COMMISSION FILE NO. 0-28996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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ELBIT MEDICAL IMAGING LTD.
(Exact Name of Registrant as Specified in its charter)
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ISRAEL
(Jurisdiction of incorporation or organization)
13 MOZES STREET, TEL-AVIV 67442, ISRAEL
(Address of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class:
NONE
Name of each exchange on which registered:
NONE
Securities registered or to be registered pursuant to Section
12(g) of the Act:
ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE
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Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
NONE
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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:
23,146,820 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.
YES |X| NO |_|
Indicate by check mark which financial statement item the registrant
has elected to follow.
ITEM 17 |_| ITEM 18 |X|
TABLE OF CONTENTS
Page
Inclusion of information about Elscint Limited...................1
ITEM 1. Identity of Directors, Senior Management and Advisors............1
ITEM 2. Offer Statistics and Expected Timetable..........................1
ITEM 3. Key Information..................................................1
ITEM 4. Information on the Company......................................19
ITEM 5. Operating and Financial Review and Prospects....................54
ITEM 6. Directors, Senior Management and Employees......................74
ITEM 7. Major Shareholders and Related Party Transactions...............81
ITEM 8. Financial Information...........................................84
ITEM 9. Offer and Listing...............................................90
ITEM 10. Additional Information..........................................91
ITEM 11. Quantitative and Qualitative Disclosure
About Market Risks.............................................107
ITEM 12. Description of Securities Other than Equity Securities.........115
ITEM 13. Defaults, Dividend Arrearages and Delinquencies................115
ITEM 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds....................................115
ITEM 15. Controls and Procedures........................................115
ITEM 16. [Reserved].....................................................116
ITEM 17. Financial Statements...........................................116
ITEM 18. Financial Statements...........................................116
ITEM 19. Exhibits.......................................................117
(ii)
CURRENCY TRANSLATION
For the reader's convenience, some financial information has been
translated from New Israeli Shekels ("NIS") to the U.S. dollar ("$" or U.S.
dollar), using the representative exchange rate as published by the Bank of
Israel as of December 31, 2002 ($1.00 = NIS 4.737). The dollar amounts reflected
in these convenience translations should not be construed as representing
amounts that actually can be received or paid in dollars or convertible into
dollars (unless otherwise indicated), nor do such convenience translations mean
that the NIS amounts (i) actually represent the corresponding dollar amounts
stated, or (ii) could be converted into dollars at the assumed rate. The Federal
Reserve Bank of New York does not certify for customs purposes a buying rate for
cable transfers in NIS. Therefore all information about exchange rates is based
on the Bank of Israel rates.
INCLUSION OF INFORMATION ABOUT ELSCINT LIMITED
We have included in this annual report certain information about our
subsidiary, Elscint Limited ("Elscint"), an Israeli company listed on the New
York Stock Exchange. Such information is taken from Elscint's annual report on
Form 20-F for the year ended December 31, 2002, as filed with the Securities and
Exchange Commission (the "SEC") on June 30, 2003 and should not be deemed as
representing full and complete information about Elscint. For more information
about Elscint's operations, please refer to Elscint's annual report.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Information not required in an Annual Report on Form 20-F
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Information not required in an Annual Report on Form 20-F
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
The selected financial data of Elbit Medical Imaging Ltd. and its
subsidiaries (together, "EMI," the "Company," "our Company," "we" or "us") is
found in our 2002 Consolidated Financial Statements and is set forth below in
table format. The 2002 Consolidated Financial Statements were prepared in
accordance with Israeli generally accepted accounting principles ("GAAP"), and
audited by Brightman Almagor & Co., a firm of certified public accountants in
Israel and a member of Deloitte & Touche ("Brightman Almagor"). We are providing
you with a copy of the 2002 Consolidated Financial Statements, related notes and
other financial information included therein, which you should read together
with the following table. Since October 1, 1999, EMI's functional currency is
the NIS.
The 1999, 2000, 2001 and 2002 information is presented in NIS. A
convenience translation to U.S. dollars is presented for 2002. The data
presented in this report includes information for 1998, which has been
translated to NIS from its original presentation in previous reports in U.S.
dollars.
Our consolidated financial statements have been prepared in accordance
with Israeli GAAP, which differs in significant respects from U.S. GAAP. We have
summarized principal differences relevant to us between Israeli GAAP and U.S.
GAAP in Note 26 to our consolidated financial statements included in Item 18 of
this annual report. You should read the information in the following tables in
conjunction with "Operating and Financial Review and Prospect" and the
consolidated financial statements and Notes to the consolidated financial
statements included in Item 18 of this annual report.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31
2002 2002 (1) *2001 (1) *2000 (2) *1999 (2) 1998 (3)
CONVENIENCE
TRANSLATION
US $ NIS NIS NIS NIS NIS
THOUSANDS THOUSANDS THOUSANDS THOUSANDS THOUSANDS THOUSANDS
REVENUES
Commercial-centers operations 60,195 285,151 134,752 28,117 -- --
Hotel operations and management 44,468 210,650 141,901 108,089 27,765 --
Long-term projects 325 1,538 10,223 20,367 -- --
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104,988 497,339 286,876 156,573 27,765 --
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COSTS OF REVENUES
Commercial-centers operations 32,274 152,887 67,926 12,917 -- --
Hotel operations and management 41,673 197,407 128,653 93,050 25,670 --
Long-term projects 300 1,419 7,452 18,245 -- --
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74,247 351,713 204,031 124,212 25,670 --
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GROSS PROFIT 30,741 145,626 82,845 32,361 2,095 --
Initiation costs of projects 3,578 16,949 5,969 2,819 -- --
Research and development expenses, net 6,122 29,001 24,663 26,566 31,721 --
Marketing and selling expenses 6,036 28,591 8,469 2,257 -- --
General and administrative expenses 18,938 89,711 63,456 55,026 55,466 13,023
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34,674 164,252 102,557 86,668 87,187 13,023
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OPERATING LOSS BEFORE FINANCIAL INCOME, NET (3,933) (18,626) (19,712) (54,307) (85,092) (13,023)
Financial income (expenses), net (1,171) (5,545) 103,510 33,189 64,192 38,592
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OPERATING INCOME (LOSS) AFTER FINANCIAL
INCOME (EXPENSES), NET (5,104) (24,171) 83,798 (21,118) (20,900) 25,569
Other income (expenses), net 2,045 9,687 34,731 (15,899) 9,664 --
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INCOME (LOSS) BEFORE INCOME TAXES (3,059) (14,484) 118,529 (37,017) (11,236) 25,569
Income taxes 4,671 22,128 13,857 18,907 9,047 2,784
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INCOME (LOSS) AFTER INCOME TAXES (7,730) (36,612) 104,672 (55,924) (20,283) 22,785
Equity in earnings (losses) of investee
companies, net (624) (2,962) (9,899) (3,303) 832 16,387
Minority-interest in results of
subsidiaries, Net 5,269 24,960 (6,029) 15,161 (11,428) (14,911)
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INCOME (LOSS) FROM CONTINUING OPERATIONS (3,085) (14,614) 88,744 (44,066) (30,879) 24,261
Income (loss) from discontinued
operations, net 11,780 55,804 19,119 28,341 (20,963) 421,763
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NET INCOME (LOSS) FOR THE YEAR 8,695 41,190 107,863 (15,725) (51,842) 446,024
=====================================================================
EARNINGS (LOSS) PER SHARE - (IN NIS)
Basic EPS:
From continuing operations (0.14) (0.66) 4.00 (1.99) (1.40) 1.12
From discontinued operations 0.52 2.50 0.86 1.28 (0.94) 19.59
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Earnings (loss) per share 0.38 1.84 4.86 (0.71) (2.34) 20.71
---------------------------------------------------------------------
Diluted EPS 0.36 1.75 4.08
=====================================================================
* Reclassified - see Note 23A to the financial
statements included in Item 18 below.
- ----------
1 Audited by Brightman Almagor.
2 Audited by Brightman Almagor and Somech Chaikin - a firm of certified public
accountants in Israel and a member of KPMG International, who were joint
auditing accountants with Brightman Almagor during these years ("Somech
Chaikin").
3 Audited by Luboshitz Kasierer & Co., a firm of certified public accountants
in Israel and an affiliate of Ernst & Young.
-2-
INCOME STATEMENT DATA
AS PER U.S. GAAP (*):
DATA IN NIS ADJUSTED AS AT 12/2003 YEAR ENDED DECEMBER 31,
-------------------------------
CONVENIENCE
TRANSLATION 2002 2001 (**) 2000 (**)
DECEMBER 31, 2002
$ ADJUSTED NIS
A) NET INCOME (LOSS) AND COMPREHENSIVE INCOME:
Net (loss) according to U.S. GAAP (in
thousands) 5,970 28,279 (21,518) (25,307)
Total comprehensive income (loss) (in thousands)
according to U.S. GAAP 30,845 146,115 16,689 (12,127)
Basic (loss) per ordinary share as per
U.S. GAAP 0.26 1.26 (0.96) (1.14)
Diluted loss per ordinary share as per U.S. GAAP (0.29) (1.38) (0.98) (1.14)
Weighted average of number of shares and share
equivalents under U.S. GAAP (thousands) 22,337 22,337 22,224 22,087
(*) For further information as to the main differences between Israeli and U.S.
GAAP, as applicable to the Company's financial statements, see Note 26 to
the attached financial statements, included in Item 18 below.
(**) Restated - see Note 26A(8) to the financial statements included in Item 18
below.
-3-
SELECTED BALANCE SHEET DATA** (INCLUDING AS PER U.S. GAAP):
DECEMBER 31,
2002 2002 *2001 *2000 *1999 *1998
CONVENIENCE
TRANSLATION NIS NIS NIS NIS NIS
US$ THOUSANDS THOUSANDS THOUSANDS THOUSANDS THOUSANDS THOUSANDS
Current Assets 217,638 1,030,964 1,153,946 870,317 1,401,003 2,229,205
Long term investments and receivables 96,507 457,162 486,218 581,744 544,999 --
Hotels, commercial centers and other
fixed assets 880,188 4,169,532 2,913,040 1,881,456 791,467 18,682
Other assets and deferred expenses 15,712 74,427 61,760 40,480 28,322 23,491
Assets related to discontinued
operations 24,094 114,135 203,190 309,998 312,408 642,878
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Total 1,234,137 5,846,220 4,818,154 3,683,995 3,078,199 2,914,256
Current Liabilities 409,120 1,938,038 1,643,513 1,039,297 749,164 473,290
Long-term liabilities 468,243 2,218,112 1,474,722 1,120,049 511,765 49,110
Liabilities related to discontinued
operations 23,669 112,120 258,731 271,687 433,534 820,446
Minority interest 104,710 496,020 506,810 476,941 493,958 482,123
Shareholders' equity 228,395 1,081,930 934,378 776,021 889,778 1,089,287
-----------------------------------------------------------------------------------
Total 1,234,137 5,846,220 4,818,154 3,683,995 3,078,199 2,914,256
Total assets according to U.S. GAAP 1,292,666 6,123,361 4,864,612(**) 3,704,296 3,376,956 2,914,256
Total liabilities according to U.S. GAAP 1,084,599 5,137,748 4,031,945(**) 2,930,024 2,488,656 1,824,969
Total shareholders equity according to
U.S. GAAP 208,067 985,613 832,667(**) 774,272 888,300 1,089,287
- -----------------------------------------------------------------------------------------------------------------------------------
(*) Reclassified - see note 23A to the financial statements included in Item 18
below.
(**) Restated - see Note 26A(8) to the financial statements included in Item 18
below.
EXCHANGE RATES
The exchange rate between the NIS and U.S. dollar published by the Bank
of Israel was NIS 4.373 to the dollar on May 31, 2003. The exchange rate has
fluctuated during the six months of December 2002 through May 2003 from a high
of NIS 4.924 to the dollar to a low of NIS 4.373 to the dollar. The high and low
exchange rates between the NIS and the U.S. dollar during the six months of
December 2002 through May 2003, as published by the Bank of Israel, were as
follows:
MONTH HIGH LOW
- --------------------------- ------------------------ ------------------------
1 U.S. dollar = 1 U.S. dollar =
- --------------------------- ------------------------ ------------------------
December 2002 4.791 NIS 4.632 NIS
January 2003 4.898 NIS 4.769 NIS
February 2003 4.924 NIS 4.810 NIS
March 2003 4.858 NIS 4.687 NIS
April 2003 4.671 NIS 4.521 NIS
May 2003 4.577 NIS 4.373 NIS
-4-
The average exchange rate between the NIS and U.S. dollar, using the
average of the exchange rates on the last day of each month during the period,
for each of the five most recent fiscal years was as follows:
PERIOD EXCHANGE RATE
January 1, 1998 - December 31, 1998 3.810 NIS/$1
January 1, 1999 - December 31, 1999 4.154 NIS/$1
January 1, 2000 - December 31, 2000 4.067 NIS/$1
January 1, 2001 - December 31, 2001 4.219 NIS/$1
January 1, 2002 - December 31, 2002 4.738 NIS/$1
FORWARD LOOKING STATEMENTS
This annual report on Form 20-F contains "forward-looking" statements,
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "1934 Act")
(collectively, the "Safe Harbor Provisions'"). These are statements that are not
historical facts and include statements about our beliefs and expectations.
These statements contain potential risks and uncertainties, and actual results
may differ significantly. Forward-looking statements are typically identified by
the words "believe," "expect," "intend," "estimate" and similar expressions.
Such statements appear in this annual report and include statements regarding
the intent, belief or current expectation of EMI or its directors or officers.
Actual results may differ materially from those projected, expressed or implied
in the forward-looking statements as a result of various factors including,
without limitation, the factors set forth below under the caption "Risk Factors"
(we refer to these factors as "Cautionary Statements"). Any forward-looking
statements contained in this annual report speak only as of the date hereof, and
we caution potential investors not to place undue reliance on such statements.
We undertake no obligation to update or revise any forward-looking statements.
All subsequent written or oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
Cautionary Statements.
RISK FACTORS
We have made some statements in this annual report about our future
activities that may or may not come true. Factors, over which we have no or
limited control, may affect our actual performance and results of operations and
may cause them to be different from what we present to you in this Annual
Report.
Our statements in this Annual Report are accurate to the best of our
knowledge and belief as of the date of this document is filed with the SEC. We
take no responsibility to publicly update or revise such statements.
EMI's activities are divided into three principal fields: (i) shopping
and entertainment malls; (ii) the hotel business conducted by Elscint; and (iii)
holdings in venture capital investments, primarily the image guided treatment
business through our subsidiary InSightec - Image Guided Treatment Ltd.
("InSightec"), and investments by Elscint in bio-technology companies. EMI is
subject to risks in all of these fields of activity.
-5-
RISKS RELATING TO THE SHOPPING AND ENTERTAINMENT MALLS BUSINESS
SUITABLE LOCATIONS ARE CRITICAL TO THE SUCCESS OF A SHOPPING AND
ENTERTAINMENT MALL
The choice of suitable locations for the development of the shopping
and entertainment mall projects is an important factor in the success of the
individual projects. Ideally, such sites should be located: (i) within the city
center, with well-developed transportation infrastructures (road and rail) in
close proximity to facilitate customer access; and (ii) within a local area with
sufficient population to support the malls. We cannot be certain that we will be
able to find sites in the target cities which meet these criteria, either at all
or at viable prices.
ZONING RESTRICTIONS AND LOCAL OPPOSITION CAN DELAY OR PRECLUDE
CONSTRUCTION OF A MALL
Sites which meet our criteria must be zoned for commercial activities
of the type contained in shopping and entertainment malls. In those instances
where the existing zoning is not applicable or in which the zoning has yet to be
determined, it will be necessary to apply for and obtain required zoning
classifications. This procedure may be protracted, particularly in countries
where the bureaucracy is cumbersome and inefficient, and we cannot be certain
that it will be completed with sufficient speed to enable the malls to open
ahead of the competition or at all. Opposition by local residents to zoning
and/or building permit applications may also cause considerable delays.
THE LEGAL AND GOVERNMENTAL ENVIRONMENT IN EASTERN EUROPE MAY NOT BE
HOSPITABLE TO US
The civil law legal system in many Eastern European countries is in
some instances rigid and slow to adapt itself to the requirements of a
western-orientated business operation. Some, but not all, countries in the
former communist bloc have been slow to adapt their commercial codes to
accommodate western business practices, and some legal and commercial concepts
and instruments which are customary in the west are either not recognized by, or
are contrary to, local laws.
In some Eastern European countries, the bureaucracy is cumbersome and
inefficient. This presents certain risks, particularly in determining the
validity of our title to the sites to be acquired for project development, and
in the registration of title acquired by us under contract. In addition,
obtaining the necessary permits, including building permits and operation
permits, may be delayed due rigid bureaucratic procedures.
WE DEPEND ON SUBCONTRACTORS TO CONSTRUCT OUR MALLS
We rely on subcontractors for all of our construction and development
activities. We cannot be certain that we will be able to enter into
subcontracting arrangements on terms acceptable to us or at all. The competition
for the services of quality subcontractors may cause delays in construction and
subcontracting arrangements may be on less favorable terms than would otherwise
be available, which may result in increased development and construction costs.
By relying on subcontractors we become subject to a number of risks relating to
these entities, such as quality of performance, work ethics, performance delays,
construction defects and the financial stability of the subcontractors. A
shortage of workers would have a detrimental effect on us and our subcontractors
and hence on our ability to conclude the construction phase on time and within
budget. We generally require our subcontractors to provide bank guarantees in
our favor to financially secure their performance. In the event the
subcontractor fails to perform, the bank guarantees provide a monetary payment
to us; however, the guarantees do not obligate the subcontractors to complete
the project and may not adequately cover our costs of completing the project or
the lost profits during the period while alternative means of completing the
project are sought.
-6-
COMPETITION IS INCREASING RAPIDLY IN EASTERN EUROPE
The retail and entertainment industry in Eastern Europe is rapidly
becoming more competitive, with a number of developers (particularly from
Germany and France) becoming active in our target areas. While their activities
in the past have tended to concentrate on "power-centers," the shopping and
entertainment mall concept we promote is gaining increasing popularity due to
its potentially high yields. Developers compete not only for patrons, but also
for desirable properties, financing, raw materials, qualified contractors,
experienced system consultants, expert marketing agents and skilled labor. The
public bidding process is subject to intense competition and some of our
competitors have longer operating histories and greater resources than us, all
of which may limit our ability to obtain such projects. There can be no
assurance that we will be successful in winning tenders which we bid for or
which are awarded pursuant to fixed price tenders or will otherwise continue to
be successful in competing in Eastern European.
WE WILL REQUIRE ADDITIONAL FINANCING TO EXPAND
The industry in which we compete is capital intensive and requires
substantial up-front expenditures for land acquisition, development and
construction costs. Accordingly, we require substantial amounts of cash and
construction financing from banks for our operations. We cannot be certain that
such external financing would be available on favorable terms or at all. In
addition, construction loan agreements generally permit the draw down of the
loan funds against the achievement of pre-determined construction and space
leasing milestones. If we fail to achieve these milestones, the availability of
the loan funds may be delayed, thereby causing a further delay in the
construction schedule. If we are not successful in obtaining financing to fund
our planned projects and other expenditures, our ability to undertake additional
development projects may be limited and our future profits and results of
operations could be materially adversely affected.
We regularly obtain construction loans from banks (including
guarantees) for our development projects. The availability and terms upon which
such financing may be obtained are material to our operations and there can be
no certainty that such financing, if available, will be on terms acceptable to
us. Furthermore, fluctuations in interest rates may adversely affect the terms
of financing available from banks.
DELAYS IN THE COMPLETION OF CONSTRUCTION PROJECTS COULD AFFECT OUR
SUCCESS
An important element in the success of our shopping mall projects is
the short construction time (generally 8 to 12 months from the receipt of
building permits, depending on the size of the project), and our ability to open
the malls ahead of competition, particularly in cities which do not have
shopping and entertainment malls of the type constructed by us. This makes us
subject to a number of risks relating to these activities including delays in
obtaining zoning and other approvals, the unavailability of materials and labor,
the abilities of sub-contractors to complete work competently and on schedule,
the surface and subsurface condition of the land underlying the project,
environmental uncertainties, extraordinary circumstances or acts of god as well
as ordinary risks of construction that may hinder or delay the successful
completion of a particular project. In addition, under our development
contracts, we have deadlines for most of our projects (subject to limited
exceptions). If construction of a project does not proceed in accordance with
our schedule, we may in some instances be required to pay penalties based on the
extent and time of the delay. The failure to complete a particular project on
schedule or on budget may have a material adverse effect on our business,
prospects, results of operations or financial condition.
WE MAY BECOME DEPENDENT ON CERTAIN SUPPLIERS
The building industry may from time to time experience fluctuating
prices and shortage in the supply of raw materials as well as shortages of labor
and other materials. The failure to obtain sufficient amounts of raw materials
-7-
and to retain efficient employees on terms acceptable to us may result in a
material adverse effect on the results of our operations.
WE ARE DEPENDENT ON ENGAGING THIRD PARTIES TO ENTER INTO LEASE
AGREEMENTS, AND ON OBTAINING AND RETAINING ATTRACTIVE HIGH CUSTOMER
TRAFFIC LOCATIONS
We are dependent on our ability to engage third parties to enter into
new leases and renew existing leases on favorable terms and may find it more
expensive to engage such third parties to enter into such leases during periods
when market rents are increasing, or when general consumer activity is
decreasing. If a significant portion of our existing leases were to expire
during such a period, we may experience a decline in rental incomes, or find it
more expensive to continue to operate the shopping and entertainment malls. We
seek agreements in principal with anchor tenants (such as the operators of movie
theaters, supermarkets, department stores, electrical appliances stores and
video and gaming arcades), either generally or on a property-by property basis,
prior to entering into a formal lease. The termination of a lease by any anchor
tenant may materially adversely affect the Company. The failure of an anchor
tenant to abide by these agreements may cause delays, result in a decline in
rental incomes (temporary or long term) and may create difficulties in finding a
suitable replacement tenant.
OUR RESULTS OF OPERATIONS FLUCTUATE DUE TO THE SEASONALITY OF OUR
BUSINESS
A weak holiday shopping season (generally, the Christmas and Easter
seasons) may adversely affect our profitability. The annual revenues and
earnings of the tenants that lease space in our shopping and entertainment malls
are substantially dependent upon the amount of patron traffic, both generally
and particularly during peak shopping periods. As a result, changes in the level
of traffic in shopping and entertainment malls during this period have a
disproportionate effect on the annual results of operations of the entities that
lease space in our shopping and entertainment malls, which may affect their
ability to meet their rental obligations.
GENERAL ECONOMIC CONDITIONS IN A REGION WILL AFFECT OUR TENANTS
If an economic recession occurs, the demand and rents for neighborhood
and community shopping and entertainment malls could decline and adversely
affect our financial condition and results of operations. Our financial
condition and results of operations could also be adversely affected if our
tenants are unable to make lease payments or fail to renew their leases.
ENVIRONMENTAL ISSUES ARE BECOMING OF INCREASING SIGNIFICANCE IN EASTERN
EUROPE
There is increasing awareness of environmental issues in Eastern
Europe. This may be of critical importance in areas previously occupied by the
Soviet Army. While we generally insist upon receiving an environment report as a
condition for purchase, or alternatively conduct environmental tests during our
due diligence investigations, we cannot be certain that all sites acquired will
be free of environmental pollution. Should that eventuality arise, it will
adversely affect our ability to construct, develop and operate the shopping and
entertainment mall on the relevant site, and may cause us to suffer expenses
needed to clean up the polluted site.
RISKS RELATING TO THE HOTEL BUSINESS OF ELSCINT
We have summarized below certain material risk factors relating to
Elscint's hotel business. For full information as to the risks involved in
Elscint's operations, please refer to Elscint's annual report on Form 20-F for
the year ended December 31, 2002.
-8-
THE LODGING INDUSTRY MAY BE AFFECTED BY ECONOMIC CONDITIONS,
OVERSUPPLY, TRAVEL PATTERNS, WEATHER AND OTHER CONDITIONS BEYOND
ELSCINT'S CONTROL WHICH MAY ADVERSELY AFFECT ELSCINT'S BUSINESS AND
RESULTS OF OPERATIONS
The lodging industry may be adversely affected by changes in national
or local economic conditions and other local market conditions. Elscint's hotels
in Johannesburg, Budapest and Bucharest may be subject to the risk of oversupply
of hotel rooms, as well as risks resulting from economic instability and
political uncertainty. Elscint is subject to various risks related to Elscint's
operations in Europe, including economic and political instability, political
and criminal corruption and the lack of experience and unpredictability of the
civil justice system. Other general risks that may affect Elscint's hotel
business are changes in travel patterns, extreme weather conditions, changes in
governmental regulations which influence or determine wages, workers union
activities, land acquisition prices or construction costs, changes in interest
rates, the availability of financing for operating or capital needs, or changes
in real estate tax rates and other current operating expenses.
COMPETITION IN THE LODGING INDUSTRY COULD HAVE A MATERIAL ADVERSE
EFFECT ON ELSCINT'S BUSINESS AND RESULTS OF OPERATIONS
The hotel business is highly competitive, particularly in those areas
where there is an over-supply of rooms. Competitive factors within the industry
include:
o convenience of location and accessibility to business centers;
o room rates;
o quality of accommodations;
o name recognition;
o quality and nature of service and guest facilities provided;
o reputation;
o reservation systems; and
o the supply and availability of alternative lodging.
Elscint intends to develop or acquire most of its hotels in geographic
locations where other hotels are or may be located. Many of these competitors
have greater financial resources and better brand name recognition than Elscint
does, and may have more established relationships with prospective franchisers,
representatives in the construction industry and other parties engaged in the
lodging industry. We cannot be sure that new or existing competitors of Elscint
will not significantly reduce their rates or offer greater convenience, services
or amenities or significantly expand or improve hotels in the markets in which
Elscint currently or may subsequently compete, thereby materially adversely
affecting Elscint's business and results of operations.
ACQUIRING, DEVELOPING AND RENOVATING HOTELS INVOLVES SUBSTANTIAL RISKS,
AND ELSCINT CANNOT BE CERTAIN OF THE SUCCESS OF ANY FUTURE PROJECTS
Part of Elscint's growth strategy is to develop new hotels and to
acquire and redevelop old or under-performing hotels. Acquiring, developing and
renovating hotels involves substantial risks, including:
-9-
o costs exceeding Elscint's budget or amounts agreed to with
contractors, because of several factors, including delays in
completion of construction;
o competition for acquisition of suitable development sites from
competitors which may have greater financial resources;
o the failure to obtain zoning and construction permits;
o unavailability of financing on favorable terms;
o the failure of Elscint's hotels to earn profits sufficient to
service debt incurred in construction or renovation, or at all;
o labor and workers' union legal requirements;
o relationships with and performance by contractors;
o changes in governmental rules, regulations, planning and
interpretations; and
o changes in general economic and business conditions.
We cannot be certain that present or future development or renovation
by Elscint will be successful. For successful growth, Elscint must be able to
acquire hotels on attractive terms and integrate the acquired hotels into its
existing operations. For acquired hotels Elscint must consolidate management,
operations, systems, personnel and procedures, which may not be immediately
possible due to collective labor agreements or other legal or operational
obstacles. Any substantial delays or unexpected costs in this integration
process could materially affect Elscint's business, financial condition or
results of operations. We cannot be certain that Elscint's newly acquired hotels
will perform as expected or that Elscint will be able to realize any cost
savings.
ELSCINT EXPECTS TO GROW INTERNALLY AND THROUGH ACQUISITIONS AND IT MAY
NOT BE ABLE TO MANAGE SUCH GROWTH
Elscint expects to grow internally and through acquisitions. Elscint
expects to spend significant time and effort in (i) renovating or refurbishing
existing hotels, (ii) identifying, completing and integrating acquisitions and
(iii) developing new properties. Any future growth in Elscint's business will
impose significant added responsibilities on members of its management,
including the need to identify, recruit and integrate new managers and
executives. We cannot be certain that Elscint will be able to identify and
retain additional management and other professional personnel with appropriate
qualifications or at all.
ELSCINT HAS SIGNIFICANT CAPITAL NEEDS AND ADDITIONAL FINANCING MAY NOT
BE AVAILABLE
The development, renovation and maintenance of hotels are capital
intensive. As part of Elscint's growth strategy it intends to acquire, renovate
and redevelop additional hotels and to develop new hotels. To pursue this
strategy, Elscint will be required to obtain additional capital in the future to
meet its expansion plans. In the past Elscint financed its growth through bank
loans at prevailing market rates. (See "Item 5 - Operating and Financial Review
and Prospects - Loans - Elscint"). In addition, in order for its hotels to
remain competitive they must be maintained and refurbished on an ongoing basis.
Elscint may obtain needed capital from cash on hand, including reserves, cash
flow from operations or from financing, including borrowing from banks and
others. Elscint may also seek financing from other sources or enter into joint
ventures and other collaborative arrangements in connection with the acquisition
or development of hotel properties. We cannot be certain that Elscint will be
able to raise any additional financing on advantageous terms on a timely basis,
which may affect its ability to construct or acquire additional hotels, and
Elscint may experience delays in its planned renovation or maintenance of its
hotels.
-10-
ELSCINT'S MANAGEMENT AGREEMENTS MAY RESTRICT ITS HOTEL BUSINESS AND ITS
MAINTENANCE, AND MAY BE TERMINATED
All of the operating hotels in which Elscint has an interest (other
than the Shaw Park Plaza Hotel) are either directly or indirectly operated under
management agreements with Park Plaza Hotels Europe, Ltd. ("Park Plaza").
Park Plaza is the franchisee for certain territories under territorial
license and franchise agreements with Park Inn International Worldwide Hotel
Group, which entitles Park Plaza to use the "Park Plaza" tradename. Elscint
expects to derive substantial benefits from its strategic alliances with Park
Plaza. However, any significant decline in the reputation of Park Plaza or in
its ability to ensure the performance of Elscint's hotels at anticipated levels
could adversely affect Elscint's results of operations. Also, if for any reason
Park Plaza loses its principal franchise, Elscint will automatically lose its
ability to use the Park Plaza name and other benefits, in which case Elscint may
suffer in the areas of brand name recognition, marketing, and centralized
reservations systems provided by Park Plaza, which, in turn, could materially
affect Elscint's results of operations. Furthermore, we cannot be certain that
Elscint will be able to obtain alternative management services of the same
standard on similar or better terms. In addition, the agreement for each hotel
usually contains specific standards for, and restrictions and limitations on,
hotel operation and maintenance. These standards, restrictions and limitations
may conflict with Elscint's priorities, and impose capital demands upon Elscint.
In addition, Park Plaza may alter its standards or hinder Elscint's ability to
improve or modify its hotels. In order to comply with Park Plaza's requirements,
or alternatively to change a franchise affiliation for a particular hotel and
disassociate itself from the "Park Plaza" tradename, Elscint may be forced to
incur significant costs or make capital improvements.
THE RESULTS OF OPERATIONS OF ELSCINT'S HOTEL DIVISION MAY BE ADVERSELY
IMPACTED BY EXCHANGE RATE FLUCTUATIONS AND INFLATION
The revenues of Elscint's hotel division, as well as its operating
expenses, capital expenses and debt payments, are generally denominated in the
currency in which each asset is located. Therefore, any fluctuations in the
exchange rates between these currencies and the NIS may have an adverse effect
on the reporting of the results of Elscint's hotel division as reflected in
Elscint's Consolidated Financial Statements, which are reported in NIS. The
reporting of Elscint's operations that do not have revenues and expenses in the
same currency will be affected by currency fluctuations. While Elscint seeks to
mitigate the impact on the results of its operations of a NIS devaluation
(including by linking financing transactions specifically to the relevant
operating currency), we cannot be certain that Elscint will be able to do so
successfully.
THE VALUE OF ELSCINT'S INVESTMENT IN THE HOTEL PROPERTIES IS SUBJECT TO
VARIOUS RISKS RELATED TO OWNERSHIP AND OPERATION OF REAL PROPERTY
Elscint's investment in the hotel properties is subject to varying
degrees of risks related to the ownership and operation of real property. The
intrinsic value of Elscint's hotels and income from the hotels may be materially
adversely affected by:
o changes in global and national economic conditions, including
global or national recession;
o a general or local slowdown in the real property market;
o political or natural events that may have a material adverse
effect on the hotel industry;
o competition from other lodging facilities;
-11-
o material changes in operating expenses, including real property
tax systems or rates;
o changes in the availability, cost and terms of financing;
o the effect of present or future environmental laws;
o the ongoing need for capital improvements and refurbishments; and
o material changes in governmental rules and policies.
RISKS RELATING TO ELSCINT'S ENTERTAINMENT AND COMMERCIAL CENTER IN
HERZLIA, ISRAEL
We have summarized below certain risk factors relating to Elscint's
entertainment and commercial center. For full information as to such risks,
please refer to Elscint's annual report on Form 20-F for the year ended December
31, 2002.
THERE ARE MANY COMPETING ENTERTAINMENT AND COMMERCIAL CENTERS
There are several entertainment and commercial centers in Israel in
general, and specifically in the greater Tel Aviv area (which includes Herzlia).
There are two operational shopping centers within approximately 1 to 3 miles
from the location of Elscint's entertainment and commercial center. These other
centers compete for customers as well as for third party retailers and operators
to lease space in such centers. There can be no assurance that Elscint will be
successful in competing with the other entertainment and commercial centers.
ELSCINT IS DEPENDENT ON ENGAGING THIRD PARTIES TO ENTER INTO LEASE
AGREEMENTS, AND ON OBTAINING AND RETAINING HIGH CUSTOMER TRAFFIC
Elscint is dependent on its ability to induce food and commodity
retailers and entertainment service providers to enter into leases for units in
its entertainment and commercial center, or to renew existing leases on
favorable terms. There is also active competition to attract tenants to
commercial areas and other locations suitable for entertainment and commercial
centers. The general economic recession in Israel may also deter businesses from
entering into new lease agreements or renewing existing lease agreements, or
from incurring the costs required to fit out their rented units in an acceptable
manner. If a significant portion of Elscint's existing leases expire, Elscint
may find it more expensive or less profitable to continue to operate its
entertainment and commercial center.
THE QUARTERLY RESULTS OF OPERATIONS OF THE ENTERTAINMENT AND COMMERCIAL
CENTER MAY FLUCTUATE DUE TO THE SEASONALITY OF ITS BUSINESS AND GENERAL
CONDITIONS IN ISRAEL
A weak holiday shopping season would adversely affect the center's
profitability. The annual revenues and earnings of the entities that have leased
or will lease space in the entertainment and commercial center, as well as of
prospective lessees, are substantially dependent upon the amount of traffic in
Elscint's entertainment and commercial center during the holiday shopping
periods, which may affect their ability to satisfy their rental obligations. As
a result, changes in the level of traffic in Elscint's entertainment and
commercial center during this period may have a disproportionate effect on the
annual results of operations of the entities that lease space in Elscint's
entertainment and commercial center, which may give rise to tenants going out of
business, defaulting on their lease agreements or otherwise being unable to
fulfill their obligations towards Elscint, which may have a material adverse
effect on Elscint's business. In addition, patron traffic during the periods
immediately following peak holiday seasons are traditionally slower.
Furthermore, general economic recession in Israel, as well as the deteriorating
security situation in the Middle East and terrorist attacks on civilian targets
in Israel could cause a slowdown in customer traffic and consumer purchasing
patterns.
-12-
ACCESS TO THE COMMERCIAL AND ENTERTAINMENT CENTER MAY BECOME CONGESTED
Vehicular access to the commercial and entertainment center is liable
to be congested during peak periods. The main access route from the Tel
Aviv-Haifa highway runs through a popular entertainment area which attracts
numerous visitors, principally at night. The same area accommodates many office
and commercial buildings which creates increased traffic flow at the beginning
and end of the working day. The patrons of the commercial and entertainment
center may encounter traffic congestion problems in reaching the center, which
may adversely affect the number of customers visiting the center. Elscint is
exploring various solutions designed to alleviate access difficulties (including
the provision of shuttle services from the nearby Herzlia railway terminal).
A DECISION OF AN ISRAELI COURT MAY CAUSE DELAYS IN THE GENERAL
DEVELOPMENT OF THE PROJECT THAT INCLUDES ELSCINT'S ENTERTAINMENT AND
COMMERCIAL CENTER
An Israeli court has determined that the zoning plan applicable to the
Herzlia Marina project permits the construction of resort units and not of
residential units. This decision is not final and an appeal by various
developers is still pending. While this issue does not directly affect Elscint's
entertainment and commercial center, any delays in the general development of
the project caused by the resolution of this matter may affect the flow of
consumers to the area.
RISKS RELATING TO EMI'S HOLDINGS IN VENTURE CAPITAL OPERATIONS AND ELSCINT'S
BIO-TECHNOLOGY INVESTMENT
START-UP OPERATIONS MAY BE HIGH-RISK VENTURES
Investments in start-up operations may involve high risks. These
investments are generally directed at providing a bridge between the preliminary
concept/proto-type stage and the manufacturing and marketing stages. Success of
start-up investments is generally a function of the quality of management,
success in tests carried out during the research and development phase, the
quality of the product or service, its relative added value in the market and
the timing of its launching. Start-up companies are subject to various risks
generally encountered by new enterprises, including delayed or protracted
research and development programs, acceptance of product in the market place,
regulatory approvals and the need for additional financing which might not be
available. While both EMI and Elscint use considerable efforts to investigate
the integrity and potential of their investments, we cannot be certain that the
professional assessments made at the time of investment as to the quality of the
concept or the proto-type will prove correct, or that there will be an adequate
return on investment, if at all, nor can we be certain that the timing of
realizing the profits from the investments will be optimal.
OUR AND ELSCINT'S INVESTMENTS IN START-UP COMPANIES ARE SPECULATIVE IN
NATURE AND WE MAY NEVER REALIZE ANY REVENUES OR PROFITS FROM SUCH
INVESTMENTS
We cannot be certain that our and Elscint's investments in start-up
companies will result in revenues or profits. Our and Elscint's success depends
upon the ability to select start-up companies that are ultimately successful. As
of the date of this report, none of the start-up companies in which we or
Elscint invested has generated operating revenues sufficient to pay dividends to
us. Economic, governmental, regulatory and industry factors outside our or
Elscint's control affect each of such companies. If such companies do not
successfully implement their business plans with the assistance of our or
Elscint's experience and methodologies, then we will not be able to realize any
profits from such investments. There are also material risks relating to the
businesses of the companies in which we or Elscint invest. Accordingly, our and
Elscint's ability to realize profits from such investments will be dependent
upon the management and operations of the companies, the success of the research
and development activities of such companies, the timing of the marketing of
their products and numerous other factors beyond our or Elscint's control.
-13-
DEVELOPMENT PERIODS OF PRODUCTS OR MARKETABLE SERVICES MAY BE
PROTRACTED
The period of time which may elapse between the initial stage and the
stage of development of marketable products or services, especially in the field
of bio-technology conducted by Gamida in which Elscint invests, may be
protracted. Concept-to-market capability development may exceed five years in
some instances, during which time substantial capital investments may be
required. Unforeseen delays in the projected research and development timetable
may cause additional delays. We cannot be certain that the products or services
developed by the companies in which we or Elscint invest, once developed, will
achieve the projected degree of market penetration, or that competitive products
will not have reached the market prior thereto, nor can we be certain that the
profits from such products or services will be adequate in light of the extent
and period of the required investments.
CLINICAL TESTING OF BIO-TECHNOLOGY AND MEDICAL DEVICE PRODUCTS UNDER
DEVELOPMENT REQUIRES FDA APPROVAL
Products in the bio-technology and the medical device field are subject
to clinical tests, either in compliance with the requirements of the United
States Food and Drug Administration (the "FDA") or the requirements of competent
regulatory authorities in other countries where target markets are identified.
In order to initiate clinical studies in humans, the prior approval of the
regulatory authorities must be obtained. In some circumstances, applications to
market such products may be denied, or the award of permission may be delayed.
The inability of our or Elscint's investee companies to commence clinical
studies in a timely manner may have a negative impact on their projected
time-to-market factors. Failure to obtain such approvals could have a material
adverse effect on the companies, and thus on our and Elscint's investments.
In the event that our or Elscint's investee companies are unable to
obtain such regulatory approvals in any potential market, then they will be
unable to market their products. While we have no reason to believe that such
approvals will not be obtained, it should be noted that they are a prerequisite
to the marketing of the products of the investee companies in all of the major
target markets.
PHYSICIANS MAY NOT UTILIZE AND MAY OPPOSE NEW PRODUCTS OR TECHNOLOGIES
OF OUR AND ELSCINT'S INVESTEE COMPANIES
Certain products or services developed by any of our and Elscint's
investee companies may fundamentally change the treatment of various medical
conditions. Physicians may be reluctant to use such products or services, and
may prefer to apply other methods of treatment. If such products or services are
not utilized by physicians, our and Elscint's investments in the relevant
investee companies may not materialize.
THE PRODUCTS AND SERVICES OF OUR AND ELSCINT'S INVESTEE COMPANIES MAY
FACE COMPETITION
Products and services of our and Elscint's investee companies may face
competition from alternative sources. There are various competitors in the
fields in which our and Elscint's investee companies are engaged, many of whom
have greater financial resources than our and Elscint's investee companies, and
have well developed marketing networks which our and Elscint's investee
companies currently lack. In addition, even if our and Elscint's investee
companies begin to market their products prior to their competitors, neither we
nor Elscint can be certain that competing products will not attain a significant
market share. Finally, several competitors enjoy high brand name recognition,
which our and Elscint's investee companies lack. (See "Item 4 - Information on
the Company - Competition - EMI -Venture Capital Investments").
-14-
OUR AND ELSCINT'S INVESTEE COMPANIES REQUIRE STRATEGIC PARTNERS TO
MARKET THEIR PRODUCTS
In order to penetrate the U.S. and European markets, it is essential to
find well-positioned and well-known strategic partners with high brand name
recognition in the market place. Such strategic partners would provide worldwide
or extensive territorial marketing, sales and other services for the products of
our and Elscint's investee companies. Failure to establish a strategic
partnership of this type could have an adverse effect on the success of the
products, since the lack of brand name recognition, geographical distance to
important target markets and the lack of an established marketing and service
infrastructure would severely hamper the efforts of our and Elscint's investee
companies to achieve a significant and early market presence.
OUR AND ELSCINT'S INVESTEE COMPANIES MAY BE REQUIRED TO DEFEND ANY
POTENTIAL INFRINGEMENT OF THEIR PATENTS
Infringement of the registered and pending patents of any of our or
Elscint's investee companies by unauthorized competitors may result in competing
products using the technology of our or Elscint's investee companies. While we
expect our and Elscint's investee companies to vigorously challenge any such
violations with all legal rights and processes available to them, neither we nor
Elscint can be certain that such litigation will either be successfully
concluded or concluded with sufficient expedition to mitigate the damage. In
addition, the costs of pursuing these remedies is often high.
THE PRODUCTS AND SERVICES OF OUR AND ELSCINT'S INVESTEE COMPANIES COULD
INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, CAUSING COSTLY
LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS
Our and Elscint's investee companies are subject to the risk that
others may assert claims that they have infringed the claimants' current or
future intellectual property rights. Any claims, with or without merit, could be
time-consuming, result in costly litigation, prevent or cause delays, in product
shipment or require our or Elscint's investee companies to enter into royalty or
licensing agreements, any of which could harm their business. Patent litigation
in particular has complex technical issues and inherent uncertainties. In the
event that an infringement claim against our or Elscint's investee companies is
successful and they cannot obtain a license on acceptable terms or license a
substitute technology or redesign their products to avoid infringement, their
business could be harmed.
RISKS RELATING TO THE IMAGE GUIDED TREATMENT BUSINESS
INSIGHTEC REQUIRES VOLUNTEERS TO TEST ITS PRODUCT UNDER DEVELOPMENT
The principal product of InSightec is the ExAblate 2000, an MR guided
Focused Ultrasound (FUS) system which has received regulatory approval for the
treatment of uterine fibroids in Europe and Israel. The system is presently
still undergoing clinical trials and beta-site testing for the uterine fibroids
treatment in the U.S. as well as for several other clinical applications
worldwide at various medical institutions in North America, Europe and Israel.
In order to complete these trials in compliance with the FDA requirements, it is
necessary to recruit volunteers to undergo the treatment offered by the new
product, subject to the strict guidelines imposed by regulatory authorities.
InSightec's inability to attract volunteers in sufficient numbers will result in
delays in obtaining regulatory approvals, which may have an adverse impact on
projected time-to-market factors.
-15-
DELAYS IN OBTAINING REIMBURSEMENT BY HEALTH PROVIDERS FOR THE USE OF
INSIGHTEC'S PRINCIPAL PRODUCT MAY ADVERSELY EFFECT INSIGHTEC'S ABILITY
TO SELL THE PRODUCT IN EUROPE
Although InSightec's principal product has been approved for the
commercial treatment of uterine fibroids in Europe and Israel, any delays in the
approval by the health providers in different countries of reimbursement for the
use of such product may adversely affect InSightec's ability to sell the product
as well as its, and therefore EMI's, results of operations.
SURGEONS MAY NOT UTILIZE AND MAY OPPOSE INSIGHTEC'S NEW TECHNOLOGY
The HIFUS product, applied in conjunction with magnetic resonance
imaging systems, creates a product that may be described as a "thermal scalpel,"
which may be used by surgeons and interventional radiologists to non-invasively
detect, monitor and destroy tissues and organs under direct real-time magnetic
resonance image guidance. Although we believe that use of InSightec's product
will fundamentally change the treatment of various medical conditions such as
breast tumors, uterine fibroids and brain tumors, surgeons may be reluctant to
use such technology, and instead elect to use current methods of treatment,
which may result in our inability to realize our investment in InSightec.
INSIGHTEC'S PRODUCT MAY FACE COMPETITION AND IT DOES NOT HAVE A
RECOGNIZABLE BRAND NAME
InSightec's product faces competition from alternative minimal invasive
surgery (MIS) and competing HIFUS products. There are a number of competitors in
these fields, although we are not aware of any that have reached InSightec's
stage of clinical trials and beta-site testing and, to our knowledge, none have
obtained regulatory approval. However, even if InSightec begins to market its
product prior to its competitors, competing products may attain a significant
market share. In addition, several competitors enjoy high domestic brand name
recognition, which InSightec presently lacks.
PATIENTS MAY SEEK LEGAL REDRESS IF TREATMENTS ARE UNSUCCESSFUL OR CAUSE
BODILY HARM
As the developer and manufacturer of the HIFUS system, InSightec may
face claims for compensation in the event that treatments administered using the
system are unsuccessful or cause bodily harm to patients. While InSightec adopts
customary legal tools to limit its liability in such instances, an adverse
judgement awarding actual or punitive damages could have a material adverse
effect both on the financial standing of InSightec and on its ability to market
its products.
RISKS RELATING TO ISRAEL
SECURITY AND ECONOMIC CONDITIONS IN ISRAEL MAY AFFECT OUR OPERATIONS
We are incorporated under Israeli law and our principal offices are
located in Israel. Political, economic and security conditions in Israel
directly affect our operations. Since the establishment of the State of Israel
in 1948, various armed conflicts have taken place between Israel and its Arab
neighbors and a state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Israel signed a peace treaty with
Egypt in 1979 and a peace treaty with Jordan in 1994. As of the date of this
annual report, Israel has not entered into any peace agreement with Syria or
Lebanon. Since 1993 several agreements have been signed between Israel and the
Palestinians, but a final agreement has not been achieved. Since October 2000,
there has been a marked increase in hostilities between Israel and the
Palestinians, characterized by terrorist attacks on civilian targets, suicide
bombings and military incursions into areas under the control of the Palestinian
Authority, all of which have adversely affected the peace process, placed the
Israeli economy under significant stress, and have negatively influenced
Israel's relationship with several Arab countries. In addition, some neighboring
countries, as well as certain companies and organizations, continue to
participate in a boycott of Israeli firms and others doing business with Israel
or with Israeli companies. Restrictive laws, policies or practices directed
towards Israel or Israeli businesses could have an adverse impact on the
expansion of our business. In addition, we could be adversely affected by the
interruption or curtailment of trade between Israel and its trading partners, a
significant increase in the rate of inflation, or a significant downturn in the
economic or financial condition of Israel.
-16-
MANY OF OUR DIRECTORS, OFFICERS AND EMPLOYEES ARE OBLIGATED TO PERFORM
ANNUAL MILITARY RESERVE DUTY IN ISRAEL. WE CANNOT ASSESS THE POTENTIAL
IMPACT OF THESE OBLIGATIONS ON OUR BUSINESS
Our directors, officers and employees who are male adult citizens and
permanent residents of Israel under the age of 49, including some of our
directors and officers, are, unless exempt, obligated to perform annual military
reserve duty and are subject to being called to active duty at any time under
emergency circumstances. The deteriorating security situation in the Middle East
has caused, and will continue to cause in the foreseeable future, a sharp
increase in the army reserve obligations of those of our directors, officers and
employees who are subject to such reserve duty obligations. Although we have
operated effectively under these requirements in the past, including during
recent hostilities with the Palestinians and the Iraq War, we cannot assess the
full impact of these requirements on our workforce or business if conditions
should change, and we cannot predict the effect of any increase or reduction of
these requirements on us.
AN INCOME TAX REFORM IN ISRAEL MAY ADVERSELY AFFECT OUR SHAREHOLDERS
AND US
Effective as of January 2003, the Israeli Parliament has enacted a wide
ranging reform of the Israeli income tax system. These tax reforms have resulted
in significant changes to the Israeli tax system, and may have adverse tax
consequences for our shareholders and us. (See "Item 10 - Additional Information
- - Taxation - Reform of Taxes on Income in Israel".)
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US AND OUR
OFFICERS AND DIRECTORS OR TO ASSERT U.S. SECURITIES LAWS CLAIMS IN
ISRAEL OR SERVE PROCESS ON US AND SUBSTANTIALLY ALL OF OUR OFFICERS AND
DIRECTORS
All of our executive officers and directors are non-residents of the
United States, and a substantial portion of our assets and the assets of these
persons are located outside the United States. Therefore, it may be difficult
for an investor, or any other person or entity, to enforce a U.S. court judgment
based upon the civil liability provisions of the U.S. federal securities laws in
an Israeli court against us or any of those persons or to effect service of
process upon these persons in the United States. Additionally, it may be
difficult for an investor, or any other person or entity, to enforce civil
liabilities under U.S. federal securities laws in original actions instituted in
Israel.
Notwithstanding the foregoing, Israeli courts may enforce a U.S. final
executory judgment for liquidated amounts in civil matters, obtained after due
process before a court of competent jurisdiction (according to the rules of
private international law currently prevailing in Israel) which recognizes and
enforces similar Israeli judgments, provided that: (i) adequate service of
process has been effected and the defendant has had a reasonable opportunity to
be heard; (ii) such judgment and the enforcement thereof are not contrary to the
law, public policy, security or sovereignty of the State of Israel; (iii) such
judgment was not obtained by fraud and does not conflict with any other valid
judgment in the same matter between the same parties; (iv) an action between the
same parties in the same matter is not pending in any Israeli court at the time
the lawsuit is instituted in the foreign court; and (v) the judgment is no
longer subject to a right of appeal.
Foreign judgments enforced by Israeli courts generally will be payable
in Israeli currency. The usual practice in Israel in an action to recover an
amount in a non-Israeli currency is for the Israeli court to render judgment for
the equivalent amount in Israeli currency at the rate of exchange in effect on
the date thereof. Under existing Israeli law, a foreign judgment payable in
foreign currency may be paid in Israeli currency at the rate of exchange of such
foreign currency on the date of payment or in foreign currency. Pending
collection, the amount of the judgment of an Israeli court stated in Israeli
currency will ordinarily be linked to the Israeli Consumer Price Index plus
interest at the annual rate (set by Israeli regulations) prevailing at such
time. Judgment creditors must bear the risk of unfavorable exchange rates.
-17-
In April 1998, the Israeli government announced its intention to
liberalize its foreign currency control regime by, in effect, permitting any
foreign currency activity or transaction, except for certain restrictions on
institutional investors and on some derivatives transactions of non-residents.
For example, in May 1998, the Israeli government adopted regulations that
replaced many of the restrictions on foreign currency transactions with the
requirement that such transactions be reported to the Controller of Foreign
Currency at the Bank of Israel. Over time, if enacted, this liberalization may
ultimately include the NIS becoming a fully convertible currency. No assurance
may be given that the Israeli government's intentions as announced will receive
legislative or regulatory approval, that any such approvals will be received in
any particular time frame or that the risks described above will be alleviated.
RISKS RELATING TO OPERATIONS IN EUROPE
WE AND ELSCINT ARE SUBJECT TO VARIOUS RISKS RELATED TO OUR AND
ELSCINT'S OPERATIONS IN EUROPE, INCLUDING ECONOMIC AND POLITICAL
INSTABILITY, POLITICAL AND CRIMINAL CORRUPTION AND THE LACK OF
EXPERIENCE AND UNPREDICTABILITY OF THE CIVIL JUSTICE SYSTEM.
Many of the Eastern European countries in which we or Elscint operate
are countries that until the last decade were allied with the former Soviet
Union under a communist economic system, and they are still subject to various
risks. For example, Romania, which is still economically and politically
unstable, suffers from rapid devaluation of the Romanian Lei (local currency)
against the U.S. dollar, political and criminal corruption, and lack of
experience and unpredictability of the civil justice system. Romania continues
to suffer from high unemployment, low wages, low literacy rates, and corruption.
These risks could be harmful to us and are very difficult to quantify or
predict.
Although many governments of the European countries have liberalized
policies on international trade, foreign ownership and development, investment,
and currency repatriation to increase both international trade and investment,
such policies might change unexpectedly. We and Elscint will be affected by the
rules and regulations regarding foreign ownership of real and personal property.
Such rules may change quickly and dramatically and thus may have an adverse
impact on ownership and may result in a loss without recourse of our or
Elscint's property or assets. Domestic and international laws and regulations,
whether existing today or in the future, could adversely affect our and
Elscint's ability to market and sell our or Elscint's products and could impair
our and Elscint's profitability.
With respect to Elscint's operations in Romania, any foreign company or
litigant may encounter difficulty in prevailing in any dispute with, or
enforcing any judgment against, the Romanian government or any of officers or
directors under the Romanian legal system. If Elscint's ownership rights in the
company that owns the Buchuresti Hotel complex are successfully challenged, this
may affect Elscint's ability to obtain compensation for its original investment.
Some countries, including Romania, may regulate or require governmental
approval for the repatriation of investment income, capital or the proceeds of
sales of securities by foreign investors. In addition, if there is a
deterioration in a country's balance of payments or for other reasons, a country
may impose temporary restrictions on foreign capital remittances abroad. This
may adversely affect our and Elscint's ability to repatriate investment loans or
to remit dividends.
Many emerging countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain emerging countries.
In addition, in an attempt to control inflation, price controls have been
imposed at times in certain countries, which may affect our ability to increase
our room rates.
-18-
OUR AND ELSCINT'S BUSINESSES MAY BE IMPACTED BY EXCHANGE RATE
FLUCTUATIONS AND INFLATION
The revenues of our shopping and entertainment malls division and
Elscint's hotel division, as well as their operating expenses, capital expenses
and debt payments are generally denominated in the currency in which each asset
is located. Therefore, any fluctuations in the exchange rates between these
currencies and the NIS may have an adverse effect on the reporting of our
results as reflected in our Consolidated Financial Statements, which are
reported in NIS. The reporting of our operations that do not have revenues and
expenses in the same currency, will be affected by currency fluctuations. While
we seek to mitigate the impact on us of a NIS devaluation (including by linking
financing transactions specifically to the relevant operating currency), we
cannot be certain that we will be able to do so successfully.
In addition, to the extent that the rate of inflation in Israel is
lower than the rate of devaluation of the NIS in relation to the dollar and
certain other currencies or if inflation in Israel lags behind any devaluation,
our results of operations may be adversely affected. In the early and mid-1990s,
the inflation rate in Israel exceeded the rate of devaluation of the NIS against
the dollar and certain European currencies. However, this trend was reversed
during 1997 and 1999. A substantial devaluation of the NIS in relation to the
dollar would substantially increase the cost of our future capital expenditures.
OTHER RISKS
WE AND ELSCINT ARE SUBJECT TO VARIOUS LEGAL PROCEEDINGS THAT MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS
Following the sale of substantially all of Elscint's assets in 1998,
EMI and Elscint were served with various claims filed by former and (then)
current shareholders and employees of Elscint in Israel and in the U.S. relating
to the negotiations preceding the transactions and the transactions themselves.
Some of the plaintiffs filed motions to certify the claims as class actions. In
addition, certain other legal proceedings have been initiated against EMI and
Elscint in connection with the change of control of both companies in May 1999,
and the acquisition of Elscint's hotel businesses in September 1999, including
motions to certify such claims as class actions (See "Item 8 - Financial
Information - Legal Proceedings"). Neither we nor Elscint can estimate the
results of these proceedings. A determination against us or Elscint in some or
all of the proceedings may materially adversely affect our and Elscint's
operational results.
ITEM 4. INFORMATION ON THE COMPANY.
BACKGROUND
EMI was incorporated in 1996 and has a perpetual duration. Our
executive offices are located at 13 Mozes Street, Tel-Aviv 67442, Israel. You
may reach us by telephone at (972-3) 608-6010 or by fax at (972-3) 695-3080.
EMI
---
EMI is currently engaged in the following businesses:
o ownership, through a wholly-owned subsidiary, of operating
shopping and entertainment malls in Europe;
o image guided treatment activities; and
o significant holdings in venture capital investments.
-19-
ELSCINT
-------
Elscint is currently engaged in the following businesses:
o ownership of operating hotels in Europe and elsewhere and of hotel
projects that are presently under development, through subsidiary
companies and jointly controlled companies;
o ownership and operation, through a wholly-owned subsidiary, of an
entertainment and commercial center in Herzlia, Israel; and
o investments in a bio-technology company.
SUMMARY
EMI
---
Following is a summary of our fields of operations:
SHOPPING AND ENTERTAINMENT MALLS
Through our wholly-owned subsidiary Plaza Centers (Europe) BV of The
Netherlands ("Plaza Centers" or "PC"), we currently have an aggregate of 18
operating shopping and entertainment malls in Hungary (15) and in Poland (3), as
well as an aggregate of 14 malls in various stages of development and planning
in Hungary, Poland, the Czech Republic, Romania. Latvia and Greece. The rights
to three of our Hungarian malls were acquired by us from a third party during
2002. During 2002, we completed the construction of additional malls.
The business concept and growth strategy of the shopping and
entertainment mall business include the following elements:
o Site Location. Sites for the malls are chosen carefully for
proximity to areas with large population concentrations, and with
particular emphasis on the available transportation facilities
that will service the malls. Where possible, the sites selected
are within close proximity to metro, bus or tram lines and
adjacent to major roads.
PC's unique strategy lies in the launching of malls not only in
the capital cities of the various countries where it operates, but
also in the peripheral cities.
o Market Penetration. The business concept is, generally, to develop
the malls in cities where no western style shopping malls exist,
to construct the malls as expeditiously as possible (generally
between 8 to 12 months from receipt of building permits), and to
open the malls to the public well ahead of any competing projects.
Alternatively, in larger cities where competition is greater,
emphasis is placed on location, tenant mix, critical density and
expedited construction, in order to attain an advantage.
o Entertainment. One of the most significant elements in the success
of the malls is the emphasis on the entertainment facilities
offered to patrons. In many instances, 10 screen cinema complexes
featuring newly released movies provide a major attraction in
regional cities where entertainment and leisure opportunities are
limited. In addition, video arcades and electronic game rooms are
popular with local residents, as are the food courts. In the
larger facilities, an IMAX 3-D screen is sometimes included.
-20-
o Anchor Tenants. Where possible, agreements in principle are
reached with anchor tenants, either generally or for agreed space.
This facilitates easier leasing of the critical anchor areas,
which in turn makes the leasing of smaller areas easier and
contributes towards obtaining financing for the construction.
o Operation. Following opening, the malls are managed by a
management company (wholly-owned subsidiary of PC), with know-how
and expertise in marketing, promotions and ad hoc entertainment
events to attract customers.
Growth Strategy. Our growth strategy is to develop an extensive chain
of shopping and entertainment malls bearing the "Plaza Centers" tradename
throughout central and eastern Europe. Implementation of this strategy has
already commenced with the opening of twelve operational malls in Hungary and
three in Poland and the acquisition of three additional malls in Hungary, and
with 14 additional projects in various stages of development in Hungary, Poland,
the Czech Republic, Romania, Latvia and Greece. Additional target countries of
Plaza Centers include Croatia, Slovakia, Slovenia, Ukraine and Lithuania. By
establishing presence in these countries well ahead of its competitors, EMI
plans to expand its network of malls throughout eastern and central Europe.
HOLDINGS IN VENTURE CAPITAL INVESTMENTS
InSightec - We maintain a significant investment in InSightec. The
products developed by InSightec are designed to create, in effect, a virtual
guided and controlled thermal scalpel, for use by surgeons and interventional
radiologists to non-invasively detect, monitor and destroy tissues and organs
under direct real-time MR image guidance. The products are evaluated for the
coagulation of breast tumors and uterine fibroids, all under FDA Investigational
Device Exemptions (IDEs). Our objective in this area is to become the market
leader in Image Guided HIFUS, achieving a significant improvement in the quality
and efficacy of the treatment while demonstrating cost effectiveness.
Holdings in other venture capital investments - For information with
respect to EMI's holdings in other venture capital investments, see " - The
current businesses of EMI and Elscint - EMI - Holdings in Venture Capital
Investment".
ELSCINT
-------
Following is a summary of Elscint's businesses:
HOTEL BUSINESS
Elscint's business concept and growth strategy for its hotel business
include the following key elements:
o Elscint's hotels are generally situated in close proximity to
major railway links into cities, such as the central railway
station in Antwerp (situated close to the Astrid Park Plaza hotel)
and Victoria railway station in London (situated close to the
Victoria Park Plaza hotel), both of which stations are scheduled
to accommodate the services of the train de grand vitesse (the
"TGV"), when such services become operational in these areas.
o Elscint's hotels offer convenient access to the local business
districts, as well as attractive conference facilities.
o Elscint's hotels make considerable efforts to offer personal
services at a five-star level under the motto "The World's
Friendliest Hotels," but at four-star level prices.
-21-
o Elscint's hotels offer quality services and guest facilities to
their patrons, with emphasis on advanced hi-tech services such as
Internet connections in rooms and a fully-equipped business center
with facsimile, photocopying services and e-mail and computer
link-ups, as well as fitness centers, indoor swimming pools and
saunas.
o Elscint's hotels' principal target customer base is the business
traveler and the tourist industry, both individuals and groups.
o Elscint's hotels focus on strategic cooperation and affiliation
with management companies with know-how and expertise in hotel
management, which enables optimal use of a centralized reservation
system, and which is beneficial due to the advantages of a unified
management system that promotes the efficiency of the operation
and control of hotels in diverse locations.
o The development and implementation of an efficient cost management
system in order to reduce overhead costs to a minimum.
The goal of Elscint's hotel business is to acquire and manage four-star
hotel properties which provide the business and vacation traveler with five-star
quality accommodations, conveniently located near major transportation stations
and commercial centers, at four-star hotel prices.
Elscint's growth strategy for the hotel business is increasing the
number of hotel rooms in both Western and Eastern Europe, with emphasis on those
cities in which a shortage of rooms exists in general, such as London and
Amsterdam, or where a shortage of quality rooms exists, such as Bucharest, with
a view to attaining its ultimate goal of having a presence in most major
European cities. This strategy is being implemented both by the acquisition and
renovation of existing operational hotels and by the construction and
development of new hotels on land purchased in optimal locations. Where
appropriate, Elscint may draw on the experience and resources of its group
affiliates to develop integrated projects which will include hotels,
entertainment and commercial centers, and office facilities, subject to
applicable restrictions.
Each of Elscint's operating hotels has appointed Park Plaza as its
management company. Park Plaza owns the franchise to the "Park Plaza" brand name
in the Benelux countries, United Kingdom, various countries in Eastern Europe,
South Africa and a number of countries in the Middle East. Park Plaza is
responsible for the operation of the hotels, including the daily monitoring of
each hotel's results and the supervision of the local management and staff.
However, local management is employed by the respective company owning the hotel
and not by Park Plaza, although Park Plaza does render hiring services.
ENTERTAINMENT AND COMMERCIAL CENTER IN HERZLIA, ISRAEL
Elscint's entertainment and commercial center is located in the heart
of, and faces, the Herzlia Marina, which is one of the most prestigious land
development projects in Israel. The principal features of Elscint's business
strategy for the entertainment and commercial center include:
o The creation of a distinctively aesthetic and architecturally
pleasant structure, with emphasis on "customer friendliness", at a
prime and unique location overlooking the Herzlia Marina and the
shores of the Mediterranean Sea;
o An aggressive marketing campaign to attract recognized
"brand-name" retailer and entertainment service provider tenants;
-22-
o Offering a wide range of quality entertainment facilities,
together with an impressive variety of retail opportunities;
o Providing ample parking facilities for patrons; and
o An innovative and dynamic management program for the center
designed to foster the interest of patrons.
The Herzlia Marina project includes an anchorage for over 800 vessels,
as well as Elscint's entertainment and commercial center and various other
developments by unrelated third parties, all being constructed on approximately
1.46 million square feet of land which has been reclaimed from the sea.
It is anticipated that the center will draw its customers from the
northern parts of Greater Tel Aviv (including the northern satellite cities of
Herzlia, Ra'anana and Kfar Sava) as well as the suburbs of northern Tel Aviv,
attracting a potential customer base of approximately 1,500,000 to 2,000,000
residents. The center offers "brand name" retail outlets, a variety of
entertainment and leisure activities, a food court with more fast and higher-end
food establishments than in any other single building in Israel, a multi-screen
cinema complex, a simulation facility, an active water-ride and a video game
arcade. To promote customer traffic, the center will be administered and
operated by an experienced management company, which will formulate a program
designed to foster the interest and involvement of the patrons in the activities
of the center, including special price reduction campaigns, entertainment and
fashion events, lotteries, contests, etc. The entertainment and commercial
center was opened to the public in June 2003. Through May 31, 2003,
approximately 141,438 square feet of the entertainment and commercial center
have been leased to various retailers, of which approximately 87,425 square feet
have been leased to three anchor tenants, including an eight (8) screen cinema
complex, a large retailer group and a pharmacy-perfumery.
BIO-TECHNOLOGY INVESTMENTS
Since its establishment in early 2000, Elscint Bio-Medical Ltd.
("EBM"), Elscint's bio-technology arm, has focused on investments in early stage
bio-technology companies. During 2002, EBM expanded its investment in Gamida,
but decided to postpone for the foreseeable future other planned investments in
additional companies due to the slowdown in the Israeli economy and projected
difficulties in raising financing for such businesses. Currently, EBM does not
have any plans to expand its activities.
HIGHLIGHTS OF 2002
During 2002 we continued to expand our shopping and entertainment malls
business and the investments in the venture capital division. Elscint expanded
its investments in the hotel and leisure industry, and sold its manufacturing
facility in Ma'alot, Israel. The following were the highlights of our and
Elscint's activities and other events relating to our businesses during 2002 and
through May 31, 2003:
EMI
---
o Acquisition and renovation of Duna Plaza, Sopron Plaza and
Nyir Plaza, three shopping and entertainment malls in Hungary;
o FDA approval for Phase III studies of uterine fibroids granted
to InSightec;
o Agreements between InSightec and Brigham & Woman's Hospital
and Haim Sheba Medical Center, for the establishment of MRI
Guided HIFUS therapeutic centers;
o Grant of Israeli Ministry of Health and other approvals for
the commercial use of InSightec's system;
o Receipt by InSightec of CE Marking Certification approval for
use of InSightec's system in EC.
-23-
o Signing of distribution and collaboration agreement between
InSightec and a Japanese distributor;
o Exercise of warrants by a third party for shares in InSightec;
o Changing our investment in VCON Telecommunications Ltd.
("VCON");
o Additional investment in Easyrun Ltd. ("Easyrun"); and
o Acquisition of Dreamland Entertainment N.V.
ELSCINT
-------
The following were the highlights of Elscint's business activities and
investments during 2002 and through May 31, 2003:
o The sale of the manufacturing facility in Ma'alot to an
unrelated third party;
o The long term lease of the hotel property located on Euston
Road in London, England (previously Shaw Park Plaza) to an
unrelated third party for a period of 25 years;
o The close down of the Bucuresti Hotel in Bucharest, Romania
for renovation and refurbishment;
o The completion of renovation works at the Astrid Park Plaza
hotel in Antwerp, Belgium and the commencement of construction
of an oceanarium attraction within the facility;
o The payment of a dividend by the Company to its shareholders;
and
o The completion of the construction of the Entertainment and
Commercial Center in Herzlia.
EMI
---
ACQUISITION OF DUNA PLAZA, SOPRON PLAZA AND NYIR PLAZA
On February 25, 2002, PC and a wholly-owned Cypriot subsidiary of PC
finalized the acquisition from an unrelated third party, for total consideration
of Euro 47.2 million (approximately $49.6 million), of all of the capital stock
of three Hungarian companies, each of which owns a shopping and entertainment
mall in Hungary: Duna Plaza Kft., which owns the Duna Plaza Shopping Mall in
Budapest; Sopron Plaza, which owns the Sopron Plaza Shopping Mall in Sopron, a
city in western Hungary close to the Austrian border; and Nyiregyhaza Plaza
Kft., which owns the Nyir Plaza Shopping Mall situated in the city of
Nyiregyhaza in eastern Hungary, approximately 30 miles from the Ukrainian
border. Duna Plaza Kft. was, at the time of the transaction, the owner of all of
the rights in and to Sopron Plaza Kft. and Nyiregyhaza Plaza Kft. In addition to
the purchase price, PC assumed a loan made previously to one of the companies in
the amount of Euro 12.27 million (approximately $12.9 million).
The foregoing transaction was subject to an adjustment in purchase
price, which has not yet been finalized for technical reasons.
PC and its Cypriot subsidiary financed this transaction by long term
loans (See "Item 5 - Operating and Financial Review and Prospects - Loans -
EMI").
-24-
DEVELOPMENTS RELATING TO INSIGHTEC
o In March 2002, InSightec received FDA approval for Phase III
(pivotal) study on the treatment of uterine fibroids, using its technology of
MRI guided High Intensity Focused Ultrasound (MRgHIFUS).
The Phase III study will be performed at Brigham and Women's Hospital
in Boston, the Mayo Clinic in Rochester, the Johns Hopkins Hospital in
Baltimore, the Saint Mary's Hospital in London, the Charite in Berlin, the
Cochin Hotel in Paris, the Sheba Medical Center in Tel Aviv and the Hadassah
Hospital in Jerusalem. InSightec estimates that commercial applications of the
treatment will be available during 2004, subject to obtaining the required
regulatory approvals.
o In June 2002, InSightec signed an agreement with Brigham & Woman's
Hospital in Boston ("BWH") for the establishment of an MR Image Guided High
Intensity Focused Ultrasound (HIFUS) therapeutic center within the hospital.
This outpatient treatment center combines a diagnostic 1.5T GE SIGNA(TM) MR
imaging system and InSightec's ExAblate 2000(TM) focused ultrasound system. The
center will enable InSightec and BWH researchers to extend their present level
of collaboration on the ongoing clinical trials in the non-invasive treatment of
uterine fibroids and breast fibroadenoma. It is anticipated that research
activities at the center will commence by late 2003. Subject to obtaining the
required regulatory approvals, the center is expected to become commercially
operational during the course of 2004.
o In June 2002, InSightec signed a principle agreement with the Haim
Sheba Medical Center in Tel-Aviv, for the establishment of an MRI Guided HIFUS
therapeutic center within the Sheba Medical Center. This custom designed
outpatient treatment center combines a diagnostic 1.5.T GE SIGNATM MR imaging
system and InSightec's ExAblate 2000. The center will enable InSightec's and
Sheba Medical Center's researchers to extend their present level of
collaboration on the ongoing clinical trials in the non-invasive treatment of
uterine fibroids, breast fibroadenoma and breast cancer. The commercial
operation of the center as well as further research works are expected to start
during the second half of 2003.
o In August 2002, InSightec received approval from the Israeli Ministry
of Health for the commercial use of its ExAblate 2000(TM) system for treatment
of Uterine Fibroids. Thereafter, in October 2002 InSightec received CE Marking
Certification approval allowing the commercial use of the device in European
Union countries as well as Switzerland, Norway, Iceland and Liechtenstein.
o In February 2003, InSightec signed a Memorandum of Understanding
("MOU") with Ktec Corporation Inc. ("Ktec") for the exclusive distribution of
MRgFUS systems in Japan. The MOU forms the basis of a three-year distribution
agreement, within the framework of which Ktec will conduct all the regulatory,
marketing and sales activities of InSightec in Japan, and shall provide
technical and clinical support. The MOU determines minimum purchase requirements
for each of the three years of the agreement, increasing annually, at a total
value of approximately $36 million. Ktec will provide bank guarantees as
security for the fulfillment of its obligations under the agreement. The MOU has
been approved by the board of directors of InSightec, and is currently subject
to the approval of the board of directors of Ktec and to the execution of a
definitive distribution agreement.
o In April 2003, a shareholder of InSightec (an unrelated third party)
exercised certain warrants for the acquisition of 4.96% of the shares of
InSightec, on a fully diluted basis, in consideration for $2.975 million.
Following such exercise, such shareholder holds 19.8% of InSightec's outstanding
capital stock (on a fully diluted basis). The exercise of such warrants reduced
our holdings in InSightec to 53.78% (on a fully diluted basis).
-25-
CHANGING OUR INVESTMENT IN VCON
Within the framework of an investment agreement signed between VCON and
Elbit Ultrasound Netherlands BV ("EUBV"), the Company's subsidiary, on January
15, 2002, the parties agreed to change the holdings of EUBV in VCON. Pursuant to
such agreement, $2 million of a debenture for the amount of $4 million which was
held by EUBV ("Original Debenture"), were converted into 2 million ordinary
shares of VCON. In addition, a new convertible subordinated note in the
principal amount of $2 million and bearing interest at 2% per year, was issued
to EUBV (the "New Note"). Following such conversion and issuance, the Original
Debenture was cancelled. The New Note has a five-year maturity term and is
convertible, in whole or in part, at the option of EUBV, at any time during its
term, into ordinary share of VCON at a conversion price of $1 per ordinary
share. Unless converted, the outstanding principal is required to be repaid in
quarterly installments commencing two years after the issuance of the New Note
(in August 2002).
In addition, and in lieu of interest payments accrued on the Original
Debenture and the New Note, VCON has issued to EUBV an additional five-year
convertible subordinated note in the principal amount of $475,000 which amount
represents all interest accrued under the Original Debenture and all interest to
be accrued under the New Note (the "Interest Note"). The Interest Note is
convertible in whole or in part, at the option of EUBV, at any time during its
term, into ordinary shares of VCON at a conversion price of $1.4 per ordinary
share and will not bear any interest. Unless converted, the outstanding
principal is required to be repaid in one payment upon maturity of the Interest
Note.
Upon consummation of the January 15, 2002 investment agreement, in
August 2002, VCON granted to EUBV three-year warrants at a purchase price of
$0.3 per warrant, to purchase up to 1,333,333 ordinary shares of VCON at an
exercise price of $1.4 per ordinary share.
In addition, EUBV acquired from its wholly owned subsidiary - Elbit
Communications and Technology BV ("ECT") its holdings in VCON and thereafter
EUBV was recorded as the holder of approximately 20.3% of VCON's issued and
outstanding ordinary shares, (30% on a fully diluted basis).
ADDITIONAL INVESTMENT IN EASYRUN
In May 2002, EMI together with certain other investors, signed an
agreement with Easyrun for the grant of a convertible loan of up to $600,000, of
which EMI was to award $360,000. The principal amount of the loan will bear
interest at the rate of 6% per year. Any part of the loan, unless converted,
will be repaid to EMI at the expiration of 6 months from the date of its
respective grant. The loan may be converted at any time until repayment, at a
conversion price of $0.3465 per Easyrun share, into Preferred C Shares.
Furthermore, Easyrun granted to EMI an option to purchase such number
of Easyrun Preferred C Shares as is equal to the principal amount of the loan
($360,000) divided by the lower of $0.81 per share or 30% less than the lowest
price determined for the purpose of any financing event. The option is
exercisable, in whole or in part, within three years from the grant of the loan.
Pursuant to the foregoing agreement, EMI has the right to appoint one
(out of five) members of the board of directors of Easyrun.
Issuance of Preferred C Shares according to the May 2002 transaction
has not yet been executed.
In January 2003, EMI and Easyrun entered into an additional agreement,
for a further loan to Easyrun of $100,000. This loan is similar in terms to the
May 2002 loan.
-26-
ACQUISITION OF DREAMLAND ENTERTAINMENT N.V.
On April 5, 2003 PC signed an agreement for the acquisition of the
shares of Dreamland Entertainment N.V. ("Dreamland") whose main activity is the
operation, through a subsidiary, of entertainment areas in shopping malls in
Poland, including bowling lanes, internet cafes, ice cream sales, vending
machines and live music and entertainment. Dreamland also operates in the Polish
shopping and entertainment centers owned by PC's project companies. The
consideration of Euro 4.2 million was net, following deduction of commercial
debts owed by Dreamland's subsidiary to the project companies.
ELSCINT
-------
SALE BY ELSCINT OF ITS MANUFACTURING AND ASSEMBLY FACILITY
On December 31, 2002, Elscint sold (on the basis of an agreement signed
on November 13, 2002), of substantially all of the assets and the assignment of
certain liabilities relating to the manufacturing, development, assembly,
engineering and integration operations conducted by Elscint at the factory in
Ma'alot in Northern Israel. The buyer did not assume tax liabilities,
liabilities arising out of breaches by Elscint of assigned contracts, employee
related liabilities for the period preceding the consummation of the
transaction, and certain retained environmental liabilities. On the basis of a
closing balance sheet, the buyer paid approximately $20.5 million, including a
goodwill payment, of which approximately $10.2 million was placed into escrow
pending verification of the purchase price, within 45 days of the closing, and
collection of accounts receivable within 90 days of closing. As of May 31, 2003
the full amount of the escrow deposit has been released to Elscint (except for
approximately $155,000 paid to the buyer for certain adjustments and accounts
receivable not collected within the 90 day period). As a result of this
transaction, Elscint recorded a capital gain of approximately $8 million.
HIGHLIGHTS OF ELSCINT'S HOTEL AND LEISURE BUSINESSES
Following the opening of the Victoria London and Sherlock Holmes hotels
in London during 2001, Elscint now has interests in six operational hotels:
o the Victoria in Amsterdam;
o the Utrecht Park Plaza in Utrecht, The Netherlands;
o the Astrid Park Plaza in Antwerp, Belgium;
o the Sandton Park Plaza in Johannesburg, South Africa;
o the Victoria London Park Plaza in London; and
o the Sherlock Holmes Park Plaza, also in London.
In collaboration with the Red Sea Hotel Ltd. group of companies ("Red
Sea") and Park Plaza, Elscint continued to implement the management program
designed to optimize management procedures, streamline cost control systems and
improve performance where possible.
In January 2003, Elscint leased the property situated on Euston Road in
London (formerly operated as the Shaw Park Plaza) (the "Euston Road Property")
to an unrelated third party for a period of 25 years.
During 2002, Elscint completed the renovations of the Astrid Park Plaza
in Antwerp, Belgium by expanding the lobby to an area of 7,000 square feet and
inaugurating a bistro on the lobby floor which has proven a popular venue. In
-27-
addition, the commercial areas of the property have been closed down and work
has commenced on converting this area into an oceanarium attraction. The works
on this renovation are scheduled to be completed by the summer of 2003.
In December 2002, Elscint closed down the Bucuresti hotel in Bucharest,
Romania, in order to facilitate the complete renovation and refurbishment of the
facility and its conversion into a hotel of international standard. Elscint has
succeeded in reducing the work force at the hotel from 890 employees to 120
employees as at May 31, 2003. The planning and design of the renovation works
are nearing completion, and Elscint intends to obtain the necessary building
permits by December 2003 in order to enable the commencement of works by early
2004. It is anticipated that the renovation works will be completed within 24
months.
In addition, 109 out of the 230 apartment units comprising the
apartment hotel (which forms part of the Bucuresti complex) have been renovated
during the beginning of 2003 at a cost of $2.5 million. The apartment hotel
enjoys a high occupancy rate and generates revenues of approximately $3,200,000
per annum. Elscint intends to improve the quality of the services offered to its
apartment hotel residents.
During 2002, Elscint also continued its plans for the development of
two additional hotel projects. In Hungary, the project for the conversion of the
National Ballet Institute Building, centrally located on Budapest's prestigious
Andrassy Boulevard, into a western business orientated hotel, proceeded. All
tenants (except one) have now been vacated from the building by agreement.
Applications for building permits are now pending, and we expect the
construction works to commence during late-2003, and to be completed within 15
months thereafter. The construction of the Riverbank Park Plaza Hotel on the
site acquired in March 2000 on the banks of the Thames River has continued
through 2002 and is expected to be completed by late 2004. This hotel will
comprise of over 550 rooms.
During 2002, the development of the Lake Monfort Project in northern
Israel was delayed, due primarily to the severe economic situation and the
decrease in demand for tourism facilities in Israel. Elscint will continue to
assess its plans for the development of this project in light of the security
situation in the region and the influence that such situation may have on the
local tourist market.
HIGHLIGHTS OF ELSCINT'S INVESTMENTS IN BIO-TECHNOLOGY COMPANIES
In April 2002, EBM acquired from a third party 450,000 additional
shares in Gamida for approximately $1,042,000, including the shares held by its
former CEO in Gamida.
As of the December 31, 2002, EBM held approximately 37.1% of the
outstanding shares of Gamida (33.6% on a fully-diluted basis) and had the right
to appoint one quarter of the members of Gamida's board of directors.
In early 2003, Gamida signed an agreement with Teva Pharmaceuticals
Ltd. ("Teva"), for the investment by Teva of $3 million in Gamida for
approximately 9% of Gamida's outstanding share capital. Gamida signed an
additional memorandum of understanding with Teva, pursuant to which Teva was
awarded an option for future cooperation with Gamida with regard to the
technology that Gamida is developing, and subject to conditions agreed between
those parties.
In November 2002, the employment agreement between EBM and Dr. Amnon
Gonenne, its former Chief Executive Officer, was terminated. Pursuant to the
termination agreement, EBM purchased from Dr. Gonenne all of his securities of
both EBM and its portfolio investee companies, in consideration for the
repayment of the loans awarded by EBM to Dr. Gonenne in order to finance the
acquisition of those securities.
Concurrently with the termination of the employment agreement of Dr.
Gonenne, EBM's management postponed for the foreseeable future further
investment opportunities in bio-technology related companies pending its
re-assessment of the market situation.
-28-
BUSINESS OVERVIEW
The following table set forth our revenues by business activity in each
geographic market in which we operate, for each of the last three years:
CONVENIENCE
TRANSLATION IN
FISCAL YEAR ENDED U.S. DOLLARS FOR
DECEMBER 31, 2002
2002 2001 2000 (UNAUDITED)
---- ---- ---- ----------------
(IN THOUSANDS OF NIS)
WESTERN EUROPE *173,598 109,847 106,686 36,647
EASTERN AND CENTRAL EUROPE **320,543 165,710 28,117 67,667
ISRAEL 1,538 10,223 20,367 324
OTHERS 1,660 1,096 1,403 350
------------------------------------------------
497,339 286,876 156,573 104,988
================================================
* Includes the revenues of the hotel business.
** Includes approximately NIS 285.1 million in revenues of the commercial and
entertainment center business and approximately NIS 35.4 million in
revenues of the hotel business.
THE CURRENT BUSINESSES OF EMI AND ELSCINT
EMI
---
SHOPPING AND ENTERTAINMENT MALLS
As a general principle, the operations of each shopping center project
are conducted through a special purpose project corporation, so that PC operates
as a holding company that holds interests in the special purpose corporations
which develop, construct and operate the centers or have interests in land,
developed or intended to be developed as centers.
PC presently has 15 operating malls in Hungary, three operating malls
in Poland (in one of these projects PC's interest is 50%) and 14 similar
projects in various stages of planning and development in Hungary, Poland, the
Czech republic, Romania and Greece.
