SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the Month of March 2003
-----------------------
ELBIT SYSTEMS LTD.
(Translation of Registrant's Name into English)
Advanced Technology Center, P.O.B. 539, Haifa 31053, Israel
(Address of Principal Corporate Offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F:
[X] Form 20-F [ ] Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934:
[ ] Yes [X] No
Attached hereto as Exhibit 1 and incorporated herein by reference is
the Registrant's press release dated March 11, 2003.
Attached hereto as Exhibit 2 and incorporated herein by reference is
the Registrant's Management Report with respect to the results of operations of
the Registrant for the year ended December 31, 2002.
Attached hereto as Exhibit 3 and incorporated herein by reference is
the Registrant's consolidated audited financial statements for the year ended
December 31, 2002.
SIGNATURE
Pursuant to the requirements 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.
ELBIT SYSTEMS LTD.
(Registrant)
By: /s/ Arie Tal
-----------------------------------------
Name: Arie Tal
Title: Corporate Secretary
Dated: March 11, 2003.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
1. Press release dated March 11, 2003.
2. Management report.
3. Financial statements
EXHIBIT 1
---------
ELBIT SYSTEMS REPORTS FOURTH QUARTER
------------------------------------
AND YEAR-END RESULTS FOR 2002
-----------------------------
o Annual revenues increase 8% to $827 million
o Net income, excluding non-recurring charges, increases 23% to $50.2 million
o Backlog of orders reaches $1.69 billion
HAIFA, ISRAEL, MARCH 11, 2003 - ELBIT SYSTEMS LTD. (THE "COMPANY") (NASDAQ:
ESLT), the international defense company, today reported its fourth quarter and
year-end consolidated results for 2002, ended December 31, 2002.
CONSOLIDATED REVENUES FOR THE FOURTH QUARTER OF 2002 increased to $238.3 million
from $224.8 million in the corresponding quarter in 2001.
CONSOLIDATED REVENUES FOR THE YEAR ENDED DECEMBER 31, 2002 increased by
approximately 8.2% to $827.5 million from $764.5 million in 2001.
CONSOLIDATED NET INCOME FOR THE FOURTH QUARTER OF 2002 increased to $13.1
million (5.5% of revenues) from $7.7 million (3.4% of revenues) in the same
period in 2001. Diluted earnings per share for the fourth quarter of 2002 were
$0.33 as compared with $0.19 for the fourth quarter of 2001.
As previously reported, the Company's results for the second quarter of 2002
included a non-recurring charge of $9.8 million (before tax) due to an agreement
reached with the Israeli Office of the Chief Scientist ("OCS"), and the results
for the third quarter of 2002 included a $2.8 million reduction in tax expenses
due to adjustments for prior years.
CONSOLIDATED NET INCOME FOR THE YEAR ENDED DECEMBER 31, 2002, excluding the
non-recurring charge related to the OCS program and prior years tax adjustment,
was $50.2 million (6.1% of revenues), as compared to $40.8 million (5.3% of
revenues) in 2001, an increase of 23%. Diluted earnings per share for the year
2002, excluding the non-recurring charge related to OCS and prior years tax
adjustment, were $1.26 as compared with $1.04 in 2001.
CONSOLIDATED NET INCOME FOR 2002, including the non-recurring charge related to
OCS and prior years tax adjustment, was $45.1 million (5.5% of revenues), or
diluted earnings per share of $1.13.
GROSS PROFIT FOR THE FOURTH QUARTER OF 2002, was $67.2 million (28.2% of
revenues), as compared with gross profit of $60 million (26.7% of revenues) in
the fourth quarter of 2001.
GROSS PROFIT FOR THE YEAR ENDED DECEMBER 31, 2002, BEFORE THE NON-RECURRING
CHARGE FOR THE OCS, was $231.9 million (28% of revenues), as compared with gross
profit of $210.5 million (27.5% of revenues) in 2001.
GROSS PROFIT FOR THE YEAR ENDED DECEMBER 31, 2002, AFTER THE NON-RECURRING
CHARGE FOR THE OCS, was $222.1 million (26.8% of revenues).
BACKLOG OF ORDERS as of December 31, 2002 reached $1,689 million, as compared
with $1,566 million at the end of 2001. 62% of the backlog relates to orders
outside of Israel. Approximately 79% of the Company's backlog as of December 31,
2002 is scheduled to be performed during 2003 and 2004.
The President and CEO of Elbit Systems, Joseph Ackerman, commented: "We are
pleased to report the Company's fourth quarter and year-end results for 2002,
which demonstrate our continued profitable growth in a challenging market. Our
advanced technologies and the excellent team of professionals employed in our
facilities worldwide, allow Elbit Systems to meet our customers' needs in the
ever-changing defense environment.
"In light of the intention of the new Government in Israel to accelerate
privatization, Elbit Systems views itself as a natural candidate to take part in
the defense industries privatization process," added Mr. Ackerman.
The Board of Directors has declared a dividend of $0.09 per share for the fourth
quarter of 2002. The dividend will be paid on April 28, 2003, net of taxes and
levies, at the rate of 17%. The record date of the dividend is April 15, 2003.
The total dividend declared for the year 2002 was $0.34 per share.
Conference Call
---------------
Elbit Systems cordially invites you to participate in our interactive conference
call on Tuesday, March 11, 2003 at 10:30 AM ET. To take part in the conference
call, please dial 1-866-500-4965 (U.S. and Canada) or 1-877-332-1104 (U.S.) or
+972-3-925-5910 (International) a few minutes before the 10:30 AM ET start time.
For your convenience, an instant replay will be available Tuesday, March 11,
2003 at 12:30 PM ET until Thursday, March 13, 2003 at 5:00 PM ET. The replay
telephone number is 1-866-500-4965 (U.S. and Canada) or +972-3-925-5945
(International).
ABOUT ELBIT SYSTEMS LTD.
Elbit Systems Ltd. is an international defense electronics company engaged in a
wide range of defense-related programs throughout the world, in the areas of
aerospace, ground and naval systems, command, control, communications, computers
and intelligence (C4I) and advanced electro-optic technologies. The Company
focuses on the upgrading of existing military platforms and developing new
technologies for defense
-2-
applications. For further information, please visit the Company web site at
www.elbit.co.il.
CONTACT
Arie Tal, Corporate Secretary, Marilena LaRosa
Ilan Pacholder, VP Finance Investor Relations
Elbit Systems Ltd The Anne McBride Company
Tel: 972-4 831-6632 1212-983-1702
Fax: 972-4 831-6659 mlarosa@annemcbride.com
STATEMENTS IN THIS PRESS RELEASE WHICH ARE NOT HISTORICAL DATA ARE
FORWARD-LOOKING STATEMENTS WHICH INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
OR OTHER FACTORS NOT UNDER THE COMPANY'S CONTROL, WHICH MAY CAUSE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT
FROM THE RESULTS, PERFORMANCE OR OTHER EXPECTATIONS IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DETAILED IN THE COMPANY'S PERIODIC FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
(FINANCIAL TABLES TO FOLLOW)
-3-
ELBIT SYSTEMS LTD.
CONSOLIDATED BALANCE SHEETS
(In thousand of US Dollars)
December 31 December 31
2002 2001
------- -------
Audited Audited
ASSETS
Current Assets:
Cash and short term deposits 77,930 42,029
Trade receivable and others 262,100 278,036
Inventories, net of advances 222,844 185,090
------- -------
Total current assets 562,874 505,155
Affiliated Companies & other Investments 33,051 31,492
Long-term receivables & others 31,186 74,765
Fixed Assets, net 202,961 184,722
Other assets, net 105,769 105,283
------- -------
935,841 901,417
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities 365,322 384,239
Long-term liabilities 154,483 136,262
Minority Interest 4,675 2,931
Shareholder's equity 411,361 377,985
------- -------
935,841 901,417
======= =======
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ELBIT SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF INCOME
(In thousand of US Dollars, except for per share amounts)
For the Year Ended Three Months Ended
December 31 December 31
2002 2001 2002 2001
---- ---- ---- ----
Audited Unaudited
Revenues 827,456 764,501 238,313 224,770
Cost of revenues 595,512 553,957 171,097 164,804
Non-recurring charge 9,801 - - -
------- ------- ------- -------
Gross Profit 222,143 210,544 67,216 59,966
Research and development, net 57,010 58,759 17,333 17,727
Marketing and selling 65,691 54,876 18,446 16,750
General and administrative 41,651 43,216 10,864 14,406
------- ------- ------- -------
Total operating expenses 164,352 156,851 46,643 48,883
------- ------- ------- -------
Operating income 57,791 53,693 20,573 11,083
Financial expenses, net (3,035) (2,617) (2,343) (1,931)
Other income (expenses), net (462) 774 62 1,249
------- ------- ------- -------
Income before income taxes 54,294 51,850 18,292 10,401
Provisions for income taxes 9,348 11,003 2,539 2,128
------- ------- ------- -------
44,946 40,847 15,753 8,273
Company's share of partnerships and affiliated 675 (598) (1,879) (169)
Companies income (loss), net
Minority rights (508) 547 (747) (437)
------- ------- ------- -------
Net income 45,113 40,796 13,127 7,667
======= ======= ======= =======
Basic Earnings per share 1.17 1.07 0.34 0.20
======= ======= ======= =======
Diluted net earnings per share 1.13 1.04 0.33 0.19
======= ======= ======= =======
Net earnings excluding OCS charge and tax
adjustment 50,153 13,127
======= =======
Diluted earnings per share excluding OCS charge and
tax adjustment 1.26 0.33
======= =======
-5-
EXHIBIT 2
---------
ELBIT SYSTEMS LTD.
------------------
MANAGEMENT'S REPORT
-------------------
FOR THE YEAR ENDED DECEMBER 31, 2002
------------------------------------
THIS REPORT SHOULD BE READ TOGETHER WITH THE COMPANY'S AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES FOR THE YEAR ENDED
DECEMBER 31, 2002 AND THE COMPANY'S FORM 20-F FOR THE YEAR ENDED
DECEMBER 31, 2001, FILED BY THE COMPANY WITH THE U.S. SECURITIES AND
EXCHANGE COMMISSION AND WITH THE ISRAELI SECURITIES AUTHORITY.
A. THE COMPANY'S BUSINESS OVERVIEW
Elbit Systems Ltd. ("Elbit Systems") and its subsidiary companies
(together the "Company" or the "Group") operate in the area of
upgrading existing airborne, ground and naval defense platforms and are
engaged in projects involving the design, development, manufacture,
integration and marketing of advanced integrated defense systems,
electronic systems, electro-optic systems and products, software
intensive programs and products for the defense and homeland security
sectors. In addition, the Company provides support and services for
such platforms, systems and products.
The Company is engaged in the design, development, manufacture and
integration of electronic and electro-optic systems and products for
various leading projects in Israel and worldwide, in areas such as air,
ground and naval Command, Control, Communication, Computers,
Intelligence, Surveillance and Reconnaissance ("C4ISR") systems,
digital maps, night vision systems, pilot helmet mounted systems,
display and data processing systems, unmanned air vehicles ("UAVs"),
computerized simulators, communication systems, thermal imaging
products, laser products, optical systems for space applications,
airborne reconnaissance systems, optic communication systems and
products, security systems and products, surveillance products and
systems and electric drive systems.
The Company provides a wide range of logistic support services,
including operation of pilot training services for the Israeli Air
Force on a private financing initiative ("PFI") basis. Several of the
Group's companies also provide advanced engineering and manufacturing
services to various customers, utilizing their advanced manufacturing
capabilities. The Company often cooperates with industries in Israel
and in various other countries.
B. BACKLOG OF ORDERS
On December 31, 2002, the Company's backlog of orders reached $1,689
million, of which 62% were for orders outside Israel. On December 31,
2001, the Company's backlog was $1,566 million, out of which 68% were
for orders outside Israel.
Approximately 79% of the Company's backlog as of December 31, 2002 is
scheduled to be performed during the year 2003 and the year 2004. The
majority of the 21% balance is scheduled to be sold in 2005 and 2006.
C. MAJOR SUBSIDIARIES AND AFFILIATED COMPANIES
o Elop Electro-Optics Industries Ltd. ("El-Op") - a wholly owned
subsidiary registered in Israel, is engaged in the field of advanced
electro-optical products for defense, homeland security and civil
applications. El-Op's main areas of activity include development and
production of thermal imaging products, laser products, optical systems
for space applications, airborne reconnaissance systems, optical
communications systems, fire control systems for combat vehicles,
homeland security products and other systems for defense applications.
o EFW Inc. ("EFW") - a wholly owned subsidiary registered in the United
States, serves as the base for the Group's activities in the United
States, mainly in the area of development, production and maintenance
of advanced defense products and systems.
o Vision Systems International LLC ("VSI") - a 50% owned subsidiary of
EFW in the United States, jointly owned with Rockwell Collins Inc., is
engaged in the area of helmet mounted systems primarily for fighter
aircraft.
o Cyclone Aviation Products Ltd. ("Cyclone") - a wholly owned subsidiary
registered in Israel, provides logistic support and maintenance
services for aircraft and helicopters and manufactures structure
components and sub-assemblies for aircraft.
o Silver Arrow LP - a wholly owned limited partnership registered in
Israel, is engaged in the business of UAV systems and products.
o Ortek Ltd. ("Ortek") - a wholly owned subsidiary registered in Israel,
is engaged mainly in the area of security products and systems and
night vision equipment. On January 7, 2002, the Company increased its
holdings in Ortek from 75% to 100%.
-2-
o Kinetics Ltd. ("Kinetics") - a 51% owned subsidiary registered in
Israel, is involved mainly in the development and production of systems
and components for armored vehicles.
o Semi-Conductor Devices ("SCD") - an affiliated Israeli partnership,
owned 50% each by the Company and Rafael Armaments Development
Authority Ltd. ("Rafael"), is engaged in the development and production
of infrared detectors and laser diodes.
o Opgal Optronic Industries Ltd. ("Opgal") - an affiliated Israeli
company, owned 50.1% by the Company and 49.9% by Galram Technologies
Ltd., a wholly owned subsidiary of Rafael, is engaged mainly in the
area of thermal imaging systems for commercial applications.
o The Company has holdings, directly and indirectly, in several
relatively small companies in various countries. These companies are
engaged mainly in the manufacturing, marketing and servicing of defense
avionics and electronics as well as defense related software.
The Company also has holdings, directly and indirectly, in several
technology spin-off companies whose activities are based on
technologies that were developed by the Company. The spin-off companies
are involved primarily in the areas of optical communications, space
satellites and medical equipment.
The Company evaluates investments in affiliates, partnerships and other
companies, and when relevant factors indicate an other then temporary
decline in the fair value of the investments below their book values,
it adjusts the investment to the estimated fair value. The value of
these companies is subject to ongoing changes resulting from their
business conditions. In the fourth quarter of 2002, the Company
wrote-off $2.0 million representing its investment in Red C Optical
Networks Inc. in which the Company owns 36%.
D. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are described in Note 2
to the audited consolidated financial statements for the year ended
December 31, 2002.
The Company's results of operations and financial condition are based
on the preparation of consolidated financial statements in conformity
with generally accepted accounting principles in the U.S. ("U.S.
