UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM .... TO ....
COMMISSION FILE NUMBER 0-21222
TECNOMATIX TECHNOLOGIES LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN THE CHARTER)
N/A ISRAEL
(TRANSLATION OF REGISTRANT'S (JURISDICTION OF INCORPORATION OR
NAME INTO ENGLISH) ORGANIZATION)
16 HAGALIM AVENUE, HERZLIYA 46733, ISRAEL
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT.
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT.
ORDINARY SHARES, PAR VALUE NIS 0.01 PER SHARE
(TITLE OF CLASS)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D)
OF THE ACT.
NONE
(TITLE OF CLASS)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report - 10,725,706
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 __ Item 18 X
1
PRELIMINARY NOTE
This annual report contains historical information and forward-looking
statements. Statements looking forward in time are included in this annual
report pursuant to the "Safe Harbor" provision of the Private Securities
Litigation Reform Act of 1995. They involve known and unknown risks and
uncertainties that may cause our actual results in future periods to be
materially different from any futurIe performance suggested herein. Furthermore,
we operate in an industry sector where securities values may be volatile and may
be influenced by economic and other factors beyond the company's control. In the
context of the forward-looking information provided in this annual report and in
other reports, please refer to the discussions of risk factors detailed in, as
well as the other information contained in, this annual report and our other
filings with the Securities and Exchange Commission.
2
TABLE OF CONTENTS
PART ONE
ITEM 1. Identity of Directors, Senior Management and Advisors...........................Not applicable
ITEM 2. Offer Statistics and Expected Timetable.........................................Not applicable
ITEM 3. Key Information.................................................................4
ITEM 4. Information on the Company......................................................13
ITEM 5. Operating and Financial Review and Prospects....................................27
ITEM 6. Directors, Senior Management and Employees......................................39
ITEM 7. Major Shareholders and Related Party Transactions...............................47
ITEM 8. Financial Information...........................................................49
ITEM 9. The Offer and Listing ..........................................................50
ITEM 10. Additional Information..........................................................51
ITEM 11. Quantitative and Qualitative Disclosure about Market Risk.......................62
ITEM 12. Description of Securities Other than Equity Securities..........................Not applicable
PART TWO
ITEM 13. Defaults, Dividend Arrearages and Delinquencies.................................Not applicable
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.. Not applicable
ITEM 15. Controls and Procedures.........................................................64
ITEM 16A. Audit Committee Financial Expert................................................Not applicable
ITEM 16B. Code of Ethics..................................................................Not applicable
PART THREE
ITEM 17. Financial Statements............................................................Not applicable
ITEM 18. Financial Statements............................................................65
ITEM 19. Exhibits........................................................................65
SIGNATURES.......................................................................... .........66
CERTIFICATION PURSUANT TO SECTION 302(A) OF THE SARBANES - OXLEY ACT OF 2002............... 67
CERTIFICATION PURSUANT TO SECTION 302(A) OF THE SARBANES - OXLEY ACT OF 2002.............. 68
EXHIBIT INDEX
3
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS - NOT APPLICABLE
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE - NOT APPLICABLE
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following selected summary of financial information was derived from
our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The selected summary data
should be read in conjunction with and are qualified in their entirety by our
Consolidated Financial Statements and notes thereto, which are presented
elsewhere herein and by reference to "Item 5: Operations and Financial Review
and Prospects."
YEAR ENDED DECEMBER 31,
2002 2001 2000 1999 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues
Software license fees................... $36,385 $42,316 $51,699 $57,444 $44,559
Services................................ 45,620 44,584 37,319 30,574 23,775
------ ------ ------ ------ ------
Total 82,005 86,900 89,018 88,018 68,334
------ ------ ------ ------ ------
Revenues....................................
Costs and expenses
Cost of software license fees................ 8,062 7,851 5,764 5,003 4,001
Cost of services............................. 15,005 15,268 13,354 9,251 6,166
Amortization of acquired 2,491 7,758 7,801 4,434 801
intangibles.......
Research and development, net.............. 14,812 19,216 20,748 16,451 11,386
Selling and marketing ....................... 36,887 44,624 50,737 39,333 33,901
General and administrative 5,013 4,855 6,037 4,932 4,964
Write-off of long-term investment 457 ---- ---- ---- ----
Restructuring and asset impairment 651 1,843 ---- ---- ----
Impairment of software acquired.......... 375 ---- ---- ---- ----
In-process research and development
and acquisition costs........................ ---- ---- 5,250 9,944 4,376
Implementation costs......................... ---- ---- ---- ---- 784
---- ---- ---- ---- ---
Total costs and expenses........................ 83,753 101,415 109,691 89,348 66,379
------ ------- ------- ------ ------
4
Operating income (1,748) (14,515) (20,673) (1,330) 1,955
(loss).............................
Financial income (expense), (799) 1,191 1,348 3,241 15,947
---- ----- ----- ----- ------
net................. ...
Income (loss) before taxes on
income........... (2,547) (13,324) (19,325) 1,911 17,902
Taxes on income
.................................... 148 (54) (505) (579) (494)
--- --- ---- ---- ----
Income (loss) after taxes on
income.............. (2,399) (13,378) (19,830) 1,332 17,408
Share in loss of affiliated (431) (532) (131) ---- ----
company.............
Minority interest in net (income) loss
of subsidiary...................... ---- ---- 2 22 145
---- ---- - -- ---
Net income(loss).............. $ (2,830) $ (13,910) $ (19,959) $1,354 $17,553
======== ========= ========= ====== =======
Basic earnings (loss) per share
Net income (loss)............... $ (0.27) $ (1.35) $ (1.95) $0.14 $1.78
======= ======= ======= ===== =====
Diluted earnings (loss) per share
Net income (loss)............... $ (0.27) $ (1.35) $ (1.95) $0.13 $1.70
======= ======= ======= ===== =====
Weighted average number of shares used
for computing basic earnings (loss)
per share
10,607,140 10,366,125 10,224,737 9,674,778 9,858,222
========== ========== ========== ========= =========
Weighted average number of shares used
for computing diluted earnings (loss)
per share
10,607,140 10,366,125 10,224,737 10,403,719 10,315,232
========== ========== ========== ========== ==========
AT DECEMBER 31,
-------------- --------------- -------------- ------------- -------------
BALANCE SHEET DATA 2002 2001 2000 1999 1998
-------------- --------------- -------------- ------------- -------------
Working capital..................... $27,460 $57,758 $67,523 $78,154 $78,361
Total assets........................ 116,343 123,379 149,318 175,443 168,751
Short term credits and current
maturities of long-term debt....... ---- 687 784 10,883 11,484
Long-term debt..................... 37,428 43,765 49,250 49,250 55,250
Shareholders' equity................ 54,917 55,893 69,696 84,691 81,417
5
D. RISK FACTORS
CERTAIN STATEMENTS INCLUDED IN THIS ANNUAL REPORT, WHICH USE THE TERMS
"ESTIMATE", "PROJECT", "INTEND", "EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED
TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS, INCLUDING THE RISK FACTORS SET
FORTH BELOW. BECAUSE OF TIME AND OTHER FACTORS AFFECTING OUR OPERATING RESULTS,
PAST HISTORICAL PERFORMANCE SHOULD NOT BE USED AS AN INDICATOR OF FUTURE
PERFORMANCE, AND INVESTORS SHOULD NOT USE HISTORICAL TRENDS TO ANTICIPATE
RESULTS OR TRENDS IN FUTURE PERIODS.
RISKS RELATED TO OUR BUSINESS
WE HAVE A RECENT HISTORY OF ANNUAL AND QUARTERLY LOSSES AND CANNOT ASSURE YOU
THAT WE WILL RETURN TO PROFITABILITY ON AN ANNUAL BASIS OR ON A QUARTERLY BASIS
IN THE FUTURE.
We incurred net losses of approximately $13.9 million in 2001 and $2.8 million
in 2002. In addition, we incurred losses during each of the four quarters of
2001, as well as each of the four quarters of 2002, in which we lost $0.5
million, $0.2 million, $0.2 million and $1.9 million, respectively. We cannot be
certain that we will return to profitability on an annual basis or on a
quarterly basis.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY RESULTS, WHICH MAKES
IT DIFFICULT FOR INVESTORS TO MAKE RELIABLE PERIOD-TO-PERIOD COMPARISONS AND MAY
CONTRIBUTE TO VOLATILITY IN THE MARKET PRICE FOR OUR ORDINARY SHARES.
Our quarterly revenues, gross profits and results of operations have fluctuated
significantly in the past and may be subject to continued fluctuation in the
future. The following events may cause such fluctuations:
o changes in timing of orders, especially large orders, for our products
and services;
o timing of product releases;
o the dollar value of orders for our products and services;
o adverse economic conditions and international exchange rate and
currency fluctuations;
o political instability in the Middle East;
o delays in the implementation of our solutions by customers;
o changes in the proportion of service and license revenues;
o changes in the economic conditions of the various industries in which
our customers operate;
o price and product competition;
o increases in selling and marketing expenses, as well as other operating
expenses;
o technological changes; and
o consolidation of our clients.
A substantial portion of our expenses, including most product development,
selling and marketing expenses, must be incurred in advance of when revenue is
generated. If our projected revenue does not meet our expectations, we are
likely to experience an even larger shortfall in our operating profit relative
to our expectations. As a result, we believe that period-to-period comparisons
of our historical results of operations are not necessarily meaningful and that
you should not rely on them as an indication for future performance. Also, our
quarterly results of operations have, on separate occasions, been below the
expectations of public market analysts and investors and the price of our
ordinary shares subsequently decreased. If this happens in the future, the price
of our ordinary shares will likely decrease again.
6
IF WE FAIL TO RETAIN OUR CUSTOMERS, OUR REVENUES MAY INCREASE AT A SLOWER RATE
OR MAY DECREASE.
We sell our products to major electronics, aerospace, automotive,
automotive supplier and other discrete manufacturing companies worldwide and our
business depends on our ability to retain these customers. Approximately 82% of
our revenues from software license fees in 2001, 83% of these revenues in 2002,
and 84% of these revenues in the first three months of 2003, resulted from
repeat sales to existing customers. We cannot assure you that we will be able to
retain our existing customers and make repeat sales to those customers. Our
inability to retain our customers would also adversely affect our revenues from
services.
OUR SALES CYCLE IS VARIABLE AND SOMETIMES LONG AND INVOLVES SIGNIFICANT
RESOURCES ON OUR PART, BUT MAY NEVER RESULT IN ACTUAL SALES.
Our sales cycle has historically been lengthy and variable, ranging between
three to nine months from our initial contact with a potential client to the
signing of a license agreement. The decision to utilize our products often
entails a significant change in a potential customer's organization, information
technology systems, and business processes. Accordingly, initial sales to new
customers often require extensive educational, sales and engineering efforts.
Historically, our customers purchased our stand-alone eMPower software products
to use in design and implementation of manufacturing workcells for specific
manufacturing activities, such as painting, assembly and welding. Currently,
however, our marketing and sales efforts increasingly focus on our comprehensive
eMPower Enterprise Solutions, including consulting services, integration,
training and support, rather than on seeking to introduce a limited number of
products focused on specific manufacturing activities. Accordingly, the
marketing and sales efforts of our eMPower Enterprise Solutions typically
entails the education of, and consulting with, a broader range of individuals
and departments within a potential customer's organization. Specifically,
provision of these server-based and Web-enabled comprehensive solutions involves
our Global Professional Services organization integrating these solutions into
the customer's information technology environment, as well as providing training
and support. The large number of individuals and departments involved in the
decision of a potential customer to purchase our enterprise solutions makes that
decision more complex, with a prolonged sales cycle of approximately nine to
twelve months.
We do not expect the sales cycle for our eMPower solutions and products to
decrease in the near future or at all. The purchasing decisions of our clients
are subject to the uncertainties and delays associated with the budgeting,
internal approval and competitive evaluation processes that typically accompany
significant capital expenditures and the purchase of mission critical software.
Any delays in sales could cause our operating results to vary widely. If our
sales cycle lengthens, our quarterly operating results may become less
predictable and may fluctuate more widely than in the past. A number of
companies decide which products to buy through a request for proposal process.
In these situations, we run the risk of investing significant resources in a
proposal, only to lose to our competition.
IF WE ARE UNABLE TO ACCURATELY PREDICT AND RESPOND TO MARKET DEVELOPMENTS OR
DEMANDS, OR IF OUR PRODUCTS ARE NOT ACCEPTED IN THE MARKETPLACE, OUR BUSINESS
WILL BE ADVERSELY AFFECTED.
The market for Manufacturing Process Management (MPM) is rapidly evolving.
This makes it difficult to predict demand and market acceptance for our
solutions and products. We cannot guarantee that the market for our solutions
and products will grow or that they will become widely accepted. If the market
for our solutions and products does not develop as quickly as we expect our
future revenues and profitability will be adversely affected. Changes in
technologies, industry standards, the regulatory environment, client
requirements and new product introductions by existing or future competitors
could render our existing offerings obsolete and unmarketable, or require us to
develop new products. If our solutions and products do not achieve or maintain
market acceptance or if our competitors release new products that achieve
quicker market acceptance, have more advanced features, offer better performance
or are more price competitive, our revenues may not grow and may even decline.
Conversely, a significant increase in the number of clients, or a significant
increase in our development of new product offerings, or both, could require us
to expend significant amounts of money, time and other resources to meet the
demand. This could strain our personnel and financial resources.
7
CONSOLIDATION IN OUR INDUSTRY MAY REQUIRE US TO PARTNER WITH PROVIDERS OF
PRODUCT LIFE-CYCLE MANAGEMENT SOLUTIONS AND FAILURE TO DO SO MAY ADVERSELY
AFFECT OUR BUSINESS.
We operate in the product life-cycle management (PLM) segment of the
business software market. This market is undergoing horizontal consolidation as
companies with complementary products and strengths are merging or otherwise
consolidating in order to provide customers with solutions for the entire life
cycle of a product or product life-cycle management solutions. While
Manufacturing Process Management (MPM) solutions such as our eMPower Enterprise
Solutions comprise an integral part of a broad product life-cycle management
solution, companies seeking to provide full product life-cycle management
solutions may choose to develop their own MPM solutions rather than incorporate
third-party solutions such as ours. In addition, as the industry consolidates,
newly-consolidated entities capable of offering broad product life-cycle
management solutions may achieve greater prominence and obtain a competitive
advantage in relation to customers seeking broad solutions. Accordingly, it may
become increasingly important for us to partner with those consolidated
entities. If we are unable to partner with some or all of those companies, or if
the market does not accept the solutions provided by the companies with which we
cooperate, our sales and revenues may decline.
WE MAY BE UNABLE TO ACHIEVE THE BENEFITS WE ANTICIPATE FROM JOINT SOFTWARE
DEVELOPMENT, MARKETING OR OTHER STRATEGIC ARRANGEMENTS WITH OUR BUSINESS
PARTNERS.
We enter into various development or joint business arrangements to develop
new software products, integrate our products with the products of other
entities or market our products together with the products of other entities. We
may distribute ourselves or jointly sell with our business partners an
integrated software product and pay a royalty to the business partner based on
end-user license fees under these joint business arrangements. The market may
reject these integrated products or these arrangements may not succeed for other
reasons. As a result we may not achieve the revenues we anticipated at the time
we entered into the joint arrangement.
OUR SALES MAY DECREASE AS A RESULT OF EVOLVING INDUSTRY STANDARDS AND RAPID
TECHNOLOGICAL CHANGES THAT COULD RESULT IN OUR PRODUCTS BEING NO LONGER IN
DEMAND.
We operate in an industry that is characterized by evolving industry
standards with rapid changes in technology and consumer demand and the
continuing introduction of higher performance products with shorter product life
cycles. If our products become outdated, our sales will likely decrease. Our
operating results will depend on our ability to continue to develop and
introduce new and enhanced products on a timely and cost-effective basis to meet
evolving customer requirements. Since our products are designed to work with
other enterprise-wide programs, they must conform to various technical standards
in order to operate efficiently on an enterprise-wide basis. Successful product
development and introduction depends on numerous factors, including among
others:
o our ability to anticipate market requirements and changes in technology
and industry standards;
o our ability to accurately define new products, and introduce them to
the market; and
o our ability to develop technology that satisfies industry requirements.
We may not be able to meet these challenges, respond successfully to new
products introduced by competitors, or recover our substantial research and
development expenditures. Our failure to develop and market new products could
result in our current products becoming uncompetitive.
UNDETECTED DEFECTS MAY INCREASE OUR COSTS AND IMPAIR THE MARKET ACCEPTANCE OF
OUR PRODUCTS AND TECHNOLOGY.
Our software products are complex and may contain undetected defects,
particularly when first introduced or when new versions or enhancements are
released. Testing of our products is particularly challenging because it is
difficult to simulate the wide variety of client environments into which our
products are deployed. Despite testing conducted by us and our clients, we have
in the past shipped product releases with some defects, certain customers have
cited possible defects, and have otherwise discovered other defects in our
products after their commercial shipment. Our products are frequently critical
to our clients' operations. As a result, our clients and potential clients have
a greater sensitivity to product defects than do clients of software products
generally.
Defects may be found in current or future products and versions after the
start of commercial shipment. This could result in:
o a delay or failure of our products to achieve market acceptance;
o adverse client reaction;
o negative publicity and damage to our reputation;
o diversion of resources; and
o increased service and maintenance costs.
8
Defects could also subject us to legal claims. Although our license
agreements contain limitation of liability provisions, these provisions may not
be sufficient to protect us against these legal claims. The sale and support of
our products may also expose us to product liability claims.
A SIGNIFICANT PERCENTAGE OF OUR REVENUES ARE GENERATED BY SALES TO MANUFACTURERS
OPERATING IN A FEW SPECIFIC INDUSTRIES AND IF ECONOMIC ACTIVITY IN ONE OR MORE
OF THOSE INDUSTRIES SLOWS, OUR REVENUES WILL MOST LIKELY DECREASE.
We sell our products to major electronics, aerospace, automotive,
automotive supplier and other discrete manufacturing companies. Therefore our
success in selling our products and services is dependent upon the level of
activity in such industries. If, whether as a result of a general slowing of
local or global economies or otherwise, economic activity in one or more of our
target industries decreases or fails to grow, our revenues will most likely
decrease. Specifically, since a substantial portion of our revenues is derived
from sales to the automotive industry and since the automotive industry is
traditionally subject to cyclicality, any adverse change in the level of
activity in the automotive industry could materially adversely affect the level
of our revenues. In 2002, our revenues from the electronics industry decreased
to $17.3 million or 21% of our total revenues, compared to $20.4 million or 24%
in 2001, as a result of the slowdown in the U.S. electronics industry in 2002.
GREATER MARKET ACCEPTANCE OF OUR COMPETITORS' PRODUCTS COULD RESULT IN REDUCED
REVENUES OR GROSS MARGINS.
We compete with other providers of MPM solutions in the industries we
target. In addition, as a result of the consolidation in the product life-cycle
management solution market, we have begun to compete with providers of product
life-cycle management solutions that do not necessarily provide MPM solutions,
as we do. We expect that competition will increase as a result of any further
consolidation in the market. A number of our current competitors, including
Dassault Systems S.A., have, and our prospective competitors may have,
competitive advantages in relation to us. These advantages may include greater
technical and financial resources, more developed marketing and service
organizations, greater expertise and broader customer bases and name recognition
than us.
We cannot assure you that competition will not result in price reductions
for our products and services, fewer client orders, reduced gross margins or
loss of market share, any of which could materially adversely affect our
business, financial condition and results of operations.
WE RELY ON SOFTWARE FROM THIRD PARTIES. IF WE LOSE THAT SOFTWARE, WE WOULD HAVE
TO SPEND ADDITIONAL CAPITAL TO REDESIGN OUR EXISTING SOFTWARE OR DEVELOP NEW
SOFTWARE.
We integrate various third-party software products as components of our
products. Our business would be disrupted if functional versions of this
software were either no longer available to us or no longer offered to us on
commercially reasonable terms. In either case, we would be required to spend
additional capital to either redesign our software to function with alternate
third-party software or develop these components ourselves. We might be forced
to limit the features available in our current or future product offerings and
the commercial release of our products could be delayed.
WE MAY BE UNABLE TO MAINTAIN OUR SALES, MARKETING AND SUPPORT ORGANIZATIONS
WHICH MAY HINDER OUR ABILITY TO MEET CUSTOMER DEMANDS.
We sell our products primarily through our direct sales force and support
our clients through our technical and customer support staff. We need to
maintain our direct sales and marketing operations to increase market awareness
and sales of our products. Competition for qualified people may lead to
increased labor and personnel costs. If we do not succeed in retaining our
personnel, in attracting new employees or in replacing employees who leave, our
business could suffer significantly.
OUR ABILITY TO INCREASE OUR REVENUES MAY DEPEND ON OUR ABILITY TO INCREASINGLY
MAKE SALES THROUGH THIRD PARTIES.
We intend to increase our focus on sales through third parties in 2003 and
beyond. If we do not succeed in executing our strategy of increasing our sales
through indirect sales channels, we may be unable to achieve revenue growth.
9
IF WE ARE UNABLE TO ATTRACT, TRAIN AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE
ABLE TO ACHIEVE OUR OBJECTIVES AND OUR BUSINESS COULD BE HARMED.
Our future success depends on our ability to absorb and retain senior
employees and to attract, motivate and retain highly qualified professional
employees. Competition for these employees can be intense, especially in a
number of our key markets and locations, including the United States, Japan and
Germany. The process of locating, training and successfully integrating
qualified personnel into our operations can be lengthy and expensive. We may not
be able to compete effectively for the personnel we need. Any loss of members of
senior management or key technical personnel, or any failure to attract or
retain highly qualified employees as needed, could materially adversely affect
our ability to carry out our business plan. In addition, we are significantly
dependent on the continuing services of Harel Beit-On, the Chairman of our Board
of Directors and Chief Executive Officer.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WHICH MAY LIMIT
OUR ABILITY TO COMPETE EFFECTIVELY.
Our success and ability to compete are substantially dependent upon our
internally developed technology. Other than our trademarks, most of our
intellectual property consists of proprietary or confidential information that
is not subject to patent or similar protection.
In general, we have relied on a combination of internally developed
technology, trade secret, copyright and trademark law and nondisclosure
agreements to protect our proprietary know-how. Unauthorized third parties may
attempt to copy or obtain and use the technology protected by those rights. Any
infringement of our intellectual property could have a material adverse effect
on our business, financial condition and results of operations. Policing
unauthorized use of our products is difficult and costly, particularly in
countries where the laws may not protect our proprietary rights as fully as in
the United States.
Substantial litigation over intellectual property rights exists in the
software industry. We expect that software products may be increasingly subject
to third-party infringement claims as the functionality of products in different
industry segments overlaps. We believe that many industry participants have
filed or intend to file patent and trademark applications covering aspects of
their technology. We cannot be certain that they will not make a claim of
infringement against us based on our products and technology. Any claims, with
or without merit, could:
o be expensive and time-consuming to defend;
o cause product shipment and installation delays;
o divert management's attention and resources; or
o require us to enter into royalty or licensing agreements to obtain the
right to use a necessary product or component.
Royalty or licensing agreements, if required, may not be available on
acceptable terms, if at all. A successful claim of product infringement against
us and our failure or inability to license the infringed or similar technology
could have a material adverse effect on our business, financial condition and
results of operations.
MARKETING AND DISTRIBUTING OUR PRODUCTS OUTSIDE OF NORTH AMERICA EXPOSES US TO
INTERNATIONAL OPERATIONS RISKS THAT WE MAY NOT BE ABLE TO SUCCESSFULLY ADDRESS.
We market and sell our products and services in North America, Europe and
Asia and derive a significant portion of our revenues from customers in Europe
and Asia. We received 70% of our total revenues in 2000, 71% of our total
revenues in 2001, 70% of our total revenues in 2002, and 70% of our total
revenues in the three months ended March 31, 2003 in non-dollar currencies from
sales to customers located outside of North America. Since our financial results
are reported in dollars, decreases in the rate of exchange of non-dollar
currencies in which we make sales relative to the dollar will decrease the
dollar-based reported value of those sales. In 2000, 2001 and the first quarter
of 2002, decreases in Euro-U.S. dollar exchange rates adversely affected our
results of operation. To the extent that decreases in exchange rates are not
offset by a reduction in our costs, they may in the future materially adversely
affect our results of operation. In addition, we have sales and support
facilities and offices in many locations outside of North America, including in
Germany, France, Italy, Spain, England, Sweden, Japan, Korea, Singapore, Taiwan
and China. These operations and entry into additional international markets may
require significant management attention and financial resources. We are also
subject to a number of risks customary for international operations, including:
10
o changing product and service requirements in response to new
regulations and requirements in various markets;
o economic or political changes in international markets;
o greater difficulty in accounts receivable collection and longer
collection periods;
o unexpected changes in regulatory requirements;
o difficulties and costs of staffing and managing foreign operations;
o difficulties in conducting business with customers, partners and others
in Asia and other areas of the world that have been or may be affected by
the SARS virus; and
o the uncertainty of protection for intellectual property rights in some
countries; multiple and possibly overlapping tax structures.
ANY FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY DISTRACT OUR MANAGEMENT
AND DISRUPT OUR BUSINESS.
One of our strategies is to acquire or make investments in complementary
businesses, technologies, services or products if appropriate opportunities
arise. We have made several acquisitions of companies or the assets of companies
in the past. We may in the future engage in discussions and negotiations with
companies about our acquiring or investing in those companies' businesses,
products, services or technologies. We cannot make assurances that we will be
able to identify future suitable acquisition or investment candidates, or if we
do identify suitable candidates that we will be able to make the acquisitions or
investments on commercially acceptable terms or at all. If we acquire or invest
in another company, we could have difficulty assimilating that company's
personnel, operations, technology or products and service offerings into our
own. The key personnel of the acquired company may decide not to work for us.
These difficulties could disrupt our ongoing business, distract our management
and employees, increase our expenses and adversely affect our results of
operations. We may incur indebtedness or issue equity securities to pay for any
future acquisitions. The issuance of equity securities could be dilutive to our
existing shareholders. Currently, we do not have any agreement to enter into any
material investment or acquisition transaction.
THE MARKET PRICE OF OUR ORDINARY SHARES MAY BE VOLATILE AND YOU MAY NOT BE ABLE
TO RESELL YOUR SHARES AT OR ABOVE THE PRICE YOU PAID, OR AT ALL.
The stock market in general has experienced, in the last three years,
extreme price and volume fluctuations. The market prices of securities of
information technology companies have been extremely volatile, and have
experienced fluctuations that have often been unrelated or disproportionate to
the operating performance of those companies. These broad market fluctuations
could adversely affect the market price of our ordinary shares. The market price
of the ordinary shares may fluctuate substantially due to a variety of factors,
including:
o any actual or anticipated fluctuations in our financial condition and
operating results; public announcements concerning us or our competitors,
or the information technology industry; the introduction or market
acceptance of new service offerings by us or our competitors; changes in
security analysts financial estimates;
o changes in accounting principles;
o sales of our ordinary shares by existing shareholders;
o changes in political, military or economic conditions in Israel and the
Middle East; and
o the loss of any of our key personnel.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market prices of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert our management's
attention and resources, which could cause serious harm to our business.
11
OUR EXECUTIVE OFFICERS, DIRECTORS AND ENTITIES THAT MAY BE DEEMED TO BE
AFFILIATED WITH THEM MAY BE ABLE TO INFLUENCE MATTERS REQUIRING SHAREHOLDER
APPROVAL AND THEY MAY DISAPPROVE ACTIONS THAT YOU VOTED TO APPROVE.
Our executive officers, directors and entities that may be deemed to be
affiliated with some of them beneficially own approximately 24.4% of our
outstanding ordinary shares as of April 30, 2003. Except as otherwise disclosed
in Schedule 13Ds filed by several of our directors and entities affiliated with
some of them, there are no voting or similar agreements among such shareholders.
However, if such shareholders were to act together, they would be able to
significantly influence all matters requiring approval by our shareholders,
including the election of directors and the approval of mergers or other
business combination transactions.
RISKS RELATED TO OUR LOCATION IN ISRAEL
IT MAY BE DIFFICULT TO EFFECT SERVICE OF PROCESS AND ENFORCE JUDGEMENTS AGAINST
DIRECTORS, OFFICERS AND EXPERTS IN ISRAEL.
We are incorporated in Israel. Many of our executive officers and directors
are nonresidents of the United States, and a substantial portion of our assets
and the assets of these persons are located outside the United States.
Therefore, it may be difficult to enforce a judgment obtained in the United
States against us or any of those persons. It may also be difficult to enforce
civil liabilities under United States federal securities laws in actions
instituted in Israel.
POLITICAL, ECONOMIC AND MILITARY CONDITIONS IN ISRAEL COULD NEGATIVELY IMPACT
OUR BUSINESS.
We are organized under the laws of the State of Israel. Our principal
research and development facilities are located in Israel. Although all of our
sales are currently being made to customers outside Israel, and we believe that
we have established redundant development and support capabilities in locations
outside Israel, we are influenced by the political, economic and military
conditions affecting Israel.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, which varies in degree and intensity, has caused security and
economic problems in Israel. Since October 2000, there has been a significant
increase in violence between Israel and the Palestinians. During the past two
years, the state of hostility has increased in intensity and Israel has
undertaken military operations in Palestinian cities and towns. It is possible
that the situation may deteriorate further and may impact our operations in
Israel. Any major hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners could
adversely affect our operations. We cannot assure you that ongoing or revived
hostilities or other events related to Israel will not have a material adverse
effect on us or our business. Several Arab countries still restrict business
with Israeli companies. We could be adversely affected by restrictive laws or
policies directed towards Israel and Israeli businesses.
Some of our directors, officers and employees are currently obligated to
perform annual reserve duty. Additionally, all such reservists are subject to
being called to active duty at any time under emergency circumstances. While we
have historically operated effectively under these requirements, we cannot
assess the full impact of these requirements on our workforce and business if
conditions should change, and we cannot predict the effect on us of any
expansion or reduction of these obligations.
WE MAY BE ADVERSELY AFFECTED IF THE RATE OF INFLATION IN ISRAEL EXCEEDS THE RATE
OF DEVALUATION OF THE NEW ISRAELI SHEKEL AGAINST THE DOLLAR.
Most of our revenues are in dollars or are linked to the dollar, while a
portion of our expenses, principally salaries and the related personnel
expenses, are in new Israeli shekels, or NIS. As a result, we are exposed to the
risk that the rate of inflation in Israel will exceed the rate of devaluation of
the NIS in relation to the dollar or that the timing of this devaluation lags
behind inflation in Israel. This would have the effect of increasing the dollar
cost of our operations. In 1998, 2001, 2002 and the first three months of 2003,
the rate of devaluation of the NIS against the dollar exceeded the rate of
inflation. However, in 1999 and 2000, while the rate of inflation was low, there
was a devaluation of the dollar against the NIS. We cannot predict any future
trends in the rate of inflation in Israel or the rate of devaluation of the NIS
against the dollar. If the dollar cost of our operations in Israel increases,
our dollar-measured results of operations will be adversely affected.
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THE TAX BENEFITS AVAILABLE TO US FROM GOVERNMENT PROGRAMS MAY BE DISCONTINUED OR
REDUCED AT ANY TIME, WHICH WOULD LIKELY INCREASE OUR TAXES.
We have received grants in the past and currently receive tax benefits
under Israeli government programs. To maintain our eligibility for these
programs and benefits, we must continue to meet specified conditions, including
making specified investments in fixed assets. Some of these programs restrict
our ability to manufacture particular products or transfer particular technology
outside of Israel. If we fail to comply with these conditions in the future, the
benefits received could be canceled and we could be required to refund any
payments previously received under these programs or pay fines. The Government
of Israel has reduced the benefits available under these programs recently and
these programs and tax benefits may be discontinued or reduced in the future. If
these tax benefits and programs are terminated or reduced, we could pay
increased taxes in the future, which could decrease our profits.
OUR UNITED STATES INVESTORS COULD SUFFER ADVERSE TAX CONSEQUENCES IF WE ARE
CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY.
Depending on various factors described below in Item 10E, we could be
characterized, for United States income tax purposes, as a passive foreign
investment company ("PFIC"). Such characterization could result in adverse
United States tax consequences to U.S. Holders (as defined in Item 10E) which
may be eliminated or ameliorated by a QEF Election (as defined in Item 10E) that
is in effect for any year in which we are a PFIC. Each U.S. Holder will be
responsible for making this QEF Election on such holder's tax return. Failure to
make a QEF Election may cause, among other things, any gain recognized on the
sale or disposition of our ordinary shares to be treated as ordinary income for
U.S. Holders. U.S. Holders should consult their United States tax advisors with
respect to the United States tax consequences of investing in our ordinary
shares, and the benefits of a QEF Election, as applied to their circumstances.
Although we do not believe that we have been a PFIC for any tax year through and
including 2002, we may be deemed to be a PFIC for tax year 2003 as a result of
our substantial holdings of cash, cash equivalents and securities combined with
a decline in our share price. For further discussion of the consequences of our
possible PFIC status, please refer to Item 10E.
CERTAIN PROVISIONS OF OUR ARTICLES OF ASSOCIATION AND OF ISRAELI LAW COULD
DELAY, HINDER OR PREVENT A CHANGE IN OUR CONTROL.
Our articles of association contain provision which could make it more
difficult for a third party to acquire control of us, even if that change would
be beneficial to our shareholders. Specifically, our articles of association
provide that our board of directors is divided into three classes, each serving
three-year terms. In addition, certain provisions of the Israeli Companies Law
could also delay or otherwise make more difficult a change in our control. The
provision of the Companies Law relating to mergers and acquisitions are
discussed in greater detail in "Item 10: Additional Information."
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Our commercial and legal name is Tecnomatix Technologies Ltd. We are a
company organized under the laws of the State of Israel and are subject to the
Israel Companies Law 1999 - 5759. We began operations in 1983. Our principal
offices are located at 16 Hagalim Avenue, Herzlia 46120, Israel and our
telephone number is + 972-9-959-4777. Our U.S. agent is our subsidiary,
Tecnomatix Technologies, Inc., located at 21500 Haggerty Road, Suite 300,
Northville, Michigan.
In 2000, we began to introduce our eMPower Enterprise Solutions to the
market through a program based on customer education, pilot and proof-of-concept
projects and limited intial implementations. In 2002, we saw successful results
from these efforts as a number of pilot projects converted to initial
implementations, and those initial implementations led to broad adoptions and
repeat orders. Specifically, by the end of 2002 we had carried out approximately
230 enterprise pilot projects around the world. Of these, appoximately 45% had
already led to initial implementations, and over 10% had matured into purchases
of eMPower as a mainstream solution for the enterprise. In 2002, 38% of our
revenue from software license fees were derived from eMPower Enterprise
Solutions and 62% from our eMPower stand-alone products as compared to 28% and
72% respectively, in 2001.
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In August 2002, we entered into a strategic alliance with EDS under which
our eMPower Enterprise Solutions will be an integral part of the EDS PLM
environment. The agreement establishes a joint development strategy, as well as
cooperative marketing and distribution rights for both companies. EDS and
Tecnomatix will share revenues for all sales of joint products made by EDS and
its distributors. (For more details on this agreement see "Strategic Alliances"
under this Item.).
We also expanded the extent of our cooperation arrangement with Siemens
during 2002. We extended the term of our 2001 agreement with Siemens whereby
both companies will continue to develop and market the eMPower eM-PLC product
for simulating and off-line programming programmable logic controller (PLC)
information. In addition, we entered into a second agreement with Siemens under
which we will develop part of the technology and infrastructure of a Siemens
product for automation design.
