FORM 10-K/A
NO. 3
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
-----------------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- -------------------------
Commission file number 1-8707
-------------------------------
PEC Israel Economic Corporation
(Exact name of registrant as specified in its charter)
Maine 13-1143528
- ----------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
511 Fifth Avenue, New York, New York 10017
- ---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 687-2400
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock (par value $1.00 per share) New York Stock Exchange
- -------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
- -------------------------------------------------------------------------------
(Title of class)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / X /
The aggregate market value of the outstanding Common Stock of the
registrant held by non-affiliates on March 26, 1999 was approximately
$101,041,000. Such aggregate market value was computed on the basis of the
closing price of the Common Stock of the registrant on the New York Stock
Exchange on that date. See Part II, Item 5, "Market for the Registrant's Common
Stock and Related Stockholder Matters."
As of March 26, 1999, 18,362,188 shares of Common Stock were
outstanding.
The Registrant, PEC Israel Economic Corporation ("PEC" or the
"Company"), hereby (i) amends (A) Item 8 of Part II of PEC's Annual Report on
Form 10-K for the year ended December 31, 1998, as previously amended (the "1998
Form 10-K"), by adding thereto the financial statements of Scitex Corporation
Ltd. as at and for the year ended December 31, 1998, which begins on the next
page and (B) Items 14(a)(2)(e) and 14(a)(2)(f) of Part IV of the 1998 Form 10-K
by renumbering such Items as Items 14(a)(2)(f) and 14(a)(2)(g), respectively,
and (ii) inserts the following as Item 14(a)(2)(e) of Part IV of the 1998 Form
10-K between Item 14(a)(2)(d) and Item 14(a)(2)(f) (as renumbered) of Part IV of
the 1998 Form 10-K:
(a)(2)(e) Financial statement schedules filed in response to
Item 14(d) pursuant to Rule 3-09 of Regulation
S-X:
Scitex Corporation Ltd. and its Subsidiaries:
Report of Independent Auditors.
Consolidated Balance Sheets as at December
31, 1998 and 1997.
Consolidated Statements of Income (Loss) for
the years ended December 31, 1998, 1997 and
1996.
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for
the years ended December 31, 1998, 1997 and
1996.
Notes to the Consolidated Financial
Statements.
SCITEX CORPORATION LTD.
1998 CONSOLIDATED FINANCIAL STATEMENTS
SCITEX CORPORATION LTD.
1998 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
REPORT OF INDEPENDENT AUDITORS 2
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 3-4
Statements of income (loss) 5
Statements of changes in shareholders' equity 6-7
Statements of cash flows 8-9
Notes to financial statements 10-38
THE AMOUNTS ARE STATED IN U.S. DOLLARS ($) IN THOUSANDS.
---------------
-------------------------
---------------
[Letterhead]
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
SCITEX CORPORATION LTD.
We have audited the consolidated balance sheets of Scitex Corporation Ltd. (the
"Company") and its subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income (loss), changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's Board of
Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement, either due to error or to intentional
misrepresentation. 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 provide
a fair basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 1998 and 1997 and the results of their
operations, the changes in shareholders' equity and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
/s/ Kesselman & Kesselman
Tel-Aviv, Israel Kesselman & Kesselman
February 3, 1999 Certified Public Accountants (Isr.)
2
SCITEX CORPORATION LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
------------------------
1998 1997
---------- ---------
U.S. DOLLARS IN THOUSANDS
-------------------------
ASSETS
CURRENT ASSETS (note 14):
Cash and cash equivalents 49,920 72,300
Short-term investments 33,447 87,057
Trade receivables (net of allowance
for doubtful accounts of $ 20,400,000 at
December 31, 1998 and $ 31,552,000
at December 31, 1997) 141,393 140,540
Other receivables 25,764 30,707
Inventories:
Systems and components (note 3) 77,557 87,998
Spare parts and supplies 45,385 51,453
Deferred income taxes (note 12d) 31,632 18,937
-------- --------
T o t a l current assets 405,098 488,992
-------- --------
INVESTMENTS AND OTHER NON-CURRENT
ASSETS (notes 4 and 14) 9,372 15,365
-------- --------
PROPERTY, PLANT AND EQUIPMENT (note 5):
Cost 295,149 276,706
L e s s - accumulated depreciation and amortization 204,247 187,101
-------- --------
90,902 89,605
-------- --------
GOODWILL AND OTHER INTANGIBLE ASSETS, net of
accumulated amortization (note 6) 60,136 74,765
-------- --------
565,508 668,727
-------- --------
-------- --------
/s/ Dov Tadmor ) CHAIRMAN OF THE BOARD
- -------------------------------------------
DOV TADMOR ) OF DIRECTORS
/s/ Yoav Z. Chelouche ) PRESIDENT, CHIEF EXECUTIVE
- -------------------------------------------
YOAV Z. CHELOUCHE ) OFFICER AND DIRECTOR
3
DECEMBER 31
------------------------
1998 1997
---------- ---------
U.S. DOLLARS IN THOUSANDS
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES (note 14):
Short-term bank credit 2,034 618
Trade payables 48,180 46,600
Accrued and other liabilities (note 7) 109,588 120,493
------- -------
T o t a l current liabilities 159,802 167,711
------- -------
LONG TERM LIABILITIES:
Deferred income taxes (note 12d) 3,206 122
Other 1,277 785
------- -------
Total long-term liabilities 4,483 907
------- -------
COMMITMENTS AND CONTINGENT LIABILITIES (note 9)
------- -------
T o t a l liabilities 164,285 168,618
------- -------
SHAREHOLDERS' EQUITY (note 10):
Share capital - ordinary shares of NIS 0.12 par value
(authorized - December 31, 1998 and 1997 -
48,000,000 shares; issued and outstanding:
December 31, 1998 - 43,038,852 shares;
December 31, 1997 - 42,808,518 shares) 6,194 6,187
------- -------
Capital surplus 360,316 358,278
------- -------
Accumulated other comprehensive income (loss) (note 1o):
Currency translation adjustments 1,064 1,457
Unrealized loss on marketable securities
available for sale (note 4(b)) (10,289)
------- -------
1,064 (8,832)
------- -------
Retained earnings 33,649 144,476
------- -------
T o t a l shareholders' equity 401,223 500,109
------- -------
565,508 668,727
------- -------
------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
4
SCITEX CORPORATION LTD.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
1998 *1997 *1996
------------ -------------------- --------
U.S. DOLLARS IN THOUSANDS
--------------------------------------------
(EXCEPT PER SHARE DATA)
--------------------------------------------
REVENUES (note 15a):
Sales 441,399 426,591 453,523
Service 137,823 134,183 119,232
Supplies 61,089 56,885 51,350
------- ------- -------
T o t a l revenues 640,311 617,659 624,105
------- ------- -------
COST OF REVENUES:
Cost of sales 227,564 234,220 274,341
Cost of service 108,274 110,771 118,272
Cost of supplies 33,198 28,535 23,383
------- ------- -------
T o t a l cost of revenues 369,036 373,526 415,996
------- ------- -------
GROSS PROFIT 271,275 244,133 208,109
RESEARCH AND DEVELOPMENT COSTS -
net (note 15b) 110,762 57,610 61,273
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (note 15c) 174,997 163,911 250,228
AMORTIZATION OF GOODWILL AND OTHER
INTANGIBLE ASSETS 9,285 6,215 8,491
RESTRUCTURING COSTS (note 11) 56,100
------- ------- -------
OPERATING INCOME (LOSS) (23,769) 16,397 (167,983)
FINANCIAL INCOME - net (note 15d) 4,971 5,941 4,683
OTHER INCOME (EXPENSES) - net 1,634 (1,000) (239)
------- ------- -------
INCOME (LOSS) BEFORE TAXES ON INCOME (17,164) 21,338 (163,539)
TAXES ON INCOME (TAX BENEFIT) (note 12) 2,231 1,500 (1,699)
SHARE IN INCOME (LOSSES) OF EQUITY
INVESTMENTS - net (note 4) (14,897) (2,742) 156
------- ------- -------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS (34,292) 17,096 (161,684)
------- ------- -------
DISCONTINUED OPERATIONS (NOTE 2b):
Loss from operations (13,831) (16,514) (16,595)
Loss from disposal (62,704)
------- ------- -------
Total loss from discontinued operations (76,535) (16,514) (16,595)
------- ------- -------
NET INCOME (LOSS) (110,827) 582 (178,279)
======= ======= =======
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE ("EPS") (NOTE 1N)
Continuing operations $(0.80) $0.40 $(3.77)
Discontinued operations $(1.78) $(0.39) $(0.39)
------- ------- -------
Net income (loss) $(2.58) $ 0.01 $ (4.16)
======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN COMPUTATION OF EPS (in thousands)
(NOTE 1N):
Basic 42,929 42,809 42,809
======= ======= =======
Diluted 42,929 43,154 42,809
======= ======= =======
* Reclassified (see note 2b).
