SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 6-K Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934 For the Month of August 2005 ----------------------- ELBIT SYSTEMS LTD. (Translation of Registrant's Name into English) Advanced Technology Center, P.O.B. 539, Haifa 31053, Israel (Address of Principal Corporate Offices) Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F: |X| Form 20-F |_| Form 40-F Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934: |_| Yes |X| No Attached hereto as Exhibit 1 and incorporated herein by reference is the Registrant's press release dated August 9, 2005. Attached hereto as Exhibit 2 and incorporated herein by reference is the Registrant's Management Report with respect to the results of operations of the Registrant for the quarter ended June 30, 2005. Attached hereto as Exhibit 3 and incorporated herein by reference is the Registrant's consolidated audited financial statements for the quarter ended June 30, 2005. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ELBIT SYSTEMS LTD. (Registrant) By: /s/ Ilan Pacholder --------------------------------- Name: Ilan Pacholder Title: Corporate Secretary Dated: August 9, 2005 EXHIBIT INDEX ------------- Exhibit No. Description ----------- ----------- 1. Press release dated August 9, 2005. 2. Management report. 3. Financial statements EXHIBIT 1 --------- EXHIBIT 1 ELBIT SYSTEMS REPORTS SECOND QUARTER 2005 RESULTS Revenues Increased by 5.2% to $243.8 Million Backlog of Orders Reached a New Record of $ 2.4 Billion Excluding One-Time In Process R&D Write-Off Related to Tadiran Share Purchase, Net Profit and EPS Reached $14.4 Million and $0.35, Respectively Haifa, Israel, August 9, 2005 - Elbit Systems Ltd. (the "Company") (NASDAQ: ESLT), the international defense company, today reported its consolidated results for the second quarter ended June 30, 2005. The Company's backlog of orders as of June 30, 2005 reached $2,401 million, an 11.5% increase as compared with $2,154 million at the end of 2004. Approximately 65% of the backlog relates to orders outside of Israel. Approximately 60% of the Company's backlog as of June 30, 2005 is scheduled to be performed over the next two quarters of 2005 and during 2006. Consolidated revenues for the second quarter of 2005 increased by 5.2% to $243.8 million from $231.6 million in the second quarter of 2004. Gross profit for the second quarter of 2005 was $66.1 million (27.1% of revenues), as compared with gross profit of $59.9 million (25.9% of revenues) in the second quarter of 2004. Reported consolidated net income for the second quarter of 2005 was $10.9 million (4.5% of revenues), as compared with $13.3 million (5.7% of revenues) in the second quarter of 2004. Reported diluted earnings per share for the second quarter of 2005 were $0.26, as compared with $0.33 for the second quarter of 2004. Excluding the one time in-process R&D write-off related to the Tadiran Communications Ltd. ("Tadiran") share purchase, the Company's net income for the second quarter of 2005 was $14.4 million (or 5.9% of revenues) and the diluted EPS was $0.35. As previously reported, the Company's financial results for the second quarter of 2005 were affected by its acquisition of Tadiran shares from Koor Industries Ltd. ("Koor"). As a result of the completion of the first stage of the agreement to acquire Koor's holdings in Tadiran, and the adoption of the required accounting standards, the Company recorded a $5.6 million expense in the second quarter of 2005, which was partially offset by its share in Tadiran's net profit for the second quarter of 2005, resulting in a $3.2 million net expense for the quarter. All the effects of the Tadiran transaction are recorded as part of the Company's earnings from affiliated companies on its income statement During the first six months of 2005 the Company produced an operating cash flow of $85.8 million. The President and CEO of Elbit Systems, Joseph Ackerman, commented: "The second quarter results indicate the continued growth of our revenues, profits and backlog of orders. Our strategic growth plan continues on course as we progress with the Elisra and Tadiran acquisitions, and we believe that both acquisitions, involving leading companies in their respective fields, will enable all of us to be even more competitive in the international defense markets. In the meantime we continue to carry out our higher than usual investments in R&D with the expectation that our efforts will contribute to our future growth. We are also very pleased with the recent Watchkeeper contract signed by Thales, in which Elbit will play a significant role, and expect that it will solidify our position in the growing global UAV market, enhancing our presence in major defense programs." The Board of Directors declared a dividend of $0.13 per share for the second quarter of 2005. The dividend's record date is September 6, 2005, and the dividend will be paid on September 19, 2005, net of taxes and levies, at the rate of 22.1%. Conference Call The Company will be hosting a webcast and conference call today, August 9th at 9:30 am EST. On the call, management will review and discuss the results, and will be available to answer investor questions. To participate, please access Elbit Systems' investor relations web-site at http://www.elbitsystems.com. An online replay will be available from 2 hours after the call end, and will be available for 30 days. Alternatively, please call one of the teleconferencing numbers that follow. Please begin placing your calls at least 5 minutes before the conference call commences. If you are unable to connect using one of the toll-free numbers, please try the international dial-in number. US Dial-in Numbers: 1 866 860 9642 UK Dial-in Number: 0 800 917 5108 ISRAEL Dial-in Number: 03 918 0600 INTERNATIONAL Dial-in Number: +972 3 918 0600 At: 09:30am Eastern Standard Time, 6:30am Pacific Standard Time, 2:30pm UK Time or 4:30pm Israel Time. In addition, a replay of the call will be available by telephone starting two hours after the call ends until Thursday, May 19, 10:00 am EST. To access the replay please dial: 1-888-269-0005 (US) or +972-3-925-5945 (international and Israel) About Elbit Systems Ltd. Elbit Systems Ltd. is an international defense electronics company engaged in a wide range of defense-related programs throughout the world, in the areas of aerospace, ground and naval systems, command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) and advanced electro-optic technologies. The Company focuses on the upgrading of existing military platforms and developing new technologies for defense applications. For further information, please visit the Company web site at www.elbitsystems.com Company Contact: IR Contact: Ilan Pacholder Ehud Helft / Kenny Green V.P. Finance & Capital Markets and Corporate Secretary Elbit Systems Ltd GK International Tel: +972-4 831-6632 Tel: 1-866-704-6710 Fax: +972-4 831-6659 Fax: + 972-3-607- 4711 E-mail: pacholder@elbit.co.il E-mail: Kenny@gk-biz.com --------------------- ---------------- E-mail: Ehud@gk-biz.com STATEMENTS IN THIS PRESS RELEASE WHICH ARE NOT HISTORICAL DATA ARE FORWARD-LOOKING STATEMENTS WHICH INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES OR OTHER FACTORS NOT UNDER THE COMPANY'S CONTROL, WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM THE RESULTS, PERFORMANCE OR OTHER EXPECTATIONS IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DETAILED IN THE COMPANY'S PERIODIC FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. (FINANCIAL TABLES TO FOLLOW) ELBIT SYSTEMS LTD. CONSOLIDATED BALANCE SHEETS --------------------------- (In thousand of US Dollars) June 30 December 31 2005 2004 --------- --------- Unaudited (*) (**) Assets Current Assets: Cash and short term deposits 55,051 34,847 Trade receivable and others 243,654 *267,903 Inventories, net of advances 296,603 249,041 --------- --------- Total current assets 595,308 551,791 Affiliated companies & other investments 129,142 *59,618 Long-term receivables & others 82,836 85,100 Fixed assets, net 252,990 244,288 Other assets, net 94,017 95,987 --------- --------- 1,154,293 1,036,784 ========= ========= Liabilities and Shareholder's Equity Current liabilities 434,010 378,450 Long-term liabilities 269,243 221,810 Minority Interest 4,067 4,340 Shareholder's equity 446,973 *432,184 --------- --------- 1,154,293 1,036,784 ========= ========= * Restated due to the Tadiran share purchase transaction ** Derived from the Company's 2004 audited financial statements ELBIT SYSTEMS LTD. CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (In thousand of US Dollars, except for per share amounts) Six Months Ended Three Months Ended Year Ended June 30 June 30 December 31 2005 **2004 2005 **2004 2004 ------- ------- ------- ------- ------- Unaudited Unaudited (*) (***) Revenues 474,470 445,317 243,782 231,645 939,925 Cost of revenues 346,821 328,839 177,695 171,759 689,626 ------- ------- ------- ------- ------- Gross Profit 127,649 116,478 66,087 59,886 250,299 Research and development, net 32,961 27,027 17,795 13,733 66,846 Marketing and selling 34,386 35,160 17,740 18,662 69,912 General and administrative 25,424 22,731 12,932 11,169 47,832 ------- ------- ------- ------- ------- Total operating expenses 92,771 84,918 48,467 43,564 184,590 ------- ------- ------- ------- ------- Operating income 34,878 31,560 17,620 16,322 65,709 Financial expenses, net (3,197) (1,301) (1,466) (822) (5,852) Other income, net (185) (84) (75) (299) 770 ------- ------- ------- ------- ------- Income before income taxes 31,496 30,175 16,079 15,201 60,627 Taxes on income 8,043 7,779 4,056 3,704 15,219 ------- ------- ------- ------- ------- 23,453 22,396 12,023 11,497 45,408 Company's share of partnerships and affiliated companies income, net (127) 2,970 (1,168) 1,612 *6,645 Minority rights 273 188 54 193 (180) ------- ------- ------- ------- ------- Net income 23,599 25,554 10,909 13,302 *51,873 Earnings per share Basic net earnings per share $ 0.58 $ 0.64 $ 0.27 $ 0.33 *$1.30 ======= ======= ======= ======= ======= Diluted net earnings per share $ 0.57 $ 0.63 $ 0.26 $ 0.33 *$1.26 ======= ======= ======= ======= ======= * Restated due to the Tadiran share purchase transaction ** Restated due to the adoption of SFAS 123 *** Derived from the Company's 2004 audited financial statements EXHIBIT 2 --------- Elbit Systems Ltd. ------------------ Management's Report ------------------- For The Three and Six-Month Period Ended June 30, 2005 ------------------------------------------------------ This report should be read together with the unaudited financial statements of Elbit Systems Ltd. ("Elbit Systems" or the "Company") and together with its subsidiaries (the "Group") for the quarter ended June 30, 2005, the Company's audited consolidated financial statements and related notes for the year ended December 31, 2004, the Company's management report for the year ended December 31, 2004 and the Company's Form 20-F for the year ended December 31, 2004, filed by the Company with the U.S. Securities and Exchange Commission and with the Israeli Securities Authority. Forward looking statements with respect to the Company's business, financial condition and results of operations in this document are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward looking statements, including, but not limited to, product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development, the effect of the Company's accounting policies as well as certain other risk factors which are detailed from time to time in the Company's filings with the U.S. Securities and Exchange Commission. A. Executive Overview ------------------ Business Description -------------------- Elbit Systems and its subsidiaries (the "Group") operate in the area of upgrading existing airborne, ground and naval defense platforms and are engaged in projects involving the design, development, manufacture and integration of advanced integrated defense systems, electronic systems, electro-optic systems and products and software intensive programs and products for the defense and homeland security sectors. In addition, the Company provides support services for such platforms, systems and products. The Group is engaged in leading projects in Israel and worldwide, in areas such as air, ground and naval Command, Control, Communication, Computers, Intelligence, Surveillance and Reconnaissance ("C(4)ISR") systems, digital maps, night vision systems, pilot helmet mounted systems, display and data processing systems, unmanned air vehicles ("UAVs"), computerized simulators, communication systems, thermal imaging products, laser products, optical systems for space applications, airborne reconnaissance systems, optic communication systems and products, systems for Homeland Defense products, surveillance products and systems and electric drive systems. The Group provides a wide range of logistic support services, including operation of pilot training services for the Israeli Air Force on a private financing initiative basis. Several of the Group's companies also provide advanced engineering and manufacturing services to various customers, utilizing their significant manufacturing capabilities. The Group often cooperates with industries in Israel and in various other countries. The Group tailors and adapts its technologies, integration skills, market knowledge and battle-proven systems to each customer's individual requirements in both existing and new platforms. By upgrading existing platforms with advanced electronic and electro-optic technologies, the Group provides customers with cost-effective solutions, and its customers are able to improve their technological and operational capabilities within limited defense budgets. 1 The Group operates in a competitive environment for most of its projects, systems and products. Competition is based on product and program performance, price, reputation, reliability, maintenance costs and responsiveness to customer requirements. This includes the ability to respond to rapid changes in technology. In addition, its competitive position sometimes is affected by specific requirements in particular markets. Financial Highlights -------------------- The Company's revenues increased by 5.2% and reached $243.8 million in the second quarter of 2005, as compared to $231.6 million in the second quarter of 2004. Net earnings in the second quarter of 2005 were $10.9 million and the diluted earnings per share were $0.26, as compared to $13.3 million and $0.33 in the second quarter of 2004. Excluding the In Process Research and Development ("IPR&D") write-off of approximately $3.5 million related to the acquisition of Tadiran Communications Ltd.'s shares, net earning in the quarter ended June 30, 2005 were $ 14.4 million, and the diluted EPS was $0.35. The Company's backlog as of June 30, 2005 reached $2.4 billion, as compared to $2.15 billion as of December 31, 2004. The Company's cash flow generated from operations in the six-month period ended June 30, 2005 was $85.8 million, as compared to $55.4 million in the six-month period ended June 30, 2004. The Board of Directors declared a dividend of $0.13 per share for the second quarter. B. Recent Events ------------- On August 4, 2005, the UK Ministry of Defence (MoD) and Thales UK signed a contract worth (pound)700 million for the Development, Manufacture and Initial Support phases of the WATCHKEEPER programme. Elbit Systems and Thales UK are establishing a Joint Venture aimed at executing a significant part of the WATCHKEEPER programme and addressing the rapidly growing UAV market worldwide. The Elbit Systems Group expects to receive a significant part of the contract, valued at around (pound)300 million, the majority to be executed by the Leicester-based Joint Venture. The Joint Venture's contract is expected to be signed this year. WATCHKEEPER will provide the UK armed forces with an essential Intelligence, Surveillance, Target Acquisition and Reconnaissance (ISTAR) capability based on the Hermes 450 UAV system and will be a key component of the UK's Network Enabled Capability (NEC). This programme will deliver equipment, training and facilities, with the capability coming into service from 2010. C. Backlog of Orders ----------------- The Company's backlog of orders as of June 30, 2005 reached $2,401 million, of which 65% was for orders outside Israel. The Company's backlog as of December 31, 2004 was $2,154 million, of which 66% was for orders outside Israel. 2 Approximately 60% of the Company's backlog as of June 30, 2005 is scheduled to be performed in the following two quarters of 2005 and during 2006. The majority of the 40% of the Company's backlog balance is scheduled to be performed in 2007 and 2008. D. Critical Accounting Policies and Estimates ------------------------------------------ The Company's significant accounting policies are described in Note 2 to the audited consolidated financial statements for the year ended December 31, 2004. See also the Company's management report for the year ended December 31, 2004. E. Stock-Based Compensation ------------------------ Effective January 1, 2004, the Company adopted the fair value recognition provision of SFAS No. 123. Following the adoption of SFAS No. 123, the financial results are no longer materially affected by the impact of changes in the Company's share price on employee stock-based compensation. As a result of the adoption of SFAS No. 123 from January 1, 2004, the statement of income and diluted net earnings per share of the first three quarters of 2004 were restated for purposes of comparison, as follows: Q1/04 Q2/04 1-6/04 Net income as previously reported in 2004 ----- ----- ------ Restated net income (according to SFAS No. 123) $ 12,727 $ 11,311 $ 24,038 ======== ======== ======== Diluted net earnings per share as reported in 2004 $ 12,252 $ 13,302 $ 25,554 ======== ======== ======== Restated diluted net earnings per share (according to SFAS No. 123) $ 0.31 $ 0.28 $ 0.59 ======== ======== ======== $ 0.30 $ 0.33 $ 0.63 ======== ======== ======== F. Tadiran Communications Ltd. Share Purchase Effect ------------------------------------------------- On April 18, 2005, the Company completed the first stage of the transaction to purchase shares of Tadiran Communications Ltd. ("Tadiran") from Koor Industries Ltd. ("Koor"). The first stage of the transaction was completed after all the conditions precedent and all the required approvals for this stage were obtained. According to the transaction agreements, Elbit Systems purchased from Koor, in this stage, approximately 13.7% of the share equity of Tadiran. In addition to the shares previously purchased by Elbit Systems in the stock market, it now holds approximately 21% of Tadirans' shares. The Company purchased Tadiran shares from Koor in consideration for approximately $62.5 million. As a result of the Company obtaining shareholder rights to exercise significant influence over Tadiran, as defined in the applicable accounting standards, the Company's investment in Tadiran, which had been previously accounted for as "available-for-sale securities", were accounted for, retroactively, under the equity method of accounting ("step-by-step acquisition"). Implementing the step-by-step acquisition method resulted in a restatement of the Company's prior financial results for the last quarter of 2004 and the first quarter of 2005, in which the Company's investment in Tadiran was accounted for as available-for-sale securities. Accordingly, the Company's net income for the fourth quarter of 2004 and the first quarter of 2005 were reduced by approximately $1.1 million and $0.5 million, respectively. As a result, the Company's net income was restated as $13 million for the fourth quarter of 2004 and $12.6 million for the first quarter of 2005, rather than the reported net income of $14.1 million and $13.1 million, respectively. 