-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CFoY45ElWMxD+a0qqPtIVAXivbZRmVnQQdwXtB5GbKyAjdyAIxMO7lTEFdIZkLs5 +64GWnYyI6xrMQ2h44xMtA== 0001047469-99-029262.txt : 19990802 0001047469-99-029262.hdr.sgml : 19990802 ACCESSION NUMBER: 0001047469-99-029262 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990730 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEC ISRAEL ECONOMIC CORP CENTRAL INDEX KEY: 0000076888 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 131143528 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-08707 FILM NUMBER: 99674524 BUSINESS ADDRESS: STREET 1: 511 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2125518881 MAIL ADDRESS: STREET 1: 511 FIFTH AVENUE STREET 2: 511 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: PALESTINE ECONOMIC CORP DATE OF NAME CHANGE: 19660905 10-K/A 1 FORM 10-K/A FORM 10-K/A NO. 3 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) / X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ----------------------------------------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- ------------------------- Commission file number 1-8707 ------------------------------- PEC Israel Economic Corporation (Exact name of registrant as specified in its charter) Maine 13-1143528 - ----------------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 511 Fifth Avenue, New York, New York 10017 - ---------------------------------------- --------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (212) 687-2400 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock (par value $1.00 per share) New York Stock Exchange - ------------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None - ------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / X / The aggregate market value of the outstanding Common Stock of the registrant held by non-affiliates on March 26, 1999 was approximately $101,041,000. Such aggregate market value was computed on the basis of the closing price of the Common Stock of the registrant on the New York Stock Exchange on that date. See Part II, Item 5, "Market for the Registrant's Common Stock and Related Stockholder Matters." As of March 26, 1999, 18,362,188 shares of Common Stock were outstanding. The Registrant, PEC Israel Economic Corporation ("PEC" or the "Company"), hereby (i) amends (A) Item 8 of Part II of PEC's Annual Report on Form 10-K for the year ended December 31, 1998, as previously amended (the "1998 Form 10-K"), by adding thereto the financial statements of Scitex Corporation Ltd. as at and for the year ended December 31, 1998, which begins on the next page and (B) Items 14(a)(2)(e) and 14(a)(2)(f) of Part IV of the 1998 Form 10-K by renumbering such Items as Items 14(a)(2)(f) and 14(a)(2)(g), respectively, and (ii) inserts the following as Item 14(a)(2)(e) of Part IV of the 1998 Form 10-K between Item 14(a)(2)(d) and Item 14(a)(2)(f) (as renumbered) of Part IV of the 1998 Form 10-K: (a)(2)(e) Financial statement schedules filed in response to Item 14(d) pursuant to Rule 3-09 of Regulation S-X: Scitex Corporation Ltd. and its Subsidiaries: Report of Independent Auditors. Consolidated Balance Sheets as at December 31, 1998 and 1997. Consolidated Statements of Income (Loss) for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. Notes to the Consolidated Financial Statements. SCITEX CORPORATION LTD. 1998 CONSOLIDATED FINANCIAL STATEMENTS SCITEX CORPORATION LTD. 1998 CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS
PAGE REPORT OF INDEPENDENT AUDITORS 2 CONSOLIDATED FINANCIAL STATEMENTS Balance sheets 3-4 Statements of income (loss) 5 Statements of changes in shareholders' equity 6-7 Statements of cash flows 8-9 Notes to financial statements 10-38
THE AMOUNTS ARE STATED IN U.S. DOLLARS ($) IN THOUSANDS. --------------- ------------------------- --------------- [Letterhead] REPORT OF INDEPENDENT AUDITORS To the shareholders of SCITEX CORPORATION LTD. We have audited the consolidated balance sheets of Scitex Corporation Ltd. (the "Company") and its subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either due to error or to intentional misrepresentation. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a fair basis for our opinion. In our opinion, the aforementioned financial statements present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 1998 and 1997 and the results of their operations, the changes in shareholders' equity and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. /s/ Kesselman & Kesselman Tel-Aviv, Israel Kesselman & Kesselman February 3, 1999 Certified Public Accountants (Isr.) 2 SCITEX CORPORATION LTD. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------------ 1998 1997 ---------- --------- U.S. DOLLARS IN THOUSANDS ------------------------- ASSETS CURRENT ASSETS (note 14): Cash and cash equivalents 49,920 72,300 Short-term investments 33,447 87,057 Trade receivables (net of allowance for doubtful accounts of $ 20,400,000 at December 31, 1998 and $ 31,552,000 at December 31, 1997) 141,393 140,540 Other receivables 25,764 30,707 Inventories: Systems and components (note 3) 77,557 87,998 Spare parts and supplies 45,385 51,453 Deferred income taxes (note 12d) 31,632 18,937 -------- -------- T o t a l current assets 405,098 488,992 -------- -------- INVESTMENTS AND OTHER NON-CURRENT ASSETS (notes 4 and 14) 9,372 15,365 -------- -------- PROPERTY, PLANT AND EQUIPMENT (note 5): Cost 295,149 276,706 L e s s - accumulated depreciation and amortization 204,247 187,101 -------- -------- 90,902 89,605 -------- -------- GOODWILL AND OTHER INTANGIBLE ASSETS, net of accumulated amortization (note 6) 60,136 74,765 -------- -------- 565,508 668,727 -------- -------- -------- --------
/s/ Dov Tadmor ) CHAIRMAN OF THE BOARD - ------------------------------------------- DOV TADMOR ) OF DIRECTORS /s/ Yoav Z. Chelouche ) PRESIDENT, CHIEF EXECUTIVE - ------------------------------------------- YOAV Z. CHELOUCHE ) OFFICER AND DIRECTOR 3
DECEMBER 31 ------------------------ 1998 1997 ---------- --------- U.S. DOLLARS IN THOUSANDS ------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES (note 14): Short-term bank credit 2,034 618 Trade payables 48,180 46,600 Accrued and other liabilities (note 7) 109,588 120,493 ------- ------- T o t a l current liabilities 159,802 167,711 ------- ------- LONG TERM LIABILITIES: Deferred income taxes (note 12d) 3,206 122 Other 1,277 785 ------- ------- Total long-term liabilities 4,483 907 ------- ------- COMMITMENTS AND CONTINGENT LIABILITIES (note 9) ------- ------- T o t a l liabilities 164,285 168,618 ------- ------- SHAREHOLDERS' EQUITY (note 10): Share capital - ordinary shares of NIS 0.12 par value (authorized - December 31, 1998 and 1997 - 48,000,000 shares; issued and outstanding: December 31, 1998 - 43,038,852 shares; December 31, 1997 - 42,808,518 shares) 6,194 6,187 ------- ------- Capital surplus 360,316 358,278 ------- ------- Accumulated other comprehensive income (loss) (note 1o): Currency translation adjustments 1,064 1,457 Unrealized loss on marketable securities available for sale (note 4(b)) (10,289) ------- ------- 1,064 (8,832) ------- ------- Retained earnings 33,649 144,476 ------- ------- T o t a l shareholders' equity 401,223 500,109 ------- ------- 565,508 668,727 ------- ------- ------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 4 SCITEX CORPORATION LTD. CONSOLIDATED STATEMENTS OF INCOME (LOSS)