GAAP"). The preparation of the consolidated financial statements
requires management to select accounting policies for critical
accounting areas as well as estimates and assumptions that affect the
amounts reported in the consolidated financial statements. Significant
changes in assumptions and/or conditions and changes in critical
accounting policies could materially impact the Company's operating
results and financial condition.
-3-
In the Company's opinion, its most critical accounting policy relates
to revenue recognition based on SOP 81-1 "Accounting for Performance of
Construction Type and Certain Production Type Contracts", which is
relevant to most of its revenues.
Under SOP 81-1, the Company has adopted the "percentage of completion"
accounting method. Under this method, the Company recognizes revenues
and profits on long-term fixed price contracts based on estimates of
costs to be incurred for the total contract. Under this approach, the
Company compares estimated costs to complete an entire contract to
total revenues for the term of the contract to arrive at an estimated
gross margin percentage for each contract. The estimated gross margin
percentage is applied to the cumulative revenue recognized on the
contract to arrive at cost of sales for the period.
Management reviews these estimates periodically and the effect of any
change in the estimated gross margin percentage for a contract is
reflected in cost of sales in the period in which the change is known.
If increases in projected costs to complete are sufficient to create a
loss contract, the entire estimated loss is charged to operations in
the period the loss first becomes known.
A number of internal and external factors affect the Company's cost
estimates, including labor rate, estimated future material prices,
revised estimates of uncompleted work, efficiency variances, linkage to
indices and exchange rates, customer specification and testing
requirement changes. If any of the above factors were to change, or if
different assumptions were used in the application of this and other
accounting policies, it is likely that materially different amounts
would be reported in the Company's consolidated financial statements.
E. IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS
Consistent with Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," goodwill is no longer
amortized, but instead is tested at least annually for impairment.
Prior to 2002, goodwill was amortized using the straight-line method
over its estimated period of useful life. As of December 31, 2002, the
Company's goodwill and assembled work force amounted to $32.5 million.
Based on the results of a goodwill impairment evaluation that was made
during the fourth quarter of 2002, the Company concluded that no
impairment loss was required to be recorded in 2002.
Consistent with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company evaluated long-lived assets
for impairment and assessed their recoverability based upon anticipated
future cash flows. The Company concluded that no impairment loss was
required to be recorded in 2002.
-4-
As of December 31, 2002, the Company's long-lived assets amounted to
$276.2 million, including $73.2 million in intangible assets.
Should future impairment tests made by the Company determine that
impairment in the value of the Company's goodwill or long-lived assets
exists, such impairment may have a material effect on the financial
results of the Company in the period in which its existence is
determined.
F. EVENTS IN 2002
o On May 23, 2002, Elbit Systems announced that its wholly-owned
subsidiary El-Op reached an agreement to join the new program offered
by the Office of the Chief Scientist of the Israeli Ministry of
Industry and Trade ("OCS"), aimed at major research and development
intensive Israeli companies.
According to the agreement, El-Op will pay the OCS, over a period of
five years commencing in 2002, an agreed amount of $10.6 million, in
exchange for a release by the OCS from all obligations of El-Op to pay
royalties in the future.
The agreed upon amount, net of cost of accrued royalties previously
recorded by El-Op, was recorded with cost of revenues as a one-time
charge of approximately $9.8 million (pre-tax) in the Company's
statement of operations for the second quarter of 2002. The Company
estimates that the cost of the agreement will be recovered through
reduction of future royalty expenses within a period of approximately
four years.
o The Company's gross profit for 2002 was affected by the write-off in
the amount of approximately $6.3 million (pre-tax) due to losses
related to the Fairchild-Dornier GmbH ("Dornier") project that was
included in its results for the second quarter of 2002. The write-off
was made in view of the insolvency proceedings that were instituted
against Dornier and the uncertain future of the "728" aircraft project,
with respect to which Cyclone had previously agreed to supply certain
parts. Through March 10, 2003, there have been no indications of
improvement with regards to the "728" project.
-5-
G. SUMMARY OF FINANCIAL RESULTS
The following table sets forth the consolidated statements of
operations of the Company and its subsidiaries for the three-month
periods and years ended December 31, 2002 and December 31, 2001.
For the year For the three months
ended on December 31 ended on December 31
------------------------------------- -----------------------------------
2002 2001 2002 2001
----------------- ---------------- --------------- ---------------
$ % $ % $ % $ %
------- ---- ------- ---- ------ ---- ------ ----
(In thousands of U.S. dollars except per share data)
Total revenues 827,456 100.0 764,501 100.0 238,313 100.0 224,770 100.0
Cost of revenues 595,512 72.0 553,957 72.5 171,097 71.8 164,804 73.3
------- ----- ------- ----- ------- ----- ------- -----
Gross profit before OCS non-recurring
charge 231,944 28.0 210,544 27.5 67,216 28.2 59,966 26.7
------- ----- ------- ----- ------- ----- ------- -----
OCS non-recurring charge 9,801 1.2 - - - - - -
------- ----- ------- ----- ------- ----- ------- -----
Gross profit as reported 222,143 26.8 210,544 27.5 67,216 28.2 59,966 26.7
------- ----- ------- ----- ------- ----- ------- -----
Research and development expenses, net 57,010 6.9 58,759 7.7 17,333 7.3 17,727 7.9
Marketing and selling expenses 65,691 7.9 54,876 7.2 18,446 7.7 16,750 7.5
General and administrative expenses 41,651 5.0 43,216 5.7 10,864 4.6 14,406 6.4
------- ----- ------- ----- ------- ----- ------- -----
164,352 19.9 156,851 20.5 46,643 19.6 48,883 21.7
------- ----- ------- ----- ------- ----- ------- -----
Operating profit 57,791 7.0 53,693 7.0 20,573 8.6 11,083 4.9
Financing expenses, net (3,035) (0.4) (2,617) (0.3) (2,343) (1.0) (1,931) (0.9)
Other income (expenses), net (462) (0.1) 774 0.1 62 - 1,249 0.6
------- ----- ------- ----- ------- ----- ------- -----
Income before income taxes 54,294 6.6 51,850 6.8 18,292 7.7 10,401 4.6
Provision for income taxes 9,348 1.1 11,003 1.4 2,539 1.1 2,128 0.9
------- ----- ------- ----- ------- ----- ------- -----
44,946 5.5 40,847 5.3 15,753 6.6 8,273 3.7
Minority interest (508) (0.1) 547 0.1 (747) (0.3) (437) (0.2)
Company's share of income (loss) of
affiliated companies and partnerships 675 0.1 (598) (0.1) (1,879) (0.8) (169) (0.1)
------- ----- ------- ----- ------- ----- ------- -----
Net earnings 45,113 5.5 40,796 5.3 13,127 5.5 7,667 3.4
======= ===== ======= ===== ======= ===== ======= =====
Diluted earnings per share 1.13 1.04 0.33 0.19
======= ======= ======= =======
Weighted average number of shares
used in computation 39,863 39,359 39,756 40,086
======= ======= ======= =======
-6-
NON -US GAAP DISCLOSURE
The following table sets forth the Company's results of operations, excluding
the non-recurring charge of $9.8 million (pre-tax) related to the agreement
between El-Op and the OCS signed in the second quarter of 2002, the tax
adjustment in 2002 and the amortization of goodwill in the amount of $2.8
million in 2001.
For the year For the three months
ended on December 31 ended on December 31
------------------------------------- -----------------------------------
2002 2001 2002 2001
----------------- ---------------- --------------- ---------------
$ % $ % $ % $ %
------- ---- ------- ---- ------ ---- ------ ----
(In thousands of U.S. dollars except per share data)
GROSS PROFIT AS REPORTED 222,143 26.8 210,544 27.5 67,216 28.2 59,966 26.7
Goodwill amortization in 2001 - - 800 0.1 - - 200 0.1
OCS charge 9,801 1.2 - - - - - -
------- ---- ------- ---- ------ ---- ------ ----
Gross profit excluding OCS charge
and goodwill amortization 231,944 28.0 211,344 27.6 67,216 28.2 60,166 26.8
======= ==== ======= ==== ====== ==== ====== ====
OPERATING PROFIT AS REPORTED 57,791 7.0 53,693 7.0 20,573 8.6 11,083 4.9
Goodwill amortization in 2001 - - 2,800 0.4 - - 700 0.3
OCS charge 9,801 1.2 - - - - - -
------- ---- ------- ---- ------ ---- ------ ----
Operating profit excluding OCS
change and goodwill amortization 67,592 8.2 56,493 7.4 20,573 8.6 11,783 5.2
======= ==== ======= ==== ====== ==== ====== ====
NET EARNINGS AS REPORTED 45,113 5.5 40,796 5.3 13,127 5.5 7,668 3.4
Goodwill amortization in 2001 - - 2,800 0.4 - - 700 0.3
Tax adjustment (2,800) (0.3)
OCS charge 7,840 0.9 - - - - - -
------- ---- ------- ---- ------ ---- ------ ----
Net earnings excluding OCS charge,
goodwill amortization in 2001 and
tax adjustment 50,153 6.1 43,596 5.7 13,127 5.5 8,368 3.7
======= ==== ======= ==== ====== ==== ====== ====
EARNINGS PER SHARE AS REPORTED 1.13 1.04 0.33 0.19
Goodwill amortization in 2001 - 0.07 - 0.02
Tax adjustment (0.07) - - -
OCS charge 0.20 - - -
------- ------- ------ ------
Diluted earnings per share excluding
OCS charge, goodwill amortization
and tax adjustment 1.26 1.11 0.33 0.21
======= ======= ====== ======
-7-
REVENUES
Year Ended on December 31, 2002, Compared to Year Ended on December 31, 2001
----------------------------------------------------------------------------
The Company's consolidated revenues increased by 8.2%, from $764.5 million in
2001 to $827.5 million in 2002.
The following table sets forth the Company's revenue distribution by areas of
operation:
Year ended
---------------------------------------------------------
December 31, 2002 December 31, 2001
$ millions % $ millions %
------------------------ -------------------------
Airborne systems 372.8 45.1 334.2 43.7
Armored vehicle systems 135.7 16.4 126.3 16.5
C4I systems 122.7 14.8 105.8 13.8
Electro-optics 148.1 17.9 162.7 21.3
Other (mainly non-defense engineering
and production services) 48.2 5.8 35.5 4.7
----- ----- ----- -----
Total 827.5 100.0 764.5 100.0
===== ===== ===== =====
Revenues increased in 2002 mainly in airborne systems, which increased by $38.6
million, and C4I Systems which increased by $16.9 million.
The following table sets forth the Company's distribution of revenues by
geographical regions:
Year ended
---------------------------------------------------------
December 31, 2002 December 31, 2001
$ millions % $ millions %
------------------------ -------------------------
Israel 225.7 27.3 226.6 29.7
United States 267.7 32.3 206.6 27.0
Europe 144.9 17.5 179.6 23.5
Other Countries 189.2 22.9 151.7 19.8
----- ---- ----- ----
Total 827.5 100.0 764.5 100.0
===== ===== ===== =====
The Company's sales are primarily to governmental entities and prime contractors
under government defense programs. Accordingly, the level of the Company's
revenues is subject to governmental budgetary constraints.
Revenues are generated mainly from sales to the United States, Israel, and
countries in Europe, Latin America and Asia. The recent economic situation in
Israel has created uncertainty with respect to the Israeli Government general
and defense budgets.
-8-
Revenues in the United States increased by 29.6%, from $206.6 million to $267.7
million. Revenues also increased in Other Countries, mainly in Latin America and
Asia, while revenues in Europe declined as deliveries under certain major
programs entered final phases. In Israel, the Company was able to maintain in
2002 its revenues level, in spite of the budgetary pressures that the Israeli
Ministry of Defense has been experiencing.
GROSS PROFIT
Year Ended on December 31, 2002, Compared to Year Ended on December 31, 2001
----------------------------------------------------------------------------
Reported gross profit in 2002 was $222.1 million (with gross profit margin of
26.8%) as compared to $210.5 million (gross profit margin of 27.5%) in 2001.
Gross profit included $9.8 million of non-recurring charges related to the OCS
program in 2002, and $0.8 million goodwill amortization in 2001. Excluding these
charges, the gross profit and gross profit margin in 2002 were $231.9 million
and 28.0%, respectively, as compared to $211.3 million and 27.6%, respectively
in 2001.
Gross profit in 2001 included expenses of $2.9 million related to the Company's
share price linked compensation costs. The effect of the share price linked
compensation on the gross profit in 2002 was not material.
As noted above, the Company's gross profit for 2002 was also affected by the
write-off in the amount of approximately $6.3 million in the second quarter of
2002 relating to the Dornier project.
RESEARCH AND DEVELOPMENT ("R&D")
The Company continually invests in R&D in order to maintain and further advance
its technologies, in accordance with a long-term plan, based on its estimate of
future market needs.
Gross R&D expenses in 2002 totaled $62.6 million (7.6% of revenues), as compared
with $67.9 million (8.9% of revenues) in 2001. The decrease in R&D expenses as a
percentage of revenues was caused mainly by a different mix of R&D work
performed by the Company under customer funded and Company funded R&D projects,
as well as a result of the Company's continued efforts to increase the
efficiency of its R&D operation.
Net R&D expenses (after deduction of the OCS participation) in 2002 totaled
$57.0 million (6.9% of revenues), as compared to $58.8 million (7.7% of
revenues) in 2001.
In September 2001, the OCS issued its new "Regulations for the Encouragement of
Research and Development in Industry" (rules for determining the level and
payment of royalties). The regulations allow large R&D intensive companies to
reach certain agreements with the OCS regarding determination of the amount and
payment schedule
-9-
of royalties, subject to certain conditions. El-Op elected to
join the program (see "Events in 2002" above). As of the date of this report,
Elbit Systems has not yet determined whether to join the OCS's new program.
The OCS's participation in the Company's R&D expenses in the 2002 was lower than
in 2001. The Company estimates that the level of participation by the OCS in the
future may be affected by changes in the OCS budget, as well as in the Company's
R&D program.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses in 2002 were $65.7 million (7.9% of revenues), as
compared to $54.9 million (7.2% of revenues) in 2001.
The Company's marketing and selling expenses increased in 2002 as compared to
2001 mainly due to the need to invest a higher level of resources in generating
new business and the increased length of time required for marketing efforts
until orders are received. In addition, the Company continues to invest in
expanding into new markets.
GENERAL AND ADMINISTRATIVE ("G&A") EXPENSES
Reported G&A expenses in 2002 were $41.7 million (5.0% of revenues), as compared
to $43.2 million (5.7% of revenues) in 2001.
Due to changes in the Company's share price in the reported periods, the
Company's G&A expenses included share price linked compensation expenses of $5.2
million in 2001, while in 2002 these expenses were not material. Excluding
goodwill amortization and share price linked compensation, the Company's G&A
expenses in 2001 were $36.0 million. The Company expects that G&A expenses may
continue to be affected in the future, due to changes in the Company's share
price.
As stated above, following the adoption of SFAS 142 effective January 1, 2002,
the Company no longer amortizes goodwill. In 2001, G&A expenses included
amortization of goodwill of approximately $2.0 million.
