We are incorporated in Israel. Most of our executive officers and directors are non-residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against any such persons or us. It may also be difficult to enforce civil liabilities under U.S. federal securities laws in original actions instituted in Israel.
If a foreign judgment is enforced by an Israeli court, it generally will be payable in New Israeli Shekels, which can then be converted into foreign currency at the rate of exchange of such foreign currency on the date of payment. Pending collection, the amount of the judgment of an Israeli court stated in New Israeli Shekels (without any linkage to a foreign currency) ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate prevailing at such time. Judgment creditors bear the risk of unfavorable exchange rates.
We have historically designed, developed, manufactured, marketed and supported automatic inspection and quality monitoring systems for the textile and other fabric industries.
In the third quarter of 2002, our management took the strategic decision to leverage our expertise in designing visual inspection systems and expand our business into new industrial fields. Since then, we have focused on an overall strategy of expanding our product portfolio and penetrating new markets. As part of this strategy, over the past three years we have acquired two new businesses, Panoptes and ScanMaster, which operate in the fields of optical vision and non-destructive ultrasonic inspection application, respectively.
On September 8, 2004, we completed the acquisition of ScanMaster, a company that develops, manufactures and markets automated ultrasonic inspection and imaging equipment for the aircraft, aerospace, train, rail, pipe, plate and automotive industries. ScanMaster was established in 1986 by a group of researchers and engineers from the Tel Aviv University in Israel. ScanMaster manufactures instruments, transducers and turnkey non-destructive inspection systems for a wide range of industrial applications using ultrasonic technologies and has an installed base of more than five hundred field-proven systems and instruments, including equipment for such inspection applications as:
ScanMaster has sold its systems to Boeing, General Electric, Daimler Benz, Wyman Gordon, General Motors, Cummins Diesel, Pratt & Whitney, MAN Technologies, Deutscher Aerospace, MTU, Snechma, Fortech, Volvo Aerospace and Preussagstahl.
In January 2006, we, together with our subsidiary ScanMaster, consummated the acquisition of the business, assets, and shares of Panoptes, an innovator of machine vision systems for surface inspection, technical fabrics, textiles, glass and other woven materials.
In June 2004, we also purchased Yuravision Co. Ltd., or Yuravision, a company in the microelectronics and flat-panel display industries. In 2006 our board of directors and management decided to focus on existing markets rather than continue developing our microelectronics technologies. As a result, on December 1, 2006, we executed an agreement with a Korean corporation for the sale of Yuravision, which was later amended on January 28, 2008. For more information seeItem 10, “Additional Information – Material Contracts”.
Our legal and commercial name is Elbit Vision Systems Ltd. We were established in Israel on September 2, 1992 and organized pursuant to the Israel Companies Ordinance, 1983, which was replaced by the Israeli Companies Law, 1999, or the Companies Law. We commenced independent commercial operations on January 1, 1994, as a subsidiary of Elbit. Prior to such date, our business operated as a division of Elbit. In July 1996, we consummated an initial public offering of 2,000,000 ordinary shares. At such time the ordinary shares were quoted on the NASDAQ National Market. Effective December 29, 2000, our ordinary shares were delisted from the NASDAQ National Market and traded on the Over-the-Counter Bulletin Board until June 21, 2001, when they were transferred to the NASDAQ SmallCap Market. On November 19, 2003, our ordinary shares were delisted from the NASDAQ SmallCap Market and we are currently traded on the Over-the-Counter Bulletin Board. For further information, seeItem 3, “Key Information – Risk Factors – Risk Factors Related to Our Ordinary Shares” andItem 9, “The Offer and Listing – Market and Share Price History”.
Recent Developments
Since January 1, 2007, the following important events have occurred to us:
Amendment to Convertible Loan Agreement with Mivtach Shamir
On February 21, 2006, we consummated the Mivtach Agreement. Pursuant to the agreement, Mivtach Shamir provided us with a two-year $3 million loan, which Mivtach Shamir was entitled at its sole discretion, for a period of 24 months following the provision of the loan, to convert into 6,000,000 of our ordinary shares, at a price per share of $0.5 (half the loan was being held in escrow subject to our completion of a certain milestone, or conversion of the loan). The interest on the loan was repaid on a quarterly basis. We also granted Mivtach Shamir a two-year warrant to purchase 4,000,000 of our ordinary shares at an exercise price of $0.5 per share, exercisable only if the loan was converted. On February 21, 2006, Mivtach Shamir assigned their right to receive shares from us, under the convertible loan and warrant, to M.S.N.D. On June 21, 2007 we executed an agreement with M.S.N.D., which was approved by our shareholders in a meeting of our shareholders held on July 31, 2007, pursuant to which, the Mivtach Agreement was amended, or the Amendment Agreement. Pursuant to the Amendment Agreement, the terms of the Mivtach Agreement and the loan therein, were amended, such that in consideration for M.S.N.D.‘s undertaking to convert the full loan amount by no later than August 1, 2007 (a) Mivtach Shamir will be issued with 9,523,810 of our ordinary shares; and (b) Mivtach Shamir will receive a 4-year warrant to purchase 2,380,952 of our ordinary shares at an exercise price of $0.45 per share. Mivtach Shamir also agreed to waive its rights to exercise warrants into at least 3,000,000 ordinary shares issuable under the Mivtach Agreement, agreeing to exercise warrants into no more than 1,000,000 ordinary shares issuable under the Amendment Agreement, which warrants expired subsequently on February 21, 2008. Following consummation the Amendment Agreement M.S.N.D, has become a holder of more than 25% of our issued and outstanding share capital. We also entered into a Registration Rights Agreement with M.S.N.D., pursuant to which we filed a Registration Statement on Form F-1 on July 31, 2007, covering all of the ordinary shares and ordinary shares underlying the warrants under the Amendment Agreement, which had not previously been registered.
21
M.S.N.D. also completed the purchase of 2,939,192 of our ordinary shares from three of the founders of ScanMaster, in accordance with the provisions of a share purchase agreement.
Agreement with Elbit
On June 21, 2007, following the approval of our board of directors and our audit committee, we executed an agreement with Elbit, or the Elbit Agreement. This agreement was approved by our shareholders in a meeting of our shareholders held on July 31, 2007. Pursuant to this agreement Elbit (i) converted an existing loan to us in the amount of $470,000 (including accrued interest up until March 31, 2007) into 1,492,063 of our ordinary shares, at a price of $0.315 per share; and (ii) invested in us $250,000 in consideration for 793,651 of our ordinary shares at a price of $0.315 per share and received a 4-year warrant to purchase 396,825 of our ordinary shares at an exercise price of $0.45 per share. At consummation we paid all interest accrued on the loan between April 1, 2007 and the closing date.
Within the framework of the Elbit Agreement, pursuant to a registration rights agreement, or the Elbit Registration Rights Agreement, we undertook to file a Registration Statement covering all of the ordinary shares and ordinary shares underlying the warrants issued pursuant to the Elbit Agreement with the Securities and Exchange Commission by no later that July 31, 2007. We filed a Registration Statement on Form F-1 on July 31, 2007, covering all such ordinary shares and ordinary shares underlying Elbit’s warrants.
Amendment to Registration Rights Agreement with Elbit
Following the Elbit Agreement, on January 1, 2007, we executed an amendment, or the Amendment, to the Elbit Registration Rights Agreement, which was approved by our shareholders on November 20, 2006, pursuant to which we agreed to register 2,647,643 of our ordinary shares beneficially owned by Elbit prior to the Elbit Registration Rights Agreement, or the Original Elbit Shares, by no later than September 30, 2007. Pursuant to the Amendment, we filed a Registration Statement on Form F-1 covering the Original Elbit Shares on July 31, 2007.
22
Private Placement with Israeli Investors
In July 2007 we completed the April Investment with a group of Israeli institutional investors, or the Israeli Investors, for the purchase of 9,465,544 of our ordinary shares for $0.315 per share, or an aggregate price of $2,981,646. Pursuant to the transaction, the investors were also issued warrants to purchase 4,732,774 of our ordinary shares at an exercise price per share of $0.45, exercisable for a period of 4 years. We filed a Registration Statement on Form F-1 covering all of the ordinary shares and ordinary shares underlying the warrants issuable under the April Investment on July 31, 2007.
Appointment of Director
On September 24, 2007, Mr. Victor Josebachvili was elected director by our board of directors, following the retirement of Mr. Menashe Shohat. His term was extended by our shareholders on December 11, 2007 until our next annual general meeting.
Appointment of External Director and Option Grant
In March 2007, the statutory 3-year term of Mr. Zahi Dekel as an external director ended and at the meeting of our shareholders on April 19, 2007, the shareholders approved the appointment of Mr. David Schwartz as our new external director. The shareholders also approved the grant of 30,000 options to each of Mr. David Schwartz and Mr. Yuval Berman (who was then serving as an external director), at an exercise price which shall be equal to the fair market value of the Company’s ordinary shares on the date of grant.
In August 2007, the statutory 3-year term of Mr. Yuval Berman as an external director ended and at the meeting of our shareholders on December 11, 2007, the shareholders approved the appointment of Mr. Amos Uzani as our new external director. The shareholders also approved the grant of 30,000 options to Mr. Amos Uzani, at an exercise price equal to the closing price of the Company’s ordinary shares on the Over the Counter Bulletin Board in the United States, at the date of grant.
Appointment of Chief Executive Officer
At the annual general meeting of our shareholders held on November 20, 2006, our shareholders approved the appointment of Mr. David Gal as our Chief Executive Officer, in addition to his service as Chairman of our Board of Directors. Due to his additional responsibilities as Chief Executive Officer, following approval by our audit committee and board of directors, our shareholders approved on July 31, 2007, an increase in the monthly fee payable to MEO Consulting, a company controlled by Mr. David Gal, of $21,500 plus Value Added Tax to be payable from January 1, 2007.
Legal Claim in India
Following the cancellation of a contract, or the Indian Project, between ScanMaster and the Research and Design Standards Organization of the Ministry of Railways of India, or RDSO, RDSO demanded the exercise of certain down-payment guarantees and a performance guarantee received from ScanMaster from the State Bank of India, as counter guaranteed by Bank Hapoalim BM, or Hapoalim. As a result, on November 14, 2006, ScanMaster petitioned the Indian court in Lucknow to receive an order to prevent RDSO from exercising the bank guarantees. The court denied ScanMaster’s request, pursuant to which the guarantees were exercised in the amount of $414,125 pursuant to the performance guarantee and $2,481,175 pursuant to the down-payment guarantees.
23
Our executive offices are located at 1 Haofe Street, Hasharon Industrial Park, Qadima, P.O.B. 5030, 60920, Israel, and our telephone number is 972-9-8661600 and fax number 972-9-8661700. Our Web site iswww.evs-sm.com. Information on our web site is not incorporated by reference in this annual report.
B. Business Overview
We currently operate as two main divisions: the Non–Destructive Automated Inspection Systems Division consisting of ScanMaster’s non-destructive inspection business and the Automated Optical Inspection Industry, or AOI, Division.
| I. | Non–Destructive Automated Inspection Systems Division |
The products of ScanMaster Systems (IRT) Ltd., or ScanMaster Ltd., serve the high end of a non-destructive testing, or NDT, market. The company’s products enjoy a high technological barrier to entry that translates into a limited number of competitors in each application niche. In terms of sensitivity, speed, resolution, data acquisition and processing hardware and software, the company’s products are believed to be well positioned in the industry.
ScanMaster Ltd. has made more than 650 equipment installations in 26 countries, for a total 14-year sales volume exceeding $87 million. Typical uses of ScanMaster equipment include the imaging and assessment of defects in forged discs used in jet engines, detection of flaws in welded pipe, periodic inspection of the integrity of train rail, evaluation of the integrity of spot weld bonds in automobiles and detection of bonding defects in composite aerospace structures.
The annual NDT world market for ultra-sonic testing, or UT, equipment is of the order of $580 million in size. The market is divided among North and South America, Europe, and the rest of the world, with each of the three sectors commanding approximately one-third of world sales. Product-wise, the UT market is divided as follows: Consumables, which in the main are transducers and accessories with annual sales of the order of $80 million;
| | — | Gauges and small portable instruments with estimated annual sales in the range of $200 million; and |
| | — | Full-size instruments, retrofit upgrades of older installed systems and new turn-key inspection systems, altogether comprising an annual turnover of $300 million. |
The early years of the current decade saw a rapid expansion of sales of UT equipment to most of the industries (aircraft, railway, steel, automotive and related industries). The annual growth is about 4%-6% of the UT market.
24
Additionally, the rapid advances made in computerized data acquisition and volumetric ultrasonic imaging are beginning to contribute to a penetration of the gamma and X-ray NDT radiation markets, presently approximately $350 million in size. UT inspection is significantly more attractive, as the equipment is of comparable or lower cost, uses far fewer consumables, poses no radiation hazard, and is amenable to computerized evaluation. It is expected that the inroads made by UT imaging in these markets will increase significantly in the future, as more UT inspection procedures in the aircraft, petroleum and steel industries supplant those originally written for NDT radiation techniques.
The years of drastic cost-cutting by many industrial concerns, combined with a dramatic increase in the price-to-performance ratio of off-the-shelf computer and electronic products, has resulted in a significant increase in the sensitivity of these companies to high-priced turn-key NDT machines. This, in turn, has opened a window of opportunity for the manufacturers of inspection equipment which are more attuned to competitive market trends in technology and pricing.
| a. | Business and Product Overview |
Applications
| — | Tube and Pipe – Inspection of spiral submerged welded pipes and electrical resistance welded pipes, either manually or in automatic operation, in-line or off-line, as well as field inspection of pipe weld, body and pipe and inspection. |
| — | Plate High-speed, automated ultrasonic testing machines for detection, evaluation and documentation of flaws in steel and other metals plates. |
| — | Bar Full Body High-speed, precision ultrasonic inspection of bars. |
| — | Power Generation Efficient and reliable ultrasonic inspection of large, rotary-symmetrical forgings and castings, such as forged compressor and turbine disks employed in stationary gas turbines for electric power production. |
| — | Train Wheels Inspection of train wheels both in the production line and in refurbishing shops. Short set-up time, high inspection throughput. |
| — | In Service Train Rail High-speed train rail inspection with super-fast B-scan display, complete data recording and analysis tools. |
| — | Storage Tank and Pipeline Multi-channel, high-speed data acquisition and recording for inspection of storage tanks and pipelines. |
| — | Aircraft Engine Disks Immersion inspection of Titanium and Ni alloy aircraft engine forgings, with full imaging and data processing capabilities. |
| — | Structural Elements Aerospace Immersion, squirter or contact inspection of aircraft and aerospace structural elements manufactured from metal and composite materials, with full imaging and data processing capabilities. |
| — | Automotive Efficient, reliable inspection and evaluation of spot welds in production line. |
| — | Portable Versatile Instrumentation Portable UT instruments for in-doors or field operation. |
| — | Multi-channel Instrumentation Multi-channel full-featured ultrasonic instrument with up to 32 channels and programmable I/O ports. |
25
Product Overview
Each ScanMaster ultrasonic system is integrated and has a number of core modules, including industrial PC-based digital ultrasonic instrumentation, production-oriented software packages and servo motion control hardware (for those applications requiring robotic manipulation). These modules are integrated in application-specific configurations, which depend on the inspection requirements for speed, number of channels, on-line display and report documentation. ScanMaster maintains in-house electronic and software groups, as well as mechanical and application engineering teams for the design, manufacture and testing of standard or customized systems.
Instrumentation
| — | Thei – 100 is an advanced instrument for in-factory or mobile inspection. Based on the Windows 2000/XP®, it provides the operator with a flexible platform for inspection combined with reporting, networking and archiving capabilities. The average net transfer price is $22,000. |
| — | TheRPP3 is a high-performance, programmable single channel, square wave ultrasonic pulser-receiver that serves as a low cost, front-end module for ScanMaster’s ultrasonic instruments. The average net transfer price is $3,500. |
| — | TheRPP4 is a high-performance, programmable multi-channel, square wave ultrasonic pulser-receiver that serves as a front-end module to ScanMaster’s ultrasonic instruments. The average net transfer price is $4,200. |
| — | TheUPR-100 is a high-speed, multi-channel programmable data acquisition system specifically designed for demanding industrial ultrasonic inspection procedures. The average net transfer price is $12,000. |
| — | Theswi-100 is a digital ultrasonic instrument which provides the possibility of computer-assisted decision making with on-line UT signal analysis. An advanced ultrasonic instrumentation for inspection and evaluation of spot welds, providing high throughput, high reliability of detection and full documentation capability. The average net transfer price is $25,000. |
| — | TheU/T Mate can convert a computer into a UT instrument by connectingUT/Mate to the universal serial bus, or USB, port.UT/Mateinnovatively incorporates powerful features, similar to those available in theupi-100 instrument. The device is ready to use by plugging it to any PC/Laptop USB port. The average net transfer price is $13,000. |
Transducers
| — | Transducers High-performance ultrasonic transducers for manual and production-line ultrasonic inspection. The transducer line includes high-sensitivity, high-resolution contact probes, as well as specialty transducers for specific applications. The average net transfer price is $750. |
| — | Spot Weld Transducers The spot weld, or SW, series of 15 and 20MHz transducers is intended for precise and repeatable inspection and evaluation of spot welds in bonded metal sheets. SW Series transducers have signal resolution, with the controlled water column allowing distinct separation of intermediate echoes for evaluation purposes at less than 0.5mm (0.020”) from the entry surface. High-sensitivity piezoelectric elements provide ultrasonic beam penetration into thick metal sheets. The average net transfer price is $1,100. |
26
C-Scan Imaging Systems
All the below systems are fully integrated imaging systems including scanning mechanics, motion control, ultrasonic electronics, and data acquisition and processing software. The ultrasonic electronics provide excellent near- surface flaw resolution, exceptional penetration power, and have a high immunity against electromagnetic noise.
| — | LS200-X – TheLS-200X,LS-200, immersion ultrasonic inspection system is a rugged, reliable system for multi shift operation in an industrial environment. The average net transfer price is $220,000. |
| — | LS-200 and LS 200bseries are immersion ultrasonic inspection systems are rugged, reliable systems for multi shift operation in an industrial environment. The average net transfer price is $400,000. |
| — | DS-200i- The DS-200i immersion ultrasonic inspection system is designed for the scanning of oversize parts. It is a rugged, reliable system for multi shift operation in an industrial environment. The high accuracy scanning mechanics have exceptional resolution and repeatability on all the linear and angular axes allowing for scanning of complex parts. The average net transfer price is $600,000. |
| — | LS-500 The LS-500 immersion ultrasonic inspection system is a modular design allowing for stretching of the tank and scanner to fit the application. The average net transfer price is $170,000. |
| — | DS-200sTheDS-200s Series of ultrasonic squirter systems complements the DS-200 Series of immersion scanners with the high-end capacity required for non-immersion inspection of large-scale parts manufactured from composite materials. Rugged gantry-mounted bridge with dual search tubes provide high-speed inspection within tight tolerance limits for accuracy, repeatability and resolution. Water squirter inspection in operator-selected pulse-echo (P-E) or thru-transmission (T-T) modes. Optional simultaneous P-E and T-T scanning. The average net transfer price is $700,000. |
| — | LFS – 300 Efficient and reliable ultrasonic inspection of large, rotary-symmetrical forgings and castings, such as forged compressor and turbine disks employed in stationary gas turbines for electric power production. Highly functional and rugged mechanics including a unique servo-driven part rotating platform which allows for chucking parts vertically and accessibility to all surfaces. A selection of special purpose design manipulators mounted on robotic arm can accommodate a high number of transducers allowing enhanced inspection coverage and shorter inspection time. Specially designed transducers are supplied with the systems including: T-R probes with excellent near-surface resolution, high-sensitivity straight and angled longitudinal wave probes and shear wave probes with superior penetration and resolution. The systems are completely integrated and include highly reliable low noise motion control, multi-channel ultrasonic instrumentation and sophisticated motion and data collection software. The average net transfer price is $500,000. |
| — | FlexiTrack II- Portable dual-axis scanners intended for ultrasonic imaging of materials and components. The average net transfer price is $90,000. |
Pipe and plate Inspection
| — | AS 200e High-speed, automated multi-channel ultrasonic testing machines for detection, classification and documentation of defects in electrical resistance welded pipes (ERW). The average net transfer price is $350,000. |
27
| — | AS 200s High-speed, automated ultrasonic testing machines for detection, evaluation and documentation of flaws in submerged-arc welded pipes (SAW). The average net transfer price is $450,000. |
| — | AS 200p High-speed, automated ultrasonic testing machines for detection, evaluation and documentation of flaws in steel plates and bars. The average net transfer price is $2,000,000. |
Product Inspection Systems
| — | AS 280High-speed, precision inspection machines for detection, evaluation and documentation of flaws in large, thick-walled tubulars. The average net transfer price is $700,000. |
Train Inspection Systems
| — | AS 220w Designed for in-service, production line or refurbishment shop type inspections. Fully integrated inspection system. Includes multi-channel ultrasonics, multi axes inspection robot, high load capacity mechanics with multiple transducer heads & advanced software. The average net transfer price is $500,000. |
| — | AS 220aFully-computerized automated ultrasonic inspection systems for refurbishment shop of train wheel axles. The average net transfer price is $500,000. |
| — | SFB-100High-Speed Rail Inspection System. A fully integrated ultrasonic inspection car fitted with complete mechanical hardware such as transducer sled and a sophisticated couplant provision system. The system includes high volume digital data acquisition, imaging, process and evaluation. Powerful software features include prediction of the inspected part’s degradation and defect propagation, generation of custom & standard reporting and analysis. The average net transfer price is $1,500,000. |
| — | SFB-50 A Train Rail Inspection System, mounted on a multi purposed car (Hi-Rail) or towed by a service car. Ultrasonic inspection intended for detection, imaging and evaluation of flaws. The average net transfer price is $400,000. |
| — | SRI- 10 Single rail ultrasonic inspector for manual inspection and verification of detected flaws. The average net transfer price is $80,000. |
Software
| — | CSI SoftwareC-scan Imaging software designed in collaboration with the major engine manufactures. The average net transfer price is $20,000. |
| — | AS-200 The AS-200 software is designed to serve the quality assurance requirements of the heavy industry manufacturer. The average net transfer price is $12,500. |
The market for NDT services is more than twice the size of the equipment market. Worldwide, inspection services, especially those employing UT equipment, encompass a variety of industries, and include the inspection of installed pipelines and fuel storage tanks, fossil fuel and nuclear power generation equipment, aircraft and aircraft engine components, train rail, and oil field tubulars.
28
Interesting business opportunities in the inspection service industry will present themselves with the establishment of joint ventures between manufacturers of specialized inspection equipment and the traditional suppliers of these services. The combination of strategic forces, when properly planned, is expected to lead to the front-line positioning of companies that offer one or more exclusive inspection services.
To date, ScanMaster Ltd. has made more than 650 installations in 26 countries. Each territory is covered by a professional representative, who is responsible for pre-sale activity through to warranty service. In addition, the Company conducts its North American operations by way of a fully owned subsidiary.
There is no real seasonality for ScanMaster’s products, though sales usually increase in the second half of the year as organizations hurry to use their entire allocated budget.
Over the past year, the concentration of ScanMaster’s sales have been to Europe, such that it’s sales breakdown is approximately 21% North America, 43% Europe and 36% to the Far East.
ScanMaster’s facilities are located in Qadima, together with our facilities. Together we currently lease 3180 m². ScanMaster’s systems are manufactured by subcontractors. The final assembly, integration and quality control are conducted by ScanMaster. In addition, ScanMaster performs logistics and purchasing activities. Every system is assembled at ScanMaster, software installed and configured and the specific application is tested. ScanMaster’s manufacturing facilities are in compliance with ISO-9002 standards.
The two leading companies in the UT market are General Electric Inspection Technologies of the United States which includes Krautkramer and Olympus of Japan which includes RD/Tech, Panametrics and Stavely with total annual sales of UT equipment of approximately $100 million.
Low end – transducers, gauges, portable instruments
The UT sector of the NDT market is served by some 30 companies worldwide. Most are involved in the manufacture of low-end products, including standard transducers and other consumables, gages and portable instruments and simple laboratory scanning systems.
The transducer market in the United States is dominated by three companies, including, Panametrics, Technisonics and Harisonics, with a total of $30 million in annual transducer sales. The transducer market in Europe is dominated by Krautkramer and Karl Deutsche and smaller companies such as Sonatest of UK and Imasonic of France with $30 million in transducer sales.
29
High end – full-featured instruments and turn-key systems
The market for full-featured UT instruments and turn-key inspection systems for the production line is characterized by a high entry barrier for product development. In the 2000‘s, this field was dominated by four or five manufacturers located in the United States and Germany.
Instruments
Panametrics, Stavely, and RD/Tech as part of Olympus of Japan, Matec and GE-Krautkramer of the United States manufacture full-featured ultrasonic instruments. Panametrics and Matec focus mostly mainly on laboratory and research applications. RD/Tech is strongest in the nuclear power generation industry. Krautkramer focus on the industrial market, while Krautkramer has the largest installed base of full-size instruments.
Immersion and squirter-based C-scan imaging systems
The market for this equipment includes the aircraft and aerospace industries, reflecting requirements for the inspection of engine, airframe and aerospace structural sectors, and encompassing part manufacturers, refurbishment shops and in-field inspection.
Panametrics, Matec and SDI offer complete inspection systems for both immersion and squirter inspection of aircraft and aerospace parts. Boeing (formerly known as McDonnell Douglas) manufactures expensive squirter-based systems for the inspection of large composite aircraft panels and domes. Nukem (part of Krautkremer, or KK) manufactures squirter-based 3D ultrasonic systems.
Production-line GO/NOGO inspection systems
The market for automatic in-line ultrasonic inspection equipment withaccept-reject decision-making capability encompasses such applications as full-body pipe, tube and bars, pipe weld, steel plate, train wheels and rail.
Three companies, Krautkramer, Nuken (acquired by KK), and Karl Deutsche have traditionally dominated the European and Asian markets for tube and bar inspection equipment based on ultrasonic technologies. In the United States, small companies, including Dapco have been key players.
The market for line pipe weld and body inspection equipment has traditionally been dominated by Krautkramer and Karl Deutsche with total annual sales of the order of $12 million.
The market for pipe weld inspection machines has grown significantly since the introduction of the new American Petroleum Institute (API) standards for flaw detection in pipe welds. These standards require a significant increase in flaw detection sensitivity, beyond the capability of most installed equipment. As customers demand adherence to these standards for the supply of pipe, manufacturers are being forced to consider the replacement of outmoded equipment.
Ultrasonic inspection equipment for steel mills
Mitsubishi of Japan, and Krautkramer and Karl Deutsche, are the well-known suppliers of ultrasonic inspection equipment for steel plate mills. The installation of these machines usually cost millions of dollars. There is a distinct cost advantage to inspecting plate on the production line, downstream of the plate trimming equipment, while the plate is still at an elevated temperature. In addition, customer product liability concerns are leading to increasingly stringent product specifications, which may now include 100 percent inspection coverage of the plate surface.
Small companies such as NDT Germany and NDT Canada installed only a few systems.
30
Train wheel and train rail inspection
A large inspection market exists for in-service train rail inspection. Countries such as the United States and Germany, with 400,000 and 45,000 kilometers of installed train track, respectively, require periodic inspection of the rail, up to several times per year depending on the average track load. The rail inspection market in the United States is dominated by two non-government companies (Sperry and Dapco) which manufacture their own equipment, while in Germany the government-owned Deutsche Bundesbahn, or DB, operates the rail inspection service using equipment purchased from ScanMaster.
The main companies which provide rail service inspection and rail inspection equipment are Sperry of the United States, Speno of Switzerland, and Tokimec of Japan.
Failure of a single train wheel in service can have catastrophic consequences for train passengers and crew, cargo and the environment. Therefore, train wheels and axles must be inspected both on the production line and again periodically in-service. Phased array technology is penetrated into this market niche by companies such as Krautkremer and IZFP.
| e. | Intellectual Property Rights |
ScanMaster has registered 1 patent in Israel with respect to certain technology incorporated in the Ultrasound inspection methodology.
The automated optical inspection industry has traditionally been a labor-intensive industry. The principle stages of the textile manufacturing process include raw materials production, yarn spinning, fabric-forming, fabric spreading, fabric cutting and fabric finishing. End uses for textiles include fabric for apparel, home textiles, industrial fabric and technical fabric.
In recent years, web manufacturers have successfully incorporated automation technology into their manufacturing process. While automation has permeated virtually every component of the textile manufacturing process, inspection and quality monitoring remain principally labor-intensive operations and consequently can be impediments to greater efficiency and profitability. Web manufacturers inspect fabric in order to:
| — | determine the quality of the fabric, thereby enabling a determination of its end usage and price; |
| — | locate, label and trace major defects (a requirement in the industry) for rapid identification in later stages of the manufacturing process; |
| — | prevent the reoccurrence of defects caused by manufacturing equipment; and |
| — | reduce rebate payments for textiles delivered with defects. |
31
Fabric inspection can be performed at various stages of the production process and is often performed two to three times during a complete production cycle.
Manual inspection of fabrics is generally performed by running the fabric over a wide table under appropriate lighting. A human inspector is generally expected to detect a variety of defects, including holes of various sizes and shapes, tears, cuts, thick ends, missing threads, width distortion and variations in the fabric density and width, and mark them according to their type and location on the fabric roll. In the case of inspection of printed fabrics, the human inspector is expected to detect defects such as misfits, lint, stick-ins and off-center and narrow prints. Inspectors inspecting dyed fabrics are also expected to detect variations in the color and shades of the dyed fabric.
Human inspection of fabrics is unreliable for the following reasons:
| ��� | the inspection environment is influenced by factors such as the speed at which the fabric passes in front of the inspector, the lighting in the testing area and the distance and angle at which the inspector views the fabric. Differences in inspection environments can lead to varying assessments of fabric quality; |
| — | the accuracy of the inspection is affected by the attention span and fatigue of the human inspector, who is normally expected to view fabrics for a period of several hours; |
| — | perception problems caused by the fatigue of specific nerve cells in the case of patterned and printed material; |
| — | manual inspection is performed by numerous persons worldwide, each with a different perception of product quality; and |
| — | certain technical fabric is produced at a very high speed and therefore defects cannot be observed by the human eye. |
These factors have led to inconsistent assessments of fabric quality and have caused fabric inspection to be a time-consuming and costly process. These limitations also make it difficult to establish a reliable industry-wide standard for fabric quality. The limitations of manual inspection, along with the general trend in the web industry towards automation, in order to reduce costs and improve quality, have created an opportunity for an effective automatic visual inspection and quality monitoring systems for various niche markets in the web industry.
The EVS Solution for the AOI
We develop and have acquired sophisticated automatic visual inspection systems for manufacturers of industrial web products. Our systems are designed to overcome the limitations of human visual inspection. Our systems combine high-performance computer processing with unique image processing capabilities based on proprietary vision understanding and interpretation algorithms. The unique image processing capabilities include image acquisition, mathematical transformation, image analysis and learning and decision-making elements. The mathematical algorithms which enable these image interpretations and understanding capabilities are performed by high-speed dedicated parallel processing computers based on specialized architectures which are capable of performing tens, and in some of our products, hundreds of billions of operations per second. These algorithms enable our systems to recognize fabric flaws in real time and to learn the types and severity of the flaws a customer wishes to detect, ignoring flaws that do not fall into such categories. Our systems then analyze detected defects and provide information regarding their nature. Our systems are an integral part of the manufacturing process and can be integrated with the customer’s management information systems, providing valuable information for the production planning process. We believe that our systems enable customers to reduce direct labor, increase manufacturing efficiency and improve product quality.
32
Products
We currently offer five families of visual inspection systems: IQ-TEX, for the visual inspection and quality monitoring of woven fabric; IQ-TEX Lite, for the visual inspection and quality monitoring of knitted, non-woven, tire cord, film, metal, coated and technical fabrics; Broken Filaments Analyzer (BFA), for the detection of broken filament defects in glass fabric; SVA LITE, a Shade Variation Analyzer for the detection of shade inconsistencies in dyed fabric; and On Loom Inspection (OLI), for the automatic visual quality inspection system that is integrated with the weaving loom and monitors selected fabric types such as carbon, tire cord and other high cost technical fabric, while weaving.
IQ-TEX Family of Products
The IQ-TEX family of automatic web inspection systems is designed to provide textile manufacturers with a comprehensive solution to their quality monitoring, grading and cutting needs. IQ-TEX systems detect numerous types of defects on any unicolor web, including: yarn and weaving faults; holes; oil, water and dye stains; missing threads; starting marks; broken yarn; and dyeing, coating and finishing irregularities. They then provide the manufacturer with information regarding the location, size and shape of the defect. Depending on the model, IQ-TEX systems can detect defects as small as 0.5 mm on a variety of web widths ranging from 150 to 600 centimeters, at maximum speeds ranging from 10 to 800 meters per minute. In addition, IQ-TEX systems can be configured to mark defects during inspection and advise the user as to the most efficient manner to cut web to eliminate unacceptable defects.
The modular design of the IQ-TEX systems enables their use for a wide range of applications throughout the fabric-forming process, including greige, dyed fabrics and finished fabrics, and for inspection of a variety of fabrics including those used for apparel, home textile and technical and industrial textiles. The modular design also enables the configuration of the system to match the manufacturer’s demands with respect to matters such as web width, web speed, desired resolution, auxiliaries, information distribution channels within the plant and grading standards. IQ-TEX systems can be integrated in-line with existing textile production equipment or can be used as off-line stand-alone units to inspect web after manufacturing is complete.
