FORM 10-K/A
NO. 1
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, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8707
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PEC Israel Economic Corporation
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(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
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 687-2400
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock (par value $1.00 per share) New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(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
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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. / /
The aggregate market value of the outstanding Common Stock of the
registrant held by non-affiliates on March 25, 1998 was approximately
$72,515,000. 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 25, 1998, 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, 1997 (the "1997 Form 10-K") by
adding thereto the financial statements of Scitex Corporation Ltd. as at and
for the year ended December 31, 1997, which begins on the next page and (B)
Items 14(a)(2)(c) and 14(a)(2)(d) of Part IV of the 1997 Form 10-K by
renumbering such Items as Items 14(a)(2)(d) and 14(a)(2)(e), respectively,
and (ii) inserts the following as Item 14(a)(2)(c) of Part IV of the 1997
Form 10-K between Item 14(a)(2)(b) and Item 14(a)(2)(d) (as renumbered) of
Part IV of the 1997 Form 10-K:
(a)(2)(c) Financial Statement schedules filed in response to Item 14(d)
pursuant to Rule 3-09 of Regulation S-X:
Scitex Corporation Ltd. and Subsidiaries:
Report of Independent Auditors.
Consolidated Balance Sheets as at December 31, 1997 and
1996.
Consolidated Statements of Income (Loss) for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
Notes to the Consolidated Financial Statements.
SCITEX CORPORATION LTD.
(An Israeli Corporation)
1997 CONSOLIDATED FINANCIAL STATEMENTS
SCITEX CORPORATION LTD.
(An Israeli Corporation)
1997 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
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REPORT OF INDEPENDENT AUDITORS 2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets 3-4
Statements of income (loss) 5
Statements of changes in shareholders' equity 6
Statements of cash flows 7-8
Notes to financial statements 9-35
THE AMOUNTS ARE STATED IN U.S. DOLLARS ($) IN THOUSANDS.
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-------------------------
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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, 1997 and 1996 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, 1997.
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, 1997 and 1996 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, 1997, in conformity with
accounting principles generally accepted in the United States.
Tel-Aviv, Israel Kesselman & Kesselman
February 11, 1998 Certified Public Accountants (Isr.)
(except for notes 9 and 17 as to
which the date is February 25, 1998)
2
SCITEX CORPORATION LTD.
(An Israeli Corporation)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
--------------------------
1997 1996
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U.S. DOLLARS IN THOUSANDS
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ASSETS
CURRENT ASSETS (NOTE 14):
Cash and cash equivalents 72,300 90,050
Short-term investments 87,057 45,103
Trade receivables (net of allowance
for doubtful accounts of $ 31,552,000 at
December 31, 1997 and $ 52,252,000
at December 31, 1996) 140,540 155,493
Other receivables 25,994 34,783
Inventories:
Systems and components (note 3) 87,998 118,826
Spare parts and supplies 51,453 57,577
Prepaid expenses 4,713 5,993
Deferred income taxes (note 12d) 18,937 15,763
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T o t a l current assets 488,992 523,588
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INVESTMENTS AND OTHER NON-CURRENT
ASSETS (notes 4 and 14) 15,365 15,114
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PROPERTY, PLANT AND EQUIPMENT (note 5):
Cost 276,706 256,040
L e s s - accumulated depreciation and amortization 187,101 170,118
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89,605 85,922
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GOODWILL AND OTHER INTANGIBLE ASSETS net of
accumulated amortization (note 6) 74,765 80,110
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668,727 704,734
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/s/ D. TADMOR ) Chairman of the Board
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Dov Tadmor ) of Directors
/s/ Y. CHELOUCHE ) President, Chief Executive
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Yoav Z. Chelouche ) Officer and Director
3
DECEMBER 31
--------------------------
1997 1996
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U.S. DOLLARS IN THOUSANDS
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES (note 14):
Short-term bank credit and current maturities
of long-term liabilities 618 826
Trade payables 46,600 50,457
Accrued and other liabilities (note 7) 120,493 152,228
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T o t a l current liabilities 167,711 203,511
LONG-TERM LIABILITIES, net of current maturities
(note 14) 907 496
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COMMITMENTS AND CONTINGENT LIABILITIES (note 9)
T o t a l liabilities 168,618 204,007
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SHAREHOLDERS' EQUITY (note 10):
Share capital - ordinary shares of NIS 0.12 par value (authorized
- December 31, 1997 and 1996 - 48,000,000 shares; issued and
outstanding - December 31, 1997 and 1996 - 42,808,518 shares) 6,187 6,187
Capital surplus 358,278 359,577
Currency translation adjustments 1,457 1,130
Unrealized loss on marketable securities
available for sale (note 4(b)) (10,289) (10,061)
Retained earnings 144,476 143,894
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T o t a l shareholders' equity 500,109 500,727
------- -------
668,727 704,734
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
