ELBIT SYSTEMS LTD - 20-F - 20040614 - LIQUIDITY_CAPITAL
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Our cash flow is effected by the cumulative cash flow of our various
projects in the reported periods. Project cash flows are affected by the timing
of the receipt of advances and the collection of accounts receivable from
customers. These relate to specific events during the project, while expenses
are ongoing. As a result, our cash flow may vary from a period to another. Our
policy is to invest our cash surplus mainly in interest bearing deposits, in
accordance with our projected needs.
FINANCIAL RESOURCES
The financial resources available to us include profits, collection of
accounts receivable, advances from customers and Government of Israel programs
such as the OCS and development grants. In addition, Elbit Systems has access to
bank credit lines and financing in Israel and abroad based on our capital,
assets and activities. We also have the possibility of raising funds through
offering of shares to the public from time to time subject to market conditions.
Elbit Systems and some subsidiaries are obligated to meet various financial
covenants set forth in our respective loan and credit agreements. As of May 31,
2004, each of the companies subject to financial covenants were in compliance
with the applicable covenants.
In 2003, the Controller of the Banks in Israel instituted new
regulations governing lending by Israeli banks to groups of affiliated
borrowers. Under these regulations the banks are limited in their maximum
exposure to groups of affiliated companies under a combined lending ceiling
based on objective and subjective guidelines. As a result, our borrowing
capacity may be limited under certain circumstances, even if we have unused
lines of credit, due to borrowing by companies affiliated with shareholders that
are defined by the Controller of the Banks as our controlling shareholders. In
anticipation of such developments we are developing credit facilities that will
not be affected by the new regulations.
2003 CASH FLOW
Our net cash flow generated from operating activities in 2003 was $91.4
million. Net cash flow used for investment activities in 2003 was $53.8 million,
which was used mainly for procurement of property, plant and equipment. The
investments were primarily in equipment for the Group's various manufacturing
plants and in buildings constructed at Elbit Systems' facility in Haifa, Israel
and El-Op's site in Rehovot, Israel. We expect to maintain this level of
investments in 2004, in order to increase our production facilities and to
invest in R&D laboratories, manufacturing and testing equipment.
Net cash flow used for financing activities in 2003 was $37.7 million,
which was used mainly for reduction of long-term loans and dividends payable,
which were partially offset by proceeds from the exercise of share options. On
December 31, 2003, we had total borrowings in the amount of $77.4 million,
including $15.3 million in short-term loans. On December 31, 2003, we had a cash
balance amounting to $76.8 million. As of December 31, 2003, we had working
capital of $198.9 million, our current ratio was 1.52 and our ratio of equity to
total assets was 44%. For further information on the level and maturity of our
borrowings, see below - Item 18. Financial Statements - Note 10 (Short-Term Bank
Credit and Loans) and Note 13 (Long-Term Loans). We believe our working capital
is sufficient to support our current requirements.
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MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURES
We believe that we have adequate sources of funds to meet our material
commitments for capital expenditures for the fiscal year ended December 31, 2003
and the subsequent fiscal year. See above "Financial Resources". Our specific
material commitments for capital expenditures as of December 31, 2003 and May
31, 2004 were approximately $12 million and $8 million respectively. These
commitments were mainly for the new building project in Haifa. See also below -
Item 18. Financial Statements - Consolidated Statements of Cash Flows and Note 8
(Property, Plant and Equipment, Net) to the Financial Statements.
2002 CASH FLOW
Our 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, we invested $22.1 million in equipment for our
various manufacturing plants, and $13.2 million in buildings, mainly those being
built at Elbit Systems' site in Haifa, Israel and El-Op's site in Rehovot,
Israel.
Net cash flow used for financing activities in 2002 was $29.3 million,
which was used mainly for reduction of short and long-term borrowings and
payment of $12.7 million in dividends during 2002. On December 31, 2002, we had
total bank borrowings in the amount of $104.1 million, including $73.2 million
in long-term loans, and $374 million in guarantees issued on our behalf by
banks, mainly as advance payment and performance guarantees in the regular
course of business. On December 31, 2002, we had cash balances amounting to
$77.9 million. As of December 31, 2002, our working capital was $197.6 million,
and our current ratio was 1.54. Our ratio of equity to total assets was 44%.
IMPACT OF INFLATION AND EXCHANGE RATES
FUNCTIONAL CURRENCY
Our functional currency is the U.S. dollar, which is the currency we
use for most of our consolidated operations. A majority of our sales are made
outside of Israel in non-Israeli currency, mainly U.S. dollars, as are a
majority of our purchases of materials and components. Transactions and balances
originally denominated in U.S. dollars are presented in their original amounts.
Transactions and balances in currencies other than the U.S. dollar are
remeasured in U.S. dollars according to the principles set forth in Statement
No. 52 of the Financial Accounting Standards Board. Exchange gains and losses
arising from remeasurement are reflected in the income statement. Balances
linked to the CPI are stated using the latest index published prior to the
balance sheet date.
MARKET RISKS AND VARIABLE INTEREST RATES
Market risks relating to our operations result mainly from changes in
interest rates and exchange rates, and we use financial instruments to limit
exposure. We typically enter into forward contracts in connection with
transactions that are denominated in currencies other than U.S. dollars and NIS.
We also enter from time to time into forward contracts related to NIS.
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On December 31, 2003, our liquid assets were comprised of bank
deposits, and we had no investments in liquid equity securities that were
subject to market fluctuations. Our deposits and loans are based on variable
interest rates, and their value as of December 31, 2003 was therefore not
exposed to changes in interest rates. Should interest rates either increase or
decrease, such change may affect our results of operations due to changes in the
cost of our liabilities and the return on our assets that are based on variable
rates.
NIS/U.S. DOLLAR EXCHANGE RATES
We attempt to manage our financial activities in order to reduce
material financial losses in U.S. dollar terms resulting from the impact of
inflation and exchange rate fluctuations on our non-U.S. dollar assets and
liabilities. Our income and expenses in Israeli currency are translated into
U.S. dollars at the prevailing exchange rates. Consequently, we are affected by
changes in the NIS/U.S. dollar exchange rates. On December 31, 2003, we had
exposure due to NIS denominated liabilities of $44 million in excess of NIS
denominated assets. These liabilities represent mostly provisions for wages and
trade payables. The amount of our exposure to the changes in the NIS/U.S. dollar
exchange rate may vary from time to time. In order to hedge against certain
expected NIS payments, we entered into forward contracts. On December 31, 2003,
we had hedging contracts covering NIS exposure in the amount of $25 million.
INFLATION AND DEVALUATION
The U.S. dollar cost of our operations in Israel is influenced by any
increase in the rate of inflation in Israel that is not fully offset by the
devaluation of the NIS in relation to the U.S. dollar. Unless inflation in
Israel is offset by a devaluation of the NIS, it may have a negative effect on
the profitability of contracts where Elbit Systems or any of our Israeli
subsidiaries receives payment in U.S. dollars, NIS linked to U.S. dollars or
other foreign currencies, but incurs expenses in NIS linked to the CPI.
Inflation in Israel and currency fluctuations may also have a negative effect on
the profitability of fixed price contracts where we receive payments in NIS.
In the past, our profitability was somewhat negatively affected when
inflation in Israel exceeded the devaluation of the NIS against the U.S. dollar
and at the same time we experienced corresponding increases in the U.S. dollar
cost of our operations in Israel. For example, in 1999 the rate of inflation was
approximately 1.3% and the rate of devaluation was -0.2%. In 2000, the rate of
inflation was approximately 0% and the devaluation rate was -2.7%. In 2001 the
inflation rate was approximately 1.4% and the devaluation rate was 9.3%. In
2002, the inflation rate was approximately 6.5% and the devaluation rate was
7.3%. In 2003, the inflation rate was approximately negative 1.9% and the
devaluation rate was negative 7.6%. There can be no assurance that we will not
be materially adversely affected in the future if inflation in Israel exceeds
the devaluation of the NIS against the U.S. dollar or if the timing of such
devaluation lags behind increases in inflation in Israel.
A devaluation of the NIS in relation to the U.S. dollar also has the
effect of decreasing the dollar value of any of our assets that consist of NIS
or accounts receivable denominated in NIS, unless such accounts receivable are
linked to the U.S. dollar. Such a devaluation also has the effect of reducing
the U.S. dollar amount of any of our liabilities that are payable in NIS, unless
such payables are linked to the U.S. dollar. On the other hand, any increase in
the value of the NIS in relation to the U.S. dollar will have the effect of
increasing the U.S. dollar value of any unlinked NIS assets as well as the U.S.
dollar amount of any unlinked NIS liabilities and expenses.
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FOREIGN CURRENCY EXPENSES
While our functional currency is the U.S. dollar, we also have some
non-U.S. dollar or non-U.S. dollar linked currency exposure for currencies other
than NIS. These are mainly non-U.S. dollar customer debts, payments to suppliers
and subcontractors, obligations in other currencies, assets or undertakings.
Some subcontractors are paid in local currency under prime contracts where we
are paid in U.S. dollars. The exposure on these transactions has not been in
amounts that are material to Elbit Systems. However, when we view it necessary,
we seek to minimize our foreign currency exposure, by entering into hedging
arrangements, obtaining periodic payments upon the completion of milestones,
obtaining guarantees and security from customers and sharing currency risks with
subcontractors. Gains and losses on forward exchange contracts entered as hedges
are recognized currently.
Most of our assets and liabilities that are denominated in currencies
other than the NIS and the U.S. dollar were covered as of December 31, 2003 by
financial instruments (mostly forward contracts). On December 31, 2003, we had
contracts for the sale and purchase of such foreign currencies totaling $26.5
million. The results of financial derivative activities were not material.
We conduct activities in a number of the countries that have adopted
the European Monitory Unit (EURO). To date, the transition to the use of the
EURO in the relevant countries has not resulted in a material exposure to us.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
----------------------
(U.S. dollars in millions)
LESS THAN MORE THAN
1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
1. Long-Term Debt $6.8 $58.8 $0.3 $2.9
2. Capital Lease Obligations -- -- -- --
3. Operating Leases 8.5 11.7 10.9 5.4
4. Purchase Obligations 214.3 129.4 4.3 0.4
5. Other Long-Term Liabilities
Reflected on the Issuer's Balance -- -- -- --
Sheet Under GAAP*
Total $229.6 $199.9 $15.5 $8.7
====== ====== ===== ====
* See above - Item 4. Information on the Company - Buy-Back.
OFF-BALANCE SHEET TRANSACTIONS
See above "General - Off-Balance Sheet and Other Long-Term Arrangements
and Commitments." Also shareholders in one of our subsidiaries have a put
option. See above - Item 4. Information on the Company - Principal Subsidiaries
- Kinetics.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Elbit Systems as of May 31,
2004 are as follows:
BOARD OF DIRECTORS
NAME AGE DIRECTOR SINCE
---- --- --------------
Michael Federmann (Chairman) 61 2000
Joseph Ackerman 55 1996
Avraham Asheri 66 2000
Rina Baum 59 2001
Aharon Beth-Halachmi 68 2000
Doron Birger 53 2002
Ami Erel 57 1999
Avi Fischer 47 2003
Yaacov Lifshitz (External Director) 60 2003
Dov Ninveh 57 2000
Nathan Sharony (External Director) 69 2002
The term of office of each director, other than the External Directors,
expires at the annual general shareholders meeting to be held during 2004. The
term of office for Natty Sharony as an External Director expires in March 2005
and for Yaacov Lifshitz as an External Director in July 2006.
EXECUTIVE OFFICERS
NAME AGE POSITION
Joseph Ackerman 55 President, Chief Executive Officer and Director
David Block Temin 49 Corporate Vice President and General Counsel
Itzhak Dvir 56 Corporate Vice President and Chief Operating
Officer
Jacob Gadot 57 Corporate Vice President and Chief Technology
Officer
Ran Galli 55 Corporate Vice President - Major Campaigns
Joseph Gaspar 56 Corporate Vice President and Chief Financial
Officer
Zeev Gofer 52 Corporate Vice President - Business Development
and Marketing
Dalia Gonen 52 Vice President - Human Resources
Ran Hellerstein 53 Corporate Vice President and Co-General Manager
- Airborne and Helmet Systems
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Haim Kellerman 50 Corporate Vice President and General Manager -
UAV Integrated Systems
Bezhalel Machlis 41 Corporate Vice President and General Manager
- Land Systems and C4I
Ilan Pacholder 49 Corporate Secretary and Vice President - Finance
and Capital Markets
Marco Rosenthal 57 Corporate Vice President - Manufacturing and
Purchasing
Haim Rousso 58 Corporate Vice President and General Manager -
El-Op
Gideon Sheffer 55 Corporate Vice President - Strategic Planning
Yoram Shmuely 44 Corporate Vice President and Co-General Manager
- Airborne and Helmet Systems
Timothy Taylor 52 President and Chief Executive Officer - EFW
MICHAEL FEDERMANN. Michael Federmann has served as Chairman of the
Board of Directors since the El-Op Merger in 2000. He served as Chairman of the
Board of Directors of El-Op from 1988 until the Merger. He has held managerial
positions in the Federmann Group since 1969, and since 2002 he has served as
Chairman and CEO of Federmann Enterprises Ltd. Currently, he also serves as
Chairman of the Board of Directors of Dan Hotels Corp. Ltd. (Dan Hotels). Mr.
Federmann is Deputy Chairman of the Board of Governors of the Hebrew University
in Jerusalem (the Hebrew University) and a member of the Board of Governors and
the Executive Committee of the Weizmann Institute of Science. Mr. Federmann
holds a bachelor's degree in economics and political science from the Hebrew
University.
JOSEPH ACKERMAN. Joseph Ackerman was appointed as President and Chief
Executive Officer in 1996. From 1994 to 1996, he served as Senior Vice President
and General Manager of Elbit Ltd.'s Defense Systems Division (EDS). Mr. Ackerman
joined Elbit Ltd. in 1982 and held various management positions, including
General Manager - EFW, Senior Vice President - Operations Group, Vice President
- Operations and Vice President - Advanced Battlefield Systems. Mr. Ackerman
holds a bachelor of science degree in aeronautical engineering from the Israel
Institute of Technology (the Technion).
AVRAHAM ASHERI. Avraham Asheri has served as an economic advisor and a
director of several companies since 1998. He currently serves on the boards of
directors of Elron Electronic Industries Ltd. (Elron), Discount Mortgage Bank
Ltd., Kardan Nadlan Ltd., Scitex Corporation Ltd. (Scitex), Africa Israel
Investment Ltd. and Meditor Pharmaceuticals Ltd. Mr. Asheri was President and
Chief Executive Officer of Israel Discount Bank from 1991 until 1998, and
Executive Vice President and member of its management committee from 1983. Prior
to that, he served for 23 years at the Israel Ministry of Industry and Trade and
at the Israel Ministry of Finance, including as Director General of the Israel
Ministry of Industry and Trade, Managing Director of the Israel Investment
Center and Trade Commissioner of Israel to the United States. Mr. Asheri holds a
bachelor's degree in economics and political science from the Hebrew University.
RINA BAUM. Rina Baum is Vice President for Investments of Federmann
Enterprises and since 1986 has served as Director and General Manager of Unico
Investment Company Ltd. She serves as a director of Dan Hotels and Harel Mutual
Funds Ltd. During 1995 to 1996, she served as a director of Leumi Mortgage Bank
Ltd. Mrs. Baum holds an L.L.B. degree from the Hebrew University.
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AHARON BETH-HALACHMI. Aharon Beth-Halachmi has served as President of
Federmann Enterprises - Division of Industries and Technologies since 1985 and
as President of Eurofund L.P. - Venture Capital Fund since 1994. He served as a
director of El-Op from 1985 until 2000. From 1983 to 1985, he served as
President of Tahal Engineering Co. Ltd. From 1982 to 1983, he was Director
General of the IMOD. Prior to that he served in the IDF, including as head of
Defense Research and Development from 1977 to 1982. He retired with the rank of
Brigadier General. Mr. Beth-Halachmi holds a bachelor of science degree in
electronic engineering from the Technion and a master of science degree in
computer science from the Naval Postgraduate School in Monterey, California.
DORON BIRGER. Doron Birger has served as Chief Executive Officer of
Elron since 2002 and as President of Elron since 2001. He joined Elron in 1994
as Vice President - Finance and served as Chief Financial Officer and Corporate
Secretary. Prior to that he served as Chief Financial Officer for a number of
companies including North Hills Electronics Ltd., Middle-East Pipes Ltd.,
Maquette Ltd., Bateman Engineering Ltd. and I.D.C. Industrial Development
Company Ltd. Mr. Birger is Chairman of Given Imaging Ltd. and ChipX Incorporated
and serves as a director in several other companies in the Elron group. Mr.
Birger holds bachelor and master of arts degrees in economics from the Hebrew
University.
AMI EREL. Ami Erel has served as President and Chief Executive Officer
of DIC since 2001. In addition, he has served as Chairman of the Board of
Directors of Elron since 1999. From 1999 until 2001, he was Chief Executive
Officer of Elron. He served as Chairman of the Board of Directors of Elbit
Systems from 1999 until the Merger in 2000. From 1997 to 1999, he served as
President and Chief Executive Officer of Bezeq - The Israel Telecommunications
Corp. Ltd. and as Chairman of the Board of Directors of PelePhone Communications
Ltd. from 1997 to 1998. He is Chairman of the Board of Scitex, a director of
Property and Building Corporation Ltd. ,Super-Sol Ltd. and Ham-let (Israel
Canada) Ltd., as well as Chairman or a member of the boards of other companies
in the DIC group and the Elron group. From 2000 until January 2004, Mr. Erel
served as the Chairman of the Board of the Israel Association of Electronic and
Information Industries. Mr. Erel holds a bachelors of science degree in
electrical engineering from the Technion.
AVI FISCHER. Avi Fischer has served as the Deputy Chairman of the
I.D.B. Group and as the Co-CEO of Clal Industries & Investments Ltd. (Clal)
since mid- 2003. Mr. Fischer is a co-founder of the Ganden Group and has served
as the Co-Chairman of Ganden Tourism and Aviation Ltd. and as the Vice Chairman
of Ganden Holding Ltd. since 1999. He has practiced law since 1983 and is a
Co-Managing Partner in the law firm of Fischer, Behar, Chen & Co. He currently
serves on the boards of directors of IDBH, DIC, Clal, Scitex, Elron, Vyyo Inc.,
Natour Ltd. and other companies. Mr. Fischer holds an L.L.B. degree from
Tel-Aviv University.
YAACOV LIFSHITZ (EXTERNAL DIRECTOR). Mr. Lifshitz serves as a director
of several companies and as a lecturer in the fields of economics, public policy
and management. He currently is a lecturer at the Department of Economics and
the Department of Public Policy and Management of Ben-Gurion University and at
the Department of Economics and Management of the Tel-Aviv - Jaffa Academic
College. He also currently serves on the boards of directors of Israel Discount
Bank, DorGas Ltd., Kali - Insurance Agencies Ltd., Springs - Pension Fund
Management Ltd., Carmel Investments Ltd. and Tesnet Software Testing Ltd. During
the period from 1994 to 2002, Mr. Lifshitz served at various times as the
chairman of the boards of directors of Hamashbir Lazarchan Israel Ltd., Israel
Military Industries Ltd., Spectronix Ltd., Dor Chemicals Ltd., Dor Energy Ltd.,
DorGas Ltd. and the Israeli Foreign Trade Risk Insurance Corp. Ltd. He also
served from 1995 to 2002 as the Chairman of the Executive Board of the Israel
Management Center. Prior to that he held various senior positions in government,
banking and
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industry, including Director General of the Israel Ministry of Finance, Chief
Economic Advisor to the Israel Ministry of Defense, Senior Vice President and
Chief Credit Officer of Israel Discount Bank and President and CEO of Electra
(Israel) Ltd. Mr. Lifshitz holds a bachelor's degree in economics and political
science and a master's degree in economics from the Hebrew University.
DOV NINVEH. Dov Ninveh has served since 1994 as Chief Financial Officer
and a manager in Federmann Enterprises. He serves as a director of Dan Hotels
and Etanit Ltd. Mr. Ninveh served as a director of El-Op from 1996 until 2000.
From 1989 to 1994, he served as Deputy General Manager of Etanit Building
Products Ltd. Mr. Ninveh holds a bachelor's degree in economics and management
from the Technion.
NATHAN SHARONY (EXTERNAL DIRECTOR). Nathan Sharony has served since
1997 as a director for several companies. He currently serves as a director for
Technorov Holdings (1993) Ltd. (Technorov), a high technology investment
company, Bituach Yashir Ltd., Union Bank, Ormat Industries Ltd., Genoa
Technologies Ltd. and Israel Bonds International Inc. From 1997 to 1999, he
served as Chairman of Technorov. From 1994 to 1997, he was employed with a U.S.
brokerage firm. Mr. Sharony served as the Director General of the Israel
Ministry of Industry and Trade from 1992 to 1994. Prior to that, Mr. Sharony
held a number of positions in industry and government including head of the
Israeli Government Economic Mission to the U.S., President and Chief Executive
Officer of El-Op and Vice President for Logistics of Tadiran Electronic Industry
Ltd. In 1982, Mr. Sharony completed 30 years of service in the IDF, retiring
with the rank of Major General. Mr. Sharony participated in the Field Artillery
Battle Officers Course in Fort Sill, Oklahoma, and studied military history at
the IDF's Staff and Command College.
DAVID BLOCK TEMIN. David Block Temin was appointed Corporate Vice
President in 2000 and has served as General Counsel since 1996. From 1987 to
1996, he was a Legal Advisor to Elbit Ltd. Prior to that, Mr. Block Temin was an
attorney with law firms in New York City. Mr. Block Temin received a juris
doctor degree as well as a master of arts degree in international relations from
Stanford University and holds a bachelor of arts degree in political science
from the University of Maryland. He is admitted to the Israeli and New York
bars.
ITZHAK DVIR. Itzhak Dvir was appointed as Chief Operating Officer in
June 2004, effective beginning in July 2004. He was appointed as a Corporate
Vice President in 2000. Mr. Dvir served as General Manager - UAV, Tactical and
Security Systems from January 2003 until his current appointment. From 2000
through 2002, he was General Manager - C4I and Battlefield Systems. From 1996
until 2000, he was Vice President and Division Manager - UAV and C3 Division.
Mr. Dvir joined Elbit Ltd. in 1989 and held various management positions,
including Vice President - UAV Division, Vice President - Advance Battlefield
Systems Division and Marketing Director - Battlefield Systems Division. Prior to
that he served as a career officer in the IAF, retiring with the rank of
Colonel. Mr. Dvir holds a bachelor of science degree in aeronautical engineering
from the Technion and a master of science degree in aeronautical engineering
from the U.S. Air Force Institute of Technology at Wright Patterson Air Force
Base.
JACOB GADOT. Jacob Gadot was appointed Corporate Vice President -
Mergers and Acquisitions in 2000 and Chief Technology Officer in 2001. He served
as Vice President - Mergers and Acquisitions from 1998 to 2000 and as Vice
President - Business Development from 1996 to 1998. Mr. Gadot joined Elbit Ltd.
in 1983 and held various positions in EDS, including Vice President -
International Marketing and head of the Airborne Division. Prior to that, he
worked for Motorola Israel, after serving for ten years as an officer in the
IAF. Mr. Gadot holds a bachelor of science degree in electrical engineering from
the Technion.
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RAN GALLI. Ran Galli was appointed Corporate Vice President - Major
Campaigns in November 2003. From 1999 until 2003 he served as Corporate Vice
President - Business Development and Marketing. Mr. Galli joined Elbit Systems
in 1997 as Vice President - Business Development. Prior to that, he served as
Corporate Vice President - Business Development and Marketing at Rafael, which
he joined in 1990, after retiring from the IAF with the rank of Colonel. In the
IAF he served as head of Research and Development, following numerous aircraft
program management positions. Mr. Galli holds bachelor and master of science
degrees in aeronautical engineering from the Technion.
JOSEPH GASPAR. Joseph Gaspar was appointed Corporate Vice President and
Chief Financial Officer in 2001. He served as Corporate Vice President -
Strategy, Technology and Subsidiaries from the El-Op Merger in 2000 until 2001.
From 1996 until the Merger, he held the position of Corporate Vice President,
Marketing and Business Development of the El-Op Group. Mr. Gaspar joined El-Op
in 1975 and held several management positions, including Vice President and
General Manager of El-Op's Optronics Product Division and co-manager of an El-Op
subsidiary in the United States. Mr. Gaspar holds a bachelor of science degree
from the Technion in electronic engineering with advanced studies in digital
signal processing and communication.
ZEEV GOFER. Zeev Gofer was appointed Corporate Vice President -
Business Development and Marketing in April 2003. He previously served as
Corporate Vice President and as Co-General Manager - Aircraft and Helicopter
Upgrades and Systems from 2000. From 1999 until 2000, he was Vice President -
Aircraft Upgrades and Airborne Systems Division, having served as Division
Manager since 1996. He joined Elbit Ltd. in 1982 and held various management
positions, including Director of EDS' Aircraft Upgrade Division, director of a
major aircraft upgrade program, director of avionics system engineering and
technical manager of the LAVI avionics program. Mr. Gofer holds bachelor and
master of science degrees in electronic engineering from the Technion and a
master of science of management degree from the Polytechnic University of New
York.
DALIA GONEN. Dalia Gonen was appointed as Vice President - Human
Resources in 2000. She became Director of Human Resources in 1996. Ms. Gonen
joined Elbit Ltd. in 1971 and held various positions in the Human Resources
Department. Ms. Gonen holds a bachelor of arts degree in sociology from Haifa
University and a master of science of management degree from the Polytechnic
University of New York.
