EX-3 4 v09011_ex3.txt EXHIBIT 3 ECI TELECOM LTD. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AS OF SEPTEMBER 30, 2004 ECI Telecom Ltd. CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2004 -------------------------------------------------------------------------------- CONTENTS PAGE Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Comprehensive Income (Loss) 5 Consolidated Statements of Changes in Shareholders' Equity 6 Consolidated Statements of Cash Flows 9 Condensed Notes to the Interim Consolidated Financial Statements 12 CONSOLIDATED BALANCE SHEETS AS OF --------------------------------------------------------------------------------
SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31 2004 2003 2003 -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (AUDITED) -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents 60,126 173,307 145,375 Short-term investments 27,094 41,270 44,945 Receivables: Trade 142,062 158,882 166,739 Other 18,180 26,174 17,097 Prepaid expenses 6,448 4,370 5,711 Work in progress 5,777 15,009 10,498 Inventories 175,969 122,152 122,993 Assets - discontinued operations - - 2,315 -------- -------- -------- TOTAL CURRENT ASSETS 435,656 541,164 515,673 -------- -------- -------- LONG-TERM RECEIVABLES AND RELATED DEPOSITS, NET 97,165 116,454 106,645 -------- -------- -------- LONG-TERM DEPOSIT AND MARKETABLE SECURITIES 123,437 35,220 65,803 -------- -------- -------- INVESTMENTS 26,746 *31,604 28,916 -------- -------- -------- PROPERTY, PLANT AND EQUIPMENT Cost 258,982 285,328 281,491 Less - Accumulated depreciation 140,634 157,007 158,239 -------- -------- -------- 118,348 128,321 123,252 -------- -------- -------- SOFTWARE DEVELOPMENT COSTS, NET 15,880 17,158 16,289 -------- -------- -------- GOODWILL AND OTHER INTANGIBLE ASSETS, NET 1,092 13,257 12,186 -------- -------- -------- OTHER ASSETS 9,006 6,953 8,801 -------- -------- -------- TOTAL ASSETS 827,330 890,131 877,565 ======== ======== ======== /s/ Doron Inbar President, Chief Executive Officer --------------------------- Doron Inbar /s/ Giora Bitan Executive Vice President, --------------------------- Chief Financial Officer Giora Bitan November 10, 2004
ECI Telecom Ltd. --------------------------------------------------------------------------------
SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31 2004 2003 2003 -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (AUDITED) -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term loans and current maturities of long-term debts 30,101 22,500 30,000 Trade payables 81,495 46,492 56,685 Other payables and accrued liabilities 125,267 120,747 118,026 Liabilities - discontinued operations - - 735 -------- -------- -------- TOTAL CURRENT LIABILITIES 236,863 189,739 205,446 -------- -------- -------- LONG-TERM LIABILITIES Banks loans 7,500 37,500 30,000 Other liabilities 2,505 6,125 6,015 Liability for employee severance benefits, net 25,749 27,846 26,600 -------- -------- -------- TOTAL LONG-TERM LIABILITIES 35,754 71,471 62,615 -------- -------- -------- TOTAL LIABILITIES 272,617 261,210 268,061 -------- -------- -------- MINORITY INTEREST 4,116 44,111 39,999 -------- -------- -------- SHAREHOLDERS' EQUITY Ordinary shares NIS 0.12 par value per share, Authorized 200,000,000 shares; Issued and outstanding 107,955,370 shares as at September 30, 2003, 108,038,063 as at December 31, 2003 and 108,891,658 as at September 30, 2004 6,186 6,160 6,163 Capital surplus 641,201 661,508 662,903 Accumulated other comprehensive loss (3,885) (2,280) (5,393) Accumulated deficit (92,905) * (80,578) (94,168) -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY 550,597 584,810 569,505 -------- -------- -------- -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 827,330 890,131 877,565 ======== ======== ========
* Restated - see Note 2(D). The accompanying notes are an integral part of these interim financial statements. ECI Telecom Ltd. CONSOLIDATED STATEMENTS OF OPERATIONS --------------------------------------------------------------------------------
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED --------------------------------- -------------------------------- -------------- SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31 2004 (*)2003 2004 (*)2003 (*)2003 -------------- -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) -------------- -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- -------------- Revenues 357,028 289,508 128,476 94,529 392,567 Cost of revenues 215,902 176,977 77,249 56,751 239,298 -------- -------- -------- -------- -------- GROSS PROFIT 141,126 112,531 51,227 37,778 153,269 Research and development costs, net 47,701 47,186 15,593 16,313 62,041 Selling and marketing expenses 56,919 54,623 19,525 18,671 73,643 General and