| · | The Nova i550 is the most recent addition to Nova’s integrated metrology product portfolio that enhances metrology performance by using newly designed optics enabling better sensitivity and accuracy while measuring the most complex structures. The i550 delivers a significant boost in productivity required in the most advanced production lines and supports new disruptive modeling that incorporate smart learning and training capabilities. The i550 platform is qualified with major process equipment vendors and is designed to meet the metrology and process control challenges of the most advanced FinFET and 3D-NAND in R&D and production. |
| · | The Nova i500 integrated metrology product family delivers advanced metrology with high throughput and tool matching performance. The platform is qualified with multiple process tools and is deployed in both R&D and high-volume production of the most advanced logic and memory technology nodes. |
| · | The NovaScan 3090Next is a legacy system still sold into 300mm fabs as the latest and bestmost advanced of the NovaScan line. Targeted for 45nm and 32nm technology nodes with extendibility down to 20nm, this tool was released in 2006 and provided significant improvements in throughput, accuracy, tool to tool matching and spectral range over the older NovaScan 3090. It also improved overall tool reliability. The NovaScan 3090Next is available as integrated metrology and as stand-alone metrology systems for both thin film and Optical CD (scatterometry) applications. |
| · | The NovaScan 2040 is Nova’s integrated thickness monitoring systems for 200mm fabs with enhanced spectral range, addressing the needs of the industry for chemical mechanical polishing high-end applications of thin films and complex layer stacks. |
| · | The Nova T600 MMSR (Multi-Measurement Spectral Reflectometry) enhances Nova’s stand-alone metrology performance by adding unique channels of information to its newly designed optical unit. The platform is complemented with advanced algorithms for smart utilization of multiple channels to optimize more accurate and faster solutions. Nova T600MMSR is designed to meet the metrology and process control challenges for advanced FinFET and 3D-NAND in R&D and production. |
| · | The Nova T600 features multi-channel reflectometry configuration that is optimized for best sensitivity on small features and critical device parameters in both Memory and Logic\Foundry advanced manufacturing. |
| · | The Nova T500T550 is a high-productivity dimensional metrology platform designed to address the unique challenges of the semiconductor manufacturing industry. This powerful platform delivers increased sampling ratesindustry, delivering a highly efficient and high performance film thickness and Optical CD metrology capabilities for 22nm and below. The T500 is part of Nova’s fleeteffective solution for semiconductor manufacturers; withadvanced nodes. With full commonality and same optics design as the Nova i500i550 integrated metrology platform, the Nova T500 provides aT550 completes Nova’s unique and highly efficient offering for CMP metrology and process control. |
| · | NOVAFitThe Nova T500 is Novaa high-productivity metrology platform that delivers increased sampling rates and high performance film thickness and Optical CD metrology capabilities. The T500 platform provides unique capabilities of thick layer measurement (TLM), enabling solutions for applications requiring accurate, repetitive measurements of thick films, such as in CMOS image sensor BSI CMP applications.. |
| · | NovaFit is our data-driven modeling software engine that enhances traditional modeling capabilities with advanced machine learning algorithms. This modeling software improves metrology capabilities and accelerates time to solution in complex 3D and High Aspect Ratio devices. Together with Nova’s Fleet Management solutions, NOVAFit utilizes fleetwide information to provide adaptive advanced metrology solutions based on continuous training. The newNovaFit suite of software capabilities complements all of Nova’s fleet and works in conjunction with Nova’s advancedNovaMARS® augmented modeling engine –NovaMARS.and Nova’s Fleet management solution to improve metrology performance, speed up time to solution and expend metrology envelope for enriched process control. NovaFit embeds the most advanced machine learning and big data architecture into optical modeling, revolutionizing the way customers utilize metrology measurement data and expands the metrology performance envelope to tighten process windows, avoid process excursions and improve yield. |
| · | NovaMars is an advanced scatterometry modeling and application development software tool enabling complex 2D, 3D and in-die measurements as well as Real Time Regression (RTR) capabilities. Process engineers can harness the power and flexibility of the tool to develop their own scatterometry applications by themselves thus keeping the details of their process within the fab. Its user interface and high level of automation provide easier and faster application development and eliminate discrepancies between different developers, enabling the best solution, independent of user proficiency. Combined with the NovaMARS innovative modeling software capabilities, Nova’s Optical CD tools provide the metrology precision and accuracy as well as application development flexibility needed for the development of most advanced technology nodes. The NovaMars is an integral part in all Nova integrated and stand-alone solutions. |
| · | Nova Hybrid Metrology solution is part of our holistic metrology approach that utilizes different sources of information that can enhance the overall metrology performance. The Hybrid metrology solution combines data from different metrology toolsets in the fab together with Nova’s optical metrology to provide improved performance above that of any individual toolset. Nova has been pioneering the hybrid concept in the past several years and has proven the value of the solution in multiple publications and technical papers. As of 2013, the Hybrid solution has been implemented in production at leading customers’ fabs. |
| · | Nova Fleet Management platform is Nova’s newestNova solution for managing large fleets of metrology tools to deliver high productivity, operational efficiency and is designed to address the needsadvanced analytics in high volume production environment of foundry and working methodologies of Metrology and Process Engineers in the fab.memory customers. The Fleet Management solution offers an easy and intuitive platform for managing and improving the overall productivity of Nova systems. ComprisedNova’s fleet of a centralized server dedicated for databasessystems and data storage, network-connected toolsis designed to address the needs and servers, Nova Fleet Management serves asworking methodologies of metrology and process engineers in the back-end platform that enables Wafer-less Recipe Creation (WRC) for simple and intuitive recipe creation without interfering with tool operation. It also supports distribution of recipes from a central location to multiple tools over the fab network in efficient and secure mechanism. The centralized server contains an advanced report generator for the analysis of the metrology spectral data collected from the tools as well as tool performance and health monitoring to ensure that the tools are operating within specifications and enable tight monitoring of the fleet’s performance trends.fab. |
| · | NovaHPC (High Power Computer) supports the NovaMars Application Development Tool and enables effective and timely calculations of attained spectra. Scalable and user configurable infrastructure with Nova’s proprietary task management software addresses the growing needs of IC manufacturing metrology. |
| · | The VeraFlex III+ XF is the most advanced, fourth generation version of the VeraFlex family of in-line XPS production metrology tools. It provides enhanced metrology performance, improved productivity, precision and sensitivity that extend the utilization of XPS technology in high volume production in the most advanced Logic and Memory technology nodes. |
| · | The VeraFlex III XF is the third generation of the globally adopted VeraFlex series of XPS production systems. It combines enhanced XPS capability with a unique low energy XRF (LE-XRF) channel as an option to address the metrology challenges of the most advanced nodes. The VeraFlex III XF provides solutions for emerging applications in FinFET HKMG (High K Metal Gate), interconnect processes, and advanced memories. |
| · | The VeraFlex II, introduced in 2010, is a unique production-proven platform to use X-ray photoelectron spectroscopy (XPS), a materials analysis technology that is proven essential to increase device yield. The VeraFlex II has characterized over 30 HKMG material systems for thickness and composition, and is addressing a growing number of thin film process control applications where traditional metrology approaches struggle to deliver viable solutions. The VeraFlex II is also used extensively by advanced node DRAM and Flash manufacturers to control tunnel oxides, capacitor films, silicides, and low doses of carbon. Manufacturers of alternative memory devices such as PRAM, ReRAM, and MRAM need VeraFlex II to characterize and control phase change materials and new electrode-oxide material systems. |
| · | QED is the Offline Advanced Data Analysis and Recipe Creation and Maintenance System that supports VeraFlex II and VeraFlex III XF. It brings the VeraFlex series engineering interface from the fab to the office. Built on PHI MultiPak's package of extensive XPS analysis function, QED brings all the tools necessary to manage the most effective film thickness and composition control recipes. QED functions include all aspects of film acquisition and analysis, a full suite of recipe creation and editing tools, and powerful signal analysis functions used to find and process the most critical elemental peaks. |
Metrology is becoming a technology enabler that allows process equipment suppliers to tighten their specifications in order to meet customer’s demand. Our strategy to offer holistic and diverse portfolio to enable the industry transitions, establishes the advantage and the value that innovative company like us brings to our customers and the market. With such a diversified portfolio, we now cover a variety of applications in both front end and back end of line that increases our served and available markets and footprint in all customer segments.
Research and Development
We have assembled a core team of experienced scientists and engineers who are highly skilled in their particular field or discipline. Our research and development core competencies, technologies and disciplines are in scatterometry, thin film metrology, XPS and material metrology and include measurement instruments, optical modeling, interpretation software, image acquisition, pattern recognition, X-ray energy sources, electron optics and detection, vacuum systems and equipment integration. Our research and development staff consists of about 216275 highly skilled members, approximately 8083 of which hold Ph.D.’s. In addition, we rely on independent subcontractors and consultants in various fields. Since June 2003, our research and development operations in Israel are certified as ISO9001/9001/2000 quality standard.
The metrology and process control market is characterized by continuous technological development and product innovations. We believe that the rapid and ongoing development of new products and enhancements to our existing product lines is critical to our success. Accordingly, we devote a significant portion of our technical, management and financial resources to developing new applications and emerging technologies. In 2015, 2016 and 2017, our research and development expenses, net of participation by IIA and the European Community, were $39.7 million, $35.0 million and $39.0 million respectively, representing, 26.7%, 21.4% and 17.5% of our respective total revenues for those years.
Our vision is to continue to be a market leader in the semiconductor process control market, increase our leadership in integrated metrology solutions, increase our leadership in in-line composition and thickness of ultra-thin layers and become the leader in the stand-alone Optical CD metrology market, and our research and development efforts and activities are designed to support this vision. Our research and development policy is based on a structured process of initiating new projects and on-going review of existing development projects. Project initiation is based on a detailed project plan, risk and market analysis. Each project is monitored throughout its life cycle in a structured process, including design reviews and project management reviews. In the frame of our research and development activities we consider from time to time entering into consortium arrangements. In 2016, we enteredenter into development consortiums in Europe, andconsortium arrangements, which also continued with development consortiums, which we entered during 2012 – 2015, mainly in order to be ablehelp us to support our customers in the transition to advance technology nodes in the coming years. These consortiums are joint collaboration programs with other semiconductors companies, and are supported and funded by the IIA andand\or European Joint Research. It should be noted, that in order to maintain our eligibility for these programs, we must continue to meet certain conditions. These programs might also restrict our ability to manufacture particular products and transfer particular technology, which were funded by the IIA. For additional information, see “Item 5C - Grants from the Israel Innovation Authority” in this annual report on Form 20-F.
As part of our long termlong-term technological collaboration, we are also engaged with joint development activities with some of our strategic customers, as well as with research institutes.institutes and other semiconductor companies. These activities impose some limitations on the joint intellectual property developed as part of these programs.
Intellectual Property
Our success depends in part upon our ability to protect our intellectual property. We therefore have an extensive program devoted to seeking patent protection for our inventions and discoveries that we believe will provide us with competitive advantages. As of December 31, 2017,2018, our portfolio includes more than 140150 U.S. patents and about 8590 non-U.S. patents. The U.S. patents we hold have expiration dates ranging from 20162019 to 2034. We also have about 3740 U.S. patent applications pending and more than 90105 applications pending in other countries including 127 PCT applications. Our patents and applications principally cover various aspects of optical measurement systems and methods, integrated process control implementation concepts, and optical, opto-mechanical and mechanical design. In addition, our patents and applications principally cover various aspects of X-ray based measurement systems and methods, including process control implementation concepts, X-ray energy sources, electron optics and detection, vacuum systems and equipment integration. We have also registered 67 trademarks in the U.S. and have more than 2430 registered trademarks and 316 applications for trademarks’ registration in countries other than the U.S.
To protect our proprietary rights, we also rely on a combination of copyrights, trademarks, trade secret laws, contractual provisions (e.g. confidentiality agreements) and licenses. Our copyrights include software copyrights. We constantly seek to control access to, and distribution of our proprietary information, such as our proprietary algorithms.
While we attempt to protect our intellectual property through patents, copyrights and non-disclosure and confidentiality agreements, we may not be able to adequately protect our technology. Competitors may be able to develop similar technology independently or design around our patents and, despite our efforts, our trade secrets may be disclosed to others. Furthermore, the laws of countries other than the U.S. may not protect our intellectual property to the same extent as the laws in the U.S. We also cannot assure that: (i) our pending patent applications will be approved; (ii) any patents granted will be broad enough to protect our technology or provide us with competitive advantages or will not be successfully challenged or invalidated by third parties; or (iii) that the patents of others will not have an adverse effect on our ability to do business. We may also have to commence legal proceedings against third parties to protect our intellectual property.
From time to time, we receive communications from others asserting that our products infringe or may infringe their intellectual property rights. Typically, our in-house patent counsel investigates these matters and, where appropriate, retains outside counsel to provide assistance. We are not presently involved in any material legal proceedings in which a third party has asserted that we have violated their intellectual property rights. If, however, we become involved in any such litigation and its outcome is adverse to us, it may result in a loss of proprietary rights, subject us to significant liabilities, including treble damages in some instances, require us to seek licenses from third parties which may not be available on reasonable terms or at all, or prevent us from selling our products. Furthermore, any litigation relating to intellectual property, even if we are ultimately successful, could result in substantial costs and diversion of time and effort by our management. This in and of itself could have a negative impact on us.
While we believe that we would be successful in any litigation seeking to enforce our patent rights, the ultimate outcome of any litigation or other legal proceedings cannot be predicted.
Our Customers, Sales and Marketing
Our sales and marketing strategy is based mostly on a direct approach where we engage with our customers from the early stages of process development, work in collaboration to address their challenges in the development phase and support the transition to high volume production. We seek to establish and maintain close and mutually beneficial relationships with our customers by consistently providing them with a high level of service, support and new capabilities. We have a global network of sales and marketing, customer service and applications support offices worldwide.
In additions,addition, we have established sales and support activities with key process equipment manufacturers to ensure our products are combined into our partners’ next generation equipment sets as those become available. As part of our integrated tools sales effort, we continuously add new process equipment manufacturers as partners as we introduce new integrated process control systems that can be integrated with different types of equipment.
We serve all sectors of the integrated circuit manufacturing industry including logic, ASIC, foundries and memory manufactures. Our end user and process equipment manufacturer customers are located in different countries.
The table below describes the distribution of our total revenues, from systems and services, according to the geographic location of the actual installation of our systems in end-user sites:
| | 2015 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2018 | |
| | (US Dollars, in thousands) | | | (US Dollars, in thousands) | |
Taiwan, R.O.C. | | $ | 65,466 | | | $ | 74,567 | | | $ | 68,041 | | | $ | 74,567 | | | $ | 68,041 | | | $ | | |
Korea | | | | 26,871 | | | | 61,664 | | | | 79,290 | |
USA | | | 21,533 | | | | 15,269 | | | | 38,254 | | | | 15,269 | | | | 38,254 | | | | 20,082 | |
Korea | | | 27,526 | | | | 26,871 | | | | 61,664 | | |
China | | | 9,652 | | | | 31,269 | | | | 36,715 | | | | 31,269 | | | | 36,715 | | | | 58,982 | |
Other | | | 24,337 | | | | 15,927 | | | | 17,319 | | | | 15,927 | | | | 17,319 | | | | 30,320 | |
Total | | | 148,514 | | | | 163,903 | | | | 221,992 | | | | 163,903 | | | | 221,992 | | | | 251,134 | |
The semiconductor industry is dominated by a small number of large companies. As a result, while our overall customer base is diverse, our sales are highly concentrated among a relatively small number of customers. The following table indicates the percentage of our total revenues derived from sales to our five largest customers and the range of these revenues from these customers for the periods indicated.
| | 2015 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2018 | |
Total revenues from five largest customers | | | 76 | % | | | 76 | % | | | 75 | % | | | 76 | % | | | 75 | % | | | 66 | % |
Range of revenues from five largest customers | | | 9%-31 | % | | | 10%-34 | % | | | 8%-23 | % | | | 10%-34 | % | | | 8%-23 | % | | | 5%-20 | % |
We anticipate that our revenues will continue to depend on a limited number of major customers, although the companies considered to be our major customers and the percentage of our revenue represented by each major customer may vary from year to year. As our customer base is highly concentrated, if any of our customers becomes insolvent or has difficulties meeting its financial obligations to us, we may suffer losses that may be material in amount. A loss of any of our major customers may likewise cause us to suffer a material decrease in sales and revenue.
The highly competitive nature of the market for semiconductor capital equipment affects our ability to successfully implement our marketing and sales efforts. Competitive factors in the market for integrated process control systems include technological leadership, system performance, ease of use, reliability, cost of ownership, technical support and customer relationships. For integrated process control, an adequate business model, internal organization and unique process equipment manufacturer agreements and partnerships are also significant factors. We believe we compete favorably on the basis of these factors in the markets we serve.
Our current stand-alone metrology products compete with both Nanometrics and KLA-Tencor. In this area, we are using our broad portfolio of stand-alone metrology platforms combined with advanced modeling and software capabilities. These solutions are being used for in line metrology at leading foundries and memory customers. In the integrated metrology field, we primarily compete with products manufactured by Nanometrics. We see an increasing demand for implementing high end metrology solutions, that are coupling software and hardware, as customers move forward to advanced nodes.
In the films and material metrology field, we primarily compete with thin films metrology products manufactured by KLA-Tencor.
We also compete against companies manufacturing other types of equipment as a result of the disruptive nature of the technology we offer. These companies include Hitachi hi-tech and Applied Materials in the area of CD-SEM and Rudolph Technologies in the area of acoustic measurement of top metal copper lines.
Manufacturing
We have one manufacturing facility for our Optical CD product lines, which is located in Ness-Ziona, Israel, divided into two buildings, and one manufacturing facility for our X-ray product line, which is located in Santa Clara, CA, US.
Our principal manufacturing activities include assembly, integration, final testing and calibration. Our production activities are conducted in our manufacturing and repair center facility in Israel and in Santa Clara. We rely and expect to continue to rely on subcontractors and turnkey suppliers to fabricate components, build subassemblies and perform other non-core activities in a cost-effective manner. While we use standard components and subassemblies wherever possible, most mechanical parts, metal fabrications, optical components and other critical components used in our products are engineered and manufactured to our specifications. A small portion of these components and subassemblies are obtained from a limited group of suppliers, and occasionally from a single source supplier.
In order to leverage the relatively high volume of the systems we manufacture, and in order to decrease production costs, we continue to focus our internal manufacturing activities on processes that add significant value or require unique technology or specialized knowledge and outsource others. Our manufacturing operations in Israel received the ISO 9001 quality mark by an international certification institute in October 1999. Since then, we have upgraded our quality systems to conform to ISO 9001:2015 requirements. In 2010, weWe received the formal certification of ISO 14001:200414001 in 2010 which was upgraded to ISO:2015 in 2016 and in 2014 we received the formal certification of ISOOHSAS 18001:2007 for our manufacturing operations in Israel.
Capital Expenditures
Our capital expenditures are primarily for network infrastructure, computer hardware and software, leasehold improvements of our facilities, expansion of clean room facilities and system demonstration and development tools. None of these assets are held as collateral or guarantee other obligations. For additional information on our capital expenditures, see “Item 5B. Liquidity and Capital Resources” in this annual report on Form 20-F.
Government Regulation
For information relating to the impact of certain government regulations on our business, see “Item 5C5.C – Grants from the Israel Innovation Authority” on this annual report on Form 20-F.
4.C Organizational Structure
Our Subsidiaries
Our subsidiaries and the countries of their incorporation are as follows. All of our subsidiaries are wholly owned by the Company:
Name of Subsidiary | | Country of Incorporation |
Nova Measuring Instruments, Inc. | | Delaware, U.S. |
Nova Measuring Instruments K.K. | | Japan |
Nova Measuring Instruments Taiwan Ltd. | | Taiwan |
Nova Measuring Instruments Korea Ltd. | | Korea |
Nova Measuring Instruments GmbH | | Germany |
ReVera Incorporated, a wholly-owned subsidiary of Nova Measuring Instruments, Inc. was merged into its parent company Effective December 31, 2017.
4.D Property, Plant and Equipment
Our main facilities, located in Ness-Ziona, Israel, occupy approximately 9,200 square meters, including: approximately 2,000 square meters of production facilities, approximately 4,800 square meters of research and development offices (including approximately 700 square meters of laboratories) and approximately 2,400 square meters of headquarters, sales and marketing, service and support and administration facilities. Our current lease agreement (which was amended in May 2016 to include additional space required for our operations) extends the lease period of the premises until January 31, 2026 (with a right, at Nova's sole discretion, to terminate the agreement on January 31, 2021, upon a 180-day prior notice).
We entered into a new lease agreement for the lease of a total of approximately 12,000 square meters at a new building being built at the Science Park in Rehovot, with the intention to move our Israel headquarters during 2019. The lease period is expected to extend for a period of ten years. We have the option to extend the lease period by two periods of five years each, subject to customary conditions. The lease period for the additional approximately 2,000 square meters, is expected to begin in 2021 and will extend through the same lease periods as the initial space. The manufacturing facility for Optical CD product lines and several R&D laboratories are expected to remain at the same location in Ness-Ziona, which lease term extends until 2026.
Our subsidiaries lease offices in various locations, for use as a research and development, manufacturing, service and pre-sale facility (depending on each subsidiary’s needs). Our U.S. subsidiary (Nova Measuring Instruments, Inc.) leases approximately 1,885 square meters including approximately 450 square meters of production facilities. The current lease agreement of the premises expires on January 31, 2020 (with, at Nova Measuring Instruments, Inc.’s sole discretion, a right to extend the lease period for an additional two years). Nova Measuring Instruments, Inc. is expected to move into approximately 3,800 square meters of a newly leased space, which includes approximately 850 square meters of production facilities, during the first half of 2019. This new facility lease will expire on March 31, 2026 (with, at Nova Measuring Instruments, Inc.’s sole discretion, a right to extend the lease period for an additional five years). Our Japanese subsidiary leases approximately 5090 square meters, our Taiwanese subsidiary leases approximately 9301,025 square meters and our Korean subsidiary leases approximately 7801,060 square meters. Our European subsidiary leases approximately 160200 square meters in Germany and France.
We believe that our facilities and equipment are in good operating condition and adequate for their present usage.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
Information in this Operating Review and Financial Prospects Section should be read in conjunction with our consolidated financial statements and notes thereto which are included elsewhere in this report.
Executive Overview
We are a worldwide leading designer, developer and producer of metrology systems for the semiconductor manufacturing industry. Our metrology systems are used to take precise measurements of semiconductors during the manufacturing process to control the manufacturing process and increase the productivity of manufacturing equipment. We market and sell our metrology systems mainly to semiconductor manufacturers, and in some cases to semiconductor process equipment manufacturers.
Our business is greatly affected by the level of spending on capital equipment by semiconductor manufacturers. In addition, demand for our products and services is affected by the timing of new product announcements and releases by us and our competitors, market acceptance of our new or enhanced products and changes or advances in semiconductor design or manufacturing processes.
In the recent five years (2012-2017)(2013-2018), we were able to present positive Compound Annual Growth Rate (CAGR) of products revenues of approximately 17.6%18%, while Gartner Inc. estimates that the Wafer Fab Equipment (“WFE”) segment have experienced a CAGR of approximately 8.2%14%. We believe that our improved performance is attributed mainly to our continued penetration intodiversification in revenue contribution. In the standalone metrology segment, including revenueslast five years we diversified our technology through acquisition to include X-ray capabilities on top of our XPS solution, andOptical technology, we added advanced machine learning algorithms on top of our leading position in Integrated Metrology. Industry forecasts indicate increase in WFE spending in the next year,physical modeling and we believeadvanced our traditional tool set to include the most advanced capabilities. We also diversified our revenue mix to include approximately 50% contribution from Memory, with several large customers. During these years we arebenefited from market growth as well positionedbeing able to continue to grow as we continueincrease our focus on high growth segments within the industry.total available market with new applications for Materials and Dimensions metrology.
In 2017,2018, product sales accounted for approximately 79%77% of our total revenues, and services accounted for approximately 21%23%.
Presently, we have no significant long-term debt (except liabilities related to the implementation of the new ASC 842 of lease accounting starting January 1st, 2019), and during 20172018 our overall cash reserves increase by approximately $58$28 million. As of the end of 2017,2018, we had overall cash reserves of $150approximately $178 million and working capital of $180approximately $233 million.
Our service organization is operated on a profit and loss basis and is measured as a cost center in each territory and on a global basis. The objectives of our service organization are defined and measured by: customer satisfaction; quality parameters, such as time to repair and mean time between failures; and by profit and loss criteria. The service organization provides support to all products we sell, during both the warranty period and the post warranty period.
Significant Events in 2018and Outlook for 2019
Significant Events in 2017 and Outlook for 2018
During 2017, Nova2018, we demonstrated several significant achievements:
| · | Continuous revenues6th consecutive year of revenue growth, with record high annual revenue of $222$251 million. |
| · | 5th consecutive year of revenue growth and record revenue. |
| · | Record annual service revenues of $48 million. |
| · | Exceeded the gross margin and operating margin targets of the $200M financial model. |
| · | Improved geography diversification with significant growth in USA,yielded three large territories, each contributing more than 20% to our total products revenue – China, Korea and Korea.Taiwan. |
| · | Diversified customer mix, with 3four major customers accounting for 10% or more of products’ revenues.revenues, two of which are Memory customers. |
| · | Diversified product portfolio supported growth in revenue from Memory, which accounted for 35%approximately 50% of total product revenues. |
| · | Continued ReVera’s integration as part of Nova to become a product line division – Materials Metrology Division, and merging ReVera into our U.S. subsidiary, Nova Measuring Instruments, Inc. |
| · | Further market rollout of Nova’s differentiated portfolio:portfolio, and adoption of this product portfolio for advanced devices by several customers: |
| o | Hardware and Software coupling |
| o | Unique Optical and X-ray solutions |
| o | Holistic offering, including Integrated and Standalone metrology |
| · | Adoption of Nova’s latest and advanced product portfolio for advanced devices by several customers. |
| · | DeepDeepening collaboration with several research institutes, process vendors and customers' technology development centers, utilizing a variety of Nova’sour products, leading to Nova’sour positioning as a partner for long term technology development and high-volume manufacturing.manufacturing partner. |
| · | Record net profit in parallel to increased investments in research and development programs aimed to generate new organic growth engines. |
In 2018, Nova2019, we plans to focus on the following:
| · | Continued growth through strongerContinue to strengthen our competitive and market position, through unique innovation and technical leadership. |
| · | Continue Nova’sour aggressive innovation and development plans for meeting future industry challenges in both the memory and foundry segments. |
| · | Expanding Nova’sExpand our total available market by addressing new emerging metrology applications and market segments. |
| · | Concentrating in further strengthening our positionsegments, through solutions delivery to the challenging buildup of advanced FinFet Logic technology nodes, memory scaled VNAND nodes and DRAM scaling at leading edge customers. |
| · | Continue deliveringdelivery of advanced metrology systems to the trailing edge technology nodes to support IOT and other new applications ramp up. |
| · | Continue our progress to meet Nova300 strategic plan, which defines the Company’s growth path in revenue, customers, technology and financial performance, to support sustainedour profitable growth.growth plans. |
| · | Continue leading the emerging metrology markets with innovative and disruptive solutions. |
| · | Continue the collaborations and joint research programs with leading semiconductor manufacturers and relevant leading research institutes. |
| · | Continue our products innovation and diversification through several new product introductions to extend the Company’s market leadership. |
| · | Continue our aggressive plans to generate revenues and competitive edge through SW algorithm products. |
| · | Strengthening the partnership with our customers and build a “Customer Centric” approach to accommodate and deliver customers’ requirements along the semiconductor lifecycle. |
| · | Build extensive roadmap for the X-ray product line, to enhance Nova’s existing product's offering. |
The challenges and risks we face in meeting our plans include:
| · | On time delivery of the required process control solutions to meet the current and future needs of our existing and new customers. |
| · | Correctly understanding the market trends and competitive landscape to ensure our products retain proper differentiation to win customer confidence. |
| · | Creating aggressive, innovative and competitive roadmap deliverables at reasonable costs in order to properly control expenses. |
| · | Identifying the metrology evolution for future industry needs to meet process control requirements and lead the market. |
| · | Achieving long-term growth targets while supporting global extensive growth in all our activities. |
| · | Building a solid company infrastructure to accommodate further growth. |
In order to address these risks and challenges, we are working closely with leading customers’ process development groups and with the leading process equipment manufacturers as well as with leading technology research institutes. The purpose of working closely with these entities is to receive from them as early as possible information and feedback on their current and future metrology and process control needs and tune the roadmap to support such needs.