RAN HELLERSTEIN. Ran Hellerstein was appointed Corporate Vice President
and Co-General Manager - Aircraft and Helicopter Upgrades and Systems in 2000
and became co-General Manager - Airborne and Helmet Systems in April 2003. From
1996 until 2000, he served as Vice President - Development and Engineering
Division, having served as Division Manager since 1993. Mr. Hellerstein joined
Elbit Ltd. in 1978 and served in various management positions, including
Director and Division Manager of EDS' Engineering Division, department manager,
technical manager and systems engineer. Mr. Hellerstein holds bachelor and
master of science degrees in electrical engineering from the Technion.
HAIM KELLERMAN. Haim Kellerman was appointed Corporate Vice President
and General Manager - UAV Integrated Systems in June 2004, effective beginning
in July 2004. From 2002 until his current appointment, Mr. Kellerman was Vice
President - UAV Programs. Prior to that he held various senior program
management positions relating to UAV, C4I and airborne programs. He joined Elbit
Ltd. in 1978. Mr. Kellerman holds a bachelor of science degree in computer
science from the Technion.
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BEZHALEL MACHLIS. Bezhalel Machlis was appointed Corporate Vice
President and General Manager - Land Systems and C4I in January 2004. In 2003,
he served as Corporate Vice President and General Manager - Ground C4I and
Battlefield Systems. From 2000 until December 2002, he served as Vice President
- Battlefield and Information Systems. Mr. Machlis joined Elbit Systems in 1991
and held various management positions in the battlefield and information systems
area. Prior to that, he served as an Artillery Officer in the IDF, where he
holds the rank of Colonel (reserves). Mr. Machlis holds a bachelor of science
degree in mechanical engineering and a bachelor of arts degree in computer
science from the Technion and a MBA from Tel-Aviv University.
ILAN PACHOLDER. Ilan Pacholder was appointed as Corporate Secretary and
Vice President - Finance and Capital Markets in August 2003. Mr. Pacholder
served as Vice President - Finance from 2001. Mr. Pacholder joined Elbit Ltd. in
1994 and held various senior positions in the Finance Department. Prior to that
he served as the Chief Financial Officer for Sanyo Industries in New York. Mr.
Pacholder worked for Bank Leumi in New York for 10 years and held the position
of Vice President in the international and domestic lending departments. Mr.
Pacholder holds a bachelor of arts degree in accounting and economics from
Queens College in New York and a MBA in finance and investments from Adelphi
University.
MARCO ROSENTHAL. Marco Rosenthal was appointed Corporate Vice President
- Manufacturing and Purchasing in 2001, having previously served as Vice
President - Operations and General Manager of the Karmiel facility since 1999.
From 1996 to 1999, he served as Vice President - Material. Mr. Rosenthal joined
Elbit Ltd. in 1975 and held various management positions, including Vice
President - Material of EDS and Director of the Sales Department. Mr. Rosenthal
holds a degree in technical engineering from the Technion and a degree in
business management from Haifa University.
HAIM ROUSSO. Haim Rousso was appointed Corporate Vice President and
General Manager of El-Op following the Merger in 2000. Prior to that, Mr. Rousso
held the position of Corporate Vice President of the El-Op Group and General
Manager of El-Op. He has held various managerial positions in El-Op since 1972.
Mr. Rousso holds bachelor and master of science degrees in electrical
engineering from the Technion.
GIDEON SHEFFER. Gideon Sheffer joined Elbit Systems in 2001 as
Corporate Vice President - Strategic Planning. Prior to that he served as Acting
Head of Israel's National Security Council and as National Security Advisor to
former Prime Minister Ehud Barak. In 1998, he completed 32 years of service in
the IDF, retiring with the rank of Major General. From 1995 to 1998, he served
on the General Staff as Head of the IDF's Human Resources Branch. Prior to that,
he served as Deputy Commander of the IAF. Mr. Sheffer held a number of command
positions in the IAF after serving as a fighter aircraft and helicopter pilot.
He is a member of the board of directors of Blue Square Ltd. and Tzarfati and
Sons Ltd. Mr. Sheffer holds a bachelor's degree in Israel studies from Bar Ilan
University and is a graduate of Harvard University Business School's Advanced
Management Program.
YORAM SHMUELY. Yoram Shmuely was appointed Corporate Vice President and
General Manager - Helmet Mounted Systems in 2000 and became Co-General Manager -
Airborne and Helmet Systems in April 2003. From 1998 until 2000, he was Vice
President - Helmet Mounted Systems Division. From its founding in 1996 until
1998, he served as President of VSI. Mr. Shmuely joined Elbit Ltd. in 1990 and
served as director of Elbit Ltd.'s Helmet Mounted Display group. He served as a
fighter aircraft pilot in the IAF. Mr. Shmuely holds a bachelor of science
degree in electronic engineering from the Technion.
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TIMOTHY TAYLOR. Timothy Taylor was appointed President and Chief
Executive Officer of EFW in 2000 after serving as EFW's President and General
Manager since 1997. He joined EFW in 1994 and held the positions of Executive
Vice President and General Manager, Vice President - Strategic Planning and
Business Development and Vice President - Aircraft Systems. A more than 30-year
veteran of the aerospace industry, he previously held various management and
strategic business development positions with Allied Signal Inc. (now Honeywell)
and GEC Marconi Avionics (now BAE Systems). A native of the United Kingdom, he
became a U.S. citizen shortly after joining EFW. Mr. Taylor received an
engineering degree in England
COMPENSATION OF DIRECTORS AND OFFICERS
The following table sets forth the aggregate compensation paid to all
directors and officers of Elbit Systems as a group, other than the President,
and the President individually, for the fiscal year ended December 31, 2003:
Salaries, Directors' Fees Pension, Retirement
Commissions and Bonuses(1) and Similar Benefits
-------------------------- --------------------
All directors and officers
other than the President
(consisting of 26 persons) $3,572,129 $577,681
President $369,190 $85,422
(1) Directors, besides Joseph Ackerman, are paid in accordance with standard
fees paid to External Directors in Israel, which currently includes an
annual fee of $9,920 and a per meeting fee of $381. Such payments are made
either directly to the director or to his or her employing company. Mr.
Ackerman does not receive director fees.
BOARD PRACTICES
APPOINTMENT AND TERMINATION OF DIRECTORS.
The current members of Elbit Systems' board of directors (Board), other
than Mr. Sharony, an External Director, were appointed at the annual general
meeting of shareholders held in August 2003. Mr. Sharony was appointed at a
general meeting of shareholders in March 2002.
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The employment contract of Elbit Systems' President and Chief Executive
Officer Joseph Ackerman, was originally approved by Elbit Systems' shareholders
in 2000, and an amendment was approved in April 2004. The agreement provides for
severance payments upon termination of his employment. Mr. Ackerman's employment
contract was extended through July 2006 in accordance with its terms. See below
- Item 7. Major Shareholder and Related Party Transactions - Related Party
Transactions - Agreements Relating to the Merger - Shareholders Agreement -
Corporate Governance - President. There are no other service contracts or
similar arrangements with any director that provide for benefits upon
termination of directorship. See below - Item 10. Additional Information -
General Provisions of Israeli Law and Related Provisions - Appointment of
Directors.
For information on contractual arrangements for appointment of
directors resulting from the Merger, see below Item 7. Major Shareholders and
Related Party Transactions - Agreements Relating to the Merger.
AUDIT COMMITTEE. Dov Ninveh (chairman), Avraham Asheri, Yaacov Lifshitz
and Nathan Sharony are currently members of the audit committee of the Board
(the Audit Committee). The Audit Committee operates in accordance with an Audit
Committee charter that provides the framework for their oversight functions
consistent with Israeli and U.S. legal and regulatory requirements. See below -
Item 10. Additional Information - General Provisions of Israeli Law and Related
Provisions - Internal Auditor and Audit Committee; Item 16A. Audit Committee -
Financial Expert and Item 16D. Exemptions from Listing Standards for Audit
Committees.
EMPLOYEES
Most of our employees are based in Israel, and we have a significant
amount of employees in the United States. The total number of employees
worldwide and the number of employees in the U.S. at the end of 2003, 2002 and
2001 were as follows:
Total Employees U.S. Employees
--------------- --------------
2003 5,504 1,110
2002 5,342 1,077
2001 5,040 1,040
Most of our Israeli employees have individual employment contracts.
However, by law some employees receive rights under a number of general
collective bargaining agreements and under Israeli employment laws. See above -
Item 4. Information on the Company - Conditions in Israel - Israeli Labor Laws.
Approximately 500 of El-Op's employees are covered by a collective bargaining
agreement extending through the end of 2004. Union collective bargaining
agreements in effect through December 2004 apply to approximately 200 of
Cyclone's employees. Approximately 160 of EFW's employees in Fort Worth are
subject to union collective bargaining agreements expiring in November 2005. We
believe our overall relationship with our employees is satisfactory.
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SHARE OWNERSHIP
ELBIT SYSTEMS' STOCK OPTION PLANS
Elbit Systems adopted employee stock option plans in 1996 (the 1996
Plan) and following the Merger with El-Op in 2000 (the Post Merger Plan). Under
these Plans, stock options for our ordinary shares were granted to officers and
employees of Elbit Systems and wholly-owned subsidiaries. The Plans are designed
to enable us to attract and retain employees and to link their incentives to the
performance of our ordinary shares. The plans were approved by our Board and
shareholders and are described in prospectuses filed with the Israel Securities
Authority (the ISA), and summaries were filed with the U.S. Securities and
Exchange Commission (the SEC). Although the options themselves are not
transferable or registered for trading, the shares underlying the options
granted under the Plans were registered for trading with the SEC and the ISA.
POST MERGER PLAN
OPTIONS GRANTED. Under the Post Merger Plan, 5,000,000 options were
authorized to be granted to approximately 800 key employees of Elbit Systems and
wholly-owned subsidiaries. Approximately 4,500,000 of these options were granted
to employees through a trustee in 2000. 400,000 of the options were granted to
Joseph Ackerman, Elbit Systems' President and CEO. No other directors were
granted options, but executive officers other than Mr. Ackerman were granted an
aggregate of 582,000 options under the Post Merger Plan. Approximately 500,000
of the options under the Post Merger Plan were issued to the Plan's trustee in
reserve for future grants to key employees, as determined from time to time by
Elbit Systems' President. As of May 31, 2004, 169,340 of these reserve options
were issued to employees. In addition, options that have lapsed or are canceled
before exercise may be added to the reserve and re-granted under the Post Merger
Plan. The general terms of these options are the same as those for other options
granted under the Post Merger Plan. Half of the options granted to any employee
under the Post Merger Plan are exercisable into one Elbit Systems ordinary share
per option in consideration for the employee's payment to Elbit Systems of the
exercise price.
PHANTOM OPTIONS. The second half of the options granted to any employee
under the Post Merger Plan is "phantom" options, similar to share appreciation
rights. These options entitle the employee, on exercise of the phantom options,
to receive shares in an amount corresponding to the value of the difference
between the "deemed" option exercise price and the closing TASE trading price on
the date before the option exercise date. For phantom options the employee pays
only the par value of the shares actually received. For the impact of the
accounting treatment of the phantom options, see above - Item 5. Operating
Financial Review and Prospects - Management's Discussion and Analysis -
Operating Results - Impact of Phantom Options.
OPTION EXERCISE PRICE. The exercise price for the options granted in
December 2000 is $12.32 per option. The exercise price was determined based upon
a discount of 15% from the average trading price of Elbit Systems' shares on the
TASE in July and August 2000. The exercise price for options granted under the
future reserve is 85% of the average price of Elbit Systems' shares on the TASE
for the 60 trading days prior to the specific option grant. The "deemed" option
exercise price for the phantom options is the same as the option exercise price
for the regular options granted at the same time under the Post Merger Plan.
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VESTING. The options vest at the rate of 25% per year following their
grant and must be exercised no later than six years after the date of grant.
Termination of employment for any reason, except in special circumstances
approved by Elbit Systems' President, will result in cancellation of the options
that have not vested before termination of employment. Following termination of
employment, unexercised options that have vested before the termination must be
exercised within 90 days of termination.
SHARE RIGHTS AND TAX CONSEQUENCES. Shares issued to employees as a
result of exercise of the options, including phantom options, will bear rights
identical to our other ordinary shares. Employees will bear all tax consequences
to them resulting from the Post Merger Plan. The Israeli tax authorities have
approved the Post Merger Plan's qualification under Section 102 of the Israeli
Income Tax Ordinance (New Version). This enables employees who hold the options
at least for two years to be exempt from Israeli tax on the gains derived from
exercising the option. This also enables Elbit Systems to benefit from a
deductible tax expense that amounts to the employee's above-mentioned gain.
1996 PLAN
A total of 2,422,000 options were issued to employees under the 1996
Plan, as amended. Each option was exercisable into one ordinary share, and this
plan did not include phantom options. All of the options under the 1996 Plan
were vested and exercised in 2002.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
MAJOR SHAREHOLDERS
PERCENTAGES
Elbit Systems had, as of May 31, 2004, 40,244,029 ordinary shares
outstanding. (This amount includes 408,921 shares held by us and our
subsidiaries as treasury shares). The following table sets forth specific
information as of May 31, 2004, to the best of our knowledge, concerning:
o beneficial ownership of more than 5% of our outstanding ordinary
shares; and
o the number of ordinary shares beneficially owned by all of our
officers and directors as a group.
Federmann Enterprises Ltd. 12,100,000 30.06%
99 Hayarkon Street
Tel-Aviv, Israel(1)(4)
Heris Aktiengesellschaft 3,836,458(2) 9.53%
c/o 99 Hayarkon Street
Tel-Aviv, Israel
Elron Electronic Industries Ltd. 7,815,448 19.42%
3 Azrieli Center, 42nd Floor
Tel-Aviv, Israel(3)(4)
Bank Hapoalim Group 2,247,604 5.58%
Tel-Aviv, Israel(5)
Bank Leumi Group
Tel-Aviv, Israel (5) 2,190,827 5.44%
All officers and directors
as a group (27 persons) 338,623 (6) 0.84%
----------------------------
(1) Federmann Enterprises Ltd. (FEL) owns the shares of Elbit Systems
directly and indirectly through Heris Aktiengesellschaft (Heris) which
is controlled by FEL. FEL is controlled by Beit Federmann Ltd. (BFL).
BFL is controlled by Beit Bella Ltd. (BBL) and Beit Yekutiel Ltd.
(BYL). Michael Federmann is the controlling shareholder of BBL and BYL.
He is also the Chairman of Elbit Systems' Board and the Chairman of the
Board and the Chief Executive Officer of FEL. Therefore, Mr. Federmann
controls, directly and indirectly, the vote of the shares owned by
Heris and FEL.
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(2) The amount of shares owned by Heris is included in the amount of shares
held by FEL as set forth in footnote (1) above.
(3) Elron Electronic Industries Ltd. (Elron) is a multinational, high
technology operational holding company whose business is conducted
through a group of high technology operating companies. The principal
shareholders of Elron are Discount Investment Corporation Ltd. (DIC),
mutual and/or provident funds managed by Bank Leumi (the Bank Leumi
Group), mutual and/or provident funds managed by Bank Hapoalim (the
Bank Hapoalim Group) and the Insurance Fund headed by Clal Insurance
Enterprises Holdings Limited (Clal). As of May 31, 2004, DIC held
approximately 38.5% of the voting power of Elron, and the Bank Leumi
Group, the Bank Hapoalim Group and Clal held approximately 8.3%, 6.4%
and 2.4%, respectively, of the voting power of Elron.
IDB Holding Corporation Ltd. (IDBH) is the parent of IDB Development
Corporation Ltd. (IDBD), which, in turn, is the parent of DIC and Clal.
IDBH, IDBD, DIC and Clal are public companies traded on the TASE.
Approximately 51.7% of the outstanding share capital of IDBH is owned
by a group comprised of: (i) Ganden Investments I.D.B. Ltd. (Ganden), a
private Israeli company controlled by Nochi Dankner and his sister,
Shelly Dankner-Bergman, which holds 31.02% of the equity of and voting
power in IDBH; (ii) Manor Investments - IDB Ltd. (Manor), a private
Israeli company controlled by Ruth Manor, which holds 10.34% of the
equity of and voting power in IDBH; and (iii) Avraham Livnat
Investments (2002) Ltd. (Livnat), a private Israeli company controlled
by Avraham Livnat, which holds 10.34% of the equity of and voting power
in IDBH. Ganden, Manor and Livnat, owning in the aggregate
approximately 51.7% of the equity of and voting power in IDBH, entered
into a shareholders agreement relating, among other things, to their
joint control of IDBH, the term of which is until May 19, 2023. Shelly
Dankner-Bergman holds approximately 4.9% of the equity and voting power
in IDBH.
Nochi Dankner is Chairman of IDBH, IDBD and DIC and a director of Clal.
Shelly Dankner-Bergman and Zvi Livnat (the son of Avraham Livnat) are
directors of each of IDBH, IDBD and DIC. Shai Livnat (the son of
Avraham Livnat) is a director of IDBD and Clal. Isaac Manor (the
husband of Ruth Manor) is a director of IDBH, IDBD, DIC and Clal, and
Dori Manor (the son of Isaac and Ruth Manor) is a director of IDBH,
IDBD, DIC and Elron.
Doron Birger, a director of Elbit Systems, is the President and CEO of
Elron. Ami Erel, Avraham Asheri and Avi Fischer, directors of Elbit
Systems, are also directors of Elron.
(4) FEL and Heris (collectively the Federmann Group) and Elron may be
deemed for purposes of U.S. securities laws to be joint owners of the
aggregate ordinary shares of Elbit Systems beneficially owned by them
by virtue of a shareholders agreement dated December 19, 1999 between
the members of the Federmann Group and Elron, which provides, among
other things, for their coordinated voting at Elbit Systems'
shareholder meetings and for their equal representation on Elbit
Systems' Board of Directors.
(5) The holdings in Elbit Systems' shares by the Bank Hapoalim Group and
the Bank Leumi Group are divided among several entities, mainly mutual
and/or provident funds.
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(6) This amount does not include any shares that may be deemed to be
beneficially owned by Michael Federmann as described in footnote (1)
above. The amount includes 81,508 shares underlying options that are
currently exercisable or that will become exercisable within 60 days of
May 31, 2004. A portion of the underlying options are "phantom options"
that have been calculated based on Elbit Systems' May 31, 2004 share
closing price of $18.72.
RIGHTS IN SHARES, SIGNIFICANT CHANGES IN SHAREHOLDERS AND CONTROLLING
SHAREHOLDERS
Except to the extent provided in the Shareholders Agreement (the
Shareholders Agreement) described below in "Related Party Transactions -
Agreements Relating to the Merger", Elbit Systems' major shareholders have the
same rights as other holders of Elbit Systems' ordinary shares. The only
significant change in shareholdings by major shareholders in the last three
years was the change resulting from the Merger in the holdings of Elron and the
Federmann Group. As a result of the Merger in 2000, Elron's shareholding
percentage decreased from approximately 33% to approximately 23%, and the
Federmann Group received approximately 32% of Elbit Systems shares. In addition,
Elron sold 380,000 shares in 2001 and 380,000 shares in 2002.
Elron and the Federmann Group may be considered under Israeli law as
controlling shareholders of Elbit Systems due to the Shareholders Agreement. We
are not aware of any other arrangement, including by way of a shareholder
agreement or registration rights agreement, that in the future may lead to a
change in control of Elbit Systems. Except as provided in the Shareholders
Agreement regarding appointment of directors, the Chairman of the Board and the
President, no appointment of the President or a director is made as a result of
a related party transaction. Also, there are no outstanding loans by Elbit
Systems or its subsidiaries to such persons.
RELATED PARTY TRANSACTIONS
AGREEMENTS RELATING TO THE MERGER
There are three main agreements relating to the Merger:
- A merger agreement dated December 19, 1999 (the Merger Agreement)
among Elbit Systems, El-Op and the Federmann Group.
- The Shareholders Agreement dated December 19, 1999, between Elron
and the Federmann Group.
- A registration rights agreement, effective on July 5, 2000, the
closing date of the Merger (the Registration Rights Agreement)
among Elbit Systems, Elron and the Federmann Group.
The following is a summary of major provisions of those agreements.
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MERGER AGREEMENT
NATURE OF THE MERGER AND CONSIDERATION. The Merger was accomplished
through a statutory merger under Israeli law of El-Op into Elbit Systems
followed immediately by a spin-off of part of the merged assets and liabilities
into a wholly-owned subsidiary of Elbit Systems, which assumed El-Op's name. In
consideration for the Merger, the Federmann Group, the principal shareholders of
El-Op before the Merger, was issued 12,100,000 new Elbit Systems ordinary
shares.
REPRESENTATIONS AND ADJUSTMENTS TO THE MERGER CONSIDERATION. Elbit
Systems and El-Op made representations regarding their business and capital
structure. The Federmann Group made representations regarding ownership of its
shares in El-Op. If any of the representations were found to be incorrect, an
adjustment would be made to the number of Elbit Systems' shares issued to the
Federmann Group under the Merger. The time period for such adjustment expired in
March 2003, and no adjustments were made.
TAXES AND EXPENSES. Each party bears any tax liability that may be
imposed on it relating to the Merger Agreement. Elbit Systems paid the Israeli
stamp tax payable for the issuance of ordinary shares. The parties share any
other Israeli stamp tax payable due to the Merger Agreement. The parties agreed
to comply with all the conditions for tax exemption in accordance with the
Israeli Income Tax Ordinance or as determined by the Israeli Income Tax
Commissioner. Among other things, Elbit Systems agreed not to issue new shares
if, as a result of the issuance, the Federmann Group or any of the units
comprising it, will be charged with tax. Under the Israeli Income Tax Ordinance,
subject to conditions imposed by applicable law and regulations, due to the tax
exemption granted for the Merger, Elbit Systems generally was restricted for a
period of two years following the Merger from issuing new shares in excess of
25% of the amount of its outstanding shares existing prior to the Merger.
However, this restriction did not apply to a public offering or shares issued
under a stock option plan. Each party to the Merger Agreement agreed to pay any
taxes and expenses that are imposed on it under any provisions of law and/or
that it incurs pursuant to the Merger Agreement.
ARBITRATION. The parties agreed to submit to arbitration any dispute
that arises between them regarding the Merger Agreement.
SHAREHOLDERS AGREEMENT
CORPORATE GOVERNANCE. Elron and the Federmann Group agreed that
following the Merger, so long as each holds at least 15% of Elbit Systems'
issued share capital, the following applies.
BOARD MEMBERS
The parties agreed to vote to cause Elbit Systems' Board to have 11
members, consisting of four directors nominated by Elron, four
directors nominated by the Federmann Group, the two External Directors
and the President of Elbit Systems. In April 2004, Elbit Systems'
shareholders approved an amendment to the Articles of Incorporation
reducing the normal number of directors to ten and removing the
requirement that the President be a director.
All Board committees are represented equally by the Board nominees of
Elron and the Federmann Group. Should the holdings of Elbit Systems'
issued share capital of only one of the parties fall below 15%, but not
below 5%, and provided the other party holds at least 15%, the number
of directors that party will have the right to nominate to the Board
will be reduced proportionally.
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The other party will have the right to nominate all other members of
the Board and to appoint the Chairman of the Board and the President
and the Chief Executive Officer.
EXTERNAL DIRECTORS. The Federmann Group has the right to nominate a
candidate to replace the first of the two External Directors who
vacates his appointment. Elron has the right to nominate a candidate to
replace the second of the two External Directors who vacates his
appointment. This arrangement will continue as long as Elbit Systems is
required to have External Directors.
PRESIDENT AS A BOARD MEMBER. As described in "Board Members" above, in
April 2004 our shareholders approved an amendment to our Articles of
Incorporation, removing the requirement, established in the
Shareholders' Agreement, that the President serve as director. The
President is entitled to participate in all Board meetings.
BOARD CHAIRMAN. The Chairman of the Board is elected by the
shareholders from among the Board members. The Federmann Group
nominates a candidate for the office of Chairman of the Board after it
has consulted with Elron. Michael Federmann was elected as Chairman
beginning on the Merger closing date.
PRESIDENT. Joseph Ackerman continued as Elbit Systems' President and
Chief Executive Officer for a period of three years from the Merger
closing date, as specified in his employment agreement. The agreement
was automatically extended for another three-year period according to
its terms. Following termination of Mr. Ackerman's employment, Elron
will nominate a candidate for the office of President and Chief
Executive Officer, after consulting with the Federmann Group. The
President and Chief Executive Officer will be elected by the Board, and
his or her appointment is subject to shareholder approval.
VOTES OF THE BOARD. Except as provided otherwise in our Articles of
Association, resolutions of the Board are determined by a simple
majority of the members participating in the vote. No member of the
Board, including the Chairman, has more than one vote.
VOTES AT SHAREHOLDERS MEETINGS. The parties coordinate in advance on
how they will vote their shares at any of our shareholders meetings.
Except as provided above, the parties will vote their shares against
any proposed resolution at any shareholders meeting, unless they agree
in writing in advance to vote in favor.
