UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
-----------------
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 0-29884
B.V.R. SYSTEMS (1998) LTD.
--------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ISRAEL
------
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
16 HAMELACHA STREET, PARK AFEK, ROSH HA'AYIN 48091, 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
------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G)
OF THE ACT:
ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE
--------------------------------------------
(TITLE OF CLASS)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO
SECTION 15(D) OF THE ACT:
NONE
----
(TITLE OF CLASS)
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:
10,660,874 ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE
-------------------------------------------------------
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.
|X| Yes |_| No
Indicate by check mark which financial statement item the registrant has elected
to follow.
|_| Item 17 |X| Item 18
TABLE OF CONTENTS
PAGE
Part I ...............................................................................................................1
ITEM 1. Identity of Directors, Senior Management and Advisors......................................1
ITEM 2. Offer Statistics and Expected Timetable....................................................1
ITEM 3. Key Information............................................................................2
ITEM 4. Information on the Company................................................................13
ITEM 5. Operating and Financial Review and Prospects..............................................27
ITEM 6. Directors, Senior Management and Employees................................................40
ITEM 7. Major Shareholders and Related Party Transactions.........................................48
ITEM 8. Financial Information.....................................................................55
ITEM 9. The Offer and Listing.....................................................................56
ITEM 10. Additional Information....................................................................57
ITEM 11. Quantitative and Qualitative Disclosures About Market Risk................................77
ITEM 12. Description of Securities Other Than Equity Securities....................................79
Part II ..............................................................................................................80
ITEM 13. Defaults, Dividend Arrearages And Delinquencies...........................................80
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds..............80
ITEM 15. Controls and Procedures...................................................................80
ITEM 16 A. Audit Committee Financial Expert..........................................................80
ITEM 16 B. Code of Ethics............................................................................80
Part III ..............................................................................................................80
ITEM 17 Not Applicable
ITEM 18 Financial Statements......................................................................F-1
i
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
Index to Consolidated Financial Statements F-1
Report of Independent Auditors F- 2
Consolidated Balance Sheets as of December 31, 2002 and 2001 F- 3
Consolidated Financial Statements as of December 31, 2002
and 2001 F- 4
Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000 F- 5
Statements of Changes in Shareholders' Equity for the years
ended December 31, 2002, 2001 and 2000 F- 6
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 F- 7
Notes to Consolidated Financial Statements F- 9 - F- 53
ii
INTRODUCTION
B.V.R. Systems (1998) Ltd., an Israeli company, was formed on January
6, 1998 to receive all of the assets and liabilities of the defense-related
business of BVR Technologies Ltd. in accordance with the terms of a
reorganization plan. The reorganization plan was consummated, and BVR began
operating as an independent company in October 1998, effective as of January 1,
1998. BVR is controlled by Elisra Electronics Systems Ltd.
Except for the historical information contained herein, the
statements contained in this annual report are forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to our business, financial condition and results of operations.
Statements that use the terms "believe," "anticipate," "expect," "plan,"
"intend," "estimate," "anticipate," "project" and similar expressions in the
affirmative and the negative are intended to identify forward-looking
statements. These statements reflect our current views with respect to future
events and are based on current assumptions, expectations, estimates and
projections about our business and the markets in which we operate and are
subject to risks and uncertainties. Actual events (including our results) could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including the risks discussed in "Item 3. Key
Information--Risk Factors" and elsewhere in this annual report. Except as
required by applicable law, including the securities laws of the United States,
we do not undertake any obligation nor intend to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
As used in this annual report, the terms "we," "us," "our," "the
company" and "BVR" mean B.V.R. Systems (1998) Ltd., and our consolidated
subsidiaries, unless otherwise indicated.
References in this annual report to Elisra refer to our controlling
shareholder, Elisra Electronics Systems Ltd.
References in this annual report to fiscal 2000 refer to our fiscal
year ended December 31, 2000, references to fiscal 2001 refer to our fiscal year
ended December 31, 2001 and references to fiscal 2002 refer to our fiscal year
ended December 31, 2002.
"Ehud(TM)" and "ATAS(TM)" are our trademarks. All other trademarks
and trade names appearing in this annual report are owned by their respective
holders.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
1
ITEM 3. KEY INFORMATION
A. SELECTED CONSOLIDATED FINANCIAL DATA
We derived the following selected consolidated financial data
presented below for each of the years ended December 31, 2000, 2001 and 2002
from our consolidated financial statements and related notes included in this
annual report. The selected consolidated financial data for the years ended
December 31, 1998 and 1999 have been derived from audited financial statements
not included in this annual report. Our consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in
Israel, or Israeli GAAP. Israeli GAAP, as applicable to our financial
statements, differ in certain significant respects from generally accepted
accounting principles in the United States, or U.S. GAAP. See Note 22 to the
consolidated financial statement included in this annual report for a discussion
of the material variations between Israeli and U.S. GAAP.
You should read the selected consolidated financial data together
with the section entitled "Item 5. Operating and Financial Review and Prospects"
and our consolidated financial statements included elsewhere in this annual
report. Please see Note 2 of our consolidated financial statements for an
explanation of the number of shares used in computing per share data.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1999 2000 2001 2002
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $44,932 $36,820 $25,369 $44,001 $28,290
Cost of revenues:.................................
Costs and expenses............................. 32,523 35,006 25,971 35,845 23,715
--------- -------- -------- -------- --------
Gross profit (loss)............................... 12,409 1,814 (602) 8,156 4,575
Operating expenses:
Research and development expenses.............. 3,528 3,252 2,870 1,081 1,554
Selling and marketing expenses................. 2,049 2,420 2,194 1,915 2,363
General and administrative expenses............ 2,038 3,456 4,676 5,029 4,577
--------- -------- -------- -------- --------
Total operating expenses.......................... 7,615 9,128 9,740 8,025 8,494
--------- -------- -------- -------- --------
Operating profit (loss) .......................... 4,794 (7,314) (10,342) 131 (3,919)
Financing expenses, net........................... (61) (559) (937) (742) (855)
Other expenses, net............................ (393) (6,739) (31) (319) (140)
--------- -------- -------- -------- --------
Income (loss) before income taxes................. 4,340 (14,612) (11,310) (930) (4,914)
Income tax (expenses) benefit..................... (768) 1,251 (1,974) - (878)
--------- -------- -------- -------- --------
Income (loss) after income taxes.................. 3,572 (13,361) (13,284) (930) (5,792)
Company's equity in earning of an affiliate....... 623 - - - -
--------- -------- -------- -------- --------
Net income (loss)................................. 4,195 (13,361) (13,284) (930) (5,792)
========= ======== ======== ======== ========
Basic and diluted net income (loss) per ordinary
share............................................. 0.56 (1.45) (1.32) (0.09) (0.54)
========= ======== ======== ======== ========
Weighted average number of ordinary shares used in
computing basic and diluted net income (loss) per
ordinary share.................................. 7,952 9,149 10,062 10,705 10,660
========= ======== ======== ======== ========
2
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1999 2000 2001 2002
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RECONCILIATION TO THE U.S. GAAP:
Net income (loss)................................. 4,195 (13,361) (13,284) (930) (5,792)
Income tax (expenses) benefit on income........... (200) 121 (121) - -
--------- -------- -------- -------- --------
Income (loss) under U.S. GAAP 3,995 (13,240) (13,405) (930) (5,792)
========= ======== ======== ======== ========
Basic and diluted net income (loss) per ordinary
share under U.S. GAAP............................. 0.54 (1.52) (1.34) (0.09) (0.54)
========= ======== ======== ======== ========
Weighted average number of ordinary shares used in
computing basic and diluted net income (loss) per
ordinary share under U.S. GAAP.................. 7,389 8,699 9,989 10,660 10,660
========= ======== ======== ======== ========
AS OF DECEMBER 31,
--------------------------------------------------------------------
1998 1999 2000 2001 2002
--------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Israeli GAAP:
Cash and cash equivalents......................... $3,455 $7,788 $12,225 $1,390 $860
Working capital (deficit)......................... 7,966 6,894 (978) (457) (5,361)
Total assets...................................... 47,567 40,149 *41,428 *31,452 26,038
Short-term bank credit and loans.................. 7,002 9,184 13,913 12,002 15,083
Shareholders equity (deficit)..................... $11,366 $11,381 $3,092 $2,162 $(3,630)
U.S. GAAP:
Total assets...................................... 48,246 41,299 *41,833 *32,526 27,647
Shareholders equity (deficit)..................... $11,366 $11,637 $2,757 $2,124 $(3,608)
- ---------------
*Reclassified
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Our business, operating results and financial condition could be
seriously harmed due to any of the following risks. If we do not successfully
address any of the risks described below, we could experience a material adverse
effect on our business, results of operations and financial condition and our
share price may decline. We cannot assure you that we will successfully address
any of these risks.
3
RISKS RELATED TO OUR BUSINESS
WE HAVE REPORTED OPERATING AND NET LOSSES IN THE PAST AND MAY REPORT OPERATING
AND NET LOSSES IN THE FUTURE.
We began business in 1998. We reported a net loss of $5.8 million for
the year ended December 31, 2002, a net loss of $0.9 million for the year ended
December 31, 2001, a net loss of $13.3 million for the year ended December 31,
2000. We have realized these results by working towards the completion of
existing projects, while simultaneously marketing our product lines aggressively
and leveraging our synergies with Elisra and strategic partners. We can offer no
assurance that we will achieve profitable operations or that any profitable
operations will be sustained. Future profitability will depend on our ability to
develop new products, the degree of market acceptance of our existing and new
products and the level of competition in the markets in which we operate. If we
continue to incur net losses, our cash flow position could be further damaged,
our operations could be jeopardized and our share price could decrease.
AS OF DECEMBER 31, 2003 WE HAD A DEFICIENCY IN OUR SHAREHOLDERS' EQUITY AND A
WORKING CAPITAL DEFICIT. WE MAY NEED TO RAISE ADDITIONAL FUNDS, WHICH MAY NOT BE
AVAILABLE.
As of December 31, 2002 we had a deficiency in our shareholders'
equity of $3.6 million and a working capital deficit of $5.4 million. We expect
that cash from our operations and existing short term bank loans and lines of
credit will be sufficient to meet our present working capital and capital
expenditure needs. In March 2003, we reached agreements with two of our
principal bank lenders according to which the repayment date of short-term loans
in the aggregate principal amount of $9.0 million, which were scheduled for
repayment through November 2003, was deferred until June 30, 2004. If our
operations do not generate cash to the extent currently anticipated or if any of
the risk factors discussed in this annual report will materialize, we may need
to raise additional funds in the future for a number of uses, including:
o implementing further marketing and sales activities;
o hiring additional qualified personnel; and
o expanding research and development programs.
We may not be able to obtain additional funds on acceptable terms or
at all. If we cannot raise needed funds on acceptable terms, we may not be able
to:
o maintain the level of our current operations;
o develop new products;
o enhance our existing products;
4
o remain current with evolving defense technologies;
o take advantage of future opportunities; or
o respond to competitive pressures or unanticipated requirements.
IF WE WILL NOT MEET THE STANDARDS OF THE NEW BULLETIN BOARD EXCHANGE OUR SHARES
WILL BE LESS LIQUID.
In June 2003, the Over-the-Counter Bulletin Board, or the OTCBB, on
which our Ordinary Shares are being quoted, will be phased out. A new market,
the Bulletin Board Exchange, or BBX, will be launched to take the place of the
OTCBB. The BBX will appeal to many of the same companies that are currently
quoted on the OTCBB, as it is expected to be a higher quality market. The BBX is
expected to offer a significant improvement over the OTCBB for qualifying
companies by increasing liquidity in the market for their securities, augmenting
the opportunity to raise equity capital and conferring the recognition of
trading on a listed market. Listing requirements to the BBX include the
requirement that at the time of listing the Company shall have at least 200
shareholders owning trading blocks. We currently do not meet that BBX listing
requirement. If we fail to meet the BBX listing requirements following the phase
out of the OTCBB or elect not to list on the BBX, our shares can trade through
informal, over-the-counter methods, which are substantially less liquid and
efficient.
BECAUSE WE RECEIVE LARGE PRODUCT ORDERS FROM A RELATIVELY SMALL NUMBER OF OUR
CUSTOMERS, OUR SALES AND OPERATING RESULTS ARE SUBJECT TO SUBSTANTIAL PERIODIC
VARIATIONS. OUR REVENUES AND OPERATING RESULTS FOR A SPECIFIC QUARTER MAY NOT BE
INDICATIVE OF OUR FUTURE PERFORMANCE, MAKING IT DIFFICULT FOR INVESTORS TO
EVALUATE OUR FUTURE PROSPECTS BASED ON THE RESULTS OF ANY ONE QUARTER.
Due to the nature of our customers and products, we receive
relatively large orders for our products from a relatively small number of
customers. Consequently, individual orders from individual customers can
represent a substantial portion of our sales in any one period and significant
orders by any customer during one period may not be followed by further orders
from the same customer in subsequent periods. Our sales and operating results
are subject to very substantial periodic variations. Because our quarterly
performance is likely to vary significantly, the results of our operations for
any quarter are not necessarily indicative of the results that we might achieve
for any subsequent period. In addition, our net sales may decline at a greater
rate than experienced in past periods. During fiscal 2002, we experienced a
continuous reduction in order backlog. A further decline in backlog levels could
result in more variability and less predictability in our quarter-to-quarter net
sales. Consequently, quarter-to-quarter comparisons of our operating results may
not be meaningful.
5
WE ARE EXPERIENCING A CONTINUING DECLINE IN OUR ORDER BACKLOG AND WE MAY NOT BE
ABLE TO CONVERT ALL OF OUR BACKLOG TO REVENUE.
We sell the majority of our products through individual purchase
orders. Many of our customers would have the right to terminate orders by paying
the cost of work in process plus a related profit factor. Customers may cancel
orders as a result of a budget being cancelled or for other reasons. As of
December 31, 2002, we had purchase orders and contractual arrangements of
approximately $26.1 million, compared with a $46.5 million at December 31, 2001,
evidencing anticipated future deliveries which we treat as backlog, through the
respective following three years. If we experience cancellations of pending
contracts, terminations or reductions of contracts in progress, we may not be
able to complete all of that backlog and book it as revenues. Any further
reduction in backlog will adversely affect our business, financial condition and
results of operations.
THE LOSS OF ONE OF OUR CUSTOMERS WOULD RESULT IN A LOSS OF A SIGNIFICANT AMOUNT
OF OUR REVENUES.
Three of our customers, a government of a country in South East Asia
that awarded us with several projects accounted for 41%, a customer located in
the Republic of Korea accounted for 27% and the Italian Air Force accounted for
18% of our revenues in fiscal 2002. We cannot be certain that these and other
customers will maintain the size of their respective purchase orders, or will
not reschedule or cancel existing purchase orders. We expect that sales of our
products to relatively few customers will account for a significant portion of
our net revenues for the foreseeable future. We were informed by one of our
customers, that due to the suspension of a budget, that customer decided not to
proceed with a planned project in which we expected to participate.
INTERNATIONAL POLITICAL AND ECONOMIC UNCERTAINTY COULD HAVE AN ADVERSE IMPACT ON
OUR BUSINESS AND ON OUR OPERATING RESULTS.
In fiscal 2002, 68% of our total revenues came from customers located
in South East Asia. We estimate that a substantial portion of our revenues in
2003 will come from customers in that region. The international political and
economic uncertainty and the ongoing war on terrorism may adversely impact our
ability to maintain the level of our sales to our foreign existing and
prospective customers and to develop new business abroad.
WE MAY FAIL IN COLLECTING AMOUNTS DUE FROM OUR CUSTOMER IN ARGENTINA.
In 2002, Argentina continued to experience economic weakness and
political crisis. To date, we met no difficulties in collecting amounts due from
our customer in Argentina, however Argentina's default on its debt and the
political and economic upheaval resulting from that country's five-year
recession may adversely impact our ability to collect such amounts in the
future. Failure to collect the amounts owed to us from our customer in
6
Argentina, will adversely affect our business, financial condition and results
of operations.
WE ARE EXPOSED TO GENERAL GLOBAL ECONOMIC AND MARKET CONDITIONS.
Our business is subject to the effects of general economic conditions
globally, and, in particular, conditions in the market for simulation systems
for military and civilian applications. In recent quarters, our sales efforts
have been adversely affected as a result of unfavorable economic conditions and
reduced capital spending in South East Asia. If the economic conditions in a
specific country in South East Asia, the government of which is a significant
customer of ours, and globally do not improve, or if the global economic
slowdown continues, we may continue to experience material adverse impacts on
our business, operating results, and financial condition.
OUR CONTRACTS ARE FIXED-PRICE AND PAYMENT THEREUNDER IS SUBJECT TO TIMELY
ACCOMPLISHMENT OF MILESTONES AND THUS COMMIT US TO UNFAVORABLE TERMS.
The majority of our contracts are for fixed-price, generally not
subject to adjustment for the costs incurred in the performance of the contract.
Consequently, we assume the risk that increased or unexpected costs may reduce
our profits or generate a loss. The risk can be particularly significant under a
fixed-price contract involving research and development with respect to new
technologies.
The majority of our contracts with our customers provide that after
we received an advance payment at the commencement of a project, additional
payments are payable upon progress or achievement of specific milestones. In a
majority of the projects, we are required to provide performance guarantees in
an amount equal to a specific percentage of the contract price.
Several agreements with our customers impose penalties or reduce the
amount payable to us in the event that the completion of a phase of a project is
delayed. In addition, we are generally responsible for the delays and defaults
of our subcontractors. To mitigate our risk, we attempt to impose liability on
our subcontractors on a "back-to-back" basis when such contract's delay or
default could expose us to liability. However, we will not be able to obtain
full recovery for such liabilities from such subcontractors.
We may encounter significant reduction in profits or incur losses as
a result of one or more of the above unfavorable terms.
To date, none of the projects in which we participate have been
terminated.
7
WE ARE CONTROLLED BY ELISRA ELECTRONIC SYSTEMS LTD., WHICH, IN THE AGGREGATE,
BENEFICIALLY OWNS APPROXIMATELY 55.0% OF OUR ORDINARY SHARES AND IS A PARTY TO A
VOTING AGREEMENT WITH OUR OTHER MAJOR SHAREHOLDERS. THEREFORE, ELISRA IS ABLE TO
ELECT THE MAJORITY OF OUR DIRECTORS AND EXERCISE CONTROL OVER THE OUTCOME OF
MATTERS REQUIRING SHAREHOLDER'S APPROVAL.
As of March 31, 2003, Elisra Electronic Systems Ltd., a subsidiary of
Koor Industries Ltd., beneficially owned an aggregate of 5,188,358 ordinary
shares and a warrant to purchase additional 1,500,000 of our ordinary shares
(representing, assuming exercise of such warrant, approximately 55.0% of our
outstanding ordinary shares) and is a party to a voting agreement with other
major shareholders of our ordinary shares regarding, among other things, the
election of directors. As a result, Elisra controls the outcome of various
actions that require our shareholder approval. For example, Elisra could elect
most of our directors, delay or prevent a transaction in which shareholders
might receive a premium over the prevailing market price for their shares and
prevent changes in control or management.
WE RELY ON CONTRACTS WITH GOVERNMENTS AND DEFENSE CONTRACTORS' ENTITIES WHICH
ENTAIL CERTAIN RISKS, ALL OF WHICH MAY ADVERSELY AFFECT OUR OPERATIONS.
As is the case with many companies deriving a substantial portion of
their revenues from government contracts for defense-related products, our
business is subject to specific risks, which include changes in governmental
appropriations and national defense policies and priorities, a change of
government in the customer's country, as well as political changes or
alterations in the government's policy regarding the issue of export and import
permits to various countries and the policies of specific governments to favor
local over foreign defense products suppliers. We may be negatively affected by
one or more of these factors.
Generally, our contracts with governments may be terminated or
suspended by such governments as a result of factors which may not depend on us,
including as a result of a decrease in the defense budget, a decline in the
military expenditures of governments, the cancellation or a significant cutback
of a large project in which we participate or as a result of situations such as
a state of war, acts of God or other circumstances seriously disrupting the
public safety, peace or good order of the customer's country. Our contracts with
non-governmental military contractors sometimes contain similar provisions. In
cases in which we received advanced payments prior to incurring the cost of
fulfilling such contracts, we realized a positive project cash flow.
Particularly, in the last three years, we have received substantial advances
under our contracts. In the event of an early termination of a contract, we may
be required to return a portion of such advanced payment. Upon such early
termination, we would, in most cases, be entitled to reimbursement for our
incurred contract costs and to payment of a proportionate share of our fee or
profit for the work actually performed. In order to reduce risks of financial
exposure resulting from an early termination of a contract, we attempt to extend
funds for projects in accordance with the rate of performance and to insure
ourselves from that risk. If, however, we are not entitled to all or a portion
of such compensation our operations would be adversely effected.
8
WE ARE DEPENDENT UPON A SUPPLIER OF ONE OF OUR KEY COMPONENTS.
We currently obtain the computers incorporated in our simulators from
Silicon Graphics, Inc. We do not have long-term supply contracts with Silicon
Graphics or any other of our suppliers. This factor presents to us the following
risks:
o delays in delivery or shortages in components could interrupt and
delay projects and our performance under existing agreements;
o suppliers could increase component prices significantly and with
immediate effect;
o we may not be able to develop alternative sources for such components,
if and as required in the future; and
o suppliers could discontinue the manufacture or supply of components
used in our products.
In such event, we might need to purchase such components from other
suppliers, which may cause delays in contracts performance and increased
manufacturing costs.
OUR ABILITY TO EXPORT OUR PRODUCTS IS SUBJECT TO APPROVALS BY AGENCIES OF THE
ISRAELI AND THE UNITED STATES GOVERNMENTS.
Our export of military goods and information is subject to approval
of SIBAT, the Foreign Defense Assistance and Defense Export Organization of the
Israel Ministry of Defense. To date, we have received all required approvals
from SIBAT, but there can be no assurance that we will receive such approvals in
the future or that the Israeli government will not impose additional
requirements on our manufacturing or export activities, which may require us to
incur additional substantial expenses or which may otherwise have a material
adverse effect on our operations. SIBAT's policy has generally been to encourage
the export of military goods and knowledge; however, SIBAT generally does not
permit sales to countries which are in a state of war or hostility with Israel
and countries which may otherwise endanger the State of Israel.
We purchase from manufacturers in the United States substantially all
of the commercial computers, a portion of the air combat maneuvering
instrumentation pod's hardware and other "off-the-shelf" products, such as
navigation systems, which we incorporate into our products. The export of such
components is subject to the approval of the United States Department of
Commerce and/or the United States Department of Defense, which often restricts
sales to certain countries. Following the events of September 11, 2001, we
experienced delays in the receipt of such required approvals. For example, we
experienced a delay in the delivery of several components of a system to a
customer and incurred additional costs, as a result of the need to modify such
components, because of a delay in the receipt of an export approval that has
9
since been obtained. Further, there can be no assurance that we will receive
such approvals in the future or that the United States Government will not
impose additional requirements on our manufacturing or export activity, which
might require us to incur substantial expenses, and/or find and contract with
alternative suppliers in countries that do not impose similar export
restrictions, or which might otherwise have a material adverse effect on our
operations.
BECAUSE COMPETITION IN THE MARKET FOR OUR PRODUCTS IS INTENSE, WE MAY LOSE
MARKET SHARE, AND WE MAY BE UNABLE TO ACHIEVE OR MAINTAIN PROFITABILITY.
We compete with numerous other contractors on the basis of products
performance, price, reputation, technical and managerial capability, products
maintenance cost and responsiveness to customers' requirements. Our ability to
successfully compete for and retain such new projects and customers is highly
dependent on technical excellence, management proficiency, strategic alliances,
cost-effective performance and the ability to recruit and retain key personnel.
The continuing consolidation of the global defense industry, which
has decreased the number of, but increased the relative size and resources of
our competitors, resulted in intensified competition. Some of the competitors
who are the top-tier contractors for competing products, such as divisions of
Thales, Lockheed-Martin, L-3 Communications, Cubic, IAI (in some countries),
Elbit Systems and CAE, have substantially greater financial, marketing and other
resources than ours.
BECAUSE WE OPERATE IN INTERNATIONAL MARKETS, WE ARE SUBJECT TO ADDITIONAL RISKS.
We currently offer our products in a number of countries and a key
component of our marketing strategy is to continue to expand in foreign markets.
Our business is subject to risks which often characterize international markets,
including:
o economic and political instability;
o import or export licensing requirements;
o difficulties in collecting accounts receivable;
o longer payment cycles;
o unexpected changes in regulatory requirements and tariffs;
o fluctuations in exchange rates;
o potentially adverse tax consequences; and
o potentially weak protection of intellectual property rights.
10
In addition, these risks may impair our ability to generate revenues
from our global sales efforts.
OUR PROFITABILITY COULD SUFFER IF THIRD PARTIES INFRINGE UPON OUR PROPRIETARY
TECHNOLOGY.
Our profitability could suffer if third parties infringe upon our
intellectual property rights or misappropriate our technologies and trademarks
for their own businesses. To protect our rights to our intellectual property, we
rely on a combination of patent, trademark and copyright law, trade secret
protection, confidentiality agreements and other contractual arrangements with
our employees, some of our affiliates, strategic partners and others. We
currently own one registered trademark, filed an application for the
registration of another trademark, and own together with BVR Technologies Ltd.
five United States patents. Several of these patents were also granted or
applied for in Israel and/or in several countries in the European Community and
worldwide. The protective steps we have taken may be inadequate to deter
misappropriation of our proprietary information. We may be unable to detect the
unauthorized use of, or take appropriate steps to enforce, our intellectual
property rights. Effective patent, trademark, copyright and trade secret
protection may not be available in every country in which we offer, or intend to
offer, our products. Any failure to adequately protect our intellectual property
could devalue our proprietary content and impair our ability to compete
effectively. Further, defending our intellectual property rights could result in
the expenditure of significant financial and managerial resources.
OUR PRODUCTS MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Third parties may assert against us infringement claims or claims
that we have violated a patent or infringed a copyright, trademark or other
proprietary right belonging to them. Any infringement claim, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
RISKS RELATING TO OUR LOCATION IN ISRAEL
CONDITIONS IN ISRAEL AFFECT OUR OPERATIONS AND MAY LIMIT OUR ABILITY TO PRODUCE
AND SELL OUR PRODUCTS.
We are incorporated under Israeli law and our principal offices,
research and development and manufacturing facilities are located in the State
of Israel. Political, economic and military conditions in Israel directly affect
our operations. Since the establishment of the State of Israel in 1948, a number
of armed conflicts have taken place between Israel and its Arab neighbors, and
the continued state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Since September 2000, the violence
between Israel and the Palestinians has intensified and a material escalation in
violence has occurred. Israel has experienced terrorist incidents within its
borders, including in the West Bank and Gaza Strip. As a result, negotiations
between Israel and representatives of the Palestinian Authority ceased. We could
be adversely affected by hostilities involving Israel, the interruption or
curtailment of trade between Israel and its trading partners, or a continuous
downturn in the economic or financial condition of Israel. In addition, several
countries continue to restrict business with Israel and with companies having
operations in Israel. We could be negatively affected by adverse developments in
11
the peace process, including the recent violence, or by restrictive laws or
practices directed towards Israel or Israeli exporters.
Like all male adult citizens and permanent residents of Israel, our
directors, officers and employees who are under the age of 48 are, unless
exempt, obligated to perform up to 36 days of military reserve duty annually.
Additionally, all such residents are subject to being called to active duty at
any time under emergency circumstances. Some of our officers and employees are
currently obligated to perform annual reserve duty. No assessment can be made as
to the full impact of such requirements on our workforce or business if
conditions in Israel should change, and no prediction can be made as to the
effect of any expansion or reduction of such military obligations on us. See
"Item 4. Information on the Company - B. Business Overview - Conditions in
Israel.".
WE BENEFIT FROM GOVERNMENT PROGRAMS AND TAX BENEFITS WHICH MAY BE DISCONTINUED
OR REDUCED.
We have received grants and are entitled to tax benefits under
Government of Israel programs. In order to maintain our eligibility for these
programs and benefits, we must continue to meet specified conditions, including
making specified investments in fixed assets and paying royalties with respect
to grants received. In addition, some of these programs restrict our ability to
manufacture particular products or transfer particular technology outside of
Israel. If we fail to comply with these conditions in the future, the benefits
received could be canceled and we could be required to pay increased taxes. The
Government of Israel has reduced the benefits available under these programs in
recent years and these programs and tax benefits may be discontinued or
curtailed in the future. If the Government of Israel ends these programs and tax
benefits, our business, financial condition and results of operations could be
materially adversely affected.
BECAUSE A SUBSTANTIAL PORTION OF OUR REVENUES ARE GENERATED IN U.S. DOLLARS AND
A PORTION OF OUR EXPENSES ARE INCURRED IN NEW ISRAELI SHEKELS, OUR RESULTS OF
OPERATIONS MAY BE SERIOUSLY HARMED IF THE RATE OF INFLATION IN ISRAEL EXCEEDS
THE RATE OF DEVALUATION OF THE NEW ISRAELI SHEKEL AGAINST THE U.S. DOLLAR.
We generate a substantial portion of our revenues in dollars, but we
incur a portion of our expenses, principally salaries and related personnel
expenses, in New Israeli Shekels, or NIS. As a result, we are exposed to the
risk that the rate of inflation in Israel will exceed the rate of devaluation of
the NIS in relation to the dollar or that the timing of this devaluation lags
behind inflation in Israel. In recent years, the rate of devaluation of the NIS
against the dollar has exceeded the rate of inflation, a reversal from prior
years which has benefited us. However, we cannot be certain that this trend will
12
continue. If the dollar costs of our operations in Israel increase, our
dollar-measured results of operations will be adversely affected.
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS NAMED IN THIS ANNUAL REPORT OR TO ASSERT UNITED STATES SECURITIES
LAWS' CLAIMS IN ISRAEL OR SERVE PROCESS ON OUR OFFICERS.
We are incorporated in Israel. All of our executive officers and
directors named in this annual report are nonresidents of the United States, and
a substantial portion of our assets and the assets of these persons are located
outside the United States. Therefore, it may be difficult to enforce a judgment
obtained in the United States based upon the civil liabilities provisions of the
United States Federal securities laws against us or any of those persons or to
effect service of process upon these persons in the United States. Additionally,
it may be difficult for you to enforce civil liabilities under United States
federal securities laws in original actions instituted in Israel.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
B.V.R. Systems (1998) Ltd., an Israeli company, was formed on January
1, 1998 to receive all of the assets and liabilities of the defense-related
business of BVR Technologies Ltd., or BVR-T, in accordance with the terms of a
reorganization plan. The reorganization plan was consummated, and BVR began
operating as an independent company in October 1998, effective as of January 1,
1998. Our principal executive offices and research and development facilities
are located at 16 Hamelacha Street, Afek Industrial Park, Rosh Ha'ayin 48091,
Israel, and our telephone number is 972-3-900-8000. Our manufacturing facilities
are located in Ashdod, Israel.
