UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report...........
OR
Commission file number 0-28884
ELTEK LTD.
(Exact name of Registrant as specified in its charter
and translation of Registrant's name into English)
Israel
(Jurisdiction of incorporation or organization)
20 Ben Zion Gelis Street, Sgoola Industrial Zone, Petach Tikva 4927920, Israel
(Address of principal executive offices)
Amnon Shemer, +972-3-9395025 (phone), +972-3- 9342584 (fax)
20 Ben Zion Gelis Street, Sgoola Industrial Zone, Petach Tikva 4927920, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares, NIS 0.6 Nominal Value
Name of each exchange on which registered
NASDAQ Capital Market
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to section 15(d) of the act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of
the close of the period covered by the annual report:
10,142,762 Ordinary Shares, nominal value NIS 0.6 per share (as of December 31, 2015)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act:
Yes (cid:1) No (cid:2)
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
Yes (cid:1) No (cid:2)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes (cid:2) No (cid:1)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes (cid:2) No (cid:1)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-
accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer (cid:1)
Accelerated filer (cid:1)
Non-accelerated filer ⌧
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements
included in this filing:
U.S. GAAP ⌧
International Financial Reporting
Standards as issued by the
International Accounting
Standards Board (cid:1)
Other (cid:1)
If “Other” has been checked in response to the previous question, indicate by check mark which financial
statement item the registrant has elected to follow:
Item 17 (cid:1) Item 18 (cid:1)
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
Yes (cid:1) No (cid:2)
INTRODUCTION
Eltek Ltd., incorporated in 1970 under the laws of the State of Israel, manufactures, markets and sells
technologically advanced custom made printed circuit boards, or PCBs, including high density interconnect, or HDI,
flex-rigid and rigid, with high layer count boards. Our principal customers include manufacturers of defense and
aerospace, medical, industrial, telecom and networking equipment, as well as contract electronic manufacturers.
Since our initial public offering in January 1997, our ordinary shares have been listed on the NASDAQ Stock
Market (symbol: ELTK) and are presently listed on the NASDAQ Capital Market. As used in this annual report, the
terms “we,” “us” and “our” mean Eltek Ltd. and its subsidiaries, unless otherwise indicated.
Our functional currency is New Israeli Shekel while our reporting currency is the U.S. dollar. All
references in this annual report to “dollars” or “$” are to U.S. dollars and all references in this annual report to
“NIS” are to New Israeli Shekels. Our consolidated financial statements appearing in this annual report are prepared
in accordance with U.S. GAAP. The consolidated financial statements appearing in this annual report are translated
into dollars at the representative rate of exchange under the current rate method. Under such method, the income
statement and cash flows statement items for each year (or period) stated in this report are translated into dollars
using the average exchange rates in effect at each period presented, and assets and liabilities for each year (or
period) are translated using the exchange rate as of December 31 of each year as published by the Bank of Israel
($1.00 = NIS 3.9020 as of December 31, 2015), except for equity accounts, which are translated using the rates in
effect at the date of the transactions. All resulting exchange differences that do not affect our earnings are reported
in the accumulated other comprehensive income as a separate component of shareholders’ equity.
Statements made in this annual report concerning the contents of any contract, agreement or other
document are summaries of such contracts, agreements or documents and are not complete descriptions of all of
their terms. If we filed any of these documents as an exhibit to this annual report or to any registration statement or
annual report that we previously filed, you may read the document itself for a complete description of its terms.
Except for the historical information contained in this annual report, the statements contained in this annual
report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Securities
Exchange Act”), or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, as amended, with
respect to our business, financial condition and results of operations. Such forward-looking statements reflect our
current view with respect to future events and financial results. We urge you to consider that statements which use
the terms “anticipate,” “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate” and similar expressions
are intended to identify forward-looking statements. We remind readers that forward-looking statements are merely
predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks
that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be
materially different from any future results, performance, levels of activity, or our achievements expressed or
implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. Except as required by applicable law, including the
securities laws of the United States, we undertake no obligation to publicly release any update or revision to any
forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date
hereof. We have attempted to identify significant uncertainties and other factors affecting forward-looking
statements in the Risk Factors section that appears in Item 3.D. “Key Information- Risk Factors.”
Page No.
PART I ....................................................................................................................................................................... 1
TABLE OF CONTENTS
ITEM 1.
ITEM 2.
ITEM 3.
A.
B.
C.
D.
ITEM 4.
A.
B.
C.
D.
ITEM 4A.
ITEM 5.
IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISERS .................................................................... 1
OFFER STATISTICS AND EXPECTED TIMETABLE ........................... 1
KEY INFORMATION ............................................................................................. 1
SELECTED FINANCIAL DATA .................................................................................... 1
CAPITALIZATION AND INDEBTEDNESS .................................................................. 3
REASONS FOR THE OFFER AND USE OF PROCEEDS ........................................... 3
RISK FACTORS ............................................................................................................... 3
INFORMATION ON THE COMPANY .......................................................... 19
HISTORY AND DEVELOPMENT OF THE COMPANY ........................................... 19
BUSINESS OVERVIEW ................................................................................................ 19
ORGANIZATIONAL STRUCTURE ............................................................................. 24
PROPERTY, PLANTS AND EQUIPMENT ................................................................. 25
UNRESOLVED STAFF COMMENTS ........................................................... 25
OPERATING AND FINANCIAL REVIEW AND
PROSPECTS .............................................................................................................. 25
OPERATING RESULTS ................................................................................................ 25
LIQUIDITY AND CAPITAL RESOURCES ................................................................ 33
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES ........................... 35
TREND INFORMATION ............................................................................................... 35
OFF-BALANCE SHEET ARRANGEMENTS ............................................................. 35
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS ........................... 36
DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES ............................................................................................................ 36
DIRECTORS AND SENIOR MANAGEMENT............................................................ 36
COMPENSATION .......................................................................................................... 39
BOARD PRACTICES .................................................................................................... 40
EMPLOYEES .................................................................................................................. 47
SHARE OWNERSHIP ................................................................................................... 49
MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS .................................................................................................... 49
A. MAJOR SHAREHOLDERS .......................................................................................... 49
RELATED PARTY TRANSACTIONS ......................................................................... 50
B.
INTERESTS OF EXPERTS AND COUNSEL .............................................................. 51
C.
FINANCIAL INFORMATION ........................................................................... 51
ITEM 8.
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
INFORMATION .............................................................................................................. 51
A.
B.
C.
D.
E.
F.
ITEM 6.
A.
B.
C.
D.
E.
ITEM 7.
ii
Page No.
SIGNIFICANT CHANGES ............................................................................................ 53
B.
THE OFFER AND LISTING ............................................................................... 53
ITEM 9.
OFFER AND LISTING DETAILS ................................................................................ 53
A.
B.
PLAN OF DISTRIBUTION............................................................................................ 54
C. MARKETS ...................................................................................................................... 54
SELLING SHAREHOLDERS ........................................................................................ 54
D.
DILUTION ...................................................................................................................... 54
E.
EXPENSE OF THE ISSUE ............................................................................................. 54
F.
ADDITIONAL INFORMATION ....................................................................... 54
ITEM 10.
A.
SHARE CAPITAL .......................................................................................................... 54
B. MEMORANDUM AND ARTICLES OF ASSOCIATION ........................................... 54
C. MATERIAL CONTRACTS ........................................................................................... 58
EXCHANGE CONTROLS ............................................................................................. 59
D.
TAXATION ..................................................................................................................... 59
E.
DIVIDENDS AND PAYING AGENTS.......................................................................... 69
F.
STATEMENT BY EXPERTS ......................................................................................... 69
G.
DOCUMENTS ON DISPLAY ........................................................................................ 69
H.
SUBSIDIARY INFORMATION ..................................................................................... 70
I.
ITEM 11.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKS ................................................. 70
DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES.......................................................................................... 71
PART II ................................................................................................................................................................... 71
DEFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES .................................................................................................. 71
ITEM 13.