RESTRICTIONS ON SALES AND PURCHASES OF ELBIT SYSTEMS SHARES
Following the Merger, as long as one of the parties holds at least
15%, and the other party at least 5%, of Elbit Systems' issued share capital, no
transfer of Elbit Systems' shares by either party will be valid unless made in
accordance with the following:
o During the period beginning on January 1, 2003 and ending on
December 31, 2004, neither party will transfer shares of
Elbit Systems if, as a result of the transfer, the
transferring party's holdings fall below 15% of Elbit
Systems' issued share capital, unless:
- shares constituting at least 15% of Elbit Systems'
issued share capital are transferred; and
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- all of the obligations and rights of the transferring
party under the Shareholders Agreement have been
assigned and transferred to the buyer, with the buyer's
assumption of all such obligations, and written notice
to this effect signed by both the transferor and the
buyer has been given to the other party before the
transfer.
o After January 1, 2005, no party will transfer, as part of a
single transaction, 15% or more of Elbit Systems' issued
share capital unless all of the obligations and rights of
the transferring party under the Shareholders Agreement have
been assigned and transferred to the buyer, with the buyer's
assumption of all such obligations, and written notice to
this effect signed by both the transferor and the buyer has
been given to the other party to the Shareholders Agreement
before the transfer.
FIRST REFUSAL AND TAG ALONG RIGHTS
The Shareholders Agreement provides for rights of first refusal if
a party wants to transfer Elbit Systems shares to a third party buyer. The party
intending to sell its Elbit Systems shares must first offer them to the other
party on the same terms offered by the buyer. The Shareholders Agreement also
provides for tag along rights if a party wants to transfer shares to a third
party buyer. The party wishing to sell its shares must enable the other party to
participate in the sale to a third party buyer, unless the selling party wishes
to:
(a) sell at least 15% of Elbit Systems' issued share capital,
and
(b) the third party buyer assumes the obligations of the selling
party under the Shareholders Agreement.
The above provisions do not apply to any transfer by a party to a
person or entity that it controls or that controls such party or that is under
common control with such party. The right of first refusal and tag along rights
will also apply to any transfer of shares of Federmann Enterprises or Heris,
respectively, if Elbit Systems shares held by such entity at any time constitute
in excess of 90% of the total assets of that entity and as a result of such
transfer of shares, Federmann Enterprises or Heris, as applicable, ceases to be
under the control of the Federmann family.
PARTICIPATION RIGHTS. The Shareholders Agreement also provides for
purchase participation rights. If a party purchases Elbit Systems shares, the
other party may participate in this purchase on the same terms as the first
party on a pro-rata basis, based on the number of Elbit Systems shares then held
by the parties. However, this participation right shall not apply to any
purchases made by Elron until Elron's share holdings in Elbit Systems equal
those of the Federmann Group.
PERMITTED SALES. Despite the above restrictions on sales of Elbit
Systems shares, each party may sell shares on the TASE in quantities not more,
in any calendar quarter, than 1% of Elbit Systems' issued share capital.
TERMINATION OF THE AGREEMENT. The Shareholders Agreement will remain in
effect until the earlier of:
(a) December 18, 2014; or
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(b) the date any party's holdings fall below 5% of Elbit Systems'
issued share capital, provided that all the rights and
obligations of that party under the Shareholders Agreement have
not been previously transferred or transferred concurrently with
such reduction to a new party, in which case the Shareholders
Agreement will not terminate but will bind the new party.
REGISTRATION RIGHTS AGREEMENT
DEMAND REGISTRATION. Elron and the Federmann Group each may twice
require Elbit Systems to register their ordinary shares for sale in the United
States. No shareholder may demand registration of ordinary shares less than 180
days following the effective date of any registration statement previously filed
by Elbit Systems under a demand registration. Elbit Systems has the right to
delay filing of a registration statement in specific circumstances.
PIGGYBACK REGISTRATION. Elron and the Federmann Group have an unlimited
number of "piggyback" registration rights. This means that any time Elbit
Systems proposes to file a registration statement in connection with any public
offering of any ordinary shares in the United States, whether for the account of
Elbit Systems or any Elbit Systems shareholder, Elron and the Federmann Group
each may require Elbit Systems to include its ordinary shares in that offering.
TERMINATION OF REGISTRATION RIGHTS. The respective registration rights
of Elron and the Federmann Group terminate if such shareholder and its
affiliates collectively cease to own at least 5% of the then issued and
outstanding Elbit Systems ordinary shares or such shares of any successor
corporation.
EXPENSES AND INDEMNITY. Other than fees and disbursements of counsel to
the shareholders, Elbit Systems agreed to pay all expenses that result from the
registration of ordinary shares under the Registration Rights Agreement, all
underwriting fees, commissions and discounts connected with the sale of any
ordinary shares and any transfer taxes incurred in such sale. Elbit Systems also
agreed to indemnify Elron and the Federmann Group against liabilities that may
result from misrepresentations or omissions in any registration statement filed
under the Registration Rights Agreement or any violation of U.S. federal or
state securities laws in connection with any such registration, other than those
liabilities caused by any act or omission of such shareholder.
TRANSACTIONS WITH ELRON AND AFFILIATED COMPANIES
Elbit Systems and RDC, an affiliated company of Elron, are joint owners
of Starling. See above - Item 4. Information on the Company - Technology
Spin-Offs - Starling.
DIC, a controlling shareholder of Elron, is a controlling shareholder
of Gav Yam Ltd. (Gav Yam), which in turn is a controlling shareholder of Matam -
Advanced Technology Center Ltd. (Matam). Elbit Systems entered into agreements
with both Gav Yam and Matam in connection with the construction of Elbit
Systems' new building in Haifa. See above - Item 4. Information on the Company -
Property, Plant and Equipment. These agreements were approved at a general
meeting of Elbit Systems' shareholders.
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Under a lease agreement entered into in 1996, Elbit Systems currently
leases from Elbit Ltd. approximately 170,000 square feet of office and
manufacturing space in Karmiel, Israel. Elbit Ltd. is a wholly-owned subsidiary
of Elron. The lease expires in October 2006 and may be terminated earlier by
Elbit Systems upon twelve months' prior written notice. The monthly rent is an
amount in NIS equal to approximately $0.598 per square foot linked to the U.S.
dollar and the U.S. CPI, payable quarterly at the beginning of each quarter. In
the event that the area leased is substantially reduced, the monthly rent will
be determined by the parties.
In the ordinary course of business, some subsidiaries and affiliates of
Elbit Systems engage in business activities with each other on terms that we
believe are comparable to those negotiated between third parties on an
arms-length basis.
TRANSACTIONS WITH OFFICERS AND DIRECTORS
Some members of Elbit Systems' Board are also directors of companies in
the Federmann Group or Elron. Therefore, in the event of an issue or transaction
between Elbit Systems and any of those companies, those individuals who are
affiliated with both of the applicable companies will be excluded from any
decisions concerning such issue or transaction. Transactions with officers,
directors, key employees and affiliates may require authorization in accordance
with the requirements of the Companies Law. See below - Item 10. Additional
Information - Approval of Certain Transactions.
For information on the grant of options in Elbit Systems' shares to
officers and directors, see above - Item 6. Directors, Senior Management and
Employees - Share Ownership - Elbit Systems' Stock Option Plans.
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ITEM 8. FINANCIAL INFORMATION.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Consolidated Financial Statements attached to this Form 20-F.
LEGAL PROCEEDINGS
Elbit Systems and our subsidiaries are involved in legal proceedings
from time to time. Based on the advice of our legal counsel, management believes
such current proceedings will not have a material adverse effect on the
financial position or results of operations of Elbit Systems.
DIVIDEND DISTRIBUTIONS
Elbit Systems does not have a declared dividend policy. Our Articles of
Association provide that the Board may approve dividend payments to shareholders
out of surplus earnings as permitted by applicable law. To date we have
consistently paid a quarterly dividend to our shareholders.
Our dividend payments for the last three full fiscal years were as
follows:
2001 $0.32 per share
2002 $0.34 per share
2003 $0.40 per share
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ITEM 9. OFFER AND LISTING.
SHARE LISTINGS AND TRADING PRICES
Elbit Systems' ordinary shares are quoted on Nasdaq under the symbol
"ESLT" and are also listed on the TASE.
The high and low sale prices for our ordinary shares for the five most
recent full financial years are:
The high and low quarterly sale prices for our ordinary shares for the
two most recent full financial years and the first two subsequent quarters are:
NASDAQ TASE(1)
------ -------
HIGH LOW HIGH LOW
---- --- ---- ---
2002
First Quarter $19.31 $17.30 $18.28 $17.50
Second Quarter $17.79 $15.00 $17.06 $15.20
Third Quarter $17.11 $15.36 $16.80 $15.08
Fourth Quarter $17.39 $14.69 $17.24 $14.43
2003
First Quarter $16.84 $14.51 $17.00 $14.77
Second Quarter $20.00 $16.60 $20.08 $16.39
Third Quarter $19.53 $16.64 $19.48 $16.43
Fourth Quarter $18.88 $15.36 $18.72 $14.99
2004
First Quarter $19.99 $17.85 $20.55 $18.01
Second Quarter (through May 31, 2004) $19.40 $17.88 $19.47 $17.80
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The monthly high and low sale prices of our ordinary shares for the
most recent six months are:
NASDAQ TASE (1)
HIGH LOW HIGH LOW
---- --- ---- ---
December 2003 $18.30 $15.36 $18.06 $14.99
January 2004 $19.97 $18.03 $20.55 $18.01
February 2004 $19.99 $18.17 $19.98 $18.11
March 2004 $19.25 $17.85 $19.31 $17.62
April 2004 $19.40 $18.14 $19.47 $17.80
May 2004 $19.21 $17.88 $19.25 $18.05
(1) The closing prices of our ordinary shares on the TASE have been
translated into U.S. dollars using the daily representative rate of
exchange of the NIS to the U.S. dollar as published by the Bank of
Israel.
As of May 31, 2004, approximately 4.08% of our outstanding ordinary
shares was held in the United States by approximately 236 holders registered on
the books of our transfer agent.
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ITEM 10. ADDITIONAL INFORMATION.
GENERAL PROVISIONS OF ISRAELI LAW AND RELATED PROVISIONS OF ARTICLES OF
ASSOCIATION
ISRAELI COMPANIES LAW AND REVISED ARTICLES OF ASSOCIATION. The Israel
Companies Law - 1999 (the Companies Law) became effective in 2000. It replaced
the Israeli Companies Ordinance as the basic corporation law governing Israeli
publicly and privately held companies. The Companies Law also mandates specific
provisions be included in an Israeli company's articles of association. In 2000,
following receipt of the required shareholder approval, Elbit Systems adopted
Restated Articles of Association (the Articles of Association), which
incorporate, among other provisions, revisions mandated by the Companies Law and
the agreements relating to the Merger. See above - Item 7. Major Shareholders
and Related Party Transactions - Related Party Transactions - Agreements
Relating to the Merger.
APPOINTMENT OF DIRECTORS. Elbit Systems' directors are appointed by the
shareholders at the annual general shareholders meeting. They hold office until
the next annual general shareholders meeting, which is held at least once every
calendar year but not more than 15 months after the previous general
shareholders meeting. Between annual general shareholders meetings the Board may
appoint new directors to fill vacancies, however new External Directors must be
elected at a general shareholders meeting as described in "External Directors"
below. Appointment of directors is also subject to the terms of the Merger
Agreement and the Shareholders' Agreement relating to the Merger. See above -
Item 7. Major Shareholders and Related Party Transactions - Related Party
Transactions - Agreements Relating to the Merger. Under these agreements Elron
and the Federmann Group each appoints four members to the Board. The Chairman of
the Board is appointed from the Federmann Group nominees. The Articles of
Association authorizes a maximum of 17 and a minimum of five directors. However,
unless otherwise approved by the Board or a general shareholders meeting or
during an interim period following a director's resignation, there are 10
directors, including two External Directors as described in "External Directors"
below.
SUBSTITUTE DIRECTORS. The Articles of Association provide that any
director may appoint another person to serve as a substitute director. A
substitute director must be qualified under the Companies Law to serve as a
substitute director. If his or her appointment is for more than one meeting it
will be subject to the approval of the Board. Such person may not act as a
substitute director for more than one director at the same time. The same rules,
including compensation, will apply to a substitute director as to the director
who appointed him or her, and the substitute director may participate in Board
and Board committee meetings in the same manner as the appointing director.
Subject to the Companies Law, a director who has appointed a substitute director
may revoke the appointment at any time. In addition, the office of a substitute
director will be vacated at any time that the office of the director who
appointed the substitute is vacated for any reason. Any appointment or
revocation of the appointment of a substitute director will be made by notice in
writing to the substitute director and Elbit Systems. The appointment or
revocation, as the case may be, will become effective on the later of the date
of receipt of the above notice or the date fixed in the notice.
EXTERNAL DIRECTORS. Under the Companies Law publicly held Israeli
companies are required to appoint two "External Directors". Among other
requirements, External Directors must be unaffiliated
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with Elbit Systems and our controlling shareholders. External Directors serve
for a three-year term that may be extended for an additional three-year term.
Any committee of the Board must include at least one External Director. Nathan
Sharony and Yaacov Lifshitz currently serve as an External Directors of Elbit
Systems, and their terms of office end in March 2005 and July 2006,
respectively.
INTERNAL AUDITOR AND AUDIT COMMITTEE. Publicly held Israeli companies
are required to appoint an internal auditor. The main role of the internal
auditor is to examine whether the company's activities comply with the law,
integrity and orderly business procedure. Publicly held companies are also
required to establish an audit committee of the Board of Directors. The audit
committee must consist of at least three directors qualified under the Companies
Law, including all External Directors. The audit committee and the internal
auditor operate in accordance with an audit committee charter that provides the
framework for their functions. See above - Item 6. Directors, Senior Management
and Employees - Board Practices - Audit Committee.
OFFICE HOLDERS
The Companies Law specifies the duty of care and fiduciary duties that
an "Office Holder" owes to a company. An Office Holder is defined as a director,
general manager, chief business manager, executive vice president, vice
president or any other person who fulfills these functions without regard to
that person's title or other manager directly under the general manager. Each
person listed above in Item 6. Directors and Executive Officers is an Office
Holder of Elbit Systems.
Under the Companies Law, an Office Holder's fiduciary duty includes
avoiding any conflict of interest between the Officer Holder's position in the
company and his or her personal affairs. The fiduciary duty also includes
avoiding any competition with the company and avoiding exploiting any business
opportunity of the company in order to receive personal advantage for the Office
Holder or others. Also, the Office Holder is required to disclose to the company
any information or documents relating to the company's affairs that the Officer
Holder has received due to his or her position as an Office Holder. Under the
Companies Law voting agreements among directors are considered a breach of
fiduciary duty. In addition, all compensation arrangements between the company
and Office Holders who are not directors require approval of the Board.
APPROVAL OF CERTAIN TRANSACTIONS
APPROVAL PROCEDURES. The Companies Law requires that certain
transactions, actions and arrangements, mainly with related parties, be approved
as provided for in the Companies Law and in a company's articles of association
and in some cases by the audit committee and by the board of directors.
Sometimes shareholder approval is also required.
PERSONAL INTEREST AND EXTRAORDINARY TRANSACTIONS. The Companies Law
requires that an Office Holder or a controlling shareholder of a company
immediately disclose (and no later than the first board meeting the transaction
is discussed) any "Personal Interest" that he or she may have and all related
material information known to him or her, in connection with any existing or
proposed transaction by the company. An Office Holder with a personal interest
in any such matter that is brought for approval of the audit committee or board
of directors may not be present at the meeting where the matter is being
approved and may not vote on the matter. "Personal Interest" also includes any
interest held by the Office Holder's spouse, siblings, parents, grandparents,
descendants, spouse's descendants and the spouses of any
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of them. It also includes an interest by any corporation in which the Office
Holder or his or her relative is a 5% or greater shareholder, director or
general manager or in which he or she has the right to appoint at least one
director or the general manager. An "extraordinary transaction" is other than in
the ordinary course of business, other than on market terms, or is likely to
have a material impact on the company's profitability, assets or liabilities.
APPROVAL OF TRANSACTIONS
The Companies Law requires approval by both the Audit Committee and the
Board for the following transactions:
(1) extraordinary transactions with an Office Holder or in which an
Office Holder has a Personal Interest;
(2) material actions or arrangements that may otherwise be considered
a breach of fiduciary duty of an Office Holder;
(3) terms of service of directors, including the grant of
indemnification, exemption or insurance and terms of employment
of directors in other roles; or
(4) exemption from insurance and indemnification of Office Holders.
Matters referred to in (3) may also require shareholder approval,
including, where applicable, a specified percentage of non-interested
shareholders.
Extraordinary transactions with controlling shareholders or
extraordinary transactions with another person in which the controlling
shareholder has a personal interest require approval by the audit committee,
board of directors and general meeting of shareholders by a special majority as
provided in the Companies Law.
INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
INSURANCE AND INDEMNIFICATION UNDER THE COMPANIES LAW
The Companies Law permits a company to obtain an insurance policy
covering liabilities of Office Holders resulting from a breach of the Office
Holder's duty of care to the company or to another person. This includes
liabilities from the breach of his or her fiduciary duty to the company, to the
extent that the Office Holder acted in good faith and had reasonable cause to
believe that the act would not prejudice the interests of the company. It also
covers monetary liabilities charged against an Office Holder while serving the
company.
The Companies Law also allows a company to indemnify an Office Holder,
in advance or retroactively, in connection with his or her activities as an
Office Holder. This includes indemnification for monetary liability incurred
under a judgment, including a settlement or arbitration decision approved by a
court, in an action brought against the Office Holder by a third party. It also
includes reasonable litigation expenses, including attorneys' fees, incurred in
an action brought against him or her by, or on
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behalf of, the company or others, or as a result of a criminal charge of which
he or she was acquitted or for a criminal charge for which he or she may be
found guilty but that does not involve criminal intent.
A company may not indemnify an Office Holder or enter into an insurance
contract that would provide coverage for any monetary liability incurred as a
result of the following:
(1) a breach of fiduciary duty, except for a breach of a fiduciary
duty to the company while acting in good faith and having
reasonable cause to assume that such act would not prejudice the
interests of the company;
(2) a willful breach of the duty of care or reckless disregard for
the circumstances or to the consequences of a breach of the duty
of care;
(3) an act done with the intent to unlawfully realize a personal
gain; or
(4) a fine or monetary penalty imposed for an offense.
INSURANCE AND INDEMNIFICATION UNDER THE ARTICLES OF ASSOCIATION
Elbit Systems' Articles of Association allows for directors and
officers liability insurance, subject to the provisions of the Companies Law.
This insurance may cover:
(1) a breach of his or her duty of care to Elbit Systems or to
another person;
(2) a breach of his or her fiduciary duty to Elbit Systems, provided
that the director or officer acted in good faith and had
reasonable cause to assume that his or her act would not harm the
interests of Elbit Systems; or
(3) any other event for which insurance of a director or officer is
permitted.
In addition, Elbit Systems' Articles of Association permit
indemnification, retroactively or in advance, of a director or officer against:
(1) a monetary liability imposed on the director of officer in favor
of a third party under a judgment, including a judgment by way of
compromise or a judgment of an arbitrator approved by a court;
(2) reasonable expenses of the proceedings, including lawyers fees,
expended by the director or officer or imposed on him or her by
the court for:
(a) proceedings issued against him or her by or on Elbit
Systems' behalf or by a third party;
(b) criminal proceedings from which the director or officer was
acquitted; or
(c) criminal proceedings in which he or she was convicted but
that do not require proof of criminal intent; or
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(3) any other liability or expense for which it is or may be
permissible to indemnify a director or an officer.
However, any indemnification so granted by Elbit Systems may not exceed
25% of Elbit Systems' consolidated equity as reflected in our last consolidated
annual financial statements published prior to the payment of such
indemnification.
The Articles of Association permit the grant of similar indemnification
to any person acting as a director or officer of another company in which Elbit
Systems is directly or indirectly a shareholder or has any interest.
Elbit Systems' shareholders approved the grant to members of our Board
of indemnification letters reflecting the above conditions and limitations.
Similar letters were also approved by the Board for grant to officers of Elbit
Systems.
In April 2004, a general meeting of Elbit Systems' shareholders
approved a framework resolution that allows Elbit Systems to purchase directors
and officers (D&O) liability insurance that meets the framework resolution's
terms. The framework resolution covers a five-year period beginning at the end
of the term of the current D&O insurance policy in August 2004, and allows for
an aggregate increase of insurance coverage of up to $45,000,000 (from the
current level of $30,000,000) for any year covered by the policy. The framework
resolution also allows for an increase of up to 25% per year in the D&O
insurance premium up to a maximum aggregate of 125% of the current annual
premium ($660,000). The Audit Committee and the Board must approve that any
purchase of D&O insurance falls within the terms of the framework resolution.
MATERIAL CONTRACTS
Elbit Systems has not entered into material contracts since June 1,
2002, other than in the ordinary course of business.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
Non-residents of Israel may freely hold and trade our ordinary shares
under general and specific permits issued under the Israeli Currency Control
Law, 1978. Our Memorandum of Association and Articles of Association do not
restrict the ownership of ordinary shares by non-residents of Israel. Neither
the Memorandum of Association and Articles of Association nor Israeli law
restrict the voting rights of non-residents.
Under the general permit given through the Israeli Currency Control
Law, 1978, non-residents of Israel who buy our ordinary shares inside or outside
of Israel with any foreign currency are able to receive a number of types of
distributions in freely repatriable U.S. dollars or specified other currencies.
These distributions include dividends, proceeds from the sale of shares and any
amounts payable on the dissolution, liquidation or winding-up of Elbit Systems.
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In the last several years, the Government of Israel liberalized its
policies regarding exchange controls and investments in Israel and abroad.
TAXATION
GENERAL
The following is a summary of some aspects of the current tax law
applicable to companies in Israel, with special reference to its effect on Elbit
Systems and our Israeli subsidiaries. The following also contains a discussion
of specified Israeli tax consequences to our shareholders and government
programs from which we and some of our Israeli subsidiaries benefit. To the
extent that the discussion is based on tax legislation that has not been subject
to judicial or administrative interpretation, there can be no assurance that the
views expressed in the discussion will be accepted by the tax authorities in
question.
In 2002, the Israeli Parliament approved a law enacting extensive
changes to Israel's tax law (the Tax Reform Legislation) generally effective
January 1, 2003. Among the key provisions of the Tax Reform Legislation are:
(i) changes which may result in the imposition of taxes on dividends and
interest received by an Israeli company from its foreign subsidiaries;
and
(ii) the introduction of the "controlled foreign corporation" concept
according to which an Israeli company may become subject to Israeli
taxes on certain income of a non-Israeli subsidiary if the
subsidiary's primary source of income is passive income (such as
interest, dividends, royalties, rental income or capital gains).
An Israeli company that is subject to Israeli taxes on the income of
its non-Israeli subsidiaries will receive a credit for income taxes paid or
withheld or that will be paid or withheld by the subsidiary in its country of
residence according to the conditions determined in the Israeli Tax Ordinance.
The discussion is not intended, and should not be construed, as legal
or professional tax advice and is not exhaustive of all possible tax
considerations.
EFFECTIVE CORPORATE TAX RATE. Generally, Israeli corporations are
subject to a 36% "Company Tax" (which rate maybe reduced to 35% in 2004). Elbit
Systems' income tax liability in Israel is based on our unconsolidated earnings
and such earnings of our Israeli-based subsidiaries. It is determined in NIS and
not in U.S. dollars. Tax liability of non-Israeli subsidiaries is determined
according to the law of their countries of residence. As a result, the tax
provision in Elbit Systems' consolidated financial statements does not directly
relate to income reported on these statements. A portion of Elbit Systems'
Israeli operations have been granted "Approved Enterprise" status, as described
under "Investment Law" below. These operations are subject to taxation at
reduced rates applicable to those types of enterprises. In addition, they are
permitted special adjustments in computing taxable income under the Income Tax
Law (Inflationary Adjustments), 1985.
INDUSTRY ENCOURAGEMENT. Under the Law for the Encouragement of Industry
(Taxes), 1969, a company qualifies as an "Industrial Company" if it is resident
in Israel and at least 90% of its income in a given tax year, with some
exceptions, comes from "Industrial Enterprises" owned by that company. An
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Industrial Enterprise is defined as an enterprise whose primary activity in a
particular tax year is industrial manufacturing activity. We believe Elbit
Systems qualifies as an Industrial Company. The principal benefits of this
status are amortization of the cost of know-how and patents, under certain
interpretations, deduction of expenses incurred in connection with a public
issuance of securities over a three-year period and an election under certain
conditions to file a consolidated tax return with additional related Israeli
Industrial Companies.
INVESTMENT LAW
The Israeli Law for the Encouragement of Capital Investments, 1959
provides that a capital investment in eligible facilities approved by the Israel
Investment Center may be designated as an "Approved Enterprise". Each approval
for an Approved Enterprise relates to a specific investment program. The
approvals specify both the program's financial scope, including its capital
resources, and its physical characteristics, such as the equipment to be
purchased and used under the program.
An Approved Enterprise is entitled to several benefits, including
Israeli Government cash grants and tax benefits. The applicable tax benefits
relate only to taxable profits attributable to the specific Approved Enterprise.
As of December 31, 2003, Elbit Systems had four and El-Op had four active
approved programs eligible for tax benefits. These programs will expire during
the years 2004 to 2012.
CAPITAL GAINS TO A COMPANY
Israeli law imposes a capital gains tax on the sale of capital assets.
The law distinguishes between the real capital gain and the inflationary
surplus. The inflationary surplus accumulated until December 31, 1993 is taxed
at a rate of 10%. Inflationary surplus accumulated from and after December 31,
1993 is exempt from any capital gains tax. The real capital gain was taxed until
December 31, 2002 at a rate of 36% for corporations.
Effective January 1, 2003, the real capital gains tax rate imposed on
the sale of capital assets acquired after that date has been reduced to 25%.
Capital gains accrued from assets acquired before that date are subject to a
blended tax rate based on the relative periods of time before and after the date
that the asset was held as well as accumulated depreciation.