administrative expenses 25,815 31,947 8,979 8,106 38,956 Amortization of acquisition - related intangible assets - 1,503 - 270 1,773 Impairment of assets 696 667 696 - 667 Restructuring expenses 2,585 6,532 - 2,091 8,394 -------- -------- -------- -------- -------- OPERATING INCOME (LOSS) 7,410 (29,927) 6,434 (7,673) (32,205) Financial expenses (4,802) (6,155) (1,017) (1,066) (8,534) Financial income 6,314 5,325 1,742 1,704 7,791 Other income (expenses), net 1,037 (4,874) 1,350 119 (5,376) -------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES ON INCOME 9,959 (35,631) 8,509 (6,916) (38,324) Taxes on income (1,333) (1,394) (480) (391) (2,141) -------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS AFTER TAXES ON INCOME 8,626 (37,025) 8,029 (7,307) (40,465) Company's equity in results of investee companies, net (3,125) (1,627) (1,720) (280) (4,334) Minority interest in results of subsidiaries - net (335) 710 (293) (349) 76 -------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS 5,166 (37,942) 6,016 (7,936) (44,723) Loss from discontinued operation, net (3,903) (19,508) - (6,716) (26,317) -------- -------- -------- -------- -------- INCOME (LOSS) FOR THE PERIOD 1,263 (57,450) 6,016 (14,652) (71,040) ======== ======== ======== ======== ======== EARNINGS (LOSS) PER SHARE IN US$ Basic earnings (loss) per share: Continuing operations 0.05 (0.35) 0.06 (0.07) (0.41) Discontinued operations (0.04) (0.18) - (0.06) (0.24) -------- -------- -------- -------- -------- Net earnings (loss) per share 0.01 (0.53) 0.06 (0.14) (0.66) ======== ======== ======== ======== ======== Weighted average number of shares outstanding used to compute basic earnings (loss) per share - in thousands 108,387 107,775 108,671 107,943 107,831 ======== ======== ======== ======== ======== Diluted earnings (loss) per share: Continuing operation 0.04 (0.35) 0.05 (0.07) (0.41) Discontinuing operations (0.03) (0.18) - (0.06) (0.24) -------- -------- -------- -------- -------- Net earnings (loss) per share 0.01 (0.53) 0.05 (0.14) (0.66) ======== ======== ======== ======== ======== Weighted average number of shares outstanding used to compute diluted earnings (loss) per share - in thousands 116,305 107,775 116,463 107,943 107,831 ======== ======== ======== ======== ========
(*) Reclassified as a result of discontinued operation - see Note 7. The accompanying notes are an integral part of these interim financial statements. ECI Telecom Ltd. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) --------------------------------------------------------------------------------
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED --------------------------------- -------------------------------- -------------- SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31 2004 2003 2004 2003 2003 -------------- -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) -------------- -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- -------------- Net income (loss) for the period 1,263 (57,450) 6,016 (14,652) (71,040) Other comprehensive income (loss): Changes in the fair value of financial instruments 4,784 (448) (1,203) (2,104) (4,843) Realization of gain on available for sale securities (1,282) - - - - Unrealized holding gain (loss) on available for sale securities arising during the period, net (1,994) - (1,994) - 1,282 -------- -------- -------- -------- -------- Total other comprehensive income (loss) 1,508 (448) (3,197) (2,104) (3,561) -------- -------- -------- -------- -------- COMPREHENSIVE INCOME (LOSS) 2,771 (57,898) 2,819 (16,756) (74,601) ======== ======== ======== ======== ========
The accompanying notes are an integral part of these interim financial statements. ECI Telecom Ltd. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY --------------------------------------------------------------------------------
ACCUMULATED NUMBER OTHER TOTAL OF SHARE CAPITAL COMPREHENSIVE ACCUMULATED SHAREHOLDERS' SHARES CAPITAL SURPLUS INCOME (LOSS) DEFICIT EQUITY ----------- ------- -------- ------------- ----------- ------------- $ IN THOUSANDS EXCEPT SHARE AMOUNTS ------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 2004 (AUDITED) 108,038,063 6,163 662,903 (5,393) (94,168) 569,505 Unaudited Net income for the nine months ended September 30, 2004 - - - - 1,263 1,263 Employee stock options exercised and paid, net 853,595 23 1,512 - - 1,535 Amortization of deferred compensation expenses - - 1,562 - - 1,562 Net unrealized loss on available for sale - - - (1,994) - (1,994) securities Realization of gain on available for sale - - - (1,282) - (1,282) securities Changes in the fair value of financial instruments - - - 4,784 - 4,784 Distribution of shares in a subsidiary as dividend in kind (see Note 5(A)) - - (24,776) - - (24,776) ----------- -------- -------- -------- -------- --------- BALANCE