B. BUSINESS OVERVIEW
GENERAL
We are engaged in the development, manufacture and marketing of
sophisticated training and simulation systems for military and civilian
applications. We currently market three lines of products:
On-Board Training Systems such as: "Ehud" Air Combat Maneuvering
Instrumentation, or ACMI, Naval Combat Instrumentation System, or NCMI, and
Battle Field Instrumentation, or BFI.
Military simulators such as simulators for fighter aircraft,
helicopters, training aircraft, Unmanned Aerial Vehicles, tank & gunnery and
naval simulators.
Embedded simulation such as: Advanced Trainer Avionics Suite, or
"ATAS" and In Flight Electronic Warfare Simulation, or "IFEWS."
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Our products offer advanced, highly effective and cost-efficient
solutions to operational training needs. Our products are based on a complete
training philosophy, which enables our customers to reduce the amount of actual
military equipment used in training while enhancing the quality of the training
exercises. And, accordingly, significantly reducing the risks associated with
actual operations and training in a live operational scenario. In addition, our
military products improve the operational capabilities of armed forces through
enhanced command and control in the battlefield and integration between fighting
units.
OUR PRODUCT LINE
We continuously design, develop and market new generation
technologies for three main product lines: on-board training; simulators; and
embedded simulation. The advances we made in the field reflect our vast
experience, unique approach to technological innovation and our drive to
singularly fulfill the needs of our global military customers.
ON-BOARD TRAINING
Our on-board training systems are designed to improve real-time
management, monitoring, training, safety and debriefing for live training
exercises and operations carried out by modern air, naval and ground forces. The
on-board training product line includes:
Ehud ACMI
Air Combat Maneuvering Instrumentation
EHUD(TM)air combat maneuvering instrumentation, or ACMI, system is a
complete on-board, autonomous training and safety suite. This system is designed
to enhance the airborne training of an aircraft crew on a wide variety of
missions.
EHUD(TM) offers a unique combination of range-less, real-time and
post-flight training and debriefing system together with safety warnings and
operational capabilities. The system is effective for air-to-air, air-to-ground
and electronics warfare pilot training with an unlimited number of participants.
The EHUD(TM)ACMI system includes features such as mid-air and ground
collision warning systems, which significantly enhance training safety. EHUD(TM)
ACMI system has been flying operationally since 1994 and has been delivered to
many leading air forces worldwide.
Naval Combat Instrumentation System
Our naval combat maneuvering instrumentation, or NCMI, is a
full-scale on-board training system. The system enables the conduct of both live
field training sessions at sea and constructive war-gaming exercises ashore.
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The basic concept behind our NCMI is the deployment of a distributed
embedded simulation system on-board an instrumented ship and a maritime patrol
aircraft.
Our NCMI system supports the debriefing, analysis, and evaluation of
naval warfare exercises at all command levels.
Our NCMI system supports various training levels ranging from
operator's training at console level, through sub-team and team training, and up
to full fleet training. Our NCMI system provides training in tactical simulators
and enhances the reality of seaborne exercises through the use of computer
generated forces, or CGF, integrated with live exercises. Typically, the
exercise is coordinated between the participants via a datalink system, which
supports the creation of a distributed simulation network.
SIMULATORS
Our simulation product line includes flight, naval, ground systems
simulators for various platforms, electronics and weapon systems. Our line of
simulators covers a full range of training scale, from basic procedural trainers
to combat mission trainers and full mission dome simulators. Our simulators are
designed with high level architecture, or HLA, delivering the capacity to
perform sophisticated distributed mission training, or DMT, by communicating and
training with other simulators and training devices. Our simulator product lines
includes:
o Flight Simulators;
o Ground Forces Simulators;
o Naval Simulators; and
o Systems Simulators
Flight Simulators
Fighter Aircraft Simulators. We have developed and manufactured
fighter aircraft simulators for aircraft such as: F-16C, F-16D, F-15, F-5, A-4,
and Mirage-2000.
Full Mission Simulators. Our full mission simulators provide training
for all aspects of a mission's flight and procedures, including sophisticated
weapon system simulations, sensors and full standard and emergency procedure
training. These simulators encompass a high-fidelity cockpit replica and a large
variety of visual systems covering up to 360(degree) field of view.
15
We use high-end computers and personal computers, or PC, as image
generators to provide the trainee with a high-resolution, fully-textured outside
world visual presentation, based on satellite imagery and three dimensions
targets and shapes.
Our full mission simulators provide pilots with complex tactical
training, using multiple computer generated forces, such as air, land, or sea
participants.
Trainer Aircraft Simulators. We developed and manufactured trainer
aircraft simulators for aircraft such as: PC-7, MB-339, and Fouga Magister.
AMOS - Cadet Screening Simulator. Our AMOS cadet screening and basic
flight training simulator has been developed for the Israeli Air Force Fouga
Magister trainer.
Our system provides a methodology for the analysis of cadets'
learning abilities, thus screening while training.
Helicopter Full Mission Simulator.
We developed and manufactured helicopter simulators for helicopters
such as AS-550.
Our full mission simulators for helicopters are offered for assault
and fully armed attack helicopter simulation. The simulators are offered in a
number of configurations, from a limited front view outside world imagery to a
full dome display. The full dome display configuration includes a full-size
cockpit replica for two pilots with a three channel high-resolution full color
outside world display. The resulting imagery fidelity level enables the system
to perform low flying missions and weapon deployment simulation. The system is
capable of simulating typical helicopter flights and attacks, including a full
range of malfunctions and emergency procedures. Our simulators also provides for
tactical training as the trainee can fly against user pre-programmed computer
generated forces.
Unmanned Air Vehicle Mission Simulators
We developed and manufactured a unmanned air vehicle, or UAV,
tactical mission simulators for tactical UAV, for both the external pilot and
the internal mission crew.
Our UAV mission simulator supports training on near-to-real-life
quality imaging systems for the entire crew. Training can be executed both
individually and as a team.
Our UAV simulator provides training for missions such as: battlefield
surveillance and reconnaissance, target location and acquisition, artillery fire
control, electronic intelligence gathering and electronic warfare, exploding UAV
16
delivery, contaminated and mined areas, international crises management, search
and rescue services for civilian purposes, training in malfunctions and
emergency procedures.
Ground Forces Simulation Systems
Integrated Tactics and Armor Combat Trainer. Our integrated tactics
armor and weapon system vehicle combat trainer, or INTACT system fulfills the
need for effective training, debriefing and evaluation of army units. Our INTACT
system was developed by experienced army officer. INTACT is a multi-station
armor and weapon vehicle tactical simulator system. Our INTACT system provides
training that ranges from individual level to combat team multi-participant
tactical exercises.
Our INTACT system provides training levels from individual precision
gunnery to combat team multi-participant exercises and beyond. The training can
include unlimited combinations of manned and computer generated forces. The
INTACT system fills the need for effective training, debriefing and evaluation
of ground forces. Our INTACT system simulates virtual forces and integrates
their actions with real forces, adding value to performance and cost-effective
training.
We believe that our INTACT system provides unprecedented debriefing
capabilities, including full playback of executed exercises or previously stored
exercises. Debriefing may be performed at the instructor station or at a
dedicated debriefing facility. Data is monitored and stored throughout the
training exercises for proficiency level and operational parameters analysis,
thus providing a powerful database for mission planning, rehearsal and
evaluation.
Naval Simulators
We developed a diversified product line of naval simulators based on
dedicated replica workstations and sophisticated visual images provide system
training for operators and officers. We specialize in quick responses to
requests for unique tailor-made systems from a wide range of naval customers.
Naval Tactical Trainer
Our naval tactical trainer, or NTT, is a complete tactical training
system providing a solution for all shore-based tactical training needs. Our NTT
is in operational use by the Israel Navy at its main training base. Our NTT is
used for the tactical training of principal war officers and combat information
center officers.
Submarine Simulators
Our submarine simulator is comprised of an attack team trainer, a
periscope simulator and a submarine driver simulator, which together provide for
three different complementing training facilities that can be operated in a
standalone mode or in concert to provide for a complete and comprehensive
training for submarines' crews.
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Systems Simulators
Our systems simulators provide a unique training device for the
training of operators in highly specialized operational tasks. Products
delivered to our customers include the LANTIRN simulator used to train pilots to
fly with the LANTIRN pod, and our weapon system trainer used to train the weapon
systems officer in the many tasks required to operate and successfully deliver
today's complex weapon to the designated target.
Embedded Simulation
Our embedded simulation product line is comprised of a wide breadth
of products. These advanced solutions are an outcome of the synergies gained
from the combination of on-board training and simulation technologies. With vast
experience in these two fields we believe that we are well positioned to play a
leading role in this evolving market.
ADVANCED TRAINER AVIONICS SUITE
Our advanced trainer avionics suite, or ATASTM, is a state-of-the-art
embedded simulation suite, installed on basic or advanced trainer aircraft,
transforms training aircraft into virtual advanced fighter aircraft. A training
aircraft equipped with ATASTM may offer capabilities such as actual flight
simulation, in-flight live or virtual target threats, operational scenarios of
gradually increasing complexity, full debriefing capabilities and flight safety
features.
An ATAS standard training aircraft is equipped or refitted to
replicate the cockpit and avionics instrumentation panel of specifically
targeted advanced fighters. The refitted trainers will resemble the behavior,
displays and controls of the advanced fighter sensors (radar, RWR, seekers) and
weapon systems. Pilots flying the ATAS-fitted trainer benefit from a real-time
feel and capabilities of the simulated advanced fighter aircraft. The system
offers features such as collision avoidance and hazard warning.
To date, we have made no sales of our ATAS system.
In-Flight Electronic Warfare Simulation, or IFEWS
Our in-flight electronic warfare simulator, or IFEWS(TM), is a
complete, autonomous, on-board threat-environment training and safety suite. The
system is an embedded simulator for the training and debriefing of EW scenarios,
simulating the real EW systems in an aircraft. IFEWS(TM) provides a virtual EW
range and includes our post-flight debriefing capabilities.
Our IFEWS(TM) generates a wide range of on-board simulation of
virtual ground and airborne threats. The virtual range, created and managed by
the IFEWS(TM) computer, authentically simulates the characteristics, behavior,
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and interactions of both the threatening weapon systems and the aircraft's self
protection suite, or SPS. Our system is tightly coupled to the aircraft's
existing EW suite. IFEWS(TM) simulates all relevant modes of weapon system,
including optical tracking modes and other modes not received by the airborne EW
suite.
After landing, Our PC-based ground station provides advanced AAR and
debriefing with a 3D analysis of crew performance, all weapon engagements,
safety events and mission scenarios.
Based on the legacy of EHUD(TM) ACMI and HCMI systems and the
operational expertise of the parent company Elisra, a world leader in EW
systems, IFEWS(TM)provides multiple features: real-time training, realistic
virtual threats, safety elements and debriefing capabilities.
In February 2002, we completed preliminary flight tests with the
Israeli Air Force and we are in the process of further demonstration flight
tests with the Israeli Air Force. To date, we have made no sales of our IFEWS.
The following table sets forth, for the period indicated, our
consolidated revenues by product line, expressed as a percentage of total
revenues.
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
On-board training Family of Products............... 49% 56% 79% 68% 48%
Simulators......................................... 51% 44% 21% 32% 52%
Total............................................ 100% 100% 100% 100% 100%
STRATEGIC RELATIONSHIPS
ISRAELI AIRCRAFT INDUSTRIES
From 1992 to 1997, we developed, manufactured and marketed the Ehud
ACMI systems pursuant to a joint venture agreement entered into in 1992 with MLM
Systems Engineering & Integration, a division of Israel Aircraft Industries
Ltd., or IAI. Pursuant to this agreement, we and IAI agreed to jointly develop,
manufacture and market the Ehud ACMI systems, with IAI subcontracting some of
the manufacturing and integration work with respect to the Ehud product.
Following the expiration of the agreement's term, various claims were alleged by
both IAI and us regarding each other's performance of obligations throughout the
term of the agreement and thereafter. In an ex parte proceeding filed by IAI,
the District Court of Tel Aviv issued in February 1999 a temporary injunction,
enjoining us from replacing IAI as our subcontractor in a project for the German
air force.
In August 1999, we entered into a cooperation agreement with IAI,
which brought an end to these legal proceedings and established terms for
19
cooperation between the two companies with respect to the marketing of the Ehud
ACMI systems.
There are still outstanding disagreements between us and IAI relating
to projects performed prior to entering into this agreement. Our agreement with
IAI provides for a resolution mechanism of such disputes, including by
arbitration in case we and IAI can not reach a mutually agreed resolution.
The cooperation agreement contemplates three basic types of business
relationships:
o Royalties and Non-Competition Arrangement. The agreement provides for
countries in which either we or IAI shall not sell or market the Ehud
ACMI. We undertook not to compete with IAI in the majority of such
countries. The party operating in each such country shall pay to the
party who undertook not to operate in such country royalties ranging
from 4.75% to 12.5% of the contract price with respect to contracts
executed in such countries during the term of the cooperation
agreement and two years, thereafter. The contract price for the
purposes of calculating the royalties includes maintenance and support
contracts. In addition, in one of the countries in which IAI undertook
not to compete, rather than actually paying royalties, we will pay IAI
$60,000 for each pod and $100,000 for each ground station we sold.
o Cooperation Arrangement. We and IAI undertook to cooperate exclusively
with each other in specific countries in which either we or IAI will
act as the prime contractor. Either we or IAI will be in charge of,
and responsible for, supplying that portion of such contract as shall
be decided by us and IAI. We and IAI will equally share in "profit,"
which for purposes of this allocation, has been defined as the
expected profit from the project (contract price minus projected cost
regardless of actual costs).
o Royalties and Competition. We and IAI have agreed that in specifically
defined countries, each will compete with the other only if such party
is required to do so under existing relationships with third parties.
Both we and IAI will generally pay royalties to the other in an amount
ranging between 4% and 8% of a contract price with respect to
contracts executed during the term of the cooperation agreement and
two years thereafter. In one of the countries, rather than actually
paying royalties, such contracting party will pay the other $60,000
for each pod sold and $100,000 for each ground station sold.
The cooperation agreement includes, among other provisions, the
following:
We and IAI have defined a mechanism to resolve outstanding financial
and other disagreements relating to the period prior to the execution of this
agreement.
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In a few countries, either we or IAI may continue to work under
preexisting arrangements.
In the countries covered by our contract with Bodenseewerk
Geraetetchnik GmbH, or BGT, IAI will replace us as a subcontractor of BGT. In
return, IAI will pay us royalties ranging between 10% and 12.5%. With respect to
existing projects in one of these countries, we will remain the prime contractor
and IAI will remain our subcontractor. Profits from these projects are to be
shared equally between us and IAI.
The cooperation agreement provides that, with respect to countries
not covered by the agreement, a joint committee will meet to determine the
specific business cooperation to be formed. If such joint committee does not
reach an agreement, the royalties and competition arrangement will apply, except
that the royalty rate will be 10%.
As part of the cooperation agreement, we and IAI each granted the
other a license to use any patent or other intellectual property right owned by
the other relating to the Ehud ACMI systems, as is required to enable such party
to exercise its rights under the agreement. In addition, we agreed that our
trade name "Ehud" shall be owned jointly with IAI.
The cooperation agreement was approved by the Israeli Controller of
Restrictive Trade Practices, came into effect in September 1999 and is for a
term of seven years. As a result of this agreement, we will no longer be able to
act as a prime contractor or compete with IAI, as the case may be, with respect
to sale of Ehud ACMI systems in some countries which accounted for a substantial
percentage of our revenues in the past.
In November 2002, Elta, a division of IAI, acquired from Koor
Industries Ltd. 30% of the outstanding shares of Elisra at such time.
OTHER STRATEGIC AGREEMENTS
In April 1998, we entered into a teaming agreement with Metric
Systems Corporation, Inc., or Metric, a leading United States-based producer of
airborne test, evaluation and training products. Pursuant to this agreement, we
and Metric agreed on joint manufacturing and marketing of our Ehud ACMI systems
for some projects. This agreement has expired in April 2001, except for certain
provisions concerning the cooperation in a specific country, which will remain
effective until May 2003.
In November 2001, we have entered into a memorandum of understanding
with Smiths Aerospace with respect to the integration of Smiths airborne video
solid state recorder with our airborne embedded training suite.
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MARKETING
We actively seek to identify and propose solutions for military
training and debriefing needs of the current and prospective customers. Our
research and development activities focus on systems designed to meet specific
needs we identified. We market our products, either as a prime contractor or as
a subcontractor, to various governments and defense contractors throughout the
world directly and through joint ventures, agents or representatives. We have
entered into cooperation agreements with a number of defense contractors, which
provide for joint participation in pursuit and performance of contracts in
certain countries.
In June 1998, we formed a subsidiary in Singapore, BVR-S Pacific PTE,
through which we conduct our operations in Singapore.
The following table sets forth the amount of our revenues, for the
periods indicated, by geographic regions:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ----------
(U.S. DOLLARS IN THOUSANDS)
Sales
Israel ................................ $ 640 $ 652 $ 311 $ 1,892 $ 406
Far East ................................ 26,902 18,761 19,572 31,890 19,462
Europe ................................ 14,788 16,663 5,013 6,770 7,846
America ................................ 2,602 744 473 163 -
Africa ................................ -- -- -- 3,286 576
---------- ---------- ---------- ---------- ----------
Total........................... $ 44,932 $ 36,820 $ 25,369 $ 44,001 $ 28,290
========== ========== ========== ========== ==========
CUSTOMERS
Currently, all of the end-user customers of our products are
governments or major defense companies controlled by government regulations.
Although the composition of our customers has changed from year to
year, and revenues from individual customers are subject to material increases
and decreases depending on customer requirements, one of our customers located
in Southeast Asia has accounted for approximately 41% of our revenues in fiscal
2002, 26% of our revenues in fiscal 2001 and 29% of our revenues in fiscal 2000,
and represented approximately 46% of our backlog as of December 31, 2002. A
customer located in the Republic of Korea has accounted for approximately 27% of
our revenues in fiscal 2002, 45% of our revenues in fiscal 2001 and 48% of our
net revenues in fiscal 2000 and represented approximately 15% of our backlog as
of December 31, 2002. The Italian Air Force accounted for approximately 18% of
our revenues in fiscal 2002, approximately 6% of our revenues in fiscal 2001 and
approximately 2% of our revenues in fiscal 2000 and represented approximately 7%
of our backlog as of December 31, 2002. We expect that sales of our products to
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a small number of customers will continue to account for a substantial
percentage of our net revenue in the foreseeable future.
GENERAL FINANCIAL CONSIDERATIONS FOR PROJECTS
A significant majority of our contracts are fixed-price contracts, as
opposed to cost-plus-type contracts. Under fixed-price contracts, the price is
generally not subject to adjustment for costs actually incurred in the
performance of such contract. Under such fixed-price contracts, we assume the
risk that increased or unexpected costs may reduce our profits or generate a
loss.
There are various types of financing terms applicable to defense
contracts. In most cases, after we receive advance payment at the commencement
of a project, we receive progress or milestone payments according to a
percentage of cost incurred in performance or achievement of a specific
milestone. In a majority of projects, we are required to provide performance
guarantees in an amount equal to a specific percentage of the contract price. A
portion of our agreements with customers contains clauses that impose penalties
or reduce the amount payable to us in the event that the completion of a phase
of work is delayed. We are generally responsible for the delays and defaults of
our subcontractors. Accordingly, we attempt to impose liability on our
subcontractors on a "back-to-back" basis when delay or default under a contract
could expose us to liability.
Our contracts with governments generally may be terminated or
suspended as a result of factors which may not depend on us, such as a state of
war, acts of God or other circumstances seriously disrupting the public safety,
peace or good order of the customer's country. Our contracts with
non-governmental military contractors sometimes contain similar provisions. In
cases in which we receive advanced payments prior to incurring the cost of
fulfilling the contract, we realize a positive project cash flow. In the last
three years, we received substantial advances from our customers under a portion
of our contracts. In the event that a contract under which an advance or
progress payment has been paid is canceled, we may be required to return a
portion of such payments to the customer. In general, in order to reduce risks
of financial exposure resulting from an early termination of a contract, we
attempt to expend funds for projects in accordance with the rate of performance.
Upon such termination, we would, in most cases, be entitled to reimbursement for
incurred contract costs and to payment of a proportionate share of our fee or
profit for the portion of such contract that was actually performed. If,
however, we are not entitled to all or a portion of such compensation, our
operations would be adversely effected. In certain cases, when possible, we
insure ourselves against such risks.
Manufacturing and Suppliers
We develop the majority of the software and hardware for our products
at research and development facilities in several locations in Israel. We
manufacture cockpit replicas, turret replicas and other hardware components and
perform hardware integration, systems assembly, and quality assurance testing at
23
our manufacturing facilities in Ashdod, Israel. We purchase components for the
systems manufactured, including commercial computers, integrated circuits,
circuit boards, sheet metal fabricated into subassemblies and cabinets, power
supplies, television monitors and floppy disc drives. Many of the purchased
components are manufactured based on our designs and specifications. Most
materials and purchased components are generally available from a number of
different sources.
COMPETITION
We operate in a competitive environment with respect to most of our
products. The defense industry has been characterized in recent years by a
consolidation of companies, which has decreased the number, but increased the
relative size and resources of competitors. Competition is based on product
performance, price, reputation, reliability, maintenance costs and
responsiveness to customer requirements, including the ability to respond to
changing technology. Some of the companies with which we compete, such as
divisions of Thales, Lockheed-Martin, L-3 Communications, Cubic, IAI (in some
countries), Elbit Systems and CAE, have substantially greater financial,
marketing and other resources than ours and have the ability to develop and
market products competitive with ours. We believe that our products favorably
compete with those of our competitors based on their technological capabilities,
price/performance ratio, proven track record and common technological platform.
Our advantage over our competitors is size. We are relatively a small company
compared to our competitors. As such, typically we have lower overhead costs. We
maintain a distinct edge in competing for simulators that are one of a kind.
RESEARCH AND DEVELOPMENT
The majority of our research and development activity is performed as
an inherent part of our various projects. In addition, we believe that continued
and timely development of new products and enhancements to existing products is
necessary to compete effectively. Accordingly, through our ongoing and extensive
research, development and engineering activities, we devote a portion of our
resources to: (i) sustaining and upgrading our existing products by improving
serviceability and adding new capabilities and features, (ii) decreasing the
cost of owning and operating such products, (iii) maintaining close
relationships with our customers to identify their product needs, (iv)
developing new products with improved capabilities to address such needs and
other military training, debriefing and communications needs identified by us,
(v) adapting our products to new evolving technologies that can lower the costs
of our products and (vi) tailoring our products to meet the specific needs of
our customers.
Our internally financed expenditures for all research and development
programs during fiscal 2002, fiscal 2001 and fiscal 2000 totaled approximately
$1.6 million, $1.1 million and $2.9 million, respectively, and represented 5%,
2% and 11% of our revenue, respectively. Royalty-bearing grants received in the
past from the Office of the Israeli Chief Scientist, or OCS, for research and
development were offset against our research and development costs. In fiscal
2002, fiscal 2001 and fiscal 2000, we did not apply for, nor receive any grants
24
from the OCS. We expect that we will continue to commit resources to research
and development in the future. As of March 31, 2003, we employed approximately
93 employees in research and development operations, both internally financed
and such that are performed under contracts with our customers.
INTELLECTUAL PROPERTY
In order to protect our proprietary rights and technology used in our
products, we rely primarily upon a combination of patent, trademark and
copyright law, trade secret protection, confidentiality agreements and other
contractual arrangements with our employees, some of our affiliates, partners,
customers and others.
BVR-T was granted five United States patents relating to the
collision warning and the data link features incorporated in our Ehud(TM)
systems, the animation technology incorporated in our simulators and our
airborne avionics simulator technology. Several of these patents were also
granted or applied for in Israel and/or in specific countries in the European
Community and worldwide. As part of the reorganization plan which controlled our
spin off from BVR-T, BVR-T granted us co-ownership rights to all patents,
pending patent applications, trademarks and other intellectual property rights
held by BVR-T with respect of its defense-related business. See "Item 7 B. -
Related Party Transactions - Relationship Between Us and BVR-T."
Our trademark "ATAS," was registered in Israel, the European
Community and Turkey. We applied for the registration in the U.S., Israel, the
European Community and several foreign countries of our trademark "Ehud".
As part of our cooperation agreement with IAI, we and IAI each
granted the other a license to use all patents and other intellectual property
right owned by the other relating to the Ehud ACMI system, as is required to
enable such party to exercise its rights under the cooperation agreement. We
further agreed to jointly own with IAI the trade name "Ehud." See "Item 4 -
Information on the Company - Strategic Relationship."
We also rely on unpatented proprietary know-how, copyrights and trade
secrets, and employ various methods, including confidentiality agreements with
employees, consultants and others, to protect our trade secrets and know-how.
However, these methods may not afford complete protection and we cannot be sure
that others will not independently develop our trade secrets and know-how or
obtain access thereto.
EMPLOYEES
As of March 31, 2003, we employed approximately 149 persons,
including 21 part time employees, of whom approximately 93, including 16 part
time employees, were employed in research and development operations, both
internally financed and such that are performed under contracts with our
customers, approximately 6, including one part time employee, in marketing and
25
sales, approximately 16 in production, and approximately 34 ,including four part
time employees, in administration and management. Our employees who have access
to proprietary information are required to sign a nondisclosure agreement
covering all of our proprietary information which they might possess or to which
they might have access. We believe that we have satisfactory labor relations
with our employees and have never experienced a work stoppage.
Certain provisions of the collective bargaining agreements between
the Histadrut (the General Federation of Labor in Israel) and the Coordination
Bureau of Economic Organizations (including the Industrialists' Associations)
are applicable to our employees in Israel by order of the Israeli Ministry of
Labor. These provisions concern principally cost-of-living increases, recreation
pay and other conditions of employment. We generally provide our employees with
benefits and working conditions beyond the required minimums. In addition to
salary and other benefits, specific employees are paid bonuses based on their
performance.
We are subject, like all other Israeli employers, to Israeli labor
laws and regulations. The laws principally concern matters like paid annual
vacation, paid sick days and other conditions of employment. In addition,
Israeli law generally requires severance pay, which may be funded by managers'
insurance described below (or by other funds), upon the retirement or death of
an employee or termination of employment, subject to the provisions of the law.
Provisions for severance pay amount to approximately 8.33% of wages.
Furthermore, Israeli employees and employers are required to pay predetermined
sums to the National Insurance Institute, which is similar to the United States
Social Security Administration. These amounts also include payments by the
employee for national health insurance. The total payments to the National
Insurance Institute are equal to approximately 16.25% of the wages (up to a
specified amount), of which the employee contributes approximately 66% and the
employer contributes approximately 34%.
We follow a practice, although not legally required, to contribute
funds on behalf of all of our employees to a fund known as "managers'
insurance." This fund provides a combination of savings plan, insurance and
severance pay benefits to the employee, giving the employee a lump-sum payment
upon retirement and securing the severance pay, if legally entitled, upon
termination of employment. We decide whether each employee is entitled to
participate in the plan, and each employee who agrees to participate contributes
an amount equal to 5% of his or her basic salary and the employer contributes
approximately 14% of the salary.
C. ORGANIZATIONAL STRUCTURE
We are controlled by Elisra Electronics Systems Ltd., which
beneficially owns 55.0% of our ordinary shares.
We hold 100% of the outstanding capital stock of B.V.R. S Pacific
Ltd., which is incorporated under the laws of Singapore.
26
We are in a process of liquidating our subsidiary, Inch Inver Invest
B.V., which is incorporated under the laws of the Netherlands. In December 2002
all assets and liabilities of Inch Inver Invst B.V. were transferred to us.
D. PROPERTY PLANTS AND EQUIPMENT
Our executive offices and research and development facilities are
located in Rosh Ha'ayin, Israel. At this location we lease approximately 2,859
square meters of office space at a monthly rent of approximately $30,275. The
rent will be increased to approximately $32,814 in January 2004. This lease will
expire on September 14, 2009. See also note 17B to our Consolidated Financial
Statements.
We lease approximately 875 square meters of manufacturing facilities
in Ashdod, Israel for a monthly rent of approximately $10,000. This lease will
expire on October 31, 2007.
We believe that our facilities are suitable and adequate for our
operations as currently conducted. In the event that additional facilities will
be required, we believe that we could obtain such facilities at commercially
reasonable rates.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes included elsewhere in this annual report. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including,
but not limited to, those set forth in "Item 3D Key Information--Risk Factors."
GENERAL
We are engaged in the development, manufacture and marketing of
sophisticated training and computer-based simulation systems for military
applications.
Most of our revenues are generated in U.S. Dollars, and a significant
portion of our expenses are incurred in U.S. Dollars, or are linked to the U.S.
Dollar. Consequently, we use the U.S. Dollar as our functional currency.
Transactions and balances originally denominated in U.S. Dollars are presented
in the financial statements in their original amounts, and non-dollar
transactions and balances have been translated into U.S. Dollars using the
exchange rates in effect on the date of a transaction or balance. Our
consolidated financial statements have been prepared in accordance with Israeli
GAAP. Israeli GAAP, as applicable to our financial statements, differs in
27
certain significant respects from U.S. GAAP. See Note 22 to our Consolidated
Financial Statements.
The financial statements of our subsidiaries the functional currency
of which is the U.S. Dollar, but which are presented in a currency other than
U.S. Dollars, have been translated into U.S. Dollars. Monetary balance sheet
items have been translated using the exchange rates in effect on the balance
sheet date and all non-monetary balance sheet items have been translated using
the historical exchange rates in effect on the date of the transaction.
Statement of income items have been translated using the average exchange rate
for the period presented.
We derive a substantial portion of our revenues from government
contracts, the majority of which are fixed-price, as opposed to cost-plus type
contracts. Under fixed-price contracts, the price is generally not subject to
adjustment for costs actually incurred in the performance of the contract.
In most of our projects, we receive advance payment at the
commencement of the project and progress or milestone payments according to our
performance or achievement of specific milestones. In these cases, the advance
payments that we receive prior to incurring the cost of fulfilling the contract
create a positive project cash flow. In the last three years, we have received
substantial advances from our customers under a portion of our contracts. Our
contracts generally may be terminated or suspended as a result of factors which
may not depend on us, such as a state of war, acts of God, or other
circumstances seriously disrupting the public safety, peace or good order of the
customer's country. In the event that a contract under which an advance or
progress payment has been paid is canceled, we may be required to return such
payments or portion of them to the customer.
In general, to reduce risks of financial exposure resulting from an
early termination of a contract, we attempt to extend funds for projects in
accordance with the rate of performance. Upon such termination, we would, in
most cases, be entitled to reimbursement for our incurred contract costs and to
payment of a proportionate share of our fee or profit for the work actually
performed.