SCITEX CORPORATION LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
1997 1996 1995
----------- ---------- ---------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER
SHARE DATA)
--------------------------------------
REVENUES (note 15a):
Sales 480,133 520,264 576,410
Service 138,659 123,434 117,745
Supplies 56,885 51,350 36,132
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T o t a l revenues 675,677 695,048 730,287
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COST OF REVENUES:
Cost of sales 268,860 316,769 306,681
Cost of service 115,529 123,795 98,785
Cost of supplies 28,535 23,383 16,548
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T o t a l cost of revenues 412,924 463,947 422,014
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GROSS PROFIT 262,753 231,101 308,273
RESEARCH AND DEVELOPMENT COSTS -
net (note 15b) 68,408 72,795 73,662
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(note 15c) 181,020 270,562 254,570
AMORTIZATION OF GOODWILL AND OTHER
INTANGIBLE ASSETS 13,441 16,221 12,347
RESTRUCTURING COSTS (note 11) 56,100 22,000
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OPERATING LOSS (116) (184,577) (54,306)
FINANCIAL INCOME - net (note 15d) 5,940 4,683 9,929
OTHER EXPENSES - net 1,001 239 2,475
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INCOME (LOSS) BEFORE TAXES ON INCOME 4,823 (180,133) (46,852)
TAXES ON INCOME (TAX BENEFIT) (note 12) 1,500 (1,700) (13,464)
SHARE IN INCOME (LOSSES) OF EQUITY
INVESTMENTS - net (note 4) (2,741) 154 (1,123)
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NET INCOME (LOSS) 582 (178,279) (34,511)
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BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE ("EPS") (note 1n) $0.01 $(4.16) $(0.81)
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------- ------- -------
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN COMPUTATION OF
(note 1n):
Basic EPS 42,809 42,809 42,800
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------- ------- -------
Diluted EPS 43,154 42,809 42,800
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------- ------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
SCITEX CORPORATION LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNREALIZED LOSS ON
CURRENCY MARKETABLE
SHARE CAPITAL TRANSLATION SECURITIES AVAILABLE
CAPITAL SURPLUS ADJUSTMENTS FOR SALE
---------- ---------- ----------- --------------------
U.S. DOLLARS IN THOUSANDS
------------------------------------------------------------------
BALANCE AT JANUARY 1, 1995 6,187 357,665 535 (10,289)
CHANGES DURING 1995:
Loss
Employee stock options exercised and paid *366
Surplus arising from employee stock options 2,860
Currency translation adjustments 353
Unrealized gain on marketable securities
available for sale 4,436
Dividend ($ 0.52 per share)
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BALANCE AT DECEMBER 31, 1995 6,187 360,891 888 (5,853)
CHANGES DURING 1996:
Loss
Elimination of surplus in respect of employee stock
options due to forfeiture, net of surplus arising
from employee stock options (1,314)
Currency translation adjustments 242
Unrealized loss on marketable securities
available for sale (4,208)
Dividend ($ 0.39 per share)
-------- ------- ----- ------
BALANCE AT DECEMBER 31, 1996 6,187 359,577 1,130 (10,061)
CHANGES DURING 1997:
Net income
Elimination of surplus in respect of employee stock
options due to forfeiture, net of surplus arising
from employee stock options (1,299)
Currency translation adjustments 327
Unrealized loss on marketable securities
available for sale (228)
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BALANCE AT DECEMBER 31, 1997 6,187 358,278 1,457 (10,289)
-------- ------- ----- ------
-------- ------- ----- ------
RETAINED TOTAL
EARNINGS (NOTE SHAREHOLDERS'
10c) EQUITY
-------------- -------------
U.S. DOLLARS IN THOUSANDS
---------------------------------------
BALANCE AT JANUARY 1, 1995 395,637 749,735
CHANGES DURING 1995:
Loss (34,511) (34,511)
Employee stock options exercised and paid 366
Surplus arising from employee stock options 2,860
Currency translation adjustments 353
Unrealized gain on marketable securities
Available for sale 4,436
Dividend ($ 0.52 per share) (22,258) (22,258)
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BALANCE AT DECEMBER 31, 1995 338,868 700,981
CHANGES DURING 1996: 1
Loss (178,279) (178,279)
Elimination of surplus in respect of employee stock
options due to forfeiture, net of surplus arising
from employee stock options (1,314)
Currency translation adjustments 242
Unrealized loss on marketable securities
available for sale (4,208)
Dividend ($ 0.39 per share) (16,695) (16,695)
-------- --------
BALANCE AT DECEMBER 31, 1996 143,894 500,727
CHANGES DURING 1997:
Net income 582 582
Elimination of surplus in respect of employee stock
options due to forfeiture, net of surplus arising
from employee stock options (1,299)
Currency translation adjustments 327
Unrealized loss on marketable securities
available for sale (228)
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BALANCE AT DECEMBER 31, 1997 144,476 500,109
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-------- --------
* Net of share issue expenses.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
(Continued - 1)
SCITEX CORPORATION LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
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U.S. DOLLARS IN THOUSANDS
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 582 (178,279) (34,511)
Adjustments to reconcile net income or loss to net
cash provided by or used in operating activities:
Share in losses (income) and write off of equity
investments - net 2,741 (154) 5,387
Depreciation and amortization 40,815 49,196 43,359
Compensation expense (income) resulting from
employee stock options (1,299) (1,314) 663
Gain on sale and increase in value of short-term
investments - net (741) (893) (5,279)
Deferred income taxes - net (2,166) 12,882 (12,810)
Loss on disposal of fixed assets 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) 14,240 145,976 (27,662)