ITEM 12.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF
SECURITY HOLDERS AND USE OF PROCEEDS ................................. 71
CONTROLS AND PROCEDURES .................................................................. 71
ITEM 15.
ITEM 16.
[RESERVED] ............................................................................................................. 72
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT .......................................... 72
ITEM 16B. CODE OF ETHICS ................................................................................................. 72
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES ........................... 72
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS
FOR AUDIT COMMITTEES ............................................................................. 73
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE
ITEM 16F.
ISSUER AND AFFILIATED PURCHASERS ............................................. 73
CHANGES IN REGISTRANT’S CERTIFYING
ACCOUNTANT ........................................................................................................ 73
ITEM 16G. CORPORATE GOVERNANCE ........................................................................ 73
ITEM 16H. MINE SAFETY DISCLOSURE ......................................................................... 74
FINANCIAL STATEMENTS .............................................................................. 74
ITEM 17.
FINANCIAL STATEMENTS .............................................................................. 74
ITEM 18.
iii
ITEM 19.
EXHIBITS ................................................................................................................... 75
Page No.
iii
PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.
KEY INFORMATION
A.
Selected Financial Data
The selected financial data, set forth in the table below, have been derived from our audited historical
financial statements for the five years ended December 31, 2015. The selected consolidated financial data as of
December 31, 2015 and 2014 and for each of the three years ended December 31, 2015 have been prepared in
accordance with U.S. GAAP, and are derived from our audited consolidated financial statements and accompanying
notes included in Item 18, “Financial Statements.” The selected consolidated financial data as of December 31,
2013 and 2012 and for the year ended December 31, 2011 have been derived from our previously published audited
consolidated financial statements, which are not included in this annual report. The selected financial data set forth
below should be read in conjunction with and are qualified entirely by reference to Item 5. “Operating and Financial
Review and Prospects” and our consolidated financial statements and notes thereto included elsewhere in this annual
report.
1
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Year ended December 31,
2015
2014
2013
2012
2011
($ and share data in thousands, except per share data)
Revenues ................................................................
41,350
Cost of revenues ..........................................................(34,802)
6,548
Gross profit ................................................................
R&D expenses
Selling, general and administrative
(90)
(4,961)
expenses ................................................................
-
Impairment on goodwill ..............................................
Total operating expenses ............................................. (5,051)
1,497
Operating profit (loss)...............................................
Financial expenses, net................................................
Other income, net ........................................................
Profit (loss) before income tax expense ..................
Income tax (expense) benefit ................................
Net profit (loss) ...........................................................
Net profit (loss) attributable to non-controlling
interest ................................................................
Net profit (loss) attributable to Eltek Ltd.
shareholders
Basic and diluted net profit (loss) per
ordinary share attributable to Eltek Ltd. ................
(259)
6
1,244
(218)
1,026
17
1,043
0.1
46,626
(40,604)
6,022
(72)
(6,773)
(80)
(6,925)
(903)
(356)
38
(1,221)
(1,634)
(2,855)
190
(2,665)
(0.26)
50,235
(42,242)
7,933
--
(6,722)
-
(6,722)
1,271
(439)
(26)
806
2,975
3,781
42
3,823
0.53
45,646
(37,836)
7,810
-
(6,040)
(481)
(6,521)
1,289
(543)
2
748
(52)
696
6
690
0.1
$46,830
(38,101)
8,729
-
(6,155)
-
(6,155)
2,574
(740)
12
1,846
(31)
1,815
(31)
1,846
0.28
Weighted average number of ordinary
shares used to compute basic and diluted
net profit (loss) per ordinary share
10,143
10,143
7,199
6,610
6,610
3
CONSOLIDATED BALANCE SHEETS DATA :
As at December 31,
2014
2013
2011
2015
($ and share data in thousands)
2012
Working capital (deficit)
1,982
(72)
1,997
(2,712)
(1,787)
Total assets
25,419
26,266
31,454
23,449
22,869
Long-term liabilities
3,194
2,087
1,749
Total shareholders’ equity
10,335
9,307
13,251
Number of issued and outstanding shares
10,143
10,143
10,143
943
5,412
6,610
1,754
4,631
6,610
B.
Capitalization and Indebtedness
Not applicable.
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
D.
Risk Factors
Investing in our ordinary shares involves a high degree of risk and uncertainty. You should carefully consider the
risks and uncertainties described below before investing in our ordinary shares. Our business, prospects, financial
condition and results of operations could be adversely affected due to any of the following risks. In that case, the
value of our ordinary shares could decline, and you could lose all or part of your investment.
Risks Relating to Our Business and Market
One key customer accounts for a significant portion of our revenues. The loss of this customer or other key
customers would have an adverse impact on our business results.
In the years ended December 31, 2015, 2014 and 2013, a group of 10 affiliated companies accounted for
17.9%, 20.6%, and 18.4% of our total revenues, respectively. We expect that a significant portion of our future
revenues will continue to be dependent on a small number of customers. If we are unable to retain our key
customers, or maintain our level of business with such customers, or, if we are unable to attract sufficient new
3
business to compensate for the loss of or reduction in business from any of our key customers, our results of
operations and financial condition would be adversely affected.
Our results of operations may be adversely affected by currency fluctuations.
Our revenues and expenses are denominated in NIS, dollars and Euros. Due to the different proportions of
currencies our revenues and expenses are denominated in, fluctuations in rates of exchange between NIS and other
currencies may affect our operating results and financial condition. The NIS value of our dollar and Euro
denominated revenues are negatively impacted by the depreciation of the dollar and the Euro against the NIS. The
average exchange rate for the NIS against the dollar was 8.6% higher in 2015 than in 2014, which had a positive
impact on our operating results in 2015. In the past, the NIS exchange rate against the dollar and other foreign
currencies fluctuated, generally reflecting inflation rate differentials. We cannot predict any future trends in the rate
of inflation in Israel or the rate of depreciation or appreciation of the NIS against the dollar. If NIS value of our
dollar or Euro denominated revenues decreases, our results of operations will be adversely affected.
We are currently not engaged in hedging transactions. If we were to decide to enter into any hedging
transactions in the future in order to protect ourselves in part from currency fluctuations, we may not be successful
in our hedging efforts, or such transactions, if entered into may not materially reduce the effect of fluctuations in
foreign currency exchange rates on our results of operations. Such hedging transactions may not necessarily
mitigate the longer-term impact of currency fluctuations on the operating costs of our business operations, and may
result in additional expenses.
Economic downturns and disruptions in financial markets can adversely affect our business and results of
operations.
Our results of operations can be materially affected by adverse conditions in the financial markets and
depressed economic conditions generally. Worsening economic conditions, such as the ongoing Eurozone crisis,
may result in diminished demand for our products and in decreased sales volumes. Recessionary environments
adversely affect the demand for our products as a result of constraints on capital spending by our customers. In
addition, this could result in longer sales cycles, slower acceptance of new products and increased competition for
our products, which in turn could cause us to reduce prices for our products resulting in reduced gross margins. Any
of these events may adversely affect our business, operating results and financial condition.
Continued losses of our Germany-based subsidiary, Kubatronik, could adversely affect our financial results
Our Germany-based subsidiary, Kubatronik Leiterplatten GmbH (“Kubatronik”), has incurred losses in
recent years. During the fiscal year 2015 and 2014, we have financed Kubatronik's operational losses in the
aggregate amount of 232,000 Euros ($258,000) and 657,000 Euros ($863,000) respectively. Kubatronik's
intercompany debt as of December 31, 2015 amounted to approximately 969,000 Euros ($1.1 million). In the event
Kubatronik is unable to repay its debt to us, we may be required to record this inter-company debt as a loss. In the
event the performance of Kubatronik does not improve, we may need to record impairment losses in respect of our
investment. Continued losses by Kubatronik may have an adverse impact on our cash flows and financial results.
We are subject to environmental laws and regulations. Compliance with those laws and regulations requires us
to incur costs and we are subject to fines or other sanctions for non-compliance.