3 The excess of the amount paid for the Tadiran shares acquired until the end of the second quarter of 2005 over their book value is approximately $62 million. Based on a purchase price allocation analysis ("PPA") performed by independent advisors, this excess was attributed as follows: $M Expected useful lives -- --------------------- In Process R&D ("IPR&D") 5.0 immediate write-off Inventory 1.5 Up to a quarter Other tangible assets net of liabilities 0.5 5 years Brand name 4.0 15 years Customer base and backlog 20.0 2-10 years Technology 12.0 10 years Goodwill 19.0 Indefinite - subject to annual impairment test ----- 62.0 ===== The effect of the above transaction on the Company's results for the last quarter of 2004 and for the first and the second quarters of 2005, which were reflected as part of the Company's equity in net earnings of affiliated companies, was as follows: Q4/04 Q1/05 Q2/05 Total ----- ----- ----- ----- IPR&D write-off (1.0) (0.5) (3.5) (5.0) Inventory (0.2) (0.2) (1.1) (1.5) amortization Other tangible and intangible assets amortization (0.2) (0.4) (1.0) (1.6) --------- ------------ ----------- ----------- (1.4) (1.1) (5.6) (8.1) Company's portion in Tadiran's profit (according to US GAAP) 0.3 0.6 2.4 3.3 --------- ------------ ----------- ----------- Net effect (1.1) (0.5) (3.2) (4.8) ========= ============ =========== =========== Further effects on the Company's financial results are expected to occur in the event of the consummation of the additional purchases of Tadiran shares from Koor in accordance with the amendments to the agreements with Koor, announced on July 6, 2005, as well as the purchase of Koor's shares in Elisra Electronic Systems Ltd. ("Elisra") (see section G below), subject to receipt of the required approvals. The effect on the Company's financial results of future purchases of shares of Tadiran as well as the anticipated purchase of shares in Elisra will be reported following completion of the respective purchases. G. Acquisition of Elisra Shares and Amendment to the Tadiran Acquisition --------------------------------------------------------------------- On July 6, 2005, the Company reported that it signed an agreement with Koor to acquire all of Koor's 70% holdings in Elisra, in consideration of $70 million in cash. In addition, the parties agreed on additional conditional consideration as a result of future insurance proceeds relating to the fire at Elisra's plant in 2001. Moreover, Koor received the right to purchase from Elisra, at an agreed upon price, Dekolink Wireless Ltd., a start-up company engaged in the cellular networks area, that is wholly-owned by Elisra. The acquisition agreement relating to Elisra is subject to the receipt of the approval of Elbit Systems' shareholders as well as governmental authorities, including the Israel Antitrust Authority. 4 Concurrently with the signing of the agreement to acquire Koor's holdings in Elisra, Elbit Systems and Koor agreed to amend their agreements regarding the purchase of Koor's holdings of Tadiran. Pursuant to the amendment, Elbit Systems will accelerate the acquisition from Koor of approximately 5% of Tadiran's shares, out of a total of 18.2% of Tadiran's shares that Elbit Systems agreed to acquire as part of the second stage of the agreement entered into between Elbit Systems and Koor on December 27, 2004. Upon completion of this step, Elbit Systems and Koor will have equal representation on Tadiran's board of directors. Joseph Ackerman, Elbit Systems President, will be appointed as Chairman of Tadiran's Board for a 24-month period and the provisions of the shareholders agreement relating to joint control in Tadiran will enter into effect. The price to be paid by Elbit Systems for the Tadiran shares will be the price agreed to in the original agreement with Koor. The agreement for the acquisition of Koor's holdings in Elisra and the amendments regarding the acquisition of Koor's shares in Tadiran, were signed following receipt of approval of Elbit Systems' Audit Committee and Board of Directors that obtained a fairness opinion from an independent appraiser regarding the consideration to be paid for the Elisra shares. The purchase of the approximately 5% of Tadiran's shares by Elbit Systems will take place following approval of Elbit Systems' shareholders at a general shareholders meeting of the Elisra transaction and the amendments to Tadiran transaction agreements. Upon completion of that stage, Elbit Systems will hold a total of approximately 26% of Tadiran's shares, including approximately 7% that were purchased on the stock market. Upon completion of the Elisra transaction, Elbit Systems will complete the purchase of Koor's remaining shares in Tadiran - approximately 13% - reaching a total of approximately 39% of Tadiran's shares based on Elbit Systems' current shareholdings. 5 H. Summary of Financial Results ---------------------------- The following table sets forth the reported consolidated statements of operations of the Company for the three and six-month periods ended June 30, 2005 and June 30, 2004. The results of the three and six months of 2004 and of the first quarter of 2005 reflect restatements, regarding the Tadiran's share acquisition and the stock-based compensation (see above). For the six months ended For the three months ended June 30 June 30 ---------------------------------------------- ------------------------------------------- 2005 2004 2005 2004 ------------------- ------------------- ------------------- ------------------- $ % $ % $ % $ % - - - - - - - - (In thousands of U.S. dollars except per share data) Total revenues 474,470 100.0 445,317 100.0 243,782 100.0 231,645 100.0 Cost of revenues 346,821 73.1 328,839 73.8 177,695 72.9 171,759 74.1 ------- ---- ------- ---- ------- ---- ------- ---- Gross profit 127,649 26.9 116,478 26.2 66,087 27.1 59,886 25.9 ------- ---- ------- ---- ------- ---- ------- ---- Research and development (R&D) expenses 42,053 8.9 32,697 7.3 22,153 9.1 16,236 7.0 Less - participation (9,092) (1.9) (5,670) (1.3) (4,358) (1.8) (2,503) (1.1) ------- ---- ------- ---- ------- ---- ------- ---- R&D expenses, net 32,961 7.0 27,027 6.1 17,795 7.3 13,733 5.9 Marketing and selling expenses 34,386 7.2 35,160 7.9 17,740 7.3 18,662 8.1 General and administrative expenses 25,424 5.4 22,731 5.1 12,932 5.3 11,169 4.8 ------- ---- ------- ---- ------- ---- ------- ---- 92,771 19.6 84,918 19.1 48,467 19.9 43,564 18.8 ------- ---- ------- ---- ------- ---- ------- ---- Operating income 34,878 7.3 31,560 7.1 17,620 7.2 16,322 7.0 Finance expenses, net (3,197) (0.7) (1,301) (0.3) (1,466) (0.6) (822) (0.4) Other expenses, net (185) -- (84) -- (75) (299) (0.1) ------- ---- ------- ---- ------- ---- ------- ---- Income before taxes on income 31,496 6.6 30,175 6.8 16,079 6.6 15,201 6.6 Taxes on income 8,043 1.7 7,779 1.8 4,056 1.7 3,704 1.6 ------- ---- ------- ---- ------- ---- ------- ---- 23,453 4.9 22,396 5.0 12,023 4.9 11,497 5.0 Minority interest in losses (gains) of subsidiaries 273 0.1 188 -- 54 -- 193 0.1 Equity in net earnings of affiliated companies and partnership (127) -- 2,970 0.7 (1,168) (0.4) 1,612 0.7 ------- ---- ------- ---- ------- ---- ------- ---- Net earnings 23,599 5.0 25,554 5.7 10,909 4.5 13.302 5.7 ======= ==== ======= ==== ======= ==== ======= ==== Diluted earnings per share 0.57 0.63 0.26 0.33 ======= ======= ======= ======= 6 Revenues -------- The Company's sales are primarily to governmental entities and prime contractors under government defense programs. Accordingly, the level of the Company's revenues is subject to governmental budgetary constraints. The changes in revenues by geographic distribution, other than standard quarterly fluctuations, were in the revenues from customers in Europe, which decreased mainly as a result of the temporary reduction in the land systems area of operations, while revenues in all other geographical regions increased. Three Months Ended on June 30, 2005, Compared to Three Months Ended on June 30, 2004 ----------------------------------------------------------------------- The consolidated revenues increased by 5.2% from $231.6 million in the second quarter of 2004 to $243.8 million in the second quarter of 2005. The following table sets forth the Company's revenue distribution by areas of operation: Three-Month Period ended ---------------------------------------------- June 30, 2005 June 30, 2004 -------------------- ------------------- $ millions % $ millions % Airborne systems 93.4 38.3 94.4 40.7 Land systems 33.2 13.6 48.7 21.0 C(4)ISR systems 44.1 18.1 27.8 12.0 Electro-optics 56.3 23.1 44.6 19.3 Other (mainly non-defense engineering and production services) 16.8 6.9 16.1 7.0 ----- ----- ----- ----- Total 243.8 100.0 231.6 100.0 ===== ===== ===== ===== The following table sets forth the Company's distribution of revenues by geographic regions: Three-Month Period ended ---------------------------------------------- June 30, 2005 June 30, 2004 -------------------- ------------------- $ millions % $ millions % Israel 77.9 31.9 56.6 24.4 United States 87.9 36.1 87.3 37.7 Europe 18.4 7.5 33.6 14.5 Other countries 59.6 24.5 54.1 23.4 ----- ----- ----- ----- Total 243.8 100.0 231.6 100.0 ===== ===== ===== ===== Six Months Ended on June 30, 2005, Compared to Six Months Ended on June 30, 2004 ----------------------------------------------------------------------- The Company's consolidated revenues increased by 6.6%, from $445.3 million in the first six months of 2004 to $474.5 million in the first six months of 2005. 