1998 *1997 *1996 ------------ -------------------- -------- U.S. DOLLARS IN THOUSANDS -------------------------------------------- (EXCEPT PER SHARE DATA) -------------------------------------------- REVENUES (note 15a): Sales 441,399 426,591 453,523 Service 137,823 134,183 119,232 Supplies 61,089 56,885 51,350 ------- ------- ------- T o t a l revenues 640,311 617,659 624,105 ------- ------- ------- COST OF REVENUES: Cost of sales 227,564 234,220 274,341 Cost of service 108,274 110,771 118,272 Cost of supplies 33,198 28,535 23,383 ------- ------- ------- T o t a l cost of revenues 369,036 373,526 415,996 ------- ------- ------- GROSS PROFIT 271,275 244,133 208,109 RESEARCH AND DEVELOPMENT COSTS - net (note 15b) 110,762 57,610 61,273 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (note 15c) 174,997 163,911 250,228 AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS 9,285 6,215 8,491 RESTRUCTURING COSTS (note 11) 56,100 ------- ------- ------- OPERATING INCOME (LOSS) (23,769) 16,397 (167,983) FINANCIAL INCOME - net (note 15d) 4,971 5,941 4,683 OTHER INCOME (EXPENSES) - net 1,634 (1,000) (239) ------- ------- ------- INCOME (LOSS) BEFORE TAXES ON INCOME (17,164) 21,338 (163,539) TAXES ON INCOME (TAX BENEFIT) (note 12) 2,231 1,500 (1,699) SHARE IN INCOME (LOSSES) OF EQUITY INVESTMENTS - net (note 4) (14,897) (2,742) 156 ------- ------- ------- NET INCOME (LOSS) FROM CONTINUING OPERATIONS (34,292) 17,096 (161,684) ------- ------- ------- DISCONTINUED OPERATIONS (NOTE 2b): Loss from operations (13,831) (16,514) (16,595) Loss from disposal (62,704) ------- ------- ------- Total loss from discontinued operations (76,535) (16,514) (16,595) ------- ------- ------- NET INCOME (LOSS) (110,827) 582 (178,279) ======= ======= ======= BASIC AND DILUTED EARNINGS (LOSS) PER SHARE ("EPS") (NOTE 1N) Continuing operations $(0.80) $0.40 $(3.77) Discontinued operations $(1.78) $(0.39) $(0.39) ------- ------- ------- Net income (loss) $(2.58) $ 0.01 $ (4.16) ======= ======= ======= WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION OF EPS (in thousands) (NOTE 1N): Basic 42,929 42,809 42,809 ======= ======= ======= Diluted 42,929 43,154 42,809 ======= ======= ======= * Reclassified (see note 2b). THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5 (Continued) - 1 SCITEX CORPORATION LTD CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ------------------------------- UNREALIZED LOSS ON CURRENCY MARKETABLE RETAINED TOTAL SHARE CAPITAL TRANSLATION SECURITIES EARNINGS SHAREHOLDER'S CAPITAL SURPLUS ADJUSTMENTS AVAILABLE FOR SALE (NOTE 10c) EQUITY -------- ------- ----------- ------------------ ---------- ------------- U.S. DOLLARS IN THOUSANDS ----------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1996 6,187 360,891 888 (5,853) 338,868 700,981 ----- ------ -------- --------- CHANGES DURING 1996: Loss (178,279) (178,279) --------- Other comprehensive income (loss) (note 1o): Currency translation adjustments 242 242 Unrealized loss on marketable securities available for sale (4,208) (4,208) ------ ------ --------- 242 (4,208) (3,966) ------ ------ -------- --------- Total comprehensive income (loss) 242 (4,208) (178,279) *(182,245) ------ ------ -------- --------- Elimination of surplus in respect of employee stock options due to forfeiture, net of surplus arising from employee stock options (1,314) (1,314) --------- Dividend ($ 0.39 per share) (16,695) (16,695) ------ ------- ------ ------ -------- --------- BALANCE AT DECEMBER 31, 1996 6,187 359,577 1,130 (10,061) 143,894 500,727 ------ ------ -------- --------- CHANGES DURING 1997: Net income 582 582 --------- Other comprehensive income (loss) (note 1o): Currency translation adjustments 327 327 Unrealized loss on marketable securities available for sale (228) (228) ------ ------ --------- 327 (228) 99 ------ ------ -------- --------- Total comprehensive income (loss) 327 (228) 582 *681 ------ ------ -------- --------- Elimination of surplus in respect of employee stock options due to forfeiture, net of surplus arising from employee stock options (1,299) (1,299) ------ ------- ------ ------ -------- --------- BALANCE AT DECEMBER 31, 1997 - forward 6,187 358,278 1,457 (10,289) 144,476 500,109 ------ ------- ------ ------ -------- ---------
6 (Concluded) - 2 SCITEX CORPORATION LTD. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ------------------------------- UNREALIZED LOSS ON CURRENCY MARKETABLE RETAINED TOTAL SHARE CAPITAL TRANSLATION SECURITIES EARNINGS SHAREHOLDER'S CAPITAL SURPLUS ADJUSTMENTS AVAILABLE FOR SALE (NOTE 10c) EQUITY -------- ------- ----------- ------------------ ---------- ------------- U.S. DOLLARS IN THOUSANDS ----------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 - brought forward 6,187 358,278 1,457 (10,289) 144,476 500,109 ------ ------- -------- -------- CHANGES DURING 1998: Loss (110,827) (110,827) -------- Other comprehensive income (loss) (note 1o): Currency translation adjustments (393) (393) ------ -------- Unrealized loss on marketable securities available for sale: Unrealized holding loss arising during the year (2,730) (2,730) Less - loss carried to the consolidated statement of loss (note 2b) 13,019 13,019 ------- -------- 10,289 10,289 ------- -------- Total comprehensive income (loss) (393) 10,289 9,896 ------ ------- -------- -------- (393) 10,289 (110,827) *(100,931) Employee stock options exercised and paid 7 **2,103 2,110 -------- Elimination of surplus in respect of employee stock options due to forfeiture, net of surplus arising from employee stock options (65) (65) ------ ------- ------ ------ -------- --------- BALANCE AT DECEMBER 31, 1998 6,194 360,316 1,084 -,- 33,649 401,223 ------ ------- ------ ------ -------- --------- ------ ------- ------ ------ -------- ---------
* Calculated in accordance with the provisions of FAS 130 (see also note 1o). ** Net of share issue expenses. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 7 (Continued - 1) SCITEX CORPORATION LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS
1998 1997 1996 -------- ------------ --------- U.S. DOLLARS IN THOUSANDS ----------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) (110,827) 582 (178,279) Adjustments to reconcile net income or loss to net cash provided by operating activities: Share in losses (income) of equity investments - net 14,897 2,742 (156) Depreciation and amortization 41,318 40,815 49,196 Write off of in-process research and development 44,264 acquired Loss from discontinued operations 76,535 Compensation income resulting from employee stock options (65) (1,299) (1,314) Gain on sale and increase in value of short-term investments - net (617) (741) (893) Deferred income taxes - net (8,657) (2,166) 12,882 Loss on disposal of fixed assets 246 523 8,424 Provision for impairment of goodwill 18,200 Changes in operating assets and liabilities: Decrease (increase) in trade receivables (including non-current portion) (1,035) 14,240 145,976 Decrease (increase) in other receivables (29,522) 8,789 (1,380) Decrease in trade payables (993) (3,857) (10,995) Decrease in accrued and other liabilities (97) (31,735) (1,495) Decrease in inventories 6,622 36,952 2,077 Decrease (increase) in prepaid expenses 806 1,280 (1,110) Other items - net 6 432 754 ------- ------- ------- Net cash provided by operating activities 32,881 66,557 41,887 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of subsidiaries * (61,585) Additional amount paid in respect of acquisition of a subsidiary (7,000) (7,000) (7,000) Purchase of property, plant and equipment and other non current assets (32,339) (33,300) (31,176) Proceeds from sale of fixed assets 1,476 1,720 2,224 Disposal of investment in subsidiary 8,000 Purchase of intangible assets (12,578) (1,096) (6) Equity and other investments (12,886) (3,622) (2,815) Purchase of short-term investments (37,735) (85,364) (27,431) Sale of short-term investments 91,223 44,151 45,701 ------- ------- ------- Net cash used in investing activities (63,424) (84,511) (20,503) ------- ------- ------- Subtotal - forward (30,543) (17,954) 21,384
8 (Concluded - 2) SCITEX CORPORATION LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS
1998 1997 1996 -------- ------------ --------- U.S. DOLLARS IN THOUSANDS ---------------------------------- Subtotal - brought forward (30,543) (17,954) 21,384 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Employee stock options exercised and paid 2,110 Increase in long-term liabilities 3,117 453 627 Decrease in long-term liabilities (56) (195) (347) Increase (decrease) in short-term bank credit 2,992 (54) (1,679) Dividends paid (22,261) ------- ------- ------- Net cash provided by (used in) financing activities 8,163 204 (23,660) ------- ------- ------- NET DECREASE IN CASH AND CASH EQUIVALENTS (22,380) (17,750) (2,276) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 72,300 90,050 92,326 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR 49,920 72,300 90,050 ------- ------- ------- ------- ------- ------- * Acquisition of subsidiaries: Working capital (excluding cash and cash equivalents) 10 Property, plant and equipment - net 666 Goodwill and other intangible assets 16,645 Acquired in-process research and development 44,264 ------- 61,585 ------- ------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - CASH PAID DURING THE YEAR FOR: Interest 738 2,117 2,271 ------- ------- ------- ------- ------- ------- Income taxes 9,867 (18,739) 7,795 ------- ------- ------- ------- ------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 9 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies, applied on a consistent basis, are as follows: a. GENERAL 1) Nature of operations Scitex Corporation Ltd. (the "Company") is an Israeli corporation which designs, manufactures and markets digital visual information communication systems for the digital preprint and digital printing markets. 