Our operations are regulated under various environmental laws and regulations that govern, among other
things, the discharge of hazardous materials into the air and water, as well as the handling, storage and disposal of
such materials. Compliance with these laws and regulations is a major consideration for PCB manufacturers
because metals and chemicals classified as hazardous substances are used in the manufacturing process. Since May
2003, our environmental management system has been ISO 14001 certified. This certification was based on
successful implementation of environmental management requirements and includes ongoing monitoring of our
4
processes, raw materials and products. The certification is subject to periodic compliance audits conducted by the
Standards Institution of Israel. If, in the future, we are found to be in violation of environmental laws or regulations,
we could be liable for damages, costs of remedial actions, may be subject to criminal prosecution including a range
of potential penalties, and could also be subject to revocation of permits necessary to conduct our business or any
part thereof. Any such liability or revocation could have a material adverse effect on our business, financial
condition and results of operations. Environmental laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with a violation. A shortage of water in Israel may
reduce the allocation of water available to manufacturing plants, including ours, which could affect the
concentrations of pollutants in our wastewater, making it harder to comply with the foregoing regulations, in which
event we would be required to invest additional funds to improve our wastewater treatment systems.
The cost of compliance with environmental laws and regulations depends in part on the requirements in
such laws and regulations and on the method selected to implement them. If new or more restrictive standards are
imposed, the cost of compliance could be very high and have an adverse impact on our revenues and results of
operations if we cannot recover those costs through the rates that we charge our customers.
Our customers are also required to comply with various government regulations, legal requirements and
industry standards, including many of the industry-specific regulations discussed above. Our customers' failure to
comply could affect their businesses, which in turn would affect our sales to them. In addition, if our customers are
required by regulation or other requirements to make changes in their product lines, these changes could
significantly disrupt particular programs for these customers and create inefficiencies in our business.
We have in the past been, and currently are, subject to claims and litigation relating to environmental matters. If
we are found to be in violation of environmental laws, we could be liable for damages and costs of remediation
and may be subject to a halt in production, which may adversely affect our business, operating results and
financial condition.
We have in the past been, and currently are, subject to claims and litigation relating to environmental matters. We
may be subject to further environmental claims alleging that we are in violation of environmental laws. If we are
unsuccessful in such claims and other future claims and litigations or if actual results are not consistent with our
assumptions and judgments, we may be exposed to losses that could be material to our company.
On August 25, 2009, we received a notice from the Petach Tikva Municipality claiming that random
automatic wastewater sampling in proximity of our plant indicates high levels of metal concentrations which exceed
the amounts permitted by law. The Municipality requested our explanations to such alleged violation and further
informed us that its environmental department has determined to initiate procedures against any plant that is not in
compliance with the permitted concentrations. On September 16, 2009, we sent a letter to the Municipality
explaining that we have invested extensive funds and resources each year in order to comply with all environmental
legal requirements. We further indicated that we have been and are still engaged in several projects to reduce salt
and metal concentrations in our plant wastewater and that we constantly update our procedures with respect to
environmental matters. In addition, we proposed to collaborate with the Municipality and conduct mutual tests to
ensure maximum protection of the environment. To date, we have not yet received any response from the
Municipality to our letter dated September 16, 2009.
In January 2014, July 2014, September 2015 and February 2016, we received notices from Meitav, the water
company of the Petach Tikva municipality, requiring payment of fees totaling NIS 3.8 million ($980,000) excluding
VAT, for discharges of industrial wastewater allegedly not meeting the applicable standards into the municipal
sewage system. The payment demands were made on the basis of several samplings conducted by Meitav in our
premises during 2013-2015.
In December 2015 we completed the construction of a new wastewater treatment facility. The first sample
of wastewater inspected by Meitav in January 2016 showed that we were in compliance with applicable standards.
We are awaiting Meitav's response to our request to rescind or reduce its demand for payment.
In October 2015, we filed an application for an emissions permit with the Israeli Ministry of Environmental
Protection (the “Ministry”). In January 2016, we received notice of non-compliance from the Ministry, stating that
5
the application was incomplete, and that we are in breach of the Clean Air Law, 5768-2008 and the Licensing of
Businesses Law, 5728-1968. Following communications with the Ministry, we committed to submit an amended
application by April 2016.
If we are found to be in violation of environmental laws, then in addition to fines, we could be liable for
damages, costs of remedial actions and a range of potential penalties, and could also be subject to a shutting down of
our factory. Such sanctions could have a material adverse effect on our business, financial condition and results of
operations.
Rapid changes in the Israeli and international electronics industries and recessionary pressure may adversely
affect our business.
Our principal customers include manufacturers of defense and aerospace, medical, industrial, telecom and
networking equipment, as well as contract electronic manufacturers. The electronics industry is subject to rapid
technological changes and products obsolescence. Discontinuance or modification of products containing printed
circuit boards, or PCBs, manufactured by us could have a material adverse effect on us. In addition, the electronics
industry is subject to sharp economic cycles. Increased or excess production capacity by our competitors in the PCB
industry and recessionary pressure in major electronics industry segments may result in intensified price competition
and reduced margins. As a result, our financial condition and results of operations may be adversely affected. A
decline in the Israeli and international electronic markets may cause a decline in our revenues and adversely affect
our operating results and financial condition in the future.
Because competition in the PCB market is intense, our business, operating results and financial condition may be
adversely affected.
The global PCB industry is highly fragmented and intensely competitive. It is characterized by rapidly
changing technology, frequent new product introductions and rapidly changing customer requirements. We compete
principally in the market for complex, flex-rigid and rigid multi-layer PCBs. In the Israeli market we mainly
compete with PCB Technologies Ltd. and major international PCB exporters, mainly from South East Asia, Europe
and North America. In the European market we mainly compete with Advanced Circuit Boards NV (Belgium),
AT&S Austria Technologie & Systemtechnik AG (Austria), Dyconex and Cicor (Switzerland), Graphics, Exception
PCB and Invotec (United Kingdom), Cistelaier and Somacis (Italy), Schoeller-Electronics GmbH (formerly Ruwel
Werke GmbH) (Germany) and certain other German companies. In the North American market we mainly compete
with TTM, Inc. (previously known as DDi Corp. and Viasystems), KCA Electronics Inc., Lenthor Engineering,
Printed Circuits, Inc., Teledyne and certain other American companies. Many of these competitors have
significantly greater financial and marketing resources than us. Our current competition in the rigid PCB segment is
mainly from PCB manufacturers in South East Asia (mainly in China), which have substantially lower production
costs than us. Continued competitive pressures could cause us to lose significant market share.
In addition, these competitors may respond more quickly to new or emerging technologies or adapt more
quickly to changes in customer requirements than we do. We must continually develop improved manufacturing
processes to meet our customers’ needs for complex products, and our manufacturing process technology is
generally not subject to significant proprietary protection. During recessionary periods in the electronics industry,
our strategy of providing quick-turn services, an integrated manufacturing solution, and responsive customer service
may take on reduced importance to our customers. As a result, we may need to compete more on the basis of price,
which would cause our gross margins to decline.
We are dependent upon a select number of suppliers for timely delivery of key raw materials and the loss of one
or more of these suppliers would adversely affect our manufacturing ability. If these suppliers delay or
discontinue the manufacture or supply of these raw materials, we may experience delays in production and
shipments, increased costs and cancellation of orders for our products.
6
We currently obtain our key raw materials from a select number of suppliers. We do not have long-term
supply contracts with our suppliers and our principal suppliers may not continue to supply raw materials to us at
current levels or at all. Any delays in delivery of or shortages in these raw materials could interrupt and delay
manufacturing of our products and may result in the cancellation of orders for our products.
As the majority of PCB manufacturing is centered in South East Asia, raw material suppliers may focus their
attention and give higher priority to manufacturers in those areas, which may interrupt the supply of raw materials to
us. In addition, these suppliers could discontinue the manufacture or supply of these raw materials at any time.