Quality Monitoring Process
The IQ-TEX quality monitoring process is comprised of three primary phases: the pre-inspection phase, the inspection phase and the post-inspection phase.
Pre-Inspection Phase. The pre-inspection phase is the preliminary learning stage in which a sample of web of acceptable quality is scanned through the system. Based on the information obtained, the system creates a parameters file for the web style to be inspected that defines the statistical features of a “good” web based on the customer’s specifications. The system then uses these parameters to learn what to look for when inspecting the fabric. Once the system has learned the parameters of the sample, the system is ready to begin inspecting the fabric.
33
Inspection Phase. The system moves the inspected web through the image acquisition unit. The image acquisition unit acquires the image of the web being inspected and transforms video signals of the web into digital signals for processing and analysis. This unit then transfers the web image to the system’s computer. The computer processes the web image and distinguishes between inherent product irregularities and product defects. It then groups product defects according to their size, direction and shape, and grades them in terms of severity. The system displays a map of the defects in real-time, stores the defect image and records information with respect to each defect detected. The system may also be programmed to activate external units such as marking units and alarms upon detection of a defect.
Post-Inspection Phase. Following the inspection of the fabric, the system provides an inspection report, which may be printed or archived, containing a record of each defect that has been detected, statistics regarding the type and position of the defect, and the overall grading of the rolls according to pre-defined guidelines. In the in-line mode, the inspection report may be sent directly to the manufacturer’s host computer, thereby enabling an operator to take immediate actions to remedy the cause of the defects or to take actions to eliminate such defects in the future. The images can also be analyzed using the video album workstation described below, enabling customers to identify the cutting points for optimal web yield, and to re-grade the fabric.
Models
IQ-TEX systems are currently available in two basic models: IQ-TEX (available in the IQ-TEX 2000 and IQ-TEX Lite models) and I-TEX (available in I-TEX 2000D and I-TEX Lite models). Both models include improved capabilities for the detection of defects, as well as additional innovative technologies for system styles tuning and defects sorting. The 2 models cover a full range of applications.
| | — | The IQ-TEX is based on the integration of our Smart Video Camera technology into the I-TEX products, mainly for woven textile range applications, such as grey fabric, dyed &finished, denim, Glass fabric (for PCB) etc. The IQ-TEX is a more compact, powerful and flexible version of IQ-TEX, and can operate at a maximum speed of up to 600 meters per minute. It includes improved capabilities for the detection of defects in complex fabrics, such as denim, and high-speed configuration for an in-line inspection of non-woven fabric. The list price for the IQ-TEX ranges between $120,000 and $250,000 depending on the configuration. |
| | — | The IQ-TEX Lite is based on the same hardware as is used in the IQ-TEX system. The IQ-TEX Lite has a light mechanical frame (the system is equipped with a camera box), which is designed for easy and flexible installation on a wide range of web production lines such as non-woven, paper, tire cord, film, composite materials, laminated materials, metal, etc. The system allows us to offer solutions to new market segments using our vast experience from the textile industry. The list price for the IQ-TEX Lite ranges between $85,000 and $250,000 depending on the configuration and the web production type. |
34
Modules
We offer the following three modules for defect analysis and cut optimization for our IQ-TEX and IQ-TEX Lite systems: the Video Album workstation, the DMSS (Defect Monitoring Sub System) and the Cut Optimization software.
Video Album Workstation. This module is a stand-alone PC-based station for review and analysis of defect images and data using a Windows-based interface. The images and inspection results are automatically transferred from the system’s computer to the video album workstation via a local area network.
The Video Album workstation enables rapid review of web images and provides visual documentation of defects and over all roll quality. The video album workstation enables review of all recorded information, such as images and data, for each defect. This information enables:
| — | reviewing and editing of defect data; |
| — | generation of management reports; |
| — | archiving of defect data; and |
| — | definition of points of interest and mandatory cutting points for the cutting table and DMSS system. |
Cut Optimization. Software that enables the user to cut a large “IQ-TEX Inspected” roll of web into smaller rolls while optimizing the fabric’s yield per class (A, B, C, etc.) according to the user’s specifications. Our Cut Optimization software offers the following benefits:
| — | maximizes web roll selling price; |
| — | reduces the quantity of second and third quality product; and |
| — | consistent fulfillment of customer's demands. |
Smart Table. The Smart Table interfaces the IQ-TEX system with the cutting table and provides users with the following benefits:
| — | allows for an accurate stop or slowing the table speed at "points of interest" which were defined on the video album such as: selected defects, cutting points and mending points; |
| — | contains a trigger for invisible ink or metallic label defect marking signs; and |
| — | operates the roll cutting device following the cut optimization results. |
These modules can be purchased separately or together to form the IQ-TEX Inspected Process, which provides an integrated link between the web-forming and cutting segments of the textile industry.
Accessories
We offer an extensive line of accessories designed to provide, along with the IQ-TEX systems, a comprehensive solution for the web inspection and grading process. These accessories include invisible ink or sticker marking units, alarm sets, ultra violet ink for marking and external connecting devices for marking and measuring.
35
Broken Filaments Analyzer (BFA)
The Broken Filaments Analyzer, or the BFA, is a visual inspection system designed for the detection of broken filaments in glass fabrics used for the electronic printed circuit board, or PCB, industry. Broken glass filaments are small filaments that protrude from glass fabric, generally used for the PCB industry. Broken glass filaments are hardly visible to the human eye at low web speeds, and are practically invisible at normal production speeds. They can be as small as a few microns and as short as 0.5 millimeters. Broken glass filaments can cause defects in the lamination of glass fabrics and the production of printed circuit boards, and may short-circuit or disconnect the end product incorporating the PCB. For this reason, it is important to effectively detect broken glass filaments and grade glass web in terms of broken filament content. Human inspectors are unable to effectively detect broken glass filaments.
The BFA utilizes proprietary processing and software technology, cameras and lighting systems to inspect glass web in real-time at speeds exceeding 120 meters per minute. The broken filaments detected by the BFA are displayed on a monitor that shows the running map of the fabric in real time, and are recorded for further analysis. The BFA produces a detailed report of each web roll, showing the broken filaments distribution in the roll, its statistics and the fabric’s grading. The BFA is integrated with the IQ-TEX 100 system, which can be used for the detection of other defects in glass fabrics, and with the Video Album to provide a more comprehensive solution to the visual inspection and quality monitoring of glass fabrics. The BFA can also be used for the detection of surface defects in other fabrics or webs including airbags and technical fabrics. The list price for the BFA system ranges between $100,000 and $150,000, depending on the configuration.
Shade Variation Analyzer
The Shade Variation Analyzer (or the SVA LITE) is an in-line system designed to measure shade variation in textiles during normal web flow. The SVA LITE is a modular system utilizing calibrated traversing sensors and proprietary signal-processing algorithms. Sensor readings are compared to readings received at the beginning of the roll, or at any other user selected point, to detect side-to-side and beginning-to-end shade variations. The system is designed to be either fully integrated with IQ-TEX systems or to operate as an independent stand-alone unit.The SVA LITE can be used in two modes of operation.In the first mode, the SVA LITE is installed after the dryer of the dyeing range and alerts the user when shade variation exceeds the preset limits. This enables the operator to modify the process parameters. In the second mode, the SVA LITE is installed at the exit of a finishing range together with an IQ-TEX system or as a stand-alone unit. The results of the inspection can be used to sort the rolls by their shade or to identify problems during the dyeing-finishing process. Data from the SVA LITE inspection process can be incorporated into the IQ-TEX system reports or into a separate SVA LITE report. The list price of the SVA LITE is between $70,000 and $150,000.
36
| b. | Sales and Markets for the AOI |
Sales Network
We market our products through in-house sales personnel in conjunction with independent sales representatives. Our independent sales representatives provide essential pre-and-post sales support for our products in their territories and account for a substantial percentage of our sales worldwide. We believe that our sales representatives network will enable us to introduce new products and to penetrate additional web manufacturers around the world. We intend to further expand our international sales representatives network by entering into relationships with additional sales representatives and forming joint ventures in target markets.
We utilize the services of independent sales representatives in Europe, Latin America, and the Far East. Our independent sales representatives do not have the authority to enter into contracts on our behalf or otherwise bind us. To promote our products, we devote significant resources towards participation in the key annual textile equipment trade shows. We also advertise in trade magazines and conduct customer seminars.
We maintain sales and support centers located in the United States, Europe, Asia, and Israel. When a high level of technical expertise is needed, the sales effort is supported by product marketing managers and our engineers who work closely with customers and potential customers to find solutions to their current and future web inspection challenges. We work closely with customers in a continuous improvement process on selected technical aspects of our products. Such improvements often become standard on products sold worldwide. A specified number of training classes are included in the purchase price of our products. Subsequent training is provided for a nominal fee.
“IQ-TEX Inspected” Standard
A significant portion of our marketing effort is focused on making web inspection by IQ-TEX systems, and the corresponding labeling of the inspected web as “IQ-TEX Inspected,” an industry standard for web quality inspection. We believe that the best way to increase demand for our IQ-TEX systems is to convince end-product manufacturers of the benefits of IQ-TEX inspection, in terms of the quality, uniformity and reliability of the inspection. If we are successful in doing so, fashion designers will increasingly demand that the fabrics they purchase from web manufacturers be inspected by IQ-TEX systems. As more and more designers make these demands, web manufacturers will be required to purchase our systems. Our efforts include performing tests of the capabilities of IQ-TEX with leading clothing manufacturers. Although inspection by IQ-TEX systems has not yet become an industry standard, many designers express preference for “IQ-TEX Inspected” fabrics. There can be no assurance that we will be successful in our efforts to make inspection by IQ-TEX an industry standard.
Relationships with Leading Equipment Manufacturers
Another important element of our marketing strategy is to establish and strengthen relationships with leading textile equipment manufacturers. These relationships bolster our marketing abilities and assist us in ensuring that our products are technically advanced and designed in conjunction with the development of the textile manufacturers’ web inspection requirements and industry trends.
37
Sales by Principal Markets and Activities
In 2004, approximately 27.8% of our consolidated sales were in the United States, approximately 46.9% were in Europe, and approximately 25.3% were in the Far East.In 2005,approximately 31.48% of our sales were in the United States, approximately 21.2% were in Europe, and approximately 46.1% were in the Far East.In 2006,approximately 22.8% of our sales were in the United States, approximately 40.1% were in Europe, and approximately 37.1% were in the Far East.In 2007,approximately 29% of our sales were in the United States, approximately 35% were in Europe, and approximately 36% were in the Far East. One customer accounted for 18%, 12% and 15%in each of the years, 2004, and 2005 and 2007 respectively. No other customers accounted for more than 10% of our net sales in any of the years 2004, 2005, 2006 or 2007. Historically, our highest level of net sales has been in the fourth quarter of each year. Nevertheless, we have experienced and may in the future experience significant fluctuations in revenues and operating results from quarter to quarter as a result of a number of factors, many of which are outside our control. For more information, seeItem 3, “Key Information – Risk Factors – Risk Factors Related to Our Business – Fluctuations in the Market”.
| c. | Manufacturing for the Web Industry |
The principal manufacturing and assembly of our basic systems are conducted by subcontractors. We perform logistics and purchasing activities, integration and final testing in-house. In addition, we perform the software installation and configuration, final hardware configuration, quality control and any special system customization needed for a particular customer. Production is based upon firm customer commitments and anticipated orders and is generally planned three to six months in advance. We contract with third party subcontractors to perform the manufacturing of our systems so that we can focus on design and product development strengths and minimize fixed costs and capital expenditures. Our engineers work closely with subcontractors to increase manufacturing yields, lower manufacturing costs and assure quality. Some of the electronic components included in our product are manufactured especially for us by exclusive suppliers. If any of these exclusive suppliers stop manufacturing these components we will need to find alternative suppliers. Our reliance on sole suppliers involves several risks, including a potential inability to obtain adequate supplies of these components and reduced control over pricing and timely delivery of these components. We believe that we maintain a sufficient inventory of these components to meet our foreseeable needs. However, if our single source supplier ceases to produce these components, we would have to transfer the manufacture of the components to another supplier or suppliers. We estimate that such a transfer would take approximately up to six months and could delay the production and supply of our products, which could harm our results of operations.
| d. | Competition in the Web Industry |
We believe that the capabilities of our technology, along with our experience in implementing these technologies and our wide customer base, provide us with a competitive advantage over potential competitors are small suppliers of automatic inspection solutions with PC-based technologies. These suppliers, who offer low-cost solutions for low-end applications such as Non-Woven, are attempting to penetrate the field of textile inspection, yet, thus far, have not been commercially successful.
38
We are targeting the technical fabric industry as a high potential market for our automatic inspection systems. The main competitor on this industry is Cognex Corporation – based in the United States. Cognex Corporation is specialized on supplying machine vision components for the industry. We believe that our capabilities for supplying “tailor made” solutions for our customers together with the high growth rate of the technical fabric industry, will allow us to produce revenues from it.
The presence of competitors in the textile automatic inspection field may increase awareness of the benefits of automatic fabric inspection, and may help us enlarge our market. However, it is possible that systems developed by these or other future competitors will prove more effective than our IQ-TEX systems or that potential customers will prefer them for other reasons. If we are unable to maintain our technological advantage or are unable to convince potential customers of the superiority of our IQ-TEX systems, our business would be seriously harmed.
Several manufactures of equipment for the fabric manufacturing industry offer products that compete with our Shade Variation Analyzer. Our main competitor is Mahlo GmbH & Co. KG.
The competition for the development and sale of advanced automated vision systems in other industries and for other applications is intense. To the extent providers of automated vision systems choose to focus on or develop advanced automated vision technology for the fabric industry or other industries for which we attempt to develop products, we could face significant competition in the future. Potential competitors may be more established, benefit from greater market recognition and have greater financial, production and marketing resources than we do.
| e. | Intellectual Property Rights for Textile Industry |
In May 2002, we entered into an agreement with our former principal shareholder Elbit and Dr. Ilan Tamches, which amended the license agreement existing between Elbit and us, dated June 12, 1996. According to this agreement, Elbit transferred to Dr. Ilan Tamches certain elements of our technology, or Elbit Technology, which we formerly licensed from Elbit, and other elements of our technology were directly transferred to us by Elbit, or Elbit Modified Technology. Consequently, we licensed the Elbit Technology from Dr. Tamches, its original developer. Pursuant to this agreement, we have certain non-exclusive rights to this technology with respect to the development, production, distribution, modification, use and repair of any of the I-TEX systems, for as long as we continue to produce, distribute, modify, use and repair any I-TEX systems. In consideration for the royalties that we have agreed to pay Dr. Tamches, he has agreed not to license Elbit Technology to any third party that competes with I-TEX systems. Since the third quarter of 2006 we have not used this technology.
Neither we, nor, to our knowledge, Dr. Tamches, have any patents or patent applications pending with respect to this technology. We do have a patent in France and patent applications pending in Israel with respect to certain technology incorporated in the video cameras used by our systems. We rely primarily upon a combination of trademark, copyright, know-how, trade secrets and contractual restrictions to protect our intellectual property rights.
Our employees who have access to confidential information are required to sign confidentiality and invention assignment agreements. We believe that such measures provide only limited protection of our proprietary information, and there is no assurance that our proprietary technology will remain a secret or that others will not develop similar technology and use this technology to compete with us. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.
39
We have registered trademarks with respect to the name “I-TEX” in the United States, Mexico, Spain, Italy, Turkey, Portugal, Brazil, France, China and Japan, and have filed applications for registered trademarks for the name “I-TEX” in India We have registered trademarks of the name and design “I-TEX Inspected” in Taiwan, South Africa, United States, Mexico, Brazil, Germany, France, Turkey, Italy, China and the European Union. We also have registered trademarks with respect to the name “PRIN-TEX” in Spain, Italy, France, Turkey and Japan. In addition, we have a registered trademark with respect to the name “KNI-TEX” in Italy. We also have a registered trademark with respect to the name “EVS” in the European Union, Japan and the United States. Our trademark rights include rights associated with the use of our trademarks.
Significant and protracted litigation may be necessary to protect our intellectual property rights, to determine the scope of the proprietary rights of others or to defend against claims of infringement.Item 8, “Financial Information – Litigation” below contains a description of a past patent infringement claim.
| IV. | Governmental Regulation Affecting the Company |
As a company which focuses on research and development and which receives grants in order to do so from the Government of Israel, we are affected by the terms of the grants we have received from the Office of the Chief Scientist, or OCS, of the Ministry of Industry, Trade and Labor of the Government of Israel. Under the terms of these grants, we are responsible to pay royalties based on the net sales of our products. In addition, manufacturing of products developed with these grants must be performed in Israel, or we may be subject to the payment of additional royalties. Approval must be obtained to transfer technologies developed through projects in which the government participates. SeeItem 5, “Operating and Financial Review and Prospects – Research and Development, Patents and Licenses, etc.”
In addition, we receive certain tax benefits and reduced tax rates from the government of Israel. SeeItem 10, “Additional Information – Taxation – Effective Corporate Tax Rate”. The entitlement to these benefits is conditional upon our fulfillment of the conditions stipulated by the law, regulations promulgated thereunder and the instruments of approval for the specific investments. In the event of a failure to comply with these conditions, the benefits could be canceled and we would be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences and interest.
C. Organizational Structure
We own all of the issued and outstanding shares of our five subsidiaries Elbit Vision Systems US, Inc., or EVS US, Elbit Vision Systems B.V., or EVS BV, ScanMaster system (IRT) Ltd., IRT ScanMaster systems Inc., and Panoptes. EVS US and IRT ScanMaster systems Inc. are incorporated in the United States under the Business Corporations Act of the State of Delaware. EVS US and IRT ScanMaster systems Inc. predominantly functions as a sales and support center for our products.
40
EVS BV is incorporated in Holland. EVS BV predominantly functions as a sales and support center for our products.
For more information on the ScanMaster and Panoptes transactions, seeItem 4, “Information on the Company – History and Development of the Company”andItem 10, “Additional Information – Material Contracts”.
D. Property, Plants and Equipment
Our facilities, together with ScanMaster Ltd.‘s facilities, are located at 1 Haofe Street, Hasharon Industrial Park, Qadima, P.O.B. 5030, Israel. We do not own any real property. Together we lease approximately 9,449 square feet at our facilities in Israel, at an annual rent of approximately $300,000. Our lease expires in November 2009. EVS US leases approximately 5,400 square feet office space in Greenville, South Carolina, at an annual rent of approximately $31,000. This lease expires in October 2008.
We believe that our current facilities are adequate for our operations as currently conducted. In the event that additional facilities are required, we believe that we could obtain such additional facilities at commercially reasonable prices.
| ITEM 4A. | | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 5. | | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
Selected Financial Data (Incorporated by reference in Item 3A)
The selected financial data as of and for the years ended December 31, 2004 and December 31, 2003, before the effects of adjustments to retrospectively reflect the discontinued operation (described in financial statements for year ended December 31, 2007 (see note 3a)), is derived from our audited financial statements, which have been audited by Kesselman & Kesselman, a member firm of PricewaterhouseCooper, independent public accountants, and which are included elsewhere in this report. The selected financial data for the years ended December 31, 2007, December 31, 2006 and December 31, 2005 are derived from the financial statements that have been audited by Brightman Almagor & Co., a member of Deloitte Touche Tohmatsu, independent auditors. Our financial statements have been prepared in accordance with U.S. GAAP. The financial data set forth below should be read in conjunction with the financial statements, related notes and other financial information contained in this annual report. For discussion of our significant accounting principles, see Note 2 of our Consolidated Financial Statements incorporated herein by reference.
41
| 2007*
| 2006*
| 2005*
| 2004*
| 2003
|
|---|
| (in U.S. thousand Dollars ) | | | | | |
|---|
| | | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Statement of Operations Data: | | | | | | | | | | | | | | | | | |
| Net sales | | | | 21,863 | | | 16,977 | | | 19,579 | | | 10,399 | | | 6,328 | |
| Cost of sales | | | | 11,308 | | | 12,236 | | | 11,633 | | | 8,040 | | | 3,748 | |
| Gross profit (loss) | | | | 10,555 | | | 4,761 | | | 7,946 | | | 2,359 | | | 2,580 | |
| Research and development expenses, net | | | | 3,313 | | | 2,562 | | | 2,039 | | | 2,456 | | | 1,431 | |
| Marketing and selling expenses, net | | | | 4,885 | | | 4,149 | | | 3,583 | | | 3,491 | | | 1,598 | |
| General and administrative expenses | | | | 1,338 | | | 1,870 | | | 1,127 | | | 1,817 | | | 637 | |
| Reorganization expenses | | | | - | | | 200 | | | - | | | - | | | - | |
| Total operating expenses | | | | 9,536 | | | 8,781 | | | 6,749 | | | 7,764 | | | 3,666 | |
| Operating profit (loss) | | | | 1,019 | | | (4,020 | ) | | 1,197 | | | (5,405 | ) | | (1,086 | ) |
| Other income | | | | (1,277 | ) | | (5 | ) | | 7 | | | 115 | | | 47 | |
| Financing income (expenses), net | | | | (1,081 | ) | | (1,332 | ) | | (437 | ) | | (365 | ) | | 60 | |
| Profit (loss) before taxes | | | | (1,339 | ) | | (5,357 | ) | | 767 | | | (5,655 | ) | | (979 | ) |
| Taxes on income | | | | 3 | | | 5 | | | 4 | | | 6 | | | 3 | |
| Income (loss) from continuing operations | | | | (1,342 | ) | | (5,362 | ) | | 763 | | | (5,661 | ) | | - | |
| Loss from operations of discontinued component | | | | - | | | (180 | ) | | (152 | ) | | (244 | ) | | - | |
| Net loss of disposal of discontinued operation | | | | - | | | (551 | ) | | - | | | - | | | - | |
| Net loss | | | | (1,342 | ) | | (6,093 | ) | | 611 | | | (5,905 | ) | | (982 | ) |
| Basic earnings (loss) per share from continuing | | |
| operations(1) | | | | (0.034 | ) | | (0.186 | ) | | 0.029 | | | (0.307 | ) | | - | |
| Diluted earnings (loss) per share from | | |
| continuing operations(1) | | | | (0.034 | ) | | (0.186 | ) | | 0.026 | | | (0.307 | ) | | - | |
| Basic earnings (loss) per share from | | |
| discontinued operations(1) | | | | - | | | (0.026 | ) | | (0.006 | ) | | (0.013 | ) | | - | |
| Diluted earnings (loss) per share from | | |
| discontinued operations(1) | | | | - | | | (0.026 | ) | | (0.005 | ) | | (0.013 | ) | | - | |
| Basic earnings (loss) per share(1) | | | | (0.034 | ) | | (0.212 | ) | | 0.023 | | | (0.32 | ) | | (0.10 | ) |
| Diluted earnings (loss) per share(1) | | | | (0.034 | ) | | (0.212 | ) | | 0.021 | | | (0.32 | ) | | (0.10 | ) |
| Weighted average number of shares | | |
| outstanding-Basic (1) | | | | 39,393 | | | 28,778 | | | 26,500 | | | 18,724 | | | 10,175 | |
| Weighted average number of shares | | |
| outstanding-Diluted (1) | | | | 39,393 | | | 28,778 | | | 28,421 | | | 18,724 | | | 10,175 | |
| 2007
| 2006
| 2005
| 2004
| 2003
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Balance Sheet Data: | | | | | | | | | | | | | | | | | |
| Working capital | | | | 1,296 | | | (6,073 | ) | | 21 | | | (2,650 | ) | | 2,507 | |
| Total assets | | | | 23,506 | | | 19,390 | | | 22,064 | | | 19,453 | | | 8,241 | |
| xxx | | |
| Total liabilities | | | | 15,906 | | | 18,389 | | | 17,965 | | | 17,307 | | | 5,865 | |
| Accumulated deficit | | | | | | | (29,936 | ) | | (23,843 | ) | | (24,454 | ) | | (18,549 | ) |
| Shareholders' equity | | | | | | | 1,001 | | | 4,099 | | | 2,146 | | | 2,376 | |
(1) Computed on the basis set forth in Note 2. R. to our Consolidated Financial Statements.
* The financial data contained in this table has been adjusted to take into account the discontinued operations of our former subsidiary Yuravision. For further information see Note 3(a) to our financial statements for the year ending December 31, 2007, contained elsewhere in this report.
42
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors.
Most of our revenues are generated in U.S. dollars, and a significant portion of our expenses are incurred in U.S. Dollars, or are linked to the U.S. Dollar. Consequently, we use the U.S. Dollar as our functional currency. Transactions and balances originally denominated in U.S. Dollars are presented in the financial statements in their original amounts, and non-Dollar transactions and balances have been translated into U.S. Dollars using the exchange rates in effect on the date of a transaction or balance. Our consolidated financial statements have been prepared in accordance with U.S. GAAP.
The financial statements of our subsidiaries the functional currency of which is the U.S. Dollar, but which are presented in a currency other than U.S. Dollars, have been translated into U.S. Dollars. Monetary balance sheet items have been translated using the exchange rates in effect on the balance sheet date and all non-monetary balance sheet items have been translated using the historical exchange rates in effect on the date of the transaction. Statement of income items have been translated using the average exchange rate for the period presented.
The amounts (in terms of Korean Won) included in the financial statements of Yuravision, drawn up in Korean Won, are dealt with, for the purpose of consolidation as follows:
The operating results and cash flows of Yuravision are translated into U.S. dollars at the exchange rates existing on the dates of the transactions (or at the average exchange rates for the period, where these approximate the actual exchange rates). Balance sheet items, including the balances of fair value adjustments made, and goodwill recognized, on the acquisition of Yuravision, are translated at the exchange rate at the end of the year. Exchange differences arising from the translation of the net investment in Yuravision are carried as a separate item within shareholders’ equity (“differences from translation of foreign currency financial statements of a subsidiary”). Upon disposal of the investment in the Yuravision, these exchange differences will be carried to the income statement, as part of the gain or loss recognized on the disposal.
Critical Accounting Policies
The preparation of our financial statements in conformity with the U.S. generally accepted accounting principles requires us 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 amount of revenues and expenses during the reporting period. These are our management’s best estimates based on experience and historical data. Actual results could differ from those estimates.
Specific accounting policies we utilize require higher degrees of judgment than others in their application. These include revenue recognition on long-term contract work. Our policy and related procedures for revenue recognition on long-term contract work are summarized below.
a.Revenue recognition
Revenues from sales of products and supplies are recognized when an arrangement exists, delivery has occurred and title has passed to the customer. The price charged by us or our subsidiaries to the customer is fixed or determinable and collectibility is reasonably assured.
43
With respect to systems sold with installation requirements, the installation is not considered to be a separate earnings process; thus, revenue is recognized when all of the above criteria are met and installation is completed.
b.Acceptance clause, customers’ support service and warranty
We and our subsidiaries distinguish between revenue recognition in respect of revenue derived from automatic vision inspection products (sold by us) and ultrasonic inspection products (sold by ScanMaster).
The terms of the agreements between us and our customers are substantially different from the terms of the agreements between ScanMaster and its customers. Therefore, the revenue recognition accounting policy applied by each of the companies is different in this case. Set forth bellow are the main accounting policies applied by each of our companies:
The Company
In a case that our agreement with a customer includes an “acceptance” clause, revenue recognition will take place after we receive the “acceptance certificate” from the customer. In some cases, we grant our customers a trial period, usually several months, in order to evaluate the prototype system’s performance. In a case where the systems performance meets the customer’s requirements, it purchases the system at the end of the trial period. We do not recognize sales revenue from products shipped to customers for trial until such products are actually purchased. Until purchased, these products are recorded as consignment inventory at the lower of cost or market.
In some cases, we grant our customers support services, including warranty in respect of products sold; these services are usually provided for a period of six to twelve months. In those cases, upon revenue recognition, we defer a portion of the sale price and recognize it as service revenue ratably over the abovementioned period.
ScanMaster
ScanMaster’s agreements with its customers usually include acceptance testing procedures clause (“ATP”). Each product of ScanMaster has standard performance specifications that are examined in the ATP; usually, the performance specifications are not customized for the specific needs of the customer. Also, unlike in our case, ScanMaster does not grant its customers a trial period in the normal course of business.
ScanMaster distinguishes between sales of new products, in respect of which ScanMaster has no past installation experience and sales of products, in installation of which the company is well experienced. In respect of sales of new products ScanMaster recognizes revenues only after the company receives the ATP from the customer. In respect of sales of other products, in the installation of which the company is well experienced, the ATP is only a formal procedure, and therefore, the installation of products is a sufficient requirement to recognize revenues.
44
The agreements with the clients do not include the right of the clients to a refund in the event that the ATP is not to their satisfaction. However, the collection of the final payment from the customer (usually 10% out of the total consideration) is scheduled to coincide with receiving the signed ATP.
ScanMaster recognizes revenues from contracts to sell systems that require significant customization, integration and installation or contracts that include services considered essential to the functionality of the system, based on the American Institute for of Certified Public Accountant’s Statement of Position 81-1 “Accounting for Performance of Construction – Type and Certain Production – Type Contracts”, or SOP 81-1. Under the SOP revenues are calculated, as the project progresses, according to the percentage of the contract for the purchase of such system that has been completed, taking into account the proportion of the actual labor costs incurred to the total labor costs estimated to be incurred over the duration of the contract. Provisions for estimated losses on uncompleted contracts are made when such losses are first determined, in the amount of the estimated loss of the entire contract.
When the services are not considered essential, revenue are allocated using provisions prescribed in EITF 00-21Revenue Arrangements with Multiple Deliverables to each deliverable. Revenues allocated to professional services are recognized as the services are performed.
ScanMaster provides for warranty costs at the same time as the revenue is recognized. The annual provision is calculated at rates of 1%-3% of the sales, based on past experience.
c.Right of return
Neither we, nor our subsidiaries, provide, in the normal course of business, a right of return to our customers. If uncertainties exist, such as the granting of a right of cancellation to the customer, revenue is recognized when the uncertainties are resolved.
Services Rendered
Service revenue in respect of our products is recognized ratably over the contractual period, or as services are performed.
45
A. Operating Results
I. Financial Data
The following table sets forth, for the periods indicated, our selected financial data as a percentage of net sales:
| 2007*
| 2006*
| 2005*
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Net sales | | | | 100.0 | | | 100.0 | | | 100.0 | |
| Cost of sales | | | | 51.7 | | | 72 | | | 59.4 | |
| Gross profit | | | | 48.3 | | | 28 | | | 40.6 | |
| | | |
| Research and development expenses, net | | | | 15.2 | | | 15.1 | | | 10.4 | |
| Marketing and selling expenses, net | | | | 22.3 | | | 24.4 | | | 18.3 | |
| General and administrative expenses | | | | 6.1 | | | 11 | | | 5.8 | |
| Reorganization expenses | | | | - | | | 1.1 | | | - | |
| Total operating expenses | | | | 43.6 | | | 51.7 | | | 34.5 | |
| Operating income (loss) | | | | 4.7 | | | (23.7 | ) | | 6.1 | |
| Other expenses | | | | (5.8 | ) | | (0.03 | ) | | 0.04 | |
| Financing expenses, net | | | | (4.9 | ) | | (7.8 | ) | | (2.2 | ) |
| Income (loss) before taxes | | | | (6.1 | ) | | (31.5 | ) | | 3.9 | |
| Income taxes | | | | 0.01 | | | 0.03 | | | 0.02 | |
| Discontinued operation | | | | - | | | (4.3 | ) | | (0.8 | ) |
| Net Income (loss) | | | | (6.1 | ) | | (35.8 | ) | | 3.1 | |
* The financial data contained in this table has been adjusted to take into account the discontinued operations of our former subsidiary Yuravision. For further information see Note 3a to our financial statements for the year ending December 31, 2007, contained elsewhere in this report.
Year Ended December 31, 2007 Compared with Year Ended December 31, 2006
Sales
Sales in 2007 increased by approximately 28.6% to $21.9 million compared with sales of $17 million in 2006. This increase was primarily attributable to the growth in the aerospace industry and the changes we made in our sales and marketing department during our recent internal reorganization.
Cost of Revenues
Cost of revenues consists of component costs, hardware costs, technical support costs, royalty payments, compensation costs and overheads related to the production and assembly of our products. Cost of sales as a percentage of net sales was 51.7% in 2007 compared with 72% in 2006. The decrease in cost of revenues in 2007 was mainly due to cost reduction and efficiency measures taken as a result of the consolidation of our two production sites in Israel and the increase in our sales compared to 2006.
Gross Profit
In 2007 our gross profit was $10.5 million as compared to $4.7 million in 2006. Gross profit as a percentage of net sales was 48.3% in 2007 as compared to 28% in 2006. The increase in our gross profit in 2007 was mainly due to a onetime loss we incurred during 2006 related to the Indian Project; for more information seeItem 4“Information on the Company – Recent Developments – Legal Claim in India” We also increased our gross profit by combining our two production sites in Israel.
