UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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 1-9178
KOOR INDUSTRIES LTD.
(Exact name of Registrant as specified in its charter and
translation of Registrant's name into English)
Israel
------
(Jurisdiction of incorporation or organization)
21 Ha`arbaa St., Tel-Aviv 64739, Israel
---------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Ordinary Shares (1) New York Stock Exchange (2)
American Depositary Shares (3) New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None
(Title of Class)
(1) Not for trading, but only in connection with the listing of the American
Depositary Shares.
(2) The Ordinary Shares are also listed on the Tel-Aviv Stock Exchange.
(3) Evidenced by American Depositary Receipts, each American Depositary Share
representing 0.20 Ordinary Shares, par value NIS 0.001 each.
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of December 31, 1999: 15,901,407 Ordinary
shares NIS 0.001 par value (the "Ordinary Shares"), 1,541,947 of which are
represented by American Depositary Shares ("ADSs").
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 which financial statement item the registrant has elected
to follow:
Item 17 X Item 18
---- ----
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
All references in this document to "Koor" are to Koor Industries Ltd., a
company organized under the laws of the State of Israel, and all references
to "the Company" or "the Koor Group" are to Koor and its consolidated
subsidiaries and affiliates. Certain amounts reported in adjusted New
Israeli Shekels ("NIS") on Koor's consolidated financial statements for the
year ended December 31, 1999 (the "Financial Statements") have been
translated into United States dollars (the "dollar" or "$") for the
convenience of the reader at the exchange rate of the dollar prevailing at
December 31, 1999 (NIS 4.153 = $1.00), as published by the Bank of Israel.
In this document, all references to Koor's percentage of equity ownership
in its subsidiaries are prior to having taken into account the possible
dilution that may be caused by the exercise of options granted to executive
officers of certain subsidiaries. See "Item 12. Options to Purchase
Securities From Registrant or Subsidiaries".
General
Koor is a diversified investment holding company. Koor is engaged, through
its direct and indirect wholly and partially owned subsidiaries and
affiliates, in the following core businesses: telecommunication equipment,
defense electronics and agrochemicals as well as in other businesses. The
Company is also engaged in seeking out new investment opportunities in high
technology and life science businesses. In 1999, international sales
represented approximately 58% of Koor's consolidated revenues. A majority
of the Company's revenues are derived from businesses in which it is the
leading producer or provider of such goods and services in Israel. In 1999,
Koor reported NIS 10.7 billion ($2.6 billion) of consolidated revenues, NIS
838 million ($202 million) of consolidated operating earnings, and NIS 549
million ($132 million) of consolidated net earnings.
Koor's ADSs are listed on the New York Stock Exchange. The address of the
registered office of Koor is 21 Ha`arba`ah Street, Tel Aviv 64739, Israel,
and its telephone number is 972-3-6238333. Koor's office in the United
States is located at 10 East 53rd street, New York, New York 10022 and its
telephone number is 212-751-2600. Koor was founded in 1944. Koor's Ordinary
Shares are listed on the Tel-Aviv Stock Exchange (the "TASE") and on the
New York Stock Exchange ("NYSE"). The address of Koor's internet website
is: WWW.KOOR.COM.
Strategy
In October 1997, as a result of certain transactions, the Claridge Group
(comprised of Claridge Israel Ltd. ("Claridge") and additional entities)
became the largest shareholder of Koor, holding of record, as of June 1,
2000, 34.7% of the outstanding Ordinary Shares. Beginning in July 1998,
Koor initiated an extensive corporate restructuring program, designed to
transform the Company into a diversified investment holding company with
controlling stakes in leading high-growth, export-oriented Israeli
companies. Based on these criteria, Koor has made the strategic decision to
focus on three businesses: telecommunication equipment, defense electronics
and agrochemicals. Koor's holdings in these businesses have the potential
to grow internally, as well as through mergers and acquisitions.
<PAGE>
Management has implemented key elements of the strategic program to date,
including a substantial capital reallocation process, in which proceeds
from the sale of low growth domestic businesses have been re-invested to
increase Koor's stakes in its core businesses. In this regard, in 1999 and
in the beginning of 2000, Koor continued to divest itself of non-core
holdings, including its interests in Koor Finance, Contahal, Merhav, the
Switching Division of Tadiran Telecommunications, Tekem (ATL), Tadiran
Information Systems, Koor Metals, Phoenicia, Yonah, Tadiran Com, Tadiran
Telematics, Mashav (Nesher), Merkavim, Middle East Tube and The Q Group.
In addition, as part of its strategic plan, Koor is seeking out new
investment opportunities in high growth potential business in the fields of
telecommunications technologies and services located in Israel and around
the world. Koor also invests in Internet ideas and technology through
investments in leading funds and recently established a joint venture to
invest in biotechnology and life science companies in Israel.
The Telecommunication Equipment Business
The activities in this business are conducted through (i) ECI Telecom Ltd.
(NASDAQ: ECIL), (ii) Telrad Networks Ltd. (formerly Telrad
Telecommunication & Electronic Industries Ltd.) and (iii) Tadiran Microwave
Networks Ltd. Until 1999, this business also included the activities of
Tadiran Telecommunications Ltd ("TTL") that was merged into ECI Telecom
Ltd., effective as of January 1, 1999.
Koor's Telecommunication Equipment business generated NIS 2,200 million and
NIS 3,420 million of revenues in 1999 and 1998, respectively, representing
20.6% and 26.7%, respectively, of Koor's consolidated revenues for such
years. International sales accounted for 70.0% and 64.4% of the revenues of
the Telecommunication Equipment business for 1999 and 1998, respectively.
A substantial portion of the sales made by the Telecommunication Equipment
business, other than those of ECI Telecom Ltd. which was not consolidated
in 1999 and 1998, are made to two principal customers: Northern Telecom
Ltd. ("Nortel") and Bezeq, The Israel Telecommunications Corporation
Limited ("Bezeq"). In 1999, the sales to those customers represented 38.0%
and 12.3%, respectively, of the Telecommunication Equipment business'
revenues. In May 2000, Koor, Telrad and Nortel signed an agreement to
establish a new Company under the name Nortel Israel. This new venture, in
which Nortel will be the majority shareholder and Koor would own 28%, will
acquire and operate Telrad's public switching and TX1 Systems businesses,
which currently comprise the majority of Telrad's sales to Nortel and
Bezeq.
The principal companies in the Telecommunication Equipment business are:
<TABLE>
<CAPTION>
Percentage
of Equity
Ownership Principal Products and Services
<S> <C> <C>
ECI Telecom Ltd. ("ECI")......................... 32.9%(1)(2) Telecommunication equipment and systems
Telrad Networks Ltd. ("Telrad") formerly -
Telrad Telecommunications & Electronic
Industries Ltd. ................................ 80.0(3) Telecommunication equipment and systems
Tadiran Microwave Networks Ltd. ("TMN").......... 100.0 Microwave networks communication
</TABLE>
---------------
(1) Not consolidated in Koor's Financial Statements and not included in backlog
data.
(2) The ordinary shares of ECI are quoted on the Nasdaq National Market.
(3) Koor's interest in Telrad will increase to 100% in connection with the
closing of an agreement with Nortel to establish Nortel Networks Israel
(discussed below). See "-Telecommunication Equipment -Telrad."
<PAGE>
ECI
ECI is a provider of integrated network solutions for digital
communications and data transmission systems enabling network operators to
deliver cost-effective services. ECI designs, develops, manufactures,
markets and supports end-to-end digital telecommunications solutions for
today's new services and converging networks. ECI's products create
bandwidth, maximize revenues for network operators, expand capacity,
improve performance and enable new revenue-producing services. These
products enhance the capabilities of existing networks to support voice,
data, video and multimedia services. ECI's equipment supports traffic in
more than 500 service networks in over 145 countries.
ECI offers the following main types of products and solutions (including
products and solutions acquired in the TTL merger that is discussed below):
Infrastructure solutions/products: These include products designed to increase
transmission capacity of satellite communications, fiber optic cable, microwave
and other communications. These products allow connectivity and various
management functions through digital communication, mainly through fiber optic
communication installations. These also include DCME compression solutions,
Network Systems transmission solutions, Digital Cross Connect bandwidth
management solutions and systems designed to provide revenue protection and
fraud management.
Access solutions/products: These include products which offer value-enhancing
residential and business service applications. Among the products are single
pair carrier/pair gain solutions, ISDN network terminations, telephony and data
solutions over cable TV (HFC or hybrid fiber/coax) facilities and a wide variety
of broadband access solutions to support Internet, teleworking, video services,
XDSL and ADSL (Asynchronous Digital Subscriber Loop) applications. These also
include: Voice over Internet Protocol (VoIP) gateway solutions providing next
generation telephony; Business Systems providing communications systems and
turnkey projects for public and private organizations; and the Wireless Local
Loop product line providing fixed wireless access solutions.
At the beginning of 2000, following the appointment of new senior management,
ECI announced a new strategic plan designed to focus its operations on key
product growth areas, including broad band access, transport systems and media
gateways.
ECI's revenues, gross profit, income from continuing operations and net income
in 1999 amounted to $1,115 million, $595 million, $166 million and $103 million,
respectively. ECI is included in Koor's Financial Statements on an equity basis.
See Note 3A of Notes to Financial Statements.
Since the beginning of 1999, Koor has increased its stake in ECI to 32.9% (as of
June 20, 2000) through the following transactions: the exercise of a call option
to purchase an additional 5% interest in ECI from Clal Electronics on February
8, 1999 for a total consideration of NIS 593 Million ($142 Million); the merger
between ECI and TTL pursuant to which Tadiran received a 12.5% interest in ECI;
additional open market purchases by Koor; and the effects of an open market
stock buyback program by ECI.
<PAGE>
In 1998, Koor and Clal Electronics signed a voting agreement, pursuant to which
both companies agreed to vote their shares at the ECI General Meeting of
shareholders to permit Koor to nominate a majority of the directors of ECI, and
to permit Clal Electronics to nominate 20% of the directors.
In March 1999, TTL, formerly an 81% subsidiary of Tadiran, was merged into ECI.
Pursuant to the merger, the shareholders of TTL were issued new shares of ECI
representing a 15.4% interest in ECI. In 1998, TTL's results of operations were
consolidated in Koor's Financial Statements. In 1998, TTL reported sales,
operating income and net income of NIS 1,761 million, NIS 179 million and NIS
169 million, respectively.
TTL's public switching equipment division was not included in the merger and
during 1999 Tadiran sold substantially all the assets and liabilities of the
switching division for $24 million.
The merger was recorded in Koor's Financial Statements at book value in
accordance with the Israeli GAAP rule for similar asset exchange transactions
which resulted in no recognition of gain and an increase of NIS 179 million in
the amount of goodwill in ECI recorded in Koor's Financial Statements. In
accordance with US GAAP, Koor would have recorded a capital gain (after taxes)
of NIS 64 million and an additional increase in goodwill of NIS 191 million.
For additional information with respect to the ECI merger, see Notes 3A(1) and
28A(2) of Notes to Financial Statements.
In October 1999, Ectel Ltd., a wholly owned subsidiary of ECI, whose
principal business is the development, production and marketing of fraud
detection systems in communication networks and improvement of traffic
quality in communication networks, completed an initial public offering on the
Nasdaq Stock Market. As a result of this offering ECI recorded a capital
gain of $29.7 million. ECI holdings in Ectel declined to 75%. In October
1999 Telegate Ltd., an affiliate of ECI completed a share and capital notes
exchange transaction with Terayon Communications Systems Ltd., which
resulted in a capital gain to ECI of $25.5 million. ECI recorded an
additional gain of approximately $30 million in the first quarter of 2000
in connection with the transactions related to the exchange offer.
In 1999 ECI recorded a loss of approximately $37 million as a result of the
termination of four different discontinued operations. In addition, in 1999 the
current loss from these discontinued operations amounted to approximately $26
million.
Telrad
Telrad is one of Israel's leading suppliers of telecommunication equipment.
Telrad supplies equipment to the Israeli and international markets and is
involved in the design, manufacture and marketing of digital public switching
equipment, private exchange equipment, voice and data transmission equipment and
telephones.
Telrad's sales to Bezeq amounted to NIS 272 million in 1999 compared to NIS 193
million in 1998. Sales to Bezeq of digital public telephone switches account for
a substantial portion of the total sales to Bezeq. Other sales to Bezeq include
other products such as innovative telephone products and services, and ISDN
(integrated services digital networks) products.
<PAGE>
On November 1998 Telrad's Board of Directors approved a reorganization
plan. According to Telrad's new organizational structure Telrad operations
were divided in 1999 into three independent market-oriented profit and loss
businesses. At the end of 1999 Telrad's Board approved an additional
restructuring program at a cost of NIS 85 million (pre-tax) for the
reduction of additional employees. This plan is in addition to the first
plan provided for in 1998 at the cost of NIS 223 million (pre-tax). Through
December 31, 1999 Telrad's work force was reduced by approximately 950
employees without disturbances to labor relations mainly through voluntary
resignations and early retirement, and approximately 100 more employees
retired by the end of the first quarter of 2000. In addition, in the first
quarter of 2000, Telrad included in its financial statements an expense of
NIS 80 million (pre tax) following the approval by Telrad's Board of a plan
to reduce its workforce by another 200 employees.
As part of Telrad's reorganization plan, Telrad is in the process of spinning
off certain of its technology and development divisions into separate start-up
subsidiary companies, in order to provide Telrad with new sources of proprietary
technology-based growth in the internet and telecommunications fields. Telrad
established five start-ups by mid-2000 and expects to set up a similar number
of new start-ups by the end of the year.
For a discussion of the investigation of the Israeli Commissioner of Restrictive
Trade Practices concerning Telrad, see "- Risk Factors.".
Relationship with Nortel
In 1999 and 1998, Telrad's sales to Nortel accounted for 42% and 35%,
respectively, of Telrad's total sales. Furthermore, approximately 85% and 87%
of Telrad's total sales in each of those years, including sales to Nortel, were
based on products licensed from Nortel.
Telrad holds licenses to the know-how underlying the digital switching and
transmission systems utilized in its public and private switches pursuant to
agreements with Nortel. The term of these agreements has been extended from time
to time, and the current term of such agreement expired in December 1999. Under
its licensing arrangements with Nortel, Telrad has agreed to limit its sales of
products based on Nortel's technology to specified countries and has agreed not
to sell competing products without Nortel's prior written approval.
In January 1995, Telrad entered into a cooperation agreement with Nortel that
enabled Telrad to market Nortel products in Israel and other specified
territories and to sell Telrad developed products to Nortel. In January 1997
Nortel exercised its option, granted in 1995, to purchase 20% of Telrad's
ordinary shares for $45 million. In connection with the Nortel investment Koor,
Telrad and Nortel entered into a shareholders agreement which provided Nortel
with certain veto rights regarding Telrad management. Pursuant to the
shareholders agreement, in the event that Telrad does not effect an initial
public offering prior to the year 2000, Nortel had the Put option to sell its
Telrad shares for the greater of $45 million or the equity value of the shares.
In addition, Nortel was granted a Call option to increase its holdings in Telrad
up to the equity interest owned by Koor.
In January 1997, Telrad licensed the right to use certain existing and future
know-how from Nortel for a ten-year period for which Telrad is unconditionally
required to pay Nortel NIS 62 million ($15 million) in four equal annual
installments, bearing interest commencing January 1998, which will be deducted
from future licensing fees. Through December 31, 1999, Telrad purchased NIS 27
million ($6.4 million) of know-how on account of such undertaking. Telrad is
currently negotiating with Nortel to terminate this agreement.
All of the foregoing agreements with Nortel will generally be superceded by the
changes in Telrad's business that will result from the implementation of the
following arrangements concerning the establishment of Nortel Israel.
<PAGE>
Relationship with Nortel Israel
In May 2000, Koor, Telrad and Nortel signed an agreement (the "Nortel Israel
Agreement") to establish a new company under the name of "Nortel Israel". This
new venture, of which Nortel will be the majority shareholder and Koor and
Telrad will own 28%, will acquire from Telrad the sales, marketing and support
functions of its public switching and TX1 Systems businesses and Telrad's
operations in these fields outside Israel in several markets including South
America and Africa. In addition, Nortel Israel will coordinate Nortel's
activities in Israel that were not previously conducted through Telrad and will
have direct access to the use of Nortel's current and future technologies.
Telrad will sell these businesses to Nortel Israel for an estimated US $95
million. The business operations that Telrad will sell to Nortel Israel
constitute approximately 40% to 50% of Telrad's business. Telrad will retain its
proprietary key system business known as SBS and its internet and
telecommunications startup businesses as well as continuing to manufacture (both
directly and through out sourcing arrangements) and undertake research and
development on behalf of the new company and Nortel. The parties are currently
finalizing the terms of such ongoing business arrangements. As part of the
overall agreement, Koor will acquire Nortel's 20% stake in Telrad for $45
million and will invest $49 million in shares and loans to Nortel Israel. In
addition, Koor was granted a put option to sell its holding in Nortel Israel to
Nortel. The option is exercisable at the end of three years, at a price based on
a formula set forth in the Agreement. The completion of this transaction is
contingent upon the receipt of regulatory approvals, including that of the
Controller of Restrictive Trade Practices.
Telrad's Other Markets. Telrad supply public switches abroad. The major
customers are located in Ethiopia, Papua New Guinea, the Palestinian Authority,
Chile, Peru, Bolivia, Georgia, Ukraine and Russia. Sales to these countries
typically include extended credit terms, which involve certain risks in light of
the political and economic conditions in such countries. As of December 31,
1999, Telrad's long-term credit-risk exposure from such agreements amounted to
NIS 216 million ($52 million) (representing the uninsured portion of the trade
receivables). These operations will be transferred to Nortel as part of the
Nortel Israel Agreement, with Telrad retaining the responsibility of collecting
the outstanding receivables.
Telrad's Backlog. As of December 31, 1999, Telrad had an aggregate backlog of
confirmed orders of NIS 1,247 million ($304 million) compared to NIS 1,126
million, as of December 31, 1998.
Other Businesses within the Telecommunication Equipment Business
On April 21,1998, Tadiran through TMN acquired for NIS 133 million from
California Microwave Ltd. ("CMI"), a U.S. company, CMI's activities in the field
of wireless microwave telecommunication, conducted by its microwave networks
division.
During the first quarter of 1999, Koor divested its holdings in several
subsidiaries and affiliates for a consideration of NIS 20 million.
On January 18, 2000 Koor sold its 23% interest in Q Multimedia PLC ("Q"), which
develops and markets multimedia systems for language instruction, for
approximately NIS 41 million. Q shares are traded on the London Alternative
Investment Market.
<PAGE>
Defense Electronics Business
The activities in this business are conducted through various subsidiaries of
Tadiran Ltd., including Elisra Electronic Systems Ltd., Tadiran Electronic
Systems Ltd. and Tadiran Spectralink Ltd. (together "the Elisra Group") , and
principally involves the design, manufacture, distribution and support of a wide
range of advanced electronic systems, primarily for military purposes. Koor's
Defense Electronics business had revenues of NIS 1,334 million and NIS 1,573
million for 1999 and 1998, respectively, representing 12.5% and 12.3% of Koor's
consolidated revenues during such periods. In 1999, the majority of the sales of
Defense Electronic business were made to defense-related customers.
In 1999, the Elisra Group's sales to the Israeli Ministry of Defense ("IMDF")
represented 22.1% of the Elisra Group's revenues.
The principal companies in the Defense Electronics business are:
<TABLE>
<CAPTION>
Percentage
of Equity
Ownership Principal Products and Services
<S> <C> <C>
Elisra Electronic Systems Ltd. ("Elisra")........ 100.0 Electronic warfare, equipment and systems
Tadiran Electronic Systems Ltd. ("TES").......... 100.0 Command, control, communications and
intelligence systems for defense applications
Tadiran Spectralink Ltd. ("Tadiran
Spectralink").................................... 100.0 Advanced data and video links for military use
B.V.R Systems Ltd. ("BVR")....................... 28.5(1)(2) Advanced military training and simulation systems
</TABLE>
(1) Not consolidated in Koor's Financial Statements and not included in backlog
data.
(2) The ordinary shares of BVR are quoted on the Nasdaq National Market.
Through a tender offer process begun in November 1998 and completed in January
1999, Koor obtained full ownership of Tadiran's equity, by acquiring the 33.6%
equity interest held by the public, for an aggregate consideration of
approximately $245 million.
In 1999, Tadiran implemented a restructuring plan. The plan included
reduction of Tadiran's headquarters staff and its merger with Koor's
headquarters, divestiture of software services and consumer appliances
businesses (which are included in the Other business) and the management of
Tadiran's real estate by Koor Properties. See "-Real Estate." Tadiran also
transferred its holdings in TTL to ECI by means of a merger.
In order to simplify Koor's corporate structure, on January 20, 2000, Koor,
Tadiran and Elisra entered into agreement pursuant to which Tadiran will
transfer all of its holdings in Elisra to Koor. In addition, Tadiran will
transfer its shares in TES and Tadiran Spectralink to Elisra. The completition
of this transaction is subject to the receipt of various approvals.
Elisra designs, develops and produces electronic warfare and surveillance
systems for military purposes, as well as a range of electronic and
microwave components for the commercial market. Elisra offers a diversified
range of combat-proven electronic warfare (EW) systems, including radar
warning systems, active countermeasure systems, comprehensive
self-protection systems, electronic intelligence (ELINT) systems,
sophisticated communication links, complemented by extremely light-weight
components. Elisra also develops a wide range of active and passive
microwave components. Microwave and RF components are essential to nearly
all intricate electronic equipment, as well as microwave telecommunication
and satellite systems.
<PAGE>
TES is engaged in providing solutions for a variety of customers in the
field of C4I (Command, Control, Communication, Computing Intelligence), EW
COMINT systems and spectrum management and control systems.
An array of electronic hardware and computer software is incorporated into the
C4I systems, which enable the collection, processing, analysis and display of
large quantities of information to facilitate effective dissemination and
accelerate decision making for better Battle Management capabilities.
TES has developed a simulator for a Tactical Ballistic Missile ("TBM"), Defense
Battle Management Center for the U.S. Ballistic Missile Defense Organization
("BMDO") and the Israeli Ministry of Defense. The simulator is currently
operating and providing information for both organizations.
TES is also a supplier of the Battle Management Center of the Israeli Arrow
Defense weapons system.
TES's activities in the field of electronic warfare systems involve the
design, development and distribution of a broad range of strategic and
tactical electronic warfare systems for ground, naval and airborne
platforms. Passive electronic warfare systems analyze and display
information with respect to incoming signals and weapons, while active
electronic warfare systems render hostile communication ineffective through
electronic countermeasure techniques.
Based on electronic warfare technology, a new range of commercial applications
have evolved in the area of spectrum management control. Integrated spectrum
management and monitoring systems provide nationwide solutions to various
telecommunication administrations.
Tadiran Spectralink develops and manufactures data and video links for a
variety of applications, including unmanned aerial vehicles, guided weapons
and satellite communications. Based on these links, command and control
systems for airborne and naval applications are developed.
As part of its strategy to focus on the Defense Electronics business, in
1999 Koor and Elisra acquired a 28.6% interest in BVR. BVR is a diversified
world leader in advanced military training and simulation systems, which
offers highly efficient and cost effective solutions for the simulation,
training and debriefing needs of modern air, sea and ground forces. Koor
acquired its interest in BVR through open market share purchases at various
prices with an aggregate cost of $20 million and through the acquisition by
Elisra of shares in BVR in a private placement transaction for an aggregate
consideration of $14 million. In connection with this acquisition, Koor
received the right to appoint three out of seven nominees to BVR's Board of
Directors.
Tadiran Com is a leading manufacturer of sophisticated defense
communications equipment and is a primary supplier of tactical radios to
the IMDF. Tadiran Com had revenues of approximately NIS 381 million in the
nine months ended September 30, 1999 and NIS 660 million in 1998 fiscal
year, representing 3.6% and 5.2% of Koor's consolidated revenues in 1999
and 1998. On November 10, 1999, Koor completed the sale of its holdings in
Tadiran Com. for an aggregate consideration (including final dividend to
Tadiran) of NIS 616 million ($149 million). Koor recorded pre tax capital
gain of NIS 317 million from this transaction.
The Defense Electronic business operates in an environment marked by a general
decline in worldwide military spending (including Israel) and competition from
companies that receive governmental subsidies.
Sales to governments, their agencies and government-controlled companies
within the Telecommunication Equipment and Defense Electronics businesses,
are subject to substantial governmental regulation affecting the award,
performance, payment and termination of government contracts. See
"Regulation-Defense and Government Contracts."
<PAGE>
As of December 31, 1999, the Defense Electronics business had an aggregate
backlog of confirmed orders of NIS 1,848 million ($445 million) compared to
NIS 2,809 million, as of December 31, 1998. As a result of the divestiture
of Tadiran Com. in 1999, the backlog of confirmed orders as at December 31,
1999 compared to December 31, 1998, has decreased by NIS 960 million. In
the first quarter of 2000 the Defense Electronics business received new
orders of approximately $207 million mainly from the IMDF.
Agrochemicals Business
The activities in the Agrochemicals business are conducted primarily
through the direct and indirect subsidiaries of MA Industries Ltd. -
Makhteshim, Agan and Milenia (sometimes collectively referred to as the "MA
Group"). These companies are leading international suppliers of generic
crop protection products. Makhteshim and Agan are Israel's largest
producers of insecticides, fungicides and herbicides. Agan is also a
manufacturer of synthetic aroma chemicals. The Agrochemicals business had
revenues of NIS 3,541 million and NIS 3,377 million in 1999 and 1998,
respectively, representing 33.2% and 26.4% of Koor's consolidated revenues
during such periods. International activities, primarily sales in Europe,
North America and Latin America, accounted for 89.3% and 90.6% of the
Agrochemicals business' revenues in 1999 and 1998, respectively.
The principal companies in the Agrochemicals business are:
<TABLE>
<CAPTION>
Percentage
of Equity
Ownership Principal Products and Services
<S> <C> <C>
Makhteshim-Agan Industries Ltd. ("MA Industries")... 59.9(1) Holding Company
Makhteshim Chemical Works Ltd. ("Makhteshim")....... 100.0(2) Insecticides and fungicides and other chemicals
Agan Chemical Manufacturers Ltd. ("Agan")........... 100.0 (2) Herbicides and synthetic aroma chemicals
Milenia Agro Ciensias S.A. ("Milenia").............. 70.0 (3) Formulation and distribution of crop protection
chemicals
</TABLE>
---------------------
(1) The ordinary shares of MA Industries are traded on the TASE.
(2) Indicates the percentage of direct ownership by MA Industries.
(3) Represents the aggregate ownership of Makhteshim and Agan.
The Agrochemicals Business Environment in 1999
During 1999, the global agrochemicals market decreased by approximately
5.7% in real terms which the MA Group believes was due to the following
factors: the low prices for agricultural crops, the reduction in the amount
of land cultivated in western Europe in the wake of the land set - aside
policy, the use of genetically engineered seeds in the U.S. and Argentina,
and financial crises in emerging markets. 1999 was the third consecutive
year of decline in the industry.
In addition, during 1999 there was a move towards consolidation among the
major multinational companies in the agrochemicals industry which resulted
in fewer but larger competitors in this field.
<PAGE>
As a result, the MA Group has adopted a comprehensive two-year
restructuring plan which includes consolidating manufacturing facilities,
both in Israel and abroad; reducing the number of employees, particularly
among administration and management; across-the-board cost-cutting
measures; focusing on the MA Group's essential businesses; and improving
the MA Group's operating cash-flow to take advantage of opportunities
within the industry as they arise. Specifically, the MA Group will
consolidate its manufacturing plants in Brazil, close down its Be'er
Sheva-based production facilities and relocate production to the MA Group's
main plant in Ramat Hovav. The MA Group has taken provisions of
approximately $33 million to implement the plan, most of which should be
completed in the year 2000.
Crop Protection
Generic agrochemicals offer an alternative source for widely utilized
chemicals previously manufactured under patent by larger research-based
chemical manufacturers. Research-based chemical manufacturers often focus
their resources on developing new agrochemicals and supply of additional
chemicals by generic manufacturers, such as Makhteshim and Agan, to
supplement their capacity. In the next few years, as a result of decreased
resources commited to research and development of new agrochemicals
products and expire of existing patents, significant number of widely used
agrochemicals are expected to lose patent protection in many geographic
regions (primarily South America), substantially increasing the available
market for sales by generic manufacturers. The off patent component of the
agrochemical industry is anticipated to grow from about 50% today to over
70% of the market by 2004. In addition, the modernization of the
agricultural industries of Eastern Europe and other developing countries
offer increasing sales opportunities for both research-based and generic
agrochemical manufacturers.
The major competitors of this business in the international market for
agrochemicals are major international research-based chemical producers. The
major international chemical producers have significant influence on the prices
of most of Makhteshim's and Agan's products. In the Israeli market, Makhteshim
and Agan compete with importers with respect to most of their products, and
Makhteshim competes with both importers and Israeli producers with respect to
non-pesticide products.
The development of new generic products require significant investments for
research, licensing, establishment of production and marketing facilities.
The MA Group typically focus on products that require a high degree of
sophistication in process development and production, which are, therefore,
less susceptible to extensive competition. Their prices, therefore, tend to
be relatively higher than sectors where competition is more prevalent. For
many of these products, the MA Group is the world's second largest
manufacturer, with the original research-based chemical company maintaining
the majority share. The Company believes that the MA Group's ability to
compete with major international research-based chemical companies and
other generic chemical manufacturers is based upon their flexible
manufacturing facilities, advanced research and development capabilities,
fulfillment of stringent registration and licensing requirements of various
countries, compliance with environmental regulations, material purity,
worldwide marketing and cooperation with certain multinational companies
regarding the production and marketing of numerous products.
An essential component of the MA Group's ability to maintain its market
share on the worldwide market is the successful introduction of new generic
products immediately after the expiration of the patents validity. In 1998,
an amendment was passed to Israeli Patents Law 1967, which has certain
beneficial ramifications for the Israeli agrochemical industry. Under this
amendment, (i) subject to certain conditions, research activities on a
patent during the patent period for the purposes of production deployment
after the patent expiration will not constitute misuse of an invention, and
(ii) the period of patents in the agrochemical industry cannot be extended.
These changes should facilitate the introduction of new products by the MA
Group.
<PAGE>
The MA Group plan to develop, over the next several years additional
agrochemical products, including fungicides, insecticides, herbicides and
biotechnological products, based primarily on a substantial number of
patents of other parties expiring within the next few years. MA Group's
total average investment program for the next several years has an
estimated yearly budget of $50 million and includes substantial investments
in these products. Recently, the MA Group purchased the right to
manufacture and market certain new agrochemical products from the
developers of such markets. The MA Group also entered into an additional
co-production agreement with Monsanto.
New research and developments in the field of trans-genetic plant species that
can tolerate insects and in plant species that are resistant to fungal diseases
may have an adverse impact on the demand for the MA Group products during the
next few years, depending upon the success of such developments.
Makhteshim and Agan market their crop protection chemicals primarily to foreign
manufacturers which use such chemicals in the formulation of a wide range of
products and sell the formulations to distributors and end users. Agan
manufactures over twenty different active ingredients which are sold as
technical grade materials and "ready" formulations. These technical grade
materials are used in the formulation of a wide range of herbicides and plant
growth regulators. The "ready" formulations are sold to distributors. Agan sells
its synthetic aroma chemicals principally to the detergent, soap and cosmetics
industries.
No single product manufactured and sold by Makhteshim and Agan accounted for
more than 10% of Makhteshim's and Agan's total sales in 1999 or 1998.
Foreign Activities
As part of its strategy to focus on its core businesses and to increase
market penetration in these fields, Koor has continued to expand its
businesses in the Agrochemicals business abroad.
In November 1998, the activities of Defenpar Participaceos S.A. and
Herbitecnica Defensivos Agricolas S.A., two Brazilian subsidiaries of
Makhteshim and Agan engaged in the formulation and distribution of crop
protection chemicals, were merged into Milenia, in which Makhteshim and
Agan hold 70%.
During 1999, the local currency in Brazil was devalued in relation to the
dollar by approximately 48% and the currency rate was extremely volatile
during this period. Until the third quarter of 1999, most of the customer
debts of Milenia in Brazil were linked to the exchange rate of the dollar.
During the third quarter, owing to the sharp cumulative rise in the
exchange rate of the local currency against the dollar, the customer market
in Brazil no longer accepted linkage to the dollar and therefore customer
balances of Milenia in Brazil as at December 31, 1999 amounting to a total
of $140 million are not linked to the dollar. As a result of the change in
the accounting method in the third quarter, relating to the linkage of the
customer balances, a customer debt from the previous period was adjusted to
the new accounting method and this led to inclusion of expenses amounting
to $12.6 million deriving from the adjustment of customer balances and from
the granting of discounts due to the devaluation.
In December 1998, MA Group acquired a 45% interest in Productos Fitosanitarios
Proficol El Carmen S.A. ("Proficol"), one of the leading agrochemicals
distribution companies in Colombia. MA Group may increase its holdings in
Proficol up to 60% at the beginning of 2002. Koor believes that Proficol
constitutes a significant anchor for the MA Group activities in the Paco-Andeau
region (the northern South American countries).
In the beginning of 1999, Milenia established a joint venture with Kasba
S.A., a leading marketer of agricultural inputs (including fertilizers,
seeds and crop protection chemicals) in Paraguay.
<PAGE>
Other Matters
In July 1999, the MA Group acquired a 50% interest in Luxembourg
Pharmaceuticals Ltds ("Luxemburg"), a manufacturer of pharmaceuticals and
medical instruments for a total consideration of $7.1 million. Concurrently
with the acquisition the MA Group sold to Luxembourg its holdings in a
subsidiary Koor Medica Ltd. for $1 million. The MA Group has a call option
to acquire the remaining 50% interest of Luxembourg and the shareholders of
Luxembourg have a put option to require that, the MA Group acquire such
interest by December 31, 2001 for $7 million.
From time to time, certain of the Company's agrochemicals products have
been the subject of legislative or other initiatives to curtail or regulate
their use due to environmental, health and safety concerns. Also, most
countries require MA Group to obtain regulatory approval prior to selling
newly-introduced products, procedures which are both time-consuming and
costly. For a discussion of certain governmental regulations applicable to
the Agrochemicals business, see "Regulation."
Building and Infrastructure Materials Business
In 1999 the Company produced construction materials through its cement, steel
and pipes businesses. The Building and Infrastructure Materials business had
revenues of NIS 1,446 million and NIS 1,645 million in 1999 and 1998,
respectively, representing 13.5% and 12.9% of Koor's consolidated revenues for
such periods. The Building and Infrastructure Materials business sells its
products primarily in Israel (including the West Bank and the Gaza Strip).
Pursuant to its business strategy to focus on certain core businesses, in 1999
and the beginning of 2000, Koor sold its interests in Mashav Initiating and
Development Ltd ("Mashav"), Middle East Tube Co. Ltd ("Metco") and Merhav
Ceramic and Building Materials Ltd. ("Merhav"). In addition, in March 2000,
United Steel Mills Ltd. ("United Steel"), in which Koor has a 72.7% interest,
applied to Court for the appointment of a trustee.
On October 5, 1997 and January 5, 1998, in authorizing the merger of the
Claridge Group and Koor, the Controller of Restrictive Trade Practises
imposed certain restrictions on both Koor and the Claridge Group regarding
their joint holdings with Clal Industries and IDB in Mashav (including
Granite) and in ECI. In accordance with the restrictions, Koor signed an
agreement in April 1998 with Clal Industries pursuant to which Clal
Industries received an option to acquire 25% of Mashav's share capital from
Koor.
On December 5, 1999 Koor and Clal Industries signed an agreement pursuant to
which Koor sold on January 6, 2000 its 50% interest in Mashav in consideration
of NIS 889 million ($214 million). In addition Koor received a 47.5% interest in
a Mashav subsidiary, Mashael Alumina Industries Ltd. In the first quarter of
2000, Koor recorded capital gains, of approximately NIS 231 million (after
allocation of deferred taxes) in connection with the sale of its interest in
Mashav. Prior to the sale, on December 30, 1999, Koor received dividends from
Mashav in the amount of NIS 355 million
In accordance with the April 1998 agreement, in May 1998 Mashav sold its
interest in Tambour Ltd. for NIS 128 million and on July 8, 1998, Mashav
divested its holding in Granite for a total consideration of approximately NIS
778 million. In 1998, Koor received a dividend from Mashav of NIS 394 million
distributed out of these proceeds and an additional dividend of NIS 187 million.
<PAGE>
Cement
Prior to the sale of its interest in Mashav, Koor indirectly owned a 50%
interest and jointly controlled Nesher Israel Cement Enterprises Ltd.
("Nesher"), Israel's only cement producer. Nesher operates 3 cement plants
and in 1998, Nesher began regular operation of a dry line cement plant in
Ramla. The first dry line plant, which is an efficient user of energy,
significantly increased Nesher's capacity for cement production from
in-house made clinker and clinker production. Clinker is an intermediate
product in the manufacture of cement and is ground into an extremely fine
powder to produce finished cement. Nesher invested approximately $180
million in the first dry line cement plant. In April 1997, Nesher began to
establish a second dry-line plant in Ramla, which involves an investment of
$175 million. The on-going operation of the new plants began by the end of
1999. Mashav revenues included in Building and Infrastructure Materials
business amounted to NIS 718 million and NIS 777 million in 1999 and 1998,
respectively.
Steel
United Steel is Israel's largest manufacturer of steel reinforcement bars,
wire rods and wire mesh. United Steel supplies approximately 40% of the
concrete reinforcement products used in the Israeli construction market and
the remainder is supplied by another Israeli manufacturer and by importers.
Most of the products manufactured by United Steel are sold in Israel, the
Gaza Strip and the West Bank. United Steel had revenues of NIS 449 million
and NIS 448 million in 1999 and 1998, respectively.
United Steel owns and operates six main production facilities, including a
scrap yard and a shredding plant that processes steel scrap, a melting
plant, two rolling mills and a plant that manufactures wire mesh, used in
the construction industry to reinforce concrete, and a range of other steel
products used in manufacturing.
Currently, the Israeli Government does not materially restrict the import of
steel to Israel, although certain other foreign countries protect their local
industry in various ways, such as by imposing import and other tariffs. Imports
of foreign steel have adversely affected sales by United Steel.
As a result of increased dumping and low selling prices, United Steel's
recorded net losses of NIS 31 million and NIS 77 million in 1999 and 1998,
respectively. As a result of such continuing losses, United Steel
experienced liquidity problems, which led United Steel and Koor to conduct
negotiations with United Steel's creditors to reach an agreement to
reschedule United Steel's debt. On March 2, 2000 United Steel announced
that it had not obtained an arrangement with it creditors and that the
negotiations between the parties had been terminated.
On March 16, 2000 United Steel applied to a Court for a stay order on
preceedings pursuant to Section 350 of the Companies Law and for the
appointment of a trustee. In the same day an order was made for a stay of
proceedings for 90 days, thus rendering it impossible to continue or
initiate any legal proceedings against United Steel, unless with the
approval of the court so as to permit the formulation of a comprehensive
recovery plan and arrangement of creditors to be submitted to the Court. On
March 20, 2000 the Court appointed a trustee for the period of the order
and revoked the powers of the Board of Directors. On May 16, 2000 the stay
of proceeding order was extended until September 2000.
In 1999, Koor recorded a write off of NIS 102 million for its total investment
in United Steel's equity and the balance of Koor's loans at December 31, 1999.
In 2000, Koor loaned United Steel NIS 15 million to permit United Steel to
continue operating during the pendency of the Court proceedings. For additional
information see Note 27 C of Notes to Financial Statements.
<PAGE>
Pipes and Faucets
Metco is the largest producer of steel pipes in Israel. Metco manufactures
a wide range of welded steel pipes for water and sewage infrastructure,
plumbing, oil and gas transportation and the transportation of
petrochemicals and industrial liquids, as well as pipes for the
construction industry. Metco had revenues of NIS 238 million and NIS 269
million in 1998 and 1997, respectively.
On December 23, 1999 Koor signed an agreement to sell its 76% interest in
Metco for a total consideration of NIS 84 million, which sale was completed
on March 30, 2000, after the receipt of various approvals.
Merhav operates two manufacturing facilities in Israel and is a leading
Israeli producer of metallic faucets for home use and sanitary-ware,
including toilets and sinks. In 1998 Merhav reported revenues from
continuing operation of NIS 163 million. On June 21, 1999, Koor sold its
interest (76.4%) in Merhav for a total consideration of approximately NIS
35 million.
Other Businesses
Koor has an interest in certain service industries, mainly tourism, real estate
and trading and in the production of batteries. In the previous years this
segment also included electrical appliances, software, food, consumer products
and metal products.
The principal companies in Other Businesses are:
<TABLE>
<CAPTION>
Percentage
of Equity
Ownership Principal Products and Services
<S> <C> <C>
Sheraton Moriah (Israel) Ltd. ("Sheraton Moriah")... 55.0 Hotel chain
Isram Wholesale Tours and Travel Ltd.("Isram")....... 70.0 Tourism Services
Knafaim-Arkia Holdings Ltd. ("Knafaim").............. 28.1(1)(2) Aviation and tourism services
Tadiran Batteries Ltd. ("Tadiran Batteries")......... 100.0 Lithium batteries
Koor Properties Ltd. ("Koor Properties")............. 100.0 Real estate
Koor Trade Ltd. ("Koor Trade")....................... 100.0 International trade
Balton C.P. Ltd. ("Balton").......................... 49.0(1) International trade
</TABLE>
--------------------
(1) Not consolidated and not included in business data.
(2) The ordinary shares of Knafaim are traded on the TASE.
<PAGE>
Tourism
Koor's interests in Israel's tourism industry include ownership and management
of hotels and resorts, and other tourism-related services, such as airlines. The
Tourism business had revenues of NIS 588 million and NIS 394 million for 1999
and 1998, respectively.
On January 24, 1999 Koor and Sheraton International Inc. ("Sheraton
International") won a public tender for the purchase of a 100% interest in
Sheraton Moriah. On April 12, 1999 the transaction was completed based on a
value of NIS 266 million ($63.5 million). In October 1999, Koor completed the
sale of a 20% interest in Sheraton Moriah to a subsidiary of Bank Hapoalim
Currently Koor has an 55% interest in Sheraton Moriah.
On December 30, 1999, Koor merged its other hotel operations, including its
interest in Herod's Hotel in Eilat into the Sheraton Moriah network. Prior to
the sale Koor recorded a NIS 38 million provision for a write off in value of
these hotels.
The Sheraton Moriah hotel network consists of approximately 3,000 rooms in 11
hotels (owned and leased) in major tourist locations in Israel, operating under
the following brand names: Sheraton (7 hotels), Luxury Collection (one hotel)
and Sheraton Four Points (three hotels).
Koor holds a 28.1% interest in Knafaim. Knafaim owns a variety of businesses in
the travel and tourism industry, including Arkia Israeli Airlines Ltd.
("Arkia"), Israel's largest domestic airline. Arkia also purchases and leases
back aircraft and operates charter flights to Europe. Knafaim also holds other
companies that supply various tourism services, both domestically and
internationally.
Koor has a 70% interest in Isram. Isram is registered as a travel agency in the
United States and is primarily engaged in Israel-oriented tourism.
In February 2000, Koor completed the transfer of its holdings (51%) in
Histour Eltiv Ltd. ("Histour") which provides tourist services in Israel in
consideration of a release of Koor`s guarantees of the liabilities of
Histour. In addition Koor invested approximate NIS 15 million in Histour in
exchange for preferred shares.
In April 2000, Koor divested for NIS 17 million its 33.3% interest in Y.D.
Vehicles and Transportation Ltd., an Israeli car rental and leasing company
which operates the concession of Europe-cars.
Tadiran Activities - Electrical Appliances, Batteries, Software and Other
The following activities of Tadiran have been classified in the Other business.
On March 9, 1999, May 16, 1999 and June 1, 1999 Tadiran divested its
holdings in three software development and services companies for a total
consideration of NIS 464 million. Koor recorded in 1999 NIS 244 million
capital gain before taxes from these transactions.
On February 15, 2000, Tadiran divested its holdings in Tadiran Telematics Ltd.
for a consideration of NIS 30 million.
Tadiran Appliances is major Israeli manufacturer and distributor of no-frost
refrigerators, air conditioners and mini-bars. Tadiran Appliances also imports
and distributes in Israel certain brand name and private label electrical
appliances. On December 30, 1999 Tadiran signed a agreement for the sale of its
56.6% interest in Tadiran Appliances for a total consideration of NIS 133
million, which sale closed on March 30, 2000.
<PAGE>
Tadiran Batteries Ltd. ("Tadiran Batteries ") is major Israeli manufacturer
and distributor of batteries, including high technology lithium thionly
chloride batteries. Tadiran lithium thionyl chloride batteries are
principally used as a primary and backup power supplies for utility
matters, communication equipment, smoke detectors, burglar alarms and other
products.
On March 15, 2000, Koor entered in agreement with Electric Fuel Corporation
Ltd. ("EFC"), a public company whose shares are traded on the Nasdaq Stock
Market pursuant to which EFC would acquire Tadiran Batteries from Tadiran
and Koor would invest $10.5 million in EFC in exchange for an allotment of
approximately 14% of the EFC common stock to Koor and Tadiran.
In May 2000, the sale of Tadiran Batteries was cancelled by mutual consent. In
June 2000, Koor invested $10 million in the share capital of EFC.
On June 15, 2000, Tadiran signed an agreement to sale its interest in Tadiran
Batteries for a total consideration of approximately $33 million.
In 1997, Tadiran together with U.S. investors established a U.S. subsidiary to
engage in the marketing of technologies and solutions for locating cellular
phone users who have dialed the emergency service number to assistance centers
(911).
Real Estate
Koor Properties own and develop real estate in Israel. In 1999 Koor Properties
assumed the management of seven Tadiran sites with an aggregate area of 250,000
square meters. Annual rent from these sites is NIS 47 million ($11.4 million).
In addition, Koor Properties owns real property of 570,000 square meters in the
aggregate, of which a significant part is undeveloped and the rest is in various
phases of development. Koor Properties has entered into several agreements with
respect to this property to build industrial and commercial parks and to build,
renovate and lease buildings. The land is being developed according to market
conditions, and the development is being financed through bank loans secured by
the land. Koor Properties also owns a prefabricated concrete element plant.
In December 1999 Koor Properties purchased Soltam Ltd. interest (50%) in an
industrial park at Yokneam for NIS 21 million ($5 million).
Trading
Koor Trade imports, exports and distributes a broad range of industrial,
agricultural and consumer products through its worldwide network of offices,
including offices in Europe, Asia, Latin America and Australia. Koor Trade had
revenues of NIS 121 million and NIS 138 million in 1999 and 1998, respectively.
Koor Trade owns a 49% equity interest in Balton, an English international
trading company, which is engaged in trading activities in seven countries in
Africa relating to agricultural, telecommunications, electromechanical and
air-conditioning equipment, construction and other projects.
Food and Related Products
In October 1999 Koor completed the sale of its 75% interest in Phoenicia Glass
Works Ltd, Israel's sole producer of glass containers, bottles and jars for food
uses for NIS 6 million. In addition, in July 1999 Koor completed the sale of
Yona Fishing and Industry Ltd. that produces canned and smoked fish.
<PAGE>
Metal Products
In January 2000, Koor completed the sale of all its holdings (51%) in Merkavim
Metal Works Ltd in consideration of NIS 17 Million. On August 1999 the Company
completed the sale of its interest (100%) in Koor Metals Ltd. for a total
consideration of NIS 11 Million. In addition in September 1998, the Company
completed the sale of all of its holdings (100%) in Soltam for the aggregate
consideration from this transaction of NIS 145 million.
High Technology Investments
As part of Koor's strategic plan, Koor is exploring new investment opportunities
in high growth potential businesses located in Israel and around the world in
the fields of telecommunications and internet technology biotechnology and life
sciences.
Commencing at the end of 1999, Koor made commitments to invest $55 million in
Polaris III, Genesis and Carmel, three leading Israeli venture capital funds.
Koor has also directly invested approximately $20 million in start-up technology
companies, including Orsus Solutions, a developer of business to business
internet integration software; NetPost Inc., an internet publishing company;
Sigma-One, a developer of cellular handset location technology; 3G.Com, a third
generation cellular chipset developer, and FolloWap, a provider of instant
messaging software for WAP enabled cellular phones.
In addition, in March 2000, Koor signed an agreement with Medabiotech SA, a
Swiss venture consulting firm, to invest $10 million in early stage companies in
the fields of life sciences located in Israel.
Suppliers
The companies engaged in Koor's businesses purchase the materials and components
used in their products from numerous independent suppliers. These materials and
components are not normally purchased under long-term contracts. Most of the
items purchased by these businesses are obtainable from a variety of suppliers,
and such businesses normally maintain alternative sources for major items. In
some cases these companies have annual purchasing agreements with their major
suppliers, which establish prices, quality thresholds and delivery schedules.
To date, the Company's businesses have not experienced any significant
difficulty in obtaining timely delivery of supplies, and management believes
these businesses maintain adequate inventories of certain significant imported
components. However, with respect to certain components, there maybe a lengthy
period of preparation for production and adaptation for the businesses
requirements. Accordingly, short-term shortages may arise in the event that
these companies were required to change suppliers without advance planning. The
unavailability of such components during such change-over period could result in
production delays, which might adversely affect the business.
<PAGE>
Research and Development
The companies in the Koor Group in the Telecommunication Equipment, Defense
Electronics and in the Agrochemicals business are actively engaged in
research and development programs intended to develop new products,
manufacturing processes, systems and technologies and to enhance existing
products and processes. Research and development is conducted throughout
the Koor Group, and is funded by a combination of the Company's own
resources and grants from the Israeli Government and in the case of Elisra
group, the Israel-United States Bi-National Research and Development
Foundation ("BIRD-F"). The Company believes its research and development
effort has been an important factor in establishing and maintaining its
competitive position. The Company has increased its research and
development expenditures significantly in the past few years and intends to
continue such expenditures in the future.
The following table sets forth the percentage of gross research and
development expenditures incurred by the Koor Group's principal businesses
in 1998 and 1999 as a percentage of the total sales of these businesses:
1998 1999
Telecommunications Equipment........... 11.1% 10.2%
Defense Electronics.................... 5.4 5.3
Agrochemicals.......................... 2.3 1.9
The Koor Group's updated research and development efforts have resulted in
an increase in the sales of internally designed products. Management
believes that research and development in high technology areas, such as
the Telecommunication Equipment, Defense Electronics and Agrochemicals
businesses, is important to the Company's future growth, particularly in
products targeted for export markets. Accordingly, it is anticipated that
the foregoing businesses will account for a majority of the Koor Group's
research and development efforts in the future. As part of its research and
development programs, the Company not only seeks to develop new products,
but also seeks to apply newly developed technologies to improve its
existing products.
In each of the last three fiscal years, the Company received grants from
the Government of Israel through the Office of the Chief Scientist (the
"OCS") for the development of certain products. The Company generally may
receive from the OCS 20% to 66% of certain research and development
expenditures for particular projects. Under the terms of Israeli Government
participation, a royalty of 3% to 5% of the net sales of products developed
from a project funded by the OCS is generally required to be paid,
beginning with the commencement of sales of products developed with grant
funds and ending when 100% to 150% of the grant is repaid. The Company has
paid in the past, and currently pays, royalties on sales of such products.
Terms of Israeli Government participation also require that the research
and development be conducted by the applicant for the grant as specified in
the grant application and that the manufacturing of products developed with
government grants be performed in Israel, unless a special approval has
been granted. Separate Israeli Government consent is required to transfer
to third parties technologies developed through projects in which the
government participates. Such restrictions, however, do not apply to
exports from Israel of products developed with such technologies. From time
to time the Government of Israel has revised its policies regarding the
availability of grants and participation, and there can be no assurance
that the Government's support of research and development will continue in
the future. In addition, in order to be eligible for the governmental
grants, programs and tax benefits, the Company must continue to meet
additional certain conditions, including making certain specified
investments in fixed assets. Should the Company fail to meet such
conditions in the future, it could be required to refund grants or tax
benefits already received (together with interest and certain inflation
adjustments). Although the Company expects that the Approved Enterprise
status of its facilities and programs will continue, the termination or
reduction of certain grants, programs and tax benefits (particularly
benefits available to the Company as a result of the Approved Enterprise
status of substantially all of the Company's facilities and programs) could
have a material adverse effect on the Company's results of operations and
financial condition. See Note 16G(2) of Notes to Financial Statements.
<PAGE>
In May 1999, Israeli Ministry of Finance decided to place limits on the
funds OCS grants to Israel's 24 largest companies. The full extent of the
decision is unknown, however it may have a material adverse effect on the
Company's results of operations.
The following table shows, for each of the periods indicated, the gross research
and development expenses of the Company, the portion of such expenses that were
funded by the Israeli Government (primarily through the OCS) and BIRD-F, and the
net cost to the Company of its research and development expenses:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1998 1999 1999
(Adjusted NIS in thousands) ($ in thousands)
<S> <C> <C> <C> <C>
Gross research and development expenses..................... 552,262 583,778 443,367 106,758
Portion funded by the Israeli Government and BIRD-F(1)...... 45,665 56,180 15,645 3,767
------- ------- ------- -------
Net research and development expenses....................... 506,597 527,598 427,722 102,991
======= ======= ======= =======
</TABLE>
--------------------------
(1) Net of royalties.
Competition
In 1999, the majority of the Company's revenues from Telecommunication
Equipment, Defense Electronics and Agrochemicals businesses were derived from
international sales. The companies comprising these businesses are focusing on
developing new markets to increase international sales. The worldwide marketing
of products in each of these businesses is highly competitive and certain
competitors are substantially larger and have substantially greater financial,
production and research and development resources, more extensive marketing and
selling organizations, greater name recognition and longer selling experience
than the Company. Some of the competitors are also able to provide their
customers with more direct financing or greater access to long-term, relatively
low-cost government loans to finance equipment purchases.
Patents and Intellectual Property
Companies in the Koor Group own and control a substantial number of patents,
trade secrets, confidential information, trademarks, trade names and copyrights
which, in the aggregate, are of material importance to the Company's business.
Management is of the opinion that the Koor Group's business, as a whole, is not
materially dependent upon any one of such assets or any related group of such
assets. The Koor Group is also licensed to use certain patents and technology
owned and controlled by others, and, similarly, other companies are licensed to
use certain patents and technology owned and controlled by the Koor Group.
The IMDF retains (and, in certain limited circumstances, certain of the
Company's other customers, including the United States Government, may
retain) certain rights to technologies and inventions resulting from the
Company's performance as a prime contractor or subcontractor under certain
contracts and may disclose such information to third parties, including
other defense contractors who may be competitors of the Company. When the
IMDF and, in certain limited circumstances, certain of the Company's other
customers, fund research and development, they usually acquire rights to
data and title to inventions and the Company may retain a non-exclusive
license for such inventions. In certain circumstances, the IMDF and some of
the Company's other customers are entitled to receive royalties in respect
of the sale of products, the development of which was financed by those
entities. However, if the IMDF or one of the Company's other customers
purchases only the end product, the Company normally retains the principal
rights to the technology.
<PAGE>
Regulation
The Company's diverse businesses are subject to significant statutory and
administrative regulation in the various jurisdictions in which the Company
operates throughout the world. Among the regulations to which the Company is
subject are those described below.
Monopoly and Pricing Regulations
In connection with the purchase of Koor shares by the Claridge Group, and the
application submitted to the Restrictive Trade Practices Controller regarding
the merger of Koor and the Claridge Group, the Controller, in his approval to
the merger on October 1997, imposed several restrictions upon Koor. These
restrictions were cancelled following Koor's sale of its interest in Mashav.
Koor or other subsidiaries or affiliates of Koor may be declared monopolies or
otherwise be subject to certain legal obligations and restrictions established
by the Restictive Trade Practices Controller or by the Restrictive Business
Practices Court (the "Court") in the event that the market share of these
companies exceeds certain prescribed limits.
Environmental, Health and Safety Matters
General. The Koor Group is subject to laws and regulations concerning
environmental, product safety, health and safety matters, and regulation of
chemicals in countries where it manufactures and sells its products. These
requirements include regulation of the handling, manufacture, transportation,
use and disposal of materials, including the discharge of pollutants into the
environment. In the normal course of its business, the Company is exposed to
risks relating to possible releases of hazardous substances into the
environment, which may cause environmental or property damage or personal
injuries. In Israel, where the Company maintains its principal production
facilities, losses and damages relating to continuous environmental pollution
are currently uninsurable.
It is the Company's policy to comply with environmental product safety, health
and safety requirements, and to provide workplaces for employees that are safe
and environmentally sound, and that will not adversely affect the health or
environment of communities in which the Company operates. From time to time, the
Company's facilities may be subject to environmental compliance actions and the
resolution of such matters has in the past involved the establishment of certain
compliance programs. Israeli legislation enacted in 1997 amended certain
environmental laws by authorizing the relevant administrative and regulatory
agencies to impose certain sanctions, including issuing an order against any
person that violates such environmental laws to remove the environmental hazard.