The shopping and entertainment malls are constructed in three basic
models:
(i) "Midi-Malls" measuring between 165,000 and 242,000 square feet
(constructed),
(ii) the substantially larger type of "Mega-Malls" measuring between
330,000 to 550,000 square feet (constructed), and
(iii) the smaller "Mini-Malls" of 110,000 to 165,000 square feet,
depending on the size of the land and the target population (all
excluding underground parking facilities, where applicable).
Areas that can be leased generally consist of approximately 75% of the
total constructed area. Mall sizes are dependent on the size of the land and the
target population. The malls are generally comprised of two principal elements,
shopping and entertainment. The anchor tenants form the basis of these elements,
around which the smaller businesses and activities are introduced, and provide a
wide range and choice of activities offered to patrons. The entertainment
facilities generally include a cinema complex of between 8-12 screens, a video
and gaming arcade, bowling alleys, billiard, fitness centers, bar, discotheque,
kid's playground and, in some projects, an IMAX three-dimensional cinema screen.
The food court consists of a range of restaurants, offering a variety of
culinary opportunities from fast food to gourmet foods.
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The commercial activities focus on supermarket and department store
anchors, and are carefully monitored to allow an optimal mix of stores and
services to cater for all requirements and to offer the maximum range of
commodities to patrons.
Our shopping and entertainment mall business currently consists of the
following projects:
OPERATIONAL MALLS
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NAME OF MALL COMMENCEMENT OF LEASEABLE PARKING OCCUPANCY MISCELLANEOUS
OPERATION AREA SPACES AT
(SQ.FT.) (SQ.FT.) 5/31/03
- ------------------------------------------------------------------------------------------------------------------------------------
CSEPEL PLAZA, Budapest, Hungary December 1997 150,000 380 91% o 95 shops
o 10 screen multiplex cinema
o Located in the heart of the
commercial sector of Csepel
Island on the Danube River
GYOR PLAZA, Gyor, Hungary September 1998 165,000 465 97% o City is close to Austrian
border, and is fast growing
o 100 shops
o 10 screen multiplex cinema
DEBRECEN PLAZA, Debrecen, December 1998 161,000 450 96% o 97 shops
Hungary o 9 screen multiplex cinema
ALBA PLAZA, Szekesfehervar, June 1999 165,000 480 93% o Open market
Hungary o 10 screen multiplex cinema
o 107 shops
PECS PLAZA, Pecs, Hungary October 1999 168,000 1,000 95% o Close to the Croatian border
o 113 shops
o 10 screen multiplex cinema
o In June 2002 we acquired an
additional parcel of land
adjusment to the Pecs Plaza
for HUF 209 million.
SZEGED PLAZA, Szeged, Hungary May 2000 170,000 1,000 97% o Close to Serbian border
o Only mall in city
o 103 shops
o 10 screen multiplex cinema
o Recreational lake
MISKOLC PLAZA, Miskolc, Hungary June 2000 161,000 450 97% o Close to Slovakian border
o Third largest city in
Hungary
o 10 screen multiplex cinema
o 107 shops
KANIZSA PLAZA, Nagykanizsa, December 2000 83,000 300 74% o Close to Croatian border
Hungary o Additional parking spaces
available
o 49 shops
o 7 screen multiplex cinema
KAPOSVAR PLAZA, Kaposvar, December 2000 91,000 254 90% o Close to Croatian border
Hungary o Additional parking spaces
available
o 55 shops
o 4 screen multiplex cinema
SZOLNOK PLAZA, Szolnok, Hungary December 2001 77,500 180 91% o 55 shops
o Multiplex cinema complex
ZALA PLAZA, Zalaegerszeg, December 2001 80,000 210 83% o 48 shops
Hungary o Multiplex cinema complex
-30-
OPERATIONAL MALLS
- ------------------------------------------------------------------------------------------------------------------------------------
NAME OF MALL COMMENCEMENT OF LEASEABLE PARKING OCCUPANCY MISCELLANEOUS
OPERATION AREA SPACES AT
(SQ.FT.) (SQ.FT.) 5/31/03
- ------------------------------------------------------------------------------------------------------------------------------------
SAVARIA PLAZA, Szombathely, March 2002 91,600 240 64%4 o Close to Austrian border
Hungary o 50 shops
o Multiplex cinema complex
DUNA PLAZA (*), Budapest, October 1996 600,000 + 1,500 96%
Hungary 123,000 o 132,000 sq. ft. of office
sq.ft. of o 291 shops
office o access to additional parking
spaces
o 14 screen multiplex cinema
o Currently undergoing
renovation
o Close to Austrian border
o 101 shops
o 7 screen multiplex cinema
SOPRON PLAZA (*), Sopron, December 1998 164,000 700 90% o Over 60 international
Hungary outlets and local retailers
o Close to Ukrainian border
o 81 shops
o 6 screen multiplex cinema
NYIR PLAZA (*), Nyiregyhaza, June 2000 150,000 600 74% o EMI owns 50%
Hungary o EMI is subject to a put
option of the joint venture
SADYBA BEST MALL (50%), September 2000 260,000 1,100 85% partner until September 2003
Warsaw, Poland o EMI will have a call right
as to the remaining 50% of
the mall
o Situated in the center of
Warsaw
o 12 screen multiplex cinema
o Three-dimensional IMAX
screen
o 81 shops
o 8 screen multiplex cinema
o 140 shops
RUDA SLASKA PLAZA, Ruda November 2001 158,000 600 80.6% o Multiplex screen cinema
Slaska, Poland complex, including an IMAX
KRAKOW PLAZA, Krakow, Poland December 2001 344,300 1,500 80.1% screen
(*) Recently acquired
In addition to our operating projects, all of the below sites are
designated for construction of shopping and entertainment malls of various
sizes. The following projects are in various stages of planning and development.
PROJECTS UNDER DEVELOPMENT
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Name Status Scheduled Leaseable Parking Miscellaneous (1)
Opening Area (sq. ft.) Spaces
- ------------------------------------------------------------------------------------------------------------------------------------
BALATON PLAZA, Vesxprem Pre Sale 2004 100,000 370 o Total anticipated cost of project
Hungary Agreement Euro 10.161 million ($10.67 million)
POZNAN PLAZA, Poznan Land Acquired 2004 341,000 1,100 o Total anticipated cost o project
Poland Euro 53.2 million ($55.8 million)
- ----------------
4 Recently opened.
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Name Status Scheduled Leaseable Parking Miscellaneous (1)
Opening Area (sq. ft.) Spaces
- ------------------------------------------------------------------------------------------------------------------------------------
LUBLINE PLAZA, Lublin Joint Venture 2005 286,000 950 o The acquisition by PC of a 50%
Poland Agreement interest in this project is
scheduled to be consummated in September
2003 following completion of certain
pre-closing obligations by the joint
venture parties.
o Total anticipated cost of project
Euro 43.6 million (US$45.7 million)
RYBNIK PLAZA, Rybnik Tender won (2) 2004 161,000 500 o Situated in the very city center
Poland o Total anticipated cost of project
Euro 23 million (US$24.1 million)
BRNO PLAZA, Brno Czech Pre Sale 2004 222,600 860 o 125 miles east of Prague
Rep. Agreement (2) o Total anticipated cost of project
Euro 32.5 million (US$34.1 million)
NOVO PLAZA, Prague Pre Sale 2004 300,000 800 o PC will hold 99% of the ownership in
Czech Rep. Agreement (2) the land (5)
o Situated in Prague (district IV)
o 57,700 sq. ft. - office use
o Total anticipated cost of project
Euro 36.7 million (US$38.5 million)
PIREAS PLAZA, Athens Final stages of 2005 270,000 1,015 o Situated between Athens and Piraeus
Greece planning and o Total anticipated cost of project
designing Euro 78.3 million (US$82.2 million)
(1) Details provided in this item are presented according to the plans and
design of each respective malls and may subsequently differ.
(2) Building permit not yet issued.
OTHER PLANNED PROJECTS
In addition to the foregoing operating malls and malls under
construction, PC is in various preliminary stages of the development and
planning of the following shopping and entertainment centers:
- ------------------------------------------------------------------------------------------------------------------------------------
Date of anticipated Anticipated approximate project
Name of Project Location opening costs (including land) Status
- ------------------------------------------------------------------------------------------------------------------------------------
Elblag Plaza Elblag, Poland 2006 Euro 17.9 million (approximately Tender won
$18.8 million)
Sosnowiec Plaza Sosnowiec, Poland 2006 Euro 20.7 million (approximately Tender won
$21.7 million)
Lodz Plaza Lodz, Poland 2006 Euro 60 million (approximately $63 Land Acquired
million)
Duna Plaza extention Budapest, Hungary 2005 Euro 25.1 million (approximately Planning
$26.4 million)
Pilzen Plaza Pilzen, Czech 2005 Euro 21.8 million (approximately Agreement for the
Republic $22.9 million) perpetual use signed
Bucuresti Plaza Bucharest, Romania Not determined Euro 30.2 million (approximately Land Acquired
$31.7 million)
Riga Plaza Riga, Latvia 2006 Euro 44.3 million (approximately Final stages of
$46.5 million) negotiations for a
joint venture
agreement
5 The remaining 1% is being held by the seller for a period of 5 years,
following which PC has an option to acquire such 1% at nominal value secured
by a pledge over the shares in PC's favor. The transaction is pending
consummation.
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OTHER PROPERTIES
HUNGARY - PLAZA HOUSE BUILDING
Plaza House Kft., a wholly owned Hungarian subsidiary of PC, is the
owner of a building located on the prestigious Andrassy Boulevard, in the center
of Budapest. The building was reconstructed and refurbished by Plaza House
during 2000-2001. Many of the original features are retained with the building
including the inner courtyard, staircases, stucco, ornate metalwork and fine
wood carvings.
The building is located on property totaling approximately 600 square
meters (approximately 6,600 square feet) and consists of four floors, an atrium
and a basement, with a total constructed area of approximately 2,400 square
meters (approximately 26,400 square feet). The site is located in an exclusive
area of the city in which several foreign embassies are located.
Parts of the building have been leased to subsidiaries of PC and
C.D.P.M. Kft., a subsidiary of Control Centers ("CDPM") (see "Item 7. Major
Shareholders and Related Party Transactions - Related party transactions - Plaza
House Office Building"). The building is also used as the headquarters of PC's
management.
THE CZECH REPUBLIC - THE PRAHA PLAZA COMMERCIAL COMPLEX
Praha Plaza s.r.o., a wholly owned Czech subsidiary of PC, is the owner
of a commercial complex comprised of a number of buildings located in the Third
District of Prague. Their strategic location allows for convenient
transportation thereto.
The buildings are located on property totaling approximately 50,000
square meters (approximately 550,000 square feet) and consist of a five floor
main building and a basement, an office building consisting of four floors and
an office building of two floors. In addition, there are a number of other
buildings of one floor each. The total leasable area of the buildings is
approximately 45,000 square meters (approximately 495,000 square feet). A
building permit granted to Praha Plaza s.r.o. allows for the development of the
property as an office center. The development of such center has been postponed
by the management of Praha Plaza s.r.o. due to disadvantageous office market
conditions in Prague.
The property is currently operating as a commercial complex with a 37%
occupancy rate as at May 31, 2003.
KATOWICE PLAZA, POLAND
In December 1998, Katowice Plaza Sp.z.o.o, a wholly owned subsidiary of
PC, entered into an agreement for the acquisition of the rights in and to
several adjacent parcels of land in Katowice as well as the ownership of the
buildings located thereon (the "Purchase Agreement") for the purpose of
constructing a commercial and entertainment center, in exchange for PLN 5.5
million. The Purchase Agreement also provided that Katowice Plaza would pay all
liabilities and payments relating to the acquisition of the assets and their
registration in the name of Katowice Plaza. An amount of PLN 4 million was paid
on the date the agreement was signed, with PLN 1 million to be paid to the
seller upon the receipt of the construction permit and the balance of PLN
500,000 to be paid when the local zoning plan is changed to the purposes of
trade and services. However, to date the construction has not commenced, and the
parties are disputing the agreement due to the discovery of a major fault in the
land which renders construction inviable. See "Item 8. Financial Information -
Legal Proceeding - Poland."
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PROJECT MANAGEMENT AND SUPERVISION
DEVELOPMENT AND MANAGEMENT SERVICES
Pursuant to an agreement dated as of August 1, 2001 among EMI, PC, EUBV
and Triple-S, Triple-S undertook either itself or through Mr. Shmuel S. Smucha,
its controlling shareholder who also acts as the President and Chief Executive
Officer of PC, to render management services to PC, which services include:
initiation of projects, location of plots of land for the construction of malls
and negotiation of the purchase thereof, negotiation and execution of credit
facilities for the financing of the malls' construction, supervision and
coordination of the development of the malls, and other related services.
As consideration for such services, Triple-S receives a monthly fee of
$40,000. In addition, Mr. Smucha is eligible to receive from PC reimbursement of
reasonable living expenses, as well as other customary benefits. Triple-S is
entitled to receive from PC a monthly loan of $5,000, bearing market interest
rates and repayable no later than December 31, 2004. This agreement will be in
effect until December 31, 2003. EMI is entitled to terminate the service
agreement, at any time, by giving a 90-days advance notice.
PROJECTS UNDER DEVELOPMENT AND CONSTRUCTION
Each of PC's Hungarian subsidiaries that engages in the construction of
a mall enters into a Management Services and Cost Allocation Agreement with HOM
Kft., a wholly owned subsidiary of PC ("HOM"), pursuant to which HOM renders
general management, administration and project development services to each of
the subsidiaries from the early development stages until the shopping and
entertainment mall is opened. Companies similar to HOM operate in Poland and
will be incorporated in each of the countries in which PC is active in order to
serve the projects in the relevant country.
In addition, each of the subsidiaries also enters into a Project
Supervision Agreement with CDPM, pursuant to which CDPM provides project
supervision and construction management services to each of the relevant
subsidiaries during the construction phase of the project. In consideration for
such services, CDPM is entitled to receive fees calculated at 5% of the cost of
the design and construction related costs of the project excluding land
acquisition and financing costs (which cost will be calculated as per the
instructions in the agreement).
OPERATING PROJECTS
Immediately following the completion and opening of each shopping and
entertainment mall, the subsidiary that constructed such mall enters into a
management agreement with Plaza Centers Management BV. a wholly owned subsidiary
of PC, and which renders to the construction subsidiaries services relating to
the ongoing administration, maintenance and operation of the shopping and
entertainment malls, in consideration for which it receives service fees which
are paid by the tenants of the shopping malls.
HOLDINGS IN VENTURE CAPITAL INVESTMENTS
IMAGE GUIDED TREATMENT PRODUCTS
All of EMI's activities in the image guided treatment field are
performed through InSightec.
ExAblate 2000(TM) is based on breakthrough technology that combines
high-intensity focused ultrasound with MRI imaging to achieve accurate
destruction of tumors in a completely non-invasive manner and under real-time
imaging control. The standard treatment for uterine fibroids is currently
invasive surgery (hysterectomy). This new procedure, performed in an outpatient
environment, has been shown to provide relief in women suffering from
symptomatic uterine fibroids with minimal side effects.
-34-
ExAblate 2000(TM) systems are used in clinical studies at leading North
American and European medical centers, including: Harvard's Brigham and Women's
Hospital in Boston, Massachusetts; Saint Luc Hospital in Montreal, Canada; the
Mayo Clinic at Rochester, Minnesota; John Hopkins Hospital, Baltimore; Saint
Mary's of London; Charite in Berlin; Semmelweiss University, Budapest as well as
at the Sheba Medical Center and Hadassah Hospital in Israel. About 350 clinical
treatments for several indications have already been performed.
InSightec's HIFUS technology is at the cutting edge of developments in
its field, and contains several technical breakthroughs and advanced system
concepts, which facilitate a dramatic improvement in treatment capabilities,
mainly by controlling volume thereby considerably shortening treatment time as
well as providing three-dimensional planning and follow-up capabilities. These
developments are based on the extensive accumulated know-how in the medical
imaging area, use of high-output ultrasound, MRI and robotics.
The Focused Ultrasound treatment of uterine fibroids replaces the
current solution for this problem, namely hysterectomy, which is a major surgery
with a considerable rate of complications and long convalescence time. An FDA
approved study for the same indication has already been finished and the data is
now being analyzed prior to submission for final regulatory approval in the US.
In addition, InSightec and its clinical partners are performing
clinical studies using the ExAblate 2000 for the treatment of breast cancer,
breast fibroadenoma (benign tumor), brain tumors through an open flap in the
skull and several other indications. First results are very encouraging.
InSightec is also in advanced stages of development of a second FUS system that
is able to focus the ultrasound through the intact skull, opening new
possibilities in the non-invasive treatment of the brain.
InSightec is also assessing the concept of using ultrasound energy, in
a controlled manner, to direct drugs. The assessment is focused on the technical
and physiological feasibility of the use of FUS in this role.
TXSONICS
TxSonics has a wholly-owned subsidiary registered in the United States
known as TxSonics Inc. The current function of this subsidiary is to provide
support and services for clinical testing in North America.
VCON
VCON is a developer and manufacturer of videoconferencing systems for
ISDN and Internet Protocol networks. VCON offers comprehensive meeting solutions
for desk top, portable and group conferencing over ISDN, Transmission Control
Protocol or TCP/IP, ATM, Satellite, xDSL and other carriers. VCON is
headquartered in Israel with subsidiaries in the U.S. and Europe and with sales
offices in Japan and China. VCON has established strategic alliances with
leading high tech companies worldwide to offer high quality audio, video and
data collaboration. The company markets its products and services exclusively
through a network of reseller partners, OEMs (original equipment manufacturers)
and value added resellers worldwide. VCON is publicly traded on the Paris Stock
Exchange (Nouveau Marche).
OLIVE
EMI, through a Dutch indirect subsidiary, holds shares of Series A
preferred stock as well as Ordinary Shares, representing 25% and 5%,
respectively, of the issued and outstanding stock of Olive Software, Inc.
("Olive"), a Delaware company engaged in the development and marketing of
products enabling a transparent link between the newspapers' traditional
printing systems and the world of e-publishing. These products enable newspapers
and magazines to automatically present their printed edition on the internet,
-35-
while supporting the e-commerce applications, personalization and interactive
advertising. In addition, Olive develops and markets digital archive services
for newspapers and libraries.
The Preferred A Shares held by EMI's subsidiary are senior to other
securities of Olive with respect to rights in liquidation, conversion rights to
common stock, anti-dilution and voting rights on an as converted basis. EMI's
subsidiary is party to a Stockholders Rights Agreement that provides for
customary restrictions on sale of shares, such as no sale restrictions for a
fixed period of time, right of first refusal, co-sale rights and bring along
rights as well as pre-emptive rights. EMI's subsidiary was also granted the
right to appoint one director to the Board of Directors of Olive, which is to be
comprised of up to 4 directors.
In June 2002 a Stock Purchase Agreement was executed between ECT and a
private shareholder, for the purchase by ECT of the shares held by such
shareholder in exchange for $125,000. Acquisition of the said shares increased
the holdings of ECT in Olive to 33% (fully diluted).
EASYRUN
Easyrun is engaged in the development and marketing of "call centers"
solutions, which support under one platform, diversified infrastructure from
historical telephonia and up to futuristic telecom equipment (IP switchboards)
and modern e-commerce applications (Web).
In November 2001, a convertible loan agreement was executed between
EMI, Easyrun and other investors (including another major shareholder - "Alon"),
pursuant to which EMI granted to Easyrun a loan in the amount of $300,000 (out
of a total investment round of $500,000), bearing annual interest of LIBOR + 2%.
The loan is convertible into Series C Preferred Shares. The Preferred C Shares
entitle their holder to all rights granted to the Preferred B holders as well as
to seniority to all other equity securities in liquidation. The conversion price
of the Preferred C Shares was set to achieve aggregate holdings by EMI and Alon
of 48%. Preferred C shares have not yet been issued to either EMI or Alon. As to
further investment in Easyrun, see - "Highlights of 2002 - EMI - Additional
Investment in Easyrun".
As of May 31, 2003, EMI held shares of Series B preferred stock
representing 30.33% of the issued and outstanding shares of capital stock of
Easyrun. The Preferred B shares provide for customary rights such as demand
registration, rights of co-sale, rights of first refusal, preemptive rights,
conversion rights and the right to vote on an as converted basis. The Preferred
B shares also entitle their holders to seniority in the event of liquidation and
winding up.
Bank Leumi Le-Israel B.M. has agreed to extend to Easyrun a line of
credit secured by certain invoices issued by Easyrun to various buyers which
invoices will be assigned to the bank. Such line of credit is also secured by
guarantees provided by EMI and other parties up to a total amount of $150,000,
out of which EMI's share is limited to approximately $140,000.
ELSCINT
-------
HOTELS AND LEISURE
Set forth below is certain information relating to the hotel business
of Elscint:
- ------------------------------------------------------------------------------------------------------------------------------------
ELSCINT'S TOTAL AVERAGE OCCUPANCY
NAME AND RATE HOLDING CONSTRUCTED AREA DURING 2002 AND
OF HOTEL PERCENTAGE (SQ. FT.) TOTAL ROOMS THROUGH MAY 2003 OTHER INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
Victoria Hotel 50% 220,000 305 (27 Suites) 89.8% o business
Amsterdam, four stars center
o health center
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Utrecht Park Plaza Hotel, 50% 55,880 120 (40 executive 67.8% o 70 parking
Utrecht, The Netherlands, rooms) spaces
four stars o 11 conference rooms
Astrid Park Plaza Hotel, 100% 223,300 232 (19 business 67.8% o part of
Antwerp suites) complex that
Belgium, four stars includes an
oceanarium (under
development)
Sandton Park Plaza, Hotel, 33.33% 89,100 138 (61 suites) 45.1% o business
Johannesburg, four stars center
Sherlock Holmes Hotel, 45.1% equity 67,460 119 (17 executive 66% o fitness
London 50% voting studios, 3 split center
level "loft" suites) o main meeting
room for 600
people
o 6 board rooms
Bucuresti Hotel Complex, 69% 901,000 446 (24 units) in The hotel is o adjacent
Bucharest, Romania the hotel; 220 in closed for historically
four star hotel and an apartment hotel renovation. protected
apartment hotel Apartment hotel - building
90% (restaurant)
o health center
Victoria Park Plaza Hotel, 50% 242,000 287 rooms (22 73.1% o Executive
London (standard of business suites and lounge
building equivalent to 12 main suites) o health club
"four star deluxe") 12 apartments o main conference room
for up to 750
people
o 13 additional
convention health
o underground
parking
facilities
-37-
- ------------------------------------------------------------------------------------------------------------------------------------
ELSCINT'S TOTAL AVERAGE OCCUPANCY
NAME AND RATE HOLDING CONSTRUCTED AREA DURING 2002 AND
OF HOTEL PERCENTAGE (SQ. FT.) TOTAL ROOMS THROUGH MAY 2003 OTHER INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
Riverbank (Thames) Project, 45% equity 377 rooms o full leisure
London, preliminary 5% voting 156 boutique hotel center
development style rooms o two main
conference
rooms, each with
capacity of up
to 650 people 20
additional
conference rooms
Ballet Building, Budapest, 50% 143,000 196 rooms o construction
Hungary - in development works to
commence during
2003
ENTERTAINMENT AND COMMERCIAL CENTER IN HERZLIA, ISRAEL
The total estimated project cost of the entertainment and commercial
center is approximately $150 million (approximately NIS 710 million). As of
March 31, 2003, the total estimated remaining cost required to complete the
entertainment and commercial center was approximately $40 million (approximately
NIS 190 million). As of May 31, 2003 the construction of the facility has been
completed and efforts are currently concentrated upon final decoration, tenant
fit outs and completion of the entertainment facilities. The center was opened
to the public during June 2003.
As of May 31, 2003, 78 leases had been signed for space in the
entertainment and commercial center, including agreements with three
anchor-lessees (a cinema, a large retailer group and a pharmacy-perfumery) for a
total area of approximately 13,140 square meter. The rental periods range from
four to ten years for the "anchor" areas to shorter periods for large brand name
shops and other regular shops, not including an option to extend the lease.
Total annual rent for the whole project is expected to be approximately $14-15
million (approximately NIS 66.3 million - NIS 71.0 million).
INVESTMENTS IN BIO-TECHNOLOGY COMPANIES
Gamida develops proprietary technology for multiplying embryonic-like
cells called "stem cells" outside the body, that could potentially expand the
use of stem cells in therapy. Stem cells are undifferentiated, primitive cells
with the ability to multiply and differentiate into specific kinds of cells.
Stem cells hold the promise of allowing researchers to grow specialized cells or
tissue, which could be used to treat injuries or disease. Stem cells could serve
in the near future as replacement of bone marrow for cancer patients undergoing
radiation therapy. In addition, stem cells could become the vehicle of choice
for gene therapy and, ultimately, be used for tissue regeneration. EBM is
entitled to appoint two directors to the board of directors of Gamida.
Umbilical Cord Blood Bank. As a complement to its investment in Gamida
and the fulfillment of its quest to become a leader in the bio-technology
sector, EBM expects to establish an international umbilical cord blood bank
("UCBB") during 2004. The UCBB will provide a broad-based source of stem cells
that are collected from umbilical cords immediately after birth and then
-38-
processed and stored for various medical uses. EBM expects that the UCBB will
supply its products worldwide. In this regard, EBM intends to cooperate with
several leading research groups in Israel which are active in research and
development in the broader field of stem cell. Within the framework of the
proposed activities of the UCBB, EBM also intends to establish a highly
sophisticated laboratory for the genetic analysis of stem cells, and for
conducting other genetic tests on a commercial basis. In this regard, EBM is
negotiating with the Ezer M'Zion, a charitable organization (which maintains the
largest bone marrow registry in Israel) with a view to establishing a joint
venture for the operation of the laboratory.
LuriDent. EBM has terminated the term sheet, signed in April 2001, for
an investment in LuriDent Ltd. ("LuriDent"), a company that develops proprietary
platform technology which creates controlled release formulations, which
preferentially adhere to the mucosa tissue. LuriDent has developed a first
generation mouth rinse, which contains a known antibacterial agent. EBM intends
to initiate legal proceedings against LuriDent for the refund of certain amounts
advanced on account of the proposed investment.
Oncologics. EBM is currently assessing whether to continue its
investment in Oncologics Ltd. ("Oncologics"), to which EBM had previously
provided a line of credit of up to $250,000. Of this amount, EBM has extended a
$167,000 loan to Oncologics for the performance of studies intended to advance
its technological proof of concept stage. Oncologics has identified a biological
defect in cancer cells which renders them resistant to chemotherapy. If
corroboration of this finding is established, Oncologics' technology could be
used to identify patients who are resistant to chemotherapy and offer them an
alternative therapy. This could improve the clinical outcome of cancer patients
and save substantial costs of inadequate therapy. As consideration for the loan,
EBM has the option to purchase up to 40% of Oncologics' capital stock at a
pre-money value of $1 million. In addition, in the event Oncologics does not
comply with the terms of the foregoing loan, EBM will have the right to convert
the loan into shares of capital stock of Oncologics.
COMPETITION
EMI
---
SHOPPING AND ENTERTAINMENT MALLS
There are a number of competitors in the eastern and central European
countries in which EMI operates or intends to operate in the shopping and
entertainment mall business, particularly in the larger cities, such as Budapest
and Warsaw. However, the following should be noted: (a) shopping centers which
are not in close proximity and which do not draw their clientele from the same
catchment areas are not considered as being competitive; (b) we believe that
large retail centers (known as "power centers"), even if they compete with our
centers directly merely by virtue of their proximity to our shopping and
entertainment malls, are at a disadvantage because they do not offer the
entertainment facilities which characterize our malls, and which we consider to
comprise a significant element in the attraction of patrons; and (c) in the
regional cities of Hungary, Poland, the Czech Republic as well as in Athens,
Greece, the competitive activity is more limited.
In addition to several ad hoc entrepreneurial projects, there are two
significant groups operating a number of shopping malls in the eastern and
central Europe with whom we compete directly, namely the Corfu chain based in
France and the ECE chain based in Germany. We compete with these chains in the
pre-development stage (for acquisition of suitable sites), in the development
stage (obtaining suitably qualified architects, consultants and contractors) and
in the operational stage, if the malls compete for the patronage of the same
population. We also compete for quality "brand name" tenants to occupy the
rental units. In locations where competing malls are being constructed
simultaneously, the first mall to open generally enjoys an advantage over its
competitor, which is the reason for our emphasis on the expeditious completion
of the construction operations.
-39-
The Duna Plaza Shopping and Entertainment Mall in Budapest competes
directly with the "West End Shopping Mall" which is more centrally located, also
benefits from proximity of bus and rail access points, and is a western style
shopping mall of a high standard offering substantially similar facilities to
those offered by the Duna Plaza. The Csepel Shopping and Entertainment Mall in
Budapest is less directly affected by the competition posed by the "West End"
mall, since it is located in a principally residential district, approximately
three miles from the city center, and serves mainly the local residential
population.
The Sadyba Best Mall in Warsaw also competes directly with the "Mokotow
Shopping Center", a shopping mall of a similar quality and standard as the
Sadyba Best Mall, located in the same district of Warsaw and serving the same
population. In Krakow, the Krakow Plaza mall competes with the M1 Power Center
located in close proximity.
However, in most of the cities in Hungary and Poland in which we
operate or are developing shopping malls, our malls are the only ones of their
type in the city, and competition is therefore minimal or non-existent.
Traditional shopping outlets lack the added benefit of the entertainment
activities which our malls offer, and accordingly have difficulty competing with
us. The Helios Plaza Mall presently under construction in Athens, Greece is the
first western style shopping and entertainment mall in the entire Greater Athens
area (which includes Piraeus), and will thus enjoy a significant advantage when
it opens. However, there can be no certainty that this competitive edge will
continue, especially in the larger metropolitan areas, which have populations
sufficient to support more than one mall.
HOLDINGS IN VENTURE CAPITAL INVESTMENTS
HIFUS PRODUCTS
The competition in the HIFUS products field can be divided into two
main categories: alternative Minimally Invasive Surgery methods (MIS) and
competing image guided high intensity focused ultrasound systems.
Regarding the MIS methods, in general, there are tissue ablation
methods in various MIS versions (e.g., radio frequency electromagnetic energy
inserted into the body by a special needle, laser & cryogenic) which are
potential competitors with our application market. Another experimental method
in the treatment of uterine fibroids is that of uterine artery embolization.
Presently we are not aware of any established method in the clinical
applications of breast tumors, uterine fibroids or brain tumors. Although these
techniques might be somewhat less expensive, they are invasive and we expect
that they will be less accurate and less effective.
Insofar as Image Guided HIFUS competition is concerned, although the
field of HIFUS tissue ablation is not yet clinically established, we know of
several companies that are active in developing such systems and clinical
applications. The imaging guidance of our system is to facilitate on-line/closed
loop thermometry. We believe that this feature is essential to ensure the
quality of the treatment.
Philips is developing a similar system to the one being developed by
InSightec. While the exact application has not been disclosed, it appears to be
compatible with superficial target tissue ablation. Philips does not claim to be
in clinical trials. Transurgical is developing a small portable MRI integrated
unit, which would appear to use a low field MRI with limited application in MR
thermometry. No clinical trials have been reported. EDAP is marketing in Europe
a non-real time ultrasound guided HIFUS transrectal system for treatment of
prostate cancer which is presently under clinical testing in the U.S. Siemens,
which holds a minority interest in EDAP, collaborated with EDAP on an
experimental system for the treatment of breast cancer. A single patient was
treated and the activity has been discontinued. Focus Surgery Inc. is developing
a HIFUS treatment system for benign prostatic hyperplasia and is also starting
clinical trials on an ultrasound guided system for the treatment of prostate
cancer. Toshiba has several patents in the field but no specific activity is
reported besides a possible involvement with Focus Surgery. Hitachi has an old
patent on some aspects of MR guided FUS, which it does not seem to be actively
pursuing.
-40-
ELSCINT
-------
HOTEL AND LEISURE
The lodging industry in Europe has traditionally been classified on a
grading system, with five-star representing a luxury hotel and one-star a budget
hotel. All of Elscint's hotels enjoy a four-star grading, or qualify as
four-star establishments, while some are designated as "Four Star Deluxe"
establishments.
Each of Elscint's hotels competes with other hotels in its geographic
area for clientele, including hotels associated with franchisers, which may have
more extensive reservation networks than those which may be available to
Elscint. Elscint competes with other facilities on various bases, including room
prices, quality, service, location and amenities customarily offered to the
traveling public. Levels of demand are dependent upon many factors including
general and local economic conditions and changes in levels of tourism and
business-related travel. Elscint's hotels depend upon both business and tourist
travelers for revenues.
In addition, Elscint competes with other companies in the hotel
industry for opportunities to purchase or build new hotels. These other
companies may be larger than Elscint and may have greater financial resources.
Elscint's hotel in Utrecht, The Netherlands competes directly with the Holiday
Inn hotel (which is located directly opposite Elscint's hotel), the Mercury
Hotel and the President Hotel. Elscint's hotel in Antwerp, Belgium competes
directly with the Hilton, Holiday Inn, Crown Plaza and Park Lane hotels,
although Elscint believes that the average room rate in its hotel is
competitive. The Victoria Park Plaza Hotel in London is in direct competition
with a number of three-star plus and four-star rated hotels within relatively
close proximity of the Victoria railway station, including the Thistle Grosvenor
and the Victoria Holiday Inn hotels, both of which benefit from their close
proximity to Victoria station, as well as the Thistle Royal Westminster, Rubens,
Status Street, Ennins, St. James's Court and Merchant Court hotels. In addition,
there is a considerable number of traditional budget hotels in the proximity of
the Victoria Hotel. The hotel Elscint is planning to construct in Budapest,
Hungary will compete directly with the Kempinski, Marriott, Hilton,
Inter-Continental and Hyatt hotels. The Bucuresti Hotel in Bucharest competes
with the Hilton situated directly across the street, the Intercontinental, and
the newly opened Marriott Grand Palace hotel.
Although the hotel industry in Europe is highly competitive, and is
witnessing an increase in room supply in some areas, the outlook for the medium
to long term is positive. Notwithstanding a slight slow-down in the latter part
of 1998, the market had strengthened during 1999 and 2000. During 2001 Elscint
experienced a reduction in hotel demand in London, which is attributable
primarily to the outbreak of the foot and mouth disease in the United Kingdom
and secondarily to a slow-down in the U.S. economy, especially following the
events of September 11, 2001. The goal of Elscint's hotel business is to acquire
and manage four-star hotel properties which provide the business and vacation
traveler with luxury quality accommodations, conveniently located near major
transportation stations and commercial centers, at four-star prices.
ENTERTAINMENT AND COMMERCIAL CENTER IN HERZLIA
There is a large number of shopping malls located in the Greater Tel
Aviv area and in its satellite cities, including Herzlia, Ra'anana, Petach-Tikva
and Rishon LeTzion. A large shopping mall has recently been opened in Herzlia,
approximately 1.5 kilometers from the site of Elscint's commercial and
entertainment center at the Marina in Herzlia. All these malls compete
vigorously not only for tenants but also for customers. Elscint is attempting to
-41-
establish a competitive edge, both due to: (a) the unique location of the
Marina, overlooking the Mediterranean Sea; and (b) the strong emphasis on the
entertainment facilities to be offered to its patrons.
INVESTMENTS IN BIO TECHNOLOGY COMPANIES
Start up companies, including companies in the bio-technology field,
tend to operate in a highly competitive environment. In order to succeed, the
products or services require a unique "added value" factor, relatively brief
concept-to-market parameters, and aggressive marketing. Gamida faces competition
from large international companies with access to financial resources and with
well-established research and development capabilities. However, the
bio-technology field, which is dominated by large multi-national conglomerates,
although affected by global pressures on the investment market, is more
resilient to market trends than the more volatile high technology industry.
SEASONALITY
EMI AND ELSCINT
---------------
SHOPPING AND ENTERTAINMENT MALLS (INCLUDING ELSCINT'S ENTERTAINMENT AND
COMMERCIAL CENTER IN HERZLIA, ISRAEL)
The entertainment and commercial center may experience seasonal shifts
in retail activity. Generally speaking, peak holiday seasons (such as Christmas,
Easter, Passover, the Jewish New Year and other national holidays), will show an
increase in patron traffic, both for the purchase of holiday gifts and for
utilizing the entertainment facilities offered by the center. The periods
immediately following such periods tend to show a decrease in the number of
patrons visiting the centers and a corresponding slow down in retail activity.
However, this may be offset by the fact that the indoor facilities will offer a
heated or an air-conditioned environment for shoppers and patrons which is of
particular significance in areas with severe weather conditions.
ELSCINT
-------
HOTEL AND LEISURE
The business activities of the various hotels, especially in Europe,
are influenced by several constant factors that affect the revenues and gross
operating profit ("GOP"), either on an absolute basis or relative to other
periods during the year. These factors include (i) seasonality of general
business activity (which affects the volume of traffic in the business
community), (ii) holiday seasons (such as Christmas and Easter), and (iii) the
weather conditions. These factors generally cause the first and third quarters
to be weaker than the second and fourth quarters.
The first quarter, which is the period immediately following the
Christmas season and the height of the European winter, is traditionally
characterized by lower revenues and GOP resulting from lower occupancy rates and
reduced room rates. During the third quarter, there is generally a decrease in
local business activities due to the summer holidays which, together with a
tendency for local tourist traffic to seek out resort destinations, also
generates slower results, while the increase in international tourism is to some
extent offset by lower room rates, particularly for groups.
However, the second quarter shows an increase due to more favorable
weather conditions (spring to early summer) and the Easter holiday and the
corresponding revival of both business and tourist activity, while the fourth
quarter is usually the strongest period, leading to the Christmas and New Year's
holiday season and a significant year-end increase in business activities.
For Elscint's South African hotel, generally the holiday seasons
(Christmas and Easter) show insignificantly stronger results, although the
depressed economy and the political uncertainty of the region have reduced
occupancy rates to the point that seasonal comparisons are largely irrelevant.
-42-
GOVERNMENTAL REGULATION
EMI
---
SHOPPING AND ENTERTAINMENT MALLS
The development, construction and operation of shopping and
entertainment centers are subject to various regulatory controls, which vary
according to the country of activity. In certain countries, such as Poland, a
foreign company (or a local company which is controlled by foreign shareholders)
is required to obtain a special permit for the acquisition of real estate
properties in that country. In addition, some countries such as Poland and the
Czech Republic require that the developer carry out an environmental report on
the land before building permit applications are countenanced. In Poland,
acquisitions of shares of a Polish company or of a foreign company that controls
a Polish company require a permit from the Polish Anti Monopoly Office.
In Poland, Hungary and the Czech Republic, building permits are issued
in two stages. The first stage determines the "building conditions", which
addresses factors such as the proposed area to be constructed and its
distribution over the floors of the building, the building "foot-print" within
the plot, building lines, access routes, and conceptual design. Once the
"building conditions" have been approved and have become lawful (see below), the
application for the formal building permit is submitted, which includes detailed
architectural building plans, sections, elevations etc. all of which must comply
with the approved building conditions. Following the issuance of both the
"building conditions" approval and the building permit approval, a period of is
allowed (which varies from country to country) for third parties whose rights
are allegedly affected by the permits to file objections. Only in the event that
this period passes without objection, or in the event that objections raised are
dismissed by the competent authorities, do the permits become "lawful", valid
and available for execution. In some instances where the applicable town zoning
scheme does not permit commercial activities of the type characterized by our
malls, it is necessary to process an amendment to the zoning scheme, which may
be a protracted process and may not necessarily be successful (as in the case of
the Prague District III project).
Apart from the building permits which are required for the construction
of the shopping and entertainment malls as mentioned above, the mall
constructing are required to obtain "operating permits" from the municipal
authorities before the mall can be opened to the public and commence operation.
Such permits will typically address issues such as fire fighting facilities,
escape routes, mechanical integrity of systems, public sanitation, and
compliance with the approved building conditions and building permits. In
addition, the individual tenants are required to obtain operating or business
licenses in order to commence trading within the malls. In certain countries,
video arcade operators may be required to obtain gaming licenses. The Project
Companies are also required to comply with local regulations governing the
employment of its employees.
HIFUS PRODUCTS
The testing, manufacture and sale of InSightec's products are subject
to regulation by numerous governmental authorities, principally the FDA, the
European Economic Community (the "EEC"), and corresponding state and foreign
regulatory agencies.
The U.S. Safe Medical Devices Act of 1990 (the "SMDA") includes various
provisions which are applicable to each of the existing products of InSightec
and may result in the Pre Market Approval process (a process whereby the FDA
approves a new system that has no predicate devices that have been approved in
the past) for such products becoming lengthier and more costly. Under the SMDA,
the FDA can impose new special controls on medical products. These include the
promulgation of performance standards, post-market surveillance requirements,
patient registries, and the development and dissemination of guidelines and
other actions as the FDA may deem necessary to provide a reasonable assurance of
safety and effectiveness.
-43-
In June 1993, directive 93/42/EEC for medical devices was adopted by
the EEC. In June 1998, this directive replaced the local regulations and ensured
free transfer of qualified medical equipment among member states. Medical
devices that meet the established standards receive certification represented by
the symbol "CE". There are two types of certifications that are granted: (i)
general certification of a company and (ii) certification for a specific
product. In addition, the established directives indicated, among other things,
that InSightec should comply with the medical device directive; however,
InSightec decided to comply with International Standard ISO 9001 (European
Standard EN 29001) entitled "Model for Quality Assurance in Design, Development,
Production, Installation and Servicing" and its extension to medical products EN
46001 which satisfies the medical device directive. On May 10, 2001, InSightec
obtained a certification by the European Notified Body that it complies with the
requirements of ISO 9001 and EN 46001.
In 1985, Israel and the United States entered into a free trade
agreement which generally enables tariff-free access of InSightec's products
into the United States. As a result of an agreement entered into between Israel
and the EEC, the EEC has abolished customs duties on most Israeli industrial
products, including all Elscint, EUL and InSightec products of which Israeli or
EEC origin can be proved.
ELSCINT
-------
HOTEL AND LEISURE
The Netherlands
---------------
In The Netherlands, there are a number of commercial organizations
regulating the hotel and restaurant industry, which govern methods of engaging
in agreements, advertising tariffs and advertising the hotel. These regulations
also govern the sale of alcohol to the public, terms of employing personnel,
methods of registering the hotel and creating a method of rating the hotels in
the Benelux countries (Belgium, The Netherlands and Luxembourg).
In the Benelux countries, there is a "Benelux-Hotelclassificatie"
(Benelux hotel classification system). In The Netherlands this classification
system is conduced by the "Bedrijfschap Horecsa en Catering", a trade
organization established by law in collaboration with the consumer society ANWB
(which is a consumer society comparable to the AAA in the United States of
America). Our hotels in The Netherlands have received a four-star rating.
Restaurants and hotels operating in The Netherlands must operate under the
management of a general manager and a local manager.
According to Dutch law, where a company sells its business, it is
obligated to transfer all employees together with the business. The hotel and
restaurant industry in The Netherlands has collective labor agreement, which
provides a grading system for employees in the hotel and restaurant industry.
For each grade there is a minimum wage mandated. Among other things, the
provisions of the collective labor agreement obligate the employer to provide
money for employees for a number of funds.
The total obligations of the companies in The Netherlands due to the
termination of employees, in accordance with the laws in The Netherlands and
labor agreements in effect, are covered by (i) current payments to government
institutions for provisions for the retirement of employees or their dismissal;
(ii) current payments to life insurance companies for pensions; and (iii) a
provision included in their financial reporting.
Belgium
-------
Astrid Park Plaza has a license for operating the Astrid Park Plaza
hotel in Antwerp, Belgium.
In Belgium, the grading of hotels is conducted by a tourism
organization which operates under the authority of, and in accordance with
regulations issued by, the Belgian Ministry of Tourism. Hotels which are not
graded are prohibited from trading as a hotel. This organization regulates and
-44-
grades hotels and restaurants including supervising the method of engaging in
agreements and advertising tariffs and the hotel. The regulations also establish
the rating of hotels using the "stars" method. As of April 30, 2002, the
evaluation of the Astrid Park Plaza hotel has been completed and the hotel has
received an official H-4 rating, which is equivalent to a "Four Star Deluxe"
rating.
In addition, various licenses and permits are required to be issued by
governmental authorities (including permits for the operation of a restaurant,
the sale of alcohol and food and beverage licenses, etc.) and in some instances
by the municipal authorities (including illumination, operation of a public
terrace during summer months, etc.). Governmental authorities also conduct
periodic reviews of installations and systems operating within the hotel
(elevators, sprinkler systems, sanitation, etc.). Regulations also govern the
employment of employees, the observance of which is monitored by the employee's
union and regulated by governmental authorities.
United Kingdom
--------------
The principal regulatory requirements for the construction and
operation of hotels in the United Kingdom are as follows:
o Approval of the appropriate building control authorities for the plans
and designs of the proposed hotel, culminating in the grant of a valid
building permit;
o Building regulation consents required for the occupation and operation
of the building, particularly in connection with means of escape in the
case of fire;
o Licenses for sale of alcohol;
o Compliance with various United Kingdom and European Union regulations
in connection with employees, in particular working hours regulations;
o Compliance with health and safety regulations, in particular those
concerning food and hygiene; and
o Gaming licenses (where applicable).
The type and nature of the licenses will vary according to
circumstances. In particular, there are a number of different licenses that may
be relevant in connection with the sale of alcohol and operation of
entertainment facilities, depending on the nature of the services to be provided
by the hotel to its patrons.
Hungary
-------
The fact that the Ballet Institute Building has a historical landmark
status, under the protection of the Hungarian Historical Building Office (which
has authority for the administration and preservation of such building),
mandates that the planning consents and requisite permits for the proposed
renovation of the Ballet Institute Building and its conversion into an hotel
must be applied for and obtained from the Historical Building Office. In order
to obtain such consents and permits, it is necessary to ensure that the
renovation plans provide for the restoration of the building and the
preservation of its historical status.
Various government decrees establish the criteria for the rating of
hotel establishments. These criteria include: size of rooms; suite-to-room
ratio; number of restaurants and other catering facilities; level of room
service provided; level of room amenities provided; air-conditioning; guest
facilities; and the quality and periods of food and beverage services provided.
Following the completion of the renovation works, it will also be
necessary to obtain an operating permit, which will only be issued after the
following consents and approvals have been obtained:
-45-
o The approval of the local State Public Health and Medical Officer
Service for the commercial accommodation;
o Animal Health Station and the local State Public Health and Medical
Officer Service for businesses or catering establishments which use or
market food or ingredients of animal origin;
o The Fire Department as fire control authority for business
establishments, commercial accommodations and hospitality
establishments; and
o The competent building authority (in Elscint's case, the Historical
Building Office) certifying that the developer has executed the
renovation and construction works in compliance with the permits issued
to it.
The operating permit is issued for the hotel as a business activity.
Other activities conducted within the premises (such as: restaurants, bars,
shops, health clubs, etc.) require special operating permits, which are issued
by the local municipal authorities. The sale of alcohol on the premises requires
a permit from the customs authorities.
South Africa
------------
The Sandton Hotel is required to maintain, and it currently maintains,
licenses for the sale of alcohol on the premises, a trading license, and to
comply with national and municipal regulations regarding food, hygiene and
employees.
Romania
-------
Building permits required under local applicable laws will be necessary
in order to execute the renovation works at the Bucuresti Hotel. In order to
enable the re-opening of the hotel following renovation, the Bucuresti Hotel
will be required to maintain licenses for the operation of the building as a
hotel, the sale of alcohol on the premises and the operation of a restaurant and
tourism services. In addition, the hotel will be required to maintain a trading
license, and to comply with national and municipal regulations regarding food,
hygiene, the operation and maintenance of the swimming pool, casino, elevators,
health, sanitation, electricity, fire hazards prevention, and employees. The
hotel will also be required to obtain local municipal and police approvals for
the means of access to and egress from the hotel for motor vehicles.
PRINCIPAL CAPITAL EXPENDITURES AND DIVESTITURES
FISCAL YEAR 2000
EMI
---
In 2000, EMI made the following capital expenditures and divestitures:
Acquisition of Shopping and Entertainment Malls Business. On September
19, 2000, a subsidiary of EMI consummated the acquisition of the shopping and
entertainment malls business from BEA Holding BV ("BEA Holding"), a subsidiary
of Europe-Israel (M.M.S.) Ltd. ("Europe-Israel"), an Israeli company listed on
the Tel Aviv Stock Exchange ("TASE"), which at that time held 50% of the rights
to such malls (the "BEA Agreement") and from a subsidiary of Red Sea (an
unrelated third party, who at that time held the remaining 50% of said malls)
(the "Red Sea Agreement").
Within the framework of the BEA Agreement, EUBV acquired BEA Holding's
holdings in PC in consideration of $42.5 million (based on an independent
valuation of PC's assets) as well as certain indebtedness owed to BEA Holding
under certain financing facilities provided by BEA Holding to PC, which, as of
March 31, 2000, totaled approximately $19.46 million, including accrued
interest. Furthermore, EUBV acquired from BEA Holdings all additional
-46-
shareholder loans granted by BEA Holdings to PC, as of April 1, 2000 and until
the closing of the BEA Agreement, in consideration for the payment of their
principal amounts only. The interest accrued on these loans was attributed to
EUBV from the respective dates of the grant of the loans to PC. The total amount
of these additional shareholder loans at the time of the closing of the BEA
Agreement was approximately $15.3 million.
Pursuant to the Red Sea Agreement, EUBV acquired all of Red Sea's
investments in the capital stock of the various companies owning the malls, and
all of the loans granted by Red Sea to companies, in consideration for the
payment of $42.5 million.
Immediately following the consummation of both transactions, EUBV held
100% of the shopping and entertainment mall business, 50% directly and 50%
through PC. In October 2000, as part of a corporate re-structuring program, EUBV
transferred to PC those rights acquired by it directly from Red Sea (50%) in
each of the mall-owning companies. The consideration for the transfer of these
rights was $42.5 million, which was recorded in the books of PC as an interest
bearing loan due and owed by PC to EUBV. PC held, following the above described
transactions 100% of the rights to the mall owning companies.
Sadyba - In March 2000 we acquired the rights to 50% of the Sadyba mall
for consideration of $4.150 million.
Olive - In September 2000, we signed agreements for the acquisition,
through ECT, of 32.8% of the outstanding share capital of Olive (30% on a fully
diluted basis), in exchange for $6 million.
Easyrun - In November 2000, EMI entered into a subscription agreement
with Easyrun, as well as with various third parties, for the purchase of
preferred shares of Easyrun, at a price per share of $1.79. Following payment by
EMI of approximately $3 million, EMI was issued 23.7% of the preferred shares of
Easyrun (19.22% on a fully diluted basis).
ELSCINT
-------
In 2000, Elscint made the following capital expenditures and
divestitures:
Riverbank (Thames), London - The company owning the hotel paid an
aggregate initial amount of GB (Pound)13.55 million as consideration for the
acquisition of the long term lease rights to the land and certain property
constructed thereon, and will pay annual lease payments of GB (Pound)500,000.
Sherlock Holmes Hotel, London - The consideration paid for the assets
acquired was approximately GB (Pound)10.5 million. The annual lease payment is
GB (Pound)450,000, subject to review every five years on the basis of "open
market value".
The Bucuresti Hotel Complex, Bucharest, Romania - The total investment
made by BEA in respect of this transaction (including ancillary costs) totaled
approximately $27 million.
Monfort Lake Project, Israel - Elscint entered into a development
agreement with the Israeli Lands Administration and the local municipal
authority, pursuant to which Elscint undertook to invest approximately NIS 9
million in the development of the infrastructure of the land, which amount
includes the capitalized annual lease payment for the initial lease term.
Sale of ELGEMS - As consideration for the transfer to GEMS of its 50%
holdings in ELGEMS, Elscint received $30 million in the form of a promissory
note maturing on December 31, 2001, linked to the U.S. dollar and bearing no
interest. The discounted value of the proceeds of the sale at December 31, 2000
amounted to $28.3 million (based on an annual discount rate of approximately
6%). This transaction resulted in a capital gain of NIS 73 million.
-47-
EBM - In early 2000, EBM invested approximately $1.5 million in Gamida
(including the purchase of Dr. Gonen's shares), at a pre-money valuation of $7
million.
FISCAL YEAR 2001
EMI
---
In 2001, EMI made the following capital expenditures and divestitures:
Additional investment in VCON - In February 2001, a Dutch subsidiary of
EMI signed an agreement for the investment in VCON of $4 million, and subsequent
thereto signed an amendment to the agreement pursuant to which it would receive,
for no further consideration, additional shares and warrants to purchase shares
of VCON.
Additional investment in Easyrun - On November 13, 2001, EMI entered
into a convertible loan agreement with Easyrun (and other lenders), which
provided for the grant by the lenders to Easyrun of a loan in the aggregate
amount of $500,000, with EMI's share in such loan being $300,000. The principal
amount bears interest at the rate of LIBOR + 2% per year. It was agreed that the
loan may, at any time, be converted into Series C Preferred Shares of Easyrun at
a price per share of between $0.928 and $1.124.
Purchase of Afridar - In early 2001, a consortium that included a
wholly-owned subsidiary of EMI (the "Group") won the right to acquire from the
Governmental Companies' Authority ("GCA") the shares of the state owned company
Afridar - Housing and Development Company of Ashkelon Ltd. ("Afridar"), a well
known and experienced Israeli real estate entrepreneurial company with
substantial holdings in residential property, and, as a joint venture party, in
projects being developed in southern Israel. Afridar also has investment
property holdings. Immediately thereafter, members of the Group signed an
agreement in principle to govern their business relationship, according to which
the party other than EMI would pay the total acquisition cost of the Afridar
shares and, in exchange, the Company and/or its subsidiary would hold the
Afridar shares registered in their names in trust for such other party. The
Company, together with the other party, negotiated with the GCA the assignment
of the Company's rights and obligations in Afridar to the other party. As of May
31, 2003, these rights had not yet been assigned.
ELSCINT
-------
In 2001, Elscint made the following capital expenditures and
divestitures:
Riverbank (Thames), London - Following the acquisition and during 2001,
the hotel-owning company made additional payments on account of planning and
design costs of GB (Pound)3.2 million.
Sherlock Holmes Hotel, London - The renovation of the Sherlock Holmes
Hotel commenced in early 2001, and as of December 31, 2001 was in its final
stages of completion. As of December 31, 2001, Elscint had invested GB
(Pound)7.8 million in the hotel's renovation.
The Victoria Park Plaza Hotel, London - The Victoria Park Plaza Hotel
was opened in September 2001, and became fully operational in the beginning of
2002. During 2001, Elscint's subsidiary invested GB (Pound)10.7 million in the
construction works of the hotel. As of December 31, 2001 Elscint invested GB
(Pound)53.9 in the construction of the hotel.
The Ballet Building, Budapest, Hungary - Currently in Preliminary
Development - Elscint's subsidiary invested approximately $5.7 million in the
renovations of the building.
Monfort Lake Project, Israel - As of December 2001, Elscint invested
NIS 9 million, including initial planning costs, in this project.
-48-
EBM - In September 2001, EBM invested an additional $5 million in
Gamida (including the purchase of Dr. Gonen's shares), at a pre-money valuation
of $20 million.
Gilbridge - In October 2001, Elscint entered into an agreement with Mr.
Emmanuel Gill, a former Chairman of the board of directors of Elscint, for the
sale by Elscint to Mr. Gill of 49% of the issued and outstanding shares held by
Elscint in Gilbridge and the assignment of Elscint's rights under certain
capital notes made by Gilbridge to Elscint for a consideration of $5 million. It
was further agreed that the loan of NIS 18.9 million granted to Gilbridge for
repayment out of initial profits for the period ending October 30, 2005 will
nevertheless be repayable in full on that date if initial profits prove
insufficient.
FISCAL YEAR 2002
EMI
---
Acquisition of Duna Plaza, Sopron Plaza and Nyir Plaza - see " -
Highlights of 2002". See also "Item 5 - Operating and Financial Review and
Prospects - Loans".
Refinancing of Alba Plaza, Debrecen Plaza, Miskolc Plaza and Szeged
Plaza - See "Item 5 - Operating and Financial Review and Prospects - Loans".
Financing loan for the acquisition of 50% of Pireas Plaza - See "Item 5
- - Operating and Financial Review and Prospects - Loans".
Continuing Investments in Mall Projects - Throughout 2002, EMI
completed the construction of and opened the Savaria Plaza in Szombathely,
Hungary, and continued the construction of various other projects. Part of the
funds paid with respect to the mall projects were financed through investments
by the Company, while a majority of the financing was obtained through bank
loans. See "Item 5 - Operating and Financial Review and Prospects - Loans".
ELSCINT
-------
HOTEL AND LEISURE
Riverbank (Thames), London - The total additional amount invested by
Elscint in this project during fiscal year 2002 was GB (Pound)12.1 million
(approximately $19.5 million), including annual rent payments made by Elscint to
the owner of the land. These amounts were expended principally in respect of
planning and design and construction operations. Elscint has received approval
in principal, in the form of a term sheet, for a long-term construction facility
in respect of this project.
The Ballet Building, Budapest, Hungary - The total investment in the
project during 2002 (including obtaining full and clean possession) was
approximately (Euro) 9.1 million (approximately $9.5 million).
Astrid Park Plaza Hotel - The cost of the completion and of the
renovation works at the Astrid Park Plaza hotel in Antwerp, Belgium and the
commencement of construction of an oceanarium attraction within the facility was
approximately (Euro) 2.6 million (approximately $2.7 million).
Sale of Manufacturing Facility - Effective December 31, 2002, Elscint
sold substantially all of the assets and assigned substantially all of the
liabilities pertaining to the business previously conducted by it at its factory
in Ma'alot, to an unrelated third party. The sale price of the facility was
approximately $20 million, and Elscint recorded a capital gain of approximately
$8 million. (See : "Item 4 - Highlights of 2002").
Entertainment and Commercial Center - The total additional amount
invested by Elscint's subsidiary in this project during fiscal year 2002 was
$20.9 million. The total cost of the project is estimated at approximately $150
million.
-49-
Bio Technology Investments - In April 2002, EBM acquired from a third
party an additional 450,000 ordinary shares of Gamida for approximately
$1,042,000.
PRINCIPAL CAPITAL EXPENDITURES AND DIVESTITURES CURRENTLY IN PROGRESS
Currently, we and Elscint are either in the process of making or are
planning to make additional capital expenditures, as follows:
EMI
---
Refinancing loan for the acquisition of an aircraft - See "Item 5 -
Operating and Financial Review and Prospects - Loans".
Refinancing loan for Krakow Plaza - See "Item 5 - Operating and
Financial Review and Prospects - Loans".
EMI has recently agreed with an Israeli bank, on an extension to the
repayment term of the credit facility. See "Item 5 - Operating and Financial
Review and Prospects - Liquidity and Capital Resources".
Acquisition of Dreamland Entertainment N.V. See "Item 4 - Information
on the Company -Highlights of 2002 - EMI".
ELSCINT
-------
During 2003, Elscint either made, was in the process of making, or was
planning to make, additional capital expenditures, as follows:
HOTEL AND LEISURE
Riverbank (Thames), London - construction
-----------------------------------------
The additional amount invested by Elscint in this project during 2003
was (Pound)6.5 million (approximately $10.47 million) including annual rent
payments made by Elscint to the owner of the land. These amounts were expended
principally in respect of planning and design and construction operations.
The Ballet Building, Budapest, Hungary - construction
-----------------------------------------------------
The additional amount invested by Elscint in this project during 2003
was approximately (Euro) 0.45 million (approximately $0.47 million). The
estimated cost of the renovation and conversion of the building into a hotel,
which will commence in late 2003, is approximately (Euro) 35 million
(approximately $36.7 million).
Astrid Park Plaza hotel
-----------------------
The cost of the construction of the oceanarium attraction within the
facility up to May 31, 2003 was approximately (Euro) 1.5 (approximately $1.6
million).
Bernard Shaw hotel
------------------
In January 2003, Elscint leased the Euston Road Property to an
unrelated third party for a period of 25 years. The rental payments are in a
fixed amount for each of the first four years of the lease, and thereafter
increase annually at the rate of 2.5% through the end of the lease term.
Bucuresti Hotel Complex, Bucharest, Romania - Renovation Planned
----------------------------------------------------------------
Elscint intends to extensively renovate the Bucuresti Hotel in order to
enable compliance with the international standards required for a four star
business hotel. As at May 31, 2003, the renovation program was in an advanced
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stage of preparation. On the basis of the budget currently under consideration,
Elscint anticipates that an investment of approximately (Euro) 36.5 million
(approximately $38.3 million) will be required, which Elscint intends to finance
through the issuance of equity, shareholders loans and bank loans.
ENTERTAINMENT AND COMMERCIAL CENTER
During the first quarter of 2003, Elscint's subsidiary invested
approximately $9 million in this project. The total estimated cost of completing
the project is approximately $40 million.
ORGANIZATIONAL STRUCTURE
EMI is a member of the Europe-Israel group of companies (See "Item 7 -
Major Shareholders and Related Party Transactions"). Control Centers Ltd.
("Control Centers"), an Israeli privately-held company, is currently EMI's
largest shareholder (approximately 80%).
EMI's significant subsidiaries, as of May 31, 2003, were as follows:
COUNTRY OF EMI'S DIRECT/INDIRECT
NAME OF COMPANY ABBREVIATED NAME ORGANIZATION OWNERSHIP (PERCENTAGE)
EQUITY VOTING
SUBSIDIARY AND JOINTLY CONTROLLED COMPANIES **
Elbit Medical Holdings Ltd. EMH Israel 99% 99%
Elscint Ltd. Elscint Israel 61.5% 61.5%
BEA Hotels NV BEA Hotels The Netherlands 61.5% * 61.5%
Elscint Bio-Medical Ltd. EBM Israel 61.5% * 61.5%
S.L.S. Sails Ltd. SLS Israel 61.5% * 61.5%
Elbit Ultrasound Ltd. EUL Israel 100% 100%
Elbit Ultrasound (Netherlands) BV EUBV The Netherlands 100% 100%
Elbit Communications and Technology BV ECT The Netherlands 100% 100%
InSightec - Image Guided Treatment Ltd. InSightec Israel 53.8% 53.8%
Plaza Centers (Europe) BV PC The Netherlands 100% 100%
Plaza Centers Management Hungary Kft. PCM Hungary 100% 100%
Superior Investments Ltd. Superior Israel 100% 100%
AFFILIATED COMPANIES AND OTHER INVESTMENTS
VCON Telecommunications Ltd. VCON Israel 20.3% 20.3%
Olive Software Inc. Olive USA 36.2% 36.25%
Easyrun Ltd. Easyrun Israel 30.3% 30.3%
(*) These percentages are calculated as beneficially owned by EMI by virtue of
its holdings of Elscint.
(**) There are various additional companies in various stages of liquidation.
PROPERTY, PLANTS AND EQUIPMENT
EMI
---
As of May 31, 2003, EMI (excluding Elscint) leased approximately 26,000
square feet in Israel for management and administration purposes, of which parts
were leased from Control Centers at market prices. For further details see "Item
7 - Major Shareholders and Related Party Transactions - Related Party
Transactions - Other - Lease".
InSightec's operations are conducted in facilities mainly leased from
unaffiliated entities. As of May 31, 2003, InSightec leased an aggregate of
approximately 18,000 square feet in Tirat Hacarmel and Or-Yehuda, Israel, where
it maintains its principal executive offices and performs the research,
development and manufacturing activities of TxSonics and TOR. These leases will
expire in 2005. Rental payments are linked primarily to the various Israeli
price indices. Total annual rental expenses under these leases are $400,000
(approximately NIS 1.76 million). The leased property is adequate for the needs
of InSightec in the foreseeable future.
-51-
Sadyba Center SA, the owner of the Sadyba Best Mall, in which we hold a
50% interest, leases 305,668 square feet from the Municipality of Warsaw on a
long term lease which expires on July 31, 2021. Annual rental payments are
approximately $350,000 (approximately NIS 1.658 million), which are partially
off-set by rental received from the sub lessee, which sub-leases an area of
approximately 50,000 square feet upon which a gas station operates at an annual
rental of approximately $50,000 (approximately NIS 236,850). No mortgages are
registered over the long term lease rights in this property. A shopping mall
with a total constructed area of 583,000 square feet is constructed upon this
site, of which approximately 254,500 square feet are available for leasing.
Plaza House Kft. is the owner of a renovated building with a total
built up area of approximately 26,400 square feet, which is constructed upon a
plot of land measuring approximately 6,600 square feet on Andrassy Blvd. in
central Budapest. A mortgage is registered over this property in favor of Hypo
Vereinsbank as security for a loan awarded to Plaza House Kft. in the amount of
EURO 2.3 million
The following mall-constructing subsidiaries are registered as the
owners of certain rights to various properties, as follows:
Name Title Land Constructed Area (sq.ft.) Lien
Area (sq.ft.) Total Leasable
Duna Plaza (**) Freehold 476,000 1,100,000 600,000 OVAG
Csepel Plaza Freehold 151,000 220,000 150,000 OVAG
Gyor Plaza Freehold 567,000 219,000 165,000 OVAG
Debrecen Plaza Freehold 152,000 372,000 161,000 MKB+OTP+K&H
Alba Plaza Freehold 321,000 223,000 165,000 MKB+OTP+K&H
Pecs Plaza Freehold 660,000 228,000 168,000 OVAG
Szeged Plaza Freehold 473,000 230,600 170,000 MKB+OTP+K&H
Miskolc Plaza Freehold 160,000 390,000 161,000 MKB+OTP+K&H
Kanizsa Plaza Freehold 267,000 117,000 83,000 CIB
Kaposvar Plaza Freehold 296,000 133,000 91,000 MKB
Szolnok Plaza Freehold 51,500 165,600 77,500 K&H and OTP
Zala Plaza Freehold 110,000 112,400 80,000 K&H and OTP
Savaria Plaza Freehold 120,000 128,000 91,600 K&H and OTP
Sopron Plaza (**) Freehold 548,000 234,000 164,000 OVAG
Nyir Plaza (**) Freehold 485,000 218,000 150,000 Erste
Sadyba Best Mall (50%) (*) Leasehold 306,000 594,000 260,000 ----
Ruda Slaska Plaza Freehold 385,000 242,000 158,000 ING-BANK SLASKI
Krakow Plaza Freehold 660,000 440,000 344,300 OVAG
(*) Leased until 2021
(**) Recently acquired
ELSCINT
-------
PROPERTY IN ISRAEL
As of May 31, 2003, Elscint leased approximately 6,300 square feet in
Tel Aviv.
Elscint's subsidiary that acquired the rights to the entertainment and
commercial center in the Marina in Herzlia, Israel will be registered as the
owner of the long term lease rights to land owned by the Israeli Land
Administration.
In September 2000, Elscint won a tender for the acquisition of
long-term lease rights to approximately 22 acres, situated on the bank of the
artificial Lake Monfort near Ma'alot in Northern Israel.
-52-
PROPERTY IN THE UNITED STATES
Elscint Inc., Elscint's wholly-owned United States subsidiary, owns a
building in Rockleigh, New Jersey, consisting of approximately 40,000 square
feet. Until March 2001, Elscint Inc. used approximately 5,000 square feet for
its office space.
PROPERTY IN EUROPE AND SOUTH AFRICA
Set forth below is certain information with respect to Elscint's hotels
and hotel projects in Europe and South Africa:
- ------------------------------------------------------------------------------------------------------------------------------------
Size of Property Percentage of Ownership
Name of Hotel (Sq. Ft.) by Elscint Encumbrances; Miscellaneous
- ------------------------------------------------------------------------------------------------------------------------------------
Victoria Hotel, Amsterdam 220,000 50% o land pledged as collateral to secure payment of loan
o first priority mortgage and first priority lien on
all movable assets
- ------------------------------------------------------------------------------------------------------------------------------------
Utrecht Park Plaza, 55,880 50% o long term lease rights pledged as collateral to
Utrecht secure payment of loan
o first priority lien on all movable assets
- ------------------------------------------------------------------------------------------------------------------------------------
Astrid Park Plaza, 315,000 100% o none
Antwerp
- ------------------------------------------------------------------------------------------------------------------------------------
Euston Road, London 275,000 35% o first priority mortgage on land and on movable
assets
o first ranking pledge on shares of subsidiary that
owns the rights to the land
- ------------------------------------------------------------------------------------------------------------------------------------
Southern Park Plaza 89,100 33.33% o first priority mortgage on land
Hotel, Johannesburg,
South Africa o lien on all movable assets
- ------------------------------------------------------------------------------------------------------------------------------------
Victoria Park Plaza, 242,000 50% o first priority mortgage on land
London
o first priority lien on shares of subsidiary that
owns the rights to the land
o lien on all movable assets
- ------------------------------------------------------------------------------------------------------------------------------------
Ballet Building, Budapest 170,000 50% o no loans have been taken. Property is
unencumbered.
- ------------------------------------------------------------------------------------------------------------------------------------
Riverbank (Thames) 327,700 45% equity o long term lease rights for 125 years
property, London
50% voting o first priority mortgage on land
o first ranking lien on shares of subsidiary that
owns the rights to the lease
o lien on all movable assets
- ------------------------------------------------------------------------------------------------------------------------------------
Sherlock Holmes Hotel, 65,600 45% equity o sub-lease for 99 years and an option to extend to
London 50% voting a total of 125 years
o lien on the sub-lease rights
- ------------------------------------------------------------------------------------------------------------------------------------
Bucuresti Hotel Complex, 901,000 69% o Property and movables unencumbered
Bucharest, Romania
- ------------------------------------------------------------------------------------------------------------------------------------
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In January 2003, Elscint leased the Euston Road property in London to
an unrelated third party for a period of 25 years. The rental payments are in a
fixed amount for each of the first four years of the lease, and thereafter
increase annually at the rate of 2.5% through the end of the lease term. The
lessee has placed a deposit in the amount of GB (Pound)2.5 million
(approximately $4.0 million) that will serve as security for the rent payments.
The lessee has also been granted an option to extend the lease agreement by two
additional periods of 15 years each.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
GENERAL
Our functional currency is NIS and our financial statements are
prepared in accordance with Israeli GAAP. Israeli GAAP and U.S. GAAP differ in
certain respects, which are summarized in detail in Note 26 of the Notes to the
Financial Statements.
In accordance with the principles set forth in Opinion No. 36 of the
ICPAI, the financial statements of autonomous foreign subsidiaries, or
autonomous subsidiaries, are prepared in their local currency, which is their
functional currency. The financial statements were translated into NIS on the
basis of the exchange rates in effect on the balance sheet date after first
being adjusted for inflation in their respective countries of principal
operation. The differences arising between the adjustment of the Company's
investment in its various other entities (including in loans of an investment
nature) on the basis of the changes in the CPI, and the adjustment of the
Company's share in the shareholders' equity of such entities on the basis of the
changes in the exchange rate of the local currency as compared to the NIS and
the rate of inflation in the respective countries, are included in shareholders'
equity under the item "Capital reserves from the translation of financial
statements of foreign investees." Financing expenses caused by foreign currency
loans that financed the investments in the autonomous subsidiaries, as well as
the related tax effect, are also included in the same item.
The financial statements of the Company's integrated foreign entities
in which it owns an interest (as defined in Opinion No. 36 of the ICPAI) are
prepared in foreign currency. The financial statements of these companies were
translated into Israeli currency as follows:
o Non-monetary balance sheet items were translated according to
historical exchange rates and adjusted, through September 1999, on the
basis of the changes in the exchange rate of the dollar, and from that
date on, according to the changes in the CPI.
o Monetary balance sheet items (items which represent amounts
receivable or payable at face value, which represent their realizable
value) were translated according to the exchange rate as at balance
sheet date.
o Statement of income items were translated, through September 1999,
according to the average exchange rates prevailing when the
transactions were effected and thereafter according to the changes in
the CPI. Differences arising from such translations are included in
financing expenses.
Because our revenues and expenses are recorded in various currencies,
the results of our operations are affected by several inter-related factors,
including the ratio between the value of the NIS and other currencies, the rate
of inflation in Israel and the timing and amount of the devaluation of the
Israeli currency as compared to the U.S. dollar.
Financial data included in this discussion has derived from our
Consolidated Financial Statements and analyses based on our general accounting
records and published statistical data. Such financial data has been rounded to
the nearest thousand. For convenience purposes, certain selected financial data
presented herein for the fiscal year ended December 31, 2002, has been
translated into dollars using the representative exchange rate on December 31,
2002 of NIS 4.737 = $1.00.
-54-
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion should be read in conjunction with the
consolidated financial statements of the Company included in Item 18 and notes
thereto.
"Critical accounting policy" as indicated by the SEC, is one that (i)
is important to the portrayal of an entity's financial condition and results and
(ii) requires management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain. We believe that our critical accounting policies are
those described below. For detailed information on the application of these and
other accounting policies, see Note 2 to the consolidated financial statements
includes in Item 18. As for the differences between Israeli GAAP and U.S. GAAP,
see Note 26 to the financial statements included in Item 18.
The preparation of our consolidated financial statements in conformity
with accounting principles generally accepted in Israel ("Israeli GAAP"),
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to impairment of real estate assets and investments,
assessment of the probable potential outcome of litigation matters in which we
are involved and other contingent liabilities, allowance for doubtful accounts,
determination of subsidiaries' functional currency, deferred taxes and
capitalization of costs. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. In preparing the financial statements and forming its estimates
and judgments with respect to certain amounts included therein, management has
utilized available information including, among other factors, the Company's
past history, industry standards and the current economic environment, while
giving due consideration to materiality. It is possible that the ultimate
outcome, as anticipated by management in formulating its estimates inherent in
these financial statements, will not materialize. However, application of the
critical accounting policies described below involves the exercise of judgment
and use of assumptions as to future uncertainties and, as a result, the actual
outcome could differ from these estimates. In addition, other companies may use
different estimates, which may have impact on the comparability of the Company's
results of operations to those of companies in similar businesses.
The SEC recently issued Financial Reporting Release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"),
suggesting companies provide additional disclosure and commentary on those
accounting policies considered most critical. FRR 60 considers an accounting
policy to be critical if it is important to our financial condition and results
of operations, and requires significant judgment and estimates on the part of
management in its application.
We believe the following critical accounting policies reflect our
principal significant judgments and estimates used in the preparation of the
consolidated financial statements.
IMPAIRMENT AND DEPRECIATION OF LONG-LIVED ASSETS
The Company evaluates the need for an impairment loss on its real
estate assets used in operations or under construction, when indicators of
impairment are present and based on the estimated undiscounted cash flows
(before interest and tax charges) expected to be generated by those assets in
comparison and if they are not sufficient to recover their carrying amounts.
Indicators we consider important so as to trigger an impairment review include
the following: a significant negative industry or economic trend; a significant
under-performance relative to historical or projected operating results; a
significant change in the manner in which an asset is used; and an accumulation
of costs significantly in excess of the amount originally expected to construct
an asset. Our cash flow estimates are based on historical results adjusted to
reflect our best estimate of future market and operating conditions. If such an
asset is considered to be impaired, an impairment loss is recorded. The
impairment loss, if any, is measured by comparing the amount that reflects the
fair value of the asset at the time impairment is evident, to its carrying
amount. Estimates of fair value represent the best estimate based on industry
-55-
trends with reference to market rates and transactions. In the event the
projected forecasts regarding the future cash flow generated by those assets are
not met, we may have to record in the future an impairment loss not previously
recorded.
Based on management's estimates of future cash flows, our long-lived
assets were determined to be recoverable, except for an impairment loss of NIS
4.4 million, which were recorded in 2002. In addition, the Company has recorded
an impairment loss of the carrying value of investments in certain subsidiaries,
for the year ended December 31, 2002, which was attributed, in the consolidated
financial statements, to the assets value of each such a subsidiary. See also
"Impairment of Investments", below.
The recognition of an impaired property and the potential impairment
calculation are subject to a considerable degree of judgment, the results of
which, when applied under different principles or different conditions or
assumptions, are likely to result in materially different amounts and could have
a material adverse impact on the financial statements. The evaluation of future
cash flow expected to be generated by each property is subject to a significant
uncertainty in the estimation of future income and expenses of the hotels'
and/or the commercial center's operations, and the future capital expenditures.
In preparing these projections, the Company must make a number of assumptions
concerning occupancy rates, average room rate (in respect of hotels), rental
fees rates (in respect of the commercial and entertainment center), rates of
growth of revenues, market prospects, operational efficiency of the management
company and the scope of maintenance and other operational expenses. Such
estimates are affected by economic factors such as visitors' trends per each
site, general prospect of demand and supply of hotel rooms in the city (in
respect of hotels), competition in the site area and macro-economic factors in
each country.
Depreciation of real estate is based on the estimated useful life of
the property (50 years in respect of the commercial centers and 67 years in
respect of the hotels) using the straight-line method.
Maintenance and repairs are charged to expenses as incurred. Capital
improvements and renovations are capitalized and depreciated using the
straight-line method over their estimated useful life.
Under different assumptions or conditions, the asset impairment
analysis may yield a different outcome, which may alter the impairment analysis
on our assets, as well as the gain or loss on the eventual disposition of the
asset.
IMPAIRMENT OF INVESTMENTS
The Company evaluates permanent impairment on individual investments
(including, in subsidiaries) in its portfolio, when an investment has
experienced a sustained decline (not of a temporary nature) in fair value below
cost. Management considers several factors, including a significant negative
industry or economic trend, a significant under-performance relative to
historical or projected operating results, the length of time during which such
investment has experienced a decline, achievement of business plan objectives
and milestones, the value of each ownership interest in an unconsolidated
company in relation to the carrying value, the financial condition and prospects
of the company as well as the volatility inherent in the external markets for
these investments, and other relevant factors. These evaluations are subjective
in nature. Permanent declines in value result in a charge to net income or
against foreign translation adjustment reserve in shareholders equity, as
applicable, reducing the carrying value of the investment.
The Company holds majority interest in private investee companies
(without a quoted market value), which own and operate (each of them) an
entertainment and commercial center and/or a hotel.
In addition, the company holds also minority interests in high-tech
companies that are either operational or in their development stage, some of
which are publicly traded and whose share prices are highly volatile and some of
which are privately held companies (without a market for the trade of their
securities), whose value is difficult to determine.
-56-
The Company records an investment impairment charge when it believes an
investment has experienced a decline in value that is not temporary. Future
adverse changes in market conditions or poor operating results of underlying
investments could result in losses or in an inability to generate the
anticipated cash flow from holding the investee company and recover the carrying
value of the investments (which is not reflected in an investment's current
carrying value), thereby possibly requiring an impairment charge in the future.
In 2002, the Company recorded a write-down of such investments in the
amount of NIS 99.6 million ($21.0 million). In the year 2001 - NIS 16.6 million
($3.8 million) and in 2000, no write-down was recorded.
For additional information - see notes 2G; 10A(1); 10B(1)b(8);
10B(3)b(8) and 11A to the financial statements including in item 18.
As for the differences between Israeli and U.S. GAAP in respect of
investment in subsidiaries- fair value measurement - see subsection A14 to note
26 to the financial statements included in Item 18.
ALLOWANCE FOR DOUBTFUL ACCOUNTS, LITIGATION AND OTHER CONTINGENT LIABILITIES
a. The Company and its subsidiaries are currently involved in various
litigation disputes in substantial amounts. We provide a provision for
contingent obligations (including those in respect of discontinued operations)
when the obligations are probable and the amounts may be estimated reasonably.
We include in the financial statements provisions which in management's opinion,
based on, among other factors, legal consultation and past experience, are
deemed adequate to cover the costs and resources necessary to satisfy the
potential liabilities under these claims. As facts concerning contingencies
become known, we reassess our position and make appropriate adjustments to the
financial statements.
In addition to the above, the Company and its subsidiaries are involved
in litigation matters, the amount or outcome of which may not be estimated
(e.g., class actions). Because of the uncertainties related to amounts and/or
ranges of losses in these remaining litigation matters, neither the Company's
management nor its legal advisors are able to make a reasonable estimate of the
liability that could result from an unfavorable outcome. As additional
information becomes available, we will re-assess the potential liability related
to our pending litigation and revise our estimates accordingly. Such revisions
in our estimates of the potential liability could materially impact our results
of operations and financial position.
For additional information regarding contingent liabilities, see "Item
8 - Financial Information - Legal Proceedings".
b. Following the sale of the Company's operations in 1998, the Company
was required to assess the outcome of various contingent liabilities in
connection with such sale. The outcome of such contingent liabilities may differ
materially from the assessment of management. Management periodically evaluates
these assessments and makes appropriate adjustments to the financial statement
based thereon.
c. The Company examines, on an ongoing basis, the volume of credit
extended to its customers in the ordinary course of business and, accordingly,
records a provision for doubtful accounts based on those factors affecting
credit risks of certain customers based upon the judgment of management.
Our group companies periodically evaluate the quality and value of
loans granted by them to various third parties in the ordinary course of
business, in light of the securities provided therefor, the term of such loan
and their past expreience with such third parties.
d. The allocation of the proceeds from the sale of the Company's
operations in 1998 among Elscint and its subsidiaries is based on an estimated
fair value of assets (both tangible and intangible) sold by each of the
companies; on separate negotiations held with each selling company; and on the
-57-
basis of the provisions stipulated in the respective sale agreements. A
different method of allocation may cause Elscint and its subsidiaries additional
liabilities and/or expenses. Elscint's management believes that the estimates
used as the basis for this allocation of proceeds are adequate under the
circumstances.
DETERMINATION OF FUNCTIONAL CURRENCY OF INVESTEE COMPANIES
In preparing our consolidated financial statements, we are required to
evaluate the functional currency of certain subsidiaries operating outside of
Israel (mainly in Europe). The functional currency is determined based on
management judgment and involves consideration of all relevant economic factors
and circumstances affecting each subsidiary (e.g., the currency of the financial
environment that significantly affects management in determining, inter alia,
services' prices, or the currency used by management for the purpose of decision
making). Generally, the currency in which each subsidiary transacts a majority
of its transactions, including purchases, billings, collections and payments
(i.e., currency in which receivables and payments from current activity are
denominated or in which they are held following their conversion), as well as
financing, the currency in which majority of costs pertaining to the supply of
services are incurred (e.g. payroll, maintenance and other expenditures), may
indicate the functional currency while the nature of the subsidiary's operations
must also be considered. A significant change in the financial environment, or
in the foregoing factors in whole or in part, may require management to re-asses
its determination of the functional currency.
Based on our assessment of the foregoing factors, we consider the
relevant subsidiary's local currency to be the functional currency for each of
our international subsidiaries.
When any subsidiary's functional currency is deemed to be the local
currency, then any gain or loss associated with the translation of that
subsidiary's financial statements, for consolidation purposes, is charged
directly to a separate item in the shareholders' equity, namely "foreign
currency translation adjustments". Exchange differences on net monetary items
included in the subsidiary's financial statements which are denominated in, or
linked to, currencies other than the functional currency, are recorded directly
to the statements of operations. See also "Item 11 - Quantitative and
Qualitative disclosure about market risks - Exchange rate exposure" and "Item 11
- - Quantitative and Qualitative disclosure about market risks - Exposure to net
investment value of foreign entity."
However, in the event the functional currency changes to a currency
other than the local currency, the amount of the foreign currency translation
adjustment and/or the net income could be materially affected in each reported
year relevant to the change.
For information on currencies involved in our global operations, see
"Item 11 - Quantitative and Qualitative disclosure about market risks - Table I
- - foreign currency risks".
ACCOUNTING FOR INCOME TAXES
As part of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves an estimate by us of our actual current tax
exposure, together with assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities that are
included in our consolidated balance sheet. We must then assess the likelihood
that our deferred tax assets will be recovered from future taxable income. To
the extent we believe that recovery is unlikely, we must establish a valuation
allowance. The Company records a valuation allowance to reduce deferred tax
assets to the amount believed more likely than not to be realized. In assessing
the need for the valuation allowance, the Company considers future taxable
income and ongoing prudent and feasible tax planning strategies. In the event
the Company determines that it may not be able to realize all or part of its net
deferred tax assets, an adjustment to the deferred tax assets would be charged
as a tax expense in the period throughout which such determination was made.
Likewise, should the Company determine that it would be able to realize its
-58-
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax assets would be recorded as tax income in the
period throughout which such determination was made.