In 2017,2018, we performed well with yearly growth in revenues. We were able to present growth in revenue as well as record revenues for the fifthsixth consecutive year, demonstrating our growing position in the market.
It is our belief that we have been able to consistently win and grow as a result of a combination of factors:
| · | Optical metrology has become an enabler for the entire industry over the last few years, sometimes on the account of other metrology capabilities, which are not optical based. |
| · | XPS has been widely adopted by leading memory and foundry customers for complex materials composition and film thickness applications. |
| · | Nova’s unique metrology solutions, combining Optical and X-ray metrology for both dimensions and materials, provide the most advanced solution, combining the best innovative and technical metrology capabilities with the best cost of ownership. |
| · | The ability to provide a unique and differentiated technology portfolio sets us apart from the competition and adding a competitive edge to our offering. |
| · | Our technical innovative solutions are well accepted by leading customers that allow us to gain more market share with additional process steps and new applications. |
| · | Our ability to closely team with our customers allows us to predict the industry evolution and process control challenges and by that introduce innovative and advanced metrology solutions to solve industry needs. |
| · | Our diversified portfolio, which is a result of continuous research and development, is becoming more attractive to our customers. |
| · | Widening our solutions’ base to include hardware and software elements in a coupled offering. |
| · | Well controlled P&L and operating model to support a sustainable andour profitable growth.growth plans. |
Understanding the industry’s challenges for the next several years, it is our belief that we should continue growing going forward as the adoption of our solutions increases as a function of process complexity and industry development. We believe that our served addressable market is continuously expanding as we penetrate to more steps of the semiconductor manufacturing processes and, as we continue innovating our portfolio for leading new emerging metrology opportunities. We also believe that going forward, as the semiconductor process is becoming much more complicated with variety of challenges, the necessity for our unique portfolio, combining multiple technologies for both materials, film and dimensional metrology, will grow in the next few years.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Use of Estimates – General
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our management evaluates its estimates on an ongoing basis, including those related to, but not limited to income taxes and tax uncertainties, collectability of accounts receivable, inventory accruals, fair value and useful lives of intangible assets, and revenue recognition. These estimates are based on management's knowledge about current events and expectations about actions the Company may undertake in the future. Actual results could differ from those estimates.
Revenue Recognition
We recognize revenuesUnder ASC 606, the company derives revenue from the salesales of products when all the following criteria have been met: a persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, collection of resulting receivables is probableadvanced process control systems, spare parts, labor hours (mainly systems installation) and there are no remaining significant obligations.service contracts.
For transactions containing multiple elements, revenue isRevenues derived from sales of advanced process control systems, spare parts and labor hour are recognized upon deliveryat point in time, when control of the separate elements, based on their relative fair value. The Company determinespromised goods or services is transferred to the selling price using vendor specific objective evidence (“VSOE”), if it exists, and otherwise uses estimated selling price (“ESP”). Third Party Evidence (“TPE”) is not typically used to determine selling prices as to limited availabilitycustomers, upon fulfillment of reliable competitor products’ selling prices. The ESP is established considering multiple factors including, but not limited to, gross margin objectives, pricing strategies, internal costs and other economic conditions. These factors are subjective in nature and any changes in these factors will affect the ESP and as a consequence revenues recognized.contractual terms.
Service contractsRevenues derived from service contract, which generally specify fixed payment amounts and contractual terms for periods longer than one month, and are recognized on a straight-line basisratably over the term of the contract.time.
The amount recognized reflects the consideration that the Company has recently adopted an updated revenue recognition policyexpects to be entitled to in accordance with the new revenue recognition accounting standard effective January 1, 2018.exchange for those performance obligations.
Revenues from sales which were not yet determined to be final sales due to acceptance provisions are deferred.
44
Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative Standalone Selling Price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately and needs to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
The Company enters into revenue arrangements that includes products and services which are generally distinct and accounted for as separate performance obligations. The Company determines whether arrangements are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether the Company's commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract.
Inventories Write-Off
We carry our inventory at the lower of either the actual cost or the net realizable value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twenty-four months. As demonstrated in the past, demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand, which could lead to losses. In addition, our industry is characterized by rapid technological change, frequent new product developments, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.
Goodwill
Goodwill and certain other purchased intangible assets have been recorded as a result of the acquisition of ReVera. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. acquired, and related liabilities. Goodwill amount on December 31, 2018 was $20 million.
Goodwill is not amortized, but rather is subject to an impairment test. Goodwill amount on December 31, 2017 was $20 million.
The Company performs an annual impairment test during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present. The Company operates in one operating segment, and this segment comprises its only reporting unit.
In accordance with ASC 350, “Intangibles – Goodwill and Other”, prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment, whileat least annually (in the second phase (if necessary) measures impairment. Goodwill impairment is deemed to existfourth quarter), or more frequently if the net book value of a reporting unit exceeds its estimated fair value. In such case, the second phase is then performed, and the Company measures impairment by comparingevents or changes in circumstances indicate that the carrying amount of the reporting unit's goodwill to the implied fair value of that goodwill. An impairment loss is recognized in an amount equal to the excess.may be impaired. The Company has an option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amountvalue prior to performing the two-stepquantitative goodwill impairment test. IfThe Company operates in one operating segment, and this issegment comprises its only reporting unit.
Following the case,adoption of ASU 2017-04, "Simplifying the two-stepTest for Goodwill Impairment", as part of the quantitative goodwill impairment test, any excess of the carrying value of the reporting unit over its fair value is required. If itrecognized as an impairment loss, and the carrying value of goodwill is more-likely-than-not thatwritten down to the fair value of athe reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.
unit. For the year ended December 31, 2017, the Company2018, we performed an annual impairment analysis, using market capitalization, and no impairment losses have been identified.
Intangible assets
As a result of the acquisition of ReVera in April 2015, our balance sheet included acquired intangible assets, in the aggregate amount of approximately $15.4$12.8 million and $12.8$10.2 million as of December 31, 20162017 and 2017,2018, respectively.
In 2015, we allocated the purchase price of ReVera to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. These valuations require management to make significant estimations and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include future expected cash flows from technology acquired, backlog and customer relationships. Management’s estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
Intangible assets are comprised of acquired technology, customer relations, backlog and IP R&D.
During 20162017 and 2017,2018, no impairment charges were identified.
For a discussion of other significant accounting policies used in the preparation of our financial statements and recent accounting pronouncements, see Note 2 to our consolidated financial statements contained elsewhere in this report.
New Accounting Pronouncements
For information regarding new accounting pronouncements, see Note 2W to our consolidated financial statements contained elsewhere in this annual report.
Starting January 1, 2019, in accordance with ASC 842 - lease accounting standard, we are required to present a significant NIS linked liability related to our operational leases in Israel, which is expected to have a material impact on our financial statements, resulting from USD to NIS currency trends.
5.A Operating Results
Overview
The table below describes the distribution of our total revenues, from systemsproducts and services, by geographic areas of our product installations at semiconductor manufacturing facilities. As our customers include semiconductor manufacturers as well as process equipment manufacturers, this distribution is different from the distribution of our revenues by customer location discussed in the immediately preceding paragraph.
| | 2015 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2018 | |
Taiwan, R.O.C. | | | 44 | % | | | 45 | % | | | 31 | % | | | 45 | % | | | 31 | % | | | 25 | % |
USA | | | 14 | % | | | 9 | % | | | 17 | % | | | 9 | % | | | 17 | % | | | 8 | % |
Korea | | | 19 | % | | | 16 | % | | | 28 | % | | | 16 | % | | | 28 | % | | | 32 | % |
China | | | 6 | % | | | 19 | % | | | 17 | % | | | 19 | % | | | 17 | % | | | 23 | % |
Other | | | 17 | % | | | 11 | % | | | 8 | % | | | 11 | % | | | 8 | % | | | 12 | % |
Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Historically, a substantial portion of our revenues has come from a small number of customers, and we anticipate that our revenues will continue to depend on a limited number of major customers.
The sales cycle for our systems typically ranges from six (6) to twelve (12) months and depends upon the status of our system’s integration with a particular manufacture and model of process equipment, the evaluation criteria of our customers, and the technology or application of the process. Additionally, the rate and timing of customer orders may vary significantly from month to month as a function of the specific timing of fab expansions. Accordingly, if sales of our products do not occur when we expect or we are unable to adjust our estimates on a timely basis, our expenses and inventory levels may fluctuate relative to revenues and total assets. In 2017,2018, our inventory levels at the end of each quarter ranged from $31$39 million to $39$42 million. We schedule production of our systems based upon order backlog and customer forecasts. We include in backlog only those orders to which the customer has assigned a purchase order number and for which delivery has been specified.
Our revenues increased by 13% in 2018 following an increase of 35% in 2017, followingand an increase of 10% in 2016, and an increase of 23% in 2015. The revenue increase in 2017 is attributed to increased demand across our Optical CD and XPS products, and to higher service revenues as a result of larger installed base.2016.
The following table shows the relationship, expressed as a percentage, of the listed items from our consolidated income statements to our total revenues for the periods indicated:
| | Percentage of Total Revenues | |
| | Year ended December 31, | |
| | 2015 | | | 2016 | | | 2017 | |
| | | | | | | | | |
Revenues from product sales | | | 74.9 | % | | | 74.7 | % | | | 78.5 | % |
Revenues from services | | | 25.1 | % | | | 25.3 | % | | | 21.5 | % |
| | | | | | | | | | | | |
Total revenues | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | |
Cost of products sale | | | 34.1 | % | | | 30.7 | % | | | 28.0 | % |
Cost of services | | | 14.0 | % | | | 15.5 | % | | | 12.9 | % |
Expense related to settlement of IIA grants | | | - | | | | 7.9 | % | | | - | |
Total cost of revenues | | | 48.1 | % | | | 54.1 | % | | | 40.9 | % |
| | | | | | | | | | | | |
Gross profit | | | 51.9 | % | | | 45.9 | % | | | 59.1 | % |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Research and development expenses, net | | | 26.7 | % | | | 21.3 | % | | | 17.5 | % |
Sales and marketing expenses | | | 10.8 | % | | | 13.1 | % | | | 11.1 | % |
General and administrative expenses | | | 5.7 | % | | | 4.2 | % | | | 3.6 | % |
Amortization of intangible assets | | | 0.9 | % | | | 1.1 | % | | | 1.2 | % |
| | | | | | | | | | | | |
Total operating expenses | | | 44.1 | % | | | 39.7 | % | | | 33.0 | % |
| | | | | | | | | | | | |
Operating profit | | | 7.8 | % | | | 6.2 | % | | | 26.0 | % |
| | | | | | | | | | | | |
Financial income, net | | | 0.4 | % | | | 0.7 | % | | | 1.0 | % |
Income before income taxes | | | 8.2 | % | | | 6.9 | % | | | 27.1 | % |
| | | | | | | | | | | | |
Income tax expenses (benefit) | | | (2.4 | )% | | | 1.0 | % | | | 6.1 | % |
| | | | | | | | | | | | |
Net income | | | 10.6 | % | | | 5.9 | % | | | 20.9 | % |
| | Percentage of Total Revenues | |
| | Year ended December 31, | |
| | 2016 | | | 2017 | | | 2018 | |
| | | | | | | | | |
Revenues from product sales | | | 74.7 | % | | | 78.5 | % | | | 77.0 | % |
Revenues from services | | | 25.3 | % | | | 21.5 | % | | | 23.0 | % |
| | | | | | | | | | | | |
Total revenues | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | |
Cost of products sale | | | 30.7 | % | | | 28.0 | % | | | 28.6 | % |
Cost of services | | | 15.5 | % | | | 12.9 | % | | | 13.6 | % |
Expense related to settlement of IIA grants | | | 7.9 | % | | | - | | | | - | % |
Total cost of revenues | | | 54.1 | % | | | 40.9 | % | | | 42.2 | % |
| | | | | | | | | | | | |
Gross profit | | | 45.9 | % | | | 59.1 | % | | | 57.8 | % |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Research and development expenses, net | | | 21.3 | % | | | 17.5 | % | | | 18.1 | % |
Sales and marketing expenses | | | 13.1 | % | | | 11.1 | % | | | 11.5 | % |
General and administrative expenses | | | 4.2 | % | | | 3.6 | % | | | 3.5 | % |
Amortization of intangible assets | | | 1.1 | % | | | 1.2 | % | | | 0.7 | % |
| | | | | | | | | | | | |
Total operating expenses | | | 39.7 | % | | | 33.0 | % | | | 33.8 | % |
| | | | | | | | | | | | |
Operating profit | | | 6.2 | % | | | 26.0 | % | | | 24.1 | % |
| | | | | | | | | | | | |
Financial income, net | | | 0.7 | % | | | 1.0 | % | | | 1.2 | % |
Income before income taxes | | | 6.9 | % | | | 27.1 | % | | | 25.3 | % |
| | | | | | | | | | | | |
Income tax expenses (benefit) | | | 1.0 | % | | | 6.1 | % | | | 3.6 | % |
| | | | | | | | | | | | |
Net income | | | 5.9 | % | | | 20.9 | % | | | 21.7 | % |
Comparison of Years Ended December 31, 2018 and 2017
Revenues. Our revenues in 2018 increased by $29.1 million, or 13.1%, compared to 2017. Revenues attributable to product sales were $193.3 million, an increase of $19.0 million, or 10.9%, compared to 2017. Revenues attributable to services were $57.8 million, an increase of $10.2 million, or 21.4%, compared to 2017. The increase in product revenues in 2018 was attributed to XPS products. The increase in services revenues is attributed mainly to higher time and materials revenues, as a result of the higher installed base of systems.
Cost of Revenues and Gross Profit. Cost of revenues consists of labor, material and overhead costs of manufacturing our systems, royalties, and the costs associated with our worldwide service and support infrastructure. It also consists of inventory write-offs and provisions for estimated future warranty costs for systems we have sold. Our cost of revenues attributable to product sales in 2018 was $71.7 million. Our gross margin attributable to product revenues in 2018 was 62.9%, compared to 64.3% in 2017. The decrease in products gross margins in 2018 is related to the decrease in software sales which have a higher gross margin.
Our cost of services in 2018 was $34.2 million, relative to $28.6 million in 2017. Gross margin attributable to service revenues in 2018 was 40.9%, compared to 40.1% in 2017.
Research and Development Expenses, net. Consist primarily of salaries and related expenses and also include consulting fees, subcontracting costs, related materials and overhead expenses, after offsetting grants received or receivable from the IIA and the European Community. Our net research and development expenses in 2018 were $45.5 million, an increase of $6.5 million, or 16.7%, compared to 2017, after offsetting grants received of $5.8 million in 2018 and $4.6 million in 2017. Research and development expenses excluding grants received or receivable in 2018 were $51.2 million, compared to $43.6 million in 2017. In 2018, net research and development expenses represented 18.1% of our revenues, compared to 17.5% of our revenues in 2017. The increase in research and development expenses in 2018 is mainly related to the investments in new technologies, which are aimed to expand our addressable markets, towards their market introduction in 2019-2020.
Sales and Marketing Expenses. Sales and marketing expenses are mainly comprised of salaries and related costs for sales and marketing personnel, travel related expenses, overhead and commissions to our representatives and sales personnel. Starting 2015, sales and marketing expenses also include amortization of intangibles related to customer relations. Our sales and marketing expenses in 2018 were $28.8 million, an increase of $4.3 million, or 17.5%, compared to 2017. The increase in sales and marketing expenses in 2018 was mainly attributed to an increase in headcount and related labor costs of sales and marketing personnel and commissions. Sales and marketing expenses represented 11.5% our revenues in 2018 compared to 11.1% of our revenues in 2017.
Amortization of Intangible Assets. As part of the acquisition of ReVera on April 2, 2015, the company acquired $12.3 million of intangible asset related to technology. In both 2018 and 2017, the company recorded $1.8 million of amortization of intangible assets.
General and Administrative Expenses. General and administrative expenses are comprised of salaries and related expenses and other non-personnel related expenses such as legal expenses. Our general and administrative expenses in 2018 were $8.7 million, an increase of $0.6 million, or 7.8%, compared to 2017. The increase in general and administration expenses was attributed mainly to the increase in headcount related labor costs. In 2018, general and administration expenses represented 3.5% of our revenues, compared to 3.6% of our revenues in 2017.
Income Tax Expenses. Income tax expenses are comprised of current tax expenses and deferred tax expenses/income. In 2018, we recorded $9.1 million of income tax expenses, reflecting effective tax rate of 14.3%. In 2017, we recorded $13.6 million of income tax expenses, reflecting effective tax rate of 21%. The decrease in the effective tax rate in 2018 is attributed mainly to tax benefits related to US Tax Cuts and Jobs Act.
Comparison of Years Ended December 31, 2017 and 2016
Revenues. Our revenues in 2017 increased by $58.1 million, or 35.4%, compared to 2016. Revenues attributable to product sales were $174.3 million, an increase of $51.9 million, or 42.4%, compared to 2016. Revenues attributable to services were $47.6 million, an increase of $6.2 million, or 15%, compared to 2016. The increase in product revenues in 2017 was attributed to an increase in sales of Optical CD (mainly integrated metrology and software) and XPS products. The increase in services revenues is attributed mainly to higher time and materials revenues, as a result of the higher installed base of systems.
Cost of Revenues and Gross Profit. Cost of revenues consists of labor, material and overhead costs of manufacturing our systems, royalties, and the costs associated with our worldwide service and support infrastructure. It also consists of inventory write-offs and provisions for estimated future warranty costs for systems we have sold. Our cost of revenues attributable to product sales in 2017 was $62.2 million. Our gross margin attributable to product revenues in 2017 was 64.3%, compared to 48.3% in 2016, which included $12.9 million of expenses related to the royalty buyout agreement and $1.9 million of inventory write-off. The increase in products gross margins in 2017 excluding these non-recurring items, is related to the increase in software sales which have a higher gross margin, as well as to efficiencies related to the product revenues scale.
Our cost of services in 2017 was $28.6 million, relative to $25.3 million in 2016. Gross margin attributable to service revenues in 2017 was 40.1%, compared to 38.8% in 2016. The increase in service gross margins in 2017 is mainly related to scale efficiencies as a result of incremental service revenues utilizing similar infrastructure.
Research and Development Expenses, net. Consist primarily of salaries and related expenses and also include consulting fees, subcontracting costs, related materials and overhead expenses, after offsetting grants received or receivable from the IIA and the European Community. Our net research and development expenses in 2017 were $39.0 million, an increase of $4.0 million, or 11%, compared to 2016, after offsetting grants received or receivable of $4.6 million in 2017 and $4.3 million in 2016. Research and development expenses excluding grants received or receivable in 2017 were $43.6 million, compared to $39.3 million in 2016. In 2017, net research and development expenses represented 17.5% of our revenues, compared to 21.4% of our revenues in 2016.
Sales and Marketing Expenses. Sales and marketing expenses are mainly comprised of salaries and related costs for sales and marketing personnel, travel related expenses, overhead and commissions to our representatives and sales personnel. Starting 2015, sales and marketing expenses also include amortization of intangibles related to customer relations. Our sales and marketing expenses in 2017 were $24.6 million, an increase of $3.0 million, or 14%, compared to 2016. The increase in sales and marketing expenses in 2017 was mainly attributed to an increase in headcount and related labor costs of sales and marketing personnel. Sales and marketing expenses represented 11.1% our revenues in 2017 compared to 13.1% of our revenues in 2016.
Amortization of Intangible Assets. As part of the acquisition of ReVera on April 2, 2015, the company acquired $12.3 million of intangible asset related to technology. In both 2017 and 2016, the company recorded $1.8 million of amortization of intangible assets.
General and Administrative Expenses. General and administrative expenses are comprised of salaries and related expenses and other non-personnel related expenses such as legal expenses. Our general and administrative expenses in 2017 were $8.1 million, an increase of $1.3 million, or 19%, compared to 2016. The increase in general and administration expenses was attributed mainly to the increase in headcount and related labor costs. In 2017, general and administration expenses represented 3.6% of our revenues, compared to 4% of our revenues in 2016.
Income Tax Expenses. Income tax expenses are comprised of current tax expenses and deferred tax expenses/income. In 2017, we recorded $13.6 million of income tax expenses, reflecting effective tax rate of 23%. In 2016, we recorded $1.7 million of income tax expenses reflecting effective tax rate of 15%. The increase in the effective tax rate in 2017 is attributed mainly to a $3.5 million tax provision due to prior years’ tax assessment.
Comparison of Years Ended December 31, 2016 and 2015
Revenues. Our revenues in 2016 increased by $15.4 million, or 10%, compared to 2015. Revenues attributable to product sales were $122.4 million, an increase of $11.3 million, or 10%, compared to 2015. Revenues attributable to services were $41.5 million, an increase of $4.1 million, or 11%, compared to 2015. The increase in product revenues in 2016 was mainly attributed to an increase in sales of OCD, while XPS products revenues increased in 2016 financial reports due to the inclusion of ReVera results for a full year (relative to nine months in 2015). The increase in services revenues is attributed mainly to the higher number of systems included in our installed base, including the transition of XPS installed base in some regions to Nova responsibility, as part of ReVera integration into Nova operations. This higher installed base generated higher service contracts as well as higher time and materials revenues.
Cost of Revenues and Gross Profit. Cost of revenues consists of labor, material and overhead costs of manufacturing our systems, royalties, and the costs associated with our worldwide service and support infrastructure. It is also consists of inventory write-offs and provisions for estimated future warranty costs for systems we have sold. In 2016, cost of revenues also included $12.9 million of expenses related to royalty buyout agreement with the IIA in Israel. Our cost of revenues attributable to product sales in 2016 was $50.4 million. Our gross margin attributable to product revenues in 2016 was 48%, compared to 54% in 2015. This decrease in products gross margins in 2016 is mainly related to the above mentioned $12.9 million of expenses related to the royalty buyout agreement and $1.9 million of inventory write-off. Our cost of services in 2016 was $25.4 million. Our gross margin attributable to service revenues in 2016 was 39%, compared to 44% in 2015. The decrease in service gross margins in 2016 is mainly related to the costs associated with transitioning ReVera global service organization into Nova overall service operations, as well as expansion of the service global infrastructure and headcount teams to ensure the quality of services provided to our customers.
Research and Development Expenses, net. Consist primarily of salaries and related expenses and also include consulting fees, subcontracting costs, related materials and overhead expenses, after offsetting grants received or receivable from the IIA and the European Community. Our net research and development expenses in 2016 were $35 million, a decrease of $4.7 million, or 12%, compared to 2015, after offsetting grants received or receivable of $4.3 million in 2016 and $1.2 million in 2015. Research and development expenses excluding grants received or receivable in 2016 were $39.3 million, compared to $40.9 million in 2015. The decrease in net research and development expenses in 2016 was mainly attributed to the $3.0 million increase in grants and to lower expenses related to prototypes purchasing in 2016. In 2016, net research and development expenses represented 21% of our revenues, compared to 27% of our revenues in 2015.
Sales and Marketing Expenses. Sales and marketing expenses are mainly comprised of salaries and related costs for sales and marketing personnel, travel related expenses, overhead and commissions to our representatives and sales personnel. Starting 2015, sales and marketing expenses also include amortization of intangibles related to customer relations. Our sales and marketing expenses in 2016 were $21.5 million, an increase of $5.6 million, or 35%, compared to 2015. The increase in sales and marketing expenses in 2016 was mainly attributed to higher commission expenses related to the increase in sales, as well as an increase in headcount of sales and marketing personnel. Sales and marketing expenses represented 13% our revenues in 2016 compared to 11% of our revenues in 2015.
Amortization of Intangible Assets. As part of the acquisition of ReVera on April 2, 2015, the company acquired $12.3 million of intangible asset related to technology. In 2016, the company recorded $1.8 million of amortization of intangible assets compared to $1.3 million in 2015. This increase results from the different amortization periods in 2016 and 2015.
General and Administrative Expenses. General and administrative expenses are comprised of salaries and related expenses and other non-personnel related expenses such as legal expenses. Our general and administrative expenses in 2016 were $6.8 million, a decrease of $1.7 million, or 20%, compared to 2015. The decrease in general and administrative expenses in 2016 was mainly attributed to $2.7 million of expenses related to the acquisition and integration of ReVera included in the general and administrative expenses in 2015. In 2016, general and administration expenses represented 4% of our revenues, compared to 6% of our revenues in 2015.
Income Tax Expenses. Income tax expenses are comprised of current tax expenses and deferred tax expenses/income. In 2016, we recorded $1.7 million of income tax expenses, compared with $3.5 million of income tax benefit in 2015. The increase in income tax expenses in 2016 is attributed to the decrease in accumulation of future research and development credits in 2016 relative to 2015, and to an increase in applicable tax rates, following the conclusion of utilization of certain tax exemptions in Israel in 2015.
5.B Liquidity and Capital Resources
As of December 31, 2017,2018, we had working capital of approximately $180.1$233.5 million compared to working capital of approximately $128.6$180.1 million as of December 31, 2016.2017. The increase in our working capital is related mainly to our fluent profits and cash flow.
Cash and cash equivalents, short-term and long-term deposits as of December 31, 20172018 were $149.8$177.8 million compared to $91.7$149.8 million as of December 31, 2016.2017.
Trade accounts receivable decreasedreceivables increased from $42.6 million as of December 31, 2016 to $40.9 million as of December 31, 2017.
Inventories increased from $29.32017 to $53.5 million as of December 31, 2016 to2018, mainly as a result of the higher quarterly sales levels and the timing of tool shipments in the last quarter of the year.
Inventories increased from $34.9 million as of December 31, 2017.2017 to $41.8 million as of December 31, 2018. The increase in inventory is a direct result ofrelated to the higher business volumes and revenues in 20172018 compared to 2016.2017.
Operating activities in 20172018 generated positive cash flow of $36.1 million compared to a positive cash flow of $61.8 million compared to a negative cash flow of $4.2 million in 2016.2017. The increasedecrease in operating cash flow in 20172018 is mainly related to the increase in the net income and to effective working capital management including improved collections.requirements which included increased accounts receivables and inventories.