Revenues related to work in progress under long-term contracts are
recognized according to the percentage-of-completion method. The percentage of
completion is computed based on the project's total execution costs which
reflect the progress of its completion, and which include: salaries, material
costs and subcontractor charges. Revenues ascribed to each period are the
amounts of gross profits earned on such contracts during such period plus the
costs incurred during such period (excluding cost of materials that have not yet
been used and costs incurred for subcontracted work that is still to be
performed).
With respect to sale of products acquired from third parties as shelf
products and where the cost of adaptation thereof for a customer's specific
needs is not material, the related revenue is recognized after completion and
28
delivery. Provision for estimated losses on uncompleted contracts are made in
the period in which such losses are first determined, in the amount of the
estimated loss on the entire contract. Royalty revenues are recorded mainly on
the cash basis.
In October 2002, as part of our cost reduction measures, we
implemented progressive marginal salary reductions ranging from 2% to 12 % for
all employees. Israeli law generally requires that severance pay, for eligible
employees, shall be based upon such employees' most recent salary rate.
Nevertheless we agreed with our eligible employees, that the severance pay for
such employees shall be based upon such employees' salaries rate as at the end
of September 2002 with respect to the employment period ending in October 2002,
and upon the most recent salaries rate with respect to any employment period
thereafter. We also agreed with our employees that these salary reductions shall
be reversed should our order backlog reach $45 million, commencing on such date.
In August 1999, we entered into a cooperation agreement with IAI. As
a result of the cooperation agreement, IAI substituted us as the prime
contractor for several projects in which we acted as a prime contractor, and we
became a subcontractor of IAI. As a subcontractor, we do not record the full
contract price as revenue, but only the amounts we receive for the portion of
the contract we supply and royalties to which we are entitled. The aggregate
contracts price transferred to IAI is approximately $14.0 million, divided over
an average period of approximately three years. This transfer of contracts
negatively impacted our operating results in fiscal 2000, 2001 and 2002.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements in conformity with the
Israeli generally accepted accounting principles requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. These are our management's best estimates based on experience and
historical data. Actual results could differ from those estimates.
Specific accounting policies we utilize require higher degrees of
judgment than others in their application. These include revenue recognition on
long-term contract work. Our policy and related procedures for revenue
recognition on long-term contract work are summarized below. In addition, Note 2
to our Consolidated Financial Statements includes further discussion of our
significant accounting policies.
We account for our revenues on fixed price long-term contract work on
the percentage of completion method. This method of accounting requires us to
calculate project profit to be recognized in each reporting period for each
project based upon our predictions of future outcomes which include, estimates
of the total cost to complete (such as assumptions relative to future labor
performance and costs, materials costs and subcontractor charges) and estimates
of project schedule and completion date.
29
At the onset of each contract, we prepare a detailed analysis of our
estimated cost to complete the project. Our project personnel evaluate the
estimated costs at the project level. Significant projects are reviewed in
detail by senior management at least quarterly.
Our estimates of revenues and expenses on long-term contracts could
change periodically in the normal course of business results. such changes would
be reflected in results of operations as a change in accounting estimate in the
period the revisions are determined. For all the contracts, provisions for
estimated losses on uncompleted individual contracts are made in the period in
which such losses are first determined, in the amount of the estimated loss on
the entire contract.
A. RESULTS OF OPERATIONS
The table below sets forth, for the periods indicated, financial
data, expressed as a percentage of total revenues which we believe to be
significant in analyzing our results of operations. The data is as follows:
FOR YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- ------- -------
Revenues.................................. 100% 100% 100% 100% 100%
Cost of revenues.......................... 72% 95% 102% 82% 84%
Gross profit (loss)....................... 28% 5% (2%) 18% 16%
Research and development.................. 8% 9% 11% 2% 5%
Selling, general and administrative 9%
expenses............................... 16% 28% 16% 25%
Operating profit (loss)................... 11% (20%) (41%) 0% (14%)
Financing expenses, net................... -- 1% 3% 1% 3%
Other expenses, net....................... 1% 18% -- 1% --%
Income (loss) before income taxes ........ 10% (39%) (44%) (2%) (17%)
Income tax (expenses) benefits............ (2%) 3% (8%) 0% (3%)
Equity in income of an affiliate.......... 1% -- -- -- --
Net Income (loss)......................... 9% (36%) (52%) (2%) (20%)
SUBSEQUENT EVENT
Backlog of orders as of December 31, 2002, was $ 26.1 million.
Subsequent to the balance sheet date, we reached agreements with two of our
principal bank lenders according to which the repayment date of short-term loans
30
in the aggregate principal amount of $9.0 million, which were scheduled for
repayment through November 2003, was deferred until June 30, 2004.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues. Revenues in fiscal 2002 were $28.3 million, a decrease of
36% compared with revenues of $44.0 million in fiscal 2001. The decrease was
primarily attributed to a decline in new orders during fiscal 2001 and 2002.
Revenues from sales of our instrumentation line of products in fiscal 2002
accounted for 48% compared with 68% of our revenues in fiscal 2001. Revenues
derived from our simulators line of products accounted for 52% of our revenues
in fiscal 2002 compared with 32% of our revenues in fiscal 2001. The
geographical breakdown of our revenues in fiscal 2002 was as follows:
approximately 68% of our revenues were in the Far East, 28% in Europe, 2% in
Africa and 2% in Israel. In fiscal 2001, approximately 73% of our revenues were
in the Far East, 15% in Europe, 8% in Africa and 4% in Israel. Our agreements
are multi-year contracts and we recognize revenues on a percentage of completion
method, recognizing expenses when incurred.
Gross Profit (Loss). Gross profit in fiscal 2002 was approximately
$4.6 million, a decrease of $3.6 million, from a gross profit of $8.2 million in
fiscal 2001. As a percentage of revenues, gross profit decreased from a gross
profit of 18% in fiscal 2001, to a gross profit of 16% in fiscal 2002. The
decrease in gross profit was primarily attributed to the decline in the number
of projects and to increased costs incurred in connection with delays in the
completion of specific projects. Our gross profit is influenced by various
factors, including the type and size of a project, the method used for revenues
recognition and the portion of projects performed by subcontractors.
Research and Development Costs. Gross research and development
expenditures consist primarily of salaries, subcontractors and other personnel
related expenses related to design, development and enhancement of our products
and, to a lesser extent, depreciation and other expenditures. Gross research and
development expenses in fiscal 2002 were $1.6 million, an increase of $0.5
million or 45% from $1.1 million in fiscal 2001. The increase in gross research
and development expenses was primarily attributed to an increase in internally
financed research and development activities.
Selling Expenses. Selling expenditures consist primarily of costs
relating to compensation costs, subcontractors and consultants, travel expenses,
demonstrations, exhibitions, participation in trade shows, and customer support.
Net selling expenditures in fiscal 2002 were $2.4 million, an increase of
$448,000, or 23%, from $1.9 million in fiscal 2001. The increase in selling
expenses was primarily attributed to an increase in consulting expenses, an
increase in travel expenses and an increase in the portion of the salaries of
our personnel attributed to selling activities, which were partially offset by a
decrease in costs related to demonstrations.
General and Administrative Expenses. General and administrative
expenses consist primarily of salaries and related costs of welfare and
31
administration, finance and general management personnel, professional fees,
provisions for doubtful debt, office, vehicle, rental expenses, entertainment
and travel expenditures and fees payable. General and administrative expenses in
fiscal 2002 were $4.6 million, a decrease of $452,000, or 9%, from $5.0 million
in fiscal 2001. The decrease in general and administrative expenses was
primarily attributed to cost reductions of welfare and entertainment expenses
and a decrease of approximately $137,000 in legal expenses. The decrease was
also attributed to a material reduction in costs relating to our subsidiary
B.V.R.S. Pacific Ltd., including due to a decrease in the number of such
subsidiary's executive officers and employees. As a percentage of revenues,
general and administrative expenses in fiscal 2002 were approximately 16%
compared with 11% in fiscal 2001.
Operating Profit (loss). We had an operating loss of $(3.9) million
in fiscal 2002 compared to an operating profit of $131,000 in fiscal 2001. As a
percentage of revenues, operating profit decreased from an operating profit of
0% in fiscal 2001, to an operating loss of (14%) in fiscal 2002.
Financial Expenses, Net. Financial expenses, net consist primarily of
interest paid on loans and bank charges, net of income from interest earned on
short-term deposits and interest on non-current receivables, gains or losses
from derivatives instruments and gains or losses arising from erosion of
monetary balances. Financial expenses, net in fiscal 2002 were approximately
$855,000, an increase of approximately $113,000 from approximately $742,000 in
fiscal 2001. The increase was primarily attributed to a decrease in income from
interest earned on short-term deposits and a decrease in interest on non-current
receivables, which was partially offset by a decrease in interest paid on loans
and gains from erosion of monetary balances.
Other Expenses, Net. We incurred net expenses from other sources of
approximately $140,000 in fiscal 2002, compared to approximately $319,000 in
fiscal 2001. Other expenses consist primarily of a write-down of investment in
marketable securities which are not designated for sale in the short term. This
decrease was primarily attributed to a write-down to a lesser extent in fiscal
2002 than in fiscal 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues. Revenues in fiscal 2001 were $44.0 million, an increase of
73% compared with revenues of $25.4 million in fiscal 2000. The increase was
primarily attributed to the fact that projects entered into in late 1999 and
2000 as well as new projects entered in fiscal 2001 have generated significant
revenues. Revenues from sales of our instrumentation line of products in fiscal
2001 accounted for 68% compared with 79% of our net revenues in fiscal 2000.
Revenues derived from our simulators line of products accounted for 32% of our
net revenues in fiscal 2001 compared with 21% of our net revenues in fiscal
2000. The geographical breakdown of our revenues in fiscal 2001 was as follows:
approximately 73% of our net revenues were in the Far East, 15% in Europe, 4% in
Israel and 8% in Africa. In fiscal 2000, 77% of our net revenues were in the Far
East, 20% in Europe, 1% in Israel and 2% in America. Our agreements are
32
multi-year contracts and we recognize revenues on a percentage of completion
method, recognizing expenses when incurred.
Gross Profit (Loss). Gross profit in fiscal 2001 was approximately
$8.2 million, an increase of $8.8 million, from a gross loss of $0.6 million in
fiscal 2000. As a percentage of revenues, gross profit increased from a gross
loss of (2%) in fiscal 2000, to a gross profit of 18% in fiscal 2001. The
increase in gross profit was primarily attributed to profit generated from
projects entered into in fiscal 2000 and 2001, and to the completion of specific
projects, a delayed delivery of which caused increased costs in fiscal 2000. Our
gross profit is influenced by various factors, including the type and size of a
project, the method used for revenues recognition and the portion of projects
performed by subcontractors.
Research and Development Costs. Gross research and development
expenditures consist primarily of salaries, other personnel related expenses
related to design, development and enhancement of our products and, to a lesser
extent, depreciation and other expenditures. Gross research and development
expenses in fiscal 2001 were $1.1 million, a decrease of $1.8 million or 62%
from $2.9 million in fiscal 2000. In the first quarter of 2000, we decided to
discontinue certain activities related to the development of the Ehud ACMI fifth
generation as a compatible technology became available to us as a result of our
cooperation agreement with IAI.
Selling Expenses. Selling expenditures consist primarily of costs
relating to compensation costs, subcontractors and consultants, travel expenses,
demonstrations, exhibitions, participation in trade shows, and customer support.
Net selling expenditures in fiscal 2001 were $1.9 million, a decrease of
$279,000, or 14%, from $2.2 million in fiscal 2000. The decrease in selling
expenses was primarily attributed to a decrease in salaries of our personnel,
decrease in costs relating to exhibits, and a decrease in advertising costs,
which were partially offset by an increase in consulting expenses and an
increase in indirect selling expenses.
General and Administrative Expenses. General and administrative
expenses consist primarily of salaries and related costs of welfare and
administration, finance and general management personnel, professional fees,
provisions for doubtful debt, office, vehicle, rental expenses, entertainment
and travel expenditures and fees payable. General and administrative expenses in
fiscal 2001 were $5.0 million, an increase of $353,000, or 6%, from $4.7 million
in fiscal 2000. The increase in general and administrative expenses was
primarily attributed to an increase in the number of our executive officers and
employees, resulting in an increase in welfare, rental and vehicles expenses and
an increase of approximately $70,000 in the costs related to a settlement of an
employment litigation. The increase was further attributed to quality assurance
costs. As a percentage of net revenues, general and administrative expenses were
approximately 11% in fiscal 2001 compared with 19% in fiscal 2000.
Operating Profit. We had an operating profit of $131,000 in fiscal
2001 compared with an operating loss of ($10.3) million in fiscal 2000. As a
33
percentage of revenues, operating profit increased from an operating loss of
(41%) in fiscal 2000, to an operating profit of 0% in fiscal 2001.
Financial Expenses, Net. Financial expenses, net consist primarily of
interest paid on loans and bank charges, net of income from interest earned on
short-term deposits and interest on non-current receivables. Financial expenses,
net in fiscal 2001 were approximately $742,000, a decrease of approximately
$195,000 from approximately $937,000 in fiscal 2000. The decrease was primarily
attributed to the return of a loan to BVR-T in the first quarter of 2001 and to
a decrease in interest on loans and other bank charges, which was partially
offset by a loss from a derivative instrument.
Other Expenses, Net. We incurred net expenses from other sources of
approximately $319,000 in fiscal 2001, compared to approximately $31,000 in
fiscal 2000. This increase was primarily attributed to a write-down of
investment in marketable securities, which are not designated for sale in the
short-term.
IMPACT OF INFLATION AND DEVALUATION ON RESULTS OF OPERATIONS, LIABILITIES AND
ASSETS
The dollar cost of our operations is influenced by the extent to
which inflation in Israel is or is not offset, or is offset on a lagging basis,
by the devaluation of the NIS in relation to the dollar. When the rate of
inflation in Israel exceeds the rate of devaluation of the NIS against the
dollar, companies experience increases in the dollar cost of their operations in
Israel. Unless offset by a devaluation of the NIS, inflation in Israel will have
a negative effect on our profitability, as we receive payment in dollars or
dollar-linked NIS for all of our sales, while we incur a portion of our expenses
in NIS.
The following table presents information about the rate of inflation
in Israel, the rate of devaluation of the NIS against the dollar, and the rate
of inflation in Israel adjusted for the devaluation:
ISRAELI INFLATION
YEAR ENDED ISRAELI INFLATION NIS DEVALUATION ADJUSTED FOR
DECEMBER 31, RATE % RATE % DEVALUATION %
------------- ----------------- ---------------- ------------------
1997 7.0 8.8 (1.7)
1998 8.6 17.6 (7.7)
1999 1.3 (0.1) 1.3
2000 0.0 (2.7) 2.7
2001 1.4 9.3 (7.2)
2002 6.5 7.3 (0.8)
A devaluation of the NIS in relation to the dollar has the effect of
reducing the dollar amount of any of our expenses or liabilities payable in NIS,
unless those expenses or payables are linked to the dollar. This devaluation
also has the effect of decreasing the dollar value of any asset which consists
of NIS or receivables payable in NIS, unless the receivables are linked to the
dollar. Conversely, any increase in the value of the NIS in relation to the
dollar has the effect of increasing the dollar value of any unlinked NIS assets
and the dollar amounts of any unlinked NIS liabilities and expenses.
34
Because exchange rates between the NIS and the dollar fluctuate
continuously, with a historically declining trend in the value of the NIS,
exchange rate fluctuations, particularly larger periodic devaluations, will have
an impact on our profitability and period-to-period comparisons of our results.
We are exposed to a variety of market risks, including changes in
interest rates and foreign currency fluctuations.
We entered into currency future contracts and put and call options
contracts to reduce our exposure to fluctuations of specific currencies against
the dollar, resulting primarily from firm commitments in such currencies.
As at December 31, 2002, the Company has an obligation to sell
$151,000 for a total amount of (pound)108 thousand (recorded as a
hedge) in two increments in April and May 2003.
The fair value of this off-balance sheet instrument amounted to a net
asset of $22,000 as of December 31, 2002.
Subsequent to the balance sheet date, we entered into certain put
option for selling $2.4 million for NIS 11.5 million (short option).
The option expires after various periods ending February 2004.
Political Conditions
Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors, and the
continued state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Since September 2000, the violence
between Israel and the Palestinians has intensified and a material escalation in
violence has occurred. Israel has experienced terrorist incidents within its
borders, including in the West Bank and Gaza Strip. As a result, negotiations
between Israel and representatives of the Palestinian Authority ceased. We could
be adversely affected by hostilities involving Israel, the interruption or
curtailment of trade between Israel and its trading partners, or a continuous
downturn in the economic or financial condition of Israel. In addition, several
countries continue to restrict business with Israel and with companies having
operations in Israel. We could be negatively affected by further adverse
developments in the peace process, including the recent violence, or by
restrictive laws or practices directed towards Israel or Israeli exporters.
Like all male adult citizens and permanent residents of Israel, our
directors, officers and employees who are under the age of 48 are, unless
exempt, obligated to perform up to 36 days of military reserve duty annually.
Additionally, all such residents are subject to being called to active duty at
any time under emergency circumstances. The majority of our officers and
employees are currently obligated to perform annual reserve duty. No assessment
35
can be made as to the full impact of such requirements on our workforce or
business if conditions in Israel should change, and no prediction can be made as
to the effect of any expansion or reduction of such military obligations on us.
See "Item 4. Information on the Company - B. Business Overview - Conditions in
Israel."
Economic Conditions
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli Government has intervened in various sectors of
the economy by utilizing fiscal and monetary policies, import duties, foreign
currency restrictions and controls of wages, prices and foreign currency
exchange rates. The Israeli Government has periodically changed its policies in
all these areas.
EFFECTIVE CORPORATE TAX RATE
Israeli companies are generally subject to tax at the rate of 36% of
taxable income. However, our old manufacturing facilities in Jerusalem and our
new facilities in Rosh Ha'ayin have been granted "Approved Enterprise" status
under the Law for the Encouragement of Capital Investments, 1959, as amended,
known as the Investment Law. Consequently, these facilities are eligible,
subject to compliance with specified requirements, for tax exemption for a
period of two years and reduced tax rate of 25% for an additional period of five
years on our increased income, if any, commencing on the day we derive taxable
income from our facilities in Rosh Ha'ayin. We may utilize such tax benefits
until 2016. The tax benefits under the Investment Law are not available with
respect to income derived from products manufactured outside of Israel. We
expect to derive a substantial portion of our income from our Approved
Enterprise facility.
GOVERNMENT GRANTS
The Government of Israel, through the Office of the Chief Scientist,
encourages research and development projects which result in products for
export. We may receive from the Office of the Chief Scientist up to 50% of the
research and development expenditures for particular projects. In the past we
received grants from the Office of the Chief Scientist for the development of
technologies related to our simulators. Pursuant to the terms of these grants,
we were obligated to pay royalties of 3% to 6% of revenues derived from sales of
products funded with these grants. We completed payment of all royalties due
with respect to the grants we received.
B. LIQUIDITY AND CAPITAL RESOURCES
Historically we have met our financial requirements primarily through
the private sale of equity securities, accumulation of profits, customer
payments and advances, utilization of bank credit lines. In addition, capital
raised by BVR-T in 1998 and 1997 was attributed proportionately to us in
36
accordance with the reorganization plan. As of December 31, 2002, we had cash
and cash equivalents of approximately $860,000 and working capital deficit of
approximately ($5.4) million.
As of March 31, 2003 we had borrowed $13.75 million under our credit
lines with banks, which are bearing interest at an annual rate of three month
LIBOR plus 1.8% - 3%. As of December 31, 2002 we had borrowed $15.0 million that
were available to us under our credit lines at such time. There are no
restrictions as to our use of these credit lines. In March 2003, we reached
agreements with two of our principal bank lenders according to which the
repayment date of short-term loans in the aggregate principal amount of $9.0
million, which were scheduled for repayment through November 2003, was deferred
until June 30, 2004. Our credit lines may be terminated by the banks at any time
and the banks may demand repayment in full of any indebtedness then outstanding.
In addition, we have obtained bank guarantees to secure our
performance of certain obligations, including under our leases and contracts
with customers. Of these guarantees, which aggregated $27.5 million at December
31, 2002, guarantees in an aggregate of $27.0 million are to be released by our
performance of specific contracts milestone, which are scheduled to be completed
through the end of 2006.
In connection with our guarantees, loans and credit lines we have
deposited cash in restrictive bank accounts as collateral for the continued
performance of work and placed equally ranking, first priority fixed and
floating liens on all of our assets.
Our operating cash flow is influenced by cash provided from our
customers as an advance and by cash used in the performance of ongoing projects.
Operating activities for the year 2002, 2001, and 2000 used cash of
approximately ($3.1) million, ($12.0) million and ($2.3) million, respectively.
For fiscal 2002, cash provided from changes in assets and liabilities of $1.4
million primarily consisted of a decrease in trade receivables of $ 4.4 million
and a decrease in non-current receivables of $0.5 million, net of a decrease in
excess of advances from customers over amount recognized as revenues of $2.6
million, an increase in inventory of $0.4 million and an increase in work in
progress of $0.3 million. For fiscal 2001, cash provided from changes in assets
and liabilities of ($12.1) million primarily consisted of a decrease in excess
of advances from customers over amount recognized as revenues of $7.6 million ,
an increase in trade receivables of $4.5 million and a decrease in other
payables and accrued expenses of $1.1 million, net of an increase in trade
payables of $1.4 million. For fiscal 2000, cash provided from changes in assets
and liabilities of $9.0 million primarily consisted of an increase in other
payables and accrued expenses of $13.6 million, a decrease in work in progress
of $9.0 million and a decrease in inventory of $2.6 million, net of an increase
in trade receivables of $9.0 million and a decrease in trade payables of $7.9
million.
Investing activities for fiscal 2002, fiscal 2001 and fiscal 2000
provided (or used) cash of approximately ($0.5) million, $3.0 million and ($3.0)
million, respectively. Cash flow used in investing activities in fiscal 2002
consisted primarily from purchase of fixed assets in the amount of $535,000.
Cash flow provided by investing activities in fiscal 2001 consisted primarily
37
from a decrease in restricted bank deposits of $3.3 million, partially offset
primarily by purchase of fixed assets in the amount of $324,000. Cash flow used
in investing activities in fiscal 2000 consisted primarily of an increase in
restricted of bank deposits of $2.3 million and purchase of fixed assets in the
amount of $689,000.
Financing activities for fiscal 2002, fiscal 2001 and fiscal 2000
provided (or used) cash of approximately $3.1 million, ($1.9) million and $9.7
million, respectively. Cash flow provided by financing activities in fiscal 2002
consisted of receiving short-term bank credit of $3.1 million. Cash flow used in
financing activities in fiscal 2001 consisted primarily of a repayment of
short-term bank loan of $1.3 million and a repayment of a loan received from
BVR-T of $642,000. Cash flow provided by financing activities in fiscal 2000
consisted primarily of net proceeds from issuances of ordinary shares of $4.9
million and short-term bank credit of $6.9 million, partially offset by a
repayment of a loan from BVR-T of $2.2 million. In March 2003, we reached
agreements with two of our principal bank lenders according to which the
repayment date of short-term loans in the aggregate principal amount of $9.0
million, which were scheduled for repayment through November 2003, was deferred
until June 30, 2004.
Although our current liabilities exceed our current assets, we
believe that our potential cash flow from operations and cash available to us
under our existing credit lines for 2003, will be sufficient to meet our present
cash needs for working capital.
However, if current sources are not sufficient to meet our needs, we
may seek additional debt or equity financing. There can be no assurance that
such additional financing would be available on acceptable terms, if at all.
CONTRACTUAL CASH OBLIGATIONS
Our significant financial and contractual obligations as of December
31, 2002, and the periods in which such obligations are due are as follows:
Payments and Amount of Commitment Expiration Per Period
(U.S. Dollars in thousands)
Total
Amounts Less than Over
Contractual Obligations(1) Committed 1 Year 1-2 Years 3-4 Years 4 years
- ------------------------------------------------- ---------- ---------- ---------- ----------- --------
Borrowed Lines of credit(2)...................... $15,083 $ 15,083 - - -
Guarantees....................................... 27,528 23,011 $1,071 $3,221 $ 225
Other commitments(3) ............................ 2,901 454 467 467 1,513
------- -------- ------ ------ -------
Total commercial commitments.................. $45,512 $ 38,548 $1,538 $3,688 $ 1,738
======= ======== ====== ====== =======
- ---------------------------
(1) Excludes liability for employee severance benefits, net in the amount of
$584,000.
38
(2) In March 2003, we reached agreements with two of our principal bank lenders
according to which the repayment date of short-term loans in the aggregate
principal amount of $9.0 million, which were scheduled for repayment through
November 2003, was deferred until June 30, 2004.
(3) Includes lease commitments.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
See "Item 4 -- Information on the Company-Research and Development;
Intellectual Property."
D. TREND INFORMATION
PERIODIC VARIATIONS IN OPERATING RESULTS
Due to the nature of our customers and products, our sales are often
made pursuant to a relatively small number of customers and large orders.
Consequently, an individual project, from an individual customer can represent a
substantial portion of our revenues in any one period. In addition, a
significant project for any customer during one period may not be followed by
further projects for the same customer in subsequent periods. Our sales and
operating results may, therefore, vary substantially from period to period.
REDUCTION IN ORDER BACKLOG
Our business is subject to the effect of general economic conditions
globally, and, in particular, conditions in the market for simulation systems
for military and civilian applications. In recent quarters, our sales efforts
have been adversely affected as a result of unfavorable economic conditions and
reduced capital spending in South East Asia. As an example, we were informed by
one of our customers, that due to the suspension of a budget, that customer
decided not to proceed with a planned project in which we expected to
participate. As of December 31, 2002 , we had purchase orders and contractual
arrangements of approximately $26.1 million compared with a backlog of $46.5
million at December 31, 2001, evidencing anticipated future deliveries which we
treat as backlog, through the respective following three years. A further
decline in our backlog level could result in more variability and less
predictability in our quarter-to-quarter net sales.
DELAY IN THE RECEIPT OF REQUIRED EXPORT APPROVALS
We purchase from manufacturers in the United States substantially all
of the commercial computers, a portion of the air combat maneuvering
instrumentation pod's hardware and other "off-the-shelf" products, such as
navigation systems, which we incorporate into our products. The export of such
components is subject to the approval of the United States Department of
Commerce and/or the United States Department of Defense, which often restricts
sales to certain countries. Following the events of September 11, 2001, we
experienced delays in the receipt of such required approvals. For example, we
39
experienced a delay in the delivery of several components of a system to a
customer and incurred additional costs, as a result of the need to modify such
components, because of a delay in the receipt of an export approval that has
since been obtained.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table lists the name, age and position held
by each of our executive officers and directors, as of April
30, 2003:
NAME AGE POSITION
- ---- --- --------
Yuval Yanai...................... 51 Director and Chairman of the Board of Directors
Yoel Katzir...................... 53 President and Chief Executive Officer
Reuven Shahar.................... 44 Chief Financial Officer and Vice President, Finance
Amir Makover..................... 55 Vice President, Projects and Marketing
Julio Arluk...................... 40 Vice President, Research and Development
Ran Maidan....................... 32 Director
Shlomi Rozenfeld................. 51 Director
Itzchak Gat...................... 56 Director
Yaron Sheinman................... 48 Director
Aaron Zuker...................... 57 Director
Dov Avron........................ 56 Director
Amnon Harari..................... 53 Director*
- -----------------------------
*External Director
YOVAL YANAI has been appointed as Chairman of our board of directors
in April 2003. Mr. Yanai has been our director since August 2001. Mr. Yanai has
been senior vice president and chief financial officer of Koor Industries Ltd.
since October 1, 2000. Mr. Yanai served as senior vice president and chief
financial officer of Nice Systems Ltd., from April 1998 to September 2000. From
1991 to 1998, he was the vice president, finance and chief financial officer of
Elscint Ltd. and director of several of Elscint's subsidiaries, as well as a
director of certain public and private companies. Mr. Yanai joined Elscint in
1985 and served as corporate controller and corporate treasurer through 1991.
Mr. Yanai formerly served as a pilot in the Israeli Air Force (including reserve
service). Mr. Yanai is a director of Makhteshim-Agan Industries Ltd., Elisra
Electronics Systems Ltd. and Telrad Networks Ltd. Mr. Yanai holds a bachelor
degree in Accounting and Economics from the Tel Aviv University.
YOEL KATZIR has been appointed as our president and chief executive
officer in December 2000. Prior to joining us, Mr. Katzir was a group vice
president for business development at Elisra Electronic Systems Ltd. From 1993
40
to 1998, Mr. Katzir worked at RAFAEL (USA), where he first served as director
and later as vice president for marketing and business development for North
America and Mexico. Mr. Katzir is a lieutenant colonel in the Israeli Air Force
reserves where he held a variety of command posts in the Electronic Warfare
Directorate.
REUVEN SHAHAR has been appointed as our chief financial officer and
vice president, finance on July 1, 2000. From 1995 through June 2000, he was
treasurer, director of finance of Elisra Electronic Systems Ltd. From 1990 to
1995, Mr. Shahar was the head of the economic staff in the defense division of
Elisra. He previously held various positions at Elisra commencing in 1984. Mr.
Shahar holds a BA in business management from the Hebrew University, Jerusalem
and an MBA from Recanati Graduate School of Business Administration in Tel Aviv
University.
AMIR MAKOVER was appointed as our vice president, projects in May
2001 and as our Vice President Marketing in December 2002. Since 1996 Mr.
Makover has been an independent consultant on electronic warfare to Rafael,
Israel Armament Development Authority and a technical consultant to AS2T Ltd.,
an advanced shielding and sensors technology company. From 1989 until 1996 Mr.
Makover served in various positions at Elul Group including as president of Elul
Energy Ltd. and as deputy general manager of Taldor Technical Services Ltd.
JULIO ARLUK has been our acting vice president, research and
development, since September 2001. From July 1999 until August 2001, Mr. Arluk
served as vice president engineering and technologies in one of our
subsidiaries, BVR S. Pacific Pte. Ltd. in Singapore. From 1997 until June 1999,
Mr. Arluk served as a software department manager and project manager in our
company. Mr. Arluk holds a BSc degree in computer engineering from the Technion,
Israel Institute of Technology in Haifa.
RAN MAIDAN has been our director since March 2003. Mr. Maidan is
serving as a vice president in the Elisra Group since March 2003. Mr. Maidan
serves as director in Elisra Electronic Systems Ltd., Tadiran Electronic Systems
Ltd. and Tadiran Spectralink. Prior to joining Elisra, Mr. Maidan was vice
president in charge of mergers, acquisitions and taxation at Koor Industries
Ltd. since June 2000. Prior to this position Mr. Maidan served as Koor's
controller. From 1995 until 1999 Mr. Maidan was an audit manager at KPMG Somekh
Chaikin. Mr. Maidan is a Certified Public Accountant, and holds a Masters Degree
in Business Administration from Bar Ilan University, Israel.