CAPITALIZATION OF COSTS
We capitalize direct acquisitions, construction and development costs,
including initiation costs, pre-development costs, finance costs in real terms,
property taxes, insurance, and indirect allocated project costs, that are
associated with the acquisition, development or construction of real estate
projects. Costs previously capitalized that relate to (i) an abandoned
development opportunity; (ii) a project that is not reasonably expected to
materialize; or (iii) a project the expected economic benefit of which is
doubtful, are written off, and charged to the statement of operations. Should
development and construction activities decrease substantially, a portion of
financial costs and project expenses may no longer be eligible for
capitalization, and would be expensed.
OPERATING RESULTS
The following table presents for the periods indicated the
relationships of certain income statement items as percentages of net revenues
of EMI:
YEAR ENDED DECEMBER 31,
2002 (%) 2001 (%) 2000 (%)
-------- -------- --------
Revenues 100 100 100
Revenues from Commercial-center operations 57 47 18
Revenues from hotel operations and management 42 49 69
Revenues from Long-term projects 0 4 13
Cost of commercial-center operations 31 24 8
Cost of hotel operations and management 40 45 59
Cost of long-term projects 0 3 12
Gross profit 29 29 21
Initiation Costs of projects 3 2 2
Research and development expenses, net 6 9 17
Marketing and selling expenses 6 3 1
General and administrative expenses 18 22 35
Operating loss before financial income, net (4) (7) (35)
Financial income (expenses), net (1) 36 21
Operating income(loss) after financial income, net (5) 29 (13)
Other income (expenses), net 2 12 (10)
Income (loss) before income taxes (3) 41 (24)
Income taxes 4 5 12
Income (loss) after income taxes (7) 36 (36)
Equity in earnings (losses) of investee companies, net (1) (3) (2)
Minority interest in results of subsidiaries, net 5 (2) 10
Income (loss) from continuing operations (3) 31 (28)
Income (loss) from discontinued operations, net 11 7 18
Net income (loss) for the year 8 38 (10)
FISCAL 2002 COMPARED TO FISCAL 2001
Revenues from Commercial and Entertainment malls operations, Hotal
operations and management and long term projects were NIS 497 million
(approximately $105 million), compared to NIS 287 million for fiscal 2001, an
increase of NIS 210 million, or 73%.
-59-
Revenues from Commercial and Entertainment malls operations for fiscal
2002 were NIS 285 million (approximately $60 million), as compared to NIS 134
million for fiscal 2001, an increase of NIS 151 million or 112%.
The increase in revenues in the reported period compared to the
corresponding period in the previous year was due primarily to the inclusion of
the activities of three additional Commercial and Entertainment malls in Hungary
and two Commercial and Entertainment malls in Poland, most of which were
inaugurated at the end of 2001, in addition to another three Commercial and
Entertainment malls acquired on February 25, 2002.
Following completion of the acquisition and the opening of the
aforementioned Commercial and Entertainment malls, the Company owns 18 active
Commercial and Entertainment malls, of which 15 are located in Hungary and 3 in
Poland. These centers are expected to yield aggregate annual revenues of
approximately NIS 250 million (approximately $52-63 million) and are
characterized by a rate of gross profit estimated at 45% to 48%.
Revenues from Elscint's hotel activities for fiscal 2002 were NIS 210
million as compared to NIS 141 million for fiscal 2001, an increase of NIS 69
million (approximately $14.5 million) or 48%.
The increase in revenues of the hotel division resulted primarily from
(i) commencement of operation of the Sherlock Holmes and Victoria Park Plaza
hotels in London at the end of fiscal 2001 and (ii) increase in the exchange
rate of the Euro and the British Pound against the NIS in fiscal 2002.
Elscint expects income from its hotel business to decrease in fiscal
2003, mainly due to the discontinuing operations at the Bernard Shaw hotel at
the beginning of fiscal 2003, as a result of leasing the property, and to the
closing of the Bucuresti Hotel in Romania for renovation. In addition, Elscint
expects to record revenue from the operation of the entertainment and commercial
center at the Herzlia Marina in the second half of 2003.
As a result of the foregoing factors, total gross profit for fiscal
2002 was NIS 145 million (approximately $31 million), or 29% of total revenues,
compared to NIS 82 million, or 29% of total revenues, in fiscal 2001.
Cost of initiation of projects in 2002 was NIS 17 million
(approximately $4 million) compared to cost of initiation of projects in 2001 of
NIS 6 million. These expenses derived primarily from land acquisition activities
in connection with non-realized Commercial and Entertainment malls, as well as
hotels.
Net research and development expenses in fiscal 2002 totaled NIS 29
million (approximately $6 million), as compared to NIS 24 million in fiscal
2001. EMI included in its results for fiscal 2002 income from the Office of the
Chief Scientist of the Ministry of Industry and Trade of the Government of
Israel ("OCS") in the amount of NIS 8 million. In the twelve month period ended
December 31, 2002, the Company recorded, under other income, deferred income
amount deriving from an increase in the Company's share in the net book value of
InSightec (resulting from the decrease in its rate of shareholding in InSightec)
at the end of 2001, in an amount of NIS 25.1 million (approximately $5.3
million).
General and administrative expenses in fiscal 2002 were NIS 90 million
(approximately $19 million), as compared to NIS 63 million in fiscal 2001. These
general and administrative expenses included executive, administrative, legal
and accounting activities, rental expenses and professional fees. These
increases derive primarily from an increase in administrative and general
expenses in the subsidiary company Plaza Centers, which incorporates the
activities of commercial centers in the Group, comprising an additional eight
Commercial and Entertainment malls, over the course of the reported year.
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Net other income in fiscal 2002 was NIS 9.6 million (approximately $2
million), as compared to NIS 34.7 million in fiscal 2001. See note 20I to the
financial statements.
Net financing expenses in fiscal 2002 were NIS 5.5 million
(approximately $1 million), as compared to net financing income of NIS 103
million in fiscal 2001. The transition from net financing income to net
financing expenses in 2002 as compared to 2001 was primarily due to a
combination of the following factors:
1. An increase in the volume of credit balances (mainly in Hungary and
Poland) assumed by group companies (mainly during the first
quarter) for financing increases in investments in Commercial and
Entertainment malls and the resulting increase in the cost of
credit.
2. A decrease in Elscint's liquid assets and in the rate of actual
yield produced by the Group companies, resulting out of their
investment in cash and deposits.
3. A decrease in the Company's income from derivative financial
transactions carried out by the Company's investments department,
as compared to the previous year. See "Item 11. - Quantitative and
Qualitative Disclosure About Market Risks."
4. Changes in the exchange rate of operational currencies (primarily
the Euro and the NIS) in relation to the exchange rate of financing
currencies (primarily the Dollar), which yielded financing income
due to the lower rate of depreciation of the Dollar to the NIS, as
compared to last year.
Income taxes for fiscal 2002 were NIS 22 million (approximately $4.6
million), as compared to NIS 14 million in fiscal 2001.
EMI's share in net loss of investee companies in fiscal 2002 totaled
NIS 2.9 million (approximately $0.6 million). This loss was due to a net loss
from the operations of the Group's investee companies: Gamida, VCON, Olive and
Easyrun.
On December 31, 2002, Elscint sold to a third party all of its
manufacturing, assembly, engineering, and integration activities of systems and
sub-systems segment (mainly related to medical imaging), which were performed in
Elscint's plant in Maalot in northern Israel. Upon completion of this
transaction, the group's activity in this segment and in the field of medical
imaging in general was discontinued. Net income from discontinuing operations in
fiscal 2002 was NIS 55.8 million (approximately $11.8 million) as compared with
NIS 19.1 million in fiscal 2001. See note 23 to the financial statements.
In the reported year, the Group paid to its minority shareholders in
Elscint a cash dividend of $1.10 per share.
As a result of the foregoing factors, EMI had a net income in fiscal
2002 of NIS 41.1 million (approximately $8.6 million), as compared to a net
income of NIS 107.8 million in fiscal 2001.
FISCAL 2001 COMPARED TO FISCAL 2000
Revenues from Commercial and Entertainment malls operation, hotel
operations and management and long-term projects for fiscal 2001 were NIS 286
million compared to NIS 156 million for fiscal 2000, an increase of NIS 130
million, or 83%.
The increase in the total revenues resulted primarily from (i)
consolidation of the operations of the two additional shopping malls in Hungary
and the two malls in Poland, which were opened during 2001 and (ii)
consolidation of Elscint's Buchuresti Hotel's results commencing in April 2001.
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Total gross profit for fiscal 2001 was NIS 82 million, or 29% of total
revenues, compared to NIS 32 million, or 20% of total revenues, in fiscal 2000.
Cost of initiation of projects in 2001 was NIS 5.9 million compared to
cost of initiation of projects in 2000 of NIS 2.8 million. These expenses
derived primarily from land acquisition activities in connection with
non-realized commercial centers, as well as hotels.
Net research and development expenses in fiscal 2001 totaled NIS 24
million as compared to NIS 26 million in fiscal 2000. EMI included in its
results for fiscal 2001, income from the OCS in the amount of NIS 14 million.
Research and development expenses were generated only by InSightec. In the
fourth quarter of 2001, the Company accounted for a deferred income of
approximately NIS 30 million resulting from the investment by an unrelated third
party in InSightec. Such deferred income is offset against net research and
development expenses in 2002 up to the amount of such expenses. Any remaining
income will be deferred and offset against the subsequent year's net research
and development expenses.
General and administrative expenses in fiscal 2001 were NIS 63 million
as compared to NIS 55 million in fiscal 2000. These general and administrative
expenses included executive, administrative, legal and accounting activities,
rental expenses and professional fees. The increase resulted mainly from sales,
general and administrative expense of the Company's subsidiary, Plaza Centers.
The results of such subsidiary were consolidated with EMI's results of
operations beginning in the fourth quarter of 2000.
Net financing income in fiscal 2001 was NIS 103 million as compared to
NIS 33 million in fiscal 2000. The increase in the net financing income resulted
mainly from the revaluation in the exchange rate of the operating currencies in
Eastern Europe (Hungary and Poland) in relation to the exchange rates of the
currencies financing the operation of the Company and its subsidiaries in such
countries (mainly Euro), as well as the increase in the price index in Hungary
(approximately 6.9%) and Poland (approximately 3.6%).
The net financing income was also affected by the investment of the
majority of the Company's consolidated liquidity instruments (mainly that of
Elscint) in U.S. Dollar denominated deposits, which investment resulted in
increased income due to the appreciation of the U.S. Dollar as compared to the
NIS during 2001.
Furthermore, the net financing income was affected by activity
resulting from entering into transactions in derivative financial instruments.
Net other income in fiscal 2001 was NIS 34 million as compared to net
other expenses of NIS 16 million in fiscal 2000. See note 20I to the financial
statements.
Income taxes for fiscal 2001 were NIS 14 million as compared to NIS 19
million in fiscal 2000.
EMI's share in net loss of investee companies in fiscal 2001 totaled
NIS 9.9 million compared to net loss of investee companies of NIS 3.3 million in
fiscal 2000. This decrease was primarily due to a net loss from the operations
of Gilbridge Holdings Ltd., during the nine months period ended September 30,
2001.
Income from discontinued operations, net, in fiscal 2001 was NIS 19
million as compared with an income from discontinued operations in fiscal 2000
of NIS 28.3 million. See Note 23 to the financial statements.
As a result of the foregoing factors, EMI had a net income in fiscal
2001 of NIS 108 million as compared to a net loss of NIS 16 million in fiscal
2000.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Major balance sheet items as a percentage of total assets as at
December 31, 2002 and 2001 were as follows:
DECEMBER 31,
2002 2001
Current assets...................... 17% 24%
Current liabilities................. 33% 34%
Long-term liabilities............... 38% 31%
Minority Interest................... 8% 10%
Shareholders' equity................ 19% 19%
EMI met its operational and liquidity needs in fiscal 2002 from cash
from operations, utilization of bank credit facilities and cash on hand. Cash
and cash equivalents decreased to NIS 215 million (approximately $45 million) at
December 31, 2002 from NIS 363 million at December 31, 2001. This decrease was
primarily due to the ongoing investments in the shopping and entertainment
malls, the construction of the hotels and general and administrative expenses.
Trade accounts receivables increased to NIS 54 million (approximately $11
million) at December 31, 2002 from NIS 34 million at December 31, 2001.
Hotels, commercial centers and other fixed assets increased to NIS 4.17
billion (approximately $880 million) at December 31, 2002 from NIS 2.913 billion
at December 31, 2001, primarily due to continuing investments in the commercial
centers and in Elscint's hotels under construction in Europe.
Other assets (net) increased to NIS 74 million (approximately $16
million) at December 31, 2002 from NIS 61 million at December 31, 2001, due to
growth in the activities of the commercial centers as well as from Elscint's
hotels' operations.
Assets related to discontinuing operations decreased to NIS 114 million
(approximately $24 million) at December 31, 2002 from NIS 203 million at
December 31, 2001. This decrease was attributed primarily to the disposition of
assets related to the subassemblies segment as a result of the sale of this
segment on December 2002, which was offset in part by the balance due to Elscint
from the buyer of this segment.
Short-term borrowings increased to NIS 1.664 billion (approximately
$351 million) at December 31, 2002 from NIS 1.445 billion at December 31, 2001
and long-term loans and other long-term liabilities increased to NIS 2.217
billion (approximately $468 million) at December 31, 2002 from NIS 1.474 billion
at December 31, 2001. These changes reflect primarily borrowings from banks to
finance the construction and operations of the commercial center operations and
the construction of hotels by Elscint as well as the devaluation of the NIS
against foreign currencies as offset in part by the repayments of loans.
Liabilities relating to discontinuing operations decreased to NIS 112
million (approximately $23 million) at December 31, 2002 from NIS 259 million at
December 31, 2001, primarily due to the sale by Elscint of the sub-assembly
segment in December 2002 and reduction of provisions previously accrued in
respect of Elscint's sale in 1998 of its CT, MRI and NM assets.
-63-
Net cash used in operating activities in fiscal 2002 totaled NIS 4
million (approximately $845,000), compared to net cash provided by operating
activities of NIS 23 million in 2001. Net cash used in investing activities
decreased to NIS 507 million (approximately $107 million) from NIS 972 million
in 2001. The investing activities in fiscal 2002 were attributed mainly to the
purchase of fixed and other assets. Net cash provided by financing activities
during 2002 totaled NIS 356 million (approximately $75 million) compared to NIS
838 million in 2001, representing net borrowings due to continuation of
investments in the commercial-centers operations and in Elscint's hotel
division. In fiscal 2002, the Group paid to its minority shareholders in Elscint
a cash dividend in the amount of NIS 34 million (approximately $7 million).
Under credit financing loan agreements between the Company and an
Israeli bank, EMI undertook, for as long as the credit facility or any amount
thereunder is outstanding, to maintain certain financial covenants, including,
among others, a minimal ratio of shareholders' equity to its "reduced total
assets' book value" ("RTA") as determined in the loan documentation.
EMI has recently agreed in principle with the aforementioned Israeli
bank on an extension to the repayment term of the credit facility. Terms and
conditions in respect of interest and repayment of principal, as well as certain
other terms and conditions, including reduction of the minimal ratio of
shareholder's equity to the RTA and acceleration of repayment, in whole or in
part, in events of realization of assets acquired using the funds from this
loan, are to be concluded between the parties in detailed agreements, yet to be
signed.
We anticipate, based on management's internal forecasts and assumptions
relating to our operations, that our existing cash and funds generated from
operations, together with our existing financing agreements and proceeds of our
asset sales, will be sufficient to meet our working capital and capital
expenditure requirements for the completion of those projects whose construction
has already commenced. In the event that our plans change, our assumptions
change or prove to be inaccurate, business conditions change, or if other
capital resources and projected cash flow otherwise prove to be insufficient to
fund our operations (due to unanticipated expenses or other unforeseen events),
we may be required to seek additional financing sooner than currently
anticipated. We have no current arrangements with respect to sources of
additional financing and there can be no assurance that we will be able to
obtain additional financing on terms acceptable to us, if at all.
RECENTLY ISSUED ACCOUNTING STANDARDS (For other standards issued up to
the date of approval of the Financial Statements, see Financial Statements
included in Item 18 below)
On April 30, 2003, the FASB issued FASB Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which amends
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, to address (1) decisions reached by the Derivatives Implementation
Group, (2) developments in other Board projects that address financial
instruments, and (3) implementation issues related to the definition of a
derivative. Statement 149 has multiple effective date provisions depending on
the nature of the amendment to Statement 133. The Company is currently
evaluating the impact of adopting Statement 149 on its financial statements
On May 15, 2003, the FASB issued FASB Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. Restatement is not
permitted. For nonpublic entities, mandatorily redeemable financial instruments
are subject to the provisions of this Statement for the first fiscal period
beginning after December 15, 2003. The Company is currently evaluating the
impact of adopting Statement 150 on its financial statements.
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DERIVATIVE INSTRUMENTS
For information about financial instruments used, profile of debt,
currencies, interest rate structure, and the use of financial instruments, see
"Item 11 - Quantitative and Qualitative Disclosure about Market Risks".
LOANS
EMI
---
General. We have entered into or assumed liability for various
financing agreements, either directly or indirectly through our subsidiaries, to
provide capital for the purchase, construction, renovation and operation of
shopping and entertainment centers and hotels as well as for various investments
in our other fields of operations. In our opinion, our working capital is
sufficient for our current requirements; however, our subsidiaries may continue
to borrow funds from time to time to finance their various projects. Set forth
below is certain material information with respect to loans extended to EMI and
its subsidiaries:
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AMOUNT
NAME OF MALL/PURPOSE/ AMOUNT AND TERM OF OUTSTANDING AS OF SECURITY FOR LOAN AND OTHER
OTHER LOAN 31/12/2002 LENDING BANK INTEREST ON LOAN INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
General, for Loan I- $75 million Loan I- $75 Bank Loan I- LIBOR + Loan I- pledge of investment
financing future Loan II-90.8 million Hapoalim 0.7% portfolio in an amount not less
businesses and million (6) Loan II- $90.8 Loan II- LIBOR + 3% than the amount of Loan I,
activities of EMI million accruing interest 0.7% lower than
especially in the interest on Loan I.
malls business, and Loan II- first priority pledge of
for refinancing a shares of PC and undertaking to
previous loan provide second ranking pledge
granted in relation over assets acquired using such
to payment of a loan;
dividend declared in General - Undertaking by EMI to
April 1999. maintain a minimal ratio of
shareholder equity to RTA.
EMI guaranteed the repayment of
any amount under the credit
facility paid to any of its
subsidiaries.
General, for $35.2 million.(7) $35.2 million Bank Leumi Libor + 2%-2.5% Pledge of cash deposit and
financing activities securities of $18.2 million
of subsidiaries,
mainly in the malls
business, of which
$15 million were
used to finance the
Sadyba transaction.
EMI, for investment $10 million credit $10 million Bank LIBOR + 2%
in InSightec facility repayable Hapoalim
in December 2003.(8)
InSightec $5 million credit $1 million Bank Libor +3% InSightec may borrow loans out of
facility Hapoalim the facility for two year period
each.
EMI guaranteed repayment
of this loan.
PC for refinancing $3.150 million N/A GMAC Prime + 1.55% Promissory note; pledge of the
the acquisition of granted in February aircraft; assignment of
the executive 2003 repayable by maintenance program contract
aircraft May 2008
Alba Plaza Euro 75.2 million Euro 22 million MKB+K&H Euribor+1.875% First ranking mortgage on all
Debrecen Plaza refinancing facility Euro 18.5 million +OTP projects; floating charge on all
Szeged Plaza to be repaid in 2017 Euro 16.6 million assets of each project; pledged
Miskolc Plaza Euro 17.9 million on interest in the malls;
assisgnment of insurance
proceeds;
Borrowers undertook to maintain
various financial covenants.
Obligations of Borrowers are
joint and several
Csepel Plaza Euro 17.9 million Euro 12.6 million OVAG fixed rate of First ranking mortgage on the
refinancing facility 5.75% through mall; Pledge on interest in the
to be repaid by 2010 12/31/03, mall; Assignment of leases in
thereafter mall; Assignment of insurance
Eurilibor + 2% proceeds; Floating lien on assets
until 2006 and of mall
thereafter OVAG has the right to appoint one
Eurilibor + 1.75% director to the board of EMI's
subsidiary building the mall;
EMI guaranteed payments under the
loan up to DM 5 million.
Europe-Israel and Control Centers
provided another similar guaranty
- ----------
6 EMI has recently agreed with the bank to extend the repayment term of the
credit facility.
7 EMI is negotiating with the bank an extension of the term of the loan to a
long-term loan.
8 The bank has agreed in principle to extend the term of such loan until
December 2004 at an interest rate of LIBOR +3%, subject to finalizing a
definitive agreement.
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AMOUNT
NAME OF MALL/PURPOSE/ AMOUNT AND TERM OF OUTSTANDING AS OF SECURITY FOR LOAN AND OTHER
OTHER LOAN 31/12/2002 LENDING BANK INTEREST ON LOAN INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
Gyor Plaza Euro 16.36 million Euro 12.9 million OVAG In respect to Euro First ranking mortgage on the
refinancing facility 8.7 million 6.14% mall; Pledge on interest in the
to be repaid by 2011 until June 2004, mall; Assignment of leases in
Euribor+2.3% mall; Assignment of insurance
until June 2007 and proceeds; Assignment of
Euribor 2.2% proceeds; Pledge over bank
thereafter. With accounts and insurance
respect to Euro 7.7 coverage proceeds; OVAG has
million 6.82% until the right to appoint one
June 2009 director to the board of EMI's
subsidiary building the mall
Kanisza Plaza Euro 4.9 million Euro 4.3 million CIB Euribor + 1.5% - First ranking mortgage on the
facility to be Kozep-Europai 2.1% mall; Assignment of leases in
repaid by 2009 Nemzetkozi mall; Assignment of proceeds;
Bank Rt. Pledge over bank accounts
Kapsovar Plaza Euro 5.4 million + Euro 8.1 million MKB Euribor + 1.875% First ranking mortgage on the
Euro 3 million +Euribor + 1.85% mall; Pledge on interest in the
credit facility to mall; Assignment of leases in
be repaid by 2017 mall; Pledge over bank
accounts; lien on the mall's
assets
Pecs Plaza Euro 15.8 million Euro 14.6 million OVAG In respect of Euro First ranking mortgage on the
refinancing loan to credit facility 14.3 million - mall; Pledge on interest in
be repaid by 2015 Euribor + 1.7% - the mall; Assignment of income
1.875% in respect from the mall; Pledge over
of Euro 1.5 million bank accounts; Assignment of
Euribor+2% - 2.5% insurance proceeds; OVAG has
the right to appoint one
director to the board of EMI's
subsidiary building the mall
Szolnok Plaza Euro 5.4 million Euro 5 million K& H+OTP Euribor + First ranking mortgage on the
Szombathely Plaza Euro 5.7 million Euro 5.5 million 1.75-1.9% mall; Assignment of insurance
Zalaegerszag Plaza Euro 5.2 million Euro 4.9 million proceeds; Pledge on interest in
All to be repaid by companies constructing the
2013 malls;Lien on bank accounts of
companies constructing malls;
Assignment of all rights and
benefits of respective
companies under project
agreements; Floating lien
over assets of respective
companies
Tatabanya Plaza Euro 5 million Euro 3.5 million MKB Euribor + 1.75% Pledge on interest of
facility to be Tatabanya Plaza, suretyship of
repaid in 2003 PC, Negative pledge, Pledge
over shares of Helios Plaza,
Krakow Plaza $35 million credit Euro 42.1 million OVAG LIBOR + 1.9% First ranking mortgage on the
facility to be mall; Pledge on interest in
repaid by 2014 company constructing the mall;
Assignment of all leases of
premises in mall; Pledge of
bank accounts; Assignment of
insurance proceeds; Assignment
of contractor performance
guaranty; OVAG has the right
to elect one member of the
board of directors of the
company constructing the mall
Ruda Slaska Plaza Euro 16 million Euro 14.8 million Bank Slaski Euribor + 1.9% Blank promissory note made by
facility to be credit facility the company constructing the
repaid by 2012 mall; First ranking mortgage
on the mall; Pledge on machines
and equipment; Assignment of
rights to certain financial
assets; Assignment of rights
under leases for premises in
mall; Assignment of bank
accounts and insurance
proceeds; Guaranty signed
by PC to cover construction
costs in excess of $21.825
million
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AMOUNT
NAME OF MALL/PURPOSE/ AMOUNT AND TERM OF OUTSTANDING AS OF SECURITY FOR LOAN AND OTHER
OTHER LOAN 31/12/2002 LENDING BANK INTEREST ON LOAN INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
Duna Plaza Total facility in Duna: Euro 41.2 OVAG, MKB In respect of Euro Mortgage on malls up to 140%
Sopron Plaza the amount of Euro million and OTP 69.9 million the of respective loan amounts;
Amanati 82.9 million to be Sopron: Euro 8.9 following interest Pledge on shares of Cyprus
repaid by 2016 million rates apply: in subsidiary; Pledge on shares
Amanati: Euro respect of 65 in mall constructing
29.7 million million - Euribor companies; Pledge over lease
+1.85%; In respect payments generated by the
of Euro 4.9 malls; Lien on bank accounts
million - Euribor and assets of mall constructing
+2.35% until 2006. companies; Assignment of
insurance proceeds; Cross
In respect of Euro guaranty by the mall
13 million the constructing companies and the
interest rate is Cyprus subsidiary as to their
Euribor + 1.85% obligations; Subordination
shareholder loans; Certain
guaranties by PC
Nyir Plaza Euro 13.235 million Euro 11.2 million Erste Bank Euribor + 1.5% First ranking mortgage on
facility to be Hungary mall; First ranking mortgage
repaid by 2010 on current and future assets;
Pledge on shares of company
constructing the mall;
Assignment of all leases of
premises in mall; Pledge on
bank accounts; Certain
guaranties by PC
Praha Plaza Euro 6 million N/A OVAG Euribor + 2.35% First ranking mortgage on the
granted in March land; pledge on interest of
2003, to be repaid borrower; assignment of
in 2008. current and future leases;
assignment of tenant
guarantees; pledge of
liquidity deficit account;
assignment of insurance claims;
subordination of shareholders
loans;
Pireas Plaza Euro 7.5 million to Euro 7.5 million Pireas Bank Euribor + 2% First ranking mortgage on the
be repaid in 2003 land
Plaza House Euro 2.75 million Euro 2.45 million Hypo Euribor + 1.35% First ranking mortgage on the
credit facility to credit facility Vereinsbank building; Right under a
be repaid by 2011 Hungaria 10-year lease; Pledge on
interest in the constructing
company; Floating lien on
assets of mall constructing
company; Assignment of claims
under lease or sale of
Assignment of insurance
property; proceeds; Certain
guaranty by PC for
construction costs
-68-
ELSCINT
Set forth below is information with respect to loans taken by us, by
our subsidiaries and by our jointly controlled companies. The loans granted to
our jointly controlled companies are presented in the table at their full value:
AMOUNT OF LOAN AND
AMOUNT OUTSTANDING
NATURE OF FACILITY AS OF 12/31/02 LENDING BANK INTEREST ON LOAN SECURITY FOR LOAN OTHER INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
General Facilities 3 Credit facilities Bank Hapoalim, With respect to pledge on security As long as any of the
to the Company in the aggregate Israel the Loan I(A) deposit of $55 facilities are
total of ($55 million) - million outstanding, the ratio
approximately $110 0.7% more than subordinated between equity and
million rate of interest security interest adjusted balance sheet has
accruing on in certain assets to be not less than 25%
pledged security acquired using the Bank agreed to provide an
Amount outstanding - deposit; and Loan facility additional long term
Loan I in U.S. I(B) ($9.7 Various pledges facility of $30 million,
dollar - $64.7 million) - LIBOR (first and second secured by a $20 million
million comprised + 2.5% ranking) on shares collateral deposit
of (A) $55 million; With respect to of subsidiary
and (B) $9.7 million Loan II - LIBOR + companies
Loan II in Euro - 2.5% (Africana,
35.0 million With respect to Grandis, Albert,
Loan III in GB Loan III - LIBOR Euston)
(Pound) 10.2 million + 2.5%
Mortgage on both 15% of principal to be
Victoria and Euro 49.9 million Depfa Bank 4.9% - first five hotels and another paid during first five
Utrecht Park Plaza Amount outstanding years hotel in Eindhoven years
Hotels (The Euro 44.4 million Euro Swap + 1.2% (not owned by 20% of principal to be
Netherlands) - next five years Elscint) paid during next five years
First priority Balance to be paid at end
security on of term
movable property, Elscint has no interests
goods, present and in the Eindhoven hotel
future rights included in the
under lease, FF&E refinancing loan. In as
and insurance much as all borrowers have
proceeds joint and severally
First ranking liability. Elscint has a
pledge on shares material indemnity
of subsidiary that arrangement with the owner
owns the rights to of the hotel in Eindhoven
the land with respect to
liabilities under the
loan, which pertain to the
Eindhoven hotel
-69-
AMOUNT OF LOAN AND
AMOUNT OUTSTANDING
NATURE OF FACILITY AS OF 12/31/02 LENDING BANK INTEREST ON LOAN SECURITY FOR LOAN OTHER INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
Euston Road, (Pound) 28 million Bank Hapoalim LIBOR + 1.25% Mortgage on hotel Half of loan payable in 20
London - amount outstanding- and related assets equal installments, with
(Pound) 24.15 million Third party balance payable 10 years
guarantee of (Pound) after closing of loan
5 million (the third (Pound) 5 million may not
party is be repaid until certain
indemnified by conditions are met, and
Europe-Israel for can be used only to repay
(Pound) 2.5 million) shareholders' loans
Europe-Israel and
a Third Party
guarantee
(severely and
jointly) of (Pound)
2.25 million First
ranking pledge on
shares of subsidiary
that owns the rights
to the land
Sandton Park Plaza Loan: Nedcor Investment 10/02 - 9/03 - 7% $500,000 deposit Payments to commence on
Rand 20 million 10/03 and on - 1% to guarantee 10/1/03; full balance
(approximately $2.3 below prime payment of loan payable on 10/1/2013
million) overdraft rate Mortgage on hotel
Amount outstanding charged by bank and liens on other
- Rand 19.2 million assets
(approximately $2.2 Rand 5 million bond
million)
Victoria Park Plaza Credit Line: Bank Leumi U.K. LIBOR + 2% (Pound) 250,000
Hotel, London Line of credit of guarantee by each Short term facility
up to(Pound) 500,000 of Europe-Israel
Amount outstanding and a third party
- (Pound) 492,000
Credit Facility - Fixed and floating One-half of refinancing
(Pound) 39.9 millions Bank Hapoalim LIBOR + 1.4% liens on hotel and loan repayable in 20
Amount outstanding related assets and semi-annual installments
-(Pound)39.9 million rights commencing six months
First ranking following first
pledge on shares anniversary of
subsidiaries opening of hotel;
that own the balance repayable in
rights to one payment 10 years
the lands after opening hotel,
guarantees by Shareholders agreed to
each of a third maintain an equity
party and Elscint investment of at least
for the higher of (Pound) 17.9 million
2.5% of total costs of
project and (Pound)
1.25 million
-70-
AMOUNT OF LOAN AND
AMOUNT OUTSTANDING
NATURE OF FACILITY AS OF 12/31/02 LENDING BANK INTEREST ON LOAN SECURITY FOR LOAN OTHER INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
Bucuresti Hotel Two loans, each for Bank Leumi First loan - First loan -
$14.0 million LIBOR + 0.7% pledge on a The Bank has restricted
Second loan - security deposit its right to realize the
Amount outstanding LIBOR + 1.95% of $14 million Elscint guarantee, by
- $28 million Second loan: linking it to the
Lien on Domino realization of the pledge
shares over the Bucuresti shares
Pledge of Domino's owned by Domino within 6
assets months (except for certain
Other liens and instances stipulated in
pledges the loan agreement).
Undertaking to
maintain existing Short term credit
ownership
structure of hotel
Unlimited
guarantee by
Elscint
Riverbank Park Credit facility - Bank Hapoalim LIBOR + 1.5% Liens on all Short term credit
Plaza Project, (Pound) 17.7 million assets, including
London land and goodwill
Amount outstanding of hotel owning
-(Pound) 17.7 million subsidiary
First ranking
pledge on shares
of subsidiary that
owns the rights to
the land
Sherlock Holmes (Pound)14.2 million Bank Hapoalim LIBOR + 1.4% Fixed and floating One-half to be repaid in
Hotel, London lien on rights to 19 semi-annual installments
Amount outstanding hotel's assets, Balance to be repaid 10
-(Pound)13.8 million including goodwill years after first draw
First ranking down on loan
pledge on shares
of subsidiary that
owns the rights to
the land
TREND INFORMATION
EMI
---
SHOPPING AND ENTERTAINMENT MALLS BUSINESS
The economies of most Central European countries are experiencing a
moderate upward trend, as evidenced by gross domestic products ranging between
2% to 6%. The shopping and entertainment malls business benefits from these
trends, which are generally manifested in increased consumer spending, but at
the same time are subject to local pressures of supply and demand. With the
growth in the number of shopping malls, especially in the capital and large
regional cities, supply is beginning to outpace demand, resulting in
increasingly aggressive competition for patronage. However, the negative impact
of these market forces on our shopping and entertainment centers is offset by
the strong emphasis which PC places on the entertainment facilities which it
offers to its customers, which has been shown to be a dominant factor in
attracting visitors to the malls.
-71-
In the smaller regional cities, where both local and foreign investors
are reluctant to develop projects, the shopping and entertainment centers of PC
generally operate in an environment devoid of meaningful competition and thus
benefit, notwithstanding that the catchment populations are smaller and the
relative buying power of patrons is less than in the larger metropolitan
locations.
ELSCINT
-------
HOTEL BUSINESS
Elscint's hotel business is affected by the trends in each of the
geographic areas in which it operates. The Western European hotel industry is
generally seen to be recovering after the slower period during 1998 and 1999,
and the demand fallouts which were suffered by most European gateway cities
(including London and Amsterdam) with highest exposure to slump in United States
demand, particularly at the top-end of the market, following the outbreak of
"food and mouth" disease and the subsequent September 11. 2001 terrorist attacks
in New York. These events served to push down hotel room yields by up to 30% in
the fourth quarter of 2001. This trend has continued during 2002 as revival in
the United States economy proved slower than anticipated, and growth in
operating profits remains uncertain for the foreseeable future. However, in the
medium term gateway cities are liable to show the strongest growth over the next
five years, with an increase in business demand preceding the leisure market
which may lag behind this recovery as the threat of terrorist reprisals persist.
European markets with the highest proportion of domestic and intra-regional
demand, which are less reliant on US and international traffic and strengthened
by economic convergence following the launch of the euro-currency in January
2002, will fare best in the short term.
In the Eastern European market, significant supply increases, for
exmple in Budapest and Warsaw, are a key factor for falling damand in the
region, although the pending acceptance of Hungary as a member of the European
Union is likely to exert a positive influence on the economy of that country
which may generate an increase in business and tourist traffic. However, room
rates in Hungary are expected to remain lower than in Western European countries
in the short to mid term. The political and economic situation in South Africa
is liable to remain unstable for the foreseeable future, while the prospects for
stabilization in Romania remain unclear.
ENTERTAINMENT AND COMMERCIAL CENTER
In 1999, an Israeli court determined that the zoning plan applicable to
the Herzlia Marina project permits the construction of resort units only and not
of residential units. This decision is not final and an appeal by the various
developers is still pending before the Supreme Court in Israel. While this issue
does not directly affect Elscint's entertainment and commercial center, any
delays in the general development of the project caused by the resolution of
this matter may affect the flow of consumer traffic to the area.
HOLDINGS IN VENTURE CAPITAL INVESTMENTS BY EMI AND INVESTMENTS IN BIO-TECHNOLOGY
COMPANIES BY ELSCINT
In late 2000 and early 2001, the high technology industry experienced a
severe worldwide crisis, generating a widespread loss of confidence in the
market. As a result, many high technology companies, including some of the
industry leaders, suffered sudden and dramatic losses, large scale lay-off of
employees, and acute liquidity problems. Many high technology companies,
particularly start-up companies, were forced out of business as a result. This
negative global trend will undoubtedly affect, in varying degrees, some or all
of the hi-tech companies in which we and Elscint have invested. We cannot assess
at this time for how long this negative trend will persist. However, the
bio-technology field, although affected to some extent by global pressure on the
investment market, is more resilient than the traditional high tech industry,
and is less likely to be directly affected by recent upheavals in that industry.
Nevertheless, during 2002 EBM determined to temporarily postpone all additional
investment in bio technology companies due to the slowdown in and other
conditions of the Israeli economy and projected difficulties in raising
financing for such companies.
IMPACT OF DEVALUATION ON RESULTS OF OPERATIONS AND ON MONETARY ASSETS AND
LIABILITIES
The following table sets forth, for the periods indicated, certain
information with respect to the rate of inflation in Israel, the rate of
devaluation of the NIS in relation to the U.S. dollar and the rate of inflation
in Israel adjusted for the NIS-dollar devaluation:
-72-
ANNUAL DEVALUATION
ISRAELI CONSUMER ISRAELI CLOSING EXCHANGE ANNUAL ADJUSTED FOR ANNUAL
YEAR ENDED PRICE INDEX INFLATION RATE RATE OF THE DEVALUATION RATE INFLATION
DECEMBER 31, (UNITS) (1) (%) (2) DOLLAR (3) (%) (4) (%) (5)
- ---------------- ------------------ -------------- ----------------- ---------------- -------------------
1998 166.3 8.6 NIS 4.16 17.6 8.3
1999 168.5 1.3 NIS 4.153 (0.2) (1.5)
2000 168.5 0 NIS 4.041 (2.7) (2.7)
2001 170.9 1.4 NIS 4.416 9.2 7.7
2002 182.01 6.5 NIS 4.737 7.2 0.65
- -------------------------
(1) For purposes of this table, the CPI figures use 1993 as base equal to
100. These figures are based on reports of the Israeli Central
Statistics Bureau.
(2) Annual inflation is the percentage change in the CPI in Israel between
December of the year indicated and December of the preceding year.
(3) Closing exchange rate is the rate of exchange between the NIS and the
dollar at December 31 of the year indicated, as reported by the Bank of
Israel.
(4) Annual devaluation is the percentage increase in the value of the
dollar in relation to the NIS during the year indicated.
(5) The percentage of the annual devaluation adjusted for annual inflation
is obtained by dividing the percentage of the annual devaluation rate
plus 1 by the percentage of the annual Israeli inflation rate plus 1,
minus 1. For information about inflation rates and exchange rates of
foreign currencies of autonomous units, see Note 2 of the Notes to the
Consolidated Financial Statements.
EMI incurs certain of its expenses in NIS, which expenses are usually
linked, wholly or partially, to changes in the CPI.
RESEARCH AND DEVELOPMENT
OFFICE OF THE CHIEF SCIENTIST
The Israeli government encourages industrial companies by funding their
research and development activities through grants of the OCS.
EMI
---
In 2001 and 2002 InSightec received grants from the OCS for the
financing of InSightec's research and development in the amounts of
approximately NIS 9.4 million (approximately $2.2 million) and NIS 7.8 million
(approximately $1.6 million) respectively.
InSightec is committed to pay royalties to the OCS on proceeds from
sale of products in the research and development in which the OCS has
participated by way of grants, up to 100% of the grants received plus interest
at the rate of LIBOR (in dollar terms). The royalties are payable at the rate of
3% for the first three years and 3.5% thereafter.
The total accumulated amount of grants received by InSightec as of
December 31, 2002 was $7.5 million.
The following table shows EMI's consolidated total research and
development expenditures and royalty-bearing participation by the Israeli
government for the years 2000 through 2002, together with the percentages of net
revenues for each year (in NIS thousands, except for percentages):
-73-
YEAR ENDED DECEMBER 31,
-----------------------
2000 2001 2002
---- ---- ----
THOUSANDS % OF NET THOUSANDS % OF NET THOUSANDS % OF NET
NIS REVENUES NIS REVENUES NIS REVENUES
Total expenditures for research and
development 41,351 26.4 39,141 13.6 36,791 7.4
Royalty-bearing participation from the
Government of Israel 14,785 9.4 14,478 5.0 7,790 1.6
Net research and development expenses funded
by EMI 26,566 16.9 24,663 8.6 29,001 5.8
Research and development expenses are attributed to InSightec.
PATENTS AND PROPRIETARY RIGHTS; LICENSES
EMI
---
TXSONICS
In December 1998, TxSonics acquired focused ultrasound technology from
GEMS, which included all relevant intellectual property (13 patents) at an
aggregate purchase price of $5 million. All patents have been purchased by
TxSonics. As of May 31, 2003, InSightec has submitted over 30 additional patent
applications. Of these, three have already been approved and the remaining
applications are in process.
EMI believes that its research orientation through InSightec in image
guided treatment, a field of rapidly changing technology, increases the
importance of patents which are intended to protect the ability of InSightec to
develop, manufacture and market its products. InSightec is diligently expanding
its intellectual property portfolio.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
The directors and senior officers of EMI as of May 31, 2003 were:
NAME AGE POSITION
Mordechay Zisser(2) (3) 47 Executive Chairman of the Board of Directors
Shimon Yitzhaki(2) (3)(4) 47 President, Chief Financial Officer and Director
Rachel Lavine(4) 37 Director
Avraham Elimelech Firer 49 Director
Yehoshua (Shuki) Forer(1)(5) 59 Director
Meir Kaisserman(1) (3)(4)(5) 49 External Director
Yosef Apter(1) 48 External Director
Marc Lavine(5) 49 Corporate Secretary and General Counsel
Shmuel S. Smucha 58 President and Chief Executive Officer of PC
- -----------------
(1) Member of the Audit Committee
(2) Member of the Investment Committee
(3) Member of the Donations Committee
(4) Member of the Balance-Sheet Committee
(5) Member of the Disclosure Committee
-74-
MORDECHAY ZISSER. Mr. Zisser became Executive Chairman of our board of
directors in May 1999. He has been President of Europe-Israel since March 1998
and its Chairman of the board of directors from March 1988, and President and
Chairman of the board of directors of Control Centers, a privately held company,
which is the parent company of Europe-Israel, since 1983. Europe-Israel and
Control Centers are engaged, through their direct and indirect wholly and
partially owned subsidiaries and affiliates, in the following core businesses:
real estate investment, hotel ownership and management, development and
operation of shopping and entertainment malls in Eastern European countries, in
the venture capital investments in the hi-tech, medical and bio-technology
industries and in the manufacturing and supply of sub-systems and assemblies.
Control Centers also holds direct interests in property development projects in
Israel. Mr. Zisser is active in charitable organizations. He is a member of the
management of the "Oranit" hostel.
SHIMON YITZHAKI. Mr. Yitzhaki was appointed as the President and a
member of our board of directors in May 1999. In May 1999 he was also appointed
as a member of the board of directors of Elscint. Since March 1998, Mr. Yitzhaki
has served as the Vice President of Europe-Israel, and, since the mid-1980's, as
Vice President of Control Centers. Mr. Yitzhaki holds a Bachelor of Arts degree
in accounting from Bar Ilan University and is a certified public accountant.
RACHEL LAVINE. Ms. Lavine was appointed as a member of our board of
directors in May 1999. On May 1999 Ms. Lavine was also appointed as President
and a member of the board of directors of Elscint. Since March 1998, she has
served as Vice President of Europe-Israel, and, from 1994 to 1998, Ms. Lavine
has served as Chief Financial Officer of Control Centers, the parent company of
EMI. Ms. Lavine holds a Bachelor of Arts degree in accounting and is a certified
public accountant.
AVRAHAM ELIMELECH FIRER. Mr. Firer was appointed as a member of our
board of directors in May 1999. He is the Chairman and founder of "Ezra
Lemarpeh" Association since 1979. "Ezra Lemarpeh" is a voluntary association,
which provides assistance to the sick and needy. "Ezra Lemarpeh" has established
a logistic layout, which includes dozens of ambulances, a special ICU for flying
patients abroad, Home Care Network that cares for cancer stricken children and a
Video-Conference System for international medical sessions. Mr. Firer is an
ordained Rabbi. He holds an Honorary Ph.D. from the Bar-Ilan University in
Israel. In 1997 Mr. Firer received the "Israel Award", a distinguished and
highly prestigious award granted to persons who contribute to social life in
Israel. In 2002, Mr. Firer was awarded an Honorary Doctorate from the Weitzman
Institute.
YEHOSHUA (SHUKI) FORER. Mr. Forer was appointed as a member of our
board of directors in May 1999. He is the Mayor of the City of Rehovot in
Israel. Mr. Forer is an attorney, and was the managing partner of Forer Azrieli
and Partners, a law firm with offices in Tel-Aviv and Rehovot from 1994 to 1998.
Mr. Forer was the Acting Chairman of Herzlia Marina Ltd., Ashkelon Marina Ltd.
and Control Centers from 1989 to 1994 and of Williger Ltd. from 1989 to 1991.
Mr. Forer was also Managing Director of the Israel Ministry of Industry and
Commerce from 1983 to 1986 and of the Investment Center From 1981 to 1983. Mr.
Forer was an Assistant to the Minister of Industry and Commerce in charge of
development areas from 1980 to 1981. Mr. Forer held positions as a member of the
boards of directors of Bank Leumi Le-Israel Ltd., Israel Chemicals Ltd., Negev
Phosphates Company Ltd., Industrial Buildings Corporation Ltd., Red Sea Hotels
Ltd. ("Red Sea") and Ackerstein Zvi Ltd. and was a member of the Presidium and
Vice President of the Association of the Tel-Aviv Chamber of Commerce from 1987
to 1996. Mr. Forer is currently a member of the board of directors of Castro
Model Ltd. Mr. Forer received his LL.B. with Honors from the Hebrew University
in Jerusalem.
MEIR KAISSERMAN. Mr. Kaisserman was appointed as an external director,
to our board of directors in June 1999 for a period of five years. Mr.
Kaisserman is the Chairman of Executive Council of KAN Textile Dyeing and
Finishing Ltd., Milat Textile Industries and ARKA Investment Ltd. He is a member
of the board of directors of the Shenkar College, Nehora Yeshiva and the Yeshiva
of Kerem B'Yavne. A graduate of the Shenkar College in Ramat Gan, Mr. Kaisserman
holds a B.A. in Textile Chemistry.
-75-
YOSEF APTER. Mr. Apter was appointed as an external director in
December 2002 for a period of three years. Mr. Apter serves as a director of the
Jerusalem College of Technology. Between 1980 and 2002, Mr. Apter served as a
member of the executive boards of the Center for Investigation of Driving and
Casualties, Shiloh Hesder Yeshiva, Nature Life, Zamir Systems Ltd., Binyamin
Regional Council, Binyamin Development Company and Elad Non-Profit Organization.
Mr. Apter also served as a director and vice chairman of Security Funds. Mr.
Apter is a graduate of the Jerusalem College of Technology (B.Sc.) and holds an
MBA from the Hebrew University in Jerusalem.
MARC LAVINE. Mr. Lavine was appointed as our General Counsel and
Corporate Secretary in May 1999. Mr. Lavine also serves as General Counsel and
Corporate Secretary for Elscint and Europe-Israel. Prior thereto, Mr. Lavine was
in private practice as an associate and as a partner in the Law firms Miron,
Bension & Priwes (Tel-Aviv) (1977 to 1997) and Raved, Magriso, Benkel & Caspi
(Tel-Aviv) (1997 to 1998). Mr. Lavine is a graduate of the University of
Zimbabwe (B.L., 1974).
SHMUEL S. SMUCHA. Mr. Smucha was appointed President and Chief
Executive Officer of PC in 1998. From 1982 until 1992, he was Vice President of
Control Centers, responsible for development, design and construction of large
residential, resort and commercial projects in Israel, South Africa and Belgium,
and from 1992 to 1998, he served as president of Control Centers. From 1971
until 1982, Mr. Smucha was an engineering supervisor and project manager at
Bechtel Inc., a U.S. company. He holds B.Sc. and M.Sc. degrees in engineering
from the Technion - Israeli Institute of Technology, in Haifa, Israel.
Marc Lavine and Rachel Lavine are married.
There are no arrangements made with directors and senior management for
their appointment.
COMPENSATION OF DIRECTORS AND OFFICERS
The cost of compensation of Mr. Shimon Yitzhaki in his capacities as
President and Chief Financial Officer of EMI (including pension and retirement
benefits, cost of vehicle and estimated provisions for annual bonus which is
subject to the approval of the Company's Board of Directors and its
shareholders) for the year ended December 31, 2002 was approximately NIS 2.18
million (approximately $461,000). In addition, Mr. Yitzhaki received from
Elscint a dividend payment (under Elscint's employees and officers incentive
plan), in the amount of approximately NIS 263,000 (approximately $55,500).
The cost of compensation of Mr. Mordechay Zisser in his capacity as the
Executive Chairman of our Board of Directors for the year ended December 31,
2002 was NIS 840,573 (including pension and retirement benefits) (approximately
$177,000), on an annualized basis. Mr. Zisser started receiving compensation
from EMI as of August 1, 2002. For details on Mr. Zisser's terms of employment,
see "Item 7 - Major Shareholders and Related Party Transaction - Related Party
Transaction - Terms of employment of Executive Chairman of the Board of
Directors of the Company". For details on the issuance of 350,000 options to Mr.
Zisser, see " - Share Ownership - Issuance of 350,000 options to EMI's
Executive Chairman of the Board".
The cost of compensation of Mr. Shalom Singer in his capacity as
Executive Vice Chairman of EMI (including pension and retirement benefits, cost
of vehicle and estimated provisions for annual bonus which is subject to the
approval of the Company's Board of Directors and its shareholders) for the year
ended December 31, 2002 was NIS 1.58 million (approximately $333,700). In
addition, Mr. Singer received from Elscint a dividend payment (under Elscint's
employees and officers incentive plan), in the amount of approximately NIS
131,000 (approximately $27,500). In addition, effective January 1, 2000, an
annual bonus has been approved to be disbursed at Mr. Singer's discretion among
the Company's investment department's employees, including Mr. Singer himself.
Such annual bonus is calculated on the basis of annual profits gained on
derivatives activity and investment portfolio directly supervised or
-76-
managed by the investment department, net of the investment department's costs
for the same year. Total amount approved for the Company's investment
department's employees, for 2002 (excluding the amount paid to Mr. Singer
himself which is included in his compensation above) was approximately NIS
264,000 (approximately $55,700).
The compensation of Ms. Rachel Lavine is not paid by EMI. The
compensation of Mr. Marc Lavine, EMI's Corporate Secretary and General Counsel,
is not paid by EMI. The compensation of Mr. Shmuel S. Smucha is paid by PC.
The aggregate amount accrued by the Company and its subsidiaries in
2002 to provide pension and retirement benefits for the directors and members of
the administrative, supervisory and management bodies of EMI, as a group, was
NIS 374,052 (approximately $79,000).
The aggregate compensation paid to or accrued on behalf of the
remaining directors of EMI as a group for the year ended December 31, 2002
(consisting of four persons, including Prof. Many who served as external
director on our board of directors until August 2002) was approximately NIS
232,000 (approximately $49,000).
For details on the issuance of shares to officers and directors of EMI,
see " - Share Ownership - Issuance of ordinary shares to employees and directors
of EMI and its group companies".
BOARD PRACTICES
APPOINTMENT OF DIRECTORS. Our current directors (other than the
independent directors) were appointed by our shareholders at their annual
meeting on December 25, 2002 and will hold office until the next annual meeting
of our shareholders. Mr. Shalom Singer, who was also appointed as a director at
such meeting, resigned from office on December 31, 2002. Mr. Meir Kaisserman and
Mr. Yosef Apter were elected in June 1999 and December 2002, respectively, as
external directors. Mr. Kaisserman's term of appointment is five years, ending
in July 2004, and Mr. Apter's term of appointment is three years, ending in
December 2005.
AUDIT COMMITTEE. The members of our audit committee are Messrs.
Kaisserman, Forer and Apter. The audit committee operates in accordance with its
charter, which sets forth the requirements, obligations and duties of the
members thereof. All of the members of the audit committee meet the current
independence requirements under Israeli law and Nasdaq rules.
EMPLOYEES
As of May 31, 2003, EMI employed 20 persons in investment,
administration and managerial services, all of whom were employed in Israel. As
of May 31, 2003, PC had 191 employees in Eastern Europe. As of May 31, 2003,
InSightec had 68 employees, of whom 64 were employed in Israel and 4 were
employed in the United States.
To date, EMI has enjoyed good employee relations and have never
experienced labor disputes, strikes or work stoppages.
MANAGERS' INSURANCE AND OTHER EMPLOYMENT CONDITIONS
In Israel
The liability of EMI and its subsidiaries to employees upon termination
include, primarily, , severance pay, termination pay, retirement grants,
advance-notice pay and compensation for unutilized vacation days.
-77-
Although not legally required, EMI and Elscint generally contribute, on
behalf of most of their employees, to a fund known as "Managers' Insurance".
This fund provides a combination of savings plan, insurance and severance
payment benefits to the employee, giving the employee a lump sum payment upon
retirement and securing the severance payment, if legally entitled, upon
termination of employment. EMI and Elscint determine whether an employee is
entitled to participate in the plan, and each employee who agrees to participate
contributes an amount equal to 5% of his salary, with EMI or Elscint, as
applicable, contributing between 13.3% and 15.8% of his salary.
The funds contributed by EMI and Elscint to the insurance companies and
the pension fund are transferred under the employee's name but are in EMI and
Elscint's possession until a written approval for withdraw is granted by the
Company or Elscint, as the case may be.
The reserves included in the financial statements of EMI include
accumulated profits deriving from severance funds under the name of the Company
as of December 31, 2002. The deposited amounts may be withdrawn only after EMI's
severance obligations are fulfilled. Severance obligations related to terminated
employees are fully covered.
Israeli law generally requires severance payment, which may be funded
by the Managers' Insurance, to be paid upon the retirement or death of an
employee or termination of employment without cause (as defined in the law). The
payments amount to one-month salary for each employment year. Furthermore,
Israeli employees and employers are required to pay predetermined sums to the
National Insurance Institute (similar to the United States Social Security
Administration), which amounts include payments for national health insurance.
The payments to the National Insurance Institute are equal to approximately
15.42% of the wages, of which the employee contributes 9.49% and the employer
contributes 5.93%.
Israeli employment laws, are applicable to the employees of EMI and
Elscint and their subsidiaries in Israel. These laws concern primarily the
length of working-day, minimum daily wages for professional workers, insurance
for work-related accidents, procedures for dismissing employees, determination
of severance payment and other conditions of employment.
Abroad
The Company's liability for severance pay in respect of its employees
abroad, pursuant to the laws of the countries in which these companies reside
and the labor agreements in effect, is ordinarily covered by current payments to
government agencies with respect to the voluntary or involuntary termination of
the employees employment, as well as by regular payments to insurance companies
for pension benefits.
SHARE OWNERSHIP
EMI
---
ISSUANCE OF ORDINARY SHARES TO EMPLOYEES AND DIRECTORS OF EMI AND ITS
GROUP OF COMPANIES.
In accordance with EMI's shareholders' approval obtained in February
2001, EMI issued 550,000 shares (out of which 23,000 shares were subsequently
returned to the plan), NIS 1 par value each, to employees and officers of EMI,
Europe-Israel and companies controlled by EMI or by Europe-Israel, including
Elscint, pursuant to EMI's employees and officers incentive plan. 280,000 of
those shares were issued to EMI's directors (out of which 15,000 shares returned
to the plan).
The shares were issued at a price per share of NIS 24.1 per share
(approximately $5.4). Except for one recipient whose shares vested upon grant,
the rights of the other recipients to receive those shares vest over periods of
two or three years after the issuance.
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EMI granted each recipient a loan for the purpose of financing the
purchase of the shares in an amount equal to the full purchase price of the
shares such recipient is entitled to receive. The loans were granted for a
period of five years, bearing interest at an annual rate of 6%. Value added tax
payable in respect of the interest will be paid by EMI. In addition, EMI will
pay any taxes, if applicable and when due from the recipients as a result of the
interest rate. The loan (principal and interest) will be repaid upon the
expiration of five years after the grant of the loan.
The shares were issued to a trustee for the benefit of the recipients,
and will serve as sole collateral for the repayment by each recipient of the
loan. Notwithstanding the foregoing, each recipient of shares is entitled to
instruct the trustee to transfer or sell any vested shares, provided that in
this event the recipient shall deposit a percentage of the loan (capital and
interest) equal to the pro rata number of shares sold or transferred out of the
total number of shares issued in favor of such recipient, in an interest bearing
deposit on the recipient's name. The deposit will serve as collateral and the
loan will become a recourse loan.
As of May 31, 2003, the right to purchase 441,834 shares had vested. As
of May 31, 2003, no shares were purchased by any recipient.
ISSUANCE OF 350,000 OPTIONS TO EMI'S EXECUTIVE CHAIRMAN OF THE BOARD
In September 2001, EMI granted to Mr. Mordechay Zisser, the executive
chairman of our Board of Directors, options to purchase up to 350,000 ordinary
shares of EMI. The shares underlying the options were registered for trade on
the TASE, but not on the Nasdaq National Market. The options were granted
without consideration, became exercisable immediately upon the grant thereof and
will remain exercisable for a period of three years thereafter. The exercise
price of the options was set at NIS 35.7 per share, and was later amended to
reflect changes in the exchange rate between the NIS and the U.S. dollar. In
December 2002, the Company's shareholders approved an amendment of the exercise
price to unlinked NIS 44 per option (approximately $9.28).
The shares underlying the options represented, on the date of the
issuance thereof, 1.51% of EMI's issued and outstanding share capital.
EMI 1996 STOCK OPTION PLAN
The Company's 1996 stock option plan covers 2,100,000 ordinary shares.
Currently, there are no options outstanding, following the expiration of all
previously outstanding options.
INSIGHTEC STOCK OPTION PLAN
1999 ESOP - On May 19, 1999, the board of directors of InSightec
approved, subject to the approval of a special committee appointed by the board,
the issuance to a trustee of 2,500,000 shares of InSightec, NIS 0.01 nominal
value each, pursuant to InSightec's 1999 stock option plan (the "InSightec
Plan"), to be reserved for issuance upon the exercise of options to be granted
to InSightec's and its subsidiaries' managers, employees and directors. The
InSightec Plan is administered by a committee of the board, whose consent is
required for the following matters:
o the relationship between EUBV, the controlling shareholder of
InSightec, and the participants in the InSightec Plan, upon
the occurrence of certain investment situations in InSightec;
and
o amendments to the InSightec Plan.
The shares subject to the InSightec Plan constituted, upon the grant
thereof and prior to an investment by an unrelated third party in InSightec, 25%
of the issued share capital of InSightec.
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Options are non-transferable and vest (i) as to 50% of the underlying
shares, 24 months after grant, (ii) as to an additional 25% of the underlying
shares, 36 months after grant, and (iii) as to the remaining underlying shares,
48 months after grant. In the event of a material change in InSightec, the
vesting of unexercised options shall be accelerated and the options will vest
immediately.
Participants do not have any shareholders' rights in InSightec by
virtue of the grant of an option, until the exercise of options and issuance of
one or more share certificates in respect thereof. Sale of shares issuable upon
the exercise of options is subject to a right of first refusal of all other
shareholders, including participants in the InSightec Plan. The right of first
refusal will be in effect until InSightec's shares are listed for trade on an
Israeli or foreign stock exchange.
Under applicable law, participants bear all tax consequences and
liabilities relating to the options and the shares issuable pursuant to the
exercise thereof. The InSightec Plan is governed by Israeli law, and is
available also to employees of subsidiaries of InSightec.
In 1999, InSightec granted to its directors options to purchase up to
150,000 ordinary shares (out of a total of 300,000 ordinary shares), exercisable
until March 2006 at an exercise price of $3.33 per share; the rights to purchase
75% of those shares vested as of December 31, 2002, with the remainder to vest
during 2003.
2003 ESOP AND CSOP - On January 26, 2003, the board of directors of
InSightec approved the issuance to a trustee of 1,000,000 shares of InSightec,
NIS 0.01 nominal value each, pursuant to InSightec's 2003 Employee & Directors
Stock Ownership Plan (the "2003 ESOP"), pursuant to the "Capital Gains - Trustee
Track" provided for in the Amended Section 102 of the Israeli Income Tax
Ordinance (New Version), and the Service Providers Stock Ownership Option Plan
(the "2003 CSOP"), pursuant to Section 3(9) of the Israeli Income Tax Ordinance
(New Version). Both plans were approved at InSightec's Shareholders General
Meeting held on February 10, 2003.
In addition, InSightec approved the transfer by the trustee under the
InSightec Plan to the trustee appointed under the 2003 ESOP and 2003 CSOP of the
outstanding balance of 394,000 shares, which were not, as of the date of such
approval, granted to any specific participant under the InSightec Plan, to be
held by the trustee under the 2003 ESOP or under the 2003 CSOP.
Following the said issuance and transfer of the shares, up to 1,094,000
options were designated to the 2003 ESOP and up to 300,000 were designated to
the 2003 CSOP.
The options under the 2003 ESOP will vest at the end of two years from
the year in which the options were granted to the participant and are
exercisable at an exercise price of NIS 0.01 per option. The exercise price for
the options under the 2003 CSOP will be set in each participant's grant
notification which will also outline the vesting terms for each participant's
options. The exercise period for the options under both plans is seven years
from the date of each grant.
The shares subject to the 2003 ESOP and 2003 CSOP constituted, as of
May 31, 2003, 10.2% of the issued share capital of InSightec.
Options are non-transferable and vest in accordance with the terms of
the Grant Notice letter to each participate. In the event of a material change
in InSightec, the vesting of unexercised options will be accelerated and the
options will vest immediately.
Participants do not have any shareholders' rights in InSightec by
virtue of the grant of an option, until the exercise of options and issuance of
one or more share certificates in respect thereof. Sale of shares issuable upon
the exercise of options is subject to a right of first refusal of all other
shareholders who hold more than 1% of InSightec's shares on a fully diluted
basis, including participants in the 2003
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ESOP. The right of first refusal will be in effect until InSightec's shares are
listed for trade on an Israeli or foreign stock exchange.
Under applicable law, participants bear all tax consequences and
liabilities relating to the options and the shares issuable pursuant to the
exercise thereof. The 2003 ESOP and 2003 CSOP are governed by Israeli law.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
The Company had, as of May 31, 2003, 23,146,820 shares outstanding
(excluding 626,900 shares which were issued by the Company but not paid for).
The following table sets forth certain information as of May 31, 2003,
concerning: (i) persons or entities who, to our knowledge, beneficially own more
than 5% of the outstanding ordinary shares of EMI, (ii) the number of ordinary
shares of EMI beneficially owned by all officers and directors of EMI as a
group, and (iii) the number of ordinary shares of EMI beneficially held by
Elscint:
NAME AND ADDRESS NUMBER OF SHARES PERCENT
Europe-Israel (M.M.S.) Ltd. 13,437,584 58.5%
13 Mozes Street
Tel-Aviv, Israel(1)
Bank Leumi (Provident Funds) 2,103,368 9.09%
32 Yehuda Halevi Street
Tel-Aviv, Israel
All officers and directors as a group (8 14,259,251 61.6%
persons) (2)
Elscint Limited 885,140 (3) 3.8%
13 Mozes Street
Tel Aviv, Israel
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(1) As of May 31, 2003, Control Centers owned 80.17% of the issued and
outstanding shares of Europe-Israel. Control Centers is controlled by
Mr. Mordechay Zisser, the Executive Chairman of the board of directors
of EMI.
(2) Includes 13,437,584 shares of EMI held by Europe-Israel, which may be
deemed indirectly beneficially owned by Mr. Mordechay Zisser by virtue
of his control of Europe-Israel through his control of Control Centers,
as described in footnote (1). Mr. Zisser disclaims beneficial ownership
of such shares. Also includes 350,000 shares underling options which
are currently exercisable; 221,667 shares issued to the Company's
directors and officers pursuant to the Company's employees and officers
incentive plan, which have either vested or will vest within 60 days
after the date of this report; and 250,000 shares held by Triple-S, a
company controlled by Mr. Shmuel S. Smucha. Mr. Smucha disclaims
beneficial ownership of such shares.
(3) Elscint has voting rights with respect to 208,431 shares.
Except for (i) 676,709 shares held by Elscint and (ii) 350,000 shares
underlying options that prior to the exercise thereof confer no voting rights to
the holder thereof, the shareholders listed above do not have any different
voting rights from any other shareholder of EMI. However, by virtue of the fact
that Europe-Israel holds more than a majority of the outstanding shares of EMI,
it can, in all likelihood, control the direction of EMI at shareholders'
meetings where a simple majority vote is required for adoption of proposals.
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550,000 additional shares were granted to directors, officers and
employees of the Company (out of which 23,000 shares were subsequently returned
to the plan) pursuant to the Company's officer and employees incentive plan, of
which 441,834 shares have vested as of the date of this report. For more details
on the issuance of shares to employees and officers of the Company, see "Item 6
- - Directors, Senior Management and Employees - Share Ownership - EMI - Issuance
of ordinary shares to employees and directors of EMI and its group of
companies".
As of May 31, 2003, on the books of our transfer agent, there were
approximately 230 holders of record of our ordinary shares with addresses in the
United States, holding approximately 5.7% of our issued and outstanding ordinary
shares.
RELATED PARTY TRANSACTIONS
Framework agreement for the provision of services of coordination,
planning, execution and supervision over construction projects. Pursuant to a
certain services agreement dated February 17, 1998 between Europe-Israel and
Control Centers, Control Centers, through its subsidiary CDPM, renders services
with respect to the coordination, planning, execution and supervision of the
construction of the Centers (the "Services"), for a fee equal to 5% of the
actual construction costs of each such project (but excluding land acquisition
and financing costs), plus VAT. The Company and Control Centers have entered
into a similar agreement (the "Services Agreement"), pursuant to which the
Company will receive the Services from Control Centers or its subsidiary
companies. Each engagement under the Services Agreement for the receipt of
Services by a specific mall is subject to the prior approval of the board of
directors and audit committee of the Company, and must comply with the terms of
the Services Agreement.
The 5% fee was agreed to by the parties based on customary fees paid in
similar transactions in Eastern Europe and is payable in accordance with the
progress of the construction works. In addition, the Company will reimburse
Control Centers for all reasonable costs incurred in connection with the
services rendered thereby, not to exceed a total of $50,000 per project. The
parties agreed that if any project is not completed, or is sold to a third party
before completion, Control Centers' fee will be determined based on its total
costs incurred in connection with such project through the termination or sale
thereof. The Services Agreement is effective through December 31, 2002.
For additional details see Note 21(A)*(1) to the Financial Statements
included in Item 18 below.
Lease: As and from January 2001, EMI has been leasing office space from
Control Centers. The annual rental fees (including management fees) for 2002
were approximately NIS 431,000 (approximately $91,000).
Issuance of 350,000 options to the Executive Chairman of the Board of
Directors. See "Item 6 - Directors, Senior Management and Employees - Share
Ownership - EMI - Issuance of 350,000 options to EMI's Executive Chairman of the
Board."
Terms of Employment of Executive Chairman of the Board of Directors of
the Company. In December 2002 the shareholders of the Company approved the terms
of employment by the Company of Mr. Zisser in his capacity as the Executive
Chairman of the Board of Directors of EMI. In accordance with the shareholders'
approval, Mr. Zisser is entitled to receive a monthly salary of approximately
NIS 106,500 (approximately $22,500), linked to the Israeli consumer price index
prevailing on August 1, 2002, as well as customary employment benefits, as
described below. The salary is being paid by the Company and/or its private
subsidiaries and/or private affiliates. Mr. Zisser is also entitled to unlimited
reimbursement of his expenses incurred in connection with his office.
Mr. Zisser is also entitled to customary annual vacation, paid sick
leave, replenishment payment, managers' insurance and participation in a
sabbatical fund. The Company shall be responsible for any expenses incurred in
the event that the foregoing benefits exceed the maximum amount of managers'
insurance and sabbatical fund contributions which are exempted from taxes. In
addition to the above, the Company shall provide Mr. Zisser with the use of a
motor vehicle, of a model and type commensurate with his office, and shall bear
all costs and expenses incurred in connection with the use of such vehicle,
including any expenses in connection with the payment of income tax and social
security insurance imposed in respect of such use. The Company shall also
provide Mr. Zisser with a telephone, facsimile, mobile phone, computer, printer
and modem and shall bear all installation costs and all reasonable expenses
related thereto.
The term of Mr. Zisser's employment is for a period of three years
commencing August 1, 2002 (the "Effective Date"). Either the Company or Mr.
Zisser may terminate the employment by providing the other party with at least
six (6) months advanced written notice of its intention to do so.
Mr. Zisser has been serving as the Executive Chairman of our Board of
Directors since May 1999. Prior to the Effective Date the Company has not paid
to Mr. Zisser any amounts with respect to such office and no allowance was made
with respect to such payments on the Company's financial statements.
Mr. Zisser also serves as the president and chairman of the board of
both Control Centers and Europe-Israel. Mr. Zisser's cost of employment by the
Europe-Israel group therefore remains unchanged, and in light of the Company's
shareholders' approval (that Mr. Zisser's term of employment by Europe-Israel is
to be counted in calculating the period of his employment by the Company for all
purposes) Mr.
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Zisser's monthly salary in Europe-Israel was reduced accordingly. In addition,
all relative amounts out of the contribution made by Europe-Israel in connection
with Mr. Zisser's employment by Europe-Israel in policies and funds, as well as
all other amounts accumulated by Europe-Israel for Mr. Zisser's benefit, were
transferred to the Company, effective as of August 1, 2002.
Allocation of Costs Agreement: At the Annual General Meeting of the
shareholders of the Company held on February 21, 2001, our shareholders approved
an agreement with Europe-Israel and Elscint, retroactively from January 1, 2000
and until December 31, 2002, for the allocation of costs and expenses incurred
in connection with services rendered to those companies by their in-house legal,
economic and taxation and accounting departments. Each party to the agreement is
entitled to terminate it at the end of each 12-month period by giving a 60-day
advance notice to the other parties. The allocation would be carried out so that
Europe-Israel bears 35%, while Elscint and EMI each bear 32.5% of such costs.
These percentage shares reflect a general estimate of the companies' management
of the actual utilization rate of these departments' services by each of the
companies based on the actual services provided thereby during the first half of
2000. Should these percentage rates deviate from the actual service rates by
more than 10%, the parties will be charged on the basis of the actual cost
allocation. In November 2002 the Company's Board of Directors approved the
extension of the agreement for a three years term.
ELSCINT
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Hotel and Leisure - Elscint and Europe-Israel have provided loans,
guarantees and lines of credit to various of Elscint's hotel owning
subsidiaries.
BEA - Jet Link - BEA receives, from time to time, aviation services
from Jet Link Ltd. (an aviation company controlled by Control Centers) in
exchange for a payment based on the latter's price list, net of a discount of
5%.
Line of Credit - Elscint has provided to its wholly-owned subsidiary,
Elscint Holding and Investment NV (the holding company of the hotels), a line of
credit for the construction and development of the hotels, in the following
amounts:
Linkage Base Interest rate Balance as of Balance as of
12/31/02 in 3/31/03 in
millions (*) millions (*)
$** LIBOR + 1.25% 113.1 116.6
Euro LIBOR + 2.5% 39.9 40.4
GB(Pound) LIBOR + 2.5% 11.9 12.0
(*) These balances are presented in their original currency and
include accrued interest as of the balance sheet date. The balance
as of March 31, 2003 represents the largest amount during the
period from January 1, 2002 through March 31, 2003.
(**) Includes loans of approximately $54.4 million and $54.7 million
from Elscint Inc. (Elscint's wholly-owned U.S. subsidiary) to BEA
as of December 31, 2002 and March 31, 2003, respectively.
Commercial and Entertainment Center - Agreement between CDPM and BEA:
In October 2001 an agreement between BEA and CDPM was approved by the
shareholders meeting of Elscint. In accordance with the agreement, CDPM will
provide logistical, planning and supervisory services in connection with the
renovation of the Bucuresti Hotel, in exchange for consideration equal to the
lower of 5% of the renovation costs (excluding general and administrative
expenses and financing expenses) or 5% of U.S. $30 million.
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Commercial and Entertainment Center - Agreement between CDPM and SLS:
In May 2002, Elscint's shareholders approved a turn-key contracting agreement by
and between SLS and CDPM, for the completion of the construction works of the
center for a consideration of $57.7 million plus Value Added Tax (if
applicable), subject to reductions and adjustments due to payments by SLS to
sub-contractors, suppliers, consultants and other third parties in connection
with the construction work. The amount of the consideration was determined on
the basis of a calculation of the amount of work remaining to be performed, as
at March 1, 2002. From March 1, 2002 until March 31, 2003 SLS made such payments
on account of implementation of the project in the total sum of U.S. $25.2
million. As of the date of this report, the agreement had not yet been
consummated. Upon the closing of the agreement, SLS is to pay to CDPM an advance
of $3 million, on account of the consideration and, concurrently, CDPM is to
provide SLS with a bank guarantee, at the rate of 5% of the Work Consideration.
In addition, SLS committed, as part of the agreement, to assign to CDPM all the
rights and obligations, based on the agreements, which it signed with various
suppliers, except for those specified in the agreement. The agreement includes a
number of conditions, the breach of which is considered as a fundamental breach,
which confers the remedies stated in the agreement. Nevertheless, further to
SLS's request CDPM is assisting in the construction and management of the
project.
Line of Credit: Elscint has provided to SLS a credit line for the
construction works at the commercial and entertainment center, which is linked
to the Israeli CPI and bears annual interest of 5%.
The balance of the loan (including accrued interest) was NIS 390
million and NIS 452 million as of December 31, 2002 and March 31, 2003,
respectively.
Investments in Bio-Technology Companies - Line of Credit. Elscint has
provided to EBM a $30 million line of credit for investments in bio-technology
companies and for the financing of EBM's operations. This line of credit is
linked to the U.S. dollar and bears annual interest of LIBOR + 1.25%.
The balance of the loan (including accrued interest) was $10.3 million
and $10.5 million as of December 31, 2002 and March 31, 2003, respectively.
Lease. As of September 2000, Elscint has been leasing office space from
Control Centers. The annual rent under such lease is approximately $85,000 per
annum, including payments to the management company of the building. The term of
the lease is three years, and Elscint has an option to extend such term to an
additional 23 months.
Credit line from Bank Leumi. Elscint and its investee companies conduct
credit, deposit and management of security portfolio transactions with the bank,
which is an indirect interested party in the Company. These transactions are
conducted during the ordinary course of business and under customary market
terms and conditions.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Consolidated Financial Statements included in Item 18.
LEGAL PROCEEDINGS
Class Action by Minority Shareholders. In September 1999, we and
Elscint (among others) were served with a claim and a motion to recognize the
claim as a class action filed by a shareholder of Elscint on behalf of all
minority shareholders who held shares on February 18, 1999, and on the date that
the claim was submitted.
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The plaintiff requested (i) relief of approximately NIS 1.9 million
(the plaintiff subsequently requested to amend the relief to approximately NIS
2.5 million) plus expenses and attorney's fees, and (ii) approximately $148.5
million (the plaintiff subsequently requested to amend the relief to $158
million) plus expenses and attorney's fees for alleged damages suffered by the
class.
The main allegation of this claim is that EMI, through the actions of
its former directors in Elscint, caused Elscint damages and discriminated
against the minority shareholders of Elscint. The plaintiff also alleged that
Elscint's former directors acted while being in a conflict of interest between
the interests of Elscint and its minority shareholders, on the one hand, and the
interests of the controlling shareholders of Elscint, on the other hand.
The plaintiff requested that Elscint, or alternatively all or part of
the defendants, be ordered to purchase from each members of the class all shares
held by such member at a price of $27.46 per share.
On October 7, 1999, the plaintiff filed a motion to amend his claim to
include an additional cause, being EMI's violation of its offer to acquire all
shares of Elscint held by the public at a price per share of $14. On November
15, 1999, the Israeli Supreme Court ruled that this claim be removed from the
District Court in Haifa to the District Court in Tel-Aviv, and that it be heard
together with the claim filed by Elscint's former President and Chief Executive
Officer (described above). On July 19, 2000, EMI filed a motion to dismiss the
motion to recognize the claim as a class action, on the grounds of lack of
cause, lack of opponency and failure by the plaintiff to pay the court fee. In
October 2000, the plaintiff and the defendants reached a procedural agreement,
providing that all the proceedings shall be withheld until the Israeli Supreme
Court shall have rendered its ruling with respect to a motion filed by certain
investors (described below) for permission to appeal a ruling of the Haifa
District Court to dismiss the application to recognize their claim as a class
action.
Class Action by Investors. In November 1999, we and Elscint were served
with a claim and a motion to recognize the claim as a class action, which claim
was also submitted against Europe-Israel, Control Centers, Marina Herzlia
Limited Partnership 1988 (which is controlled by Control Centers), Elron and 25
past and present directors in the above companies, which claim and motion were
filed in the District Court in Haifa, Israel.
The claim was submitted by a number of institutional investors and
other individuals and entities that hold shares in Elscint. The motion to
recognize the claim as a class action was submitted on behalf of those persons
who held shares of Elscint on September 6, 1999, and continued to hold such
shares on the date on which the motion was filed, excluding the defendants.
The plaintiffs alleged that the minority shareholders of Elscint were
discriminated against as a result of various activities carried out by Elscint's
controlling shareholders and its board of directors. The main allegations raised
by the plaintiffs include the following:
o EMI (i) discriminated against the minority shareholders of Elscint in
favor of Elron and its own interests, (ii) refrained from distributing
dividends to Elscint's shareholders, (iii) caused, or did not prevent,
the sale of controlling interest in Elscint, favoring the creation of
great profits to Elron over Elscint's best interest, and (iv) did not
report, and prevented the report by Elron and Elscint, of the
negotiations to sell the controlling interest in EMI held by Elron;
o EMI breached (i) its contractual undertaking towards Elscint to conduct
a takeover bid for the purchase of Elscint's shares held by the
minority shareholders of Elscint at a price per share of $14, and (ii)
its obligation to cancel of the takeover bid in accordance with certain
provisions under applicable law;
o EMI released misleading reports with respect to, and refrained from
reporting on, the takeover bid and the acquisition of the business of
Elscint from its controlling shareholders, thereby violating
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the applicable reporting requirements and causing damage to Elscint's
shareholders who relied on EMI's announcements and either purchased or
refrained from selling Elscint's shares;
o EMI violated Israeli law by entering into agreements to assist in
redeeming its shares; and
o EMI violated Israeli law by acquiring Elscint's shares based on inside
information.
The plaintiffs argued that the total damages suffered until the time of
submission of the claim were $100 million. The remedy requested by the
plaintiffs was that EMI be ordered to execute the alleged buy-out of Elscint
shares held by the public at $14 per share. Alternatively, the plaintiffs
requested compensation for the damages, which they allegedly suffered, and the
rescission of the transactions with controlling shareholders. In addition, the
plaintiffs demanded, among other remedies, the return by Elscint of all amounts
paid in connection with the acquisition by Elscint of the hotel business in
September 1999. Certain of the remedies have also been requested as derivative
claims on behalf of Elscint.
On December 26, 1999, we filed motions, together with other defendants,
to dismiss the claim. The defendants alleged, among other things, that the
remedies requested in the claim could only be raised by Elscint itself, and that
the claim is not suitable to be recognized as a class action. In August 2000,
the motion to recognize the claim as a class action was dismissed before the
hearing of the motion on its merits. The claim itself remains pending.
Currently, two separate proceedings are pending:
(1) Before the Israeli Supreme Court - several, but not all, of the
plaintiffs, have filed a motion with the Israeli Supreme Court for permission to
appeal the ruling of the District Court in Haifa to dismiss the motion to
recognize the claim as a class action. We have filed a written response to this
motion. In May 2001, the Israeli Attorney General filed a notice with the
Supreme Court that in accordance with the authority granted to him under law he
joined the proceedings and filed his position, which supports the plaintiffs'
legal claims.
At a hearing held before the Israeli Supreme Court on November 21,
2001, the plaintiffs received permission to appeal the ruling of the District
Court in Haifa, we filed our arguments and the plaintiffs responded. As of the
date of this report, the Supreme Court has no yet rendered its decision in this
motion.
(2) Before the Haifa District Court - The District Court ruled that the
claim filed by the plaintiffs shall continue to be heard as a regular claim in
spite of the fact that the request to recognize the claim as a class action has
been dismissed. The plaintiffs and the defendants disagree on the issue of court
fees. While the counsel for the plaintiffs claims that the claim is of a
declarative nature and therefore the court fee is approximately NIS 1,600
(approximately $400), counsel for the respondents claims that the relief claimed
is a financial relief and that according to their calculations, the court fee
(taking into account all of the relieves claimed) is approximately NIS 1.32
million (approximately $300,000) or approximately NIS 20.09 million
(approximately $4.97 million). In the course of interim procedure, the Court
repeated its position that the real relief claimed by the plaintiffs is in fact
a financial relief and that counsel for the plaintiffs should adjust the amount
of the court fee in accordance with such financial relief. Since the court fee
has not been paid, on March 11, 2001, Elscint, together with seven other
respondents, filed a request with the District Court in Haifa to rule on the
assessment of the court fee due. Elscint's counsel's opinion was supported by
the Attorney General's opinion filed on May 14, 2001 with the court. Several
court hearings pertaining to court fees took place before the District Court,
the last one on April 25, 2002, and the District Court's decision is pending.
However, the court has ruled that Elscint shall submit its statement of defense
75 days after the plaintiffs have paid the court fee in full, and that we shall
submit our statement of defense 45 days after Elscint has submitted its
statement of defense.
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Claim against EMI and EMS. In March 2000, we were served with a
Statement of Claim against us and our subsidiary Elbit Medical Services Ltd.
("EMS") that was filed by two Brazilian companies in the District Court in
Haifa.
The plaintiffs allege that we and EMS breached, and/or caused the
breach of, two agreements between EMS and the plaintiffs regarding the
participation in a tender for the establishment of a Multi-Diagnostic Medical
Center in the city of Brazilia. The remedy sought is damages in the amount of
$14.3 million (approximately NIS 57.8 million); however, for the purpose of
court filing fees, the amount requested was approximately $4.94 million
(approximately NIS 20 million). In May 2000, we filed a petition to dismiss the
Statement of Claim on the ground of lack of authority of Israeli courts, and,
alternatively, Forum Non Convenient. On May 13, 2001, the District Court
rejected our request to dismiss the Statement of Claim. In May 2001, we appealed
the decision of the District Court and simultaneously filed a petition for
another extension for filing its statement of defense. We reached an agreement
with the plaintiffs that if our appeal to dismiss the claim is rejected, we
shall submit our statement of defense within 30 days after the dismissal. On
January 23, 2002, a hearing took place in the District Court in Haifa. Our
counsel informed us that the District Court in Haifa dismissed our appeal on
February 19, 2003 and ordered us to pay legal expenses in the amount of NIS
20,000 (approximately $4,500). On April 1, 2003, our counsel submitted an
application to the Supreme Court for permission to file an appeal on the
District Court's decision and on April 2, 2003, our counsel submitted our
defense to the plaintiffs' claim.
Poland. Katowice Plaza was served with a statement of claim in the
amount of $235,000, constituting the last part of the consideration for property
purchased by Katowice Plaza in December 1998. The statement of claim was filed
by the seller, a construction company, in the regional court of Katowice.
Katowice Plaza filed its statement of defense alleging an error going to the
essence of the transaction. In addition, Katowice Plaza filed a counter claim
against the construction company, demanding the return of payments, which
Katowice Plaza paid to the construction company, in the amount of $960,000. On
March 19, 2001, a judgment was rendered in favor of the construction company,
and Katowice Plaza was compelled to pay $222,222 to the plaintiff with interest
calculated as of October 8, 1999, and legal expenses of $15,000. The
counterclaim filed by Katowice Plaza was dismissed and Katowice Plaza was
compelled to pay legal expenses in the amount of $3,000. On May 23, 2001,
Katowice Plaza appealed this judgment. On July 27, 2001, Katowice Plaza received
a notification from the court that a lien in the sum of $438,000 was applied to
its assets, in order to secure the payments due to the construction company as a
result of the judgment given by the court. On August 1, 2002, Katowice Plaza
Counsel informed us that the judgment was finalized and Katowice Plaza was
compelled to pay the sum of $438,000. According to the court judgment Katowice
Plaza had to pay that sum until July 15, 2002, but the payment was not yet made.