The following table describes our investments in capital expenditures during the last three years:
| | 2015 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2018 | |
| | Domestic | | | Abroad | | | Domestic | | | Abroad | | | Domestic | | | Abroad | | | Domestic | | | Abroad | | | Domestic | | | Abroad | | | Domestic | | | Abroad | |
| | (US dollars, in thousands) | | | (US dollars, in thousands) | |
Electronic equipment | | | 2,925 | | | | 32 | | | | 1,618 | | | | 136 | | | | 2,320 | | | | 177 | | | | 1,618 | | | | 136 | | | | 2,320 | | | | 177 | | | | 2,400 | | | | 237 | |
Office furniture and equipment | | | 37 | | | | 90 | | | | 83 | | | | - | | | | 141 | | | | 105 | | | | 83 | | | | - | | | | 141 | | | | 105 | | | | 21 | | | | 19 | |
Leasehold improvements | | | 1,135 | | | | 154 | | | | 1,183 | | | | 113 | | | | 3,488 | | | | 64 | | | | 1,183 | | | | 113 | | | | 3,488 | | | | 64 | | | | 493 | | | | 508 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 4,097 | | | | 276 | | | | 2,884 | | | | 249 | | | | 5,949 | | | | 346 | | | | 2,884 | | | | 249 | | | | 5,949 | | | | 346 | | | | 2,914 | | | | 764 | |
In 2017,2018, the investment in capital expenditures was financed from our fluent operating cash reserves. Although we currently have no significant capital commitments, weflow. We expect to spendsignificantly increase our capital spending in 2019, to approximately $8$25 million, on capital expenditures in 2018, mainly for expansion of manufacturing andleasehold improvements in our new office facilities, renovation of existing office facilities, information systems improvements (software and hardware) andfor electronic equipment used in our research and development labs. We expect capital expenditures to reduce once we complete the transition to the new office facilities.
Our principal liquidity requirement is expected to be for working capital and capital expenditures as well as additional acquisitions. We believe that our current cash reserves will be adequate to fund our planned activities for at least the next 12twelve months. Our long-term capital requirements will be affected by many factors, including the success of our current products, our ability to enhance our current products and our ability to develop and introduce new products that will be accepted by the semiconductor industry. We plan to finance our long-term capital needs with our cash reserves together with positive cash flow from operations, if any. If these funds are insufficient to finance our future business activities, which may include acquisitions, we would have to raise additional funds through the issuance of additional equity or debt securities, through borrowing or through other means. We cannot assure that additional financing will be available on acceptable terms.
Presently, we have no long-term debt, nor any readily available source of long-term debt financing such as a line of credit.
With regard to usage of hedging financial instruments and the impact of inflation and currency fluctuations, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk” in this annual report on Form 20-F.
5.C Research and Development, Patents and Licenses, etc.
For information regarding our research and development activities, see “Item 4B – Research and Development” in this annual report on Form 20-F.
Grants from the Israeli Innovation Authority & European Programs
IIA sponsoring for generic research and development projects of large Israeli companies
We participate in a generic research and development programs sponsored by the IIA, available for Israeli companies that meet specific criteria’s set forth by the IIA. Companies eligible to participate in this program receive IIA funding intended to focus on long-term creation of know-how and technological infrastructure, used for the development or production of future innovative products. These programs do not require payments of royalties to the IIA, but all other restrictions under the Innovation Law, such as local manufacturing obligations and know-how transfer limitations, as further detailed hereunder, are applicable to the know how developed by us with the funding received in such program.
IIA sponsoring for Israeli research and development consortiums
In 2018 and 2017, and in previous years, we participated in a consortium program sponsored by IIA. Under the terms of this program, we cooperate with additional companies and research institutes in Israel, organized in a consortium for the development of new technologies. The rules of the consortium include several references to the distribution of knowledge between the consortium members, requires us to provide the other members in the consortium with a non-sublicensable license to use the “new information” developed by such member, without consideration. These programs do not require payments of royalties to the IIA, but all other restrictions under the Innovation Law, such as local manufacturing obligations and know-how transfer limitations, as further detailed hereunder, are applicable to the know how developed by us with the funding received in such program.
Joint programs of the European Research Area and the IIA
We participate in European consortiums, which are joint programs governed by the Electronic Component Systems for European Leadership Joint Undertaking (the “JU”) as part of the Horizon 2020 cooperation between the European Research Area and the IIA (the “EU Consortiums”).
Some of the obligations and undertakings specified hereunder in connection with our IIA activities (such as the restrictions under the Innovation Law and obligation to grant certain access rights to our technology and intellectual property rights) apply with respect to these joint projects. In addition, the participation in an EU Consortium includes specific obligations, such as the following: The budgeted grant will be paid to the company pursuant to certain rules regarding ‘eligible costs’; Obligation to properly implement the activities assigned under the specific EU Consortium project; Restrictions in contributions of third parties (by service or otherwise); Obligation to keep information up to date and to inform about events and circumstances likely to affect the consortium activity; Obligations related to records keeping, investigations and audits by the JU in order to verify the proper implementation of the specific EU Consortium project and compliance with the obligations under the terms of the program, including assessing deliverables and reports during a period of up to two years following the receipt by the company of the full grant payment; Obligations related to Intellectual property allocation generated by an EU Consortium, background intellectual property designation prior to the commencement of the EU Consortium’s project and the provision of access rights to results obtained as part of the EU Consortium. Breach of such obligations may result in the reduction of the aggregate expected grant amount or claiming back previously received grants. In addition, the company may be subject to administrative and financial penalties such as temporary exclusion from all JU European Consortiums and fines of up to 10% of the maximum expected grant, as well as to contractual liabilities.
Past royalty bearing programs and royalties arrangements
Some of our previous research and development efforts were financed in part through royalty-bearing grants. We were obligated to pay royalties of 5% in 2016 and 2015 and in previous years, of revenues derived from sales of products funded with these grants. This obligation included different annual interest rates ranging up to 5%. In August 2016, we entered into a royalty buyout arrangement, or the Arrangement, with the IIA. As part of the Arrangement we paid approximately $12.9 million to the IIA in September 2016. The contingent net royalty liability to the IIA at the time we executed the Arrangement was approximately $24 million.. As a result of the foregoing payment, we are released from any future royalty payments on these previous funds received from the IIA. However, to the extent that we will be able to commercialize products that were developed as part of IIA programs and were declared as “failed” at the time of the Arrangement, we will be required to pay royalties to the IIA from income generated from such commercialization. Currently, we do not anticipate that such failed projects will generate revenues in the future. We note that the Arrangement does not release the Company from other obligations towards the IIA as further detailed herein. See also Note 8A to our consolidated financial statements contained elsewhere in this report. In addition, in the future, we may, alone or together with third parties, participate in research and development programs, which may bear royalty obligations (depending on the specific terms of the applicable program).
Pertinent obligations under the Israeli Encouragement of Research, Development and Technological Innovation in the Industry Law 1984
Under the Encouragement of Research, Development and Technological Innovation in the Industry Law 1984 and the provisions of the applicable regulations, rules, procedures and benefit tracks, together the Innovation Law, a qualifying research and development program is typically eligible for grants of up to 50% of the program’s pre-approved research and development expenses. The program must be approved by a committee of the IIA. The recipient of the grants is typically required to return the grants by the payment of royalties on the revenues generated from the sale of products (and related services) developed (in allwhole or in part) according to, or as a result of, a research and developmentunder IIA program funded by the IIA (at rates which are determined under the Innovation Law up to the aggregatetotal amount of the total grants received byfrom IIA, linked to the IIA, plusU.S. dollar and bearing annual interestinterest. (as determined in the Innovation Law). Royalties are paid in NIS linked to the dollar at the exchange rate in effect at the time of payment. Following the full payment of such royalties and interest, there is generally no further liability for royalty payment.payment for our currently developed and sold products. Nonetheless, the restrictions under the Innovation Law (as generally specified below) will continue to apply even after our company has repaid the grants, including accrued interest, in full.
The main pertinent obligations under the Innovation Law are as follows:
| · | Local Manufacturing Obligation. The terms of the grants under the Innovation Law require that we manufacture the products developed with these grants in Israel. Under the regulations promulgated under the Innovation Law, the products may be manufactured outside Israel by us or by another entity only if prior approval is received from the IIA (such approval is not required for the transfer of less than 10% of the manufacturing capacity in the aggregate, as declared to be manufactured out of Israel in the applications for funding, in which case a notice should be provided to the IIA). This approval may be given only if we abide by all the provisions of the Innovation Law and related regulations. Ordinarily, as a condition to obtaining approval to manufacture outside Israel, we would be required to pay royalties at an increased rate (usually 1% in addition to the standard rate and increased royalties cap between 120% and 300% of the grants, depending on the manufacturing volume that is performed outside Israel). We note that a company also has the option of declaring in its the IIA grant application an intention to exercise a portion of the manufacturing capacity abroad, thus, if the grant application is approved by IIA, such company will avoid the need to obtain additional approvals and pay the increased royalties cap for manufacturing outside of Israel at portions which were mentioned in such approved grant applications. |
| · | Know-How transfer limitation. The Innovation Law restricts the ability to transfer know-how funded by the IIA outside of Israel.Israel, including by way of a license to a non-Israeli entity. Transfer of IIA funded know-how outside of Israel requires prior to the IIA approval and is subject to certain payment to the IIA calculated according to formulae provided under the Innovation Law. If we wish to transfer the IIA funded know-how, the terms for approval will be determined taking into account various factors, including the character of the transaction and the consideration paid to us for such transfer.IIA. The IIA approval to transfer know-how created, in whole or in part, in connection with an IIA-funded project to third party outside Israel is subject to payment of a redemption fee to the IIA calculated according to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grants to the company’s aggregate investments in the project that was funded by these IIA grants, multiplied by the transaction consideration, taking into account depreciation mechanism, and less royalties already paid to the IIA. The transfer of such know-how to a party outside Israel is subject to a redemption fee formula that is based, in general, on the ratio between aggregate IIA grants received by the company and the company’s aggregate R&D expenses, multiplied by the transaction consideration, taking into account depreciation mechanism, and less royalties already paid to the IIA. The regulations promulgated under the Innovation Law establish a maximum payment of the redemption fee paid to the IIA under the above mentioned formulas and differentiates between two situations: (i) in the event that the company sells its IIA funded know-how, in whole or in part, or is sold as part of an M&A transaction, and subsequently ceases to conduct business in Israel, the maximum redemption fee under the above mentioned formulas will be no more than six times the total grants received (plus accrued interest) for development of the know-how being transferred, or the entire amount received from the IIA, as applicable; (ii) in the event that following the transactions described above (i.e., asset sale of IIA funded know-how or transfer as part of an M&A transaction) the company undertakes to continue its R&D activity in Israel (for at least three years following such transfer and maintain at least 75% of its R&D staff employees it had for the six months before the know-how was transferred, while keeping the same scope of employment for such R&D staff), then the company is eligible for a reduced cap of the redemption fee of no more than three times the amounts received (plus accrued interest) for the applicable know-how being transferred, or the entire amount received from the IIA, as applicable. No assurance can be given that approval to any such transfer, if requested, will be granted and what will be the amount of the redemption fee payable. |
Approval of the transfer of IIA funded technology to another Israeli company requires a pre-approval by IIA and may be granted only if the recipient undertakes to fulfil all the liabilities to IIA and undertakes abides by all the provisions of the Innovation law and related regulations, including the restrictions on the transfer of know-how and manufacturing rights outside of Israel and takes upon itself all the undertakings of the grant recipient associated with the grants received.obligation to pay royalties. In light of the Arrangement (as further discussed below), in certain circumstances, under such sale transactions (i.e., the transfer of IIA funded technology or portion thereof to another Israeli company), we might be obligated to pay royalties to the IIA from any income derived from such a sale transaction.
Licensing arrangements54. Under the terms of the Innovation Law, licensing know how developed under the IIA programs outside of Israel, requires prior consent of IIA and payment of license fees to IIA, calculated in accordance with the licensing rules promulgated under the Innovation Law. The payment of the license fees does not discharge the company from the obligation to pay royalties or other payments due to IIA in accordance with Innovation Law.
| · | Licensing arrangements. Under the terms of the Innovation Law, licensing know how developed under the IIA programs outside of Israel, requires prior consent of IIA and payment of license fees to IIA, calculated in accordance with the licensing rules promulgated under the Innovation Law. The payment of the license fees does not discharge the company from the obligation to pay royalties or other payments due to IIA in accordance with Innovation Law. |
These restrictions may impair our ability to enter into agreements for those products or technologies which were developed with assistance of the IIA grants without the approval of the IIA. We cannot be certain that any approval of the IIA will be obtained on terms that are acceptable to us, or at all. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of know-how developed with IIA funding pursuant to a merger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to pay to the IIA. Any approval, if given, will generally be subject to additional financial obligations. Failure to comply with the requirements under the Innovation Law may subject us to mandatory repayment of grants received by us (together with interest and penalties), as well as may expose us to criminal proceedings. In addition, IIA may from time to time audit sales of products which it claims incorporate technology funded via IIA programs and this may lead to additional royalties being payable on additional products.
We were obligated to pay royalties of 5% in 2016 and 2015, of revenues derived from sales of products funded with these grants. In August 2016, we entered into a royalty buyout arrangement, or the Arrangement, with the IIA. As part of the Arrangement we paid approximately $12.9 million to the IIA in September 2016. The contingent net royalty liability to the IIA at the time we executed the Arrangement was approximately $24 million. This obligation included different annual interest rates ranging up to 5%. As a result of the foregoing payment, we are released from any future royalty payments on these previous funds received from the IIA. However, to the extent that we will be able to commercialize products that were developed as part of IIA programs and were declared as “failed” at the time of the Arrangement, we will be required to pay royalties to the IIA from income generated from such commercialization. Currently, we do not anticipate that such failed projects will generate revenues in the future. As of December 31, 2017, we had no royalty liability to the IIA for grants received (subject to the aforementioned). We may, alone or together with third parties, participate in research and development programs, which may or may not bear royalty obligations (depending on the specific terms of the applicable program) towards the IIA. We note that the Arrangement does not release the Company from other obligations towards the IIA as further detailed herein. See also Note 8A to our consolidated financial statements contained elsewhere in this report.5.D Trend Information
In addition to royalty-bearing grants from the IIA, in 2010, we participated in a 'Magnet' program, IMG4, sponsored by the IIA. Under the terms of this program, we were cooperating with additional companies and research institutes in Israel, organized in a consortium, for the development of advanced techniques for improved tool control. No royalties from this funding are payable to the Israeli government, however, the provisions of the Innovation Law and related regulations regarding, inter alia, the restrictions on the transfer of know-how outside of Israel do apply, mutatis mutandis. In general, any consortium member that develops technology as a result of its activities within and during the framework of the consortium project ("Foreground IP") remains the owner of such technology and any intellectual property rights related thereto. Specific mechanism applies with respect to joint Foreground developed by several members. In addition, the Foreground is subject to certain access rights as detailed in the consortium agreement. Further, there are certain limitations with respect to the transfer of the Foreground. Technology which was held by a consortium member prior to its entering into the consortium agreement or which was developed as a result of activities outside the framework of the consortium member ("Background IP") remains owned by the member who developed it. In certain circumstances, such Background is subject to certain access rights as detailed in the consortium agreement. The IMG4 program ended in 2010.
In addition, in 2016, 2015 and 2014, we participated in an additional 'Magnet' program, METRO 450, sponsored by the IIA. Under the terms of this program, we are cooperating with additional companies and research institutes in Israel, organized in a consortium for the development of pre-competitive elements of 450mm solutions that can also bring value even if the transition to 450mm is delayed. No royalties from this funding are payable to the Israeli government. Some of the abovementioned obligations (such as the restrictions under the Innovation Law and obligation to grant certain access rights to the Company's technology and intellectual property rights) apply regarding this project as well.
In addition, in 2017 we participated in an additional 'Magnet' program, multi-dimensional metrology consortium, sponsored by IIA. Under the terms of this program, we are cooperating with additional companies and research institutes in Israel, organized in a consortium for the development of N+2 technology. No royalties from this funding are payable to the Israeli government. Some of the abovementioned obligations (such as the restrictions under the Innovation Law and obligation to grant certain access rights to the Company's technology and intellectual property rights) apply to this project as well.
In addition, we are also participating in European consortiums, which are joint programs with the IIA and the European Research Area. Some of the abovementioned obligations and undertakings (such as the restrictions under the Innovation Law and obligation to grant certain access rights to the Company's technology and intellectual property rights) apply with respect to these joint projects as well.
5.D Trend Information
For Information regarding most significant recent trends in our market, see “Item 4B –4B– Our Market – The World Economy – Update” in this annual report on Form 20-F.
5.E Off-Balance Sheet Arrangements
We do not have and are not party to any off-balance sheet arrangements.
5.F Tabular Disclosure of Contractual Obligations
As of December 31, 2017,2018, we had contractual obligations as described in the following table:
| | Payment due by Period (US Dollars, in $ thousands) | | | Payment due by Period (US Dollars, in $ thousands) | |
| | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
Operating Lease Obligations | | $ | 7,886 | | | $ | 2,569 | | | $ | 4,500 | | | $ | 817 | | | | - | | | $ | 48,542 | | | $ | 3,135 | | | $ | 6,896 | | | $ | 6,021 | | | $ | 32,489 | |
Purchase Obligations | | | 31,134 | | | | 17,612 | | | | 7,192 | | | | 111 | | | | 6,219 | | | | 31,028 | | | | 27,564 | | | | 3,459 | | | | 3 | | | | 2 | |
Other Long-Term Liabilities | | | 68 | | | | - | | | | - | | | | - | | | | 68 | | |
Total | | | 39,088 | | | | 20,181 | | | | 11,692 | | | | 928 | | | | 6,287 | | | | 79,570 | | | | 30,699 | | | | 10,355 | | | | 6,024 | | | | 32,491 | |
Item 6. Directors, Senior Management and Employees
6.A Directors and Senior Management
The following is the list of senior management and directors as of February 15, 2018:14, 2019:
Name | Age | Position |
Michael Brunstein (3) | 7475 | Chairman of the Board of Directors |
Alon Dumanis | 67 | Director |
Avi Cohen (1) | 6465 | Director |
Raanan Cohen (2) | 6263 | Director |
Zehava Simon (1)(2)(3) | 5960 | External Director (External Director until May 2018) |
Dafna Gruber (1)(2) | 5253 | External Director (External Director until May 2018) |
Eli Fruchter (1)(3) | 6263 | Director |
Ronnie (Miron) Kenneth (2)(3) | 6162 | Director |
Eitan Oppenhaim | 5253 | President and Chief Executive Officer |
Dror David | 4849 | Chief Financial Officer |
Shay Wolfling | 4647 | Chief Technology Officer |
Gabriel Waisman | 4748 | Chief Business Officer |
Adrian S. Wilson | 4647 | General Manager Material Metrology Division |
Gabi Sharon | 5556 | Corporate Vice President Operations |
Dov Farkash | 5859 | Corporate Vice President Strategic Development |
Sharon Dayan | 4546 | Corporate Vice President Human Resources |
Zohar Gil | 5152 | Corporate Vice President Marketing and Business Development |
Udi Cohen | 4546 | Corporate VP and General Manager Dimensional Metrology Division |
Our directors (other than the external directors) serve as such until the next annual general meeting of our shareholders. Our external directors, in accordance with Israeli law, serve for a three-year term, which may be renewed for two additional three-year terms, subject to certain conditions, and thereafter for additional three-year terms, if both the audit committee and the board of directors confirm that in light of the expertise and contribution of the external director, the extension of such external director’s term would be in the interest of the Company. Our external directors are Ms. Zehava Simon who was elected for a second tenure in 2017, and Ms. Dafna Gruber who was elected in 2015 and whose initial term expires in 2018. | (1) | Member of the audit committee |
Our board of directors determined that Zehava Simon, Dafna Gruber, Avi Cohen, Raanan Cohen and Eli Fruchter are independent directors under the Companies Law. In addition, our board of directors determined that all of our directors qualify as ‘‘independent directors’’ as defined by The NASDAQ Stock Market. | (2) | Member of the compensation committee |
| (3) | Member of the Nominating committee |
Dr. Michael Brunstein was named chairman of our board of directors in June 2006, after serving as member of our board of directors from November 2003. During the years 1990 and 1999, Dr. Brunstein served as Managing Director of Applied Materials Israel Ltd. Prior to that, Dr. Brunstein served as President of Opal Inc., and as a Director of New Business Development in Optrotech Ltd. Dr. Brunstein holds a B.Sc. in Mathematics and Physics from The Hebrew University, Jerusalem, and a M.Sc. and a Ph.D. in Physics from Tel Aviv University, Israel.
Dr. Alon Dumanis has served as a director of Nova since 2002. Until December 31, 2015, Dr. Dumanis acted as the Chief Executive Officer of Crecor B.V, Docor International B.V, Docor Levi Lassen I BV, Docor Levi Lassen II BV and Docor International Management Ltd., all Dutch investment companies, subsidiaries of The Van-Leer Group Foundation, and currently Dr. Dumanis is a member of the management teams of the foregoing companies. Dr. Dumanis is currently a chairman of Aposense and a member of the board of directors of Rada, both public companies traded on TASE. Dr. Dumanis is the chairman of Dumanis Investments Ltd., Dumanis Holdings Ltd., Dumanis Ventures Ltd. and the chief executive officer of ACS Cyber Solutions, all private companies. Dr. Dumanis is a former member of the board of directors of Tadiran Communications (a public company traded on TASE), of El Al Israel Airlines (a public company traded on TASE), of Protalix Biotherapeutics (a public company traded on the New York Stock Exchange), and a former member of the board of directors of Inventech Investments Co. Ltd. (a public company traded on TASE), Spectronix (a public company traded on TASE) and Ice Cure (a public company traded on TASE). Previously, Dr. Dumanis was the Head of the Material Command in the Israel Air Force at the rank of Brigadier General. Dr. Dumanis currently serves as chairman and member of several national steering committees and is the author of many papers published in a number of subject areas, including technology and management. Dr. Dumanis holds a Ph.D. in Aerospace Engineering from Purdue University, West Lafayette, Indiana, USA.
Mr. Avi Cohen has served as a director of Novathe Company since 2008. From July 2016 to September 2017 Mr. Cohen served as the Chief Executive Officer of MX1, a global media service provider founded in July 2016 as a result of a merger between RR Media Ltd., and SES Platform Services GmbH. From July 2012 and until its merger with SES Platform Services GmbH, Mr. Cohen served as the chief executive officer of RR Media Ltd. (previously known as RRsat Global Communications Network Ltd.), which was a public company traded on NASDAQ.Nasdaq. Prior to that, until March 2012, Mr. Cohen served as President and Chief Executive Officer of Orbit Technologies, a public company traded on the TASE. Prior to joining Orbit in December 2008, Mr. Cohen served as Chief Operating Officer and Deputy to the chief executive officer of ECI Telecom Ltd. a leading supplier of best-in-class networking infrastructure equipment for carrier and service provider networks worldwide. Prior to joining ECI in September 2006, Mr. Cohen served in a variety of management positions at KLA-Tencor. From 2003 Mr. Avi Cohen was a Group Vice President, Corporate Officer and Member of the Executive Management Committee based at the corporate headquarters in the U.S. During his tenure, he successfully led the creation of KLA-Tencor’s global Metrology Group. From 1995 he was the President of KLA-Tencor Israel responsible for the Optical Metrology Division. Before joining KLA-Tencor, Mr. Cohen also spent three years as Managing Director of Octel Communications, Israel, after serving as Chief Executive Officer of Allegro Intelligent Systems, which he founded and which was acquired by Octel. Mr. Cohen is currently a Director of BioFishency Ltd. ESC-BAZ Ltd., Beit Issie Shapiro, Israel Consumer Council and Israel Wine Institute. Mr. Cohen holds B.Sc. and M.Sc. degrees in electrical engineering and applied physics from Case Western Reserve University, USA.
Mr. Raanan Cohen was appointed as a director of the Company by our board of directors in February 2014. Prior to that and until December 2012, Mr. Cohen has served as the President and Chief Executive Officer of Orbotech Ltd., a public company traded on NASDAQ.Nasdaq. Mr. Cohen has also served in a range of other executive positions at Orbotech Ltd, including Co-President for Business and Strategy, EVP and President of the Printed Circuit Board (PCB) Division, Vice President for the PCB-AOI product line and President and chief executive officer of Orbotech, Inc. Prior to its merger with Orbotech in 1991, Mr. Cohen held various positions at Orbot, another manufacturer of AOI systems. Prior to joining Orbot in 1984, he worked at Telrad Networks Ltd. Mr. Cohen currently serves as the Chief Executive Officer of EyeWay Vision Ltd., as a member of the board of directors of Utilight Ltd., all private companies. Mr. Cohen holds a B.Sc. in Computer Science from the Hebrew University in Jerusalem, Israel.
Ms. Zehava Simon was elected as the Company’s external director in accordance with the provisions of the Companies Law in June 2014 and reelected in June 2017. Effective as of May 2018, and our adoption of the exemption under the Regulation (as defined below), Ms. Simon is no longer classified as an external director under the Companies Law. Ms. Simon served as a Vice President of BMC Software from 2000 until 2013 and in her last position (as of 2011) acted as Vice President of Corporate Development. From 2002 to 2011, Ms. Simon served as Vice President and General Manager of BMC Software in Israel. In this role, she was responsible for directing operations in Israel and India as well as offshore sites. Prior to that, Ms. Simon held various positions at Intel Israel., which she joined in 1982, including leading of Finance & Operations and Business Development for Intel in Israel. Ms. Simon is currently a board member of Audiocodes, a public company traded on NASDAQNasdaq and TASE, Nice Systems, a public company traded on NASDAQNasdaq and TASE, and Amiad water systems, a public company traded on London Stock Exchange. Ms. Simon is a former member of the board of directors of Insightec Ltd. (2005-2012), M-Systems Ltd., a NASDAQNasdaq listed company which was acquired in 2006 by SanDisk Corp., a public company traded on NASDAQNasdaq as well (2005-2006) and Tower Semiconductor Ltd., a public company traded on TASE and NASDAQNasdaq (1999-2004). Ms. Simon holds a B.A. in Social Sciences from the Hebrew University, Jerusalem, Israel, a law degree (LL.B.) from the Interdisciplinary Center in Herzlia and an M.A. in Business and Management from Boston University, USA.
Ms. Dafna Gruber was elected as the Company’s external director in accordance with the provisions of the Companies Law in April 2015.2015 and reelected in April 2018. Effective as of May 2018, and our adoption of the exemption under the Regulation, Ms. Gruber is no longer classified as an external director under the Companies Law. Ms. Gruber has more than 25 years of broad experience, serving as chief financial officer and a senior executive management member in leading hi-tech companies traded on both NASDAQNasdaq and TASE. Since September 2017, Ms. Gruber has been serving as the chief financial officer of Landa Corporation Ltd., aand then as financial advisor to Landa group, private company.companies. From October 2015 until September 2017, Ms. Gruber has been serving as the chief financial officer of Clal Industries Ltd., a private company. From April 2007 until April 2015, Ms. Gruber served as the chief financial officer of Nice Systems Ltd., a public company traded on NASDAQNasdaq and TASE. As a member of the senior management team, Ms. Gruber was a senior member of the strategy and M&A forum of the company. During her employment with Nice, Ms. Gruber was responsible, inter alia, for finance, operation, MIS and IT, legal and investor relations. From 1996 until May 2007, Ms. Gruber was part of Alvarion Ltd., a public company traded on NASDAQNasdaq and TASE, mostly as chief financial officer. Prior to that, from 1993 to 1996, Ms. Gruber was a controller at Lannet Data Communications Ltd., subsequently acquired by Lucent Technologies Inc. Ms. Gruber serves as an external director at TAT Technologies Ltd., a public company traded on NASDAQNasdaq and TASE, since November 2013, and as a member of the board of directors of Clal Biotechnologies Ltd., a public company traded on TASE. In addition, Ms. Gruber serves on the boards of directors of several private companies held by Clal Industries Ltd. Ms. Gruber is a certified public accountant and holds a Bachelor’s degree in Accounting and Economics from Tel Aviv University, Israel.