In addition, such law imposes criminal liability on the officers and directors
of a corporation that violates such environmental related laws, and increases
the monetary sanctions that such officers, directors and corporations may be
ordered to pay as a result of such violations. The Company has established
worker safety programs and procedures in its plants, which the Company believes
are reasonable under the circumstances, and the Company believes that its
experience relating to worker accidents is generally consistent with
industry-wide experience. Furthermore, the Company believes that it is not
currently subject to material liabilities for non-compliance with applicable
environmental, health and safety laws, although there is a risk that legislation
enacted in the future could create liabilities for past activities undertaken in
compliance with then-current laws and regulations or that there may be
environmental damage of which the Company is not aware.
<PAGE>
In addition to the specific matters described below, at a number of locations at
which certain of the businesses have conducted manufacturing operations for many
years, it is possible that contamination may exist as a result of on-site waste
disposal, spills, use of wastewater treatment ponds, or other historical
practices. While in recent years industrial solid wastes generally have been
disposed of at a central State-authorized disposal facility in Ramat Hovav, this
central facility was not available to Israeli industry during earlier periods of
operation. It is unclear whether any existing conditions on any Company-owned
property will require significant redemption or cleanup in the future, and the
Company cannot speculate about the timing or potential costs associated with
such cleanup. It is possible, however, that material expenditures could be
required with respect to these past practices.
In recent years, the operations of the Company's businesses have become subject
to increasingly stringent legislation and regulation related to occupational
safety and health, product registration and environmental protection. Such
legislation and regulations are complex and constantly changing, and there can
be no assurance that such regulatory changes in the future will not require the
Company to make significant capital expenditures to modify, supplement or
replace equipment, or to change methods of disposal or discharge, or the manner
in which the Company manufactures products or operates its businesses. In
Israel, in particular, the Company anticipates that increasingly stringent
requirements will result in substantial expenditures, particularly for
improvements of environmental controls at older facilities. The Company has
generally adopted, or intends to adopt in its newer facilities, environmental
control standards comparable to those set by the German Technische Anleitung
Luft air emission regulations. These regulations set forth strict controls on
air emissions from industrial facilities. The Israeli government has looked to
these standards as a basis for upgrading its air pollution requirements and has
applied the standards to some, but not all, facilities in Israel.
The Company regularly incurs capital expenditures and operating costs to comply
with various environmental, health and safety laws and regulations. The costs
related to environmental matters may increase significantly in the future if the
implementation of new environmental standards in Israel is more rapid or
stringent than currently anticipated by the Company, or if contemplated
pollution control measures do not achieve the desired results.
MA Group. The distribution and use of agricultural chemical products, including
crop protection chemicals such as those produced by the Agrochemicals business,
are regulated in most parts of the world, requiring extensive testing, quality
control and compliance with registration procedures. The strictest standards are
applied in the United States, where the Environmental Protection Agency ("EPA")
is the leading regulator, and in Japan and Western Europe. The granting of a
registration involves consideration of health, safety and environmental issues,
as well as the performance and benefits of the product. The registration for an
agricultural chemical product in the U.S. and in Western Europe is often subject
to data call-in or process. Usually, updating the registration necessitates the
submission of additional data by the Company. Re-registrations, which permit the
continued sales of pesticides for an additional period, are frequently granted
as a matter of course, subject to compliance during the term of the registration
period. While Makhteshim and Agan are not aware of any immediate intent to
cancel any of their registrations, there can be no assurance that the Company
might not face a revocation process or encounter difficulties in renewing the
registrations for its products for additional periods.
From time to time, some of the Company's agrochemical products are subject to
legislative or other initiatives to curtail or regulate their use due to
environmental, health or safety concerns.
Registration expenditures for the MA Group in each of the last two years
averaged approximately $20 million. The Company believes that its registration
expenditures in the future will increase, based on the stricter standards that
are expected to be applied in countries where the Company sells its products. As
a result of the foregoing developments and obligations, virtually all of the
Company's businesses in recent years have spent significant amounts on operation
and maintenance, as well as under capital programs to address increasingly
stringent requirements with respect to environmental, safety, and health
protection concerns.
<PAGE>
Agan expects to invest approximately $20 million over the next five years in
biological wastewater treatment facilities, pollution control equipment and
other environmental related matters.
Pursuant to recent analysis of underground sub-layers in Ramat Hovav, where one
of Makhteshim's plants is located, signs of possible contamination were
discovered. Further surveys are being conducted in conjunction with other plants
in Ramat Hovav by certain University institutions, and Makhteshim has undertaken
to finance one-third of the $1.2 million research expenses. At this stage,
Makhteshim cannot assess the possible cost it might incur in respect of the
above, should a solution be found and implemented.
Defense and Government Contracts
The businesses of the Company which sell their products to military and
governmental markets are subject to various statutes, regulations and
administrative rules governing defense and government contracts and the
manufacture and sale of defense products in the United States, Israel and other
countries, including the following:
Defense Electronics subsidiaries export a number of military systems and
products in accordance with the military export policy of the State of Israel.
Current Israeli policy encourages exports to approved customers of military
systems and products similar to those manufactured by the Company, provided that
such exports do not run counter to Israeli Government policy, including national
security considerations. A permit is required to initiate a sale proposal and an
export license is necessary for the actual sale transaction. To date, the
Company has not encountered significant difficulties in obtaining or retaining
the necessary permits or licenses, but no assurance can be given that the
Company will continue to be able to obtain or retain such permits or licenses
or, that one or more permits or licenses will not be revoked, or that
governmental policy with respect to military exports will not be altered.
Difficulties in obtaining or retaining such permits or licenses, if encountered
in the future, could have a material adverse effect upon the Company.
In addition, the revocation of a required permit or license after having been
granted would likely preclude the Company from fulfilling its contractual
obligations. In such a case, the Company might be unable to assert the defense
of force majeure (or a similar defense) relating to any resulting breach of
contract claim and might therefore be held liable for damages, or subject to
other penalties. Substantial damages arising from such a claim could have a
material adverse effect upon the Company's results of operations and financial
condition. In addition, suspension or debarment of the Company as a government
contractor is among the possible penalties imposed for defaulting on a
contractual obligation due to the revocation of a license.
Joint Ventures, Subcontracting and Teaming Arrangements. Certain military
projects of the Company are conducted under joint ventures, subcontracting
or other "teaming" arrangements pursuant to which the Company is
responsible for a portion, but less than all, of a project. In certain of
such instances, the Company is not permitted to participate, or even
assist, in that portion of the project for which it is not responsible.
Notwithstanding the foregoing, in the event of a termination of, or a
default under, certain prime contracts or subcontracts (whether or not the
Company is a party to such prime contract or subcontract), including a
termination for cause or convenience or a default on the part of a joint
venture, prime contractor, subcontractor or "teaming" partner (for which
termination or default neither the Company nor such other person is
responsible and which termination or default may be beyond the control of
the Company and such other person), the Company might be held liable for
damages, or subject to other penalties, which could be very substantial and
might have a material adverse effect on the Company's results of operations
and financial condition. Moreover, certain joint ventures, subcontracting
or other "teaming" agreements to which the Company is a party, deny or
limit the right of the non-defaulting party to seek damages or
indemnification from the defaulting party in such circumstances.
<PAGE>
Contract Financing. There are various types of financing terms applicable
to defense contracts (and in some cases, large telecommunications
contracts). In some cases, the Company receives progress or milestone
payments according to a percentage of the progress in performance or
achievement of specific milestones. In certain cases, work is performed
prior to receipt of any payment, which means that the Company finances the
project. In other cases, the Company receives advances prior to incurring
the cost of fulfilling the contract, which creates a positive project cash
flow. In this latter case, the customer normally requires financial
guarantees against advances paid. The Company often receives substantial
advances from its customers. In the event that a contract under which an
advance has been paid is canceled, the Company may be required to return
all or a portion of such advance to the customer. If sales had been
recognized under such a contract, such cancellation could cause losses to
the Company that might have a materially adverse effect on the Company's
results of operations and financial condition.
Fixed Price Contracts. Approximately 90%-95% of the Company's defense contracts
are made on a fixed price basis. Such contracts are subject to the risk that
actual costs may exceed those anticipated at the time the contracts are
executed, particularly when the products to be sold pursuant to the contracts
require a substantial amount of development.
Employees and Labor Relations
The Company is subject to various Israeli labor laws, collective bargaining
agreements, Israeli labor practices, as well as orders extending certain
provisions of collective bargaining agreements between the Histadrut
(currently the largest labor organization in Israel) and the Coordinating
Bureau of Economic Organizations (the federation of employers'
organizations). Such laws, agreements and orders are of wide scope,
including minimum employment standards (including, among other things,
working hours, minimum wages, vacation and severance pay), and special
issues, such as equal pay for equal work, equal opportunity in employment,
and employment of women, youth and army veterans. Currently, all of Koor's
employees have individual employment agreements with Koor.
According to the National Insurance Law, Israeli employers and employees are
required to pay predetermined sums to the National Insurance Institute, an
organization similar to the United States Social Security Administration. These
contributions entitle the employees to benefits during periods of unemployment,
work injury, maternity leave, disability, reserve military service, and
bankruptcy or the winding-up of the employer, in addition to health insurance.
The National Health Insurance Law 1994 imposes a health tax at a rate of 4.8% of
the base wage.
The collective bargaining agreements of the Company's subsidiaries cover a term
of one to three years or are for an indefinite period. Upon expiration of the
term of an agreement, and pending negotiations for extension, the provisions of
the agreement remain in force unless one of the parties gives a notice of
termination or a new collective agreement is signed. Management believes that,
upon expiration of such existing agreements, its subsidiaries will be able to
negotiate, without material disruptions to the Company's business, satisfactory
new agreements. However, there can be no guarantee that satisfactory agreements
will be reached in each subsidiary or that the negotiation of such agreements
will not generate material disruptions to the Company's business.
In 1999, total labor costs of the Koor Group (including temporary employees)
amounted to approximately NIS 2,687 million, which represented approximately
25.2% of the Koor Group's total revenues. The majority of the Koor Group's labor
costs are denominated in NIS and are affected by the periodic changes in the
inflation rate in Israel.
The future success of the Company will depend significantly upon its
ability to attract and retain highly skilled and qualified personnel.
Although competition for such personnel is generally intense, the Company
believes adequate personnel resources are currently available in Israel.
<PAGE>
In October 1994, a claim seeking declaratory relief was filed by the
Engineering Workers Union against Telrad in the Tel-Aviv Regional Labor
Court, demanding the recognition and application of the wage tables
contained in the collective bargaining agreement signed in 1993 and 1994,
between the Engineering Workers Union and the employers in the public
service sector. On January 31, 1996, the Tel-Aviv Regional Labor Court
rejected the above claim on the grounds that the Koor Agreement from 1994
is not a collective agreement and, therefore, not enforceable by the
Engineers Union. The Engineers Union has appealed the decision to the
National Labor Court. The appeal was heard and the parties are awaiting the
Court's decision. Telrad's management believes, based upon an opinion of
counsel, that the claim of the Engineering Workers Union is deficient in a
number of significant ways and that Telrad's chances of prevailing are
good, in view of its defenses.
At the opening of the hearing of the appeal, the Histadrut submitted a
petition that Koor be added as a party to the proceedings. Koor contested
the petition. The National Labor Court has not yet made a determination on
this issue. In the opinion of Koor's legal counsel, Koor has strong
arguments against the Histadrut's petition and under the prevailing law
there is no basis to grant the petition to add Koor as a party to the
proceedings.
In April 1996, the Lod Workers Council, on behalf of Telrad's Committee of
Monthly Workers, filed in the Regional Labor Court a claim concerning the
application of wage tables applicable in the public service sector, to Telrad
monthly employees. The parties to the litigation agreed to stay the proceedings
until the National Labor Court decides on the appeal of the Engineering Workers.
In 1999, a claim was filed against Telrad by company employees who are
members of the company's workers committee. They are suing to examine
Telrad's accounts so that they can calculate the distribution of earnings
to employees. They are also suing for a declaratory judgment in order to
require Telrad to prepare new accounts for the distribution of earnings. In
addition, an application was filed to recognize the plaintiffs as the
representatives of all of Telrad's workers and employees. In response,
Telrad filed an application, as agreed, to extend the date for submission
of its response on the grounds that another proceeding is pending between
the parties in which the matter of a class action has also arisen. This
application was accepted.
Risk Factors
In addition to the other information in this Annual Report on Form 20-F, the
following risk factors should be carefully considered in evaluating the Company
and its businesses.
Certain statements included in this Annual Report, which use the terms
"estimate," "project," "intend," "expect" and similar expressions are
intended to identify forward-looking statements within the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
are subject to risks and uncertainties that could cause actual results to
differ materially from those contemplated by such forward-looking
statements, including the factors set forth herein and elsewhere in this
Annual Report. See "Item 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations." Because of time and other
factors affecting the Company's operating results, past historical
performance should not be used as an indicator of future performance, and
investors should not use historical trends to anticipate results or trends
in future periods.
<PAGE>
Dependence on Subsidiaries and Affiliates for Dividends and Management
Fees. Koor conducts its business primarily through its wholly and partially
owned subsidiaries, and is dependent upon management fees and cash
distributions from its subsidiaries and affiliates as a source of cash flow
for funding its corporate level activities. Koor received management fees
in the amount of NIS 65 million and of NIS 63 million in 1999 and 1998,
respectively, pursuant to management agreements between Koor and certain
subsidiaries and affiliates. In addition, in 1999 Koor received NIS 1,540
million in dividends from subsidiaries and affiliates, of which NIS 1,131
million was received from Tadiran, including with respect to sales of
interests in subsidiaries, and NIS 355 million was received from Mashav. In
1998, dividends received by Koor aggregated NIS 1,298 million, of which NIS
543 was received with respect to sales if interests in subsidiaries and NIS
422 due to the delisting of Tadiran. In recommending dividends and
approving management fees, the directors and applicable committees of each
subsidiary must take into consideration (i) Israeli corporate law, (ii) tax
exemption for undistributed profits under the Investment Law (as defined
below), (iii) the provisions of the charter documents of the subsidiary,
(iv) the best interests of such subsidiary, and (v) any restrictive
covenants that may be contained in financing or other agreements of such
subsidiary. Certain of Koor's subsidiaries are subject to certain dividend
payment restrictions derived from such certain subsidiaries' partnership
structure organizational documents, credit agreements and tax
considerations. Koor's other principal sources of funds are from bank loans
and sales of assets, including shares of Koor's subsidiaries. In the event
that Koor was to experience a substantial reduction in the level of
payments of dividends and management fees, there can be no assurance that
alternative sources of cash flow will be available to Koor to carry out
certain of its investment plans, to pay dividends on its capital stock and
to service its debt.
In addition, all unsecured indebtedness of Koor is effectively subordinated
to all liabilities, including trade payables of Koor's subsidiaries. Any
right of Koor to receive assets of its subsidiaries upon their liquidation
or reorganization (and the consequent right of the holders of Koor's
indebtedness to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's creditors (including trade
creditors), except to the extent that Koor is itself recognized as a
creditor of such subsidiary, in which case the claims of Koor would still
be subordinate to any security interests in the assets of such subsidiary
and any indebtedness of such subsidiary senior to that held by Koor. Under
Israeli law, certain indebtedness of a company under liquidation, including
certain indebtedness resulting from an employment relationship or tenancy
and certain indebtedness resulting from governmental and municipal tax
liabilities may rank prior to other unsecured indebtedness.
Necessity to Develop and Introduce New Products in the Telecommunication
Equipment and Defense Electronics Businesses; Reliance on Licensed
Technology. For the years ended December 31, 1999 and 1998, the
Telecommunication Equipment and Defense Electronics Businesses accounted
for approximately 33.1% and 39.0% of Koor's consolidated revenues,
respectively, in each of these years. In addition the investment in ECI and
BVR accounted for 91% of the investments in investees. The businesses and
markets in this segments are characterized by rapid technological
development. Consequently, the ability to anticipate changes in technology
and to develop and introduce new and enhanced products incorporating such
new technologies on a timely basis will be significant factors in the
ability of the businesses in the Telecommunication Equipment and Defense
Electronics Businesses to grow and to remain competitive. Telrad, Elisra
and ECI establish their own research and development priorities and
budgets. In addition, certain of Telrad's products have been based on
technology licensed from Nortel. As a result, the Company's ability to
introduce new and enhanced products has been partially dependent on Nortel
continuing to provide advanced technology to Telrad. However, following the
completion of the establishment of Nortel Israel and the related change in
Telrad's business, such reliance shall be substantially reduced. In
addition, one of the Company's objectives is to continue to seek to apply
certain of the advanced technologies developed in its Defense Electronic
Businesses to new commercial products. However, there can be no assurance
that such technologies will be successfully applied or that markets will
develop for such products. See "-The Telecommunication Equipment and
Defense Electronics Businesses."
<PAGE>
Reliance on the Expiration of Patents and Need for Regulatory Approval in
the Agrochemicals Industry. For the years ended December 31, 1999 and 1998,
Agrochemicals business accounted for approximately 33.2% and 26.4% of
Koor's consolidated revenues, respectively. The MA Group specializes in the
improvement and production of agrochemical generic products, which are
products that are based on expired patents. Development of new generic
products requires substantial expenditures for research and development,
product registration, construction of production lines and marketing in
support of new product introduction. An important component for the growth
of the Agrochemicals business is the successful introduction of new generic
chemical products to the market in a timely manner (promptly after patents
expire). Reintroduction of any new legislation to extend the life of
patents on chemical products could adversely affect the ability of the
Agrochemicals business to introduce new products.
Also, most countries require the Company to obtain regulatory approval
prior to selling newly introduced products, which is both time consuming
and expensive. Any delay in the development or introduction of new products
or in obtaining regulatory approval from the countries where the
Agrochemicals business markets its products may have a material adverse
effect on the Company's results of operations and financial condition. In
addition, new developments in the field of trans-genetic plant species that
are toxic to insects and plant species that are resistant to fungal disease
may have an adverse effect on sales of the Agrochemicals business. See
"Agrochemicals Business" and "Regulation."
An Investigation of the Office of Restrictive Trade Practices. Koor or
other subsidiaries or affiliates of Koor may be declared monopolies or
otherwise be subject to certain legal obligations and restrictions
established by the Israeli Restrictive Trade Practices Controller or by the
Court. See "-Regulation-Monopoly and Pricing Regulations." On December 13,
1998 the Controller announced in a press release that the Investigations
Department of the Antitrust Authority has concluded the investigation
regarding allegations of illegal restrictive arrangements between Koor,
TTL, Telrad, Bezeq and Bezeqcall Communications Ltd. in the field of the
supply of public switches and in the N.S.R. area. According to the
announcement, the investigators recommend indicting some of the examinees
regarding some of the allegations investigated, and the Legal Department of
the Antitrust Authority will decide if offenses were in fact committed and
if there is a sufficient evidential basis for trial. As of June 15, 2000,
no details were released about the findings of the Legal Department. Under
the Law, a fine may be levied against an entity that has violated the Law.
There is also the possibility of negative repercussion in the civil domain,
should it be proven that violations have indeed been committed. The
management of the Company and its subsidiaries, after consultation with
their legal counsel, are in the opinion that, at this stage, as long as the
results of the Controller examinations have not yet been published, it is
not possible to assess the possible developments in this matter, nor to
evaluate if a significant loss is expected to result, if at all.
Dependence on Key Customers and Supplier. Telrad has been substantially
dependent upon its relationship with Nortel as a key supplier of technology
and as a key customer of Telrad's products. For the years ended December
31, 1999 and 1998, approximately 7.8% and 4.2%, respectively, of Koor's
consolidated revenues and 43.2% and 36.8%, respectively, of Telrad's
revenues were derived from sales to Nortel. This dependence will be
substantially reduced after completion of the transaction with Nortel and
Nortel Israel. See "Telecommunication Equipment Business - Telrad."
Future Military Spending. For the years ended December 31, 1999 and 1998, sales
of military products accounted for approximately 10.9% and 14.6%, respectively,
of Koor's consolidated revenues. A decline in worldwide military spending may
have material adverse effect upon the Company's results of operations and
financial condition. Both in Israel and worldwide, demand for military products
has been generally declining during the past few years.
<PAGE>
Exchange Rate Fluctuations and Impact of Inflation in Israel. Koor's, major
subsidiaries and affiliates make significant portions of their sales
outside of Israel in dollars or other non-Israeli currencies and incur
significant portions of their expenses in NIS, and some subsidiaries and
affiliates whose sales are principally in NIS incur expenses in dollars or
in other non-Israeli currencies. For example, a significant portion of the
revenues of the Telecommunication Equipment, Defense Electronics and the
Agrochemicals businesses are in dollars, whereas a significant portion of
expenses of these businesses are incurred in NIS and generally linked to
the Consumer Price Index (the "CPI"). In addition, certain borrowings are
linked to the dollar or other non-Israeli currencies or to the CPI. However
the rate of inflation in Israel in the past years is gradually declining.
During the calendar years 1997 and 1998 the annual rate of inflation was
approximately 7.0% and 8.6% respectively while the NIS was devalued against
the dollar by approximately 8.8% and 17.6% respectively. In 1999, the
annual rate of inflation increased approximately 1.3%, while the NIS
appreciated against the dollar by approximately 0.2%. Continued inflation
in Israel and the delay in or lack of any devaluation of the NIS in
relation to the dollar and other currencies may have a material adverse
effect on the Company's results of operations and financial condition. See
"Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations-General."
During 1999, the local currency in Brazil was devalued in relation to the
dollar by approximately 48% and the currency rate was extremely volatile
during this period. Until the third quarter of 1999 most of the customer
debts of Milenia in Brazil were linked to the exchange rate of the dollar.
During the third quarter, owing to the sharp cumulative rise in the
exchange rate of the local currency against the dollar, the customer market
in Brazil no longer accepted linkage to the dollar and therefore customer
balances, net of Milenia in Brazil as of December 31, 1999 amounting to a
total of $140 million are not linked to the dollar. The MA Group has
entered into a hedging arrangement for $65 million to offset this exposure.
To compensate for inflation in Israel and changes in the relative value of
Israeli currency compared to the dollar and other currencies, Koor and
certain of its subsidiaries and affiliates have adopted financial
strategies, including entering into foreign currency transactions with
respect to certain specific commitments and general hedging transactions
with respect to monetary assets and liabilities denominated in non-Israeli
currencies (including Brazilian currency). There can be no assurance,
however, that such activities, or others that may be from time to time
undertaken by the Koor Group, will eliminate the negative financial impact
of such fluctuations. See Note 21B of Notes to Financial Statements and
"Item 9A. Quantitative and Qualitative Disclosures About Market Risk."
Operations in Israel; Political and Military Conditions; Economic
Conditions. Koor and its principal subsidiaries are incorporated under the
laws of the State of Israel, where their principal offices and substantial
portion of the Koor Group's operations are located. The Company is directly
influenced by the political, economic and military conditions affecting
Israel. Accordingly, any major hostilities involving Israel, the
interruption or curtailment of trade between Israel and its present trading
partners, a significant increase in inflation or a significant downturn in
the economic or financial condition of Israel could have a material adverse
effect on the Company's business, results of operations and financial
condition. Despite the progress towards peace between Israel, its Arab
neighbors and the Palestinians, there remain a number of countries which
restrict business with Israel or Israeli companies. There can be no
assurance that restrictive laws or policies directed toward Israel or
Israeli businesses will not have an adverse impact on the expansion of the
Company's business.
Year 2000 Issue. The "Year 2000 issue" refers to the use by many computer
hardware and software systems of only two digits to represent the calendar
year. As a result, these systems and programs may not process dates beyond
1999, which may cause errors in information or systems failures. The
Company believes it has taken all reasonable and prudent steps to protect
its assets and operations from the impact of the Year 2000 Issue. To date
there have been no known adverse effects on any of the Company's operations
or offices. While the change in date has occurred, it is not possible to
conclude that all aspects of the Year 2000 Issue that may affect the
Company have been fully resolved. The Company believes that exposure to
business disruption remains, but does not expect it would have a material
impact on the Company's results of operations, liquidity and financial
condition.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
Koor's headquarters are located in the Platinum building at 21 Ha`arba`ah St.,
Tel-Aviv, Israel where Koor owns an aggregate of 18,000 square feet of office
space. Koor purchased this facility in 1998.
The manufacturing facilities of the Koor Group companies are located
throughout Israel. Major concentrations are in the Beersheva/Ramat Hovav
area in the south and the Tel Aviv-Petach Tikva-Holon- Ramla-Lod-Ashdod
area in the central part of Israel. The Company owns its major
manufacturing plants, facilities, machinery and equipment. In addition, the
Company leases certain manufacturing and office facilities.
Most of the industrial land utilized by the Company is under 49-year leases
from the Israel Lands Authority (in a significant number of cases with
options for an additional 49 years). Land rent on uncapitalized leases is
generally equal to 4% of the value of the land per annum and is subject to
revaluation every seven years.
The Company believes that, in general, it has sufficient plant capacity for its
current level of operations and that it has the ability to expand its plant
capacity when required.
ITEM 3. LEGAL PROCEEDINGS
For a discussion of the Company's employee relations and certain legal activity
in connection therewith, see "Item 1. Description of Business-Employees and
Labor Relations."
For a discussion of the investigation of the Restrictive Trade Practices
Controller concerning Tadiran and Telrad, see "Item 1. Description of Business -
Risk Factors.
The companies that comprise the Koor Group are involved in various other
litigation proceedings incidental to the Company's business, see Note 18a of
Notes to Financial Statements. Management does not believe that any of such
proceedings will have a material adverse effect upon the Company.
<PAGE>
ITEM 4. CONTROL OF REGISTRANT
The following table sets forth certain information regarding the ownership of
Ordinary Shares as of June 1, 2000, with respect to: (i) each person known by
Koor to own more than 10% of the outstanding Ordinary Shares, and (ii) all
officers and directors of Koor as a group.
<TABLE>
<CAPTION>
Number of Percentage of
Ordinary Shares Outstanding Ordinary Shares
Beneficially Owned Beneficially Owned(1)(2)
<S> <C> <C>
Claridge Group (3).................................................... 5,389,573 34.70%
Hapoalim Properties (Shares) Ltd. (a subsidiary of Bank Hapoalim)..... 3,180,279 20.48%
Officers and Directors as a Group (19 persons)........................ 225,023(4) 1.43%
</TABLE>
-----------------------
(1) Based upon 15,459,199 Ordinary Shares issued and outstanding on June 1,
2000, which amount excludes 442,208 Ordinary Shares reacquired by Koor
through May 2000 under Koor's Board resolution to use $50 million for
reacquiring Koor's Ordinary Shares and 624,577 Ordinary Shares owned by
Koor Trusts (1995) Ltd. that do not confer voting or distribution rights.
See Note 20 to the Financial Statements. The respective numbers of Ordinary
Shares listed as beneficially owned in the table above, and the percentage
of outstanding Ordinary Shares represented thereby, do not give effect to
(i) the conversion of NIS 93,740,446 aggregate principal amount of Series F
convertible debentures into 284,062 Ordinary Shares, and (ii) Ordinary
Shares issuable upon exercise of options granted pursuant to the 1997 and
1998 Plans, which are exercisable within 60 days of this Annual Report. See
"Item 12. Options to Purchase Securities from Registrant or Subsidiaries",
and Note 20C to the Financial Statements.
(2) As of June 1, 2000, certain subsidiaries of Koor held an aggregate of
182,436 Ordinary Shares and 12,927,374 deferred shares of Koor, par value
NIS 0.001 per share (the "Deferred Shares"). Holders of Deferred Shares are
only entitled to receive the nominal paid-up value of the Deferred Shares
in the event of the winding up of Koor, subject to prior payment of the
nominal paid-up value of the Ordinary Shares to the holders of Ordinary
Shares. The holders of the Deferred Shares do not have any voting rights
and they are not entitled to participate in the distribution of dividend of
any kind.
(3) The Claridge Group holdings are comprised as follows:
a) Claridge Israel L.L.C., a Delaware limited liability company, which
holds 4,542,333 Ordinary Shares. Claridge Israel L.L.C. is owned by
the following two different trusts, whose beneficiaries are relatives
of Charles Bronfman, Koor's Chairman of the Board:
I. Charles Bronfman Trust - a trust established under the laws of
the U.S.A. (primarily) for the benefit of Charles R. Bronfman and
Ellen J. Bronfman Hauptman and her issue;
II. Charles R. Bronfman Trust - a trust established under the laws of
the U.S.A (primarily) for the benefit of Charles R. Bronfman and
Stephen R. Bronfman and his issue.
<PAGE>
b) Anfield Ltd., a company registered in Israel, which holds 847,240
Ordinary Shares. Anfield Ltd. is owned by Jonathan Kolber, Koor's
Chief Executive Officer and Vice Chairman of the Board of Directors.
The holdings of the Claridge Group in Koor shares were pledged in
favor of Bank Hapoalim as a guarantee for a loan that was given to the
Claridge Group by Bank Hapoalim.
Pursuant to certain restrictions under an amendment to the Banking
(Licensing) Law 1981, with respect to non bank-holdings held by
banking corporations, on July 12, 1998, the Claridge Group and Bank
Hapoalim, on behalf of Hapoalim Properties (Shares) Ltd., signed
certain agreements concerning their holdings in Koor, the principles
of which are:
(i) Bank Hapoalim was granted a put option to sell to the Claridge
Group its holdings in Koor which are in the excess of 20%. The
put option is exercisable from January 1, 1999 until December 1,
1999. The Bank exercised the put option with respect to 364,038
shares and the Claridge Group acquired such shares in December
1999.
(ii) The Claridge Group was granted a right of first refusal in
respect of Bank Hapoalim's holdings in Koor of up to 20% ("the
remaining shares of Bank Hapoalim"). Should the Claridge Group
not exercise the above right, and Bank Hapoalim desires to sell
its remaining shares to any third party, Bank Hapoalim will have
the right to demand that the Claridge Group sell to that
particular third party up to 5% of its holdings in Koor shares,
to the extent these holdings exceed 32.5% of Koor's capital, in
order to enable that particular third party to purchase a total
of up to 25% of Koor Shares. In that case, the price per Ordinary
Share owned by the Claridge Group will be the higher of $142.50
or the price at which Bank Hapoalim sells its remaining shares to
that particular third party. Such right will expire should Bank
Hapoalim's holdings in Koor shares be lower than 19%, under
circumstances stipulated in the agreements; and
(iii) As long as the Claridge Group has the power to nominate the
majority of Koor's Board members, and as long as Bank Hapoalim
holdings in Koor will not fall below 5%, then the Claridge Group
is committed to vote for the appointment of members recommended
by Bank Hapoalim to the Koor Board of Directors, at graduated
rates of 10%-25% of the members.
4) Includes options to purchase Ordinary Shares held by certain officers and
directors, exercisable within 60 days of the date of this Annual Report and
40 shares held by one director, and does not include Ordinary Shares held
by the Claridge Group and Hapoalim Properties (Shares) Ltd. which may be
deemed beneficially owned by certain officers and directors as described in
Note 3 above.
<PAGE>
ITEM 5. NATURE OF TRADING MARKET
Koor's securities have been listed on the TASE since 1956. Koor's Ordinary
Shares have been listed on the TASE since 1991. The Ordinary Shares are not
listed on any other stock exchange and have not been publicly traded outside
Israel.
In the United States, the ADSs are traded on NYSE under the symbol "KOR" and are
evidenced by ADRs. Each ADS represents 0.20 fully paid Ordinary Shares. The ADSs
are issued pursuant to a Deposit Agreement entered into by Koor and The Bank of
New York, as depository. In addition, the ADSs are quoted on the Stock Exchange
Automated Quotation International System operated by the International Stock
Exchange of the United Kingdom and the Republic of Ireland Limited (SEAQ).
The table below sets forth for the periods indicated (i) the high and low last
reported prices of the Ordinary Shares on the TASE (in nominal NIS), and (ii)
the high and low closing sales prices of the ADSs as reported on the NYSE
Composite Tape.
<TABLE>
<CAPTION>
ADS
Equivalents
Ordinary Shares (1)
--------------- --------------
----------------------------------------- High Low
NIS $ $
----------------------------------------- ---- ---
High Low
------------------- --------------------
Year ended December 31, 1998:
<S> <C> <C> <C> <C>
First Quarter........................................... 448.00 335.00 25.00 18.31
Second Quarter.......................................... 484.00 450.00 26.56 23.12
Third Quarter........................................... 469.00 320.00 25.00 16.25
Fourth Quarter.......................................... 392.00 268.00 18.50 12.50
Year ended December 31, 1999:
First Quarter........................................... 419.00 341.00 21.44 17.00
Second Quarter.......................................... 493.00 417.00 25.13 21.13
Third Quarter........................................... 485.00 359.00 24.75 17.19
Fourth Quarter.......................................... 436.00 352.00 21.50 16.00
</TABLE>
--------------------
(1) Represents actual sales prices of ADSs, as reported on the NYSE Composite
Tape.
As of June 14, 2000, the last reported price of the Ordinary Shares on the TASE
was NIS 425.60 and the closing price of the ADSs as reported on the NYSE
Composite Tape was $20 5/8.
As of March 31, 2000, 6,747,615 ADSs (representing 1,349,523 Ordinary Shares)
were issued and outstanding and represented approximately 8.5% of the total
number of issued and outstanding Ordinary Shares of Koor. The ADS's were held of
record by 70 registered holders.
The address of The Bank of New York that serves as the depositary for the ADSs
is 101 Barclay Street, New York, New York 10286.
<PAGE>
Dividend Policy; Repurchase of Shares
In determining whether to declare a dividend, Koor's Board of Directors may take
into consideration, among other things, Koor's profits, business and financial
conditions, the economic situation and other conditions, as deemed appropriate
by the Board of Directors. As to Koor's dividend payment, see Note 20D to the
Financial Statements.
Koor paid an interim dividend for 1999 of NIS 3.60 per Ordinary Share on July
28, 1999, and declared additional dividends for 1999 of NIS 2.70 and NIS 7.80
per Ordinary Share which were paid on January 11, 2000 and April 10, 2000
respectively.
In April 2000, Koor`s Board of Directors approved the purchase of up to $50
million worth of Koor's Ordinary Shares and ADR`s, from time to time, in
open market purchases on the Tel Aviv and New York Stock Exchanges. Through
May 2000, Koor had purchased approximately $40 million in shares pursuant
to such program and wrote a put option exercisable at 14 August, 2000, for
115,000 Ordinary Shares at an exercise price of $92.949 per one Ordinary
Share.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
Under current Israeli regulations, any dividends or other distributions paid in
respect of ADSs or Ordinary Shares may be paid in non-Israeli currencies, or, if
paid in Israeli currency, will be freely repatriable in non-Israeli currencies
at the rate of exchange prevailing at the time of conversion. Because exchange
rates between the NIS and the dollar fluctuate continuously, a U.S. shareholder
will be subject to the risk of currency fluctuations between the dates when
NIS-denominated dividends are declared and paid by the Company in NIS. See "Item
1. Description of Business-Risk Factors-Exchange Rate Fluctuations and Impact of
Inflation in Israel."
Neither the Memorandum of Association of the Company nor the laws of the
State of Israel restrict in any way the ownership or voting of Ordinary
Shares by non-residents, except that certain restrictions may exist with
respect to citizens of countries which are in a state of war with Israel.
ITEM 7. TAXATION
The following discussion represents a summary of certain Israeli tax laws
affecting U.S. and other non-Israeli shareholders, for general information only
and is not intended to substitute for careful or specific tax planning. To the
extent that the discussion is based on legislation yet to be judicially or
administratively interpreted, there can be no assurance that the views expressed
herein will accord with any such interpretation in the future. This discussion
is not intended, and should not be construed, as legal or professional tax
advice, and does not cover all possible tax considerations. Each investor should
consult his or her own tax advisor as to the particular tax consequences of an
investment in the Ordinary Shares including the effects of applicable Israeli or
foreign or other tax laws and possible changes in the tax laws.
<PAGE>
Under current law, sales of ADSs or Ordinary Shares of the Company are exempt
from Israeli capital gains tax so long as they are listed on the TASE or on a
stock exchange, such as NYSE, recognized by the Israeli Ministry of Finance and
as long as the holder of such securities is an individual or a company
wholly-owned by individuals which did not receive trading income in the relevant
tax year or which has not claimed a financial expenses deduction in such year.
The latter condition with respect to a company wholly-owned by individuals was
added as a result of an amendment from October 1998 to the Income Tax
(Adjustment for Inflation) Law 1985 (the "Inflationary Adjustment Law"), which
extended the applicability of such law to include companies, including
non-resident companies which are not wholly-owned by individuals. Taxpayers to
whom the Inflationary Adjustment Law does not apply are exempt from tax on
profits deriving from the sale of listed securities, as described above. As a
result of the amendment, taxpayers to whom the Inflationary Adjustment Law
applies, will be liable to tax on the real gain accruing to them at the time of
sale of securities. The base cost for calculating the gain will be the market
value of the securities on December 31, 1998. Notwithstanding the foregoing,
dealers in securities in Israel are taxed at applicable tax rates to ordinary
income.
Pursuant to the Convention Between the Government of the United States of
America and the Government of Israel with Respect to Taxes on Income, as amended
(the "U.S.-Israel Tax Treaty"), the sale, exchange or disposition of ADSs or
Ordinary Shares by a person who qualifies as a resident of the United States
within the meaning of the U.S.-Israel Tax Treaty and who is entitled to claim
the benefits afforded to such resident by the U.S.-Israel Tax Treaty ("Treaty
U.S. Resident") will generally not be subject to Israeli capital gains tax
unless such Treaty U.S. Resident held, directly or indirectly, shares
representing 10% or more of the voting power of the Company during any part of
the 12-month period preceding such sale, exchange or disposition, subject to
certain conditions. A sale, exchange or disposition of ADSs or Ordinary Shares
by a Treaty U.S. Resident who held, directly or indirectly, shares representing
10% or more of the voting power of the Company at any time during such preceding
12-month period would be subject to such Israeli tax, to the extent applicable;
however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be
permitted to claim a credit for such taxes against the U.S. income tax imposed
with respect to such sale, exchange or disposition, subject to the limitations
in U.S. laws applicable to foreign tax credits.
Non-residents of Israel are subject to income tax on income accrued or derived
from sources in Israel or received in Israel. Such sources of income include
passive income such as dividends, royalties and interest, as well as non-passive
income from services rendered in Israel. On distributions of dividends other
than bonus shares (stock dividends) by the Company, income tax at the rate of
25% is generally withheld at source, unless a different rate is provided in a
treaty between Israel and the shareholder's country of residence.
During May 2000, the Public Committee regarding Changes in the Tax System in
Israel (Ben Bassat Committee) published various recommendations to reform the
tax laws, including recommendations that deal with tax relief on earned income
and with taxation income derived from capital and from capital market
operations.
According to the recommendations, capital gain from quoted securities of an
Israeli company, realised by an individual or a company, to which the
Inflationary Adjustment Law does not apply, will be taxable at the rate of 25%.
However, according to a clarification which the Ministry of Finance published on
May 9, 2000, residents of countries with whom Israel has signed a Treaty for the
Prevention on Double Taxation (such as the United States) will be tax-exempt on
gains from securities of companies that are listed on a stock exchange (such as
the Ordinary Shares and ADR's of Koor). In the case of controlling shareholders
who according to provision of the Treaty are liable to capital gains tax in
Israel, those person will have to report their income in Israel.
These recommendations are currently under review and there can be no assurance
as to whether or not such recommendations will be adopted or whether the final
form will differ from the proposals.
<PAGE>
ITEM 8. SELECTED FINANCIAL DATA
Yearly Selected Financial Data
The selected consolidated financial data is derived from the Financial
Statements, which have been prepared in accordance with generally accepted
accounting principles ("GAAP") in Israel, which differ in certain respects from
U.S. GAAP. See Note 28 to the Financial Statements.
The financial data amounts are expressed in adjusted new Israeli shekels ("NIS")
or in United States dollars ("dollars" or "$"). For the convenience of the
reader, the 1999 data contains translation of NIS into dollars. No
representation is made that NIS amounts have been, could have been or can be
converted into dollars at the prevailing rate on December 31, 1999, or at any
other rate.
All figures have been adjusted to reflect the increase in the Israeli Consumer
Price Index and are accordingly all expressed in the terms of the purchasing
power at December 1999, and not in the figures as originally reported. See "Item
9. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Unless otherwise stated, the translations of NIS into dollars appearing in this
data have been made at the representative exchange rate effective for December
31, 1999 of NIS 4.153 = $1.00 as published by the Bank of Israel, see Note 2B(1)
of Notes to Financial Statements. Therefore, it is possible to compute the
dollar equivalent of any of the figures in adjusted NIS by dividing such NIS by
the rate of exchange at December 31, 1999. See Note 2 of Notes to Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
Year ended December, 31
--------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
------------- ------------- ------------- --------------- ------------ -------------
Adjusted NIS $
---------------------------------------------------------------------------------- ------------
(In thousands, except per share data)
--------------------------------------------------------------------------------------------------
Operating Data:
Israeli GAAP:
<S> <C> <C> <C> <C> <C> <C>
Sales 12,313,596 12,519,342 12,925,375 12,792,316 10,675,301 2,570,503
Gross profit 2,711,880 2,822,887 3,035,346 2,925,292 2,545,435 612,915
Operating earnings 1,082,782 1,093,732 1,035,594 711,950 837,870 201,751
Financial expenses, net 148,511 137,569 151,843 251,015 358,289 86,273
Other income, net 19,411 160,175 117,399 (71,270) 107,228 25,820
Minority interest, net 160,300 249,587 254,530 239,964 (2,472) (595)
Result of discontinued
activities, net 20,581 16,590 15,929 69,420 -
Net earnings for the year 638,460 692,396 537,337 47,121 549,119 132,222
Earnings per Ordinary
Share 45.70 45.71 35.05 3.07 34.89 8.40
Cash dividends declared
per Ordinary Share 5.85 6.41 7.56 13.94 14.13 3.40
U.S. GAAP:
Income before 656,995 661,760 478,098 41,373 532,424 128,202
extraordinary item
Net income 658,025 666,214 480,740 43,190 537,899 129,521
Earnings per Ordinary
Share 47.35 44.09 32.03 2.77 34.20 8.24
Earnings per ADS 9.47 8.82 6.41 0.55 6.84 1.65
Balance Sheet Data:
Israeli GAAP
Working capital 2,292,442 2,343,577 3,045,391 3,487,042 910,131 219,150
Total assets 12,153,753 13,638,925 14,853,291 17,785,548 17,370,600 4,182,663
Short-term debt 1,520,226 1,829,827 2,186,861 2,730,806 3,559,014 856,975
Long-term debt 1,811,036 2,024,935 2,103,303 4,695,801 4,070,334 980,094
Shareholder's equity 3,518,056 4,040,471 4,532,206 4,075,918 4,384,714 1,055,795
U.S. GAAP:
Total assets 12,120,276 13,835,621 15,136,166 17,986,891 17,560,693 4,228,436
Shareholder's equity 3,439,906 3,961,587 4,532,207 4,043,258 4,422,258 1,064,835
</TABLE>
<PAGE>
Quarterly Selected Financial Data
The selected consolidated financial data set forth below for the three months
ended March 31, 1999 and 2000 are derived from the unaudited financial
statements of the Company, not included in this annual report which, in the
opinion of management, have been prepared on the same basis as the audited
Financial Statements and reflect all adjustments (consisting only of normal
recurring adjustments) necessary for the fair presentation of the consolidated
financial condition and results of operations of the Company at the date and for
the periods indicated. All comparative figures have been adjusted to reflect the
increase in the Israeli CPI and are accordingly all expressed in the terms of
the purchasing power at March 2000, and not as originally reported.
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------
(adjusted NIS in thousands)
1999 2000
--------------- ----------------
Operating Data:
Israeli GAAP:
<S> <C> <C>
Sales 2,637,891 2,144,712
Gross profit 603,069 574,897
Operating earnings 166,640 239,614
Financial expenses, net 101,710 57,470
Other income (expenses), net (4,067) 306,771
Taxes on income 18,565 166,046
Equity in results of affiliates, net 19,287 40,040
Minority interest, net 14,907 11,778
Net earnings for the period 46,678 351,131
March 31,
---------
2000
----
(adjusted NIS in thousands)
Balance Sheet Data:
Israeli GAAP
Working capital 2,141,387
Total assets 14,986,712
Short term debt 1,892,403
Long term debt 3,905,344
Shareholders' equity 4,615,858
</TABLE>
<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Statements and the Notes thereto, which appear elsewhere in this
Annual Report. The Financial Statements are prepared in conformity with Israeli
GAAP, as applied to Koor's Financial Statements. Israeli GAAP differ in certain
respects from U.S. GAAP, as described in Note 28 of Notes to Financial
Statements.
General
The Financial Statements are presented in NIS, adjusted to reflect changes in
the CPI through the latest balance sheet date. The financial statements of the
MA Group, Elisra Group and ECI are prepared in dollars, the functional currency
of these companies, which are then translated into NIS at the rate of exchange
prevailing at the end of the period. See Note 2B to the Financial Statements.
For comparative purposes, financial data of prior periods for these companies
are adjusted to reflect changes in the CPI between the prior periods and the
most recent reported period. During periods when the rate of inflation in Israel
differs significantly from the rate of devaluation of the NIS in relation to the
dollar, application of inflation accounting to Koor's Financial Statements
creates distortions between the comparative financial data of subsidiaries whose
functional currency is the dollar, as reported in the financial statements of
those companies and as reflected in Koor's Financial Statements.
Currently, Koor's management is exploring the possibility of preparing Financial
Statements in dollars as from April 1, 2000. The presentation in dollars is
subject to approval by Israeli authorities, and is conditioned on deriving a
majority (approximately 75%) of revenues in dollars and other foreign currency.
In accordance with Opinion No. 57 of the Institute of Certified Public
Accountants, the financial statements of companies that were jointly controlled,
principally Mashav, which includes the results of Nesher and Taavura, were
included in Koor's Financial Statements, in accordance with the proportionate
consolidation method. See Note 2C(2) to the Financial Statements.
Transactions between Koor's subsidiaries are entered into on an arm's-length
basis and, in management's opinion, generally on terms no less favorable than
those available from third parties. See "Item 13. Interest of Management in
Certain Transactions."
<PAGE>
Impact of Devaluation on Results of Operations and on Monetary Assets and
Liabilities
The following table sets forth, for the periods indicated, certain information
with respect to the rate of inflation in Israel, the rate of devaluation of the
NIS in relation to the dollar and the rate of inflation in Israel adjusted for
the NIS-dollar devaluation:
<TABLE>
<CAPTION>
Closing Annual
Israeli Israeli Exchange Annual Inflation
Year ended Consumer inflation rate of the devaluation adjusted for
December 31, Price Index(1) rate(2) dollar(3) rate(4) devaluation(5)
------------ -------------- --------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
1995 129.4 8.1 NIS 3.135 3.9 4.0
1996 143.1 10.6 NIS 3.251 3.7 6.6
1997 153.1 7.0 NIS 3.536 8.8 (1.7)
1998 166.3 8.6 NIS 4.16 17.6 (8.3)
1999 168.5 1.3 NIS 4.153 (0.2) 1.5
</TABLE>
----------------------------
(1) For purposes of this table, the CPI figures use 1993 as base equal to 100.
These figures are based on reports of the Israel Central Statistics Bureau.
(2) Annual inflation is the percentage change in the CPI in Israel between
December of the year indicated and December of the preceding year.
(3) Closing exchange rate is the rate of exchange between the NIS and the
dollar at December 31 of the year indicated, as reported by the Bank of
Israel.
(4) Annual devaluation is the percentage increase in the value of the dollar in
relation to the NIS during the year indicated.
(5) Annual inflation adjusted for devaluation is obtained by dividing the
Israeli inflation rate (column 2 plus 1) by the annual inflation rate
(column 4 plus 1), minus 1.
Since most of the Company's operations are based in Israel, the Company incurs
significant expenses in NIS, which expenses are usually linked, wholly or
partially, to changes in the CPI.
The relationship between Koor's monetary assets and liabilities, and the
extent to which these are linked to a particular currency or price index,
affects Koor's financial results. In the event of a devaluation of the NIS,
in relation to the dollar, Koor would report a financial expense to the
extent that its dollar-denominated or dollar-linked monetary liabilities
exceed its dollar-denominated or dollar-linked monetary assets or,
conversely, Koor would report financial income if its dollar-denominated or
dollar-linked monetary assets exceeded its dollar-denominated or
dollar-linked monetary liabilities. On December 31, 1999, the excess of
Koor's foreign currency denominated or linked monetary liabilities over its
foreign currency denominated or linked monetary assets was NIS 3,521
million (the majority of which was dollar-denominated or dollar-linked).
However, in accordance with applicable accounting rules the effect of
changes in the dollar exchange rate on the balance of dollar denominated
loans amounting to approximately NIS 1,900 million that were taken to
finance acquiring ECI, the MA Group and Tadiran's equity, was charged to
Koor's shareholder's equity under "Cumulative foreign currency translation
adjustments", rather than being reported as a financial expense.
In addition, Koor and certain subsidiaries have entered into financial
agreements with major Israeli banks and other financial institutions in
order to reduce the overall exposure of assets and liabilities denominated
in foreign currencies, and commitments for the purchase of raw materials
and the sale of goods in currencies other than the dollar arising from
foreign currency exchange rates. Such agreements include forward sales,
purchase contracts, sale options and swap transactions. As at December 31,
1999, the balance of Koor hedging agreements amounted to approximately NIS
1,400 million.
Also, the receipt of divestiture proceeds on January 6, 2000 significally
reduced Koor financial debt and overall exposure to currency exchange rates. By
the end of February 2000 Koor`s hedging activities of NIS 1,400 million expired
and were not renewed.
<PAGE>
Koor and its subsidiaries do not hold or issue financial instruments or
derivative financial instruments for trading purposes. See Note 21B to the
Financial Statements. The caption "Financial expenses, net" in the Financial
Statements includes the impact of these factors on monetary assets and
liabilities, as well as regular interest expense.
Effective Corporate Tax Rate
Koor does not file a consolidated tax return with its subsidiaries, and is
taxed only on its own income. Each subsidiary of Koor files its own tax
return, based on its own taxable income. The income tax obligations of Koor
and its Israeli subsidiaries are based on earnings determined in nominal
NIS for Israeli statutory purposes, adjusted for tax purposes, in terms of
end-of-year Israeli currency, in accordance with changes in the CPI. The
tax provision in the Financial Statements does not directly relate to
income shown on such statements, for the reconciliation between the
theoretical and actual tax expense. Non-Israeli subsidiaries are taxed
based upon tax laws in their countries of residence. The effective
corporate tax rate is affected mainly by tax benefits arising from reduced
tax rates applied to Approved Enterprises, utilization of tax loss
carryforwards for which no deferred taxes were recorded, the effect of the
Inflationary Adjustment Law on Israeli companies, whose functional currency
is the dollar and disallowance of provisions for anticipated losses from
the sale of assets. The Company's overall effective tax rates for 1997,
1998 and 1999 were 23.6%, 60.0% and 27.6%, respectively. See Note 16G(2) to
the Financial Statements.
<PAGE>
The following tables summarize certain recent financial information relating to
each of the Company's businesses. The tables are prepared on the same basis as
that utilized in the Financial Statements. See Note 24 to the Financial
Statements.
<TABLE>
<CAPTION>
Convenience
1998/1997 Translation
CPI - adjusted NIS Changes CPI - adjusted NIS into 1999/1998
------------------------------------------- -------------------- Dollars Changes
1997 % 1998 % % 1999 % 1999 %
------------- ------ ------------- ------ -------- ------------ ------ ---------- ---------
(In thousands) (In thousands) (In thousands) (In thousands)
REVENUES FROM SALES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Telecommunication equipment NIS 3,408,168 26.37 NIS 3,419,501 26.73 0.3 NIS 2,199,702 20.61 $ 529,666 (35.7)
Defense electronics 1,458,576 11.28 1,572,584 12.29 7.8 1,333,690 12.49 321,139 (15.2)
Agrochemicals 2,881,212 22.29 3,376,893 26.40 17.2 3,540,922 33.17 852,618 4.9
Buildings and infrastructure
materials 1,964,115 15.20 1,645,089 12.86 (16.2) 1,445,878 13.54 348,152 (12.1)
Other 3,213,304 24.86 2,778,249 21.72 (13.5) 2,155,109 20.19 518,928 (22.4)
------------- ------ ------------- ------ ----- ------------- ------ ---------- -----
Total 12,925,375 100.00 12,792,316 100.00 (1.0) 10,675,301 100.00 2,570,503 (16.5)
OPERATING EARNINGS:
Telecommunication equipment 299,429 25.59 46,406 5.28 (84.5) 260,662 27.67 62,765 461.7
Defense electronics 138,126 11.81 167,684 19.07 21.4 69,060 7.33 16,629 (58.8)
Agrochemicals 359,271 30.70 428,441 48.74 19.3 390,503 41.45 94,029 (8.9)
Buildings and infrastructure
materials 202,857 17.34 76,251 8.67 (62.4) 127,210 13.50 30,631 66.8
Other 170,317 14.56 160,293 18.24 (5.9) 94,685 10.05 22,799 (40.9)
------------- ------ ------------- ------ ----- ------------- ------ ---------- ------
Total 1,170,000 100.00 879,075 100.00 (24.9) 942,120 100.00 226,853 7.2
============= ====== ============= ====== ===== ============= ====== ========== ======
CAPITAL EXPENDITURES:
Telecommunication equipment 223,654 22.99 208,106 19.09 (7.0) 67,051 9.50 16,145 (67.8)
Defense electronics 50,429 5.18 67,772 6.22 34.4 42,888 6.07 10,327 (36.7)
Agrochemicals 312,166 32.08 340,780 31.25 9.2 277,545 39.31 66,830 (18.6)
Buildings and infrastructure 165,007 16.96 289,308 26.53 75.3 119,455 16.93 28,764 (58.7)
Other 221,709 22.79 184,375 16.91 (16.8) 199,078 28.19 47,936 8.0
------------- ------ ------------- ------ ----- ------------- ------ ---------- ------
Total 972,965 100.00 1,090,341 100.00 12.1 706,017 100.00 170,002 (35.2)
====== ====== ===== ====== ======
DISCONTINUED ACTIVITY 64,053 31,873
CORPORATE ASSETS 1,870 27,112 14,052 3,383
------------- ------------- ------------- ----------
1,038,888 1,149,326 720,069 173,385
============= ============= ============= ==========
EXPORTS OF KOOR PRODUCTS
BY BUSINESSES (1)
Telecommunication equipment NIS 1,755,604 30.27 NIS 2,201,755 33.40 25.4 NIS 1,539,242 27.53 $370,634 (30.1)
Defense electronics 1,069,771 18.44 1,069,924 16.23 0.0 763,151 13.65 183,759 (28.7)
Agrochemicals 2,336,356 40.28 2,789,365 42.32 19.4 2,918,533 52.19 702,753 4.6
Building and infrastructure 23,075 0.40 18,641 0.29 (19.2) 12,810 0.23 3,084 (32.3)
Other 615,352 10.61 511,554 7.76 (16.9) 357,830 6.40 86,162 (30.1)
------------- ------ ------------- ------ ----- ------------- ------ ---------- ------
Total 5,800,158 100.00 6,591,239 100.00 13.64 5,591,566 100.00 1,346,392 (15.2)
============= ====== ============= ====== ===== ============= ====== ========== ======
EXPORTS OF KOOR PRODUCTS
BY DESTINATIONS (2)
North America 1,785,456 30.78 1,907,365 28.94 6.83 1,608,174 28.76 387,232 (15.7)
Europe 1,588,563 27.39 2,032,650 30.84 27.96 1,710,133 30.58 411,782 (15.9)
South America 1,295,826 22.34 1,563,876 23.72 20.69 1,433,075 25.63 345,070 (8.4)
Africa 77,826 1.34 176,423 2.68 126.69 129,132 2.31 31,094 (26.8)
Asia and Australia 1,052,487 18.15 910,925 13.82 (13.45) 711,052 12.72 171,214 (21.9)
------------- ------ ------------- ------ ----- ------------- ------ ---------- ------
Total 5,800,158 100.00 6,591,239 100.00 13.64 5,591,566 100.00 1,346,392 (15.2)
============= ====== ============= ====== ===== ============= ====== ========== ======
</TABLE>
-----------
(1) Including foreign industrial operations.
(2) Destination to which shipment is made.
<PAGE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The following is an analysis of Koor's consolidated results of operations, which
is followed by an analysis of results of operations of each of Koor's
businesses.
Revenues. Revenues decreased 16.5% to NIS 10,675 million in 1999 compared to NIS
12,792 million in 1998. Exports and international operations, representing 57.9%
of revenues, decreased 14.3% in 1999, primarily due to sales of companies which
are no longer consolidated in the framework of consolidated financial statements
which was partially offset by increased exports in Telrad and in the
Agrochemicals business.
Revenues increased 4.9% in the Agrochemicals business and decreased by 35.7%,
15.2%, 12.1% and 22.4% in the Telecommunication Equipment, the Defense
Electronics, the Building and Infrastructure Materials and in the Other
Businesses, respectively.
Operating earnings. Operating earnings increased 17.7% to NIS 838 million in
1999 compared to NIS 712 million in 1998. Operating earnings increased 461.7% in
the Telecommunication Equipment business and 66.8% in the Building and
Infrastructure Materials business. Operating earnings decreased 58.8% in the
Defense Electronics business, 8.9% in the Agrochemicals business and 40.9% in
the Other Businesses business.
