SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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, 1996 ----------------------------------------------- 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. / / The aggregate market value of the outstanding Common Stock of the registrant held by non-affiliates on March 24, 1997 was approximately $100,288,000. 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 24, 1997, 18,508,388 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, 1996 (the "1996 Form 10-K") by adding thereto the financial statements of Scitex Corporation Ltd. as at and for the year ended December 31, 1996, which begins on the next page and (B) Items 14(a)(2)(c) and 14(a)(2)(d) of Part IV of the 1996 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 1996 Form 10-K between Item 14(a)(2)(b) and Item 14(a)(2)(d) (as renumbered) of Part IV of the 1996 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, 1996 and 1995. Consolidated Statements of Income (Loss) for the years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. Notes to the Consolidated Financial Statements. SCITEX CORPORATION LTD. (An Israeli Corporation) 1996 CONSOLIDATED FINANCIAL STATEMENTS SCITEX CORPORATION LTD. (An Israeli Corporation) 1996 CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS Page ---- REPORT OF INDEPENDENT AUDITORS 2 CONSOLIDATED FINANCIAL STATEMENTS: Balance sheets 3 Statements of income (loss) 4 Statements of changes in shareholders' equity 5 Statements of cash flows 6-7 Notes to financial statements 8-31 The amounts are stated in U.S. dollars ($) in thousands. --------------- ------------------------- --------------- 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 at December 31, 1996 and 1995 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, 1996. 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. Our audits were performed 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 that the financial statements are free of material misstatement, whether caused by an error in the financial statements or by misleading information included therein. 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 at December 31, 1996 and 1995 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, 1996, in conformity with accounting principles generally accepted in the United States. Tel-Aviv, Israel Kesselman & Kesselman Certified Public Accountants (Isr.) February 13, 1997 (except for notes 9b(2) and (3), as to which the date is March 11) 2 SCITEX CORPORATION LTD. (An Israeli Corporation) CONSOLIDATED BALANCE SHEETS December 31 -------------------------- 1996 1995 ------- ------- U. S. dollars in thousands -------------------------- Assets CURRENT ASSETS (note 14): Cash and cash equivalents 90,050 92,326 Short-term investments 45,103 62,480 ------- ------- T o t a l cash and short-term investments 135,153 154,806 Trade receivables (net of allowance for doubtful accounts of $ 52,252,000 at December 31, 1996 and $ 45,900,000 at December 31, 1995) 155,493 298,974 Other receivables 34,783 33,403 Inventories: Systems and components (note 3) 118,826 121,716 Spare parts and supplies 57,577 58,706 Prepaid expenses 5,993 4,883 Deferred income taxes (note 12d) 15,763 30,542 ------- ------- T o t a l current assets 523,588 703,030 INVESTMENTS AND OTHER NON-CURRENT ASSETS (notes 4 and 14) 15,114 17,892 PROPERTY, PLANT AND EQUIPMENT (note 5): Cost 256,040 250,412 L e s s - accumulated depreciation and amortization 170,118 152,042 ------- ------- 85,922 98,370 GOODWILL AND OTHER INTANGIBLE ASSETS, net of accumulated amortization (note 6) 80,110 101,539 ------- ------- 704,734 920,831 ------- ------- ------- ------- s/ D. TADMOR ) Chairman of the Board ----------------------- ) of Directors Dov Tadmor s/ Y. CHELOUCHE ) President, Chief Executive ----------------------- ) Officer and Director Yoav Z. Chelouche 3 December 31 -------------------------- 1996 1995 -------- -------- U. S. dollars in thousands -------------------------- Liabilities and shareholders' equity CURRENT LIABILITIES (note 14): Short-term bank credit and current maturities of long-term liabilities 826 2,386 Trade payables 50,457 61,452 Accrued liabilities and other (note 7) 152,228 155,588 -------- -------- T o t a l current liabilities 203,511 219,426 LONG-TERM LIABILITIES, net of current maturities (note 14) 496 424 -------- -------- T o t a l liabilities 204,007 219,850 COMMITMENTS AND CONTINGENT LIABILITIES (note 9) SHAREHOLDERS' EQUITY (note 10): Ordinary shares of NIS 0.12 par value (authorized - December 31, 1996 and 1995 - 48,000,000 shares; issued and outstanding - December 31, 1996 and 1995 - 42,808,518 shares) 6,187 6,187 Capital surplus 359,577 360,891 Currency translation adjustments 1,130 888 Unrealized loss on marketable securities available for sale (note 4(b)) (10,061) (5,853) Retained earnings 143,894 338,868 -------- -------- T o t a l shareholders' equity 500,727 700,981 -------- -------- 704,734 920,831 -------- -------- -------- -------- The accompanying notes are an integral part of the financial statements. 3 SCITEX CORPORATION LTD. (An Israeli Corporation) CONSOLIDATED STATEMENTS OF INCOME (LOSS) Year ended December 31 -------------------------------- 1996 1995 1994 -------- -------- -------- U.S. dollars in thousands (except per share data) -------------------------------- REVENUES (note 15a): Sales 520,264 576,410 576,475 Service 123,434 117,745 103,398 Supplies 51,350 36,132 24,265 -------- -------- -------- T o t a l revenues 695,048 730,287 704,138 COST OF REVENUES: Cost of sales 316,769 306,681 252,527 Cost of service 123,795 98,785 72,294 Cost of supplies 23,383 16,548 11,319 -------- -------- -------- T o t a l cost of revenues 463,947 422,014 336,140 -------- -------- -------- GROSS PROFIT 231,101 308,273 367,998 RESEARCH AND DEVELOPMENT COSTS - net (note 15b) 72,795 73,662 73,258 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (note 15c) 270,562 254,570 214,205 AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS) 16,221 12,347 9,454 RESTRUCTURING COSTS (note 11) 56,100 22,000 -------- -------- -------- OPERATING INCOME (LOSS) (184,577) (54,306) 71,081 FINANCIAL INCOME - net (note 15d) 4,683 9,929 5,465 OTHER INCOME (EXPENSES) - net (239) (2,475) 2,774 -------- -------- -------- INCOME (LOSS) BEFORE TAXES ON INCOME (180,133) (46,852) 79,320 TAXES ON INCOME (TAX BENEFIT) (note 12) (1,700) (13,464) 11,736 SHARE IN INCOME (LOSSES) OF EQUITY INVESTMENTS - net (note 4) 154 (1,123) (3,834) -------- -------- -------- NET INCOME (LOSS) (178,279) (34,511) 63,750 -------- -------- -------- -------- -------- -------- EARNINGS (LOSS) PER SHARE (note 1n) $ (4.16) $ (0.81) $ 1.49 -------- -------- -------- -------- -------- -------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - IN THOUSANDS (note 1n) 42,809 42,800 42,762 -------- -------- -------- -------- -------- -------- The accompanying notes are an integral part of the financial statements. 