Decrease (increase) in other receivables 8,789 (1,380) (16,043)
Increase (decrease) in trade payables (3,857) (10,995) 2,461
Increase (decrease) in accrued and
other liabilities (31,735) (1,495) 17,902
Decrease (increase) in inventories 36,952 2,077 (7,078)
Decrease (increase) in prepaid expenses 1,280 (1,110) 830
Other items - net 433 752 486
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Net cash provided by (used in) operating activities 66,557 41,887 (32,295)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries * (50,737)
Additional amount paid in respect of acquisition of a
Subsidiary (7,000) (7,000) (7,000)
Purchase of property, plant and equipment (33,300) (31,176) (39,515)
Proceeds from sale of fixed assets 1,720 2,224 3,254
Purchase of intangible assets (1,096) (6) (146)
Equity and other investments (3,622) (2,815)
Purchase of short-term investments (85,369) (27,431) (396,678)
Sale of short-term investments 44,151 45,701 470,078
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Net cash used in investing activities (84,511) (20,503) (20,744)
------- ------- -------
Subtotal - forward (17,954) 21,384 (53,039)
7
(Concluded - 2)
SCITEX CORPORATION LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
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U.S. DOLLARS IN THOUSANDS
--------------------------------------
Subtotal - brought forward (17,954) 21,384 (53,039)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Employee stock options exercised and paid 366
Increase in long-term liabilities 453 627 70
Decrease in long-term liabilities (195) (347) (40)
Increase (decrease) in short-term bank credit (54) (1,679) 1,551
Dividends paid (22,261) (22,256)
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Net cash provided by (used in) financing activities 204 (23,660) (20,309)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (17,750) (2,276) (73,348)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 90,050 92,326 165,674
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CASH AND CASH EQUIVALENTS AT END OF YEAR 72,300 90,050 92,326
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------- ------- -------
* Acquisition of subsidiaries:
Working capital (excluding cash and cash equivalents) 3,370
Property, plant and equipment - net 3,667
Goodwill and other intangible assets - net 42,977
Investments and other non-current assets 723
-------
50,737
-------
-------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - CASH PAID DURING THE YEAR
FOR:
Interest 2,117 2,271 3,883
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------- ------- -------
Income taxes (18,739) 7,795 12,497
------- ------- -------
------- ------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
SCITEX CORPORATION LTD.
(An Israeli Corporation)
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
graphic arts, printing and video 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");
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. Gains and losses arising from non-dollar
transactions and balances are included in net financial
income.
The financial statements of certain subsidiaries and an
entity 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
("SFAS") 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. The resulting
aggregate translation adjustments are reported as a
component of shareholders' equity.
9
SCITEX CORPORATION LTD.
(An Israeli Corporation)
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 revenue and expenses during the
reporting years. Actual results could differ from those
estimates.
4) Accounting principles
The 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.
C. CASH EQUIVALENTS
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less 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 in short-term
investments. The change in market value of these securities is
included in financial income or expenses.
An investment in quoted shares of a company, classified as
"available for sale securities", is stated at market value and
is included in investments and other non-current assets. The
difference between the market value of these shares and their
cost is recorded as a separate component of shareholders'
equity.
10
SCITEX CORPORATION LTD.
(An Israeli Corporation)
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 5-15 years (mainly 7-10 years).
Acquired technology and other intangible assets are amortized
by the straight-line method over a period of 3-13 years
(mainly 3-5 years).
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.
11
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
I. RECOGNITION OF REVENUE
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 to 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 it is the
Company's policy not 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 for the long term.
12
SCITEX CORPORATION LTD.
(An Israeli Corporation)
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. The Company intends
to permanently reinvest the amounts of tax exempt
income. 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 current assets or
liabilities, 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 statement 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.
13
SCITEX CORPORATION LTD.
(An Israeli Corporation)
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.
O. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
1) In February 1997, the FASB issued SFAS No. 128,
"Earnings Per Share". SFAS 128 simplifies the EPS
computation and it requires the presentation of both
basic and diluted EPS, instead of the previously
required primary and fully diluted EPS. SFAS 128 is
effective for 1997, with prior period EPS data being
restated to conform with the provisions of the new
statement. Since in 1996 and 1995 the basic EPS
represents loss per share, the effect of including
share equivalents in the EPS computation is
anti-dilutive, and accordingly, the basic and diluted
EPS are the same amount. Therefore, the application of
SFAS 128 has no effect on the 1996 and 1995 EPS figures
previously reported.