Research and Development Costs
Our research and development expenses consist of our total costs less grants from the Government of Israel. Gross research and development expenditures consist primarily of salaries and related costs of employees engaged in ongoing research and development, and, to a lesser extent, costs of materials, depreciation and other expenditures. Gross research and development expenditures increased to $3.454 million in 2007 from $2.707 million in 2006, and were offset by Israeli government grants of $0.141 million in 2007 and $0.145 million in 2006. Net research and development expenses in 2007 were $3.31 million compared with $2.56 million in 2006. The increase in the gross research and development expenses was mainly due to our efforts to penetrate new markets by adjusting our technology to market demand. For more information, seeItem 3, “Key Information – Risk Factors – General Risks”.
46
Sales and Marketing Expenses
Marketing and sales expenditures consist primarily of costs relating to promotion, advertising and trade shows, payroll and related expenses, sales commissions, travel expenses. Marketing and sales expenses amounted to $4.89 million in 2007, compared to $4.15 million in 2006. The increase in the marketing and sales expenses was primarily due to an increase in sales commissions following the growth in our sales as compared to 2006.
General and administrative Expenses
General and administrative expenses consist of payroll and related expenses, doubtful and bad accounts, professional fees paid to auditors, legal advisors and other consultants and other related expenses. As a percentage of net sales, general and administrative expenses decreased to 6.1% in 2007 from 11% in 2006. General and administrative expenses in 2007 were $1.34 million, compared to $1.87 million in 2006. The decrease in expenses in 2007 was primarily attributable to combining our two sites in Israel.
Financial Expenses
Financial expenses consist primarily of interest on our loans from banks and from two of our major shareholders Elbit and Mivtach Samir. Additionally, expenses consist of currency translation adjustments between the U.S. Dollar and NIS exchange rate imposed on our assets and liabilities. Financial expenses in 2007 were $1.08 million, compared to $1.33 million in 2006. During 2006 and 2007, we financed our operations using a credit line facility provided to us by our bank. The decrease in financial expenses was primarily due to the improvement in our business results, funds raised during 2007 in private placements and capitalization of certain our loans from shareholders.
Profit/Loss
In 2007 we recorded net loss of $1.3 million, as compared to a $6.1 in 2006. This was primarily due to a one time loss during 2006 with regard to the Indian railway project and the increase in our sales in 2007 compared to 2006. We also completed our reorganization plan during 2007 which improved our profitability.
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
Sales
Sales in 2006 decreased by approximately 13% to $17 million compared with sales of $19.58 million in 2005. This decrease was primarily attributable to loss of the Indian Project in 2006.
Cost of Revenues
Cost of revenues consists of component costs, hardware costs, technical support costs, royalty payments, compensation costs and overheads related to the production and assembly of our products. Cost of sales as a percentage of net sales was 72% in 2006 compared with 59.4% in 2005. The increase in cost of revenues in 2006 is mainly due to the loss of the Indian Project which caused a one time write off of inventories and other expenses due to the project, we also recorded an inventory write off in an amount of $400,000 related to parts we used with respect to the old technology.
47
Gross Profit
In 2006 our gross profit was $4.7 million as compared to $7.9 million in 2005. Gross profit as a percentage of net sales was 28% in 2006 as compared to 41.2% in 2005. The decrease in our gross profit in 2006 was mainly due to the loss of the Indian Project and the one time inventory write off.
Research and Development Costs
Our research and development expenses consist of our total costs less grants from the Government of Israel. Gross research and development expenditures consist primarily of salaries and related costs of employees engaged in ongoing research and development, and, to a lesser extent, costs of materials, depreciation and other expenditures. Gross research and development expenditures increased to $2.707 million in 2006 from $2.193 million in 2005, and were offset by Israeli government grants of $0.145 million in 2006 and $0.154 million in 2005. Net research and development expenses in 2006 were $2.56 million compared with $2.04 million in 2005. The increase in the gross research and development expenses was mainly due to the efforts in integrating the new Panoptes Technology in our vision products. For more information, seeItem 10, “Additional Information – Material Contracts”.
Sales and Marketing Expenses
Marketing and sales expenditures consist primarily of costs relating to promotion, advertising and trade shows, payroll and related expenses, sales commissions, travel expenses. Marketing and sales expenses amounted to $4.15 million in 2006, compared to $3.58 million in 2005. The increase in the marketing and sales expenses was primarily due to efforts we made in increasing our market share and penetration of new markets with our new Panoptes Technology.
General and administrative Expenses
General and administrative expenses consist of payroll and related expenses, doubtful and bad accounts, professional fees paid to auditors, legal advisors and other consultants and other related expenses. As a percentage of net sales, general and administrative expenses increased to 11% in 2006 from 5.7% in 2005. General and administrative expenses in 2006 were $1.87 million, compared to $1.13 million in 2005. The increase in expenses in 2006 was primarily attributable to the recruiting of new management.
Financial Expenses
Financial expenses consist primarily of interest on our loans from banks and from two of our major shareholders Elbit and Mivtach Samir. Additionally, expenses consist of currency translation adjustments between the U.S. Dollar and NIS exchange rate imposed on our assets and liabilities. Financial expenses in 2006 were $1.33 million, compared to financial expenses of $0.43 million in 2005. During 2005 and 2006, we financed our operations using a credit line facility provided to us by our bank. The increase in financial expenses was primarily due to loan we received Mivtach Shamir, and the increase of our bank loans in order to finance the constant growth of our backlog.
48
Profit/Loss
In 2006 we recorded net loss of $6.1million, as compared to a $0.61 million net profit in 2005. This was primarily due to the decrease in our revenues, loss of the Indian Project and the loss from selling Yuravision.
II. Impact of Inflation and Devaluation on Results of Operations, Liabilities and Assets
For many years prior to 1986, the Israeli economy was characterized by high rates of inflation and devaluation of the Israeli currency against the U.S. Dollar and other currencies. However, since the institution by the Israeli government of an economic recovery program in 1985, inflation, while continuing, has been significantly reduced and until recently the rate of devaluation has substantially diminished. Since the majority of our revenues are denominated and paid in U.S. Dollars, we believe that inflation and fluctuations in the U.S. Dollar exchange rate have no material effect on our revenue. Inflation and U.S. Dollar exchange rate fluctuations, however, have some effect on our expenses and, as a result, on our net income/loss. The cost of our Israel operations, as expressed in U.S. Dollars, is influenced by the extent to which any increase in the rate of inflation in Israel is not offset (or is offset on a lagging basis) by a devaluation of the NIS in relation to the U.S. Dollar. For more information, see the discussion regarding inflation inItem 3, “Key Information – Risk Factors – General Risks” and Item 11, “Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Exchange and Interest Rate Risk”.
The exchange rate between NIS and the U.S. Dollar has fluctuated during the past twelve months from a high of NIS 4.342 to the Dollar to a low of NIS 3.83 to the Dollar. The high and low exchange rates between the NIS and U.S. Dollar during the six most recent months, as published by the Bank of Israel, were as follows:
MONTH
| HIGH
1 U.S. dollar =
| LOW
1 U.S. dollar =
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| September 2007 | | | | 4.137 | | | 4.013 | |
| October 2007 | | | | 4.047 | | | 3.966 | |
| November 2007 | | | | 3.969 | | | 3.83 | |
| December 2007 | | | | 4.008 | | | 3.841 | |
| January 2008 | | | | 3.861 | | | 6.625 | |
| February 2008 | | | | 3.655 | | | 3.578 | |
The average exchange rate, using the average of the exchange rates on the last day of each month during the period, for each of the five most recent fiscal years, was as follows:
Period
| Exchange Rate
|
|---|
| | |
|---|
| |
|---|
| |
|---|
| |
|---|
| January 1, 2003 - December 31, 2003 | 4.5124 NIS/$1 |
| January 1, 2004 - December 31, 2004 | 4.4833 NIS/$1 |
| January 1, 2005 - December 31, 2005 | 4.5026 NIS/$1 |
| January 1, 2006 - December 31, 2006 | 4.442 NIS/$1 |
| January 1, 2007 - December 31, 2007 | 4.085 NIS/$1 |
49
During 2003, the rate on inflation was approximately -1.9% and the Dollar devalued against the NIS by 7.55%. In 2004, the rate of inflation of approximately 1.21% and the Dollar devalued against the NIS by approximately 1.61%. In 2005, the rate of inflation was approximately 2.39% and the rate of revaluation was 5.67%. In 2006, the Israeli economy recorded negative inflation of approximately 0.1% where the NIS revalued against the U.S. dollar by approximately 8.21%. In 2007, the rate of inflation of approximately 3.4% and the Dollar devalued against the NIS by approximately 8.97%. As a result of the differential between the rate of inflation and the rate of evaluation of the NIS, we experienced increases in the costs of our Israel operations, as expressed in U.S. Dollars, in 2007, but they did not materially affect our results of operations in such periods.
From time to time, we engage in hedging or other transactions intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations. Although, we do not undertake such transactions on a regular basis, our management may determine that it is necessary to further minimize such risks.
Governmental Policies Affecting Company Operations
The discussion regarding governmental regulation is hereby incorporated by reference toItem 4, “Information on the Company – Business Overview – Governmental Regulation Affecting the Company”and the discussion regarding political policies is hereby incorporated by reference toItem 3, “Key Information – Risk Factors – General Risks – Conditions in Israel”.
B. Liquidity and Capital Resources
Prior to our initial public offering, our principal source of financing for our operations and working capital requirements were loans from Elbit and grants from the Government of Israel. In July 1996, we raised approximately $15.7 million, net of expenses, through the initial public offering of our securities. Since our initial public offering, we have financed our operations primarily through (i) cash reserves, (ii) cash generated from operations, (iii) grants from the Government of Israel (iv) the use of a bank credit line (v) receipt of a convertible loan, and (vi) private placements of our securities. As of December 31, 2007, we had positive working capital of $1.296 million.
We anticipate that we will continue to incur significant operating expenses in connection with the development and marketing of our products. We believe that our current assets, together with anticipated cash generated from operations and available credit lines, will be sufficient to meet our cash requirements for working capital and capital expenditures for at least twelve months from. Thereafter, if cash generated from operations is insufficient to satisfy our liquidity requirements, we may sell additional equity or debt securities or seek to obtain additional credit facilities.
50
Investments
Our cash and cash equivalents increased to $2.2 million at the end of 2007 compared to $1 million recorded at the end of 2006. Short term restricted deposits decreased to $0.5 million at the end of 2007 compared to $0.7 million recorded at the end of 2006. The changes were mainly due to the private placement investments made during 2007. Some of our sales agreements require us to provide a performance guarantee for a period of between six and twelve months. In order to provide such guarantees we are required to deposit between 25% and 60% of the guarantee amount. During 2007 we had negative cash flow from operational activity of $3 million, the negative cash flow was mainly due to payments we made in 2007 instead of 2006 due to the onetime loss of the Indian railway project in October 2006.
Our inventories increased from $4 million as of December 31, 2006 to $5.3 million as of December 31, 2007, reflecting our growth in business and increase in revenues in 2007 compared to 2006. Inventories as a percentage of revenues as of December 31, 2007, increased to 24.2% compared with 23.3% as of December 31, 2006.
The discussions regarding the Convertible Loan Agreement with Mivtach Shamir and the Amendment Agreement, the April Investment, the Indian Project and the Elbit Agreement are hereby incorporated by reference toItem 4, “Information on the Company – Recent Developments”. The discussion on the April Investment is hereby incorporated by reference also toItem 10 “Additional Information – Material Contracts”.
Borrowing
From time to time we use money received from bank loans from several banks to finance our operating activities. Most of the loans are linked to the U.S. Dollars and for a period of three to 18 months. The interest rates of those loans are according to the market rate.
Capital Expenditure
The discussion regarding the ScanMaster and Panoptes acquisitions and the Yuravision acquisition and sale are hereby incorporated by reference toItem 4, “Information on the Company – History and Development of the Company”andItem 10, “Additional Information – Material Contracts”.
C.Research and Development, Patents and Licenses, etc.
Our research and development group focuses on adapting our technologies to the development of new products for applications in the web and ultrasonic industries as well as enhancing our existing products. We devote a significant portion of our resources to improving our current systems through enhancements in the areas of sharpness of resolution, processing speed, sensor accuracy and illumination. We also continually work to enhance the ease of use and flexibility of our systems’ software and to develop product add-ons to augment our systems currently in use by customers. These product add-ons are being designed to further integrate our systems into each phase of our customers’ manufacturing process.
51
We have a number of product and technology initiatives underway at any given time. Our research and development activities have generally resulted in periodic introductions of new products, new auxiliaries and upgrades to our existing products. Current product and technology initiatives include, among others, the following:
Our prepress inspection product is based on the proprietary technology of AOI Technology which the Company has developed over the past two years, and is enhanced with features developed at the request of the manufacturer to meet the needs of the prepress industry.
For our developments in the Prepress Inspection Industry Division we have devised a visual inspection system for the inspection of the prepress cylinder. The system is already operating, and was developed as an Original Equipment Manufacturing, or OEM, product with one of world’s top prepress system manufacturers.
For our developments in the Non–Destructive Automated Inspection Systems Division we are expanding our capabilities by developing multi transducers of automatic calibration, different process algorithms and a scanner capable of inspecting in 2.5 dimensions. We are also expanding our capabilities to provide portable Non-Destructive Automated Inspection instruments for automotive and industrial applications.
As of March 2008, our research and development staff consisted of 33 full-time employees, all of whom are located in Israel and hold advanced technical degrees. Our research and development staff engages in hardware, electro-optics and ultrasonic development, real-time software development, PC software development, manufacturing engineering, system engineering and customer support engineering. Our research and development staff for the web industry consisted of 10 full time employees, and our research and development staff for the ultrasonic industry consisted 23 full time employees. In 2005 our gross research and development expenditures for the web industry were approximately $2.3 million, in 2006 they were $1.6 million and in 2007 they were $1.5 million. These expenditures were partially offset by grants by the OCS of the Ministry of Industry, Trade and Labor of the Government of Israel of approximately $171,000, $145,000 and $141,000 in each of 2005, 2006, and 2007, respectively.
Research and Development Grants
The Government of Israel encourages research and development projects oriented towards products for export through the OCS. Since inception, we have received grants from the OCS for the development of various systems and products. Under the terms of these grants, a royalty of 3% to 5% of the net sales of products developed from a project funded by the OCS must be paid, beginning with the commencement of sales of products developed with grant funds and ending when 100% of the dollar value of the grant is repaid. The terms of Israeli government participation also require that the manufacture of products developed with government grants be performed in Israel, unless a special approval has been granted by the OCS. Such approval, if granted, is generally subject to an increase in the total amount to be repaid to the OCS to between 120% and 300% of the amount granted, depending on the extent of the manufacturing to be conducted outside of Israel. Separate Israeli government consent is required to transfer to third parties technologies developed through projects in which the government participates. Such restrictions do not apply to exports from Israel of products developed with such technologies. For more information, seeItem 10, “Additional Information – Taxation”.
52
Pursuant to regulations, effective with regard to OCS grants received under programs approved after January 1, 1999, repayments of such grants will be subject to interest at an annual rate of LIBOR for 12 months applicable to Dollar deposits, which will accrue annually based on the LIBOR rate published on the first day of each year.
Royalty-bearing grants received from the Government of Israel for research and development are offset against our gross research and development expenditures on development of products only for the textile industry.
The following table sets forth net research and development expenses, the grants received from the OCS and the gross research and development expenditures for the periods indicated.
(in thousands)
| 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Research and development expenses, net | | | $ | 3,313 | | $ | 2,562 | | $ | 2,039 | |
| | | |
| OCS grants | | | $ | 141 | | $ | 145 | | $ | 154 | |
| Gross research and development expenditures | | | $ | 3,454 | | $ | 2,707 | | $ | 2,193 | |
D. Trend Information
Trends and changes in the world textile industry are having an influence on our markets, customers and sales. World textile production has transferred to the Far East due to low labor costs. The Far East market is increasing with large investments in textile machinery (especially in China). The investments are currently in productive equipment for increasing the production volume and achieving the demands of Western markets and not in automatic inspection technology. Our traditional markets in Western Europe and the United States are becoming smaller, with less willingness for capital expenditures. Unless textile manufacturers in the Far East begin investing in automatic inspection technology, the growth in our sales revenue may not keep pace with the growth in the Far East market.
We anticipate that our NDT business will provide the majority of our revenues in the short term. While ScanMaster’s traditional markets have been in the US and Europe, we expect that in the near future over 60% of its sales will be made in the Far East.
In line with recent developments in the field of non-destructive inspection systems, it is expected that the demand for attractively-priced inspection equipment will accelerate in the coming years, as industrial concerns regarding product reliability and liability take on an increasing commercial relevance.
E. Off-Balance Sheet Arrangements.
We do not have any off-balance sheet arrangements which have or are reasonably likely to have a material current or future effect on the financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, of our company and its subsidiaries.
53
F. Tabular Disclosure of Contractual Obligations
Our significant financial and contractual obligations as of December 31, 2007, and the periods in which such obligations are due are as follows:
| Payments and Amount of Commitment Expiration Per Period
(U.S. Dollars in thousands)
|
|---|
Contractual Obligations
| Total
Amounts
Committed
| Less than
1 Year
| 1-3
Years
| 3-5
Years
| Over
5 years
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Operating Car Lease Obligations | | | | 485 | | | 485 | | | ___ | | | ___ | | | ___ | |
| Operating Building Lease Obligations | | | | 1,012 | | | ___ | | | 1,012 | | | ___ | | | ___ | |
| Total commercial commitments | | | | 1,497 | | | 485 | | | 1,012 | | | ___ | | | ___ | |
| | | | | |
G.Safe Harbor. Not applicable
| ITEM 6. | | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. Directors and Senior Management
As of March 15, 2008, our directors, senior managers and key employees were as follows:
Name
| Age
| Position
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| David Gal* | 51 | Chairman of the Board and Chief Executive Officer |
| Ofer Sela* | 38 | Vice President of research & development |
| Yaron Menashe* | 32 | Vice president, Chief Financial Officer and Secretary |
| Benjamin Mano* | 62 | Vice President of Sales & Marketing |
| Hillel Avni* | 69 | Vice President of Electronic Inspection Division |
| Silviu Rabinovich | 63 | Vice President os UT Sales and Marketing |
| Arie Shilan | 47 | VP Operations |
| Amos Uzani* | 41 | External Director |
| David Schwartz * | 58 | External Director |
| Nir Alon | 44 | Director |
| Linda Harnevo* | 52 | Director |
| Victor Josebachvili | 52 | Director |
| | |
* Beneficially owns less than 1% of our outstanding ordinary shares.
54
David Gal was appointed as chairman of the board of directors on March 2, 2006, and as our chief executive officer on November 20, 2006. He served as chairman of the board of directors of Odin Medical Technologies Ltd. since 2005, and from 2001 through 2004 served as its president and chief executive officer. Between 2002 and 2004 Mr. Gal served as the active chairman of the board of directors of MindGuard Medical Technologies Ltd. From 1996 through 2000, Mr. Gal served as the president and chief executive officer of Wizcom Technologies Ltd. From 1991 through 1995, Mr. Gal served as the chief executive officer of Orbotech Inc., headquartered in Boston, USA. From 1989 through 1990, Mr. Gal served as an economic advisor to the Israeli Minister of Finance – Mr. Shimon Peres. Mr. Gal holds a B.A. in economics and business, and an M.B.A. from the Hebrew University of Jerusalem.
Ofer Selaserved as the vice president of Research and Development of Advanced Dicing Technology (ADT) Ltd. between the years 2003 and 2007. Prior to this role, between the years 2000 and 2003, Mr. Sela has held various program management positions at Kulicke & Soffa. Between the years 1997 and 2000 Mr. Sela worked in various engineering capacities at Kulicke & Soffa. Mr. Sela holds a B.Sc in mechanical engineering from the Technion and an MBA from Heriot-Watt University. Mr. Sela is a graduate of the Israeli Naval Academy.
Yaron Menashehas served as our chief financial officer since December 2006. Between the years 2000 and 2003, Mr. Menashe worked as a senior auditor at KPMG.Mr. Menashe holds a bachelor’s degree in economics and accounting from the Haifa University, Israel and is a Certified Public Accountant in Israel.
Benjamin Mano served as the chief executive officer of Panoptes between the years 2000 and 2005 and between the years 1995 and 2000 served as the VP of operations and VP of sales and marketing for the Rest of the World of EVS. Mr. Mano served as VP of operations for seven years of Fibronics International Inc. Between the years 1983 and 1988 Mr. Mano served in Japan as Sitex Japan’s desk manager, establishing the joint venture company together with Toyo Inc. Between the years 1973 and 1983 Mr. Mano worked for us in various capacities. Mr. Mano holds a B.Sc. in electrical engineering from the Technion.
Hillel Avniis one of our founders and served as our vice president of engineering from inception until 1999 and from 2006 following our acquisition of Panoptes. Between 2000 and 2005 Mr. Avni founded and was vice president of research and development of Panoptes. Between 1973 and 1990 he was employed by Elbit, where he served as the manager of digital signal processing computers development from 1987 until 1990, and prior to that, as the project manager for the development of a general purpose real-time image processing system. Mr. Avni holds a B.A. in mathematics and statistics from the Hebrew University of Jerusalem and an M.Sc. in computer science from the Technion.
Silviu Rabinovich was one of the major shareholders of ScanMaster prior to it being acquired by our company and served on our Board of Directors until February 2006. Mr. Rabinovich has spent over fifteen years with ScanMaster, serving as ScanMaster’s VP of Sales and Marketing and Chief Technology Officer. Mr. Rabinovich holds an M.A. in digital signal processing from Tel Aviv University.
Arie Shilan has served as our VP, Operations since November 2007. From 1998 until 2007, Mr. Shilan was employed by Transtech Control Ltd., an affiliate of Formula Vision, in various management positions, including most recently as its VP, Operations. Prior to Transtech, Mr. Shilan worked at various major Israeli corporations, including Comverse (OTC: CMVT.PK) and Scitex Vision Ltd. (a subsidiary of Hewlett-Packard Company). Mr. Shilan holds a B.Sc in Electronic Engineering and an M.B.A. in business administration from Tel Aviv University, Israel.
55
Amos Uzani served as an attorney at the Haifa’s District Attorney’s Office from 1981-1983. From 1983 and until 1989 he practiced as an attorney. From 1989-1992 Mr. Uzani served as Internal Controller (VP) and from 1992-1996 as VP of Human Resources, both at the Israel Ports and Railways Authority. From 1996 and until December 2001 Mr. Uzani served as CEO of Israel Railways Corporation and as Vice President of the Israel Ports and Railways Authority. Between 2002 and 2004 Mr. Uzani served as CEO of IRS Corporation, a company wholly owned at the time by Mr. Uzani, specializing in handling projects and initiatives in the fields of transportation infrastructure and railway equipment. As of 2005, Mr. Uzani is acting President of Haifa Port. From 1986 Mr. Uzani served as director for the Industrial Buildings Corporation, until its privatization in 1992. From 2006, Mr. Uzani has been serving as an external director for Emilia Group (TASE: EMDV), a company publicly traded on the Tel Aviv Stock Exchange. Mr. Uzani holds a law degree from Bar-Ilan University (Israel), an Executive M.B.A. from Tel-Aviv University (Israel) and is a member of the Israeli BAR.
David Schwartzworked at the accounting offices of Weinstein and Associates from 1975-1978. From 1978 and until 1990 he worked for Tadiran Ltd. in the monetary regulation section. Between 1990 and 2002 Mr. Schwartz worked for Tadiran Consumer Goods Ltd. and its subsidiaries as a manager and controller. As of 2001, Mr. Schwartz is acting chairman of the tax committee for the forum of Industrial Financial Managers in the Industrial Organization. Mr. Schwartz has served as a director, external director, internal auditor and tax and financial advisor for many large companies, including Brightman Almagor Trusts Ltd., Tadiran Consumer Goods Ltd., Ubank Trust Funds Ltd. and Arco holdings Ltd. Mr. Schwartz holds a B.A. in Economics and Accounting from Bar Ilan University.
Nir Alon served as chairman of the board of directors from February 2001 until March 2, 2006. Since 1990, he has been the president of Altro Warenhandels GmbH, a cotton and textile company. From 1986 until 1990, he was part of the management of an Israeli based textile company. Mr. Alon holds a B.A. in social sciences from Tel-Aviv University.
Linda Harnevo was elected director by our board of directors on April 1, 2006. Ms. Harnevo served as chief executive officer of EduConcept Ltd. between the years 1994 and 1996 and chief executive officer of TeamWorks Technology Ltd. between the years 1997 and 2001. She is the founder of RedZebra Ltd. and Global Medical Networks International Ltd., where she currently serves as international chief executive officer. Ms. Harnevo holds a B.Sc. in mathematics, computer science and linguistics from Bar Ilan University, an M.Sc. in mathematics from the Weizmann institute and a Ph.D. in applied mathematics from the Weizmann Institute.
Victor Josebachvili was elected director by our board of directors on September 24, 2007, following the retirement of Mr. Menashe Shohat. Mr. Josebachvili is the founder and Managing Partner of Harbor Hills Partners, LLC (“HHP”), a financial advisory boutique firm and has been advising major US and European multinationals for the last 18 years. Prior to founding HHP Mr. Josebachvili was a Managing Director in JP Morgan’s Global M&A Group. Before joining JP Morgan Chase Mr. Josebachvili held similar positions at Bankers Trust and Citibank. Mr. Josebachvili has a B.Sc. (Cum Laude) degree in industrial engineering from the Technion (Israel Institute of Technology) (1981) and an MBA from Columbia University Graduate School of Business.
56
Board of Directors
Our directors, who are not external directors, commence their term when they are elected at the annual general meeting of our shareholders until the following annual general meeting. Messrs. David Schwartz and Amos Uzaniare our external directors who were elected to serve for terms of three years commencing April 2007 and December 2007, respectively.In September 2007 Mr. Victor Josebachvili replaced Mr. Menashe Shohat as director.
B. Compensation
During 2007, we paid to all our directors and officers a total of $1.017 million in salaries, fees and bonuses. This does not include money spent on automobiles made available to our officers, expenses (including business travel, professional and business association dues and expenses) reimbursed to officers and other fringe benefits commonly reimbursed or paid by companies in Israel.
Our audit committee, board of directors and shareholders approved the following compensation for our director Ms. Linda Harnevo, in consideration for her serving as a member of the Company’s Audit Committee and Board of Directors: (i) an annual fee of NIS 18,280 (approximately $5,523), (ii) payment of NIS 1,220 (approximately $348) per meeting in which she personally participates, (iii) payment of NIS 732 (approximately $209) per meeting in which she participates by phone, (iv) reimbursement of out of pocket expenses incurred in connection with the performance of her services as a director of the Company, (v) linking the above amounts to the Israeli Consumer Price Index in the same manner that the fees of the Company’s External Directors are linked to such index; payable retroactively from April 1, 2006, and (vi) options to purchase 30,000 ordinary shares of the Company exercisable at a price per share of $0.4, vesting quarterly, with the following vesting schedule: 4,286 ordinary shares vested on September 30, 2006, and 4,286 are vesting at the end of each fiscal quarter thereafter until March 31, 2008, when all options will be fully vested.
Following the approval of our audit committee and board of directors, on March 24 2008, our shareholders approved: (A) the following revised terms of compensation for Ms. Harveno: (i) an annual fee of NIS 26,250 (approximately $7,721) + VAT; (ii) payment of NIS 1,360 (approximately $400) + VAT per meeting in which she participates in person; (iii) payment of NIS 816 (approximately $240) + VAT per meeting in which she attends other than in person; (iv) payment of NIS 680 (approximately $200) + VAT per written resolution executed; and (v) reimbursement of out of pocket expenses incurred in connection with the performance of her services as a director of the Company; and (B) the following terms of compensation for our director, Mr. Victor Josebachvili: (i) an annual fee of NIS 26,250 (approximately $7,721) + VAT; (ii) payment of NIS 1,360 (approximately $400) + VAT per meeting in which he participates in person; (iii) payment of NIS 816 (approximately $240) + VAT per meeting in which he attends other than in person; (iv) payment of NIS 680 (approximately $200) + VAT per written resolution executed; (v) reimbursement of out of pocket expenses incurred in connection with the performance of his services as a director of the Company; (vi) reimbursement for a business class return flight to Israel, for flights taken specifically for the attendance of each of 2 meetings of the Board or other Company business related to service as director and if the Company requires attendance of Mr. Josebachvili in Israel for other meetings or special services, it shall fund such attendance, subject to approval by the chairman of the Board; (vii) reimbursement for up to 2 nights of hotel accommodation per working day, in connection with trips taken to Israel specifically for attendance of meetings of the Board or other Company business related to service as director; and (viii) options to purchase 30,000 ordinary shares of the Company par value NIS 1 at an exercise price of $0.32. 12.5% of the options shall vest immediately upon grant, 12.5% will vest on March 31, 2008, and the remainder shall vest quarterly in equal amounts until October 1, 2009 (provided that Mr. Josebachvilli remains a member of the Company’s board of directors, in which case the vesting shall cease upon cessation of his service on the board of directors), and shall be subject to the Company’s Employee Option Plan (2006).
57
We paid an aggregate of $27,000 to our serving external directors in 2007.
On February 21, 2006, our shareholders approved the payment to David Gal of a monthly compensation of $13,500 plus Value Added Tax in consideration for his services as the chairman of our board of directors. Additionally, it was approved to lease an automobile for his use, and supply him with certain other office related equipment necessary to provide us with his services. Finally, it was also approved to grant Mr. Gal options to purchase up to 600,000 of our Ordinary Shares at an exercise price of $0.50 per share. One third of the options shall vest on December 31, 2006 and thereafter 2.8% of the total shares subject to the option shall vest on a monthly basis. The vesting of the options will be subject to Mr. Gal serving as the chairman of our board of directors on the relevant vesting date. Mr. Gal shall be entitled to exercise the options on the date such options have vested and up to 5 years thereafter. Pursuant to his appointment as Chief Executive Officer and following approval of our audit committee and board of directors, our shareholders approved on July 31, 2007, an increase in the monthly fee payable to MEO Consulting, a company controlled by Mr. David Gal, of $21,500 plus VAT to be payable from January 1, 2007.
Pension and Retirement Benefits
We offered no pension or retirement benefits to our directors and key personnel in 2007.
C. Board of Directors
Our articles of association provide for a board of directors of no fewer than two and not greater than nine members. On February 21, 2006, as a closing condition to the Convertible Loan Agreement with Mivtach Shamir, our shareholders approved the adoption of new articles of association. These changes were adopted due to changes in Israel’s business and legal environment and the entering into effect of the Companies Law, which replaced the Companies Ordinance. The new articles of association adopted following our February 21, 2006 shareholders’ meeting, include the following changes: (i) with the exception of resolutions which require the affirmative vote of a special majority pursuant to the Companies Law, all other resolutions shall be passed by an ordinary majority; and (ii) to the extent permitted by the Companies Law, the board will have the ability to declare dividends (in cash or in kind) to shareholders without shareholder approval.
58
The Companies Law which entered into effect on February 1, 2000 and was amended most recently in March 2005, requires the board of directors of a public company to determine the number of directors who shall possess accounting and financial expertise, as defined in the regulations promulgated on December 5, 2005, taking into account the type of company, its size, the extent of its activities and the complexity of the company’s operations.For further information on the appointment of directors, please see Item 7, “Major Shareholders and Related Party Transactions – VotingAgreements.”
Our articles of association provide that any director may, by written notice, appoint another person to serve as a substitute director and may cancel such appointment. A person may not serve as a substitute director for more than one director and may not serve both as a director and as a substitute director. Appointment of a substitute director for a member of a committee of the board of directors is only permitted if the substitute is a member of the board of directors and does not regularly serve as a member of such committee. If the committee member being substituted is an external director, such substitute may only be another external director possessing the same expertise as the external director being substituted and may not be a regular member of such committee.
The term of appointment of a substitute director may be for one meeting of the board of directors or for a specified period or until notice is given of the cancellation of the appointment. Any substitute director shall have all of the rights and obligations of the director appointing him or her, except the power to appoint a substitute, unless the instrument appointing him provides otherwise, and the right to remuneration. The substitute director may not act at any meeting at which the director appointing him or her is present. Unless the time period or scope of any appointment is limited by the appointing director, the appointment is effective for all purposes, but will expire upon the expiration of the appointing director’s term. To our knowledge, no director currently intends to appoint any other person as a substitute director, except if the director is unable to attend a meeting of the board of directors.
The Companies Law, requires Israeli companies with shares that have been offered to the public in or outside of Israel to appoint no less than two external directors. No person may be appointed as an external director if the person or the person’s relative, partner, employer or any entity under the person’s control, has or had, on or within the two years preceding the date of the person’s appointment to serve as external director, any affiliation with the company or any entity controlling, controlled by or under common control with the company. The term “affiliation” includes:
| — | an employment relationship; |
| — | a business or professional relationship maintained on a regular basis; |
| — | service as an office holder. |
59
A person shall be qualified to serve as an external director only if he or she possesses accounting and financial expertise or professional qualifications. At least one external director must posses accounting and financial expertise. The conditions and criteria for possessing accounting and financial expertise or professional qualifications were recently determined in regulations promulgated by the Israeli Minister of Justice in consultation with the Israeli Securities Authority. These regulations do not appear to relate to external directors currently serving. The regulations mandate that a person is deemed to have “expertise in finance and accounting” if his or her education, experience and qualifications provide him or her with expertise and understanding in business matters – accounting and financial statements, in a way that allows him or her to understand, in depth, the company’s financial statements and to encourage discussion about the manner in which the financial data is presented.