7 The following table sets forth the Company's revenue distribution by areas of operation: Six-Month Period ended ---------------------------------------------- June 30, 2005 June 30, 2004 -------------------- ------------------- $ millions % $ millions % Airborne systems 194.4 41.0 178.7 40.1 Land systems 59.2 12.5 100.5 22.6 C(4)ISR systems 88.1 18.5 57.3 12.9 Electro-optics 99.5 21.0 85.0 19.1 Other (mainly non-defense engineering and production services) 33.3 7.0 23.8 5.3 ----- ----- ----- ----- Total 474.5 100.0 445.3 100.0 ===== ===== ===== ===== The following table sets forth the Company's distribution of revenues by geographic regions: Six-Month Period ended ---------------------------------------------- June 30, 2005 June 30, 2004 -------------------- ------------------- $ millions % $ millions % Israel 145.1 30.6 110.5 24.8 United States 177.5 37.4 166.7 37.4 Europe 34.5 7.3 65.7 14.8 Other countries 117.4 24.7 102.4 23.0 ----- ---- ----- ---- Total 474.5 100.0 445.3 100.0 ===== ===== ===== ===== Gross Profit ------------ The Company's gross profit represents the aggregate results of the Company's activities and projects, and is based on the mix of programs in which the Company is engaged during the reported period. Three Months Ended on June 30, 2005, Compared to Three Months Ended on June 30, 2004 ----------------------------------------------------------------------- The Company's gross profit in the quarter ended June 30, 2005 was $66.1 million as compared to $59.9 million in the quarter ended June 30, 2004. The gross profit margin in the second quarter of 2005 was 27.1% as compared to 25.9% in the same period last year. The difference in the gross profit was as a result of the mix of programs generating revenues in the applicable periods, which included in the second quarter of 2005 certain programs with a relatively higher gross profit. Six Months Ended on June 30, 2005, Compared to Six Months Ended on June 30, 2004 ----------------------------------------------------------------------- The Company's gross profit in the six months ended June 30, 2005 was $127.6 million as compared to $116.5 million in the six months ended June 30, 2004. The gross profit margin in the six months ended June 30, 2005 was 26.9% as compared to 26.2% in the corresponding period of the previous year. The difference in the gross profit was the result of the mix of programs generating revenues in the applicable periods. 8 Research and Development ("R&D") -------------------------------- The Company continually invests in R&D in order to maintain and further advance its technologies, in accordance with a long-term plan, based on its estimate of future market needs. The Company's R&D activities in the reported period were in accordance with its strategy plans. Some of these activities are coordinated with, and partially funded by, third parties, including the Israeli Ministry of Defense ("IMOD") and the Office of the Chief Scientist ("OCS"). These programs were mainly in the areas of advanced airborne systems, cutting edge electro-optics technology and products for surveillance, aerial reconnaissance, lasers and space based sensors. Further to the trend that began in the fourth quarter of 2004, the Company increased its R&D efforts, mainly in the areas of Airborne, Land and Electro-Optics Systems, for the development of advanced technologies and products to meet expected market requirements. Three Months Ended on June 30, 2005, Compared to Three Months Ended on June 30, 2004 ----------------------------------------------------------------------- Gross R&D expenses in the quarter ended June 30, 2005 totaled $22.2 million (9.1% of revenues), as compared to $16.2 million (7.0% of revenues) in the quarter ended June 30, 2004. Net R&D expenses (after deduction of third party participation, including the IMOD and the OCS) in the quarter ended June 30, 2005 totaled $17.8 million (7.3% of revenues), as compared to $13.7 million (5.9% of revenues) in the quarter ended June 30, 2004. Six Months Ended on June 30, 2005, Compared to Six Months Ended on June 30, 2004 ----------------------------------------------------------------------- Gross R&D expenses in the six months ended June 30, 2005 totaled $42.1 million (8.9% of revenues), as compared to $32.7 million (7.3% of revenues) in the six months ended June 30, 2004. Net R&D expenses (after deduction of third party participation, including the IMOD and the OCS) in the six months period ended June 30, 2005 totaled $33.0 million (6.9% of revenues), as compared to $27.0 million (6.1% of revenues) in the six months period ended June 30, 2004. Marketing and Selling Expenses ------------------------------ The Company maintains its activities in developing new markets and pursues various business opportunities according to the Company's plan. Three Months Ended on June 30, 2005, Compared to Three Months Ended on June 30, 2004 ----------------------------------------------------------------------- Marketing and selling expenses in the quarter ended June 30, 2005 were $17.7 million (7.3% of revenues), as compared to $18.7 million (8.1% of revenues) in the quarter ended June 30, 2004. Six Months Ended on June 30, 2005, Compared to Six Months Ended on June 30, 2004 ----------------------------------------------------------------------- Marketing and selling expenses in the six months ended June 30, 2005 were $34.4 million (7.2% of revenues), as compared to $35.2 million (7.9% of revenues) in the six months ended June 30, 2004. 9 General and Administrative ("G&A") Expenses ------------------------------------------- Three Months Ended on June 30, 2005, Compared to Three Months Ended on June 30, 2004 ----------------------------------------------------------------------- G&A expenses were $12.9 million (5.3% of revenues) in the quarter ended June 30, 2005, as compared to $11.2 million (4.8% of revenues) in the quarter ended June 30, 2004. Six Months Ended on June 30, 2005, Compared to Six Months Ended on June 30, 2004 ----------------------------------------------------------------------- G&A expenses were $25.4 million (5.4% of revenues) in the six months ended June 30, 2005, as compared to $22.7 million (5.1% of revenues) in the six months ended June 30, 2004. Finance Expense (Net) --------------------- The increase in the net finance expense resulted mainly from a higher level of long-term loans, currency exchange rate differences and an increase in market interest rates. Three Months Ended on June 30, 2005, Compared to Three Months Ended on June 30, 2004 ----------------------------------------------------------------------- Net finance expense in the quarter ended June 30, 2005 was $1.5 million, as compared to $0.8 million of finance expense in the quarter ended June 30, 2004. Six Months Ended on June 30, 2005, Compared to Six Months Ended on June 30, 2004 ----------------------------------------------------------------------- Net finance expense in the six months ended June 30, 2005 was $3.2 million, as compared to $1.3 million of finance expense in the six months ended June 30, 2004. Taxes on Income --------------- The Company's tax rate represents a weighted average of the tax rates to which the various companies in the Group are subject. The change in the effective tax rate is attributable mainly to the mix of the tax rates in the various tax jurisdictions in which the Group's companies generating the taxable income operate and the recent decrease in the tax rate in Israel. On July 25, 2005, the Knesset (Israeli Parliament) passed the Law for the Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among other provisions, a gradual decrease in the corporate tax rate in Israel to the following tax rates: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and thereafter - 25%. According to US GAAP accounting rules, the effect of the amendment will be included in the third quarter of 2005. The Company estimates that the amendment is not expected to have a material effect on the Company's financial position and results of operations in 2005. Three Months Ended on June 30, 2005, Compared to Three Months Ended on June 30, 2004 ----------------------------------------------------------------------- Provision for taxes in the quarter ended June 30, 2005 was $4.1 million (effective tax rate of 25.2%), as compared to a provision for taxes of $3.7 million (effective tax rate of 24.4%) in the quarter ended June 30, 2004. 10 Six Months Ended on June 30, 2005, Compared to Six Months Ended on June 30, 2004 ----------------------------------------------------------------------- Provision for taxes in the six months ended June 30, 2005 was $8.0 million (effective tax rate of 25.5%), as compared to a provision for taxes of $7.8 million (effective tax rate of 25.8%) in the six months ended June 30, 2004. Company's Share in Earnings of Affiliated Entities -------------------------------------------------- The companies and partnerships, in which the Company holds 50% or less in shares or voting rights and are therefore not consolidated in its financial statements, operate in complementary areas to the Company's core business activities, including electro-optics and airborne systems. This includes the Company's share in the earnings of Tadiran, and reflects the impact of the corresponding purchase price allocation adjustments described above. Three Months Ended on June 30, 2005, Compared to Three Months Ended on June 30, 2004 ----------------------------------------------------------------------- In the second quarter of 2005 the Company had net expense of $1.2 million from its share in earnings of affiliated companies and partnership, as compared to net income of $1.6 million in the second quarter of 2004. Six Months Ended on June 30, 2005, Compared to Six Months Ended on June 30, 2004 ----------------------------------------------------------------------- In the six months ended June 30, 2005 the Company had net expense of $0.1 million from its share in earnings of affiliated companies and partnership, as compared to net income of $3.0 million in the six months ended June 30, 2004. Net Earnings and Earnings Per Share ("EPS") ------------------------------------------- Three Months Ended on June 30, 2005, Compared to Three Months Ended on June 30, 2004 ----------------------------------------------------------------------- Net earnings in the quarter ended June 30, 2005 were $10.9 million (4.5% of revenues), as compared to reported net earnings of $13.3 million (5.7% of revenues) in the quarter ended June 30, 2004. Diluted EPS in the quarter ended June 30, 2005 was $0.26, as compared to $0.33 in the quarter ended June 30, 2004. Excluding the IPR&D write-off related to Tadiran, which amounted to approximately $3.5 million, net earnings in the quarter ended June 30, 2005 were $14.4 million (5.9% of revenues), and the diluted EPS was $0.35. The number of shares used for computation of diluted EPS in the quarter ended June 30, 2005 was 41,617 thousand shares, as compared to 40,892 thousand shares in the quarter ended June 30, 2004. Six Months Ended on June 30, 2005, Compared to Six Months Ended on June 30, 2004 ----------------------------------------------------------------------- Net earnings in the six months ended June 30, 2005 were $23.6 million (5.0% of revenues), as compared to net earnings of $25.6 million (5.7% of revenues) in the six months ended June 30, 2004. Diluted EPS in the six months ended June 30, 2005 was $0.57, as compared to $0.63 per share in the six months ended June 30, 2004. 