During the years ended December 31, 2015, 2014 and 2013, our purchases from one supplier accounted for 17.9%,
24.1% and 23.1% of our total consolidated raw material costs, respectively. We may not be able to identify and
integrate alternative sources of supply in a timely fashion. Any transition to alternate suppliers may result in delays
in production and shipment and increased expenses and may limit our ability to deliver products to our customers.
If a raw material or component supplier fails to satisfy our product quality standards, including standards relating to
“conflict minerals” it could harm our customer relationships. Furthermore, if we are unable to identify an alternative
source of supply, we may have to modify our products or a large portion of our production process to use a
substitute raw material, which may cause delays in production and shipments, increased design and manufacturing
costs and increased prices for our products. See “—New requirements related to conflict-free minerals may disrupt
our operations, cause us to incur additional expenses, create challenges with our customers, or result in other
significant adverse effects.”,
We may not succeed in our efforts to expand into the U.S. defense market. If we are unsuccessful, our future
revenues and profitability would be adversely affected.
In January 2009, we received International Traffic in Arms Regulations (ITAR) registration from the U.S.
Department of State, which certifies us to sell our PCBs to the U.S. defense market. In January 2016, Eltek USA
Inc. received an extension of such registration through January 2017. Our business plan assumes an increase in
revenues to the U.S. defense market. However, our efforts to enter into to the U.S. defense market may not succeed
and sales to the defense and aerospace industries may be affected by cutbacks in U.S. government spending, and this
may not become a substantial market for us. If we are unsuccessful in such efforts, our future revenues and
profitability would be adversely affected. In the event of a change in control of our company, the U.S. Department
of State may investigate the transfer of control and oppose the transaction. In such an event we may lose our ITAR
certification, which could adversely affect our future revenues and profitability. In November 2013, Nistec Ltd., or
Nistec, an Israeli private company controlled by Mr. Yitzhak Nissan, acquired a controlling interest in our company.
While the U.S. Department of State did not object to this change in our control, we cannot assure you that such
transaction may not be opposed in the future.
We may be subject to the requirements of the National Industrial Security Program Operating Manual for our
facility security clearance, which is a prerequisite to our ability to work on classified contracts for the U.S.
government.
A facility security clearance is required in order to be awarded and perform on classified contracts for the
U.S. Department of Defense ( the “DoD”) and certain other agencies of the U.S. government. To become a cleared
entity, we must comply with the requirements of the National Industrial Security Program Operating Manual
(“NISPOM”), and any other applicable U.S. government industrial security regulations. Further, due to the fact that
a significant portion of our voting equity is owned by a non-U.S. entity, we are required to be governed by and
operate in accordance with the terms and requirements of a Special Security Agreement (the “SSA”).
If we were to violate the terms and requirements of the SSA, the NISPOM, or any other applicable U.S.
government industrial security regulations (which may apply to us under the terms of classified contracts), we could
lose our security clearance. We cannot be certain that we will be able to maintain our security clearance. If for some
reason our security clearance is invalidated or terminated, we may not be able to continue to perform on classified
contracts and would not be able to enter into new classified contracts, which could materially adversely affect our
business, financial condition, and results of operations.
7
We may encounter difficulties with our international operations and sales that may have a material adverse effect
on our sales and profitability.
We have manufacturing facilities in Israel and Germany and generate a large percentage of our sales in
Israel, Europe, North America and Asia. We intend to increase our business in North America, including sales to
U.S. military contractors. However, contracts with U.S. military agencies, as well as military equipment
manufacturers in Europe, are subject to certain regulatory restrictions and approvals, which we may not be able to
comply with or obtain. We may not be able to maintain or increase international market demand for our products.
To the extent that we cannot do so, our business, operating results and financial condition may be adversely affected.
International operations are subject to inherent risks, including the following:
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the impact of possible recessionary environments in multiple foreign markets;
changes in regulatory requirements and complying with a wide variety of foreign laws;
tariffs and other trade barriers;
the imposition of exchange or price controls or other restrictions on the conversion of foreign
currencies;
difficulties and costs of staffing and managing foreign operations; and
political and economic instability.
Compliance with the conditions of a new business permit may be costly.
In connection with the change of control of our company that resulted from Nistec’s acquisition of a
controlling stake in our company, Israeli law requires us to obtain a new business permit in order to continue
operating our business. We have submitted an application for this permit, but we have not yet received the new
permit. The new permit is expected to be subject to certain conditions, especially conditions imposed by the Israeli
Ministry for Environmental Protection. Compliance with these conditions may be costly. If we are unable to comply
with such requirements, certain sanctions may be imposed, including significant fines and possibly an order shutting
down the factory
We had a history of operating losses and may not be able to achieve and sustain long term profitable operations.
We may not have sufficient resources to fund our operations in the future.
We have not maintained consistent profitable operations in the past, and there can be no assurance that we
will be able to operate profitably in the future. To the extent that we incur operating losses in the future, we may
have insufficient working capital to fund our operations. If we do not generate sufficient cash from operations, we
will be required to obtain additional financing or reduce our level of expenditure. Such financing may not be
available in the future, or, if available, may not be on terms favorable to us. If adequate funds are not available to
us, our business, and results of operations and financial condition will be materially and adversely affected.
Our quarterly operating results fluctuate significantly. Results of operations in any period should not be
considered indicative of the results to be expected for any future period.
Our quarterly operating results have fluctuated significantly in the past and are likely to fluctuate significantly
in the future. Our future operating results will depend on many factors, including (but not limited to) the following:
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the size and timing of significant orders and their fulfillment;
demand for our products and the mix of products purchased by our customers;
competition from lower priced manufacturers;
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fluctuations in foreign currency exchange rates, primarily the NIS against the dollar and the Euro;
• manufacturing yield;
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plant utilization;
availability of raw materials;
plant or line shutdowns to repair or replace malfunctioning manufacturing equipment;
the length of our sales cycles;
changes in our strategy;
the number of working days in the quarter;
changes in seasonal trends; and
general domestic and international economic and political conditions.
Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast, and it is
likely that there will be significant differences between the results of one quarter to another.
Quarterly sales and operating results are also difficult to forecast because quarterly sales and results are
dependent, almost exclusively, on the volume and timing of orders during the quarter and our customers generally
operate with a short delivery cycle and expect delivery of a significant portion of our production within 30 working
days. The delivery of such orders is subject to the number of available working days during the quarter, which can
fluctuate significantly from quarter to quarter due to holidays and vacations. Certain prototype and pre-production
runs require even shorter turn-around times stemming from customers’ product launches and design changes. In
addition, there might be sudden increases, decreases or cancellations of orders for which there are commitments,
which further characterize the electronics industry and the companies that operate in it. The industry practice is to
make such changes without any penalties, except for the time and materials expended on the order.
Our expenses are, in significant part, relatively fixed in the short-term. If revenue levels fall below
expectations, our net income is likely to be disproportionately adversely affected because a proportionately smaller
amount of the expenses varies with our revenues. We may not be able to be profitable on a quarterly or annual basis
in the future. An ongoing pattern of cancellations, reductions in orders and delays could have a material adverse
effect on our results of operations. Due to all of the foregoing, it is very difficult to predict revenues for any future
quarter with any significant degree of accuracy. Accordingly, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and should not be relied upon as indications of future performance.
We may not be in compliance with financial covenants in our loan agreements in the future.
We are subject to financial covenants in the loan agreements from the banks that provide us with our credit
facilities and long-term loans. The borrowings from our banks are secured by specific liens on certain assets, by a
first priority charge on the rest of our now-owned or after-acquired assets and by a fixed lien on goodwill (intangible
assets) and insurance rights (rights to proceeds on insured assets in the event of damage). In addition, the
agreements prohibit us from selling or otherwise transferring any assets except in the ordinary course of business or
from placing a lien on our assets without the banks’ consent.
Both of our banks require us to be in compliance with certain financial covenants in each fiscal year. Our
compliance with the financial covenants is measured annually based on our annual audited financial statements. In
recent years, we were forced to seek waivers of certain of these covenants. Both banks have the right to demand
immediate repayment of the loans and lines of credit in the event of a change of control in our company, if such a
change occurred without their prior approval. Our failure to remain in compliance with each of the banks’
9
covenants, obtain waivers, negotiate agreements with new covenant terms, or obtain additional financing, if
required, may adversely affect our business, results of operations and financial position.