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
(Continued) - 1
SCITEX CORPORATION LTD
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
-------------------------------
UNREALIZED LOSS ON
CURRENCY MARKETABLE RETAINED TOTAL
SHARE CAPITAL TRANSLATION SECURITIES EARNINGS SHAREHOLDER'S
CAPITAL SURPLUS ADJUSTMENTS AVAILABLE FOR SALE (NOTE 10c) EQUITY
-------- ------- ----------- ------------------ ---------- -------------
U.S. DOLLARS IN THOUSANDS
-----------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1996 6,187 360,891 888 (5,853) 338,868 700,981
----- ------ -------- ---------
CHANGES DURING 1996:
Loss (178,279) (178,279)
---------
Other comprehensive income (loss) (note 1o):
Currency translation adjustments 242 242
Unrealized loss on marketable securities
available for sale (4,208) (4,208)
------ ------ ---------
242 (4,208) (3,966)
------ ------ -------- ---------
Total comprehensive income (loss) 242 (4,208) (178,279) *(182,245)
------ ------ -------- ---------
Elimination of surplus in respect of employee
stock options due to forfeiture, net of surplus
arising from employee stock options (1,314) (1,314)
---------
Dividend ($ 0.39 per share) (16,695) (16,695)
------ ------- ------ ------ -------- ---------
BALANCE AT DECEMBER 31, 1996 6,187 359,577 1,130 (10,061) 143,894 500,727
------ ------ -------- ---------
CHANGES DURING 1997:
Net income 582 582
---------
Other comprehensive income (loss) (note 1o):
Currency translation adjustments 327 327
Unrealized loss on marketable securities
available for sale (228) (228)
------ ------ ---------
327 (228) 99
------ ------ -------- ---------
Total comprehensive income (loss) 327 (228) 582 *681
------ ------ -------- ---------
Elimination of surplus in respect of employee stock
options due to forfeiture, net of surplus arising
from employee stock options (1,299) (1,299)
------ ------- ------ ------ -------- ---------
BALANCE AT DECEMBER 31, 1997 - forward 6,187 358,278 1,457 (10,289) 144,476 500,109
------ ------- ------ ------ -------- ---------
6
(Concluded) - 2
SCITEX CORPORATION LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
-------------------------------
UNREALIZED LOSS ON
CURRENCY MARKETABLE RETAINED TOTAL
SHARE CAPITAL TRANSLATION SECURITIES EARNINGS SHAREHOLDER'S
CAPITAL SURPLUS ADJUSTMENTS AVAILABLE FOR SALE (NOTE 10c) EQUITY
-------- ------- ----------- ------------------ ---------- -------------
U.S. DOLLARS IN THOUSANDS
-----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 - brought forward 6,187 358,278 1,457 (10,289) 144,476 500,109
------ ------- -------- --------
CHANGES DURING 1998:
Loss (110,827) (110,827)
--------
Other comprehensive income (loss) (note 1o):
Currency translation adjustments (393) (393)
------ --------
Unrealized loss on marketable securities
available for sale:
Unrealized holding loss arising during the
year (2,730) (2,730)
Less - loss carried to the
consolidated statement of loss (note 2b) 13,019 13,019
------- --------
10,289 10,289
------- --------
Total comprehensive income (loss) (393) 10,289 9,896
------ ------- -------- --------
(393) 10,289 (110,827) *(100,931)
Employee stock options exercised and paid 7 **2,103 2,110
--------
Elimination of surplus in respect of employee
stock options due to forfeiture, net of
surplus arising from employee stock options (65) (65)
------ ------- ------ ------ -------- ---------
BALANCE AT DECEMBER 31, 1998 6,194 360,316 1,084 -,- 33,649 401,223
------ ------- ------ ------ -------- ---------
------ ------- ------ ------ -------- ---------
* Calculated in accordance with the provisions of FAS 130 (see also note 1o).
** Net of share issue expenses.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
7
(Continued - 1)
SCITEX CORPORATION LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1998 1997 1996
-------- ------------ ---------
U.S. DOLLARS IN THOUSANDS
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (110,827) 582 (178,279)
Adjustments to reconcile net income or loss to net
cash provided by operating activities:
Share in losses (income) of equity investments - net 14,897 2,742 (156)
Depreciation and amortization 41,318 40,815 49,196
Write off of in-process research and development 44,264
acquired
Loss from discontinued operations 76,535
Compensation income resulting from
employee stock options (65) (1,299) (1,314)
Gain on sale and increase in value of short-term
investments - net (617) (741) (893)
Deferred income taxes - net (8,657) (2,166) 12,882
Loss on disposal of fixed assets 246 523 8,424
Provision for impairment of goodwill 18,200
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables
(including non-current portion) (1,035) 14,240 145,976
Decrease (increase) in other receivables (29,522) 8,789 (1,380)
Decrease in trade payables (993) (3,857) (10,995)
Decrease in accrued and other liabilities (97) (31,735) (1,495)
Decrease in inventories 6,622 36,952 2,077
Decrease (increase) in prepaid expenses 806 1,280 (1,110)
Other items - net 6 432 754
------- ------- -------
Net cash provided by operating activities 32,881 66,557 41,887
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries * (61,585)
Additional amount paid in respect of acquisition of a
subsidiary (7,000) (7,000) (7,000)
Purchase of property, plant and equipment
and other non current assets (32,339) (33,300) (31,176)
Proceeds from sale of fixed assets 1,476 1,720 2,224
Disposal of investment in subsidiary 8,000
Purchase of intangible assets (12,578) (1,096) (6)
Equity and other investments (12,886) (3,622) (2,815)
Purchase of short-term investments (37,735) (85,364) (27,431)
Sale of short-term investments 91,223 44,151 45,701
------- ------- -------
Net cash used in investing activities (63,424) (84,511) (20,503)
------- ------- -------
Subtotal - forward (30,543) (17,954) 21,384
8
(Concluded - 2)
SCITEX CORPORATION LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
1998 1997 1996
-------- ------------ ---------
U.S. DOLLARS IN THOUSANDS
----------------------------------
Subtotal - brought forward (30,543) (17,954) 21,384
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Employee stock options exercised and paid 2,110
Increase in long-term liabilities 3,117 453 627
Decrease in long-term liabilities (56) (195) (347)
Increase (decrease) in short-term bank credit 2,992 (54) (1,679)
Dividends paid (22,261)
------- ------- -------
Net cash provided by (used in) financing activities 8,163 204 (23,660)
------- ------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (22,380) (17,750) (2,276)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 72,300 90,050 92,326
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR 49,920 72,300 90,050
------- ------- -------
------- ------- -------
* Acquisition of subsidiaries:
Working capital (excluding cash and cash equivalents) 10
Property, plant and equipment - net 666
Goodwill and other intangible assets 16,645
Acquired in-process research and development 44,264
-------
61,585
-------
-------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - CASH PAID DURING THE YEAR FOR:
Interest 738 2,117 2,271
------- ------- -------
------- ------- -------
Income taxes 9,867 (18,739) 7,795
------- ------- -------
------- ------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
FINANCIAL STATEMENTS.