G&A expenses in 2002 included $2.8 million in amortization of intangible assets
related to activities and companies that were not consolidated in the same
period last year, including mainly Aeroeletronica S.A. (Brazil) and Elron
Telesoft Government Division (Israel), which were acquired in the second half of
2001 and in January 2002, respectively.
OPERATING PROFIT
As a result of all of the above, reported operating income in 2002 was $57.8
million (7.0% of revenues), as compared to $53.7 million (7.0% of revenues) in
2001.
Excluding the non-recurring charge related to the OCS program in 2002 and
goodwill
-10-
amortization in 2001, the Company's operating income and operating margin in
2002 (as a percentage of revenues) were $67.6 million and 8.2%, respectively,
compared to $56.5 million and 7.4% in the comparable period in 2001.
The operating profit in 2001 included share price linked compensation expenses
of $9.1 million. In 2002, the Company had income related to share price linked
compensation that was not material.
The Company expects that operating income may continue to be affected in the
future by changes in the Company's share price due to the Company's share price
linked compensation program.
FINANCE EXPENSE (NET)
Net finance expense in 2002 was $3.0 million, as compared to $2.6 million of net
finance expense in 2001.
The increase in the net finance expense resulted mainly from the increased
financing required by the Company due to the higher level of its revenues,
operating assets and investments.
TAXES ON INCOME
Provision for taxes for 2002 was approximately $9.3 million, as compared to a
provision for taxes of $11.0 million in 2001.
The provision for taxes in 2002 included reduction of tax expenses in the amount
of $2.8 million that was made in the third quarter of 2002, due to adjustment of
estimated taxes and completion of tax assessments for prior years in respect of
various Group companies.
The Company's effective tax rate in 2002 was 17.2%, as compared to 21.2% in
2001. Excluding the tax reduction mentioned above, the Company tax rate for 2002
would have been 22.4%, due mainly to the mix of the tax rates in the various tax
jurisdictions in which the Group's companies generating the taxable income
operate, since the Company's tax rate represents the Group's weighted average
tax rate.
NET EARNINGS AND EARNINGS PER SHARE ("EPS")
Reported net earnings in 2002 was $45.1 million (5.5% of revenues), as compared
to reported net earnings of $40.8 million (5.3% of revenues) in 2001. Reported
fully diluted EPS was $1.13 in 2002, as compared to $1.04 per share in 2001.
Net earnings in 2002, excluding non-recurring charges related to the OCS program
and prior years tax adjustment, were $50.2 million (6.1% of revenues), as
compared to $40.8 million (5.3% of revenues) in 2001. Excluding these charges
and adjustments, diluted EPS was $1.26 in 2002.
-11-
Excluding amortization of goodwill, net earnings and diluted EPS in 2001 were
$43.6 million and $1.11, respectively.
Net earnings in 2001 included $7.1 million in expenses related to share price
linked compensation. In 2002, the Company had income related to share price
linked compensation that was not material.
The number of shares used for computation of diluted EPS in 2002 and 2001 was
approximately 39.9 million shares and 39.4 million shares, respectively. The
increase in the number of shares was due mainly to the exercise of options
during the period.
I. LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow is affected by the cumulative cash flows of its various
projects in the reported periods. Projects' cash flows are affected by the
timing of the receipt of advances and the collection of accounts receivable from
customers, which relate to specific events during the project, while expenses
are on-going. As a result, the Company's cash flows may vary from one period to
another.
The Company's policy is to invest its cash surplus primarily in interest bearing
deposits in accordance with its projected needs.
The resources available to the Company include mainly profits, collection of
accounts receivable, advances from customers, as well as Government of Israel
grants and participation and bank financing in Israel and elsewhere based on its
capital, assets and activities. In addition, the Company has the ability to
raise funds through the offering of shares and debentures to the public from
time to time.
The Company's net cash flow generated from operating activities in 2002 was
$116.0 million, resulting mainly from net income for the period, receipt of
advances from customers and collection of accounts receivables. The cash inflows
were partially offset, mainly by increase in inventories and payment of trade
payables.
Net cash flow used for investment activities in 2002 was $51.0 million, which
was used mainly for procurement of property, plant and equipment, as well as
other assets. During 2002, the Company invested $22.1 million in equipment for
its various manufacturing plants, and $13.2 million in buildings, mainly in
those which are being built at Elbit Systems' facility in Haifa, Israel and
El-Op's site in Rehovot, Israel. The buildings are planned to house employees
currently located in various leased locations in the industrial parks in which
the respective companies are located.
Net cash flow used for financing activities in 2002 was $29.3 million, which was
used mainly for reduction of short and long-term borrowing and payment of $12.7
million in dividends during 2002.
-12-
On December 31, 2002 the Company had total bank borrowing in the amount of
$104.1 million, including $73.2 million in long-term loans, and $374 million in
guarantees issued on its behalf by banks, mainly as advance payment and
performance guarantees in the regular course of business. On December 31, 2002,
the Company had cash balance amounting to $77.9 million
As of December 31, 2002, the Company had working capital of $197.6 million, and
its current ratio was 1.54. The Company's ratio of equity to total assets was
44%.
J. DERIVATIVES AND HEDGES
Market risks relating to the Company's operations result primarily from changes
in interest rates and exchange rates. The Company typically uses financial
instruments to limit exposure. The Company also typically enters into forward
contracts in connection with transactions that are denominated in currencies
other than US dollars and New Israeli Shekels ("NIS"). The Company may enter
from time to time into forward contracts related to NIS, based on market
conditions.
On December 31, 2002, the Company's liquid assets were held in bank deposits,
and it had no liquid equity investments that were subject to market
fluctuations. The Company's financial assets and liabilities are based on
floating interest rates, and their value as of December 31, 2002 was therefore
not exposed to changes in interest rates. Should interest rates either increase
or decrease, such change may affect the Company's financial results due to
changes in the cost of the liabilities and the return on the assets that are
based on floating rates.
The Company's functional currency is the U.S. dollar. On December 31, 2002, the
Company had exposure due to liabilities denominated in NIS of $46 million in
excess of its NIS denominated assets. These liabilities represent mostly wages,
trade payables and the debt to the OCS resulting from the OCS agreement. (See
"Events in 2002"). The amount of the Company's exposure to the value of the NIS
changes from time to time.
Most of the Company's assets and liabilities which are denominated in currencies
other than the NIS and the U.S. dollar were covered as of December 31, 2002 by
forward contracts. On December 31, 2002, the Company had contracts for the sale
and purchase of such foreign currencies totaling $21.4 million. The results of
financial derivative activities were not material.
-13-
K. DIVIDENDS
The Board of Directors declared on March 10, 2002 a dividend of $0.09 per share.
The total dividend declared for 2002 was $ 0.34 per share.
* * *
--------------------------------------------------------------------------------
Forward looking statements with respect to the Company's business, financial
condition and results of operations in this document are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward looking statements, including, but not limited to,
product demand, pricing, market acceptance, changing economic conditions, risks
in product and technology development, the effect of the Company's accounting
policies as well as certain other risk factors which are detailed from time to
time in the Company's SEC filings.
-14-
EXHIBIT 3
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
-----------------------
(IN THOUSANDS OF U.S. DOLLARS)
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
--------------------------------------------------------------------------------
C O N T E N T S
---------------
PAGE
REPORT OF INDEPENDENT AUDITORS 2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Operations 5
Consolidated Statements of Changes in Shareholders' Equity 6 - 7
Consolidated Statements of Cash Flows 8 - 9
Notes to the Consolidated Financial Statements 10 - 58
# # # # # # #
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Elbit Systems Ltd.
We have audited the accompanying consolidated balance sheets of Elbit Systems
Ltd. (the "Company") and its subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of operations, changes in 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 conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial position of the
Company and its subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and 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.
LUBOSHITZ KASIERER
AN AFFILIATE MEMBER OF ERNST & YOUNG INTERNATIONAL
Haifa, Israel
March 10, 2003
-2-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
DECEMBER 31,
--------------------------
NOTE 2002 2001
----- -------- ---------
CURRENT ASSETS
Cash and cash equivalents $76,280 $40,583
Short-term bank deposits 1,650 1,446
Trade receivables, net (3A) 227,724 241,827
Other receivables and prepaid expenses (4) 34,376 36,209
Inventories, net of advances (5) 222,844 185,090
-------- ---------
Total current assets 562,874 505,155
-------- ---------
INVESTMENTS AND LONG-TERM RECEIVABLES
Investments in affiliated companies and partnership (6A) 21,947 19,583
Investments in other companies (6B) 11,104 11,909
Long-term receivables (3B) 20,859 64,804
Long-term bank deposits and loan (7) 3,686 3,433
Severance pay fund 6,641 6,528
-------- ---------
64,237 106,257
-------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET (8) 202,961 184,722
-------- ---------
OTHER ASSETS, NET (9)
Goodwill and assembled work-force, net 32,541 31,946
Know-how and other intangible assets, net 73,228 73,337
-------- ---------
105,769 105,283
-------- ---------
$935,841 $ 901,417
======== =========
The accompanying notes are an integral part of the financial statements.
-3-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share data)
DECEMBER 31,
--------------------------
NOTE 2002 2001
----- -------- ---------
CURRENT LIABILITIES
Short-term bank credit and loans (10) $30,915 $ 46,894
Trade payables 83,463 108,617
Other payables and accrued expenses (11) 142,526 135,386
Customers advances and amounts in excess of
costs incurred (12) 108,418 93,342
-------- --------
Total current liabilities 365,322 384,239
-------- --------
LONG-TERM LIABILITIES
Long-term loans (13) 73,173 69,202
Advances from customers (12) 40,411 29,840
Deferred income taxes (15) 16,413 21,989
Accrued severance pay (14, 2M) 24,486 15,231
-------- --------
154,483 136,262
-------- --------
CONTINGENT LIABILITIES AND COMMITMENTS (16)
MINORITY INTEREST 4,675 2,931
-------- --------
SHAREHOLDERS' EQUITY (17)
Share capital
Ordinary shares of NIS1 par value; Authorized - 80,000,000 shares
as of December 31, 2002 and 2001; Issued - 39,205,478 and
38,739,093 shares as of December 31, 2002 and 2001,
respectively; Outstanding -38,796,657 and 38,330,272 shares as
of December 31, 2002 and 2001, respectively 11,154 11,054
Accumulated other comprehensive loss (2,882) -
Additional paid-in capital 248,387 244,625
Retained earnings 159,023 126,627
Treasury stock- 408,821 shares as of December 31, 2002
and 2001 (4,321) (4,321)
-------- --------
411,361 377,985
-------- --------
$935,841 $901,417
======== ========
The accompanying notes are an integral part of the financial statements.
-4-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share data)
YEAR ENDED
-------------------------------------------
DECEMBER 31,
NOTE 2002 2001 2000
------ ------------- ----------- ----------
Revenues (18) $827,456 $764,501 $ 591,084
Cost of revenues (19) 605,313 553,957 432,786
Restructuring expenses (inventory write-off) - - 10,300
------- ------- -------
Gross profit 222,143 210,544 147,998
------- ------- -------
Research and development costs, net (20) 57,010 58,759 44,274
Marketing and selling expenses (21) 65,691 54,876 38,449
General and administrative expenses (22) 41,651 43,216 26,251
Acquired in-process research and development - - 40,000
Restructuring costs - - 11,800
------- ------- -------
164,352 156,851 160,774
------- ------- -------
Operating income (loss) 57,791 53,693 (12,776)
Financial income (expenses), net (23) (3,035) (2,617) 115
Other income (expenses), net (24) (462) 774 3
------- ------- -------
Income (loss) before taxes on income 54,294 51,850 (12,658)
Taxes on income (15) 9,348 11,003 6,227
------- ------- -------
44,946 40,847 (18,885)
Equity in net (losses) earnings of affiliated companies and
partnership 675 (598) (1,429)
Minority interest in losses (gains) of
subsidiaries (508) 547 (217)
------- ------- -------
Net income (loss) $45,113 $40,796 $(20,531)
======= ======= ========
Earnings (loss) per share (17)
Basic net earnings (loss) per share $1.17 $ 1.07 $ (0.65)
======= ======= ========
Diluted net earnings (loss) per share $1.13 $ 1.04 $ (0.65)
======= ======= ========
The accompanying notes are an integral part of the financial statements.
-5-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(In thousands of U.S. dollars, except share data)
ACCUMULATED
NUMBER OF ADDITIONAL OTHER
OUTSTANDING SHARE PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES CAPITAL CAPITAL LOSS EARNINGS SHARES
----------- -------- ---------- -------------- -------- --------
BALANCE AS OF JANUARY 1, 2000 25,422,396 $7,883 $52,697 - $127,924 $(3,613)
Issuance of shares- in respect of
merger with El- Op 12,100,000 2,963 177,037 - - -
Exercise of options 289,002 70 810 - - -
Tax benefit in respect
of options exercised - - 889 - - -
Capital reserve in respect of
issuance of shares by
development stage investees - - 3,874 - - -
Amortization of stock
compensation - - 155 - - -
Dividends paid - - - - (9,430) -
Net loss - - - - (20,531) -
----------- -------- ---------- -------------- -------- --------
BALANCE AS OF DECEMBER 31, 2000 37,811,398 10,916 235,462 - 97,963 (3,613)
Exercise of options 585,860 138 3,162 - - -
Tax benefit in respect of
options exercised - - 1,363 - - -
Adjustment to capital reserve - - (3,874) - - -
Amortization of stock
compensation - - 8,512 - - -
Purchase of treasury shares (66,986) - - - - (708)
Dividends paid - - - - (12,132) -
Net income - - - - 40,796 -
----------- -------- ---------- -------------- -------- --------
BALANCE AS OF DECEMBER 31, 2001 38,330,272 $11,054 $244,625 - $126,627 $(4,321)
=========== ======== ========== ============== ======== ========
TOTAL TOTAL
SHAREHOLDERS' COMPREHENSIVE
EQUITY INCOME (LOSS)
------------- -------------
BALANCE AS OF JANUARY 1, 2000 $184,891 -
Issuance of shares- in respect of
merger with El- Op 180,000 -
Exercise of options 880 -
Tax benefit in respect
of options exercised 889 -
Capital reserve in respect of
issuance of shares by
development stage investees 3,874 -
Amortization of stock
compensation 155 -
Dividends paid (9,430) -
Net loss (20,531) (20,531)
------------- -------------
BALANCE AS OF DECEMBER 31, 2000 340,728 -
Exercise of options 3,300 -
Tax benefit in respect of
options exercised 1,363 -
Adjustment to capital reserve (3,874) -
Amortization of stock
compensation 8,512 -
Purchase of treasury shares (708) -
Dividends paid (12,132) -
Net income 40,796 40,796
------------- -------------
BALANCE AS OF DECEMBER 31, 2001 $377,985 40,796
============= =============
The accompanying notes are an integral part of the financial statements.
-6-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (CONT.)