Mr. Eli Fruchter was appointed to serve as a director of the Company by our board of directors in August 2016. Mr. Fruchter founded EZchip Semiconductor Ltd., a supplier of highly integrated Network Processors, where he served as the chief executive officer until February 2016 when the company was acquired by Mellanox (Nasdaq: MLNX) for approximately $811 million. Prior to EZChip, Mr. Fruchter co-founded LanOptics Ltd., a supplier of networking products, where he served as co-general manger. During his tenure at LanOptics, Mr. Fruchter led LanOptics’ successful initial public offering on the Nasdaq. Mr. Frutcher was also among the founders of Adacom Technologies Ltd., a manufacturer of data communications products. Mr. Fruchter holds a B.Sc. degree in Electrical Engineering from the Technion – Israel Institute of Technology, Haifa, Israel.
Mr. Ronnie (Miron) Kenneth was appointed to serve as a director of the Company by our board of directors in December 2017.2017 and was reappointed by our shareholders in April 2018. Mr. Kenneth is a veteran high-tech leader who served for ten years as Chairman and Chief Executive Officer at Voltaire Technologies Ltd. (Nasdaq: VOLT), leading it to an initial public offering on Nasdaq in 2007. Following Voltaire’s merger with Mellanox Technologies Ltd. (Nasdaq: MLNX) in 2011, Mr. Kenneth became the Chief Executive Officer of Pontis Ltd., a privately-held company, until 2013. Mr. Kenneth currently serves as the Chairman of Teridion Technologies Ltd., and Varada Ltd., and he is a director of Allot Communications Ltd. (Nasdaq: ALLT) and Orbotech Ltd. (Nasdaq: ORBK). Mr. Kenneth holds a BA in Economics and Computer Science from the Bar-Ilan University and an MBA from the Golden Gate University, San Francisco.
Mr. Eitan Oppenhaim has been serving as the President and Chief Executive Officer of the Company since July 31, 2013. He has previously served as the Executive Vice President Global Business Group, since November 2010. From 2009 until 2010, Mr. Oppenhaim served as Vice President and Europe General Manager of Alvarion Ltd., a public company traded on NASDAQ.Nasdaq. During the years 2007 through 2009, Mr. Oppenhaim served as Vice President of sales and marketing of OptimalTest Ltd., a public company traded the New York Stock Exchange. Prior to that, from 2002 till 2006, Mr. Oppenhaim served as Vice President – Business Manager of the Flat Panel Displays division of Orbotech Ltd., a public company traded on NASDAQ.Nasdaq. From 2001 till 2002, Mr. Oppenhaim served as Managing Director of Asia Pacific at TTI Telecom International, a leading provider of assurance, analytics and optimization solutions to communications service providers (CSP) worldwide. Prior to that, from 1994 till 2001, Mr. Oppenhaim held several key executive positions at Comverse Network Systems Ltd., a public company traded on NASDAQ.Nasdaq. Mr. Oppenhaim holds a BA in Economics and Accounting from the Haifa University, Israel and an MBA from Ben-Gurion University, Beer-Sheva, Israel.
Mr. Dror David has served as the Chief Financial Officer since November 2005. Mr. David joined Nova in April 1998, as the Company’s Controller, and since then served in various financial and operational positions, including the position of Vice President of Resources, in which he was responsible for the finance, operations, information systems and human resources functions of the Company. Mr. David was also a leading member in the Company’s initial public offering on NASDAQNasdaq in 2000, the Company’s private placement in 2007 and the Company's secondary offering in 2010. Prior to joining Nova, Mr. David spent five years in public accounting with Delloitte Touch in Tel Aviv, specializing in industrial high-tech companies. Mr. David is a shareholder and a board member of P2P Ltd., a privately held company. Mr. David is a Certified Public Accountant in Israel, holds a B.A. in Accounting and Economics from Bar Ilan University, and an M.B.A. from Derby University of Britain.
Dr. Shay Wolfling joined Nova in 2011, as Chief Technology Officer. Prior to joining Nova, Dr. Wolfling was an R&D manager at KLA-Tencor-Belgium (formerly ICOS Vision Systems, a public traded company acquired by KLA in 2008), where he led multidisciplinary metrology & inspection development projects. From 2000 until its technology acquisition by ICOS in 2005, Dr. Wolfling was a founder and Vice President of Research and Development of Nano-Or-Technologies, a start-up company with a proprietary technology for 3D optical measurements. Dr. Wolfling took Nano-Or from the idea stage to initial product sales. Prior to founding Nano-Or, Dr. Wolfling was a project manager in Y-Beam-Technologies, a start-up offering laser-based skin treatments. Dr. Wolfling has several patents under his name in the field of optical measurements. Dr. Wolfling holds a B.Sc. in physics and mathematics from the Hebrew University of Jerusalem, Israel, a second degree in physics from Tel-Aviv University, Israel and a Ph.D. in physics from the Hebrew University of Jerusalem, Israel.
Mr. Gabriel Waisman joined Nova in 2016 as our Chief Business Officer, responsible for the Company’s customer facing groups, including global sales, marketing, customer support and applications. Mr. Waisman brings over 1719 years of managerial expertise in a global geographically dispersed environment, and extensive experience in working with pioneering multidisciplinary technologies, particularly within the electronics and telecom sectors. Prior to joining Nova, Mr. Waisman served as President at Orbotech Pacific (Orbotech LTD, Hong Kong) from August 2013 until April 2016 and Orbotech West (Orbotech Inc., USA) from May 2011 until July 2013, where he was responsible for sales and marketing, finance and operations, and customer support. Previous to this, from June 2003 until May 2011, Mr. Waisman served in various managerial positions at Alvarion Technologies Ltd., starting as Strategic Marketing Director, EMEA, and moving on to Vice President of Strategic Accounts, General Manager of West Europe, followed by Managing Director, Asia-Pacific. Mr. Waisman has also served as EMEA Regional Sales and Marketing Director (Broadband division) at Comverse Ltd. Mr. Waisman holds a B.Sc. in electronic engineering from the Technion – Israel Institute of Technology, Haifa, Israel and an MBA in Business Administration from the Tel-Aviv University, Israel.
Mr. Adrian S. Wilson Joined Nova in January 2018 as General Manager Material Metrology Division. Mr. Wilson has over 20 years of Semiconductor capital equipment and materials experience. Mr. Wilson joins us from Nanometrics Inc, where he held the position of Vice President & General Manager of Advanced Imaging and Analytics Business Unit. Prior to Nanometrics Inc, he held the position of Managing Director of Element Six Technologies Ltd., the non-abrasive arm of the synthetic diamond group of DeBeers, focused on thermal management and optical components for the semiconductor industry. Mr. Wilson has experience in leading both start-ups and divisions within large public multi-nationals’ companies, including KLA-Tencor, FormFactor Inc and Phoenix X-ray Systems & Services Inc, a capital equipment start-up. Mr. Wilson holds a Bachelor’s Degree in Electronics Engineering, post Grad in Marketing Management and a MBA in Technology Management. Mr. Wilson’s accreditations include Fellow of the Chartered Institute of Marketing (UK) and Fellow of the Institute of Directors (UK).
Mr. Gabi Sharon has served as Corporate Vice President of Operations since September 2006. Having joined Nova in 1995, Mr. Sharon served in several key positions in the Company including as Global Customer Support Manager from September 1995 to September 2004. From September 2004 until September 2006 Mr. Sharon managed the Product Development Division, and spearheaded the NovaScan 3090 product line and its successful market launch. For a period of two years, from 2004 to 2006, he also served as the Product Marketing Manager and led the initial penetration of the Copper CMP market. Prior to joining Nova Mr. Sharon served as Project Manager in ECI Israel. Mr. Sharon holds a B.Sc. in Computer Science from Northeastern University, Boston, Massachusetts, and a M.Sc. in Technology Management from Polytechnic University, New York.
Mr. Dov Farkash has served as our Corporate Executive Vice President Strategic Development since August 2017. Prior to that, Mr. Farkash served as Senior Corporate Vice President Modeling Software Division between April 2016 and July 2017, and as our Senior Vice President Strategic Software between April 2014 and March 2016. Mr. Farkash joined Nova in 2000, and till 2005 he served in various key sales positions in Nova. From 2005 until 2009, Mr. Farkash has served as VP Sales of Nova. From 2009 until April 2014, Mr. Farkash served as our Vice President Business Development. Prior to joining Nova, Mr. Farkash served as worldwide Sales and Marketing Manager of AFCON Ltd., and AFCON Inc., USA. Prior to that, Mr. Farkash served in various managerial positions in software development in various Hi-tech companies. Mr. Farkash holds a B.Sc. in Computer Engineering and an MBA from the Technion – Israel Institute of Technology, Haifa, Israel.
Ms. Sharon Dayan joined Nova in January 2018, as Corporate Vice President Human Resources. Ms. Dayan is an experienced HR executive, bringing diversified experience which covers all human resources disciplines, including HR strategy, organizational and people development, M&A and employee experience. Prior to joining Nova Ms. Dayan served in several senior HR regional and corporate positions within global companies. Her last position before joining Nova, was in the role of SVP at Teva in the capacity of HR Business Partner for the global corporate functions. Prior to that she served as the Global Head of HR as part of Comverse management, responsible for all HR functions in the company. Before joining Comverse, Ms. Dayan had multiple positions in Amdocs. Ms. Dayan holds BA in Social Science from Tel-Aviv – Jaffe college, MSc. In Organizational Development from Tel-Aviv University and Group dynamics diploma from Tel Aviv university.
Mr. Zohar Gil has served as our Corporate Vice President Marketing and Business Development since March 2016. Mr. Gil joined Nova in June 2011, and until March 2016 served in several key business and marketing positions including Head of Customer Management for Nova’s foundry accounts in the Asia Pacific region and Head of Marketing and Product Management. Currently, as our Vice President Marketing and Business Development, Mr. Gil is focusing on the Company’s corporate marketing, strategy and M&A activities. Prior to joining Nova, from 2001 until 2010, Mr. Gil held leading business and marketing positions at Alvarion Ltd., including General Manager for the Carrier Line of Business and Vice President of Product Management. Prior to that, from 1997 until 2001, Mr. Gil served in variety of marketing and product management positions in 3Com Corporation. Mr. Gil holds a B.Sc. in Industrial Engineering from Tel-Aviv University, Israel, and an Executive MBA from Northwestern and Tel-Aviv Universities from the Kellogg-Recanati Business School of Management.
Dr. Udi Cohen has served as our Corporate Vice President and GM Dimensional Metrology Division since June 2017. Prior to joining Nova, Dr. Cohen served as Chief Executive Officer of BioControl Medical [(B.C.M) Ltd.] since 2005. Under his leadership, BioControl Medical attracted a world-class group of senior executives, engineers and medical advisors and developed an advanced implantable electrostimulation platform technology with potential application in numerous therapeutic areas. Dr. Cohen successfully led BioControl Medical through three financing rounds, and also the sale of its technology assets in urology and gynecology to American Medical Systems Inc., in 2006. Since 2010, he led the strategic partnership with Medtronic focused on developing and commercializing implantable electrostimulation devices for the treatment of congestive heart failure. Dr. Cohen received a Bachelor Degree of Science in Mathematics and Physics as well as a Ph.D. in Physics from Hebrew University in Jerusalem and participated in Wharton’s AMP program.
Voting Agreement
We are not aware of any voting agreement currently in effect.
6.B Compensation
The aggregate direct remuneration paid or payablecompensation expensed, including share-based compensation and other compensation expensed by us, to all persons who served inour executive officers with respect to the capacity of executive officer for 2017year ended December 31, 2018 (consisting of 10 persons, including two former executive officer) in terms of employer costsofficers) was $6.7 million. This amount includes approximately $5.6 million (including $0.8$0.6 million set aside foror accrued to provide pension, andseverance, retirement, or similar benefits and amounts expensed by the Company for automobiles made available to its executive officers).officers.
Disclosure regarding the compensation of our senior executives on an individual basis will be disclosed in our proxy statement in connection with the 20182019 annual general meeting of shareholders in accordance with Israeli regulations.
Terms of employment of Mr. Eitan Oppenhaim, our President and Chief Executive Officer, as approved by our shareholders, are as follows:
General
(i) a monthly base salary of NIS 120,000;126,000; (ii) an annual bonus of up to twelve (12) monthly base salaries (with additional payment of up to 50% of the target bonus in the case of over achievement), subject to objectives which are annually predetermined by the board of directors and its committees, in accordance with our compensation policy; (iii) in connection with termination of employment (other than for cause), a three month advance notice and a six month adjustment period, during which Mr. Oppenhaim will be entitled to all of his compensation elements, and to the continuation of vesting of his options. In the event of employment termination during a fiscal year (unless for cause), the bonus shall be prorated (subject to certain adjustments); (iv) customary social benefits such as pension fund or management insurance, education fund, vacation pay, sick leave and convalescence pay; (v) subject to required approvals under applicable law, a directors and officers insurance, including a “run-off” insurance policy; (vi) non-disclosure, non-compete and ownership of intellectual property undertakings; and (vii) monthly travel expenses or a Company car, cellular phone, a land line phone, toll road expenses, a laptop computer and other expense reimbursements pursuant to the Company general policies.
Equity-Based Compensation
Since January 1, 2015 until December 31, 2017,2018, per the approval of the respective annual general meeting of shareholders, Mr. Oppenhaim was granted a total of 303,334373,334 options to purchase ordinary shares of the Company with a weighted average exercise price of $14.75$16.94 and 22,22282,222 restricted share units. The options and restricted share units: vest in equal annual installments over a terms of four years commencing one year from the grant date; expire seven (7) years after each grant date; can be cancelled in accordance with the terms and conditions of the applicable incentive plan of the Company or the employment terms of Mr. Oppenhaim; and, were made in accordance with and subject to Section 102 of the Income Tax Ordinance of 1961 (New Version) (the “Ordinance”). In addition, Mr. Oppenhaim was granted in July 2017 30,000and May 2018 60,000 performance based restricted units that vest over a period of three (3) years, provided that the Company exceeded the performance targets for vesting set by the compensation committee and board of directors of the Company, unless such restricted share units have been cancelled in accordance with the terms and conditions of the share incentive plan of the Company or the employment terms of Mr. Oppenhaim. In the event a portion of these restricted share units fails to vest, such portion will be carried forward to the third vesting date and will vest if the Company’s average annual return on equity based on net income during the previous three (3) years shall be no less than ten percent (10%).
Compensation upon Significant Event
Upon the occurrence of a Significant Event, unvested options granted to Mr. Oppenhaim will vest upon the consummation of the Significant Event, and unexercised options may be exercised until the earlier of two years from the consummation of the Significant Event, and termination of the options. Such arrangements will not apply if Mr. Oppenhaim remains the chief executive officer of our company or the surviving entity, and unvested options are replaced for new options of the surviving entity as part of the Significant Event with a vesting schedule and terms identical to the replaced options. Further, upon a Significant Event, Mr. Oppenhaim will be entitled to a special bonus of up to 12 monthly salaries, subject to the approval of the compensation committee and our board of directors and subject to the limitation on a special bonus imposed by our compensation policy. In the event of termination of employment (up to 12 months from the Significant Event), Mr. Oppenhaim will be entitled to the retirement terms under his employment agreement, the special bonus described above and the payment of the annual bonus in full for the year in which the Significant Event has occurred, subject to the annual bonus plan, on an annual basis calculation, and subject to the approval of the compensation committee and our board of directors prior to the consummation of the transaction, or the respective body in the new surviving entity following the transaction, as applicable. A “Significant Event” is defined for this purpose as: (1) the sale of all or substantially all of our company’s assets; (2) a merger of our company with or into another company or entity after which our shareholders will hold 50% or less of the surviving entity; (3) our company becoming a division or a subsidiary of another company; or (4) the purchase of our company's shares, after which the purchaser will hold 50% or more of our company's shares, provided, however, that the purchaser is not one of our institutional investors upon execution of the purchase agreement.
Compensation upon Acquisition
Upon Acquisition of a company (which is not an affiliate of the company), Mr. Oppenhaim will be entitled to receive a bonus of up to 12 monthly salaries subject to the approval of the compensation committee and our board of directors and subject to the limitation on a special bonus imposed by our compensation policy. An “Acquisition” includes, among others, a merger of our company or a subsidiary of our company with or into another entity, such that upon consummation of such transaction our shareholders will hold more than 50% of the surviving entity.
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Directors and Officers Equity Based Compensation
As of February 15, 2018,14, 2019, a total of 848,4861,027,928 options to purchase our ordinary shares and 120,743130,702 RSU’s were outstanding and held by certain current executive officers and directors (consisting of seventeen17 persons), of which 319,695509,181 options are currently exercisable or exercisable within 60 days of February 15,14, 2018, 13,96838,274 shares are held by Trusteetrustee due to vested RSUs and 2,1118,278 RSU’s will vest within 60 days of February 15,14, 2018. See “Item 6E. Share Ownership” in this annual report on Form 20-F.
In accordance with our equity-based compensation policy, effective August 2017, the exercise price of granted options is equal to the closing sale price of the Company's ordinary shares on Nasdaq on the day of grant.
Compensation of Directors
The total amount paid or payable to the directors, including our directors who were in the position of external directors until May 2018, (consisting of eight persons from January until April 2018, and seven persons in 2017, and an additional director elected infrom May until December 18, 2017), for 20172018 was $0.35$0.36 million.
The compensation arrangement of the Company’s directors (excluding the chairman of the board of directors and, unless approved otherwise, any other director who is also an employee of the Company), as approved by our shareholders at the 2012 annual general meeting, includes:
1. An annual payment of US$18,000 (or an equivalent amount in NIS calculated into NIS according to a NIS 4.00 = US$1.00 exchange rate) but not less than the annual payment required under the Companies Regulations (Rules Regarding Compensation and Expenses to an External Director), 2000, and the Companies Regulations (Relief for Public Companies with Shares Listed for Trading on a Stock Market Outside of Israel), 2000 (collectively, the “Regulations”).
2. Additionally, the following payments (subject to the minimal and maximal payment restrictions applicable to the Company under the Regulations): (i) for each meeting that the director or external director attends in person, an amount of US$600 (in an equivalent amount in NIS according to a NIS 4.00 = US$1.00 exchange rate, provided that such payment will not be lower than the applicable payment required under the Regulations to be paid to external directors); (ii) for each execution of a written consent in lieu of a meeting, an amount of US$300 (in an equivalent amount in NIS according to a NIS 4.00 = US$1.00 exchange rate, provided that such payment will not be lower than the applicable payment required under the Regulations to be paid to external directors); and (iii) for each meeting that the director or external director attends by teleconference, an amount of US$360 (in an equivalent amount in NIS according to a NIS 4.00 = US$1.00 exchange rate, provided that such payment will not be lower than the applicable payment required under the Regulations to be paid to external directors).
3. An annual award of an option to purchase up to 10,000 ordinary shares or options with fair market value of US$80,000, the lower of the two, to be granted to each director or external director on the date of each annual general meeting at which such director or external director is elected or reelected (or if an external director is not standing for reelection, on the date of the annual general meeting, provided that such external director is serving on the board of directors at the time of the annual general meeting).reelected. The exercise price of each option will be determined pursuant to our equity based compensation policy and consistent with our compensation policy, the options will vest quarterly over a period of four years.
All the above mentioned sums were paid in an equivalent amount in NIS according to a NIS 4.00 = US$1.00 exchange rate, provided that such payment will not be lower than the applicable payment required under the Regulations to be paid to external directors, and the proposed changes are in line with the Company’s Compensation Policy (as further detailed below).
In February 2017, our board of directors has resolved, based on the recommendation of our compensation committee, that effective as of July 2017, the compensation arrangement of the Company’s directors (including external directors and excluding(excluding the chairman of the board of directors and, unless approved otherwise, any other director who is also an employee of the Company) will be changed such that the annual payment will be increased to NIS 92,000 (approximately US$26,300) and the payment per meeting to NIS3,000 (approximately US$860) (for each execution of a written consent in lieu of a meeting, an amount of NIS 1,500 and for each meeting that the director or external director attends by teleconference, an amount of NIS 1,800), subject to the applicable minimum and maximum limitations include in the Companies Regulations (Rules Regarding the Compensation and Expenses of an External Director), 5760- 2000, as amended by the Companies Regulations (Relief for Public Companies Traded in Stock Exchange Outside of Israel), 5760-2000, as such regulations may be amended from time to time. No change was made with respect to the equity grants to the directors and external directors. The revisions in the annual and per meeting fees are exempted from approval of the Company’s shareholders pursuant to Rule 7 of Companies Regulations (Rules Regarding the Compensation and Expenses of an External Director), 5760-2000 and Rule 1A(2) of the Companies Regulations (Relief from Related Party Transactions), 5760-2000.
The compensation arrangement of Dr. Michael Brunstein, the chairman of our board of directors, as approved by our shareholders at the 2006, 2008 and 2010 annual general meetings, includes: (i) a gross annual fee of US$110,000 payable monthly in NIS; (ii) an annual award of options to purchase up to 10,000 ordinary shares, to be granted to Dr. Brunstein on the date of each annual general meeting at which the chairman of the board of directors is elected or reelected, starting the 2008 annual general meeting, the exercise price of which will be determined pursuant to our equity based compensation policy and the other terms (i.e., the amount, exercise price and vesting schedule) will be identical to the terms of options granted to other directors on an annual award; and (iii) a biennial award of an option to purchase up to 75,000 ordinary shares to Dr. Brunstein on the date of every other annual general meeting at which the chairman of the board of directors is elected or reelected, starting with the 2010 annual general meeting (and thereafter in 2012). The exercise price of such options is determined pursuant to our equity based compensation policy, and consistent with our compensation policy, the options will vest quarterly over a period of four years.
On September 12, 2013, our shareholders approved the Company's compensation policy.
Pursuant to the Companies Law a compensation policy must be re-approved (and re-considered) at least once in every three years. Our shareholders voted on June 30, 2016 against the amended and restated compensation policy recommended by our board of directors. In August 2, 2016, our board of directors (per the recommendation of our compensation committee) has concluded that the approval of the proposed amended and restated compensation plan is for the benefit of the company, and based on detailed arguments and in accordance with the provisions of the Companies Law, has resolved to approve our amended and restated compensation policy despite the objection of our shareholders. Accordingly, our amended compensation policy is effective as of that date. The full text of the amended and restated compensation policy was included as Appendix A to the proxy statement attached to our report on Form 6-K, furnished to the Securities and Exchange Commission on May 26, 2016.
6.C Board Practices
Our Amended and Restated Articles of Association, as adopted by the Company’s shareholders and recently amended on April 26, 2018, or the Amended Articles, provide that we may have between five and nine directors. Our board of directors currently consists of seven directors, two of which are women.
Under the Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” including companies with shares listed on the Nasdaq Global Select Market, are required to appoint at least two external directors.
Pursuant to regulations promulgated under the Companies Law, companies with shares traded on a U.S. stock exchange, including the Nasdaq Global Select Market, may, subject to certain conditions, “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors. In accordance with these regulations, in May 2018, we elected to “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors.
Under these regulations, the exemptions from such Companies Law requirements will continue to be available to us so long as: (i) we do not have a “controlling shareholder” (as such term is defined under the Companies Law), (ii) our shares are traded on a U.S. stock exchange, including the Nasdaq Global Select Market, and (iii) we comply with the director independence requirements, the audit committee and the compensation committee composition requirements, under U.S. laws (including applicable Nasdaq Rules) applicable to U.S. domestic issuers.
Our board of directors has determined that all of our directors qualify as ‘‘independent directors’’ as defined by The Nasdaq Stock Market Rules.
Our Amended Articles provide that directors may be elected at our annual general meeting of shareholders by a vote of the holders of more than 50% of the total number of votes represented at such meeting, not taking into consideration abstention votes. In addition, our board of directors is authorized to appoint directors, at its discretion, provided that the total number of directors does not exceed the maximum number of directors permitted by the Amended Articles. Our directors (other than the directors who were in the position of external directors until May 2018) serve as such until the next annual general meeting of our shareholders. Effective as of May 2018, and our adoption of the exemption under the Israeli Companies Regulations (Reliefs for Public Companies whose Shares are Listed on a Stock Exchange Outside of Israel), 2000, or the Regulation, our directors in office who were elected and classified as external directors, Ms. Dafna Gruber and Ms. Zehava Simon, are no longer classified as such under the Companies Law. The transition rules set forth under the Regulation provide that such directors have the right to remain in office as our directors at their option after the exemption under the Regulation is adopted until the earlier of such directors’ original end of term of office or the second annual meeting of shareholders after the adoption of the exemption under the Regulation, which in the case of Ms. Gruber is until the date of our annual meeting of shareholders to be held in 2020, and in case of Ms. Simon is until earlier of the date of our annual meeting of shareholders to be held in 2020 and June 2020.
According to the Companies Law, the board of directors of a public company must establish the minimum number of board members that are to have accounting and financial expertise while considering, inter alia, the nature of the company, its size, the scope and complexity of its operations and the number of directors stated in the Amended Articles.
Our board of directors resolved that the minimum number of board members that need to have accounting and financial expertise is one (1).
Our board of directors determined that each of Ms. Dafna Gruber and Ms. Zehava Simon has accounting and financial expertise as described in the regulations promulgated pursuant to the Companies Law, and that, therefore, the requirements of the minimum number of board members that need to have accounting and financial expertise, as set by the board of directors, has been met.
Our board of directors has adopted a training program for newly appointed directors. Once appointed and following the completion of their onboard training, our directors continue to receive ongoing training as part of our directors training and development efforts.
Family Relationships
There are no family relationships between any members of our executive management and our directors.
Board of Directors’ Committees
The Company’s board of directors has appointed the following committees:
The Audit Committee
Our Audit Committee is comprised of Dafna Gruber, Zehava Simon, Avi Cohen and Eli Fruchter. The audit committee is responsible to provide oversight of the accounting and financial reporting process of the Company and the audits of the financial statements of the Company, and assist the Board in its oversight of (i) the integrity of the Company's financial statements and other published financial information, (ii) the Company's compliance with applicable financial and accounting related standards, rules and regulations, (iii) the selection, engagement and termination, subject to shareholder approval, of the Company's independent auditor, (iv) the pre-approval of all audit, audit-related and all permitted non-audit services, if any, by the Company's independent auditor, and the compensation therefor, (v) the Company's internal controls over financial reporting and (vi) risk assessment and risk management.
According to the Companies Law, the audit committee must consist of at least three directors, must include all of the external directors and the majority of its members must be independent directors under the Companies Law. The following individuals may not be members of the audit committee: (i) the chairman of the board of directors; (ii) any director employed by the Company, its controlling shareholder or any entity under the control of the controlling shareholder; (iii) any director providing services on a regular basis to the Company, its controlling shareholder or any entity under the control of the controlling shareholder; (iv) any director whose main source of income comes from the Company’s controlling shareholder; or (v) the Company’s controlling shareholders or any of their relatives. The chairman of the audit committee must be an external director, who has not been serving as a chairman of the audit committee for more than nine years.66
Under the Companies Law, the audit committee is responsible, among others, for (i) identifying deficiencies in the business management practices of the Company, including by consulting with the internal auditor, and recommending remedial actions with respect to such deficiencies; (ii) reviewing and approving related party transactions, including, among others, determining whether or not such transactions are deemed material actions or extraordinary transactions; (iii) ensuring that a competitive process is conducted for related party transactions with a controlling shareholder (regardless of whether or not such transactions are deemed extraordinary transactions), optionally based on criteria which may be determined by the audit committee annually in advance; (iv) setting forth the approval process for transactions that are 'non-negligible' (i.e., transactions with a controlling shareholder that are classified by the audit committee as non-negligible, even though they are not deemed extraordinary transactions), as well as determining which types of transactions would require the approval of the audit committee, optionally based on criteria which may be determined annually in advance by the audit committee; (v) evaluating the Company’s internal audit program and the performance of the Company’s internal auditor and the resources at his/her disposal; (vi) reviewing the scope of work of the Company’s external auditor and making recommendations regarding his/her salary; and (vii) creating procedures relating to the employees’ complaints regarding deficiencies in the administration of the Company as well as adopting against retaliation. The audit committee is also responsible for reviewing and approving any material change or waiver in the Company's Corporate Code of Conduct regarding directors or executive officers, and disclosures made in the Company's annual report in such regard. The audit committee operates under a charter dully adopted by the board of directors.