In 2002, we acquired the CIMBridge software division of Teradyne, Inc., a
leading supplier of PCB assesmbly equipment. CIMBridge, which provides software
for printed circuit board assembly processes, was acquired by Teradyne in 2001
as part of its acquisition of GenRad Inc. Due to its focus on hardware, Teradyne
sought a purchaser for the CIMbridge software that would continue to maintain
the software for CIMbridge's 350 users. As consideration for this acquisition,
we assumed certain liabilities. We also retained some of CIMbridge's employees
and will maintain the CIMBridge software as a stand-alone product, as well as
assist CIMBridge's existing users in transitioning to our eMPower Assembly
Expert product.
Towards the end of 2002, we appointed Jaron Lotan as our President and
Chief Operating Officer. Prior to joining us, Mr. Lotan served as Executive Vice
President for Business and Strategy at Orbotech Ltd., an Israeli company
providing testing machinery to the electronics industry. Harel Beit-On continues
to serve as our Chairman of the Board and Chief Executive Officer.
B. BUSINESS OVERVIEW
We develop and market software solutions for Manufacturing Process
Management (MPM). Manufacturers are increasingly required to implement efficient
and cost-effective production processes, offer the ability to effect product
customization and rely on third-party suppliers in order to stay competitive.
Our eMPower solutions enable collaboration between manufacturers and their
production plants, external suppliers and other members of their extended
enterprise and supply chain throughout the world with respect to the
development, implementation and management of their manufacturing processes. By
enabling business-to-business collaboration across the manufacturing process and
the supply chain, our solutions allow manufacturers to accelerate new product
introductions, reduce time to market for new products, cut time to volume
production and introduce greater flexibility into their manufacturing processes.
Our eMPower offering provides manufacturers and their extended enterprises
with the ability to:
o plan, engineer, simulate and optimize manufacturing processes and
systems from the factory level down to the level of production lines and
workcells;
o estimate and analyze performance, cost and throughput of production
lines;
o create and debug programs for robots, numerical control, testing and
other machines;
o create manufacturing process documentation and work instructions that
can be used on the production floor and re-used on future projects and
production lines;
o collect, analyze and manage production data from the shop-floor
assembly equipment in real time;
o define, predict and manage manufacturing tolerances; and
o communicate, review and exchange manufacturing process information over
the Internet.
The eMPower offering was launched in March 2000. eMPower Enterprise
Solutions and the suite of eMPower Products comprise newly developed and
Web-based applications as well as some of our historical stand-alone
Computer-Aided Production Engineering (CAPE) products. The development,
marketing and support of CAPE products had been our core business since 1983.
CAPE tools are used to model and simulate a computerized representation of a
complete manufacturing plant, its production lines and processes.
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Because MPM addresses a customer's entire manufacturing enterprise and
process supply chain, the scope of an MPM project often requires end-to-end
solutions that involve seamless integration into the customer's information
technology environment, customized software, creation and documentation of the
methodology procedures, installation, training, on-site support, hotline support
and on-going enhancements throughout the duration of the MPM life cycle. In
order to provide this kind of end-to-end enterprise-wide solution, we
established our Global Professional Services unit. This unit, which currently
contains over 120 professionals located around the world, provides our clients
with industry-specific consulting and development services, as well as
implementation and engineering support.
We target the electronics, aerospace, automotive, automotive supplier and
other discrete manufacturing industries. We sell our products primarily through
our direct sales force, although we are seeking to increase our sales through
indirect sales channels. Our customers include most of the world's major
automotive manufacturers including Audi, BMW, Camau, DaimlerChrysler, Fiat,
Ford, General Motors, Kia, Mazda, PSA Peugeot Citroen, Renault, Volkswagen and
Volvo; major aerospace manufacturers including Airbus, Boeing, British
Aerospace, EADS, General Electric, Korea Aerospace Industries (KAI), Lockheed
Martin, McDonnel Douglas, and Pratt & Whitney; heavy machinery manufacturers
such as GEC Alsthom, Hyundai, JI Case, Kuka, MAN, Mannesman, Komatsu and
Mitsubishi Heavy Industries; and electronics manufacturers such as Alcatel,
Canon, Celestica, Delphi, Ericcson, Hewlett Packard, Jabil, Lucent, Motorola,
Nokia, Philips, Sanmina-SCI, Schneider, Solectron, Siemens, Toshiba, Universal
and Venture. We have initiated over 230 pilot projects with prospective
customers involving our eMPower Enterprise Solutions since the introduction of
these solutions in the first quarter of 2000. Approximately 45% of those
projects have matured into implementations of eMPower Enterprise Solutions. Over
10% have matured into purchases of eMPower as a mainstream solution for the
enterprise, including multi-million dollar investments by Airbus, Audi, BMW,
EADS, Ford, General Motors, Kia, Korea Aerospace Industries, Kuka , Mazda, PSA
Peugeot Citroen, and Schneider. Our strategy is to leverage the success of our
eMPower Enterprise Solutions to promote large and small-scale implementations by
new customers, and to help our existing customers expand their deployments to
other plants and divisions.
Our company comprises two divisions, the Mechanical division and the
Electronics division. The Mechanical division handles all operations, including
research and development, marketing and sales relating to the automotive,
automotive supplier and aerospace industries, as well as to other discrete
manufacturing companies. The Electronics division handles all operations,
including research and development, marketing and sales relating to the
electronics assembly industry. We believe that by having two separate divisions
we are able to best address the technology requirements, functions and range of
shop-floor resources and expertise that are particular to the industries in the
two divisions.
INDUSTRY BACKGROUND
As manufacturing companies strive to keep pace with the rapidly changing
and competitive global marketplace, they are faced with the need to:
o accommodate shorter product life cycles with increasing product
variants and configurations;
o manage operations in a global environment;
o decrease costs and increase productivity;
o improve quality;
o reduce the time to introduce new products; and
o accelerate the time to produce at full volume.
FROM COMPUTER-AIDED PRODUCTION ENGINEERING (CAPE) PRODUCTS TO MPM SOLUTIONS
The industrial process generally includes three main phases: (1) product
design (2) production planning and engineering and (3) manufacturing. In the
product design phase, a product is conceptualized and the product and its
components are designed. The production engineering phase involves the
development, construction and installation of the manufacturing line for the
product. The manufacturing phase consists of the orderly production of the
product.
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The product design phase features a high degree of computerization with the
wide use of computer-aided design (CAD) systems. As a result, the CAD industry
has developed into a multi-billion dollar industry. The manufacturing phase, due
to the increased demand for flexibility in manufacturing systems, is
characterized by the proliferation of computer-controlled equipment on the
factory floor. This equipment includes robots, coordinate measurement machines
commonly known as CMMs, numerical control machines commonly known as NC
machines, printed circuit board assembly equipment and other sophisticated
machine tools.
Despite the increasing acceptance of computer-based automation in the
product design and manufacturing phases, the essential link between these
phases--the production engineering phase--was traditionally performed with
limited use of computers. Instead, production engineers received hard copies of
drawings of the product designs from the CAD systems. Using elaborate drawings,
mock-ups or models, corporate manufacturing standards, handbooks and drawings of
existing production systems, the production engineers then evaluated the
feasibility and costs of different manufacturing concepts and planned the
sequence of manufacturing activities.
After the building of the manufacturing system, robots and other production
machines are installed in the manufacturing line and are programmed to perform
each movement and operation required to complete a manufacturing cycle. Often,
the production line must be shut down during the programming. Programming errors
are then corrected and optimization efforts continue on the factory floor during
initial production ramp-up until the desired production rates and quality
standards are achieved.
Production engineering is further complicated by several other factors:
o frequent modifications in product design render portions of the
previous engineering work useless and require costly and time-consuming
redesign;
o communication difficulties due to the large number of participants from
many disciplines and, in many cases, from different organizations such as
subcontractors and suppliers;
o manufacturing design errors are generally detected at a late stage in
the process and can be corrected only at substantial cost, involving delays
in production start-up and line shut-downs, which if not corrected can
result in unsatisfactory quality and lower production throughput; and
o optimization of the production process may only begin after substantial
completion of the installation and programming of equipment, resulting in
the need to perform optimization on the shop floor, which interferes with
orderly production.
In addition, engineers using traditional methods are often not able to
provide early feedback with respect to the manufacturing feasibility and cost
implications of the product that is being designed. The limited ability to
implement concurrent product design and production engineering can result in
product designs that are not optimized for manufacturing, delays in product
introduction and increased manufacturing costs.
Our CAPE technology was designed to address this missing link by allowing
production engineers to create an on-screen virtual manufacturing environment
that graphically displays and simulates actual manufacturing operations. Our
suite of CAPE products enables production engineers to interactively arrange
models of machines, production equipment and manufacturing lines and manipulate
them to perform on-screen manufacturing activities while accessing and using the
design data in its native format and sharing such data with product designers
and shop-floor machines and robots.
IMPACT OF THE INTERNET ON PRODUCTION ENGINEERING
Beyond the complications and limitations inherent in the production
engineering process, manufacturers must deal with the pressures of a global
marketplace that increasingly relies on the Internet as a primary means of
interaction at many levels of operations. The Internet and the globalization of
the marketplace have created a significant shift in the standards and priorities
of customers and manufacturers. Use of the Internet enables the conduct of
business at an accelerated pace which, among other things, results in
increasingly shorter product life-cycles, decreasing time-to-market constraints
and reduced inventories. Through Internet-based links with manufacturers,
customers request higher levels of customization. This increase in numbers of
product variants has contributed to a de-standardization of the marketplace.
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In light of these trends, many manufacturers are turning or have turned to an
extended enterprise model in which components of the manufacturing process are
performed by third-party suppliers and contractors as well as a manufacturer's
own production plants. Aside from simply existing as separate corporate
entities, these suppliers and contractors often are located in geographically
varying locations. However, although manufacturers are willing to outsource part
of their operations in order to use the best source for obtaining a competitive
advantage, they must enable collaboration between all members of the extended
enterprise in order to efficiently manage the manufacturing process while
successfully meeting time-to-market expectations and customization requests.
Therefore, the ability of manufacturers to outsource and effectively structure
flexible supply chains as well as to enable integration and collaboration among
all the participants in the manufacturing process chain have become significant
factors in their competitive strategy.
THE INTRODUCTION OF MANUFACTURING PROCESS MANAGEMENT (MPM)
While we experienced wide acceptance of our original CAPE products, we
decided that the shifting priorities and standards that characterize the
Internet-oriented global marketplace required a more fully integrated platform
and wider use of planning, data management and Web-based technologies in the
production engineering phase of the manufacturing process. We called this
extended CAPE domain, which encompassed collaborative planning, execution and
management of manufacturing processes as well as detailed production
engineering, Manufacturing Process Management (MPM). We define MPM as a
technology-enabled business strategy for determining "how" a product is to be
manufactured by defining, simulating, managing and executing production
processes across the extended enterprise of supply chain partners and customers.
In March 2000, we launched a suite of eMPower Enterprise Solutions for
Manufacturing Process Management (MPM). These solutions are composed of a newly
developed platform, new products and Web-based applications as well as some of
our historically stand-alone CAPE products.
THE TECNOMATIX OFFERING
To compete in the MPM domain and to enable manufacturers to pursue their
MPM initiatives, we offer the eMPower family of solutions and products for MPM.
The eMPower family comprises two basic approaches to selling into the MPM space
that differ based on the complexity of the customer's need: eMPower Enterprise
Solutions and eMPower Products.
EMPOWER ENTERPRISE SOLUTIONS
eMPower Enterprise Solutions consist of bundled applications and services
geared to multifaceted customer needs. These bundles are typically customized
and fine-tuned to meet an individual customer's specific needs. eMPower
Enterprise Solutions consist of three technology components: (a) the electronic
bills of processes or eBOP; (b) the Web-enabled server or eMServer; and (c)
various eMPower applications.
THE EBOP, or electronic bill of processes, integrates and associates
product data, as defined by the computer-aided design (CAD) systems, and
resources as defined in the enterprise resource planning (ERP) systems. With the
use of eMPower planning applications, the eBOP enriches this information with a
description of the requisite operations that have to be executed in order to
manufacture a product such as a car, airplane or telephone. eBOPs feature an
open and scalable structure that allow users to view specific details or
combinations of details of the manufacturing process. Because they provide a
common way to define, capture and exchange manufacturing processes, eBOPs enable
collaboration between different members of the supply chain. For instance, using
an eBOP, suppliers may provide feedback or modify a particular part of the
manufacturing process that is relevant to them.
THE EMSERVER is a Web-based application server that supports the eMPower
applications. It is used to manage and communicate eBOPs over the Internet. An
eBOP stored on our eMServer is available for collaborative input, review and
exchange through a customized Web portal. By centralizing the process data on a
Web-based server, eMServer enables manufacturers to control and coordinate the
efforts of their extended enterprise.
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THE EMPOWER APPLICATIONS--many of which were developed from our original
CAPE software--represent a fundamental shift from traditional production
engineering methods. Our planning and engineering applications are based on
proprietary technologies, including multiple-tier and Web architecture,
kinematics modeling, simulation, data base utilization, data mining and
integration technologies. Our technologies allow production engineers to create
a computerized integrated representation of a complete manufacturing plant, its
production lines and processes, which graphically displays and simulates actual
manufacturing operations on-screen. Using these technologies, manufacturing
planners and engineers can (a) plan new manufacturing production plants, lines
and processes and update and optimize existing ones, (b) estimate cost,
performance and throughput of new production lines (c) analyze manufacturing and
maintenance implications of newly designed products, (d) design, visualize,
simulate and optimize automated and manual manufacturing processes and systems
from the factory level down to the level of production lines and work cells, (e)
create and debug programs for robots and other machines using virtual machine
models, (f) create and deliver documentation including manufacturing reports,
analyses, schedules and work instructions to the shop floor and (g) collect
information from shop-floor equipment and analyze the results.
As part of the extension of our traditional CAPE products to MPM, we
developed collaboration applications that utilize Web database, data streaming
and Web browser technology. These applications enable the access of multiple
users to the design, review and utilization of manufacturing information created
and captured by the other components of the eMPower solution. Using our
collaboration technology, manufacturers and their external suppliers and
contractors can access and work on electronic work instructions and process
simulations together with other members of the supply chain. They can also
deliver and retrieve reports and feedback in real-time on matters like project
progress, costs, resource allocation and manufacturing processes.
Our factory execution applications are based on proprietary algorithms and
real-time tracking and monitoring technologies. These products enable real-time
collection, sharing, analysis and management of assembly operations across the
extended enterprise. This technology creates the link between the various design
and engineering activities our customers perform with our products and the
actual manufacturing of their products and efficient management of the
production floor.
INDUSTRY PROCESS-SPECIFIC SOLUTIONS
All of our eMPower Enterprise Solutions incorporate elements of the
application groups described above. Our solutions also feature applications
designed for the manufacturing process of specific industries and can be
customized to fit particular customer needs. Currently, we develop and market
solutions for specific industries as follows:
o EMPOWER CARBODY is designed for body-in-white processes in the
automotive and heavy vehicles industries;
o EMPOWER ASSEMBLY is designed for final assembly processes in the
automotive, heavy vehicle, and aerospace industries;
o EMPOWER MACHINING is designed for machining processes in the powertrain
industry;
o EMPOWER BOX BUILD is designed for assembly processes in the electronics
industry; and
o EMPOWER EXECUTION SYSTEM is designed for shop-floor monitoring and
management of production lines in the electronics industry.
EMPOWER ENTERPRISE SOLUTIONS APPLICATIONS
The eMPower applications are based on the eMServer and defined in four
groups, namely (a) Planning, (b) Engineering, (c) Collaboration and (d) Factory
Execution.
PLANNING APPLICATIONS are designed for planning, analyzing and managing new
manufacturing processes and updating and optimizing those already running.
ENGINEERING APPLICATIONS are designed for designing, analyzing, simulating,
optimizing and verifying the assembly of complex products, planning shop-floor
layouts and workplaces, simulating robot and human operations, and creating
programs off line for robots and other shop-floor machines.
WEB-BASED COLLABORATION APPLICATIONS are designed for transferring and
accessing manufacturing information over the Internet.
FACTORY EXECUTION APPLICATIONS are designed for monitoring the performance
of assembly lines, inventory tracking and material control.
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EMPOWER PRODUCTS
eMPower Products are individual, stand-alone applications designed for
specific functions. Most eMPower products can be included as applications within
an eMPower Enterprise Solution, or they can be purchased and deployed on a
stand-alone basis.
DESIGN AND SIMULATION PRODUCTS are designed for designing, simulating and
off-line programming of manufacturing processes, including spot-welding,
arc-welding, painting, drilling and laser cutting.
TOLERANCE MANAGEMENT PRODUCTS are designed for defining, analyzing and
managing tolerances of product assemblies.
EMPOWER PCB ASSEMBLY AND TEST PRODUCTS are designed for programming
assembly and test machines, creating production documentation and managing part
libraries.
EMPOWER ADVANTAGES
We believe that the main benefits of our solutions and products are:
o acceleration of time to ramp up production lines and reach full volume
production;
o reduction of time and costs for bringing new products to market;
o collaboration among various participants in the manufacturing process
including its planning, production engineering and execution phases;
o acceleration of response-time to more complex, personalized customer
orders;
o optimization of product design for manufacturing and maintenance;
o more effective mass customization due to increased flexibility in the
manufacturing process;
o reduction of costly production line shut-down for programming;
o increase in productivity of production line operations; and
o improvement in product quality.
MARKETING AND SALES
Our objective is to build upon our success in the introduction of our
eMPower offering and to be the market leader of the MPM industry. Our strategy
to achieve this objective includes, among other things, strengthening our global
selling and services, leveraging partnerships with other market leaders and
extending MPM technology leadership and offerings. While our marketing strategy
over the past few years mainly involved direct sales, we intend to increase
focus on sales through third parties in 2003.
We focus our marketing and sales efforts on the electronics, aerospace,
automotive, automotive supplier and other discrete manufacturing industries as
these are primary users of factory automation systems and their components. We
sell our products to large industrial companies as well as to smaller
subcontractors and production engineering firms. Sales of our products to large
industrial companies often facilitate the sale of our products to their
subcontractors, production-engineering firms and service suppliers.
All marketing and sales activities for the electronics assembly industry
are handled by our Tecnomatix Unicam subsidiary. Our marketing and sales
activities for the automotive, aerospace, tier-1 suppliers and other discrete
manufacturing industries are handled by our Mechanical division. Within the
Mechanical division, we maintain industry-focused business units. Each unit is
responsible for sales and marketing to a particular target industry. In
addition, we maintain a Global Professional Services unit. This unit, which
contains over 120 professionals located around the world, provides our clients
with consulting and development services, as well as implementation, development
and engineering support, in order to allow our clients to more efficiently
integrate our solutions within their systems.
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The decision to utilize our products often entails a significant change in
a potential customer's organization and business processes. Accordingly, initial
sales to new customers often require extensive educational, sales and
engineering efforts. Historically, our customers purchased several of our
products to use in detailed design and implementation of manufacturing workcells
for specific manufacturing activities, such as assembly, painting or welding.
However, with the rollout of our eMPower Enterprise Solutions, our marketing and
sales efforts increasingly focus on introducing enterprise solutions that are
integrated into the customer's IT environment and legacy systems, rather than on
selling a limited number of stand-alone products for specific manufacturing
activities. As a result of this transition, our marketing efforts often entail
education of, and consultation with, a broader range of individuals and
departments within a potential customer's organization. And, as the number of
individuals and departments involved in the decision of a potential customer to
purchase our solutions has increased, that decision has become more complex, and
our sales cycle has lengthened to nine to twelve months.
Generally, the process of educating customers requires significant sales
and engineering efforts which we believe are carried out most effectively by a
worldwide direct sales and support organization, including members of our
industry business units and Global Professional Services unit.
We maintain sales and support offices in the United States, France,
Germany, Italy, the United Kingdom, Spain, Sweden, Japan and Korea. Each of
these offices is staffed with sales personnel and engineers to provide technical
support. At December 31, 2002, we had 414 employees who were engaged in direct
sales and marketing operations, including pre-sale engineering, maintenance and
support.
Our products are also sold by distributors in Europe and the USA, as well
as Australia, Brazil, China, Hong Kong, Korea, Japan, Mexico, Singapore, South
Africa, and Taiwan. From time to time, we also sell our products through vendors
of CAD products. In 2000, we created a joint venture with Zuken Corporation, a
leading provider of design solutions for Japanese electronics companies. The
joint venture company, which is 49% owned by us, markets, sells and supports
Tecnomatix Unicam electronics assembly industry products in Japan. Our
subsidiary, Tecnomatix Unicam, Inc. also sells its eMPower products for the
electronics industry under a cooperation and reselling agreement with suppliers
of surface mounted technology assembly equipment, including Assembleon, Autron
Corporation Ltd., Fuji Machine Manufacturing Ltd., and Teradyne Inc.
Similarly, we expect to sell our products under the development, marketing
and reselling agreement with EDS that we signed in August 2002. During the first
quarter of 2003, a team of EDS salesmen received training on our products and
will be dedicated to selling them as part of the EDS product life-cycle
management offering.
We sell our products primarily to large corporations and our sales are
subject to the fiscal and budgeting cycles of these companies. Accordingly, a
large percentage of our sales occur in the fourth quarter, while sales in the
first and third quarters are relatively slower.
COMPETITION
We compete with other providers of MPM solutions in the industries we
target. In addition, as a result of the consolidation in the product life-cycle
management solution market, we have begun to compete with providers of product
life-cycle management solutions who do not necessarily provide manufacturing
process management solutions, as we do. While MPM solutions such as ours
comprise an integral part of a broad product life-cycle management solution,
companies seeking to provide full product life-cycle management solutions may
choose to develop their own MPM solutions rather than incorporate third-party
solutions such as ours. We expect that competition will increase as a result of
any further consolidation in the market.
Currently, significant companies in the product life-cycle management
industry include SAP, Dassault, PTC and EDS. In addition, as the industry
consolidates, newly-consolidated entities capable of offering broad product
life-cycle management solutions may achieve greater prominence and obtain a
competitive advantage in relation to customers seeking broad solutions.
Accordingly, it may become increasingly important for us to partner with those
consolidated entities, as we have done with SAP and EDS. If we are unable to
partner with some or all of those companies, or if the market does not accept
the solutions provided by the companies with which we cooperate, our sales and
revenues may decline.
Dassault Systems, is currently our major competitor in the automotive and
aerospace fields. Dassault has a partnership with IBM under which Dassault
provides product data management (PDM), MPM and ERP solutions as part of IBM's
product life-cycle management offering. Dassault also acquired EAI-DELTA GmbH, a
company that competes with our eM-Planner product. Dassault, as a result of its
acquisitions, currently offers several products that compete with some of our
products, and is expected to continue to offer additional competing products. In
the electronics assembly industry, our competitors include Aegis Industrial
Software, Inc., Datasweep, Inc., Matrologic Group SA, Polyplan Technologies,
Inc., and Valor Computerized Systems Ltd.
20
It is likely that as the markets we serve continue to evolve, existing
competitors may impose increased competitive pressures through acquisitions of
complementary products and businesses, and there may be other market entrants.
In addition, as a result of our movement into the MPM domain, we expect to face
competition from companies offering other platforms for enterprise-wide
manufacturing activities. While these platforms may not compete directly with
our present and future products, they may compete by offering alternative
solutions designed to enhance companies' supply chains and overall performance.
Some of our existing competitors have, and prospective competitors may
have, technical and financial resources, marketing and service organizations,
expertise, customer bases and name recognition substantially greater than ours.
In addition, some of our existing competitors have, and prospective competitors,
particularly PLM vendors, may have, strong, established relationships with many
of our existing and potential customers and may be able to offer combined PLM
and MPM solutions. Furthermore, should competition intensify, we may have to
reduce our prices. If we are unable to compete successfully, our business,
financial condition and results of operations would be materially adversely
affected.
We believe that the main competitive factors affecting our business
include:
o technological leadership,
o product performance,
o integration and methodology expertise,
o customer base,
o customer support,
o price,
o distribution channels, and
o ability to respond quickly and effectively to emerging opportunities
and demand.
STRATEGIC ALLIANCES
As part of our attempt to offer a solution that is completely integrated
with our customers' IT environments, we seek to partner, where appropriate, with
providers of complementary solutions that augment our MPM solutions. For
example, many large companies are now implementing IT infrastructures for
product life cycle management (PLM), or software solutions that support a
product from original concept through product retirement. PLM systems therefore
address activities such as product ideation, product definition, manufacturing
process development, production and service. Accordingly, MPM is an integral
part of PLM and forming alliances with PLM providers is a strategic goal for us.
This strategy often features the integration of our solutions with the
software or hardware of our partners. This integration benefits manufacturers
by, among other things, facilitating a flow of information from the design
process to the manufacturing planning and execution process. Furthermore,
integration of software across disciplines enables the creation of a shared
database for use and development by design engineers, planners and production
engineers.
In August 2002, we entered into a strategic alliance with EDS under which
our eMPower Enterprise Solutions will be incorporated into EDS's PLM
environment. The agreement establishes a joint development strategy, as well as
cooperative marketing and distribution rights for both companies. EDS and
Tecnomatix will share revenues for all sales of Tecnomatix MPM products and EDS
planner products made by EDS and its distributors. In large strategic accounts
where both EDS and Tecnomatix are currently engaged, selling will be done
jointly. In all other EDS accounts, EDS will sell independently of Tecnomatix
and provide all pre-sales, professional service and hot-line support. A team of
EDS sales personnel have received training on Tecnomatix products and are
beginning to sell directly to customers. In non-EDS accounts, Tecnomatix will
continue to sell directly to its customers as is currently practiced.
21
Similarly, in August 2001 we entered into a global strategic development
and marketing agreement with SAP to provide integration between our eMPower
Enterprise Solution and SAP's product life-cycle management solution. This
integration is designed to allow the bi-directional exchange of
bill-of-materials and routing information between our and SAP's solutions,
enabling, among other things, users of our eMPower solutions to plan and develop
manufacturing processes on the basis of accurate and up-to-date Bill-of-Material
information. As opposed to our agreement with EDS, our agreement with SAP allows
for both parties to sell directly to all customers rather than requiring direct
sales of our products by SAP.
In addition, in April 2002, we announced a joint product development and
marketing partnership agreement with Siemens Automation and Drives Group, a
world leader in automation and drives and programmable logic controllers (PLC).
The agreement is the third in a series of product development agreements Siemens
has made with us over the past three years to launch a newly integrated virtual
environment that streamlines the engineering process and provides a seamless
path from process design to shop-floor automation. The new jointly developed
eM-PLC product enables engineers to design manufacturing processes in a 3D
virtual environment and then introduce control information into that virtual
manufacturing cell. We also signed an agreement whereby Tecnomatix will develop
part of the technology and infrastructure for a Siemens product for automation
design.
GLOBAL PROFESSIONAL SERVICES
We believe that customer support is crucial both to the initial marketing
of our products and to maintain customer satisfaction, which in turn enhances
our reputation and aids in the generation of repeat orders. In addition, we
believe that the customer interaction and feedback involved in our ongoing
support activities provide us with information on market trends and customer
requirements that is critical to future product development efforts.
We created a Global Professional Services unit in the fourth quarter of
2000. This unit, which contains over 120 professionals located around the world,
provides our clients with consulting and customization services, as well as
deployment, training and on-going support, in order to allow our clients to more
efficiently integrate our solutions within their systems. The unit was created
as part of our transition from a tools-oriented provider to a provider of
enterprise-wide solutions. These solutions require a higher degree of support to
deploy and integrate with a customer's existing operations, due to their more
comprehensive nature and enterprise-wide reach and impact.
Generally, during the warranty period for our products, bug-fixing services
are provided free of charge. Maintenance services, including bug-fixing service,
software upgrades, enhancements and "hot-line" support for technical inquiries
are provided through a one-year renewable maintenance contract for an annual fee
which is generally 14% of the then current product list price. Approximately 21%
of our revenues in 2002 were generated by the activities of our Global
Professional Services unit.
INTELLECTUAL PROPERTY
Our success is heavily dependent upon our proprietary manufacturing
technologies. We rely on a combination of non-disclosure agreements with certain
distributors, customers and employees, trade secrets and copyright laws, as well
as technical measures, to establish and protect our proprietary technologies. We
have no patents, and recognize that existing copyrights provide only limited
protection. Moreover, not all countries provide legal protection of proprietary
technology to the same extent as the United States. There can be no assurance
that the measures taken by us to protect our proprietary technologies are or
will be sufficient to prevent misappropriation of our technologies by
unauthorized third parties or independent development of similar products or
technologies by others.
We do not believe that our products or the technologies embedded in our
products infringe upon any proprietary rights of third parties. However, there
can be no assurance that third parties will not claim infringement by us with
respect to current or future products. We expect that we will increasingly be
subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. Responding to such claims, regardless of their merit, could
be time-consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements to secure the right to
use or sell the contested technology or product. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all. This could have a material adverse effect on our business, operating
results and financial condition.
22
RESEARCH AND DEVELOPMENT
CORE TECHNOLOGIES AND ARCHITECTURE
The eMPower solutions and products are based on proprietary technologies
that include: (a) multiple-tier (N-tier) architecture; (b) Web architecture; (c)
process and kinematics modeling and simulation; (d) data base utilization and
data mining; (e) mathematical algorithms for tolerance management and analysis;
(f) mathematical algorithms for analysis, real-time tracking and monitoring of
production lines; and (g) integration technologies.
a) The multiple-tier architecture allows multiple users to work
simultaneously on the same project. This architecture supports the eMServer
for data management and business logic; the eBOP model and the services
required to update and manipulate it; and the MPM applications for creating
and populating the eBOP. Because the technology is open to users and
third-party software developers, it enables them to develop, in a
relatively short time, applications that address specific manufacturing
activities utilizing our proprietary manufacturing simulation technology.
b) The Web architecture supports a portal for collaborative engineering
over the Internet. The portal of Web-based tools allows users to create and
access reports, work instructions and analysis. Users can visualize,
manipulate and edit manufacturing processes via the Internet.
c) Process and kinematics modeling technologies enable the creation of an
eBOP. Simulation technologies, including technologies for 3D visualization,
motion emulation and collision detection, allow production engineers to
create, simulate, verify and then optimize a computerized integrated
representation of a complete manufacturing plant, its production lines and
manufacturing processes.
d) Data base utilization and data mining technologies allow analyses of
production line and machine throughput, performance and cost, feasibility
studies and ergonomics.
e) Mathematical algorithms enable defining tolerances of product
assemblies, tolerance stack-up analysis and tolerance management.
f) Mathematical algorithms allow analysis, real-time tracking and
monitoring of production lines.
g) Integration technologies allow the eMPower software to access data in
the PLM database, the product model in the CAD/PDM system and the resources
in the ERP systems, without the need for data conversion. This integration
allows full association of and interaction between product and process
design.
To further enhance the integration of our products with CAD systems, ERP
systems and shop-floor equipment, we pursue strategic alliances with leading
providers of such products. Accordingly, we have agreements with software
providers such as EDS, PTC, and SAP. In addition, we have an agreement with
RealityWave whereby our eMPower Web-based applications use the RealityWave
streaming technology to exchange and visualize large quantities of 3D
manufacturing data over the Web, even over low-bandwidth networks.
Agreements that we have with shop-floor equipment suppliers such as Carl
Zeiss, Fuji, Mori Seiki, Orbotech, Siemens, Teradyne and Universal provide for
integration with their shop-floor automation machines and capabilities such as
off-line programming, execution and analysis of machine-program performance.
RESEARCH AND DEVELOPMENT OPERATIONS
We believe that our ability to enhance our current products, develop and
introduce new products on a timely basis, maintain technological competitiveness
and meet customer requirements is essential to our future success. Accordingly,
we devote, and intend to continue to devote, a significant portion of our
personnel and financial resources to research and development. In addition, in
order to successfully develop new and enhanced products, we seek to maintain
close relationships with our customers and remain responsive to their needs. We
strive to provide our customers with a comprehensive solution to their
production engineering needs. We intend to continue to broaden our product
offering to automate more production engineering tasks across a wide range of
manufacturing activities throughout the industrial process.
Our research and development efforts have occurred at our main research and
development facility in Israel as well as at our subsidiaries' sites in
California, New Hampshire, the Netherlands, France and Germany. We believe that
we have established redundant development and support capabilities in locations
outside Israel. Our product development teams include experts in advanced
mathematical techniques, computer graphics, database and Internet technologies,
computer science and mechanical, manufacturing and electronic engineering. Our
research and development efforts have been financed through internal resources,
programs sponsored by the Office of the Chief Scientist in Israel and other
funding from third parties. See "Item 5: Operating and Financial Review and
Prospects -Research and Development Grants."
23
REVENUES
The following chart is a three-year breakdown of our revenues by geographic area
for the periods indicated:
2002 2001 2000
(US$ IN THOUSANDS)
Israel...................... 37 9 188
United States............... 24,781 24,809 26,689
Germany..................... 24,262 22,665 24,794
France...................... 9,299 10,260 11,088
Other European Countries. 10,687 10,490 9,989
Asia........................ 12,939 18,667 16,270
Total Revenues.............. 82,005 86,900 89,018
The following chart contains a three-year breakdown of our revenues by
segments for the periods indicated:
2002 2001 2000
(US$ IN THOUSANDS)
Mechanical................. 64,670 66,454 63,255
Electronics................ 17,335 20,446 25,763
Total Revenues............. 82,005 86,900 89,018
CONDITIONS IN ISRAEL
POLITICAL AND MILITARY CONDITIONS
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. However, a peace agreement between
Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan
was signed in 1994. However, as of the date hereof, Israel has not entered into
any peace agreement with Syria or Lebanon. Since October 2000, there has been an
increase in violence between Israel and the Palestinians. During the past two
years the state of hostility has increased in intensity and Israel has
undertaken military operations in Palestinian cities and towns. It is possible
that the situation may deteriorate further and may impact our operations in
Israel.
Despite peace-related developments, certain countries, companies and
organizations continue to participate in a boycott of Israeli firms. We do not
believe that the boycott has had a material adverse effect on us, but there can
be no assurance that restrictive laws, policies or practices directed towards
Israel or Israeli businesses will not have an adverse impact on our business or
financial condition in the future.
24
ECONOMIC CONDITIONS
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early- to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices and military
conflicts. The Israeli Government has, for these and other reasons, intervened
in the economy by utilizing, among other means, fiscal and monetary policies,
import duties, foreign currency restrictions and control of wages, prices and
exchange rates. The Israeli Government has periodically changed its policies in
all these areas. Although we derive most of our revenues outside of Israel, a
substantial portion of our expenses are incurred in Israel and are affected by
economic conditions in the country.
ARMY SERVICE
Generally, all male adult citizens and permanent residents of Israel under
the age of 40 are, unless exempt, required to perform up to 36 days of military
reserve duty annually. Some of our officers and employees are currently
obligated to perform annual reserve duty. Additionally, all such reservists are
subject to being called to active duty at any time under emergency
circumstances. While we have historically operated effectively under these
requirements, we cannot assess the full impact of these requirements on our
workforce and business if conditions should change, and we cannot predict the
effect on us of any expansion or reduction of these obligations.
25
C. ORGANIZATIONAL STRUCTURE
The following table lists information concerning the companies in the
Tecnomatix organization. All the entities listed are direct or indirect
subsidiaries of ours. The table lists entities by name, country of organization
and our equity interest.