4 SCITEX CORPORATION LTD. (An Israeli Corporation) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Unrealized loss on Ordinary Capital Currency marketable Retained Total shares surplus translation securities available earnings shareholders' adjustments for sale (note 10c) equity -------- ------- ----------- -------------------- ---------- ------------- U. S. dollars in thousands --------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1994 6,181 355,598 341 354,139 716,259 CHANGES DURING 1994: Net income 63,750 63,750 Employee stock options exercised and paid 6 *640 646 Surplus arising from employee stock options 1,427 1,427 Currency translation adjustments 194 194 Unrealized loss on marketable securities available for sale (10,289) (10,289) Dividend ($ 0.52 per share) (22,252) (22,252) ------ ------- ----- ------- ------- ------- BALANCE AT DECEMBER 31, 1994 6,187 357,665 535 (10,289) 395,637 749,735 CHANGES DURING 1995: Loss (34,511) (34,511) Employee stock options exercised and paid *366 366 Surplus arising from employee stock options 2,860 2,860 Currency translation adjustments 353 353 Unrealized gain on marketable securities available for sale 4,436 4,436 Dividend ($ 0.52 per share) (22,258) (22,258) ------ ------- ----- ------- ------- ------- BALANCE AT DECEMBER 31, 1995 6,187 360,891 888 (5,853) 338,868 700,981 CHANGES DURING 1996: 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) (1,314) Currency translation adjustments 242 242 Unrealized loss on marketable securities available for sale (4,208) (4,208) 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 ------ ------- ----- ------- ------- ------- ------ ------- ----- ------- ------- ------- * Net of share issuance expenses. The accompanying notes are an integral part of the financial statements. 5 (Continued - 1) SCITEX CORPORATION LTD. (An Israeli Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 --------------------------------- 1996 1995 1994 -------- -------- -------- U.S dollars in thousands --------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) (178,279) (34,511) 63,750 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 (155) 5,387 3,834 Depreciation and amortization 49,196 43,359 34,500 Acquired in-process research and development 7,766 Gain on sale of equity investments (3,103) Compensation expense (income) resulting from employee stock options (1,314) 663 1,427 Gain on sale and increase in value of short-term investments - net (893) (5,279) (1,088) Deferred income taxes - net 12,882 (12,810) (4,747) Loss on disposal of fixed assets 8,424 Provision for impairment of intangible assets 18,200 Changes in operating assets and liabilities: Decrease (increase) in trade receivables (including non-current portion) 145,976 (27,662) (24,280) Decrease (increase) in other receivables (1,380) (16,043) 5,482 Increase (decrease) in trade payables (10,995) 2,461 (3,438) Increase (decrease) in accrued liabilities and (1,495) 17,902 17,522 other Decrease (increase) in inventories 2,077 (7,078) (33,098) Decrease (increase) in prepaid expenses (1,110) 830 (709) Other items - net 753 486 (228) -------- -------- -------- Net cash provided by (used in) operating activities 41,887 (32,295) 63,590 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of consolidated subsidiaries * (50,737) (21,374) Additional amount paid in respect of acquisition of consolidated subsidiary (7,000) (7,000) (7,000) Purchase of property, plant and equipment (31,176) (39,515) (36,515) Proceeds from sale of fixed assets 2,224 3,254 2,566 Purchase of intangible assets (6) (146) (219) Equity and other investments (2,815) (4,806) Sale of equity investments 4,187 Purchase of short-term investments (27,431) (396,678) (367,488) Sale of short-term investments 45,701 470,078 365,422 -------- -------- -------- Net cash used in investing activities (20,503) (20,744) (65,227) -------- -------- -------- Subtotal - forward 21,384 (53,039) (1,637) 6 (Concluded - 2) SCITEX CORPORATION LTD. (An Israeli Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 ---------------------------------- 1996 1995 1994 -------- -------- -------- U.S dollars in thousands ---------------------------------- Subtotal - brought forward 21,384 (53,039) (1,637) CASH FLOWS FROM FINANCING ACTIVITIES: Employee stock options exercised and paid 366 646 Increase in long-term liabilities 627 70 Discharge of long-term liabilities (347) (40) (105) Increase (decrease) in short-term bank credit (1,679) 1,551 (308) Dividends paid (22,261) (22,256) (22,239) -------- -------- -------- Net cash used in financing activities (23,660) (20,309) (22,006) -------- -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (2,276) (73,348) (23,643) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 92,326 165,674 189,317 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR 90,050 92,326 165,674 -------- -------- -------- -------- -------- -------- * Acquisition of consolidated subsidiaries: Working capital (excluding cash and cash equivalents) 3,370 2,378 Property, plant and equipment - net 3,667 916 Goodwill and other intangible assets - net 42,977 10,314 Investments and other non-current assets 723 Acquired in-process research and development 7,766 -------- -------- 50,737 21,374 -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - cash paid during the year for: Interest 2,271 3,883 2,724 -------- -------- -------- -------- -------- -------- Income taxes 7,795 12,497 17,277 -------- -------- -------- -------- -------- -------- The accompanying notes are an integral part of the financial statements. 