Financing expenses, net. Financing expenses increased 42.6% to NIS 358 million
in 1999 compared to NIS 251 million in 1998. The above increase occurred
primarily in Koor, as a result of increase in long-term bank borrowings during
1999 and in the MA Group, as a result of significant translation differences
between the Brasilian currency and the dollar.
Other income, net. Other income, net amounted to NIS 107 million in 1999
compared to other expenses of NIS 71 million in 1998. Other income in 1999
consisted mainly of NIS 642 million in capital gains derived from from the
divestiture of holdings, mainly in Tadiran Com. and Tadiran's software
companies (NIS 434 million in income in 1998), net of NIS 206 million in
additional provisions for retirement and pension arrangements, in
particular in Telrad and MA Group (NIS 269 million in provisions in 1998)
and from NIS 266 million in expenses in respect of writing down of assets,
mainly United Steel, Hotels and the reorganization program in the MA Group
(NIS 232 million in expenses in 1998). Other income, net was partially
offset by an amortization of goodwill of NIS 49 million in 1999 ( NIS 27 in
1998) and NIS 53 million provision due to uncertainty in Brasil in 1999.
Taxes on income. Taxes on income decreased 30.8% to NIS 162 million in 1999
compared to NIS 234 million in 1998. Taxes on income as a percentage of
income before taxes in 1999 and 1998 were 27.6% and 60.0%, respectively.
The decrease in taxes derives mainly from the anticipated utilization of
carryforward losses of NIS 129 million in Koor and the decline of the
adverse affect of devaluation on the tax expense of subsidiaries the
financial statements of which are dollar adjusted. Taxes on income in 1999
include taxes on capital gains of NIS 190 million compared to NIS 95
million in 1998.
Equity in the operating results of affiliates, net. Koor's share in net
profits of affiliated companies increased to NIS 122 million in 1999
compared to NIS 62 million in 1998, primarily as a result of the increase
in Koor's share in the profits of ECI from NIS 49 million in 1998 to NIS
144 million in 1999.
Minority interest in subsidiaries, net. Minority interest in the losses of
subsidiaries amounted to NIS 2 million in 1999 compared to minority interest in
the profits of NIS 240 million in 1998. The decrease in this item occurred
mainly in the profits of Tadiran as a result of Koor's purchase of the minority
interests, the termination of consolidation of TTL and the decline in profits of
the MA Group.
<PAGE>
Net earnings. As a result of the above factors, net earnings increased to NIS
549 million in 1999 compared to NIS 47 million in 1998. As a percentage of
revenues, net earnings were 5.1% in 1999 compared to 0.4% in 1998.
<TABLE>
<CAPTION>
Telecommunication Equipment Business
Year Ended December 31,
-----------------------------------------------------------
1998 1999 1999
------------- ------------- ---------------
(Adjusted NIS in thousands) ($ in thousands)
<S> <C> <C> <C>
Revenue................................................. NIS 3,419,501 NIS 2,199,702 $529,666
Operating earnings...................................... 46,406 260,662 62,765
</TABLE>
Revenues from the Telecommunication Equipment business decreased 35.7% to NIS
2,200 million in 1999 from NIS 3,420 million in 1998. The termination of
consolidation of TTL in 1999 following the ECI merger caused a decrease in
revenues of NIS 1,717 million. Telrad increased its sales by NIS 484 million in
1999 mainly as a result of increased supplies to Nortel.
Revenues from this business related to sales of telecommunication equipment to
Nortel were NIS 836 million in 1999 compared to NIS 533 million in 1998, or
38.0% compared to 15.6% of the Telecommunication Equipment business revenues in
1999 and 1998, respectively.
The Telecommunication Equipment business exports amounted to NIS 1,539 million
in 1999 compared to NIS 2,202 million in 1998. The decrease of export sales
resulted primarily from the termination of consolidation of TTL in 1999, which
was partially offset by increased export sales of Telrad.
Operating earnings from this business increased 461.7% in 1999 to NIS 261
million compared to NIS 46 million in 1998. The increase in operating earnings
was a result of an NIS 264 million operating profit in Telrad in 1999 due to a
reorganization program implemented by Telrad's new management since the second
half of 1998 and an increase in Telrad sales of telecommunications equipment. In
1998 Telrad's operating loss amounted to NIS 113 million. In 1998 the businesses
operating profit included NIS 176 million from TTL, which merged into ECI
effective as of January 1, 1999.
In May 2000, Telrad signed an agreement to sell the Public Switching and other
operations that constitutes approximately 40%-50% of Telrad's business to Nortel
Israel.
<TABLE>
<CAPTION>
Defense Electronics Business
Year Ended December 31,
-----------------------------------------------------------
1998 1999 1999
------------- ------------- ---------------
(Adjusted NIS in thousands) ($ in thousands)
<S> <C> <C> <C>
Revenues................................................ NIS 1,572,584 NIS 1,333,690 $321,139
Operating earnings...................................... 167,684 69,060 16,629
</TABLE>
Revenues from the Defense Electronics business decreased 15.2% to NIS 1,334
million in 1999 from NIS 1,573 million in 1998. This decrease was primarily due
a NIS 280 million decrease in revenues from Tadiran Com. due to the sale of this
company in the fourth quarter of 1999 and the decrease in military exports of
communication systems to the U.S. Army. This decrease was partially offset by an
increase in sales of Elisra.
<PAGE>
Operating earnings from this business decreased 58.8% in 1999 to NIS 69 million
compared to NIS 168 million in 1998. The decrease in operating earnings was a
result of an NIS 60 million decline in operating profit in Tadiran Com. in 1999
and NIS 47 million decline in operating profit in TES mainly due to the cost of
a reorganization program and a result of decline in sales that was partially
ofset by an increase in operating profit in Elisra and Tadiran Spectralink.
<TABLE>
<CAPTION>
Agrochemicals Business
Year Ended December 31,
-----------------------------------------------------------
1998 1999 1999
------------- ------------- ---------------
(Adjusted NIS in thousands) ($ in thousands)
<S> <C> <C> <C>
Revenues................................................ NIS 3,376,893 NIS 3,540,922 $852,618
Operating earnings...................................... 428,441 390,503 94,029
</TABLE>
Revenues from the Agrochemicals business increased 4.9% to NIS 3,541 million in
1999 compared to NIS 3,377 million in 1998, primarily as a result of increased
sales of newly launched herbicides and insecticides products and sales of newly
acquired companies. Approximately 89.3% and 90.7% of the sales in 1999 and 1998,
respectively, were made outside of Israel. 36.1% and 39.0% of total sales in
1999 and 1998, respectively, were to South America.
Operating earnings for this business decreased 8.9% in 1999 to NIS 391 million
compared to NIS 428 million in 1998. The decrease in operating income was
primarily due to the erosion of sale prices as a result of reduced demand for
agrochemicals and increased competition from major international chemical
companies.
<TABLE>
<CAPTION>
Building and Infrastructure Materials Business
Year Ended December 31,
-----------------------------------------------------------
1998 1999 1999
------------- ------------- ---------------
(Adjusted NIS in thousands) ($ in thousands)
<S> <C> <C> <C>
Revenues................................................ NIS 1,645,089 NIS 1,445,878 $348,152
Operating earnings...................................... 76,251 127,210 30,631
</TABLE>
Revenues from the Building and Infrastructure Materials business decreased 12.1%
to NIS 1,446 million in 1999 compared to NIS 1,645 million in 1998. The decrease
in revenues in 1999 was primarily a result of a continued erosion in selling
prices in cement and pipes due to slowdown in the Israeli construction market as
well as, the divestiture at the end of the second quarter of 1999 of Merhav. In
1999, Metco's revenues decreased 18.2% to NIS 196 million compared to NIS 240
million in 1998.
Operating earnings for this business increased 67.19% in 1999 to NIS 127 million
compared to NIS 76 million in 1998, primarily due to a substantial decrease in
operating losses of United Steel and increase in operating profit in Nesher due
to the commencement of production at its dry line plant.
In 1999 and at the beginning of 2000, Koor disposed of its interest in all of
the companies in this business other than United Steel Mills.
<PAGE>
<TABLE>
<CAPTION>
Other Businesses
Year Ended December 31,
-----------------------------------------------------------
1998 1999 1999
------------- ------------- ---------------
(Adjusted NIS in thousands) ($ in thousands)
<S> <C> <C> <C>
Revenues................................................ NIS 2,778,249 NIS 2,155,109 $518,928
Operating earnings...................................... 160,293 94,685 22,799
</TABLE>
Revenues of the Other business in 1999 decreased 22.4% to NIS 2,155 million
compared to NIS 2,778 million in 1998. The decrease was principally the result
of the sale of a number of holdings in this business in 1998 and 1999, including
Soltam, Pri Hagalil, Hod Lavan, the Software companies of Tadiran and others.
This decrease was partially offset by an increase in sales of Sheraton Moriah of
NIS 142 million which was consolidated for the first time in 1999.
Operating earnings for this business decreased 40.9% in 1999 to NIS 95 million
compared to NIS 160 million in 1997, primarily due to the divestiture Tadiran
software-related companies and food-related companies which reported operating
earnings in 1998 and an increase in the operating losses from the tourism hotel
activities.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The following is an analysis of Koor's consolidated results of operations, which
is followed by an analysis of results of operations of each of Koor's
businesses.
Revenues. Revenues decreased 1.0% to NIS 12,792 million in 1998 compared to NIS
12,925 million in 1997. Exports and international operations, representing 51.5%
of revenues, increased 13.6% in 19, primarily due to increased exports in the
Telecommunication Equipment and Defense Electronics business and in the
Agrochemicals business.
Revenues increased 17.2% in the Agrochemicals business, 7.8% in the Defense
Electronics business and 0.3% in the Telecommunication Equipment business.
Revenues decreased by 16.2% in the Building and Infrastructure Materials
business and 13.5% in the Other Businesses.
Operating earnings. Operating earnings decreased 31.3% to NIS 712 million in
1998 compared to NIS 1,036 million in 1997. Operating earnings increased 19.3%
in the Agrochemicals business and 21.4% in the Defense Electronics business.
Operating earnings decreased 74.5% in the Telecommunication Equipment business,
62.4% in the Building and Infrastructure Materials business and 5.9% in the
Other Businesses.
Financing expenses, net. Financing expenses increased 65.3% to NIS 251 million
in 1998 compared to NIS 152 million in 1997. The above increase occurred
primarily in Koor, as a result of increase in long-term bank borrowings and the
real devaluation of the NIS against the dollar in 1998, and in MA Industries, as
a result of a significant increase in its operations.
Other expenses, net. Other expenses, net amounted to NIS 71 million in 1998
compared to other income of NIS 117 million in 1997. These expenses in 1998 are
comprised mainly of NIS 269 million in expenses derived from additional
provisions for retirement and pension arrangements, in particular in Telrad and
Metco (NIS 27 million in 1997) and from NIS 232 million in expenses in respect
of writing down of assets, mainly due to discontinuance or sale of operations
not synergetic to Koor's core businesses (NIS 70 million in 1997). Capital gain
of NIS 434 million in 1998 from divestiture of holdings mainly in Gvanim,
Soltam, Home Center, TTL's wireless division and Tambour, partially offset the
amount of other expenses (NIS 180 million in 1997).
<PAGE>
Taxes on income. Taxes on income decreased 0.8% to NIS 234 million in 1998
compared to NIS 236 million in 1997. Taxes on income as a percentage of income
before taxes in 1998 and 1997 were 60.0% and 23.6%, respectively. The increase
in taxes as a percentage of income in 1998 is mainly attributed to the non
allowance for tax purposes of provisions for the write-down of the value of
assets and the adverse affect of devaluation on the tax expense of subsidiaries
the financial statements of which are dollar adjusted.
Equity in the operating results of affiliates, net. Koor's share in net profits
of affiliated companies increased to NIS 62 million in 1998 compared to NIS 11
million in 1997, primarily as a result of Koor's share in the profits of ECI.
Minority interest in subsidiaries, net. Minority interest in subsidiaries
amounted to NIS 240 million in 1998 compared to NIS 255 million in 1997. The
decrease in this item was less than the decrease in net earnings, primarily due
to the fact that certain losses of Telrad were not attributed to the minority
shareholders who have a put option to sell Koor their Telrad shares under
certain conditions.
Discontinued operations, net. This item increased to NIS 69 million in 1998
compared to NIS 16 million in 1997. This increase was due to a capital gain in
1998 amounting to NIS 60 million (net of income taxes) from the divestiture of
Granite.
Net earnings. As a result of the above factors, net earnings decreased to NIS 47
million in 1998 compared to NIS 537 million in 1997. As a percentage of
revenues, net earnings were 0.4% in 1998 compared to 4.2% in 1997.
<TABLE>
<CAPTION>
Telecommunication Equipment Business
Year Ended December 31,
---------------------------------
1997 1998
------------- -------------
(Adjusted NIS in thousands)
<S> <C> <C>
Revenues................................................ NIS 3,408,168 NIS 3,419,501
Operating earnings...................................... 299,429 46,406
</TABLE>
Revenues from the Telecommunication Equipment business increased 0.3% to NIS
3,420 million in 1998 from NIS 3,408 million in 1997. This increase was
primarily due to an increase in civilian export sales of telecommunication
equipment by TTL and Telrad. This increase was partially offset by a decrease in
sales of telecommunication equipment to Bezeq.
Revenues from this business related to sales of telecommunication equipment to
Bezeq were NIS 525 million in 1998 compared to NIS 818 million in 1997, or 15.4%
compared to 24.0% of the Telecommunication Equipment business revenues in 1998
and 1997, respectively. The decrease in Bezeq related revenues was consistent
with changes that occurred in 1997 in which Bezeq reassessed its equipment
procurement policy and negotiated lower prices.
The Telecommunication Equipment business exports amounted to NIS 2,202 million
in 1998 compared to NIS 1,756 million in 1997. The increase of 25.4% in export
resulted primarily from increase in civilian telecommunication equipment sales
and the sales of TMN, which was consolidated for the first time in 1998.
Operating earnings for this business decreased 74.5% in 1998 to NIS 46 million
compared to NIS 299 million in 1997. The decline in operating earnings was a
result of an operating loss in Telrad due to a decline in supply of
telecommunications equipment to Bezeq and to the reorganization program
implemented by Telrad's new management. This decline was partially offset by
improvements in Tadiran's telecommunication business.
<PAGE>
<TABLE>
<CAPTION>
Defense Electronics Business
Year Ended December 31,
---------------------------
1997 1998
---------------------------
(Adjusted NIS in thousands)
<S> <C> <C>
Revenues.................................................... NIS 1,458,576 NIS 1,572,584
Operating earnings....................................... 138,126 167,684
</TABLE>
Revenues from the Defense Electronics business increased 7.8% to NIS 1,573
million in 1998 from NIS 1,459 million in 1997. This increase was primarily due
to an increase in export sales of Tadiran Electronic Systems. This increase was
partially offset by a decrease in military exports of communication systems to
the U.S. Army.
Operating earnings from this business increased 21.4% in 1998 to NIS 168
million compared to NIS 138 million in 1997. The increase in operating
earnings was a result of increased sales of Tadiran Electronic Systems.
<TABLE>
<CAPTION>
Agrochemicals Business
Year Ended December 31,
---------------------------
1997 1998
---------------------------
(Adjusted NIS in thousands)
<S> <C> <C>
Revenues.................................................... NIS 2,881,212 NIS 3,376,893
Operating earnings...................................... 359,271 428,441
</TABLE>
Revenues from the Agrochemicals business increased 17.2% to NIS 3,377
million in 1998 compared to NIS 2,881 million in 1997, primarily as a
result of increased sales of herbicides and insecticides in South America
by subsidiaries acquired in 1997 and 1998. Due to the timing of these
acquisitions in 1997, the financial statements of these newly acquired
companies were fully reflected only in Koor's 1998 Financial Statements.
Approximately 90.6% and 89.8% of the sales in 1998 and 1997, respectively,
were made outside of Israel. 40.1% and 35.9% of export and international
sales in 1998 and 1997, respectively, were to South America.
Operating earnings for this business increased 19.3% in 1998 to NIS 428
million compared to NIS 359 million in 1997. The increase in operating
income was primarily due to increased sales and the launching of new higher
margin products that was partially offset by increased provision for
doubtful debts and expenses related to the merger of the Brazil activities.
<PAGE>
<TABLE>
<CAPTION>
Building and Infrastructure Materials Business
Year Ended December 31,
---------------------------
1997 1998
---------------------------
(Adjusted NIS in thousands)
<S> <C> <C>
Revenues.................................................... NIS 1,964,115 NIS 1,645,089
Operating earnings....................................... 202,857 76,251
</TABLE>
Revenues from the Building and Infrastructure Materials business decreased
16.2% to NIS 1,645 million in 1998 compared to NIS 1,964 million in 1997.
The decrease in revenues in 1998 was primarily a result of a slowdown in
the Israeli construction market due to a general slowdown in the Israeli
economy as well as continuous erosion in selling prices in cement, pipes
and steel. In 1998, Nesher marketed 6.5 million tons of cement, compared to
6.8 million in 1997. Nesher's sales of cement and the portion of Ta'avura's
infrastructure sales represented 47.4% of the business sales. In 1998,
revenues from United Steel decreased 15.6% to NIS 450 million compared to
NIS 533 million in 1997, and Metco's revenues decreased 11.5% to NIS 241
million compared to NIS 273 million in 1997.
Operating earnings for this business declined 62.4% in 1998 to NIS 76
million compared to NIS 203 million in 1997, primarily due to a lower level
of sales and erosion in prices in United Steel and Metco.
<TABLE>
<CAPTION>
Other Businesses
Year Ended December 31,
---------------------------
1997 1998
---------------------------
(Adjusted NIS in thousands)
<S> <C> <C>
Revenues.................................................... NIS 3,213,304 NIS 2,778,249
Operating earnings.......................................... 170,317 160,293
</TABLE>
Revenues from Other Businesses decreased 13.5% to NIS 2,778 million in 1998
compared to NIS 3,213 million in 1997. This decrease was primarily due to
(i) a decrease of NIS 453 million (54.6%) in revenues of Koor's
food-related companies as a result of divestitures of Shemen at the end of
1997 and Hod Lavan and Pri Hagalil in 1998; (ii) a decrease of NIS 142
million in revenues from metal-related companies including, among others,
Soltam following their divestiture through 1997 and 1998; and (iii) an
increase of NIS 111 million in Tadiran Appliances.
Operating earnings for this business decreased 5.9% in 1998 to NIS 160
million compared to NIS 170 million in 1997, primarily due to an increase
in operating earnings of Tadiran Appliances, Taavura (the non
infrastructure related activities) and the tourism group. Such increase was
partially offset as a result of the above divestitures of food-related and
metal-related companies.
<PAGE>
Liquidity and Capital Resources
Koor finances its corporate level activities principally through proceeds from
divestitures, management fees and dividends it receives from subsidiaries and
affiliates and through debt financing. In 1999 and 1998, Koor received
management fees in the amount of NIS 65 million and of NIS 63 million,
respectively, and dividends (including return of investment) in the amount of
NIS 1,540 million and NIS 1,298 million, respectively. The dividends received in
1999 and 1998 includes dividends from Tadiran, Mashav and Telrad Holdings that
represent proceeds received from divestitures.
Koor's shareholders' equity at December 31, 1999 increased 7.6% to NIS 4,385
million, compared to NIS 4,076 million at December 31, 1998. The increase in
1999 is primarily due to a NIS 549 million net profit, net of NIS 226 million
interim dividends declared.
Working capital at December 31, 1999 was NIS 910 million, compared to NIS 3,487
million at December 31, 1998 and NIS 2,344 million at December 31, 1997. The
decrease in 1999 is primarily due to a NIS 887 million investment in affiliated
companies and divestitures.
Long-term debt aggregated NIS 4,070 million at December 31, 1999 and constituted
23.4% of total assets, compared to NIS 4,696 million constituted 26.4% of total
assets at December 31, 1998. The decrease in the balance of long-term debt is
attributed mainly to long-term debt repayed by Koor in 1999.
Total debt at December 31, 1999 increased 73.1% to NIS 7,629 million, or 43.9%
of total assets, compared to NIS 7,427 million, or 41.8% of total assets, at
December 31, 1998. This increase was a result of a NIS 828 million increase in
the short- term debt.
Cash Flows
Cash flows from operating activities increased 6.0% to NIS 721 million in
1999, compared to NIS 680 million in 1998 and NIS 823 million in 1997. The
increase in 1999 was primarily due to a decrease of NIS 4 million in net
asset and liability items relating to current operations, mainly the
increase in trade and other payables in 1999, compared to an increase of
NIS 88 million in 1998. The increase in trade and other receivables in 1999
of NIS 364 million relates mainly to Telrad and the MA Group and is due
mainly to an increase in credit to foreign customers.
Cash flows used for investment activities decreased 59.4% to NIS 1,743
million in 1999 compared to NIS 4,296 million in 1998 and NIS 1,067 million
in 1997. Investments in fixed and other assets, net of investment grants,
aggregated NIS 717 million in 1999 compared to NIS 1,133 million in 1998
and NIS 995 million in 1997, and represented 126% of depreciation and
amortization compared to 166% in 1998 and 148% in 1997. The principal
investments in fixed assets during 1999 were by the MA Group, Mashav and
Tadiran.
The net proceeds from sale of investments and fixed assets contributed NIS 834
million to cash flows generated from investment activities in 1999, compared to
NIS 926 million in 1998. The 1999 net proceeds are mainly from the sale of
holdings of software companies and Tadiran Com. at Tadiran, Koor Finance,
Merhav
and others, as well as the sale of fixed assets, mainly hotels and by the car
hire subsidiary.
In 1999, investment in affiliated companies, net, aggregated NIS 887
million compared to NIS 1,897 million in 1998 and NIS 40 million in 1997,
mainly due to the NIS 662 million invested in 1999 in the purchase of
shares of ECI.
The investment in consolidated subsidiaries aggregated NIS 119 million in
1999 compared to NIS 1,255 million in 1998 and NIS 94 million in 1997. The
1999 investment is primarily attributed to the completion of Koor`s
investment in the purchase of Tadiran's shares.
<PAGE>
Financing activities in 1999 generated NIS 989 million compared to NIS 3,708
million in 1998 and NIS 584 million in 1997.
Long-term debt incurred during 1999 totaled NIS 826 million, compared to
NIS 3,395 million in 1998. Long term debt in 1999 consisted primarily of
loans taken by MA Group and Telrad. Repayment of long-term debt totaled NIS
606 million in 1999, compared to NIS 685 million in 1998.
Net short-term debt increased by NIS 914 million in 1999, compared to NIS
173 million in 1998. Short-term debt in 1999 increased mainly in Koor - the
parent company, in Tadiran and Mashav.
Dividends in the amount of NIS 144, 193 and 127 millions were paid to
Koor's shareholders in 1999, 1998 and 1997, respectively.
ITEM 9A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in the value of financial
instruments caused by fluctuations in interest rates, foreign exchange
rates and equity prices.
Market risk related to foreign currency exchange rates
At December 31, 1999, the Company had net monetary liabilities in foreign
currency amounting to approximately NIS 3,500 million. Substantially all of
such net monetary liabilities was denominated in dollars or linked thereto,
except for approximately NIS 600 mllion of net monetary assets denominated
in Brasilian reales. At December 31, 1999, the Company had a balance of
approximately NIS 1,500 million of financial instruments designated to
hedge dollar denominated loans and divestiture proceeds received in the
beginning of 2000. The Company had a balance of approximately NIS 270
million of financial instruments designated to hedge Brasilian reale
assets.
In addition to hedging its foreign currency exposure with financial
instruments, the Company's foreign currency exposure is reduced in the
following ways:
(1) Approximately NIS 1,160 million of the Company's net monetary liabilities
in foreign currency are liabilities of subsidiaries whose functional
currency is the dollar and who are therefore not exposed to market risk
with respect to such liabilities from changes in the exchange rate of the
dollar; and
(2) Approximately NIS 1,900 million of the Company's net monetary liabilities
in foreign currency are dollar liabilities that were incurred by the
Company to acquire shares in investee companies whose functional currency
is the dollar. As a result, the additional financial expenes that arise
from an increase in the exchange rate of the dollar are offset by the
increase in the value of underlying assets.
Market risk was estimated as the potential increase in net monetary
liabilities resulting from a hypothetical 5% increase in the exchange rate
of the dollar. At December 31, 1999, assuming such increase in the dollar
exchange rate, the Company's financial expenses would decrease by
approximately NIS 50 million.
Primarily as a result of the repayment of the balance of the specific loans
described above and the expiration of the majority of hedging instruments
in the first quarter of 2000, at March 31, 2000, a 5% increase in the
dollar exchange rate would increase Company's financial expenses by
approximately NIS 50 million.
For a disclosure regarding the Company's foreign currency exchange rate
financial instruments to reduce its overall exposure to foreign currency
exchange rate risk and the linkage terms of the net monetary liabilities,
see Note 21 to the Financial Statements.
<PAGE>
Market risk related to interest rates
The Company does not hold or issue financial instruments regarding interest
rate risk.
At December 31, 1999 approximately NIS 4,500 million of the Company's net
financial liabilities were in dollars or linked thereto and bore variable
interest rates. Market risk was estimated as the potential hypothetical
increase of 1% in the interest rate and amounted to NIS 45 million increase
in annual interest expense. According to Koor's agreements with banks, Koor
has the right of early repayment of NIS 1,040 million until July 2000 and
NIS 1,260 million in the following year.
At December 31, 1999 and at March 31, 2000, approximately NIS 600 million and
NIS 300 million, respectively, of Koor's net excess of financial liabilities
over financial assets were linked to the CPI and bear fixed interest rates.
Market risk was estimated as the potential hypothetical decrease of 1% in the
relevant interest rates. Such decrease would have no immediate influence on
Koor's financial expenses. According to Koor's agreements with banks, Koor has
the right of early repayment regarding NIS 400 million of the above liabilities
from July 2000 and until the date of maturity in June 2003. Therefore, the
change in the fair value of these long term financial liabilities would not be
material.
Market risk related to equity prices
The Company has equity marketable securities at December 31, 1999 of
approximately NIS 90 million. Market risk was estimated as the potential
hypothetical decrease of 20% in the prices of these securities. Assuming such
decrease, the fair value of the equity marketable securities would decrease by
approximately NIS 18 million.
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Charles R. Bronfman............. 69 Chairman of the Board of Directors
Jonathan Kolber(1).............. 38 Vice Chairman of the Board of Directors and Chief Executive Officer
Dr. Janet Aviad................. 58 Director
Joseph Dauber(1)(3)............. 65 Director
Moshe Dovrat (2)(4)............. 55 Director
Ron Feinstein(2)................ 62 Director
Avi Harel (2)................... 52 Director
Andrew Hauptman (1)(3).......... 31 Director
Jacob Hornik(1)(2)(3)(4)........ 58 Director
Eli Hurwitz..................... 68 Director
Samuel Minzberg................. 51 Director
Chemi Peres..................... 42 Director
David Biran..................... 60 Director
Prof. Gavriela Shalev........... 59 Director
Danny Biran..................... 57 President
Yosef Ben-Shalom................ 44 Executive Vice President and Chief Financial Officer
Shlomo Heller................... 56 General Counsel and Corporate Secretary
Gil Leidner..................... 49 Vice President and Head of Mergers and Acquisitions
Aron Zuker...................... 54 Vice President
</TABLE>
---------------------
(1) Member of Koor's Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Remuneration Committee.
(4) Independent directors. Under the Israeli Companies Law 1999 (the "Companies
Law"), publicly held companies in Israel are required to appoint at least
two independent directors.
Under Koor's Articles of Association, the appointment of members to the
Board of Directors, their replacement and removal, and the appointment of
the Chairman of the Board of Directors is effected by Koor's shareholders
by ordinary resolution. Each member of the Board of Directors shall remain
in office until his office shall be vacated due to any one of the following
events: his death, legal incompetence, bankruptcy or resignation or upon
his removal at Koor's shareholders meeting. Koor's chief executive officer
is appointed by the Board of Directors. Koor's executive officers serve at
the discretion of Koor's chief executive officer pursuant to powers
delegated to him by Koor's Board of Directors.
Charles R. Bronfman has been Chairman of the Board of Directors of Koor since
November 1997. Mr. Bronfman is a director, Co-Chairman and Chairman of the
Executive Committee of the Seagram Company Ltd., Chairman of the Board of
Directors of Claridge Israel (1996) Inc., Claridge Israel Ltd. and the CRB
Foundation. He is also a director of the Power Corporation of Canada.
<PAGE>
Jonathan B. Kolber has been Vice Chairman of the Koor Board of Directors
since November 1997 and Chief Executive Officer of Koor since July 1, 1998.
Mr. Kolber has been President of Claridge or its predecessors since 1989.
Mr. Kolber was associated with Cemp Investments from 1985 to 1987 and was a
Vice President of Claridge Inc., an affiliate of Claridge, from 1986 to
1990. He also serves as director of other Israeli companies, including Teva
Pharmaceutical Industries Ltd., MA Industries, Tadiran, Arkia and R.M.
Renaissance Management (1993) Ltd.. He also serves as Chairman of the Board
of ECI since April 1997. He has a Bachelor degree in Near Eastern Languages
and Civilizations from Harvard University and a Certificate on Advanced
Arabic from the American University of Cairo.
Dr. Janet Aviad has been a director of Koor since June 2000. Dr. Aviad
serves as Vice President of the Andrea and Charles Bronfman Philanthropies,
a family of private foundations dedicated to Canadian Heritage and Jewish
Peoplehood, and as a director of Keren Karev, the Israeli branch of the
Philanthropies. Dr. Aviad was a Senior Lecturer of Education at the Hebrew
University in Jerusalem for almost twenty years. Dr. Aviad has an M.A. and
a Ph.D. in the Sociology of Religion from Columbia University and a BHL
from the Jewish Theological Seminary.
Joseph Dauber has been a director of Koor since June 1995. Mr. Dauber has been
the Chairman of the Board of Directors of Poalim American Express since April
1995 and also of Isracard Ltd. and its subsidiaries since April 1994. Mr. Dauber
has been a Joint General Manager of Bank Hapoalim since 1994. He has been a
member of the management of Bank Hapoalim since July 1988. During the last five
years, Mr. Dauber has been and is a director of Isracard Ltd., Eurocard Ltd. and
Poalim Properties (Shares) Ltd. He has also been a director of The Investment
Company of Bank Hapoalim Ltd. since June 1994. Between 1989 and February 1995,
Mr. Dauber was a director of Bank Hapoalim (Switzerland) Ltd.
Moshe Dovrat has been an independent director of Koor since March 1997. Since
1992 to September 1996, Mr. Dovrat was the General Manager of the Investment
Center of the Ministry of Industry and Trade. Prior thereto, Mr. Dovrat was the
owner of an economic consulting company, before which, he was the Head of the
Economics Division of Kupat Holim, the major health insurance fund in Israel.
Since 1997, Mr. Dovrat has been a director of Rotlex (1994) Ltd. and Makefet
Pension Fund, a Chairman of the Board of Directors of Kfar Bloom Hotel and an
independent director of Etgar Investments and Development Ltd.
Ron Feinstein has been a director of Koor since October 1991 and since 1999
he has served as a Chairman of the Board of Directors of Sheraton Moriah
Israel and Tadiran. From 1996 until 1998 Mr. Feinstein served as a Chairman
of the Board of Radisson Moriah Hotels Ltd. Since 1992, Mr. Feinstein has
also served as the Chairman of the Board of Tourist Industry Development
Corporation Ltd. Mr. Feinstein was a partner in the law firm of Glass,
Feinstein and Bar-Sela from 1981 through March 1997 and since then he is a
senior partner in the law office and notary of Feinstein and Feinstein.
Avi Harel has been a director of Koor since September 1998. Mr. Harel is a
Chairman of the Board of certain affiliates of Bank Hapoalim, including
Poalim Capital Markets - Investment Bank Ltd., Poalim Capital Markets and
Investments - Holdings Ltd. and Capital Markets and Investments Ltd. Mr.
Harel also serves as a director of Poalim Real Estates Markets Ltd. and
Ma'alot the Israeli Company of Securities Grading Ltd. Mr. Harel holds an
MA in Economics from the Tel-Aviv University.
Andrew Hauptman has been a director of Koor since November 1997. During the
past five years, he was a Director of Business Development and Strategic
Planning at the Universal Studios Holdings (UK) Ltd. and at present he is
the President of Andell Inc. Mr. Hauptman holds an MBA degree from Harvard
University.
<PAGE>
Jacob Hornik has been a director of Koor since March 1997. Prof. Hornik was
the Associate Dean and he is a Professor of Marketing and Advertising at
the Leon Recanati Graduate School of Business, Tel-Aviv University. Prof.
Hornik holds a Ph.D. in Business Administration from Syracuse University,
New York. Prof. Hornik acts as a consultant to various organizations and is
an independent director of Supersol Ltd. He serves on the editorial boards
of several academic journals, including the International Journal of
Research in Marketing. Prof. Hornik has also taught and lectured at a
number of universities outside Israel, including, the University of
Chicago, Northwestern University, New York University, and the University
of Washington at Seattle.
Eli Hurwitz has been a director of Koor since November 1997. Mr. Hurwitz is
the President and Chief Executive Officer of Teva Pharmaceutical Industries
Ltd. Mr. Hurwitz was sentenced to payment of a fine of 700,000 NIS
($170,000) and a suspended sentence of 18 months, following the decision on
December 1998 to convict him on charges of assisting a third party in the
avoidance of income taxes. Mr. Hurwitz was acquitted from all the other
charges. In March 1999, attorneys for Mr. Hurwitz filed an appeal to
Israel's Supreme Court. The State of Israel appealed against the decision
to acquit Mr. Hurwitz from the additional charges and against the sentence.
Samuel Minzberg has been a director of Koor since November 1997. He is also the
President of Claridge Inc.
Chemi Peres has been a director of Koor since June 2000. He is a Managing
Director and Founder of Polaris Venture Capital, a venture capital fund.
Mr. Peres is one of the pioneers of the venture capital industry in Israel.
In 1992 he founded and managed Mofet Israel Technology Fund, and Israeli
venture capital fund. Mr. Peres is the Chairman of the Board of WebGlide,
and serves as a director in Orckit Communications Ltd, Aladdin Knowledge
Systems Ltd and several other companies. Mr Peres holds a B.Sc. in
industrial engineering and management and M.B.A. from Tel Aviv University.
David Rubner has been a director of Koor since June 2000. He is Chairman
and CEO of Rubner Technology Ventures Ltd. and Chairman of Net2 Wireless
Inc. Mr. Rubner was employeed with ECI from 1970 and was its President and
CEO from 1991 to October 1999 and February 2000, respectively. Since
November 1999 he serves as Vice Chairman of the Board of Directors of ECI.
He serves as Chairman of the Board of Ectel Ltd., and director of VPS Ltd.,
Transit Networks Ltd., Chekpoint Software Ltd. and Efcon Ltd.. Mr. Rubner
holds a B.Sc. (Hons) in Engineering from Queen Mary Colledge, University of
London and a M.S. from Carnegie Mellon University. He is a member of the
Presidium of the Israel Manufacturers Association and was a recepient of
the Industry Prize for 1995.
Prof. Gavriela Shalev has been a director of Koor since February 1999. Prof.
Shalev is a Contracts Law Professor in the Hebrew University in Jerusalem. Prof.
Shalev also serves as a director of several other companies including Van-Lir
Institute and Hadassah Hospital.
Danny Biran has been President of Koor since July 1, 1998. He was a director of
Koor from November 1997 until his resignation on February 2, 2000. He serves as
Senior Vice President of Claridge Israel, as the Chairman of the Board of MA
Industries, Tadiran, Elisra, Isrex (94) Ltd., Koor Properties, Koor Trade, R.M.
Renaissance Management (1993) Ltd. and is also a director of Barak ITC (1995) -
The International Telecommunications Services Corp., Knafaim, and various
companies within the Koor Group. He is a graduate of the Law faculty of the
Tel-Aviv University. He served as a senior executive in the Office of the Prime
Minister in Israel for more than ten years.
Joseph Ben-Shalom has been Executive Vice President and the Chief Financial
Officer of Koor since July 1, 1998. He served as the Vice President and Chief
Financial Officer of Tadiran from February 1995 to June 1998. He joined Tadiran
in 1986 and served as its Director of Finance from 1991 through January 1995.
Mr. Ben-Shalom serves as a director of Tadiran, MA Industries, Telrad Networks
and other Israeli companies including Nice Systems Ltd. and Investec Clali Bank
Ltd.
<PAGE>
Shlomo Heller has been General Counsel and Corporate Secretary of Koor since
August 1997. Between 1990 and 1997 he was the General Counsel of United Mizrahi
Bank Ltd. Mr. Heller has served as a director of Telrad since January 1998. He
also serves as a director of several other companies within the Koor Group.
Gil B. Leidner has been Vice President of Koor since July 1, 1998 and has
been the Head of Mergers and Acquisitions of Koor since December 1997. From
1995 to 1997, he served as the General Manager of Koor Tourism, from 1992
to 1995 as the General Manager of M.I. Holdings Ltd. the Israeli Government
company responsible for the privatization of the banking system; and from
1989 to 1992, as Deputy General Controller of the Israeli Government. Mr.
Leidner serves as a director of ECI since 1998. Mr. Leidner is also a
director of several other companies within the Koor Group, including
Telrad.
Aron Zuker has been Vice President of Koor since January 1999. He serves as a
managing director of R.M. Renaissance Management (1993) Ltd. and serves as a
director of Isrex (94) Ltd., Clalcom Ltd., Barak ITC (1995) Ltd.,(as an
alternate director), Tadiran, Elisra, Telrad Networks and various companies
within Koor Group. Between the years 1990-1995 he served as CFO and then CEO of
The Jerusalem Report Publication. He is a graduate of B.F.A. of New York
Institute of Technology.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate compensation paid to or accrued on behalf of all Koor's
directors and executive officers, as a group, during 1999, was NIS
14,766,000, which includes salaries, bonuses and expenses and amounts set
aside or accrued to provide pension, retirement, or similar benefits, but
does not include expenses (including business travel, professional and
business association dues and expenses) reimbursed to directors and
officers and other fringe benefits commonly reimbursed or paid by companies
in Israel. On October 3, 1995, Koor entered into an agreement with Bank
Hapoalim, pursuant to which all directors' compensation paid by Koor to any
member of the Board of Directors associated with Bank Hapoalim, would be
paid directly to Bank Hapoalim. These directors received compensation,
identical to that received by other Koor directors, which is the highest
compensation payable pursuant to a formula determined by Israeli law with
respect to independent directors. In addition, in connection with the
Claridge Acquisition, four directors associated with Claridge assigned
their directors' compensation to Claridge. In 1999, one officer of Koor
received options under the 1998 Plan (as defined in Item 12), see "Item 12.
Options to Purchase Securities from Registrant or Subsidiaries". For
additional information concerning the compensation of directors, see Note
25G to the Financial Statements.
The General Meeting of Shareholders held on August 30, 1998, approved the
salary of Mr. Jonathan Kolber, Koor's Chief Executive Officer in the sum of
NIS 195,000 per month and the salary of Mr. Danny Biran, Koor's President
in the sum of NIS 150,000 per month. The Remuneration Committee of the
Board of Directors was authorized to grant them annual bonuses of up to
maximum of 8 monthly salaries, subject to profits being shown in Koor's
consolidated financial statements and based upon stated criteria which
shall be approved in advance by the Audit Committee and the Remuneration
Committee.
For the fiscal year ended December 31, 1999, Koor accrued the following
compensation for it four the most highly compensated officers (which
amounts are includes in the aggregate amount set forth above):
Name Amount in NIS thousands
---- -----------------------
Jonathan Kolber 4,692
Danny Biran 3,684
Gil Leidner 2,113
Joseph Ben Shalom 1,973
<PAGE>
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
The 1997 Stock-Based Compensation Plan
On May 26 1997, Koor's Board of Directors adopted the 1997 Stock-Based
Compensation Plan (the "1997 Plan"). The 1997 Plan authorizes an issuance at no
cost of options to purchase 188,968 Ordinary Shares. On May 27 1997, options to
purchase 134,547 Ordinary Shares were granted at an exercise price of $90.989
per share, and on November 6 1997, additional options to purchase 54,421
Ordinary Shares were granted at an exercise price of $98.747 per share. At June
20, 2000, options to purchase 120,838 shares were outstanding under the 1997
Plan. The options vest over a three-year period from the date of grant. Unless
exercised, options granted under the 1997 Plan shall expire five years from the
date of grant.
A subsidiary, Koor Trusts 1995 Ltd. ("Koor Trusts") together with a trust
company of a bank (together - the "Trustee") serve as Trustee for the purposes
of the 1997 Plan. According to the 1997 Plan, Koor Trusts will purchase for the
optionee, utilizing funds provided by the Company, such number of Ordinary
Shares issued upon the exercise of such options by the optionee, at a price per
share equal to the average closing price per share of the Ordinary Shares on the
TASE in the ten trading days immediately preceding the date of the exercise, as
are equal (based on such price) to the aggregate exercise price paid by such
optionee upon exercise of such options. Upon completion of the above described
transactions, the employees will hold that portion of shares which reflects the
component of profit and the balance of shares will be held by Koor Trusts. The
shares which will be purchased by Koor Trusts will be reserved for granting them
in the future to any specific employee or employees of Koor, subject to receipt
of approvals described in the 1997 Plan. Koor Trusts will not participate or
vote in General Shareholders Meetings and will not participate in any
distribution with respect to those shares. If the shares so held by Koor Trusts
in reserve shall not be granted to employees within a reasonable period of time,
Koor shall take steps to defer the rights attached to such shares or eliminate
them from Koor's share capital by way of a reduction of capital pursuant to the
Companies Ordinance.
On August 28, 1997, Columbus Capital Corporation ("Columbus") (a member of the
Claridge Group), undertook to grant put options to those senior employees of
Koor, who were eligible for options to purchase Ordinary Shares by virtue of the
1997 Plan (as well under a prior employee stock option plan). These put options
are exercisable within 90 days from the first date in which the employees are
eligible to exercise the options under the plans. The put options confer to the
employees the right to sell to Columbus the outstanding shares granted to them
and the profits inherent in the exercise of the options. Columbus will purchase
these shares from the employees, if they should desire, for $121.25 per Ordinary
Share. In 1998 and 1999, employees exercised put options with respect to 127,506
and 9,360 Ordinary Shares, respectively.
The 1998 Stock-Based Compensation Plan
On August 30 1998, an Extraordinary General Shareholders Meeting approved
the issuance, at no cost, of 400,000 options to be granted to employees of
the Company (the "1998 Plan"). Of such options, 353,596 options have been
granted to senior employees (of which 105,263 options have been granted to
Koor's Chief Executive Officer who is also Vice Chairman of the Board of
Directors) and 46,404 options have been allotted to a trustee, to be held
in trust for other employees. Each option may, theoretically, be exercised
into one Ordinary Share. In practice, however, the optionee will not be
issued the total number of shares to which he is entitled upon exercising
the options, but only the number of shares reflecting the monetary benefit
component of the option as at the exercise date. The options vest over a
three-year period from July 1998. Unless exercised, options granted under
the 1998 Plan shall expire on July 16, 2003 (excluding those granted to the
Chief Executive Officer which expire on July 16, 2002). The exercise price
of the options (excluding those issued to the trustee that do not yet have
an exercise price) is $114.7, excluding options issued to the Chief
Executive Officer, which their exercise price is $118.3 per share. The
exercise price of these options is subject to downward adjustment in the
amount of the dividends per share that are paid prior to the date of
exercise.
As of June 20, 2000, options to purchase 353,596 Ordinary Shares were
outstanding under the 1998 Plan.
<PAGE>
Year 2000 Stock-Based Compensation Plan
On June 14, 2000, the Executive Committee of Koor's Board of Directors
approved (subject to the approval of the Full Board of Directors), the
issuance at no cost of up to 400,000 options to be granted to employees of
the Company (the "2000 Plan"). The exercise price of the options is $97.39
per share. The terms of the 2000 Plan are substantially similar to those of
the 1998 Plan.
Israeli Banks' Options
Within the framework of the comprehensive arrangement signed in September
1991 between Koor and Israeli banks, the banks were given options to
purchase 5,405,918 Ordinary Shares (the "Israeli Banks' Options"). As of
June 1, 2000, options to purchase 46,985 Ordinary shares were outstanding.
The options may be exercised at any time through September 2001. Upon the
exercise of an option by any of the banks, an Ordinary Share held by Hevrat
Ha'ovdim is converted automatically into a deferred share, so, for all
practical purposes, the total number of Ordinary Shares shall not be
changed.
Option Plans of Certain Subsidiaries
Certain Koor's subsidiaries have option plans issued to their senior
employees. The term of the options expires generally in 2001. The exercise
price is similar to the market price of the subsidiary's shares, upon
issuance of the options. The rate of dilution in these subsidiaries,
following the exercise of the options, will not exceed 2%. The subsidiaries
are MA Industries and United Steel.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Ordinary Course of Business Transactions with Affiliated Companies. From
time to time, the Company engages in transactions with companies affiliated
with Bank Hapoalim and Claridge. Certain subsidiaries also engage in
ordinary course of transactions with other companies in the Koor Group,
such as supplying building materials or other products and foreign currency
transactions, the terms of which in each case are negotiated on an
arm's-length basis and are conducted upon terms that the Company believes
to be generally no less favorable than would be available from unaffiliated
third parties. The Company intends to continue to engage in transactions on
a similar basis with such affiliated businesses. Because of the large
number of entities with which such transactions have been concluded and
because they are carried out in the ordinary course of business,
determination of the amounts of such transactions is impractical.
Registration Rights Agreements. In April 1995, Koor entered into a
registration rights agreement with the Shamrock Group, a former principle
shareholder of Koor ("Shamrock") and Bank Hapoalim ("the 1995 Registration
Rights Agreement"). In connection with the acquisition of Shamrock's
holdings in Koor by the Claridge Group (the "Claridge Acquisition"),
completed in October 1997, Koor entered into a registration rights
agreement with Claridge that is similar to the 1995 Registration Rights
Agreement. Under these agreements, each of Bank Hapoalim and Claridge have
the right to make two requests that Koor register its Ordinary Shares
and/or issue a prospectus for the public offering of the Ordinary Shares
held by them, under the Securities Act or the securities laws of the State
of Israel. These registration demand rights terminate upon the earlier of
(i) April 12, 2007, or (ii) the date on which the amount of Ordinary Shares
held by either Bank Hapoalim or Claridge is less than 5% of the issued and
outstanding share capital of Koor. In addition, if Koor proposes to
register any of its securities under the Securities Act or the securities
laws of the State of Israel, such holders are entitled to include such
number of Ordinary Shares as either or both such holders may request,
provided that, among other conditions, the underwriters of any offering
have the right to limit the number of Ordinary Shares included in such
registration.
<PAGE>
Borrowings from Affiliates. As of December 31, 1999, the balance of the
Company's indebtedness to Bank Hapoalim was approximately NIS 2,432 million.
Of the above mentioned indebted amount, approximately NIS 1,460 million were
borrowed by Koor from Bank Hapoalim on market terms, in connection with the
acquisition of ECI and Tadiran shares in 1998.
Consulting Agreements. On October 3, 1995, Koor entered into separate
consulting agreements with each of Shamrock Capital Advisors, Inc.
("Shamrock Capital") and Poalim Capital Markets and Investments Ltd.
("PCMI"), a wholly owned subsidiary of Bank Hapoalim. In connection with
the Claridge Acquisition, Koor and Claridge entered into an agreement in
similar terms to the consulting agreement from October 1995. Pursuant to
these consulting agreements, each of PCMI and Claridge agreed to provide
consulting services to Koor, relating to, among other things, strategic
investments, financial policies, properties, international activities,
strategic partnership and corporate organization. For such services, each
of PCMI and Claridge is entitled to receive an annual fee of up to $400,000
depending upon the amount of services rendered. Each agreement has a term
of one year and is automatically renewed for successive one-year periods,
unless earlier terminated by either party. The consulting agreement
contains customary indemnification provisions.
Purchase of ECI shares from the Claridge Group. On April 9, 1998, Koor
purchased from the Claridge Group an 8.6% interest in ECI for a total cash
consideration of NIS 735 million. The transaction was approved on April 8,
1998 by more than 99% of the shareholders, who were not interested parties,
at an Extraordinary General Shareholders Meeting of Koor.
Other Transactions. On May 11, 1999 Koor signed a memorandum with Hapoalim
Properties (Shares) Ltd., according to which on October 11, 1999, it acquired
from Koor a 20% interest in the Sheraton Moriah for approximately $13 million.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
Not applicable.
<PAGE>
PART IV
ITEM 17. FINANCIAL STATEMENTS
See Item 19(a).
ITEM 18. FINANCIAL STATEMENTS
Not applicable.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) The following consolidated financial statements and related schedule,
together with the reports of Somekh Chaikin Certified Public Accountants
(Israel), Koor's Auditors and auditors' reports of certain subsidiaries, are
filed as part of this Annual Report:
<TABLE>
<CAPTION>
Page
<S> <C>
Index to Consolidated Financial Statements............................................................... F-1
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1999................................................ F-3
Company Balance Sheets at December 31, 1998 and 1999..................................................... F-4
Consolidated Statements of Income for the three years ended December 31, 1999............................ F-5
Company Statements of Income for the three years ended December 31, 1999................................. F-6
Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 1999... F-7
Consolidated Statements of Cash Flows for the three years ended December 31, 1999........................ F-11
Company Statements of Cash Flows for the three years ended December 31, 1999............................ F-16
Notes to Consolidated Financial Statements............................................................... F-18
ECI's Consolidated Financial Statements ................................................................. F-109
Auditors' Reports of Certain Subsidiaries................................................................ F-190
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(b) Exhibits
Exhibit No. Exhibit
1.1 Agreement dated December 5, 1999 between Koor and Clal
Industries and Investments Ltd. for the sale of Koor's
holdings in Mashav.
1.2 Agreement dated November 10, 1999 between Tadiran and the
Shamrock Group for the sale of Tadiran's interest in Tadiran
Com.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused the annual report to be signed on its behalf by
the undersigned, thereunto duly authorized.
KOOR INDUSTRIES LTD.
By: /s/ Jonathan Kolber
-----------------------------------
Jonathan Kolber
Chief Executive Officer and
Vice Chairman of the
Board of Directors
Date: June 20, 2000
<PAGE>
Koor Industries Ltd. (an Israeli Corporation)
Financial Statements as at 31 December, 1999
-----------------------------------------------------------------------------
Contents
Page
Auditors' Report F-2
Financial Statements
Consolidated Balance Sheets F-3
Company Balance Sheets F-4
Consolidated Statements of Operations F-5
Company Statements of Operations F-6
Statement of Shareholders' Equity F-7
Consolidated Statements of Cash Flows F-11
Company Statements of Cash Flows F-16
Notes to the Financial Statements F-18
<PAGE>
March 23, 2000
Auditors' Report to the Shareholders of
Koor Industries Ltd.
We have audited the accompanying balance sheets of Koor Industries Ltd.
(the "Company") as at December 31, 1999 and 1998, and the consolidated
balance sheets of the Company and its subsidiaries as at such dates, and
the related statements of operations, shareholders' equity, and cash flows,
for each of the three years, the last of which ended December 31, 1999.
These financial statements are the responsibility of the Company's Board of
Directors and of its Management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries,
including those consolidated by the proportionate consolidation method,
whose assets constitute 18% and 30% of the total consolidated assets as at
December 31, 1999 and 1998 respectively, and whose revenues constitute 16%,
31% and 48% of the total consolidated revenues for the years ended December
31, 1999, 1998, and 1997 respectively. The financial statements of those
subsidiaries were audited by other auditors whose reports thereon were
furnished to us. Our opinion, insofar as it relates to amounts emanating
from the financial statements of such subsidiaries, is based solely on the
said reports of the other auditors. Furthermore, the data included in the
financial statements relating to the net asset value of the Company's
investments in affiliates and to its share in their operating results is
based on the financial statements of such affiliates, some of which were
audited by other auditors.
We conducted our audits in accordance with Israeli generally accepted
auditing standards, including those prescribed by the Israeli Auditors'
Regulations (Manner of Auditors Performance), 1973, which do not differ, in
any significant respect, from U.S. generally accepted auditing standards.
Such standards require that we plan and perform the audit to obtain
reasonable assurance that the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and Management, as
well as evaluating the overall financial statement presentation. We believe
that our audits, and reports of the other auditors, provide a reasonable
basis for our opinion.
In our opinion, based on our audits and on the reports of the
above-mentioned other auditors, the financial statements referred to above
present fairly, in all material respects, the financial position of the
Company and the consolidated financial position of the Company and its
subsidiaries as at December 31, 1999 and 1998 and the results of their
operations, the changes in shareholders' equity and cash flows for each of
the three years, the last of which ended December 31, 1999, in conformity
with generally accepted accounting principles in Israel, which differ in
certain respects from those followed in the United States (see Note 28 to
the consolidated financial statements). Furthermore, these statements have,
in our opinion, been prepared in accordance with the Securities Regulations
(Preparation of Annual Financial Statements), 1993.
As explained in Note 2B, the above-mentioned financial statements are
stated in values adjusted for the changes in the general purchasing power
of the Israeli currency, in accordance with opinions of the Institute of
Certified Public Accountants in Israel.
Without qualifying our above opinion we call attention to Note 18A(1) to
the financial statements, relating to an investigation by the Restrictive
Trade Practices Authority, concerning the alleged coordination of prices in
the Koor Group with respect to the products of its subsidiaries, Tadiran
Ltd. and Telrad Networks Ltd. (formerly - "Telrad Industries and
Telecommunications Ltd.").
Certified Public Accountants (Isr.)