9
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies, applied on a consistent basis,
are as follows:
a. GENERAL
1) Nature of operations
Scitex Corporation Ltd. (the "Company") is an Israeli
corporation which designs, manufactures and markets
digital visual information communication systems for the
digital preprint and digital printing markets.
2) Functional currency
The currency of the primary economic environment in
which the operations of the Company and most of its
subsidiaries are conducted is the U.S. dollar ("dollar"
or "$"); thus, the dollar is the functional currency of
the Company and most of its subsidiaries.
For the Company and those subsidiaries whose functional
currency is the dollar, transactions and balances
denominated in dollars are presented at their original
amounts. Balances in non-dollar currencies are
translated into dollars using historical and current
exchange rates for non-monetary and monetary balances,
respectively. For non-dollar transactions reflected in
the statements of operations, the exchange rates at
transaction dates are used, except for expenses deriving
from non-monetary items, which are translated using
historical exchange rates. The currency transaction
gains or losses are carried to financial income or
expenses, as appropriate.
The financial statements of certain subsidiaries and
entities in which the Company has an equity investment,
whose functional currency is their local currency, are
translated into dollars in accordance with the
principles set forth in Statement of Financial
Accounting Standard ("FAS") No. 52 of the Financial
Accounting Standards Board of the United States ("FASB")
- "Foreign Currency Translation": assets and liabilities
are translated using the year-end rate of exchange;
results of operations are translated at average exchange
rates during the year. The resulting aggregate
translation adjustments are reported as a component of
"accumulated other comprehensive income".
10
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
3) Use of estimates in the preparation of financial
statements
The preparation of financial statements in conformity
with generally accepted accounting principles ("GAAP")
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the
reporting years. Actual results could differ from those
estimates.
4) Accounting principles
The consolidated financial statements are prepared in
accordance with US GAAP.
b. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are
wholly-owned. Intercompany balances and transactions have been
eliminated in consolidation.
c. CASH EQUIVALENTS
The Company and its subsidiaries consider all highly liquid
debt instruments purchased with a maturity of three months or
less, at time of investment, that are not restricted as to
withdrawal or use, to be cash equivalents. Bank deposits with
a maturity of more than three months but less than one year
(from the date of deposit) are included in short-term
investments.
d. INVESTMENTS IN MARKETABLE SECURITIES
Marketable securities, classified as "trading securities", are
stated at market value and are included under "short-term
investments". The changes in market value of these securities
are carried to financial income or expenses.
As of December 31, 1997, an investment in quoted shares of a
company, classified as "available for sale securities", was
stated at market value and included under "investments and
other non-current assets". The difference between the market
value of these shares and their cost was recorded as a
separate component of shareholders' equity, under
comprehensive income (loss). As to the Company's decision, in
1998, to dispose of this investment, see note 4(b).
11
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
e. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined as follows: components and supplies - on the moving
average basis; labor and overhead - on the basis of actual
manufacturing costs.
f. EQUITY INVESTMENTS
These investments are accounted for by the equity method.
g. PROPERTY, PLANT AND EQUIPMENT
These assets are stated at cost and are depreciated by the
straight-line method over their estimated useful lives.
Annual rates of depreciation are as follows:
%
--------
Machinery and equipment 10-33 (mainly 20)
Building 4
Office furniture and equipment 6-33 (mainly 20)
Motor vehicles 15-25 (mainly 15)
Leasehold improvements are amortized by the straight-line
method over the term of the lease or the estimated useful life
of the improvements, whichever is shorter.
h. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, representing the difference between the cost of the
investment in subsidiaries and the fair value of their
underlying net assets at the time of acquisition, and acquired
goodwill, are amortized by the straight-line method over a
period of 7-15 years.
Acquired technology and other intangible assets are stated at
cost and amortized by the straight-line method over a period
of 3-13 years (mainly 5-7 years).
12
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
i. RECOGNITION OF REVENUES:
1) Sale of products
The Company recognizes revenue from sale of its products
upon shipment. Cost of sales includes an estimate of
costs associated with installation, warranty and
training.
2) Service revenue
Service revenue is recognized ratably over the
contractual period or as services are performed.
3) Sale of supplies
The Company recognizes revenue from sale of supplies
upon shipment.
j. RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged as expense as
incurred. Government funding for development of approved
projects is recognized as a reduction of expenses as the
related costs are incurred.
k. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance is partly determined for specific accounts
doubtful of collection and partly based on statistical
analysis of past experience.
l. INCOME TAXES
1) Deferred income taxes are provided for temporary
differences between the assets and liabilities as
measured in the financial statements and for tax
purposes. Deferred taxes are computed using the tax
rates expected to be in effect when these differences
reverse.
2) The Company may incur an additional tax liability in
the event of an intercompany dividend distribution; no
additional tax has been provided, since the Company
does not intend to distribute, in the foreseeable
future, dividends which would result in additional tax
liability.
3) Taxes which would apply in the event of disposal of
investments in subsidiaries and other investees have
not been taken into account in computing the deferred
taxes, as it is the Company's policy to hold these
investments, not to realize them.
13
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
4) Upon the distribution of dividends from the tax-exempt
income of "approved enterprises" (see also note 12a),
the amount distributed will be subject to tax at the
rate that would have been applicable had the Company not
been exempted from payment thereof. If such distribution
is made, the amount of the related tax is to be charged
as an expense in the income statements. The Company
intends to permanently reinvest the amounts of tax
exempt income and it does not intend to cause
distribution of such dividends. Therefore, no deferred
income taxes have been provided in respect of such
tax-exempt income.
m. DERIVATIVES
The Company enters into forward exchange contracts and
purchases and writes currency options to hedge existing
non-dollar assets and liabilities as well as certain firm
commitments. The written options are part of the hedging
policy. The Company also purchases currency options to hedge
anticipated sales for the coming year, which are probable and
which are expected to be denominated in non-dollar currencies.
The Company does not hold or issue derivative financial
instruments for trading purposes.
All of the Company's foreign exchange derivatives are
designated as, and effective as, a hedge. A derivative is
qualified as a hedge if: (1) the item to be hedged exposes the
Company to a risk, (2) the related derivative reduces that
exposure and is inversely correlated to the hedged item, and
(3) the derivative is designated at inception for hedging
purposes.
Gains and losses on derivatives that are hedging existing
assets or liabilities are recognized in income commensurate
with the results from those assets or liabilities; balances
receivable or payable in respect of such derivatives are
included in the balance sheets among other accounts receivable
or payable, as appropriate. Gains and losses related to
derivatives that are hedging firm commitments or anticipated
sales are deferred, and ultimately recognized in income as
part of the measurement of the results of the underlying
hedged transactions. Cash flows from derivatives are
recognized in the statements of cash flows together with
results from the hedged item.