7 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 its 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 the determination of net income or loss. The financial statements of certain subsidiaries and an entity in which the Company has an equity investments, whose functional currency is their local currency, are translated into dollars in accordance with the principles set forth in Statement No. 52 of the Financial Accounting Standards Board of the United States ("FASB") - "Foreign Currency Translation". Assets and liabilities are translated using 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. Condensed nominal Israeli currency data are presented in note 17. 8 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. However, the Company participates in highly competitive markets that are characterized by aggressive pricing practices, downward pressures on gross margins, short product life cycles, rapid technological advances, variable demand patterns on the part of consumers, and changes in the creditworthiness of the Company's customer base. As a result of the dynamic nature of the Company's principal markets, it is at least reasonably possible that the estimates used by the Company to determine its various reserves will be materially different from the actual amounts or results, which could have a materially adverse effect on the Company's results of operations and financial condition in the near term. 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 are included in short-term investments. d. Investments in marketable securities Marketable securities classified as "trading securities" are stated at market value. 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. The difference between the market value of the shares and their cost is recorded as a separate component of shareholders' equity. 9 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 life. Annual rates of depreciation are as follows: % ----- Machinery and equipment 10-33 (mainly 20) Building 4 Office furniture and equipment 6-20 (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 consolidated 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). The Company examines the realizability of goodwill and other intangible assets and the appropriateness of their amortization periods, based on the estimated future undiscounted cash flows derived from those assets. Any impairment loss is recognized in the income statement. i. Recognition of revenue: 1) Sale of systems 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. 10 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 Research and development costs are charged to income as incurred. Participation received for development of approved projects is recognized as a reduction of expenses as the related cost is incurred (see also note 9a(1)). 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 Deferred income taxes are provided for temporary differences between the assets and liabilities as measured in the financial statements and for tax purposes, at the tax rates expected to be in effect when these differences reverse. 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 dividends which would result in additional tax liability. 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. m. Derivatives Gains and losses on hedges of existing assets or liabilities are recognized in income commensurate with the results from those assets or liabilities. Gains and losses related to qualifying hedges of firm commitments or anticipated transactions are deferred and included as part of the measurement of the results of the underlying hedged transactions. n. Earnings (loss) per share Earnings (loss) per share are computed based on the weighted average number of shares outstanding during each year. Stock options under key employee share incentive and stock option plans have been excluded from the computation because the dilutive effect of such options is immaterial. 11 o. Reclassification Certain prior years' amounts have been reclassified to conform with the 1996 presentation. NOTE 2 - ACQUISITIONS: One. 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. (see b. below). Two. In September 1994, the Company acquired all of the operations of the ImMIX division of a U.S. corporation (which consist of the development, manufacturing and marketing of non-linear digital video editing systems) in consideration of $ 21,607,000 in cash (including $607,000-costs related to the acquisition). An amount of $ 7,766,000 out of the total acquisition cost was attributed to in-process research and development. Upon acquisition, the technological feasibility of the in-process research and development had not yet been established and the technology being developed had no alternative future use. Therefore, the amount was charged to research and development costs. An amount of $10,314,000 was attributed to goodwill and other intangible assets and is being amortized over their estimated useful lives. NOTE 3 - INVENTORIES - SYSTEMS AND COMPONENTS: December 31 ------------------- 1996 1995 ------- ------- $ in thousands ------------------- Components for manufacturing of systems 53,932 44,320 Work in process 14,553 21,826 Finished products 50,341 55,570 ------- ------- 118,826 121,716 ------- ------- ------- ------- 12 NOTE 4 - INVESTMENTS AND OTHER NON-CURRENT ASSETS: December 31 ------------------ 1996 1995 ------ ------ $ in thousands ------------------ Equity investments: Joint venture company (a) 3,442 3,799 Other 1,709 Available for sale investment (b) 4,778 8,986 Non-current receivables 1,095 3,933 Deferred income taxes (note 12d) 2,035 225 Limited partnership - related party - at cost 650 Shares at cost and other 2,055 299 ------ ------ 15,114 17,892 ------ ------ ------ ------ (a) Joint venture company: 1) This item represents an investment in a 50%-owned joint venture company in Japan, composed as follows: December 31 ---------------- 1996 1995 ----- ----- $ in thousands ---------------- Cost 1,922 1,922 Cumulative currency translation adjustments 1,892 2,404 Cumulative share in losses - net (372) (527) ----- ----- 3,442 3,799 ----- ----- ----- ----- 2) The Company has provided guarantees for bank credit received by the joint venture company - $ 13.5 million at December 31, 1996 and 1995. (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% and 15% of Truevision's ordinary share capital at December 31, 1996 and 1995, respectively. 