<PAGE>
<TABLE>
F-3
<CAPTION>
Consolidated Balance Sheets as at December 31
---------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 1999
Convenience
translation
(Note 2B)
------------
December 31 December 31
1999 1998 1999
------- ------ -----------
Note NIS thousands US $ thousands
--------------------------------------------------------------
Assets
Current assets
<S> <C> <C> <C> <C>
Cash and cash equivalents 1,448,706 1,491,373 348,834
Short-term deposits and investments 4 472,335 1,587,346 113,733
Trade receivables 5 3,213,207 3,629,163 773,707
Other receivables 6 660,608 683,944 159,068
Inventories and work in process,
net of customer advances 7 2,123,687 2,810,513 511,362
----------- ---------- ---------
Total current assets 7,918,543 10,202,339 1,906,704
----------- ---------- ---------
Investments and long-term
receivables
Investments in affiliates 8 3,495,772 1,623,060 841,746
Other investments and receivables 9 757,747 581,936 182,458
---------- ---------- ---------
4,253,519 2,204,996 1,024,204
---------- ---------- ---------
Fixed assets 10
Cost 10,662,967 10,841,579 2,567,533
Less - accumulated depreciation 6,091,693 6,325,688 1,466,817
---------- ---------- ---------
4,571,274 4,515,891 1,100,716
---------- ---------- ---------
Intangible assets and deferred expenses ---------- ---------- ----------
after amortisation 11 627,264 862,322 151,039
---------- ---------- --------
---------- ---------- ----------
17,370,600 17,785,548 4,182,663
========== ========== ==========
<PAGE>
Liabilities and Shareholders Equity
Current liabilities
Credits from banks and others 12 3,559,014 2,730,806 856,975
Trade payables 13 1,512,037 1,545,269 364,083
Other payables and accruals 14 1,733,912 2,106,802 417,508
Customer advances, net of work in process 7 203,449 332,420 48,988
--------- ---------- ---------
Total current liabilities 7,008,412 6,715,297 1,687,554
--------- ---------- ---------
Long-term liabilities
Net of current maturities: 15,21
Bank loans 3,691,887 4,297,966 888,969
Other loans 133,060 106,760 32,039
Debentures 65,228 96,486 15,706
Convertible debentures 180,159 194,589 43,380
Customer advances 45,583 180,834 10,976
Deferred taxes 16F 236,895 219,514 57,042
Liability for employee severance benefits 17 304,891 264,048 73,415
---------- --------- ---------
Total long-term liabilities 4,657,703 5,360,197 1,121,527
---------- --------- ---------
Contingent liabilities and commitments 18
Minority Interest 1,319,771 1,634,136 317,787
---------- --------- ---------
Shareholders' Equity 20 4,384,714 4,075,918 1,055,795
---------- --------- ---------
---------- ---------- ---------
17,370,600 17,785,548 4,182,663
========== ========== =========
----------------------- --------------------------------
March 23, 2000 Jonathan Kolber Avraham Harel
CEO and Vice Chairman Member of the Board of Directors
of the Board of Directors
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
F-4
<CAPTION>
Company Balance Sheets as at December 31
--------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 1999
Convenience
translation
(Note 2B)
-----------
December 31 December 31
1999 1998 1999
Note NIS thousands US $ thousands
-------- -------------------------- --------------
Assets
Current assets
<S> <C> <C> <C> <C>
Cash and cash equivalents 725,354 315,453 174,658
Short-term deposits and investments 4 279,097 171,584 67,204
Current maturities of loans to investees 1,699 - 409
Receivables :
Investees 6, 16E 94,905 442,302 22,852
Deferred taxes 129,000 - 31,062
Others 6 26,176 15,181 6,303
--------- ---------- ---------
Total current assets 1,256,231 944,520 302,488
--------- ---------- ---------
Investments and long-term receivables
Investments in investees 8 6,400,868 6,398,708 1,541,264
Other investments and receivables 9 383,377 98,897 92,313
---------- ---------- ---------
6,784,245 6,497,605 1,633,577
---------- ---------- ---------
Fixed assets 10
Cost 40,383 31,286 9,724
Less - accumulated depreciation (1,983) (3,091) (478)
---------- ---------- ----------
38,400 28,195 9,246
---------- ---------- ----------
Cost of raising of capital, net of
amortisation 11 1,564 2,773 376
--------- -------- ---------
--------- --------- ---------
8,080,440 7,473,093 1,945,687
========= ========= =========
<PAGE>
Liabilities and Shareholders' Equity
Current liabilities
Credit from banks and others 12 977,516 72,027 235,376
Trade payables 1,657 7,187 399
Payables and accruals:
Investees 79,849 107,779 19,227
Interim dividend 166,962 87,299 40,203
Others 14 134,210 79,433 32,316
--------- -------- -------
Total current liabilities 1,360,194 353,725 327,521
--------- -------- -------
Long-term liabilities
Net of current maturities: 15, 21
Bank loans 2,128,779 2,829,509 512,588
Convertible debentures 170,897 165,918 41,150
Investees 29,342 30,956 7,065
Liability for employee severance
benefits, net 17 6,514 17,067 1,569
--------- --------- -------
Total long-term liabilities 2,335,532 3,043,450 562,372
--------- --------- -------
Contingent liabilities and commitments 18
Total Shareholders' Equity 20 4,384,714 4,075,918 1,055,794
--------- --------- ---------
--------- --------- ---------
8,080,440 7,473,093 1,945,687
========= ========= =========
--------------------- -----------------------
March 23, 2000 Jonathan Kolber Avraham Harel
CEO and Vice Chairman Member of the Board of Directors
of the Board of Directors
---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
F-5
<CAPTION>
Consolidated Statements of Operations*
---------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 1999
Convenience
translation
(Note 2B)
-----------
Year ended
Year ended December 31 December 31
1999 1998 1997 1999
Note NIS thousands US $ thousands
------- ----------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C>
Income from sales
and services 23A 10,675,301 12,792,316 12,925,375 2,570,503
Cost of sales and services 23B 8,129,866 * 9,867,024 * 9,890,029 1,957,588
----------- ----------- ----------- ----------
Gross profit 2,545,435 * 2,925,292 * 3,035,346 612,915
Selling and marketing
expenses 23C 978,056 * 1,202,457 * 1,125,264 235,506
General and
administrative expenses 23D 729,509 1,010,885 874,488 175,658
---------- ----------- ----------- ----------
Operating earnings 837,870 711,950 1,035,594 201,751
Financing expenses, net 23E 358,289 251,015 151,843 86,273
---------- ----------- ----------- ---------
479,581 460,935 883,751 115,478
Other income (expenses),
net 23F 107,228 (71,270) 117,399 25,820
--------- ----------- ---------- --------
Earnings before income
tax 586,809 389,665 1,001,150 141,298
Income tax 16G 161,887 233,985 235,847 38,981
-------- ---------- ---------- --------
424,922 155,680 765,303 102,317
Group's equity in the
operating results of
affiliates, net 23G 121,725 61,985 10,635 29,310
-------- --------- --------- -------
546,647 217,665 775,938 131,627
Minority interest in
subsidiaries, net 2,472 (239,964) (254,530) 595
-------- ---------- ---------- --------
Net earnings (loss) from
continuing activities 549,119 (22,299) 521,408 132,222
Result of discontinued
activities, net 24H - 69,420 15,929 -
-------- -------- -------- --------
Net earnings for the year 549,119 47,121 537,337 132,222
======== ======== ======== ========
NIS NIS NIS US$
-------- -------- -------- --------
Basic earnings (loss) per
NIS 1 par value
of ordinary shares: 26
Continuing activities 34,892 (1,347) 34,014 8,402
Discontinued activities - 4,414 1,032 -
-------- --------- -------- -------
34,892 3,067 35,046 8,402
======== ========= ======== =======
Diluted earnings per
NIS 1 par value of
ordinary shares: 26
Continuing activities 34,559 (1,347) 33,038 8,321
Discontinued activities - 4,414 1,015 -
--------- ------- -------- -------
34,559 3,067 34,053 8,321
========= ======= ======== ======
* Reclassified.
The accompanying notes are an integral part of the financial statements
</TABLE>
<PAGE>
<TABLE>
F-6
<CAPTION>
Company Statements of Operations
----------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 1999
Convenience
translation
(Note 2B)
Year ended
Year ended December 31 December 31
1999 1998 1997 1999
Note NIS thousands US $ thousands
------ ------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Income
Management services 23A 65,121 62,752 101,516 15,680
Others, net 23F - - 95,858 -
Financing, net 23E - - 8,639 -
--------- ------- -------- -------
Total income 65,121 62,752 206,013 15,680
--------- ------- -------- -------
Expenses
Administrative 23D 66,170 116,643 102,888 15,933
Others, net 23F 107,505 6,729 - 25,886
Financing, net 23E 160,475 84,568 - 38,641
-------- ------- -------- -------
Total expenses 334,150 207,940 102,888 80,460
-------- ------- -------- -------
Earnings (loss) before
income tax (269,029) (145,188) 103,125 (64,780)
Income tax 101,500 - - 24,440
--------- --------- -------- --------
(167,529) (145,188) 103,125 (40,340)
Koor's equity in the
operating results of
investees, net 23G 716,648 122,889 418,283 172,562
--------- -------- -------- --------
Net earnings (loss) from
continuing activities 549,119 (22,299) 521,408 132,222
Results of discontinued
activities, net 24H - 69,420 15,929 -
---------- --------- -------- --------
Net earnings for the year 549,119 47,121 537,337 132,222
========== ========= ======== =======
NIS NIS NIS NIS
---------- --------- -------- -------
Basic earnings (loss )
per NIS 1 par value of
ordinary shares : 26
Continuing activities 34,892 (1,347) 34,014 8,402
Discontinued activities - 4,414 1,032 -
--------- ------- ------- --------
34,892 3,067 35,046 8,402
======== ======= ======= =======
Diluted earnings
(losses) per NIS 1 par
value of ordinary shares 26
Continuing activities 34,559 (1,347) 33,038 8,321
Discontinued activities - 4,414 1,015 -
------- ------- ------- -------
34,559 3,067 34,053 8,321
======= ======= ======= ========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
F-7
<CAPTION>
Statement of Shareholders' Equity
--------------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 1999
Number Share Capital Company Cumulative Retained Total
of capital reserves shares foreign earnings
ordinary held by currency
shares (1) subsidiaries translation
adjustments
---------- ------- ------- ------------ ----------- --------- -----
NIS thousands
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 15,079,830 532,746 2,176,402 (7,007) (738,856) 2,077,186 4,040,471
Changes during 1997:
Net income - - - - - 537,337 537,337
Exercise of stock options granted
to Israeli banks 1 1,855 - 1,856
Interim dividend - - - - - (57,902) (57,902)
Interim dividend - - - - - (29,817) (29,817)
Interim dividend - - - - - (30,668) (30,668)
Erosion of dividend proposed in 1996 - - - - - 2,717 2,717
Cumulative foreign currency translation
adjustments - - - - 18,228 - 18,228
Purchase of Company shares by subsidiaries,
net, and dividend received therefrom (132,924) (46,634) - 2,016 (44,618)
Exercise of stock options (series 2) 233,157 * - 94,602 - - - 94,602
Exercise of stock options granted to
senior employees (2) 127,506 * - - - - - -
---------- ------- --------- -------- -------- --------- ---------
Balance at 31 December, 1997 15,307,569 532,747 2,272,859 (53,641) (720,628) 2,500,869 4,532,206
========== ======= ========= ========= ========= ========= =========
* Represents an amount lower than NIS 1,000.
(1) Net of subsidiaries' holdings.
(2) See also Note 20(c).
The accompanying notes are an integral part of the financial statements.
<PAGE>
Balance at January 1, 1998 15,307,569 532,747 2,272,859 (53,641) (720,628) 2,500,869 4,532,206
Changes during 1997:
Net income - - - - - 47,121 47,121
Exercise of stock options granted
to Israeli banks - * - 619 - - - 619
Interim dividend - - - - - (68,870) (68,870)
Interim dividend - - - - - (66,352) (66,352)
Interim dividend - - - - - (87,299) (87,299)
Erosion of dividend proposed in 1996 - - - - - 724 724
Cumulative foreign currency translation
adjustments - - - - 163,068 - 163,068
Dividend from company shares held by
subsidiaries - - - - - 2,074 2,074
Conversion of debentures into shares 315,658 1 141,163 - - - 141,164
Employee benefit from options granted by a
controlling shareholder (2) - - 6,080 - - - 6,080
Adjustment of consideration in respect
of purchase of investment from
controlling shareholder (3) - - (6,080) - - (588,904) (594,984)
Exercise of stock options granted
to senior employees (2) 100,100 *- - - - - -
Other adjustments - - 367 - - - 367
----------- ------- --------- ------- --------- --------- ---------
Balance at 31 December, 1998 15,723,327 532,748 2,415,008 (53,641) (557,560) 1,739,363 4,075,918
========== ======= ========= ======= ========= ========= =========
* Represents an amount lower than NIS 1,000.
(1) Net of subsidiaries' holdings.
(2) See also Note 20C.
(3) See Note 3A.
The accompanying notes are an integral part of the financial statements.
<PAGE>
Balances at January 1, 1999 15,723,327 532,748 2,415,008 (53,641) (557,560) 1,739,363 4,075,918
Changes during 1999:
Net income - - - - - 549,119 549,119
Exercise of stock options granted
to Israeli banks - * - 414 - - - 414
Interim dividend - - - - - (58,228) (58,228)
Interim dividend - - - - - (42,934) (42,934)
Interim dividend - - - - - (124,028) (124,028)
Erosion of dividend proposed in 1998 - - - - - (442) (442)
Cumulative foreign currency translation
adjustments - - - - (19,350) - (19,350)
Dividend from company shares held
by subsidiaries - - - - - 2,412 2,412
Conversion of debentures into shares 2,171 * - 1,020 - - - 1,020
Employee benefit from options granted
by a controlling shareholder (2) - - 774 - - - 774
Exercise of stock options granted to
senior employees (2) 5,473 * - - - - -
Other adjustments - - 39 - - - 39
---------- ------- --------- ------- -------- --------- ---------
Balance at 31 December, 1999 15,730,971 532,748 2,417,255 (53,641) (576,910) 2,065,262 4,384,714
========== ======= ========= ======== ======== ========= =========
* Represents an amount lower than NIS 1,000.
(1) Net of subsidiaries' holdings.
(2) See also Note 20C.
The accompanying notes are an integral part of the financial statements.
<PAGE>
Convenience translation into US dollars (Note 2B)
Balance at January 1, 1999 15,723,327 128,280 581,509 (12,916) (134,255) 418,821 981,439
Changes during 1999:
Net income - - - - - 132,222 132,222
Exercise of stock options granted
to Israeli banks - * - 100 - - - 100
Interim dividend - - - - - (14,021) (14,021)
Interim dividend - - - - - (10,338) (10,338)
Interim dividend - - - - - (29,865) (29,865)
Erosion of dividend proposed in 1998 - - - - - (106) (106)
Cumulative foreign currency
translation adjustments - - - - (4,659) - (4,659)
Dividend from company shares held
by subsidiaries - - - - - 581 581
Conversion of debentures into shares 2,171 * - 246 - - - 246
Employee benefit from options granted
by a controlling shareholder (2) - - 186 - - - 186
Exercise of stock options granted
to senior employees (2) 5,473 * - - - - - -
Other adjustments - - 9 - - - 9
---------- ------- ------- -------- -------- ------- ---------
Balance at 31 December, 1999 15,730,971 128,280 582,050 (12,916) (138,914) 497,294 1,055,794
========== ======= ======= ======== ======== ======= =========
(1) Net of subsidiaries' holdings.
(2) See also Note 20C.
* Represents an amount lower than $1,000.
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
F-11
<CAPTION>
Consolidated Statement of Cash Flows
----------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 1999
Convenience
translation
(Note 2B)
Year ended
Year ended December 31 December 31
1999 1998 1997 1999
NIS thousands US $ thousands
-------------------------------------------- ----------------
Cash flows generated by operating
activities:
<S> <C> <C> <C> <C>
Net earnings 549,119 47,121 537,337 132,222
Adjustments to reconcile net earnings to
cash flows generated by
operating activities (A) 171,509 632,419 285,503 41,298
-------- --------- -------- ---------
Net cash inflow generated by operating
activities 720,628 679,540 822,840 173,520
-------- --------- -------- ---------
Cash flows generated by investing
activities:
Purchase of fixed assets (654,694) (1,056,788) (991,967) (157,646)
Investment grants in respect of fixed assets 45,050 16,015 54,860 10,849
Amounts charged to intangible assets and
deferred expenses (107,293) (92,092) (58,337) (25,835)
Additional investments in subsidiaries (118,869) (1,255,337) (94,414) (28,622)
Acquisition of initially-consolidated
subsidiaries (B) (234,432) (231,504) (18,902) (56,449)
Investments in affiliates (886,984) (1,897,053) (40,451) (213,577)
Investments in loans to affiliates (5,911) (8,265) (10,874) (1,423)
Repayment of long-term loans to affiliates 105 27,007 4,966 25
Proceeds from realisation of investments in
formerly consolidated subsidiaries, net of
cash in those subsidiaries at the time they
ceased being consolidated (C) 508,144 540,513 168,914 122,357
Purchase of consolidated companies' shares
by their consolidated companies (116,497) - - (28,051)
Investment in restricted bank deposit - (746,194) - -
Proceeds from disposal of investments
in investees 140,277 314,401 241,660 33,777
Proceeds from sale of fixed assets 185,893 71,493 81,589 44,761
Decrease (increase) in other
investments (347,184) 184,082 (210,607) (83,598)
Changes in short-term deposits and
investments, net (150,962) (161,955) (193,615) (36,351)
----------- ----------- ---------- --------
Net cash outflow generated by investing
activities (1,743,357) (4,295,677) (1,067,178) (419,783)
----------- ----------- ----------- ---------
The accompanying notes are an integral part of the financial statements
<PAGE>
Cash flows generated by financing
activities:
Proceeds from exercise of stock options 414 619 96,458 100
Purchase of Company shares by
subsidiaries, net - - (46,634) -
Dividend paid (144,411) (193,176) (127,274) (34,773)
Issuance of shares to minority in
subsidiaries 13,552 299,638 182,147 3,263
Dividend paid to minority in
subsidiaries (12,894) (25,859) (30,555) (3,105)
Payment of suppliers credit received
for the purchase of fixed assets (1,232) (1,917) (5,150) (297)
Issuance of convertible debentures 62,220 746,194 - 14,982
Proceeds from principal of long-term
loans and other long-term liabilities 763,930 3,394,867 836,116 183,947
Repayment of long-term loans, debentures
and other long-term liabilities (606,496) (684,889) (683,921) (146,038)
Credit from banks and others, net 913,907 172,504 362,992 220,060
--------- --------- -------- --------
Net cash inflow generated by financing
activities 988,990 3,707,981 584,179 238,139
--------- --------- -------- --------
Translation differences in respect of cash
balances of autonomous foreign investees (8,928) 64,746 4,091 (2,149)
--------- --------- ------- --------
Increase (decrease) in cash and cash
equivalents (42,667) 156,590 343,932 (10,273)
Balance of cash and cash equivalents
at beginning of year 1,491,373 1,334,783 990,851 359,107
---------- --------- --------- --------
Balance of cash and cash equivalents
at end of year 1,448,706 1,491,373 1,334,783 348,834
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements
<PAGE>
A. Adjustments to reconcile net
earnings to cash flows generated
by operating activities:
Income and expenses not involving cash flows:
Minority interest in subsidiaries, net (2,472) 247,052 266,784 (595)
Dividend received from affiliates net
of equity in the operating results
(equity in operating results of
affiliates net of dividend received
therefrom) (74,696) (34,240) 3,325 (17,986)
Depreciation and amortisation 570,070 683,095 672,359 137,267
Deferred taxes (155,683) (117,068) 15,815 (37,487)
Increase in liabilities in respect of
employee severance benefits, net 60,061 82,604 7,608 14,462
Capital losses (gains), net:
Fixed assets 2,993 7,339 (15,413) 721
Investments in formerly consolidated
subsidiaries (401,880) (147,902) (70,791) (96,769)
Investments in investees (47,560) (249,716) (108,855) (11,452)
Inflationary adjustment of principal of
long-term loans and other liabilities (43,814) 53,510 26,664 (10,550)
Inflationary erosion of principal of
credit from banks and others - 16,204 - -
Adjustment of value of investments,
deposits and loans receivable (2,619) (54,425) (5,321) (631)
Write-down in value of assets and
investments 262,232 227,398 47,052 63,144
Liquidating dividend - - (20,327) -
Employee benefits granted by a
controlling shareholder 774 6,080 - 186
--------- ------- -------- -------
167,406 719,931 818,900 40,310
--------- ------- -------- -------
The accompanying notes are an integral part of the financial statements
Changes in operating asset and
liability items:
Increase in trade receivables and other
receivables (after taking into
account non-current amounts) (363,926) (639,503) (426,242) (87,630)
Decrease (increase) in inventory, work
in process and customer advances
(including long-term customer
advances and deposits) (31,029) (10,777) 56,010 (7,471)
Increase (decrease) in trade payables
and other payables and accruals 399,058 562,768 (163,165) 96,089
--------- -------- --------- -------
4,103 (87,512) (533,397) 988
--------- -------- --------- -------
171,509 632,419 285,503 41,298
========= ======== ========= =======
B. Acquisition of initially
consolidated subsidiaries
Assets and liabilities of the
subsidiaries at date of acquisition:
Working capital deficit (surplus),
excluding cash and cash equivalents 137,360 (150,468) (1,070) 33,075
Fixed assets and investments (808,959) (43,830) (85,186) (194,789)
Long-term liabilities 192,422 4,675 75,859 46,333
Minority interest in subsidiaries 61,938 2,437 22,241 14,914
Excess of cost over net asset value
upon acquisition (37,921) (48,328) (48,470) (9,131)
Equity in net assets 108,597 4,010 (2,603) 26,149
Liquidating dividend - - 20,327 -
Liability for acquisition of subsidiaries 112,131 - - 27,000
---------- -------- --------- --------
(234,432) (231,504) (18,902) (56,449)
========== ========= ========= ========
The accompanying notes are an integral part of the financial statements
<PAGE>
C. Proceeds from realisation of
investments in formerly
consolidated subsidiaries, net of cash
in those subsidiaries at the time
they ceased being consolidated:
Assets and liabilities of the formerly
consolidated subsidiaries at the time
they ceased being consolidated:
Working capital surplus, excluding
cash and cash equivalents 610,811 94,836 38,282 147,077
Fixed assets and investments 994,450 793,540 260,452 239,453
Long-term liabilities (233,786) (249,922) (168,786) (56,293)
Minority interest in the subsidiaries as at
the date of sale (243,164) (206,326) (25,551) (58,551)
Investments in affiliated companies, net (1,022,047) - - (246,098)
Consideration not yet received from
consolidation of companies - (39,517) (6,274) -
Capital gain on sale of investments
in the subsidiaries 401,880 147,902 70,791 96,768
---------- -------- -------- --------
508,144 540,513 168,914 122,356
========== ======== ======== ========
D. Non-cash transactions:
Purchase of fixed assets 5,897 6,673 20,637 1,420
========== ======== ======== ========
Investment grant receivable - - 234 -
========== ======== ======== ========
Purchase of other assets 8,306 29,426 24,911 2,000
========== ======== ======== ========
Purchase of switching division 3,945 - - 950
========== ======== ======== ========
Proceeds from sale of fixed assets and
investees - 44,874 17,384 -
========== ======== ======== ========
Investment in initially consolidated
subsidiaries 112,131 - - 27,000
========== ======== ======== ========
Proposed dividend to minority shareholders - 8,793 12,963 -
========== ======== ======== ========
Interim dividend 165,172 86,363 59,820 39,772
========== ======== ======== ========
Conversion of convertible debentures into
shares of the Company and of subsidiaries 1,020 141,492 - 246
========== ======== ======== ========
Conversion of current trade receivables
into long-term loans receivable - - 8,508 -
=========== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Company Statements of Cash Flows
----------------------------------------------------------------------------------------------------------------------------
In terms of shekels of December 1999
Convenience
translation
(Note 2B)
Year ended
Year ended December 31 December 31
1999 1998 1997 1999
NIS thousands US $ thousands
-------------------------------------------- ----------------
Cash flows generated by operating
activities:
<S> <C> <C> <C> <C>
Net earnings 549,119 47,121 537,337 132,222
Adjustments to reconcile net earnings
to cash flows generated by
operating activities (A) (322,620) 175,337 (367,197) (78,875)
--------- -------- ---------- --------
Net cash inflow generated by operating
activities 226,499 222,458 170,140 53,347
--------- -------- -------- -------
Cash flows generated by investing
activities:
Investees - acquisition of shares, payments
on account of shares, loans granted, and
non-current accounts (1,098,942) (3,633,853) (113,341) (259,010)
Purchase of fixed assets (14,052) (26,320) (776) (3,384)
Increase in investments and other
receivables, net (355,461) (39,464) (62,194) (85,591)
Proceeds from sale of fixed assets 949 1,707 440 229
Proceeds from realisation of investments
in investees, net 178,379 409,463 257,800 41,946
Dividend received from an investees 1,448,145 542,761 - 345,292
Investment in short-term deposits and
investments, net (86,748) (2,553) (30,820) (20,888)
----------- ----------- --------- ---------
Net cash inflow (outflow) generated by
investing activities 72,270 (2,748,259) 51,109 18,594
---------- ----------- --------- --------
Cash flows generated by financing
activities:
Proceeds from exercise of stock options 414 619 96,458 100
Dividend paid (145,969) (194,979) (128,626) (35,148)
Receipt of long-term loans and other
long-term liabilities 107,062 2,779,618 10,594 25,779
Payments of long-term loans and
other long-term liabilities (90,819) (86,358) (68,910) (21,868)
Credit from banks and others, net 240,444 (6,137) (968) 57,896
---------- ---------- --------- -------
Net cash inflow (outflow) generated by
financing activities 111,132 2,492,763 (91,452) 26,759
--------- ---------- --------- -------
Increase (decrease) in cash and cash
equivalents 409,901 (33,038) 129,797 98,700
Balance of cash and cash equivalents at
beginning of year 315,453 348,491 218,694 75,958
-------- --------- --------- -------
Balance of cash and cash equivalents at
end of year 725,354 315,453 348,491 174,658
======== ======== ========= =======
The accompanying notes are an integral part of the financial statements.
<PAGE>
(A) Adjustments to reconcile net earnings
to cash flows generated by
operating activities:
Income and expenses not involving cash flows:
Dividend received from investees net of equity
in their operating results (equity in
operating results of investees, net of
dividend received therefrom) (206,403) 141,275 (299,014) (46,294)
Depreciation and amortisation 2,433 3,143 4,608 587
Deferred taxes (129,000) - - (31,062)
Increase (decrease) in liability in respect
of employee severance benefits, net (10,553) (22,508) 12,425 (2,541)
Capital losses (gains), net:
Fixed assets 1,661 1,121 86 400
Investment in investees (44,699) (113,159) (93,088) (10,763)
Decrease (increase) in value of deposits
and other erosions, net 1,202 435 (3,834) 289
Exchange rate differences and erosion of
principal of long-term loans and other
liabilities (19,327) 13,059 5,171 (4,654)
Erosion of principal of credit from banks
and others - 6,678 - -
Employee benefits from option
granted by a controlling shareholder 774 6,080 - 186
Write down in value of investments 153,989 131,090 - 37,079
---------- --------- ---------- -------
(249,923) 167,214 (373,646) (56,773)
---------- --------- ---------- --------
Changes in operating assets and liability items:
Decrease (increase) in current accounts of
investees, net (88,911) 26,003 (5,531) (26,007)
Decrease (increase) in receivables (11,007) (2,520) 1,743 (2,650)
Increase (decrease) in payables and
accruals 27,221 (15,360) 10,237 6,555
-------- --------- -------- -------
(72,697) 8,123 6,449 (22,102)
--------- -------- --------- --------
(322,620) 175,337 (367,197) (78,875)
========= ======= ========= ========
(B) Significant non-cash transactions:
Interim dividend 166,962 87,299 60,484 40,203
======== ======= ======= ========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
F-18
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 1 - General
A. Koor Industries Ltd. is a diversified holding company, which
operates in the fields of telecommunication, defence
electronics, agro-chemicals and other chemicals and building
and infrastructure materials, through its subsidiaries,
proportionately consolidated companies and affiliates
(hereinafter - the "Koor Group" or the "Group").
The Company's shares are traded both on the Tel-Aviv Stock
Exchange and on the New York Stock Exchange.
Note 2 - Significant Accounting Policies
The financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") in Israel, which
differ in certain respects from those followed in the United
States, as described in Note 28.
The significant accounting policies, which were applied on a
consistent basis, are as follows: In these financial Statements:
A. Definitions:
1. The Company - Koor Industries Ltd. (hereinafter - "Koor" or
the "Company").
2. Subsidiaries - companies in which more than 50% of the
equity is held by Koor.
3. Proportionately consolidated companies - jointly controlled
companies, which are consolidated by the proportionate
consolidation method in Koor's financial statements.
4. Affiliates - companies, in which Koor has voting or equity
rights which give it significant influence over the
operating and financial policies of these companies, and
which are not fully or proportionately consolidated. Such
companies are included on the equity basis.
5. Investees - subsidiaries, proportionately consolidated
companies and affiliates.
6. Related parties - as defined in the Israeli Securities
Regulations (Preparation of Annual Financial Statements),
1993, including related parties as defined by the Institute
of Certified Public Accountants in Israel - (hereinafter -
"ICPAI").
B. Adjusted financial statements:
1. a) All NIS figures in the financial statements are stated
in terms of NIS of a identical purchasing power (NIS
of December 1999), the required adjustments are based
upon the changes in the Israeli Consumer Price Index
(hereinafter - "CPI")
b) The adjustments of the financial statements of the
Koor Group's is in accordance with the opinions of the
ICPAI and is based on the accounting records which are
kept in historical NIS, or in other functional
currencies.
c) The adjusted amounts of non-monetary assets do not
necessarily represent their realisable or current
economic value, but rather the original historical
cost of those assets in terms of adjusted NIS. The
term "cost" in these financial statements means cost
in adjusted NIS.
<PAGE>
B. Adjusted financial statements: (cont'd)
2. The adjusted financial statements as at 31 December, 1999
and for the year then ended have been translated into
dollars using the representative exchange rate as at that
date ($1 = NIS 4.153). The translation was made solely for
the convenience of the reader. The dollar amounts so
presented in these financial statements should not be
construed as representing amounts receivable or payable in
dollars or convertible into dollars, unless otherwise
indicated.
3. The following principles of adjustment relate to those
companies of the Koor Group whose financial statements were
adjusted on the basis of the CPI:
a) Non-monetary items (mainly fixed assets, inventory,
work in process and related customer advances,
intangible assets and deferred expenses), have been
adjusted on the basis of the CPI at the time when the
related transactions were carried out. The components
of the statement of operations relating to
non-monetary items (mainly changes in inventory and
work in progress, depreciation and amortisation) have
been adjusted on the same basis used for the
adjustment of the related balance sheet items.
b) Investments in investees and the equity in their
results of operations for the current year, as well as
the minority interest in subsidiaries and their share
in the results of their operations for the current
year, are based on the adjusted financial statements
of those companies.
c) Monetary items (items whose amounts in the balance
sheet reflect current or realisable values) are
presented in the balance sheet as at 31 December,
1999, at their historical amounts (comparative figures
are also stated in terms of shekels of December 1999).
d) The components of the statement of operations (except
for financing), relating to transactions carried out
during the year - sales, purchases, labour costs,
etc., have been adjusted according to the CPI at the
time the related transactions were effected. The
erosion of monetary balances relating to the aforesaid
transactions has been included in the financing item.
e) The components of the statement of operations relating
to provisions included in the balance sheet, such as:
liability in respect of employee severance benefits,
provision for vacation pay, etc., are based on the
changes in the balances of the related balance sheet
items after their related cash flows were taken into
account.
f) The financing item which is derived from the other
items of the statement of operations reflects real
financing income and expenses, as well as the erosion
of monetary balances during the year, the earnings and
losses from the realisation and pledging of marketable
securities and the earnings and losses from derivative
financial instruments.
g) Current income expense includes also the expense
resulting from the erosion in value of payments on
account of income tax from payment date to the end of
the year.
<PAGE>
B. Adjusted financial statements: (cont'd)
4. Adjustment of financial statements on the basis of the
exchange rate of the dollar:
The financial statements of certain subsidiaries and
affiliates are adjusted on the basis of the exchange rate of
the dollar. For the purpose of consolidation or inclusion
according to the equity method, of the above-mentioned
companies, the amounts (in terms of foreign currency),
stated in the financial statements of those companies, have
been treated, as autonomous foreign investees.
According to Interpretation No. 8 to Opinion 36 of the
ICPAI, at each balance sheet date, the figures of the
balance sheet and the statements of operations for the year
then ended are translated into shekels at the exchange rate
prevailing at the end of the year, of the foreign currency
in which the financial statements of those companies were
prepared. Balance sheet items as at the beginning of the
year, and changes in capital during the year, were
translated according to the exchange rate at the beginning
of the year or at the date of the change, respectively, and
were then adjusted for the changes in the CPI until December
1999. This treatment is relevant both to the autonomous
foreign investees as well as to the Israeli companies whose
functional currency is the dollar.
Differences arising from the translation were included in a
separate item of shareholders' equity under "Cumulative
foreign currency translation adjustments".
C. Principles of consolidation:
1. The consolidated financial statements include the accounts
of Koor, all its subsidiaries and proportionately
consolidated companies.
The Group's share in the equity of subsidiaries and
proportionately consolidated companies is computed on the
basis of their issued share capital. To the extent that sale
and/or exercise of convertible securities issued by investee
is probable, in accordance with the criteria set forth in
Opinions 48 and 53 of the ICPAI, and if the percentage of
Koor's holdings of such subsidiaries is expected to decrease
upon their conversion or exercise, following which Koor will
incur a loss, an appropriate provision is included for such
an anticipated loss.
<PAGE>
2. Consolidation of financial statements of proportionately
consolidated companies
In accordance with generally accepted accounting principles
in Israel, the financial statements of companies that are
jointly controlled, mainly Mashav Initiating and Development
Ltd. and its subsidiaries, are included in Koor's
consolidated financial statements according to the
proportionate consolidation method.
3. Goodwill deriving from the acquisition of an investment,
which represents the excess of acquisition cost or the
investment in subsidiaries over the fair value of
identifiable assets less the fair value of identifiable
liabilities upon acquisition, is amortised at equal annual
rates over 10 years commencing from the acquisition date.
Differences resulting from changes in holding rates are
charged to the statement of operations, as incurred.
4. Significant inter-company transactions and balances are
eliminated upon consolidation.
5. Koor's shares which were purchased by subsidiaries are
accounted for as treasury stock.
D. Use of estimates:
The financial statements, which were prepared in accordance with
generally accepted accounting principles, include amounts based on
estimates and assumptions of the Management which take the factor
of materiality into consideration. Actual results may differ from
such estimates.
E. Cash equivalents:
Cash equivalents are considered by the Company to be highly liquid
investments which include short-term bank deposits with an
original maturity of three months or less and which are not
encumbered by a lien.
F. Marketable securities:
Investments in marketable securities designated for sale in the
short term, which can be sold immediately ("current investments"),
are stated at market value. Investments in marketable securities
not designated for sale in the short term ("permanent investment")
are stated at cost (debentures - including accrued interest), as
long as there has not been a decline in value which is not of a
temporary nature.
<PAGE>
G. Allowance for doubtful debts:
The allowance is partly determined in respect of specific debts
whose collection is doubtful, and partly as a percentage of the
balance of trade receivables.
H. Inventory:
Inventory is stated at the lower of cost or market value. Cost is
determined as follows:
Raw materials, auxiliary materials and spare parts - at average
cost or by the "first-in, first-out" method.
Finished goods and goods in process - mainly on the basis of
direct manufacturing costs and, in part, on the basis of average
manufacturing costs with the addition of indirect manufacturing
costs.
Merchandise - by the first-in, first-out method or by the moving
average method.
I. Work in process:
Work in process is valued at direct production cost, plus
allocated indirect expenses, all of which are on an average basis.
The cost of work in process under long-term contracts also
includes allocation of general expenses, as well as interest at an
average rate for external financing.
Interest is calculated in respect of the excess of the cost of
work in process over customer advances received for each order or
in respect of the excess of customer advances received for each
order over the cost of work in process.
The excess of the investment in inventory and work in process,
over related advances received, is included in current assets,
while the excess of advances received over investment is included
in current liabilities.
J. Investments in investees companies:
The investments in investees (consolidated - investments in
affiliates) are stated by the equity method. Goodwill, arising
from the acquisition of investments, is amortised at equal annual
rates over a 10 year period, commencing from acquisition date.
<PAGE>
K. Long-term receivables and liabilities:
Long-term receivables and liabilities, with below-market interest
rates at date of inception, were recorded at their present values.
L. Fixed assets:
1. The assets are stated at cost, net of related investment
grants.
2. Cost includes interest capitalised during the period of
construction of the assets, calculated according to the
specific interest rates applicable to the sources used to
finance the investment.
3. Depreciation is computed by the straight-line method, on the
basis of the estimated useful lives of the assets.
The annual depreciation rates used are as follows:
_________%
Buildings and leasehold rights 1-10 (mainly 2%)
Machinery, equipment and installations 5-20 (mainly 10%)
Vehicles and forklifts 10-20 (mainly 15%)
Office furniture and equipment 6-33 (mainly 6%
and 25%)
M. Debentures convertible into shares:
1. Debentures, conversion of which is not expected in the
foreseeable future, are stated at their liability value as
at balance sheet date, in accordance with the provision, of
Opinion 53 of the ICPAI, and are stated as long-term
liabilities.
2. In accordance with Opinions 48 and 53 of the ICPAI, the
provision for anticipated loss on the reduction in the
percentage of holdings of investees is included in the item
"Minority interest in subsidiaries", in the balance sheet.
N. Intangible assets and deferred expenses:
1. Intangible assets - know-how, software and patents purchased
and payments for licensing of products abroad - are stated
at cost and are amortised in 5 to 10 annual installments
beginning with the commencement of the utilisation thereof.
2. Deferred expenses - debenture issuance costs:
These costs are amortised over the life of the debentures.
O. Deferred taxes:
1. Deferred taxes are computed in respect of differences
between the amounts stated in the financial statements and
those to be considered for tax purposes. As for the main
components in respect of which deferred taxes have been
created - see Note 16F.
2. Deferred tax balances are computed at the tax rate expected
to be in effect at the time these taxes will be charged to
the statement of operations. The amount stated in the
statement of operations represents the changes in the said
balances during the current year.
3. Koor has not recorded deferred taxes in respect of the
possible sale of investments in investees that management
intends to retain. Similarly, deferred taxes have not been
provided for future taxable distributions from investees
since it is the Group's policy not to distribute taxable
dividends in the foreseeable future.
P. Revenue recognition:
1. Work in process:
Revenue and costs related to work in process under long-term
contracts are recognised under the percentage of completion
method, once accumulated costs have become significant.
As for contracts involving technological uncertainties,
revenue is recognised on the basis of the completed
contracts method.
Income and costs relating to contracts on a "cost plus"
basis (i.e. cost with the addition of profit at a fixed
rate) are recognised when the costs are incurred.
Full provision is made for anticipated losses.
2. Sale of products and rendering of services:
Sales are recognised upon delivery of the products or
performance of the services.
In special contracts, the sales are recognised after
performing the work and passing acceptance tests, as defined
in the product delivery contract.
Q. Adjustments of computer systems to Year 2000
The costs required to adjust and convert the existing programs of
the Group, so that they can differentiate between years belonging
to the 20th century and years belonging to the 21st century (year
2000 capability), are recorded as current expenses as incurred.
R. Presentation of transactions between the Company and the
controlling shareholder
Transactions between the Company and the controlling shareholder
of the Company are presented in accordance with the Securities
Regulations (Presenting transactions between a company and its
controlling shareholder in the financial statements) - 1996.
Accordingly, the difference between the price paid to the
controlling shareholder in 1998, regarding the sale of an asset,
and the book value of the asset in the books of the controlling
shareholder is included in the item Shareholders' equity of the
Company.
S. Research and development:
Research and development costs, net of participations (mainly from
the Government of Israel), are charged to the statement of
operations, as incurred. Research and development costs financed
by the customer are charged to the cost of work in process, and
are included in the statement of operations, as part of the
recognition of revenue from such work in process.
T. Derivative financial instruments:
Koor and its subsidiaries enter into option contracts and forward
transactions that are designated to reduce the specific risks
(i.e., commitments for the import of raw materials, export of
goods, liabilities linked to the CPI or foreign currency) involved
in the exposure to fluctuations in the exchange rates of foreign
currency and changes in the CPI.
The results of option contracts and forward transactions for the
purchase or sale of foreign currency, which are designated to
hedge the proceeds from export and the cost of imports against
changes in foreign currency (hedging transactions), are recorded
in the statement of operations, concurrently with the recording of
the related import and export results.
The results of option contracts and forward transactions for the
purchase or sale of foreign currency intended to hedge certain net
assets, but not classified as hedging transactions, are recorded
in the statement of operations, as financing expenses in the
period of the change in the exchange rate of the hedged balances
(see also Note 21). The fair value of derivative financial
instruments is established according to their market values, and
when such does not exist, according to a valuation model.
U. Earnings per share:
Earnings per share data is computed in accordance with Opinion 55
of the ICPAI (see also Note 26).
V. Data regarding the CPI and the exchange rate of foreign
currency:
1. Below is data regarding the CPI and the US dollar exchange
rate:
Israeli Exchange rate
CPI* of one U.S.$
--------- --------------
Points NIS
--------- --------------
For the year ended:
December 1999 168.53 4.153
December 1998 166.3 4.160
December 1997 153.1 3.536
________% ______%
Changes during:
1999 1.3 (0.2)
1998 8.6 17.6
1997 7.0 8.8
______%
Real increase (decrease)
in the CPI relative
to the exchange rate
of the dollar during the year:
1999 1.5
1998 (8.3)
1997 (1.7)
(*) According to the index in respect of the month (1993 average
basis) ended on balance sheet date.
2. Assets and liabilities in foreign currency or linked thereto
are included in the financial statements according to the
representative exchange rate, as published by Bank of Israel
as at balance sheet date.
3. Assets and liabilities linked to the CPI are included in the
financial statements according to the latest index published
prior to balance sheet.
Note 3 - Information Regarding Certain Investee Companies
A. ECI Telecom Ltd. - An Affiliated Company
1. Merger of ECI and Tadiran Telecommunications
a. On 16 March, 1999 ECI Telecom Ltd. (hereinafter: "ECI") and
Tadiran Telecommunications Ltd. (hereinafter: "TTL")
announced the completion of the merger between them,
effective 1 January, 1999.
b. The merger was recorded in Koor's financial statements at
book value, based on the accounting principles applying to
transactions in which assets of similar nature are
exchanged. This treatment is different from accepted
accounting treatment in the United States (GAAP), where the
transaction would have been recorded at market value. See
also Note 28A(2).
c. Following the merger and before the purchase by Koor of
additional shares in ECI as described in Section 2 below,
the direct holdings of Koor and Tadiran Ltd. (hereinafter:
"Tadiran") in ECI were 16.6% and 12.6% respectively. As a
result of the merger the balance of goodwill of both Koor
and Tadiran in ECI increased by some NIS 179 million.
d. As a result of the merger, effective 1 January, 1999, Koor
no longer consolidates TTL's operations in its financial
statements.
The details of TTL which are included in the consolidated
financial statements of the company for 1998 and 1997:
Year ended December 31
-----------------------
1998 1997
---- ----
NIS millions
------------
Sales revenues 1,761 1,728
Operating income 179 114
Net profit as reported by TTL 169 93
Total assets 2,355 -
2. On 31 January, 1999 Koor notified Clal Electronics
Industries Ltd. (hereinafter: "Clal") of exercise of the
call option for the purchase from Clal of 3,830,000 ordinary
shares of ECI at $37 per share. The transaction was
concluded on 8 February, 1999.
As at the balance sheet date, after purchase by Koor of
additional shares on the stock exchange and the purchase by
a consolidated company of ECI of treasury stock, Koor's
direct and indirect holdings in ECI reached 34.1%.
3. In October 1999 a subsidiary of ECI, whose principal
business is the development, production and marketing of
fraud detection systems in communications networks and
improvement of traffic quality in communications networks,
completed an initial public offering on NASDAQ. This
offering caused ECI to register a capital gain of
approximately $30 million. As a result of the offering
ECI's holding in its subsidiary declined to approximately
75%.
4. During the fourth quarter of 1999 ECI registered a loss of
approximately $37 million as a result of the termination of
four different operations. In addition, in 1999 the current
loss from the terminated operations amounted to
approximately $26 million.
5. In September 1999, Telegate Ltd., an affiliated company of
ECI, signed an agreement of principles whereby the shares
and capital notes held by its shareholders, including those
of ECI, would be exchanged for shares of Trion
Communications Systems Ltd., a company whose shares are
listed for trading in the United States. The share exchange
enabled ECI to post a capital gain of $25.5 million, which
was registered upon completion of the transaction in the
fourth quarter of 1999.
6. Below is an adjustment of the profits of ECI based on the
profit reported by ECI pursuant to the United States
accounting regulations, to the profit pursuant to Israeli
accounting regulations:
Year ended
December 31,
1999
-------------
$ thousands
-----------
Net profit of ECI based on its reported profit 102,519
Adjustments:
Finance income - marketable securities, see Note 28A(6) 11,171
Tax income - deferred taxes, see Note 28A(4) 2,000
--------
Net profit of ECI based on net profit
pursuant to Israeli accounting
regulations 115,690
========
B. Tadiran Ltd. - consolidated company
1. Completion of purchase offer
On 31 December, 1998 Koor held 97.4% of the issued capital
of Tadiran. Pursuant to the purchase offer documents, in
January 1999 Koor transferred the consideration for the
balance of Tadiran shares amounting to NIS 79 million and
achieved 100% ownership of Tadiran's shares.
2. Reorganisation
During the accounting period decisions were taken in
connection with personnel and activities downsizing plan in
respect of Tadiran's consolidated companies. The managements
of said companies estimate that implementation of the above
plan will cost NIS 30 million.
3. Divestitures
a. Within the framework of the merger agreement between
ECI and TTL, Tadiran purchased the assets and
liabilities of TTL's Switching Division (hereinafter:
"Switching") in consideration of approximately $29
million. On 21 March, 1999 an agreement was signed by
Tadiran and a third party for the sale of most of the
assets and liabilities of Switching in consideration
of approximately $24 million without accrual of a
capital gain or loss as a result thereof.
b. On 8 March, 1999 an agreement was signed whereunder
Tadiran will sell all its holdings (86.9%) of its
shares in Contahal Ltd. (hereinafter: "Contahal") for
a total consideration of $24 million. The capital gain
after tax to Koor from this sale amounts to some NIS
45 million.
c. On 16 May, 1999 Tadiran signed an agreement of
principles for the sale of all its holdings (87%) in
Advanced Technology Ltd. in consideration of $64
million. The capital gain before tax to Koor was
approximately NIS 142 million.
d. On 10 June, 1999 an agreement was signed by Tadiran
for the sale of all its holdings (49%) in Tadiran
Information Systems Ltd., an affiliated company, to IBM
Israel Ltd. which prior to the transaction held 51% of
Tadiran Information Systems Ltd. for a consideration
(including dividend) of NIS 105 million. The capital
gain before tax amounted to some NIS 57 million.
e. On November 10, 1999 a final agreement was signed by
the Shamrock Group and others for the sale of all
Tadiran's holdings (100%) in Tadiran Com. Ltd.
(hereinafter: "Com.") for a total consideration of $149
million, of which $5 million was distributed as a
dividend and $35 million was paid by Com. for use of
the Tadiran logo and a non-competition agreement. The
after tax capital gain to Koor amounted to NIS 164
million. See Note 18A(12).
f. In August 1999 Tadiran signed an agreement to sell all
its holdings (100%) in Tadiran Batteries Ltd. in
consideration of approximately $19.5 million.
Completion of the transaction was contingent on
compliance with certain terms determined in the
agreement, but since not all the required approvals
were received by the date set by the parties, the
agreement was cancelled. On 15 March, 2000 an
agreement was signed by Tadiran for the transfer of
its holdings in Tadiran Batteries. See Note 27F
g. On 25 November, 1999 Tadiran signed an agreement to
sell all its holdings in Tadiran Telematics Ltd. in
consideration of approximately $7.5 million after
distribution of a dividend amounting to approximately
$1 million. In the financial statements a provision
was recorded for a loss of NIS 8 million which
reflects the loss from the realisation of the holding.
The agreement was concluded on 15 February, 2000.
h. On 30 December, 1999 Tadiran signed a final agreement
for the sale of all its holdings (56.6%) in Tadiran
Appliances. The consideration amounted to
approximately NIS 133 million. Implementation of the
transaction was contingent on receipt from the
relevant authorities of the approvals required for
completion of the transaction. In the financial
statements a provision was recorded for a loss of NIS
13 million which reflects the loss from realisation of
the holding.
C. M-A Industries Ltd. - Consolidated Company
1. On 26 December, 1999 the Board of Directors of M-A
Industries Ltd. (hereinafter: "M-A Industries") decided on a
plan to reorganise the group in light of the continuing
crisis in the global agro-chemicals industry, which will be
applied in the group and its investee companies overseas and
in Israel, and which will include mainly a focus on the
company's key areas of business, closing and relocating
production installations, cutting fixed costs, as well as
employee retirement. The total cost of the plan, which was
included in the 1999 financial statements, is estimated to
be approximately $36 million (before tax on income) and it
is scheduled for implementation in 2000.
2. As at the balance sheet date Koor's holdings in M-A
Industries are approximately 59.7%.
3. Acquiring operations -
In July 1999 M-A Industries purchased from the shareholders
of Luxembourg Pharmaceuticals Ltd. (a pharmaceuticals and
medical instruments company, hereinafter: "Luxembourg")
42.86% of its issued and paid-up share capital and in
addition, Luxembourg issued to M-A Industries shares
constituting 7.14% of its share capital in a total
consideration of $7.1 million. Concurrently with the
issuance, M-A Industries sold to Luxembourg its holdings
(100% ownership and control) in Koor Medica Ltd. in
consideration of $1 million. Following the above
transactions M-A Industries holds 50% of the shares of
Luxembourg.
In addition M-A Industries has an option to purchase the
remaining shares of Luxembourg and the shareholders of
Luxembourg have a sale option, which enables them to
obligate M-A Industries to purchase their shares by 31
December, 2001, in consideration of $7 million. To secure
the option M-A Industries has deposited $4 million with a
trustee.
4. During 1999 the local currency in Brazil was devalued in
relation to the dollar by approximately 48%, and the
currency rate was extremely volatile during this period.
Until the third quarter of 1999 most of the customer debts
of the consolidated company in Brazil were linked to the
exchange rate of the dollar. During the third quarter, owing
to the sharp cumulative rise in the exchange rate of the
local currency against the dollar, the customer market in
Brazil no longer accepts linkage to the dollar and
therefore, customer balances of the consolidated company in
Brazil, as at 31 December, 1999, amounting to a total of
$149 million, are not linked to the dollar.
As a result of the change in the accounting method in the
third quarter, relating to the linkage of customer balances,
a customer debt from the previous period was adjusted to the
new accounting method, and this led to inclusion of expenses
amounting to $12.6 million deriving from the adjustment of
customer balances and from the granting of discounts due to
the devaluation.
Financing expenses, net, include expenses for translation
differentials amounting to approximately $8 million, which
stemmed mainly from the devaluation of the local currency in
Brazil in the first quarter of the year.
D. Mashav Initiation and Development Ltd. - a proportionately
consolidated investee
On 5 December, 1999 an agreement was signed by Koor and Clal
Industries and Investments Ltd. (hereinafter: "Clal")
whereby Koor will sell to Clal all its holdings (50%) in
Mashav Initiation and Development (hereinafter: "Mashav").
This agreement replaces the previous agreement between Koor
and Clal concerning Mashav.
During December 1999, before conclusion of the transaction,
Mashav distributed a dividend to Koor and Clal in the total
amount of NIS 710 million.
Upon conclusion of the transaction, on 6 January, 2000 NIS
889 million were paid to Koor. In addition Koor received
47.5% of the share capital of Mashael Alumina Industries
Ltd. The expected gain to Koor from the sale is
approximately NIS 357 million and after allocation of
deferred taxes is approximately NIS 228 million. This gain
will be recorded in the first quarter of 2000. See also Note
16E(1).
As at the date of the balance sheet Mashav is still
proportionately consolidated in Koor's financial statements
(50%).
Below are data (on the basis of relative consolidation) from
Mashav's financial statements for 1999.
For the year
ended
31 December
1999
------------
NIS millions
------------
Total assets 1,300
Shareholders' equity 544
Revenues from sales 876
Operating earnings 134
Net profit 97
E. Telrad Networks Ltd. - consolidated company
In 1998 the Board of Directors of Telrad Networks Ltd.
(formerly "Telrad Telecommunications and Electronics
Industries Ltd., hereinafter: "Telrad") decided on a
reorganisation plan which includes employee retirement at a
total cost of approximately NIS 223,000 thousand (NIS
152,000 thousand after tax on income). In 1999 and after the
balance sheet date the company's Board of Directors approved
two additional reorganisation plans containing further
employee retirement at a total cost of some NIS 85,000
thousand (NIS 57,800 thousand after tax on income). The
estimated cost of the retirement plan is calculated in
accordance with tables broken down by age and seniority of
the retiring employees. Pension payments for these employees
are presented at the present value at a computation using a
discount rate of 3.6% per year.
F. Sheraton Moriah (Israel) Ltd. - consolidated company
During April 1999, pursuant to a memorandum of understanding
dated 27 January, 1999, Koor purchased 75% of the ownership
of the Radisson-Moriah hotel chain at a value of
approximately $81.5 million (before distribution of a
dividend). The name of the company was changed to Sheraton
Moriah (Israel) Ltd. (hereinafter: "Sheraton Moriah").
Sheraton Moriah was consolidated in Koor's financial
statements starting in the second quarter of 1999. During
October 1999 Koor concluded the sale of 20% of the ownership
of Sheraton Moriah in consideration of $13 million (after
distribution of a dividend) to Hapoalim Assets (Shares) Ltd.
of the Bank Hapoalim Group.
In December 1999 Koor sold its hotels and also the Sheraton
management company of which it owned 49% to Sheraton Moriah.
Prior to the sale of the hotels owned by Koor to Sheraton
Moriah, Koor recorded a provision for a write-off in value
of the hotels in the amount of NIS 38 million.
Sheraton Moriah is in the process of preparing a prospectus
for a public offering on the Tel Aviv Stock Exchange.
G. BVR Systems (1998) Ltd. - an affiliated company
During 1999 Koor purchased shares on NASDAQ in BVR Systems
(1998) Ltd. (hereinafter: "BVR"). The total cost of the
purchases amounts to approximately $20 million. On 5
August, 1999 Koor signed an agreement with a number of BVR's
shareholders for the purchase of additional BVR shares (part
by way of private placement and part in purchase from the
other shareholders) in consideration of approximately $14
million. The transaction was closed on 22 September, 1999 by
means of Elisra Electronic Systems Ltd.
The agreement determined that the other shareholders of BVR,
together with Koor, will exercise their voting power so that
three directors of BVR will be recommended by Koor and the
other four directors will be recommended by the other
shareholders. As of 1 October, 1999 Koor recorded its
investment in BVR according to the equity method, and the
original differential allocated to goodwill at approximately
NIS 120 million, was calculated accordingly. As at the
balance sheet date Koor's holdings are approximately 28.6%
of BVR's share capital.
H. Divestiture of additional holdings
1. On 3 March, 1999 an agreement was signed with Menorah
Holdings and B. Gaon Holdings Ltd. (hereinafter: the
"Buyers") for the sale of most of Koor's shares in Koor
Finance Ltd., (hereinafter: "Koor Finance") which controls,
among others, Koor Capital Markets and Netivot Pension under
terms whose principal points are listed below:
Under the agreement, Koor sold to the Buyers 80% of its
rights in Koor Finance (share capital and capital note) for
a total consideration (including a dividend of NIS 8
million) of NIS 44 million, subject to certain adjustments.
On 31 May, 1999 the transaction was concluded after the
receipt of approvals from various authorities and the
consideration was paid. The capital gain after tax to Koor
from this sale amounted to some NIS 10 million and was
recorded in the second quarter of 1999.
Koor and the Buyers granted one another put and call options
for purchase of the remainder in Koor's interest in Koor
Finance. The put option is exercisable starting from the end
of one year after the date of signature of the agreement
until the end of two years from that date. The call option
is exercisable within 90 days of the expiry date of the put
option. The exercise price of the options is NIS 12 million,
linked to the dollar and bearing interest.
After the balance sheet date in March 2000, Koor announced
its intention to exercise the put option. A capital gain of
some NIS 2 million is expected to accrue to Koor as a result
of the exercise.
On 14 June, 1999 Tadiran sold its holdings (20%) in Koor
Investment House (H.A.L. Ltd.) to a subsidiary in the Koor
Finance Group, in consideration of NIS 5 million.
2. On 21 June, 1999 a transaction was completed for the sale of
all the holdings (76.37%) of Koor Investments Ltd. (a wholly
owned subsidiary of Koor) in Merhav Building Materials and
Ceramics Center Ltd. (hereinafter: "Merhav") in total
consideration of NIS 35 million. As part of the transaction
the buyers purchased from Koor the capital note which Merhav
had issued in favour of Koor in the amount of approximately
NIS 4 million, and Koor was released from its guarantees in
favour of Merhav and its subsidiaries.
After deduction of provisions for decreased value which were
included in 1998 for this investment, the capital gain after
tax arising from the sale amounted to approximately NIS 7
million which was included in the second quarter of 1999.
3. On 21 July, 1999 an agreement was finalised for the sale of
Koor's holdings (100%) in Yonah Fishing and Industry Ltd.
(hereinafter: "Yonah") and its subsidiary. Under the
agreement Koor was released from the guarantees which it
gave in respect of Yonah to banking institutions and other
parties in a total amount of approximately NIS 55 million.
After provisions for a decline in value of NIS 9 million,
recorded up to the end of the second quarter of 1999, no
capital gain or loss accrued to Koor from the transaction.
See Note 24H.
4. On 28 July, 1999 Koor signed an agreement for the sale of
all its holdings (about 75%) in Phoenicia Glass Works Ltd.
(hereinafter: "Phoenicia") in consideration of NIS 6 million
and the release of Koor from its guarantees in favour of
Phoenicia towards other parties in the amount of
approximately NIS 36 million. On 20 October, 1999 the
transaction was completed, the consideration was paid and
the shares transferred. The net gain after tax after
cancellation of the provisions recorded for decreased value
amounted to approximately NIS 9 million. See Note 24H.
5. On 4 August, 1999 Koor sold all of its holdings (100%) in
the subsidiary Koor Metals Ltd. (hereinafter: "Koor Metals")
for a total consideration of approximately NIS 11 million
and released Koor from its guarantees in favour of Koor
Metals and its subsidiary to banks and third parties in
consideration of approximately NIS 34 million. In addition,
the loans between Koor and the company were repaid. After
provisions for decreased value in the approximate amount of
NIS 10 million which were recorded during 1998, no capital
gain or loss was recorded from the transaction.
6. On 25 November, 1999 a contract was signed by Koor and ISSTA
Lines Student Travel Company Israel Ltd. (hereinafter:
"ISSTA") whereby Koor undertook to transfer all its share
capital in the subsidiary Histour Eltiv Ltd. (hereinafter:
"Histour") to ISSTA. In return ISSTA undertook to release
Koor from all its guarantees for the liabilities of Histour.
Furthermore, Koor undertook to invest in Histour
approximately NIS 13.5 million and in return Histour
undertook to allocate to Koor preferred shares which will
confer upon it the right to appoint one director in Histour
and the preferential right to receive dividends over a
period of ten years, after which the preferred shares will
be deferred. The transaction was approved by the
Commissioner of Restrictive Trade Practices and it was
concluded on 21 February, 2000. Koor is not expected to
incure a loss or profit from the transaction.
7. On 7 December, 1999 Koor signed an agreement to sell all its
holdings (51%) in Merkavim Metal Works Ltd. for a total
consideration of approximately NIS 17.5 million. The
transaction was concluded in January 2000. The capital gain
after tax and after cancellation of the provision recorded
for decreased value, will be recorded in the first quarter
of 2000 in the amount of approximately NIS 4 million.
8. On 23 December, 1999 Koor signed an agreement to sell all
its holdings (approximately 76%) in Middle East Tubes Ltd.
in consideration of some NIS 84 million. After recording a
provision for decreased value in the approximate amount of
some NIS 8 million during 1999, no gain or loss is expected
from the transaction.