(In thousands of U.S. dollars, except share data)
ACCUMULATED
NUMBER OF ADDITIONAL OTHER
OUTSTANDING SHARE PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES CAPITAL CAPITAL LOSS EARNINGS SHARES
----------- -------- ---------- -------------- -------- --------
BALANCE AS OF DECEMBER 31, 2001 38,330,272 11,054 244,625 - 126,627 (4,321)
Exercise of options 466,385 100 4,040 - - -
Tax benefit in respect of
options exercised - - 648 - - -
Amortization of stock
compensation - - (926) - - -
Dividends paid - - - - (12,717) -
Net income - - - - 45,113 -
Minimum pension liability - - - (2,882) - -
----------- -------- ---------- -------------- -------- --------
BALANCE AS OF DECEMBER 31, 2002 38,796,657 $11,154 $248,387 $(2,882) $159,023 $(4,321)
=========== ======== ========== ============== ======== ========
TOTAL TOTAL
SHAREHOLDERS' COMPREHENSIVE
EQUITY INCOME (LOSS)
------------- -------------
BALANCE AS OF DECEMBER 31, 2001 377,985 -
Exercise of options 4,140 -
Tax benefit in respect of
options exercised 648 -
Amortization of stock
compensation (926) -
Dividends paid (12,717) -
Net income 45,113 45,113
Minimum pension liability (2,882) (2,882)
------------- -------------
BALANCE AS OF DECEMBER 31, 2002 $411,361 $42,231
============ =============
The accompanying notes are an integral part of the financial statements.
-7-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
-------- ------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $45,113 $40,796 $(20,531)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 32,937 32,865 20,663
Amortization of deferred stock compensation (926) 8,512 155
Acquired in-process research and development - - 40,000
Deferred income taxes (5,620) (2,694) (6,482)
Severance pay fund (113) 167 (1,196)
Increase (decrease) in provision for severance pay 6,373 (800) 9,266
Gain (loss) on disposal of property and equipment 743 (327) (575)
Tax benefit in respect of options exercised 648 1,363 889
Other adjustments 683 (117) (921)
Minority interests in gains (losses) of subsidiaries 508 (547) 217
Equity in net losses (earnings) of affiliated companies and partnership (675) 598 1,429
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables, other receivables and prepaid expenses 58,554 (9,963) (18,975)
Increase in inventories (55,106) (72,165) (25,228)
Increase (decrease) in trade payable and accrued expenses (19,321) 37,004 (3,520)
Increase (decrease) in advances received from customers 42,999 6,489 (10,632)
Chief Scientist 9,197 - -
------- ------- --------
Net cash provided by (used in) operating activities 115,994 41,181 (15,441)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment and other assets (46,003) (45,244) (40,374)
Investment grants received for property, plant and equipment 119 1,334 1,533
Acquisition of subsidiaries and activities (Schedule A) (5,280) (3,344) 14,133
Investments in affiliated companies and subsidiaries (1,681) (801) (13,126)
Proceeds from sale of property, plant and equipment and investments 956 3,010 1,279
Long-term loan granted (714) - -
Short-term loan repaid 1,371 - -
Long-term bank deposits paid (1,228) (1,872) (2,042)
Long-term bank deposits repaid 1,689 2,322 23,419
Short-term bank deposits, net (204) (57) (638)
------- ------- --------
Net cash used in investing activities (50,975) (44,652) (15,816)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of convertible debentures - - (283)
Proceeds from exercise of options 4,140 3,300 787
Repayment of long-term credit for purchase of a building - (3,000) (10,000)
Purchase of treasury stock - (708) -
Repayment of long-term bank loans (3,249) (13,049) (1,852)
Proceeds from long-term bank loans 2,233 25,444 33,933
Dividends paid (12,717) (12,132) (9,430)
Change in short-term bank credit and loans (19,729) (6,517) 32,321
------- ------- --------
Net cash provided by (used in) financing activities (29,322) (6,662) 45,476
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,697 (10,133) 14,219
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 40,583 50,716 36,497
-------- ------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $76,280 $40,583 $50,716
======== ======== =========
The accompanying notes are an integral part of the financial statements.
-8-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
(In thousands of U.S. dollars)
YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
-------- --------- -----------
SUPPLEMENTARY CASH FLOWS ACTIVITIES:
Cash paid during the year for:
Income taxes $ 21,730 $ 9,469 $ 9,360
========= ======= =======
Interest $ 2,947 $ 6,649 $ 7,645
========= ======= =======
NON CASH TRANSACTIONS
Debentures converted into shares $ - $ - $ 93
========= ======= =======
SCHEDULE A:
Subsidiaries and activities acquired (*)
Estimated net fair value of assets acquired and liabilities
assumed at the date of acquisition was as follows:
Working capital deficiency (working capital)
(excluding cash and cash equivalents) $ - $888 $(39,805)
Property, plant and equipment (275) (1,886) (80,493)
Know-how and other intangible assets (5,078) (3,800) (53,000)
Goodwill and assembled work-force - - (31,139)
In-process research and development - - (40,000)
Long-term liabilities - 1,454 76,224
Purchase of investments in credit 73 - -
------- ------- -------
(5,280) (3,344) (168,213)
------- ------- -------
Investment in subsidiary prior to consolidation - - 2,346
Less - amounts acquired by issuance of shares - - 180,000
------- ------- -------
$(5,280) $(3,344) $14,133
======= ======= =======
(*) El-Op in 2000 (see note 1C); AEL in 2001 (see note 1F); Defense
systems division of Elron Telesoft in 2002 (see note 1G).
The accompanying notes are an integral part of the financial statements.
-9-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
NOTE 1 - GENERAL
A. Elbit Systems Ltd. (the "Company") is an Israeli corporation,
31% owned by the Federmann Group and 20% owned by Elron
Electronic Industries Ltd. ("Elron"). The Company's shares are
traded on the Tel Aviv Stock Exchange and on the NASDAQ
National Market in the United States. The Company and its
subsidiaries (the "Group") are engaged mainly in the field of
defense electronics. The Company's principal wholly-owned
subsidiaries are EFW Inc. ("EFW") and El-op Electro-Optics
Industries Ltd. ("El-Op").
B. A majority of the Group's revenues were derived in recent
years from direct or indirect sales to governments or to
government agencies. As a result, a substantial portion of the
Group's sales is subject to the special risks associated with
sales to governments or to government agencies. These risks
include, among others, the dependency on the resources
allocated by governments to defense programs, changes in
governmental priorities and changes in governmental approvals
regarding export licenses required for the Group products and
for its suppliers.
C. In 2000, the Company completed its merger with El-Op and
issued 12,100,000 ordinary shares to El-Op shareholders. The
purchase price based on the market value of the shares
amounted to $180,000.
The merger was accounted for as a purchase and accordingly the
purchase price was allocated to the fair value of assets
acquired and liabilities assumed of El-Op.
El-Op is engaged primarily in the production and sales of
military products and systems in the electro-optical and
electro-mechanical sectors.
The excess of the purchase price over the fair value of the
net tangible assets acquired ("excess of cost"), in the amount
of $109,000 was allocated, based primarily on an independent
appraisal, as follows: $40,000 was allocated to in-process
research and development ("R&D") which was charged to
operations upon completion of the merger; $58,000 was
allocated to know-how ($45,000), trademarks ($8,000) and
assembled work-force ($5,000); $18,200 was recorded as a
deferred tax liability in respect of the differences between
the allocation of the aforementioned assets and their tax
basis and the balance, amounting to $29,200 was allocated to
goodwill. These intangible assets are included in other assets
in the consolidated balance sheet and are amortized over a
period of 17 - 20 years, (except for goodwill and assembled
work-force which commencing January 1, 2002 are no longer
amortized - See Note 9). The Company began consolidating El-Op
from the third quarter of 2000.
-10-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 1 - GENERAL (CONT.)
C. (Cont.)
At the merger date, El-Op was conducting design,
development, engineering and testing activities associated
with the completion of numerous projects aimed at
developing next-generation technologies that were expected
to address emerging market demands in defense and
commercial markets. The value assigned to these assets was
determined by identifying significant research projects for
which technological feasibility had not been established,
including development, engineering and testing activities
associated with the following areas: thermal imaging (night
vision); lasers; avionics; battle field management; fire
control systems; remote sensing; airborne/space
photography; enhanced landing systems; and other classified
projects for the U.S. and Israeli governments.
The nature of the efforts to develop the acquired
in-process technology into commercially viable products
principally relates to the completion of all planning,
designing, prototyping, high-volume verification and
testing activities that are necessary to establish that the
proposed technologies meet their design specifications
including functional, technical and economic performance
requirements.
In making its purchase price allocation, management
considered present value calculations of income, an
analysis of project accomplishments and remaining
outstanding items and an assessment of overall
contributions as well as project risks. The value assigned
to purchased in-process technology was determined by
estimating the costs to develop the acquired technology
into commercially viable products, estimating the resulting
net cash flows from the projects, and discounting the net
cash flows to their present value. The revenue projection
used to value the in-process R&D was based on estimates of
relevant market sizes and growth factors, expected trends
in technology, and the nature and expected timing of new
product introductions by the Company and its competitors.
The resulting net cash flows from such projects are based
on management's estimates of cost of sales, operating
expenses and income taxes from such projects.
-11-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 1 - GENERAL (CONT.)
C. (Cont.)
Aggregate revenues for the developmental El-Op products
were estimated to grow at a compounded annual growth rate
of approximately 30 percent for the five years following
introduction, assuming the successful completion and market
acceptance of the major R&D programs. The estimated
revenues for the in-process projects were expected to peak
within five to six years of acquisition and then decline as
other new products and technologies are expected to enter
the market.
The estimated costs of goods sold and operating expenses as
a percentage of revenues are expected to be lower than
El-Op's on a stand-alone basis primarily due to production
efficiencies expected to be achieved through economies of
scale of the combined operations. As a result of these
savings, the combined company has the possibility of
achieving slightly higher margins in future periods.
The rates utilized to discount the net cash flows to their
present value were based on estimated cost of capital
calculations. Due to the nature of the forecast and the
risks associated with the projected growth and
profitability of the developmental projects, a discount
rate of 18 to 20 percent was considered appropriate for the
in-process R&D. These rates are higher than the Company's
overall weighted average cost of capital due to the
inherent uncertainties surrounding the successful
development of the purchased in-process technology, the
useful life of such technology and the uncertainty of
technological advances that are unknown at this time.
If none of the acquired R&D projects is successfully
developed, the sales and profitability of the combined
company may be adversely affected in future periods. The
failure of any particular individual project in-process
would not likely impact the Company's financial condition,
results of operations or the attractiveness of the overall
El-Op investment. Financial results will be subject to
uncertain market events and risks, which are beyond the
Company's control, such as trends in technology, government
spending, market size and growth and product introduction
or other actions by competitors.
-12-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 1 - GENERAL (CONT.)
C. (Cont).
The following unaudited proforma data is based on
historical financial statements of the Company and El-Op
and is provided for comparative purposes only. The proforma
information does not purport to be indicative of the
results that actually would have occurred had the merger
agreement been consummated prior to the beginning of the
reported periods.
The proforma information reflects the results of the
Company's operations assuming that the merger had been in
effect as of January 1, 2000 and under the following
assumptions:
1. Goodwill and other intangible assets arising from the
merger of approximately $83,000, is amortized over an
average period of 17 years.
2. Excess of cost over equity purchased allocated to real
estate assets of approximately $25,000, is amortized
over a period of 25 years.
3. Deferred income taxes of approximately $18,000 have
been recorded in respect of the differences between
the allocated value of the aforementioned assets and
their tax basis.
4. The cost attributed to purchased in-process R&D
projects, in the amount of approximately $40,000 has
been charged to operations immediately as a
non-recurring item and is not included in the proforma
consolidated results.
5. Intercompany balances and material transactions have
been eliminated.
-13-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 1 - GENERAL (CONT.)
C. (Cont).
6. Management fees of approximately $3,000 per annum,
which pursuant to the merger agreement would not be
paid in the future, were eliminated in the proforma
statements.
YEAR ENDED DECEMBER 31,
--------------------------
2000 (UNAUDITED)
Revenues - proforma $699,114
========
Net loss as reported $(20,531)
Adjustments:
Elimination of the charge to operations for
purchased in-process research and development 40,000
Other adjustments, net (2,570)
--------
Net income - proforma (1)(2) $16,899
========
Basic net earnings per share - proforma $0.45
========
Diluted net earnings per share - proforma $0.44
========
(1) The proforma net income for the year ended
December 31, 2000 includes restructuring expenses,
net of taxes, in the amount of $16,800.
(2) Included amortization of goodwill and assembled
work force in the amount of approximately $1,100
which as of January 1, 2002 are no longer being
amortized.
D. In 2000, EFW acquired the assets and the activities of
Honeywell Inc. relating to head-up displays and tracking
systems for helmets in consideration for $14,000. The
excess of the purchase price over the fair value of
identified net tangible assets acquired, in the amount of
$11,100, was allocated to technology and other identifiable
intangible assets ($9,300), to be amortized over a period
of 15 years and to goodwill ($1,800).
Pro forma information in accordance with statement of
financial accounting standards SFAS No. 141 has not been
provided, since the revenues and net income of the
Honeywell Inc. head-up display tracking business were not
material in relation to total consolidated revenues and net
loss.
-14-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 1 - GENERAL (CONT.)
E. In the third quarter of 2000, the Company commenced a
program of restructuring its business, improving efficiency
and reducing expenses. The program consisted of the
consolidation of redundant activities, reduction of
workforce, elimination of excessive inventories and
equipment and other related actions. The program was
accounted in accordance with EITF Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs in
a Restructuring)", SAB-100, "Restructuring and Impairment
Charges" and SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
of". Pursuant to the program, the Company wrote-off
inventories in the amount of $10,300 and equipment in the
amount of $5,100. The equipment will not be used in the
future by the Company as this equipment is less efficient
than other equipment held by the Company.
Through December 31, 2001, the Company paid $3,500 as part
of its restructuring plan. The amount includes payments
made to consultants, travel and other out-of-pocket
expenses.
In addition, the Company accrued and paid $3,200 for
employee severance benefits. The Company's plan included
termination of the employment of a total of 61
manufacturing, marketing and corporate employees both in
Israel and in the U.S.
F. In 2001, the Company acquired a 62.5% interest in
Aeroeletronica - Industrial de Componentes Avionicos S.A.
("AEL"), a Brazilian company located in Porto Alegre, for
approximately $3,450. In July 2002, the Company acquired
the remaining 37.5% interest for an additional $900. The
consideration paid includes approximately $1,200 (in cash)
held in escrow, pending final resolution of certain
liabilities and contingencies of AEL to be resolved over a
period of five years following the acquisition. The excess
of cost over equity purchased of approximately $6,700 was
allocated to land ($1,200) and identifiable intangible
assets ($5,500), to be amortized over a period of 8 years.
AEL serves as a center for the production and logistics
support of defense electronics for programs in Brazil.
-15-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 1 - GENERAL (CONT.)
F. (CONT.)
The results of AEL's operations have been included in the
consolidated financial statements from the date of
purchase.
Pro forma information in accordance with SFAS No. 141 has
not been provided, since the revenues and net income of AEL
were not material in relation to total consolidated
revenues and net income .
G. In January 2002, the Company acquired from Elron Telesoft
Inc. and its subsidiaries ("Elron Telesoft") the assets and
the activities of the Defense Systems Division of Elron
Telesoft ("the Government Division") in consideration for
$5,700. The excess of the purchase price over the fair
value of net tangible assets acquired in the amount of
approximately $5,100 was allocated to technology and other
intangible assets to be amortized over an average period of
3 years.