13 NOTE 5 - PROPERTY, PLANT AND EQUIPMENT Grouped by major classifications, the assets are composed as follows: Accumulated depreciation and C o s t amortization ----------------- ---------------------------- December 31 December 31 ----------------- ---------------------------- 1996 1995 1996 1995 ------- ------- ------- ------- $ in thousands $ in thousands ----------------- ---------------------------- Machinery and equipment 185,284 187,732 126,658 115,196 Building (including land) 8,755 8,755 1,364 1,086 Leasehold improvements 27,160 24,977 22,369 19,705 Office furniture and equipment 30,140 23,988 17,248 13,559 Motor vehicles 4,701 4,960 2,479 2,496 ------- ------- ------- ------- 256,040 250,412 170,118 152,042 ------- ------- ------- ------- ------- ------- ------- ------- Depreciation and amortization of property, plant and equipment totaled $ 32,975,000, $ 30,433,000 and $ 24,308,000 in 1996, 1995 and 1994, respectively. NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS: December 31 ----------------- 1996 1995 ------- ------- $ in thousands ----------------- Original amount: Goodwill in consolidated subsidiaries and acquired goodwill *98,704 112,709 Acquired technology and other intangible assets 20,509 26,010 ------- ------- 119,213 138,719 L e s s - accumulated amortization: Goodwill in consolidated subsidiaries and acquired goodwill *30,109 31,432 Acquired technology and other intangible assets 8,994 5,748 ------- ------- 39,103 37,180 ------- ------- 80,110 101,539 ------- ------- ------- ------- * In 1996, an amount of $ 18,200,000 - representing the amortized balance of goodwill arising from the acquisition of a subsidiary - was written off (see also note 1m). The amount of write-off was included among restructuring costs as detailed in note 11. 14 NOTE 7 - ACCRUED LIABILITIES AND OTHER: December 31 ---------------- 1996 1995 ------- ------- $ in thousands ---------------- Employees and related liabilities 27,766 32,999 Taxes on income, net of advances 7,296 20,675 Advances from customers 11,285 13,132 Allowance in respect of sales financed by third parties (see note 9b(1)) 20,933 12,604 Accrued restructuring costs (see note 11) 23,124 12,182 Other accrued expenses and sundry 61,824 63,996 ------- ------- 152,228 155,588 ------- ------- ------- ------- NOTE 8 - EMPLOYEE RIGHTS UPON RETIREMENT: One. 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 policies issued by 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 as above are included among accrued liabilities. Two. The U.S. subsidiaries offer a 401(k) matching plan to all eligible employees. The U.S. subsidiaries' matching contribution ranges from 50% to 200% of a participant's contribution, depending upon years of service, up to a maximum of 3% of a participant's qualifying earnings. Three. 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. Four. Severance pay, pension and defined contribution plan expenses totaled $ 16,414,000, $ 18,130,000 and $ 17,090,000 in 1996, 1995 and 1994, 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). 15 NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES: One. Commitments: 1) Royalty commitments: (a) The Company is committed to pay royalties to the Government of Israel on proceeds from sale 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 participations were received, successful development of the related projects was not assured. Through December 31, 1995, royalty rates varied from 2% to 3%. As from January 1, 1996, under the Research and Development Encouragement Regulations which were published in June 1996, the royalty rates were changed to 3%-6%. At December 31, 1996, the maximum contingent royalty payable is $43 million. (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 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 1996, are as follows: $ in thousands ------------------- Year ending December 31: 1997 13,262 1998 10,059 1999 8,244 2000 7,345 2001 7,342 2002 and thereafter 34,716 The rental payments for the premises in Israel, which constitute approximately 26% of the above amounts, are payable in Israeli currency linked partially to the Israeli consumer price index (hereafter - the Israeli CPI), and partially to the dollar. 16 Rental expense totaled $ 16,523,000, $ 14,499,000 and $ 13,436,000 in 1996, 1995 and 1994, respectively; in 1996, an additional amount of $ 9,600,000 is included in restructuring costs (see Note 11). Two. 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, 1996, 1995 and 1994, approximately $ 90,500,000, $ 113,200,000 and $ 148,800,000, respectively, of revenues were financed under these agreements. At December 31, 1996, the subsidiaries were contingently liable to the financing companies for approximately 16%-20% of the outstanding balance of $ 247 million, subject to estimated default rates, remarketing proceeds and other factors, as described in the agreements. The subsidiaries have established provisions ($ 20,933,000 and $ 12,604,000 at December 31, 1996 and 1995, 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) The Company and certain of its present and former officers and directors are defendants in a class action lawsuit, filed in December 1995 in the United States, alleging violations of certain provisions of federal securities law with respect to certain reports of the Company's results of operations during the period May 1994 to November 1995. The Company has and continues to believe that the claims asserted have no merit. In March 1997, the Company entered into a settlement, subject to court approval, a substantial portion of which would be covered by its insurance carrier. The settlement, net of insurance coverage, is not material and has been accrued in the accompanying financial statements. 