AT SEPTEMBER 30, 2004 (UNAUDITED) 108,891,658 6,186 641,201 (3,885) (92,905) 550,597 =========== ======== ======== ======== ======== ========= Balance at January 1, 2003 (audited) 107,512,612 6,152 658,425 (1,832) *(23,128) 639,617 Unaudited Net loss for the nine months ended September 30, 2003 - - - - (57,450) (57,450) Shares issuance to employees 424,633 8 647 - - 655 Employee stock options exercised and paid, net 18,125 - 57 - - 57 Amortization of deferred compensation expenses - - 2,379 - - 2,379 Changes in the fair value of financial instruments - - - (448) - (448) ----------- -------- -------- -------- -------- --------- Balance at September 30 2003 (unaudited) 107,955,370 6,160 661,508 (2,280) (80,578) 584,810 =========== ======== ======== ======== ======== =========
* Restated - see Note 2(D). ECI Telecom Ltd. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT'D) --------------------------------------------------------------------------------
ACCUMULATED NUMBER OTHER TOTAL OF SHARE CAPITAL COMPREHENSIVE ACCUMULATED SHAREHOLDERS' SHARES CAPITAL SURPLUS INCOME (LOSS) DEFICIT EQUITY ----------- ------- -------- ------------- ----------- ------------- $ IN THOUSANDS EXCEPT SHARE AMOUNTS ------------------------------------------------------------------------------------------- BALANCE AT JULY 1, 2004 (UNAUDITED) 108,445,005 6,174 640,217 (688) (98,921) 546,782 Unaudited Net income for the three months ended September 30, 2004 - - - - 6,016 6,016 Employee stock options exercised and paid, net 446,653 12 842 - - 854 Amortization of deferred compensation expenses - - 142 - - 142 Net unrealized loss on available for sale - - - (1,994) - (1,994) securities Changes in the fair value of financial instruments - - - (1,203) - (1,203) ----------- -------- -------- -------- -------- --------- BALANCE AT SEPTEMBER SEPTEMBER 30, 2004 108,891,658 6,186 641,201 (3,885) (92,905) 550,597 =========== ======== ======== ======== ======== ========= Balance at July 1, 2003 (unaudited) 107,937,245 6,160 660,261 (176) *(65,926) 600,319 Unaudited Net loss for the three months ended September 30, 2003 - - - - (14,652) (14,652) Employee stock options exercised and paid, net 18,125 - 57 - - 57 Amortization of deferred compensation expenses - - 1,190 - - 1,190 Changes in the fair value of financial instruments - - - (2,104) - (2,104) ----------- -------- -------- -------- -------- --------- Balance at September 30, 2003 (unaudited) 107,955,370 6,160 661,508 (2,280) (80,578) 584,810 =========== ======== ======== ======== ======== =========
* Restated - see Note 2(D). ECI Telecom Ltd. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT'D) --------------------------------------------------------------------------------
ACCUMULATED NUMBER OTHER TOTAL OF SHARE CAPITAL COMPREHENSIVE ACCUMULATED SHAREHOLDERS' SHARES CAPITAL SURPLUS INCOME (LOSS) DEFICIT EQUITY ----------- ------- -------- ------------- ----------- ------------- $ IN THOUSANDS EXCEPT SHARE AMOUNTS ------------------------------------------------------------------------------------------- Balance at January 1, 2003 (Audited) 107,512,612 6,152 658,425 (1,832) *(23,128) 639,617 Audited Net loss for the year ended December 31, 2003 - - - - (71,040) (71,040) Employee stock options exercised and paid, net 100,818 3 263 - - 266 Share issuance to employees 424,633 8 647 - - 655 Amortization of deferred compensation expenses - - 3,568 - - 3,568 Changes in the fair value of financial instruments - - - (4,843) - (4,843) Net unrealized gain on available for sale securities - - - 1,282 - 1,282 ----------- -------- -------- -------- -------- --------- Balance at December 31, 2003 (Audited) 108,038,063 6,163 662,903 (5,393) (94,168) 569,505 =========== ======== ======== ======== ======== =========
* Restated - see Note 2(D). The accompanying notes are an integral part of these interim financial statements. ECI Telecom Ltd. CONSOLIDATED STATEMENT OF CASH FLOWS --------------------------------------------------------------------------------
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED --------------------------------- -------------------------------- -------------- SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31 2004 2003 2004 2003 2003 -------------- -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) -------------- -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- -------------- CASH FLOWS FOR OPERATING ACTIVITIES Income (loss) for the period 1,263 (57,450) 6,016 (14,652) (71,040) ADJUSTMENTS TO RECONCILE LOSS TO CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization 26,463 31,521 7,813 9,962 41,622 Amortization of deferred compensation (including subsidiaries) 1,562 2,378 142 1,189 3,568 Loss (gain) on sale of property