CAPITAL GAINS TO A SHAREHOLDER
Effective January 1, 2003, so long as our ordinary shares are listed on
a stock exchange the sale of these shares is subject to a blended tax in which
the portion of the gain accrued until December 31, 2002 is exempt from Israeli
capital gains tax, and the portion of the real gain accrued from January 1, 2003
until the date of sale is subject to a 15% tax. The real gain is based on the
difference between the adjusted average value of the shares during the last
three trading days before January 1, 2003 (or the adjusted original cost if it
is higher than the adjusted average value) and the value of the shares at the
date of sale. In the later case, the capital loss that might be set off is the
difference between the adjusted average value and the value of the shares at the
date of sale. In addition, since Elbit Systems ordinary shares are traded on the
TASE and Nasdaq, gains on the sale of ordinary shares held by non-Israeli
resident investors for tax purposes will generally be exempt from Israeli
capital gains tax subject to the provisions of the Israeli tax legislation.
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However, dealers in securities in Israel and companies taxed under the
Inflationary Adjustment Law are taxed at regular tax rates applicable to
business income.
INFLATIONARY ADJUSTMENTS. The Income Tax (Inflationary Adjustments)
Law, 1985 attempts to overcome some of the problems of a tax system effected by
an economy experiencing rapid inflation. This was the case in Israel at the time
the law was enacted. Generally, this law provides significant tax deductions and
adjustments to depreciation methods, finance income and expenses and tax loss
carry forwards to compensate for loss of value resulting from an inflationary
economy. Elbit Systems' taxable income is determined under this law. However,
due to low inflation during 2000 portions of this law were temporarily
suspended. In 2001, the provisions of the law were re-implemented since the
inflation during the year exceeded 3%. In 2002 inflation during the year
exceeded 6%. In 2003 the inflation rate was a negative 1.9%.
INCOME TAX FOR NON-RESIDENTS OF ISRAEL. Non-residents of Israel are
subject to a graduated income tax on income from sources in Israel. On
distributions of dividends other than bonus shares (stock dividends), the paying
company withholds at source income tax at the rate of 25%, unless a lower rate
is applicable under a double taxation treaty. Generally, dividends distributed
from taxable income accrued during the period of benefit of an Approved
Enterprise are taxable at the rate of 15% if the dividend is distributed during
the tax benefit period under the Investment Law or within 12 years after the
period. (This limitation does not apply if the company qualifies as a foreign
investors' company according to the Investment Law.) These rates are the final
tax on dividends for individual and corporate non-residents and for individual
Israeli residents. Foreign residents who have Israeli derived income for which
tax was withheld at the source are generally exempt from the duty to file tax
returns in Israel for such income. This includes income from Israeli derived
interest, dividends and royalties.
ISRAELI TAX ON UNITED STATES SHAREHOLDERS
Dividends paid by Elbit Systems to a shareholder resident in the United
States are generally subject to withholding tax deducted at source in Israel.
Israel and the United States are parties to a tax treaty. Under the treaty, the
withholding tax rate on a dividend is normally 25% of the dividend amount, or
15% in connection with an Approved Enterprise.
A U.S. corporation would have a reduced withholding rate on dividends
if it were to own 10% or more of Elbit Systems' voting shares under specified
conditions. The reduced withholding tax rate on the dividend would be 12.5%. The
U.S. corporation must own at least 10% of the voting shares during the portion
of Elbit Systems' tax year before the payment of the dividend and during the
entire prior tax year. The reduced rate is also subject to two other conditions.
First, not more than 25% of Elbit Systems' gross income for the prior tax year
could consist of interest, other than interest received from banking, financing
or similar businesses or from certain subsidiaries. Second, the dividend cannot
be derived from income during any period for which Elbit Systems is entitled to
the reduced tax rate applicable to an Approved Enterprise. In this case the
withholding tax rate would be 15%.
Under the terms of the tax treaty, Israel may tax, subject to any
exemptions under Israeli law, any capital gain realized by a shareholder
resident in the United States on a sale of Elbit Systems' shares if the
shareholder owned, directly or indirectly, 10% or more of Elbit Systems' voting
shares at any time during the 12-month period before the sale or the above
shareholder is an individual and was present in Israel for more than 183 days
during the relevant taxable year. However, according to a new amendment in the
Israeli Tax Ordinance, effective January 1, 2003, since Elbit Systems ordinary
shares are traded on the TASE and on Nasdaq, gains on the sale of ordinary
shares held by non-Israeli resident investors for tax purposes will generally be
exempt from Israeli capital gains tax, subject to the provisions of the Israeli
tax legislation.
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With some limitations, any Israeli tax withheld or paid for dividends
on ordinary shares generally will be eligible for credit against a U.S.
shareholder's U.S. federal income tax liability. Such limitations include
separate computation rules limiting foreign tax credits allowable for specific
classes of foreign source income. The tax credits are limited to the
corresponding U.S. federal income taxes otherwise payable for each such class of
income. Alternatively, a U.S. shareholder may elect to claim a U.S. tax
deduction for such Israeli tax, but only for a year in which the U.S.
shareholder elects to do so for all foreign income taxes.
This summary of taxation is based on existing treaties, laws,
regulations and judicial and administrative interpretations. There can be no
assurance that any of these may not be amended or repealed, possibly with
retroactive effect, or that a tax authority may take a contrary position. Also,
this summary does not address the tax consequences that may be applicable to
specific persons based on their individual circumstances. It also does not
address any state, local or other foreign tax consequences. A shareholder should
consult his or her own tax advisor as to the specific tax consequences of
purchasing, holding or transferring shares of Elbit Systems.
DOCUMENTS ON DISPLAY
Elbit Systems is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended. In accordance with these
requirements, Elbit Systems files reports and other information with the SEC.
These materials, including this Annual Report and its exhibits, may be inspected
and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional office at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of the materials may be
obtained from the Public Reference Room of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The public may obtain information on
the operation of the Commission's Public Reference Room by calling the SEC in
the United States at 1-800-SEC-0330.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK.
While our functional currency is the U.S. dollar, we also have some
non-U.S. dollar or non-U.S. dollar linked currency exposure from time to time.
See above - Item 5. Operating Financial Review and Prospects - Management's
Discussion and Analysis - Impact of Inflation and Exchange Rates - Foreign
Currency Expenses.
Except when we view it necessary, we do not invest in derivative
financial instruments or other market risk sensitive instruments. Therefore, we
do not believe that we are exposed to any material market risk with regard to
market risk sensitive instruments.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not applicable.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our periodic filings with the SEC is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. These controls and procedures also provide that
such information is accumulated and communicated to our management, including
our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives. Also, management necessarily was required to use its judgment in
evaluating the cost to benefit relationship of possible disclosure controls and
procedures. Within 90 days prior to the date of this report, we performed an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. The evaluation was performed with the participation of
senior management of major business areas and key corporate functions, and under
the supervision of the CEO and CFO. Based on the evaluation, our management,
including the CEO and CFO, concluded that our disclosure controls and procedures
were effective. There have been no significant changes in our internal controls
or in other factors that could significantly affect internal controls after the
date we completed the evaluation.
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ITEM 16.
ITEM 16.A - AUDIT COMMITTEE FINANCIAL EXPERT
Yaacov Lifshitz, a member of our Audit Committee, meets the criteria of
an "Audit Committee Financial Expert" under the applicable rules and regulations
of the SEC, and his designation as the Audit Committee's Financial Expert has
been ratified by the Board. Mr. Lifshitz is "independent", as that term is
defined in the Nasdaq listing standards.
ITEM 16.B - CODE OF ETHICS
We have adopted a code of business conduct and ethics that is
applicable to all our directors, officers and employees including our principal
executive, financial and accounting officers and persons performing similar
functions. The code of ethics was approved by our Board and covers areas of
professional and business conduct. It is intended to promote honest and ethical
behavior, including fair dealing and the ethical handling of conflicts of
interest. The code of ethics includes a "whistleblower" process to encourage
reports of violations. Our code of ethics is posted on our website:
www.elbitsystems.com .
ITEM 16.C - PRINCIPAL ACCOUNTANT FEES AND SERVICES
In the annual general shareholders meeting held in August 2003, our
shareholders reappointed Kost Forer Gabbay & Kasierer (Kost), a member of Ernst
& Young Global (E&Y), to serve as our independent auditors. We paid to Kost and
other E&Y affiliates the following fees for professional services in each of the
last two fiscal years:
Year Ended December 31
2003 2002
---- ----
(U.S. dollars in thousands)
Audit Fees $616 $556
Audit-Related Fees $40 $46
Tax Fees $398 $159
All Other Fees $54 $67
------- -----
Total $1,108 $828
99
"Audit Fees" are the aggregate fees billed for the audit of our annual
financial statements. This category also includes services generally provided by
the independent auditor, such as statutory audits required by the Office of the
Chief Scientist and other Israeli government entities, consents and assistance
with and review of documents filed with the SEC. "Audit Related Fees" are the
aggregate fees billed for assurance and related services that are reasonably
related to the performance of the audit and are not reported under Audit Fees.
These fees include mainly accounting consultations regarding the accounting
treatment of matters that occur in the regular course of business, implications
of new accounting pronouncements and other accounting issues that occur from
time to time. "Tax Fees" are the aggregate fees billed for professional services
rendered for tax compliance and tax advice, other than in connection with the
audit. Tax compliance involves preparation of original and amended tax returns,
tax planning and tax advice. "Other Fees" relate to permissible services
provided by the independent auditors that do not fall into the three
above-mentioned categories.
Our Audit Committee has adopted a pre-approval policy for the
engagement of our independent accountant to perform permitted audit and
non-audit services. Under this policy, which is designed to assure that such
engagements do not impair the independence of our auditors, the Audit Committee
pre-approves annually a range of specific audit and non-audit services in the
categories of Audit Service, Audit-Related Services, Tax Services and other
services that may be performed by our independent accountants, and the maximum
pre-approved fees that may be paid as compensation for each pre-approved service
in those categories. Any proposed services exceeding the maximum pre-approved
fees require specific approval by the Audit Committee.
ITEMS 16.D - EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not yet applicable to Registrant.
ITEMS 16.E - PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
Neither Elbit Systems nor any affiliated purchaser purchased any of
Elbit Systems' equity securities during 2003.
100
ITEM 17. FINANCIAL STATEMENTS.
Not applicable.
ITEM 18. FINANCIAL STATEMENTS.
See Financial Statements attached.
ITEM 19. EXHIBITS.
(a) Index to Financial Statements
Page
----
Independent Auditors' Reports F-2
Consolidated Balance Sheets at December 31, 2002 and 2003 F-5
Consolidated Statements of Income F-7
Consolidated Statements of Shareholders' Equity F-8
Consolidated Statements of Cash Flows F-10
Notes to Consolidated Financial Statements F-12
Schedule II - Valuation and Qualifying Accounts S-1
(b) Exhibits
1.1 Elbit Systems' Memorandum of Association *
1.2 Elbit Systems' Restated Articles of Association
4.1 Spin-off Agreement among Elbit Ltd., Elbit Medical Imaging
Ltd. and Elbit Systems **
4.2 Technology Assignment and Cross License Agreement among
Elbit Ltd., Elbit Medical Imaging Ltd.
and Elbit Systems **
4.3 Lease Agreement with Elbit Ltd. **
4.4 Merger Agreement between Elbit Systems and Elop Electro-
Optics Industries Ltd. ***
4.5 Shareholders Agreement between Elron Electronic Industries
Ltd. and the Federmann Group ***
4.6 Form of Registration Rights Agreement among Elbit Systems,
Elron and the Federmann Group ***
4.7 Elbit Systems' Post Merger Stock Option Plan (Summary in
English) *
8.1 List of material subsidiaries and jurisdictions of
incorporation
10.1 Consent of Kost Forer Gabbay & Kasierer
31.1 Certification of Chief Executive Officer of the Registrant
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
101
31.2 Certification of Chief Financial Officer of the Registrant
pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer of the Registrant
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer of the Registrant
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed as an exhibit to Elbit Systems' Annual Report on Form 20-F (File
No. 0-28998) for the year ended December 31, 2000, which was filed with
the Securities and Exchange Commission on April 5, 2001, and
incorporated herein by reference.
** Filed as an exhibit to Elbit Systems' Registration Statement on Form
20-F (File No. 0-28998), which was filed with the Securities and
Exchange Commission on November 22, 1996, and incorporated herein by
reference.
*** Filed as an exhibit to Elbit Systems' Report on Form 6-K for February
2000, which was filed by Elbit Systems with the Securities and Exchange
Commission on March 6, 2000, and incorporated herein by reference.
102
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: June 14, 2004
ELBIT SYSTEMS LTD.
By: /s/ Joseph Ackerman
-------------------------------------
Name: Joseph Ackerman
Title: President and Chief Executive Officer
103
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands of U.S. dollars)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions Charged to
Balance at Charged to Other Balance at
DESCRIPTION Beginning Costs and Accounts Deductions End of
----------- of Period Expenses (Describe) (Describe) Period
--------- -------- ---------- ---------- ------
YEAR ENDED DECEMBER 31, 2003:
Deducted from Assets Accounts:
Allowance for Doubtful Accounts...... 3,411 908 458 3,861
Provisions for Additional Work on
Systems and Products Delivered,
Warranties and Expected Losses....... 57,395 20,361 24,452 53,304
YEAR ENDED DECEMBER 31, 2002:
Deducted from Assets Accounts:
Allowance for Doubtful Accounts...... 3,200 459 248 3,411
Provisions for Additional Work on
Systems and Products Delivered,
Warranties and Expected Losses....... 51,132 34,541 28,278 57,395
YEAR ENDED DECEMBER 31, 2001:
Deducted from Assets Accounts:
Allowance for Doubtful Accounts...... 2,957 270 -- 27 3,200
Provisions for Additional Work on
Systems and Products Delivered,
Warranties and Expected Losses....... 44,019 31,345 345(1) 24,577 51,132
(1) Acquisition of subsidiaries
S-1
EXHIBIT INDEX
1.1 Elbit Systems' Memorandum of Association *
1.2 Elbit Systems' Restated Articles of Association
4.1 Spin-off Agreement among Elbit Ltd., Elbit Medical Imaging
Ltd. and Elbit Systems **
4.2 Technology Assignment and Cross License Agreement among
Elbit Ltd., Elbit Medical Imaging Ltd.
and Elbit Systems **
4.3 Lease Agreement with Elbit Ltd. **
4.4 Merger Agreement between Elbit Systems and Elop Electro-
Optics Industries Ltd. ***
4.5 Shareholders Agreement between Elron Electronic Industries
Ltd. and the Federmann Group ***
4.6 Form of Registration Rights Agreement among Elbit Systems,
Elron and the Federmann Group ***
4.7 Elbit Systems' Post Merger Stock Option Plan (Summary in
English) *
8.1 List of material subsidiaries and jurisdictions of
incorporation
10.1 Consent of Kost Forer Gabbay & Kasierer
31.1 Certification of Chief Executive Officer of the Registrant
pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer of the Registrant
pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer of the Registrant
pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer of the Registrant
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed as an exhibit to Elbit Systems' Annual Report on Form 20-F (File
No. 0-28998) for the year ended December 31, 2000, which was filed with
the Securities and Exchange Commission on April 5, 2001, and
incorporated herein by reference.
** Filed as an exhibit to Elbit Systems' Registration Statement on Form
20-F (File No. 0-28998), which was filed with the Securities and
Exchange Commission on November 22, 1996, and incorporated herein by
reference.
*** Filed as an exhibit to Elbit Systems' Report on Form 6-K for February
2000, which was filed by Elbit Systems with the Securities and Exchange
Commission on March 6, 2000, and incorporated herein by reference.
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 2003
(In U.S. dollars)
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 2003
(In U.S. dollars)
C O N T E N T S
Page
----
REPORT OF INDEPENDENT AUDITORS 2 - 4
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 5 - 6
Consolidated Statements of Income 7
Statements of Changes in Shareholders' Equity 8 - 9
Consolidated Statements of Cash Flows 10 - 11
Notes to the Consolidated Financial Statements 12 - 58
# # # # # # #
[ERNST & YOUNG LOGO]
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Elbit Systems Ltd.
We have audited the accompanying consolidated balance sheet of Elbit Systems
Ltd. (the "Company") and its subsidiaries as of December 31, 2003, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the year ended December 31, 2003. Our audits also included the
financial statement schedule listed in the Index at Item 19a. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (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 audit provides 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, 2003, and the consolidated
results of their operations and cash flows for the year ended December 31, 2003,
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible assets".
Kost Forer Gabbay & Kasierer
A member of Ernst & Young Global
Haifa, Israel
March 9, 2004
-2-
[ERNST & YOUNG LOGO]
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Elbit Systems Ltd.
We have audited the accompanying consolidated balance sheet of Elbit Systems
Ltd. (the "Company") and its subsidiaries as of December 31, 2002, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year then ended. 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. The financial
statements of Elbit Systems Ltd. As of December 31, 2001 and for the year then
ended were audited by other auditors who have ceased operations as a foreign
associated firm of the Securities and Exchange Commission Practice Section of
the American Institute of Certified Public Accountants and whose report dated
March 24, 2002, expressed an unqualified opinion on those statements.
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 the consolidated
results of their operations and cash flows fro the year then ended in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002.
LUBOSHITZ KASIERER
AN AFFILIATE MEMBER OF ERNST & YOUNG INTERNATIONAL
Haifa, Israel
March 10, 2003
-3-
This is a copy of the previously issued Independent Public Account's report of
Arthur Andersen. The report has not been reissued by Arthur Andersen.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
ELBIT SYSTEMS LTD.
We have audited the accompanying consolidated balance sheets of Elbit Systems
Ltd. and its subsidiaries as of December 31, 2001 and 2000 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, 2001. 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 Elbit
Systems Ltd. and its subsidiaries as of December 31, 2001 and 2000, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Luboshitz Kasierer
Arthur Andersen
Haifa, Israel
March 24, 2002
-4-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands)
December 31,
--------------------------------
Note 2003 2002
----------- -------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 76,156 $ 76,280
Short-term bank deposits 690 1,650
Trade receivables, net (3) 203,281 225,773
Other receivables and prepaid expenses (4) 48,363 42,698
Inventories, net of advances (5) 249,225 220,399
-------------- --------------
Total current assets 577,715 566,800
-------------- --------------
INVESTMENTS AND LONG-TERM RECEIVABLES:
Investments in affiliated companies and
partnership (6A) 26,478 21,947
Investments in other companies (6B) 11,745 11,104
Long-term trade receivables 393 20,859
Long-term bank deposits and loan (7) 1,954 3,686
Severance pay fund (2N) 76,218 67,024
-------------- --------------
116,788 124,620
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT,
NET (8) 229,221 202,961
-------------- --------------
OTHER ASSETS, NET: (9)
Goodwill 32,576 32,162
Know-how and other intangible assets, net 67,436 73,607
-------------- --------------
100,012 105,769
-------------- --------------
$ 1,023,736 $ 1,000,150
============== ==============
The accompanying notes are an integral part of the consolidated financial statements
-5-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands, except per share data)
December 31,
---------------------------------
Note 2003 2002
----------- -------------- ---------------
CURRENT LIABILITIES:
Short-term bank credit and loans (10) $ 8,509 $ 24,302
Current maturities of long-term loans (13) 6,818 6,613
Trade payables 107,545 82,094
Other payables and accrued expenses (11) 156,527 141,304
Customers advances and amounts in excess of
costs incurred on contracts in progress (12) 99,618 106,467
-------------- ---------------
Total current liabilities 379,017 360,780
-------------- ---------------
LONG-TERM LIABILITIES:
Long-term loans (13) 62,038 73,173
Advances from customers (12) 7,592 40,411
Deferred income taxes (15E) 24,916 24,735
Accrued severance pay (14,2N) 93,979 84,973
-------------- ---------------
188,525 223,292
-------------- ---------------
COMMITMENTS AND CONTINGENT
LIABILITIES (16)
MINORITY INTERESTS 4,115 4,717
-------------- ---------------
SHAREHOLDERS' EQUITY (17)
Share capital
Ordinary shares of New Israeli Shekels (NIS)
1 par value;
Authorized - 80,000,000 shares as of
December 31, 2003 and 2002;
Issued - 39,746,125 and 39,212,328 shares as
of December 31, 2003 and 2002, respectively;
Outstanding - 39,337,304 and 38,803,507
shares as of December 31, 2003 and 2002,
respectively 11,273 11,154
Additional paid-in capital 259,033 248,387
Accumulated other comprehensive loss (3,992) (2,882)
Retained earnings 190,086 159,023
Treasury shares - 408,821 shares as of
December 31, 2003 and 2002 (4,321) (4,321)
-------------- ---------------
452,079 411,361
-------------- ---------------
$ 1,023,736 $ 1,000,150
============== ===============
The accompanying notes are an integral part of the consolidated financial statements
-6-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands, except per share data)
Year ended December 31,
Note 2003 2002 2001
---- ---- ---- ----
Revenues (18) $897,980 $827,456 $764,501
Cost of revenues 673,561 605,313 553,957
-------- -------- --------
Gross profit 224,419 222,143 210,544
-------- -------- --------
Research and development costs, net (19) 54,919 57,010 58,759
Marketing and selling expenses 69,943 65,691 54,876
General and administrative expenses 46,077 41,651 43,216
-------- -------- --------
170,939 164,352 156,851
-------- -------- --------
Operating income 53,480 57,791 53,693
Financial expenses, net (20) (4,870) (3,035) (2,617)
Other income (expenses), net (21) 903 (462) 774
-------- -------- --------
Income before taxes on income 49,513 54,294 51,850
Taxes on income (15) 11,334 9,348 11,003
-------- -------- --------
38,179 44,946 40,847
Equity in net earnings (losses) of affiliated companies and
partnership 7,209 675 (598)
Minority interests in losses (earnings) of
subsidiaries 557 (508) 547
-------- -------- --------
Net income $ 45,945 $45,113 $40,796
======== ======== ========
Earnings per share (17G)
Basic net earnings per share $ 1.18 $ 1.17 $ 1.07
======== ======== ========
Diluted net earnings per share $ 1.14 $ 1.13 $ 1.04
The accompanying notes are an integral part of the consolidated financial statements
-7-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands, except per share data)
Accumulated
Number of Additional other
outstanding Share paid-in comprehensive
shares capital capital loss
------------- ------------ ------------ ----------------
Balance as of January 1, 2001 37,811,398 $ 10,916 $ 235,462 $ -
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 based
compensation - - 8,512 -
Purchase of treasury shares (66,986) - - -
Dividends paid - - - -
Net income - - - -
---------- ----------- ----------- -----------
Balance as of December 31, 2001 38,330,272 11,054 244,625 -
Exercise of options 473,235 100 4,040 -
Tax benefit in respect of options
exercised - - 648 -
Amortization of stock based
compensation - - (926) -
Dividends paid - - - -
Comprehensive income (loss):
Minimum pension liability - - - (2,882)
Net income - - - -
---------- ----------- ----------- -----------
Total comprehensive income
Balance as of December 31, 2002 38,803,507 $ 11,154 $ 248,387 $ (2,882)
========== =========== =========== ===========
Total Total other
Retained Treasury shareholders' comprehensive
earnings shares equity income
------------ ------------- -------------- ----------------
Balance as of January 1, 2001 $ 97,963 $ (3,613) $ 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 based
compensation - - 8,512
Purchase of treasury shares - (708) (708)
Dividends paid (12,132) - (12,132)
Net income 40,796 - 40,796 $ 40,796
--------- --------- --------- ---------
Total comprehensive income $ 40,796
=========
Balance as of December 31, 2001 126,627 (4,321) 377,985
Exercise of options - - 4,140
Tax benefit in respect of options
exercised - - 648
Amortization of stock based
compensation - - (926)
Dividends paid (12,717) - (12,717)
Comprehensive income (loss):
Minimum pension liability - - (2,882) $ (2,882)
Net income 45,113 - 45,113 45,113
--------- --------- --------- ---------
Total comprehensive income $ 42,231
=========
Balance as of December 31, 2002 $ 159,023 $ (4,321) $ 411,361
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements
-8-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.)
------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands, except per share data)
Accumulated
Number of Additional other
outstanding Share paid-in comprehensive
shares capital capital loss
------------- ------------ ------------ ----------------
Balance as of December 31, 2002 38,803,507 $ 11,154 $ 248,387 $ (2,882)
Exercise of options 533,797 119 5,147 -
Tax benefit in respect of
options exercised - - 758 -
Amortization of stock based
compensation - - 4,741 -
Dividends paid - - - -
Comprehensive income (loss):
Unrealized gains on derivative
instruments - - - (578)
Foreign currency translation differences - - - 340
Minimum pension liability - - - (872)
Net income - - - -
------------ ------------ ------------ ------------
Total comprehensive income
Balance as of December 31, 2003 39,337,304 $ 11,273 $ 259,033 $ (3,992)
============ ============ ============ ============
Accumulated other comprehensive loss
------------------------------------
Accumulated gains on derivative instruments $ (578)
Accumulated foreign currency translation differences 340
Accumulated minimum pension liability (3,754)
------------
Accumulated other comprehensive loss
as of December 31, 2003 $ (3,992)
============
Total Total other
Retained Treasury shareholders' comprehensive
earnings shares equity income
------------ ------------- -------------- ----------------
Balance as of December 31, 2002 $ 159,023 $ (4,321) $ 411,361
Exercise of options - - 5,266
Tax benefit in respect of
options exercised - - 758
Amortization of stock based
compensation - - 4,741
Dividends paid (14,882) - (14,882)
Comprehensive income (loss):
Unrealized gains on derivative
instruments - - (578) $ (578)
Foreign currency translation differences - - 340 340
Minimum pension liability - - (872) (872)
Net income 45,945 - 45,945 45,945
--------- --------- --------- ---------
Total comprehensive income $ 44,835
=========
Balance as of December 31, 2003 $ 190,086 $ (4,321) $ 452,079
========= ========= =========
The accompanying notes are an integral part of the consolidated statements.
