UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] Registration statement pursuant to Section 12 (b) or 12 (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, 2000
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 # 15038
ARYT 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)
7 Haplada Street, P.O. Box 696, Or Yehuda 60256 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
N/A N/A
Securities registered or to be registered pursuant to Sections 12(g)
of the Act:
Ordinary Shares, par value 1.00 New Israeli Shekels per share
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period
covered by the annual report.
Ordinary Shares, par value 1.00 New Israeli Shekels per share: 47,640,031
-------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 [X] Item 18 [_]
(applicable only to issuers involved in BANKRUPTCY proceedings during
the past five years)
Indicate by check mark whether the registrant has filed all documents
reports required to be filed by section 12,13 or 15 (d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
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[References in this Annual Report to NIS or Shekels are to New
Israeli Shekels and references to U.S. dollars, dollars, U.S.$ or
$ are to United States dollars. Unless the context requires
otherwise, "Aryt", "us", "we" and "our" refer to Aryt Industries,
Ltd. and its subsidiaries.]
PART I
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
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Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
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Item 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
We have derived the selected consolidated statement of operations
data presented below for the years ended December 31, 1998, 1999 and 2000 and
the consolidated balance sheet data as of December 31, 1999 and 2000 from our
audited consolidated financial statements and notes thereto set forth in Item
17 of this annual report. We have derived the selected consolidated statement
of operations data presented below for the years ended December 31, 1996 and
1997 and the consolidated balance sheet data as of December 31, 1996, 1997 and
1998 from our audited consolidated financial statements that are not included
in this annual report. Our consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in Israel
("Israeli GAAP"). The data should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements, related
notes and other financial information included elsewhere herein. For all
fiscal periods for which financial data are set forth below, Israeli GAAP and
U.S. GAAP as applied to the Company differ in certain respects as explained in
Note 30 of Notes to the Company's Consolidated Financial Statements. The
consolidated financial statements have been prepared on the historical cost
basis in United States dollars (See Note 2 of Notes to the Company's
Consolidated Financial Statements). The amounts presented below are not
intended to represent the value of assets, liabilities, costs or income at any
date, but only their historic values. We do not believe that period to period
comparisons of our operating results are necessarily meaningful nor should
they be relied upon as indicators of our future performance, particularly in
light of the substantial change in the nature of Aryt's operations over the
period presented below.
INCOME STATEMENT DATA (in Thousand Except Per Share Amount)(1)
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- --------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
US$ US$ US$ US$ US$
- --------------------------------------------------------------------------------------------------------------------
Revenues from Sales and Services 7,681 7,041 6,073 11,731 13,164
- --------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (1,729) (1,215) (1,804) (5,956) (1,059)
- --------------------------------------------------------------------------------------------------------------------
Other Income (Expenses), net (2) 11,884 2,234 (9) 277 3
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 24,575 (1,866) (4,120) (7,217) (1,230)
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) from Discontinued Operations - - - - 1,054 (62) 287
- --------------------------------------------------------------------------------------------------------------------
Net Income (Loss) for The Year 24,575 (1,866) (3,066) (6,671) (1,090)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
(LOSS) EARNINGS PER SHARE
Basic Earnings (Loss) per Share:
- --------------------------------------------------------------------------------------------------------------------
From Continuing Operations 0.57 (0.05) (0.15) (0.27) (0.20)
- --------------------------------------------------------------------------------------------------------------------
From Discontinued Operations - - - - 0.04 0.02 0.04
- --------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share 0.57 (0.05) (0.11) (0.25) (0.16)
- --------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
From continuing operations 0.51 (0..05) (0.15) (0.27) (0.20)
- --------------------------------------------------------------------------------------------------------------------
From discontinued operations -- -- 0.04 0.02 0.04
- --------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per share 0.51 (0.05) (0.11) (0.25) (0.16)
- --------------------------------------------------------------------------------------------------------------------
Weighted average number of Ordinary Shares used in 43,000,000 33,572,000 27,514,318 26,859,318 6,946,000
computation of earnings (loss) per Ordinary Share
basic
- --------------------------------------------------------------------------------------------------------------------
Weighted average number of Ordinary Shares used in 48,872,000 33,572,000 27,514,318 26,859,318 6,945,643
computation of earnings (loss) per Ordinary Share
basic (fully diluted)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
CASH DIVIDEND PER SHARE - - - - - - - - - -
- --------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (in Thousands)(1)
December 31
----------------------------------------------------------
2000 1999 1998 1997 1996
US$ US$ US$ US$ US$
--- --- --- --- ---
----------------------------------------------------------
Working Capital 21,574 (417) 2,366 3,233 1,178
Total Assets 35,274 9,331 11,231 11,752 21,447
Long-Term Liabilities(2) 5,485 2,490 7,507 4,580 11,626
Commitment to be converted into shares - - - - 1,021 2,485 134
Shareholders' Equity (Deficiency) 24,224 (999) (1,631) 992 569
(1) This chart is only a summary.
(2) Including gain from sale of, and reduction in the holdings of, affiliated
companies, the amortization of good-will and depreciation of fixed assets
and capital gain from the sale of and reduction in the holdings of
affiliated companies. See Note 25 of the Notes to the Company's
Consolidated Financial Statements. In previous filings the figures for
1996 and 1997 included financial expenses.
(3) Including convertible bond
The effect of the material differences between Israeli GAAP and U.S. GAAP
on the above-mentioned items is as follows:
INCOME STATEMENT DATA (in Thousand Except Per Share Amount)(1)
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ---------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
US$ US$ US$ US$ US$
- ---------------------------------------------------------------------------------------------------------------------
Revenues from Sales and Services 7,681 7,041 6,073 11,731 13,164
- ---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (1,729) (1,215) (1,804) (5,956) (1,059)
- ---------------------------------------------------------------------------------------------------------------------
Other Income (Expenses), net (2) 12,925 2,234 (9) 277 3
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 25,511 (1,948) (3,762) (7,191) (1,903)
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) from Discontinued Operations - - - - 1,054 (62) 287
- ---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) for The Year 25,511 (1,948) (2,708) (7,253) (1,616)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
(LOSS) EARNINGS PER SHARE
Basic Earnings (Loss) per Share:
- ---------------------------------------------------------------------------------------------------------------------
From Continuing Operations 0.64 (0.07) (0.14) (0.28) (0.27)
- ---------------------------------------------------------------------------------------------------------------------
From Discontinued Operations - - - - 0.04 0.02 0.03
- ---------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share 0.64 (0.07) (0.10) (0.26) (0.24)
- ---------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share
- ---------------------------------------------------------------------------------------------------------------------
From continuing operations 0.58 (0..07) (0.14) (0.28) (0.27)
- ---------------------------------------------------------------------------------------------------------------------
From discontinued operations -- -- 0.04 0.02 0.03
- ---------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per share 0.58 (0.07) (0.10) (0.26) (0.24)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
CASH DIVIDEND PER SHARE - - - - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------
(1) This chart is only a summary.
(2) Including gain from sale of, and reduction in the holdings of, affiliated
companies, the amortization of good-will and depreciation of fixed assets
and capital gain from the sale of and reduction in the holdings of
affiliated companies. See Note 25 of the Notes to the Company's
Consolidated Financial Statements. In previous filings the figures for
1996 and 1997 included financial expenses.
(3) Including convertible bond
- ----------------------------------------------------------------------------------------------------------------------
EXCHANGE RATE HISTORY
The following table sets forth, for the period indicated, the end,
high, low and average exchange rate between the NIS and the United States
dollar, as announced by the Bank of Israel:
- ----------------------------------------------------------------------------------------------------------------
Year ended Closing Average High Low
December 31
- ----------------------------------------------------------------------------------------------------------------
1996 3.25 3.20 3.30 3.08
- ----------------------------------------------------------------------------------------------------------------
1997 3.54 3.45 3.56 3.24
- ----------------------------------------------------------------------------------------------------------------
1998 4.16 3.80 4.37 3.54
- ----------------------------------------------------------------------------------------------------------------
1999 4.15 4.14 4.29 4.02
- ----------------------------------------------------------------------------------------------------------------
2000 4.041 4.0775 4.198 3.967
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------
Six Most Recent High Low
Calendar Months
- ----------------------------------------------------------------------
December 2000 4.103 4.05
- ----------------------------------------------------------------------
January 2001 4.153 4.041
- ----------------------------------------------------------------------
February 2001 4.143 4.10
- ----------------------------------------------------------------------
March 2001 4.217 4.115
- ----------------------------------------------------------------------
April 2001 4.226 4.139
- ----------------------------------------------------------------------
May 2001 4.152 4.122
- ----------------------------------------------------------------------
The exchange rate between the NIS and the United States dollar, as announced
by the Bank of Israel, as of June 15, 2001 was 4.176.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
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D. RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND OTHER INFORMATION
IN THIS ANNUAL STATEMENT.
Risks Associated with Aryt.
Our Current and Anticipated Operating Losses.
We have a history of operating losses. Although we reported net
income for the year ended December 31, 2000, of $24.6 million, we incurred an
operating loss of $1.7 million for the year ended December 31, 2000 and
operating losses of $1.2 million and $1.8 million for the years ended December
31, 1999 and 1998, respectively. There can be no assurance that we will be
successful in attaining operating profitability. If we fail to attain and
maintain operating profitability, our financial prospects could be materially
adversely affected.
Our Backlog of Orders may be Cancelled At Will by Our Customers.
Substantially all of the equipment orders received by our military
division contain termination for convenience clauses which allow the customer
to terminate the agreement at will. Generally, in the event of termination at
will the customer is required to pay accrued costs plus a limited markup.
Therefore, if customers were to exercise their rights of termination at will,
our results of operations and financial position may be materially adversely
affected.
Potential Fluctuations in Our Results.
We expect that our quarterly and annual operating results will
fluctuate significantly due to many factors, a number of which are discussed
in these "Risk Factors." Many of these factors are beyond our control. We do
not believe that period-to-period comparisons of our operating results are
necessarily meaningful nor should they be relied upon as indicators of our
future performance. Additionally, if our operating results in one or more
quarters do not meet the investors' expectations, the price of our ordinary
shares could be materially adversely affected.
Risks Associated with Expansion and Anticipated Growth.
We intend to grow through the investment in, acquisition of, or
merger or strategic alliance with additional companies in each of the military
defense, technology and medical divisions. This growth may place a significant
strain on our resources and systems. To manage our growth, we must implement
systems and train and manage our employees. Many of our senior management have
only recently joined us. These individuals have not previously worked together
and are in the process of becoming integrated as a management team. Our
ability to manage our anticipated future growth will depend on our:
o ability to evaluate new markets;
o monitor operations; and
o control costs.
We cannot assure you that we will be able to effectively or
successfully manage our growth.
Risks Related to Holding Company Structure.
We are a holding company and our material assets, other than existing
cash and marketable securities, consist of the stock of our subsidiaries and
investee companies. We have, in the past, relied on the issuance of
convertible debentures, sale of equity securities and the receipt of
shareholder and bank loans to generate the funds necessary to meet the
obligations of our subsidiaries. The payment of dividends and the repayment of
loans and advances by us to our subsidiaries are subject to statutory,
taxation and other restrictions, are dependent upon the earnings of such
subsidiaries and are subject to various business considerations.
Dependence upon Key Personnel.
Our success is dependent, in part, upon our (or our subsidiaries')
management or technological personnel. The loss of the services of certain of
our (or any subsidiary's) senior management or technological team could have a
material adverse effect on our business. We believe our future success will
depend in large part upon our ability to attract, retain and motivate highly
skilled employees. Such employees are in great demand and are often subject to
offers for competitive employment. There can be no assurance that we can
retain our key managerial employees or that we can attract, integrate or
retain such employees in the future.
Controlling Shareholders.
Two of our shareholders control, in the aggregate, approximately
38.7% of our outstanding capital stock (42.50% of the voting power), not
including approximately 10.77% of our outstanding stock which is held by our
subsidiary Amcoram and which hold no voting rights under applicable laws. Such
shareholders may be able to control the election of substantially all of our
directors and the results of other shareholder votes. The exercise of the
voting power by such shareholders may present conflicts of interest between
them and the other owners of our capital shares. This concentration of
ownership in two shareholders may have the effect of delaying, deferring or
preventing a change in control of Aryt, a transaction that might otherwise be
beneficial to shareholders.
Absence of Dividends.
Since 1993, we have not paid dividends on our Ordinary Shares and do
not anticipate paying any such dividends in the foreseeable future. In
addition, our Series 3 Convertible Debentures ("Series 3 Debentures") contain
certain restrictions on our ability to declare and pay dividends on our
Ordinary Shares.
Devaluation and Currency Risks.
A material portion of our revenues and expenses are and will be
denominated in non-U.S. currencies. In addition, in the future, we may acquire
interests in entities that operate in countries where the expatriation or
conversion of currency is restricted. We occasionally hedge against foreign
currency exchange translation risks and may in the future undertake such
hedging against specific foreign currency transaction risks. Because of our
constantly changing currency exposure we cannot quantify the effect of
exchange rate fluctuations on our future financial condition or results of
operations.
Risks Associated With Our Military Defense Industry Business.
Risks of Reductions or Changes in Military Expenditures.
Our primary military defense customer is the Israeli Defense Forces
through the Israeli Ministry of Defense, which represented approximately
68.4%, 47.6%, and 44.4% of our sales for each of the years ended December 31,
2000, 1999, and 1998, respectively. It is not possible for us to predict
future levels of defense spending and declines in Israeli military
expenditures could materially adversely affect us and the results of our
operations. In addition, Israel receives material amounts of aid and loans
from the United States. As a condition to such aid, Israel is required to use
a substantial portion of such funds to purchase products manufactured in the
United States. As a result, in recent years, the Israeli military has reduced
the scope and amount of its military purchases in Israel. This reduction has
had, and is likely to continue to have, a negative effect on our business and
results of operations, possibly materially. The impact of possible further
declines in the level of Israeli defense procurement on our results of
operations and financial condition will depend upon the timing and size of the
changes and our ability to mitigate their impact with new business, or cost
reductions. The loss or significant curtailment of a material purchase program
in which we participate could materially adversely affect our future results
of operations and financial condition. In view of the uncertainty regarding
the size, content and priorities of the annual Israeli military procurement
schedule, our historical financial performance may not be indicative of future
performance.
Procurement and Other Related Laws and Regulations.
We are subject to extensive and complex Israeli and foreign laws and
regulations. These laws and regulations provide for ongoing audits and reviews
of contract procurement, performance and administration. Failure to comply,
even inadvertently, with these laws and regulations and with laws governing
the export and import of military equipment and related parts, could subject
us to potential contract termination, civil and criminal penalties, and under
certain circumstances, suspension and debarment from future military
procurement programs for a period of time. Any such actions could have a
material adverse effect on our results of operations and financial condition.
Additionally, under applicable regulations and certain of our contracts, we
are subject to audit and review by the Israeli Military as well as by certain
of our customers. The costs and prices under such contracts may be subject to
adjustment based upon the results of such audits. To date, such audits have
not had a material effect on our results of operations or financial condition;
however, no assurance can be given that future audits will not have a material
adverse effect on our results of operations or financial condition.
Licensing Requirements.
Licenses are required from U.S. Government agencies for export from
the United States of many of the parts incorporated in our products. In
addition, both Israeli and United States regulations restrict the export of
our products outside of Israel without the receipt of certain consents and
approvals. Although to date we have not experienced any material problem in
receiving the required import and export approval from the relevant
governmental authorities, there can be no assurance that we will continue to
be able to receive such approvals in a timely manner or at all. In the event
we are unable to receive such approvals, our military defense business and
results from operations would be adversely effected, possibly materially.
Competitive Bidding.
We obtain substantially all of our military contracts through either
competitive bidding or sole-sourced procurement. Contracts, from which we have
derived and expect to derive a significant portion of our sales, were or will
be obtained through competitive bidding in which, in many instances, numerous
bidders participated or will participate. There can be no assurance that we
will continue to be successful in having our bids accepted or, if accepted,
that awarded contracts will be profitable. Additionally, inherent in the
procurement process is the risk that if a bid is submitted and a contract is
subsequently awarded, actual performance costs may exceed the projected costs
upon which the submitted bid or contract price was based. To the extent that
actual costs exceed the projected costs on which bids or contract prices were
based, our profitability could be materially adversely affected.
Certain Other Risks.
We, like many defense businesses, are subject to risks associated
with uncertain cost factors related to scarce technological skills and
components, the frequent need to bid on programs in advance of design
completion (which may result in unforeseen technological difficulties and/or
cost overruns), rapid obsolescence and the potential need for design
improvement. Failure to adequately address such risks may adversely affect our
results of operations and financial position.
Risks Associated with Manufacturing and Handling of Explosive
Materials.
Certain of our products involve the manufacture and/or handling of a
variety of explosive materials. From time to time in the past, such
manufacturing and/or handling has resulted in explosive incidents which have
temporarily shut down or otherwise disrupted certain of our manufacturing
processes, thereby causing production delays. There can be no assurance that
we will not experience such incidents in the future or that any such incidents
will not result in production delays or otherwise have a material adverse
effect on the Company's results of operations or financial condition.
Supply of Key Raw Materials and Parts.
Key raw materials and electronic, electro-mechanical and mechanical
components, subassemblies and subsystems which are integrated with our own
manufactured parts and products are purchased from third parties. We closely
monitor our sources of supply to attempt to assure an adequate supply of raw
materials and other supplies needed in our manufacturing processes. While we
do not rely on any sole source of supply, any disruption in our supply of such
material or parts and assemblies could adversely affect our business and
results of operations, possibly materially.
Competition.
We encounter intense competition for our military supply contracts
from numerous other companies. Most of these companies have financial,
technical, marketing, manufacturing, distribution and other resources
substantially greater than ours. Our ability to compete for these contracts
depends to a large extent on the effectiveness and innovativeness of our
research and development programs and our ability to offer better performance
at a competitive cost. In some instances, programs are sole sourced or work
directed by the U.S. Government to a single supplier. There can be no
assurance that we will be successful in competing for and obtaining military
supply contracts in the future. If we fail to compete successfully, our
business and results of operations will be materially adversely effected.
Risks Related to Investment in Companies in the Technology and Medical
Divisions.
Dependence on Portfolio Companies.
Economic, governmental, industry and internal company factors outside
our control affect each of our technology and medical division portfolio
companies. If our technology and medical portfolio companies do not succeed,
the value of our assets could decline. The material risks relating to our
portfolio companies include:
o fluctuations in the market price of the common stock of future
publicly-traded portfolio companies, which are likely to affect the
value of our stock;
o lack of the widespread commercial use of certain technologies
associated with our portfolio company's products and services, which
may prevent them from succeeding; and
o intensifying competition for the products and services that our
portfolio companies offer, which could lead to the failure of some
of our portfolio companies.
Rapid Growth of Portfolio Companies.
Our portfolio companies have grown, and we expect them to continue to
grow rapidly by adding new products and services and hiring new employees.
This growth is likely to place significant strain on the portfolio companies'
resources and on the resources we have to allocate to assist our portfolio
companies.
Uncertainty of Investor Interest in the High Technology and Medical
Industry.
All of our medical and technology division portfolio companies are
involved in divisions of the technology industry. Therefore, our success
depends on the ability of our portfolio companies and prospective portfolio
companies to raise capital and grow their businesses. The recent deterioration
of the economy and economic uncertainty in the technology and technology
related markets has resulted in a curtailment of capital investment by many
investors and industry participants beginning late in 2000. Many new and small
emerging growth companies failed and existing companies have been pushing to
increase efficiency and reduce expenditure rates. As a result, there may be a
decline in investments and capital expenditures and such companies may not be
able to raise funds. If this occurs, such companies could be materially
adversely affected.
Competition.
We face competition for investment opportunities from providers of
investment banking services for seed stage companies, seed stage venture
capital funds, private incubators, angel investor clubs and large
corporations. Many of these competitors have greater financial resources and
brand name recognition than we have. These competitors may limit our
opportunity to secure new portfolio companies. If we cannot secure new
attractive companies, our strategy to build a portfolio of medical and
technology companies may not succeed.
Internet Valuations.
Certain of our portfolio companies are or may be dependent on the
market for Internet-related technologies and services. Recently, the market
for Internet-related companies has weakened significantly. If such weakness
continues for an extended period of time, the ability of such portfolio
companies to grow and access the capital markets will be impaired and their
valuation may be materially diminished.
The development of the e-commerce market is in its early stages. If
widespread commercial use of the Internet does not develop, or if the Internet
does not develop as an effective medium for providing products and services,
our current or future portfolio companies may not succeed. Their success
depends on widespread market-acceptance of the Internet and e-commerce. A
number of factors could prevent such acceptance, including the following:
o the unwillingness of businesses and consumers to shift from
traditional processes to e-commerce processes;
o the necessary network infrastructure for substantial growth in usage
of e-commerce may not be adequately developed;
o increased government regulation or taxation, or the issuance of a
patent may adversely affect the viability of e-commerce;
o insufficient availability of telecommunication services or changes
in telecommunication services could result in slower response times
for the users of e-commerce; and
o concern and adverse publicity about the security of e-commerce
transactions.
Protection of Proprietary Rights.
Our current and possibly future portfolio companies are inventing new
ways of doing business. In support of this innovation, they will develop
proprietary techniques, trademarks, processes and software. Although we
anticipate that reasonable efforts will be taken to protect the rights to this
intellectual property, the complexity of international trade secret,
copyright, trademark and patent law, coupled with the limited resources of
these young companies and the demands of quick delivery of products and
services to market, create risk that their efforts will prove inadequate.
Further, the nature of Internet business demands that considerable detail
about their innovative processes and techniques be exposed to competitors,
because the information must be presented on the web sites in order to attract
clients. Some of our portfolio companies also license content from third
parties. It is possible that we and our portfolio companies could become
subject to infringement actions based upon the content licensed from third
parties or based upon content they themselves invent or develop. We anticipate
that our portfolio companies will generally obtain representations as to the
origin and ownership of such licensed content; however, this may not
adequately protect them. Any claims against us or our current or future
portfolio companies concerning proprietary rights, with or without merit,
could subject us and our portfolio companies to costly litigation and the
diversion of their technical and management personnel. If we or our portfolio
companies incur costly litigation and their personnel are not effectively
deployed, the expenses and losses incurred by us and our portfolio companies
will increase and their profits, if any, will decrease. In addition, the
inability of Aryt or its portfolio companies to secure licenses or other
rights which are necessary to their business could materially and adversely
affect such business.
Need to Upgrade Systems to Meet Increased Demand.
Capacity limits on some of our current and future portfolio
companies' technology, transaction processing systems, network hardware and
software and other infrastructure may be difficult to project and they may not
be able to expand and upgrade their systems to meet increased use. As the
scope of operation, of our portfolio companies increases, our
portfolio companies must expand and upgrade their technology and
infrastructure. Our portfolio companies may be unable to accurately project
the rate of increase in the scope of their operations and the demand for their
products and services. In addition, our portfolio companies may not be able to
expand and upgrade their systems capabilities to accommodate increased use of
their products and services. If our portfolio companies are unable to
appropriately upgrade their systems and network hardware and software and
other infrastructure, the operations of our portfolio companies may be
disrupted.
Security Concerns.
We believe that concern regarding the security of confidential
information transmitted over the Internet prevents many potential customers
from engaging in online transactions. If our portfolio companies that depend
on such transactions do not add sufficient security features to their future
product releases, our portfolio companies' products may not gain market
acceptance or risk claims for damages resulting from such breaches of
confidentiality. Despite measures which some of our current or future
portfolio companies have taken or may take, they are potentially vulnerable to
physical or electronic break-ins, viruses or similar problems. A person who
circumvents their security measures could misappropriate proprietary
information or cause an interruption in the operations of such company.
Security breaches that result in access to confidential information could
damage the reputation of such company and expose it to a risk of loss or
liability.
Rapid Technological Changes.
The markets in which our portfolio companies operate are
characterized by rapid technological change, frequent new product and service
introductions and evolving industry standards. Significant technological
changes could render our portfolio companies' existing technology or other
products and services obsolete. Market growth and intense competition
exacerbate these conditions. If our portfolio companies are unable to
successfully respond to these developments or do not respond in a
cost-effective way, our business, financial condition and operating results
will be adversely affected. To be successful, our portfolio companies must
adapt to their rapidly changing markets by continually improving the
responsiveness, services and features of their products and services and by
developing new features to meet the needs of their customers. Our success will
depend, in part, on our portfolio companies' ability to license leading
technologies useful in their businesses, enhance their existing products and
services and develop new offerings and technology that address the needs of
their customers. Our portfolio companies will also need to respond to
technological advances and emerging industry standards in a cost-effective and
timely manner.
Medical Device Division Risks.
Our Investee Companies May Not be Able to Obtain and Maintain
Necessary Regulatory Approvals
Our investee companies may be unable to obtain, and comply with,
applicable regulatory approvals. The development, manufacture, testing and
marketing of many of the products and services of our medical division
portfolio companies may be subject to extensive regulation by numerous
authorities in the U.S. and other countries. Products that are going to be
used on humans generally require extensive testing to satisfy applicable
regulations that they are safe for use. Many regulatory bodies, including the
United States Food and Drug Administration ("FDA"), have increased their
scrutiny and regulation and therefore no assurance can be given that the
governing regulatory authorities will act favorably or quickly review any
application of a portfolio company or otherwise find any submission of a
portfolio company to be adequate.
Furthermore, approval by regulatory authorities in many countries
must be obtained prior to commencing the marketing of health care, drug
products and medical devices in such countries. The approval process varies
from country to country, and approval in one country does not ensure approval
in other countries. Delays in obtaining regulatory approvals may adversely
affect the development, testing and marketing of a portfolio company's
products and their ability to generate revenues from the sale or licensing of
such products. There can be no assurance that regulatory approvals will be
obtained by a portfolio company in the U.S. or any other country to sell its
products for such purposes.
Manufacturers of healthcare, drug and medical device products may be
required to satisfy applicable other regulations from regulatory authorities,
including the FDA. Their manufacturing facilities and processes must adhere to
the such agencies' Good Manufacturing Practices ("GMP") regulations and engage
in extensive record keeping and reporting. Even if regulatory approval for a
product is granted, the facilities in which the product is manufactured will
generally be subject to periodic review and inspections by applicable
regulatory authorities for compliance with GMP or other regulatory standards.
Compliance with such regulations requires substantial time and attention, and
is costly. In addition, certain countries have specific registration
requirements for manufacturing facilities.
Product Liability Exposure.
Healthcare, drug product and medical device companies face an
inherent business risk of financial exposure to product liability claims in
the event that the use of their products results in personal injury. The
products of one or more of our medical division portfolio companies are
designed to comply with applicable safety standards, but it is possible that
the use of one or more of these products could adversely affect a patient's
health, or even cause death. Furthermore, in the event that any of our
companies' products prove to be defective, the company may be required to
recall and redesign such products. Although our portfolio companies to date
have not experienced any material losses due to product liability claims,
there can be no assurance that they will not experience any such losses in the
future. Our portfolio companies currently maintain product liability insurance
in form and amount as are common in such industries. However, there is no
assurance such coverage will continue to be available on terms acceptable to
the company or that such coverage will be adequate for liabilities actually
incurred. In the event a portfolio company is found liable for damages in
excess of the limits of its insurance coverage, or if any claim or product
recall results in significant adverse publicity against such company, such
company's business, financial condition and results of operations could be
materially and adversely affected.
No Assurance that our Products will be Accepted by the Medical
Community or Achieve General Market Acceptance.
There can be no assurance that our medical division portfolio
companies' products will achieve acceptance or continue to receive acceptance
by the medical community and the consumer market, in general. The degree of
market acceptance for such companies' products and services will depend on a
number of factors including the receipt and timing of applicable regulatory
approvals and the establishment and demonstration in the medical community and
among health care payers of clinical safety, efficacy, and cost effectiveness.
Certain of the medical conditions that can be treated or diagnosed by our
portfolio company's products and devices can also be treated or diagnosed by
other companies' medical products and devices. Decisions amongst competing
products will primarily be influenced by members of the medical community, who
will have the option of recommending other kinds of treatments or procedures
and may not choose our companies' products. Long term market acceptance of our
portfolio companies' products and services will depend, in part, on the
capabilities, operating features and price of such companies' products and
services as compared to those of other available products and services.
Failure of the companies' products and services to gain market acceptance
would have a material adverse effect on the companies' business.
Major Developments in the Political or Economic Conditions in Israel Could
Cause Our Business To Suffer.
Our Facilities and Resources are Located in Israel.
We are incorporated under the laws of the State of Israel. Our
principal research and development facilities as well as our executive offices
are located in Israel and many of our portfolio companies have material
facilities in Israel. Our operations, financial condition and results of
operations are directly influenced by economic, political and military
conditions in and affecting Israel. We could be adversely affected if major
hostilities break out in the Middle East or if trade between Israel and its
present trading partners is curtailed. Since the establishment of the State of
Israel in 1948, hostility has existed between Israel and the Arab countries in
the region, varying from time to time in intensity and degree. Any future
armed conflicts or political instability in the region could negatively affect
our business or harm our results of operations. We cannot predict whether a
full resolution of these problems will be achieved, the nature of any such
resolution or any consequences that any of these factors may have on us.
The peace process between Israel and the Palestinian Authority has
seriously deteriorated due to the recent increased violence between Israelis
and Palestinians. Israeli companies and companies doing business with them
have been subject to an economic boycott initiated by the Arab countries. This
boycott and other policies may seriously harm our operating results or the
expansion of our business. We cannot predict the effect on the region of the
increase in the degree of violence between Israel and the Palestinians and the
recent change in the political situation as a result of the election of Ariel
Sharon as Israel's new prime minister. Some of our senior officers and key
employees are currently obligated to perform annual reserve duty in the Israel
Defense Forces and are subject to being called for active military duty at any
time. Fulfillment of these obligations may deprive us of key employees for
extended periods of time.
Inflation in Israel and devaluation of the NIS could have an impact
on our financial results. Although Israel has substantially reduced the rates
of inflation and devaluation in recent years, if inflation rates in Israel
were to increase materially and hurt Israel's economy as a whole, our
operations and financial condition could suffer.
Israel has an unfavorable balance of payments, due principally to
defense expenditures, immigrant absorption, providing a minimum standard of
living for its citizens, and maintaining a minimum level of net foreign
reserves. Most of the deficit is covered by unilateral transfers, mainly from
the U.S. Government and the private sector, and the balance through long-term
loans. The increase in foreign investments, along with receiving loan
guarantees from the U.S. Government, which lowers the cost of financing the
deficit, means that the Israel economy should be able to finance the current
account deficit. However, should there be a material reduction in such foreign
assistance, Israel's ability to finance its deficit could be materially
adversely affected.
Any Future Profitability May Be Diminished if Tax Benefits from the
State of Israel Are Reduced or Withheld.
Pursuant to the Law for the Encouragement of Capital Investments, the
Israeli government has granted "Approved Enterprise" status to certain of our
existing capital investment programs. Consequently, we are eligible for tax
benefits for the first several years in which we generate taxable income. Our
future profitability may be diminished if all or a portion of these tax
benefits are reduced. These tax benefits may be cancelled in the event of
changes in Israeli government policies or if we fail to comply with requisite
conditions and criteria. Currently the most significant conditions which we
must continue to meet include making specified investments in fixed assets,
maintaining the development and production nature of our facilities, and
financing of at least 30% of these investments through the issuance of capital
stock.
Exchange Rate Fluctuations Between the U.S. dollar and the NIS May
Negatively Affect Our Earnings.
A significant portion of our research, development and production
expenses are incurred in NIS. In addition, we have outstanding loans
denominated in and dependent on NIS and U.S. dollars. As a result, we may be
negatively affected by fluctuations in the exchange rate between the U.S.
dollar and the NIS.
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Item 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We were incorporated under the laws of the State of Israel in 1979
under the name "Ranly Investments Limited" and commenced our operations in
1981. We changed our name three times and adopted our current name Aryt
Industries, Ltd. in July 1992. We are a company with limited liability under
the laws of the State of Israel. Our principal offices are located at 7
Haplada Street, Or Yehuda, 60218, Israel and our phone number is 03-538-8666.