The net premiums paid for currency options are presented in
the balance sheets among prepaid expenses and charged to
financial expenses over the term of the options.
14
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
n. EARNINGS (LOSS) PER SHARE ("EPS")
EPS are computed based on the weighted average number of
shares outstanding during each year.
Since the basic EPS for 1998 and 1996 represents loss per
share, the effect of including the incremental shares from
assumed exercise of options in the EPS computation is
anti-dilutive, and accordingly, the basic and diluted EPS for
these years are the same amount.
o. COMPREHENSIVE INCOME
In 1998, the Company adopted FAS No. 130, "Reporting
Comprehensive Income", ("FAS 130"), which was issued in June
1997 by the FASB.
FAS 130 requires the reporting and display of comprehensive
income and its components in a full set of general purpose
financial statements. In addition to net income (loss),
comprehensive income or loss includes all non-owner changes in
equity ("other comprehensive income") which, as applicable to
the Company, include currency translation adjustments and
unrealized loss on marketable securities available for sale.
The company presents its comprehensive income (loss) in the
consolidated statements of changes in shareholders equity.
p. IMPAIRMENT OF LONG-LIVED ASSETS
When indicators of impairment are present, the Company
evaluates the realizability of goodwill and other intangible
assets and the appropriateness of their amortization periods
in relation to the operating performances and estimated future
undiscounted cash flows of the underlying assets.
q. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133").
FAS 133 established a new model for accounting for derivatives
and hedging activities. FAS 133 requires companies to record
derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it
qualifies for hedge accounting. FAS 133 is effective for
calendar-year companies as from January 1, 2000.
The Company is currently evaluating the impact FAS 133 will
have on its financial statements.
r. RECLASSIFICATIONS
Certain prior year balances have been reclassified to be
consistent with the current year presentation.
15
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITIONS AND DISPOSAL OF A BUSINESS:
a. ACQUISITIONS:
1) In February 1998, the Company acquired all of the
shares of Idanit Technologies Ltd., an Israeli
corporation which designs and manufactures wide
format ink jet printing systems, for an aggregate
cash consideration of $ 63,039,000 in cash
(including $ 339,000 - costs related to the
acquisition). The acquisition was accounted for by
the purchase method . The amounts carried to
assets and liabilities in respect of the
acquisition were based on the fair values of the
assets and liabilities acquired on the date of
acquisition. Idanit's Net income for 1998 of
$165,000 is included in the 1998 consolidated
statement of loss from the date of acquisition.
An amount $ 44,264,000 out of the total
acquisition cost was attributed to in-process
research and development and resulted in a one
time non-cash charge. An amount of $ 16,645,000
was attributed to goodwill and other intangible
assets and is being amortized over their estimated
useful lives.
At the time of the acquisition, Idanit had two
products under development: 163Ad and Flatbed,
which were both mostly completed but had not
reached technological feasibility, and had no
future alternative use the valuation assumed that
approximately $ 5,000,000 of development costs
would be incurred from the acquisition date
through their scheduled completion in December
1998 and June 1999, respectively. The valuation
also assumed that these products would generate
revenues through the year 2004.
The inability of Idanit to complete this
technology within the expected timeframes could
materially impact future revenues and earnings,
which could have an adverse material effect on the
Company's business, financial condition and
results of operations.
2) In October 1998, the Company acquired the
superwide activities of the Matan group of
companies for an aggregate cash consideration of
$12,247,000 (including $152,000-costs related to
the acquisition). This amount is included under
"acquired goodwill and other intangible assets"
and is being amortized over its estimated useful
life. The agreement provides for additional
payments up to a maximum of $14.5 million, based
on the achievement on specified financial targets
during the period 1999 to 2004.
b. DISCONTINUED OPERATIONS - DISPOSAL OF A BUSINESS
In November 1998, the Company decided to exit from the
digital video business. The digital video business of the
Company was comprised of the operations of the wholly owned
subsidiary Scitex Digital Video ("SDV") and an investment
in quoted shares which was classified as "available for
sale securities" (see also note 4(b)). As a result of the
decision, the Company recognized a loss from the disposal
amounting to $62,704,000, which is presented in the
statement of loss for 1998 under "discontinued operations".
This amount is comprised of $49,685,000 in respect of the
loss from the disposal of SDV, and $13,019,000 representing
the accumulated unrealized loss on available for sale
shares which was expensed. In December 1998, substantially
all of the assets and liabilities of SDV were sold.
16
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITIONS AND DISPOSAL OF A BUSINESS (continued):
Results of these operations in 1998, 1997 and 1996 have been
classified as discontinued operations. Revenues, loss from
discontinued operations and the remaining asset and liability items
at December 31, 1998 in respect of the discontinued operations, are
as follows:
1998 1997 1996
--------- ---------- --------
U.S. DOLLARS IN THOUSANDS
---------------------------------
$ IN THOUSANDS
---------------------------------
Revenues 29,534 58,018 70,942
------- ------- -------
------- ------- -------
Operating loss (13,831) (16,514) (16,595)
------- ------- -------
------- ------- -------
Loss from discontinued operations:
Loss from operations 13,831 16,514 16,595
Loss from disposal 62,704
------- ------- -------
76,535 16,514 16,595
------- ------- -------
------- ------- -------
-------------------
DECEMBER 31, 1998
-------------------
$ IN THOUSANDS
-------------------
Short-term investments -
investment in shares 1,820
-------
-------
Other receivables 2,000
-------
-------
Accrued and other liabilities -
accrued disposal costs (note 7) 9,323
-------
-------
The company anticipates that no additional losses will be incurred as a
result of these transactions.
NOTE 3 - INVENTORIES - SYSTEMS AND COMPONENTS:
DECEMBER 31
-----------------------
1998 1997
--------- ---------
$ IN THOUSANDS
-----------------------
Components for manufacturing of systems 38,411 38,648
Work in process 8,137 13,305
Finished products 31,009 36,045
------- -------
77,557 87,998
------- -------
------- -------
17
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - INVESTMENTS AND OTHER NON-CURRENT ASSETS
DECEMBER 31
-----------------------
1998 1997
-----------------------
$ IN THOUSANDS
-----------------------
Equity investments:
Joint venture companies (a) 2,756 1,143
Other 1,821 973
Available for sale investment (b) 4,550
Non-current deposits 659 3,540
Non-current receivables 2,068 1,808
Deferred income taxes (note 12d) 72 1,026
Shares at cost and other 1,996 2,325
------- -------
9,372 15,365
------- -------
------- -------
(a) The Company has provided guarantees for bank credit
received by a joint venture company - $ 10.2 million
and $ 10.5 million at December 31, 1998 and 1997,
respectively.
(b) Represents investment of approximately 14% of
ordinary share capital of Truevision, Inc.
("Truevision"), purchased in a private placement and
through a market transaction for a total
consideration of $ 14,839,000. The shares of
Truevision, a U.S. corporation, are traded in the
United States. In 1998, as part of the decision to
exit from the digital video business (see note 2b),
the Company decided to dispose of these shares and
accordingly, these shares are included in
"short-term investments".
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Grouped by major classifications, the assets are composed as follows:
ACCUMULATED
DEPRECIATION
COST AND AMORTIZATION
------------------- -----------------------
DECEMBER 31 DECEMBER 31
------------------- -----------------------
1998 1997 1998 1997
-------- ----------- ------------ ---------
$ IN THOUSANDS
----------------------------------------------
Machinery and
equipment 207,156 208,673 153,869 141,821
Building (including land) 8,755 8,755 1,918 1,641
Leasehold improvements 41,850 26,123 24,515 23,079
Office furniture and
equipment 35,630 30,570 22,799 19,195
Motor vehicles 1,758 2,585 1,146 1,365
------- ------- ------- -------
295,149 276,706 204,247 187,101
------- ------- ------- -------
------- ------- ------- -------
Depreciation and amortization of property, plant and equipment
totaled $ 26,181,000 $ 25,102,000 and $ 30,935,000 in 1998, 1997
and 1996, respectively.