2) Functional currency The currency of the primary economic environment in which the operations of the Company and most of its subsidiaries are conducted is the U.S. dollar ("dollar" or "$"); thus, the dollar is the functional currency of the Company and most of its subsidiaries. For the Company and those subsidiaries whose functional currency is the dollar, transactions and balances denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions reflected in the statements of operations, the exchange rates at transaction dates are used, except for expenses deriving from non-monetary items, which are translated using historical exchange rates. The currency transaction gains or losses are carried to financial income or expenses, as appropriate. The financial statements of certain subsidiaries and entities in which the Company has an equity investment, whose functional currency is their local currency, are translated into dollars in accordance with the principles set forth in Statement of Financial Accounting Standard ("FAS") No. 52 of the Financial Accounting Standards Board of the United States ("FASB") - "Foreign Currency Translation": assets and liabilities are translated using the year-end rate of exchange; results of operations are translated at average exchange rates during the year. The resulting aggregate translation adjustments are reported as a component of "accumulated other comprehensive income". 10 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued): 3) Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting years. Actual results could differ from those estimates. 4) Accounting principles The consolidated financial statements are prepared in accordance with US GAAP. b. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany balances and transactions have been eliminated in consolidation. c. CASH EQUIVALENTS The Company and its subsidiaries consider all highly liquid debt instruments purchased with a maturity of three months or less, at time of investment, that are not restricted as to withdrawal or use, to be cash equivalents. Bank deposits with a maturity of more than three months but less than one year (from the date of deposit) are included in short-term investments. d. INVESTMENTS IN MARKETABLE SECURITIES Marketable securities, classified as "trading securities", are stated at market value and are included under "short-term investments". The changes in market value of these securities are carried to financial income or expenses. As of December 31, 1997, an investment in quoted shares of a company, classified as "available for sale securities", was stated at market value and included under "investments and other non-current assets". The difference between the market value of these shares and their cost was recorded as a separate component of shareholders' equity, under comprehensive income (loss). As to the Company's decision, in 1998, to dispose of this investment, see note 4(b). 11 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): e. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined as follows: components and supplies - on the moving average basis; labor and overhead - on the basis of actual manufacturing costs. f. EQUITY INVESTMENTS These investments are accounted for by the equity method. g. PROPERTY, PLANT AND EQUIPMENT These assets are stated at cost and are depreciated by the straight-line method over their estimated useful lives. Annual rates of depreciation are as follows: % -------- Machinery and equipment 10-33 (mainly 20) Building 4 Office furniture and equipment 6-33 (mainly 20) Motor vehicles 15-25 (mainly 15) Leasehold improvements are amortized by the straight-line method over the term of the lease or the estimated useful life of the improvements, whichever is shorter. h. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill, representing the difference between the cost of the investment in subsidiaries and the fair value of their underlying net assets at the time of acquisition, and acquired goodwill, are amortized by the straight-line method over a period of 7-15 years. Acquired technology and other intangible assets are stated at cost and amortized by the straight-line method over a period of 3-13 years (mainly 5-7 years). 12 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): i. RECOGNITION OF REVENUES: 1) Sale of products The Company recognizes revenue from sale of its products upon shipment. Cost of sales includes an estimate of costs associated with installation, warranty and training. 2) Service revenue Service revenue is recognized ratably over the contractual period or as services are performed. 3) Sale of supplies The Company recognizes revenue from sale of supplies upon shipment. j. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged as expense as incurred. Government funding for development of approved projects is recognized as a reduction of expenses as the related costs are incurred. k. ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance is partly determined for specific accounts doubtful of collection and partly based on statistical analysis of past experience. l. INCOME TAXES 1) Deferred income taxes are provided for temporary differences between the assets and liabilities as measured in the financial statements and for tax purposes. Deferred taxes are computed using the tax rates expected to be in effect when these differences reverse. 2) The Company may incur an additional tax liability in the event of an intercompany dividend distribution; no additional tax has been provided, since the Company does not intend to distribute, in the foreseeable future, dividends which would result in additional tax liability. 3) Taxes which would apply in the event of disposal of investments in subsidiaries and other investees have not been taken into account in computing the deferred taxes, as it is the Company's policy to hold these investments, not to realize them. 13 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued): 4) Upon the distribution of dividends from the tax-exempt income of "approved enterprises" (see also note 12a), the amount distributed will be subject to tax at the rate that would have been applicable had the Company not been exempted from payment thereof. If such distribution is made, the amount of the related tax is to be charged as an expense in the income statements. The Company intends to permanently reinvest the amounts of tax exempt income and it does not intend to cause distribution of such dividends. Therefore, no deferred income taxes have been provided in respect of such tax-exempt income. m. DERIVATIVES The Company enters into forward exchange contracts and purchases and writes currency options to hedge existing non-dollar assets and liabilities as well as certain firm commitments. The written options are part of the hedging policy. The Company also purchases currency options to hedge anticipated sales for the coming year, which are probable and which are expected to be denominated in non-dollar currencies. The Company does not hold or issue derivative financial instruments for trading purposes. All of the Company's foreign exchange derivatives are designated as, and effective as, a hedge. A derivative is qualified as a hedge if: (1) the item to be hedged exposes the Company to a risk, (2) the related derivative reduces that exposure and is inversely correlated to the hedged item, and (3) the derivative is designated at inception for hedging purposes. Gains and losses on derivatives that are hedging existing assets or liabilities are recognized in income commensurate with the results from those assets or liabilities; balances receivable or payable in respect of such derivatives are included in the balance sheets among other accounts receivable or payable, as appropriate. Gains and losses related to derivatives that are hedging firm commitments or anticipated sales are deferred, and ultimately recognized in income as part of the measurement of the results of the underlying hedged transactions. Cash flows from derivatives are recognized in the statements of cash flows together with results from the hedged item. The net premiums paid for currency options are presented in the balance sheets among prepaid expenses and charged to financial expenses over the term of the options. 