<PAGE>
<TABLE>
<CAPTION>
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------------------------------
Note 4 - Short-Term Deposits and Investments
Consolidated Company
------------------------ -----------------------
December 31 December 31
------------------------ -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
NIS thousands NIS thousands
------------------------ ----------------------
<S> <C> <C> <C> <C>
Marketable securities (1):
Debentures 219,657 109,912 192,614 37,754
Short-term Treasury notes 35,368 58,581 29,122 10,461
Shares and options 84,678 120,593 36,596 35,958
Convertible securities 1,496 2,537 - -
Mutual fund participation
certificates 13,102 14,168 - -
--------- --------- --------- ---------
354,301 305,791 258,332 84,173
Deposits in banks and financial
institutions 96,177 533,537 - 87,411
Deposit in bank per merger
agreement (2) - 746,194 - -
Loans 21,857 1,824 20,765 -
--------- --------- --------- ---------
472,335 1,587,346 279,097 171,584
========= ========= ========= =========
</TABLE>
(1) Stated at market value.
(2) Bank deposit in accordance with the ECI - TTL merger
agreement. Within the framework of the merger agreement between
TTL and ECI, as aforesaid in Note 3A(1), in December 1998 TTL
issued debentures convertible to shares, in consideration of $177
million.
Note 5 - Trade Receivables
Consolidated:
<TABLE>
<CAPTION>
December 31
--------------------------
1999 1998
--------- ---------
NIS thousands
--------------------------
<S> <C> <C>
On open account 2,936,846 3,291,169
Post dated checks receivable and credit card
companies 224,222 272,743
Current maturities of long-term trade receivables 52,139 65,251
--------- ---------
3,213,207 3,629,163
========= =========
Including:
Affiliates 11 108
========= =========
Proportionately consolidated companies 173 255
========= =========
Net of allowance for doubtful accounts 46,024 114,981
========= =========
</TABLE>
<PAGE>
Note 6 - Other Receivables
<TABLE>
<CAPTION>
Consolidated Company
--------------------- ---------------------
December 31 December 31
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
NIS thousands NIS thousands
--------------------- ---------------------
<S> <C> <C> <C> <C>
Government agencies 112,644 162,184 8,837 3,995
Deferred taxes, see Note 16F 271,492 160,001 129,000 -
Accrued income (including
from a subsidiary) 53,571 90,377 5,193 2,545
Prepaid expenses 76,003 84,477 658 632
Employees 17,591 20,545 15 8
Receivables from the sale
of investments and fixed assets - 24,086 - -
Affiliates - current accounts 5,631 3,986 394 -
Proportionately consolidated
companies 21,418 3,567 3,035 -
Others 102,258 134,721 8,044 8,001
------- ------- ------- -------
660,608 683,944 155,176 15,181
======= ======= ======= =======
</TABLE>
Note 7 - Inventories and Work in Process
Consolidated:
<TABLE>
<CAPTION>
December 31
--------------------------
1999 1998
--------- ---------
NIS thousands
--------------------------
<S> <C> <C>
A. Inventories and work in process, net of
customer advances - stated as
current assets:
Industrial inventory:
Raw and auxiliary materials 759,274 982,958
Goods and work in process (1)(2) 341,272 515,136
Finished goods 925,209 1,145,509
Advances in respect of materials 10,160 40,015
Inventories for trading operations -
merchandise (including advance payments) 161,482 174,248
--------- ---------
2,197,397 2,857,866
Less - customer advances 73,710 47,353
--------- ---------
2,123,687 2,810,513
========= =========
</TABLE>
<PAGE>
Note 7 - Inventories and Work in Process (cont'd)
<TABLE>
<CAPTION>
December 31
---------------------
1999 1998
------- -------
NIS thousands
---------------------
<S> <C> <C>
B. Customer advances, net of work in process - stated as
current liabilities:
Customer advances in respect of work in process(1)(3)(4) 242,510 449,487
Less - inventory and work in process 39,061 117,067
------- -------
203,449 332,420
======= =======
(1) Net of provision for loss in
respect of work in process 15,917 1,703
======= =======
(2) Including long-term contracts, net: 64,247 65,872
======= =======
(3) Not including long-term advances.
(4) See Note 22 regarding guarantees provided for securing
the gross amounts of customer advances (including
long-term advances).
</TABLE>
Note 8 - Investments in Investee companies
<TABLE>
<CAPTION>
December 31
----------------------------
1999 1998
----------- -----------
NIS thousands
----------------------------
<S> <C> <C>
A. Consolidated balance sheet - affiliates
Net asset value of the investments (1)(2) 1,957,207 848,692
----------- -----------
Goodwill (2):
Original amount, net 1,739,625 806,586
Accumulated amortisation, net (230,418) (77,051)
----------- -----------
1,509,207 729,535
----------- -----------
Long-term loans (3) 29,358 44,833
----------- -----------
3,495,772 1,623,060
=========== ===========
(1) As follows:
Net asset value of investments as at 31 December, 1991 261,563 261,563
Changes from January 1, 1992:
Cost of shares acquired or received 1,071,477 754,220
Accumulated net earnings 441,233 194,383
Changes in capital reserves and
foreign currency translation adjustments (12,336) 10,719
Initially consolidated subsidiaries, net (233,838) (176,220)
Disposals, net 429,108 (195,973)
----------- -----------
1,957,207 848,692
=========== ===========
(2) Including investments in companies traded on the Stock
Exchange in Tel-Aviv or abroad, in millions of NIS:
Carrying value 3,370 1,469
=========== ===========
Market value 4,517 2,511
=========== ===========
(3) Linkage terms and interest rates relating to
long-term loans:
Linked to the CPI - in part bearing
interest at the rate of 5%, and in part bearing
no interest 19,693 32,197
Linked to foreign currency (mainly to the
the dollar) - in part bearing interest up to
the rate of Libor + 2%, and in part bearing
no interest 7,411 12,636
Without linkage 2,254 -
----------- -----------
29,358 44,833
=========== ===========
<PAGE>
<CAPTION>
Note 8 - Investment in Investee Companies (cont'd)
B. Company balance sheet - investees
December 31
----------------------------
1999 1998
----------- -----------
NIS thousands
----------------------------
<S> <C> <C>
Shares:
Net asset value of the investments 4,429,303 4,257,908
----------- -----------
Goodwill:
Original amount, net 1,273,568 1,135,356
Accumulated amortisation (155,817) (45,829)
----------- -----------
1,117,751 1,089,527
----------- -----------
Book value (1) 5,547,054 5,347,435
Payments on account of shares (1) 60,250 122,464
Long-term loans and capital notes (2) 822,058 895,245
Non-current inter-company accounts (3) 25,147 87,205
----------- -----------
6,454,509 6,452,349
Less - Company shares held by subsidiaries 53,641 53,641
----------- -----------
6,400,868 6,398,708
=========== ===========
(1) As follows:
Cost of shares including accumulated
earnings as at 31 December, 1991 1,918,301 1,918,301
Changes from January 1, 1992:
Cost of acquired shares 5,380,513 4,289,635
Accumulated net earnings 138,903 1,082,319
Changes in capital reserves, net (442,379) (389,943)
Disposals (1,388,034) (1,430,413)
----------- -----------
Book value, including payments on
account of shares (4) 5,607,304 5,469,899
=========== ===========
Net of investment in Koor Trusts (1995) Ltd. See Note 20C.
<CAPTION>
Note 8 - Investment in Investee Companies (cont'd)
B. Company balance sheet - investees (cont'd)
December 31
----------------------------
1999 1998
----------- -----------
NIS thousands
----------------------------
<S> <C> <C>
(2) Long-term loans and capital notes:
Long-term loans (a) 254,965 250,266
Capital notes - unlinked and not bearing
interest (b) 568,792 644,979
----------- -----------
823,757 895,245
Less - current maturities of long-term
loans 1,699 -
----------- -----------
822,058 895,245
=========== ===========
</TABLE>
<PAGE>
(a) Loans classified by linkage terms and interest rates:
<TABLE>
<CAPTION>
Interest rate
at December 31 December 31 December 31
-------------- ----------- ------------
1998 1999 1998
-------------- ----------- ------------
% NIS thousands
-------------- ------------------------------
<S> <C> <C> <C>
Linked to the CPI 2-2.75 69,858 68,488
Linked to the CPI 4.5 54,318 1,697
Linked to the CPI 5.5 46,393 -
Linked to the CPI 6.5 30,472 29,195
Linked to the CPI - 53,924 150,886
----------- ------------
254,965 250,266
=========== ============
</TABLE>
(b) Capital notes are not stated at their present value,
since their repayment date has not yet been fixed by
the parties.
(3) Non-current inter-company accounts:
<TABLE>
<CAPTION>
December 31
----------------------------
1999 1998
----------- -----------
NIS thousands
----------------------------
<S> <C> <C>
Linked to the dollar exchange rate 125 -
Unlinked-bears interest at the rate of
the increase in the CPI 25,022 87,205
25,147 87,205
</TABLE>
Note 8 - Investment in Investee Companies (cont'd)
B. Company balance sheet - investees (cont'd)
<TABLE>
<CAPTION>
December 31
----------------------------
1999 1998
----------- -----------
NIS millions
----------------------------
<S> <C> <C>
(4) Including investments in marketable
shares traded on the Tel-Aviv Stock
Exchange or abroad in NIS millions:
Carrying value 2,288 * 3,484
=========== ===========
Market value 3,051 5,559
=========== ===========
* Net of a dividend receivable from a subsidiary of NIS 422
million which is included in current assets.
</TABLE>
<PAGE>
Note 9 - Other Investments and Receivables
A. Composition:
<TABLE>
<CAPTION>
Consolidated Company
----------------------- --------------------
December 31 December 31
----------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
NIS thousands NIS thousands
----------------------- --------------------
<S> <C> <C> <C> <C>
Deposits in banks and in
financial institutions 391,459 111,308 365,000 -
Non-current trade receivables (1) 141,284 157,791 - -
Long-term loans receivable
from others (2) 129,143 109,285 15,464 8,131
------- ------- ------- -------
661,886 378,384 380,464 8,131
Marketable securities -
mainly fixed investments (2), (3) 3,469 75,833 - -
------- ------- ------- -------
Investment in a hotel under
construction - 50,214 - 50,214
Non-marketable shares 65,597 48,807 2,812 40,552
Others 26,795 28,648 101 -
------- ------- ------- -------
757,747 581,936 383,377 98,897
======= ======= ======= =======
(1) Including a reserve for the
renewal of equipment
and for the construction
and expansion of plants
in a proportionately
consolidated company - 79,435
======= =======
(2) Including loans to
proportionately
consolidated companies 34,527 44,020
======= =======
</TABLE>
<PAGE>
Note 9 - Other Investments and Receivables (cont'd)
A. Composition (cont'd):
(3) As at 31 December, 1998, includes NIS 42 million of
debentures of a subsidiary, pledged to secure long-term
loans received from banks, in order to invest in
marketable government bonds. An additional amount of NIS
172 million in debentures, which is the sole security for
the repayment of the maximum amount of the loans received
for the purchase of those debentures, was deducted from
the balance of the loans.
B. Classification by linkage terms and interest rates of
other investments and receivables (not including
marketable and other securities):
Consolidated:
<TABLE>
<CAPTION>
Average
interest rates at December 31
December 31 -----------------------
1998 1999 1998
----------------- ------- -------
% NIS thousands
----------------- -----------------------
<S> <C> <C> <C>
Linked to CPI 4-7 425,506 154,852
Linked to the dollar 4-7 228,618 198,528
Unlinked Mainly 15 7,762 25,004
------- -------
661,886 378,384
======= =======
<CAPTION>
Company:
December 31
-----------------------
1999 1998
------- -------
NIS thousands
-----------------------
<S> <C> <C> <C>
Linked to CPI 6.6 367,827 2,832
Linked to foreign currency
(mainly to the dollar) 6.2 12,637 5,299
------- -------
380,464 8,131
======= =======
</TABLE>
<PAGE>
Note 9 - Other Investments and Receivables (cont'd)
C. Repayment schedule of deposits, non-current customers
balances and long-term loans from others, in the
consolidated balance sheet:
<TABLE>
<CAPTION>
Consolidated Company
------------------------ ---------------------
December 31 December 31
------------------------ ---------------------
1999 1998 1999 1998
------- ------- ------- -------
NIS thousands NIS thousands
------------------------ ----------------------
<S> <C> <C> <C> <C>
Amounts collectible in the:
First year (1) 34,527 58,365 - -
Second year 124,279 139,673 7,267 -
Third year 60,628 59,013 - -
Fourth year 395,634 54,667 365,000 -
Fifth year 17,093 14,875 - -
Thereafter and without a
specific maturity date 29,725 51,791 8,197 8,131
------- ------- ------- -------
661,886 378,384 380,464 8,131
======= ======= ======= =======
(1) Management of a proportionately consolidated company is
of the opinion that these amounts are primarily
designated for investment in fixed assets, See also A(2)
above
</TABLE>
<PAGE>
Note 10 - Fixed Assets
A. Consolidated
<TABLE>
<CAPTION>
Land Buildings Machinery, Office Tools Installations Total
(including equipment Vehicles furniture and under cons-
leasehold and and and instru- truction and
land) installa- forklifts equipment ments payments on
tions account of
acquisition
of assets
---------- ---------- ---------- --------- --------- ------- ------------- ------------
NIS thousands
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost as at January 1, 1998 377,795 2,424,284 7,348,027 520,700 323,858 17,920 353,856 11,366,440
Additions during the year 39,446 170,893 528,105 98,866 38,319 (16) 182,125 1,057,738
Disposals during the year 10,572 57,346 196,189 15,575 4,000 - 18,272 301,954
Adjustments resulting from
foreign currency
translation differences* (6,200) (526,082) (995,538) (48,194) (29,300) (3,187) (31,541) (1,640,042)
Formerly consolidated
subsidiaries, net 76,680 (64,361) (135,278) (106,110) (15,478) (1) 37 (244,511)
---------- ---------- ---------- --------- --------- ------- ---------- -----------
Balance as at
31 December, 1998 498,293 2,062,080 6,941,505 480,837 321,399 14,716 522,749 10,841,579
---------- ---------- ---------- --------- --------- ------- ---------- -----------
Additions during the year 11,663 131,175 780,833 99,547 29,812 (260) (437,229) 615,541
Other changes during the
year, net (5,580) (26,804) (38,962) (823) (485) - (2,886) (75,540)
Adjustments resulting from
foreign currency
translation differences* (31,055) 739,195 (532,760) (114,966) (96,340) 1,993 32,150 (1,783)
Formerly consolidated
subsidiaries, net (1,239) (206,942) (392,617) (92,893) (23,139) - - (716,830)
---------- ---------- ---------- --------- --------- ------- ---------- -----------
Balance as at
31 December, 1999 472,082 2,698,704 6,757,999 371,702 231,247 16,449 114,784 10,662,967
---------- ---------- ---------- --------- --------- ------- ---------- -----------
* See Note 2B(3).
<PAGE>
<CAPTION>
Note 10 - Fixed Assets (cont'd)
A. Consolidated (cont'd)
Land Buildings Machinery, Office Tools Installations Total
(including equipment Vehicles furniture and under cons-
leasehold and and and instru- truction and
land) installa- forklifts equipment ments payments on
tions account of
acquisition
of assets
---------- ---------- ---------- --------- --------- ------- ------------- ------------
NIS thousands
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brought forward 472,082 2,698,704 6,757,999 371,702 231,247 16,449 114,784 10,662,967
---------- ---------- ---------- --------- --------- ------- ---------- -----------
Accumulated depreciation
as at January 1, 1998 3,012 1,266,661 5,002,700 281,133 196,208 - - 6,749,714
Additions during the year 3,089 66,814 464,158 59,709 29,165 - - 622,935
Other changes during the
year, net 51 35,130 104,767 6,726 (1,187) - - 145,487
Adjustments resulting from
foreign currency
translation differences* (102) (267,245) (768,243) (30,174) (17,194) - - (1,082,958)
Formerly consolidated
subsidiaries, net (1) (20,469) (21,984) (57,661) (9,375) - - (109,490)
---------- ---------- ---------- --------- --------- ------- ---------- -----------
Balance as at
31 December, 1998 6,049 1,080,891 4,781,398 259,733 197,617 - - 6,325,688
Additions during the year 161 70,084 344,025 43,847 23,214 - - 481,331
Adjustments resulting from
foreign currency
translation differences* (11) (14,275) (18,030) (90) (503) - - (32,909)
Formerly consolidated
subsidiaries, net 1,998 266,066 (463,830) (51,559) (53,356) - - (300,681)
Other changes, net - (100,595) (220,733) (44,555) (15,853) - - (381,736)
---------- ---------- ---------- --------- --------- ------- ---------- -----------
Balance as at
31 December, 1999 8,197 1,302,171 4,422,830 207,376 151,119 - - 6,091,693
---------- ---------- ---------- --------- --------- ------- ---------- -----------
Net book value as at
31 December, 1999 463,885 1,396,533 2,335,169 164,326 80,128 16,449 114,784 4,571,274
========== ========== ========== ========= ========= ======= ========== ===========
Net book value as at
31 December, 1998 492,244 98,189 2,160,107 221,104 123,782 14,716 522,749 4,515,891
========== ========== ========== ========= ========= ======= ========== ===========
* See Note 2B(3)
</TABLE>
<PAGE>
Note 10 - Fixed Assets (cont'd)
A. Consolidated (cont'd)
Supplementary data on consolidated fixed assets :
(1) Some of the properties have not yet been registered in
the Land Registry Office in the name of the subsidiaries,
in some cases because of the absence of formal
parcelisation of the area.
Leasehold rights are for a period of 49 years, ending in
the year 2000 and thereafter. Certain leases provide an
option for extension for another 49 years.
The cost of leasehold real estate as at 31 December,
1999, is NIS 1,267 million, of which NIS 776 million is
under a capitalized lease.
(2) After deduction of investment grants, net of
depreciation, which have been received from the State of
Israel by certain subsidiaries under the terms of the Law
for the Encouragement of Capital Investments, 1959,
amounting to NIS 130 million, adjusted, and NIS 191
million, adjusted, as at 31 December, 1999 and 1998,
respectively (see also Note 16A).
If the subsidiaries will not comply with the conditions
related to the grants, they may be required to refund the
grants, in whole or in part, plus interest and linkage
increments, from the date of receipt. Most of the
companies have complied with the conditions of these
grants through 31 December, 1999, and they believe that
they will continue to comply with the terms of the
grants.
As security for the implementation of the approved
projects and compliance with the conditions of the
approval, a charge has been registered on the above
subsidiaries' assets in favor of the State of Israel.
(3) Includes capitalized interest amounting to NIS 73,404
thousand, adjusted, and NIS 98,572 thousand, adjusted to
31 December, 1999 and 1998, respectively.
(4) As for amounts charged to cost of fixed assets, see Note
23B. and E.
(5) Including fully depreciated assets amounting to NIS 2,896
million, adjusted to 31 December, 1999.
(6) See Note 22 regarding liens.
Note 10 - Fixed Assets (cont'd)
B. Company
Composition of the assets and accumulated depreciation, according
to major groups, and changes therein during the current year, are
as follows:
<TABLE>
<CAPTION>
Balance at Changes during the year
beginning --------------------------- Balance at
of year Additions Disposals end of year
---------- --------- --------- -----------
NIS thousands
-------------------------------------------
<S> <C> <C> <C> <C>
Cost:
Offices and land * 23,465 10,159 - 33,624
Vehicles 2,986 257 (1,847) 1,396
Office equipment 4,835 3,636 (3,108) 5,363
-------- -------- -------- --------
31,286 14,052 (4,955) 40,383
-------- -------- -------- --------
Accumulated depreciation:
Land and offices premises - 336 - 336
Vehicles 1,000 326 (892) 434
Office equipment 2,091 575 (1,453) 1,213
-------- -------- -------- --------
3,091 1,237 (2,345) 1,983
-------- -------- -------- --------
Net book value:
Land and offices premises 23,465 33,288
Vehicles 1,985 962
Office equipment 2,745 4,150
-------- -------- -------- --------
28,195 38,400
======== ======== ======== ========
(*) Represents the ownership of two stories in an office
building in Tel Aviv and leasehold rights to land in
Dimona, in an area of 27 dunams, not yet registered in
the Company's name. These premises have not as yet been
registered in the name of the Company at the Land
Registry Office. The premises are on land leased under a
capital lease for a period of 49 years ending in 2044.
</TABLE>
<PAGE>
Note 11 - Other Assets, Net of Amortisation
<TABLE>
<CAPTION>
Consolidated Company
----------------------- ---------------------
December 31 December 31
----------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
NIS thousands NIS thousands
----------------------- ---------------------
<S> <C> <C> <C> <C>
Intangible assets:
Goodwill
Original amounts 443,135 690,383 - -
Accumulated amortisation 84,993 61,510 - -
------- ------- ------- -------
358,142 628,873
------- ------- ------- -------
Licensing of products abroad:
Original amounts 392,903 323,186 - -
Accumulated amortisation 189,502 150,596 - -
------- ------- ------- -------
203,401 172,590 - -
------- ------- ------- -------
Know-how, software, patents and others:
Original amounts 94,599 97,277
Accumulated amortisation 30,892 41,786 - -
------- ------- ------- -------
63,707 55,491 - -
------- ------- ------- -------
Deferred expenses:
Debentures issuance costs:
Original amount 41,854 72,852 25,004 25,004
Accumulated amortisation 39,840 67,484 23,440 22,231
------- ------- ------- -------
2,014 5,368 1,564 2,773
------- ------- ------- -------
627,264 862,322 1,564 2,773
======= ======= ======= =======
</TABLE>
<PAGE>
Note 12 - Credit from Banks and Others
A. Composition:
<TABLE>
<CAPTION>
Consolidated Company
------------------------- ---------------------
December 31 December 31
------------------------- ---------------------
1999 1998 1999 1998
--------- --------- ------- -------
NIS thousands NIS thousands
------------------------- ---------------------
<S> <C> <C> <C> <C>
From banks 2,479,869 1,603,223 241,410 966
From others 386 160 - -
--------- --------- ------- -------
2,480,255 1,603,383 241,410 966
Debentures convertible into
shares of a subsidiary (1) - 746,194 - -
--------- --------- ------- -------
2,480,255 2,349,577 241,410 966
Current maturities of long-term
loans and debentures
(see Note 15) 1,078,759 381,229 736,106 71,061
--------- --------- ------- -------
3,559,014 2,730,806 977,516 72,027
========= ========= ======= =======
(1) See Note 4(2).
</TABLE>
B. Classification by linkage terms and average interest rates:
<TABLE>
<CAPTION>
Consolidated
Average ----------------------------
interest rates at December 31
December 31 ----------------------------
1999 1999 1998
----------------- ----------------------------
% NIS thousands
----------------- ----------------------------
<S> <C> <C> <C>
Linked to foreign currency
(mainly to the dollar) L+0.3-1.8 1,737,078 1,758,748
Linked to the CPI 4-6 79,019 82,784
Unlinked 7-14 664,158 508,045
2,480,255 2,349,577
<CAPTION>
Company
Average ----------------------------
interest rates at December 31
December 31 ----------------------------
1999 1999 1998
----------------- ----------------------------
% NIS thousands
----------------- ----------------------------
<S> <C> <C> <C>
6.6 240,961 -
Linked to the dollar 11.5 449 -
Unlinked 241,410 966
</TABLE>
C. See Note 22 regarding liens to secure credit.
Note 13 - Trade Payables
Consolidated
-------------------------
December 31
-------------------------
1999 1998
------- -------
NIS thousands
Including notes payable 28,681 36,726
Note 14 - Other Payables and Accruals
<TABLE>
<CAPTION>
Consolidated Company
--------------------------- -------------------------
December 31 December 31
--------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
NIS thousands NIS thousands
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Employees and withholdings
remittable 194,633 296,947 5,834 8,379
Provision for vacation pay and
vacation expense allowance 159,043 275,895 1,445 1,610
Accrued expenses 238,756 380,886 27,267 25,552
Government agencies
(including taxes) 202,188 170,583 38,142 10,389
Provision for warranty and
repairs 64,636 141,389 - -
Payables for purchase of
investments 112,597 894 - -
Severance pay payable and
current portion of early
retirement pensions
(see Note 17) 187,488 250,625 300 709
Reserve for internal insurance 30,122 34,363 14,150 19,136
Interim dividend to Koor
shareholders 165,172 86,363 - -
Dividend to minority in
subsidiaries - 8,797 - -
Deferred income 49,950 61,811 654 851
Affiliates and proportionately
consolidated companies -
current accounts 20 7,950 - 2,762
Provision for loss for consolidated
company 33,837 - 24,709 -
Others 295,470 390,299 21,709 10,045
--------- --------- --------- ---------
1,733,912 2,106,802 134,210 79,433
========= ========= ========= =========
Includes interested parties 830 1,331
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Note 15 - Long Term Liabilities
A. Loans
Consolidated Company
December 31 December 31
-------------------------------- --------------------------------
1999 1998 1999 1998
NIS thousands NIS thousands NIS thousands NIS thousands
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Loans from banks 4,644,001 4,539,938 2,795,670 2,843,650
Less - current
maturities 952,114 241,972 666,891 14,141
-------------- -------------- -------------- --------------
3,691,887 4,297,966 2,128,779 2,829,509
-------------- -------------- -------------- --------------
2. Loans from others
Shareholders in
subsidiaries
and in proportionately
consolidated companies 58,350 52,211 - -
Investees 400 811 42,027 31,159
Receipts from time-sharing
units 35,302 - - -
Others and long-term
accrued expenses 42,637 78,953 - -
-------------- -------------- -------------- --------------
136,689 131,975 42,027 31,159
Less - current
maturities 3,629 25,215 12,685 203
-------------- -------------- -------------- --------------
133,060 106,760 29,342 30,956
-------------- -------------- -------------- --------------
Total loans 3,824,947 4,404,726 2,158,121 2,860,465
============== ============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
3. Classification by linkage terms and interest rates:
The consolidated balance sheet:
Interest rate at
December 31 December 31
1999 1999 1998
% NIS thousands
----------------- ------------------------------
<S> <C> <C> <C>
Foreign currency (mainly US dollar) Libor+0.3-1.8 3,937,683 3,665,814
Dollar exchange rate or CPI - the higher
of the two 4.9 216,850 219,755
CPI Up to 5 297,170 306,072
CPI Above 5 322,783 443,776
(mainly 6.2)
Unlinked 0-15 6,204 36,495
--------- ---------
4,780,690 4,671,912
Less - current maturities 955,743 267,186
--------- ---------
3,824,947 4,404,726
========= =========
The Company balance sheet:
Interest rate at
December 31 December 31
1999 1999 1998
% NIS thousands
----------------- ------------------------------
a. From banks
Dollar exchange rate or CPI - the higher of the two 4.9 216,830 219,755
CPI 6.3 397,329 410,609
US dollar 6.5 2,181,511 2,213,286
---------- ----------
2,795,670 2,843,650
Less - current maturities 666,891 14,141
---------- ----------
2,128,779 2,829,509
========== ==========
Interest rate at
December 31 December 31
1999 1999 1998
% NIS thousands
---------------- ----------------------------
b. From investees:
CPI 4.8 41,227 30,348
Unlinked -capital notes* - 800 811
------- ------
42,027 31,159
Less - current maturities 12,685 203
------- ------
29,342 30,956
======= ======
* The repayment date of the capital note has not yet been set but it will not be before 31 December 2000.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
B. Debentures
Consolidated Company
December 31 December 31
1999 1998 1999 1998
NIS thousands NIS thousands NIS thousands NIS thousands
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1. Debentures 96,536 129,288 - -
Less - current maturities 31,308 32,802 - -
----------- ---------- ---------- ---------
65,228 96,486 - -
=========== ========== ========== =========
2. Debentures convertible into
shares
Issued by Koor
Series E 20,329 40,633 20,329 40,633
Series F 144,803 182,003 144,803 182,003
----------- ---------- ---------- ---------
165,132 222,636 165,132 222,636
Debentures convertible into shares of investee companies:
Issued by Koor 62,295 - 62,295 -
Issued by subsidiaries and
proportionately consolidated
companies 44,440 53,194 - -
----------- ---------- ---------- ---------
Total debentures convertible
into shares 271,867 275,830 227,427 222,636
Less - current maturities 91,708 81,241 56,530 56,722
----------- ---------- ---------- ---------
180,159 194,589 170,897 165,918
=========== ========== ========== =========
</TABLE>
<PAGE>
3. Debentures convertible into shares:
(a) NIS 11,340 thousand par value of debentures (Series E) are
linked to the CPI of December 1992 and bear interest at an
annual rate of 1.75%. The debentures were redeemed on 31
January, 2000.
(b) NIS 93,740 thousand par value of debentures (Series F), traded
on the Tel-Aviv Stock Exchange, are linked to the CPI of April
1994 and bear interest at an annual rate of 2.75%. The
debentures are redeemable, if not previously converted into
shares, in the years 2000-2003. The debentures are convertible
into registered ordinary shares of Koor of a par value of NIS
0.001 at the conversion rate of NIS 330 par value of debentures
for 1 ordinary share.
(c) The debentures are secured by a first degree fixed token charge
on a NIS 1 coin deposited with a trustee. In addition, Koor
undertook not to create any charges on its assets, whether fixed
or floating, prior to receiving the trustee's explicit approval,
and on the condition that a charge of the same degree will also
be registered in favor of the trustee to secure the debentures,
except for a token charge to secure additional series of
debentures that will be issued by Koor.
In the current period debentures of a par value of NIS 716 thousand
(Series F) were converted into shares.
(d) According to the prospectuses of the issue of Koor's convertible
debentures, Koor will refrain from any distribution of dividends
out of capital reserves, or from profits deriving from capital
reserves, either of the Company or of the subsidiaries.
<TABLE>
<CAPTION>
4. The debentures are classified by linkage basis and interest rate as follows:
(1) Convertible debentures issued by the company, subsidiaries and proportionately consolidated companies:
Interest rate as at Consolidated
December 31 December 31
1999 1999 1998
------------------- --------------- --------------- ---------------
% Maturity NIS thousands NIS thousands
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CPI (a) 3.0 2000-2001 44,440 53,194
US dollar (b) 2.5 2002 62,295 -
--------------- ---------------
106,735 53,194
=============== ===============
(a) NIS 18,524 thousand were issued by United Steel
Mills Ltd., see also Note 27C.
(b) Debentures convertible in to ECI shares held by
Koor at a minimum realisation price of $50 per share.
The convertible debentures are, for the most part,
secured by a subordinated floating charge on the entire
assets of the issuing companies and some by a token
charge.
(2) Debentures of Series 7 issued by "Koor issuers" bear
interest of 4.5% and are linked to the CPI, both as to
principal and interest, and are redeemable until 2002.
The debentures are secured by a floating charge on all
the said company's assets. Under the terms of the trust
deed the Company has guaranteed the full payment of all
principal, interest and linkage differences of the
debentures. The Company registered a "negative pledge" to
secure its guarantee.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Note 15 - Long Term Liabilities (cont'd)
C. Liabilities (net of current maturities) that will mature in the following years subsequent to balance sheet date,
are as follows:
1. Consolidated
Loans from banks Loans from others Debentures Total
-------------------- -------------------- -------------------- --------------------
December 31 December 31 December 31 December 31
-------------------- -------------------- -------------------- --------------------
1999 1998 1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- --------- --------- --------- ---------
NIS thousands
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Second year 811,495 1,255,573 15,124 15,976 139,056 107,423 965,684 1,378,971
Third year 298,189 673,101 13,969 19,442 70,121 76,952 382,279 769,495
Fourth year 1,853,130 260,596 9,008 11,268 36,210 70,300 1,898,339 342,164
Fifth year 393,569 1,819,108 10,097 1,762 - 36,400 403,666 1,857,270
Sixth year 172,242 78,456 17,733 28,597 - - 189,975 107,053
Subsequent years 163,262 211,132 67,129 29,715 - - 230,391 240,847
--------- --------- --------- --------- --------- --------- --------- ---------
3,691,887 4,297,966 133,060 106,760 245,387 291,075 4,070,334 4,695,801
========== ========= ========= ========= ========= ========= ========= ==========
2. The Company
Loans from banks Loans from investees Convertible debentures Total
-------------------- -------------------- -------------------- --------------------
December 31 December 31 December 31 December 31
-------------------- -------------------- -------------------- --------------------
1999 1998 1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- --------- --------- --------- ---------
NIS thousands
---------------------------------------------------------------------------------------------------------
Second year 477,595 676,327 12,685 203 98,495 56,716 588,775 733,246
Third year - 484,814 15,857 203 36,201 36,401 52,058 521,418
Fourth year 1,651,184 - - 29,740 36,201 36,401 1,687,385 66,141
Fifth year - 1,668,368 - - - 36,400 - 1,704,768
Sixth year - - - - - - - -
Subsequent years - - 800 810 - - 800 810
2,128,779 2,829,509 29,342 30,956 170,897 165,918 2,329,018 3,026,383
========== ========= ========= ========= ========= ========= ========= ==========
</TABLE>
<PAGE>
D. See Note 22 for details of security pledged to secure loans.
Note 16 - Taxes on Income
A. Tax benefits under the Law for Encouragement of Capital Investments, 1959:
Under this law, by virtue of the "approved enterprise" status granted
to certain enterprises of several investees, these companies are
entitled to various tax benefits. The income derived from these
enterprises during a period of up to 10 years, from the year in which
these enterprises first had taxable income (limited to 12 years from
commencement of production or 14 years from the date of the approval,
whichever is earlier), is subject to a corporate tax rate of 0 - 25%.
In the event that an investee distributes a dividend to shareholders
out of income attributable to revenues from an approved enterprise
which received a tax exemption, the company that distributes the
dividend would be liable to tax at 25% of the earnings distributed.
Deferred taxes in respect of income from approved enterprises were not
provided, since it is the Group's policy not to initiate a distribution
of dividend that involves an additional tax liability to the Group.
B. Measurement of results for tax purposes in accordance with the Income
Tax (Inflationary Adjustments) Law, 1985 (hereinafter - "the Adjustments
Law"):
In accordance with the Adjustments Law, the results for tax purposes
are measured in real (non-inflationary) terms, based on the changes in
the CPI.
C. Law for the Encouragement of Industry (Taxation), 1969:
Certain companies qualify as "industrial companies" under the above
law. By virtue of this status and certain regulations published under
the inflationary adjustments law, the companies are entitled to claim,
and have in fact claimed, accelerated rates of depreciation.
D. Tax rates applicable to income from other sources:
Income not eligible to "approved enterprise" benefits, mentioned in A.
above, is liable to tax at the regular rate of 36%.
E. Losses for tax purposes carried forward to future years and tax
assessments:
1. The consolidated balance of net operating tax loss
carryforwards at 31 December, 1999, amounted to approximately
NIS 1,050 million, out of which NIS 14 million relates to
foreign subsidiaries and NIS 510 million relates to Koor.
Tax loss carryforwards, for which deferred taxes were not created,
amounted to NIS 780 million.
The balance of the consolidated capital loss carryforward, as at
31 December, 1999, is NIS 460 million (out of which NIS 370
million relates to the Company), which can be offset mainly
until 2003.
In 1999 the utilization of capital losses and part of the
business losses carried forward for the Company's tax purposes
became feasible and in 1999 Koor accordingly recorded a tax
asset of NIS 129 million against the income tax income.
Under the inflationary adjustments law, carryforward tax losses
are linked to the CPI.
Note 16 - Taxes on Income (cont'd)
E. Losses carried forward to future years and tax assessments (cont'd.):
2. Final tax assessments have been received by the Company and by
some of the subsidiaries through the 1998 tax year. Some of
the Group companies have received final assessments through
the 1993 tax year.
The Company has received final assessments for the 1992 to 1998
tax years, according to which the Company paid, after the
balance date, some NIS 28 million for the aforementioned tax
years. This amount is included in the tax expenses for
previous years.
<PAGE>
<TABLE>
<CAPTION>
F. Deferred taxes:
1. Deferred taxes are presented in the consolidated balance sheet as follows:
December 31
--------------------------------
1999 1998
------------- ------------
NIS thousands
--------------------------------
Within current assets in respect of:
<S> <C> <C>
Provision for vacation pay and severance benefits (73,843) (95,632)
Operating loss and capital loss carryforwards (1) (151,05) (22,639)
Inventory, net of customer advances (9,428) (9,029)
Timing differences in respect of recognition of
income and expenses (37,165) (32,701)
------------- ----------
Total in current assets (271,492) (160,001)
------------- ----------
Within long-term liabilities in respect of:
Depreciation 391,212 386,809
Operating loss carryforwards (450,066) (352,561)
Capital loss carryforwards (37,500) (117,251)
Liability in respect of employee severance benefits (90,459) (79,638)
Other 17,339 (18,669)
------------- ----------
(169,474) (181,310)
Balance not expected to be realised (2) 406,369 400,824
------------- ----------
Total in long-term liabilities 236,895 219,514
------------- ----------
Net amount of deferred tax (34,597) 59,513
============= ==========
(1) Including in respect of the Company 129,000 -
============= ==========
(2) The Company and certain subsidiaries have deferred
tax assets, that are not expected to be realised,
because of accumulated tax loss carryforwards and
other temporary differences. Company Management
believes that it is not likely that these balances
will be realised and, accordingly, no deferred taxes
were created in respect thereof.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Note 16 - Taxes on Income (cont'd)
F. Deferred taxes (cont'd):
2. Balances and movement of deferred taxes in the consolidated balance sheet:
Depreciable Inventories Provisions Losses and Timing` Total
fixed net of for deductions differences
assets customer employee carried in respect of
advances rights forward recognition of
income and
expenses
----------- ----------- ----------- ----------- ----------- -----------
NIS thousands
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as at
January 1, 1998 370,060 (13,271) (110,898) (29,864) (48,735) 167,292
Translation differences
in subsidiaries 11,124 (1,469) (5,681) (564) (2,315) 1,095
Amounts charged to
statement of operations (1) 10,935 6,058 (63,502) (76,183) 6,250 (116,442)
Other changes, net * (5,309) (348) 4,812 9,963 (1,550) 7,568
----------- ----------- ----------- ----------- ----------- -----------
Balance as at
31 December, 1998 386,810 (9,030) (175,269) (96,648) (46,350) 59,513
Translation differences
in subsidiaries (2,464) 200 1,057 327 413 (467)
Amounts charged to
statement of operations (2) 30,287 (15,783) 3,478 (98,365) (75,300) (155,683)
Other changes, net * (23,421) 15,185 6,432 (29,172) 93,016 62,040
----------- ----------- ----------- ----------- ----------- -----------
Balance as at
31 December, 1999 391,212 (9,428) (164,302) (223,858) (28,221) (34,597)
=========== =========== =========== =========== =========== ===========
(1) Including discontinued
operations
In 1998 (1,824) - - - 1,198 (626)
=========== =========== =========== =========== =========== ===========
(2) Including taxes for
previous years
* Mainly companies whose consolidation was terminated, net.
Deferred taxes were computed at tax rates of 25% - 36% (mainly 28%).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Note 16 - Taxes on Income (cont'd)
G. Taxes on income included in consolidated statements of operations:
1. Composition:
Year ended December 31
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
NIS thousands
-----------------------------------------------
Earnings before income tax:
<S> <C> <C> <C>
In Israel 520,833 167,722 785,806
Abroad 65,976 221,943 215,344
------------- ------------- -------------
586,809 389,665 1,001,150
============= ============= =============
For the current year:
Current taxes:
In Israel 284,821 287,246 161,031
Abroad 19,696 62,357 61,607
Deferred taxes:
In Israel (135,472) (110,635) 25,297
Abroad 14,371 (5,807) (5,330)
------------- ------------- -------------
183,416 233,161 242,605
In respect of previous years:
In Israel * (15,356) 2,353 (6,979)
Abroad (6,173) (1,529) 221
------------- ------------- -------------
161,887 233,985 235,847
============= ============= =============
* Including deferred taxes in the amount of NIS 34,582 thousand.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Note 16 - Taxes on Income (cont'd)
G. Taxes on income included in the consolidated statements of operations (cont'd):
2. Below is a reconciliation between the theoretical tax expense,
if all the income of Koor and the subsidiaries were taxed at
the regular rate of 36%, and the actual tax expense as
reported in the statement of operations:
Year ended December 31
---------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
NIS thousands
---------------------------------------------------
<S> <C> <C> <C>
Earnings before taxes on income, as
reported in the statement of operations 586,809 389,665 1,001,150
============== ============== ==============
Statutory tax rate 36% 36% 36%
============== ============== ==============
Theoretical tax expenses in respect of
these earnings 211,251 140,279 360,414
Increase (decrease) in taxes resulting from
the following factors - the tax effect:
Tax benefits under various
encouragement laws (46,523) (72,272) (85,336)
Non-deductible expenses for tax
purposes (including depreciation) 38,509 29,159 27,670
Losses for which deferred taxes
were not recorded 29,303 36,900 58,148
Capital gains from sale of investments
and assets, net (27,104) (7,002) (45,665)
Provisions for anticipated
losses from the sale of assets, net 64,032 68,157 -
Tax loss carryforwards from prior years
for which deferred taxes were not
created and which were utilised during
the current year (102,980) (16,212) (60,803)
Inflationary erosion of tax advances (50) 5,499 1,709
Effect of the Inflationary Adjustments Law
in respect of companies
whose functional currency is the
U.S. dollar 7,302 65,890 6,319
Taxes in respect of prior years (21,529) 824 (6,758)
Effect of foreign subsidiaries 10,316 (23,349) (21,366)
Others (640) 6,112 1,515
-------------- -------------- --------------
Total taxes on income 161,887 233,985 235,847
============== ============== ==============
Effective tax rate 27.6% 60.0% 23.6%
============== ============== ==============
</TABLE>
<PAGE>
Note 17 - Liabilities for Employee Severance Benefits, Net
A. Pension, severance pay and retirement grants:
Under current labour laws and existing labour agreements, the
companies in the Group are required to make severance payments, to
employees who are dismissed or who retire. In respect of these
liabilities, regular deposits are made by Group companies with
pension and severance pay funds. The balance sheet amount
represents the unfunded balance of the liabilities. Where the funds
deposited are not under the control and management of the Group
companies, the funded amounts are not reflected in the balance
sheets. These deposits and the amount stated in the balance sheet
fully cover the Company's liability for employee severance
benefits.
Employees dismissed before reaching retirement age are entitled to
severance pay, computed on the basis of their latest salary. Where
amounts accumulated in the pension funds are insufficient to cover
such severance pay, the Company and its subsidiaries will make up
the amount of the shortfall at the time of payment. In Management's
opinion, an appropriate provision, based on the salary components
used in the computation of severance pay, has been included in the
financial statements to fully cover this liability.
Regarding companies in which enhanced severance pay has been
planned or agreed upon for the employees, appropriate provisions
have been made for the supplementary amounts.
B. Early retirement pension:
Under agreements with certain employees who retired from service,
Koor Group companies have undertaken to make pension payments until
they reach retirement age. The entire liability for such pensions
is included in the accounts on the basis of the present value of
future pension payments, computed at a monthly discount rate of
0.3% (3.7% per year).
C. Compensation for unutilised sick leave:
A provision for this liability, according to agreements, is
included in the accounts in respect of those employees who have
reached the age of 55, due to the uncertainty as to whether
employees who have not reached that age will be entitled to such
compensation (as a result of utilization of sick leave or early
retirement). The provision is computed on the basis of the latest
salary for 8 working days in respect of each year during which the
sick leave was not utilised.
<TABLE>
<CAPTION>
D. Liabilities for severance benefits, which are presented in the balance sheet, and the amount funded
in severance pay funds, are as follows:
Consolidated Company
------------------------------ ------------------------------
December 31 December 31
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
NIS thousands NIS thousands
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Severance pay and retirement
grants 518,168 860,302 7,051 11,955
Amount accrued for early
retirement 144,367 121,882 1,611 7,017
Amount accrued in respect of
unutilised sick leave 24,329 27,442 - -
------------- ------------- ------------- -------------
686,864 1,009,626 8,662 18,972
Less - amount funded * 381,973 745,578 2,148 1,905
------------- ------------- ------------- -------------
304,891 264,048 6,514 17,067
============= ============= ============= =============
* The amounts funded can be withdrawn, subject to the fulfillment of
the provisions of the Severance Pay law.
</TABLE>
<PAGE>
Note 18 - Contingent Liabilities and Commitments
A. Contingent liabilities
1. Commissioner of Restrictive Trade Practices:
a) During October 1997, proximate to the date of the publication
of a newspaper article containing details about alleged
violations of the Law for Restrictive Trade Practices, 1988
(hereinafter - the "Law") regarding price coordination and lack
of competition between TTL and Telrad, the Commissioner of
Restrictive Trade Practices (hereinafter - the "Commissioner")
conducted an examination at the offices of TTL, Telrad and
Koor, during which certain documents were confiscated, certain
employees were questioned and additional information was
submitted as requested.
On December 13, 1998, the Commissioner issued a press release, in
which he announced that the Investigations Department of the
Restrictive Trade Practices Authority (hereinafter - the
Authority) has concluded the investigation regarding suspicions
about restrictive arrangements between Koor, TTL, Telrad, Bezeq
and Bezeqcall, in the field of the supply of switchboards for
the commercial market and in the field of N.S.R.
According to a press release by the Commissioner, the investigators
of the Investigations Department of the Authority recommend
submitting a bill of indictment against some of the examinees
regarding some of the suspicions investigated, and that the
Legal Department of the Authority is to decide if offenses were
in fact committed and if there is a sufficient evidential basis
for trial. In this press release, nothing was mentioned
regarding details about the findings of the Legal Department of
the Authority.
Under the Law, penalties may be imposed against an entity which
has violated the Law. There is also the possibility of
repercussions at the civil level, if damage should be proven as
a result of a violation of the law. The Management of the
Company and the subsidiaries, after consultation with their
legal counsel, are of the opinion that, at this stage, as long
as the results of the Commissioner's examinations have not yet
been published, it is not possible to assess the possible
developments in this matter, nor to evaluate if a significant
loss is expected to result - if at all. Accordingly, it was not
considered appropriate to make any provision in the financial
statements in respect of this matter.
b) Pursuant to the directives of the Commissioner, in the
conditions of the permit to merge Claridge Group with the
Company and the amendments thereto, various restrictions were
imposed on the Claridge Group, on Koor and on companies in its
Group. With the completion of the sale of Koor's holding in
Mashav Initiation and Development Ltd. the restrictions imposed
were cancelled. (See Note 3D).
2. Within the framework of the merger agreement as aforesaid
in Note 3(A)1 Tadiran undertook to indemnify ECI for any
damage it incurred as a result of the matters listed below:
(a) Taxes imposed on TTL and its consolidated companies
over and above the provisions included in the financial
statement.
(b) Errors, omissions, and inaccuracies detected in
representations made by TTL within the framework of
the agreement concerning matters linked to other
property, claims, and transactions with related
parties.
(c) Breach of the obligations of Tadiran and TTL in the
merger agreement concerning agreement with related
parties.
(d) Any subject connected with the matters being
investigated by the Commissioner (see Section 1 above).
(e) Non-receipt of the approvals and consent from third
parties required to transfer operations of the
Switching Division of TTL.
The indemnity items will cover losses in excess of the deductible of
between $1.5 million and $10 million (contingent upon each section
separately) and/or are restricted to 81.67% of the loss incurred.
For indemnity purposes only the representations made by TTL shall remain
valid for one year from the date of the merger. Tadiran's indemnity in
respect of the matters or facts being investigated by the Commissioner,
shall remain valid for a period of seven years from the date of the
merger and shall be extendible for an additional period as long as these
matters are under investigation. Aside from this all the remaining
representations made by the company shall not remain valid after the
date of the merger.
3. Environmental issues
The activities of M.A. Industries Ltd. are exposed to the risk
of causing damage to the environment, since the Group
manufactures, stores and sells chemicals. M.A. Industries
invests significant amounts in order to comply with the
provisions of the laws and of the environmental regulations,
and in the opinion of management it does in fact comply
therewith. M.A. Industries' insurance policies provide coverage
in the event of a sudden unexpected crisis of environmental
pollution in Israel and worldwide, subject to relevant terms of
the policy. As at balance sheet date, M.A. Industries does not
have insurance coverage for continuous environmental pollution.
Such insurance is difficult to obtain, and in those cases where
it is obtainable, M.A. Industries' management is of the
opinion, that the terms of the policy, including the cost of
the coverage, is, at present, not justified.
One of M.A. Industries' plants is located in Ramat Hovav, along
with other chemical plants, since the Government decided that
the geological layers in that particular area are completely
impenetrable to liquid or pollution. Recently, the Ministry of
the Environment conducted examinations, which determined that
there is data indicating subterranean pollution in Ramat Hovav.
The examiners recommended the taking of measures to prevent the
continuation of leakages from active and inactive plants, which
are liable to constitute a source of pollution of the water
table, in the area. At this stage, the subsidiary cannot
estimate the costs involved, if, in the light of the research
that will be carried out, a solution will be found, which it
will be decided to implement. Furthermore, the local Municipality
at Ramat Hovav is continuing to take rehabilitation steps relating
to past incidents.
4. Claims against Telrad:
a). In October 1994, a claim was filed by the Union Engineers
against Telrad, for an unspecified amount. The claim pertains
to the recognition and applicability of the salary tables
included in the general collective bargaining agreements, which
were signed in 1994 and 1995 between the Engineers Union and
the employers in the public service sector, to Telrad
engineers. On January 31, 1996, a ruling was handed down by the
Tel-Aviv District Labour Court completely rejecting the claims
of the Engineers Union. The Engineers Union has appealed
against the judgement. The appeal was heard in the National
Labour Court, and a decision thereon has not yet been handed
down.
At the deliberation stage in the National Labour Court, the
Engineers Union filed a motion that Koor be added as a "liable
party" in the legal proceedings. The National Labour Court has
not yet made a determination on this issue.
In the opinion of the legal counsel which represents Koor in
the above procedure, the arguments against the motion are
substantial, and they believe that legally the motion is not
acceptable. In the opinion of the legal counsel, at this stage
of the proceedings, the issue of which is the status of the
"Koor Agreement" as a collective agreement, the results of the
deliberation should not impose any liabilities on Koor.
In April 1996, a parallel claim was filed, by the Lod Workers'
Council and the Workers Committee concerning the application of
salary tables of the public service sector to employees of
Telrad. To date, it was decided to abstain from deliberations
in this claim until the National Labour Court decides in the
appeal of the Engineers Union.
b). In 1999 a claim was filed against Telrad by company employees
who are members of the company's workers' committee. They are
suing for the accounts so that the plaintiffs can examine the
calculation of the distribution of earnings to employees. They
are also suing for a declaratory judgment which will determine
that Telrad is obliged to draw up new accounts for the
distribution of earnings. In addition an application was filed
to recognise the plaintiffs and representatives of all Telrad's
workers and employees. In response the company filed an
application as agreed to extend the date for submission of
their response on the grounds that another proceeding is
pending between the parties in which the matter of a class
action has also arisen. The application was accepted.
5. Claims filed against Tadiran and its subsidiaries:
a) In 1997, Qualcomm Inc. (hereinafter - Qualcomm), a U.S.
corporation, filed a claim against Elisra Electronics Systems
Ltd. (hereinafter - "Elisra"), a subsidiary of Tadiran, in
response to a claim filed by Elisra pertaining to a transaction
cancelled by Qualcomm in August 1996. The claim filed by Elisra
is in the amount of $25 million, and the counter-claim is in
the amount of $79 million, plus punitive damages. The claims
were filed during an arbitration procedure in the United
States. According to legal opinion received, Elisra has a
well-founded cause for its claim against Qualcomm and valid
arguments against the counter-claim. No provisions have been
made in the financial statements in respect of either the claim
or the counter-claim.
5. Claims filed against Tadiran and its subsidiaries (cont'd.):
b) Employees of a plant of Tadiran, which had been closed during
1990, filed actions against the company, alleging that they
sustained injuries and certain related illnesses had been
caused by exposure to certain substances during their
employment. Tadiran has insurance policies, which, relying on
legal opinion, cover possible damages as a result of these
claims, and, consequently, no provisions have been made in
respect of those claims. Tadiran recorded provisions in respect
of possible damages which had been covered by an insurance
company currently in the process of liquidation.
c) In May 1999 an application was filed for arbitration against
Tadiran by Adaptive Broadband Corporation (hereinafter - "ABC")
(formerly California Microwave Inc.), pursuant to the
arbitration clause in the agreement which was signed between
those parties within the framework of the sale of the business
division by ABC to Tadiran.
The main thrust of the application is a declarative decision
determining that Tadiran is required to indemnify ABC in
connection with claims which were lodged at the arbitration
institute against ABC by a customer of the business division
which was sold as aforesaid. The claim lodged by the customer
before the arbitration institution which conducted discussion
in Switzerland and on January 31, 2000 a settlement was reached
whereby the customer received $2 million. Half of this amount
was for the account of Tadiran and half for ABC. The
arbitration between Tadiran and ABC taking place in the United
States is supposed to resolve the issue of which of the two
parties shall incur the full amount of the payment to the
customer.
In June 1999 Tadiran submitted its response to the deed of
arbitration and in addition it claimed financial restitution
from ABC.
The management of Tadiran believes, based on the opinion of its
legal advisers, that it has appropriate defence arguments
against the above indemnity demands, and accordingly, no
provision was made in the financial statements for the
arbitration results.
d) In October 1999, Bezeq, The Israel Telecommunication Corp. Ltd.
(hereinafter - "Bezeq") lodged a claim against Tadiran Ltd.
whose main cause is various losses incurred by Bezeq due to
delays in the performance of works which were ordered under
development and application contracts originally signed between
Bezeq and TTL in the amount of some $6.7 million (hereinafter -
"the Principal Claim").
Alternatively, Bezeq is suing for the balance of arrearage
penalties to which it alleges it is entitled pursuant to those
contracts, and which were not paid in full, in the amount of
approximately $1.7 million (hereinafter - "the Alternative
Claim").
In an arbitration judgment handed down on February 17, 2000 all
Bezeq's arguments regarding the company's liability for the
Principal Claim were dismissed. The arbitration judgment
determines that pursuant to the engagement contracts between
the parties Bezeq is entitled to compensation within the
framework of arrearage penalties only. Since the period of time
allocated to the arbitration has elapsed, Bezeq is obligated to
lodge a new claim in respect of its Alternative Claim. At this
stage negotiations for a settlement are in progress. The
financial statements contain a provision, based on the opinion
of its legal counsel, which the company's management believes
reflects the possible outcome of the Alternative Claim.
6. Claims filed against M-A Industries and its foreign subsidiaries
(cont'd)
a) A claim was filed against Makhteshim's subsidiary in Brazil and
a former employee of the claimant, alleging that the subsidiary
has copied and is employing a certain process, which is a
protected trade secret that is owned by the claimant.
Accordingly, the subsidiary is being sued to indemnify the
claimant in respect of unfair competition, in the amount of $
13 million (based on a calculation involving the amount of
materials used). In addition, the claimant has requested that a
fine of 100 thousand Brazilian reals per day be levied against
the subsidiary in respect of the unlawful exploitation of trade
secrets. Based on the opinion of its legal counsel, the
subsidiary's management estimates that the claim has no
validity and, therefore, no provision has been included in the
financial statements in respect thereto.
b) A claim was filed against Makhteshim's subsidiary in Brazil and
others, in the aggregate amount of $24 million, by a group
that acquired the rights to two banks that had declared
bankruptcy. The subsidiary is requested to repay a loan of $1
million, out of the aforementioned amount, which the claimants
maintain had been granted directly to the subsidiary. With
respect to the balance of the claim, the subsidiary has been
sued as the guarantor of debts of agricultural cooperatives,
which were its former shareholders.
Based on the opinion of its legal counsel, the subsidiary's
management estimates that there is a reasonable likelihood that
its defense against the claim will be accepted and, therefore,
no provision has been included in the financial statements in
respect thereto.
c) Claims and other monetary demands have been filed against
Makhteshim's investee in Brazil, in the aggregate amount of $
15 million. Based, inter alia, on the opinion of its legal
counsel, the investee's management estimates that the
provisions recorded in its financial statements are adequate to
cover any possible damage, which may result in respect of these
claims.
7. A number of claims have been filed against certain other
companies concerning various matters pertaining to the normal
course of business, including tax, customs and VAT liabilities,
which are in various legal proceedings. The managements of said
companies believe, based on the opinion of the legal counsel
handling the claims, that appropriate provisions in light of
the circumstances have been included in the financial
statements.
8. Under certain conditions, Nortel has the right to sell its
holding of shares (20%) in Telrad to a wholly-owned subsidiary
of Koor in the years 2000 - 2005 at a price which is the
greater of $45 million or the net asset value of the shares it
sells at that date. Furthermore, Nortel has the "right of
equalisation" until the year 2000, at specified terms - See
also Note 18B3.
After the balance sheet date, on 6 March, 2000, Nortel realised its
right to sell its shares in Telrad to Koor. See Note 27D.
9. See Note 10A(2) regarding the matter of the fulfillment of the
conditions attached to the receipt of investment grants.
10. The business activities of the Koor Group are characterised
primarily by advanced technologies. The accelerated rate of
technological developments and innovations in the Group's
segments of operations, require the investment of substantial
financial resources in research and development, in order to
assure the Group's standing in its respective segments of
operations, while facing the constant competition of both
Israeli and worldwide entities. Consequently, the Group may be
exposed to the loss of its position in certain segments, as
well as to substantial research and development costs, which,
in turn, may have an adverse effect on the Group's operating
results.