Since January 2000, we have been actively seeking investment
opportunities in companies in the defense, technology and medical sectors. We
actively involved in leveraging our business, developing products and
marketing our experience to assist such companies in achieving their growth
potential and accelerating their growth in value.
Principal Investments and Divestitures Since January 1, 1998.
As of June 27, 2001, we have invested in the following portfolio
companies: Military Division - Aryt Systems Ltd.; Technology Division -
Officecore.com, Ltd., Voice Diary, Ltd., Sensotech, Ltd., Sky Dart, Ltd.; and
Medical Division - SygMed, Ltd. and ElscinTec, Ltd. In addition, our
subsidiary, Amcoram, Ltd. (part of our military division) acquired 51% of the
shares of C.T.S. (Combat Training Simulation), Ltd. and all of the assets and
business of Technology-Systems-Tecsys Ltd. See Item 4. "Information on the
Company-Business Overview" for a complete description of our investment in
each of the companies. See Items 5 and 18 for a description of capital
expenditures and divestitures by the Company for the past three fiscal years.
On October 17, 2000, Aryt purchased 63% of the issued and outstanding
share capital of Aryt Systems, Ltd., formerly Ram-Zur Industries Ltd., ("Aryt
Systems") (a public company traded on the Tel-Aviv Stock exchange) for
approximately $1.95 million. In conjunction with such transaction, the former
controlling shareholders of Aryt Systems purchased all of Aryt Systems' assets
in exchange for their assuming all of Aryt System's liabilities of
approximately $1.46 million. Since October 2000, when Aryt completed its
investment in Aryt Systems, the company has not conducted any business
activities.
In January 2001, Aryt adopted a resolution to sell its subsidiaries
Reshef and Amcoram to Aryt Systems pursuant to a Share Exchange Agreement.
After such transaction is completed, Aryt will hold approximately 89% of the
issued and outstanding share capital of Aryt Systems. In addition, Aryt and
Aryt Systems have entered into a Management Agreement pursuant to which Aryt
will provide office and logistic services, consulting services, and certain
other services in exchange for the payment of fees on a cost-plus 17% basis,
but not in an excess of $80,000 plus 2.5% of the consolidated net profit of
Aryt Systems, per year. The above transaction has been approved by the general
meeting of the shareholders of Aryt Systems and by the Tel-Aviv Stock
Exchange. The sale of Reshef and Amcoram to Aryt Systems has been completed on
June 28, 2001.
We are not aware of any public takeover offers by third parties in
respect of our shares, and we have made no public takeover offers in respect
of other companies' shares during fiscal years 1999 and 2000.
Sale of Terayon Shares.
During January, 2000, we closed the sale of all of our Telegate Ltd.
("Telegate") shares to Terayon Communication Systems ("Terayon"). In exchange
of our shares in Telegate, we received 220,000 Terayon shares and
approximately NIS 167,000 in cash. During the first 2 quarters of 2000, we
sold approximately 200,000 of our Terayon shares for an average price of $198
per share. The remainder of our Terayon shares which were not sold are held in
escrow under the terms of the Terayon transaction. We have written off such
shares due to a lack of certainty concerning the receipt of such shares and
the current price of Terayon shares (approximately $3-5 per share).
As a result of the transaction with Terayon (the sale of Telegate
shares to Terayon), we realized a capital gain of approximately $11.95
million. As a result of the sale of Terayon's shares we had a gross capital
gain of approximately $28.00 million. These gains have been recorded in our
financial statements under "Other Income (Net)" and "Financial Expenses
(Income) Net", respectively.
B. BUSINESS OVERVIEW
Aryt Industries, Ltd. is an Israeli holding company and since January
2000, we have been actively seeking investment opportunities in the
technology, medical and defense sectors. We are seeking emerging companies
which we believe have strong potential for growth. As of June 15, 2001, our
subsidiaries and affiliates were divided into three business divisions: the
defense division, technology division and medical division. As of June 15,
2001 we held interests in nine companies. To date we have invested
approximately $3.3 million in our medical division, $3.5 million in our
defense division and $3.8 million in our technology division. We actively
involved in leveraging our business, developing products and marketing our
experience to assist such companies in achieving their growth potential and
accelerating their growth in value.
Below is our organizational chart as of June 28, 2001.
[OBJECT OMITTED]
* Held indirectly through an intermediary holding company, Towtown Ltd.,
which, in turn, holds 50% of ElscinTec Holdings, Ltd. which in turn holds
all of the share capital of ElscinTec Systems, Ltd.
** On June 28, 2001 Aryt Systems acquired all of our shares of Amcoram, Ltd.
and Reshef Technologies, Ltd. pursuant to which our holdings in Aryt
Systems has been increased to approximately 89%. See Military
Division-Amcoram below for a description of the transaction.
Technology Division
In January 2000, we embarked on a policy of actively seeking
investment opportunities in high technology companies and as of June 28, 2001
we have invested in four technology companies, Voice Diary, Ltd. ("Voice
Diary"), Sensotech, Ltd. ("Sensotech"), Officecore.com, Ltd.
("Officecore.com") and Sky Dart, Ltd. ("SkyDart"). To date, We have invested
approximately $3.8 million in our technology division.
Voice Diary Ltd.
Voice Diary is engaged in the development, marketing and sale of a
voice activated palm diary that is intended for users with sight impairment.
Voice Diary commenced commercial sales during the year 2000 and had aggregate
sales of approximately NIS 187,000. As described below, we currently hold 64%
of the share capital of the Company.
In January 2000, we purchased 11,652 ordinary shares of Voice Diary,
representing 13% of its issued and outstanding share capital, in exchange for
our providing Voice Diary with a line of credit of up to $150,000 to finance
Voice Diary's manufacture of the Voice Diary product. In November 2000, we
increased our investment in Voice Diary by purchasing an additional 100,000
shares for $25,000 thereby increasing our ownership in Voice Diary to 35%. In
December 2000, Voice Diary issued us an additional 300,000 shares in
consideration for our providing the above-mentioned credit line to Voice
Diary. Accordingly, as of June 15, 2001, Aryt currently holds 64% of the share
capital of Voice Diary.
As of June 27, 2001, we have provided to Voice Diary loans in an
aggregate amount of approximately $135,000 ($55,000 as of December 31, 2000),
on terms and conditions we believe to be on an arms length basis. In addition,
Voice Diary has received grants for research and development from the Office
of the Israeli Chief Scientist pursuant to which it is obligated to pay
royalties to the Chief Scientist at the rate of 3%-5% on sales proceeds from
products developed under the research and development programs up to the
amounts of financing, linked to the U.S. dollar.
Voice Diary's continued viability will depend on its ability to
attract additional product orders, develop a new generation of products and
the willingness of Aryt to increase its investment in the company. There can
be no assurance that any of the above will occur.
Sensotech Ltd.
Sensotech is engaged in the development, manufacture and marketing of
intelligent, ultrasonic security non-contact sensors which utilize ultrasound
energy for smart sensing. Sensotech safety sensors are designed for the auto
industry ("ACCESSOR"), public transportation ("CLASS"), elevator ("Sensolift")
and robotics and automatization products ("ROBOSENSE") markets. Sensotech is
in the process of developing additional products based on core Sensotech
technology. Sensotech commenced sales during 2000, with sales of approximately
NIS 442,000.
During August 2000, Sensotech set up a wholly owned subsidiary,
Sensotech Automotive Ltd. ("Sensotech Automotive"), and granted a license
under its technology to Sensotech Automotive, to exploit such technology in
the automotive field. Sensotech Automotive intends to seek strategic
partnerships within the automotive industry. During the first quarter of 2001,
Sensotech Automotive entered into a joint venture agreement with a United
States parts manufacturer (with approval of a large automotive corporation) to
establish a production line for Sensotech products for the automotive
industry.
In September 2000, Sensotech entered into an Agreement with Vapor
Corporation ("Vapor"), to sell the manufacturing rights to its "CLASS" product
for public transportation (buses and trains) in North America, for a period of
ten (10) years. Vapor is to pay Sensotech $770,000 for such manufacturing
rights and royalties on sales of "CLASS" products by Vapor. In addition, in
September 2000, Sensotech received a $260,000 product order for delivery
during the course of 2001.
In April 2000, we purchased 25% of the issued and outstanding shares
of Sensotech for $1 million and also received warrants to purchase an
additional approximately 12% of the share capital of Sensotech which are
exercisable at an exercise price of between $1 million to $1.2 million. On
December 17, 2000, we purchased an additional approximately 16.5% of the
issued and outstanding shares of Sensotech from First Isratech Fund L.P.,
First Isratech LLC and First Isratech Norway A.S. for $1 million of which
approximately $960,000 is payable within 3 years. On February 15, 2001, we
exercised our warrants and purchased 2,129 Preferred B shares of Sensotech for
$1 million thereby increasing our holdings to 53% percent.
Officecore.com, Ltd.
Officecore.com is engaged in the development of an internet based
complete work environment, primarily for use by small and medium businesses.
Officecore.com's products include office applications, Customer Relations
Management ("CRM"), e-commerce website management, inventory management and
other models. Officecore.com services may be accessed from cellular devices.
Officecore.com's service is provided via the internet utilizing a central
server of the service provider. Officecore.com's systems are intended to serve
a flexible number of users while providing secured access and privacy.
Officecore.com's strategy is to enable small business users to rent
applications tailored to their needs via the internet at significant cost and
human resources savings. Officecore.com intends to operate through local
service providers. To date, Officecore.com has entered into a limited number
of initial partnership arrangements. Officecore.com commenced sales during
2000, and had aggregate sales of NIS 40,000. However, Officecore.com generally
does not yet charge for their services.
In order to reduce Officecore.com's dependence on additional
financing, Officecore.com has begun operating as a software house for various
customers. Officecore.com believes that such services should provide a secure
source of positive cash flow to the company.
In May 2000, Aryt invested in Officecore.com $500,000 in exchange for
30% of Officecore.com's shares and received an option, to invest an additional
$300,000 for an additional 15% interest in Officecore.com. In February 2001,
Aryt exercised such option and increased its holdings from 30% to 45% of
Officecore.com's issued and outstanding share capital.
Sky Dart Ltd.
SkyDart is a private company, with patented technology utilizing
lasers with wireless activation method and receipt of a feedback. This patent
provides a technological platform for various applications, including an
application, in the developing stage, fitted for plaything, activated by
remote control.
SkyDart was formed in May 2001, by Aryt and certain shareholders of
Combat Training Simulation, Ltd. ("CTS") to exploit and commercialize the CTS
technology for non-military applications. CTS assigned all of its intellectual
property to SkyDart and SkyDart entered into an agreement with CTS granting
back to CTS the rights to exploit such intellectual property for all military
applications. We hold 51% of the share capital of SkyDart.
Medical DIVISION
SygMed Ltd.
SygMed Ltd. ("SygMed") was formed in 1990 and is engaged in the
development, manufacture and marketing of medical robotic systems designed for
early detection of breast cancer. SygMed's flagship product is "Robolite", a
computerized stereotactic biopsy system that enables the examining physician
to guide the biopsy needle to the precise location of the suspected tissue
with pinpoint accuracy. The system can be installed on all types of
mammography x-ray machines. SygMed's primary markets are South America, United
States and Europe. Furthermore, SygMed's technology allows for its
implementation in other computerized biopsy areas and robotics systems in
general, including various plastic surgery applications. All of SygMed's
products have received U.S. FDA approval.
SygMed had sales of approximately $600,000 for the year ended
December 31, 2000. Substantially all of such sales came from the sale of
products that SygMed has since discontinued. SygMed is in the process of
developing and marketing a new generation of breast cancer detection products.
In November 2000, we entered into an agreement with SygMed to
purchase 21.32% of its issued and outstanding share capital for $750,000. In
addition, we were granted the option to increase our holdings in SygMed to 35%
for an additional investment of $750,000. The option is for a period of 12
months from the date of closing of the transaction, and we also have the
option to increase our holdings to 40% of the issued and outstanding share
capital of SygMed for an additional investment of $500,000. The second option
is exercisable for a period of 24 months from the date that the transaction
was closed. During June 2001, we entered into an agreement with SygMed to
invest an additional $300,000 for an additional approximately 10% of the share
capital of SygMed after giving effect to such investment. We anticipate such
transaction will close during July 2001.
ElscinTec Systems Ltd.
ElscinTec Systems Ltd. ("ElscinTec") was formed in 1993 and is a
private company that is engaged in the development, manufacture and marketing
of mammography systems for the detection and diagnosis of breast cancer for
the international marketplace. ElscinTec's products are a known brand name in
the mammography field. ElscinTec's products have been granted "FDA" and
European CE approvals. As of May 31, 2001, ElscinTec has installed
approximately 550 mammography units worldwide. We currently own 50% of
ElscinTec.
In January 2001, we acquired all of the issued and outstanding share
capital of Towton Ltd., a holding company, organized under the laws of the
Isle of Man, which owns 50% of the issued and outstanding share capital of
ElscinTec Holdings Ltd., an entity organized under the laws of Israel, which
in turn holds all of the share capital of ElscinTec, for $1.25 million. In
addition, we agreed to provide ElscinTec with guarantees in the amount of $
1.25 million for a period of three years.
MILITARY DIVISION
Reshef Technologies Ltd.
General.
Reshef Technologies Ltd. ("Reshef") was incorporated in 1984, under
the laws of the State of Israel, as Reshef Ammunition Ltd. Reshef changed its
name to Reshef Technologies, Ltd. in 1988. Reshef is engaged in the
development, manufacture, marketing and sales of electronic fuzes for military
applications.
Prior to March 21, 2001, Reshef was a wholly owned subsidiary of the
Company (99.9%). On March 21, 2001, Soltam Systems Ltd. ("Soltam") purchased
10% of Reshef's outstanding share capital for approximately $300,000, and we
granted an option to Soltam to purchase from us 10% of our shares in Reshef
(8.97% of the current issued and outstanding share capital of Reshef) for
approximately $500,000. The option is exercisable for a period of two (2)
years from the date of the closing of the transaction. Concurrent with such
transaction, Reshef entered into an agreement with K.M. Fuzes Engineering Ltd.
("K.M."), a wholly owned subsidiary of Soltam, to purchase from K.M. the
business operations and assets relating to the development, manufacture and
sale of electronic fuzes for $300,000. In addition, Reshef and Soltam entered
into a Marketing Agreement, pursuant to which Soltam was granted the right,
subject to certain sales performance milestones, to increase its holdings in
Reshef, from time to time, in an amount not to exceed the amount of Aryt's
holdings in Reshef at such time. Therefore, as of June 27, 2001, we held 90%
of the issued and outstanding share capital of Reshef. We believe that the
transactions with Soltam may provide Reshef with increased access to
international distribution channels.
Products.
Reshef markets and sells an advanced line of precision fuze
detonation products which control ammunition detonation, based on either
precision time after firing or accurate target proximity above ground. All
products are based upon proprietary technology developed by Reshef.
Sales.
Reshef sells its products to the Israeli Defense Forces ("IDF") and
to certain foreign customers. Sales to our direct foreign customers are
carried out directly and indirectly through non-exclusive agents, who operate
in various geographical territories to procure orders for Reshef on a
commission basis with commissions ranging from 3% to 5% of each order.
Reshef realized revenues from the sale of fuzes in the amount of
approximately $4.10 million, $3.40 million, and $3.46 million in the years
ended December 31, 2000, 1999 and 1998, respectively (sales for the years 1998
and 1999 do not include intra group sales).
Supplies.
Reshef purchases certain components from subcontractors but is not
dependent on any sole source of supply. To date, Reshef has not experienced
difficulty in obtaining components for the assembly of its products. Because
of the military applications of most of its products, Reshef must obtain
export and import licenses for most of the components it uses and export
approval for sales to foreign customers. To date, Reshef has not experienced
major difficulties in obtaining any such permits, however, there can be no
assurance that we will be able to obtain such permits in the future on a
timely basis or at all. Reshef has ISO 9000 security standard certification.
Grants from the Office of the Chief Scientist.
The Chief Scientist of the Ministry of Industry and Trade of the
State of Israel (the "Chief Scientist") is authorized to provide partial
grants to finance specific research and development project costs. Reshef
received Chief Scientist grants during 1999 in the amount of approximately
$50,000 compared to grants totaling approximately $163,000 in 1998. We have
not applied for any Chief Scientist grants during 2000.
Approved Enterprise Status.
Reshef's facilities were granted "approved enterprise" status under
the Law for the Encouragement of Capital Investments, 1959 ("the law").
Undistributed income derived from the approved enterprise is entitled to a
reduced tax rate of 25% for seven years.
The benefit period for the approved programs of Reshef commenced in
1993-1994.
If a dividend is distributed out of income attributable to
revenues from an "approved enterprise", it will be subject to
tax at the rate of 15%.
In addition, Reshef qualifies as an "industrial company" under the
Law for the Encouragement of Industry (Taxes), 1969, and accordingly, is
entitled to certain tax benefits in accordance with this law.
Competition.
Because of the secrecy involved in weapons development, it is
difficult to accurately determine the scope of potential competition for our
products. The standard fuze type currently in general use is a mechanical one.
Such fuzes are generally less expensive than the fuzes manufactured and sold
by Reshef, but are also less effective and less accurate than our products.
While barriers to entry in the ammunition fuze detonation business are high,
there are a number of companies worldwide who manufacture comparable products
to those produced by Reshef, many of which have substantially greater
financial resources providing them with greater research, development and
marketing capabilities. Our current competitors include Philips NV, Reunet
S.A., NET, Borletti, Bulva, Accudyne Corp., Fuchs Electronic Ltd. and
Thompson. We believe our products are more advanced and reliable than such
products and are competitively priced.
Amcoram Ltd.
Amcoram was founded by Amcor, Ltd. in 1969. Amcoram develops,
manufactures and markets training simulators for ground forces (both indoors
and outdoors) as well as electro-optical systems. Amcoram specializes in
selling turnkey systems, rather than individual products. Amcoram is a wholly
owned subsidiary of the Company.
Products.
We have two major product lines which are our outdoor ground force
training system and our indoor ground force training system. In addition, we
have sold certain electro-optical laser warning systems, although we do not
believe such line of products will be material to Amcoram on a going forward
basis. All products are based upon proprietary technology developed by
Amcoram. Amcoram's systems are characterized by the integration of software
and hardware specifically designed to meet client requirements and
specifications.
Outdoor Ground Force Training System: Computerized live-firing ranges
for infantry troops for training forces ranging from an individual soldier up
to an entire armored unit. The system provides training in precision firing
under field conditions with changing targets and conditions. The system places
targets and reports on accuracy and other result parameters.
Indoor Ground Force Training System: Computerized simulators
that simulate training with live fire and tactical decision-making in the
battlefield. The system provides training in precision firing under field
conditions with changing targets and conditions. The system places targets and
reports on accuracy and other result parameters.
Electro-optical Systems: The first system is a diameter laser
warning system to provide passive protection to tanks by warning of optical
radiation sources in the vicinity. Our second system is an opto-mechanical and
opto-electrical instrument for various military applications including
spherical vision periscopes for armored vehicles. Currently, we are about to
complete and provide all backlog orders, related to the Electro-optical
Systems, received from our customers. We do not expect any further orders for,
or demand to, our Electro-optical Systems.
Maintenance.
All Amcoram training systems are maintained by Amcoram pursuant to
long term service contract. Certain training sites are also operated by
Amcoram.
Expansion of Product Offerings.
Amcoram has actively engaged in expanding the scope of its product
offerings through the acquisition of companies with related products and
related technologies. On September 12, 2000, Amcoram acquired all of the
business and assets, including patents, know-how and good-will of
Technology-Systems-Tecsys Ltd. ("Tecsys") for approximately $1.25 million
payable at closing and an additional $750,000 payable over a period of five
(5) years. As of December 31, 2000, $68,000 were paid on account of such
commitments. The Tecsys business acquired by Amcoram is the development,
manufacturing and marketing of indoor training simulators for military defense
forces based on advanced technology incorporating video and graphic display.
On September 17, 2000, Amcoram purchased 51% of the issued and
outstanding capital of CTS for approximately $80,000. In addition, Amcoram has
the right to invest an additional $300,000 upon CTS's commencement of initial
marketing activities which includes construction of a beta site and
demonstration to several potential companies. In the event that Amcoram elects
not to make such an additional investment, its holdings in CTS will be diluted
to 30% of the issued and outstanding capital of CTS. CTS is a private company
with proprietary technology for laser based military training systems
employing wireless activated lasers and target feedback reception. In May
2001, SkyDart was formed by Aryt and certain shareholders of CTS to exploit
and commercialize the CTS technology for non-military applications. CTS
assigned all of its intellectual property to SkyDart and SkyDart entered into
an agreement with CTS granting back to CTS the rights to exploit such
intellectual property for all military applications. We hold 51% of the share
capital of SkyDart. In conjunction with the establishment of Sky Dart, Amcoram
and CTS amended their Agreement by eliminating Amcoram's obligation to invest
$300,000 in CTS. Instead, Aryt has agreed to invest, directly or indirectly,
up to $300,000 in the aggregate in CTS and/or Sky Dart, if, and to the extent,
that the Board of Directors of CTS and/or Sky Dart determine that such funds
are required. As of June 27, 2001, no funds have as of yet been requested.
Research, Development and Manufacturing.
Amcoram carries out its research, development and engineering of its
products through Reshef on an arms-length basis. Amcoram has ISO 9000 security
standard certification.
Supplies.
Materials and components used by Amcoram in its product manufacturing
are generally available from a number of sources, and Amcoram has not
experienced difficulties in obtaining said materials.
Sales and Marketing.
Amcoram's management believes that potential buyers of its products
are the armed forces and original equipment manufacturers of weapon systems,
which may integrate Amcoram's products into their own systems. Presently,
Amcoram markets a substantial portion of its products to the Israeli Defense
Forces. Amcoram had sales revenue of approximately $3.55 million, $3.63
million and $2.61 million for the years ending December 31, 2000, 1999 and
1998, respectively.
Capitalization.
In February 2000, Amcoram exercised its option to purchase Aryt's
Series 4 Convertible Debentures ("Series 4 Debentures") for approximately
$1.46 million. In March 2000, Amcoram converted the Series 4 Debentures into
approximately 10.77% of Aryt's issued and outstanding capital.
In October 2000, Aryt provided Amcoram with a loan of approximately
$3.08 million. The loan bears interest at a rate of 6.9% per annum and is
repayable in 40 equal quarterly installments commencing as of January 2002.
In January 2001, Amcoram distributed a dividend of approximately
$1.161 million to Aryt and Aryt re-contributed such amount to Amcoram as a
capital contribution in exchange for additional shares of Amcoram.
Aryt Systems, Ltd.
Aryt Systems, Ltd., formerly Ram-Zur Industries Ltd., ("Aryt
Systems") is a public company traded on the Tel-Aviv Stock exchange. On
October 17, 2000, Aryt purchased 63% of the issued and outstanding share
capital of Aryt Systems for approximately $1.95 million. In conjunction with
such transaction, the former controlling shareholders of Aryt Systems
purchased all of Aryt Systems' assets in exchange for their assuming all of
Aryt System's liabilities of approximately $1.46 million. Since October 2000,
when Aryt completed its investment in Aryt Systems, the company has not
conducted any business activities.
In January 2001, Aryt adopted a resolution to sell its subsidiaries
Reshef and Amcoram to Aryt Systems pursuant to a Share Exchange. After such
transaction is completed, Aryt will hold approximately 89% of the issued and
outstanding share capital of Aryt Systems. In addition, Aryt and Aryt Systems
have entered into a Management Agreement pursuant to which Aryt will provide
office and logistic services, consulting services, and certain other services
in exchange for the payment of fees on a cost-plus 17% basis, but not in an
excess of $80,000 plus 2.5% of the consolidated net profit of Aryt Systems.
The above transaction has been approved by the general meeting of the
shareholders of Aryt Systems and by the Tel-Aviv Stock Exchange. The sale of
Reshef and Amcoram to Aryt Systems has been completed on June 28, 2001.
Aryt Industries, Ltd.
Sales.
The following is the breakdown of our sales on a consolidated basis,
by major customers (including approximate percentage of total sales for each
period):
YEAR ENDED DECEMBER 31
------------------------- ------------------------- -------------------------
2000 1 9 9 9 1 9 9 8
------------------------- ------------------------- -------------------------
$ thousand % $ thousand % $ thousand %
------------ --------- ------------ ------- ------------ ---------
Foreign customer 1,136 14.8 1,508 21.4 1,555 25.6
Israel Ministry of Defense 5,224 68.4 3,352 47.6 2,696 44.4
Other Israeli customer 1,321 16.8 2,181 31.0 1,823 30.0
------------ --------- ------------ ---------- ------------ ---------
7,681 100.0 7,041 100.0 6,073 100.0
============ ========= ============ ========== ============ =========
The following is a breakdown of our sales by market segments on a consolidated
basis (including the approximate percentage of total sales for each period):
YEAR ENDED DECEMBER 31
------------------------- ------------------------- -------------------------
2000 1 9 9 9 1998
------------------------- ------------------------- --------------------------
$ thousand % $ thousand % $ thousand %
------------ --------- ----------- --------- ----------- -----------
Sales and Maintenance
Services of Military
Products 7,638 99.0 7,041 100.0 6,073 100.0
------------ --------- ----------- --------- ----------- ----------
TOTAL 7,638 99.0 7,041 100.0 6,073 100.0
============ ========= =========== ========= =========== ==========
The following is a breakdown of our sales by geographic regions, on a
consolidated basis, (including percentages of total sales for each period):
YEAR ENDED DECEMBER 31
------------------------ ------------------------ -----------------------------
2000 1 9 9 9 1 9 9 8
------------------------- ------------------------ -----------------------------
$ thousand % $ thousand % $ thousand %
----------- --------- ------------ --------- ------------- --------------
Asia 854 11.1 1,083 15.4 837 13.8
Israel 6,545 85.2 5,533 78.6 4,517 74.4
Europe 282 3.7 425 6.0 718 11.8
----------- --------- ------------ --------- ------------- --------------
TOTAL 7,681 100.0 7,041 100.0 6,073 100.0
=========== ========= ============ ========= ============= ==============
Backlog. As of May 2001, we had a backlog of orders of approximately
$5.6 million. Of the aggregate backlog, 43% belongs to the Israeli Defense
Forces and the remaining 57% to foreign customers and other Israeli customers.
Research and Development.
Our research and development efforts are focused on development of
new products and technologies, on quality and performance improvement of its
existing products, and on upgrading our product line through the development
of additional features and improved functionality. During 2000 we were
involved in the development of certain features of our electronic fuze and
computerized firing range products in addition to other research and
development projects.
Research and development activities are conducted through Reshef's
engineering department located at its facilities in Or Yehuda, Israel.
We have received and continue to seek external financing for
development projects from the Chief Scientist, and from customers who
participate in the costs of a particular project.
The following is a breakdown of our R&D expenditures on a
consolidated basis:
YEAR ENDED DECEMBER 31
--------------------------- -------------------------- -------------------------
2000 1 9 9 9 1 9 9 8
--------------------------- -------------------------- -------------------------
$ % $ thousand % $ thousand %
thousand
------------ ----------- ----------- ---------- ----------- ----------
Total Expenditure(1) 858 11.0 894 12.7 943 15.5
Less Royalty Bearing Grants
incl. of Israeli Govt. &
Others(2) - - (49) 5.5 (164) 17.3
------------ ----------- ----------- ---------- ----------- ----------
Net Expenditure(1) 858 11.0 845 12.0 779 12.8
============ =========== =========== ========== =========== ==========
(1) Percentage indicates item ratio to sales.
(2) Percentage indicates item ratio to total R&D expenditure.
The grant terms of the Chief Scientist prohibit our manufacture of
developed products outside Israel or the transfer of technologies developed
with grants to any person without the prior written consent of the Chief
Scientist. Although such approvals have been obtained in the past, there can
be no assurance that we will be able to obtain such approvals in the future on
a timely basis or at all.
Royalties.
We are required to make royalty payments to the Chief Scientist on
the sale of our products developed in whole or in part through financing
provided by the Chief Scientist, and to companies with whom we jointly
developed certain products and which retain certain rights thereto.
Under our research and development agreements with the Chief
Scientist, we are required to pay royalties at the rate of 2% to 5% of sales
of products developed with funds received from the Chief Scientist, up to the
dollar-linked amount equal to 100%-150% of such grants. In the year ended
December 31, 2000, we paid royalties totaling approximately $53,000 compared
to $34,000 in 1999 and $146,000 in 1998.
In addition, we have received a participation grant from the Fund for
Encouragement of Marketing Abroad (the "Fund") pursuant to which we are
obligated to pay royalties at the rate of 3% per annum on our increase in
exports of products marketed with the participation of the Fund.
As of December 31, 2000, our total contingent liability with respect
to royalties to the Chief Scientist and the Fund amounted to approximately
$2.64 million.
Patents And Intellectual Property.
Certain of our subsidiaries and investee companies hold patents and
patent applications with respect to portions of their products. In addition,
we rely on a combination of copyright, trade secret and contractual
restrictions as protection for our technology and products and consider most
of our products proprietary. There can be no assurance, however, that such
proprietary know-how and technology will not be independently developed. We
rely more on our innovative skills and technical competence than on the legal
protection of proprietary rights.
Government Regulation.
As Israeli corporations, sales and transfer of products, know-how and
services of Reshef and Amcoram are regulated by the Ministry of Defense of the
State of Israel. Under Israeli law, Reshef and Amcoram must obtain approval
from the Ministry of Defense to export their products and know-how. Certain of
Reshef's products contain U.S.-made restricted components, and such products
may require export permits from the relevant U.S. authorities. To date, Reshef
and Amcoram have not experienced major difficulties in obtaining such permits,
however, there can be no assurance that we will be able to obtain such permits
on a timely basis, or at all, in the future.
Liens.
To secure certain obligations of members of our consolidated group,
we have pledged a floating charge on all the assets of the Company, including
certain shares of our subsidiary companies.
Pursuant to the terms and conditions of our Series 3 Debentures, Aryt
agreed to pledge any and all funds raised by the Company through the issuance
of additional shares in favor of the holders of the Series 3 Debentures. In
addition, Aryt agreed to place a specific charge upon one half of the proceeds
from the exercise of our Series 4 Warrants, if and when exercised. The entire
amount of the liens pursuant to the Series 3 Debentures will not exceed the
then outstanding unpaid principal balance of such debentures.
In order to guarantee our compliance with the terms and conditions of
the Approved Enterprise status granted to Reshef, we granted a floating lien
over all of our assets in favor of the State of Israel.
Employees.
As of June 27, 2001, we employed the following personnel:
Company Total Engineers Assembly Administration,
Employees Workers Marketing, Customer
Support
Aryt Industries, Ltd. 2 - - 2
Aryt Systems, Ltd - - - -
Amcoram, Ltd. 22 1 18 3
Combat Training Simulation, - - - -
Ltd. ("CTS")
Reshef Technologies, Ltd. 55 9 34 12
Officecore.com, Ltd. 12 1 7 4
Voice Diary, Ltd. 1 - - 1
Sensotech, Ltd. 15 7 1 7
Sensotech Automotive, Ltd. - - - -
Sky Dart, Ltd. - - - -
SygMed, Ltd. 7 1 3 3
ElscinTec Systems, Ltd. 22 8 7 7
------------------------------ -------------- ------------- -------------- ---------------------------
Total 136 27 70 39
Except with respect to Reshef, neither we nor our employees are
parties to any collective bargaining agreements. However, certain provisions
of the collective bargaining agreements between the General Labor Federation
of Israel (the "Histadrut") and the Coordinated Bureau of Economic
Organizations are applicable to us by order of the Israeli Ministry of Labor.
These provisions mainly concern the length of the work day, minimum daily
wages for professional workers, contributions to pension funds, insurance for
work-related accidents, procedures for dismissal of employees, determination
of severance pay, and other terms of employment. Israeli law generally
requires severance pay upon retirement or death of an employee, or termination
of employment without due cause. Our severance pay liability for key employees
is fully funded through managers' insurance policies and by accruals on our
financial statements. The severance pay of certain employees is funded by
regular contributions by us to external pension funds. We consider our
employee relations to be satisfactory.