The company’s board of directors must evaluate the proposed external director’s expertise in finance and accounting, by considering, among other things, his or her education, experience and knowledge in the following: (i) accounting and auditing issues typical to the field in which the company operates and to companies of a size and complexity similar to such company; (ii) a company’s independent public accountant’s duties and obligations; (iii) preparing company financial statements and their approval in accordance with the Companies Law and the Israeli Securities Law.
A director is deemed to be “professionally qualified” if he or she meets any of the following criteria: (i) has an academic degree in any of the following professions: economics, business administration, accounting, law or public administration; (ii) has a different academic degree or has completed higher education in a field that is the company’s main field of operations, or a field relevant to his or her position; or (iii) has at least five years experience in any of the following, or has a total of five years experience in at least two of the following: (A) a senior position in the business management of a corporation with significant operations, (B) a senior public position or a senior position in public service, or (C) a senior position in the company’s main field of operations. The board of directors here too must evaluate the proposed external director’s “professional qualification” in accordance with the criteria set forth above.
The affidavit required by law to be signed by a candidate to serve as an external director must include a statement by such candidate concerning his or her education and experience, if relevant, in order that the board of directors may properly evaluate whether such candidate meets the requirements set forth in the regulations. Additionally, the candidate should submit documents and certificates that support the statements set forth in the affidavit.
No person may serve as an external director if the person’s position or other business activities create, or may create, a conflict of interest with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director. If, at the time external directors are to be appointed, all current members of the board of directors are of the same gender, then at least one external director must be of the other gender.
External directors are to be elected by a majority vote at a shareholders’ meeting, provided that either:
| — | the majority of shares voted at the meeting, including at least one-third of the shares held by non-controlling shareholders voted at the meeting, vote in favor of election of the director; or |
60
| — | the total number of shares held by non-controlling shareholders voted against the election of the director does not exceed one percent of the aggregate voting rights in the company. |
The initial term of an external director is three years and may be extended for an additional three years. External directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to the company. Each committee of a company’s board of directors must include at least one external director.
An external director is entitled to compensation as provided in regulations adopted under the new Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an external director.
Currently, Messrs. Schwartz and Uzani serve as our external directors.
The Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee include identifying irregularities in the management of the company’s business and approving related party transactions as required by law. An audit committee must consist of at least three directors, including the external directors of the company. The chairman of the board of directors, any director employed by or otherwise providing services to the company, and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the audit committee.
Our two external directors Messrs. Schwartz and Uzani serve on the audit committee of the board of directors.
Under the Companies Law, the board of directors must appoint an internal auditor, nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an office holder, or an affiliate, or a relative of an office holder or affiliate, and he may not be the company’s independent accountant or its representative.
D. Employees
2007
As of December 31, 2007, we employed a total of 108 full time persons in both of our divisions, as follows:
Non–Destructive Automated Inspection Systems Division
As of December 31, 2007, we employed 69 full-time persons, out of which 66 were employed in Israel of whom 22 were in research and development, 8 were in marketing and sales, 3 were in customer support, 27 were in operations and 6 were in administration and management.
61
AOI Division
As of December 31, 2007, we employed 39 full-time persons, out of which 30 were employed in Israel of whom 10 were in research and development, 2 were in marketing and sales, 3 were in customer support, 9 were in operations and 6 were in administration and management.
2006
As of May 31, 2006 we employed a total of 103 full time persons in both of our divisions, as follows:
Non–Destructive Automated Inspection Systems Division
As of May 31, 2006, we employed 58 full-time persons, out of which 56 were employed in Israel of whom 15 were in research and development, 7 were in marketing and sales, 3 were in customer support, 26 were in operations and 5 were in administration and management.
AOI Division
As of May 31, 2006, we employed 45 full-time persons, out of which 34 were employed in Israel of whom 14 were in research and development, 2 were in marketing and sales, 3 were in customer support, 9 were in operations and 6 were in administration and management.
2005
As of December 31, 2005 we employed a total of 137 full time persons in both of our divisions, as follows:
Non–Destructive Automated Inspection Systems Division
As of December 31, 2005, we employed 75 full-time persons, out of which 72 were employed in Israel of whom 18 were in research and development, 7 were in marketing and sales, 2 were in customer support, 39 were in operations and 6 were in administration and management.
AOI Division
As of December 31, 2005, we employed 62 full-time persons, out of which 37 were employed in Israel of whom 14 were in research and development, 2 were in marketing and sales, 3 were in customer support, 12 were in operations and 6 were in administration and management. 15 of our employees were employed in Korea, of whom 9 were in research and development, 2 were in marketing and sales, 1 was in customer support and 3 were in administration and management.
We believe that our success will depend, in large part, on our ability to attract and retain highly-skilled engineering, managerial and sales and marketing personnel. Competition for such personnel is intense.
Certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) are applicable to our employees by order of the Israeli Ministry of Labor. These provisions concern principally the length of the workday, minimum daily wages for professional workers, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay, and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimums.
62
Israeli law generally requires severance pay, which may be funded by Managers’ Insurance described below, upon the retirement or death of an employee or termination of employment without cause (as defined in the law). These payments amount to approximately 8.33% of wages. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Such amounts also include payments for national health insurance. The payments to the National Insurances Institute are equal to approximately 14.5% of the wages (up to a specified amount), of which the employee contributes approximately 66% and the employer contributes approximately 34%.
Although not legally required, we contribute funds on behalf of most of our employees to a fund known as “Managers’ Insurance”. This fund provides a combination of savings plan, insurance and severance pay benefits to the employee, giving the employee a lump sum payment upon retirement and securing the severance pay, if legally entitled, upon termination of employment. We decide whether each employee is entitled to participate in the plan, and each employee who agrees to participate contributes an amount equal to 5% of a salary and the employer contributes between 13.3% and 15.8% of a salary.
E. Share Ownership
Of the persons listed above under the caption “Directors, Senior Management and Employees”, Mr. Nir Alon beneficially own shares and options exceeding 1% of our outstanding ordinary shares since Mr. Nir Alon is the controlling shareholder of Altro, our majority shareholder. Mr. Shlomo Alon, Nir Alon’s father, who served as a member of our board of directors until March 2, 2006, beneficially owns shares and options exceeding 1% of our outstanding ordinary shares.
Employee Share Option Plans
We maintain the following share option plans for our employees and the employees of our subsidiaries. In addition to the discussion below, see Note 11 to our consolidated financial statements.
In February 1996, the board of directors adopted a share option plan, or the 1996 Share Option Plan, pursuant to which 565,720 ordinary shares were reserved for issuance upon the exercise of options to be granted to our directors, officers, employees, and consultants. As of March 25, 2008, options to purchase 104,500 of such ordinary shares were outstanding and the remaining options have expired. Of the outstanding options, options to purchase 102,500 and 2,000 ordinary shares are fully vested and are exercisable at an exercise price of, $1.68 and $0.2 per share, respectively. All of the outstanding options terminate ten years following the date of grant if not exercised earlier or terminated by reason of termination of employment.
63
The 1996 Share Option Plan is administered by a committee of the board of directors, which designates the optionees and dates of grant. The option exercise price is determined by our board of directors. All recent grants have been made at an exercise price equal or above to the fair market value of our shares. The options are non-assignable except by the laws of succession. The last date on which the options may be granted was February 2006. The remaining options will be exercisable for a period up to ten years from the date of grant and will generally vest at a rate of 50% at the beginning of the third year after the grant and an additional 25% in each of the two years thereafter, assuming continuous employment with us through such periods.
In April 2000, our board of directors adopted a share option plan pursuant to which 4,500,000 ordinary shares were reserved for issuance upon the exercise of options to be granted to our directors, officers, employees and consultants. As of March 25, 2008, options to purchase 1,285,869 of such ordinary shares were outstanding and options to purchase 2,655,582 ordinary shares were available for future grants. 523,639 of the outstanding options have an exercise price of $1.169 per share. All of the options referred to above vested equally on the anniversary of May 24 from 2001 until 2004 inclusive, assuming continuous employment with us through such period.272,750 of the outstanding options have an exercise price of $0.36 per share. 295,100 of the outstanding options have an exercise price of $0.48 per share 20,852 of the outstanding options have an exercise price of $0.15 per share 166,027 of the outstanding options have an exercise price of $1 per share. and an additional 7,500 have an exercise price of $1.68per share and have already vested. All of the outstanding options terminate ten years following the date of grant if not exercised earlier. The 2000 Share Option Plan is administered by a committee of the board of directors, which designates the optionees and dates of grant. The option exercise price is determined by our board of directors. All recent grants have been made at an exercise price equal to or above the fair market value of our shares. The options are non-assignable except by the laws of descent. The last date on which the options may be granted is April 2010. The remaining options will be exercisable for a period up to ten years from the date of grant and will generally vest as to 25-33% commencing the beginning of the second year after the grant and as to an additional 25-33% in each of the remaining years thereafter, assuming continuous employment with us through such periods.
In November 2003, the board of directors adopted a share option plan pursuant to which 2,000,000 ordinary shares were reserved for issuance upon the exercise of options to be granted to our directors, officers, employees and consultants. The number of ordinary shares issuable under the share option plan is annually increased by 1,500,000 ordinary shares. As of March 25, 2008, options to purchase 3,339,984 of such ordinary shares were outstanding and options to purchase 6,032,992 ordinary shares were available for future grants. 727,500 of the outstanding options have an exercise price of $1.25 per share, 44,000 of the outstanding options have an exercise price of $1.2 per share, 136,500 of the outstanding options have an exercise price of $0.85 per share, 15,000 of the outstanding options have an exercise price of $0.83 per share, 300,334 of the outstanding options have an exercise price of $0.8 per share, 625,000 of the outstanding options have an exercise price of $0.75 per share, 25,000 of the outstanding options have an exercise price of $0.70 per share, 153,197 of the outstanding options have an exercise price of $0.68 per share, 600,000 of the outstanding options have an exercise price of $0.5 per share, 60,000 of the outstanding options have an exercise price of $0.4 per share, 30,000 of the outstanding options have an exercise price of $0.37 per share, 30,000 of the outstanding options have an exercise price of $0.35 per share, 470,000 of the outstanding options have an exercise price of $0.28 per share, and an additional 123,453 an exercise price of $0.2 per share. As of March 25, 2008, 2,798,205 of the options were vested, and the remainder will vest at various dates until February 14, 2011. All of the outstanding options terminate ten years following the date of grant if not exercised earlier. The 2003 Share Option Plan is administered by a committee of the board of directors, which designates the optionees and dates of grant. The option exercise price is determined by our board of directors. All recent grants, except for the grant to our chairman, Mr. David Gal, have been made at an exercise price equal to or above the fair market value of our shares. The options are non-assignable except by the laws of descent. The last date on which the options may be granted is November 2013. The remaining options will be exercisable for a period up to ten years from the date of grant and will generally vest as to 25-33% commencing the beginning of the second year after the grant and as to an additional 25-33% in each of the remaining years thereafter, assuming continuous employment with us through such periods.
64
In March 2006, the board of directors adopted a share option plan pursuant to which 2,000,000 ordinary shares were reserved for issuance upon the exercise of options to be granted to our directors, officers, employees and consultants. The number of ordinary shares issuable under the share option plan may be increased by the board of directors from time to time. As of March 25, 2008, options to purchase 410,000 of such ordinary shares were outstanding and options to purchase 1,660,000 ordinary shares were available for future grants. 100,000 of the outstanding options have an exercise price of 0.46 per share, 230,000 of the outstanding options have an exercise price of $0.4 per share. 30,000 of the outstanding options have an exercise price of 0.32 per share and 50,000 of the outstanding options have an exercise price of 0.28 per share. As of March 25, 2008, 16,250 of the options were vested, and the remainder will vest at various dates until February 13, 2012. All of the outstanding options terminate either ten years following the date of grant if not exercised earlier or 6 months after termination of the employee. The 2006 Share Option Plan is administered by a committee of the board of directors, which designates the optionees and dates of grant. The option exercise price is determined by our board of directors. All recent grants have been made at an exercise price equal to or above the fair market value of our shares. The options are non-assignable except by the laws of descent. The last date on which the options may be granted is March 15, 2016. The remaining options will be exercisable for a period up to ten years from the date of grant and will generally vest as to 25-33% commencing the beginning of the second year after the grant and as to an additional 25-33% in each of the remaining years thereafter, assuming continuous employment with us through such periods.
| ITEM 7. | | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
A. Major Shareholders
The following table and notes set forth information, as of March 1, 2008, concerning the beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of our securities by (i) any person who is known to own at least 5% of our ordinary shares and (ii) our directors and officers as a group. The voting rights of our major shareholders do not differ from the voting rights of holders of all of our ordinary shares.
65
Identity of Person or Group
| Amount Beneficially Owned
| Percent of Class
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Nir Alon (1)(2)(3)(9) | | | | 3,106,436 | | | 6.02 | % |
| Nir Alon Holdings GmbH (3) | | | | 1,500,000 | | | 2.94 | % |
| Elbit Ltd. (4)(5) | | | | 6,843,121 | | | 12.94 | % |
| M.S. Master Investments (2002) Ltd. (6) | | | | 4,044,833 | | | 7.94 | % |
| M.S.N.D. Real Estate Holdings Ltd. (4)(7) | | | | 15,843,954 | | | 29.15 | % |
| Shavit Capital Entities (8) | | | | 4,761,905 | | | 9.1 | % |
| All directors and officers as a group (9) | | | | 5,990,833 | | | 11.49 | % |
| | |
The percentages in this table are based on 50,970,707 of ordinary shares currently issued and outstanding and options exercisable within 60 days.
(1) All of these shares are pledged to Bank Leumi B.M., in order to guarantee a credit line for Altro Warenhandels GMBH, or Altro, in the sum of $1,500,000.
(2) Includes 75,000 ordinary shares which are subject to an option to purchase shares granted by Mr. Alon to Mr. Barath on March 29, 2001, and 600,000 ordinary shares currently issuable upon the exercise of warrants within 60-days.
(3) Mr. Nir Alon is deemed to be the beneficial owner of all of the shares held by Nir Alon Holdings GmbH.
(4) In an agreement between Elbit and Mivtach, dated July 29, 2007, the parties agreed to vote their shares at meetings of our shareholders at which members of the board are to be elected, as follows: (a) to elect to our board one director nominated by Mivtach, who shall serve as chairman of our board, and (b) to elect to our board one director nominated by Elbit; provided that the party entitled to nominate a director continues to at least hold 7.5% of our share capital on a fully diluted basis. A reduction of a party’s holdings shall only be deemed to occur upon a sale by one of the parties, of our ordinary shares. If a party fails to meet the 7.5% threshold it shall lose the right to nominate a director and such right shall be granted to the party who at such time holds the highest number of our ordinary shares. Additionally, the parties to the agreement agreed that in the event that and for as long as Mivtach continues to hold at least 15% of our share capital on a fully diluted basis, the parties will vote their shares at meetings of our shareholders at which members of the board are to be elected as follows: (a) to elect to our board two directors nominated by Mivtach, one of whom shall serve as chairman of our board, and (b) to elect to our board one director nominated by Elbit. A reduction of a party’s holdings shall only be deemed to occur upon a sale by a shareholder of our ordinary shares. Notwithstanding the foregoing, at any time during the term of the agreement, Elbit may, in its absolute discretion, by notice in writing to Mivtach, voluntarily terminate its right to designate a director to our board of directors. In such an event the right to designate the director to our board of directors shall be granted to Mivtach and Elbit shall be obliged to vote its shares in favor of the nominee designated by Mivtach. Furthermore, notwithstanding the foregoing, if prior to May 14, 2008, Elbit holds less than the 7.5% threshold other than if any reductions in Elbit’s holdings are as a result of sales of our shares by Elbit, Elbit shall maintain its right to designate one member of the board, until May 14, 2008. A party whose holdings of our share capital falls below 5% of our share capital on a fully diluted basis, shall, as from the time of such change, automatically cease to be a party to the agreement.
66
(5) Includes 1,909,764 shares issuable upon the exercise of an immediately exercisable warrant. Elbit is a wholly owned subsidiary of Elron Electronic Industries Ltd. (NASDAQ and TASE: ELRN). As a result, Elron may be deemed to be the beneficial owner of our ordinary shares owned by Elbit. As of November 1, 2007, Discount Investment Corporation Ltd., or DIC, owned approximately 49% of the outstanding shares of Elron and, as a result, DIC may be deemed to be the beneficial owner of our ordinary shares owned by Elbit. IDB Holding Corporation Ltd., or IDBH, owns the majority of the outstanding shares of IDB Development Corporation Ltd., or IDBD, which, in turn, owns the majority of the outstanding shares of DIC and Clal Insurance Enterprises Holdings, or CIEH. As of January 1, 2008 subsidiaries of CIEH held for their own account a total of 245,586 shares of EVS. The CIEH group had no other holdings of our shares as of the same date. As a result, IDBH may be deemed to be the beneficial owner of our ordinary shares owned by Elbit, and our ordinary shares held by subsidiaries of CIEH for their own account.
(6) M.S. Master Investments (2002) Ltd. owns 2,080,944 ordinary shares and has a proxy to vote 1,080,944 ordinary shares held by S.R. Master Investment (2002) Ltd., 700,540 ordinary shares held by R.D. Master Investment (2002) Ltd. and 182,405 ordinary shares held by Avner Shacham.
(7) Includes 3,380,952 ordinary shares issuable upon the exercise of a warrant exercisable within 60-days. M.S.N.D. Real Estate Holdings Ltd. is a fully owned subsidiary of Mivtach-Shamir Holdings Ltd.
(8) Includes 2,383,079 ordinary shares and 1,191,540 warrants owned by Shavit Capital (Cayman) Fund, L.P., 638,318 ordinary shares and 319,159 warrants owned by Shavit Capital Fund (Israel), L.P., and 153,206 ordinary shares and 76,603 warrants owned by Shavit Capital Fund (US) L.P. The warrants are exercisable at the option of the holder within 60 days.
Shavit Capital Fund GP, L.P. is the general partner of Shavit Capital (Cayman) Fund, L.P., Shavit Capital Fund (Israel), L.P. and Shavit Capital Fund (US), L.P. Shavit Capital (GP) Management Ltd. is the general partner of Shavit Capital Fund GP, L.P. and is controlled by entities ultimately controlled by Paul Packer, Leon Recanati and Isi Leibler, each of whom have shared voting and investment control over all the shares held by the Shavit Capital Entities and therefore may be deemed to share beneficial ownership of the shares held by the Shavit Capital Entities. Each of Messrs. Packer, Recanati and Leibler disclaims beneficial ownership of the shares held by the Shavit Capital Entities, except to the extent of his pecuniary interest therein, if any.
(9) Includes all of the shares deemed as beneficially owned by Mr. Nir Alon and options currently exercisable by directors and officers within 60 days.
As of March 15, 2008, there were a total of 76 holders of record of our ordinary shares, of which 14 were registered in the United States. Such United States shareholders were, as of such date, the holders of record of approximately 29% of our outstanding ordinary shares.
67
Voting Agreements
On June 21, 2007, Altro Warenhandels GmbH, M.S. Master Investments, Elbit Ltd., Nir Alon Holdings GmbH, and Nir Alon, the parties to a shareholders agreement dated February 21, 2006, terminated their shareholders agreement.
On June 21, 2007, M.S. Master Investments, Elbit Ltd., Nir Alon Holdings GmbH, Nir Alon and M.S.N.D. Real Estate Holdings, the parties to a shareholders agreement dated February 21, 2006, terminated their shareholders agreement.
In an agreement which Elbit and Mivtach have agreed to execute in the event that the shareholders approve the Amendment Agreement and the Elbit Agreement, the parties will agree to vote their shares at meetings of our shareholders at which members of the board are to be elected, as follows: (a) to elect to our board one director nominated by Mivtach, who shall serve as chairman of our board, and (b) to elect to our board one director nominated by Elbit; provided that the party entitled to nominate a director continues to hold 7.5% of our share capital on a fully diluted basis. A reduction of a party’s holdings shall only be deemed to occur upon a sale by one of the parties, of our ordinary shares. If a shareholder fails to meet the 7.5% threshold it shall lose the right to nominate a director and such right shall be granted to the shareholder who at such time holds the highest number of our ordinary shares. Additionally, the parties to the agreement agreed to vote their shares at meetings of our shareholders at which members of the board are to be elected as follows: (a) to elect to our board two directors nominated by Mivtach, one of whom shall serve as chairman of our board, and (b) to elect to our board one director nominated by Elbit; provided that the party entitled to nominate a director continues to hold 15% of our share capital on a fully diluted basis. A reduction of a party’s holdings shall only be deemed to occur upon a sale by a shareholder of our Ordinary Shares. Notwithstanding the foregoing, if prior to May 14, 2008, Elbit holds less than the 7.5% threshold other than if any reductions in Elbit’s holdings are as a result of sales of our shares by Elbit, Elbit shall maintain its right to designate one member of the board, until May 14, 2008. A party whose holdings of our share capital falls below 5% of our share capital on a fully diluted basis, shall, as from the time of such change, automatically cease to be a party to the agreement. Elbit may, by written notice to Mivtach, voluntarily terminate its right to designate a director to our board of directors. In such case, the right to designate a director, which Elbit terminated, shall be granted to Mivtach and Elbit shall be obliged to vote its shares in favor of the nominee designated by Mivtach. Pursuant to the agreement, the parties also granted each other mutual rights of first offer and tag-along rights with respect to a private sale of our ordinary shares.
B. Related Party Transactions
Amendment to Convertible Loan Agreement with Mivtach Shamir
For information concerning convertible loan agreement, the amendment and the registration rights agreement, seeItem 4“Information on the Company – Recent Developments”.
Consulting Agreement with MA&AT
On May 1, 2006, we executed a consulting agreement with MA&AT, an Austrian company which receives services from, but is not controlled by, Mr. Nir Alon (a member of our board of directors), which includes the provision of consulting services by Mr. Alon to us for a fee. This agreement was approved and ratified by our shareholders on November 20, 2006.
68
On November 1, 2007, we executed a new consulting agreement with MA&AT for the provision of consulting services to us, through its designated representative, Mr. Alon. This agreement superseded and replaced the consulting agreement dated May 1, 2006. Pursuant to the agreement, Mr. Alon will promote sales of our UT Products in Europe (excluding France), India and South Africa in consideration for: (i) a monthly fee of $15,000, (ii) a commission on sales made by us of our UT products in Europe (excluding France), India and South Africa, unless Mr. Alon was not involved is such sale, in an amount of 2% of the net sale price of the products, (iii) an additional commission of 1% of gross profit per UT product, (iv) reimbursement of reasonable expenses incurred in connection with the performance of the consulting services, and (v) a car provided for the purpose of fulfilling the consulting services. The agreement also includes a non-competition provision restricting MA&AT and Mr. Alon from competing with us during the term of the agreement and for a year following the termination of the agreement. This new agreement was approved by our shareholders on March 24, 2008.
Appointment of David Gal as CEO
On February 21, 2006 our shareholders approved an agreement which provided for the terms of compensation for Mr. Gal. Under the agreement, we will pay Mr. Gal a monthly fee of $13,500 plus Value Added Tax, lease an automobile for his use, and supply him with certain other office related equipment necessary to provide us with his services. The agreement concerning Mr. Gal’s services may be terminated by either party upon providing 3 months prior written notice, and we shall pay all remuneration for such 3 month notice period. Additionally, we have granted Mr. Gal options to purchase up to 600,000 of our ordinary shares at an exercise price of $0.50 per share. One third of the options vested on December 31, 2006 and since which time 2.8% of the total shares subject to the option are vesting on a monthly basis. The vesting of the options is subject to Mr. Gal serving as the chairman of our board of directors on the relevant vesting date, and he shall be entitled to exercise the options up to 5 years after the options have vested.
At the annual general meeting of our shareholders held on November 20, 2006, our shareholders approved the appointment of Mr. David Gal as our Chief Executive Officer, in addition to his service as Chairman of our Board of Directors. Due to his additional responsibilities as Chief Executive Officer, following approval by our audit committee and board of directors, our shareholders approved on July 31, 2007, an increase in the monthly fee payable to MEO Consulting, a company controlled by Mr. David Gal, of $21,500 plus Value Added Tax to be payable from January 1, 2007.
Indemnification Agreements
On March 24, 2008, following approval by our audit committee and board of directors, our shareholders approved indemnification agreements with each of our current and future directors. The indemnification agreements provide, among other things, for the indemnification of our directors for up to $3 million for each case (in addition to any amounts paid out under an insurance policy) and their exemption from their duty of care in certain circumstances.
69
Commission to Mr. Nir Alon
On March 24, 2008, following approval by our audit committee and board of directors, our shareholders approved the payment of a certain commission to Mr. Nir Alon, a director of the Company, equal to five percent (5%) of the aggregate proceeds paid to the Company by UB Precision Co., Ltd., from the sale of all of the shares of Yuravision Co. Ltd., held by the Company, or the Yuravision Shares, and the assignment of creditor’s rights under a certain loan granted to Yuravision. Mr. Alon represented the Company in its search for a purchaser of the Yuravision Shares and in its negotiations with UB Precision.
C.Interests of Experts and Counsel.Not applicable
| ITEM 8. | | FINANCIAL INFORMATION |
A. Consolidated Statements and Other Financial Information
Our consolidated financial statements and other financial information are incorporated herein by reference to pages F1-F39.
Export Sales
In 2007, 97% of our sales, amounting to $21,209,000 were exported outside of Israel.
Litigation
Other than the claims described below, we are not a party to any material litigation and are not aware of any pending or threatened litigation that would have a material adverse effect on our business or us.
For information concerning legal proceedings with RDSO seeItem 4“Information on the Company – Recent Developments – Legal Claim in India”.
On November 7, 2007, we received a letter from the Ministry of Trade, Industry and Labor – Fund for the Encouragement of Marketing Abroad (the “Fund”), claiming that it had failed to pay royalties to the Fund since 1999 in the aggregate amount of $480,818. On November 21, 2007, we sent a letter to the Fund in which we stated that the Fund had not requested any of these royalties for many years despite our written request to clarify the issue. In our letter we stated that a material amount of the royalties could no longer be claimed due to the operation of the statute of limitations and that in any event the Fund may be estopped from making at least part of the claims as a result of its non-response to our inquiry. On December 18, 2007, we met with representatives of the Fund to discuss the issue. We have yet to receive a response to the meeting. On November 4, 2007, the Manufacturers Association of Israel (“MAI”) filed a claim with the Tel-Aviv-Jaffa District Labor Court against our company, claiming we have failed to pay MAI its annual handling fees over the past 7 years and claiming NIS 200,000 (approximately $57,143). On December 11, 2007, the court decided that in the absence of any objections from the parties, the claim would be transferred to the Nazereth District Labor Court. A hearing on the matter has been set for May 20, 2008 at the Nazereth District Labor Court. We are required to file our defense by April 30, 2008. We are currently in discussions with MAI to agree a settlement on this matter.
70
On August 30, 2007, we received notification of a claim filed with the Court of Prato, Italy, by an Italian customer, Microtex Cottonclub S.p.A. (“Microtex”) for damages in the amount of €139,787.97 (approximately $209,682). According to Microtex, we breached an agreement with Microtex, dated June 30, 2005, by failing to supply it with an iTex 3000 system. On March 12, 2008, Microtex executed a settlement agreement with us pursuant to which we agreed to return to Microtex a €13,200 down-payment made by it for the iTex 3000 and Microtex agreed to withdraw the claim.
On November 15, 2006, Mr. Yoav Kahane, our former VP of Marketing and Sales submitted a Statement of Claim to the Labor Court in Nazareth against our company in which Mr. Kahane claimed that we owed him an aggregate of $140,241.06 under our bonus compensation plan. On December 31, 2006, we filed a Statement of Defense with the Labor Court rejecting Mr. Kahane’s claims. On May 30, 2007, the parties reached and executed a settlement agreement, pursuant to which we paid Mr. Kahane NIS 275,000. On June 7, 2007, the Nazareth Labor Court approved the settlement agreement.
Dividend Distributions
We have never paid any cash dividends on our ordinary shares and we do not intend to pay cash dividends on our ordinary shares in the foreseeable future. Our current policy is to retain earnings for reinvestment in our business.
In the event that we decide to pay a cash dividend from income that is tax exempt under our approved enterprise status, we would be liable for corporate tax on the amount distributed at the rate of up to 25%. Income not derived from an approved enterprise in 2007 is taxable at regular rates of 31%. See Note [12] to our Consolidated Financial Statements andItem 10, “Additional Information – Taxation.”
B. Significant Changes
No significant changes have occurred since the date of the consolidated financial statements included in this annual report.
| ITEM 9. | | THE OFFER AND LISTING |
A.Offer and Listing Details andC.Markets
Market and Share Price History
In July 1996, we consummated an initial public offering of 2,000,000 ordinary shares. At such time, our ordinary shares were quoted on the NASDAQ National Market. Our ordinary shares were quoted on the NASDAQ National Market from July 1996. Effective December 29, 2000, our ordinary shares were delisted from the NASDAQ National Market. From that time our shares traded on the Over-the-Counter Bulletin Board until June 21, 2001, when they were transferred to the NASDAQ SmallCap Market. On November 19, 2003 our ordinary shares were delisted from the SmallCap Market and following a seven business day period in which the shares were traded on the Pink Sheets (as a result of an error by the NASDAQ Listings Qualifications Panel), our ordinary shares were listed on the Over-the-Counter Bulletin Board from November 28, 2003. For further information, seeItem 3, “Key Information – Risk Factors – Risk Factors Related to Our Ordinary Shares” andItem 4, “Information on the Company – History and Development of the Company”. From July 1996 until May 4, 1999, our ordinary shares were quoted under the symbol EVSNF. From May 4, 1999, until November 18, 2003, they were quoted under the symbol EVSN, and since November 19, 2003 our ordinary shares have been quoted under the symbol EVSNF.OB. Our ordinary shares are not listed on any other stock exchange and have not been publicly traded outside the United States.
71
The table below sets forth the high and low bid prices of the ordinary shares, as reported by the NASDAQ National Market, NASDAQ SmallCap Market or the Over-the-Counter Bulletin Board as applicable, during the indicated fiscal periods as reported by such exchange:
Period
| High ($)
| Low ($)
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| February 2008 | | | | 0.48 | | | 0.34 | |
| | | |
| January 2008 | | | | 0.51 | | | 0.41 | |
| | | |
| December 2007 | | | | 0.54 | | | 0.45 | |
| | | |
| November 2007 | | | | 0.46 | | | 0.39 | |
| | | |
| October 2007 | | | | 0.47 | | | 0.35 | |
| | | |
| September 2007 | | | | 0.37 | | | 0.28 | |
| | | |
| Fourth quarter 2007 | | | | 0.54 | | | 0.35 | |
| | | |
| Third quarter 2007 | | | | 0.37 | | | 0.27 | |
| | | |
| Second quarter 2007 | | | | 0.38 | | | 0.31 | |
| | | |
| First quarter 2007 | | | | 0.42 | | | 0.33 | |
| | | |
| Fourth quarter 2006 | | | | 0.32 | | | 0.22 | |
| | | |
| Third quarter 2006 | | | | 0.44 | | | 0.22 | |
| | | |
| Second quarter 2006 | | | | 0.69 | | | 0.35 | |
| | | |
| First quarter 2006 | | | | 0.83 | | | 0.64 | |
| | | |
| Year ended 2007 | | | | 0.54 | | | 0.27 | |
| | | |
| Year ended 2006 | | | | 0.83 | | | 0.22 | |
| | | |
| Year ended 2005 | | | | 0.77 | | | 0.44 | |
| | | |
| Year ended 2004 (2) | | | | 1.65 | | | 0.37 | |
| | | |
| Year ended 2003 (1) | | | | 1.86 | | | 0.11 | |
| | |
(1) Traded on the NASDAQ SmallCap Market until November 19, 2003, and subsequently on the Over-the-Counter Bulletin Board.
(2) Traded on the Over-the-Counter Bulletin Board throughout the period, and continues to trade there today.
72
B.Plan of Distribution. Not applicable
D.Selling Shareholders. Not applicable
E.Dilution. Not applicable
F.Expenses of the Issue. Not applicable
| ITEM 10. | | ADDITIONAL INFORMATION |
Memorandum and Articles of Association
A. Share Capital. Not applicable
B. Memorandum and Articles of Association
Our shareholders approved our articles of association on February 21, 2006. Our objective as stated in our articles of association is to engage in any lawful act or activity for which companies may be organized under the Israeli Companies Law-1999, as amended.
Currently we have one class of outstanding securities, our ordinary shares, par value NIS 1.00 per share. No preferred shares are currently authorized.
Holders of our ordinary shares have one vote per share, and are entitled to participate equally in the payment of dividends and share distributions and, in the event of our liquidation, in the distribution of property after satisfaction of liabilities to creditors. Our articles may be amended by a resolution carried at a general meeting by a majority of the shares voting on such resolution. The shareholders rights may not be modified in any other way unless otherwise expressly provided in the terms of issuance of the shares.
Our articles of association require that we hold our annual general meeting of shareholders each year no later than 15 months from the last annual meeting, at a time and place determined by the board of directors, upon at least 21 days prior notice to our shareholders. No business may be commenced until a minimum quorum under applicable law, which currently provides for two or more shareholders holding at least one-quarter of the voting rights are present in person or by proxy. A meeting adjourned for lack of a quorum is adjourned to the same day in the following week at the same time and place. At the reconvened meeting, in the event a quorum is not present within half an hour of the time fixed for the meetings commencement, then any two shareholders present shall constitute a quorum, regardless of the number of shares held by them.