Katowice Plaza is continuing its attempts to sell the property so that it could
pay the debt to the plaintiff. In addition, Katowice Plaza, made a settlement
proposal to the plaintiff according to which the debt will be paid in 12 equal
payments in consideration for freezing the proceedings against it. The plaintiff
is considering this offer.
A second claim was filed against Katowice Plaza on July 2, 2001 by the
construction company, claiming an additional payment for the subject property.
The sum claimed under this suit was also secured by an additional lien on
Katowice Plaza's assets. Katowice Plaza filed an appeal against the lien imposed
on its assets but a court hearing has not yet been scheduled. On February 2002,
the court gave a judgment in this suit, in which the evaluation of the property
that is subject to both claims, was reduced to $1,255,000. According to this
judgment Katowice Plaza's total outstanding debt to the plaintiff is in the sum
of $250,000 plus interest. The parties intend to meet in order to negotiate a
settlement in light of this judgment.
During the court proceedings regarding the property, land taxes have
not been paid by Katowice Plaza to the municipality of Katowice. As a result, a
lien has been applied to Katowice Plaza's bank accounts in favor of the
municipality of Katowice.
In July 2002, a third party filed a lawsuit in Poland against our
subsidiary in Poland, Ruda Slaska Plaza S.P Z.O.O ("Ruda") for approximately
$3.6 million, alleging an unpaid debt arising from a service
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agreement. In addition, the plaintiff asked the court to seize monies owed to
Ruda by three lessees, in order to secure the payment of Ruda's debt. In
September 2002, the court accepted the plaintiff's request to also seize future
rental payments of the three lessees and on October 21 2002, the court rejected
Ruda's appeal on this decision. In October 2002, Ruda also filed its response to
the main claim, in which it rejected most of the plaintiff's assertions.
On March 21, 2003, the court gave a decision according to which the
seizure of rental payments would be expanded so that it will be applied to other
debtors of Ruda. Ruda submitted an appeal against this decision as well as a
request to postpone its execution until its claims are considered. The court's
decision in the appeal is pending.
Concurrently, Ruda filed a counter-claim against the third party in the
sum of approximately $3.4 million, claiming damages due to defects in the
performance of the agreement by the plaintiff as well as additional losses
incurred as a result of its actions. In addition to these proceedings, Ruda
requested to be included in a compromise settlement being finalized between the
plaintiff and all of its creditors. Ruda was formally approved as one of the
plaintiff's creditors and will thus participate in all the proceedings
pertaining to the arrangement.
On April 23, 2003, a hearing in the main claim was held. Ruda submitted
a request to replace the judge. The request was based on the argument that due
to the fact that many errors were made in the management of the suit, the court
proceedings were unjustly prolonged. The request to replace the judge was
dismissed.
Claims Relating to the Sale of the NM, MRI and CT Businesses. In
connection with the sale in 1998 of substantially all of Elscint's assets to
GEMS and Picker (today Philips), the following material claims were filed or
threatened against Elscint:
1. In October 1999, Elscint received a claim letter from a former
distributor of Elscint in Greece, claiming approximately $27 million in damages
as a result of an alleged breach of a distribution agreement. Elscint denied all
allegations in a letter dated October 19, 1999, and received another letter on
November 9, 1999, in which the plaintiff asked that Elscint arrange for all of
the plaintiff's contracts to be assigned to and assumed by GEMS. Elscint
discussed the merit of these claims with GEMS, but was not informed by either
GEMS or the distributor of the outcome of their actions. Since the end of 1999,
Elscint did not receive any communication from this distributor with respect to
the foregoing matter.
2. Distributors and Agents: Various other distributors of Elscint
and/or its subsidiaries have sent letters to Elscint, demanding payment for
damages that they have allegedly suffered as a result of the sale of assets in
1998. The aggregate amount demanded under these letters is approximately $4
million. Additional letters of demand did not specify the amounts claimed.
3. Claims in Brazil: Elscint is a defendant in several claims filed by
certain of its customers (including some demanding the cancellation of sales and
service agreements) totaling approximately $5 million. These claims allege among
other things, damages caused to medical equipment acquired from Elscint.
Claims relating to the hotel business
-------------------------------------
Bucuresti Hotel Complex, Bucharest, Romania. In December 2000, BEA
acquired 80% of the capital and voting rights in Desca Investments Ltd., a
Cypriot company ("Desca"), which at the time held 100% of Domino International
Hotels s.r.l, a Romanian limited liability company ("Domino"). In December 1999,
Domino successfully bid for the acquisition from the Romanian State Ownership
Fund (the "SOF") of 66.18% of the outstanding shares (the "Bucuresti Shares") of
SC Bucuresti Turism S.A. ("Bucuresti"), a Romanian joint stock company that
owned the rights to the Bucuresti Hotel and other parties have filed a petition
with the Supreme court to re-consider its desition given. The Bucuresti Shares
were offered for sale through a tender for the privatization of the holdings of
the SOF
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in Bucuresti (the foregoing transaction is referred to as the "Bucuresti
Transaction").
Under Romanian law, Domino, as the holder of 66.18% of the outstanding
shares of Bucuresti, controls Bucuresti. The acquisition of the Bucuresti Shares
by Domino was delayed from December 1999 to December 2000 due to various legal
disputes between Domino, the SOF and unrelated third parties who contested
Domino's right to acquire the Bucuresti Shares on the grounds that the
privatization tender was conducted improperly by the SOF. However, in November
2000 the Romanian Supreme Court "finally and irrevocably" determined that the
Bucuresti Transaction should be consummated and that the Bucuresti shares should
be sold to Domino. The Bucuresti Transaction was consummated on December 11,
2000.
An employee union active in the Bucuresti Hotel and other parties have
filed a petition with the Supreme Court to re-consider its foregoing decision.
The ground for this petition is that the employees and the other parties were
not summoned to appear at one of the hearings of the court, due to a technical
error of the court administration, and were thus allegedly denied a fair
opportunity to present their arguments to the court. In July 2002, the Supreme
Court of Romania dismissed the petition.
An additional claim submitted by certain individuals requesting the
nullification of the public tender for the sale of the Bucuresti Shares, the
privatization contract and the transfer of the Bucuresti shares to Domino was
also dismissed outright by the courts in Romania on procedural grounds before
the matter was heard on its merits.
A criminal procedure has been instigated against 17 former officers of
the SOF responsible for the execution of the tender for the sale of the
Bucuresti Shares on allegations of fraudulent conduct. Although Domino is not a
party to these proceedings and is not cited as an accused party on the
indictment, its local counsel advised us that the indictment does contain
certain allegations regarding the validity of the privatization proceedings
which may indirectly affect the ownership interest by Domino of the Bucuresti
Shares.
Bucuresti and Domino are engaged in several other litigations in
Romania arising in the ordinary course of business or which are not considered
material.
Office of the Chief Scientist
-----------------------------
The Israeli government encourages industrial companies by funding their
research and development activities. Elscint, in the past, received
royalty-bearing participation grants from the Office of the Chief Scientist of
the Israeli Ministry of Industry and Trade (the "OCS"), for the development of
its medical imaging systems and products.
Elscint agreed to pay royalties for sales of products, for which the
research and development was funded principally by the OCS or by third parties.
The amount of each royalty payment payable to the OCS is computed on the portion
of sales proceeds from such products at rates varying from 1% to 5%. The
commitment to the OCS is limited to the amount it funded.
In 1999, we received a letter from the OCS requesting certain details
regarding the previous years' computation of royalties. This matter is still
under review, and we are not able to determine if we will have any liability to
the OCS as a result of these discussions.
Pursuant to the sale of business agreement signed between Elscint and
GEMS, Elscint was responsible for 60%, and GEMS for 40%, of the amount of $11
million of royalties payment by Elscint to the OCS relating to MRI business
activity. It was also agreed that NM and MRI know-how, products and components
funded by the OCS and currently produced only in Israel will not be made outside
Israel unless GEMS seeks the approval of the OCS. Elscint committed to pay
royalties to the OCS in the amount in excess of $1.5 million of royalties for
sales of MRI products by GEMS, which contain certain know-how and components
funded by the OCS. In 1999, Elscint received a letter from the OCS
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requesting details regarding the proceeds from GEMS allocated to the MRI product
line according to which the above-mentioned royalties payment was computed.
Elscint has been conducting internal inquiries and is negotiating with
the OCS in order to resolve all matters which are the subject of disputes with
the OCS. At this time it is not clear what amounts, if any, Elscint may be
required to pay to the OCS in settlement of these royalty payment claims.
Ordinary course of business
---------------------------
The Company and its subsidiaries are involved from time to time in
litigation arising out of the ordinary course of the Company's business.
Although the outcome of each of these cases is uncertain at this time, we
believe that the resolution of such litigation will not have a material adverse
effect on our financial position.
ITEM 9. OFFER AND LISTING
The ordinary shares of EMI are quoted on Nasdaq under the symbol
"EMITF" and are listed on the TASE.
The annual high and low sale prices for our ordinary shares for the
five most recent full financial years are:
NASDAQ TASE
------ ----
YEAR ENDED DECEMBER 31, HIGH ($) LOW ($) HIGH ($) LOW ($)
----------------------- -------- ------- -------- -------
2002 7.71 4.50 7.19 4.49
2001 6.30 4.23 6.55 4.39
2000 13.50 5.1562 13.338 5.596
1999 11 15/16 7 5/16 11.96 7.60
1998 10 13/16 4 9/16 10.97 4.67
The quarterly high and low sale prices for our ordinary shares for the
two most recent full financial years and the first subsequent quarter are:
NASDAQ TASE
------ ----
HIGH ($) LOW ($) HIGH ($) LOW ($)
-------- ------- -------- -------
2003
First Quarter 5.78 3.70 6.13 4.25
2002
First Quarter 7.71 5.42 6.89 5.16
Second Quarter 5.88 5.00 6.32 5.58
Third Quarter 6.36 5.05 6.75 5.72
Fourth Quarter 5.95 4.50 6.25 4.87
2001
First Quarter 6.30 4.59 5.89 4.48
Second Quarter 6.11 4.85 5.81 4.73
Third Quarter 5.65 4.23 5.35 4.39
Fourth Quarter 6.50 4.56 6.55 4.44
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The monthly high and low sale prices for our ordinary shares during the
six months of December 2002 through May 2003 were:
NASDAQ TASE
------ ----
MONTH HIGH ($) LOW ($) HIGH ($) LOW ($)
-------- ------- -------- -------
December 2002 5.89 4.50 6.25 4.87
January 2003 4.37 4.14 4.88 4.74
February 2003 4.21 3.70 4.8 4.25
March 2003 5.78 4.46 6.13 4.63
April 2003 6.40 5.40 6.8 5.92
May 2003 6.70 5.00 6.85 5.23
The closing price of our ordinary shares on Nasdaq on May 31, 2003 was
$6.04, and on the TASE was $6.12.
The closing prices of our ordinary shares listed on the TASE for each
of the years 1998 through 2002 have been translated into dollars using the
representative rate of exchange of the NIS to the U.S. dollar on the last
trading day of each such year as published by the Bank of Israel. The closing
prices of our ordinary shares listed on the TASE for all periods during 2003
have been translated into dollars using the representative rate of exchange of
the NIS to the U.S. dollar on May 31, 2003 as published by the Bank of Israel.
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION AND GENERAL PROVISIONS OF ISRAELI LAW
PURPOSES AND OBJECTS OF THE COMPANY
-----------------------------------
We are a public company registered under the Israeli Companies Law of
1999 ("Companies Law") as Elbit Medical Imaging Ltd., registration number
52-004303-5.
Pursuant to our Memorandum of Association, we were formed for the
purpose of operating in the development, manufacture, compilation, sale and
service of technological and electronic systems in the field of medical imaging
and ancillary products. In addition we are also empowered to operate in any
business or matter for profit purposes as shall be determined by the board of
directors of the Company from time to time.
At our shareholders' meeting held on February 21, 2001, a resolution
was adopted approving the amendment of our Articles of Association by adding a
new article authorizing us to make, from time to time, contributions of
reasonable sums for worthy causes even if such contributions do not fall within
the company's business considerations as referred to in Section 11 of the
Israeli Companies Law. Our board of directors, or any committee appointed by it,
is authorized to determine, in its discretion, with respect to any contribution,
the amount thereof, its purpose, the entity to receive the contribution and any
other term or condition relating thereto.
APPOINTMENT OF DIRECTORS
------------------------
Our directors are elected by our shareholders at the annual meeting of
the shareholders. Only a person nominated by the board of directors may be
elected at the shareholders' meeting to the office of director, unless written
notice is submitted to the Company at its registered address, at least seven
days prior to the date set for the meeting, signed by the shareholder entitled
to participate and vote at such meeting, of his intention to propose at such
meeting a certain candidate confirming his consent to such
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election which will be submitted to the Company at its registered address at
least 24 hours prior to such date. The directors hold office until the next
annual meeting of our shareholders, which is required to be held at least once
during every calendar year but not more than fifteen months after the last
preceding meeting. In the intervals between annual meetings, the board of
directors may appoint additional directors to the Board in the event that the
number of directors is less than the maximum number authorized by our Articles.
Any director so appointed shall hold office until the next General Meeting.
According the our Articles of Association, not les than 2/3 in number of
directors present in person or represted by their substitutes shall be a quorum.
In accordance with Article 22 of our Articles of Association, our
directors are elected by an ordinary majority at a general meeting and they hold
office until the next ordinary meeting and shall be eligible for re election at
such meeting, or until they resign or other circumstances listed in our Articles
of Association occur, except that external directors are elected in accordance
with applicable law and in accordance with relevant stock exchange rules
applicable to us (See "-Independent Directors, External Directors" above). A
director need not hold any qualification shares. The board of directors may
appoint one or more additional directors to the board if the current number of
directors is less than the maximum number authorized by our Articles of
Association. Any director so appointed shall hold office until the conclusion of
the next ordinary meeting of our shareholders.
Under Article 21(d) of our Articles of Association, subject to the
Companies Law, our directors may hold offices in other companies in which we may
have an interest, and they may also enter, either on their own or as directors
of other companies or as members of other entities, into contracts with us, and
neither will such contracts be avoided nor will the director be liable to
account to us for any profit arising from any such contract or other office. In
addition, subject to the Companies Law, our directors are not disqualified from
voting as directors on any contract or arrangement in which they (or any of
them) are interested, either individually or as directors of other companies or
members of other entities. (See also: "Approval of Related Party Transactions"
above).
ALTERNATE DIRECTORS
-------------------
EMI's Articles of Association provide that any director may, subject to
the approval of the other directors, appoint, by written notice, another person
to serve as an alternate director, and such appointing director may also remove
such alternate director. The Israeli Companies Law provides that a person may
not serve as an alternate director if such person is not qualified to serve as a
director or already serves as a director or as an alternate. Any alternate
director possesses all the rights and obligations of the director who appointed
him except that the alternate has no standing at any meeting while the
appointing director is present, and the alternative is not entitled to receive
remuneration for his services. The appointment is effective for all purposes
until the appointing director ceases to be a director or terminates the
appointment.
The appointment of an alternate director does not in itself diminish
the responsibility of the appointing director as a director and such
responsibility shall apply giving effect to the circumstances of the matter
including the circumstances of the appointment of the alternate director and the
period such alternate served.
Our Articles of Association also provide that our board of directors
may delegate its powers to one or more committees of the board of directors as
it deems appropriate. Such delegation may be exercised subject to the provisions
of the Israeli Companies Law, which limits the matters that the board of
directors may delegate to committees (such as the determination of the general
policies of EMI).
The Israeli Companies Law requires that each committee which is
authorized to exercise powers of the board of directors must include at least
one external director.
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INDEPENDENT DIRECTORS; EXTERNAL DIRECTORS
-----------------------------------------
Pursuant to SEC and Nasdaq rules, each audit committee of a listed
company must have at least three members who are independent directors. Our
audit committee members are Messrs. Kaisserman and Apter (each, an external
director) and Forer, all of whom fulfill the reuiqrements of independent
directors.
The Israeli Companies Law requires Israeli companies whose shares have
been offered to the public in or outside of Israel to appoint two people to
serve as external directors on the board of directors of a company. The Israeli
Companies Law provides for certain qualifications that a candidate for external
directorship must fulfill or comply with. Among other requirements, a person may
not be appointed as an external director if the person or the person's relative,
partner or employer or any entity controlled by that person, has, at the date of
appointment, or had at any time during the two years preceding that date, any
affiliation with the company, any entity controlling the company or any entity
controlled by the company or by the entity controlling the company. The term
"affiliation" is broadly defined.
In addition, no person can serve as an external director if the
person's position or other business creates, or may create, conflict of
interests with the person's position as an external director or if such position
or other business may impair on such director's ability to serve as an external
director. The Israeli Companies Law provides for additional qualification
requirements that are imposed on such candidates.
The Israeli Companies Law further provides that external directors
shall be appointed by a general meeting of shareholders, and that the approval
of such appointment requires that at least a majority of the votes of
shareholders present at the general meeting in person or by proxy have voted for
such proposal, provided that (i) such majority vote at the general meeting shall
include at least one third (1/3) of the total votes of non-controlling
shareholders present at such general meeting in person or by proxy, excluding
abstaining votes, or (ii) the total number of votes of the shareholders
mentioned in clause (i) above that have voted against such proposal does not
exceed one percent (1%) of the total voting rights in the company.
The Israeli Companies Law also provides that a general meeting at which
the appointment of external directors is to be considered shall not be convened
unless the candidate for external directorship has declared to the company that
he fulfills or complies with the qualifications for his appointment as an
external director.
The initial term of an external director in accordance with the
Companies Law, is three years and such term may be extended for an additional
three-year period. Each committee of EMI's board of directors that is authorized
to exercise powers of the board of directors is required to include at least one
external director, and all external directors must be members of the company's
audit committee. The Companies Law provides that an independent director
appointed pursuant to the Companies Ordinance (which preceded the Companies Law)
shall, for the purposes of the requirement to appoint external directors
pursuant to the Companies Law, be deemed an external director, except that with
respect to the term of appointment and its renewal, the provisions of the
Companies Ordinance shall apply. Pursuant to the Companies Ordinance the
appointment term of an external director shall be for five consecutive years,
and it may not be renewed unless two years have passed since the expiration of
the previous appointment.
An external director is entitled to reimbursement of expenses, monetary
and other compensation as provided in regulations promulgated under the Israeli
Companies Law, but is otherwise prohibited from receiving any other
compensation, directly or indirectly, in connection with services provided by
such person as an external director.
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APPROVAL OF RELATED PARTY TRANSACTIONS
--------------------------------------
Generally, under the Israeli Companies Law, engagement terms of
directors and of directors fulfilling other offices in the company including (i)
the grant of an exemption from liability for damages sustained due to a breach
by the directors' of their duty of care, (ii) directors' and officers'
insurance, (iii) a prospective undertaking to indemnify such directors, and (iv)
a retroactive indemnification, require the approval of the audit committee, the
board of directors and the majority vote of the shareholders of the company. The
Israeli Companies Law also requires that the compensation and terms of
engagement and employment of Office Holders (as hereinafter defined) or of
employees of the company who hold a controlling interest in a company must be
approved by the audit committee, the board of directors and the majority vote of
the shareholders at general meetings, provided that (i) such majority vote at
the shareholders meeting shall include at least one third (1/3) of the total
votes of shareholders having no personal interest in the transaction, present at
the meeting in person or by proxy (excluding abstaining votes); or (ii) the
total number of votes of shareholders mentioned in clause (i) above who voted
against such transaction does not exceed one percent (1%) of the total voting
rights in the company.
The Israeli Companies Law requires that an Office Holder, or a
controlling shareholder, promptly disclose any direct or indirect personal
interest that he or any of his affiliates may have, and all related material
information known to him, in connection with any existing or proposed
"extraordinary transaction" by the company. If the Office Holder complies with
such disclosure requirements and the transaction is not prejudicial to the best
interests of the company, then, unless the Articles of Association of the
company provide otherwise, the board of directors of a company may approve the
transaction in accordance with the provisions of such company's Articles of
Association. Under the Israeli Companies Law, if the transaction is an
"extraordinary transaction", then it must be approved by the company's audit
committee, its board of directors and, in certain circumstances, the
shareholders of the company. An "extraordinary transaction" is defined in the
Israeli Companies Law as a transaction not in the ordinary course of business, a
transaction that is not on market terms or a transaction that is likely to have
a material impact on the company's profitability, assets or liability.
In most circumstances, the Israeli Companies Law restricts Office
Holders who have a personal interest in a matter which is considered at a
meeting of the board of directors or the audit committee from being present at
such meeting, participating in the discussions or voting on any such matter.
The Israeli Companies Law contains the same disclosure requirements
applicable to persons having control of a public company as was required under
the Companies Ordinance (which preceded the Israeli Companies Law). In addition,
under the Israeli Companies Law, "extraordinary transactions" between a public
company and a controlling shareholder of the company, extraordinary transactions
of the company with a third party in which a controlling shareholder has a
personal interest and an engagement of a public company with a controlling
shareholder regarding employment terms, all require the approval of the audit
committee, the board of directors and the shareholders.
An offer of securities to a shareholder who holds more than 5% of the
company's outstanding share capital or voting rights, or to a party that will
become, as a result of the issuance, a holder of more than 5% of the company's
outstanding share capital or voting rights, requires approval of the board of
directors and the approval of the shareholders of the company.
AUDIT COMMITTEE
---------------
The Israeli Companies Law requires public companies to appoint an audit
committee. The responsibilities of the audit committee include identifying
irregularities in the management of the company's business and approving related
party transactions and transactions with officers of the company, as required by
law. An audit committee must consist of at least three members and include all
of the company's external directors. However, the chairman of the board of
directors, any director employed by the company or rendering services to the
company on a permanent basis, any controlling shareholder and any relative of a
controlling shareholder, may not be a member of the audit committee.
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INTERNAL AUDITOR AND CERTIFIED PUBLIC ACCOUNTANT
------------------------------------------------
The Israeli Companies Law requires the board of directors to appoint an
internal auditor recommended by the audit committee. A person who does not
satisfy certain independence requirements may not be appointed as an internal
auditor. The role of the internal auditor is to examine, among other matters,
the compliance of the company's actions with applicable law, and orderly
business procedure. EMI's internal auditor is Greitzer, IA and IE Services. In
addition, under the Israeli Companies Law, all companies must appoint a
certified public accountant to audit the company's financial statements and
report any material improprieties that he may discover to the chairman of the
board of directors. EMI appointed Brightman Almagor & Co., certified public
accountants in Israel and the Israeli affiliate of Deloitte Touche Tohmatsu &
Co., as its certified public accountant for the above matter.
RIGHTS ATTACHED TO SHARES
-------------------------
Our registered share capital consists of a single class of 50,000,000
ordinary shares, par value NIS 1 per share, of which 23,146,820 ordinary shares
were issued and outstanding as of December 31, 2002. All outstanding ordinary
shares are validly issued, fully paid and non-assessable. Of the total
outstanding shares, 76,900 shares are held by the Company and considered dormant
shares, and do not confer any rights as long as they are held by us. Elscint is
the owner of 885,140 ordinary shares of EMI, but under the Israeli Companies Law
has voting rights only with respect to 208,431 of the shares. In addition,
following approval of EMI's shareholders in February 2001, EMI issued 550,000
shares to employees and officers of EMI, Europe-Israel and companies controlled
by EMI or by Europe-Israel (see "Item 6 - Directors, Senior Management and
Employees - Share Ownership"). Prior to the vesting of the rights to acquire the
shares, voting rights in respect of the shares may not be exercised.
The rights attached to all of the ordinary shares are as follows:
DIVIDEND RIGHTS
Subject to the rights of persons, if any, entitled to shares with
special rights as to dividend, or whose rights to dividend are limited in any
way, all dividends shall be declared and paid according to the amounts paid or
credited as paid on the shares in respect whereof the dividend is paid, but no
amount paid or credited as paid on a share in advance of calls shall be treated
as paid on the share. All dividends shall be apportioned and paid
proportionately to the amounts paid or credited as paid on the shares during any
portion or portions of the period in respect of which the dividend is paid; but
if any share is issued on terms providing that it shall rank for dividend as
from a particular date, such share shall rank for dividend accordingly.
The board of directors may propose a dividend only out of profits, in
accordance with the provisions of the Israeli Companies Law. Declaration of a
dividend requires approval by an ordinary shareholders' resolution, which may
decrease, but not increase, the amount proposed by the board of directors.
One year after a dividend has been declared and is still unclaimed, the
board of directors is entitled to invest or utilize the unclaimed amount of
dividend in any manner to the benefit of the Company until it is claimed. We are
not obligated to pay interest or linkage on an unclaimed dividend.
The directors may, from time to time, pay to the Company's shareholders
on account of the next forthcoming dividend an interim dividend which in their
judgment is justified in view of the Company's position.
VOTING RIGHTS
Holders of ordinary shares have one vote for each ordinary share held
by them on all matters submitted to a vote of the shareholders. Such voting
rights may be affected by the creation of any special
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rights to the holders of a class of shares with preferential rights that may be
authorized in the future in the manner provided for under the Israeli Companies
Law and our Articles of Association. The quorum required for an ordinary meeting
of shareholders consists of at least two shareholders present in person or by
proxy who hold or represent, in the aggregate, at least 33 1/3 % of the issued
voting share capital. In the event that a quorum is not present within half an
hour of the scheduled time, the meeting shall be adjourned to the same day of
the following week, at the same time and place, or to such other day, time and
place as the board of directors shall determine by notice to the shareholders.
If at such adjourned meeting a quorum is not present within half an hour of the
scheduled time, the two members present in person or by proxy will constitute a
quorum.
An ordinary resolution, such as a resolution for the election of
directors, the declaration of dividends or the appointment of auditors, requires
approval by the holders of a majority of the voting rights represented at the
meeting, in person or by proxy, and voting thereon. Under our Articles of
Association as amended at our shareholders' meeting on February 21, 2001, also
resolutions such as a resolution amending the Articles of Association or
approving any change in capitalization, reconstruction, or other decisions the
general meeting of our shareholders is empowered to make require the approval by
an ordinary majority.
RIGHTS TO THE COMPANY'S PROFITS
Our shareholders have the rights to share in our profits distributed as
a dividend and any other permitted distribution. (See " - Dividend Rights"
above.)
RIGHTS IN THE EVENT OF LIQUIDATION
Pursuant to Article 33 of our Articles of Association, subject to
approval of an ordinary majority, at a meeting convened for such purpose, a
liquidator may divide among the shareholders the assets of the Company other
than in accordance with the legal rights of the shareholders, subject to
statutory rights.
CHANGING RIGHTS ATTACHED TO SHARES
According to our Articles of Association, if at anytime the share
capital of the company is divided into different classes of shares, then, unless
otherwise provided for by the terms of issuance of that class of shares, in
order to change the rights attached to any class of shares, the consent in
writing of the holders of the majority of the issued shares of the affected
class must be obtained, or at a separate meeting of the shareholders of that
class of shares convened for such purpose adopting a resolution to change such
rights. The provisions relating to general meetings shall apply, except that the
necessary quorum required shall be two person holding or representing by proxy
at least two thirds of the issued shares of that class. In an adjourned meeting,
those shareholders present in person or by proxy shall be deemed to constitute a
quorum. The rights conferred upon the holders of the shares of any class issued
with preferred or other rights shall not, unless expressly provided for by the
terms of the shares of that class, be deemed to be varied by the creation or
issue of further shares ranking pari-passu with that class.
FIDUCIARY DUTY AND DUTY OF CARE OF AN OFFICE HOLDER
---------------------------------------------------
The Israeli Companies Law codifies the duties that an officer owes to a
company. These duties consist of a fiduciary duty, a duty to act in good faith
and in the best interests of the company and a duty of care. An "Office Holder"
is defined in the new Israeli Companies Law as a director, general manager,
chief executive officer, executive vice president, vice president, any other
person assuming the responsibilities of any of the foregoing positions without
regard to such person's title and other managers directly subordinate to the
general manager. The Office Holder's duties to the company include:
o The avoidance of any conflict of interest between the officer's
position with the company and any other position he fulfills or
with his personal affairs;
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o the avoidance of any competition with the company;
o the avoidance of exploiting any of the company's business
opportunities in order to gain a personal advantage for himself or
for others; and
o the disclosure to the company of any information and documentation
relating to the company's affairs, obtained by the officer due to
his position with the company.
The Israeli Companies Law requires that an office holder promptly
disclose to the company any personal interest that he or she may have, including
all related material information known to him or her, in connection with any
existing or proposed transaction by the company. The disclosure must be made
without delay and not later than the first board of directors meeting at which
the transaction is first discussed. (See also: "- Approval of Related Party
Transactions" and " Voting Rights" above).
DUTY OF A SHAREHOLDER
---------------------
Under the Israeli Companies Law, a shareholder, in exercising his
rights and fulfilling his obligations to the company and the other shareholders,
must act in good faith and in a customary manner and refrain from improperly
exploiting his power in the company, including when voting at general or class
meetings of shareholders on: (a) any amendment to the Articles of Association;
(b) an increase of the company's authorized share capital; (c) a merger; or (d)
approval of related party transactions. In addition, a shareholder shall refrain
from prejudicing the rights of other shareholders. The laws governing breach of
contracts apply, with the necessary modifications, to a breach of the above
obligations. Furthermore, any controlling shareholder, any shareholder who knows
that he possesses power to determine the outcome of the shareholders' vote at a
general or a class meeting, and any shareholder that, pursuant to the provisions
of the Articles of Association, has the power to appoint or prevent the
appointment of an Office Holder in the company or possesses any other power
towards the company, is under a duty to act in fairness towards the company. A
breach by any such shareholder of this duty is treated similarly to a breach of
a fiduciary duty of an Office Holder, with the applicable changes. The Israeli
Companies Law does not detail the substance of this duty.
EXEMPTION, INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
------------------------------------------------------------------
EXEMPTION
Our Articles of Association provide that EMI may prospectively exempt
any of its officers from liability for damages sustained due to a breach by the
officer of such officer's duty of care to EMI. The annual meeting of our
shareholders held on February 21, 2001 approved to prospectively exempt our
company's officers from liability for damages sustained due to a breach by the
officer of such officer's duty of care to the company, except with respect to
Mr. Zisser, the controlling shareholder of the Company. Such exception applied,
at the time of the said meeting, also to Ms. Bracha Zisser, the wife of Mr.
Zisser, who, at that date, served as a director of the Company.
INSURANCE
Our Articles of Associatin provide that we may obtain an insurance
policy providing directors and officers of the Company insurance for liability
imposed on them due to an act performed by them in their capacity as directors
or officers of the Company, in any of the following:
(1) Breach of their duty of care to the Company or to any other
person;
(2) Breach of their fiduciary duty to the Company, provided that
they acted in good faith and had reasonable grounds to believe
that the act would not prejudice the interest of the Company;
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(3) Monetary liability imposed upon them in favor of a third
party; and
(4) Any other event in respect of which an insurance of a director
or officer is and/or may be permitted.
Our shareholders, at their annual meeting held on February 21, 2001,
approved the subscription for insurance covering liability of our directors and
officers in accordance with the above principles, except with respect to Mr.
Mordechay Zisser .
Pursuant to the Israeli Companies Law, in no event may EMI insure,
indemnify or exempt its officers and directors with respect to:
(1) breach of the fiduciary duty towards EMI, unless the officer
or director acted in good faith and had reasonable grounds to
assume that the action would not prejudice EMI;
(2) breach of the duty of care, made intentionally or recklessly;
(3) an intentional act which was made to unlawfully realize a
personal gain; or
(4) a fine or penalty imposed for an offense.
INDEMNIFICATION
Our Articles of Association also provide that we may prospectively or
retroactively undertake to indemnify an officer or director of EMI in respect of
the following matters:
(1) Monetary liability imposed upon a director or an officer in
favor of a third party by a judgment, including a settlement
or arbitrator's award approved by a court;
(2) Reasonable litigation expenses, including attorney's fees,
incurred by or charged to a director or an officer by court,
in proceedings brought against the director or officer by the
Company or on its behalf or by a third party, or a criminal
charge from which the director or officer was acquitted or for
a criminal charge in which such director or officer was
convicted of an offense not requiring proof of criminal
intent; and
(3) Other liability or expense for which it is or may be
permissible to indemnify a director or an officer;
provided, however, that the prospective undertaking is limited to
certain events that the board of directors may anticipate at the time such
undertaking is issued and limited at an amount which the board of directors
determines is reasonable under the circumstances.
Pursuant to our Articles of Association, the aggregate indemnification
amount paid to an officer of the Company pursuant to a prospective undertaking
to indemnify shall not exceed the lower of (i) 25% of the shareholders' equity
of EMI as of the date of actual payment by EMI of the indemnification amount (as
set forth in EMI's most recent consolidated financial statements prior to such
payment); and (ii) $40 million in excess of any amounts paid (if paid) by
insurance companies pursuant to insurance policies maintained by EMI with
respect to matters covered by such indemnification.
At their annual meeting held on February 21, 2001, our shareholders
approved that we may prospectively exempt and accordingly issue prospective
indemnification undertakings in favor of our directors and officers pursuant to
our Articles of Association.
In addition, we may prospectively undertake to indemnify and
accordingly issue a prospective indemnification undertaking in favor of any
person, including an officer of the Company who officiates or
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officiated on behalf or at the request of the Company as a director of another
company of which the Company is either directly or indirectly a shareholder or
in which it has any other interest whatsoever ("Director of the Other Company")
with respect to a liability or expense as set forth above, which may be imposed
upon such person as a result of an act performed by such person in his/her
capacity as a Director of the Other Company, provided that such undertaking is
limited to events that in the opinion of the board of directors are foreseeable
at the time of the issue of the undertaking and is limited to the amount
determined by the board of directors as reasonable under the circumstances.
We may also retroactively indemnify a Director of the Other Company in
respect of liability or expense as set forth above, imposed upon him/her as a
result of an act performed by him/her in his/her capacity as a Director of the
Other Company.
ANTI-TAKEOVER PROVISIONS AND ACQUISITIONS UNDER ISRAELI LAW
Pursuant to the Israeli Companies Law, if following any acquisition of
shares of a public company or of a class of shares of a public company, the
purchaser will hold 90% or more of the company's shares or 90% of any class of
the company's shares, then the purchaser must make a tender offer for all of the
remaining shares or the particular class of shares of the company. In the event
that holders of 5% or more of the shares have not responded favorably to a
tender offer, the offeror may not purchase more than 90% of that class of
shares. In the event that holders of less than 5% of the company's outstanding
share capital, or the outstanding share capital of a class of shares, have not
responded favorably to the tender offer, then all of the company's shares that
the offeror intended to purchase will be transferred to such offeror by way of a
compulsory sale of such shares.
At the request of an offeree of a tender offer which has favorably been
accepted, which request was submitted to a competent court, the court may
determine that the consideration for the acquired shares purchase under the
tender offer, was lower than their fair value and compel the offeror to pay to
the offerees the fair value of the shares. It should also be noted that such
application to the courts may be filed as a class action.
Furthermore, the Israeli Companies Law provides that as long as a
shareholder in a public company holds more than 90% of the company's shares or
of a class of shares, such shareholder shall be precluded from purchasing any
additional shares, or a class of shares, for as long as such shareholder holds
shares in the aforementioned percentage, without executing a full tender offer,
as above mentioned.
The Israeli Companies Law also provides that an acquisition of shares
in a public company must be made by means of a special tender offer if as a
result of the acquisition the purchaser would become a holder of 25% or more of
the voting rights in the company. This rule does not apply if there already is
another holder of 25% or more of the voting rights in the company. Similarly,
the Israeli Companies Law provides that an acquisition of shares in a public
company must be made by means of a special tender offer if as a result of the
acquisition the purchaser would become the holder of more than 45% of the voting
rights in the company. This rule does not apply if another party already holds
more than 50% of the voting rights in the company.
ANNUAL AND EXTRAORDINARY MEETINGS
---------------------------------
In accordance with the Israeli Companies Law, the board of directors
must convene an annual meeting of shareholders at least once every calendar
year, and no later than within fifteen months of the last annual meeting. Notice
of at least 21 days prior to the date of the meeting is required. An
extraordinary meeting may be convened by the board of directors, either at its
discretion or upon a demand of any two directors or 25% of the directors, or of
one or more shareholders holding in the aggregate at least 5% of our issued
capital. An extraordinary meeting must be held not more than 35 days from the
publication date of the announcement of the meeting.
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LIMITATIONS ON THE RIGHTS TO OWN SECURITIES
-------------------------------------------
Our Memorandum and Articles of Association do not restrict in any way
the ownership of our shares by nonresidents of Israel and neither the Memorandum
of Association nor Israeli law restricts the voting rights of non-residents of
Israel, except that under Israeli law, any transfer or issue of shares of the
Company to a resident of a country under a state of war with Israel is
prohibited and shall have no effect, unless authorized by the Israeli Minister
of Finance.
CHANGES TO OUR CAPITAL
----------------------
Changes to our capital are subject to the approval of the shareholders
at a general meeting by an ordinary majority of more than 50% of the votes of
the shareholders who are entitled to vote and who vote at a general meting in
person, by means of a proxy or by means of a deed of vote.
MATERIAL CONTRACTS
The following is a list of material agreements entered into by EMI,
Elscint or any of their subsidiaries during the last two years prior to the
filing of this annual report:
EMI
Agreement dated December 27, 2001 for the Investment by an unrelated
third party in InSightec - On December 27, 2001, a Stock and Warrant Purchase
Agreement was signed between EMI, EUBV, InSightec and an unrelated third party
for an investment of $10 million by the third party in InSightec, in
consideration for 11.8% of InSightec's shares, on a fully diluted basis. As part
of the transaction, the unrelated third party converted its previous 5.4%
holdings in InSightec's subsidiary into an additional 5% holdings in InSightec.
In addition, the unrelated third party was granted three-year warrants
to purchase an additional 5% of the shares of InSightec for $3 million. See
"Item 4 -Information on the Company - Highlights of 2002 - EMI".
Agreement for the acquisition of Duna Plaza, Sopron Plaza and Nyir
Plaza - For a description of the terms of this agreement, see "Item 4 -
Information on the Company - Highlights of 2002 - EMI - Acquisition of Duna
Plaza, Sopron Plaza and Nyir Plaza".
Framework Agreement dated January 22, 2002 between OVAG, MKB and OPT
banks, Amanati Ltd., Duna Plaza Kft. Sopron Plaza Kft. and Plaza Centers Europe
BV - On January 22, 2002, a Framework Agreement was entered into between OVAG
(as leader of a syndicate of banks comprised of OVAG, MKB and OTP) as lender,
Amanati Ltd. of Cyprus (a wholly owned subsidiary of PC) ("Amanati"), Duna Plaza
and Sopron Plaza as borrowers, and PC as guarantor, for a credit facility in the
aggregate amount of Euro 82.9 million (approximately $87.1 million). This
facility was granted for the purpose of the acquisition by Amanati of the entire
interest in Duna Plaza and Sopron Plaza and for the refinancing of existing
loans (for certain terms of the facility, see "Item 5 - Operating and Financial
Review and Prospects - Loans - EMI").
1. Agreement between CDPM and SLS for the completion of the works at
the entertainment and commercial center in the Herzlia Marina, Israel. See "Item
7 - Major Shareholders and Related Party Transactions - Related Party
Transactions - Elscint - Commercial and Entertainment Center".
EXCHANGE CONTROLS
In 1998, the government of Israel promulgated a general permit under
the Israeli Currency Control Law. Pursuant so such permit, substantially all
transactions in foreign currency are permitted.
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Our memorandum and articles of association do not restrict in any way
the ownership of the shares by non-residents and neither the memorandum of
association nor Israeli law restricts the voting rights of non-residents.
TAXATION
Following is a discussion of certain tax laws that may be material to
our U.S. shareholders, all as in effect as of the date of this report and all of
which are subject to changes, possibly on a retroactive basis, to the extent
that such laws are still subject to judicial or administrative interpretation in
the future. This discussion is not intended, and should not be construed, as
legal or professional tax advice and does not cover all possible tax
considerations.
WE ENCOURAGE EACH INVESTOR TO CONSULT WITH HIS OR HER OWN TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE EFFECTS OF
APPLICABLE ISRAELI, U.S. FEDERAL, STATE, AND LOCAL, AND FOREIGN TAX LAWS AND
POSSIBLE CHANGES IN SUCH TAX LAWS.
TAXATION IN ISRAEL
In general, Israeli companies are currently subject to company tax at
the rate of 36% of taxable income.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
Certain of the facilities of Elscint have been granted "Approved
Enterprise" status under the Law for the Encouragement of Capital Investments,
1959 ("Investment Law"), as amended. The Investment Law provides that a capital
investment in eligible facilities may, upon application to the Israel Investment
Center, be designated as an Approved Enterprise. Each certificate of approval
for an Approved Enterprise relates to a specific investment program delineated
both by its financial scope, including its capital sources and its physical
characteristics, e.g., the equipment to be purchased and utilized pursuant to
the program. The tax benefits derived from any such certificate of approval
relate only to taxable income attributable to the specific Approved Enterprise.
Taxable income of a company derived from an Approved Enterprise status
is subject to company tax at the rate of 25% for the "Benefit Period": a period
of seven years commencing with the year in which the Approved Enterprise first
generated taxable income (limited to twelve years from commencement of
production or fourteen years from the date of approval, whichever is earlier)
and, under certain circumstances (as further detailed below), extending to a
maximum of ten years from the commencement date. In the event a company is
operating under more than one approval or that its capital investments are only
partly approved, such company will be taxed at a rate that is the result of a
weighted combination of the various applicable rates.
A company, which qualifies as a "Foreign Investors' Company", is
entitled to further reductions in the tax rate normally applicable to Approved
Enterprises. Subject to certain conditions, a "Foreign Investors' Company" is a
company which has more than 25% of its combined shareholders' investment in
share capital (in terms of rights to profits, voting and the appointment of
directors) and in long term shareholders' loans made originally by persons who
are not residents of Israel. The percentage owned by non-residents of Israel for
any tax year will be determined by the lowest percentage of any of the above
rights held by non-residents during that year. Such a company will pay company
tax on the income of the company derived from an Approved Enterprise at reduced
rates (ranging from 10%-25%, depending on the percentage of foreign shareholders
investment in the share capital, and with respect to an Approved Enterprise
approved after January 1, 1997, such income will be exempted during the first
two years) for
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an extended ten-year (rather than the otherwise applicable seven-year) period
and is exempt from any other tax on the income from its Approved Enterprise.
In addition, a company owning an Approved Enterprise approved after
April 1, 1986 (or prior thereto provided no government grants or loans had
previously been granted regarding such enterprise) may elect (as we have) to
forego certain government grants extended to Approved Enterprises in return for
an "alternative package" of tax benefits. Under such alternative package, a
company's undistributed income derived from an Approved Enterprise will be
exempt from company tax for a period of between two and ten years, depending on
the geographic location of the Approved Enterprise within Israel, and such
company will be eligible for the tax benefits under the Investment Law for the
remainder of the Benefit Period.
A company that has elected the alternative package of tax benefits
referred to above and that subsequently pays a dividend out of income derived
from the Approved Enterprise(s) during the tax exemption period will be subject
to company tax in the year the dividend is distributed in respect of the amount
distributed at the rate that would have been applicable had the company not
elected the alternative package (generally 25%). The dividend recipient is taxed
at the reduced rate applicable to dividends from Approved Enterprises (15% as
compared to 25% for individuals), if the dividend is distributed during the tax
exemption period or within a specified period. This tax must be withheld at
source by the company.
Subject to certain provisions concerning income subject to the
alternative package of tax benefits, all dividends are considered to be
attributable to the entire enterprise and the effective tax rate is the result
of a weighted combination of the various applicable tax rates.
Grants and certain other incentives received by a company in accordance
with the Investment Law remain subject to final ratification by the Israel
Investment Center and final determination by the Israel Tax Authority, such
ratification and determination being conditional upon fulfillment of all terms
of the approved program.
The benefits granted under these programs are contingent upon the
fulfillment of the conditions stipulated in the law, and the regulations there
under and the approval documents based on which the investment had been carried
out. In the event of failure to comply with these conditions the benefits may be
cancelled, and the Company may be require to refund the amount of benefits,
previously received in whole or in part, with the addition of linkage
differences and interest.
A distribution of cash dividends out of tax-exempt income of an
Approved Enterprise would impose on the Company an additional tax of 25% in
respect of the amount distributed. The said tax addition has not been included
in these financial statements due to the Group's Group's policy to avoid
dividend distribution which may result in additional tax to the Group.
The period of tax benefits under the Investment Law with respect to
Elscint expired upon the sale of the Ma'alot Ma'alot facility, effective
December 31, 2002.
InSightec has two investment programs approved under the law as
approved enterprises. Accordingly, income generated by these two enterprises is
exempt from tax during the initial two years of the benefit period and subject
to a reduced tax rate of 25% during the remaining five years for one program and
full exemption from tax for ten years for the second program. The benefit period
for the two programs has not yet commenced.
TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax Law (Inflationary Adjustments), 1985, (the "Inflationary
Adjustments Law"), represents an attempt to overcome the problems presented to a
traditional tax system by an economy
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undergoing rapid inflation. The Inflationary Adjustments Law is characterized by
a high degree of complexity and its salient features can be described generally
as follows:
(a) A special tax adjustment for the preservation of equity whereby
certain corporate assets are classified broadly into fixed (inflation resistant)
assets and non-fixed (soft) assets. Where a corporation's equity, as defined in
such law, exceeds the depreciated cost of Fixed Assets, a tax deduction which
takes into account the effect of the annual inflationary change on such excess
is allowed (up to a ceiling of 70% of taxable income in any single tax year,
with the unused portion permitted to be carried forward on a linked basis). If
the depreciated cost of Fixed Assets exceeds a corporation's equity, then such
excess multiplied by the annual inflation change is added to taxable income.
(b) Depreciation deductions on fixed assets and losses carried forward
are adjusted for inflation based on the increase in the Israeli Consumer Price
Index.
CAPITAL GAINS TAX
Israeli law imposes a capital gains tax on the sale of capital assets
by both residents and non-residents of Israel. The law distinguishes between the
"Real Gain" and the "Inflationary Surplus." The Real Gain is the excess of the
total capital gain over the Inflationary Surplus, computed on the basis of the
increase in the Israeli Consumer Price Index between the date of purchase and
the date of sale. The Inflationary Surplus is tax exempt, except for inflation
surplus accumulated until December 31, 1993 which is taxed at a rate of 10% for
residents of Israel (reduced to no tax for non-residents if calculated according
to the exchange rate of the dollar instead of the Israeli CPI), while the Real
Gain is added to ordinary income which is taxed at the ordinary rate for
individuals and at 36% for companies (as for capital gains tax after January 1,
2003, see "Reform of taxes on income in Israel below").
Pursuant to the Convention Between the government of the United States
of America and the government of Israel with Respect to Taxes on Income (the
"US-Israel Tax Treaty"), the sale, exchange or disposition of shares by a person
who qualifies as a resident of the United States within the meaning of the
US-Israel Tax Treaty and who is entitled to claim the benefits afforded to such
resident by the U.S.-Israel Tax Treaty ("Treaty U.S. Resident"), will not be
subject to the Israeli capital gains tax unless such Treaty U.S. Resident holds,
directly or indirectly, shares representing 10% or more of the voting power of
the company during any part of the 12-month period preceding such sale, exchange
or disposition. A sale, exchange or disposition of shares by a Treaty U.S.
Resident who holds, directly or indirectly, shares representing 10% or more of
the voting power of the company at any time during such preceding 12-month
period would be subject to such Israeli tax; however, under the US-Israel Tax
Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such
taxes against the U.S. income tax imposed with respect to such sale, exchange or
disposition, subject to the limitations applicable to foreign tax credits.
TAXATION OF NON-RESIDENTS
Non-residents of Israel are subject to income tax on income derived
from sources in Israel. On distributions of dividends other than bonus shares
(stock dividends), income tax at the rate of 25% (15% for dividends generated by
an "Approved Enterprise") is withheld at source, unless a different rate is
provided in a treaty between Israel and the shareholder's country of residence.
The US-Israel Tax Treaty provides for a maximum tax of 25% on dividends paid to
a Treaty U.S. Resident and for a rate of 12.5% on dividends paid to a United
States corporation that holds 10% or more of the shares of the Israeli company,
or 15% for dividends distributed from income derived from an "Approved
Enterprise".
For information with respect to the applicability of Israeli capital
gains taxes on the sale of our ordinary shares by U.S. residents, see " -
Capital Gains Tax" above.
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REFORM OF TAXES ON INCOME IN ISRAEL
During 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. As of the
effective date, an Israeli 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. Changes in the method of taxation prevailing in Israel regarding the
revenues of foreign companies controlled (over 10%) by Israeli residents, most
of whose revenues are passive revenues, as defined in the law, or most of whose
profits result from passive revenues, the tax rate applying to them does not
exceed 20%, and over 50% of the means of control in them are held, directly or
indirectly, by Israeli residents ("C.F.C."). In accordance with the provisions
of the law, the controlling shareholder in such companies which have
undistributed profits, as defined in the law, will be deemed to have received
its proportional share in these profits as a dividend, and income tax in Israel
of up to 25% will apply to them.
2. Dividend whose source is revenues produced or accrued outside of
Israel and a dividend whose source is out of Israel will be taxed at a rate of
up to 25%.
In addition, the law sets forth provisions regarding amounts and rates
of tax, in those cases where tax was paid abroad on such revenues.
3. As of January 1, 2003, all income of an Israeli resident, even if
accrued or produced outside of Israel, will be taxed. Until the end of 2002,
Israeli residents were subject to taxation on certain types of income only if
received for the first time in Israel.
4. As of January 1, 2003, the tax rate on capital gains from realizing
assets was reduced to 25%. The reduced rate will apply to assets purchased and
realized as of January 1, 2003 and thereafter. The tax rate on capital gains
derived from assets purchased prior to January 1, 2003 and realized after
January 1, 2003 will be calculated by taking into account part of the profits
relating to the period after that date, and up to the date of realization.
TAXATION IN THE U.S.
This summary of certain U.S. federal income tax laws applies to persons
that are generally subject to U.S. federal income taxation on world-wide income
basis (collectively, "U.S. Persons"). However, this summary does not address
U.S. federal income tax considerations that may be relevant to certain U.S.
Persons that are subject to special treatment under the federal income tax law,
such as tax-exempt organizations, financial institutions, non-U.S. persons,
insurance companies, broker-dealers or certain other persons). In addition, this
summary does not contain any specific tax discussion applicable to particular
U.S. Persons.
PASSIVE FOREIGN INVESTMENT COMPANIES
In general, a foreign corporation will be a passive foreign investment
company ("PFIC"), if either (i) 75% or more of its gross income in a taxable
year is passive income or (ii) 50% or more of the average value of its assets in
a taxable year are held for the production of, or produce, passive income. If a
corporation is a PFIC, a U.S. shareholder, in the absence of an election to
treat the corporation as a "qualified electing fund" or a "mark to market", will
be required to report any gain on the disposition of the shares of such
corporation as ordinary income rather than capital gain and to compute the tax
liability on such gain, as well as on certain dividends and other distributions,
at the time of such disposition or distribution, as if the income had been
earned ratably over each day in the U.S. shareholder's holding period, and such
U.S. shareholder automatically will be subject to the highest ordinary income
tax rate for each taxable year that the corporation was a PFIC in which the
items were treated as having been earned
-104-
regardless of the rate otherwise applicable to such shareholder during such
taxable years. In addition, the taxes attributable to these prior years will be
increased by an interest factor. Additionally, if a corporation is a PFIC, a
non-electing shareholder who acquires shares in such corporation from a decedent
generally is denied the normally available step-up in the tax basis of such
shares to fair market value at the date of death and instead will hold such
shares with a tax basis equal to the decedent's basis, of lower than the fair
market value.
We believe that EMI was not a PFIC for the year ended December 31, 2002
or prior years. However, we emphasize that there can be no assurance that the
Internal Revenue Service will not determine that, under the methodology
currently used by EMI or a possible alternative capitalization methodology, EMI
was a PFIC for its taxable year ended December 31, 2002 or prior years.
USE OF THE COMPANY'S NET OPERATING LOSSES
A complex set of rules exists under the U.S. Internal Revenue Code of
1986, as amended (the "Code") limiting the potential utilization of U.S. net
operating loss and tax credit carry-forwards in periods following a corporate
"ownership change". In general, for U.S. federal income tax purposes, an
ownership change is deemed to occur if the percentage of stock of a loss
corporation owned (actually, constructively and, in some cases, deemed) by one
or more "5% shareholders" has increased by more than 50 percentage points over
the lowest percentage of such stock owned during a three-year testing period.
Subsequent stock ownership changes, or changes in relevant tax laws and
interpretations, may result in an ownership change at some date in the future.
If the change in control of EMI in 1999 is considered an ownership change
according to the U.S. Internal Revenue Code, our ability to utilize our U.S. net
operating loss and tax attribute carry-forwards could be significantly limited.
While such limitation will not have a direct impact on our shareholders who are
U.S. Persons, it may affect the amounts of income available for distribution to
the shareholders.
TAXATION OF DIVIDENDS PAID TO U.S. SHAREHOLDERS
Under the recently enacted amendments to the Code, dividends paid to
individual U.S. Persons with respect to shares of a qualified foreign
corporation are taxed at a capital gains tax rate (currently, 15%, with a
transitional rate available for dividends paid in 2003), which is substantially
lower than the ordinary income tax rates. A qualified foreign corporation
includes a corporation the shares of which (with respect to which the dividend
is paid) are readily tradable on an established U.S. securities market. As a
result, dividends paid with respect to the ordinary shares of the Company in
2003 should be taxable to the U.S. Persons who hold such shares at the
transitional tax rate, and dividends paid thereafter with respect to the
ordinary shares (provided such shares continue to be publicly-traded in the
United States) should be eligible for the 15% tax rate (during the time such
rate remains in effect).
TAXATION IN POLAND
The corporation tax rate imposed on the income of the subsidiaries
incorporated in Poland (including capital gains) is currently 28%. The tax rate
is decreased in 2003 to 27%. Losses can be carried forward for the period of
five years and only 50% of a loss can be offset in any one year. Dividends paid
out of net income are subject to a withholding tax of 20%, subject to the
relevant double taxation treaty.
TAXATION IN GREECE
The corporation tax rate imposed on the income of the subsidiaries
incorporated in the Greece (including capital gains) is currently 35%. Tax
losses can be carried forward and be offset against taxable
-105-
income of the five years following the accounting year in which they were
incurred. Dividends paid out of net income are not subject to any withholding
tax.
TAXATION IN THE CZECH REPUBLIC
The corporation tax rate imposed on the income of the subsidiaries
incorporated in the Czech Republic (including capital gains) is currently 31%.
Tax losses can be carried forward up to seven years to offset future taxable
income. Dividends paid out of net income are subject to a withholding tax of
25%, subject to the relevant double taxation treaty.
TAXATION IN HUNGARY
The corporate tax rate applicable to income (including capital gains)
of subsidiaries incorporated in Hungary is 18%. Dividends paid out of these
profits are taxed by an additional 20%, subject to the terms of the relevant
treaty for the prevention of double taxation. Losses from the third year onward
may be offset against taxable income for a period of five years, subject to the
fulfillment of a losses-to-revenues ratio, pursuant to the income tax
regulations. The losses incurred during the first two years of operation may be
carried forward for an unlimited period of time.
TAXATION IN ROMANIA
Corporate income tax is payable by resident legal entities and
non-resident entities with permanent establishments in Romania. The corporate
income tax rate is generally 25%. Dividends paid to resident and non-resident
companies are subject to a final withholding tax of 10%, unless reduced double
taxation treaty rates apply for non-residents. Capital gains are generally
treated as ordinary business income. Losses may be offset against taxable income
for a period of 5 years from the period they incurred.
TAXATION IN THE NETHERLANDS
Some of our subsidiary companies are taxable in the Netherlands. A
Dutch company is subject to Dutch corporate tax at normal rates on its worldwide
profits. As of 2002, the general rate is reduced from 35% to 34.5%.
All Dutch companies must withhold 25% dividend withholding tax on their
distributions and certain interest payments, where the loan has certain features
of equity. The rate can be reduced by taxed treaty.
Dutch companies are exempt from Dutch corporate income tax on all
"benefits" connected with a qualifying shareholding. The participation exemption
provisions not only over dividends, but also capital gains, realized upon the
disposal of the shareholding. Capital losses on the shareholding are not tax
deductible except in cases of certain liquidations losses. Expenses connected
with a foreign qualifying participation, including interest on loans to acquire
or capitalize a subsidiary, are not deductible for Dutch corporate tax purposes.
The following cumulative conditions must be met in order to qualify for
the participation exemption:
1. The subsidiary must have a capital devided into shares.
2. The Dutch company must own at least 5% of the nominal paid up
capital of a subsidiary. A smaller holding may qualify if the
shares are held for business purposes.
-106-
3. The shares of the subsidiary, will not be held for inventory
purposes only. This exclusion is an anti abuse provision to
exclude the trade in shelf companies from the participation
exemption and does generally not apply if the subsidiary
carry's on an active business.
If the subsidiary is a non-resident company the following additional
conditions must be met:
4. The subsidiary must be subject to a profit tax, levied at
federal level, by the state of its resinence, which ever the
tax rate.
5. The shares of the subsidiary must not be held as a portfolio
investmnet, which includes shareholdings in non-resident
passive group companies. Shareholdings in operating companies
and sub-holding companies operating companies, generally meet
this condition. For qualifying EU subsidiaries, this condition
is met automatically, subject to an anti-abuse rule.
WE STRONGLY ADVISE THAT YOU CONSULT YOUR TAX ADVISORS IN REGARD TO TAX
ISSUES, INCLUDING ISSUES RELATING TO PFIC, WHICH MAY AFFECT YOUR INVESTMENT IN
EMI.
DOCUMENTS ON DISPLAY
EMI is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements, EMI
files annual reports with and furnishes other information to the SEC. These
materials, including this annual report and the exhibits hereto, may be
inspected and copied at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the SEC's regional office at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the materials may
be obtained from the Public Reference Room of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The public may obtain information on
the operation of the SEC's Public Reference Room by calling the SEC in the
United States at 1-800-SEC-0330.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.
1. EXCHANGE RATE EXPOSURE
(a) The Shopping and Entertainment Mall business: The main transactions
(revenues and construction costs/expenditures) and balances (mainly, loans which
financed the malls, both active and under construction) of companies in our
shopping and entertainment mall business, which are measured as autonomous
entities, are linked, mainly, to foreign currencies which are not their
functional currency. Consequently, there is an exposure to fluctuations in
exchange rates of those currencies (mainly the Euro) in relation to the
functional currency of each project company. Such fluctuations may have a
material adverse effect on the Company's results of operations. The extent of
such exposure depends primarily on the differences between the time of revenues'
generation and the time of expenses' generation, on the difference between the
time of the execution of the transactions and the time of the receipt of the
consideration therefore, and on the fluctuations between the EURO and each local
currency. Each company does not activity hedge against the fluctuations in these
currencies in relation to their functional currency. However, in order to
minimize the exposure to the effects of the fluctuation in the rate of exchange
as mentioned above, the Company adopted a policy to obtain loans for the
financing of the acquisition of the plots of land and the constructions of the
malls, in the same currency that future lease income is denominated.
(b) Hotel Division: The main transactions and balances of companies in
our hotel division, which are measured as autonomous entities, are denominated
or linked to the functional currency of each company. As of December 31, 2002
and for the year then ended, the company did not have any significant exchange
rate exposure in the hotel division, except for the divisions' activity in
Romania.
-107-
(c) General Monetary Assets and Liabilities: The functional currency of
the Company is the NIS. The Company (on a consolidated basis with Elscint) has
monetary assets and monetary liabilities in substantial amounts, denominated or
linked to other currencies, and is therefore exposed to a substantial
devaluation of the NIS, especially in relation to the U.S. dollar, and to the
EURO, Further details of the Company's foreign currency exposure as of December
31, 2002, are set forth in Table I below. The Company does not actively hedge
against fluctuations in the NIS in relation to these currencies.
For the rate of exchange between the relevant main currencies, see Note
2L and Note 24A to the financial statements included in item 18 below.
2. EXPOSURE TO THE NET INVESTMENT VALUE OF FOREIGN ENTITIES
The Company's subsidiaries that operate outside of Israel and which are
autonomous entities, prepare their financial statements in the currency of their
country of residence which is also their functional currency. Such financial
statements were translated into the functional currency of their holding
company, according to the exchange rate prevailing as at the balance sheet date.
Differences between (i) the holding companies' investments in the investees
(including monetary balances with a nature of investments), based on their
functional currency; and (ii) the holding companies' share in the shareholders'
equity of these investees, determined in their local currency (translated to the
functional currency of the holding companies), are charged directly to the
shareholders' equity of the Company.
The Company's exposure to fluctuations in exchange rates of foreign
currencies, as above-mentioned, in relation to the functional currency of the
holding companies is reflected only by the value of the net investment in the
autonomous entities (capital and loans with a nature of investments).
Further details of the Company's foreign currency exposure as of
December 31, 2002, regarding investments in foreign entities, are set forth in
Table I below.
The Company does not actively hedge against the exposure to the net
investment value of the foreign entities, except for certain investments that
are financed by bank loans denominated in the same currency of the functional
currency of the investee - see below.
A decrease/increase in the value of foreign currencies of the
autonomous entities in relation to the holding companies' functional currency
(other than where the investment was financed in the functional currency of the
autonomous entity) may therefore have a negative/ positive impact on the
Company's shareholders equity.
In addition, the Company's exposure to the foregoing fluctuations has
an impact on the extent of the assets, liabilities and operations of the
autonomous companies, as reflected in the Company's financial statements, and on
the date-to-date and period-to-period comparison of the company's financial
statements.
For the rate of exchange between the relevant main currencies, see Note
2L and Note 24A to the financial statements included in item 18 below.
3. RATE OF INFLATION
Exposure to fluctuations in the rates of inflation in the countries in
which the Company and/or its subsidiaries operates: The group companies prepare
their financial statements in real terms, so that non-monetary items (e.g.,
fixed assets and inventory) are presented on the basis of cost as adjusted to
the change in the CPI of each country of residence, while monetary items are
presented at their nominal value. Therefore, any rate of inflation with a
positive amount in respect to each reporting entity with an excess of monetary
liabilities (which have been assumed in order to finance the construction and/or
acquisition of non-monetary assets, mainly in the commercial centers business
and in the hotel division) over monetary assets, has a positive impact on the
results of operations of the Company, while any rate of
-108-
inflation with a positive amount in respect to each reporting entity, with an
excess of monetary assets over liabilities, has a negative impact on the results
of operations of the Company.
The Company does not actively hedge against the fluctuations in the
rate of inflation.
As mentioned in Note 2 to the financial statements included in Item 18
below, new accounting standards were issued during the year 2001 and thereafter,
in respect of the ceasing of the adjustments of financial statement for
inflation and in respect of the effect of changes in foreign currency exchange
rates in effect, which standards will enter into force, commencing January 1,
2004. The management of the Company and its subsidiaries cannot at this stage,
asses the impact of these standards on the companies' results of operation, in
the periods commencing January 1, 2004. However, the management of the Company
is of the opinion that the results of operations of the Company, may be
substantially affected, as a result of implementation of the above standards, in
comparison to the measurement principle that are in effect during the reported
period ending December 31, 2003, inclusive.
Further details about the Company's rate of inflation exposure on net
monetary assets/liabilities, as at December 31, 2002, are set forth in Table I
below.
As to the rate of inflation see Note 2L and Note 24A to the financial
statements included in Item 18 below.
4. INTEREST RATE RISKS
The Company and its subsidiaries finance some of their activities by
means of credit in foreign currencies (mainly in U.S. dollar and Euro) and
maintain its monetary assets in bank deposits (namely, in U.S. dollars). Parts
of the credit and the deposits are obtained at or invested in fixed interest
rate while the major part is provided at variable rates (see Table III below).
The changes in interest rates in the countries in which the Company operates
affect its results of operations and its future cash flows. The company does not
actively hedge against the impact of the interest rate risks on its net
momentary assets/liabilities.
5. CREDIT RISKS
Cash, cash equivalents and bank deposits are maintained with reputable
banks. In the commercial centers business and in the hotel division, the
services and sales are rendered to a large numbers of customers, and thus the
Company is not significantly exposed to credit risks arising from dependence on
any customer. See also Note 24d to the financial statements in item 18.
In relation to anchor tenants, see "Item 3 - Key Information - Risk
Factors - Risk Relating to the Shopping and Entertainment Malls Business".
6. EQUITY PRICE RISK
As to the Company's liability towards Triple-S which is subject to the
market price of the Company's shares, immediately prior to January 15, 2004 -
see note 19c to the financial statements included in Item 18. As for the
differences between Israeli and U.S. GAAP regarding this issue - see subsection
A 17 of Note 26 to the financial statements included in Item 18.
7. MARKETABLE SECURITIES
As for composition of the short and long-term investment portfolio- see
Note 4 and Note 8 to the financial statements included in Item 18. Such
investments are exposed to market-price fluctuation, with the Group affected by
fluctuation of the capital markets over which the Group has no control.
-109-
8. HOLDINGS IN VENTURE CAPITAL INVESTMENTS
As to exposures relating to venture capital investments, see "Item 3 -
Risk Factors - Risks relating to EMI's holdings in venture capital operations
and Elscint's investments in bio-technology companies."
9. RENT INCOME FROM SHOPPING AND ENTERTAINMENT MALLS
As to risks relating to the market price of lease of spaces in
commercial centers - See "Item 3 - Key Information - Risk Factors - Risk
Relating to the Shopping and Entertainment Malls Business".
10. ADDITIONAL MARKET RISK
The Company engages in derivative and financial trading instruments.
The results of such activities, and the value of assets and liabilities arising
therefrom, are affected by the volatility in foreign exchange rates and interest
rates. Changes in foreign exchange rates and interest rates in Israel and abroad
may significantly affect the financial results of the Company and its assets,
liabilities, equity capital and cash flow, as a result of the aforementioned
derivative and financial instruments trading activity.
The highest balance at open positions of derivatives for currency sale
and purchase during 2002 was NIS 753 million.
It should be noted that due to the extensive volatility of global
financial markets, foreign exchange and interest rate trading involve
significant risks, mainly in the short term.
For currency transactions outstanding as at December 31, 2002, see
Table II - Derivative contracts on foreign exchange rates below.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
EMI's and its subsidiaries' financial instruments include monetary
assets (cash and cash equivalents, short and long-term deposits, trade accounts
receivables, marketable securities as well as other receivables and current
assets) and monetary liabilities (short-term borrowings, long-term liabilities,
trade accounts payables as well as payables and other current liabilities). Due
to the nature of the financial instruments included in working capital, their
fair values approximate those presented in the balance sheet.
It is difficult to estimate the fair value of many accounts as well as
notes receivable bearing different maturity dates and interest rates in the
different countries in which the Group companies are active. Nevertheless, the
Group companies' management estimates that the fair value of these accounts and
notes is not lower than their book value.
The fair value of long term trade accounts receivable, deposits and
other long-term liabilities is ordinarily based on the present value of future
receipts and disbursements, discounted by the interest rate applicable to the
Company's lending or borrowing activities under similar terms as of the balance
sheet date, and it is not materially different than the one presented in the
financial statements.
As for the presentation of long-term balances not under market
conditions - see Note 2J to the financial statements included in Item 18.
Derivative financial instruments having an active market, were valued
based on market value.
Assets included among long term investments that their market value
differ from their carrying amount are as follows:
-110-
---------------------------------------
December 31, 2002
---------------------------------------
NIS (in millions)
---------------------------------------
Carrying amount Market value
-------------------- ------------------
Elscint (see Note 10 B. (6) (*)) 517.7 179.5
VCON (see Note 10 A. (1) (b) (*)) 19.0 6.0
-------------------- ------------------
(*) to the financial statements
TABLE I - FOREIGN CURRENCY RISKS
The table below provides information as at December 31, 2002 regarding
the Company's financial assets and liabilities (including - inter company
balances) denominated or linked to foreign currencies (other than the functional
currency):
NIS (IN MILLIONS)
BRITISH (POUND HUNGARIAN
FUNCTIONAL CURRENCY(1): ISRAELI SHEKELS (NIS) STERLING) EURO (EURO) FORINT
$ (EURO) (POUND) UN- (EURO) UN- $ HUF (POUND) UN- (HUF)
LINKAGE CURRENCY(3) LINKED LINKED LINKED (EURO)
----------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 81 63 - 13 - 5 2 - - 7 -
Short-term deposits and
investments 592 - - 32 - 1 22 - - 29 7
Trade Receivables - - - - - 8 - - - 9 -
Other receivables and other
debit balances - - - 12 - 5 24 - 1 24 -
Inventories - - - - - - - - - - -
673 63 - 57 - 19 48 - 1 69 7
LONG-TERM INVESTMENTS AND
RECEIVABLES:
Deposits, loans and
long-term receivables 262 - - 45 - - 26 - - 18 8
Investments in investees and
others companies:
Shares 17 344 - 1,135 - - 51 544 (38) 222 -
Loans 971 141 91 20 - - 920 - 74 305 49
FIXED ASSETS
Other assets and deferred
expenses
Assets related to
discontinued operations 101 4 - 9 - - - - - - -
1,351 489 91 1,209 - - 997 544 36 545 57
TOTAL ASSETS 2,024 552 91 1,266 - 19 1,045 544 37 614 64
==============================================================================================
CURRENT LIABILITIES:
Short-term borrowings 838(4)(7) 187(5) 79(5) 19 - 83 120(4) - - 70 -
Suppliers and services
providers - - - 1 - 11 - - - 10 -
Other payables and
credit balances 20 1 - 52 - 24 2 - - 39 5
----------------------------------------------------------------------------------------------
858 188 79 72 - 118 122 - - 119 5
----------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Group companies 25 10 - 11 177 74 1,626 - 91 89 176
Others 355(4) - - 3 - 255 16 - - 106 1,215(6)
Liabilities relating to
termination of employment - - - 1 - - - - - - -
Liabilities relating to
discontinued operations 99 10 - 3 - - - - - - -
----------------------------------------------------------------------------------------------
479 20 - 18 177 329 1,642 - 91 195 1,391
----------------------------------------------------------------------------------------------
MINORITY INTEREST
SHAREHOLDERS' EQUITY
TOTAL LIABILITIES AND
EQUITY-BASED RIGHTS 1,337 208 79 90 177 447 1,764 - 91 314 1,396
==============================================================================================
TOTAL ASSETS LESS
LIABILITIES AND
EQUITY-BASED RIGHTS (8) 687 344 12 1,176 (177) (428) (719) 544 (54) 300 (1,332)
=============================================================================================
FUNCTIONAL CURRENCY(1): ROMANIAN RECONCI-
POLISH ZLOTY LEI OTHER(2) LIATION
LINKAGE CURRENCY(3) (PLZ) (ROL) FOR CONSOL-
$ (EURO) $ IDATION TOTAL
--------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents - - 2 42 - 215
Short-term deposits and
investments - - - 8 - 691
Trade Receivables - - - 37 - 54
Other receivables and other
debit balances - - - 49 (48) 67
Inventories - - - - 3 3
--------------------------------------------------------------
LONG-TERM INVESTMENTS AND - - 2 136 (45) 1,030
RECEIVABLES:
Deposits, loans and
long-term receivables - - - 38 (42) 355
Investments in investees and
others companies:
Shares - - - (16) (2,156) 103
Loans - - - 124 (2,695) -
FIXED ASSETS - 4,170 4,170
Other assets and deferred
expenses - 74 74
Assets related to
discontinued operations - - - - - 114
- - - 146 (649) 4,816
--------------------------------------------------------------
TOTAL ASSETS - - 2 282 (694) 5,846
==============================================================
CURRENT LIABILITIES:
Short-term borrowings - 1 133 - 134 1,664
Suppliers and services
providers - - - 75 - 97
Other payables and
credit balances - - 1 43 (10) 177
--------------------------------------------------------------
- 1 134 118 124 1,938
--------------------------------------------------------------
LONG-TERM LIABILITIES:
Group companies 50 220 53 108 (2,710) -
Others 247(6) 37(6) - 76 (93) 2,217
Liabilities relating to
termination of employment - - - - - 1
Liabilities relating to
discontinued operations - - - - - 112
--------------------------------------------------------------
297 257 53 184 (2,803) 2,330
--------------------------------------------------------------
MINORITY INTEREST 496 496
SHAREHOLDERS' EQUITY 1,082 1,082
TOTAL LIABILITIES AND
EQUITY-BASED RIGHTS 297 258 187 302 (1,101) 5,846
==============================================================
TOTAL ASSETS LESS
LIABILITIES AND
EQUITY-BASED RIGHTS (8) (297) (258) (185) (20) 407 0
==============================================================
-111-
FOOTNOTES:
(1) Adjusted to the CPI in the state of residence.
(2) Includes linkage currencies which total financial assets or financial
liabilities that are denominated therein or linked thereto, do not exceed
5% of total financial assets or financial liabilities, respectively (on a
consolidated basis).
(3) As for investments in investees - "linkage currency" means the functional
currency of each investee. As for loans with nature of investment -
"linkage currency" means the currency that the loan is denominated in or
linked to.
(4) Loans totaling - as at December 31, 2002 - approximately NIS 526 million
(mainly, granted to companies which functional currency is the NIS) are
linked to the U.S. Dollar, the effect of exchange rates on which, is
attributed to cost of assets under construction during the period of
construction (anticipated completion by 2003-2004). As for the differences
between Israeli and U.S. GAAP in respect of capitalization of exchange rate
differences (in real term) - see subsection A 12 of Note 26 to the
financial statements included in Item 18 below.
(5) Mainly, loans which have been taken in order to hedge value (accounting
recognizable) of net investment (including loans of capital nature) made in
these currencies, the exchange rate fluctuations' impact of which is
charged directly to the shareholders' equity and not to the statements of
operations (see subsection 2 above).
(6) The loans are generally linked to the currencies in which rental fees of
the shopping centers (the construction of which such loans served to
finance) are denominated in or linked to (for financial hedging purposes -
accountancy non-recognizable). As for the implementation of SFAS 133,
according to U.S. GAAP - see subsection A18 of Note 26 to the financial
statements included in Item 18 below.
(7) Including liabilities in the amount of NIS 22 million which value may
decrease parallel to the increase in the market value of the Company's
shares - See Note 19c. to the financial statements included in Item 18
below.
(8) Comprised as follows (9)
BRITISH (POUND HUNGARIAN
FUNCTIONAL CURRENCY(1): ISRAELI SHEKELS (NIS) STERLING) EURO FORINT
$ EURO POUND UN- EURO UN- $ HUF POUND UN- (HUF)
LINKAGE CURRENCY(3) LINKED LINKED LINKED EURO
-----------------------------------------------------------------------------------------------------------
Net Monetary
items, (10) (276)(7) (131)(5) (79) 32 - (353) (64) - - (138) (1,206)(6)
Intercompany
balances
(loans with
nature of
investment)(11) 946(4) 130 91 9 (177) (75) (706)(4) - - 216 (126)
Investments in
investees shares(11) 17 345 - 1,135 - - 51 544 (16) 222 -
Non-monetary items - - - - - - - (38) - -
------------------------------------------------------------------------------------------------------------
687 344 12 1,176 (177) (428) (719) 544 (54) 300 (1,332)
============================================================================================================
FUNCTIONAL CURRENCY(1): ROMANIAN RECONCI-
POLISH ZLOTY LEI OTHER(2) LIATION
LINKAGE CURRENCY(3) (PLZ) (ROL) FOR CONSOL-
$ EURO $ IDATION TOTAL
--------------------------------------------------------------
Net Monetary
items, (10) (247)(6) (38)(6) (132) (20)(5) (121) (2,773)
Intercompany
balances
(loans with
nature of
investment)(11) (50) (220) (53) 16 15 16
Investments in
investees shares(11) - - - (16) (2,156) 126
Non-monetary items - - - - 2,669 2,631
------------------------------------------------------------
(297) (258) (185) (20) 407 -
============================================================
(9) The above table includes items of Elscint (61.53% owned by the Company), as
follows:
-112-
BRITISH (POUND ROMOAN- RECONCI-
FUNCTIONAL CURRENCY(1): ISRAELI SHEKELS (NIS) STERLING) EURO IAN LIATION
$ EURO POUND UN- EURO UN- $ (POUND) UN- LEI OTHER FOR CONSOL-
LINKAGE CURRENCY(3) LINKED LINKED LINKED (ROL) (2) IDATION TOTAL
-----------------------------------------------------------------------------------------------------------
Net monetary items(10) 170 (176)(5) (79)(5) 26 - (355) 24 - (102) (131) (12) - (635)
Intercompany balances
(loans with nature
of investment)(11) 533 198 91 - (177) (74) (487) (17) (1) (37) (29) - -
Investment in investees'
shares(11) 17 (259) - 42 - - - (38) - - (4) 275 33
Net non-monetary items - - - - - - - - - - - 602 602
-----------------------------------------------------------------------------------------------------------
Total 720 (237) 12 68 (177) (429) (463) (55) (103) (168) (45) 877 -
===========================================================================================================
(10) The impact of exchange rates exposure and inflation adjustments exposure,
on net monetary items, is charged directly to the statements of operations.
(11) The impact of exchange rates exposure on these items is charged directly to
the shareholders equity and not to the statements of operations.
(12) Exchange rates:
BRITISH 1,000,000
POUND HUNGARIAN ROMANIAN
STERLING FORINT POLISH ZLOTY LEI
FUNCTIONAL CURRENCY: ISRAELI SHEKELS (NIS) POUND EURO (HUF) (PLZ) (ROL)
- --------------------- ---------------------------- ------- --------------------------- -------- ----------------- ---------
LINKAGE CURRENCY: $ (EURO) (POUND) (EURO) $ HUF 1,000 (EURO) (EURO) $ $
- --------------------- ------- ------- ------- ------- ------- ---------- -------- ------ ------ ---------
DECEMBER 31:
May 30, 2003 4.373 5.176 7.209 0.718 0.845 4.001 249.38 3.71 4.39 31.40
======= ======= ======= ======= ======= ======= ======== ====== ====== ==========
December 31, 2002 4.737 4.969 7.633 0.652 0.952 4.239 235.9 3.84 4.02 33.50
======= ======= ======= ======= ======= ======= ======== ====== ====== ==========
December 31, 2001 4.416 3.908 6.400 0.611 1.135 4.060 246.3 3.99 3.52 31.60
======= ======= ======= ======= ======= ======= ======== ====== ====== ==========
(12) Changes in the CPI (in effect)
-------------- -------------- -------------- -------------- -------------- -------------- --------------
ISRAEL BRITAIN HOLLAND BELGIUM HUNGARY POLAND ROMANIA
-------------- -------------- -------------- -------------- -------------- -------------- --------------
March 31, 2003 0.78 0.78 1.94 1.42 2.93 0.80 3.20
============== ============== ============== ============== ============== ============== ==============
December 31, 2002 6.49 2.94 3.24 1.37 5.00 0.69 17.80
============== ============== ============== ============== ============== ============== ==============
December 31, 2001 1.40 1.28 4.45 2.18 6.90 3.61 30.30
============== ============== ============== ============== ============== ============== ==============
December 31, 2000 0.00 2.93 2.89 2.49 10.13 8.90 40.70
============== ============== ============== ============== ============== ============== ==============
(13) Changes in the exchange rates (in effect)
- ---------------------- --------------------- ---------- --------------- ----------- --------------------- ------------------------
FUNCTIONAL CURRENCY
BRITISH HUNGARIAN
ISRAELI SHEKELS POUND FORINT 1,000,000 ROMANIAN
(NIS) STERLING EURO (HUF) POLISH ZLOTY (PLZ) LEI (ROL)
- ---------------------- ------ ------- ------ ---------- --------------- ----------- ------- ------------- ------------------------
Linkage Currency $ Euro Pound Euro $ HUF (Euro) $ (Euro) $
1000
May 30, 2003 (7.68) 4.10 (5.55) 10.12 (11.23) (5.61) 5.71 3.39 9.2 (6.29)
====== ======= ====== ========== ======= ======= =========== ======= ============= ========================
December 31, 2002 7.27 27.18 19.27 6.71 (16.12) 4.41 (4.23) (3.76) 14.20 6.01
====== ======= ====== ========== ======= ======= =========== ======= ============= ========================
December 31, 2001 9.28 3.85 6.10 (1.86) 5.40 7.58 (7.02) (3.80) (9.00) -
====== ======= ====== ========== ======= ======= =========== ======= ============= ========================
TABLE II - DERIVATIVE CONTRACTS ON FOREIGN EXCHANGE RATES
The following table presents a summery of the currency transactions
outstanding at December 31, 2002:
(1) Forward transactions:
- --------------------- ----------------- ------------------- -------------------
FAIR VALUE AS
AMOUNTS RECEIVABLE AMOUNTS PAYABLE SETTLEMENT DATE OF 31/12/02
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
- --------------------- ----------------- ------------------- -------------------
31.0 Dollars 3,839.0 YEN January 2003 (5.2)
- --------------------- ----------------- ------------------- -------------------
(2). Certain short term, non-hedging currency transaction, in a
total amount of $8 million which were concluded up to the date
of the approval of the financial statements. Results of such
transactions are immaterial to the company's business.
-113-
(3). As to foreign currency loans, assumed for accounting hedging
purposes - see Table I footnote (5) above; As to foreign
currency loans assumed for economical hedging purposes- see
Table I footnote (6) above.
TABLE III - INTEREST RISKS
The following table presents a summery of balances classified according
to interest rate, at December 31, 2002:
1. LONG TERM LOANS AND DEPOSITS - (IN MILLIONS NIS)
- ------------------------------------------------- -------------------------------------------------------------------
REPAYMENT YEARS
- ------------------------------------------------- -------------------------------------------------------------------
FUNCTIONAL LINKAGE INTEREST RATE % 1 2 3 4 6 AND NOT YET TOTAL
CURRENCY CURRENCY THEREAFTER DETERMINED
- ------------------ ------------- ---------------- -------- ------ ----- -------- ----------- ------------ -----------
EURO US Dollar - 8 16 (2) 24
EURO US Dollar Libor +2.0 3 4 4 11 (3)
EURO US Dollar 6.7 (1) 20 1 21
EURO EURO 4.0 (1) 6 6
(average rate)
Hungarian Forint Hungarian Bubor -3.0 39 39
Forint (7.0%)
Hungarian Fotint EURO Libor -1.5 2 2
Polish Zloty Polish Zloty 2 2
Adjusted NIS US Dollar Libor - 0.7 261 (4) 261
Adjusted NIS US Dollar Libor + 2.0 3 3
Adjusted NIS Adjusted NIS - 14 14
- ------------------ ------------- ---------------- -------- ------ ----- -------- ----------- ------------ -----------
23 3 18 12 - 327 383
================== ============= ================ ======== ====== ===== ======== =========== ============ ===========
(1) Fixed Interest.
(2) See note 8A(2) to the financial statements included in Item 18.
(3) See Note 10A (2) to the financial statements included in Item 18.
(4) In order to secure loans at the same amount - see 2 below.
2. LONG TERM LOANS - (IN MILLIONS NIS)
AVERAGE
FUNCTIONAL LINKAGE INTEREST
CURRENCY CURRENCY INTEREST RATE % RATE % REPAYMENT YEARS
- ------------- --------- ----------------- -------------- ------------------------------------------------------------------------
6 AND NOT YET
1 2 3 4 5 THEREAFTER DETERMINED TOTAL
- ------------- --------- ----------------- -------------- ------- ------- ------- ------- ------- ----------- ----------- --------
EURO EURO 4.9-5.0 (1) 4 5 5 5 5 87 111
Euribor
EURO USD +1.5-2.2 3.8 16 16
Hungarian
Forint EURO 5.8-6.6 (2) 12 9 10 10 11 75 127
Hungarian Euribor +
Forint EURO 1.4-2.1 4.8-5.6 53 45 47 49 52 826 1,072
Polish Zloty EURO Euribor + 1.9-2 5.7 16 19 19 20 20 152 246
US
Polish Zloty Dollar 7 (2) 18 18
-114-
US
Polish Zloty Dollar Libor + 1.9-2 3.7 1 1 1 1 1 14 19
UK
UK Pound Pound
Sterling Sterling Libor + 1.3-1.4 5.4 14 13 13 13 14 202 269
US
Adjusted NIS Dollar Libor + 2.0-2.5 4.4 52 20 72
US
US Dollar Dollar Libor + 3.0 5.0 - 5 5
US
Adjusted NIS Dollar Libor 2.4 261 (3) 261
- ------------- --------- ----------------- -------------- ------- ------- ------- ------- ------- ----------- ----------- --------
152 133 95 98 103 1,374 261 2,216
============= ========= ================= ============== ======= ======= ======= ======= ======= =========== =========== ========
(1) Fixed interest of 4.9% up to March 2004 and thereafter Euro Swap + 1.2.