Our board of directors has determined that each member of our audit committee is independent as such term is defined in Rule 10A‑3 under the Exchange Act, and that each member of our audit committee satisfies the additional requirements applicable under the Nasdaq rules to members of an audit committee.
The
Our Compensation Committee is comprised of Zehava Simon, Dafna Gruber, Raanan Cohen and Raanan Cohen.Miron (Ronnie) Kenneth. The function of the compensation committee is described in the approved charter of the committee, and includes assisting the board of directors in discharging its responsibilities relating to compensation of the Company’s officers, directors and executives and the overall compensation programs and reviewing and approving, or if required by law, approving and recommending for approval by the board of directors, grants and awards under the Company’s equity incentive plans. The primary objective of the committee is to oversee the development and implementation of the compensation policies and plans that are appropriate for the Company in light of all relevant circumstances, and which provide incentives that fit the Company’s long-term strategic plans and are consistent with the culture of the Company and the overall goal of enhancing shareholder’s value. Under the Companies Law the
Our board of directors has determined that each member of our compensation committee must consist of at least three directors, must include allis independent under the external directors,Nasdaq rules, including the majority of its members must be external directors, and its chairman must be an external director. In addition, alladditional independence requirements applicable to the members of thea compensation committee must meet the requirements under the Companies Law for membership in the audit committee, as described above.committee.
Under the Companies Law and our compensation committee charter, our compensation committee is responsible, among others, for (i) recommending to the board of directors regarding its approval of a compensation policy in accordance with the requirements of the Companies Law, and any other compensation policies, incentive-based compensation plans and equity-based plans; (ii) overseeing the development and implementation of such compensation plans and policies that are appropriate in light of all relevant circumstances and recommending to the board of directors regarding any amendments or modifications that the compensation committee deems appropriate; (iii) determining whether to approve transactions concerning the terms of engagement and employment of our officers and directors that require compensation committee approval under the Companies Law or our compensation plans and policies; and (iv) taking any further actions as the compensation committee is required or allowed to under the Companies Law or the compensation plans and policies.
Nominating Committee
Our Nominating Committee is comprised of Alon Dumanis,Ronnie (Miron) Kenneth, Michael Brunstein, Eli Fruchter and Zehava Simon. The function of the nominating committee is described in the approved charter of the committee, and includes responsibility for identifying individuals qualified to become board members and recommending that the board of directors consider the director nominees for election at the general meeting of shareholders. The nominating and corporate governance committee is also responsible for developing and recommending to the board of directors a set of corporate governance guidelines applicable to the Company, periodically reviewing such guidelines and recommending any changes thereto.
On September 7, 2010, our board of directors resolved to authorize the audit committee to fulfill the scope and act as the Company’s investment committee.
All committees are acting according to written charters that were approved by our board of directors. In February 2012, we adopted an internal enforcement plan which was approved by our board of directors. The internal enforcement plan, as part of which we adopted and implementing procedures and policies in order to comply with the provisions of the Israeli Securities Law, 5728-1968 (the “Israeli Securities Law”), the Companies Law and the applicable guidelines issued by Israeli Securities Authority. The internal enforcement plan includes, among others, the board committees’ charters, procedures with respect to related party transactions, insider trading, which prohibits hedging activities, reporting and complaints, anti-bribery policy and a code of conduct. Each of our committees have the power to retain, terminate and approve the related fees and other retention terms, as it deems appropriate, outside counsel and other experts and consultants to assist the committee in connection with its responsibilities without our board of directors approval and at the Company's expense.
In May 2017, we completed a review process of our enforcement plan and related procedures.
Approval of Related Party Transaction
The Companies Law requires that office holders of a company, including directors and executive officers, promptly disclose to the board of directors any personal interest they may have and all related material information known to them about any existing or proposed transaction with such company. The approval of the board of directors is required for 'non-extraordinary' transactions between a company and its office holders, or between a company and other persons in which an office holder has a personal interest, unless such company's articles of association provide otherwise. Under the Companies Law, a 'non-extraordinary' transaction between a company or between the company and a third party in which an office holder of a company has a personal interest, will require the approval of the board of directors or a committee authorized by the board of directors, unless such company's articles of association provide otherwise. Our Amended Articles do not provide otherwise, and therefore such transaction requires the approval of our board of directors. If a transaction is an “extraordinary transaction”, it is subject to the approval of the audit committee prior to its approval by the board of directors. For information regarding the necessary approvals under the Companies Law for transactions with office holders and directors regarding their terms of engagement with the company, see “— Compensation of Officers and Directors” in this Item below.
In addition, an extraordinary transaction between a public company and a controlling shareholder (i.e. a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from its position on the board of directors or any other position with the company), or in which a controlling shareholder has a personal interest, including a private placement in which the controlling shareholder has a personal interest, a transaction between a public company and a controlling shareholder, the controlling shareholders' relative, or entities under its control, directly or indirectly, with respect to services to be provided to the public company, and a transaction concerning the terms of compensation of the controlling shareholder or the controlling shareholder’s relative, who is an office holder or an employee, requires the approval of the audit committee or, in some cases, the compensation committee (see "— Compensation of Officers and Directors" in this Item below), the board of directors and a majority of the shares voted by the shareholders of the company participating and voting on the matter in a shareholders’ meeting. In addition, the shareholder approval must fulfill one of the following requirements: (i) the majority must include at least a majority of the shares of the voting shareholders who have no personal interest in the transaction (in counting the total votes of such shareholders, abstentions are not taken into account); or (ii) the total of opposition votes among the shareholders who have no personal interest in the transaction may not exceed 2% of the aggregate voting rights in the company. Any such transaction the term of which is more than three years, must be approved in the same manner every three years, unless with respect to certain transactions as permitted by the Companies Law, the audit committee has determined that longer term is reasonable under the circumstances.
According to the Companies Law, if an extraordinary transaction is discussed by the board of directors or the audit committee, directors and office holders that have personal interest in the proposed transaction, may not participate in the discussion or vote. However, if the majority of the members of the audit committee or the board of directors (as applicable) have personal interest in the proposed transaction, then all directors (including those with personal interest) may participate in the discussion and vote, provided that in the event the majority of the members of the board of directors have personal interest in the transaction, said transaction will also be subject to the approval of the Company's shareholders.
Compensation of Officers and Directors
Under the Companies Law, Israeli public companies are required to establish a compensation committee and adopt a policy regarding the compensation and terms of employment of their directors and officers. For information on the composition, roles and objectives of the compensation committee pursuant to the Companies Law and our compensation committee charter, see above “—Board of Directors” Committees — Compensation Committee" in this annual report on Form 20-F.
Pursuant to the Companies Law, the compensation policy must be approved by the company's board of directors after reviewing the recommendations of the compensation committee. The compensation policy also requires the approval of the general meeting of the shareholders, which approval must satisfy one of the following (the "Majority Requirement"): (i) the majority should include at least a majority of the shares of the voting shareholders who are non-controlling shareholders or do not have a personal interest in the approval of the compensation policy (in counting the total votes of such shareholders, abstentions are not be taken into account) or (ii) the total number of votes against the proposal among the shareholders mentioned in paragraph (i) does not exceed two percent of the aggregate voting power in the company. Under certain circumstances and subject to certain exceptions, the board of directors may approve the compensation policy despite the objection of the shareholders, provided that the compensation committee and the board of directors determines that it is for the benefit of the company, following an additional discussion and based on detailed arguments. In August 2016, our compensation committee and board of directors acted accordingly and adopted our amended and restated compensation plan despite our shareholders’ objection.
The Companies Law provides that the compensation policy must be re-approved (and re-considered) every three years, in the manner described above. Moreover, the board of directors is responsible for reviewing from time to time the compensation policy and deciding whether or not there are any circumstances that require an adjustment to the company's compensation policy. When approving the compensation policy, the relevant organs must take into consideration the goals and objectives listed in the Companies Law, and include reference to specific issues listed in the Companies Law. Such issues include, among others (the “Compensation Policy Mandatory Criteria”): (i) the relevant person’s education, qualifications, professional experience and achievements; (ii) such person's position within the company, the scope of his responsibilities and previous compensation arrangements with the company; (iii) the proportionality of the employer cost of such person in relation to the employer cost of other employees of the company, and in particular, the average and median pay of other employees in the company, including contract workers, and the impact of the differences between such person's compensation and the other employees' compensation on the labor relations in the company; (iv) the authority, at the board of director's sole discretion, to lower any variable compensation components or set a maximum limit (cap) on the actual value of the non-cash variable components, when paid; and (v) in the event that the terms of engagement include any termination payments - the term of employment of the departing person, the company’s performance during that term, and the departing person’s contribution to the performance of the company.
In addition, the Companies Law provides that the following matters must be included in the compensation policy (the "Compensation Policy Mandatory Provisions"): (i) the award of variable components must be based on long term and measurable performance criteria (other than non-material variable components, which may be based on non-measurable criteria taking into account the relevant person's contribution to the performance of the company); (ii) the company must set a ratio between fixed and variable pay, set a cap on the payment of any cash variable compensation components as of the payment of such components, and set a cap on the maximum cash value all non-cash variable components as of their grant date; (iii) the compensation policy must include a provision requiring the relevant person to return to the company any compensation that was awarded on the basis of financial figures that were subsequently restated; (iv) equity based variable compensation components should have an appropriate minimum vesting periods, which should be linked to long term performance objectives; and (v) the company must set a clear limit on termination payments.
Pursuant to the Companies Law, any transaction with an office holder (except directors and the chief executive officer of the company) with respect to such office holder's compensation arrangements and terms of engagement, requires the approval of the compensation committee and the board of directors. Such transaction must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (also see above "—Board of Directors' Committees — Compensation Committee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement. Notwithstanding the above, the compensation committee and the board of directors may, under special circumstances, approve such transaction even if the shareholders' meeting objected to its approval, provided that (i) both the compensation committee and the board of directors re-discussed the transactions and decided to approve it despite the shareholder's objection, based on detailed arguments, and (ii) the company is not a 'Public Pyramid Held Company'. For the purpose hereof, a "Public Pyramid Held Company" is a public company that is controlled by another public company (including companies that issued only debentures to the public), which is also controlled by another public company (including companies that issued only debentures to the public) that has a controlling shareholder.
Transactions between public companies (including companies that have issued only debentures to the public) and their chief executive officer, with respect to his or her compensation arrangement and terms of engagement, require the approval of the compensation committee, the board of directors and the shareholder's meeting, provided that the approval of the shareholders' meeting must satisfy the Majority Requirement. Notwithstanding the above, the compensation committee and the board of directors may, under special circumstances, approve such transaction with the chief executive officer even if the shareholders' meeting objected to its approval, provided that (i) both the compensation committee and the board of directors re-discussed the transactions and decided to approve it despite the shareholder's objection, based on detailed arguments, and (ii) the company is not a Public Pyramid Held Company. Such transaction with the chief executive officer must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (see above —“Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement. In addition, the compensation committee may determine that such transaction with the CEO does not have to be approved by the shareholders of the company, provided that: (i) the chief executive officer is independent based on criteria set forth in the Companies Law; (ii) the compensation committee determined, based on detailed arguments, that bringing the transaction to the approval of the shareholders may compromise the chances of entering into the transaction; and (iii) the terms of the transaction are consistent with the provisions of the company's compensation policy. Under the Companies Law, non-material amendments of transactions relating to the compensation arrangement or terms of engagement of office holders (including the chief executive officer), require only the approval of the compensation committee.
With respect to transactions relating to the compensation arrangement and terms of engagements of directors in public companies (including companies that have issued only debentures to the public), the Companies Law provides that such transaction is subject to the approval of the compensation committee, the board of directors and the shareholders' meeting. Such transaction must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (see above "—Board Practices –Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement.
Pursuant to the Companies Law a compensation policy must be re-approved (and re-considered) at least once in every three years. Our shareholders voted on June 30, 2016 against the amended and restated compensation policy recommended by our board of directors. On August 2, 2016, our board of directors (per the recommendation of our compensation committee) has concluded that the approval of the proposed amended and restated compensation plan is in the interest of the Company, and based on detailed arguments and in accordance with the provisions of the Companies Law, has resolved to approve our amended and restated compensation policy despite the objection of our shareholders. Accordingly, our amended compensation policy is effective as of that date. For the full text of the amended and restated compensation policy see our report on Form 6-K furnished to the Securities and Exchange Commission on May 26, 2016.
Internal Auditor
Under the Companies Law, the board of directors must also appoint an internal auditor nominated by the audit committee. Our internal auditor is Ms. Dana Gottesman-Erlich, CPA (Isr.) of BDO Ziv Haft, an independent registered accounting firm which is a part of the BDO international accounting firm. Ms. Gottesman-Erlich replaced Mr. Guy Sapir, C.P.A (Isr) of Kesselman & Kesselman PwC Israel as our internal auditor as of January 2016. The role of the internal auditor is to examine whether a company’s actions comply with the law and proper business procedure. The internal auditor may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative. The Companies Law defines an interested party as a holder of 5% or more of the shares or voting rights of a company, any person or entity that has the right to nominate or appoint at least one director or the general manager of the company or any person who serves as a director or as the general manager of a company. Our internal auditor is working based on a risk survey and audit plan, which is determined by our audit committee and approved by our board of directors.
6.D Employees
Set forth below is a chart showing the number of people we employed at the times indicated:
| | As of December 31, | | | As of December 31, | |
| | 2015(*) | | | 2016(*) | | | 2017(*) | | | 2016(*) | | | 2017(*) | | | 2018(*) | |
| | | | | | | | | | | | | | | | | | |
Total Personnel | | | 496 | | | | 510 | | | | 616 | | | | 510 | | | | 616 | | | | 662 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Located in Israel | | | 301 | | | | 299 | | | | 352 | | | | 299 | | | | 352 | | | | 373 | |
Located abroad | | | 195 | | | | 211 | | | | 264 | | | | 211 | | | | 264 | | | | 289 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
In operations | | | 87 | | | | 83 | | | | 100 | | | | 83 | | | | 100 | | | | 100 | |
In research and development | | | 180 | | | | 178 | | | | 216 | | | | 178 | | | | 216 | | | | 275 | |
In global business | | | 195 | | | | 214 | | | | 251 | | | | 214 | | | | 251 | | | | 242 | |
In general and administration | | | 34 | | | | 35 | | | | 49 | | | | 35 | | | | 49 | | | | 45 | |
_______________________
(*) The numbers of employees set forth in this table do not include contractors and an insignificant number of temporary employees retained by the Company from time to time.
We were a member of the Industrialists Association in Israel, an employer’s union until December 31, 2006. Under applicable Israeli law, we and our employees are subject to protective labor provisions such as restrictions on working hours, minimum wages, paid vacation, sick pay, severance pay and advance notice of termination of employment as well as equal opportunity and anti-discrimination laws. Orders issued by the Israeli Ministry of Economy and Industry make certain industry-wide collective bargaining agreements applicable to us. These agreements affect matters such as cost of living adjustments to salaries, length of working hours and week, recuperation and travel expenses. In Israel, Nova is subject to the instructions of the Extension Order in the Industrial Field for Extensive Pension Insurance 2006 according to the Israeli Collective Bargaining Agreements Law, 1957 (the “Extension Order”). The Extension Order ensuresdetermines the pension insuranceterms of mostthe employees which fall under its criteria.
6.E Share Ownership
Based on information provided to us, our eighteen17 directors and officers listed in Item 6A above, have had, as a group, sole voting and investment power for 335,774560,028 shares beneficially owned by them as of February 15,14, 2018 (representing 1.2%2% of the 27,903,05827,925,149 issued and outstanding ordinary shares of the Company as of such date). Such number includes 319,695512,148 shares subject to options that are immediately exercisable or exercisable within 60 days of February 15,14, 2018 (with expiration dates ranging between 20182019 and 2025;2026; exercise prices ($/share) ranging between 0.93 and 24.96)29.45), 13,96845,769 shares held by the trustee due to vested RSUs, and 2,111 RSUs to be vested within 60 days as of February 15,14, 2018. Each of such directors and executive officers beneficially owned less than 1% of the Company’s shares as of such date.
Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary shares that are subject to warrants or options that are presently exercisable or exercisable within 60 days of the date of February 15,14, 2018 are deemed to be outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.
Employee Benefit Plans
The share option plans active throughout 2017,under which we have outstanding equity grants, are described below:
2007 Incentive Plan (which was active until October 2017) - The maximum number of ordinary shares to be issued under the plan, which was adopted by our shareholders on October 25, 2007, was 2,500,000, subject to future increases or decreases by the Company. On May 1, 2012, the board of directors resolved to increase the aggregate number of shares issuable under the 2007 Incentive Plan by one million shares, and amend the 2007 Incentive Plan to address a change in the clearing procedures of the TASE. On December 17, 2014, the board of directors resolved to increase the aggregate number of shares issuable under the 2007 Incentive Plan by two million shares, and to amend the 2007 Incentive Plan. Such amendment includes, among others, a change of the exercise period in the event of termination, and in case of death, disability or retirement of the optionee. In connection with the aforementioned increases, we have not obtained a shareholder approval as required under NASDAQNasdaq Listing Rules and followed in lieu home practice rules that do not require such approval. As of December 31, 2017,2018, options to purchase 3,354,112 ordinary shares at an exercise prices which range from $0.43 to $24.70, the fair market value of Nova’s stock based on the dates of grant, were granted under this plan of which, as of December 31, 2017, 1,720,5982018, 2,288,813 options were exercised, 349,214691,720 options were outstanding and exercisable, 672,987932,227 options had been cancelled and 611,313391,352 were outstanding and unvested. As of December 31, 20172018, 834,142 RSU’s had been granted, of which 536,158622,993 had vested, 58,38097,411 had been cancelled and 239,604113,738 RSU's were outstanding. Following adoption of 2017 share incentive plan, as detailed herein, we have ceased granting equity under the 2007 incentive plan.
2017 Share Incentive Plan - The maximum number of ordinary shares to be issued under the plan, which was adopted by our board of directors on August 1, 2017, is 2,500,000, subject to future increases or decreases by the Company. The Company has used its option as a foreign private issuer to opt out of Nasdaq requirement for a shareholders’ approval of the plan, by providing a legal opinion letter to Nasdaq on August 25, 2017. As of December 31, 2017,2018, options to purchase 81,262314,681 ordinary shares at an exercise prices ofwhich range from $22.56 to $31.26, the closing price of the Company's ordinary shares on Nasdaq on the day of grant, were granted under this plan of which, as of December 31, 2017,2018, no options were exercised, 11036,345 options were outstanding and exercisable, no5,680 options had been cancelled and 81,152410,656 were outstanding and unvested. As of December 31, 20172018, 52,941226,303 RSU’s had been granted, of which no12,450 RSU’s had vested, 703,696 had been cancelled and 52,871210,157 RSU's were outstanding.
On September 12, 2013, our shareholders (following an approval by our compensation committee and board of directors), approved the Company's compensation policy, which includes, among others, provisions relating to equity basedequity-based compensation for Nova's executive officers. On August 2, 2016, our board of directors (per the recommendation of our compensation committee) has concluded that the approval of the proposed amended and restated compensation plan is in the interest of the Company, and based on detailed arguments and in accordance with the provisions of the Companies Law, has resolved to approve our amended and restated compensation policy despite the objection of our shareholders. Accordingly, our amended compensation policy is effective as of that date.
The amended and restated compensation policy provides, among others, that: (i) such equity based compensation is intended to be in a form of share options and/or other equity based awards, such as RSUs, in accordance with the Company's equity incentive plan in place as may be updated from time to time; (ii) all equity-based incentives granted to executive officers will be subject to vesting periods in order to promote long-term retention of the awarded executive officers. Unless determined otherwise in a specific award agreement approved by the compensation committee and the board of directors, grants to executive officers (other than directors) will vest gradually over a period of between three to five years; and (iii) all other terms of the equity awards will be in accordance with Nova's incentive plans and other related practices and policies. The board of directors may, following approval by the compensation committee, extend the period of time for which an award is to remain exercisable and make provisions with respect to the acceleration of the vesting period of any executive officer's awards, including, without limitation, in connection with a corporate transaction involving a change of control, subject to any additional approval as may be required by the Companies Law. The compensation policy also provides that the equity basedequity-based compensation will be granted from time to time and be individually determined and awarded according to the performance, educational background, prior business experience, qualifications, role and the personal responsibilities of the executive officer. The fair market value of the equity basedequity-based compensation for the executive officers will be determined according to acceptable valuation practices at the time of grant.
Our equity basedequity-based compensation policy, which was initially adopted in February 2007 and was most recently amended in August 2017,December 2018, provides, among others, that the exercise price for each option will be equal to the closing sale price of the Company's ordinary shares on Nasdaq on the day of grant.
For additional information regarding our employees’ incentive plans, see Note 9 of our consolidated financial statements, contained elsewhere in this report.
Item 7. Major Shareholder and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of the dates indicated below for each person who we know beneficially owns five percent or more of the outstanding ordinary shares.
Beneficial ownership of shares is determined under rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Applicable percentages are based on 27,903,05827,925,149 ordinary shares outstanding as of February 15,14, 2018.
Name | | Number of Ordinary Shares Beneficially Owned | | | Percentage of Ordinary Shares Beneficially Owned | |
Renaissance Technologies LLC(1) | | | 1,904,700 | | | | 6.83 | % |
Harel Insurance Investments & Financial Services Ltd.(2) | | | 1,701,541 | | | | 6.10 | % |
Menora Mivtachim Holdings Ltd.(3) | | | 1,592,756 | | | | 5.71 | % |
Migdal Insurance & Financial Holdings Ltd.(4) | | | 1,533,324 | | | | 5.50 | % |
Yelin Lapidot Holdings Management Ltd., Dov Yelin, Yair Lapidot(5) | | | 1,489,713 | | | | 5.34 | % |
The Phoenix Holdings Ltd. and Excellence Holdings Ltd., Itshak Sharon (Tshuva), Delek Group Ltd. (6) | | | 1,456,800 | | | | 5.22 | % |
Name | | Number of Ordinary Shares Beneficially Owned | | | Percentage of Ordinary Shares Beneficially Owned | |
Menora Mivtachim Holdings Ltd. and Menora Mivtachim Pensions and Gemel Ltd. (1) | | | 2,748,785 | | | | 9.84 | % |
The Phoenix Holdings Ltd., Itshak Sharon (Tshuva), and Delek Group Ltd. (2) | | | 2,228,397 | | | | 7.98 | % |
Harel Insurance Investments & Financial Services Ltd. (3) | | | 2,095,493 | | | | 7.50 | % |
Clal Insurance Enterprises Holdings Ltd., IDB Development Corporation Ltd. and Eduardo Sergio Elsztain. (4) | | | 2,025,849 | | | | 7.25 | % |
Renaissance Technologies LLC. (5) | | | 2,013,700 | | | | 7.21 | % |
Psagot Investment House Ltd. (6) | | | 1,505,717 | | | | 5.39 | % |
(1) The information is based upon Amendment no. 42 to Schedule 13G13G/A filed with the SEC by Renaissance Technologies LLCMenora Mivtachim Holdings Ltd. and Menora Mivtachim Pensions and Gemel Ltd. on February 14, 2018.2019.
(2) The information is based upon Amendment no. 41 to Schedule 13G/A filed with the SEC by The Phoenix Holdings Ltd., Delek Group Ltd. and Itshak Sharon (Tshuva) as of February 14, 2019.
(3) The information is based upon Amendment no. 5 to Schedule 13G/A filed with the SEC by Harel Insurance Investments & Financial Services Ltd. on February 1, 2018.January 29, 2019.
(3)(4) The information is based upon Amendment no. 1 to Schedule 13G13G/A filed with the SEC by Menora MivtachimClal Insurance Enterprises Holdings Ltd., and IDB Development Corporation Ltd. and Eduardo Sergio Elsztain on February 14, 2018.2019.
(4)(5) The information is based upon Amendment no. 5 to Schedule 13G filed with the SEC by Migdal Insurance & Financial Holdings Ltd.Renaissance Technologies LLC on January 22, 2018.February 13, 2019.
(5)(6) The information is based upon Amendment No. 32 to Schedule 13G filed with the SEC by Dov Yelin, Yair Lapidot and Yelin Lapidot Holdings ManagementPsagot Investment House Ltd. on January 31, 2018.February 21, 2019.
(6) Based upon information provided to the Company by The Phoenix Holdings Ltd., Excellence Holdings Ltd., Delek Group Ltd. and Itshak Sharon (Tshuva) as of February 13, 2018,
All the shareholders of the Company have the same voting rights.
To our knowledge, the significant changes in the percentage of ownership held by our major shareholders during the past three years have been: (i) the decrease in the percentage of ownership by Clal Insurance Enterprises Holdings Ltd. below 5% in 2017;2017 and increase above 5% in 2018; (ii) the increase in the percentage of ownership held by Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP and Wellington Management Company LLP above 5% in 2016, and the decrease in the percentage of ownership below 5% in 2017; and (iii) the increase in the percentage of ownership held by Menora Mivtachim Holdings Ltd. above 5% in 2017.2017, (iv) the increase in the percentage of ownership of Psagot Investment House Ltd. above 5% in 2018; (v) the decrease in the percentage of ownership of Yelin Lapidot Holdings Management Ltd., Dov Yelin, Yair Lapidot below 5% in 2018, and (vi) the decrease of in the percentage of ownership of Migdal Insurance & Financial Holdings below 5% in 2018.
As of February 15, 2018,14, 2019, our ordinary shares were held by 14 registered holders (not including CEDE & Co.). Based on the information provided to us by our transfer agent, as of February 15,14, 2018, 12 registered holders were U.S. domicile holders and held approximately 0.13% of our outstanding ordinary shares.
Control of Registrant
To the Company’s knowledge, it is not owned or controlled by a foreign government. Except for the shareholders identified above owning more than five percent of the Company’s ordinary shares, the Company has no knowledge of any corporation or other natural or legal person owning a controlling interest in the Company.
B. Related Party Transactions
In November 2016,June 2018, we obtained directors’ and officers’ liability insurance for our officers and directors with coverage in an aggregate amount of $40,000,000$50,000,000 (including $5,000,000 Side A DIC). This directors’ and officers’ liability insurance was presented and approved by our compensation committee and board of directors and wasin accordance with the framework approved by our shareholders inon June 2017 (the22, 2017(the “Policy”).
The resolution of our compensation committee and Board in May 2017, and the approval of our shareholders in June 2017, authorized the Company, from time to time and for up to a period of three years in the aggregate (effective immediately as of the approval of our shareholders), to extend and/or renew the Policy or enter into a new insurance policy, with the same insurers or any other insurers, in Israel or overseas, for the insurance of directors and officers liability with respect to the directors and/or officers serving in the Company and its subsidiaries, as may serve from time to time, and with the directors and/or officers serving in associated companies on behalf of the Company and/or on behalf of its subsidiaries, provided however, that the insurance transaction complies with the following conditions: (i) the annual premium to be paid by us will not exceed 1.5% of the aggregate coverage of the insurance policy; (ii) the limit of liability of the insurer will not exceed the greater of $50 million or 30% of our shareholders equity based on our most recent financial statements at the time of approval by the compensation committee; and (iii) the insurance policy, as well as the limit of liability and the premium for each extension or renewal will be approved by the compensation committee (and, if required by law, by the board of directors) which will determine that the sums are reasonable considering our exposures, the scope of coverage and the market conditions and that the insurance policy reflects the current market conditions, and it will not materially affect our profitability, assets or liabilities.