On July 8, 1999, Reshef entered into a collective bargaining
agreement (the "Collective Agreement") with the Histadrut/Sderot Regional
Workers Committee. The Collective Agreement covers all of Reshef's employees,
other than certain of its executives. The Collective Agreement mainly concerns
the general work conditions such as acceptance of new employees, trial
periods, medical examinations, overtime, vacation and other general
work-related conditions. The Collective Agreement does not cover employee
wages which are covered by individual agreements with each employee.
Special Considerations Applicable to Israeli Companies.
The following table sets forth the changes in the Israeli consumer
price index, Israel inflation rate, Closing exchange rate of the U.S. dollar,
and Annual devaluation rate of the NIS.
Year ended Israeli Consumer Israel Closing exchange Annual
December 31, price Index(1) inflation rate of the U.S. devaluation
rate(2) dollar(3) rate(4)
1996 143.1 10.6 3.251 3.7
1997 153.1 7.0 3.536 8.8
1998 166.3 8.6 4.160 17.6
1999 168.5 1.3 4.153 (0.2)
2000 168.5 -- 4.041 (2.7)
(1) For purposes of this table, the Israeli CPI figures use 1987 as
base equal to 100. These figures are based on reports of the
Israel Central Statistical Bureau.
(2) Annual inflation is the percentage change in the Israeli CPI
between December 31 of the year indicated and December 31 of the
preceding year.
(3) Closing exchange rate is the rate of exchange between the
Israeli currency 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 Israeli currency during the year
indicated.
Except for 1998, the NIS devaluation rate relative to the dollar
generally has not kept pace with the inflation rate, therefore, Israeli
companies whose sales are made in U.S. dollars, while their local costs are
incurred in inflated Shekels, may be adversely affected.
To offset the effects of inflation on the purchasing power of Israeli
currency, the Israeli government has instituted "linkage" policies, also
practiced by most private organizations. Through linkage, the amount of an
obligation or payment is increased from time to time by an amount related to
index changes, which may be the exchange rate of a foreign currency or a price
index. The payee is thus compensated for any relative decline in the Israeli
currency's purchasing power. Linkage adjustments may be based upon the total
or only a specified percentage change in the index being used. Many
obligations or payments in Israeli currency are linked to the U.S. dollar or
the CPI.
The dollar cost of our operations in Israel is influenced by the
extent to which any increase in the inflation rate in Israel is offset by the
devaluation of the Shekel in relation to the U.S. dollar. Inflation in Israel
will have an adverse effect on our profitability if (i) we sell in U.S.
dollars or other foreign currencies and incur costs in inflated Shekels and if
(ii) our liabilities linked to the inflated Shekels are higher than our
dollar-linked assets, effects of such inflation may be offset by a shekel
devaluation.
Since exchange rates between the Shekel and the U.S. dollar fluctuate
continuously, exchange rate fluctuations have an impact on our profitability
and period-to-period comparisons of our results. For the years ended December
31, 2000, 1999 and 1998, such impact did not have a material effect on our
operations. The caption "Financial expenses - net" in our financial statements
includes the impact of these factors.
C. ORGANIZATIONAL STRUCTURE
As of June 28, 2001, the following chart presents our corporate
structure, the jurisdiction of incorporation of our subsidiaries and the
percentage of shares that we hold in those subsidiaries and affiliates.
- -----------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND AFFILIATES PERCENTAGE JURISDICTION
SHARE OWNERSHIP OF
INCORPORATION
- -----------------------------------------------------------------------------------------------------------------------
Military Division
- -----------------------------------------------------------------------------------------------------------------------
Aryt Systems Ltd. 89% ISRAEL
- -----------------------------------------------------------------------------------------------------------------------
Amcoram Ltd.* 100% ISRAEL
- -----------------------------------------------------------------------------------------------------------------------
Reshef Technologies Ltd.* 90% ISRAEL
- -----------------------------------------------------------------------------------------------------------------------
C.T.S. (Combat Training Simulation), Ltd.** 51% ISRAEL
- -----------------------------------------------------------------------------------------------------------------------
Technology Division
- -----------------------------------------------------------------------------------------------------------------------
Officecore.com Ltd. 45% ISRAEL
- -----------------------------------------------------------------------------------------------------------------------
Voice Diary Ltd. 64% ISRAEL
- -----------------------------------------------------------------------------------------------------------------------
Sensotech Ltd. 53% ISRAEL
- -----------------------------------------------------------------------------------------------------------------------
Sky Dart Ltd. 51% ISRAEL
- -----------------------------------------------------------------------------------------------------------------------
Medical Division
- -----------------------------------------------------------------------------------------------------------------------
SygMed Ltd. 21% ISRAEL
- -----------------------------------------------------------------------------------------------------------------------
ElscinTec Ltd. *** 50% ISRAEL
- -----------------------------------------------------------------------------------------------------------------------
* On June 28, 2001, Aryt Systems, Ltd. acquired all of our shares in
Amcoram, Ltd. and Reshef Technologies, Ltd. pursuant to which our holdings
in Aryt Systems has been increased to approximately 89%. See Military
Division-Amcoram for a description of the transaction.
** A 51% subsidiary of Amcoram, Ltd.
*** Held indirectly through an intermediary holding company, Towtown Ltd.,
which holds 50% of ElscinTec Holdings, Ltd. which in turn holds
all of the share capital of ElscinTec Systems, Ltd.
D. PROPERTY, PLANTS AND EQUIPMENT
The following is a description of our facilities:
Aryt leases approximately 4,500 square meters of office, laboratory
and production space from an unaffiliated third party, in Or Yehuda, Israel,
pursuant to a short-term lease through September 30, 2002. The lease is
extendible for up to two additional two-year periods until September 30, 2006.
Our annual lease payments are approximately $444,000. We currently sublet
approximately 750 square meters to a third party.
In 1986, Reshef entered into a 49-year lease with the State of
Israel, for approximately 1,000 square meters of industrial space in Sderot,
Israel, pursuant to a long-term lease. The lease payments for the entire
period are NIS 19,117 and has been pre-paid in its entirety. Upon expiration
of the lease, Reshef has an option to extend it for an additional period of up
to 49 years.
In addition, in February 2000 Reshef entered into a new lease for
approximately 1,000 square meters of industrial space in Sderot, Israel,
pursuant to a short term lease for approximately NIS 6,400. The lease expires
as of February 28, 2001, however, we have the option to extend it for up to
seven additional one-year periods.
We believe that our facilities in Israel are sufficient to support
our current activities and anticipated growth.
(Remainder of page intentionally left blank)
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
The following Discussion of Operating Review and Prospects contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth herein and in our other filings with the Securities and Exchange
Commission. In addition, the following discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
which appear elsewhere in this Annual Report.
We were incorporated under the laws of the State of Israel in 1979
under the name "Ranly Investments Limited" and commenced our operations in
1981. We changed our name three times and adopted our current name Aryt
Industries, Ltd. in July 1992. We are a company with limited liability under
the laws of the State of Israel. Our principal offices are located at 7
Haplada Street, Or Yehuda, 60218, Israel and our phone number is 03-538-8666.
Since January 2000, we have been actively seeking investment
opportunities in companies in the defense, technology and medical sectors. We
actively involved in leveraging our business, product development and
marketing experience to assist such companies achieving their growth potential
and accelerating their growth in value.
Aryt and its subsidiaries' transactions are recorded in New Israeli
Shekels. The majority of our subsidiaries' sales are made in Israel, and a
substantial portion of our costs are incurred in NIS. Therefore, our
functional currency is in NIS. However, in accordance with Israeli GAAP, item
29 to SOP 36 of the Institute of Certified Public Accountants in Israel, our
financial statements are adjusted to the changes in the exchange rate of the
dollar against the NIS. Accordingly, monetary accounts, maintained in
currencies other than the dollar, are re-measured using the foreign exchange
rate at balance sheet date. Operational accounts and non-monetary balance
sheet accounts are measured and recorded at the effective exchange rate on the
transaction date. The effect of foreign currency re-measurement is reported in
current operations.
Our consolidated financial statements conform with generally accepted
accounting policies in Israel which differ in certain respects from those
followed in the United States. See Note 30 of the Notes to Consolidated
Financial Statements attached as Item 17 hereto, for a discussion of such
differences and their effects on our financial statements.
As of December 31, 2000, we had an accumulated loss for Israeli tax
purposes of approximately $6 million. Such loss may be carried forward and
offset against taxable income in the future for an indefinite future. However,
our management believes that, due to our history of losses, it is more likely
than not that such loss carry forward will not be realized.
CONSOLIDATED INCOME STATEMENT DATA (In Thousands Except Per Share Amount)
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
--------------- --------------- --------------
U.S. dollars
--------------------------------------------------
(In thousands)
Revenues from sales and services provided $7,681 $ 7,041 $ 6,073
Cost of sales 5,938 5,533 5,065
--------------- --------------- --------------
Gross profit 1,743 1,508 1,008
--------------- --------------- --------------
Research and development costs, net 858 845 779
Selling and marketing expenses 359 426 402
General and administrative expenses 2,255 1,452 1,631
--------------- --------------- --------------
3,472 2,723 2,812
--------------- --------------- --------------
Operating loss 1,729 1,215 1,804
Financial income (expenses), net 23,411 (322) (503)
Other income (expenses), net 11,884 2,234 (9)
--------------- --------------- --------------
Income (loss) before taxes on income 35,566 697 (2,316)
Taxes on income 8,594 - - 27
--------------- --------------- --------------
Income (loss) before equity in losses of affiliate 24,972 697 (2,343)
Equity in losses of affiliate 414 2,563 1,777
Minority interest in subsidiaries 17
--------------- --------------- --------------
Income (loss) from continuing operations 24,575 (1,866) (4,120)
Income from discontinued operations - - - - 1,054
--------------- --------------- --------------
Net income(loss) for the year $24,575 $ (1,866) $ (3,066)
=============== =============== ==============
Sales.
Our sales for 2000 amounted to approximately $7.68 million compared
with $7.04 million in 1999, and $6.07 million in 1998. The increase in sales
in each of 1999 and 2000 as compared to the respective preceding year was due
to the growth of Reshef's and Amcoram's sales.
The aggregate sales of Aryt's group of companies (including the
unconsolidated companies) during the year ended on December 31, 2000, amounted
to $8.41 million compared with $7.04 million in 1999. The increase in the
aggregate sales is attributed to the growth of Reshef's and Amcoram's sales
and the inclusion, for the first time, the sales of SygMed, Sensotech,
Officecore and Voice Diary.
Gross Profit.
Our gross profit margin was 22.69% in 2000, compared with 21.4% in
1999 and 16.6% in 1998. The increase in gross profit margin in each of 1999
and 2000 as compared to the respective preceding year was due to an increase
in productivity.
Net Research and Development.
Net Research and Development expenses were approximately $858,000 in
2000, compared with $845,000 in 1999 and $779,000 in 1998. The net increase in
2000 as compared to 1999 is mainly attributable to Reshef's settlement of
Reshef's obligations towards the Israeli Chief Scientist. The net increase in
1999 as compared to 1998 is mainly attributable to our receipt of reduced
research grants from the Chief Scientist which are recorded as an offset to
research and development expenses.
Selling And Marketing Expenses.
Selling and marketing expenses in 2000 amounted to approximately
$359,000 compared with $426,000 in 1999 and $402,000 in 1998. The decrease in
2000 as compared to 1999 was due primarily to our policy of increased
efficiency and reducing selling expenses. The increase in 1999 as compared to
1998 was due mainly to salary increases offset in part by a reduction in
senior management staff in the fourth quarter of 1999.
General And Administrative Expenses.
General and administrative expenses in 2000 amounted to approximately
$2.25 million compared with $1.45 million in 1999 and $1.63 million in 1998.
The increase in expenses in 2000 as compared to 1999 was primarily due to
implementation of Aryt's business plan and the costs associated with review
and examination of potential investments. The decrease in expense in 1999 as
compared to 1998 was due to increased efficiency and reduced expenses due to
cost-saving measures.
Financial Income (Expenses).
Our financial income in 2000 was approximately $23.41 million
compared with expenses of $322,000 in 1999 and $503,000 in 1998. The
significant income in 2000 as compared to an expense in 1999 was primarily due
to appreciation of Aryt's investment in Terayon offset in part by losses from
marketable securities. The reduced expense in 1999 as compared to 1998 was due
to a reduction of higher interest bank loans and interest income on our bank
deposits.
Other Income (Expenses).
Other income net was approximately $11.89 million in 2000, compared
with $2.23 million in 1999 and expenses of $9,000 in 1998. The significant
other income in 2000 was due to profit realized by us on the sale of Telegate
to third parties. The other income in 1999 was due to profit realized by us on
the sale of Aryt Holdings (1998) Ltd. during 1999 and profit from an equity
offering by Telegate to third parties.
Income (Loss) From Continuing Operations.
We realized net income of approximately $24.58 million in 2000,
compared to a net loss of $1.87 million in 1999 and $4.12 million in 1998. The
significant net income in 2000 is primarily due to capital gain we realized by
us on the sale of our investment in Telegate in the amount of approximately
$12.00 million (see "Other Income") and the appreciation of Terayon's shares
(received for the sale of our shares in Telegate to Terayon) in the amount of
approximately $28.00 million (see "Financial Income") offset in part by losses
from marketable securities. The decrease in net loss in 1999 as compared to
1998 resulted primarily from increased sales and reduced expenses as discussed
above.
Effective Tax Rate.
Reshef qualifies under the Law for the Encouragement of Capital
Investments, 1959, as an "Approved Enterprise" or as "Mixed Enterprise" for
purposes of Israeli taxation. Consequently, Reshef is entitled to exceptions
from taxation on income derived from the "Approved Programs" as long as Reshef
fulfills the stipulations required under the relevant approval certificates
and under the law. Undistributed income derived from these enterprises is
entitled to a reduced tax rate of 25% for seven years. Reshef's benefit period
commenced in 1993-1994. Dividends derived from income from "Approved Programs"
are subject to withholding tax at the rate of 15%. Subsidiaries are also
entitled to other benefits in accordance with other Israeli tax laws.
Impact of Inflation and Exchange Rates.
Our results of operations in Israel are, among other things, a
function of the inflation rate in Israel compared with the devaluation rate of
the NIS in relation to the U.S. dollar and the timing of the devaluation
compared with the timing of inflation. Certain of our costs in Israel,
reported in dollars, will increase if the inflation rate exceeds the
devaluation rate of the Shekel against the dollar, or if the timing of such
devaluation were to lag behind inflation.
We incur significant expenses in Shekels. These expenses are
translated into dollars at the prevailing exchange rates for purposes of our
Financial Statements and tend to rise with local inflation. Consequently, we
are materially affected if devaluation of the Shekel against the dollar is not
matched by contemporaneous devaluation of the Shekel against the dollar.
The relationship between our assets and liabilities is in Shekels,
and whether these are linked to a currency or price index, also impacts our
financial results. In the event that our liabilities are linked to the Israeli
Consumer Price Index and the Shekel is not devaluated at the same rate, we may
be adversely affected.
We do not generally engage in currency hedging. We do not hold or
issue derivatives or other financial instruments for trading purposes.
However, Amcoram enters into forward transactions to reduce the risks
associated with exchange rate fluctuations related to export sales and foreign
currency. As of December 31, 2000 Amcoram had entered into 4 transactions in
the amount of $515,000 for the sale of Turkish liras in exchange for U.S.
dollars. The forward contract expired in May 2001.
B. LIQUIDITY & CAPITAL RESOURCES.
During the past several years, we have met our financial requirements
primarily through funds provided by operating activities, shareholder loans
and proceeds from issuance of convertible debentures and shares.
Liquidity and Capital Resources.
Cash, cash equivalents and short-term investments were approximately
$3.08 million, $1.62 million, and $800,000 at December 31, 2000, 1999 and
1998, respectively. We had a negative cash flow from operations of $1.92
million and $772,000 for the years ended December 31, 2000 and 1999 and
generated cash from operations of $155,000 for the year ended December 31,
1998. The negative cash flow from operations in 2000 and 1999 resulted
primarily from delay in payments by customers that were deferred to the first
quarter of the following year. Net cash generated from operations in 1998
resulted primarily from an increase in accounts payable, an increase in
customer advances and a decrease in trade receivables. Investing activities
provided cash of approximately $3.68 million in 2000, primarily due to the
proceeds from the sale of marketable securities, offset in part by investment
in investee companies. During 1999 and 1998, net cash used in investing
activities was $210,000 and $1.95 million respectively and was primarily due
to purchases of property and equipment in 1999 and an investee company in
1998. Financing activities used cash of $296,000 in 2000 and provided cash of
$1.80 million and $2.56 million in each of 1999 and 1998 respectively. In
2000, cash was provided primarily from proceeds from the sale of Terayon
shares received for the sale of our shares in Telegate. In each of 1999 and
1998 cash was provided primarily from proceeds from the issuance of Ordinary
Shares to Altschuler Sham, Ltd. ("ASL"), the issuance of convertible
debentures and bank loans.
Our working capital increased to $21.57 million on December 31, 2000,
including cash and cash equivalents of $3.082 million at such date compared
with $1.6 million on December 31, 1999, and with $2.37 million on December 31,
1998. In addition to marketable securities in the amount of $15.4 million on
December 31, 2000 compared with none in December 31, 1999 and in 1998.
The current ratio (current assets compared with current liabilities)
decreased from 1.55 on December 31, 1998 to 0.94 on December 31, 1999 and
increased to 4.87 on December 31, 2000.
The quick ratio (current assets less inventory, compared with current
liabilities less customers' advances) decreased from 0.74 on December 31, 1998
to 0.52 on December 31, 1999 and increased to 4.41 on December 31, 2000.
In November 1999, we issued 3,150,000 Ordinary Shares, 3,150,000
Series 7 Warrants and 3,150,000 Series 8 Warrants through a private placement
to ASL, for aggregate consideration of NIS 3.15 million. The Series 7 Warrants
are exercisable through September 25, 2000 and have an exercise price of NIS 1
per share. The Series 8 Warrants are exercisable through September 25, 2001
and have an exercise price of NIS 1.125 per share.
During 2000, ASL exercised all of its Series 7 Warrants for 3,150,000
Ordinary Shares in exchange for $764,000. To date no Series 8 Warrants have
been exercised.
During August 2000, the Directors and employees of the Company
exercised all of the outstanding Series 9 Warrants and purchased 1,550,000
Ordinary Shares for NIS 2.092 million. The exercise of such options was
financed by a loan from the Company to its employees and officers for the
exercise price. The loan is in NIS and is linked to the Israeli Consumer Price
Index and is set at the interest rate of four percent (4%) per annum. The loan
is due upon the employee's or officer's disposition of such shares.
In January 2001, Amcoram distributed a dividend of approximately
$1.16 million to Aryt and Aryt re-contributed such amount to Amcoram as a
contribution of capital in exchange for additional shares of Amcoram.
In February 1999 we issued our Series 4 Debentures to a group of
investors led by Excellence Investments Ltd. and Tamar Central Pension Fund
directed by Israel Discount Bank Ltd. for an amount of $1.5 million. To secure
the repayment of the Series 4 Debentures, concurrent with the issuance of such
Debentures we purchased 23,678 ordinary shares of Telegate from Aryt Holdings
and registered a first priority charge on such shares in favor of the
debenture holders. During 1999 debenture holders converted 1,087,151 of their
Series 4 Debentures into 1,087,151 of our Ordinary Shares. In February 2000,
Amcoram exercised its option to purchase Aryt's Series 4 Debentures for $1.462
million. In March 2000, Amcoram converted the Series 4 Debentures into
approximately 9.74% of Aryt's issued and outstanding capital.
In October 2000, Aryt provided Amcoram with a loan of $3.086 million.
The loan bears interest at a rate of 6.9% per annum and is repayable in 40
equal quarterly installments commencing as of January 2002.
In 1998 we raised $1.5 million from the issuance of our Series 5
Convertible Debentures, $2 million from bank loans and approximately $500,000
from shareholder loans.
As a result of our sale of our interest in Telegate and our
disposition of substantially all of the Terayon shares, we received aggregate
proceeds of approximately $40.73 million.
As of December 31, 2000 we had outstanding short term bank loans of
approximately $1.581 million (including current maturities in the amount of
$634,000). $672,000 of such loans are NIS denominated loans and bear interest
at between 12-20% per annum and $275,000 of such loans are linked to the US
dollars and bear interest at the rate of LIBOR plus 1.25%. As of December 31,
2000 we had outstanding long term bank loans, net of current maturities of
approximately $2.537 million. Such loans bear interest at the rate of LIBOR
plus 1.25%.
As of December 31, 2000, we had Series 3 Debentures outstanding. In
February 1997, the Company issued Series 3 Debentures in consideration for our
Series 2 Debentures. The Series 3 Debentures are convertible into Ordinary
Shares at conversion rate of 297.4%. The Series 3 Debentures mature in nine
equal annual installments commencing October 1997. The unconverted principal
of the debentures bears interest at a rate of 4.9% per annum payable
semi-annually.
In addition, in exchange for and in consideration of the original
warrants held by the holders of Series 2 Debentures, the Company issued
600,200 new Series 3 Warrants and new Series 4 Warrants, in an amount equal to
the amount of old warrants which were turned over by the holders of the Series
2 Debentures. The Series 3 Warrants expired on February 1999 and the Series 4
Warrants expired on February 2001.
As part of the Series 2 Debentures arrangement, the Company undertook
various commitments such as: increasing its shareholders' equity within 24
months, reports to the escrow agent for the debentures as well as setting
limits to the scope of its activities and penetrating into new business
segments. Non-compliance with these commitments results in a retroactive
change in the interest rate from January 1, 1997. In any event, however, the
Company will not be required to pay interest at a rate higher than the dollar
interest rate of 5.9% per annum. We believe that as of May 30, 2001 we comply
with these commitments.
As of May 30, 2001 the balance of the outstanding Series 3 Debentures
was NIS 6,311,112 par value (current value $2,122,095).
We believe that Aryt currently has sufficient working capital to
finance its ongoing operations for the foreseeable future.
C. RESEARCH AND DEVELOPMENT
We expended approximately $858,000, $845,000, and $779,000, on
research and development expenses, net of related grants and participations,
during the years ended December 31, 2000, 1999, and 1998, respectively. We
avail ourselves of several Israeli governmental programs which support
research and development activities. For a discussion of such activities, see
Item 4. "Information on the Company - Business Overview".
D. TREND INFORMATION
In connection with our policy of seeking to expand our investments in
each of the technology, medical and defense divisions, we anticipate that in
the future, our results of operations and financial position will be more
significantly influenced by the operating results and financial position of
our investee companies in the technology and medical divisions. The recent
deterioration of the economy and economic uncertainty in the technology and
technology related sectors (including medical) may have a material adverse
effect upon the ability of such investee companies to develop and expand their
operations and realize operating revenues and profits in accordance with
expectations. The scope and effect of such downturn, and their effect on Aryt,
are not possible to predict at this time.
(Remainder of page intentionally left blank)
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following is a list of our Directors, Senior Management and
Employees as of June 28, 2001:
Name Age Position with the Company
---- --- -------------------------
Gilad Shabtai 57 Director, Chairman
Zvi Oren* 54 Director
Yoram Oron 53 Director
Israel Gravinsky* 53 External Director
Dan Halperin 52 Director
Ofer Shabtai 32 Director
Shmuel Bachar 46 Chief Executive Officer
Arieh Geller 52 Executive Vice-President, Aryt Industries Ltd.
Ran Eckhaus 31 Chief Financial Officer, Secretary
Rafi Tzizel 65 Internal Auditor
- ------------------------------
* Member of Audit Committee
All Directors (other than External Directors) hold office until their
removal by the General Meeting of our Shareholders. Officers serve at the
discretion of the Board of Directors, subject to the terms of any agreement
with them. Our Articles of Association provide for a Board of Directors of no
less than six, or more than fifteen, members.
Gilad Shabtai, has been Director of Aryt since August 1997. Mr.
Shabtai is the brother of Mr. Benjamin Shabtai who holds approximately 31% in
the Company. Mr. Gilad Shabtai also serves as Director for Aryt Systems.
Zvi Oren, has been Director since September 1997.
Yoram Oron, has been Director since May 1992. Mr. Oron also serves as
Director for Yoram Oron Holdings Ltd., Cerel, Or-Amir, Vertex, Novadent,
Caral, Helios, Visiontek, Test-You, Scopus, and S.H.C.
Israel Gravinsky, has been External Director since December 1999. Mr.
Gravinsky also serves as Director for Hachsharat Hayishuv-Hotels Ltd.
Dan Halperin, has been Director since July 2000. Mr. Halperin also
serves as Director for Continental Bank Ltd., Moritz Tuchler, Caesarea
Development Company, the Caesarea Fund, Metrani, El-Al Israel Airline Ltd.,
The First International Bank of Israel Ltd.-Pension Funds, Kaniel, and Chayal
Holdings.
Ofer Shabtai, has been Director since July 2000. Mr. Shabtai also
serves as Director for Twin Diamonds, Inc., Demanin Group, Corp., and Aryt
Systems. Ofer Shabtai is the son of Gilad Shabtai.
Shmuel Bachar, has served as CEO since June 1999. Mr. Bachar also
serves as CEO of Aryt Systems and Chairman of Reshef, Amcoram, Sensotech,
Officecore.com, Voice Diary, SkyDart, SygMed, ElscinTec and C.T.S.
Arieh Geller, has served as Executive Vice-President of Aryt since
2000. Prior thereto, he served as C.E.O. of Reshef since 1990. Mr. Geller also
serves as a member of the Board of Directors of the subsidiaries.
Ran Eckhaus, has served as CFO and secretary since July 1998. Mr.
Eckhaus also serves as C.F.O. for Aryt Systems, Reshef, Amcoram, Sensotech,
Officecore.com, Voice Diary, SkyDart, SygMed, ElscinTec and C.T.S.
Rafi Tzizel, has served as internal auditor since March, 2000.
B. COMPENSATION
The aggregate remuneration paid to Directors and executive officers
(a total of 10 persons) for the year ended December 31, 2000, was
approximately $559,000 in salaries, fees, commissions and bonuses. This
includes amounts set aside or accrued to provide for pensions, retirement or
similar benefits, but does not include amounts expended by us for automobiles
made available to our executive officers, expenses (including business travel,
professional and business associations dues and expenses) reimbursed to
officers, and other fringe benefits commonly reimbursed or paid by companies
in Israel.
During August 2000, the Directors and employees of the Company
exercised all of the outstanding Series 9 Warrants and purchased 1,550,000
Ordinary Shares for NIS 2,092,500. The exercise of such Warrants was financed
by a loan from the Company to its employees and officers for the exercise
price. The loan is in NIS and is linked to the Israeli Consumer Price Index
and is set at the interest rate of four percent (4%) per annum. The loan is
due upon the employee's or officer's disposition of such shares.
We do not currently have any stock option or profit sharing plans in
effect.
C. BOARD PRACTICES
Election, Terms and Removal of Directors.
All directors, other than our External Directors, hold office until
their removal by the General Meeting of our Shareholders. Officers serve at
the discretion of the Board of Directors, subject to the terms of any
agreement with them. Our Articles of Association provide for a Board of
Directors of no less than six, or more than fifteen, members.
Alternate Directors.
Our Articles of Association provide that any director may, by written
notice to the Company, appoint another person to serve as alternate Director,
subject to the Directors' approval, and may cancel such appointment at any
time. Any person, whether or not already a Director, may act as an alternate,
and the same person may act as alternate for several Directors. An alternate
Director has the number of votes equivalent to the number of Directors who
appointed him. The term of appointment of an alternate Director may be for one
Board of Directors' meeting, for a specified period, or until notice of
cancellation of the appointment is given. To the Company's knowledge, no
Director currently intends to appoint any other person as an alternate
Director, except if the Director is unable to attend a Board of Directors'
meeting.
External Directors.
Under the Israeli Companies Law 1999-5759, (the "Companies Law")
Israeli companies whose shares have been offered to the public, like us, are
required to appoint two people to serve as external directors on the Board of
Directors. The Companies Law provides that a person may not be appointed as an
external director if the person or the person's relative, partner, employer or
any entity has at the date of appointment, or has had at any time during the
two years preceding that date, any affiliation with us, any entity controlling
us or any entity controlled by us or by such controlling entity. The term
"affiliation" includes:
- an employment relationship;
- business or professional relationship maintained on a regular
basis;
- control; or
- service as an officer.
No person can serve as an External Director if the person's position
or other business creates, or may create, conflicts of interests with the
person's responsibilities as an External Director or if such position or other
business may impair such Director's ability to serve as an External Director.
No person who is a Director in one company can serve as an External Director
in another company, if at that time a Director of the other company serves as
an External Director in the first company. The Companies Law further provides
that when, at the time of appointment of an External Director, all members of
the Board of Directors of the company are of one gender, then the External
Director appointed shall be of the opposite gender.
As of February 1, 2000 External Directors are appointed by a majority
vote at a shareholders' meeting, provided that either: (1) the majority of
shares voted at the meeting, including at least one third of the shares of
non-controlling shareholders voted at the meeting, vote in favor of
appointment of the Director or (2) the total number of shares of
non-controlling shareholders voted against the election of the Director does
not exceed one percent of the aggregate voting rights in the company. The
initial term of an External Director will be three years and may be extended
for an additional three-year period. For our External Director serving
currently, the provisions of the Companies Ordinance 1983-5743 [New Version]
apply, under which the External Directors serve for a 5-year period and may
only be re-appointed two years after the term. Each committee of our board of
directors will be required to include at least one External Director and all
External Directors must be members of our audit committee.
The External Directors have the same powers and duties as the regular
Directors and as such are entitled to obtain all information relating to the
company's management and assets and to receive assistance, in special cases,
from outside experts at our expense. An External Director is entitled to
consideration and to the refund of expenses, only as provided in regulations
adopted under the Companies Law and is otherwise prohibited from receiving any
other consideration, directly or indirectly, in connection with service
provided as an External Director. Nevertheless, the grant of an exemption from
liability for breach of fiduciary duty or duty of care, an undertaking to
indemnify, indemnification or insurance under the provisions of the Companies
Law is not deemed as consideration. Under the Companies Law, an External
Director cannot be dismissed from the office unless:
- the Board of Directors determines that the External Director no
longer meets the requirements for holding such office, as set forth
in the Companies Law or that the Director is in breach of his or
her fiduciary duties to the company and the shareholders of the
company vote (by the same majority required for the appointment) to
remove the External Director after the external director has been
given the opportunity to present his or her position;
- an Israeli court determines, upon a request of a Director or a
shareholder, that the Director no longer meets the requirements for
holding such office as set forth in the Companies Law or that the
Director is in breach of his or her fiduciary duties to the
company; or
- the court determines, upon a request of the company or a
Director, shareholder or creditor of the company, that the
External Director is unable to fulfill his or her duty or has
been convicted of certain crimes as specified in the Companies
Law.
Our External Directors were Israel Gravinsky and Micha Avnimelech.
Mr. Avnimelech ceased serving as an external director on April 1, 2001. Mr.
Gravinsky serves as an External Director pursuant to the Companies Ordinance
1983-5743 [New Version]. Mr. Gravinsky will serve in such position until
January 2002. A shareholders' meeting is scheduled for July 1, 2001, to vote
upon the appointment of Mrs. Iris Stark as an External Director. If appointed,
Mrs. Stark will serve until July 2004.
Audit Committee.
The Companies Law provides that public companies, such as us, must
appoint an audit committee of the board of directors. The number of members of
the audit committee is required to be not fewer than three and it must include
all of the external directors. The chairman of the Board of Directors, any
Director who is employed by us or provides services to us, on a regular basis,
or a controlling shareholder or his or her relative cannot be a member of the
audit committee. Our audit committee consists of Israel Gravinsky and Zvi
Oren. Upon the appointment of our second External Director, such director
shall also serve on our Audit Committee. Under the Companies Law, the Board of
Directors must also appoint an internal auditor in accordance with the
recommendations of the audit committee. The role of the internal auditor is to
examine, among other matters, whether the company's actions comply with the
law, integrity and orderly business procedure. The internal auditor may be an
employee of the company but not a person holding 5% or more of a company's
capital, a person who has the power to appoint one or more directors or the
general manager, an officer, or an affiliate or relative of an office holder,
and may not be the company's certified public accountant or its
representative. Our internal auditor is Rafi Tzizel. In addition, under the
Companies Law, all companies must appoint a certified public accountant to
audit the company's financial statements.