17 3) In April and May of 1996, four lawsuits with similar allegations (which purport to be class actions) were filed against the Company, a number of the Company's current and former directors and certain other individuals. The suits generally allege that the defendants breached fiduciary duties to the Company's shareholders in responding to a purported offer to buy the Company. The Company has and continues to believe that the claims asserted have no merit. In March 1997, the Company entered into a settlement, subject to court approval, for the payment of the plaintiffs' legal fees and expenses, a substantial portion of which would be covered by its insurance carrier, as well as agreement to certain other conditions regarding the composition of the Board of Directors and committees thereof. The settlement, net of insurance coverage, is not material and has been accrued in the accompanying financial statements. 4) 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. NOTE 10 - SHAREHOLDERS' EQUITY: One. Authorized, issued and outstanding shares: 1) The Company's shares are traded in the United States on The Nasdaq Stock Market under the symbol SCIXF. 2) The number of shares stated as issued and outstanding (42,808,518 ordinary shares at December 31, 1996 and 1995) does not include unpaid 43,950 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. Two. Share incentive and stock option plans: 1) The Company has two current share incentive and stock option plans - the Scitex Israel Key Employee Share Incentive Plan 1991, mainly for officers and other key employees of the Company, and the Scitex International Key Employee Stock Option Plan 1991 (As Amended, 1995), mainly 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. The exercise price per share under each plan is determined by a committee, which consists of members of the Board of Directors, subject to guidelines determined by the Board. 18 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 expected service periods (usually - four years). The amount of the difference is correspondingly credited to capital surplus. 2) 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 Statement No. 123 - "Accounting for Stock-Based Compensation" ("SFAS 123"). This Statement, effective as of the 1996 financial statements, 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. Had compensation cost for the Company's plans been determined based on the fair value at the grant dates for awards granted during 1996 (in 1995 no awards were granted) under the plans consistent with the method of SFAS 123, the Company's loss and loss per share for 1996 would have increased to the pro-forma amounts indicated below: As reported Pro-forma ----------- --------- Loss - in thousands of dollars (178,279) (180,124) ----------- --------- ----------- --------- Loss per share - in dollars (4.16) (4.21) ----------- --------- ----------- --------- 3) The total number of options authorized under the plans is as follows: December 31 --------------------- 1996 1995 --------- --------- Number of options --------------------- Available for future awards 1,299,750 1,972,525 Granted 2,389,350 1,716,575 Exercised and paid 60,900 60,900 --------- --------- 3,750,000 3,750,000 --------- --------- --------- --------- 19 The options granted are exercisable in purchase of shares as follows: December 31 ---------------------- 1996 1995 --------- --------- Number of shares ---------------------- At balance sheet date 907,261 902,649 During first year thereafter 691,100 461,398 During second year thereafter 179,864 289,228 During third year thereafter 502,311 63,300 During fourth year thereafter 108,814 --------- --------- 2,389,350 1,716,575 --------- --------- --------- --------- The rights to exercise options are generally conditional upon continuous employment by the Company. 4) A summary of the status of the Company's plans at December 31, 1996, 1995 and 1994, and changes during the years ended on those dates, is presented below: Year ended December 31 ---------------------------------------------------------------- 1996 1995 1994 -------------------- ------------------ -------------------- Weighted Weighted Weighted average average average exercise exercise exercise Number price Number price Number price ---------- --------- --------- --------- --------- --------- $ $ $ Options outstanding at beginning of year 1,716,575 20.75 1,970,975 20.75 1,873,800 21.53 Changes during the year: Granted 1,596,250 14.72 500,250 18.31 Exercised (19,000) 19.75 Forfeited (923,475) 18.86 (235,400) 20.83 (403,075) 21.31 --------- ------ --------- ------ --------- ------ Options outstanding at end of year 2,389,350 17.46 1,716,575 20.75 1,970,975 20.75 --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ Options exercisable at end of year 907,261 20.84 902,649 21.89 325,390 23.05 --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ The weighted average fair value of options granted during 1996 is $ 3.22 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: dividend yield of $ 0.39 per share for all years (based on the actual 1996 dividend); expected volatility of 14.44%; risk-free interest rates of 5.5%; and expected lives of 2.17 years. 