NAME COUNTRY OWNERSHIP
Tecnomatix Ltd. Israel 100%
Robcad Ltd. Israel 100%
Tecnomatix Technologies, Inc. U.S. 100%
Tecnomatix Unicam, Inc. U.S. 100%
Nihon Tecnomatix K.K. Japan 100%
Zuken Tecnomatix K.K. Japan 49%
Tecnomatix Technologies Gibraltar Ltd. Gibraltar 100%
Tecnomatix Technologies Holding SA Luxembourg 100%
Tecnomatix Europe S.A. Belgium 100%
Tecnomatix GmbH Germany 100%
Anysim Simulationssystem Systeme GmbH Germany 100%
Tecnomatix S.A.R.L. France 100%
Tecnomatix Technologies Espania SL Spain 100%
Tecnomatix Technologies Italia S.r.l. Italy 100%
Tecnomatix Technologies Ltd. U.K. 100%
Tecnomatix Technologies Sweden AB Sweden 100%
Tecnomatix Machining Automation B.V. The Netherlands 100%
Tecnomatix Unicam B.V. The Netherlands 100%
Tecnomatix Unicam GmbH Germany 100%
Tecnomatix Unicam France S.A. France 100%
Tecnomatix Unicam UK Ltd. U.K. 100%
Tecnomatix Unicam (Singapore) Pte Ltd. Singapore 100%
Tecnomatix Unicam Taiwan Co., Ltd. Taiwan 100%
Tecnomatix Technologies (Shenzhen) Ltd. China 100%
Fabmaster China Limited* Hong-Kong 100%
View2Partner, Inc.* U.S. 100%
View2Partner Israel Company Ltd.* Israel 100%
* Inactive subsidiary
26
D. PROPERTY, PLANTS AND EQUIPMENT
We do not own any real property.
We currently lease approximately 30,000 square feet of research and
development, marketing and administrative facilities in Herzlia, Israel. The
lease for this space expires in September 2007. The annual rent for the facility
is approximately $456,000. Of such amount the maintenance fees and the rent for
the parking space are linked to the changes in the Israeli consumer price index.
The annual rent may be increased up to approximately $537,000 if we choose to
make certain renovations at the expense of the lessor.
Tecnomatix Technologies, Inc. leases approximately 29,000 square feet of
research and development, sales, marketing, and administrative facilities in
Northville, Michigan and other locations in the United States. The lease for
most of these spaces expires on various dates through February 2008. The
aggregate annual rent for these facilities is approximately $688,000.
Tecnomatix GmbH leases approximately 52,000 square feet of reasearch and
development, sales, marketing and administrative facilities in Frankfurt,
Munich, Stuttgart and Dusseldorf, Germany. The leases for most of these spaces
expire on various dates through October 2005. The aggregate annual rent for
these facilities is approximately $834,000.
Tecnomatix Unicam, Inc. leases approximately 26,500 square feet of research
and development and sales and marketing facilities in Portsmouth, New Hampshire
and other locations in the United States, with an aggregate annual rent of
approximately $500,000. The leases for these facilities expire on several dates
through October 2005.
Nihon Tecnomatix K.K. leases approximately 9,000 square feet of sales and
marketing facilities in Tokyo, Japan and Korea. The leases for these facilities
expire on various dates through November 2004. The aggregate annual rent for
these facilities is approximately $550,000.
Tecnomatix Unicam France S.A. leases approximately 8,000 square feet of
research and development and sales and marketing facilities in Grenoble, France.
The lease for these facilities expires in August 2003. The annual rent for these
facilities is approximately $60,000.
In addition, our sales and support subsidiaries occupy, in the aggregate,
approximately 51,000 square feet in Germany, France, the United Kingdom,
Belgium, Spain, Sweden, Italy, The Netherlands, Taiwan, Singapore and China
under leases expiring through December 2008 with a total annual rental of
approximately $755,000.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE SET FORTH IN THIS ANNUAL REPORT. THE FOLLOWING DISCUSSION AND
ANALYSIS SHOULD BE READ IN CONJUNCTION WITH "ITEM 3A: SELECTED FINANCIAL DATA"
AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCORPORATED BY
REFERENCE IN THIS ANNUAL REPORT.
A. OPERATING RESULTS
OVERVIEW
We derive revenues mainly from: (a) software license fees, and (b) services
which include maintenance fees from upgrades and the provision of technical
support for our software products, and fees from providing engineering,
training, consulting, implementation and development services. Annual
maintenance fees are generally 14% of the then current list price of our
software products. It has been our experience that most of our customers elect
to receive maintenance services from us on a continuing basis. We believe that
revenues from maintenance fees, which have grown in recent years, will continue
to increase as the installed base of our software products increases. Our
revenue recognition policies are in conformity with the American Institute of
Certified Public Accountants Statement of Position on Software Revenue
Recognition (SOP97-2 as amended).
27
Most of our revenues derive from repeat sales to existing customers. In
2002, approximately 83% of our revenues from software license fees derived from
repeat sales, compared to 82% in 2001 and 76% in 2000. We expect that repeat
sales will continue to account for a significant part of our revenues in the
future.
Cost of software license fees consists principally of (a) amortization of
capitalized software development costs; (b) royalties to the Office of the Chief
Scientist of the Government of Israel; and (c) royalties to third parties for
the use of software and technologies. Cost of services includes primarily the
costs of salaries to engineers involved in the provision of technical support.
We capitalize software development costs in accordance with Statement No.
86 of the Financial Accounting Standards Board (FASB) and amortize such costs at
the greater of (a) the amount computed using the ratio of current gross revenue
for a product to the total of current and anticipated product revenue or (b) the
straight-line basis over the remaining economic useful life of the related
product, which is not more than five years. Effective April 1, 2002, based on
management's periodic review of the useful lives of capitalized software
development costs, we changed our estimation of the useful lives of certain
software modules whose development costs we capitalized from three years to five
years. This change resulted from our increased use of more complex MPM
enterprise solutions with longer useful lives than those of the engineering
applications which comprised our older products. We believe that this change
will more appropriately match amortization of the capitalized software
development costs with periods in which the software developed generates income.
As a result of the change in the estimate of the useful lives of capitalized
software development costs, our net loss in 2002 was reduced by $1,569,000, or
$0.15 basic and diluted net loss per share. Had we not made that change, our net
loss for 2002 would have been $4,399,000.
We are obligated to pay royalties to third parties pursuant to license
agreements that allow us to use such parties' products and technologies in our
products. Royalty expenses paid or accrued in 2000, 2001 and 2002 were $350,000,
$488,000 and $1,070,000, respectively. The increase in royalty expenses paid or
accrued in 2002 is due to our use of a broader range of third party products and
technologies in our more complex MPM enterprise solutions.
In light of the severe downturn in the economic environment and the
slowdown in investments in information technologies, especially in the U.S.
electronics industry, in 2001 we undertook a program aimed at creating a leaner
and more agile organization with suitable infrastructure in place to better
serve our customers and support long-term revenue growth. As part of this
program, we reduced excess personnel and capacity costs in order to align our
operating expenses with current revenue levels. Due to the continuation of the
downturn in the economic environment we also adopted a cost-reduction program in
2002. As a result, our operating expenses in 2001 and 2002 decreased
significantly as compared to the level of operating expenses in 2000. In the
first quarter of 2003 we initiated an additional cost reduction plan aimed at
reducing excess personnel and capacity costs in order to further reduce the
level of operating expenses. For additional details regarding the 2003 cost
reduction plan see the description below in Section D of this Item 5, entitled
"Trend Information."
We market and sell our products and services in North America, Europe and
Asia and derive a significant portion of our revenues from customers in Europe
and Asia. We received 70% of our total revenues in 2000, 71% of our total
revenues in 2001, 70% of our total revenues in 2002, and 70% of our total
revenues in the three months ended March 31, 2003 in non-dollar currencies from
sales to customers located outside of North America. Since our financial results
are reported in dollars, decreases in the rate of exchange of non-dollar
currencies in which we make sales relative to the dollar will decrease the
dollar-based reported value of those sales. In 2000, 2001 and the first quarter
of 2002, decreases in Euro - U.S. dollar exchange rates adversely affected our
results of operation. However, during the last three quarters of 2002 and the
first quarter of 2003 our results of operation benefited from the increase in
the Euro - U.S. dollar exchange rates during these periods. To the extent that
decreases in exchange rates are not offset by a reduction in our costs, they may
in the future materially adversely affect our results of operations.
In June 2001, the U.S. Financial Accounting Standard Board issued Statement
of Financial Accounting ("SFAS") No. 141, "Business Combinations", which
supersedes Accounting Principals Board ("APB") Opinion No. 16, "Business
Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises", and SFAS No. 142, "Goodwill and Other Intangible Assets"
which supersedes APB Opinion No. 17, "Intangible Assets". SFAS No. 141 which
applies to all business combinations initiated after June 30, 2001, requires
that all business combinations be accounted for by the purchase method, modifies
the criteria for recognizing intangible assets, and expands disclosure
requirements. The adoption of SFAS No. 141 did not have a significant impact on
our results of operations.
28
SFAS No. 142, which is effective for fiscal years commencing after December
31, 2001, addresses the question of how acquired intangible assets should be
accounted for in the financial statements upon their acquisition and thereafter.
SFAS No. 142 requires that goodwill and intangible assets that have indefinite
useful lives not be amortized but rather tested for impairment. Impairment
losses that arise due to initial adoption of SFAS No. 142 are to be reported as
a change in accounting principle. The application of the non-amortization
provisions of SFAS No. 142 resulted in an increase in our operating income (a
decrease in operating loss) of $3,672,000 for 2002. The initial adoption of SFAS
No. 142 as of January 1, 2002 did not result in any impairment losses. We have
performed and intend to continue to perform internal impairment tests pursuant
to SFAS No. 142. As of December 31, 2002, we did not believe that further
adjustments were necessary.
During 2001, we repurchased in open market transactions $5,485,000
principal amount, of our 5.25% convertible notes at an aggregate purchase price
of $3,986,000. In connection with the repurchase of these notes, we recognized a
gain in the amount of $1,393,000. During 2002, we repurchased in open market
transactions $6,337,000 principal amount of our 5.25% convertible notes at an
aggregate purchase price of $5,709,000. In connection with the repurchase of
these notes, we recognized a gain in the amount of $599,000. During the first
quarter of 2003, we repurchased in open market transactions $5,783,000 principal
amount, of our 5.25% convertible notes at an aggregate purchase price of
$5,470,000. In connection with the repurchase of these notes, we recognized a
gain in the amount of $274,000. Following repurchases of notes made in 1998,
1999, 2001, 2002 and the first quarter of 2003, we had $31,645,000 principal
amount outstanding of such notes as of March 31, 2003.
During 2000, we acquired all of the outstanding shares of Fabmaster S.A., a
publicly-traded France-based leading provider of computer integrated software
solutions for manufacturing and tests in the electronics industry, for
$16,510,000, which included $1,310,000 in transaction costs. The acquisition was
accounted for as a purchase and the financial results of Fabmaster have been
included in our consolidated financial statements since the date of acquisition.
The purchase price has been allocated on the basis of the estimated fair value
of the assets acquired and the liabilities assumed. The excess of the purchase
price over the fair value of the net tangible assets acquired has been
attributed to developed technology, core technology, assembled workforce and
goodwill in the amounts of $2,361,000, $1,964,000, $233,000 and $4,205,000,
respectively. The purchase price allocated to such intangible assets is being
amortized over their estimated useful life, which is three years for developed
technology, core technology and established workforce, and seven years for
goodwill. However, in accordance with accounting standards SFAS No. 141 and SFAS
No. 142, which are discussed above, we no longer amortize goodwill, but rather
subject it to periodic impairment tests. In connection with the acquisition, we
recorded in the first quarter of 2000 a one-time non-recurring charge for
in-process research and development and acquisition costs in the amount of
$5,250,000.
In March 2002, we acquired the 5% minority share in Nihon Tecnomatix K.K.,
our Japanese subsidiary, not previously owned by us, resulting in total
ownership of 100%, in exchange for waiving an outstanding loan in the amount of
$227,000 (30 million Japanese Yen) given to the minority shareholder in
September 2001. The excess of the purchase price over the estimated fair value
of the net assets acquired, in the amount of $224,000 has been attributed to
distribution channels and marketing rights, and will be amortized on a straight
line basis over its estimated useful life.
In October 2002, we purchased the CIMBridge software division of Teradyne,
Inc. for consideration to be paid on a contingent and deferred basis based upon
a revenue sharing arrangement. Pursuant to this transaction we acquired certain
assets and assumed certain liabilities relating to the CIMBridge software, which
includes tools for New Product Introduction (NPI) and machine programming,
product and line optimization, and work instruction generation. In connection
with the transaction we incurred approximately $111,000 in transaction costs.
The purchase was accounted for in accordance with SFAS No. 141 and SFAS No. 142
which are discussed above, and the financial results of the CIMBridge software
business have been included in our consolidated financial statements since the
date of purchase. The purchase price has been allocated on the basis of the
estimated fair value of the assets purchased and the liabilities assumed. The
excess of the purchase price over the fair value of the net tangible assets
acquired has been attributed to goodwill in the amount of $1,120,000. In
accordance with accounting standards SFAS No. 141 and SFAS No. 142, which are
discussed above, we no longer amortize goodwill, but rather subject it to
periodic impairment tests.
29
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statement SFAS No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS No. 145 impacts how companies
account for sale-leaseback transactions and how gains or losses on the
extinguishments of debt are presented in financial statements. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002; early adoption is
encouraged. Under the provisions of SFAS No. 4 gains and losses associated with
the extinguishments of debt will be classified as an extraordinary item. SFAS
No. 145 provides that gains and losses associated with the extinguishments of
debt will be classified as an extraordinary item only if they meet the criteria
of APB No. 30. We adopted SFAS No. 145 effective January 1, 2002 and accordingly
have reclassified gains from repurchases of our 5.25% convertible notes in the
amount of $599,000, $1,393,000, and $0, into financial income (expense), net for
the years ended December 31, 2002, 2001, and 2000, respectively, to comply with
this guidance.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We evaluate these estimates on an on-going basis. We base our
estimates on our historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying amount values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe that application of the following critical accounting policies
entails the more significant judgments and estimates used in the preparation of
our consolidated financial statements.
REVENUES. Our revenue recognition policy is significant because our
revenues are a key component of our results of operations. Revenue results are
difficult to predict, and any shortfall in revenues or delay in recognizing
revenues could cause our operating results to vary significantly from quarter to
quarter and could result in future operating losses. In addition, our revenue
recognition determines the timing of certain expenses, such as commissions and
royalties. We follow very specific and detailed guidelines in measuring
revenues, however, certain judgments affect the application of our revenue
policy. Our revenues are principally derived from the licensing of our software
and the provision of related services. We recognize revenues in accordance with
SOP97-2. Revenues from software license fees are recognized when persuasive
evidence of an arrangement exists, either by written agreement or a purchase
order signed by the customer, the software product has been delivered, the
license fees are fixed and determinable, and collection of the license fees is
considered probable. License fees from software arrangements which involve
multiple elements, such as post-contract customer support, consulting and
training, are allocated to each element of the arrangement based on the relative
fair values of the elements. We determine the fair value of each element in
multiple-element arrangements based on vendor specific objective evidence
("VSOE"). We determine the VSOE for each element according to the price charged
when the element is sold separately.
In judging the probability of collection of software license fees we
continuously monitor collection and payments from our customers and maintain a
provision for estimated credit losses based upon our historical experience and
any specific customer collection issues that we have identified. In connection
with customers with whom we have no previous experience, we may utilize
independent resources to evaluate the creditworthiness of those customers. For
some customers, typically those with whom we have long-term relationships, we
may grant extended payment terms. We perform on-going credit evaluations of our
customers and adjust credits limits based upon payment history and the
customer's current creditworthiness, as determined by our review of their
current credit information. If the financial situation of any of our customers
were to deteriorate, resulting in an impairment of their ability to pay the
indebtedness they incur with us, additional allowances may be required.
Our software products generally do not require significant customization or
modification, however, when such customization or modification is necessary, the
revenue generated by those activities is deferred and recognized using the
percentage of completion method.
Service revenues include post-contract customer support, consulting and
training. Post-contract customer support arrangements provide for technical
support and the right to unspecified upgrades on an if-and-when-available basis.
Revenues from those arrangements are recognized ratably over the term of the
arrangement, usually one year. Consulting services are recognized on a time and
material basis, or in a fixed price contract, on a percentage of completion
basis. Revenues from training are recognized as the services are provided.
In recognizing revenues based on the rate of completion method, we estimate
time to completion with revisions to estimates reflected in the period in which
changes become known. If we do not accurately estimate the resources required or
the scope of work to be performed, or do not manage our projects properly within
the planned periods of time or satisfy our obligations under the contracts, then
future services margins may be significantly and negatively affected or losses
on existing contracts may need to be recognized.
30
CAPITALIZED SOFTWARE DEVELOPMENT COSTS. We capitalize software development
costs, in accordance with SFAS No. 86, subsequent to the establishment of
technological feasibility and up to the time the software is available for
general release to customers. Our policy on capitalized software development
costs determines the timing of our recognition of certain development costs. In
addition, this policy determines whether the cost is classified as a development
expense or cost of license fees. We are required to use professional judgment in
determining whether development costs meet the criteria for immediate expense or
capitalization. Our judgment refers primarily to the establishment of
technological feasibility and to on-going assessment of the recoverability of
cost capitalized. We do that by considering certain external factors such as
anticipated future gross product revenue, estimated economic life and changes in
software and hardware technology. In the years ended December 31, 2000, 2001 and
2002, we capitalized software development costs in the amount of $7,294,000,
$5,103,000 and $4,097,000, respectively (22%, 18% and 17% of gross research and
development costs, respectively). We amortize software development costs on a
product-by-product basis when the product is available for general release. In
the years ended December 31, 2000, 2001 and 2002, amortization of capitalized
software development costs reported under cost of software license fees,
amounted to $3,479,000, $5,060,000 and $4,076,000, respectively (4%, 6% and 5%
of total revenues, respectively). We continue to evaluate the recoverability of
capitalized software development costs year-by-year.
Effective April 1, 2002, based on management's periodic review of the
useful lives of capitalized software development costs, we changed our
estimation of the useful lives of certain software modules whose development
costs we capitalized from three years to five years. This change resulted from
our increased use of more complex MPM enterprise solutions with longer useful
lives than those of the engineering applications that comprised our older
products. We believe that this change will more appropriately match amortization
of the capitalized software development costs with periods in which the software
developed generates income. As a result of the change in the estimate of the
useful lives of capitalized software development costs, our net loss in 2002 was
reduced by $1,569,000, or $0.15 basic and diluted net loss per share. Had we not
made that change, our net loss for 2002 would have been $4,399,000.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUES. In 2002, revenues decreased by 6% to $82,005,000 from $86,900,000
in 2001. Revenues from the Mechanical division (previously called the
e-Manufacturing division) decreased by 3% to $64,670,000 from $66,454,000 and
accounted for 79% of total revenues compared to 76% of total revenues in 2001.
The decrease in revenues from this division is mainly attributable to the
decrease in revenues from the Far East, where the sales cycle of our eMPower
Enterprise Solutions proved to be longer than in the U.S. and in Europe. The
decrease in revenues from the Far East was partially offset by an increase in
revenues from the U.S. and Europe, where our eMPower Enterprise solutions were
adopted by new customers and where we received repeat orders from existing
customers. Accordingly, revenues from Europe increased by 6% and accounted for
61% of total revenues from the Mechanical division, compared to 57% in 2001.
Revenues from the U.S. increased by 22% and accounted for 24% of total revenues
from the Mechanical division compared to 19% in 2001. Revenues from the Far East
decreased by 41% and accounted for 15% of total revenues from the Mechanical
division, compared to 25% in 2001.
Revenues from our Electronics division decreased by 15% to $17,335,000 from
$20,446,000 in 2001 and accounted for 21% of total revenues, compared to 24% of
total revenues in 2001. The decrease in revenues from this division is mainly
attributable to the continuing downturn in the electronics industry, especially
in the U.S. The decrease in revenues from the U.S. and Europe was partially
offset by an increase in revenues from the Far East. Revenues from Europe
decreased by 21% and accounted for 27% of total revenues from the Electronics
division, compared to 29% in 2001. Revenues from the U.S. decreased by 23% and
accounted for 55% of total revenues, compared to 60% in 2001. Revenues from the
Far East increased by 43% and accounted for 19% of total revenues from the
Electronics division, compared to 11% in 2001.
The increase in revenues from the Far East was due, in part, to the growth
in that market caused by U.S. and European manufacturers moving production to
the Far East.
In 2002, revenues generated from software license fees decreased by 14% to
$36,385,000, or 44% of total revenues, from $42,316,000, or 49% of total
revenues in 2001. Service revenues increased by 2% in 2002 to $45,620,000 or 56%
of total revenues, from $44,584,000, or 51% of total revenues in 2001. The
increase in service revenues reflects growth in maintenance fees relating to our
increased number of installed software products, as well as increasing demand
for consulting services in connection with our eMPower Enterprise Solutions. The
decrease in software license fees, both on an absolute and a percentage basis,
reflects the increased demand for eMPower Enterprise Solutions in which the
services portion of the revenues is relatively high compared to that of the
software license fees.
31
COST OF SOFTWARE LICENSE FEES. In 2002, cost of software license fees
increased by 3% to $8,062,000, or 10% of total revenues, from $7,851,000, or 9%
of total revenues in 2001. This increase resulted primarily from an increase in
royalties paid to third parties pursuant to license agreements that allow us to
use such parties' products and technologies in our products, and to the Office
of the Chief Scientist (the "OCS") of the Government of Israel on proceeds from
sales of products developed using grants from the OCS. Royalties to such third
parties and to the OCS totaled $2,306,000, compared to $1,542,000 in 2001. The
increase in royalty expenses paid or accrued in 2002 is due to our use of a
broader range of third party products and technologies in our MPM enterprise
solutions. However, effective April 1, 2002, based on management's periodic
review of the useful lives of capitalized software development costs, we changed
our estimation of the useful lives of certain software modules whose development
costs we capitalized from three years to five years. This change mitigated the
increase in the cost of software license fees in 2002 as amortization of
capitalized software development costs was $1,569,000 less than what it would
have been had we not changed the amortization period of these software modules.
COST OF SERVICES. In 2002, cost of services decreased by 2% to $15,005,000,
or 18% of total revenues, from $15,268,000 or 18% of total revenues in 2001.
This decrease was primarily related to the decrease in payroll payments
resulting from the decrease in personnel.
AMORTIZATION OF ACQUIRED INTANGIBLES. In 2002, amortization of acquired
intangibles, primarily developed software products, decreased to $2,491,000 from
$7,758,000 in 2001. The decrease in amortization was primarily due to the effect
of SFAS 142, pursuant to which we no longer amortize goodwill, and to our
completion of the amortization of other acquired intangibles prior to 2002.
RESEARCH AND DEVELOPMENT, NET. In 2002, gross research and development
costs decreased by 17% to $23,491,000, or 29% of revenues, from $28,333,000 or
33% of revenues in 2001. This decrease is due to the reduction in research and
development personnel that resulted in lower payroll expenses and related
benefits. The reduction in personnel was part of the program that we initiated
in 2001 and continued through 2002 to reduce expenses. This program included
reducing research and development costs by focusing more on the continued
development of our core MPM enterprise solutions as opposed to the engineering
applications that comprised our older products and other projects that we view
as less critical to our customers' current and anticipated needs.
Capitalized software development costs decreased by 20% to $4,097,000, or
5% of revenues, from $5,103,000, or 6% of revenues in 2001, primarily in
connection with the reduction of research and development costs. Capitalized
software development costs, as a percentage of gross research and development
expenses, decreased to 17% in 2002 from 18% in 2001.
Third-party participation in research and development costs increased to
$4,582,000 from $4,014,000 in 2001. Third party participation in research and
development costs, as a percentage of gross research and development costs,
increased to 20% in 2002 from 14% in 2001, reflecting the decrease in gross
research and development costs, and the increase in participation in research
and development activities in Israel and from a third party.
Net research and development costs decreased by 23% to $14,812,000, or 18%
of revenues, in 2002 from $19,216,000, or 22% of revenues in 2001, mainly due to
the reduction in research and development personnel.
SELLING AND MARKETING. In 2002, selling and marketing expenses decreased by
17% to $36,887,000, or 45% of revenues, compared to $44,624,000, or 51% of
revenues in 2001. This decrease mainly reflects the continuation in 2002 of the
program we initiated in 2001 aimed at creating a leaner and more agile
organization with suitable infrastructure in place to better serve our customers
and support long-term revenue growth. As part of this program, we reduced excess
personnel and capacity costs in order to align our operating expenses with
current revenue levels. As a result, we focused on our target market industries
and territories, thereby facilitating the reduction in selling and marketing
personnel, which resulted in lower payroll expenses, commissions and related
benefits.
GENERAL AND ADMINISTRATIVE. In 2002, general and administrative expenses
increased by 3% to $5,013,000, or 6% of revenues, from $4,855,000, or 6% of
revenues in 2001. The increase in 2002 is primarily due to certain management
bonuses in the amount of $100,000.
WRITE-OFF OF LONG-TERM INVESTMENT. In 2002, we wrote-off an investment in
the shares of a privately-held company in the amount of $457,000.
32
RESTRUCTURING AND ASSET IMPAIRMENT. In 2002, we recorded a charge of
$651,000, or 1% of revenues, related to a cost reduction program involving the
termination of employees and the reduction in leased office space and equipment
in certain offices, pursuant to a program aimed at reducing our operating
expenses, compared to a charge of $1,843,000, or 2% of revenues in 2001 related
to a cost reduction program implemented in 2001.
IMPAIRMENT OF SOFTWARE ACQUIRED. In 2002, we recorded a charge in the
amount of $375,000 for the impairment of certain products and technologies of
third parties which will no longer be used in our products.
OPERATING INCOME (LOSS). In 2002, operating loss decreased by 88% to
$(1,748,000) from $(14,515,000) in 2001. Operating loss from the Mechanical
division in 2002 was $(180,000) compared to operating loss of $(1,530,000) in
2001, reflecting a significant decrease in operating expenses. Operating loss
from the Electronics division in 2002 decreased by 88% to $(1,568,000) from
$(12,985,000) in 2001, reflecting a significant decrease in operating expenses.
The decrease in operating expenses is due to the cost reduction plan we
initiated in the fourth quarter of 2001. In addition, operating loss also
decreased by $1,569,000 as a result of the reduction in amounts of capitalized
software development costs that were amortized in 2002 due to the change in the
estimate of the useful lives of capitalized software development costs.
FINANCIAL INCOME (EXPENSE), NET. In 2002, net financial income (expense)
was $(799,000) compared to financial income of $1,191,000 in 2001. This change
was attributable mainly to the capital loss from realization of marketable
securities and the decrease in the value of certain marketable securities held
by us resulting from the decrease in the rating of such marketable securities,
expenses incured by us in connection with devaluation of the NIS against the
U.S. dollar and related transactions effected by us to hedge foreign currencies,
mainly Euro and Japanese Yen, against the U.S. dollar, and the decrease in the
amount of capital gain we had from the repurchase of our convertible notes as
opposed to the amount of such capital gain in 2001.
TAXES ON INCOME. In 2002, we recorded a provision for income tax in the
amount of $(148,000) compared to $54,000 in 2001. In 2002, provision for current
taxes in Israel and in non-Israeli subsidiaries amounted to $(458,000) and
provision for deferred taxes amounted to $310,000. In 2001, provision for
current income taxes in Israel and in non-Israeli subsidiaries amounted to
$(133,000) and provision for deferred taxes amounted to $187,000.
SHARE IN LOSS OF AFFILIATED COMPANY. In 2002, we recorded losses in the
amount of $431,000 from our equity share in an affiliate company, compared to
$532,000 in 2001.
NET INCOME (LOSS). In 2002, our net loss was $(2,830,000), or 3% of
revenues, compared to a net loss of $(13,910,000), or 16% of revenues in 2001.
In 2002, diluted loss per share was $(0.27) based on an average number of shares
outstanding of 10,607,140, compared to diluted loss per share of $(1.35) in
2001, based on an average number of shares outstanding of 10,366,125.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUES. In 2001, revenues decreased by 2% to $86,900,000 from $89,018,000
in 2000. Revenues from the Mechanical division increased by 5% to $66,454,000
from $63,255,000 and accounted for 76% of total revenues compared to 71% of
total revenues in 2000. The increase in revenues from this division is mainly
attributable to the acceptance of our new MPM solutions, which were introduced
in 2000, by existing customers as well as to the adoption of these solutions by
new customers in the U.S. and in the Far East. The increase in revenues from
those customers was partially offset by a decrease in revenues from Europe,
where the sales cycle of our MPM solutions was longer than in the U.S. and in
the Far East. Accordingly, revenues from Europe decreased by 5% and accounted
for 57% of total revenues from the Mechanical division, compared to 63% in 2000.
Revenues from the U.S. increased by 26% and accounted for 19% of total revenues
from the Mechanical division compared to 16% in 2000. Revenues from the Far East
increased by 19% and accounted for 25% of total revenues from the Mechanical
division, compared to 22% in 2000.
Revenues from our Electronics division decreased by 21% to $20,446,000 from
$25,763,000 in 2000 and accounted for 24% of total revenues, compared to 29% of
total revenues in 2000. The decrease in revenues from this division is mainly
attributable to the downturn in the electronics industry, especially in the U.S.
Revenues from Europe decreased by 9% and accounted for 29% of total revenues
from the Electronics division, compared to 25% in 2000. Revenues from the U.S.
decreased by 27% and accounted for 60% of total revenues, compared to 65% in
2000. Revenues from the Far East decreased by 10%, however these revenues
accounted for 11% of total revenues, compared to 10% in 2000, due to the
decrease in revenues from other geographic areas.
33
In 2001, revenues generated from software license fees decreased by 18% to
$42,316,000, or 49% of total revenues, from $51,699,000, or 58% of total
revenues in 2000. Service revenues increased by 19% in 2001 to $44,584,000 or
51% of total revenues, from $37,319,000, or 42% of total revenues in 2000. The
increase in service revenues reflects growth in maintenance fees relating to our
increased number of installed software products, as well as increasing demand
for consulting services in connection with our MPM solutions. The decrease in
software license fees, both on an absolute and a percentage basis, reflects the
increased demand for MPM solutions in which the services portion of the revenues
is relatively higher than that of the software license fees.
COST OF SOFTWARE LICENSE FEES. In 2001, cost of software license fees
increased by 36% to $7,851,000, or 9% of total revenues, from $5,764,000, or 6%
of total revenues in 2000. This increase resulted primarily from an increase in
amortization of capitalized software development costs which totaled $5,060,000,
compared to $3,479,000 in 2000. The increase in amortization of software
development costs is related to the completion of major research and development
projects during 2001 and the release of those projects to customers.
COST OF SERVICES. In 2001, cost of services increased by 14% to
$15,268,000, or 18% of total revenues, from $13,354,000 or 15% of total revenues
in 2000, reflecting mainly the growth in maintenance services due to our growing
installed base of customers and increased demand for consulting services.
AMORTIZATION OF ACQUIRED INTANGIBLES. In 2001, amortization of acquired
intangibles, primarily goodwill and developed software products, decreased
slightly to $7,758,000 from $7,801,000 in 2000.
RESEARCH AND DEVELOPMENT, NET. In 2001, gross research and development
costs decreased by 14% to $28,333,000, or 33% of revenues, from $33,030,000 or
37% of revenues in 2000. This decrease is due to the reduction in research and
development personnel that resulted in lower payroll expenses and related
benefits. The reduction in personnel was part of our program to reduce research
and development costs by also focusing more on the continued development of our
core MPM enterprise solutions as opposed to the engineering applications that
comprised our older products and other projects that we view as less critical to
our customers' current and anticipated needs.
Capitalized software development costs decreased by 30% to $5,103,000, or
6% of revenues, from $7,294,000, or 8% of revenues in 2000, primarily in
connection with the reduction of research and development costs. Capitalized
software development costs, as a percentage of gross research and development
expenses, decreased to 18% in 2001 from 22% in 2000.
Third-party participation in research and development costs decreased to
$4,014,000 from $4,988,000 in 2000. Third party participation in research and
development costs, as a percentage of gross research and development costs,
decreased to 14% in 2001 from 15% in 2000, reflecting mainly the decrease in
participation in research and development activities in Israel.
Net research and development costs decreased by 7% to $19,216,000, or 22%
of revenues, in 2001 from $20,748,000, or 23% of revenues in 2000.
SELLING AND MARKETING. In 2001, selling and marketing expenses decreased by
12% to $44,624,000, or 51% of revenues, compared to $50,737,000, or 57% of
revenues in 2000. This decrease mainly reflects our strategy to focus on our
target market industries and territories, thereby facilitating the reduction in
selling and marketing personnel which resulted in lower payroll expenses,
commissions and related benefits.
GENERAL AND ADMINISTRATIVE. In 2001, general and administrative expenses
decreased by 20% to $4,855,000, or 6% of revenues, from $6,037,000, or 7% of
revenues in 2000. This decrease is mainly attributed to the reduction in general
and administrative personnel which resulted in lower payroll expenses and
related benefits.
RESTRUCTURING AND ASSET IMPAIRMENT. In 2001, we recorded a charge of
$1,843,000, or 2% of revenues, related to the termination of employees and the
reduction in leased office space and equipment in certain offices, pursuant to a
program aimed at reducing our operating expenses. This charge includes the
amount of $316,000 for the impairment of certain software development costs.
Those costs had previously been capitalized in connection with a software
product with respect to which we have decided to cease all activities.
OPERATING INCOME (LOSS). In 2001, operating loss decreased by 30% to
$(14,515,000) from $(20,673,000) in 2000. Operating loss from the Mechanical
division in 2001 decreased by 84% to $(1,530,000) from $(9,336,000) in 2000,
reflecting an increase in revenues and a significant decrease in operating
expenses. Operating loss from the Electronics division in 2001 increased by 15%
to $(12,985,000) from $(11,337,000) in 2000, reflecting the decrease in revenues
from that division.
34
FINANCIAL INCOME (EXPENSE), NET. In 2001, net financial income (expense)
decreased to $1,191,000 from $1,348,000 in 2000. The decrease was attributable
mainly to the decrease in general interest rates during 2001 affecting our gains
from debt securities held by us compared to the expense associated with our
interest payments on our convertible notes. The decrease in general interest
rates during 2001 was partially offset by a capital gain in the amount of
$1,393,000 resulting from the repurchase of our 5.25% convertible notes in open
market transactions. However, in 2000 we did not repurchase any of our 5.25%
convertible notes.
TAXES ON INCOME. In 2001, we recorded a provision for income tax in the
amount of $54,000 compared to $505,000 in 2000. In 2001, provision for current
taxes in Israel and in non-Israeli subsidiaries amounted to $(133,000) and
provision for deferred taxes amounted to $187,000. In 2000, provision for
current income taxes in Israel and in non-Israeli subsidiaries amounted to
$219,000 and provision for deferred taxes amounted to $286,000.
SHARE IN LOSS OF AFFILIATED COMPANY. In 2001, we recorded losses in the
amount of $532,000 from our equity share in an affiliate company, compared to
$131,000 in 2000.
MINORITY INTEREST IN NET LOSS OF SUBSIDIARY. The interest of minority
shareholders in the net losses of Nihon Tecnomatix during 2001 was $0 compared
to $2,000 in 2000.
EXTRAORDINARY GAIN FROM REPURCHASE OF CONVERTIBLE NOTES. In 2001, we
recorded an extraordinary gain in the amount of $1,393,000 from the repurchase
of $5,485,000 aggregate principal amount of our 5.25% convertible notes,
reflecting primarily the excess of this principal amount over the amount paid
and proportionate share of offering expenses. However, as a result of our
adoption, effective January 1, 2002, of SFAS No. 145 regarding the presentation
of gains or losses resulting from the extinguishments of debt in financial
statements, we have reclassified this extraordinary gain as Financial Income
(Expenses), Net.