18
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS:
DECEMBER 31
-----------------------
1998 1997
---------- ---------
$ IN THOUSANDS
-----------------------
ORIGINAL AMOUNT:
Goodwill in subsidiaries and acquired
goodwill 72,555 105,144
Acquired technology and other intangible
assets 30,588 21,877
------- -------
103,143 127,021
------- -------
L e s s - accumulated amortization:
Goodwill in subsidiaries and acquired
goodwill 30,855 39,856
Acquired technology and other intangible
assets 12,152 12,400
------- -------
43,007 52,256
------- -------
60,136 74,765
------- -------
------- -------
NOTE 7 - ACCRUED AND OTHER LIABILITIES
DECEMBER 31
-----------------------
1998 1997
---------- ---------
$ IN THOUSANDS
-----------------------
Employees and related liabilities 26,599 23,460
Taxes on income, net of advances 11,654 18,184
Advances from customers 5,669 8,028
Allowance in respect of sales financed
by third parties (see note 9b(1)) 6,680 15,354
Accrued disposal and restructuring
costs (see notes 2b and 11) 11,471 3,995
Sundry 47,515 51,472
------- -------
109,588 120,493
------- -------
------- -------
19
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - EMPLOYEE RIGHTS UPON RETIREMENT:
a. Virtually the entire liability for severance pay for Israeli
employees, pursuant to Israeli law and employment agreements, is
funded with severance pay and pension funds and with insurance
companies (principally with an affiliate of two of the major
shareholders of the Company), for which the Company makes monthly
payments. Since the control and management of these funds is
independent of the Company, the amounts funded are not reflected in
the balance sheets. The amounts not funded are included among accrued
liabilities.
b. The U.S. subsidiaries offer 401(k) matching plans to all eligible
employees. The U.S. subsidiaries' matching contribution ranges from
50% to 200% of the first 3% of a participant's contribution, depending
upon years of service, up to a maximum employer contribution of 6% of
a participant's qualifying earnings.
c. Substantially all of the European subsidiaries make contributions to
pension plans administered by insurance companies. Since the control
and management of these funds are independent of the European
subsidiaries, the amounts funded are not included in the balance
sheets. The amounts not funded are included among accrued liabilities.
d. Severance pay, pension and defined contribution plan expenses totaled
$9,236,000 $9,587,000 and $15,772,000 in 1998, 1997 and 1996,
respectively. In addition, employee termination benefits in the amount
of $18,000,000 in 1996 were included in restructuring costs (see note
11).
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES:
a. Commitments:
1) Royalty commitments:
(a) The Company is committed to pay royalties of 2%-5% to the
Government of Israel on sales of products in the research
and development of which the Government participates by way
of grants, up to the amount of the grants received (in
dollar terms); for certain projects, which were approved
prior to January1, 1994, the limit is up to 100% of the
grants received. At the time the funding was received,
successful development of the related projects was not
assured.
At December 31, 1998, the maximum contingent royalty payable
is $46 million.
20
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (continued):
(b) The Company is obligated to pay royalties to certain
parties, based on agreements which allow it to use
technologies developed by these parties. Such royalties are
based on the revenues from sales of products which
incorporate these technologies or on quantities of such
products sold.
2) Lease commitments
Most of the premises occupied by the Company and its subsidiaries
are rented under various operating lease agreements. Most of the
premises in Israel are leased from an affiliate of two of the
major shareholders of the Company.
Minimum lease commitments of the Company and its subsidiaries
under the above leases (net of amounts provided in "accrued
restructuring costs") at rates in effect in December 1998, are as
follows:
$ IN
THOUSANDS
---------
Year ending December 31:
1999 11,400
2000 10,039
2001 9,714
2002 9,040
2003 5,298
2004 and thereafter 24,706
The rental payments for the premises in Israel, which constitute approximately
18.8 % of the above amounts, are payable in Israeli currency linked partially to
the Israeli consumer price index (the Israeli CPI), and partially to the dollar.
Rental expense totaled $12,408,000, $11,778,000 and $14,899,000 in 1998, 1997
and 1996, respectively; in 1996, an additional amount of $9,600,000 was included
in restructuring costs (see note 11).
21
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (continued):
b. Contingent liabilities:
1) Certain subsidiaries of the Company have entered into
agreements with third-party financing companies (hereafter -
the agreements) under which long-term financing (generally
five years) is provided to customers in connection with the
purchase of the Company's equipment.
Under the terms of the agreements, the third-party financing
companies have recourse against the subsidiaries in an
amount equal to either a fixed amount established at the
time of financing or a percentage of the outstanding
balance, including interest, owed by the customers to the
financing company.
During the years ended December 31, 1998, 1997 and 1996,
approximately $20,904,000 $38,300,000 and $90,500,000,
respectively, of revenues were financed under these
agreements. At December 31, 1998, the subsidiaries were
contingently liable to the financing companies for a portion
of the total of the outstanding balance of $70 million.
The subsidiaries have established provisions ($6,680,000 and
$15,354,000 at December 31, 1998 and 1997, respectively) for
potential losses which may be incurred in the event of
default under the agreements. The level of provisions is
determined based upon an analysis of the individual
transactions and past experience.
2) In September 1996, an action was commenced in the United
States District Court of the Northern District of California
to invalidate certain of the Company's patents relating to
its core trapping technology. The action was later expanded
to include claims that certain company products infringe
patents of the plaintiffs. The Company is vigorously
defending the claims presented in the action and has itself
filed counterclaims against the plaintiffs for infringement
of the trapping patents. The suit is continuing; however,
the parties are engaged in a mediation process. If the
mediation fails to produce a settlement, trial of the
lawsuit will take place most likely in the latter part of
1999.
3) Lawsuits have been lodged against the Company in the
ordinary course of business. The Company intends to defend
itself vigorously against those lawsuits. Management does
not expect that the Company will incur substantial expenses
in respect thereof; therefore, no provision has been made
for the lawsuits.
22
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY:
a. Share capital
The number of shares stated as issued and outstanding at December 31,
1997 (42,808,518 ordinary shares) did not include 43,950 unpaid
ordinary shares which were allotted to a trustee in the implementation
of a share option plan. These shares, until paid, had no voting rights
or rights to cash dividends and accordingly were not treated as
outstanding for accounting purposes.
b. Share incentive and stock option plans (the "plans"):
1) The Company has two current share incentive and stock option
plans- the Scitex Israel Key Employee Share Incentive Plan 1991
(with various sub-plans), mainly for officers and other key
employees of the Company, and the Scitex International Key
Employee Stock Option Plan 1991 (As Amended, 1995), for officers
and other key employees of non-Israeli subsidiaries. Option
awards may be granted under the plans up to September2001. The
maximum term of an option may not exceed ten years. Each option
can be exercised to purchase one share having the same rights as
the other ordinary shares.
The grant of options under the Israeli plan is subject to the
terms stipulated by the Israeli Income Tax Ordinance. Inter alia,
the Ordinance provides that the Company will be allowed to claim
as an expense for tax purposes the amounts credited to the
employees as a benefit, when the related tax is payable by the
employee.