The Government Division is engaged mainly in the
development of communication systems, information
technology and image intelligence processing for defense
and military applications.
The results of the Government Division have been included
in the consolidated financial statements from the first
quarter of 2002.
pro forma information in accordance with SFAS No. 141 has
not been provided, since the revenues and net income of the
Government Division were not material in relation to total
consolidated revenues and net income .
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the
United States ("US GAAP"). As applicable to the financial
statements of the Company, such principles are substantially
identical to accounting principles generally accepted in Israel,
except as described in Note 26.
-16-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
A. USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the amounts reported and disclosure of contingent assets
and liabilities in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
B. FINANCIAL STATEMENTS IN U.S. DOLLARS
The Company revenues are generated mainly in U.S. dollars.
In addition, most of the Company's costs are incurred in
U.S. dollars. Company's management believes that the U.S.
dollar is the primary currency of the economic environment
in which the Company operates. Thus, the functional and
reporting currency of the Company is the U.S. dollar.
Transactions and balances originally denominated in U.S.
dollars are presented at their original amounts.
Transaction and balances in other currencies have been
remeasured into U.S. dollars in accordance with principles
set forth in SFAS No. 52.
Accordingly items have been remeasured as follows:
Monetary items - at the exchange rate in effect on the
balance sheet date.
Nonmonetary items - at historical exchange rates.
Revenue and expense items - at the exchange rates in effect
as of the date of recognition of those items (excluding
depreciation and other items deriving from non-monetary
items).
All exchange gain and losses from the remeasurement
mentioned above are reflected in the statement of
operations in financial income or expenses.
Balances linked to the Consumer Price Index in Israel
("CPI") are stated using the relevant published index.
-17-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts
of the Company and its subsidiaries.
The consolidated subsidiaries include El-op, EFW and other
Israeli and non - Israeli subsidiaries.
Intercompany transactions and balances including profit
from intercompany sales not yet realized outside the Group
have been eliminated upon consolidation.
D. CASH AND CASH EQUIVALENTS
All short-term highly liquid investments with an original
maturity of three months or less are considered cash
equivalents.
E. SHORT-TERM BANK DEPOSITS
Short-term bank deposits are disposits with maturities of
more than three months but less than one year. The
short-term bank deposits are presented at their cost.
F. INVENTORIES
Inventories are stated at the lower of cost or net
realizable value. Inventory write-offs are provided for
slow-moving items or technological obsolescence for which
recoverability is not probable.
Cost is determined as follows:
- Raw materials, parts and supplies using the average cost
method.
- Costs on long-term contracts represent recoverable costs
incurred for production, allocable operating overhead
and, where appropriate, research and development costs.
Advances from customers are allocated to the applicable
contract inventories and are reflected as an offset against
the related inventory balances.
-18-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
G. INVESTMENT IN AFFILIATED COMPANIES, PARTNERSHIP
AND OTHER COMPANIES
Investments in non-marketable shares of companies in which
the Group holds less than 20% and the Group does not have
the ability to exercise significant influence over
operating and financial policies of the companies are
recorded at the lower of cost or estimated fair value.
Investments in companies and partnership over which the
Group can exercise significant influence (generally,
entities in which the Group holds between 20% and 50% of
voting rights) are presented using the equity method of
accounting. The Group generally discontinues applying the
equity method when its investment (including advances and
loans) is reduced to zero and it has not guaranteed
obligations of the affiliate or otherwise committed to
provide further financial support to the affiliate.
In certain investments, the Group applies EITF 99-10,
"Percentage Used to Determine the Amount of Equity Method
Losses", according to which the Company recognizes equity
method losses based on the ownership level of the
particular investee security or loan held by the company to
which the equity method losses are being applied.
Management evaluates investments in affiliates, partnership
and other companies for evidence of other than temporary
declines in value. When relevant factors indicate a loss in
value that is other than temporary, the Company records a
provision for the decline in value.
H. LONG-TERM TRADE RECEIVABLES
Long-term trade receivables from extended payment
agreements are recorded initially at their estimated
present values (determined based on the original rates of
interest). Imputed interest is recognized using the
effective interest method and is included as a component of
interest income in the accompanying statements.
I. LONG-TERM BANK DEPOSITS
Bank deposits with maturities of more than one year are
presented at cost including accumulated interest.
-19-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
J. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment are stated at cost, net of
accumulated depreciation and investment grants. For
equipment produced for the Group's own use, cost includes
materials, labor and overhead, but not in excess of the
fair value of replacement equipment. Depreciation is
calculated by the straight-line method over the estimated
useful life of the assets at the following annual rates:
%
-------
Buildings 2 - 4 (mainly 4%)
Instruments, machinery and equipment 10 - 33
Office furniture and other 6 - 33
Motor vehicles 15 - 33 (mainly 15%)
Land rights and leasehold improvements - over the term of
the lease.
K. IMPAIRMENT OF LONG-LIVED ASSETS
The Company's long-lived assets and certain identifiable
intangible assets are reviewed for impairment in accordance
with SFAS No. 144 "Accounting for the impairment or
Disposal of Long-Lived Assets" whenever events or changes
in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the asset. If an asset is
considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of
the assets exceed its fair value.
L. OTHER ASSETS
Other assets include mainly goodwill, know-how and
trademarks acquired in connection with the purchase of
subsidiaries and activities. Know-how and trademarks are
amortized over their estimated useful lives using the
straight-line method.
Goodwill represents excess of the cost of acquired entities
over the net of the amounts assigned to assets acquired and
liabilities assumed. Goodwill that arose from acquisitions
prior to July 1, 2001, was amortized until December 31,
2001, on a straight-line basis over 10 - 20 years. Under
SFAS No. 142, "Goodwill and Other Intangible Assets", such
goodwill shall no longer be amortized effective as of
January 1, 2002.
-20-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
SFAS No. 142 requires goodwill to be tested for impairment
on adoption and at least annually thereafter or between
annual tests in certain circumstances, and written down
when impaired, rather than being amortized as previous
accounting standards required. Goodwill attributable to
each of the reporting units is tested for impairment by
comparing the fair value of each reporting unit with its
carrying value. If the carrying value exceeds the fair
value, impairment is measured by comparing the implied fair
value of goodwill to its carrying value. Fair value of a
reporting unit is determined using discounted cash flows.
Significant estimates used in the methodology include
estimates of future cash flows, further short-term and
long-term growth rates and weighted average cost of capital
for each of the reportable units.
The adoption of SFAS 142 did not affect the financial
position and results of operations of the Group as of
January 1, 2002.
M. SEVERANCE PAY
Under Israeli law and employment agreements, the Group's
companies in Israel are required to make severance payments
and, in certain situations, pay pensions to terminated
employees. The calculation is based on the employee's
latest salary and the period of his employment. The
companies' obligation for severance pay and pension is
provided by monthly deposits with insurance companies,
pension funds and by an accrual.
The value of severance pay funds is presented in the
balance sheet and includes profits accumulated to balance
sheet date. The amounts deposited may be withdrawn only
after fulfillment of the obligations pursuant to Israeli
severance pay law or labor agreements. The value of the
deposited funds are based on the cash surrendered value of
these funds and include immaterial profits.
Severance pay expenses for the years ended December 31,
2000, 2001 and 2002, amounted to approximately $5,591,
$8,097 and $10,138, respectively.
-21-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
N. REVENUE RECOGNITION
The Company generates revenues from long-term contracts
involving the design, development, manufacture and
integration of defense systems and products and providing
support and services for such systems and products.
Revenues from long-term contracts are recognized based on
SOP 81-1 "Accounting for Performance of Construction-Type
and Certain Production - Type Contracts" on the percentage
of completion method.
Sales and anticipated profit under long-term fixed-price
production type contracts are recorded on a percentage of
completion basis, generally using units of delivery as the
measurement basis for effort accomplished. Estimated
contract profit is included in earnings in proportion to
recorded sales.
Sales under certain long-term fixed-price contracts which,
among other things require a significant amount of
development effort in relation to total contract value, are
recorded using the cost-to-cost method of accounting where
sales and profit are recorded based on the ratio of costs
incurred to estimated total costs at completion but not
before the Company achieves certain milestones.
Sales under cost-reimbursement-type contracts are recorded
as costs are incurred. Applicable estimated profits are
included in earnings in the proportion that incurred costs
bear to total estimated costs.
Estimated gross profit or loss from long-term contracts may
change due to changes in estimates resulting from
differences between actual performance and original
forecasts. Such changes in estimated gross profit are
recorded in results of operations when they are reasonably
determinable by management, on a cumulative catch-up basis.
Amounts representing contract change orders, claims or
other items are included in sales only when they can be
reliably estimated and realization is probable. Penalties
and awards applicable to performance on contracts are
considered in estimating sales and profit rates, and are
recorded when there is sufficient information to assess
anticipated contract performance.
-22-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Anticipated losses on contracts are charged to earnings
when identified.
The Company estimates the costs that may be incurred under
its basic warranty and records a liability in the amount of
such costs at the time revenue is recognized. The specific
terms and conditions of those warranties vary depending
upon the product sold and the country in which the Company
does business. Factors that affect the Company's warranty
liability include the number of delivered units,
engineering estimates and anticipated rates of warranty
claims. The Company periodically assesses the adequacy of
its recorded warranty liability and adjusts the amount as
necessary.
O. RESEARCH AND DEVELOPMENT COSTS
Research and development costs, net of participations, are
charged to operations as incurred.
Group sponsored research and development costs primarily
include independent research and development and bid and
proposal efforts.
Under certain arrangements in which a customer shares in
product development costs, the Group's portion of such
unreimbursed costs is expensed as incurred.
Customer-sponsored research and development costs incurred
pursuant to contracts are accounted for as contract costs.
Certain group companies in Israel receive royalty-bearing
grants from the Government of Israel and from other sources
for the purpose of funding approved research and
development projects. These grants are recognized at the
time the applicable company is entitled to such grants on
the basis of the costs incurred and are presented as a
deduction from research and development costs.
P. INCOME TAXES
The Group accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes". This Statement
prescribes the use of the liability method whereby deferred
tax assets and liability account balances are determined
based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Group provides a
valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
-23-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Q. CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially subject the Group to
concentrations of credit risk consist principally of cash
and cash equivalents, short-term and long-term deposits,
trade receivables and long-term receivables.
The majority of the Group's cash and cash equivalents is
invested in dollar instruments with major banks in Israel
and in the U.S. Management believes that the financial
institutions that hold the Group investments are
financially sound and accordingly, minimal credit risk
exists with respect to these investments.
The Group's trade receivables are derived primarily from
sales to large and solid customers and governments located
mainly in Israel, the United States and Europe. The Group
performs ongoing credit evaluations of its customers and to
date, has not experienced any unexpected material losses
except for a one time loss in 2002 of approximately $4,600
due to the insolvency of one of the Group's customers. An
allowance for doubtful accounts is determined with respect
to those amounts that the Group has determined to be
doubtful of collection and by a general reserve.
R. DERIVATIVE FINANCIAL INSTRUMENTS
The Group accounts for derivatives and hedging based on
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 requires the Company to
recognize all derivatives on the balance sheet at fair
value. If the derivative meets the definition of a hedge
and is so designated, depending on the nature of the hedge,
changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the
hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value is
recognized in earnings.
For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in current
earnings during the period of change.
-24-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company enters into forward exchange contracts to hedge
certain firm commitments denominated in foreign currencies.
The purpose of the Company's foreign currency hedging
activities is to protect the Company from risk that the
eventual dollar cash flows from the sale of products to
international customers will be adversely affected by
changes in the exchange rates.
In addition, in order to ensure the dollar value of certain
assets and liabilities, the Group has enters into forward
exchange contracts. As of December 31, 2002, the Group had
contracts with notional value of approximately $21,400 to
purchase and sell foreign currencies. These contracts
mature in 2003.
The fair value of the foreign exchange contracts as of
December 31 , 2002 amounted to $1,178.
S. STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles
Board Opinion No. 25 ("APB 25") "Accounting for Stock
Issued to Employees" and FASB Interpretation No. 44 ("FIN
44") "Accounting for Certain Transactions Involving Stock
Compensation" in accounting for its employee stock option
plans. Under APB 25, compensation expense is recognized
based on the intrinsic value method where by compensation
expense is equals to the excess if any of the quoted market
price of the stock at the grant date of the award or other
measurement date, over the amount an employee must pay to
acquire the stock. The Company recognize the expense over
the vesting period of the award.
In respect of phantom share options the Company applies
compensation accounting under SFAS No. 123, "Accounting for
Stock-Based Compensation" as amended by SFAS No. 148, the
Company is required to disclose pro forma information
regarding stock based employee compensation cost net income
(loss) and basic and diluted net income (loss) per share,
as if the Company had accounted for its employee share
options under the fair value method of SFAS 123. The fair
value for these options was estimated at the grant date
using a Black-Scholes
-25-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
option pricing model with the following weighted average
assumptions for 2000, 2001 and 2002: risk-free interest
rates of 6%, 2% and 1.34% respectively, dividend yields of
2.0%, 2.03% and 1.99% respectively, volatility of 49.5%,
33.8% and 21.2% respectively, and a weighted average
expected life of the options of 6 years.
Pro forma information under SFAS 123 is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
------- -------- ---------
Net income (loss) as reported $45,113 $ 40,796 $ (20,531)
Stock based compensation as reported (926) 8,512 155
Stock based compensation under
SFAS 123 (3,695) (3,665) (730)
------- -------- ---------
Pro forma net income (loss) $40,492 $ 45,643 $ (21,106)
======= ======== =========
Basic net income (loss) per share as
reported $ 1.17 $ 1.07 $ (0.65)
======= ======== =========
Pro forma basic net income (loss) per share $ 1.05 $ 1.20 $ (0.67)
======= ======== =========
Diluted net income (loss) per share as
reported $ 1.13 $ 1.04 $(0.65)
======= ======== =========
Pro forma diluted net income (loss) per share $ 1.02 $ 1.16 $(0.67)
======= ======== =========
-26-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
T. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for cash
and cash equivalents, short-term deposits, trade
receivables, other receivables, short-term bank loans,
short-term trade payables and other payables approximate
their fair values due to the short-term maturities of such
instruments.
Long-term loans are estimated by discounting the future
cash flows using current interest rates for loans of
similar terms and maturities. The carrying amount of the
long-term loans approximates their fair value.
The fair value of foreign currency contracts (used for
hedging purposes) is estimated by obtaining current quotes
from investment bankers.
It was not practicable to estimate the fair value of the
Company's investments in shares of non-public affiliates
and other Companies because of the lack of a quoted market
price and the inability to obtain valuation of each Company
without incurring excessive costs. The carrying amounts of
these Companies were $31,492 and $33,051 as of December 31,
2001 and 2002, respectively and represent the original cost
and, in the case of affiliates, include the Company's
equity in the earnings or losses of the affiliates since
the dates of acquisition.
U. BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is computed based on
the weighted average number of ordinary shares outstanding
during each year. Diluted net earning (loss) per share is
computed based on the weighted average number of ordinary
shares outstanding during each year, plus dilutive
potential ordinary shares considered outstanding during the
year. Outstanding stock options are excluded from the
calculation of the diluted net earning (loss) per ordinary
share when such securities are anti-dilutive. The total
weighted average number of shares related to the
outstanding options excluded from the calculation of
diluted net loss per share was 647 for the year ended
December 31, 2000 (2001 and 2002 - none).
-27-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
V. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which
addresses significant issue regarding the recognition,
measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities.
SFAS No. 146 requires that costs associated with exit or
disposal activities be recognized when they are incurred
rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 is effective for all exit or
disposal activities initiated after December 31, 2002. SFAS
No. 146 also requires liabilities accrued in respect of
such cost to be measured at fair value. The Company does
not expect the adoption of SFAS No. 146 to have a material
impact on its results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others, an interpretation of FASB Statements No. 5, 57,
and 107 and Rescission of FASB Interpretation No. 34 ("FIN
No.45"). FIN No. 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken
in issuing the guarantee. FIN No. 45 does not prescribe a
specific approach for subsequently measuring the
guarantor's recognized liability over the term of the
related guarantee. It also incorporates, without change,
the guidance in FASB Interpretation No.34, "Disclosure of
Indirect Guarantees of Indebtedness of Others", which is
being superseded. The disclosure provisions of FIN No. 45
are effective for financial statements of interim or annual
periods that end after December 15, 2002, and the
provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are
issued or modified after December 31, 2002, irrespective of
a guarantor's year-end. The Company does not expect the
adoption of FIN No. 45 to have a material impact on its
results of operations or financial position.
-28-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
W. RECLASSIFICATIONS
Certain financial statement data for prior years has been
reclassified to conform with current year financial
statement presentation.
NOTE 3 - TRADE RECEIVABLES, NET
A. Trade receivables
DECEMBER 31,
--------------------------
2002 2001
--------- --------
Open accounts (*) $177,465 $175,275
Unbilled receivables 53,670 69,752
Less - allowance for doubtful accounts (3,411) (3,200)
-------- --------
$227,724 $241,827
======== ========
(*) Includes affiliated companies $9,647 $14,257
======== ========
B. Long-term trade receivables include amounts due to the
Company in connection with certain contracts. The
receivables are guaranteed by governmental authorities and
their majority portion is insured by financial
institutions. The receivables are denominated in U.S
dollars, payable over a period of one and a half years and
bear intrest rates of Libor + 1.5%.
NOTE 4 - OTHER RECEIVABLES AND PREPAID EXPENSES
DECEMBER 31,
--------------------------
2002 2001
--------- --------
Prepaid expenses $12,244 $ 13,445
Government departments 5,915 4,937
Employees 1,029 710
Deferred income taxes 11,675 11,631
Other 3,513 5,486
-------- --------
$ 34,376 $ 36,209
======== ========
-29-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 5 - INVENTORIES, NET OF ADVANCES
DECEMBER 31,
------------------------
2002 2001
-------- --------
Cost of long-term contracts in progress $205,318 $155,712
Raw materials 75,579 70,133
Advances to suppliers and subcontractors 25,047 30,955
-------- --------
305,944 256,800
Less -
Cost of contracts in progress deducted
from customer advances
10,658 10,961
-------- --------
295,286 245,839
Less -
Advances received from customers 67,624 49,969
Provision for losses 4,818 10,780
-------- --------
$222,844 $185,090
======== ========
(*) The Company has transferred legal title of inventories to
certain customers as collateral for advances received.
NOTE 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES
A. INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE EQUITY METHOD
DECEMBER 31,
----------------------
2002 2001
-------- --------
SCD (1) $ 15,713 $ 13,036
VSI (2) 3,893 2,030
Red C (3) - 2,549
Opgal (4) 2,028 1,894
Others (5) 313 74
-------- --------
$ 21,947 $ 19,583
======== ========
(1) Semi Conductor Devices ("SCD"), a partnership, held 50% by
the Company and 50% by Rafael Armaments Development Authority
Ltd. ("Rafael"). SCD is engaged in the development and
production of various thermal detectors and laser diodes.
-30-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
COMPANIES (CONT.)
A. INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE EQUITY METHOD
(CONT.)
(2) Vision Systems International LLC ("VSI") based in San
Jose, California is a limited liability company that is
held 50% by EFW. VSI operates in the area of helmet
mounted display systems for fixed wing military and
paramilitary aircraft.
(3) Red C Optical Networks Inc. ("Red C") is engaged in the
multi-focal optic communications sector and is held 36.5%
by El-Op. Red C designs, develops and manufacture optical
amplifiers for dense wave-length multiplexing (DWDM)
optical networks for telecommunication renders. In 2002
the investment in Red C was written off.
(4) Opgal Optronics Industries ("Opgal") Ltd., is an Israeli
company owned 50.1% by the Company and 49.9% by a
subsidiary of Rafael. Opgal focuses mainly on commercial
applications of thermal imaging and electro-optic
technologies. The Company jointly controls Opgal with
Rafael, and therefore Opgal is not consolidated in the
Company's financial statements.
(5) Mediguide Inc. ("Mediguide") and its Israeli subsidiary,
Mediguide Ltd., were established in 2000 as a spin-off
from the Company, which holds the majority of Mediguide's
ordinary shares. In 2001 and 2002, Mediguide issued
preferred shares to other investors in consideration for
approximately $6,000 based on a pre-money valuation of
$14,000 - $17,000. The preferred shares entitle the other
investors to preference rights in any liquidation event.
Therefore, the Company did not record any gain as a
result of the above transaction. In addition the
preferred shares entitle their holders to certain
participating rights. Accordingly based on the guidance
in EITF 96-16, the Company ceased consolidating its
investment in Mediguide and accounts for the investment
in Mediguide under the equity method of accounting.
(6) See Note 16(E) for guarantees.
-31-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
COMPANIES (CONT.)
B. INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE COST METHOD
DECEMBER 31,
----------------------
2002 2001
-------- --------
Sultam (1) $3,500 $3,500
ISI (2) 7,230 7,230
Other 374 1,179
-------- --------
$11,104 $11,909
======== ========
(1) Sultam Systems Ltd. ("Sultam"), held 10% by the Company,
is engaged in the development and manufacturing of
military systems in the artillery sector.
(2) ImageSat International N.V. ("ISI"), held 14% (10% on a
fully diluted basis) by the Company, is engaged in the
operation of satellite photography formations and
commercial delivery of satellite photography for civil
purposes.
NOTE 7 - LONG -TERM BANK DEPOSITS AND LOAN
DECEMBER 31,
----------------------
2002 2001
-------- --------
Deposits with bank for loans granted to
employees (*) $2,037 $2,238
Other deposits with bank 935 1,195
Long-term loan 714 -
-------- --------
$3,686 $3,433
======== ========
(*) The deposits are linked to the Israeli CPI, bear annual
interest of 4% and are presented net of current maturities
of $680 (2001 - $746).
-32-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31,
----------------------
2002 2001
-------- --------
Cost (1):
Land, buildings and
leasehold improvements (2) $127,932 $114,690
Instruments, machinery
and equipment (3) 167,105 145,114
Office furniture and other 24,790 22,093
Motor vehicles 24,393 19,715
--------- ---------
344,220 301,612
Accumulated depreciation (141,259) (116,890)
--------- ---------
Depreciated cost $202,961 $184,722
========= =========
Depreciation expenses for the years ended December 31, 2000, 2001
and 2002 amounted to $24,177, $24,517 and $26,525 respectively.
(1) Net of investment grants received (mainly for instruments,
machinery and equipment) in the amounts of approximately
$38,300 and $38,420 as of December 31, 2001 and 2002,
respectively. Cost includes assets fully depreciated and
still in use in the amount of $124,000 and of $134,000 as
of December 31, 2001 and 2002, respectively.
(2) Includes, rights in approximately 9,225 square meters of
land in, Tirat Hacarmel Israel, of which approximately
2,300 square meters are owned while the remaining land is
leased from the Israel Land Administration until the years
2014 to 2024 with an option to renew the lease for
additional periods up to 49 years. The Company's rights in
the land have not yet been registered in its name.
Includes, rights in approximately 10,633 square meters of
land in Rehovot, Israel. The land is leased from the Israel
Land Administration until the year of 2043 with an option
to renew the lease for additional periods up to 49 years.
The Company's rights in the land have not yet been
registered in its name.
(3) Includes equipment produced by the Group for its own use in
the amount of $4,913 and $5,517 as of December 31, 2001 and
2002, respectively.
(4) As for pledges of assets - see Note 16(G).
-33-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 9 - OTHER ASSETS, NET
A.
WEIGHTED-AVERAGE
NUMBER OF YEARS DECEMBER 31,
---------------------
2002 2001
---------------- ------- --------
Original cost:
Know-how (1) 12.5 $74,716
$81,019
Trade marks (2) 17 8,000 8,000
Goodwill and assembled work-force (3) 37,578 36,983
126,597 119,699
Accumulated amortization:
Know-how 14,666 8,704
Trade marks 1,125 675
Goodwill and assembled work-force 5,037 5,037
------- --------
20,828 14,416
------- --------
Amortized cost $105,769 $105,283
======== =========
(1) Includes mainly know-how acquired in the merger with
El-Op ($45,000), know-how acquired in the acquisition
of AEL and the Government Division ($10,600) and
intangible assets acquired from Honeywell Inc. ($9,300)
(see Notes 1C, 1D, 1F and 1G).
(2) Includes trade marks acquired in the merger with El-Op.
(3) Includes mainly intangible assets acquired in the
merger with El-Op ($34,200) and intangible assets
acquires from Honeywell Inc. ($1,800). Until January 1,
2002, goodwill and assembled work-force were amortized
at an annual rate of 5% - 10%.
B. Amortization expenses amounted to $5,401, $8,348 and
$6,412 for the years ended December 31, 2000, 2001 and
2002, respectively.
C. The annual amortization expense relating to intangibles
existing as of December 31, 2002 for each of the five years
in the period ending December 31, 2007 is estimated to be
approximately $7,000.
-34-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 9 - OTHER ASSETS, NET (CONT.)
The following information is presented to reflect net income and
earnings per share for all prior periods adjusted to exclude
amortization of goodwill.
YEAR ENDED
DECEMBER 31,
---------------------
2001 2000
------- --------
Reported net income (loss) $40,796 $(20,531)
Goodwill amortization 2,760 2,012
------- --------
Adjusted net income (loss) $43,556 $(18,519)
======= ========
Earnings per share
Reported basic earnings (loss) per share $ 1.07 $ (0.65)
Goodwill amortization 0.08 0.06
------- --------
Adjusted basic earnings per share $ 1.15 $ (0.59)
------- --------
Reported diluted earnings (loss) per share $ 1.04 $ (0.65)
Goodwill amortization 0.07 0.06
------- --------
Adjusted diluted earnings (loss) per share $ 1.11 (0.59)
======= ========
NOTE 10 - SHORT-TERM BANK CREDIT AND LOANS
DECEMBER 31,
--------------------------------------------
2002 2001 2002 2001
-------- ------- ------- -------
INTEREST RATE %
---------------------
Short-term bank loans:
In U.S dollars 3 - 5 2.5 - 3 $12,683 $12,922
In NIS unlinked - 4.7 - 8 - 13,273
------- -------
12,683 26,195
------- -------
Short-term bank credit:
In NIS unlinked 2.8 - 10.9 8 5,241 1,869
In U.S dollars 3.2 - 3.6 2 - 2.5 6,378 15,967
------- -------
11,619 17,836
------- -------
Current maturities of long-term loans 6,613 2,863
------- -------
$30,915 $46,894
======= =======
-35-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 11 - OTHER ACCOUNTS PAYABLES AND ACCRUED EXEPNSES
DECEMBER 31,
------------------------
2002 2001
--------- ---------
Payroll and related expenses $ 27,912 $ 25,736
(1) Provision for vacation pay 20,492 18,380
Government departments 22,443 28,750
(2) Provision for warranty 26,641 22,723
Cost provisions and other 45,038 39,797
--------- ---------
$142,526 $135,386
========= =========
NOTE 12 - CUSTOMERS ADVANCES AND AMOUNTS IN EXCESS OF COSTS INCURRED
DECEMBER 31,
------------------------
2002 2001
--------- ---------
Advances received $227,111 $184,112
Less -
Advances presented under long-term
liabilities 40,411 29,840
Advances deducted from inventories 67,624 49,969
--------- ---------
119,076 104,303
Less -
Costs of contracts in progress 10,658 10,961
--------- ---------
$108,418 $93,342
========= =========
-36-
ELBIT SYSTEMS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 13 - LONG-TERM LOANS
DECEMBER 31,
INTEREST YEARS OF ---------------------
LINKAGE % MATURITY 2002 2001
----------- --------- ----------- ------- -------
Banks U.S dollars Libor +
0.5%-5% 2003 - 2007 $67,206 $70,719
Banks NIS-unlinked Israeli
Prime 2003 - 2036 3,383 1,346
Office of chief NIS-linked to
scientist the Israeli-CPI 4% 2003- 2006 9,197 -
------- -------
79,786 72,065
Less-current maturities 6,613 2,863
------- -------
$73,173 $69,202
======= =======
The Libor rate as of December 31, 2002 was 1.34%.
The Israeli Prime rate as of December 31, 2002 was 10.5%
The maturities of these loans after December 31, 2002 are as
follows:
2003 - current maturities $ 6,613
2004 54,278
2005 4,499
2006 4,506
2007 7,062
2008 and thereafter 2,828
-------
$79,786
=======
In connection with bank credits and loans, including performance
guarantees issued by banks and bank guarantees securing certain
advances from customers, the Company and certain subsidiaries are
obligated to meet certain loan covenants. Management believes
that the Company and the subsidiaries meet the conditions of
these covenants as of balance sheet date.
NOTE 14 - BENEFIT PLANS
Retirement Benefits:
Subsidiaries in the U.S. sponsor defined benefit retirement plans
("Plans") which are a noncontributory plans, covering
substantially all of the U.S. employees, that provide monthly
pension to eligible employees upon retirement, in amounts based
on years of service and average compensation.
-37-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 14 - BENEFIT PLANS (CONT.)
The following table reconciles the benefit obligations, Plans
assets, funded status and net asset (liability) information of
the Plans:
DECEMBER 31,
----------------------
2002 2001
------- -------
Benefit obligation at beginning of year $22,358 $18,474
Service cost 2,067 1,766
Interest cost 1,678 1,461
Actuarial losses 2,955 1,338
Benefits repaid (619) (681)
------- -------
Benefit obligation at end of year 28,439 22,358
------- -------
Plans assets at beginning of year 16,167 17,846
Actual return on plan assets (1,560) (1,121)
Contributions by employer 1,571 123
Benefits repaid (619) (681)
------- -------
Plans assets at end of year 15,559 16,167
------- -------
Funded status of Plans (underfunded) (12,880) (6,191)
Unrecognized prior service cost 234 223
Unrecognized net actuarial loss 7,582 1,508
------- -------
Net amount recognized (5,064) (4,460)
======= =======
Net asset (liability) consists of:
Accrued benefit liability (10,298) (4,667)
Intangible asset 234 207
Accumulated other comprehensive income 5,000 -
------- -------
Net amount recognized $(5,064) $(4,460)
======= =======
Weighted average assumptions :
Discount rate as of December 31, 6.75% 7.38%
Expected long-term rate of return on
Plans assets 9.00% 9.50%
Rate of compensation increase 3.00% 3.00%
-38-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 14 - BENEFIT PLANS (CONT.)
YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
------- ------- -------
Components of net periodic pension cost:
Service cost $2,067 $1,766 $1,904
Interest cost 1,678 1,461 1,253
Expected return on Plan assets (1,597) (1,666) (1,680)
Amortization of prior service cost 28 24 25
Recognized of net actuarial gain (340) (38) (312)
One-time FAS 88 charge for 2001 SRP - 177 -
------- ------- -------
Net periodic pension cost $1,836 $1,724 $1,190
======= ======= =======
DEFINED CONTRIBUTION PLAN
The 401(k) savings plan ("401(k) plan") is a defined contribution
retirement plan that covers all eligible employees, as defined in
section 401(k) of the U.S. Internal Revenue Code. Employees may
elect to contribute a percentage of their annual gross
compensation to the 401(k) plan. The Company may make
discretionary matching contributions as determined by the
Company. Total expense under the 401(k) plan amounted to $1,369
for the year ended December 31, 2002 (2001 - $639).
NOTE 15 - TAXES ON INCOME
A. APPLICABLE TAX LAWS
(1) MEASUREMENT OF TAXABLE INCOME UNDER ISRAEL'S INCOME
TAX (INFLATIONARY ADJUSTMENTS) LAW, 1985:
Results for tax purposes are measured and reflected
in accordance with the change in the Israeli
Consumer Price Index ("CPI"). As explained above in
Note 2B, the consolidated financial statements are
presented in U.S. dollars. The differences between
the change in the Israeli CPI and in the NIS/U.S.
dollar exchange rate cause a difference between
taxable income and the income before taxes reflected
in the consolidated financial statements.
-39-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 15 - TAXES ON INCOME (CONT.)
APPLICABLE TAX LAWS (CONT.)
In accordance with paragraph 9(f) of SFAS No. 109,
the Company has not provided deferred income taxes
on the above difference between the reporting
currency and the tax basis of assets and
liabilities.
(2) TAX BENEFITS UNDER ISRAEL'S LAW FOR THE
ENCOURAGEMENT OF INDUSTRY (TAXES), 1969:
The Company and certain subsidiaries (mainly El-Op
and Cyclone) are "Industrial Companies", as defined
by the Law for the Encouragement of Industry
(Taxes), 1969, and as such, these Companies are
entitled to certain tax benefits, mainly
amortization of costs relating to know-how and
patents over eight years, accelerated depreciation
and the right to deducte for tax purpose public
issuance expenses.
(3) TAX BENEFITS UNDER ISRAEL'S LAW FOR THE
ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959:
Four expansion programs of the Company have been
granted "Approved Enterprise" status under Israel's
Law for the Encouragement of Capital Investments,
1959. For these expansion programs, the Company has
elected to receive grant. Accordingly the income of
the Company derived from the "Approved Enterprise"
expansion programs is tax exempt for two-year period
and subject to reduced tax rates of 25% for
five-year period commencing in the year in which the
Company first generates taxable income (limited to
twelve years from commencement of
-40-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 15 - TAXES ON INCOME (CONT.)
APPLICABLE TAX LAWS (CONT.)
production or fourteen years from the date of
approval, whichever is earlier). As of December 31,
2002, the tax benefits for these expansion programs
will expire between 2002 to 2007.
Three expansion programs of El-Op have been granted,
such "Approved Enterprise" status. For these
expansion programs, El-Op has elected the
alternative tax benefits track. In this track the
income of El-Op derived from the "Approved
Enterprise" expansion programs is tax exempt for a
two-year period and subject to reduced tax rates of
25% for a five-year period commencing in the year
which the company first generates taxable income
(limited to twelve years from commencement of
production or fourteen years from the date of
approval, whichever is earlier). As of December 31,
2002, the tax benefits for these expansion programs
will expire between 2003 to 2005.
The entitlement to the above benefits is subject to
the companies fulfilling the conditions specified in
the above refereed law, regulations published there
under and the letters of approval for the specific
investments in "Approved Enterprises". In the event
of failure to comply with these conditions, the
benefits may be canceled and the companies may be
required to refund the amount of the benefits, in
whole or in part, including interest. (For liens -
see Note 16F). As of December 31, 2002, management
believes that the companies are meeting all
conditions of the approvals.
The tax-exempt income attributable to the "Approved
Enterprise" can be distributed to shareholders
without imposing tax liability on the companies only
upon the complete liquidation of the companies. As
of December 31, 2002, retained earnings included
approximately $74,000 in tax-exempt profits earned
by the Group's "Approved Enterprise". The Company's
Board of Directors has decided that its policy is
not to declare dividends out of such tax-exempt
income. Accordingly, no deferred income taxes have
been provided on income attributable to the
Company's "Approved Enterprise".
If the retained tax-exempt income is distributed in
a manner other than on the complete liquidation of
the Company, it would be taxed at the corporate tax
rate applicable to such profits as if the Company
had not elected alternative tax benefits (currently
- 25%) and an income tax liability would be incurred
of approximately $ 19,000 as of December 31, 2002.
-41-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 15 - TAXES ON INCOME (CONT.)
A. APPLICABLE TAX LAWS (CONT.)
(3) Tax benefits under the Israel's Law for the
Encouragement of Capital Investments, 1959 (Cont.)
Income from sources other then the "Approved
Enterprise" during the benefit period will be
subject to tax at the regular corporate tax rate of
36%.
Since the Company and El-Op are operating under more
than one approval, and since part of their taxable
income is not entitled to tax benefits under the
abovementioned law and is taxed at the regular tax
rate of 36%, the effective tax rate is the result of
a weighted combination of the various applicable
rates and tax exemptions, and the computation is
made for income derived from each approval on the
basis of formulas specified in the law and in the
approvals.
B. TAX ASSESSMENTS
1. The Company and El-Op have received final tax
assessments through December 31, 2000. EFW has
received final tax assessments through December 31,
1997.
2. The Company and El-Op have received in previous
years pre-rulings from the tax authorities, which
allowed them to transfer development products and
assets to companies under their ownership without
any tax liability pursuant to section 104 of the
Israeli Income Tax Ordinance. The pre-rulings
specify terms for the companies to comply, usually
for a two - year period. Noncompliance with the
terms of the pre-rulings will result in the
retroactive cancellation of the aforementioned
exemption from taxes. Tax implications upon
non-compliance are estimated by management to be
immaterial to the Group's results.
-42-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 15 - INCOME TAXES (CONT.)
C. NON - ISRAELI SUBSIDIARIES
Non-Israeli subsidiaries are taxed based on tax laws in
their countries of residence (mainly in the U.S.).
D. INCOME (LOSS) BEFORE TAXES ON INCOME
YEAR ENDED
DECEMBER 31,
----------------------------------
2002 2001 2000
------- ------- ---------
Income (loss) before taxes on
income income:
Domestic $42,317 $44,212 $(13,779)
Foreign 11,977 7,638 1,121
------- ------- --------
$54,294 $51,850 $(12,658)
======= ======= ========
E. TAXES ON INCOME
YEAR ENDED
DECEMBER 31,
----------------------------------
2002 2001 2000
------- ------- ---------
Taxes on income:
Current taxes:
Domestic $11,654 $9,385 $8,710
Foreign 6,114 3,048 879
------- ------ ------
17,768 12,433 9,589
------- ------ ------
Deferred income taxes:
Domestic (3,561) (839) (5,309)
Foreign (2,059) (591) 1,947
------- ------ ------
(5,620) (1,430) (3,362)
------- ------ ------
Taxes in respect of prior years (*)(2,800) - -
------- ------ ------
$9,348 $11,003 $6,227
======= ====== ======
(*) A reduction of tax expenses due to adjustments of estimated
taxes and completion of tax assessments for prior years in
respect of various Group companies.
-43-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 15 - INCOME TAXES (CONT.)
F. DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effect of
temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant
components of net deferred tax assets and liabilities are
as follows:
DEFERRED
TAX ASSET (LIABILITY((1)
--------------------------
TOTAL CURRENT NONCURRENT
-------- ----------- ------------
As of December 31, 2002
Deferred tax assets:
Reserve and allowances $ 12,770 $ 4,797 $7,973
Inventory 6,878 6,878 -
Net operating loss carryforwards 2,326 - 2,326
-------- ------- --------
Valuation allowance (2) (2,326) - (2,326)
-------- ------- --------
Net deferred tax assets 19,648 11,675 7,973
-------- ------- --------
Deferred tax liabilities:
Property, plant and equipment (9,209) - (9,209)
Other assets (15,177) - (15,177)
-------- ------- --------
(24,386) - (24,386)
-------- ------- --------
Net deferred tax assets (liabilities) $ (4,738) $11,675 $(16,413)
======== ======= ========
As of December 31, 2001 Deferred tax assets:
Reserve and allowances $ 9,067 $ 4,308 $ 4,759
Inventory 7,323 7,323 -
Net operating loss carryforwards 4,248 - 4,248
-------- ------- --------
Valuation allowance (2) (2,202) - (2,202)
-------- ------- --------
Net deferred tax assets 18,436 11,631 6,805
-------- ------- --------
Deferred tax liabilities:
Property, plant and equipment (12,111) - (12,111)
Other assets (16,683) - (16,683)
-------- ------- --------
(28,794) - (28,794)
-------- ------- --------
Net deferred tax assets (liabilities) $(10,358) $11,631 $(21,989)
======== ======= ========
-44-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 15 - INCOME TAXES (CONT.)
F. DEFERRED INCOME TAXES (CONT.)
(1) Current tax asset is included in other receivables.
Noncurrent tax liability is included as a long-term
liabilitiy.
(2) During 2002, the Company increased the valuation
allowance due to an increase in accumulated operating
loss carryforwards not expected to be utilized.
G. The Company's Israeli subsidiaries have estimated total
available carryforward tax losses of approximately $2,200
as of December 31, 2002, . The Company's non-Israeli
subsidiaries have estimated available carryforward tax
losses of approximately $200 as of December 31 2002 to
offset against future taxable profits for an indefinite
period. Deferred tax assets in respect of the above
carryforward losses amount to approximately $2,400 in
respect of which a valuation allowance has been recorded in
the amount of approximately $2,400.
H. Reconciliation of the theoretical tax expense, assuming all
income is taxed at the statutory rate applicable to income
of the Company, and the actual tax expense as reported in
the statements of operations, is as follows:
YEAR ENDED
DECEMBER 31,
-----------------------------------
2002 2001 2000
------- ------- ---------
Income (loss) before taxes as reported in the
consolidated statements of operations $54,294 $51,850 $(12,658)
Statutory tax rate 36% 36% 36%
======= ======= ========
Theoretical tax expense (benefit) $19,546 $18,666 $(4,557)
Tax benefit arising from reduced rate as an
"Approved Enterprise" (9,054) (7,697) (4,015)
Tax adjustment in respect of different tax rate for
foreign subsidiaries (461) (952) (469)
Operating carryforward losses for which
valuation allowance was provided 2,189 101 318
-45-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 15 - INCOME TAXES (CONT.)
Increase (decrease) in taxes resulting from
nondeductible expenses (263) 571 15,280
Difference in basis of measurement for
financial reporting and tax return purposes 458 832 (684)
Taxes in respect of prior years (2,800) - -
Other differences, net (267) (518) 354
------- -------- --------
Actual tax expenses $ 9,348 $ 11,003 $ 6,227
======= ======== ========
Effective tax rate 17.2% 21.2% -
======= ======== ========
NOTE 16 - CONTINGENT LIABILITIES AND COMMITMENTS
A. Royalty commitments
1. The Company and certain Israeli subsidiaries partially
finance their research and development expenditures
under programs sponsored by the Office of the Chief
Scientist of Israel ("OCS") for the support of
research and development activities conducted in
Israel. At the time the participations were received,
successful development of the related projects was not
assured.
In exchange for participation in the programs by the
OCS, the Company and the subsidiaries agreed to pay 2%
- 3.5% of total sales of products developed within the
framework of these programs. The royalties will be
paid up to maximum amount equaling 100% to 150% of the
grants provided by the OCS, linked to the dollar and
for grants received after January 1, 1999, also
bearing annual interest at a rate based on LIBOR. The
obligation to pay these royalties is contingent on
actual sales of the products and in the absence of
such sales, payment of royalties is not required.
In some cases, the Government of Israel participation
(through the OCS) is subject to export sales or other
conditions. The maximum amount of royalties is
increased in the event of production outside of
Israel.
The Company and certain of its subsidiaries are also
obligated to pay certain amounts to the Israeli
Ministry of Defense and others on certain sales
including sales resulting from the development of
certain technology.
Royalties expenses or accrued amounted to $6,661,
$8,252 and $14,471 in 2000, 2001 and 2002,
respectively.
-46-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 16 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)
2. In September 2001, the OCS issued "Regulations for the
Encouragement of Research and Development in Industry"
(rules for determining the level and payment of
royalties) ("the regulations"). The regulations allow
large R&D intensive companies to reach certain
agreements with the OCS regarding determination of the
amount and payment schedule of royalties, subject to
certain conditions.
A. Royalty commitments (Cont.)
If the Company elects to adopt the regulations, it will
have to record a significant one-time expense resulting
from accruing liability for an absolute amount of
royalties.
As of the date the financial statement was approved, the
Company has not concluded discussions or finalized any
agreements with the OCS with respect to the company.
In May 2002 El-Op's Board of Directors approved an
arrangement, proposed by the OCS, according to which El-Op
will pay commencing in 2002 an agreed amount of $10,632 in
exchange for a release from all obligations to pay
royalties in the future. As a result El-Op recorded an
expense for the agreed amount net of the accrual for
royalties previously recorded by El-OP.
B. Commitments in respect of long-term projects
In connection with long-term projects in certain countries,
the Company and certain subsidiaries undertook to use its
respective best efforts to make or facilitate purchases or
investments in those countries at certain percentages of
the amount of the projects. The companies' obligation to
make or facilitate third parties making such investments
and purchases is subject to commercial conditions in the
local market, typically without a specific financial
penalty. The maximum aggregate undertaking as of December
31, 2002 amounted to $715,000 to be performed over a period
of up to 11 years, is typically tied to a percentage (up to
100%) of the amount of the specific contract.
In the opinion of management, the actual amount of the
investments and purchases is anticipated to be less than
that mentioned above, since certain investments and
purchases can result in reducing the overall undertaking on
more than a one to one basis.
-47-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 16 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)
C. Legal claims
The Company and its subsidiaries are involved in legal
claims arising in the ordinary course of business,
including claims by employees, consultants and others.
Company's management, based on the opinion of its legal
counsel, believes the amount of such claims in excess of
the accruals recorded in the financial statements will not
have a material adverse effect on the financial position or
results of operations of the Group.
D. Lease commitments
The future mininum lease commitments of the Group under
various non-cancelable operating lease agreements in
respect of premises, motor vehicles and office equipment
are as of December 31, 2002:
2003 $8,197
2004 8,985
2005 4,834
2006 4,156
2007 and there after 3,877
-------
$30,049
=======
Rent expenses for the years ended December 31, 2000, 2001
and 2002 amounted to $7,411, $7,978, and $9,215,
respectively.