73
Shareholders may vote in person or by proxy, and will be required to prove title to their shares as required by the Companies Law pursuant to procedures established by the board of directors. Resolutions regarding the following matters must be passed at a general meeting of shareholders:
| — | amendments to our articles of association; |
| — | appointment or termination of our auditors; |
| — | appointment and dismissal of directors, other than temporary directors which may be appointed by other directors; |
| — | approval of acts and transactions requiring general meeting approval under the Companies Law; |
| — | increase or reduction of our authorized share capital; |
| — | any merger as provided in Section 320 of the Companies Law; |
| — | the exercise of the board of directors’ powers by a general meeting, if the board of directors is unable to exercise its powers and the exercise of any of its powers is vital for our proper management, as provided in Section 52(a) of the Companies Law. |
A meeting of our shareholders shall be convened by our board of directors, at the request of any two directors or one quarter of the officiating directors, or by request of one or more shareholders holding at least 5% of our issued share capital. Within 21 days of receipt of the request, the board must convene a meeting and send out notices setting forth the date, time and place of the meeting.
The Israeli Companies Law
The Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An office holder, is defined in the Companies Law, as a (i) director, (ii) general manager, (iii) chief business manager, (iv) deputy general manager, (v) vice general manager, (vi) any other person assuming the responsibilities of any of the forgoing positions without regard to such person’s title or (vii) another manager directly subordinate to the general manager.
The Companies Law requires that an office holder of a company promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. In addition, if the transaction is an extraordinary transaction, as defined under Israeli law, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of the foregoing, or by any corporation in which the office holder is a 5% or greater shareholder, holder of 5% or more of the voting power, director or general manager or in which he or she has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction not in the ordinary course of the company’s business, not on market terms, or that is likely to have a material impact on the company’s profitability, assets or liabilities.
74
In the case of a transaction that is not an extraordinary transaction, after the office holder complies with the above disclosure requirement, only board approval is required unless the articles of association of the company provide otherwise. The transaction must not be adverse to the company’s interest. If the transaction is an extraordinary transaction, then, in addition to any approval required by the articles of association, it must also be approved by the audit committee and by the board of directors, and, under specified circumstances, by a meeting of the shareholders.
Agreements regarding directors’ terms of employment require the approval of the audit committee and the board of directors. In all matters in which a director has a personal interest, including matters of his/her terms of employment and compensation, he/she shall not be permitted to vote on the matter or be present at the meeting in which the matter is considered. However, should a majority of the audit committee or of the board of directors have a personal interest in the matter then:
| | a) | all of the directors shall be permitted to vote on the matter and attend the meeting in which the matter is considered; and |
| | b) | the matter requires approval of the shareholders at a general meeting. |
According to the Companies Law, the disclosure requirements discussed above also apply to a controlling shareholder of a public company. In general, extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and agreements relating to employment and compensation terms of a controlling shareholder require the approval of the audit committee, the board of directors and the shareholders of the company. For this purpose, the term “controlling shareholder” is defined as a shareholder who has the ability to direct the activities of a company, other than if this power derives solely from the shareholder’s position on the board of directors or any other position with the company. The definition also includes shareholders that hold 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company.
The shareholder approval must either include at least one-third of the shares held by disinterested shareholders who actively participate in the voting process, or, alternatively, the total shareholdings of the disinterested shareholders who vote against the transaction must not represent more than one percent of the voting rights in the company.
Private placements in a public company require approval by a company’s board of directors and shareholders in the following cases:
| | — | A private placement that meets all of the following conditions: |
| | š | The private placement will increase the relative holdings of a shareholder that holds five percent or more of the company’s outstanding share capital, assuming the exercise of all of the securities convertible into shares held by that person, or that will cause any person to become, as a result of the issuance, a holder of more than five percent of the company’s outstanding share capital. |
75
| | š | 20 percent or more of the voting rights in the company prior to such issuance are being offered. |
| | š | All or part of the consideration for the offering is not cash or registered securities, or the private placement is not being offered at market terms. |
| | — | A private placement which results in anyone becoming a controlling shareholder of the public company. |
In addition, under the Companies Law, certain transactions or a series of transactions are considered to be one private placement. Any placement of securities that does not fit the above description may be issued at the discretion of the board of directors.
Under the Companies Law, a shareholder has a duty to act in good faith towards the company and other shareholders and refrain from abusing his, her or its power in the company, including, among other things, voting in the general meeting of shareholders on the following matters:
| — | any amendment to the articles of association; |
| — | an increase of the company's authorized share capital; |
| — | approval of interested party transactions that require shareholder approval. |
In addition, any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or prevent the appointment office holder in the company is under a duty to act in good faith towards the company. The Companies Law does not describe the substance of this duty. The Companies Law requires that specified types of transactions, actions and arrangements be approved as provided for in a company’s articles of association and in some circumstances by the audit committee, by the board of directors and by the shareholders. The vote required by the audit committee and the board of directors for approval of these matters, in each case, is a majority of the disinterested directors participating in a duly convened meeting.
Provisions Restricting Change in Control of Our Company
Tender Offer. A person wishing to acquire shares or any class of shares of a publicly traded Israeli company and who would as a result hold over 90% of the company’s issued and outstanding share capital or of a class of shares which are listed, is required by the Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company. If the shareholders who do not respond to the offer hold less than 5% of the issued share capital of the company, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. The Companies Law provides for an exception regarding the threshold requirement for a shareholder that prior to and following February 2000 holds over 90% of a company’s issued and outstanding share capital. However, the shareholders may petition the court to alter the consideration for the acquisition. If the dissenting shareholders hold more than 5% of the issued and outstanding share capital of the company, the acquirer may not acquire additional shares of the company from shareholders who accepted the tender offer if following such acquisition the acquirer would then own over 90% of the company’s issued and outstanding share capital.
76
The Companies Law provides that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company. This rule does not apply if there is already another 25% shareholder of the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company, if there is no 45% or greater shareholder of the company.
Merger. The Companies Law permits merger transactions if approved by each party’s board of directors and the majority of each party’s shares voted on the proposed merger at a shareholders’ meeting called on at least 21 days’ prior notice. Under the Companies Law, merger transactions may be approved by holders of a simple majority of our shares present, in person or by proxy, at a general meeting and voting on the transaction. In determining whether the required majority has approved the merger, if shares of a company are held by the other party to the merger, or by any person holding at least 25% of the outstanding voting shares or 25% of the means of appointing directors of the other party to the merger, then a vote against the merger by holders of the majority of the shares present and voting, excluding shares held by the other party or by such person, or anyone acting on behalf of either of them, is sufficient to reject the merger transaction. If the transaction would have been approved but for the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be executed unless at least 30 days have passed from the receipt of the shareholders’ approval and 50 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of Companies. See alsoItem 6, “Directors, Senior Management And Employees – Directors And Senior Management”
Nasdaq Marketplace Rules and Home Country Practices
Not applicable.
C. Material Contracts
Convertible Loan Agreement with Mivtach Shamir. Discussions of this agreement, its amendmentand the Registration Rights Agreementare incorporated herein by reference to the discussion under the caption“Information on the Company – Recent Developments”in Item 4 of this Annual Report.
Investment Agreement, Registration Rights Agreement and Amendment to the Registration Rights Agreement with Elbit.Discussions of this agreement are incorporated herein by reference to the discussion under the caption“Information on the Company – Recent Developments”in Item 4 of this Annual Report.
77
Private Placement with Israeli Institutional Investors.Discussions of this agreement are incorporated herein by reference to the discussion under the caption“Information on the Company – Recent Developments”in Item 4 of this Annual Report.
Consulting Agreement with MA&AT.Discussions of this agreement are incorporated herein by reference to the discussion under the caption“Major Shareholders and Related Party Transactions – Related Party Transactions”in Item 7 of this Annual Report.
David Gal. Discussions of appointment of David Gal as CEO and compensation terms are incorporated herein by reference to the discussion under the caption“Major Shareholders and Related Party Transactions – Related Party Transactions”in Item 7 of this Annual Report.
Acquisition of Panoptes.
On February 21, 2006, together with ScanMaster, we acquired the business, assets, and shares of Panoptes, a company that develops, manufactures and markets machine vision systems for surface inspection, with an accent on technical woven materials, textiles, and glass fabric, or the Panoptes Technology. Panoptes’s machine vision systems inspects fabrics in all stages of production, from on-loom weaving to finished fabric, and produces images, maps and statistical data for all visual defects. In connection with such acquisition, we issued 800,000 of our ordinary shares to Ma’aragim, Panoptes’s previous shareholder, and, subject to certain instances, are obligated to pay cash royalties equaling 3.5% of sales of EVS optical inspection systems between January 1, 2006 and December 31, 2008.
Loan from Mizrahi Bank.
On August 15, 2005 and February 15, 2006, together with ScanMaster we entered into an agreement with Mizrahi Tefahot Bank Ltd., or Mizrahi, pursuant to which both us and ScanMaster received a credit line for the aggregate amount of $2,000,000 from Mizrahi. The credit line is secured by a first ranking floating charge on all of our assets and all the assets of ScanMaster. This credit line will terminate on June 30, 2007. We also granted Mizrahi a warrant to purchase up to 571,429 ordinary shares, at an exercise price of $0.77 per share. In November 2006 our board approved to reduce the exercise price to $0.5 per share. The number of our ordinary shares which we may issue pursuant to the warrant may increase upon certain events, as defined in the warrant.
Sale of Yuravision.
In June 2004, we purchased Yuravision Co. Ltd., or Yuravision, a company in the microelectronics and flat-panel display industries. In 2006 our board of directors and management decided to focus on existing markets rather than continue developing our microelectronics technologies. As a result, on December 1, 2006, we executed an agreement with a Korean corporation for the sale of Yuravision shares in consideration for $950,000, or the Purchase Price, plus the purchase from us of our right to receive from Yuravision repayment of an $800,000 loan, or the Loan Amount in consideration for the full value of the loan. Half of the Purchase Price was paid upon the closing of the transaction on December 15, 2006, and the remaining half of the Purchase Price was to be payable no later than December 1, 2008. The purchaser undertook to pay us half of the Loan Amount by no later than December 1, 2008 and the remaining half, or the Outstanding Payment, by no later than May 1, 2009. The Outstanding Payment was subject to reduction in the event that certain of the employees of Yuravision resigned from Yuravision prior to December 1, 2008. We received a stand by letter of credit from the purchaser guaranteeing payment of the Loan Amount.
78
On January 28, 2008 we entered into a modification agreement amending the December 1, 2006 agreement with the Korean corporation. Pursuant to the modification agreement the Loan Amount was reduced from $800,000 to $460,000, without any further obligation by the Korean corporation for the reduced amount of $340,000. The payment terms of the loan were changed so that the Korean corporation was required to pay us $360,000 by February 11, 2008 and to pay us the remaining $100,000 owed under the loan by January 28, 2009. A payment of $360,000 was made by the Korean corporation to us on February 4, 2008. The terms for the payment of the purchase price were not changed.
D. Exchange Controls
The Government of Israel recently replaced the general prohibition under the Israel Currency Control Law. Pursuant to the new general permit, most transactions in foreign currency are permitted. Any dividends or other distributions paid in respect of ordinary shares and any amounts payable upon the dissolution, liquidation or winding up of our affairs, as well as the proceeds of any sale in Israel of our securities to an Israeli resident are freely repatriable into non-Israeli currencies at the rate of exchange prevailing at the time of conversion, provided that Israeli income tax has been paid on (or withheld from) such payments. Because exchange rates between the NIS and the U.S. Dollar fluctuate continuously, U.S. shareholders will be subject to any such currency fluctuation during the period from when such dividend is declared through the date that the payment is made in U.S. Dollars. For further discussion with respect to such currency fluctuation, seeItem 5, “Operating and Financial Review and Prospects – Impact of Inflation and Devaluation on Results of Operations, Liabilities, and Assets.”
E. Taxation
The following is a summary of the material tax consequences in the United States and Israel to individual and corporate residents of the United States and Israel resulting from the sale of ordinary shares (i) issuable to the selling security holders pursuant to the exercise of the Warrants and (ii) held by the selling security holders. Since we have never paid dividends on our ordinary shares, this summary does not discuss the tax consequences in Israel or the United States that would result from the payment of dividends. To the extent that the discussion is based on tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the tax authorities will accept the views expressed in this summary.
Israeli Tax Considerations
The following is a summary of the current tax law applicable to companies in Israel, with special reference to its effect on us. The following also contains a discussion of specified Israeli Government programs benefiting us. To the extent that the discussion is based on tax legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax authorities in question. The discussion is not intended, and should not be taken, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
79
WE RECOMMEND THAT IN ADDITION TO REVIEWING THE DISCUSSION BELOW, PROSPECTIVE PURCHASERS OF OUR ORDINARY SHARES CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES, ISRAELI OR OTHER TAX CONSEQUENCES TO THEM, BASED UPON THEIR PARTICULAR CIRCUMSTANCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
General Corporate Tax Structure
Israeli companies are subject to corporate tax at the rate of 29% in the 2007 tax year, 27% in the 2008 tax year 26% in the 2009 tax year and 25% in the 2010 tax year and thereafter. However, the effective tax rate payable by a company which derives income from an Approved Enterprise (as further discussed below) may be considerably less.
Law for the Encouragement of Capital Investments, 1959
Certain of our facilities have been granted “Approved Enterprise” status under the Law for the Encouragement of Capital Investments, 1959, as amended, or the Investment Law. The Investment Law provides that a capital investment in eligible facilities may, upon application to the Israel Investment Center of the Ministry of Industry and Trade of the State of Israel (referred to as the Investment Center), be designated as 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 and its physical characteristics, for example, the equipment to be purchased and utilized pursuant to the program. The tax benefits derived from any such certificate of approval relate only to taxable income attributable to the specific Approved Enterprise.
A recent amendment to the Investment Law which came into effect as of April 1, 2005, or the Amendment, significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by determining criteria for the approval of a facility as an Approved Enterprise, such as provisions generally requiring that at least 25% of the income of an Approved Enterprise will be derived from export. Additionally, as explained below, the Amendment sets forth major changes in the manner in which tax benefits are awarded under the Investment Law whereby companies no longer require Investment Center approval (and Approved Enterprise status) in order to qualify for tax benefits. However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the Investment Law as in effect on the date of such approval. Therefore the tax benefits granted to our Approved Enterprises under the Investment Law will generally not be subject to the provisions of the Amendment.
80
Tax Benefits Prior to the Amendment
In general, taxable income of a company derived from an Approved Enterprise was subject to corporate tax at the maximum rate of 25% rather than the rates stated above (this will also apply to Approved Enterprises approved after the Amendment, as explained below). The 25% corporate tax rate applies for a period of time termed the “benefit period”. The benefit period is a period of seven years commencing with the year in which the Approved Enterprise first generated taxable income. In any event, the benefit period is limited to 12 years from the commencement of production or 14 years from the year of receipt of approval, whichever is earlier. Under certain circumstances (as further detailed below), the benefit period may extend to a maximum of ten years from the commencement of the benefit period. In the event that a company is operating under more than one approval or that only part of its capital investments are approved, or a Mixed Enterprise, its effective Company Tax rate is the result of a weighted combination of the various applicable rates.
A company which qualifies as a “Foreign Investors’ Company” is entitled to an extended benefit period and to further reductions in the tax rate normally applicable to Approved Enterprises. Subject to certain conditions, a “Foreign Investors’ Company” is a company in which persons who are not residents in Israel invested more than 25% of its combined shareholders’ investment in share capital (in terms of rights to profits, voting and the appointment of directors) and in long term shareholders’ loans, as defined in the Investment Law. The percentage owned by nonresidents of Israel for any tax year will be determined by the lowest percentage of any of the above rights held by nonresidents during that year. Such a company will pay corporate tax at reduced rates for an extended ten-year (rather than the otherwise applicable seven-year) period as detailed below:
| Level of Foreign Investment
| Corporate Tax
Rate
| Benefit period
(years)
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Over 0% but less than 25% | | | | 25 | % | | 7 | |
| | | |
| Over 25% but less than 49% | | | | 25 | % | | 10 | |
| | | |
| Over 49% but less than 74% | | | | 20 | % | | 10 | |
| | | |
| Over 74% but less than 90% | | | | 15 | % | | 10 | |
| | | |
| 90% or more | | | | 10 | % | | 10 | |
| | | |
There can be no assurance that the above-mentioned shareholding proportion will be reached by us.
Prior to the Amendment, a company owning an Approved Enterprise approved after April 1, 1986 (or prior thereto provided no government grants or loans had previously been granted regarding such enterprise) was entitled to elect (as we have) to forego certain Government grants extended to Approved Enterprises in return for an “alternative track” of tax benefits, or the Alternative Track. Under the Alternative Track, a company’s undistributed income derived from an Approved Enterprise is exempt from corporate tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location of the Approved Enterprise within Israel, and such company is eligible for the reduced tax rates under the Investment Law for the remainder of the benefit period as mentioned above.
81
The entitlement to the above benefits is conditional upon fulfillment of the conditions stipulated by the law, regulations published thereunder and the instruments of approval for the specific investments in the Approved Enterprise. In the event of failure to comply with these conditions, the benefits may be canceled and a company may be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences, interest and penalties.
Should we derive income from sources other than the Approved Enterprise during the relevant periods of benefits, such income will be taxable at regular corporate tax rates.
A company that elected the Alternative Track and that subsequently pays a dividend out of income derived from the Approved Enterprise(s) during the tax exemption period will be subject to corporate tax in the year the dividend is distributed in respect of the amount distributed (including the corporate tax thereon), at the rate that would have been applicable had the company not elected the Alternative Route (10%-25%, depending on the level of foreign investment in the company, as explained above). In addition, the dividend recipient is taxed at the reduced rate applicable to dividends from Approved Enterprises (15%), if the dividend is distributed during the tax exemption period or within a specified period thereafter (In the event, however, that the company qualifies as a Foreign Investors’ Company, there is no such time limitation). This tax must be withheld by the company at source, regardless of whether the dividend is converted into foreign currency.
Subject to certain provisions concerning income subject to the Alternative Route, all dividends are considered to be attributable to the entire enterprise and the effective tax rate is the result of a weighted combination of the various applicable tax rates.
The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program.
Grants and certain other incentives received by a company in accordance with the Investment Law remain subject to final ratification by the Israel Investment Center and final determination by the Israel Tax Authority. Such ratification and determination are conditional upon fulfillment of all of the terms of the approved program.
Tax Benefits under the Amendment
As a result of the Amendment, it is no longer required to acquire Approved Enterprise status in order to receive the tax benefits previously available under the Alternative Track of benefits and therefore companies need not apply to the Investment Center for this purpose. However, the Investment Center will continue to grant Approved Enterprise status to companies seeking governmental grants. 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 Amendment, or a Benefited Enterprise. Companies are also entitled to approach the Israeli Tax Authority and request for a pre-ruling regarding their eligibility for benefits under the Amendment. The Amendment includes provisions intended to ensure that a company will not enjoy both government grants and tax benefits for the same investment program.
82
Tax benefits are available under the Amendment to production facilities and to other eligible facilities, which are generally required to derive more than 25% of their business income from export. In order to receive the tax benefits, the Amendment states that the company must make an investment in the Benefited Enterprise exceeding a minimum amount specified in the Investment Law. Such investment may be made over a period of no more than three years concluding at the end of the year in which the company requests to have the tax benefits apply to its Benefited Enterprise, or the Year of Election. Where the company requests to have the tax benefits apply to an expansion of existing facilities, only the expansion will be considered a Benefited Enterprise and the company’s effective tax rate will be the result of a weighted combination of the applicable rates. In the case of an expansion of existing facilities, the minimum investment required in order to qualify as a Benefited Enterprise is determined as a certain percentage of the company’s production assets before the expansion.
The tax benefits available under the Amendment to qualifying income of a Benefited Enterprise are determined by the geographic location of the Benefited Enterprise in Israel. The Investment Law divides the country into three zones – A, B and C, so that a Benefited Enterprise operating in Zone A (which generally includes areas remote from the center of Israel) will receive the greatest benefits and Benefited Enterprises in Zone C will receive the least benefits.
The Amendment provides that a company producing income from a Benefited Enterprise in Zone A may elect either that (i) the undistributed income derived from the Benefited Enterprise will be fully tax exempt for the entire benefit period described below, or tax exemption, in which case the ordinary provisions described below concerning the taxation of the company and shareholder for distribution of dividends will apply; or (ii) that the income from its Benefited Enterprise will be subject to corporate tax at a rate of a 11.5%, in which case dividends paid out of such income to a foreign resident will be taxed at a rate of 4% and the company will not be subject to additional tax upon dividend distribution. Further benefits are available in the event of certain large investments by multinational companies. Benefited Enterprises located in Zones B and C will be exempt from tax for six and two years, respectively, and subject to tax at a rate of 10%-25% for the remainder of the benefit period, depending on the extent of foreign investment in the Company, as described above.
Similarly to a company which elected the Alternative Track before the amendment, dividends paid out of income derived by a Benefited Enterprise, or out of dividends received from a company whose income is derived from a Benefited Enterprise, are generally subject to withholding tax at the rate of 15%, such tax being deductible at source. The reduced withholding tax rate of 15% is limited to dividends and distributions out of income derived during the benefit period and actually paid at any time up to 12 years thereafter. A company qualifying for tax benefits under the Amendment which pays a dividend out of income derived by its Benefited Enterprise during the tax exemption period will be subject to corporate tax in respect of the gross amount of the dividend. The rate of such corporate tax will be 25%, which is the rate to which a Benefited Enterprise is generally subject. Such tax rate is lower in the case of a qualified “Foreign Investors’ Company”. The dividend recipient is subject to tax at the rate of 15% on the amount received which tax is deductible at source.
The period for which tax benefits are available under the Amendment is also determined by the geographical location of the Benefited Enterprise in Israel. The benefit period for Benefited Enterprises in Zone A will end on the earlier of (i) a period of ten years from the tax year in which the company first derived taxable income from the Benefited Enterprise, or the Commencement Year; or (ii) twelve years (or in certain cases fourteen years) from the first day of the Year of Election. The benefit period for Benefited Enterprises in Zones B and C will extend until the earlier of (i) seven years from the Commencement Year or (ii) 12 years from the first day of the Year of Election. This period may be extended for Benefited Enterprises owned by a “Foreign Investors’ Company” during all or part of the benefit period.
83
Additionally, the Amendment sets forth a minimal amount of foreign investment required for a company to be regarded a Foreign Investors’ Company.
There can be no assurance that we will attain approval for additional tax benefits under the Amendment, or receive approval for Approved Enterprises in the future.
Law for the Encouragement of Industrial Research and Development, 1984
Under the Law for the Encouragement of Industrial Research and Development, 1984, commonly referred to as the Research Law, research and development programs that meet specified criteria and are approved by a governmental committee of the OCS are eligible for grants of up to 50% of the project’s expenditures, as determined by the research committee, in exchange for the payment of royalties from the sale of products developed under the program. Regulations under the Research Law generally provide for the payment of royalties to the Chief Scientist of 3-5% on sales of products and services derived from a technology developed using these grants until 100% of the dollar-linked grant is repaid. Our obligation to pay these royalties is contingent on our actual sale of such products and services. In the absence of such sales, no payment is required. Effective for grants received from the Chief Scientist under programs approved after January 1, 1999, the outstanding balance of the grants will be subject to interest at a rate equal to the 12 month LIBOR applicable to dollar deposits that is published on the first business day of each calendar year. Following the full repayment of the grant, there is no further liability for royalties.
The terms of the Israeli government participation also require that the manufacture of products developed with government grants be performed in Israel. However, under the regulations of the Research Law, if any of the manufacturing is performed outside of Israel, assuming we receive approval from the Chief Scientist for the foreign manufacturing, we may be required to pay increased royalties. The increase in royalties depends upon the extent of the manufacturing volume that is performed outside of Israel as follows:
Extent of Manufacturing
Volume Outside of Israel
| Royalties to the
Chief Scientist
as percentage
of Grants
|
|---|
| | |
|---|
| |
|---|
| |
|---|
| |
|---|
| less than 50% | | | | 120 | % |
| between 50% and 90% | | | | 150 | % |
| 90% and more | | | | 300 | % |
| |
A recent amendment to the Research Law has provided that the restriction on manufacturing outside of Israel shall not apply to the extent that plans to so manufacture were declared when applying for funding.
84
In general, the technology developed with Chief Scientist grants may not be transferred to Israeli third parties without the prior approval of a governmental committee under the Research Law and may not be transferred to non-Israeli third parties. A recent amendment to the Research Law has stressed, that it is not just transfer of know-how that is prohibited, but also transfer of any rights in such know-how. This approval, however, is not required for the export of any final products developed using the grants. Approval of the transfer of technology may be granted in specific circumstances only if the recipient abides by the provisions of the Research Law and related regulations, including the restrictions on the transfer of know-how and the obligation to pay royalties in an amount that may be increased. We cannot assure you that any consent, if requested, will be granted, or if granted, will be on reasonable commercial terms.
The Israeli authorities have indicated that the government may reduce or abolish grants from the Chief Scientist in the future. Even if these grants are maintained, we cannot assure you that we will receive Chief Scientist grants in the future. In addition, each application to the Chief Scientist is reviewed separately, and grants are based on the program approved by the research committee. Generally, expenditures supported under other incentive programs of the State of Israel are not eligible for grants from the Chief Scientist. We cannot assure you that applications to the Chief Scientist will be approved and, until approved, the amounts of any grants are not determinable.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction in the year incurred for expenditures (including capital expenditures) in scientific research and development projects, if the expenditures are approved by the relevant Israeli Government Ministry (determined by the field of research) and the research and development is for the promotion of the enterprise and is carried out by or on behalf of the company seeking such deduction. Such expenditures not so approved are deductible over a three-year period.
Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law, Industrial Companies (as defined below) are entitled to the following tax benefits:
(a) Amortization of purchases of know-how and patents over eight years for tax purposes.
(b) The right to elect, under specified conditions, to file a consolidated tax return with other related Israeli Industrial Companies.
(c) Amortization of expenses incurred in connection with certain public securities issuances over a three-year period.
(d) Tax exemption for shareholders who held shares before a public offering on capital gains derived from the sale (as defined by law) of securities, if realized after more than five years from the public issuance of additional securities of the company. (As of November 1994, this exemption was repealed, however, it applies to some of our shareholders pursuant to a grand-fathering clause; the recent tax reform repealed the grandfathered exemption for any gains accrued from January 1, 2003.)
85
(e) Accelerated depreciation rates on equipment and buildings.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. Under the Industry Encouragement Law, an “Industrial Company” is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, determined in Israeli currency, exclusive of income from government loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production activity.
We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law. No assurance can be given that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
Taxation under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, which was effective until 1.1.2008, or the Inflationary Adjustments Law, represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. The Inflationary Adjustments Law is characterized by a high degree of complexity and its salient features can be described generally as follows:
(a) A special tax adjustment for the preservation of equity whereby certain corporate assets are classified broadly into Fixed (inflation resistant) Assets and Non-Fixed (non-inflation resistant) Assets. Where a corporation’s equity, as defined in such law, exceeds the depreciated cost of Fixed Assets, a tax deduction which takes into account the effect of the annual inflationary change on such excess is allowed (up to a ceiling of 70% of taxable income in any single tax year, with the unused portion permitted to be carried forward on a linked basis). If the depreciated cost of Fixed Assets exceeds a corporation’s equity, then such excess multiplied by the annual inflation rate is added to taxable income.
(b) Depreciation deductions on Fixed Assets and losses carried forward are adjusted for inflation based on the increase in the Israeli Consumer Price Index.
In February 2008, the Inflationary Adjustments Law was repealed, effective from 1.1.2008 and therefore companies will be taxed on their income using nominal values.
Capital Gains Tax on Sales of Our Ordinary Shares
Until the end of the year 2002 and provided we maintained our status as an industrial corporation, capital gains from the sale of our securities were generally exempt from Israeli Capital Gains Tax. This exemption did not apply to a shareholder whose taxable income was determined pursuant to the Israeli Income Tax Law (Inflationary Adjustments) 1985, or to a person whose gains from selling or otherwise disposing of our securities were deemed to be business income.
86
On January 1, 2006 an amendment to the Israeli tax regime became effective, or the 2006 Tax Reform. The 2006 Tax Reform significantly changed the tax rates applicable to income derived from shares.
According to the 2006 Tax Reform, an individual is subject to a 20% tax rate on real capital gains derived from the sale of shares, as long as the individual is not a “substantial shareholder” (generally a shareholder with 10% or more of the right to profits, right to nominate a director or voting rights) of the company issuing the shares. There will generally be no capital gains tax on the inflationary surplus.
A substantial shareholder will be subject to tax at a rate of 25% in respect of real capital gains derived from the sale of shares issued by the company in which he or she is a substantial shareholder. The determination of whether the individual is a substantial shareholder will be made on the date that the securities are sold. In addition, the individual will be deemed to be a substantial shareholder if at any time during the 12 months preceding this date he had been a substantial shareholder.
Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares in an Israeli corporation publicly traded on the TASE and/or on a foreign stock exchange, provided such gains do not derive from a permanent establishment of such shareholders in Israel and that such shareholders did not acquire their shares prior to the issuer’s initial public offering. However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source.
Pursuant to the treaty between the Governments of the United States and Israel with respect to taxes on income, or the U.S.-Israel tax treaty, the sale, exchange or disposition of our ordinary shares by a person who qualifies as a resident of the United States under the treaty and who is entitled to claim the benefits afforded to him by the treaty, will generally not be subject to Israeli capital gains tax. This exemption shall not apply to a person who held, directly or indirectly, shares representing 10% or more of the voting power in our company during any part of the 12-month period preceding the sale, exchange or disposition, subject to certain conditions. A sale, exchange or disposition of our shares by a U.S. resident qualified under the treaty, who held, directly or indirectly, shares representing 10% or more of the voting power in our company at any time during the preceding 12-month period would be subject to Israeli tax, to the extent applicable; however, under the treaty, this U.S. resident would be permitted to claim a credit for these taxes against the U.S. income tax with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits.
Taxation of Dividends
Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. On distributions of dividends other than bonus shares, or stock dividends, to Israeli individuals and foreign resident individuals and corporations we would be required to withhold income tax at the rate of 20%. If the income out of which the dividend is being paid is attributable to an Approved Enterprise under the Law for the Encouragement of Capital Investments, 1959, the rate is 15%. A different rate may be provided for in a treaty between Israel and the shareholder’s country of residence. Under the U.S.-Israel tax treaty, if the income out of which the dividend is being paid is not attributable to an Approved Enterprise, then income tax with respect to shareholders that are U.S. corporations holding at least 10% of our voting power in the twelve-month period preceding the distribution of such dividends, is required to be withheld at the rate of 12.5%.
87
Residents of the United States will generally have taxes in Israel withheld at source. Such persons generally would be entitled to a credit or deduction for United States Federal income tax purposes for the amount of such taxes withheld, subject to limitations applicable to foreign tax credits.
Effective Corporate Tax Rate
Our effective tax rate in Israel was 0% in each of the years 2003, 2004, 2005, 2006 and 2007 (the regular rate of corporate tax being 35% in 2004, 34% in 2005, 31% in 2006 and 29% in 2007).
Under the law, by virtue of the “approved enterprise” status granted to investments in certain assets of ours and ScanMaster Ltd., we are entitled to various tax benefits.
The main tax benefits available to us and ScanMaster Ltd. are:
Tax exemption during the period of benefits – 10 years – commencing in the first year in which we earn taxable income from the approved enterprises (provided that the maximum period to which it is restricted by the law has not elapsed).
We have three approved enterprises; the benefit period in respect of the first, second and third enterprises commenced in 1994, 1995, and 1997, respectively. The periods of benefits expired in 2003, 2004 and 2006, respectively.
In the event of distribution of cash dividends from income, which was tax exempt as above, we would have to pay 25% tax in respect of the amount distributed. The amount distributed for this purpose includes the amount of the tax that applies as a result of the distribution.
In 2005, we received from the Investment Center the instrument of approval for its fourth approved enterprise.
88
During the period of benefits – 7 years – commencing in the first year in which the company earns taxable income from the approved enterprises (provided the maximum period to which it is restricted by law has not elapsed), the following reduced tax rates apply:
Tax exemption on income from approved enterprises in respect of which the companies have elected the “alternative benefits” (involving waiver of investment grants); the length of the exemption period is four years, after which the income from these enterprises is taxable at the rate of 25% for three years.
ScanMaster Ltd. has three approved enterprises; the benefit periods in respect of the first and second enterprises commenced in 1994 and 1997, respectively.
The period of tax benefits in respect of the first approved enterprise has expired. The period of tax benefits in respect of the second approved enterprise will expire in 2008. The third approved enterprise has not yet been activated.
On March, 2004 ScanMaster Ltd. was warned by the Investment Center that their second approved enterprise status may be withdrawn, a decision which we plan to appeal in the near future. In the event such approved enterprise status is cancelled, we do not believe that we will be subject to penalties since a grant has not been received and tax benefits were not used.