Further, upon circumstances to be approved by the compensation committee (and, if required by law, by the board of directors), we will be entitled to enter into a "run off" insurance policy of up to seven years, with the same insurer or any other insurance, as follows: (i) the limit of liability of the insurer will not exceed the greater of $50 million or 30% of our shareholders equity based on our most recent financial statements at the time of approval by the compensation committee; (ii) the annual premium will not exceed 300% of the last paid annual premium; and (iii) the insurance policy, as well as the limit of liability and the premium for each extension or renewal will be approved by the compensation committee (and, if required by law, by the board of directors) which shall determine that the sums are reasonable considering our exposures covered under such policy, the scope of cover and the market conditions, and that the insurance policy reflects the current market conditions and that it will not materially affect our profitability, assets or liabilities.
We may also extend the insurance policy in place to include cover for liability pursuant to a future public offering of securities as follows: (i) the additional premium for such extension of liability coverage will not exceed 50% of the last paid annual premium; and (ii) the insurance policy as well as the additional premium will be approved by the compensation committee (and if required by law, by the board of directors) which will determine that the sums are reasonable considering the exposures pursuant to such public offering of securities, the scope of cover and the market conditions and that the insurance policy reflects the current market conditions, and it does not materially affect our profitability, assets or liabilities.
In addition, we undertook to indemnify our officers and directors. On June 21, 2012, the shareholders at the annual general meeting approved an amended letter of indemnification to be given to our directors and officers. The aggregate indemnification amount that the Company can pay to all its officers and directors pursuant to these letters of indemnification will not exceed 25% of the Company’s shareholders’ equity, according to the most recent consolidated financial statement prior to the date of indemnification payment. Prior to that, we undertook to indemnify our officers and directors up to an aggregate amount of $10,000,000 or 25% of the Company’s shareholders equity, the higher of the two. Pursuant to our amended and restated compensation policy, we may indemnify our directors and officers to the fullest extent permitted by applicable law, for any liability and expense that may be imposed on the director or the officer, as provided in the indemnity agreement between us and such individuals, all subject to applicable law and our articles of association. Our amended and restated compensation policy also provides that we may exempt our directors and officers in advance for all or any of their liability for damage in consequence of a breach of the duty of care vis-a-vis our company, to the fullest extent permitted by applicable law.
For information relating to options granted to officers and directors, see “Item 6E. Share Ownership” in this annual report on Form 20-F. For information regarding our compensation policy and compensation arrangements with our directors and executive officers (including our chairman and chief executive officer), please refer to “Item 6B. Compensation” in this annual report on Form 20-F.
7.C Interest of Experts and Counsel
Not applicable.
Item 8. Financial Information
8.A Consolidated Statements and Other Financial Information
See “Item 17. Financial Statements” in this annual report on Form 20-F and pages F-1 through F-30.
Legal Proceedings
From time to time, we or our subsidiaries may be a party to legal proceedings and claims in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, we do not believe they will have a material effect on our consolidated financial position, results of operations, or cash flows.
We are currently not involved in any significant legal proceedings.
Dividend Policies
We anticipate that, for the foreseeable future, we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends for at least the next several years.
The distribution of dividends may be limited by the Companies Law, which permits the distribution of dividends only out of retained earnings or earnings derived over the two most recent fiscal years, whichever is higher, provided that there is no reasonable concern that payment of a dividend will prevent a company from satisfying its existing and foreseeable obligations as they become due. Our Amended and Restated Articles of Association provide that dividends will be paid at the discretion of, and upon resolution by, our board of directors.
In addition, distribution of dividends may be subject to certain tax implication. For additional information regarding tax implication of dividends' distribution, see “Item 10E. Taxation – Israeli Taxation” in this annual report on Form 20-F.
Export Sales
Substantially all of our products are sold to customers located outside Israel and the US.United States.
8.B Significant Changes
Not applicable.
Item 9. The Offer and Listing
9.A Offer and Listing Details
The information presented in the table below presents, for the periods indicated, the reported high and low market prices on NASDAQ. The Our ordinary shares began trading on NASDAQNasdaq on April 11, 2000 at a price of $18 per share.under the symbol “NVMI”. Our ordinary shares were registered for trading on the Tel Aviv Stock Exchange Ltd. in 2002 andunder the table below presents, for the periods indicated, the reported high and low market prices on the Tel Aviv Stock Exchange.symbol “נובה”.
NASDAQ |
| Price per share (US$) |
| High | Low |
Yearly highs and lows | | |
| | |
2012 | 9.28 | 6.82 |
2013 | 10.31 | 7.68 |
2014 | 12.25 | 9.5 |
2015 | 13.34 | 9.43 |
2016 | 13.96 | 8.57 |
2017 | 31.88 | 13.04 |
| | |
Quarterly highs and lows | | |
| | |
2015 | | |
First quarter | 12.10 | 10.04 |
Second quarter | 13.34 | 10.57 |
Third quarter | 13.06 | 9.43 |
Fourth quarter | 11.20 | 9.55 |
2016 |
First quarter | 11.47 | 8.57 |
Second quarter | 11.96 | 10.38 |
Third quarter | 12.26 | 10.77 |
Fourth quarter | 13.96 | 11.64 |
2017 | | |
First quarter | 18.99 | 13.04 |
Second quarter | 28.41 | 17.09 |
Third quarter | 28.26 | 20.55 |
Fourth quarter | 31.88 | 23.38 |
2018 | | |
First quarter (until February 15, 2018) | 28.72 | 23.95 |
| | |
Monthly highs and lows | | |
| | |
August 2017 | 25.47 | 20.55 |
September 2017 | 28.26 | 22.86 |
October 2017 | 31.69 | 27.55 |
November 2017 | 31.88 | 23.38 |
December 2017 | 27.71 | 25.52 |
January 2018 | 28.72 | 26.16 |
February 2018 (until February 15, 2018) | 27.73 | 23.95 |
Tel Aviv Stock Exchange |
| Price per share (NIS) |
| High | Low |
Yearly highs and lows | | |
| | |
2012 | 36.58 | 26.04 |
2013 | 36.99 | 29.02 |
2014 | 42.55 | 33.99 |
2015 | 50.67 | 37.53 |
2016 | 53.86 | 34.10 |
2017 | 109.70 | 50.23 |
| | |
Quarterly highs and lows | | |
| | |
2015 | | |
First quarter | 48.50 | 39.77 |
Second quarter | 50.67 | 40.93 |
Third quarter | 48.96 | 37.66 |
Fourth quarter | 43.89 | 37.53 |
2016 | | |
First quarter | 43.41 | 34.10 |
Second quarter | 45.80 | 38.61 |
Third quarter | 46.95 | 41.35 |
Fourth quarter | 53.86 | 43.60 |
2017 | | |
First quarter | 69.25 | 50.23 |
Second quarter | 99.88 | 63.67 |
Third quarter | 95.98 | 76.79 |
Fourth quarter | 109.70 | 89.84 |
2018 | | |
First quarter (until February 15, 2018) | 98.80 | 89.50 |
| | |
Monthly highs and lows | | |
| | |
August 2017 | 90.95 | 77.60 |
September 2017 | 95.98 | 81.57 |
October 2017 | 109.00 | 98.34 |
November 2017 | 109.70 | 91.00 |
December 2017 | 96.60 | 89.84 |
January 2018 | 98.80 | 89.50 |
February 2018 (until February 15, 2018) | 96.66 | 82.50 |
9.B Plan of Distribution
Not applicable.
9.C Markets
Our ordinary shares are quoted on The NASDAQthe Nasdaq Global Select Market under the symbol “NVMI” and on the Tel Aviv Stock Exchange.
9.D Selling Shareholders
Not applicable.
9.E Dilution
Not applicable.
9.F Expenses on the Issue
Not applicable.
Item 10. Additional Information
10.A Share Capital
Not applicable.
10.B Memorandum and Articles of Association
Set forth below is a summary of certain provisions of the Company’s Amended and Restated Articles of Association, as adopted by the Company’s shareholders on September 25, 2008, our “Amended Articles” and Israeli law affecting shareholders of the Company. This summary does not purport to be complete and is qualified in its entirety by reference to our memorandumAmended Articles and Amended and Restated Articles of Association and suchthe applicable law.On September 25, 2008, our shareholders adopted the Amended and Restated Articles of Association of the Company, which were later amended on June 21, 2012 (for the purposes of this Item, the “Amended Articles”).
Registration.
The Company was incepted and registered with the Israeli Registrar of Companies on May 17, 1993, under registration number 51-181-246-3.
Purpose of the Company. The purposes of the Company, as provided by Article 4 of our Amended Articles, are (a) to invent, design, plan, develop, manufacture, market and trade in the field of measuring instruments in electronics, micro-electronics, medicine, chemistry, metallurgy, ceramics and any other field, (b) to initiate, participate, manage, execute, import and export any kind of project within the borders of the State of Israel and/or outside Israel, (c) to register patents, trademarks, trade names, intellectual property rights, marketing rights and any other right of any kind whatsoever, both in Israel and abroad and (d) to engage in any legal activity, both in Israel and abroad.
Approval of Related Party Transaction; Corporate Borrowings. Share CapitalThe Companies Law requires that office holders of a company, including directors and executive officers, promptly disclose to the board of directors any personal interest they may have and all related material information known to them about any existing or proposed transaction with such company. The approval of the board of directors is required for 'non-extraordinary' transactions between a company and its office holders, or between a company and other persons in which an office holder has a personal interest, unless such company's articles of association provide otherwise. Under the Companies Law, a 'non-extraordinary' transaction between a company or between the company and a third party in which an office holder of a company has a personal interest, will require the approval of the board of directors or a committee authorized by the board of directors, unless such company's articles of association provide otherwise. Our Amended Articles do not provide otherwise, and therefore such transaction requires the approval of our board of directors. If a transaction is an “extraordinary transaction”, it is subject to the approval of the audit committee prior to its approval by the board of directors. For information regarding the necessary approvals under the Companies Law for transactions with office holders and directors regarding their terms of engagement with the company, see “— Compensation of Officers and Directors” in this Item below..
In addition, an extraordinary transaction between a public company and a controlling shareholder (i.e. a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from its position on the board of directors or any other position with the company), or in which a controlling shareholder has a personal interest, including a private placement in which the controlling shareholder has a personal interest, a transaction between a public company and a controlling shareholder, the controlling shareholders' relative, or entities under its control, directly or indirectly, with respect to services to be provided to the public company, and a transaction concerning the terms of compensation of the controlling shareholder or the controlling shareholder’s relative, who is an office holder or an employee, requires the approval of the audit committee or, in some cases, the compensation committee (see "— Compensation of Officers and Directors" in this Item below), the board of directors and a majority of the shares voted by the shareholders of the company participating and voting on the matter in a shareholders’ meeting. In addition, the shareholder approval must fulfill one of the following requirements: (i) the majority must include at least a majority of the shares of the voting shareholders who have no personal interest in the transaction (in counting the total votes of such shareholders, abstentions are not taken into account); or (ii) the total of opposition votes among the shareholders who have no personal interest in the transaction may not exceed 2% of the aggregate voting rights in the company. Any such transaction the term of which is more than three years, must be approved in the same manner every three years, unless the audit committee has determined that longer term is reasonable under the circumstances.
According to the Companies Law, if an extraordinary transaction is discussed by the board of directors or the audit committee, directors and office holders that have personal interest in the proposed transaction, may not participate in the discussion or vote. However, if the majority of the members of the audit committee or the board of directors (as applicable) have personal interest in the proposed transaction, then all directors (including those with personal interest) may participate in the discussion and vote, provided that in the event the majority of the members of the board of directors have personal interest in the transaction, said transaction will also be subject to the approval of the Company's shareholders meeting.
Under regulations promulgated under the Companies Law regarding payment of compensation to external directors, compensation of external directors is comprised of annual compensation and a per meeting payment ranging as stated in the regulations. These amounts are adjusted once every year in accordance with the Israeli consumer price index. With regard to a company, which shares are traded in an exchange outside of Israel, and is subject to laws which impose upon the external directors duties which exceed the duties imposed upon them under Israeli law, the maximum amount payable to the external directors is approximately NIS 148,575 per annum and approximately NIS 4,285 per meeting, as adjusted for changes in the Israeli CPI on a year basis. The approval of the shareholders of the company is required for such compensation, unless it is between the maximum and fixed amounts set forth in these regulations. If the shareholder's approval is required, it has to be done in the same manner as the approval of transactions with office holders and directors regarding their terms of engagement with the company (see "— Compensation of Officers and Directors" in this Item below). The compensation of external directors may also be linked to the compensation of other directors, subject to certain restrictions. Additionally, external directors may be entitled to compensation in stock (including by way of granting options to purchase the Company’s stock), provided that such compensation is granted within the framework of a stock incentive plan applicable to all other directors and further provided the amount of stock granted or purchasable does not fall below the lowest amount granted to any other director and does not exceed the average amount of stock granted to all other directors. The regulations also allow an increased compensation to external directors that are considered “expert external directors” under the terms set forth in said regulations.
Share Capital. The Company currently has one class of ordinary shares, 0.01 NIS par value per share. The Amended Articles provide that the board of directors may decide on a distribution, subject to the provisions set forth under the Companies Law and the Amended Articles. Under the Companies Law, dividends may be paid out of net earnings, as calculated under that law, for the two years preceding the distribution of the dividend and retained earnings, provided that there is no reasonable concern that the dividend will prevent the company from satisfying its existing and foreseeable obligations as they become due. For more information, see the Company’s balance sheet and the statement of shareholders’ equity in the financial statements. Each ordinary share is entitled to one vote at all shareholders meetings.
Changes of Rights of Holders of the Shares.
According to the Amended Articles, any change in the rights and privileges of the holders of any class of shares requires the approval of a class meeting of such class of shares by a simple majority (unless otherwise provided by the Companies Law or the regulations thereto or by the terms of issue of the shares of that class).
Shareholders Meetings.
An annual meeting should be convened at least once every calendar year, and no later than 15 months after the preceding annual meeting, to review the Company’s financial statements and to transact any other business required pursuant to the Amended Articles or to the Companies Law, and any other matter which the board of directors places on the agenda of the annual meeting, at a time and place that the board of directors will determine. A special meeting may be called by the board of directors and at the demand of any of the following: two directors or one-quarter of the directors then serving; one or more shareholders who hold at least five per centpercent of the issued and outstanding capital stock and at least one percent of the voting rights in the Company; or one or more shareholders who hold at least five percent of the voting rights in the Company.
According to the Amended Articles, the quorum required for an ordinary meeting of shareholders is at least two shareholders present in person or by proxy who together hold or represent in the aggregate 33 1/3 % or more than one third (33.33%) of the voting power. A meeting adjourned for lack of a quorum is reconvened one day thereafter at the same time and place or to such other day, time and place as our board of directors may indicate in a notice to the shareholders. At the reconvened meeting, the required quorum consists of any number of members present in person or by proxy, regardless of the number of shares represented. The Companies Law and regulations determine that prior notice of no less than 21 days should be given to the company’s shareholders, prior to convening a meeting. In the event that the issue to be resolved is an issue subject to the Israeli proxy rules, a notice of no less than 35 days should be given to the company’s shareholders. In some cases, a prior notice of not less than 14 days may be given to the company’s shareholders.
Subject to anti-terror legislations, there are no limitations on the rights of non-resident or foreign owners to hold or vote ordinary shares imposed under Israeli law or under the Amended Articles.
Board of Directors. The Amended Articles provide that directors may be elected either at our annual general meeting or a special meeting of shareholders by a vote of the holders of more than 50% of the total number of votes represented at such meeting. In addition, our board of directors is authorized to appoint directors, at its discretion, provided that the total number of directors does not exceed the maximum number of directors permitted by the Amended Articles. Each of our directors (except our external directors) holds office until the next annual general meeting of shareholders. The Companies Law provides that a person, who is, directly or indirectly subordinated to the chief executive officer of a public company, may not serve as the chairman of its board of directors. In addition, neither the chief executive officer nor his relative is eligible to serve as chairman of the board of directors (and vice versa), unless such nomination was approved by a majority of the company’s shareholders for a term not exceeding three years, and either: (i) such majority included the majority of the voting shareholders (shares held by abstaining shareholders are not considered) which are not controlling shareholders and have not personal interest regarding the decision; or (ii) the aggregate number of shares voting against the proposal did not exceed 2% of company voting shareholders. The term can be extended for additional three-year terms, in the same manner.
The Companies Law provides that Israeli public companies must have at least two external directors, and any and all of such external directors are no longer required to be Israeli residents in case of a company listed on a foreign stock exchange (such as our Company). External directors may be elected at our annual general meeting or a special meeting of our shareholders in a number and manner stipulated by the Companies Law, i.e., for an initial term of three years, which may be extended for two additional three-year terms (provided that the re-election for additional term was presented by the external director whose tenure is about to end or by the board of directors or by one or more shareholders that own, in the aggregate, 1% or more of the Company's outstanding share capital), and thereafter for additional three-year terms, if both the audit committee and the board of directors confirm that in light of the expertise and contribution of the external director, the extension of such external director’s term would be in the interest of the Company. The election and re-election of external directors, requires the affirmative vote of a majority of the shares and in addition either that (i) a majority of the shares held by shareholders who are not controlling shareholders or a have personal interest in the election (other than a personal interest unrelated to the controlling shareholders) attending in person or represented by proxy have voted in favor of the proposal (shares held by abstaining shareholders are not be considered) or (ii) the aggregate number of shares voting against the proposal held by such shareholders has not exceeded 2% of the company’s voting shareholders. External directors may be removed from office only under the following circumstances: (i) an external director ceases to meet the legal requirements for appointment as an external director or breaches his or her fiduciary duty to the company and a resolution to remove such external director is made by the shareholders at a meeting at which such external director is granted a reasonable opportunity to express his position (such a resolution requires the same majority of votes that elected the external director); (ii) an external director ceases to meet the legal requirements for appointment as an external director or breaches his or her fiduciary duty to the Company and a court orders that such director be removed; or (iii) an external director is unable to perform his or her duties or is convicted of certain felonies and a court orders that such director be removed. An external director is qualified for nomination as an external director, only if he/she has either professional qualifications or accounting and financial expertise. At least one of the external directors must have accounting and financial expertise. However, a company whose shares are traded in certain exchanges outside of Israel, including The NASDAQ Global Select Market, such as our company, is not required to nominate at least one external director who has accounting and financial expertise, as long as another independent director for audit committee purposes who has such expertise serves on the board of directors pursuant to the applicable foreign securities laws. In such case all external directors will have professional qualification.
Regulations adopted under the Companies Law provide that a director with accounting and financial expertise is a director that due to his education, experience and skills has high expertise and understanding in business-accounting matters and financial statements in a way that enables him to deeply understand the financial statements of the company and to facilitate discussion with respect to the way the financial data should be presented. The assessment of the accounting and financial expertise of a director should be made by the board of directors, who has to take into consideration, inter alia, the education, experience and knowledge of the director in the following subjects:
| (1) | Accounting matters and audit accounting matters, which are typical to the sector in which the company works and of companies with the same size and complexity as of the company; |
| (2) | The duties and obligations of the auditing accountant; and |
| (3) | Preparing of financial statements and their approval according to applicable law, including securities law. |
The regulations also provide that a director with professional qualifications is a director who meets one of the following conditions:
| (1) | A holder of an academic degree in one of the following: economics, business administration, accounting, law, or public administration; |
| (2) | A holder of another academic degree or is otherwise a graduate of higher education in a major field of business of the company or in another field which is relevant to the role; and |
| (3) | He has experience of at least five years in one of the following, or that he has cumulative experience of at least five years in two or more of the following: |
| (a) | A senior position in the business management of a corporation which has a significant scope of business; |
| (b) | A senior public position or in a senior role in the public service; or |
| (c) | A senior position in the company’s major fields of business. |
According to the Companies Law, the board of directors of a public company must establish the minimum number of board members that are to have accounting and financial expertise while considering, inter alia, the nature of the company, its size, the scope and complexity of its operations and the number of directors stated in the Amended Articles.
In April 2006, our board of directors resolved that the minimum number of board members that need to have accounting and financial expertise, including the external director with accounting and financial expertise, is one (1).
Our board of directors determined that each of Ms. Dafna Gruber and Ms. Zehava Simon has accounting and financial expertise as described in the regulations promulgated pursuant to the Companies Law, and that, therefore, the requirements of the minimum number of board members that need to have accounting and financial expertise, as set by the board of directors, has been met.
Under the Companies Law, the majority of the members of the audit committee must be independent directors. A public company may classify a director as independent only if (i) the audit committee has determined that he or she is qualified to serve as an external director (with the exception that such director does not have to have professional qualifications or accounting and financial expertise in order to serve as an independent director), and (ii) he or she is not serving as a director in the company for more than consecutive nine years (only a period of two or more years, in which such person did not serve as a director in the company, will be deemed to discontinue the nine year sequence), provided that a company listed on NASDAQ, such as our company, may extend such nine year period by additional three-year periods in certain circumstances. In February 2018, our audit committee and board of directors acted accordingly and resolved to extend the classification of Mr. Avi Cohen as an independent director under the Companies Law. All of our board members are independent, in accordance with NASDAQ Listing Rules and the Companies Law.
Compensation of Officers and Directors. Under the Companies Law, Israeli public companies are required to establish a compensation committee and adopt a policy regarding the compensation and terms of employment of their directors and officers. For information on the composition, roles and objectives of the compensation committee pursuant to the Companies Law and our compensation committee charter, see “Item 6C. Board Practices –Board of Directors” Committees – Compensation Committee" in this annual report on Form 20-F.
Pursuant to the Companies Law, the compensation policy must be approved by the company's board of directors after reviewing the recommendations of the compensation committee. The compensation policy also requires the approval of the general meeting of the shareholders, which approval must satisfy one of the following (the "Majority Requirement"): (i) the majority should include at least a majority of the shares of the voting shareholders who are non-controlling shareholders or do not have a personal interest in the approval of the compensation policy (in counting the total votes of such shareholders, abstentions are not be taken into account) or (ii) the total number of votes against the proposal among the shareholders mentioned in paragraph (i) does not exceed two percent of the aggregate voting power in the company. Under certain circumstances and subject to certain exceptions, the board of directors may approve the compensation policy despite the objection of the shareholders, provided that the compensation committee and the board of directors determines that it is for the benefit of the company, following an additional discussion and based on detailed arguments. In August 2016, our compensation committee and board of directors acted accordingly and adopted our amended and restated compensation plan despite our shareholders’ objection.
The Companies Law provides that the compensation policy must be re-approved (and re-considered) every three years, in the manner described above. Moreover, the board of directors is responsible for reviewing from time to time the compensation policy and deciding whether or not there are any circumstances that require an adjustment to the company's compensation policy. When approving the compensation policy, the relevant organs must take into consideration the goals and objectives listed in the Companies Law, and include reference to specific issues listed in the Companies Law. Such issues include, among others (the “Compensation Policy Mandatory Criteria”): (i) the relevant person’s education, qualifications, professional experience and achievements; (ii) such person's position within the company, the scope of his responsibilities and previous compensation arrangements with the company; (iii) the proportionality of the employer cost of such person in relation to the employer cost of other employees of the company, and in particular, the average and median pay of other employees in the company, including contract workers, and the impact of the differences between such person's compensation and the other employees' compensation on the labor relations in the company; (iv) the authority, at the board of director's sole discretion, to lower any variable compensation components or set a maximum limit (cap) on the actual value of the non-cash variable components, when paid; and (v) in the event that the terms of engagement include any termination payments - the term of employment of the departing person, the company’s performance during that term, and the departing person’s contribution to the performance of the company.
In addition, the Companies Law provides that the following matters must be included in the compensation policy (the "Compensation Policy Mandatory Provisions"): (i) the award of variable components must be based on long term and measurable performance criteria (other than non-material variable components, which may be based on non-measurable criteria taking into account the relevant person's contribution to the performance of the company); (ii) the company must set a ratio between fixed and variable pay, set a cap on the payment of any cash variable compensation components as of the payment of such components, and set a cap on the maximum cash value all non-cash variable components as of their grant date; (iii) the compensation policy must include a provision requiring the relevant person to return to the company any compensation that was awarded on the basis of financial figures that were subsequently restated; (iv) equity based variable compensation components should have an appropriate minimum vesting periods, which should be linked to long term performance objectives; and (v) the company must set a clear limit on termination payments.
Pursuant to the Companies Law, any transaction with an office holder (except directors and the chief executive officer of the company) with respect to such office holder's compensation arrangements and terms of engagement, requires the approval of the compensation committee and the board of directors. Such transaction must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (also see "Item 6C. Board Practices –Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement. Notwithstanding the above, the compensation committee and the board of directors may, under special circumstances, approve such transaction even if the shareholders' meeting objected to its approval, provided that (i) both the compensation committee and the board of directors re-discussed the transactions and decided to approve it despite the shareholder's objection, based on detailed arguments, and (ii) the company is not a 'Public Pyramid Held Company'. For the purpose hereof, a "Public Pyramid Held Company" is a public company that is controlled by another public company (including companies that issued only debentures to the public), which is also controlled by another public company (including companies that issued only debentures to the public) that has a controlling shareholder.
Transactions between public companies (including companies that have issued only debentures to the public) and their chief executive officer, with respect to his or her compensation arrangement and terms of engagement, require the approval of the compensation committee, the board of directors and the shareholder's meeting, provided that the approval of the shareholders' meeting must satisfy the Majority Requirement. Notwithstanding the above, the compensation committee and the board of directors may, under special circumstances, approve such transaction with the chief executive officer even if the shareholders' meeting objected to its approval, provided that (i) both the compensation committee and the board of directors re-discussed the transactions and decided to approve it despite the shareholder's objection, based on detailed arguments, and (ii) the company is not a Public Pyramid Held Company. Such transaction with the chief executive officer must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (see "Item 6C. Board Practices –Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement. In addition, the compensation committee may determine that such transaction with the CEO does not have to be approved by the shareholders of the company, provided that: (i) the chief executive officer is independent based on criteria set forth in the Companies Law; (ii) the compensation committee determined, based on detailed arguments, that bringing the transaction to the approval of the shareholders may compromise the chances of entering into the transaction; and (iii) the terms of the transaction are consistent with the provisions of the company's compensation policy. Under the Companies Law, non-material amendments of transactions relating to the compensation arrangement or terms of engagement of office holders (including the chief executive officer), require only the approval of the compensation committee.
With respect to transactions relating to the compensation arrangement and terms of engagements of directors in public companies (including companies that have issued only debentures to the public), the Companies Law provides that such transaction is subject to the approval of the compensation committee, the board of directors and the shareholders' meeting. Such transaction must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (see "Item 6C. Board Practices –Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement.
Pursuant to the Companies Law a compensation policy must be re-approved (and re-considered) at least once in every three years. Our shareholders voted on June 30, 2016 against the amended and restated compensation policy recommended by our board of directors. On August 2, 2016, our board of directors (per the recommendation of our compensation committee) has concluded that the approval of the proposed amended and restated compensation plan is in the interest of the Company, and based on detailed arguments and in accordance with the provisions of the Companies Law, has resolved to approve our amended and restated compensation policy despite the objection of our shareholders. Accordingly, our amended compensation policy is effective as of that date. For the full text of the amended and restated compensation policy see our report on Form 6-K furnished to the Securities and Exchange Commission on May 26, 2016.