-9-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands)
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 45,945 $ 45,113 $ 40,796
Adjustments required to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 37,890 32,937 32,865
Amortization of deferred stock based compensation 4,741 (926) 8,512
Deferred income taxes, net 35 (5,620) (2,694)
Accrued severance pay, net (1,240) 6,260 (633)
Gain (loss) on sale of property, plant and equipment (915) 743 (327)
Tax benefit in respect of options exercised 758 648 1,363
Minority interests in earnings (losses) of subsidiaries (557) 508 (547)
Equity in net losses (earnings) of affiliated companies and partnership, net of
dividend received (*) (4,995) (675) 598
Changes in operating assets and liabilities:
Decrease (increase) in short and long-term receivables and prepaid expenses 45,297 58,554 (9,963)
Increase in inventories (38,651) (55,106) (72,165)
Increase (decrease) in trade payable, other payables and accrued expenses 32,147 (19,321) 37,004
Increase (decrease) in advances received from customers (27,855) 42,999 6,489
Settlement of royalties with the Office of the Chief Scientist (1,581) 9,197 -
Other adjustments 337 683 (117)
--------- --------- ---------
Net cash provided by operating activities 91,356 115,994 41,181
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (61,287) (46,003) (45,244)
Investment grants received for property, plant and equipment - 119 1,334
Acquisition of subsidiaries and businesses (Schedule A) (2,458) (5,280) (3,344)
Investments in affiliated companies and subsidiaries (1,049) (1,681) (801)
Proceeds from sale of property, plant and equipment 5,815 956 3,010
Grant of long-term loan - (714) -
Repayment of long-term loan 2,400 - -
Repayment of short-term loan - 1,371 -
Investment in long-term bank deposits (1,750) (1,228) (1,872)
Proceeds from sale of long-term bank deposits 3,568 1,689 2,322
Short-term bank deposits, net 960 (204) (57)
--------- --------- ---------
Net cash used in investing activities (53,801) (50,975) (44,652)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options 5,266 4,140 3,300
Repayment of long-term credit for purchase of a building - - (3,000)
Purchase of treasury shares - - (708)
Repayment of long-term bank loans (27,066) (3,249) (13,049)
Proceeds from long-term bank loans 10,000 2,233 25,444
Dividends paid (14,882) (12,717) (12,132)
Change in short-term bank credit and loans, net (10,997) (19,729) (6,517)
--------- --------- ---------
Net cash used in financing activities (37,679) (29,322) (6,662)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (124) 35,697 (10,133)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 76,280 40,583 50,716
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 76,156 $ 76,280 $ 40,583
========= ========= =========
(*) Dividend received $ 2,214 $ - $ -
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
-10-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
-------------------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands)
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid during the year for:
Income taxes $ 14,666 $ 21,730 $ 9,469
======== ======== ========
Interest $ 4,034 $ 2,947 $ 6,649
======== ======== ========
SCHEDULE A:
Subsidiaries and businesses acquired (*)
Estimated net fair value of assets acquired and liabilities assumed at the date
of acquisition was as follows:
Working capital deficiency (excluding cash and cash equivalents) $ 657 $ - $ 888
Property, plant and equipment (249) (275) (1,886)
Goodwill, know-how and other intangible assets (1,334) (5,078) (3,800)
Deferred income taxes (1,765) - -
Long-term liabilities 198 - 1,454
Minority interest 35 - -
-------- -------- --------
(2,458) (5,353) (3,344)
Less short-term debt incurred on acquisition - 73 -
-------- -------- --------
$ (2,458) $ (5,280) $ (3,344)
======== ======== ========
(*) AEL in 2001 (see Note 1C). Defense systems division of Elron Telesoft
in 2002 (see Note 1D). In 2003 OIP (see Note 1E) and AD&D (see Note
1F).
The accompanying notes are an integral part of the consolidated financial statements.
-11-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U. S. dollars (In thousands)
Note 1 - GENERAL
A. Elbit Systems Ltd. (the "Company") is an Israeli
corporation, 30% 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 Elop
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. As for a major customer
refer to Note 18C.
C. In 2001, the Company acquired a 62.5% interest in
Aeroeletronica - Industria de Componentes Avionicos S.A.
("AEL"), a Brazilian company located in Porto Alegre, for
approximately $3,450 in cash. In July 2002, the Company
acquired the remaining 37.5% interest for an additional $900
in cash. The consideration paid included approximately
$1,200 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 the fair value of net liabilities acquired 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.
The results of AEL's operations have been included in the
consolidated financial statements from the date of
acquisition.
Pro forma information in accordance with Statement of
Financial Accounting Standards No. 141 "Business
Combinations" ("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 for
the year 2001.
-12-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 1 - GENERAL (Cont.)
D. In January 2002, the Company acquired from Elron Telesoft
Inc. and its subsidiaries ("Elron Telesoft") the assets and
the business of the Defense Systems Division of Elron
Telesoft ("the Government Division") in consideration for
$5,700 in cash. 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 a weighted 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 for the years 2001 and
2002.
E. In June 2003, the Company (through El-Op) acquired all of
the outstanding Ordinary shares of Optronics Instruments &
Products N.V. (O.I.P.), a company registered in Belgium, in
consideration for $1,846 in cash. The acquisition was
accounted for by the purchase method of accounting.
O.I.P. develops, manufactures and supports electro-optical
products, mainly for the defense and space markets.
The following table summarizes the fair values of the assets
acquired and liabilities assumed at the date of acquisition
as estimated by the Company:
Current assets $ 6,896
Property and equipment 168
Deferred tax assets 1,700
--------
Total assets acquired 8,764
Current liabilities (6,918)
--------
Net assets acquired $ 1,846
========
The results of O.I.P.'s operations have been included in the
consolidated financial statements from the date of
acquisition.
-13-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 1 - GENERAL (Cont.)
Pro forma information in accordance with SFAS No. 141 has
not been provided, since the revenues and net income of
O.I.P. were not material in relation to total consolidated
revenues and net income for the years 2001, 2002 and 2003.
F. In July 2003, the Company acquired approximately 54% of the
outstanding shares of Aero Design Development Ltd. ("AD&D")
an Israeli company in consideration for $1,406 in cash. The
acquisition was accounted for by the purchase method of
accounting.
AD&D develops, manufactures and builds airborne models and
other engineered products.
The purchase price over the fair value of net tangible
assets acquired in the amount of approximately $1,334 was
allocated to know-how ($1,000) to be amortized by the
straight-line method over a period of 10 years and to
goodwill ($334).
The following table summarizes the fair values of the assets
acquired and liabilities assumed at the date of acquisition
as estimated by the Company:
Current assets $ 604
Property and equipment 81
Know-how and goodwill 1,334
Deferred tax assets 65
---------
Total assets acquired 2,084
Current liabilities (445)
Long-term liabilities (198)
Minority interest (35)
---------
Net assets acquired $ 1,406
=========
The results of AD&D.'s operations have been included in the
consolidated financial statements from the date of
acquisition.
Pro forma information in accordance with SFAS No. 141 has
not been provided, since the revenues and net income of AD&D
were not material in relation to total consolidated revenues
and net income for the years 2001, 2002 and 2003.
-14-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the
United States ("U.S. GAAP"). As applicable to the consolidated
financial statements of the Group, such principles are
substantially identical to accounting principles generally
accepted in Israel, except as described in Note 23.
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's revenues are generated mainly in U.S. dollars.
In addition, most of the Company's costs are incurred in
U.S. dollars. The 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 "Foreign Currency Translation". All exchange gain and
losses from the remeasurement mentioned above are reflected
in the statement of income in financial income or expenses.
For those foreign subsidiaries whose functional currency has
been determined to be other than the U.S. dollar, assets and
liabilities are translated at year-end exchange rates and
statement of income items are translated at average exchange
rates prevailing during the year. Such translation
adjustments are recorded as a separate component of
accumulated other comprehensive income in shareholders'
equity.
-15-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts
of the Company and its wholly and majority-owned
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 EQUIVALENTS
Cash equivalents, are short-term highly liquid investments
that are readily convertible to cash with maturities of
three months or less at the date of acquisition.
E. SHORT-TERM BANK DEPOSITS
Short-term bank deposits are deposits 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 using the average cost method.
- Costs incurred on long-term contracts in progress
represent recoverable costs incurred for production,
allocable operating overhead and, where appropriate,
research and development costs (refer to Note 2Q).
Advances from customers are allocated to the applicable
contract inventories and are reflected as an offset against
the related inventory balances.
-16-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
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. Profits on intercompany sales, not realized
outside the Group, were eliminated. The Group 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.
Certain investments are accounted for under the hypothetical
liquidation method. For these investments, the Group applies
Emerging Issues Task Force ("EITF 99-10"), "Percentage Used
to Determine the Amount of Equity Method Losses", according
to which the Group recognizes equity method losses based on
the ownership level of the particular investee security or
loan held by the Group to which the equity method losses are
being applied.
The Group's investments in affiliates are reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an investment may not
be recoverable. As of December 31, 2003, based on
management's most recent analyses, no impairment losses have
been identified.
H. LONG-TERM TRADE RECEIVABLES
Long-term trade receivables from extended payment agreements
are recorded at their estimated present values (determined
based on the original rates of interest).
I. LONG-TERM BANK DEPOSITS
Bank deposits with maturities of more than one year are
presented at cost including accumulated interest.
-17-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
J. PROPERTY, PLANT AND EQUIPMENT
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 the 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 15-20 (mainly 15%)
Land rights and leasehold improvements - over the term of
the lease.
K. IMPAIRMENT OF LONG-LIVED ASSETS
The Group'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 determined to
be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the asset exceeds
its fair value. As of December 31, 2003, no impairment
losses have been identified.
L. OTHER ASSETS
Intangible assets subject to amortization arose from
acquisitions prior to July 1, 2001, are being amortized on a
straight-line basis over their useful life in accordance
with APB Opinion No. 17, "Intangible Assets" ("APB No. 17").
-18-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
L. OTHER ASSETS (CONT.)
Intangible assets acquired in a business combination for
which date is on or after July 1, 2001, are being amortized
over their useful life using a method of amortization that
reflects the pattern in which the economic benefits of the
intangible assets are consumed or otherwise used up, in
accordance with Statements of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets", ("SFAS No.
142").
M. GOODWILL
Goodwill represents excess of the cost of acquired entities
over the net fair values of the 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, such goodwill shall no longer be amortized
effective as of January 1, 2002. Goodwill acquired in a
business combination on or after July 1, 2001 is not
amortized.
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, future short-term and long-term growth
rates and weighted average cost of capital for each of the
reporting units. As of December 31, 2003, no impairment
losses have been identified.
The adoption of SFAS 142 did not affect the financial
position and results of operations of the Group as of
January 1, 2002.
-19-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
N. 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,
2003, 2002 and 2001, amounted to approximately $11,491,
$10,138 and $8,097, respectively.
O. REVENUE RECOGNITION
The Group 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 Statement
of Position 81-1 "Accounting for Performance of
Construction-Type and Certain Production - Type Contracts"
("SOP 81-1") 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 Group achieves certain milestones. As for
research and development costs accounted for as contract
costs refer to Note 2Q.
-20-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
O. REVENUE RECOGNITION (CONT.)
Sales under long-term fixed-price development and production
type contracts are recorded on a percentage of completion
basis using cost-to-cost method and units of delivery
method, as applicable.
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.
The Group believes that the use of the percentage of
completion method is appropriate as the Group has the
ability to make reasonably dependable estimates of the
extent of progress towards completion, contract revenues and
contract costs. In addition, contracts executed include
provisions that clearly specify the enforceable rights
regarding services to be provided and received by the
parties to the contracts, the consideration to be exchanged
and the manner and terms of settlement. In all cases the
Group expects to perform its contractual obligations and its
customers are expected to satisfy their obligations under
the contract. Anticipated losses on contracts are charged to
earnings when identified.
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.
-21-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
P. WARRANTY
The Group 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 Group does
business. Factors that affect the Group's warranty liability
include the number of delivered units, engineering estimates
and anticipated rates of warranty claims. The Group
periodically assesses the adequacy of its recorded warranty
liability and adjusts the amount as necessary.
Changes in the Group's provision for warranty during the
year are as follows:
Balance, at January 1, 2003 $ 8,541
Warranties issued during the year 4,491
Warranties forfeited or exercised
during the year (3,340)
-------
Balance, at December 31, 2003 $ 9,692
=======
Q. 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 grants (mainly
royalty-bearing) 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.
-22-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
R. 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.
S. CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially subject the Group to
concentrations of credit risk consist principally of cash
and cash equivalents and trade receivables.
The majority of the Group's cash and cash equivalents and
deposits are 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.
-23-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
T. DERIVATIVE FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"), requires companies to recognize all of its
derivative instruments as either assets or liabilities in
the statement of financial position at fair value. The
accounting for changes in the fair value (i.e. gains or
losses) of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging
relationship and further, on the type of hedging
relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company
must designate the hedging instrument, based upon the
exposure being hedged, as a fair value hedge, cash flow
hedge or a hedge of a net investment in a foreign
operations.
For derivative instruments that are designated and qualify
as a fair value hedge (i.e., hedging the exposure to changes
in the fair value of an asset or a liability or an
identified portion thereof that is attributable to a
particular risk), the gain and loss on the derivative
instrument as well as the offsetting loss or gain on the
hedged item attributable to the hedged risk are recognized
in the same line item associated with the hedged item in
current earnings during the period of the change in fair
values. For derivative instruments that are designated and
qualify as a cash flow hedge (i.e. hedging the exposure to
variability in expected future cash flows that is
attributable to a particular risk), the effective portion of
the gain or loss on the derivative instrument is reported as
a component of other comprehensive income and reclassified
into earnings in the same line item associated with the
forecasted transaction in the same period or periods during
which the hedged transaction affects earnings.
The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the present value of
future cash flows of the hedged item, if any, is recognized
in other income/expense in current earnings during the
period of change.
For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in other
income/expense in current earnings during the period of
change.
-24-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
T. DERIVATIVE FINANCIAL INSTRUMENTS (CONT.)
As part of its fair value hedging strategy the Group enters
into forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies. The purpose
of the Group's foreign currency hedging activities is to
protect the Group 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 part of its cash flows hedging strategy the Group enters
into forward exchange contracts to hedge forecasted salary
expenses denominated in currency other than the U.S. dollar.
As of December 31, 2003, the Group had forward contracts
with notional value of approximately $27,500 to purchase and
sell foreign currencies. The Group also had options to hedge
future cash flow in the amount of $24,000. The forward
contracts and the options mature in 2004.
The fair value of the foreign exchange contracts as of
December 31, 2003 amounted to $1,113. The fair value of the
options as of December 31, 2003 is minimal.
U. STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles
Board Opinion No. 25 ("APB No. 25") "Accounting for Stock
Issued to Employees" and FASB Interpretation No. 44 ("FIN
No. 44") "Accounting for Certain Transactions Involving
Stock Compensation" in accounting for its employee stock
option plans. Under APB No. 25, compensation expense is
recognized based on the intrinsic value method where by
compensation expense is equal 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 recognizes the
expense over the vesting period of the award.
In respect of phantom share options, the Company applies
variable stock compensation accounting (See Note 17C).
-25-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
U. STOCK-BASED COMPENSATION (CONT.)
The Company adopted the disclosure provisions of Financial
Accounting Standards Board Statement No. 148, "Accounting
for Stock-Based Compensation - transition and disclosure"
("SFAS No. 148"), which amended certain provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for an entity that
voluntarily changes the fair value based method of
accounting for stock-based employee compensation, effective
as of the beginning of the fiscal year. The Company
continues to apply the provisions of APB No. 25, in
accounting for stock-based compensation.
Pro forma information regarding the Company's net income and
net earnings per share is required by SFAS No. 123 and has
been determined as if the Company had accounted for its
employee stock options under the fair value method
prescribed by SFAS No. 123.
The fair value for options granted in 2003, 2002 and 2001 is
amortized over their vesting period and estimated at the
date of grant using a Black-Scholes options pricing model
with the following weighted average assumptions:
2003 2002 2001
---- ---- ----
Divided yield 2.19% 1.99% 2.03%
Expected volatility 19.03% 21.90% 33.80%
Risk-free interest 1.20% 1.34% 2.00%
Expected life of up to 6 years 6 years 6 years
-26-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
U. STOCK-BASED COMPENSATION (CONT.)
Pro forma information under SFAS No.123 is as follows:
Year ended December 31,
2003 2002 2001
------------- ------------ -------------
Net income as reported $ 45,945 $ 45,113 $ 40,796
Add - Stock based compensation
expense (income), net of related
tax effects as reported (intrinsic
method) 3,793 (741) 6,810
Deduct - Stock based compensation
expense under fair value based
method of SFAS 123 net of
related tax effects (2,956) (2,956) (2,932)
-------- -------- ----------
Pro forma net income $ 46,782 $ 41,416 $ 44,674
======== ======== ==========
Net earnings per share:
Basic net earnings per share as reported $ 1.18 $ 1.17 $ 1.07
======== ======== ==========
Diluted net earnings per share as reported $ 1.14 $ 1.13 $ 1.04
======== ======== ==========
Pro forma basic net earnings per share $ 1.20 $ 1.08 $ 1.18
======== ======== ==========
Pro forma diluted net earnings per share $ 1.16 $ 1.04 $ 1.14
======== ======== ==========
V. FAIR VALUE FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for cash
and cash equivalents, short-term bank deposits, trade
receivables, short-term bank credit and loans and trade
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.
-27-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
V. FAIR VALUE FINANCIAL INSTRUMENTS (CONT.)
It was not practicable to estimate the fair value of the
Group's investments in shares of non-public companies that
are accounted for under the cost method 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 $11,104 and
$11,745 as of December 31, 2002 and 2003, respectively, and
represent the original cost of acquisition.
W. BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed based on the
weighted average number of Ordinary shares outstanding
during each year. Diluted net earnings 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 in
accordance with SFAS No. 128 "Earnings Per Share".
Outstanding stock options are excluded from the calculation
of the diluted net earnings per Ordinary share when such
securities are anti-dilutive. In all the years presented no
stock options were excluded.
X. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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
-28-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
X. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONT.)
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 adoption of FIN No. 45 did not
have a material impact on the Group's results of operations
or financial position.
In November 2002, the EITF reached a consensus on Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 applied to revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003. Additionally, companies will be permitted to
apply the consensus guidance in this issue to all existing
arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20,
"Accounting Changes". The adoption of EITF Issue No. 00-21
did not have a material impact upon the Company's
consolidated financial position, cash flows or results of
operations.
In December 2003, the SEC issued Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition." ("SAB No. 104")
which revises or rescinds certain sections of SAB No. 101,
"Revenue Recognition", in order to make this interpretive
guidance consistent with current authoritative accounting
and auditing guidance and SEC rules and regulations. The
changes noted in SAB NO. 104 did not have a material effect
on the Company's consolidated financial position, results of
operations or cash flows.
In 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51 ("FIN
46"). In December 2003, the FASB revised FIN 46 to make
certain technical corrections and address certain
implementation issues that had arisen. FIN 46 provides a new
framework for identifying Variable Interest Entities
("VIE's") and determining when a company should include the
assets, liabilities, non-controlling interests and results
of activities of a VIE in its consolidated financial
statements.
-29-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
X. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONT.)
In general, a VIE is an entity that either (1) has an
insufficient amount of equity to carry out its principal
activities, without additional subordinated financial
support, (2) has a group of equity owners that are unable to
make significant decisions about the entity's activities, or
(3) has a group of equity owners that do not have the
obligation to absorb the entity's losses or the right to
receive returns generated by its operations. FIN 46 requires
the consolidation of a VIE by the primary beneficiary. The
primary beneficiary is the entity that absorbs a majority of
the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the
entity.
The Group is currently evaluating the effects of this
interpretation in respect of its investments. It is possible
that some of its unconsolidated investees may be considered
as VIEs in accordance with the interpretation. Accordingly,
if it is determined that the Group is the primary
beneficiary of a VIE, the Group will be required to
consolidate the financial statements of such VIE with its
own financial statements commencing in the first quarter of
2004.
Y. RECLASSIFICATIONS
Certain financial statement data for prior years has been
reclassified to conform with current year financial
statement presentation.
-30-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 3 - TRADE RECEIVABLES, NET
Trade receivables
December 31,
---------------------
2003 2002
---- ----
Open accounts (*) $170,287 $185,997
Unbilled receivables 36,855 43,187
Less - allowance for doubtful accounts (3,861) (3,411)
-------- --------
$203,281 $225,773
======== ========
(*) Includes affiliated companies $ 6,668 $ 9,647
======== ========
December 31,
------------------------------
2003 2002
---- ----
Cost incurred on long-term contracts in progress $253,663 $ 210,418
Raw materials 78,504 75,579
Advances to suppliers and subcontractors 20,137 25,047
-------- ----------
352,304 311,044
Less -
Cost incurred on contracts in progress deducted
from customer advances 14,581 10,658
-------- ----------
337,723 300,386
Less -
Advances received from customers 77,482 67,624
Provision for losses 11,016 12,363
-------- ----------
$249,225 $ 220,399
======== ==========
The Company has transferred legal title of inventories to certain
customers as collateral for advances received.
-31-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
COMPANIES
A. Investments in companies accounted for under the equity
(1) Semi Conductor Devices ("SCD"), an Israeli 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. SCD is jointly controlled
and therefore is not consolidated in the Company's
financial statements.
(2) Vision Systems International LLC ("VSI") based in San
Jose, is a California limited liability company that is
held 50% by EFW. VSI is jointly controlled and
therefore is not consolidated in the Company's
financial statements. VSI operates in the area of
helmet mounted display systems for fixed wing military
and paramilitary aircraft. VSI is jointly controlled
and therefore is not consolidated in the Company's
financial statements.
(3) Opgal Optronics Industries Ltd. ("Opgal") 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.
-32-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
COMPANIES (CONT.)
A. Investments in companies accounted for under the equity
method (cont.)
(4) 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 2001-2003, Mediguide
issued Preferred shares to other investors in
consideration for approximately $16,000. 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 does not consolidate Mediguide. The carrying
value of the investment in Mediguide is zero.
RedC Optical Networks Inc. ("RedC") is engaged in the
multi-focal optic communications sector and is held
36.5% by El-Op. RedC designs, develops and manufacture
optical amplifiers for dense wave-length multiplexing
(DWDM) optical networks for telecommunication renders.
Based on analysis performed, the Company recorded a
provision for loss on its investment in RedC of $2,500
during the year ended December 31, 2002. This provision
has been presented under "Equity in net earnings of
affiliated companies and partnership".
(5) See Note 16(E) for guarantees.
-33-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
COMPANIES (CONT.)
B. Investments in companies accounted for under the cost method
(1) Sultam Systems Ltd. ("Sultam"), held 10%, is an Israeli
company 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), is engaged in the operation of
satellite photography formations and commercial
delivery of satellite photography for civil purposes.
(3) AeroAstro Inc. - In October 2003, the Company purchased
Common stock of AeroAstro Inc., ("AAI") a Delaware
corporation, representing 8.33% of the total
outstanding Common stock of AAI on a fully diluted
basis, in consideration for $1,000. AAI is engaged in
innovative micro and nanospacecraft applications. AAI
manufactures low-cost satellite systems and components,
used in its own spacecraft and for spacecraft
development in and outside the U.S.
Note 7 - LONG -TERM BANK DEPOSITS AND LOAN
December 31,
---------------------------
2003 2002
---- ----
Deposits with bank for loans
granted to employees (*) $ 1,901 $ 2,037
Other deposits with bank 53 935
Long-term loan - 714
------- -------
$ 1,954 $ 3,686
======= =======
(*) The deposits are linked to the Israeli CPI, bear annual
interest of 4% and are presented net of current maturities
of $633 (2002 - $680).
-34-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 8 - PROPERTY, PLANT AND EQUIPMENT, NET
December 31,
----------------------------
2003 2002
---- ----
Land, buildings and leasehold improvements (2) $ 143,223 $ 128,456
Instruments, machinery and equipment (3) 194,129 169,467
Office furniture and other 24,943 21,904
Motor vehicles 29,776 24,393
--------- ---------
392,071 344,220
Accumulated depreciation (162,850) (141,259)
--------- ---------
Depreciated cost $ 229,221 $ 202,961
========= =========
Depreciation expenses for the years ended December 31, 2003, 2002
and 2001 amounted to $30,775, $26,525 and $24,517, respectively.
(1) Net of investment grants received (mainly for
instruments, machinery and equipment) in the amounts of
approximately $30,700 and $30,800 as of December 31,
2003 and 2002, respectively.
(2) Includes, rights in approximately 9,225 square meters
of land in, Tirat Hacarmel, Israel. The land is leased
from the Israel Land Administration until the years
2014 to 2024 with a renewal option for additional
periods of 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
a renewal option for additional periods of 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 $10,498 and $5,517 as of December
31, 2003 and 2002, respectively.
(4) As for pledges of assets - see Note 16(H).
-35-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 9 - OTHER ASSETS, NET
A.