14 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued) n. EARNINGS (LOSS) PER SHARE ("EPS") EPS are computed based on the weighted average number of shares outstanding during each year. Since the basic EPS for 1998 and 1996 represents loss per share, the effect of including the incremental shares from assumed exercise of options in the EPS computation is anti-dilutive, and accordingly, the basic and diluted EPS for these years are the same amount. o. COMPREHENSIVE INCOME In 1998, the Company adopted FAS No. 130, "Reporting Comprehensive Income", ("FAS 130"), which was issued in June 1997 by the FASB. FAS 130 requires the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. In addition to net income (loss), comprehensive income or loss includes all non-owner changes in equity ("other comprehensive income") which, as applicable to the Company, include currency translation adjustments and unrealized loss on marketable securities available for sale. The company presents its comprehensive income (loss) in the consolidated statements of changes in shareholders equity. p. IMPAIRMENT OF LONG-LIVED ASSETS When indicators of impairment are present, the Company evaluates the realizability of goodwill and other intangible assets and the appropriateness of their amortization periods in relation to the operating performances and estimated future undiscounted cash flows of the underlying assets. q. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 established a new model for accounting for derivatives and hedging activities. FAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. FAS 133 is effective for calendar-year companies as from January 1, 2000. The Company is currently evaluating the impact FAS 133 will have on its financial statements. r. RECLASSIFICATIONS Certain prior year balances have been reclassified to be consistent with the current year presentation. 15 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - ACQUISITIONS AND DISPOSAL OF A BUSINESS: a. ACQUISITIONS: 1) In February 1998, the Company acquired all of the shares of Idanit Technologies Ltd., an Israeli corporation which designs and manufactures wide format ink jet printing systems, for an aggregate cash consideration of $ 63,039,000 in cash (including $ 339,000 - costs related to the acquisition). The acquisition was accounted for by the purchase method . The amounts carried to assets and liabilities in respect of the acquisition were based on the fair values of the assets and liabilities acquired on the date of acquisition. Idanit's Net income for 1998 of $165,000 is included in the 1998 consolidated statement of loss from the date of acquisition. An amount $ 44,264,000 out of the total acquisition cost was attributed to in-process research and development and resulted in a one time non-cash charge. An amount of $ 16,645,000 was attributed to goodwill and other intangible assets and is being amortized over their estimated useful lives. At the time of the acquisition, Idanit had two products under development: 163Ad and Flatbed, which were both mostly completed but had not reached technological feasibility, and had no future alternative use the valuation assumed that approximately $ 5,000,000 of development costs would be incurred from the acquisition date through their scheduled completion in December 1998 and June 1999, respectively. The valuation also assumed that these products would generate revenues through the year 2004. The inability of Idanit to complete this technology within the expected timeframes could materially impact future revenues and earnings, which could have an adverse material effect on the Company's business, financial condition and results of operations. 2) In October 1998, the Company acquired the superwide activities of the Matan group of companies for an aggregate cash consideration of $12,247,000 (including $152,000-costs related to the acquisition). This amount is included under "acquired goodwill and other intangible assets" and is being amortized over its estimated useful life. The agreement provides for additional payments up to a maximum of $14.5 million, based on the achievement on specified financial targets during the period 1999 to 2004. b. DISCONTINUED OPERATIONS - DISPOSAL OF A BUSINESS In November 1998, the Company decided to exit from the digital video business. The digital video business of the Company was comprised of the operations of the wholly owned subsidiary Scitex Digital Video ("SDV") and an investment in quoted shares which was classified as "available for sale securities" (see also note 4(b)). As a result of the decision, the Company recognized a loss from the disposal amounting to $62,704,000, which is presented in the statement of loss for 1998 under "discontinued operations". This amount is comprised of $49,685,000 in respect of the loss from the disposal of SDV, and $13,019,000 representing the accumulated unrealized loss on available for sale shares which was expensed. In December 1998, substantially all of the assets and liabilities of SDV were sold. 16 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - ACQUISITIONS AND DISPOSAL OF A BUSINESS (continued): Results of these operations in 1998, 1997 and 1996 have been classified as discontinued operations. Revenues, loss from discontinued operations and the remaining asset and liability items at December 31, 1998 in respect of the discontinued operations, are as follows:
1998 1997 1996 --------- ---------- -------- U.S. DOLLARS IN THOUSANDS --------------------------------- $ IN THOUSANDS --------------------------------- Revenues 29,534 58,018 70,942 ------- ------- ------- ------- ------- ------- Operating loss (13,831) (16,514) (16,595) ------- ------- ------- ------- ------- ------- Loss from discontinued operations: Loss from operations 13,831 16,514 16,595 Loss from disposal 62,704 ------- ------- ------- 76,535 16,514 16,595 ------- ------- ------- ------- ------- -------
------------------- DECEMBER 31, 1998 ------------------- $ IN THOUSANDS ------------------- Short-term investments - investment in shares 1,820 ------- ------- Other receivables 2,000 ------- ------- Accrued and other liabilities - accrued disposal costs (note 7) 9,323 ------- -------
The company anticipates that no additional losses will be incurred as a result of these transactions. NOTE 3 - INVENTORIES - SYSTEMS AND COMPONENTS:
DECEMBER 31 ----------------------- 1998 1997 --------- --------- $ IN THOUSANDS ----------------------- Components for manufacturing of systems 38,411 38,648 Work in process 8,137 13,305 Finished products 31,009 36,045 ------- ------- 77,557 87,998 ------- ------- ------- -------
17 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 4 - INVESTMENTS AND OTHER NON-CURRENT ASSETS
DECEMBER 31 ----------------------- 1998 1997 ----------------------- $ IN THOUSANDS ----------------------- Equity investments: Joint venture companies (a) 2,756 1,143 Other 1,821 973 Available for sale investment (b) 4,550 Non-current deposits 659 3,540 Non-current receivables 2,068 1,808 Deferred income taxes (note 12d) 72 1,026 Shares at cost and other 1,996 2,325 ------- ------- 9,372 15,365 ------- ------- ------- -------
(a) The Company has provided guarantees for bank credit received by a joint venture company - $ 10.2 million and $ 10.5 million at December 31, 1998 and 1997, respectively. (b) Represents investment of approximately 14% of ordinary share capital of Truevision, Inc. ("Truevision"), purchased in a private placement and through a market transaction for a total consideration of $ 14,839,000. The shares of Truevision, a U.S. corporation, are traded in the United States. In 1998, as part of the decision to exit from the digital video business (see note 2b), the Company decided to dispose of these shares and accordingly, these shares are included in "short-term investments". NOTE 5 - PROPERTY, PLANT AND EQUIPMENT Grouped by major classifications, the assets are composed as follows:
ACCUMULATED DEPRECIATION COST AND AMORTIZATION ------------------- ----------------------- DECEMBER 31 DECEMBER 31 ------------------- ----------------------- 1998 1997 1998 1997 -------- ----------- ------------ --------- $ IN THOUSANDS ---------------------------------------------- Machinery and equipment 207,156 208,673 153,869 141,821 Building (including land) 8,755 8,755 1,918 1,641 Leasehold improvements 41,850 26,123 24,515 23,079 Office furniture and equipment 35,630 30,570 22,799 19,195 Motor vehicles 1,758 2,585 1,146 1,365 ------- ------- ------- ------- 295,149 276,706 204,247 187,101 ------- ------- ------- ------- ------- ------- ------- -------