11. In March 1999 a collective labour agreement was signed between
Middle East Tubes Ltd. (METCO) and The New General Federation
of Workers concerning the retirement terms of 35 workers at the
Acre plant of METCO who it was agreed would retire from METCO
and with regard to the retirement of additional workers. A
provision was made in the 1998 financial statements for the
retirement of the aforementioned 35 workers. Under the
agreement, workers from the Akko plant who resign or who accept
early retirement by 31.12.2000 are entitled to enlarged
compensation, depending on the number of years of their
employment at METCO.
It was also decided that additional workers who retire during the
term of the agreement will be entitled, upon reaching the age
of 56 (or 54 for female workers), to early pension payments
until they reach retirement age. In addition, these workers
will be entitled to grants as stipulated in the agreement.
Workers who are younger than 56 but more than 54 on the date of
signing the agreement and whom the management of METCO has
decided to dismiss, will also be entitled to early pension
payments. Every retirement is subjected to the approval of the
management of METCO.
The term of the above agreement is until 31 December, 2000, but
will remain in effect as long as no other agreement is signed.
At this stage it is not possible to estimate how many workers,
if any, will retire pursuant to the agreement, beyond the
workers who have already been dismissed, and therefore no
additional provision was made for them in the financial
statements.
In addition, in February 2000 a claim was filed against METCO in
the Acre Labour Court by 45 employees from the plant regarding
their entitlement to receive increased severance compensation.
As at the date of publication of the financial statements METCO
is unable to assess the chances and results of the claim and so
no provision therefor has been made in METCO's books. See Note
3H(8).
12. Tadiran Com. Was sold to the buying company in a transaction of
representations. According to the terms of the transaction,
should it transpire that the condition of Tadiran Com. Is
materially different from the representation made, the buyer
shall be entitled to compensation therefore from Tadiran.
Koor Industries Ltd. Guarantees the liabilities of Tadiran in this
transaction up the amount of the consideration received. This
guarantee shall take effect if Tadiran's equity capital falls
below $250 million.
B. Commitments
1. Certain subsidiaries have research and development contracts
with the Government of Israel. Under these contracts, the
subsidiaries are required to pay royalties (2% - 5% of proceeds
of sales resulting from the research and development) to the
Government of Israel, in amounts not exceeding 100% - 150% of
the linked amounts of the grants received by the subsidiaries
as participation in the research and development projects.
Royalty paid to the Government of Israel in respect of the
aforementioned research and development contracts, are as
follows:
Year ended NIS thousand
----------------- ------------
31 December, 1997 67,017
31 December, 1998 75,732
31 December, 1999 35,957
Negotiations have been underway between a subsidiary and the Office
of the Chief Scientist (hereinafter - "OCS") of the Government of
Israel, to re-examine the royalties paid to the OCS during a
period exceeding 10 years. The financial statements include a
provision which, in the opinion of the management of the
subsidiary, will be required to pay the royalties which will
result from the negotiations.
2. Certain subsidiaries are required to pay royalties at the rate
of 3% per year of the increase in export sales, not to exceed
the amount financed by the Fund for the Encouragement of
Marketing Abroad. Such amounts are linked to the exchange rate
of the U.S. dollar
3. In an agreement dated January 1997, Telrad undertook to acquire
know-how from Nortel over a 10 year period at a cost of $15
million to be paid in four equal annual interest bearing
installments, beginning in January 1998. By 31 December, 1999,
Telrad had acquired know-how of a value of 6,406 thousand. In
addition, Telrad paid $1,100 thousand on account of the said
undertaking. Telrad is negotiating with Nortel in order to
terminate the know-how agreement.
4. Commitments for the purchase of fixed assets are as follows: 31
December, 1999 - NIS 60 million adjusted; 31 December, 1998 -
NIS 130 million adjusted.
5. Koor has guaranteed, until the year 2004, the compliance of
Elad Hotels Ltd. with the terms of the agreement regarding
management of two hotels by a subsidiary. A subsidiary pays
usage fees for hotel services, as defined in the agreement.
<PAGE>
6. Certain companies in the Group lease industrial and office
premises under non-cancelable, long-term leases with, in most
cases, renewal options. The rent expense of these companies was
NIS 45 million in 1999, NIS 43 million in 1998 and NIS 53
million in 1997.
Future minimum payments under the non-cancelable operating leases,
for the years subsequent to balance sheet date, are as follows:
December 31
1999
---------------
(NIS thousands)
---------------
First year 41,010
Second year 31,753
Third year 25,329
Fourth year 19,800
Fifth year and thereafter 28,153
-----------
146,045
===========
7. On 30 November, 1999 Koor's Board of Directors committee,
having been authorized for this purpose, passed a resolution to
cooperate on an equal basis with the Israel Corporation Ltd.,
in a joint venture with an equity capital of up to $100
million. The joint venture will focus on investments in
high-tech projects and companies in the fields of the Internet,
telecommunications and operation of telecommunications in
Israel and abroad.
Note 19 - Convertible Securities of Investee Companies
A. Option warrants to senior employees:
Certain investors issued options to senior employees
until 1999 inclusive. Employee entitlement to such
options is be determined over a number of years from
their date of issue, subject to continued employment. The
exercise term of the options varies according to the
terms of the different plans.
The exercise price was, in most cases, identical to the
market price of the shares of subsidiary companies on the
issuance date of the option warrants.
The rate of dilution in these subsidiaries, following the
exercise of options, will not exceed approximately 2%.
B. An affiliated company - ECI
ECI has outstanding convertible notes (hereinafter - "the
notes") which are convertible until December 2003 of a
par value of $85,000. The conversion rate is 1 share for
each $25 par value of notes. Assuming the conversion of
all the notes into shares, Koor's rate of holding in ECI
will decrease by 1.2%.
The Claridge Group, which is the controlling shareholder
of Koor, holds 47% of these outstanding convertible
notes.
<PAGE>
Note 20 - Share Capital, Stock Options and Warrants
A. Share capital is composed as follows:
<TABLE>
<CAPTION>
31 December, 1999 31 December, 1998
-------------------------------- --------------------------------
Authorised Issued and Authorised Issued and
outstanding outstanding
------------- -------------- ------------- -------------
Number of shares:
<S> <C> <C> <C> <C>
Ordinary shares of a
par value of NIS 0.001 (1)(3)(4) 84,557,334 16,525,984 84,557,334 16,503,786
============= ============= ============= =============
Deferred shares of a
par value of NIS 0.001(2)(3)(4) 15,167,666 14,461,481 15,167,666 14,391,637
============= ============= ============= =============
Amount in NIS:
Ordinary shares of a par value
of NIS 0.001 84,557 16,526 84,557 16,504
============= ============= ============= =============
Deferred shares of a par value
of NIS 0.001 15,168 14,461 15,168 14,391
============= ============= ============= =============
</TABLE>
(1) These shares are traded on the Tel-Aviv Stock Exchange.
As at 31 December, 1999, the per share market price was
NIS 415.
Traded on the New York Stock Exchange (NYSE). Each ADS
represents 0.2 of Koor's ordinary Shares of NIS 0.001 par
value. The market price in New York of the ADS as at 31
December, 1999 was $20.
(2) Holders of the deferred shares are only entitled to
receive the nominal paid-up value of the deferred shares
in the event of a winding up of Koor, subject to prior
payment of the nominal paid-up value of the ordinary
shares to the holders of ordinary shares. The holders of
the Deferred Shares do not have any voting rights, and
they are not entitled to participate in the distribution
of dividends of any kind.
(3) The classification of the authorised and outstanding
ordinary shares, and the authorised and outstanding
deferred shares changes as a result of any deferral of
ordinary shares occurring at the time of the exercise of
stock options issued by the Company to the Israeli banks
(see (b) below).
(4) As at balance sheet date 170,436 ordinary shares and
12,903,884 deferred shares are held by subsidiaries and,
accordingly, an amount of adjusted NIS 53,641 thousand
was deducted from shareholders' equity.
As for the rights and legal status of the additional 624,577
ordinary shares held by a subsidiary, Koor Trusts 1995
Ltd., see B below.
The shares held by Koor Trusts will only be used in future
for an issuance to company employees, subject to receipt
of the requisite approvals. If these shares are not
issued to the employees by June 2001 the company will
reduce its capital. Until June 2001 Koor Trusts will not
have the right to participate or vote in general meetings
of the company's shareholders, nor will it have the right
to receive a dividend for these shares.
B. Stock options:
Stock options issued to Israeli banks:
Within the framework of the comprehensive arrangement signed
in September 1991 between Koor and the Israeli banks, banks
were given options for the purchase of ordinary shares of
Koor. The stock options may be exercised at any time
through 2001. Upon exercise of a stock option by any of
the banks, an ordinary share held by Hevrat Ha'ovdim will
be converted automatically into a deferred share, so, for
all practical purposes, the total number of ordinary
shares does not change.
In 1999 and 1998, the Israeli banks exercised options for
the purchase of 69,844 and 97,933 ordinary shares
respectively.
As of 31 December, 1999 - 70,475 options were outstanding.
C. Key employee stock-based compensation plans:
1. The 1997 Stock-Based Compensation Plan:
On May 27, 1997, 134,547 options were issued (exercise price
- $90.989) and on November 6, 1997, an issuance of an
additional 54,421 options was completed (exercise price -
$98.747).
See Note 4 as to details of stock options that have not been
exercised and of exercise in the current year.
2. On August 28, 1997, Columbus Capital Corporation
("Columbus"), a member of the Claridge Group, undertook
to grant put options to those senior employees of Koor,
including Koor's President and Chief Executive Officer
who retired in 1998 , who are eligible for options to
purchase Koor ordinary Shares by virtue of the 1995 Plan
and the 1997 Plan. These put options are exercisable
within 90 days from the first date upon which the
employees are eligible to exercise the options under the
above Plans. The put options confer to the employees the
right to sell to Columbus the outstanding shares granted
to them and the profits inherent in the exercise of the
options. Columbus will purchase these shares from the
employees, if they should desire, at a price identical to
that paid by the Claridge Group for the purchase of
Koor's shares held by the Shamrock group - $121.25 per
Common Share of NIS 0.001.
Each employee shall be eligible to sell his outstanding
shares, all or in part, to Columbus under the said terms
and according to his discretion.
In 1998 an expense of NIS 6,080 thousand was allocated for
the exercise of the aforementioned put options by all of
the employees, including the retired Chief Executive
Officer. In 1999 an expense of NIS 774 thousand was
allocated for the exercise of the aforementioned put
options.
C. Key employee stock-based compensation plans (cont'd.):
3. The 1998 Stock-Based Compensation Plan:
On August 30, 1998, an Extraordinary General Shareholders
Meeting approved a private placement, at no cost, of up
to 400,000 stock options to employees of the Company.
Each option may be exercised into one ordinary share of a
par value of NIS 0.001 each (hereinafter - "the Plan").
The Plan authorises the allotment of up to 313,596 stock
options, under specified terms, to 5 senior employees of
Koor, including 105,263 option warrants to Koor's Chief
Executive Officer who is also Vice Chairman of the Board
of Directors.
In 1999 40,000 options were allotted and a balance of 46,404
options has not yet been allotted.
The effective date for implementation of the Plan is 16
July 1998 (hereinafter: the "Effective Date" or
"Determining Date"). At the end of the first year from
the Determining Date and at the end of each of the first
two years thereafter each employee will be entitled to
exercise up to one third of the total number of options
in his allotment.
The employee is entitled to exercise all or part of the
stock options, pursuant to the conditions of the Plan,
from the date of entitlement to exercise of the stock
options on the dates set forth above and up to five years
from the Determining Date, in other words, up to 16 July,
2003 (with the exception of the CEO who will be entitled
to exercise the stock options until four years have
elapsed from the Determining Date).
Under the terms of the Plan, each option may be
theoretically exercised to purchase one ordinary share
(subject to adjustments). In practice, however, the
optionee will not be issued the total number of shares to
which he is entitled upon exercising such options, but
only the number of shares reflecting the monetary benefit
component of the option as at the exercise date. The
exercise price of the issued options set for the purpose
of calculating the benefit component when exercising the
option (excluding those issued to the trustee that do not
as yet have an exercise price) is $114.7 per share in
respect of each option, payable in NIS, (excluding
options issued to the Chief Executive Officer). The
exercise price of the options issued to the Chief
Executive Officer equals the NIS equivalent of $118.3 per
share in respect of each option, subject to adjustment of
exercise price for dividend distribution.
The exercise price of the options issued to a trustee for
those employees to be defined in the future shall be
determined based on the share's market price on the Tel
Aviv Stock Exchange at a date to be decided by the
Remuneration Committee.
The theoretical economic value of the option on August 5,
1998, according to the Black-Scholes options pricing
model was $38.8 per option issued to the optionees (other
than the CEO) and $31.92 per option issued to the Chief
Executive Officer.
<PAGE>
C. Key employee stock-based compensation plans: (cont'd)
4. Detail of options that have not yet been exercised as at 31
December, 1999 are as follows:
<TABLE>
<CAPTION>
Exercise Number of Last exercise
price options date
--------------- -------------- ----------------
$
--------------- -------------- ----------------
<S> <C> <C> <C> <C>
1997 plan 90.989 66,518 May 2002
1997 plan 98.747 54,421 November 2002
1998 plan 110.90 - 111.60 248,333 July 2003
1999 plan 114.40 - 115.10 105,263 July 2002
-------------
474,535
=============
</TABLE>
Movement in options during the year was as follows:
<TABLE>
<CAPTION>
1995 plan 1997 plan 1998 plan Total
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Balance as at
beginning of year 13,728 131,017 313,596 458,341
Exercised - - 40,000 40,000
Granted (13,728) (6,299) - (20,027)
Expired - (3,779) - (3,779)
----------- ----------- ------------ ----------
Balance as at end
of year - 120,939 353,596 474,535
=========== =========== ============ ==========
Shares that were issued
to Koor Trusts (1995) Ltd.* 9,646 4,908 - 14,554
=========== =========== ============ ==========
</TABLE>
* In accordance with the exercise mechanism, the
allotment was not shown in the statement of
shareholders' equity.
<PAGE>
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances
A. General:
The Company and certain subsidiaries have entered into forward
transactions and option contracts, in order to reduce the overall
exposure of assets and liabilities denominated in foreign currency
and commitments for the purchase of raw materials and the sale of
goods, in currencies other than the US dollar. Those subsidiaries
neither hold nor issue financial instruments for trading purposes.
B. Details of the open foreign exchange transactions made to
hedge subsidiaries' assets and liabilities in foreign
currency as at 31 December, 1999:
<TABLE>
<CAPTION>
Forward Call Put Swap
transaction options options transactions
------------ ----------- ----------- -----------
NIS thousands
-------------------------------------------------------------------
Purchase of U.S. dollars in
exchange for:
<S> <C> <C> <C> <C>
NIS 417,486 1,949,604 999,336 588,173
European currencies 22,147 83,060 62,295 -
Purchase of European currencies
in exchange for:
NIS - 53,989 20,765 -
------------ ----------- ----------- -----------
683,993 2,016,653 1,082,396 588,173
============ =========== =========== ===========
Sale of U.S. dollars in
exchange for:
NIS 51,092 83,226 237,136 672,636
European currencies 78,907 33,224 - 37,404
Sale of European currencies in exchange for:
NIS - - 20,765 -
------------ ----------- ----------- -----------
129,999 116,450 257,901 710,040
============ =========== =========== ===========
</TABLE>
The transactions are usually for a period of up to 12 months, with
the exception of financial instruments for the purchase of US
dollars in consideration of NIS 1,400, net, in Koor, which were
terminated by the end of February 2000 and not renewed.
The loss in respect of derivative financial instruments, as
included in the consolidated financial statements for the year
ended 31 December, 1999, amounts to NIS 26,064 thousand (for the
year ended as at 31 December, 1998 the gain in respect of
derivative financial instruments amounted to NIS 5,319 thousand).
C. Fair value of financial instruments:
Condensed data of monetary assets and liabilities, whose fair
value as at 31 December, 1999, based on their market value, is
significantly different from those presented in the financial
statements, is as follows:
<TABLE>
<CAPTION>
Carrying Fair
amount value
----------- ----------
NIS millions
--------------------------------
<S> <C> <C>
Investments in affiliates 3,370 4,517
Debentures and convertible debentures 281 268
</TABLE>
The carrying amounts of cash and cash equivalents, short-term
investment, trade receivables, other accounts receivable, credits
from banks and others, trade payables and other accounts payable
and accruals, and other financial instruments approximate at their
fair value.
<PAGE>
D. Credit risk of trade receivables:
<TABLE>
<CAPTION>
NIS millions
------------
<S> <C>
Insured receivables 1,103
Receivables insured by foreign trade risk insurance 290
Receivables - Government authorities and Bezeq 290
Other receivables, including checks and credit
card companies 1,671
------------
Total, including non-current receivables 3,354
============
</TABLE>
In Management's estimation, the allowance for doubtful accounts
adequately covers all anticipated losses in respect of
concentration of credit risks of trade receivables.
The exposure to credit risks relating to trade receivables is
limited, due to the relatively large number of customers in the
various segments.
E. Linkage terms of monetary balances:
(1) Consolidated
- 31 December, 1999
<TABLE>
<CAPTION>
In foreign Linked Unlinked Total
currency to the
or linked CPI
thereto
------------- ----------- ----------- ------------
NIS thousands
------------------------------------------------------------------
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents 932,747 3,591 512,368 1,448,706
Short-term deposits and
investments 105,354 209,810 157,171 472,335
Trade receivables 2,258,183 133,077 821,947 3,213,207
Other accounts receivable 133,016 25,126 154,882 313,024
Investments and other
long-term receivables 259,485 448,122 11,066 718,673
------------- ----------- ----------- ------------
3,688,785 819,726 1,657,434 6,165,945
============= =========== =========== ============
Liabilities
Current liabilities:
Credits from banks and others
(not including current
maturities of long-term
liabilities) 1,737,077 79,019 664,159 2,480,255
Trade payables 1,160,042 37,793 314,202 1,512,037
Other accounts payable 312,508 60,583 1,310,871 1,683,962
Long-term loans and
debentures (including current
maturities) 3,999,978 1,142,911 6,204 5,149,093
------------- ----------- ----------- ------------
7,209,605 1,320,306 2,295,436 10,825,347
============= =========== =========== ============
<PAGE>
In foreign Linked Unlinked Total
currency to the
or linked CPI
thereto
------------- ----------- ----------- ------------
NIS thousands
------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents 982,699 3,487 505,187 1,491,373
Short-term deposits and
investments 1,206,005 114,181 267,160 1,587,346
Trade receivables 2,568,814 144,562 915,788 3,629,164
Other accounts receivable 234,362 67,164 137,940 439,466
Investments and other
long-term receivables 272,486 204,652 28,140 505,278
------------- ----------- ----------- ------------
5,264,366 534,046 1,854,215 7,652,627
============= =========== =========== ============
Liabilities
Current liabilities:
Credits from banks and others
(not including current
maturities of long-term
liabilities) 1,758,748 82,784 508,044 2,349,576
Trade payables 1,109,019 3,194 433,056 1,545,269
Other accounts payable 1,139,310 160,447 745,234 2,044,991
Long-term loans and
debentures (including current
maturities) 3,885,569 1,154,966 36,495 5,077,030
------------- ----------- ----------- ------------
7,892,646 1,401,391 1,722,829 11,016,866
============= =========== =========== ============
(2) Company
Assets
Current assets:
Cash and cash equivalents 346,114 - 379,240 725,354
Short-term deposits and
investments 20,765 192,614 65,718 279,097
Other investments, loans and
receivables 12,738 367,827 - 380,565
Accounts receivable - - 25,518 25,518
Investments and other
long-term receivables 125 254,965 593,814 848,904
------------- ----------- ----------- ------------
379,742 815,406 1,064,290 2,259,438
============= =========== =========== ============
Liabilities
Current liabilities:
Credits from banks and others
(not including current
maturities of long-term
liabilities) 240,961 - 449 241,410
Trade payables 8 - 1,649 1,657
Other accounts payable 27,261 29,857 243,400 300,518
Long-term loans and
debentures (including current
maturities) 2,352,808 711,516 800 3,065,124
------------- ----------- ----------- ------------
2,621,038 741,373 246,298 3,608,709
============= =========== =========== ============
<PAGE>
In foreign Linked Unlinked Total
currency to the
or linked CPI
thereto
------------- ----------- ----------- ------------
NIS thousands
------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents 4,185 - 311,268 315,453
Short-term deposits and
investments 43,664 43,748 84,173 171,585
Other investments, loans and
receivables 5,299 2,832 - 8,131
Accounts receivable - - 14,423 14,423
Investments and other
long-term receivables - 250,266 732,184 982,450
------------- ----------- ----------- ------------
53,148 296,846 1,142,048 1,492,042
============= =========== =========== ============
Liabilities
Current liabilities:
Credits from banks and others
(not including current
maturities of long-term
liabilities) - - 966 966
Trade payables 1,685 - 5,502 7,187
Other accounts payable 14,349 31,207 120,325 165,881
Long-term loans and
debentures (including current
maturities) 2,652,795 443,839 811 3,097,445
------------- ----------- ----------- ------------
2,668,829 475,046 127,604 3,271,479
============= =========== =========== ============
</TABLE>
<PAGE>
Note 22 - Liens and Guarantees
A. In order to secure liabilities, certain subsidiaries have
mortgaged their real estate and have placed fixed charges on
plant, equipment and bank deposits, as well as floating
charges on all of their assets. They also pledged a portion of
their shares in investee companies.
Regarding the lien in respect to an investment grant - see
Note 10A(2).
B. The balances of secured liabilities are as follows:
<TABLE>
<CAPTION>
Consolidated
--------------------------------
December 31
--------------------------------
1999 1998
------------- -------------
NIS thousands
--------------------------------
<S> <C> <C> <C>
Credit from banks 1,083,166 1,374,876
Loans from banks and
others and debentures (including current
maturities) (see Note 15, and also C
and D below) 820,226 668,147
------------- -------------
1,903,392 2,043,023
Others - mainly customer advances 153,262 306,378
------------- -------------
2,056,654 2,349,401
============= =============
</TABLE>
See Note 9 regarding bank loans which were taken to invest in
debentures, which have been pledged as securities for the
loans which were offset against the investment therein.
C. For the purpose of securing debentures convertible into
Koor shares, Koor has undertaken not to pledge its assets
in future, except in accordance with the terms stipulated
by the trust deeds. See also Note 15B.
D. Debentures issued by Koor Issuance Ltd. a subsidiary, are
secured by a floating charge on all the assets of the
above company. Under the terms of the deed of trust, Koor
has guaranteed the full repayment of all the amounts of
the principal, interest and linkage differences of the
debentures. Koor registered a "negative pledge" to secure
its guarantee.
E. Guarantees to banks and others for loans and for assuring
credit lines and other guarantees in favor of:
<TABLE>
<CAPTION>
Consolidated Company
------------------------------- -----------------------------
December 31 December 31
------------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -----------
NIS thousands NIS thousands
------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Subsidiaries - - 91,628 -
Affiliates 19,652 20,353 19,652 9,033
Others 9,114 23,529 1,622 33,086
------------- ------------- ------------- -----------
28,766 43,882 112,902 42,119
============= ============= ============= ===========
</TABLE>
1) In certain cases when advances from customers
are received, a subsidiary provides its
customers with bank guarantees to secure the
advances. Guarantees in excess of the amount of
advance payments stated as liabilities in the
balance sheet, amounted to NIS 307,035 thousand
as at 31 December, 1999, and NIS 223,049 as at
31 December, 1998.
2) In connection with the Bezeq agreement to
transfer ownership of public switching Bezeq
received from Koor a guarantee in the amount of
NIS 104 million. See also Note 18A5.
3) There are also guarantees, in an unlimited
amount, to ensure due performance of work,
customer agreements, product warranty, advance
payments received, and liabilities to customs
and excise authorities.
Note 23 - Data concerning Items in Statements of Operations
A. Revenues from sales and services - net (1) (3) (4):
1. Consolidated
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------
1999 1998 1997
------------ --------------- ---------------
NIS thousands
--------------------------------------------------
Local:
<S> <C> <C> <C>
Industrial operations (2) 3,425,703 4,631,273 5,451,809
Trading operations 1,064,315 945,412 1,052,089
Abroad:
Industrial operations - export and
international operations 5,591,566 6,591,239 5,800,158
Trading operations 593,717 624,392 621,319
------------ --------------- ---------------
10,675,301 12,792,316 12,925,375
============ =============== ===============
(1) Not including agency sales 555,633 367,653 499,270
============ =============== ===============
(2) Including sales to major customer - 532,037 829,074
============ =============== ===============
(3) Including sales under long-term credit
arrangements (see also Note 2K) 510 78,004 67,175
============ =============== ===============
(4) Revenues and expenses relating
to work performed under long-term
contracts:
Revenues 830,637 869,969 836,619
Costs (617,547) (696,080) (712,705)
Decrease (increase) in provision
for losses 1,150 12,474 (3,223)
------------ --------------- ---------------
214,240 186,363 120,691
============ =============== ===============
2. Company
Income from management fees :
From subsidiaries 45,589 42,181 73,348
From proportionately consolidated
investees 18,776 20,571 28,168
From affiliated companies 756 - -
------------ --------------- ---------------
65,121 62,752 101,516
============ =============== ===============
</TABLE>
<PAGE>
B. Cost of sales and services - consolidated :
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------
1999 1998 1997
------------ --------------- ---------------
NIS thousands
--------------------------------------------------
Industrial operations:
<S> <C> <C> <C>
Materials 3,522,270 4,660,519 4,595,995
Labour 1,542,802 2,293,136 2,146,711
Subcontracted work 127,930 177,767 158,291
Depreciation and amortisation 397,591 511,250 490,306
Research and development expenses, net (*) 427,722 527,928 506,597
Other manufacturing expenses 609,489 762,012 799,255
------------ --------------- ---------------
6,627,804 8,932,612 8,697,155
Less - expenses charged to cost of fixed assets 12,659 33,600 25,813
------------ --------------- ---------------
6,615,145 8,899,012 8,671,342
Decrease (increase) in inventory of goods
and work in process 214,223 (17,223) 37,600
------------ --------------- ---------------
6,829,368 8,881,789 8,708,942
Increase in inventory of finished goods 137,487 (162,766) (61,733)
------------ --------------- ---------------
6,966,855 8,719,023 8,647,209
------------ --------------- ---------------
Trading operations:
Merchandise 839,499 923,767 1,011,410
Labour 145,194 101,209 104,932
Depreciation 43,680 33,022 35,428
Others 134,638 90,003 91,050
------------ --------------- ---------------
1,163,011 1,148,001 1,242,820
------------ --------------- ---------------
8,129,866 9,867,024 9,890,029
=========== =============== ===============
(*) Net of grants and participations, net 15,645 56,180 45,665
=========== =============== ===============
</TABLE>
C. Selling and marketing expenses - consolidated :
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------
1999 1998 1997
------------ --------------- ---------------
NIS thousands
--------------------------------------------------
<S> <C> <C> <C>
Salaries 337,646 422,873 375,111
Commissions 139,712 168,418 168,262
Advertising expenses 62,280 81,919 85,997
Depreciation and amortisation 44,350 47,001 39,187
Other 394,068 482,246 456,706
------------ --------------- ---------------
978,056 1,202,457 1,125,264
============ =============== ===============
</TABLE>
<PAGE>
Note 23 - Data to Items in Statements of Operations (cont'd)
--------------------------------------------------------------------------------
D. General and administrative expenses:
<TABLE>
<CAPTION>
Consolidated Company
----------------------------------------- ------------------------------------------
Year ended December 31 Year ended December 31
----------------------------------------- ------------------------------------------
1999 1998 1997 1999 1998 1997
---------- ----------- ------------ ----------- ----------- ------------
NIS thousands NIS thousands
----------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries 384,613 557,363 489,168 26,402 81,316 70,447
Bad and
doubtful debts 27,463 58,783 14,866 - - -
Depreciation and
amortisation 32,190 35,976 32,751 1,237 1,240 1,305
Other 285,243 358,763 337,703 38,531 34,087 31,136
---------- ----------- ------------- ----------- ----------- ------------
729,509 1,010,885 874,488 66,170 116,643 102,888
========== =========== ============= =========== =========== ============
</TABLE>
E. Financing expenses (income), net:
<TABLE>
<CAPTION>
Consolidated Company
----------------------------------------- ------------------------------------------
Year ended December 31 Year ended December 31
----------------------------------------- ------------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ------------- ----------- ----------- ------------
NIS thousands NIS thousands
----------------------------------------- ------------------------------------------
In respect of
<S> <C> <C> <C> <C> <C> <C>
convertible debentures 7,598 9,876 19,880 6,079 7,653 16,240
In respect of debentures 5,102 6,458 11,347 - - -
In respect of
long-term loans 218,430 257,017 147,697 126,188 107,010 469
In respect of short-term
loans and credit 181,136 159,896 128,072 26,687 - 497
Amortisation of
capital raising
expenses 2,546 5,663 5,982 1,196 1,902 2,327
Losses (gains) from
marketable securities, net (67,707) (59,804) (49,436) (27,229) 11,757 (25,415)
Interest capitalized to
fixed assets and
work in process* 32,829 (48,892) (20,259) 28,257 (36,981) -
Revenue (expenses)
from investees, net - - - (3,397) 1,694 (2,375)
Revenue from deposits
and others, net (21,645) (79,199) (91,440) 2,694 (8,467) (382)
---------- ----------- ------------- ----------- ----------- ------------
358,289 251,015 151,843 160,475 84,568 (8,639)
========== =========== ============= =========== =========== ============
</TABLE>
* Including amounts recorded directly to shareholders' equity as "cumulative
foreign currency adjustments."
<PAGE>
F. Other income (expenses), net
1. Consolidated
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
------------- ------------- ---------------
NIS thousands
---------------------------------------------------
Sale of investments in investees (including
<S> <C> <C> <C>
changes in rates of holding) 641,974 433,582 179,645
Liquidating dividend - - 20,327
Income in respect of settlement agreements - - -
Expenses relating to the termination
and/or sale of activities and
sale and write down of assets, net (319,312) (231,974) (70,166)
Supplemental severance pay and pensions (205,599) (269,061) (27,323)
Management services and participation in
selling general and administrative expenses:
Proportionately consolidated companies 9,567 9,812 14,142
Affiliates 2,765 3,413 10,707
Rent from buildings and equipment
(net of related depreciation) (1) 4,231 2,739 3,881
Joint ventures, net 415 1,181 1,327
Compensation for damages 560 368 4,680
Sale of know-how - 12,203 -
Earnings on severance pay fundings - - 854
Amortisation of goodwill (48,838) (27,170) (19,227)
Miscellaneous, net 21,465 (6,363) (1,448)
------------- ------------- ---------------
107,228 (71,270) 117,399
------------- ------------- ---------------
(1) Including depreciation 745 1,427 4,227
============= ============= ===============
</TABLE>
2. Company
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
------------- ------------- ---------------
NIS thousands
---------------------------------------------------
Capital gain on sale of investments in investee
<S> <C> <C> <C>
companies 44,699 113,159 73,810
Liquidating dividend - - 19,279
Joint venture 610 1,231 1,496
Write-down of investments (157,099) (131,091) -
Capital loss from sale of fixed assets (1,661) (1,122) (86)
Sale of know-how - 12,203 -
Miscellaneous, net 5,946 (1,109) 1,359
------------- ------------- ---------------
(107,505) (6,729) 95,858
============= ============= ===============
</TABLE>
<PAGE>
G. Equity of the Koor Group in the operating
results of affiliates, net
1. Consolidated
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
------------- ------------- ---------------
NIS thousands
---------------------------------------------------
<S> <C> <C> <C>
Affiliates companies, net (1) 284,197 105,713 28,900
Amortisation of goodwill (2) (162,472) (43,728) (18,265)
------------- ------------- ---------------
121,725 61,985 10,635
============= ============= ===============
Dividend received 49,742 29,315 11,095
============= ============= ===============
(1) Including discontinued operations in an
affiliate (86,773) - -
============= ============= ===============
(2) Including write-off of goodwill balance
in an affiliate - - 8,852
============= ============= ===============
</TABLE>
2. Company
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
------------- ------------- ---------------
NIS thousands
---------------------------------------------------
<S> <C> <C> <C>
Equity of Koor in operating results for the year (1) 836,845 160,396 423,548
Amortisation of goodwill (2) (120,197) (37,507) (5,265)
------------- ------------- ---------------
716,648 122,889 418,283
============= ============= ===============
Dividend received 1,539,910 1,297,923 135,197
============= ============= ===============
(1) Including discontinued operation in
an affiliate (86,773) - -
============= ============= ===============
(2) Including write-off of goodwill in
investee companies (1,849) - 4,913
============= ============= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
H. Income (expenses) from investee companies and their participation in expenses
-----------------------------------------------
Year ended December 31
------------------------------------------ --------------------------------------------
1999 1998
Consolidated Consolidated
companies by companies by
Consolidated proportional Affiliated Consolidated proportional Affiliated
companies consolidation companies companies consolidation companies
------------ ------------- ---------- ------------ ------------- ----------
NIS thousands NIS thousands
------------------------------------------ --------------------------------------------
Income:
<S> <C> <C> <C> <C> <C> <C>
Management services 45,589 18,776 756 - 42,181 20,571
============ ============= =========== ============ ============= ===========
Administrative expenses
(in respect of salaries of plant
managers paid by Koor) - - - - 26,949 -
============ ============= =========== ============ ============= ===========
Financing income (expenses),
net 4,443 (14) (1,032) - (2,324) 705
============ ============= =========== ============ ============= ===========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------
1997
-----------------------------------------
Consolidated
companies by
Consolidated proportional Affiliated
companies consolidation companies
------------ ------------- -----------
NIS thousands
------------------------------------------
Income:
<S> <C> <C> <C>
Management services - 73,348 28,168
============ ============ ===========
Administrative expenses
(in respect of salaries of plant
managers paid by Koor)
- 41,242 22,499
Financing income (expenses), ============ ============ ============
net
- 3,489 (1,393)
============ ============ ============
</TABLE>
<PAGE>
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------
Note 24 - Business Segments
A. The Koor Group operates in the following segments:
Following a change by the company's management in the
definition of Koor's segments of operation, the
operations of the telecommunications and electronics
segments which had been reported in 1998 in the
telecommunications segment were divided retroactively
into the telecommunications, military electronics and
"others" segments. Pursuant thereto the comparison
numbers were classified accordingly.
Following are Koor's segments after this reclassification:
Telecommunications
Defence electronics
Agro-chemicals and other chemicals Building and
infrastructure materials The "others" segment includes
mainly tourism, consumer products, software and trade.
B. Segment sales include products sold and services rendered
to unrelated customers. Inter-industry segment sales are
immaterial and are based primarily on prices determined
in the ordinary course of business. Accordingly, these
sales are not presented separately.
Segment operating earnings include all costs and expenses
directly related to the relevant segment and an
allocation of expenses from which more than one segment
may benefit. Expenses and revenue presented in the
statements of operations after operating earnings are not
taken in account in the determination of operating
earnings or loss. Identifiable assets by industry
segments are those assets that are used by Koor in its
activities in each segment.
C. See Note 24H for details of the discontinuation of the
activities of the energy segment.
D. Data regarding business segments of the Koor Group:*
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
NIS thousands % NIS thousands % NIS thousands %
-------------- -------- ------------- -------- ------------- ---------
Revenues
from sales
and services:
Segments:
<S> <C> <C> <C> <C> <C> <C>
Telecommunication 2,199,702 20.61 3,419,501 26.73 3,408,168 26.37
Defence electronics 1,333,690 12.49 1,572,584 12.29 1,458,576 11.28
Agro-chemicals
and other chemicals 3,540,922 33.17 3,376,893 26.40 2,881,212 22.29
Building and
infrastructure materials 1,445,878 13.54 1,645,089 12.86 1,964,115 15.20
Others 2,155,109 20.19 2,778,249 21.72 3,213,304 24.86
-------------- -------- ------------- -------- ------------- ---------
Total segments 10,675,301 100.00 12,792,316 100.00 12,925,375 100.00
============== ======== ============= ======== ============= =========
* Reclassified
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
NIS thousands % NIS thousands % NIS thousands %
-------------- -------- ------------- -------- ------------- ---------
Pre-tax earnings
Operating earnings
according to segments:
<S> <C> <C> <C> <C> <C> <C>
Telecommunication 260,662 27.67 46,406 5.28 299,429 25.59
Defence electronics 69,060 7.33 167,684 19.07 138,126 11.81
Agro-chemicals and
other chemicals 390,503 41.45 428,441 48.74 359,271 30.7
Building and .
infrastructure materials 127,210 13.50 76,251 8.67 202,857 17.34
Others 94,685 10.05 160,293 18.24 170,317 14.56
-------------- -------- ------------- -------- ------------- ---------
Total segments 942,120 100.00 879,075 100.00 1,170,000 100.00
======== ======== =========
Joint general expenses (104,250) (167,125) (134,406)
-------------- ------------- -------------
Total operating earnings 837,870 711,950 1,035,594
Financing expenses, net 358,289 (251,015) (151,843)
Other income (expenses), net 107,228 (71,270) 117,399
Pre-tax earnings 586,809 389,665 1,001,150
============= ============= =============
</TABLE>
<PAGE>
The Koor Group's equity in the excess of earnings over losses of affiliates,
net, is as follows:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
NIS thousands % NIS thousands % NIS thousands %
-------------- -------- ------------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Telecommunications 137,018 112.56 37,504 60.51 (4,177) (39.28)
Defence electronics (8,018) (6.58) - - - -
Agro-chemicals and
other chemicals - - - - 4,512 42.42
Building and
infrastructure materials 1,355 1.11 552 0.89 (9,392) (88.31)
Others (8,630) (7.09) 23,929 38.60 19,692 185.17
-------------- -------- ------------- -------- ------------- ---------
121,725 100.00 61,985 100.00 10,635 100.00
============== ======== ============= ======== ============= =========
* Reclassified
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
NIS thousands % NIS thousands % NIS thousands %
-------------- -------- ------------- -------- ------------- ---------
Capital investments:
Segments:
<S> <C> <C> <C> <C> <C> <C>
Telecommunication 67,051 9.50 208,106 19.09 223,654 22.99
Defence electronics 42,888 6.07 67,772 6.22 50,429 5.18
Agro-chemicals and
other chemicals 277,545 39.31 340,780 31.25 312,166 32.08
Building and
infrastructure materials 119,455 16.93 289,308 26.53 165,007 16.96
Others 199,078 28.19 184,375 16.91 221,709 22.79
-------------- -------- ------------- -------- ------------- ---------
Total segments 706,017 100.00 1,090,341 100.00 972,965 100.00
======== ======== =========
Discontinued activity - 31,873 64,053
Corporate assets 14,052 27,112 1,870
------------- ------------- ------------
720,069 1,149,326 1,038,888
============= ============= =============
Depreciation and
amortisation:
Segments:
Telecommunication 85,090 14.99 152,891 23.31 136,358 21.87
Defence electronics 55,879 7.45 51,407 7.85 39,589 6.36
Agro-chemicals and
other chemicals 187,698 33.08 170,075 25.93 131,591 21.10
Building and
infrastructure materials 123,697 21.80 144,021 21.96 179,504 28.79
Others 114,973 22.68 137,370 20.95 136,449 21.88
-------------- -------- ------------- -------- ------------- ---------
Total segments 567,337 100.00 655,764 100.00 623,491 100.00
======== ======== =========
Discontinued activity - 21,967 42,128
Corporate assets 2,733 5,364 6,740
------------- ------------- ------------
570,070 683,095 672,359
============= ============= =============
* Reclassified
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------
1999 1998
--------------------------------- --------------------------------
NIS thousands % NIS thousands %
------------------- ------------ --------------- ---------------
Identifiable assets:
Segments:
<S> <C> <C> <C> <C>
Telecommunication 1,843,738 15.49 4,116,743 27.43
Defence electronics 681,360 5.73 1,330,708 8.89
Agro-chemicals and other
chemicals 5,277,603 44.35 5,221,023 34.79
Building and infrastructure
materials 1,752,011 14.72 2,177,670 14.5
Others 2,345,877 19.71 2,159,999 14.39
------------------- ------------ --------------- ---------------
Total segments 11,900,589 100.00 15,006,143 100.00
============ ===============
Corporate assets 1,974,239 1,156,345
Affiliates** 3,495,772 1,623,060
------------------- --------------
17,370,600 17,785,548
=================== ==============
* Reclassified
** Including an investment of NIS 3,067 million (31
December, 1998 - NIS 1,285 million) in ECI which operates
in the telecommunications segment.
</TABLE>
E. Industrial operations - export sales and foreign
industrial operations by geographical destination:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------
1999 1998 1997
---------- ----------- -----------
NIS thousands
-----------------------------------------------
<S> <C> <C> <C>
North America 1,608,174 1,907,365 1,785,455
Europe 1,710,133 2,032,650 1,588,563
South America 1,433,075 1,563,876 1,295,827
Africa 129,132 176,423 77,826
Asia and Australia 711,052 910,925 1,052,487
5,591,566 6,591,239 5,800,158
</TABLE>
F. Assets by geographic location of manufacturing operation
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1999 1998
--------------- ---------------
NIS thousands NIS thousands
--------------- ---------------
<S> <C> <C>
Israel 15,724,883 16,197,462
Brazil 1,457,906 1,344,797
North America 192,811 243,289
--------------- ---------------
17,375,600 17,785,548
=============== ===============
</TABLE>
<PAGE>
G. Capital investments in assets by geographic location
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
NIS thousands NIS thousands
--------------- ---------------
<S> <C> <C>
Israel 688,678 1,069,316
United States 5,972 5,767
Brazil 25,919 74,243
--------------- ---------------
720,569 1,149,326
=============== ===============
</TABLE>
H. Discontinued activity
1. In Koor's financial statements the companies Phoenicia
and Yonah constituted part of the food segment included
in the financial statements as at 31 December, 1998, in
the "Others" framework in the Note relating to segments.
After conclusion of the sale of the companies, operations
in Koor's food segment were terminated.
<TABLE>
<CAPTION>
The year ended 31 December
----------------------------------------------------
1999 1998 1997
--------------- -------------- ---------------
NIS thousands NIS thousands NIS thousands
--------------- -------------- ---------------
<S> <C> <C> <C>
Revenues from sales and implementation of works 96,009 376,701 830,220
=============== ============== ===============
Profit (loss) from operating earnings (429) 18,939 41,483
=============== ============== ===============
Loss - Koor's share 4,078 1,439 6,018
=============== ============== ===============
Total assets 109,412
==============
</TABLE>
2. In the 1997 financial statements Granite Hacarmel
Investments Ltd. constituted all the operations in the
energy segment. As from the 1998 financial statements the
operation was retroactively represented in the energy
segment of the statement of operations as a sector in
which operations had been terminated.
I. Additional information on business segments of the Company*:
The Company operates through subsidiaries, proportionately
consolidated companies and affiliates in various sectors of the
economy.
Data according to business segments is as follows:
Equity of the Company in earnings (losses) net, of investees:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
-------------- ------------- ---------------
NIS thousands
---------------------------------------------------
<S> <C> <C> <C>
Telecommunications 259,451 (162,928) 160,251
Defence Electronics 23,638 83,452 61,897
Agro-chemicals and other chemicals (1,281) 102,927 112,129
Buildings and infrastructure materials 75,500 (4,560) 76,929
Others 324,758 93,600 3,295
-------------- ------------- ---------------
682,066 112,491 414,501
Provision for severance benefits - 10,398 3,782
Provision for taxes 34,582 - -
Discontinued activities - 69,420 15,929
-------------- ------------- ---------------
716,648 192,309 434,212
============== ============= ===============
</TABLE>
<PAGE>
Investment of the Company in shares, loans and capital notes net,
of investees:
<TABLE>
<CAPTION>
December 31
----------------------------------
1999 1998
--------------- ---------------
NIS thousands
----------------------------------
<S> <C> <C>
Telecommunications 3,743,766 2,784,023
Defence Electronics 442,804 497,382
Agro-chemicals and other chemicals 1,259,651 1,251,383
Buildings and infrastructure materials 609,618 1,015,824
Others 346,728 884,678
--------------- ---------------
6,402,567 6,433,290
Provision for taxes - (34,582)
- -
--------------- ---------------
6,402,567 6,398,708
=============== ===============
* Restated
</TABLE>
Note 25 - Transactions and Balances with Interested Parties
A. The following are details of interested parties in Koor
resulting from their holdings of Koor's ordinary shares:
1. Claridge Group (Claridge).
2. Bank Hapoalim B.M. group (Bank Hapoalim B.M.)
3. Bank Leumi B.M. Group (Bank Leumi B.M.) - after
the balance sheet date Bank Leumi B.M. ceased to
be an interested party in Koor.
B. Koor and its subsidiaries undertake transactions with
interested parties as detailed below. These transactions,
which consist principally of the receipt of banking
services, are carried out in the normal course of
business and thus no separate records are kept of the
handling and recording of such transactions.
Consequently, and given the large number of the above
mentioned entities, it is not possible to accurately
determine the scope and scale of these transactions.
The Securities Authority, in a meeting on 10 February,
2000, decided to exempt the Company from disclosure of
transactions with Bank Hapoalim B.M., Bank Leumi B.M.,
Claridge and their investee companies, for purposes of
the financial statements as at 31 December, 1999, other
than for exceptional transactions.
C. The balance of liabilities owed to Bank Hapoalim B.M. as
at 31 December, 1999 and 1998 is NIS 2,396 million and
NIS 2,432 million respectively.
D. The balance of liabilities owed to Bank Leumi B.M. as at
31 December, 1999 and 1998 is NIS 1,849 million and NIS
2,171 million respectively.
E. See Note 20C(2) regarding the granting of put options to
senior employees of the Koor Group by the Claridge Group
for the purchase of shares in Koor.
<PAGE>
F. Benefits to interested parties
1. Directors*
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------
1999 1998 1997
-------- --------- --------
NIS thousands
---------------------------------------------
Directors employed by the Company:
<S> <C> <C> <C>
Salary and related costs (a) (b) 8,376 11,497 13,568
======= ========= ========
Number of directors 2 3 1
======= ========= ========
Directors not employed by the Company:
Annual compensation and participation
in meetings:
Claridge Group 271 282 66
======= ========= ========
Number of directors 6 7 7
======= ========= ========
Poalim Assets (Shares ) Ltd. 173 206 187
======= ========= ========
Number of directors 3 3 3
======= ========= ========
Shamrock Group - - 216
======= ========= ========
Number of directors - - 5
======= ========= ========
Other directors 235 280 237
======= ========= ========
Number of directors 3 3 5
======= ========= ========
Consulting fee 1,101 555 1,062
======= ========= ========
Number of directors 1 1 1
======= ========= ========
</TABLE>
* Including directors who resigned or were appointed during the year.
(a)
On July 1, 1998 Mr. B. Gaon resigned from his position as
General Manager of the Company. At the request of the
Board of Directors Mr. Gaon remained with the Company
until 31 December, 1998 and he undertook to continue to
render it services as a consultant in 1999 and 2000 for
an annual consulting fee of $125,000.
The 1998 and 1997 figures include the cost of the
retirement arrangement with the outgoing General Manager.
In 1998, 137,274 options were exercised by Mr. Gaon,
under the 1995 incentive plan.
The value of the benefit included in the exercise was NIS
23,334 thousand based on the market price at exercise
date. In respect of options granted by shareholders see
also Note 20C(2).
(b) See Note 20C(3) in respect of the issue of options to the
General Manager and the Company's President under the
1998 Incentive Plan.
2. Consultancy services
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------
1999 1998 1997
----------- ----------- -----------
NIS thousands
------------------------------------------------
<S> <C> <C> <C>
Claridge 1,683 1,734 382
========== =========== ===========
Poalim Capital Markets and
Investment Ltd. 1,683 1,734 1,536
========== =========== ===========
Shamrock* - - 1,384
========== =========== ===========
</TABLE>
* Including expense reimbursement and special
consultancy.
The Company has agreements with interested parties -
Claridge and Poalim Capital Markets and Investments Ltd.
(Poalim) - for the receipt of consultancy services. These
services include, inter alia, advice in respect of
investment strategies, monetary policies, international
activities, strategic partnerships and company
structuring. The agreements include instructions
regarding the indemnification of the consultants
(Claridge/Poalim) in respect of claims connected to the
consultancy, except for cases of gross negligence and/or
intentional damage.
In consideration for the consultancy the Company has
agreed to pay an annual sum which will not exceed
US$400,000 to each of the consultants. The agreements are
for the period of one year and are automatically
renewable each year, unless one of the parties gives 60
days' prior notice of the termination of the agreement.
<PAGE>
Note 26 - Earnings Per Share
A. Adjusted net earnings used in the computation of earnings
per NIS 1 par value of the share capital:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------
1999 1998 1997
----------- ----------- -----------
NIS thousands
------------------------------------------------
Earnings used in the computation of basic
<S> <C> <C> <C>
earnings per NIS 1 par value of shares 549,119 48,240 541,047
Add - theoretical earnings resulting from:
Conversion of convertible debentures:
Series E 490 - 5,034
Series F 5,485 - 13,232
Effect of subsidiaries' convertible securities - - (3,108)
Net earnings used in the computation of fully
diluted earnings per NIS 1 par value of shares 555,094 48,240 556,205
</TABLE>
B. Weighted number of ordinary shares of NIS 0.001 used in
the computation of net earnings per NIS 1 par value of
the share capital:
<TABLE>
<CAPTION>
Number of ordinary shares
------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
In the computation of basic earnings per share 15,737,564 15,723,996 15,438,487
Add - theoretical share capital resulting from:
Conversion of convertible debentures:
Series E 40,500 - 273,750
Series F 284,062 - 620,690
----------- ----------- -----------
Total share capital used in the computation of
fully diluted earnings per share 16,062,126 15,723,996 16,332,927
=========== =========== ===========
</TABLE>
C. To examine that the conversion or exercise of convertible
securities is reasonable, the present value of these
securities was computed according to a discount rate of
6% (31 December, 1998 - 6%, 31 December, 1997 - 4%) for
securities linked to the CPI.
<PAGE>
Note 27 - Subsequent Events
A. Following conclusion of the offer to purchase the
holdings of various shareholders in Q Group PLC
(hereinafter: - "Q Group"), in which Koor held, by means
of Koor Multimedia Ltd. (100%), approximately 23%, on 18
January, 2000 Koor sold its holdings in Q Group in
consideration of approximately NIS 42 million. The
capital gain before tax to Koor from this sale amounted
to NIS 30 million.
B. On 20 January, 2000 an agreement was signed by Tadiran,
Koor and Elisra Electronic Systems Ltd. (hereinafter:
"Elisra") whereby Tadiran will transfer all its holdings
in Elisra to Koor, at no consideration. Immediately after
the transfer of shares (effective 31 January, 2000)
Elisra will receive shares in Tadiran Spectralink and
Tadiran Electronic Systems Ltd. (fully owned companies by
Tadiran) at no consideration. The share transfer as set
forth above will be implemented after compliance with
prior terms stipulated in the agreement, including inter
alia the receipt of the requisite approvals for
conclusion of the transaction from the relevant
authorities.
On 23 January, 2000 Tadiran lodged an application in the
District Court for approval of a reduction in capital as
required following the transfer of the shares. The court
ordered that creditor meetings be held. The meetings were
held and the creditors approved the reduction. The court
has not yet approved the reduction.
C. On 2 March, 2000 United Steel Mills Ltd. (hereinafter:
"United Steel") (approximately 73%) announced that it had
not obtained an arrangement with the banks and other
credit providers concerning rescheduling of its long-term
and short-term debts, and that the negotiations between
United Steel and the banks had been terminated.
In Koor's 1999 financial statements a write-off was
recorded for the total investment in United-Steel's
shareholders' equity and the loans granted by Koor to
United Steel in the total amount of NIS 102 million. The
assets of United Steel consolidated in the financial
statements constitute approximately 2.2% of all Koor's
assets in its consolidated balance sheet.
Owing to the fact that Koor does not guarantee United
Steel's third party liabilities, Koor and its legal
counsel is in the opinion that Koor will not be obligated
to bear any financial cost whatsoever over and above said
provisions, for United Steel's third party debts.
Moreover, Koor's management does not intend to cover past
debts and the capital deficit in realisation values, if
any.
On 16 March, 2000 United Steel and its subsidiaries
applied to the Haifa District Court for a stay of
proceedings pursuant to Section 350 of the Companies law
- 1999, and for the appointment of a trustee. The
application was lodged by the applicants only, with the
consent of some of the secured creditors. On the same
date an order was given for a stay of proceedings against
the applicants, and each one of them, for 90 days, thus
rendering it impossible to continue or initiate any legal
proceedings against the applicants unless with the
approval of the court in order to formulate a
comprehensive recovery plan and creditor arrangement
proposal which will be submitted to the court within 45
days. Koor consents to the stay of proceedings and is
ready to grant a new loan to the special management of up
to a maximum of NIS 15 million so that the United Steel
can continue operating. Each new loan granted to the
applicants during the stay of proceedings at the request
of the trustee, including loans granted by Koor, will
receive preferential status over all the company's
creditors, including secured creditors, and the loans
will be repaid only from the considerations received by
the trustee while it is operating the plant, and will be
paid before any other payment within the framework of the
creditor arrangement.
D. On 2 March, 2000 Koor signed documents enabling it to
become a limited partner in the Polaris Venture Capital
Fund III L.P. which is a limited partnership registered
in Israel. Within the framework of its commitment Koor is
supposed to invest up to $35 million in the fund, and it
will be entitled to a permanent representative on the
committee advising the fund.
E. On 6 March, 2000 a binding memorandum of understanding
was signed by Nortel Networks, an international Canadian
company, the Company and Telrad. The said memorandum of
understanding stipulates that the Canadian Nortel and the
Koor Group will set up a new company in Israel ("Nortel
Israel") which will be controlled by Nortel, and the Koor
Group will hold 28% of its share capital.
Once it is set up Nortel Israel will acquire from Telrad
the Public Switching and TX1 systems businesses, together
with Telrad's operations in this field outside Israel, in
return for some $95 million which will be paid to the
Koor Group. The business operation which Telrad will sell
to Nortel Israel constitutes approximately 40% - 50% of
its business operation. The Koor Group is expected to
record a pre-tax capital gain from this transaction of
approximately $61 million.
At the same time, Nortel will sell to Koor all its
holdings (20%) in Telrad in consideration of $45
million, thereby turning Telrad into a fully owned
subsidiary of Koor, and in return the Koor Group will
invest some $49 million in Nortel in share capital and
shareholders' loans.
Nortel Israel will take over all the operations of the
Canadian Nortel currently being implemented in Israel
outside the Telrad framework, thereby obtaining direct
access to the use of the technologies of the global
Nortel, including future technologies.
Implementation of the transaction is contingent upon the
receipt of various approvals, including that of the
Commissioner of Restrictive Trade Practices.
F. On 15 March 2000, agreement was signed by Tadiran and the
Electric Fuel Corporation (hereinafter: "EFC"), a public
company registered in the American state of Delaware,
whose shares are traded on NASDAQ. According to the
agreement Tadiran will transfer all its holdings (100%)
in Tadiran Batteries Ltd., to EFC, and in return EFC will
issue to Tadiran 2,335,767 shares (subject to adjustments
in accordance with the market share price in the period
defined in the agreement). On the date of implementation
of the transaction Koor will invest $10.5 million in EFC,
and in return EFC will issue 613,139 shares to Koor.
After completion of these issues Koor will hold, directly
and indirectly, 14% of EFC's issued share capital and
will have the right to appoint one director to EFC's
Board of Directors. On March 14, 2000, EFC's share price
was $18.125, and pursuant thereto the consideration in
shares received by Tadiran for shares in Batteries equals
approximately $42.3 million. Implementation of the
transaction is contingent upon receipt of various
approvals, including approval from the Commissioner of
Restrictive Trade Practices.
Note 28 - Material Differences Between Israeli and U.S. GAAP and their Effect
on the Financial Statements
A. The consolidated financial statements of Koor conform
with accounting principles generally accepted in Israel
("Israeli GAAP"), which differ in certain respects from
those generally accepted in the United States ("U.S.
GAAP") as described below:
1. Effect of inflation
In accordance with Israeli GAAP:
The consolidated financial statements of Koor are expressed in
terms of a uniform monetary unit - the inflation adjusted Israeli
shekel - which is after adjustment respect of the changes in the
Consumer Price Index. (See Note 2B for principles of the
adjustment)
In accordance with US GAAP:
The financial statements are expressed in current nominal
historical monetary terms.
Measuring on the basis of the change in the CPI, which reflects
the effect of changes in the general price level in the Israeli
economy, provides a very valid picture of the financial position,
results of operations and the cash flows of the Koor Group for
both Israeli and US accounting purposes.
In view of the above, no data on the effect of the differences
between measurement on the basis of cost adjusted to the CPI or on
the basis of historical cost, were included.
2. ECI and Tadiran Telecommunication - merger
In accordance with Israeli GAAP:
The merger described as aforesaid in Note 3A was recorded in
Koor's financial statement at book values in accordance with the
accepted rules governing similar asset exchange transactions.
Pursuant to the merger agreement, shares of Tadiran
Telecommunications held by Tadiran were exchanged for ECI shares
at an exchange rate determined in the merger agreement.
In accordance with U.S. GAAP:
According to EITF 98-3 and EITF/D-81 the merger of ECI and TTL is
not considered as an exchange of similar assets in respect of Koor
and Tadiran and therefore a capital gain from the realisation of
TTL is recorded and an original differentials is recorded and
allocated to goodwill.