Weighted-average December 31,
number of ------------------------
years 2003 2002
----------------- ---- ----
Original cost:
Know-how and technology (1) 12.5 $ 82,449 $ 81,398
Trade marks (2) 17 8,000 8,000
Goodwill (3) 37,613 37,199
--------- ---------
128,062 126,597
--------- ---------
Accumulated amortization:
Know-how and technology 21,555 14,666
Trade marks 1,458 1,125
Goodwill 5,037 5,037
--------- ---------
28,050 20,828
--------- ---------
Amortized cost $ 100,012 $ 105,769
========= =========
(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).
(2) Includes trade marks acquired in the merger with El-Op.
(3) Includes mainly goodwill acquired in the merger with
El-Op ($34,200) and goodwill acquired from Honeywell
Inc. ($1,800). Until January 1, 2002, goodwill was
amortized at an annual rate of 5% - 10%.
B. Amortization expenses amounted to $7,222, $6,412 and $8,348
for the years ended December 31, 2003, 2002 and 2001,
respectively.
C. The annual amortization expense relating to intangible
assets existing as of December 31, 2003 for each of the five
years in the period ending December 31, 2008 is estimated to
be approximately $6,000.
-36-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 9 - OTHER ASSETS, NET (CONT.)
The following information is presented to reflect net income and
net earnings per share for all prior periods adjusted to exclude
amortization of goodwill.
Year ended
December 31,
------------
2001
------------
Reported net income $ 40,796
Goodwill amortization 2,760
--------
Adjusted net income $ 43,556
========
Net earnings per share
Reported basic net earnings per share $ 1.07
Goodwill amortization 0.08
--------
Adjusted basic net earnings per share $ 1.15
========
Reported diluted net earnings per share $ 1.04
Goodwill amortization 0.07
--------
Adjusted diluted net earnings per share $ 1.11
========
Note 10 - SHORT-TERM BANK CREDIT AND LOANS
December 31,
----------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest rate %
------------------
Short-term bank loans:
In U.S. dollars 3.3-4.75 3-5 $ 533 $ 13,512
In EURO 3.5 - 1,927 -
--------- ---------
2,460 13,512
--------- ---------
Short-term bank credit:
In NIS unlinked 7.2 9.6-10.9 4,684 5,241
In U.S. dollars 2.6 2.8-3.6 1,365 5,549
--------- ---------
6,049 10,790
--------- ---------
$ 8,509 $ 24,302
========= =========
The subsidiary in the U.S. maintains standby lines of credit with
various banks. The sum of the lines equals $66,000 of which
$15,900 was available as of December 31, 2003.
As for liens - see Note 16F.
-37-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 11 - OTHER PAYABLES AND ACCRUED EXEPNSES
December 31,
---------------------
2003 2002
---- ----
Payroll and related expenses $ 33,382 $ 27,912
Provision for vacation pay 25,280 20,492
Government departments 25,243 22,443
Provision for warranty 9,692 8,541
Cost provisions and others 62,930 61,916
---------- ----------
$ 156,527 $ 141,304
========== ==========
Note 12 - CUSTOMERS ADVANCES AND AMOUNTS IN EXCESS OF COSTS INCURRED ON
CONTRACTS IN PROGRESS
December 31,
---------------------
2003 2002
---- ----
Advances received $199,273 $225,160
Less -
Advances presented under long-term
liabilities 7,592 40,411
Advances deducted from inventories 77,482 67,624
-------- --------
114,199 117,125
Less -
Costs incurred on contracts in progress 14,581 10,658
-------- --------
$ 99,618 $106,467
======== ========
As for guarantees see Note 16G
-38-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 13 - LONG-TERM LOANS
December 31,
Interest Years of -----------------
Linkage % maturity 2003 2002
------- -------- -------- ---- ----
Banks U.S. dollars Libor + 2004 - 2005 $57,574 $67,206
0.75%-1.85%
Banks NIS-unlinked Israeli
Prime 2004 - 2022 3,599 3,383
Office of chief NIS-linked to
scientist the Israeli-CPI 5.2% 2004 - 2008 7,683 9,197
------- -------
68,856 79,786
Less-current maturities 6,818 6,613
------- -------
$62,038 $73,173
======= =======
The Libor rate as of December 31, 2003 was 1.12%. The Israeli
Prime rate as of December 31, 2003 was 6.3%. The maturities of
these loans after December 31, 2003 are as follows:
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.
As for charges see Note 16H.
-39-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 14 - BENEFIT PLANS
The subsidiary in the U.S. has adopted for its employees in the
U.S. benefits plans as follows:
Defined Benefit Retirement Plan
The subsidiary in the U.S. has two defined benefit pension plans
(the Plans) covering substantially its employees in the U.S.
Monthly benefits are based on years of benefit service and annual
compensation. Annual contributions to the Plans are determined
using the unit credit actuarial cost method and are equal to or
exceed the minimum required by law. Pension fund assets of the
Plans are invested primarily in stock, bonds and cash by a
financial institution, as the investment manager of the Plans'
assets.
The following table reconciles the benefit obligations, Plans
assets, funded status and net asset (liability) information of the
Plans:
December 31,
------------------------
2003 2002
---- ----
Benefit obligation at beginning of year $ 28,439 $ 22,358
Service cost 2,480 2,067
Interest cost 1,921 1,678
Actuarial losses 2,825 2,955
Benefits repaid (700) (619)
-------- --------
Benefit obligation at end of year 34,965 28,439
-------- --------
Plans assets at beginning of year 15,558 16,167
Actual return on Plan assets 2,689 (1,560)
Contributions by employer 3,649 1,571
Benefits repaid (700) (619)
-------- --------
Plans assets at end of year 21,196 15,559
-------- --------
Funded status of Plans (underfunded) (13,769) (12,880)
Unrecognized prior service cost (195) 234
Unrecognized net actuarial loss 9,395 7,582
-------- --------
Net amount recognized (4,569) (5,064)
======== ========
Net asset (liability) consists of:
Accrued benefit liability (11,011) (10,298)
Intangible asset 51 234
Accumulated other comprehensive income 6,391 5,000
-------- --------
Net amount recognized (4,569) $ (5,064)
======== ========
Weighted average assumptions :
Discount rate as of December 31, 6.25% 6.75%
Expected long-term rate of return on
Plans assets 9.00% 9.00%
Rate of compensation increase 3.00% 3.00%
-40-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 14 - BENEFIT PLANS (Cont.)
Year ended December 31,
------------------------------
2003 2002 2001
---- ---- ----
Components of net periodic pension cost:
Service cost $ 2,480 $ 2,067 $ 1,766
Interest cost 1,921 1,678 1,461
Expected return on Plan assets (1,573) (1,597) (1,666)
Amortization of prior service cost (15) 28 24
Recognized of net actuarial gain 339 - (38)
One-time FAS 88 charge for 2001 SRP - - 177
------- -------- -------
Net periodic pension cost $ 3,152 $ 2,176 $ 1,724
======= ======== =======
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. Subsidiary's
employees may elect to contribute a percentage of their annual
gross compensation to the 401(k) plan. The U.S. subsidiary may
make discretionary matching contributions as determined by the
subsidiary. Total expense under the 401(k) plan amounted to $1,629
for the year ended December 31, 2003 (2002 - $1,369).
-41-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
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 for the Company and certain of
its Israeli subsidiaries 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.
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 in Israel (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 deduct
public issuance expenses for tax purposes.
(3) Tax benefits under Israel's Law for the Encouragement
of Capital Investments, 1969:
Several expansion programs of the Company and certain
of its Israeli subsidiaries ("the companies") have been
granted "Approved Enterprise" status under Israel's Law
for the Encouragement of Capital Investments, 1959. For
some expansion programs, the companies have elected the
grants track and for others they have elected the
alternative tax benefits track, waiving grants in
return for tax exemptions.
-42-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 15 - TAXES ON INCOME
A. APPLICABLE TAX LAWS (CONT.)
(3) Tax benefits under Israel's Law for the Encouragement
of Capital Investments, 1959 (cont.):
Accordingly, certain income of the companies, derived
from the "Approved Enterprise" expansion programs is
tax exempt for two-year to ten-year period and subject
to reduced tax rates of 25% for a five-year to
eight-year period commencing in the year in which the
companies had 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, 2003, the tax benefits for these expansion
programs will expire between 2004 to 2010.
The entitlement to the above benefits is subject to the
companies fulfilling the conditions specified in the
above referred 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, 2003, 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, 2003, retained earnings included approximately
$96,000 in tax-exempt profits earned by the companies'
"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 $ 23,940 as of December 31, 2003.
-43-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 15 - TAXES ON INCOME
A. APPLICABLE TAX LAWS
(3) Tax benefits under Israel's Law for the Encouragement
of Capital Investments, 1959:
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
Companyies "Approved Enterprise".
In Israel, income from sources other than the "Approved
Enterprise" during the benefit period will be subject
to tax at the regular corporate tax rate of 36%.
Since the companies 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. NON - ISRAELI SUBSIDIARIES
Non-Israeli subsidiaries are taxed based on tax laws in
their countries of residence (mainly in the U.S.).
-44-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 15 - INCOME TAXES (CONT.)
C. INCOME BEFORE TAXES ON INCOME
Year ended December 31,
----------------------------
2003 2002 2001
---- ---- ----
Income before taxes on income:
Domestic $ 38,423 $ 42,317 $ 44,212
Foreign 11,090 11,977 7,638
-------- -------- --------
$ 49,513 $ 54,294 $ 51,850
======== ======== ========
D. TAXES ON INCOME
Year ended December 31,
----------------------------
2003 2002 2001
---- ---- ----
Taxes on income:
Current taxes:
Domestic $ 12,346 $ 11,654 $ 9,385
Foreign 718 6,114 3,048
-------- -------- --------
$ 13,064 17,768 12,433
======== ======== ========
Deferred income taxes:
Domestic (4,672) (3,561) (839)
Foreign 2,942 (2,059) (591)
-------- -------- --------
(1,730) (5,620) (1,430)
-------- -------- --------
Taxes in respect of prior years - (*)(2,800) -
-------- -------- --------
$ 11,334 $ 9,348 $ 11,003
======== ======== ========
(*) A reduction of tax expenses due to adjustments of estimated
tax provision pursuant to the completion of prior years'
tax assessments in respect of various Group companies.
-45-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 15 - INCOME TAXES (CONT.)
E. 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, 2003
Deferred tax assets:
Reserve and allowances $ 13,884 $ 13,922 $ (38)
Inventory 7,547 7,547 -
Net operating loss carryforwards 6,606 439 6,167
-------- -------- --------
28,037 21,908 6,129
Valuation allowance (2) (3,879) - (3,879)
-------- -------- --------
Net deferred tax assets 24,158 21,908 2,250
-------- -------- --------
Deferred tax liabilities:
Property, plant and equipment (12,769) - (12,769)
Other assets (14,397) - (14,397)
-------- -------- --------
(27,166) - (27,166)
-------- -------- --------
Net deferred tax assets (liabilities) $ (3,008) $ 21,908 $(24,916)
======== ======== ========
As of December 31, 2002
Deferred tax assets:
Reserve and allowances $ 10,510 $ 10,859 $ (349)
Inventory 9,138 9,138 -
Net operating loss carryforwards 2,326 - 2,326
-------- -------- --------
21,974 19,997 1,977
Valuation allowance (2) (2,326) - (2,326)
-------- -------- --------
Net deferred tax assets 19,648 19,997 (349)
-------- -------- --------
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) $ 19,997 $(24,735)
======== ======== ========
-46-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 15 - INCOME TAXES (CONT.)
E. DEFERRED INCOME TAXES (CONT.)
(1) Current tax asset is included in other receivables.
Noncurrent tax liability is included as a long-term
liability.
(2) During 2003, the Group increased the valuation
allowance due to an increase in accumulated operating
loss carryforwards that more likely than not, will not
be utilized.
F. The Group's Israeli subsidiaries have estimated total
available carryforward tax losses of approximately $12,000
as of December 31, 2003. The Group's non-Israeli
subsidiaries have estimated available carryforward tax
losses of approximately $8,500 as of December 31, 2003 to
offset against future taxable profits for an indefinite
period. Deferred tax assets in respect of the above
carryforward losses amount to approximately $6,600 in
respect of which a valuation allowance has been recorded in
the amount of approximately $3,900.
G. Reconciliation of the theoretical tax expense, assuming all
income is taxed at the statutory rate applicable to income
of the Group, and the actual tax expense as reported in the
statements of operations, is as follows:
Year ended December 31,
----------------------------------------------
2003 2002 2001
---- ---- ----
Income before taxes as reported in the
consolidated statements of operations $ 49,513 $ 54,294 $ 51,850
Statutory tax rate 36% 36% 36%
======== ======== ========
Theoretical tax expense $ 17,825 $ 19,546 $ 18,666
Tax benefit arising from reduced rate as an
"Approved Enterprise" and other tax (8,391) (9,054) (7,697)
benefits
Tax adjustment in respect of different tax rate for
foreign subsidiaries 279 (461) (952)
Operating carryforward losses for which
valuation allowance was provided 126 2,189 101
Increase (decrease) in taxes resulting from
nondeductible expenses 993 (263) 571
Difference in basis of measurement for
financial reporting and tax return purposes 846 458 832
Taxes in respect of prior years - (2,800) -
Other differences, net (344) (267) (518)
-------- -------- --------
Actual tax expenses $ 11,334 $ 9,348 $ 11,003
======== ======== ========
Effective tax rate 22.9% 17.2% 21.2%
======== ======== ========
-47-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 16 - COMMITMENTS AND CONTINGENT LIABILITIES
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 in 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%
- 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 and other
applicable law. 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 expensed or accrued amounted to $7,812,
$14,741 and $8,252 in 2003, 2002 and 2001,
respectively.
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.
-48-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 16 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
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 a liability for an absolute amount of royalties.
In May 2002, El-Op's Board of Directors approved an
arrangement, proposed by the OCS, according to which El-Op
pays 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 in the amount of $9,801 included in Cost
of Revenues.
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 their
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, 2003
amounted to $630,000 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.
-49-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 16 - COMMITMENTS AND CONTINGENT LIABILITIES (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 that the financial impact for the settlement 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, 2003:
2004 $ 8,520
2005 6,145
2006 5,557
2007 5,453
2008 and there after 5,451
--------
$ 31,126
========
Rent expenses for the years ended December 31, 2003, 2002
and 2001 amounted to $9,177, $9,215, and $7,978,
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 $13,900
(2002- $10,600), of which $13,400 (2002 - $10,200) relates
to a owned 50% foreign investee. 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.
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 $800 (see Note 15 A (3) above ).
-50-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 16 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
G. Guarantees in the amount of approximately $399,200 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 equity
upon liquidation of the Company.
B. 2000 EMPLOYEE STOCK OPTION PLAN
In 2000, the Company adopted an 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 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, 2003, 479,217 options of the Company were still
available for future grants.
C. "PHANTOM" SHARE OPTIONS
The phantom share options are considered as part of a
variable plan as defined in APB No. 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.
-51-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 17 - SHAREHOLDER'S EQUITY (CONT.)
D. A summary of the Company's share option activity under the
plans is as follows:
December 31,
----------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------- ------------------------------ ------------------------------
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 4,511,724 $ 12.26 5,107,634 $ 11.93 5,671,918 $ 11.26
Granted 13,000 14.91 27,000 14.92 98,840 12.91
Exercised (757,947) 12.13 (558,901) 9.45 (598,348) 11.93
Forfeited (31,175) 12.29 (64,009) 11.33 (64,776) 12.50
--------- -------- --------- -------- --------- ---------
Outstanding - end of the
year 3,735,602 $ 12.30 4,511,724 $ 12.26 5,107,634 $ 11.93
========= ======== ========= ======== ========= =========
Options exercisable at
the end of the year 2,547,196 $ 12.23 2,287,790 $ 12.18 373,138 $ 7.56
========= ======== ========= ======== ========= =========
E. The options outstanding as of December 31, 2003, have been
separated into ranges of exercise price, as follows:
Options outstanding Options exercisable
----------------------------------------------- -----------------------------
Number Weighted Weighted
outstanding average Weighted Number average
as of remaining average outstanding as exercise
December 31, contractual exercise of December 31, price per
Exercise price 2003 life (years) price per share 2003 share
-------------- ------------ ------------ --------------- --------------- ---------
$10.61-$12.16 158,935 0.42 $10.69 158,935 $10.69
$12.18-$15.64 1,786,193 2.93 12.37 1,190,240 12.34
$12.18-$15.64(*) 1,790,474 2.94 12.37 1,198,021 12.33
--------- ---- ------ --------- ------
3,735,602 2.83 $12.30 2,547,196 $12.23
========= ==== ====== ========= ======
(*) Phantom share options.
-52-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 17 - SHAREHOLDER'S EQUITY (CONT.)
E. (Cont.)
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 $4,741, $(926) and $8,512
were recognized during the years ended December 31, 2003,
2002 and 2001, respectively.
F. The weighted average exercise price and fair value of
options granted during the years ended December 31, 2003,
2002 and 2001 were:
Less than market price
--------------------------------------
Year ended December 31,
--------------------------------------
2003 2002 2001
---- ---- ----
Weighted-average
exercise price $ 14.91 $ 14.92 $ 12.91
Weighted-average
fair values on
grant date $ 4.63 $ 4.31 $ 5.14
G. Computation of basic and diluted net earnings per share:
Year ended Year ended Year ended
December 31, 2003 December 31, 2002 December 31, 2001
-------------------------------------- ------------------------------------ -------------------------------------
Net income
Net income to Weighted to Weighted Net income to Weighted
shareholders averaged Per shareholders averaged Per shareholders averaged Per
of Ordinary number of share of Ordinary number of share of Ordinary number of share
shares shares (*) amount shares shares (*) amount shares shares (*) amount
-------------------------------------- ------------------------------------ -------------------------------------
Basic net earnings $ 45,945 39,061 $1.18 $45,113 38,489 $1.17 $40,796 37,975 $1.07
Effect of dilutive
securities:
Employee stock
options - 1,169 - 1,374 - 1,384
---------- ------ ------- ------ ------- ------
Diluted net
earnings $ 45,945 40,230 $1.14 $45,113 39,863 $1.13 $40,796 39,359 $1.04
========== ====== ===== ======= ====== ===== ======= ====== =====
* In thousands
-53-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 17 - SHAREHOLDER'S EQUITY (CONT.)
H. TREASURY SHARES
The Company's shares held by the Company are presented at
cost and deducted from shareholder's equity.
I. DIVIDEND POLICY
Dividends declared by the Company are 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.
Note 18 - MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
The Group adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related
Information", ("SFAS No. 131"). The Group operates in one
reportable segment (see Note 1 for a brief description of the
Group's business).
A. Revenues are attributed to geographic areas based on
location of the end customers as follows:
Year ended December 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Europe $109,409 $144,862 $179,560
U.S. 332,323 267,686 206,627
Israel 255,742 225,674 226,650
Others 200,506 189,234 151,664
-------- -------- --------
$897,980 $827,456 $764,501
======== ======== ========
B. Revenues are generated by the following product lines:
Year ended December 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Airborne systems $373,580 $372,756 $334,201
Armored vehicles systems 199,800 135,700 126,300
Command, control, communications,
computers and intelligence systems (C4I) 133,900 122,700 105,800
Electro-optical systems 140,500 148,200 162,700
Others 50,200 48,100 35,500
-------- -------- --------
$897,980 $827,456 $764,501
======== ======== ========
C. Revenues from single customer, which exceed 10% of total
revenues in the reported years:
Year ended December 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Customer A 21% 18% 20%
-54-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 18 - MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION (CONT.)
(*) The amounts relate mainly to transactions with VSI.
Note 23 - RECONCILIATION TO ISRAELI GAAP
As described in Note 2, the Company prepares its financial
statements in accordance with U.S. GAAP. The effects of the
differences between U.S. GAAP and Israeli GAAP on the Company's
financial statements are detailed below.
Differences between U.S. GAAP and Israeli GAAP:
-56-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 23 - RECONCILIATION TO ISRAELI GAAP (CONT.)
A building purchased from Elbit Ltd.
According to generally accepted accounting principles in Israel
("Israeli GAAP"), 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 U.S. 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 U.S. 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
U.S. 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.
-57-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
U. S. dollars (In thousands)
Note 23 - RECONCILIATION TO ISRAELI GAAP
1. Effect on net income and earnings per share
Year ended December 31
--------------------------------------
2003 2002 2001
---- ---- ----
Net income as reported according to
U.S. GAAP $ 45,945 $ 45,113 $ 40,796
Adjustments to Israeli GAAP 595 (4,227) 1,767
-------- -------- --------
Net income according to Israeli GAAP $ 46,540 $ 40,886 $ 42,563
======== ======== ========
2. Effect on shareholders' equity
As per
As reported Adjustments Israeli GAAP
----------- ----------- ------------
As of December 31, 2003
Shareholders' equity $452,079 $(10,367) $441,712
======== ======== ========
As of December 31, 2002
Shareholders' equity $411,361 $(11,076) $400,285
======== ======== ========
# # # # # # # #
-58-
Exhibit 1.2
April 2004
RESTATED ARTICLES OF ASSOCIATION
OF
ELBIT SYSTEMS LTD.
TABLE OF CONTENTS
ARTICLE
1. INTERPRETATION.............................................................3
2. PUBLIC COMPANY.............................................................5
3. PERMISSIBLE OBJECTIVES.....................................................5
4. NAME AND REGISTERED OFFICE.................................................5
5. SHARE CAPITAL..............................................................6
6. SHARE RIGHTS...............................................................7
7. SHARE REGISTER AND SHARE CERTIFICATES......................................8
8. SHARE WARRANTS, OPTIONS AND DEBENTURES.....................................8
9. LIEN ON SHARES.............................................................9
10. REDEEMABLE SHARES AND WARRANTS.............................................9
11. CALLS ON SHARES; FORFEIT OF SHARES.........................................9
12. TRANSFER OF SHARES........................................................11
13. TRANSMISSION OF SHARES ON DEATH, BANKRUPTCY OR DISSOLUTION................11
14. REGISTRATION OF COMPANY SECURITIES FOR TRADING ON SECURITIES EXCHANGES....12
15. BORROWING POWERS..........................................................12
16. DIVIDENDS AND RESERVES....................................................12
17. CAPITALIZATION OF RESERVES................................................13
18. CONVENING OF GENERAL MEETINGS.............................................14
1
19. PROCEEDINGS AT GENERAL MEETINGS...........................................15
20. VOTING AT GENERAL MEETINGS; VOTING INSTRUMENTS............................16
21. PROXY STATEMENTS..........................................................18
22. ROLE AND COMPOSITION OF THE BOARD OF DIRECTORS............................18
23. ELECTION, APPOINTMENT AND REMOVAL OF DIRECTORS............................19
24. EXTERNAL DIRECTORS........................................................20
25. BOARD OF DIRECTORS MEETINGS...............................................21
26. COMMITTEES OF THE BOARD OF DIRECTORS......................................22
27. PRESIDENT.................................................................22
28. SECRETARY.................................................................23
29. SIGNATURE AUTHORITY.......................................................23
30. ACCOUNTS..................................................................24
31. INDEPENDENT CERTIFIED ACCOUNTANTS.........................................24
32. INTERNAL AUDITOR..........................................................24
33. NOTICES...................................................................24
34. INSURANCE AND INDEMNITY...................................................25
35. RECONSTRUCTION AND WINDING-UP.............................................27
36. AMENDMENTS TO ARTICLES....................................................27
2
1. INTERPRETATION
(a) In these Articles of Association the following terms will have the meanings
described below:
TERM MEANING
(1) Annual Meeting The annual General Meeting.
(2) Articles These Articles of Association, as may be
amended from time to time.
(3) Audit Committee The audit committee of the Board of Directors
established according to these Articles and
the Law.
(4) Board or The Company's supervisory governing board
Board of Directors appointed according to these Articles and the
Law.
(5) Chairman of the The chairman of the Board of Directors,
Board of Directors appointed according to these Articles.
(6) Company Elbit Systems Ltd.
(7) Director A member of the Company's Board of Directors.
(8) Extraordinary Meeting A General Meeting other than an Annual
Meeting.
(9) General Meeting A meeting of the Company's Shareholders
convened according to these Articles and the
Law.
(10) Independent Certified The Company's independent certified
Accountants accountants appointed according to these
Articles and the Law.
(11) Internal Auditor The Company's internal auditor appointed in
accordance with these Articles and the Law.
(12) Law The [Israel] Companies Law - 1999, including
any regulations and regulatory orders
relating thereto, and any successor laws and
regulations, as will be in effect from time
to time.
(13) NIS New Israeli Shekels.
(14) Ordinary Shares Shares nominal value NIS 1 per Share, which
carry all ordinary rights Shareholders are
entitled to under these Articles and the Law.
3
(15) President The president and general manager of the
Company appointed according to these
Articles.
(16) Proxy A person appointed, as provided in these
Articles, by a Shareholder to vote or
otherwise act on the Shareholder's behalf at
a General Meeting.
(17) Proxy Statement A document issued by the Board of Directors
to Shareholders soliciting the Shareholders
to vote for a General Meeting.
(18) Register The register of Shareholders, including any
branch registers the Company may maintain,
kept according to the Law.
(19) Registered Office The Company's registered office.
(20) Secretary The Company's corporate secretary.
(21) Securities Law The [Israel] Securities Law - 1968 and any
regulations and regulatory orders relating
thereto, and any successor laws and
regulations, as will be in effect from time
to time.
(22) Share Capital The Company's registered Share capital as
authorized by its Memorandum of Association
and these Articles.
(23) Shareholder Any person or entity that is the owner,
according to these Articles and the Law, of a
Share.
(24) Shares Proportional allocations to Shareholders of
rights in the Company's Share Capital,
whether Ordinary Shares or otherwise,
according to these Articles and the Law.