SHLOMI ROZENFELD has been our director since November 1999. He has
been vice president of finance and control for Elisra Electronic Systems Ltd.
since June 1994. Mr. Rozenfeld currently serves as a director of Tadiran
Spectralink Ltd. and Tadiran Electronics Systems Ltd.
ITZCHAK GAT has been our director since June 2000. He has been
general manager of Polar Communication Ltd. since 1999. Between 1993 and 1999,
Mr. Gat was president and general manager of RAFAEL, the Armament and
Development Authority of the Israeli Ministry of Defense. Between 1990 and 1992,
41
Mr. Gat served as the head of material command for the Israeli Air Force. He
served in the Israeli Air Force and retired as a Brigadier General. Mr. Gat has
a BSc in Aeronautical Engineering from the Technion, Israel Institute of
Technology in Haifa.
YARON SHEINMAN has been our director since the consummation of our
spin-off in October 1998. He is a founder and chairman of the board of directors
of BVR-T. From the commencement of BVR-T's operations in 1987 through 1996, Mr.
Sheinman served as the chairman and chief executive officer of BVR-T.
Previously, he acted as an independent consultant to Israel Aircraft Industries
for two years for the development of avionics systems. Mr. Sheinman served as a
combat pilot with the Israeli Air Force (including reserve service) for
approximately 15 years. Mr. Sheinman also serves as chairman of the board of
Nexus Telocation Systems, VIZ, Coresma and Unisfair. Mr. Sheinman serves on the
board of BrightCom.
AARON ZUKER has been our director since October 2000. Mr. Zuker has
been the vice president of Koor since January 1999. Mr. Zuker is the managing
director of R.M. Renaissance Management (1993). Mr. Zuker is a director of
Makhteshim-Agan Industries Ltd., Telrad Networks Ltd. and several companies in
the Elisra Group. Mr. Zuker is also a director of Isrex (94) Ltd., Clalcom Ltd
and Barak ITC (1995) Ltd. Between the years 1990 and 1995, Mr. Zuker served as
chief financial officer and later as chief executive officer of the Jerusalem
Report Publication. Mr. Zuker is a graduate of B.F.A. of New York Institute of
Technology.
DOV AVRON has been our director since October 2000. Since 1994 Mr.
Avron has been an assistant to the president and chief executive officer of
Elisra Electronic Systems Ltd. where he serves as vice president, marketing
since 1999. Mr. Avron holds a master degree in Political Science from the Bar
Ilan University.
AMNON HARARI has been one of our external directors since July 2002.
Mr. Harari currently serves as the chief executive officer of Advanced Heating
Technologies Ltd. From May 2000 to March 2002, Mr. Harari served as chief
executive officer of Partner Future Communication Ltd. From April 1999 to April
2000, Mr. Harari served as general manager of Alcatel Israel. From April 1997 to
April 1999, Mr. Harari served as corporate vice-president and general manager of
the Public Switching Division of Tadiran Telecommunication Ltd. From 1992 to
1996 Mr. Harari served as the head of the Israeli Air Force Material
Directorate. From February 1997 to February 2002, Mr. Harari served as an
external director of Elbit Systems Ltd. Mr. Harari is a Brigadier-General in the
Israeli Air Force. Mr. Harari holds a B.Sc. in Physics from the Tel Aviv
University.
REGISTRATION OF DIRECTORS AND OFFICERS
Mr. Avner Raz resigned from our board of directors on March 30, 2003.
Mr. Yitzchak Rabinovitz resigned from our company on March 26, 2003
Mr. Iftach Gideoni resigned from our company on January 31, 2003.
42
EXPIRATION OF TERM OF OFFICE
The term of Ms. Brurira Lekner as our external director has expired,
in accordance with the provisions of the Israeli Companies Law 1999, on April 5,
2003.
B. COMPENSATION
The aggregate remuneration we paid for the year ended December 31,
2002 to all executive officers as a group (6 persons), was approximately
$839,000 in salaries, fees, commissions and bonuses. This amount includes
approximately $160,000 set aside or accrued to provide for pension, retirement
or similar benefits provided to our directors and executive officers.
Members of our board of directors, other than our external directors,
do not receive compensation for their service on the board of directors or any
committee of the board of directors. However, all of our directors are
reimbursed for their expenses for each board of directors meeting attended. Our
external directors received an aggregate of approximately $9,500 for the year
ended December 31, 2002.
As of March 31, 2003, options to purchase 195,000 ordinary shares
granted to our directors and executive officers under our option plans were
outstanding. The weighted average exercise price of these options was $2.4 per
share. Of these options, options to purchase 90,000 ordinary shares are
currently exercisable or will become exercisable within 60 days of such date.
C. BOARD PRACTICES
Our articles of association provide for a board of directors of not
less than two and no more than fifteen members. Each director is elected to
serve until the next annual general meeting of shareholders and until his or her
successor has been elected. Officers serve at the discretion of the board of
directors.
Our articles of association provide that any director may, by written
notice, appoint another person to serve as a substitute director and may cancel
such appointment. According to the Israeli Companies Law 1999, or Companies Law,
a person may not serve as a substitute director for more than one director and a
director may not serve as a substitute director. Any substitute director will
have all of the rights and obligations of the director appointing him or her,
except the power to appoint a substitute, unless the instrument appointing him
provides otherwise, and the right to remuneration. Unless the time period or
scope of any appointment is limited by the appointing director, the appointment
is effective for all purposes, but will expire upon the expiration of the
appointing director's term. To our knowledge, no director currently has
appointed any other person as a substitute director.
43
EXTERNAL DIRECTORS
Under the Companies Law, companies incorporated under the laws of
Israel whose shares have been offered to the public in or outside of Israel are
required to appoint two external 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 under the person's control,
has, as of the date of the person's appointment to serve as external director,
or had, during the two years preceding that date, any affiliation with the
company, any entity controlling the company or any entity controlled by the
company or by this controlling entity. The term affiliation includes:
o an employment relationship;
o a business or professional relationship maintained on a regular basis;
o control; and
o service as an office holder.
No person can serve as an external director if the person's position
or other business creates, or may create, conflict of interests with the
person's responsibilities as an external director. Until the lapse of two years
from termination of office, a company may not engage an external director to
serve as an office holder and cannot employ or receive services from that
person, either directly or indirectly, including through a corporation
controlled by that person. External directors are to be elected by a majority
vote at a shareholders' meeting, provided that either:
o the total number of votes FOR the appointment of the external
directors shall include the votes of at least one third of the shares
represented at the meeting in person or by proxy, which are not held
by controlling shareholders of the company; or
o the total number of votes AGAINST the appointment of the external
directors, among the non-controlling shareholders of the company,
shall not exceed 1% of the aggregate voting rights in the company .
When counting the votes of the non-controlling shareholders,
abstentions shall not be included in such calculations.
An external director is entitled to compensation as provided in
regulations promulgated under the Companies Law and is otherwise prohibited from
receiving any compensation, directly or indirectly, in connection with services
provided as an external director. We compensate our two external directors in
accordance with regulations promulgated under the Companies Law.
44
The initial term of an external director is three years and may be
extended for an additional three years. Each committee of a company's board of
directors, which exercises board powers, is required to include at least one
external director. However, the audit committee should include all the external
directors.
Following the expiration of Ms. Bruria Lekner's term as our external
director, we intend to convene a special general meeting as soon as practical to
appoint an additional external director to our company.
EXCULPATION, INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Companies Law, an Israeli company may not exempt an office
holder from liability with respect to 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, with respect to a breach of his duty of care, provided, that the
company is so permitted under its articles of association.
Office Holder Insurance
Our articles of association provide that, subject to the provisions
of the law, we may enter into a contract for the insurance of the liability of
any of our office holders with respect to:
o a breach of his duty of care to us or to another person;
o 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
o a financial liability imposed upon him in favor of another person
concerning an act performed by him in his capacity as an office
holder.
Indemnification of Office Holders
Our articles of association provide that we may indemnify an office
holder against:
o a financial liability imposed on him in favor of another person by any
judgment, including a settlement or an arbitrator's award approved by
a court concerning an act performed in his capacity as an office
holder; and
o reasonable litigation expenses, including attorneys' fees, expended by
the office holder or charged to him by a court, in proceedings we
institute against him or instituted on our behalf or by another
45
person, or in a criminal charge from which he was acquitted, or a
criminal charge in which he was convicted for a criminal offense that
does not require proof of intent, in each case relating to an act
performed in his capacity as an office holder.
Under the Companies Law, these provisions are subject to
shareholder approval.
Limitations on Insurance and Indemnification
The Companies Law provides that a company may not indemnify an office
holder nor enter into an insurance contract which would provide coverage for any
monetary liability incurred as a result of any of the following:
o a breach by the office holder of his duty of loyalty unless the office
holder acted in good faith and had a reasonable basis to believe that
the act would not prejudice the company;
o a breach by the office holder of his duty of care if the breach was
done intentionally or recklessly;
o any act or omission done with the intent to derive an illegal personal
benefit; or
o 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, in specified circumstances,
by our shareholders.
We have obtained directors and officers liability insurance.
AUDIT COMMITTEE
Under the Companies Law, the board of directors of any public
company, as defined by the Companies Law, must appoint an audit committee
comprised of at least three directors, including all of the external directors,
but excluding the chairman of the board of directors, the general manager, the
chief executive officer and a controlling shareholder or its relative and any
director employed by the company or who provides services to the company on a
regular basis. Following the expiration of Ms Bruria Lekner's term as our
external director, Messrs. Itzhak Gat and Amnon Harari serve as the members of
our audit committee. We intend to convene a special general meeting as soon as
practical to appoint an additional external director to our company. The elected
external director will serve as the third member of our Audit Committee.
46
The role of the audit committee is to examine flaws in the our
business management, in consultation with the internal auditor and our
independent accountants, and suggest appropriate course of action.
In addition, the approval of the audit committee is required to
effect specified actions and transactions with office holders and interested
parties. An interested party is defined in the Companies Law as a 5% or greater
shareholder, any person or entity who has the right to designate one or more
directors or the general manager of the company or any person who serves as a
director or as a general manager. An audit committee may not approve an action
or a transaction with an interested party or with an office holder unless at the
time of approval the two external directors are serving as members of the audit
committee and at least one external director was present at the meeting in which
such approval was granted.
In addition to the audit committee, our board of directors has formed
a finance committee, which advises the board of directors on finance issues.
MANAGEMENT EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of our executive
officers. These agreements contain various provisions, including provisions
relating to assignment of intellectual property rights to us and confidentiality
and are in effect until terminated by either party upon advance notice or
otherwise in accordance with the terms of the particular agreement. All of these
agreements also contain non-competition provisions. Under the Companies Law, in
a public company, as defined in the Companies Law, the chief executive officer
may not serve as the company's chairman of the board. However, the shareholders
of the company may approve the service of the chairman of the board also as the
chief executive officer, for a period of up to three years, provided, that at
least two-thirds of the votes of non-controlling shareholders present and voting
at the meeting vote affirmatively.
EMPLOYEE SHARE OPTION PLANS
We have four employee stock option plans. Options granted under our
option plans generally vest over a period of two or three years. Options granted
under each plan expire four or five years from the date of grant. Our share
option plans are administered by our board of directors. All of our employees
are eligible to participate in our option plans. The board of directors has
complete discretion to make all decisions relating to the interpretation and
operation of our option plans, including the discretion to determine which
eligible individuals are to receive an award, and to determine the type, number,
vesting requirements and other features and conditions of each award.
As of March 31, 2003, we have granted options to purchase 1,746,886
ordinary shares. As of March 31, 2003, an additional 70,200 ordinary shares were
reserved for issuance pursuant to options issuable under our share option plans.
47
D. EMPLOYEES
As of March 31, 2003, we employed approximately 149 persons,
including 21 part time employees, of whom approximately 93, including 16 part
time employees, were employed in research and development operations, both
internally financed and such that are performed under contracts with our
customers, approximately 6, including one part time employee, in marketing and
sales, approximately 16 in production, and approximately 34 ,including four part
time employees, in administration and management. Our employees who have access
to proprietary information are required to sign a nondisclosure agreement
covering all of our proprietary information which they might possess or to which
they might have access. We believe that we have satisfactory labor relations
with our employees and have never experienced a work stoppage.
We are subject to labor laws and regulations in Israel. We and our
Israeli employees are also subject to certain provisions of the general
collective bargaining agreements between the Histadrut (General Federation of
Labor in Israel) and the Coordination Bureau of Economic Organizations
(including the Industrialists Association) by order of the Israeli Ministry of
Labor and Welfare. None of our employees is represented by a labor union and we
have not experienced any work stoppages.
E. SHARE OWNERSHIP
As of March 31, 2003, other than Yaron Sheinman who beneficially
owned 948,328 ordinary shares, which represented 8.9% of our outstanding
ordinary shares, none of our directors and officers beneficially owned more than
1% of our outstanding equity securities.
As of March 31, 2003, our directors and officers, as a group, held
options to purchase 195,000 ordinary shares, at a weighted average exercise
price of $2.4 per share expiring between July 24, 2005 and November 14, 2006.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our ordinary shares as of March 31, 2003, by each person
or entity known to own beneficially more than 5% of our outstanding ordinary
shares based on information provided to us by the holders or disclosed in public
filings with the Securities and Exchange Commission.
48
PERCENTAGE OF
NUMBER OF ORDINARY OUTSTANDING ORDINARY
NAME SHARES BENEFICIALLY OWNED(1) SHARES(2)
------------------------------------------ ---------------------------- ---------
Elisra Electronic Systems Ltd.(3)(4) 6,688,358 55.0%
48 Mivtza Kadesh Street
Bnai Brak 51203
Clal Industries and Investments Ltd.(5)(6) 1,889,600 17.73%
Azrieli Center, Building 3
Tel Aviv 67023
Polar Investments Ltd.(5)(7) 1,414,129 13.27%
Platinum House
21 Ha'arbah St.
Tel Aviv 64731
Yaron Sheinman 948,328 8.90%
3 Yasmin
Karmei Yosef
- -----------------------
(1) Except as otherwise noted and pursuant to applicable community property
laws, each person named in the table has sole voting and investment power
with respect to all ordinary shares listed as owned by such person. Shares
beneficially owned include shares that may be acquired pursuant to options
that are exercisable within 60 days of March 31, 2003.
(2) Ordinary shares deemed beneficially owned by virtue of the right of any
person or group to acquire these ordinary shares within 60 days of March
31, 2003, are treated as outstanding only for the purposes of determining
the percent owned by such person or group. The percentage of outstanding
ordinary shares is based on 10,660,874 ordinary shares outstanding as of
March 31, 2003.
(3) Elisra Electronic Systems Ltd. is a subsidiary of Koor Industries Ltd.,
referred to as Koor. As a result, Koor effectively has the power to vote
the shares held by Elisra.
(4) Includes 1,500,000 ordinary shares issuable upon exercise of an outstanding
warrant.
(5) Each of such entities is publicly traded on the Tel Aviv Stock Exchange.
(6) Includes 694,200 ordinary shares owned by Clal Industries and Technologies
Ltd., a wholly owned subsidiary of Clal Industries and Investments Ltd.
(7) Includes 542,929 ordinary shares held by Koonras Technologies Ltd., a
wholly-owned subsidiary of Polar Investments Ltd. and 871,200 ordinary
shares held by Polar Communication Ltd., a company which is publicly traded
on the Tel Aviv Stock Exchange, in which Polar Investments Ltd. holds a
majority interest. As a result, Polar Investments Ltd. effectively has the
power to vote the shares held by Koonras Technologies Ltd. and Polar
Communication Ltd.
As of October 24, 2002, we had approximately 13 shareholders of
record with a United States address. As of April 30, 2001, these United States
49
record holders held approximately 825,952 of our ordinary shares, representing
approximately 7.75% of our outstanding share capital as of such date.
B. RELATED PARTY TRANSACTIONS
RELATIONSHIP BETWEEN US AND BVR-T
Following the consummation of the reorganization plan, BVR-T and us,
except as otherwise contemplated in the intercompany agreements referred to
below, have operated independently of one another as separate public companies.
Mr. Yaron Sheinman, who is BVR-T's director and chief executive officer, serves
as our director.
In connection with the reorganization plan, we and BVR-T entered into
several agreements for the purpose of giving effect to the reorganization plan
and defining our ongoing relationship. The following is a summary of the such
agreements and other arrangements and transactions entered into by us and BVR-T.
INTERCOMPANY AGREEMENTS
Spin-off Agreement
Pursuant to the terms of a Spin-off Agreement between us and BVR-T,
BVR-T transferred its defense-related operations to us and retained its
remaining businesses. Responsibility for the obligations that cannot be related
to any of specific field of activity were distributed in proportion to the
respective net equity (as defined in the Spin-off Agreement) of each of the
companies.
Liens granted on assets of BVR-T in respect of obligations that were
transferred to us were registered on our assets. Similarly, we assumed
responsibility for indemnities given in respect of activities transferred to us.
Legal claims and quasi-legal claims, including arbitration, relating
to our rights and obligations, were and in the future will be transferred to,
and if unable to be transferred, will be pursued and defended by us.
Employees of BVR-T whose employment was related to activities
transferred to us ceased to be employees of BVR-T and became our employees. We
assumed all obligations to such employees, including such obligations relating
to the period prior to consummation of the Spin-Off. We received and assumed all
existing rights and obligations for such employees in pension funds, severance
pay funds, certain other funds, managers' insurance policies and financial and
other arrangements. All provisions reflecting obligations to these employees
were recorded in our books and the books of BVR-T, respectively.
We and BVR-T each undertook to indemnify and/or compensate the other
(the "Injured Party") for any amount, damage or expense that the Injured Party
incurred in consequence of a third-party claim relating to a field of activity
50
of the indemnifying party, concerning events occurring before the effective date
of the Spin-Off, provided that the Injured Party has notified the indemnifying
party of the third-party claim and has allowed the indemnifying party to manage
and defend any such claim. In addition, BVR-T has undertaken to guarantee to our
creditors and we have undertaken to guarantee to creditors of BVR-T any and all
obligations or indebtedness incurred by BVR-T prior to the effective date of the
Spin-off.
In order not to prejudice the validity of the Spin-Off under Section
105A(1) of the Israeli Income Tax Ordinance, each of the two companies undertook
to act in accordance with the provisions of Section 105 of the Israeli Income
Tax Ordinance and the provisions of the Israel Income Tax Commission's
authorization.
We and BVR-T undertook to indemnify our controlling shareholders and
the controlling shareholders of BVR-T in respect of any tax obligations they
incur as a result of the consummation of the Spin-off.
Each of us and BVR-T may, in the ordinary course of business, enter
into certain other leases, operating agreements and other agreements that serve
to define various aspects of the relationship that will exist among the parties
in the future. None of these agreements, either alone or in the aggregate, is
expected to materially affect the results of operations of either of the two
companies.
Corporate Services Agreements
We entered into corporate services agreements with BVR-T, pursuant to
which BVR-T made available to us specific services related to technical
documentation and we made available to BVR-T certain bookkeeping services until
December 31, 1999. Under these agreements, the parties provided services as
requested from time to time. In consideration for BVR-T's performance of the
agreement, we reimbursed BVR-T for certain expenses incurred by BVR-T and paid
BVR-T based on agreed-to rates. In respect of services we rendered to BVR-T,
BVR-T paid us based on agreed-to rates. In addition, each party agreed to
indemnify the other with respect to any losses, damages or expenses caused to
such party which result from the provision of services unless caused by an
intentional act or in bad faith, or by gross negligence on the part of the party
providing the services.
Lease Agreements
We and BVR-T had entered into a lease agreement, pursuant to which we
leased from BVR-T approximately 2,375 square meters of office and manufacturing
space and facilities from BVR-T and its subsidiary, Coresma Ltd., in Rosh
Ha'ayin, Israel. These facilities were sold by BVR-T to Electra Properties Ltd.
and we signed a lease with Electra in August of 1999. In January 2002, we
entered into an agreement with BVR-T according to which we amended this lease to
include additional 164 square meters which were formerly leased by BVR-T. We
paid BVR-T $15,000 in consideration for improvements and furniture which
51
remained in this facility. This agreement was approved by our audit committee
and our board of directors in December 2001.
Technology Transfer and Cross License Agreement
In order to ensure that we and BVR-T, and each company's respective
subsidiaries, own the technology required to pursue and develop their respective
fields of activity, we and BVR-T, and certain of our respective subsidiaries
entered into an agreement concerning technology transfers and cross licenses
between each of the parties (the "Technology Transfer and Cross License
Agreement"). Under this agreement, BVR- T transferred to us the rights to
co-ownership of BVR-T's intellectual property. We are entitled to exploit such
intellectual property for military applications relating to simulation and
training systems. In addition, we shall be entitled to exploit such intellectual
property for commercial applications relating to simulation and training and for
civil aviation related businesses to the extent we determine to enter into these
fields of operations. BVR-T will only be entitled to exploit such intellectual
property rights for commercial activities that do not conflict with our
activities as conducted at the time of the consummation of the reorganization
plan. We and BVR-T further agreed not to compete with each other's business
activities. In addition, each of us and BVR-T and our respective subsidiaries
will be entitled to use the name "B.V.R." in the business activities in which we
or they are, or will become, respectively engaged. The agreement will terminate
with respect to any party in the event of such party's dissolution, liquidation
or the winding up of its business.
Each of the parties undertook to indemnify any other party and such
other party's respective subsidiaries, officers, directors, employees and agents
in respect of any losses, damages or expenses resulting from the use by the
indemnifying party or its respective subsidiaries, employees, agents and
assignees of intellectual property rights transferred to it pursuant to this
agreement.
Loan Agreement
In November 1998, we and BVR-T entered into a loan agreement,
pursuant to which BVR-T agreed to loan us up to $6.5 million. As of December 31,
2000, the loan, including all interest accumulated thereon, amounted to
approximately $600,000. Interest on the loan was at the average interest rate we
paid to Bank Hapoalim Ltd. on our line of credit. The loan was repaid during the
period ending on the first quarter of 2001.
MANAGEMENT SERVICES AGREEMENTS WITH ELISRA ELECTRONIC SYSTEMS LTD.
On July 27, 2000 we entered into a management services agreement with
Elisra Electronic Systems Ltd., our controlling shareholder, pursuant to which
we paid Elisra a management services fee of $200,000. The agreement has expired
on December 31, 2000. On March 29, 2001, we entered into a second management
services agreement with Elisra pursuant to which Elisra provided us with
52
management services during fiscal 2001 for an annual fee of $200,000, which has
since expired. On March 18, 2002, we entered into a third management services
agreement with Elisra pursuant to which Elisra will provide us with management
services during the year 2002 for an annual fee of $200,000. On April 6, 2003 we
entered into a fourth management services agreement with Elisra pursuant to
which Elisra will provide us with management services during the year 2003 for
an annual fee of $200,000. The fourth management agreement has been approved by
our audit committee and by our board of directors. See "Item 10. Additional
Information - Transactions Requiring Special Approval."
LOAN AGREEMENT WITH ELISRA
On May 15, 2002, we obtained a $4.0 million credit line from Elisra,
our controlling shareholder, under which we borrowed $3.5 million and which bore
interest at a rate of three months LIBOR plus 1%. The proceeds of this loan were
used to finance our operations in the third quarter of 2002. Following a payment
by a customer of approximately $12.5 million the loan was repaid and the credit
line was terminated.
TRANSACTION WITH A SUBSIDIARY OF ELISRA
We purchase specific component that is incorporated into our on-board
training systems from Tadiran Spectalink Ltd., a wholly owned subsidiary of
Elisra. Purchases from Tadiran Spectalink were approximately $244,000, $1.7
million and $1.2 million for fiscal 2002, fiscal 2001 and fiscal 2000,
respectively. As of March 31, 2003, we had no open orders from Tadiran
Spectalink. We believe that the terms of our transactions with Tadiran
Spectalink are no less favorable to us from those we could have obtained from an
unaffiliated third party supplier.
In November 2002, Elta, a division of IAI, acquired from Koor
Industries Ltd. 30% of the outstanding shares of Elisra at such time. Commencing
on November 2002 we treat IAI as a related party (See "Item 4 B.--Business
Overview--Strategic Relationship.)
SALE OF SHARES TO PRINCIPAL SHAREHOLDERS
SALE OF SHARES TO AN INVESTMENT COMPANY OF BANK HAPOALIM
Prior to the Spin Off, in February 1998, BVR-T sold an aggregate of
372,827 of BVR-T ordinary shares to an investment company of Bank Hapoalim, or
ICBH, for an aggregate purchase price of $3,821,476. In connection with this
transaction, BVR-T also issued to ICBH 3-year warrants to purchase an aggregate
of 170,102 of BVR-T ordinary shares at a per share exercise price of $14.00. As
part of the Spin-Off, ICBH was issued 372,827 of our ordinary shares and
warrants to purchase 170,102 of our ordinary shares at an exercise price of
$9.70 per share, with the exercise price of its option to purchase ordinary
shares of BVR-T being adjusted to $4.30 per share. In May 1999, we agreed to
53
reduce the exercise price of these warrants to $7.628 per share in consideration
for ICBH's agreement to exercise the warrants. ICBH then exercised all of these
warrants for an aggregate exercise price of $1,297,565.
GRANT OF PHANTOM OPTIONS TO SHREM, FUDIM, KELNER & CO.
In consideration for services relating to a private placement, we
granted Shrem, Fudim, Kelner & Co., the controlling shareholder of ICBH, 200,000
phantom options that grant their holder the right to receive in cash the
difference between the price of the share on the date of exercise and $9.00. We
had the exclusive right to convert these phantom options into options to
purchase 200,000 of our ordinary shares for an exercise price of $9.00 per
share. In January 2000, we converted the phantom options into options to
purchase 200,000 of our ordinary shares at a purchase price of $9.00 per shares.
These options expired on December 11, 2001.
EXERCISE OF OPTIONS BY CLAL
In May 1999, Clal Industries and Technologies (1997) Ltd. exercised
warrants to purchase an aggregate of 365,000 of our ordinary shares for an
aggregate exercise price of approximately $2.7 million.
SALES OF SHARES TO ELISRA
In August 1999, we issued an aggregate of 700,000 of our ordinary
shares to Elisra Electronic Systems Ltd., our controlling shareholder, for an
aggregate purchase price of $9,100,000. Elisra is a wholly-owned subsidiary of
Koor Ltd. In addition, Elisra purchased 760,000 of our ordinary shares from a
number of our shareholders, including Aviv Tzidon, Yaron Sheinman, Clal
Industries and Investments Ltd. and Poalim Investments Ltd.
On August 29, 2000, we issued to Elisra 1,000,000 of our ordinary
shares and warrants to purchase an aggregate of additional 1,500,000 of our
ordinary shares for an aggregate purchase price of $5.0 million. The warrants
are exercisable at any time prior to June 25, 2003, at an exercise price of
$6.00, which is subject to adjustments upon the occurrence of certain events
prior to the exercise of the warrants. As part of this transaction Elisra
purchased from Aviv Tzidon (our founder) 996,858 of our ordinary shares for a
purchase price of $4.50 per share. Assuming the exercise of all of Elisra's
warrants, Elisra, would hold approximately 55.0% of our outstanding shares.
In connection with the sale of the ordinary shares and the warrant we
granted Elisra (i) registration rights with respect to substantially all of our
ordinary shares held by Elisra and such ordinary shares issuable upon the
exercise of the warrants and (ii) a preemptive right, for as long as Elisra
holds 5% or more of our outstanding share capital, to purchase such number of
ordinary shares of our future issued equity securities as will be required to
maintain Elisra's proportionate holdings in our outstanding share capital.
54
VOTING AGREEMENT
On July 19, 2000 Elisra, Clal Industries and Investment Ltd., Clal
Industries and Technologies (1997) Ltd., Koonras Technologies Ltd., Polar
Communication Ltd. and Yaron Sheinman, entered into a shareholders agreement and
terminated a prior agreement between the same parties. Each of the parties to
that shareholders agreement agreed, among other things, to vote all of such
party's shares in our company in order to cause our board of directors to
consist of not more than eleven members. Each party agreed to vote its shares in
favor of up to six director nominees designated by Elisra, one director nominee
designated by Clal Industries and Investment and Clal Industries and
Technologies, as a group, one director nominee designated by Koonras
Technologies and Polar Communication, as a group, one director nominee
designated by Yaron Sheinman, one external director nominee designated by Elisra
and one external director nominee designated by the other parties together. Each
such group's and Sheinman's rights to designate a director and to participate in
the designation of one external director are subject to the holding by such
group, in the aggregate, and Sheinman, of not less than four percent of our
outstanding share capital. Elisra's rights to designate director nominees and
one external director are subject to Elisra's holding of not less than
twenty-four percent of our outstanding share capital.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of our executive
officers. See "Item 6--Board Practices--Management Employment Agreements."
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The Financial Statements required by this item are found at the end
of this Annual Report, beginning on page F-1.
LEGAL PROCEEDINGS
We are not a party to any material legal proceeding.
55
B. SIGNIFICANT CHANGES
Except as otherwise disclosed in this annual report, there has been
no material change in our financial position since December 31, 2002.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
The following table sets forth the high and low closing price for our
ordinary shares as reported by the Nasdaq SmallCap Market and the
Over-the-Counter Bulletin Board for the periods indicated:
1998 HIGH LOW
---- ---- ---
October 28 - December 31 $9 7/16 $7 1/4
1999
----
January 1 - December 31 $12.63 $7.88
2000
----
January 1 - December 31 $9.63 $0.88
2001
----
January 1 - December 31 $3.50 $1.00
January 1 - March 31........................................................ $3.50 $1.50
April 1 - June 30........................................................... $2.31 $1.00
July 1 - September 30....................................................... $3.50 $2.03
October 1 - December 31..................................................... $3.02 $2.40
2002
----
January 1 - December 31............................................................ $3.00 $0.5
January 1 - March 31
April 1 - June 30........................................................... $2.65 $1.75
July 1 - September 30 $2.42 $1.02
October 1 - December 31..................................................... $1.07 $0.50
October 1 - October 31................................................ $1.02 $0.88
November 1 - November 30.............................................. $1.00 $0.93
December 1 - December 31.............................................. $1.07 $0.50
2003
----
January 1 - March 31........................................................ $1.10 $0.37
January 1 - January 31................................................ $0.60 $0.47
February 1 - February 28.............................................. $1.10 $0.37
March 1 - March 31.................................................... $1.01 $0.90
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B. MARKETS
Our ordinary shares traded on the Nasdaq SmallCap Market until
February 13, 2003. The Nasdaq delisted our ordinary shares after we failed to
comply with required listing standards of the Nasdaq SmallCap Market. Since
February 14, 2003, our ordinary shares are traded on the Over-the-Counter
Bulletin Board under the symbol "BVRSF".