and equipment (542) 431 (120) 59 1,362 Impairment of assets 696 6,686 696 - 6,686 Capital losses, net 4,175 4,772 102 10 4,862 Capital gain from sale of an operation (24,186) - - - - Other - net (mainly deferred 745 6,899 (321) 249 7,066 taxes) Company's equity in results of investee companies 3,125 1,627 1,720 280 4,334 Minority interest in net results of subsidiaries 167 (12,810) 293 (4,417) (16,956) Loss (gain) from marketable securities 698 (334) (610) (282) (111) Decrease in trade receivables (including non-current maturities of bank deposits and trade receivables) 13,031 66,816 (10,740) 18,214 69,069 Decrease (increase) in other receivables 3,708 1,854 (4,643) 1,741 9,531 Decrease (increase) in prepaid expenses (1,413) (69) (1,811) 774 (1,410) Decrease (increase) in work in progress 4,721 (1,319) (1,150) 785 3,192 Decrease (increase) in (57,914) 25,322 (13,364) 13,422 24,149 inventories Increase in trade payables 27,117 4,220 8,157 4,916 14,413 Increase (decrease) in other payable and accrued liabilities 16,532 (16,849) 13,220 (7,707) (23,500) Decrease in other long-term liabilities (3,510) (2,254) (3,502) (2,118) (2,364) Increase (decrease) in liability for employee severance benefits net (542) 1,589 1,536 (1,051) 537 -------- -------- -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 15,895 63,030 3,433 21,374 75,010 ======== ======== ======== ======== ========
The accompanying notes are an integral part of these interim financial statements. ECI Telecom Ltd. CONSOLIDATED STATEMENT OF CASH FLOWS (CONT'D) --------------------------------------------------------------------------------
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED --------------------------------- -------------------------------- -------------- SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31 2004 2003 2004 2003 2003 -------------- -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) -------------- -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- -------------- CASH FLOWS FOR INVESTING ACTIVITIES Investments in deposits, net 2,859 (19,571) (113) (9,657) (22,563) Software development costs capitalized (9,080) (8,719) (2,974) (2,855) (11,364) Investment in property, plant and equipment (18,155) (7,025) (3,289) (3,505) (11,347) Proceeds from sale of property, plant and equipment 1,218 706 208 218 878 Investment in investee companies (1,153) (203) (508) (113) (203) Investment in marketable securities (50,310) (49,809) 4,430 (43,442) (80,317) Purchase of technology - (869) - - (869) Proceeds from realization of consolidated subsidiary and operations (see Note A) 35,000 9,100 - - 9,100 -------- -------- -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (39,621) (76,390) (2,246) (59,354) (116,685) -------- -------- -------- -------- -------- CASH FLOWS FOR FINANCING ACTIVITIES Repayment of loans from banks (22,500) (100,000) - - (100,000) Increase (decrease) in short term credit, net 101 (70,012) 1 - (70,012) Proceeds from share issuance 1,535 712 854 57 921 Exercise of employee stock options in a subsidiary 120 - - - - Disposition of a consolidated subsidiary as a dividend in kind (see Note B) (39,981) - - - - -------- -------- -------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (60,725) (169,300) 855 57 (169,091) -------- -------- -------- -------- -------- Effect of change in exchange rate on cash (798) (682) 193 (198) (508) -------- -------- -------- -------- -------- CHANGES IN CASH AND CASH EQUIVALENTS (85,249) (183,342) 2,235 (38,121) (211,274) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 145,375 356,649 57,891 211,428 356,649 -------- -------- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 60,126 173,307 60,126 173,307 145,375 ======== ======== ======== ======== ========
The accompanying notes are an integral part of the financial statements. ECI Telecom Ltd. CONSOLIDATED STATEMENT OF CASH FLOWS (CONT'D) -------------------------------------------------------------------------------- A. PROCEEDS FROM REALIZATION OF CONSOLIDATED SUBSIDIARY AND OPERATIONS A breakdown of the book value of the assets and liabilities of a subsidiary and operations that were sold is as follows:
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED --------------------------------- -------------------------------- -------------- SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31 2004 2003 2004 2003 2003 -------------- -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) -------------- -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- -------------- Net current assets (other than cash) 8,831 8,257 - - 8,257 Property, plant, equipment and other assets, net 1,983 843 - - 843 Capital gain 24,186 - - - - -------- -------- -------- -------- -------- 35,000 9,100 - - 9,100 ======== ======== ======== ======== ========