Our taxes outside Israel are dependent on operations in each jurisdiction as well as relevant laws and treaties. We incurred tax expenses in the aggregate amount of approximately $6,000, $3,000 and $6,000, outside of Israel in 2004, 2003 and 2002, respectively. There can be no assurance that changes in our operations or applicable tax treaties or laws will not subject us to taxation.
We received final tax assessments for the years since our incorporation ending and including December 31, 2002. ScanMaster Ltd. received final tax assessments through the tax year 2002. Our other subsidiaries have not received final tax assessments since their respective incorporations.
United States Tax Considerations
Subject to the limitations described in the next paragraph, the following discussion describes the material U.S. federal income tax consequences resulting from the ownership and disposition of ordinary shares by each person who is a US Holder (as defined below). For purposes of our discussion a U.S. Holder means any holder of ordinary shares who is:
| | — | a citizen or resident of the United States; |
| | — | a corporation created or organized in the United States or under the laws of the United States or any State; |
| | — | an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source; or |
| | — | a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or if the trust has validly elected to be treated as a U.S. person under applicable Treasury regulations. |
89
The discussion is based on current provisions of the Internal Revenue Code of 1986, or the Code, as amended, current and proposed Treasury regulations promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly on a retroactive basis. This discussion is not a representation of, nor does it address, all aspects of United States federal income taxation that may be relevant to any particular shareholder based on such shareholder’s individual circumstances. In particular, this discussion considers only U.S. Holders that will own ordinary shares as capital assets at all relevant times and does not address the potential application of the alternative minimum tax or U.S. federal income tax consequences to U.S. Holders that are subject to special treatment, including U.S. Holders that:
| | — | are broker-dealers or insurance companies; |
| | — | have elected mark-to-market accounting; are financial institutions or financial services entities; |
| | — | hold ordinary shares as part of a straddle, hedge or conversion transaction with other investments; |
| | — | own directly, indirectly or by attribution at least 10% of our voting power; or |
| | — | have a functional currency that is not the U.S. dollar. |
In addition, this discussion does not address any aspect of state, local or non-U.S. tax laws.
Additionally, the discussion does not consider the tax treatment of persons who hold ordinary shares through a partnership or other pass-through entity or the possible application of U.S. federal gift or estate tax.
Each prospective investor is advised to consult such person’s own tax advisor with respect to the specific tax consequences to such person of purchasing, holding or disposing of ordinary shares.
F. Dividends and Paying Agents.
Not applicable
G.Statement by Experts.
Not applicable
H. Documents on Display
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill the obligation with respect to such requirements by filing reports with the Securities and Exchange Commission. You may inspect and copy such material at the public reference facilities maintained by the Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of such material from the Securities and Exchange Commission at prescribed rates by writing to the Public Reference Section of the Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference room. The Securities and Exchange Commission maintains an Internet website athttp://www.sec.gov that contains reports, proxy statements, information statements and other material that are filed through the Securities and Exchange Commission’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. We began filing through the EDGAR system beginning on December 2, 2002.
90
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the 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. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. However, we generally do publicly announce our year-end results promptly and file periodic information with the SEC under cover of Form 6-K. A copy of each report submitted in accordance with applicable United States law is available for public review at our principal executive offices.
Any statement in this annual report about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the registration statement, the contract or document is deemed to modify the description contained in this annual report. We urge you to review the exhibits themselves for a complete description of the contract or document.
I.Subsidiary Information.Not applicable
| ITEM 11. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
In the course of our normal operations, we are exposed to market risks including fluctuations in foreign currency exchange rates and interest rates.
Foreign Currency Exchange
The majority of our revenues is generated in, or linked to, U.S. dollars (“Dollars”). In addition, a substantial portion of our costs is incurred in New Israeli Shekels (“NIS”). We believe that the Dollar is the currency of the primary economic environment in which we operate. Thus, our functional and reporting currency is the Dollar.
Our operating and pricing strategies take into account changes in exchange rates over time. However, there can be no assurance that future fluctuations in the value of foreign currencies will not have an adverse material effect on our business, operating results or financial condition.
Market risk was estimated as the potential change in fair value resulting from a hypothetical 10% change in the year-end Dollar exchange rate.
91
As of December 31, 2007, we had accounts payable in NIS or in funds linked thereto in the amount of $3.4 million. Market risk was estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in the year-end NIS/Dollar and the Euro/Dollar exchange rate. Assuming such decrease in the NIS/Dollar and the Euro/Dollar exchange rate, the fair value of our accounts payable would increase by $340,000.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily to funds borrowed by us from banks and others. As of December 31, 2007 we had liabilities in the amount of $5.967 million. Market risk was estimated as the potential increase in fair value of our liabilities resulting from a hypothetical 10% increase in the year-end interest rate of our liabilities. Assuming such increase in the interest rates, the fair value of our cash and cash equivalents would decrease by approximately $48,000.
| ITEM 12. | | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. |
Not applicable.
PART II
| ITEM 13. | | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES. |
None.
| ITEM 14. | | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. |
None.
| ITEM 15. | | CONTROLS AND PROCEDURES |
| ITEM 15T. | 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, 2007. Based on such review, our chief executive officer and chief financial officer have concluded that we have in place effective 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 our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
(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, 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 as 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:
92
| | – | 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 our 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, 2007 based on the framework for Internal Control-Integrated Framework set forth by The Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that the Company’s internal controls over financial reporting were effective as of December 31, 2007. |
| | This management report on internal control over financial reporting shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to the liabilities of that Section. |
| | This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Commission that permit us to provide only management’s report in this Annual report. |
(c) 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.
93
| ITEM 16A | Audit Committee Financial Expert |
Our board of directors has determined that Mr. David Schwartz is our audit committee financial expert and is independent in accordance with applicable Securities and Exchange Commission regulations.
Our board of directors has adopted a code of ethics, which applies to all of our employees, officers and directors, including our chief executive officer, our chief financial officer and our principal accountant. We undertake to provide any person with a copy of our code of ethics upon request.
| ITEM 16C | Principal Accountant Fees and Services |
The following table presents fees for professional audit services rendered by our principal accountants, Brightman Almagor & Co., for the audit of our consolidated annual financial statements for the years ended December 31, 2006, and December 31, 2007.
| | 2007
| 2006
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Audit Fees(1) | | | | 70,000 | | | 70,000 | |
| Tax Fees(2) | | | | 2,500 | | | - | |
| All Other Fees(3) | | | | 16,200 | | | - | |
| Total | | | | 88,700 | | | 70,000 | |
| | | |
| | (1) | “Audit fees” consist of fees for professional services rendered for the audit of our consolidated financial statements and review of financial statements and services normally provided by the independent auditor in connection with statutory and regulatory filings or engagements. |
| | (2) | “Tax fees” are fees for consulting services rendered by our auditors with respect to company tax services and to tax benefits under the Israeli law for encouragement of investment. |
| | (3) | “All Other Fees” are fees for consulting services rendered by our auditors with respect to the requests for grants from the Israeli Office of the Chief Scientist and other. |
Pre-approval Policies and procedures
The audit committee approves all audit, audit-related services, tax services and other services provided by Brightman Almagor & Co. Any services provided by Brightman Almagor & Co. that are not specially included within the scope of the audit must be pre-approved by our audit committee prior to any engagement.
| ITEM 16D | Exemptions from the Listing and Standards of Audit Committees |
Not applicable.
| ITEM 16E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
The discussion relating to the purchase of our securities by Altro is incorporated herein by reference toItem 3,“Risk Factors – Risks Related to Our Ordinary Shares”.
94
PART III
| ITEM 17. | | FINANCIAL STATEMENTS. |
Not applicable.
| ITEM 18. | | FINANCIAL STATEMENTS. |
See pages F-1 to F-47.
| 1.1 | Articles of Association, as amended, of the Registrant, incorporated by reference to Exhibit A to our Form 6-K, File No. 000-28580, filed with the Commission on January 25, 2006. |
| 1.2 | English translation or summary from Hebrew original Memorandum of Association of the Registrant, incorporated by reference to our Registration Statement on Form F-1, File No. 333-03080, as amended, filed with the Commission on April 2, 1996. |
| 4.1 | Amendment No.1 to License Agreement dated June 12, 1996, among the Company, Elbit Ltd. and Dr. Ilan Tamches, dated May 12, 2002, incorporated by reference to our Annual Report on Form 20-F for the year ended December 31, 2001. |
| 4.2 | Agreement dated January 2, 2006, between the Company and Mivtach Shamir Holdings Ltd., incorporated by reference to our Registration Statement on Form F-3, File No. 333-134591, filed with the Commission on May 31, 2006. |
| 4.3 | Appendix to Agreement dated February 21, 2006, between the Company and Mivtach Shamir Holdings Ltd., incorporated by reference to our Registration Statement on Form F-3, File No. 333-134591, filed with the Commission on May 31, 2006. |
| 4.4 | Asset and Share Purchase Agreement dated December 27, 2005, among Panoptes Ltd., Elbit Vision Systems Ltd., ScanMaster Systems (IRT) Ltd. and Ma'aragim Enterprises Ltd., incorporated by reference to our Registration Statement on Form F-3, File No. 333-134591, filed with the Commission on May 31, 2006. |
| 4.5 | Amendment to Asset and Share Purchase Agreement dated February 21, 2006, among Panoptes Ltd., Elbit Vision Systems Ltd., ScanMaster Systems (IRT) Ltd. and Ma'aragim Enterprises Ltd., incorporated by reference to our Registration Statement on Form F-3, File No. 333-134591, filed with the Commission on May 31, 2006. |
95
| 4.6 | Securities Purchase Agreement among the Company and the Buyers as defined therein, dated April 30, 2007, incorporated by reference to our Annual Report on Form 20-F for the year ended December 31, 2006. |
| 4.7 | Registration Rights Agreement among the Company and the Buyers as defined therein, dated April 30, 2007, incorporated by reference to our Annual Report on Form 20-F for the year ended December 31, 2006. |
| 4.8 | Form of Ordinary Share Purchase Warrant issued to the Investor parties to the Securities Purchase Agreement, incorporated by reference to our Annual Report on Form 20-F for the year ended December 31, 2006. |
| 4.9 | Registration Rights Agreement between the Company and Elbit Ltd., dated January 1, 2007, incorporated by reference to our Annual Report on Form 20-F for the year ended December 31, 2006. |
| 4.10 | Stock and Loan Purchase Agreement for the sale of Yuravision Co. Ltd. between the Company and the Purchaser as defined therein, dated December 1, 2006, incorporated by reference to our Annual Report on Form 20-F for the year ended December 31, 2006. |
| 4.11 | Employee Retention Agreement among the Company and the Purchaser as defined therein, dated November 29, 2006, incorporated by reference to our Annual Report on Form 20-F for the year ended December 31, 2006. |
| 4.12 | Consulting Agreement between the Company and MA&AT, dated May 2006, incorporated by reference to our Annual Report on Form 20-F for the year ended December 31, 2006. |
| 4.13 | Consulting Agreement between the Company and MA&AT, dated November 1, 2007, superseding and replacing the Consulting Agreement dated May 2006. |
| 4.14 | Modification Agreement between the Company and the Purchaser as defined therein, dated January 28, 2008, amending the Stock and Loan Purchase Agreement, dated December 1, 2006. |
| 8.1 | List of subsidiaries incorporated by reference to our Annual Report on Form 20-F for the year ended December 31, 2006. |
| 10.1 | Consent of Deloitte Brightman Almagor, certified public accountants (Israel). |
| 12.1 | Certification by Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
| 12.2 | Certification by Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
| 12.3 | Certification by Chief Executive Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
| 12.4 | Certification by Chief Financial Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
96
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
March 31, 2008
| | ELBIT VISION SYSTEMS LTD.
By: /s/ David Gal
——————————————
David Gal
Chief Executive Officer |
97
ELBIT VISION SYSTEMS LTD.
(An Israeli Corporation)
2007 CONSOLIDATED FINANCIAL STATEMENTS
ELBIT VISION SYSTEMS LTD.
2007 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
| | |
| | Brightman Almagor |
| 1 Azrieli Center |
| | Tel Aviv 67021 |
| | P.O.B. 16593, Tel Aviv 61164 |
| | Israel |
| | |
| | Tel: +972 (3) 608 5555 |
| | Fax: +972 (3) 609 4022 |
| | info@deloitte.co.il |
| | www.deloitte.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Elbit Vision Systems Ltd.
We have audited the accompanying consolidated balance sheets of Elbit Vision Systems Ltd. (“the Company”) and its subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2007 and 2006 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
March 31, 2008
| |
Audit • Tax • Consulting • Financial Advisory • | Member of |
| Deloitte Touche Tohmatsu |
F - 2
ELBIT VISION SYSTEMS LTD.
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
| | December 31
|
|---|
| Note
| 2007
| 2006
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| A s s e t s | | | | | | | | | | | |
| CURRENT ASSETS: | | |
| Cash and cash equivalents | | | | | | | 2,189 | | | 1,060 | |
| Restricted deposit (short term) | | | | 14 | | | 540 | | | 688 | |
| Accounts receivable: | | | | 15a | |
| Trade (net of allowance for doubtful account 2007- $677, | | |
| 2006-$936) | | | | | | | 4,738 | | | 3,198 | |
| Other | | | | | | | 1,428 | | | 603 | |
| Inventories | | | | 4 | | | 5,299 | | | 3,968 | |
| |
| |
| |
| T o t a l current assets | | | | | | | 14,194 | | | 9,517 | |
| |
| |
| |
| INVESTMENTS AND LONG-TERM RECEIVABLES: | | |
| Severance pay fund | | | | 8 | | | 1,623 | | | 1,891 | |
| Other long-term receivables | | | | 5 | | | 231 | | | 1,066 | |
| |
| |
| |
| | | | | | | | 1,854 | | | 2,957 | |
| |
| |
| |
| PROPERTY AND EQUIPMENT, net of accumulated | | |
| depreciation and amortization | | | | 6 | | | 490 | | | 455 | |
| |
| |
| |
| OTHER ASSETS, net of accumulated amortization | | |
| Goodwill | | | | | | | 3,529 | | | 2,363 | |
| Other intangible assets | | | | 7 | | | 3,439 | | | 4,098 | |
| |
| |
| |
| | | | | | | | 6,968 | | | 6,461 | |
| |
| |
| |
| T o t a l assets | | | | | | | 23,506 | | | 19,390 | |
| |
| |
| |
| | | |
The accompanying notes are an integral part of the financial statements
F - 3
ELBIT VISION SYSTEMS LTD.
CONSOLIDATED BALANCE SHEETS (Cont.)
U.S. dollars in thousands
| | December 31
|
|---|
| Note
| 2007
| 2006
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| Liabilities and shareholders' equity | | | | | | | | | | | |
| CURRENT LIABILITIES: | | |
| Credit from banks | | | | 15c | | | 4,967 | | | 4,713 | |
| Current maturities of loan from shareholder | | | | 9a | | | - | | | 160 | |
| Short term loan from banks | | | | 9a | | | - | | | 2,015 | |
| Accounts payable and accruals: | | |
| Trade | | | | | | | 3,220 | | | 3,502 | |
| Deferred income | | | | 2i | | | 2,082 | | | 1,617 | |
| Other | | | | 15b | | | 2,629 | | | 3,583 | |
| |
| |
| |
| T o t a l current liabilities | | | | | | | 12,898 | | | 15,590 | |
| |
| |
| |
| LONG-TERM LIABILITIES: | | |
| Loans and other liabilities (net of current maturities) | | | | 9 | | | 1,000 | | | - | |
| Loans from Related Parties (net of current maturities) | | | | 9 | | | - | | | 609 | |
| Accrued severance pay | | | | 8 | | | 2,008 | | | 2,190 | |
| |
| |
| |
| T o t a l long-term liabilities | | | | | | | 3,008 | | | 2,799 | |
| |
| |
| |
| COMMITMENTS AND CONTINGENT LIABILITIES | | | | 10 | | | | | | | |
| T o t a l liabilities | | | | | | | 15,906 | | | 18,389 | |
| |
| |
| |
| SHAREHOLDERS' EQUITY: | | | | 11 | | | | | | | |
| Share capital - ordinary shares of NIS 1 par value ("Ordinary Shares"); | | |
| Authorized - 60,000,000 Ordinary Shares as of December 31, 2007 | | |
| 60,000,000 ordinary shares as of December 31, 2006 | | |
| Issued and outstanding: | | |
| December 31, 2007 - 50,791,382 Ordinary shares | | |
| December 31, 2006 - 29,516,314 Ordinary shares | | | | | | | 10,629 | | | 5,091 | |
| Additional paid-in capital | | | | | | | 28,249 | | | 25,846 | |
| Accumulated deficit | | | | | | | (31,278 | ) | | (29,936 | ) |
| |
| |
| |
| T o t a l shareholders' equity | | | | | | | 7,600 | | | 1,001 | |
| |
| |
| |
| T o t a l liabilities and shareholders' equity | | | | | | | 23,506 | | | 19,390 | |
| |
| |
| |
| | | |
The accompanying notes are an integral part of the financial statements.
F - 4
ELBIT VISION SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands (except per share data)
| | Year ended December 31,
|
|---|
| Note
| 2007
| 2006
| 2005
|
|---|
| | | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| REVENUES: | | | | | | | | | | | | | | |
| Sale of products | | | | | | | 18,690 | | | 14,527 | | | 15,428 | |
| Services rendered | | | | | | | 3,173 | | | 2,470 | | | 4,151 | |
| |
| |
| |
| |
| | | | | | | | 21,863 | | | 16,997 | | | 19,579 | |
| |
| |
| |
| |
| COST OF REVENUES: | | | | 15d | | | | | | | | | | |
| Cost of products sold | | | | | | | 9,382 | | | 10,367 | | | 9,422 | |
| Cost of services rendered | | | | | | | 1,926 | | | 1,869 | | | 2,211 | |
| |
| |
| |
| |
| | | | | | | | 11,308 | | | 12,236 | | | 11,633 | |
| |
| |
| |
| |
| | | |
| GROSS PROFIT | | | | | | | 10,555 | | | 4,761 | | | 7,946 | |
| RESEARCH AND DEVELOPMENT COSTS- NET | | | | 15e | | | 3,313 | | | 2,562 | | | 2,039 | |
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: | | |
| Marketing and selling | | | | | | | 4,885 | | | 4,149 | | | 3,583 | |
| General and administrative | | | | | | | 1,338 | | | 1,870 | | | 1,127 | |
| Reorganization expenses | | | | | | | - | | | 200 | | | - | |
| |
| |
| |
| |
| OPERATING INCOME (LOSS) | | | | | | | 1,019 | | | (4,020 | ) | | 1,197 | |
| FINANCIAL EXPENSES- NET | | | | 15f | | | (1,081 | ) | | (1,332 | ) | | (437 | ) |
| |
| |
| |
| |
| | | |
| INCOME (LOSS) BEFORE OTHER INCOME (EXPENSES) | | | | | | | (62 | ) | | (5,352 | ) | | 760 | |
| OTHER INCOME (EXPENSES) | | | | 15g | | | (1,277 | ) | | (5 | ) | | 7 | |
| |
| |
| |
| |
| | | |
| INCOME (LOSS) BEFORE TAXES ON INCOME | | | | | | | (1,339 | ) | | (5,357 | ) | | 767 | |
| TAXES ON INCOME | | | | 12d | | | 3 | | | 5 | | | 4 | |
| |
| |
| |
| |
| INCOME (LOSS) FOR THE YEAR FROM CONTINUING OPERATIONS | | | | | | | (1,342 | ) | | (5,362 | ) | | 763 | |
| |
| |
| |
| |
| LOSS FROM OPERATIONS OF DISCONTINUED COMPONENT | | | | 3a | | | - | | | (180 | ) | | (152 | ) |
| NET LOSS ON DISPOSAL OF DISCONTINUED OPERATION | | | | 3a | | | - | | | (551 | ) | | - | |
| |
| |
| |
| |
| INCOME (LOSS) FOR THE YEAR | | | | | | | (1,342 | ) | | (6,093 | ) | | 611 | |
| |
| |
| |
| |
| | | |
| EARNING (LOSS) PER SHARE FROM CONTINUING OPERATIONS: | | | | 2m | | | | | | | | | | |
| Basic | | | | | | | (0.034 | ) | | (0.186 | ) | | 0.029 | |
| |
| |
| |
| |
| Diluted | | | | | | | (0.034 | ) | | (0.186 | ) | | 0.026 | |
| |
| |
| |
| |
| LOSS PER SHARE FROM DISCONTINUED OPERATIONS: | | | | 2m | | | | | | | | | | |
| Basic | | | | | | | - | | | (0.026 | ) | | (0.006 | ) |
| |
| |
| |
| |
| Diluted | | | | | | | - | | | (0.026 | ) | | (0.005 | ) |
| |
| |
| |
| |
| EARNING (LOSS) PER SHARE: | | | | 2m | | | | | | | | | | |
| | | | |
| Basic | | | | | | | (0.034 | ) | | (0.212 | ) | | 0.023 | |
| |
| |
| |
| |
| Diluted | | | | | | | (0.034 | ) | | (0.212 | ) | | 0.021 | |
| |
| |
| |
| |
| | | |
| WEIGHTED AVERAGE NUMBER OF SHARES USED IN | | |
| COMPUTATION OF EARNING (LOSS) PER SHARE - BASIC | | |
| (IN THOUSANDS) | | | | | | | 39,393 | | | 28,778 | | | 26,500 | |
| |
| |
| |
| |
| DILUTED (IN THOUSANDS) | | | | | | | 39,393 | | | 28,778 | | | 28,421 | |
| |
| |
| |
| |
The accompanying notes are an integral part of the financial statements.
F - 5
ELBIT VISION SYSTEMS LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
| Share capital
| Receipts on
account of
shares to be
allotted
| Additional
paid-in
Capital*
| Other
comprehensive
income
| Accumulated
deficit
| Total
shareholders'
equity
|
|---|
| Number
of shares
| Amount
|
|---|
| In thousands
| U.S. dollars in thousands
|
|---|
| | | | | | | | |
|---|
| | | | | | | |
|---|
| BALANCE - DECEMBER 31, 2004 | | | | 25,682 | | | 3,863 | | | 70 | | | 22,535 | | | 132 | | | (24,454 | ) | | 2,146 | |
| CHANGES DURING 2005: | | |
| Net income for the year | | | | | | | | | | | | | | | | | | | 611 | | | 611 | |
| Currency translation differences | | | | | | | | | | | | | | | | (43 | ) | | | | | (43 | ) |
| | | | | | |
| |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | 568 | |
| Employee stock options exercised and paid | | | | 82 | | | 18 | | | | | | (1 | ) | | | | | | | | 17 | |
| Receipts on account of shares to be allotted | | | | | | | | | | 105 | | | | | | | | | | | | 105 | |
| Issuance of share capital and warrants (note 11a) | | | | 815 | | | 607 | | | (175 | ) | | 766 | | | | | | | | | 1,198 | |
| Warrant exercised and paid (note 11a,11b) | | | | 183 | | | 41 | | | | | | 24 | | | | | | | | | 65 | |
|
| |
| |
| |
| |
| |
| |
| |
| BALANCE - DECEMBER 31, 2005 | | | | 26,762 | | | 4,529 | | | - | | | 23,324 | | | 89 | | | (23,843 | ) | | 4,099 | |
| CHANGES DURING 2006: | | |
| Loss for the year | | | | | | | | | | | | | | | | | | | (6,093 | ) | | (6,093 | ) |
| Currency translation differences | | | | | | | | | | | | | | | | (89 | ) | | | | | (89 | ) |
| | | | | | |
| |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | (6,182 | ) |
| Employee stock options exercised and paid | | | | 182 | | | 40 | | | | | | (1 | ) | | | | | | | | 39 | |
| Issuance of share capital and warrants (notes 3b,11a) | | | | 2,441 | | | 494 | | | | | | 1,606 | | | | | | | | | 2,100 | |
| Beneficial conversion feature (note 9a(3)) | | | | | | | | | | | | | 900 | | | | | | | | | 900 | |
| Warrant exercised and paid | | | | 131 | | | 28 | | | | | | 17 | | | | | | | | | 45 | |
|
| |
| |
| |
| |
| |
| |
| |
| BALANCE - DECEMBER 31, 2006 | | | | 29,516 | | | 5,091 | | | - | | | 25,846 | | | - | | | (29,936 | ) | | 1,001 | |
| CHANGES DURING 2007: | | |
| Loss for the year | | | | | | | | | | | | | | | | | | | (1,342 | ) | | (1,342 | ) |
| Issuance of share capital and warrants (note 11a) | | | | 21,275 | | | 5,538 | | | | | | 2,403 | | | | | | | | | 7,941 | |
|
| |
| |
| |
| |
| |
| |
| |
| BALANCE - DECEMBER 31, 2007 | | | | 50,791 | | | 10,629 | | | - | | | 28,249 | | | - | | | (31,278 | ) | | 7,600 | |
|
| |
| |
| |
| |
| |
| |
| |
| | * Net of share issuance costs. |
The accompanying notes are an integral part of the financial statements.
F - 6
ELBIT VISION SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
| Year ended December 31,
|
|---|
| 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | |
| Net income (Loss) | | | | (1,342 | ) | | (6,093 | ) | | 611 | |
| Adjustments to reconcile net income (loss) to net | | |
| cash provided by or used in operating activities: | | |
| Depreciation and amortization | | | | 1,241 | | | 1,411 | | | 886 | |
| Amortization of discount on loan from shareholder | | | | 1,212 | | | 285 | | | - | |
| Loss from disposal of property | | | | - | | | 48 | | | 7 | |
| Loss from disposal of discontinued operation | | | | - | | | 551 | | | - | |
| Liability for employee rights upon retirement | | | | (182 | ) | | 118 | | | 55 | |
| Changes in operating assets and liabilities: | | |
| Decrease (increase) in trade accounts receivable | | |
| (including non-current portion) | | | | (1,540 | ) | | 283 | | | (1,013 | ) |
| Decrease (increase) in other accounts receivable | | | | (465 | ) | | 443 | | | (168 | ) |
| Increase (decrease) in trade account payable | | | | (282 | ) | | 1,003 | | | 29 | |
| Deferred income | | | | 465 | | | (897 | ) | | 1,725 | |
| Other | | | | (965 | ) | | (2,212 | ) | | (1,523 | ) |
| Decrease (increase) in inventories | | | | (1,331 | ) | | 591 | | | 123 | |
|
| |
| |
| |
| Net cash provided by (used in) operating activities | | | | (3,189 | ) | | (4,469 | ) | | 432 | |
|
| |
| |
| |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| Acquisition of subsidiary consolidated for the first time (a) | | | | - | | | - | | | - | |
| Disposal of subsidiary (b) | | | | - | | | 120 | | | - | |
| Purchase of property and equipment | | | | (296 | ) | | (130 | ) | | (222 | ) |
| Long-term receivables | | | | 400 | | | (101 | ) | | 7 | |
| Redemption of (investment in) restricted deposit | | | | 148 | | | 1,122 | | | (1,042 | ) |
| Proceeds from disposal of property and equipment | | | | 38 | | | 30 | | | 16 | |
| Funds severance pay | | | | 268 | | | (258 | ) | | (244 | ) |
|
| |
| |
| |
| Net cash provided by (used in) investing activities | | | | 558 | | | 783 | | | (1,485 | ) |
|
| |
| |
| |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| Issuance of share capital and warrants - net of issuance costs | | | | 4,521 | | | 964 | | | - | |
| Short-term credit from bank - net | | | | (761 | ) | | 2,281 | | | 797 | |
| Proceeds from exercise of options and warrants | | | | - | | | 77 | | | 187 | |
| Retirement of long-term loan from shareholder | | | | - | | | (27 | ) | | - | |
| Proceeds from long-term loans from shareholder | | | | - | | | 1,556 | | | - | |
| Proceeds from long-term loans from bank | | | | - | | | 547 | | | 1,454 | |
| Short-term credit paid to Cornell Capital Partners L.P. - net | | | | - | | | (1,449 | ) | | (1,719 | ) |
|
| |
| |
| |
| Net cash provided by financing activities | | | | 3,760 | | | 3,949 | | | 719 | |
|
| |
| |
| |
| TRANSLATION DIFFERENCES ON CASH BALANCES OF | | |
| CONSOLIDATED SUBSIDIARY | | | | - | | | (89 | ) | | (2 | ) |
|
| |
| |
| |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | | 1,129 | | | 174 | | | (336 | ) |
| BALANCE OF CASH AND CASH EQUIVALENTS AT | | |
| BEGINNING OF YEAR | | | | 1,060 | | | 886 | * | | 1,222 | * |
|
| |
| |
| |
| BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR | | | | 2,189 | | | 1,060 | | | 886 | * |
|
| |
| |
| |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW | | |
| INFORMATION- cash paid during the year for: | | |
| Interest paid - net | | | | 704 | | | 415 | | | 295 | |
|
| |
| |
| |
| Income taxes paid - net | | | | 3 | | | 5 | | | 4 | |
|
| |
| |
| |
| | | |
* Including cash and cash equivalents from discontinuing operation.
The accompanying notes are an integral part of these financial statements.
F - 7
ELBIT VISION SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
| | | 2006
|
|---|
| | | U.S. dollars in
thousands
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| (a) | Acquisition of subsidiary consolidated | | | | | |
| | for the first time, see also note 3: | | |
| | Assets and liabilities of the subsidiary at date of | | |
| | acquisition: | | |
| | Working capital (excluding cash and cash equivalents) | | | | (1,033 | ) |
| | Fixed assets | | | | 59 | |
| | Long-term receivables | | | | 12 | |
| | Other assets | | | | 1,514 | |
| | Long-term loans and other liabilities | | | | (9 | ) |
| | Goodwill arising on acquisition | | | | - | |
| | |
| |
| | | | | | 543 | |
| | Less: | | |
| | Issuance of share capital and warrants (see c 2) hereafter) | | | | (543 | ) |
| | |
| |
| | | | | | - | |
| | |
| |
| | | 2006
|
|---|
| | | U.S. dollars in
thousands
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| (b) | Disposal of subsidiary | | | | | |
| | | | |
| | Assets and liabilities of the subsidiary at date of | | |
| | disposal: | | |
| | Working capital (excluding cash and cash equivalents) | | | | 346 | |
| | Fixed assets | | | | (284 | ) |
| | Long-term receivables | | | | (193 | ) |
| | Other assets | | | | (148 | ) |
| | Long-term loans and other liabilities | | | | 232 | |
| | Goodwill | | | | (1,039 | ) |
| | |
| |
| | | | | | (1,086 | ) |
| | Less: | | |
| | Future proceeds from selling the subsidiary | | | | 966 | |
| | |
| |
| | | | | | (120 | ) |
| | |
| |
| | | |
| | (c) | Supplementary information on financing activities not involving cash flow: |
| | 1) | $ 1,168,000 worth of shares were released from escrow and $ 1,970,000 long term loan from shareholders were converted into share capital (see Notes 9 a.(2),(3) and 11 a.4),5)). |
| | 2) | During 2006 part of the acquisition of the subsidiary was made through issuance of share capital in an amount equivalent to $ 543,000. |
The accompanying notes are an integral part of these financial statements.
F - 8
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | Elbit Vision Systems Ltd. (the “Company”) is an Israeli corporation, which, together with its subsidiaries (the “Group”), is principally engaged in the design, development, manufacturing and marketing automatic vision and ultrasonic inspection and quality monitoring systems, and rending services related to those systems. |
| | Elbit Vision Systems Inc. (“EVS Inc.”) incorporated in Delaware U.S.A. and Elbit Vision Systems B.V. (“EVS BV”) incorporated in the Netherlands are wholly-owned subsidiaries, engaged in the selling and marketing of the Company’s products worldwide. |
| | In June 2004, the Company expanded its activities and entered into new fields of operations through the acquisition of 70% of Yuravision Co. Ltd.‘s (“Yuravision”) shares, a South Korean developer of visual inspection software and systems for the microelectronics industry and display industries. This investment was sold during December 2006 and therefore presented as discontinued operation in the financial statements (see Note 3a). |
| | In September 2004, the Company also completed the acquisition of the entire shareholding of ScanMaster Systems (IRT) Ltd. (“ScanMaster Ltd.”), an Israeli company and IRT ScanMaster System Inc. (“ScanMaster Inc.”), a new Hampshire corporation (collectively – “ScanMaster”). ScanMaster is engaged in the development, manufacturing and marketing of equipment for the ultrasonic inspection of industrial parts and components for the automotive and transportation industries, the metal industry as well as applications for aircraft and jet engine inspection. |
| | In February 2006, the Company acquired business, assets and liabilities of Panoptes Ltd.(“Panoptes”) and ScanMaster Ltd. acquired 100% of the shares of Panoptes. Panoptes Ltd. is principally engaged in the design, development, manufacturing and marketing automatic vision and quality monitoring systems for surface inspection, especially textiles, glass fabric and technical woven materials (see Note 3b). |
| | As to Business and Geographical segments – see Note 17. |
| NOTE 2 | – | SIGNIFICANT ACCOUNTING POLICIES: |
| | The consolidated financial statements are prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America. |
| | a. | Use of estimates in the preparation of financial statements |
| | The preparation of financial statements in conformity with GAAP 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting years. Actual results could differ from those estimates. |
| | Estimates and assumptions which, in the opinion of management, are significant to the underlying amounts included in the financial statements and for which it would be reasonably possible that future events or information could change those estimates include: (i) impairment assessments of goodwill and long-lived assets; (ii) realization of deferred income tax assets; and (iii) provisions for obsolete and slow moving inventory, These estimates are discussed further throughout the accompanying notes. |
F - 9
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2 | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | b. | Functional Currency and Financial Statements in U.S. Dollars |
| | The currency of the primary economic environment in which operations of the Company and its subsidiaries are conducted, except for its Korean subsidiary, is the U.S. dollar (the “dollar”). |
| | Virtually all sales by the Company and its subsidiaries are made outside Israel in non-Israeli currencies, mainly the dollar. Most purchases of materials and components are made in dollars or in Israeli currency under contracts linked to the dollar. In addition, most marketing and service costs are incurred outside Israel, primarily in dollars, through the Company’s wholly-owned non-Israeli subsidiaries. Thus, the functional currency of the Company and its subsidiaries is the dollar. |
| | Transactions in currencies other than each company’s functional currency are translated based on the average currency exchange rates in accordance with the principles set forth in Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”. All gains and losses from translation of monetary balance sheet items and transactions denominated in currencies other than the functional currency are recorded in the statements of income as financial income, net as they arise. |
| | c. | Principles of consolidation |
| | The consolidated financial statements include the financial statements of the company and its wholly-owned subsidiaries. |
| | All material inter-company transactions and balances have been eliminated. |
| | Cash equivalent consist of short-term highly liquid investments, that are readily convertible into cash with original maturities when purchased of three month or less. |
| | e. | Allowance for doubtful accounts |
| | The allowance for doubtful accounts has been made on the specific identification basis. |
| | Inventories are stated at the lower of cost or market. Cost is determined as follows:
Raw materials and spare parts – on moving average basis.