20 5) The following table summarizes information about options outstanding at December 31, 1996: Options outstanding Options exercisable --------------------------------------------- ------------------------ Range of Number Weighted Weighted Number Weighted exercise outstanding at average remaining average exercisable at average prices December 31, contractual life exercise December 31, exercise 1996 price 1996 price - --------------- --------------- ----------------- --------- -------------- --------- $ years $ $ 14 to 15 1,269,250 9.1 14.72 23,500 14.38 17 to 20 885,150 7.2 19.18 648,811 19.30 25 to 26 234,950 5.1 25.73 234,950 25.73 --------- ------- 2,389,350 8.0 17.46 907,261 20.84 --------- ------- --------- ------- Three. Retained earnings The distribution of cash dividends in the amount of approximately $ 126,000,000 out of retained earnings of $ 143,894,000 as of December 31, 1996 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 note 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 planned actions within the Graphic Arts Group (the "Group") to address changes in market conditions and were aimed at restoring the Group to profitability. The 1995 restructuring charge primarily involved a workforce reduction of approximately 250 employees. The 1996 charge consists of a planned 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 are no longer required due to changes in plans. In addition, goodwill impairment was recognized for the effect of decisions regarding certain product lines. Most of the restructuring activities are expected to be completed during 1997. 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 ------ ------ ------ ------ 21 Movement in accrued restructuring costs during 1995 and 1996 was as follows: Employee Facility termination closure benefits and 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 ------- ------ ------- ------- ------ ------- Although the Company believes that the restructuring activities were necessary, no assurance can be given that these restructuring actions will be successful or that similar actions will not be required in the future. NOTE 12 - TAXES ON INCOME: One. 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% (as described above). The period of benefits relating to the "approved enterprises" will expire in the years 1997 through 2001. 22 In the event of distribution of cash dividends from income which was tax exempt as above, the Company would have to pay the 15% or 20% tax in respect of the amount distributed. The approved portion of production facilities of the Company approximates 74% in 1996, 76% in 1995, and 89% in 1994. 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 instruments 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 investment company". The Company and its Israeli subsidiaries elected to measure their results on the basis of the changes in the Israeli CPI. 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, 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%; 1994 - 38%. Two. Non-Israeli subsidiaries: 1) Non-Israeli subsidiaries are taxed based upon tax laws in their countries of residence. 2) The U.S. subsidiaries file a consolidated tax return in the United States. Therefore, the tax provision is calculated on a consolidated tax return basis. Three. Carryforward tax losses and deductions Carryforward tax losses and deductions of the Company and its subsidiaries approximated $ 197 million at December 31, 1996. Substantially all of the carryforward amounts have no expiration date. 23 Four. Deferred income taxes: December 31 ---------------- 1996 1995 ------ ------ $ in thousands ---------------- 1) Provided in respect of the following: Allowance for doubtful accounts 20,647 18,013 Carryforward tax losses 32,974 9,918 Inventories 7,696 4,091 Accrued liabilities and deferred income 8,785 7,424 Other 3,971 2,311 ------ ------ 74,073 41,757 L e s s - valuation allowance 56,398 11,200 ------ ------ 17,675 30,557 ------ ------ ------ ------ 2) Deferred taxes are included in the balance sheets as follows: Current assets 15,763 30,542 Non-current assets 2,035 225 Long-term liabilities (123) (210) ------ ------ 17,675 30,557 ------ ------ ------ ------ 3) As stated in a(1) above, most of the Company's income is tax exempt due to the approved enterprise status granted to the Company's production facilities. The Company has decided to permanently reinvest the amount of the said tax exempt income, and not to distribute such income as dividends. Accordingly, no deferred income taxes have been provided in respect of the said tax exempt income. Five. Taxes on income (tax benefit) included in the income statements: 1) As follows: Year ended December 31 ----------------------------- 1996 1995 1994 ------- ------- ------- $ in thousands ----------------------------- Current: Israeli 3,353 (3,894) 4,865 Non-Israeli (17,935) 3,240 11,618 ------- ------- ------- (14,582) (654) 16,483 Deferred, see d. above: Israeli 42 (4,877) 263 Non-Israeli 12,840 (7,933) (5,010) ------- ------- ------- 12,882 (12,810) (4,747) ------- ------- ------- (1,700) (13,464) 11,736 ------- ------- ------- ------- ------- ------- 24 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 ------------------------------ 1996 1995 1994 -------- ------- ------- $ in thousands ------------------------------ Income (loss) before taxes on income (180,133) (46,852) 79,320 -------- ------- ------- -------- ------- ------- Theoretical tax (tax benefit) on the above amount (64,848) (17,335) 30,142 L e s s - effect of lower tax rate for "approved enterprises" 22,127 9,057 (5,522) -------- ------- ------- (42,721) (8,278) 24,620 Increase (decrease) in taxes resulting from different tax rates - net (2,608) (855) 1,433 Increase in taxes resulting from permanent differences - primarily non-deductible amortization and other expenses 3,141 4,808 3,347 Reversal of prior years' income tax provisions (1,600) (14,748) Change in valuation allowance 45,198 7,129 493 Decrease in taxes arising from differences between non-dollar currencies income and dollar income - net* (3,110) (1,520) (18,157) -------- ------- ------- Actual tax expense (benefit) (1,700) (13,464) 11,736 -------- ------- ------- -------- ------- ------- Per share effect of "approved $ (0.52) $ (0.21) $ 0.13 enterprise" benefits -------- ------- ------- -------- ------- ------- * 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. Six. Income (loss) before taxes on income: Year ended December 31 ----------------------------- 1996 1995 1994 -------- ------- ------ $ in thousands ----------------------------- Israeli (83,058) (33,546) 77,705 Non-Israeli (97,075) (13,306) 1,615 -------- ------- ------ (180,133) (46,852) 79,320 -------- ------- ------ -------- ------- ------ Seven. Tax assessments The Company has received final tax assessments through the 1990 tax year. The tax returns of the U.S. subsidiaries and the main European subsidiary have been audited by the tax authorities through the 1991 tax year. 25 NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: One. 