Under the Companies Law, the approval of the Board of Directors is
required for arrangements with respect to compensation of a company's chief
executive officer and with respect to the compensation of directors audit
committee and shareholder approval is also required.
The Companies Law requires that an officer or a controlling
shareholder in a public company, such as us, promptly disclose any personal
interest that he may have and all related material information known to him,
in connection with any existing or proposed transaction by the company (an
office holder and a controlling shareholder are under no such duty of
disclosure when the personal interest stems only from the personal interest of
a relative in a transaction that is not exceptional). In addition, if the
transaction is an exceptional transaction, as defined in the Companies Law,
the officer must also disclose any personal interest held by the officer's
spouse, siblings, parents, grandparents, descendants, spouse's descendants and
the spouse of any of the foregoing, or by a corporation in which the officer
is a 5% or greater shareholder, Director or general partner or in which he or
she has the right to appoint at least one Director or the general manager. The
disclosure must be made without delay and not later than the Board of
Directors meeting as which the transaction is first discussed. For these
purposes, the definition of a controlling shareholder under the Companies Law
includes a shareholder that holds 25% or more of the voting rights in a
company, unless another shareholder holds more than 50% of the voting rights
(if two or more shareholders are interested parties in the same transaction
their shareholdings shall be deemed cumulative).
Once the officer or controlling shareholder complies with these
disclosure requirements, the company may approve the transaction in accordance
with the provisions of the Companies Law and its Articles of Association.
Generally, the approval of the majority of the disinterested members of the
audit committee and the Board of Directors is required and, in certain
circumstances, shareholder approval may also be required. If the transaction
is with an officer or with a third party in which the officer or the
controlling shareholder has a personal interest, the approval must confirm
that the transaction is not adverse to the company's interest. Furthermore, if
the transaction is an exceptional transaction then, in addition to any
approval stipulated by the Articles of Association of the company, it also
must be approved by the company's audit committee and then by its Board of
Directors. The audit committee of a public company, shall not be entitled to
grant any such approval, unless, at the time the approval was given, two
members of the audit committee were External Directors and at least one of
them was present at the meeting at which the audit committee decided to grant
the approval. An exceptional transaction is a transaction other than in the
ordinary course of business, otherwise than on market terms or that is likely
to have a material impact on the company's profitability, assets or
liabilities. Under certain circumstances, shareholder approval is also
required. For example, shareholders must approve all compensation paid to
Directors in whatever capacity, the company's undertaking to indemnify a
Director or indemnification under a permit to indemnify and any transaction in
which a majority of the Board members have a personal interest. An office
holder with a personal interest in any matter may not be present at any audit
committee or Board of Directors meeting where such matter is being approved,
and may not vote thereon. An approval for an exceptional transaction may be
achieved in a general meeting either (i) if it was approved by a majority
provided that at least one third of the shareholders who have no personal
interest in the transaction and are present at the meeting approved such
transaction; or (ii) if the total shareholdings of those who vote against the
transaction do not represent more than one percent of the voting rights in the
company, unless the Israeli Minister of Justice shall determine a different
percentage.
In addition, the issue of shares by a public company, other than by
way of a public offering, to a 5% shareholder or to someone who, as a result
of such issue, shall become a 5% shareholder, requires the approval of the
board of directors and the shareholders at the general meeting.
Compensation.
Under our Articles of Association, no Director may be paid any
remuneration by the Company for his services as Director except as may be
approved by a shareholders' resolution, except for reimbursement of expenses
incurred in connection with fulfilling his duties as a Director. Our External
Directors are entitled to consideration and reimbursement of expenses only as
provided in regulations promulgated under the Companies Law and are otherwise
prohibited from receiving any other consideration, directly or indirectly, in
connection with their services as External Directors. In accordance with these
regulations, our shareholders approved an annual fee of approximately $7,500
and a participation fee of approximately $320 for attendance at a meeting of
the Board or a committee thereof to be paid to each of our External Directors.
During the year ended December 31, 2000, we paid Director fees
totaling approximately $104,000.
D. EMPLOYEES
As of June 27, 2001, we employed the following personnel:
Company Total Engineers Assembly Administration,
Employees Workers Marketing, Customer
Support
Aryt Industries, Ltd. 2 - - 2
Aryt Systems, Ltd - - - -
Amcoram, Ltd. 22 1 18 3
Combat Training Simulation, - - - -
Ltd. ("CTS")
Reshef Technologies, Ltd. 55 9 34 12
Officecore.com, Ltd. 12 1 7 4
Voice Diary, Ltd. 1 - - 1
Sensotech, Ltd. 15 7 1 7
Sensotech Automotive, Ltd. - - - -
Sky Dart, Ltd. - - - -
SygMed, Ltd. 7 1 3 3
ElscinTec Systems, Ltd. 22 8 7 7
Total 136 27 70 39
We are subject to Israeli labor laws and regulations with respect to
our Israeli employees. These laws principally concern matters such as paid
annual vacation, paid sick days, length of the work day and work week, minimum
wages, pay for overtime, insurance for work-related accidents, severance pay
and other conditions of employment.
Except with respect to Reshef, neither we nor our employees are
parties to any collective bargaining agreements. However, certain provisions
of the collective bargaining agreements between the General Labor Federation
of Israel (the "Histadrut") and the Coordinated Bureau of Economic
Organizations are applicable to us by order of the Israeli Ministry of Labor.
These provisions mainly concern the length of the work day, minimum daily
wages for professional workers, contributions to pension funds, insurance for
work-related accidents, procedures for dismissal of employees, determination
of severance pay, and other terms of employment. Israeli law generally
requires severance pay upon retirement or death of an employee, or termination
of employment without due cause. Our severance pay liability for key employees
is fully funded through managers' insurance policies and by accruals on our
financial statements. The severance pay of certain employees is funded by
regular contributions by us to external pension funds. We consider our
employee relations to be satisfactory.
On July 8, 1999, Reshef entered into a collective bargaining
agreement (the "Collective Agreement") with the Histadrut/Sderot Regional
Workers Committee. The Collective Agreement covers all of Reshef's employees,
other than certain of its executives. The Collective Agreement mainly concerns
the general work conditions such as acceptance of new employees, trial
periods, medical examinations, overtime, vacation and other general
work-related conditions. The Collective Agreement does not cover wages to pay
to employees which are covered by individual agreements with each employee.
E. SHARE OWNERSHIP
The following table sets forth, as of June 28, 2001, the number of
shares beneficially owned by Directors known to us to own beneficially more
than 1% of our Ordinary Shares.
NAME Number Of Shares Percentage
Beneficially Owned of all Ordinary Shares
Outstanding
Shmuel Bachar
1,100,000 2.3%
Ofer Shabtai* 1,878,800 3.9%
* Ofer Shabtai is the son of Gilad Shabtai. Each of Ofer Shabtai and Gilad
Shabtai confirmed the beneficial ownership disclaimer of Gilad Shabtai over
the shares held by Ofer Shabtai.
All of the Directors and officers of Aryt, other than those listed above, do
not own individually 1% or more of the share capital of the Company.
(Remainder of page intentionally left blank)
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of our ordinary shares as of June 28, 2001, by each person known by
us to be the beneficial owner of more than 5% of our outstanding ordinary
shares. Each of our shareholders has identical voting rights with respect to
its shares. However, under Israeli Law, our shares held by Amcoram are not
entitled to any voting rights. All of the information with respect to
beneficial ownership of the ordinary shares is given to the best of our
knowledge.
NAME OF BENEFICIAL OWNER NUMBER OF SHARES OWNED PERCENTAGE
- ------------------------ ---------------------- ----------
Benjamin Shabtai 14,726,454 30.9%
Sharon Shabtai(1) 4,087,146 8.6%
Amcoram Ltd. (2) 4,642,275 10.77%
(1) Sharon Shabtai is the son of Gilad Shabtai, our Chairman of the Board.
Each of Sharon Shabtai and Gilad Shabtai confirmed the beneficial ownership
disclaimer of Gilad Shabtai over the shares held by Sharon Shabtai. (2)Amcoram
is a wholly owned subsidiary of the Company. Pursuant to the Israeli Company
Law, such shares are not entitled to any voting power.
Other than Amcoram's initial acquisition of our shares pursuant to
the conversion of our Series 4 Debentures on March 2000, Amcoram had no other
significant acquisitions or dispositions of shares. See "Related Party
Transactions" below for a description of Amcoram's acquisition and conversion
of our Series 4 Debentures.
During the prior three years, Sharon Shabtai's significant
transactions with respect to the Company's shares were as follows:
Date Number of Shares Purchased
---- --------------------------
January 2000 415,785
February 2000 293,923
March 2000 857,172
April 2000 364,725
September 2000 1,800,000
October 2000 297,630
November 2000 57,911
During the prior three years, Benjamin Shabtai's significant
transactions with respect to the Company's shares were as follows:
Date Number of Shares Purchased
---- --------------------------
Prior to June 2001 1,309,000
June 2001 13,417,454
B. RELATED PARTY TRANSACTIONS
Yorokal's Loan.
Yorokal, which owned more than 5% of the Company shares at the time,
gave the Company loans, from November 1997 through April 1998, amounting to
approximately $1 million. The loans bear interest of prime + 3% and are
repayable immediately upon request. The loan could be converted into Company
shares upon the lender's request. The conversion rate was not to be less than
95% of the higher of the price of the shares on the Tel-Aviv Stock Exchange on
the date of notification of the private placement, or the average price of the
shares during the 90 trading days ending on the notification date.
In February 1998, upon request of Yorokal, the Company initiated the
process for a private offering of 3,550,460 Ordinary Shares to Yorokal, in
exchange of the above-mentioned loan. The Company made public its intention to
make such a private placement, and filed with the Israeli Securities Authority
("ISA") a notification to that effect. Due to the ISA's request for additional
details and clarifications in respect of the share issue, the process was
delayed, and the stock issue was not concluded since the shareholders' meeting
did not convene.
The loan was repaid in full in March 2000 (see note 28 of the
Consolidated Financial Statements).
Sherwing Loan.
Sherwing Investment S.A. ("Sherwing"), Yorokal's parent company, gave
a loan of approximately $850,000 to our subsidiary (at the time) Aryt Holdings
in the first quarter of 1997, in consideration of a convertible debenture
secured by Telegate shares purchased with the loan's money, giving the lender
the right to convert the loan into shares, which will constitute 99% of the
outstanding shares of Aryt Holdings at the time of conversion. In addition
Sherwing received an option, exercisable under certain conditions, to purchase
our shares in Aryt Holdings for $1,000. Sherwing did not have any interest
holding in the Company when the loan was made.
In December 1997, Aryt Holdings received an additional loan of
approximately $101,000 from Sherwing. In April and May 1998, Aryt Holdings
received additional loans from Sherwing in the amount of $55,000 and $1.29
million respectively. In September 1999, holders of Aryt Holdings exercised
their right to purchase all of the shares of Aryt Holdings in exchange for
$1,000. We recognized a capital gain of $968,000 on the sale.
Officer and Employee Compensation.
In January 2000, we issued 1,550,000 Series 9 Warrants to certain of our key employees as set
forth bellow:
- -----------------------------------------------------------------------------------------------------------
Employee Number of Vesting Period Exercise Price
Warrants
- -----------------------------------------------------------------------------------------------------------
Shmuel Bachar 700,000 200,000 Warrants fully vested as of July 1, NIS 1.35
2000. 16,662 Warrants per month from August 1,
2000, and 12,500 Warrants per month from August
1, 2001
- -----------------------------------------------------------------------------------------------------------
Arie Geller 350,000 43,750 Warrants fully vested as of July 1, NIS 1.35
2000. 7,291 Warrants per month
- -----------------------------------------------------------------------------------------------------------
Ran Eckhaus 200,000 25,000 Warrants fully vested as of July 1, NIS 1.35
2000. 4,166 Warrants per month
- -----------------------------------------------------------------------------------------------------------
Yosef Reich 150,000 18,750 Warrants fully vested as of July 1, NIS 1.35
2000. 3,125 Warrants per month
- -----------------------------------------------------------------------------------------------------------
Eitan Shemesh 150,000 18,750 Warrants fully vested as of July 1, NIS 1.35
2000. 3,125 Warrants per month
- -----------------------------------------------------------------------------------------------------------
The above options vested during August 2000. During August 2000, the directors
and employees of the Company exercised all of the outstanding Series 9 Stock
Options and purchased 1,550,000 Ordinary Shares for NIS 2,092,500. The
exercise of such options was financed by a loan from the Company to its
employees and officers for the exercise price. The loan is in NIS and is
linked to the Israeli Consumer Price Index and is set at the interest rate of
four percent (4%) per annum. The loan is due upon the employee's or officer's
disposition of such shares.
Amcoram.
In February 1999 we issued our Series 4 Debentures to a group of
investors led by Excellence Investments Ltd. and Tamar Central Pension Fund
directed by Israel Discount Bank Ltd. for an amount of $1.5 million. To secure
the repayment of the Series 4 Debentures, concurrent with the issuance of such
Debentures we purchased 23,678 ordinary shares of Telegate from Aryt Holdings
and registered a first priority charge on such shares in favor of the
debenture holders. During 1999 debenture holders converted 1,087,151 of their
Series 4 Debentures into 1,087,151 of our Ordinary Shares. In February 2000,
Amcoram exercised its option to purchase Aryt's Series 4 Debentures for $1.462
million. In March 2000, Amcoram converted the Series 4 Debentures into
approximately 10.77% of Aryt's issued and outstanding capital.
In October 2000, Aryt provided Amcoram with a loan of $3.08 million.
The loan bears interest at a rate of 6.9% per annum and is repayable in 40
equal quarterly installments commencing as of January 2002.
In January 2001, Amcoram distributed a dividend of approximately
$1.161 million to Aryt and Aryt re-contributed such amount to Amcoram as a
contribution of capital in exchange for additional shares of Amcoram.
Group Structure.
In January 2001, Aryt adopted a resolution to sell its subsidiaries
Reshef and Amcoram to Aryt Systems pursuant to a Share Exchange. After such
transaction is completed, Aryt will hold approximately 89% of the issued and
outstanding share capital of Aryt Systems. In addition, Aryt and Aryt Systems
have entered into a Management Agreement pursuant to which Aryt will provide
office and logistic services, consulting services, and certain other services
in exchange for the payment of fees on a cost-plus 17% basis, but not in an
excess of $80,000 plus 2.5% of the consolidated net profit of Aryt Systems.
The above transaction has been approved by the general meeting of the
shareholders of Aryt Systems and by the Tel-Aviv Stock Exchange. The sale of
Reshef and Amcoram to Aryt Systems has been completed on June 28, 2001.
Management Fees (as of June 28, 2001).
We entered into management agreements with the following of our
subsidiaries and investee companies:
Reshef, has agreed to pay Aryt an annual management fee of $70,000
plus 1.5% of its gross sales revenues. The agreement is for a period of 1
year, renewable annually. We have agreed to assign our rights to receive
annual fees from Reshef, to Aryt Systems as of July 1, 2001.
Amcoram has agreed to pay Aryt an annual management fee of $50,000
plus 1.5% of its Amcoram's sales revenues. The agreement is for a period of 1
year, renewable annually. We have agreed to assign our rights to receive
annual fees from Amcoram, to Aryt Systems as of July 1, 2001.
Sensotech has agreed to pay Aryt an annual management fee of $
25,000. The agreement is for a period of 1 year, renewable annually.
SygMed, an affiliate, has agreed to pay Aryt an annual management fee
of $ 30,000. The agreement is for a period of 1 year, renewable annually.
Officecore.com, an affiliate, has agreed to pay Aryt, commencing on
2001, an annual management fee of $ 15,000. The agreement is for a period of 1
year, renewable annually.
ElscinTec, an affiliate, has agreed to pay Aryt, commencing on 2001,
an annual management fee of not less than $25,000 and not more than
approximately $100,000. The amount of management fees will be determined by
the actual services provided. The agreement is for a period of 1 year,
renewable annually.
C. INTERESTS OF EXPERT AND COUNSEL
Not Applicable.
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Item 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 17 for Audited Consolidated Financial Statements.
Export Sales.
The Company had export sales from Israel to Asia of approximately
$854,000, $1.083 million and $837,000 during the year ended December 31, 2000,
1999 and 1998, respectively.
The Company had export sales from Israel to Europe of approximately
$282,000, $425,000 and $718,000 during the year ended December 31, 2000, 1999
and 1998, respectively.
Such export sales constituted 14.8%, 21.4% and 25.6% of our total
sales for each of the years ended December 31, 2000, 1999, l998,
respectively.(Note 21 Financial Statements)
Legal Proceedings.
Shareholder Litigation.
On November 2, 1999, a complaint was filed in the Tel Aviv District
Court by certain of our shareholders against Aryt Industries, Ltd., Channon
Associates Ltd., Gilad Shabtai, Yoram Oron and certain other parties (the
"Defendants"). The suit alleges that the Defendants, other than Aryt,
conspired to improperly take advantage of Aryt and its public shareholders for
their own personal benefit by assigning or transferring certain of our rights
in Telegate without receiving adequate consideration. In addition, the
plaintiffs allege that the Defendants improperly diluted, or caused the
dilution of, the value of Aryt by entering into, or approving, the private
placement with ASL since plaintiffs allege that they offered to purchase such
securities at a price higher than that paid by ASL. The plaintiffs are seeking
to have the claim certified as a shareholder derivative suit or a class action
suit and are seeking to have the relevant Defendants turn over all Telegate
shares held by them and to have the ASL share issuance declared void along
with certain other remedies.
The Court denied the plaintiff's motion to have the claim certified
as a class action suit and approved the shareholder derivative suit. The
Defendants have appealed to the Israeli Supreme Court challenging the
certification of the claim as a shareholder derivative suit. The parties are
waiting for the court to render a decision in the matter.
The Company denies such allegations and intends to vigorously defend
against the suit. However, there can be no assurance as to the outcome of any
litigation. We have reserved on our financial statement $110,000 in respect of
legal fees regarding this litigation.
Chief Scientist.
In 1998 we received a claim from the office of the Chief Scientist
alleging that we owe them $602,000 with respect to royalties from sales of
products financed in part through grants from the Chief Scientist.
During 2000, we reached an agreement with the Chief Scientist whereby
we will pay to the Scientist royalties in the amount of $220,000, during 2001,
and the Scientist will remove all demands in connection with the full
repayment of the royalties except as said below. However, a dispute still
remains regarding royalties of $60,000 that the Chief Scientist is claiming in
respect of a certain transaction. A provision was recorded in the financial
statements regarding the Company's commitments.
Customer Dispute.
There is a dispute between a subsidiary and two customers regarding
breakdowns which were found in fuzes that were supplied to them in the past.
In accordance with an understanding between the parties, it was agreed that
the subsidiary will reimburse for part of the expenses. The subsidiary
recorded in its books a provision of $ 446,000 in respect of said expenses.
We are not a party to any other material litigation or disputes.
Dividend Policy.
Since 1993, we have not paid dividends on our Ordinary Shares and do
not anticipate paying any such dividends in the foreseeable future.
B. SIGNIFICANT CHANGES
Other than as described herein or in the Notes to the Consolidated
Financial Statements attached hereto (see Item 17), there have been no
significant changes since the date of our financial statements filed herewith
under Item 17.
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Item 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Not Applicable, except for Items 9A(4) and Item 9C, which are detailed below:
Our Ordinary Shares are traded on the Tel-Aviv Stock Exchange and in
the over-the-counter market (OTC Bulletin Board) in the United States, and are
not traded on any other stock exchange. Our Ordinary Shares have been traded
on the Tel-Aviv Stock Exchange since December 1982. On December 11, 1996, our
Ordinary Shares were delisted from the NASDAQ Stock Market, and since April
1997 have been traded on the OTC Bulletin Board under the symbol ARYTF.
The prices set forth below are the high and low closing bid prices
for our ordinary shares as reported by the Tel-Aviv Stock Exchange and the OTC
Bulletin Board for the fiscal year ended December 31 of each year indicated
below, as of the end of each fiscal quarter indicated below, and for each
month for the six month period ending May 30, 2001. Such quotations reflect
inter-dealer prices, without retail markup, markdown, or commission and may
not necessarily represent actual transactions.
TEL-AVIV (in NIS) OTC (in US $)
-------- ---
YEAR HIGH LOW HIGH LOW
1996........................ ......... Not Available (see preceding
......... paragraphs)
1997........................ 2.61 0.57
1998........................ 1.74 0.61 ......... 0.55 0.10
1999........................ 1.62 0.80 ......... 0.44 0.22
2000........................ 2.17 0.92 ......... 0.72 0.16
QUARTER HIGH LOW HIGH LOW
1999: .........
First Quarter...... 1.13 0.90 ......... 0.24 0.19
Second Quarter..... 1.27 0.80 ......... 0.29 0.16
Third Quarter...... 1.62 1.14 ......... 0.44 0.22
Fourth Quarter..... 1.35 0.86 ......... 0.28 0.16
2000: .........
First Quarter...... 2.7 0.92 ......... 0.72 0.25
Second Quarter 2.02 1.34 ......... 0.51 0.31
Third Quarter...... 1.77 1.40 ......... 0.89 0.26
Fourth Quarter..... 1.40 1.007 ......... 0.38 0.20
2001: .........
First Quarter...... 1.093 0.897 ......... 0.25 0.16
MOST RECENT HIGH LOW HIGH LOW
SIX MONTHS
April 2001............... 1.01 0.897 ......... 0.21 0.17
March 2001.............. 0.99 0.897 ......... 0.23 0.16
February 2001........... 1.048 0.959 ......... 0.25 0.21
January 2001............ 1.093 0.959 ......... 0.25 0.21
December 2000......... 1.07 1.007 ......... 0.26 0.21
November 2000......... 1.09 1.053 ......... 0.25 0.20
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Item 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not Applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Objects and Purposes.
We were first registered under Israeli law on May 17, 1979 as a
private company, and on July 25, 1982 became a public company. Our
registration number with the Israeli registrar of companies is 52-003335-8.
The full details of our objects and purposes can be found in Section 2 of our
Memorandum of Association filed with the Israeli registrar of companies. Among
the objects and purposes stipulated are the following, "to engage in any kind
of commercial and/or productive business and to engage in any action or
endeavor which the company's managers consider to be beneficial to the
company."
Transfer of Shares and Notices.
Fully paid ordinary shares are issued in registered form and may be
freely transferred pursuant to our articles of association unless such
transfer is restricted or prohibited by another instrument. Unless otherwise
prescribed by law, each shareholder of record will be provided at least 21
calendar days' prior notice of any general shareholders meeting.
Election of Directors.
The Ordinary Shares do not have cumulative voting rights in the
election of Directors. Thus, the holders of Ordinary Shares conferring more
than 50% of the voting power have the power to elect all the Directors, to the
exclusion of the remaining shareholders.
Dividend and Liquidation Rights.
Dividends on our Ordinary Shares may be paid only out of profits and other
surplus, as defined in the Israeli Companies Law, as of the end of the most
recent fiscal year or as accrued over a period of two years, whichever is
higher. Our Board of Directors is authorized to declare dividends, provided
that there is no reasonable concern that the dividend will prevent us from
satisfying our existing and foreseeable obligations as they become due. In the
event of our liquidation, after satisfaction of liabilities to creditors, our
assets will be distributed to the holders of Ordinary Shares in proportion to
their respective holdings. This liquidation right may be affected by the grant
of preferential dividends or distribution rights to the holders of a class of
shares with preferential rights that may be authorized in the future.
Voting, Shareholders' Meetings and Resolutions.
Holders of Ordinary Shares have one vote for each Ordinary Share held
on all matters submitted to a vote of shareholders.
These voting rights may be affected by the grant of any special
voting rights to the holders of a class of shares with preferential rights
that may be authorized in the future. The quorum required for an ordinary
meeting of shareholders consists of at least two shareholders present in
person or by proxy who hold or represent between them at least 40% of the
outstanding voting shares unless otherwise required by applicable rules. A
meeting adjourned for lack of a quorum generally is adjourned to the same day
in the following week at the same time and place or any time and place as the
Board may designate. At such reconvened meeting the required quorum consists
of any two members present in person or by proxy.
Under the new Israeli Companies Law, unless otherwise provided in the
Articles of Association or applicable law, all resolutions of the shareholders
require a simple majority of the shares present, in person or by proxy, and
voting on the matter. However, our Articles of Association require approval of
75% of the shares present and voting to amend the Articles of Association and
to revise the structure of our Board of Directors.
Under the Companies Law, each and every shareholder has a duty to act
in good faith in exercising his rights and fulfilling his obligations towards
the company and other shareholders and refrain from abusing his power in the
company, such as in voting in the general meeting of shareholders on the
following matters:
- any amendment to the Articles of Association;
- an increase of the company's authorized share capital;
- a merger; or
- approval of certain actions and transactions which require
shareholder approval.
In addition, each and every shareholder has the general duty to
refrain from depriving the rights of other shareholders. Furthermore, any
controlling shareholder, any shareholder who knows that it possesses the power
to determine the outcome of a shareholder vote and any shareholder that,
pursuant to the provisions of the Articles of Association, has the power to
appoint or to prevent the appointment of an office holder in the company or
any other power toward the company is under a duty to act in fairness towards
the company.
The Companies Law does not describe the substance of this duty of
fairness. These various shareholder duties, which typically do not apply to
shareholders of U.S. companies, may restrict the ability of a shareholder to
act in what the shareholder perceives to be its own best interests.
Restrictions on Non-Israeli Residents.
The ownership or voting of our ordinary shares by non-residents of
Israel, except with respect to citizens of countries which are in a state of
war with Israel, is not restricted in any way by our Memorandum of Association
or Articles of Association or by the laws of the State of Israel.
Mergers and Acquisitions under Israeli Law.
The Israeli Companies Law includes provisions that allow a merger
transaction and requires that each company that is party to a merger approve
the transaction by its board of directors and a vote of the majority of its
shares, voting on the proposed merger at a shareholders' meeting called on at
least 21 days' prior notice. For purposes of the shareholder vote, unless a
court rules otherwise, the merger will not be deemed approved if a majority of
the shares held by parties other than the other party to the merger, or by any
person who holds 25% or more of the shares of the right to appoint 25% or more
of the directors of the other party, vote against the merger. Upon the request
of a creditor of either party of the proposed merger, the court may delay or
prevent the merger if it concludes that there exists a reasonable concern that
as a result of the merger, the surviving company will be unable to satisfy the
obligations of any of the parties to the merger. In addition, a merger may not
be completed unless at least 70 days have passed from the time that a proposal
of the merger has been filed with the Israeli Registrar of Companies.
The Companies Law also provides that an acquisition of shares of
public company must be made by means of tender offer if as a result of the
acquisition the purchaser would become a 25% shareholder of the company and
there is no 25% or more shareholder in the company. If there already is
another 25%, but less than 50%, shareholder in the company, the Companies Law
provides that an acquisition of shares of a public company must be made by
means of a tender offer if as a result of the acquisition the purchaser would
become a 45% shareholder of the company. This rule does not apply if someone
else is already a majority shareholder in the company. If following any
acquisition of shares, the acquirer will hold 90% or more of the company's
shares, the acquisition may not be made other than through a tender offer to
acquire all of the shares of such class. If more than 95% of the outstanding
shares are tendered in the tender offer, all the shares that the acquirer
offered to purchase will be transferred to it. However, the remaining minority
shareholders may seek to alter the consideration by court order.
Finally, Israeli tax law treats stock-for-stock acquisitions between
an Israeli company and a foreign company less favorably than does U.S. tax
law. For example, Israeli tax law subjects a shareholder who exchanges his
ordinary shares for shares in another corporation to taxation on half the
shareholder's shares two years following the exchange and on the balance four
years hereafter even if the shareholder has not yet sold the new shares.
Modification of Class Rights.
Our articles of association provide that the rights attached to any
class (unless otherwise provided by the terms of such class), such as voting,
rights to dividends and the like, may be varied by written consent of holders
of a majority of the issued shares of that class, or by adoption by the
holders of a majority of the shares of that class at a separate class meeting.
Board of Directors.
According to the Companies Law and our Articles of Association, the
management of our business is vested in our board of directors. The board of
directors may exercise all such powers and may take all such actions that are
not specifically granted to our shareholders. As part of its powers, our board
of directors may cause the company to borrow or secure payment of any sum or
sums of money, at such times and upon such terms and conditions as it thinks
fit, including the grants of security interests on all or any part of the
property of the company. A resolution proposed at any meeting of the board of
directors shall be deemed adopted if approved by a majority of the directors
present and voting on the matter. For additional information, please see Item
6C. "Board Practices".
Exculpation of Office Holders.
Under the Companies Law, an Israeli company may not exempt an office
holder from liability for a breach of his duty of loyalty, but may exempt in
advance an office holder from his liability to the company, in whole or in
part, for a breach of his duty of care provided the articles of association of
the company allow it to do so. Our articles allow us to exempt our office
holders to the fullest extent permitted by law.
Insurance of Office Holders.
Our articles of association provide that, subject to the provisions
of the Companies Law, we may enter into a contract for the insurance of the
liability of any of our office holders, with respect to an act performed in
the capacity of an office holder for:
- a breach of his duty of care to us or to another person;
- a breach of his duty of loyalty to us, provided that the office
holder acted in good faith and had reasonable cause to assume that
his act would not prejudice our interests; or
- a financial liability imposed upon him in favor of another person.
Indemnification of Office Holders.
Our articles of association provide that we may indemnify an office
holder against the following obligations and expenses imposed on the office
holder with respect to an act performed in the capacity of an office holder:
- a financial obligation imposed on him in favor of another person by a
court judgment, including a compromise judgment or an arbitrator's
award approved by the court; and reasonable litigation expenses,
including attorneys' fees, expended by the office holder or charged
to him by a court in connection with:
- proceedings we institute against him or instituted on our behalf or
by another person;
- a criminal charge from which he was acquitted; or
- a criminal proceeding in which he was convicted of an offense that
does not require proof of criminal intent.
Our Articles of Association also include provisions:
- authorizing us to undertake to indemnify an office holder as
described above, provided that the undertaking is limited to types of
events which our Board of Directors deems to be anticipated when the
undertaking is given and to an amount determined by our Board of
directors to be reasonable under the circumstances; and
- authorizing us to retroactively indemnify an officer or director.
Limitations on exculpation insurance and indemnification.
The Israeli Companies Law provides that a company may not exculpate
or indemnify an office holder, or enter into an insurance contract which would
provide coverage for any monetary liability incurred as a result of any of the
following:
- a breach by the office holder of his duty of loyalty unless, with
respect to insurance coverage, the office holder acted in good faith
and had a reasonable basis to believe that the act would not
prejudice the company;
- a breach by the office holder of his duty of care if the breach was
done intentionally or recklessly;
- any act or omission done with the intent to derive an illegal personal
benefit; or
- any fine levied against the office holder.
In addition, under the Companies Law, indemnification of, and
procurement of insurance coverage for, our office holders must be approved by
our audit committee and our board of directors and, if the beneficiary is a
director, by our shareholders.
We have agreed to exempt from liability and indemnify our office
holders to the fullest extent permitted under the Companies Law. We have
obtained directors and officers liability insurance for the benefit of our
office holders.
C. MATERIAL CONTRACTS
Investment in investee companies.
During 1999 and 2000, Aryt commenced its business plan of investing
in diversified companies in the defense technology and medical sectors. For a
description of each of the investment transactions, see Item 4. "Information
on the Company-Business Overview" and Item 5. "Operating Results-Liquidity"
and Item 7. "Major Shareholders and Related Party Transactions-Related Party
Transactions".
Group Structure.
The Company has entered into an agreement with respect to the
acquisition of Aryt Systems Ltd. and its conversion into a holding company to
hold all of Aryt's interests in Amcoram and Reshef. This transaction has been
completed and closed on June 28, 2001. See Item 4. "Information on the
Company-Business Overview" for a detailed description of the transaction.
Series 2, 3 & 4 Convertible Debentures.