11 Excluding the IPR&D write-off related to Tadiran, which amounted to approximately $4.0 million, net earnings in the six months ended June 30, 2005 were $27.6 million (5.8% of revenues), and the diluted EPS was $0.66. The number of shares used for computation of diluted EPS in the six months ended June 30, 2005 was 41,617 thousand shares, as compared to 40,805 thousand shares in the six months ended June 30, 2004. I. Liquidity and Capital Resources ------------------------------- The Company's net cash flow generated from operating activities in the six months ended June 30, 2005 was $85.8 million, resulting mainly from net income and advances received from customers. The cash inflows were partially offset, mainly by an increase in inventories and by payments of trade payables. Net cash flow used for investment activities in the six months ended June 30, 2005 was $101.1 million, which was used mainly for acquisition of Tadiran's shares and for procurement of various assets and equipment. Net cash flow from financing activities in the six months ended June 30, 2005 was $35.0 million, which was mainly from receipt of long-term loans. On June 30, 2005, the Company had total borrowings in the amount of $140.2 million, including $128.7 million in long-term loans, and $440.9 million in guarantees issued on its behalf by banks, mainly in respect of advance payment and performance guarantees provided in the regular course of business. On June 30, 2005, the Company had a cash balance amounting to $53.9 million. The Company and some of its subsidiaries operate with loan and credit agreements that contain certain covenants. Such covenants include requirements for shareholders' equity, current ratio, operating profit margin, tangible net worth, EBITDA, interest coverage ratio and total leverage. As of June 30, 2005, the Company and its subsidiaries are in full compliance with all such covenants. As of June 30, 2005, the Company had working capital of $161 million and its current ratio was 1.37. The Company's ratio of equity to total assets was 38.7%. J. Derivatives and Hedges ---------------------- Market risks relating to the Company's operations result primarily from changes in interest rates and exchange rates. The Company typically uses financial instruments to limit its exposure to those changes. The Company also typically enters into forward contracts in connection with transactions that are denominated in currencies other than U.S. dollars and New Israeli Shekels ("NIS"). The Company may enter from time to time into forward contracts related to NIS, based on market conditions. On June 30, 2005, the Company's liquid assets were comprised of bank deposits, and it had no investments in liquid equity securities that were subject to market fluctuations, except for the Tadiran Communications shares acquired as mentioned above. The Company's deposits and loans are based on variable interest rates. Should interest rates either increase or decrease, such change may affect the Company's results of operations due to changes in the cost of the liabilities and the return on the assets that are based on variable rates. 12 The Company's functional currency is the U.S. dollar. On June 30, 2005, the Company had exposure due to liabilities denominated in NIS of $62.8 million in excess of its NIS denominated assets. These liabilities represent mostly wages and trade payables. The amount of the Company's exposure to the changes in the NIS-U.S. dollar exchange rate varies from time to time. Most of the Company's assets and liabilities which are denominated in currencies other than the NIS and the U.S. dollar were covered as of June 30, 2005 by forward contracts and options. On June 30, 2005, the Company had forward contracts for the sale and purchase of such foreign currencies totaling $32.2 million ($19.2 million in Euro, $5.9 million in GBP and $7.1 million in other currencies). The results of financial derivative activities in this quarter were not material. K. Resignation of a Director ------------------------- On August 2, 2005, the Company reported that Mr. Aharon Beth-Halachmi submitted his resignation from the Company's Board of Directors effective as of July 31, 2005. The resignation was submitted in connection with the Company's compliance with Sarbanes-Oxley Act and Nasdaq Listing Requirements relating to independence criteria for boards of directors. Mr. Beth-Halachmi will serve as a special advisor to the Chairman of the Company's Board of Directors. L. Dividends --------- The Board of Directors declared on August 8, 2005 dividend of $0.13 per share. * * * * * 13 EXHIBIT 3 --------- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2005 ------------------- (Unaudited) (In thousands of U.S. dollars) C O N T E N T S P a g e ------- CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets 2 - 3 Consolidated Statements of Income 4 Consolidated Statements of Changes in Shareholders' Equity 5 -7 Consolidated Statements of Cash Flows 8 - 9 Notes to the Consolidated Financial Statements 10 - 16 # # # # # # 1 ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -------------------------------------------------------------------------------- U.S. dollars (in thousands) June 30, December 31, 2005 2004 ----------- ------------ (Unaudited) (**) CURRENT ASSETS: Cash and cash equivalents $ 53,855 $ 34,109 Short-term bank deposits 1,196 738 Trade receivables, (net of allowance for doubtful accounts in the amount of $2,890 and $3,064 as of June 30, 2005 and December 31, 2004, respectively) 189,599 214,816 Other receivables and prepaid expenses 54,055 *53,087 Inventories, net of advances 296,603 249,041 ---------- ---------- Total current assets 595,308 551,791 ---------- ---------- INVESTMENTS AND LONG-TERM RECEIVABLES: Investments in affiliated companies and a partnership 117,397 *47,873 Investments in other companies 11,745 11,745 Long-term bank deposits and trade receivables 1,595 2,102 Severance pay fund 81,241 82,998 ---------- ---------- 211,978 144,718 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, NET 252,990 244,288 ---------- ---------- INTANGIBLE ASSETS: Goodwill 33,716 33,706 Other intangible assets, net 60,301 62,281 ---------- ---------- 94,017 95,987 ---------- ---------- $1,154,293 $1,036,784 ========== ========== * Restated (See Note 1B) ** Derived from the Company's 2004 audited financial statements The accompanying notes are an integral part of the consolidated financial statements. -2- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -------------------------------------------------------------------------------- U.S. dollars (in thousands, except share and per share data) June 30, December 31, 2005 2004 ----------- ------------ (Unaudited) (**) ----------- ------------ CURRENT LIABILITIES: Short-term bank credit and loans $ 8,581 $ 8,592 Current maturities of long-term loans 2,914 1,656 Trade payables 111,006 118,391 Other payables and accrued expenses 159,261 169,702 Customers advances and amounts in excess of costs incurred on contracts in progress 152,248 80,109 ----------- ------------ Total current liabilities 434,010 378,450 ----------- ------------ LONG-TERM LIABILITIES: Long-term loans 128,681 86,234 Advances from customers 19,099 10,320 Deferred income taxes 24,082 24,516 Accrued termination liability 97,381 100,740 ----------- ------------ 269,243 221,810 ----------- ------------ MINORITY INTERESTS 4,067 4,340 ----------- ------------ SHAREHOLDERS' EQUITY: Share capital Ordinary shares of New Israeli Shekels (NIS) 1 par value; Authorized 80,000,000 shares as of June 30, 2005 and December 31, 2004; Issued - 41,154,632 and 40,969,947 shares as of June 30, 2005 and December 31, 2004 respectively; Outstanding -- 40,745,711 and 40,561,026 shares as of June 30, 2005 and December 31, 2004, respectively 11,590 11,548 Additional paid-in capital 276,461 274,432 Accumulated other comprehensive loss (5,064) *(4,742) Retained earnings 168,307 *155,267 Treasury shares - 408,921 shares as of June 30, 2005 and December 31, 2004 (4,321) (4,321) ----------- ------------ 446,973 *432,184 ----------- ------------ $ 1,154,293 $ 1,036,784 =========== ============ * Restated (See Note 1B) ** Derived from the Company's 2004 audited financial statements The accompanying notes are an integral part of the consolidated financial statements. -3- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------------------------------------------------------------------------------------------------ U.S. dollars (in thousands, except share and per share data) Six months ended Three months ended Year ended June 30, June 30, December 31, ------------------------------ ------------------------------- --------------- 2005 **2004 2005 **2004 2004 ------------------------------ ------------------------------- --------------- (Unaudited) (Unaudited) (***) ----------- ----------- ----- Revenues $ 474,470 $ 445,317 $ 243,782 $ 231,645 $ 939,925 Cost of revenues 346,821 328,839 177,695 171,759 689,626 --------- --------- --------- --------- ------- Gross profit 127,649 116,478 66,087 59,886 250,299 --------- --------- --------- --------- ------- Research and development costs, net 32,961 27,027 17,795 13,733 66,846 Marketing and selling expenses 34,386 35,160 17,740 18,662 69,912 General and administrative expenses 25,424 22,731 12,932 11,169 47,832 --------- --------- --------- --------- ------- 92,771 84,918 48,467 43,564 184,590 --------- --------- --------- --------- ------- Operating income 34,878 31,560 17,620 16,322 65,709 Financial expenses, net (3,197) (1,301) (1,466) (822) (5,852) Other income (expenses), net (185) (84) (75) (299) 770 --------- --------- --------- --------- ------- Income before taxes on income 31,496 30,175 16,079 15,201 60,627 Taxes on income 8,043 7,779 4,056 3,704 15,219 --------- --------- --------- --------- ------- 23,453 22,396 12,023 11,497 45,408 Equity in net earnings of affiliated companies and partnership (127) 2,970 (1,168) 1,612 *6,645 Minority interests in losses (earnings) of subsidiaries 273 188 54 193 (180) --------- --------- --------- --------- ------- Net income $ 23,599 $ 25,554 $ 10,909 $ 13,302 *$51,873 ========= ========= ========= ========= ======= Earnings per share Basic net earnings per share $ 0.58 $ 0.64 $ 0.27 $ 0.33 *$1.30 ========= ========= ========= ========= ======= Diluted net earnings per share $ 0.57 $ 0.63 $ 0.26 $ 0.33 * $ 1.26 ========= ========= ========= ========= ======= Number of shares used in computation of basic net earnings per share 40,675 39,704 40,705 39,828 39,952 ========= ========= ========= ========= ======= Number of shares used in computation of Diluted net earnings per share 41,617 40,805 41,617 40,892 41,041 ========= ========= ========= ========= ======= * Restated (See Notes 1B) ** Restated (See Note 3) *** Derived from the Company's 2004 audited financial statements The accompanying notes are an integral part of the consolidated financial statements. -4- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------------------------ U.S. dollars (in thousands, except share data) Accumulated Number of Additional other outstanding Share paid-in comprehensive shares capital capital income (loss) ------------ ---------- ------------- ----------------- Balance as of January 1, 2004 39,337,204 $ 11,273 $ 259,033 $ (3,992) Exercise of options 1,223,822 275 10,985 -- Cumulative effect of first time adoption of the fair value based method for stock based compensation expenses (152) (152) Tax benefit in respect of options exercised -- -- 1,179 -- Stock based compensation -- -- 3,387 -- Dividends paid -- -- -- -- Other comprehensive income (loss): Unrealized gains on derivative instruments -- -- -- (299) Foreign currency translation differences -- -- -- 450 Minimum pension liability -- -- -- (901) Net income -- -- -- -- ------------ -------- --------- -------- Total comprehensive income Balance as of December 31, 2004 40,561,026 $ 11,548 $ 274,432 $ (4,742) Exercise of options 184,685 42 1,545 -- Tax benefit in respect of options exercised -- -- 484 -- Dividends paid -- -- -- -- Other comprehensive income (loss): Unrealized gains on derivative instruments -- -- -- 293 Foreign currency translation differences -- -- -- (615) Net income -- -- -- -- ------------ -------- --------- -------- Total comprehensive income Balance as of June 30, 2005 (Unaudited) 40,745,711 $ 11,590 $ 276,461 $ (5,064) =========== ========= ========== ======== Total Total Retained Treasury shareholders' comprehensive earnings shares equity income (loss) ------------ ------------ --------------- --------------- Balance as of January 1, 2004 $ 190,086 $ (4,321) $ 452,079 Exercise of options -- -- 11,260 Cumulative effect of first time adoption of the fair value based method for stock based compensation expenses Tax benefit in respect of options exercised -- -- 1,179 Stock based compensation -- -- 3,387 Dividends paid (86,692) -- (86,692) Other comprehensive income (loss): Unrealized gains on derivative instruments -- -- (299) $ (299) Foreign currency translation differences -- -- 450 450 Minimum pension liability -- -- (901) (901) Net income 51,873 -- 51,873 51,873 ------------ -------- --------- -------- Total comprehensive income 51,123 ======== Balance as of December 31, 2004 $ 155,267 $ (4,321) $ 432,184 Exercise of options -- -- 1,587 Tax benefit in respect of options exercised -- -- 484 Dividends paid (10,559) -- (10,559) Other comprehensive income (loss): Unrealized gains on derivative instruments -- -- 293 $ 293 Foreign currency translation differences -- -- (615) (615) Net income 23,599 -- 23,599 23,599 ------------ -------- --------- -------- Total comprehensive income $ 23,277 ======== Balance as of June 30, 2005 (Unaudited) $ 168,307 $ (4,321) $ 446,973 =========== ========= ========== The accompanying notes are an integral part of the consolidated financial statements. -5- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------------------------ U.S. dollars (in thousands, except share data) Accumulated Number of Additional other outstanding Share paid-in comprehensive shares capital capital income (loss) ------------ ------------- ------------- ---------------- Balance as of January 1, 2004 39,337,204 $ 11,273 $ 259,033 $ (3,992) ----------- -------- --------- -------- Exercise of options 591,247 132 5,584 -- Tax benefit in respect of options exercised -- -- 691 -- Stock based compensation -- -- 1,845 -- Dividends paid -- -- -- -- Other comprehensive income (loss): Unrealized gains on derivative instruments -- -- -- 428 Foreign currency translation differences -- -- -- (20) Net income -- -- -- -- ----------- -------- --------- -------- Total comprehensive income Balance as of June 30, 2004 (Unaudited) 39,928,451 $ 11,405 $ 267,153 $ (3,584) =========== ======== ========= ======== Balance as of April 1, 2005 (Unaudited) 40,682,842 $ 11,576 $ 275,766 $ (4,705) Exercise of options 62,869 14 498 -- Tax benefit in respect of options exercised -- -- 197 -- Dividends paid -- -- -- -- Other comprehensive income (loss): Unrealized gains on derivative instruments 81 Foreign currency translation differences (440) Net income -- -- -- -- ----------- -------- --------- -------- Total comprehensive income Balance as of June 30, 2005 (Unaudited) 40,745,711 $ 11,590 $ 276,461 $ (5,064) =========== ======== ========= ======== Total Total Retained Treasury shareholders' comprehensive earnings shares equity income (loss) ------------ ------------ --------------- ----------------- Balance as of January 1, 2004 $ 190,086 $ (4,321) $ 452,079 Exercise of options -- -- 5,716 Tax benefit in respect of options exercised -- -- 691 Stock based compensation -- -- 1,845 Dividends paid (8,696) -- (8,696) Other comprehensive income (loss): Unrealized gains on derivative instruments -- -- 428 $ 428 Foreign currency translation differences -- -- (20) (20) Net income 25,554 -- 25,554 25,554 ----------- -------- --------- -------- Total comprehensive income $ 24,448 ======== Balance as of June 30, 2004 (Unaudited) $ 206,944 $ (4,321) $ 477,597 =========== ======== ========= Balance as of April 1, 2005 (Unaudited) $ 162,661 $ (4,321) $ 440,977 Exercise of options -- -- 512 Tax benefit in respect of options exercised -- -- 197 Dividends paid (5,263) -- (5,263) Other comprehensive income (loss): Unrealized gains on derivative instruments 81 $ 81 Foreign currency translation differences (440) (440) Net income 10,909 -- 10,909 10,909 ----------- -------- --------- -------- Total comprehensive income $ 10,550 ======== Balance as of June 30, 2005 (Unaudited) $ 168,307 $ (4,321) $ 446,973 =========== ======== ========= The accompanying notes are an integral part of the consolidated financial statements. -6- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------------------------ U.S. dollars (in thousands, except share data) Accumulated Number of Additional other outstanding Share paid-in comprehensive shares capital capital income (loss) ------------ ------------- ------------- ---------------- Balance as of April 1, 2004 (Unaudited) 39,718,313 $ 11,358 $ 263,919 $ (3,942) Exercise of options 210,138 47 2,032 -- Tax benefit in respect of options exercised -- -- 280 -- Amortization of deferred stock -- -- -- compensation 922 Dividend paid -- -- -- -- Other comprehensive income (loss): Unrealized gains on derivative 522 instruments Foreign currency translation differences -- -- -- (164) Net income -- -- -- -- ----------- -------- --------- --------- Total comprehensive income Balance as of June 30, 2004 (Unaudited) 39,928,451 $ 11,405 $ 267,153 $ (3,584) =========== ======== ========= ========= Total Total Retained Treasury shareholders' comprehensive earnings shares equity income (loss) ------------ ------------ --------------- ----------------- Balance as of April 1, 2004 (Unaudited) $ 198,010 $ (4,321) $ 465,025 Exercise of options -- -- 2,079 Tax benefit in respect of options exercised -- -- 280 Amortization of deferred stock -- -- compensation 922 Dividend paid (4,369) -- (4,369) Other comprehensive income (loss): Unrealized gains on derivative -- -- 522 $ 522 instruments Foreign currency translation differences -- -- (164) (164) Net income 13,302 -- 13,302 13,302 ----------- -------- --------- --------- Total comprehensive income $ 13,660 ========= Balance as of June 30, 2004 (Unaudited) $ 206,944 $ (4,321) $ 477,597 =========== ======== ========= The accompanying notes are an integral part of the consolidated financial statements. -7- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------------------------------------------------------------------ U.S. dollars (in thousands) Six months ended Year ended June 30, December 31, --------------------------- --------------- 2005 2004 2004 ------------- ------------- --------------- (Unaudited) (***) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 23,599 $ 25,554 **$ 51,873 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,102 20,304 42,261 Stock based compensation - 1,845 3,387 Deferred income taxes (1,804) 1,653 153 Accrued severance pay, net (1,725) (833) (2,304) Loss (gain) on sale of property and equipment (304) 16 143 Tax benefit in respect of options exercised 484 691 1,179 Minority interests in earnings (losses) of subsidiaries (273) (187) 180 Equity in net losses (earnings) of affiliated companies and partnership, 4,265 681 **1,505 net of dividend received (*) Changes in operating assets and liabilities: Decrease (increase) in short and long-term receivables and prepaid expenses 25,732 24,603 (16,871) Decrease (increase) in inventories (63,529) (5,062) 2,932 Increase (decrease) in trade payables, other payables and accrued (21,262) (5,216) 