B. DISPOSITION OF A CONSOLIDATED SUBSIDIARY AS DIVIDEND IN KIND:
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED --------------------------------- -------------------------------- -------------- SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31 2004 2003 2004 2003 2003 -------------- -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) -------------- -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- -------------- Working capital (other than cash) 15,471 - - - - Short-term investments (10,822) - - - - Property, plant and equipment, net 4,175 - - - - Long-term deposits and marketable securities 5,494 - - - - Goodwill and other assets 10,942 - - - - Long-term liabilities (309) - - - - Minority interest (36,475) - - - - Capital surplus (24,776) - - - - Loss from disposition (3,681) - - - - -------- -------- -------- -------- -------- (39,981) - - - - ======== ======== ======== ======== ========
C. NON CASH ACTIVITIES
Sale of fixed assets in return for shares in investee company - 1,053 - 1,053 1,053 ======== ======== ======== ======== ========
The accompanying notes are an integral part of these interim financial statements. ECI Telecom Ltd. CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 1 -GENERAL The interim financial statements are prepared in a condensed format, as of September 30, 2004 and for the nine and three-month periods then ended. The interim consolidated financial statements should be read in conjunction with Company's annual consolidated financial statements as of December 31, 2003 and the accompanying notes thereto. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES A. The accounting policies applied in the preparation of these interim consolidated financial statements are identical with those applied in the preparation of the latest annual consolidated financial statements. B. The interim consolidated financial statements are prepared in accordance with accounting principles for preparation of financial statements for interim periods. C. Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation. See also Note 7. D. In December 2002, the Company entered into a transaction pursuant to which it transferred the VOIP and other activities, including certain related net assets with a book value of $ 19.6 million, of the business NGTS, plus $10 million in cash, to NexVerse Networks, in exchange for approximately 43% (fully diluted 36%) of the shares of NexVerse. The name of the Company resulting from this transaction was changed to Veraz Networks and ECI's investment in Veraz is being accounted for by the equity method and was initially recorded at the amount of $ 29.6 million. During 2003 a third party valuation commissioned by Veraz was finalized, which evaluated among other things, the fair value of the shares transferred to ECI as of December 31, 2002. The valuation indicated that the fair market value as of December 31, 2002 of the Veraz shares held by ECI to be $ 22.8 million. Due to the fact that the value of the shares received by ECI was less than the value of the assets transferred, ECI reduced its investment in Veraz by $ 6.8 million, resulting in an additional charge to earnings in 2002. The following represents the effects of the restatement on the Consolidated Balance Sheet as of September 30, 2003. Consolidated Balance Sheet ($ in thousands) AS REPORTED AS RESTATED ----------- ----------- Investments 38,387 31,604 Accumulated deficit (73,795) (80,578) ECI Telecom Ltd. CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 3 - FINANCIAL STATEMENTS DENOMINATED IN U.S. DOLLARS The interim consolidated financial statements have been prepared in accordance with US GAAP on the basis of historical cost convention and denominated in U.S. dollars. NOTE 4 - SHAREHOLDERS' EQUITY 1. SHARE INCENTIVE AND STOCK OPTION PLAN A. Stock options under the ECI Plans are as follows:
NINE MONTHS ENDED YEAR ENDED ---------------- ---------------- SEPTEMBER 30 DECEMBER 31 2004 2003 ---------------- ---------------- NUMBER OF SHARES NUMBER OF SHARES ---------------- ---------------- Total number authorized at beginning of period 29,760,700 26,760,700 Increase in number authorized during period - 3,000,000 Options unexercised at beginning of period (19,067,545) (12,349,747) Exercised till beginning of period (2,129,800) (2,028,982) Granted during period (*) (3,958,707) (10,523,271) Cancelled during period 1,985,310 3,704,655 ----------- ----------- Authorized for future grant at end of period 6,589,958 8,563,355 =========== =========== Exercised during the period ** 853,595 100,818 =========== =========== **Average price of options exercised during period (in US$) 1.80 2.62 =========== =========== Options unexercised at end of period 20,187,347 19,067,545 =========== =========== Options may be exercised as follows (1): First year or thereafter 17,111,442 16,540,199 Second year or thereafter 1,387,959 1,911,858 Third year or thereafter 1,687,946 615,488 ----------- ----------- 20,187,347 19,067,545 =========== ===========