C. PLAN OF DISTRIBUTION
Not applicable
D. SELLING SHAREHOLDERS
Not applicable
E. DILUTION
Not applicable
F. EXPENSES OF THE ISSUE
Not applicable
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 January 6, 1998. Our
registration number with the Israeli registrar of companies is 52-004362-1. Our
objects and purposes include the development, design, manufacture and marketing
of advanced training systems for military objectives and other wide variety of
business purposes as set forth in Section 2 of our Memorandum of Association,
which was filed with the Israeli registrar of companies.
TRANSACTIONS REQUIRING SPECIAL APPROVAL
An "office holder" is defined in the Companies Law as a director,
general manager, chief business manager, deputy general manager, vice general
57
manager and any person assuming the responsibilities of any of the foregoing
positions without regard to such person's title and any other manager who is
directly subject to the general manager.
The Companies Law imposes a duty of care and a duty of loyalty on all
office holders of a company. The duty of care requires an office holder to act
with the level of care which a reasonable office holder in the same position
would have acted under the same circumstances. The duty of care includes a duty
to use reasonable means to obtain:
o information on the appropriateness of a given action brought for his
approval or performed by him by virtue of his position; and
o all other important information pertaining to the previous actions.
The duty of loyalty requires an office holder to act in good faith
for the interests of the company and includes a duty to:
o refrain from any conflict of interest between the performance of his
duties in the company and his personal affairs;
o refrain from any activity that is competitive with the company;
o refrain from exploiting any business opportunity of the company to
receive a personal gain for himself or others; and
o disclose to the company any information or documents relating to a
company's affairs which the office holder has received due to his
position as an office holder.
Each person listed in the table under "Item 6--Directors, Senior
Management and Employees--Directors and Senior Management" is an office holder.
The Companies Law requires that an office holder disclose to the
company any personal interest that he or she may have, and all related material
information known to him or her, in connection with any existing or proposed
transaction by the company. The disclosure is required to be made promptly and
in any event, no later than the board of directors meeting in which the
transaction is first discussed. A personal interest of an office holder includes
an interest of a company in which the office holder is, directly or indirectly,
a 5% or greater shareholder, director or general manager or in which he or she
has the right to appoint at least one director or the general manager. If the
transaction is an extraordinary transaction, the office holder must also
disclose any personal interest held by his or her relative.
Under the Companies Law, an extraordinary transaction is a
transaction:
o not in the ordinary course of business;
58
o not on market terms; or
o likely to have a material impact on the company's profitability,
assets or liabilities.
Under the Companies Law, once an office holder complies with the
above disclosure requirement, the board of directors may approve the
transaction, unless the company's articles of association provide otherwise. A
transaction that is adverse to the company's interest may not be approved. If
the transaction is an extraordinary transaction, then it also must be approved
by the audit committee, before the board approval, and under certain
circumstances, by the shareholders of the company. A director who has a personal
interest in a matter which is considered at a meeting of the board of directors
or the audit committee may not be present at this meeting or vote on this
matter. If a majority of the directors has a personal interest in a transaction,
these directors are permitted to be present and vote, but shareholder approval
is also required.
Under the Companies Law, the disclosure requirements which apply to
an office holder also apply to a controlling shareholder of a public company. A
controlling shareholder includes a shareholder that holds 25% or more of the
voting rights in a public company if no other shareholder owns more than 50% of
the voting rights in the company. Extraordinary transactions of a public company
with a controlling shareholder or in which a controlling shareholder has a
personal interest, and the terms of compensation of a controlling shareholder
who is an office holder, require the approval of the audit committee, the board
of directors and the shareholders of the company. The shareholder approval must
satisfy either of the following criteria:
o the majority of the votes for the approval includes the votes of at
least one-third of the total votes of shareholders who are present at
the meeting and who have no personal interest in the transaction; the
votes of abstaining shareholders shall not be included in the number
of the said total votes; or
o the total number of votes against the approval, among the shareholders
who are present at the meeting and who have no personal interest in
the transaction shall not exceed 1% of the aggregate voting rights in
the company.
For information concerning the direct and indirect personal interests
of certain of our office holders and principal shareholders in certain
transactions with us, see "Item 7--Major Shareholders and Related Party
Transactions--Related Party Transactions."
DIRECTORS' COMPENSATION
Under the Companies Law, all arrangements as to compensation of
office holders who are not directors require approval of the board of directors.
Arrangements as to compensation of directors also require audit committee
59
approval, before board approval, and shareholder approval. Nevertheless,
pursuant to our articles of association, our directors who are not our employees
or professional services providers shall not be paid any remuneration for their
services unless it was approved by the general meeting of our shareholders.
DIRECTORS BORROWING POWERS
Our board of directors may from time to time, in its discretion,
cause the Company to borrow or secure the payment of any sum or sums of money
for the purposes of the Company. Such borrowing powers may be exercised by a
majority of the board in accordance with our articles of association.
RIGHTS ATTACHED TO OUR SHARES
Dividend Rights. Our articles of association provide that our
shareholders at a general meeting and upon the recommendation of our board of
directors may from time to time, declare such dividend as may appear to be
justified but not in excess of our board of directors recommendation. Subject to
the rights of the holders of shares with preferential or other special rights
that may be authorized in the future, holders of ordinary shares are entitled to
receive dividends according to their rights and interest in our profits.
Voting Rights. Holders of ordinary shares have one vote for each
ordinary shares 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 ordinary shares do not have cumulative voting rights in the
election of directors. As a result, holders of ordinary shares that represent
more than 50% of the voting power have the power to elect all the directors to
the exclusion of the remaining shareholders.
Liquidation Rights. 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.
Redemption Provisions. We may, subject to applicable law, issue
redeemable preference shares and redeem the same.
Capital Calls. Under our memorandum of association and the Companies
Law, the liability of our shareholders is limited to the par value of the shares
held by them.
60
Preemptive, First Refusal and Co-Sale Rights. All outstanding
ordinary shares are validly issued, fully paid and non-assessable and do not
have preemptive rights, rights of first refusal or co-sale rights.
Transfer of Shares. Fully paid ordinary shares are issued in
registered form and may be transferred pursuant to our articles of association,
unless such transfer is restricted or prohibited by another instrument and
subject to applicable securities laws.
MODIFICATION OF RIGHTS
Unless otherwise provided by our articles of association, rights
attached to any class may be modified or abrogated by a resolution adopted in a
general meeting approved by a majority of 75% of the voting power represented at
the meeting in person or by proxy and voting thereon, subject to the sanction of
a resolution passed by majority of the holders of 75% a majority of the shares
of such class present and voting as a separate general meeting of the holders of
such class.
SHAREHOLDERS' MEETINGS AND RESOLUTIONS
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 33-1/3% 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 chairman of the board may designate. At
such reconvened meeting the required quorum consists of any two shareholders
present in person or by proxy.
Under the Companies Law, each shareholder of record will be provided
at least 21 calendar days' prior notice of any general shareholders meeting.
Under the Companies Law and our articles of association, all
resolutions of our shareholders require a simple majority of the shares present,
in person or by proxy, and voting on the matter, subject to certain exceptions
provided for under the Companies Law, which require a majority of at least 75%
of the shares present. However, the Companies Law requires that any amendment to
the articles of association of a company incorporated prior to February 1, 2000,
shall be approved by holders of at least 75% of the voting rights represented at
the meeting, in person or by proxy, and voting thereon, unless the articles are
amended to the effect of requiring a different majority.
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 us and other shareholders, such as in voting
in the general meeting of shareholders on the following matters:
o any amendment to the articles of association;
61
o an increase of our authorized share capital;
o a merger; or
o approval of certain actions and transactions which require shareholder
approval.
In addition, each and every shareholder has the general duty to
refrain from depriving other shareholders of their rights.
Our annual general meetings are held once in every calendar year at
such time (within a period of not more than fifteen months after the last
preceding annual general meeting) and at such place determined by our board. All
general meetings other than annual general meetings shall be called
extraordinary general meetings. Our board may, whenever it thinks fit, convene
an extraordinary general meeting at such time and place as it determines, and
shall be obligated to do so upon a requisition in writing in accordance with the
Companies Law.
LIMITATION ON OWNING SECURITIES
The ownership of our ordinary shares by nonresidents of Israel is not
restricted in any way by our memorandum of association and articles of
association or the laws of the State of Israel, except for citizens of
countries, which are in a state of war with Israel, who may not be recognized as
owners of our ordinary shares.
MERGERS AND ACQUISITIONS UNDER ISRAELI LAW
The Israeli Companies Law includes provisions that allow a merger
transaction and requires that each company that is a party to a merger have the
transaction approved by its board of directors and a vote of at least 75% of its
shares, at a shareholders' meeting called on at least 21 days' prior notice. For
purposes of the shareholders 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 other party, or 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
for the approval of the merger has been filed with the Israeli Registrar of
Companies.
The Companies Law also 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 25% shareholder of the company and
there is no existing 25% or greater shareholder in the company. If there is no
existing 50% or greater shareholder in the company, the Companies Law provides
62
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. Regulations adopted under the Companies Law provide
that these tender offer requirements do not apply to companies whose shares are
listed for trading outside of Israel if, according to the laws of the country in
which the shares have been offered to the public or in which the shares are
listed for trading on an exchange, including the rules and regulations of such
exchange, there is either a restriction upon any acquisition of control to any
extent, or the acquisition of control to any extent requires the purchaser to
make a tender offer to the public.
If following any acquisition of shares, the acquirer will hold 90% or
more of the company's shares or of a class of shares, the acquisition may not be
made other than through a tender offer to acquire all of the shares of such
class. If the shareholders who declined the tender offer hold 5% or less of the
company's outstanding share capital or class of shares, all the shares that the
acquiror offered to purchase will be transferred to it. However, the tendered
shareholders may seek to alter the consideration by court order.
MATERIAL CONTRACTS
For a summary of our other material contracts, see "Item 4 -
Information on the Company--Strategic Relationship."
On October 29, 1999, we entered into our first contract with the
Republic of Korea Air Force to supply it with Ehud ACMI systems. We are the
prime contractor for this project. We have targeted the Republic of Korea as a
strategic market with a significant growth potential and accordingly, in order
to win this contract over first tier competitors, we priced the contract at
approximately $43 million, although such price does not provide us with expected
profits. As in substantially all of our contracts, this contract is payable in
accordance and subject to timely achievement of specific milestones during the
lifetime of the project. We expect to complete the deliveries under this project
during the fourth quarter of 2003, at which time the two years warranty period
shall commence.
On December 22, 2000 we entered into an agreement with the Government
of a country in Southeast Asia, for the supply of a full mission simulator for
F-16 fighter aircraft. The contract price is of approximately $20.0 million,
which, as in substantially all of our contracts, is payable in accordance and
subject to timely achievement of specific milestones during the lifetime of the
project. We expect to complete this project during the fourth quarter of 2003.
We expect revenues from this project to become a substantial portion of our
revenues in the year ending December 31, 2003.
In September 2001, we entered into an agreement with Aermacchi
S.p.A., a leading manufacturer and producer of modern military training aircraft
in Europe, for the supply of a MB339 training aircraft full mission simulator
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and three years of logistical support. The contract price is $7.1 million,
which, as in substantially all of our contracts, is payable in accordance and
subject to timely achievement of specific milestones during the lifetime of the
project. We expect to complete this project during the second quarter of 2003
and enter into the logistical support period. We expect to derive revenues from
this project until 2006.
In February 2001, we entered into an agreement with a foreign defense
force for the provision of a cockpit procedural flight trainer. The contract
price is approximately $3.7 million, which, as in substantially all of our
contracts, is payable in accordance and subject to timely achievement of
specific milestones during the lifetime of the project. We expect to complete
the warranty period of this project during the third quarter of 2003. As of June
30, 2002, we received all the revenues from this project.
In November 2001, we entered contract for the supply of EHUDtm ACMI
System to the Israeli Air Force. We will act as the prime contractor in the
performance of this contract and MLM, a division of IAI, will act as our
sub-contractor. The purchase package consists of airborne pods and upgraded
ground-debriefing stations, and includes a maintenance package. The contract
price was NIS 9.9 million, which as of May 31, 2002, equaled $2.0 million, as in
substantially all of our contracts, the contract price is payable in accordance
and subject to timely achievement of specific milestones during the lifetime of
the project. We expect to complete this project during the year 2007. We expect
to receive the majority of the considerations from this contract in the year
ending December 31, 2003.
On August 15, 2002 we entered into a contract with a foreign naval
force with respect to the delivery of enhancements to a ship-borne, embedded
Naval Combat Maneuvering Instrumentation. The contract price is approximately
$4.5 million, which, as in substantially all of our contracts, is payable in
accordance and subject to timely achievement of specific milestones during the
lifetime of the project. We expect to complete this project during the first
quarter of 2005. As of April 30, 2003, we received $2.0 million under this
contract.
On October 31, 2002 we entered into a contract with the armed forces
of an Asian country with respect to the delivery of a simulator. The contract
price is a minimum of $1.6 million, which, as in substantially all of our
contracts, is payable in accordance and subject to timely achievement of
specific milestones during the lifetime of the project. We expect to complete
this project during the first quarter of2004. As of April 30, 2003, we received
$295,000 under this contract.
In April 2003 we entered into a contract with the Air Force of a
South-American country for the development and supply of an F-16 training
facility. The contract price is approximately $5.0 million, which, as in
substantially all of our contracts, is payable in accordance and subject to
timely achievement of specific milestones during the lifetime of the project. We
expect to complete this project during the first quarter of 2005.
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C. EXCHANGE CONTROLS
Under current Israeli regulations, we may pay dividends or other
distributions in respect of our ordinary shares either in non-Israeli or Israeli
currencies. If we make these payments in Israeli currency, they will be freely
converted into non-Israeli currencies at the rate of exchange prevailing at the
time of conversion. Because exchange rates between the NIS and the dollar
fluctuate continuously, a U.S. shareholder will be subject to the risk of
currency fluctuations between the date when we declare NIS-denominated dividends
and the date when we pay them in NIS. See "Item 3. Key Information--Risk
Factors."
Non-residents of Israel may freely hold and trade our securities
pursuant to the general permit issued under the Israeli Currency Control Law,
1978. Neither our memorandum of association nor the laws of the State of Israel
restrict in any way the ownership of our ordinary shares by non-residents,
except that these restrictions may exist with respect to citizens of countries
which are in a state of war with Israel.
D. TAXATION
ISRAELI TAX CONSIDERATIONS AND GOVERNMENT PROGRAMS
The following is a summary of the current tax structure applicable to
companies in Israel, with special reference to its effect on us. The following
also contains a discussion of certain Israeli and United States tax consequences
to purchasers of our ordinary shares and certain Israeli Government programs
benefiting us. To the extent that the discussion is based on new tax legislation
which 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.
On January 1, 2003 Israel's tax laws had undergone a significant tax
reform (Amendment 132 to Israel's Income Tax Ordinance (New Version) - 1961)
(the "NEW LAW"). The underlying principle of the New Law is to broaden the
categories of taxable income, and reduce the tax rates imposed on employment
income.
The New Law includes provisions which impose a tax on capital gains
at a rate of up to 15% for Israeli residents, with respect to real capital gains
derived from sales of shares of publicly traded companies (which are currently
exempt from capital gains tax). Under the New Law, foreign residents will
continue to be exempt from capital gains tax on sale of traded securities of
Israeli companies.
HOLDERS OF OUR ORDINARY SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS
AS TO THE UNITED STATES, ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE,
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OWNERSHIP AND DISPOSITION OF ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE
EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
General Corporate Tax Structure
Israeli companies are subject to "Company Tax" at the rate of 36% of
taxable income. However, the effective tax rate payable by a company which
derives income from an approved enterprise (as further discussed below) may be
considerably less.
Tax Benefits Under the Law for the Encouragement of Capital
Investments, 1959
The Law for the Encouragement of Capital Investments, 1959 provides
that a proposed capital investment in eligible facilities may, upon application
to the Investment Center of the Ministry of Industry and Commerce of the State
of Israel, 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, e.g., 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 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.
Taxable income of a company derived from an approved enterprise is
subject to company tax at the maximum rate of 25% (rather than 36%) for the
benefit period. This period is ordinarily seven years commencing with the year
in which the approved enterprise first generates taxable income, and is limited
to twelve years from commencement of production or 14 years from the date of
approval, whichever is earlier. The Investment Law also provides that a company
that has an approved enterprise is entitled to accelerated depreciation on its
property and equipment that are included in an approved investment program.
A company owning an approved enterprise may elect to receive an
alternative package of benefits. Under the alternative package, a company's
undistributed income derived from an approved enterprise will be exempt from
company 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 such company will be eligible for a reduced tax rate for the
remainder of the benefits period.
Our requests for designation of our capital investment at our
facility in Rosh Ha'ayin as an "approved enterprise" program were approved under
the Investment Law. For this approved enterprise, we elected the alternative
package of benefits.
A company that has elected the alternative package of benefits and
that subsequently pays a dividend out of income derived from the approved
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enterprise during the tax exemption period will be subject to tax in respect of
the amount distributed (including the tax thereon) at the rate which would have
been applicable had it not elected the alternative package of benefits
(generally 10%-25%, depending on the extent of foreign shareholders holding our
ordinary shares). In addition, the dividend recipient is taxed at the reduced
rate applicable to dividends from approved enterprises (15%), if the dividend is
distributed during the tax exemption period or within 12 years thereafter. We
must withhold this tax at source, regardless of whether the dividend is
converted into foreign currency. See "--Taxation of Ordinary Shares--Taxation of
Dividends Paid On Ordinary Shares" and Note 18 to the Consolidated Financial
Statements.
Subject to certain provisions concerning income under the alternative
package of benefits, all dividends are considered to be attributable to the
entire enterprise and their effective tax rate is the result of a weighted
combination of the various applicable tax rates. We are not obliged to
distribute exempt retained profits under the alternative package of benefits,
and we may generally decide from which year's profits to declare dividends. We
currently intend to reinvest the amount of our tax-exempt income and not to
distribute such income as a dividend.
The Investment Center bases its decision as to whether or not to
approve an application, on the criteria set forth in the Investment Law and
regulations, the then prevailing policy of the Investment Center, and the
specific objectives and financial criteria of the applicant. Accordingly, there
can be no assurance that any such application will be approved. In addition, the
benefits available to an approved enterprise are conditional upon the
fulfillment of conditions stipulated in the Investment Law and its regulations
and the criteria set forth in the specific certificate of approval, as described
above. In the event that a company does not meet these conditions, it would be
required to refund the amount of tax benefits, with the addition of the consumer
price index linkage adjustment and interest.
The Investment 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.
We have derived, and expect to continue to derive, a substantial
portion of our income from our approved enterprise facilities. Subject to
compliance with applicable requirements, income derived from our approved
enterprise facility will be tax exempt for a period of two years after we have
taxable income and will be subject to a reduced company tax of up to 25%
depending on the extent of foreign shareholders holding our ordinary shares for
the following five years.
Grants under the Law for the Encouragement of Industrial Research and
Development, 1984
Under the Law for the Encouragement of Industrial Research and
Development, 1984, research and development programs which meet certain criteria
and are approved by the Research Committee, a governmental committee of the
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Office of the Chief Scientist are eligible for grants of up to 50% of the
project's expenditure, as determined by the Research Committee, in return for
the payment of royalties from the sale of the product developed in accordance
with the program. Regulations promulgated under the Research Law generally
provide for the payment of royalties to the Chief Scientist ranging from 3% to
5% or in some cases, such as ours, ranging from 4% to 6%, on revenues from
products developed using such grants until 100-150% of the dollar-linked grant
is repaid. Following the full repayment of the grant, there is no further
liability for payment. See "Item 5--Operating and Financial Review and
Prospects" and Note 18 to the Consolidated Financial Statements.
The terms of the Israeli government participation also require that
the manufacture of products developed with government grants be performed in
Israel. However, under the regulations promulgated under the Research Law, in
the event that any of the manufacturing is performed outside Israel by any
entity other than us, if approval is received from the Office of the Chief
Scientist for such foreign manufacturing and the identity of the foreign
manufacturers, we may be required to pay increased royalties. If the
manufacturing volume that is performed outside of Israel is less than 50%, the
total amount to be repaid to the Office of the Chief Scientist may be adjusted
to 120% of the grant. If the manufacturing volume that is performed outside of
Israel is between 50% and 90% the total amount may be adjusted to 150% of the
grant and if it is more than 90%, the total amount may be adjusted to 300% of
the grant. Since our manufacturing activities are performed by subcontractors
outside of Israel, the consent of the Office of the Chief Scientist is required
for these activities and additional consents will be required in connection with
the manufacturing of products developed in the future with Office of the Chief
Scientist grants. The letters of approval under which we received the grants do
not specifically refer to our manufacturing activities outside of Israel
however, we believe that the Office of the Chief Scientist has adequately
expressed its consent to such activities. There can be no assurance that the
consents granted to date by the Office of the Chief Scientist will be deemed to
be adequate under applicable laws and regulations or that such consents will not
be reversed or modified in any way or that we will obtain consents for such
activities at all from the Office of the Chief Scientist in the future. Failure
to comply with the requirements for consents for manufacturing outside of Israel
could result in penalties, cancellation of grants and denial of any future
applications for grants or for these consents. If the consents obtained from the
Office of the Chief Scientist to manufacture our products outside of Israel are
terminated or if we are unable to obtain similar consents in the future, our
business could be harmed. The technology developed pursuant to the terms of
these grants may not be transferred outside of Israel and may be transferred in
Israel only subject to the prior approval of the Research Committee. Such
approval is not required for the export of any products resulting from such
research or development. Approval of the transfer of technology in Israel may be
granted only if the recipient abides by all the provisions of the Research Law
and regulations promulgated thereunder, including the restrictions on the
transfer of know-how and production and the obligation to pay royalties in an
amount that may be increased. There can be no assurance that such consent, if
requested, will be granted. See "Item 5--Operating and Financial Review and
Prospects--Government Grants."
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Effective for grants received from the Office of the Chief Scientist
under programs approved after January 1, 1999, the outstanding balance of such
grants will be subject to interest equal to the 12 months' LIBOR rate applicable
to dollar deposits, that is published on the first business day of each calendar
year.
As governmental incentives, the funds generally available for grants
from the Office of the Chief Scientist may be reduced in the future and there is
no assurance that the government will not abolish such grants in the future.
Even if these grants are maintained, there is no assurance we will receive
Office of the Chief Scientist grants in the future. In addition, each
application to the Office of the Chief Scientist is reviewed separately, and
grants are based on the program approved by the Research Committee. Generally,
expenditures supported under other incentive programs of the State of Israel are
not eligible for grants from the Office of the Chief Scientist. There is no
assurance that applications to the Office of the Chief Scientist will be
approved and, until approved, the amounts of any such grants is not
determinable.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction in
the year incurred for expenditures (including capital expenditures) in
scientific research and development projects, if the expenditures are approved
by the relevant Israeli government Ministry (determined by the field of
research) and the research and development is for the promotion of the
enterprise and is carried out by or on behalf of the company seeking such
deduction. Expenditures not so approved are deductible over a three-year period.
However, expenditures made out of proceeds made available to us through
government grants are not deductible, according to Israeli law.
Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969
According to the Law for the Encouragement of Industry (Taxes), 1969,
or the "Industry Encouragement Law," an "Industrial Company" is a company
resident in Israel, at least 90% of the income of which, in any tax year,
determined in Israeli currency (exclusive of income from certain government
loans, capital gains, interest and dividends), is derived from an "Industrial
Enterprise" owned by it. An "Industrial Enterprise" is defined as an enterprise
whose major activity in a given tax year is industrial production activity. We
believe that we currently qualify as an "Industrial Company" within the
definition of the Industry Encouragement Law.
Under the Industry Encouragement Law, Industrial Companies are
entitled to the following preferred corporate tax benefits:
(a) deduction of purchases of know-how and patents over an eight-year
period for tax purposes;
(b) right to elect under certain conditions to file a consolidated
tax return with additional related Israeli Industrial Companies; and
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(c) accelerated depreciation rates on equipment and buildings.
Eligibility for the benefits under the Industry Encouragement Law is
not subject to receipt of prior approval from any governmental authority. No
assurance can be given that we will continue to qualify as an "Industrial
Company" or that the benefits described above will be available in the future.
Special Provisions Relating to Taxation Under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, generally
referred to as the "Inflationary Adjustments Law," represents an attempt to
overcome the problems presented to a traditional tax system by an economy
undergoing rapid inflation. The Inflationary Adjustments Law is highly complex.
Its features which are material to us can be described as follows:
(a) There is a special tax adjustment for the preservation of equity
whereby certain corporate assets are classified broadly into fixed (inflation
resistant) assets and non-fixed (soft) assets. Where a company's equity, as
defined in such law, exceeds the depreciated cost of fixed assets, a deduction
from taxable income that takes into account the effect of the applicable annual
rate of inflation on such excess is allowed (up to a ceiling of 70% of taxable
income in any single tax year, with the unused portion permitted to be carried
forward on a linked basis). If the depreciated cost of fixed assets exceeds a
company's equity, then such excess multiplied by the applicable annual rate of
inflation is added to taxable income.
(b) Subject to certain limitations, depreciation deductions on fixed
assets and losses carried forward are adjusted for inflation based on the
increase in the consumer price index.
(c) Gains on certain traded securities, which are normally exempt
from tax, are taxable in certain circumstances. However, dealers in securities
are subject to the regular tax rules applicable to business income in Israel.
Capital Gains Tax on Sales of Our Ordinary Shares
Under current Israeli law, capital gains received by individual
shareholders (which are not subject to the provisions of the Inflationary
Adjustments Law) upon the sale of our ordinary shares are subject to a 15% tax
rate on any capital gain accrued from January 1, 2003. Notwithstanding the
foregoing, dealers in securities in Israel are taxed at regular tax rates
applicable to business income. Under the New Law, foreign residents will
continue to be exempt from capital gains tax on sale of traded securities of
Israeli companies.
Pursuant to the convention between the Governments of the United
States and Israel with respect to taxes on income, or the U.S.-Israel tax
treaty, the sale, exchange or disposition of our ordinary shares by a person who
qualifies as a resident of the United States under the treaty and who is
70
entitled to claim the benefits afforded to him by the treaty, will generally not
be subject to Israeli capital gains tax. This exemption shall not apply to a
person who held, directly or indirectly, shares representing 10% or more of the
voting power in our company during any part of the 12-month period preceding the
sale, exchange or disposition, subject to certain conditions. A sale, exchange
or disposition of our shares by a U.S. resident qualified under the treaty, who
held, directly or indirectly, shares representing 10% or more of the voting
power in our company at any time during the preceding 12-month period would be
subject to Israeli tax, to the extent applicable; however, under the treaty,
this U.S. resident would be permitted to claim a credit for these taxes against
the U.S. income tax with respect to the sale, exchange or disposition, subject
to the limitations in U.S. laws applicable to foreign tax credits.
Non-residents of Israel are subject to income tax on income accrued
or derived from sources in Israel. These sources of income include passive
income like dividends, royalties and interest, as well as non-passive income
from services rendered in Israel. On distributions of dividends other than bonus
shares (stock dividends) we should generally withhold at source income tax at a
rate of 25%, unless a different rate applies under a treaty between Israel and
the shareholder's country of residence. Under the U.S.-Israel tax treaty, the
maximum tax on dividends paid to a holder of our ordinary shares who is a
resident of the United States will be 25% or 12.5% if the holder is a company
which holds, directly or indirectly, shares representing 10% or more of the
voting power in our company during any part of the 12-month period preceding the
date of payment of the dividend. However, under the Law for the Encouragement of
Capital Investments, 1959 (the Investments Law), dividends generated by an
approved enterprise are taxed at the rate of 15%.
Foreign Exchange Regulations
Dividends (if any) paid to the holders of our ordinary shares and any
amounts payable upon our dissolution, liquidation or winding up, as well as the
proceeds of any sale in Israel of the ordinary shares to an Israeli resident,
may be paid in non-Israeli currency or, if paid in Israeli currency, may be
converted into freely dollars at the rate of exchange prevailing at the time of
conversion. Because exchange rates between the NIS and the dollar fluctuate
continuously, a U.S. shareholder will be subject to the risk of currency
fluctuations between the date when we declare NIS-denominated dividends and the
date when we pay them in NIS.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Subject to the limitations described in the next paragraph, the
following discussion describes the material United States federal income tax
consequences to a holder of our ordinary shares, referred to for purposes of
this discussion as a "U.S. Holder", that is:
o a citizen or resident of the United States,
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o a corporation created or organized in the United States or under the
laws of the United States or of any state,
o an estate, the income of which is includible in gross income for
United States federal income tax purposes regardless of its source, or
o 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 U.S. persons have the authority to control all substantial
decisions of the trust.
o In addition, certain material aspects of United States federal income
tax relevant to a holder other than a U.S. Holder, referred to as a
"Non-U.S. Holder," are discussed below.
This summary is for general information purposes only. It does not
purport to be a comprehensive description of all of the tax considerations that
may be relevant to each person's decision to purchase ordinary shares.
This discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, current and proposed Treasury regulations
promulgated thereunder, and administrative and judicial decisions as of the date
hereof, all of which are subject to change, possibly on a retroactive basis.
This discussion does not address all aspects of United States federal income
taxation that may be relevant to any particular shareholder based on such
shareholder's individual circumstances. In particular, this discussion considers
only U.S. Holders that will own ordinary shares as capital assets and does not
address the potential application of the alternative minimum tax or United
States federal income tax consequences to U.S. Holders that are subject to
special treatment, including U.S. Holders, that:
o are broker-dealers or insurance companies;
o have elected mark-to-marketing accounting;
o are tax-exempt organizations;
o financial institutions or "financial services entities";
o hold ordinary shares as part of a straddle, "hedge" or "conversion
transaction" with other investments;
o own directly, indirectly or by attribution at least 10% of our voting
power;
o have a functional currency that is not the U.S. Dollar.
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In addition, this discussion does not address any aspect of state,
local or non-United States tax laws.
Additionally, the discussion does not consider the tax treatment of
persons who hold ordinary shares through a partnership or other pass-through
entity or the possible application of United States federal gift or estate tax.
Material aspects of United States federal income tax relevant to a holder other
than a U.S. Holder are also discussed below.
EACH HOLDER OF ORDINARY SHARES IS ADVISED TO CONSULT SUCH PERSON'S
OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PERSON OF
PURCHASING, HOLDING OR DISPOSING OF OUR ORDINARY SHARES.