Our products and related manufacturing processes are often highly complex and therefore we may be delayed in
product shipment. Also our products may at times contain manufacturing defects, which may subject us to
product liability and warranty claims.
Our business involves highly complex manufacturing processes that are subject to periodic failure. Process
failures have occurred in the past and have resulted in delays in product shipments, and process failures may occur
in the future. Furthermore, we face an inherent business risk of exposure to warranty and product liability claims,
which are likely to be substantial in light of the use of our products in business-critical applications. Our products
may fail to perform as expected or may be alleged to result in bodily injury or property damage. If we were to
manufacture and deliver products to our customers that contain defects, whether caused by a design, manufacturing
or component failure, or by deficiencies in the manufacturing processes, it may result in delayed shipments to
customers and reduced or cancelled customer orders. In addition, if any of our products are or are alleged to be
defective, we may be required to participate in a recall of such products. Over the years we have been involved in
claims or litigation relating to allegedly defective products. A successful warranty or product liability claim against
us in excess of our established warranty and legal reserves or available insurance coverage, or a requirement that we
participate in a product recall may have a material adverse effect on our business, financial condition, results of
operations or cash flows and may harm our business reputation, which could lead to customer cancellations or non-
renewals.
Our operating margins may be affected as a result of price increases for our principal raw materials.
In recent years, the significant increase in oil and energy costs and commodity prices (such as copper, gold
and glass fibers) put pressure on our suppliers to increase their prices for most of our principal raw materials. We
may not be successful in our attempts to negotiate lower price increases than requested by our suppliers. We have
faced pressure to raise our prices for our products to compensate for supplier price increases in order to maintain our
operating margins, and we may not be able to maintain moderate price increases as we have in the past. Future price
increases for our principal raw materials may materially affect our operating margins and future profitability.
Obstacles in our transition to a new enterprise resource planning (“ERP”) system may adversely affect our
business and results of operations and the effectiveness of our internal control over financial reporting .
In the third quarter of 2014, we began the implementation of a new ERP system that will deliver a new
generation of work processes and information systems. ERP implementations are complex and time-consuming
projects and involve substantial expenditures. ERP implementations also require transformation of business and
financial processes. We expect to complete the implementation of our new ERP system in 2016. If we do not
effectively implement the new ERP system as planned or if the system does not operate as intended, it could
adversely affect our financial reporting systems, our ability to produce financial reports and the effectiveness of our
internal control over financial reporting.
We will require additional capital in the future, which may not be available to us.
Our working capital requirements and cash flow provided by our operating and financing activities are
likely to vary greatly from quarter to quarter, depending on the following factors: (i) the timing of orders and
deliveries; (ii) net profit in the period; (iii) the purchase of new equipment; (iv) the build-up of inventories; (v) the
payment terms offered to our customers; (vi) the payment terms offered by our suppliers; and (vii) approval of the
current or additional lines of credit and long-term loans from banks.
As of December 31, 2015, we had revolving lines of credit aggregating NIS 13 million ($3.3 million) with
our banks, of which $589,000 were utilized as of such date, and $4.2 million of long-term loans, including supplier
credits. These credit facilities may not remain available to us in the future. Furthermore, under certain
circumstances the banks may require us to accelerate or make immediate payment in full of our credit facilities. All
of our assets are pledged as security for our liabilities to our banks, whose consents are required for any future
pledge of such assets.
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In November 2013, we raised $4.2 million from Nistec, which is now our controlling shareholder, in a
private placement of our ordinary shares. During the three years ended December 31, 2015, we invested
approximately $6.7 million in new equipment and the expansion of our facilities and infrastructure. To the extent
that the funds generated from our operations and our existing capital resources are insufficient to fund our operating,
financial and capital investment requirements, we will need to raise additional funds through public or private
financing or other sources. Additional financing may not be available on commercially reasonable terms, if at all. If
adequate funds are not available on terms acceptable to us, we may be required to delay, scale back or eliminate
certain aspects of our operations, and our business, financial condition and results of operations would be materially
adversely affected.
Breaches of network or information technology security, natural disasters or terrorist attacks could have an
adverse effect on our business.
Breaches of network or information technology (IT) security, natural disasters, pandemics, terrorist acts or
acts of war may cause equipment failures or disrupt our systems and operations. Although we have not experienced
any of these events as of the date of this annual report, we expect that our inability to operate our facilities as a result
of such events, even for a limited period of time, may result in significant expenses and/or loss of market share to
other competitors in the global PCB industry. While we maintain insurance coverage for some of these events, the
potential liabilities associated with these events could exceed the insurance coverage we maintain. In addition, a
failure to protect the privacy of customer and employee confidential data against breaches of network or IT security
could result in damage to our reputation. Any of these occurrences could adversely affect our results of operations
and financial condition.
In particular, both unsuccessful and successful cyber-attacks on companies have increased in frequency,
scope and potential harm in recent years. We have been subject, and will likely continue to be subject, to attempts
to breach the security of our networks and IT infrastructure through cyber-attack, malware, computer viruses and
other means of unauthorized access. However, to date, we have not been subject to cyber-attacks or other cyber
incidents which, individually or in the aggregate, resulted in a material impact to our operations or financial
condition. While we use firewall and anti-virus systems, there is no assurance that cyber-attacks will always be
blocked or discovered, and as a result, we may encounter damages to our computer network servers, manipulation of
our data (including production, financial and other information).
If our workforce will be represented by a labor union we could incur additional costs or experience work
stoppages as a result of the renegotiation of our labor contracts.
In November 2011, we were notified by the General Federation of Labor in Israel, or the Histadrut, that
more than one-third of our employees in Israel had decided to join the Histadrut and that they established an
employees’ union committee. In 2012, a significant portion of our employees decided to resign their membership in
the Histadrut, which then ceased to represent our employees. If our employees are represented by a union in the
future, we could incur additional costs, experience work stoppages, either of which could adversely affect our
business operations, including through a loss of revenue and strained relationships with customers.
New requirements related to conflict-free minerals may disrupt our operations, cause us to incur additional
expenses, create challenges with our customers, or result in other significant adverse effects.
In August 2012, the SEC adopted new due diligence, disclosure and reporting requirements pursuant to the
Dodd-Frank Wall Street Reform and Consumer Protection Act, regarding the use of certain minerals and derivative
metals referred to collectively as “conflict minerals”. Conflict minerals include tantalum, tin, gold, and tungsten.
We use some of such minerals as component parts in our products. We have implemented procedures to investigate
whether any such minerals that we manufacture or use in our products originated in the Democratic Republic of the
Congo or adjoining countries. Our recent report under these requirements was filed on May 19, 2015. Complying
with these new SEC rules may be both time-consuming and costly. In addition, these rules could harm the sourcing,
supply, and price of raw materials that we use in our products. If we cannot timely verify the sources of all conflict
minerals used in our products, or if we cannot replace any conflict minerals sourced from the Democratic Republic
of the Congo or adjoining countries with acceptable alternatives, we may face reputational damage or be unable to
satisfy customers who require all of the components of our products to be certified as “conflict-free”. If we cannot
11
meet such customer requirements, our customers may choose not to purchase our products, and our results of
operations would be materially adversely affected.
In addition to SEC regulations, industry standards and our customers may require us to comply with their
own social responsibility, conflict minerals, quality or other business policies or standards, which may be more
restrictive than current laws and regulations and our pre-existing policies, before they commence, or continue, doing
business with us. Such policies or standards may be customer-driven, established by the industries in which we
operate, or imposed by third party organizations. Our compliance with these policies, standards and third-party
certification requirements could be costly, and our failure to comply could adversely affect our operations, customer
relationships, reputation and profitability.
Increased regulation associated with climate change and greenhouse gas emissions could impose significant
additional costs on operations.