The capital gain from this sale (after tax) amounted to NIS 64,473
thousand and an increase in original differentials allocated to
goodwill of NIS 190,954 thousand, amortised at equal annual rates
over 10 years.
3. Debt arrangement within the framework of an overall
financial arrangement
In accordance with Israeli GAAP :
Koor reported an extraordinary gain in 1991 as a result of the
restructuring of part of its debts.
In accordance with US GAAP:
In accordance with FAS No. 15 - "Accounting by Debtors and
Creditors for Troubled Debt Restructuring" future interest
payments must be deducted from the restructuring of an old debt.
The recognition of non-realised earnings (which represents
deferred interest) is affected by payments of interest over the
period from the date of the restructuring of the debt up to its
repayment date. The balance of deferred interest, net of the tax
effect, (before minority interest), at 31 December, 1999 and
1998,was NIS 48 million, and NIS 34 million, respectively.
4. Deferred taxes
a) Deferred taxes in respect to inflation adjustment
differences
In accordance with Israeli GAAP:
Koor does not provide deferred taxes in respect to
adjustment differences to the CPI for assets defined as
"immune assets" in the Law for Taxation Under
Inflationary Conditions and for which the depreciation
period is at least 20 years.
In accordance with US GAAP:
Under FAS No. 109, a provision for deferred taxes should
be made for all temporary differences, without relation
to the period of amortisation of the assets. The effect
on net earnings, as a result of the above provision for
deferred taxes, was a decrease in income tax in 1997,
1998 and 1999, by NIS 4,856 thousand, NIS 5,232 thousand
and NIS 12,300 thousand, respectively.
b) Deferred taxes in companies which adjust their financial
statements for inflation on the basis of changes in the
U.S. dollar exchange rate.
In accordance with Israeli GAAP:
Certain companies, which adjust their financial statements
on the basis of changes in the dollar exchange
rate, create deferred taxes in respect of all the
differences between the amounts of assets (mainly in
respect to fixed assets and inventory) as stated in the
financial statements and the amounts for tax purposes.
In accordance with U.S. GAAP:
According to paragraph 9(f) of FAS No. 109, deferred
taxes should not be provided in respect of differences,
the source of which is in the difference of assets and
liabilities for accounting purposes and their amounts for
tax purposes, where the source of the tax difference
stems from different measuring bases for accounting
purposes and for tax purposes. The ultimate effect of the
above write-off of deferred taxes on the statement of
operations is a reduction in income tax in the amount of
NIS 1,739 thousand and NIS 40,366 thousand, in 1997 and
1998, respectively, and an increase in income tax in 1999
in the amount of NIS 29,444 thousand.
c) Earnings from "Approved Enterprises"
Under the Israeli Law for Encouragement of Capital
Investments, 1959, a company which owns an "approved
enterprise" is subject tax at a rate of 25% of
attributable earnings during "the period of benefits".
Dividends paid to shareholders from the earnings of an
"approved enterprise" are subject to income tax at a rate
of 15%. A company that received such a dividend is
entitled to a 15% tax credit, if and when this dividend
is paid to its shareholders.
The owners of an "approved enterprise" who choose the
"alternative benefits" track are exempted from income tax
on undistributed profits.
In the event that a dividend is distributed out of tax
exempt earnings of the approved enterprise under on the
"alternative benefits" track, the distributing company
will be subject to tax on the distributed earnings at a
rate of 25%. Furthermore, the shareholders will be liable
to tax at the rate of 15%. However, if the shareholder is
a company, that shareholder will be entitled to a 15% tax
credit, if and when such dividend out of "approved
enterprise" earnings is distributed to its shareholders.
In accordance with Israeli GAAP:
Deferred tax should not be provided in respect to the
undistributed tax-exempt earnings of an "approved
enterprise" of subsidiaries, whose earnings have been
reinvested and will not be distributed to the company
shareholders.
Koor has not provided deferred tax in respect to
undistributed tax-exempt earnings attributed to the
"approved enterprise" of subsidiaries under the
"alternative benefits" track, which may be distributed,
since it is the Group's policy not to initiate such a
dividend distribution.
In accordance with US GAAP:
A reserve for deferred tax should be provided on the
undistributed tax-exempt earnings of local subsidiaries
established subsequent to December 15, 1992, as their
distribution results in additional tax.
The effect of providing a reserve for deferred tax on the
undistributed tax exempt earnings of an "approved
enterprise", assuming either the sale of the shares in
the subsidiary, a merger (change of structure), or its
liquidation, was an increase in income tax, in 1997, 1998
and 1999, amounting to NIS 25,714 thousand, NIS 34,980
thousand and NIS 3,270 thousand, respectively.
5. Handling of "benefit component" in respect of options
issued to employees
In accordance with Israeli GAAP:
The overall "benefit component", in respect to options
granted to employees of Koor, is not charged as an
expense in the statement of operations.
In accordance with US GAAP:
a) Fixed Option Plan:
Under U.S. GAAP (APB-25), the "benefit component" is
measured as the difference between the share market price
and, the exercise price of the option, when measuring the
"benefit". The benefit is charged as a salary expense
during the period in which the employee performs the
services for which the benefit was granted.
(b) Variable Option Plans:
In the event that the options have been issued to
employees for the future performance of work or services,
the benefit is charged to salary expense in the statement
of operations. The "benefit component" is computed on the
basis of the full benefit valued as at that date, and,
the proportional part of the period which has passed from
the opening balance of that period.
For information regarding the effect of proforma data,
according to FAS No. 123 data, see subsection 3b below.
6. The accounting treatment of quoted securities:
In accordance with Israeli GAAP:
Quoted securities which constitute a short-term
investment (see note 2F) are stated at market value.
Quoted securities which constitute a permanent investment
are stated at cost (regarding debentures, including
accumulated interest), except where market value is
lower, and the decline in value is not considered to be
temporary.
In accordance with US GAAP:
FAS No. 115 divides quoted securities, into three types:
securities held for a short period and traded at a high
frequency (trading securities), available for sale
securities and held to maturity securities.
A change in the value of trading securities, including
unrealised earnings, is charged to the statement of
operations, while unrealised earnings after tax of the
available for sale type is reported as a separate item
within shareholders' equity.
7. Attribution of proceeds from an issuance to debentures,
when securities are issued as a package:
According to the accounting policy of Koor:
According to the accounting policy of Koor, the proceeds
from an issuance of debentures and stock options, as a
package, are attributed to debentures according to their
par value while the remainder of the proceeds is
attributed to the share options.
According to Israeli GAAP:
The proceeds from an issuance of share options and
convertible debentures, as a package, are split based on
the relative market prices of these securities at the
date of issuance. This will sometimes result in the
recording of a discount in respect of the convertible
debentures, that is to be amortised over the term of
debentures.
8. Dividends
According to Israeli GAAP:
A dividend proposed prior to the date of approval of the
financial statements is included in the balance sheet as
a current liability.
According to US GAAP:
Such a dividend is reflected only in the notes and is not
recorded in the balance sheet as a liability until
declared.
9. Convertible securities of investees
According to Israeli GAAP:
According to the provisions of Opinion Nos. 48 and 53 of
the ICPAI, a parent company is required to create a
provision for losses which it may incur from the dilution
of its holdings in investees, when it is probable that
the share options will be exercised or the debentures
will be converted.
According to US GAAP:
A loss in the parent company resulting from the dilution
of its holdings, because of share options being exercised
or debentures being converted, is recorded only at the
time of exercise or conversion.
10. Employee severance benefits as a part of an efficiency
program
According to Israeli GAAP:
Employee severance benefits as part of future anticipated
dismissals are recorded when Management decides on the
dismissals.
According to US GAAP:
According to the provisions of EITF 94-3, employee
severance benefits, as part of a program for promoting
efficiency, are charged as an expense in the financial
statements only when all the following conditions exist:
a) Management has the appropriate authority to
dismiss employees and the efficiency program
includes all employee severance benefits.
b) Management notified employees of its intention
to dismiss them, while supplying them with full
details regarding employee severance benefits.
c) The plan for dismissals states specifically the
names of the dismissed employees, their
positions and their duties.
d) The period of time for completion of the program
of dismissals indicates that a significant
change in the plan is not likely to occur.
11. Earnings per share
According to Israeli GAAP:
Opinion No. 55 - the dilutive effect of share options and
convertible debentures is included in the computation of
basic earnings per share only if their exercise or
conversion is considered to be probable. Calculation of
the probability is based on the ratio between the market
price of the shares and the present value of the price of
exercising the stock options into shares or the present
value of the payments for conversion of the debentures
into shares.
According to U.S. GAAP:
In accordance with FAS 128. Basic earnings per share is
computed on the basis of the weighted average number of
shares outstanding during the year. Diluted earnings per
share is computed on the basis of the weighted average
number of shares outstanding during the year, plus the
dilutive potential of ordinary shares considered
outstanding during the year.
12. Acquiring an Investment in stages
According to Israeli GAAP:
Opinion 68 determines that when acquiring an investment
in stages, on the date of which the holding constitutes
an initial material influence, it is necessary to
calculate the original differentials and record the
investment according to the equity method from this date
onwards.
According to U.S. GAAP:
When acquiring an investment in stages, on the date an
initial influence becomes material it is necessary to
calculate post factum for each acquisition the original
differentials created by the acquisition despite the fact
that on that date the company did not yet have a material
influence and to implement the equity method
retroactively.
13. FAS 133
During 1998, the FASB published a new statement, FAS 133,
dealing with the reporting of derivative financial
instruments. This publication requires that all
derivative financial instruments be recorded in the
financial statements at their fair value as at the date
of the financial statement. FAS 133 is to be applied
beginning with the financial statements of 2001.
The effect of the implementation of FAS 133 on the
financial statements is expected to be immaterial.
B. The effect of the material differences between Israeli
and U.S. GAAP on the financial statements
1. Statements of operations:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------
1999 1998 1997
---------- ---------- ---------
NIS thousands
------------------------------------------------
<S> <C> <C> <C>
a) Net earnings as reported, according
to Israeli GAAP 549,119 47,121 537,337
---------- ---------- ---------
Amortisation of deferred interest in
respect of the restructuring of debts 11,924 17,236 22,166
Deferred taxes (37,055) 10,619 (20,768)
Salary expenses in respect of
share options issued to employees (3,544) (13,470) (82,341)
Correction of capital gain included in
results of discontinued activities - 4,354 -
Gain from marketable securities, net (43,566) (1,304) 18,428
Provisions for anticipated losses from
realisation of convertible securities in
investees 1,336 (2,492) 11,668
Amortisation of discount in respect of
convertible debentures (1,874) (2,543) (4,754)
Severance pay, including that arising
from an efficiency program 12,459 (4,743) 4,379
Capital gain from a merger 190,954 - -
Equity in an investee company purchased
in stages (4,967) - -
Amortisation of goodwill in accordance with a
merger (see A2) (21,004) - -
---------- ---------- ---------
104,663 7,657 (51,222)
Income taxes (129,321) 2,312 (9,837)
Minority interests in respect of the above
differences 7,963 (15,717) 1,820
---------- ---------- ---------
(16,695) (5,748) (59,239)
Extraordinary item (1) 5,475 1,817 2,642
---------- ---------- ---------
(11,220) (3,931) (56,597)
---------- ---------- ---------
Net income according to U.S. GAAP 537,899 43,190 480,740
========== ========== =========
(1) Deferred gains were recognized in respect of early repayment of debts.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------
1999 1998 1997
---------- ------------- ----------
NIS thousands
------------------------------------------------
b) Earnings per ordinary share
1. Basic earnings per ordinary
share:
As reported, according to
<S> <C> <C> <C>
Israeli GAAP 34.89 3.07 35.04
========== =========== ==========
As per U.S. GAAP:
Before extraordinary item 33.85 2.65 31.86
Extraordinary item 0.35 0.12 0.17
---------- ----------- ----------
Total 34.20 2.77 32.03
========== =========== ==========
Weighted average of number of
shares and share equivalents
under U.S. GAAP 15,727,144 15,569,840 15,030,867
========== =========== ==========
2. Diluted earnings per ordinary
share:
As reported, according to Israeli
GAAP 34.56 3.07 34.06
========== =========== ==========
Before extraordinary item 33.52 2.64 30.76
Extraordinary item 0.34 0.12 0.17
---------- ----------- ----------
Total 33.86 2.76 30.93
========== =========== ==========
Weighted average of number of
shares and share equivalents
under U.S. GAAP 16,061,493 15,618,776 16,127,878
========== =========== ==========
</TABLE>
<PAGE>
2. Balance sheet:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------- -----------------------------------------------
As Adjustments As per As Adjustment As per
reported U.S. GAAP reported U.S. GAAP
--------------- --------------- --------------- --------------- --------------- ---------------
NIS thousands
----------------------------------------------------------------------------------------------------------------------------
Investments in
<S> <C> <C> <C> <C> <C> <C>
affiliates (10) 3,495,772 165,626 3,661,398 1,623,060 - 1,623,060
Other investments
and receivables (1) 757,747 - 757,747 581,934 (9) 174,158 756,092
Intangible assets -
net of
amortisation (10) 627,264 24,467 651,731 628,873 27,186 656,059
Total assets 17,370,600 190,093 17,560,693 17,785,548 201,343 17,986,891
Payables and
accruals (7)(8) 1,733,912 (135,161) 1,598,751 2,106,802 (86,363) 2,020,440
Long-term bank
loans 3,691,887 - 3,691,887 4,297,966 (9) 174,158 4,472,123
Deferred
interest (3) - 20,022 20,022 - 37,912 37,912
Convertible
debentures (4) 180,159 (3,408) 176,751 194,589 (5,282) 189,307
Deferred taxes(2) 236,895 295,676 532,571 219,514 129,275 348,788
Minority
interests (6) 1,319,771 (24,580) 1,295,191 1,634,136 (15,695) 1,618,441
Capital reserve
for "available for
sale" securities
(1) - 33,276 33,276 - (8,416) (8,416)
Capital reserves
(4)(5) 2,417,255 137,948 2,555,203 2,415,008 134,404 2,549,412
Retained
earnings (6) 2,065,262 (133,680) 1,931,582 1,739,365 (158,649) 1,580,716
Total
shareholders'
equity 4,384,714 37,544 4,422,258 4,075,919 (32,661) 4,043,258
(1) Adjustment of value of investment securities to market value.
(2) Change in deferred taxes.
(3) Deferred gain on debt restructuring.
(4) Debentures issued with stock options.
(5) Share options issued to employees.
(6) Effects of the reconciliation to US GAAP.
(7) Proposed dividend.
(8) Provision for employee severance benefits resulting from an
efficiency program.
(9) The effect of presenting investment in marketable securities
before deduction of long-term loans (see Note 9A(3).
(10) Original differentials arising from the exchange of shares
in the merger, acquiring an investment in stages and
increasing the holdings in a consolidated company.
</TABLE>
<PAGE>
B. The effect of the material differences between Israeli
and U.S. GAAP on the financial statements (cont'd)
3. Additional information according to US GAAP
The effect of proforma data calculated according to FAS 123 :
a) Under the provisions of FAS 123, all option plans are
recorded in the statement of operations, based on the
fair value of the option at the grant date.
b) The Company applies the Black-Scholes model to estimate
fair value of the options, utilizing the following
assumptions:
Risk free interest rate 6%
Expected life of stock options 5 years
Anticipated weekly standard deviation 45.14%
Expected dividend per share 1.2%
See Note 20C relating to the fair value of share options
at the time they were granted, (according to the
prevailing conditions at the grant date).
For proforma disclosure, the fair value of the share
options, as estimated, is amortised over the period of
the benefit.
c) If the cost of the benefit in respect of share options
issued to employees under this plan (including plans of
certain subsidiaries) had been computed on the basis of
the fair value at date of grant in accordance with FAS
123, the Company's net earnings and earnings per share in
accordance with U.S. GAAP would have been as follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------
1999 1998 1997
-------- -------- ---------
Proforma net earnings
<S> <C> <C> <C>
(NIS thousands) 497,703 21,654 508,102
-------- -------- ---------
Proforma basic earnings
per share (NIS) 31.65 1.38 33.8
======== ======== =========
Proforma diluted earnings
per share (NIS) 31.36 1.38 32.64
======== ======== =========
</TABLE>
<PAGE>
7. Comprehensive earnings
"Comprehensive earnings" consists of the change, during
the current period, in Company's shareholder equity that
does not derive from shareholders' investments or from
the distribution of earnings to shareholders.
A. Comprehensive earnings includes two components - net
earnings and other comprehensive earnings. Net earnings
are the earnings stated in the statement of operations
and other comprehensive earnings includes the amounts
that are recorded directly in shareholders' equity and
that do not derive from transactions with shareholders.
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------
1999 1998 1997
----------- ---------- -----------
NIS thousands
------------------------------------------
<S> <C> <C> <C>
Net earnings according to US GAAP 537,899 43,190 480,740
Other comprehensive earnings, after tax:
Adjustments from translation of
financial statements of investees (19,492) 162,710 18,069
Unrealised gains from securities 41,685 2,668 5,829
----------- ---------- -----------
Total other comprehensive earnings* 22,193 165,378 23,898
----------- ---------- -----------
Total comprehensive earnings 560,092 208,568 504,638
=========== ========== ===========
*Tax component included in the item (1,881) 2,333 (6,718)
=========== ========== ===========
B. The effect of taxes on the other comprehensive earnings:
Before tax Tax effect After tax
----------- ---------- -----------
NIS thousands
------------------------------------------
Adjustments from translation of
investees (19,492) - (19,492)
----------- ---------- -----------
Unrealised gains from securities:
Gains which arose in current year 7,345 (1,332) 6,013
Less realised gains credited to net
earnings 36,221 (549) 35,672
----------- ---------- -----------
43,566 (1,881) 41,685
----------- ---------- -----------
Net unrealised gains 24,134 (1,881) 22,193
=========== ========== ===========
</TABLE>
<PAGE>
ECI Telecom Ltd.
Consolidated Financial Statements as at December 31, 1999
------------------------------------------------------------------------------
Contents Page
Report of Independent Accountants 1
Consolidated Balance sheets as of
December 31, 1999 and 1998 2
Consolidated Statements of Income for the Years
Ended December 31, 1999, 1998 and 1997 4
Statements of Other Comprehensive Income
for the Years Ended December 31, 1999, 1998 and 1997 5
Statements of Changes in Shareholders' Equity
for the Years ended December 31, 1999, 1998 and 1997 6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997 9
Notes to the Consolidated Financial Statements 11
February 7, 2000
Report of Independent Accountants
To the Shareholders of ECI Telecom Ltd.
We have audited the accompanying consolidated financial statements of ECI
Telecom Ltd. ("the Company") and its subsidiaries, consolidated balance
sheets as of December 31, 1999 and 1998, consolidated statements of income,
statements of other comprehensive income, statements of changes in
shareholders' equity and consolidated cash flows for each of the three
years the last of which ended December 31, 1999. These consolidated
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.
We did not audit the financial statements of certain consolidated
subsidiaries, whose assets constitute approximately 15.2% and 18% of total
consolidated assets at December 31, 1999 and 1998 respectively and whose
revenues constitute approximately 7.6%, 4.3% and 19.1% of consolidated
revenues for the years ended December 31, 1999, 1998 and 1997,
respectively. Those financial statements were audited by other certified
public accountants whose reports thereon have been furnished to us. Our
opinion expressed herein, insofar as it relates to the amounts included for
the abovementioned subsidiaries, is based solely upon the reports of the
other accountants. Furthermore, the data included in the financial
statements relating to the net asset value of the Company's investments in
affiliates and to its equity in their operating results, and the results of
Discontinued Business, in the income statement is based on the financial
statements of such affiliates, some of which were audited by other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards in the Untied States. Those standards require that we plan and
perform the audits 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 the Board of
Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the
other accountants provide a fair basis for our opinion.
In our opinion, based upon our audits and the reports of the other
accountants referred to above, the aforementioned financial statements
present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries at December 31, 1999 and 1998,
and the results of their operations, statements of comprehensive income,
changes in shareholder's equity and their cash flows for each of the three
years the last of which ended December 31, 1999, in conformity with
generally accepted accounting principles (GAAP) in the United States.
Somekh Chaikin
Certified Public Accountants (Israel)
<TABLE>
<CAPTION>
Consolidated Balance Sheet as at December 31
----------------------------------------------------------------------------------------------------------------------------------
1999 1998
-------------- --------------
Note $ in thousands $ in thousands
---------- -------------- --------------
<S> <C> <C> <C>
Assets 13; 14; 16
Current assets
Cash and cash equivalents 1C; 17A 232,144 141,848
Short-term investments 1D; 2; 17B 227,619 299,679
Receivables:
Trade 1H; 17C 435,706 251,303
Other 97,797 26,037
Prepaid expenses 6,889 4,458
Recoverable costs and estimated
earnings - not yet billed 1L5 13,082 9,843
Inventories 1E; 3 185,754 162,664
-------------- --------------
Total current assets 1,198,991 895,832
-------------- --------------
Long-term bank deposits and
receivables, net of current maturities 1L2; 4 105,568 82,658
-------------- --------------
Investments 1D; 5; 19 4,982 6,913
-------------- --------------
Properties, plant and equipment 1F; 6
Cost 333,943 234,688
Less - Accumulated depreciation
and amortisation 148,920 103,797
-------------- --------------
185,023 130,891
-------------- --------------
Software development costs, net 1I; 7 13,559 23,374
-------------- --------------
Other assets 1J; 8 149,143 11,265
-------------- --------------
Total assets 1,657,266 1,150,933
============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ECI Telecom Ltd.
----------------------------------------------------------------------------------------------------------------------------------
1999 1998
-------------- --------------
Note $ in thousands $ in thousands
---------- -------------- --------------
<S> <C> <C> <C>
Liabilities and shareholders' equity 13; 14; 16
Current liabilities 13; 16
Short-term credits and current maturities of
long-term debt 17D 137 121,140
Trade payables 115,382 53,788
Other payables and accrued liabilities 17E 175,309 98,401
Excess of liabilities over assets relating to discontinued
operations 20 1,011 -
---------- -----------
Total current liabilities 291,839 273,329
---------- -----------
Long-term liabilities
Convertible notes 9A 85,000 100,000
Other liabilities and loans 9B; 19 7,770 5,559
Liability for employee severance benefits, net 10 24,559 2,511
---------- -----------
Total long-term liabilities 117,329 108,070
---------- -----------
Total liabilities 409,168 381,399
---------- -----------
Minority interests 23,778 6,442
---------- -----------
Commitments and contingencies 11
Shareholders' equity 12
Share capital 5,762 5,317
Capital surplus 587,639 156,559
Accumulated other comprehensive income 1R 11,171 648
Retained earnings 691,188 606,890
---------- -----------
1,295,760 769,414
Company's stock held by a
consolidated subsidiary 1K (71,440) (6,322)
---------- -----------
Total shareholders' equity 1,224,320 763,092
Jonathan B. Kolber
_________________________________________________
Chairman of the Board of Directors
Doron Inbar
_________________________________________________
President, Chief Executive Officer
Petah Tikva, February 7, 2000
---------- -----------
Total liabilities and shareholders' equity 1,657,266 1,150,933
========== ===========
</TABLE>
<TABLE>
<CAPTION>
ECI Telecom Ltd.
Consolidated Statement of Income for the Year Ended December 31
--------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------ ----------- -----------
Note $ in thousands, except per share amounts
------------- ------------------------------------------------
<S> <C> <C> <C> <C>
Revenue 1L; 16; 17F 1,114,595 744,370 582,899
Cost of revenues 16; 17G 519,735 316,591 273,143
------------ ----------- -----------
Gross profit 594,860 427,779 309,756
Research and development costs, net 1M; 17H 125,147 78,647 51,326
Selling and marketing expenses 16; 17I 180,413 107,589 79,379
General and administrative expenses 16; 17J 64,022 38,750 28,240
Amortization of acquisition-related
intangible assets 16,294 1,492 540
Restructuring expenses 19C 14,947 - -
Purchase of in process research and
development 1N; 19A 87,327 14,371 -
------------ ----------- -----------
Operating income 106,710 186,930 150,271
Financial expenses 16; 17K (9,622) (8,007) (7,591)
Financial income 16; 17K 28,375 16,542 13,127
Other income (expenses) - net 17L 50,892 (53) (2,367)
------------ ----------- -----------
Income from continuing operations before
taxes on income 176,355 195,412 153,440
Taxes on income 15 7,109 12,855 7,554
Income from continuing operations after
taxes on income 169,246 182,557 145,886
Company's equity in results of
investee companies, net (2,022) (2,952) (2,174)
Minority interest in income of a subsidiary (1,703) (5,793) -
------------ ----------- -----------
Income from continuing operations 165,521 173,812 143,712
Discontinued operations
Loss from discontinued operation,
net of income tax 1A3; 20 (25,593) (17,650) (11,272)
Loss from disposal of discontinued
operation, net of income tax 1A3; 20 (37,409) - -
------------ ----------- -----------
Net income 102,519 156,162 132,440
============ =========== ===========
Earnings per share 12; 17N
Basic earnings per share
Continuing operations 1.82 2.26 1.88
Discontinued operations (0.70) (0.23) (0.15)
------------ ----------- -----------
Net income 1.12 2.03 1.73
============ =========== ===========
Diluted earnings per share
Continuing operations 1.77 2.19 1.84
Discontinued operations (0.66) (0.22) (0.14)
------------ ----------- -----------
Net income 1.11 1.97 1.70
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
ECI Telecom Ltd.
Consolidated Statement of Comprehensive Income for the Year Ended December 31
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
Note $ in thousands $ in thousands $ in thousands
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income 102,519 156,162 132,440
Other comprehensive income: 1R
Realisation of gain on available for
sale securities (648) - -
Unrealised holding gains (losses) on
available for sale securities arising
during the period 1D2 11,171 1,056 (408)
Total other comprehensive income 10,523 1,056 (408)
Comprehensive income 113,042 157,218 132,032
</TABLE>
<PAGE>
ECI Telecom Ltd.
Statement of Changes in shareholders' Equity
<TABLE>
<CAPTION>
Number Share Capital Accumulated Retained Company's Total
of shares* capital surplus other earnings stock held share-
comprehensive (Note 15A1) by a holders'
income (loss) consolidated equity
subsidiary
----------- -------- ------- ------------- ----------- ------------ --------
$ in thousands, except share amounts and dividends per share
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 76,001,487 5,287 137,545 - 348,956 (7,282) 484,506
Changes during 1997 -
Net income for the year - - - - 132,440 - 132,440
Employee stock options exercised and
paid, net (Note 12C) 579,632 21 9,409 - - - 9,430
Net unrealised loss on available for
sale securities - - - (408) - - (408)
Amortization of deferred compensation
expenses - - 1,485 - - - 1,485
Sale of the Company's stock held by a
consolidated subsidiary, net of taxes 75,000 - 626 - - 960 1,586
Dividend** - - - - (15,301) - (15,301)
Balance at December 31, 1997
carried forward 76,656,119 5,308 149,065 (408) 466,095 (6,322) 613,738
----------- ------- --------- -------- ----------- --------- ----------
Balance at December 31, 1997
brought forward 76,656,119 5,308 149,065 (408) 466,095 (6,322) 613,738
=========== ======= ========= ======== =========== ========= ==========
Changes during 1998 -
Net income for the year - - - - 156,162 - 156,162
Employee stock options exercised and
paid, net (Note 12C) 304,300 9 4,624 - - - 4,633
Amortization of deferred compensation
expenses - - 2,870 - - - 2,870
Net unrealised gain on available for sale
securities - - - 1,056 - - 1,056
Dividend** - - - - (15,367) - (15,367)
----------- ------- --------- -------- ----------- --------- ----------
Balance at December 31, 1998
carried forward 76,960,419 5,317 156,559 648 606,890 (6,322) 763,092
=========== ======= ========= ======== =========== ========= ==========
Balance at December 31, 1998 brought forward 76,960,419 5,317 156,559 648 606,890 (6,322) 763,092
Changes during 1999 -
Net income for the year - - - - 102,519 - 102,519
Employee stock options exercised and paid, 815,102 24 18,028 - - - 18,052
net (Note 12C) Share issuance 13,966,480 403 394,379 - - - 394,782
Conversion of convertible note
into share capital 600,000 18 14,982 - - - 15,000
Realisation of gain on available for
sale securities - - - (648) - - (648)
Net unrealised gain on available for
sale securities - - - 11,171 - - 11,171
Amortization of deferred compensation
expenses - - 3,691 - - - 3,691
Acquisition of company's stock held by
a subsidiary (2,240,000) - - - - (65,118) (65,118)
Dividend** - - - - (18,221) - (18,221)
----------- -------- ------- ------------- ----------- ------------ ---------
Balance at December 31, 1999 90,102,001 5,762 587,639 11,171 691,188 (71,440) 1,224,320
=========== ======== ======= ============= =========== ============ =========
*________Issued and outstanding
**_______Dividend per share as follows:
<PAGE>
For the year ended December 31
------------------------------------
1999 1998 1997
---------- ---------- --------
$ $ $
---------- ---------- --------
Interim dividend 0.15 0.15 0.15
Proposed dividend 0.05 0.05 0.05
---------- ---------- --------
0.20 0.20 0.20
========== ========== ========
</TABLE>
<PAGE>
ECI Telecom Ltd.
Consolidated Statement of Cash Flows for the Year Ended December 31
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Cash flows from operating activities
<S> <C> <C> <C>
Net income 102,519 156,162 132,440
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 91,122 45,571 36,079
Loss (gain) on sale of property and equipment 162 9 (71)
Capital gains, net (52,383) - -
Other - net (mainly long-term deferred taxes) 2,777 (1,262) (2,647)
Purchase of in-process research and development 87,327 14,371 -
Company's equity in results of investee companies 2,378 2,952 2,174
Minority interest in income from subsidiaries 1,703 5,793 -
Decrease (increase) in marketable securities 8,826 (36,411) (12,552)
Increase in trade receivables (including non-current
maturities of bank deposits and trade receivables) (124,028) (2,576) (90,858)
Decrease (increase) in other receivables (28,264) (12,132) 5,641
Decrease (increase) in prepaid expenses (2,321) 347 86
Decrease (increase) in recoverable costs and estimated
earnings - not yet billed (4,026) 9,976 (19,819)
Decrease (increase) in inventories 23,125 (29,609) 46,164
Increase (decrease) in trade payables 33,825 (2,236) 8,519
Increase (decrease) in other payables and accrued liabilities (5,394) 7,252 21,937
Increase (decrease) in other long-term liabilities (856) 4,223 614
Increase (decrease) in liability for employee
severance benefits, net 1,196 (395) 818
-------------- -------------- --------------
Net cash provided by operating activities 137,688 162,035 128,525
-------------- -------------- --------------
Cash flows from investing activities
Software development costs capitalized (15,444) (12,905) (13,962)
Investment in property, plant and equipment (54,375) (44,039) (31,540)
Proceeds from sale of property, plant and equipment 1,365 996 313
Purchase of technology (1,000) (16,371) -
Acquisition of investee companies (500) (1,741) (880)
Repayment of long-term receivables - - 132
Long-term loans granted to investee companies (4,850) (2,546) (1,596)
Acquisition of available for sale securities - (5,864) -
Proceeds from sale of available for sale securities 1,905 7,891 -
Acquisition of newly consolidated subsidiaries 47,038 (624) -
Acquisition of additional rights in consolidated subsidiary (12,500) - (2,649)
Payments in respect of other assets (7,252) (385) -
Decrease (increase) in short-term investments 123,911 20,022 (92,277)
Repayment of due from related party 25,000 - -
Investment in convertible bond - (177,000) -
-------------- -------------- --------------
Net cash provided by (used in) investing activities 103,298 (232,566) (142,459)
-------------- -------------- --------------
The accompanying notes are an integral part of the financial statements.
Cash flows from financing activities
Exercise of employee stock options
(net of share issue expenses) 18,052 4,633 9,430
Repayment of long-term debt (5,779) (187) (189)
Increase (decrease) in short-term credit, net (122,707) 119,953 (4,853)
Public share issuance in consolidated company 43,199 - -
Dividend (17,564) (15,352) (15,268)
Acquisition of Company's stock by a subsidiary (65,118) - 1,780
-------------- -------------- --------------
Net cash provided by (used in) financing activities (149,917) 109,047 (9,100)
-------------- -------------- --------------
Effect of change in exchange rate on cash (773) (1,459) (544)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 90,296 37,057 (23,578)
Cash and cash equivalents at beginning of year 141,848 104,791 128,369
-------------- -------------- --------------
Cash and cash equivalents at end of year 232,144 141,848 104,791
============== ============== ==============
Supplemental disclosures:
Income taxes paid, net of tax returns 5,029 10,125 1,059
============== ============== ==============
Interest (received) paid, net (15,789) 4,787 4,833
============== ============== ==============
<PAGE>
A. Acquisition of newly consolidated subsidiaries (Note 19)
Working capital (other than cash) (256,937) 133 -
Long-term receivables, net of current maturities (10,284) - -
Investment in investee companies 171,923 - -
Property, plant and equipment, net (52,114) (653) -
Other assets (mainly - deferred taxes) (2,431) - -
Goodwill (144,646) (104) -
In process research and development (87,327) - -
Long-term liabilities 31,996 - -
Minority interest 2,076 - -
Share issuance 394,782 - -
47,038 (624) -
============== ============== ==============
B. Non-cash activities
Conversion of convertible note into share capital 15,000 - -
Conversion of convertible debentures into share
capital of an investee company 177,000 - -
Sale of production activity on credit 16,689 - -
Sale of investment in investee company for
available for sale securities 29,266 - -
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Note 1 - Significant Accounting Policies
Significant accounting policies, applied on a consistent basis,
are as follows:
A. General
1. The Company is an Israeli corporation which operates in
the telecommunication industries. The Company designs,
develops and manufactures telecommunications equipment,
including hardware and software, - partly to buyers'
specifications - and markets and services such equipment.
2. At the beginning of 1999 Tadiran Telecommunication Ltd.
(hereinafter "TTL) merged with ECI by share issuance of
ECI ordinary shares (which consisted approximately of 15%
of the issued and outstanding shares of ECI on the merger
date) to TTL shareholders (mainly Tadiran Ltd.,
hereinafter - "Tadiran"). The merger is accounted for
under the "purchase" method of accounting. The excess of
cost is mainly allocated to goodwill and intangible
assets amounting to $230 million of which $87 million was
written-off immediately as in process research and
development costs. (For more details - see Note 19).
3. On February 7, 2000 the Board of Directors approved a
decision made by company management to discontinue
operation of certain activities (for more details see
Note 20), accordingly the results of discontinued
operations for all periods reported were reclassified in
one line on the income statement after the result from
continued operations. The assets regarding the
discontinued operations are classified in one line on
current liabilities.
4. The financial statements have been prepared in conformity
with generally accepted accounting principles (GAAP) in
the United States.
5. The currency of the primary economic environment in which
the operations of the Company and its subsidiaries are
conducted is the U.S. dollar ("dollar").
Most of the Company's sales are made outside of Israel
(see Note 17F regarding geographical distribution) -
mainly in dollars and other non-dollar currencies.
Arrangements are made to ensure that the dollar value of
sales made in non-dollar currencies is maintained (see
Note 11E). Most purchase of materials and components, as
well as most selling and other expenses incurred outside
Israel, are in dollars. In view of the foregoing, the
dollar has been determined to be the Company's functional
currency.
Transactions and balances denominated in dollars are
presented at their original amounts.
Non-dollar transactions and balances have been remeasured
into dollars in accordance with the principles set forth
in Statement No. 52 of the Financial Accounting Standards
Board (FASB) of the United States.
All exchange gains and losses from remeasurement of
monetary balance sheet items denominated in non-dollar
currencies are reflected in the income statement when
they arise. Such exchange gains and losses are included
in the same income statement items in which the related
transactions are included.
The financial statements have been prepared in accordance
with the historical cost convention.
6. 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.
These are management's best estimates based on experience
and historical data, however, actual results could differ
from these estimates.
B. Principles of consolidation
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
C. Cash and cash equivalents
The Company considers all highly liquid investments with a
maturity of three months or less at date of purchase, to be cash
equivalents.
D. Investments
1. Investee companies
Investments in investee companies, in which the Company
has significant influence (affiliated companies) are
stated by the equity method, that is, at cost plus the
Company's share of the post-acquisition gains or losses.
Goodwill - as stated in "J" hereunder.
Investment in shares of companies in which the Company
does not have significant influence (hereinafter - "other
companies"), are stated as follows:
- Marketable securities - as stated in 2 hereunder.
- Non-marketable securities - at cost.
2. Marketable securities
These securities are classified as "trading" or as
"available for sale" and stated at market value. Gains or
losses arising from the realisation of marketable
securities which are classified as "trading" are included
in financial income in accordance with the principles set
forth in Statement No. 115 of the FASB. The changes in
the market value during the current year related to those
classified as "available for sale" are included in other
comprehensive income, and are attributed to income
statement on realisation.
E. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined as follows:
Raw materials (including components) - on the moving average basis.
Work in process and finished products:
Raw materials and components - on the moving average basis. Labor
and overhead components - on the basis of actual manufacturing
costs.
F. Property, plant and equipment
1. These assets are stated at cost.
2. Depreciation is computed using the straight-line method,
over the estimated useful life of the assets as estimated
by the Company.
Annual rates of depreciation are as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings 2.5%
Machinery, equipment and furniture 6%-33% (principally 10%)
Motor vehicles 15%-20% (principally 15%)
</TABLE>
Leasehold improvements are amortized by the straight-line
method over the term of the lease.
3. Major renewals and improvements are capitalized, while
repairs and maintenance are expensed as incurred.
4. Upon the sale or retirement of equipment and leasehold
improvements, the cost and related accumulated
depreciation and amortization are eliminated from the
respective accounts and the resulting gain or loss is
reflected in the consolidated statements of income.
5. In 1996, the Company adopted FAS 121, Accounting for the
Impairment of Long-lived Assets and for Long-Lived Assets
to be Disposed of. FAS 121 requires that long-lived
assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in
circumstances indicate that the carrying amount of an
asset may not be recoverable based on estimated future
cash flows expected to result from the use of the asset
and its eventual disposition. Impairment losses are
required to be recorded to reduce such asset to fair
value if such asset is not considered to be recoverable
based on estimated future cash flows.
G. Accrued warranty costs
Accrued warranty costs are calculated in respect of products sold
and work performed (for periods subsequent to performance of the
work or delivery of the products) based on the Company's prior
experience and in accordance with management's estimation.
H. Allowance for doubtful debts
The financial statements include an allowance which Management
believes reflects adequately the loss inherent in specific
receivables for which collection is in doubt. In determining the
fairness of the allowance Management based itself, inter alia, on
information at hand about debtors financial situation, the volume
of their operations, aging of the balance and evaluation of the
security received from them.
I. Software development costs
The Company capitalizes certain software development costs in
accordance with Statement of Financial Accounting Standards (SFAS)
No. 86 "Accounting for Costs of Computer software to be sold,
Leased or Otherwise Marketed". Capitalization of software
development costs begins upon the establishment of technological
feasibility as defined in the Statement and continues up to the
time the software is available for general release to customers,
at which time capitalized software costs are amortized to product
development expenses on a straight-line basis over the expected
life of the related product, generally two to three years.
Software development costs include costs which relate principally
to projects which have recently been released or are not yet
available for release to customers. Management believes that
future revenues related to these projects will be sufficient to
realise the amounts capitalized at December 31, 1999, and as such
these amounts will be recovered over the lives of the related
projects. It is possible, however, that those estimates of future
revenues could be adversely impacted if these projects are not
finally completed and released during 2000 or if market acceptance
of related technology is not as anticipated by Management. As a
result, the recoveries of these capitalized software development
costs through future revenues could be reduced materially. In such
an event, related capitalized software development costs will be
written-off in the following accounting period.
As to Management's estimates and assumptions - see Note 1A6 above.
J. Amortization of goodwill and other intangible assets
Goodwill and other intangible assets, excluding software
development costs, are included in other assets and are being
amortized over a period of 2-25 years, mainly 10 years, based on
the estimated life of the assets.
The Company continually assesses the carrying value of goodwill in
order to determine whether an impairment has occurred, taking into
accounts both historical and forecasted results of operations.
K. Company's stock held by a consolidated subsidiary
Holdings of Company shares by a consolidated subsidiary are
presented as Treasury Stock (cost to the Company).
L. Revenue recognition
1. The Company generally recognizes revenue from sales of
systems when products are shipped, economic risk of loss
has passed to the customer, collection is probable and
any future obligations of the Company regarding the
product are insignificant.
2. Revenues from sales involving long-term credit
arrangements at less than accepted interest rates are
recorded at the present value of the related future cash
flows. The difference between the amounts receivable and
their present value is to be recognized as interest
income over the period of the debt.
3. Software license revenue is generally recognized at the
time the software is delivered to the customer, if
collection is probable and the Company has no significant
obligations remaining under the sales or licensing
agreement and no significant customer acceptance
requirements exist subsequent to software delivery.
4. Service revenues from product maintenance contracts and
separately priced extended warranty contracts are
generally recognized ratable over the contract period,
while revenue from software services generally is
recognized as the services are performed or, if no
pattern of performance is evident, ratably over the
period during which they are performed.
5. The estimated sales value of performance on long-term
contracts is recognized using the percentage of
completion method, which is in accordance with statement
of position (SOP81-1). The percentage of completion is
determined as a ratio of accumulated costs incurred
(including materials, labor and overhead) to total
estimated costs of the contract.
In the event that Management anticipates a loss on a
particular contract, such anticipated loss is provided
for in full. As to Management's evaluation and
assumptions, see Note 1A6 above.
M. Research and development
Research and development costs, net of related royalty bearing
participations, are charged to income statement as incurred. As to
software development costs see I above.
N. Purchase of in process research and development costs (IPR&D)
The Company writes down to the operating costs in the income
statement, the excess of costs related to the process of research
and development of acquired companies according to FIN No. 4 of
SFAS No. 2 (see Note 19).
O. Reclassification
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year's presentation.
P. Income taxes
1. The Company accounts for income taxes under Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting
for Income taxes".
Under SFAS 109 deferred tax assets or liabilities are
recognized in respect of temporary differences between
the tax bases of assets and liabilities and their
financial reporting amounts as well as in respect of tax
losses and other deductions which may be deductible for
tax purposes in future years, based on tax rates
applicable to the periods in which such deferred taxes
will be realized. Deferred tax assets for future tax
benefits from realization are not included when their
realization is more likely than not. Valuation allowances
are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Deferred
tax assets and liabilities are presented as current or
long-term items in accordance with the nature of assets
or liabilities to which they relate, according to the
date of their realization.
Deferred taxes were not recorded in respect of the
following matters -
o Taxes which may apply upon the realization of
investments in consolidated subsidiaries and
affiliated companies, as no intention to realize
such investments exists (see 2 hereunder).
o Certain undistributed earnings of foreign
consolidated subsidiaries which are taxable upon
distribution by way of dividend, as no such
dividend distribution intention exists (for
domestic consolidated subsidiaries, see 2
hereunder).
o Differences between the rate of change in the
Israeli Consumer Price Index (which serves as a
basis for measurement for tax purposes) and the
rate of change in the NIS/US dollar exchange
rate, this in accordance with paragraph 9 (f) of
SFAS 109. The said differences are not material.
2. In accordance with paragraph 33 of SFAS 109, deferred
taxes have not been provided for the Parent Company's
temporary difference relating to earnings in both its
domestic subsidiaries and domestic "approved enterprises"
as the tax laws provide methods whereby the reported
amounts of these investments can be recovered tax-free
and the parent company expects that it will ultimately
use these methods.
- Earnings distributed by domestic subsidiaries relating to
"approved enterprises" can be transferred to the Parent
Company by way of a tax-free merger.
- Earnings distributed related to the Parent Company's
"approved enterprises" are not taxable to the Parent
Company in a liquidation as such taxes would be due from
the shareholders.
- Earnings distributed by domestic subsidiaries which are
not generated by an "approved enterprise" are not
taxable.
Income tax expense represents the tax payable for the period and
the change during the period in deferred tax assets and
liabilities.
Q. Derivative financial instruments
The Company enters into foreign currency future contracts, put and
call option contracts to reduce the impact of fluctuations of
certain currencies against the U.S. dollar resulting from existing
trade receivables or from firm commitments not denominated in U.S.
dollars and in relation with anticipated transactions. Gains or
losses resulting from qualified hedges of firm commitments are
deferred and recognized when the hedged transactions occur, while
results of transactions which do not meet all the criteria
specified in SFAS No. 52 are recorded as financial income or
expense.
R. Comprehensive income
The Company adopted SFAS No. 130, Reporting Comprehensive income.
SFAS No. 130 establishes standards for reporting and presentation
of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income
and net unrealized gains (losses) on securities and is presented
in the statements of stockholder's equity and comprehensive
income. The SFAS requires only additional disclosures in the
consolidated financial statements; it does not affect the
Company's financial position or results of operations.
S. Stock option plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25
Accounting for Stock Issued to Employees, and related
interpretations, in accounting for its fixed plan stock options.
As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock
exceeded the exercise price.
T. Segment reporting
In 1998, the Company adopted SFAS No.131, "Disclosures about
Segments of an Enterprise and Related Information". According to
Management's approach, disclosure is made using the internal
information used by Management for making operating decisions and
assessing the performance of the organization, as the source of
the Company's reportable segments (see Note 17F).
<PAGE>
Note 2 - Short-Term Investments
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
-------------- -------------
$ in thousands $ in thousands
-------------- -------------
<S> <C> <C> <C>
Marketable securities (1) 50,456 49,138
Available for sale securities (2) 40,437 -
Short-term deposits 136,726 73,541
Convertible debentures - 177,000
-------------- -------------
227,619 299,679
============== =============
</TABLE>
(1) Classified as "trading". As at December 31, 1999,
includes unrealized holding loss of $11,343 thousand
(December 31, 1998 - $1,302 thousand unrealized holding
loss).
(2) See Note 5A(3). Net unrealized holding gain in amount of
$11,171 thousand credited as a comprehensive income
directly to the statement of changes in shareholders'
equity.
Note 3 - Inventories
<TABLE>
<CAPTION>
Consist of the following:
December 31 December 31
1999 1998
-------------- -------------
$ in thousands $ in thousands
-------------- -------------
<S> <C> <C>
Raw materials and components 94,077 65,764
Work in process 46,256 53,013
Finished products 45,421 43,887
-------------- -------------
185,754 162,664
============== =============
</TABLE>
Note 4 - Long-Term Bank Deposits and Receivables, Net of Current Maturities
A. Consist of the following:
<TABLE>
<CAPTION>
Weighted
average interest
rate as of
December 31 December 31 December 31
1999 1999 1998
---------------- -------------- --------------
% $ in thousands $ in thousands
---------------- -------------- --------------
<S> <C> <C> <C>
Long-term trade receivables (1) 7.3% 84,544 40,564
Long-term pledged deposits (2) 5% 62,658 63,903
Others - 341
-------------- -------------
147,202 104,808
Less deferred interest income* 5,118 3,128
-------------- -------------
Total (3) 142,084 101,680
Less - doubtful accounts 8,150 6,400
Less - current maturities 28,366 12,622
-------------- -------------
105,568 82,658
============== =============
</TABLE>
<PAGE>
The deposits and trade receivables are denominated in U.S. dollars.
* The deferred interest income derived from the difference
between the original amount of the receivables and their
net present value computed, at the transaction date, by
the relevant interest rate.
(1) Long-term trade receivables consist mainly of
receivables, resulting from sales of the Company's
products, providing from 3 to 10 years credit commencing
on the date of signing of the sales contract or the
finance agreement related thereto. Such receivables are
interest bearing. Principal and interest are payable in
between quarterly to semi-annually payments. These
receivables are partially secured by trade risk insurance
policies.
(2) The deposits are deposited with and pledged to a
commercial bank and are mainly released simultaneously
with, and in amounts equal to, payments on account of the
loan extended by the commercial bank to a foreign
commercial bank (hereinafter "the customer bank"). The
commercial bank served the customer bank as source of
financing for the purpose of the sale transaction with
the Company.
(3) December 31, 1999 - includes two customers in the
Philippines accounting for $30 and $27 million each and
11 other customers whose indebtedness does not exceed $10
million per customer.
(4) In the opinion of the Company's management, due to the
nature of the customers and their activities, their
financial performance and, updated financial and business
data, previous business relations and existing trade
insurance as stated above, as well as provision for
doubtful debts, the Company has limited risk exposure in
relation to the long-term receivables as well as the
long-term pledged deposits.
B. Aggregate maturities are as follows:
<TABLE>
<CAPTION>
December 31
1999
--------------
$ in thousands
--------------
<S> <C>
First year (current maturities) 28,366
Second year 25,803
Third year 21,107
Fourth year 18,064
Fifth year 17,531
Thereafter 31,213
--------------
142,084
==============
</TABLE>
<PAGE>
Note 5 - Investments
<TABLE>
<CAPTION>
Consist of the following:
December 31 December 31
1999 1998
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
<S> <C> <C>
Affiliated companies (A) 3,919 3,202
Available for sale and other companies 1,063 3,711
-------------- --------------
4,982 6,913
============== ==============
A.1. Investment in affiliated companies comprises:
December 31 December 31
1999 1998
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Cost of shares 945 4,868
Accumulated losses (651) (5,807)
-------------- --------------
294 (939)
Loans 3,625 4,141
-------------- --------------
3,919 3,202
============== ==============
A.2. Goodwill
December 31 December 31
1999 1998
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Cost - 3,705
Less - Accumulated amortization - 2,103
-------------- --------------
- 1,602
============== ==============
</TABLE>
<PAGE>
A.3. Affiliated companies
On October 14, 1999, Telegate Ltd., an affiliated company and its
shareholders signed an agreement according to which its shares and
convertible notes that are held by its shareholders, including by
the Company, will be replaced by shares of another Company, shares
which are registered for trading on NASDAQ. Capital gain on amount
of $25,572 thousands was recorded according to accounting
treatment for non similar assets transactions in accordance with
APB No. 29 "Accounting for non-monetary transactions" (See Note
17L for capital gain). The investment in the shares, which
represents 3% of the acquired company, is accounted as available
for sale securities.
Note 6 - Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
Freehold Machinery Motor Office Leasehold Total
land and and vehicles furniture and improvements
buildings equipment equipment
----------- ----------- ----------- ------------- ------------- -----------
$ thousands $ thousands $ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- ------------- ------------- -----------
Cost
Balance at
beginning of
<S> <C> <C> <C> <C> <C> <C>
year 34,374 169,044 12,668 10,793 7,809 234,688
Additions from
acquired
companies* 6,497 63,532 5,933 8,766 6,868 91,596
Additions 3,996 41,145 4,044 3,100 2,090 54,375
Disposals** - (35,908) (2,037) (2,122) (855) (40,922)
Discontinued
operations
adjustment *** - (4,950) (131) (599) (114) (5,794)
Balance at end ----------- ----------- ----------- ------------- ------------- -----------
of year 44,867 232,863 20,477 19,938 15,798 333,943
----------- ----------- ----------- ------------- ------------- -----------
Accumulated
depreciation
and
amortization
Balance at
beginning of
year 3,160 87,832 3,586 6,186 3,033 103,797
Additions from
acquired
companies* 227 30,504 2,208 4,119 2,424 39,482
Additions 754 36,109 2,938 1,517 1,726 43,044
Disposals** - (28,994) (1,409) (1,637) (794) (32,834)
Discontinued
operations
adjustment*** - (3,993) (93) (403) (80) (4,569)
Balance at end ----------- ----------- ----------- ------------- ------------- -----------
of year 4,141 121,458 7,230 9,782 6,309 148,920
----------- ----------- ----------- ------------- ------------- -----------
Undepreciated
balance at
December 31,
1999 40,726 111,405 13,247 10,156 9,489 185,023
=========== =========== =========== ============= ============= ===========
Undepreciated
balance at
December 31,
1998 31,214 81,212 9,082 4,607 4,776 130,891
=========== =========== =========== ============= ============= ===========
* Including additions from acquired company. (See Note 19).
** Including discontinued operation write-off. (See Note 20).
*** See Note 1A3 and Note 20.
</TABLE>
<PAGE>
Note 7 - Software Development Costs
Capitalization and amortization of software development costs
during the years ended December 31, 1999, 1998 and 1997 is
comprised as follows:
<TABLE>
<CAPTION>
December 31 December 31 December 31
1999 1998 1997
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
<S> <C> <C> <C>
Balance at beginning of year 23,374 25,040 20,670
Capitalization of software development
costs during the year 15,444 12,905 13,962
Amortization and write-off during the year (25,259) (14,571) (9,592)
-------------- -------------- --------------
13,559 23,374 25,040
============== ============== ==============
</TABLE>
Note 8 - Other Assets
Consists of the following:
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
<S> <C> <C>
Goodwill, net* 80,010 1,286
Intangible assets related to TTL's acquisition, net* 60,462 -
Other assets** 8,671 9,979
-------------- --------------
149,143 11,265
============== ==============
* Original amount 162,841 7,373
Less - accumulated amortization 22,369 6,087
-------------- --------------
140,472 1,286
-------------- --------------
** Including deferred taxes 6,578 7,166
============== ==============
</TABLE>
<PAGE>
Note 9 - Long-Term Liabilities
A. Convertible notes
On December 30, 1996 (the "Closing Date"), the Company completed a
private placement of an aggregate amount of $100,000 thousand of
convertible subordinated notes (the "Notes") to three purchasers
who are related parties of the Company (the "Purchasers"). During
the current year $15 million was converted to ordinary shares by
one of the purchaser.
The Notes bear interest at the rate of 4.5% per year, payable
semi-annually, and mature on December 31, 2003.
The Purchasers have the right to convert the Notes into Ordinary
shares of the Company at the rate of one Ordinary Share for each
US$25 of the principal amount of the Notes subject to adjustments
as set forth in the Note Purchase Agreement (the "Agreement")
entered into by the Company and the Purchasers.
In case of certain events occurring as set forth in the Agreement,
the Company has the right to demand the conversion of the
outstanding principal amount of the Notes into Company Ordinary
Shares. In such case, each holder of the Notes has the right to
demand repayment in full of the principal amount of the Notes plus
interest accrued and unpaid thereon.
B. Other long-term liabilities
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
<S> <C>
Liability for claims(*) 6,000 -
Liability for monetary incentive plan (**) 1,691 3,343
Liability in respect of other assets - 1,000
Deferred income taxes - 816
Loans - 348
Others 79 52
-------------- --------------
7,770 5,559
* See Note 11B(2)
** See Note 12C(5)
</TABLE>
<PAGE>
Note 10 - Liability for Employee Severance Benefits, Net
A. Employees of the Company and of its consolidated
subsidiaries in Israel (Israeli companies)
Under Israeli law and labor agreements, the Israeli companies are
required to make severance and pension payments to their retired
or dismissed employees and to employees leaving employment in
certain other circumstances.
1.A. The liability in respect of most of its non-senior
employees is discharged by participating in a defined
contribution pension plan and making regular deposits
with a pension fund. The liability deposits with the
pension fund is based on the components prescribed in the
existing labor agreement. The custody and management of
the amounts so deposited are independent of the companies
and accordingly such amounts funded (included in expenses
on an accrual basis) and related liabilities are not
reflected in the balance sheet.
B. As to certain employees of TTL (see Note 19) who are
subject to a labor agreement, the provision for severance
benefits was calculated in accordance with the wage
component as defined in the employment contract.
2. In respect of the liability to other employees,
individual insurance policies are purchased and deposits
are made with recognized severance pay funds.
The liability for severance pay is calculated on the
basis of the latest salary paid to each employee
multiplied by the number of years of employment. The
liability is covered by the amounts deposited including
accumulated income thereon as well as by the unfunded
provision.
3. The liability for severance pay includes provision for the
former TTL employees which are entitled to the retirement
plan. This plan gives the employees the right for early
retirement under unconditional terms. The main right of
this plan is to retire and get, until the formal
retirement date, the same conditions as if they were
continuously working.
4. The expenses in respect of severance and pension pay for
the years ended December 31, 1999, 1998 and 1997 are $
4,477 thousand, $5,301 thousand, and $5,715 thousand
respectively.
Details of the provision and amounts funded relating to other
employees:
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
<S> <C> <C>
Provision for severance pay 71,626 13,274
Amounts funded including accumulated income 47,067 10,763
-------------- --------------
24,559 2,511
============== ==============
</TABLE>
<PAGE>
Withdrawals from the funds may be made only for the purpose of
disbursement of severance pay.
B. Employees of U.S. consolidated subsidiaries (U.S. companies)
The subsidiaries sponsor a section 401(K) defined contribution
plan or 401(A) plan which permits their employees to invest up to
certain amounts of their compensation (subject to limitation by
Internal Revenue Service Regulations) on a pretax basis in certain
self-directed investment programs. The subsidiaries may, at the
discretion of the Board of Directors, make contributions to the
plan. Company contribution with respect to this plan were $977
thousand, $743 thousand and $741 thousand in 1999, 1998 and 1997,
respectively.
C. Employees of the rest of the world
The provision for severance pay includes amounts related to
employees in countries other than Israel and the U.S. and are
calculated in accordance with their locals' rules, if any, in the
country that operates.