NET INCOME (LOSS). In 2001, our net loss was $(13,910,000), or 16% of
revenues, compared to a net loss of $(19,959,000), or 22% of revenues. In 2001,
diluted loss per share was $(1.35) based on an average number of shares
outstanding of 10,366,125, compared to diluted loss per share of $(1.95) in
2000, based on an average number of shares outstanding of 10,224,737.
IMPACT OF INFLATION AND FOREIGN CURRENCY FLUCTUATION
Although a majority of our sales are made (and a substantial amount of our
expenses are incurred) outside Israel in local currencies, a portion of our
expenses are incurred in Israel in transactions denominated in New Israeli
Shekels (NIS). The dollar cost of our operations in Israel is impacted by
several factors including (a) the rate of inflation in Israel, (b) the
devaluation of the NIS relative to the dollar in comparison to the rate of
inflation, and (c) the timing of such devaluation. Consequently, we may
experience a material adverse effect should the rate of the devaluation of the
NIS relative to the dollar significantly lag behind the rate of inflation in
Israel. In 1997, 1998, 2001 and 2002, the rate of devaluation exceeded the rate
of inflation. This trend was reversed in 1999, 2000 and the first three months
of 2003, during which our dollar cost of operations in Israel was adversely
affected since the rate of inflation generally exceeded the devaluation of the
NIS against the dollar. In addition, as our revenues and costs outside the U.S.
are generally denominated in local non-dollar currencies, fluctuations in the
rates of exchange between the dollar and non-dollar currencies may have a
material effect on our results of operations. Thus, an increase in the value of
a particular currency relative to the dollar will increase the dollar reporting
value for transactions in such currency, and a decrease in the value of such
currency relative to the dollar will decrease the dollar reporting value for
such transactions. This effect on the dollar reporting value for transactions is
only partially offset by the impact that such fluctuations may have on our
costs. See "Overview" above and "Item 11: Disclosure about Market Risk."
EFFECTIVE CORPORATE TAX RATE
We and each of our subsidiaries are subject to corporate taxes in various
countries in which they operate. We are currently most significantly affected by
corporate taxes in Israel where we received a final tax assessment through the
tax year ended December 31, 1999. We believe that our effective tax rate in
Israel would have been approximately 15% for the year ended December 31, 2002,
had we not utilized our loss carryforwards in Israel. We believe that we have no
tax loss carryforwards in Israel as of the end of 2002. However, as of December
31, 2002, we have approximately $17,044,000 in net operating loss carryforwards
in the U.S. We expect that as our profits increase and our subsidiaries utilize
their respective loss carryforwards, particularly in countries with relatively
high corporate tax rates, our consolidated effective tax rate will increase.
35
We currently have eleven Approved Enterprise programs, under the Israeli
Law for the Encouragement of Capital Investments, 1959, which programs commenced
operation between 1993 and 1998. Consequently, we are eligible for certain
Israeli tax benefits. Income derived from our Approved Enterprise programs is
exempt from tax for a period of either two or four years, commencing in the
first year in which we generate taxable income from such Approved Enterprise and
is subject to a reduced tax rate of 15% for a further eight or six years,
respectively. See Note 13 of the notes to our consolidated financial statements
included elsewhere in this annual report.
B. LIQUIDITY AND CAPITAL RESOURCES
We have met our financial obligations primarily through funds provided by
operations and by research and development grants, which are discussed in Item
5C below. Additional cash resources were generated from the issuance in August
1997 of our 5 1/4% convertible notes in an aggregate principal amount of
$97,750,000.
In connection with the August 1997 convertible notes offering, we incurred
related issuance expenses of $3,104,000. These expenses are recorded as deferred
expenses and are amortized using the straight-line method over the life of the
notes. The notes bear interest at 5.25% per annum, payable semi-annually and
mature on August 15, 2004. The notes are convertible into ordinary shares at any
time at or before maturity, unless previously redeemed, at a conversion price of
$42.39 per share, subject to adjustment in certain events. We may, at our
option, redeem the notes on or after August 18, 2000, in whole or in part, at
certain redemption prices. Following the repurchases of an aggregate
$42,500,000, $6,000,000, $5,485,000 and $6,337,000 principal amount of the notes
in 1998, 1999, 2001 and 2002, respectively, at aggregate purchase prices of
approximately $29,203,000, $4,200,000, $3,986,000 and $5,709,000, we had, as of
December 31, 2002, an aggregate $37,428,000 principal amount of the notes
outstanding. Although we currently believe that our cash resources as well as
amounts currently available to us under our credit line from Bank Hapoalim will
be sufficient for repayment of our notes, we may need to raise additional funds
to repay amounts due under the notes upon their maturity either through
additional borrowings or through the sale of securities. In the event that we
seek to raise funds through additional borrowings, we may be required to borrow
on terms or at interest rates that are less favorable to us than the terms and
rates applicable to our current outstanding debt or the terms of our credit line
from Bank Hapoalim described below. In addition, additional borrowings may
subject us to further covenants, restrictions and pledges.
In April 2003, we signed a letter of intent with Bank Hapoalim B.M. under
which Hapoalim will provide us with a credit line in an aggregate principal
amount of $25,000,0000. We may draw amounts under the credit line until June 30,
2003. To date we have not withdrawn any amounts under the credit line. Loans
under this credit line will bear interest at a rate equal to the three month
LIBOR rate at the time of a draw plus a spread to be agreed to by us and
Hapoalim prior to each draw. We may, but are not required to, use this credit
line to refinance our 5.25% convertible notes, thereby reducing payable interest
and generating capital gains from repurchase of the notes. The credit line
matures four years after withdrawal. Unless we take advantage of our right of
prepayment of the credit, the repayment of an amount of $10,000,000 under the
line of credit is required to be made in equal quarterly payments, commencing 15
months after withdrawal, and repayment of the remaining amounts under the line
of credit, if withdrawn, is required to be made upon the maturity of the line of
credit or the earlier maturity of certain bonds deposited with Hapoalim to
secure repayment. In connection with the credit line we agreed to create a
floating charge over our assets in favor of Hapoalim and to maintain certain
financial ratios which include (a) a covenant to maintain certain levels of
cash, cash equivalents, bonds and deposits, as long as the credit line is
outstanding with such level being initially $30 million and gradually decreasing
as we progress with repayment of the credit line; (b) commencing with the last
quarter of 2003, an average quarterly EBITDA of at least $1 million in the
preceding three quarters; (c) a ratio of shareholders equity to total assets of
not less than 40% and an amount of shareholders equity of not less than $33
million, and (d) a ratio of current assets to current liabilities (excluding
amounts due under our convertible notes and excluding then current maturities
under the credit line) of at least 1.5. Additional details regarding the credit
line are described below in "Item 10.C - Material Contracts."
As of December 31, 2002, our cash and cash equivalents, short-term
investments and long-term investments totaled $41,919,000 compared to
$51,185,000 as of December 31, 2001. This decrease was primarily the result of
the use of cash to repurchase convertible notes, to purchase certain software
technology rights and to invest in additional property and equipment. As of
December 31, 2002, working capital was $27,460,000 and total assets were
$116,343,000 compared to $57,758,000 and $123,379,000, respectively as of
December 31, 2001. The change in working capital resulted from our moving
approximately $25,000,000 from short-term investments to long-term investments
ranging in terms from one to ten years in order to increase our interest
returns. We believe that our cash, short-term investments, long-term investments
and funds generated from operations and research and development grants will be
sufficient to finance our operations for at least the next twelve months.
However, because we depend mostly on our revenues to fund our operating
activities, if our revenues were to decrease, whether due to a continued
slowdown in the industries in which we operate, our sales decreasing as a result
of evolving industry standards and rapid technological changes that could result
in our products being no longer in demand, competitive pressures, our failure to
retain our customers or for any other reason, we may need to reduce our
operating expenses, including possibly through additional reductions in
personnel, or use more of our cash reserves to fund operating expenses.
Similarly, in the event that the amounts we receive from research and
development grants decline, we may need to reduce operating expenses or utilize
more of our cash reserves.
36
Our trade receivables, net of allowance for doubtful accounts on December
31, 2002 totaled $27,671,000 compared to $23,110,000 on December 31, 2001. The
collection cycle has increased during 2002 compared to 2001 due to the request
of certain customers to extend the payment due dates. We believe that generally,
the quality of receivables remained unchanged and we will continue our efforts
to lower the collection cycle. In addition, we entered into a factoring
agreement with a financial institution under which we may sell our account
receivables subject to inspection and acceptance by the financial institution.
The financial institution is responsible for collecting the receivables with no
recourse to us. Upon completion of the sale, the financial institution remits
all or part of the funds to us, less applicable discounts and service fees. Upon
remittance of the funds to us the receivable is deemed collected. During 2002,
we sold receivables in the amount of $1,071,000 and incurred related expenses in
the amount of $32,000.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject us to concentration of credit risk consist principally of cash and cash
equivalents, short-term investments and accounts receivable. Our cash and cash
equivalents, short-term investments and long-term investments are invested in
deposits with major banks in the United States, Europe and Israel. We believe
that the financial institutions holding our cash funds are financially sound,
and that minimal credit risk exists with respect to our marketable securities,
which consist of debt securities of the Government of Israel and highly-rated
corporate bonds. Our accounts receivable are generated from a large number of
customers, mainly large industrial corporations and their suppliers, located in
Europe, the United States and the Far East. We perform ongoing evaluations of
our accounts receivable and maintain an allowance for doubtful accounts which we
believe is adequate to cover all anticipated losses with respect to our
accounts.
Contractual Obligations as of Payments due by Period
December 31, 2002 (US$ in thousands)
Total Less than 1 1-3 Years 4-5 Years After 5 Years
Year
Long-Term Debt (1) $37,428 --- $37,428 --- ---
Operating Leases $10,972 $4,293 $5,383 $1,296 ---
Total Contractual Cash $48,400 $4,293 $42,811 $1,296 ---
Obligations
(1) In April 2003, we signed a letter of intent with Bank Hapoalim B.M.
under which Hapoalim will provide us with a credit line in an aggregate
principal amount of $25,000,0000. We may draw amounts under the credit line
until June 30, 2003. To date we have not withdrawn any amounts under the credit
line. For more details regarding this credit line see "Liquidity and Capital
Resources" above and "Item 10.C - Material Contracts."
DERIVATIVE FINANCIAL INSTRUMENTS. In 2001, we adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities
(collectively referred to as SFAS No. 133). The initial adoption did not have an
impact on our shareholders' equity. SFAS133 requires that all derivatives be
recorded in the balance sheet at fair value. If certain conditions are met, a
derivative may be designated as a hedge of exposures to changes in fair value,
cash flows or foreign currency exchange rates. The accounting for changes in the
fair value of such derivative instruments depends on the intended use of the
derivative and the nature of any hedge designation thereon. We generally use
derivatives to reduce our exposure to foreign currency risks stemming from
various assets, liabilities and cash flows. In 2000, 2001 and 2002, 70%, 71% and
70% of our revenues, respectively, were denominated in non-dollar currencies.
Since our financial results are reported in dollars, fluctuations in the rates
of exchange between the dollar and non-dollar currencies may have a material
effect on our results of operations. We therefore use currency exchange forward
contracts and options to hedge the impact of the variability in the exchange
rates on accounts receivable and future cash flows denominated in non-dollar
currencies. The counter-parties to our forward contracts and options are major
financial institutions with high credit ratings. We believe the risk of
incurring losses on such forward contracts and options related to credit risks
is remote and that any losses would be immaterial. As of December 31, 2002, we
had options contracts to sell up to $4,254,000 for a total amount of NIS
19,950,000 that matured prior to March 31, 2003.
OFF-BALANCE SHEET ARRANGEMENTS. We are not party to any material
off-balance sheet arrangements.
37
C. RESEARCH AND DEVELOPMENT, PATENTS, LICENSES, ETC.
We conduct our research and development operations primarily in Israel,
U.S., Germany and France. Our research and development efforts have been
financed through internal resources, through programs sponsored by the Chief
Scientist of the Government of Israel and through grants from other third
parties. In the years ended December 31, 2000, 2001 and 2002, our gross research
and development expenditures were $33,030,000, $28,333,000 and $23,491,000,
respectively (37%, 33% and 29% of total revenues, respectively). In 2000, 2001
and 2002, the Chief Scientist of the Government of Israel provided participation
financing for research and development efforts of $2,500,000, $1,244,000 and
$1,918,000, respectively (8%, 4% and 8% of total research and development
expenses, respectively). Under the provisions of Israeli law in effect until
1996, royalties of 2%-3% of the revenues derived in connection with products
developed according to, or as a result of, a research and development program
funded by the Chief Scientist must be paid to the State of Israel. Pursuant to
an amendment effected in 1996 effective with respect to Chief Scientist programs
funded in or after 1994, royalties generally at the rate of 3% during the first
three years, 4% over the following three years and 5% in or after the seventh
year of the revenues derived in connection with products developed according to
such programs are payable to the State of Israel. The maximum aggregate
royalties will not exceed 100% (for funding prior to 1994, 100%-150%) of the
dollar-linked value of the total grants received. Pursuant to an amendment
effected in 2000, effective with respect to Chief Scientist programs funded in
or after 2000, the royalty rates described above were updated to 3% during the
first three years and 3.5% in or after the fourth year, of the revenues derived
in connection with products developed under such programs. Pursuant to an
amendment effected on January 1, 1999, effective with respect to Chief Scientist
programs approved in or after 1999, funds received from the Chief Scientist
shall bear annual interest at a rate equal to LIBOR for twelve months.
The Government of Israel does not own proprietary rights in the technology
developed using its funding and there is no restriction on the export of the
products manufactured using the technology. Certain restrictions with respect to
the technology do apply, however, including the obligation to manufacture the
product based on such technology in Israel and to obtain the Chief Scientist's
consent for the transfer of the technology to a third party. If the Chief
Scientist consents to the manufacture of the products outside Israel, applicable
regulations would require the payment of increased royalties, ranging from 120%
up to 300% of the amount of the Chief Scientist grant, depending on the
percentage of foreign manufacture. These restrictions continue even if we have
paid the full amount of royalties payable in respect of the grants. In 2002, the
law relating to the Chief Scientist was amended to, among other things, enable
companies applying for grants from the Chief Scientist to seek prior approval
for conducting manufacturing activities outside of Israel without being subject
to increased royalties. However, this amendment will not apply to any of our
existing grants. In addition, the amendment provides that one of the factors to
be taken into consideration by the Chief Scientist in deciding whether to
approve a grant application is the percentage of the manufacturing of the
relevant product that will be conducted outside of Israel. Accordingly, should
we seek additional grants from the Chief Scientist in connection with which we
also seek prior approval for manufacturing products outside of Israel, we may
not receive such grant or may receive a grant in an amount that is less than the
amount we sought.
Based upon the aggregate participation payments received to date, we expect
that we will continue to pay royalties to the Chief Scientist on sales of our
products and related services for the foreseeable future. In the years ended
December 31, 2000, 2001 and 2002, we paid or accrued royalties to the Chief
Scientist in the amount of $1,543,000, $1,504,000 and $1,627,000, respectively.
From time to time provisions of Israeli law relating to the terms of the Chief
Scientist participation have been amended and may be further amended in the
future. In addition, the Chief Scientist budget has been subject to reductions
and such reductions may affect the availability of funds for chief scientist
participation in the future. Such amendments or reductions in budgets could have
a material adverse effect on our business, financial condition and results of
operations.
38
In addition to royalty-bearing grants from the Office of the Chief
Scientist we participate in a program sponsored by the Office of the Chief
Scientist that is intended to develop generic technologies for use by Israeli
high-technology companies. As part of this program, we are a member of a
research consortium comprised of several Israeli high-technology companies that
are engaged in the development of software tools for industrial processes. The
Office of the Chief Scientist contributes 66% of the approved research and
development budget for the research consortium and the members of the research
consortium contribute the remaining 34%. No royalties are payable to the Israeli
government in relation to products or other developments attributable to this
funding. Expenses in excess of the approved budget are borne by the consortium
members. In general, any consortium member that develops technology in the
framework of the consortium retains the intellectual property rights to the
technology developed by this member, and all the members of the consortium have
the right to utilize and implement such technology without having to pay
royalties to the developing consortium member. As of December 31, 2002, we have
recognized $6,328,000 in grants from the Office of the Chief Scientist in
connection with the consortium.
In 1994, we entered into an agreement with the Binational Industrial
Research and Development Fund ("BIRD-F") for a development project conducted by
Tecnomatix and its wholly owned U.S. subsidiary, Tecnomatix Technologies, Inc.
We are eligible, subject to certain conditions, to receive grants from BIRD-F
upon progress of such development project. Under the terms of the BIRD-F grant,
we are obligated to pay royalties of 5% of the revenues derived from sales of
products developed in this project, up to 150% of the amount granted. The total
amount received, net of royalties paid or accrued as of December 31, 2002, was
$317,000. Royalty expenses to the BIRD-F in the year ended December 31, 2002
were $0. In January 2002, we entered into an agreement with BIRD-F for a
development project conducted by Tecnomatix and its wholly owned U.S.
subsidiary, Tecnomatix Unicam, Inc. We are eligible, subject to certain
conditions, to receive grants from BIRD-F upon progress of such development
project. Under the terms of the BIRD-F grant, we are obligated to pay royalties
of 5% of the revenues derived from sales of products developed in this project,
up to 150% of the amount granted. The total amount received for this project,
net of royalties paid or accrued as of December 31, 2002, was $500,000.
D. TREND INFORMATION
Our quarterly results of operations may be subject to significant
fluctuations due to several factors, primarily the timing of large orders, which
represent a significant percentage of our revenues, and other factors, including
customer budget cycles, competitive pressures, the low level of business
activity during the summer months in the European market, the timing of new
product announcements, the release of new products by us and our competitors and
the effective provision by us of customer support.
In addition, our results of operations and financial condition may be
affected by various other factors discussed in "Item 3D: Risk Factors" including
the length of our sales cycle, market acceptance of our eMPower offering for
MPM, changes in political, military or economic conditions in Israel and in the
Middle East, general slowing of local or global economies and decreased economic
activity in one or more of our target industries.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Our directors and executive officers are listed below, together with brief
accounts of their business experience and certain other information.
NAME AGE POSITION
Harel Beit-On(1).......... 43 Chairman of the Board of Directors and Chief Executive
Officer
Shlomo Dovrat(1) (2)...... 43 Vice Chairman of the Board of Directors
Kenneth J. Bialkin(3)..... 73 Director
Gerald B. Cramer(3)....... 72 Director
Aharon Dovrat(2)(3)....... 71 Director
Avi Zeevi(1).............. 52 Director
Talia Livni(2)(3)......... 60 Director
Jaron Lotan............... 45 President and Chief Operating Officer
Oren Steinberg............ 35 Executive Vice President and Chief Financial Officer
Alex Shapira.............. 45 Executive Vice President of Product Operations
Amir Livne................ 42 Executive Vice President of Business Development and
Strategy
Olivier Leteurtre......... 40 Executive Vice President of Sales and Field Operations
Israel Levy............... 43 Chief Executive Officer of Tecnomatix Unicam, Inc.
39
(1) Member of the Investment and Finance Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
HAREL BEIT-ON has served as Chairman of the Board of Directors since
December 2001, as Chief Executive Officer since 1996 and as a director since
1999. Mr. Beit-On also served as President of Tecnomatix from 1995 until October
2002. From 1994 to 1996, Mr. Beit-On served as Chief Operating Officer of
Tecnomatix. Between 1991 and 1994, Mr. Beit-On served as Executive Vice
President of Sales and Engineering of Tecnomatix. From 1988 to 1991, Mr. Beit-On
served as the President of Tecnomatix's United States sales and support
subsidiary. From 1985 to 1988, Mr. Beit-On served in various marketing positions
with Tecnomatix.
SHLOMO DOVRAT is the founder of Tecnomatix and has served as a director of
Tecnomatix since its inception and as Vice Chairman of the Board of Directors
since December 2001. Mr. Dovrat served as Chairman of the Board of Directors of
Tecnomatix from 1995 to 2001. Mr. Dovrat served as the Chief Executive Officer
and President of Tecnomatix from its inception to 1996 and 1995, respectively.
Mr. Dovrat served as a director, President and Chief Executive Officer of Oshap
Technologies Ltd. from 1983 until 1999. Mr. Dovrat is a founding partner in
several high-tech venture capital funds including Carmel Software Fund and Dor
Ventures Fund, and he is also a partner in Dovrat & Co., a privately held
investment group. Shlomo Dovrat is Aharon Dovrat's son.
KENNETH J. BIALKIN has served as a director of Tecnomatix since 1993. Mr.
Bialkin has been a partner of the law firm of Skadden, Arps, Slate, Meagher &
Flom LLP, our U.S. counsel, for more than the past five years. Mr. Bialkin is a
director of Municipal Assistance Corporation for the City of New York,
CitiGroup, Inc. and Sapiens International Corporation N.V.
GERALD B. CRAMER has served as a director of Tecnomatix since 1996. Mr.
Cramer is a co-founder and has been Chairman of CRM LLC since 1973. Prior to
co-founding CRM LLC, Mr. Cramer was a senior partner at Oppenheimer & Company.
Mr. Cramer serves on the board of directors of Teatown Lake Reservation, the
Board of Trustees at Syracuse University and serves on its Investment Committee.
Mr. Cramer is a former trustee of St. Joseph's Medical Center. Mr. Cramer earned
a BSc from Syracuse and attended the University of Pennsylvania Wharton Graduate
School of Finance. Mr. Cramer served as a Lieutenant in the United States Navy.
AHARON DOVRAT has served as a director of Tecnomatix since 1989 and served
as Chairman of the Board of Directors of Tecnomatix from 1989 to February 1995.
Until 1991, Mr. Dovrat served as Managing Director of Clal (Israel) Ltd., one of
Israel's largest public investment companies. From 1991 until 1998, Mr. Dovrat
was the founder, principal shareholder and Chairman of Dovrat, Shrem & Co., an
investment-banking firm established in 1991. Mr. Dovrat currently serves as
Chairman of Dovrat & Co., a private investment company, Chairman of Isal Amlat
Ltd., a publicly traded investment company, Chairman of Alvarion Ltd., a
publicly traded wireless telecommunications equipment company, and Chairman of
Cognifit Ltd. Mr. Dovrat also serves as board member of DS Polaris Ltd., Delta
Galilee Industries Ltd., a publicly traded company, Lumenis Ltd., a publicly
traded company, and B.O.S - Better Online Solutions. Aharon Dovrat is Shlomo
Dovrat's father.
AVI ZEEVI has served as a director of Tecnomatix since 1995. Mr. Zeevi
served as Chief Financial Officer of Oshap from 1994 until 1999 and he is now a
founding partner in several high-tech venture capital funds including Carmel
Software Fund and Dor Ventures Fund. From 1983 to 1994, Mr. Zeevi served as
Chief Executive Officer of Oshap's subsidiary MINT Software Technologies Ltd.
TALIA LIVNI has served as a director of Tecnomatix since August 2000. Ms.
Livni has been the Legal Advisor of the Histadrut (General Federation of Labor
in Israel) since 1997. From 1992 until 1996, she served as Head of the Human
Resources Division of the Israeli Ministry of Defense. From 1975 until 1992, Ms.
Livni served as Senior Deputy Legal Advisor to the Israeli Ministry of Defense.
From 1973 until 1975, Ms. Livni served as Legal Adviser to RAFAEL Israel
Armament Development Authority Ltd.
40
JARON LOTAN has served as President and Chief Operating Officer of
Tecnomatix since October 2002. Prior to joining Tecnomatix, Mr. Lotan served as
Corporate Executive Vice President for business and strategy at Orbotech Ltd., a
leading supplier of automated optical inspection and other productivity
solutions for the electronics industry. At Orbotech, he was responsible for
worldwide sales, marketing and support organization, corporate marketing
activities and strategy and business development. Prior to serving as Corporate
Executive Vice President, Mr. Lotan served as President of the Orbotech PCB
Division and President of Orbotech Europe. Before joining Orbotech in 1992, Mr.
Lotan co-founded and served as General Manager, North America for Rosh
Intelligent Systems, a software company offering knowledge-based solutions to
customer support organizations. Mr. Lotan holds a BA in Economics and
Mathematics, and an MA in Economics both from the Hebrew University in
Jerusalem.
OREN STEINBERG has served as Chief Financial Officer and Executive Vice
President of Tecnomatix since June 2001. Mr. Steinberg joined Tecnomatix in
August 2000 as Chief Financial Officer and Vice President of Tecnomatix Unicam,
Inc., a subsidiary of Tecnomatix based in New Hampshire, USA. Prior to joining
Tecnomatix, Mr. Steinberg served as Chief Financial Officer and Vice President
at Lucent Technologies Israel - Wireless Networking Group, where he was
responsible for the financial operations of the firm and its American
subsidiaries located in New Jersey, Boston and Chicago. From 1995 to 1997, Mr.
Steinberg served as Financial Manager and Controller of Sapiens. Prior to 1995,
Mr. Steinberg was a certified public accountant at Price Waterhouse, LLP and at
Somech Cheikin and Assoc. CPA, Israel.
AMIR LIVNE has served as Executive Vice President of Business Development
and Strategy of Tecnomatix since January 2003. Mr. Livne served as Executive
Vice President Industry Marketing from February 1999 until January 2003. Mr.
Livne served as Vice President of Marketing from January 1998 until February
1999, and prior to this he served as Director of Strategic Accounts. Before
joining Tecnomatix, Mr. Livne worked as a senior associate at Booz, Allen &
Hamilton, a leading management consulting firm, for a period of three years.
Prior to his employment with Booz, Allen & Hamilton, Mr. Livne served in various
software research and development positions for a period of six years.
ALEX SHAPIRA has served as Executive Vice President of Product Operations
since December 2000. Mr. Shapira joined Tecnomatix in May 2000 as Vice President
of Research and Development. Before joining Tecnomatix, Mr. Shapira served as a
Vice President of Research and Development at Cimatron Ltd., a leader in CAD/CAM
and collaboration software for the tooling industry. Between 1995 and 1998, Mr.
Shapira served as Vice President of Research and Development at PC Soft
International (today eMation), one of the leading companies in the Industrial
Control and Automation field. Prior to this, Mr. Shapira served as an
Application Group Manager at TEKEM Ltd., (today part of Ness Technologies Ltd.),
a large Israeli software-house.
OLIVIER LETEURTRE has served as Executive Vice President of Sales of
Tecnomatix since January 2002. Previously, Mr. Leteurtre managed our operations
in Japan and Korea. Prior to his service in Japan, Mr. Leteurtre managed our
operations in Western Europe. Prior to joining Tecnomatix in 1993, Mr. Leteurtre
was a regional manager at Computervision, France.
ISRAEL LEVY has served as Chief Executive Officer of our Tecnomatix Unicam
subsidiary since 2001. Prior to joining Tecnomatix, Mr. Levy was Senior Vice
President responsible for worldwide sales and communications of BizWorks at
interBiz, the e-Business application division of Computer Associates
International Inc. Prior to this, he held several senior positions with Computer
Associates in both Israel and the United States. Mr. Levy also previously held
technical positions at Tel Aviv University, where he implemented and managed
financial systems. Mr. Levy also worked as an independent contractor for the
development of client-server applications for personal computers.
B. COMPENSATION
The aggregate compensation paid to, or accrued on behalf of, all our
directors and executive officers as a group (13 persons) during the year ended
December 31, 2002, was $1,889,783 in salary, management fees, bonuses,
directors' fees and expenses and approximately $99,947 in amounts set aside or
accrued for, to provide pension, retirement or similar benefits. Such amounts do
not include amounts expended by us for automobiles made available to our
directors and executive officers, expenses (including business travel,
professional and business association dues and expenses) reimbursed to directors
and officers and other fringe benefits commonly provided by Israeli companies to
their executives. We currently do not compensate directors as such, but may do
so in the future. See "Item 6E: Share Ownership" and "Item 7: Major Shareholders
and Related Party Transactions" for a description of entities affiliated with
certain of our directors.
41
As of April 30, 2003, options granted to our officers and directors to
purchase up to 1,837,750 ordinary shares were outstanding. The exercise price of
these options ranges between $4.75-$ 25.75 per share. The expiration date of
these options ranges from January 2006 to April 2013.
We do not have service contracts with any of our directors.
C. BOARD PRACTICES
TERMS OF OFFICE
Our articles of association provide that directors are elected by an
ordinary resolution of a general meeting of our shareholders. However, our
directors (other than external directors, who are appointed pursuant to the
provisions of the Companies Law) are apportioned into three classes: (a) one
class to hold office until our annual meeting of shareholders to be held in
2003, consisting of Kenneth Bialkin, (b) another class to hold office until our
annual meeting of shareholders to be held in 2004, consisting of Shlomo Dovrat,
Aharon Dovrat and Avi Zeevi and a third class to hold office until our annual
meeting of shareholders to be held in 2005 consisting of Harel Beit-On .
Pursuant to the Companies Law, Talia Livni and Gerald Cramer complete their
initial terms as our external directors on August 2, 2003 and July 19, 2003,
respectively. However we may extend their term of service for another three-year
period. See "--External Directors; Audit Committee; Internal Auditor." The
periods during which each of our directors has served in office are set forth in
Section 6A above.
INVESTMENT AND FINANCE COMMITTEE
Our Board of Directors has appointed an Investment and Finance Committee.
The members of the Investment and Finance Committee are Harel Beit-On
(Chairman), Shlomo Dovrat, Aharon Dovrat and Avi Zeevi. The responsibilities of
the Investment and Finance Committee include reviewing and, as required,
approving our financial investments and cash management policies, corporate tax
status and corporate structure.
COMPENSATION COMMITTEE
Our Board of Directors has appointed a Compensation Committee. The members
of the Compensation Committee are Shlomo Dovrat (Chairman), Aharon Dovrat and
Talia Livni. The responsibilities of the Compensation Committee include
reviewing and, as required, approving the compensation of our executive officers
and overseeing the administration of our stock option plans.
EXTERNAL DIRECTORS; AUDIT COMMITTEE; INTERNAL AUDITOR
EXTERNAL DIRECTORS
We are currently subject to the provisions of the Israeli Companies Law
5739 - 1999 (the "Companies Law"). Under the Companies Law, companies
incorporated under the laws of the State of Israel whose shares have been
offered to the public in or outside Israel are required to appoint two external
directors. The Companies Law provides that a person may not be appointed as an
external director if the person's relative, partner, employer or any entity
under the person's control, has, or had during the two years preceding the date
of appointment, any affiliation with us, any entity controlled by us or by any
entity controlling us. The term "affiliation" includes: (a) an employment
relationship; (b) a business or professional relationship maintained on a
regular basis; (c) control; and (d) service as an office holder. In addition, no
person can serve as an external director if the person's or other business
creates, or may create, conflict of interests with the person's responsibilities
as an external director or may otherwise interfere with the person's ability to
serve as external director. Until the lapse of two years from termination of
office, a company may not engage an external director to serve as an office
holder and cannot employ or receive services from that person, either directly
or indirectly, including through a corporation controlled by that person.
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External directors are to be elected by a majority vote at a shareholders'
meeting, provided that either: (1) the majority of shares voted at the meeting,
include at least one third of the shares of non-controlling shareholders voted
at the meeting; or (2) the total number of shares of non-controlling
shareholders voted against the election of the external director does not exceed
one percent of the aggregate voting rights in the company.
The initial term of an external director is three years and may be extended
for an additional three years . External directors may be removed only by the
same percentage of shareholders as is required for their election, or by a
court, and then only if the external directors cease to meet the statutory
qualifications for their appointment or if they violate their duty of loyalty to
the company. Each committee exercising powers of the board of directors is
required to include at least one external director. Gerald Cramer and Talia
Livni currently serve as our external directors pursuant to the Companies Law.
An external director is entitled to compensation as provided in regulations
adopted under the new Companies Law and is otherwise prohibited from receiving
any other compensation, directly or indirectly, in connection with service
provided as an external director.
AUDIT COMMITTEE
Under the Companies Law, the board of directors of any company that is
required to appoint external directors must also appoint an audit committee,
comprised of at least three directors including all of the external directors
but excluding: (a) the chairman of the board of directors; (b) the controlling
shareholder or a relative of the controlling shareholder; or (c) any director
employed by the company or who provides services to the company on a regular
basis. Pursuant to the current requirements of the Nasdaq National Market, we
are required to have two independent directors on the audit committee. We have
appointed such audit committee. Pursuant to the Sarbanes - Oxley Act of 2002,
the Nasdaq National Market is expected to introduce new listing standards
requiring all members of an audit committee to comply with tightened
independence requirements. In addition, the Nasdaq rules require that the
members of the audit committee not have any relationship to the company that may
interfere with the exercise of their independence and that they be financially
literate. In addition, at least one member of the audit committee must have
accounting or related financial management expertise.
The responsibilities of the audit committee under the Companies Law include
identifying irregularities in the management of the company's business and
approving related party transactions as required by law. The responsibilities of
the audit committee under the Nasdaq rules include, among other things,
evaluating the independence of a company's outside auditors. Pursuant to the
Sarbanes - Oxley Act, the audit committee is responsible for the appointment,
compensation and oversight of the work of a company's independent auditor for
the purpose of preparing or issuing an audit report or related work.
Our Audit Committee currently consists of Aharon Dovrat (Chairman), Kenneth
J. Bialkin, Gerald Cramer and Talia Livni.
INTERNAL AUDITOR
The Companies Law provides that public companies must appoint an internal
auditor that will be appointed by the board, in accordance with proposal of the
audit committee. An internal auditor may not be an interested party, an office
holder or an affiliate, or a relative of an interested party, nor may the
internal auditor be the company's independent accountant or its representative.
The role of the internal auditor is to examine, among other things, the
compliance of the company's conduct with applicable law and orderly business
procedures.
We currently have an internal auditor who meets the independence
requirements of the Companies Law.
D. EMPLOYEES
As of March 31, 2003, we employed 658 employees, 502 of whom were employed
outside Israel. Out of the total number of our employees, 239 were engaged in
research and development, 211 were engaged in maintenance and engineering, 190
were engaged in sales and marketing and 18 were engaged in corporate management,
finance and general administration.
As of March 31, 2002, we employed 696 employees, 527 of whom were employed
outside Israel. Out of the total number of our employees, 238 were engaged in
research and development, 234 were engaged in maintenance and engineering, 201
were engaged in sales and marketing and 23 were engaged in corporate management,
finance and general administration.
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As of March 31, 2001, we employed 797 employees, 617 of whom were employed
outside Israel. Out of the total number of our employees, 280 were engaged in
research and development, 248 were engaged in maintenance and engineering, 235
were engaged in sales and marketing and 34 were engaged in corporate management,
finance and general administration.
The decrease in the number of our employees was due to the effect of the
cost-reduction programs we implemented in each of the fourth quarters of 2001
and 2002 and the first quarter of 2003. The decrease in the number of employees
between the period ended March 31, 2002 and March 31, 2003 was partially offset
by our recruitment of new employees as part of our increased research and
development, marketing and selling efforts of our new MPM offering.
Our Israeli employees are not party to any collective bargaining agreement.
However, we are subject to certain labor related statutes, and to certain
provisions of collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and the Coordinating Bureau of Economic
Organizations (including the Industrialists' Association) which are applicable
to our Israeli employees by virtue of expansion orders of the Israeli Ministry
of Labor and Welfare. These statutes and provisions principally concern the
length of the work day, minimum daily wages for professional workers,
contributions to a pension fund, insurance for work-related accidents,
procedures for dismissing employees, determination of severance pay, annual and
other vacations, sick pay and other conditions of employment. We generally
provide our employees with benefits and working conditions beyond the required
minimum. An additional significant provision applicable to all employees in
Israel under collective bargaining agreements and expansion orders is the
automatic adjustment of wages in relation to increases in the consumer price
index. The amount and frequency of these adjustments are modified from time to
time.