2) In June 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income". SFAS 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, comprehensive income
includes all non-owner changes in equity. SFAS 130 is
effective for financial statements for fiscal years
beginning after December 15, 1997, and reclassification
of financial statements for earlier periods for
comparative purposes is required. The adoption of SFAS
130 will have no material impact on the Company's
consolidated results of operations, financial position
or cash flows.
3) In June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and
Related Information". SFAS 131 requires publicly-held
enterprises to report financial and other information
about key revenue-producing segments of the entity for
which such information is available and is evaluated
regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing
performance. It also establishes standards for related
disclosures about the revenues derived from the
enterprise's products and services, about the countries
in which the enterprise earns revenues and holds assets
and about major customers. SFAS 131 is effective for
financial statements for fiscal years beginning after
December 15, 1997. Financial statement disclosures for
prior periods are required to be restated. The Company
is in the process of evaluating the disclosure
requirements.
14
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITION
In September 1995, the Company acquired all of the shares of Abekas
Video Systems, Inc., a U.S. corporation, and substantially all of
the assets and certain liabilities of Abekas Video Systems Ltd., a
U.K. corporation (hereafter collectively - Abekas) for an aggregate
consideration of $ 51,432,000 in cash (including $ 1,432,000 -
costs related to the acquisition).
An amount of $ 42,977,000 out of the total acquisition cost was
attributed to goodwill and other intangible assets and is being
amortized over their estimated useful lives.
In October 1995, Abekas (which develops, manufactures and markets
video manipulation devices used in high-end video postproduction
and broadcast applications) was merged into Scitex Digital Video,
Inc. (hereafter - SDV) - a wholly-owned subsidiary in the U.S.,
formerly known as ImMIX, Inc.
NOTE 3 - INVENTORIES - SYSTEMS AND COMPONENTS
DECEMBER 31
-------------------------
1997 1996
------- -------
$ IN THOUSANDS
-------------------------
Components for manufacturing of systems 38,648 53,932
Work in process 13,305 14,553
Finished products 36,045 50,341
------- -------
87,998 118,826
------- -------
------- -------
NOTE 4 - INVESTMENTS AND OTHER NON-CURRENT ASSETS:
DECEMBER 31
--------------------------
1997 1996
---------- ----------
$ IN THOUSANDS
--------------------------
Equity investments:
Joint venture company (a) 1,143 3,442
Other 973 1,709
Available for sale investment (b) 4,550 4,778
Non-current bank deposits 3,540
Non-current receivables 1,808 1,095
Deferred income taxes (note 12d) 1,026 2,035
Shares at cost and other 2,325 2,055
------- -------
15,365 15,114
------- -------
------- -------
15
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - INVESTMENTS AND OTHER NON-CURRENT ASSETS (CONTINUED):
(a) The Company has provided guarantees for bank credit
received by the joint venture company - $ 10.5
million and $ 13.5 million at December 31, 1997 and
1996, respectively.
(b) Available for sale investment
The Company owns shares in Truevision, Inc.
(hereafter -Truevision), a U.S. corporation,
purchased in a private placement and through a
market transaction for a total consideration of
$14,839,000. The shares are traded in the United
States. The investment, stated at market value,
represents approximately 14% of Truevision's
ordinary share capital at December 31, 1997 and
1996.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Grouped by major classifications, the assets are composed as follows:
ACCUMULATED DEPRECIATION AND
COST AMORTIZATION
------------------------- ----------------------------
DECEMBER 31 DECEMBER 31
------------------------- ----------------------------
1997 1996 1997 1996
------ ------ ------ ------
$ IN THOUSANDS
-------------------------------------------------------------
Machinery and
equipment 208,673 185,284 141,821 126,658
Building (including land) 8,755 8,755 1,641 1,364
Leasehold improvements 26,123 27,160 23,079 22,369
Office furniture and
equipment 30,570 30,140 19,195 17,248
Motor vehicles 2,585 4,701 1,365 2,479
------- ------- ------- -------
276,706 256,040 187,101 170,118
------- ------- ------- -------
------- ------- ------- -------
Depreciation and amortization of property, plant and equipment
totaled $ 27,374,000, $ 32,975,000 and $ 30,433,000 in 1997, 1996,
and 1995, respectively.
16
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS:
DECEMBER 31
----------------------
1997 1996
------ ------
$ IN THOUSANDS
----------------------
ORIGINAL AMOUNT:
Goodwill in subsidiaries and acquired
Goodwill 105,144 *98,704
Acquired technology and other intangible
Assets 21,877 20,509
------- -------
127,021 119,213
------- -------
L e s s - accumulated amortization:
Goodwill in subsidiaries and acquired
Goodwill 39,856 *30,109
Acquired technology and other intangible
Assets 12,400 8,994
------- -------
52,256 39,103
------- -------
74,765 80,110
------- -------
------- -------
* In 1996, an amount of $ 18,200,000 - representing the
amortized balance of goodwill arising from the
acquisition of a subsidiary - was written off. The
amount of write-off was included among restructuring
costs (see note 11).