(*) Including grants as a result of distribution of ECtel's shares (see Note 5). ECI Telecom Ltd. CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 4 - SHAREHOLDERS' EQUITY (CONT'D) 1. SHARE INCENTIVE AND STOCK OPTION PLAN (CONT'D) B. To be paid in ILS based on the rate of exchange of the dollar on the date of payment as follows: SEPTEMBER 30 DECEMBER 31 2004 2003 ---------------- ---------------- DOLLARS PER SHARE* NUMBER OF SHARES NUMBER OF SHARES ---------------- ---------------- Zero 2,645,561 2,942,728 1.26 - 3.04 2,331,219 2,587,619 3.11 4,944,660 5,124,326 3.12 - 6.91 3,967,767 598,334 13.76 - 20.76 826,274 1,134,842 23.76 - 26.14 173,500 183,500 26.42 3,250,322 3,985,054 27.27 - 29.29 1,403,594 1,792,292 29.76 - 39.76 644,450 718,850 ----------- ------------ 20,187,347 19,067,545 =========== ============ * The dollas per share exercise range figures were adjusted as a result of distribution of ECtel's shares (see Note 5). 2. FAIR VALUE METHOD A. In October 1995 the Financial Accounting Standards Board (FASB) issued SFAS 123 "Accounting for Stock-based Compensation" which establishes financial accounting and reporting standards for stock-based compensation plans. The statement defines a fair value based method of accounting for an employee stock option. As required by SFAS 123, the Company has determined the weighted average fair value of stock-based arrangements grants during the reporting period to be $ 3.51. The fair values of stock based compensation awards granted were estimated using the "Black - Scholes" option pricing model with the following assumptions.
OPTION EXPECTED RISK FREE TERM VOLATILITY INTEREST RATE -------- ----------- -------------- PERIOD OF GRANT TERM VOLATILITY INTEREST RATE -------- ----------- -------------- Nine months ended September 30, 2004 5 70.0 2.0% Nine months ended September 30, 2003 5 70.0 1.0% Three months ended September 30, 2004 5 70.0 2.0% Three months ended September 30, 2003 5 70.0 1.0% Year ended December 31, 2003 5 70.0 1.0%
ECI Telecom Ltd. CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 4 - SHAREHOLDERS' EQUITY (CONT'D) 2. FAIR VALUE METHOD (CONT'D) B. Had the compensation expenses for stock options granted under the Company's stock option plans been determined based on fair value at the grant dates consistent with the method of SFAS 123, the Company's net loss and net loss per share would have been as follows:
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED --------------------------------- -------------------------------- -------------- SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31 2004 2003 2004 2003 2003 -------------- -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) -------------- -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- -------------- Net income (loss) As reported 1,263 (57,450) 6,016 (14,652) (71,040) Add: Stock based employee compensation expenses included in reported net income, net of related tax effects 1,562 2,379 142 1,190 3,568 Deduct: Total stock-based employee compensation expenses determined under fair value based method for all awards, net of related tax effects (7,801) (25,407) (2,812) (5,782) (23,450) --------- -------- --------- --------- --------- Pro forma net loss (4,976) (80,478) 3,346 (19,246) (90,922) ========= ======== ========= ========= ========= Basic earnings (loss) per share ($) As reported 0.01 (0.53) 0.06 (0.14) (0.66) Pro forma (0.04) (0.75) 0.03 (0.18) (0.84) Diluted earnings (loss) per share ($) As reported 0.01 (0.53) 0.05 (0.14) (0.66) Pro forma (0.04) (0.75) 0.03 (0.18) (0.84)
ECI Telecom Ltd. CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 5 - MATERIAL EVENTS IN THE CURRENT PERIOD A. ECTEL 1. On February 9, 2004, ECtel, then a subsidiary of the Company, signed a definitive agreement to sell its Government Surveillance business to Verint Systems Inc. for $ 35 million in cash. According to the terms of the transaction, ECtel transferred to Verint various assets and liabilities relating to its Government Surveillance business and undertook certain commitments to Verint. ECtel recorded during the first quarter of 2004 in respect of this transaction a gain of $24.2 million (see Note 7B). 