(2) Fixed Interest.
(3) Are secured by deposits at the same amount. The margin between the interest
rate in the loan and on the deposit - is 0.7% - see 1 above.
3. SHORT TERM CASH AND DEPOSITS - see notes 3 and 4 to the financial
statements included in Item 18.
4. SHORT TERM LOANS - see note 13 to the financial statements included in
Item 18.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our periodic filings with
the SEC is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our President (our senior
executive officer) and Chief Financial Officer (CFO), as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives. Furthermore,
management necessarily was required to use its judgment in evaluating the cost
to benefit relationship of possible disclosure controls and procedures. Within
90 days prior to the date of this report, we performed an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures. The evaluation was performed with the participation of senior
management of each business segment and key corporate functions, and under the
supervision of the President and CFO. Based on the evaluation, our management,
including the President and CFO, concluded that our disclosure controls and
procedures were effective. There have been no significant changes in our
internal controls or in other factors that could significantly affect internal
controls after the date we completed the evaluation.
-115-
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
-116-
ITEM 18. FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
ELBIT MEDICAL IMAGING LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
- -------------------------------------------------------------------------------
CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORTS 2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets 3-4
Statements of operations 5
Statements of changes in shareholders' equity 6
Statements of cash flows 7-9
Notes to the consolidated financial statements 10-133
Report of other auditor
-1-
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF
ELBIT MEDICAL IMAGING LTD.
We have audited the accompanying balance sheets of Elbit Medical Imaging Ltd.
(the "Company") as of December 31, 2002 and 2001, and the consolidated balance
sheets as of those dates and the related statements of operations and changes in
shareholders' equity of the Company and on a consolidated basis and the
consolidated statement of cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of certain consolidated subsidiaries, whose assets included in
consolidation, constitute 50% and 49% of the total consolidated assets, as of
December 31, 2002 and 2001, respectively and whose revenues constitute 46%, 29%
and 14% of total consolidated revenues for the years ended December 31, 2002,
2001 and 2000, respectively. In addition, we did not audit the financial
statements of affiliates, the Company's investment in which amounts to NIS 57
million as of December 31, 2002, and the Company's share of losses in which
amounts to NIS 7 million for the year then ended. The financial statements of
those subsidiaries were audited by other auditors whose reports thereon were
furnished to us, and our opinion, insofar as it relates to the amounts included
for those companies, is based solely on the reports of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Company's Board of Directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audits and the reports of the other auditors provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company and on a consolidated
basis as of December 31, 2002 and 2001, and the results of operations and
changes in shareholders' equity - of the Company and on a consolidated basis -
and consolidated cash flows for each of the three years in the period then
ended, in conformity with generally accepted accounting principles generally
accepted in Israel. These principles differ in certain significant respects from
accounting principles generally accepted in the United States of America. The
effect of the material differences between Israeli and U.S. generally accepted
accounting principles on the consolidated financial statements is presented in
Note 26 to the financial statements.
As described in Note 2A, the financial statements have been presented in
adjusted values to reflect changes in the general purchasing power of the
Israeli currency, in conformity with pronouncements of the Institute of
Certified Public Accountants in Israel.
Without qualifying our opinion, we draw attention to the information presented
in Note 18B, regarding claims filed against Group companies. For some of those
claims petitions have been filed for certification as class actions.
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A MEMBER FIRM OF DELOITTE TOUCHE
TOHMATSU
Tel-Aviv, April 8, 2003
- 2 -
ELBIT MEDICAL IMAGING LTD.
BALANCE SHEETS
IN THOUSAND NIS OF DECEMBER 2002
CONSOLIDATED COMPANY
---------------------------------- ----------------------
DECEMBER 31
------------------------------------------------------------
2002 2002 2001(*) 2002 2001
---- ---- ------- ---- ----
CONVENIENCE
TRANSLATION
NOTE US$'000 (IN THOUSAND NIS)
---- ----------- ----------------------------------------------
CURRENT ASSETS
Cash and cash equivalents (3) 45,484 215,463 363,623 75,636 5,643
Short-term deposits and
Investments (4) 146,023 691,724 693,823 468,440 490,317
Trade accounts receivable (5) 11,463 54,303 34,545 -- --
Receivables and other
current Assets (6) 14,001 66,323 58,487 4,535 2,692
Inventories (7) 665 3,151 3,468 -- --
--------- --------- --------- --------- ---------
217,636 1,030,964 1,153,946 548,611 498,652
--------- --------- --------- --------- ---------
LONG-TERM INVESTMENTS
AND RECEIVABLES
Deposits, debentures and
long-term loans and receivables (8) 74,805 354,358 399,102 245 1,708
Venture-capital investments (9) -- -- 64,478 -- --
Investments in investees
and others (10) 21,702 102,804 22,638 1,426,053 1,289,816
--------- --------- --------- --------- ---------
96,507 457,162 486,218 1,426,298 1,291,524
--------- --------- --------- --------- ---------
HOTELS, COMMERCIAL
CENTERS AND OTHER FIXED ASSETS (11) 880,188 4,169,532 2,913,040 2,541 2,835
--------- --------- --------- --------- ---------
OTHER ASSETS AND DEFERRED
EXPENSES (12) 15,712 74,427 61,760 -- --
--------- --------- --------- --------- ---------
ASSETS RELATED TO
DISCONTINUING OPERATION 24,094 114,135 203,190 -- --
--------- --------- --------- --------- ---------
1,234,137 5,846,220 4,818,154 1,977,450 1,793,011
========= ========= ========= ========= =========
(*) Reclassified - see Note 23A.
The accompanying notes are an integral part of the financial statements.
- 3 -
ELBIT MEDICAL IMAGING LTD.
BALANCE SHEETS
IN THOUSAND NIS OF DECEMBER 2002
CONSOLIDATED COMPANY
---------------------------------- ----------------------
DECEMBER 31
------------------------------------------------------------
2002 2002 2001(*) 2002 2001
---- ---- ------- ---- ----
CONVENIENCE
TRANSLATION
NOTE US$'000 (IN THOUSAND NIS)
---- ----------- ----------------------------------------------
CURRENT LIABILITIES
Short-term borrowings (13) 351,285 1,664,067 1,445,096 803,382 726,250
Trade accounts payable 20,506 97,141 64,592 -- --
Payables and other current
liabilities (14) 37,329 176,830 133,825 32,153 25,985
--------- --------- --------- --------- ---------
409,120 1,938,038 1,643,513 835,535 752,235
--------- --------- --------- --------- ---------
LONG-TERM LIABILITIES
Loans and other long-term
liabilities (15) 468,136 2,217,605 1,474,286 59,985 106,320
Accrued severance pay (16) 107 507 436 -- 78
--------- --------- --------- --------- ---------
468,243 2,218,112 1,474,722 59,985 106,398
--------- --------- --------- --------- ---------
LIABILITIES RELATED TO
DISCONTINUING OPERATIONS 23,669 112,120 258,731 -- --
--------- --------- --------- --------- ---------
MINORITY INTEREST 104,710 496,020 506,810 -- --
--------- --------- --------- --------- ---------
CONTINGENT LIABILITIES,
COMMITMENTS, LIENS AND
SECURITY (18)
SHAREHOLDERS' EQUITY (19) 228,395 1,081,930 934,378 1,081,930 934,378
--------- --------- --------- --------- ---------
1,234,137 5,846,220 4,818,154 1,977,450 1,793,011
========= ========= ========= ========= =========
/S/ MORDECHAI ZISSER /S/ SHIMON ITZCHAKY
- ----------------------------------- ----------------------------------------
MORDECHAI ZISSER SHIMON ITZCHAKY
CHAIRMAN OF THE BOARD OF DIRECTORS CEO AND MEMBER OF THE BOARD OF DIRECTORS
Board of Directors approval date of the financial statements: April 8, 2003.
The accompanying notes are an integral part of the statements.
- 4 -
ELBIT MEDICAL IMAGING LTD.
STATEMENT OF OPERATIONS
IN THOUSAND NIS OF DECEMBER 2002
CONSOLIDATED COMPANY
----------------------------------------------- -------------------------------
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------
2002 2002 2001 (*) 2000 (*) 2002 2001 (*) 2000 (*)
---- ---- -------- -------- ---- -------- --------
CONVENIENCE
NOTE TRANSLATION
US$'000 (IN THOUSAND NIS)
--------------------------------------------------------------------
(EXCEPT FOR EARNINGS-PER-SHARE DATA)
--------------------------------------------------------------------
REVENUES
Commercial-center
operations 60,195 285,151 134,752 28,117 -- -- --
Hotel operations and
management (20a) 44,468 210,650 141,901 108,089 -- -- --
Long-term projects 325 1,538 10,223 20,367 -- -- --
------- ------- ------- ------- ------- ------- -------
104,988 497,339 286,876 156,573 -- -- --
------- ------- ------- ------- ------- ------- -------
COSTS OF REVENUES
Commercial-center
operations (20b) 32,274 152,887 67,926 12,917 -- -- --
Hotel operations and
management (20c) 41,673 197,407 128,653 93,050 -- -- --
Long-term projects (20d) 300 1,419 7,452 18,245 -- -- --
------- ------- ------- ------- ------- ------- -------
74,247 351,713 204,031 124,212 -- -- --
------- ------- ------- ------- ------- ------- -------
GROSS PROFIT 30,741 145,626 82,845 32,361 -- -- --
Initiation costs of projects 3,578 16,949 5,969 2,819 -- -- --
Research and development
expenses, net (20e) 6,122 29,001 24,663 26,566 -- -- --
Marketing and selling
expenses (20f) 6,036 28,591 8,469 2,257 -- -- --
General and
administrative expenses (20g) 18,938 89,711 63,456 55,026 19,862 17,253 20,470
------- ------- ------- ------- ------- ------- -------
34,674 164,252 102,557 86,668 19,862 17,253 20,470
------- ------- ------- ------- ------- ------- -------
OPERATING LOSS BEFORE
FINANCIAL INCOME, NET (3,933) (18,626) (19,712) (54,307) (19,862) (17,253) (20,470)
Financial income
(expenses), net (20h) (1,171) (5,545) 103,510 33,189 7,492 17,783 30,322
------- ------- ------- ------- ------- ------- -------
OPERATING INCOME (LOSS)
AFTER FINANCIAL INCOME, NET (5,104) (24,171) 83,798 (21,118) (12,370) 530 9,852
Other income (expenses), net (20i) 2,045 9,687 34,731 (15,899) (3,282) (2,296) (4,304)
------- ------- ------- ------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES (3,059) (14,484) 118,529 (37,017) (15,652) (1,766) 5,548
Income taxes (17) 4,671 22,128 13,857 18,907 10,327 -- --
------- ------- ------- ------- ------- ------- -------
INCOME (LOSS) AFTER
INCOME TAXES (7,730) (36,612) 104,672 (55,924) (25,979) (1,766) 5,548
Equity in earnings (losses)
of investee companies, net (624) (2,962) (9,899) (3,303) 11,365 90,510 (49,614)
Minority interest in results
of subsidiaries, net 5,269 24,960 (6,029) 15,161 -- -- --
------- ------- ------- ------- ------- ------- -------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (3,085) (14,614) 88,744 (44,066) (14,614) 88,744 (44,066)
Income from discontinuing
operations, net (23) 11,780 55,804 19,119 28,341 55,804 19,119 28,341
------- ------- ------- ------- ------- ------- -------
NET INCOME (LOSS) FOR THE
YEAR 8,695 41,190 107,863 (15,725) 41,190 107,863 (15,725)
======= ======= ======= ======= ======= ======= =======
EARNINGS (LOSS) PER SHARE (20j)
- (in NIS)
Basic EPS:
From continuing operations (0.14) (0.66) 4.00 (1.99) (0.66) 4.00 (1.99)
From discontinuing
operations 0.52 2.50 0.86 1.28 2.50 0.86 1.28
------- ------- ------- ------- ------- ------- -------
Earnings (loss) per share 0.38 1.84 4.86 (0.71) 1.84 4.86 (0.71)
======= ======= ======= ======= ======= ======= =======
Diluted EPS 0.36 1.75 4.08 1.75 4.08
======= ======= ======= ======= =======
(*) Reclassified - see Note 23A.
The accompanying notes are an integral part of the financial statements.
- 5 -
ELBIT MEDICAL IMAGING LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
IN THOUSAND NIS OF DECEMBER 2002
LOANS TO
EMPLOYEES
TO ACQUIRE
NUMBER SHARE CAPITAL TRANSLATION RETAINED TREASURY COMPANY
OF SHARES CAPITAL RESERVES ADJUSTMENTS EARNINGS SUB-TOTAL STOCK SHARES TOTAL
--------- ------- -------- ----------- -------- --------- ----- ------ -----
(IN THOUSAND NIS)
-----------------------------------------------------------------------------------------
BALANCE -
JANUARY 1, 2000 22,940,177 32,775 453,150 (25,834) 470,769 930,860 (41,065) 889,795
Loss for the year -- -- -- -- (15,725) (15,725)
Foreign currency
translation
adjustments -- -- -- 13,760 -- 13,760
Capital reserve with
respect to transaction
with a controlling
party (see Note
10B.(3)a) -- -- -- -- (113,382) (113,382)
Options exercised and
debentures converted
to shares 31,543 34 1,553 -- -- 1,587
---------- ------ ------- ------- ------- --------- ------- ------- -------
BALANCE -
DECEMBER 31, 2000 22,971,720 32,809 454,703 (12,074) 341,662 817,100 (41,065) 776,035
Net income -- -- -- -- 107,863 107,863
Foreign currency
translation
adjustments (*) -- -- -- 44,389 -- 44,389
Issuance of shares to
employees (see Note
19B.) 550,000 586 14,530 -- -- 15,116 (15,116)
Issuance of shares
(see Note 19C.) 250,000 266 5,825 -- -- 6,091
---------- ------ ------- ------- ------- --------- ------- ------- -------
BALANCE -
DECEMBER 31, 2001 23,771,720 33,661 475,058 32,315 449,525 990,559 (41,065) (15,116) 934,378
---------- ------ ------- ------- ------- --------- ------- ------- -------
Net income -- -- -- -- 41,190 41,190
Foreign currency
translation
adjustments (*) -- -- -- 106,041 -- 106,041
Options exercised 2,000 2 51 -- -- 53
Erosion of loans to
employees (395) -- 268 (127) 395
---------- ------ ------- ------- ------- --------- ------- ------- -------
BALANCE -
DECEMBER 31, 2002 23,773,720 33,663 474,714 138,356 490,983 1,137,716 (41,065) (14,721) 1,081,930
========== ====== ======= ======= ======= ========= ======= ======= =======
CONVENIENCE TRANSLATION
IN US$'000:
BALANCE -
DECEMBER 31, 2001 23,771,720 7,106 100,285 6,822 94,895 209,108 (8,669) (3,190) 197,249
Net Income -- -- -- -- 8,695 8,695
Foreign currency
translation
adjustments (*) -- -- -- 22,385 -- 22,385
Issuance of shares to
employees (see Note
20C.)
Exercised options 2,000 10 -- -- 10
Erosion of loans to
employees (83) -- 57 (27) 83
---------- ------ ------- ------- ------- --------- ------- ------- -------
BALANCE -
DECEMBER 31, 2002 23,773,720 7,106 100,212 29,207 103,647 240,171 (8,669) (3,107) 228,395
========== ====== ======= ======= ======= ========= ======= ======= =======
(*) Net of a write-down, in respect of realization of capital reserves
(see Notes 10A, 11A and 20I below).
The accompanying notes are an integral part of the financial statements.
- 6 -
ELBIT MEDICAL IMAGING LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
IN THOUSAND NIS OF DECEMBER 2002
DECEMBER 31
------------------------------------------------------------
2002 2002 2001(*) 2000(*)
---- ---- -------
CONVENIENCE
TRANSLATION
US$'000 (IN THOUSAND NIS)
----------- ----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 8,695 41,190 107,863 (15,725)
Adjustments to present cash flows from continuing
operating activities (Appendix A) (12,743) (60,367) (98,327) (12,223)
-------- -------- -------- --------
Net cash provided by (used in) continuing operating
activities (4,048) (19,177) 9,536 (27,948)
Net cash provided by (used in) discontinuing operating
activities 3,195 15,135 14,132 (69,772)
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (853) (4,042) 23,668 (97,720)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in initially consolidated subsidiaries
(Appendix C) (49,132) (232,741) 3,600 (452,849)
Additions to fixed assets and other assets (79,045) (374,442) (604,376) (326,802)
Proceeds from disposition of fixed assets, investments and
loans 4,205 19,920 23,292 161,531
Investment (including loans) in affiliated companies,
other companies and venture capital companies (2,824) (13,378) (127,184) (150,822)
Repayment of deposits, investments and long-term loans 3,515 16,649 2,624 7,808
Investment in deposits, debentures and long-term loans (154) (730) (82,503) (60,560)
Short-term deposits and marketable securities 16,852 79,828 (261,984) 443,404
Investment in a proportionately consolidated subsidiary
(Appendix D) -- -- -- (15,829)
Liquidation of subsidiaries (Appendix E) -- -- (47,357) --
-------- -------- -------- --------
Net cash used in continuing investing activities (106,583) (504,894) (1,093,888) (394,119)
Net cash provided by (used in) discontinuing investing
activities (507) (2,404) 121,603 (26,757)
-------- -------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (107,090) (507,298) (972,285) (420,876)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to a minority shareholder in a subsidiary (7,131) (33,780) -- --
Issuance of shares to minority interest of a subsidiary 128 608 14,440 1,169
Receipt of long-term loans 146,964 696,184 420,787 337,322
Repayment of long-term loans (104,392) (494,513) (159,078) (170,728)
Short-term borrowings, net 39,756 188,326 562,330 160,759
-------- -------- -------- --------
NET CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES 75,325 356,825 838,479 328,522
-------- -------- -------- --------
NET EFFECT ON CASH DUE TO CHANGES
IN CURRENCY EXCHANGE RATES 1,342 6,355 15,075 4,145
-------- -------- -------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (31,276) (148,160) (95,063) (185,929)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 76,762 363,623 458,686 644,615
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 45,484 215,463 363,623 458,686
======== ======== ======== ========
(*) Reclassified - see Note 23A.
The accompanying notes are an integral part of financial statements.
- 7 -
ELBIT MEDICAL IMAGING LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT.)
IN THOUSAND NIS OF DECEMBER 2002
DECEMBER 31
---------------------------------------------------------
2002 2002 2001(*) 2000(*)
---- ---- ------- ------
CONVENIENCE
TRANSLATION
US$'000 (IN THOUSAND NIS)
----------- -------------------------------------------
APPENDIX A -
ADJUSTMENTS TO PRESENT CASH FLOWS
FROM OPERATING ACTIVITIES, NET
INCOME AND EXPENSES NOT INVOLVING CASH FLOWS:
Discontinuing operations (11,780) (55,804) (19,119) (28,341)
Depreciation and amortization (including a provision
for impairment of investments and assets) 35,073 166,143 76,476 25,938
Company share in losses of affiliates 625 2,962 9,899 3,303
Minority interest in profits (losses) of a subsidiary (5,269) (24,960) 6,029 (15,161)
Capital loss (gain) from disposition of fixed assets
and investments 96 452 (443) --
Indexation and exchange-rate differences
on investments and loans, net (21,669) (102,646) (97,313) 22,381
Gain upon liquidation of subsidiaries -- -- (56,515) --
Gain from realizing investment-type monetary balances
in investees (6,618) (31,351) -- --
Change in accrued severance pay balance -- -- (215) (3,573)
Decrease (Increase) in value of securities, net 114 538 (4,022) (25,361)
Deferred income taxes 1,355 6,420 11,687 (1,411)
CHANGES IN ASSETS AND LIABILITIES:
Trade accounts receivable (1,891) (8,958) (8,727) (3,177)
Receivables and other current assets (3,193) (15,126) 10,022 (61,155)
Long-term receivables 653 3,091 (6) 481
Inventory 191 907 (78) (133)
Trade accounts payable 2,136 10,117 270 12,257
Payables and other current liabilities (2,241) (10,614) (16,049) 78,314
Customer advances, net of projects in progress (325) (1,538) (10,223) (16,585)
------- ------- ------- -------
(12,743) (60,367) (98,327) (12,223)
======= ======= ======= =======
APPENDIX B -
NON-CASH TRANSACTIONS
Liabilities in consideration for land acquisition -- -- 22,080 32,323
======= ======= ======= =======
Liabilities in consideration for acquisition of
shares in another company -- -- -- 25,916
======= ======= ======= =======
Acquisition of investments, fixed assets and other assets
on credit and against allocation of shares 8,281 39,229 59,390 7,935
======= ======= ======= =======
Sale of an affiliate against other accounts receivable -- -- 13,382 --
======= ======= ======= =======
(*) Reclassified.
The accompanying notes are an integral part of the financial statements.
- 8 -
ELBIT MEDICAL IMAGING LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT.)
IN THOUSAND NIS OF DECEMBER 2002
DECEMBER 31
---------------------------------------------------------
2002 2002 2001 2000
---- ---- ------- ------
CONVENIENCE
TRANSLATION
US$'000 (IN THOUSAND NIS)
----------- -------------------------------------------
APPENDIX C -
INVESTMENT IN INITIALLY CONSOLIDATED COMPANIES
Deficit in working capital (excluding cash), net 2,537 12,018 820 29,537
Long-term receivables, investments and deposits (1,799) (8,520) -- (20,285)
Fixed assets and other assets (108,629) (514,586) (169,581) (715,488)
Long-term loans 58,759 278,347 13,363 366,769
Minority interest -- -- 26,784 --
Capital reserve with respect to a transaction with
a controlling party -- -- -- (113,382)
------- -------- -------- --------
(49,132) (232,741) (128,614) (452,849)
Less - investment on the cost basis -- -- 132,214 --
------- -------- -------- --------
(49,132) (232,741) 3,600 (452,849)
======= ======== ======== ========
APPENDIX D -
INVESTMENT IN A PROPORTIONATELY CONSOLIDATED SUBSIDIARY
Deficit in working capital (excluding cash), net 12,883
Long-term investment and receivables (4,804)
Fixed assets - building under construction (80,182)
Long-term loans 56,274
------
(15,829)
=======
APPENDIX E -
LIQUIDATION OF A SUBSIDIARY
Deficit in working capital (excluding cash), net (47,357)
=======
The accompanying notes are an integral part of the financial statements.
- 9 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1 - GENERAL
A. The Company engages, directly and through its investees, in
Israel and abroad, in the following areas:
- Development, construction and operation of commercial
and entertainment centers, through Plaza Centers, in
Central and Eastern Europe.
- Ownership, management and operation of hotels, through
the Park Plaza network, primarily in major European
cities.
- Investments in research and development activities of
MRI-guided, focused ultrasound, through Insightec
("IGTX").
- Establishing an entertainment and commercial center at
the Herzliya Marina.
- Venture-capital investments.
Until December 31, 2002 the Company had also been engaged,
through Elscint Ltd., in the production of systems and
subsystems, mainly for medical imaging equipment. As for
the discontinuation of this segment's operations and its
sale to a third party - see Note 23A below.
B. The shares of the Company are registered for trade on the
Tel Aviv Stock Exchange and over the counter in the United
States on NASDAQ.
C. DEFINITIONS:
The Company - Elbit Medical Imaging Ltd.
Subsidiaries - companies in which the Company holds more than 50% of the voting
rights or of the rights to appoint directors (other than cases in
which control is deemed temporary).
Proportionately consolidated
subsidiaries - companies and joint ventures (including partnerships) held by the
Company, together with other entities, among which there is a
contractual agreement for joint control, according to which
resolutions vital to the joint venture are to be made jointly and
with the consent of all shareholders and whose financial statements
are (directly or indirectly) consolidated with those of the Company
by the proportionate consolidation method.
Affiliated companies - companies in which the Company's (direct or indirect) rights entitle
it to exercise significant influence on their financial and
operating policies and which have been included on the basis of the
equity method, in accordance with the principles established by
Opinion No. 68 of the Institute of Certified Public Accountants in
Israel ("the ICPAI") and which are not fully or proportionately
consolidated.
Investee companies - subsidiaries, proportionately consolidated subsidiaries and
affiliates. (Major investee companies are presented in the appendix
to the financial statements.)
- 10 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1 - GENERAL (CONT.)
C. DEFINITIONS (CONT.):
Venture-capital investments- companies, which - at the time of the Company's investment therein -
are mainly engaged in research and development of new,
knowledge-intensive, products or processes, the investment in which
constitutes above-average risk and at least 90% of whose financing
originates from shareholders' investment, support of government
agencies or investment grants.
Group - the Company and its investee companies.
Parent company - Europe Israel (M.M.S.) Ltd. ("EIL").
Europe Israel Group - Europe Israel (M.M.S.) Ltd. and its investee companies.
Control Centers - Control Centers Ltd. - the controlling party in Europe Israel
(M.M.S.) Ltd.
Control Centers Group - Control Centers and its investees.
Related parties - as defined in Opinion No. 29 of the ICPAI, including interested
parties as defined in the Israeli Securities Regulations
(Preparation of Annual Financial Statements), 1993.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
A. FINANCIAL STATEMENTS IN ADJUSTED VALUES
1. GENERAL
The financial statements are presented on the basis
of the historical-cost convention in new Israeli
shekels ("NIS") of constant purchasing power (NIS of
December 2002) ("adjusted financial statements").
The Company maintains its accounting records on a
current basis in nominal NIS, which have been
adjusted to NIS of constant purchasing power in
accordance with Opinion No. 36 of the ICPAI, on the
basis of the changes in the Israeli consumer-price
index ("CPI"). The comparative figures have been
adjusted to NIS of December 2002.
The term "cost" in the financial statements refers
to adjusted cost, unless otherwise stated.
Regarding the accounting standard which deals with
the cessation of financial statement adjustment to
the CPI commencing January 1, 2004 see V.1 below.
- 11 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
A. FINANCIAL STATEMENTS IN ADJUSTED VALUES (CONT.)
2. PRINCIPLES OF ADJUSTMENTS
BALANCE SHEET
The balance-sheet items have been adjusted as
follows:
Non-monetary items have been adjusted according to
the changes in the CPI from date of acquisition
through the balance-sheet date.
Monetary items (representing amounts receivable or
payable at stated values or reflecting realizable
values) are presented in the balance sheet at their
nominal values.
The value of investments in investee companies and
minority interest in subsidiaries have been
determined on the basis of the financial statements
of those companies.
The adjusted amounts of non-monetary assets do not
necessarily represent realizable or real economic
value, but only the original values adjusted for the
changes in the purchasing power of the currency of
measurement.
STATEMENT OF OPERATIONS
The components of the statement of operations have
been adjusted as follows:
Income and expenses (other than those deriving from
non-monetary items and except for financial
expenses, net) have been adjusted to the changes in
the CPI from the date of each transaction through
the balance-sheet date.
Income and expenses deriving from non-monetary items
and items relating to balance sheet accruals have
been adjusted on the basis of specific indices
corresponding to the adjustment of the related
balance-sheet item.
The effect of indexation changes on tax advances is
included in current income taxes.
The Company's share as well as that of the minority
interest in the results of investee companies has
been determined on the basis of their financial
statements.
Net financial income reflects financial expenses and
financial income in real terms (such as interest on
loans and short-term borrowings) as well as the
inflationary erosion of non-monetary items arising
from transactions included in the statement of
operations.
SUBSIDIARIES OPERATING ABROAD
(A) Subsidiaries operating abroad and
constituting "autonomous entities" prepare
their financial statements in accordance
with the principles established in Opinion
No. 36 of the ICPAI in the currency of their
country of residence, which is their
functional currency. The financial
statements of these companies were
translated to NIS, subsequent to their
adjustment to the CPI in their country of
- 12 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
A. FINANCIAL STATEMENTS IN ADJUSTED VALUES (CONT.)
2. PRINCIPLES OF ADJUSTMENTS (CONT.)
residence, according to the exchange rate in
effect on the balance-sheet date.
Differences arising between the adjustment
of the Company's investment amount in the
investees (including monetary balances of a
capital nature) on the basis of the changes
in the Israeli CPI, and the adjustment of
the Company's share in the shareholders'
equity of these investees, based on the
changes in the exchange rate of the local
currency against the NIS and the local CPI,
are included in "foreign exchange
translation differences of foreign
investees" in shareholders' equity.
Financial differences arising from loans in
foreign currency used for the financing of
investments in foreign autonomous entities
as well as income taxes relating to such
differences have also been included in that
component of shareholders' equity.
Upon the realization of an autonomous unit,
in whole or in part (including realization
as a result of a decline in holding
percentage arising from the issuance of
shares to a third party or through the
repayment of investment-type monetary
balances), accumulated translation
adjustments relating to the realized
investment are released to the statement of
operations as other income. As for the
realization of capital reserves arising from
translation adjustments due to a decline in
the fair value of investments - see g below.
(B) Subsidiaries operating abroad and
constituting an extension of the Group (as
defined in Opinion No. 36 of the ICPAI)
prepare their financial statements in
foreign currency. The financial statements
of these companies were translated to NIS,
with non-monetary balance-sheet items
translated by historical exchange rates and
adjusted to changes in the CPI. Monetary
balance-sheet items were adjusted on the
basis of the exchange rate in effect on the
balance-sheet date. The
statement-of-operations items were adjusted
by the average exchange rates prevailing on
the date of the transactions, and adjusted
to the CPI. Differences arising from these
translations are included in financial
expenses.
B. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the financial
statements of the Company and its subsidiaries. The results
of operations of subsidiaries are included from their date
of incorporation or proximate to the date of acquisition by
the Company, as applicable, until the balance-sheet date,
or date of sale (or transfer to liquidator), if earlier.
In accordance with the principles set forth in Opinion No.
57 of the ICPAI, the assets, liabilities and operations of
jointly controlled companies and ventures have been
included on the basis of the proportionate-consolidation
method.
The amounts from the financial statements of subsidiaries
were included upon consolidation after taking into account
the necessary adjustments in order for them to comply with
the group financial accounting policies.
Material inter-company balances and transactions among the
Group companies have been eliminated in the consolidation.
- 13 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
B. CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Profits from transactions among Group companies, the
results of which are attributable to assets, which at the
respective balance-sheet date had not been realized in
third-party transactions, were eliminated in consolidation.
Company shares held by a subsidiary are presented at cost
and deducted from the Company's shareholders' equity using
the treasury stock method.
C. CASH AND CASH EQUIVALENTS
Cash equivalents include unrestricted liquid deposits with
an original maturity not exceeding three months.
D. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance has been determined on specific balances, the
collection of which, in the opinion of management of the
companies, is doubtful.
E. MARKETABLE SECURITIES
Investments in marketable securities, designated by
management for sale in the short term, are included in
current assets at their market value at the balance-sheet
date. Changes in the value of securities are included in
the statement of operations as incurred. Investments in
marketable securities not designated by management for sale
in the short term and which are not part of the Group's
liquid resources are presented at cost except when, in the
opinion of management, a decline in value not of a
temporary nature exists.
F. INVENTORY
Inventory is stated at the lower of cost or market value,
with cost determined as follows:
Food, beverages and current operating hotel supplies - by
the "first-in, first-out" method.
Regarding projects in process - see Q below.
G. INVESTMENTS IN INVESTEES, VENTURE CAPITAL INVESTMENTS AND
INVESTMENTS IN OTHER COMPANIES
Investments in investees are presented in the Company's
financial statements by the equity method. When computing
the Company's share in the results of investee companies,
losses (if any) deriving from the expected conversion of
convertible securities of the exercise of vested options,
which were issued by the Investee companies, are included
in the computation if such conversion or exercise is
probable.
The excess of the investment's cost over the Company's
share in the fair value of the investees' net identified
assets at acquisition or upon the change from the cost
method to the equity method, as applicable, is recorded as
goodwill and amortized over its estimated economic benefit
period.
Financial expenses in respect of borrowings used for the
investment (shares and loans) in companies engaged solely
in the construction of hotels or commercial centers were
capitalized to the cost of the investment.
An other-than-temporary decline in the fair value of an
investment in an autonomous investee is charged directly
against any credit balance in the capital reserves for
translation adjustments previously recorded in respect of
this investment. The amount of the required provision in
excess of the translation adjustment is charged to
operations. If the translation adjustments are reflected by
a debit balance, they are charged to operations together
with the provision for the decline in investment's value.
- 14 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
G. INVESTMENTS IN INVESTEES, VENTURE CAPITAL INVESTMENTS AND
INVESTMENTS IN OTHER COMPANIES (CONT.)
Group investments in other companies and investments of
subsidiaries constituting venture-capital funds in
"venture-capital investments", as defined by Standard No. 1
of the Israeli Accounting Standards Board, have been
included based on the lower of: cost net of allowances for
other-than-temporary decline in value; or fair value, based
on management's estimate.
Gain on share issuance to a third party by a company in the
research and development stages has been recorded as
deferred income and included in the annual results of
operations as other income, at the higher of: (i)
straight-line amortization over three years; or (ii) the
Company's share in the investee's losses on an aggregated
basis
H. FIXED ASSETS
(1) Fixed assets are stated at cost. Investment grants
received by subsidiaries were deducted in arriving
at the cost of the assets in respect of which the
grant had been made.
The cost of the land and building construction
includes, among other things, costs in respect of
contractual obligations for the acquisition of land
when the Group companies' obligations thereunder are
finalized by each financial statement date (i.e.,
all major conditions required for the conclusion of
the transaction and its implementation had been
fulfilled) and their amounts determined. Amounts not
yet paid by each balance-sheet date are presented,
accordingly, as a liability.
Improvements and renovations are capitalized.
Maintenance and repair expenses are charged to
operations as incurred.
Proceeds paid for assets acquired as part of a
multiple-element agreement ("package") have been
allocated to the cost of the assets on the basis of
a valuation and in relation to their fair value in
that package.
Financial expenses in real terms in respect of
borrowings used for construction (including the
acquisition of the related land) as well as direct
supervision and construction costs incurred in the
pre-operating period, have been capitalized to the
cost of the buildings. As for the capitalization of
borrowing costs - see item R below.
As for fixed assets acquired from companies having
controlling interest in the Company - see item (N)
below.
(2) Depreciation is computed by the straight-line method
at annual rates considered sufficient to depreciate
the assets over their useful lives. Leasehold
improvements are amortized over the shorter of the
estimated useful period or the lease period.
Annual depreciation rates follow: %
----------------------------------
Freehold land 0
Leasehold land Over lease period
Hotels 1.5
Commercial centers 2
Other buildings 2 - 2.5
Building operating systems 7 (average)
Other fixed assets (*) 6 - 33 (mainly 10% - 20%)
(*) Consists of motor vehicles, aircraft, office
furniture and equipment, machinery and
equipment, computers and peripheral
equipment, software, etc.
- 15 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
I. OTHER ASSETS AND DEFERRED EXPENSES
(1) KNOW-HOW
Acquired know-how is stated at cost and amortized by
the straight-line method over its estimated benefit
period.
(2) PRE-OPERATING HOTEL AND COMMERCIAL CENTER EXPENSES
Pre-operating costs of hotels and/or commercial
centers (mainly - employee training, testing of
systems and preparation of the hotels/commercial
centers for opening, operation and occupancy) are
stated at cost and amortized over a three-year
period from commencement of full scale operations.
(3) OPERATING COSTS RELATING TO INITIATION ACTIVITIES
Operating costs relating to initiation activities
(prior to the finalization of the investment or land
acquisition, etc.) are capitalized as incurred, when
an investment or a property acquisition transaction
is foreseen, and are charged to the cost of the
investment or the real estate project upon the
investment or acquisition. If the transaction is not
reasonably expected to materialize or when the
expected economic benefit of these costs is
doubtful, these costs are charged to operations.
(4) EXPENSES IN CONNECTION WITH OBTAINING LOANS
Expenses incurred in obtaining loans are capitalized
as incurred and included in operations over the life
of the loan and in relation to their balance.
(5) COST OF OBTAINING LONG-TERM LEASES
Costs for obtaining long-term leases are capitalized
when incurred and charged to operations over the
lease period.
(6) Acquisition costs of a long-term service contract
are stated at cost and amortized over the service
period.
J. LONG-TERM RECEIVABLES AND LIABILITIES
(1) Long-term loans for a fixed period, which do not
bear interest or that bear interest at below market
rates, when the difference between the adjusted
value of the balances and their present value at the
time of loan receipt is material, are stated at
present value (discounted at market interest rates
in effect for similar loans). The effective interest
is charged to operations over the term of the loan.
(2) Short-term supplier credit and other liabilities, as
well as short-term bank borrowings used for
establishing commercial centers and/or hotels and
whose repayment sources are arranged by long-term
financing agreements signed by the Company and its
subsidiaries with financial institutions, have been
included as long-term liabilities. Related repayment
schedule disclosure is included with those of the
corresponding long-term loans, in accordance with
the relevant agreements with the lenders.
- 16 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
K. INCOME TAXES
Deferred taxes are calculated for temporary differences
between income and expenses included in the financial
statements and for tax purposes due to the difference
between the adjusted value of non-monetary depreciable
assets and the amount allowed for tax purposes (except for
differences in respect of buildings), and for tax losses
and deductions carried forward to future years. In
addition, deferred taxes are recorded for differences
between the fair values of identifiable assets and
liabilities of subsidiaries upon acquisition of the
investment therein (except for assets for which
amortization is not allowable for tax purposes) and their
values for tax purposes at that date. A deferred tax asset
is created only when there is a reasonable likelihood that
it will be realized against future taxable income. Deferred
taxes are computed based on the tax rates expected to be in
effect when they are realized, to the extent they are known
at the financial statements preparation date.
Current and deferred income taxes relating to capital
reserves from translation adjustments are included directly
in capital reserves.
The deferred taxes do not include taxes which would be
applicable in case of future realization of investments in
subsidiaries, or upon the receipt of retained earnings as
dividends, since for some subsidiaries, the receipt of
dividends and/or earnings arising from their sale is
tax-exempt and, for others, management's policy is not to
sell and/or distribute earnings as a dividend or in any
other manner in the foreseeable future in a manner that
would create a material additional tax liability for the
Group.
Regarding deferred taxes for exempted income from an
approved enterprise, see Note 17.b.1.e below.
L. EXCHANGE RATES AND LINKAGE BASES
Assets and liabilities in foreign currency or linked
thereto are stated on the basis of the exchange rate
prevailing on the balance-sheet date.
Balances linked to various indices are stated on the basis
of the relevant linkage terms of each linked asset or
liability.
For details of consumer-price indices and exchange rates of
foreign currencies - see Note 24A.
M. DERIVATIVE FINANCIAL INSTRUMENTS
(1) Financial instruments - see Note 24A.
(2) Derivative financial instruments which are
designated for hedging existing assets or
liabilities are charged to the statement of
operations when the results deriving from those
assets or liabilities are included in the statement
of operations. Derivative financial instruments not
designated for hedging purposes are stated at
estimated fair value. Changes in their fair value
during the reporting period are included in the
statement of operations.
N. INVESTMENTS IN COMPANIES ACQUIRED FROM CONTROLLING
SHAREHOLDERS
Investments in investees, acquired from companies that are
controlling shareholders of the Company, are included
according to their adjusted value on the books of the
transferring companies immediately prior to acquisition, in
accordance with the Securities Regulations (Presentation of
Transactions Between a Company and its Controlling Party in
the Financial Statements), 1996. The difference between the
price paid for that investment and the transferor's book
value is recorded directly to shareholders' equity.
- 17 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
O. PURCHASE OF ASSETS IN CONSIDERATION FOR ISSUANCE OF SHARES
Issuance of shares of a non-public subsidiary to third
parties for non-cash consideration (in consideration for
assets and services) is recorded based on the fair value of
the assets and services received.
P. REVENUE RECOGNITION
Revenues from hotel operations are recognized upon
performance of the service.
Revenues from leasing of assets and management fees, as
well as other income relating to the activities of the
commercial centers, are recognized pro rata over the term
of the lease and/or the service provided.
Q. PROJECTS IN PROGRESS AND REVENUE RECOGNITION
Revenues from contractual work are recognized by the
"percentage of completion" method, in accordance with
Standard No. 4 of the Israeli Accounting Standards Board.
The completion rate is determined by the proportion of the
costs incurred to the total estimated cost, based on an
evaluation made by the Company's engineers. The cost of
long-term projects in progress includes direct costs and
the allocated indirect expenses. Differences in estimates
emerging at the stage of invoice approval are reflected in
the year determined. Regarding projects for which a loss is
anticipated, the expected losses are provided for in full.
R. RESEARCH AND DEVELOPMENT COSTS
Research and development costs, net of grants and
participation of third parties (mainly the OCS), are
included in operations, as incurred.
S. CAPITALIZATION OF BORROWING COSTS
The Company capitalizes borrowing costs in accordance with
Standard No. 3 of the Israeli Accounting Standards Board;
accordingly, both specific and non-specific borrowing costs
are capitalized to qualified assets (assets in preparation
or under construction not yet in designated use and whose
preparation for this purpose requires a prolonged period of
time). Non-specific borrowing costs are capitalized to
these qualified assets or to that portion not financed by
that specific borrowing by using a rate constituting a
weighted average of the costs in respect of the Group's
borrowings not specifically capitalized.
T. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share have been computed in accordance
with Opinion No. 55 of the ICPAI based on the
weighted-average number of paid-up shares outstanding
during the year net of shares held by a subsidiary.
The number of shares used for the computation of basic
earnings (loss) per share take into account convertible
securities or other rights to shares (including shares
issued against non-recourse loans) (which are vested), if
conversion or realization may reasonably be assumed.
Diluted earnings (loss) per share take into account
securities excluded from the basic earnings (loss) per
share computation if their effect is dilutive. Net income
used in the computation of diluted earnings (loss) per
share has been reduced by the provision necessary, if any,
assuming the full exercise of the investees' securities not
taken into account in the computation of basic earnings
(loss) per share.
- 18 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
U. USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires of Group
companies' management to make estimates and assumptions
affecting the reported balance-sheet amounts of assets and
liabilities, disclosure of contingent assets and
liabilities at the issuance date of the financial
statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual data and
operating results may differ from these estimates.
V. NEW ACCOUNTING STANDARDS
(1) In October 2001 the Israeli Accounting Standards
Board issued Standard No. 12, Cessation of Financial
Statements Adjustment. According to this standard,
the adjustment of financial statements for inflation
will cease commencing January 1, 2003. Through
December 31, 2002 the Company, according to this
standard, was required to continue preparation of
adjusted financial statements in accordance with the
existing pronouncements of the Institute of
Certified Public Accountants in Israel. Amounts
presented in the December 31, 2002 balance sheet
will serve as the opening, nominal balances at
January 1, 2003.
In October 2001 the Israeli Accounting Standards
Board issued Standard No. 13, Effect of Changes in
Foreign Currency Exchange Rates. This standard
addresses the translation of transactions
denominated in foreign currency, as well as the
translation of financial statements of a foreign
operation, for inclusion in the financial statements
of the reporting company.
The following is an outline of the major changes
included in Standard No. 13:
Classification of foreign operations as an
"autonomous unit" or as an "extension of the
Company" requires the application of judgment and
should be based on the indicators established in
this standard. This approach differs from the
existing principles, which require the fulfillment
of several cumulative tests prior to the
determination of a foreign activity as an
"autonomous unit" and prohibit the application of
judgment.
Translation of income and expense items as well as
cash flow amounts of foreign operations constituting
"autonomous units" based on the exchange rate in
effect on the transaction/cash flow date or, due to
practicality, using average exchange rates in effect
during the reporting period. This differs from the
current principles whereby the translation of all
the autonomous unit's financial statement items is
carried out based on the current exchange rates.
Adjustment of an autonomous unit's financial
statements prior to their translation into the
company's reporting currency, which, is always
permitted under the existing principles, will be
carried out only when the "autonomous unit" operates
in a highly inflationary environment. In these
cases, the closing exchange rates should be used for
translation.
Goodwill created upon the acquisition of an
"autonomous unit" will be treated as an asset of the
"autonomous unit" and translated by using the
closing exchange rates. This differs from current
principles, according to which goodwill is deemed a
non-monetary, independent item of the acquiring
company.
A reduction in value of an investment in an
"autonomous unit" will not result in the release to
the statement of operations of amounts previously
recorded as foreign currency differences in
shareholders' equity. This rule constitutes an
amendment to Opinion No. 68.
- 19 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
V. NEW ACCOUNTING STANDARDS (CONT.)
(1) (CONT.)
In December 2002 the Israeli Accounting Standards
Board issued Standard No. 17 concerning the
postponement of the cessation date of adjusted
financial statements as well as the postponement of
the effective date of Standard No.13 ("Effects of
Fluctuations in Foreign Exchange Rates"). According
to Standard No.17, the reporting of nominal
financial statements based on Standard No. 12 and
the implementation of Standard No.13 are postponed
by one year - to reporting periods commencing
January 1, 2004.
The Company is currently examining the new standards
but is unable, at this stage, to assess its impact
on the financial statements of the period commencing
with the effective date of the standard (January 1,
2004).
(2) In August 2002 the Israeli Accounting Standards
Board published Standard No.14 (Interim Financial
Reporting), which defines the minimal content of
financial reporting for interim periods, including
the disclosure required in the notes thereto and
details the accounting principles pertaining to
recognition and measurement issues to be implemented
in interim financial reporting.
The major changes established by Standard No.14 in
relation to current accounting principles:
o Disclosure requirements pertaining to segment
income and expenses in respect of segments
constituting the company's primary format for
segment reporting.
o Provision for income taxes during the interim
period will be accrued on the basis of the tax
rate applicable to the expected annual pre-tax
income, i.e., the estimated average annual
income tax amount multiplied by the interim
pre-tax income. This differs from the existing
rules according to which provisions for income
tax for the interim periods were established on
the basis of data known at the end of the
reported interim period.
A carryforward tax loss in respect of which no
deferred income tax amount had been provided
does affect the average annual tax rate and,
therefore, will be allocated over the interim
period by the ratio of the income reported
during the entire interim period divided by the
estimated income for the year. Such practice
differs from existing rules, according to which
the determination of the provision for income
taxes in the first interim period took into
account previous years' carryforward losses.
o Should the estimated amount reported in the
interim period change considerably during the
reported year's last interim period without
separate financial statements being published
for that last interim period, then the nature
and the amount of that change in estimate
require disclosure in the annual financial
statements for that particular fiscal year.
Standard No.14 should be implemented in interim
financial statements for periods starting January 1,
2003. The Company is currently examining the
provisions of the new standard but it is not
possible at this stage to estimate its impact on the
interim financial statements commencing in 2003.
- 20 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
V. NEW ACCOUNTING STANDARDS (CONT.)
(3) In January 2003 the Israeli Accounting Standards
Board Standard issued Standard No.15 ("Impairment of
Assets"). The standard sets forth, for the first
time in Israel, the accounting treatment and method
of presentation required in the event of asset
impairment, and also establishes procedures to be
implemented by the company in order to ensure that
its assets are not presented in amounts exceeding
the higher of their net selling price or their value
in use ("recoverable amount'). This standard also
identifies indicators that may point to the asset's
impairment, the measurement principles for the
recoverable amount of an individual asset or
cash-generating unit, as appropriate, and for the
loss resulting from the decline in value, the extent
of the disclosure required in the financial
statements in connection with the standard's
application, the timing of the cancellation of a
previously recorded provision for impairment etc.
Standard No. 15 establishes that the recoverable
amount must be assessed whenever indicators point to
a possible impairment of an asset, with that
impairment recorded as a loss in the statement of
operations.
This standard will apply to financial statements for
periods beginning on January 1, 2003 or thereafter,
generally on a prospective basis. A loss incurred
from an asset impairment, equaling the difference
between the net book value at the standard's
effective date and the recoverable amount at that
time will be charged to operations as "cumulative
effect at the beginning of the year of a change in
an accounting method" if that loss had previously
not been recognized because the total undiscounted
future cash flows exceeded book value.
Until this standard's effective date, the Group
companies had assessed the need for a computation of
asset impairment based on the future cash flows
expected from the holding and use of these assets in
undiscounted values in accordance with the practice
acceptable in Israel and based on US SFAS 121
("Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of").
Upon the effective date of Standard No.15, Opinion
No. 68 of the Institute of Certified Public
Accountants in Israel will be amended so that if the
value of an investment in a foreign autonomous
investee becomes impaired and a translation
adjustment was previously recorded to shareholders'
equity in respect of this investment, it would no
longer be permitted to record the related portion of
these translation adjustments in the statement of
operations upon recognition of impairment. As for
the accounting treatment in accordance with the
rules in effect on December 31, 2002 - see Note 2G
above.
The Group companies are examining the recoverable
value of certain owned investments and assets as
well as the ramifications of the initial application
of the provisions of the standard on their results
for the first quarter of 2003. Moreover, the
companies' managements believe, based on information
available at the financial statements date, that no
provision in material amounts for impairment of
investments and/or assets will be required in the
first quarter of 2003 and, accordingly, these
companies would not incur material costs in the
statement of operations for that period in
connection with the standard's initial application.
W. RECLASSIFICATION
The comparative figures for prior years have been
reclassified in order to conform with classifications used
in the reported period, mainly due to the classification of
activities sold during 2002, as discontinuing operations.
X. A statement of cash flows has not been presented for the
parent company only since it would not provide any
significant additional information.
- 21 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3 - CASH AND CASH EQUIVALENTS
CONSOLIDATED COMPANY
--------------------------------------- ------------------
DECEMBER 31
------------------------------------------------------------------
2002 2002 2001 2002 2001
------------------------ ---- ---- ---- ----
INTEREST CONVENIENCE
RATE TRANSLATION
% US$'000 (IN THOUSAND NIS)
------- ----------- ----------------------------------------------
In foreign currency:
US dollar 0.3-2.5 20,845 98,743 292,805 13,153 2,087
Euro Mainly 2.75 13,748 65,125 2,854 57,806 --
Other (mainly Forint) Mainly 7.0(1) 8,060 38,183 23,586 -- --
In NIS 7.2-8.4 2,831 13,412 44,378 4,677 3,556
------ ------- ------- ------ -----
45,484 215,463 363,623 75,636 5,643
====== ======= ======= ====== =====
(1) Variable rate.
NOTE 4 - SHORT-TERM DEPOSITS AND INVESTMENTS
A. COMPOSITION:
CONSOLIDATED COMPANY
--------------------------------------- ------------------
DECEMBER 31
------------------------------------------------------------------
2002 2002 2001 2002 2001
------------------------ ---- ---- ---- ----
INTEREST CONVENIENCE
RATE TRANSLATION
% US$'000 (IN THOUSAND NIS)
------- ----------- ----------------------------------------------
DEPOSITS IN BANKS
AND FINANCIAL
INSTITUTIONS
Mainly
Dollar-linked (*) Libor+/-0.3 127,881 605,785 582,446 429,462 406,666
Euro-linked (**) Euribor-1.5 7,545 35,741 25,858 64 24,807
Zlote-linked 7.0 109 518 23,946 -- --
Pound
Sterling-linked 1.0 431 2,041 -- -- --
Australian
dollar-linked 3.0-3.3 1,075 5,094 -- 5,094 --
Forint-linked 6.0 1,389 6,582 -- -- --
Unlinked (**) 6.7-8.9 5,497 26,038 38,858 26,038 38,826
------- ------- ------- ------- -------
143,927 681,799 671,108 460,658 470,299
------- ------- ------- ------- -------
MARKETABLE
SECURITIES (1)
Dollar-linked 813 3,851 13,677 1,765 10,981
Unlinked 1,282 6,074 9,038 6,017 9,037
------- ------- ------- ------- -------
2,095 9,925 22,715 7,782 20,018
======= ======= ======= ======= =======
(1) COMPOSITION:
Shares 1,944 9,210 13,026 5,927 10,329
Corporate
debentures -- -- 1,082 -- 1,082
Government
bonds 151 715 8,607 1,855 8,607
------- ------- ------- ------- -------
2,095 9,925 22,715 7,782 20,018
======= ======= ======= ======= =======
(*) A total of NIS 412 million is used as security for short-term borrowings
(also see Note 13 below).
(**)Used as security for transactions in derivative financial instruments.
B. LIENS - see Note 18D.
- 22 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5 - TRADE ACCOUNTS RECEIVABLE
CONSOLIDATED
------------------------------------------
DECEMBER 31
2002 2002 2001 (*)
---- ---- --------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
------------------------------------------
Outstanding balances (mainly dollar-linked) 15,742 74,573 45,166
Less: allowance for doubtful accounts (4,279) (20,270) (10,621)
------ ------- -------
11,463 54,303 34,545
====== ======= =======
(*) Reclassified
NOTE 6 - RECEIVABLES AND OTHER CURRENT ASSETS
CONSOLIDATED COMPANY
----------------------------------- ---------------------------
YEAR ENDED DECEMBER 31
----------------------------------------------------------
2002 2002 2001 (*) 2002 (*) 2001
---- ---- -------- -------- ----
CONVENIENCE
TRANSLATION
US$'000 (IN THOUSAND NIS)
--------------------------------------------------------------------
Government agencies in Israel
and abroad 5,882 27,864 38,560 2,469 712
Prepaid expenses 1,819 8,618 4,312 1,674 1,510
Employees 127 602 312 -- 46
Advances to suppliers 308 1,457 472 -- --
Receivables in respect of the
realization of medical equipment
(MRI) 3,190 15,112 -- -- --
Control Center Group companies
(Mainly EIL) 913 4,324 4,154 -- 226
Other 1,762 8,346 10,677 392 198
------ ------ ------ ----- -----
14,001 66,323 58,487 4,535 2,692
====== ====== ====== ===== =====
(*) Reclassified.
NOTE 7 - INVENTORY
CONSOLIDATED
---------------------------------------
DECEMBER 31
---------------------------------------
2002 2002 2001 (*)
---- ---- --------
CONVENIENCE
TRANSLATION
US$'000 (IN THOUSAND NIS)
----------- -----------------
Hotel inventory and hotel beverages 665 3,151 3,468
=== ===== =====
(*) Reclassified.
- 23 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8 - DEPOSITS, DEBENTURES, LOANS AND LONG-TERM RECEIVABLES
A. COMPONENTS:
CONSOLIDATED
----------------------------------------
DECEMBER 31
----------------------------------------
2002 2002 2001 (*)
---- ---- --------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
------- -----------------
Deposits with banks and financial institutions (1) 69,818 330,735 394,073
Debentures convertible into shares -- -- 20,479
Loans to holders of rights in affiliates (2) 5,509 26,095 28,300
Loan (3) 2,872 13,605 11,809
Deferred income taxes 2,464 11,673 10,216
Receivables and other current assets 801 3,795 4,604
------ ------- -------
81,464 385,903 469,481
Less: allowance for doubtful accounts (2,309) (10,940) (4,540)
------ ------- -------
79,155 374,963 464,941
Less: current maturities (4,350) (20,605) (65,839)
====== ======= =======
74,805 354,358 399,102
====== ======= =======
(*) Reclassified.
(1) Includes, primarily, NIS 280 million in US dollars,
bearing an annual variable interest of Libor+0.7%;
NIS 40 million in Hungarian forint bearing annual
interest of Libor - 3%.
Deposits pledged as security for the repayment of
loans obtained by Group companies and/or to secure
guarantees provided by them in favor of third
parties have been included as amounts due concurrent
to the loan repayment dates or release of guarantees
for which they had been pledged (see Note 15c).
(2) Loans to the management company of companies that it
controls.
A loan of NIS 7.9 million is linked to the US
dollar, bears annual interest of Libor+1% and is due
on December 31, 2006. A loan of NIS 15.8 million may
be converted into shares - see Note 18a(3) below.
Should B.H. decide not to exercise the option, the
loan would then be subject to the linkage terms,
interest and repayment outlined above. The amounts
of money due to the management company from the
Group companies in respect of its rights in the
hotels owned by them (see Note 10b(1) b above),
other than hotel management fees (see Note 10b(1) c
above) will be used as security for the repayment of
the loans. Loans totaling NIS 2.4 million, which are
linked to the US dollar, do not bear interest and
their repayment date has not yet been determined.
B.H. has not received any other security for the
abovementioned loans.
(3) The loan is linked to the CPI, is unsecured, bears
no interest and is due no later than October 30,
2005.
B. REPAYMENT DATES:
DECEMBER 31 2002
----------------------------------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
----------- -----------------
2003 - Current maturities 4,350 20,605
2004 317 1,500
2005 2,872 13,605
2006 1,717 8,134
2007 and thereafter 53 250
Undetermined (*) 72,155 (*) 341,809
------ -------
81,464 385,903
====== =======
(*) See Note - 15C.
C. LIENS - see Note 18D.
- 24 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9 - VENTURE-CAPITAL INVESTMENTS
A. COMPOSITION - CONSOLIDATED:
CONSOLIDATED
----------------------------------------
DECEMBER 31
----------------------------------------
2002 2002 2001
---- ---- ----
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
------- -----------------
MEDICAL IMAGING LTD. ("EMI") - SEE B.(2) BELOW:
THROUGH - ELBIT COMMUNICATION & TECHNOLOGY B.V
Olive Software Inc. ("Olive") -- -- 24,973
THROUGH - SUPERIOR INVESTMENTS LTD
Easy Run Ltd. ("E.R.") -- -- 14,690
---- ---- ------
-- -- 39,663
Provision for impairment of investments -- -- 4,703
---- ---- ------
Total - Elbit -- -- 34,960
---- ---- ------
ELSCINT GROUP LTD. ("ELSCINT") - SEE B(3) BELOW:
(THROUGH ELSCINT BIOMEDICAL LTD.)
Gamida Cell Ltd. ("Gamida") -- -- 27,846
Other -- -- 1,672
---- ---- ------
Total - Elscint -- -- 29,518
---- ---- ------
-- -- 64,478
==== ==== ======
B. ADDITIONAL INFORMATION:
(1) Certain Group investments are carried out through
venture-capital funds, as defined in Standard No. 1
of the Israeli Accounting Standards Board, engaged
in the investment and management of high-tech
companies in Israel and abroad. These companies -
which have not yet attained financial stability -
are engaged in research and development activities.
The value of these investments is thus contingent
upon the continued activity of the investee
companies, which involves certain risks stemming
from the nature of their activity including the
uncertainty associated with the ultimate success of
the product development and marketing potential. It
is, therefore, difficult to objectively estimate the
fair value of most of these investments due to the
lack of a verifiable market-value; nevertheless, the
funds' managements are of the opinion that the fair
value of the investments are not lower than their
cost (net of provisions for decline in values).
(2) The Company agreed, in principle, to receive telecom
and multi-media consultation services from an
employee of the EIL Group, in exchange for which it
would grant the right to purchase a given percentage
(to be agreed upon by the parties) of the Company's
holdings in the investee companies, at the Company's
cost (shares and shareholders' loans).
Due to the slowdown in the telecoms sector and in
light of the long period of time that has elapsed
since the last investments carried out by the
venture-capital funds owned by the venture-capital
investments company, the Company's management has at
this stage (starting the fourth quarter of 2002)
temporarily postponed additional investments through
these venture-capital funds. Consequently, the
Company's management believes that in accordance
with the nature and level of their current activity,
the venture-capital funds that it owns have, in
fact, lost at this stage their status as such and,
accordingly, the investments in Olive and E.R have
been classified in the financial statements as of
December 31, 2002 as investments in affiliates.
- 25 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9 - VENTURE-CAPITAL INVESTMENTS (CONT.)
B. ADDITIONAL INFORMATION (CONT.):
(3) Elscint Biomedical Ltd. ("EBL") entered into
agreements with a company controlled by its former
chief executive officer ("the CEO"), within the
framework of which he was entitled to shares
representing 2% of EBL's issued and outstanding
share capital in exchange for their par value. In
addition, it was decided to make venture-capital
investments in EBL whereby EBL would invest 92% and
the CEO - 8%. For financing his investment, EBL
would provide the CEO a non-recourse loan bearing
interest of Libor plus 1%. It was also established
that should this or the consultation agreement be
cancelled, EBL would be entitled to acquire the
holdings of the CEO in the venture-capital
investments (in whole or in part) at cost and/or
based on their market value, as applicable (based on
the acquisition date). In the fourth quarter of 2002
EBL and the CEO terminated their agreement. Within
the framework of this termination, Elscint
transferred the rights of the CEO in EBL and in the
venture-capital investments to its ownership as a
repayment of the loans it had provided him for their
acquisition. The parties have not yet signed an
agreement for waiving and/or settling any mutual
claims (if any). Elscint's management estimates that
in any event no additional costs are expected in
respect of the agreements' termination beyond those
already reflected in the financial statements.
Concurrent with the termination of the employment
contract, as noted, Elscint's management temporarily
postponed additional investments in the
biotechnology field through EBL. Consequently,
Elscint believes that in light of the volume as well
as nature of its present activity it has, in fact,
lost at this stage its status as a venture-capital
fund and, accordingly, has classified the EBL
investment in Gamida as "an investment in an
affiliate", and its investments in other
venture-capital investments as "investment in other
companies".
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES
A. COMPOSITION AND ACTIVITY:
CONSOLIDATED
------------------------------------------------
DECEMBER 31
------------------------------------------------
2002 2002 2001
---- ---- ----
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
------- -----------------
AFFILIATED COMPANIES:
Shares (1):
Cost (*) 25,180 119,279 --
Accumulated losses, net (625) (2,962) --
Adjustment arising from translation of autonomous
investees' financial statements (68) (322) --
------ ------- ------
Total shares 24,487 115,995 --
Debentures convertible into shares (2) 2,373 11,240 --
A loan (3) 682 3,233 --
------ ------- ------
27,542 130,468 --
Provision for impairment of investment (4) 6,837 32,387 --
------ ------- ------
20,705 98,081 --
OTHER COMPANIES- at cost (5) 997 4,723 22,638
------ ------- ------
21,702 102,804 22,638
====== ======= ======
(*) Including - goodwill:
COST NET BOOK VALVE
-------------------------------------------------------
AMORTIZATION DECEMBER 31
RATE -----------------------------------
% 2002 2002 2001
------------ ---- ---- ----
(IN THOUSAND NIS)
-------------------------------------------------------
10 79,700 49,800 --
==== ====== ====== ====
- 26 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
A. COMPOSITION AND ACTIVITY: (CONT.)
(1) A. GAMIDA CELL LTD. ("GAMIDA")
Elscint, through a wholly owned subsidiary Elscint
Biomedical ("Bio") holds 37.1% of the capital and
voting rights in Gamida Cell Ltd. ("Gamida") and the
rights to appoint 25% of the members of its Board of
Directors.
Gamida is engaged in the development of technology
for multiplying ("expansion") of stem cells
harvested from cord blood. The expanded stem cells
could potentially be used for bone marrow
replacement for cancer patients, for genetic
therapy, and at a later stage, for the regeneration
of organs and tissues.
Some of the shares held by Bio are ordinary shares
and some are preferred shares with liquidation
preference and anti-dilution rights. Bio has options
to be exercised by 2005, to receive an additional
0.7% in consideration for U.S.$ 165 thousand. Should
all the securities of Gamida in circulation be
exercised, Bio's share in Gamida will decline to
33.6%.
Subsequent to the balance sheet date, Gamida signed
a memorandum of understanding with Teva
Pharmaceuticals Ltd. ("Teva"), in the framework of
which Teva will invest an amount of U.S.$ 3 million
in Gamida against an allotment of shares in it at a
rate of 9%. Implementation of the investment is
subject to signing a detailed agreement between the
parties.
In addition, Gamida signed an additional memorandum
of understanding with Teva, in the framework of
which Teva was given an option for future
cooperation with Gamida, with regard to the
technology that Gamida is developing, and subject to
conditions agreed between the parties.
B. VCON TELECOMMUNICATIONS LTD. ("VCON")
Vcon is a public company whose shares are traded on
the French Stock Exchange (Nouveau Marche), engaged
in the field of long range audio and
video-conferencing equipment using various
telecommunication infrastructures. Vcon's products
faciliate video-conferencing and have been designed
primarily for business, distance learning and
governmental markets.
Within the framework of an investment agreement
between Elbit Ultrasound (Netherlands) BV ("EUN") -
a Dutch corporation owned by the Company - and Vcon,
concluded in August 2002, a portion of the Vcon
debentures held by EUN and totaling $2 million were
converted into 2 million shares. As a result, EUN
holds 20.3% of the ownership and control rights in
Vcon as well as the right to appoint one of the nine
members of the board of directors. Accordingly, the
investment of EUN in Vcon has been included by the
equity method starting the fourth quarter of 2002.
The value of EUN's holding of Vcon's shares, on the
basis of their quoted price on the stock-exchange in
France, at December 31, 2002 amounted to NIS 6
million. The Company's adjusted net book value at
that time was NIS 19 million.
In addition, EUN was given the right to acquire
during the three years following the agreement date
up to 1.3 million options in exchange for $0.3 per
each option. These options may be exercised into
non-marketable ordinary options of Vcon within three
years from their grant, in exchange for an exercise
price of $1.40 per share (subject to adjustments).
These options may not be transferred to a third
party without the consent of Vcon.
- 27 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
A. COMPOSITION AND ACTIVITY: (CONT.)
(1) (CONT.)
B. VCON TELECOMMUNICATIONS LTD. ("VCON") (CONT.)
Following the conclusion of this transaction, EUN
holds 2.5 million out of the total 4.5 million
outstanding debentures (see (2) below). Assuming an
exercise of the rights to acquire the options, EUN
would also hold approximately 2.0 million out of 4
million outstanding options, which may be exercised
into shares at various exercise prices up to $18.00
(mostly up to $2.00) per option. In addition, there
are 4.0 million options outstanding, which were
issued to employees (of which 1.5 million are
already exercisable) which may be exercised into
shares at exercise prices mostly ranging from $1.20
to $6.0 per option. Assuming the conversion of all
the convertible debentures into shares and the
exercise of all the outstanding options, the share
of EUN in Vcon would be approximately 30%.
The conversion of part of the convertible securities
is contingent upon the advance approval of the Chief
Scientist while the sale of the shares issued by the
conversion of options or debentures to a third party
prior to their registration for trade is subject to
restrictions under the securities regulation in the
US and /or France.
Within the terms of the agreement, Vcon undertook to
register its shares (including those resulting from
the conversion and options exercise), within 18
months of the agreement's conclusion, for trade on
the Nouveau Marche in France.
Due to the continued considerable gap between the
market value of Vcon shares and the Company's
investment cost therein, the Company considered it
necessary to examine the fair value of its
investment in Vcon. On the basis of this examination
and based on an economic valuation (by an
independent financial and economic consultation
company), management decided to include in the
Company's financial statements an impairment
provision of NIS 10.9 million for the investment.
C. OLIVE SOFTWARE INC. ("OLIVE")
Olive is engaged in the development and marketing of
products enabling a transparent link between the
newspapers' traditional printing systems and the
world of e-publishing. These products enable
newspapers and magazines to automatically present
their printed edition on the Internet, while
supporting e-commerce applications, personalization
and interactive advertising. In addition, the
company develops and markets digital archive
services for newpapers and libraries.
Through EUN, the Company owns 36.2% of the equity
and voting rights in Olive as well as the right to
appoint 25% of its board of directors. The shares
held by EUN have liquidation preference (i.e.,
receipt of the Company's investment in Olive, plus
interest of Libor + 2% per annum, before any
distribution to shareholders holding ordinary or
lower-rank preferred shares) as well as
anti-dilution rights. Olive and its shareholders
decided to modify the terms of the investment of EUN
such that its holding percentage would increase by
5%. A final agreement in respect thereof has not yet
been signed. Due to Olive's negotiations with
potential investors in it, on the basis of
fair-value estimates, the Company's management has
decided to include in these financial statements a
provision of NIS 14 million for the decline in the
value of its investment in Olive. Should all of
Olive's outstanding convertible securities be
converted into shares, the Company's share in Olive
would be diluted to 33%.
- 28 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
A. COMPOSITION AND ACTIVITY: (CONT.)
(1) (CONT.)
D. EASY RUN LTD. ("E.R.")
E.R is engaged in the development and marketing of
"call centers" solutions, which support under one
platform, diversified infrastructure from historical
telephonia to futuristic telecom equipment (IP
switchboards) and modern e-commerce applications
(Web).
The Company's investment in ER was carried out
through Superior Investments Ltd. ("Superior"). The
process of transferring the investment to Superior
has not yet been concluded. Through Superior, the
Company holds 30% of the equity and voting rights in
ER as well as the right to appoint one of the board
of directors' five members. The Company holds
ordinary as well as liquidation shares (as defined
in the investment agreements), before any
distribution to the ordinary or (the lower-ranked)
preferred shareholders as well as anti-dilution
rights. Due to delays in the achievement of business
goals by ER and in light of the lack of trading in
its shares, the Company's management decided to
include in these financial statements a provision,
which, at December 31, 2002, amounted to about NIS
7.5 million in respect of the decline in value of
its investment in ER.
Accompanying financial statements of the affiliates
referred to above have not been presented in the
Company's financial statements since they are not
significant to the latter's business.
(2) Debentures of $ 2 million bearing annual interest of
2%, whose principal is repayable in equal
consecutive quarterly installments between March
2004 and December 2006. These debentures will be
convertible (in whole or in part), at any time, into
non-traded shares of Vcon, at a conversion price of
$ 1.00 per share (subject to adjustments).
To effect repayment of the interest accrued on the
existing debentures as well as interest accruable
through redemption, the Company will be issued an
additional non-interest bearing debenture of $475
thousand, repayable at the end of five years from
issuance. This debenture may be converted, in whole
or in part, to non-traded shares of Vcon at a
conversion rate of $1.40 per share.
These debentures will have second priority as to
Vcon's repayment of bank loans and have an identical
repayment priority to the $2m-debenture issued to a
third party. As security for the repayment of the
debentures, Vcon will record a second-ranking lien
on all its assets in favor of the Company and a
third party (pari passu), with priority over all
other pledges other than those granted to the banks
and subject to their consent. The debentures are not
transferable to a third party without the consent of
Vcon.
For additional information regarding the limitation
on conversion of the debentures into shares and/or
the sale of the underlying shares, as well as
contingencies for the transaction's completion - see
1b.
(3) The loan is linked to the US dollar, bears interest
of Libor + 2% and is due in May 2003. The loan is
convertible into ER liquidation-preference shares
with anti-dilution rights. In addition, the Company
provided a guarantee of $90 thousand in favor of a
bank as security for a loan granted by it to ER. The
Company is committed to increase the ER loan up to
$100 thousand.
(4) Against capital reserves of NIS 12.8 million,
arising from translation adjustments.
- 29 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
A. COMPOSITION AND ACTIVITY (CONT.):
(5) COMPOSITION:
CONSOLIDATED
DECEMBER 31
-----------------------------------
2002 2002 2001
---- ---- ----
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
----------- --------------------
Vcon Telecommunications Ltd. -- -- 18,953
Algotec System Ltd. (i) 778 3,685 3,685
Other (ii) 219 1,038 --
--- ----- ------
997 4,723 22,638
=== ===== ======
(i) Shares entitling 18.4% of the capital and
voting rights.
(ii) Loans to companies engaged in the
biotechnology field, linked to the US dollar,
bearing prevailing market interest rates and
convertible into shares of the borrowing
companies, upon the fulfillment of certain
conditions, as defined in the agreements. The
balance of NIS 260 thousand is presented net
of the allowance of doubtful accounts.
CONSOLIDATED
DECEMBER 31
-------------------------------------
2002 2002 2001
---- ---- ----
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
----------- ----------------------
CONSOLIDATED COMPANIES:
Shares - 240,183 1,137,769 (*) 1,013,362
Company's shares held by a consolidated
company (8,669) (41,065) (41,065)
------- --------- ---------
TOTAL SHARES 231,514 1,096,704 972,297
Loans 69,526 329,349 (*) 317,519
------- --------- ---------
301,040 1,426,053 1,289,816
======= ========= =========
(*) Reclassified.
THE INVESTMENT ACTIVITY DURING 2002 FOLLOWS:
(IN THOUSAND NIS)
-----------------
BALANCE AT THE BEGINNING OF THE YEAR 972,297
ACTIVITY DURING THE YEAR:
Investment in shares 862
Provision for impairment of investment (2,785)
Share in profits 123,814
Dividends (54,775)
Adjustment arising from translation
of autonomous investees' financial statements 57,291
---------
BALANCE AT THE END OF THE YEAR 1,096,704
=========
- 30 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN INVESTEE
COMPANIES
(1) HOTELS SEGMENT - BEA HOTELS GROUP ("B.H.")
A. GENERAL
In September 1999, the Company acquired Bea Hotels
N.V., (a company incorporated in Holland), which
owns hotels (both operational and under
construction), from BEA Holding B.V. ("BEA") - a
company controlled by EIL.
B. ADDITIONAL DATA CONCERNING THE HOTELS HELD BY THE
B.H. GROUP
(1) VICTORIA HOTEL C.V. - A LIMITED PARTNERSHIP
("VHCV")
The Victoria Hotel in Amsterdam is owned by a
limited partnership registered in Holland. VHCV is
held by a subsidiary of the Company ("VEII") and an
additional company, a member of the Red Sea Hotels
Group - 50% (directly and indirectly) by each party
(hereafter - "the Limited Partnership"). VHRI - a
company owned by the Limited Partnership - is the
general partner in the partnership and manages
VHCV's business under agreement.
The limited partners in the VHCV Limited
Partnership, which serve as directors in VHRI, may
be held jointly and severally liable for the
obligations of the limited partnership.
(2) SHAW HOTEL HOLDING B.V. ("SHH")
On completion of the reorganization process of the
structure of holdings of hotels in England in
December 2002, the Shaw Park Plaza Hotel in London
will be owned by SHH, which is incorporated in
Holland and 35% of its share capital is held by
B.H., 35% - held by the Red Sea Hotels Group while
the balance of the shares (30%) are held by another
corporation (hereinafter - "the Shareholders"). On
December 31, 2002 SHH also held (indirectly) also
the shares of the Hotel's operating company
(hereinafter - "ERO"). Concurrently with the leasing
of the Hotel to a third party ("the Lessee"), ERO
entered into an agreement with the Lessee to sell
the hotel's operations (including the portfolio of
customers, the inventories and goodwill).
The shareholders and the companies controlled by
them have an agreement between themselves in the
framework of which the terms of holding the shares
in SHH, inter alia, have been arranged. The
agreement stipulates that every shareholder has the
right to appoint up to 2 directors, where every
director will have voting power in proportion to the
number of shares of the shareholder appointing him
and proportionally to the number of directors on
behalf of that shareholder present at the meeting,
without giving a casting vote to the Chairman of the
Board of Directors or the Chairman of the General
Meeting, as the case may be. Decisions regarding the
companies' budgets will be taken after obtaining the
agreement of every shareholder. Decisions at
meetings of the Board of Directors and General
Meetings will be passed by a majority, but a number
of important matters have been decided where the
decision must be unanimous.
Park Plaza Hotels Europe Ltd. (hereinafter - "the
Management Company") has an option to receive 10% of
the share capital of SHH (out of the holdings of the
Company and of the Red Sea Hotels Group and
proportionally to their holdings - 5% each party),
in consideration for participation at a rate of 10%
in all investments of shareholders, up to the date
of realizing the option. The validity of the option
has been extended by agreement up to December 31,
2004. No extension agreement has yet been signed
between the parties. If the option is exercised, the
holdings of B.H. in SHH will be reduced to 30%.
- 31 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN
INVESTEE COMPANIES (CONT.)
(1) HOTELS SEGMENT - BEA HOTELS GROUP ("B.H.") (CONT.)
B. ADDITIONAL DATA CONCERNING THE HOTELS HELD BY
THE B.H. GROUP (CONT.)
(3) GRANDIS NETHERLANDS HOLDING B.V.
("GRANDIS")
B.H. holds 45% of the rights in Grandis, a
Dutch corporation holding a sublease
interest in the "Sherlock Holmes Park
Plaza Hotel", an operational hotel in
London. A further 45% of the remaining
rights are held by a Red Sea Group
subsidiary, with the balance of 10% held
by a management company.
The shareholders of Grandis have agreed
that the shares held by the management
company would not carry any voting rights.
In order to achieve this, the management
company has granted B.H. and the Red Sea
Group subsidiary a power of attorney to
vote jointly in its name and in the name
of the management company in every
shareholders meeting and in every matter
requiring the decision of shareholders.
B.H. is entitled to appoint one director
(of two) in Grandis.
(4) RIVER BANK HOTEL HOLDING B.V. ("RBH")
On completion of the reorganization
process of the structure of the hotels'
holdings in England, from December 2002,
RBH - a company incorporated in Holland -
will hold the leasehold rights of land on
the banks of the Thames River in London.
B.H. holds 45% of the rights of RBH, an
additional 45% are held by the Red Sea
Group and 10% are held by the management
company. Among the shareholders of RBH it
was agreed that the shares, which are held
by the management company, will have no
voting rights whatsoever.
(5) VICTORIA LONDON HOTEL HOLDING B.V. ("VLH")
On completing the reorganization of the
structure of the hotels' holdings in
England in December 2002, VLH - a company
incorporated in Holland - will hold the
ownership rights in the land and the
Victoria Park Plaza Hotel, built on it in
London. B.H. holds 50% of the rights in
VLH, an additional 45% are held by the Red
Sea Group and 5% are held by the
management company. It was agreed between
the shareholders of VLH that the shares
held by the management company will have
no voting rights whatsoever, thus the
voting rights are divided 50% to B.H. and
50% to the Red Sea Group.
- 32 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN INVESTEE
COMPANIES (CONT.)
(1) HOTELS SEGMENT - BEA HOTELS GROUP ("B.H.") (CONT.)
B. ADDITIONAL DATA CONCERNING THE HOTELS HELD BY THE
B.H. GROUP (CONT.)
(6) PARK PLAZA HOTEL (SANDTON) (PTY) LTD.
("SANDTON")
B.H. owns (through a company incorporated
in Holland) 33.3% of the rights in a hotel
operating in South Africa, which is in
turn owned by Sandton. The remaining
rights are held (indirectly) by the Red
Sea Group and another company (which is a
related party to the management company)
(33.3% to each party) (hereinafter
together - "the Shareholders").
The agreement establishing the Dutch
incorporated holding company stipulates
that each party has the right to appoint
one director and that the resolutions of
the Board of Directors and the General
Meetings will be passed by a majority
vote; however, it was resolved that
certain key matters would require a
unanimous decision.
The parties to the agreement are entitled
to and are liable for in equal shares all
the rights and obligations connected with
and/or relating to the hotel, to Sandton
and to the hotel's operating company, and
this includes, inter alia, the obligation
to provide credit, guarantees or
shareholders' capital, as necessary for
the acquisition and/or operation of the
hotel.
(7) SC BUCURESTI TOURISM S.A. ("BUCURESTI")
i. B.H. holds all the rights (in capital,
voting and the rights to appoint all
directors) in a company known as BEA
Hotels Eastern Europe B.V. ("BHEE")
(incorporated in Holland) which holds,
indirectly - through a wholly owned
and controlled company, incorporated
in Romania ("Domino") - 69% of
Bucuresti. Bucuresti owns a complex
including an hotel, an apartment hotel
and a restaurant, situated in the
center of Bucharest, Romania ("the
Bucuresti Complex"). Bucuresti was
purchased through a privatization
tender published by the State
Ownership Fund of the Romanian
government ("SOF"). The tender
procedure was approved by a decision
of the Supreme Court of Romania. The
cost of the acquisition of the rights
in the complex (including related
costs of the purchase) totaled NIS 172
million.
The acquisition of the rights in
Bucuresti was carried out within the
framework of a memorandum of
understanding ("MOU") for the
establishment of a joint venture in
which 80% of the rights were to be
held by B.H. and 20% of the rights by
an unrelated third party ("Third Party
Shareholder"). Based on the terms of
the MOU, B.H. is entitled to receive
100% of Domino's profits to be
distributed as dividends up to an
aggregate amount of U.S.$ 2 million.
Income above this amount will be
distributed according to the ratio of
holdings (80%: 20%).
In addition, B.H. has a Put Option to
demand that the Third Party
Shareholder increase its percentage
shareholding (in accordance with the
cost of the full investment) from 20%
to 50% for the period and on the
conditions as agreed between the
parties. The parties undertook to
finance the renovation of the hotel,
should this be required. Should one of
the parties not provide the financing
in proportion to its share, its
holdings will be diluted based on the
mechanism to be agreed.
In December 2001 all of the shares in
Domino were transferred to BHEE.
- 33 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN INVESTEE
COMPANIES (CONT.)
(1) HOTELS SEGMENT - BEA HOTELS GROUP ("B.H.") (CONT.)
B. ADDITIONAL DATA CONCERNING THE HOTELS HELD BY THE B.H.
GROUP (CONT.)
(7) SC BUCURESTI TOURISM S.A. ("BUCURESTI") (CONT.)
i. (Cont.) As a result of a dispute which
arose between B.H. and the Third Party
Shareholder regarding compliance by
the Third Party Shareholder with its
obligations to provide indemnities to
B.H. pertaining to the results of
certain matters pending against Domino
(the circumstances and causes of which
arose prior to the signature of the
MOU concluded between the parties in
respect of the acquisition of
Bucuresti), B.H is withholding the
shares of the Third Party Shareholder
(20%) in BHEE as security for
compliance by the Third Party
Shareholder with its obligations, so
that formally B.H. is, therefore, on
the issuance date of financial
statements, the owner of 100% of the
capital and voting rights in Domino.
The results of this dispute do not
have an effect on the results of
operations of B.H. for the reported
periods and/or on the amount of its
shareholders' equity as at December
31, 2002.
BHEE filed a monetary claim against
the Third Party Shareholder as a
result of its failure to comply with
the terms of the indemnity given by
it, within the framework of which
attachments were imposed on the assets
of the Third Party Shareholder. In
October 2002 the Third Party
Shareholder filed an application with
the Court to transfer the dispute to
arbitration in accordance with the
provisions of the MOU. BHEE filed its
objection to this application, and in
December 2002 the court rejected the
Third Party Shareholder's application
to transfer the dispute to
arbitration. As a result, in February
2003 the Third Party Shareholder filed
a statement of defense relating to the
claim.
ii. An application submitted to the High
Court of Romania to cancel the tender
under which Domino purchased the
controlling shares of Bucuresti, was
rejected by the Court. This ruling
could be appealed to the High Court.
Up to the date of approval of the
financial statements no appeal has
been filed. As the period of time to
serve an appeal has passed, the legal
advisors of Domino consider that this
matter may be considered as being
closed. An additional claim for the
cancellation of the tender, the
cancellation of the entire
privatization process relating to
Bucuresti and the cancellation of
Domino's rights in Bucuresti's shares
has been filed with the Magistrates
Court in Bucharest, Romania. In the
pre-trial hearing which took place on
March 6, 2003 the Court rejected the
claim in limine.
iii. A criminal investigation carried out
against a number of suspects
(including former officers in SOF who
were involved in the privatization
process and the sale of control in the
Bucuresti Hotel to Domino) for events
relating to the period prior to the
acquisition of control in Bucuresti by
B.H., culminated in the filing of an
indictment against 17 accused. The
hearings in these proceedings have
been deferred until September 2003.
These criminal proceedings may have an
indirect effect on the validity of the
privatization and thereby an indirect
effect on Domino's rights in
Bucuresti, despite the fact that
Domino is not an accused party under
the indictment. Domino's legal counsel
cannot estimate at this stage the
results of the criminal proceedings or
their effect on Domino's rights in
Bucuresti.
- 34 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN INVESTEE
COMPANIES (CONT.)
(1) HOTELS SEGMENT - BEA HOTELS GROUP ("B.H.") (CONT.)
B. ADDITIONAL DATA CONCERNING THE HOTELS HELD BY THE
B.H. GROUP (CONT.)