NOTE 7 - ACCRUED AND OTHER LIABILITIES:
DECEMBER 31
----------------------
1997 1996
------ ------
$ IN THOUSANDS
-----------------------
Employees and related liabilities 23,460 27,766
Taxes on income, net of advances 18,184 7,296
Advances from customers 8,028 11,285
Allowance in respect of sales financed
by third parties (see note 9b(1)) 15,354 20,933
Accrued restructuring costs (see note 11) 3,995 23,124
Sundry 51,472 61,824
------- -------
120,493 152,228
------- -------
------- -------
17
SCITEX CORPORATION LTD.
(An Israeli Corporation)
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 of 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 $ 10,870,000, $ 16,414,000 and $ 18,130,000 in 1997,
1996 and 1995, respectively. In addition, employee termination
benefits in the amounts of $ 18,000,000 and $ 17,000,000 in
1996 and 1995, respectively, 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%-6%
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 January 1,
1994, the limit is up to 150% of the grants
received. At the time the funding was received,
successful development of the related projects was
not assured.
At December 31, 1997, the maximum contingent royalty
payable is $ 46 million.
18
SCITEX CORPORATION LTD.
(An Israeli Corporation)
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 1997, are as follows:
$ IN
THOUSANDS
-----------------
Year ending December 31:
1998 13,651
1999 10,783
2000 9,172
2001 9,012
2002 8,246
2003 and thereafter 28,646
The rental payments for the premises in Israel, which
constitute approximately 16.4% 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 $ 13,173,000, $ 16,523,000 and
$14,499,000 in 1997, 1996, and 1995, respectively; in
1996, an additional amount of $ 9,600,000 was included in
restructuring costs (see note 11).
19
SCITEX CORPORATION LTD.
(An Israeli Corporation)
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. Commencing 1996, the
Company provides letters of credit to the major financing
company in amounts equivalent to 30% of the original
amount of the transactions.
During the years ended December 31, 1997, 1996 and 1995
approximately $ 38,300,000, $ 90,500,000 and
$113,200,000, respectively, of revenues were financed
under these agreements. At December 31, 1997, the
subsidiaries were contingently liable to the financing
companies for a portion of the total of the outstanding
balance of $ 146 million, subject to estimated default
rates, remarketing proceeds and other factors, as
described in the agreements.
The subsidiaries have established provisions
($15,354,000 and $ 20,933,000 at December 31, 1997 and
1996, 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) A lawsuit has been filed against the Company claiming an
amount of approximately $ 5 million in relation to a
purported guarantee which would require the acquisition
of additional shares in a company which is in
liquidation. The Company intends to defend itself
vigorously against this lawsuit. An estimate of the
eventual outcome cannot be made at this time.
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.
20
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY
a. SHARE CAPITAL
The Company's shares are traded in the United States on The
Nasdaq Stock Market under the symbol SCIXF.
The number of shares stated as issued and outstanding
(42,808,518 ordinary shares at December 31, 1997 and 1996)
does 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, have no voting rights
or rights to cash dividends and accordingly are 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 September
2001. The maximum term of an option may not exceed ten
years.
2) The total number of options authorized under the plans
is as follows:
DECEMBER 31
----------------------------
1997 1996
--------- ---------
NUMBER OF OPTIONS
----------------------------
Available for future awards 339,150 1,299,750
Granted 3,349,950 2,389,350
Exercised and paid 60,900 60,900
--------- ---------
3,750,000 3,750,000
--------- ---------
--------- ---------
The options granted are exercisable for the purchase
of shares as follows:
DECEMBER 31
----------------------------
1997 1996
---------- ----------
NUMBER OF OPTIONS
----------------------------
At balance sheet date 76,125 907,261
During first year thereafter 1,146,397 691,100
During second year thereafter 992,772 179,864
During third year thereafter 1,124,656 502,311
During fourth year thereafter 10,000 108,814
--------- ---------
3,349,950 2,389,350
--------- ---------
--------- ---------
The rights to exercise options are generally
conditional upon continuous employment by the Company.
