UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
AMENDMENT NO. 1
|_| 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
EXPLANATORY NOTE
B.V.R. Systems (1998) Ltd. ("Company") has determined that it is
necessary to correct multiple inadvertent typographical errors found in its
consolidated financial statements filed as Item 18 under the Company's annual
report on form 20-F for the year ended December 31, 2002, as filed on May 13,
2003 (the "Form 20-F").
Item 18 is amended by including the Company's consolidated financial
statements for the fiscal year ended December 31, 2002.
1
ITEM 18 FINANCIAL STATEMENTS
The Financial Statements required by this item are found at the end
of this amendment to the Form 20-F, beginning on page F-1.
2
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).
3
** 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, 2002.
+ Incorporated by reference to the annual report on Form 20-F for the year ended
December 31, 2000.
4
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 28, 2003
5
CERTIFICATIONS
--------------
I, Yoel Katzir, certify that:
1. I have reviewed this amendment to annual report on Form 20-F/A 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
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 28, 2003
/s/ Yoel Katzir
---------------------------------------
President and Chief Executive Officer
6
CERTIFICATIONS
--------------
I, Reuven Shahar, certify that:
1. I have reviewed this amendment to annual report on Form 20-F/A 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
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 28, 2003
/s/ Reuven Shahar
-----------------------------------------------
Chief Financial Officer and Vice President,
Finance
7
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 - 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
Director
/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 BALANCE SHEETS 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 1,995 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.
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 the book
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)
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
------------ ------------- -------------
B. 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, 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'D)
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'D)
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
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 18 - INCOME TAXES (CONT'D)
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-of-year valuation allowance 318 - 1,063
Taxes in respect of subsidiaries 236 66 -
------------- ------------- -------------
Actual tax expense 878 - 1,974
============= ============= =============
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.
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 on 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 10,660,874 2,529 21,408 22 (27,567) 3,608
=========== ============= =============== ============= ============= ==============
(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$)
---------- --------------- --------- ---------------- ----------- ----------------
Options outstanding at the
beginning of the year 1,781,786 3.89 1,200,186 4.79 132,118 7.62
Granted during the year 77,700 2.54 639,600 2.35 1,093,636 4.49
Exercised during the year - - - - (23,336) 5.375
Forfeited during the year (68,400) 3.05 (58,000) 5.73 (2,232) 7.875
---------- --------------- ---------- ---------------- ----------- ----------------
Outstanding at the end of the
year 1,791,086 3.86 1,781,786 3.89 1,200,186 4.79
========== =============== ========== ================= =========== ================
Options exercisable at year-end 1,069,386 4.50 439,186 4.98 99,278 7.875
========== =============== ========== ================= =========== ================
F-50
B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)
2. The following table summarizes information relating to stock options at
December 31, 2002:
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
----------------- -----------------
NUMBER AT NUMBER AT
EXERCISE PRICE (US$) 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)
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