We consider our relationship with our employees to be good and we have
never experienced a labor dispute, strike or work stoppage.
E. SHARE OWNERSHIP
1. The following table sets forth, as of May 5, 2003, certain information with
respect to the beneficial ownership of our ordinary shares held by our directors
and officers. Other directors and officers that do not appear in the table below
beneficially own less than one percent of our ordinary shares.
NUMBER OF ORDINARY SHARES
NAME BENEFICIALLY OWNED (1) PERCENT OF CLASS (2)
Shlomo Dovrat (3).......... 956,708 8.75%
Harel Beit-On (4)............ 909,279 8.22%
Avi Zeevi (5)................. 187,043 1.75%
Aharon Dovrat (6)........... 98,000 0.92%
Kenneth J. Bialkin (7)...... 37,968 0.35%
Gerald B. Cramer (8)....... 477,162 4.46%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Ordinary shares relating to options currently
exercisable or exercisable within 60 days of the date of this annual report are
deemed outstanding for computing the percentage of the person holding such
securities but are not deemed outstanding for computing the percentage of any
other person. Except as indicated by footnote, and subject to community property
laws where applicable, the persons named in the table above have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
(2) All percentages are calculated based on 10,664,206 issued and
outstanding ordinary shares of Tecnomatix as of May 5, 2003. Such number
excludes treasury stock and 850,000 ordinary shares held by a wholly owned
subsidiary of Tecnomatix.
(3) The number of ordinary shares includes options to acquire 271,163
ordinary shares that are currently exercisable or which will first become
exercisable within 60 days. Mr. Dovrat also holds options to acquire an
additional 175,838 ordinary shares. The exercise price of the options ranges
between $6.875-$25.75 per share. The final expiration date of the options ranges
from May 2007 to March 2013. Please refer also to "Item 7A: Major Shareholders"
for additional information regarding shares which may be deemed to be
beneficially owned by Mr. Dovrat.
44
(4) The number of ordinary shares includes options to acquire 396,663
ordinary shares that are currently exercisable or which will first become
exercisable within 60 days. Mr. Beit-On also holds an additional 187,088 options
to acquire ordinary shares. The exercise price of the options ranges between
$6.875-$25.75 per share. The final expiration date of the options ranges from
January 2006 to March 2013. Please refer also to "Item 7A: Major Shareholders"
for additional information regarding shares which may be deemed to be
beneficially owned by Mr. Beit-On
(5) The number of ordinary shares includes options to acquire 48,925
ordinary shares that are currently exercisable or which will first become
exercisable within 60 days. Mr. Zeevi also holds options to acquire an
additional 47,075 ordinary shares. The exercise price of the options ranges
between $6.875-$20.75 per share. The final expiration date of the options ranges
from July 2009 to March 2013. Please refer also to "Item 7A: Major Shareholders"
for additional information regarding shares which may be deemed to be
beneficially owned by Mr. Zeevi.
(6) The number of ordinary shares includes options to acquire 28,000
ordinary shares that are currently exercisable or which will first become
exercisable within 60 days. Mr. Dovrat also holds options to acquire an
additional 12,000 ordinary shares. The exercise price of the options ranges
between $6.875-$18.375 per share. The final expiration date of the options
ranges from July 2006 to January 2011. Please refer also to "Item 7A: Major
Shareholders" for additional information regarding shares which may be deemed to
be beneficially owned by Mr. Dovrat.
(7) The number of ordinary shares includes options to acquire 28,000
ordinary shares that are currently exercisable or which will first become
exercisable within 60 days. Mr. Bialkin also holds options to acquire an
additional 12,000 ordinary shares. The exercise price of the options ranges
between $6.875-$18.375 per share. The final expiration date of the options
ranges from July 2006 to January 2011. The number of ordinary shares excludes
2,000 ordinary shares held by the Bialkin Family Foundation for which Mr.
Bialkin disclaims beneficial ownership. In addition, Mr. Bialkin is involved
with D Partners (BVI) L.P., an investment fund which holds 218,246 ordinary
shares. Mr. Bialkin expressly disclaims beneficial ownership of such shares.
(8) The number of ordinary shares also includes options to acquire 28,000
ordinary shares that are currently exercisable or which will first become
exercisable within 60 days. The shares listed on the table include shares held
by a number of trusts for the benefit of members of Mr. Cramer's family and
other related entities. Mr. Cramer also holds options to acquire an additional
12,000 ordinary shares. The exercise price of the options ranges between
$6.875-$18.375 per share. The final expiration date of the options ranges from
July 2006 to January 2011. In addition, Mr. Cramer is involved with D Partners
(BVI) L.P., an investment fund which holds 218,246 ordinary shares. Mr. Cramer
expressly disclaims beneficial ownership of such shares.
2. We have granted to our employees and officers options to purchase ordinary
shares pursuant to our stock option plans. As of April 30, 2003, options to
purchase 4,117,492 ordinary shares were outstanding and 257,331 ordinary shares
were available for grants of additional options. The following is a description
of certain provisions of our stock option plans.
In August 1994, we adopted the Tecnomatix Technologies Ltd. 1994 Stock
Option Plan (the "1994 Plan"). The 1994 Plan currently authorizes the grant of
options to acquire up to 864,250 ordinary shares to employees, officers and
directors. Options pursuant to the 1994 Plan are exercisable at an exercise
price equal to the fair market value of the ordinary shares at the date of the
grant. Pursuant to the 1994 Plan, a grantee is entitled to exercise 40% of the
options granted to him after the second anniversary of the date of grant and an
additional 30% after each of the third and fourth anniversaries of the date of
grant. As of April 30, 2003, options to purchase 45,700 ordinary shares were
outstanding pursuant to the 1994 Plan and no ordinary shares were available for
grants of additional options
In July 1996, we adopted the Tecnomatix Technologies Ltd. 1996 Stock Option
Plan (the "1996 Plan"). The 1996 Plan currently authorizes the grant of options
to acquire up to 3,840,706 ordinary shares to employees, officers and directors
at a purchase price of 100% of the fair market value of the ordinary shares on
the date of grant. Pursuant to the 1996 Plan, the vesting of options granted to
a particular grantee is determined by our Compensation Committee, and in the
absence of such determination, a grantee is entitled to exercise 40% of the
options granted to him after the second anniversary of the date of grant and an
additional 30% after each of the third and fourth anniversaries of the date of
grant. As of April 30, 2003, options to purchase 3,267,250 ordinary shares were
outstanding pursuant to the 1996 Plan, and 58,331 ordinary shares were available
for grants of additional options.
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In July 1996, we adopted the 1996 Directors Stock Option Plan (the
"Directors Plan"). The Directors Plan currently authorizes the grant of options
to acquire up to 404,000 ordinary shares to directors. Under the Directors Plan,
a grantee is entitled to exercise 20% of the options granted to him after the
second anniversary of the date of grant, and an additional 20% of the options
after each of the third to sixth anniversaries of the date of grant. Options
granted pursuant to the Directors Plan expire on the earlier of the termination
of the service of the director or the tenth anniversary of the date of grant.
The Compensation Committee may change the vesting provisions of the Directors
Plan. As of April 30, 2003, options to purchase 256,000 ordinary shares were
outstanding pursuant to the Directors Plan and 128,000 ordinary shares were
available for grants of additional options.
In October 1998, our subsidiary, Tecnomatix Ltd. (previously named Robcad
Technologies (1980) Ltd.) adopted the Robcad Technologies (1980) Ltd. Stock
Option Plan (the "Robcad Plan"). The Robcad Plan currently authorizes the grant
of options to acquire up to 49,175 ordinary shares of Tecnomatix Technologies to
employees, officers and directors of Tecnomatix Ltd., its subsidiaries and
affiliated companies. The vesting and expiration provisions of the Robcad Plan
are similar to those of the 1996 Plan. As of April 30, 2003, options to purchase
36,125 ordinary shares were outstanding under the Robcad Plan and no ordinary
shares were available for grants of additional options.
In March 1999, we adopted the Performance Based Stock Option Plan, referred
to as the Performance Plan in connection with the acquisition of our U.S.
subsidiary, Tecnomatix Unicam. The Performance Plan provides for the grant of
options to employees, officers and consultants to acquire up to 175,999 ordinary
shares. All options vest seven years from the date of grant but vesting will
accelerate if certain revenue and operating income goals are reached. Although
the Performance Plan was designed for Unicam and Exaline employees and only such
employees have received option grants pursuant to it, the Performance Plan may
be used for other employees. As of April 30, 2003 options to purchase 153,417
ordinary shares were outstanding under the Performance Plan and no ordinary
shares were available for additional grants of options.
In December 2002 our Board of Directors approved the adoption of the
Tecnomatix Technologies Ltd. 2003 Global Share Option Plan (the "2003 Plan").
The Board also authorized reductions in the number of shares available for
future grants under the 1994 Plan, the 1996 Plan, the Directors Plan, the Robcad
Plan and the Performance Plan and concurrent increases in the number of shares
available for future grants under the 2003 Plan. Any such reductions and
increases may be made by the Board from time to time. Pursuant to this
resolution the number of ordinary shares subject to the 1994 Plan, the 1996
Plan, the Robcad Plan and the Performance Plan has been decreased by an
aggregate of 430,000 ordinary shares and, accordingly, the number of ordinary
shares subject to the 2003 Plan is currently 430,000. Officers, directors,
employees and consultants of Tecnomatix and our subsidiaries are eligible to
participate in the 2003 Plan. The Board of Directors and the Compensation
Committee have broad discretion to determine the terms of grants of options
under the 2003 Plan, including type, size, exercise price and vesting schedule.
As of April 30, 2003, options to purchase 359,000 ordinary shares were
outstanding under the 2003 Plan and 71,000 ordinary shares were available for
additional grants of options.
Currently, we utilize only the Directors Plan, the 1996 Plan and the 2003
Plan to grant options to our employees, officers and directors.
In December 2000, we adopted the Tecnomatix Technologies Ltd. 2000 Employee
Share Purchase Plan (the "Share Purchase Plan"), pursuant to which our employees
and employees of certain of our subsidiaries may purchase up to 500,000 ordinary
shares. Every six months, each employee is entitled to purchase ordinary shares
for an amount of up to 10% of his or her salary at that period, but no more than
750 ordinary shares. The purchase price under the Share Purchase Plan is the
lower of 85% of the price of the ordinary shares on Nasdaq on the beginning of
such six-month period or 85% of the price of the ordinary shares on Nasdaq at
the end of such six-month period. As of April 30, 2003, 350,358 ordinary shares
have been purchased under the Share Purchase Plan and 149,642 ordinary shares
remain available for future purchases.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth, as of May 5, 2003, certain information with
respect to the beneficial ownership of our ordinary shares held by each person
known to us to beneficially own more than 5% of our outstanding ordinary shares.
With respect to the holdings of Yozma Venture Capital Ltd., we have relied on
reports filed by this entity with the Securities and Exchange Commission and on
information provided to us supplementally by this entity. With respect to the
holdings of Shlomo Dovrat, Avi Zeevi and Harel Beit-On we have relied both on
reports filed by these persons with the Securities and Exchange Commission and
on our records.
IDENTITY OF PERSON OR GROUP NUMBER OF ORDINARY SHARES PERCENT OF CLASS (2)
BENEFICIALLY OWNED (1)
Shlomo Dovrat (3)................. 956,708 8.75%
Harel Beit-On (4).................. 909,279 8.22%
Yozma Venture Capital Ltd. (5) 700,345 6.57%
Avi Zeevi (6)....................... 187,043 1.75%
Aharon Dovrat (7)................. 98,000 0.92%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Ordinary shares relating to options currently
exercisable or exercisable within 60 days of the date of this annual report are
deemed outstanding for computing the percentage of the person holding such
securities but are not deemed outstanding for computing the percentage of any
other person. Except as indicated by footnote, and subject to community property
laws where applicable, the persons named in the table above have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
(2) All percentages are calculated based on 10,664,206 issued and
outstanding ordinary shares of Tecnomatix as of May 5, 2003. Such number
excludes treasury stock and 850,000 ordinary shares held by a wholly owned
subsidiary of Tecnomatix.
(3) Shlomo Dovrat is a party to certain understandings with Avi Zeevi and
Harel Beit-On and therefore may be deemed to beneficially own the ordinary
shares held by such persons included on this table. Mr. Dovrat expressly
disclaims beneficial ownership of such shares. In addition, Mr. Dovrat is a
major shareholder and director of A. S. Dovrat Management Ltd., which provides
advisory services to D. Partners (Israel) L.P. and D. Partners (BVI) L.P.,
investment funds which hold 117,517 ordinary shares and 218,246 ordinary shares,
respectively. Mr. Dovrat is also a major shareholder of Dovrat & Co. Ltd., the
parent company of the general partner of D. Partners (Israel) L.P. Mr. Dovrat
expressly disclaims beneficial ownership of the 335,763 ordinary shares held by
these investment funds.
(4) Harel Beit-On is a party to certain understandings with Shlomo Dovrat
and Avi Zeevi and therefore may be deemed to beneficially own the ordinary
shares held by such persons included on this table. Mr. Beit-On expressly
disclaims beneficial ownership of such shares.
(5) Yozma Venture Capital Ltd. purchased 594,595 of these shares from
SunGard Data Systems, Inc. in June 2001, as part of the sale of shares by
SunGard described below.
(6) Avi Zeevi is a party to certain understandings with Shlomo Dovrat and
Harel Beit-On and therefore may be deemed to beneficially own the ordinary
shares held by such persons included on this table. Mr. Zeevi expressly
disclaims beneficial ownership of such shares.
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(7) Aharon Dovrat is a major shareholder and director of A. S. Dovrat
Management Ltd., which provides advisory services, among others, to D. Partners
(Israel) L.P. and D. Partners (BVI) L.P., investment funds which hold 117,517
ordinary shares and 218,246 ordinary shares, respectively. Mr. Dovrat is also a
major shareholder of Dovrat & Co. Ltd., the parent company of the general
partner of D. Partners (Israel) L.P. Mr. Dovrat expressly disclaims beneficial
ownership of the 335,763 ordinary shares held by these investment funds.
Pursuant to a power of attorney granted to Mr. Dovrat, he may exercise certain
rights with respect to 108,108 ordinary shares held by Aldon Holding Ltd., and
as a result he may be deemed to beneficially own such ordinary shares. Mr.
Dovrat expressly disclaims beneficial ownership of such shares.
As of May 5, 2003, there were 76 record holders of ordinary shares, of
which 49 represented U.S. record holders owning an aggregate of approximately
86% of our outstanding ordinary shares.
SunGard Data Systems, Inc., which was our largest shareholder
(approximately 17%), sold, in a series of separate private transactions that
closed on June 29, 2001, all of our shares held by it at a price per share of
$9.25. Among the purchasers were Harel Beit-On, our Chairman of the Board and
Chief Executive Officer, Shlomo Dovrat, Vice Chairman of our Board, other
members of our Board, Yozma Venture Capital Ltd. and other parties affiliated
with some of them, which in the aggregate purchased approximately 10.5% of our
share capital.
On January 1, 2003 Tecnomatix repurchased from Harel Beit-On, our Chairman
of the Board and Chief Executive Officer, 110,000 ordinary shares, representing
approximately 1% of our issued and outstanding ordinary shares. The shares were
purchased for consideration of $843,700, representing a price per share of
$7.67. See Item 7B "Related Party Transactions" for additional information
regarding this transaction.
The ordinary shares held by the shareholders described in this Section have
the same voting rights as all of our other ordinary shares.
B. RELATED PARTY TRANSACTIONS
In July of 1999 we entered into an agreement with A.T.L. Management
Services Ltd. ("A.T.L."), a company in which Shlomo Dovrat, our Vice Chairman of
the Board, Harel Beit-On, our Chairman of the Board and Chief Executive Officer,
and Avi Zeevi, a member of our Board, each have beneficial interests. Until
December 31, 2002 the agreement with A.T.L. provided for an annual management
fee of $400,000 in consideration for strategic management and business and
financial consulting services to be provided by A.T.L. As of January 1, 2003 the
annual management fees were reduced to $300,000. In each of 2001 and 2002 we
paid A.T.L. management fees in the amount of $400,000.
In October 1998 and June 1999 we granted to Harel Beit-On, our Chairman of
the Board and Chief Executive Officer, loans in an aggregate principal amount of
$1,020,000. The loans, which bore interest at a rate of 6.8% per annum, matured
as of December 31, 2002 and the outstanding amount of the loans including all
accrued interest as of December 31, 2002 was $1,257,629.
On December 31, 2002 and January 1, 2003 Mr. Beit-On repaid in cash
$100,000 and $300,000, respectively, of the outstanding amount of these loans to
us. In addition, as of January 1, 2003, we repurchased 110,000 of our ordinary
shares from Mr. Beit-On for a total amount of $843,700, representing a price per
share of $7.67, equal to the average closing price of the ordinary shares as
quoted on the Nasdaq National Market during the three-month period prior to the
date of the repurchase. The consideration was used to offset the outstanding
balance of the loans. Due to the lower than anticipated price per share for the
repurchase transaction, there was an outstanding balance left in the amount of
$13,929 that was repaid to us by Mr. Beit-On. The cash repayment of the loan was
funded also by using the net proceeds of a compensatory retention bonus in the
gross amount of $300,000 paid to Mr. Beit-On in connection with his commitment
to continue serving the Company as either Chief Executive Officer or Chairman
until December 31, 2005. In the event that the Mr. Beit-On terminates his
service to the company, he shall be required to return to the company one third
of the compensatory retention bonus for each year in which he failed to provide
a full year of service.
In March and April 2001 we provided to Amir Livne, our Executive Vice
President of Business Development and Strategy, loans denominated in NIS
aggregating $100,000. The loans were provided to Mr. Livne pursuant to a Letter
of Agreement entered into in January 2001, as subsequently amended. The loans
are linked to the Israeli consumer price index and bear interest at the rate
provided for pursuant to the regulations promulgated under the Israeli Tax
Ordinance, from time to time. The loans (principal and accrued interest thereon)
are forgiven ratably over a three-year period. Any taxes applicable to the
forgiven loans will be borne by Mr. Livne. In the event that Mr. Livne
terminates his employment with us at specified periods during the term of the
loans, or in the event that we terminate his employment for reasons other than
breach of a material obligation under his employment agreement at specified
periods during the term of the loans, he will be required to repay to us certain
amounts of the principal of the loans and any accrued interest thereon, provided
that in the latter event we will bear all taxes associated with the forgiven
portion of the loans. As of December 31, 2002 an amount of $67,987 (principal
and accrued interest) of the loan has been forgiven and a balance of $33,995
remains outstanding. As of May 31, 2003, the outstanding balance of the loan was
$35,869.
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C. INTEREST OF EXPERT AND COUNSEL - NOT APPLICABLE.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Our consolidated audited financial statements are included in this annual
report in "Item 18: Financial Statements" and incorporated herein by this
reference.
We are not a party to any material litigation and are not aware of any
pending or threatened litigation that would have a material adverse effect on us
or our business.
We have never paid dividends on our ordinary shares. We intend to retain
future earning for use in our business and do not presently anticipate paying
dividends in the foreseeable future. Our future dividend policy will be
determined by our Board of Directors and will be based upon conditions then
existing including our results of operations, financial conditions, current and
anticipated cash needs, contractual restrictions and other conditions as the
Board of Directors may deem relevant.
B. SIGNIFICANT CHANGES
Except for the events described in this Item 8B, since the date of the
annual consolidated financial statements included in this annual report, no
significant change has occurred.
In April 2003 we obtained a credit line in the amount of $25,000,000 from
Bank Hapoalim. See Item 5 "Operating and Financial Review and
Prospects--Liquidity and Capital Resources" and Item 10C "Material Contracts"
for further information regarding the credit line.
In the first quarter of 2003 we initiated a cost reduction plan, similar to
plans we effected in 2001 and 2002, aimed at reducing excess personnel and
capacity costs in order to further reduce the level of our operating expenses.
As a result of such plan, we recorded a charge in the first quarter of 2003 for
restructuring costs and asset impairment in a total amount of $1,487,000. The
plan included mainly the discharge of employees. Charges relating to the
termination of these employees represent severance and benefits expenses in the
amount of $897,000 and legal fees in the amount of $185,000 incurred in
connection with the layoff process. The reduction in headcount resulted in the
utilization of less office space and office equipment in certain of our offices
around the world. Consequently, we also recorded costs in connection with
payments required under lease contracts and write-down of office equipment for
which no alternative use has been found, in the amount of $199,000 and $206,000,
respectively.
In the first quarter of 2003 we repurchased $5,783,000 principal value of
our 5.25% convertible notes for an aggregate amount of $5,490,000.
49
ITEM 9. THE OFFER AND LISTING
A. The following table lists the high and low reported closing prices of
our ordinary shares on the Nasdaq National Market for the periods indicated:
PERIOD HIGH LOW
LAST FIVE YEARS:
1998.............................. $39.00 $7.56
1999.............................. $32.25 $11.62
2000.............................. $48.62 $4.06
2001.............................. $14.30 $3.56
2002.............................. $15.44 $7.10
LAST TEN QUARTERS:
First Quarter 2001............... $7.56 $3.75
Second Quarter 2001........... $9.41 $3.56
Third Quarter 2001............. $14.3 $8.45
Fourth Quarter 2001............ $14.25 $8.65
First Quarter 2002.............. $15.44 $13.00
Second Quarter 2002........... $13.45 $8.40
Third Quarter 2002............. $9.68 $7.20
Fourth Quarter 2002............ $8.83 $7.10
First Quarter 2003.............. $8.47 $6.69
Second Quarter $8.28 $6.30
(through May 27, 2003).......
LAST SIX MONTHS:
December 2002................. $8.83 $7.18
January 2003.................... $8.47 $8.00
February 2003.................. $8.01 $6.75
March 2003..................... $6.99 $6.69
April 2003....................... $7.29 $6.30
May 2003.......................... $9.30 $6.95
June 2003 (through June 17, 2003)...... $10.20 $9.17
On June 17, 2003, the last reported closing price of the ordinary shares on
the Nasdaq National Market was $10.20 per share.
B. Our $97,750,000 principal amount of 5.25% Convertible Subordinated Notes due
in August 2004 were registered under the Securities Act of 1933, as amended, and
have been designated for trading in Nasdaq's Private Offerings, Resale and
Trading through Automated Linkage Market. The notes are not otherwise listed on
any securities exchange and are not included in any automated inter-dealer
quotation system. As of December 31, 2002, we had repurchased an aggregate
principal amount of $60,322,000 of these notes.
C. Our ordinary shares are quoted on the Nasdaq National Market under the symbol
"TCNO".
50
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL - NOT APPLICABLE
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
OBJECTS AND PURPOSES
The objects and purposes of our company appear in our Memorandum of
Association and include taking all actions permissible under applicable laws;
developing, marketing and manufacturing products for computer-aided design and
manufacturing in the electronics industry; developing business opportunities in
various technological industries and acquiring companies and products in such
industries; and effecting any transaction which will assist us, in the view of
our management, in relation to our operations.
APPROVAL OF SPECIFIED RELATED PARTY TRANSACTIONS
The Companies Law imposes a duty of care and a duty of loyalty on all of a
company's office holders as defined below, including directors and executive
officers. The duty of care requires an office holder to act with the level of
care which a reasonable office holder in the same position would have acted
under the same circumstances. The duty of loyalty generally requires an office
holder to act in good faith and for the good of the company. An "office holder"
as defined in the Companies Law is a director, a general manager, a chief
executive officer, a deputy general manager, a vice general manager, other
managers directly subordinate to the general manager and any person who fills
one of the above positions without regard to title.
The Companies Law requires that an office holder of a company promptly
disclose any personal interest that he may have and all related material
information known to him, in connection with any existing or proposed
transaction by the company. Once an office holder complies with these disclosure
requirements, the board of directors may approve a transaction between the
company and the office holder, or a third party in which an office holder has a
personal interest, unless the articles of association provide otherwise. A
transaction that is adverse to the company's interest cannot be approved. If the
transaction is an extraordinary transaction as defined under the Companies Law,
then, in addition to any approval stipulated by the articles of association, it
also requires audit committee approval before board approval and, in specified
circumstances, subsequent shareholder approval. Any transaction between a
company and one of its directors relating to the conditions of the director's
service, including in relation to exculpation, insurance or indemnification, or
in relation to the terms of the director's service in any other capacity
requires audit committee approval before board approval and subsequent
shareholder approval.
The Companies Law also provides that a director with an interest in an
extraordinary transaction brought before the board or the audit committee for
its approval may not vote on the approval and may not be present for the
discussion of the issue. However, this rule would not apply if a majority of the
directors or a majority of the members of the audit committee also possessed an
interest in the transaction.
Under our articles of association, our board can, among other things,
determine our plans of activity and the principles of financing such plans,
examine our financial situation and set the framework of credit which we may
take and decide to issue a series of debentures.
Our directors are not subject to any age limit requirement, nor are they
disqualified from serving on the board because of a failure to own Tecnomatix
shares.
RIGHTS, PREFERENCES AND RESTRICTIONS UPON SHARES
Our articles of association authorize one class of shares, which are our
ordinary shares. We may declare a dividend to be paid to the holders of our
ordinary shares and allocated among them in proportion to the sums paid up or
credited as paid up on account of the nominal value of their respective
shareholdings, without taking into account any premium paid for the shares. Our
board may declare dividends only out of retained earnings, or earnings derived
over the two most recent fiscal years, whichever is higher. Our articles provide
that our board may declare and pay dividends without any future action by our
shareholders. All unclaimed dividends may be invested or otherwise used by the
board for our benefit until those dividends are claimed. In the event an
unclaimed dividend is claimed, only the principal amount of the dividend will be
paid to the person entitled to the dividend.
51
If we liquidate, after satisfying liabilities to creditors and subject to
the rights of holders of shares, if any, with any special rights upon winding
up, our assets will be distributed to the holders of ordinary shares in
proportion to their holdings.
Holders of ordinary shares have one vote for each paid-up ordinary share
held of record on all matters submitted to a vote of our shareholders. These
voting rights may be affected by the grant of any special voting rights to the
holders of a class of shares with preferential rights that may be authorized in
the future.
Our articles provide that directors are elected by an ordinary resolution
of a general meeting of our shareholders. Our ordinary shares do not have
cumulative voting rights in the election of directors. Accordingly, the holders
of ordinary shares representing more than 50% of the voting power in our company
have the power to elect all directors. However, our directors (other than
external directors, who are appointed pursuant to the provisions of the
Companies Law) are apportioned into three classes: (a) one class to hold office
until our annual meeting of shareholders to be held in 2003, (b) another class
to hold office until our annual meeting of shareholders to be held in 2004 and
(c) a third class to hold office until our annual meeting of shareholders to be
held in 2005.
We may, subject to the applicable provisions of the Companies Law, issue
redeemable shares and subsequently redeem them. In addition, our board may make
calls upon shareholders in respect of any sum which has not been paid up in
respect of any shares held by those shareholders.
Under the Companies Law, the disclosure requirements which apply to an
office holder also apply to a controlling shareholder of a public company. A
controlling shareholder includes a shareholder that holds 25% or more of the
voting rights in a public company if no other shareholder owns more than 50% of
the voting rights in the company. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest, and
the terms of compensation of a controlling shareholder who is an office holder,
require the approval of the audit committee, the board of directors and the
shareholders of the company. The shareholder approval requires that: (a) the
majority of shares voted at the meeting, including at least one third of the
shares of disinterested shareholders voted at the meeting, vote in favor of the
transaction; or (b) the total number of shares of disinterested shareholders
voted against the transaction does not exceed one percent of the aggregate
voting rights in the company.
The Companies Law also requires a shareholder to act in good faith towards
a company in which he holds shares and towards other shareholders and to refrain
from abusing his power in the company, including in connection with voting at a
shareholders' meeting on:
o Any amendment to the articles of association;
o An increase in the company's authorized capital;
o A merger; or
o Approval of some of the acts and transactions which require shareholder
approval.
A shareholder has the general duty to refrain from depriving other
shareholders of their rights. Any controlling shareholder, any shareholder that
knows that it possesses the power to determine the outcome of a shareholder vote
and any shareholder that, under the provisions of the articles of associations,
has the power to appoint an office holder in the company, is under a duty to act
in fairness towards the company. The Companies Law does not describe the
substance of this duty.
MODIFICATIONS OF SHARE RIGHTS
Under our articles of association, the rights attached to any class may be
varied by adoption of the necessary amendment of the articles, provided that the
holders of shares of the affected class approve the change by a class meeting in
which the holders of at least 75% of the shareholders present at the meeting, in
person or by proxy, with the right to vote on the issue approve the change. Our
articles differ from the Companies Law in this respect, as under the law changes
in the rights of shareholders require the consent of a majority of the voting
power of the affected class represented at the meeting and voting on the change.
In addition, our articles require for quorum at a meeting of a particular class
of shares, the presence of one shareholder holding at least 75% of the shares of
that class. However, the Companies Law requires for quorum the presence of two
shareholders holding at least 25% of the voting power in the specific class. Our
articles also require, in order to amend the articles, the approval of the
holders of at least 75% of the shareholders present at a meeting, in person or
by proxy, with the right to vote on the issue. However, the Companies Law
requires only the consent of a majority of the voting power of the company
represented at a meeting and voting on the change for amendment of articles of
association.
52
SHAREHOLDERS MEETINGS AND RESOLUTIONS
We are required to hold an annual general meeting of our shareholders once
every calendar year, but no later than 15 months after the date of the previous
annual general meeting. All meetings other than the annual general meeting of
shareholders are referred to as extraordinary general meetings. Extraordinary
general meetings may be called by our board whenever it sees fit, at such time
and place, within or without the State of Israel, as it may be determined. In
addition, the Companies Law provides that the board of a public company is
required to convene an extraordinary meeting upon the request of (a) any two
directors of the company or one quarter of the company's board of directors or
(b) one or more shareholders holding, in the aggregate, (i) five percent of the
outstanding shares of the company and one percent of the voting power in the
company, or (ii) five percent of the voting power in the company.
The quorum required by our articles for a meeting of shareholders consists
of at least two shareholders present in person or by proxy who hold or represent
between them at least 33.3% of the voting power in our company. A meeting
adjourned for lack of quorum is adjourned to the same day in the following week
at the same time and place or any time and place as the chairman of the meeting
decides with the consent of the holders of a majority of the voting power
represented at such meeting. At such reconvened meeting, the required quorum
consists of any two shareholders present in person or by proxy.
Notwithstanding the foregoing, our articles provide that a resolution in
writing signed by all our shareholders then entitled to attend and vote at
general meetings or to which all such shareholders have given their written
consent (by letter, telegram, facsimile or otherwise) shall be deemed to have
been unanimously adopted by a duly convened general meeting.
Our articles enable our board to fix a record date to allow us to determine
the shareholders entitled to notice of, or to vote at, any general meeting of
our shareholders. The record date may not be more than 40 days before the date
of the meeting. Each shareholder of record as of the record date determined by
the board may vote the shares then held by that shareholder unless all calls and
other sums then payable by the shareholder in respect of its shares have not
been paid.
LIMITATION ON OWNERSHIP OF SECURITIES
The ownership and voting of our ordinary shares by non-residents of Israel
are not restricted in any way by our articles or by the laws of the State of
Israel, except for shareholders who are subjects of countries which are in a
state of war with Israel.
MERGERS AND ACQUISITIONS; ANTI-TAKEOVER PROVISIONS
The Companies Law includes provisions allowing corporate mergers. These
provisions require that the board of directors of each company that is party to
the merger approve the transaction. In addition, the shareholders of each
company must approve the merger by a vote of 75% of the company's shares,
present and voting on the proposed merger at a shareholders' meeting. In
determining whether the requisite majority has approved the merger, shares held
by the other party to the merger or any person holding at least 25% of such
other party or otherwise affiliated with such other party are excluded from the
vote.
The Companies Law does not require court approval of a merger other than in
specified situations. However, upon the request of a creditor of either party to
the proposed merger, a court may delay or prevent the merger if it concludes
that there exists a reasonable concern that as a result of the merger, the
surviving company will be unable to satisfy the obligations of any of the
parties of the merger to their creditors.
A merger may not be completed unless at least 70 days have passed from the
time that a request for the approval of the merger has been filed with the
Israeli registrar of companies. This request may be filed once a shareholder
meeting has been called to approve the merger.
53
The Companies Law also provides that the acquisition of shares in a public
company on the open market must be made by means of a tender offer if, as a
result of the acquisition, the purchaser would become a 25% shareholder of the
company. The rule does not apply if there already is another 25% shareholder of
the company. Similarly, the law provides that an acquisition of shares in a
public company must be made by means of a tender offer if, as a result of the
acquisition, the purchaser would become a 45% shareholder of the company, unless
there already is a 50% shareholder of the company.
If, following any acquisition of shares, the purchaser would hold 90% or
more of the shares of the company that acquisition must be made by means of a
tender offer for all of the target company's shares. An acquirer who wishes to
eliminate all minority shareholders must do so by means of a tender offer and
acquire 95% of all shares not held by or for the benefit of the acquirer prior
to the acquisition. However, in the event that the tender offer to acquire that
95% is not successful, the acquirer may not acquire tendered shares if by doing
so the acquirer would own more than 90% of the shares of the target company.
Our articles contain provisions which could delay, defer or prevent a
change in our control. These provisions include the staggered board provisions
of our articles described above under the caption "Rights, preferences and
restrictions upon shares." Our articles provide that the staggered board
provision cannot be amended without approval of the greater of (a) holders of at
least 75% of the voting power represented at a shareholders meeting and voting
on any such amendment, or (b) holders of a majority of the outstanding voting
power of all shares of our company.
CHANGES IN CAPITAL
Our articles enable us to increase or reduce our share capital. Any such
changes are subject to the provisions of the Companies Law and must be approved
by a resolution passed by a majority of at least 75% of our shareholders
present, in person or by proxy, at a general meeting voting on such change in
the capital. Our articles differ from the Companies Law in this respect, as
under the law changes in capital require approval only of a majority of the
voting power of a company represented at the relevant shareholders meeting and
voting thereon. In addition, certain transactions which have the effect of
reducing capital, such as the declaration and payment of dividends and the
issuance of shares for less than their nominal value, require a board resolution
and court approval.
C. MATERIAL CONTRACTS
LEASE AGREEMENT
On June 1, 2003, Tecnomatix Ltd., our wholly owned Israeli subsidiary,
entered into a lease agreement with Intergama Assets (1961) Ltd. pursuant to
which it leased approximately 30,000 square feet at the site of our current
corporate headquarters located in an office building in Herzliya, Israel. We
will continue to use the space in this buliding for our corporate headquarters,
research and development, marketing and administrative facilities. The term of
the lease is for five years expiring on September 30, 2007. The annual rent
(including maintenance fees) for the premises is $456,492. Of this amount, the
maintenance fees for the premises and the rent for the parking space are linked
to the Israeli consumer price index. Under the agreement, Tecnomatix Ltd. has an
option, effective from January 1, 2004 and expiring on December 31, 2004, to
lease additional space in the building and a right of first refusal with respect
to certain other space in the building. The parties agreed that the lessor will
make certain improvements in the premises on its own expense. In addition,
Tecnomatix may make certain agreed upon renovations of the premises at the
expense of the lessor, in which case the rent for the office space will be
adjusted and the total annual rent may be increased up to $537,102. Tecnomatix
Ltd. may not transfer its rights under the agreement or sublease the premises in
whole or in part to any third parties without the prior written consent of the
lessor except that it may: (i) sublease the premises to us or one of our
subsidiaries in which our holdings exceed 50%, and (ii) transfer its rights
under the agreement to us if the transaction of the transfer of certain assets
from us to Tecnomatix Ltd. will not be approved and consented to by the
pertinent governmental authorities and third parties.