21
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
3) A summary of the status of the Company's plans at
December 31, 1997, 1996 and 1995, and changes during
the years ended on those dates, is presented below:
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------
1997* 1996 1995
----------------------- ------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
------ -------- ------ -------- ------ ---------
$ $ $
Options outstanding at
beginning of year 2,389,350 17.46 1,716,575 20.75 1,970,975 20.75
Changes during the year*:
Granted 2,066,950 9.47 1,596,250 14.72
Exercised (19,000) 19.75
Forfeited (1,106,350) 16.13 (923,475) 18.86 (235,400) 20.83
---------- -------- ---------
Options outstanding at end
of year 3,349,950 10.00 2,389,350 17.46 1,716,575 20.75
---------- -------- ---------
---------- -------- ---------
Options exercisable at end
of year 76,125 17.03 907,261 20.84 902,649 21.89
---------- -------- ---------
---------- -------- ---------
* During 1997, 1,125,375 options awarded in
earlier years, with a weighted average
exercise price of $ 18.00 per share, were
repriced to a weighted average exercise price
of $ 9.15 per share subject to a revised
vesting schedule. All data in this note
assumes election by the relevant grantees of
the revised exercise price and the revised
exercise schedule.
The weighted average fair value of options granted
during 1997 and 1996 is $ 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
-----------------------
1997 1996
------ -------
Dividend yield - per share in dollars -,- 0.39
----- -----
----- -----
Expected volatility 25% 14%
----- -----
----- -----
Risk-free interest rate 6.1% 5.5%
----- -----
----- -----
Expected lives - in years 2.09 2.17
----- -----
----- -----
22
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
4) The following table summarizes information about
options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE OUTSTANDING AT REMAINING WEIGHTED AVERAGE EXERCISABLE AT EXERCISE
PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1997 PRICE
----------------- ------------------ ------------------ ---------------- ----------------- ---------
$ YEARS $ $
- ----- - -
9-10 2,692,625 7.5 9.06
11-12 240,950 8.8 11.52
14-17 388,000 8.2 14.77 47,750 14.99
19-26 28,375 6.1 20.46 28,375 20.46
--------- -------
9-26 3,349,950 7.6 10.00 76,125 17.03
--------- -------
--------- -------
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.
In October 1995, the FASB issued SFAS No. 123 -
"Accounting for Stock-Based Compensation" ("SFAS 123").
SFAS 123 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 APB 25.
The Company has elected to continue applying the
provisions of APB 25 and has accordingly complied with
the disclosure requirements set forth in SFAS 123 for
companies electing to apply APB 25. Accordingly, the
difference, if any, between the quoted market price of
the shares on the date of the award of the options and
the exercise price of such options is charged to income
over the vesting periods. The amount of the difference is
correspondingly credited to capital surplus.
23
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY (continued):
Had compensation cost for the Company's plans been
determined based on the fair value at the grant dates
for awards granted during 1997 and 1996 (in 1995 no
awards were granted) consistent with the method of
SFAS 123, the Company's net income (loss), and
earnings (loss) per share would have changed to the
pro-forma amounts indicated below:
YEAR ENDED DECEMBER 31
---------------------------------------------------------------
1997 1996 1997 1996
----------- ----------- --------- ---------
AS REPORTED AS REPORTED PRO-FORMA PRO-FORMA
----------- ----------- --------- ---------
Net income (loss) - in thousands of
dollars 582 (178,279) (3,130) (180,124)
------- ------- ------- -------
------- ------- ------- -------
Earnings (loss) per share - in
dollars
Basic 0.01 (4.16) (0.07) (4.21)
------- ------- ------- -------
------- ------- ------- -------
Diluted 0.01 (4.16) (0.07) (4.21)
------- ------- ------- -------
------- ------- ------- -------
c. RETAINED EARNINGS
The distribution of cash dividends in the amount of
approximately $128,000,000 out of retained earnings of
$144,476,000 as of December 31, 1997 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 $ 56.1 million and $ 22.0 million, respectively. The
restructuring consisted of a series of actions within the
Graphic Arts Group (the "Group") to address changes in
market conditions and was aimed at restoring the Group 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.
24
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - RESTRUCTURING COSTS (CONTINUED):
The components of the 1996 and 1995 restructuring charges
are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
-------- --------
$ IN THOUSANDS
-----------------------
Employee termination benefits 18,000 17,000
Facility closure and excess
purchase commitments 12,200
Goodwill impairment 18,200
Other asset write downs 7,700 5,000
-------- -------
56,100 22,000
-------- --------
-------- --------
Movement in accrued restructuring liabilities during 1995, 1996
and 1997 was as follows:
EMPLOYEE FACILITY
TERMINATION CLOSURE AND
BENEFITS OTHER TOTAL
----------- ------------ ------
$ IN THOUSANDS
-------------------------------------------
1995:
Restructuring charges 17,000 17,000
Payments during 1995 (4,818) (4,818)
------- -------
Balance at December 31, 1995 12,182 12,182
1996:
Restructuring charges 18,000 12,200 30,200
Payments during 1996 (16,740) (1,118) (17,858)
Adjustments (1,400) (1,400)
------- ------- -------
Balance at December 31, 1996 13,442 9,682 23,124
1997:
Payments during 1997 (10,945) (8,184) (19,129)
------- ------- -------
Balance at December 31, 1997 2,497 1,498 3,995
------- ------- -------
------- ------- -------
25
SCITEX CORPORATION LTD.