Depreciation and amortization of property, plant and equipment totaled $ 26,181,000 $ 25,102,000 and $ 30,935,000 in 1998, 1997 and 1996, respectively. 18 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS:
DECEMBER 31 ----------------------- 1998 1997 ---------- --------- $ IN THOUSANDS ----------------------- ORIGINAL AMOUNT: Goodwill in subsidiaries and acquired goodwill 72,555 105,144 Acquired technology and other intangible assets 30,588 21,877 ------- ------- 103,143 127,021 ------- ------- L e s s - accumulated amortization: Goodwill in subsidiaries and acquired goodwill 30,855 39,856 Acquired technology and other intangible assets 12,152 12,400 ------- ------- 43,007 52,256 ------- ------- 60,136 74,765 ------- ------- ------- -------
NOTE 7 - ACCRUED AND OTHER LIABILITIES
DECEMBER 31 ----------------------- 1998 1997 ---------- --------- $ IN THOUSANDS ----------------------- Employees and related liabilities 26,599 23,460 Taxes on income, net of advances 11,654 18,184 Advances from customers 5,669 8,028 Allowance in respect of sales financed by third parties (see note 9b(1)) 6,680 15,354 Accrued disposal and restructuring costs (see notes 2b and 11) 11,471 3,995 Sundry 47,515 51,472 ------- ------- 109,588 120,493 ------- ------- ------- -------
19 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 8 - EMPLOYEE RIGHTS UPON RETIREMENT: a. Virtually the entire liability for severance pay for Israeli employees, pursuant to Israeli law and employment agreements, is funded with severance pay and pension funds and with insurance companies (principally with an affiliate of two of the major shareholders of the Company), for which the Company makes monthly payments. Since the control and management of these funds is independent of the Company, the amounts funded are not reflected in the balance sheets. The amounts not funded are included among accrued liabilities. b. The U.S. subsidiaries offer 401(k) matching plans to all eligible employees. The U.S. subsidiaries' matching contribution ranges from 50% to 200% of the first 3% of a participant's contribution, depending upon years of service, up to a maximum employer contribution of 6% of a participant's qualifying earnings. c. Substantially all of the European subsidiaries make contributions to pension plans administered by insurance companies. Since the control and management of these funds are independent of the European subsidiaries, the amounts funded are not included in the balance sheets. The amounts not funded are included among accrued liabilities. d. Severance pay, pension and defined contribution plan expenses totaled $9,236,000 $9,587,000 and $15,772,000 in 1998, 1997 and 1996, respectively. In addition, employee termination benefits in the amount of $18,000,000 in 1996 were included in restructuring costs (see note 11). NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES: a. Commitments: 1) Royalty commitments: (a) The Company is committed to pay royalties of 2%-5% to the Government of Israel on sales of products in the research and development of which the Government participates by way of grants, up to the amount of the grants received (in dollar terms); for certain projects, which were approved prior to January1, 1994, the limit is up to 100% of the grants received. At the time the funding was received, successful development of the related projects was not assured. At December 31, 1998, the maximum contingent royalty payable is $46 million. 20 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (continued): (b) The Company is obligated to pay royalties to certain parties, based on agreements which allow it to use technologies developed by these parties. Such royalties are based on the revenues from sales of products which incorporate these technologies or on quantities of such products sold. 2) Lease commitments Most of the premises occupied by the Company and its subsidiaries are rented under various operating lease agreements. Most of the premises in Israel are leased from an affiliate of two of the major shareholders of the Company. Minimum lease commitments of the Company and its subsidiaries under the above leases (net of amounts provided in "accrued restructuring costs") at rates in effect in December 1998, are as follows:
$ IN THOUSANDS --------- Year ending December 31: 1999 11,400 2000 10,039 2001 9,714 2002 9,040 2003 5,298 2004 and thereafter 24,706
The rental payments for the premises in Israel, which constitute approximately 18.8 % of the above amounts, are payable in Israeli currency linked partially to the Israeli consumer price index (the Israeli CPI), and partially to the dollar. Rental expense totaled $12,408,000, $11,778,000 and $14,899,000 in 1998, 1997 and 1996, respectively; in 1996, an additional amount of $9,600,000 was included in restructuring costs (see note 11). 21 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (continued): b. Contingent liabilities: 1) Certain subsidiaries of the Company have entered into agreements with third-party financing companies (hereafter - the agreements) under which long-term financing (generally five years) is provided to customers in connection with the purchase of the Company's equipment. Under the terms of the agreements, the third-party financing companies have recourse against the subsidiaries in an amount equal to either a fixed amount established at the time of financing or a percentage of the outstanding balance, including interest, owed by the customers to the financing company. During the years ended December 31, 1998, 1997 and 1996, approximately $20,904,000 $38,300,000 and $90,500,000, respectively, of revenues were financed under these agreements. At December 31, 1998, the subsidiaries were contingently liable to the financing companies for a portion of the total of the outstanding balance of $70 million. The subsidiaries have established provisions ($6,680,000 and $15,354,000 at December 31, 1998 and 1997, respectively) for potential losses which may be incurred in the event of default under the agreements. The level of provisions is determined based upon an analysis of the individual transactions and past experience. 2) In September 1996, an action was commenced in the United States District Court of the Northern District of California to invalidate certain of the Company's patents relating to its core trapping technology. The action was later expanded to include claims that certain company products infringe patents of the plaintiffs. The Company is vigorously defending the claims presented in the action and has itself filed counterclaims against the plaintiffs for infringement of the trapping patents. The suit is continuing; however, the parties are engaged in a mediation process. If the mediation fails to produce a settlement, trial of the lawsuit will take place most likely in the latter part of 1999. 3) Lawsuits have been lodged against the Company in the ordinary course of business. The Company intends to defend itself vigorously against those lawsuits. Management does not expect that the Company will incur substantial expenses in respect thereof; therefore, no provision has been made for the lawsuits. 22 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 10 - SHAREHOLDERS' EQUITY: a. Share capital The number of shares stated as issued and outstanding at December 31, 1997 (42,808,518 ordinary shares) did not include 43,950 unpaid ordinary shares which were allotted to a trustee in the implementation of a share option plan. These shares, until paid, had no voting rights or rights to cash dividends and accordingly were not treated as outstanding for accounting purposes. b. Share incentive and stock option plans (the "plans"): 1) The Company has two current share incentive and stock option plans- the Scitex Israel Key Employee Share Incentive Plan 1991 (with various sub-plans), mainly for officers and other key employees of the Company, and the Scitex International Key Employee Stock Option Plan 1991 (As Amended, 1995), for officers and other key employees of non-Israeli subsidiaries. Option awards may be granted under the plans up to September2001. The maximum term of an option may not exceed ten years. Each option can be exercised to purchase one share having the same rights as the other ordinary shares. The grant of options under the Israeli plan is subject to the terms stipulated by the Israeli Income Tax Ordinance. Inter alia, the Ordinance provides that the Company will be allowed to claim as an expense for tax purposes the amounts credited to the employees as a benefit, when the related tax is payable by the employee. 2) The total number of options authorized under the plans is as follows:
DECEMBER 31 ------------------------ 1998 1997 ----------- ---------- NUMBER OF OPTIONS ------------------------ Available for future awards 877,498 339,150 Outstanding 3,231,268 3,349,950 Exercised and paid 291,234 60,900 --------- --------- 4,400,000 3,750,000 --------- --------- --------- ---------
23 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 10 - SHAREHOLDERS' EQUITY (continued): The options granted are exercisable for the purchase of shares as follows:
DECEMBER 31 ------------------------- 1998 1997 ------------ ----------- NUMBER OF OPTIONS ------------------------- At balance sheet date 758,902 76,125 During first year thereafter 1,232,250 1,146,397 During second year thereafter 1,053,366 992,772 During third year thereafter 107,750 1,124,656 During fourth year thereafter 79,000 10,000 --------- --------- 3,231,268 3,349,950 --------- --------- --------- ---------
The rights to exercise options are generally conditional upon continuous employment by the Company. 3) A summary of the status of the Companys plans at December31, 1998, 1997 and 1996, and changes during the years ended on those dates, is presented below:
YEAR ENDED DECEMBER 31 ---------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------------- -------------------------- ----------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE NUMBER PRICE NUMBER PRICE NUMBER PRICE ----------- ---------- ----------- --------- ------------ --------- $ $ $ --- --- --- Options outstanding at beginning of year 3,349,950 10.00 2,389,350 17.46 1,716,575 20.75 Changes during the year: Granted 483,000 11.58 2,066,950 *9.47 1,596,250 14.72 Exercised and paid (230,334) 9.06 Forfeited (371,348) 11.69 (1,106,350) *16.13 (923,475) 18.86 ----------- ----------- ----------- Options outstanding at end of year 3,231,268 10.10 3,349,950 *10.00 2,389,350 17.46 ----------- ----------- ----------- ----------- ----------- ----------- Options exercisable at end of year 758,902 9.38 76,125 *17.03 907,261 20.84 ----------- ----------- ----------- ----------- ----------- -----------
24 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 10 - SHAREHOLDERS' EQUITY (continued): * During 1997, 1,125,375 options awarded in earlier years, with a weighted average exercise price of $18.00 per option, were repriced to a weighted average exercise price of $9.15 per option subject to a revised vesting schedule. All data in this note assume election by the relevant grantees of the revised exercise price and the revised vesting schedule. The weighted average fair value of options granted during 1998, 1997 and 1996 is $5.51, $3.11 and $ 3.22, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
YEAR ENDED DECEMBER 31 ------------------------------------------------- 1998 1997 1996 -------------- ----------------- -------------- Dividend yield - per share in dollars -,- -,- $0.39 ----- ---- ----- ----- ---- ----- Expected volatility 64% 25% 14% ----- ---- ----- ----- ---- ----- Risk-free interest rate 5.2% 6.1% 5.5% ----- ---- ----- ----- ---- ----- Expected life - in years 2.38 2.09 2.17 ----- ---- -----
4) The following table summarizes information about options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------------------------------- ----------------------------------- WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE - -------------------------- ------------------ --------------- ------------ ----------------- ---------------- $ YEARS $ $ - ----- - - 9.00 to 11.00 2,410,068 6.3 9.18 703,839 9.20 11.01 to 13.00 521,200 6.2 11.65 55,063 11.71 13.01 to 15.00 300,000 8.1 14.75 --------- ------- 9.00 to 15.00 3,231,268 7.0 10.10 758,902 9.38 --------- ------- --------- -------
25 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 10 - SHAREHOLDERS' EQUITY (continued): 5) Accounting treatment of share incentive and stock option plans The Company accounts for its share incentive and stock option plans (the plans) using the treatment prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Under APB 25, compensation cost for employee stock option plans is measured using the intrinsic value based method of accounting. FAS No.123, "Accounting for Stock-Based Compensation" ("FAS 123"), which was issued by the FASB in October 1995, established a fair value based method of accounting for an employee stock option or similar equity instrument, and encourages adoption of such method of accounting for stock compensation plans. However, it also allows companies to continue to account for those plans using the accounting treatment prescribed by APB25. The Company has elected to continue applying the provisions of APB25, and has accordingly complied with the disclosure requirements set forth in FAS 123 for companies electing to apply APB 25. The compensation income - which reflects the reversal of compensation cost charged to income in earlier years in respect of employee stock options due to forfeiture, net of compensation cost in respect of the current year - in the years ended December 31, 1998, 1997 and 1996, is $65,000, $1,299,000 and $1,314,000, respectively. Had compensation for the Company's plans been determined based on the fair value at the grant dates for awards made under the Plans in 1995, and thereafter, consistent with the method of FAS123, the Company's net income (loss), and earnings (loss) per share, would have been changed to the pro-forma amounts indicated below:
1998 1997 1996 1998 1997 1996 ------------ ----------- ------------ ---------- ------------ ---------- AS REPORTED PRO-FORMA --------------------------------------------------------------------------------- Net income (loss) - in thousands of dollars (110,827) 582 (178,279) (114,320) (3,130) (180,124) ---------- ------ ---------- ---------- -------- ---------- ---------- ------ ---------- ---------- -------- ---------- Earnings (loss) per share - in dollars Basic and diluted (2.58) 0.01 (4.16) (2.66) (0.07) (4.21) ---------- ------ ---------- ---------- -------- ---------- ---------- ------ ---------- ---------- -------- ----------
26 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 10 - SHAREHOLDERS' EQUITY (continued): c. RETAINED EARNINGS The distribution of cash dividends in the amount of approximately $17,173,000 out of retained earnings of $33,649,000 as of December 31, 1998 would subject the Company to payment of 15% or 20% tax on the amount distributed, effectively reducing the dividend distribution by the amount of the tax (see also notes 11(4) and 12a(1)). NOTE 11 - RESTRUCTURING COSTS In 1996 and 1995, the Company recorded restructuring charges of $56.1million and $22.0million, respectively. The restructuring consisted of a series of actions to address changes in market conditions and was aimed at restoring the Company to profitability. The 1995 restructuring charge primarily involved a workforce reduction of approximately 250 employees. The 1996 charge consisted of a workforce reduction of approximately 400 employees (mainly in the U.S., Europe and Israel), the closing of certain facilities in the U.S. and Europe and the disposition of assets that were no longer required due to changes in plans. In addition, goodwill impairment was recognized for the effect of decisions regarding certain product lines. The components of the 1996 restructuring charges are as follows:
$ IN THOUSANDS --------- Employee termination benefits 18,000 Facility closure and excess purchase commitments 12,200 Goodwill impairment 18,200 Other asset write downs 7,700 ------ 56,100 ------ ------