For an description of Aryt's Series 2, 3 & 4 Convertible Debentures,
see Item 4. "Information on the Company-Business Overview" and Item 7. "Major
Shareholders and Related Party Transactions-Related Party Transactions".
Series 4, 7 & 8 Warrants
For an description of Aryt's Series 4, 7 & 8 Warrants, see Item 4.
"Information on the Company-Business Overview" and Item 7. "Major Shareholders
and Related Party Transactions-Related Party Transactions".
Sale of Terayon Shares.
During January, 2000, we closed the sale of all of our Telegate Ltd.
("Telegate") shares to Terayon Communication Systems ("Terayon"). In exchange
of our shares in Telegate, we received 220,000 Terayon shares and
approximately NIS 167,000 in cash. During the first 2 quarters of 2000, we
sold approximately 200,000 of our Terayon shares for an average price of $198
per share. The remainder of our Terayon shares which were not sold are held in
escrow under the terms of the Terayon transaction. We have written off such
shares due to a lack of certainty concerning the receipt of such shares and
the current price of Terayon shares (approximately $3-5 per share).
As a result of the transaction with Terayon (the sale of Telegate
shares to Terayon), we realized a capital gain of approximately $12 million.
As a result of the sale of Terayon's shares we had a gross capital gain of
approximately $28 million. These gains have been recorded in our financial
statements under "Other Income (Net)" and "Financial Expenses (Income) Net",
respectively.
D. EXCHANGE CONTROLS
In 1998, the Israeli currency control regulations were liberalized
significantly, as a result of which Israeli residents generally may freely
deal in foreign currency. There are currently no Israeli currency control
restrictions on remittances of dividends on our Ordinary Shares or the
proceeds from the sale of the shares, provided that any applicable Israeli
income tax has been paid or withheld on such amounts. See Section E, below,
entitled "Taxation". However, legislation remains in effect pursuant to which
currency controls can be imposed by administrative action at any time.
Non-residents of Israel may freely hold and trade our securities.
Neither our Memorandum of Association nor our Articles of Association nor the
laws of the State of Israel restrict in any way the ownership or voting of our
Ordinary Shares by non-residents, except that such restrictions may exist with
respect to citizens of countries which are in a state of war with Israel.
Israeli residents are allowed to purchase our Ordinary Shares.
E. TAXATION
The following contains a discussion of certain Israeli and United
States tax consequences to United States holders of Ordinary Shares not doing
business in Israel. In addition, the following is a summary of the current tax
structure applicable to companies in Israel, with special reference to its
effect on us. To the extent that the discussion is based on new tax
legislation that has not been subject to judicial or administrative
interpretation there can be no assurance that the views expressed in the
discussion will be accepted by the tax authorities in question. The discussion
is not intended, and should not be construed, as legal or professional tax
advice and is not exhaustive of all possible tax considerations.
Taxation under Israeli Law of Non-Israeli Shareholders; Estate Taxes.
Under an exemption currently in effect, and under the approval of the
applicable Israeli Tax Authority' s committee regarding the taxation of shares
which are listed for trade in Israel and in other stock exchange recognized
under Israeli regulations, so long as the Ordinary Shares are traded on the
Tel-Aviv Stock Exchange, gains on the sale of our Ordinary Shares will
generally be exempt from Israeli capital gains tax. In addition, the
Convention Between The State Of Israel And The Government Of The United States
Relating To Relief From Double Taxation (the "Treaty") exempts from Israeli
taxation any capital gain realized on the sale, exchange or other disposition
of Ordinary Shares by a U.S. Resident (as defined in the Treaty) who owned,
directly or indirectly, less than 10% of our voting stock at all times during
the 12-month period preceding such sale, exchange or other disposition.
Individuals who are non-residents of Israel are subject to a
graduated income tax on income derived from sources in Israel. On the
distribution of dividends other than stock dividends, income tax at the rate
of 25% (15% to the extent of dividends distributed from the taxable income
attributable to an Approved Enterprise) is withheld at the source, unless a
different rate is provided in a treaty between Israel and the shareholder's
country of residence. The Treaty provides for a maximum amount tax of 25% on
dividends paid to a resident of the United States (as defined in the Treaty).
The withheld tax is the final tax in Israel on dividends paid to non-residents
not doing business in Israel. A non-resident of Israel who has interest,
dividend or royalty income derived from or accrued in Israel from which tax
was withheld at the source is generally exempt from the duty to file tax
returns in Israel in respect of such income, provided that such income was not
derived from a business conducted in Israel by the taxpayer, and the non
resident has no other taxable sources of income in Israel.
Residents of the United States generally will be entitled to a credit
or deduction for United States federal income tax purposes in the amount of
the taxes withheld in Israel. See "U.S. Federal Tax Considerations" below.
o Different rules apply to investors doing business in Israel.
o Israel has no estate tax.
Proposed Tax Reform.
On July 26, 2000, the Israeli government submitted a bill to the
Israeli Parliament that would amend Israeli tax laws. The bill, based on the
recommendations of the public Committee on the Reform of Taxes on Income, aims
to broaden the categories of taxable income and to reduce the tax rates
imposed on employment income.
The bill proposes, among other things, to impose a tax upon capital
gains at rate of up to 25% upon individuals and non Israeli residents,
including capital gains derived from the sale of shares in publicly traded
companies (which are currently exempt from capital gains tax); to impose a tax
on all income of Israeli residents (individuals and corporations) regardless
of the territorial source of income; and to increase the tax rate from zero to
10% on the exempt period under the alternative package of benefits for
Approved Enterprises under the Law for the Encouragement of Capital
Investments, 1959.
In order to be enacted as legislation, the bill must be approved by
the Israeli Parliament and published. If implemented, the bill might result in
the imposition of Israeli capital gains taxes on non-Israeli residents who are
not eligible for an exemption under a relevant tax treaty.
General Corporate Tax Structure
The regular rate of corporate tax in Israel to which Israeli
companies are subject is 36%. As described below, the tax rate payable by a
company which derives income from an 'Approved Enterprise' may be considerably
less.
Law for the Encouragement of Capital Investments, 1959
The Law for Encouragement of Capital Investments, 1959, provides that
upon application to the Investment Center of the Ministry of Industry and
Trade of the State of Israel, a proposed capital investment in eligible
facilities may be designated as an "Approved Enterprise". Each certificate of
approval for an Approved Enterprise relates to a specific investment program
delineated both by its financial scope, including its capital sources, and by
its physical characteristics, such as the equipment to be purchased and
utilized pursuant to the program. The tax benefits derived from any such
certificate of approval relate only to taxable income derived from growth in
manufacturing revenues attributable to the specific Approved Enterprise. If a
company has more than one approval or only a portion of its capital
investments are approved, its effective tax rate is the result of a weighted
combination of the applicable rates. The benefits under the law are usually
not available with respect to income derived from products manufactured
outside of Israel.
Taxable income of a company derived from an Approved Enterprise is
subject to tax at the maximum rate of 25%, rather than the regular rate of
36%, for the benefit period. That income is eligible for further reductions in
tax rates depending on the percentage of the foreign investment in the
company's share capital (conferring rights to profits, voting and appointment
of directors) and the percentage of its combined share and loan capital owned
by non-Israeli residents ('foreign investment level'). The tax rate is:
o 20% if the foreign investment level is 49% or more but less than
74%;
o 15% if the foreign investment level is 74% or more but less than
90%; and
o 10% if the foreign investment level is 90% or more.
The lowest level of foreign investment during the year will be used
to determine the relevant tax rate for that year. These tax benefits are
granted for a limited period not exceeding seven years, or ten years for a
company whose foreign investment level exceeds 25% from the first year in
which the Approved Enterprise has taxable income.
The period of benefits may in no event, however, exceed the lesser of
12 years from the year in which production commenced and 14 years from the
year of receipt of Approved Enterprise status.
A company owning an Approved Enterprise may elect to receive, in lieu
of the foregoing, an alternative package of benefits. Under the alternative
package, the company's undistributed income derived from an Approval
Enterprise will be exempt from tax for a period of between two and ten years
from the first year of taxable income, depending on the geographic location of
the Approved Enterprise within Israel, and the company will be eligible for
the tax benefits under the law for the remainder of the benefit period. A bill
submitted to the Israeli parliament by the Israeli government on July 26, 2000
proposes, among other things, to increase the tax rate from zero to 10% during
the exempt period under the alternative package of benefits.
The Investment Center bases its decision of whether to approve or
reject a company's application for designation as an Approved Enterprise on
criteria set forth in the law and related regulations, the then prevailing
policy of the Investment Center and the specific objectives and financial
criteria of the applicant. Accordingly, a company cannot be certain in advance
whether its application will be approved. In addition, the benefits available
to an Approved Enterprise are conditional upon compliance with the conditions
stipulated in the law and related regulations and the criteria set forth in
the specific certificate of approval. In the event that a company violates
these conditions, in whole or in part, it may be required to refund all or a
portion of its tax benefits, linked to the Israeli consumer price index and
interest. These conditions include:
o adhering to the business plan contained in the application to
the Investment Center;
o financing at least 30% of the investment in property, plant and
equipment with the proceeds of the sale of ordinary shares;
o filing regular reports with the Investment Center with respect
to the Approved Enterprise; and
o obtaining the approval of the Investment Center for changes in
the ownership of a company.
Reshef's facilities were granted "approved enterprise" status under
the Law for the Encouragement of Capital Investments, 1959 ("the law").
Undistributed income derived from the approved enterprise is entitled to a
reduced tax rate of 25% for seven years.
The benefit period for the approved programs of Reshef commenced in
1993-1994.
Dividends paid out of income derived from an Approved Enterprise
during the tax exemption period will be subject to corporate tax in respect of
the amount distributed, including withholding tax thereon, at the rate that
would have been applicable had the company not elected the alternative package
of benefits. The dividend recipient is taxed at a reduced rate of 15%,
applicable to dividends from an Approved Enterprise, if the dividend is paid
during the same benefit period and at any time up to 12 years thereafter. The
withholding tax rate will be up to 25% after such period. If the foreign
investment level in the company exceeds 25%, the 12-year limitation period
does not apply. This tax should be withheld by the company at source,
regardless of whether the dividend is converted into foreign currency.
When dividends are distributed from the Approved Enterprise, they are
generally considered to be attributable to the entire enterprise and their
effective tax rate is a result of a weighted combination of the applicable tax
rates. In the event that we pay a cash dividend from income that is derived
from our Approved Enterprises pursuant to the alternative package of benefits,
which income would otherwise be tax-exempt, we would be required to pay tax on
the amount of income distributed as dividends at the rate which would have
been applicable if we had not elected the alternative package of benefits,
that rate is ordinarily up to 25% and to withhold at source on behalf on the
recipient of the dividend an additional 15% of the amount distributed.
The law also provides that an Approved Enterprise is entitled to
accelerated depreciation on its property and equipment that are included in an
approved investment program.]
Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969, or the
Industry Encouragement Law, a company qualifies as an 'Industrial Company' if
it is resident in Israel and at least 90% of its income in a given tax year,
determined in NIS, exclusive of income from capital gains, interest and
dividends, is derived from Industrial Enterprises owned by that company. An
'Industrial Enterprise' is defined as an enterprise whose major activity in a
particular tax year is industrial activity.
Industrial Companies qualify for accelerated depreciation rates for
machinery, equipment and buildings used by an Industrial Enterprise. An
Industrial Company owning an Approved Enterprise, as described below, may
choose between the above depreciation rates and the depreciation rates
available to Approved Enterprises.
Pursuant to the Industry Encouragement Law, an Industrial Company is
also entitled to amortize the purchase price of know-how and patents over a
period of eight years beginning with the year in which such rights were first
used.
Eligibility for the benefits under the law is not subject to receipt
of prior approval from any governmental authority.
Both Reshef and Amcoram qualify as an Industrial Company within the
definition of the Industry Encouragement Law. However, the definition may be
amended from time to time and the Israeli tax authorities, which reassess our
qualifications annually may determine that Reshef and Amcoram no longer
qualify as an Industrial Company. As a result of either of the foregoing, the
benefits described above might not be available in the future.
Taxation Under Inflationary Conditions
The Income Tax (Inflationary Adjustment) Law, 1985, commonly referred
to as the Inflationary Adjustments Law, attempts to overcome some of the
problems presented to a traditional tax system by rapid inflation. The
Inflationary Adjustments Law provides tax deductions and adjustments to
depreciation deduction and tax loss carry forwards to mitigate the effects
resulting from an inflationary economy. Our taxable income is determined under
this law.
The Israeli Income Tax Ordinance and regulations ___ promulgated
thereunder allow 'Foreign-Invested Companies,' which maintain their accounts
in U.S. dollars in compliance with the regulations, to adjust their tax
returns based on exchange rate fluctuations of the NIS against the U.S. dollar
rather than changes in the Israeli consumer price index, or CPI, in lieu of
the principles set forth by the Inflationary Adjustments Law. For these
purposes, a Foreign-Invested Company is a company more than 25% of the share
capital of which in terms of rights to profits, voting and appointment of
directors, and of the combined share capital of which including shareholder
loans and capital notes, is held by persons who are not residents of Israel. A
company that elects to measure its results for tax purposes based on the
dollar exchange rate cannot change the election for a period of three years
following the election. We adjust our tax returns based on the changes in the
Israeli CPI. Because we qualify as a 'Foreign-Invested Company,' we are
entitled to measure our results for tax purposes on the basis of changes in
the exchange rate of the U.S. dollar in future tax years.
A non-resident of Israel who receives interest, dividend or royalty
income derived from or accrued in Israel, from which tax was withheld at the
source, is generally exempted from the duty to file tax returns in Israel with
respect to such income, provided such income was not derived from a business
conducted in Israel by the taxpayer and the taxpayer has no other taxable
sources of income in Israel.
U.S. Federal Tax Considerations; Taxation of U.S. Holders.
The following summary describes the principal United States federal
income tax consequences to U.S. Holders (as defined below) of an investment in
our Ordinary Shares. This summary does not, however, purport to be a
comprehensive description of all of the tax considerations that may be
relevant to a decision to acquire our Ordinary Shares. The summary applies
only to U.S. Holders that will hold our Ordinary Shares as capital assets and
does not address special classes of holders, such as dealers in securities,
holders whose "functional currency" is not the U.S. dollar, or holders that
own 10% or more of our voting shares.
In general, a "U.S. Holder" is any holder of Ordinary Shares who or
which is (i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States or under the laws of the
United States, any state thereof or the District of Colombia, (iii) an estate
the income of which is included in gross income for United States federal
income tax purposes, regardless of source or (iv) a trust, if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. Notwithstanding
the preceding sentence to the extent provided by regulations, certain trusts
in existence on August 20, 1996, and treated as United States persons prior to
such date that elect to continue to be treated as United States persons, shall
also be considered U.S. Holders.
Distributions.
In general, for U.S. federal income tax purposes, distributions paid
by us, if any, in respect of our Ordinary Shares to a U.S. Holder will, to the
extent of our current and accumulated earnings and profits, be treated as
dividends taxable as ordinary income, then as a non-taxable return of capital
to the extent of such U.S. Holder's adjusted tax basis in the Ordinary Shares,
and thereafter, as gain from the sale of a capital asset.
The gross amount of any dividends (before reduction for any Israeli
tax withheld at source) received from us will be included in a U.S. Holder's
ordinary income. Dividends paid in NIS will be included in the income of a
U.S. Holder in a U.S. dollar amount calculated by reference to the spot rate
in effect on the day they are received by a U.S. Holder. If such payments are
converted into U.S. dollars on the day they are received, the U.S. Holder
generally should not be required to recognize foreign currency gain or loss in
respect of the dividend income.
Dividends received by a U.S. Holder will generally be treated as
foreign source "passive income" or, with respect to certain holders,
"financial services income" for foreign tax credits purposes. In general, a
U.S. Holder may elect for each taxable year whether to claim a deduction or,
subject to certain limitations, a credit in computing its U.S. tax liability
for Israeli taxes withheld from dividends received on the Ordinary Shares.
Dividends received by a U.S. Holder that is a corporation generally will not
qualify for the deduction for dividends received.
Dispositions.
Subject to the Passive Foreign Investment Company Rules discussed
below, upon the sale or other disposition of Ordinary Shares a U.S. Holder
will recognize gain or loss for U.S. federal income tax purposes in an amount
equal to the difference between the amount realized on the sale of disposition
and the U.S. Holder's adjusted tax basis in the Ordinary Shares. Such gain or
loss will be capital gain or loss if the Ordinary Shares are a capital asset
in the hands of the U.S. Holder. The maximum tax rate applicable to net
capital recognized by individuals and other non-corporate taxpayers is 20% for
capital assets held for more than one year. The maximum net capital gains tax
rate for corporations is 35%. Under most circumstances, any gain recognized on
the sale or other disposition of Ordinary Shares will be treated under article
4 (6) of the Treaty as Israeli source income. Accordingly, if Israel were to
impose tax on any such gain, the Israeli tax would generally be available as a
credit for the U.S. Holder against U.S. federal income tax subject to the
limitations under U.S. federal law.
Passive Foreign Investment Company.
We believe that historically we have not been a passive foreign
investment company for United States federal income tax purposes and do not
expect to become a passive foreign investment company in the future. However,
because of the sale of certain securities that we owned during 2000 (the
"Telegate-Terayon" transaction), we believe that we would be a passive foreign
investment company for that year. Consequently, a U.S. Holder who owns
Ordinary Shares during 2000 will be subject to the passive investment company
tax rules discussed below.
A company is considered a passive foreign investment company for any
taxable year if either (i) at least 75% of its gross income is passive income,
or (ii) at least 50% of the value of its assets (based on an average of the
quarterly values of the assets during a taxable year) is attributable to
assets that produce or are held for the production of passive income. For
purposes of this test, we are treated as owning our proportionate share of the
assets and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, more than 25% (by value)
of the stock.
In determining whether we are a passive foreign investment company,
we rely, among other things, on our projected income and projected acquisition
and capital expenditure plans for the current year and for future years.
However, it is possible that our actual income, acquisitions and capital
expenditure will not match our projections, which may result in our
classification as a passive foreign investment company. This was the case for
2000.
We must make a separate determination each year as to whether we are
a passive foreign investment company. As a result, our passive foreign
investment company status may change.
If we are a passive foreign investment company for any taxable year
during which you hold Ordinary Shares, you will be subject to special tax
rules with respect to any excess distribution that you receive and any gain
you realize from a sale or other disposition (including a pledge) of the
Ordinary Shares, unless you make a mark-to-market election as discussed below.
Distributions you receive in a taxable year that are greater than 125% of the
average annual distributions you received during the shorter of (i) the three
preceding taxable years and (ii) your holding period for the Ordinary Shares
will be treated as an excess distribution. Under these special tax rules (a)
the excess distribution or gain from a sale or other disposition (including a
pledge) of the Ordinary Shares will be allocated ratably over your holding
period for the ordinary Shares, (b) the amount allocated to the current
taxable year, and any taxable year prior to the first taxable year in which we
were a passive foreign investment company, will be treated as ordinary income,
and (c) the amount allocated to each other year will be subject to tax at the
highest tax rate in effect for that year and the interest charge generally
applicable to underpayments of tax will be imposed on the resulting tax
attributable to each such year.
The tax liability for amounts allocated to years prior to the year of
disposition or excess distributions cannot be offset by any net operating
losses, and gains (but not losses) realized on the sale of the Ordinary Shares
cannot be treated as capital, even if you hold the Ordinary Shares as capital
assets.
If we are a passive foreign investment company, you may avoid
taxation under the rules described above by making a qualified electing funds
election to include your share of our income on a current basis. However, you
may make a qualified electing funds election only if we agree to furnish you
annually with certain tax information, and we do not presently intend to
prepare or provide such information.
If we have been a passive foreign investment company and then cease
to be one, a U.S. Holder may avoid taxation under the passive foreign
investment company rules discussed above for future years when we are not a
passive foreign investment company by making a deemed sales election once we
no longer qualify as a passive foreign investment company. The effect of such
an election is to cause you to be treated as having sold your shares on the
last day of the year for which we were a passive foreign investment company.
Any gain from such deemed sale would be taxed under the rules described above.
Alternatively, a U.S. Holder of marketable stock in a passive foreign
investment company may also make a mark-to-market election for stock of a
passive foreign investment company to elect out of taxation under the rules
described above. If you make a mark-to-market election for the Ordinary
Shares, you will include in income each year an amount equal to the excess, if
any, of the fair market value of the Ordinary Shares as of the close of your
taxable year over your adjusted basis in such Ordinary Shares. You are allowed
a deduction for the excess, if any, of the adjusted basis of the Ordinary
Shares over their fair market value as of the close of the taxable year.
However, deductions are allowable only to the extent of any net mark-to-market
gains on the stock included in your income for prior taxable years. Amounts
included in your income under a mark-to-market election, as well as gain on
the actual sale or other disposition of the Ordinary Shares, are treated as
ordinary income. Ordinary loss treatment also applies to the deductible
portion of any mark-to-market loss on the Ordinary Shares, as well as to any
loss realized on the actual sale or disposition of the Ordinary Shares, to the
extent that the amount of such loss does not exceed the net mark-to-market
gains previously included for such Ordinary Shares. Your basis in the Ordinary
Shares will be adjusted to reflect any such income or loss amounts. The tax
rules that apply to distributions by corporations which are not passive
foreign investment companies would apply to distributions by us.
The mark-to-market election is available only for stock which is
regularly traded on a national securities exchange that is registered with the
Commission or on NASDAQ, or an exchange or market that the U.S. Secretary of
the Treasury determines has rules sufficient to ensure that the market price
represents a legitimate and sound fair market value. We expect that our
Ordinary Shares will continue to be listed on the Tel-Aviv Stock Exchange and,
consequently, the mark-to-market election would be available to you were we to
be or become a passive foreign investment company.
If you hold Ordinary Shares in any year in which we are a passive
foreign investment company, you would be required to file Internal Revenue
Service Form 8621 regarding distributions received on the Ordinary Shares and
any gain realized on the disposition of the Ordinary Shares.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable.
G. STATEMENT BY EXPERTS
Not Applicable.
H. DOCUMENTS ON DISPLAY
Any statement in this annual report about any of our contracts or
other documents is not necessarily complete. If the contract or document is
filed as an exhibit to a registration statement, the contract or document is
deemed to modify the description contained in this annual report. You must
review the exhibits themselves for a complete description of the contract or
document.
You may review a copy of our filings with the SEC, including exhibits
and schedules, at the SEC's public reference facilities in Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the SEC located at 7 World Trade Center, 13th Floor, New
York, New York 10048 and at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of
such materials from the Public Reference Section of the SEC, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at proscribed
rates. You may call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. The SEC maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. Although we make
many of our filings with the SEC electronically, as a foreign private issuer
we are not obligated to do so.
You may read and copy any reports, statements or other information
that we file with the SEC at the addresses indicated above and you may also
access them electronically at the web site set forth above. These SEC filings
are also available to the public from commercial document retrieval services.
I. SUBSIDIARY INFORMATION
Not Applicable.
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Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash, cash equivalents or short-term investments were
approximately $3.08 million, $1.62 million and $800,000 at December 31, 2000,
1999, and 1998, respectively, and we had cash flow from operations of $(1.92)
million, ($772,000) and $155,000 for 2000, 1999 and 1998, respectively. The
results of our operations are affected by, among other things, the inflation
rate in Israel, the devaluation rate of the Shekel in relation to the dollar,
and the timing of devaluation of the Shekel compared to the timing of
inflation. Since we incur significant expenses in Shekels, the profitability
of our sales in dollars is reduced when the rate of devaluation of the Shekel
does not keep pace with the inflation rate in Israel (which has been the case
each year except 1998).
As discussed under Item 4.C "Description of Business-Special
Considerations Applicable to Israeli Companies", through "linkages," many
obligations of or payments to Israeli companies, including us, are increased
from time to time by an amount related to changes in indices, such as a price
index or the exchange rate of a foreign currency. The relationship between our
assets and liabilities in Shekels, and whether and to what extent they are
linked to different indices and the differences in rates of change of those
indices, impacts our financial results.
For financial reporting purposes, our income and expenses are
translated into dollars at prevailing exchange rates from time to time. Our
results of operations can be materially affected if the rate of inflation in
Israel differs materially from the rate of devaluation of the Shekel relative
to the dollar.
Since exchange rates between the Shekel and the dollar, and the rate
of inflation in Israel, fluctuate continuously we cannot predict the impact of
such fluctuations on future operations or reported results of operations.
During 1998 and 1999, we did not hold any securities or other
financial instruments or derivatives for trading purposes, held only
immaterial amounts of deposits as interim investments pending use in our
business, and did not have any material market risk attributable to such
deposits.
As a result of our sale of our interest in Telegate and our
disposition of substantially all of the Terayon shares that we received in
that transaction, we received gross proceeds of approximately $40.73 million.
After payment of transaction expenses, debts, provision for taxes, and
application of funds to acquisitions of interests in our investee companies,
at the completion of our sale of our Terayon shares, we had approximately $24
million, at December 31, 2000 we had, on a consolidated basis, approximately
$18 million, and at June 28, 2001 we have, on a consolidated basis,
approximately $15 million, available for investment in our business.
Pending application in our existing businesses or in investment
opportunities in emerging technology companies, our funds have been invested
as follows:
(i) A portion of our funds has been invested in saving
accounts, or mutual funds investing in saving accounts, in major
Israeli banks linked to the U.S. dollar. Those funds are available to
us upon demand. The amounts so invested, the weighted average
earnings (loses) borne by those funds, and the risk-adjusted rate of
return on those funds is summarized below for the periods indicated.
Upon demand; (i) in case of an investment in a bank, we were entitled
to receive the Shekel equivalent of the dollar amount indicated,
together with interest accrued for the period from deposit until
withdrawal, and (ii) in case of an investment in a mutual fund we
were entitled to receive the Shekel equivalent of the dollar amount
of the aggregate units' value we had in such mutual funds, upon
withdrawal.
Quarter Ended Balance(1) Income (loss)(2)
(in million US$) (in million US$)
------------------------------------------------------------------
3/31/00 11 (0.15)
------------------------------------------------------------------
6/30/00 14 0.20
------------------------------------------------------------------
9/30/00 11 0.15
------------------------------------------------------------------
12/31/00 9 (0.04)
------------------------------------------------------------------
3/31/01 7 0.05
------------------------------------------------------------------
(1) The balance, in dollars, on closing of quarter.
(2) The cumulative gain or (loss) of amounts invested, in
banks and mutual funds, during the quarter, in dollars, on
balance of deposit during the quarter.
(ii) A portion of our funds has been invested in daily NIS
saving accounts in major Israeli banks, or mutual funds investing in
NIS saving accounts. Those funds are available to us upon demand. The
amounts so invested, the weighted average earning (loss) borne by
those funds, and the risk-adjusted rate of return on those funds is
summarized below for the periods indicated. Upon demand: (i) in case
of investment in a bank, we were entitled to receive in Shekels the
amount indicated, together with the interest accrued on a daily
basis, and (ii) in case of an investment in a mutual fund we were
entitled to receive in Shekels the aggregate units' value we had in
such mutual funds, upon withdrawal.
-----------------------------------------------------------------
Quarter Ended Balance(1) Income (loss)(2)
(in million US$) (in million US$)
-----------------------------------------------------------------
3/31/00 5 0.01
-----------------------------------------------------------------
6/30/00 4 (0.04)
-----------------------------------------------------------------
9/30/00 6 (0.11)
-----------------------------------------------------------------
12/31/00 4 0.04
-----------------------------------------------------------------
3/31/01 4 0.03
-----------------------------------------------------------------
(1) The balance, in dollars, on closing of quarter.
(2) The cumulative gain or (loss) of amounts
invested, in banks and mutual funds, during the quarter,
in dollars, on balance of deposit during the quarter.
Loses may be attributed, among others, to the
fluctuation of the Shekel in relation to the dollar at
the end of each quarter.
(c) A portion of our funds has been invested in a portfolio of
equity securities listed on the NASDAQ and/or Tel Aviv Stock
Exchanges. The amounts so invested for the periods indicated below,
and the value of such investments at the beginning and end of such
period, are summarized below.
---------------------------------------------------------------
Quarter Ended Closing Balance(1) Earning (loss)(2)
(in million US$) (in million US$)
---------------------------------------------------------------
3/31/00 6 (0.78)
---------------------------------------------------------------
6/30/00 5 0.07
---------------------------------------------------------------
9/30/00 5 (0.07)
---------------------------------------------------------------
12/31/00 3 (2.57)
---------------------------------------------------------------
3/31/01 2 (0.49)
---------------------------------------------------------------
(1) The value, in dollars of the holdings at the
closing of the quarter (measured by the closing sale
price of such holdings on the last trading day of the
relevant quarter).
(2) Gain or (loss) for the period based on the change from
the opening balance to the closing balance. The
sum of (a) the earnings/losses from securities held
through the quarter (measured by the closing sale price
of such holdings on the last trading day of such
quarter), plus/minus (b) in the case of the sale of any
holding, the earnings/loss during such quarter from the
sold holdings, plus (c) any dividends or other
distributions during the quarter. Loses may be
attributed, among others, to the fluctuation of the
Shekel in relation to the dollar at the end of each
quarter.
At June 28, 2001 the market value of the portfolio was $12.5
million, and together with an additional investment in the amount of $2.5
million (a tax refund received during June 2001) - $15 million.
There is no assurance as to the results of our investments for the
year ended 2001.
We have not acquired any other securities or financial instruments
or any derivatives, nor have we entered into any hedging transactions (other
than the linkages in the certificates of deposit) with respect to our cash
at hand. None of our interim investments have been made for trading
purposes, although our equity securities are traded in order to preserve
capital and mitigate risk.
We believe that our interim investments have not subjected us to any
currency or inflation risks that we are not already subject to in our
business, as described above. Our NIS savings accounts subject us to
interest rate risk, to the extent that the rate of inflation in Israel from
time to time exceeds the interest rate on our savings account. However, in
2000 the rate of inflation in Israel was 0% and since 1995 the rate of
inflation in Israel has been less than 9% each year except 1996 (when it was
10.6%). Our investment in equity securities exposes us to equity price risks
of the equity markets generally, and of the technology sector in particular,
the timing and magnitude of which we cannot predict.
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Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
(Remainder of page intentionally left blank)
PART II
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable.
(Remainder of page intentionally left blank)
Item 14. Material Modifications to the Rights of Security Holders and
Use of Proceeds
Not Applicable.
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Item 15. [RESERVED]
(Remainder of page intentionally left blank)
Item 16. [RESERVED]
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PART III
Item 17. FINANCIAL STATEMENTS
ARYT INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000
IN U.S. DOLLARS
INDEX
Page
-------
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Statements of Changes in Shareholders' Equity (Deficiency) F-6
Consolidated Statements of Cash Flows F-7 - F-9
Notes to Consolidated Financial Statements F-10 - F-58
List of Group Companies F-59
- - - - - - - - - - - - -
ERNST & YOUNG
Kost Forer & Gabbay Phone: 972-3-6232525
3 Aminadav St. Fax: 972-3-5622555
Tel-Aviv 67067, Israel
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
ARYT INDUSTRIES LTD.
We have audited the accompanying consolidated balance sheets of Aryt
Industries Ltd. ("the Company") and its subsidiaries as of December 31, 2000
and 1999 and the related consolidated statements of operations, changes in
shareholders' equity (deficiency) and cash flows for each of the three years
in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We did not audit the financial statements of certain affiliates, the
investment in which on the equity basis of accounting totaled $ 1,113 thousand
as of December 31, 2000, and the Company's share in the losses of which
totaled $ 137 thousand for the year ended December 31, 2000. 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 those certain
affiliates, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards in the United States and Israel, including those prescribed by the
Israeli Auditors' Regulations (Auditor's 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 management, 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2000 and 1999 and the
consolidated results of their operations, changes in equity (deficiency) and
cash flows for each of the three years in the period ended December 31, 2000,
in conformity with generally accepted accounting principles in Israel which
differ in certain respects from those followed in the United States (see Note
30 to the consolidated financial statements).