(7) SC BUCURESTI TOURISM S.A. ("BUCURESTI") (CONT.)
iv. The Third Party Shareholder (a former
shareholder in Domino - see i above)
cancelled the partnership agreement
that it made with another third party
("the Plaintiff") regarding their
joint investment in Domino prior to
its acquisition by B.H., on the
grounds of non-compliance by the
Plaintiff with its fundamental
obligations under the partnership
agreement. As a result, the Plaintiff
filed a monetary claim in the courts
in Romania against Domino and others,
for an amount of $ 2.5 million, for
commissions allegedly due to it in
terms of the abovementioned
partnership agreement, and to which
Domino was a party. Domino's legal
advisors in respect of this matter
estimate that the Plaintiff will be
unable, for procedural reasons, to
complete the proceedings relating to
the claim. This claim is covered by
the indemnity given to B.H. by the
Third Party Shareholder.
On the date of approval of the
financial statements an additional
claim filed against Domino by another
third party is pending, in which the
main reliefs claimed under it are the
payment of the same commission of $
2.5 million in accordance with the
partnership agreement mentioned above,
and the cancellation of an agreement
with a bank in Israel within the
framework of which the shares of
Domino in Bucuresti were pledged in
favor of the bank.
The Company received an indemnity from
the Third Party Shareholder against
these claims (see i above).
In Domino's opinion, based on legal
advice received, these claims have no
legal or contractual basis whatsoever,
and the third party has no legal
standing to make its claims.
Accordingly, no provision for these
claims is included in the financial
statements.
v. In the framework of an agreement to
establish a joint company owned by
Bucuresti and a third party, which was
signed prior to the acquisition of
Bucuresti by B.H., that third party
undertook to invest $ 27 million in
the said joint company and in
consideration Bucuresti undertook to
transfer its rights in the Bucuresti
Complex to the ownership of the joint
company. As that third party failed to
meet its obligations, Bucuresti
cancelled the partnership contract and
also filed an application to the Court
to liquidate the joint company. At
this stage, the parties are litigating
regarding the sole authority of the
Romanian Courts to issue an
instruction to liquidate the joint
company and not regarding the transfer
of rights in the Bucuresti Complex to
the joint company. If Bucuresti is
forced to transfer its rights in the
Bucuresti Complex to the joint
company, then its rights in the hotel
are likely to be significantly
prejudiced. B.H.'s management is of
the opinion that it is not reasonable
that as a result of the said
proceedings Bucuresti will be forced
to transfer its rights in the
Bucuresti Complex to the joint
company.
- 35 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN
INVESTEE COMPANIES (CONT.)
(1) HOTELS SEGMENT - BEA HOTELS GROUP ("B.H.") (CONT.)
B. ADDITIONAL DATA CONCERNING THE HOTELS HELD BY THE
B.H. GROUP (CONT.)
(7) SC BUCURESTI TOURISM S.A. ("BUCURESTI") (CONT.)
vi. In addition, certain legal proceedings
are being conducted in Romania within
the framework of which it is claimed
that resolutions passed at the general
meetings of shareholders of Bucuresti,
were not validly adopted - for
procedural reasons only - and are not
binding. Some of these proceedings
were approved by the Court and in
respect of others Domino has filed
appeals, while some of these
proceedings were rejected by the
Courts.
B.H.'s management is of the opinion
that the claims are spurious and
tendentious and that these claims will
not significantly affect B.H.'s rights
in the shares of Bucuresti and in the
Bucuresti Complex owned by it.
vii. Two claims are pending against
Bucuresti, which challenge its
ownership in its properties (including
an appeal relating to the period of
the State's ownership of the
properties which are the subject of
the claim, prior to the sale of
Bucuresti's shares to Domino). One of
the claims is rejected, but the
plaintiffs have the right to appeal
this ruling, and regarding the other
claim, the legal advisors are not able
to estimate the outcome.
viii. There are legal proceedings against
Domino and/or Bucuresti ("the
Companies") regarding various
activities carried out in the normal
course of business, for a total amount
of $ 160 thousand. In the opinion of
B.H.'s management, B.H. will not incur
any significant additional costs over
and above those included in the
provision in the financial statements.
(8) PROVISION FOR IMPAIRMENT IN VALUE OF
INVESTMENTS
Repeated postponements in the
execution of infrastructure work by
the Belgium authorities next to the
hotel owned (but not controlled) by a
Belgium investee have adversely
affected its activity. In light of
these postponements Elscint deemed it
necessary to reexamine the adjusted
value of its investment in the company
owning the hotel. Following that
examination Elscint included in its
financial statements a provision of
NIS 23.2 million as an adjustment of
that investment's value to its fair
value (NIS 11.3 million - against
capital reserves from translation
adjustments and NIS 11.9 million - in
"other income (expenses)" (see Note 2g
above)). The fair value of the
investment was determined based on,
among other things, a valuation
obtained from an independent
appraiser.
- 36 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN
INVESTEE COMPANIES (CONT.)
(1) HOTELS SEGMENT - BEA HOTELS GROUP ("B.H.") (CONT.)
C. HOTEL MANAGEMENT AGREEMENTS
(1) HOTELS IN HOLLAND (OWNED BY VHCV AND UVH),
HOTEL IN BELGIUM (OWNED BY AP) AND A HOTEL
IN ENGLAND (OWNED BY SHH, GRANDIS AND VLH)
The Park Plaza Hotels Europe Ltd. ("the
Management Company") owns the concession
to use the Park Plaza brand name and to
operate hotels under its management
system.
The hotels are directly managed by the
management company, in return for an
annual fee of 7% of the operating profit.
The companies also share in the necessary
expenses incurred by the management
company in the performance of its
contractual obligations. Should the
companies sell the hotels owned by them or
should the control in any one of them be
transferred to a third party, the
companies are to pay the management
company an amount calculated as being 7%
of the (gross) operating profit of the
year preceding that sale or transfer. In
such case, VHCV is also to pay 2.5% of any
gain derived from the sale of the hotel.
Information pertaining to the leasing of
SPP Hotel to an unrelated hotel company is
provided in Note11c.1 See (2) below.
With regard to the hotel owned by AP, it
has been agreed that should the operating
profit (gross) of the hotel be less than
Euro 1,735 thousand (NIS 8,623 thousand)
during each of the first 5 years, the
management company is obligated to pay an
amount equal to the difference between
that amount and the amount of the actual
(gross) operating profit. Implementation
of this condition has been postponed by
agreement of the parties, and the parties
are discussing amending or rescinding this
condition. Accordingly, the financial
statements do not include income
receivable.
(2) ANDRASSY 25 KFT. ("ANDRASSY") - HOTEL
UNDER CONSTRUCTION
In December 2002 the hotel management
company ("HMC") signed a 20-year agreement
with Andrassy (which owns the rights in
the (preserved) National Ballet Building
for operating the hotel following the
building's renovation and conversion into
a hotel. In exchange, the operator is
entitled to receive a basic salary
equaling a percentage of the (gross)
revenues, plus a management fee equaling a
percentage of the operating income. The
operator guarantees that the adjusted
operating income will not be lower than
fixed amounts stipulated in the agreement.
Moreover, Andrassy participates in other
expenses incurred by HMC and which were
required within the framework of
fulfillment of its responsibilities
(marketing expenses etc.). This agreement
is contingent upon the approval of the
boards of directors of the two contracting
companies.
- 37 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN
INVESTEE COMPANIES (CONT.)
(1) HOTELS SEGMENT - BEA HOTELS GROUP ("B.H.") (CONT.)
D. FRANCHISE AGREEMENTS
Within the terms of the management agreements
B.H. Group companies ("the Companies") were
granted a secondary franchise by the management
company permitting the use of the name "Park
Plaza" in consideration for monthly royalties
of up to 3% of the gross hotel-room revenues
("the Franchise Agreement").
The Companies undertook to indemnify Park Plaza
International and related parties for any
claim, damage or expense incurred by it in
connection with the hotels or the performance
of Park Plaza International's commitments under
the agreement. The Franchise Arrangement is to
remain in force throughout the entire period of
the management agreements.
E. SUBSIDY IN RESPECT OF PARTICIPATION IN
HOTEL-EMPLOYEE WAGES
Under Belgian law, under certain conditions,
companies that create employment opportunities
are entitled to receive a subsidy from the
government in the form of a contribution
towards the salary of employees, based on the
amount of the investment to create such
positions, up to a certain maximum limit.
Due to a dispute between AP (a subsidiary) and
the Belgium government concerning AP's status
in connection with the scope and applicability
of the subsidy's provisions, the previous
years' financial statements did not include any
income in respect of participation in hotel
employees' wages. In September 2002 the
government approved for AP such a subsidy
totaling (euro)1.09 million (net of a
commission) and, accordingly, this amount was
included in 2002 as a participation in wage
costs.
(2) COMMERCIAL CENTER AT THE HERZLIYA MARINA
A. In September 1999 a subsidiary of Elscint (SLS)
signed an agreement with the Herzliya Marina
Limited Partnership ("the Partnership"), and
Herzliya Marina (Holdings) Ltd. ("the Limited
Partner") - a company in which Control Centers
Ltd. holds a majority of the shares, entitling
holders to management rights in the
partnership, as well as the majority of shares
entitling holders to voting rights. Pursuant to
the agreement, SLS acquired the commercial and
entertainment center being constructed by the
Partnership at the marina. Completion of the
transaction is contingent upon the transfer of
the real estate (which is dependent, among
other things, on the completion of certain
activities by the partnership, and receiving
certain approvals from various authorities to
carry out the activities) and registration in
the name of the purchaser in the Israel Lands
Registry. As of the issuance date of these
financial statements, the land has not been
transferred to SLS. To secure the Partnership's
commitments under the above agreement, 90% of
the proceeds were deposited in trust until
satisfaction of all the obligations under this
agreement.
- 38 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN
INVESTEE COMPANIES (CONT.)
(2) COMMERCIAL CENTER AT THE HERZLIYA MARINA (CONT.)
B. In April 2002, SLS entered into an agreement
with a company in the Control Center group
(hereinafter - "contractor"), in accordance
with which the contractor undertook to complete
the construction of the Commercial Center,
including development as defined in the
agreement, for a consideration of $57.7
million, which is to be paid based on the
progress of the work (hereinafter - "the Work
Consideration"). The consideration amount was
set based on a calculation of the remaining
work as of March 1, 2002. The amount of the
Work Consideration was determined on the basis
of a calculation of the work remaining to be
performed as of March 1, 2002. As of December
31, 2002, the cost of fee work accrued in SLS's
books for the contract amounted to $16.8
million. The work covered by the agreement does
not include specific activities, which were
detailed in the agreement (mainly - planning,
marketing, license fees and supervision), the
cost of which is to be borne by SLS. In
addition, the agreement provides that the
contractor is to bear the cost of alterations
for tenants, based on specifications in the
agreement. The contractor undertook to deliver
the Commercial Center to SLS, ready for
commercial operation ("turn key"), no later
than March 2003.
The consideration for alterations not included
in the specifications is to be determined based
on a mechanism described in the agreement. As
of the issuance date of these financial
statements the agreement had not yet been
closed. Upon execution of the agreement, SLS is
to pay to the contractor an advance of $3
million on account of the Work Consideration
and, concurrently, the contractor is to provide
SLS with a bank guarantee to the extent of 5%
of the Work Consideration. In addition, SLS is
obligated, as part of the agreement, to assign
all of its rights and obligations to the
contractor under agreements, which it signed
with various suppliers, except for those
specified in the agreement. The agreement
includes a number of conditions, the breach of
which is considered as a fundamental breach,
which confers the remedies stated in the
agreement. The agreement was approved by the
General Meeting of Elscint's shareholders.
C. SLS's agreements for leasing the commercial
space are for an average term of 5 years and
they are generally on standard conditions. The
rentals comprise a basic rent per sq. m. and in
certain cases a percentage of turnover. The
agreements include, among other stipulations,
provisions requiring the tenant to contribute
to the advertising expenses of the commercial
center while under construction, management
fees etc.
- 39 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN
INVESTEE COMPANIES (CONT.)
(3) COMMERCIAL CENTERS IN CENTRAL AND EASTERN EUROPE
A. GENERAL
In September 2000, Elbit Ultrasound
(Netherlands) BV ("EUN") under the terms of an
agreement acquired from BEA Holding BV ("BEA" a
subsidiary of EIL) all of its holdings in Plaza
Centers (Europe) BV ("PC"), which up to then
held half of the rights of the Commercial and
Entertainment Centers in Eastern Europe
("Commercial Centers"). BEA undertook to
indemnify PC and/or EUN during a seven-year
period from the Closing Date for any damage or
expense suffered by PC and/or EUN as a result
of any breach of commitment or representation
made by BEA in the PC Agreement.
In addition, an agreement between EUN and Red
Sea Hotels Group companies ("the sellers") was
finalized in September 2000 for the acquisition
by EUN of the outstanding half of the rights in
the above commercial centers. In addition, EUN
assumed all liabilities and guarantees provided
by the sellers to the commercial centers. EUN
undertook to indemnify the sellers and/or
additional companies and the Red Sea Hotels
Group for any damage or expense suffered by
them as a result of these liabilities.
Shortly thereafter, EUN transferred its
holdings in the project companies to PC against
shareholder loans. Following completion of the
above two transactions, EUN holds all the
rights in PC, while also holding - directly and
through PC - all the rights in these commercial
centers.
During the course of implementing the
procedures necessary for final approval of the
transaction, EIL announced that - following the
publication of the Company's results for 2002 -
an evaluation is to be made on the gross
revenues of nine commercial centers which had
been appraised for 2001 and 2002 on the basis
of which appraisal the PC acquisition had been
effected as compared to actual gross revenues.
Should the actual revenues be lower than the
estimated revenues, as were used to determine
the appraised value of the centers, then a
revised valuation is to be obtained by
multiplying the average actual revenues for
2001 and 2002 by 10. If the revised valuation
of the centers is lower than the appraised
valuation, EIL is to indemnify EUN for one half
of the difference. On the basis of actual
gross-income data as included in the financial
statements for those years, Company management
believes that EUN will not be indemnified at
all in respect of the established formula.
B. ADDITIONAL INFORMATION CONCERNING THE
COMMERCIAL CENTERS HELD BY PLAZA CENTERS ("PC")
1. GENERAL
Each commercial center is ordinarily
operated through a separate company
("Project Company"), so that PC in fact
holds companies that own the rights in
operational centers or in sites on which
commercial centers are to be constructed.
The development and establishment of the
centers, as well as the related financing
and current operating activities are
carried out by PC, directly and/or
indirectly, through its subsidiaries.
- 40 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN
INVESTEE COMPANIES (CONT.)
(3) COMMERCIAL CENTERS IN CENTRAL AND EASTERN EUROPE
B. ADDITIONAL INFORMATION CONCERNING THE
COMMERCIAL CENTERS HELD BY PLAZA CENTERS
("PC") (CONT.)
2. PRINCIPAL AGREEMENTS FOR PROPERTY LEASES
PC is committed under principal agreements
with several organizations to lease
commercial space in its Project Companies'
centers (built or that will be built).
Control Centers is a party to one such
agreement. Principal agreements are
ordinarily entered into with tenants
designated as "anchors", who lease
relatively large spaces, for long periods
of time. In principle, these agreements
bind PC and the Project Companies to grant
those anchors detailed leases for the
rental of space in every commercial center
("Detailed Agreement"). The principal
agreements grant the anchor tenants
exclusivity for the rental of space in the
commercial centers (in any area
appropriate to a tenant).
The Detailed Agreements are ordinarily
prepared in a standard form for each
anchor tenant, and stipulate that the rent
payments are to comprise basic rental per
square meter or in certain circumstances
the higher of a rental per square meter or
a specified percentage of the tenant's
turnover. In certain circumstances the
rental fees are a function of the
occupancy rate of the specific commercial
center. The Detailed Agreements are
ordinarily signed for terms ranging from
between five to ten years (from each
center's opening date) and include a
tenant's renewal option for fixed terms of
from five to ten years, at predetermined
and stipulated rental fees. The Detailed
Agreements include provisions granting
options entitling the tenant to determine
the lease in case certain minimum targets
are not met, contain restrictions against
leasing areas to third parties active in
competing activities etc. In addition to
the Detailed Agreements, the Project
Companies also enter into lease agreements
with other tenants, in each commercial
center.
3. COMMITMENTS
As of December 31, 2002 the Project
Companies are party to pre-contracts for
land acquisition which are subject to the
satisfaction of specified material
conditions prior to the signing of a final
purchase agreement, amounting to a total
of Euro 12.6 million (NIS 62.7 million).
- 41 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN
INVESTEE COMPANIES (CONT.)
(3) COMMERCIAL CENTERS IN CENTRAL AND EASTERN EUROPE
B. ADDITIONAL INFORMATION CONCERNING THE
COMMERCIAL CENTERS HELD BY PLAZA CENTERS
("PC") (CONT.)
4. COORDINATION, PLANNING, SUPERVISION AND
MANPOWER SERVICES
A. The following are the commitments of the
Company and its subsidiaries with Control
Centers Ltd. ("CC") and/or companies under
its control:
(1) A framework agreement to provide
coordination, planning, execution and
supervisory services in connection
with the establishment of the
commercial centers by Control Centers
(or by companies owned by CC). These
services are to include the
coordination and supervision of the
entire planning phase of the projects
initiated by the Company, including
the selection of consultants and
planners and carrying out relevant
negotiations with them. CC (or its
representative) is to be remunerated
at a rate of 5% of the actual
development costs incurred for each
project (excluding the cost of the
land, general and administrative
expenses and financial expenses) for
provision of these services. These
services are to be provided for each
separate project as agreed upon by the
parties. These payments will be paid
to CC based on milestones established
in the agreements. In addition, CC
will be entitled to receive
reimbursement for reasonable expenses
directly incurred by it in the
appointment of consultants (to carry
out the agreed services) at an amount
not to exceed $50 thousand per
project.
(2) An agreement with Jet Link Ltd., a
company controlled by CC for the
supply of air transportation services,
with payment based on the price list
of Jet Link Ltd., net of a 5%
discount.
B. PC has entered agreements with third
parties for the supply of manpower,
management, supervisory and logistic
services, for a commission payment.
C. An agreement between the Company, PC, EUN
and a company controlled by PC's President
(Triple-S), under which Triple-S is to
provide services - through its controlling
party who also functions as PC's CEO - to
include initial feasibility, location of
suitable sites and negotiations for
acquisition, obtaining real estate
financing, supervision and coordination of
development and construction work as well
as additional related services. Triple-S
is to receive a monthly fee of $40
thousand (NIS 190 thousand) for these
services. In addition, the controlling
individual of Triple-S is to be reimbursed
for living and other normal expenses.
Triple-S is entitled to receive from PC a
monthly loan of $5 thousand, at market
interest rates and repayable no later than
December 31, 2004.
This agreement will be in effect until
December 31, 2003.The Company is entitled
to terminate the service agreement, at any
time, by giving 90 days advance notice.
- 42 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN
INVESTEE COMPANIES (CONT.)
(3) COMMERCIAL CENTERS IN CENTRAL AND EASTERN EUROPE
B. ADDITIONAL INFORMATION CONCERNING THE
COMMERCIAL CENTERS HELD BY PLAZA CENTERS
("PC") (CONT.)
5. AGREEMENT OF SHAREHOLDERS IN SADYBA CENTRE
S.A. ("SADYBA")
Sadyba owns and operates a commercial
center in Warsaw, Poland.
PC holds 50% of the ownership in, and
control of, Sadyba, which includes the
right to appoint its directors. Sadyba's
Board resolutions require a majority vote
(legal quorum - at least one director per
party) to be passed. Resolutions deemed
fundamental to its business activities as
well as other material decisions require
the approval of all the directors and a
majority of the shareholders. A committee
is to supervise Sadyba's operations, with
each shareholder entitled to appoint three
out of its six members. Any voluntary or
non-voluntary transaction involving
Sadyba's shares requires the supervisory
committee's approval.
PC's partner in Sadyba (50%) has been
granted a put option, exercisable until
September 2003, to compel PC to acquire
the partner's shares in Sadyba at a price
computed as the multiple of 8 times the
operating income (before depreciation and
financing), as defined in the agreement,
net of long-term liabilities.
PC was granted a call option to compel its
partner to sell to PC the partner's shares
in Sadyba, at a price computed as the
multiple of 9.5 times the operating income
(before depreciation and financing), net
of long-term liabilities. This option is
exercisable within 30 days following the
expiration of the put-option period.
6. In February 2002, PC completed a
transaction on the basis of an agreement
in principle originating during 2001 for
the acquisition of companies holding full
ownership and control of three shopping
and entertainment centers in Hungary with
a total area of approximately 75,000
square meters, for a consideration of Euro
47.2 million (NIS 234.6 million). The
consideration reflects a gross value of
the centers acquired (before deducting
long-term financing) of Euro 111.2 million
(NIS 552.6 million).
The parties decided that, in addition,
they would prepare a reconciliation in
respect of the acquired companies'
working-capital upon their acquisition by
PC. Such a reconciliation has not yet been
prepared by the approval date of these
financial statements. PC's management
estimates that the outcome of the
reconciliation will not materially affect
amounts and/or results of the transaction.
Assets in the amount of NIS 617 million
were included in the December 31, 2002
balance sheet. Revenues, operating income
and net income included during the year
ended December 31, 2002 amounted to
approximately NIS 73 million, NIS 26
million and NIS 34 million, respectively.
7. LIENS - see Note 18D below.
- 43 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN INVESTEE
COMPANIES (CONT.)
(3) COMMERCIAL CENTERS IN CENTRAL AND EASTERN EUROPE
B. ADDITIONAL INFORMATION CONCERNING THE COMMERCIAL
CENTERS HELD BY PLAZA CENTERS ("PC") (CONT.)
8. PROVISION FOR IMPAIRMENT IN VALUE OF INVESTMENTS
Due to the continued devaluation of the euro in
relation to the Hungarian forint, coupled with the
deterioration in the operating parameters of some of
the project companies, the Company deemed it
necessary to reexamine the adjusted value of its
investments in the project companies. The Company
included in its financial statements an after-tax
net provision of NIS 33.1 million, against capital
reserves from translation adjustments, in respect of
the adjustment of the value of these owned
investments to their fair value (see Note 2g above).
The investments' fair value has been determined on
the basis of valuations of the commercial centers
owned by those companies, obtained from external
appraisers.
(4) INSIGHTEC - IMAGE GUIDED TREATMENT LTD. ("IGTX")
A. Through December 31, 2001 EUN had (in trust by the
Company), 100% of the ownership and control of IGTX,
a company engaged in the development and manufacture
of non-invasive methods for the treatment of
(malignant and benign) blood vessel tumors and
localized injection of medication, and the
development of decision support systems for
operating rooms and trauma units.
B. Through December 31, 2001 Texonics Ltd. (Texonics)
was held by IGTX and GE Medical Systems (GEMS) ("the
shareholders"). The shareholders' agreement provided
that should any additional shareholder investments
and/or shareholders' loans be required for Texonics,
the shareholders would be required to provide them
ratably to their relative percentage holdings in
Texonics, and any party not so contributing would
have its holdings diluted on the basis of a formula
set out in the agreement. As at December 31, 2001
GEMS had not provided its quota of shareholders'
loans as required, and therefore its holdings in
Texonics were diluted to 5% while, concurrently, the
holdings of IGTX therein had increased to 95%. In
accordance with the agreement GEMS was given an
option to sell its holdings in Texonics to IGTX for
$1.25 million or in exchange for royalties on
Texonics' sales at rates and over periods stipulated
in the agreement for the acquisition of know-how
from GEMS.
C. IGTX has an employee share option plan in operation
in accordance with Section 102 of the Income Tax
Ordinance, under which it has issued 2.5 million
options to a trustee. These options will be released
to the employees, upon vesting and may be exercised
into shares at an exercise price of NIS 0.01 per
share. The options vest over a four-year period from
the grant date. Under this plan, IGTX has designated
2,106,000 shares for employees options for which
were granted as of December 31, 2002. The rights to
1,314,063 shares of that amount were vested as of
December 31, 2002. The exercise period has been set
for seven years from the date of grant. The
employees will bear any tax burden under law for the
plan. Regarding shares had by the trustee not yet
designated for employees, IGTX's shareholders'
meeting approved, after the balance sheet date, to
allot the shares under two additional plans - see
(f) and (g) below. In addition, IGTX has an option
plan for its directors for the purchase of 150,000
shares. Of this amount, 100,000 options have been
granted, exercisable into 100,000 ordinary shares of
IGTX, for an exercise price of $3.33 per option. The
vesting period is 4 years from the grant date. As of
December 31, 2002, 75,000 options were vested. The
exercise period is for seven years.
- 44 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN INVESTEE
COMPANIES (CONT.)
(4) INSIGHTEC - IMAGE GUIDED TREATMENT LTD.
("IGTX") (CONT.)
D. On December 31, 2001 a transaction ("the Share
Agreement") was concluded between the Company, EUN
and IGTX, and GEMS, under which GEMS invested $10
million in the share capital of IGTX (made up as to
$3 million in cash and $7 million in assets and
services to be provided over a five-year period), in
return for 11.8% of the (fully diluted) share
capital of IGTX. It was also agreed that GEMS would
convert its holdings in Texonics, as outlined above,
into an additional 5% of the share capital of IGTX.
EUN's shareholdings in IGTX will thereby be diluted
to 61.14% on a fully diluted basis. In addition,
GEMS was granted a three-year option to acquire an
additional 5% of the share capital of IGTX in
exchange for $3 million. If the option granted GEMS
is exercised into shares, EUN's shareholding in IGTX
would decrease to 58.1% (fully diluted).
At the time of this transaction, IGTX was classified
as a development-stage company. Accordingly, the
resulting increase in the Company's share in IGTX's
equity is reported as deferred income, to be
included in the Company's statement of operations as
income at the higher of the amortization of such
deferred income over these years or up to an amount
equal to the Company's share in IGTX's losses during
that period based on a cumulative computation (see
Note 20H).
The shareholders' agreement also provided that in
the event of a share issuance by IGTX to a third
party within two years from the transaction's
conclusion date which values IGTX lower than its
value for the purposes of the Share Agreement, the
percentage-holdings of GEMS would be adjusted based
on the value used in the later transaction. This
agreement also established a number of restrictions
on the carrying out of certain material and
exceptional transactions or activities without the
prior consent of GEMS.
E. Employee options plans - 2003
Subsequent to the balance-sheet date, IGTX adopted
an additional equity-based employee options plan,
which was approved by its shareholders' meeting held
on February 10, 2003. Under the plan, IGTX
employees, as well as employees of its related
companies, will be awarded 1,094,000 options, each
exercisable into one ordinary share of IGTX, in
exchange for an exercise price of NIS 0.01 per
option. This award will vest at the end of two years
from the year in which the options were granted to
the participant. The exercise period is for seven
years from a date to be established for each grant.
The shares issued pursuant to this plan are subject
to capital-gains tax under Section 102 of the Income
Tax Ordinance.
F. Options plan for non-employees - 2003
Subsequent to the balance-sheet date, IGTX adopted a
non-employee options plan, which was approved by its
shareholders' meeting held on February 10, 2003.
Under the plan, IGTX suppliers will be granted up to
300,000 options, each exercisable into one ordinary
share of IGTX. The exercise price for each
participant will be set in his grant notification.
The grant award notification will also outline the
vesting terms for each participant's options. The
exercise period will expire at the end of seven
years from a date to be established in each grant
notification. The shares issued pursuant to this
plan are subject to the provisions of Article 3(i)
of the Income Tax Ordinance.
G. On April 1, 2003 GEMS exercised its option to
acquire additional IGTX shares (see d above). The
Company's gain from the decline in the percentage of
holding in IGTX amounts to 4.0 million.
- 45 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN
INVESTEE COMPANIES (CONT.)
(4) INSIGHTEC - IMAGE GUIDED TREATMENT LTD. ("IGTX")
(CONT.)
H. Assuming the conversion of all the IGTX convertible
securities (including those allotted within the
framework of the plans adopted in 2003) the
Company's holding percentage in IGTX would be
reduced to 53.8%.
I. IGTX filed a request with the income tax authorities
to merge with Texonics Ltd. effective December 31,
2002, pursuant to Article 103 of the Income Tax
Ordinance. This merger is contingent upon approval
by the income tax authorities, the Investment Center
and the Office of the Chief Scientist of the
Ministry of Industry and Trade. A temporary
approval-in-principle was received from the
Investment Center subsequent to the balance-sheet
date. The final approval is contingent upon a share
issuance by IGTX, as detailed in the in-principle
approval document.
Should it be approved, this merger would have no
effect on assets and liabilities and/or their
classification in these financial statements.
Nevertheless, the Company and/or its shareholders
would be subject to certain restrictions, as
stipulated by law, including limitations in
connection with the holdings that may be sold,
amounts of third party issuances and/or public
offerings, as well as the sale of the merged
company's assets, during a two-year period following
the merger date, as well as additional limitations
pertaining to the utilization of the merging
companies' losses accumulated prior to the merger.
(5) SONOTRON HOLDING AG IN LIQUIDATION ("SONOTRON")
Following a resolution of its shareholders,
Sonotron, a wholly-owned and controlled subsidiary
operating in Switzerland and constituting an
independent entity, commenced voluntary liquidation
proceedings during 2001. As a consequence, on August
29, 2001, Sonotron was registered as a company in
liquidation in accordance with the decision of the
Swiss Companies Registrar. The liquidator of
Sonotron reported that the liquidation proceedings
for Sonotron were completed in August 2002 and it
was, subsequently, deleted from the records of the
Swiss Registrar of Companies.
As for the outcome of Sonotron's liquidation - see
Note 20(i) below.
(6) ADDITIONAL DATA CONCERNING THE INVESTMENT IN ELSCINT
In December 2001 Elscint issued 802,500 ordinary
shares (of 850,000 ordinary shares approved by
Elscint's shareholders) to directors and employees
of Elscint, and also employees of the Group
companies of Europe Israel which provide services to
Elscint. Of those, 365,000 shares were allocated to
directors of Elscint (including 175,000 shares to
offerees who also serve on the Company's board). At
December 31, 2002, 734,000 of the outstanding shares
were earmarked for employees.
The vesting of the options will occur ratably over a
two or three-year period (50% or 33.3% at the end of
each year - depending on the offeree) from the
allotment date and is subject to the offerees'
continued employment with the company in which
he/she was employed at the grant date; however,
immediate vesting will arise upon a termination of
employment entitling the offeree to severance
payment. The recipients paid an amount equal to the
closing price of Elscint shares on the last day of
trading prior to issuance (NIS 15.65 per share). The
price of Elscint's shares on the stock exchange at
the time of the board's resolution was $ 3.8.
- 46 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
B. ADDITIONAL INFORMATION CONCERNING INVESTMENT IN
INVESTEE COMPANIES (CONT.)
(6) ADDITIONAL DATA CONCERNING THE INVESTMENT IN ELSCINT
(CONT.)
To finance payment of the issuance proceeds, Elscint
advanced to the recipients an amount equal to the
full acquisition price of the shares, bearing
interest at 6% per annum and repayable after 5
years. The loan is non-recourse and the shares will
be the sole security for repayment of the loan.
Notwithstanding the above, should an offeree (who is
eligibile to receive the shares from the trustee or
sell them) elect to transfer the shares, he will
then be required to provide as security for payment
of the loan and for those shares a deposit equaling
the outstanding amount of the loan, thus converting
it into a recourse loan. Tax, if any, imposed on
offerees and arising from the applicable interest on
the loan is to be paid by Elscint. Elscint will not
bear tax liability in connection with the issue of
shares to offerees and their subsequent sale to
third parties.
Should Elscint distribute cash dividends whose
ex-dividend date falls in the period that the shares
are held in trust for the offerees, including the
vesting period, then Elscint will transfer to the
trustee, on behalf of the offeree, dividends in
respect of shares held in trust on behalf of that
offeree, and the trustee will then transfer these
dividends to the offerees irrespective of whether
their rights to receive the offered shares had
already been vested.
The rights to 296,583 shares were vested by December
31, 2002, while the remaining 437,417 shares will
vest during 2003 and 2004. If, after the completion
of the vesting period, all the employees exercise
their rights for shares, the Company's holdings in
Elscint would be diluted to 58.9%. The Company's
potential loss in respect of such a dilution would
amount to NIS 14.6 million.
In October 2002 Elscint paid its shareholders
dividends totaling $19.3 million (reflecting $1.10
per share). Of that amount, NIS 4.0 million, paid in
respect of dividends allotted to employees and
directors of Elscint as well as to Group employees
providing services to Elscint, have been charged to
operations as wage expense.
Elscint's shares are traded on the New York Stock
Exchange. The market value of the Company's Elscint
shares at December 31, 2002 amounted to NIS 179.5
million ($ 38 million). Their adjusted book value at
that date was NIS 517.7 million ($ 108 million)
(gross, before deducting the cost of the Company's
shares held by Elscint).
As for Elscint's commitment to maintain a minimal
level of shareholders' equity until 2003 - see Note
18A.(2).b below.
- 47 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10 - INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)
C. THE FOLLOWING IS SUMMARIZED DATA OUTLINING THE GROUP'S
SHARE IN ITEMS OF THE PROPORTIONATELY CONSOLIDATED
SUBSIDIARIES' FINANCIAL STATEMENTS.
AT DECEMBER 31, 2002 AND FOR THE YEAR THEN ENDED:
PROPORTIONATELY CONSOLIDATED SUBSIDIARIES
--------------------------------------------------
50% 33.3% 35% TOTAL
--- ----- --- -----
(IN THOUSAND NIS)
--------------------------------------------------
Current assets 25,580 334 6,202 32,116
Fixed assets and other assets 698,737 3,391 123,532 825,660
Deposits and long-term receivables 2,107 799 -- 2,906
Current liabilities (126,276) (234) (10,242) (136,752)
Long-term liabilities (313,082) (3,502) (60,172) (376,756)
-------- ------ ------- --------
287,066 788 59,320 347,174
======== ====== ======= ========
Group companies' liabilities 281,237 9,219 73,833 364,289
Shareholders' equity (deficiency) 5,829 (8,431) (14,513) (17,115)
-------- ------ ------- --------
287,066 788 59,320 347,174
======== ====== ======= ========
Revenues 125,922 1,659 25,842 153,423
======== ====== ======= ========
Gross profit 46,936 518 9,137 56,591
======== ====== ======= ========
Operating income 12,674 238 1,133 14,045
======== ====== ======= ========
Net income (loss) (8,901) 4,631 (390) (4,660)
======== ====== ======= ========
AT DECEMBER 31, 2001 AND FOR THE YEAR THEN ENDED:
PROPORTIONATELY CONSOLIDATED SUBSIDIARIES
--------------------------------------------------
50% 33.3% 35% TOTAL
--- ----- --- -----
(IN THOUSAND NIS)
--------------------------------------------------
Current assets 23,516 159 4,276 27,951
Fixed assets and other assets 612,905(*) 4,901 111,216 729,022
Deposits and long-term receivables 2,062 801 -- 2,863
Current liabilities (76,515) (206) (8,535) (85,256)
Long-term liabilities (294,164)(*) (2,350) (56,826) (353,340)
--------- ------ ------- --------
267,804 3,305 50,131 321,240
========= ====== ======= ========
Group companies' liabilities 222,649 8,834 62,495 293,978
Shareholders' equity (deficiency) 45,155(*) (5,529) (12,364) 27,262
--------- ------ ------- --------
267,804 3,305 50,131 321,240
========= ====== ======= ========
Revenues 70,935 1,095 22,799 94,829
========= ====== ======= ========
Gross profit 24,417 113 6,832 31,362
========= ====== ======= ========
Operating income (loss) 12,212 (77) (7) 12,128
========= ====== ======= ========
Net income (loss) 15,042 (2,009) (3,998) 9,035
========= ====== ======= ========
(*) Reclasified
- 48 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11 - HOTELS, COMMERCIAL CENTERS AND OTHER FIXED ASSETS, NET
A. COMPOSITION - CONSOLIDATED:
DECEMBER 31
----------------------------------------------------------------------------------
2 0 0 2
----------------------------------------------------------------------------------
REAL ESTATE MACHINERY,
HOTELS COMMERCIAL CENTERS EQUIPMENT,
---------------------------- -------------------------- COMPUTERS
UNDER UNDER AND
CONST- CONST- PERIPHERAL
ACTIVE RUCTION(1) ACTIVE RUCTION(1) OTHER EQUIPMENT
------------- ------------- ------------ ------------- ---------- -------------
( I N T H O U S A N D N I S )
----------------------------------------------------------------------------------
COST
Balance - January 1 (*) 971,866 101,477 1,331,103 557,312 44,355 32,813
Additions in respect of
initially consolidated companies -- -- 488,393 29,655 -- --
Adjustments from
translation of foreign
subsidiaries' financial
statements 166,014 22,362 434,680 31,977 5,678 53
Additions during the year 3,597 48,399 58,184 205,306 463 157
Hotels and commercial
centers whose construction
ended during the year -- -- 129,716 (129,716) -- --
Current dispositions (1,980) -- -- (10,009) -- (14,358)
------------- ------------- ------------ ------------- ---------- -------------
Balance - December 31 1,139,497 172,238 2,442,076 684,525 50,496 18,665
------------- ------------- ------------ ------------- ---------- -------------
ACCUMULATED DEPRECIATION:
Balance - January 1 (*) 109,040 -- 58,220 -- 2,162 2,393
Additions in respect of
initially consolidated subsidiaries -- -- -- -- -- --
Additions during the year 30,329 -- 64,300 -- 1,952 622
Adjustments from translation
of foreign subsidiaries'
financial statements 18,987 -- 15,204 -- 192 4
Current dispositions (1,512) -- (144) -- -- --
------------- ------------- ------------ ------------- ---------- -------------
Balance - December 31 156,844 -- 137,580 -- 4,306 3,019
------------- ------------- ------------ ------------- ---------- -------------
Payments on account of
fixed Assets -- -- -- 6,257 -- --
------------- ------------- ------------ ------------- ---------- -------------
Provision for impairment of
investments and assets (2) 23,153 4,400 39,816 4,552 -- --
------------- ------------- ------------ ------------- ---------- -------------
NET BOOK VALUE:
December 31, 2002 959,500 167,838 2,264,680 686,230 46,190 15,646
============= ============= ============ ============= ========== =============
December 31, 2001 862,826 101,477 1,272,883 573,070 42,193 30,420
============= ============= ============ ============= ========== =============
DECEMBER 31
---------------------------------------------------------------------
2 0 0 2 2001
------------------------------------------------------- ------------
FIXED
AND
LEASE- OTHER CONVENIENCE
HOLD ASSETS TOTAL TRANSLATION TOTAL
------------- ------------ ----------- ------------ ------------
( I N T H O U S A N D N I S ) US$'000 NIS'000
---------------------------------------- ------------ ------------
Balance - January 1 (*) 4,744 35,807 3,079,477 650,078 2,095,692
Additions in respect of
initially consolidated companies -- -- 518,048 109,360 214,833
Adjustments from
translation of foreign
subsidiaries' financial
statements 5 6,027 666,796 140,761 233,058
Additions during the year 158 560 316,824 66,882 686,927
Hotels and commercial
centers whose construction
ended during the year -- -- -- -- --
Current dispositions (278) (1,661) (28,286) (5,972) (151,033)
------------- ------------ ----------- ------------ ------------
Balance - December 31 4,629 40,733 4,552,859 961,109 3,079,477
------------- ------------ ----------- ------------ ------------
ACCUMULATED DEPRECIATION:
Balance - January 1 (*) 1,588 8,792 182,195 38,461 219,224
Additions in respect of
initially consolidated subsidiaries -- -- -- -- 45,252
Additions during the year 1,402 4,568 103,173 21,780 53,235
Adjustments from translation
of foreign subsidiaries'
financial statements (24) 1,259 35,622 7,520 12,593
Current dispositions (278) (1,393) (3,327) (702) (148,109)
------------- ------------ ----------- ------------ ------------
Balance - December 31 2,688 13,266 317,663 67,059 182,195
------------- ------------ ----------- ------------ ------------
Payments on account of
fixed Assets -- -- 6,257 1,321 15,758
------------- ------------ ----------- ------------ ------------
Provision for impairment of
investments and assets (2) -- -- 71,921 15,183 --
------------- ------------ ----------- ------------ ------------
NET BOOK VALUE:
December 31, 2002 1,941 27,507 4,169,532 880,188
============= ============ =========== ============
December 31, 2001 3,156 27,018 2,913,040
============= ============ ============
(1) Includes land designated for the construction of hotels/commercial centers.
Hotels under construction include a hotel in Romania that, since December
2002, has been undergoing renovation, the net book value of which is NIS
203,555.
(2) See Note 10B(3)b(8) and 10B(1)b(8) above and d below.
(*) Reclassified.
- 49 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11 - HOTELS, COMMERCIAL CENTERS AND OTHER FIXED ASSETS, NET (CONT.)
A. COMPOSITION - CONSOLIDATED (CONT.):
THE FIXED ASSETS INCLUDE:
ACCUMULATED DEPRECIATION
-------------------------------------------
CONVENIENCE
TRANSLATION
---------------
DECEMBER 31
-------------------------------------------
2002 2002 2001
--------------- ------------ ------------
US$'000 (IN THOUSAND NIS)
--------------- --------------------------
Financial expenses capitalized to the
cost of the buildings 30,355 143,794 104,731
=============== ============ =============
Capitalized coordination, planning,
execution and supervision costs (*) 21,421 101,475 66,408
=============== ============ =============
(*) See Note 10B(3)b(4)a(1) above.
According to applicable laws, AP is entitled to a subsidy
from the Government of Belgium in respect of investments in
fixed assets. The amount of the subsidy claimed by AP in
accordance with these laws amounted to Euro 1.83 million.
Following a dispute that arose between the Belgium
authorities and AP concerning the latter's status and the
amount it is entitled to receive (see Note 10B (1) e), AP
recorded a provision in its books for the disputed amounts.
Payment of the grant's balance was approved in September
2002. Accordingly, the net book value of fixed assets
decreased by Euro 1,074 thousand (NIS 5,366 thousand) as of
December 31, 2002.
B. COMPOSITION OF LAND, CLASSIFIED BETWEEN OWNERSHIP AND
LEASING RIGHTS:
CONSOLIDATED
------------------------------------------------------------------------------
DECEMBER 31, 2002
------------------------------------------------------------------------------
COMMERCIAL
COMMERCIAL CENTER
HOTELS CENTERS IN CONVENIENCE
ABROAD ABROAD ISRAEL(2) OTHERS(3) TOTAL TRANSLATION
--------- --------- --------- --------- --------- -----------
(IN THOUSAND NIS) US$'000
---------------------------------------------------------------- -----------
Freehold land (1) 879,971 2,255,402 - 46,190 3,181,563 671,628
Capitalized
leasehold land (1) 247,367 243,735 451,773 - 942,875 199,041
--------- --------- --------- --------- --------- ----------
1,127,338 2,499,137 451,773 46,190 4,124,438 870,669
========= ========= ========= ========= ========= ==========
(1) The ownership rights are mostly recorded in the name
of the subsidiaries, which own the rights in the
land and, in part, are undergoing various
registration proceedings - see D below.
(2) The leasing period extends over 49 years plus a
renewal option for an identical period, ending in
2086 and subject to the lessee's fulfillment of the
terms of the lease - see 10B(2) above.
(3) Mainly abroad. Includes NIS 4.4 million in respect
of properties in Israel (see D below).
- 50 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11 - HOTELS, COMMERCIAL CENTERS AND OTHER FIXED ASSETS, NET (CONT.)
C. ADDITIONAL DATA CONCERNING THE RIGHTS IN LAND OWNED BY
THE GROUP COMPANIES:
1. HOTELS
PERCENTAGE NATURE STATUS OF
HOTEL NAME OF RIGHTS LOCATION OF RIGHTS REGISTRATION
---------- --------- -------- --------- ------------
%
-
ACTIVE HOTELS:
Victoria Amsterdam ("VHA") 50 Amsterdam, Holland Ownership Completed
Utrecht Park Plaza ("PPU") 50 Utrecht, Holland Leased(1) Completed
Astrid Park Plaza ("APP") 100 Antwerp, Belgium Ownership Completed
Show Park Plaza ("SPP") 35 London, England Ownership(2) Completed
Sherlock Holmes Park Plaza ("HPP") 45 London, England Sublease(3) Completed
Victoria Park Plaza ("VPP") 50 London, England Ownership Completed
Park Plaza (Sandton) ("PPS") 33.3 Johannesburg, S.A. Ownership Completed
Bucuresti Apartment Hotel
(Apart. Hotel) ("APH") 69 Bucurest, Romania Ownership Completed
UNDER CONSTRUCTION AND/OR
LAND DESIGNATED FOR HOTEL
CONSTRUCTION:
River Bank Park Plaza ("RPP") 45 London, England Leased(4) Completed
Andrassy - building
designated for renovation ("Andrassy") 50 Budapest, Hungary Ownership Completed
Bucuresti Hotel ("BPP") 69 Budapest, Hungary Ownership Completed
NO. NOTE
HOTEL NAME OF ROOMS CLASS 10B(1)B
---------- -------- ----- -------
(STARS)
ACTIVE HOTELS:
Victoria Amsterdam ("VHA") 305 4- deluxe (1)
Utrecht Park Plaza ("PPU") 120 4
Astrid Park Plaza ("APP") 229 4
Show Park Plaza ("SPP") 310 4- deluxe (2)
Sherlock Holmes Park Plaza ("HPP") 119 4- deluxe (3)
Victoria Park Plaza ("VPP") 300 4- deluxe (5)
Park Plaza (Sandton) ("PPS") 138 4 (6)
Bucuresti Apartment Hotel
(Apart. Hotel) ("APH") 230 N/A (7)
UNDER CONSTRUCTION AND/OR
LAND DESIGNATED FOR HOTEL
CONSTRUCTION:
River Bank Park Plaza ("RPP") 537(5) 4-5 (5) (4)
Andrassy - building
designated for renovation ("Andrassy") 196 4-5 (5)
Bucuresti Hotel ("BPP") 446 4 (7)
---------------------------
Notes - on the following page.
- 51 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11 - HOTELS, COMMERCIAL CENTERS AND OTHER FIXED ASSETS, NET (CONT.)
C. ADDITIONAL DATA CONCERNING THE RIGHTS IN LAND OWNED BY
THE GROUP COMPANIES (CONT.):
1. HOTELS (CONT.)
(1) The leasing rights were acquired from the
Municipality of Utrecht for an unlimited
period of time, with the leasing cost
reflecting a capitalization of leasing fees
for a 50-year period (until 2036). In
addition, the execution of any change in the
use of the land or the demolition of a
building thereon requires approval as
aforementioned. The lessee cannot terminate
the leasing rights. The Municipality may
terminate the leasing rights, only if it
determines that the land is required for
public needs or if a court rules that the
lessee had not fulfilled its undertakings
under the terms of the lease.
(2) Following the balance sheet date (January
2003), the owner of this hotel entered into
an agreement with an unrelated third party
for the leasing of this hotel for a period of
25 years. The annual lease fees were fixed
for the initial 4 years, whereas commencing
the fifth year, the annual lease fee will be
adjusted and increased annually by 2.5%.
Lease fees are paid quarterly, in advance.
Payment of the lease fees will be secured by
a GBP 2.5 million deposit. The third party
was granted an option to extend the term of
the lease by two additional periods of 15
years each. The cost of the hotel as at
December 31, 2002 was GBP 46 million.
(3) For a period of 99 years (commencing 1996),
in exchange for GBP 450 thousand annually,
adjusted every five years on the basis of
"open market value". The company holding the
property ("Grandis"), has an option
exercisable at the end of a 3 year period
commencing from the agreement date, to notify
the owners as to either the extension of the
sub-lease period up to 125 years or the
purchase of the owner's rights in the main
lease. Furthermore, Grandis has the option to
terminate the lease as of 2059 with an early
notice of 2.5 years. A Red Sea Group company
("guarantor") guaranteed fulfillment of all
undertakings of Grandis as if it were a party
to the agreement. The guarantee contains
provisions, by which, in the event the
guarantee is exercised, the land-owners may
require the guarantor to assume Grandi's
position as a lessee. Two documents were
signed between the guarantor and B.H., which
establishes the indemnification procedures
amongst them, in relation to the said
guarantee. The parties will endeavor to
substitute the guarantee provided by the
guarantor.
(4) For a period of 125 years (commencing 2000),
in exchange for GBP 500 thousand per annum,
adjusted each five years based on the CPI in
England. Several previous rights exist on
this property, as well as easements of
various authorities, contingent upon which
the leasing of the property had been carried
out; based on the framework agreement, the
lessee is disallowed to assign its rights to
a third party without the lessor's consent;
taxes, surcharges and fees related to the
property will be paid by the lessee; in any
event of breach of contract by the lessee,
the lessor would have the right to forfeit
the property in accordance with the terms
stipulated in the agreement; in cases when
the lessor receives a proposal for the
acquisition of the ownership rights in the
property, the lessee shall be entitled to
have the right of first refusal to purchase.
(5) Planned.
- 52 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11 - HOTELS, COMMERCIAL CENTERS AND OTHER FIXED ASSETS, NET (CONT.)
C. ADDITIONAL DATA CONCERNING THE RIGHTS IN LAND OWNED BY
THE GROUP COMPANIES (CONT.):
2. COMMERCIAL CENTERS IN EASTERN EUROPE - CLASSIFICATION
BY PROJECT
DECEMBER 31
2002 GENERAL INFORMATION
------------ ----------------------------------------------------------------
DATE OF
SHARE STATUS OF OPERATIONAL COMMENCING
PROJECT LOCATION HOLDING RATE NATURE OF RIGHTS REGISTRATION PERMIT OPERATIONS
--------------------------- -------- ------------ ---------------- ------------ ----------- ----------
%
------------
A. ACTIVE CENTERS:
Csepel Plaza Kft. Hungary 100 Ownership Completed Final permit 12/1997
Gyor Plaza Kft. Hungary 100 Ownership Completed Final permit(1) 9/1998
Debrecen Kft. Hungary 100 Ownership Completed Final permit 12/1998
Alba Plaza Kft. Hungary 100 Ownership Completed Final permit 6/1999
Pecs Plaza Kft. Hungary 100 Ownership(2) Completed(2) Final permit(2) 10/1999
Partly - ownership;
Szeged Plaza Kft. Hungary 100 partly - leasing(3) Completed Final permit 5/2000
Miskolc Plaza Kft. Hungary 100 Ownership Completed Final permit 6/2000
Kanizsa Plaza Kft. Hungary 90(8) Ownership Completed Final permit 12/2000
Kaposvar Plaza Kft. Hungary 100 Ownership Completed Final permit 12/2000
Szolnok Plaza Kft. Hungary 100 Ownership Completed Final permit 12/2001
Zalaegerszeg Plaza Kft. Hungary 100 Ownership Completed Final permit 12/2001
Szombathely Plaza Kft. Hungary 100 Ownership Completed Temporary (4) 7/2002
Duna Plaza Kft. Hungary 100 Ownership Completed Final permit 2/2002
Sopron Plaza Kft. Hungary 100 Ownership Completed Final permit 2/2002
Nyir Plaza Kft. Hungary 100 Ownership Completed Final permit 2/2002
Sadyba Center S.A Poland 50 Leasing for 25 years(5) Completed Final permit 9/2000
Ruda Slaska Plaza Sp.z.oo Poland 100 Perpetual usufruct (6) Completed Final permit 11/2001
Krakow Plaza Sp.z.oo Poland 100 Ownership Completed Final permit 12/2001
B. YIELDING REAL ESTATES:
Main part in ownership;
remainder in leasehold
Praha Plaza S.R.O.(7) Czech Republic 100 for 99 years Completed Final permit 1/2002
1. There is a commitment for preparation of a place for cultural
events. Lack of performance may trigger fines of which the
Company's share would amount to HUF 50 million (NIS 1,053
thousand).
2. In addition, Pecs has an obligatory option, valid until May
2003, for the acquisition of additional plots of land. Not
exercising this option in case of building the road would
trigger a payment of which the Company's share amounts to HUF
19.5 million (NIS 411 thousand).
3. Leased for 50 years for no additional consideration.
4. Temporary permit has no expiration date. The final permit can
be received once the center is fully occupied.
5. Annual leasing fees of PLN are 828 thousand (NIS 979
thousand).
6. Annual leasing fees of PLN are 500 thousand (NIS 591
thousand).
7. The land is partially leased as a logistic center. 8. 10% is
held in trust for PC.
- 53 -
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NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11 - HOTELS, COMMERCIAL CENTERS AND OTHER FIXED ASSETS, NET (CONT.)
C. ADDITIONAL DATA CONCERNING THE RIGHTS IN LAND OWNED BY
THE GROUP COMPANIES (CONT.):
2. COMMERCIAL CENTERS IN EASTERN EUROPE - CLASSIFICATION
BY PROJECT
C. CENTERS UNDER CONSTRUCTION/LAND:
DECEMBER 31
2002
-------------
SHARE HOLDING NATURE OF STATUS OF
PROJECT LOCATION RATE RIGHTS(5) REGISTRATION
--------------------------- ---------- ------------- --------------- ------------------
%
CENTERS UNDER CONSTRUCTION:
Not yet carried
Veszprem Plaza Kft. Hungary 100 Owned(2) out(6)
Poznan Plaza Sp z.o.o. Poland 100 Owned Completed
Partly owned,
partly leased
Lodz Centrum Plaza Sp z.o.o. Poland 100 (until 2089) Completed
Elblag Plaza Sp.z..oo Poland 100 Leased to 2100 Completed
Sosnowiec Plaza Sp.z.oo Poland 100 Owned Completed (6)
Not yet carried
Rybnik Plaza Sp.z.oo Poland 100 Owned(3) out(6)
Katowice Plaza Sp z.o.o. (4) Poland 100 Leased until 2089 Completed
Pilsen Plaza S.R.O Czech 100 leased for 99 years Not yet carried out
Republic
Gdansk Plaza Sp z.o.o. Poland 100 Lease until 2100 Completed
Primarily owned;
Czech balance leased for Not yet
Entertainment Plaza S.R.O Republic 100 99 years completed(7)
Czech Not yet carried
Brno Plaza S.R.O Republic 100 Owned out(10)
Bucharesti Plaza Centers S.R.L Romania 100 Owned Completed
Timisoara Plaza Centers
S.R.L(11) Romania 100 Owned Completed
Helios Plaza S.A Greece 100(8) Owned Completed
RECEIPT OF PERMIT/AUTHORIZATION(1)
----------------------------------------------------
MUNICIPAL
PROJECT ACQUISITION BUILDING PLAN CONSTRUCTION
--------------------------- ------------ ------------- -------------------
CENTERS UNDER CONSTRUCTION:
Request not yet
Veszprem Plaza Kft. N/A Obtained submitted
Poznan Plaza Sp z.o.o. Obtained Obtained Obtained
Lodz Centrum Plaza Sp z.o.o. Obtained Obtained Obtained
Elblag Plaza Sp.z..oo Obtained Obtained Obtained
Request not yet
Sosnowiec Plaza Sp.z.oo Obtained Obtained submitted
Request not yet
Rybnik Plaza Sp.z.oo Obtained Obtained submitted
Katowice Plaza Sp z.o.o. (4) Obtained Obtained N/A
Application
has not yet Request not yet
Pilsen Plaza S.R.O N/A been submitted submitted
Request submitted
Gdansk Plaza Sp z.o.o. Obtained Obtained and denied(9)
Entertainment Plaza S.R.O Obtained Obtained
Brno Plaza S.R.O Obtained Request submitted
Bucharesti Plaza Centers S.R.L Obtained Obtained Obtained
Timisoara Plaza Centers S.R.L(11) Obtained Obtained Request submitted
Helios Plaza S.A N/A Obtained Obtained
Comments (1) to (11) appear on next page.
- 54 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11 - HOTELS, COMMERCIAL CENTERS AND OTHER FIXED ASSETS, NET (CONT.)
C. ADDITIONAL DATA CONCERNING THE RIGHTS IN LAND OWNED BY
THE GROUP COMPANIES (CONT.):
2. COMMERCIAL CENTERS IN EASTERN EUROPE - CLASSIFICATION
BY PROJECT
C. CENTERS UNDER CONSTRUCTION/LAND (CONT.):
1. The acquiring company is ordinarily
entitled to cancel the preliminary
agreement for the purchase of the land
if it does not receive the purchase
permit and/or approval of the
Municipal Building Plan and/or the
building permit in accordance with the
dates stipulated in the preliminary
agreements.
2. Final purchase agreement has not yet
been signed.
3. A final purchase agreement will be
signed upon the receipt of the
construction permit.
4. In December 1998 Katowice Plaza
entered into agreement with a third
party for acquiring the usage rights
in several adjacent parcels of land as
well as the ownership of the buildings
located thereon ("the Purchase
Agreement") for the purpose of
establishing a commercial and
entertainment center, in exchange for
5.5 million PLN (NIS 6.5 million). The
Purchase Agreement also stipulated
that Katowice Plaza would pay all
liabilities and payments stemming from
the acquisition of the asset and its
registration in the name of Katowice
Plaza. An amount of 4 millions PLN
(NIS 4.7 million) was paid on the
contract-signing date, with 1 million
PLN (NIS 1.2 million) to be paid to
the seller upon the receipt of the
construction permit and the remaining
PLN 500,000 to be paid when the local
development plan is changed to the
purposes of trade and services.
An examination conducted for the
purpose of granting construction
permits revealed a defect in the land,
which prevents the commencement of
construction at the level planned and
the company withheld payment of the
remaining amount of 1.5 million PLN
(NIS 1.8 million). The seller claimed
it was entitled to the balance. The
seller has filed a claim for the
balance due of 1 million PLN. Katowice
Plaza, in turn, notified the seller in
August 2000 that it was canceling the
contract. In 2001 the court decided
against Katowice Plaza. Katowice Plaza
was ordered to pay 1 million PLN
together with interest accrued thereon
from October 8, 1999 as well as court
fees- a total amount of 0.5 million
PLN (NIS 0.6 million).
A subsequent claim by the seller for
the payment of the balance amount of
0.5 million PLN (NIS 0.6 million) was
denied and as a consequence the
consideration amount (as per the
agreement) was set at 5 million PLN
(NIS 6.5 million). Following the
rejection of the subsequent amount the
parties have expressed their intention
to negotiate a settlement of the
entire claim.
The management of PC estimates that
cost of the land, as recorded in the
financial statements, will not exceed
its realization amount and that
Katowice will not bear additional
costs as a result of the proceedings
described above over the provisions
included in its books.
5. The recording of rights in a portion
of the project has not yet been
performed/completed, since the
necessary conditions for recording
such rights have not yet been
completely fulfilled.
- 55 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11 - HOTELS, COMMERCIAL CENTERS AND OTHER FIXED ASSETS, NET (CONT.)
C. ADDITIONAL DATA CONCERNING THE RIGHTS IN LAND OWNED BY
THE GROUP COMPANIES (CONT.):
2. COMMERCIAL CENTERS IN EASTERN EUROPE - CLASSIFICATION
BY PROJECT
C. CENTERS UNDER CONSTRUCTION/LAND (CONT.):
6. Amounts paid on account of the
acquisition (including awarded
guarantees) will not be returned to
the project company even if building
permits are not received. PC's
management estimates that at this
stage, nothing prevents the company
from receiving such permits. Amounts
paid on account of land purchases in
Vesprem, Sosnowiec and Rybnik total,
at December 31, 2002, Euro 1.3 million
(NIS 6.5 million).
7. A preliminary acquisition agreement
was signed. An advance, in the amount
of Euro 1.3 million, was guaranteed by
a bank guarantee.
8. An additional 50% was acquired in 2002
for Euro 6.4 million (NIS 31.8
million).
9. Rights were acquired from the
municipality. Concurrently with the
rejection of the application for a
building permit, the municipality
undertook to provide the company with
an alternative land. The company is
negotiating with the municipality the
terms of the provision of such land.
The management of PC estimates that
the cost amount recorded in its
financial statements, will not exceed
the amount Gdansk will be reimbursed
in the settlement with the
municipality.
10. A preliminary acquisition agreement
was signed. An advance in the amount
of Euro 1.6 million was guaranteed by
a banking guarantee, which expired as
at the date of the approval of the
financial statements. The seller is
taking steps for the cancellation of
the acquisition agreement claiming the
Brno did not fulfill its obligations,
and intends to return to Brno the
acquisition costs. Seller has returned
to Brno Euro 1 million out of the
consideration amount paid, up to the
date of the approval of the financial
statements. Brno has filed a claim
against the seller demanding
performance as well as against the
bank for wrongfully canceling the
guarantee it awarded to Brno. The
court placed an attachment on the
land, in favour of Brno preventing its
sale to a third party.
11. Timisoara had entered into a
memorandum of understanding in 2003,
for the sale of its land to a third
party, in exchange for $ 1.25 million.
The management of OPC estimates that
the results of this transaction on the
financial results of PC are not
significant.
D. Elscint holds the rights in a contract for the development
of land in the vicinity of Ma'alot in the Galilee. After
the completion of the development period and upon the
fulfillment of all conditions, a lease agreement will be
signed for a 49-year period. According to the terms of the
bid, Elscint would establish within a period of three years
(through the end of 2003) and subject to the receipt of
construction permits and other approvals, a 650 residential
unit recreation village. In addition, within the framework
of the terms of the tender bid, Elscint entered into public
infrastructure development agreements with
Ma'alot-Tarshicha Municipality and the Ma'ale Yosef
Regional Council. Elscint committed to invest NIS 9.2
million in respect of long-term leasing and development of
the land infrastructure. The project's total cost is
estimated at $ 45 million. Elscint invested NIS 8.8 million
in the project through December 31, 2002. Due to various
causes, including adverse economic conditions in Israel,
continuing since the bid was won, and in view of the
condition of the tourism industry in particular, the
project has been delayed. Elscint's management believes
that the net book value of its investment as of December
31, 2002, does not exceed its recoverable amount.
E. ANNUAL DEPRECIATION RATES - see Note 2H above.
F. LIENS - see Note 18D below.
- 56 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12 - OTHER ASSETS AND DEFERRED EXPENSES
CONSOLIDATED
----------------------------------------
DECEMBER 31
----------------------------------------
2002 2002 2001
------------ ----------- -----------
AMORTIZATION CONVENIENCE
RATE TRANSLATION
------------ ------------
% US$'000 (IN THOUSAND NIS)
------------ ------------ -------------------------
COST
Acquired know-how 10 6,236 29,540 29,493
Pre-opening expenses 33.3 2,877 13,630 13,411
Expenses for obtaining loans (*) 5,742 27,200 11,151
Project-development costs (*) 1,387 6,572 7,221
Cost of obtaining long-term leases (*) 4,632 21,943 12,835
Cost of long-term service contract 20 745 3,528 3,964
------------ ----------- -----------
21,619 102,413 78,075
------------ ----------- -----------
ACCUMULATED AMORTIZATION
Acquired know-how 2,493 11,814 8,844
Pre-opening expenses 1,475 6,986 3,478
Expenses for obtaining loans 822 3,893 1,741
Cost of obtaining long-term leases 1,117 5,293 2,252
------------ ----------- -----------
5,907 27,986 16,315
------------ ----------- -----------
NET BOOK VALUE 15,712 74,427 61,760
============ =========== ===========
(*) See Note 2I.3-5
NOTE 13 - SHORT-TERM BORROWINGS
CONSOLIDATED COMPANY
---------------------------------------- -------------------------
DECEMBER 31
-------------------------------------------------------------------
2002 2002 2001 2002 2001
------------- ----------- ------------ ----------- ------------
INTEREST CONVENIENCE
RATE TRANSLATION
---------------- -------------
% US$'000 (IN THOUSAND NIS)
---------------- ------------- ----------------------------------------------------
Short-term bank
loans (1):
US dollars Libor+ 0.7-3.0 230,529 1,092,035 994,514 742,746 726,250
Euro Euribor+ 1.9-2.5 53,239 252,197 159,599 - -
Pounds sterling Libor+ 1.9-2.5 31,433 148,901 108,030 - -
NIS 9.0-10.8 4,080 19,326 - 8,353 -
------------- ----------- ------------ ----------- ------------
319,281 1,512,459 1,262,143 751,099 726,250
Current maturities 32,004 151,608 182,953 52,283 -
------------- ----------- ------------ ----------- ------------
351,285 1,664,067 1,445,096 803,382 726,250
============= =========== ============ =========== =============
(1) The balance includes loans in the amount of NIS 784 million
received by the Company from an Israeli bank and in respect
of which the Company recorded a lien on deposits totaling
NIS 367 million while undertaking to provide the bank with
additional security (see Note 18D(1)). The balance also
includes a loan of NIS 302 million received by Elscint from
that same bank and in respect of which Elscint agreed,
among other matter, to provide additional security (see
Note 18D(2)). Within the framework of the negotiations
between the Company and the bank and between Elscint and
the bank, for establishing a long-term credit line, the
bank notified each of the companies of its agreement in
principle to schedule the loans, together with the deposits
provided as security, for repayment over 10 years, subject
to providing additional, agreed-upon security and signing
detailed agreements among the parties. The companies'
managements believe, based on the understandings reached,
that the loan balance will be re-scheduled on a long-term
basis.
LIENS - see Note 18D.
- 57 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 14 - PAYABLES AND OTHER CURRENT LIABILITIES
CONSOLIDATED COMPANY
---------------------------------------- -------------------------
DECEMBER 31
-------------------------------------------------------------------
2002 2002 2001(*) 2002 2001
------------- ----------- ------------ ----------- ------------
CONVENIENCE
TRANSLATION
-------------
US$'000 (IN THOUSAND NIS)
------------- ----------------------------------------------------
Deferred revenues due to decrease
in percentage holding in
development stage company 2,569 12,169 30,391 - -
Liabilities arising from the
acquisition of assets or
services (including land) 8,035 38,064 7,407 - -
Government agencies 4,550 21,555 14,109 - -
Wages and fringe benefits 3,773 17,873 18,349 3,768 3,869
Payables in respect of
currency transactions 1,101 5,214 10,331 5,214 10,331
Accrued interest payable 1,415 6,702 1,907 - -
Deferred income 950 4,501 1,596 - -
Advances in respect of
Projects in progress, net of
related costs - - 1,538 - -
CC Group companies - - - 1,160 -
Deferred taxes 353 1,670 1,585 - -
Accrued expenses and
commissions and others 14,583 69,082 46,612 22,011 11,785
------------- ----------- ------------ ----------- ------------
37,329 176,830 133,825 32,153 25,985
============= =========== ============ =========== ============
(*) Reclassified.
- 58 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 15 - LONG-TERM LOANS AND LIABILITIES
A. COMPONENTS
CONSOLIDATED COMPANY
---------------------------------------- -------------------------
DECEMBER 31
-------------------------------------------------------------------
2002 2002 2001(*) 2002 2001
------------- ----------- ------------ ----------- ------------
CONVENIENCE
TRANSLATION
-------------
US$'000 (IN THOUSAND NIS)
------------- ----------------------------------------------------
LOANS -
From Banks and financial
institutions 467,699 2,215,534 1,483,066 72,416 51,927
------------- ----------- ------------ ----------- ------------
OTHER LIABILITIES:
Trade accounts payable 228 1,081 78,333 - -
Deferred income taxes 22,466 106,424 65,055 - -
Liability for the acquisition
of shares in subsidiaries
(Note 19C) 4,704 22,283 21,935 22,283 21,935
Pre-paid rent received 5,043 23,891 8,850 - -
Subsidiaries - - - 17,569 32,458
------------- ----------- ------------ ----------- ------------
32,441 153,679 174,173 39,852 54,393
------------- ----------- ------------ ----------- ------------
500,140 2,369,213 1,657,239 112,268 106,320
Less: current maturities (32,004) (151,608) (182,953) (52,283) -
------------- ----------- ------------ ----------- ------------
468,136 2,217,605 1,474,286 59,985 106,320
============= =========== ============ =========== ============
B. LINKAGE BASIS AND INTEREST RATES ON LOANS:
CONSOLIDATED
-----------------------------------------
DECEMBER 31
-----------------------------------------
INTEREST RATES 2002 2002 2001
AT THE -------------- ----------- -----------
BALANCE-SHEET CONVENIENCE
DATE TRANSLATION
------------------- --------------
% US$'000 (IN THOUSAND NIS)
------------------- -------------- -------------------------
Loans in foreign currency:
US dollar Libor+ 0.1-2.2 127,102 602,093 482,876
Pound sterling Libor+ 1.25-1.40 56,867 269,384 239,548
Euro Euribor+ 1.35-2.10 232,850 1,103,030 528,392
Euro 4.90 - 6.46(1) 50,136 237,499 213,068
US dollar - - 16,826
South African rand 5.00(2) 745 3,528 2,356
-------------- ----------- -----------
467,700 2,215,534 1,483,066
============== =========== ===========
(1) Fixed interest through 2004. Thereafter at market
rates.
(2) Fixed interest rate.
- 59 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 15 - LONG-TERM LOANS AND LIABILITIES (CONT.)
C. REPAYMENT SCHEDULE:
CONSOLIDATED
DECEMBER 31
-----------------------------------------
2 0 0 2 2 0 0 2
----------------- ------------------
CONVENIENCE
TRANSLATION
-----------------
US$'000 (IN THOUSAND NIS)
----------------- ------------------
First year - current maturities 32,004 151,608
Second year 32,686 154,835
Third year 20,099 95,213
Fourth year 20,893 98,971
Fifth year 17,760 84,130
Sixth year and thereafter 294,353 1,394,377
Undetermined (*) 82,346 (*) 390,079
----------------- ------------------
500,141 2,369,213
================= ==================
(*) Includes a bank loan of NIS 261 million against
which the Company placed a deposit of equal amount
as security.
D. LIENS - see Note 18D.
NOTE 16 - ACCRUED SEVERANCE PAY (CONSOLIDATED)
A. COMPOSITION:
DECEMBER 31
--------------------------------------------
2002 2002 2001 (*)
------------ ------------- --------------
CONVENIENCE
TRANSLATION
------------
US$'000 (IN THOUSAND NIS)
------------ -----------------------------
Provision for severance pay 268 1,269 1,500
Less: amounts deposited in the severance-pay fund (161) (762) (1,064)
------------ ------------- --------------
107 507 436
============ ============= ==============
(*) Reclassified.
B. IN ISRAEL:
The liability of the Group companies to employees upon
termination include, primarily, severance pay, termination
pay and advance-notice pay. The liabilities are partially
covered by current deposits to accounts on the employees'
behalf at recognized pension and severance-pay funds and/or
by acquiring policies from insurance companies. These
deposits are not under the custody or management of the
Group companies and, therefore, are not reflected in the
balance sheet. The accrued severance pay included in the
balance sheet represents the balance of the liability not
covered by the above-mentioned deposits and/or insurance
policies for which a fund is maintained (in the Company's
name) at a recognized pension fund.
C. ABROAD:
The liability of foreign subsidiaries for severance pay to
their employees, pursuant to the laws of the countries in
which those companies reside and the labor agreements in
effect, is ordinarily covered by current payments to
government agencies with respect to the voluntary or
involuntary termination of employment, as well as by
regular payments to insurance companies for pension
benefits and by the balance-sheet accrual.
- 60 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 17 - INCOME TAXES
A. COMPOSITION:
CONSOLIDATED
-----------------------------------------------------------
DECEMBER31
-----------------------------------------------------------
2002 2002 2001 2000
----------- ------------ ------------- -------------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
----------- -------------------------------------------
Current income taxes 590 2,795 9,524 14,576
Deferred income taxes 1,355 6,420 12,272 4,545
Taxes in respect of prior years 2,726 12,913 (7,939) (214)
----------- ------------ ------------- -------------
4,671 22,128 13,857 18,907
=========== ============ ============= =============
B. TAX LAWS APPLICABLE TO THE MAJOR GROUP COMPANIES IN
THEIR COUNTRY OF RESIDENCE:
1) ISRAEL
A. The Company and its Israeli subsidiaries are
subject to income tax under the provisions of
the Income Tax Law (Inflationary
Adjustments), 1985, which introduced the
concept of measuring results for tax purposes
on a real basis, according to the changes in
the CPI. Corporate tax rate applicable to
companies incorporated in Israel is 36%.
B. 1. Starting January 1, 2003, new tax
regulations go into effect relating,
among other things, to the change in
the Israeli taxation system in
connection with income of foreign
companies controlled (in excess of
10%) by an Israeli resident. These
provisions apply to companies whose
income consists mostly of passive
income, as defined by law, or revenues
stemming from passive income, the tax
rate of which does not exceed 20%,
controlled, directly or indirectly, by
Israeli residents ("CFC"). According
to the Law, a controlling party in
those companies having undistributed
earnings, as defined by law, would be
deemed as having received his
proportionate share in these earnings
in the form of a dividend, which will
be subject to Israeli taxes of 25%.
2. A dividend received in Israel and
originating from income generated or
derived abroad as well as a dividend
originating abroad will be subject to
tax of 25%.
The law also stipulates provisions with
regard to the tax amount and its rate, in
instances where income taxes were paid abroad
in respect of this income.
C. Starting January 1, 2003 an Israeli resident
will be subject to tax on his income even if
derived or generated abroad. Through the end
of the 2002 tax-year, an Israeli resident was
taxed on such income only if it was initially
received in Israel.
D. Starting January 1, 2003 the capital-gains
tax on the sale of assets was reduced to 25%
and will be computed on the portion of the
gain pertaining to the period subsequent to
that date through the date of the sale.
E. Two investment programs of IGTX and its
subsidiary were granted the status of
"approved enterprise"("AE") pursuant to the
Law for the Encouragement of Capital
Investments, 1959 ("the Law"), within the
framework of which income stemming from an AE
will be exempt from tax during the initial
two years, starting from the first year in
which the AE has taxable income, and
subsequently subject to a reduced tax rate of
25% during the remaining five-year period for
one program, and entitlement for a full tax
exemption over a ten-year period for the
other program. The investment schedule was
extended to November 2003. The period of
benefits of the two programs has not yet
begun.
- 61 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 17 - INCOME TAXES (CONT.)
B. TAX LAWS APPLICABLE TO THE MAJOR GROUP COMPANIES IN
THEIR COUNTRY OF RESIDENCE (CONT.):
1) ISRAEL (CONT.)
E. (cont.)
Should the investment rate of foreign
residents (as defined by law) in IGTX exceed
25%, the period of benefits would then
increase from seven to ten years. If this
rate exceeds 49%, the tax rate would decrease
from 25% to 10%-20%, based on the investment
amount during each of the relevant tax-years.
The period of benefits to these AEs is
limited to 12 years from the earlier of the
commencement of production or 14 years
following receipt of the approval document.
The benefits are determined by the ratio of
the additional sales revenues during the
period of benefits over the sales revenues in
the entire last year of production prior to
the activation of each program (adjusted for
the change in the wholesale-price index of
the industrial output), divided by the total
revenues in each of the tax-benefit years).
Those benefits are subject to the conditions
stipulated in the Law, the regulations
thereunder and the approval documents based
on which the investments were made. Failure
to meet those conditions may lead to the
cancellation of the benefits and also trigger
a demand for reimbursement of the amounts
received (in whole or in part), plus interest
and linkage. Change in the ownership
structure of a company owned by an AE,
including a public offering of over 49% or
any private placement during the period of
the approved investment program through the
end of the period of benefits is subject to
the advance approval by the Investment
Center.
In the event of a distribution of tax-exempt
earnings, as noted, in the form of a
dividend, the distributing company would be
subject to tax of up to 25% while the
distribution of earnings of an AE as
dividends would be taxable to the recipient
at a rate of 15%.
2) USA
a. US tax laws set limitations on the
utilization of carry-forward tax losses in
companies that have undergone a material
change in ownership. Accordingly, if the
transfer of the Company's shares to EIL (in
1999) is defined as a material change in
ownership of Elscint, then the ability to
utilize the tax-losses of a US subsidiary
against future income would be limited
considerably.
The restriction referred to above (even if
applicable) would not have a material impact
on Elscint's shareholders' equity at December
31, 2002 and its results of operations for
the year then ended, since those losses have
not yet been offset against taxable income,
and no deferred income taxes have been
recorded in respect thereof.
b. A non-US company may (under certain
conditions) be deemed for US income tax
purposes as a Passive Foreign Investment
Company ("PFIC") on the basis of an "income
test" and an "assets test", as determined by
the IRS. Once so defined, the US shareholders
may be subject to additional taxes upon the
distribution of earnings or assets and/or
upon their realization of their holdings in
such a defined company. Following the sale of
the Company's and Elscint's activities and
due to their entry into other areas of
activity, the management of both companies
believe - based on advice received for this
matter - that in light of existing
indications, they may not - under the
circumstances - be considered as a PFIC.
Nevertheless, there is no certainty that the
companies' position would prevail with the
IRS.
- 62 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 17 - INCOME TAXES (CONT.)
B. TAX LAWS APPLICABLE TO THE MAJOR GROUP COMPANIES IN
THEIR COUNTRY OF RESIDENCE (CONT.):
3) THE NETHERLANDS
a. Corporate tax applicable to companies
incorporated in the country - 34.5%.
b. Under the "Participation Exemption", a
dividend received by a Dutch company in
respect of an investment in shares of other
companies is exempt from corporate tax in The
Netherlands. A capital gain derived upon the
sale of the shares of an investee company
would be exempt from tax, subject to the
fulfillment of the following criteria:
1. The company holds at least 5% of the
share capital of the investee.
2. The investing company and the investee
are not investment funds as defined by
Dutch law.
3. The investment is not held in
inventory.
Four additional criteria are required for an
exemption in respect of an investment in
foreign companies:
1. The profits of the investee must be
taxed in its country of residence.
2. The investment is not carried out
within the framework of an investment
portfolio.
3. The investee is an active company.
4. A subsidiary acting as the financier
must be active and meet additional
conditions in order not to be deemed a
passive company.
Capital losses cannot be offset unless the
investee is liquidated, under certain
conditions.
4) JERSEY
a. A company with international commercial
activity:
- Income from operating activities is
subject to tax at the rate of 30%.
- Income from international activity
(including receipt of dividends) would be
taxed at rates ranging from 0.5% to 2%.
- Capital gains would be exempt from tax.
- Dividends received would be taxed at a
rate of 20% subject to international tax
treaties.
b. A company without international commercial
activity:
- Income except for bank interest if not
earned in Jersey, in excess of a fixed
annual amount of 600 pounds sterling is
exempt from tax.
- Income derived in Jersey except for bank
interest would be taxed at 20%.
- Capital gains would be exempt from tax.
- A dividend distributed from income
originating in Jersey entitles a tax-
credit of 20%.
- 63 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 17 - INCOME TAXES (CONT.)
B. TAX LAWS APPLICABLE TO THE MAJOR GROUP COMPANIES IN
THEIR COUNTRY OF RESIDENCE (CONT.):
5) ENGLAND
a. A UK resident - company:
- Operating income and capital gains would
be subject to tax rates ranging from 0%
to 32.75%, subject to the level of
profitability.
- Dividends received from a UK-resident
company are exempt from tax.
- No tax credits are given for dividends
distributed.
b. A non-resident company having an investment
activity in property in England:
- Net rental income from leasing buildings
in England would be taxed at 22%.
- Capital gains are exempt from tax.
6) BELGIUM
The corporate tax rate applicable to income of
companies incorporated in Belgium is 34%. Dividends
paid from such income are subject to additional tax
of 25%, other than a dividend received by companies
incorporated in Belgium or in the EU, whose holding
rate in the Belgian company is at least 25%, subject
to international tax treaties.
7) ROMANIA
The corporate income tax rate for resident companies
and non-resident entities with permanent
establishments in Romania is generally 25%. Capital
gains are generally treated as ordinary business
income. Dividends paid to resident and non-resident
companies are subject to a final withholding tax of
10%, unless reduced double taxation treaty rates
apply for non-residents. Losses may be offset
against taxable income for a period of five years
from the period they were incurred.
8) HUNGARY
The corporate tax rate applicable to income
(including capital gains) of subsidiaries
incorporated in the country is 18%. Dividends paid
out of these profits are taxed an additional 20%,
subject to the terms of the relevant treaty for the
prevention of double taxation. Losses from the third
year onward may be offset against taxable income for
a period of five years, subject to the fulfillment
of a losses/revenues ratio, pursuant to the income
tax regulations. The losses incurred during the
first two years of operation may be carried forward
for an unlimited period of time.
9) POLAND
The corporate tax applicable to subsidiaries in
Poland is 28%. Dividends paid out of these earnings
are subject to an additional (final) tax of 20%,
subject to the relevant tax treaty for the
prevention of double taxation. The tax rate on
taxable income will be gradually reduced to 22% by
2004. Losses may be offset against taxable income
over a five-year period, limited each year to a
maximum utilization of up to 50% of the accumulated
loss.
- 64 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 17 - INCOME TAXES (CONT.)
C. Effective tax rate:
The following is a reconciliation between the income tax
expense computed on the pretax income at the ordinary tax
rates ("the theoretical tax") and the tax amount included
in the consolidated statement of operations:
CONSOLIDATED
DECEMBER3 1
2002 2002 2001 2000
------------ ----------- ------------ ------------
CONVENIENCE
TRANSLATION
------------
US$'000 (IN THOUSAND NIS)
------------ ------------------------------------------
Company's theoretical tax rate (%) 36 36 36 36
============ =========== ============ ============
Income (loss) before taxes -
per statement of operations (3,058) (14,484) 118,529 (37,017)
============ =========== ============ ============
The theoretical tax (1,101) (5,214) 42,670 (13,326)
Differences in tax liability in respect of:
Utilization of prior-year losses for
which deferred taxes had not been
created in the past (5,667) (26,846) (16,960) (13,206)
Losses and other timing differences for
which deferred taxes had not been
created 18,475 87,518 68,029 77,620
Variances from different measurement
rules applied for the financial
statements and those applied for income
tax purposes (including exchange-rate
differences) (3,186) (15,092) (28,583) (9,836)
Differences in the tax rates on income
of foreign subsidiaries (3,917) (18,554) (16,266) (6,176)
Taxes for prior years 2,726 12,913 (7,939) (214)
Other differences, net (*) (2,659) (12,597) (27,094) (15,955)
------------ ----------- ------------ ------------
4,671 22,128 13,857 18,907
============ =========== ============ ============
(*) Mainly tax-exempt income and disallowed expenses.
D. Carryforward losses and deductions:
At December 31, 2002 the Group companies had accumulated
tax losses and deductions amounting to NIS 630 million,
which may be utilized in future years against taxable
income at rates ranging from 18% to 34.5% depending on the
country of residence. The utilization of these losses is
contingent upon generating taxable income during the period
in which these losses may be offset.
E. Deferred taxes in respect of non-monetary assets
(consolidated):
Deferred taxes not allocated in respect of the CPI-adjusted
amounts of buildings and net book value of assets whose
depreciation for tax purposes would be disallowed (for
which it had been determined not to record deferred income
taxes) amounted at December 31, 2002 to NIS 91million ($ 19
million).
- 65 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 17 - INCOME TAXES (CONT.)
F. Deferred income taxes (consolidated):
DECEMBER 31
-----------------------------------------
2002 2002 2001
------------ ------------ ------------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
----------- --------------------------
Accelerated depreciation differences in respect of
fixed assets (14,016) (66,395) (25,881)
Difference between fair value of land at acquisition and
related cost for income tax purposes (7,988) (37,841) (42,707)
Temporary differences - income and expenses (3,968) (18,797) (9,653)
Carryforward tax losses and deductions 5,618 26,612 21,817
------------ ------------ ------------
Deferred taxes (20,354) (96,421) (56,424)
============ ============ ============
PRESENTED IN:
Long-term liabilities (22,465) (106,424) (65,055)
Current liabilities (353) (1,670) (1,585)
Long-term loans and receivables 2,464 11,673 10,216
Current assets - - -
------------ ------------ ------------
(20,354) (96,421) (56,424)
============ ============ ============
G. Final tax assessments:
The Company, Elscint and some of the Group companies in
Israel have received final tax assessments through 1998.
Some of the Group companies abroad have received final tax
assessments from 1991 to 1999 while some have not yet been
assessed since incorporation.
- 66 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES
A. COMMITMENTS
(1) The minimum annual future rental fees under the
building and equipment operating leases, based on
prices and terms in effect at December 31, 2002,
(including renewal options), for periods subsequent
to December 31, 2002, are immaterial to the Group's
business.
As for the commitments in respect of the
land-leasing fees of the Hotel Division and the PC
Group - see Note 11C1 and 11C2.
(2) In connection with the sale of the Elscint
operations to GEMS and Phillips Medical Systems Ltd.