27 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 12 - TAXES ON INCOME: a. The Company and its Israeli subsidiaries: 1) Tax benefits under the Law for the Encouragement of Capital Investments, 1959 The Company's production facilities in Israel have been granted "approved enterprise" status under the above law. The main benefit arising from such status is the reduction in tax rates on income derived from "approved enterprises". The Company is also a "foreign investors' company" as defined by that law and as such is entitled to a ten-year period of benefits and to an additional reduction in tax rates to 15% or 20% (based on the percentage of foreign shareholding in each tax year). For "approved enterprises", income derived therefrom is tax exempt for a period of two or four years out of the ten-year period of benefits. Based on the percentage of foreign shareholding in the Company, income derived during the remaining eight or six years of benefits is taxable at the rate of 15% or 20%. The period of benefits relating to the "approved enterprises" will expire in the years 1999 through 2008. In the event of distribution of cash dividends from income which was tax exempt as described above, the Company would have to pay the 15% or 20% tax in respect of the amount distributed. The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the above law, regulations published thereunder and the certificates of approval for the specific investments in "approved enterprises". In the event of failure to comply with these conditions, the benefits may be cancelled and the Company may be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences and interest. 2) Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments) Law, 1985 (hereafter - the Inflationary Adjustments Law) Under this law, results for tax purposes are measured in real terms, in accordance with the changes in the Israeli CPI, or in the exchange rate of the dollar for a "foreign investors company". The Company and its Israeli subsidiaries elected to measure their results on the basis of the changes in the Israeli CPI. 28 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 12 - TAXES ON INCOME (continued): 3) Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969 The Company is an "industrial company" as defined by this law and as such is entitled to certain tax benefits, mainly accelerated depreciation of machinery and equipment, as prescribed by regulations published under the Inflationary Adjustments Law, and the right to claim public issuance expenses and amortization of patents and other intangible property rights as a deduction for tax purposes. 4) Tax rates applicable in Israel to income from other sources Income not eligible for "approved enterprise" benefits mentioned in (1) above is taxed at the regular rate of 36%. b. NON-ISRAELI SUBSIDIARIES The U.S. subsidiaries file a consolidated tax return for federal purposes and in most states. Therefore, the tax provision is calculated on a consolidated tax return basis. c. CARRYFORWARD TAX LOSSES AND DEDUCTIONS Carryforward tax losses and deductions of the Company and its subsidiaries approximated $250 million at December31, 1998. Most of the carryforward amounts have no expiration date. 29 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 12 - TAXES ON INCOME (continued): d. DEFERRED INCOME TAXES:
DECEMBER 31 ------------------------ 1998 1997 ------------------------ $ IN THOUSANDS ------------------------ 1) Provided in respect of the following: Allowance for doubtful accounts 18,204 13,322 Carryforward tax losses and credits 47,560 34,657 Inventories 5,874 7,129 Accrued liabilities and deferred income 13,803 15,423 Other (2,124) 3,619 --------- -------- 83,317 74,150 L e s s - valuation allowance 54,819 54,309 --------- -------- 28,498 19,841 --------- -------- --------- -------- 2) Deferred taxes are included in the balance sheets as follows: Current assets 31,632 18,937 Non-current assets 72 1,026 Long-term liabilities (3,206) (122) --------- -------- 28,498 19,841 --------- -------- --------- --------
e. INCOME (LOSS) BEFORE TAXES ON INCOME:
YEAR ENDED DECEMBER 31 -------------------------------------- 1998 1997 1996 --------- --------------- ------------ $ IN THOUSANDS -------------------------------------- Israeli 2,032 (7,317) (82,937) Non-Israeli (19,196) 28,655 (80,602) ------- ------- ------- (17,164) 21,338 (163,539) ------- ------- ------- ------- ------- -------
f. TAXES ON INCOME (TAX BENEFIT) INCLUDED IN THE INCOME STATEMENTS: 1) As follows:
YEAR ENDED DECEMBER 31 -------------------------------------- 1998 1997 1996 ----------- -------------- ----------- $ IN THOUSANDS -------------------------------------- Current: Israeli 41 2 3,353 Non-Israeli 10,847 3,664 (17,935) -------- -------- -------- 10,888 3,666 (14,582) -------- -------- -------- Deferred, see d. above: Israeli 515 (199) 43 Non-Israeli (9,172) (1,967) 12,840 -------- -------- -------- (8,657) (2,166) 12,883 -------- -------- -------- 2,231 1,500 (1,699) -------- -------- -------- -------- -------- --------
30 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 12 - TAXES ON INCOME (continued): 2) Following is a reconciliation of the theoretical tax expense (benefit), assuming all income is taxed at the regular tax rate applicable to Israeli corporations (see a(4) above) and the actual tax expense:
YEAR ENDED DECEMBER 31 -------------------------------------- 1998 *1997 *1996 ------- ------- ------- $ IN THOUSANDS -------------------------------------- Income (loss) before taxes on income (17,164) 21,338 (163,539) ------- ------- ------- ------- ------- ------- Theoretical tax expense (tax benefit) on the above amount (6,179) 7,682 (58,874) Effect of lower tax rate for "approved enterprises" (528) 1,946 22,083 ------- ------- ------- (6,707) 9,628 (36,791) Decrease in taxes resulting from different tax rates - net (891) (255) (2,442) Increase in taxes resulting from permanent differences 3,458 1,730 3,091 Reversal of prior years' income tax provisions (1,600) Change in valuation allowance 511 (8,301) 39,153 Increase (decrease) in taxes arising from differences between non-dollar currencies income and dollar income - net and others** 5,860 (1,302) (3,110) ------- ------- ------- Actual tax expense (benefit) 2,231 1,500 (1,699) ------- ------- ------- ------- ------- ------- Per share effect of "approved enterprise" benefits $(0.01) $0.04 $0.52 ------- ------- ------- ------- ------- -------
* Reclassified. ** Resulting mainly from the difference between the changes in the Israeli CPI (the basis for computation of taxable income of the Company and its Israeli subsidiaries, see a(2) above) and the changes in the exchange rate of the Israeli currency relative to the dollar. 31 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 12 - TAXES ON INCOME (continued): g. TAX AUDITS The Company has received final tax assessments through the 1991 tax year. The audits of the tax returns of the U.S. subsidiaries and the main European subsidiary have been completed through the 1991 and 1995 tax years, respectively. NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: a. GENERAL The Company operates internationally, which gives rise to significant exposure to market risks, mainly from changes in foreign exchange rates. Derivative financial instruments (hereafter - derivatives) are utilized by the Company to reduce these risks. The Company is exposed to losses in the event of non-performance by counterparties to the derivatives, but it does not expect any counterparties to fail to meet their obligations, since the counterparties are major Israeli and European banks and major U.S. brokers. The Company does not require or place collaterals for these financial instruments. b. FOREIGN EXCHANGE RISK MANAGEMENT As stated in note 1m, the Company uses foreign currency derivatives for hedging purposes. The terms of these derivatives are shorter than one year. The amounts relating to foreign currency derivatives as of the balance sheet dates are as follows:
NOTIONAL AMOUNT ------------- DECEMBER 31, 1998 ------------- $ IN MILLIONS ------------- Derivatives for the conversion of non-dollar currencies into dollars: Forward exchange contracts 69 ------ ------ Currency options purchased 53 ------ ------ Currency options written 92 ------ ------
32 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued): c. CONCENTRATIONS OF CREDIT RISK At December 31, 1998 and 1997, the Company held cash and cash equivalents, most of which were deposited with major Israeli, European and U.S. banks. Most of the marketable securities held by the Company are debt securities of the U.S. Treasury, the Government of Israel and highly rated corporations. The company considers the inherent credit risks to be remote. Most of the Company's sales are made in the United States and in Europe, to a large number of customers. Consequently, the exposure to concentrations of credit risks relating to individual customer receivables is limited. The Company performs ongoing credit evaluations of its customers and generally does not require collateral from its customers in Europe and in the United States. In respect of certain sales to customers in emerging economies, the Company requires letters of credit. d. FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of the Company and its subsidiaries consist mainly of non-derivative assets and liabilities (items included in working capital, long-term investments, non-current receivables and long-term liabilities); the Company also uses some derivatives. In view of their nature, the fair value of the financial instruments included in working capital is usually identical or close to their carrying amount. The fair value of non-current receivables, long-term investments and long-term liabilities also approximates their carrying value, since they bear interest at rates close to the prevailing market rates. The fair value and the carrying amount of derivatives at December 31, 1998 and 1997 is approximately a liability of $ 3.3 million and $3.7 million, respectively. The fair value of the derivatives generally reflects the estimated amounts that the Company would receive or pay upon termination of the contracts at the reporting dates. 33 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 14 - MONETARY BALANCES IN NON-DOLLAR CURRENCIES: Comprise at December 31, 1998:
ASSETS LIABILITIES ------ ----------- IN THOUSANDS ------------ Israeli currency (A) Unlinked 23,264 22,963 ------- ------- ------- ------- Linked (B) 1,636 ------- ------- Other non-dollar currencies (C) 91,396 34,761 ------- ------- ------- -------
(a) The above does not include balances in Israeli currency linked to the dollar. (b) To the Israeli CPI. (c) As to hedging transactions entered into by the Company in order to maintain the dollar value of net assets in non-dollar currencies, see note 13. NOTE 15 - SELECTED INCOME STATEMENT DATA: a. SEGMENT INFORMATION: 1) General information: (a) In 1998, the Company adopted FAS 131, "Disclosures about Segments of an Enterprise and Related Information", which was issued in June 1997 by the FASB. (b) As described in note 1a(1) the Company and its subsidiaries design, manufacture and market digital visual information communication systems for the digital preprint and digital printing markets. The Company and its subsidiaries' reportable segments are strategic business units which are distinguished by the geographical areas in which they generate revenues. Although the products sold and the services rendered are mostly the same, gross margins differ significantly in the various geographical areas. The revenues are attributed to geographical segments based on location of the customer. 2) Information about reported segment profit or loss and assets: a) Measurement of segment profit or loss and segment assets: The accounting policies of the segments are the same as those described in the significant accounting policies. 34 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 15 - SELECTED INCOME STATEMENT DATA (continued): The Company evaluates performance mainly based on gross profit, which is presented for each geographical segment based on the cost of the manufacturer, which is significantly different from the transfer cost. b) Reported segment profit or loss and segment assets:
NORTH FAR AND SOUTH EAST & AMERICA EUROPE OTHER TOTAL ------------- ------------- -------------- ----------- $ IN THOUSANDS -------------------------------------------------------- Year ended December 31, 1998: Revenues from external customers 296,858 236,779 106,674 640,311 ------- ------- ------- ------- ------- ------- ------- ------- Segment gross profit 120,900 101,400 49,275 271,275 ------- ------- ------- ------- ------- ------- ------- ------- Segment assets 239,999 124,254 197,435 561,688 ------- ------- ------- ------- ------- ------- ------- ------- Depreciation and amortization 20,251 3,368 11,847 35,466 ------- ------- ------- ------- ------- ------- ------- ------- Year ended December 31, 1997: Revenues from external customers 275,099 222,956 119,604 617,659 ------- ------- ------- ------- ------- ------- ------- ------- Segment gross profit 110,400 84,700 49,033 244,133 ------- ------- ------- ------- ------- ------- ------- ------- Segment assets 257,137 107,214 230,278 594,629 ------- ------- ------- ------- ------- ------- ------- ------- Depreciation and amortization 18,466 4,165 8,686 31,317 ------- ------- ------- ------- ------- ------- ------- ------- Year ended December 31, 1996(*): Revenues from external customers 242,899 221,228 159,978 624,105 ------- ------- ------- ------- ------- ------- ------- ------- Segment assets 247,076 133,611 236,893 617,580 ------- ------- ------- ------- ------- ------- ------- -------
* Computation of segment gross profit for 1996 is not practicable. 35 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 15 - SELECTED INCOME STATEMENT DATA (continued): c) Reconciliation of reportable segment assets to the Companys consolidated totals:
DECEMBER 31 ---------------------------------- 1998 1997 1996 ------- ------- ------- $ IN THOUSANDS ---------------------------------- Total assets for reportable segments 561,688 594,629 617,580 Assets of discontinued operations 3,820 74,098 87,154 ------- ------- ------- Consolidated total 565,508 668,727 704,734 ------- ------- ------- ------- ------- -------
d) Geographic information Information about geographic areas, classified by the Company's country of domicile and by foreign countries, is as follows: 1) Revenues from external customers:
1998 1997 1996 ------- ------- ------- $ IN THOUSANDS ------------------------------------------- United States 293,861 265,979 227,554 Japan 64,573 67,320 110,210 Other countries 281,877 284,360 286,341 ------- ------- ------- 640,311 617,659 624,105 ------- ------- ------- ------- ------- -------
Revenues are attributed to countries based on the location of the customers. 2) Long-lived assets: (a) As follows:
DECEMBER 31 ---------------------------------------- 1998 1997 1996 ------- ------- ------- $ IN THOUSANDS Israel 30,762 26,776 29,950 United States 51,522 49,473 38,808 Other countries 8,618 8,111 10,876 ------- ------- ------- 90,902 84,360 79,634 ------- ------- ------- ------- ------- ------- (b) Reconciliation of reportable long-lived assets to the company's consolidated long-lived assets: Total assets for reportable segments 90,902 84,361 79,634 Long-lived assets of discontinued operations 5,244 6,288 ------- ------- ------- Consolidated long-lived assets 90,902 89,605 85,922 ------- ------- ------- ------- ------- -------
36 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 15 - SELECTED INCOME STATEMENT DATA (continued):
YEAR ENDED DECEMBER 31 ---------------------------------- 1998 *1997 *1996 --------- ------------- ---------- $ IN THOUSANDS ---------------------------------- b. RESEARCH AND DEVELOPMENT COSTS - net: Expenses incurred, including in-process research and development (see note 2a) 121,632 68,110 72,822 L e s s - royalty-bearing participations from the Government of Israel (note 9a(1)(a)) 10,870 10,500 11,549 ------- ------- ------- 110,762 57,610 61,273 ------- ------- ------- ------- ------- ------- c. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling 100,855 91,327 108,076 General and administrative** 74,142 72,584 142,152 ------- ------- ------- 174,997 163,911 250,228 ------- ------- ------- ------- ------- ------- * Reclassified, see note 2b. ** Including net change in allowance for doubtful accounts and direct write-off of bad debts 7,625 15,468 69,767 ------- ------- ------- ------- ------- -------
37 SCITEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 15 - SELECTED INCOME STATEMENT DATA (continued): d. FINANCIAL INCOME - NET:
YEAR ENDED DECEMBER 31 ---------------------------------- 1998 *1997 *1996 --------- ------------ --------- $ IN THOUSANDS ---------------------------------- Income: Interest 5,049 6,954 6,648 Realized and unrealized gain on trading marketable securities - net 619 740 893 Non-dollar currency gains and losses - net 1,287 2,175 1,071 ------- ------- ------- 6,955 9,869 8,612 ------- ------- ------- Expenses: Interest 521 2,171 1,846 Bank charges 819 915 1,012 Cost of hedging transactions 644 842 1,071 ------- ------- ------- 1,984 3,928 3,929 ------- ------- ------- 4,971 5,941 4,683 ------- ------- ------- ------- ------- -------
* Reclassified. NOTE 16 - TRANSACTIONS AND BALANCES WITH RELATED PARTIES: a. The Company and its subsidiaries have conducted financial transactions with related parties, mainly banks and insurance and leasing companies, in the ordinary course of business. b. The Company had trade receivables from a 50%-owned joint venture company in Japan totaling $10,040,000 and $14,381,000 at December 31, 1998 and 1997, respectively. c. See also notes 8, 9a(2) and 15a. --------------- -------------------- --------------- 38 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PEC Israel Economic Corporation By: /s/ JAMES I. EDELSON --------------------------- DATE: July 30, 1999 James I. Edelson EXECUTIVE VICE PRESIDENT AND SECRETARY -----END PRIVACY-ENHANCED MESSAGE-----