Tel-Aviv, Israel KOST FORER & GABBAY
March 29, 2001 A Member of Ernst & Young International
ARYT INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------
2000 1999
---------------- ----------------
Note U.S. dollars
--------- -------------------------------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 4 3,082 1,620
Marketable securities 5 15,395 -
Trade receivables 6 3,120 1,588
Other accounts receivable and prepaid expenses 7 2,968 171
Inventory 8 2,574 3,364
Investment in investee 9 - 680
---------------- ----------------
27,139 7,423
---------------- ----------------
LONG-TERM INVESTMENTS, LOANS AND RECEIVABLES:
Long-term loans and receivables 10 103 -
Investments in investees 9 2,734 -
---------------- ----------------
2,837 -
---------------- ----------------
PROPERTY AND EQUIPMENT, NET 11 1,628 1,857
---------------- ----------------
MINORITY INDEBTEDNESS 65 -
---------------- ----------------
OTHER ASSETS, NET 12 3,605 51
---------------- ----------------
35,274 9,331
================ ================
The accompanying notes are an integral part of the consolidated financial
statements.
ARYT INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------------
2000 1999
------------------- -------------------
Note U.S. dollars
---------- ------------------------------------------
(In thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Credit from banks 13 1,581 4,359
Trade payables 14 1,222 819
Other accounts payable and accrued expenses 15 2,701 2,364
Customer advances 16 61 298
------------------- -------------------
5,565 7,840
------------------- -------------------
LONG-TERM LIABILITIES:
Convertible debentures 17 1,698 2,122
Long-term bank loans, net of current maturities 18a 2,537 -
Other long-term liabilities 18b 839 -
Accrued severance pay 19 411 368
------------------- -------------------
5,485 2,490
------------------- -------------------
COMMITMENTS AND CONTINGENT LIABILITIES 21
SHAREHOLDERS' EQUITY (DEFICIENCY)
Share capital -
Ordinary shares of NIS 1 par value - 22
Authorized: 61,000,000 shares as of December 31, 2000
and 1999. Issued and outstanding: 47,640,031 and
38,297,756 shares as of December 31, 2000 and 1999,
respectively. 13,481 11,157
Additional paid-in capital 11,877 11,693
Accumulated foreign currency translation adjustments 9 -
Treasury stock (1,337) -
Notes from employees (532) -
Retained earnings (accumulated deficit) 726 (23,849)
------------------- -------------------
24,224 (999)
------------------- -------------------
35,274 9,331
=================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
ARYT INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Note U.S. dollars
--------- --------------------------------------------------
(In thousands, except per share data)
Sales and services provided 26 7,681 7,041 6,073
Cost of sales 25a 5,938 5,533 5,065
-------------- -------------- --------------
--------------
Gross profit 1,743 1,508 1,008
-------------- -------------- --------------
--------------
Research and development costs, net 25b 858 845 779
Selling and marketing expenses 25c 359 426 402
General and administrative expenses 25d 2,255 1,452 1,631
-------------- -------------- --------------
--------------
3,472 2,723 2,812
-------------- -------------- --------------
--------------
Operating loss 1,729 1,215 1,804
Financial income (expenses), net 25e 23,411 (322) (503)
Other income (expenses), net 25f 11,884 2,234 (9)
-------------- --------------
--------------
Income (loss) before taxes on income 33,566 697 (2,316)
Taxes on income 20f 8,594 - 27
-------------- -------------- --------------
Income (loss) after taxes on income 24,972 697 (2,343)
Equity in losses of affiliates 414 2,563 1,777
Minority interest in subsidiaries 17 - -
-------------- -------------- --------------
Income (loss) from continuing operations 24,575 (1,866) (4,120)
Income from discontinued operations 3 - - 1,054
-------------- -------------- --------------
Net income (loss) for the year 24,575 (1,866) (3,066)
============== ============== ==============
--------------
Earnings (loss) per NIS 1 nominal value of
Ordinary shares (in dollars):
Basic earnings (loss) per share:
Earnings (loss) from continuing operations 27 0.57 (0.05) (0.15)
============== ============== ==============
Earnings from discontinued operations - - 0.04
============== ============== ==============
Earnings (loss) for the year 0.57 (0.05) (0.11)
============== ============== ==============
Diluted earnings (loss) per share:
Earnings (loss) from continuing operations 27 0.51 (0.05) (0.15)
============== ============== ==============
Earnings from discontinued operations - - 0.04
============== ============== ==============
Earnings (loss) for the year 0.51 (0.05) (0.11)
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
ARYT INDUSTRIES LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
foreign Retained Notes
Additional currency earnings receivable
Share paid-in translation Treasury (accumulated from
capital capital adjustments stock (deficit) Total employees Total
------- ----------- -------------- --------- ------------ ------ --------- -----
U.S. dollars
------------------------------------------------------------------------------------------------
(In thousands)
Balance as of January 1, 1998 8,336 11,573 - - (18,917) 992 - 992
Conversion of debentures into 288 155 - - - 443 - 443
shares Loss for the year - - - - (3,066) (3,066) - (3,066)
--------- ---------- ------------ ------------ ----------- ------- ------ --------
Balance as of December 31, 1998 8,624 11,728 - - (21,983) (1,631) - (1,631)
Conversion of debentures into 1,789 2 - - - 1,791 - 1,791
shares Issuance of shares, net 744 (37) - - - 707 - 707
Loss for the year - - - - (1,866) (1,866) - (1,866)
--------- ---------- -------------- ------------- ---------- ------ ------ ---------
Balance as of December 31, 1999 11,157 11,693 - - (23,849) (999) - (999)
Conversion of debentures into shares
by subsidiary 1,166 171 - (1,337) - - - -
Exercise of stock options into 774 (10) - - - 764 - 764
shares Capital surplus from acquisition
of Company's convertible debentures by
subsidiary - (125) - - - (125) - (125)
Issuance of shares to employees 385 135 - - - 520 (520) -
Erosion of notes receivable from
employees - 12 - - - 12 (12) -
Foreign currency translation - - 9 - - 9 - 9
adjustment
Net income for the year - - - - 24,575 24,575 - 24,575
--------- ---------- --------- ---------- --------- ------ ----- --------
Balance as of December 31, 2000 13,481 11,877 9 (1,337) 726 24,756 (532) 24,224
=========== ========== ========= ========== ========== ====== ===== ========
The accompanying notes are an integral part of the consolidated financial
statements.
ARYT INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
U.S. dollars
--------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income (loss) for the year 24,575 (1,866) (3,066)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Impairment of an investment 75 - -
Gain from sale of marketable securities, net (23,556) - -
Gain from issuance of shares by subsidiary - (1,257) -
Depreciation and amortization 548 577 538
Deferred income taxes, net - - 27
Increase (decrease) in accrued severance pay 43 (20) (153)
Capital loss (gain) from sale of property and equipment (13) (9) 9
Minority interest in subsidiaries (17) - -
Equity in losses of affiliates 414 2,563 1,777
Gain from sale of investment in affiliate, net of tax (3,352) (968) -
Erosion of loans, debentures and interest - 53 289
Results of operations, net of changes in intercompany
balances and changes in cash and cash equivalents
related to discontinued operations - - (1,054)
Decrease (increase) in trade receivables (1,533) (283) 1,355
Decrease (increase) in other accounts receivable and
prepaid expenses (236) 292 140
Decrease (increase) in inventory 1,103 930 (531)
Increase (decrease) in trade payables 372 (9) (462)
Increase (decrease) in other accounts payable
and accrued expenses 208 (71) 767
Increase (decrease) in customer advances (548) (704) 519
-------------- -------------- --------------
Net cash provided by (used in) operating activities (1,917) (772) 155
-------------- -------------- --------------
The accompanying notes are an integral part of the consolidated financial
statements.
ARYT INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
U.S. dollars
--------------------------------------------------
(In thousands)
Cash flows from investing activities:
Proceeds from sale of marketable securities, net of tax 9,614 - -
Investment in investees (2,391) - (1,245)
Proceeds from sale of investment in a subsidiary (a) - (12) -
Purchase of property and equipment (269) (241) (131)
Loans granted to an investee - - (579)
Proceeds from sale of property and equipment 75 43 9
Investment in long-term deposit (71) - -
Loans granted to employees (70) - -
Proceeds from loans granted to employees 1 - -
Purchase of other assets (1,257) - -
Payment for acquisition of certain companies (b) (1,957) - -
-------------- -------------- --------------
Net cash provided by (used in) investing activities 3,675 (210) (1,946)
-------------- -------------- --------------
Cash flows from financing activities:
Short-term credit from banks, net (715) 1,269 (310)
Issuance of shares (net of issuance expenses) - 707 -
Proceeds from exercise of stock options 764 - -
Proceeds from issuance of convertible debentures, net - 1,500 1,415
Proceeds from long-term loans 2,716 18 2,100
Principal payments of long-term loans (1,175) (1,268) (218)
Redemption and payment of convertible debentures (1,886) (424) (424)
-------------- -------------- --------------
Net cash provided by (used in) financing activities (296) 1,802 2,563
-------------- -------------- --------------
Increase in cash and cash equivalents 1,462 820 772
Cash and cash equivalents at the beginning of the year 1,620 800 28
-------------- -------------- --------------
Cash and cash equivalents at the end of the year 3,082 1,620 800
============== ============== ==============
Supplemental disclosure of cash flows information:
Cash paid during the year for interest 187 257 348
============== ============== ==============
Cash paid during the year for taxes on income 11,364 6 14
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
ARYT INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
U.S. dollars
--------------------------------------------------
(In thousands)
(a) Sale of investment in a subsidiary:
-----------------------------------
Working capital (excluding cash) - 571 -
Investment in an affiliate - 390 -
Long-term liabilities - (1,941) -
Gain from sale of investment in a subsidiary - 968 -
-------------- ------------- --------------
- (12) -
============== ============= ==============
(b) Investment in newly consolidated subsidiaries:
----------------------------------------------
Estimated fair value of assets acquired and
liabilities assumed as of the acquisition date:
Working capital deficiency (excluding cash and
cash equivalent) 400 - -
Investment in an affiliate 15 - -
Property and equipment (7) - -
Minority interest at date of acquisition (49) - -
Goodwill created (2,402) - -
Short-term loan from the Company 55 - -
Long-term loans including current maturities 31 - -
-------------- ------------- --------------
(1,957) - -
============== ============= ==============
(c) Significant non-cash operations:
--------------------------------
Conversion of debentures into shares 1,337 1,791 443
============== ============= ==============
Acquisition of investee by long-term borrowing 839 - -
============== ============= ==============
Issuance of shares to employees against notes
receivable 520 - -
============== ============= ==============
The accompanying notes are an integral part of the consolidated financial
statements.
ARYT INDUSTRIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1:- GENERAL
a. Description of the Company:
1. Aryt Industries Ltd. (hereby: "the Company") is a public company
whose shares are traded on both the Tel-Aviv Stock Exchange and on the
OTC-BULLETIN Board in the United States.
2. The Company is a holding company which mainly manages, establishes and
develops companies that are engaged in various fields and takes an
active part in their management. The Company's Israeli companies are
engaged in the following business segments: medical, defense and
technology.
3. The Company sells its products throughout the world. For the years
ended December 31, 2000, 1999 and 1998 approximately 15%, 22% and 26%,
respectively, of the Company's total sales were derived from sales to
customers outside Israel. Sales in Israel are mainly to the Ministry of
Defense and to the Israeli Military Industries.
The Company's business is dependent on the military
segment, consequently, any changes in the military
marketplace could affect the Company's operating results
and financial condition (see Note 26).
4. In 1999, the Company held in 20% of Telegate Ltd. ("Telegate").
In October 1999, the Company approved a commitment contract entered
between Telegate and Terayon Communication System Inc. ("Terayon") and
all of Telegate shareholders in the matter of selling all of Telegate's
shares to Terayon in consideration for shares in Terayon and cash
payment.
In January 2000, upon the completion of the transaction, the Company
sold its investment in Telegate and Telegate became Terayon's wholly
owned subsidiary. Following the transaction, Aryt received 204,620 of
Terayon's shares and $ 41 thousand in cash. As of the date of the
issuance of the financial statements, Aryt sold all of its interest in
Terayon in consideration for the average price of $ 198 per share.
As a result of the transaction, in 2000, the Company recorded a capital
gain of $ 11,946 thousand and net gain from marketable securities of $
28,015 thousand. These gains are included in "Other income" and
"Financial income", respectively.
b. Definitions:
In these financial statements:
The Company - Aryt Industries Ltd.
The Group - Aryt Industries Ltd. and its
investees, as listed in the attached
list of companies.
Subsidiaries - companies over which the Company
exercises control (as defined in
Opinion No. 57) and whose accounts
are consolidated with those of the
Company.
Affiliates - companies that are not subsidiaries,
and over which the Company has
significant influence. The Company's
investment therein is included using
the equity method of accounting.
Investees - subsidiaries and affiliates.
Related parties - as defined in Opinion No. 29 of the
Institute of Certified Public
Accountants in Israel and as defined
in the Israeli Securities Regulation
(Preparation of Annual Financial
Statements), 1993.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The Company's consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting
Principles in Israel ("Israeli GAAP"), which differ in certain
respects from these followed in the United States (see Note 30).
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
b. Financial statements in U.S. dollars:
The Company elected to adjust its financial statements
according to the changes in the exchange rate of the U.S.
dollar, in conformity with Section 29 to Statement No. 36 of
the Institute of Certified Public Accountants in Israel.
Accordingly, monetary accounts maintained in currencies
other than the dollar are remeasured using the foreign
exchange rate at balance sheet date. Operational accounts and
non-monetary balance sheet accounts are measured and recorded
at the exchange rate in effect at the date of the
transaction. The effect of foreign currency remeasurement are
reported in current operations.
Certain subsidiaries and affiliates that operate
independently from the Company, prepare their financial
statements in accordance with the directives of
Interpretation 8 to Statement 36 of the Institute of
Certified Public Accountants in Israel.
Pursuant to the directives of Interpretation 8 to Statement 36
of the Institute of Certified Public Accountants in Israel, the resulting
difference between the investment and the remeasurement of shareholders'
equity, in respect of the said companies, and according to changes in the
exchange rates of the different functional currencies, is carried to a
separate item among the statement of changes in shareholders' equity,
"Cumulative foreign currency translation adjustments".
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries listed below. Intercompany transactions
and balances, including profits from intercompany sales not yet
realized outside the group, have been eliminated in consolidation.
Subsidiaries included in consolidation:
December 31, 2000
-----------------------------------
Shares conferring
-----------------------------------
Voting Rights to
rights profits
---------------- ---------------
% %
---------------- ---------------
Reshef Technologies Ltd. 100 100
Amcoram Ltd. 100 100
C.T.S. Combat Training Simulation Ltd. 51 51
Aryt Systems Ltd. (formerly: Ram-Zur Industries Ltd.) 63 63
Voice Diary Ltd. 64 64
Company shares that were acquired by the subsidiary, were
presented using the treasury shares method (see Note 17).
d. Investments in investees:
1. Investments in privately held companies in
which the Company can exercise significant
influence over operating and financial policy of
the affiliate are presented using the equity
method of accounting.
Goodwill is amortized in equal annual installments
over 10 years, commencing with the acquisition
date. Based on its most recent analysis,
management believes that no impairment of goodwill
exists as at December 31, 2000.
2. As for deferred taxes, see j. below.
e. Cash equivalents:
The Company considers all highly liquid investments,
originally purchased with maturities of three months or
less to be cash equivalents.
f. Marketable securities:
Marketable securities invested for the short-term and
available for sale in the immediate-term are presented at
their quoted market price as of balance sheet date in
accordance with Opinion No. 44 of the Institute of
Certified Public Accountants in Israel. Changes in their
value are carried to the statement of operations in
financing item.
g. Inventory:
Inventory is stated at the lower of cost or market value.
Inventory write-offs are provided to cover risks arising
from slow-moving items or technological obsolescence.
Cost is determined as follows:
Raw materials - by the "average cost" method.
Work in progress and finished products - on the basis of
cost which includes materials, labor and other direct and
indirect costs.
Inventory is stated net of specific advances received in
this respect.
h. Property and equipment:
1. These assets are stated at cost, net of related investment
grants.
2. Depreciation is calculated using the straight line method at annual
rates which are deemed sufficient to depreciate the assets over their
estimated useful lives, as follows:
%
-----------------------------------------
Buildings 4 - 10
Leasehold improvements Over the term of the lease agreement
Machinery and equipment 6 - 20 (mainly 10%)
Motor vehicles 15
Office furniture and equipment 6 - 33 (mainly 6%)
Investment grants 10
3. Capitalized leasehold rights are amortized over the leasehold
period.
i. Amortization of other assets and deferred charges:
1. The unallocated excess of the investment in a subsidiary over its
equity upon acquisition is carried to goodwill which is
presented among deferred charges, and is amortized over a period of 10
years commencing with the date of acquisition.
2. Know-how is amortized using the straight line method over a period
of 10 years.
3. Right to future contract for the sale of inventory to customers is
amortized using the straight line method over a period of 2 years.
4. Patents are amortized using the straight line method over a period
of 8 years.
5. Issuance expenses of debentures are amortized over the
period from the date of the issuance until maturity date, taking into
account the balances which were not repaid at the end of each year.
6. The Company evaluates annually the realization of goodwill and other
intangible assets and the appropriateness of the amortization period
based on the estimated future undiscounted cash flows derived from the
asset. Any impairment loss is recognized in the statement of operations.
Based on its most recent analyses, management believes that no
impairment of other assets exists as at December 31, 2000.
j. Deferred taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets are as follows:
The differences between the value of real estate assets, property
and equipment, and inventory in the adjusted financial statements and
their value for tax purposes (considering the determinations set forth
in statement 40 of the Institute of Certified Public Accountants in
Israel) accrued vacation pay, accrued severance pay and losses for tax
purposes.
Deferred tax balances are calculated according to the expected tax rate
when these taxes are released to the statement of operations.
Companies which incurred tax loss carryforwards did not record tax
assets resulting from tax loss carryforwards and other temporary
differences between financial reporting and the recognition for tax
purposes due to the uncertainty as to the utilization of these losses.
Deferred taxes were not included in respect of selling investments
in investees since the Company intends to hold these investments. In
addition, deferred taxes were not included in respect of distribution
of earnings by investees as dividends since the distribution of
dividend does not cause an additional tax liability.
k. Revenue recognition:
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), as amended in June 2000, which summarizes the staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company adopted SAB 101 during
the fourth quarter of 2000. The adoption did not have a significant
effect on the consolidated results of operations or financial position.
Revenues from service contracts and management fees are recognized
ratably over the term of the service contract or at the time that
services are rendered.
Revenues from sales of products are recognized upon
fulfillment of the following four criteria:
- Persuasive evidence of an arrangement exists.
- Delivery has occurred or services have been
rendered.
- The seller's price to the buyer is fixed or
determinable
- Collectibility is reasonably assured.
l. Provision for repairs:
The provision for repairs is computed based on Company's management
estimate and based on past experience. In light of past experience, the
Company does not create provision for repairs, except for the stated in
Note 21a(3).
m. Research and development costs:
Research and development costs, net of related grants and
participations, are charged to expenses, as incurred.
n. Earnings (loss) per share:
Earnings (loss) per share is calculated, in accordance with Statement
No. 55 of the Institute of Certified Public Accountants in Israel. (See
Note 27).
o. Convertible debentures:
Convertible debentures are included on the
basis of the probability of conversion, in accordance
with criteria set forth in Statement No. 53 of the
Institute of Certified Public Accountants in Israel.
In the event that the conversion is not deemed
foreseeable, the debentures are stated at their monetary
liability value at balance sheet date, and in the event
that the conversion is likely, the debentures are
presented between liabilities and shareholders' equity at
the greater of their monetary liability value or capital
value.
p. Concentration of credit risk:
Financial instruments that potentially subject the
Company to concentrations of credit risk consist
principally of cash, cash equivalents, marketable
securities, loans to investees and trade receivables.
The Company's cash and cash equivalents are invested in
deposits in major Israeli banks. Management believes that
the financial institutions that hold the Company's cash
and cash equivalents are financially sound and,
accordingly, credit risks with respect to its cash
and cash equivalents are minimal.
The Group's sales are made in Israel and abroad to a
small number of customers. Sales in Israel are mainly to
the Ministry of Defense and to the Israeli Military
Industries. The Company's business is dependent on the
military segment, consequently, any changes in the
military marketplace could affect the Company's operating
results.
Generally, there is exposure due to the concentration of
credit among a small number of customers. The Company
performs ongoing credit evaluations of its customers and
generally does not require collateral. In many cases, the
Company requires customer advances. The allowance for
doubtful accounts is calculated in respect of debts,
which in management's opinion, are doubtful of
collection.
The Company's marketable securities include
investments in various companies and in Government of
Israel debentures. Management believes that the portfolio
is well diversified, and accordingly, minimal credit risk
exists with respect to these marketable securities.
The Company holds a long-term note receivable from a
subsidiary, amounting to $ 3,086 as of December 31, 2000
(see Note 9). The long-term note receivable is unsecured,
and if not paid, a material loss could result to the
Company.
A subsidiary entered into foreign exchange forward
contract to minimize the short-term impact of foreign
currency fluctuations on inventory to a certain customers
denominated in Turkish Lira. This contract is highly
inversely correlated to the hedge item and is designated
as, and considered effective as, hedges of the underlying
assets.
q. Advertising costs:
The Company expenses advertising costs as incurred.
Advertising expenses for the years ended December 31,
2000, 1999 and 1998 were approximately $ 39, $ 22
thousand and $ 31 thousand, respectively.
r. Fair value of financial instruments:
The book value of cash and cash equivalents, trade
receivables, other accounts receivable, short-term credit
from banks and others, trade payables and other accounts
payable, approximates their fair value due to the
short-term maturities of these instruments.
The fair value for marketable securities are based on
quoted market prices.
Liabilities to banks and other long-term liabilities
are estimated by discounting the future
cash flows using rates currency used for notes of similar
terms and maturities and therefore approximates fair
values.
s. Derivative financial instruments:
A certain subsidiary enters into forward transactions in order to
reduce the specific risks (commitments for the export of products) that
are related to the exposure to the fluctuations in the exchange rates
of foreign currency.
The results of forward transactions for the purchase or
sale of foreign currency that are designated to hedge the
proceeds from export against the fluctuations in foreign
currencies (hedging transactions) are carried to the
statement of operations concurrently with the record
of the results of these export and import transactions.
t. Royalty-bearing grants:
Royalty-bearing grants from the Government of Israel for
funding approved research and development projects are
recognized at the time the Company is entitled to such
grants, on the basis of the costs incurred and included
as a deduction of research and development costs.
u. Severance pay:
The Company's liability for severance pay is
calculated pursuant to Israeli severance pay law based on
the most recent salary of the employees multiplied by the
number of years of employment, as of the balance sheet
date. Employees are entitled to one month's salary for
each year of employment or a portion thereof. The
Company's liability for all of its employees, is fully
provided by monthly deposits with insurance policies.
The deposited funds include profits accumulated
up to the balance sheet date. The deposited funds may be
withdrawn only upon the fulfillment of the obligation
pursuant to Israeli severance pay law or labor
agreements. The value of the deposited funds are based on
the cash surrendered value of these policies, and include
immaterial profits.
NOTE 3:- DISCONTINUED OPERATIONS
In December 1994, the Company engaged in a contract for the sale
of all its holdings (100%) in JP Mfg. Corp. ("Jerico") to TAT
Technologies Ltd. ("TAT"), in consideration for $ 1 and
extending balances which remained to the credit of the Group as
loan, effective as of January 1, 1995.
In May 1998, following counter claims filed by the companies,
TAT and the Company signed on a settlement agreement in
connection with the above loan and the Company's commitments to
TAT which include also options (series E and series F) which
were granted to TAT. The settlement agreement was validated by a
Court order. It was agreed that any party of the agreement
waives his claims, allegations and rights deriving from the
business relations between the parties or any other source.
The gain recorded from the settlement with TAT in 1998 which
amounted to $ 1,054 thousand was presented in the statement of
operations as "Income from discontinued operations".
NOTE 4:- CASH AND CASH EQUIVALENTS
December 31,
-------------------------------------
2000 1999
---------------- -----------------
U.S. dollars
-------------------------------------
(In thousands)
Cash in NIS 852 1,588
Cash in foreign currency 2,230 32
---------------- ----------------
3,082 1,620
================ ================
NOTE 5:- MARKETABLE SECURITIES
December 31,
------------------------------------
2000 1999
--------------- -----------------
U.S. dollars
------------------------------------
(In thousands)
Marketable securities presented at market price:
Shares 5,899 -
Stock options 121 -
Participation certificates of mutual funds 8,922 -
Government bonds and debentures 453 -
-------------- ----------------
15,395 -
============== ================
NOTE 6:- TRADE RECEIVABLES
Open accounts 3,120 1,097
Accrued income - 491
---------------- ----------------
3,120 1,588
================ ================
NOTE 7:- OTHER ACCOUNTS RECEIVABLE
Government authorities (3) 2,780 81
Advances to suppliers 21 -
Investees (1) 22 9
Prepaid expenses 16 -
Unbilled receivables 5 69
Related parties (2) 38 -
Employees (2) 32 -
Others 54 12
-------------- ----------------
2,968 171
============== ================
(1) Intercompany balances among the Group companies for the
current year of operations.
(2) Linked to the U.S. dollar and does not bear interest.
(3) See Note 20h.
NOTE 8:- INVENTORY
December 31,
-------------------------------------
2000 1999
---------------- -----------------
U.S. dollars
-------------------------------------
(In thousands)
Raw materials 2,030 1,610
Work in progress 311 1,902
Finished products 233 165
--------------- ----------------
2,574 3,677
Less - customer advances - 313
--------------- ----------------
2,574 3,364
=============== ================
NOTE 9:- INVESTMENTS IN INVESTEES
a. In affiliates:
Cost of shares 3,129 3,489
Post-acquisition losses (303) (2,809)
Amortization of goodwill (99) -
Foreign currency translation adjustments 7 -
---------------- ----------------
2,734 680
================ ================
Unallocated goodwill upon acquisition:
Original cost 1,871 1,794
================ ================
Balance as of balance sheet date 1,772 1,794
================ ================
b. Additional information:
1. Reshef Technologies Ltd. ("Reshef"):
Reshef is engaged in the research, development, production and
marketing of advanced electronic fuses for military purposes.
A 100% owned subsidiary.
As for events subsequent to the balance sheet date, see Note 29g.
2. Amcoram Ltd. ("Amcoram"):
Amcoram develops, manufactures and markets training simulators for ground
forces as well as electro-optical systems. Amcoram specializes in selling
turnkey systems, rather than individual products.
In November 1999, Reshef sold its holdings (100%) to the Company.
In February 2000, Amcoram exercised the option for the acquisition of all
of the Company's outstanding debentures (series 4) (5,199,349 par value)
for the payment of $ 1,462 thousand. In March 2000, Amcoram converted all
the remaining debentures (series 4) that it had into 4,642,275 Ordinary
shares of Aryt.
In September 2000, Amcoram completed an investment of $ 80 thousand in
C.T.S. in exchange for 510 Ordinary shares of NIS 1 par value each,
representing 51% of the share capital of C.T.S. after the allocation. At
the time when C.T.S. initial marketing activity is completed, which
includes the construction of beta systems and their presentation to several
potential customers, Amcoram has undertaken to make an additional
investment in C.T.S. in the amount of $ 300 thousand. Amcoram retains the
right not to make that investment and, accordingly, its holdings in C.T.S.
will be diluted to 30%. As for events subsequent to the balance sheet date,
see Note 29.
In September 2000, Amcoram completed the acquisition of the activity of
Technology Systems - Tecsys Ltd. ("Tecsys") including the know-how,
goodwill, and right to future contracts for the sale of inventory to
customers which are included among other assets.
In consideration for the acquisition of activity, Amcoram paid to Tecsys $
1,251 thousand, in cash, and an additional amount of $ 750 thousand is
payable over a period of 5 years. As of December 31, 2000, $ 68 thousand
were paid on account of that commitment.
Tecsys is a private company engaged in the development, manufacture and
marketing of indoor training simulators for the defense forces based on
advanced technology incorporating video and graphic display. The technology
is Amcoram's proprietary and protected by a patent.
In October 2000, the Company extended to Amcoram a loan of $ 3,086 thousand
repayable in 40 equal quarterly payments from January 2002. The loan is
linked to the Israeli CPI and bears annual interest of 6.9%.
3. Voice Diary Ltd. ("Voice Diary"):
Voice Diary is a private company engaged in the development and manufacture
of a palm diary, activated by voice.
In January 2000, the Company was issued 11,652 shares, representing 13% of
the issued and outstanding share capital of Voice Diary in exchange for the
authorization of a credit line of up to $ 150 thousand for financing the
manufacture of the voice diary.
In November 2000, the Company invested $ 25 thousand in exchange for
100,000 shares, whereby increasing its interest in Voice Diary to 35%.
During December 2000, Voice Diary allocated additional 300,000 shares to
the Company in exchange for the above authorization of credit so that, as
of December 31, 2000, the Company holds in 64% of Voice Diary.
As of December 31, 2000, the Company extended to Voice Diary loans in the
aggregate amount of $ 55 thousand which are payable in the course of 2001.
As for events subsequent to the balance sheet date, see Note 29e.
4. Aryt Systems Ltd. (formerly: Ram-Zur Industries Ltd.) ("Aryt Industries"):
In July 2000, the Company signed an agreement with Aryt Systems, a public
company whose shares are traded on the Tel Aviv Stock Exchange and with its
controlling shareholders whereby the company invested $ 1,775 thousand in
exchange for 7,350,000 shares of Aryt Systems which were issued by a
private placement.
Concurrently with the private placement, Aryt controlling shareholders
transferred to the Company 2,688,000 shares of Aryt Systems at no
additional consideration so that immediately after the private placement
and the transfer of shares, the Company holds in 63% of Aryt Systems share
capital. The above agreement was conditioned that, ___ concurrently ___
with the ___ implementation of the agreement, the former controlling
shareholders of Aryt Systems acquired from Aryt Systems all its business
activity (assets and liabilities) against the payment of Aryt System's
outstanding debts and liabilities as of the time the activity was
transferred, subsequent to receiving the Company's payment in respect of
the allocated shares.
During October 2000, the transaction was completed.
The Company and Aryt Systems hold advance negotiations regarding the sale
of the Company's holdings in companies of the military segment, i.e. Reshef
and Amcoram to Aryt Systems (as for events subsequent to the balance sheet
date, see Note 29d.).
5. Sensotech Ltd. ("Sensotech"):
Sensotech is engaged in the development, manufacture and marketing of
intelligent, ultrasonic security sensors based on unique proprietary and
patented technology.
In April 2000, the transaction for the investment in Sensotech was
completed. According to the agreement, the Company invested in Sensotech
$ 1 million in exchange for 25% of Sensotech's shares.
In December 2000, the Company acquired additional 16.5% of the issued
shares capital of Sensotech from a third party in exchange for $ 1
million, of which $ 960 thousand is payable within 3 years.
Upon the completion of the transaction, the Company holds in
approximately 41.5% of the issued share capital of Sensotech. In
addition, the Company retains an option which is exercisable over one
year, to invest in Sensotech an additional $ 1 million for 12% interest
in Sensotech so that after the above option is exercised, the Company
will hold in 53% of Sensotech.
The investment in included in these financial statements among
"Investments in affiliates".
As for events subsequent to the balance sheet date, see Note 29f.
6. Investment in Officecore.com, Ltd. ("Officecore"):
Officecore is engaged in the development of an internet complete work
environment, primarily for small and medium business management,
including office applications, customer relations management, e-commerce
website management, inventory management and other models.
In May 2000, the transaction for the investment in Officecore was
completed. According to the agreement, the Company invested in
Officecore $ 500 thousand in exchange for 30% of Officecore's shares.
The Company retains an option, which is exercisable until February 2001,
to invest in Officecore an additional $ 300 thousand for 15% interest in
Officecore so that after the above option is exercised, the Company will
hold in 45% of Officecore.
The investment in included in these financial statements among
"Investments in affiliates".
As for events subsequent to the balance sheet date, see Note 29h.