20,522 expenses Increase (decrease) in advances received from customers 96,507 (7,308) (18,535) Settlement of royalties with the Office of the Chief Scientist - (1,247) (3,714) Other adjustments 45 (91) (1,228) ------------- ------------- --------------- Net cash provided by operating activities 85,837 55,403 81,483 ------------- ------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (30,017) (26,262) (53,008) Acquisition of subsidiaries and businesses (Schedule A) (318) - (2,315) Investments in affiliated companies and subsidiaries (74,782) (250) (18,391) Proceeds from sale of property, plant and equipment 1,001 1,351 2,560 Proceeds from sale of investment 3,100 - - Investment in long-term bank deposits (551) (167) (1,203) Proceeds from sale of long-term bank deposits 945 317 1,507 Short-term bank deposits, net (458) 125 (48) ------------- ------------- --------------- Net cash used in investing activities (101,080) (24,886) (70,898) ------------- ------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of options 1,587 5,716 11,260 Repayment of long-term bank loans (51,652) (12,222) (35,826) Receipt of long-term bank loans 95,500 - 58,410 Dividends paid (10,559) (8,696) (86,692) Change in short-term bank credit and loans, net 113 (1,135) 216 ------------- ------------- --------------- Net cash provided by (used in) financing activities 34,989 (16,337) (52,632) ------------- ------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,746 14,180 (42,047) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 34,109 76,156 76,156 ------------- ------------- --------------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 53,855 $ 90,336 $ 34,109 ============= ============= =============== (*) Dividend received $ 4,138 $ 3,651 $ 8,150 ============= ============= =============== (**) Restated (See Notes 1B and 3) (***) Derived from the Company's 2004 audited financial statements The accompanying notes are an integral part of the consolidated financial statements. -8- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------------------------------------------------------------------ U.S. dollars (in thousands) Six months ended Year ended June 30, December 31, ------------------------- --------------- 2005 2004 2004 ------------ ------------ --------------- (Unaudited) (*) SUPPLEMENTARY CASH FLOWS ACTIVITIES: Cash paid during the period for: Income taxes $ 13,233 $ 6,614 $ 13,305 ============ ============ =============== Interest $ 3,193 $ 844 $ 3,122 ============ ============ =============== SCHEDULE A: Subsidiaries and businesses acquired Estimated net fair value of assets acquired and liabilities assumed at the date of acquisition: Working capital, net (excluding cash and cash equivalents) $ (3,281) - $ (707) Property, plant and equipment - - (10) Goodwill, customer contracts and other intangible assets (1,514) - (1,598) Long-term liabilities - mainly advances from customers 4,477 - - ------------ ------------ --------------- $ (318) - $ (2,315) ============ ============ =============== * Derived from the Company's 2004 audited financial statements -9- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED -------------------------------------------------------------------------------- U. S. dollars (In thousands) Note 1 - GENERAL A. The accompanying unaudited interim consolidated financial statements have been prepared in a condensed format as of June 30, 2005, and for the three and six months then ended in accordance with generally accepted accounting principles in the United States )U.S. GAAP( relating to the preparation of financial statements for interim periods. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States but which are not required for interim reporting purposes, have been condensed or omitted. See Note 7 for the reconciliation from U.S. GAAP to accounting principles generally accepted in Israel (Israeli GAAP). These statements should be read in conjunction with the Company's annual financial statements and accompanying notes as of December 31, 2004, included in the Form 20-F for the year ended December 31, 2004. The interim financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation. All such adjustments were of a normal recurring nature. Reclassifications have been made to comparative data in the balance sheet as of December 31, 2004 in order to conform to the current period presentation. Comparative data in the condensed interim financial statements for the three and six months ended June 30, 2004, for the year ended December 31, 2004 and for the three months ended March 31, 2005 have been restated (see Notes 1B and 3). Operating results for the three and six months ended June 30, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. B. On December 27, 2004, the Company reached an agreement with Koor Industries Ltd. ("Koor") to purchase all of Koor's holdings in Tadiran Communications Ltd. ("Tadiran Communications"), which represents approximately a 32% interest in Tadiran Communications, at a price of $37 per share. This purchase was to be made concurrently with Koor's purchase of approximately 9.8% of the Company's shares from Federmann Enterprises Ltd ("Federmann"). Tadiran Communications is an Israeli company, whose shares are traded on the Tel Aviv Stock Exchange. The purchase of the interest in Tadiran Communications was to have been made in two stages, subject to the terms agreed upon between the parties. On April 18, 2005, the Company completed the first stage of the transaction to purchase shares of Tadiran Communications from Koor. The first stage of the transaction was completed after all the precedent conditions were met and all the required approvals for this stage were obtained. According to the transaction agreements, Elbit Systems purchased from Koor, in this stage, approximately 13.7% of the outstanding shares of Tadiran in consideration for $62.5 million. In addition to the shares previously purchased by Elbit Systems in the stock market, it now holds approximately 21% of Tadirans' shares. The total consideration paid by the Company for the purchase of Tadiran shares from Koor and in the stock market amounted to approximately $90 million. -10- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED -------------------------------------------------------------------------------- U. S. dollars (In thousands, except per share data) Note 1 - GENERAL (CONT.) The excess of the amount paid for the Tadiran shares acquired until the end of the second quarter of 2005 over their book value is approximately $62 million. Based on a purchase price allocation analysis ("PPA") performed by independent advisors, this excess was attributed as follows: $M Expected useful lives -- --------------------- In Process R&D ("IPR&D") 5.0 immediate write-off Inventory 1.5 Up to a quarter Other tangible assets and liabilities 0.5 5 years Brand 4.0 15 years name Customer base and backlog 20.0 2-12 years Technology 12.0 10 years Goodwill 19.0 Indefinite - subject to annual impairment test -------- 62.0 ======== As a result of the acquisition in the second quarter of 2005, the Company is able to execise significant influence in Tadiran. In accordance with APB 18, "The Equity Method of Accounting for Investments in Common Stock", the Company's interest in Tadiran, which was previously accounted for as available-for-sale securities, is accounted retroactively under the equity method of accounting ("step-by-step acquisition"). Implementing the step-by-step acquisition method resulted in a restatement of the Company's financial statements for all prior periods, in which the Company's investment in Tadiran Communications was accounted for as available-for-sale securities. The following are the effects of the restatement: (1) Consolidated balance sheet December 31, 2004 ------------------------------------------- As Effect by As reported restatement restated -------- ----------- -------- Other receivables and prepaid expenses $ 52,335 $ 752 $53,087 Investment in affiliated companies and partnership 33,124 14,748 47,873 Available for sale securities 18,017 (18,017) - Accumulated other comprehensive loss (3,346) (1,396) (4,742) Retained earnings 156,387 (1,120) 155,267 Total shareholders' 434,700 (2,516) 432,184 equity (2) Consolidated statement of income Year ended December 31, 2004 ------------------------------------------- As Effect by As reported restatement Restated -------- ----------- -------- Equity in net earnings of affiliated companies and partnership $ 7,765 $ (1,120) $ 6,645 Net income 52,993 (1,120) 51,873 Basic net earnings per share 1.33 (0.03) 1.30 Diluted net earnings per share 1.29 (0.03) 1.26 -11- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED -------------------------------------------------------------------------------- U. S. dollars (In thousands) Note 1 - GENERAL (CONT.) C. On July 6, 2005, the Company reported that it signed an agreement with Koor to acquire all of Koor's 70% holdings in Elisra Electronic Systems Ltd. ("Elisra"), in consideration for $70 million to be paid in the form of cash. The parties also agreed on an additional contingent consideration as a result of future insurance proceeds relating to the fire at Elisra's plant in 2001. As part of the transaction, Koor may purchase Dekolink Wireless Ltd. from Elisra at an agreed upon price. Dekolink Wireless Ltd. is a start-up company engaged in the cellular networks area that is wholly-owned by Elisra. The acquisition agreement relating to Elisra is subject to receipt of the Company's shareholders approval as well as approvals from governmental authorities, including the Israel Antitrust Authority. Concurrently with signing the agreement to acquire Koor's holdings in Elisra, the Company and Koor agreed to amend their agreements regarding the Company's purchase of Tadiran shares held by Koor. Pursuant to the amendment, the Company will accelerate the acquisition from Koor of approximately 5% of Tadiran's outstanding shares, out of a total of 18.2% of Tadiran outstanding shares that the Company agreed to acquire as part of the second stage of the aforementioned agreement. Upon