(25) Special Majority A majority of at least sixty-seven percent
(67%) of all votes properly cast at a General
Meeting, without taking into account
abstentions.
(26) Treasury Shares Shares that have been acquired, redeemed or
otherwise received by the Company or a
Company subsidiary and allocated by the
Company to a reserve for future allocation or
sale.
(27) Voting Instrument A written form for Shareholders to use,
according to these Articles and the Law, in
voting at General Meetings.
(28) Writing A handwriting, typewriting, facsimile, print,
e-mail and any other legally recognized form
of communication that can be read.
4
(b) In these Articles, unless the context otherwise requires, expressions
defined in the Law will have the meanings so defined. In addition, words
importing the singular will include the plural, and vice versa. Words
importing the masculine gender will include the feminine, and words
importing persons will include companies, partnerships, associations and
all other legal entities. Days, months and years refer to the Gregorian
calendar.
(c) In the event that an Article is revised or a new Article is added to these
Articles, which contradicts an original Article, the revised or added
Article(s) will take precedence.
(d) In any place in these Articles that specifies the provisions will apply
according or subject to the provisions of the Law and/or any other law, the
intention is to provisions of the Law and/or of any other law that are not
elective, unless the context requires otherwise.
2. PUBLIC COMPANY
The Company is a public company as defined in the Law. Therefore:
(a) No limitations will apply to the transfer of its Shares.
(b) The number of Shareholders is unlimited.
(c) The Company may issue any form of its Shares or other securities to the
public.
(d) Liability of the Shareholders is limited to the payment of the nominal
(par) value of the unpaid issued Share Capital of the Company.
3. PERMISSIBLE OBJECTIVES
(a) The permissible objectives of the Company may include any objectives
permitted by law.
(b) The Company may contribute, from time to time, reasonable sums to worthy
causes even if the cause is not within the specific scope of the Company's
business.
4. NAME AND REGISTERED OFFICE
(a) The name of the Company is Elbit Systems Ltd.
(b) The Registered Office will be at such place in Israel as the Board of
Directors will from time to time select.
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5. SHARE CAPITAL
(a) The Share Capital of the Company is NIS 80,000,000 (eighty million New
Israeli Shekels) divided into 80,000,000 (eighty million) ordinary shares
of NIS 1 nominal (par) value each.
(b) The Company may, by a resolution of a Special Majority of Shareholders at a
General Meeting:
(1) increase the Share Capital, including by classes of Shares, as the
General Meeting may determine; or
(2) annul Share Capital that has not yet been issued, provided that the
Company has no undertaking, including a provisional undertaking, to
allot such Shares.
(c) Subject to the provisions of the Law, the Company may, by a resolution of a
majority of the Shareholders voting in a General Meeting without taking
into account abstentions:
(1) consolidate all or part of the Shares and/or divide them into Shares
of a greater par value than the par value of the existing Shares;
(2) split all or part of the Shares, by way of subdivision, into Shares of
lesser par value than the par value of the existing Shares; or
(3) decrease the capital or any reserve fund from redemption of capital.
(d) In executing any resolution adopted according to Article 5(c) above, the
Board may, at its discretion, resolve any related issues.
(e) Subject to any contrary decision in a General Meeting resolution
authorizing an increase in Share Capital, any new Share Capital will be
subject to the same provisions regarding payment of calls, liens, title,
forfeiture, transfer and otherwise as apply to the original Share Capital.
Such General Meeting resolution may also determine that the new Shares, or
any part of them, will first be offered, at par value or at a premium, to
all the existing Shareholders in proportion to the par value of their
Shares or may determine other provisions with regard to the issuance and
allotment of the new Shares. However, in the absence of such a
determination in the General Meeting resolution, the Board may allot such
Shares as provided in Article 6(a) below.
(f) If as a result of a consolidation or split of Shares authorized under these
Articles, fractions of a Share will stand to the credit of any Shareholder,
the Board is authorized at its discretion, to act as follows:
6
(1) determine that fractions of Shares that do not entitle their owners to
a whole Share, will be sold by the Company and that the consideration
for the sale be paid to the beneficiaries, on terms the Board may
determine;
(2) allot to every Shareholder, who holds a fraction of a Share resulting
from a consolidation and/or split, Shares of the class that existed
prior to the consolidation and/or split, in a quantity that, when
consolidated with the fraction, will constitute a whole Share, and
such allotment will be considered valid immediately prior to the
consolidation or split;
(3) determine the manner for paying the amounts to be paid for Shares
allotted in accordance with Article 5(f)(2) above, including on
account of bonus Shares; and/or
(4) determine that the owners of fractions of Shares will not be entitled
to receive a whole Share in respect of a Share fraction or that they
may receive a whole Share with a different par value than that of the
fraction of a Share.
6. SHARE RIGHTS
(a) Subject to these Articles and to the terms of any General Meeting
resolution creating new Shares, the allotment and issue of Shares will be
as determined by the Board of Directors, who may allot and issue such
Shares to persons on terms and conditions and at times as determined by the
Board of Directors, including the allotment of bonus Shares.
(b) Each Ordinary Share will entitle its owner to receive notices of, to attend
and to cast one vote at a General Meeting.
(c) The rights granted to Shareholders of any class of Shares issued with
preferred or other rights will not, unless specifically provided by the
terms of issue of the Shares of that class, be deemed to be changed by the
creation or issue of other Shares of the same rank.
(d) Unless otherwise provided for by the terms of issuance of a particular
class of Shares, the Company may create or change rights, preferences,
restrictions and provisions related to one or more of the classes of
Shares, after receipt of the consent in writing of all Shareholders of the
affected class, or a resolution passed at a General Meeting of such class,
approved by a Special Majority of the Shareholders of the affected class.
These Articles will apply, as applicable, to every such separate General
Meeting of a class.
(e) Treasury Shares will not carry voting or dividend rights while they remain
in the Company's Treasury Share reserve. Conversion of Treasury Shares into
Ordinary Shares or Ordinary Shares into Treasury Shares will be subject to
approval of the Board of Directors and any applicable provisions of the Law
and Securities Law.
(f) The rights applicable to any Shares, whether in the original Share Capital
or any increased Share Capital, may be changed according to the terms of
these Articles.
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7. SHARE REGISTER AND SHARE CERTIFICATES
(a) The Company will maintain a Register of Shareholders according to the Law.
The Company may maintain one or more branch registers of Shareholders, in
Israel or another jurisdiction, which will be considered as part of the
Register.
(b) No person will be recognized by the Company as holding any Share under a
trust unless he is so registered in the Register according to applicable
provisions of the Law.
(c) The Company will not be bound by or required to recognize, even when having
notice, any right or interest in any Share other than rights or interests
of the Shareholder duly registered in the Register or otherwise proven in
accordance with these Articles and the Law.
(d) Every person whose name duly appears as a Shareholder in the Register or
who otherwise establishes proof of ownership in accordance with these
Articles and the Law, will have the right without payment to receive,
within two (2) months after allotment or registration of transfer (unless
the conditions of allotment or transfer provide for a longer period), a
stamped certificate for all the Shares registered in his name. The
certificate will specify the number of Shares for which it is issued.
However, in case of joint Shareholders the Company will not be required to
issue more than one certificate to all the joint Shareholders. Delivery of
a certificate to any of the joint Shareholders will be sufficient delivery
to all. Every certificate will be signed by a Director and countersigned by
the Secretary or some other person nominated by the Board of Directors for
that purpose. The Company may withhold the issue of Share certificates for
Shares not fully paid up.
(e) If any Share certificate will be defaced, worn out, destroyed or lost, it
may be renewed following production of any evidence, provision of any
indemnity and payment of any of the Company's out of pocket expenses as the
Board of Directors will require. In case of defacement or wearing out,
renewal will require delivery of the old certificate.
(f) The Company may destroy Share certificates which have been canceled if at
least seven (7) years have passed from the cancellation date. The Company
may also destroy Share transfer forms or certificates if at least seven (7)
years have passed from the Share transfer date.
8. SHARE WARRANTS, OPTIONS AND DEBENTURES
The Company may issue from time to time Share warrants, options on Shares,
debentures and similar forms of securities. The price, terms and conditions
of any such securities will be determined by the Board of Directors.
8
9. LIEN ON SHARES
(a) The Company will have a lien on every Share for all moneys, whether
currently payable or not, called or payable in respect of that Share.
However, the Board of Directors may at any time declare any Share to be
wholly or partly exempt from the provisions of this Article. The Company's
lien, if any, on a Share will extend to all dividends payable on that
Share.
(b) The Company may sell any Shares on which it has a lien at such time and
manner as will be determined by the Board of Directors. However, if some
sum on which there is a lien is currently payable, no sale will be made
until fourteen (14) days after sending a notice in writing to the
registered Shareholders, demanding payment of such sum and giving notice of
the Company's intention to sell in default. To give effect to any such
sale, the Board of Directors may authorize transfer of the Shares sold to
the purchaser who will be registered as the holder of the Shares. The
Company will receive the net proceeds of the sale which will be applied in
payment of the sum then payable on the lien. The balance of the sale
proceeds, if any, will be paid to the person holding the Shares immediately
before the sale, subject to any lien for sums that were not currently
payable for the Shares before the sale.
10. REDEEMABLE SHARES AND WARRANTS
Subject to the applicable provisions of the Law, the Company may issue and
redeem redeemable preference Shares and redeemable warrants.
11. CALLS ON SHARES; FORFEIT OF SHARES
(a) The Board of Directors may, in its discretion, from time to time authorize
the amount and manner of the consideration to be given to the Company for
Shares. The Board may also make calls on Shareholders for any moneys unpaid
on their Shares. Each Shareholder will be liable to pay the amount of every
call so made on him to the persons and at the times, places and
installments specified by the Board. A call may be revoked or postponed as
the Board may determine.
(b) A call will be considered to have been made at the time the Board of
Directors approves the resolution authorizing such call.
(c) The joint Shareholders of a Share will be jointly and severally liable for
the payment of all calls and related installments.
(d) The Board of Directors may, at its discretion, authorize receipt of
advances from any Shareholder relating to future calls on Shares. The Board
may authorize interest to be paid as may be agreed with the advancing
Shareholder.
(e) Any sum that, by the terms of a Share, is payable on the Share's allotment
or at any fixed date, will be considered to be a call duly made and payable
on the date fixed for payment. In case of non-payment of such sum, the
relevant provisions of these Articles will apply as if such sum were a call
duly made and notified according to these Articles.
9
(f) The Board of Directors may, on the issue of Shares, differentiate between
the Shareholders as to the amount of calls to be paid and the times of
payment.
(g) If any Shareholder fails to pay all or part of any call or installment of a
call on or before the day appointed for such payment, the Board of
Directors may serve a notice on such Shareholder. The notice will require
payment of the amount remaining unpaid together with interest, at such rate
as the Board will determine, and any expenses that may have accrued by
reason of such non-payment. The notice will name a date, not less than
fourteen (14) days from the date of the notice, on or before which such
call or installment, and all interest and expenses that have accrued by
reason of such non-payment are to be paid. It will also name the place
where payment is to be made, and will state that in the event of
non-payment on or before the time and at the place appointed, the Shares
for which such call was made will be liable to be forfeited. If the
requirements of any such notice are not met, any Share for which such
notice has been given may, before the payment required by the notice has
been made, be forfeited by a resolution of the Board to that effect. A
forfeiture of Shares will include all dividends applicable to the Shares
not actually paid before the forfeiture, even if the dividend has been
declared.
(h) When any Shares have been forfeited in accordance with these Articles,
notice of the forfeiture will be promptly given to the Shareholder or to
the person entitled to the Shares by transmission, as the case may be. An
entry of such notice having been given and of the date of the forfeiture of
the applicable Shares will be made in the Register. However, a forfeiture
will not be invalid due to not giving such notice or making such entry in
the Register.
(i) Following a forfeiture, the Board of Directors may, at any time before the
forfeited Share has been otherwise disposed of, revoke the forfeiture on
terms determined by the Board.
(j) Every forfeited Share may be sold or reallotted or otherwise disposed of,
to any other person, on such terms as the Board of Directors may determine.
Any forfeited Share held by the Company will be considered as a Treasury
Share.
(k) A person whose Shares have been forfeited will remain liable to pay to the
Company all calls made and not paid on such Shares at the time of
forfeiture, and interest thereon to the date of payment, in the same manner
in all respects as if the Shares had not been forfeited. He will also
remain liable to satisfy any claims and demands which the Company might
have enforced regarding the Shares at the time of forfeiture, without any
deduction or allowance for the value of the Shares at the time of
forfeiture. However, if the Company chooses to sell the forfeited Shares
then the net consideration accepted by the Company for such Shares will be
deducted from the amount the person whose Shares have been forfeited is
liable to pay the Company.
(l) The forfeiture of a Share will cause the extinction at the time of
forfeiture all claims and demands against the Company regarding the Share,
and all other rights and liabilities relating to the Share as between the
forfeiting Shareholder and the Company, except as provided by law.
10
(m) A written declaration, that the declarant is a Director and that a Share
has been duly forfeited according to these Articles and stating the date of
forfeiture, will be conclusive evidence of the facts stated in the
declaration against any persons claiming to be entitled to the forfeited
Shares. Such declaration, together with the Company's receipt for the
consideration, if any, given for the forfeited Shares on their sale or
disposition, and a duly signed Share certificate delivered to the purchaser
will constitute good title to the Shares. Such purchaser will be registered
as the holder of the Shares.
12. TRANSFER OF SHARES
(a) Subject to the restrictions in these Articles, Shares will be transferable.
Every transfer must be in writing in any usual or common form, or in such
other form as the Board of Directors may from time to time approve. The
written form of transfer will be delivered to the Registered Office,
accompanied by a true copy of the certificate of the Shares to be
transferred, and any other evidence as the Board may require to prove the
title of an intending transferor.
(b) The written form of transfer of a Share will be executed both by the
transferor and the transferee. The transferor will be considered to remain
the Shareholder until the name of the transferee is entered in the Register
for the applicable Shares.
(c) The Board of Directors may decline to register any transfer of Shares,
which have not been fully paid up.
(d) The Board of Directors may determine a fee to be charged for registration
of a transfer.
(e) The registration of transfers may be suspended at such times and for such
periods as the Board of Directors may determine, not to exceed thirty (30)
days in any calendar year.
13. TRANSMISSION OF SHARES ON DEATH, BANKRUPTCY OR DISSOLUTION
(a) In the case of death, bankruptcy or dissolution of a Shareholder, that
Shareholder's rightful successor in interest will be entitled to the
Shareholder's Shares by transmission as provided in this Article.
(b) If a deceased Shareholder was a joint Shareholder, his surviving joint
Shareholder will be the successor in interest. If a deceased Shareholder
was a sole Shareholder, or has no surviving joint Shareholders, the
executors or administrators of the deceased, or in their absence the
legally declared heirs, will be recognized by the Company as the successor
in interest to the Shares. If the Shareholder was a legal entity declared
bankrupt or otherwise declared dissolved, then its legally recognized
successor in interest will be recognized by the Company as receiving title
to the applicable Shares.
(c) Nothing in these provisions will release the estate of a deceased
Shareholder from any liability for any Shares held by the deceased
Shareholder.
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(d) Any person becoming entitled to a Share in consequence of a Shareholder's
death, bankruptcy or dissolution may, upon producing such evidence of title
as the Board of Directors will require, be registered himself as a holder
of the Share, or subject to provisions regarding transfers of Shares,
transfer the same to some other person.
(e) A person entitled to a Share by transmission will be entitled to receive,
and may give a release for, any dividends or other moneys payable for the
Share. However, he will not have the right to receive notices of, or to
attend or vote at General Meetings or, except as provided above, to
exercise any of the rights or privileges of a Shareholder unless and until
he becomes a Shareholder of the applicable Shares.
14. REGISTRATION OF COMPANY SECURITIES FOR TRADING ON SECURITIES EXCHANGES.
The Board of Directors may authorize Shares or any other duly authorized
Company securities to be registered for trading on securities exchanges in
Israel and/or in other jurisdictions.
15. BORROWING POWERS
The Board of Directors may, from time to time, at its discretion, determine
a framework of credit or a specific sum the Company may raise or borrow or
secure the payment of such credit or sum for Company purposes. The Board
may authorize securing the repayment of such sum in such manner and terms
as it may decide. This may include the issue of debentures or similar
instruments of the Company secured by all or any part of the present and
future property of the Company, including its then existing uncalled Share
Capital.
16. DIVIDENDS AND RESERVES
(a) The Board of Directors may approve dividends to be paid from time to time
to the Shareholders according to the Shareholders' respective rights and
may fix the record date and time for payment. The dividend will be reported
to the next Annual Meeting.
(b) Subject to any preferential or limited rights to receive dividends, all
dividends will be declared and paid according to the amounts paid or
credited as paid on the applicable Shares. All dividends will be
apportioned and paid proportionately to the amounts paid or credited as
paid on the Shares during any portion of the period for which the dividend
is paid. However, a Share may be issued on terms providing that it will
qualify for dividends only from a particular date.
(c) No dividend will be paid other than out of surplus earnings as permitted by
the applicable provisions of the Law relating to capital preservation and
allocation. However, the Company may request a court to allow it to pay
dividends under other terms permitted by the Law.
12
(d) Dividends will be paid to Shareholders recognized by the Company in
accordance with Article 7(c) above, at the time the dividend is declared,
as the Shareholders for the Shares for which the dividend has been
declared.
(e) Notice of the declaration of any dividend, whether interim or otherwise,
will be given to the entitled Shareholders in the manner described in these
Articles for notices to Shareholders.
(f) Unless otherwise directed by the Board of Directors, any dividend may be
paid by check, warrant or bank transfer to the registered address of the
person entitled, or in case of joint Shareholders to the one of them first
named in the Register regarding the joint holding. The receipt of the
person whose name on the date of the dividend declaration appears on the
Register as the owner of any Share, or in the case of joint Shareholders,
of anyone of such joint Shareholders, will be a good discharge to the
Company of all payments made for such Share. All dividends unclaimed for up
to seven (7) years after having been declared may be invested or otherwise
used as directed by the Board for the benefit of the Company until claimed.
After such time the Company will have no obligation to pay the unclaimed
dividend. No unclaimed dividend or interest will bear interest against the
Company.
(g) The Board of Directors may deduct from any dividend payable to any
Shareholder all sums of money, if any, then payable by him to the Company
on account of calls or otherwise in relation to the Company Shares.
17. CAPITALIZATION OF RESERVES
(a) The Board of Directors may, from time to time, direct the setting aside out
of the profits of the Company and the allocation to reserves of such sums
as the Board may decide. All sums allocated to any such reserve will, at
the discretion of the Board, be applicable for:
(1) meeting contingencies;
(2) the liquidation of any debt or liability of the Company;
(3) maintaining any properties of the Company;
(4) meeting losses on realization of, or writing down, investments (either
individually or in the aggregate);
(5) equalizing or paying dividends or bonus Shares; or
(6) any other purpose to which Company profits may be properly applied.
(b) All sums allocated to a reserve may, pending any other applications
authorized by these Articles, be invested together with any other Company
funds in the ordinary course of business and without it being necessary to
distinguish between the investments of the reserves and investments of the
other moneys of the Company or between investments of reserves of different
types.
13
(c) The Board of Directors may direct establishment of a capital reserve
account and apply such account in any manner authorized by these Articles
or by law.
(d) Subject to any legal requirements, the General Meeting may at any time pass
a resolution that any sum be capitalized, provided that it is:
(1) not required for the payment or provision of any fixed preferential
dividend;
(2) not then allocated to any reserve fund or reserve account of the
Company, including premiums received on the issue of any Shares,
debentures or similar Company securities; and
(3) undivided net profit held by the Company.
(e) If a resolution as provided in Article 17(d) above is passed, the
resolution will also provide that such sum be available for distribution
and be appropriated as capital to the Shareholders in the proportion in
which they would have been entitled to receive dividends and in such manner
as the resolution may direct.
(f) In accordance with the specific resolution adopted according to Articles 17
(d) and (e) above, the Board of Directors will apply such sum in paying up
in full any unissued Shares in the Share Capital of the Company on behalf
of the Shareholders. The Board will direct appropriation of such Shares and
then distribution credited as fully paid up proportionally among such
Shareholders in satisfaction of their Shares and interests in the
capitalized sum. Alternatively, the Board will direct application of all or
part of such sum on behalf of such Shareholders in paying up all or part of
any uncalled balance that will then be unpaid regarding any issued Shares
held by such Shareholders, or otherwise deal with such sum as directed by
such resolution. Where difficulty arises in connection with any such
distribution, the Board may resolve the matter as it sees fit.
18. CONVENING OF GENERAL MEETINGS
(a) General Meetings will be held at least once in every calendar year at the
time and place, and with an agenda, as may be determined by the Board of
Directors. Shareholders representing at least one percent (1 %) of the
Company's voting power may request the Chairman of the Board to add
appropriate items to a General Meeting agenda. Each such annual General
Meeting will be called an "Annual Meeting", and any other Shareholders'
meeting will be called an "Extraordinary Meeting".
(b) Each Annual Meeting will take place no later than fifteen (15) months after
the previous Annual Meeting, but no later than the end of the applicable
calendar year. The Board may convene an Extraordinary Meeting whenever it
finds it necessary.
(c) The Board of Directors will convene an Extraordinary Meeting on receipt of
a written request from any of:
(1) two (2) Directors or twenty-five percent (25%) of the total number of,
Directors;
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(2) one (1) or more Shareholders, holding at least five percent (5%) of
the issued Share Capital and at least one percent (1%) of the
Shareholders' voting power; or
(3) one (1) or more Shareholders holding no less then five percent (5%) of
the Company's issued voting Shares.
(d) An Extraordinary Meeting requested under Article 18(c) above will be
convened within fifty-six (56) days of submission of the Board's receipt of
a proper written request to convene an Extraordinary Meeting. If the Board
of Directors fails to convene such meeting within such time, then, the
required Extraordinary Meeting may be convened, in the same manner as for
other Extraordinary Meetings, by any of the Directors and/or by
Shareholders (representing at least one-half of such Shareholders' voting
rights), who requested the convening; provided it is convened no later than
three (3) months after submission of the written request to the Board.
(e) The Board of Directors will establish a record date in accordance with the
requirements of the Law for Shareholders entitled to receive notice of and
vote at a General Meeting.
(f) A written notice of the convening of a General Meeting will be given, as
required by the Law, at least twenty-one (21) days in advance. The notice
will specify the place, date and time of the Meeting as well as other
requirements specified in the Law. The place of the meeting will be in
Israel. The date of any Extraordinary Meeting convened under Article 18(c)
above will be not later than thirty-five (35) days after the date of the
notice.
19. PROCEEDINGS AT GENERAL MEETINGS
(a) No business will be transacted at any General Meeting unless a quorum is
present. The quorum at any General Meeting, except an Extraordinary Meeting
convened in accordance with Article 18(c) above, will be at least two (2)
Shareholders present in person, by Proxy or by a Voting Instrument and
holding or representing between them at least one-third (1/3) of the issued
voting Shares.
(b) If within one-half (1/2) hour from the time appointed for the holding of a
General Meeting a quorum is not present, the meeting will be adjourned to
the same day, time and place in the next week, or to such other day, time
and place as will be determined by the Board of Directors by notice to the
Shareholders. If at such adjourned meeting a quorum is not present within
one-half (1/2) hour from the time appointed for holding the adjourned
meeting, then two (2) Shareholders representing at least ten percent (10%)
of the Shareholders' voting power, present in person, by Proxy or by a
Voting Instrument will be a quorum.
(c) If the General Meeting adjourned is an Extraordinary Meeting convened in
accordance to Article 18(c) above, then no business will be transacted at
such adjourned Extraordinary Meeting unless a quorum is present comprised
of:
(1) one (1) or more Shareholders holding no less then five percent (5%) of
the issued Share Capital and one percent (1%) of the voting power of
the Company; or
15
(2) one or more Shareholders holding no less then five percent (5%) of the
issued voting Shares.
(d) Except as provided in these Articles, the Law and the Securities Law, all
business transacted at a General Meeting will be decided by a resolution
adopted by a simple majority of the votes cast at the General Meeting, not
taking into account abstentions.
(e) The Chairman of the Board of Directors, will preside at any General
Meeting, but if there will be no such Chairman, or if at any General
Meeting he will not be present within fifteen (15) minutes after the time
appointed for holding the meeting, or is unwilling to act as chairman, the
Shareholders present will choose any Director to act as chairman of the
meeting. If no Director is present, or if all the Directors present decline
to take the chair, the Shareholders present will choose a Shareholder
present to be chairman of the meeting.
(f) The Chairman may, with the consent of any General Meeting at which a quorum
is present, (and will if so directed by the meeting) adjourn the meeting
from time to time and from place to place. Whenever a General Meeting is
adjourned for twenty-one (21) days or more, notice of the adjourned General
Meeting will be given in the same manner as for the original General
Meeting. No Shareholder will have the right to any other notice of an
adjournment or of the business to be transacted at any adjourned General
Meeting other than the business which might have been transacted at the
original General Meeting which was adjourned.
20. VOTING AT GENERAL MEETINGS; VOTING INSTRUMENTS
(a) Subject to the applicable record date and any rights or restrictions then
existing for a particular class of Shares, each Shareholder will have the
right to vote who is present at a General Meeting either personally, by a
Voting Instrument in such cases as required or permitted under the Law for
voting by Voting Instrument, or by Proxy. A Shareholder may vote in respect
of only part of his Shares, and he may vote in different ways in respect to
portions of his Shares.