("Phillips") (as outlined in Note 23 below), Elscint
undertook not to make dividend distributions either
in kind, cash or extraordinary distributions, and
not file for liquidation or merge with another
entity unless the following conditions are met:
A. In the event of merger or consolidation, the
acquiring company must assume Elscint's
liability to Phillips.
B. The value of the net tangible assets (as
defined in the agreement) must not decline
below $10 million in 2003, as a result of the
merger or distribution. Commencing in 2004 no
restrictions exist on such a distribution or
merger, provided that - at the time of those
transactions - there is no pending claim by
Phillips against Elscint in excess of $10
million.
(3) B.H. was granted an option from the management
company, exercisable until September 30, 2003, to
purchase from the management company 33% of its
ownership and controlling rights in a company under
its ownership, which was incorporated to acquire the
business (including tangible assets, hotel
management agreements, management rights, rights to
use trade names, etc.) of the Park Plaza chain in
Europe (hereinafter "the acquired company"). As part
of the agreement, B.H. granted the management
company a loan of $ 5 million.
The level of B.H.'s investment may increase by $
2.25 million, if and to the extent that this amount
is required for the purchase of other assets by the
acquired company. The management company has an
option, exercisable up to the end of one year or at
any time in the event of disagreement between the
parties regarding the management company's rights,
to acquire part of the company, in consideration for
the refund of the cost of B.H.'s original
investment.
(4) Elscint is required to pay royalties to the Office
of the Chief Scientist ("OCS") in respect of sales
of products developed with grants provided by the
latter. The royalties are computed on the sales
volume of these products at percentages ranging from
1% to 5% limited to the aggregate amount of the
grants. Elscint received correspondence from the
OCS, requesting the submission of certain data in
order to ascertain its obligation in respect of
royalties due to the OCS.
The liability to the OCS in respect of the sale of
the MRI operations to GEMS, determined at $11
million, was allocated 60% to Elscint and 40% to
GEMS. Elscint received a written notification from
the OCS, requiring details concerning the allocation
of the proceeds received from GEMS, in connection
with the sale, to the MRI project, based on which
the royalties had been computed. In addition, it was
agreed that the NM and MRI technologies, products
and components would not be transferred out of
Israel unless GEMS first seeks OCS approval.
Pursuant to the agreement between Elscint, GEMS and
the OCS, Elscint undertook that should GEMS sell MRI
products containing certain know-how and components
financed with the assistance of the OCS, it would
pay the OCS royalties in excess of $ 1.5 million.
The Company and Elron Ltd. notified Elscint that the
outcome of the settlement of their disagreement with
the OCS in connection with the sale of Elron's
holdings in the Company will not involve any
additional cost to Elscint.
- 67 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
A. COMMITMENTS (CONT.)
(5) IGTX is required to pay royalties to the OCS on
proceeds from the sale of products, in whose
research and development the OCS has participated,
at a rate of 3% for the first three years and 3.5%
thereafter up to a maximum of 100% of the grants
received. The total amount of grants received as of
December 31, 2002 is NIS 37.2 million.
(6) Hotel management agreements - see Note 10B.1.c.
(7) Hotel franchise agreements - see Note 10B.1.d
(8) Principal agreements for leasing space in the
commercial centers - see Note 10B.3.b.2.
(9) Commitments to acquire and/or construct assets at
the Commercial Centers Division - see Note
10B.3.b.3.
(10) Agreements for management, supervisory and manpower
services for the establishment of commercial centers
- see Note 10B.3.b.4.
(11) A commitment to effect a final payment in respect of
the Triple-S transaction - see Note 19c above.
(12) Pursuant to the agreements between the Company and
Elbit Ltd., from which the Company and Elbit Systems
Ltd. were spun-off ("the spun-off companies"),
effective January 1, 1996, Elbit Ltd. agreed to
grant the Company, for no consideration, the
ownership of know-how and intellectual property
rights in connection with the Company's operations,
the right to use the "Elbit" name and to provide
various services for consideration. The parties
undertook mutual indemnifications in respect of the
activities preceding the spin-off.
(13) CURRENCY TRANSACTIONS- see Note 24b.
(14) Within the terms of an agreement with EIL and
Elscint, extended to be in effect through December
31, 2005, direct as well as indirect expenses of the
internal departments of EIL Group (legal,
investments, accounting and taxation) are to be
allocated. Each party to the agreement is entitled
to terminate the agreement at the end of each
12-month period by giving prior notice to that
effect. Under the agreement, the expenses are to be
divided so that EIL bears 35%, with the Company and
Elscint, each, 32.5%, unless the actual utilization
rate deviates by more than 10% from these
percentages. Should the deviation be more than 10%,
the parties would be charged on the basis of
actual-cost allocation. The renewal agreement was
approved by the audit committees of all the
participating companies' boards of directors.
(15) In October 2001 an agreement between Bucuresti and a
company controlled by Control Centers (CDPM), was
approved at the shareholders' meeting. In accordance
with that agreement CDPM will provide logistical,
planning, and supervisory services in connection
with the renovation of the Bucuresti hotel, for a
fee equal to the lower of 5% of the renovation costs
(excluding general and administrative costs and
financing) or 5% of $ 30 million.
(16) On February 14, 2001 the Company was notified, by
the Government Companies' Authority ("GCA"), that
the Elezra Group had won the right to purchase from
the State the shares of Afridar -The Housing and
Development Company of Ashkelon Ltd. ("Afridar").
The Elezra Group consists of Elezra Developments and
Investments Ltd. ("Elezra"), an unrelated company
and Elbit Medical Holdings Ltd., a subsidiary of the
Company ("Elbit Holdings"), as well as the Company
and Mr. Eli Elezra as interested parties (together,
"the Group"). Afridar is a highly regarded
real-estate company with extensive experience.
- 68 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
A. COMMITMENTS (CONT.)
(16) CONT.
Immediately following that notice, Group members
signed an agreement in principle to govern their
business relationship, according to which Elezra
would pay the total acquisition cost of the Afridar
shares (NIS 80 million ($ 19.8 million)) and, in
exchange, the Company and/or Elbit Holdings would
hold the Afridar shares that would be registered in
their name, in trust for Elezra.
The parties also agreed that in consideration of the
above, Elezra would pay the Company NIS 1 million,
an amount that Elezra converted - in accordance with
the agreement-in-principle - into an option for 24
months to be granted to the Company and/or Elbit
Holdings for the acquisition of up to 15% of Afridar
shares in exchange for a payment to Elezra equaling
15% of the Afridar share price paid by the latter
(or any other percentage equalling the number of
shares to be purchased). In March 2003 Company
management decided not to exercise the option and it
thus expired.
The transfer of shares between the members in the
Group is subject to the approval of the GCA during
the initial 12 months following the conclusion of
the transaction. In the absence of such approval,
the Company and/or Elbit Holdings would remain the
owners of the Afridar shares until the restriction
on their transfer is lifted. In this case, Elbit
Holdings and Elezra will be, jointly and severally
liable to the GCA and the State of Israel for all
charges applicable to purchasers of Afridar shares.
In addition, after 12 months from the date of the
transaction's conclusion, any direct or indirect
sale of control in Afridar is contingent upon the
transfer of the seller's commitments to the GCA to
the potential purchaser, as stipulated in the
agreement. Elezra undertook to indemnify the Company
and/or Elbit Holdings for any expense and/or damage
and/or claim and/or loss and/or request for payment
and/or any other expense incurred by the Company
and/or Elbit Holdings in connection with the offer
for the acquisition of the Afridar shares, the
related transaction, the acquisition of the shares
and their holding in trust, receipt of the above
option, transfer of the shares between the parties
and the above agreement in principle.
The Company, together with Elezra, was negotiating
with the Government Companies Authority for the
assignment of the Company's rights and obligations
in Afridar to Elezra. At the issuance date of these
financial statements, these rights have not yet been
assigned.
B. CLAIMS
(1) In November 1999, a number of institutional
investors and others, holding shares in Elscint,
filed, a lawsuit in the Haifa District Court against
the Company, Elscint, EIL and others. The plaintiffs
also requested the certification of their claim as a
class action in the name of all those who had held
Elscint shares on September 6, 1999, and continued
to do so when the claim was filed (excluding the
Company and others). The claim alleges
discrimination against Elscint's minority
shareholders arising from various transactions or
activities carried out by its controlling
shareholders and directors, which - allegedly -
caused them financial loss, manifested by the 45% ($
100 million) decline in the value of Elscint's
shares in the period from February 24, 1999 to the
claim's filing date.
The principal remedy requested in the claim is a
court order instructing the Company to carry out a
tender offer for Elscint's shares at $ 14 per share.
Alternatively, the plaintiffs, inter alia, also
asked the court to issue an injunction prohibiting
implementation of the September 9, 1999 transactions
and the refund of any amounts paid thereunder. Part
of the relief was requested as a derivative claim by
Elscint.
- 69 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
B. CLAIMS (CONT.)
(1) (CONT.)
The Haifa District Court summarily dismissed the
request for certification as a class action. This
decision was appealed by some of the plaintiffs to
the Supreme Court. Concurrently, the district court
ruled that the plaintiffs may - notwithstanding
having rejected the request for class action
proceedings - nevertheless pursue the matter. The
State Attorney General has submitted a position
paper to the Supreme Court regarding the appeal.
According to his opinion, the district court erred
in its two legal conclusions when rejecting the
request for class-action certification. Accordingly,
he believes that the plaintiffs should be allowed to
appeal and that the appeal - if filed - should be
accepted. Moreover, the State Attorney General
believes that, subsequent to the acceptance of this
appeal, it will be necessary to evaluate the request
and approve it as a class action. At this stage, the
Registrar has deferred the dates for submitting the
defense documents, until the question of the
required court fees due in these procedures has been
decided, as outlined below:
On November 21, 2001 hearings were held in the
Supreme Court at following which it granted a right
of appeal. The Company and the parties filing the
class action presented their respective motions. On
February 27, 2002, the court decided to permit the
State Attorney General to present his final motion,
in writing, within seven days.
A dispute has arisen between the parties regarding
the question of the fee, which is determined based
on the classification of the relief sought in the
claim. For the time being, the plaintiffs have
defined the relief sought by them as declaratory
relief and have paid a fee for it. The position of
the defendants is that the true relief sought in the
claim is monetary, and that the plaintiffs should
pay a court fee which is substantially greater than
the sum that the plaintiffs have paid. On August 3,
2001, the Registrar of the Haifa District Court held
that part of the relief sought by the plaintiffs is
not declaratory as claimed by the plaintiffs, but
rather monetary as the defendants claim. Therefore,
the Registrar decided that the plaintiffs must pay
the fee for these reliefs totalling 2.5% of the
amount claimed (totalling NIS 20 million) and, in
addition, itemize the monetary reliefs sought by the
plaintiffs. As for the other relief sought by the
plaintiffs, the court ruled that they are not
monetary remedies, rather applications for
injunctive releif, on which the plaintiffs will have
to pay a fee of an insignificant amount.
To date, the plaintiffs have not yet paid the court
fee and also have not advanced satisfactory
arguments to support the relief they are seeking. As
a consequence, Elscint has applied the court to
strike out from the list of relief sought those
deemed by the court as needing additional
substantiation. The Company has joined in Elscint's
application. On February 28, 2002 a hearing was held
before the registrar of the district court regarding
the defendants' application to strike out portions
of the claim in view of the fact that the plaintiffs
failed to pay the court fee. The Registrar decided
that the proceedings regarding this application will
be heard after the appellate court decides regarding
the court fee as described below. The court also
ruled that, at this stage, the filing by the
defendants of defense motions would be postponed.
Two appeals on the Registrar's decision of August 3,
2001 were filed with the Haifa District Court on
September 20, 2001. Elscint and other plaintiffs
petitioned the court to determine that the primary
relief and the alternative relief demanded in the
claim are both monetary, and subject to a fee of
2.5% of the amount. In another appeal, the
plaintiffs petitioned the court to establish that
the relief categorized as monetary is, in fact,
injunctive relief. In addition, the plaintiff
petitioned the court to overrule the Registrar's
decision concerning the postponement of the filing
of the defense-motion. On October 28, 2001 the
Company filed a counter-appeal, claiming, as Elscint
had, that the primary and the alternative claim
constitute a stated monetary remedy and are thus
subject to a fee of 2.5% on the amount of damages
claimed. The hearing on these appeals took place in
April 2002. The court has not yet rendered its
decision.
- 70 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
B. CLAIMS (CONT.)
(1) (CONT.)
The Company's management believes - based on the
opinion of its legal counsel - that the final
outcome of this case cannot be estimated.
On January 26, 2003, the Company received a letter
from one of the insurers ("the Insurer") of EIL,
Elscint and the Company (the "Insured Companies"),
that provides insurance to the Insured companies
including insurance pertaining to this
representative claim.
In this letter, the Insurer made certain allegations
against the Insured Companies, including, inter
alia, that the Insured Companies breached their
disclosure duties under section 6(a) to the
Insurance Contract Law, 1981, by failing to disclose
to the Insurer material information prior to the
issuance of additional cover to the policy purchased
by EIL (the "Policy"), effective as of July 1999
(the "Additional Cover"), and prior to the
replacement of the Policy and the Additional Cover
by the issuance of a new policy effective as of
August 1999 (the "Replacement Cover"). The letter
states that the Policy, Additional Cover and
Replacement Cover issued by the Insurer will be
cancelled unless the Insured Companies indicate the
circumstances were different than those described in
the letter. The Company's legal counsel sent a reply
on behalf of EIL, Elscint and the Company on March
20, 2003, in which the allegations of the Insurer
were rejected. As of the date of the issuance of the
financial statements the company has not received an
answer from the Insurer to the Company's letter.
(2) In September 1999, a lawsuit for $ 158 million was
filed against the Company, Elscint and others, along
with a request for recognition as a class action.
The plaintiffs assert that the Company, through
Elscint's Board of Directors, caused damages to, and
discriminated against, the minority shareholders of
Elscint. Based on the parties' agreement, the court
hearings were postponed until the Supreme Court
decides in the appeal described in item 1 above.
Based on the advice received from legal counsel,
management believes that at this stage it is not
possible to ascertain the outcome of the claim and
whether it will be recognized as a class action.
(3) The Company and its subsidiaries are parties in a
number of lawsuits in the courts as well as to other
claims by third parties- in part, with no amounts
stipulated, and, in part, in an aggregate amount of
approximately $39 million, as compensation for
damages allegedly caused by the activities and/or
products of the companies and which relate,
primarily, to the operations of the Company and of
Elscint which were sold during 1998 and 1999.
Regarding a portion of the claims, amounting to $8
million, management of the companies estimates, on
the basis of the opinion of their legal counsel
dealing with these matters and/or on the basis of
counsel of insurance advisors, that no significant
costs will result therefrom, over and above the
relevant amounts accrued in the financial statements
and that the provisions recorded in the financial
statements are adequate to cover the costs and
resources that will be necessary to settle any
obligations resulting from the claims. Regarding a
portion of the claims amounting to $31 million,
legal counsel of the companies is unable at this
stage to estimate the outcome. Nevertheless, the
companies have recorded accruals in their financial
statements in amounts that are adequate, in the
opinion of their management, to cover the costs and
resources necessary to resolve the obligations under
these claims as of the date of issuance of the
financial statements based, inter alia, on the
counsel of their relevant advisors in such matters
and on past experience. The aggregate amount of the
claims as mentioned above, was decreased during
2002, as a result of negotiations carried out with
some of the distributors, which negotiations led to
settlements with claimants. As a result of such
settlements no costs were incurred beyond the
provisions that were included in the financial
statements.
- 71 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
B. CLAIMS (CONT.)
(4) A claim for $ 14.3 million is pending in an Israeli
court by two foreign companies against the Company
and its subsidiary, which - for the purposes of
filing fees - was set at NIS 20 million
(approximately $ 5 million). The claim alleges
damages, mainly, loss of profits and damage to
goodwill, allegedly sustained due to the Company's
breach of its obligation to take part in a tender in
Brazil to set up a medical diagnostic center. The
Company requested the court to summarily dismiss the
claim due to lack of jurisdiction or, alternately,
due to the Israeli courts being an "inappropriate
forum" to adjudicate the matter. In May 2001, the
District Court rejected the request to summarily
dismiss the claim and the Company appealed this
decision in the District Court. In addition, the
Company will submit a request to extend the date to
file a defense motion until after the court's
decision on the appeal. The parties agreed that,
should the Company's appeal concerning the lack of
legal jurisdiction by the Israeli courts be
rejected, the Company would then file a defense
motion within 30 days thereafter. On March 2, 2003
the Haifa District Court rejected the Company's
appeal and stated that the court handling this claim
is empowered to decide the appropriate and qualified
jurisdiction for hearing the case. The Company filed
a defense motion against the actual claim. In
addition, the Company is contemplating filing an
appeal with the Supreme Court.
On the basis of legal advice, Company management
considers the likelihood of acceptance of the claim
against the Company to be remote and that, with
regard to the subsidiary, there are good grounds for
defense. Management believes that should any of the
plaintiff's assertions be accepted with regard to
the breach of contract, then the amounts claimed
would appear to be exaggerated and groundless. These
financial statements do not include any provision in
respect of this claim.
(5) During 2001 GEMS drew the balance of the $3.5
million credit facility provided by the Company in
connection with the sale of the ultrasound
operations. In addition, it demanded from the
Company an additional $1 million in respect of
damages allegedly suffered by it following the
implementation of the sales agreement under the
indemnification had been awarded. In January 2003
the Company reached a comprehensive and final
arrangement with GEMS under arbitration proceedings.
In accordance with a signed agreement between the
parties, GEM reimbursed the Company $1.3 million,
resulting in a gain of $0.8 million to be reported
by the Company in the first quarter of 2003.
(6) In respect of the legal proceedings underway in the
Romanian courts which may have an adverse effect on
the Group - see Note 10b(1) b (7) above.
(7) In July 2002 a third party filed a lawsuit in a
Polish court against a contractor in Poland for $3.6
million, alleging an unpaid debt arising from a
service agreement. In addition, the plaintiff asked
the court to seize a debt owed by three lessees, in
order to secure the repayment of that company's
debt. In September 2002 the court accepted the
plaintiff's request to seize the rental payments. In
October 2002, the court rejected the Company's
appeal in respect thereof. In that month the Company
also filed its response to the main claim, in which
it rejected most of the plaintiff's assertions and
requested the court to reduce the payment for the
construction services it owes the plaintiff due to
the alleged incomplete construction and the
execution of the construction work at
lower-than-agreed standards.
Concurrently, the Company filed a counter-claim for
$3.4 million, alleging damages due to defects in
discharging the agreement as well as additional
losses incurred as a results of its actions. In
addition to these proceedings, the Company asked to
be included in a compromise settlement being
finalized between the plaintiff and all his
creditors. The Company was formally approved as one
of the plaintiff's creditors and will thus
participate in all the proceedings pertaining to the
arrangement. Company management does not foresee any
additional expenses in respect of these claims
beyond those already included in these financial
statements.
- 72 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
B. CLAIMS (CONT.)
(8) In addition, the Company and its subsidiaries are
currently involved in litigation in connection with
matters in their ordinary course of activities.
Although the final outcome of these claims cannot be
foreseen at this time, the management of these
companies believes - based on advice of their legal
counsel - that the claims will not have any material
impact on the Group companies.
C. OTHER CONTINGENT LIABILITIES
(1) The allocation of the proceeds in respect of
operations sold in 1998 between Elscint and its
subsidiaries in 1998 is based on an estimate of fair
value of the assets (both tangible and intangible)
sold by each one of the companies; on separate
negotiations held with each selling Group company;
and on the basis of the provisions stipulated in the
sales agreement. A different method of allocation
may cause Elscint and its subsidiaries additional
liabilities and/or expense. Elscint's management
believes that the estimates used as the basis for
this allocation of proceeds is adequate under the
circumstances.
(2) The General Meeting of the Company's shareholders
approved the granting of advance indemnification
contracts to directors and officers (including in
their capacity as officers of the subsidiaries). The
total indemnification amount will not exceed the
lower of 25% of the Company's shareholders' equity
in accordance with the financial statements at the
time of indemnification or $40 million, above the
amounts to be paid, if at all, by insurance
companies under its policies for risks covered by
those policies. In addition, the General Meeting
approved an exemption for the directors and officers
(other than controlling parties) from responsibility
for any damage caused by breach of due care towards
the Company.
(3) There is a commitment to indemnify additional
officers (including directors) subject to, and up
to, the limit allowed by law, in connection with a
financial obligation incurred in favor of a third
party and in respect of reasonable legal expenses
incurred by or charged to any one of them. The
Company took out an insurance policy to cover
officers and directors in an amount, which - in the
opinion of management - is sufficient to cover
reasonable risks.
(4) Elscint is committed to indemnify its officers and
directors at the maximum amount permitted by law and
by its own bylaws, in connection with any act or
deed carried out in the discharge of their duties.
Notwithstanding the above, Elscint's shareholders
approved in their General Meeting, the granting of
advanced indemnification certificates to officers
and directors, including those acting in its
subsidiaries. The total indemnity will not exceed
the lower of 25% of the share capital of Elscint
presented in the financial statements at the time of
the indemnification, or $50 million, in addition to
such amounts, if any, to be paid by the insurers in
accordance with its insurance policy, at times, for
causes covered by such indemnification policies. The
General Meeting also approved an exemption from
liability in respect to any damage caused to Elscint
by breach of duty of care committed by officers and
directors.
(5) Regarding several sales, which were effected by
Elscint prior to the sale of its assets (November
1998), Elscint undertook towards a number of its
customers to repurchase, under certain specified
conditions, at an agreed price, equipment they had
purchased. The price of the equipment repurchase by
Elscint as of December 31, 2002 was NIS 3,752
thousand.
- 73 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
C. OTHER CONTINGENT LIABILITIES (CONT.)
(6) Within the framework of the agreement for selling
Elscint's plant, as described in Note 23 below,
Elscint undertook to indemnify the purchasers for
any losses incurred in connection with, and as a
result of, the liabilities not acquired by them. It
also agreed to pay the income-tax liability incurred
by the plant up to December 31, 2002, including
those arising from environmental-quality matters, in
connection with employee benefits (including
subcontractor and workers of manpower agencies), in
connection with breach of the contract signed for
the leasing of land from the Israel Lands
Administration, in connection with taxes due for the
transfer of the rights in the lands to purchasers,
that apply to Elscint, etc.). Some of these
liabilities are limited in amount while others are
not; some are for a 24-month period while others are
for unlimited periods of time. In any event, the
total indemnification will not exceed 20% of the
transaction price, other than the liabilities
pertaining to the environmental quality.
D. LIENS AND COLLATERAL
(1) A. As security for credit totaling NIS 784
million received by the Company and a
subsidiary from a bank in Israel, the Company
agreed to fulfill several financial
covenants, including the maintenance - during
the term of the loan - of a minimum ratio of
shareholders' equity to its total net book
value (NBV), as defined in the loan
agreement. As security for the loan received,
the subsidiary granted to the bank for the
entire term of the credit agreement, a
first-tier fixed lien, unlimited in amount
and assigned by way of a pledge over all of
its PC shares. In addition, the Company
registered a fixed and a floating lien on
deposits totaling NIS 367 million. It also
undertook not to grant additional liens on
its present, as well as future, assets in
favor of third parties, without first
obtaining the bank's consent (other than the
mortgaging of assets and/or new projects in
favor of the entity financing them or in the
event of a refinancing). The Company also
undertook to provide, under certain
conditions, additional security, as outlined
in the agreement, including second-tier liens
on assets and rights to be acquired by means
of the line of credit. It was agreed that
should the Company not comply with the
stipulated financial covenants or in case of
certain specified events, (including not
providing additional security), the bank
would be entitled to demand immediate
repayment of any amounts drawn. During 2001
and 2002, the Company at the bank's request,
provided additional security, including a
first-tier lien on its Sadyba shares and
agreed to provide its rights in real estate
held in Prague held by Praha Plaza. Within
the framework of the understandings reached
between the Company and the bank (as outlined
in Note 13 above), which are contingent upon
the fulfillment of certain conditions as well
as the signing of a detailed agreement
between the parties, certain changes are to
be made regarding the financial parameters,
within the framework of which, among other
things, the minimal ratio of shareholders'
equity would be reduced and the mechanism for
accelerating loan repayment would be
determined, in agreement, at an amount
equaling the proceeds received, in any event
of sale or issuance of PC and/or commercial
center or in the event of a refinancing.
B. As security for a loan obtained from another
bank in Israel the Company also undertook
towards that bank that no part of its Elscint
shares would be pledged without first
receiving that bank's consent.
- 74 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
D. LIENS AND COLLATERAL (CONT.)
(2) A. To secure a credit of approximately NIS
563million that Elscint received from a bank
in Israel, Elscint undertook to comply with
covenants which include, inter alia, an
undertaking to the bank regarding the
maintenance of a minimum ratio of Elscint's
shareholders' equity during the credit period
to its total assets. To secure the credit
that it received, Elcint granted the bank for
the period of the credit, a fixed first
charge unlimited in an amount, and an
assignment by way of a charge on deposits and
securities totaling NIS 261 million. Elscint
pledged in favor of the bank the BH shares
and shares of subsidiaries owned by it as
demanded by the bank. In addition, Elscint
undertook not to create charges (current
and/or fixed of any degree) in favor of third
parties on its existing or future assets,
without receiving the bank's approval
(excluding charges on new assets and/or
projects -in favor of the party financing the
acquisition and/or execution and/or in the
event of refinancing). Elscint also undertook
to provide additional collateral, as detailed
in the agreement, including: first or second
tier charges on assets and rights, that it
will purchase with the proceeds of all
advances provided under the terms of the
facility. Should Elscint not comply with the
financial covenants in whole or in part, or
on the occurrence of certain events specified
in the agreement, the bank will be entitled
to demand immediate payment of these credits.
B. To secure a subsidiary company's liability to
the Bank of NIS 133 million, Elscint granted,
in addition, specific charges on deposits and
investments held in banks, whose balance as
at December 31, 2002 was NIS 66 million.
(3) Approximately NIS 12.7 million of Elscint's deposits
are used as collateral for bank letters of guarantee
totaling approximately NIS 17.3 million which a bank
provided in favor of financial institutions. (See
Note 24D above).
(4) ASTRID PARK PLAZA N.V. ("AP" )
As security for a credit-line provided to a supplier
of AP by a local bank, AP deposited with the bank
Euro 0.9 million (NIS 4.3 million ($ 0.9 million)).
The amount of the deposit was offset from the
supplier's trade accounts payable balance for which
the bank guarantee had been provided.
(5) VICTORIA HOTEL C.V. ("VHCV") AND UTRECHT VICTORIA
HOTEL B.V. (UVH)
To secure amounts received under a loan agreement,
designated for refinancing hotel activities, between
VHCV, VHRI, UVH and Mandarin Hotel B.V. (a company
in the Red Sea Hotel Group), as joint and several
borrowers ("the Borrowers") and Depfa Bank AG ("the
Bank"), the Borrowers received a loan of Euro 56.7m.
the shareholders of the Borrowers (VEI, VEII and
VEIII) provided a guarantee to the Bank to secure
the liability of each of the Borrowers to it.
According to the agreement between the Borrowers and
their shareholders, Euro 49.9m out of the total loan
amount was designated for the hotels owned by VHCV
and UVH, and the balance of Euro 6.8 million was
earmarked for Mandarin Hotel B.V.
As security for repayment of the loan, the Bank was
granted, among other things, a first mortgage on the
Victoria Hotel, Utrecht Hotel and Mandarin Hotel
properties and a first-tier lien on all the moveable
property located thereon; a first-tier lien on the
Borrowers' rights under existing rental agreements;
rights under insurance policies covering the real
estate; rights under management agreements; issued
share capital (including accompanying rights) and
rights in certain bank accounts.
In addition, the Borrowers subordinated to the Bank
all shareholder loans to rank after the bank's loans
and undertook not to pay the shareholders' loans
without the Bank's consent.
- 75 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
D. LIENS AND COLLATERAL (CONT.)
(5) (CONT.)
The borrowers and the guarantors signed a
mutual-indemnification agreement, according to which
the Mandarin Hotel Company and VEI (its shareholder)
would indemnify VEII, VEIII and the Borrowers (not
including Mandarin) for any amount borne by VEII and
VEIII in respect of that guarantee. It was also
agreed between VEI and VEII that they would both
indemnify each other for any expense incurred by
either one of them which exceeds 50% of the amount
due in respect of the loan.
(6) SHAW HOTELS HOLDINGS B.V. ("SHH")
To secure its liabilities under a loan agreement
designated to finance the SPP Hotel in London (see
Note 11.C.1) the following liens were granted in
favor of the Bank: a first mortgage on its real
estate and moveable property, including a first-tier
lien on rights to use the trade name of Park Plaza,
insurance rights connected to real estate, rights
under management agreements, the issued share
capital of SHH and the Hotel's operating company,
rights in certain bank accounts and goodwill; a
floating lien on all SHH's assets; the subordination
of all shareholders' loans to the demands of the
bank.
In addition, the Bank obtained from the Red Sea
Hotels Group a guarantee for the repayment of the
credit-line up to (pound) 5 million. EIL undertook
to indemnify the Red Sea Hotels Group for up to half
of that guarantee, if ever called.
As security for an additional line of credit granted
to SHH by the Bank, EIL and the Red Sea Hotels Group
jointly and severally provided a guarantee of up to
the line's ceiling of pound sterling 2.25 million.
In addition to the abovementioned, and with respect
to the hotel lease transaction (see Note
11.C.1.(ii)), the financing bank received from the
Company an indemnification commitment regarding any
damage incurred by the bank following its agreement
to the said transaction, as well as a commitment
from B.H. to provide additional security besides
that mentioned above if the hotel is not refinanced.
As at the date of approval of the financial
statements B.H. and a company of the Red Sea Hotels
Group are conducing negotiations with foreign banks
regarding the refinancing of the SPP hotel. In
addition, as security for a credit-line granted by
other Bank to SPP and VPP (see item 7), EIL provided
the Bank a guarantee of pound sterling 0.25 million.
(7) VICTORIA LONDON HOTEL HOLDING B.V. ("VLH")
In order to secure loans designated for financing
VPP Hotel (see Note 11.C.1), VLH provided the banks
first-tier (fixed and floating) liens on all its
assets, including land, moveable property, goodwill
and intangibles. In addition, a lien has been
granted over the shares of the investee companies by
their shareholders. VLH also undertook to refrain
from disposing of the guaranteed assets without
approval from the financing banks.
Furthermore, VLH agreed that all of its liabilities
would be second priority in relation to the bank
loans. VLH also gave covenants and undertakings with
respect to, inter alia, the scope of the development
and date of completion, and meeting certain
performance milestones by certain deadlines;
concerning the sale of assets, amendments to the
articles of incorporation, modification in its
holding structure, carrying out transactions not in
the ordinary course of business, management of
operations other than the hotels, issuance of
additional shares, minimal shareholders' equity
(including shareholder loans), transactions with
related companies, dividend distribution, repayment
of shareholder loans, rights stemming from
management agreements, rights in certain bank
accounts, ratio of shareholders' equity to the
project's cost, ratio of net income to current bank
loan, occupancy rate, average room price etc.,
during the entire credit term.
The Company has guaranteed VLH's undertakings under
the loan agreement up to an amount of pound sterling
1.25 million or 2.5% of the cost of constructing the
hotel whichever higher.
- 76 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
D. LIENS AND COLLATERAL (CONT.)
(8) GRANDIS NETHERLANDS HOLDING B.V. ("GRANDIS")
In order to secure loans received by it, Grandis
provided the banks first-tier (fixed and floating)
liens on all its assets, including land, moveable
property, goodwill and intangibles. In addition, a
lien has been granted over the shares of Grandis to
the financing bank. Grandis also undertook to
refrain from disposing of the guaranteed assets
without approval from the financing banks.
Furthermore, Grandis agreed that all of its
liabilities would be second priority in relation to
the bank loans. Grandis also gave covenants and
undertakings with respect to, inter alia, the scope
of the development and date of completion, and
meeting certain performance milestones by certain
deadlines; concerning the sale of assets, amendments
to the articles of incorporation, modification in
its holding structure, carrying out transactions not
in the ordinary course of business, management of
operations other than the hotels, issuance of
additional shares, minimal shareholders' equity
(including shareholder loans), transactions with
related companies, dividend distribution, repayment
of shareholder loans, rights stemming from
management agreements, rights in certain bank
accounts, ratio of shareholders' equity to the
project's cost, ratio of net income to current bank
liabilities, occupancy rate, average room price
etc., during the entire credit term.
(9) RIVER BANK HOTEL HOLDING B.V. ("RBH")
In order to secure RBH's liabilities to the bank
financing the construction of RPP Hotel (see Note
11.C.1), RBH granted a first mortgage (fixed and
floating) on all its assets, including rights in
real estate, movables, agreements, goodwill, etc. In
addition RBH assigned its rights under the leasing
agreements. RBH shares were pledged to the bank and
its liabilities were subordinated to the repayment
of the bank loans.
The Company and a company of the Red Sea Hotels
Group are guarantors for the fulfillment of
commitments under an agreement for an increase in
financing by up to (pound) 10 million. The guarantee
of each one of the guarantors is for 50% of the
additional credit facility. As of December 31, 2002
additional credit in the amount of (pound) 6.1
million has been utilized.
(10) PARK PLAZA HOTEL (SANDTON) (PTY) LTD. ("SANDTON")
To ensure Sandton's undertakings to the bank,
Sandton mortgaged the Hotel in a first mortgage and
registered a charge on its movable property. In
addition, Sandton's shareholders made a deposit in
the bank in the name of Sandton in which B.H.'s
share totals NIS 799 thousand. In the event of a
breach of the terms of the loan by Sandton, the
deposit will be forfeited and concurrently the bank
will be entitled to sell the Hotel on account of
repaying the balance of the loan.
(11) SC BUCURESTI TOURISM SA ("BUCURESTI")
The Company granted a first-tier lien on a bank
deposit of $ 14 million and on the rights and income
deriving from it in order to secure borrowings of $
28 million from a bank that the controlling
shareholder in Domino ("BHEE") obtained, to finance
its investment, indirectly through Domino, in the
rights in a hotel complex in Romania. In addition,
BHEE granted a fixed lien on the Domino shares that
it owns and a floating lien on all of Domino's
assets and a lien on the Bucuresti shares. The
Company undertook to place a lien on BHEE shares
that it owns and a floating lien on BHEE's assets.
The bank received a commitment that no changes in
the company's ownership and control structure would
take place throughout the entire credit term. In
addition, the Company provided a guarantee,
unlimited in time or amount, to secure BHEE's bank
loans. The bank restricted its right to realize this
guarantee, by linking it to the terms of the
realization of the Bucuresti shares owned by Domino
(except for certain instances stipulated in the
agreement).
- 77 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
D. LIENS AND COLLATERAL (CONT.)
(12) DEVELOPMENT BANK FINANCING
In order to secure the commitments of subsidiaries
made in agreements with banks providing the
financing for construction projects (commercial
centers in Central and Eastern Europe), companies
("the Project Companies") granted first-tier (fixed
and floating) liens on all of their assets
(including rights in land and the projects for which
the loans had been provided); liens on all rights
arising from the agreements they are a party to
(leases, operating and management agreement);
assignment of insurance rights etc.
It was agreed that the loans obtained by the Project
Companies from their shareholders and/or any
existing or future right of the rights' owners in
these companies would be subordinated to the bank
loans. No payment would be permitted to the
shareholders (including the distribution of
dividends and excluding amounts for managing the
projects) before securing repayment of the bank
loans. A lien was placed on the shares of the
Project Companies in favor of the bank.
Regarding certain projects, PC's holdings in the
Project Companies are transferred to a trustee to be
appointed by the bank, as part of the security.
Based on the provisions of the trust agreement, the
trustee will use the voting rights based on PC's
instructions, except for cases when the value of the
security would be impaired or the financial position
of the borrowing company would negatively change.
Profits arising from these holdings would belong to
PC. Regarding these projects, the lending bank will
have the right to elect one board member for each
relevant Project Company.
In addition, in the event of refinancing, the
project companies are to use the excess funds
obtained from such refinancing remaining after
repayment of any construction debt to repay
shareholder loans to PC or to pay the latter for
various services. Several project companies granted
loans to PC from excess refinancing funds. At
December 31, 2002 the total outstanding PS loans
payable to the project companies amounted to NIS
98.6 million.
PC and/or EUN undertook in some of the loan
agreements to supplement the minimal shareholders'
equity (including shareholder loans) of the Project
companies, in accordance with the financing
agreements or provide additional financing in the
event of any deviation from the business plans or if
any financing is required for the project operation
or maintenance. The Project Companies agreed, in
certain circumstances, not to sell, transfer or
lease any material part of their properties without
the consent of the financing bank. Some of the loan
agreements are secured by guarantees limited to NIS
12.5 million. In certain events the same Project
Companies agreed not to carry out the following
transactions without the bank's consent: change
control structure; carry out material transactions
(detailed in the agreement); exceed a given level of
liabilities to third parties; obtain loans and/or
provide guarantee to third parties.
(13) As security for bank loans totaling NIS 46 million
received by the project companies abroad, PC pledged
in favor of these banks deposits of equal amount.
(14) A subsidiary provided Sadyba with a guarantee of $ 5
million as security for the completion of
construction work carried out on its commercial
center. The subsidiary has taken steps to terminate
this guarantee since the construction of the
commercial center has been completed.
(15) The Company provided a bank guarantee of $5 million
as security for the IGTX bank loans.
- 78 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 19 - SHARE CAPITAL
A. COMPOSITION
ORDINARY SHARES
OF NIS 1.00 PAR VALUE EACH
------------------------------
DECEMBER 31
------------------------------
2002 2001
-------------- -------------
Authorized share capital 50,000,000 50,000,000
Issued and outstanding (*) 23,773,720 (*)23,771,720
(*) Includes 550,000 shares issued to employees against
non-recourse loans (see b below) as well as 887,144
shares held by Elscint Ltd.
During February and March, 2001, within the framework of a
program to compensate employees and officers, the Company
allotted 550,000 Company ordinary shares of NIS 1.00 par
value to its employees and directors, as well as to the
employees of the EIL Group (including employees of Elscint
and employees of EIL). Of these shares, 280,000 were
allotted to directors of the Company. Of those shares,
527,000 shares allotted to employees were outstanding as of
December 31, 2002. In exchange for each share, the offerees
paid NIS 24.10 ($ 5.9) - the closing market price on the
Tel Aviv Stock Exchange on the day prior to this allotment.
The vesting period will be over a two or three-year period
(50% or 33% at the end of each year - depending on the
position) from the allotment date and subject to the
offerees' continued employment with their company at the
time of the grant or in the event of dismissal that
entitles severance pay. The market value of the share
immediately prior to the Board's resolution (December 4,
2000) was NIS 30.15 per share ($ 7.46).
Payment for these shares was made from a loan provided by
the Company to be repaid at the end of a five-year period.
The loan bears annual interest of 6%. Any tax stemming from
the loan's interest rate will be paid by the Company.
However, the Company will not pay tax if imposed in respect
of the allotment of these shares and their eventual sale to
third parties.
The shares were deposited with a trustee, and will be used
as the sole, security for repayment of the non-recourse
loan. Despite the above, if one of the recipients elects to
transfer the vested shares from the trustee to him or,
alternatively, to sell them, he must deposit as security
for repayment of the loan in respect of these shares a
deposit equal to the loan balance and turn the loan into a
recourse loan.
Should the Company distribute cash dividends, with the
ex-dividend date falling during the period in which the
shares were held by the trustee for the offerees, including
the vesting period, the Company will transfer to the
trustee, for the offeree, dividends in accordance with the
number of shares held on behalf of the offeree and the
trustee will then transfer the dividends to the offered
party, irrespective whether the right to receive them has
already vested.
C. RIGHT TO ACQUIRE SHARES
In February 2001, an agreement was signed between the
Company and EUN and Triple-S, under which the latter
transferred to PC those rights granted to it under the
cancelled agreement, to acquire shares in the project
companies, and which had vested by that date, and waived
the remainder of its rights under that agreement (including
the remaining rights to acquire shares in the project
companies which had not vested at that date). In exchange,
the Company issued Triple-S 250,000 ordinary (fully paid)
shares of the Company. The parties agreed that, on January
15, 2004, an evaluation of the market value of those shares
is to be performed at that date (calculated by reference to
the average price of the Company's shares on the NASDAQ
during the 30 days of trading prior to that date). If the
market value of the shares at that date is lower than $ 6
million, the Company is to issue additional shares to
Triple-S, such that the total value of shares allocated to
Triple-S will be equal to $ 6 million, based on the average
price per share, as indicated above. Alternatively, the
Company may at its sole discretion pay the difference, if
any, in cash. If Triple-S disposes of the shares before
January 15, 2004, the above calculation will be carried
out, by reference to the actual sale proceeds.
- 79 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 19 - SHARE CAPITAL (CONT.)
C. RIGHT TO ACQUIRE SHARES (CONT.)
Taxes due, if any, in respect of the issuance of shares
and/or payment to Triple-S, as outlined above, will be the
responsibility of Triple-S. It was further agreed that the
execution of the agreement would not be contingent in any
way upon the implementation of other existing contracts, if
applicable, between the parties.
The transaction consideration, in the NIS equivalent of $ 6
million, was recorded as the cost of acquiring the rights,
against the issuance of shares according to their value at
the date of the transaction (in the NIS amount equal to
approximately $ 1.4 million) and against long-term
liabilities for the amount of the difference. As for the
balance of the liabilities at December 31, 2002 - see Note
15A above.
D. OUTSTANDING OPTIONS
350,000 options were issued (in a private placement in
September 2001), for no consideration, to a controlling
party who also serves as its Chairman of the Board. These
options may be exercised, from the date of issue over a
three-year period (contingent upon the holder then being a
Company officer), into 350,000 Company ordinary shares of
NIS 1.00 par value each (constituting 1.45% of its share
capital), in exchange for an exercise price of NIS 44.0 per
share. The exercise price of each option in October 2002
amounted to NIS 40.0, linked to the US dollar. In December
2002 the Company's General Meeting of shareholders approved
the change in these terms. These options are non
transferable. Any options not exercised by the end of the
three-year period will be cancelled with the holder
forfeiting any rights represented by the options. The
computed theoretical economic value of the proposed
options, based on the Black - Scholes model, at July 9,
2001, amounted to NIS 1.2 million (calculated with a
standard deviation of 34.6% and an annual discount rate of
6%).
The options' computed theoretical economic value, based on
the Black-Scholes model on October 8, 2002 (date of board's
resolution to changes the exercise terms) totaled NIS 0.7
million (computed on the basis of an annual volatility of
40% and an annual discount rate of 9%). The closing quoted
price of the Company's shares on the Tel Aviv Stock
Exchange and Nasdaq just prior to the board's resolution
concerning the new exercise price was NIS 23.54 and $4.70,
respectively.
The Company will not bear any tax, if imposed, in
connection with the allotment of the proposed options or in
connection with their exercise.
- 80 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 20 - ADDITIONAL DETAILS CONCERNING OPERATING ITEMS (CONSOLIDATED)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2002 2001 2000
------------ ------------ ------------ -----------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
------------ ----------------------------------------
A. REVENUES FROM OPERATING AND
MANAGING HOTELS
Rooms 28,996 137,359 94,314 70,062
Food and beverages 10,715 50,757 36,769 29,691
Rental of commercial space 1,343 6,361 5,527 4,008
Other services 3,414 16,173 5,291 4,328
------------ ------------ ------------ -----------
44,468 210,650 141,901 108,089
============ ============ ============ ===========
B. COST OF OPERATING COMMERCIAL CENTERS
DIRECT EXPENSES
Wages and fringe benefits 2,452 11,617 5,229 1,140
Maintenance of property 15,873 75,190 32,925 6,414
------------ ------------ ------------ -----------
18,325 86,807 38,154 7,554
============ ============ ============ ===========
OTHER OPERATING EXPENSES 841 3,982 3,000 421
------------ ------------ ------------ -----------
DEPRECIATION OF BUILDING AND EQUIPMENT 13,108 62,098 26,772 4,942
------------ ------------ ------------ -----------
32,274 152,887 67,926 12,917
============ ============ ============ ===========
C. COST OF OPERATING AND MANAGING HOTEL DIRECT EXPENSES:
Wages and fringe benefits (*) 15,059 71,335 51,098 39,560
Food and beverages 3,713 17,591 14,078 6,771
Other direct expenses 9,888 46,840 32,519 23,594
------------ ------------ ------------ -----------
28,660 135,766 97,695 69,925
------------ ------------ ------------ -----------
OTHER OPERATING EXPENSES 5,777 27,367 12,682 10,343
------------ ------------ ------------ -----------
DEPRECIATION AND AMORTIZATION 7,236 34,274 18,276 12,782
------------ ------------ ------------ -----------
41,673 197,407 128,653 93,050
============ ============ ============ ===========
(*) 2002 - Net of a subsidy - see Note 10b(1) e above.
D. COST OF LONG-TERM DEVELOPMENT
Wages and fringe benefits - - 827 1,113
Subcontractors 300 1,419 6,589 17,049
Others - - 36 83
------------ ------------ ------------ -----------
300 1,419 7,452 18,245
============ ============ ============ ===========
E. RESEARCH AND DEVELOPMENT EXPENSES, NET
Wages and fringe benefits 3,550 16,819 17,518 16,591
Materials and subcontractors 2,933 13,895 15,200 20,290
Depreciation and amortization 837 3,966 4,160 3,498
Others 446 2,111 2,263 972
------------ ------------ ------------ -----------
7,766 36,791 39,141 41,351
Less: participation of the OCS 1,644 7,790 14,478 14,785
------------ ------------ ------------ -----------
6,122 29,001 24,663 26,566
============ ============ ============ ===========
- 81 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 20 - ADDITIONAL DETAILS CONCERNING OPERATING ITEMS (CONSOLIDATED)
(CONT.)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2002 2001(*) 2000(*)
------------ ------------ ------------ -----------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
------------ ----------------------------------------
F. MARKETING AND SELLING EXPENSES
Advertising 2,166 10,262 5,560 1,038
Bad debt 2,880 13,641 1,249 474
Depreciation and amortization 613 2,904 1,176 291
Other 377 1,784 484 454
------------ ------------ ------------ -----------
6,036 28,591 8,469 2,257
============ ============ ============ ===========
G. MARKETING AND SELLING EXPENSES
Wages and fringe benefits (**) 6,881 32,598 22,239 22,582
Depreciation and amortization 630 2,982 2,366 2,368
Other 11,427 54,131 38,851 30,076
------------ ------------ ------------ -----------
18,938 89,711 63,456 55,026
============ ============ ============ ===========
(*) Reclassified.
(**) See Note 21A below
H. FINANCIAL INCOME (EXPENSES), NET
In respect of:
Long-term loans (4,425) (20,962) (3,414) (18,573)
Short-term loans (15,097) (71,515) (134,458) (44,599)
Deposits, debentures and long-term
receivables 6,348 30,072 136,976 54,487
Gains (losses) from currency
transactions 2,477 11,734 26,745 (4,599)
Gains (losses) on securities (377) (1,787) 4,279 14,909
Others (including erosion of monetary
items and other, net) (4,429) (20,982) (7,405) 10,525
------------ ------------ ------------ -----------
(15,503) (73,440) 22,723 12,150
Financial costs capitalized to buildings
under construction (1) 5,911 28,004 73,964 21,039
Financial costs credited to capital
Reserves from translation differences 8,421 39,891 6,823 -
------------ ------------ ------------ -----------
(1,171) (5,545) 103,510 33,189
============ ============ ============ ===========
(*) Reclassified.
(1) The discount rate applicable to non-specific credit (in
accordance with Standard No. 3 of the Israeli
Accounting Standards Board) is 4% (2001 - 10.5%, 2000 -
7%).
- 82 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 20 - ADDITIONAL DETAILS CONCERNING OPERATING ITEMS (CONSOLIDATED)
(CONT.)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2002 2001(*) 2000(*)
------------ ------------ ------------ -----------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
------------ ----------------------------------------
I. OTHER INCOME (EXPENSES), NET
Gain (loss) from realizing investments
in investees, net 5,317 25,185 - 1,428
Net gain arising from a voluntary
liquidation of subsidiaries 64 303 (1) 54,820 -
Gain on realization (payment) of
Investment-type monetary balances in
Investees (2) 6,618 31,351 - -
Cost of a cable-laying project (3) - - (1,551) (24,799)
Gain (loss) from disposition of fixed
assets (109) (517) (754) 5,184
Provision for impairment of investments
and assets (4) (9,479) (44,901) (17,707) -
Other income (expenses), net (366) (1,734) (77) 2,288
------------ ------------ ------------ -----------
2,045 9,687 34,731 (15,899)
============ ============ ============ ===========
(*) Reclassified.
(1) The balance during 2001 stems mainly from the
realization of the "capital reserve from translation
adjustments" previously created in respect of the
Company's investment in a subsidiary. The amount is
presented net of related liquidation expenses (see
Note 10B(5) above).
(2) In November 2002 PC, together with other contract
companies under its ownership, signed an agreement
with a consortium of foreign banks for the
refinancing of four commercial centers in Hungary.
Out of the total loans obtained, PC transferred to
its shareholders certain financing excesses as
repayment of shareholder loans to the Company.
Consequently, the capital reserves from translation
adjustments attributed to the shareholder loans had
been released.
(3) The Company has examined the possibility of joining
a project of an international consortium, which
contemplates the laying as well as operating a
global fiber-optic telecom network, together with
others, mostly from Asia and Australia at a total
planned amount of $4.3 billion. Due to delays in
commencing the project and in light of the recent
material changes occurring in the international
telecom market, coupled with the difficulty in
securing financial and strategic investors for the
project, the Company's management decided to charge
to the 2000 operations the entire cost incurred
thereof.
The Company and other partners in the consortium
have the right to use know-how gained in connection
with this project.
(4) See Notes 10A.1 and 10B.1.b.8.
- 83 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 20 - ADDITIONAL DETAILS CONCERNING OPERATING ITEMS (CONSOLIDATED)
(CONT.)
J. EARNINGS PER SHARE
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2002 2001 2000
------------ ------------ ------------ -----------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
------------ ----------------------------------------
1. EARNINGS PER SHARE
Basic earnings (loss) per share -
per statement of operations 8,695 41,190 107,863 (15,725)
Allowance for decline in value of
investments in respect of
realization of shares and
exercise of options in
subsidiaries (206) (974) (14,936) -
Adjustment in respect of real
interest computed on the proceeds
from share and
option allotment (46) (216) 115 -
------------ ------------ ------------ -----------
8,443 40,000 93,042 (15,725)
============ ============ ============ ===========
2. NUMBER OF SHARES USED IN FULLY DILUTED EPS
COMPUTATION (IN THOUSANDS)
Weighted average outstanding
share capital at December 31 22,337 22,224 22,087
Weighted average number of shares
stemming from exercise
of rights and options 550 567 -
------------ ------------ ------------
22,887 22,791 22,087
============ ============ ===========
- 84 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 21 - RELATED AND INTERESTED PARTIES
A. TRANSACTIONS
(1) COMPONENTS
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2002 2001(*) 2000(*)
------------ ------------ ------------ -----------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
------------ ----------------------------------------
Revenues from long-term
projects (see Note 10b(2)) 325 1,538 10,223 20,367
General and administrative
expenses (1) 2,279 10,795 7,354 3,749
Royalty income from an affiliate - - 305 -
Financial income (expenses), net (I) (56) (266) (1,329) 8,113
Project expenses (development,
supervision, aviation,
management and services)(II) 6,396 30,297 24,999 2,485
(I) INCLUDES:
A. BENEFITS GRANTED TO INTERESTED PARTIES, AS FOLLOWS:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2002 2001(*) 2000(*)
------------ ------------ ------------ -----------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
------------ ----------------------------------------
PAYMENTS TO
DIRECTORS:
Non-employee -
Cost 50 235 284 331
============ ============ ============ ===========
Number of recipients 4 4 4 4
============ ============ ============ ===========
Employed -
Cost 1,552 (2) 7,353 (2) 5,446 (1) 2,323
============ ============ ============ ===========
Number of recipients - 4 3 4
============ ============ ============ ===========
(1) Includes a provision of NIS
1.35 million for the salary of
the Chairman of the Board of
Directors charged as an expense
in 1999 and, subsequently,
cancelled in 2000 since a
decision concerning the salary
for his employment period up to
December 31, 2000 had been
removed from the agenda of the
Company shareholders' general
meeting held in February 2001.
(2) Includes NIS 266 thousand (2001
- 1,070 thousand) constituting
an annual bonus to the
investment department's manager
(a Company director) in respect
of that department's results
(see item 7 below).
B. PARTICIPATION IN
EIL EXPENSES
(see Note 18A(14)) 416 1,969 1,620 855
============ ============ ============ ===========
(II) See Notes 10B(3) b (4) (a) and item a(8).
(*) Reclassified.
- 85 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 21 - RELATED AND INTERESTED PARTIES (CONT.)
A. TRANSACTIONS (CONT.)
(2) In December 2002 the General Meeting of the
Company's shareholders approved a three-year
employment contract of the Chairman of the Board,
retroactively from August 1, 2002, according to
which he agreed to devote at least 80% of his time
as the Company's active chairman. In exchange for
his services, the Company is to pay him (by itself
or through its investees) a salary plus customary
fringe benefits. The chairman's employment period
with Europe Israel (MMS) Ltd. (the Company's parent)
would be counted towards his total years of
seniority with the Company for all intents and
purposes.
The following table presents pro-forma data
pertaining to the relevant statement-of-operations
items for each one of the reported periods included
in these financial statements and which reflects the
Company's activities as well as results had the
abovementioned contract terms, been in effect on
January 1, 2000:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2002 2001 2000
------------ ------------ ------------ -----------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
------------ ----------------------------------------
GENERAL AND ADMINISTRATIVE
EXPENSES:
As reported 18,938 89,711 63,456 55,026
Pro-forma adjustment 254 1,204 2,064 2,064
------------ ------------ ------------ -----------
Total adjusted amount 19,192 90,915 65,520 57,090
============ ============ ============ ===========
EARNINGS PER SHARE -
ADJUSTED 8,441 39,986 105,799 (17,789)
============ ============ ============ ===========
BASIC EARNINGS (LOSS) PER
SHARE - ADJUSTED (IN NIS) 0.38 1.79 4.77 (0.80)
============ ============ ============ ===========
(3) As for shares and options allotted to interested
parties and loans provided for their purchase - see
Notes 19C, 19D, and 10B.(6) above. As for the change
in the terms of the exercise price of the options
granted to an interested party in the Company - see
Note 19E above.
(4) The directors and officers of the Company and in
Group companies (and in companies these directors
serve on behalf of the Company) are covered through
September 2003 by insurance of up to $ 40 million,
within the framework of a joint insurance policy for
the EIL Group companies. Each Group company bears
33% of the pro-rata insurance cost. Approval to
increase the coverage to $ 40 million is subject to
shareholder approval.
(5) As for the directors indemnification - see Note
18C.3. above.
(6) EIL acquired "Run off" coverage for itself, the
Company and Elscint, up to a limit of $ 20 million
beyond the coverage of $ 40 million included in the
additional policies, up to a six-year period. The
premium for this coverage would be $ 0.81 million
for the entire six years (33% for each company).
This insurance covers officers in respect of events
occurring prior to this date so long as unreported
and unknown in May 1999.
(7) The employees of the Company's investment
department, headed by a director, are entitled to
receive an annual bonus of 2.5% of realized profits
(as defined in the agreement) from activity in
derivatives and from the management of investments
portfolios, carried out by the Company by this
department or under its supervision (net of its
cost). This bonus is distributed to the employees
based on the discretion of the department manager.
(8) B.H. receives, from time to time, aviation services
from Jet Link Ltd. (a company controlled by Control
Centers) in exchange for a payment based on the
latter's price list, net of a discount of 5%.
(9) The Company and Elscint lease office space from
Control Centers at market prices.
- 86 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 21 - RELATED AND INTERESTED PARTIES (CONT.)
B. BALANCES
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2002 2002 2001 2002 2000
------------ ------------ ------------ ------------ ----------
CONVENIENCE
TRANSLATION
-----------
US$'000 (IN THOUSAND NIS)
------------ ------------------------------------------------------
ASSETS:
Trade accounts
receivable 913 4,324 4,154 - -
Investment in loans and
capital notes - - - 329,342 317,519
LIABILITIES:
Long-term loans and
liabilities - - 17,572 32,458 -
C. Commitments - see Note 18A above.
D. Liens and guarantees - see Note 18D.
E. The Group companies conduct credit, deposit and management
of security portfolio transactions with a bank, which is an
interested party in the Company. Since these transactions
are during the ordinary course of business and under
customary market terms and conditions, no segregation has
been made in respect thereof and no disclosure has been
provided in the financial statements.
- 87 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 22 - BUSINESS AND GEOGRAPHIC SEGMENTS
A. DATA REGARDING BUSINESS SEGMENTS - CONSOLIDATED
1. PRIMARY REPORTING
R&D AND
COMMERCIAL AND VENTURE GENERAL
ENTERTAINMENT CAPITAL ASSETS/
CENTER HOTELS INVESTMENTS LIABILITIES TOTAL
-------------- ----------- ------------- ----------- -----------
( I N T H O U S A N D N I S )
---------------------------------------------------------------------
YEAR ENDED
DECEMBER 31 2002:
REVENUES 285,151 210,650 - 1,538 497,339
============== =========== ============= =========== ===========
OPERATING INCOME (LOSS)
BY SEGMENT 62,275 1,064 (41,100) (398) 21,841
============== =========== ============= ===========
Plus (less) unallocated
expenses:
General and
administrative expenses (40,467)
Financial expenses, net (5,545)
Other income, net 9,687
------------
INCOME (LOSS) BEFORE INCOME
TAXES (14,484)
Income taxes (22,128)
------------
LOSS AFTER TAXES (36,612)
Company's share in
income of affiliates (2,962) (2,962)
=============
Minority interest in
results of subsidiaries,
net 24,960
------------
INCOME FROM CONTINUING
OPERATIONS (14,614)
LOSS FROM A DISCONTINUING
OPERATION 55,804
------------
NET INCOME 41,190
============
PURCHASE COST OF
SEGMENT FIXED AND
INTANGIBLE ASSETS (*) 805,135 51,996 13,389 1,394 871,914
============== =========== ============= =========== ===========
DEPRECIATION AND
AMORTIZATION OF SEGMENT
ASSETS 87,180 52,570 20,979 5,414 166,143
============== =========== ============= =========== ===========
PROVISION
FOR IMPAIRMENT OF
INVESTMENTS AND ASSETS 9,901 16,327 15,470 3,203 44,901
============== =========== ============= =========== ===========
DECEMBER 31 2002:
SEGMENT ASSETS (*) 3,098,629 1,179,356 159,417 1,408,818 5,846,220
============== =========== ============= =========== ===========
EQUITY METHOD
INVESTMENT - - 98,081 - 98,081
============== =========== ============= =========== ===========
SEGMENT LIABILITIES 109,463 53,715 20,695 4,084,402 4,268,275
============== =========== ============= =========== ===========
(*) As for the balance of, and transactions in, assets
under construction during the reporting year - see
Note 11A. above.
- 88 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 22 - BUSINESS AND GEOGRAPHIC SEGMENTS (CONT.)
A. DATA REGARDING BUSINESS SEGMENTS - CONSOLIDATED (CONT.)
1. PRIMARY REPORTING (CONT.)
R&D AND
COMMERCIAL AND VENTURE GENERAL
ENTERTAINMENT CAPITAL ASSETS/
CENTER HOTELS INVESTMENTS LIABILITIES TOTAL
-------------- ----------- ------------- ----------- -----------
( I N T H O U S A N D N I S )
---------------------------------------------------------------------
YEAR ENDED
DECEMBER 31 2001 (*):
REVENUES 134,752 141,901 - 10,223 286,876
============== =========== ============= =========== ===========
OPERATING INCOME (LOSS)
BY SEGMENT 47,295 5,682 (35,883) 2,542 19,636
============== =========== ============= ===========
Plus (less) unallocated
expenses:
General and
administrative expenses (39,348)
Financial income, net 103,510
Other income, net 34,731
------------
INCOME BEFORE INCOME TAXES 118,529
Income taxes 13,857
------------
INCOME AFTER TAXES 104,672
Company's share in
income of affiliates (9,899) (9,899)
=============
Minority interest in
results of subsidiaries,
net (6,029)
------------
INCOME FROM CONTINUING
OPERATIONS 88,744
LOSS FROM A DISCONTINUING
OPERATION 19,119
------------
NET INCOME 107,863
===========
PURCHASE COST OF
SEGMENT FIXED AND
INTANGIBLE ASSETS (**) 541,354 345,912 57,323 7,076 951,665
============== =========== ============= =========== ===========
DEPRECIATION AND
AMORTIZATION OF SEGMENT
ASSETS 31,194 18,564 22,467 4,251 76,476
============== =========== ============= =========== ===========
PROVISION
FOR IMPAIRMENT OF
INVESTMENTS - - 17,707 - 17,707
============== =========== ============= =========== ===========
DECEMBER 31 2001:
SEGMENT ASSETS (**) 2,002,048 1,004,958 131,445 1,679,703 4,818,154
============== =========== ============= =========== ===========
SEGMENT LIABILITIES 126,009 38,991 8,531 3,203,435 3,376,966
============== =========== ============= =========== ===========
(*) Reclassified.
(**) As for the balance of, and transactions in,
assets under construction during the reporting
year - see Note 11A., above.
- 89 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 22 - BUSINESS AND GEOGRAPHIC SEGMENTS (CONT.)
A. DATA REGARDING BUSINESS SEGMENTS - CONSOLIDATED (CONT.)
1. PRIMARY REPORTING (CONT.)
R&D AND
COMMERCIAL AND VENTURE GENERAL
ENTERTAINMENT CAPITAL ASSETS/
CENTER HOTELS INVESTMENTS LIABILITIES TOTAL
-------------- ----------- ------------- ----------- -----------
( I N T H O U S A N D N I S )
---------------------------------------------------------------------
YEAR ENDED
DECEMBER 31 2000 (*):
REVENUES 28,117 108,089 - 20,367 156,573
============== =========== ============= =========== ===========
OPERATING INCOME (LOSS)
BY SEGMENT 11,944 12,642 (33,710) 2,124 (7,000)
============== =========== ============= ===========
Plus (less) unallocated
expenses:
General and
administrative expenses (47,307)
Financial income, net 33,189
Other income, net (15,899)
------------
LOSS BEFORE INCOME TAXES (37,017)
Income taxes 18,907
------------
LOSS AFTER TAXES (55,924)
Company's share in
income of affiliates (3,303) (3,303)
=============
Minority interest in
results of subsidiaries,
net 15,161
------------
INCOME FROM CONTINUING
OPERATIONS (44,066)
LOSS FROM A DISCONTINUING
OPERATION 28,341
------------
NET INCOME (15,725)
===========
PURCHASE COST OF
SEGMENT FIXED AND
INTANGIBLE ASSETS 906,720 138,622 30,909 19,848 1,096,099
============== =========== ============= =========== ===========
DEPRECIATION AND
AMORTIZATION OF SEGMENT
ASSETS 8,135 12,781 3,497 1,525 25,938
============== =========== ============= =========== ===========
(*) Reclassified.
- 90 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 22 - BUSINESS AND GEOGRAPHIC SEGMENTS (CONT.)
A. DATA REGARDING BUSINESS SEGMENTS - CONSOLIDATED
2. SECONDARY REPORTING
EAST AND
WEST CENTER
ISRAEL EUROPE EUROPE OTHERS TOTAL
----------- ----------- ----------- ----------- -----------
(I N T H O U S A N D N I S)
--------------------------------------------------------------------
YEAR ENDED
DECEMBER 31 2002:
REVENUES BY GEOGRAPHICAL
MARKETS 1,538 173,598 320,543 1,660 497,339
============ =========== =========== =========== ===========
PURCHASE COST OF SEGMENT
ASSETS (FIXED AND
INTANGIBLES) 127,702 96,518 641,874 5,820 871,914
============ =========== =========== =========== ===========
SEGMENT ASSETS 480,360 1,169,801 2,760,594 26,647 4,437,402
============ =========== =========== =========== ===========
YEAR ENDED
DECEMBER 31 2001:
REVENUES BY GEOGRAPHICAL
MARKETS 10,223 109,847 165,710 1,096 286,876
============ =========== =========== =========== ===========
PURCHASE COST OF SEGMENT
ASSETS (FIXED AND
INTANGIBLES) 134,486 128,118 681,345 7,716 951,665
============ =========== =========== =========== ===========
SEGMENT ASSETS 453,879 800,701 1,856,435 27,436 3,138,451
============ =========== =========== =========== ===========
YEAR ENDED DECEMBER 31 2000:
REVENUES BY GEOGRAPHICAL
MARKETS 20,367 106,686 28,117 1,403 156,573
============ =========== =========== =========== ===========
PURCHASE COST OF SEGMENT
ASSETS (FIXED AND
INTANGIBLES) 98,368 149,380 848,351 - 1,096,099
============ =========== =========== =========== ===========
B. As for additional data concerning the Hotels and the
Commercial Centers Division segments- see Note 10B(1) and
(3) above.
- 91 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 23 - DISCONTINUING OPERATIONS
A. On December 31, 2002, Elscint sold to a third party ("the
acquirers") (based on an agreement signed by them on
November 13, 2002) all the manufacturing, assembly,
engineering, and integration activities of the systems and
sub-systems segment, (mainly related to medical imaging),
which were performed in Elscint's plant in Maalot in
northern Israel ("the Plant"). Based on the agreement,
Elscint sold to the acquirers the assets of the plant
(tangible and intangible assets), as defined in the
agreement. In addition, the acquirers will assume certain
liabilities in connection with the plant (agreed-upon on-
and off-balance sheet liabilities). The acquirers will not
assume the liabilities arising from claims relating to
events or circumstances that occurred or arose prior to the
consummation date, as defined in the agreement. The
consideration was set based on the net book value of the
net assets transferred (trade receivables, inventory and
fixed assets less recorded liabilities) as such were
included in the audited financial statements of the plant
as of December 31, 2002, plus a set amount for goodwill.
The net book value of the transferred assets as of December
31, 2002, amounted to $12 million. The capital gain from
this transaction (net, after minority interest) is
approximately $4.8 million (NIS 22 million). To secure the
potential purchase price adjustments that may be required
(if at all) an amount of the consideration was deposited in
trust, equal to 15% of the net book value of the
transferred assets (gross), for a period not to exceed 90
days from consummation date, and an amount equal to the
balance of trade receivables which amounts were not
confirmed by the customers as to their propriety. At a date
proximate to the financial statements' approval date (March
25, 2003) the balance deposited in trust for Elscint
amounted to $3.2 million. Regarding the indemnification
that the acquirers received from Elscint - see Note 18C(6)
above.
Upon completion of the transaction, the activities of the
Group in the sub-assemblies and components segment, in
particular, and in the medical imaging area, in general,
were discontinuing. As a result, the prior years'
comparative amounts have been reclassified to present the
assets, liabilities, income and expenses, and cash flows
relating to the discontinuing operations, separately from
continuing operations. Accordingly, assets and liabilities,
which relate to the discontinuing operations, are included
in separate line items in the balance sheet as
"assets/liabilities relating to discontinuing operations."
In addition, the activity and cash flows from the
discontinuing operations are presented in the statement of
operations and the statement of cash flows as "income from
discontinuing operations" and "cash flows from
discontinuing operations," respectively.
B. Following the sale of the ultrasound activity in the area
of diagnostics and medical services that was previously
consolidated in certain subsidiaries and the sale of the
NM, MRI and CT activities by Elscint , the Group's core
activity in these areas was terminated in 1998. Due to the
sale of these businesses, their results have been presented
in these financial statements as discontinuing operations.
The corresponding amounts in the statement of operations
reflect primarily settlements or resolution of lawsuits
and/or claims relating to the ultrasound, CT and MRI
businesses and their ultimate sale by the Company and
Elscint.
- 92 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 23 - DISCONTINUING OPERATIONS (CONT.)
C. Following is the break-down of assets, liabilities, income
and expenses relating to the discontinuing operations:
DECEMBER 31,
---------------------------
2002 2001
----------- -----------
(IN THOUSAND NIS)
---------------------------
CURRENT ASSETS
Trade accounts receivable 2,548 89,582
Receivables and other current assets 102,223 31,202
Inventories - 57,363
----------- -----------
104,771 178,147
LONG-TERM INVESTMENTS AND RECEIVABLES 9,364 11,681
FIXED ASSETS - 13,362
----------- -----------
114,135 203,190
=========== ===========
CURRENT LIABILITIES
Trade accounts payable - 95,716
Payables and other current liabilities 111,797 161,326
----------- -----------
111,797 257,042
----------- -----------
LONG-TERM LIABILITIES
Loans and other long-term liabilities 323 781
Accrued severance pay - 908
----------- -----------
323 1,689
----------- -----------
112,120 258,731
=========== ===========
YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- ----------
(IN THOUSAND NIS)
-----------------------------------------
Revenues 430,165 400,923 388,853
Cost of revenues 377,259 367,107 363,268
----------- ----------- ----------
52,906 33,816 25,585
Marketing and selling expenses (1,096) (980) (1,357)
General and administrative expenses (8,745) (12,399) (12,173)
----------- ----------- ----------
OPERATING INCOME BEFORE FINANCING INCOME, NET 43,065 20,437 12,055
Financing income (expenses), net (5,733) (15) 1,864
Other income, net 15,498 12,093 52,778
----------- ----------- ----------
INCOME BEFORE INCOME TAXES 52,830 32,515 66,697
Income taxes - - 12,270
----------- ----------- ----------
INCOME AFTER INCOME TAXES 52,830 32,515 54,427
Equity in earnings of investee companies - - 7,101
----------- ----------- ----------
52,830 32,515 61,528
Gain on sale of activity 37,863 - -
----------- ----------- ----------
90,693 32,515 61,528
Minority interest (34,889) (13,396) (33,187)
----------- ----------- ----------
NET INCOME FROM DISCONTINUING OPERATIONS 55,804 19,119 28,341
=========== =========== ==========
- 93 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 24 - FINANCIAL INSTRUMENTS
A. CURRENCY RISKS
LINKAGE-BASIS REPORT AS OF DECEMBER 31, 2002 (IN MILLION DOLLARS):
MEASUREMENT CURRENCY(1): NIS (POUND) EC CURRENCIES (EURO) HUF
LINKAGE CURRENCY(3): $ (EURO) (POUND) UN- (EURO) UN- $ HUF (POUND) UN- (EURO)
LINKED LINKED LINKED
----------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 81 63 - 13 - 5 2 - - 7 -
Short-term deposits and
investments 592 - - 32 - 1 22 - - 29 7
Trade accounts receivable - - - - - 8 - - - 9 -
Receivables and other current
assets - - - 12 - 5 24 - 1 24 -
Inventories - - - - - - - - - - -
673 63 - 57 - 19 48 - 1 69 7
LONG-TERM INVESTMENTS AND
RECEIVABLES:
Deposits, debentures and
long-term loans and
receivables 262 - - 45 - - 26 - - 18 8
Investments in investees and
others
Shares 17 344 - 1,135 - - 51 544 (38) 222 -
Loans 971 141 91 20 - - 920 - 74 305 49
FIXED ASSETS
Other assets and deferred
expenses
Assets related to
discontinuing operation 101 4 - 9 - - - - - - -
1,351 489 91 1,209 - - 997 544 36 525 57
TOTAL ASSETS 2,024 552 91 1,266 - 19 1,045 544 37 614 64
==============================================================================================
CURRENT LIABILITIES:
Short-term borrowings 838(4)(7) 187(5) 79(5) 19 - 83 120(4) - - 70 -
Trade accounts payable - - - 1 - 11 - - - 10 -
Payables and other current 20 1 - 52 - 24 2 - - 39 5
liabilities 858 188 79 72 - 118 122 - - 119 5
----------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Group companies 25 10 - 11 177 74 1,626 - 91 89 176
Others 355(4) - - 3 - 255 16 - - 106 1,215(6)
Accrued severance pay - - - 1 - - - - - - -
Liabilities related to
discontinuing operations 99 10 - 3 - - - - - - -
----------------------------------------------------------------------------------------------
479 20 - 18 177 329 1,642 - 91 195 1,391
----------------------------------------------------------------------------------------------
MINORITY INTEREST
SHAREHOLDERS' EQUITY
TOTAL LIABILITIES AND
EQUITY-BASED RIGHTS 1,337 208 79 90 177 447 1,764 - 91 314 1,396
==============================================================================================
TOTAL ASSETS LESS
LIABILITIES AND
EQUITY-BASED RIGHTS (8) 687 344 12 1,176 (177) (428) (719) 544 (54) 300 (1,332)
=============================================================================================
CONSOLI-
MEASUREMENT CURRENCY(1): PLZ ROL OTHER(2) DATION TOTAL
LINKAGE CURRENCY(3): ADJUST- CONSOLI-
(EURO) $ $ MENTS DATED
--------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents - - 2 42 - 215
Short-term deposits and
investments - - - 8 - 691
Trade accounts receivable - - - 37 - 54
Receivables and other current
assets - - - 49 (48) 67
Inventories - - - - 3 3
--------------------------------------------------------------
- - 2 136 (45) 1,030
LONG-TERM INVESTMENTS AND
RECEIVABLES:
Deposits, debentures and
long-term loans and
receivables - - - 38 (42) 355
Investments in investees and
others
Shares - - - (16) (2,156) 103
Loans - - - 124 (2,695) -
FIXED ASSETS - 4,170 4,170
Other assets and deferred - 74 74
expenses
Assets related to
discontinuing - - - - - 114
operation - - - 146 (649) 4,816
--------------------------------------------------------------
TOTAL ASSETS - - 2 282 (694) 5,846
==============================================================
CURRENT LIABILITIES:
Short-term borrowings - 1 133 - 134 1,664
Trade accounts payable - - - 75 - 97
Payables and other current - - 1 43 (10) 177
liabilities - 1 134 118 124 1,938
--------------------------------------------------------------
LONG-TERM LIABILITIES:
Group companies 50 220 53 108 (2,710) -
Others 247(6) 37(6) - 76 (93) 2,217
Accrued severance pay - - - - - 1
Liabilities related to
discontinuing
operations - - - - - 112
--------------------------------------------------------------
297 257 53 184 (2,803) 2,330
--------------------------------------------------------------
MINORITY INTEREST 496 496
SHAREHOLDERS' EQUITY 1,082 1,082
TOTAL LIABILITIES AND
EQUITY-BASED RIGHTS 297 258 187 302 (1,101) 5,846
==============================================================
TOTAL ASSETS LESS
LIABILITIES AND
EQUITY-BASED RIGHTS (8) (297) (258) (185) (20) 407 0
==============================================================
Notes (1) - (13): see following pages.
- 94 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 24 - FINANCIAL INSTRUMENTS (CONT.)
A. CURRENCY RISKS (CONT.)
LINKAGE-BASIS REPORT AS OF DECEMBER 31, 2002 (IN MILLION DOLLARS):
NOTES (1) - (13):
(1) Adjusted to the CPI of the resident country.
(2) Includes linkage bases regarding which all financial assets or
liabilities denominated or linked thereto do not exceed 5% of the
total financial assets or liabilities, respectively, on a
consolidated basis.
(3) Regarding investments in shares of investees, the term "linkage
currency" connotes the measurement currency of each investee.
Regarding investment-type loans the term "linkage currency"
connotes the currency in which the loan is denominated or linked
thereto.
(4) Loans amounting to NIS 526 million, as of December 31, 2002
(mainly, taken by units whose measurement currency is the shekel)
are linked to the US dollar, the exchange rate effects of which are
included in the cost of the asset under construction, during the
construction period (expected completion - 2003-2004).
(5) Primarily loans for financing an investment in an autonomous
investee taken in the functional currency of the investees (for
hedging, qualified hedges for accounting purposes). The effect of
the exchange rats on these loans are charged directly to
shareholders' equity and not to the statement of operations.
(6) The loans are generally linked to the currency in which the
commercial center rental fees are denominated or linked thereto.
The loans were designated for the financing of the construction
(economic hedging, not qualified for accounting purposes).
(7) Includes a NIS 22 million liability which is likely to decrease
corresponding to the increase of the market price of the Company's
share - see Note 19C above.
(8) Consists of(9):
MEASUREMENT CURRENCY(1): NIS (POUND) EURO ZONE CURRENCIES (EURO) HUF
LINKAGE CURRENCY(3): $ (EURO) (POUND) UN-LINKED (EURO) UN-LINKED $ HUF (POUND) UN-LINKED (EURO)
------------------------------------------------------------------------------------------------------------
Monetary items,
net(10) (276)(7) (131)(5) (79) 31 - (353) (64) - - (138) (1,206)(6)
Intercompany
balances
(investment-type
loans)(11) 946(4) 130 91 8 (177) (75) (705)(4) - (16) 216 (126)
Investments in
shares
of investees(11) 17 345 - 1,135 - - 51 544 (38) 222 -
Non-monetary items,
net - - - - - - - - - -
------------------------------------------------------------------------------------------------------------
687 344 12 1,176 (177) (428) (719) 544 (54) 300 (1,332)
============================================================================================================
MEASUREMENT CURRENCY(1): PLZ ROL OTHER(2) CONSOLI
DATION TOTAL
LINKAGE CURRENCY(3): (EURO) $ $ ADJUST- CONSOLI-
MENTS DATED
---------------------------------------------------------
Monetary items,
net(10) (247)(6) (38)(6) (132) (20)(5) (121) (2,774)
Intercompany
balances
(investment-type
loans)(11) (50) (220) (53) 16 15 -
Investments in
shares
of investees(11) - - - (16) (2,156) 105
Non-monetary items,
net - - - - 2,669 2,669
---------------------------------------------------------
(297) (258) (185) (20) 407 -
=========================================================
- 95 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 24 - FINANCIAL INSTRUMENTS (CONT.)
A. CURRENCY RISKS (CONT.)
LINKAGE-BASIS REPORT AS OF DECEMBER 31, 2002 (IN MILLION DOLLARS):
NOTES (1) - (13):
(9) THE TABLE ABOVE INCLUDES ITEMS OF ELSCINT (61.53% OF ITS SHARES
ARE HELD BY THE COMPANY) AS FOLLOWS:
-----------------------------------------------------------------------------------------------------------
CONSOLI-
MEASUREMENT CURRENCY(1): NIS (POUND) EURO ZONE CURRENCIES ROL OTHER(2) DATION TOTAL
(EURO) ADJUST- CONSOLI-
LINKAGE CURRENCY(3): $ (EURO) (POUND) UN- (EURO) UN- $ (POUND) UN- $ MENTS DATED
LINKED LINKED LINKED
-----------------------------------------------------------------------------------------------------------
Monetary items, net(10) 170 (176)(5) (79)(5) 26 - (355) 24 - (102) (131) (12) - (635)
Intercompany balances
(investment-type
loans)(11) 533 198 91 - (177) (74) (487) (17) (1) (37) (29) - -
Investments in shares
of investees(11) 17 (259) - 42 - - - (38) - - (4) 275 33
Non-monetary items,
net - - - - - - - - - - - 602 602
-----------------------------------------------------------------------------------------------------------
720 (237) 12 68 (177) (429) (463) (55) (103) (168) (45) 877 -
===========================================================================================================
(10) Effects of exchange rates and CPI-indexing (inflationary erosion of
monetary items, net) are included in the statements of operations.
(11) Effects of exchange rates on these balances are charged directly to
equity and not to the statement of operations.
(12) EXCHANGE RATES:
1,000,000
LEI
MEASUREMENT CURRENCY: NIS (POUND) EURO ZONE CURRENCIES (EURO) HUF PLZ ROL
- --------------------- ---------------------------- ------- --------------------------- -------- ----------------- ---------
LINKAGE CURRENCY: $ (EURO) (POUND) (EURO) $ 1,000 HUF (EURO) (EURO) $ $
- --------------------- ------- ------- ------- ------- ------- ---------- -------- ------ ------ ---------
DECEMBER 31:
2002 4.737 4.969 7.633 0.652 0.952 4.239 235.9 4.02 3.84 33.50
======= ======= ======= ======= ======= ======= ======== ====== ====== ==========
2001 4.416 3.908 6.400 0.611 1.135 4.060 246.3 3.52 3.99 31.60
======= ======= ======= ======= ======= ======= ======== ====== ====== ==========
- 96 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 24 - FINANCIAL INSTRUMENTS (CONT.)
A. CURRENCY RISKS (CONT.)
LINKAGE-BASIS REPORT AS OF DECEMBER 31, 2002 (IN MILLION DOLLARS):
NOTES (1) - (13):
(13) CHANGES IN THE CONSUMER PRICE INDEX AND PREVAILING EXCHANGE
RATES (%):
CHANGES IN THE CONSUMER PRICE INDEX (%)
-----------------------------------------------------------------------------------------------------------------
ISRAEL ENGLAND HOLLAND BELGIUM HUNGARIA POLAND RUMANIA
-----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31:
2002 6.49 2.94 3.24 1.37 5.00 0.69 17.80
======== ========= ========= ======== ========= ========== =========
2001 1.40 1.28 4.45 2.18 6.90 3.61 30.30
======== ========= ========= ======== ========= ========== =========
2000 0.00 2.93 2.89 2.49 10.13 8.90 40.70
======== ========= ========= ======== ========= ========== =========
CHANGES IN PREVAILING EXCHANGE RATES (%)
-------------------------------------------------------------------------------------------------------------------------
1,000,000
EURO ZONE CURRENCIES LEI
MEASUREMENT CURRENCY: NIS (POUND) (EURO) HUF PLZ ROL
LINKAGE CURRENCY: $ (EURO) (POUND) (EURO) $ 1,000 HUF (EURO) (EURO) $ $
-------------------------------------------------------------------------------------------------------------------------
DECEMBER 31:
2002 7.27 27.18 19.27 6.71 (16.12) 4.41 (4.23) 14.20 (3.76) 6.01
======== ======== ======= ======= ======== ======== ======= ======= ======== =======
2001 9.28 3.85 6.10 (1.86) 5.40 7.58 (7.02) 9.00) (3.80) -
======== ======== ======= ======= ======== ======== ======= ======= ======== =======
-------------------------------------------------------------------------------------------------------------------------
- 97 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 24- FINANCIAL INSTRUMENTS
B. The following table presents a summary of the outstanding currency
forward transactions open at December 31, 2002:
1. FORWARD TRANSACTIONS
SETTLEMENT FAIR VALUE
AMOUNTS AMOUNTS ------------------- RECEIVABLE
RECEIVABLE PAYABLE DATE PRICE (PAYABLE)
---------------- ----------------- -------- --------- ----------
NIS'000
----------
$ 31 million (Y)3,839 million 01.2003 122.92 (5,214)
==========
2. The results of several short-term currency transactions not
carried out for hedging purposes, totaling $8 million and
settled by the approval date of these financial statements,
is immaterial to the Company's business activities.
3. As for loans denominated in foreign currency obtained for
the purpose of accounting hedging - see item a, comment (5)
above. As for loans denominated in foreign currency
obtained for general hedging purposes - see item a, comment
(6) above.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Group's financial instruments include monetary assets (cash
and cash equivalents, short and long-term deposits, trade accounts
receivable, marketable securities as well as other receivables and
current assets) and monetary liabilities (short-term borrowings,
long-term liabilities, trade accounts payables as well as payables
and other current liabilities). Due to the nature of the financial
instruments included in working capital, their fair values
approximate those presented in the balance sheet.
It is difficult to estimate the fair value of many accounts
receivable and notes receivable bearing different maturity dates
and interest rates in the different countries in which the Group
companies are active. Nevertheless, the Group companies'
management estimates that the fair value of these accounts and
notes is not lower than their book value.
The fair value of trade accounts receivable, deposits and
long-term liabilities is ordinarily based on the present value of
future receipts and disbursements, discounted by the interest rate
applicable to the Company's lending or borrowing activities under
similar terms as of the balance sheet date, and it is not
materially different than the one presented in the financial
statements.
As for the presentation of long-term balances not under market
conditions - see Note 2J.
Derivative financial instruments having an active market were
valued based on market value.
D. CONCENTRATION OF CREDIT RISKS
Cash and amounts on deposit in Israel and abroad are deposited in
banks.
As for composition of the short and long-term investment
portfolio- see Note 4 and Note 8. Such investments are exposed to
market-price fluctuation, with the Group affected by fluctuation
of the Israeli capital market over which the Group has no control.
Such changes may have an impact on the value of these investments
upon realization.