2. On March 9, 2004, the Board of Directors of ECI decided, in principle, that ECI would distribute 7.6 million of its shares in ECtel Ltd. to ECI's shareholders. Before distribution, ECI held approximately 10.5 million, or 58%, of ECtel's shares. After distribution of the shares, ECI holds approximately 16% of ECtel's outstanding shares. On April 28, 2004, after the Company has obtained court approval and the consent of its banks, the Board of Directors declared a distribution of 7.6 million shares of ECtel to the Company's shareholders of record on May 5, 2004. The shares were distributed on May 10, 2004 (see also Note 7C). Following the said transaction and in order to preserve the intrinsic value of outstanding stock options of the Company under the stock option plans, the Company adjusted the price of the options and, in certain instances, granted additional stock options to the holders. The undistributed shares of ECtel are presented as available for sale investment. Furthermore, at the end of the second quarter, the Company recorded a loss from a permanent decline in value of the shares of ECtel in an amount of $ 2,469 thousand. B. RESTRUCTURING EXPENSES Following the Company's Board of Director's decision to focus on its two core activities, in the first quarter, the Company recorded $ 2.6 million in restructuring expenses associated with the completion of reorganization plan and the integration of Lightscape Optical Networks and Enavis Networks into the Optical Networks Division. The expenses were due to abandonment of several leased buildings. NOTE 6 - LEGAL PROCEDURES In October 1997, an investigation was commenced by the Israeli Comptroller of Restrictive Trade Practices (hereinafter - "comptroller") regarding alleged price fixing and non-competitive practices among TTL, Tadiran and Telrad Telecommunications and Electronics Industries Ltd., a subsidiary of Koor (Koor is a significant shareholder of the Company and Tadiran). Pursuant to the Restrictive Trade Practices Law - 1988, a fine may be levied against an entity or person violating the law. In addition, violators may be liable for damages that are proven as a result of their violation. Tadiran has agreed to indemnify the Company for damages above $6 million. In the third quarter, the company has been informed that the comptroller has ceased the investigation without taking any action against the company. Accordingly, a provision in the amount of $6 million that was recorded at the acquisition of TTL was reversed and recorded as other income. In September 2004, a claim was filed against Bezeq (Israel's national telecommunications provider), Koor, TTL, Tadiran and Telrad in the District Court of Tel Aviv-Jaffa. Attached to the claim was a request for certification thereof as a class action, brought in the name of all Bezeq customers against the aforesaid companies, including the company, in an amount of $ 380 million. ECI Telecom Ltd. CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 6 - LEGAL PROCEDURES (CONT'D) Management of the company believes, in light of the advice of its legal counsel, that a provision in the amount of $2.5 million, which is included in the financial statements, in respect thereof, is appropriate and sufficient at this time. Further legal analysis is being carried out to enable Management to assess the exposure. NOTE 7 - DISCONTINUED OPERATIONS A. During the third quarter of 2002, the Company's Board of Directors decided on a plan to sell the operations of the InnoWave segment, which specialized in development of solutions for broadband wireless access to communications networks. In April 2003, the Company signed an agreement with Alvarion to sell the InnoWave operation. The total value of the transaction was approximately $ 20 million, consisting of a cash consideration paid by Alvarion and the cash balances withdrawn by ECI at closing. In addition, Alvarion granted warrants to purchase 200,000 Alvarion shares over a period of five years at an exercise price of $ 3 per share (of which, warrants to purchase 50,000 were transferred to certain key employees of InnoWave transferred to Alvarion). In the first quarter, the Company sold all the shares it had obtained from exercising the aforementioned warrants. The gain from the sale of the shares amounted to $ 1.5 million. B. During 2003, ECtel's Board of Directors decided on a plan to sell the operations of the Government surveillance business of ECtel, which provides telecommunication monitoring needs to government agencies. The Company found a purchaser for the Government segment, and in February 2004 signed a definitive agreement with him (see Note 5A (1)). C. In May 2004, the Company distributed 7.6 million shares of ECtel to its shareholders. After the distribution of the shares , ECI holds approximately 16% of ECtel's outstanding shares. Accordingly, the result of ECtel for all periods reported were reclassified to one line in the statement of operations following the result from continuing operations. Set forth below is the details of the assets and liabilities of the discontinued operation on December 31, 2003: DECEMBER 31 2003 -------------- (AUDITED) -------------- $ IN THOUSANDS -------------- Assets relating to discontinued operation* Trade and other receivables - Inventory 332 Long-term receivables - Property, plant and equipment 1,394 Other assets 589 -------------- 2,315 ============== ECI Telecom Ltd. CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 7 - DISCONTINUED OPERATIONS (CONT'D) DECEMBER 31 2003 -------------- (AUDITED) -------------- $ IN THOUSANDS -------------- Liabilities relating to discontinued operation* Trade payables - Other payables 541 Liabilities for employee severance benefit, net 194 -------------- 735 ============== * The assets and liabilities as of December 31, 2003 related to the discontinued Government operation. Set forth below are the results of operations of the discontinued segments
NINE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED --------------------------------- -------------------------------- -------------- SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31 2004 2003 2004 2003 2003 -------------- -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) -------------- -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- -------------- Revenues 3,948 38,779 - 10,034 44,697 Expenses * (7,851) (58,287) - (16,750) (71,014) --------- -------- --------- --------- --------- Net results (3,903) (19,508) - (6,716) (26,317) ========= ======== ========= ========= =========
* Including loss from disposition of $ 3,681 thousand. NOTE 8 - SEGMENT REPORTS 1. SEGMENT ACTIVITIES DISCLOSURE: Segment information is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This standard is based on a management approach, which requires segmentation based upon the Company's internal organization and internal financial reports to the management. The Company's internal financial reporting systems present various data for management to run the business, including profit and loss statements (P&L). ECI Telecom Ltd. CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 8 - SEGMENT REPORTS 2. OPERATIONAL SEGMENT DISCLOSURE: The following financial information is the information that management uses for analyzing the business results. The figures are presented as presented to management.
NINE MONTHS ENDED SEPTEMBER 30, 2004 ---------------------------------------------------------------------- OPTICAL BROADBAND NETWORKS ACCESS OTHER CONSOLIDATED -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- Revenues 182,029 153,065 21,934 357,028 ============== ============== ============== ============== Operating profit (loss) 312 14,949 (7,851) 7,410 ============== ============== ============== ============== NINE MONTHS ENDED SEPTEMBER 30, 2003(*) ---------------------------------------------------------------------- OPTICAL BROADBAND NETWORKS ACCESS OTHER CONSOLIDATED -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- Revenues 129,066 135,690 24,752 289,508 ============== ============== ============== ============== Operating profit (loss) (28,490) 12,065 (13,532) (29,927) ============== ============== ============== ============== THREE MONTHS ENDED SEPTEMBER 30, 2004 ---------------------------------------------------------------------- OPTICAL BROADBAND NETWORKS ACCESS OTHER CONSOLIDATED -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- Revenues 68,779 54,400 5,297 128,476 ============== ============== ============== ============== Operating profit (loss) 2,223 6,353 (2,142) 6,434 ============== ============== ============== ============== THREE MONTHS ENDED SEPTEMBER 30, 2003(*) ---------------------------------------------------------------------- OPTICAL BROADBAND NETWORKS ACCESS OTHER CONSOLIDATED -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- Revenues 47,015 40,307 7,207 94,529 ============== ============== ============== ============== Operating profit (loss) (6,767) 2,301 (3,207) (7,673) ============== ============== ============== ==============
ECI Telecom Ltd. CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 8 - SEGMENT REPORTS (CONT'D) 2. OPERATIONAL SEGMENT DISCLOSURE: (CONT'D)
YEAR ENDED DECEMBER 31, 2003(*) ---------------------------------------------------------------------- OPTICAL BROADBAND NETWORKS ACCESS OTHER CONSOLIDATED -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) -------------- -------------- -------------- -------------- $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS $ IN THOUSANDS -------------- -------------- -------------- -------------- Revenues 177,706 182,290 32,571 392,567 ============== ============== ============== ============== Operating profit (loss) (37,196) 15,950 (10,959) (32,205) ============== ============== ============== ==============
(*) Reclassified as a result of discontinued operation - (see Note 7).