TAXATION OF ORDINARY SHARES
Taxation of Dividends Paid on Ordinary Shares
A U.S. Holder will be required to include in gross income as ordinary
income the amount of any distribution paid on ordinary shares, including any
Israeli taxes withheld from the amount paid, on the date the distribution is
received to the extent the distribution is paid out of our current or
accumulated earnings and profits as determined for United States federal income
tax purposes. Distributions in excess of such earnings and profits will be
applied against and will reduce the U.S. Holder's basis in the ordinary shares
and, to the extent in excess of such basis, will be treated as gain from the
sale or exchange of ordinary shares.
U.S. Holders will have the option of claiming the amount of any
Israeli income taxes withheld at source either as a deduction from gross income
or as a dollar-for-dollar credit against their United States federal income tax
liability. Individuals who do not claim itemized deductions, but instead utilize
the standard deduction, may not claim a deduction for the amount of the Israeli
income taxes withheld, but such amount may be claimed as a credit against the
individual's United States federal income tax liability. The amount of foreign
income taxes which may be claimed as a credit in any year is subject to complex
limitations and restrictions, which must be determined on an individual basis by
each shareholder. The limitations set out in the Code include, among others,
rules which limit foreign tax credits allowable with respect to specific classes
of income to the United States federal income taxes otherwise payable with
respect to each such class of income. Distributions of current or accumulated
earnings and profits will be foreign source passive income for United States
foreign tax credit purposes and will not qualify for the dividends received
deduction available to corporations. The total amount of allowable foreign tax
credits in any year cannot exceed regular U.S. tax liability for the year
attributable to foreign source taxable income. A U.S. Holder will be denied a
foreign tax credit with respect to Israeli income tax withheld from dividends
received on the ordinary shares to the extent such U.S. Holder has not held the
ordinary shares for at least 16 days of the 30-day period beginning on the date
which is 15 days before the ex-dividend date or to the extent such U.S. Holder
73
is under an obligation to make related payments with respect to substantially
similar or related property. Any days during which a U.S. Holder has
substantially diminished its risk of loss on the ordinary shares are not counted
toward meeting the 16-day holding period required by the statute.
Taxation of the Disposition of Ordinary Shares
Upon the sale, exchange or other disposition of ordinary shares, a
U.S. Holder will recognize capital gain or loss in an amount equal to the
difference between such U.S. Holder's basis in the ordinary shares, which is
usually the cost of such shares, and the amount realized on the disposition.
Capital gain from the sale, exchange or other disposition of ordinary shares
held more than one year is long-term capital gain, and is eligible for a maximum
20% rate of taxation for individuals. Gains and losses recognized by a U.S.
Holder on a sale, exchange or other disposition of ordinary shares will be
treated as United States source income or loss for United States foreign tax
credit purposes. The deductibility of a capital loss recognized on the sale,
exchange or other disposition of ordinary shares is subject to limitations.
Tax Consequences if We Are a Passive Foreign Investment Company
We will be a passive foreign investment company, or PFIC, if 75% or
more of our gross income in a taxable year, including the pro rata share of the
gross income of any company, U.S. or foreign, in which we are considered to own
25% or more of the shares by value, is passive income. Alternatively, we will be
considered to be a PFIC if at least 50% of our assets in a taxable year,
averaged over the year and ordinarily determined based on fair market value and
including the pro rata share of the assets of any company in which we are
considered to own 25% or more of the shares by value, are held for the
production of, or produce, passive income. Passive income includes amounts
derived by reason of the temporary investment of funds raised in our public
offerings. If we were a PFIC, and a U.S. Holder did not make an election to
treat us as a "qualified electing fund" (as described below):
o Excess distributions by us to a U.S. Holder would be taxed in a
special way. "Excess distributions" are amounts received by a U.S.
Holder with respect to our stock in any taxable year that exceed 125%
of the average distributions received by such U.S. Holder from us in
the shorter of either the three previous years or such U.S. Holder's
holding period for ordinary shares before the present taxable year.
Excess distributions must be allocated ratably to each day that a U.S.
Holder has held our stock. A U.S. Holder must include amounts
allocated to the current taxable year in its gross income as ordinary
income for that year. A U.S. Holder must pay tax on amounts allocated
to each prior taxable year at the highest rate in effect for that year
on ordinary income and the tax is subject to an interest charge at the
rate applicable to deficiencies for income tax.
74
o The entire amount of gain that was realized by a U.S. Holder upon the
sale or other disposition of ordinary shares will also be rated as an
excess distribution and will be subject to tax as described above.
o A U.S. Holder's tax basis in shares of our stock that were acquired
from a decedent would not receive a step-up to fair market value as of
the date of the decedent's death but would instead be equal to the
decedent's basis, if lower.
The special PFIC rules described above will not apply to a U.S.
Holder if the U.S. Holder makes an election to treat us as a "qualified electing
fund" in the first taxable year in which the U.S. Holder owns ordinary shares
and if we comply with certain reporting requirements. Instead, a shareholder of
a qualified electing fund is required for each taxable year to include in income
a pro rata share of the ordinary earnings of the qualified electing fund as
ordinary income and a pro rata share of the net capital gain of the qualified
electing fund as long-term capital gain, subject to a separate election to defer
payment of taxes, which deferral is subject to an interest charge. We have
agreed to supply U.S. Holders with the information needed to report income and
gain pursuant to a QEF election in the event we are classified as PFIC. The QEF
election is made on a shareholder-by-shareholder basis and can be revoked only
with the consent of the Internal Revenue Service, or IRS. A shareholder makes a
QEF election by attaching a completed IRS Form 8621, including the PFIC annual
information statement, to a timely filed United States federal income tax return
and by filing such form with the IRS Service Center in Philadelphia,
Pennsylvania. Even if a QEF election is not made, a shareholder in a PFIC who is
a U.S. person must file a completed IRS Form 8621 every year.
A U.S. Holder of PFIC stock which is publicly traded could elect to
mark the stock to market annually, recognizing as ordinary income or loss each
year an amount equal to the difference as of the close of the taxable year
between the holder's fair market value of the PFIC stock and the adjusted basis
in the PFIC stock. Losses would be allowed only to the extent of net
mark-to-market gain previously included by the U.S. Holder under the election
for prior taxable years. If the mark-to-market election were made, then the
rules set forth above would not apply for periods covered by the election.
We believe that we were not a PFIC in fiscal 2001. However, the tests
for determining PFIC status are applied annually and it is difficult to make
accurate predictions of future income and assets, which are relevant to this
determination. Accordingly, there can be no assurance that we will not become a
PFIC. If we determine that we have become a PFIC, we will notify our U.S.
Holders and provide them with the information necessary to comply with the QEF
rules. U.S. Holders who hold ordinary shares during a period when we are a PFIC
will be subject to the foregoing rules, even if we cease to be a PFIC, subject
to certain exceptions for U.S. Holders who made a QEF election. U.S. Holders are
urged to consult their tax advisors about the PFIC rules, including the
consequences to them of making a mark-to-market or QEF election with respect to
our ordinary shares in the event that we qualify as a PFIC.
75
Tax Consequences for Non-U.S. Holders of Ordinary Shares
Except as described in "Information Reporting and Back-up
Withholding" below, a Non-U.S. Holder of ordinary shares will not be subject to
U.S. federal income or withholding tax on the payment of dividends on, and the
proceeds from the disposition of, ordinary shares, unless:
o such item is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the United States and, in the case of
a resident of a country which has a treaty with the United States,
such item is attributable to a permanent establishment or, in the case
of an individual, a fixed place of business, in the United States;
o the Non-U.S. Holder is an individual who holds the ordinary shares as
a capital asset and is present in the United States for 183 days or
more in the taxable year of the disposition and does not qualify for
an exemption; or
o the Non-U.S. Holder is subject to tax pursuant to the provisions of
United States tax law applicable to U.S. expatriates.
Information Reporting and Back-up Withholding
U.S. Holders generally are subject to information reporting
requirements with respect to dividends paid in the United States on ordinary
shares. U.S. Holders are also generally subject to back-up withholding on
dividends paid in the United States on ordinary shares unless the U.S. Holder
provides IRS Form W-9 or otherwise establishes an exemption. U.S. Holders are
subject to information reporting and back-up withholding at a rate of 31% on
proceeds paid from the disposition of ordinary shares unless the U.S. Holder
provides IRS Form W-9 or otherwise establishes an exemption.
Non-U.S. Holders generally are not subject to information reporting
or back-up withholding with respect to dividends paid on, or upon the
disposition of, ordinary shares, provided that such non-U.S. Holder provides a
taxpayer identification number, certifies to its foreign status, or otherwise
establishes an exemption.
The amount of any back-up withholding will be allowed as a credit
against a U.S. or Non-U.S. Holder's United States federal income tax liability
and may entitle such holder to a refund, provided that certain required
information is furnished to the IRS.
E. DIVIDENDS AND PAYING AGENTS
Not applicable.
76
F. STATEMENTS BY EXPERTS.
Not applicable.
G. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, applicable to foreign private issuers and
fulfill the obligation with respect to such requirements by filing reports with
the Securities and Exchange Commission. You may read and copy any document we
file with the Securities and Exchange Commission without charge at the
Securities and Exchange Commission's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such material may be obtained by mail
from the Public Reference Branch of the Securities and Exchange Commission at
such address, at prescribed rates. Please call the Securities and Exchange
Commission at l-800-SEC-0330 for further information on the public reference
room.
As a foreign private issuer, we are exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders are exempt from the reporting and
"short-swing" profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file periodic
reports and financial statements with the Securities and Exchange Commission as
frequently or as promptly as United States companies whose securities are
registered under the Exchange Act. A copy of each report submitted in accordance
with applicable United States law is available for public review at our
principal executive offices.
H. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
All of our sales are made in U.S. Dollars. In addition, a substantial
portion of our costs is incurred in dollars. Since the dollar is the primary
currency of the economic environment in which we operate, the dollar is our
functional currency and, accordingly, monetary accounts maintained in currencies
other than the dollar (principally cash and cash equivalents, short-term
deposits and liabilities) are remeasured using the foreign exchange rate at the
balance sheet date. Operational accounts and non-monetary balance sheet accounts
are measured and recorded at the rate in effect at the date of the transaction.
The effect of foreign currency remeasurement is reported in current operations.
77
The dollar cost of our operations is influenced by the extent to
which inflation in Israel is or is not offset, or is offset on a lagging basis,
by the devaluation of the NIS in relation to the dollar. When the rate of
inflation in Israel exceeds the rate of devaluation of the NIS against the
dollar, companies experience increases in the dollar cost of their operations in
Israel. Unless offset by a devaluation of the NIS, inflation in Israel will have
a negative effect on our profitability, as we receive payment in dollars or
dollar-linked NIS for all of our sales, while we incur a portion of our expenses
in NIS.
The following table presents information about the rate of inflation
in Israel, the rate of devaluation of the NIS against the dollar, and the rate
of inflation in Israel adjusted for the devaluation:
ISRAELI INFLATION
YEAR ENDED ISRAELI INFLATION NIS DEVALUATION ADJUSTED FOR
DECEMBER 31, RATE % RATE % DEVALUATION %
------------ ------------------ ----------------- -----------------
1997 7.0 8.8 (1.7)
1998 8.6 17.6 (7.7)
1999 1.3 (0.1) 1.3
2000 0.0 (2.7) 2.7
2001 1.4 9.3 (7.2)
2002 6.5 7.3 (0.8)
A devaluation of the NIS in relation to the dollar has the effect of
reducing the dollar amount of any of our expenses or liabilities payable in NIS,
unless those expenses or payables are linked to the dollar. This devaluation
also has the effect of decreasing the dollar value of any asset which consists
of NIS or receivables payable in NIS, unless the receivables are linked to the
dollar. Conversely, any increase in the value of the NIS in relation to the
dollar has the effect of increasing the dollar value of any unlinked NIS assets
and the dollar amounts of any unlinked NIS liabilities and expenses.
Because exchange rates between the NIS and the dollar fluctuate
continuously, with a historically declining trend in the value of the NIS,
exchange rate fluctuations, particularly larger periodic devaluations, will have
an impact on our profitability and period-to-period comparisons of our results.
We entered into currency future contracts and put and call options
contracts to reduce our exposure to fluctuations of specific currencies against
the dollar, resulting primarily from firm commitments in such currencies.
As at December 31, 2002, the Company has an obligation to sell $151,000 for
a total amount of (pound)108 thousand (recorded as a hedge) in two
increments in April and May 2003.
The fair value of this off-balance sheet instrument amounted to a net asset
of $22,000 as of December 31, 2002.
78
Subsequent to the balance sheet date, we entered into certain put option
for selling $ 2.4 million for NIS 11.5 million (short option). The option
expires after various periods ending February 2004.
INTEREST RATE RISK
We are exposed to interest rate volatility primarily relating to
interest rate changes applicable to our withdrawals under our credit lines. Our
credit lines bear interest at rates which vary with changes in LIBOR. We do not
speculate on the future direction of interest rates. As of December 31, 2002,
$15.1 million of our debt bore interest at variable rates.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
79
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) Within 90 days prior to the filing date of this Annual Report on
Form 20-F, we have carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, the chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective in assuring that all material information
relating to our company is made known to them.
(b) There have been no significant changes in our internal controls
or in other factors, which could significantly affect the internal controls
subsequent to the date of their evaluation in connection with the preparation of
this Annual Report on Form 20-F.
ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT
Not applicable.
ITEM 16B CODE OF ETHICS
Not applicable.
PART III
ITEM 17 FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this item.
ITEM 18 FINANCIAL STATEMENTS
The Financial Statements required by this item are found at the end
of this Annual Report, beginning on page F-1.
80
ITEM 19 EXHIBITS
The exhibits filed with or incorporated into this annual report are
listed on the index of exhibits below.
Exhibit No. Description
1.1* Memorandum of Association of Registrant
1.2* Form of Articles of Association
3.1+ Voting Agreement, dated July 19, 2000, between Clal
Industries and Investment Ltd., Clal Industries and
Technologies (1997) Ltd., Koonras Technologies Ltd., Polar
Communication Ltd., Elisra Electronic Systems Ltd. and Yaron
Sheiman.
4.1+ Management Services Agreement, dated March 29, 2001, between
the Registrant and Elisra Electronic System Ltd. (an English
summary accompanied by Hebrew original)
4.2** Management Services Agreement, dated March 18, 2002, between
the Registrant and Elisra Electronic System Ltd. (an English
summary accompanied by Hebrew original)
4.3 Management Services Agreement, dated April 6, 2003, between
the Registrant and Elisra Electronic System Ltd. (an English
summary accompanied by Hebrew original)
4.4+ Share Purchase Agreement, dated June 25, 2000, between the
Registrant and Elisra Electronic Systems Ltd.
4.5+ Warrant, dated June 25, 2000, issued by the Registrant to
Elisra Electronic Systems Ltd.
4.6+ Lease agreement, dated September 14, 1999, as amended,
between BVR Technologies Ltd. and Minrav Holdings Ltd. (an
English summary accompanied by Hebrew original)
4.7+ Lease agreement, dated August 29, 1999, between the
Registrant and Electra Real Estate Ltd.(an English summary
accompanied by Hebrew original)
8+ Subsidiaries of the Registrant
10.1 Consent of Somekh Chaikin, a member of KPMG International
10.2 Certification pursuant to 18 U.S.C.ss. 1350
10.3 Certification pursuant to 18 U.S.C.ss. 1250
- -----------------
* Incorporated by reference to the Registration Statement on Form 20-F
(Commission File No. 0-29884).
81
** Incorporated by reference to the annual report on Form 20-F for the year
ended December 31, 2001.
+ Incorporated by reference to the annual report on Form 20-F for the year ended
December 31, 2000.
82
SIGNATURE
---------
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.
B.V.R. SYSTEMS (1998) LTD.
By: /s/ Yoel Katzir
-----------------------------------------
Name: Yoel Katzir
Title: President and Chief Executive
Officer
By: /s/ Reuven Shahar
-----------------------------------------
Name: Reuven Shahar
Title: Chief Financial Officer
Date: May 13, 2003
83
CERTIFICATIONS
--------------
I, Yoel Katzir, certify that:
1. I have reviewed this annual report on Form 20-F of B.V.R. Systems (1998) Ltd;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
84
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Yoel Katzir
-------------------------------------
President and Chief Executive Officer
CERTIFICATIONS
--------------
I, Reuven Shahar, certify that:
1. I have reviewed this annual report on Form 20-F of B.V.R. Systems (1998) Ltd;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
d. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
e. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
f. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
85
c. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
d. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Reuven Shahar
----------------------------------------------
Chief Financial Officer and Vice President,
Finance
86
B.V.R. Systems (1998) Ltd.
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
CONTENTS
PAGE
Report of Independent Auditors F- 2
Consolidated Balance Sheets as of December 31, 2002 and 2001 F- 3
Consolidated Financial Statements as of December 31, 2002
and 2001 F- 4
Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000 F- 5
Statements of Changes in Shareholders' Equity for the years
ended December 31, 2002, 2001 and 2000 F- 6
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 F- 7
Notes to Consolidated Financial Statements F- 9 - F- 53
F-1
INDEPENDENT AUDITORS' REPORT TO THE
SHAREHOLDERS OF B.V.R. SYSTEMS (1998) LTD.
We have audited the accompanying consolidated balance sheets of B.V.R. Systems
(1998) Ltd. (the Company) and its subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of operation, changes in shareholders'
equity and cash flows for each of the years in the three years ended December
31, 2002. These consolidated financial statements are the responsibility of the
Company's Board of Directors and of its Management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and by Management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the 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, 2002 and 2001 and the
consolidated results of their operations, changes in shareholders' equity and
cash flows for each of the years in the three years ended December 31, 2002, in
conformity with accounting principles generally accepted (GAAP) in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Application of accounting principles generally accepted in the United
States of America would have affected results of operations for each of the
years in the three years ended December 31, 2002 and shareholders' equity as of
December 31, 2002 and 2001 to the extent summarized in Note 22 to the
consolidated financial statements.
/s/ Somekh Chaikin
Certified Public Accountants (Isr.)
A member of KPMG International
March 26, 2003
F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------------
2002 2001
------------- -------------
NOTE US$ THOUSANDS US$ THOUSANDS
---- ------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents 3 860 1,390
Restricted bank deposits 4 4,266 4,253
Trade receivables 5 15,700 20,149
Work in progress 6 328 * 19
Other receivables and prepaid expenses 7 827 * 1,062
Inventories 8 1,817 1,376
----------- ----------
Total current assets 23,798 28,249
----------- ----------
INVESTMENTS, LOANS AND LONG-TERM RECEIVABLES 9 584 1,260
FIXED ASSETS 10
Cost 9,380 8,807
Less - accumulated depreciation 7,724 6,864
----------- ----------
Fixed assets, net 1,656 1,943
----------- ----------
TOTAL ASSETS 26,038 31,452
=========== ==========
* Reclassified
/s/ Yuval Yanai
- ------------------------------------
Yuval Yanai
Chairman of the Board of Directors
/s/ Yoel Katzir
- -------------------------------------
Yoel Katzir
President and Chief Executive Officer
Date of approval of the financial statements: March 26, 2003
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
B.V.R. Systems (1998) Ltd.
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001
NOTE US$ THOUSANDS US$ THOUSANDS
---- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank credit 11 15,083 12,002
Trade payables 12 8,461 8,513
Excess of advances from customers over amounts
recognized as revenue 13 1,290 * 3,897
Other payables and accrued expenses 14 4,325 * 4,294
--------- ---------
Total current liabilities 29,159 28,706
--------- ---------
LONG-TERM LIABILITIES
Liability for employee severance benefits, net 15 509 584
--------- ---------
COMMITMENTS AND CONTINGENCIES 17
SHAREHOLDERS' EQUITY (DEFICIT) 16
Share capital 2,529 2,529
Additional paid-in capital 21,408 21,408
Accumulated deficit (27,567) (21,775)
--------- ---------
(3,630) 2,162
--------- ---------
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 26,038 31,452
========= =========
* Reclassified.
F-4
B.V.R. Systems (1998) Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------- ------- -------
NOTE US$THOUSANDS
---- -----------------------------------------------------
Income from sales 20A 26,295 42,550 23,308
Income from royalties and commissions 20B 4 1,451 2,061
-------- --------- --------
28,290 44,001 25,369
Cost of sales 20C 23,715 35,845 25,971
-------- --------- --------
Gross profit (loss) 4,575 8,156 (602)
-------- --------- --------
Operating expenses:
Research and development 1,554 1,081 2,870
Selling and marketing 2,363 1,915 2,194
General and administrative 4,577 5,029 4,676
-------- --------- --------
Operating profit (loss) (3,919) 131 (10,342)
Financing expenses 20D (1,036) (1,443) (1,724)
Financing income 20D 181 701 787
Other expenses, net 20E (140) (319) (31)
-------- --------- --------
Loss before income taxes (4,914) (930) (11,310)
Income tax expense 18 (878) - (1,974)
-------- --------- --------
Loss after income taxes (5,792) (930) (13,284)
-------- --------- --------
Net loss for the year (5,792) (930) (13,284)
Loss per share: ======== ========= ========
Basic and diluted loss per share
(in US $) (0.54) (0.09) (1.32)
Loss per share: ======== ========= ========
Weighted average number of ordinary shares outstanding
(in thousands) used in basic and diluted loss per share
calculation 10,660 10,705 10,062
Loss per share: ======== ========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
B.V.R. Systems (1998) Ltd.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF RETAINED TOTAL
ORDINARY SHARES EARNINGS SHAREHOLDERS'
(NIS 1 ADDITIONAL (ACCUMULATED EQUITY
PAR VALUE) SHARE CAPITAL PAID-IN CAPITAL DEFICIT) (DEFICIT)
---------- ------------- --------------- ------------- ------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
------------- ------------- ------------- -------------
BALANCE AS AT
JANUARY 1, 2000 9,636,365 2,275 16,667 (7,561) 11,381
CHANGES DURING 2000
Issuance of ordinary -
shares 1,000,000 248 (1) 4,701 4,949
Exercise of stock options 23,336 6 40 - 46
----------- ---------- ---------- ---------- ----------
Net loss for the year - - - (13,284) (13,284)
BALANCE AS AT
DECEMBER 31, 2000 10,659,701 2,529 21,408 (20,845) 3,092
CHANGES DURING 2001
Net loss for the year - - - (930) (930)
----------- ---------- ---------- ---------- ----------
BALANCE AS AT
DECEMBER 31, 2001 10,659,701 2,529 21,408 (21,775) 2,162
CHANGES DURING 2002
Issuance of ordinary
shares 1,173 (2) - - - -
Net loss for the year - - - (5,792) (5,792)
----------- ---------- ---------- ---------- ----------
BALANCE AS AT
DECEMBER 31, 2002 10,660,874 2,529 21,408 (27,567) (3,630)
=========== ========== =========== =========== ===========
(1) Net of issuance expenses of US$ 50 thousand.
(2) Represents an amount less than US$ 1 thousand.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
B.V.R. Systems (1998) Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
-----------------------------------------------------------
2002 2001 2000
------------ ------------ ------------
US$ THOUSANDS
-----------------------------------------------------------
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss for the year (5,792) (930) (13,284)
Adjustments to reconcile net income to net cash used in
operating activities (A) 2,728 (11,032) 10,949
------------ ------------ ------------
Net cash used in operating activities (3,064) (11,962) (2,335)
------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of fixed assets (535) (324) (689)
Proceeds from sale of fixed assets 3 - 74
Increase in long-term deposits (8) - (30)
Withdrawal of long-term deposits - 47 24
Decrease (increase) in restricted bank deposits (13) 3,324 (2,333)
Changes in loans to employees 6 (9) 2
------------ ------------ ------------
Net cash provided by (used in) investing activities (547) 3,038 (2,952)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term loan from B.V.R. Technologies Ltd., net - (642) (2,168)
Short-term bank credit, net 3,081 (1,269) 6,897
Proceeds from issuance of shares (net of
issuance expenses) - - 4,949
Proceeds from exercise of share options - - 46
------------ ------------ ------------
Net cash (used in) provided by financing activities 3,081 (1,911) 9,724
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (530) (10,835) 4,437
Cash and cash equivalents at the beginning of the year 1,390 12,225 7,788
------------ ------------ ------------
Cash and cash equivalents at the end of the year 860 1,390 12,225
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
B.V.R. Systems (1998) Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
2002 2001 2000
------------ ------------ ------------
US$ THOUSANDS
--------------------------------------------------------
A. ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH USED IN OPERATING ACTIVITIES
Income and expenses not involving cash flows:
Write down of investment in non-traded securities - - 50
Loss (gain) on sale of fixed assets (1) 2 (19)
Erosion of long-term deposits 28 - -
Depreciation and amortization 882 903 906
Increase (decrease) in liability for employee
severance benefits, net (75) 137 (54)
Write down of investment in marketable securities 141 317 -
Deferred income taxes, net 318 (318) 1,063
--------- -------- --------
1,293 1,041 1,946
--------- -------- --------
Changes in operating asset and liability items:
Decrease (increase) in trade receivables 4,449 (4,515) (8,966)
Decrease (increase) in other receivables and
prepaid expenses (160) (135) 598
Decrease (increase) in work in progress (309) 7 9,011
Decrease in excess of advances from customers
over amount recognized as revenue (2,607) (7,590) -
Decrease (increase) in inventory (441) (454) 2,577
Increase (decrease) in trade payables (114) 1,397 (7,936)
Increase (decrease) in other payables and accrued
expenses 97 (1,141) 13,623
Decrease in non-current receivables 520 358 96
--------- -------- --------
1,435 (12,073) 9,003
--------- -------- --------
2,728 (11,032) 10,949
========= ======== ========
B. NON-CASH OPERATIONS
Purchases of fixed assets on credit 62 - -
========= ======== ========
F-8
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL
A. B.V.R. Technologies Limited ("B.V.R."), an Israeli company formed in
1986, has been engaged in the development, manufacture and marketing
of advanced training and computer-based simulation systems for
military applications, and through its subsidiaries, of commercial
applications in the fields of telecommunication and entertainment
based on virtual reality. On October 23, 1998, B.V.R. executed a Plan
of Arrangement (the "Plan" or "the spin off plan") under Sections 233
and 234 of the Israeli Companies Ordinance, pursuant to which B.V.R.
was divided into two separate companies: (i) B.V.R. Systems (1998)
Ltd. ("The Company"), which owns and operates all of what was B.V.R.'s
defense-related business and (ii) B.V.R. itself, which owns and
operates all of its existing commercial businesses. The Company,
incorporated in Israel, was formed on January 6, 1998 to receive all
of the assets and liabilities of the defense-related business of
B.V.R., in accordance with the terms of the Plan.
The principal markets for the Company's products are mainly Europe and the
Far East. Most of the Company's customers are either government
institutions or entities controlled by governments. Approximately 86% of
the Company's revenues during 2002 were provided by three customers and
approximately 71% and 77% of the Company's revenues during 2001 and 2000
respectively, were provided by two customers (see Note 20A).
The Company's business is exposed to numerous risks including product
development, technological advancement and the introduction of these
products to the world's markets. The Companies engaged in this field are
required to invest significant resources and constantly update products.
The future success of the Company is dependent upon the technological
sophistication, price and quality of its products, and the provision of
solutions to meet customers' needs in comparison to competitors.
B. As part of the Plan, the Company issued ordinary shares to
B.V.R.'s shareholders in a manner so that each shareholder of
B.V.R. received a quantity of the Company's shares equal to the
number of B.V.R.'s shares held.
In accordance with the spin-off plan, upon the exercise of options by any
option holder of B.V.R., the option holder will be issued an equal number
of shares of the Company, and the exercise price of both such options will
be allocated between B.V.R. and the Company on a 65% - 35% basis of the
original price.
C. In 2000, Elisra Electronic Systems Ltd. ("Elisra") acquired
additional holdings through purchases from other shareholders and
an issue by the Company. By December 31, 2000, Elisra had
acquired control over the Company as a result of a voting
agreement executed with the other shareholders (see Note 16C).
F-9
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL (CON'T)
D. During 2002, the Company's income totaled only US$ 28.3 million,
and it incurred an operating loss of US$ 3.9 million, a net loss
of US$ 5.8 million and negative cash flows from operating
activities of US$ 3.1 million. In addition, as of December 31,
2002 the Company has a deficiency in its shareholders' equity and
a working capital deficit of US$ 3.6 million and US$ 5.4 million,
respectively. On the same date, the Company's cash balance was
US$ 860 thousand, short-term bank credit totaled US$ 15.1 million
and the Company's backlog of orders, which has not yet been
recognized as income in the statement of operations, was US$ 26.1
million. Subsequent to balance sheet date, the Company reached
agreements with two of its principal bank lenders according to
which the repayment date of short-term loans in the aggregate
principal amount of US$ 9.0 million, which were scheduled for
repayment through November 2003, was deferred until June 30,
2004.
The Company is confident that the rescheduling of the above mentioned loans
together with meeting forecasted cash flows from operating activities for
2003, as well as obtaining orders forecasted in the budget approved by the
Board of Directors will enable it to meet its anticipated commitments for
at least 12 months following the date of approval of these financial
statements.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles in Israel.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the reporting period. These are management's best estimates based on
experience and historical data. Actual results could differ from those
estimates.
B. FINANCIAL STATEMENTS
1. Financial statements in U.S. dollars
The majority of the Company's sales are made outside Israel in U.S.
dollars, and a substantial portion of the Company's costs are incurred in
U.S. dollars. Accordingly, the Company has determined that the U.S. dollar
is the currency of its primary economic environment and thus its functional
currency. The Company's reporting currency is also the U.S. dollar.
F-10
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
The Company's transactions and balances denominated in U.S. dollars are
presented at their original amounts. Transactions denominated in currencies
other than U.S. dollars are translated into U.S. dollars using current
exchange rates. All foreign currency transaction gains and losses are
reflected in the Statements of Operations as financial income or expenses,
as appropriate.
B. FINANCIAL STATEMENTS (CONT'D)
2. The financial statements of the Company's subsidiaries are
remeasured into the Company's functional currency in the
following manner:
NON-MONETARY BALANCE SHEET ITEMS - according to the
historical exchange rates prevailing on the date of
transaction.
MONETARY BALANCE SHEET ITEMS - according to exchange rates
prevailing at the balance sheet date.
ITEMS IN THE STATEMENTS OF INCOME - according to average
exchange rates.
Translation gains or losses are recorded in the Statements
of Operations.
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries B.V.R. Pacific Pte. Ltd. a wholly owned subsidiary,
("Pacific") and Inch Inver Invest B.V. (a holding company in the
Netherlands which held Pacific). Inter-company transactions and balances,
including profits from inter-company sales not yet realized outside the
group, have been eliminated in consolidation. During December 2002, Inch
Inver Invest B.V. transferred all its assets and liabilities to the
Company, including its shares in Pacific.
D. CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments originally
purchased with maturities of three months or less and that are readily
convertible to cash.