2) The total number of options authorized under the plans is as
follows:
DECEMBER 31
------------------------
1998 1997
----------- ----------
NUMBER OF OPTIONS
------------------------
Available for future awards 877,498 339,150
Outstanding 3,231,268 3,349,950
Exercised and paid 291,234 60,900
--------- ---------
4,400,000 3,750,000
--------- ---------
--------- ---------
23
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
The options granted are exercisable for the purchase of shares as follows:
DECEMBER 31
-------------------------
1998 1997
------------ -----------
NUMBER OF OPTIONS
-------------------------
At balance sheet date 758,902 76,125
During first year thereafter 1,232,250 1,146,397
During second year thereafter 1,053,366 992,772
During third year thereafter 107,750 1,124,656
During fourth year thereafter 79,000 10,000
--------- ---------
3,231,268 3,349,950
--------- ---------
--------- ---------
The rights to exercise options are generally conditional upon
continuous employment by the Company.
3) A summary of the status of the Companys plans at December31, 1998,
1997 and 1996, and changes during the years ended on those dates, is
presented below:
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- -------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
----------- ---------- ----------- --------- ------------ ---------
$ $ $
--- --- ---
Options outstanding at
beginning of year 3,349,950 10.00 2,389,350 17.46 1,716,575 20.75
Changes during the year:
Granted 483,000 11.58 2,066,950 *9.47 1,596,250 14.72
Exercised and paid (230,334) 9.06
Forfeited (371,348) 11.69 (1,106,350) *16.13 (923,475) 18.86
----------- ----------- -----------
Options outstanding at end
of year 3,231,268 10.10 3,349,950 *10.00 2,389,350 17.46
----------- ----------- -----------
----------- ----------- -----------
Options exercisable at end
of year 758,902 9.38 76,125 *17.03 907,261 20.84
----------- ----------- -----------
----------- ----------- -----------
24
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
* During 1997, 1,125,375 options awarded in earlier years, with a
weighted average exercise price of $18.00 per option, were
repriced to a weighted average exercise price of $9.15 per option
subject to a revised vesting schedule. All data in this note
assume election by the relevant grantees of the revised exercise
price and the revised vesting schedule.
The weighted average fair value of options granted during 1998, 1997
and 1996 is $5.51, $3.11 and $ 3.22, respectively.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted average assumptions:
YEAR ENDED DECEMBER 31
-------------------------------------------------
1998 1997 1996
-------------- ----------------- --------------
Dividend yield - per share in dollars -,- -,- $0.39
----- ---- -----
----- ---- -----
Expected volatility 64% 25% 14%
----- ---- -----
----- ---- -----
Risk-free interest rate 5.2% 6.1% 5.5%
----- ---- -----
----- ---- -----
Expected life - in years 2.38 2.09 2.17
----- ---- -----
4) The following table summarizes information about options
outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------- -----------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
- -------------------------- ------------------ --------------- ------------ ----------------- ----------------
$ YEARS $ $
- ----- - -
9.00 to 11.00 2,410,068 6.3 9.18 703,839 9.20
11.01 to 13.00 521,200 6.2 11.65 55,063 11.71
13.01 to 15.00 300,000 8.1 14.75
--------- -------
9.00 to 15.00 3,231,268 7.0 10.10 758,902 9.38
--------- -------
--------- -------
25
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
5) Accounting treatment of share incentive and stock option plans
The Company accounts for its share incentive and stock option
plans (the plans) using the treatment prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). Under APB 25, compensation cost for employee
stock option plans is measured using the intrinsic value based
method of accounting.
FAS No.123, "Accounting for Stock-Based Compensation"
("FAS 123"), which was issued by the FASB in October 1995,
established a fair value based method of accounting for an
employee stock option or similar equity instrument, and
encourages adoption of such method of accounting for stock
compensation plans. However, it also allows companies to continue
to account for those plans using the accounting treatment
prescribed by APB25. The Company has elected to continue applying
the provisions of APB25, and has accordingly complied with the
disclosure requirements set forth in FAS 123 for companies
electing to apply APB 25.
The compensation income - which reflects the reversal of
compensation cost charged to income in earlier years in respect
of employee stock options due to forfeiture, net of compensation
cost in respect of the current year - in the years ended December
31, 1998, 1997 and 1996, is $65,000, $1,299,000 and $1,314,000,
respectively. Had compensation for the Company's plans been
determined based on the fair value at the grant dates for awards
made under the Plans in 1995, and thereafter, consistent with the
method of FAS123, the Company's net income (loss), and earnings
(loss) per share, would have been changed to the pro-forma
amounts indicated below:
1998 1997 1996 1998 1997 1996
------------ ----------- ------------ ---------- ------------ ----------
AS REPORTED PRO-FORMA
---------------------------------------------------------------------------------
Net income (loss) - in thousands
of dollars (110,827) 582 (178,279) (114,320) (3,130) (180,124)
---------- ------ ---------- ---------- -------- ----------
---------- ------ ---------- ---------- -------- ----------
Earnings (loss) per share - in
dollars
Basic and diluted (2.58) 0.01 (4.16) (2.66) (0.07) (4.21)
---------- ------ ---------- ---------- -------- ----------
---------- ------ ---------- ---------- -------- ----------
26
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
c. RETAINED EARNINGS
The distribution of cash dividends in the amount of approximately
$17,173,000 out of retained earnings of $33,649,000 as of
December 31, 1998 would subject the Company to payment of 15% or
20% tax on the amount distributed, effectively reducing the
dividend distribution by the amount of the tax (see also
notes 11(4) and 12a(1)).
NOTE 11 - RESTRUCTURING COSTS
In 1996 and 1995, the Company recorded restructuring charges of
$56.1million and $22.0million, respectively. The restructuring consisted of
a series of actions to address changes in market conditions and was aimed
at restoring the Company to profitability. The 1995 restructuring charge
primarily involved a workforce reduction of approximately 250 employees.
The 1996 charge consisted of a workforce reduction of approximately
400 employees (mainly in the U.S., Europe and Israel), the closing of
certain facilities in the U.S. and Europe and the disposition of assets
that were no longer required due to changes in plans. In addition, goodwill
impairment was recognized for the effect of decisions regarding certain
product lines.
The components of the 1996 restructuring charges are as follows:
$ IN
THOUSANDS
---------
Employee termination benefits 18,000
Facility closure and excess
purchase commitments 12,200
Goodwill impairment 18,200
Other asset write downs 7,700
------
56,100
------
------
27
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - TAXES ON INCOME:
a. The Company and its Israeli subsidiaries:
1) Tax benefits under the Law for the Encouragement of Capital
Investments, 1959
The Company's production facilities in Israel have been
granted "approved enterprise" status under the above law.
The main benefit arising from such status is the reduction
in tax rates on income derived from "approved enterprises".
The Company is also a "foreign investors' company" as
defined by that law and as such is entitled to a ten-year
period of benefits and to an additional reduction in tax
rates to 15% or 20% (based on the percentage of foreign
shareholding in each tax year).
For "approved enterprises", income derived therefrom is tax
exempt for a period of two or four years out of the ten-year
period of benefits. Based on the percentage of foreign
shareholding in the Company, income derived during the
remaining eight or six years of benefits is taxable at the
rate of 15% or 20%. The period of benefits relating to the
"approved enterprises" will expire in the years 1999 through
2008.
In the event of distribution of cash dividends from income
which was tax exempt as described above, the Company would
have to pay the 15% or 20% tax in respect of the amount
distributed.
The entitlement to the above benefits is conditional upon
the Company's fulfilling the conditions stipulated by the
above law, regulations published thereunder and the
certificates of approval for the specific investments in
"approved enterprises". In the event of failure to comply
with these conditions, the benefits may be cancelled and the
Company may be required to refund the amount of the
benefits, in whole or in part, with the addition of linkage
differences and interest.