Changes in Capital.
Our share capital may be increased or decreased by a vote of our shareholders in accordance with the Companies Law.
Borrowing Powers
Pursuant to the Companies Law and our articles of association, our board of directors may exercise all powers and take all actions that are not required under law or under our articles of association to be exercised or taken by a certain organ of the Company, including the power to borrow money for company purposes.
Acquisition of a Controlling Stake.
According to the Companies Law, an acquisition pursuant to which a purchaser will hold a “controlling stake”, that is defined as 25% or more of the voting rights if no other shareholder holds a controlling stake, or an acquisition pursuant to which such purchaser will hold more than 45% of the voting rights of the company if no other shareholder owns more than 45% of the voting rights, may not be performed by way of market accumulation, but only by way of a special tender offer (as defined in the Companies Law) made to all of the company’s shareholders on a pro rata basis. A special tender offer may not be consummated unless a majority of the shareholders who announced their stand on such offer have accepted it (in counting the total votes of such shareholders, shares held by the controlling shareholders, shareholders who have personal interest in the offer, shareholders who own 25% or more of the voting rights in the company, relatives or representatives of any of the above or the bidder and corporations under their control, shall not be taken into account). A shareholder may be free to object to such an offer without such objection being deemed as a waiver of his right to sell its respective shares if the transaction is approved by a majority of the company’s shareholders despite his objection. Shares purchased not in accordance with those provisions will become “dormant shares” and will not grant the purchaser any rights so long as they are held by the purchaser.
Acquisition.
A person wishing to acquire shares or a class of shares of an Israeli public company and who would, as a result, own more than 90% of the target company’s issued and outstanding share capital or of certain class of its shares, is required by the Companies Law to make a full tender offer (as defined in the Companies Law) to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company or class of shares. If either (i) the shareholders who do not accept the offer hold, in the aggregate, less than 5% of the issued and outstanding share capital of the company or of the applicable class, and more than half of the shareholders who do not have a personal interest in the offer accept the offer, or (ii) the shareholder who do not accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable class, then all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However, a shareholder that had its shares so transferred, whether or not it accepted the tender offer (unless otherwise provided in the offering memorandum), may, within six (6) months from the date of acceptance of the tender offer, petition the court to determine that the tender offer was for less than fair value and that the fair value should be paid as determined by the court. If the shareholders who did not accept the tender offer hold at least 5% of the issued and outstanding share capital of the company or of the applicable class of shares, the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of the company’s issued and outstanding share capital or of the applicable class from shareholders who accepted the tender offer.
The Companies Law provides that corporate mergers require the approval of both companies’ boards of directors and shareholders. In the event, however, that shares of the target company are held by the acquiring company or by a person holding 25% or more of any type of controlling means of the acquiring company, the merger will not be approved if a majority of the shareholders of the target company attending and voting at the meeting at which the merger is considered (without taking into account, for that purpose, the shares held by the acquiring company or by a person holding 25% or more of any type of controlling means of the acquiring company) object to and do not vote in favor of the merger. If a person holds 25% or more of any type of controlling means of more than one merging company, the same provisions shall apply with regard to the shareholders’ vote with respect to each such company. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if the court concludes that there exists a reasonable concern that as a result of the merger the surviving company will be unable to satisfy the target company’s obligations. Furthermore, a merger may not close unless at least 30 days have passed from the time that the general meeting of each of the merging companies was held and at least 50 days have passed from the date on which the merger proposal was sent to the Israeli Registrar of Companies.
84
10.C Material ContractsIn addition,
Israeli Lease Agreement
On May 3, 2018, we entered into a lease agreement, or the Companies Law preserves provisionsLease Agreement, with Bayside Land Corporation Ltd., or Bayside. Pursuant to the Lease Agreement, we will lease from Bayside a total of its predecessor,approximately 12,000 square meters at a new building being built at the Companies Ordinance, dealingScience Park in Rehovot, with arrangements betweenthe intention to move the our headquarters in Israel to such premises.
The lease period for approximately 10,000 square meters, or the Initial Space, is expected to begin in the fourth quarter of 2019 and extend for a companyperiod of ten years, or the Initial Lease Period. We will have the option to extend the lease period by two periods of five years each, subject to customary conditions. The lease period for the additional approximately 2,000 square meters, or the Additional Space, is expected to begin in 2021, and its shareholders. These arrangements may be used to effect squeeze out transactions in whichextended through the target company becomes a wholly owned subsidiary ofsame lease periods as the acquirer. These provisions generally require thatInitial Space. The lease cannot be terminated by us during the merger be approved by at least 75% ofInitial Lease Period. Under certain circumstances, Bayside may terminate the shares of participating shareholders and a majority of the shareholders voting at a shareholders meeting. In addition to shareholder approval, court approval of the transaction is required, which entails further delay.
A merger, the acquisition of a controlling stake or any transaction in which all or substantially all the assets of a company are de facto transferred to another company, may require the approval of the Israeli Commissioner of Restrictive Trade Practices,Agreement in the event that the aggregate annual sales volume in Israel of all the companies which are parties to such transactionchange of control in the year precedingCompany.
The average monthly lease, parking and management costs for the merger, exceedsInitial Space in the Initial Lease Period are expected to be approximately NIS 150 million (approximately $43.26 million), adjusted annually665,000 per month. During each of the additional lease option periods, the monthly lease and parking payments for the Initial Space will be increased by 2.5%. The monthly lease, parking and management costs for the Additional Space are expected to be NIS 175,000 per month. The monthly lease, parking and management costs will be linked to the Israeli consumer price index,index.
On February 3, 2019, we entered into a construction contractor agreement with A. Weiss Construction and Supervision Ltd. in order to set the terms under which the contractor will perform the main construction and adjustment works in connection our new Israeli Lease Agreement. The services include, among others, adjustments of electro-mechanical systems as well as works related to electricity, plumbing, air conditioning, flooring, cladding and carpentry, all in accordance with the specifications, plans and the annual sales volume in Israel of at least two ofquantities schedule (Ktav-Kamuyot) enclosed to the companies which are partiesagreement. The agreement may be terminated by the us for convenience, by providing to such transaction exceeds NIS 10 million each (approximately $2.88 million), and also if after the consummation of such transactions, the joint market, in Israel, or at any identified geographic part of Israel will be in excess of 50% with respect to such products and services.Contractor a seven-days prior written notice.
10.C Material Contracts82
None.10.D Exchange Controls
10.D Exchange Controls
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares.
Dividends, if any, paid to holders of our ordinary shares, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted into freely repatriable dollars at the rate of exchange prevailing at the time of conversion.
10.E Taxation
Israeli Taxation
The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some Israeli tax consequences to persons owning our ordinary shares. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on a new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax considerations.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax on their taxable income at the rate of 24%23% for the 20172018 tax year (toand thereafter. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise (as discussed below) may be reducedlower. Capital gains derived by an Israeli company are generally subject to 23% in 2018 and thereafter).the prevailing regular corporate tax rate.
Income Tax Regulations (Rules on Bookkeeping by Foreign Invested Companies and Certain Partnerships and Determination of their Taxable Income), 1986
As a “foreign invested company” (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company's management has elected to apply Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986. Accordingly, its taxable income or loss is calculated in US Dollars.
Tax Benefits under the Law for the Encouragement of Capital Investments, 1959
Tax benefits prior to the 2005 Amendment
The Law for the Encouragement of Capital Investments, 1959, generally referred to as the “Investments Law”, provides that a capital investment in eligible facilities may, upon application to the Israeli Authority for Investments and Development of the Industry and Economy (the “Investment Center”), be granted the status of an Approved Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources or funds, and by its physical characteristics or the facility or other assets, e.g., the equipment to be purchased and utilized pursuant to the program.
A company owning an Approved Enterprise is eligible for a combination of grants and tax benefits (the “Grant Track”). The tax benefits under the Grant Track include, among others, accelerated depreciation and amortization for tax purposes. The benefitbenefits period is ordinarily seven years commencing with the year in which the Approved Enterprise first generates taxable income. The benefitbenefits period is limited to 12 years from the earlier of the commencement of production by the Approved Enterprise or 14 years from the date of approval of the Approved Enterprise.
The tax benefits under the Investments Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed pursuant to the Approved Enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided that such income is generated within the ordinary course of business of the company investing in the Approved Enterprise. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted average of the applicable rates. The Tax Benefitstax benefits under the Investments Law are not generally available with respect to income derived from products manufactured outside of Israel. In addition, the Tax Benefitstax benefits available to a company investing in an Approved Enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and related regulations and the criteria set forth in the specific certificate of approval, as described above. In the event that a company does not meet these conditions, it wouldmay be required to refund the amount of tax benefits, plus a consumer price index linked adjustment and interest.
A company whichthat has an Approved Enterprise program that qualifies as a foreign investment company (an “FIC”) will be eligible for a three-year extension of tax benefits following the expiration of the available seven-year period referenced above.period. In addition, in the event that the level of foreign ownership in an Approved Enterprise reaches 49% or higher, the corporate tax rate applicable to income earned from the Approved Enterprise is reduced as follows:
% of Foreign Ownership | Tax Rate |
Over 25% but less than 49% | Up to 25% |
49% or more but less than 74% | 20% |
74% or more but less than 90% | 15% |
90% or more | 10% |
A company owning an Approved Enterprise may elect to forgoforego its entitlements to grants and tax benefits under the Grant Track and apply for alternative package of tax benefits for a benefit period of between seven and ten years (the “Alternative Track”). Under the Alternative Track, a company’s undistributed income derived from the Approved Enterprise will be exempt from corporate tax for a period of between two and ten years, starting from the first year the company derives taxable income under the Approved Enterprise program. The length of time of this exemption will depend on the geographic location of the Approved Enterprise within Israel and the type of the approved enterprise.Israel. After the exemption period lapses, the company subject to tax at a reduced corporate tax rate between of 10% to 25% (or a lower ratedepending on the level of foreign investment in the case of FIC)company in each year, as detailed above, for the remainder of the benefitbenefits period.
We elected to be taxed under the Alternative Track. A company that has elected the Alternative Track and subsequently pays a dividend out of income derived from the Approved Enterprise during the tax exemption period will be subject to corporate tax on the amount whichthat is determined by the distributed amount grossed(grossed up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) with the effective corporate tax rate which would have been applied had the company not elected the Alternative Track, which is at referred above ranged between 10%-25%., depending on the level of foreign investment in the company in each yare year as explained above. Under the Investments Law, the transfer of funds from the Company to shareholders and other related parties may be deemed to be regarded as a dividend distribution for this purpose in certain circumstances. Dividends paid out of any income derived from an Approved Enterprise are generally subject to withholding tax at source at the reduced rate of 15% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the Israel Tax Authority (“ITA”), allowing for a reduced tax rate), if the dividend is distributed during the tax exemption period or within 12 years thereafter. After such period, the withholding tax will be applied at a rate of up to 30%, or at a lower rate under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). In the event, however, which the company qualifies as a FIC, there is no such time limitation.
Under the Alternative Track, dividends paid by a company are considered to be attributable to income received from the entire company and the company’s effective tax rate is the result of a weighted average of the various applicable tax rates, excluding any tax-exempt income. Under the Investments Law, a company that has elected the Alternative Track is not obliged to distribute retained profits, and may generally decide from which year’s profits to declare dividends.
We currently intend to reinvest any income derived from our Approved Enterprise program and not to distribute such income as a dividend.
Tax benefits under the 2005 Amendment
An amendment to the Investments Law, which is effective as of April 1, 2005, has changed certain provisions of the Investments Law, or (the “2005 Amendment”)2005 Amendment. An eligible investment program under the 2005 Amendment qualifies for benefits as a “Benefited Enterprise” (rather than as an Approved Enterprise, which status is still applicable for investment programs approved prior to December 31, 2004 and/or investment programs under the Grant Track). According to the 2005 Amendment, only Approved Enterprises receiving cash grants require the prior approval of the Investment Center. As a result, a company is no longer required to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under the alternative benefits program. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment. A company that has a Benefited Enterprise may, at its discretion, approach the ITA for a pre-ruling confirming that it is in compliance with the provisions of the Investment Law.
The duration of the tax benefits described herein is limited to the earlier of seven (7) or ten (10) years (depending on the geographic location of the ApprovedBenefited Enterprise within Israel) from the Commencement Year (as described below) or 12 or 14 years from the first day of the Year of Election (as described below), depending on the location of the company within Israel. Commencement Year is defined as the later of the first tax year in which a company had derived liable income for tax purposes from the Benefited Enterprise, or the Year of Election, which is defined as the year in which a company requested to have the tax benefits apply to the Benefited Enterprise. The tax benefits granted to a Benefited Enterprise are determined, depending on the geographic location of the Benefited Enterprise within Israel, according to one of the following, which may be applicable to us:
(i) Similar to the currently available Alternative Track, exemption from corporate tax may be available on undistributed income for a period of two to ten years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefitbenefits period, depending on the level of foreign investment in each year. Benefits may be granted for a term of seven to ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the Benefited Enterprise during the tax exemption period and such dividend is actually paid at any time up to 12 years thereafter, except with respect to an FIC, in which case the 12-year limit does not apply, such income will be subject to deferred corporate tax with respect to the amount distributed (grossed up withto reflect such pre-tax income that it would have had to earn in order to distribute the effectivedividend) at the corporate tax rate which would have applied had the company not enjoyed the exemption) at the rate which would have applied had such company had the status of a Benefited Enterpriseotherwise been. The company is required to withhold tax on such distribution at a rate of 15%% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate); or
(ii) A special track which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at a flat rate of 11.5% on income the Benefited Enterprise (the “Ireland Track”). The benefit period under the Ireland Track is for a period of ten years. Upon payment of dividends, the company is required to withhold tax on such dividend at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents.
The benefits available to a Benefited Enterprise are subject to the continued fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index and interest, or other monetary penalty.
[As a result of the 2005 Amendment, tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income.
We had three Approved Enterprise plans under the Investments Law, which entitled us to certain tax benefits. In addition, in 2011, based on Company investments in property and equipment in the years 2008 and 2009, the Company submitted the applicable form as a BenefittedBenefited Enterprise in accordance with the 2005 Amendment to the Investments Law. The year of election was 2010.
Tax benefits under the 2011 Amendment
On December 29, 2010, the Israeli Parliament approved the 2011 amendment to the Investments Law (the “2011 Amendment”). The 2011 Amendment significantly revised the tax incentive regime in Israel, commencing on January, 1 2011.
The 2011 Amendment introduced a new status of “Preferred Enterprise”, replacing the existed status of “Benefited Enterprise”. Similarly to “Beneficiary and introduced new benefits for income generated by a “Preferred Company”, a through its Preferred Enterprise. A Preferred Company is an industrial company meetingthat meets certain conditions (including a minimum threshold of 25% export). However, under the 2011 Amendment the requirement for a minimum investment in productive assets in order to be eligible for the benefits granted under the Investments Law as with respect to “Benefited Enterprise” was cancelled.
A Preferred Company is entitled to a reduced flat tax rate with respect to the income attributed to the Preferred Enterprise, at the following rates:
Tax Year | Development Region “A” | Other Areas within Israel |
2011-2012 | 10% | 15% |
2013 | 7% | 12.5% |
2014-2016 | 9% | 16% |
2017 onwards | 7.5% | 16% |
* In December 2016, the Israeli Parliament (the Knesset) approved an amendment to the Investments Law pursuant to which the tax rate applicable to Preferred Enterprises in Development Region "A" would be reduced to 7.5% as of January 1, 2017.
The classification of income generated from the provision of usage rights in know-how or software that were developed in the Preferred Enterprise, as well as royalty income received with respect to such usage, as Preferred Enterprise income is subject to the issuance if a pre-ruling from the ITA stipulates that such income is associated with the productive activity of the Preferred Enterprise in Israel.
In addition, the 2011 Amendment introduced a new status of “Special Preferred Company” which is an Industrial company meeting, in addition to the conditions prescribed for “Preferred Company” certain additional conditions (including that the total Preferred Enterprise income is at least NIS 1.5 billion in 2016 and NIS 1 billion in 2017 and thereafter). The tax rate applicable for a period of 10 years to income generated by such an enterprise will be reduced to 5%, if located in Development Region “A”, or to 8%, if located in other area within the State of Israel.
Dividends distributed from income which is attributed to a “Preferred Enterprise” or a “Special Preferred Enterprise” will be subject to withholding tax at source at the following rates: (i) Israeli resident corporations – 0% (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply), (ii) Israeli resident individuals – 20% (iii) non-Israeli residents - 20% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate).
The In 2017 to 2019, dividends paid out of preferred income attributed to a Special Preferred Enterprise, directly to a foreign parent company, are subject to withholding tax at source at the rate of 5% (temporary provisions).The 2011 Amendment also revised the Grant Track to apply only to the approved programs located in Development Region “A” and shall provide not only cash grants (as prior to the 2011 Amendment) but also the granting of loans. The rates for grants and loans shall not be fixed but up to 20% of the amount of the approved investment (may be increased with additional 4%). In addition, a company owning a Preferred Enterprise under the Grant Track may be entitled also to the tax benefits which are prescribed for a Preferred Company.Enterprise.
The provisions of the 2011 Amendment do not apply to existing “Benefited Enterprises” or “Approved Enterprises”, which will continue to be entitled to the tax benefits under the Investments Law, as has been in effect prior to the 2011 Amendment, unless the company owning such enterprises had made an election to apply the provisions of the 2011 Amendment (such election cannot be later rescinded), which is to be filed with the Israeli Tax Authority,ITA, not later than the date prescribed for the filing of the company’s annual tax return for the respective year. A company owning a Benefited Enterprise or Approved Enterprise which made such election by June 30, 2015, will be entitled to distribute income generated by the Approved/Benefited Enterprise to its Israeli corporate shareholders tax free.
Until the end of 2015, we did not utilize tax benefits related to Preferred Enterprises. StartingIn 2016, we started utilizing such benefits, with a related tax rate which could range 12% to 16%.
The New Technological Enterprise Incentives Regime—the 2017 Amendment
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and became effective on January 1, 2017. The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.
The new incentives regime will apply to “Preferred Technological Enterprises” that meet certain conditions, including: (1) the R&D expenses in the three years preceding the tax year were at least 7% of the company's turnover or exceeded NIS 75 million (approximately $21 million); and (2) one of the following: (a) at least 20% of the workforce (or at least 200 employees) are employed in R&D; (b) a venture capital investment approximately equivalent to at least $2 million was previously made in the company and the company did not change its line of business; (c) growth in sales by an average of 25% over the three years preceding the tax year, provided that the turnover was at least NIS 10 million (approximately $2.8 million), in the tax year and in the preceding three years; or (d) growth in workforce by an average of 25% over the three years preceding the tax year, provided that the company employed at least 50 employees, in the tax year and in the preceding three years.
A “Special Preferred Technological Enterprise” is an enterprise that meets conditions 1 and 2 above, and in addition has total annual consolidated revenues above NIS 10 billion (approximately $2.8 billion).
Preferred Technological Enterprises will be subject to a reduced corporate tax rate of 12% on their income that qualifies as “Preferred Technology Income”, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development zone A.Development Region "A". These corporate tax rates shall apply only with respect to the portion of intellectual property developed in Israel. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefitted“Benefited Intangible Assets” (as defined in the Investment Law) to a related foreign company if the BenefittedBenefited Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million (approximately $56 million), and the sale receives prior approval from the IIA. Special Preferred Technological Enterprises will be subject to 6% on “Preferred Technology Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted“Benefited Intangible Assets” to a related foreign company if the BenefittedBenefited Intangible Assets were either developed by an Israeli company or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from IIA. A Special Preferred Technology Enterprise that acquires BenefittedBenefited Intangible Assets from a foreign company for more than NIS 500 million (approximately $142 million), will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding tax at source at the rate of 20%, and or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld. If such dividends are, distributed to a parent foreign company holding at least 90% of the shares of the distributing company and other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate).
We reviewed the criteria for the tax rate of a “Special Preferred Technological Enterprise” and concluded that we are entitled to the reduced tax rate under the “Preferred Technological Enterprises” tax incentive regime.regime starting 2017. We have notified the ITA that we elected applying this status starting 2017. We cannot asses at this stage the ITA position.
Law for the Encouragement of Industry (Taxes), 19695729-1969
TWe believe that we qualify as an “Industrial Company” within the meaning of thehe Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law. The Industry Encouragement Law defines “Industrial Company” as an Israeli resident company which was incorporated in Israel, of which 90% or more of its income in any tax year (exclusive of income from certain defensegovernment loans) is generated from an “Industrial Enterprise” that it owns and located in Israel. An “Industrial Enterprise” is defined as an enterprise whose principal activity in aany given tax year is industrial manufacturing.
An Industrial Company is entitled to certain tax benefits, including: (i) a deduction of the cost of purchases of patents, know-how and certain other intangible property rights (other than goodwill) ) that were purchased in good faith and are used for the development or promotion of the Industrial Enterprise over a period of eight years, beginning from the year in which such rights were first used, (ii) the right to elect to file consolidated tax returns with additional Israeli Industrial Companies controlled by it, and (iii) the right to deduct expenses related to public offerings in equal amounts over a period of three years beginning from the year of the offering.
Eligibility for benefits under the Encouragement of Industry Law is not contingent upon the approval of any governmental authority.
We believe that we qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law. There is no assurance that we qualify or will continue to qualify as an Industrial Company or that the benefits described above will be available to us in the future.
Taxation of the Company Shareholders
Capital Gains
Capital gain tax is imposed on the disposition of capital assets by an Israeli resident, and on the disposition of such assets by a non-Israel resident if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights to assets located in Israel.Israel, unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Ordinance distinguishes between “Real Gain” and the “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increase in the Israeli Consumer Price Index (CPI) or, in certain circumstances, according to the change in the foreign currency exchange rate, between the date of purchase and the date of disposition.
TheGenerally, the capital gain accrued by individuals on the sale of our ordinary shares will be taxed at the rate of 25%. However, if the individual shareholder is a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, 10% or more of one of the Israeli resident company’s means of control) at the time of sale or at any time during the preceding twelve (12) months period, such gain will be taxed at the rate of 30%.
The Real Gain derived by corporations will be generally subject to the ordinary corporate tax (24% in 2017, to be reduced to 23%(2% in 2018 and thereafter).
Individual and corporate shareholder dealing in securities in Israel are taxed at the tax rates applicable to business income – 24%23% for corporations in 20172018 (to be reduced to 23% in 2018 and thereafter)thereafter and a marginal tax rate of up to 50%47% in 20172018 for individuals, includingunless the benefiting provisions of an excess tax for high earning individuals whose taxable income from Israeli sources exceeds a certain threshold (NIS 640,000 in 2017 and thereafter, as discussed below).applicable treaty applies.
Notwithstanding the foregoing, capital gain derived from the sale of our ordinary shares by a non-Israeli shareholder may be exempt under the Ordinance from Israeli taxation provided that the following cumulative conditions are met: (i) the shares were purchased upon or after the registration of the securities on the stock exchange (this condition will not apply to shares purchased on or after January 1, 2009), and (ii) the seller does not have a permanent establishment in Israel to which the derived capital gain is attributed. ; and (iii) with respect our ordinary shares listed on a recognized stock exchange outside of Israel, so long as neither the shareholder nor the particular capital gain is otherwise subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. Non-Israeli corporations will not be entitled to the foregoing exemptions if (i) an Israeli resident has a controlling interest, directly or indirectly, alone or together with another (i.e., together with a relative, or together with someone who is not a relative but with whom, according to an agreement, there is regular cooperation in material matters of the company, directly or indirectly), or together with another Israeli resident, exceed 25% in one or more of the means of control in such non-Israeli resident corporation or (ii) Israeli residents are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli resident corporation, whether directly or indirectly.
In addition, the sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, the U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital gain tax in connection with such sale, exchange or disposition provided, among others (i) the U.S. resident owned, directly or indirectly, less than 10% of an Israeli resident company’s voting power at any time within the 12 month period preceding such sale; (ii) the seller, being an individual, is present in Israel for a period or periods of less than 183 days in the aggregate at the taxable year; and (iii) the capital gain from the sale was not derived through a permanent establishment of the U.S. resident which is maintained in Israel.Israel the capital gain arising from such sale, exchange or disposition is not attributed to real estate located in Israel; (v) the capital gains arising from such sale, exchange or disposition is not attributed to royalties; and (vi) the shareholder is a U.S. resident (for purposes of the U.S.-Israel Double Tax Treaty) is holding the shares as a capital asset.
Either the purchaser, the stockbrokers or financial institution, through which payment to the seller is made, are obliged, subject to the above mentionedabove-mentioned exemptions, to withhold Israeli tax at source from such payment. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in the form of a merger or otherwise, the ITA may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from the ITA to confirm their status as non-Israeli resident.
At the sale of securities traded on a stock exchange a detailed return, including a computation of the tax due, must be filed and an advanced payment must be paid on January 31 and June 30July 31 of every tax year in respect of sales of securities made within the previous six months. However, if all tax due was withheld at source according to applicable provisions of the Ordinance and regulations promulgated thereunder the aforementioned return need not be filed and no advance payment must be paid. Capital gain is also reportable on the annual income tax return.
Dividends
A distribution of dividends from income, which is not attributed to an Approved Enterprise/Benefited Enterprise/Preferred Enterprise to an Israeli resident individual, will generally be subject to income tax at a rate of 25%. However, a 30% tax rate will apply if the dividend recipient is a “Controlling Shareholder” (as defined above) at the time of distribution or at any time during the preceding 12 months period. If the recipient of the dividend is an Israeli resident corporation, such dividend will be exempt from income tax provided the income from which such dividend is distributed was derived or accrued within Israel.
As of January 1, 2014, any distributionDistribution of dividends from income attributed to a Preferred Enterprise is generally subject to a tax at a rate of 20%. However, if such dividends are distributed to an Israeli company, no tax is imposed. Asimposed (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of January 1, 2014, dividends20% or such lower rate as may be provided in an applicable tax treaty will apply (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for an exemption)). Dividends distributed from income attributed to an Approved Enterprise and/or a Benefited Enterprise are generally subject to a tax rate of 20%15%. Notwithstanding the above, a reduced 15% tax rate will be applicable if the dividend was distributed out of income of: (i) Approved Enterprise activated prior to 2014; or (ii) Benefited Enterprise with a Year of Election prior to 2014. Those rates may be further reduced under the provisions of any applicable double tax treaty.treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate).
The Ordinance generally provides that a non-Israeli resident (either individual or corporation) is subject to an Israeli income tax on the receipt of dividends at the rate of 25% (30% if the dividends recipient is a “Controlling Shareholder” (as defined above), at the time of distribution or at any time during the preceding 12 months period); those rates are subject to a reduced tax rate under the provisions of an applicable double tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). Thus,For example, under the U.S.-Israel Double Tax Treaty the following rates will apply in respect of dividends distributed by an Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of the taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of the outstanding shares of the voting stock of the Israeli resident paying corporation and not more than 25% of the gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain type of interest or dividends – the maximum tax rate is 12.5% on dividends, not generated by an Approved Enterprise or Benefited Enterprise, (ii) if both the conditions mentioned in section (i) above are met and the dividend is paid from an Israeli resident company’s income which was entitled to a reduced tax rate applicable to an Approved Enterprise or Benefited Enterprise – the tax rate is 15%, and (iii) in all other cases, the tax rate is 25%, or the domestic rate (if such is lower). The aforementioned rates under the Israel U.S.U.S.-Israel Double Tax Treaty will not apply if the dividend income was derived through a permanent establishment of the U.S. resident maintained in Israel.