Product in process and finished products – on basis of production costs. |
| | Inventories are written-down for estimated obsolescence, based on assumptions about future demand and market conditions. |
F - 10
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2 | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | (1) | Property and equipment are stated at cost . Depreciation is calculated by the straight-line method over the estimated useful lives of assets, as follows: |
| | %
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Machinery and equipment | 10-33 (mainly 33%) |
| Office furniture and equipment | 6-20 |
| Vehicles | 15-20 |
| | |
| | Leasehold improvements are amortized by the straight-line method over the term of the lease, or the estimated useful life of the improvements, whichever is shorter. |
| | (2) | Impairment of long-lived assets – Impairment examinations and recognition are performed and determined based on the provisions of FASB Statement No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” (“SFAS 144”). SFAS 144 requires that long-lived assets and certain identifiable assets held for use be reviewed for impairment on a periodic basis, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset to be held and used is determined by a comparison of the carrying amount of the asset and the amount of undiscounted future net cash flows to be generated by the asset or assets group. In the event that an asset is considered to be impaired, an impairment charge is recorded in the amount by which the carrying amount of the asset exceeds its estimated fair value. |
| | h. | Other assets- Goodwill and Intangible Assets |
| | Under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill is not amortized to earnings, but rather is subject to periodic testing for impairment, at the reporting unit level, at least annually or more frequently if certain events or indicators of impairment occur. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. Measurement of an impairment loss is an estimate, performed based on the following: If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Group uses the discounted cash flow method to determine the fair value of the reporting unit. The Company’s reporting units consist of reportable segments; goodwill is allocated to the Non-destructive automated inspection segment (see also Note 17). |
| | The Company has designated December 31 of each year as the date on which it will perform its annual goodwill impairment test. No impairment resulted from the annual review performed in the year 2007. |
F - 11
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2 | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | h. | Other assets- Goodwill and Intangible Assets (Cont.) |
| | (2) | Other intangible assets |
| | These assets are amortized by the straight-line method over their estimated useful lives. Annual rates of amortization are as follows: |
| | %
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Technology | 10;20 |
| Customer relations | 10;20 |
| Distribution network | 10 |
| Brand name | 8.33 |
| | |
| | The backlog is amortized according to revenues, which are derived from specific orders. |
| | Revenues from sales of products and supplies are recognized when an arrangement exists, delivery has occurred and title passed to the customer, Group’s price to the customer is fixed or determinable and collectibility is reasonably assured. |
| | With respect to systems sold with installation requirements, the installation is not considered to be a separate earnings process; thus, revenue is recognized when all of the above criteria are met and installation is completed. |
| | b. | Acceptance clause, customers’ support service and warranty |
| | The Group distinguishes between revenue recognition in respect of revenue derived from automatic vision inspection products (sold by the Company) and ultrasonic inspection products (sold by ScanMaster). |
| | The terms of the agreements between the Company and its customers are substantially different from the terms of the agreements between ScanMaster and its customers. Therefore, the revenue recognition accounting policy applied by each of the companies is different in this case. Set forth bellow are the main accounting policies applied by each of the companies: |
| | In case that Company’s agreement with the customer includes an “acceptance”clause, revenue recognition will take place after the Company receives the “acceptance certificate” from the customer. In some cases, the Company grants its customers a trial period, usually several months, in order to evaluate prototype of the system’s performance. In case that the systems performance meets the customer’s requirements, it purchases the system at the end of the trial period. The Company does not recognize sales revenue from products shipped to customers for trial until such products are actually purchased. Until purchased, these products are recorded as consignment inventory at the lower of cost or market. |
F - 12
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2 | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | i. | Revenue recognition (Cont.): |
| | 1) | Sale of products (Cont.): |
| | b. | Acceptance clause, customers’ support service and warranty |
| | ScanMaster’s agreements with its customers usually include acceptance testing procedures clause (“ATP”). Each product of ScanMaster has standard performance specifications that are examined in the ATP; usually, the performance specifications are not customized for the specific needs of the customer. Also, unlike in the case of the company, ScanMaster does not grant its customers a trial period in the normal course of business. The agreements with the clients do not include the right of the clients to a refund in case the ATP is not to their satisfaction. However, the collection of the final payment from the customer (usually 10% out of the total consideration) is dependent upon receiving the signed ATP. |
| | ScanMaster distinguishes between sales of new products, in respect of which ScanMaster has no past installation experience and sales of products, in installation of which the company is well experienced. In respect of sales of new products ScanMaster recognizes revenues only after the company receives the ATP from the customer. In respect of sales of other products, in the installation of which the company is well experienced, the ATP is only a formal procedure, and therefore, the installation of products is a sufficient requirement to recognize revenues. |
| | ScanMaster provides for warranty costs at the same time as the revenue is recognized. The annual provision is calculated at rates of 0.5%-2% of the sales, based on past experience. |
| | The Group does not provide, in the normal course of business, a right of return to its customers. If uncertainties exist, such as the granting to the customer of a right of cancellation, revenue is recognized when the uncertainties are resolved. |
| | d. | Revenues from systems that require significant customization, integration and installation are recognized based on SOP 81-1 “Accounting for Performance of Construction – Type and Certain Production – Type Contracts”, using contract accounting on the percentage of completion method, based on the relationship of actual labor costs incurred, to total labor costs estimated to be incurred over the duration of the contract. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contract. |
| | Arrangements that include professional services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential, revenue under the arrangement is recognized using contract accounting. |
| | When services are not considered essential, the revenue allocable to the software services is recognized as the services are performed. |
F - 13
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2 | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | i. | Revenue recognition (Cont.): |
| | Service revenue in respect of the Group’s products is recognized ratably over the contractual period, or as services are performed. |
| | The deferred income balance as of December 31, 2007 and 2006 include amounts of revenues that were invoiced and cash was received, but deferred less applicable product and warranty costs. |
| | j. | Research and development |
| | Research and development expenses net of third party grants, are expensed as incurred. The Company has no obligation to repay the grants if sales are not generated. |
| | Advertising expenses are expenses as in incurred. Advertising expenses for the years ended December 31, 2007, 2006 and 2005 were $ 428,000 $ 470,000, and $ 122,000, respectively. |
| | The company accounts for income taxes in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“SFAS 109”). Deferred income taxes are determined by the asset and liability method based on the estimated future tax effects attributable to temporary differences between income tax bases of assets and liabilities and their reported amounts in the financial statements, and to carryforwards for tax losses and deductions. Deferred tax balances are computed using the enacted tax rates to be in effect at the time when these differences are expected to reverse, as they are known at the balance sheet date. |
| | Deferred tax assets and liabilities are classified as current or non-current according to the classification of the respective asset or liability, or the expected reversal date of the specific temporary difference, if not related to a specific asset or liability. |
| | Valuation allowances in respect of deferred tax assets are established when it is more likely than not that all or a portion of the deferred income tax assets will not be realized. |
| | m. | Earning (loss) per share (“EPS”) |
| | Basic EPS is computed based on the weighted average number of shares outstanding during each year. 1,718,749 ordinary shares, which were issued and were placed in escrow were reflected in basic and diluted EPS shares for the years ended December 31, 2006 and 2005. Total common stock equivalents, related to options and warrants, 1,921,496 were reflected in diluted EPS for the year ended December 31, 2005. Total common stock equivalents, related to options and warrants 16,862,858, 9,322,308 and 8,716,907 shares for the years 2007 , 2006 and 2005, respectively, were excluded from EPS calculation, because the effect of such options and warrants is antidilutive. |
F - 14
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2 | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | n. | Stock-based compensation |
| | In January 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment”(“SFAS No. 123(R)”), using the modified prospective application method as its transition method. The Company recognizes $ 282,000 of compensation expenses in 2007 as a result of the application of SFAS 123 (R). Until the adoption of SFAS No. 123(R) the Company accounted for employees and directors stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and in accordance with FASB Interpretation No. 44 (“FIN 44”). Pursuant to these accounting pronouncements, the Company recorded compensation for stock options granted to employees and directors over the vesting period of the options based on the difference, if any, between the exercise price of the options and the market price of the underlying shares at that date. |
| | Had compensation cost for the Company’s stock option plans been determined based on fair value at the grant dates for all awards made in 2005 in accordance with the provisions of SFAS No. 123 (“SFAS 123”), as amended by SFAS No. 148 “Accounting for Stock-Based Compensation” (“SFAS 148”), the Company’s pro forma net loss per share would have been as follows: |
| | Year ended
December 31
2005
$ in thousands
(except per
share data)
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Net income as reported | | | | 611 | |
| Less - stock-based employee compensation | | |
| expense determined under fair value method | | | | (559 | ) |
| |
| |
| Pro forma net income | | | | 52 | |
| |
| |
| Earning per share: | | |
| Basic - as reported | | | $ | 0.023 | |
| |
| |
| Diluted - as reported | | | $ | 0.021 | |
| |
| |
| Basic - pro forma | | | $ | 0.002 | |
| |
| |
| Diluted - pro forma | | | $ | 0.002 | |
| |
| |
| | |
| | As to information about the stock option plans and assumptions used in calculating the pro forma information, see Note 11b. |
| | In addition to income (loss), other comprehensive income includes exchange differences arising from the translation of the net investment in subsidiary. |
| | Certain comparative figures have been reclassified to conform to the current year presentation. |
| | q. | Consentration of credit risk |
| | As of December 31, 2007 and 2006, the Group held cash and cash equivalents and short-term bank deposits, most of which were deposited with major Israeli, European, and U.S. banks. The Company is of the opinion that the credit risk in respect of these balances is insignificant. |
| | The Group performs ongoing credit evaluations of its customers for the purpose of determining the appropriate allowance for doubtful accounts. In respect of sales to customers in emerging economies, the Group requires letters of credit from banks. |
F - 15
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2 | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | r. | Recently issued accounting pronouncements: |
| | 1) | In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008, for the Company). Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The Company is currently evaluating the impact of the provisions of FAS 157 on its financial position and results of operations. |
| | 2) | In February 2007, the FASB issued FASB No. 159, The Fair Value Option for Financial Assets and Financial Liabilities–Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in FASB No. 159 are elective; however, the amendment to FASB No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. The fair value option established by FASB No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. FASB No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company does not expect the adoption of FASB No. 159 to have a material impact on its consolidated financial statements. |
| | 3) | In December 2007, the FASB issued FASB 141(R), “Business Combinations” of which the objective is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. The new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. |
| | 4) | In December 2007, the FASB issued FASB 160 “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No.51” of which the objective is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way – as equity in the consolidated financial statements. Moreover, Statement 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. |
| | Both FASB 141(R) and FASB 160 are effective for fiscal years beginning after December 15, 2008. The Company does not believe that adoption of these standards will have any impact on its financial statements. |
F - 16
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2 | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | s. | Initial adoption of new standards: |
| | In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 and was adopted by the Company in 2007. The adoption of FIN 48 did not have a material impact on its consolidated results of operations and financial condition. |
| NOTE 3 | – | CONSOLIDATED SUBSIDIARIES |
| | a. | Acquisition and Disposal of Yuravision |
| | On December 2, 2003, the Company signed a term sheet (the validity of which was extended on February 16, 2004) to acquire 100% of the shares of Yuravision (as to the nature of operation of Yuravision, see Note 1). |
| | Pursuant to the term sheet, through June 30, 2004, the Company entered into a series of purchase agreements with some of Yuravision’s shareholders. Under those agreements, the Company purchased 51% of Yuravision’s shares for an aggregate amount of $ 1,014,000, in cash and has a legal commitment to purchase additional 19% of Yuravision shares. |
| | The total cost of acquisition amounted to $ 1,484,000 (including legal fees and other direct costs of $ 134,000, and the aggregate fair value of the warrants issued to Yuravision’s shareholder of $ 30,000). |
| | On December 1, 2006, the Company executed an agreement with a Korean corporation for the sale of Yuravision shares in consideration for $950,000, or the Purchase Price, plus the purchase from the Company of its right to receive from Yuravision repayment of an $800,000 loan, or the Loan Amount in consideration for the full value of the loan. Half of the Purchase Price was paid upon the closing of the transaction on December 15, 2006, and the remaining half of the Purchase Price will be payable no later than December 1, 2008. The purchaser has undertaken to pay the Company half of the Loan Amount by no later than December 1, 2008 and the remaining half, or the Outstanding Payment, by no later than May 1, 2009. The Outstanding Payment may become reduced in the event that certain of the employees of Yuravision resign from Yuravision prior to December 1, 2008. |
| | The Company have received a stand by letter of credit from the purchaser guaranteeing payment of the Loan Amount. |
| | On January 28, 2008 the Company entered into a modification agreement amending the December 1, 2006 agreement with the Korean corporation. Pursuant to the modification agreement the Loan Amount was reduced from $800,000 to $460,000, without any further obligation by the Korean corporation for the reduced amount of $340,000. The payment terms of the loan were changed so that the Korean corporation paid to the Company $360,000 on February 4, 2008 and was required to pay the remaining $100,000 owed under the loan by January 28, 2009. The terms for the payment of the purchase price were not changed. |
F - 17
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 3 | – | CONSOLIDATED SUBSIDIARIES (cont.) |
| | a. | Acquisition and Disposal of Yuravision (cont.) |
| | Yuravision is classified as discontinued operation in the consolidated financial statements and its results of operation and financial position are separately reported for all periods presented. Summarized financial information for Yuravision is as follows: |
| | Year ended December 31
|
|---|
| | 2006
| 2005
|
|---|
| | $ in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| Revenues | | | | 707 | | | 1,212 | |
| Cost of revenues | | | | 345 | | | 590 | |
| |
| |
| |
| Gross profit | | | | 362 | | | 622 | |
| Research and development costs, net | | | | 207 | | | 154 | |
| Marketing and selling expenses | | | | 48 | | | 182 | |
| General and administrative expenses | | | | 319 | | | 438 | |
| |
| |
| |
| Operating loss | | | | (212 | ) | | (152 | ) |
| Financial expenses | | | | (66 | ) | | (34 | ) |
| Other income | | | | 98 | | | 34 | |
| |
| |
| |
| Net loss of discontinued operation | | | | (180 | ) | | (152 | ) |
| |
| |
| |
| | | |
| | b. | Acquisition of Panoptes Ltd. |
| | In February 2006, the Company acquired business, assets and liabilities of Panoptes Ltd., and its subsidiary acquired 100% of the shares of Panoptes Ltd. Panoptes Ltd. is principally engaged in the design, development, manufacturing and marketing automatic vision and quality monitoring systems for surface inspection, especially textiles, glass fabric and technical woven materials. |
| | The total consideration of acquisition of Panoptes Ltd. amounted to $ 622,000 (including estimated direct transaction costs amounting to $ 79,000). The Company issued 800,000 ordinary shares amounted to $ 543,000 and , subject to certain instances, will pay cash royalties equaling 3.5% of sales of EVS optical inspection systems between January 2006 and the end of December 2008 to Ma’aragim Panoptes’ controlling shareholder (see Note 10a5)). |
| | The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition: |
| | At January 1, 2006
($ in thousands)
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Long-term receivables | | | | 12 | |
| Property, plant, and equipment | | | | 59 | |
| Intangible assets | | | | 1,514 | |
| |
| |
| Total assets acquired | | | | 1,585 | |
| |
| |
| Current liabilities | | | | (954 | ) |
| Long-term liabilities | | | | (9 | ) |
| |
| |
| Total liabilities assumed | | | | (963 | ) |
| |
| |
| Net assets acquired | | | | 622 | |
| |
| |
| | |
| | Of the $ 1,514,000 of acquired intangible assets, $ 1,025,000 were assigned to current technology, which represents patent and other intellectual properties (5 years useful life); $ 489,000 were assigned to customer relations (5 years useful life). |
F - 18
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | December 31
|
|---|
| | 2007
| 2006
|
|---|
| | $ in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| Raw materials | | | | 2,341 | | | 1,330 | |
| Spare parts | | | | 621 | | | 566 | |
| Work in process | | | | 1,482 | | | 861 | |
| Finished products* | | | | 855 | | | 1,211 | |
| |
| |
| |
| | | | | 5,299 | | | 3,968 | |
| |
| |
| |
| | | |
| | * Mainly systems in trial by customers (see Note 2i). |
| | The balances are net of write-down of $463,000 and $1,467,000 as of December 31, 2007 and 2006, respectively. |
| NOTE 5 | – | OTHER LONG-TERM RECEIVABLES |
| | December 31
|
|---|
| | 2007
| 2006
|
|---|
| | $ in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| Deposits on leased vehicle (see also Note 10b2)) | | | | 70 | | | 39 | |
| Loan to other (1) | | | | 61 | | | 61 | |
| Future proceeds from selling the Yuravision | | | | 100 | | | 966 | |
| |
| |
| |
| | | | | 231 | | | 1,066 | |
| |
| |
| |
| | | |
| | (1) | Representing a loan to a company, convertible into 8% of this company’s share capital. The loan is denominated in dollars, with no interest. The Company can convert the loan into share capital after December 31, 2003. On July 22, 2004, the Company requested, pursuant to the loan agreement, to convert the loan to 197,217 shares of the company. To date, the conversion of the loan has not yet been executed. |
| NOTE 6 | – | PROPERTY AND EQUIPMENT |
| | December 31
|
|---|
| | 2007
| 2006
|
|---|
| | $ in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| Machinery and equipment | | | | 2,791 | | | 2,660 | |
| Leasehold improvements | | | | 254 | | | 216 | |
| Office furniture and equipment | | | | 418 | | | 296 | |
| Vehicles | | | | 62 | | | 184 | |
| |
| |
| |
| | | | | 3,525 | | | 3,356 | |
| Less - accumulated depreciation and amortization | | | | 3,035 | | | 2,901 | |
| |
| |
| |
| | | | | 490 | | | 455 | |
| |
| |
| |
| | | |
| | b. | Depreciation and amortization expenses totaled $ 222,000, $ 191,000, and $254,000, in the years ended December 31, 2007, 2006 and 2005, respectively. |
F - 19
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 7 | – | OTHER INTANGIBLE ASSETS |
| | Gross carrying amount
December 31
| Accumulated amortization
December 31
|
|---|
| | 2007
| 2006
| 2007
| 2006
|
|---|
| | U.S. dollars in thousands
| U.S. dollars in thousands
|
|---|
| | | | | |
|---|
| | | | | |
|---|
| Technology | | | | 2,828 | | | 2,828 | | | 1,000 | | | 625 | |
| Customer relations | | | | 1,599 | | | 1,599 | | | 566 | | | 357 | |
| Distribution network | | | | 338 | | | 338 | | | 113 | | | 79 | |
| Brand name | | | | 489 | | | 489 | | | 136 | | | 95 | |
| Backlog | | | | 414 | | | 414 | | | 414 | | | 414 | |
| |
| |
| |
| |
| |
| | | | | 5,668 | | | 5,668 | | | 2,229 | | | 1,570 | |
| |
| |
| |
| |
| |
| | | | | |
| | Amortization expenses totaled $ 659,000 $ 669,000, and $ 436,000, in the years ended December 31, 2007, 2006, and 2005, respectively. |
| | Estimated amortization expense for the following years, subsequent to December 31, 2007: |
| | $ in thousands
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Year ended December 31: | | | | | |
| 2008 | | | | 669 | |
| 2009 | | | | 669 | |
| 2010 | | | | 669 | |
| 2011 | | | | 366 | |
| 2012 | | | | 366 | |
| | |
| NOTE 8 | – | ACCRUED SEVERANCE PAY, NET |
| | a. | The Company’s liability for severance pay is calculated in accordance with Israeli law based on the latest salary paid to employees and the length of employment in the Company. |
| | Part of the liability is funded through individual insurance policies. |
| | The policies are assets of the company and, under labor agreement subject to certain limitation, they may be transferred to ownership of the beneficiary employees. |
| | b. | A U.S. subsidiary provides defined contribution plan for the benefit of its employees. Under this plan, contributions are based on specific percentages of pay. |
| | c. | Severance pay and defined contribution plan expenses were $ 14,000, $ 165,000, and $ 291,000 in the years ended December 31, 2007, 2006, and 2005, respectively. The earnings on the amounts funded were $ 52,000, $ 102,000, and $ 54,000 for the years ended December 31, 2007, 2006, and 2005, respectively. |
F - 20
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 9 | – | LONG-TERM LIABILITIES – LOANS AND OTHER |
| | December 31
|
|---|
| | 2007
| 2006
|
|---|
| | $ in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| Loans from banks(1) | | | | 1,000 | | | 2,015 | |
| Other liabilities: | | |
| Loans from shareholders(2),(3) | | | | - | | | 769 | |
| |
| |
| |
| | | | | 1,000 | | | 2,784 | |
| Less - current maturities: | | |
| From banks | | | | - | | | 2,015 | |
| From shareholder (2) | | | | - | | | 160 | |
| |
| |
| |
| | | | | - | | | 2,175 | |
| |
| |
| |
| | | | | 1,000 | | | 609 | |
| |
| |
| |
| | | |
| | (1) | In August 2005 the Company entered into an agreement with bank Mizrahi, pursuant to which the Company received in 2005 a credit line for the aggregate amount of $ 2,000,000. The credit line is secured by a first ranking floating charge on all the Company’s assets and all the assets of ScanMaster (see Note 11d). |
| | In June 2007 the Company terminated the abovementioned agreement and entered into a new agreement with bank Leumi for a credit line amounted to $ 2,500,000. |
| | (2) | During 2003, the Company and Elbit Ltd. (a shareholder), reached an agreement, whereby the Company’s debt to Elbit Ltd. of $ 400,000 and accrued interest thereon that was due in 2003, will have the following terms: |
| | a. | The loan will bear annual interest of Libor+2% (formerly Libor+0.5%) payable quarterly. |
| | b. | The loan is repayable in quarterly installments of $ 40,000 each, commencing in the third quarter of 2003, but only if the cash flows provided by Company’s operating activities in the quarter preceding the payment exceeds $ 50,000. |
| | On June 21, 2007, the Company executed an agreement with Elbit Ltd., pursuant to this agreement Elbit Ltd. (i) converted the loan to the Company in the amount of $470,000 (including accrued interest) into 1,492,063 ordinary shares, at a price of $0.315 per share; and (ii) invested in the Company $250,000 in consideration for 793,651 ordinary shares at a price of $0.315 per share and received a 4 year warrant to purchase 396,825 ordinary shares at an exercise price of $0.45 per share. |
F - 21
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 9 | – | LONG-TERM LIABILITIES – LOANS AND OTHER (cont.) |
| | a. | Composed as follows (cont.) |
| | (3) | In February 2006, the Company issued notes to Mivtach Shamir Holdings Ltd. (“Mivtach”) for $3 million (half of which will be held in escrow until the occurrence of certain events). The notes were convertible at the option of Mivtach into 6,000,000 ordinary shares of EVS, at a price per share of $0.50. Repayment of the notes was in 30 equal monthly installments commencing two years after the notes issuance or on the date that Mivtach decides not to convert the notes, whichever is sooner. The Company also granted to Mivtach a two-year warrant to purchase 4,000,000 of the Company’s ordinary shares at an exercise price of $0.50 per share, exercisable only if Mivtach converts the notes. |
| | The Company allocated the proceeds received based on the respective fair values to the notes and the warrants. Consistent with provisions of EITF 98-5 and 00-27, the Company evaluated whether the notes contain a beneficial conversion feature (“BCF”) and determined that all proceeds should be allocated to the BCF and the notes initially recorded at nil. The amount of discount is to be amortized over the term of notes. |
| | As of December 31, 2006 the company recorded in its financial reports a long term loan of $ 342,000, representing the amortized discount to date. |
| | On June 21, 2007 the Company signed an agreement with Mivtach pursuant to which, Mivtach converted the full amount of the convertible notes into (a) 9,523,810 of the Company’s ordinary shares; and (b) received a 4 year warrant to purchase 2,380,952 of the Company’s ordinary shares at an exercise price of $0.45 per share. As a result of the conversion, the unamortized discount, created as a resullt of the allocation of the proceeds to the BCF, was accelerated and recognized in earnings. |
| | b. | The liabilities (net of current maturities) mature in the following years after the balance sheet dates: |
| | December 31
|
|---|
| | 2007
| 2006
|
|---|
| | $ in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| 2008 | | | | 1,000 | | | 267 | |
| 2009 | | | | - | | | - | |
| 2010 | | | | - | | | 342 | |
| 2011 and thereafter | | | | - | | | - | |
| |
| |
| |
| | | | | 1,000 | | | 609 | |
| |
| |
| |
| | | |
F - 22
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 10 | – | COMMITMENTS AND CONTINGENT LIABILITIES |
| | 1) | The Company is committed to pay royalties to the Government of Israel based on proceeds from sales of products in the research and development of which the Government participates by way of grants. At the time the grants were received, successful development of the related projects was not assured. |
| | In the case of failure of a project that was partly financed as above, the Company is not obligated to pay any such royalties. |
| | Under the terms of the Company’s funding from the Israeli Government, royalties of 3%-5% are payable on sales of products developed from a project so funded, up to 100% of the amount of the grant received by the Company (dollar linked); as from January 1, 2001 – with the addition of an annual interest rate based on Libor. |
| | Royalty expenses to the Government of Israel totaled $ 266,000, $ 259,000 and $ 286,000 in the years ended December 31, 2007, 2006 and 2005 respectively and are included in the statements of operations among cost of revenues. |
| | 2) | The Company and ScanMaster Ltd. are committed to pay royalties to the Government of Israel in respect of marketing expenses in which the Government participated by way of grants. At the time the grants were received, successful development of the related projects was not assured. In the case of failure of a project that was partly financed as above, the Company is not obligated to pay any such royalties. The royalties are payable at the rate of 4% of the increase in export sales, up to the amount of the dollar-linked grant received. No royalties were paid in the reported years to the Government of Israel. |
| | On November 7, 2007, the Company received a letter from the Ministry of Trade, Industry and Labor – Fund for the Encouragement of Marketing Abroad (the “Fund”), claiming that it had failed to pay royalties to the Fund since 1999 in the aggregate amount of $480,818. On November 21, 2007, the Company sent a letter to the Fund in which it stated that the Fund had not requested any of these royalties for many years despite the Company’s written request to clarify the issue. In its letter the Company stated that a material amount of the royalties could no longer be claimed due to the operation of the statute of limitations and that in any event the Fund may be estopped from making at least part of the claims as a result of its non-response to the Company’s inquiry. On December 18, 2007, the Company met with representatives of the Fund to discuss the issue. The Company have yet to receive a response to the meeting. The Company recorded an allowance of $ 90,000 on acount of this claim. |
| | The maximum royalty amount payable the Company expect to pay to the Government of Israel at December 31, 2007 is approximately $ 1,092,000 (see 1) and 2) above). |
| | 3) | Effective upon its initial public offering on July 3, 1997, the Company agreed to pay Elbit Ltd. (“Elbit”) royalties in an amount dependent upon the sales of the Company’s vision system products in the textile, automotive and food industries. |
| | The royalties will in turn be paid in full by Elbit to the original developer of certain elements of the technology licensed by the Company from Elbit. |
| | In 2002, the Company and Elbit amended the abovementioned agreement, effective as of July 1, 2001; pursuant to the agreement the royalties would be paid directly to the developer, twice a year, at a rate of 0.9375%-1.5% of sales of certain products in the immediately preceding six months. |
| | The royalty expenses totaled $ 20,600 and $ 46,000 in the years ended December 31, 2006 and 2005, respectively, and are included in the statements of operations in cost of revenues.
No expenses were recorded in the year ended December 31, 2007. |
F - 23
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 10 | – | COMMITMENTS AND CONTINGENT LIABILITIES (cont.) |
| | 4) | ScanMaster Ltd. signed an agreement with a supplier, whereunder the supplier assisted Scanmaster Ltd. to complete a development of one of the Company’s products. The supplier is also entitled to receive royalties from the product’s sales. The royalty expenses in respect of royalties paid to the said supplier amounted to totaled $ 34,000 and $ 28,000 in the years ended December 31, 2007 and 2006, respectively, were included in the statements of operations in cost of revenues. |
| | 5) | As part of acquisition of Panoptes Ltd. (see Note 3b.), the Company, subject to certain instances, will pay cash royalties equaling 3.5% of sales of EVS’s optical inspection systems between January 2006 and the end of December 2008 to Ma’aragim Panoptes’ controlling shareholder. The Company paid to Ma’aragim royalties $ 155,000 and $ 109,000 during the years ended December 31, 2007 and 2006, respectively . |
| | 1) | The premises occupied by the Company and certain subsidiaries are rented under various operating lease agreements. The lease agreements for the premises expire in 2009 with extended options for another 3 years. |
| | Minimum lease commitments of the Company and the subsidiaries under the above leases, at rates in effect as of December 31, 2007, are as follows: |
| $ in thousands
|
|---|
| | |
|---|
| |
|---|
| |
|---|
| |
|---|
| Year ending December 31: | | | | | |
| 2008 | | | | 485 | |
| 2009 | | | | 499 | |
| 2010 | | | | 513 | |
|
| |
| | | | | 1,497 | |
|
| |
| |
| | The rental payments for the premises in Israel, which constitute most of the above amounts, are payable in Israeli currency linked to the Israeli CPI. |
| | Rental expenses totaled $ 331,000, $ 514,000, and $ 540,000 in the years ended December 31, 2007, 2006 and 2005, respectively. |
| | 2) | The Company leases motor vehicles under long-term operating lease agreements. The lease agreements expire on various dates ending in 2008 – 2010 (with prior notice of cancellation clauses). |
| | Minimum lease commitments of the Company under the above leases, at rates in effect on December 31, 2007, are as follows: |
| $ in thousands
|
|---|
| | |
|---|
| |
|---|
| |
|---|
| |
|---|
| 2008 | | | | 379 | |
| 2009 | | | | 263 | |
| 2010 | | | | 98 | |
|
| |
| | | | | 740 | |
|
| |
| |
| | To secure the amounts due to the lessor, the Company has deposited a total of U.S. $ 69,000. The deposits are unlinked and presented among other receivables and long-term receivables.