2) Measurement of results for tax purposes under the Income Tax
(Inflationary Adjustments) Law, 1985 (hereafter - the
Inflationary Adjustments Law)
Under this law, results for tax purposes are measured in
real terms, in accordance with the changes in the Israeli
CPI, or in the exchange rate of the dollar for a "foreign
investors company". The Company and its Israeli subsidiaries
elected to measure their results on the basis of the changes
in the Israeli CPI.
28
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - TAXES ON INCOME (continued):
3) Tax benefits under the Law for the Encouragement of Industry
(Taxes), 1969
The Company is an "industrial company" as defined by this law and
as such is entitled to certain tax benefits, mainly accelerated
depreciation of machinery and equipment, as prescribed by
regulations published under the Inflationary Adjustments Law, and
the right to claim public issuance expenses and amortization of
patents and other intangible property rights as a deduction for
tax purposes.
4) Tax rates applicable in Israel to income from other sources
Income not eligible for "approved enterprise" benefits mentioned
in (1) above is taxed at the regular rate of 36%.
b. NON-ISRAELI SUBSIDIARIES
The U.S. subsidiaries file a consolidated tax return for federal
purposes and in most states. Therefore, the tax provision is
calculated on a consolidated tax return basis.
c. CARRYFORWARD TAX LOSSES AND DEDUCTIONS
Carryforward tax losses and deductions of the Company and its
subsidiaries approximated $250 million at December31, 1998. Most of
the carryforward amounts have no expiration date.
29
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - TAXES ON INCOME (continued):
d. DEFERRED INCOME TAXES:
DECEMBER 31
------------------------
1998 1997
------------------------
$ IN THOUSANDS
------------------------
1) Provided in respect of the following:
Allowance for doubtful accounts 18,204 13,322
Carryforward tax losses and credits 47,560 34,657
Inventories 5,874 7,129
Accrued liabilities and deferred income 13,803 15,423
Other (2,124) 3,619
--------- --------
83,317 74,150
L e s s - valuation allowance 54,819 54,309
--------- --------
28,498 19,841
--------- --------
--------- --------
2) Deferred taxes are included in the
balance sheets as follows:
Current assets 31,632 18,937
Non-current assets 72 1,026
Long-term liabilities (3,206) (122)
--------- --------
28,498 19,841
--------- --------
--------- --------
e. INCOME (LOSS) BEFORE TAXES ON INCOME:
YEAR ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
--------- --------------- ------------
$ IN THOUSANDS
--------------------------------------
Israeli 2,032 (7,317) (82,937)
Non-Israeli (19,196) 28,655 (80,602)
------- ------- -------
(17,164) 21,338 (163,539)
------- ------- -------
------- ------- -------
f. TAXES ON INCOME (TAX BENEFIT) INCLUDED IN THE INCOME
STATEMENTS:
1) As follows:
YEAR ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
----------- -------------- -----------
$ IN THOUSANDS
--------------------------------------
Current:
Israeli 41 2 3,353
Non-Israeli 10,847 3,664 (17,935)
-------- -------- --------
10,888 3,666 (14,582)
-------- -------- --------
Deferred, see d. above:
Israeli 515 (199) 43
Non-Israeli (9,172) (1,967) 12,840
-------- -------- --------
(8,657) (2,166) 12,883
-------- -------- --------
2,231 1,500 (1,699)
-------- -------- --------
-------- -------- --------
30
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - TAXES ON INCOME (continued):
2) Following is a reconciliation of the theoretical tax expense
(benefit), assuming all income is taxed at the regular tax rate
applicable to Israeli corporations (see a(4) above) and the actual tax
expense:
YEAR ENDED DECEMBER 31
--------------------------------------
1998 *1997 *1996
------- ------- -------
$ IN THOUSANDS
--------------------------------------
Income (loss) before taxes on income (17,164) 21,338 (163,539)
------- ------- -------
------- ------- -------
Theoretical tax expense (tax benefit) on
the above amount (6,179) 7,682 (58,874)
Effect of lower tax rate for
"approved enterprises" (528) 1,946 22,083
------- ------- -------
(6,707) 9,628 (36,791)
Decrease in taxes resulting from
different tax rates - net (891) (255) (2,442)
Increase in taxes resulting from
permanent differences 3,458 1,730 3,091
Reversal of prior years' income tax
provisions (1,600)
Change in valuation allowance 511 (8,301) 39,153
Increase (decrease) in taxes arising
from differences between non-dollar
currencies income and dollar
income - net and others** 5,860 (1,302) (3,110)
------- ------- -------
Actual tax expense (benefit) 2,231 1,500 (1,699)
------- ------- -------
------- ------- -------
Per share effect of "approved
enterprise" benefits $(0.01) $0.04 $0.52
------- ------- -------
------- ------- -------
* Reclassified.
** Resulting mainly from the difference between the
changes in the Israeli CPI (the basis for computation
of taxable income of the Company and its Israeli
subsidiaries, see a(2) above) and the changes in the
exchange rate of the Israeli currency relative to the
dollar.
31
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - TAXES ON INCOME (continued):
g. TAX AUDITS
The Company has received final tax assessments through the 1991 tax
year.
The audits of the tax returns of the U.S. subsidiaries and the main
European subsidiary have been completed through the 1991 and 1995 tax
years, respectively.
NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
a. GENERAL
The Company operates internationally, which gives rise to significant
exposure to market risks, mainly from changes in foreign exchange
rates. Derivative financial instruments (hereafter - derivatives) are
utilized by the Company to reduce these risks.
The Company is exposed to losses in the event of non-performance by
counterparties to the derivatives, but it does not expect any
counterparties to fail to meet their obligations, since the
counterparties are major Israeli and European banks and major U.S.
brokers. The Company does not require or place collaterals for these
financial instruments.
b. FOREIGN EXCHANGE RISK MANAGEMENT
As stated in note 1m, the Company uses foreign currency derivatives
for hedging purposes. The terms of these derivatives are shorter than
one year.
The amounts relating to foreign currency derivatives as of the balance
sheet dates are as follows:
NOTIONAL
AMOUNT
-------------
DECEMBER 31,
1998
-------------
$ IN MILLIONS
-------------
Derivatives for the conversion of non-dollar
currencies into dollars:
Forward exchange contracts 69
------
------
Currency options purchased 53
------
------
Currency options written 92
------
------
32
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued):
c. CONCENTRATIONS OF CREDIT RISK
At December 31, 1998 and 1997, the Company held cash and cash
equivalents, most of which were deposited with major Israeli, European
and U.S. banks. Most of the marketable securities held by the Company
are debt securities of the U.S. Treasury, the Government of Israel and
highly rated corporations. The company considers the inherent credit
risks to be remote.
Most of the Company's sales are made in the United States and in
Europe, to a large number of customers. Consequently, the exposure to
concentrations of credit risks relating to individual customer
receivables is limited. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral
from its customers in Europe and in the United States. In respect of
certain sales to customers in emerging economies, the Company requires
letters of credit.
d. FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Company and its subsidiaries consist
mainly of non-derivative assets and liabilities (items included in
working capital, long-term investments, non-current receivables and
long-term liabilities); the Company also uses some derivatives.
In view of their nature, the fair value of the financial instruments
included in working capital is usually identical or close to their
carrying amount. The fair value of non-current receivables, long-term
investments and long-term liabilities also approximates their carrying
value, since they bear interest at rates close to the prevailing
market rates.
The fair value and the carrying amount of derivatives at December 31,
1998 and 1997 is approximately a liability of $ 3.3 million and $3.7
million, respectively. The fair value of the derivatives generally
reflects the estimated amounts that the Company would receive or pay
upon termination of the contracts at the reporting dates.