54
CREDIT LINE
In April 2003, we signed a letter of intent with Bank Hapoalim B.M. under
which Hapoalim will provide us with a credit line in an aggregate principal
amount of $25,000,000. The credit line is evidenced by the letter of intent as
well as a debenture and other definitive credit documentation. We may draw
amounts under the credit line until June 30, 2003. To date we have not withdrawn
any amounts under the credit line. Loans under this credit line will bear
interest at a rate equal to the three-month LIBOR rate at the time of a draw
plus a spread to be agreed to by us and Hapoalim prior to each draw. We may, but
are not required to, use this credit line to refinance our 5.25% convertible
notes, thereby reducing payable interest and generating capital gains from
repurchase of the notes. The credit line matures four years after withdrawal.
Unless we take advantage of our right of prepayment of the credit, the repayment
of an amount of $10,000,000 under the line of credit is required to be made in
equal quarterly payments, commencing 15 months after withdrawal, and repayment
of the remaining amounts under the line of credit, if withdrawn, is required to
be made upon the maturity of the line of credit or the earlier maturity of
certain bonds deposited with Hapoalim to secure repayment.
In connection with the credit line we agreed to create a floating charge
over our assets and the assets of our Israeli subsidiary, Tecnomatix Ltd., in
favor of Hapoalim, to create a fixed charge over certain bonds and cash
deposits, and to maintain certain financial ratios which include (a) a covenant
to maintain certain levels of cash, cash equivalents, bonds and deposits, as
long as the credit line is outstanding with such level being initially
$30,000,000 and gradually decreasing as we progress with repayment of the credit
line; (b) commencing with the last quarter of 2003, an average quarterly EBITDA
of at least $1,000,000 in the preceding three quarters; (c) a ratio of
shareholders equity to total assets of not less than 40% and an amount of
shareholders equity of not less than $33,000,000, and (d) a ratio of current
assets to current liabilities (excluding amounts due under our convertible notes
and excluding then current maturities under the credit line) of at least 1.5.
Our 5.25% convertible notes will be effectively subordinated to any obligations
arising under the credit line to the extent of the value of the assets that may
from time to time be subject to the floating charge and the fixed charge.
The credit line documentation contains representations and warranties,
covenants, conditions and events of default that are customary for similar
financings in Israel. Those covenants include the financial covenants described
above, covenants regarding the use, maintenance and transfer of the assets that
may from time to time be subject to the floating charge, restrictions on
repayment of shareholder indebtedness (excluding payments made pursuant to the
repurchase or repayment of our 5.25% convertible notes), future pledges,
mergers, acquisitions, consolidations and other reorganizations.
Events of default under the debenture include (a) failure to pay principal,
interest, fees or other amounts under the credit line when due; (b) violation of
covenants that is not cured within 30 days; (c) failure of any representation or
warranty to be true and that is not cured within 30 days; (d) appointment of a
receiver or the occurrence of other enforcement actions in respect of any of the
assets that may from time to time be subject to the floating charge, provided
that such assets are equal in value to at least $500,000; (e) certain events of
bankruptcy; (f) cessation of our business for at least 60 days; (g) other
material events that may materially impair our financial status in relation to
our status prior to any such events; or (h) a change of control. The debenture
defines a change of control as the acquisition by any person who does not hold
5% or more of our outstanding ordinary shares as of the date of the debenture
(other than a shareholder that is a member of our board of directors as of such
date or is a direct or indirect affiliate of any such director) of more than 30%
of our outstanding ordinary shares. However, such event would not be a change of
control if, at the time that any such person acquires 30% or more of our
outstanding ordinary shares, the aggregate amount of our outstanding ordinary
shares held by all persons that are either members of our board of directors at
such time, were members of our board of directors as of the date of the
debenture or are entities affiliated directly or indirectly with any such
persons, exceeds the number of ordinary shares held by the person who acquired
30% or more of our outstanding ordinary shares.
SHARE REPURCHASE AND BUY-BACK AGREEMENT
On January 1, 2003 we entered into a Repurchase and Buy-Back Agreement with
Harel Beit-On, our Chairman of the Board and Chief Executive Officer, pursuant
to which we repurchased from Mr. Beit-On 110,000 of our ordinary shares,
representing approximately 1% of our issued and outstanding ordinary shares. The
shares were purchased for consideration of $843,700, representing a price per
share of $7.67, equal to the average closing price of the ordinary shares as
quoted on the Nasdaq National Market during the three-month period prior to the
date of the repurchase. The consideration was used to offset the portions of the
outstanding balance of the loans provided by us to Mr. Beit-On.
55
LOAN AGREEMENT
Pursuant to letter of agreement dated January 16, 2001, as amended on
January 23, 2003 between us and Amir Livne, our Executive Vice President of
Business Development and Strategy, we provided to Mr. Livne in March and April
2001 loans denominated in NIS aggregating $100,000. The loans are linked to the
Israeli consumer price index and bear interest at the rate provided for pursuant
to the regulations promulgated under the Israeli Tax Ordinance from time to
time. The loans (principal and accrued interest thereon) are forgiven ratably
over a three-year period. Any taxes applicable to the forgiven loans will be
borne by Mr. Livne. In the event that Mr. Livne terminates his employment with
us at specified periods during the term of the loans, or in the event that we
terminate his employment for reasons other than breach of a material obligation
under his employment agreement at specified periods during the term of the
loans, he will be required to repay to us certain amounts of the principal of
the loans and any accrued interest thereon, provided that in the latter event we
will bear all taxes associated with the forgiven portion of the loans instead of
Mr. Livne. As of December 31, 2002 an amount of $67,987 (principal and accrued
interest) of the loan has been forgiven and a balance of $33,995 remains
outstanding. As of May 31, 2003, the outstanding balance of the loan was
$35,869.
D. EXCHANGE CONTROLS
In 1998, the Israeli currency control regulations were liberalized
significantly, as a result of which Israeli residents generally may freely deal
in foreign currency and non-residents of Israel currency and assets. There are
currently no Israeli currency control restrictions on remittances of dividends
on the ordinary shares or the proceeds from the sale of the shares provided all
taxes were paid or withheld; however, legislation remains in effect pursuant to
which currency controls can be imposed by administrative action at any time.
Non-residents of Israel may freely hold and trade our securities. Neither
our Memorandum of Association nor our Articles of Association nor the laws of
the State of Israel restrict in any way the ownership or voting of Ordinary
Shares by non-residents, except that such restrictions may exist with respect to
citizens of countries which are in a state of war with Israel.
E. TAXATION
ISRAELI TAXATION AND INVESTMENT PROGRAMS
The following is a summary of some current tax laws of the State of Israel
and certain material Israeli tax considerations as they apply to us and our
shareholders. The following also includes a discussion of certain Israeli
government programs benefiting various Israeli businesses, including us. We
derive significant tax and other benefits from various programs and laws in
Israel. If such programs or laws are eliminated or reduced, with or without
notice, or if we cease to meet the conditions for such programs or laws, we may
be materially adversely affected. To the extent that the discussion is based on
legislation yet to be subject to judicial or administrative interpretation,
there can be no assurance that the views expressed herein will accord with any
such interpretation in the future. This discussion is not intended and should
not be construed as legal or professional tax advice and does not cover all
possible tax considerations applicable to investment in or holding of our
ordinary shares.
CORPORATE TAX
The general corporate tax rate in Israel is currently 36%, although the tax
rate on capital gains was lowered to 25% on January 1, 2003. However, the
effective tax rate payable by a company, which like us, derives income from an
"Approved Enterprise", may be considerably less. See "-Law for the Encouragement
of Capital Investments, 1959" below.
Dividends received by an Israeli company from foreign entities are
generally subject to Israeli tax of up to 25%.
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
Under the Law for the Encouragement of Industry (Taxes), 5729-1969,
referred to as the Industry Law, a company qualifies as an "industrial company"
if it is a resident of Israel and at least 90% of its income in a given tax
year, determined in NIS (exclusive of income from marketable securities, capital
gains, interest and dividends), is derived from industrial enterprises owned by
that company. An "industrial enterprise" is defined as an enterprise whose major
activity in a particular tax year is manufacturing. We believe that we currently
qualify as an industrial company. See Note 13 of the notes to our consolidated
financial statements.
56
Pursuant to the Industry Law, an industrial company is entitled to deduct a
portion of the purchase price of patents or certain other tangible property
rights used for the development of the company (other than goodwill) over a
period of eight years beginning with the year in which such rights were first
used.
Additionally, under certain income tax regulations, industrial companies
qualify for special depreciation rates for machinery, equipment and buildings
used by an industrial enterprise. These rates vary based on factors such as the
date of commencement of operation and the number of work shifts. An industrial
company owning an approved enterprise (see "Law for the Encouragement of Capital
Investments, 1959" below) may choose between the above depreciation rates and
the depreciation rates available to approved enterprises.
Qualification as an industrial company under the Industry Law is not
conditioned upon the receipt of prior approval from any Israeli Government
authority. No assurance can be given that we will continue to qualify as an
industrial company or that we will be able to use tax benefits available to
companies so qualifying.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
The Law for the Encouragement of Capital Investments 1959, referred to as
the Investment Law, provides that a capital investment in a production facility
(or other eligible assets) may, upon application to the Israeli investment
center, be designated as an "approved enterprise." Each certificate of approval
for an approved enterprise relates to a specific investment program in the
approved enterprise, delineated both by the financial scope of the investment
and by the physical characteristics of the facility or the asset. An approved
enterprise is entitled to certain benefits, including Israeli government cash
grants or tax benefits.
An approved enterprise approved after April 1, 1986, may elect to forego
any entitlement to the grants otherwise available under the Investment Law and,
in lieu of the foregoing, participate in an alternative benefits program, under
which the undistributed income from the approved enterprise is fully exempt from
corporate tax for a defined period of time. The period of tax exemption ranges
between two and ten years, depending upon the location within Israel of the
approved enterprise and the type of approved enterprise. Upon expiration of the
exemption period, the approved enterprise would be eligible for the otherwise
applicable reduced tax rates under the Investment Law for the remainder, if any,
of the otherwise applicable benefits period.
The reduced corporate tax rate is generally 25%. However, further
reductions in tax rates depending on the percentage of the foreign investment in
a company's share capital (conferring rights to profits, voting and appointment
of directors) and the percentage of its combined share and loan capital owned by
non-Israeli residents, would apply. The tax rate is 20% if the foreign
investment level is 49% or more but less than 74%, 15% if the foreign investment
level is 74% or more but less than 90%, and 10% if the foreign investment level
is 90% or more. The lowest level of foreign investment during the year will be
used to determine the relevant tax rate for that year. These tax benefits are
granted for a limited period not exceeding seven or ten years for a company
whose foreign investment level exceeds 25% from the first year in which the
approved enterprise has taxable income. The period of benefits may in no event,
however, exceed the lesser of 12 years from the year in which the production
commenced or 14 years from the year of receipt of approved enterprise status.
We have eleven approved enterprises. We elected to participate in the
alternative benefits program. Since April 1993, following our initial public
offering in the United States, we have been a "foreign investors' company", as
defined by the Investment Law and we are therefore entitled to a ten year period
of benefits (instead of a seven-year period), for enterprises approved after
April 1993. The period of benefits of our approved enterprises will expire
during the period 2000 through 2010, and is conditioned upon maintaining our
approved enterprise status. There can be no assurance that the current benefit
program will continue to be available or that we will continue to qualify for
such benefits.
A company that has elected to participate in the alternative benefits
program and that subsequently pays a dividend out of the income derived from the
approved enterprise during the tax exemption period will be subject to corporate
tax in respect of the amount distributed (including withholding tax thereon) at
the rate that would have been applicable had the company not elected the
alternative benefits program (generally 10% - 25%). The dividend recipient is
taxed at the reduced withholding tax rate of 15%, applicable to dividends from
the approved enterprises if the dividend is distributed within 12 years after
the benefits period or other rate provided under a treaty. The withholding tax
rate will be 25% after such period. In the case of a company with a foreign
investment level (as defined by the Investment Law) of 25% or more, the 12-year
limitation on reduced withholding tax on dividends does not apply. Tax should be
withheld by the company at source, regardless of whether the dividend is
converted into foreign currency.
57
TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax (Inflationary Adjustment) Law, 1985, attempts to overcome
some of the problems presented to a traditional tax system by an economy
experiencing rapid inflation, which was the case in Israel at the time the law
was enacted. Generally, the Inflationary Adjustments law provides significant
tax deductions and adjustments to depreciation methods and tax loss carry
forwards to compensate for loss of value resulting from an inflationary economy.
Our and our Israeli subsidiaries' taxable income is determined under this law.
CAPITAL GAINS TAX
Pursuant to recent changes in Israeli tax law, capital gain from the sale
of our ordinary shares will generally be subject to 15% Israeli capital gains
tax effective January 1, 2003, as long as we qualify as an "Industrial Company"
and our ordinary shares are quoted on Nasdaq. Although we intend to maintain our
status as an Industrial Company and the quotation of our ordinary shares on
Nasdaq, there can be no assurance that our intention will be carried out and,
consequently, that the 15% Israeli capital gains tax will continue to apply.
However, as of January 1, 2003 nonresidents of Israel will be exempt from
capital gains tax in relation to the sale of our ordinary shares for so long as
(a) our ordinary shares are listed for trading on a stock exchange outside of
Israel, (b) the capital gains are not accrued or derived by the nonresident
shareholder's permanent enterprise in Israel, (c) the ordinary shares in
relation to which the capital gains are accrued or derived were acquired by the
nonresident shareholder after the initial listing of the ordinary shares on a
stock exchange outside of Israel and (d) neither the shareholder nor the
particular capital gain is otherwise subject to certain sections of the Israeli
Income Tax Ordinance.
In addition, pursuant to the Convention between the Government of the State
of Israel and the Government of the United States of America with Respect to
Taxes on Income (the "Tax Treaty"), gains derived from the sale, exchange or
disposition of our ordinary shares by a person who qualifies as a resident of
the United States within the meaning of the Tax Treaty and who is entitled to
claim the benefits afforded to U.S. residents under the Tax Treaty ("Treaty U.S.
Resident"), would not be subject to Israeli capital gains tax, unless such
Treaty U.S. Resident owned, directly or indirectly, shares representing 10% or
more of the voting power of our company at any time during the 12-month period
preceding such sale, exchange or disposition.
DIVIDENDS PAID TO NON-RESIDENTS
Non-residents of Israel are subject to income tax on income derived from
sources in Israel. On distributions of dividends, other than bonus shares (stock
dividends), tax at the rate of 25% generally will be withheld at source, unless
a different rate is provided in a treaty between Israel and the shareholder's
country of residence. Under the Tax Treaty, the maximum tax on dividends paid to
a holder of shares who is a Treaty U.S. Resident is 25%. However, as mentioned
above (see "--Law for the Encouragement of Capital Investments, 1959"),
dividends paid out of income derived from an Approved Enterprise during the
benefit period are subject to a reduced rate of tax of 15%.
The Tax Treaty further provides that a 12.5% Israeli withholding tax would
apply to dividends paid to a U.S. corporation owning 10% or more of an Israeli
company's voting stock during, in general, the current and preceding tax years
of the Israeli company. The lower 12.5% rate applies only to dividends from
income not derived from an Approved Enterprise in the applicable period and does
not apply if the company has certain amounts of passive income.
A non-resident of Israel who receives dividends from which tax was withheld
at source, generally is exempt from the duty to file returns in Israel in
respect of such income, provided such income was not derived from a business
conducted in Israel by the taxpayer, and, thus, the tax withheld is also the
final tax in Israel on the dividend paid.
58
U.S. FEDERAL TAX CONSIDERATIONS
The following discussion of United States federal income tax considerations
is based on the United States Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations promulgated thereunder , judicial decisions and
published positions of the United States Internal Revenue Service (the "IRS"),
all as in effect on the date hereof and which are subject to change at any time,
possibly with retroactive effect. This discussion does not address all aspects
of United States federal income taxation (including potential application of the
alternative minimum tax) that may be relevant to a particular shareholder based
on such shareholder's particular circumstances. In particular, the following
discussion does not address the United States federal income tax consequences of
purchasing, holding or disposing of ordinary shares to shareholders that own
(directly, indirectly or through attribution) 10% or more of our outstanding
voting stock or that are broker-dealers, insurance companies, tax-exempt
organizations, financial institutions, non-resident aliens of the United States
or taxpayers whose functional currency is not the dollar. The following
discussion also does not address any aspect of state, local or non-U.S. tax
laws. Further, this summary generally considers only a U.S. Holder (as defined
below) that will own ordinary shares as capital assets (generally, assets held
for investment) and does not consider the tax treatment of persons that will
hold ordinary shares through a partnership or other pass-through entity. Each
prospective investor is advised to consult such person's tax advisor with
respect to the specific United States federal, state and local tax consequences
to such person of purchasing, holding or disposing of ordinary shares.
TAXATION OF U.S. HOLDERS
For purposes of this discussion, a "U.S. Holder" is any holder of ordinary
shares that is: (i) a citizen or resident of the United States: (ii) a
corporation, or other entity treated as a corporation for United States federal
income tax purposes, created or organized under the laws of the United States or
any state thereof or the District of Columbia; (iii) an estate the income of
which is included in gross income for United States federal income tax purposes
regardless of its source; (iv) a trust (a) if a United States court is able to
exercise primary supervision over its administration and one or more United
States persons have the authority to control all of its substantial decisions,
or (b) the trust has on effect a valid election to be treated as a United States
trust for United States federal income tax purposes, and a "Non-U.S. Holder" is
any holder of ordinary shares that is an individual, corporation, estate or
trust and that is not a U.S. Holder.
DIVIDEND DISTRIBUTIONS
To the extent paid out of our current or accumulated earnings and profits
as determined under Untied States federal income tax principles, a distribution
made with respect to the ordinary shares (including the amount of any Israeli
withholding tax thereon) will be includible for United States federal income tax
purposes in the income of a U.S. Holder as a taxable dividend. To the extent
that such distribution exceeds our earnings and profits and provided that we
were not a PFIC as to such U.S. Holder, such distribution will be treated as a
non-taxable return of capital to the extent of the U.S. Holder's adjusted basis
in the ordinary shares and thereafter as taxable capital gain. Dividends paid by
us will not generally be eligible for the dividends-received deduction allowed
to corporations under the Code. Dividends paid in a currency other than the U.S.
dollar will be includible in income of a U.S. Holder in a U.S. dollar amount
based on the spot rate of exchange on the date of receipt. A U.S. Holder that
receives a foreign currency distribution and converts the foreign currency into
U.S. dollars subsequent to receipt will have foreign exchange gain or loss based
on any appreciation or depreciation in the value of the foreign currency against
the U.S. dollar, which will generally be U.S. source ordinary income or loss.
Subject to certain conditions and limitations set forth in the Code, U.S.
Holders will generally be able to elect to claim a credit against their United
States federal income tax liability for an Israeli withholding tax deducted from
dividends received in respect of ordinary shares. For purposes of calculating
the foreign tax credit, dividends paid on the ordinary shares will be treated as
income from sources outside the United States and generally will constitute
foreign source "passive income" or, in the case of certain holders, "financial
services income." In lieu of claiming a tax credit, U.S. Holders may instead
claim a deduction for foreign taxes withheld, subject to certain limitations.
THE RULES RELATING TO THE DETERMINATION OF THE AMOUNT OF FOREIGN INCOME
TAXES WHICH MAY BE CLAIMED AS FOREIGN TAX CREDITS ARE COMPLEX AND U.S. HOLDERS
SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT A
CREDIT WOULD BE AVAILABLE.
SALE, EXCHANGE OR OTHER DISPOSITION
Upon the sale or other disposition of the ordinary shares, a U.S. Holder
will generally recognize gain or loss for United States federal income tax
purposes in an amount equal to the difference between the U.S. dollar value of
the amount realized in consideration for the disposition of the ordinary shares
and the U.S. Holder's adjusted tax basis in the ordinary shares. Provided we
were not a passive foreign investment company, or PFIC, as to such U.S. Holder,
such gain or loss will generally be long-term capital gain or loss if the
ordinary shares have been held for more than one year on the date of the
disposition. Any gain or loss will generally be treated as United States source
income or loss for United States federal income tax purposes. In addition, a
U.S. Holder that receives foreign currency upon disposition of the ordinary
shares and converts the foreign currency into U.S. dollars subsequent to receipt
will have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the foreign currency against the U.S. dollar, which
will generally be United States source ordinary income or loss.
59
PASSIVE FOREIGN INVESTMENT COMPANY STATUS
Generally a foreign corporation is treated as a PFIC for United States
federal income tax purposes if either (i) 75% or more of its gross income
(including the pro rata gross income of any company (United States or foreign)
in which such corporation is considered to own 25% or more of the ordinary
shares by value) for the taxable year is passive income, generally referred to
as the "income test," or (ii) 50% or more of the average value of its assets
(including the pro rata fair market value of the assets of any company in which
such corporation is considered to own 25% or more of the ordinary shares by
value) during the taxable year produce or are held for the production of passive
income in the taxable year, generally referred to as the "asset test".
Although we do not believe that we have been PFIC for any tax year through
and including 2001, there can be no assurances that we will not become a PFIC in
the future.
If we were deemed to be a PFIC for any taxable year during which a U.S.
Holder held ordinary shares and such holder failed to make either a "QEF
election" or a "mark-to-market election" (as described below):
o gain recognized by the U.S. Holder upon the disposition of, as well as
income recognized upon receiving certain dividends on, ordinary shares
would be taxable as ordinary income;
o the U.S. Holder would be required to allocate such dividend income
and/or disposition gain ratably over such holder's entire holding period
for such ordinary shares;
o the amount allocated to each year other than the year of the dividend
payment or disposition would be subject to tax at the highest individual or
corporate tax rate, as applicable, and an interest charge would be imposed
with respect to the resulting tax liability;
o the U.S. Holder would be required to file an annual return on IRS Form
8621 regarding distributions received on, and gain recognized on
dispositions of, ordinary shares; and
o any U.S. Holder that acquired ordinary shares upon the death of a U.S.
Holder would not receive a step-up of the income tax basis to fair market
value of such shares. Instead, such U.S. Holder beneficiary would have a
tax basis equal to the decedent's tax basis, if lower.
Although a determination as to a corporation's PFIC status is made
annually, an initial determination that a corporation is a PFIC for any taxable
year will generally cause the above described consequences to apply for all
future years to U.S. Holders that held shares in the corporation at any time
during a year when the corporation was a PFIC and that made neither a QEF
election nor mark-to-market election (as discussed below) with respect to such
shares on their tax return that included the last day of the corporation's first
taxable year as a PFIC. This will be true even if the corporation ceases to be a
PFIC in later years. However, with respect to a PFIC that does not make any
distributions or deemed distributions, the above tax treatment would apply only
to U.S. Holders that realize gain on their disposition of shares in the PFIC.
In the event that we are deemed to be a PFIC for any taxable year, if a
U.S. Holder makes a valid QEF election with respect to ordinary shares:
o the U.S. Holder would be required for each taxable year for which we
are a PFIC to include in income such holder's pro rata share of our (i) net
ordinary earnings as ordinary income and (ii) net capital gain as long-term
capital gain, in each case computed under United States federal income tax
principles, even if such earnings or gains have not been distributed,
unless the shareholder makes an election to defer this tax liability and
pays an interest charge;
o the U.S. Holder would not be required under these rules to include any
amount in income for any taxable year during which we do not have net
ordinary earnings or capital gain; and
o the U.S. Holder would not be required under these rules to include any
amount in income for any taxable year for which we are not a PFIC.
60
The QEF election is made on a shareholder-by-shareholder basis. Thus, any
U.S. Holder of ordinary shares can make its own decision whether to make a QEF
election. A QEF election applies to all shares of the PFIC held or subsequently
acquired by an electing U.S. Holder and can be revoked only with the consent of
the IRS. A shareholder makes a QEF election by attaching a completed IRS Form
8621 including the information provided in the PFIC annual information
statement, to a timely filed United States federal income tax return. The
shareholder must receive certain information from us in order to make the
election. If we are unable to provide the information, the election will not be
available. It should be noted that U.S. Holders may not make a QEF election with
respect to warrants or rights to acquire ordinary shares, and that certain
classes of investors (for example, consolidated groups and grantor trusts) are
subject to special rules regarding the QEF election.
Under certain circumstances, a U.S. Holder may also obtain treatment
similar to that afforded a shareholder that has made a timely QEF election by
making an election in a year subsequent to the first year during the U.S.
Holder's holding period that we are classified as a PFIC to treat such holder's
interest as subject to a deemed sale and recognizing gain, but not loss, on such
deemed sale in accordance with the general PFIC rules, including the interest
charge provisions, described above and thereafter treating such interest as an
interest in a QEF.
Alternatively, a U.S. Holder of shares in a PFIC can elect to mark the
shares to market annually, recognizing as ordinary income or loss each year the
shares are held, as well as on the disposition of the shares, an amount equal to
the difference between the shareholder's adjusted tax basis in the PFIC stock
and its fair market value. Losses are allowed only to the extent of net
mark-to-market gains previously included in income by the U.S. Holder under the
election in prior taxable years. As with the QEF election, a U.S. Holder that
makes a mark-to-market election would not be subject to deemed ratable
allocations of gain, the interest charge, and the denial of basis step-up at
death described above. Subject to the ordinary shares ever ceasing to be
marketable, a mark-to-market election is irrevocable without obtaining the
consent of the IRS and would continue to apply even in years that we are no
longer a PFIC.
U.S. Holders of ordinary shares are urged to consult their tax advisors
about PFIC rules, including the advisability, procedure and timing of making a
QEF election, in connection with their holding of ordinary shares, including
warrants or rights to acquire ordinary shares.
TAXATION OF NON-U.S. HOLDERS
Subject to the discussion below with respect to the United States backup
withholding tax, a non-U.S. Holder will not generally be subject to United
States federal income tax on dividends from our company, if any, or gain from
the sale or other disposition of ordinary shares, unless (i) such income is
effectively connected with the conduct by the non-U.S. Holder of a United States
trade or business, or in the case of a resident of a country which has an income
tax treaty with the United States, such income is attributable to a permanent
establishment (or in the case of an individual, a fixed place of business) in
the United States; or (ii) with respect to any gain on the sale or other
disposition of ordinary shares realized by an individual non-U.S. Holder, such
individual non-U.S. Holder is present in the United States for 183 days or more
in the taxable year of the sale or other disposition and certain other
conditions are satisfied.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under the Code, under certain circumstances, United States tax information
reporting and "backup withholding" of United States federal income tax on
dividends on, and the proceeds of dispositions of, ordinary shares may apply to
both U.S. Holders and non-U.S. Holders. Backup withholding will not apply,
however, to a holder that furnishes a correct taxpayer identification number or
certificate of foreign status and makes any other required certification or that
is otherwise exempt from backup withholding. Generally, a U.S. Holder will
provide such certification on IRS Form W-9 and a non-U.S. Holder will provide
such certification on IRS Form W-8. Any amounts withheld under the U.S. backup
withholding rules will be allowed as a refund or credit against the U.S.
Holder's or non-U.S. Holder's United States federal income tax liability,
provided the required information is furnished to the IRS.
61
F. DIVIDENDS AND PAYING AGENTS - NOT APPLICABLE.
G. STATEMENT BY EXPERTS - NOT APPLICABLE.
H. DOCUMENTS ON DISPLAY
We are currently subject to the information and periodic reporting
requirements of the U.S. Securities Exchange Act of 1934, as amended, and file
periodic reports and other information with the Securities and Exchange
Commission through its electronic data gathering, analysis and retrieval (EDGAR)
system. Our securities filings, including this Annual Report and the exhibits
thereto, are available for inspection and copying at the public reference
facilities of the Securities and Exchange Commission located a Room 1024, 450
Fifth Street, NW, Washington, D.C. 20549, and the Commission's regional offices
located in New York, New York and Chicago, Illinois. Copies of all or any part
of the registration statement or other filings may be obtained from these
offices after payment of fees required by the Commission. Please call the
Commission at 1-800-SEC-0330 for further information. The Exchange Act file
number for our Securities and Exchange Commission filing is 0-21222. The
Commission also maintains a website at http://www.sec.gov from which certain
filings may be accessed.
As a foreign private issuer, we are exempt from certain rules under the
Securities Exchange Act of 1934, as amended, prescribing the furnishing and
content of proxy statements to our shareholders. In addition, we, our directors,
and our officers are also exempt from the shortswing profit recovery and
disclosure regime of Section 16 of the Exchange Act.
All documents referenced herein concerning us are archived and may also be
inspected at our head offices located at 16 Hagalim Avenue, Herzliya, Israel.
Information about us is also available on our website at
http://www.tecnomatix.com. Such information is not part of this annual report.
I. SUBSIDIARY INFORMATION - NOT APPLICABLE.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign currency exchange
rates and interest rates which could impact our results of operations and
financial condition. We seek to manage the exposure to these market risks
through our regular operating and financing activities and through the use of
foreign currency exchange contracts.
FOREIGN CURRENCY RISK
Revenues generated and costs incurred outside the U.S. are generally
denominated in local non-dollar currencies. In 2000, 2001 and 2002, 70%, 71% and
70% of our revenues, respectively, were denominated in non-dollar currencies.
Since our financial results are reported in dollars, fluctuations in the rates
of exchange between the dollar and non-dollar currencies may have a material
effect on our results of operations. Thus, an increase in the value of a
particular currency relative to the dollar will increase the dollar reporting
value for transactions in such currency, and a decrease in the value of such
currency relative to the dollar will decrease the dollar reporting value for
such transactions. This effect on the dollar reporting value for transactions is
only partially offset by the impact that such fluctuations may have on our
costs.
From time to time we enter into foreign currency exchange contracts to
hedge existing non-dollar assets and customer firm purchase commitments. The use
of such contracts allows us to reduce our exposure to exchange rate fluctuations
since the gains and losses on these contracts substantially offset losses and
gains on the assets, liabilities and transactions being hedged. As of December
31, 2002, we had purchased currency option contracts to sell up to $4,254,000
for a total amount of NIS 19,950,000 that matured on several dates ending March
31, 2003. These option contracts did not have a material effect on our financial
results in the first quarter of 2003.
Since the date of our 2002 financial statements we have entered into
"cylinder" foreign currency transactions pursuant to which we entered into
currency put option contracts to sell up to $8,741,000 for a total amount of NIS
42,000,000 that mature on several dates ending September 30, 2003 in exchange
for writing currency call option contracts to buy up to $8,104,000 for a total
amount of NIS 42,000,000.
62
INTEREST RATE RISK
Our exposure to market risk with respect to changes in interest rates
relates primarily to our short and long-term investments.
Our short-term investments consist of corporate marketable debt securities.
Our long-term investments consist of Israeli Government, U.S. Governmental
agencies and corporate marketable debt securities. The interest rate on
$3,110,000 of our long-term investments, which we refer to in the table below as
"Range Notes," during the term of the bonds depends on the three-month or
six-month LIBOR interest rate. The interest on $1,610,000 of our Range Notes is
not payable in the event the six-month LIBOR interest rate is equal to 0% or
above 3%, increasing annually to 7% over the maturity period. The interest on
$1,500,000 of our Range Notes is not payable in the event the three-month LIBOR
interest rate is equal to 0% or above 4%, increasing annually to 7% over the
maturity period.
The table below presents the interest amounts payable in the event that the
three-month or six-month LIBOR interest rate is between 3%-7% during the
following periods:
INTEREST PAYABLE TO TECNOMATIX ON RANGE NOTES(1)
(U.S DOLLARS IN THOUSANDS)
THREE-MONTH OR SIX-MONTH LIBOR 2003 2004 2005 2006 2007 THEREAFTER(2) TOTAL
INTEREST-RATE
3%............................... $151 $240 $240 $240 $208 $627 $1,706
4%............................... $80 $122 $240 $240 $208 $627 $1,517
5%............................... $73 $73 $119 $240 $208 $627 $1,340
6%............................... $73 $73 $82 $122 $208 $627 $1,185
7%............................... - - - - - - -
(1) The issuer of the U.S. dollar Range Notes may call the Range Notes prior to
maturity.
(2) Aggregate payable interest until maturity.
The fair value of our short-term investments is based on their market value
as of December 31, 2002. The table below presents the fair value amounts and
related weighted average rates by date of maturity for our short-term
investments:
MATURITY DATE
(U.S DOLLARS IN THOUSANDS)
MARKETABLE DEBT SECURITIES: 2003 2004 2005 2006 2007 THEREAFTER TOTAL
U.S. dollar debt securities
Fixed Interest Rate................ - - $5,981 - - - $5,981
Weighted Average
Interest Rate (1).................. - - 5.20% - - - 5.20%
(1) Based upon the principal yield to maturity of the debt securities.
The long-term investments are presented in our financial statements as
"held to maturity" securities according to SFAS 115. The table below presents
the book value amounts and related weighted average rates by date of maturity
for our long-term investments:
63
MATURITY DATE
(U.S DOLLARS IN THOUSANDS)
HELD TO MATURITY DEBT SECURITIES: 2003 2004 2005 2006 2007 THEREAFTER TOTAL
U.S. dollar debt securities
Fixed Interest Rate................. $1,106 $5,400 $12,761 $2,583 $512 - $22,362
Weighted Average
Interest Rate(1).................... 3.29% 4.96% 5.24% 5.47% 4.86% - 5.09%
U.S. dollar debt securities
Range Notes......................... - - - - $1,500 $1,610 $3,110
Weighted Average
Interest Rate (2)................... - - - - 7.41% 8.00% 7.72%
(1) The issuer of the U.S. dollar Range Notes may call the Range Notes prior to
their maturity date.
(2) Based upon the principal yield to maturity of the debt securities.
ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES - NOT APPLICABLE.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES - NOT APPLICABLE.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS - NOT APPLICABLE.
ITEM 15. CONTROLS AND PROCEDURES
During the 90 day period prior to the filing of this annual report, we
performed an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended). Following that evaluation, our management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that based on the evaluation, the design and operation of our disclosure
controls and procedures were effective at that time. Since the evaluation, there
have been no significant changes in our internal controls or in factors that
could significantly affect internal controls, including, because we have not
identified any significant deficiencies or material weaknesses in our internal
controls, any corrective actions with regard to significant deficiencies and
material weaknesses.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
- NOT YET APPLICABLE.
ITEM 16B. CODE OF ETHICS
- NOT YET APPLICABLE.
64
PART III
ITEM 17. FINANCIAL STATEMENTS - NOT APPLICABLE
ITEM 18. FINANCIAL STATEMENTS
1. Financial Statements.
2. Report of Independent Public Accountants of Tecnomatix Technologies, Inc.
ITEM 19. EXHIBITS
1. Articles of Association (incorporated by reference to Exhibit 1 to
Tecnomatix's Annual Report on Form 20-F for the year ended December
31, 2000).
4(b) (1) An English translation of the Hebrew original which is the
official version of the Letter of Intent dated April 27, 2003 among
Bank Hapoalim, Tecnomatix Technologies Ltd. and Tecnomatix Ltd.
(2) An English translation of the Hebrew original which is the
official version of the Debenture between Tecnomatix Technologies Ltd.
and Bank Hapoalim B.M.
(3) Share Purchase and Buy Back Agreement dated January 1, 2003
between Tecnomatix Technologies Ltd. and Harel Beit-On, Chairman of
the Board of Directors and Chief Executive Officer.