Due to their nature, of the Group companies are not materially
exposed to credit risks stemming from dependence on a given
customer. The Group companies examine on an ongoing basis the
amount of the credit extended to their customers and, accordingly,
record a provision for doubtful accounts based on those factors
affecting credit risks of certain customers in the opinion of
these companies' management.
As security for contingent liabilities of Elscint arising in
connection with loans received by former customers from foreign
banks, Elscint provided bank guarantees totaling NIS 17.3m (see
Note 18d (3) above). Elscint has fully provided in its financial
statements for these contingent liabilities.
E. INTEREST-RATE RISKS
As for interest rates - see Notes 3, 4, 8, 13 and 15 above.
- 98 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 25 - SUBSEQUENT EVENTS
A. As for the leasing of a hotel in the UK subsequent to the
balance-sheet date - see Note 11c.1, comment (2).
B. In March 2003, IGTX signed a memorandum of understanding (MOU)
with Ktec Corporation Inc. ("Ktec"), a Japanese company, for the
exclusive distribution of its products in Japan. This MOU
constitutes the basis for a three-year distribution contract
within the framework of which Ktec would manage all the licensing
and regulatory activities as well as the marketing, sales and
technical and clinical support of IGTX in Japan. The agreement
establishes minimum sales of five systems in 2003, 10 in 2004 and
20 during 2005, at a total value of approximately $36 million.
Ktec provided bank guarantees as security for carrying out its
contractual obligations. The MOU is contingent upon the approval
of the two companies' boards of directors and the signing of a
detailed distribution contract between the parties.
C. As for the employee and supplier option plans - see Note 10B(4) e
and f above.
D. As for the exercise of an option granted to GEMS for the
acquisition of IGTX shares - see Note 10B(4) d above.
- 99 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
LIST OF MAJOR INVESTEE COMPANIES - DECEMBER 31, 2002
RATE OF
(DIRECT AS WELL
AS INDIRECT) COUNTRY
OWNERSHIP OF
NAME OF COMPANY NATURE OF ACTIVITY AND CONTROL RESIDENCE
- --------------- ------------------ ----------- ---------
%
-
ELSCINT LTD. ("Elscint") Manufacture of components(*) 61.53 Israel
Bea Hotels N.V. ("B.H.") A holding company in the hotel 100.0 Holland
segment, mainly in Europe
SLS Sails Ltd. ("SLA") Establishment of a commercial 100.0 Israel
and entertainment center
Elscint Biomedical Investment N.V. ("EBM") Venture capital for investing 100.0 Holland
in biotechnology companies
ELBIT ULTRASOUND B.V. (NETHERLANDS) ("EUN") A holding company of the 100.0 Holland
commercial centers in Central
and Eastern Europe
Plaza Centers (Europe) B.V. ("P.C.") A holding company of the 100.0 Holland
commercial centers in Central
and Eastern Europe
Elscint Communication Technology B.V. ("ECT") Venture capital for investing 100.0 Holland
in foreign telecom companies
Insightec - Image Guided Treatment Ltd. ("IGTX") Development of means of 69.2(**) Israel
imaging-guided treatment
Superior Investments Ltd. ("SIL") Venture capital for investing 100.0 Israel
in telecom companies
(*) As for the discontinuing operations at the end of 2002 - see Note 23
above. Starting in 2003 - an investee.
(**) Taking into account the allotment of shares to employees (for more
details see Note 10b(4)).
- 100 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP
AND THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of the Company are prepared
in accordance with accounting principles generally accepted in
Israel ("Israeli GAAP"), which differ, in certain significant
respects from those generally accepted in the United States ("U.S.
GAAP"), as follows:
A. DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP
1. "AS IF" POOLING OF INTERESTS
In September 2000, the Company purchased, through
EUL, the Commercial Centers Division ("PC") in
Central and Eastern Europe, which had been equally
held by a controlling shareholder and by the Red Sea
Hotel Group (see Note 10B(3) a. above).
IN ACCORDANCE WITH ISRAELI GAAP:
With respect to the purchase of a portion of the
business from the controlling shareholder, the
assets acquired and the liabilities assumed were
recorded, by the company, at their historical values
in the books of the controlling shareholder at the
transfer date, and the excess of the amount paid for
the shares over the book value of the net assets
acquired, was offset against the Company's
shareholders' equity at that date. Restatement of
prior periods for inclusion of the acquired business
in the financial statements of the Company prior to
the transfer date, is not required.
IN ACCORDANCE WITH U.S. GAAP:
The transaction with the controlling shareholder was
treated as a reorganization of entities under common
control. Accordingly, the acquisition was accounted
for in a manner similar to a pooling of interests.
The net assets acquired were recorded at their
historical values in the books of the controlling
shareholder at the transfer date, and the excess of
the amount paid over the book value of the net
assets acquired was offset against the Company's
shareholders' equity at that date. In addition, the
Company's financial statements were restated to
include the results of operations of PC commencing
January 1, 2000 (see B.1.a and B.2.below).
For proforma information related to the rights (50%)
in the commercial centers, acquired from the Red Sea
Hotel Group - see B.5.c. below.
2. EFFECT OF INFLATION
IN ACCORDANCE WITH ISRAELI GAAP:
The consolidated financial statements of the Company
are presented in adjusted New Israeli Shekels (NIS).
For the basis of presentation and principles of the
adjustment - see Note 2A, above.
IN ACCORDANCE WITH U.S. GAAP:
The financial statements should be expressed in
nominal historical terms.
The effect of this difference between measurement on
the inflation adjusted basis and on the basis of
historical terms, is not required to be included in
the reconciliation to the U.S. GAAP.
- 101 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
3. JOINTLY CONTROLLED COMPANIES
IN ACCORDANCE WITH ISRAELI GAAP:
The financial statements of jointly controlled
companies are included in the consolidated financial
statements in accordance with the "proportionate
consolidation method."
IN ACCORDANCE WITH US GAAP:
Investments in jointly controlled companies are
accounted for by the "equity method". However, use
of the proportionate consolidation method is
permitted by Securities and Exchange Commission
rules for a foreign issuer. Use of proportionate
consolidation does not have any effect on the income
(loss) and/or shareholders' equity. Differences in
classifications or display of items in the balance
sheet, in the statement of operations and in the
statement of cash flow, that result from using
proportionate consolidation, is not required to be
included in the reconciliation to the U.S. GAAP
financial statements. However, summarized data on a
pro forma basis, regarding reporting differences
between the proportionate consolidation method and
the equity method, are given in B3 below.
4. DEFERRED TAX
A) DEFERRED TAXES IN RESPECT OF INFLATION
ADJUSTMENT
IN ACCORDANCE WITH ISRAELI GAAP:
Deferred taxes in respect of inflation
adjustments to fixed assets are provided only
to the extent that such fixed assets are
amortized within 20 years.
IN ACCORDANCE WITH U.S. GAAP:
Deferred taxes are provided on all such
inflation adjustments, to the extent that
they are temporary differences, regardless of
the period through which they will be
amortized or when they will be deductable for
tax purposes.
B) DEFERRED TAXES IN RESPECT OF BUSINESS
COMBINATION
IN ACCORDANCE WITH ISRAELI GAAP
Deferred taxes are recorded for differences
between the assigned values and the book
value for tax purposes, of identifiable
assets and liabilities of subsidiaries upon
acquisition of the investment therein, except
for assets for which amortization is not
allowable for tax purposes (e.g. land and the
like).
IN ACCORDANCE WITH U.S GAAP:
Deferred taxes are recorded for all the
temporary differences mentioned in the
preceding paragraph.
- 102 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
5. COMPENSATION COMPONENT OF OPTION PLAN AND SHARES
INCENTIVE PLAN
IN ACCORDANCE WITH ISRAELI GAAP:
The compensation component of stock and option
awards (including shares granted to employees, for
consideration of non-recourse loans, that are
treated as options) granted, by companies the
securities of which are traded on stock exchange
markets, to their employees and/or directors, at a
lower price than quoted market prices (if any), is
charged as compensation expenses in the statement of
operations. Since the stock based awards are granted
by the Company and by its subsidiary (Elscint Ltd.)
at prices essentially equal to their market price at
the date of granting, no compensation expenses were
charged to the statement of operations.
IN ACCORDANCE WITH US GAAP:
The compensation component of such shares and
options granted, by each company of the group, to
their employees or directors, are treated according
to the provision set forth in APB No. 25.
The compensation component of shares granted (for
consideration of non-recourse loans) to employees of
the parent company, is computed, according to the
provisions of SFAS No. 123, based on their fair
value (according to the B&S model) and is charged
directly to shareholders' equity, as compensation
expenses to the controlling shareholders, during the
period in which each employee performs its services
for the company for which the benefit was granted.
Regarding the effect on pro forma data, according to
SFAS No. 123, see B.5A.4 below.
6. VENTURE CAPITAL INVESTMENTS
IN ACCORDANCE WITH ISRAELI GAAP:
Venture capital fund's investments in venture
capital investments have been included at the lower
of: (i) their cost, net of allowances for
other-than-temporary decline in value, or (ii) their
fair value, based on management's estimate.
IN ACCORDANCE WITH U.S. GAAP:
Venture capital fund's investments are presented at
fair value.
7. ISSUANCE OF SHARES BY AN INVESTEE IN THE DEVELOPMENT
STAGE, TO A THIRD PARTY
IN ACCORDANCE WITH ISRAELI GAAP:
The increase in the Company's share of an investee's
net assets value, as a result of an issuance of
shares by the investee, is recorded as deferred
income, which is charged to the statement of
operations over a three year period or up to the
Company's share in investee's losses during the
relevant period, whichever is higher, on an
accumulated basis.
- 103 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
7. ISSUANCE OF SHARES BY AN INVESTEE IN THE DEVELOPMENT
STAGE, TO A THIRD PARTY (CONT.)
IN ACCORDANCE WITH U.S. GAAP:
The increase in the Company's share of the
investee's net assets value, is charged directly as
a capital reserve within shareholders' equity.
8. INITIAL IMPLEMENTATION OF THE EQUITY METHOD
In circumstances where the Company's ownership in an
investee is in the form of preferred securities or
other senior securities, the Company recognizes
equity method losses based on the ownership level of
the particular investee securities or loans extended
by the Company to which the equity method losses are
being applied.
Investment previously accounted for on the cost
basis which becomes qualified for use of the equity
method, due to an increase in the level of ownership
as a result of acquisition of additional voting
stock of the investee by the Company or due to a
change in investor's status because of no longer
meeting the applicable Venture Capital Investment
Fund conditions (see 11 below), is treated as
follows:
IN ACCORDANCE WITH ISRAELI GAAP:
The company (the Investor) should implement the
equity method only from the date the investment
become qualified for use the equity method (i.e.
from the date the change has occurred) and
thereafter. Restatement of previous years' data,
presented within the financial statements, is not
required or permitted.
IN ACCORDANCE WITH U.S. GAAP:
The investment, results of operations (current and
prior periods) and retained earnings of the company,
should be adjusted, retroactively, in a manner with
the accounting for a step-by-step acquisition of the
investee's stock.
The effect of the above mentioned restatement, is as
follows:
AS OF DECEMBER 31, 2001
-------------------------------------------------
AS REPORTED (1) RESTATEMENT ADJUSTED
---------------- ------------ ----------
NIS (IN THOUSANDS)
-------------------------------------------------
Venture capital investments 64,478 (62,805) 1,673
=============== ============ ===========
Investment in investee companies (2) 22,638 34,827 57,465
=============== ============ ===========
Capital reserve - foreign currency
translation adjustment 16,501 488 16,989
=============== ============ ===========
(1) According to U.S. GAAP
(2) Including goodwill at the amount - 26,440 26,440
of =============== ============ ===========
- 104 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP
AND THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
8. INITIAL IMPLEMENTATION OF THE EQUITY METHOD (CONT.)
FOR THE YESR ENDED DECEMBER 31
---------------------------------------------------------------------------------
2001 2000
--------------------------------------- --------------------------------------
AS AS
REPORTED (1) RESTATEMENT ADJUSTED REPORTED (1) RESTATEMENT ADJUSTED
------------ ----------- -------- ------------ ----------- --------
NIS (IN THOUSANDS), EXEPET FOR PER SHARE DATA
---------------------------------------------------------------------------------
Equity loss in
Investee
companies (8,874) (32,454) (41,328) (4,327) (1,028) (5,355)
============ =========== ======== ============ =========== ========
Net income (loss)
for the year 4,659 (26,177) (21,518) (24,713) (594) (25,307)
============ =========== ======== ============ =========== ========
Basic earning per
share -
(EPS) in NIS 0.21 (1.17) (0.96) (1.12) (0.02) (1.14)
============ =========== ======== ============ =========== ========
Diluted
(EPS) in NIS 0.20 (1.18) (0.98) (1.12) (0.02) (1.14)
============ =========== ======== ============ =========== ========
(1) According to the U.S. GAAP
9. FOREIGN CURRENCY TRANSLATION
IN ACCORDANCE WITH ISRAELI GAAP:
The financial statements of an "autonomous foreign
entity" (after adjustment to the Consumer Price
Index in the country of its respective residence)
are being translated into the currency of its
holding company (Euro or NIS), at the exchange rate
as of the balance sheet date ("closing rate
method").
IN ACCORDANCE WITH U.S. GAAP:
In accordance with FAS No. 52, the transactions
included in items in the statement of operations of
an "autonomous foreign entity," are translated at
the actual transaction rates or the average rate for
the period. The difference between the net profit
(loss), translated as mentioned above, and the
entity's retained earnings which are translated at
the exchange rate as of the balance sheet date, is
charged to capital reserve for translation
adjustments in the sherholders equity.
10. PRE-OPENING COSTS
IN ACCORDANCE WITH ISRAELI GAAP:
Pre-operating expenses of hotels and/or commercial
centers (mainly - employee training, testing of
systems and preparation of the hotels/commercial
centers for opening, operation and occupancy) are
stated at cost and amortized over a three-year
period from commencement of full scale operations.
IN ACCORDANCE WITH US GAAP:
In accordance with the statement of Position ("SOP")
98-5. "Reporting on the costs of start-up
activities," all costs of start-up activities
(pre-opening, pre-operating and organizational
costs) are expensed as incurred.
- 105 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
11. MARKETABLE SECURITIES
IN ACCORDANCE WITH ISRAELI GAAP:
Israeli GAAP divides marketable securities into two
categories:
Investments in marketable securities, designated by
management for sale in the short term, are included
in current assets at their market value at the
balance-sheet date. Changes in value are charged to
the statement of operations, as incurred.
Investments in marketable securities not designated
by management for sale in the short term and which
are not part of the Group's liquid resources, are
presented at cost, except when, in the opinion of
management, a decline in value, not of a temporary
nature, exists. See also Note 2E above.
IN ACCORDANCE WITH U.S. GAAP:
FAS No. 115 divide marketable securities into three
categories:
(1) Marketable securities that are acquired and
held principally for the purpose of selling
them within the near future, are classified
as "trading securities" and are reported at
their fair value. Unrealized gains and losses
are included in the statement of operations.
(2) Debt securities that the company has the
positive intent and ability to hold to
maturity, are classified as "held - to -
maturity" securities and are reported at
amortized cost.
(3) Marketable securities not classified as
either "held - to - maturity" securities or
"trading securities", are classified as
"available - for - sale" securities and are
reported at their fair value. Unrealized
gains and losses are included in a separate
item within the shareholders equity, and
reported as other comprehensive income.
12. CAPITALIZATION OF FINANCIAL EXPENSES
IN ACCORDANCE WITH ISRAELI GAAP:
The amount of financial expenses to be capitalized
for qualifying assets is intended to be that portion
of the financial expenses in real terms, including
exchange rate differences, incurred during the
assets' construction period.
IN ACCORDANCE WITH U.S. GAAP:
Financial expenses eligible for capitalization for
qualifying assets include only interest costs, and
do not include exchange rate gains and losses.
13. CERTAIN INITIATION COSTS OF PROJECTS AND WRITE -
DOWN OF INVESTMENTS
IN ACCORDANCE WITH ISRAELI GAAP:
Initiation costs of projects and write-down of
investments, included on the cost basis, are
presented as "other expenses".
IN ACCORDANCE WITH U.S. GAAP:
These expenses are included within operating income
(loss).
- 106 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
14. INVESTMENT IN INVESTEE COMPANIES - FAIR VALUE
MEASURMENT
A. IDENTIFICATION OF REPORTING UNIT
IN ACCORDANCE WITH ISRAELI GAAP:
Each investment ("reporting unit") is tested
and treated separately, regardless of any
other reporting unit, even if the reporting
units are components of the same operating
segment.
IN ACCORDANCE WITH U.S. GAAP:
Components of an operating segment (as
defined in SFAS 142) shall be aggregated
within one reporting unit, for impairment
tests purposes, if the components have
similar economic characteristics, as defined
in SFAS 142.
B. DETERMINATION OF TESTS PROCEDURS FOR
IMPAIRMENT AND THE MANNER OF IMPAIRMENT LOSS
RECOGNITION
IN ACCORDANCE WITH ISRAELI GAAP:
According to the provisions set forth in
statement No. 68 of the Institute of
Certified Public Accountant in Israel, in
case of a decline (other than of a temporary
nature) that causes the fair value of an
investment in an autonomous company
(including, subsidiaries) to be less than its
carrying amount, a provision for the decline
in fair value is provided and is charged
directly against any credit balance in the
capital reserves for translation adjustment,
previously recorded in respect of this
investment. The amount of the required
provision in excess of the capital reserve
for translation adjustment, is charged to the
statement of operations. If the translation
adjustments are reflected by a debit balance,
they are charged to the statement of
operations together with the provision for
the decline in the investment's fair value.
The provision provided (if any) in respect of
an investee in a subsidiary, is attributed
(in the consolidated financial statements of
the company) to the assets' value of the
subsidiary.
As for the accounting method for measuring
fair value of investments and/or long lived
assets, which will apply to financial
statements for periods beginning in January
1, 2003 or thereafter - see note 2V. (3),
above.
IN ACCORDANCE WITH U.S. GAAP:
The principles set forth in APB 18, in
respect of fair value measurement and loss
recognition for decline in investment's
value, refers to investments in affiliates
only (not to subsidiaries). In respect of
subsidiaries - tests and measurements for
impairments of the company's share in the
subsidiary's equity, is performed on a
consolidated basis and is covered by
provisions, included in other statements, for
measuring assets and/or liabilities. As for
test for impairment of goodwill in
subsidiaries - see c. below.
However, capital reserves for translation
adjustments are realized only upon sale or
upon complete or substantially complete
liquidation of an investment in a foreign
entity. Realization of such capital reserve
as a result of recording a provision for a
decline in fair value, is prohibited.
- 107 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
14. INVESTMENT IN INVESTEE COMPANIES - FAIR VALUE
MEASURMENT
C. AMORTIZATION AND TESTS FOR IMPAIRMENT OF
GOODWILL
IN ACCORDANCE WITH ISRAELI GAAP:
Goodwill is amortized over its respective
estimated useful life, and is reviewed
periodically, for impairment.
IN ACCORDANCE WITH U.S. GAAP:
According to principles set forth in SFAS 142
- goodwill determined to have an indefinite
useful life acquired in a purchase business
combination completed after June 30, 2001,
(but before January 1, 2002) is not
amortized, but is tested for impairment,
together with the entire investment, as a
whole. Goodwill acquired in business
combinations completed before July 1, 2001
continued to be amortized and tested for
impairment until January 1, 2002. After that
date the goodwill is no longer amortized but
rather tested, at least annually, for
impairment. The two steps which should be
applied by testing goodwill impairment, are
as follows:
(I) Determining if fair value of the
reporting unit is less than its
carrying amount (step 1); if no, no
further testing of goodwill for
impairment is necessary. If yes, step
2 should be applied, by using the fair
value of the reporting unit determined
in step 1, allocating the fair value
of the reporting unit to all the
assets and liabilities of that unit,
as if the reporting unit had been
acquired in a business combination and
the fair value of the reporting unit
was the purchase price, and comparing
goodwill resulting from the purchase
price allocation to its carrying
amount, in order to determine if and
by how much goodwill is impaired.
(II) If goodwill is impaired, a provision
for loss is recorded against
operations, up to the amount impaired.
15. REALIZATION OF CAPITAL RESERVE FOR TRANSLATION
ADJUSTMENTS
IN ACCORDANCE WITH ISRAELI GAAP:
Upon realization of an autonomous foreign entity, in
whole or in part, through a repayment of an
investment-type monetary balance, the accumulated
translation adjustment relating to that monetary
balance is released to the statement of operations.
IN ACCORDANCE WITH U.S. GAAP:
Capital reserves for translation adjustments are
realized only upon sale or upon complete or
substantially complete liquidation of an investment
in a foreign entity.
16. CONVERTIBLE SECURITIES OF INVESTEES
IN ACCORDANCE WITH ISRAELI GAAP:
A parent company is required to record a provision
for losses which may incur as a result of the
dilution of its holdings in investees, upon exercise
of vested share options (including shares issued to
employees for consideration of non-recourse loans),
when it is probable that they will be exercised.
- 108 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
16. CONVERTIBLE SECURITIES OF INVESTEES (CONT.)
IN ACCORDANCE WITH U.S. GAAP:
A loss in the parent company resulting from the
dilution of its holdings, in the event the share
options (including shares issued to employees for
consideration of non-recourse loans) being
exercised, is recorded only at the time of exercise.
17. CONTINGENT CONSIDERATION BASED ON SECURITY PRICE
Consideration for business combination may be
contingent on the market price of a specified
security issued by the acquirer. Under such an
agreement, unless the price of the security equals,
at least, an agreed amount ("Specified Amount") on a
certain date, the acquiring corporation is required
to issue additional equity or to transfer cash (at
the Company's sole discretion) in order to make the
current value of the total consideration equal to
the Specified Amount (see Note 19C.).
IN ACCORDANCE WITH ISRAELI GAAP:
The securities, which are issued unconditionally at
the date the transaction is consummated, should be
recorded at their market price at such date. The
difference between the market price of such
securities upon issuance, and the Specified Amount,
is recorded as a long-term monetary liability.
Changes in the value of the liability, are recorded
in the statement of operations for each reporting
period.
IN ACCORDANCE WITH U.S. GAAP:
The securities issued unconditionally at the date
the transaction is consummated, should be recorded
at the Specified Amount, discounted to its present
value. No adjustments are required until the
contingency is resolved.
18. DERIVATIVE FINANCIAL INSTRUMENTS
The Company leases its commercial centers under
long-term contracts (see also Note 10B.(3)b.). The
leases are denominated, generally, in Euro, most of
which are linked to the CPI in Germany (some are
denominated in dollars).
IN ACCORDANCE WITH ISRAELI GAAP:
Derivatives embedded within non-derivatives
instruments should not be bifurcated from the host
instruments and is treated for accounting purposes
together with the host instrument.
IN ACCORDANCE WITH U.S. GAAP:
On January 1, 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities"
(collectively referred to as SFAS 133).
A "derivative" is typically defined as an instrument
whose value is derived from an underlying
instrument, index or rate, has a notional amount,
requires no or little initial investment and can be
net settled. Derivatives include, but are not
limited to, the following types of investments:
interest rate swaps, interest rate caps and floors,
put and call options, warrants, futures, forwards
and commitments to purchase securities and
combinations of the foregoing.
- 109 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
18. DERIVATIVE FINANCIAL INSTRUMENTS (CONT.)
IN ACCORDANCE WITH U.S. GAAP (CONT.):
Derivatives embedded within non-derivative
instruments, must be bifurcated from the host
instrument and accounted for in accordance with SFAS
133, when the embedded derivative is not clearly and
closely related to the host instrument (rental for
the use of leased assets and adjustments for
inflation on similar property are considered to be
clearly and closely related. Thus, the
inflation-related derivative embedded in an
inflation-indexed lease contract is not bifurcated
from the host cotract).
In conformity with SFAS 133, foreign currency
forward contracts that are embedded within such
lease contract ("the host contract") should be
bifurcated and accounted for separately. The
bifurcated forward contracts are recorded at their
fair value while changes in their fair values are
charged to the statement of operations and
classified under financial income, net.
An embedded foreign currency instrument is not
bifurcated from the host contract, if (i) contracts
in which specified volumes of sales of one of the
parties to the contract serve as the basis for
settlement ("underlying"); (ii) the host contract is
not a financial instrument and it requires payments
denominated in the functional currency of any
substantial party to that contract.
19. DISCONTINUING OPERATIONS - GAIN RECOGNITION.
As for the description of the sale of plant by
Elscint ("Ma'alot transaction")- see note 23.A.
IN ACCORDANCE WITH ISRAELI GAAP:
A gain from a sale transaction is recognized only
after providing an acceptable level of assurance of
the existence and amount of the gain. Gain
generation process is deemed to be culminated when:
(i) realized (assets are exchanged for cash or claim
to cash) or realizable (ii) the seller has
substantially accomplished what it must do in order
to be entitled to the benefits represented by the
gain. Gain from business' sale transactions should
be recognized, generally, when the following
conditions have been satisfied: (i) the seller has
transferred to the buyer the significant risks and
rewards of ownership; (ii) the seller retains
neither continuing managerial involvement to the
degree usually associated with ownership nor
effective control over the assets/business sold;
(iii) any major uncertainties as to ultimate
realization of profit have been removed and the
amount of the gain can be measured reliably; and
(iv) it is probable that the economic benefits
associated with the transaction will flow to the
seller and the collection of the sale price is
reasonably assured. In light of the above mentioned
, the gain was recognized in the Company's 2002
financial statements.
IN ACCORDANCE WITH U.S. GAAP :
Gain from such sale of business should not be
recognized unless all consideration was in the hand
of the seller at the balance sheet date. Since in
the Ma'alot transaction, a significant portion of
the cash consideration was, according to the buyer
request, deposited in escrow, for future release, in
order to secure the potential purchase price
adjustments, that may be required (if any), the gain
on the sale will be recognized, for US GAAP
purposes, in the Company's 2003 financial
statements.
- 110 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
EEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
20. OTHERS
Balance sheet items - mainly differences in respect
of issues which belongs to reporting periods ended
before January 1, 2000 and others.
Profit and loss items - differences in respect of
land lease fees expended, as direct construction
costs, during the construction period.
21. EARNINGS PER SHARE ("EPS")
IN ACCORDANCE WITH ISRAELI GAAP:
A. Share options and shares issued to employees
for consideration of non-recourse loans (that
are treated as options) are included in the
computation of basic earnings per share only
if their exercise is considered to be
probable. In such case basic earnings are
adjusted for "notional interest" resulting
from such securities. Calculation of the
probability is based on the ratio between the
market price of the shares and the present
value of the exercise price of the stock
options into shares or the present value of
the repayment amount of the loans granted for
the purchase of such shares, as applicable.
B. Shares or share options issued upon the
fulfillment of certain conditions are
considered outstanding common shares and are
included in the computation of the basic EPS,
as of the date that all necessary conditions
have been met.
C. Share options (including shares for
consideration of non-recourse loans), which
are unvested and/or whose exercise is not
probable, are nevertheless considered as
exercised, for the purpose of calculating the
diluted earnings per share, in addition to
the outstanding and issued shares, whereas
the basic earnings are adjusted for "notional
interest" resulting from such option
exercised.
D. In addition to the above and for the purpose
of calculating the diluted earnings per
share, the net income of the Company is
adjusted for the provision for losses, if
any, as a result of a dilution of its
shareholding in investees, assuming that all
of the investees' convertible securities
(including those which are unvested and those
whose exercise is not probable) are
considered as exercised.
E. In computating, basic EPS, the Company's
share in investees' results of operations, is
taken into account in accordance with the
amount which is included in the financial
statements.
F. Shares which will be issued, if and to the
extent they will be issued, and which
issuance is contingent on Company's future
share price ("Contingently issuable shares"),
are not included in the total number of
issued shares for the purpose of both
calculating the basic EPS and the diluted
EPS.
- 111 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
21. EARNINGS PER SHARE ("EPS") (CONT.)
IN ACCORDANCE WITH U.S. GAAP:
A. In accordance with FAS 128, Basic earnings
per share is computed on the basis of the
weighted average number of shares outstanding
during the year, without taking into
consideration any convertible securities.
B. Diluted earnings per share is computed on the
basis of the weighted average number of
shares outstanding during the year, plus the
dilution potential of the options exercisable
into shares outstanding during the year
(including shares issued for consideration of
non-recourse loans), applying the "Treasury
Stock Method".
C. The Company's share in the investees' results
of operations is computed by multiplying the
number of the investee's shares held by the
Company by the investee's EPS.
D. If all necessary conditions have not been
satisfied by the end of the year, the number
of contingently issuable shares included in
diluted EPS shall be based on the number of
shares, if any, that would be issuable if the
end of the reporting year were the end of the
contingency year and if the result would be
dilutive.
22. RECENTLY ISSUED ACCOUNTING STANDARDS
A. In June 2001, The FASB issued SFAS 143,
"Accounting for Asset Retirement Obligations"
(hereinafter SFAS 143). SFAS 143 requires the
Company to record fair value of an asset
retirement obligation as a liability in the
period in which it incurs a legal obligation
associated with the retirement of tangible
long-lived assets that result from the
acquisition, construction, development and/or
normal use of the assets. The Company also
records a corresponding asset which is
depreciated over the life of the asset.
Subsequent to the initial measurement of the
asset retirement obligation, the obligation
will be adjusted at the end of each period to
reflect the passage of time and changes in
the estimated future cash flows underlying
the obligation. SFAS 143 is effective for
financial statements issued for the years
2003 and thereafter. Earlier Application is
permitted. The adoption of SFAS 143 does not
have a significant impact on the Company's
consolidated financial statements.
B. In July 2002, the FASB issued SFAS 146,
"Accounting for Costs Associated with Exit or
Disposal Activities" (hereinafter SFAS 146).
SFAS 146 nullifies EITF 94-3. According to
SFAS 146, commitment to a plan to exit an
activity or dispose of long-lived assets will
no longer be enough to record a one-time
charge for most anticipated costs. Instead,
companies will record exit or disposal costs
when they are "incurred" and can be measured
at fair value, and they will subsequently
adjust the recorded liability for changes in
estimated fair value. SFAS 146 also revises
accounting for specified employee and
contract terminations that are part of
restructuring activities. SFAS 146 is
effective for exit and disposal activities
that are initiated after December 31, 2002.
Earlier application is encouraged. The
Company believes that the adoption of SFAS
146 will not have a significant impact on its
consolidated financial statements.
- 112 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
22. RECENTLY ISSUED ACCOUNTING STANDARDS (CONT.)
C. In December 2002, the FASB issued Statement
of Financial Accounting Standards Board No.
148, "Accounting for Stock-Based Compensation
- Transition and Disclosure - an amendment of
FASB Statement No. 123" ("SFAS 148"). SFAS
148 amends SFAS No. 123 to provide
alternative methods of transition for a
voluntary change to the fair value based
method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual
and interim financial statements about the
method of accounting for stock-based employee
compensation and the effect of the method
used on reported results The transition
guidance and annual disclosure provisions of
SFAS 148 are effective for fiscal years
ending after December 15, 2002. The Company
has not decided yet to voluntarily adopt SFAS
123.
D. In November 2002, FASB Interpretation No.
("FIN") 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness
of Others" was issued. This interpretation
requires elaborating on the disclosures that
must be made by a guarantor in its interim
and annual financial statements about its
obligations under certain guarantees that it
has issued. It also clarifies that a
guarantor is required to recognize, at the
inception of a guarantee, a liability for the
fair value of the obligation undertaken in
issuing the guarantee. The Interpretation
requires the guarantor to recognize a
liability for the non-contingent component of
the guarantee, that 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 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. The disclosure
requirements of this Interpretation are
effective for statements issued after
December 15, 2002 and its recognition
requirements are applicable for guarantees
issued or modified after December 31, 2002.
The Company has adopted the disclosure
requirements of the Interpretation and will
apply the recognition and measurement
provisions for all guarantees entered into or
modified after December 31, 2002. Management
does not expect that adoption of FIN 45 will
have material impact on its financial
statements.
E. FIN 46 - In January, 2003, the FASB issued
FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This
Interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial
Statements", addresses consolidation by
enterprises of variable interest entities in
which equity investors do not have the
characteristics of a controlling financial
interest or do not have sufficient equity at
risk for the entity to finance its activities
without additional support from other
parties. FIN 46 applies immediately to
variable interest entities created after
January 31, 2003, and to variable interest
entities in which an enterprise obtains an
interest after that date. With respect to
variable interest entities, if any, in which
the Company holds a variable interest
acquired before February 1, 2003, the
guidance in FIN 46 will be in effect for the
Company's financial statements beginning July
1, 2003. While the Company is currently
evaluating the impact of the adoption of FIN
46 on its financial position and results of
operations, it does not expect such impact to
be material.
- 113 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
A. DIFFERENCES BETWEEN ISRAELI GAAP AND US GAAP (CONT.)
22. RECENTLY ISSUED ACCOUNTING STANDARDS (CONT.)
F. 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 EITF 00-21 is effective for
revenue arrangements entered into in fiscal
years beginning after June 15, 2003. The
Company is currently evaluating the effect of
EITF 00-21 on the consolidated financial
statements.
- 114 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
1. STATEMENTS OF OPERATIONS:
A. IN ACCORDANCE WITH U.S. GAAP - COMPRISED AS
FOLLOWS:
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
U.S. GAAP
----------------------------------------------------------------
CONVENIENCE
TRANSLATION 2002 (1) 2001 (1) 2000
------------ ------------ ----------- -----------
US$'000 IN THOUSANDS NIS
------------ -----------------------------------------------
REVENUES
Commercial-center operations 54,288 257,162 125,029 57,705
Hotel operations and management 41,722 197,638 138,440 110,248
Long-term projects 325 1,538 10,223 20,367
------------ ------------ ----------- -----------
96,335 456,338 273,692 188,320
------------ ------------ ----------- -----------
COSTS OF REVENUES
Commercial-center operations 30,001 142,114 65,162 24,498
Hotel operations and management 38,754 183,579 131,996 93,759
Long-term projects 300 1,419 7,452 18,245
------------ ------------ ----------- -----------
69,055 327,112 204,610 136,502
------------ ------------ ----------- -----------
27,280 129,226 69,082 51,818
------------ ------------ ----------- -----------
Initiation costs of projects 4,645 22,005 7,595 34,869
Research and development expenses, net 6,115 28,966 23,675 26,676
Marketing and selling expenses 5,413 25,644 7,802 5,315
General and administrative expenses 19,835 93,956 63,408 56,164
------------ ------------ ----------- -----------
36,008 170,571 102,480 123,024
------------ ------------ ----------- -----------
OPERATING LOSS BEFORE NET
FINANCIAL INCOME (8,728) (41,345) (33,398) (71,206)
Financial income, net 7,466 35,368 6,637 30,127
------------ ------------ ----------- -----------
OPERATING LOSS AFTER NET
FINANCIAL INCOME (1,262) (5,977) (26,761) (41,079)
Other income (expenses), net (3,326) (15,754) 40,484 6,035
------------ ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (4,588) (21,731) 13,723 (35,044)
Income taxes 8,379 39,690 11,128 27,270
------------ ------------ ----------- -----------
INCOME (LOSS) AFTER INCOME TAXES (12,967) (61,421) 2,595 (62,314)
Equity losses of investee
companies, net (4,174) (19,771) (41,328)(2) (2)(5,355)
Minority interest in results of
subsidiaries, net 4,309 20,406 6,680 (2) (2) 11,903
------------ ------------ ----------- -----------
LOSS FROM CONTINUING OPERATIONS (12,832) (60,786) (32,053) (55,766)
Income from discontinued
operations, net 6,862 32,507 19,276 30,459
Cumulative effect of a change in
accounting principles at the beginning
of the year - - (8,741) -
------------ ------------ ----------- -----------
NET LOSS FOR THE YEAR (5,970) (28,279) (21,518) (25,307)
============= ============ =========== ===========
(1) Reclassified - see note 23A.
(2) Restated - see A8 above.
- 115 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
1. STATEMENTS OF OPERATIONS:
B. THE STATEMENT OF OPERATIONS IN ACCORDANCE
WITH ISRAELI GAAP IS RECONCILED TO U.S. GAAP
AS FOLLOWS:
YEAR ENDED DECEMBER 31, 2002
-------------------------------------------------------------
ISRAELI GAAP U.S. GAAP
AS REPORTED
IN THESE
FINANCIAL RECONCI- CONVENIENCE
STATEMENTS LIATIONS TOTAL TRANSLATION
------------- -------------- ------------ -----------
IN THOUSANDS NIS US$'000
REVENUES
Commercial-center operations 285,151 (27,989) 257,162 54,288
Hotel operations and management 210,650 (13,012) 197,638 41,722
Long-term projects 1,538 - 1,538 325
------------- -------------- ------------ -----------
497,339 (41,001) 456,338 96,335
------------- -------------- ------------ -----------
COSTS OF REVENUES
Commercial-center operations 152,887 (10,773) 142,114 30,001
Hotel operations and management 197,407 (13,828) 183,579 38,754
Long-term projects 1,419 - 1,419 300
------------- -------------- ------------ -----------
351,713 (24,601) 327,112 69,055
------------- -------------- ------------ -----------
145,626 (16,400) 129,226 27,280
------------- -------------- ------------ -----------
Initiation costs of projects 16,949 5,056 22,005 4,645
Research and development expenses, net 29,001 (35) 28,966 6,115
Marketing and selling expenses 28,591 (2,947) 25,644 5,413
General and administrative expenses 89,711 4,245 93,956 19,835
------------- -------------- ------------ -----------
164,252 6,319 170,571 36,008
------------- -------------- ------------ -----------
OPERATING LOSS BEFORE FINANCIAL
INCOME (EXPENSES), NET (18,626) (22,719) (41,345) (8,728)
Financial income (expenses), net (5,545) 40,913 35,368 7,466
------------- -------------- ------------ -----------
OPERATING LOSS AFTER
FINANCIAL INCOME (EXPENSES), NET (24,171) 18,194 (5,977) (1,262)
Other income (expenses), net 9,687 (25,441) (15,754) (3,326)
------------- -------------- ------------ -----------
LOSS BEFORE INCOME TAXES (14,484) (7,247) (21,731) (4,588)
Income taxes 22,128 17,562 39,690 8,379
------------- -------------- ------------ -----------
LOSS AFTER INCOME TAXES (36,612) (24,809) (61,421) (12,967)
Equity in losses of investee
companies, net (2,962) (16,809) (19,771) (4,174)
Minority interest in results of
subsidiaries, net 24,960 (4,554) 20,406 4,309
------------- -------------- ------------ -----------
LOSS FROM CONTINUING OPERATIONS (14,614) (46,172) (60,786) (12,832)
Income from discontinued
operations, net 55,804 (23,297) 32,507 6,862
------------- -------------- ------------ -----------
NET INCOME (LOSS) FOR THE YEAR 41,190 (69,469) (28,279) (5,970)
============= ============== ============ ===========
- 116 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
1. STATEMENTS OF OPERATIONS:
B. THE STATEMENT OF OPERATIONS IN ACCORDANCE
WITH ISRAELI GAAP IS RECONCILED TO U.S. GAAP
AS FOLLOWS: (CONT.):
YEAR ENDED DECEMBER 31, 2001
-------------------------------------------------
ISRAELI GAAP U.S. GAAP
---------------- ------------
AS REPORTED
IN THESE
FINANCIAL RECONCI-
STATEMENTS (1) LIATIONS TOTAL
---------------- --------------- ------------
IN THOUSANDS NIS
-------------------------------------------------
REVENUES
Commercial-center operations 134,752 (9,723) 125,029
Hotel operations and management 141,901 (3,461) 138,440
Long-term projects 10,223 - 10,223
---------------- --------------- ------------
286,876 (13,184) 273,692
---------------- --------------- ------------
COSTS OF REVENUES
Commercial-center operations 67,926 (2,764) 65,162
Hotel operations and management 128,653 3,343 131,996
Long-term projects 7,452 - 7,452
---------------- --------------- ------------
204,031 579 204,610
---------------- --------------- ------------
82,845 (13,763) 69,082
---------------- --------------- ------------
Initiation costs of projects 5,969 1,626 7,595
Research and development expenses, net 24,663 (988) 23,675
Marketing and selling expenses 8,469 (667) 7,802
General and administrative expenses 63,456 (48) 63,408
---------------- --------------- ------------
102,557 (77) 102,480
---------------- --------------- ------------
OPERATING LOSS BEFORE FINANCIAL
INCOME , NET (19,712) (13,686) (33,398)
Financial income , net 103,510 (96,873) 6,637
OPERATING INCOME (LOSS) AFTER
---------------- --------------- ------------
FINANCIAL INCOME, NET 83,798 (110,559) (26,761)
Other income, net 34,731 5,753 40,484
---------------- --------------- ------------
INCOME BEFORE INCOME TAXES 118,529 (104,806) 13,723
Income taxes 13,857 (2,729) 11,128
---------------- --------------- ------------
INCOME AFTER INCOME TAXES 104,672 (102,077) 2,595
Equity in losses of investee
companies, net (9,899) (2) (31,429) (2) (41,328)
Minority interest in results of
subsidiaries, net (6,029) 12,709 (2) (2) 6,680
---------------- --------------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 88,744 (120,797) (32,053)
Income from discontinued
operations, net 19,119 157 19,276
Cumulative effect of a change in
accounting principles at the beginning
of the year - (8,741) (8,741)
---------------- --------------- ------------
NET INCOME (LOSS) FOR THE YEAR 107,863 (129,381) (21,518)
================ =============== ==============
(1) Reclassified - see note 23A.
(2) Restated - see A8 above.
- 117 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
1. STATEMENTS OF OPERATIONS:
B. THE STATEMENT OF OPERATIONS IN ACCORDANCE
WITH ISRAELI GAAP IS RECONCILED TO U.S. GAAP
AS FOLLOWS: (CONT.):
YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------
ISRAELI GAAP U.S. GAAP
------------- -----------
AS REPORTED EFFECT OF
IN THESE "AS IF" POOLING OTHER
FINANCIAL OF INTERESTS RECONCI
STATEMENTS (1) (SEE A1 ABOVE) LIATIONS T O T A L
-------------- -------------- ------------- ------------
IN THOUSANDS NIS
---------------------------------------------------------------------
REVENUES
Commercial-center operations 28,117 27,813 1,775 57,705
Hotel operations and management 108,089 - 2,159 110,248
Long-term projects 20,367 - - 20,367
-------------- --------------- ------------- ------------
156,573 27,813 3,934 188,320
-------------- --------------- ------------- ------------
COSTS OF REVENUES
Commercial-center operations 12,917 10,866 715 24,498
Hotel operations and management 93,050 - 709 93,759
Long-term projects 18,245 - - 18,245
-------------- --------------- ------------- ------------
124,212 10,866 1,424 136,502
-------------- --------------- ------------- ------------
32,361 16,947 2,510 51,818
-------------- --------------- ------------- ------------
Initiation costs of projects 2,819 7,092 24,958 34,869
Research and development expenses, 26,566 - 110 26,676
net
Marketing and selling expenses 2,257 2,915 143 5,315
General and administrative expenses 55,026 1,031 107 56,164
-------------- -------------- ------------ ------------
86,668 11,038 25,318 123,024
-------------- --------------- ------------- ------------
OPERATING INCOME (LOSS) BEFORE
FINANCIAL INCOME (EXPENSES), NET (54,307) 5,909 (22,808) (71,206)
Financial income (expenses), net 33,189 (16,254) 13,192 30,127
-------------- --------------- ------------- ------------
OPERATING LOSS AFTER FINANCIAL
FINANCIAL INCOME (EXPENSES), NET (21,118) (10,345) (9,616) (41,079)
Other income (expenses), net (15,899) (2,713) 24,647 6,035
-------------- --------------- ------------- ------------
LOSS BEFORE INCOME TAXES (37,017) (13,058) 15,031 (35,044)
Income taxes 18,907 1,624 6,739 27,270
-------------- --------------- ------------- ------------
LOSS AFTER INCOME TAXES (55,924) (14,682) 8,292 (62,314)
Equity loss of investee
companies, net (3,303) - (2) (2,052) (2) (5,355)
Minority interest in results of
subsidiaries, net 15,161 - (2) (3,258) (2) 11,903
-------------- --------------- ------------- ------------
LOSS FROM
CONTINUING OPERATIONS (44,066) (14,682) 2,982 (55,766)
Income from discontinued
operations, net 28,341 - 2,118 30,459
-------------- --------------- ------------- ------------
NET LOSS FOR THE YEAR (15,725) (14,682) 5,100 (25,307)
============== =============== ============= =============
(1) Reclassified - see note 23A.
(2) Restated - see A8 above.
- 118 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
1. STATEMENTS OF OPERATIONS:
C. THE RECONCILIATION OF EPS IN ACCORDANCE WITH
ISRAELI GAAP TO EPS IN ACCORDANCE WITH U.S.
GAAP, IS AS FOLLOWS (RECONCILING ITEMS ARE
SHOWN NET OF TAXES):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2002 2002 2001 (1) 2000 (1)
--------------- ------------ --------------- ------------------
CONVENIENCE
TRANSLATION
US$ N I S
--------------- ----------------------------------------------------
BASIC EPS ACCORDING TO:
ISRAELI GAAP:
Continuing operations (0.14) (0.65) 4.00 (1.99)
Discontinued operations 0.53 2.50 0.86 1.28
--------- --------- ---------- ----------
0.39 1.85 4.86 (0.71)
========= ========= ========== ==========
US GAAP:
Continuing operations (0.57) (2.72) (2) (1.44) (2) (2.52)
Discontinued operations 0.31 1.46 0.87 1.38
Cumulative effect of a change in
accounting principles at the
beginning of the year - - (0.39) -
--------- --------- ---------- ----------
(0.26) (1.26) (0.96) (1.14)
========= ========= ========== ==========
DILUTED EPS ACCORDING TO:
ISRAELI GAAP 0.37 1.75 4.08
========= ========= ==========
US GAAP:
From Continuing operations (0.60) (2.83) (2) (1.44) (2) (2.52)
Discontinued operations 0.31 1.45 0.85 1.38
Cumulative effect of a change in
accounting principles at the
beginning of the year - - (0.39) -
--------- --------- ---------- ----------
(0.29) (1.38) (0.98) (1.14)
========= ========= ========== ==========
(1) Reclassified - see Note 23A.
(2) Restated - see A8 above.
- 119 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
1. STATEMENTS OF OPERATIONS:
D. THE RECONCILIATION OF NET INCOME (LOSS) IN
ACCORDANCE WITH ISRAELI GAAP TO NET INCOME
(LOSS) IN ACCORDANCE WITH U.S. GAAP, IS AS
FOLLOWS (RECONCILING ITEMS ARE SHOWN NET OF
TAXES):
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2002 2002 (1) 2001 (1) 2000
------------ ----------- -------------- -------------
CONVENIENCE
SUB- TRANSLATION
SECTION US$'000 IN THOUSANDS NIS
------- ------------ -----------------------------------------------
Net income (loss) from continuing
Operations, as reported according to
Israeli GAAP (3,085) (14,614) 88,744 (44,066)
Effect of "as if" pooling of interests A1 - - - (14,682)
Deferred taxes in respect of
inflation adjustments A4a (1,582) (7,492) (7,780) (4,519)
Deferred taxes in respect of
business combination A4b - - (521) -
Compensation component of option
plan and share incentive plan A5 (1,500) (7,106) - -
Venture capital investments A6 - - 1,025 (1,025)
Issuance of shares by an investee in
the development stage, to a third party A7 (5,341) (25,300) - (1,855)
Implementation of the equity method A8 (470) (2,227) (2) (27,750) (2) (1,028)
Translation of profit and loss items A9 (1,578) (7,478) (5,973) 786
Pre-opening costs A10 815 3,862 (8,136) 1,203
Marketable securities A11 584 2,765 (1,990) 1,369
Capitalization of finance expenses A12 (483) (2,287) (23,624) 9,579
Investment in investee companies - fair
value measurment A14 2,518 11,927 - -
Realization of capital reserve for
translation adjustments A15 (6,618) (31,351) - -
Convertible securities of investees A16 - - - 1,730
Contingent consideration based on
security price A17 73 348 1,630 -
Derivative financial instruments A18 4,960 23,494 (60,387) -
Others A20 (401) (1,900) - -
Minority-interest in the
abovementioned reconciliations (724) (3,427) (2) 12,709 (2) (3,258)
------------ ----------- -------------- -------------
(12,832) (60,786) (32,053) (55,766)
Income from discontinued operations,
net A19 6,862 32,507 (3) 19,276 (3) 30,459
Cumulative effect of a change in
accounting principles at the begining
of the year A18 - - (8,741) -
------------ ----------- -------------- -------------
NET LOSS ACCORDING TO
U.S. GAAP (5,970) (28,279) (21,518) (25,307)
============ =========== ============== ==============
(1) Reclassified - see Note 23A.
(2) Restated - see A8 above.
(3) 2001 and 2000 includes only reconciliations according to subsection A9.
- 120 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
2. THE RECONCILIATION OF THE BALANCE SHEETS PREPARED IN
ACCORDANCE WITH ISRAELI GAAP TO U.S. GAAP, IS AS
FOLLOWS:
RECONCILIATION AS OF DECEMBER 31, 2002
--------------------------------------
AS REPORTED
IN THESE
FINANCIAL RECONCI- AS PER CONVENIENCE
STATEMENTS LIATIONS U.S. GAAP TRANSLATION
------------ ------------- ------------ ------------
IN THOUSANDS NIS US$'000
------------------------------------------- ------------
Investments in investees and other
companies 102,804 (27,984) 74,820 15,795
Hotels, commercial centers
and other property 4,169,532 235,714 4,405,246 929,965
Other assets and deferred expenses 74,427 27,185 101,612 21,451
Assets related to
discontinuing operation 114,135 42,226 156,361 33,008
Total assets 5,846,220 277,141 6,123,361 1,292,666
Payables and other current
liabilities -
Deferred revenues due to
decrease
in percentage holding in
development stage companies 12,169 (12,169) - -
Long-term liabilities -
Deferred taxes 106,424 119,530 225,954 47,700
Liability for the acquisition
of shares in subsidiary 22,283 (22,283) - -
Currency transactions on
long-term agreements - 228,816 228,816 48,304
Liabilities related to
discontinuing operations 112,120 80,089 192,209 40,576
Minority interest 496,020 (25,148) 470,872 99,403
Receipts on account of options - 4,623 4,623 976
Capital reserve 474,714 56,514 531,228 112,144
Deferred stock based compansation - (2,420) (2,420) (511)
Foreign currency translation
adjustments 138,356 55,583 193,939 40,942
Retained earnings 490,983 (205,994) 284,989 60,162
Total shareholders' equity 1,081,930 (96,317) 985,613 208,067
- 121 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
2. THE RECONCILIATION OF THE BALANCE SHEETS PREPARED IN
ACCORDANCE WITH ISRAELI GAAP TO U.S. GAAP, IS AS
FOLLOWS (CONT.):
RECONCILIATION AS OF DECEMBER 31, 2001 (1)
------------------------------------------
AS REPORTED
IN THESE
FINANCIAL RECONCI- AS PER
STATEMENTS LIATIONS U.S. GAAP
------------- ------------ -------------
IN THOUSANDS NIS
--------------------------------------------
Venture capital investment 64,478 (2) (62,805) (2) 1,673
Investments investees and other
companies 22,638 (2) 34,827 (2) 57,465
Hotels, commercial centers
and other property 2,913,040 (3) 53,456 (3) 2,966,496
Other assets and deferred expenses 61,760 (3) 20,980 (3) 82,740
Total assets 4,818,154 (2) 46,458 (2) 4,864,612
Payables and other current
liabilities -
Deferred revenues due to
decrease in percentage holding in
development stage companies 30,391 (30,391) -
Long-term liabilities -
Deferred taxes 65,055 66,986 132,041
Liability for the acquisition
of shares in subsidiaries 21,935 (21,935) -
Currency transaction on long
term agreements - 147,167 147,167
Minority interest 506,810 (2) (18,281) (2) 488,529
Receipts on account of options - 4,623 4,623
Capital reserve 475,058 50,333 525,391
Foreign currency translation
adjustments 32,315 (2) (15,325) (2) 16,990
Retained earnings 449,525 (2) (136,719) (2) 312,806
Total shareholders' equity 934,378 (2) (101,711) (2) 832,667
(1) Reclassified.- see note 23A.
(2) Restated - see A8 above.
(3) The portion of the value of foreign currency
forward embedded in lease contracts
denominated in foreign currency, which is an
inherent part of the fair value of fixed
assets that relates to these lease contracts
and were purchased in a business combination,
was presented, at the initial implementation
(in 2001) of the provisions set forth in SFAS
133, erroneously, separately as goodwill. In
these financial statements such portion was
included as part of the value of the
aforesaid fixed assets. Comparative data for
2001 were, accordingly, reclassified.
- 122 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS (CONT.)
2. THE RECONCILIATION OF THE BALANCE SHEETS PREPARED IN
ACCORDANCE WITH ISRAELI GAAP TO U.S. GAAP, IS AS
FOLLOWS (CONT.):
RECONCILIATION AS OF DECEMBER 31, 2002
--------------------------------------
ITEM \ SUBSECTION A4A A4B A5 A7 A8 A9 A10 A11 A12 A14 A15
-------------------------------------------------------------------------------------------------------
I N T H O U S A N D S N I S
-------------------------------------------------------------------------------------------------------
Investments in
investees
and other
companies (27,984)
Hotels, commercial
centers
and other Property 35,570 35,199 183 (16,786) 67,134
Other assets and
deferred expenses 10,880 24,071 (7,766)
Assets related to
discontinuing
operation
Total assets 46,450 59,270 - - (27,984) - (7,583) - (16,786) 67,134
Payables and other
current
liabilities -
Deferred revenues
due to decrease
in percentage holding
in development
stage companies (11,045)
Long-term
liabilities -
Deferred taxes 81,430 59,854 (141) 8,323
Liability for the
acquisition of
shares
in subsidiaries
Currency transaction
on long term
Agreements
Liabilities related
to discontinuing
operations
Minority interest (7,012) (225) 462 (3,815) (2,069) (4,584) 9,981
Receipts on account
of options
Capital reserve 9,567 31,168 (1,692)
Deferred stock
based compensation (2,420)
Foreign currency
translation
adjustments (4,229) (40) 6,867 2,461 10,679 (1,139) 929 39,970 31,351
Retained earnings (23,739) (319) (7,147) (27,452) (26,630) (10,679) (4,375) 1,692 (12,990) 8,860 (31,351)
Total shareholders'
Equity (27,968) (359) - 10,583 (24,169) - (5,514) - (12,061) 48,830 -
ITEM \ SUBSECTION A16 A17 A18 A19 A20 TOTAL
--------------------------------------------------------------
I N T H O U S A N D S N I S
--------------------------------------------------------------
Investments in
investees and other
companies (27,984)
Hotels, commercial
centers and other
Property 5,595 (6,285) 117,004 (1,900) 235,714
Other assets and
deferred expenses 27,185
Assets related to
discontinuing
operation 42,226 42,226
Total assets 5,595 (6,285) 117,004 42,226 (1,900) 277,141
Payables and other
current
liabilities -
Deferred revenues
due to decrease
in percentage holding
in development
stage companies (1,124) (12,169)
Long-term
liabilities -
Deferred taxes (29,936) 119,530
Liability for the
acquisition of
shares
in subsidiaries (22,283) (22,283)
Currency transaction
on long term 228,816 228,816
Agreements
Liabilities related
to discontinuing
operations 80,089 80,089
Minority interest (2,590) (14,566) (730) (25,148)
Receipts on account
of options 4,623 4,623
Capital reserve 17,471 56,514
Deferred stock
based compensation (2,420)
Foreign currency
translation
adjustments 2,821 (3,451) (24,470) (6,166) 55,583
Retained earnings 1,865 1,978 (57,406) (23,297) 4,996 (205,994)
Total shareholders'
Equity 4,686 15,998 (81,876) (23,297) (1,170) (96,317)
- 123 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS (CONT.)
2. THE RECONCILIATION OF THE BALANCE SHEETS PREPARED IN
ACCORDANCE WITH ISRAELI GAAP TO U.S. GAAP, IS AS
FOLLOWS (CONT.):
RECONCILIATION AS OF DECEMBER 31, 2001
--------------------------------------
ITEM \ SUBSECTION A4A A4B A5 A7 (1) A8 A9 A10 A11 A12 A14
-------------------------------------------------------------------------------------------------------
I N T H O U S A N D S N I S
-------------------------------------------------------------------------------------------------------
Venture capital investment (62,805)
Investment in investees and
other companies 34,827
Hotels, commercial centers
and Other property 3,901 28,060 162 (16,724) 4,170
Other assets and deferred
expenses 9,567 21,372 (9,959)
Total assets 13,468 49,432 (27,978) (9,797) (16,724) 4,170
Payables and other current
liabilities -
Deferred revenues due to
decrease in percentage
holding in
development stage companies (29,477)
Long-term liabilities
Defferred taxes 37,320 49,952 (224) 1,569
Liability for the
acquisition of
shares in subsidiaries
Currency transaction on long
term agreement
Minority interest (6,257) (201) (1,695) (3,090) (4,408) 1,080 (
Receipts on account of
options
Capital reserve 370 31,629 863
Foreign currency transaltion
adjustments (1,029) 488 3,044 62 (665)
Retained earnings (16,566) (319) (370) (2,152) (26,771) (3,044) (6,769) (863) (11,427) 1,521
Total shareholders' equity (17,595) (319) - 29,477 (26,283) - (6,707) - (12,092) 1,521
ITEM \ SUBSECTION A16 A17 A18 A19 TOTAL
----------------------------------------------------------
I N T H O U S A N D S N I S
----------------------------------------------------------
Venture capital investment (1) (62,805)
Investment in investees and
other companies (1) 34,827
Hotels, commercial centers
and Other property 3,762 (2,834) (2)32,959 (2) 53,456
Other assets and deferred
expenses (2) 20,980
Total assets 3,762 (2,834) 32,959 (1) 46,458
Payables and other current
liabilities -
Deferred revenues due to
decrease in percentage
holding in
development stage companies (914) (30,391)
Long-term liabilities
Defferred taxes (21,631) 66,986
Liability for the
acquisition of
shares in subsidiaries (21,935) (21,935)
Currency transaction on long
term agreement 147,167 147,167
Minority interest 3,710) (1)(18,281)
Receipts on account of
options 4,623 4,623
Capital reserve 17,471 50,333
Foreign currency transaltion
adjustments 618 (11,677) (6,166) (1)(15,325)
Retained earnings 3,145 1,630 (80,900) 6,166 (136,719)
Total shareholders' equity 3,763 19,101 (92,577) - (1)(101,711)
(1) Restated see A8 above.
(2) Reclassified.- see footnote 3 above.
- 124 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
2. THE RECONCILIATION OF THE BALANCE SHEETS PREPARED
IN ACCORDANCE WITH ISRAELI GAAP TO U.S. GAAP, IS AS
FOLLOWS (CONT.):
SUBSECTION:
A4A. Deferred taxes in respect of inflation
adjustments.
A4B. Deferred taxes in respect of business
combination.
A5. Compensation component of option plans and
shares incentive plan.
A6. Venture capital investments.
A7. Issuance of shares by an investee in the
development stage to a third party.
A8. Initial implementation of the equity method.
A9. Translation of profit and loss items.
A10. Pre-opening costs.
A11. Marketable securities.
A12. Capitalization of finance expenses.
A14. Investment in investee companies - fair value
measurment.
A15. Realization of capital reserve for
translation adjustments
A16. Convertible securities of investees.
A17. Contingent consideration based on security
price.
A18. Derivative financial instruments.
A19. Discontinuing operations - gain recognition.
A20. Others.
- 125 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
3. PROPORTIONATE CONSOLIDATION:
Summarized data regarding the differences between
the proportionate consolidation method and the
equity method:
DECEMBER 31, 2002
-----------------------------------------------------
AS REPORTED IN
THESE EFFECT OF
FINANCIAL PROPORTIONATE EQUITY
STATEMENTS CONSOLIDATION METHOD
---------------- ------------- ---------------
IN THOUSANDS NIS
-----------------------------------------------------
BALANCE SHEET:
Current assets 1,030,964 (32,116) 998,848
Non-current assets 4,815,256 (481,392) 4,333,864
Current liabilities 1,938,038 (136,752) 1,801,286
Non-current liabilities 2,330,232 (376,756) 1,953,476
STATEMENT OF OPERATIONS:
Income from sales and services 497,339 (153,423) 343,916
Gross profit 145,626 (56,591) 89,035
Operating loss (18,626) (14,045) (32,671)
STATEMENT OF CASH FLOWS:
Net cash used in operating activities (4,042) (6,484) (10,526)
Net cash used in investing activities (507,298) 44,945 (462,353)
Net cash provided by financing
activities 356,825 (37,477) 319,348
DECEMBER 31, 2001
-----------------------------------------------------
AS REPORTED IN
THESE EFFECT OF
FINANCIAL PROPORTIONATE EQUITY
STATEMENTS CONSOLIDATION METHOD
---------------- ------------- ---------------
IN THOUSANDS NIS
-----------------------------------------------------
BALANCE SHEET:
Current assets 1,153,946 (27,951) 1,125,995
Non-current assets 3,664,208 (410,645) 3,253,563
Curent liabilities 1,643,513 (85,256) 1,558,257
Non-current liabilities 1,733,453 (353,340) 1,380,113
STATEMENT OF OPERATIONS:
Income from sales and services 286,876 (94,829) 192,047
Gross profit 82,845 (31,362) 51,483
Operating loss (19,712) (12,128) (31,840)
STATEMENT OF CASH FLOWS:
Net cash provided by operating
activities 23,668 (17,058) 6,610
Net cash used in investing activities (972,285) 30,940 (941,345)
Net cash provided by financing
activities 838,479 (8,780) 829,699
(1) Reclassified - see Note 23A.
- 126 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
3. PROPORTIONATE CONSOLIDATION (CONT.):
Summarized data regarding the differences between
the proportionate consolidation method and the
equity method:
DECEMBER 31, 2000
-----------------------------------------------------
AS REPORTED IN
THESE EFFECT OF
FINANCIAL PROPORTIONATE EQUITY
STATEMENTS CONSOLIDATION METHOD
---------------- ------------- ---------------
IN THOUSANDS NIS
-----------------------------------------------------
STATEMENT OF OPERATIONS:
Income from sales and services 156,573 (80,045) 76,528
Gross profit 32,361 (31,434) 927
Operating loss (54,307) (16,479) (70,786)
STATEMENT OF CASH FLOWS:
Net cash used in operating
activities (97,720) 3,142 (94,578)
Net cash used in investing
activities (420,876) 77,845 (343,031)
Net cash provided by financing
activities 328,522 (80,862) 247,660
(1) Reclassified - see Note 23A.
4. COMPREHENSIVE INCOME (LOSS)
"Comprehensive income" consists of the change,
during the current period, in the Company's
shareholders' equity not derived from shareholders'
investments or from the distribution of earnings to
shareholders (including capital reserve from
transaction with controlling shareholders).
YEAR ENDED DECEMBER 31
-----------------------------------------------------
2002 2001 2000
---------------- ------------- ---------------
IN THOUSANDS NIS
-----------------------------------------------------
Net loss in accordance with
U.S. GAAP (28,279) (1) (21,518) (1) (25,307)
Other comprehensive income (loss), after tax:
Foreign currency translation
Adjustments 176,949 (1) 36,561 (1) 12,269
Unrealized gains (losses) from securities (2,555) 1,646 911
---------------- ------------- ---------------
Total comprehensive income (loss) 146,115 16,689 (12,127)
================ ============= ===============
(1) Restated see A8 above.
- 127 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
5. ADDITIONAL INFORMATION AS REQUIRED BY U.S. GAAP
A. The effect on pro forma data calculated
according to FAS No. 123 is as follows:
1) Under the provision of FAS No. 123,
all option plans and share incentive
plan in the Company and in Elscint are
recorded in the statement of
operations, based on the fair value of
the shares or options granted, at the
grant date.
2) The Black & Scholes model is used for
estimating fair value of such
securities (at each applicable
measurement date), utilizing the
following assumptions:
ELBIT INSIGHTEC ELSCINT
-------------------- ----------- ------------
OPTION SHARE INCENTIVE PLAN
PLAN (1)
----------- -----------------------------------
a. Dividend yield (%) - - - -
========== ========== ========== ===========
b. Risk free interest rate (%) 9 6 4 6
========== ========== ========== ===========
c. Expected lives from the
date of grant (years) 2 5 4 5
========== ========== ========== ===========
d. Expected volatility (%) 40 24 - 24
========== ========== ========== ===========
For pro forma disclosure, the
compensation within, the shares and
the share options, granted, as
estimated, is amortized over the
period of the benefit ("vesting
period").
(1) See Note 19D.
3) Information relating to shares (in
consideration for non-recourse loans)
and options granted to employees and
directors:
ELBIT INSIGHTEC ELSCINT
-------------------- ----------- ------------
OPTION SHARE INCENTIVE PLAN
PLAN (1)
----------- ---------------------------------------
Authorized 350,000 550,000 2,650,000 850,000
========== ========= ========== ===========
Granted 350,000 527,000 2,206,000 734,000
========== ========= ========== ===========
Vested - 5,000 1,389,063 296,583
========== ========= ========== ===========
- 128 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
5. ADDITIONAL INFORMATION AS REQUIRED BY U.S. GAAP
A. The effect on pro forma data calculated
according to FAS No. 123 is as follows
(cont.):
4) If the cost of the benefit in respect
of shares or share options issued to
employees under this plan had been
computed on the basis of their fair
value, in accordance with FAS No. 123,
the effect on net income and earnings
per share in accordance with U.S. GAAP
would have been as follows:
YEAR ENDED
------------------------------
DECEMBER 31,
------------------------------
2002 (1) 2001
------------- -------------
IN THOUSANDS NIS
------------------------------
Pro forma net loss (in thousands NIS) (29,591) (24,968)
========== ==========
Pro forma basic earnings per share (in NIS) (1.32) (1.11)
========== ==========
Pro forma diluted earnings per share (in NIS) (1.44) (1.13)
========== ==========
(1) Restated see A8 above.
B. VALUATION ALLOWANCE OF DEFERRED TAX ASSETS
ACCORDING TO FAS NO. 109:
DECEMBER 31, 2002
------------------------------------------------------------
AS REPORTED
IN THESE
FINANCIAL RECONCI- AS PER CONVENIENCE
STATEMENTS LIATIONS U.S. GAAP TRANSLATION
------------ ------------- ------------ ------------
IN THOUSANDS NIS US$'000
------------------------------------------- ------------
In respect of fixed
assets (accelerated
depreciation, value
adjustments and other
timing differences) 66,466 87,383 153,849 32,478
Difference between fair
value of land at
acquisition and related
cost for income tax
purposes 37,841 64,424 102,265 21,589
Temporary differences -
income and expenses (19,188) (32,478) (51,666) (10,907)
Carry forward tax
losses and deductions (200,783) 24,796 (175,987) (37,151)
---------- --------- ---------- -----------
(115,664) 144,125 28,461 6,009
Valuation allowance for
deferred tax assets 212,085 (24,595) 187,490 39,579
---------- --------- ---------- -----------
96,421 119,530 215,951 45,588
========== ========= ========== ===========
- 129 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
5. ADDITIONAL INFORMATION AS REQUIRED BY U.S. GAAP
(CONT.)
B. VALUATION ALLOWANCE OF DEFERRED TAX ASSETS
ACCORDING TO FAS NO. 109 (CONT.):
DECEMBER 31, 2001
--------------------------------------------
AS REPORTED
IN THESE
FINANCIAL RECONCI- AS PER
STATEMENTS LIATIONS U.S. GAAP
------------- ------------ -------------
IN THOUSANDS NIS
--------------------------------------------
In respect of fixed
assets (accelerated
depreciation, value
adjustments and other
timing differences) 25,948 42,812 68,760
Difference between fair
value of land at
acquisition and related
cost for income tax
purposes 42,707 47,768 90,475
Temporary differences -
income and expenses (35,498) (23,791) (59,289)
Carry forward tax
losses and deductions (169,415) 4,486 (164,929)
------------- ------------ -------------
(136,258) 71,275 (64,983)
Valuation allowance for
deferred tax assets 192,682 (4,289) 188,393
------------- ------------ -------------
56,424 66,986 123,410
============= ============ =============
C. PROFORMA INFORMATION
I. The following unaudited proforma
information for the year 2000,
presents a summary of consolidated
results of operations of the Group for
this year assuming that the
acquisition of the second half of the
rights in the commercial centers, from
the Red Sea Hotel Group - which was
accounted according to the purchase
method - had occurred at the beginning
of the year 2000. Such unaudited
information is based on historical
financial statements of the acquired
companies. The proforma information
does not purport to be indicative of
the results that actually would have
occurred had such acquisition been
effected on that date.
COMPRISED AS FOLLOWS:
YEAR ENDED
DECEMBER 31
2000
----------------
IN THOUSANDS NIS
----------------
Revenues (1) 216,130
===========
Net loss (2) (33,502)
===========
Loss per share (basic and diluted) (2) (1.52)
===========
(1) Reclassified - see Note 23A.
(2) Restated see A8 above.
- 130 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
5. ADDITIONAL INFORMATION AS REQUIRED BY U.S. GAAP
(CONT.)
C. PROFORMA INFORMATION (CONT.)
II. The following unaudited proforma
information for 2001 and 2000 presents
a summary of consolidated results of
operations of the Group for these
years, assuming that the transaction
to acquire ownership and control in
Bucuresti, as mentioned in Note
10B.(1)b(7)I above, had occurred at
the beginning of each year presented
herein. Such unaudited information is
based on historical financial
statements of the acquired company.
The proforma information does not
purport to be indicative of the
results that actually would have
occurred had such acquisition been
effected on that dates.
COMPRISED AS FOLLOWS:
YEAR ENDED DECEMBER 31
----------------------
2001 2000
--------- ---------
IN THOUSANDS NIS
Revenues (1) 284,032 226,336
========= =========
Net loss (2) (20,657) (31,923)
========= =========
Loss per share (basic and diluted) (2) (0.92) (1.45)
========= =========
(1) Reclassified - see Note 23A.
(2) Restated see A8 above.
III. The following unaudited proforma
information for 2002 and 2001 presents
a summary of consolidated results of
operations of the Group for these
years, assuming that the transaction
to acquire ownership and control of
three commercial and entertainment
centers in Hungary, as mentioned in
Note 10B.(3)b(6) above, had occurred
at the beginning of each year
presented herein. Such unaudited
information is based on historical
financial statements of the acquired
company. The proforma information does
not purport to be indicative of the
results that actually would have
occurred had such acquisition been
effected on that dates.
COMPRISED AS FOLLOWS:
YEAR ENDED DECEMBER 31
------------------------------------------
2002 2002 2001
------------ ----------- -----------
CONVENIENCE
TRANSLATION
-----------
US$'000 IN THOUSANDS NIS
------------ --------------------------
Revenues 98,670 467,402 344,381
============ =========== ===========
Income (loss) from
continuing operations (14,224) (67,379) 11,143
============ =========== ===========
Net profit (loss) (7,362) (34,872) 21,678
============ =========== ===========
Basic earning (loss) per share (0.33) (1.56) 0.98
============ =========== ===========
Diluted earning (loss) per share (0.35) (1.68) 0.92
============ =========== ===========
- 131 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
5. ADDITIONAL INFORMATION AS REQUIRED BY U.S. GAAP
(CONT.)
D. BUSINESS SEGMENTS (BASED ON ISRAELI GAAP
FINANCIAL STATEMENTS)
COMMERCIAL R&D
AND AND VENTURE
ENTERTAINMENT CAPITAL
CENTER HOTELS INVESTMENTS GENERAL TOTAL
------------- ----------- -------------- ---------- ----------
IN THOUSAND NIS
----------------------------------------------------------------------
YEAR ENDED
DECEMBER 31, 2002:
Financial income
(expenses), net (1) (29,609) (4,626) - 28,690 (5,545)
Other income
(expenses), net (2,277) (17,768) 9,830 19,902 9,687
Income taxes (14,027) 4,955 - (13,056) (22,128)
YEAR ENDED
DECEMBER 31, 2001 (2):
Financial income
(expenses), net (1) 46,566 (6,391) - 63,335 103,510
Other income
(expenses), net (215) (766) (17,707) 53,419 34,731
Income taxes (12,295) (3,055) - 1,493 (13,857)
YEAR ENDED
DECEMBER 31, 2000 (2):
Financial income
(expenses), net (1) (151) (7,319) - 40,659 33,189
Other income
(expenses), net (396) - - (15,899)
(15,503)
Income taxes (3,131) (1,020) - (18,907)
(14,756)
(1) Excluding financial results in respect of inter-company
balances and transactions.
(2) Reclassified - see note 23A.
- 132 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 26 - MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP AND
THEIR EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
B. THE EFFECT OF THE MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP
AND U.S. GAAP ON THE FINANCIAL STATEMENTS
5. ADDITIONAL INFORMATION AS REQUIRED BY U.S. GAAP
(CONT.)
E. STATEMENT OF CASH FLOWS
A) SUPPLEMENTAL INFORMATION REQUIRED
ACCORDING TO U.S. GAAP:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2002 2002 2001 2000
------------- ---------- ----------- ----------
CONVENIENCE
TRANSLATION
US$'000 (I N T H O U S A N D N I S)
------------- ---------------------------------------
Interest paid 28,466 134,846 85,775 38,632
============= ========== ========== ===========
Income tax paid
(refund) 6,110 28,945 (6,364) 52,600
============= ========== ========== ===========
B) EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS:
ACCORDING TO ISRAELI GAAP:
The statement shall report the effect
of exchange rate changes on cash
balances held in foreign currencies,
only in "autonomous foreign entities",
in a separate part of the
reconciliation of the change in cash
and cash equivalents during the
period.
ACCORDING TO U.S. GAAP:
The statement shall report the effect
of exchange rate changes on all cash
balances held in foreign currencies in
all foreign entities as a separate
part of the reconciliation of the
change in cash and cash equivalents
during the period.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2002 2002 2001 2000
------------- ---------- ----------- ----------
CONVENIENCE
TRANSLATION
US$'000 (I N T H O U S A N D N I S)
------------- ---------------------------------------
As reported,
according to
Israeli GAAP 1,342 6,355 15,075 4,145
Reconciliation as
per U.S. GAAP 1,129 5,349 23,191 (9,338)
------------- ---------- ----------- ----------
2,471 11,704 38,266 (5,193)
============= ========== ========== ===========
- 133 -
ELBIT MEDICAL IMAGING LTD.
NOTES TO THE FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
AUDITORS' REPORT TO THE SHAREHOLDERS OF PLAZA CENTERS (EUROPE) B.V.
We have audited the accompanying consolidated balance sheet of Plaza Centers
(Europe) B.V. ("the Company") and its subsidiaries as at December 31, 2002 and
2001 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the two years then ended. These financial
statements are the responsibility of the Company's Board of Directors and of its
Management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. 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 audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries as at December 31, 2002
and 2001 and the consolidated results of their operations, the changes in
shareholders' equity and their cash flows for each of the two years then ended,
in conformity with generally accepted accounting principles in Israel. The
effect of the material differences between GAAP in Israel and in the U.S on the
abovementioned financial statements is shown in Note 18 to the consolidated
financial statements.
In addition, in our opinion the above-mentioned consolidated financial
statements comply with the requirements of the Israeli Securities Regulations
(Preparation of Annual Financial Statements) - 1993.
As explained in note 2, the above-mentioned consolidated financial statements
are stated in values adjusted for the changes in the general purchasing power of
the different currencies in the countries of operation of the Company and its
subsidiaries, in accordance with the opinions of the Institute of Certified
Public Accountants in Israel.
Budapest, Hungary
March 28, 2003
KPMG Hungaria Kft.
ITEM 19. EXHIBITS
a. Index to Financial Statements
Financial Statements of EMI Page
Independent Auditors' Report.......................................... 2
Consolidated Balance Sheets........................................... 3-4
Consolidated Statements of Operations................................. 5
Consolidated Statements of Shareholders' Equity....................... 6
Consolidated Statements of Cash Flows................................. 7-9
Notes to Consolidated Financial Statements............................ 10-99
Appendix. 100
Reports of Auditor of Subsidiary
b. Exhibits.
1.1(1) Memorandum of Association of the Company.
1.2(1) Articles of Association of the Company.
1.3(2)^ Notice dated March 4, 2001, sent by the Registrant to the Israeli
Companies Registrar with respect to an amendment to the Articles
of Association.
4.1(3) First Addendum to the Memorandum of Agreement dated December 31,
2001 relating to the acquisition of Duna Plaza, Sopron Plaza and
Nyir Plaza.
4.2(3) Loan facility agreement dated January 22, 2002 between OVAG, MKB
and OPT banks, Amanati Ltd., Duna Plaza Kft. Sopron Plaza Kft. and
Plaza Centers Europe BV with respect to a credit facility in the
amount of Euro 82.9 million.
4.3(2)^ Loan facility agreement dated September 27, 2000, between the
Registrant and Bank Hapoalim BM with respect to a $150 million
line of credit.
4.4(2) Loan Agreement dated March 1, 2001, between Krakow Plaza Sp.z.o.o.
and OVAG with respect to a credit facility in the amount of $35
million.
4.5(4) Loan agreement among, inter alia, Depfa Bank AG, Victoria Hotel
C.V. and Utrecht Victoria Hotel B.V. dated March 24, 1999.
4.6(4) Hotel management agreement between Euston Road Hotel Operators
Ltd. and Park Plaza Europe Ltd. dated December 1997.
4.7(4) Management agreement between Victoria Hotel C.V. and Park Plaza
Hotel Europe, Ltd. (previously Prestige Hotels International Ltd.)
dated October 4, 1993.
4.8(4) Management support and sub-license agreement between Astrid Park
Plaza N.V. and Park Plaza Hotels Europe Ltd. dated April 15, 1997.
4.9(5) Loan agreement dated December 21, 2000 with Bank Hapoalim B.M.
with respect to the financing of the Victoria Park Plaza Hotel.
4.10(5)^ Loan facility agreement dated October 23, 2000 between Elscint and
Bank Hapoalim BM with respect to a $110 million line of credit.
4.11(5)^ Development agreement dated December 17, 2000 between Elscint and
the Israeli Land Administration with respect to the Monfort
Project.
4.12(6)^ Agreement dated April 14, 2002 between SLS Sails Ltd. and C.D.P.M.
Kft. for the completion of the construction works of Elscint's
commercial and entertainment center in Herzlia.
8.1 List of subsidiaries.
-117-
10.1(7) Certification of the President and Chief Financial Officer of the
Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- --------------
(1) Previously filed as an Exhibit to EMI's Annual Report on Form 20-F,
File No. 0-28996, filed with the Securities and Exchange Commission on
November 22, 1996 and incorporated by reference herein.
(2) Previously filed as an exhibit to EMI's Annual Report on Form 20-F for
the year ended December 31, 2000, File No. 0-28996, filed with the
Securities and Exchange Commission on July 16, 2001 and incorporated by
reference herein.
(3) Previously filed as an exhibit to EMI's Annual Report on Form 20-F for
the year ended December 31, 2001, File No. 0-28996, filed with the
Securities and Exchange Commission on July 1, 2002 and incorporated by
reference herein.
(4) Previously filed as an Exhibit to Elscint's Annual Report on Form 20-F
for the year ended December 31, 1999, File No. 2-44872, filed with the
Securities and Exchange Commission on June 2, 2000, and incorporated by
reference herein.
(5) Previously filed as an Exhibit to Elscint's Annual Report on Form 20-F
for the year ended December 31, 2000, File No. 2-44872, filed with the
Securities and Exchange Commission on July 10, 2001 and incorporated by
reference herein.
(6) Previously filed as an exhibit to Elscint's Annual Report on Form 20-F
for the year ended December 31, 2001, File No. 2-44872, filed with the
Securities and Exchange Commission on June 28, 2002 and incorporated by
reference herein.
(7) This document is being furnished in accordance with SEC Releases Nos.
33-8212 and 34-47551.
^ Translation from Hebrew.
-118-
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
By: /s/ Shimon Yitzhaki
---------------------------------
Name: Shimon Yitzhaki
Title: President
Date: June 30, 2003
-119-
CERTIFICATION
I, Shimon Yitzhaki, certify that:
1. I have reviewed this annual report on Form 20-F of Elbit Medical
Imaging 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: June 30, 2003
/s/ Shimon Yitzhaki
------------------------------------
Shimon Yitzhaki
President, Chief Financial Officer and
Director
-120-
EXHIBIT INDEX
1.1(1) Memorandum of Association of the Company.
1.2(1) Articles of Association of the Company.
1.3(2)^ Notice dated March 4, 2001, sent by the Registrant to the Israeli
Companies Registrar with respect to an amendment to the Articles
of Association.
4.1(3) First Addendum to the Memorandum of Agreement dated December 31,
2001 relating to the acquisition of Duna Plaza, Sopron Plaza and
Nyir Plaza.
4.2(3) Loan facility agreement dated January 22, 2002 between OVAG, MKB
and OPT banks, Amanati Ltd., Duna Plaza Kft. Sopron Plaza Kft. and
Plaza Centers Europe BV with respect to a credit facility in the
amount of Euro 82.9 million.
4.3(2)^ Loan facility agreement dated September 27, 2000, between the
Registrant and Bank Hapoalim BM with respect to a $150 million
line of credit.
4.4(2) Loan Agreement dated March 1, 2001, between Krakow Plaza Sp.z.o.o.
and OVAG with respect to a credit facility in the amount of $35
million.
4.5(4) Loan agreement among, inter alia, Depfa Bank AG, Victoria Hotel
C.V. and Utrecht Victoria Hotel B.V. dated March 24, 1999.
4.6(4) Hotel management agreement between Euston Road Hotel Operators
Ltd. and Park Plaza Europe Ltd. dated December 1997.
4.7(4) Management agreement between Victoria Hotel C.V. and Park Plaza
Hotel Europe, Ltd. (previously Prestige Hotels International Ltd.)
dated October 4, 1993.
4.8(4) Management support and sub-license agreement between Astrid Park
Plaza N.V. and Park Plaza Hotels Europe Ltd. dated April 15, 1997.
4.9(5) Loan agreement dated December 21, 2000 with Bank Hapoalim B.M.
with respect to the financing of the Victoria Park Plaza Hotel.
4.10(5)^ Loan facility agreement dated October 23, 2000 between Elscint and
Bank Hapoalim BM with respect to a $110 million line of credit.
4.11(5)^ Development agreement dated December 17, 2000 between Elscint and
the Israeli Land Administration with respect to the Monfort
Project.
4.12(6)^ Agreement dated April 14, 2002 between SLS Sails Ltd. and C.D.P.M.
Kft. for the completion of the construction works of Elscint's
commercial and entertainment center in Herzlia.
8.1 List of subsidiaries.
10.1(7) Certification of the President and Chief Financial Officer of the
Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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(1) Previously filed as an Exhibit to EMI's Annual Report on Form 20-F,
File No. 0-28996, filed with the Securities and Exchange Commission on
November 22, 1996 and incorporated by reference herein.
(2) Previously filed as an exhibit to EMI's Annual Report on Form 20-F for
the year ended December 31, 2000, File No. 0-28996, filed with the
Securities and Exchange Commission on July 16, 2001 and incorporated by
reference herein.
(3) Previously filed as an exhibit to EMI's Annual Report on Form 20-F for
the year ended December 31, 2001, File No. 0-28996, filed with the
Securities and Exchange Commission on July 1, 2002 and incorporated by
reference herein.
(4) Previously filed as an Exhibit to Elscint's Annual Report on Form 20-F
for the year ended December 31, 1999, File No. 2-44872, filed with the
Securities and Exchange Commission on June 2, 2000, and incorporated by
reference herein.
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(5) Previously filed as an Exhibit to Elscint's Annual Report on Form 20-F
for the year ended December 31, 2000, File No. 2-44872, filed with the
Securities and Exchange Commission on July 10, 2001 and incorporated by
reference herein.
(6) Previously filed as an exhibit to Elscint's Annual Report on Form 20-F
for the year ended December 31, 2001, File No. 2-44872, filed with the
Securities and Exchange Commission on June 28, 2002 and incorporated by
reference herein.
(7) This document is being furnished in accordance with SEC Releases Nos.
33-8212 and 34-47551.
^ Translation from Hebrew.
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