7. SygMed Ltd. ("SygMed"):
SygMed is engaged in the development, manufacture and marketing of
medical robotic systems designed for early detection of breast cancer.
In November 2000, the Company signed an agreement with SygMed for the
investment of $ 750 thousand, so that after the investment the Company
will hold in 21% of SygMed share capital.
In addition, Aryt was granted the option to increase its holding in
SygMed to 35% of the overall share capital of SygMed against an
additional investment of $ 750 thousand within 12 months from the time
that the transaction is closed and to 40% of the overall share capital
of SygMed against an additional investment of $ 500 thousand within 24
months from the time that the transaction is closed.
The investment in included in these financial statements among
"Investments in affiliates".
NOTE 10:-LONG-TERM LOANS AND RECEIVABLES
a. Composition:
December 31,
-------------------------------------
2000 1999
---------------- -----------------
U.S. dollars
-------------------------------------
(In thousands)
Long-term loans and receivables (1) 141 -
Less - current maturities 38 -
---------------- ----------------
103 -
================ ================
(1) Linked to the U.S. dollar and do not bear interest.
b. Payment dates:
First year - current maturities 38 -
---------------- ----------------
Second year 26 -
---------------- ----------------
Deposit for lease of 3 vehicles, in respect of
three last months of lease 77 -
---------------- ----------------
141 -
================ ================
NOTE 11:- PROPERTY AND EQUIPMENT, NET
a. Composed as follows:
Buildings
and Machinery Office
leasehold and furniture
improvements equipment Motor and Investment
(**) (*) vehicles equipment grants Total
---------------- ------------ ------------ ------------- ------------- -----------
U.S. dollars
------------------------------------------------------------------------------------------------
(In thousands)
Cost:
Balance at January 1, 2000 1,751 5,339 304 383 (1,576) 6,201
Additions during the year 43 144 - 82 - 269
Additions for newly
consolidated subsidiary - 4 - 3 - 7
Disposals during the year - - (182) - - (182)
---------------- ------------ ------------ ------------- ------------- -----------
Balance at December 31,
2000 1,794 5,487 122 468 (1,576) 6,295
---------------- ------------ ------------ ------------- ------------- -----------
Accumulated depreciation
Balance at January 1, 2000 764 4,174 139 299 (1,032) 4,344
Additions during the year 116 382 29 23 (107) 443
Disposals during the year - - (120) - - (120)
---------------- ------------ ------------ ------------- ------------- -----------
Balance at December 31,
2000 880 4,556 48 322 (1,139) 4,667
---------------- ------------ ------------ ------------- ------------- -----------
Depreciated cost at
December 31, 2000 914 931 74 146 (437) 1,628
================ ============ ============ ============= ============= ===========
Depreciated cost at
December 31, 1999 987 1,165 165 84 (544) 1,857
================ ============ ============ ============= ============= ===========
*) Including self made equipment and machinery in the amount of $ 476
thousand.
**) Including $ 5 thousand in respect of leasehold rights on 3,511
sq. m. of land until 2035. The land is registered in the name of
the Company with the Israel Lands Administration.
b. Investment grant:
The investment grant, which was deducted from the cost of assets, has been
received by the Company and Reshef, pursuant to the Law for the
Encouragement of Capital Investments, 1959 (see Note 20a). Final approval
for receiving the grant is subject to the implementation of the approved
plan and compliance of the terms of the approval. In the opinion of the
Company's management and the subsidiary's management, the companies comply
with the terms related to the receipt of the grant.
c. Depreciation expenses for the years ended December 31, 2000, 1999 and 1998,
were $ 443 thousand, $ 475 thousand and $ 519 thousand, respectively.
d. As for charges, see Note 23.
NOTE 12:- OTHER ASSETS, NET
December 31,
-------------------------------------
2000 1999
---------------- -----------------
U.S. dollars
-------------------------------------
(In thousands)
Goodwill:
Original amount 2,423 -
Less - accumulated amortization 49 -
---------------- ----------------
2,374 -
----------------- ----------------
Right to future contracts for the sale of inventory to
customers:
Original amount 30 -
Less - accumulated amortization 4 -
----------------- ----------------
26 -
----------------- ----------------
Patents:
Original amount 77 -
Less - accumulated amortization 2 -
----------------- ----------------
75 -
---------------- ----------------
Know-how:
Original amount 1,129 -
Less - accumulated amortization 35 -
---------------- ----------------
1,094 -
----------------- ----------------
Issuance expenses of debentures:
Original amount 87 153
Less - accumulated amortization 51 102
----------------- ----------------
36 51
---------------- ----------------
3,605 51
================ ================
NOTE 13:- CREDIT FROM BANKS
a. Composition:
Weighted interest rate December 31,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
% U.S. dollars
-------------------------------- --------------------------------
(In thousands)
From banks:
NIS - unlinked 12-20 16-22 672 793
Linked to the U.S. dollar Libor+1.25 Libor+1.25 275 725
------------- --------------
947 1,518
Current maturities
of debentures and
long-term loans (1) 634 2,841
-------------- --------------
1,581 4,359
============== ==============
(1) See Notes 17 and 18.
The Company's unused line of credit amounts to approximately $ 3,328
thousand.
b. As for charges, see Note 23.
NOTE 14:- TRADE PAYABLES
December 31,
--------------------------------
2000 1999
-------------- --------------
U.S. dollars
--------------------------------
(In thousands)
Open accounts 602 605
Notes payable 620 214
-------------- --------------
1,222 819
============== ==============
NOTE 15:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31,
-------------------------------------
2000 1999
---------------- -----------------
U.S. dollars
-------------------------------------
(In thousands)
Employees and payroll accruals 411 266
Government authorities 355 131
Accrued expenses 1,383 1,616
Related parties (1) 400 351
Others 152 -
---------------- ----------------
2,701 2,364
================ ================
(1) Most of the balance is linked to the U.S. dollar and does not bear
interest.
NOTE 16:- CUSTOMER ADVANCES
Customer advances 61 611
Less - advances netted from inventory - 313
---------------- ----------------
61 298
================ ================
NOTE 17:- CONVERTIBLE DEBENTURES
a. Composition
Linkage Weighted December 31,
-------------------------------------
terms interest 2000 1999
----------------- ----------------
------------ -------------
% U.S. dollars
------------- -------------------------------------
(In thousands)
Convertible debentures
(series 3) dollar 4.9 2,122 2,547
Convertible debentures
(series 4) dollar 7.2 - 1,240
----------------- ----------------
2,122 3,787
Less - current maturities
424 1,665
----------------- ----------------
1,698 2,122
================= ================
Convertible debentures (series 3):
In February 1997, the Company issued debentures (series 3) in
consideration for debentures (series 2). The debentures are
convertible into shares at current conversion rate of 297.4%.
The debentures mature in nine equal annual installments commencing
October 1997. The unconverted principal of the debentures bears annul
interest of 4.9% payable semi-annually.
In addition, in exchange for and in consideration of the original
options held by the holders of debenture (series 2), the Company
issued new options in an amount equal to the amount of old options
which were turned over by the holders of debenture (series 2).
600,200 options - (options series D) are convertible up to four years
from when they were issued at an exercise increment of $ 1 per share
for the first two years after they were issued, and $ 1.10 per share
up to four years.
As of balance sheet date, no options (options series D) were
converted into shares.
As part of the debenture (series 2) arrangement, the Company
undertook various commitments, such as: increasing its shareholders'
equity within 24 months, reports to the escrow agent for the
debentures as well as setting limits to the scope of its activities
and penetrating into new business segments. Non-compliance with these
commitments will result in a retroactive change in the interest rate
from January 1, 1997. However, in any event the Company will not be
required to pay interest at a rate higher than the dollar annual
interest rate of 5.9%. According to the Company's management, as of
balance sheet date, the Company is complying with these commitments.
In 1999 and 2000, the Company redeemed debentures which were issued
to institutions in consideration for $ 424 for each of the years. Up
to balance sheet date, the Company either converted or redeemed
13,671,666 par value of debentures into shares.
As of December 31, 2000, the balance of the outstanding debentures is
NIS 6,311,112 par value.
Convertible debentures (series 4):
In November 1998, the Company entered into an agreement to allocate
NIS 6,286,500 par value of debentures for NIS 1 per each NIS 1 par
value of debentures.
The debentures were allocated in February 1999 and the consideration
amounted to $ 1,500 thousand.
The debentures are convertible into shares at current conversion rate
of 112%.
The debentures are linked to the representative exchange rate of the
dollar and are due to mature on November 22, 2000. The unpaid balance
of the debenture principal will bear annual interest of 7.2% payable
on November 22, 2000.
During 1999, 1,087,151 par value of debentures were converted into
1,087,151 shares of NIS 1 nominal value each.
In February 2000, in furtherance to an offering presented in December
1999, Amcoram, a subsidiary, purchased all of the Company's
debentures (series 4) (5,199,349 debentures) in consideration for $
1,462 thousand. In March 2000, Amcoram (a subsidiary) converted all
the balance of the outstanding balance of debentures (series 4) it
owned into 4,642,275 Ordinary shares of the Company.
b. Aggregate maturities of the debentures are as follows:
December 31,
-------------------------------------
2000 1999
---------------- -----------------
U.S. dollars
-------------------------------------
(In thousands)
---------------- ----------------
First year - current maturities 424 1,665
---------------- ----------------
Second year 426 426
Third year 424 424
Fourth year 424 424
Fifth year 424 424
Sixth year - 424
---------------- ----------------
1,698 2,122
---------------- ----------------
2,122 3,787
================ ================
c. As for collateral provided to secure the debentures (series 3), see Note
23.
NOTE 18:- LIABILITIES TO BANKS AND OTHER LONG-TERM LIABILITIES
a. Long-term bank loans:
December 31,
-------------------------------------------------
Weighted In or
interest Linked to linked to
rate the Israeli foreign
--------------
2000 CPI currency *) Total
-------------- -------------- -------------- --------------
% U.S. dollars
-------------- -------------------------------------------------
(In thousands)
Banks Libor+1.25 31 2,716 2,747
Less - current maturities 8 202 210
-------------- -------------- --------------
23 2,514 2,537
============== ============== ==============
As of December 31, 2000, the aggregate maturities of
long-term loans are as follows:
First year (current maturities) 8 202 210
Second year 16 825 841
Third year 7 783 790
Fourth year - 453 453
Fifth year - 453 453
------------- -------------- --------------
31 2,716 2,747
============= ============== ==============
b. Other long-term liabilities:
Liabilities for the acquisition of
affiliate (1) - 839 839
============= ============== ==============
(1) Repayment of loans is until the end of 2003.
NOTE 19:- ACCRUED SEVERANCE PAY
a. The amounts deposited in managers' insurance policies and provident funds
in the name of the employees and the related liability are not included in
the balance sheet as they are not under the control and management of the
Company.
b. Severance expenses (income) for the years ended December 31, 1998, 1999 and
2000, amounted to approximately $ (153) thousand, $ (20) thousand and $ 43
thousand, respectively.
NOTE 20:- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital Investments,
1959:
- - Reshef plant was granted an "approved enterprise" status under the Law for
the Encouragement of Capital Investments, 1959 ("the law"). Undistributed
income derived from the approved enterprise is entitled to a reduced tax
rate of 25% for seven years. The benefit period for the approved programs
of Reshef commenced in 1993-1994.
- - If a dividend is distributed out of income attributable to revenues from an
"approved enterprise", it will be liable to tax at the rate of 15%.
b. Law for the Encouragement of Industry (Taxes), 1969:
The Company's subsidiaries are "industrial companies" under the Law
for the Encouragement of Industry (Taxes), 1969, and accordingly, the
companies are entitled to certain tax benefits in accordance with
this law.
c. Taxation under inflation:
In accordance with the Income Tax (Inflationary Adjustments) Law,
1985, the results for tax purposes are measured in real terms based
on the changes in the Israeli CPI.
d. Losses for tax purposes carried forward to future years:
The Company and its subsidiaries have accumulated losses for tax purposes
as of December 31, 2000, in the amount of approximately $ 6 million, which
may be carried forward and offset against taxable income in the future for
an indefinite period.
e. In the tax report, the Company netted operating carryforward losses against
gain from sale of Telegate. The financial statements include a tax assets
receivable of $ 2.7 million in respect of said set-off.
f. Deferred taxes:
Deferred tax assets (liabilities) are composed as follows:
Year ended December 31,
---------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
Provisions for employee benefits and
other temporary differences 170 150 135
In respect of tax loss carryforward 802 6,115 6,388
-------------- -------------- --------------
Gross deferred tax assets 972 6,265 6,523
-------------- -------------- --------------
Depreciation 60 314 178
Inventory - - 159
-------------- -------------- --------------
Gross deferred tax liabilities 60 314 337
-------------- -------------- --------------
Net deferred tax assets before valuation
allowance 912 5,951 6,186
Valuation allowance for deferred
taxes (1) (912) (5,951) (6,186)
-------------- -------------- --------------
Net deferred tax assets - - -
============== ============== ==============
(1) Deferred taxes which are associated with carryforward tax losses were carried as an asset up to the amount of
the deferred taxes included among current liabilities and long-term liabilities. As for the remaining
carryforward tax losses, no deferred taxes were recorded as an asset as their utilization is uncertain.
Deferred tax balances are computed at the tax rate expected to be in effect at the time when they will be realized -
36%.
g. Taxes on income included in the statements of operations:
Year ended December 31,
---------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
Taxes on income included in the statements of operations:
Current taxes in Israel 8,594 - -
Deferred taxes in Israel (see f. above) - - 27
-------------- -------------- --------------
8,594 - 27
============== ============== ==============
Current taxes during the reported year were computed at the average tax rate of 36%.
h. Reconciliation of theoretical tax expense:
A reconciliation of theoretical tax expense, assuming all income is taxed at the statutory rate applicable to
the income of companies in Israel, and the actual tax expense, is as follows:
Year ended December 31,
---------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
Income (loss) before taxes on income 33,566 697 (2,316)
============== ============== ==============
Statutory tax rate in Israel 36% 36% 36%
============== ============== ==============
Theoretical tax expenses (benefit) 12,084 250 (834)
Increase (decrease) in taxes resulting
from permanent differences - the tax
effect:
Tax benefit resulting from reduction in
tax rates for "approved enterprise" - 338 141
Tax adjustments in respect of inflation
in Israel and others - 60 40
Tax-exempt income - (928) -
Non-deductible expenses - 21 33
Utilization of carryforward tax losses
for which deferred taxes were not recorded
in the past (5,792) (350) -
Losses for tax purposes for which deferred
taxes were not recorded 2,253 609 647
Others 49 - -
-------------- -------------- --------------
Taxes on income 8,594 - 27
============== ============== ==============
Effective tax rate 25.60% - 1.2%
============== ============== ==============
i. Tax assessments:
Final tax assessments, by virtue of the law, have been received by the Company and by subsidiaries through the
1994 tax year.
NOTE 21:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Contingent liabilities:
1. Guarantees that were provided:
As of balance sheet date, contingent liabilities in
respect of guarantees to banks and customers are as
follows:
December 31, 2000
------------------
U.S. dollars
------------------
(In thousands)
Guarantees to customers in respect of advances and raw material 351
==================
In addition, there are unlimited guarantees in favor of subsidiaries.
2. Legal claims filed against the Group:
a) In November 1999, a group of the Company's
shareholders filed a claim against the Company and
certain of its directors and related parties. The
main allegations raised in the indictment against the
Company are in respect of the Company's assignment of
its rights in Telegate Ltd. without consideration and
unlawfully, hence, causing to the dilution of its
holdings in the affiliate.
The plaintiffs further claim that as a result of the
private placement (see Note 22a), the Company caused
to the dilution of the value of shareholding beyond
that necessary as it did not accept the plaintiffs
proposal to issue to them shares and options at like
terms plus 5%.
The Company entirely rejects the allegations raised
against it in the indictment.
Company management is of the opinion that the claim
will not have any material impact on the Company
except for fees, for which a provision of $ 110
thousand was recorded in the books.
b) A supplier filed a claim against a subsidiary in the
aggregate amount of $ 7,296 as of December 31, 2000.
The subsidiary provided in its books for the full
amount.
3. There is a dispute between a subsidiary and two customers regarding
breakdowns which were found in fuses that were supplied to them in the
past. Of an understanding between the parties, it was agreed that the
subsidiary will reimburse for part of the expenses. The subsidiary
recorded in its books a provision of $ 446 thousand in respect of said
expenses.
b. Commitments:
1. For lease of buildings:
The Company rents its facilities under various operating
lease agreements which expire on various dates, the latest
of which is in 2006. The minimum rental payments under
non-cancelable operating leases as of December 31, 2000
are as follows:
U.S. dollars
--------------------
(In thousands)
First year 444
Second year 444
Third year 444
Fourth year 444
Fifth year 444
Sixth year 333
--------------------
2,553
====================
2. Employment contract with the CEO:
The Company signed an employment contract with its
CEO, which contains, among other things, instructions
regarding early notification and adjustment periods
and special compensation grant of $ 75 thousand, in
cases and times as set in the agreement.
3. Royalties:
a) A subsidiary has received participation grants
for research and development from the Chief
Scientist in the Ministry of Industry and Trade
of the ("Chief Scientist") Government of Israel
in consideration for which the subsidiary is
required to pay royalties at the rate of 2% - 5%
on sales proceeds from products in which the
Government participated in the research and
development, in an amount not to exceed 100%-150%
of the total grants received.
During the reported year, the subsidiary reached
an agreement with the Chief Scientist whereby the
subsidiary will pay to the Chief Scientist an
amount of $ 220 thousand.
Furthermore, still remains a dispute regarding
royalties differences of $ 60 thousand that are
due to the Chief Scientist in respect of a
certain transaction. The dispute was communicated
to the legal adviser of the Office of the Chief
Scientist for review, however, his opinion was
not yet received.
A provision was recorded in the financial
statements in order to cover the Company's
commitment for the payment of royalties, as
aforementioned.
b) A subsidiary was awarded from the Fund for the
Encouragement of Marketing Activities grants for
participation in marketing expenses overseas in
consideration for which the subsidiary is
committed to pay royalties at the annual rate of
3% of the increase in export sales from products
marketed abroad in which the Fund participated in
marketing.
c) As of December 31, 2000 and 1999, the Company has
a remaining contingent obligation for royalties
as described in a) and b) above of $ 2,639
thousand and $ 2,460 thousand, respectively.
In the year ended December 31, 2000, the Company
paid royalties totaling approximately $ 53
thousand an amount of $ 34 thousand in 1999 and $
146 in 1998.
d) Under Voice Diary's (subsidiary) research and
development agreements with the Chief Scientist,
Voice Diary is committed to pay royalties at the
rate of 3% on sales proceeds from products
developed under the research and development
programs up to the amounts of financing, linked
to the U.S. dollar.
According to the Chief Scientist decision dated
August 24, 1999, Voice Diary was requested to
refund to the Chief Scientist $ 41,386, including
interest and linkage differences. The company
provided in its books for the full amount.
However, the company intends to demand that the
Scientist reimburses for research and development
for the period from December 1998 until March
1999.
e) Certain of Voice Diary's (subsidiary)
shareholders participated in financing the
research and development expenses in
consideration for royalties at the rate of 3% of
the subsidiary's proceeds from sale of the
devices and 12% of the subsidiary's proceeds from
sale of know-how gained as a result from the
development of the device, up to the maximum
amount of three times the amount of their
financing.
Under certain conditions, the subsidiary may
convert the remaining contingent obligation for
royalties to the investors into shares. Most of
the shareholders exercised their right to convert
into the subsidiary's shares.
4. Management fees:
The company entered into management agreements with the following subsidiaries
and affiliates:
a) Reshef, subsidiary (100%) - is committed to pay
to the Company annual management fees of $ 70
thousand plus 1.5% of Reshef's sales revenues.
b) Amcoram, subsidiary (100%) - is committed to pay
to the Company annual management fees of $ 50
thousand plus 1.5% of Amcoram's sales revenues.
c) Sensotech, affiliate - is committed to pay to the
Company annual management fees of $ 25 thousand.
d) SygMed, affiliate - is committed to pay to the
Company annual management fees of $ 30 thousand.
5. Derivative financial instruments:
A subsidiary entered into a forward transaction with a
bank in order to reduce the specific risks related to
a commitment for the sale of products in currency
other than the U.S. dollar. The subsidiary neither
holds nor issues financial instruments for trading
purposes.
The forward transaction was signed for a period of
seven months (until May 2001) for the sale of Turkish
Liras in exchange for U.S. dollars. The national
amount of the transaction is $ 515 thousand.
NOTE 22:- SHAREHOLDERS' EQUITY
a. Ordinary shares:
The Ordinary shares confer upon their holders the right to
participate and vote in the general meetings, to receive
dividends and to participate in the excess of assets upon
liquidation of the Company.
In July 1998, the Board of Directors decided to recommend
to the general meeting to reduce the Company's capital by
converting every ten Ordinary shares of NIS 1 nominal
value each into one Ordinary share of NIS 1 nominal value
each. On July 10, 1998, in an extraordinary meeting, a
special resolution regarding the aforementioned capital
reduction was accepted. On July 30, 1998, the Court
approved the capital reduction. As of December 31, 2000,
the capital reduction was not effected and the Company
does not intend to implement it.
In February 1999, the Company's authorized share capital
was increased by 20 million Ordinary shares of NIS 1
nominal value each to 61 million Ordinary shares of NIS 1
nominal value each.
In November 1999, a private placement of 3,150,000
Ordinary shares of NIS 1 nominal value each was completed
for the proceeds of $ 764 thousand. In addition to the
shares, the Company issued to an investor options which
were exercised into shares during 2000, see b. below.
As for the conversion of debentures into shares, see Note
17.
b. Stock options:
1. As for stock options (series D) which were issued within the framework of
issuance of convertible debentures (series 3), see Note 17.
2. Options (series G) - 3,150,000 non-marketable options which were issued
under a private placement (see a. above). Each option confer upon its
optionee the right to purchase one Ordinary share of NIS 1 nominal value
for NIS 1.
During 2000, all of the options (series G) were exercised into 3,150,000
shares.
3. Options (series H) - 3,150,000 non-marketable options which were issued
under a private placement (see a. above) are exercisable until September
2001. Each option confer upon its optionee the right to purchase one
Ordinary share of NIS 1 nominal value for NIS 1.125.
4. Options (series I) - were issued to the Company's employees and CEO. Each
option is exercisable into one Ordinary share of NIS 1 nominal value for
NIS 1.35. In August 2000, all of the options were exercised into
1,550,000 shares. The exercise increment was financed by a non-recourse
loan which the Company provided to its employees and CEO. The loan is in
NIS, linked to the Israeli CPI and bears annual interest of 4%. The loan
is repayable to the Company at the time when the employees exercise the
shares.
NOTE 23:- CHARGES
a. As a collateral for the subsidiaries' liabilities, real estate properties
were mortgaged and fixed charges were placed on securities, rights to
land, insurance rights, goodwill, share capital and receipts from
customers. Floating charges were placed on the all of the subsidiaries'
assets. In addition, part of the shares of subsidiaries were pledged.
b. In respect of a series of NIS 8,836 thousand par value of debentures
(series 3), the Company will place a junior in priority fixed charge of
NIS 1. In addition, the Company is committed to collateralize any amounts
raised, if so raised, by the Company against future issuance of the
Company's shares, by a senior in priority specific charge that will
always secure the balance of the final three payments of the principal.
As an additional collateral for payment of the debentures,
the Company has undertaken to place a senior in priority
specific charge on half of any amount added to its
shareholders' equity from the exercise of the options
(series D), if so exercised, by the holders of the
debentures.
In any event, the inclusive amount pledged in favor of
holders of debentures will not exceed, in dollar terms,
the unpaid balance of the final three payments of the
principal.
c. As a collateral for complying with the terms of the "approved enterprise"
status granted to a subsidiary pursuant to the Law for the Encouragement
of Capital Investments, 1959, the subsidiary placed an unlimited floating
charge on all its assets in favor of the State of Israel.
d. As collateral for the management of securities portfolio by the Company
and the subsidiaries, the Company and the subsidiaries placed fixed
charges in favor of banks and investment companies.
e. As collateral for the payment of a debt of $ 839 thousand, the Company
placed a charge on 3,522 Ordinary shares of Sensotech (representing 16%
of Sensotech's issued share capital) in favor of the companies from which
the shares were acquired (see Note 18b).
f. The balances of the secured liabilities are as follows:
December 31,
-------------------------------------
2000 1999
---------------- ----------------
U.S. dollars
-------------------------------------
(In thousands)
Credit from banks (see Note 13) 906 1,518
Long-term liabilities (including current
maturities) (Notes 13, 17 and 18) 5,708 3,795
Customer advances (see Note 16) - 611
----------------- ----------------
6,614 5,924
================= ================
g. As a collateral for its commitments for lease fees, the Company delivered
two promissory notes to the lessor in the overall amount of $ 360
thousand.
ARYT INDUSTRIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------------------------------
NOTE 24:- LINKAGE TERMS OF MONETARY BALANCES
December 31, 2000
---------------------------------------------------------------
In or
Linked to linked to
the Israeli foreign
CPI currency (*) Unlinked Total
-------------- -------------- -------------- -------------
U.S. dollars
---------------------------------------------------------------
(In thousands)
ASSETS
Cash and cash equivalents - 2,230 852 3,082
Trade receivables - - 3,120 3,120
Other accounts receivable 2,847 76 8 2,931
Long-term receivables - 103 - 103
------------- ------------- ------------- ------------
2,847 2,409 3,980 9,236
============= ============= ============= ============
LIABILITIES
Credit from banks and others - 275 672 947
Trade payables - 97 1,125 1,222
Other accounts payable and
accrued expenses - 352 2,349 2,701
Long-term liabilities 30 5,677 - 5,707
------------- ------------- ------------- ------------
30 6,401 4,146 10,577
============= ============= ============= ============
*) Mainly the U.S. dollar.
(table continued)
December 31, 1999
----------------------------------------------------------------
In or
Linked to linked to
the Israeli foreign
CPI currency (*) Unlinked Total
-------------- -------------- -------------- --------------
U.S. dollars
-----------------------------------------------------------------
(In thousands)
ASSETS
Cash and cash equivalents - 32 1,588 1,620
Trade receivables - 604 984 1,588
Other accounts receivable - - 159 159
Long-term receivables - - - -
------------- ------------- ------------- -------------
- 636 2,731 3,367
============= ============= ============= =============
LIABILITIES
Credit from banks and others - 725 793 1,518
Trade payables - 116 703 819
Other accounts payable and
accrued expenses - 351 2,013 2,364
Long-term liabilities 1 4,954 8 4,963
------------- ------------- ------------- -------------
1 6,146 3,517 9,664
============= ============= ============= =============
*) Mainly the U.S. dollar.
Final -- July 01, 2001
NOTE 25:- SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS
Year ended December 31,
---------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
a. Cost of sales:
Materials 1,639 2,348 3,331
Labor costs 1,554 1,289 1,306
Subcontracted work 556 120 128
Other manufacturing expenses 439 494 886
Deprecation 227 305 378
-------------- -------------- --------------
4,415 4,556 6,029
Decrease (increase) in inventory of
work in progress 1,591 9 (176)
Decrease (increase) in inventory of
finished products (68) 968 (788)
-------------- -------------- --------------
5,938 5,533 5,065
============== ============== ==============
b. Research and development costs, net:
Materials 180 33 182
Labor costs 461 438 545
Depreciation 54 47 48
Other expenses 163 377 167
-------------- -------------- --------------
858 895 942
Less - Government grants - 50 163
-------------- -------------- --------------
858 845 779
============== ============== ==============
c. Selling and marketing expenses:
Wages and salaries 284 197 193
Commissions - - 10
Advertisement 66 41 31
Others 9 188 168
-------------- -------------- --------------
359 426 402
============== ============== ==============
Year ended December 31,
---------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
d. General and administrative expenses:
Wages and salaries 699 535 547
Maintenance expenses 656 320 456
Professional consulting 548 380 381
Depreciation and amortization 252 123 93
Other 100 94 154
-------------- -------------- --------------
2,255 1,452 1,631
============== ============== ==============
e. Financial income (expenses), net:
Financial expenses in respect of
convertible debentures (53) (235) (195)
Financial expenses in respect of
long-term loans (327) (201) (365)
Gain from sale of marketable securities 23,556 - -
Income from bank deposits 322 25 91
Interest income and dividend 99 124 -
Other financial expenses including
translation differences (186) (35) (34)
-------------- -------------- --------------
23,411 (322) (503)
============== ============== ==============
f. Other income (expenses), net:
Gain from sale of investment in affiliate - 968 -
Gain from decrease of holdings in
investees - 1,257 -
Capital gain (loss) from sale of
property and equipment 13 9 (9)
Impairment of an investment (1) (75) - -
Capital gain from exchange of the right
to invest in Telegate shares into
Teryon shares (2) 11,946 - -
-------------- -------------- --------------
11,884 2,234 (9)
============== ============== ==============
(1) During 2000, the Company provided a convertible loan of $ 75 thousand to a start-up company. As the
start-up company terminated, the loan was carried to the statement of operations and written off in
full.
(2) See Note 1a3.
NOTE 26:- BUSINESS SEGMENTS AND SUPPLEMENTARY INFORMATION TO THE REVENUES ITEM
a. General:
1. The Group companies operate in the three principal
business segments: defense, technology and medical.
2. All revenues and expenses are allocated directly to the
business segments.
3. In previous years, the Company's holdings and operations
were in the military segment, excluding its holdings in an
affiliate in the technology segment (see Note 1a3). During
the year, the Company acquired companies which operate in
diversified markets, hence increasing the group's business
segments.
4. The segment's assets include all the operating assets
which are used by the segment and are composed mainly of
cash, checks receivable, trade receivables, equipment and
other assets. Most of these assets can be attributed to a
specific segment, whereas the amounts for certain assets
which are used together by two segments or more are
attributed to the segments on a reasonable basis. The
segment's liabilities do not include accrued severance
pay. The segment's assets and liabilities do not include
deferred taxes.
5. This data is presented in accordance with SFAS 131
"Disclosures about Segments of an Enterprise and Related
Information", which the Company has retroactively adopted
for all periods presented.
b. Information by business segments:
Year ended December 31, 2000
-----------------------------------------------------------------------------------
Defense Technology Medical Adjustments Total
-------------- -------------- -------------- ----------------- --------------
U.S. dollars
-----------------------------------------------------------------------------------
(In thousands)
Revenues:
Revenues from external customers 7,638 - - - 7,638
Revenues from services provided - 38 5 - 43
Revenues from intra group services
provided 235 - - (235) -
-------------- -------------- -------------- ----------------- --------------
Total revenues 7,873 38 5 (235) 7,681
============== ============== ============== ================= ==============
Segment results (*) (490) 38 5 - (447)
============== ============== ============== =================
General corporate expenses -
unallocated (1,282)
--------------
Operating loss (1,729)
Financial expenses - attributed (**) 28,015 28,015
Financial expenses, net - (4,604)
unattributed
Other expenses - attributed (**) 11,871 11,871
Other expenses - unattributed 13
Equity in losses of affiliates (368) (46) (414)
Minority interest in subsidiaries 17
Taxes on income (8,594)
--------------
Net income for the year 24,575
==============
*) Segments results - segment's revenue net segment's
cost.
Segment's cost - cost resulting from the segment's
operating activities which contribute directly to the
segment and the relevant portion of cost which can be
attributed to the segment on a reasonable basis,
including cost related to sales to external customers
and intersegment expenses. Segment's cost includes
financial expenses if they can be attributed to the
segment.
**) Gains from sale of investment in affiliate (see Note
1a3) and Loss from write down of investment (see Note
25).
Additional information:
Year ended December 31, 2000
-----------------------------------------------------------------------------------
Defense Technology Medical Adjustments Total
-------------- -------------- -------------- ----------------- --------------
U.S. dollars
-----------------------------------------------------------------------------------
(In thousands)
Segment assets (*) 11,006 421 11,427
Investment in investees presented
using the equity method of
accounting 2,032 702 2,734
Minority indebtedness (22) 87 65
Corporate assets - unattributed 21,048
--------------
Total consolidated assets 35,274
==============
Segment liabilities (*) 9,323 1,269 (3,381) 7,211
Corporate liabilities - unattributed 3,839
--------------
Total consolidated liabilities 11,050
==============
Capital investments 349 2,412 750 3,511
==============
Segment's depreciation and
amortization 391 4 395
==============
Depreciation and amortization -
unattributed 153
==============
*) Segment's assets - operating assets which are used by
the segment for its operating activity and that are
either attributed directly to the segment or that can
be allocated to the segment on a reasonable basis.