F-11
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
E. INVENTORIES
Inventories (raw materials and components) are stated at the lower of cost
or market value. Cost is determined as follows:
Raw materials and components - on the "first-in, first-out" method
Labor and overhead component - on the basis of direct and allocable
indirect manufacturing cost.
F. WORK IN PROGRESS AND ADVANCES FROM CUSTOMERS
Work in progress is stated at cost which includes direct identified costs
and indirect joint costs. Direct costs are charged to a project by
identification and indirect joint costs are divided between projects based
on the ratio of costs. The net balance of costs stated in the balance sheet
as part of current assets is after the deduction of those accumulated
costs, which were included in the statement of operations on the basis of
the percentage of completion (see Note 2K).
The excess of accumulated revenues included in the statement of operations
over advances from customers in respect of the completed part of the
project is classified as trade receivables.
Excess advances received from customers, after deduction of revenues
included in the statement of operation by the percentage of completion
method, are classified as current liabilities.
G. PROVISION FOR DOUBTFUL DEBTS
The financial statements include specific provisions for doubtful debts,
which, in Management's opinion, adequately reflect the loss inherent in
those debts. Management's determination of the adequacy of the provision is
based, inter alia, on an evaluation of the risk, by considering the
available information on the financial position of the debtors, the volume
of their business and an evaluation of the security received from them.
Doubtful debts which, in the opinion of management, are unlikely to be
collected, are written off, based on a Management resolution or if they
exceed a specified amount.
H. FIXED ASSETS
Fixed assets are stated at cost less accumulated depreciation. Depreciation
is calculated using the straight-line method over the estimated useful
lives of the assets.
F-12
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Annual rates of depreciation are as follows:
%
---------------------------
Computers 20 - 33.3
Motor vehicles 15
Manufacturing equipment 10 - 15
Office furniture and equipment 6 - 15
Leasehold improvements Over the term of the lease
I. PROVISION FOR WARRANTIES
The Company provides warranties on sales of systems to certain customers
for periods of up to 24 months. The provision is computed on the basis of
specific management evaluations.
J. MARKETABLE SECURITIES
Investments in marketable securities that are not designated for sale in
the short-term are carried at cost, except where market value is lower than
cost and the impairment in value is deemed to be other than temporary. An
impairment in the value of marketable securities is charged to earnings and
a new cost basis for the security is established.
K. REVENUE RECOGNITION
The Company follows the requirements defined in Israel Accounting Standard
No.4 ("the Standard"). The Standard requires that income from the execution
of long-term contract work should be recognized according to the
"percentage of completion" method. The percentage of completion is computed
based on the project's total execution costs which reflect the progress of
its completion, and which mainly include: salaries, material costs and
subcontractor charges.
Revenues ascribed to each period are the amounts of gross profits earned on
such contracts during the period plus the costs incurred during the period
(excluding cost of materials that have not yet been used and costs incurred
for subcontracted work that is still to be performed).
In accordance with the Standard, the accumulated results of project
execution work are recorded currently. The periodic report of income and
expenses from project execution work covers the full turnover, including
such turnover in respect of which an earnings forecast cannot be estimated
at the time of reporting, but from which it can be determined that the
recovery of expenses incurred is probable. In such cases, full expenses
incurred are currently charged against income at the level of such expenses
("nil net margin presentation").
F-13
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
The initial adoption of the Standard by the Company had no effect on the
Company's financial statements as at January 1, 2000.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are first determined, in the amount of the
estimated loss on the entire contract.
Royalty revenues are recorded mainly on the cash basis.
As to management's estimates and assumptions - see Note 2A above.
L. RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to the Statement of
Operations, as incurred.
M. SELLING AND MARKETING COSTS
Selling and marketing costs which can be identified clearly and
unmistakably with the individual project and with it alone are charged to
the costs of work in progress.
Costs that cannot be so identified are charged to selling and marketing
expenses in the statement of operations.
N. INCOME TAXES
Taxes on income for all periods presented have been computed on the basis
of income tax rates applicable to the Company as a separate stand-alone
entity.
The Company accounts for income taxes under the liability method of
accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities as well as losses carried forward, and are
measured using the prevailing tax rates and laws that will be in effect
when the differences are expected to be utilized. The main factors, in
respect of which deferred taxes were not calculated, are as follows:
1. Adjustments relating to the change in the purchasing power of the
shekel (which is the basis for computation of taxable income of the
Company), in respect of private motor vehicles, according to the rules
determined by the Israeli Institute of Certified Public Accountants.
2. Realization of investment in a subsidiary that management intends to
retain. Similarly, deferred taxes have not been provided for future
taxable distribution from a subsidiary, since it is group policy not
to initiate a distribution of dividend that involves additional tax
liability.
F-14
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Deferred tax assets for future tax benefits from realization are not
included where their realization is less than "more likely than not". As
such, the Company has recorded a valuation allowance in regard of all its
tax losses carried forward as well as for other temporary differences. (See
Note 18G)
O. BASIC AND DILUTED LOSS PER SHARE
Basic earnings per share are computed based on the weighted average number
of ordinary shares outstanding during each year, plus the effect of options
and warrants outstanding at year-end the exercise of which is probable.
Diluted loss per share is computed based on the
weighted average number of ordinary shares used for computing the basic
loss per share plus options and warrants which were not included in the
basic loss per share calculation and which do not have an anti-dilutive
effect.
P. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25") and related
interpretations, including the FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" and interpretation of
APB 25 issued in March 2000 (FIN No. 44) in accounting for its fixed
employee stock options plans. Under APB 25, when the exercise price of the
Company's employee stock options equals or is above the market price of the
underlying stock on the date of grant, no compensation expense is
recognized. The pro-forma information with respect to the fair value of the
options is provided in accordance with the provisions of Statement No. 123
(see Note 22). The effect of the spin-off on employee options was accounted
for in accordance with the guidelines in Emerging Issues Task Force Issue
No. 90-9.
Q. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist mainly of cash and cash equivalents, restricted bank
deposits and trade receivables.
At December 31, 2002 and 2001, the Company had cash and cash equivalents,
and restricted bank deposits which were deposited with major Israeli banks.
Management believes that the financial institutions that hold the Company's
investments are financially sound, and, accordingly, minimal credit risk
exists with respect to these investments.
Trade receivables include amounts billed to customers and various amounts
due from transactions arising in the ordinary course of business.
Management periodically evaluates the collectibility of these trade
receivables and adjusts the allowance for doubtful accounts to reflect the
amounts estimated to be doubtful of collection.
F-15
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
The Company operates on the basis of agreements it signs with its
customers. The Company manages a limited number of projects at the same
time, so that a delay in the execution of a project may have a material
effect on the financial results. Furthermore, the majority of the Company's
transactions in progress are with major customers, see Note 1A.
R. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair market value of the Company's financial instruments, which are
cash and cash equivalents, restricted bank deposits, accounts receivable,
and short and long-term debt approximate their carrying value as of
December 31, 2002 and 2001. The carrying amounts of
the Company's borrowings under its short loan agreements approximate their
fair value, since they bear interest that changes according to the LIBOR
rate.
S. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments, held for hedging, are deferred and
recognized when the hedged transactions occur.
Derivative financial instruments, not held for hedging, are stated in
the financial statements at their fair value. Changes in fair value
are recognized as they occur.
The fair value of derivative financial instruments is determined
based on their market value and, when there is no market value, then
according to a valuation model.
T. NEW ACCOUNTING STANDARDS
1. In February 2003, the Israel Accounting Standards Board published
Accounting Standard No. 15 - Decline in Value of Assets. The Standard
provides procedures which a company must apply in order to ensure that
its assets in the consolidated balance sheet, are not presented at an
amount which is in excess of their recoverable value, which is the
higher of the net selling price or the present value of the estimated
future cash flows expected to be derived from use and disposal of the
asset. In addition, the Standard provides rules for presentation and
disclosure with respect to assets whose value has declined.
The Standard applies to financial statements for periods beginning
January 1, 2003. The Standard provides that in most cases the
transition will be effected by means of the "from here on" method,
however a loss from decline in value of an asset, in the amount of the
difference between the book value on the commencement date of the
Standard and the recoverable amount as at that date, shall be charged
to the statement of operations in the category "cumulative effect as
at beginning of the year of change in accounting method" if and only
if, the said loss was not recognized in the past solely due to the
fact that the net non-discounted future cash flows were greater than
F-16
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
the book value. In the opinion of management, adoption of this
Standard is not expected to have any material effect on its financial
position and/or operating results.
2. In August 2002, the Israel Accounting Standards Board published
Standard No. 14, "Interim Financial Reporting". The standard
prescribes the minimum content of an interim financial report,
including the disclosure required in the notes, and also prescribes
the accounting recognition and measurement principles that should be
applied in an interim financial report. Standard No. 14 will become
effective for financial statements covering periods beginning on or
after January 1, 2003.
The standard does not require that comparative data for interim periods
prior to the date of effect be restated, but if the financial statements
include comparative data for interim periods prior to the date of effect,
which is not in compliance with the provisions of the standard, a
description of the principal differences between the provisions of this
standard and the principles by which the comparative data was prepared
should be included in the notes to the financial statements.
NOTE 3 - CASH AND CASH EQUIVALENTS
DECEMBER 31,
-----------------------------------------------
2002 2001
---------------------- -------------------
US$ THOUSANDS US$ THOUSANDS
---------------------- -------------------
Linked to the U.S. dollar 13 308
In New Israeli Shekels 760 988
----------------------- -------------------
Linked to other foreign currencies 87 94
----------------------- -------------------
860 1,390
======================= ===================
NOTE 4 - RESTRICTED BANK DEPOSITS
A. Cash was deposited in banks in respect of bank guarantees granted
to the Company's customers as collateral for the continued
performance of work and advances received from the customers. The
withdrawal of these deposits is based on the progress in the work
and is subject to customer approval. The Company recorded charges
on these deposits in favor of the banks that granted the
guarantees.
F-17
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 4 - RESTRICTED BANK DEPOSITS (CONT'D)
EFFECTIVE ----------------------------------------------------
INTEREST RATE AS AT DECEMBER 31,
----------------------------------------------------
2002 2002 2001
------------ ------------- -------------
% US$ THOUSANDS US$ THOUSANDS
------------ ------------- -------------
Composed as follows:
Linked to the U.S. dollar 1.16% 4,266 4,253
------------- -----------
4,266 4,253
------------- -----------
As for charges, see Note 17D.
NOTE 5 - TRADE RECEIVABLES
Open accounts include amounts billed to customers and various amounts
due from transactions arising in the ordinary course of business.
Management periodically evaluates the collectibility of these trade
receivables and adjusts the allowance for doubtful accounts to
reflect the amounts estimated to be doubtful of collection.
Customers of the Company in the context of long-term contracts are
billed in accordance with milestones determined in the agreements. In
respect of the majority of the contracts, advances are paid upon the
signing of the contract.
DECEMBER 31
-----------------------------------
2002 2001
------------- -------------
US$ THOUSANDS US$ THOUSANDS
------------- -------------
Open accounts 8,118 4,300
Income receivable (1) 6,992 15,329
Current maturities of long-term trade receivables 520 520
Elisra Electronic Systems Ltd. Related party (see
Note 21A) 70 -
------------- ------------
15,700 20,149
============= ============
(1) Income receivable represents the excess of the accumulated
revenues included in the statement of operation over
advances from customers in respect of the completed part of
the project or amounts billed which are reflected as open
accounts.
DECEMBER 31
------------------------------------
2002 2001
------------- --------------
US$ THOUSANDS US$ THOUSANDS
------------- --------------
Accumulated amounts recognized as revenues 78,797 54,602
Less - advances from customers and open accounts 72,332 40,481
-------------- ------------
6,465 14,121
Other income receivable 527 1,208
-------------- ------------
6,992 15,329
============== ============
F-18
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 6 - WORK IN PROGRESS
DECEMBER 31,
-----------------------------------
2002 2001
------------- -------------
US$ THOUSANDS US$ THOUSANDS
------------- -------------
Costs with respect to work-in-progress 121,820 125,714
Less - amounts charged to statement of income (121,492) (125,695)
328 19
NOTE 7 - OTHER RECEIVABLES AND PREPAID EXPENSES
DECEMBER 31,
-------------------------------------
2002 2001
------------- -------------
US$ THOUSANDS US$ THOUSANDS
------------- -------------
Government authorities 158 298
Employees 18 29
Prepaid expenses 337 133
Deferred income taxes - 384
Others 565 440
1,078 1,284
Allowance for doubtful accounts (251) (222)
827 1,062
F-19
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 8 - INVENTORIES
DECEMBER 31,
--------------------------------------
2002 2001
------------- -------------
US$ THOUSANDS US$ THOUSANDS
------------- -------------
Components for systems manufacturing 1,765 1,325
Raw materials 52 51
1,817 1,376
F-20
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 9 - INVESTMENTS, LOANS AND LONG-TERM RECEIVABLES
DECEMBER 31,
-------------------------------------
2002 2001
------------- -------------
US$ THOUSANDS US$ THOUSANDS
------------- -------------
Long-term trade receivables (1)(2) 1,040 1,560
Less - current maturities (520) (520)
------------- -------------
520 1,040
Marketable securities 31 172
Loans to employees - 2
Long term deposit 33 46
------------- -------------
584 1,260
============= =============
(1) Linked to the U.S. dollar and bearing interest at the rate of
7.8% per year.
(2) Aggregate maturities are as follows:
DECEMBER 31
2002
------------
US$ THOUSANDS
------------
First year (current maturities) 520
Second year 520
------------
1,040
============
F-21
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 10 - FIXED ASSETS
COMPUTERS OFFICE
AND ELECTRONIC MANUFACTURING MOTOR FURNITURE AND LEASEHOLD
EQUIPMENT EQUIPMENT VEHICLES EQUIPMENT IMPROVEMENTS TOTAL
------------- ------------- ------------- ------------- ------------- -------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
------------- ------------- ------------- ------------- ------------- -------------
COST
Balance as at
December 31,
2001 5,694 1,959 50 852 252 8,807
Additions 555 15 - 27 - 597
Disposals - - (24) - - (24)
------------- ------------- ------------- ------------- ------------- -------------
Balance as at
December 31,
2002 6,249 1,974 26 879 252 9,380
------------- ------------- ------------- ------------- ------------- -------------
ACCUMULATED
DEPRECIATION
Balance as at
December 31,
2001 4,627 1,808 23 339 67 6,864
Additions 673 118 5 60 26 882
Disposals - - (22) - - (22)
------------- ------------- ------------- ------------- ------------- -------------
Balance as at
December 31,
2002 5,300 1,926 6 399 93 7,724
------------- ------------- ------------- ------------- ------------- -------------
NET BOOK VALUE
AS AT DECEMBER
31, 2002 949 48 20 480 159 1,656
============= ============= ============= ============= ============= =============
NET BOOK VALUE
AS AT DECEMBER
31, 2001 1,067 151 27 513 185 1,943
============= ============= ============= ============= ============= =============
F-22
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 11 - SHORT-TERM BANK CREDIT
The weighted average interest rates on short-term bank credit (linked
to the U.S. dollar) as at December 31, 2002 and 2001, are 3.7% and
3.8%, respectively. As of December 31, 2002, the Company has utilized
all its available credit lines which are due for payment through
November 2003. Subsequent to balance sheet date, the Company reached
an agreement with its principal bank lenders to reschedule the
repayment of short-term loans in the amount of US$ 9 million to June
2004.
NOTE 12 - TRADE PAYABLES
DECEMBER 31,
---------------------------------------
2002 2001
------------- -------------
US$ THOUSANDS US$ THOUSANDS
------------- -------------
Tadiran Spectralink Ltd., related party (see Note 21A) 27 6
Post-dated checks 1,313 669
Others 7,121 7,838
8,461 8,513
NOTE 13 - EXCESS OF ADVANCES FROM CUSTOMERS OVER AMOUNTS RECOGNIZED AS REVENUE
DECEMBER 31,
-------------------------------------
2002 2001
------------- -------------
US$ THOUSANDS US$ THOUSANDS
------------- -------------
Advances from customers 3,819 51,467
Less - accumulated amounts recognized as revenue (2,529) (47,570)
------------- -------------
1,290 3,897
============= =============
NOTE 14 - OTHER PAYABLES AND ACCRUED EXPENSES
DECEMBER 31,
-------------------------------------
2002 2001
------------- -------------
US$ THOUSANDS US$ THOUSANDS
------------- -------------
Payroll and related accruals 1,323 1,407
Provision for warranty and completion 455 150
Income taxes payable 966 892
Deferred income taxes - 66
Elisra Electronic Systems Ltd. - related party (see Note 21A) 68 52
Other accrued expenses and accounts payable 1,513 1,727
------------- -------------
4,325 4,294
============= =============
F-23
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 15 - LIABILITY FOR EMPLOYEE SEVERANCE BENEFITS, NET
A. Under Israeli law, the Company is required to make severance
payments to dismissed employees and to employees terminating
employment under certain other circumstances. The Company's
liability for severance pay is fully provided for through
insurance policies and by accrual.
Due to a reduction in salaries effective from October 1, 2002 and in
accordance with an agreement between the Company and its employees, the
liability for severance pay calculation is divided into two periods, until
the salary reduction and onwards. The calculation was based on the number
of years of employment until September 30, 2002 multiplied by the latest
salary paid as of September, 2002, plus the number of years of employment
commencing October 1, 2002 multiplied by the latest salary paid.
DECEMBER 31,
-------------------------------------
2002 2001
------------- -------------
US$ THOUSANDS US$ THOUSANDS
Severance pay 2,096 1,696
Less - amounts funded* (1,587) (1,112)
------------- -------------
509 584
============= =============
* The Company may only withdraw amounts funded for the purpose of severance
pay disbursement.
B. Severance pay expenses (income) recorded for the years ended
December 2002, 2001 and 2000 were $(54) thousand, $163 thousand
and $247 thousand, respectively.
NOTE 16 - SHAREHOLDERS' EQUITY
A. On February 14, 2003, the Company transferred the ordinary shares
quote from the Nasdaq SmallCap Market to the Over the Counter
Bulletin Board (OTCBB) under the symbol BVRSF.
B.
AUTHORIZED ISSUED AND OUTSTANDING
------------------------------ ----------------------------
DECEMBER 31, DECEMBER 31,
------------------------------ ----------------------------
2002 2001 2002 2001
----------- ----------- ---------- ----------
Ordinary shares of
NIS 1.00 par value 20,000,000 20,000,000 10,660,874 10,659,701
=========== =========== =========== ===========
F-24
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT.)
C. In June 2000, the Company reached agreement with one of its
shareholders, Elisra Electronic Systems Ltd. ("Elisra"), a wholly
owned subsidiary of Koor Industries Ltd. Under the agreement (the
"Share Purchase Agreement"), the Company issued Elisra one
million B.V.R. ordinary shares at US$ 5.00 per share on August
29, 2000, for an aggregate purchase price of US$ 5.0 million. The
Company also granted Elisra an option to purchase up to an
additional 1.5 million ordinary shares at a price of US$ 6.00 per
share which is subject to adjustments if there will be any change
in the number of the Company's shares. The option will be valid
for three years until June 25, 2003 and may be exercised
partially or in whole. Under certain conditions, Elisra will be
entitled to a dividend (if distributed), to be paid when the
options are exercised.
The Share Purchase Agreement includes an indemnification provision pursuant
to which the Company undertakes to indemnify Elisra for any liability
greater than US$ 2.5 million, arising as a result of claims against the
Company on part of the Israeli Aircraft Industry Ltd. ("IAI"), relating to
the period prior to the cooperation agreement between the Company and IAI
(see Note 17A). The Company shall only be obliged to indemnify Elisra for
amounts which the Company shall have to compensate IAI in accordance with
Elisra's added percentage of holding in the Company as results from the
Share Purchase Agreement (not including any increase in the holdings
resulting from the exercise of the option granted to Elisra as mentioned
above). As at December 31, 2002 and for the three years then ended, no
expenses and/or liabilities were recorded by the Company. Management
believes that the resolving of disagreements with IAI will not have
additional implications on the financial results or the Company's financial
situation.
In addition to the above, during July 2000, Elisra also signed a purchase
agreement with Mr. Aviv Tzidon, one of B.V.R.'s founders, for the purchase
of all of Mr. Tzidon's shares in the Company and entered into a voting
agreement with all other major shareholders pursuant to which Elisra shall
have the right to nominate the majority of the members of the Board of
Directors of the Company, effective as of August 29, 2000 (the closing date
of the above-mentioned transactions) and therefore Elisra has control of
the Company. As of December 31, 2002 Elisra holds 46.15% of the Company's
shares.
D. In June 2000, the Board of Directors of the Company approved a
plan to grant options for the purchase of up to 1,200,000
ordinary shares to the Company's employees. Each option is
exercisable into one ordinary share of the Company at an exercise
price equal to the market price of the share on the date of
issuance.
At December 31, 2002, there are 856 thousand options outstanding, after
cancellation of those options held by employees who are no longer employed
by the Company. The options are exercisable at prices of US$ 1.188 to US$
4.125 per share. The aforesaid options are exercisable in three equal
increments (one third per year) commencing one year after their issuance.
F-25
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDER'S EQUITY (CONT'D)
Within the framework of the above plan, in July 2000, the Company issued to
Mr. Avner Raz, former Chairman of the Board of Directors and former CEO,
options to purchase 60,000 ordinary shares of the Company, at an exercise
price of US$ 4.25 per each share. The vesting dates of the options are as
follows: options to purchase 20,000 ordinary shares of the Company on July
24, 2001; options to purchase 20,000 ordinary shares of the Company on July
24, 2002, and options to purchase 20,000 ordinary shares of the Company on
July 24, 2003.
In August 2001, the Board of Directors resolved to cancel the remaining
balance of options that were available for issuance from that option plan.
For details of employee stock options of the Company, see Note 22.
E. In February 2000, the Company's Board of Directors approved the
grant of up to 300 thousand options to employees of the Company.
The options were issued in March 2000 and will be exercisable,
after a vesting period, until March 2005 at the price of US$
7.125 in cash per option. Each option is exercisable into one
ordinary share of the Company.
At December 31, 2002, there are 163 thousand options outstanding, after
cancellation of those options held by employees who are no longer employed
by the Company.
For details of employee stock options of the Company, see Note 22.
F. In August 2001, the Board of Directors of the Company approved an
option plan to grant options for the purchase of up to 707,900
ordinary shares to the Company's employees, directors and
subcontractors. Each option is exercisable into one ordinary
share of the Company at an exercise price equal to the market
price of the share on the date of issuance.
At December 31, 2002, there are 666 thousand options outstanding after
cancellation of those options held by employees who are no longer employed
by the Company.
Within the framework of the above plan, in September 2001, the Company
issued to Mr. Avner Raz, Chairman of the Board of Directors, options to
purchase 60,000 ordinary shares of the Company, at an exercise price of US$
2.03 per each share.
The aforesaid options are exercisable in two increments, one third after
one year from the date of issuance and two thirds after two years from the
date of issuance. The options will expire after three years from the
vesting date of each increment.
For details of employee stock options of the Company, see Note 22.
F-26
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDER'S EQUITY (CONT'D)
G. Any dividend distributed by the Company will be declared in NIS
and paid in U.S. dollars on the basis of the exchange rate
prevailing at the date of payment.
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES
A. COOPERATION AGREEMENT
1. The Company developed, manufactured and marketed the "Ehud" system
pursuant to a joint venture agreement entered into in 1992 with the
MLM division of Israel Aircraft Industries Ltd. ("IAI") (the "IAI
Agreement"). Pursuant to the IAI Agreement, the Company and IAI agreed
to jointly develop, manufacture and market the Ehud, with IAI
subcontracting certain of the manufacturing and integration work with
respect to the Ehud product to the Company. The IAI Agreement expired
pursuant to its terms in October 1997.
During August 1999, the Company signed a new agreement with MLM (MLM
Agreement) which governs a joint venture between them and which also
provides guidelines for fair competition between them, this without
adversely impacting existing agreements previously signed with third
parties.
2. The parties have agreed that the "Ehud" system will be marketed by
each of the parties, in various territories, in consideration of the
payment of various royalties to the other parties. As part of the MLM
Agreement, the following worldwide territories have been delineated:
a. A territory in which one party operates exclusively while paying
the other party royalties at the rate of 4.75%-12.5% of the
contract consideration with respect to contracts executed in such
countries until 2008. The party receiving the royalty shall not
operate in this territory in any manner whatsoever.
b. A territory in which the parties may compete, with the successful
party paying the other party royalties at the rate of 4%-8% of
the contract consideration, with respect to contracts executed in
such countries until 2008.
c. Countries not included in a. and b., above, shall be covered by a
separate arrangement.
The agreement, whose terms are set forth above, shall apply to the
sale of the "Ehud" systems. With regard to other product, separate
royalty payment instructions were set up.
There are still outstanding disagreements between the parties relating
to projects performed prior to entering into the MLM agreement. The
MLM agreement provides for a resolution mechanism of such disputes,
including by arbitration in case the parties can not reach a mutually
agreed resolution. Management believes that the resolving of
outstanding disagreements will not have additional implications on the
financial results or the Company's financial situation.
3. In April 1998, the Company signed a teaming agreement with Metric
Systems Corporation ("Metric"), pursuant to which Metric shall be a
licensed manufacturer of the Company for the fourth-generation Ehud
systems, to the global market.
F-27
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)
Pursuant to this agreement, the parties mutually agreed to provide
each other with components, engineering or manufacturing services,
regarding the Ehud systems. This agreement expired in April 2001,
except for certain provisions concerning cooperation in a specific
country, which will remain effective until May 2003.
4. During November 2001, the Company and Smiths Aerospace signed a
Memorandum of Understanding to pursue an integrated Smiths Airborne
Video Solid State Recorder (AVSR) with the Company's airborne embedded
training suite ("the Product"). The parties agreed to work towards a
teaming agreement that will define the roles of the parties and terms
of a program or programs relating to the said Product.
B. LEASE COMMITMENTS
The premises occupied by the Company are rented under various operating leases
expiring at the end of September 2009. The future minimum annual rental payments
as of December 31, 2002 are as follows:
YEAR ENDING DECEMBER 31, US$ THOUSANDS
------------------------ -------------
2003 454
2004 467
2005 467
2006 467
2007 and after 1,046
-------------
2,901
-------------
C. SPIN-OFF
In connection with the spin-off plan ("plan") the Company completed several
agreements with B.V.R. for the purpose of giving effect to the plan and defining
the Company's and B.V.R.'s working relationship, as follows:
1. The Company and B.V.R. each undertook to indemnify and/or compensate
the other (the "Injured Party") for any amount, damage or expense that
the Injured Party incurs in consequence of a third-party claim
relating to a field of activity of the indemnifying party, concerning
events occurring before the effective date of the spin-off, provided
that the Injured Party has notified the indemnifying party of the
third-party claim and has allowed the indemnifying party to manage and
defend such claim. As at December 31, 2002 and for the three years
then ended, no expenses and/or liabilities were recorded by the
Company. The Company has no information that would indicate that any
material payments will be required in respect of this agreement.
F-28
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)
2. The Company and B.V.R. entered into an agreement concerning technology
transfers and cross licenses between each of the parties (the
"Agreement"). Under this agreement, B.V.R. transferred to the Company
the rights to co-ownership of B.V.R.'s intellectual property as
related to the defense-related operations transferred to the Company
pursuant to the spin-off agreement.
3. B.V.R. will only be entitled to exploit such intellectual property
rights for its activities that do not conflict with the Company's
activities as conducted at the time of consummation of the Plan other
than with respect to applications relating to simulation and training
systems for commercial applications which shall be exploited solely by
the Company. The Company and B.V.R. further agreed not to compete with
each other's business activities.
D. CHARGES AND GUARANTEES
1. In order to provide security for the credit received from banks and
for the bank guarantees provided in favor of the Company, the Company
registered first degree fixed and floating liens on money deposits, a
floating lien on all its property, assets and related insurance
benefits and a floating lien on its unpaid share capital, its goodwill
and its plant, assets and rights.
2. The Company has deposited cash and cash equivalents with certain
financial institutions that have issued guarantees on behalf of the
Company in favor of its customers. In order to fulfill the
above-mentioned commitment, the Company placed a charge on its bank
deposits (including the insurance rights attached thereto), which
amounted to US$ 4,266 thousand at balance sheet date.
3. The secured liabilities and guarantees (secured by a debenture) are as
follows:
DECEMBER 31,
---------------------------------
2002 2001
--------------- -------------
US$ THOUSANDS US$ THOUSANDS
--------------- -------------
Short-term credit from banks 15,083 12,002
============== =============
Performance guarantees (1) 6,732 12,680
============== =============
Advance payment guarantees (1) 16,378 15,464
============== =============
Other bank guarantees (1) 4,414 4,937
============== =============
(1) The guarantees are provided by banks in favor of the Company.
The expiration dates of the guarantees are from January 31, 2003 to
December 31, 2006.
Bank charges on those guarantees are attributed to financial expenses.
F-29
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)
E. LIABILITY FOR WARRANTY AND COMPLETION
The Company has made provision for warranty and completion for some of
its completed projects, in accordance with management judgment and
based on past experience. The changes in this Provision during 2002
are as follows:
US$ THOUSANDS
-------------
Balance at December 31, 2001 150
Changes during year 305
-------------
Balance at December 31, 2002 455
=============
F. MANAGEMENT AGREEMENT WITH THE SHAREHOLDERS
The Company reached an agreement with Elisra concerning management services
to be provided to the Company by Elisra.
For each of the three years ended December 31, 2002, the Company paid to
Elisra US$ 200 thousand.
G. COMMITMENT TO INDEMNIFY SHAREHOLDERS
Regarding the Company's commitment to indemnify Elisra for amounts which
the Company shall have to compensate IAI, See Note 16C.
H. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters, from time to time, into foreign currency future
contracts and put and call options contracts to reduce the impact of
fluctuations of certain currencies against the U.S. dollar resulting
primarily from firm commitments not denominated in U.S. dollars. Gains or
losses resulting from qualified hedges of firm commitments are deferred and
recognized when the hedged transactions occur, while results of
transactions which do not meet all the criteria specified in SFAS No. 52
and SFAS No. 80 are recorded as financial income or expense.
As at December 31, 2002, the Company has an obligation to sell US$ 151
thousand for a total amount of (pound) 108 thousand (recorded as a hedge).
The fair value of this off-balance sheet instrument amounted to a net asset
of US$ 22 thousand as of December 31, 2002.