Lease expenses in 2007, 2006 and 2005, amounted to $ 430,000, $ 299,000, and $ 298,000 respectively. |
F - 24
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 10 | – | COMMITMENTS AND CONTINGENT LIABILITIES (cont.) |
| | To secure the Company’s commitment under its sales agreements, the Company provided guarantees in the amounts $ 1,185,000 to its customers. The guarantees are usually secured by cash advances received from the said customers. |
| NOTE 11 | – | SHAREHOLDER’ EQUITY |
| | a. | Authorized, issued and outstanding shares |
| | 1) | The Company’s Ordinary Shares are traded in the United States on the OTC Bulletin Board market under the symbol EVSNF.OB. |
| | 2) | In March 2004, the Company entered into a Standby Equity Distribution Agreement with Cornell. Pursuant to this agreement, the Company will be entitled to issue Cornell with put notices requiring it to purchase, six days following each put notice, a number of Company’s ordinary shares with a value of up to $ 300,000 per put notice and up to an aggregate value of $ 10,000,000 over two years. |
| | The price per share payable by Cornell will be determined based on the minimum price of Company’s shares during the five days period following Company’s put notice to Cornell to purchase Company’s shares. Under the said agreement, the Company agrees to pay Cornell commitment fees, which were defined as follows: |
| | a) | For each notice, Cornell will deduct 5% from the price payable for Company’s ordinary shares, as a commitment fee. |
| | b) | Upon execution of the Agreement, the Company issued Cornell with 148,438 of its ordinary shares in an amount equal to $ 190,000. |
| | c) | Upon the first to occur of (i) receipt by the Company of an aggregate of more than $5,000,000 from Cornell pursuant to the Agreement; and (ii) the first put notice to be provided by the Company following the first anniversary of the execution of the Agreement, the Company will issue to Cornell a number of its ordinary shares with a value of $ 150,000, calculated in accordance with the minimum closing bid price of Company shares on the public market on which its shares shall be traded at such time, on the day on which the Company is required to issue the ordinary shares. |
| | Through December 31, 2005, the Company repaid $ 2,129,000 of the Note in cash and $ 433,000 by the issuance of 869,946 shares to Cornell, as stipulated in the said agreement. |
| | Through June 2006, the Company issued Cornell with 1,433,527 of its ordinary shares in an amount equal to $ 569,000. |
| | On February 17, 2006, the Company repaid all outstanding amounts owed to Cornell, and have thus fulfilled all of it obligations toward them under the Promissory Note. Following repayment of the Promissory Note, all ordinary shares and advance notices held in trust to guarantee the loan were returned to the Company, and the floating charge on its assets was removed. |
F - 25
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 11 | – | SHAREHOLDER’ EQUITY (cont.) |
| | a. | Authorized, issued and outstanding shares (cont.) |
| | 3) | In June 2007 the Company completed the April Investment with a group of Israeli institutional investors, or the Israeli Investors, for the purchase of its 9,465,544 ordinary shares for $0.315 per share, of an aggregate price of $2,981,646. Pursuant to the transaction, the investors were also issued warrants to purchase 4,732,774 of the Company’s ordinary shares at an exercise price per share of $0.45, exercisable for a period of 4 years. |
| | 4) | On June 21, 2007, following the approval of the Company’s board of directors and the Company’s audit committee, the Company executed an agreement with Elbit Ltd., or the Elbit Agreement. This agreement was approved by the Company’s shareholders in a meeting held on July 31, 2007. Pursuant to this agreement Elbit Ltd.(i) converted an existing loan to the Company in the amount of $470,000 (including accrued interest up until March 31, 2007) into 1,492,063 ordinary shares, at a price of $0.315 per share; and (ii) invested $250,000 in consideration for 793,651 of the Company’s ordinary shares at a price of $0.315 per share and received a 4-year warrant to purchase 396,825 of the Company’s ordinary shares at an exercise price of $0.45 per share. At consummation the Company paid all interest accrued on the loan between April 1, 2007 and the closing date. |
| | 5) | On February 21, 2006, the Company consummated the Mivtach Agreement. Pursuant to the agreement, Mivtach Shamir Hidings Ltd. (“Mivtach”) provided the Company with a two-year $3 million loan, which Mivtach Shamir was entitled at its sole discretion, for a period of 24 months following the provision of the loan, to convert into 6,000,000 of the Company’s ordinary shares, at a price per share of $0.5 (half the loan was being held in escrow subject to the completion of a certain milestone, or conversion of the loan). The interest on the loan was repaid on a quarterly basis. Mivtach was also granted a two-year warrant to purchase 4,000,000 of the Company’s ordinary shares at an exercise price of $0.5 per share, exercisable only if the loan was converted. On February 21, 2006, Mivtach assigned their right to receive shares from the Company, under the convertible loan and warrant, to M S N D Real Estate Holding Ltd. (“M.S.N.D.”). On June 21, 2007 the Company executed an agreement with M.S.N.D., which was approved by the Company’s shareholders in a meeting held on July 31, 2007, pursuant to which, the Mivtach Agreement was amended, or the Amendment Agreement. Pursuant to the Amendment Agreement, the terms of the Mivtach Agreement and the loan therein, were amended, such that in consideration for M.S.N.D.‘s undertaking to convert the full loan amount by no later than August 1, 2007 (a) Mivtach will be issued with 9,523,810 of ordinary shares; and (b) Mivtach will receive a 4-year warrant to purchase 2,380,952 of the Company’s ordinary shares at an exercise price of $0.45 per share. Mivtach also agreed to waive its rights to exercise at least 3,000,000 ordinary shares issuable under the Mivtach Agreement, agreeing to exercise no more than 1,000,000 ordinary shares issuable under the Amendment Agreement. Following consummation the Amendment Agreement M.S.N.D, has become a holder of more than 25% of the Company’s issued and outstanding share capital. |
| | M.S.N.D. also completed the purchase of 2,939,192 of the Company’s ordinary shares from three of the founders of ScanMaster, in accordance with the provisions of a share purchase agreement. |
F - 26
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 11 | – | SHAREHOLDER’ EQUITY (cont.) |
| | (a) | In February 1996, the Company’s board of directors adopted the Company’s Employee Share Option Plan (1996) (hereafter – The 1996 Plan). Under the 1996 plan, 565,720 options can be granted to directors, employees and consultants of the Company and its subsidiaries. Each option can be exercised into one ordinary share of the Company. |
| | The 1996 plans was valid for ten years and expired in February 2006, except for option awards outstanding on that date. |
| | Under the 1996 Plan, options usually vest as follows: 50% – two years after the effective date of grant; 75% – after three years; and 100% – after four years. |
| | (b) | In April 2000, the board of directors of the Company adopted the Employee Share Option Plan (2000) (hereafter – The 2000 Plan). |
| | Under the 2000 plan, options to purchase an aggregate of 4,500,000 ordinary shares are available to be awarded to employees, directors or consultants of the Company or any of its subsidiaries.
Under the 2000 plan, options usually vest over a period of three or four years from the date of grant, in equal parts each year. |
| | The 2000 Plan is valid for ten years and will expire on April 3, 2010, except for options outstanding on that date. |
| | (c) | In November 2003, the Board of Directors of the Company adopted the Employee Share Option Plan (2003) (hereafter – The 2003 Plan). |
| | Under the 2003 plan, options to purchase an aggregate of 2,000,000 ordinary shares are available to be awarded to employees, directors or consultants of the Company or any of its subsidiaries. |
| | Under the 2003 plan, options usually vest over a period of four years from the date of grant, in equal parts each year.
The 2003 Plan is valid for ten years and will expire on November 30, 2013, except for options outstanding on that date. |
| | (d) | In March 2006, the Board of Directors of the Company adopted the Employee Share Option Plan (2006) (hereafter – The 2006 Plan). |
| | Under the 2006 plan, options to purchase an aggregate of 2,000,000 ordinary shares are available to be awarded to employees, directors or consultants of the Company or any of its subsidiaries. |
| | Under the 2006 plan, options usually exercisable over a period up to ten years following the date of grant, if not exercised earlier, or 6 months after termination of the employee, will generally vest as to 25-33% commencing the beginning of the second year after the grant and as to an additional 25-33% in each of the remaining years thereafter, assuming continuous employment with the Company through such periods. |
F - 27
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE | – | 11 SHAREHOLDER’ EQUITY (cont.) |
| | b. | Share option plans (cont.): |
| | The 2006 Plan is valid for ten years and will expire in March, 2016, except for options outstanding on that date. |
| | The exercise price of options granted under the 1996, 2000 and 2003 plans is to be not less than 85% of the fair market value of the ordinary share on the date of grant. All of the outstanding options from the 1996, 2000 and 2003 plan are to expire no later than 10 years following the date of grant. |
| | Through December 31, 2005, options to purchase 474,848 shares were exercised. The proceeds from the exercise amounted to $ 102 thousands. |
| | During 2006 options to purchase 183,797 shares were exercised. The proceeds from the exercise amounted to $ 43 thousands. |
| | During 2007 no options were exercised. |
| | The 2000, 2003 and 2006 plans are subject to the terms stipulated by Section 102 of the Israeli Income Tax Ordinance. Inter alia, these terms provide that the Company will be allowed to claim, as an expense for tax purposes, the amounts credited to the employees as a benefit in respect of shares or options granted under the plan. |
| | The amount allowed as an expense for tax purposes, at the time the employee utilizes such benefit, is limited to the amount of the benefit that is liable to tax as labor income, in the hands of the employee; all being subject to the restrictions specified in Section 102 of the Income Tax Ordinance. |
| | The aforementioned expense will be recognized in the tax year that the benefit is credited to the employee. |
| | 2) | Options granted to employees: |
| | (a) | A summary of the status of the above plans in respect of options granted to employees and directors of the Company and its subsidiaries as of December 31, 2007, 2006 and 2005, and changes during the years ended on those dates, is presented below: |
| | Y e a r e n d e d D e c e m b e r 3 1
|
|---|
| | 2 0 0 7
| 2 0 0 6
| 2 0 0 5
|
|---|
| | Number
| Weighted
average
exercise
price
| Number
| Weighted
average
exercise
price
| Number
| Weighted
average
exercise
price
|
|---|
| | | | | | | |
|---|
| | | | | | | |
|---|
| Options outstanding at beginning of year | | | | 4,888,686 | | $ | 0.83 | | | 4,551,596 | | $ | 0.86 | | | 4,406,138 | | $ | 0.88 | |
| Changes during the year: | | |
| Granted (1) | | | | 350,000 | | | 0.42 | | | 777,500 | | | 0.69 | | | 625,000 | | | 0.51 | |
| Exercised | | | | - | | | - | | | (183,797 | ) | | 0.21 | | | (82,250 | ) | | 0.21 | |
| Forfeited | | | | (228,334 | ) | | 1.19 | | | (256,613 | ) | | 1.21 | | | (397,292 | ) | | 0.69 | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | |
| Options outstanding at end of year | | | | 5,010,352 | | | 0.79 | | | 4,888,686 | | | 0.83 | | | 4,551,596 | | | 0.86 | |
| |
| |
| |
| |
| |
| |
| |
| Options exercisable at year end | | | | 3,962,739 | | $ | 0.85 | | | 3,663,176 | | $ | 0.90 | | | 3,147,401 | | $ | 0.97 | |
| |
| |
| |
| |
| |
| |
| |
| Weighted average fair value | | |
| of options granted during | | |
| the year (2) | | | $ | 0.35 | | | | | $ | 0.64 | | | | | $ | 0.37 | | | | |
| |
| | | |
| | | |
| | | |
| | | | | | | |
F - 28
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 11 | – | SHAREHOLDER' EQUITY (cont.) |
| | b. | Share option plans (cont.): |
| | 2) | Options granted to employees (cont.): |
| | (1) | Options granted in 2007, 2006 and 2005 were granted with exercise price that was at market value or above. |
| | (2) | The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model in 2007 and 2005 and the Binomial lattice model in 2006, with the following weighted average assumptions: |
| | Year ended December 31
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Dividend yield | | | | 0 | % | | 0 | % | | 0 | % |
| |
| |
| |
| |
| Expected volatility | | | | 140 | % | | 102 | % | | 70 | % |
| |
| |
| |
| |
| Risk-free interest rate | | | | 4.15 | % | | 4.7 | % | | 4.84 | % |
| |
| |
| |
| |
| Expected life - in years | | | | 6 | | | 6 | | | 4 | |
| |
| |
| |
| |
| | | | |
| | Dividend yield – Management used an expected dividend yield based primarily on past experience applicable as of the grant date. |
| | Expected volatility – Management estimated volatility based on the historical volatility of the Company’s ordinary shares, being the only traded financial instrument of the Company, using in most cases daily observations of the Company’s price share to determine the standard deviation. |
| | Risk free interest rate – The risk-free interest rate is based on the implied yield in effect at the time of each option grant, based on U.S. Treasury zero-coupon bond issued with equivalent remaining terms. |
| | Management estimates forfeiture rates at the date of grant, which are adjusted in subsequent periods if the actual forfeiture rates differ from those initially estimated. Management uses historical data to estimate pre-vesting option forfeiture rates and records share-based compensation expense only for those awards that are expected to vest. |
F - 29
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 11 | – | SHAREHOLDERS’ EQUITY (Cont.) |
| | b. | Share option plans (Cont.): |
| | 2) | Options granted to employees (Cont.): |
| | (b) | The following table summarizes certain information about options granted to employees and directors of the Company which were outstanding and exercisable under the above plans as of December 31, 2007: |
| Options outstanding
| Options exercisable
|
|---|
| Exercise
prices
| Number
outstanding at
December 31,
2007
| Weighted
average
remaining
contractual
life
| Number
exercisable at
December 31,
2007
| Weighted
average
remaining
contractual
life
|
|---|
| $
| | Years
| | Years
| |
|---|
| | | | | |
|---|
| | | | | |
|---|
| | 1.68 | | | 110,000 | | | 1.00 | | | 110,000 | | | 1.00 | |
| | 1.25 | | | 727,500 | | | 6.24 | | | 727,500 | | | 6.24 | |
| | 1.20 | | | 44,000 | | | 6.95 | | | 44,000 | | | 6.95 | |
| | 1.17 | | | 523,639 | | | 2.41 | | | 523,639 | | | 2.41 | |
| | 1.00 | | | 166,027 | | | 4.58 | | | 166,027 | | | 4.58 | |
| | 0.85 | | | 136,500 | | | 5.90 | | | 136,500 | | | 5.90 | |
| | 0.83 | | | 15,000 | | | 5.96 | | | 15,000 | | | 5.96 | |
| | 0.80 | | | 300,334 | | | 6.79 | | | 300,334 | | | 6.79 | |
| | 0.78 | | | 400,000 | | | 8.15 | | | - | | | - | |
| | 0.75 | | | 625,000 | | | 6.59 | | | 625,000 | | | 6.59 | |
| | 0.70 | | | 25,000 | | | 7.98 | | | 16,667 | | | 7.98 | |
| | 0.68 | | | 153,197 | | | 5.90 | | | 153,197 | | | 5.90 | |
| | 0.50 | | | 600,000 | | | 7.98 | | | 400,004 | | | 7.98 | |
| | 0.48 | | | 295,100 | | | 4.21 | | | 295,100 | | | 4.21 | |
| | 0.40 | | | 290,000 | | | 9.62 | | | 30,716 | | | 8.42 | |
| | 0.37 | | | 30,000 | | | 9.12 | | | - | | | - | |
| | 0.36 | | | 272,750 | | | 3.06 | | | 272,750 | | | 3.06 | |
| | 0.35 | | | 30,000 | | | 9.30 | | | - | | | - | |
| | 0.28 | | | 120,000 | | | 8.97 | | | - | | | - | |
| | 0.20 | | | 125,453 | | | 5.62 | | | 125,453 | | | 5.62 | |
| | 0.15 | | | 20,852 | | | 4.58 | | | 20,852 | | | 4.58 | |
| | |
| | | |
| | | |
| | | | | 5,010,352 | | | 6.08 | | | 3,962,739 | | | 5.40 | |
| |
| | | |
| | | |
| | | | | |
| | In the event the Company declares cash dividends, such dividends will be paid in Israeli currency. Under current Israeli regulations, any cash dividend in Israeli currency paid in respect of ordinary shares purchased by non-residents of Israel with non-Israeli currency may be freely repatriated in such non-Israeli currency, at the rate of exchange prevailing at the time of conversion. |
| | d. | Options issued to consultants |
| | In May 2005, the Company issued to advisors 50,000 warrants, fully vested with an exercise price of $1 and 125,000 with vesting period of a three years and an exercise price of $0.8. |
| | In September 2005, the Company issue 571,429 warrants, fully vested to bank Mizrahi with an exercise price of $0.77 and immediate vesting in favor of loan agreement (see also Note 9). During November 2006, the Company’s board of directors approved to change the exercise price to $0.5. |
| | All those warrants were granted above market value and the Company recorded expenses according to SFAS 123. |
F - 30
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | a. | Corporate taxation in Israel |
| | 1) | Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments) Law, 1985 (the “Inflationary Adjustments Law”) |
| | Under the Inflationary Adjustments Law, results for tax purposes are measured in real terms, having regard to the changes in the Israeli Consumer Price Index (hereafter – CPI). The Company and ScanMaster Ltd. are taxed under this law. |
| | On February 26, 2008 the Income Tax (Inflationary Adjustments) Law (Amendment no. 20) (Limitation for period of application), 2008 (the”Amendment”) passed in a third calling in the Knesset. According to the amendment, the application of the Inflationary Law will cease in the tax year of 2007, and beginning in 2008 the instructions of the law will no longer apply, except for transaction period instructions which have the purpose of preventing distortions in the calculations of taxes. |
| | In accordance with the Amendment, beginning in the year 2008, no calculations for inflationary adjustments of revenues for tax purposes will be made . In addition,there will be no adjustments to the Israeli CPI for fixed assets’ depreciations and carryforward tax losses for the period beginning January 1, 2008. |
| | As explained in Note 2, the financial statements are measured in dollars. The difference between the changes in the Israeli CPI and in the exchange rate of the dollar relative to Israeli currency, both on annual and cumulative bases, creates a difference between taxable income and income reflected in these financial statements. |
| | Paragraph 9(f) of FAS 109, “Accounting for Income Taxes”, prohibits the recognition of deferred tax liabilities or assets that arise from differences between the financial reporting and tax bases of assets and liabilities that are measured from the local currency into dollars using historical exchange rates, and that result from changes in exchange rates or indexing for tax purposes. Consequently, the abovementioned differences were not reflected in the computation of deferred tax assets and liabilities. |
| | a) | The income of the Company and ScanMaster Ltd. (other than income from “approved enterprises”, see b. below) are taxed at the regular rate. For 2007 the corporate tax rate was 29% and it will gradually decrease from 27% in 2008 through 25% in 2010. |
| | b) | Non Israeli subsidiaries |
| | Subsidiaries that are incorporated outside of Israel are assessed for tax under the tax laws in their countries of residence. The principal tax rates applicable to subsidiaries outside Israel are as follows: |
| | Company incorporated in the USA – tax rate of 39%. |
| | Company incorporated in tne Netherlands – tax rate of 20 %. |
F - 31
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 12 | – | TAXES ON INCOME (cont.) |
| | b. | Tax benefits under the Law for the Encouragement of Capital Investments, 1959(hereinafter – the law) |
| | Under the law, by virtue of the “approved enterprise” status granted to investments in certain assets the Company and ScanMaster Ltd. are entitled to various tax benefits. |
| | 1) | The main tax benefits available to the Company and ScanMaster Ltd. are: |
| | Tax exemption during the period of benefits – 10 years – commencing in the first year in which the Company earns taxable income from the approved enterprises (provided that the maximum period to which it is restricted by the law has not elapsed). |
| | The Company has four approved enterprises; the benefit periods commenced in 1994, 1995, 1997 and 2004, respectively. |
| | The periods of benefits for the first, second and third approved enterprise expired in 2003, 2004 and 2006, respectively. |
| | In the event of distribution of cash dividends from income, which was tax exempt as above, the Company would have to pay 25% tax in respect of the amount distributed. The amount distributed for this purpose includes the amount of the tax that applies as a result of the distribution. |
| | Tax exemption during the period of benefits – 7 years – commencing in the first year in which the Company earns taxable income from the approved enterprises (provided that the maximum period to which it is restricted by the law has not elapsed). |
| | Tax exemption on income from approved enterprises in respect of which the companies have elected the “alternative benefits” (involving waiver of investment grants); the length of the exemption period is four years, after which the income from these enterprises is taxable at the rate of 25% for three years. |
| | ScanMaster Ltd. has three approved enterprises; the benefit periods in respect of the first and second enterprises commenced in 1994 and 1997, respectively. |
| | The period of tax benefits in respect of the first approved enterprise has expired. |
| | The period of tax benefits in respect of the second approved enterprise will expire in 2008. The third approved enterprise has not yet been activated. |
| | In March 2004 ScanMaster Ltd. received a warning from the Investment Center that the instrument of approval of the second approved enterprise might be cancelled. ScanMaster Ltd. plans to appeal the Investment Center’s decision in the near future. ScanMaster Ltd. has not utilized its tax benefits in respect of this enterprise. In case that the said approved enterprise will be cancelled, the Company estimates that it will not be required to be subject to penalties. |
F - 32
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 12 | – | TAXES ON INCOME (cont.) |
| | b. | Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (hereinafter – the law) (cont.) |
| | (b) | Accelerated depreciation |
| | The Company is entitled to claim accelerated depreciation in respect of equipment used by the approved enterprises during five tax years. |
| | (c) | Conditions for entitlement of the benefits |
| | The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the above law, regulations published there under and the certificate of approval for the specific investments in approved enterprises. In the event of failure to comply with these conditions, the benefits may be canceled, and ScanMaster Ltd. and the Company may be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences to the Israeli CPI and interest. |
| | In the event of distribution of cash dividends out of income, which was tax exempt as above, the companies would have to pay the 25% tax in respect of the amount distributed. For this purpose, the amount distributed includes the amount of the tax that applies as a result of the distribution. |
| | c. | Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969 |
| | The Company and ScanMaster Ltd. are “industrial companies” as defined by this law and as such are entitled to certain tax benefits, consisting mainly of accelerated depreciation as prescribed by regulations published under the Inflationary Adjustments Law, amortization of patents and certain other intangible property, and the right to claim public issuance expenses. |
| | d. | Reconciliation of Income Taxes |
| | Following is a reconciliation of the theoretical tax expense, assuming all income is taxed at the statutory corporate tax rate applicable to Israeli corporations, and the actual expense: |
| | Year ended December 31
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | $ in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| Income (Loss) before taxes on income | | | | (1,339 | ) | | (5,357 | ) | | 767 | |
| |
| |
| |
| |
| Theoretical tax benefit on the above amount | | | | (388 | ) | | (1,661 | ) | | 261 | |
| Increase in taxes in respect of tax losses | | |
| incurred in the reported year for which | | |
| deferred taxes were not recorded (see f. below) | | | | 388 | | | 1,661 | | | (261 | ) |
| Other | | | | 3 | | | 5 | | | 4 | |
| |
| |
| |
| |
| Actual tax expense | | | | 3 | | | 5 | | | 4 | |
| |
| |
| |
| |
| | Taxes on income included in the statement of operations relate to Company’s subsidiaries. |
F - 33
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 12 | – | TAXES ON INCOME (cont.) |
| | 1) | The Company has approximately $ 30 million unutilized carryforward tax losses from prior years. Therefore, no current tax liability has been provided in 2007 and 2006. |
| | Virtually all the Company’s temporary differences are in respect of carryforward tax losses. The Company expects that during the period in which its tax losses are utilized, its income would be tax exempt, as described in b1) (a) above. Accordingly, no deferred tax assets have been included in these financial statements in respect of the Company’s carryforward tax losses. |
| | 2) | ScanMaster has unutilized carryforward tax losses from prior years, exceeding other temporary differences. Valuation allowance has been provided in full, for all deferred taxes relating to the above tax losses and temporary differences; Accordingly no tax benefits have been included in these financial statements, as follows: |
| | December 31, 2007
| December 31, 2006
|
|---|
| | $ in thousands
| $ in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Provision for vacation pay | | | | 87 | | | 94 | |
| Accrued severance pay | | | | 42 | | | 14 | |
| Carryforward tax losses | | | | 858 | | | 1,362 | |
| Research and development costs | | | | 417 | | | 218 | |
| Less - valuation allowance | | | | (1,404 | ) | | (1,688 | ) |
| |
| |
| |
| | | | | - | | | - | |
| |
| |
| |
| | The deferred taxes are computed at the average tax rate of 25% – 27%. |
| | f. | Carryforward tax losses |
| | Carryforward tax losses of the Company and its subsidiaries aggregate approximately $ 41 million at December 31, 2007. |
| | Final tax assessments have been received by the Company and ScanMaster Ltd. through the tax year 2002. |
| NOTE 13 | – | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT |
| | The Company operates internationally, which gives rise to exposure to market risks, mainly from changes in foreign exchange rates. |
| | b. | Fair value of financial instruments |
| | The fair value of financial instruments included in working capital is usually identical or close to their carrying amount. The fair value of long-term receivables also approximate the carrying amounts, since they bear interest at rates close to prevailing market rates. |
F - 34
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 14 | – | LIABILITIES SECURED BY PLEDGES AND RESTRICTION PLACED IN RESPECT OF LIABILITIES |
| | a. | The Group has registered fixed charge on bank deposits in favor of certain banks. The bank deposits are used to secure a credit line granted to the Company by the banks, and as collateral for guarantees provided to its customers (see Note 2q). |
| | As of December 31, 2007, the bank deposits amount to $ 540 thousands, out of which $ 182 thousands are linked to the dollar and $ 358 thousands are linked to the Euro; The deposits are for a period of one Month. |
| | b. | The Company and Scanmaster have registered floating charges on all of their assets in favor of banks (see Notes 9, 15c). |
| NOTE 15 | – | SUPPLEMENTARY INFORMATION: |
| | | December 31
|
|---|
| | | 2007
| 2006
|
|---|
| | | $ in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| 1) | Trade -allowance for doubtful accounts: | | | | | | | | |
| | | | |
| | Balance at beginning of year | | | | 936 | | | 774 | |
| | Charged to general and administrative expenses | | | | (84 | ) | | 174 | |
| | Write-off of uncollectible amounts | | | | (175 | ) | | (12 | ) |
| | |
| |
| |
| | Balance at end of year | | | | 677 | | | 936 | |
| | |
| |
| |
| | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Employees | | | | 60 | | | 50 | |
| Prepaid expenses | | | | 378 | | | 181 | |
| Israeli Government departments and agencies | | | | 324 | | | 362 | |
| Receivables from selling the Yuravision | | | | 360 | | | - | |
| Advance to agent | | | | 275 | | | - | |
| Sundry | | | | 31 | | | 10 | |
| |
| |
| |
| | | | | 1,428 | | | 603 | |
| |
| |
| |
F - 35
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 15 | – | SUPPLEMENTARY INFORMATION (Cont.) |
| | b. | Accounts payable and accruals – other: |
| | December 31
|
|---|
| | 2007
| 2006
|
|---|
| | $ in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| Employees and employee institutions | | | | 535 | | | 645 | |
| Israeli Government departments and agencies | | | | 1,005 | | | 998 | |
| Provision for vacation and recreation pay | | | | 588 | | | 592 | |
| Provision for product warranty | | | | 218 | | | 259 | |
| Liability for commissions to agents | | | | 108 | | | 394 | |
| Accrued expenses and sundry | | | | 175 | | | 695 | |
| |
| |
| |
| | | | | 2,629 | | | 3,583 | |
| |
| |
| |
| | % interest rate
as of
December 31, 2007
| December 31
|
|---|
| | 2007
| 2006
|
|---|
| | $ in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| Unlinked credit from bank | | | | 9 | | | 504 | | | 528 | |
| Short-term loans from banks: | | |
| Linked to the dollar | | | | 8 | | | 3,793 | | | 3,223 | |
| Linked to the Euro | | | | 7 | | | 670 | | | 962 | |
| | |
| |
| |
| | | | | | | | 4,967 | | | 4,713 | |
| | |
| |
| |
| | In 2003, the Company entered into agreements for bank credit facilities, pursuant to which the Company may, from time to time, borrow an aggregate amount of up to $ 3,930,000. As of December 31, 2007 the Company uses $ 3,537,444 of the said credit; to secure the credit facilities, the Company registered a floating fixed charge on certain bank deposits in favor of the said banks (see Note 14). |
| | Year ended December 31
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | $ in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| Industrial operations: | | | | | | | | | | | |
| Materials consumed | | | | 4,202 | | | 5,636 | | | 7,178 | |
| Payroll and related expenses | | | | 2,776 | | | 2,745 | | | 2,569 | |
| Subcontracted work | | | | 247 | | | 253 | | | 135 | |
| Depreciation and amortization | | | | 579 | | | 579 | | | 457 | |
| Other production expenses | | | | 1,873 | | | 2,267 | | | 1,736 | |
| Royalties (see Note 10a) | | | | 300 | | | 287 | | | (490 | ) |
| Increase in inventories | | | | 1,331 | | | 469 | | | 48 | |
| |
| |
| |
| |
| | | | | 11,308 | | | 12,236 | | | 11,633 | |
| |
| |
| |
| |
F - 36
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 15 | – | SUPPLEMENTARY INFORMATION (cont.): |
| | e. | Research and development expenses: |
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Total expenses | | | | 3,454 | | | 2,707 | | | 2,193 | |
| Less - grants and participations, see Note 10a1). | | | | (141 | ) | | (145 | ) | | (154 | ) |
| |
| |
| |
| |
| | | | | 3,313 | | | 2,562 | | | 2,039 | |
| |
| |
| |
| |
| | f. | Financial income (expenses) |
| | Year ended December 31
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | $ in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| Income: | | | | | | | | | | | |
| Interest in respect of bank | | |
| Deposits and securities | | | | 62 | | | 44 | | | 46 | |
| Exchange differences | | | | 48 | | | - | | | 99 | |
| Other | | | | - | | | 9 | | | - | |
| |
| |
| |
| |
| | | | | 110 | | | 53 | | | 145 | |
| |
| |
| |
| |
| Expenses: | | |
| Interest | | |
| In respect of liability to related parties | | | | 360 | | | 460 | | | 22 | |
| In respect of credit from banks | | | | 747 | | | 695 | | | 170 | |
| In respect of credit from Cornell | | | | - | | | - | | | 79 | |
| Exchange differences | | | | - | | | 215 | | | 124 | |
| Other | | | | 84 | | | 15 | | | 187 | |
| |
| |
| |
| |
| | | | | 1,191 | | | 1,385 | | | 582 | |
| |
| |
| |
| |
| | | | | (1,081 | ) | | (1,332 | ) | | (437 | ) |
| |
| |
| |
| |
| | g. | Other income (expenses) |
| | Year ended December 31
|
|---|
| | 2007
| 2006
| 2005
|
|---|
| | $ in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| Write off of discount on convertible loan | | | | | | | | | | | |
| associated with beneficial conversion feature | | |
| (see note 9a.(3)) | | | | (1,047 | ) | | - | | | - | |
| Other | | | | (230 | ) | | (5 | ) | | 7 | |
| |
| |
| |
| |
| | | | | (1,277 | ) | | (5 | ) | | 7 | |
| |
| |
| |
| |
| | 2007
| 2006
| 2005
|
|---|
| | $ in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Marketing and selling | | | | 120 | | | 92 | | | - | |
| |
| |
| |
| |
| General and administrative | | | | 278 | | | 322 | | | 184 | |
| |
| |
| |
| |
| Financing expenses on long-term loan | | |
| granted by shareholders - see Note 9a. | | | | 360 | | | 29 | | | 22 | |
| |
| |
| |
| |
| Other expenses | | | | 1,047 | | | - | | | - | |
| |
| |
| |
| |
F - 37
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 17 | – | BUSINESS AND GEOGRAPHICAL SEGMENTS |
| | 1) | Factors management used to identify the enterprise’s reportable segments |
| | The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the businesses were acquired as a unit, and the management at the time of the acquisition was retained. |
| | 2) | Description of the types of products and services from which each reportable segment derives its revenues |
| | Due to the acquisition in 2004, the internal organizational structure changed; consequently, the company has two reportable segments: |
| | (a) | Automatic Vision Inspection segment – design, develop, manufacture and marketing automatic vision inspection and quality monitoring systems, and rendering services related to those systems. |
| | (b) | Non-destructive Automated Inspection segment – develop, manufacture and market equipment for the ultrasonic inspection of industrial parts and components for the automotive and transportation industries, the metal industry as well as applications for aircraft and jet engine inspection. |
| | Prior to June 2004, the Company operated only in one segment – the Automatic Vision Inspection segment. |
| | b. | Information about reported segment income or loss and assets: |
| | Measurement of segment income or loss and segment assets |
| | The accounting policies of the segments are the same as those described in the significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes, not including non-recurring gains and losses and foreign exchange gains and losses. |
| | The Company accounts for inter-segment sales and transfers as if the sales or transfers were to third parties, that is – at current market prices. |
| | Automatic
Vision
Inspection
| Non-
Destructive
Automated
Inspection
| Total
|
|---|
| | $ in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Year ended December 31, 2007: | | | | | | | | | | | |
| Revenues from unaffiliated customers | | | | 7,646 | | | 14,217 | | | 21,863 | |
| Total Consolidated revenues | | | | | | | | | | 21,863 | |
| | | |
| |
| Segment Operating income (loss) | | | | (122 | ) | | 1,356 | | | 1,234 | |
| Unallocated corporate expenses | | | | | | | | | | (215 | ) |
| | | |
| |
| Operating income | | | | | | | | | | 1,019 | |
| | | |
| |
| Segment assets | | | | 7,852 | | | 15,648 | | | 23,500 | |
| Other unallocated amounts | | | | | | | | | | 6 | |
| | | |
| |
| Consolidated assets at the year end | | | | | | | | | | 23,506 | |
| | | |
| |
| Expenditures for segment assets | | | | 186 | | | 110 | | | 296 | |
| | | |
| |
| Total depreciation and amortization | | | | 438 | | | 455 | | | 893 | |
| | | |
| |
F - 38
ELBIT VISION SYSTEMS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 17 | – | BUSINESS AND GEOGRAPHICAL SEGMENTS (cont.) |
| | 1) | The Company’s revenues by geographic areas (based on locaton of customers) are as follows: |
| | 2007
| 2006
| 2005
|
|---|
| | $ in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| U.S.A. | | | | 6,341 | | | 4,178 | | | 6,163 | |
| Europe | | | | 7,756 | | | 7,370 | | | 4,389 | |
| Other (mainly Japan and China) | | | | 7,766 | | | 5,449 | | | 9,027 | |
| |
| |
| |
| |
| | | | | 21,863 | | | 16,997 | | | 19,579 | |
| |
| |
| |
| |
| | 2) | The Company’s long-lived assets by gegraphic areas are as follows: |
| | 2007
| 2006
|
|---|
| | $ in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Israel | | | | 7,437 | | | 6,887 | |
| U.S.A. | | | | 21 | | | 27 | |
| |
| |
| |
| | | | | 7,458 | | | 6,914 | |
| |
| |
| |
F - 39