Various governments and governmental agencies have adopted or are contemplating statutory and
regulatory changes in response to the potential impacts of climate change and emissions of greenhouse gases.
International treaties or agreements may also result in increasing regulation of climate change and greenhouse gas
emissions, including the introduction of greenhouse gas emissions trading mechanisms. Any such law or regulation
regarding climate change and greenhouse gas emissions could impose significant costs on our operations and on the
operations of our customers and suppliers, including increased energy, capital equipment, environmental
monitoring, reporting and other compliance costs. The potential costs of “allowances,” “offsets” or “credits” that
may be part of potential cap-and-trade programs or similar proposed regulatory measures are still uncertain. Any
adopted future climate change and greenhouse gas laws or regulations could negatively impact our ability, and that
of our customers and suppliers, to compete with companies situated in areas not subject to such laws or regulations.
These statutory and regulatory initiatives, if enacted, may impact our operations directly or indirectly through our
suppliers or customers. Until the timing, scope and extent of any future law or regulation becomes known, we
cannot predict the effect on our business, financial condition, results of operations or cash flows.
We depend on key personnel for the success of our business.
Our success depends, to a significant extent, on the continued active participation of our executive officers
and other key personnel. In addition, there is significant competition for employees with technical expertise in our
industry. In order to succeed we would need to be able to:
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retain our executive officers and key technical personnel;
attract and retain additional qualified personnel to provide technological depth and support to enhance
existing products and develop new products; and
attract and retain highly skilled operations, marketing and financial personnel.
We cannot make assurances that we will be successful in attracting, integrating, motivating and retaining
key personnel. If we are unable to retain our key personnel and attract additional qualified personnel as and when
needed, our business may be adversely affected.
We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002, which could have a material adverse effect on our operating results, investor
confidence in our reported financial information, and the market price of our ordinary shares.
Our efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, governing
internal control and procedures for financial reporting have resulted in increased general and administrative
expenses and a diversion of management time and attention, and we expect these efforts to require the continued
commitment of significant resources. We may identify material weaknesses or significant deficiencies in our
assessments of our internal control over financial reporting. Failure to maintain effective internal control over
financial reporting could result in investigations or sanctions by regulatory authorities, and could have a material
adverse effect on our operating results, investor confidence in our reported financial information, and the market
price of our ordinary shares.
12
Technological change may adversely affect the market acceptance of our products.
Technological change in the PCB industry is rapid and continual. To satisfy customers’ needs for
increasingly complex products, PCB manufacturers must continue to develop improved manufacturing processes,
provide innovative solutions and invest in new facilities and equipment. To the extent we determine that new
technologies and equipment are required to remain competitive, the acquisition and implementation of such
technologies and equipment are likely to require significant capital investment. We expect that we will need to
invest large amounts in the next few years to replace or refurbish old equipment and to remain competitive in the
market. This capital may not be available to us in the future for such purposes and any new manufacturing
processes developed by us may not become or remain commercially viable. As a result, we may not be able to
maintain our current technological position. Furthermore, the PCB industry may in the future encounter competition
from new technologies that may reduce demand for PCBs or may render existing technology less competitive or
obsolete. Our future process development efforts may not be successful or the emergence of new technologies,
industry standards or customer requirements may render our technology, equipment or processes obsolete or
uncompetitive.
We will need to compete with PCB manufacturers in Asia whose manufacturing costs are lower than ours.
In recent years, many electronics manufacturers have moved their commercial production to Asia to take
advantage of its exceptionally large, relatively low-cost labor pool. The continued outsourcing of production to the
Far-East is likely to result in additional commercial market share potential for PCB manufacturers with a strong
presence and reputation in such markets. Accordingly, we will need to compete with PCB manufacturers whose
costs of production may be substantially lower than ours. This competition may limit our ability to price our
products profitably, which could significantly harm our financial condition and results of operations. In addition, we
distinguish ourselves by focusing on developing cutting edge technologies for high-end products, in order to serve
our sophisticated defense, aerospace and medical customers. This may limit our ability to reach certain clientele,
which demands lower-end products in order to reduce its costs.
The measures we take in order to protect our intellectual property may not be effective or sufficient.
Our success depends in part on our proprietary techniques and manufacturing expertise, particularly in the
area of complex multi-layer and flex-rigid PCBs. We currently rely on a combination of trade secrets, copyright and
trademark law, together with non-disclosure and invention assignment agreements, to establish and protect the
proprietary rights and technology used in our products. Like many companies in the PCB industry, we do not hold
any patents. We believe that, because of the rapid pace of technological change in the electronics industry, the legal
protections for our products are less significant factors in our success than the knowledge, ability and experience of
our employees, the frequency of product enhancements and the timeliness and quality of support services that we
provide.
We generally enter into confidentiality agreements with our employees, consultants, customers and
potential customers and limit the access to and the distribution of our proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without
authorization, or to develop similar technology independently. Further, the laws of certain countries in which we
sell our products do not protect our intellectual property rights to the same extent as do the laws of the United States.
Substantial unauthorized use of our products could have a material adverse effect on our business. We cannot make
assurances that our means of protecting our proprietary rights will be adequate or that our competitors will not
independently develop similar technology.
Claims that our products infringe upon the intellectual property of third parties may require us to incur
significant costs.
While we do not believe that our products and proprietary rights infringe upon the proprietary rights of
others, third parties may assert infringement claims against us or claims that we have violated a patent or infringed
on a copyright, trademark or other proprietary right belonging to them. Any infringement claim, even one without
merit, could result in the expenditure of significant financial and managerial resources to defend against the claim.
Moreover, a successful claim of product infringement against us or a settlement could require us to pay substantial
amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or
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prohibit our use of the technology. We might not be able to obtain a license from the third party asserting the claim
on commercially reasonable terms, if at all. We also may not be able to obtain a license from another provider of
suitable alternative technology to permit us to continue offering the product. Infringement claims asserted against us
could have a material adverse effect on our business, operating results and financial condition.
A supplier of one of our software packages requested to conduct an audit of our operation to verify that we
do not breach any intellectual property rights he allegedly owns. We believe that we have fully, diligently and
timely complied with our obligation toward the supplier. We also believe that the supplier has no right to conduct
any audit of our products or services and such audit may cause us to breach confidentiality obligations to other
entities. If we are found to be in violation of such supplier's intellectual property rights, we could be liable for
compensation and costs of an unknown amount. Such liability could have a material adverse effect on our business,
financial condition and results of operations.
Our products and product components need to meet certain industry standards.
Our products and product components need to meet certain standards for the aerospace, defense, and other
industries to which we market our products. In addition, new industry standards in the aviation and defense
industries could cause some or all of our products and services to become obsolete and unmarketable, which would
adversely affect our results of operations. Noncompliance with any of these standards could limit our sales and
adversely affect our business, financial condition, and results of operations.
We may be required to make payments to satisfy our indemnification obligations.
We have agreements with our directors and senior officers which may require us, subject to Israeli law and
certain limitations in the agreements, to indemnify our directors and senior officers for certain liabilities and
expenses that may be imposed on them due to acts performed, or failures to act, in their capacity as office holders as
defined in the Israeli Companies Law, 5759-1999 (the “Companies Law”). These liabilities may include financial
liabilities imposed by judgments or settlements in favor of third parties, and reasonable litigation expenses imposed
by a court in relation to criminal charges from which the indemnitee was acquitted or criminal proceedings in which
the indemnitee was convicted of an offense that does not require proof of criminal intent. Furthermore, we agreed to
exculpate our directors and officers with respect to a breach of their duty of care towards our company.
In addition, as part of the transaction in which Nistec acquired a controlling stake in our company, we
agreed to indemnify Nistec for any losses or liabilities occasioned by the breach of any representations or warranties
that we made in the investment agreement. If we are found to have breached any of these representations or
warranties, we could be required to expend significant amounts of cash to meet our indemnification obligations.
Payments made pursuant to such indemnification obligations may materially adversely affect our financial
condition.
Risk Factors Related to Our Ordinary Shares
Our share price has been volatile in the past and may continue to be susceptible to significant market price and
volume fluctuations in the future.