33
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - MONETARY BALANCES IN NON-DOLLAR CURRENCIES:
Comprise at December 31, 1998:
ASSETS LIABILITIES
------ -----------
IN THOUSANDS
------------
Israeli currency (A)
Unlinked 23,264 22,963
------- -------
------- -------
Linked (B) 1,636
-------
-------
Other non-dollar currencies (C) 91,396 34,761
------- -------
------- -------
(a) The above does not include balances in Israeli currency linked to the
dollar.
(b) To the Israeli CPI.
(c) As to hedging transactions entered into by the Company in order to
maintain the dollar value of net assets in non-dollar currencies, see
note 13.
NOTE 15 - SELECTED INCOME STATEMENT DATA:
a. SEGMENT INFORMATION:
1) General information:
(a) In 1998, the Company adopted FAS 131, "Disclosures about
Segments of an Enterprise and Related Information", which
was issued in June 1997 by the FASB.
(b) As described in note 1a(1) the Company and its subsidiaries
design, manufacture and market digital visual information
communication systems for the digital preprint and digital
printing markets.
The Company and its subsidiaries' reportable segments are
strategic business units which are distinguished by the
geographical areas in which they generate revenues. Although
the products sold and the services rendered are mostly the
same, gross margins differ significantly in the various
geographical areas.
The revenues are attributed to geographical segments based
on location of the customer.
2) Information about reported segment profit or loss and assets:
a) Measurement of segment profit or loss and segment assets:
The accounting policies of the segments are the same as
those described in the significant accounting policies.
34
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SELECTED INCOME STATEMENT DATA (continued):
The Company evaluates performance mainly based on gross
profit, which is presented for each geographical segment
based on the cost of the manufacturer, which is
significantly different from the transfer cost.
b) Reported segment profit or loss and segment assets:
NORTH FAR
AND SOUTH EAST &
AMERICA EUROPE OTHER TOTAL
------------- ------------- -------------- -----------
$ IN THOUSANDS
--------------------------------------------------------
Year ended December 31,
1998:
Revenues from external
customers 296,858 236,779 106,674 640,311
------- ------- ------- -------
------- ------- ------- -------
Segment gross profit 120,900 101,400 49,275 271,275
------- ------- ------- -------
------- ------- ------- -------
Segment assets 239,999 124,254 197,435 561,688
------- ------- ------- -------
------- ------- ------- -------
Depreciation and
amortization 20,251 3,368 11,847 35,466
------- ------- ------- -------
------- ------- ------- -------
Year ended December 31,
1997:
Revenues from external
customers 275,099 222,956 119,604 617,659
------- ------- ------- -------
------- ------- ------- -------
Segment gross profit 110,400 84,700 49,033 244,133
------- ------- ------- -------
------- ------- ------- -------
Segment assets 257,137 107,214 230,278 594,629
------- ------- ------- -------
------- ------- ------- -------
Depreciation and
amortization 18,466 4,165 8,686 31,317
------- ------- ------- -------
------- ------- ------- -------
Year ended December 31,
1996(*):
Revenues from external
customers 242,899 221,228 159,978 624,105
------- ------- ------- -------
------- ------- ------- -------
Segment assets 247,076 133,611 236,893 617,580
------- ------- ------- -------
------- ------- ------- -------
* Computation of segment gross profit for 1996 is not
practicable.
35
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SELECTED INCOME STATEMENT DATA (continued):
c) Reconciliation of reportable segment assets to the Companys
consolidated totals:
DECEMBER 31
----------------------------------
1998 1997 1996
------- ------- -------
$ IN THOUSANDS
----------------------------------
Total assets for reportable segments 561,688 594,629 617,580
Assets of discontinued operations 3,820 74,098 87,154
------- ------- -------
Consolidated total 565,508 668,727 704,734
------- ------- -------
------- ------- -------
d) Geographic information
Information about geographic areas, classified by the
Company's country of domicile and by foreign countries, is
as follows:
1) Revenues from external customers:
1998 1997 1996
------- ------- -------
$ IN THOUSANDS
-------------------------------------------
United States 293,861 265,979 227,554
Japan 64,573 67,320 110,210
Other countries 281,877 284,360 286,341
------- ------- -------
640,311 617,659 624,105
------- ------- -------
------- ------- -------
Revenues are attributed to countries based on the location
of the customers.
2) Long-lived assets:
(a) As follows:
DECEMBER 31
----------------------------------------
1998 1997 1996
------- ------- -------
$ IN THOUSANDS
Israel 30,762 26,776 29,950
United States 51,522 49,473 38,808
Other countries 8,618 8,111 10,876
------- ------- -------
90,902 84,360 79,634
------- ------- -------
------- ------- -------
(b) Reconciliation of reportable long-lived
assets to the company's consolidated
long-lived assets:
Total assets for reportable segments 90,902 84,361 79,634
Long-lived assets of discontinued operations 5,244 6,288
------- ------- -------
Consolidated long-lived assets 90,902 89,605 85,922
------- ------- -------
------- ------- -------
36
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SELECTED INCOME STATEMENT DATA (continued):
YEAR ENDED DECEMBER 31
----------------------------------
1998 *1997 *1996
--------- ------------- ----------
$ IN THOUSANDS
----------------------------------
b. RESEARCH AND DEVELOPMENT COSTS -
net:
Expenses incurred,
including in-process
research and development
(see note 2a) 121,632 68,110 72,822
L e s s - royalty-bearing
participations from the
Government of Israel
(note 9a(1)(a)) 10,870 10,500 11,549
------- ------- -------
110,762 57,610 61,273
------- ------- -------
------- ------- -------
c. SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES:
Selling 100,855 91,327 108,076
General and administrative** 74,142 72,584 142,152
------- ------- -------
174,997 163,911 250,228
------- ------- -------
------- ------- -------
* Reclassified, see note 2b.
** Including net change in
allowance for doubtful
accounts and direct
write-off of bad debts 7,625 15,468 69,767
------- ------- -------
------- ------- -------
37
SCITEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SELECTED INCOME STATEMENT DATA (continued):
d. FINANCIAL INCOME - NET:
YEAR ENDED DECEMBER 31
----------------------------------
1998 *1997 *1996
--------- ------------ ---------
$ IN THOUSANDS
----------------------------------
Income:
Interest 5,049 6,954 6,648
Realized and unrealized gain on
trading marketable securities -
net 619 740 893
Non-dollar currency gains and
losses - net 1,287 2,175 1,071
------- ------- -------
6,955 9,869 8,612
------- ------- -------
Expenses:
Interest 521 2,171 1,846
Bank charges 819 915 1,012
Cost of hedging transactions 644 842 1,071
------- ------- -------
1,984 3,928 3,929
------- ------- -------
4,971 5,941 4,683
------- ------- -------
------- ------- -------
* Reclassified.
NOTE 16 - TRANSACTIONS AND BALANCES WITH RELATED PARTIES:
a. The Company and its subsidiaries have conducted financial
transactions with related parties, mainly banks and insurance and
leasing companies, in the ordinary course of business.
b. The Company had trade receivables from a 50%-owned joint venture
company in Japan totaling $10,040,000 and $14,381,000 at
December 31, 1998 and 1997, respectively.
c. See also notes 8, 9a(2) and 15a.
---------------
--------------------
---------------
38
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEC Israel Economic Corporation
By: /s/ JAMES I. EDELSON
---------------------------
DATE: July 30, 1999 James I. Edelson
EXECUTIVE VICE PRESIDENT AND
SECRETARY