Note 11 - Commitments and Contingencies
A. Claims and potential claims
1. The Company is in discussions with an international
technology company ("technology company") regarding
allegations that the Company is using certain patents
owned by the technology company in its products. The
Company is unable to determine at this time with any
certainty the ultimate outcome of these allegations or
their effect, if any, on the Company's financial
position, operating results and business. However, the
Company believes it has meritorious defenses and hopes to
reach a favorable settlement with the technology company,
although there can be no assurance that it will be able
to do so.
2. The Company has been in contact with another
international technology company in which that company
has raised the possibility that the Company is utilizing
certain of that company's patents in its products. This
allegation relates to industry standards commonly used,
which, according to such company's claim, rely on such
patents. The Company cannot at this stage assess whether
there is any merit to this allegation. The Company
estimates that such allegation, even if found justified,
will not have a material adverse affect on the Company's
financial position.
3. Several claims have been submitted against the Company
and against consolidated subsidiaries, resulting from
ordinary business operations. Management of the
companies, based mainly on opinions of their legal
advisors, believe that the effect, if any, of the results
of such claims on the financial position of the Company
and the results of its operations will be insignificant
and therefore the provisions which are included in the
financial statements in respect thereof are appropriate
and sufficient.
B. TTL acquisition
1. For certain commitments including contingencies that the
Company had burden in the TTL acquisition - see Note 19.
2. In October 1997, an investigation was commenced by the
Israeli Comptroller of Restrictive Trade Practices
(hereinafter - "comptroller") regarding alleged price
fixing and non-competitive practices among TTL, Tadiran
and Telrad Telecommunications and Electronics Industries
Ltd., a subsidiary of Koor (Koor is a significant
shareholder of the company and Tadiran). Pursuant to the
Restrictive Trade Practices Law - 1988, criminal charges
may be commenced and a fine may be levied against an
entity or person which has violated the law. In addition,
violators may be liable for damages that are proven as a
result of their violation.
The Department of the Restrictive Trade Practice
authority investigators recommended filing criminal
charges against certain of the entities or persons
investigated in connection with such suspicions. The
legal department of the Authority is currently reviewing
the investigation material and the recommendation of the
investigators. This review may take months and at this
time the outcome cannot be predicted.
Tadiran has agreed to indemnify the company from damages
up to $6 million. The Company cannot estimate the
results of the investigation before the discussion of the
comptroller.
C. Lease commitments
The Company and its consolidated subsidiaries have entered into
several operating lease agreements in Israel and abroad. The
agreements expire on various dates from 2000 to 2021 (some of
which have renewal options) and are in local currencies or linked
to the dollar or to the Israeli Consumer Prince Index.
Future minimum annual rental payments which the Company and its
subsidiaries are committed to pay under the above leases, at rates
in effect at December 31, 1999, are as follows ($ in thousands).
Year ending December 31 $ in thousands
----------------------- --------------
2000 11,709
2001 10,973
2002 3,897
2003 2,822
2004 and thereafter 5,012
As to rent expense under the Company's leases, see Note 17J.
D. Royalty commitments
1. 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
participated by way of grants. The royalties are computed
at the rates of 2%-4% of the aggregated proceeds from
sale of such products, up to the amount not exceeding
100% of such grants. As at December 31, 1999 such future
commitment is approximately $19.8 million. For the R&D
projects of which the government participated by way of
grants from 1999, the Company is committed to pay
royalties which bear interest.
2. The Company is committed to pay royalties to certain
parties who participated in the development of certain
components of its products. Such royalties are based on
sales of products which incorporated the component and
are paid based either on a fixed rate or price per unit
sold or as a rate of the until sale price.
3. The Company entered during the fourth quarter of 1999
into partnership, in which it would not have controlled,
to develop certain products. The Company is committed to
pay royalties to the Partnership up to 10% of its sales
originating in Partnership developments up to twice
R&D expenses actually invested in their new value. The
Company has the exclusive rights to sell the Partnership
products and an option to buy the other partners parts in
a price that was agreed on between the partners (subject to
the exercise date of the option by the Company).
E. Financial instruments
1. Off-balance sheet contracts
The geographical distribution of the Company's operations
gives rise to exposure to market risks mainly from
changes in foreign currency exchange rates against the
dollar. Financial instruments are utilized by the Company
to reduce these risks.
The Company enters into forward exchange contracts and
purchases currency options to hedge existing non-dollar
assets and liabilities, certain firm sale and purchase
commitments, as well as anticipated sale and purchase
transactions.
As at December 31, 1999, the Company has purchased
currency futures contracts and foreign exchange options,
for various lengths of time, ending 2001 as a hedge
against sales contracts receivable, firm commitments and
anticipated transactions as follows:
Forward exchange contracts
- Obligation to sell Pounds Sterling 37,500
thousand for a total amount of $61,008 thousand.
- Obligation to sell Euro currency 25,790 thousand
for a total amount of $26,480 thousand.
- Obligation to sell Dollar Singapore 2,102
thousand for a total amount of $1,279 thousand.
In addition, the Company entered into certain put and
call options strategies for buying $74,752 thousand for
Euro currency 73,000 thousand.
The fair value and the carrying amount of the off-balance
sheet instrument are $1,342 thousand and $1,800 thousand
respectively (1998 - $2,387 thousand and $144 thousand,
respectively).
The fair value of foreign currency contracts is estimated
using quoted exchange rate futures and quoted market
prices (option).
2. Concentrations of credit risk
Financial instruments which potentially subject the
Company to significant concentrations of credit risk
consist principally of cash investments, currencies
futures contracts and trade accounts receivable.
The Company maintains cash and cash equivalents, short
and long-term investments, future contracts and certain
other financial instruments with various major financial
institutions.
These major financial institutions are located throughout
Israel, the U.S.A. and Europe, and the Company's policy is
designed to limit exposure to any one institution. The
Company performs periodic evaluations of the relative
credit standing of these financial institutions and the
value of business transacted with them.
With respect to trade accounts receivable, credit risk is
limited due to the large number and geographical
dispersion of the Company's customer base, as well as
allowance for doubtful accounts which provided. With
respect to long-term receivables (including deposits)
(see Note 4), the Company believes that there is limited
credit risk exposure since these customers are large
telecommunications providers which operate in countries
where the telecommunication market is anticipated to
grow.
3. Fair value of financial statements
In management's estimation, except for off-balance sheet
financial instruments (see E1 above) the estimated fair
value of the Company's financial instruments did not
materially differ from their respective carrying amount
as at December 31, 1999 and 1998.
Considerable judgment is required in determining the
estimates of fair value. The management used certain
estimates provided herein, that are not necessarily
indicative of amounts that could be realized in a current
market exchange.
- Cash and cash equivalents, short-term
investments, trading account assets, other
accounts receivable, trade payables, other
payables, advances from customers:
The carrying amounts approximate the fair value
because of the short maturing of those
instruments.
- Long-term receivables or debt: Book values
approximate fair value since the average
interest rate in relation to long-term
receivables or debt is not materially
different from those which are applicable
or offered at the balance sheet date.
F. Capital expenditure commitments
The Company and its consolidated subsidiaries in Israel are
incurring capital expenditures pursuant to "Approved Enterprise"
programs. At December 31, 1999, the Companies are committed to
invest approximately $38,589 thousand pursuant to these programs.
Completion of such investment programs will provide tax benefits
in the future (see Note 15A1).
G. Purchase commitments
At December 31, 1999, commitments for purchase of materials and
for acquisition of property, plant and equipment aggregated
$107,097 thousand (December 31, 1998 - $82,531 thousand).
H. Guarantees
1. At December 31, 1999, the Company has granted guarantees
to third parties in the sum of $3,131 thousand mainly as
guarantees for tenders which the Company has attained or
in which it participates.
2. The Company also maintains certain third-party guarantees
(primarily with banks) to support its performance
obligations under customer contracts. These guarantees
approximated $31,859 thousand.
Note 12 - Shareholders' Equity
A. Authorized, issued and outstanding shares
<TABLE>
<CAPTION>
Authorized
------------------------------
December 31 December 31
1999 1998
-------------- ------------
Number of shares
------------------------------
<S> <C> <C> <C>
(Each NIS 0.12 par value per share) 200,000,000 200,000,000
=========== ===========
</TABLE>
1. The Company's shares (each NIS 0.12 par value) are traded
in the United States on the over the counter market and
are listed on the NASDAQ.
2. For details of the issued, paid up share capital and
shares held by subsidiary, see Statement of Changes in
shareholders' Equity.
3. At the beginning of 1999 the Company issued 13,966,480
ordinary shares to TTL shareholder (see Note 19), and
600,000 ordinary shares in connection with the conversion
of convertible notes (see Note 9), as well as 815,102
shares upon exercise of employee options.
B. Dividends
Dividends may be paid by the Company only out of the retained
earnings. There are no restrictions on the transfer of funds to
foreign shareholders for the payment of dividends.
C. Share incentive and stock option plans
1.a ECI Plan
The Company's current Key Employee Share Incentive Plan
(the "ECI Plan") was adopted by the shareholders at the
Annual General Meeting held on August 29, 1991. The ECI
Plan will expire on December 31, 2001.
The ECI Plan provides that options may be granted to any
employee, consultant or contractor of the Company
pursuant to (a) one or more sub-plans designed to benefit
from the provisions of Section 102 of the Israeli Income
Tax Ordinance (New Version) 1961 and (b) any other share
incentive plan approved by the Board of Directors of the
Company.
Under the terms of the ECI Plan, the Company is
authorized to grant options for a total of 5,800,000
shares, subject to anti-dilution adjustment. The option
awards are personal and non-assignable and terminate
automatically upon termination of employment (except for
approved retirement or termination caused by death or
disability). Until the balance sheets date options were
given only to employees.
The exercise price per share under the option awards is
to be determined on the date of grant provided that such
price shall not be less than 80% of the fair market value
on such date.
<PAGE>
1.b Stock options under the ECI Plan are as follows:
<TABLE>
<CAPTION>
December 31 December 31 December 31
1999 1998 1997
---------------- ---------------- ----------------
Number of shares Number of shares Number of shares
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total number authorized 5,800,000 5,800,000 3,800,000
Options unexercised at beginning of year (2,387,750) (1,911,650) (1,450,050)
Exercised till beginning of year (1,466,582) (1,176,532) (621,900)
Granted (1,251,000) (872,650) (1,200,000)
Cancelled 120,000 106,500 183,768
---------------- ---------------- ----------------
Authorized for future grant at end
of year 814,668 1,945,668 711,818
================ ================ ================
Exercised during the current year * 328,900 290,050 554,632
================ ================ ================
* Average price of options exercised
during the year $ 16.89 $ 15.22 $ 16.47
================ ================ ================
Options unexercised at end of year 3,189,850 2,387,750 1,911,650
================ ================ ================
Options may be exercised as follows (1):
First year or thereafter 1,364,100 1,061,100 548,900
Second year or thereafter 1,130,750 709,900 862,250
Third year or thereafter 695,000 541,750 341,750
Fourth year or thereafter - 75,000 158,750
---------------- ---------------- ----------------
3,189,850 2,387,750 1,911,650
================ ================ ================
</TABLE>
(1) To be paid in NIS based on the rate of exchange of the dollar
on the date of payment as follows:
<TABLE>
<CAPTION>
December 31 December 31 December 31
1999 1998 1997
---------------- ---------------- ----------------
Number of shares Number of shares Number of shares
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
$ 7.60 per share 8,000 8,000 16,000
$ 7.61 per share 5,600 6,800 8,800
$14.02 per share 17,000 22,000 108,750
$14.93 per share 214,750 264,750 366,000
$15.01 per share 31,200 92,800 117,600
$15.19 per share 4,000 5,000 15,000
$17.00 per share 263,900 444,500 531,500
$18.70 per share 29,250 51,750 113,000
$20.81 per share 571,000 635,000 635,000
$21.00 per share 445,000 470,000 -
$24.25 per share 40,500 45,500 -
$26.00 per share 150,000 150,000 -
$26.38 per share 30,000 - -
$29.53 per share 1,110,000 - -
$30.00 per share 161,500 68,500 -
$31.00 per share 11,000 -
$32.00 per share 97,150 123,150 -
---------------- ---------------- ----------------
3,189,850 2,387,750 1,911,650
================ ================ ================
</TABLE>
<PAGE>
Shares covered by unexercised options have no voting
rights or rights to cash dividends.
2.a ECI U.S. Plan
At the Annual General Meeting held on August 29, 1991,
the shareholders also approved a Key Employee Incentive
stock Option Plan for the Company's wholly-owned U.S.
subsidiary, ECI Telecom Inc. (the "ECI U.S. Plan). Under
the ECI U.S. Plan, any officer, management employee or
other key employee of ECI Telecom Inc. may participate in
the ECI U.S. Plan.
Under the terms of the ECI U.S. Plan, the Company is
authorized to grant options for a total of 400,000
shares, subject to the anti-dilution adjustments. The
exercise price per share under the option awards is to be
determined on the dates of grant, provided that (1) in
the case of options which qualify as "incentive stock
options" as defined in the Code, such price shall not be
less than the fair market value on such date, and (2) in
the case of options which do not qualify as incentive
stock options, such price shall not be less than 80% of
the fair market value on such date.
2.b Stock options under the ECI U.S. Plan are as follows:
<TABLE>
<CAPTION>
December 31 December 31 December 31
1999 1998 1997
----------- ---------------- -----------
Number of shares
------------------------------------------------
<S> <C> <C> <C>
Total number authorized 400,000 400,000 200,000
Options unexercised at beginning of year (119,500) (101,500) (44,500)
Exercised till beginning of year (58,250) (44,000) (24,000)
Granted during the year (78,000) (60,000) (83,000)
Cancelled during the year 9,500 27,750 6,000
Available for future grants at end of year 153,750 222,250 54,500
Exercised during the current year * 17,500 14,250 20,000
* Average price of options exercised
during the year $ 17.24 $ 18.7 $ 16.14
Options unexercised at end of year 170,500 119,500 101,500
Options may be exercised as follows (1):
First year or thereafter 75,500 70,000 17,750
Second year or thereafter 60,000 29,250 52,750
Third year or thereafter 35,000 20,250 31,000
170,500 119,500 101,500
(1) To be paid as follows:
December 31 December 31 December 31
1999 1998 1997
----------- ---------------- -----------
Number of shares
------------------------------------------------
$17.00 per share 56,000 74,000 77,000
$18.70 per share 2,500 5,000 24,500
$23.88 per share 6,000 - -
$26.37 per share 7,000 - -
$27.96 per share 2,000 - -
$28.12 per share 15,000 - -
$29.12 per share 17,000 - -
$31.00 per share 30,000 - -
$32.00 per share 34,000 40,500 -
$32.94 per share 1,000 - -
------------ ---------------- -----------
170,500 119,500 101,500
============ ================ ===========
</TABLE>
3.a TTL Plan
As a result of the Merger with TTL, the Company has
options outstanding which were granted before the Merger
under plans established by TTL as follows:
During 1996, TTL implemented the Tadiran
Telecommunications Ltd. 1996 Equity Incentive Plan ("the
1996 Plan") and granted options to certain employees of
TTL thereunder. In addition, during 1997, TTL adopted a
second employee option plan similar to the 1996 Plan
("the 1997 Plan") and granted options to certain
employees of TTL thereunder.
Both plans ("the TTL Plan") provide that from the time an
optionee is entitled to exercise the options, he or she
shall have the right to exercise all or part of the
options under the expiration of the fifth anniversary of
the date on which the option was granted ("the Grant
Date"). All of the options expire on the fifth
anniversary of their respective Grant Dates.
Pursuant to the Agreement and Plan of Merger among the
Company and TTL options granted pursuant to the 1996 and
1997 Plans were converted into fully vested options to
purchase ordinary shares of the Company. The exchange
ratio for the options was the same as that for shares of
TTL held before the Merger; that is, immediately
following the Merger, optionees under the TTL Plans would
receive 0.55866 ordinary shares of ECI for each ordinary
share of TTL they would have received on exercise of
their options. As a result of the Merger, optionees under
the TTL Plans hold options for the purchase of 691,779
shares of the Company.
Before the closing of the Merger, optionees were given
the opportunity to participate in an arrangement called
an "Exchange Program". Optionees choosing to participate
in the Exchange Program exercised their options and were
given the option ("the Put Option") to sell those shares
to a trustee (the same trustee with which the options
were deposited in accordance with the terms of the Plans)
at a price of $39.35 per share ("the Put Price"). The Put
Option is exercisable during the three-month period
beginning March 16, 2000. In order to pay the Put Price,
the trustee is to sell the related shares to the Company
at the market price on the Nasdaq, but no less than
$32.90. To the extent that the net proceeds from such
sale are equal to or less than $38.35, Tadiran has agreed
to pay the trustee up to a maximum of $5.45 per share and
the Company has agreed to pay up to $1 per share.
In accordance with the terms of the Merger Agreement, any
shares of the Company acquired as a result of exercising
options received under the TTL Plans (whether or not
acquired pursuant to the Exchange Program), the proceeds
from the sale of such shares and the options themselves
may not be released to any optionee until March 16, 2000.
No additional options are authorized to be granted under
the TTL Plans.
C. Share incentive and stock option plans (cont'd)
3.b Stock Option under the TTL Plan are as follows:
<TABLE>
<CAPTION>
December 31
1999
------------
Number of
shares
------------
<S> <C>
Total number authorized and granted 691,779
Options exercised (under the exchange program) (468,702)
------------
Options outstanding and exercisable at end of year 223,077
============
Price range of options outstanding at end of year $23.16-36.47
============
Average price of options exercised during year $ 26.70
============
</TABLE>
4.a Fair value method
The difference between the quoted market price of the
shares on the date of the grant of the options and the
exercise price of such options is charged to income over
the expected vesting period, generally over a period of 3
years, in accordance with the methods prescribed by APB
25 "Accounting for stocks Issued to Employees".
4.b In October 1995 the Financial Accounting Standards
Board (FASB) issued FAS 123 "Accounting for Stock-based
Compensation" which establishes financial accounting and
reporting standards for stock-based compensation plans.
The statement defines a fair value based method of
accounting for an employee stock option.
In 1997 the Company adopted the disclosure provisions of
FAS 123 but opted to remain under the expense recognition
provision of "Accounting for Stock Issued to Employees",
as described in 4.a above.
As required by SFAS 123, the Company has determined the
weighted average fair value of stock-based arrangements
grants during 1999 to be $9.03. The fair values of stock
based compensation awards granted were estimated using
the "Black - Scholes" option pricing model with the
following assumptions.
Option Expected Risk free
Year of grant term volatility interest rate
------------- ---------- ---------- --------------
1999 5 58.3 6.00%
1998 5 52.5 5.25%
1997 5 47.0 6.00%
C. Share incentive and stock option plans (cont'd)
4.b (cont'd)
Had the compensation expenses for stock options granted
under the Company's stock option plans been determined
based on fair value at the grant dates consistent with
the method of FAS 123, the Company's net income and
earnings per share would have reduced to the pro forma
amount below:
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Net income ($ in thousands)
As reported 165,521 156,162 132,440
Pro forma 154,012 150,585 129,640
Basic earnings per share ($)
As reported 1.82 2.03 1.73
Pro forma 1.69 1.96 1.69
Diluted earnings per share ($)
As reported 1.77 1.97 1.70
Pro forma 1.65 1.90 1.67
The above pro forma amounts relate only to options
granted since the beginning of 1995.
</TABLE>
5. Other plans
During 1998 and 1997 the Board of Directors approved a
general monetary incentive plan, according to which
certain company employees, to be determined by
Management, will receive a certain number of incentive
units (Phantom shares).
Under this plan the holder of an incentive unit will be
entitled to a cash bonus, equal to the difference between
a base price of the Company shares and the market price
of the shares on the date of exercise.
Each such portion will be exercisable in three equal
parts, at the end of two, three and four years
respectively from date of grant of the relevant units.
As of December 31, 1999, a total of 1,096,350 incentive
units were held by employees. The cost of the incentive
unit plan is recognized by the Company over the period of
the plan.
A provision of $1,533 thousands related to short-term
grants and $1,691 thousand related to long-term (in 1998
$1,494 thousand and $3,309 thousand respectively).
<PAGE>
<TABLE>
<CAPTION>
Note 13 - Balances in Currencies Other Than the Dollar
December 31, 1999 December 31, 1998
--------------------------------------------------------------------- ------------------------------------
Israeli currency Foreign currency Israeli currency Foreign currency
------------------- -------------------------- -------------------- ---------------------------------
Linked(*) unlinked EURO Pounds Others Linked(*) Unlinked Deutsche Pounds Others
Sterling marks Sterling
-------- --------- -------- -------- ------ -------- -------- -------- -------- ------
$ in thousands
----------------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Trade receivables 8,721 22,004 24,895 21,468 11,826 - 5,910 14,652 21,471 9,995
Other current
assets 24,617 17,042 14,210 2,603 1,986 9,695 16,294 6,448 8,935 3,653
-------- --------- -------- -------- -------- -------- -------- -------- -------- ------
33,338 39,046 39,105 24,071 13,812 9,695 22,204 21,100 30,406 13,648
======== ========= ======== ======== ======== ======== ======== ======== ======== ======
Liabilities
Trade payables 709 66,679 646 782 2,836 - 30,444 1,634 651 4,343
Other current
liabilities - 56,859 1,982 5,222 7,556 8 33,704 2,896 7,571 6,808
Long-term
liabilities
(including current
maturities) 22,839 - - - - 522 2,413 98 - -
-------- --------- -------- -------- -------- -------- -------- -------- -------- ------
23,548 123,538 2,628 6,004 10,392 530 66,561 4,628 8,222 11,151
======== ========= ======== ======== ======== ======== ======== ======== ======== ======
* Linked to the Israeli CPI.
</TABLE>
<PAGE>
Note 14 - Charges (Assets Pledged)
Some of the Company's existing and future indebtedness to the
certain Israeli banks are secured by Negative Pledges for
unlimited amounts on all of the Company's assets. In accordance
with the terms of the Negative Pledges, the Company is committed
to maintain certain financial convenants with respect to
shareholders' equity, the ratio of shareholders' equity to total
assets, current ratio and operating income as a percentage of
sales. As of December 31, 1999, the Company was in compliance with
all such convenants.
As to deposit pledged - see Note 4A.
As to restricted short-term investments - see Note 17B.
Note 15 - Taxes on Income
A. Tax programs under various Israeli tax laws:
1. A. Tax benefits under the Law for the Encouragement of
Capital Investments, 1959.
Pursuant to the above Law the Company and its Israeli
subsidiaries are entitled to tax benefits relating to
investments in "Approved Enterprises" in accordance
with letters of approval received.
A major part of the production facilities of the
Company and its Israeli subsidiaries has been granted
the status of an "Approved Enterprise" under the above
Law. According to the Law, the Company is entitled to
a tax benefit, which grants her a reduced tax rate of
20% for a specific period (Alternative A). The
Company's "Approved Enterprise" is subject to zero tax
rates under the "Alternative Benefit Method" and
reduced tax rates (currently - 20%) based on the level
of foreign ownership, for specified periods
(alternative B). All of the approved enterprise which
currently entitles the Company to benefits is under
alternative B.
The period of benefits in respect of most of the
Company's production facilities will terminate in the
years 2000-2010. The Company's current investments in
development facilities are made under new approvals.
In 1999, approximately 70% of the cost of production
facilities of the Company represented approved
enterprise facilities (1998 - 62%).
In the event of distribution of cash dividends from
income taxed at zero rate, a reduced tax rate in
respect of the amount distributed would have to be
paid. As of December 31, 1999, a distribution of all
accumulated profits in excess of approximately 139
million from retained earnings as a cash dividend
would result in an additional tax expense which would
approximate 99 million as the tax rate which applies
to such distribution would be 20%. Effectively such
dividend distribution would be reduced by the amount
of the tax. The benefits are related to the "approved
Enterprise" according to the turnover growth from plan
to plan.
In 1999 the tax authority published instructions that
allowed R&D companies under some conditions to reduce
the base turnover (which entitled to 36% tax rate) by
10% for each year beginning 1996 till year 2001. Those
instructions are reducing the effective tax rate due
to reduced turnover under full tax rate.
B. According to the income tax ordinance in Israel, TTL
ceased to be an independent taxpayer, all its
activities are done with the framework of the Company.
The income tax rate applicable to TTL facilities
attributed income to the company is in the final stage
of discussion with the Israeli tax authorities'
opinion. In the financial statements, the income tax
rate is based on the Company's suggestion as submitted
to the tax authorities and represents management's
estimate of the effective tax rate will be agreed on with
the tax authorities.
2. Measurement of results for tax purposes under the Income Tax
Law (Inflationary Adjustments), 1985.
Under this law, operating 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 Investors' Company", as defined by the Law for
the Encouragement of Capital Investments, 1959. The Company
and its Israeli subsidiaries elected to measure their
operating results on the basis of the changes in the Israeli
CPI. As a result the Company and its subsidiaries are
entitled to deduct from their taxable income an "equity
preservation deduction" (which partially compensates for the
decrease in the value of shareholders' equity resulting from
the annual rise in the Israel CPI).
A. Tax programs under various Israeli tax laws: (cont'd)
3. Tax benefits under the Law for the Encouragement of Industry
(Taxation), 1969.
The Company is an "Industrial Company" as defined by this
Law, and as such is entitled, among other benefits, to claim
accelerated depreciation of machinery and equipment as
prescribed by regulations issued under the inflationary
adjustments tax law.
4. Tax rates applicable to income from other sources in Israel.
Income not eligible for "Approved Enterprise" benefits as
mentioned above is taxed at the ordinary tax rate of 36%.
B. Non-Israeli subsidiaries
Non Israeli subsidiaries are taxed based upon tax laws in their
countries of residence.
C. Taxes on income from continuing operations
Taxes on income included in the consolidated statement of income
comprise the following:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
-------------- ------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
<S> <C> <C> <C>
Current taxes relating to-
The Company and its Israeli subsidiaries 4,576 2,945 2,660
Foreign subsidiaries 2,190 12,308 5,808
--------- --------- --------
6,766 15,253 8,468
--------- --------- --------
Deferred taxes relating to -
The Company and its Israeli subsidiaries 422 (612) 83
Foreign subsidiaries (79) (1,786) (997)
--------- --------- -------
343 (2,398) (914)
--------- --------- -------
7,109 12,855 7,554
========= ========= =======
</TABLE>
D. Income from continuing operations before income tax
provision
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------
1999 1998 1997
--------------- -------------- ---------------
$ in thousands $ in thousands $ in thousands
--------------- -------------- ---------------
<S> <C> <C> <C>
The Company and its Israeli subsidiaries 178,728 169,455 141,075
Foreign subsidiaries (2,373) 25,957 12,365
---------- --------- ---------
176,355 195,412 153,440
========== ========= ==========
</TABLE>
E. Reconciliation of the statutory tax expense to actual tax
expense
A reconciliation of the statutory tax expense, assuming all income
is taxed at the statutory rate (see A4 above) applicable to the
income of companies in Israel, and the actual tax expense is as
follows:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
<S> <C> <C> <C>
Income from continuing operations
as reported in the consolidated statements
of income 176,355 195,412 153,440
========== ========= ========
Theoretical tax on the above amount (36%) 63,488 70,348 55,238
Tax effect of non-Israeli subsidiaries 2,752 6,213 7,377
Tax benefit arising from the "Approved
Enterprise" (60,288) (90,907) (60,120)
Increase in taxes resulting from permanent
differences, (mainly goodwill) net 4,386 531 522
Adjustments arising from differences in the
basis of measurement for tax purposes and
for financial reporting purposes and other* (3,229) 26,670 4,537
--------- ---------- --------
Taxes on income for the reported year 7,109 12,855 7,554
========= ========== ========
* Resulting 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 A2 above)
and the exchange rate of Israeli currency relative to the
dollar.
</TABLE>
F. Components of deferred income tax
(1) At December 31, 1999 and December 31, 1998, deferred income
tax consists of future tax assets (liabilities) attributable
to the following:
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
-------------- -------------
$ in thousands $ in thousands
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards 3,626 4,215
Capital loss carrryforward 46,800 2,160
Operating loss carryforward 18,033 9,497
Vacation pay accruals and severance pay fund 4,393 2,277
Depreciation 2,923 2,068
Inventory obsolescence 5,187 2,312
Eliminated inter company profits* 1,628 1,813
Loss on disposition of discontinued operations 11,296 -
Other 4,115 1,636
-------- --------
Gross total deferred tax assets 98,001 25,978
Valuation allowance for deferred tax assets** (78,249) (10,513)
-------- --------
Net deferred tax assets 19,752 15,465
-------- --------
Deferred tax liabilities:
Software development costs (6,138) (3,965)
Depreciation - (1,266)
Amortization of intangibles (955) (1,018)
Other - (79)
--------- ---------
Net deferred tax liabilities (7,093) (6,328)
--------- --------
Deferred income tax, net*** 12,659 9,137
========= ========
* This deferred taxes relates to intercompany
transactions that have no impact on the consolidated
income statement.
** The valuation allowance is in respect of capital loss
carryforward, depreciation related to foreign property
and miscellaneous tax credits. Management believes
that it is more likely than not that a portion of the
deferred tax asset will not be realized and the net
deferred tax will be realized.
*** Including changes from acquired companies and
classification of balances related to discontinued
operations in the amount of $3,179 thousands.
</TABLE>
(2) At December 31, 1999, the Company had, for tax purposes,
federal net operating loss carryforward, capital loss
carryforward, general business and minimum alternative
carryforwards of $50,550 thousand, $130,075 thousand, $2,740
thousands and $886 thousand, respectively. The capital loss
carryforwards expire in 2006 . The general business and
other credit carryforwards expire over the period 2000
through 2009. The federal net operating loss carryforward
expires over 15 years beginning in 2011 and the alternative
minimum tax carryforward remains available indefinitely.
G. Tax assessment
Final tax assessments have been received by some of the Israeli
companies through the 1992 tax year.
Note 16 - Related Party transactions
Related parties are comprised of principal shareholders (10% and
up of the Company's share capital) and their subsidiaries and
affiliates as well as affiliates of the Company. Transactions with
related parties are mainly as follows:
a. Sales of certain of the Company's products and expenses
related to such sales.
b. Interest payable on convertible capital notes and other
credits.
c. Buildings and rentals.
All transactions with related companies were in the ordinary
course of business and at terms identical to those applied to
transactions with other customers or suppliers.
A. Balance due to or from related parties:
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
-------------- -------------
$ in thousands $ in thousands
-------------- --------------
Assets:
<S> <C> <C>
Trade receivables 9,700 9,495
Other receivables 2,760 2,254
Convertible debentures - 177,000
Loans to affiliates (Note 5) 3,625 4,141
Liabilities:
Trade payables 47 686
Other payables 2,173 741
Long-term loan, including current maturities - 522
Convertible note 85,000 100,000
</TABLE>
B. Income from, and expenses to, related parties:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
<S> <C> <C> <C>
Sales 16,950 22,957 7,048
Cost of sales 14,311 11,331 516
Selling and marketing expenses 2,912 2,755 2,280
General and administrative expenses 141 40 522
Financial expenses 3,938 4,677 5,670
Financial income 412 251 144
C. Purchase of equipment 35 16 125
</TABLE>
D. The Company has arm's-length banking relationships with a
number of Israeli Banks, one of which is a substantial
shareholder of a significant shareholder. The amounts stated
above do not include transactions with this bank.
Note 17 - Supplementary Financial Statement Information
Balance sheet:
A. Cash and cash equivalents
1. Including deposits of $203,325 thousand at December 31, 1999
(December 31, 1998 - $104,958 thousand).
2. As to concentration of risk - see Note 11E2.
B. Short-term investments
Including restricted balances of $5,441 thousand at December 31,
1999 (December 31, 1998 - $4,079 thousand).
C. Trade receivables
1. Net of provision for doubtful accounts of $11,861 thousand
at December 31, 1999 (December 31, 1998 - $5,772 thousand).
2. Substantially all of the Company's sales are to large
telecommunications service providers around the world.
Historically, the Company's uncollectable accounts
receivable have not been significant, and typically the
Company does not require collateral for its receivables.
D. Short-term credits and current maturities of long-term debt
Consist of the following:
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
-------------- ---------------
$ in thousands $ in thousands
-------------- ---------------
<S> <C> <C>
In U.S. dollars* 137 120,000
In Chinese Yuan - 966
In Israeli currency - non-linked - -
Current maturities of long-term debt - 174
-------------- --------------
137 121,140
============== ==============
* At December 30, 1998, the Company took a bank loan for
financing the investment in convertible debentures of TTL.
</TABLE>
E. Other payables and accrued liabilities
Consist of the following:
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
<S> <C> <C>
Employees and social benefits 56,535 41,242
Chief Scientist 13,071 1,541
Deferred revenue - 6,893
Tax authorities 17,845 5,770
Commissions payable 34,131 22,691
Advances from customers 1,855 2,655
Proposed dividend 4,505 3,848
Warranty accrual 9,186 3,136
Provisions related to TTL's acquisition (see Note 19) 9,312 -
Other payables and accrued liabilities 28,869 10,625
--------- --------
175,309 98,401
========= ========
</TABLE>
F. Disclosures about segments and related information
1. The Company manages its business in one operating segment.
2. Information on income by products and services
ECI's products provide integrated network solutions. ECI
designs, develops, manufactures and markets products which
provide capacity expansion and operational flexibility for
transmission systems in new and existing communication
networks.
The Company is accustomed to distinguishing three types of
products:
Infrastructure products -
These include those products designed to increase
transmission capacity of satellite communications, fiber
optic cable, microwave and other communications. Similarly,
these products allow connectivity and various management
functions through digital communication, mainly through
fiber optic communication installations.
Access products -
These include those products which provide for cheap and
effective subscriber connection to national telephone grids
and transfer of a greater capacity of voice, data
transmission and ISDN communications on existing networks
and also the erection of new local communication networks in
areas where there is no cheap or easily available existing
infrastructure, using copper cable, fiber optics or radio.
Multimedia products -
These include switching equipment, wide inter-network access
and transmission (wan) and the provision of integrated
solutions for wide area communication networks, their
installation and management. Similarly, this segment
includes products used for transferring video of a high
quality using public network dialing and others.
Sales by the types of products (in US$ thousands):
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
<S> <C> <C> <C>
Infrastructure 666,030 559,645 397,815
Access 442,045 184,214 184,144
Multimedia 6,520 511 940
---------- --------- --------
1,114,595 744,370 582,899
========== ========= =========
</TABLE>
3. Information on sales by geographic distribution (in US$
thousands)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
North America 237,500 168,600 176,300
Europe 490,800 369,500 254,799
Africa, Asia Pacific and Australia 221,195 157,000 104,700
Others 165,100 49,270 47,100
--------- ------- --------
1,114,595 744,370 582,899
========= ======== ========
</TABLE>
<PAGE>
G. Cost of revenues
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------------
1999 1998 1997
$ in thousands $ in thousands $ in thousands
-------------- -------------- ---------------
<S> <C> <C> <C>
Materials and components consumed 367,345 278,203 183,506
Salaries, wages and employed benefits 97,089 50,461 47,915
Depreciation and amortization 28,891 10,713 8,214
Other manufacturing and other service costs 22,589 12,952 7,947
-------- -------- -------
515,914 352,329 247,582
Decrease (increase) in inventories of work in
process and finished products 3,821 (35,738) 25,561
---------- ---------- --------
519,735 316,591 273,143
========== ========== ========
</TABLE>
H. Research and Development costs, net
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
<S> <C> <C> <C>
Expenses incurred 155,494 101,665 71,616
Less - grant participations (see Note 11D) 30,347 23,018 20,290
--------- -------- --------
125,147 78,647 51,326
========= ======== ========
</TABLE>
I. Selling and marketing expenses
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
<S> <C> <C> <C>
Salaries and employee benefits 63,603 46,309 27,545
Agents' commissions 34,348 10,289 12,619
Royalties to Chief Scientist and others 20,437 14,856 9,696
Advertising and exhibitions 6,041 3,076 2,503
Foreign travel 16,166 6,273 5,928
Marketing, selling and other expenses 39,818 26,786 21,088
-------- -------- --------
180,413 107,589 79,379
======== ======== =======
</TABLE>
<PAGE>
J. General and administrative expenses
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------------
1999 1998 1997
$ in thousands $ in thousands $ in thousands
-------------- -------------- ---------------
<S> <C> <C> <C>
Salaries and employee benefits 39,641 19,096 15,093
Rent and maintenance of premises 1,557 5,310 4,198
Other administrative and general expenses 22,824 14,344 8,949
-------- ------- -------
64,022 38,750 28,240
======== ======== =======
</TABLE>
K. Financial income, net
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
$ in thousands $ in thousands $ in thousands
-------------- -------------- ---------------
Financial expenses:
<S> <C> <C> <C>
On long-term debt 4,539 4,568 4,575
Interest and bank charges 2,419 1,473 3,016
Exchange rate differences (see Note 1A5) 2,664 1,966 -
------- -------- --------
9,622 8,007 7,591
======= ======== ========
Financial income:
Interest mainly on bank deposits and other
receivables 17,167 14,516 12,376
Exchange rate differences (see Note 1A5) 7,032 202 59
Gain on sale and revaluation of marketable
securities 4,176 1,824 692
-------- ------- ---------
28,375 16,542 13,127
======== ======= =========
</TABLE>
<PAGE>
L. Capital gain and other income, net
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
<S> <C> <C> <C>
Gain from issuance of shares by subsidiary (1) 29,734 - -
Gain from realization of an affiliated
company (2) 25,572 - -
Gain (loss) from sale of property and
equipment, net (3) (2,923) 27 341
Other income (expenses), net (4) (1,491) (80) (2,708)
-------- ------ --------
Total other income (expenses), net 50,892 (53) (2,367)
======== ====== =========
</TABLE>
(1) In October 1999, ECtel Ltd., a wholly owned subsidiary,
which mainly provides solutions for fraud detection, quality
monitoring of networks and interconnect billing, completed
an initial public offering in NASDAQ U.S. stock exchange, in
which it raised a net sum of $43.2 million. As a result of
the initial public offering, holdings in ECtel declined to
75%.
(2) See Note 5A3.
(3) In December 1999, agreement was signed with SCI Systems Inc.
(hereinafter - "SCI") to purchase TTL's Manufacturing Plant
(named "Shemer"). SCI is one of the world's largest
providers of electronics manufacturing services. The Shemer
facility produces printed circuit board assemblies and other
products for the Company and provided related services. The
agreements also include a multi-year supply agreement in
which the Company will subcontract part of its manufacturing
activities to SCI according to cost plus method.
(4) Include expenses amounting to $651 thousand, deriving from
selling certain trade account receivables, to an
unaffiliated financial institute ("the Purchaser"). The
Company will not be liable for any recourse, nevertheless,
it will continue to service, administer and collect the
receivables on behalf of the purchaser. In 1999, the impact
of the above transaction reduced trade receivables in the
consolidated balance sheets and increased cash flows from
operating activities in the consolidated statement of cash
flows by $44,612 thousand.
<PAGE>
M. Supplementary income statement information
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
1999 1998 1997
$ in thousands $ in thousands $ in thousands
-------------- -------------- ---------------
Expenses:
<S> <C> <C> <C>
Maintenance and repairs 12,951 8,338 8,064
Depreciation of property, plant and equipment 42,988 25,418 21,275
Taxes (other than income taxes) 2,747 3,003 2,125
Rent 12,542 8,685 8,220
Advertising costs 6,144 4,968 3,192
Royalties 20,625 15,045 10,038
</TABLE>
N. Earnings per share ("EPS")
Under SFAS No. 128 "Earnings per share" and "basic earnings per
share", is calculated based upon the weighted average number of
common shares actually outstanding, and "diluted earnings per
share" is calculated based upon the weighted average number of
common shares, common equivalent shares, and other convertible
securities outstanding.
Following are the details of the basic and diluted EPS:
1. EPS for continuing operations
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------- ----------------------------- ---------------------------
Income Number Per Income Number Per Income Number Per
from of share from of share from of share
continuing shares amount continuing shares amount continuing shares amount
operations operations operations
---------- ---------- ------ --------- ---------- ------- --------- --------- -------
$ in in $ in in in in
thousands thousands $ thousands thousands $ thousands thousands $
---------- ---------- ------ --------- ---------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS 165,521 91,148 1.82 173,812 76,787 2.26 143,712 76,375 1.88
==== ==== ====
Effect of dilutive securities:
Employee stock options 893 - 776 - 415
Convertible notes 3,822 3,466 4,500 4,000 4,500 4,000
--------- ------- ------- ------ -------- ------
Diluted EPS 169,343 95,507 1.77 178,312 81,563 2.19 148,212 80,790 1.84
========= ======= ==== ======= ====== ==== ======== ====== ====
</TABLE>
2. EPS for discontinued operations
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ------------------------------ -------------------------------
Loss from Number Per Loss from Number of Per Loss from Number of Per
discontinued of share discontinued shares share discontinued shares share
operations shares amount operations amount operations amount
---------- -------- ------ ------------ --------- ------ ------------ --------- ------
$ in in $ in in $ in in
thousands thousands $ thousands thousands $ thousands thousands $
----------- --------- ------ ----------- --------- ------ ------------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS (63,002) 91,148 (0.70) (17,650) 76,787 (0.23) (11,272) 76,375 (0.15)
====== ====== ======
Effect of dilutive securities:
Employee stock options 893 - 776 - 415
Convertible notes - 3,466 - 4,000 - 4,000
--------- ------- -------- ------- ------- -------
Diluted EPS (63,002) 95,507 (0.66) (17,650) 81,563 (0.22) (11,272) 80,790 (0.14)
========= ======= ====== ======== ======= ======= ======== ======== ======
</TABLE>
<PAGE>
3. EPS for Net income
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------- --------------------------------- ---------------------------
Net Number of Per share Net Number of Per share Net Number of Per
income shares amount income shares amount income shares share
--------- --------- --------- --------- --------- -------- --------- --------- ------
$ in in $ in in $ in in amount
thousands thousands $ thousands thousands $ thousands thousands $
--------- --------- --------- --------- --------- -------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS 102,519 91,148 1.12 156,162 76,787 2.03 132,440 76,375 1.73
==== ==== ====
Effect of dilutive
securities:
Employee stock options 893 - 776 - 415
Convertible notes 3,822 3,466 4,500 4,000 4,500 4,000
-------- ------- ------- ------ ------- -----
Diluted EPS 106,341 95,507 1.11 160,662 81,563 1.97 136,940 80,790 1.70
======== ======= ==== ======= ====== ==== ======= ====== ====
</TABLE>
Note 18 - Recently Relevant Enacted Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which will require
that all derivative financial instruments be recognized as either
assets or liabilities in the balance sheet. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of SFAS No.
133", which deferred the implementation of SFAS No. 133. SFAS No.
133 will be effective for the Company's first quarter of fiscal
2001. The Company is evaluating the effects of the new statement
and how to implement the new requirements. The Company has not yet
evaluated the impact of SFAS No 133.
<PAGE>
Note 19 - Acquisitions
A. The acquired companies
Tadiran Telecommunications Ltd. (hereinafter "TTL")
Effective the first quarter of 1999, ECI completed the merger with
TTL (hereinafter "merger"), a subsidiary of Tadiran Ltd.
(hereinafter "Tadiran"). TTL specialized in a variety of
telecommunications fields, including: transport and access
systems, wireless local loop, data communications, multiplexing
equipment and business telecommunications systems. TTL provided
innovative solutions to telecommunications operators and other
businesses throughout the world.
During the first quarter of 1999 the Board of Directors, the
shareholders, and the authorities in Israel, confirmed the merger.
The merger is accounted for under the "purchase" method of
accounting. Consequently, the assets and liabilities of TTL were
recorded on ECI's books at their fair market values.
The purchase price for the TTL acquisition is $403.8 million. The
purchase price is calculated based on the market price of the ECI
Ordinary Shares at the time that the merger conditions including
the Exchange Ratio were agreed upon in principle and publicly
announced, according to EITF No. 95-19.
The total excess of cost is $ 229.9 million, which was allocated
as follows:
$ in thousands
--------------
In process research and development 87,327
Goodwill and Intangible asset 142,583
--------
229,910
========
* The IPR&D considered according to the specific requirements
of SFAS No. 2. Critical elements of SFAS No. 2 Valuation of
IPR&D are that the product has not yet demonstrated
technological feasibility and that it does not have an
alternative future use.
A. The acquired companies (cont'd)
The consideration of the IPR&D was modified by income approach
according to the guidance provided by SEC using specific factors
as follows:
o analysis of the stage of completion of each project,
o exclusion of value related to R & D yet-to-be completed as
part of ongoing IPR&D project, and
o the contribution of existing products/technologies.
In the merger agreement, the Company indemnify and hold harmless
Tadiran from and against all losses and damages incurred by
Tadiran arising out of (i) taxes imposed on ECI or certain of its
subsidiaries which are not fully provided for in ECI's
consolidated financial statements and (ii) any inaccuracy in the
representations and warranties made by ECI pursuant to the Merger
Agreement with respect to intangible assets and litigation. ECI's
indemnification obligations are subject to deductibles of between
$5 million and $22.5 million.
Solely for purposes of indemnification by Tadiran, the
representations and warranties made by TTL with respect to
intangible assets, litigations and related party transactions and
the representation and warranty made by Tadiran regarding related
party transactions shall survive for 12 months following the
Closing Date. Solely for purposes of ECI's indemnification of
Tadiran, the representations and warranties made by ECI with
respect to intangible assets and litigation shall survive for 12
months following the Closing Date. Tadiran's indemnification
obligations for any matter or allegation being reviewed by the
Israeli Comptroller of Restrictive Trade Practices (see Note 11B2)
shall survive the Closing Date by seven years, extended by any
period that such matters continue to be under active investigation
or review after the Closing Date.
B. Unaudited - Pro forma Summary
The following unaudited pro forma summary presents the Company's
consolidated results of operations as if the acquisitions occurred
at the beginning of the respective periods, after giving effect to
certain adjustments including amortization of goodwill and other
intangibles acquired, business disposed of or to be disposed of,
reclassification and related income tax effects. These pro forma
results are not necessarily indicative of those that would have
occurred had the merger taken place at the beginning of the
respective periods.
Year ended
December 31
1998
-------------
$ in millions (except per share amounts) (Unaudited)
-------------
Revenues 1,041
Net income applicable to common stockholders 180
Net income applicable to common
stockholders - per share:
Basic 1.98
Diluted 1.93
C. Restructuring cost
Following the merger with TTL an analysis was performed of ECI's
product lines to determine where products which were duplicative
with products which were offered by TTL existed. Based on this
analysis and a comparison of functionality and features of the
respective products, the company recorded a charge of $14,947
thousand regarding to assets and liabilities of ECI, as follows:
Year ended
December 31
1999
----------------
($ in thousands)
----------------
Inventory write-down 3,518
Equipment write-down 2,352
Capitalized software write-down 2,414
Severance pay 5,950
Others 713
------
14,947
======
Note 20 - Discontinued Operations
Before the approval of the financial statements for the year ended
December 31, 1999 the Management, after receiving the approval of
the Board of Directors, had completed a formal plan for disposal
certain segments, as defined at APB opinion No. 30, by method of
sale or abandonment.
The activities whose operations it was decided to discontinue
were:
1. DNI (Data Networking/Internet) which operates in the field
of developing and marketing software and certain hardware
for data networking/internet, by way of abandonment until
the last quarter of 2000. Therefore, a provision of $36
million was recorded for anticipated losses from abandoning
this operation, from which, in Management's estimation, no
significant proceeds will be had.
2. TNN, Taditel and Tactel - three subsidiaries of TTL which
merged with the Company at beginning of 1999. The
subsidiaries are in the field of marketing equipment of
Newbridge in Israel (TNN) and in the development,
manufacturing and marketing of components to the Automotor
Industries (Tactel and Taditel). The disposal of the
subsidiaries intent to be by way of sales of their
shares/activities to a non related parties.
Summarized data for the discontinued operations is as follows:
A. Results of operations
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1999 1998 1997
-------- ------- -------
(In thousands, except per share amounts)
---------------------------------------------
<S> <C> <C> <C>
Net sales 67,753 61,834 94,842
------- -------- -------
Loss from discontinued operations before taxes
on income 24,622 19,210 11,920
Taxes on income (loss) 614 (1,560) (648)
------ -------- -------
Loss from discontinued operations after taxes on
income 25,236 17,650 11,272
Company's equity in results of investee
companies, net 357 - -
------ ------- -------
Loss from discontinued operations (net of
income tax) 25,593 17,650 11,272
------ ------- -------
Loss from disposal of discontinued operations
(net of income taxes) 37,409 - -
------ ------- -------
63,002 17,650 11,272
====== ======== =======
Loss per Common Share
Basic (0.70) (0.23) (0.15)
====== ====== ======
Diluted (0.66) (0.22) (0.14)
====== ====== ======
</TABLE>
B. Net assets and liabilities of discontinued operations,
consist:
December 31,
1999
-------------
(In thousands)
-------------
Current assets 16,934
Investments in subsidiaries 4,915
Property, plant and equipment, net 1,225
Other assets 35
Current liabilities (23,726)
Non-current liabilities (394)
---------
(1,011)
=========
AUDITOR REPORT
To the shareholders of
Koor Properties Ltd.
I have audited the financial statements of Koor Properties Ltd.
(hereinafter - the company) and the consolidated financial statements of
the company and its subsidiaries: balance sheets as of December 31, 1999
and 1998 and the related statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
company's board of directors and management. My responsibility is to
express an opinion on these financial statements based on my audit.
I did not audit the financial statements of consolidated subsidiaries,
whose assets at December 31, 1999 and 1998 constitute approximately 27% and
24%, respectively, of total consolidated assets, and whose revenues for
three years in the period ended December 31, 1999 constitute approximately
11%, 20% and 23%, respectively, of total consolidated revenues. The
financial statements of those companies were audited by other auditors,
whose reports have been furnished to me, and my opinion, insofar as it
relates to amounts included for the foregoing subsidiaries, is based solely
on the reports of the other auditors. Also, I did not audit the financial
statements of certain associated companies, the company's interest in which
as reflected in the balance sheets at December 31, 1999 and 1998 is
adjusted NIS 4,726,000 and adjusted NIS 4,405,000, respectively, and the
company's share in profits of which is a net amount of adjusted NIS 321,000
in 1999, adjusted NIS 1,263,000 in 1998 and adjusted NIS 514,000 in 1997.
The financial statements of those companies were audited by other auditors
whose reports have been furnished to me, and my opinion, insofar as it
relates to amounts included for those companies, is based solely on the
reports of the other auditors.
I conducted my audit in accordance with generally accepted auditing
standards, including those prescribed by the Auditors (Mode of Performance)
Regulations, 1973. Those standards require that I 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 the company's board of directors and
management, as well as evaluating the overall financial statements
presentation. I believe that my audits provide a fair basis for my opinion.
In my opinion, based on my audit and the reports of the other auditors
referred to above, the aforementioned consolidated financial statements
present fairly, in all material respects, the consolidated financial
position - of the company and consolidated - as of December 31, 1999 and
1998 and the results of operations, changes in shareholders' equity and
cash flows - of the company and consolidated - for each of the three years
in the period ended December 31, 1999, in conformity with generally
accepted accounting principles. Also, in my opinion, the abovementioned
financial statements have been prepared in accordance with the Securities
(Preparation of Annual Financial Statements) Regulations 1993.
As mentioned in note 2, these financial statements are presented in New
Israeli Shekels adjusted for the changes in the general purchasing power of
the Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.
YOSEF SHIMONY
Certified Public Accountants (Isr.)
Kost Forer & Gabbay Phone: 972-3-6232525
2 Kremenetski St. Fax: 972-3-5622555
Tel-Aviv 67899, Israel
March 19, 2000.
ERNST & YOUNG
REPORT OF INDEPENDENT AUDITOR
To the Shareholders of
KOOR TRADE LTD.
We have audited the accompanying balance sheets of Koor Trade Ltd.
("the Company") as of December 31, 1999 and 1998 and the related statements
of operations, changes in shareholders' deficiency and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's Board of Directors and
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We did not audit the financial statements of a company, the investment
in which on the equity basis of accounting totaled NIS 43.2 million and NIS
50.5 million as of December 31, 1999 and 1998, respectively, and the
Company's share in the net income of which totaled NIS 0.2 million, NIS 1.5
million and NIS 1.2 million for the three years in the period ended
December 31, 1999, respectively. These statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to data included for this certain company, is based solely on
the reports of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards in Israel, including those prescribed by the Israeli Auditors'
Regulations (Mode of Performance), 1973. 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 the Board of
Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
The financial statements audited by other auditors were not received,
the investments in affiliate was included at its adjusted book value as of
December 31, 1998. The statement does not include the equity in the results
of operations of the aforementioned affiliate for the year ended December
31, 1998.
In our opinion, except for the matters described in the preceding
paragraph, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December
31, 1999 and 1998 and the results of its operations, changes in
shareholders' deficiency and cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles in Israel.
As applicable to the Company's financial statements, generally accepted
principles in the united states and in Israel are identical in all material
aspects.
Tel-Aviv, Israel KOST FORER & GABBAY
March 20, 2000 A Member of Ernst & Young
International
REPORT OF INDEPENDENT AUDITOR
To the Shareholders of
UNITED STEEL MILLS LTD.
(Under stay of proceedings)
We have audited the accompanying balance sheets of United Steel Mills
Ltd. (under stay of proceedings) ("the Company") as of December 31, 1999
and 1998 and the consolidated balance sheets for the same dates and the
statements of income, changes in shareholders' equity and cash flows - the
Company and the consolidated - for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility
of the Company's management and Board of Directors. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors' Regulations
(Mode of Performance), 1973. 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 the Company's
management and Board of Directors, as well as evaluating the overall
financial statement presentation. We believe that our audits and the
reports of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other
auditors, the financial statements referred to above present fairly, in all
material respects, the financial position of - the Company and the
consolidated - as of December 31, 1999 and 1998, and the results of
operations, changes in shareholders' equity and cash flows - the Company
and the consolidated - for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting
principles in Israel. Furthermore, in our opinion, the aforementioned
financial statements comply with the requirements of the Israeli Securities
Regulations (Preparation of Annual Financial Statements), 1993.
As explained in Note 2, the aforementioned financial statements are
presented in adjusted values according to the changes in the general
purchasing power of Israeli currency, as required by Statements of the
Institute of Certified Public Accountants in Israel.
Without qualifying our review report, we wish to draw attention to the
fact that the Company has suffered losses for the year ended December 31,
1999 in the amount of NIS 31 million and has a working capital deficiency
as of that date in the amount of NIS 95 million. In addition, in December
1999, the Company's Board of Directors gave notice that it is unable to
discharge the redemption of the principal of the debentures in January
2000, as described in Note 13. On March 16, 2000, the Haifa District Court
issued an order to stay the proceedings against the Company and its
subsidiaries, pursuant to section 350 to the Companies Law, 1999, and the
Court also appointed a special trustee-manager on behalf of the Court to
supervise the operations and businesses of the Company and its subsidiaries
and to act as a special manager for the Company and its subsidiaries. These
factors, along with additional factors set forth in Notes 1a (6), 13 and
14c raise significant doubts about the Company's ability to continue as a
going concern. As described in Note 1a(6), an order to stay the proceedings
against the Company and its subsidiaries was issued in order to enable the
formation of a comprehensive recovery plan and to propose a settlement for
the creditors.
The financial statements do not include any adjustments with respect to
the value of the assets and the liabilities and their classification which
may be required should the Company not be able to continue to operate as a
going concern.
Tel-Aviv, Israel KOST FORER & GABBAY
March 22, 2000 A Member of Ernst & Young
International
AUDITORS' REPORT
To the shareholders of
SHERATON MORIAH (ISRAEL) LTD.
We have audited the accompanying balance sheet of Sheraton Moriah (Israel)
Ltd. (hereinafter - the company) as at December 31, 1999 and the
consolidated balance sheet as at that date, and the related statements of
income (loss), changes in shareholders' equity and cash flows for the year
ended on that date. These financial statements are the responsibility of
the board of directors and company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, whose
assets constitute approximately 10.36% of total consolidated assets as at
December 31, 1999 and whose revenues constitutes 0% of total consolidated
revenues for the year ended on that date. The financial statements of the
above subsidiaries were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to amounts included
for those companies, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulation, 1973. 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 the company's
board of directors and management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the aforementioned financial statements present fairly, in all material
respects, the financial position - of the company and consolidated - as at
December 31, 1999 and the results of operations, changes in shareholders'
equity and cash flows - of the company and consolidated - for the year
ended on that date. Also, in our opinion, the aforementioned financial
statements have been prepared in accordance with the Israeli Securities
(Preparation of Annual Financial Statement) Regulations, 1993.
As explained in note 2, the aforementioned financial statements are
presented in values adjusted to reflect the changes in the general
purchasing power of the Israeli currency, in accordance with pronouncements
of the Institute of Certified Public Accountants in Israel.
This report is based on our opinion on the financial statements for said
year, which was given on March 15, 2000.
LEVIN, DOV, ORLITZKY & CO. BRIGHTMAN, ALMAGOR & CO.
Certified Public Accountants (Isr.) Certified Public Accountants (Isr.)
Ramat-Gan, June 19, 2000
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Exhibit
----------- -------
1.1 Agreement dated December 31, 1999 between Koor and Clal
Industries and Investments Ltd. for the sale of Koor's
holdings in Mashav.
1.2 Agreement dated November 10, 1999 between Tadiran and
the Shamrock Group for the sale of Tadiran's interest in
Tadiran Com.