If the dividend is attributable partly to income derived froman Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income.
Payors of dividends on our shares, including the Israeli stockbroker effectuating the transaction, or the financial institution through which the securities are held, are generally required, subject to any of the foregoing exemption, reduced tax rates and the demonstration of a shareholder of his, her or its foreign residency, to withhold taxes upon the distribution of dividends at a rate of 25%, provided that the shares are registered with a Nominee Company (for corporations and individuals).
Excess Tax
Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 3% in 2017 and thereafter on annual income exceeding a certain threshold of (NIS 641,880 for NIS 640,000 for 20172018 and thereafter, (linkedwhich amount is linked to the Israeli Consumer Price Index)), including, but not limited to income derived from dividends, interest and capital gains.
Foreign Exchange Regulations
Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is generally required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of currency exchange control has not been eliminated, and may be restored at any time by administrative action.
U.S. Taxation
The following discussion describes certain material United States (“U.S.”) federal income tax consequences generally applicable to U.S. holders (as defined below) of the purchase, ownership and disposition of our ordinary shares. This summary addresses only holders who acquire and hold ordinary shares as “capital assets” for U.S. federal income tax purposes (generally, assets held for investment purposes).
For purposes of this discussion, a “U.S. holder” is a beneficial owner of ordinary shares who is:
| · | An individual citizen or resident of the U.S. (as determined under U.S. federal income tax rules); |
| · | a corporation (or another entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S., any state thereof, or the District of Columbia; |
| · | an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or |
| · | a trust, if (a) a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions,decisions; or (b) the trust has in effect a valid election in effect under applicable Treasury Regulations (as defined below) to be treated as a United States person. |
This summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase, hold or dispose of the Company’s ordinary shares. In addition, the possible application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws is not considered. This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations) (the “Treasury Regulations”), rulings, current administrative interpretations and official pronouncements by the Internal Revenue Service (the “IRS”), and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, with a retroactive effect. Such changes could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder based on the holder’s particular circumstances, including, but not limited to,to:
| · | persons who own, directly, indirectly or constructively, 10% or more (by voting power or value) of our outstanding voting shares; |
| · | persons who hold the ordinary shares as part of a hedging, straddle or conversion transaction; |
| · | persons whose functional currency is not the U.S. dollar; |
| · | persons who acquire their ordinary shares in a compensatory transaction; |
| · | regulated investment companies; |
| · | real estate investment companies; |
| · | qualified retirement plans, individual retirement accounts and other tax-deferred accounts; |
| · | traders who elect to mark-to-market their securities; |
| · | tax-exempt organizations; |
| · | banks or other financial institutions; |
| · | persons subject to special tax accounting rules as a result of any item of gross income with respect to ordinary shares being taken into account in an applicable financial statement; |
| · | U.S. expatriates and certain former citizens and long-term residents of the United States; and |
| · | persons subject to the alternative minimum tax. |
The tax treatment of a partner in a partnership (or other entity or arrangement classified as a partnership for U.S. federal income tax purposes) may depend on both the partnership’s and the partner’s status and the activities of the partnership. Partnerships (or other entities or arrangements classified as a partnership for U.S. federal income tax purposes) that are beneficial owners of ordinary shares, and their partners and other owners, should consult their own tax advisers regarding the tax consequences of the acquisition, ownership and disposition of ordinary shares.
THIS SUMMARY OF MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO IT OF AN INVESTMENT IN THE ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE UNITED STATES FEDERAL INCOME TAX LAWS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY FOREIGN, STATE OR LOCAL JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
Distributions on the Ordinary Shares
We currently do not intend to distribute dividends for at least the next several years. However, if we make any distributions of cash or other property to a U.S. holder of our ordinary shares, the amount of the distribution for U.S. federal income tax purposes will equal the amount of cash and the fair market value of any property distributed and will also include the amount of Israeli taxes withheld, if any, as described above under “[Israel Taxation] — Dividends” above. In general (and subject to the PFIC rules discussed below), any distribution paid by us on the ordinary shares to a U.S. holder will be treated as dividend income to the extent the distribution does not exceed our current and/or accumulated earnings and profits, as determined under U.S. federal income tax principles. The amount of any distribution which exceeds these earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. holder’s tax basis in its ordinary shares to the extent thereof, and then as capital gain income (long-term capital gain if the U.S. holder’s holding period exceeds one year), from the deemed disposition of the ordinary shares (subject to the PFIC rules discussed below). Corporate holders generally will not be allowed a deduction for dividends received on the ordinary shares.
The amount of any dividend paid in NIS (including amounts withheld to pay Israeli withholding taxes) will equal the U.S. dollar value of the NIS calculated by reference to the exchange rate in effect on the date the dividend is received by the U.S. holder, regardless of whether the NIS are converted into U.S. dollars. A U.S. holder will have a tax basis in the NIS equal to their U.S. dollar value on the date of receipt. If the NIS received are converted into U.S. dollars on the date of receipt, the U.S. holder should generally not be required to recognize foreign currency gain or loss in respect of the distribution. If the NIS received are not converted into U.S. dollars on the date of receipt, a U.S. holder may recognize foreign currency gain or loss on a subsequent conversion or other disposition of the NIS. Such gain or loss will be treated as U.S. source ordinary income or loss.
Dividends paid by us generally will be foreign source, “passive income” for U.S. foreign tax credit purposes. U.S. holders may elect to claim as a foreign tax credit against their U.S. federal income tax liability the Israeli income tax withheld from dividends received on the ordinary shares. The Code provides limitations on the amount of foreign tax credits that a U.S. holder may claim. U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld, but only for a year in which these U.S. holders elect to do so for all foreign income taxes. The rules relating to foreign tax credits are complex (and may also be impacted by the tax treaty between the United States and Israel), and you should consult your tax advisor to determine whether you would be entitled to this credit.
Under current law, certain distributions treated as dividends that are received by an individual U.S. holder from a “qualified foreign corporation” generally qualify for a 20% reduced maximum tax rate so long as certain holding period and other requirements are met. A non-U.S. corporation (other than a corporation that is treated as a PFIC with respect to the U.S. holder for the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program, or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. Dividends paid by us in a taxable year in which we are not a PFIC and with respect to which we were not a PFIC in the preceding taxable year with respect to the U.S. holder are expected to be eligible for the 20% reduced maximum tax rate, although we can offer no assurances in this regard. However, any dividend paid by us in a taxable year in which we are a PFIC or were a PFIC in the preceding taxable year with respect to the U.S. holder will be subject to tax at regular ordinary income rates (along with any applicable additional PFIC tax liability, as discussed below).
The additional 3.8% tax on “net investment income” (described below) may apply to dividends received by certain U.S. holders who meet certain modified adjusted gross income thresholds.
Sale, Exchange or Other Taxable Disposition of the Ordinary Shares
Upon the sale, exchange or other taxable disposition of the ordinary shares (subject to the PFIC rules discussed below), a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. holder’s tax basis in the ordinary shares. The gain or loss recognized on the sale or exchange of the ordinary shares generally will be long-term capital gain (currently taxable at a reduced rate for non-corporate U.S. holders) or loss if the U.S. holder’s holding period of the ordinary shares is more than one year at the time of the disposition. The deductibility of capital losses is subject to limitations.
Gain or loss recognized by a U.S. holder on a sale or exchange of ordinary shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. Under the tax treaty between the United States and Israel, gain derived from the sale, exchange or other taxable disposition of ordinary shares by a holder who is a resident of the U.S. for purposes of the treaty and who sells the ordinary shares within Israel may be treated as foreign source income for U.S. foreign tax credit purposes.
The additional 3.8% tax on “net investment income” (described below) may apply to certain U.S. holders who meet certain modified adjusted gross income thresholds, including capital gains.
Passive Foreign Investment Companies
In general, a foreign (i.e., non-U.S.) corporation will be a PFIC for any taxable year in which, after applying the relevant look-through rules with respect to the income and assets of its subsidiaries, either (1) 75% or more of its gross income in the taxable year is “passive income,” or (2) assets held for the production of, or that produce, passive income comprise 50% or more of the average of its total asset value in the taxable year. For purpose of the income test, passive income generally includes dividends, interest, royalties, rents, annuities and net gains from the disposition of assets, which produce passive income. For purposes of the asset test, assets held for the production of passive income includes assets held for the production of, or that produce dividends, interest, royalties, rents, annuities, and other income that are considered passive income for purposes of the income test. In determining whether we meet the asset test, cash is considered a passive asset and the total value of our assets generally will be treated as equal to the sum of the aggregate fair market value of our outstanding stock plus our liabilities. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income. The income test is conducted at the taxable year-end. The asset test is conducted on a quarterly basis and the quarterly results are then averaged together.
If a corporation is treated as a PFIC for any year during a U.S. holder’s holding period and the U.S. holder does not timely elect to treat the corporation as a “qualified electing fund” under Section 1295 of the Code or elect to mark its ordinary shares to market (both elections described below), any gain on the disposition of the shares will be treated as ordinary income, rather than capital gain, and the holder will be required to compute its tax liability on that gain, as well as on dividends and other distributions, as if the income had been earned ratably over each day in the U.S. holder’s holding period for the shares. The portion of the gain and distributions allocated to prior taxable years in which a corporation was a PFIC will be ineligible for any preferential tax rate otherwise applicable to any “qualified dividend income” or capital gains, and will be taxed at the highest ordinary income tax rate in effect for each taxable year to which this portion is allocated. An interest charge will be imposed on the amount of the tax allocated to these taxable years. A U.S. holder may elect to treat a corporation as a qualified electing fund only if the corporation complies with requirements imposed by the IRS to enable the shareholder and the IRS to determine the corporation’s ordinary income and net capital gain. Additionally, if a corporation is a PFIC, a U.S. holder who acquires shares in the corporation from a decedent will be denied the normally available step-up in tax basis to fair market value for the shares at the date of death of the decedent and instead will have a tax basis equal to the decedent’s tax basis if lower than fair market value. These adverse tax consequences associated with PFIC status could result in a material increase in the amount of tax that a U.S. holder would owe and an imposition of tax earlier than would otherwise be imposed and additional tax form filing requirements. Unless otherwise provided by the IRS, if a corporation is classified as a PFIC, a U.S. person that is a direct or indirect holder generally will be required to file IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form, to report its ownership interest in such entity.
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Status of Nova as a PFIC. Under the income test, less than 75% of our gross income was passive income in 2017. For 2017,2018, while we continued to have substantial amounts of cash and short-term deposits and the market value of our ordinary shares continued to be volatile, a determination of the value of our assets by reference to the average market value of our ordinary shares and our liabilities results in a conclusion that the average value of our passive assets did not exceed 50% of the average value of our gross assets in 2016.2017. Nonetheless, there is a risk that we were a PFIC in 20172018 or we will be a PFIC in 20182019 or subsequent years. For example, taking into account our existing cash balances, if the value of our stock were to decline materially, it is possible that we could become a PFIC in 20182019 or a subsequent year. Additionally, due to the complexity of the PFIC provisions and the limited authority available to interpret such provisions, there can be no assurance that our determination regarding our PFIC status could not be successfully challenged by the IRS.
Available Elections. If we become a PFIC for any taxable year, U.S. holders should consider whether or not to elect to treat us as a “qualified electing fund” or to elect to “mark-to-market” their ordinary shares in order to mitigate the adverse tax consequences of PFIC status.
If a U.S. holder makes a qualified electing fund election (a “QEF election”) for its ordinary shares that is effective from the first taxable year that the U.S. holder holds our ordinary shares and during which we are a PFIC, the electing U.S. holder will avoid the adverse consequences of our being classified as a PFIC, but will instead be required to include in income a pro rata share of our net capital gain, if any, and other earnings and profits (“ordinary earnings”) as long-term capital gains and ordinary income, respectively, on a current basis, in each case whether or not distributed, in the taxable year of the U.S. holder in which or with which our taxable year ends. A subsequent distribution of amounts that were previously included in the gross income of U.S. holders should not be taxable as a dividend to those U.S. holders who made a QEF election. In the event we incur a net loss for a taxable year, such loss will not be available as a deduction to an electing U.S. holder, and may not be carried forward or back in computing our net capital gain or ordinary earnings in other taxable years. The tax basis of the shares of an electing U.S. holder generally will be increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the QEF rules described above. In order to make (or maintain) a QEF election, the U.S. holder must annually complete and file IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form. However, we do not expect that we will prepare or provide to U.S. Holders a “PFIC annual information statement,” which would enable a U.S. Holder to make one type of a QEF election.
Alternatively, if a U.S. holder elects to “mark-to-market” its ordinary shares, the U.S. holder generally will include in its income any excess of the fair market value of our ordinary shares at the close of each taxable year over the holder’s adjusted basis in such ordinary shares. A U.S. holder generally will be allowed an ordinary deduction for the excess, if any, of the adjusted tax basis of the ordinary shares over the fair market value of the ordinary shares as of the close of the taxable year, or the amount of any net mark-to-market gains recognized for prior taxable years, whichever is less. A U.S. holder’s adjusted tax basis in the ordinary shares generally will be adjusted to reflect the amounts included or deducted under the mark-to-market election. Additionally, any gain on the actual sale or other disposition of the ordinary shares generally will be treated as ordinary income. Ordinary loss treatment also will apply to any loss recognized on the actual sale or other disposition of ordinary shares to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included with respect to such ordinary shares. If a U.S. holder makes a valid mark-to-market election with respect to our ordinary shares for the first taxable year of the U.S. holder in which the U.S. holder holds (or is deemed to hold) our ordinary shares and for which we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect of its commonordinary shares. A mark-to-market election applies to the tax year for which the election is made and to each subsequent year, unless our ordinary shares cease to be marketable, as specifically defined, or the IRS consents to revocation of the election. No view is expressed regarding whether our ordinary shares are marketable for these purposes or whether the election will be available.
If a U.S. holder makes either the QEF election or the mark-to-market election, distributions and gain will not be recognized ratably over the U.S. holder’s holding period or be subject to an interest charge as described above. Further, the denial of basis step-up at death described above will not apply. If a U.S. holder makes the QEF election, gain on the sale of the ordinary shares will be characterized as capital gain. However, U.S. holders making one of these two elections may experience current income recognition, even if we do not distribute any cash. The elections must be made with the U.S. holder’s federal income tax return for the year of election, filed by the due date of the return (as it may be extended) or, under certain circumstances provided in applicable Treasury Regulations, subsequent to that date.
The foregoing discussion relating to the QEF election and mark-to-market elections assumes that a U.S. holder makes the applicable election with respect to the first year in which Nova qualifies as a PFIC. If the election is not made for the first year in which Nova qualifies as a PFIC, the procedures for making the election and the consequences of election will be different.
SPECIFIC RULES AND REQUIREMENTS APPLY TO BOTH THE QEF ELECTION AND THE MARK-TO-MARKET ELECTION, AND YOU ARE URGED TO CONSULT YOUR TAX ADVISOR CONCERNING OUR PFIC STATUS AND THE VARIOUS ELECTIONS YOU CAN MAKE.
Medicare Tax on Net Investment Income
A U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% tax on the lesser of (1) the U.S. holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold. A U.S. holder’s “net investment income” generally may include its dividend income and its net gains from the disposition of shares, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a U.S. holder that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the shares and the interaction of these rules with the rules applicable to income included as a result of the QEF election.
United States Information Reporting and Backup Withholding
In general, U.S. holders may be subject to certain information reporting requirements under the Code relating to their purchase and/or ownership of stock of a foreign corporation such as the Company. Failure to comply with these information reporting requirements may result in substantial penalties.
Specifically, certain U.S. Holders holding specified foreign financial assets, including our ordinary shares, with an aggregate value in excess of the applicable U.S. dollar threshold are subject to certain exceptions, required to report information relating to our Ordinary Shares by attaching a complete IRS Form 8938, Statement of Specified Foreign Financial Assets, to their tax returns, for each year in which they hold our ordinary shares. U.S. Holders are urged to consult their own tax advisors regarding information reporting requirements relating to the ownership of our Ordinary Shares.
In addition, and as discussed in the section of this annual report entitled “U.S. Taxation – Passive Foreign Investment Companies”, if a corporation is classified as a PFIC, a U.S. person that is a direct or indirect holder generally will be required to file an informational return annually on IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form, to report its ownership interest in such entity, unless otherwise provided by the IRS.
Dividend payments and proceeds from the sale or disposal of ordinary shares may be subject to information reporting to the IRS and possible U.S. federal backup withholding, currently at the rate of 28%.withholding. Certain holders (including, among others, corporations) generally are not subject to information reporting and backup withholding. A U.S. holder generally will be subject to backup withholding if such holder is not otherwise exempt and such holder:
| · | fails to furnish its taxpayer identification number, or TIN, which, for an individual, is ordinarily his or her social security number,number; |
| · | furnishes an incorrect TIN,TIN; |
| · | is notified by the IRS that it is subject to backup withholding because it has previously failed to properly report payments of interest or dividends,dividends; or |
| · | fails to certify, under penalties of perjury, that it has furnished a correct TIN and that the IRS has not notified the U.S. holder that it is subject to backup withholding. |
Any U.S. holder who is required to establish exempt status generally must file IRS Form W-9 (“Request for Taxpayer Identification Number and Certification”).
Backup withholding is not an additional tax and may be claimed as a refund or a credit against the U.S. federal income tax liability of a U.S. Holder, provided that the required information is timely furnished to the IRS.
10.F Dividends and Paying Agents
Not applicable.
10.G Statements by Experts
Not applicable.
10.H Documents on Display
The documents referredAs a foreign private issuer, are exempt from the rules under the Exchange Act related to herein, including the Amended Articles,furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Furthermore, as a foreign private issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. In addition, we are not be required under the Exchange Act to file annual or other reports and consolidated financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. Instead, we must file with the SEC, within 120 days after the end of each fiscal year, or such other applicable time as required by the SEC, an annual report on Form 20-F containing consolidated financial statements audited by an independent registered public accounting firm. We also intend to furnish certain other material information to the SEC under cover of Form 6-K.
We maintain a corporate website at www.novameasuring.com. Information contained on, or that can be obtained from the Company at its registered office at Weizmann Science Park, Building 22, 2nd Floor, Ness-Ziona, Israel. In addition, the Company is subject to certain informational requirementsaccessed through, our website does not constitute a part of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder. In accordance therewith, the Company files reports with the Commission. Reports and other information provided to the Commission by the Company may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 100 Fifth Street, N.E., Washington, D.C. 20549. Informationthis annual report on the operation of the public reference facilities may be obtained by calling the Commission at 1-800-SEC-0330. In addition, certain of the Company’s reports filed with the Commission are available on-line at www.sec.gov.Form 20-F. We have included our website address in this annual report on Form 20-F solely as an inactive textual reference.
10.I Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of the Company. The Company is exposed to market risk in the area of foreign exchange rates, as described below.
The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments that could expose it to significant market risk.
Impact of Currency Fluctuation
Because our results are reported in Dollars, changes in the rate of exchange between the Dollar and local currencies in those countries in which we operate (primarily the NIS, the Euro and the Japanese Yen) will affect the results of our operations. The dollar cost of our operations in countries other than the U.S., is negatively influenced by revaluation of the U.S. dollar against other currencies. During 2017,2018, the value of the U.S. dollar devaluatedrevaluated against the NIS by 9.8%8.1%, devaluated against the Yen by approximately 3.7%2.0% and devaluatedrevaluated against the Euro by approximately 12.3%4.6%. During the first six months of 20172018 the value of the U.S. dollar devaluatedrevaluated against the NIS by approximately 9.1%5.3%, devaluated against the Yen by approximately 3.9%2.1% and devaluatedrevaluated against the Euro by 7.8%3.6%. During the last six months of 20172018 the value of the U.S. dollar devaluatedrevaluated against the NIS by approximately 0.8%2.7%, revaluateddevaluated against the Yen by approximately 0.3%0.1% and devaluatedrevaluated against the Euro by approximately 4.9%1.0%.
As of December 31, 2017,2018, the majority of our net monetary assets were denominated in dollars and the remainder was denominated mainly in NIS. Net monetary assets that are not denominated in dollars or dollar-linked NIS were affected by the currency fluctuations in 2017,2018, and are expected to continue to be affected by such currency fluctuations in 2018.2019. Starting January 1st, 2019, under the implementation of ASC 842 for lease accounting, we expect to record a NIS and Israel CPI linked liability, in the amount of approximately $16 million This liability is also expected to be affected by such currency fluctuations across the term of the lease.
In 2014, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $59 million with settlement dates through 2015-2016, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $59 million. In accordance with ASC 815-10, we recorded in 2015 an increase of approximately $1.1 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as of December 31, 2015, with all other variables held constant, would decrease the fair value of our net assets denominated in foreign currency, held at December 31, 2015, by approximately $0.75 million.
In 2015, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $60 million with settlement dates through 2016-2017, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $60 million. In accordance with ASC 815-10, we recorded in 2016 an increase of approximately $0.1 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as of December 31, 2016, with all other variables held constant, would decrease the fair value of our net assets denominated in foreign currency, held at December 31, 2016, by approximately $0.8 million.
In 2017, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $140$58 million with settlement dates through 2017-2018, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $60$58 million. In accordance with ASC 815-10, we recorded in 2017 an increase of approximately $0.2$0.16 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as of December 31, 2017, with all other variables held constant, would decreaseincrease the fair value of our net assets denominated in foreign currency, held at December 31, 2017, by approximately $0.8$0.11 million.
In 2018, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $77 million with settlement dates through 2018-2019, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $77 million. In accordance with ASC 815-10, we recorded in 2018 a decrease of approximately $0.3 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as of December 31, 2018, with all other variables held constant, would increase the fair value of our net assets denominated in foreign currency, held at December 31, 2018, by approximately $0.25 million.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modification to the Rights of Security Holders and Use of Proceeds
Not applicable.
Item 15. Controls and Procedures
(a) Our management, including our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2017. Based on such review, our chief executive officer2018. The term “disclosure controls and chief financial officer have concludedprocedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we havefile or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in place effectivethe rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the our management, including our principalchief executive officer and principalchief financial officers,officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the foregoing, our chief executive officer and chief financial officer have concluded that, as of December 31, 2018, our disclosure controls and is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.procedures were effective.
(b) Our management, under the supervision of our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over our financial reporting,. The Company’s internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act, of 1934, as amended. The Company’s internal control over financial reporting is defined asmeans a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that:
| — | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions; |
| — | provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| — | provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements. |
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of ourOur management including our principal executive officer and principal financial officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this evaluation, we used2018, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management concluded that, the Company’s internal controls over financial reporting were effective as of December 31, 2017.2018, the Company’s internal control over financial reporting was effective.
(c) Kost Forer Gabbay & Kasierer, an independent registered accounting firm and a member firm of Ernst & Young, has issued an attestation report on the effectiveness of our internal control over financial reporting, as stated in their report included herein. See “Report of Independent Registered Public Accounting Firm” on page F-3.
(d) There were no changes in our internal controls over financial reporting identified with the evaluation thereof that occurred during the period covered by this annual report that have materially affected, or are reasonable likely to materially affect our internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that our audit committee includes one audit committee financial expert, as defined by Item 16A of Form 20-F. Our board of directors has determined that Ms. Dafna Gruber is an “audit committee financial expert” as defined by the SEC rules as well as an independent director as such term is defined by Rule 5605(a)(2) of The NASDAQthe Nasdaq Stock Market.Market and has the requisite financial experience as defined by the Nasdaq rules.
The Company has adopted a written code of conduct that applies to all Company employees, including the Company’s directors, principal executive officer, principal financial officer and principal accounting officer.
You may review our code of conduct on our website: http://www.novameasuring.com, under “Corporate/Corporate Governance”.
Item 16C. Principal Accountant Fees and Services
During the last three fiscal years, Kost Forer Gabbay & Kasierer, an independent registered accounting firm and a member firm of Ernst & Young (“Kost Forer Gabbay & Kasierer”) has acted as our registered public accounting firm and independent auditors. The following table provides information regarding fees paid by us to Kost Forer Gabbay & Kasierer for all services, including audit services, for the years ended December 31, 20162017 and 2017:2018:
| | 2016 | | | 2017 | | | 2017 | | | 2018 | |
| | | | | | | | | | | | |
Audit Fees | | $ | 250,000 | | | $ | 285,000 | | | $ | 285,000 | | | $ | 310,000 | |
Tax Fees | | | - | | | $ | 10,000 | | | | 10,000 | | | $ | 58,000 | |
Other Fees | | | 9,000 | | | $ | 2,500 | | | | 2,500 | | | $ | 4,000 | |
Total | | $ | 259,000 | | | $ | 297,500 | | | $ | 297,500 | | | $ | 372,000 | |
“Audit “Audit fees” are fees associated with the annual audit and reviews of the Company’s quarterly consolidated financial results submitted on Form 6-K, consultations on various accounting issues and performance of local statutory audits. The audit fee includes fees associated with the audit of management assessment of internal control over financial reporting, annual tax returns and audit of reports to IIA.
“Tax Fees”. We did not incur expenses for anyThe tax advice services byfees to Kost Forer Gabbay & Kasierer during the year ended December 31, 2016.2017 included services related to tax assessment. The tax fees during the year ended December 31, 20172018 include services related to Tax assessments. ad- hoc tax advice.
“Other “Other Fees” include services related to SEC regulation consulting, IIA application support and Europe funding reporting requirements.
Our audit committee has adopted a pre-approval policy for the engagement of our independent accountant to perform certain services. Pursuant to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, all audit, audit related and tax services must be specifically approved by the audit committee and certain other non-audit, non-audit related and non-tax services may be approved without consideration of specific case-by-case provided certain terms and procedures are met. The Company’s audit committee approved all of the services provided by Kost Forer Gabbay & Kasierer in fiscal years 20172018 and 2016.2017.
Item 16D. Exemptions from the Listing Standards for Audit Committees
The Company has not obtained any exemption from applicable audit committee listing standards.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliates Purchasers
None. In November 2018, we announced a $25 million repurchase program of our ordinary shares. Through December 31, 2018, we spent an aggregate of $4.8 million to repurchase 200,000 ordinary shares under our share repurchase program. The following table provides information regarding our repurchases of our ordinary shares for each month included in the period covered by this annual report on Form 20-F:
Period | | (a) Total Number of Ordinary Shares Purchased | | | (b) Average Price Paid per Ordinary Share | | | (c) Total Number of Ordinary Shares Purchased as Part of Publicly Announced Plans or Programs | | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) | |
| | | | | | | | | | | | |
January-October 2018 | | N\A | | | N\A | | | N\A | | | N\A | |
November 2018 | | | 100,000 | | | $ | 23.51 | | | | 100,000 | | | $ | 22.65 | |
December 2018 | | | 100,000 | | | $ | 24.50 | | | | 200,000 | | | $ | 20.2 | |
Item 16F. Change In Registrant’s Certifying Accountant
See ITEM 16F in our annual report on Form 20-F for the year ended December 31, 2015.
Item 16G. Corporate Governance
There are no significant ways in which the Company’s corporate governance practices differ from those followed by domestic companies listed on Thethe NASDAQNasdaq Global Select Market. However, on August 1, 2017, our board of directors resolved to adopt the 2017 Share Incentive Plan, in connection of which, we have elected to follow home country practice rules which do not require the approval of our shareholders for such action rather than the applicable NASDAQNasdaq’s shareholder approval requirement.
Item 16H. Mine Safety Disclosure
Not applicable.
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
See pages F-1 through F-31.F-30.
See Exhibit Index.