E. The Company has provided, on a proportional basis to its
ownership interest, guarantees for two of its investees in
respect of credit lines from banks amounting to $10,600
(2001- $10,700), of which $10,200 (2001 - $9,700) relates
to a foreign investee owned 50% by El-Op. The guarantees
will exist as long as the credit lines are in effect. The
Company would be liable to perform under the guarantee for
any debt the investee would be in default under the terms
of the credit line.
-48-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars, except for share and per share data)
NOTE 16 - CONTINGENT LIABILITIES, AND COMMITMENTS (CONT.)
F. A lien on the Group's Approved Enterprises has been
registered in favor of the State of Israel. Grants received
in respect of projects which have not yet been approved
amount to approximately $3,600.(see note 15 A (3) above ).
G. Guarantees in the amount of approximately $374,000 were
issued by banks securing certain advances from customers
and performance bonds on behalf of Group companies.
H. Certain Group companies recorded fixed charges on most of
their machinery and equipment, mortgages on most of their
real estate and floating charges on most of their assets.
NOTE 17 - SHAREHOLDER'S EQUITY
A. SHARE CAPITAL
Ordinary shares confer upon their holders voting rights, the
right to receive dividends and the right to share in excess
sets as upon liquiation of the Company.
B. 1996 EMPLOYEE STOCK OPTION PLAN
In 1996, the Company adopted an employee stock option plan
pursuant to which options to buy 2,100,000 ordinary shares
may be granted to employees. In April 1998, the Company
amended the plan in order to be able to grant an additional
322,000 options. The exercise price approximates market
price of the share at the grant date less 15%. The options
vested over a period of two to four years from the date of
grant and expire no later than six years from the date of
grant. The plan is implemented in accordance with Section
102 of the Israeli Income Tax Ordinance.
C. 2000 EMPLOYEE STOCK OPTION PLAN
In 2000, the Company adopted another employee stock option
plan for employees comprising options to purchase up to
2,500,000 ordinary shares. The exercise price approximates
market price of the shares at the grant date. The plan
includes an additional 2,500,000 options to be issued as
"phantom" shares options that grant the option holders a
-49-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars, except for share and per share data)
NOTE 17 - SHAREHOLDER'S EQUITY (CONT.)
number of shares reflecting the benefit component of the
options exercised, as calculated at the exercise date, in
consideration for their par value only. Options vest over a
period of one to four years from the date of grant and
expire no later than six years from the date of grant.
Any options, which are canceled or forfeited before
expiration, become available for future grants. As of
December 31, 2002, 466,042 options of the Company were
still available for future grants.
D. "PHANTOM" SHARE OPTIONS
The phantom share options are considered as part of a
variable plan as defined in APB 25, and accordingly the
compensation cost of the options is measured by the
difference between the market price of the Company's shares
and the exercise price of the options at the end of every
reporting period and amortized by the accelerated method
over the remaining vesting period.
E. A summary of the Company's share option activity under the
plans is as follows:
DECEMBER 31,
-------------------------------------------------------------------------------------------------------
2000 2001 2002
------------------------------- ------------------------------- ------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------- ----------- -------------- ------------ -------------- --------------
Outstanding-beginning of
the year 1,471,830 $ 2.35 5,671,918 $ 11.26 5,107,634 $11.93
Granted 4,530,662 12.32 98,840 12.91 27,000 14.92
Exercised (268,753) 7.64 (598,348) 11.93 (558,901) 9.45
Forfeited (61,821) 7.13 (64,776) 12.50 (64,009) 11.33
--------- -------- --------- -------- --------- ------
Outstanding - end of the
year 5,671,918 $ 11.26 5,107,634 $ 11.93 4,511,724 $12.26
========= ======== ========= ======== ========= ======
Options exercisable at
the end of the year 748,760 $ 5.10 373,138 $ 7.56 2,287,790 $12.18
========= ======== ========= ======== ========= ======
-50-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars, except for share and per share data)
NOTE 17 - SHAREHOLDER'S EQUITY (CONT.)
E. (Cont.)
The options outstanding as of December 31, 2002, have been
separated into ranges of exercise price, as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AS REMAINING AVERAGE OUTSTANDING AS AVERAGE
OF DECEMBER 31, CONTRACTUAL LIFE EXERCISE OF DECEMBER 31, EXERCISE
EXERCISE PRICE 2002 (YEARS) PRICE PER SHARE 2002 PRICE PER SHARE
-------------------- --------------- ---------------- --------------- --------------- ---------------
$10.61-$12.16 252,853 1.45 $10.71 242,478 $10.67
$12.18-$15.07 2,135,897 3.92 12.35 1,024,368 12.39
$12.18-$15.07(*) 2,122,974 3.90 12.35 1,020,944 12.34
--------------- ---------------- --------------- --------------- ---------------
4,511,724 3.77 $12.26 2,287,790 $12.18
=============== ================ =============== =============== ===============
(*) Phantom share options.
Where the Company has recorded deferred stock compensation
for options issued with an exercise price below the fair
value of the ordinary shares, the deferred stock
compensation is amortized and recorded as compensation
expense ratably over the vesting period of the options.
Compensation expense (income) of approximately $155, $8,512
and $(926) were recognized during the years ended December
31, 2000, 2001 and 2002, respectively.
F. The weighted average exercise price of options granted
during the years ended December 31, 2000, 2001 and 2002
were:
EXCEEDS
MARKET PRICE LESS THAN MARKET PRICE
------------- ------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 2001 2002
------------- ----------- ------------
Weighted-average
exercise price $12.32 $12.91 $14.92
-51-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars, except for share and per share data)
NOTE 17 - SHAREHOLDER'S EQUITY (CONT.)
G. Computation of basic and diluted net earning (loss) per share
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
----------------------------------- ------------------------------------- -------------------------------------
NET INCOME
TO WEIGHTED NET INCOME TO WEIGHTED
SHAREHOLDERS AVERAGED PER SHAREHOLDERS AVERAGED PER SHAREHOLDERS AVERAGED PER
OF ORDINARY NUMBER OF SHARE OF ORDINARY NUMBER SHARE OF ORDINARY NUMBER SHARE
SHARES SHARES AMOUNT SHARES OF SHARES AMOUNT SHARES OF SHARES AMOUNT
=========== ============ ========== =============== =========== ========= =============== =========== =========
Basic net earnings
(losses) $45,113 38,489 $1.17 $40,796 37,975 $1.07 $(20,531) 31,572 $(0.65)
Effect of dilutive
securities:
Employee stock
options - 1,374 - 1,384 - -
------- ------ ------- ------ -------- ------
Diluted net
earnings (losses) $45,113 39,863 $1.13 $40,796 39,359 $1.04 $(20,531) 31,572 $(0.65)
======= ====== ===== ======= ====== ===== ======== ====== ======
H. Treasury shares
The Company's shares held by the Company are presented at
cost and deducted from shareholder's equity.
I. Dividend policy
In the event that cash dividends are declared by the
Company, such dividends will be paid in NIS or in foreign
currency subject to any statutory limitations. The Company
has decided not to declare dividends out of tax exempt
earnings.
-52-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars, except for share and per share data)
NOTE 18 - MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
A. Revenues are attributed to geographic areas based on location
of the end customers as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
-------- -------- --------
Europe $144,862 $179,560 $124,127
U.S. 267,686 206,627 189,147
Israel 225,674 226,650 159,593
Other 189,234 151,664 118,217
-------- -------- --------
$827,456 $764,501 $591,084
======== ======== ========
B. Revenues are generated by the following product lines:
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
-------- -------- --------
Airborne systems $372,756 $334,201 $257,884
Armored vehicles systems 135,700 126,300 111,800
Command, control, communications
Systems 122,700 105,800 113,700
Electro-optical systems 148,200 162,700 91,100
Others 48,100 35,500 16,600
-------- -------- --------
$827,456 $764,501 $591,084
======== ======== ========
C. Revenues from single customers, which exceed
10% of total revenues in the reported years:
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
-------- -------- --------
Customer A 18% 20% 26%
D. Long-lived assets by geographic areas:
DECEMBER 31,
---------------------
2002 2001
-------- --------
U.S $83,814 $ 84,864
Israel 211,256 194,690
Other 13,660 10,451
-------- --------
$308,730 $290,005
======== ========
-53-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 19 - COST OF REVENUES
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
-------- -------- --------
Materials $237,918 $182,936 $133,900
Labor 195,213 187,558 148,063
Subcontractors 126,579 129,057 78,983
Maintenance of buildings and services 30,643 28,824 15,374
Other manufacturing expenses 37,655 31,342 30,644
Depreciation 20,662 20,979 12,713
Royalties 14,471 8,252 6,661
-------- -------- --------
663,141 588,948 426,338
Amortization of intangibles assets 1,552 3,497 1,706
Increase (decrease) in provision for costs, warranties and
expected losses (4,257) 29 3,975
-------- -------- --------
660,436 592,474 432,019
-------- -------- --------
Less:
Cost of equipment produced for own use 5,517 4,913 6,651
Increase (decrease) in inventories of
contracts in-progress 49,606 33,604 (7,418)
-------- -------- --------
55,123 38,517 (767)
-------- -------- --------
$605,313 $553,957 $432,786
======== ======== ========
NOTE 20 - RESEARCH AND DEVELOPMENT COSTS, NET
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
-------- -------- --------
Total expenses $ 62,560 $ 67,871 $ 53,251
Less - participations 5,550 9,112 8,977
-------- -------- --------
$ 57,010 $ 58,759 $ 44,274
======== ======== ========
NOTE 21 - MARKETING AND SELLING EXPENSES
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
-------- -------- --------
Salaries and related expenses $24,692 $23,379 $14,205
Constancy Fee's 24,782 20,648 11,546
Advertising and exhibitions 5,301 4,792 3,130
Depreciation 3,883 2,709 1,584
Other 7,033 3,348 7,984
-------- -------- --------
$65,691 $54,876 $38,449
======== ======== ========
-54-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 22 - GENERAL AND ADMINISTRATIVE EXPENSES
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
------- ------- -------
Salaries and related expenses $24,741 $27,113 $12,074
Office expenses 7,198 7,060 4,063
Depreciation and amortization 3,540 2,730 3,947
Other 6,172 6,313 6,167
------- ------- -------
$41,651 $43,216 $26,251
======= ======= =======
NOTE 23 - FINANCIAL INCOME (EXPENSES), NET
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
------- ------- -------
Income:
Interest on cash equivalents and bank
deposits $1,547 $2,179 $2,574
Other 2,073 2,841 3,949
------- ------- -------
3,620 5,020 6,523
------- ------- -------
Expenses:
On long-term bank debt and debentures 2,026 3,033 1,442
On short-term bank credit and loans 3,415 3,806 3,626
Other 1,214 798 1,340
------- ------- -------
6,655 7,637 6,408
------- ------- -------
$(3,035) $(2,617) $115
======= ======= =======
NOTE 24 - OTHER INCOME (EXPENSES), NET
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
------- ------- -------
Gain (loss) on disposal of property, plant
and equipment $(743) $327 $597
Other, net 281 447 (594)
------- ------- -------
$(462) $774 $3
======= ======= =======
-55-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
NOTE 25 - RELATED PARTIES TRANSACTIONS AND BALANCES
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
------- ------- -------
Income -
Sales (*) $37,924 $28,675 $11,168
Expenses charged $902 $633 $626
Cost and expenses -
Supplies and services $10,457 $11,125 $7,392
Participation in expenses (*) $1,498 $1,632 $1,464
Financial expenses $110 $193 -
DECEMBER 31,
-------------------
2002 2001
------ -------
Trade receivables (*) $9,647 $14,257
Trade payables $4,006 $2,016
(*) The amounts relate mainly to transactions with VSI.
The Company's President and CEO is entitled for a three-year
period, starting in July 2000, to an annual bonus of not less
than 1% of the Company's net income after tax (excluding unusual
expenses such as amortization of goodwill), and is also entitled
to up to 10% of the number of options or shares issued by the
Company to its employees and under the same terms (see Note 17).
A former director of the Company received an annual bonus of 1%
of the Company's net income after tax (excluding unusual expenses
such as amortization of goodwill) from July 2000 to December 2001
and an additional bonus equal to the compensation derived from
400,000 options of the Company.
NOTE 26 - RECONCILIATION TO ISRAELI GAAP
As described in Note 1, the Company prepares its financial statements
in accordance with U.S. GAAP. The effects of the differences between
US GAAP and Israeli GAAP on the Company's financial statements are
detailed below.
Differences between US GAAP and Israeli GAAP:
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ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
A building purchased from Elbit Ltd.
------------------------------------
According to generally accepted accounting principles in Israel, the
Company charged to capital reserves the excess of the amount paid
over net book value of a building acquired from Elbit Ltd in 1999.
According to US GAAP, the entire amount paid is considered as the
cost of the building acquired.
Proportional consolidation method
---------------------------------
According to Israeli GAAP, a jointly controlled company should be
included according to the proportional consolidation method.
According to US GAAP, the investment in such a company is recorded
according to the equity method.
Tax benefit in respect of options exercised
-------------------------------------------
According to Israeli GAAP, tax benefits from employee options
exercised are recorded as a reduction of tax expense. According to US
GAAP, the difference between the above mentioned tax benefits and the
benefits recorded in respect of compensation expense in the financial
statements is credited to capital reserves.
Goodwill
--------
Effective January 1, 2002 the Company adopted SFAS 142, "Goodwill and
Other Intangible Assets" according to which goodwill and intangible
assets with indefinite lives are no longer amortized periodically but
are reviewed annually for impairment (or more frequently if
impairment indicators arise). According to Israeli GAAP, all
intangibles, including goodwill should be amortized.
NOTE 26 - RECONCILIATION TO ISRAELI GAAP
1. EFFECT ON NET INCOME AND EARNINGS PER SHARE
YEAR ENDED
DECEMBER 31
-----------------------------------------
2002 2001 2000
--------- ------ -------
A) Net earnings (loss) as reported
according to U.S. GAAP 45,113 40,796 (20,531)
Adjustments to Israeli GAAP (4,227) 1,767 1,822
--------- ------ -------
Net earnings (loss) according to Israeli
GAAP 40,886 42,563 (18,709)
========= ====== =======
B) Earnings per share
Basic net earnings (loss) per share
As reported according to U.S. GAAP 1.17 1.07 (0.65)
As per Israeli GAAP 1.03 1.11 (0.59)
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ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(In thousands of U.S. dollars)
Diluted net earnings (loss) per share
As reported according to U.S. GAAP 1.13 1.04 (0.65)
As per Israeli GAAP 0.96 1.11 (0.59)
2. EFFECT ON SHAREHOLDERS' EQUITY
AS PER
AS REPORTED ADJUSTMENTS ISRAELI GAAP
----------- ----------- ------------
AS OF DECEMBER 31, 2002
Shareholders' equity 411,361 (11,076) 400,285
======= ======= =======
AS OF DECEMBER 31, 2001
Shareholders' equity 377,985 (12,149) 365,836
======= ======= =======
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