(4) Amendment to Letter of Agreement dated January 23, 2002 between
Tecnomatix Technologies Ltd. and Amir Livne, Executive Vice President
of Business Development and Strategy.
(5) An English translation of the Hebrew original which is the
official version of the Lease Agreement dated June 1, 2003 between
Tecnomatix Technologies Ltd. and Intergama Assets (1961) Ltd. and
exhibits thereto.
4(c) (1) Tecnomatix Technologies Ltd. 1994 Stock Option Plan (incorporated
by reference to Exhibit 10.8 to Tecnomatix's registration statement on
Form F-1 (File No. 333-3540)).
(2) Tecnomatix Technologies Ltd. 1996 Stock Option Plan (incorporated
by reference to Exhibit 4(c) to Tecnomatix's Annual Report on Form
20-F for the year ended December 31, 2000).
(3) 1996 Directors Stock Option Plan (incorporated by reference to
Exhibit 4(c) to Tecnomatix's Annual Report on Form 20-F for the year
ended December 31, 2000).
(4) Robcad Technologies (1980) Ltd. Stock Option Plan (incorporated by
reference to Exhibit 4(c) to Tecnomatix's Annual Report on Form 20-F
for the year ended December 31, 2000).
(5) Performance Based Stock Option Plan (incorporated by reference to
Exhibit 4(c) to Tecnomatix's Annual Report on Form 20-F for the year
ended December 31, 2000).
(6) Tecnomatix Technologies Ltd. 2000 Employee Share Purchase Plan
(incorporated by reference to Exhibit 4(c) to Tecnomatix's Annual
Report on Form 20-F for the year ended December 31, 2000).
(7) Tecnomatix Technologies Ltd. 2003 Global Share Option Plan and
U.S. and Israel Appendixes.
8. List of subsidiaries.
23. (1) Consent of Independent Public Accountants.
(2) Consent of Independent Public Accountants of Tecnomatix
Technologies, Inc.
99.1 Chief Executive Officer's Certification Pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Chief Financial Officer's Certification Pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
65
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
TECNOMATIX TECHNOLOGIES LTD.
By: /S/ Harel Beit-On
__________________________________ *
Harel Beit-On
Chairman of the Board of Directors
and Chief Executive Officer
Dated: June 20, 2003
66
CERTIFICATION PURSUANT TO
SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002
I, Harel Beit-On, certify that:
1. I have reviewed this annual report on Form 20-F of Tecnomatix Technologies
Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 20, 2003
/S/ Harel Beit-On *
_______________________
Harel Beit-On
Chief Executive Officer
*The originally executed copy of this Certification will be maintained at the
Company's offices and will be made available for inspection upon request.
67
CERTIFICATION PURSUANT TO
SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002
I, Oren Steinberg, certify that:
1. I have reviewed this annual report on Form 20-F of Tecnomatix Technologies
Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 20, 2003
/S/ Oren Steinberg
________________________ *
Oren Steinberg
Chief Financial Officer
*The originally executed copy of this Certification will be maintained at the
Company's offices and will be made available for inspection upon request.
68
EXHIBIT INDEX
4(b) (1) An English translation of the Hebrew original which is the official
version of the Letter of Intent dated April 27, 2003 among Bank Hapoalim,
Tecnomatix Technologies Ltd. and Tecnomatix Ltd.
(2) An English translation of the Hebrew original which is the official
version of the Debenture between Tecnomatix Technologies Ltd. and Bank
Hapoalim B.M.
(3) Share Purchase and Buy Back Agreement dated January 1, 2003 between
Tecnomatix Technologies Ltd. and Harel Beit-On, Chairman of the Board of
Directors and Chief Executive Officer.
(4) Amendment to Letter of Agreement dated January 23, 2002 between
Tecnomatix Technologies Ltd. and Amir Livne, Executive Vice President of
Business Development and Strategy.
(5) An English translation of the Hebrew original which is the official
version of the Lease Agreement dated June 1, 2003 between Tecnomatix
Technologies Ltd. and Intergama Assets (1961) Ltd. and exhibits thereto.
4(c) (7) Tecnomatix Technologies Ltd. 2003 Global Share Option Plan and U.S. and
Israel Appendixes.
8. List of subsidiaries.
23. (1) Consent of Independent Public Accountants.
(2) Consent of Independent Public Accountants of Tecnomatix Technologies,
Inc.
99.1 Chief Executive Officer's Certification Pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer's Certification Pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
69
<Page>
TECNOMATIX TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 2
CONSOLIDATED FINANCIAL STATEMENTS:
BALANCE SHEETS
as of December 31, 2002 and 2001 3
STATEMENTS OF OPERATIONS
for the years ended December 31, 2002, 2001 and 2000 5
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 2002, 2001 and 2000 6
STATEMENTS OF CASH FLOWS
for the years ended December 31, 2002, 2001 and 2000 7
NOTES TO FINANCIAL STATEMENTS 9
</Table>
F-1
<Page>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF
TECNOMATIX TECHNOLOGIES LTD.
We have audited the accompanying consolidated balance sheets of Tecnomatix
Technologies Ltd. ("the Company") and its subsidiaries at December 31, 2002 and
2001 and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We did not audit the financial statements of certain subsidiaries, whose assets
constitute approximately 20% of total consolidated assets at December 31, 2002
and 2001, and whose revenues constitute approximately 33%, 32%, and 33% of
consolidated total revenues for the years ended December 31, 2002, 2001 and
2000, respectively. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for the abovementioned subsidiaries, is based
solely on the report of those other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
the other auditors referred to above provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors as
stated above, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries at December 31, 2002 and 2001 and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
By: /s/ BRIGHTMAN ALMAGOR & CO.
- --------------------------------
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A MEMBER OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
February 12, 2003
F-2
<Page>
TECNOMATIX TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31,
--------------------
2 0 0 2 2 0 0 1
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................... $ 10,466 $ 21,670
Short-term investments (Note 4) ......................... 5,981 29,515
Accounts receivable, net of allowance for
doubtful accounts of $ 2,091 and $ 2,000, respectively.. 27,671 23,110
Due from related parties ................................ 695 417
Other receivables and prepaid expenses (Note 15) ........ 5,212 5,988
--------- ---------
Total current assets ............................... 50,025 80,700
NON-CURRENT RECEIVABLES (Note 15) ........................ 915 808
--------- ---------
LONG-TERM INVESTMENTS (Note 5) ........................... 25,472 457
--------- ---------
PROPERTY AND EQUIPMENT (Note 6)
Cost .................................................... 29,203 26,504
Less - accumulated depreciation ......................... 23,095 19,145
--------- ---------
6,108 7,359
--------- ---------
ACQUIRED INTANGIBLES, NET (Note 7) ....................... 17,210 17,604
--------- ---------
OTHER ASSETS, NET (Note 8) ............................... 16,613 16,451
--------- ---------
Total assets ........................................... $ 116,343 $ 123,379
========= =========
</Table>
F-3
<Page>
TECNOMATIX TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31,
====================
2 0 0 2 2 0 0 1
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans (Note 15) ........................ $ - $ 687
Accounts payable .................................. 2,950 2,267
Other payables and accrued expenses (Note 15) ..... 14,956 15,214
Deferred revenue .................................. 4,659 4,774
--------- ---------
Total current liabilities ................... 22,565 22,942
Allowance for losses of affiliated company (Note 15) 526 95
--------- ---------
ACCRUED SEVERANCE PAY, NET (Note 10) ............... 907 681
--------- ---------
5 1/4% CONVERTIBLE SUBORDINATED NOTES (Note 9) ..... 37,428 43,765
--------- ---------
MINORITY INTEREST .................................. - 3
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)
SHAREHOLDERS' EQUITY (Note 12)
Share capital:
Ordinary shares of NIS 0.01 par value
(Authorized - 20,000,000 shares, issued and
outstanding - 11,575,706 and 11,356,258 at
December 31, 2002 and 2001, respectively) ........ 40 39
Additional paid-in capital ........................ 71,948 70,311
Loans granted to purchase shares .................. (1,158) (1,213)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment ......... (4,083) (4,237)
Unrealized losses on marketable securities ...... (263) (270)
Retained earnings ................................. 1,633 4,463
--------- ---------
68,117 69,093
Treasury stock, at cost; 850,000 shares
at December 31, 2002 and 2001 .................... (13,200) (13,200)
--------- ---------
54,917 55,893
--------- ---------
Total liabilities and shareholders' equity......... $ 116,343 $ 123,379
========= =========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<Page>
TECNOMATIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
===========================================
2 0 0 2 2 0 0 1 2 0 0 0
=========== =========== ===========
REVENUES (Notes 2 and 16):
Software license fees .................................... $ 36,385 $ 42,316 $ 51,699
Services ................................................. 45,620 44,584 37,319
----------- ----------- -----------
Total revenues ............................................ 82,005 86,900 89,018
COSTS AND EXPENSES:
Cost of software license fees ............................ 8,062 7,851 5,764
Cost of services ......................................... 15,005 15,268 13,354
Amortization of acquired intangibles ..................... 2,491 7,758 7,801
Research and development, net (Note 16) .................. 14,812 19,216 20,748
Selling and marketing .................................... 36,887 44,624 50,737
General and administrative ............................... 5,013 4,855 6,037
Write-off of long-term investment (Note 5) ............... 457 -- --
Restructuring and asset impairment (Note 16) ............. 651 1,843 --
Impairment of software acquired (Note 16) ................ 375 -- --
In-process research and development
and acquisition costs (Note 3) .......................... - -- 5,250
----------- ----------- -----------
TOTAL COSTS AND EXPENSES .................................. 83,753 101,415 109,691
----------- ----------- -----------
OPERATING LOSS ........................................... (1,748) (14,515) (20,673)
Financial income (expense), net (Note 16) ................. (799) 1,191 1,348
----------- ----------- -----------
LOSS BEFORE TAXES ON INCOME ............................... (2,547) (13,324) (19,325)
Taxes on income (Note 13) ................................. 148 (54) (505)
----------- ----------- -----------
LOSS AFTER TAXES ON INCOME ............................... (2,399) (13,378) (19,830)
Company's share in loss of affiliated company ............. (431) (532) (131)
Minority interest in net loss of subsidiary ............... -- -- 2
----------- ----------- -----------
NET LOSS ................................................. $ (2,830) $ (13,910) $ (19,959)
=========== =========== ===========
Loss per ordinary share
Basic:
Net loss ............................................... $ (0.27) $ (1.35) $ (1.95)
=========== =========== ===========
Diluted:
Net loss ............................................... $ (0.27) $ (1.35) $ (1.95)
=========== =========== ===========
Shares used in computing loss
per ordinary share:
Basic ................................................... 10,607,140 10,366,125 10,224,737
=========== =========== ===========
Diluted ................................................. 10,607,140 10,366,125 10,224,737
=========== =========== ===========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<Page>
TECNOMATIX TECHNOLOGIES LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
OTHER COMPREHENSIVE
INCOME
NUMBER OF
ORDINARY LOANS FOREIGN
SHARES ADDITIONAL GRANTED TO CURRENCY
NIS 0.01 SHARE PAID-IN PURCHASE TRANSLATION
PAR VALUE CAPITAL CAPITAL SHARES ADJUSTMENT
------------ ------------ ------------- ------------ ------------
Balance at January 1, 2000 9,951,191 $ 38 $ 65,325 $ (2,427) $ (3,304)
Exercise of employees' options and shares 334,832 3,686
Repayment of loans granted to purchase shares 1,291
Comprehensive loss -
Net loss for the year
Other comprehensive income (loss) -
Unrealized loss on marketable securities
Foreign currency translation adjustment 23
Comprehensive loss
Balance at December 31, 2000 10,286,023 $ 38 $ 69,011 $ (1,136) $ (3,281)
Exercise of employees' options 20,056 (*) 169
Share purchases under ESPP 200,179 1 1,131
Loans granted to purchase shares (77)
Comprehensive loss -
Net loss for the year
Other comprehensive loss -
Unrealized loss on marketable securities
Foreign currency translation adjustment (956)
Comprehensive loss
Balance at December 31, 2001 10,506,258 $ 39 $ 70,311 $ (1,213) $ (4,237)
Exercise of employees' options 69,269 * 474
Share purchases under ESPP 150,179 1 1,163
Repayment of loans granted to purchase shares, net 55
Comprehensive loss -
Net loss for the year
Other comprehensive income -
Unrealized loss on marketable securities
Foreign currency translation adjustment 154
Comprehensive loss
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 10,725,706 $ 40 $ 71,948 $ (1,158) $ (4,083)
============ ============ ============ ============ ============
<Caption>
OTHER COMPREHENSIVE
INCOME
UNREALIZED TOTAL
HOLDING TREASURY SHARE-
GAINS RETAINED STOCK COMPREHENSIVE HOLDERS'
(LOSSES) EARNINGS AT COST LOSS EQUITY
------------ ------------ ------------- ------------- ------------
Balance at January 1, 2000 $ (73) $ 38,332 $ (13,200) $ 84,691
Exercise of employees' options and shares 3,686
Repayment of loans granted to purchase shares 1,291
Comprehensive loss - (19,959)
Net loss for the year (19,959) $ (19,959)
Other comprehensive income (loss) - (36) (36) (36)
Unrealized loss on marketable securities
Foreign currency translation adjustment 23 23
-------------
Comprehensive loss (19,972)
=============
Balance at December 31, 2000 $ (109) $ 18,373 $ (13,200) $ 69,696
Exercise of employees' options 169
Share purchases under ESPP 1,132
Loans granted to purchase shares (77)
Comprehensive loss -
Net loss for the year (13,910) $ (13,910) (13,910)
Other comprehensive loss -
Unrealized loss on marketable securities (161) (161) (161)
Foreign currency translation adjustment (956) (956)
-------------
Comprehensive loss $ (15,027)
=============
Balance at December 31, 2001 $ (270) $ 4,463 $ (13,200) $ 55,893
Exercise of employees' options 474
Share purchases under ESPP 1,164
Repayment of loans granted to purchase shares, net 55
Comprehensive loss -
Net loss for the year (2,830) $ (2,830) 2,830()
Other comprehensive income -
Unrealized loss on marketable securities 7 7 7
Foreign currency translation adjustment 154 154
------------
Comprehensive loss $ 2,669()
============
------------ ------------ ------------- ------------
Balance at December 31, 2002 $ (263) $ 1,633 $ (13,200) $ 54,917
============ ============ ============= ============
</Table>
(*) Less than 1 thousand
The accompanying notes are an integral part of the financial statements.
F-6
<Page>
TECNOMATIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
=================================
2 0 0 2 2 0 0 1 2 0 0 0
========= ========= =========
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $ (2,830) $ (13,910) $ (19,959)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities
(Appendix A) ............................................... 9,479 18,255 17,262
--------- --------- ---------
Net cash provided by (used in) operating activities ........ 6,649 4,345 (2,697)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Long-term investments ...................................... -- (457) 42,900
Purchase of marketable securities .......................... (18,484) (26,922) (56,971)
Proceeds from realization of marketable securities ......... 11,914 29,519 39,266
(Investment in) realization of non-current receivables...... (23) 18 61
Purchase of property and equipment and other assets ........ (3,088) (2,592) (2,960)
Capitalization of software development costs ............... (4,097) (5,103) (7,408)
Proceeds from sale of property and equipment ............... 5 119 215
Acquisition of subsidiaries, net of
cash acquired (Appendix B) ................................ (111) - (15,279)
Investment in a joint venture .............................. - - (437)
--------- --------- ---------
Net cash used in investing activities ...................... (13,884) (5,418) (613)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loans granted to purchase shares .............. 100 -- 1,291
Repurchase of convertible notes ............................ (5,709) (3,986) --
Exercise of employees' options ............................. 474 169 3,686
Purchase of shares under Employee Share Purchase........ 1,164 1,132 --
Plan .......................................................
Short-term credit, net ..................................... (720) 2 (10,270)
--------- --------- ---------
Net cash used in financing activities ...................... (4,691) (2,683) (5,293)
--------- --------- ---------
Effect of exchange rate changes on cash .................... 722 (403) 352
--------- --------- ---------
Net change in cash and cash equivalents .................... (11,204) (4,159) (8,251)
Cash and cash equivalents at beginning of year ............. 21,670 25,829 34,080
--------- --------- ---------
Cash and cash equivalents at end of year ................... $ 10,466 $ 21,670 $ 25,829
========= ========= =========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<Page>
TECNOMATIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTD.)
(U.S. DOLLARS IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
=================================
2 0 0 2 2 0 0 1 2 0 0 0
========= ========= =========
APPENDIX A
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
In-process research and development and acquisition
costs .................................................................. $ -- $ -- $ 5,250
Company's share in loss of affiliated company ............................ 431 532 131
Minority interest in net loss of subsidiary .............................. (3) -- (2)
Depreciation and amortization ............................................ 10,180 16,435 13,989
Asset impairment ......................................................... -- 316 --
Write-off of investment in Visopt B.V .................................... 457 -- --
Gain from repurchase of the
Company's convertible notes ............................................. (599) (1,393) --
Other .................................................................... 100 492 (365)
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECT OF
PURCHASE OF SUBSIDIARY:
Decrease (increase) in assets:
Accounts receivable ..................................................... (3,951) 6,512 1,708
Changes in trading marketable securities, net ........................... 4,430 -- --
Due from related parties ................................................ (278) (400) 368
Deferred income taxes ................................................... 246 246 447
Other receivables and prepaid expenses .................................. 1,057 1,717 482
Increase (decrease) in liabilities: .....................................
Accounts payable ........................................................ (198) (862) 904
Other payables and accrued expenses ..................................... (2,595) (4,914) (5,409)
Accrued severance pay, net .............................................. 202 (426) (241)
--------- --------- ---------
$ 9,479 $ 18,255 $ 17,262
========= ========= =========
APPENDIX B
PURCHASE OF SUBSIDIARIES (NOTE 3)
Working capital - excluding cash ......................................... 1,146 -- (1,101)
Property and equipment ................................................... (137) -- (242)
Other assets ............................................................. -- -- (4,558)
In-process research and development ...................................... -- -- (5,250)
Goodwill ................................................................. (1,120) -- (4,128)
--------- --------- ---------
$ (111) $ -- $ (15,279)
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................................ $ 5,166 $ 5,191 $ 2,071
========= ========= =========
Taxes ................................................................... $ 260 $ 252 $ 588
========= ========= =========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 - GENERAL
Tecnomatix Technologies Ltd. (the "Company") is an Israeli corporation engaged
in the development, selling, marketing and support of Manufacturing Process
Management ("MPM") software tools for the collaborative development and
optimization of manufacturing processes across the extended enterprise. The
Company's products are used by world-leading manufacturers in the automotive,
aerospace, electronics and heavy equipment industries. The Company's software
solutions enable the optimization of the manufacturing process chain, increased
throughput, and reduced time-to-market, time-to-volume and product costs. The
Company operates in two business segments, Mechanical and Electronics. The
Company sells and supports its products mainly in Europe, the United States and
Asia.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of the financial statements in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FINANCIAL STATEMENTS IN U.S. DOLLARS
The reporting currency of the Company is the U.S. dollar ("dollar").
The dollar is the functional currency of the Company and its subsidiaries in
Israel and in the United States. Transactions and balances originally
denominated in dollars are presented at their original amounts. Non-dollar
transactions and balances are remeasured into dollars in accordance with the
principles set forth in Statement of Financial Accounting Standards ("SFAS") No.
52. All exchange gains and losses from remeasurement of monetary balance sheet
items resulting from transactions in non-dollar currencies are recorded in the
statement of operations as they arise.
The financial statements of certain of the Company's subsidiaries whose
functional currency is other than the dollar are translated into dollars in
accordance with the principles set forth in SFAS No. 52. Assets and liabilities
have been translated at year-end exchange rates; results of operations have been
translated at average exchange rates. The translation adjustments have been
reported as a separate component of shareholders' equity.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant inter-company transactions and
balances have been eliminated.
CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments that are
readily convertible into cash with original maturities of three months or less.
F-9
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTD.)
MARKETABLE SECURITIES
The Company accounts for its investments in marketable securities using SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of its investments in
marketable debt and equity securities at the time of purchase and reevaluates
such determinations at each balance sheet date. Held-to-maturity securities
include debt securities for which the Company has the intent and ability to hold
to maturity. Investments in marketable debt securities that are classified as
held to maturity are stated at amortized cost.
Investments in marketable debt securities that are classified as "trading
securities" are stated at market value. Net realized and unrealized gains losses
on these securities are included in other income (expense).
Debt securities for which the Company does not have the intent or ability to
hold to maturity are classified as available-for-sale. Available-for-sale debt
and equity securities are stated at fair value, with the unrealized gains and
losses reported as a separate component of shareholders' equity under
accumulated other comprehensive loss.
As of December 31, 2001 all marketable securities were classified as
"available-for-sale".
Realized gains and losses on sales of investments, as determined on a specific
identification basis, are included in the consolidated statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated based on
the straight-line method over the estimated useful lives of the assets, as
follows:
<Table>
Computers and software................................... 3-5 years
Office furniture and equipment........................... 3-16 years
Motor vehicles........................................... 4-7 years
</Table>
Leasehold improvements are amortized based on the straight-line method over the
shorter of the term of the lease, or the estimated useful life of the
improvements.
The Company periodically assesses the recoverability of the carrying amount of
property and equipment based on expected undiscounted cash flows. If an asset's
carrying amount is determined to be not recoverable, the Company recognizes an
impairment loss based upon the difference between the carrying amount and the
fair value of such assets, in accordance with SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144").
F-10
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTD.)
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed." Capitalization of software development costs begins upon
the establishment of technological feasibility, and continues up to the time the
software is available for general release to customers. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors including, but not limited to, anticipated future gross product
revenue, estimated economic life and changes in software and hardware
technology.
Amortization of capitalized software development costs is provided on a
product-by-product basis and begins when the product is available for general
release to customers. Annual amortization is the greater of the amount computed
using the ratio of current gross revenue for a product to the total of current
and anticipated product revenue or the straight-line basis over the remaining
economic useful life of the software, which is not more than five years.
Amortization of capitalized software development costs is reflected in cost of
software license fees.
Based upon management's periodic review of the useful lives of its various
assets, the Company's estimate of the useful life of various modules of its
capitalized software changed from 3 years to 5 years, effective April 1, 2002.
The change relates, mainly, to the software capitalized as part of the Company's
shift in focus to MPM related solutions. Management believes that this change
will more appropriately match the amortization expense of the software with the
periods in which the software will be utilized. This change in estimate resulted
in a decrease in net loss for 2002 of approximately $1.6 million and a decrease
of $0.15 per share basic and diluted for 2002.
ACQUISITION- RELATED INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Identifiable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (but with no maximum life). The Company
adopted SFAS No.142 effective January 1, 2002. As a result of SFAS No. 142 the
reclassification of an acquired assembled workforce no longer qualifies as a
separately identifiable intangible and has been reclassified as goodwill. The
adoption of SFAS No. 142 resulted in a reduction of amortization expense in the
amount of $3,672 in 2002.
A reconciliation of previously reported net loss and loss per share to the
amounts adjusted for the exclusion of goodwill amortization is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
----------- ----------- -----------
Net loss ......................................... $ (2,830) $ (13,910) $ (19,959)
Goodwill amortization ............................ -- 3,942 3,896
----------- ----------- -----------
Adjusted net income .............................. $ (2,830) $ (9,968) $ (16,063)
=========== =========== ===========
Reported basic and diluted loss per share ........ $ (0.27) $ (1.35) $ (1.95)
Goodwill amortization ............................ -- 0.38 0.38
----------- ----------- -----------
Adjusted basic and diluted loss per share ........ $ (0.27) $ (0.97) $ (1.57)
=========== =========== ===========
</Table>
F-11
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTD.)
ACQUISITION- RELATED INTANGIBLE ASSETS - (CONTD.)
Acquisition-related intangible assets result from the Company's acquisitions of
businesses accounted for under the purchase method and consist of the values of
identifiable intangible assets including developed software products, and trade
names, as well as goodwill. Goodwill is the amount by which the acquisition cost
exceeds the fair values of identifiable acquired net assets on the date of
purchase. Acquisition-related intangible assets are reported at cost, net of
accumulated amortization. Identifiable intangible assets are amortized on a
straight-line basis over their estimated useful lives of three to five years for
developed software products and seven years for trade-names.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and in accordance with FASB Interpretation No. 44. Pursuant to these
accounting pronouncements, the Company records compensation for stock options
granted to employees over the vesting period of the options based on the
difference, if any, between the exercise price of the options and the market
price of the underlying shares at that date. Deferred compensation is amortized
to compensation expense over the vesting period of the options.
Had compensation cost for the Company's option plans been determined on the
basis of the fair value at the grant dates in accordance with the provisions of
SFAS No. 123 "Accounting for Stock-Based Compensation," as amended by SFAS No.
148, the Company's pro forma net loss and pro forma basic and diluted net loss
per share would have been as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
--------- --------- ----------
Pro forma net loss:
Net loss for the year, as reported ...................... $ (2,830) $ (13,910) $ (19,959)
Deduct - stock-based compensation determined under APB 25 -- -- --
Add - stock-based compensation determined under SFAS 123 . 5,452 5,975 6,919
--------- --------- ----------
$ (8,282) $ (19,885) $ (26,878)
========= ========= ==========
PRO FORMA LOSS PER SHARE BASIC AND DILUTED
As reported ............................................. $ (0.27) $ (1.35) $ (1.95)
Pro forma ............................................... $ (0.78) $ (1.92) $ (2.63)
========= ========= ==========
</Table>
DATA IN RESPECT OF THE STOCK OPTION PLANS
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes optionpricing model with the following assumptions used for
grants in 2002, 2001 and 2000: a dividend yield of 0.0% for all periods;
weighted average expected volatility of 70% in 2002, 72% in 2001 and 73% in
2000; weighted average risk-free interest rates of 3.6% in 2002, 4.7% in 2001
and 6.5% in 2000; and weighted average expected lives of 5 years for options
granted in 2002 and 2001 and 2000. The expected life of the options is based on
the assumption that employees will exercise the options at an average of 6
months after the end of the vesting period and the expected forfeiture rate is
based on management's best estimate of 5%.
Because additional option grants are expected to be made each year, and due to
the factors described in the preceding paragraph, the above proforma disclosures
are not necessarily representative of proforma effects of reported net income
for future years.
F-12
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (contd.)
REVENUE RECOGNITION
The Company recognizes revenues in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position 97-2, Software
Revenue Recognition, as amended.
Revenues from software license fees are recognized when persuasive evidence of
an arrangement exists, the software product covered by written agreement or a
purchase order signed by the customer has been delivered, the license fees are
fixed and determinable and collection of the license fees is considered
probable. The Company's products generally do not require significant
customization. Revenues from software product license agreements, which require
significant customization and modification of the software product are deferred
and recognized using the percentage-of-completion method. When software
arrangements involve multiple elements the Company allocates revenue to each
element based on the relative fair values of the elements. The Company's
determination of fair value of each element in multiple element arrangements is
based on vendor-specific objective evidence ("VSOE"). The Company limits its
assessment of VSOE for each element to the price charged when the same element
is sold separately.
Service revenues include consulting services, post-contract customer support and
training. Consulting revenues are generally recognized on a time and material
basis. However, revenues from certain fixed-price contracts are recognized on
the percentage of completion basis. Software maintenance agreements provide
technical support and the right to unspecified upgrades on an
if-and-when-available basis. Post-contract customer support revenues are
recognized ratably over the term of the support period (generally one year) and
training and other service revenues are recognized as the related services are
provided.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs (net of third-party grants) that are not
capitalized to software and development costs are expensed as incurred. The
Company has no obligation to repay the grants if sufficient sales are not
generated.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts has been made on the basis of specific
accounts receivable.
DEFERRED 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, in
accordance with SFAS No. 109.
PROVISION FOR WARRANTY
The Company warrants its products in certain countries in Europe. The warranty
period is generally up to six months. The Company provides for estimated
warranty costs, based on its past experience. As of December 31, 2002 and 2001,
the provision for warranty cost is immaterial.
EARNINGS (LOSS) PER ORDINARY SHARE
Basic and diluted net earnings (loss) per share have been computed in accordance
with SFAS No. 128 using the weighted average number of ordinary shares
outstanding. Basic earnings (loss) per share exclude any dilutive effect of
options, warrants and convertible securities. Diluted earnings per share give
effect to all potential dilutive issuances of ordinary shares that were
outstanding during the period. A total of 558,179, 428,683 and 670,963
incremental shares were excluded from the calculation of diluted net loss per
ordinary share for 2002, 2001 and 2000 respectively due to the anti-dilutive
effect.
5 1/4% convertible subordinated notes at a conversion price of $ 42.39 per
share were not included in the calculation of diluted earnings per ordinary
share, because the effect would have been anti-dilutive.
F-13
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTD.)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) has been reported in the statement of changes in
shareholders' equity, in accordance with SFAS No. 130, "Reporting Comprehensive
Income."
DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities and SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities (collectively referred to
as SFAS 133). The Company's initial adoption of SFAS 133 did not have a
significant impact on the equity of the Company.
A derivative is typically defined as an instrument whose value is "derived" from
an underlying instrument, index or rate, has a notional amount, requires no or
little initial investment and can be net settled. Derivatives include, but are
not limited to, the following types of investments: interest rate swaps,
interest rate caps and floors, put and call options, warrants, futures, forwards
and commitments to purchase securities and combinations of the foregoing.
Derivatives embedded within non-derivative instruments (such as call options
embedded in convertible bonds) must be bifurcated from the host instrument and
accounted for in accordance with SFAS 133 when the embedded derivative is not
clearly and closely related to the host instrument. In addition, non-investment
instruments, including certain types of insurance contracts that have
historically not been considered derivatives, may be derivatives or contain
embedded derivatives under SFAS 133.
SFAS 133 requires that all derivatives be recorded in the balance sheet at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge of exposures to changes in fair value, cash flows or
foreign currency exchange rates. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the nature of any
hedge designation thereon.
RISK MANAGEMENT POLICY - Foreign exchange rate risk arises from the possibility
that changes in foreign currency exchange rates will impact the fair value or
the cash flows of financial instruments denominated in a foreign currency. The
Company uses derivatives in the normal course of business, primarily to reduce
its exposure to foreign currency risk stemming from various assets, liabilities
and cash flows. Principally, the Company uses currency forwards and options as
hedging instruments to hedge the impact of the variability in exchange rates on
accounts receivable and future cash flows denominated in certain foreign
currencies.
ACCOUNTING POLICY - Although such contracts may qualify as cash flow hedges or
fair value hedges the Company did not designate them as hedges against specific
assets or liabilities.
DERIVATIVES CREDIT RISK - Counter parties to currency exchange forward contracts
are major financial institutions with credit ratings of investment grade or
better and no collateral is required. There are no significant risk
concentrations. Management believes the risk of incurring losses on derivative
contracts related to credit risk, if any, is remote and any losses would be
immaterial.
As of December 31, 2002, the Company had options contracts to sell up to $4,254
for a total amount of NIS 19,950 that matures until March 31, 2003
F-14
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTD.)
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements SFAS
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." SFAS No. 145 will impact how companies account for sale-leaseback
transactions and how gains or losses on debt extinguishments are presented in
financial statements. SFAS No. 145 is effective for fiscal years beginning after
May 15, 2002, early application is encouraged. Under the provisions of SFAS No.
4, gains and losses associated with extinguishments of debts were reclassified
as extraordinary item. SFAS No. 145 provides that gains and losses associated
with extinguishments of debts will be classified as extraordinary item only if
they meet the criteria of APB Opinion No. 30. The Company adopted SFAS No. 145
effective January 1, 2002 and reclassified gains from repurchase of its
convertible notes of approximately $599, $1,393 and $0, into financial expenses
(income) for the years ended December 31, 2002, 2001 and 2000, respectively, to
comply with this guidance.
In July 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 requires that a liability for costs
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The application of the requirements of SFAS No. 146 will not have a
material impact on the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material impact on
the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation--Transition and Disclosure--as Amendment to FAS 123." SFAS 148
provides two additional transition methods for entities that adopt the
preferable method of accounting for stock based compensation. Further, the
statement requires disclosure of comparable information for all companies
regardless of whether, when, or how an entity adopts the preferable, fair value
based method of accounting. These disclosures are now required for interim
periods in addition to the traditional annual disclosure. The amendments to SFAS
No. 123, which provides for additional transition methods, are effective for
periods beginning after December 15, 2002, although earlier application is
permitted. The amendments to the disclosure requirements are required for
financial statements for fiscal years ending after December 15, 2002 and for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002.
RECLASSIFICATION
Certain figures from prior years have been reclassified in order to conform to
the 2002 presentation.
F-15
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3 - SIGNIFICANT ACQUISITIONS
a. ACQUISITION OF CIMBRIDGE SOFTWARE BUSINESS
In October 2002 Tecnomatix Unicam, Inc. ("TUI"), a wholly owned subsidiary
of the Company, acquired certain assets and assumed certain liabilities
relating to the CIMBridge software business ("CIMBridge") from Teradyne,
Inc. and GenRad, Inc., its wholly owned subsidiary (together, "Teradyne").
The transaction was accounted for in accordance with SFAS No.141 and SFAS
No.142, and the financial results of CIMBridge have been included in the
Company's financial statements beginning on the acquisition date. Under
the agreement signed between the parties, TUI will pay to Teradyne a
purchase price on a contingent and deferred basis that equals the
difference between the Gross Purchase Price (as defined below) and $514.
The Gross Purchase Price is comprised of certain percentages of revenue
which will be recognized by TUI during a four-year period ending October
9, 2006 as follows: (i) 40% of the revenue recognized by TUI from
licensing of the software; (ii) 40% of the revenue recognized by TUI from
maintenance fees in excess of annual thresholds amounting to $1,800,
$1,700, $1,500, and $1,400 for the years ending September 30, 2003, 2004,
2005, and 2006, respectively; and (iii) a finders fee on concluded and
collected software license revenue and maintenance fees based on referred
leads by Teradyne.
The purchase price has been allocated on the basis of the estimated fair
value of the assets acquired and the liabilities assumed. The excess of
the purchase price over the fair value of the net tangible assets acquired
has been attributed to goodwill.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition:
<Table>
Equipment............................ $ 137
Deposits............................. 18
Goodwill............................. 1,120
----------
Total assets......................... $ 1,275
==========
Liabilities assumed.................. 721
Deferred revenue..................... 443
Acquisition costs.................... 111
----------
Total liabilities assumed............ $ 1,275
==========
</Table>
F-16
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3 - SIGNIFICANT ACQUISITIONS (CONTD.)
b. ACQUISITION OF FABMASTER S.A. ("FABMASTER")
In February 2000, the Company acquired all of the outstanding shares of
Fabmaster, at that time, a publicly traded software company based in
France, for $ 16,510. The acquisition was accounted for as a purchase, and
the financial results of Fabmaster have been included in the Company's
financial statements beginning on the acquisition date.
The purchase price totalling $ 16,510 (including transaction costs
totalling $ 1,310) has been allocated on the basis of the estimated fair
value of the assets acquired and the liabilities assumed.
Values assigned to acquired in-process research and development, and
developed software products were determined using a discounted cash flow
analysis. To determine the value of the in-process research and
development, the Company considered, among other factors, the state of
development of each project, the time and cost needed to complete each
project, expected income, and associated risks, which included the
inherent difficulties and uncertainties in completing the project and
thereby achieving technological feasibility and risks related to the
viability of and potential changes to future target markets. This analysis
resulted in amounts assigned to in-process research and development
projects that had not reached technological feasibility or did not have
alternative future uses. To determine the value of the developed software
products, the expected future cash flows of the existing technology
product were discounted taking into account risks related to the
characteristics and applications of each product, existing and future
markets, and assessments of the life cycle stage of each product. Based on
this analysis, the existing technology that had reached technological
feasibility was capitalized.