completion of the acquisition of the 5% interest in Tadiran, the Company and Koor will have equal representation on Tadiran's board of directors, Joseph Ackerman, Elbit Systems President, will be appointed as Chairman of Tadiran's Board of Directors and the provisions of the shareholders' agreement relating to joint control in Tadiran will enter into effect. The price to be paid by the Company for the Tadiran shares will be the price agreed upon in the original agreement with Koor signed on December 27, 2004. The agreement for acquiring Koor's holdings in Elisra and the amendments regarding the acquisition of Koor's shares in Tadiran, were signed following the approval of the transactions by the Company's Audit Committee and Board of Directors, who obtained a fairness opinion from an independent appraiser regarding the consideration to be paid for the Elisra shares. The purchase of the approximately 5% interest in Tadiran by Elbit Systems will take place following the approval of the Company's shareholders for the acquisition of Elisra and the amendments to the Tadiran acquisition agreements. Following the acquisition of the 5% interest in Tadiran, the Company will hold a total of approximately 26% of Tadiran's shares, including approximately 7% that were purchased on the stock market. Upon completion of the Elisra transaction, the Company will complete the purchase of Koor's remaining shares in Tadiran - approximately 13% - reaching a total of approximately a 39% interest in Tadiran based on the Company's current shareholdings. -12- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED -------------------------------------------------------------------------------- U. S. dollars (In thousands) Note 1 - GENERAL (CONT.) D. In March 2005, the Company, through its wholly-owned subsidiary Cyclone Aviation Products Ltd. ("Cyclone"), acquired from Israel Military Industries Ltd. ("IMI") the assets and customer contracts related to the Aircraft Systems Division of IMI ("the Aircraft Division") in consideration for approximately $7 million, to be paid in cash (approximately $1 million out of which $318 was paid through balance sheet date) and assumed liabilities of approximately $6 million. The excess of the purchase price over the fair value of net tangible assets acquired in the amount of approximately $1,500 was allocated to customers' contracts to be amortized over an estimated period of four years. The Aircraft Division manufactures weapon payloads and external fuel tanks for fighter aircrafts. The financial results of the business acquired are included in the Company's 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 the Aircraft Division are not material in relation to the total consolidated revenues and net income of the Company. Note 2 - SIGNIFICANT ACCOUNTING POLICIES A. The significant accounting policies followed in the preparation of these statements are identical to those applied in preparation of the latest annual financial statements. B. The accompanying financial statements have been prepared in U.S. dollars since the functional currency of the primary economic environment in which the operations of the Group (which includes Elbit Systems Ltd. and its subsidiaries) are conducted is the U.S. dollar. Note 3 - STOCK-BASED COMPENSATION As mentioned in Note 2X to the Company's annual financial statements, effective January 1, 2004, the Company adopted the fair value recognition provisions of SFAS 123. Under the modified prospective method of adoption selected by the Company under the provisions of SFAS No. 148, the fair value recognition provisions are applied from January 1, 2004 to all employee awards granted, modified or settled subsequent to January 1, 2004, and to previously granted awards that were not fully vested on the date of adoption. The aforementioned decision to adopt the fair value recognition provisions of SFAS 123 took place in December 2004. SFAS 123 fair value recognition provisions were adopted effective January 1, 2004 and the results of the first three quarters of 2004 were restated accordingly. The restatement reflects the change in stock-based compensation expense calculated under the intrinsic value based method as compared to the expense calculated under the fair value based method. -13- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED -------------------------------------------------------------------------------- U. S. dollars (In thousands, except per share data) Note 3 - STOCK-BASED COMPENSATION (CONT.) The following is the effect of the restatement of stock-based compensation expense on the financial statements for the three and six months ended June 30, 2004: Three months ended June 30, 2004 ------------------------------------------- As Effect by As -- --------- -- reported restatement restated -------- ----------- -------- Gross profit $ 58,518 $ 1,368 $ 59,886 Operating income 13,835 2,487 16,322 Net income 11,312 1,990 13,302 Basic net earnings per share 0.28 0.05 0.33 Diluted net earnings per share 0.28 0.05 0.33 Six months ended June 30, 2004 ------------------------------------------- As Effect by As -- --------- -- reported restatement restated -------- ----------- -------- Gross profit $ 115,438 $ 1,040 $116,478 Operating income 29,669 1,891 31,560 Net income 24,039 1,515 25,554 Basic net earnings per share 0.61 0.03 0.64 Diluted net earnings per share 0.59 0.04 0.63 Note 4 - INVENTORIES, NET OF ADVANCES June 30, December 31, 2005 2004 ---------------------------------- (Unaudited) (*) ---------------------------------- Cost of long-term contracts in progress $ 309,308 $ 254,009 Raw materials 78,426 71,813 Advances to suppliers and subcontractors 27,549 21,164 --------- --------- 415,283 346,986 Less - Cost incurred on contracts in progress deducted from customer advances 34,512 14,533 --------- --------- 380,771 332,453 Less - Advances received from customers 77,104 75,776 Provision for losses 7,064 7,636 --------- --------- $ 296,603 $ 249,041 ========= ========= * Derived from the Company's 2004 audited financial statements -14- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED -------------------------------------------------------------------------------- U. S. dollars (In thousands) Note 5 - RECENTLY ISSUED ACCOUNTING STANDARDS A. In March 2005, the SEC released SEC Staff Accounting Bulletin No. 107, "Share-Based Payment" ("SAB 107"). SAB 107 provides the SEC staff's position regarding the application of Statement 123R and contains interpretive guidance related to the interaction between Statement 123R and certain SEC rules and regulations and also provides the SEC staff's views regarding the valuation of share-based payment arrangements for public companies. SAB 107 highlights the importance of disclosures made related to the accounting for share-based payment transactions. The Company is currently reviewing the effect of SAB 107; however, it does not believe that SAB 107 will have a material impact on its financial position, results of operations or cash flows. B. In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154 ("FAS 154"), "Accounting Changes and Error Corrections" - a replacement of APB No. 20, Accounting Changes" and FAS No. 3, "Reporting Accounting Changes in Interim Financial Statements". FAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. APB Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FAS 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable to do so. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company estimates that the adoption of FAS 154 will not have a significant impact on its results of operations, financial condition and cash flows. C. FASB Statements No. 123 (revised 2004), "Share-based Payment" (FASB 123(R)) (See Note 2AA(3)) to the Company's annual financial statements for 2004, was to have been effective as of the beginning of the first interim or annual reporting period that commences after June 15, 2005 (July 1, 2005 for the Company); however, on April 14, 2005, the United States Securities and Exchange Commission ("SEC") delayed effectiveness of FAS 123(R) for companies with fiscal years ending December 31 (such as the Company) to January 1, 2006. Note 6 - TAXES ON INCOME On July 25, 2005, the Knesset (Israeli Parliament) approved the Law for the Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among other provisions, a gradual decrease in the corporate tax rate in Israel to the following tax rates: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and thereafter - 25%. The Company estimates that the change in tax rate is not expected to have a material effect on the Company's financial position and results of operations in 2005. -15- ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED -------------------------------------------------------------------------------- U. S. dollars (In thousands) Note 7 - RECONCILIATION TO ISRAELI GAAP As described in Note 1, the Company prepares its financial statements in accordance with U.S. GAAP. See Note 26 to the 2004 annual financial statements for a description of the differences between U.S. GAAP and Israeli GAAP in respect to the Company. The effects of the differences between U.S. GAAP and Israeli GAAP on the Company's financial statements are detailed below. A. Effect on net income Three months ended Year ended June 30, December 31, ------------------------------------------------ 2005 2004 2004 -------------- --------------------------------- (Unaudited) (*) Net income as reported according to U.S. GAAP $ 23,599 $ 25,554 $ 51,873 Adjustments to Israeli GAAP (3,004) (1,907) 662 -------- -------- -------- Net income according to Israeli GAAP $ 20,595 $ 23,647 $ 52,535 ======== ======== ======== B. Effect on shareholders' equity As per As reported Adjustments Israeli GAAP ----------- ----------- ------------ As of June 30, 2005 (Unaudited) Shareholders' equity $ 446,973 $ (17,143) $ 429,830 ========= ========= ========= As of December 31, 2004 (*) Shareholders' equity $ 432,184 $ (12,004) $ 420,180 ========= ========= ========= * Derived from the Company's 2004 audited financial statements # # # # # # -16-