Segments' liabilities - operating liabilities which
derive from the segment's manufacturing activity and
that either contribute directly to the segment or
that can be allocated to the segment on a reasonable
basis.
Capital investments - the costs involved during the
year for the acquisition of the segment's assets
which are to be used over more than one reportable
year.
c. Revenues from sales and services provided:
1. The following presents total revenues and long-lived
assets for the years ended December 31, 2000, 1999 and
1998, in which, revenues are based on the customer's
location:
2000 1999 1998
----------------------------- ----------------------------- ----------------------------
Long- Long- Long-
Total lived Total lived Total lived
revenues assets revenues assets revenues assets
------------- -------------- -------------- ------------- ------------- --------------
U.S. dollars
-----------------------------------------------------------------------------------------
(In thousands)
Israel 6,545 7,967 5,533 1,908 4,518 4,531
Asia 854 - 1,083 - 837 -
Europe 282 - 425 - 718 -
------------- -------------- -------------- ------------- ------------- --------------
7,681 7,967 7,041 1,908 6,073 4,531
============= ============== ============== ============= ============= ==============
2. Major customer data:
Year ended December 31,
---------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Sales to customer A 5,224 3,352 2,696
============== ============== ==============
Percentage of total sales 68.4% 47.6% 44.4%
============== ============== ==============
Sales to customer B 802 1,591 1,621
============== ============== ==============
Percentage of total sales 10.5% 22.6% 26.7%
============== ============== ==============
Sales to customer C - 1,084 838
============== ============== ==============
Percentage of total sales - 15.4% 13.8%
============== ============== ==============
Sales to customer D 848 - -
============== ============== ==============
Percentage of total sales 11.1% - -
============== ============== ==============
3. Revenues from services provided (see Note 21b2):
Revenues from services provided
included in the consolidated
statements of operations 43 - -
============== ============== ==============
NOTE 27:- EARNINGS (LOSS) PER SHARE
a. Number of shares and income (loss) used in the computation of earnings
(loss) per share:
Year ended December 31,
--------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
U.S. dollars
--------------------------------------------------
(In thousands)
Basic and diluted loss (in U.S. dollars
in thousand):
Income (loss), as reported in the
statement of operations 24,575 (1,866) (3,066)
============== ============== ==============
Income (loss) used in computation of
basic income (loss) 24,666 (1,777) (3,066)
============== ============== ==============
Income (loss) used in computation of
diluted income (loss) 24,884 (1,777) (3,066)
============== ============== ==============
Number of shares:
Weighted average number of shares
used in the computation (in
thousands): 43,000 28,930 27,514
Add -
Securities which are likely to be
exercised - 4,642 -
-------------- -------------- --------------
Number of shares used in the
computation of basic income (loss)
(in thousands): 43,000 33,572 27,514
Add -
Effect of convertible securities whose
conversion is unlikely (in thousands) 5,872 - -
-------------- -------------- --------------
Number of shares used in the
computation of diluted income (loss)
(in thousands): 48,872 33,572 27,514
============== ============== ==============
Computed interest rate used in
capitalizing payments linked
to the U.S. dollar 6% 6% 5%
============== ============== ==============
Computed interest rate used in
capitalizing NIS payments 7.5% 10% 12.5%
============== ============== ==============
NOTE 28:- TRANSACTIONS AND BALANCES WITH RELATED PARTIES
a. In November 1997 and April 1998, the Company received loans from a then
shareholder, Yorocal Investments and Development Ltd. ("Yorocal"), in the
amount of $ 958 and $ 51 thousand, respectively. The loans bear interest
of prime + 3% and are repayable immediately upon request. The loans may
be converted immediately into the Company's shares upon the lender's
request.
In March 2000, the Company repaid the loans.
b. As for the allocation of 700,000 options (series I) to the CEO, see Note
22b(4).
c. In August 2000, 700,000 options which were allocated to the CEO (see b.
above) were exercised into 700,000 shares. The exercise increment was
financed by a loan of $ 234 thousand which the Company extended to the
CEO, see Note 22b4.
d. As for the employment contract of the CEO, see Note 21b(2).
e. Transactions with related parties:
Year ended December 31,
--------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
U.S. dollars
--------------------------------------------------
(In thousands)
1. Cost of sales, selling, general, and
administrative expenses and
financial expenses:
Management fees and rental
payments from affiliates (71) (360) (316)
Salary and related benefits to
the CEOs of the Group 457 262 255
Directors' fees (7 directors) 104 26 29
Reimbursement of affiliates and
shareholder for financial expenses,
net (1) 75 146 (17)
-------------- -------------- --------------
565 74 (49)
============== ============== ==============
(1) Is not a shareholder as of the date of the financial statements.
December 31,
--------------------------------
2000 1999
-------------- --------------
U.S. dollars
--------------------------------
(In thousands)
2. Balances with related parties:
Debit balance (see Notes 7 and 10) 86 2
============== ==============
The highest debit balance during the year 112 891
============== ==============
Credit balance (see Notes 15 and 18) 400 1,518
============== ==============
NOTE 29:- SUBSEQUENT EVENTS
a. In January 2001, Amcoram, a wholly-owned subsidiary, distributed to the
Company dividend of $ 1,161 thousand.
b. In January 2001, the Company invested $ 1,161 thousand in Amcoram, a
subsidiary (100%), in exchange for 100 Ordinary shares of NIS 1 par value
each (see a. above).
c. In January 2001, the Company acquired for $ 1,250 thousand 100% interest
in Towton Ltd. (a foreign company). This acquisition entitles the
Company, indirectly, to the rights to 50% of the issued share capital of
ElscinTec Systems Ltd. ("ElscinTec"). In the context of this transaction,
the Company provided to ElscinTec guarantees in the scope of $ 1,250
thousand for three years.
ElscinTec is engaged in the development, manufacture and marketing of
mammography systems for the detection and diagnosis of breast cancer to
the international marketplace.
d. In January 2001, the Company accepted a resolution to sell the
subsidiaries, Reshef and Amcoram, to a subsidiary Aryt Systems (see Note
9c(4)), by allocation of shares so that after the allocation, the Company
will hold in 89% of the issued and outstanding share capital of Aryt
Systems. In addition, the Company and Aryt Systems entered into a
management agreement whereby the Company will provide to Aryt Systems
office and logistic services, management fees, consulting services,
extension of loans services, collaterals and services for the lease of
facility. The above resolutions are pending the approval of the general
meeting and approval of the Tel Aviv Stock Exchange Ltd. to list for
trade the shares to be allocated to the Company, as detailed above (see
unaudited subsequent events).
e. In February 2001, a subsidiary, Voice Diary, pledged in favor of the
Company all its holdings in inventory which was purchased in order to
manufacture voice diaries of several types, as collateral for the
repayment of all the loans that the Company extended to Voice Diary in
relation to the authorization of credit, as mentioned in Note 9c(3). In
addition, in February 2001, the Company provided additional amount of $
30 thousand to Voice Diary on account of the authorization of credit.
f. In February 2001, the Company exercised its option to increase its
holdings in the affiliate, Sensotech, in exchange for $ 1 million (see
Note 9c(3)). Subsequent to the exercise of the option, the Company holds
in 53% of Sensotech's share capital.
g. In March 2001, the transaction between Reshef (a subsidiary) and Kaf Mem
Fuses Engineering (Soltam) Ltd. ("Kaf Mem") and a subsidiary of Soltam
Systems ("Soltam") was completed, as detailed in Note 9c(1). According to
the agreement, Reshef acquired Kaf Mem business in the filed of
electronic fuses including product contracts, know-how, order backlog and
proprietary rights in exchange for $ 300 thousand.
In addition, the transaction between Reshef and Soltam according to which
Reshef will allocate to Soltam its shares in exchange for $ 300 thousand
was completed. So that after the allocation is effectuated, Soltam will
hold in 10% of Reshef's share capital.
Soltam was also granted the option to acquire additional 10% of Reshef's
shares in exchange for $ 500 thousand. The option is exercisable over 6
years. Soltam was also granted the option to increase its overall
interest up to 50% of Reshef's share capital, however, not more than
Aryt's share in Reshef based on the results of the marketing activity of
Soltam for Reshef. The option is exercisable over 6 years.
h. In February 2001, Aryt exercised the option it had to invest additional $
300 thousand in Officecore, so that after the exercise of said option,
the Company holds in 45% of Officecore's share capital.
i. Subsequent to the balance sheet date, the quoted market price for the
Company's investment in marketable securities declined by $ 0.67 million.
SUBSEQUENT EVENTS (UNAUDITED)
a. In June 2001, the transaction mentioned in d. above has been approved by
the general meeting of the shareholders of Aryt Systems and by the
Tel-Aviv Stock Exchange and the shares of Aryt Systems have been
allocated.
b. In May 2001, the Company and certain shareholders of C.T.S. formed a new
private company - Sky Dart Ltd.
C.T.S. assigned all of its intellectual property of Sky Dart for the
amount of $ 30 thousand and Sky Dart entered into an agreement with
C.T.S. granting back to C.T.S. the rights to exploit such intellectual
property for all military applications for the amount of $ 15 thousand.
In conjunction with the establishment of Sky Dart, Amcoram and C.T.S.
amended their Agreement by eliminating Amcoram's obligation to invest $
300,000 in C.T.S. Instead, Aryt has agreed to invest, directly or
indirectly, up to $ 300,000 in the aggregate in C.T.S. and/or Sky Dart,
if and to the extent, that the Board of Directors of CTS and/or Sky Dart
determine that such funds are required. As of June 27, 2001, no funds
have as of yet been requested.
The Company hold 51% of the share capital of Sky Dart.
NOTE 30:- DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP
The consolidated financial statements of the Company conform with
generally accepted accounting principles in Israel ("Israeli GAAP"),
which differ in certain respects from those followed in the United States
("U.S. GAAP"), as described below:
a. Accrued severance pay:
The amounts funded in regard to liabilities in respect of employee rights upon
retirement are presented as a deduction from the liabilities in Note 19,
whereas according to U.S. GAAP, such amounts funded would be presented in the
balance sheet as long-term assets.
The amounts funded in regard to liabilities in respect of employee rights upon
retirement as of December 31, 2000 and 1999, are $ 479 thousand and $ 488
thousand, respectively.
b. Treatment of deferred taxes on income:
Under the Israeli Law for Encouragement of Capital Investments,
1959, companies which own an "approved enterprise" and are entitled
to investment grants (see Note 11b), are generally taxed at a rate
of 25% of attributable income during "the period of benefits".
Dividends paid to shareholders from the profits of an "approved
enterprise" are subject to income tax at a rate of 15%. The
shareholders are entitled to a 15% tax credit, if and when this
dividend is paid to their shareholders.
Under Israeli GAAP, deferred income taxes are not provided on the
undistributed tax exempt profits from domestic subsidiaries of an
"approved enterprise". Under U.S. GAAP, deferred income taxes should
be provided on the undistributed tax exempt profits of domestic
subsidiaries that arose in fiscal years beginning after December 15,
1992.
The effect of providing deferred taxes on the undistributed tax
exempt profits of an "approved enterprise", assuming either the sale
of the subsidiary or its liquidation, was in 2000 and 1999 in the
amount of $ 0 and $ 56 thousand, respectively, and an increase
(decrease) in tax on income in 2000, 1999 and 1998 in the amounts of
$ (56), $ 218 thousand and $ (245) thousand, respectively.
c. Comprehensive income:
Under Israeli GAAP, these specific income components are recorded in
the Company's statement of operations or as part of the additional
paid-in capital, as applicable for the relevant income component.
Under Statement of Financial Accounting Standard Board ("SFAS") No.
130, "Reporting Comprehensive Income", the Company should include
and display specific income component as part of the shareholders'
equity. As applicable to the Company's financial statements, these
differences are immaterial.
d. Earnings per share:
According to Israeli GAAP (Opinion No. 55) the dilutive effect of
options, warrants and other convertible securities is included in
the computation of primary net income per share only if their being
exercised is considered to be probable, based on the ordinary
relationship between the market price of the shares issuable upon
the exercise of the options, warrants and other convertible
securities, and the discounted present value of the future proceeds
derived from the exercise of such options, warrants and convertible
securities.
According to U.S. GAAP basic net income per share is computed based
on the weighted average number of Ordinary shares outstanding during
each year. Diluted net income per share is computed based on the
weighted average number of Ordinary shares outstanding during each
year, plus dilutive potential Ordinary shares considered outstanding
during the year, in accordance with FASB Statement No. 128,
"Earnings Per Share".
e. Convertible debentures:
1. Convertible debentures issued with detachable option:
According to U.S. GAAP, a portion of the proceeds from the
issued convertible debentures with a detachable option is
allocated to the option, based on relative market prices at
date of issuance and accounted for as additional paid-in
capital. Such allocation results in the recording of a discount
in the convertible debentures that is amortized by the interest
method over the term of the debt securities.
In accordance with Israeli accounting principles, the proceeds
received are allocated based on the par value of the option.
The differences in amortization of issuance expenses for
debenture according to Israeli and U.S. GAAP is immaterial.
2. Non-detachable conversion feature:
Under U.S GAAP debt securities with a nondetachable conversion
feature that is "in the money" at the date of issue
("beneficial conversion feature") should be recognized and
measured by allocating a portion of the proceeds equal to the
intrinsic value of that feature to additional paid-in capital.
That amount should be calculated at the date of issuance as the
difference between the conversion price and the fair value of
the ordinary shares into which the security is convertible,
multiplied by the number of shares into which the security is
convertible and would be amortized over the conversion term.
Furthermore, under U.S GAAP, convertible notes will be
classified as liabilities until they are converted.
Under Israeli GAAP, convertible notes are classified in the
balance sheet based on the tests defined in Opinion 53.
Convertible notes that are not considered to be exercised to
equity under those tests will be classified as long-term loans
based on their commitment value, otherwise those loans will be
classified between the long-term liabilities and the equity
based on the higher between their commitment value and their
fair value.
3. Extinguishment of convertible debt:
Under U.S. GAAP, according to APB 26 "Early Extinguishment of
Debt", the difference between the cash acquisition price of the
debt and its net carrying amount should be recognized currently
in income in the period of extinguishment as losses or gains.
Under Israeli GAAP such gain or loss is attributed to
additional paid capital.
f. Effect of inflation:
The Company, in accordance with Israeli GAAP, comprehensively
includes the effects of price level changes in the accompanying
financial statements as described in Note 2. As permitted by the
United States Securities and Exchange Commission rules for foreign
private issuers whose financial statements comprehensively include
the effects of price level changes, price level adjustments have not
been reversed in the accompanying reconciliation of Israeli
accounting principles to U.S. accounting principles.
g. Equity in affiliates and subsidiaries:
According to U.S. GAAP, when an investment qualifies for the use of
the equity method, the investor should adopt the equity method of
accounting. The investment, results of operations (current and prior
periods presented), and retained earnings of the investor should be
adjusted retroactively in a manner consistent with the accounting
for a step-by-step acquisition of a subsidiary.
According to Israeli GAAP, the equity method is applied from the
date when an investment first qualifies.
h. Minority interest in debit:
In accordance with Israeli GAAP minority interest in subsidiary's
deficiency is included in the balance sheet as part of the Company's
assets.
According to U.S. GAAP, minority interest in subsidiary's deficiency
should be included in the balance sheet as mezzanine finance
presented between total liabilities and shareholders' equity.
i. Treatment of marketable securities:
Marketable securities designated for sale in the short-term are
carried at market value, in accordance with Israeli accounting
principles. Realized and unrealized gains or losses from securities
classified as a "current investment" in accordance with Israeli GAAP
are reflected in the statements of operations. Proceeds from sale of
marketable securities are presented in investing activities in the
statements of cash flow.
For U.S. GAAP purposes, the Company has determined, as of the
purchase date and as of the balance sheets date, that its marketable
securities should be classified as trading securities and stated at
fair value, with unrealized gains and losses, reported in the
statement of operations. According to U.S. GAAP, proceeds from sale
of marketable securities held for trading should be included as an
adjustment to reconcile net income (loss) to net cash provided by
operating activities.
Presentation of income taxes in the statements of cash flows:
Under Israeli GAAP, income taxes paid in respect of the realization
of Telegate were allocated to investing transactions.
Under U.S. GAAP, all income taxes paid must be classified as
operating cash outflows.
The effect of the differences between Israeli and U.S. GAAP
described above, results an increase in net cash provided by
operating activities is in the amount of $ 9,614 thousand for the
year ended December 31, 2000, and the decrease in net cash provided
by investing activities is in the amount of $ 9,614 thousand.
j. Presentation of pro-forma information in respect of business
combinations:
U.S. GAAP requires disclosure of the following supplemental
information on a pro forma basis in the notes to the financial
statements of an acquiring enterprise for the period in which a
purchase business combination occurs:
1. Results of operations for the current period, as though the
enterprises had combined at the beginning of the period.
2. Results of operations for the immediately preceding period, as
though the enterprises had combined at the beginning of that
period.
Under Israeli GAAP, such disclosure is not required.
The following represents the unaudited pro-forma under
U.S. GAAP, results of operations for the years ended
December 31, 1999 and 2000, assuming that the Voice Diary
acquisition (see note 9b) had been consummated as of
January 1, 1999 and January 1, 2000, respectively:
December 31,
-----------------------------------------
2000 1999
------------------ ------------------
U.S. dollars
-----------------------------------------
(In thousands except
per share date)
Revenues 7,727 7,188
================== ==================
Net income (loss) 25,387 (2,080)
================== ==================
Basic net income (loss) per share 0.64 (0.07)
================== ==================
Diluted net income (loss) per share 0.58 (0.05)
================== ==================
k. Shares against loans to employees:
According to Israeli GAAP compensation expenses of shares issued to
employee are not recognized.
According to U.S. GAAP Compensation expenses should be measured and
recorded in accordance with EITF 95-16 "Accounting for Stock
Compensation Agreement with Employer Loan Features under APB 25".
Due to the fact that the loans granted to the employees for the
acquisition of Company's share bear variable interest and the loans
are secured only by charge of the shares, a variable plan accounting
is applied. As the market price declined below the original purchase
price, no compensation expenses were recorded in the year 2000. SFAS
123 requires use of an option valuation model to measure the fair
value of the options at the grant date. The pro-forma disclosure
required by SFAS 123, is not provided due to immateriality.
l. Foreign Currency translations of equity method investment:
According to Israeli GAAP the financial statements of an entity
reported using the equity method of accounting, whose functional
currency is not the NIS have been translated into NIS in accordance
with Interpretations No. 8 and No. 9 to opinion No. 36. Statements
of operation amounts have been translated using the exchange rate in
effect at the balance sheet date.
According to US GAAP statement of operations amounts should be
translated in accordance with FASB statement No. 52 "Foreign
Currency Translation", using the average exchange rate for the year.
As applicable to the Company's financial statements, these
differences are immaterial.
m. Impact of recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, which is required to be adopted in years
beginning after June 15, 2000. The Company is required to adopt the
new Statement effective January 1, 2001. The Statement will require
the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives will
either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings.
Based on the Company's derivative positions at December 31, 2000,
the Company estimates that the adoption of the new Statement will
not have a significant effect on earnings or the financial position
of the Company.
n. Classification of Chief Scientist royalties expenses:
According to Israeli GAAP, Chief Scientist royalties expenses are
presented in the statements of operations as research and
development cost in the amount of $ 120 thousand, $ 90 thousand and
$ 104 thousand for the years ended December 31, 2000, 1999 and 1998,
respectively.
According to U.S. GAAP, Chief Scientist royalties expenses should be
presented as cost of sales.
o. The effect of the material differences between Israeli and U.S. GAAP
of the abovementioned items on the financial statements is as
follows:
1. On consolidated statements of operations:
Year ended December 31,
---------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands except per share data )
Profit (loss) as reported according
to Israeli GAAP 24,575 (1,866) (3,066)
Financial expenses 161 13 36
Other income 1,041 - -
Deferred taxes on income 56 (218) 245
Equity in losses of affiliates - 149 149
-------------- -------------- --------------
Profit (loss) according to U.S.
GAAP 25,511 (1,948) (2,708)
============== ============== ==============
Basic earnings (losses) per Ordinary share:
From continuing operations:
As reported according to Israeli
GAAP 0.57 (0.05) (0.15)
============== ============== ==============
As per U.S. GAAP 0.64 (0.07) (0.14)
============== ============== ==============
From discontinued operations:
As reported according to Israeli
GAAP - - 0.04
============== ============== ==============
As per U.S. GAAP - - 0.04
============== ============== ==============
Basic earnings (losses) per
Ordinary shares:
As reported according to Israeli GAAP
0.57 (0.05) (0.11)
============== ============== ==============
As per U.S. GAAP 0.64 (0.07) (0.10)
============== ============== ==============
Year ended December 31,
---------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands except per share data )
Diluted earnings (losses) per Ordinary share:
From continuing operations:
As reported according to Israeli
GAAP 0.51 (0.05) (0.15)
============== ============== ==============
As per U.S. GAAP 0.58 (0.07) (0.14)
============== ============== ==============
From discontinued operations:
As reported according to Israeli
GAAP - - 0.04
============== ============== ==============
As per U.S. GAAP - - 0.04
============== ============== ==============
Diluted earnings (losses) per
Ordinary shares:
As reported according to Israeli
GAAP 0.51 (0.05) (0.11)
============== ============== ==============
As per U.S. GAAP 0.58 (0.07) (0.10)
============== ============== ==============
2. The following table sets forth the computation of historical
basic and diluted earnings (net loss) per share:
Year ended December 31,
------------------------------------------------
2000 1999 1998
--------------- -------------- ---------------
U.S. dollars
------------------------------------------------
(In thousands)
Numerator:
Net income (loss) $ 25,511 $ (1,948) $ (2,708)
=============== ============== ===============
Numerator for basic earnings (net loss)
per net - income (loss) available to
Ordinary shareholders $ 25,499 $ (1,948) $ (2,708)
=============== ============== ===============
Numerator for diluted earnings (net loss) per
share - net income (loss) available to Ordinary
shareholders
after assumed conversions $ 25,656 $ (1,940) $ (2,708)
=============== ============== ===============
Denominator:
Denominator for basic earnings (net
loss) per share - weighted - average
shares 39,969 28,929 27,514
--------------- -------------- ---------------
Effect of dilutive securities:
Convertible debentures 2,896 2,547 (*) -
Options 1,078 (*) - (*) -
--------------- -------------- ---------------
Dilutive potential Ordinary Shares 3,974 2,547 -
--------------- -------------- ---------------
Denominator for diluted earnings (net
loss) per share 43,943 31,476 27,514
=============== ============== ===============
(*) Antidilutive.
3. On consolidated balance sheet items:
December 31,
2000 1999
As per As As per
As Adjustment U.S. reported U.S.
reported GAAP Adjustment GAAP
U.S. dollars
(In thousands)
Investment in affiliate - - - 680 (1,041) (361)
Severance pay fund - 479 479 - 488 488
Deferred charges, net 36 (7) 29 51 (7) 44
Minority indebtedness 65 (65) - - - -
Total assets 35,274 407 35,681 9,331 (560) 8,771
Deferred taxes on income - - - - 56 56
Convertible debentures 1,698 (118) 1,580 2,122 (148) 1,974
Accrued severance pay 411 479 890 368 488 856
Minority interest - (65) (65) - - -
Total liabilities 11,050 296 11,346 10,330 396 10,726
Additional paid-in 11,877 315 12,192 11,693 190 11,883
capital
Accumulated deficit 726 (204) 522 (23,849) (1,140) (24,989)
Shareholders' equity 24,224 111 24,335 (999) (1,330) (2,329)
December 31, 2000
-------------------------------------
Shares conferring
-------------------------------------
Voting Rights to
rights profits
----------------- ----------------
% %
----------------- ----------------
a. Subsidiaries:
Reshef Technologies Ltd. 100 100
Amcoram Ltd. 100 100
C.T.S. Combat Training Simulation Ltd. 51 51
Aryt Systems Ltd. (formerly: Ram-Zur Industries Ltd.) 63 63
Voice Diary Ltd. 64 64
b. Affiliates:
SygMed Ltd. 21 21
Officecore.com Ltd. 30 30
Sensotech Ltd. 41 41
c. Inactive companies:
G.S.T. Ltd. 100 100
D.T. Industries Inc. (through G.S.T.) 100 100
Indofinance Inc. (through G.S.T.) 100 100
- - - - - - - - - - - -
HAIM HILEROWITZ - C.P.A.
60 Weizmann St.
Kfar-Saba 44250
Tel: (09) 767-7556
Fax: (09) 767-7616
AUDITORS' REPORT TO THE SHAREHOLDERS OF
SYGMED LIMITED
I have audited the accompanying balance sheets of SYGMED Limited ("The
Company") as of December 31, 2000 and 1999, and the related statements of
income, changes in equity and cash flows for each of the three years ended
December 31, 2000. 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 audits.
I conducted my audits in accordance with generally accepted auditing
standards, including those prescribed by the Auditor's Regulations (Auditor's
Mode of Performance - 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 board of directors and management, as
well as evaluating the overall financial statement presentation. I believe
that my audits provide a reasonable basis for my opinion.
The financial statements referred to above are presented in values
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.
A summary of the financial statements in nominal (historical) Israeli
shekels, which served as a basis for the adjusted statements, is presented in
note 23.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December
31, 2000 and 1999 and the results of its operations, the changes in equity and
in its cash flows for each of the three years ended, December 31, 2000 in
conformity with generally accepted accounting principles. Furthermore, in my
opinion, the financial statements referred to above are prepared in accordance
with the Securities Regulations (Preparation of Annual Financial Statements) -
1993.
This opinion replaces the opinion, which was given on Feb 19, 2001.
(I) HAIM HILEROWITZ
C.P.A.
Kfar-Sava, Israel
March 22, 2001.
HOCH DORON ANUKOV
CERTIFIED PUBLIC ACCOUNTANT
155 Bialik St.
Ramat Gan, 52523
Tel.: (03) 751-0814
Fax: (03) 751-0815
AUDITORS' REPORT TO THE SHAREHOLDERS OF
OFFICECORE.COM LTD.
We have audited the accompanying balance sheets of officecore.com LTD. (the
"Company") as of December 31, 2000 and the related statements of income,
changes in equity and cash flows for year ended December 31, 2000. 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 conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December
31, 2000 and the results of their operations, the changes in its equity and
the cash flows for the year ended December 31, 2000 in conformity with
accounting principles in Israel generally accepted
As explained in note 2, the above mentioned financial statements are stated in
values adjusted for the change in the general purchasing power of the Israeli
currency, in accordance with opinions of the institute of certified public
accountants in Israel.
Ramat-Gan
15 March 2001
Hoch Doron Anukov
Certified Public Accountant (Isr.)
Item 18. FINANCIAL STATEMENTS
See Item 17.
(Remainder of page intentionally left blank)
Item 19. EXHIBITS
The following exhibits are filed as part of this Annual Report:
Exhibit Number Exhibit
1.1 Memorandum of Association(1).
1.2 Articles of Association(1).
2.1 Registrant's Series 3 Convertible Debentures, dated February, 1997(1).
2.2 Registrant's Series 4 Debentures, dated February, 1999, to Excellence Investments Ltd.
and Tamar Central Pension Fund and other investors(2).
2.3 Registrant's Series 5 Convertible Debentures, dated December 1998(2).
4.1 Share Purchase Agreement between Terayon Communications Inc., Telegate Ltd., Aryt
Industries and others, and Amendment No.1(2)
4.2 Summary of 7 Haplada St., Or Yehuda Lease Agreement (November 7, 2000).
4.3 Or Yehuda Lease Agreement, dated November 7, 2000, between owners and the Registrant.(3)
4.4 Sderot Lease Agreements(2)
4.5 Summary of Sderot Lease Agreement(2)
4.6 Registrant's Series 7 Warrant.(2)
4.7 Registrant's Series 8 Warrant.(2)
4.8 Registrant's Series 9 Warrant.(2)
4.9 Share Purchase Agreement, dated April 2000, between Sensotech and the Registrant.
4.10 Share Purchase Agreement, dated May 2000, between Officecore.com and the Registrant.
4.11 Share Purchase Agreement, dated November 2000, between SygMed and the Registrant.
4.12 Share Purchase Agreement, dated January 2001, between ElscinTec and the Registrant.
4.13 Share Purchase Agreement, Assets Purchase Agreement and Shareholders Agreement dated March
1, 2001, between Reshef, Soltam, K.M. and the Registrant.(3)
4.14 Summery of Share Purchase Agreement, Assets Purchase Agreement and Shareholders Agreement
dated March 1, 2001, between Reshef, Soltam, K.M. and the Registrant.
4.15 Share Purchase Agreement between First Isratech Fund L.P., First Isratech LLC and First
Isratech Norway A.S. and the registrant dated, December 17, 2000.
4.16 Share Purchase Agreement, dated October 17, 2000, between Aryt Systems and the Registrant.(3)
4.17 Summery of Share Purchase Agreement, dated October 17, 2000, between Aryt Systems and
the Registrant.
6. Explanation of Earnings Per Share Calculation Information - see Note 27 to Financial Statements
7. Explanation of Ratio of Earning to Fixed Charges etc. - NA
8 . List of Subsidiaries
10. Additional exhibits - None
- -------------------------
1 Previously filed with Aryt Industries Form 20-F, and incorporated by
reference herein.
2 Previously filed with Aryt Industries Form 20-F for the year ended
December 31, 1999 and incorporated by reference herein.
3 Copies in Hebrew to be filed in paper form by mail.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this Annual Report on its behalf.
ARYT INDUSTRIES, LTD.
By: __________________________
Name: Shmuel Bachar
Title: Chief Executive Officer
Date: June 29, 2001
EXHIBIT 8 LIST OF SUBSIDIARIES (as of June 28, 2001)
- ------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES AND AFFILIATES PERCENTAGE JURISDICTION
OF
INCORPORATION
- ----------------------------------------------------------------------------------------------------------------------
Military Division
- ----------------------------------------------------------------------------------------------------------------------
Aryt Systems Ltd. 89% ISRAEL
- ----------------------------------------------------------------------------------------------------------------------
Amcoram Ltd.* 100% ISRAEL
- ----------------------------------------------------------------------------------------------------------------------
Reshef Technologies Ltd.* 90% ISRAEL
- ----------------------------------------------------------------------------------------------------------------------
C.T.S. (Combat Training Simulation), Ltd.** 51% ISRAEL
- ----------------------------------------------------------------------------------------------------------------------
Technology Division
- ----------------------------------------------------------------------------------------------------------------------
Officecore.com Ltd. 45% ISRAEL
- ----------------------------------------------------------------------------------------------------------------------
Voice Diary Ltd. 64% ISRAEL
- ----------------------------------------------------------------------------------------------------------------------
Sensotech Ltd. 53% ISRAEL
- ----------------------------------------------------------------------------------------------------------------------
Sky Dart Ltd. 51% ISRAEL
- ----------------------------------------------------------------------------------------------------------------------
Medical Division
- ----------------------------------------------------------------------------------------------------------------------
SygMed Ltd. 21% ISRAEL
- ----------------------------------------------------------------------------------------------------------------------
ElscinTec Ltd. *** 50% ISRAEL
- ----------------------------------------------------------------------------------------------------------------------
* On June 28, 2001, Aryt Systems, Ltd. acquired all of our shares in Amcoram,
Ltd. and Reshef Technologies, Ltd.pursuant to which our holdings in Aryt
Systems has been increased to approximately 89%. See Military Division-Amcoram
for a description of the transaction.
** A 51% subsidiary of Amcoram, Ltd.
*** Held indirectly through an intermediary holding company, Towtown Ltd.,
which holds 50% of ElscinTec Holdings, Ltd. which in turn holds all of the
share capital of ElscinTec Systems, Ltd.