The purchase price was allocated to developed technology, core technology,
established work-force and goodwill of $ 2,361, $ 1,964, $ 233 and $
4,205, respectively. These intangible assets are being amortized over the
estimated useful life of three years for developed and core technology and
established work-force and seven years for goodwill. Acquired-in-process
technology has been valued using the income approach, resulting in a
charge of $ 5,250.
The allocation of fair value is as follows:
<Table>
Current assets............................ $ 4,741
Property and equipment.................... 276
Current liabilities....................... (2,520)
In-process research and development....... 5,250
Intangible assets......................... 8,763
---------
Total purchase price...................... $ 16,510
=========
</Table>
The following unaudited pro forma summary presents information as if the
acquisition of Fabmaster occurred at the beginning of the periods
presented. In-process research and development charges are considered
nonrecurring charges related directly to the acquisition and have
therefore been excluded from pro forma net income and pro forma earnings
per share. The pro forma information, which is provided for information
purposes only, is based on historical information and does not necessarily
reflect the results that would have occurred, nor is it necessarily
indicative of future results of operations of the consolidated entities.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------
2 0 0 0
-------
Revenues.................................. $ 89,297
Net income (loss)......................... $ (21,227)
Earnings (loss) per share:
Basic.................................... $ (2.08)
Diluted.................................. $ (2.08)
</Table>
F-17
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 4 - SHORT-TERM INVESTMENTS
Comprised as follows:
<Table>
<Caption>
DECEMBER 31,
---------------------
2 0 0 2 2 0 0 1
--------- ---------
Marketable securities:
Available for sale - Government of Israel bonds..... $ -- $ 4,051
Available for sale - corporate bonds................ -- 25,464
Trading - corporate bonds........................... 5,981 --
--------- ---------
$ 5,981 $ 29,515
========= =========
</Table>
NOTE 5 - LONG-TERM INVESTMENTS
<Table>
<Caption>
DECEMBER 31,
---------------------
2 0 0 2 2 0 0 1
--------- ---------
Held to maturity marketable securities:
Government of Israel bonds......................... $ 2,766 $ --
Corporate bonds.................................... 22,706 --
--------- ---------
25,472 --
========= =========
Visopt B.V.......................................... -- 457
--------- ---------
$ 25,472 $ 457
========= =========
</Table>
Aggregate maturities of marketable securities are as follows:
<Table>
<Caption>
DECEMBER 31,
------------
2 0 0 2
-------
Within one year................... $ 1,106
One to five years................. 22,756
Six to ten years.................. 1,610
------------
$ 25,472
============
</Table>
In October 2001, the Company purchased 10% of the shares of Visopt B.V., a
privately-held Dutch company, for a total amount of $457. In December 2002, the
Company reviewed its investment in Visopt B.V. Due to Visopt's failure to
generate any revenues from its products, failure to raise additional funding and
laying-off most of its employees the Company resolved to write-off its entire
investment.
F-18
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6 - PROPERTY AND EQUIPMENT
Comprised as follows:
<Table>
<Caption>
DECEMBER 31,
2 0 0 2 2 0 0 1
--------- --------
Cost
Computers and software ............................ $ 21,551 $ 19,819
Office furniture and equipment .................... 4,888 4,272
Motor vehicles .................................... 519 617
Leasehold improvements ............................ 2,245 1,796
--------- --------
$ 29,203 $ 26,504
========= ========
Accumulated depreciation:
Computers and software ............................ $ 18,265 $ 15,337
Office furniture and equipment .................... 3,096 2,408
Motor vehicles .................................... 312 291
Leasehold improvement.............................s 1,422 1,109
--------- --------
$ 23,095 $ 19,145
========= ========
</Table>
NOTE 7 - ACQUIRED INTANGIBLES, NET
Comprised as follows:
<Table>
<Caption>
DECEMBER 31,
2 0 0 2 2 0 0 1
-------- --------
Cost:
Goodwill ........................................... $ 28,236 $ 26,363
Developed software products ........................ 12,053 12,053
Trade name ......................................... 283 283
Distribution rights ................................ 224 --
-------- --------
$ 40,796 $ 38,699
-------- --------
Accumulated amortization:
Goodwill ........................................... $ 11,026 $ 10,954
Developed software products ........................ 12,053 9,971
Trade name ......................................... 283 170
Distribution rights ................................ 224 --
-------- --------
23,586 21,095
-------- --------
$ 17,210 $ 17,604
======== ========
</Table>
F-19
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 8 - OTHER ASSETS, NET
Comprised as follows:
<Table>
<Caption>
DECEMBER 31,
2 0 0 2 2 0 0 1
--------- ---------
Cost:
Software development costs .............................. $ 42,552 $ 38,455
Deferred financing costs relating to the issuance of
5 1/4% convertible subordinated notes .................. 1,188 1,389
Other ................................................... 1,625 1,073
--------- ---------
$ 45,365 $ 40,917
--------- ---------
Accumulated amortization:
Software development costs .............................. $ 27,613 $ 23,537
Deferred financing costs relating to the issuance of
5 1/4% convertible subordinated notes ................... 912 869
Other ................................................... 227 60
--------- ---------
28,752 24,466
--------- ---------
$ 16,613 $ 16,451
========= =========
</Table>
NOTE 9 - 5 1/4% CONVERTIBLE SUBORDINATED NOTES
On August 12, 1997, the Company issued to the public an aggregate amount of
$97,750 convertible subordinated notes (the "Notes"). The related issuance
expenses of $ 3,104 were recorded as deferred expenses and are amortized using
the straight-line method over the life of the Notes.
The Notes bear interest at 5 1/4% per annum, payable semi-annually and mature on
August 15, 2004.
The Notes are convertible into ordinary shares of the Company at any time at or
before maturity, unless previously redeemed, at a conversion price of $ 42.39
per share, subject to adjustment in certain events.
The Company may, at its option, redeem the Notes on or after August 18, 2000, in
whole or in part, at the following redemption prices (expressed as percentages
of the principal amount) plus accrued interest until the redemption date. If
redeemed during the 12-month period beginning August 15 in the year indicated,
the redemption price shall be:
<Table>
<Caption>
YEAR REDEMPTION PRICE
---- ----------------
2001...................... 102.25%
2002...................... 101.50%
2003...................... 100.75%
</Table>
During 2002 and 2001 the Company repurchased aggregate amounts of $ 6,337, and
$5,485 respectively, of the Notes. As a result of the repurchase, the Company
realized a gain of $599 and $ 1,393 in 2002 and 2001 respectively. The
outstanding balance of the Notes as of December 31, 2002 was $ 37,428.
NOTE 10 - ACCRUED SEVERANCE PAY, NET
The majority of the Company's liability for severance pay is calculated in
accordance with the Israeli law based on the most recent salary paid to
employees and the length of employment with the Company. The Company's liability
for severance pay is fully provided for. Part of the liability is funded through
individual insurance policies purchased from outside insurance companies, which
are not under the Company's control.
The aggregate value of the insurance policies as of December 31, 2002 and 2001
was $ 1,504 and $ 1,152, respectively.
Severance pay expenses for the years ended December 31, 2002, 2001 and 2000 were
$ 561, $ 683 and $ 1,171, respectively.
The Company has no liability for pension expenses to its employees.
F-20
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
ROYALTIES
1. The Company is committed to pay royalties to the office of the Chief
Scientist of the Israeli Ministry of Commerce and Trade on proceeds from
sales of products in the research and development of which the Chief
Scientist has participated by way of grants, up to the amount of 100%-150%
of the grants received (in dollar terms) (from 1999 - up to the amount of
100% of the grants received plus interest at LIBOR). The royalties are
payable at a rate of 3% for the first three years of product sales and
3.5% thereafter. The total amount of grants received, net of royalties
paid or accrued, at December 31, 2002 was $ 12,214. Royalty expenses to
the Chief Scientist in 2002, 2001 and 2000 were $ 1,627, $ 1,504, and $
1,543, respectively.
The research and development grants are presented in the statements of
operations as an offset to research and development costs.
The refund of the grant is contingent on future sales and the Company has
no obligation to refund these grants, if sufficient sales are not
generated.
2. The Company and its subsidiaries are obligated to pay royalties to certain
parties, based on agreements which allow the Company to incorporate their
products into the Company's products. Royalty expenses to these parties in
2002, 2001 and 2000 were $ 1,070, $ 488 and $ 350, respectively.
LEASE COMMITMENTS
1. The premises of the Company are leased on a monthly basis. The annual rent
of the Company's facility is approximately $460, of which approximately
31% is linked to the changes in the Israeli Consumer Price Index ("CPI").
The premises of the Company's subsidiaries are leased under various
operating lease agreements which expire on various dates. Future aggregate
minimum annual rental payments, pursuant to existing lease commitments in
effect at December 31, 2002, are as follows:
<Table>
Year ended December 31,
2003...................... $ 3,283
2004...................... 2,851
2005...................... 1,527
2006...................... 678
2007 and thereafter....... 616
-------
Total..................... $ 8,955
=======
</Table>
2. The Company leases its motor vehicles under cancelable operating lease
agreements for periods through 2003. The minimum payment under these
operating leases, upon cancellation of these lease agreements, amounted to
$ 128 as of December 31, 2002.
Lease expenses for the years ended December 31, 2002, 2001 and 2000 were $
623, $ 211 and $ 631, respectively.
F-21
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES (contd.)
FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents, short-term
investments and long-term investments, totaling $ 41,919 and $ 51,185 as of
December 31, 2002 and 2001, respectively, and accounts receivable. The Company's
cash and cash equivalents and short-term investments are invested in deposits
with major banks in the U.S., Europe and Israel. Management believes that the
financial institutions holding the Company's cash and cash equivalents are
financially sound. In addition, the marketable securities held by the Company
consist mainly of debt securities of the Government of Israel and highly-rated
corporate bonds. The accounts receivable are derived from sales to a large
number of customers, mainly large industrial corporations and their suppliers
located mainly in Europe, the United States and the Asia. The Company generally
does not require collateral. The Company performs ongoing credit evaluations of
its customers and maintains an allowance for doubtful accounts which management
believes adequately covers all anticipated losses in respect of trade
receivables.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Company consist mainly of cash and cash
equivalents, short-term investments, current and non-current accounts
receivable, accounts payable 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 amounts.
TRANSACTIONS WITH RELATED PARTIES
The Company is party to a management service agreement with A.T.L. Management
Services Ltd ("A.T.L."), a related party, which provides for the payment to
A.T.L. of an annual management fee of $ 400 and reimbursement of expenses in
consideration for strategic management and business and financial consulting
services, on a basis which the Company believes represents fair value.
SALE OF TRADE RECEIVABLES
The Company entered into a factoring agreement with a financial institution
under which the Company may sell its account receivables subject to the
financial institution inspection and acceptance. The financial institution is
responsible for collecting the receivables with no recourse to the Company. Upon
completion of the sale the financial institution remits all or part the funds to
the Company, less dicount and service fees. At the consummation the receivable
is derecognized from the Company's records. During 2002 the Company sold
receivables in the amount of $ 1,071 and incurred related expenses in the amount
of $ 32.
CROSS LICENSING AND MARKETING AGREEMENT WITH EDS.
In July 2002 the Company entered into a strategic alliance with Unigraphics
Solutions, Inc. ("UGS"), a wholly-owned subsidiary of Electronics Data Systems,
Inc. ("EDS"), a leading global information technologies service provider engaged
in the development, selling and marketing of Product Lifecycle Management
("PLM") solutions.
The Cross Licensing and Marketing Agreement (the "Agreement") signed between the
Company and UGS establishes a joint development strategy, as well as cooperative
marketing and distribution rights. Under the Agreement, UGS and the Company will
share revenues for all sales of the Company's MPM products and UGS planner
product made by UGS and its distributors. In large strategic accounts where both
UGS and the Company are currently engaged, selling will be done jointly. In all
other UGS accounts, UGS will sell independently of the Company and provide all
pre-sales, professional service and hot-line support. In non-UGS accounts, the
Company will continue to sell directly to its customers as is currently
practiced. In order to provide UGS with an additional incentive to sub-license
the Company's products and to perform its obligations under the Agreement, UGS
will be entitled to a warrant to purchase the Company's Ordinary Shares based on
the achievement of certain revenue goals under the Agreement.
F-22
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 12 - SHAREHOLDERS' EQUITY
SHARE CAPITAL
1. The Company's shares are traded in the United States and are listed on the
Nasdaq National Market.
2. Loans granted to purchase shares
The balance at December 31, 2002 represents loans granted to the Chairman
and Chief Executive Officer ("CEO") of the Company in October 1998 and
July 1999 with respect to the exercise of options to purchase the
Company's shares. The loans are in dollars, bear interest at 6.8% per
annum and were due on December 31, 2002. The loans were granted in
consideration of recourse notes.
As of January 1, 2003 the Company repurchased 110,000 of its shares from
the Chairman and CEO for a total amount of $844 representing a price per
share of $7.67, equal to the average closing price of the ordinary shares
as quoted on the Nasdaq National Market during the three-month period
prior to the date of the repurchase. The consideration was used to offset
the outstanding balance of the loan. In addition, the CEO repaid $300 of
the outstanding amount of these loans. This repayment was funded by using
the net proceeds of a compensatory retention bonus in the gross amount of
$300 paid to the CEO in connection with his commitment to continue serving
the Company as either CEO or Chairman until December 31, 2005. In the
event that the CEO and Chairman terminates his service for the Company, he
shall be required to return to the Company one third of the compensatory
retention bonus for each year in which he failed to provide a full year of
service. Subsequent to the above-mentioned transactions, the outstanding
balance of the loans was $14.
EMPLOYEE SHARE PURCHASE PLAN
In December 2000, the Company adopted the Tecnomatix Technologies Ltd. 2000
Employee Share Purchase Plan ("the Share Purchase Plan"), pursuant to which the
Company's employees may purchase up to 500,000 ordinary shares. Every six
months, each employee is entitled to purchase ordinary shares for an amount up
to 10% of his gross salary at that period, but not more than 750 ordinary
shares. The purchase price under the Share Purchase Plan is the lower of 85% of
the fair market value of an ordinary share at the beginning of such six-month
period or 85% of the fair market value at the end of such six-month period. As
of December 31, 2002, 350,358 shares have been purchased under the Share
Purchase Plan.
STOCK OPTION PLANS
As of December 31, 2002, the Company had the following employees' and directors'
stock option plans:
1996 PLAN
Under the 1996 Stock Option Plan (the "1996 Plan") for employees of the Company,
options to purchase up to 3,840,706 shares of the Company may be granted at an
exercise price equal to the fair market value of the share at the date of the
grant. The options granted vest at a rate of 40%, 30% and 30% after two, three
and four years, respectively, from the date of the grant, or in four equal
annual installments, commencing one year from the date of grant. Under the 1996
Plan, options will expire ten years from the date of the grant.
As of December 31, 2002, options to purchase 3,438,300 shares were outstanding
with exercise prices ranging from $ 4.75 to $ 40.375 per share.
DIRECTORS PLAN
Under the 1996 Directors' Stock Option Plan (the "Directors Plan") for directors
of the Company, options to purchase up to 404,000 shares of the Company may be
granted at an exercise price equal to the fair market value of the share at the
date of the grant. The options granted are exercisable in five equal annual
installments, commencing two years from the date of the grant. Under the
Directors Plan, options will expire on the earlier of the termination of the
service of the director or the tenth anniversary of the date of grant. As of
December 31, 2002 options to purchase 256,000 shares were outstanding with an
exercise price of $ 18.375 per share.
2003 PLAN
In December 2002 the Company's Board of Directors approved the adoption of the
Tecnomatix Technologies Ltd. 2003 Global Share Option Plan (the "2003 Plan").
Under the 2003 Plan options to purchase up to 430,000 shares of the Company may
be granted. Officers, directors, employees and consultants of the Company are
eligible to participate in the 2003 Plan. No options were granted under the 2003
Plan during 2002.
F-23
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 12 - SHAREHOLDERS' EQUITY (CONTD.)
STOCK OPTION PLANS (CONTD.)
A summary of the status of the Company's stock option plans as of December 31,
2002, 2001 and 2000 and changes during the years then ended, is presented below:
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
----------------------- ------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ----------- ---------- ------------ ----------
Options outstanding at
beginning of year 4,204,422 $ 12.16 3,330,231 $ 13.61 2,859,675 $ 14.74
Granted during year 237,200 $ 8.46 1,297,900 $ 8.76 1,599,950 $ 11.14
Exercised during year (69,700) $ 6.52 (20,056) $ 9.41 (334,832) $ 11.60
Forfeited during year (477,005) $ 11.09 (403,653) $ 13.35 (794,562) $ 13.53
---------- ----------- ------------
Outstanding at
end of year 3,894,917 $ 12.16 4,204,422 $ 12.16 3,330,231 $ 13.61
========== =========== ============
Options exercisable
at year-end 1,969,965 $ 13.80 1,233,970 $ 14.64 570,001 $ 15.68
========== =========== ============
Weighted average fair
value of options granted
during the year $ 5.14 $ 4.25 $ 5.49
========== =========== ============
</Table>
The following table summarizes information relating to stock options outstanding
at December 31, 2002:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------- ----------------------------
WEIGHTED
NUMBER OF SHARES AVERAGE WEIGHTED NUMBER OF SHARES WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 2002 LIFE (IN YEARS) PRICE 2002 PRICE
- ---------------- ---------------- --------------- ---------- ---------------- --------
$ 4 - 7.75 1,192,025 8.21 $ 5.989 390,375 $ 5.61
$ 9 - 11.563 583,575 6.40 $ 10.017 392,575 $ 10.56
$ 12 - 13.813 1,342,667 7.32 $ 13.039 587,084 $ 13.22
$ 14 - 18.375 181,250 4.85 $ 17.438 150,050 $ 18.04
$ 20.375 - 25.75 547,900 6.47 $ 21.536 417,381 $ 21.73
$ 28.75 - 40.75 47,500 7.67 $ 40.375 32,500 $ 40.38
---------------- ----------------
$ 4 - 40.75 3,894,917 7.23 $ 12.162 1,969,965 $ 13.80
================ ================
</Table>
F-24
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 13 - TAXES ON INCOME
TAXATION UNDER VARIOUS LAWS
1. The Company and its subsidiaries are assessed for tax purposes on an
unconsolidated basis. The Company and its Israeli subsidiaries are
assessed under the provisions of the Income Tax Law (Inflationary
Adjustments), 1985, pursuant to which the results for tax purposes are
measured in Israeli currency in real terms in accordance with changes in
the Israeli CPI. Each of the subsidiaries is subject to the tax rules
prevailing in the country of incorporation.
2. "APPROVED ENTERPRISE"
The production facilities of the Company in Israel have been granted
"approved enterprise" status in eleven separate programs under the Law for
the Encouragement of Capital Investments, 1959, as amended. Under this
law, income attributable to each of these enterprises is fully exempt from
tax for either two or four years, commencing the first year in which each
enterprise generates taxable income and is entitled to a reduced tax rate
of 15% for a further eight or six years, respectively. The expiration date
of the period of benefits is limited to the earlier of twelve years from
commencement of production or fourteen years from the date of the
approval. Through December 31, 2002, the period of benefits of eight
enterprises has commenced.
In the event of a distribution of cash dividends to shareholders of
earnings subject to the exemption, the Company will be liable to tax at a
rate of 15%. The Company has not provided deferred taxes on future
distributions of tax-exempt earnings, as management and the Board of
Directors have determined not to make any distribution that may result in
a tax liability for the Company. Accordingly, such earnings have been
considered to be permanently reinvested. The tax-exempt earnings may be
distributed to shareholders without subjecting the Company to taxes only
upon a complete liquidation of the Company.
As of December 31, 2002, the aggregate amount of undistributed tax-exempt
earnings for which deferred taxes had not been provided was $ 14,093 and
the amount of unrecognized deferred taxes in respect of such earnings
amounted to $ 2,114.
Income derived from sources other than the "approved enterprises" is
taxable at the regular corporate tax rate of 36%.
3. "INDUSTRIAL COMPANY"
The Company and one of its Israeli subsidiaries are "industrial companies"
as defined in the Law for the Encouragement of Industry (Taxes), 1969, and
as such, are entitled to certain tax benefits, mainly the right to claim
public issuance expenses and the amortization of patents and other
intangible property rights as a deduction for tax purposes.
COMPOSITION OF INCOME TAX BENEFIT (PROVISION):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
--------- --------- ---------
Loss before taxes on income:
Israel.................................. $ (6,325) $ (3,030) $ 159
Non-Israeli (*)......................... 3,778 (10,294) (19,484)
--------- --------- ---------
(2,547) (13,324) (19,325)
========= ========= =========
Income tax benefit (provision):
Current:
Israel.................................. (90) 198 89
Non-Israeli............................. 548 (65) (308)
--------- --------- ---------
458 133 (219)
--------- --------- ---------
Deferred:
Israel.................................. - (26) (386)
Non-Israeli............................. (310) (161) 100
--------- --------- ---------
(310) (187) (286)
--------- --------- ---------
$ 148 $ (54) $ (505)
========= ========= =========
</Table>
(*) Including an acquired in-process research and development charge of
$ 5,250 in 2000 (see Note 3b).
F-25
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 13 - TAXES ON INCOME (contd.)
DEFERRED TAXES
The main components of the Company's deferred tax assets and liabilities are as
follows:
<Table>
<Caption>
DECEMBER 31,
---------------------
2 0 0 2 2 0 0 1
--------- ---------
Deferred tax assets:
Technology assets of non-Israeli subsidiaries........ $ 2,146 $ 2,088
Reserves and accruals not currently deductible....... 732 829
Credit carryforwards................................. 3,034 2,694
Deferred revenue..................................... 673 532
Net operating loss carryforwards
of non-Israeli subsidiaries......................... 12,502 13,734
Net operating loss carryforwards in Israel............ - 168
--------- ---------
19,087 20,045
Less - valuation allowance............................ 16,544 17,269
--------- ---------
2,543 2,776
--------- ---------
Deferred tax liabilities:
Software development costs........................... (3,188) (3,181)
Fixed assets and intangible assets................... (215) (171)
--------- ---------
(3,403) (3,352)
--------- ---------
Net deferred tax liabilities......................... $ (860) $ (576)
========= =========
</Table>
Under Statement No. 109 of the FASB, deferred tax assets are to be recognized
for the anticipated tax benefits associated with net operating loss
carryforwards and deductible temporary differences, unless it is more likely
than not that some or all of the deferred tax asset will not be realized. The
adjustment is made by a valuation allowance.
Since the realization of the net operating loss carryforwards and deductible
temporary differences of some of the non-Israeli subsidiaries is less likely
than not, a valuation allowance has been established for the amounts of the
related tax benefits.
Tax loss carryforwards of a U.S. subsidiary totalling $ 17,044 expires between
2018 and 2020.
The following is a reconciliation of the theoretical taxes on income assuming
that all income is taxed at the ordinary rate applicable to Israeli companies
and the actual taxes on income:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
--------- --------- ---------
Income (loss) before taxes on income................. $ (2,547) $ (13,324) $ (19,325)
========= ========= =========
Theoretical tax on the above amount.................. $ (917) $ (4,797) $ (6,957)
Tax benefit arising from "approved enterprise"....... 1,981 186 1,033
Increase (decrease) in valuation allowance........... (725) 5,056 5,129
Carryback of net operating losses of subsidiary...... (636) -- --
In-process research and development................. -- -- 1,838
Other............................................... 149 (391) (538)
--------- --------- ---------
$ (148) $ 54 $ 505
========= ========= =========
</Table>
TAX ASSESSMENTS
The Company and its Israeli subsidiaries received final tax assessments through
the tax year ended December 31, 1999. Certain subsidiaries of the Company in
Europe received tax assessments through the tax year ended December 31, 1999.
F-26
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 14 - TRANSACTIONS WITH RELATED PARTIES
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
--------- --------- ---------
Management fees to related parties............... $ 400 $ 400 $ 401
General and administrative expenses, net......... $ (21) $ (161) $ (88)
Interest income, net............................. -- -- $ 19
</Table>
NOTE 15 - SUPPLEMENTARY BALANCE SHEET INFORMATION
OTHER RECEIVABLES AND PREPAID EXPENSES
<Table>
<Caption>
DECEMBER 31,
---------------------
2 0 0 2 2 0 0 1
--------- ---------
Research and development participation from
the Government of Israel........................ $ 1,056 $ 873
Interest receivable.............................. 623 718
Employees........................................ 135 280
Advances to suppliers............................ 106 287
Prepaid expenses................................. 2,117 2,459
Others........................................... 1,175 1,371
--------- ---------
$ 5,212 $ 5,988
========= =========
</Table>
NON-CURRENT RECEIVABLES
<Table>
<Caption>
DECEMBER 31,
---------------------
2 0 0 2 2 0 0 1
--------- ---------
Deposits......................................... $ 844 $ 736
Employees........................................ 62 64
Other............................................ 9 8
--------- ---------
$ 915 $ 808
========= =========
</Table>
SHORT-TERM LOANS
<Table>
<Caption>
RATE OF
INTEREST DECEMBER 31,
--------- ---------------------
% 2 0 0 2 2 0 0 1
--------- --------- ---------
In Japanese yen.................................. 1.9 $ - $ 687
========= =========
</Table>
F-27
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 15 - SUPPLEMENTARY BALANCE SHEET INFORMATION (CONTD.)
OTHER PAYABLES AND ACCRUED EXPENSES
<Table>
<Caption>
DECEMBER 31,
---------------------
2 0 0 2 2 0 0 1
--------- ---------
Payroll and related amounts...................... $ 7,915 $ 7,859
Accrued expenses................................. 4,107 4,139
Interest payable................................. 737 862
Advances from customers.......................... 212 192
Value added tax.................................. 792 1,093
Income tax authorities........................... 206 350
Deferred income taxes............................ 860 576
Others........................................... 127 143
--------- ---------
$ 14,956 $ 15,214
========= =========
</Table>
ALLOWANCE FOR LOSSES OF AFFILIATED COMPANY
In the end of 2000, the Company and Zuken Inc., a company based in Japan,
established a joint venture in Japan, Zuken-Tecnomatix K.K., for the purpose of
selling and marketing the electronics software products of the Electronics
division and related services. In the framework of the joint venture agreement,
the Company invested in December 2000, 49,000 Japanese Yen (equivalent to $ 437)
in Zuken-Tecnomatix K.K. in exchange for 49% of its share capital. During 2002
and 2001, the Company recorded losses in the amount of $ 431 and $ 532,
respectively, from its share in Zuken-Tecnomatix K.K.
NOTE 16 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION.
The Company develops, sells, markets and supports MPM software tools for the
collaborative development and optimization of manufacturing processes across the
extended enterprise. The Company's products are used by world-leading
manufacturers in the automotive, aerospace, electronics and heavy equipment
industries.
The Company operates in two segments, the Mechanical division and the
Electronics division, reflecting the different nature of the products and the
manufacturing processes they address. The Mechanical division develops, sells,
markets and supports software products to the automotive, aerospace and heavy
equipment industries, and the Electronics division develops, sells, markets and
supports software products to the electronics industry.
The Company evaluates performance based on profit and loss from operations
before income taxes, interest expenses and other income. The Company does not
identify or allocate its assets by operating segments as part of the assessment
of segment performance; accordingly, assets are not reported by segment.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
--------- --------- ---------
MECHANICAL:
Revenues......................................... $ 64,670 $ 66,454 $ 63,255
========= ========= =========
Operating loss................................... $ (180) $ (1,530) $ (9,336)
========= ========= =========
ELECTRONICS:
Revenues......................................... $ 17,335 $ 20,446 $ 25,763
========= ========= =========
Operating loss................................... $ (1,568) $ (12,985) $ (11,337)
========= ========= =========
</Table>
F-28
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 16 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (CONTD.)
The following table summarizes the Company's revenues and long-lived assets, by
country. Revenue is attributed to geographic region based on the location of the
customers. Long-lived assets include property and equipment, acquired
intangibles (excluding goodwill) and capitalized software development costs and
are attributed to geographic region based on the country in which the assets are
located.
<Table>
<Caption>
REVENUES: YEAR ENDED DECEMBER 31,
---------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
--------- --------- ---------
Israel........................................... $ 37 $ 9 $ 188
U.S.A............................................ 24,781 24,809 26,689
Germany.......................................... 24,262 22,665 24,794
France........................................... 9,299 10,260 11,088
Japan............................................ 9,691 16,393 13,947
Other Asian countries............................ 3,248 2,274 2,323
Other European countries......................... 10,687 10,490 9,989
--------- --------- ---------
Total revenues.................................. $ 82,005 $ 86,900 $ 89,018
========= ========= =========
</Table>
<Table>
<Caption>
LONG-LIVED ASSETS: YEAR ENDED DECEMBER 31,
---------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
--------- --------- ---------
Israel........................................... $ 10,079 $ 12,308 $ 14,907
U.S.A............................................ 7,472 7,686 9,855
Germany.......................................... 2,903 2,503 2,061
France........................................... 571 2,006 3,457
Japan............................................ 974 726 887
Other countries.................................. 290 236 2,647
--------- --------- ---------
Total long-lived assets.......................... $ 22,289 $ 25,465 $ 33,814
========= ========= =========
</Table>
F-29
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 16 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (CONTD.)
RESEARCH AND DEVELOPMENT, NET
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
--------- --------- ---------
Gross research and development costs................. $ 23,491 $ 28,333 $ 33,030
Less- software development costs capitalized......... 4,097 5,103 7,294
Less - participation:
The Government of Israel:
Royalty-bearing grants............................. 3,071 1,974 2,776
Other grants....................................... 1,481 1,724 1,949
Non-Israeli grants................................. 30 316 263
--------- --------- ---------
Research and development, net $ 14,812 $ 19,216 $ 20,748
========= ========= =========
</Table>
RESTRUCTURING AND ASSET IMPAIRMENT
RESTRUCTURING IN 2001:
In October 2001, in light of the worldwide economic recession and the slowdown
in investments in information technologies, especially in the U.S., the
management of the Company resolved to initiate a cost reduction plan aimed at
reducing excess personnel and capacity costs, and thus the level of its
operating expenses. As a result of this plan, the Company recorded in the fourth
quarter of 2001 restructuring costs and asset impairment in the amount of $
1,843.
The reorganization plan included mainly the discharge of certain employees in
both business segments of the Company, Mechanical and Electronics. The
discharged employees were identified by name and position in advance as part of
the plan, and given termination notice during the fourth quarter of 2001.
Restructuring costs relating to such employees represent severance and benefits
expenses incurred by the Company in connection with the layoff of the employees,
and related legal consulting in connection with the layoff process.
The reduction in headcount resulted in the utilization of less office space and
office equipment in certain offices of the Company around the world.
Consequently, the Company recorded costs in connection with payments required
under lease contracts and write-off of office equipment for which no alternative
use has been found.
The Company also recorded a charge of $ 316 related to the impairment of certain
software development costs capitalized in connection with software product
included in the Electronics segment. Key factors in this write-off were lay-off
of personnel directly related to this product and abandonment of this line of
activity.
The 2001 restructuring costs are summarized in the following table:
<Table>
<Caption>
Severance benefits Excess facilities and Asset
and resulted expenses write-off of fixed assets impairment Total
--------------------- ------------------------- ---------- ------------
$ 1,121 $ 406 $ 316 $ 1,843(1)
========== ======== ======== ============
</Table>
(1) An amount of $ 764 was paid through December 31, 2001. The balance of $
689 (excluding the non-cost asset impairment and write-off of fixed
assets) was paid during 2002.
F-30
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RESTRUCTURING IN 2002:
In the fourth quarter of 2002 following the continuous worldwide economic
recession and slowdown in investments in information technologies, especially in
the Electronics industry in the U.S., management resolved to initiate an
additional cost reduction plan aimed at reducing excess personnel and capacity
costs. As a result of such plan, the Company recorded in the fourth quarter of
2002 restructuring costs of $ 651.
The restructuring plan included the discharge of certain employees mainly in the
Electronics segment. Discharged employees were identified by name and position
in advance as part of the plan, and given notice during the fourth quarter of
2002. Restructuring costs relating to such employees represent severance and
benefits expenses incurred by the Company in connection with the lay-off of the
employees, and related legal consulting expenses in connection with the lay-off
process.
The reduction in headcount resulted in utilization of less office and equipment
in certain offices of the Company around the world. Consequently, the Company
wrote-off office equipment for which no alternative use has been found.
The 2002 restructuring costs are summarized in the following table:
<Table>
<Caption>
Severance benefits
and resulted expenses Write-off of fixed assets Total
--------------------- ------------------------- ----------
$ 495 (1) $ 156 $ 651
=========== ======= ========
</Table>
(1) An amount of $ 240 was paid through December 31, 2002. The balance of $
255 is expected to be paid during 2003.
IMPAIRMENT OF SOFTWARE ACQUIRED
During 2002 the Company recorded a charge of $ 375 related to the impairment of
certain software acquired as a result of technological changes in the platform
of the Company's software products.
OPERATING EXPENSES, NET
Selling and marketing expenses include bad debt expenses of $ 1,217, $ 1,553 and
$ 1,713 for the years ended December 31, 2002, 2001 and 2000, respectively.
FINANCIAL INCOME (EXPENSES), NET
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
---------- --------- ---------
Interest income from marketable securities........... $ 1,889 $ 1,726 $ 3,402
Interest expenses and bank fees...................... (160) (118) (492)
Amortization of deferred issuance costs.............. (192) (226) (223)
Interest expenses on convertible notes............... (2,201) (2,466) (2,534)
Gain from repurchase of convertible notes............ 599 1,393 --
(Loss) gain from realization and devaluation of
marketable securities.............................. (153) 933 778
(Loss) gain on foreign currency transactions, net.... (217) 872 518
Exchange rates differences, net...................... (364) (923) (101)
---------- --------- ---------
$ (799) $ 1,191 $ 1,348
========== ========= =========
</Table>
F-31
<Page>
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SCHEDULE VIII
TECNOMATIX TECHNOLOGIES LTD.
VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
---------- --------- ---------
Allowance for doubtful accounts at beginning of year.. $ 2,000 $ 2,617 $ 869
Acquisition of Fabmaster.............................. -- -- 124
Provision............................................. 1,217 1,553 1,713
Translation adjustments............................... (656) (304) --
Accounts receivable written off....................... (470) (1,866) (89)
---------- --------- ---------
Allowance for doubtful accounts at end of year........ $ 2,091 $ 2,000 $ 2,617
========== ========= =========
</Table>
F-32
<Page>
INDEPENDENT AUDITORS' REPORT
The Board of Directors'
Tecnomatix Technologies, Inc.:
We have audited the consolidated balance sheets of Tecnomatix Technologies, Inc.
(the Company), a wholly-owned affiliate of Tecnomatix Technologies, Ltd. (TTL),
as of December 31, 2002 and 2001 and the related consolidated statements of
operations, shareholders' deficit and comprehensive income (loss), and cash
flows for each of the years in the three year period ended December 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tecnomatix
Technologies, Inc. as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
As described in notes 1 and 3 to the consolidated financial statements, the
Company conducts a significant amount of business with its affiliates, and
receives advances from TTL to guarantee future operations of the Company.
As discussed in note 2(e) to the consolidated financial statements, the Company
changed the estimated useful lives of certain capitalized software development
costs in 2002.
As discussed in note 2(f) to the consolidated financial statements, the Company
adopted the provisions of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, as
of January 1, 2002.
/s/ KPMG LLP
Detroit, Michigan
January 24, 2003
F-33