(b) The vote may be by show of hands, by secret ballot, by Voting Instrument or
by any other manner authorized by the Board of Directors consistent with
the Law. A Shareholder will have one (1) vote for each Share held by him.
However, unless otherwise determined by the Board, no Shareholder will be
permitted to vote at a General Meeting or to appoint a Proxy to so vote
unless he has paid all calls for payment and all moneys due to the Company
from him with respect to his Shares.
(c) A Proxy present at a General Meeting will have the same rights as a
Shareholder with respect to voting at a General Meeting. A Proxy need not
to be a Shareholder.
(d) The vote of the senior of any joint Shareholders, whether in person, by
Voting Instrument or by Proxy, will be accepted to the exclusion of the
votes of other joint Shareholders. For the purpose of these Articles,
seniority will be determined by the order in which the names appear in the
Register.
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(e) An objection to a Shareholder's or a Proxy's right to vote in a General
Meeting must be raised at the applicable meeting or adjourned meeting where
that person was supposed to vote. The chairman of the meeting will decide
whether to accept or reject any objection raised at the proper time
regarding the vote of a Shareholder or Proxy, and the chairman's decision
will be final. Every vote not disqualified as provided above will be valid
for all matters at the General Meeting.
(f) A Shareholder that is a corporation or other form of legal entity will have
the right to appoint a person to be its representative at any General
Meeting. Such appointment. must be authorized in writing by the Board of
Directors, president or general manager or similar body of such entity. The
representative so appointed will have the right to exercise on behalf of
the entity he represents all the powers that the entity itself might
perform in connection with the General Meeting.
(g) A Shareholder who has been declared legally incompetent or has otherwise
had a legally appointed guardian, may, following a proof of appointment of
a legal guardian or similar representative, vote at a General Meeting
through such guardian or representative, whether in person, by Voting
Instrument or by Proxy.
(h) A vote by Proxy or a Voting Instrument will be considered valid even if
there has been the death or declaration of incompetence of the
appointee/signatory or the cancellation of the Proxy appointment or Voting
Instrument or expiration of a Proxy appointment or Voting Instrument in
accordance with any law, or the transfer of the Shares for which the Proxy
appointment or Voting Instrument was given, unless the Company receives at
the Registered Office, prior to a General Meeting, a written notice as
specified below. For a Voting Instrument or Proxy appointment that has been
provided to the Company for a specific General Meeting to be considered
invalid, a written notice of cancellation of a Voting Instrument or Proxy
appointment must be duly signed by the applicable Shareholder specifying
the applicable Shares, the name of the Shareholder, legal representative or
successor in interest and nature of the event invalidating the Proxy
appointment or Voting Instrument. In the event of voting by a secret ballot
or by Voting Instrument, a notice canceling the appointment of a Proxy will
be valid it if is signed by the appointee/signatory and received at the
Registered Office no later than one (1) hour before beginning the vote.
(i) A Shareholder will have the right, where permitted or required by
provisions of the Law relating to Voting Instruments, to vote by a Voting
Instrument as an alternative to voting in person or by Proxy. In all
applicable cases, the Voting Instrument will be sent to Shareholders before
the applicable General Meeting no later then the time required in the Law.
(j) A Shareholder has the right to vote by a separate Proxy with respect to
each Share held by him, provided that each Proxy will have a separate
letter of appointment containing the serial number of the Shares for which
the Proxy is entitled to vote. If a specific Share is included in more than
one (1) letter of appointment, then no Proxy will have the right to vote
such Share.
(k) An instrument appointing a Proxy which is not limited in time will expire
twelve (12) months after the date of its execution. If the appointment is
for a limited period, even if more than twelve (12) months, the instrument
will be considered valid for the period specified in the instrument.
17
(l) A Voting Instrument, letter of appointment of a Proxy, power of
attorney or other instrument relating to voting at a General Meeting
must be in writing. The form of the Voting Instrument or the form of
appointing a Proxy will be in any appropriate form as may be
determined by the Board of Directors. The signature of the appointor
or voting Shareholder will be confirmed by a lawyer, notary, bank or
in any other manner acceptable to the Board. The original or a copy of
such confirmed instrument will be delivered to the Registered Office,
or at such other place in Israel or abroad as the Board may direct
from time to time, at least twenty-four (24) hours before the time
appointed for the applicable original or adjourned General Meeting.
Otherwise, that person will not be entitled to vote that Share through
the instrument.
21. PROXY STATEMENTS
(a) Subject to the applicable provisions of the Law, the Board of Directors,
and in the case of a General Meeting in accordance with Article 18(c) above
those Directors and Shareholders entitled to convene such meeting, may
solicit the Shareholders by a written Proxy Statement in order to persuade
the Shareholders regarding their vote in a General Meeting. The Proxy
Statement will be distributed by the Company, at its own expense together,
with the Voting Instrument, if any, relating to that General Meeting.
(b) The persons authorized to distribute Proxy Statements under Article 21(a)
above may send additional Proxy Statements, similarly distributed, in
response to any other solicitations forwarded to the Shareholders in
connection with a General Meeting.
22. ROLE AND COMPOSITION OF THE BOARD OF DIRECTORS
(a) The Board of Directors will determine the policies of the Company and
oversee the performance of the duties of the President. The duties of the
Board will include, among others, any mandatory Board responsibilities
specified in the Law or the Securities Law. The Board will have all
residual powers not granted under these Articles or by law to any other
Company body.
(b) The General Meeting may assume powers granted under these Articles or by
law to the Board of Directors. However, any decision to assume such powers
must specify the matters and time period for which such powers are assumed.
(c) The number of Directors may be determined from time to time at a General
Meeting. The number of Directors comprising the Board will be at least five
(5) and not more than seventeen (17). Until otherwise determined by the
Board or at a General Meeting, the number of Directors will be ten (10).
The Board will include at least two (2) External Directors in accordance
with the requirements of the Law. A Director need not to be a Shareholder.
The President may serve as a Director in accordance with Article 27(c)
below.
18
(d) The compensation to the Directors will be approved at a General Meeting.
The Directors will be entitled to be reimbursed for reasonable expenses
incurred by them in carrying out Company business.
(e) No Director, other than an External Director, will be disqualified due to
holding any office in the Company or any affiliated entity of the Company
other than the office of Internal Auditor or Independent Certified
Accountant. A Director may also contract with the Company or an affiliated
entity of the Company either as vendor, purchaser or otherwise, whether on
his own behalf or as a director or representative of another entity. No
such holding of office by a Director or such contract entered into by or on
behalf of the Company in which a Director will be in any way interested
will be voided, nor will any Director be liable to account to the Company
for any profit arising from any such office, or contract by reason only of
such Director holding that office or of the fiduciary relations so
established.
(f) A Director, other than an External Director, need not be a resident of the
State of Israel.
23. ELECTION, APPOINTMENT AND REMOVAL OF DIRECTORS
(a) Directors will be elected annually by the Shareholders at the Annual
Meeting. Directors will hold office until the conclusion of the next Annual
Meeting or until their earlier removal or resignation. However, if no
Directors are elected at an Annual Meeting, then the persons who served as
Directors immediately prior to the Annual Meeting will continue to serve as
Directors unless otherwise determined by the Annual Meeting or by the
Board. Except as provided in Article 24 below regarding External Directors,
Directors will be eligible for re-election.
(b) A person nominated by the Board of Directors may be elected at the Annual
Meeting or a General Meeting to the office of Director. However, a
Shareholder entitled to vote at that Annual Meeting or General Meeting may
nominate a candidate for Director by submitting a written notice to the
Company at the Registered Office, no later than seven (7) days after the
date notice is given of the meeting, signed by the Shareholder of his
intention to propose at that meeting a candidate for Director to which is
attached the written consent and resume of such nominee.
(c) The Chairman of the Board of Directors will be appointed by a General
Meeting from the Directors who continue to hold office as Directors by the
conclusion of such General Meeting or from the Directors elected to their
office in such General Meeting. Such Director will serve as Chairman of the
Board of Directors until he ceases to hold the office of Director or until
he is replaced by the General Meeting.
(d) The Board of Directors will have the power to appoint additional Directors
if the current number of Directors is less than ten (10) or other maximum
number approved at a General Meeting or by the Board. Any Director so
appointed will hold office until the conclusion of the next Annual Meeting,
unless he is removed or resigns earlier. A Director will state the reasons
for his resignation.
(e) If the number of Directors is reduced below ten (10) or any other number
that may be determined by a General Meeting, and until additional Directors
are elected or appointed
19
so that the number of Directors is ten (10) or such other number so
determined by the General Meeting, the Board may continue to act. In such
case, the majority required for any act of the Board of Directors, except
for the calling of a General Meeting, will be at least seventy-five (75%)
of the number of Directors before the reduction.
(f) Subject to the terms of any applicable agreement, a Director will be
removed if he:
(1) becomes bankrupt or enters into similar status;
(2) becomes deceased or is declared legally incompetent;
(3) resigns his office by notice in writing given to the Company; or
(4) is removed by a resolution of a General Meeting.
(g) A Director may appoint a substitute director in his place. A substitute
Director must be qualified under the Law to serve as a substitute Director,
and if his appointment is for more than one meeting it will be subject to
the approval of the Board. Such person may not act as a substitute Director
for more than one (1) Director at the same time. The same rules, including
compensation, will apply to a substitute Director as to the Director who
appointed him, and the substitute Director may participate in Board and
Board committee meetings in the same manner as the Director who appointed
him. Subject to the Law, a Director who has appointed a substitute Director
may revoke the appointment at any time. In addition, the office of a
substitute Director will be vacated at any time that the office of the
Director who appointed the substitute is vacated for any reason. Any
appointment or revocation of the appointment of a substitute Director will
be made by notice in writing to the substitute Director and the Company.
The appointment or revocation, as the case may be, will become effective on
the later of the date of receipt of the above notice or the date fixed in
the notice.
24. EXTERNAL DIRECTORS
(a) The Board of Directors will include at least two (2) External Directors
complying with the qualifications described in the Law.
(b) An External Directors will be appointed by a majority vote at a General
Meeting, provided that:
(1) The majority vote at the General Meeting will include at least
one-third (1/3) of the total number of the votes of the
non-controlling Shareholders voting at the meeting. For the purposes
of this Article, abstentions will not be taken into consideration in
counting the total number of the non-controlling Shareholders; and
(2) The total number of non-controlling Shareholders voting against the
resolution appointing an External Director, is not more than one
percent (1%) of the overall voting rights in the Company.
(c) The compensation and indemnification of expenses of External Directors will
be in accordance with the applicable provisions of the Law.
20
(d) An External Director will be appointed for a period of three (3) years and
his office may be extended by a resolution of the General Meeting for an
additional three (3) years. An External Director may be removed from his
office only in accordance with the applicable provisions of the Law.
25. BOARD OF DIRECTORS MEETINGS
(a) The Board of Directors may meet, adjourn and otherwise regulate its
meetings as it sees fit. However, the Board will meet at least once every
three (3) months. Unless otherwise determined by the Board, the quorum for
a Board meeting will be not less than two-thirds (2/3) of the then number
of Directors.
(b) Except as provided below, questions arising at any Directors' meeting will
be decided by a majority of votes cast at the meeting. In cases of an
equality of votes the Chairman will not have a second or casting vote. Any
resolution regarding the following issues will require a special majority
of seven (7) Directors, and unless seven (7) Directors vote in favor of
such resolution, the resolution will be considered rejected:
(1) the number of Directors and their appointment;
(2) amendment of these Articles;
(3) declaration of dividends;
(4) allotment of Shares;
(5) voluntary liquidation;
(6) reorganization of the Company;
(7) the purchase and sale of material Company assets;
(8) entering into a new line of business; or
(9) appointment of the Company's Internal Auditor or Independent Public
Accountants.
(c) Each Director will receive reasonable prior notice of a Board meeting. Such
notice may be given by any means of communication as determined by the
Secretary, including, among others, telephone or e-mail. Such notice will
include the time and location of the meeting and a reasonable description
of the meeting's agenda.
(d) At the request of a Director, the Secretary will at any time summon a
meeting of the Board. Reasonable advance notice of the time, place and
agenda of each Board meeting will be given to each Director. The Directors
may waive such notice requirement.
(e) Directors may participate in a Board meeting or a Board committee meeting
by means of a telephone conference or other communications media, provided
that all participating
21
Directors can hear each other simultaneously. Participation by such means
will be considered as presence in person at a meeting.
(f) All acts done bona fide by any meeting of the Board or of a committee of
the Board or by any person acting as a Director will be valid, even if it
is later discovered that there was some defect in the appointment of any
Director, or that any Director was disqualified.
(g) The Board of Directors will cause proper minutes to be made of all General
Meetings and of the proceedings of all meetings of Board of Directors and
Board committee meetings. Such minutes purporting to be signed by the
chairman of such meeting, or by the chairman of the next succeeding
meeting, will be considered conclusive evidence of the facts stated in the
minutes.
26. COMMITTEES OF THE BOARD OF DIRECTORS
(a) Subject to the applicable provisions of the Law regarding matters that the
Board may not delegate to a committee, the Board of Directors may delegate
any of its powers to committees consisting of at least three (3) Directors,
including at least one (1) External Director. Any committee so formed will
in the exercise of its powers conform to any directions given to it by the
Board.
(b) A Board committee may elect a chairman. If no such chairman is elected, or
if at any meeting the chairman is not present within fifteen (15) minutes
after the time appointed for holding the meeting, the committee members
present may choose a committee member to be chairman of the meeting. Unless
otherwise specifically directed by the Board of Directors, the meetings and
proceedings of any committee will be governed as applicable by the
provisions in these Articles for regulating the meetings and proceedings of
the Board.
(c) A committee may meet and adjourn as its members may determine. Questions
arising at any meeting will be determined by a majority of votes of the
members present. In case of an equality of votes, the chairman of a
committee will not have a second or casting vote.
(d) The Board of Directors will appoint an Audit Committee composed of at least
three (3) Directors qualified under the Law and under all other applicable
laws, regulations and rules to serve on the Audit Committee including all
External Directors. The Audit Committee will act under a charter issued by
the Board and according to the requirements of the Law and all other
applicable laws, regulations and rules.
(e) A resolution in writing signed by the Secretary will serve as evidence of a
resolution passed at a duly convened meeting of the Board of Directors.
27. PRESIDENT
(a) Subject to these Articles and the Law, the Board of Directors will from
time to time appoint a President for such period, on such terms and with
such powers as the Board
22
may determine. The appointment of a President is subject to the approval of
a General Meeting. The compensation of the President may be by salary or
any other consideration as determined by the Board and approved by a
General Meeting.
(b) A President will be subject to the provisions of any contract between him
and the Company, the terms of which will be approved by the Board of
Directors and by the General Meeting, as required by the Law.
(c) The President may hold, while he is President, the office of a Director, if
he is elected or appointed in accordance with the provisions of these
Articles. If so elected the President is subject to the same provisions as
resignation and removal as the other Directors. In regard to his position
as President, the President will be appointed as provided in Article 27(a)
above and may be removed by the Board of Directors. If he ceases to hold
the office of President for any reason and at that time he serves as a
Director, he will immediately cease to be a Director. In any case, if the
President does not serve as a Director, he will be entitled to participate
in any Board meeting.
(d) Subject to the supervision of the Board of Directors, the President may
exercise all powers of the Company and do on behalf of the Company all acts
as may be exercised and done by the Company and that are not by the Law or
by these Articles required to be exercised or done by other Company bodies.
No resolution made by a General Meeting will invalidate any prior act of
the President that would have been valid if such resolution had not been
made.
(e) Subject to applicable law and the specific or general approval of the
Board, the President may delegate any of his powers to another person.
(f) The General Meeting and/or the Board of Directors may assume powers granted
under these Articles or by law to the President, provided that such
decision to assume power specifies the matters and time period for which
such powers are assumed.
28. SECRETARY
The Board of Directors may appoint a Secretary of the Company on any terms
the Board may determine. The Board may also from time to time appoint an
acting Secretary, who will be considered as the Secretary during the term
of his appointment.
29. SIGNATURE AUTHORITY
The Company's signature authority will be in accordance with a signature
authority procedure approved by the Board of Directors. The Board may also,
from time to time, appoint any individual to sign on behalf of the Company
for a particular matter. All checks, bank transfers, negotiable instruments
and similar documents will be signed in accordance with the Company's
signature authority procedure.
23
30. ACCOUNTS
(a) The Board of Directors will cause the Company's books of accounts to be
kept in accordance with legal requirements. The books of account will be
kept at the Registered Office and will be open to the inspection of the
Board of Directors and, as required by the Law, of the Shareholders.
(b) The Company will issue financial statements as required by the Law, the
Securities Law and other applicable laws. The issued financial statements
will be available for inspection by the Board of Directors and Shareholders
at the Registered Office during regular office hours.
31. INDEPENDENT CERTIFIED ACCOUNTANTS
(a) The Company will appoint Independent Certified Accountants at a General
Meeting. The Independent Certified Accountants will hold office until the
end of the next Annual Meeting. However, the Shareholders at a General
Meeting may remove the Independent Certified Accountants or extend the term
of appointment for up to three (3) years.
(b) The fee of the Independent Certified Accountants will be set and approved
by the Board of Directors and reported to the next Annual Meeting.
32. INTERNAL AUDITOR
(a) The Board of Directors, subject to the recommendation of the Audit
Committee, will appoint an Internal Auditor for the Company. Within the
organizational structure of the Company the Internal Auditor will report to
the President. The Internal Auditor may only be removed or replaced in
accordance with the applicable provisions of the Law.
(b) The Internal Auditor will submit a yearly audit plan for the approval of
the Audit Committee. The Internal Auditor will also submit a yearly account
of his findings to the chairman of the Board of Directors, the President
and the chairman of the Audit Committee.
33. NOTICES
(a) A notice to a Shareholder may be served as a general notice to all
Shareholders, by publication in a daily Hebrew newspaper appearing in
Israel. The date of such newspaper publication will be considered as the
date of service on all the Shareholders. The Board of Directors may also
decide that notice be served on each Shareholder individually to his
registered address by hand, by mail or by any other form of media or
transmission permitted by law, to the registered address of each
Shareholder, provided that such delivery and date thereof can be reasonably
verified and recorded. A notice served on a Shareholder by mail will be
considered as duly served the day after it was placed in the mail.
24
(b) A notice to joint Shareholders may be given by the Company only to the
Shareholder named first in the Register for the applicable Shares.
(c) The Board of Directors may authorize other methods of notice to
Shareholders that are consistent with the Law.
(d) Notices of General Meetings will contain the information required by the
Law.
34. INSURANCE AND INDEMNITY
(a) Subject to the provisions of the Law, the Company may exempt in advance or
retroactively, any Director or Company officer from any liability to the
Company attributed to damage or loss caused by breach of the Director's or
officer's duty of care owed to the Company.
(b) Subject to the provisions of the Law, the Company may procure Directors'
and officers' liability insurance for the following:
(1) breach of duty of care by any Director or officer owed to the Company
or any other person;
(2) breach of fiduciary duty by any Director or officer owed to the
Company, provided that such Director or officer acted in good faith
and had a reasonable basis to assume that the action would not harm
the interests of the Company; or
(3) any other event for which insurance of a director or officer is or may
be permitted.
(c) Subject to the provisions of the Law, the Company may undertake in advance
or retroactively to indemnify a Director or Company officer in respect of a
liability or expense as detailed in Article 34(d) below, imposed on him as
a result of an act carried out in his capacity as a Director or Company
officer. However, such undertaking will be limited to the kinds of events
that in the Board's opinion are foreseeable at the time of the issue of the
undertaking and will be limited to the amount fixed by the Board as
reasonable under the circumstances.
(d) An indemnity, as provided in Article 34(c) above, may be issued in respect
of a liability or expense as follows:
(1) a monetary liability imposed on the Director of officer in favor of a
third party under a judgment, including a judgment by way of
compromise or a judgment of an arbitrator approved by a court;
(2) reasonable expenses of the proceedings, including lawyers fees,
expended by the Director or officer or imposed on him by the court
for:
(a) proceedings issued against him by or on behalf of the Company or
by a third party;
(b) criminal proceedings from which the Director or officer was
acquitted; or
25
(c) criminal proceedings in which he was convicted but that do not
require proof of criminal intent; or
(3) any other liability or expense for which it is or may be permissible
to indemnify a director or an officer.
(e) Subject to the provisions of the Law, the Company may issue an undertaking
in advance or retroactively to indemnity any person, including a Director
or a Company officer, who acts or acted on behalf of or at the request of
the Company as a director or officer of another company in which the
Company, directly or indirectly, is a shareholder, or in which the Company
has any other interest. Such indemnity will be in respect of a liability or
expense as detailed in Article 34(d) above, imposed on him as a result of
an act carried out by him in his capacity as a director or officer of the
other company. However, such undertaking will be limited to the kinds of
events that in the Board's opinion are foreseeable at the time of the issue
of the undertaking and will be limited to the amount fixed by the Board as
reasonable under the circumstances.
(f) Subject to the provisions of the Law:
(1) The Company may indemnify any employee or representative of the
Company, who is not a Director or a Company officer, for any liability
or expense paid or imposed on him in his capacity as a Company
employee or representative in any legal proceedings, due to an act
carried out by him in good faith in his capacity as Company employee
or representative. However, such indemnity may not be given for a
criminal indictment in which he was convicted in an offense that
requires proof of criminal intent and the convicting judgment was not
reversed on appeal or cannot be issued for an appeal.
(2) The Company may issue an undertaking in advance to indemnify a Company
employee or representative, who is not a Director or Company officer,
or to indemnify him retroactively for any monetary liability imposed
or that may be imposed on him in favor of any third party in respect
of an act carried out by him in good faith in his capacity as a
Company employee or representative.
(g) Subject to the provisions of the Law, nothing in these Articles will limit
the Company, in any manner, in entering into an agreement of liability
insurance, or in granting an exemption or indemnification in respect of:
(1) a Director or Company officer, or a director or officer of another
company as provided in Article 34(e) above, to the extent that the
insurance, exemption or indemnity is not prohibited by law; or
(2) any person who is not a Director or Company officer, or a director of
another company as provided in Article 34(e) above, including but not
limited to employees and representatives of the Company or such other
company.
(h) Notwithstanding the above, any indemnification granted by the Company under
this Article 34 shall not exceed twenty-five percent (25%) of the
26
consolidated equity of the Company as reflected in its last consolidated
Annual Financial Statements published prior to the payment of such
indemnification.
35. RECONSTRUCTION AND WINDING-UP
(a) If the Company will be wound up voluntarily the liquidators may, with the
approval of a Special Majority of the Shareholders voting at a General
Meeting, divide among the Shareholders any part of the Company's assets.
Such approval may also vest any part of the Company's assets to trustees
under trusts for the benefit of the Shareholders as the liquidators may
determine.
(b) On any sale of the Company or its assets through a liquidation or
winding-up, a Special Majority of the Shareholders voting at a General
Meeting may authorize the Board of Directors or liquidators to:
(1) accept fully or partly paid up Shares, debentures, or other Company
securities, whether registered in Israel or other jurisdictions,
whether existing or contingent, for the purchase in whole or in part
of Company property and, if the profits of the Company permit,
distribute such Shares, securities or any other Company property among
the Shareholders without requiring their realization, or vest the same
in trustees for them; and/or
(2) distribute or appropriate the Company's cash, Shares, other
securities, benefits or property for the valuation of any such
securities or property as so approved at the General Meeting. In such
case, all Shareholders will be bound to accept any valuation on
distribution so authorized, and will waive all rights in relation to
such valuation, except where otherwise required by law.
36. AMENDMENTS TO ARTICLES
These Articles may be amended, in whole or in part, by a Special Majority
of the Shareholders voting at a General Meeting.
27
EXHIBIT 8.1
PRINCIPAL OPERATING SUBSIDIARIES OF ELBIT SYSTEMS LTD.
See Item 4. Information the Company - Organizational Structure
Exhibit 10.1
Haifa, Israel, June 14, 2004
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the registration
statement of Elbit Systems Ltd. on Form S-8 (File No. 333-9354) of our report
dated March 9, 2004, on our audit of the consolidated financial statements and
financial statement schedule of Elbit Systems Ltd. and subsidiaries as of
December 31, 2003, and for the year then ended, which are included in the Elbit
Systems Ltd. Annual Report on Form 20-F for the year ended December 31, 2003.
/s/ Kost Forer Gabbay & Kasierer
-------------------------------
Kost Forer Gabbay & Kasierer
A member of Ernst & Young Global
Exhibit 31.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Joseph Ackerman, certify that:
1. I have reviewed this annual report on Form 20-F of Elbit Systems
Ltd.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting.
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: June 14, 2004
/s/ Joseph Ackerman
-------------------
Joseph Ackerman
President, Chief Executive Officer and
Director
Exhibit 31.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Joseph Gaspar, certify that:
1. I have reviewed this annual report on Form 20-F of Elbit Systems
Ltd.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting.
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: June 14, 2004
/s/ Joseph Gaspar
------------------
Joseph Gaspar
Corporate Vice President and Chief Financial
Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 20-F of Elbit Systems Ltd.
(the "Company") for the year ended December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Joseph Ackerman, Chief Executive Officer of the Company, certifies,
pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of operations
of the Company.
Date: June 14, 2004
/s/ Joseph Ackerman
-------------------
Joseph Ackerman
Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 20-F of Elbit Systems Ltd.
(the "Company") for the year ended December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Joseph Gaspar, Chief Financial Officer of the Company, certifies,
pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of operations
of the Company.
Date: June 14, 2004
/s/ Joseph Gaspar
-----------------
Joseph Gaspar
Chief Financial Officer
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