(An Israeli Corporation)
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 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 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 1998 through 2001.
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 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.
26
SCITEX CORPORATION LTD.
(An Israeli Corporation)
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 to income from other sources in
Israel
Income not eligible for "approved enterprise" benefits
mentioned in (1) above is taxed at the regular rate:
1996 and thereafter - 36%; 1995 - 37%.
b. NON-ISRAELI SUBSIDIARIES
The U.S. subsidiaries file a consolidated tax return.
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 $ 191 million at December 31,
1997. Substantially all of the carryforward amounts have no
expiration date.
27
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - TAXES ON INCOME (CONTINUED):
d. DEFERRED INCOME TAXES:
DECEMBER 31
-------------------------------
1997 1996
-------------------------------
$ IN THOUSANDS
-------------------------------
1) Provided in respect of the following:
Allowance for doubtful accounts 13,322 20,647
Carryforward tax losses and credits 34,657 32,974
Inventories 7,129 7,696
Accrued liabilities and deferred income 15,423 10,844
Other 3,619 1,912
------ ------
74,150 74,073
L e s s - valuation allowance 54,309 56,398
------ ------
19,841 17,675
------ ------
------ ------
2) Deferred taxes are included in the
balance sheets as follows:
Current assets 18,937 15,763
Non-current assets 1,026 2,035
Long-term liabilities (122) (123)
------ ------
19,841 17,675
------ ------
------ ------
e. INCOME (LOSS) BEFORE TAXES ON INCOME
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
-------------------------------------
$ IN THOUSANDS
-------------------------------------
Israeli (6,878) (83,058) (33,546)
Non-Israeli 11,701 (97,075) (13,306)
------ ------- -------
4,823 (180,133) (46,852)
------ ------- -------
------ ------- -------
f. TAXES ON INCOME (TAX BENEFIT) INCLUDED IN THE INCOME
STATEMENTS:
1) As follows:
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
-------------------------------------
$ IN THOUSANDS
-------------------------------------
Current:
Israeli 2 3,353 (3,894)
Non-Israeli 3,664 (17,935) 3,240
------ ------ -------
3,666 (14,582) (654)
------ ------ -------
Deferred, see d. above:
Israeli (199) 42 (4,877)
Non-Israeli (1,967) 12,840 (7,933)
------ ------ -------
(2,166) 12,882 (12,810)
------ ------ -------
1,500 (1,700) (13,464)
28
SCITEX CORPORATION LTD.
(An Israeli Corporation)
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
-------------------------------------
1997 1996 1995
-------------------------------------
$ IN THOUSANDS
-------------------------------------
Income (loss) before taxes on income 4,823 (180,133) (46,852)
----- -------- -------
----- -------- -------
Theoretical tax (tax benefit) on the
above amount 1,736 (64,848) (17,335)
Effect of lower tax rate for
"approved enterprises" 1,788 22,127 9,057
----- -------- -------
3,524 (42,721) (8,278)
Decrease in taxes resulting from
different tax rates - net (425) (2,608) (855)
Increase in taxes resulting from
permanent differences 1,792 3,141 4,808
Reversal of prior years' income tax
provisions (1,600) (14,748)
Change in valuation allowance (2,089) 45,198 7,129
Decrease in taxes arising from
differences between non-dollar
currencies income and dollar
income - net* (1,302) (3,110) (1,520)
----- -------- -------
Actual tax expense (benefit) 1,500 (1,700) (13,464)
----- -------- -------
----- -------- -------
Per share effect of "approved
enterprise" benefits $0.04 $(0.52) $(0.21)
----- -------- -------
----- -------- -------
* 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.
29
SCITEX CORPORATION LTD.
(An Israeli Corporation)
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 tax returns of the U.S. subsidiaries and the main
European subsidiary have been audited by the tax authorities
through the 1992 and 1994 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 financial instruments,
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
----------------------
1997 1996
----------------------
$ IN THOUSANDS
----------------------
Forward contracts - for conversion of
non-dollar currencies into dollars 73 86
--- ---
--- ---
Options purchased 63 -,-
--- ---
--- ---
Options written 123 -,-
--- ---
--- ---
30
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED):
c. CONCENTRATIONS OF CREDIT RISK
At December 31, 1997 and 1996, 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.
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, 1997 and 1996 was approximately $ 3.7 million
and $ (1.0) 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.
NOTE 14 - MONETARY BALANCES IN NON-DOLLAR CURRENCIES
Comprise at December 31, 1997:
ASSETS LIABILITIES
------ -----------
IN THOUSANDS
-----------------------
Israeli currency (a)
Unlinked 15,122 21,212
------ ------
------ ------
Linked (b) 3,999
------
------
Other non-dollar currencies (c) 86,799 38,544
------ ------
------ ------
(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.
31
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SELECTED INCOME STATEMENT DA:
a. REVENUES:
1) Geographic area segment data
The following data present revenues and operating
income (loss) according to the geographic location in
which the revenues and operating income (loss) were
recorded.