F-30
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)
I. INFORMATION ON CONTRACTS FOR LONG-TERM PROJECTS
DECEMBER 31 DECEMBER 31 DECEMBER 31
2002 AND THE 2001 AND THE 2000 AND THE
YEAR THEN ENDED YEAR THEN ENDED YEAR THEN ENDED
--------------- --------------- ---------------
CONTRACTS FOR CONTRACTS FOR CONTRACTS FOR
PROJECTS PROJECTS PROJECTS
--------------- -------------- ---------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
--------------- -------------- --------------
Amount of contracts for long-term projects
signed during the year 6,123 12,291 20,801
=============== ============== ==============
Portion of the accumulated amount of contracts for long-term
projects not yet recognized as income at the year end 20,225 38,152 65,845
===============
NOTE 18 - INCOME TAXES
A. TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY
(TAXES), 1969
The Company is an "industrial company", as defined by this law and, as
such, is entitled to certain tax benefits, mainly accelerated depreciation
of machinery and equipment, as prescribed by regulations published under
the Inflationary Adjustments Law (see Note 18C hereunder), the right to
claim public issuance expenses and amortization of patents and other
intangible property rights as a deduction for tax purposes.
B. TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL
INVESTMENTS, 1959 ("THE LAW")
According to the law the Company's production facilities in Jerusalem have
been granted "approved enterprise" status. Pursuant to the aforementioned
law, the Company was entitled to tax benefits on its undistributed income
arising from the "approved enterprise", for a period of seven years ended
1995.
In addition, in 1998, the Company applied for approval of the expansion of
its facilities in Rosh Ha'ayin ("the second plan").
In addition, in 2001 the Company filed a request for an additional new plan
to expand its production facilities in Rosh Ha'ayin ("the third plan"). The
request was approved in 2002.
Pursuant to the aforementioned law the Company will be entitled to a full
exemption on its taxable income arising from the second and third plan for
a period of two years and a reduced tax rate of 25% for an additional five
years from the date on which the investments are significantly completed
and the Company has taxable income as defined by the law.
F-31
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 18 - INCOME TAXES (CONT'D)
The benefits to which the Company will be entitled, will be granted on the
proportionate part of the income, deriving from a future increase in its
income in excess of the base turnover, which is not entitled to benefits.
The utilization of the seven years of benefits for the second and third
plan is limited to 2012 and 2016, respectively.
As of December 31, 2002, due to losses, the Company had not yet utilized
the tax benefits provided in the second plan.
The tax exempt income attributable to the "Approved Enterprise" can be
distributed to shareholders without subjecting the Company to taxes only
upon the complete liquidation of the Company. The Company's Board of
Directors has determined that such tax exempt income will not be
distributed as dividends. Accordingly, no deferred income taxes have been
provided on income attributable to the Company's "Approved Enterprise".
If the retained tax exempt income is distributed in a manner other than the
complete liquidation of the Company, it would be taxed at the corporate tax
rate applicable to such profits as if the Company had not chosen the
alternative tax benefits (currently - 25%). As at December 31, 2002 the
Company has accumulated losses.
The aforementioned benefits are conditional upon compliance with the terms
and regulations as prescribed by law, and the approvals according to which
the investments were carried out. Non compliance with the terms may result
in the cancellation of the benefits, in whole, or in part, and the refund
of the benefit amounts in addition to accrued interest.
As of the date of the financial statements, the Company's management is of
the opinion that it is in compliance with all of the aforementioned terms.
C. MEASUREMENT OF TAXABLE INCOME UNDER THE INCOME TAX (INFLATIONARY
ADJUSTMENTS) LAW, 1985
Under this law, taxable income is measured in real terms, in accordance
with the changes in the Israeli CPI.
D. TAX RATES APPLICABLE TO INCOME FROM OTHER SOURCES IN ISRAEL
Income derived from sources other than the approved enterprise is not
eligible for the aforementioned benefits and is taxed at the regular rates
of 36% for 2002, 2001 and for 2000.
E. TAXATION OF FOREIGN SUBSIDIARIES
The subsidiaries in the Netherlands and the Far East are taxed under the
tax laws in force in those countries.
F-32
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 18 - INCOME TAXES (CONT.)
F. ISRAEL TAX REFORM WITH EFFECT FROM JANUARY 1, 2003
During the year 2002, tax reform legislation was enacted with effect from
January 1, 2003, which significantly changed the taxation basis of
corporate and individual taxpayers from a territorial basis to a worldwide
basis. From such date an Israel resident taxpayer will be taxed on income
produced and derived both in and out of Israel. The main provisions of the
tax reform that may affect the Company are as follows:
1. Transfer pricing of international transactions with related parties.
The Income Tax Ordinance was amended to include provisions concerning
transfer pricing between related parties, where one of the parties is
situated abroad. Detailed provisions are to be included in Income Tax
Regulations that have yet to be issued. Although the Company considers
that the transfer pricing policy adopted with foreign affiliates is
economically fair, an adjustment may be required following the issue
of the said Regulations.
2. Employee stock incentive plans.
The tax reform codified past practice and determined three alternative
tracks for taxing employee stock option plans. Where a trustee
arrangement is in place, the employer can either claim an expense for
tax purposes while the employee will be fully taxed up to the maximum
marginal tax rate of 50% or the Company can waive the tax expense and
the employee will pay a reduced tax rate of 25%. Where there is no
trustee arrangement, the employee is fully taxable and no expense is
allowed to the Company. There are detailed provisions for implementing
these tracks. The Company is considering the alternatives.
3. Controlled foreign company (CFC).
The amendment to the law introduced Controlled Foreign Company (CFC)
provisions, which, in certain circumstances, will lead to the Israeli
company being charged to tax on passive income of foreign affiliates
as if it had received a dividend from such companies.
4. Capital gains tax is reduced to 25% from 36%, except with respect to
capital gains from marketable securities, with transitional provisions
for assets acquired prior to January 1, 2003.
5. The seven year limit for carrying forward of capital losses has been
removed with respect to capital losses arising from 1996 and
thereafter.
G. DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for
F-33
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 18 - INCOME TAXES (CONT.)
income tax purposes. Deferred tax assets for future tax benefits from
realization are included where their realization is "more likely than
not". As such, the Company has recorded a valuation allowance in
regard of all its tax losses carried forward as well as for other
temporary differences.
Significant components of the Company's deferred tax liabilities and
assets are as follows:
DECEMBER 31,
-----------------------------------
2002 2001
-------------- -------------
US$ THOUSANDS US$ THOUSANDS
-------------- -------------
Deferred tax assets:
Provision for vacation 175 177
Liability for employees severance pay 183 210
Net operating loss carryforwards 11,524 9,020
Research and development costs, net 469 537
-------------- -------------
12,351 9,944
-------------- -------------
Deferred tax liabilities
Deferred financing income - (66)
Others (18) (24)
-------------- -------------
(18) (90)
-------------- -------------
12,333 9,854
Less: Valuation allowance (12,333) (9,536)
-------------- -------------
Deferred tax asset - 318
============== =============
F-34
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
-----------------------------------
2002 2001
------------- -------------
US$ THOUSANDS US$ THOUSANDS
------------- --------------
The deferred tax asset reported at the balance sheet date is presented
as follows:
Current assets - 384
Current liabilities - (66)
------------- --------------
- 318
If the undistributed earnings of the Singapore subsidiary of
approximately US $ 136 thousand were distributed as a dividend,
additional taxes of approximately US$ 34 thousand will be payable (see
Note 2N2).
F-35
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 18 - INCOME TAXES (CONT'D)
H. A reconciliation of the theoretical tax expense,
assuming all income is taxable at the statutory
rates applicable in Israel, and the actual tax
expense, is as follows:
DECEMBER 31,
----------------------------------------------------------
2002 2001 2000
------------- ------------- -------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
------------- ------------- -------------
Loss before taxes on income (4,914) (930) (11,310)
Statutory tax rate in Israel 36% 36% 36%
------------- ------------- -------------
Theoretical tax benefit (1,769) (335) (4,072)
Losses deductions and expenses in respect of which deferred tax
assets were not recorded 1,863 73 4,128
Taxes in respect of previous years 128 218 903
Non-deductible expenses 107 101 88
Deductible expenses (5) (123) (136)
Change in beginning-f-year valuation allowance 318 - 1,063
Taxes in respect of subsidiaries 236 66 -
------------- ------------- -------------
Actual tax expense 878 - 18
============= ============= =============
I. INCOME TAX ASSESSMENTS
The Company has not received any final tax assessments since
incorporation.
J. NET OPERATING LOSSES CARRYFORWARD
Net operating loss carryforwards as of December 31, 2002 totaled
approximately US$ 32 million. The net operating loss carryforwards
have no expiration date.
F-36
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 19 - MONETARY BALANCES IN OR LINKED TO CURRENCIES OTHER THAN THE U.S. DOLLAR
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------------------------------------- ----------------------------------------------------
ISRAELI CURRENCY FOREIGN ISRAELI CURRENCY FOREIGN
CURRENCIES CURRENCIES
--------------------------------- ------------- -------------------------------- -------------
LINKED UNLINKED LINKED UNLINKED
------------- ------------- ------------- -------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
------------- ------------- ------------- ------------- ------------- -------------
ASSETS
Current assets 17 1,418 452 29 1,885 233
Long-term assets - 33 - 2 46 -
------------- ------------- ------------- ------------- ------------- -------------
17 1,451 452 31 1,931 233
============= ============= ============= ============= ============= =============
LIABILITIES
Current
liabilities 966 2,933 1,940 889 4,490 631
Long-term
liabilities - 509 - - 584 -
------------- ------------- ------------- ------------- ------------- -------------
966 3,442 1,940 889 5,074 631
============= ============= ============= ============= ============= =============
F-37
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 20 - SUPPLEMENTARY STATEMENT OF OPERATION INFORMATION
A. SUMMARY INFORMATION ABOUT BUSINESS SEGMENTS AND GEOGRAPHICAL
AREAS:
The Company manages its business on a basis of one reportable segment. See
Note 1 for a brief description of the Company's business.
Total revenues are attributed to geographic areas based on the location of
the customers. Long lived assets are not presented in the table below
because all long-lived assets are located in Israel.
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002 2001 2000
------------- ------------- -------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
------------- ------------- -------------
1. Total revenues:
Israel 406 1,892 311
Far East 19,462 31,890 19,572
Italy 5,108 2,582 609
Rest of Europe 2,738 4,188 4,404
America - 163 473
Africa 576 3,286 -
------------- ------------- -------------
28,290 44,001 25,369
============= ============= =============
2. Major customers data as a percentage of the total revenues
Customer A 41% 26% 29%
Customer B 27% 45% 48%
Customer C 18% *- *.-
Actual tax expense 86% 71% 77%
============= ============= =============
* Less than 10%
B. INCOME FROM ROYALTIES AND COMMISSIONS
In the Cooperation agreement the Company signed with MLM, it was provided
that in respect of those territories in which the project is carried out by
one party, royalties will be paid to the other party. The rate of royalties
is mainly 8%-12.5% of the contract price (see Note 17A1).
F-38
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 20 - SUPPLEMENTARY STATEMENT OF OPERATION INFORMATION (CONT'D)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000
------------- ------------- -------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
------------- ------------- -------------
C. COST OF SALES
Raw materials 6,481 16,843 9,734
Salaries, wages and employee's benefits 6,071 5,101 4,427
Subcontractors 5,778 7,538 6,459
Agents fees 1,818 3,713 2,545
Depreciation 652 636 692
Other manufacturing costs 2,915 2,014 2,114
------------- ------------- -------------
23,715 35,845 25,971
============= ============= =============
D. FINANCIAL ITEMS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000
------------- ------------- -------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
------------- ------------- -------------
Financial income:
Interest on short-term deposits 83 563 592
Interest on loans to others and interests from non-current
receivables 98 138 195
------------- ------------- -------------
181 701 787
============= ============= =============
Financial expenses:
Bank charges and interest on short-term credit 878 1,213 1,442
Interest on loan from B.V.R. - - 147
Interest to Elisra 9 - -
Other 149 230 135
------------- ------------- -------------
1,036 1,443 1,724
============= ============= =============
F-39
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 20 - SUPPLEMENTARY STATEMENT OF OPERATION INFORMATION (CONT'D)
E. OTHER EXPENSES, NET
2002 2001 2000
------------- ------------- -------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
------------- ------------- -------------
Write-down of investment in marketable securities 141 317 -
Others (1) 2 31
------------- ------------- -------------
140 319 31
============= ============== =============
F. SUPPLEMENTARY INFORMATION ON
STATEMENTS OF OPERATIONS
Rent 574 542 499
============= ============== =============
Advertising costs 100 54 140
============= ============== =============
Royalties expenses 671 1,482 1,160
============= ============== =============
F-40
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 21 - RELATED PARTIES
A. BALANCES
Related parties are comprised of principal shareholders (10% holding of the
Company's share capital) and their subsidiaries and affiliates as well as
affiliates of the Company. Transactions with related parties are mainly as
follows:
1. Sales of the Company's products and expenses related to such sales.
2. Interest payable on loans received.
3. Payment of Management fees.
4. Purchases of services and products.
All transactions, and terms with related parties were identical to
those applied to transactions with other customers or suppliers.
DECEMBER 31,
--------------------------------------
2002 2001
------------- -------------
US$ THOUSANDS US$ THOUSANDS
------------- -------------
Due from:
Trade receivables - Elisra Electronic Systems Ltd. 70 -
Israel Aircraft Industries Ltd.(*) 354 -
Due to:
Trade payable - Tadiran Spectralink Ltd. 27 6
Israel Aircraft Industries Ltd.(*) 885 -
Other payable - Elisra Electronic Systems Ltd. 68 52
Israel Aircraft Industries Ltd.(*) 177 -
(*) A related party from December 2002.
B. TRANSACTIONS WITH RELATED PARTIES
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2002 2001 2000
------------- ------------- -------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
------------- ------------- -------------
Income from sales(1) 70 - -
Cost of sales(2) 245 1,699 1,239
General and administrative expenses(1)(3) 363 362 343
Interest expense, net(4) 9 - -
(1) To Elisra.
(2) To Tadiran Spectralink.
(3) Including the salary of the CEO and fees paid to directors.
F-41
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 21 - RELATED PARTIES (CONT'D)
(4) On May 15, 2002, the Company obtained a US$ 4.0 million credit line
from Elisra Electronics Systems Ltd. ("Elisra") of which $500,000 were
not utilized, which bears interest at the rate of three months LIBOR
plus 1%. The proceeds of this loan were used to finance the Company's
operation until receiving, in the third quarter of 2002, a payment of
approximately US$ 12.5 million, following which the loan was repaid to
Elisra.
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP
A. THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY CONFORM WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL ("ISRAELI GAAP"),
WHICH DIFFER IN CERTAIN SIGNIFICANT RESPECTS FROM THOSE FOLLOWED IN
THE UNITED STATES ("U.S. GAAP"), AS DESCRIBED BELOW:
1. DEFERRED INCOME TAXES
Under Israeli GAAP, deferred taxes are recognized on temporary
differences that result from changes in exchange rates or indexing
when the reporting and local currency is the U.S. dollar or a currency
linked thereto.
Under U.S. GAAP, deferred taxes are not recognized for temporary
differences that result from changes in exchange rates or indexation
for tax purposes related to non-monetary assets and liabilities that
are remeasured using historical exchange rates when the functional
currency is the reporting currency.
2. DERIVATIVE FINANCIAL INSTRUMENTS
Under Israeli GAAP, derivative financial instruments (the
"derivatives") held for hedging are deferred and recognized when the
hedged transactions occur. Derivative financial instruments not held
for hedging are stated in the financial statements at their fair
value. Changes in fair value are recognized as they occur.
Under U.S. GAAP, SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (the "Standard") requires that all derivatives
will be classified on the balance sheet as assets or as liabilities at
their fair value. The change in the fair value of derivatives which
are not designated as a hedging instrument will be recognized in the
statement of operations in the period of the change. If the nature and
characteristics of a derivative meet the definition of a "hedge", the
changes in the fair value of the derivative will be offset from the
changes in the fair value of the hedged item (assets, liabilities or
firm commitments) and will be recognized in the statement of
operations or as part of comprehensive income until the hedged item is
recognized in the statement of operations. The ineffective part of the
hedging derivative will be reported in the statement of operations on
a current basis.
F-42
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)
3. COMPREHENSIVE INCOME
Israeli GAAP does not require disclosure of comprehensive income.
Under U.S. GAAP, SFAS No. 130 "Reporting Comprehensive Income"
requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid in capital in the equity section
of the statement of financial position.
4. TREATMENT OF MARKETABLE SECURITIES
a) According to Israeli GAAP
Marketable securities not designated for sale in the short-term
are carried at cost (regarding debentures, including accumulated
interest), except where market value is lower and the decline in
value is deemed to be permanent.
b) According to Israeli GAAP
In accordance with SFAS 115 unrealized gains and losses on
investments in available-for-sale securities (purchase and sales
transactions which are not carried out on an active and frequent
basis) are reported as a separate component of shareholders'
equity. Permanent decline in market value is recorded to the
statement of operations.
For U.S. GAAP purposes, the Company has determined, as of the
purchase date and as of the balance sheets date that its equity
securities should be classified as available-for-sale securities
and stated at fair value, with unrealized gains and losses, net
of tax, reported as other Comprehensive Income.
The effect of the above-mentioned difference on the Statement of
Changes in Shareholders' Equity for each of the three years ended
December 31, 2002 is reported as part of the Other Comprehensive
Income.
5. EARNINGS PER SHARE
a) According to Israeli GAAP
The effect of options and warrants is included in the computation
of basic earnings per share only if their exercise is considered
probable, based on the ordinary relationship between the market
price of the shares stemming from the
F-43
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)
exercise of the warrants and the discounted present value of the
future proceeds derived from the exercise of the options and
warrants.
The effect of convertible debentures is taken into account in the
computation of basic earnings per share only if their conversion
is considered probable, based on the relationship between the
market price of the shares stemming from the conversion and the
discounted present value of the convertible debentures.
5. EARNINGS PER SHARE (CONT'D)
Diluted earnings (losses) per share are computed based on the
weighted average number of ordinary shares used for computing the
basic earnings per share plus options, warrants and convertible
debentures which were not included in the basic earnings per
share calculation and which are not anti dilutive.
b) According to U.S. GAAP
U.S. GAAP also requires dual presentation of basic and diluted
earnings per share for entities with complex capital structures
as well as a reconciliation of the basic EPS computation to the
diluted EPS computation. Basic EPS is calculated by dividing net
income available to ordinary stockholders, by the weighted
average number of common shares outstanding. The computation of
diluted EPS assumes the issuance of common shares for all
dilutive-potential common shares outstanding during the reporting
period. The dilutive effect of stock options is considered in
earnings per share calculations if dilutive, using the "if
converted" treasury stock method.
6. LIABILITY FOR TERMINATION OF EMPLOYER-EMPLOYEE RELATIONS
a) According to Israeli GAAP
Amounts funded by purchase of insurance policies are deducted
from the related severance pay liability.
b) According to U.S. GAAP
According to U.S. GAAP, the amounts funded should be presented as
long-term investments and the gross amount of the liability should be
presented as a long-term liability.
F-44
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)
B. THE EFFECT OF THE DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP OF
THE AFOREMENTIONED ITEMS ON THE FINANCIAL STATEMENTS IS AS
FOLLOWS:
1. ON STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2002 2001 2000
------------- ------------- -------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
------------- ------------- -------------
NET LOSS AS REPORTED, ACCORDING TO ISRAELI GAAP (5,792) (930) (13,284)
Income tax benefit (expenses) on income - - (121)
------------- ------------- -------------
Net loss under U.S. GAAP (5,792) (930) (13,405)
============= ============= =============
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE (IN U.S. $)
As reported, according to Israeli GAAP (0.54) (0.09) (1.32)
According to U.S. GAAP (0.54) (0.09) (1.34)
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES OUTSTANDING (IN THOUSANDS)
USED IN BASIC AND DILUTED LOSS PER SHARE CALCULATION
UNDER U.S. GAAP 10,660 10,660 9,989
============= ============= =============
F-45
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)
2. ON BALANCE SHEET ITEMS
DECEMBER 31,
------------------------------------------------- ------------------------------------------
2002 2001
------------------------------------------------- ------------------------------------------
US$ THOUSANDS
AS AS PER AS AS PER
REPORTED ADJUSTMENT US GAAP REPORTED ADJUSTMENT US GAAP
-------- ---------- ------- -------- ---------- -------
Severance pay fund - 1,587 1,587 - 1,112 1,112
Investment, loans and long-term
receivables - - - 1,260 (61) 1,199
Derivative financial instruments - 22 22 - 23 23
Total assets 26,038 1,609 27,647 31,452 1,074 32,526
Liability for employee severance
benefits, net 509 1,587 2,096 584 1,112 1,696
---------- ---------- --------- ---------- ---------- ---------
Total shareholders equity (deficit) (3,630) 22 (3,608) 2,162 (38) 2,124
========== ========== ========= ========= ========== =========
3. ON STATEMENTS OF CASH FLOW
According to U.S. GAAP, supplemental disclosures is required as
follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000
------------- ------------- -------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
------------- ------------- -------------
Income tax paid 85 121 24
============= ============= =============
Interest paid 468 797 802
============= ============= =============
F-46
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)
4. ON STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
SHARE CAPITAL ACCUMULATED
---------------------------- OTHER
NUMBER OF ADDITIONAL COMPREHENSIVE ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL INCOME (LOSS) DEFICIT TOTAL
----------- ------------- --------------- ------------- ------------- -------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
----------- ------------- --------------- ------------- ------------- -------------
BALANCE AS OF JANUARY 1, 2000 9,636,365 2,275 16,667 135 (7,440) 11,637
CHANGES DURING 2000:
Net loss for the year - - - - (13,405) (13,405)
Unrealized loss on available for
sale securities - - - (470) - (470)
--------------
Comprehensive loss (13,875)
--------------
Issuance of ordinary shares 1,000,000 248 (1)4,701 - - 4,949
Exercise of stock options 23,336 6 40 - - 46
----------- ------------- --------------- ------------- ------------- --------------
BALANCE AS OF DECEMBER 31, 2000 10,659,701 2,529 21,408 (335) (20,845) 2,757
CHANGES DURING 2001:
Net loss for the year - - - - (930) (930)
Unrealized loss on available for
sale securities - - - (43) - (43)
Realized loss in investment in
available for sale securities - - - 317 - 317
Unrealized profit deriving from
financial instruments - - - 23 - 23
--------------
Comprehensive loss (633)
----------- ------------- --------------- ------------- ------------- --------------
BALANCE AS OF DECEMBER 31, 2002 10,659,701 2,529 21,408 (38) (21,775) 2,124
CHANGES DURING 2002:
Net loss for the year - - - - (5,792) (5,792)
Realized loss on investment in
available for sale securities - - - 61 - 61
Realization of profit deriving
from financial instruments - - - (1) - (1)
--------------
Comprehensive loss (5,732)
Issuance of ordinary shares 1,173 (2) - - - -
----------- ------------- --------------- ------------- ------------- --------------
BALANCE AS OF DECEMBER 31, 2002 (3,630) 22 (3,608) 2,162 (38) 2,124
=========== ============= =============== ============= ============= ==============
(1) Net of issuance expenses of US$ 50 thousand.
(2) Represents an amount less than US$ 1 thousand.
F-47
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)
C. STOCK BASED COMPENSATION
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock compensation programs. Had the Company
determined compensation cost based on the fair value at the grant
date for its stock options under Statement 123, the Company's net
income available to common stockholders and diluted earnings per
share would have been reduced to the pro forma amounts indicated
below.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
------------- ------------- -------------
US$ THOUSANDS US$ THOUSANDS US$ THOUSANDS
------------- ------------- -------------
Net loss attributable to ordinary shareholders under U.S. GAAP:
As reported (5,792) (930) (13,405)
Deduct:
Total stock-based employee compensation expense determined under the
fair value based method for all amounts, net of related
tax effects (1,046) (1,501) (772)
------------- ------------- -------------
Pro-forma (6,838) (2,431) (14,177)
============= ============= =============
Basic and diluted loss per share under U.S. GAAP in U.S. dollars:
As reported (0.54) (0.09) (1.34)
Pro-forma (0.64) (0.24) (1.42)
F-48
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)
The fair value of each option grant is estimated on the date of grant using the
Black & Scholes option-pricing model, with the following assumptions used for
grants during the years 2000, 2001 and 2002:
OPTIONS OPTIONS
2002 GRANTED DURING 2001 GRANTED DURING 2000
----------------- --------------------------------------- ----------------------
FEBRUARY MAY FEBRUARY AUGUST SEPTEMBER NOVEMBER MARCH JULY DECEMBER
--------- ------- -------- ------ --------- -------- ----- ---- --------
Dividend yield (%) 0 0 0 0 0 0 0 0 0
Expected volatility (%) 110 106 117 118 118 109 45 54 72
Risk-free interest rate (%) 2 2 5 3.5 2.5 2 6.5 6.5 6.5
Weighted average expected life (years) 4.7 4.7 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Average fair value of options granted
to Company's employees (US$) 2.08 1.56 2.32 1.68 1.96 2.05 3.49 2.23 1.0
F-49
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)
D. DATA IN RESPECT OF THE OPTION PLANS
As of December 31, 2002, 1,791,086 options were outstanding. The
options are each exercisable for one ordinary share at exercise price
ranging between US$ 1.188 and US $ 7.875 per share.
1. A summary of status of the company's stock option plans as of
December 31, 2002, 2001 and 2000, and changes during the years
then ended, is as follows:
AS AT DECEMBER 31,
-------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ------------------------------ --------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE
OPTIONS (US$) OPTIONS (US$) OPTIONS (US$)
---------- --------------- --------- ---------------- ----------- ----------------
Options outstanding at the
beginning of the year 1,781,786 3.89 1,200,186 4.79 132,118 7.62
Granted during the year 77,700 2.54 639,600 2.35 1,093,636 4.49
Exercised during the year - - - - (23,336) 5.375
Forfeited during the year (68,400) 3.05 58,000 5.73 (2,232) 7.875
---------- --------------- --------- ---------------- ----------- ----------------
Outstanding at the end of the
year 1,791,086 3.86 1,781,786 584 1,200,186 4.79
========== =============== ========= ================= =========== ================
Options exercisable at year-end 1,069,386 4.50 439,186 2,162 99,278 7.875
========== =============== ========= ================= =========== ================
F-50
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)
2. The following table summarizes information relating to stock options at
December 31, 2002:
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
----------------- -----------------
NUMBER AT NUMBER AT
EXERCISE PRICE (US$) DECEMBER 31, 2002 DECEMBER 31, 2002
----------------- -----------------
7.875 106,550 106,550
7.125 162,636 162,636
4.25 60,000 40,000
4.125 714,000 504,000
4 3,000 3,000
2.69 55,500 -
2.6 39,000 13,000
2.5 18,000 6,000
2.36 492,800 172,200
2.25 16,000 12,000
2.06 18,600 -
2.03 60,000 20,000
1.188 45,000 30,000
----------------- -----------------
1,791,086 1,069,386
================= =================
3. Outstanding options as at December 31, 2002 may be exercised as follows:
WEIGHTED
NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE (US$)
----------------- --------------------
Immediately 1,069,386 4.5
First year or thereafter 666,300 2.94
Second year or thereafter 55,400 2.53
----------------- -------------------
1,791,086
=================
F-51
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)
E. IMPACT OF RELEVANT RECENTLY ISSUED ACCOUNTING STANDARDS
1. In June 2002, the Financial Accounting Standard Board (FASB) issued
SFAS 146, Accounting for Costs Associated with Exit or Disposal
Activities which nullifies EITF 94-3, Liability Recognition for
Certain Employee Termination Benefit and Other Exit Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The
principal difference between Statement 146 and Issue 94-3 relates to
its requirements for recognition of a liability for a cost associated
with an exit or disposal activity. Statement 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. SFAS 146 is
required to be adopted for exit or disposal activities initiated after
December 31, 2002. The Company believes that adoption of SFAS 146 will
not have a significant impact on its consolidated financial
statements.
2. In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (the Interpretation), which addresses, among
other things, the disclosure to be made by a guarantor in its interim
and annual financial statements about its obligations under guarantee.
These disclosure requirements are included in footnote 17D to the
consolidated financial statement. The Interpretation also requires the
recognition of a liability by a guarantor at the inception of certain
guarantees.
The Interpretation requires the guarantor to recognize a liability for
the non-contingent component of the guarantee, this is the obligation
to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability
is the fair value of the guarantee at inception. The recognition of
the liability is required even if it is not probable that payments
will be required under the guarantee or if the guarantee was issued
with a premium payment or as part of a transaction with multiple
elements.
As noted above, the Company has adopted the disclosure requirements of
the Interpretation (see Note 17D) and will apply the recognition and
measurement provisions for all guarantees entered into or modified
after December 31, 2002.
3. In December 2002, the FASB issued SFAS 148, "Accounting for Stock
Based Compensation - Transition and disclosure - an amendment of FASB
Statement No. 123" (SFAS 148"). SFAS 148 permits two additional
methods for entities that adopt the fair value based method of
accounting for stock-based employee compensation. The statement also
requires new disclosures about the ramp-up effect of stock-based
employee compensation on reported results.
F-52
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- -------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)
E. IMPACT OF RELEVANT RECENTLY ISSUED ACCOUNTING STANDARDS (CONT'D)
The Statement also requires that those effects be disclosed more
prominently by specifying the form, content, and location of those
disclosures. The transition guidance and annual disclosure provisions
of SFAS 148 are effective for fiscal years ending after December 15,
2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports
containing financial statement for interim periods beginning after
December 15, 2002.
The Company has decided to continue accounting for its options in
accordance with APB 25.
See Note 22C and 22D for the required annual disclosures.
4. In November 2002, the Emerging Task-Force issued its consensus on EITF
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21") on an approach to determine whether an entity should divide an
arrangement with multiple deliverables into separate units of
accounting. According to the EITF in an arrangement with multiple
deliverables, the delivered item(s) should be considered a separate
unit of accounting if all of the following criteria are met: (1) The
delivered item(s) has value to the customer on a standalone basis, (2)
There is objective and reliable evidence of the fair value of the
undelivered item(s), (3) If the arrangement includes a general right
of return, delivery or performance of the undelivered item(s) is
considered probable and substantially in the control of the vendor. If
all the conditions above are met and there is objective and reliable
evidence of fair value for all units of accounting in an arrangement,
the arrangement consideration should be allocated to the separate
units of accounting based on their relative fair values. However,
there may be cases in which there is objective and reliable evidence
of the fair value(s) of the undelivered item(s) in an arrangement but
no such evidence for one or more of the delivered items. In those
cases, the residual method should be used to allocate the arrangement
consideration. The guidance in this Issue is effective for revenue
arrangements entered into in fiscal beginning after June 15, 2003.
Alternatively, entities may elect to report the change in accounting
as a cumulative-effect adjustment in accordance with Opinion 20. If so
elected, disclosure should be made in periods subsequent to the date
of initial application of this consensus of the amount of recognized
revenue that was previously included in the cumulative effect
adjustment. The Company believes that the adoption of EITF 00-21 will
not have a significant impact on the Company's consolidated financial
statements.
F-53