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 does not hold or issue financial instruments for trading purposes. 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. Two. Foreign exchange risk management The Company enters into forward exchange contracts and purchases currency options to hedge existing non-dollar assets and liabilities as well as certain firm sale and purchase commitments.The Company also purchases currency options to hedge anticipated sales planned for the coming year, which are expected to be denominated in non-dollar currencies. The Company writes currency options as part of its hedging policy. The terms of all of these currency derivatives are shorter than one year. The net premiums paid for currency options are presented in the balance sheets among prepaid expenses and charged to financial expenses over the terms of the options. The amounts relating to foreign currency derivatives are as follows: Notional amount ----------------- December 31 ----------------- 1996 1995 ------- ------- $ in millions ----------------- S> Forward contracts - for conversion of non-dollar currencies into dollars 86 149 ------- ------- ------- ------- Options purchased -,- 32 ------- ------- ------- ------- Options written -,- 36 ------- ------- ------- ------- Three. Concentrations of credit risk At December 31, 1996 and 1995, the Company held cash and cash equivalents in the total amount of $ 90,050,000 and $ 92,326,000, respectively, 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. Therefore, the Company does not anticipate any credit losses in respect of these items. 26 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. Four. Fair value of financial instruments The financial instruments of the Company and its subsidiaries consist mainly of non-derivative assets: cash and cash equivalents, short and long-term investments, current and non-current accounts receivable, and non-derivative liabilities: short-term bank credit, accounts payable and accrued liabilities and long-term liabilities. In view of their nature, the fair value of the financial instruments included in working capital of the Company is usually identical or close to their carrying amount. The fair value of non-current receivables 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, 1996 and 1995 was approximately $(1.0) million and $1.2 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: December 31, 1996 December 31, 1995 ---------------------- ---------------------- Assets Liabilities Assets Liabilities -------- ------------ ------- ------------ $ in thousands $ in thousands ---------------------- ---------------------- Israeli currency (a): Unlinked 10,939 15,583 9,749 20,533 ------- ------ ------- ------ ------- ------ ------- ------ Linked (b) 1,057 72 ------- ------- ------- ------- Other non-dollar currencies (c) 116,797 50,566 196,030 50,698 ------- ------ ------- ------ ------- ------ ------- ------ (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. 27 NOTE 15 - SELECTED INCOME STATEMENT DATA: One. 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 generated. Unaffiliated customers are customers outside the Company and its consolidated subsidiaries. Identifiable assets are those assets employed in, or associated with, generating those revenues. Total Israel and other United States Europe Eliminations consolidated ---------------- ------------- ------ ------------ ------------ $ In thousands --------------------------------------------------------------------- Year ended December 31, 1996: Revenues from unaffiliated customers *103,049 **276,662 177,465 557,176 Inter-area revenues from unaffiliated customers 15,590 122,200 82 137,872 -------- --------- ------- -------- T o t a l revenues from 118,639 398,862 177,547 695,048 unaffiliated customers 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 *105,595 **302,564 257,028 665,187 Inter-area revenues from unaffiliated customers 627 64,065 408 65,100 -------- --------- ------- -------- T o t a l 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) -------- --------- ------- -------- -------- -------- --------- ------- -------- -------- Year ended December 31, 1994: Revenues from unaffiliated customers *93,373 **354,010 223,803 671,186 Inter-area revenues from unaffiliated customers 2,607 30,345 32,952 -------- --------- ------- -------- T o t a l revenues from unaffiliated customers 95,980 384,355 223,803 704,138 Intercompany revenues between geographical areas 219,727 28,344 345 (248,416) -------- --------- ------- -------- -------- 315,707 412,699 224,148 (248,416) 704,138 Operating income (loss) 54,575 (1,374) 5,209 12,671 71,081 -------- --------- ------- -------- -------- -------- --------- ------- -------- -------- 28 * Mainly export sales to a 50%-owned joint venture company in Japan aggregating $ 56,604,000, $ 57,725,000 and $ 52,665,000 in 1996, 1995 and 1994. ** Including sales to a 50%-owned joint venture company in Japan aggregating $ 5,661,000, $ 2,681,000 and $ 1,581,000 in 1996, 1995 and 1994, respectively. December 31 ----------------- 1996 1995 ------- ------- $ in thousands ----------------- Identifiable assets: Israel and other 236,893 230,910 United States 334,230 457,993 Europe 133,611 231,928 ------- ------- 704,734 920,831 ------- ------- ------- ------- Year ended December 31 -------------------------- 1996 1995 1994 ------- ------- ------- $ in thousands -------------------------- 2) Revenues by destination: United States 284,143 302,992 356,467 Europe 238,679 296,269 243,540 Japan 110,211 71,504 60,849 Other 62,015 59,522 43,282 ------- ------- ------- 