Unaffiliated customers are customers outside the
Company and its subsidiaries.
Identifiable assets are those assets employed in, or
associated with, each geographic area.
ISRAEL AND UNITED STATES TOTAL
OTHER EUROPE ELIMINATIONS CONSOLIDATED
------------- ------------- ------ ------------ ------------
$ IN THOUSANDS
--------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
Revenues from unaffiliated
customers *121,412 380,557 173,708 675,677
Intercompany revenues
between geographical areas 134,903 30,471 9 (165,383)
------- ------- ------- -------- -------
256,315 411,028 173,717 (165,383) 675,677
------- ------- ------- -------- -------
------- ------- ------- -------- -------
Operating income (loss) (10,969) 3,500 8,479 (1,126) (116)
------- ------- ------- -------- -------
------- ------- ------- -------- -------
YEAR ENDED DECEMBER 31, 1996
Revenues from unaffiliated
customers *118,639 398,862 177,547 695,048
Intercompany revenues
between geographical areas 115,503 45,808 709 (162,020)
------- ------- ------- -------- -------
234,142 444,670 178,256 (162,020) 695,048
------- ------- ------- -------- -------
------- ------- ------- -------- -------
Operating income (loss) (97,531) (69,167) (23,214) 5,335 (184,577)
------- ------- ------- -------- -------
------- ------- ------- -------- -------
YEAR ENDED DECEMBER 31, 1995
Revenues from unaffiliated
customers *106,222 366,629 257,436 730,287
Intercompany revenues
between geographical areas 206,640 57,700 117 (264,457)
------- ------- ------- -------- -------
312,862 424,329 257,553 (264,457) 730,287
------- ------- ------- -------- -------
------- ------- ------- -------- -------
Operating income (loss) (61,376) 4,670 (4,347) 6,747 (54,306)
------- ------- ------- -------- -------
------- ------- ------- -------- -------
32
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SELECTED INCOME STATEMENT DATA (CONTINUED):
* Export sales from Israel to a 50%-owned joint venture
company in Japan totaled $ 42,557,000, $ 56,604,000 and $
57,725,000 in 1997, 1996 and 1995, respectively.
DECEMBER 31
--------------------
1997 1996
--------------------
$ IN THOUSANDS
--------------------
Identifiable assets:
Israel and other 230,278 236,893
United States 331,235 334,230
Europe 107,214 133,611
------- -------
668,727 704,734
------- -------
------- -------
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------------------------------------
$ IN THOUSANDS
------------------------------------
------------------------------------
2) Revenues by destination:
United States 310,921 284,143 302,992
Europe 236,365 238,679 296,269
Japan 67,320 110,211 71,504
Other 61,071 62,015 59,522
------- ------- -------
675,677 695,048 730,287
------- ------- -------
------- ------- -------
b. RESEARCH AND DEVELOPMENT COSTS-
net:
Expenses incurred 78,908 84,344 83,545
L e s s - royalty-bearing
participations from the
Government of Israel
(note 9a(1)(a)) 10,500 11,549 9,883
------ ------ ------
68,408 72,795 73,662
------ ------ ------
------ ------ ------
33
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - SELECTED INCOME STATEMENT DATA (CONTINUED):
YEAR ENDED DECEMBER 31
---------------------------------
1997 1996 1995
---------------------------------
$ IN THOUSANDS
---------------------------------
c. SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES:
Selling 105,061 124,182 135,821
General and administrative* 75,959 146,380 118,749
------- ------- -------
181,020 270,562 254,570
------- ------- -------
------- ------- -------
* Including net change in
allowance for doubtful
accounts and direct
write-off of bad debts 16,067 70,235 46,800
------- ------- -------
------- ------- -------
d. FINANCIAL INCOME - NET:
Income:
Interest 6,954 6,648 11,074
Realized and unrealized gain on
trading marketable securities -
net 740 893 3,741
Non-dollar currency gains and
losses - net 2,175 1,071
------- ------- -------
9,869 8,612 14,815
------- ------- -------
Expenses:
Interest 2,171 1,846 3,079
Bank charges 916 1,012 935
Cost of hedging transactions 842 1,071 352
Non-dollar currency gains and
losses - net 520
------- ------- -------
3,929 3,929 4,886
------- ------- -------
5,940 4,683 9,929
------- ------- -------
------- ------- -------
34
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 $ 14,381,000 and
$15,659,000 at December 31, 1997 and 1996, respectively.
c. See also notes 8, 9a(2) and 15a.
NOTE 17 - SUBSEQUENT EVENT
In February 1998, the Company acquired the shares of Idanit
Technologies Ltd. (an Israeli company) a supplier of wide format
inkjet printing systems, for approximately $ 60 million in cash.
The acquisition will be accounted for under the purchase method,
which will result in a write off of in-process research and
development for approximately $ 44 million.
---------------
--------------------
---------------
35
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
36