695,048 730,287 704,138 ------- ------- ------- ------- ------- ------- Two. Research and development costs - net: Expenses incurred* 84,344 83,545 82,551 L e s s - royalty-bearing participations from the Government of Israel (note 9a(1)(a)) 11,549 9,883 9,293 ------- ------- ------- 72,795 73,662 73,258 ------- ------- ------- ------- ------- ------- * Including acquired in-process research and development 7,766 ------- ------- Three. Selling, general and administrative expenses: Selling 124,182 135,821 141,674 General and administrative* 146,380 118,749 72,531 ------- ------- ------- 270,562 254,570 214,205 ------- ------- ------- ------- ------- ------- * Including net change in allowance for doubtful accounts and direct write-off of bad debts 70,235 46,800 8,600 ------- ------- ------- ------- ------- ------- 29 Year ended December 31 ---------------------- 1996 1995 1994 ----- ------ ------ $ in thousands ---------------------- Four. Financial income - net: Income: Interest 6,648 11,074 11,032 Realized and unrealized gain on trading marketable securities - net 893 3,741 601 Non-dollar currency gains and losses - net 1,071 ----- ------ ------ 8,612 14,815 11,633 Expenses: Interest 1,846 3,079 2,550 Bank charges 1,012 935 948 Cost of hedging transactions 1,071 352 2,373 Non-dollar currency gains and losses - net 520 297 ----- ------ ------ 3,929 4,886 6,168 ----- ------ ------ 4,683 9,929 5,465 ----- ------ ------ ----- ------ ------ NOTE 16 - TRANSACTIONS AND BALANCES WITH RELATED PARTIES: One. The Company and its subsidiaries have concluded financial transactions with related parties, mainly banks, in the ordinary course of business. Two. The Company has conducted foreign currency transactions with an affiliate of two of its shareholders. Three. The Company has purchased certain insurance policies from insurance companies which are affiliates of two of the Company's major shareholders. The insurance premium paid was $ 2,500,000 in each of the years 1996, 1995 and 1994. Four. Sales to related parties (not including a 50%-owned joint venture company in Japan) in 1996, 1995 and 1994 aggregated $ 1,404,000, $ 7,200,000 and $ 2,400,000, respectively. Five. The Company had trade receivables from a 50%-owned joint venture company in Japan totalling $ 15,659,000 and $ 24,258,000 at December 31, 1996 and 1995, respectively. Six. See also notes 8, 9a(2) and 15a. 30 NOTE 17 - NOMINAL DATA OF THE COMPANY a. Balance sheet data Nominal NIS in thousands ------------------------ December 31 ------------------------ 1996 1995 --------- --------- Assets Current assets: Cash and cash equivalents 90,336 103,278 Short-term investments 122,690 168,462 --------- --------- T o t a l cash and short-term investments 213,026 271,740 Accounts receivable: Trade 60,688 101,999 Consolidated Companies 1,474,683 1,445,783 Government of Israel 15,421 42,094 Other receivables 28,727 35,022 Inventories 122,832 117,910 Prepaid expenses 2,532 3,038 --------- --------- 1,917,909 2,017,586 Investment and other non-current assets: Investment in consolidated companies 619,455 846,063 Investment in associated companies and in limited partnership 14,152 6,059 Other investment 47,253 42,988 Deferred income taxes 719 706 Long-term receivables 48 --------- --------- 681,579 895,864 Property, plant and equipment: Cost 220,952 203,323 L e s s - accumulated depreciation and amortization 144,508 119,448 --------- --------- 76,444 83,875 Goodwill and other intangible assets, net of accumulated amortization 23,972 30,967 --------- --------- 2,699,904 3,028,292 --------- --------- --------- --------- 31 Nominal NIS in thousands ------------------------ December 31 ------------------------ 1996 1995 --------- --------- Liabilities and shareholders' equity Current liabilities: Short-term bank credit and current maturities of long-term liabilities 2,209 3,389 Accounts payable and accruals: Trade 52,748 77,877 Consolidated companies 828,142 557,463 Other 230,422 273,017 --------- --------- 1,113,521 911,746 Capital note 410 410 --------- --------- T o t a l - commitments 1,113,931 912,156 Shareholders' equity 1,585,973 2,116,136 --------- --------- 2,699,904 3,028,292 --------- --------- --------- --------- b. Statement of operations data: Nominal NIS in thousands ------------------------ 1996 1995 --------- --------- Revenues from sales and service 659,859 1,024,592 Cost of sales and service 597,699 645,395 --------- --------- Gross profit 62,160 379,197 Research and development costs - net 141,488 156,655 --------- --------- (79,328) 222,542 Selling, general and administrative expenses 167,221 304,064 --------- --------- Operating loss (246,549) (81,522) Financial income - net 56,941 34,263 Other expenses -net (19,159) (4,487) --------- --------- Loss before taxes on income (208,767) (51,746) Taxes on income 152 (10,726) --------- --------- Loss from operations of the company (208,919) (41,020) Share in income (losses) of equity investments - net (267,432) 9,785 --------- --------- Net income (loss) - nominal (476,351) (31,235) --------- --------- --------- --------- 32 c. Changes in shareholders' equity: Nominal NIS in thousands ----------------------------------------- Share Capital Retained capital surplus earnings Total ------- ------- --------- --------- Balance at January 1, 1995 5,135 640,665 1,561,514 2,207,314 Changes during 1995: Net income (loss) (31,235) (31,235) Employee stock options exercised and paid 2 7,987 7,989 Dividend (68,110) (68,110) Exchange difference in value of dividend declared in 1994 178 178 ------- ------- --------- --------- Balance at December 31, 1995 5,137 648,652 1,462,347 2,116,136 Changes during 1996: Net income (loss) (476,351) (476,351) Dividend (54,062) (54,062) Exchange differences in value of dividend declared in 1995 250 250 ------- ------- --------- --------- Balance at December 31, 1996 5,137 648,652 932,184 1,585,973 ------- ------- --------- --------- ------- ------- --------- --------- --------------- -------------------- --------------- 33 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