Our ordinary shares have experienced significant market price and volume fluctuations in the past and may
experience significant market price and volume fluctuations in the future in response to factors such as the
following, some of which are beyond our control:
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quarterly variations in our operating results;
operating results that vary from the expectations of securities analysts and investors;
changes in expectations as to our future financial performance, including financial estimates by
securities analysts and investors;
announcements of technological innovations or new products by us or our competitors;
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announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships,
joint ventures or capital commitments;
changes in the status of our intellectual property rights;
announcements by third parties of significant claims or proceedings against us;
announcements by governmental or regulatory authorities of significant investigations or proceedings
against us;
additions or departures of key personnel;
changes in our cost structure due to factors beyond our control, such as new laws or regulations
relating to environmental matters and employment;
future sales of our ordinary shares;
general stock market price and volume fluctuations; and
devaluation of the dollar against the NIS.
Domestic and international stock markets often experience extreme price and volume fluctuations. Market
fluctuations, as well as general political and economic conditions, such as a recession, interest rate or currency rate
fluctuations or political events or hostilities in or surrounding Israel, could adversely affect the market price of our
ordinary shares.
The 50.5% voting interest of Nistec, our controlling shareholder, may conflict with the interests of other
shareholders.
As of March 31, 2015, Nistec, controlled by Mr. Yitzhak Nissan, our Chairman of the Board and CEO,
beneficially owns 50.5% of our outstanding ordinary shares. Accordingly, Nistec has the ability to exercise a
significant influence over our business and affairs and generally has the power to determine all matters submitted to
a vote of our shareholders where our shares vote together as a single class, including the election of directors and
approval of significant corporate transactions. Nistec may make decisions regarding Eltek and our business that are
opposed to other shareholders' interests or with which other shareholders may disagree. Nistec's voting power could
have the effect of deterring or preventing a change in control of our Company that might otherwise be beneficial to
our other shareholders.
If we fail to maintain NASDAQ’s continued listing requirement of a minimum bid price of at least $1.00 per
share for a period of 30 consecutive business days, our shares may be delisted from the NASDAQ Capital Market.
Our ordinary shares are listed on the NASDAQ Capital Market under the symbol “ELTK.” To continue to
be listed on NASDAQ, we need to satisfy a number of requirements, including a minimum bid price for our ordinary
shares of $1.00 per share for a period of 30 consecutive business days. If we fail to comply with such requirement,
we would have a period of 180 calendar days to achieve compliance by meeting the applicable standard for a
minimum of ten consecutive business days. If we are not deemed in compliance before the expiration of the 180 day
compliance period, NASDAQ may afford us an additional 180 day compliance period, provided that on the 180th
day of the first compliance period we have demonstrated that we meet all applicable standards for initial listing on
the NASDAQ Capital Market (except the bid price requirement) based on our most recent public filings and market
information.
Our ordinary shares have experienced significant market price and volume fluctuations in the past and for
certain periods have traded below the $1.00 threshold requirement for continued trading. On June 23, 2015 we
received notice from the Listing Qualifications Department of Nasdaq advising us that we were not in compliance
with the $1.00 threshold requirement for continued trading. On August 26, 2015, we received notice from the
Listing Qualifications Department of Nasdaq advising us that we have regained compliance with the listing rules,
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and the matter was then closed. In 2015, the price of our ordinary shares ranged from $0.81 to $1.65 and the closing
price of our ordinary shares on December 31, 2015 was $1.27 per share. If we fail to meet the minimum bid price
requirement again in the future, our share may be delisted from the NASDAQ Capital Market. If we are delisted
from NASDAQ, trading in our ordinary shares would be conducted on a market where an investor would likely find
it significantly more difficult to dispose of, or to obtain accurate quotations as to the value of, our ordinary shares.
We may in the future be classified as a passive foreign investment company, or PFIC, which will subject our U.S.
investors to adverse tax rules.
For U.S. federal income tax purposes, we may be classified as a PFIC, for any taxable year in which either:
(i) 75% or more of our gross income is passive income; or (ii) at least 50% of the average quarterly value of our
assets for the taxable year produce or are held for the production of passive income. Based upon our current and
projected income, assets and activities, we do not believe that for the tax year ending December 31, 2015 we are a
PFIC for U.S. federal income tax purposes, but there can be no assurance that we will not be classified as such in the
future. Such classification may have significant tax consequences for U.S. Holders. If we were determined to be a
PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. holders owning our ordinary
shares and such U.S. holders could suffer adverse U.S. tax consequences. Accordingly, you are urged to consult
your tax advisors regarding the application of such rules. U.S. residents should carefully read Item 10E. “Additional
Information - Taxation - United States Federal Income Tax Consequences” for a more complete discussion of the
U.S. federal income tax risks related to owning and disposing of our ordinary shares.
We do not expect to distribute dividends in the foreseeable future.
We have never declared or paid any cash dividends on our ordinary shares. We currently intend to retain
our current and any future earnings to finance operations and expand our business and, therefore, do not expect to
pay any dividends in the foreseeable future. According to the Companies Law, a company may distribute dividends
out of its profits (as defined by the Companies Law), provided that there is no reasonable concern that such dividend
distribution will prevent the company from paying all its current and foreseeable obligations, as they become due, or
otherwise upon the permission of the court. In the event cash dividends are declared, such dividends will be paid in
NIS. The declaration of dividends is subject to the discretion of our board of directors and would depend on various
factors, including our operating results, financial condition, future prospects and any other factors deemed relevant
by our board of directors. You should not rely on an investment in our company if you require dividend income
from your investment.
Risks Relating to Our Operations in Israel
Political, economic and military instability in Israel may disrupt our operations and negatively affect our
business condition, harm our results of operations and adversely affect our share price.
We are incorporated under the laws of, and our principal executive offices, production or manufacturing
and research and development facilities are located in, the State of Israel. As a result, political, economic and
military conditions affecting Israel directly influence us. Since the establishment of the State of Israel in 1948, a
number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving
Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could
adversely affect our business, financial condition and results of operations and could make it more difficult for us to
raise capital. In recent years, these have included hostilities between Israel and Hezbollah in Lebanon, and Israel
and Hamas in the Gaza Strip, both of which resulted in rockets being fired into Israel causing casualties and
disruption of economic activities. Israel also faces threats from more distant neighbors, in particular, Iran. . In
addition,, the Islamic State of Iraq and Syria (ISIS), a violent jihadist group, is involved in hostilities in Syria and its
stated purpose is to take control of the Middle East, including Israel. Any armed conflicts, terrorist activities or
political instability in the region could adversely affect business conditions and could harm our business, financial
condition and results of operations, and could make it more difficult for us to raise capital.
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Our commercial insurance does not cover losses that may occur as a result of an event associated with the
security situation in the Middle East. Although the Israeli government has in the past covered the reinstatement
value of certain damages that were caused by terrorist attacks or acts of war, we cannot assure you that this
government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages
incurred. Any losses or damages incurred by us could have a material adverse effect on our operations.
Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened
unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners
face to face. In addition, the political and security situation in Israel may result in parties with whom we have
agreements involving performance in Israel claiming that they are not obligated to perform their commitments under
those agreements pursuant to force majeure provisions in such agreements. To date, these matters have not had any
material effect on our business and results of operations; however, the regional security situation and worldwide
perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us
in the future.
Furthermore, several countries and companies restrict business with Israel and Israeli companies.
Restrictive laws or policies directed towards Israel or Israeli businesses may have an adverse impact on our
operations, our financial results or the expansion of our business.
Our results of operations may be negatively affected by the obligation of our personnel to perform military
reserve service.
Some of our employees, directors and officers in Israel are obligated to perform annual reserve duty in the
Israeli Defense Forces and may be called for active duty under emergency circumstances at any time. If a military
conflict or war arises, these individuals could be required to serve in the military for extended periods of time. Our
operations could be disrupted by the absence for a significant period of one or more of our executive officers or key
employees or a significant number of other employees due to military service. Any disruption in our operations
could adversely affect our business.
Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
Service of process upon our directors and officers and the Israeli experts named herein, all of whom reside
outside the United States, may be difficult to obtain within the United States. Furthermore, since substantially all of
our assets, all of our directors and officers and the Israeli experts named in this annual report are located outside the
United States, any judgment obtained in the United States against us or these individuals or entities may not be
collectible within the United States.
There is doubt as to the enforceability of civil liabilities under the Securities Act and the Securities
Exchange Act in original actions instituted in Israel. However, subject to certain time limitations and other
conditions, Israeli courts may enforce final judgments of United States courts for liquidated amounts in civil matters,
including judgments based upon the civil liability provisions of those and similar acts.
Under current Israeli law, we may not be able to enforce covenants not to compete and therefore may be unable to
prevent our competitors from benefiting from the expertise of some of our former employees.
We currently have non-competition clauses in the employment agreements of most of our employees. The
provisions of such clauses prohibit our employees, if they cease working for us, from directly competing with us or
working for our competitors. Recently, Israeli labor courts have required employers, seeking to enforce non-compete
undertakings against former employees, to demonstrate that the competitive activities of the former employee will
cause harm to one of a limited number of material interests of the employer recognized by the courts (for example, the
confidentiality of certain commercial information or a company’s intellectual property). In the event that any of our
employees chooses to leave and work for one of our competitors, we may be unable to prevent our competitors from
benefiting from the expertise our former employee obtained from us, if we cannot demonstrate to the court that we
would be harmed.
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Provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change
of control and therefore impact the price of our shares.
Provisions of Israeli corporate and tax laws may have the effect of delaying, preventing or making more
difficult a merger with, or other acquisition of, us or all or a significant portion of our assets. Israeli corporate law
regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions
involving significant shareholders and regulates other matters that may be relevant to these types of transactions.
These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it
more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. These
provisions may limit the price that investors may be willing to pay in the future for our ordinary shares.
Furthermore, Israeli tax considerations may make potential transactions undesirable to us or to some of our
shareholders.
These laws may have the effect of delaying or deterring a change in control of our company, thereby
limiting the opportunity for shareholders to receive a premium for their shares and possibly affecting the price that
some investors are willing to pay for our company’s securities. This could cause our ordinary shares to trade at
prices below the price for which third parties might be willing to pay to gain control of us. Third parties who are
otherwise willing to pay a premium over prevailing market prices to gain control of us may be unable or unwilling
to do so because of these provisions of Israeli law.
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from
the rights and responsibilities of shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are
governed by our memorandum of association, articles of association and by Israeli law. These rights and
responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S.
corporations. In particular, each shareholder of an Israeli company has a duty to act in good faith and in a customary
manner in exercising his or her rights and fulfilling his or her obligations toward the company and other
shareholders and to refrain from abusing his or her power in the company, including, among other things, in voting
at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in
shareholder votes on, among other things, amendments to a company's articles of association, increases in a
company's authorized share capital, mergers and interested party transactions requiring shareholder approval. In
addition, a controlling shareholder of an Israeli company, or a shareholder who knows that he or she possesses the
power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment
of a director or officer in the company, has a duty of fairness toward the company. Currently there is not a clear
definition of the duty of fairness under Israeli law. There is limited case law available to assist us in understanding
the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose
additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders
of U.S. corporations.
As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we may follow certain home
country corporate governance practices instead of certain NASDAQ requirements. We follow Israeli law and
practice instead of NASDAQ rules regarding the composition of the board of directors, director nomination
process and quorum at shareholders’ meetings.
As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we are permitted to
follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Stock
Market Rules. We follow Israeli law and practice instead of the NASDAQ Stock Market Rules regarding the
composition of the board of directors, director nomination process and quorum at shareholders’ meetings. As a
foreign private issuer listed on the NASDAQ Capital Market, we may also follow home country practice regarding,
for example, the requirement to obtain shareholder approval for certain dilutive events (such as for the establishment
or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the
company, certain transactions other than a public offering involving issuances of a 20% or more interest in the
company and certain acquisitions of the stock or assets of another company). A foreign private issuer that elects to
follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written
statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not
prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed
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with the Securities and Exchange Commission, or the SEC, or on its website, each such requirement that it does not
follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly,
our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance
rules.
ITEM 4.
INFORMATION ON THE COMPANY
A.
History and Development of the Company
We were incorporated under the laws of the State of Israel on January 1, 1970. We are a public limited
liability company under the Companies Law, and operate under that law and associated legislation. Our registered
offices and principal place of business are located at 20 Ben Zion Gelis Street, Sgoola Industrial Zone, Petach Tikva
4927920, and our telephone number is +972-3-9395025. Our website is www.nisteceltek.com. The information on
our website is not incorporated by reference into this annual report.
We manufacture and supply technologically advanced custom made circuitry solutions for use in
sophisticated and compact electronic products. We provide specialized services and are a solution provider in the
PCB business, mainly in Israel, Europe, North America and Asia. PCBs are platforms that conduct an electric
current among active and passive microelectronics components, microprocessors, memories, resistors and capacitors
and are integral parts of the products produced by high-technology industries. Our focus is on short run quick-
turnaround, prototype, pre-production and low to medium volume runs of high-end PCB products for high growth,
advanced electronics applications, mainly flex-rigid PCBs.
We design and develop innovative manufacturing solutions pursuant to complex interconnect requirements
of original equipment manufacturers, and provide our customers with a wide range of custom designed PCBs,
including complex rigid, double-sided and multi-layer PCBs as well as flexible circuitry (flex and flex-rigid boards)
made of several types of high-performance base material. To complement our quick-turnaround, prototype, pre-
production and low to medium volume production capability and provide our customers with single source service,
we also act as an agent for the importation of PCBs from South East Asia when customers require high volume
production runs, although such activity was not significant in recent years.
In June 2002, we acquired a majority ownership interest in Kubatronik, a European manufacturing and
marketing subsidiary located in Geislingen, Germany. In July 2007, we established Eltek USA Inc. (“Eltek USA”),
a wholly-owned subsidiary incorporated in Delaware, to manage our sales and marketing in the North American
market. In June 2015, we relocated Eltek USA into a new and better-located facility. In December 2008, we
established Eltek Europe GmbH, a wholly-owned subsidiary organized in Germany, to manage our sales and
marketing activities for certain European customers.
In November 2013, Nistec acquired 50.5% of our issued share capital and gained control of our company.
During the three years ended December 31, 2015, we invested approximately $6.7 million in new
equipment and the expansion of our facilities and infrastructure. Subject to availability of financial resources, we
expect to invest approximately $2.3 million in capital expenditures in 2016, primarily for our operations in Israel
and Germany, mainly for manufacturing equipment to expand our manufacturing capacity and to upgrade our
technological capabilities. We intend to finance these expenditures with suppliers’ credit, cash flow from operations
and bank loans; however, external financing may not be available, or, if available, may not be on terms favorable to
us.
B.
Business Overview
Industry Overview
PCBs are constructed from a variety of base raw materials. PCBs can be double-sided or multi-layered and
made of rigid, flexible, flex-rigid or high-frequency materials. In essence, they are platforms that conduct electrical
signals among active and passive microelectronics components, microprocessors, memories, resistors and
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capacitors. Photolithographic type processes transfer the images of the electrical circuit onto the layers, and
chemical processes etch these lines on the boards. There are several broad categories of PCBs:
Rigid PCBs. Rigid PCBs are the core product of the industry and can be found in virtually every
electronics device. The layer count of these products generally ranges from two to 30 layers, although some PCBs
are composed of 42 layers.
Flexible and flex-rigid PCBs. Flexible boards are thin, light-weight circuits used to interconnect other
circuit boards and electronic devices within electronic equipment. Flex-rigid boards are composed of rigid parts and
flexible layers. They generally range from two to 30 layers. Flex-rigid boards provide solutions for electronic
systems that impose space and shape restrictions and for systems in which reliability of connectivity is crucial.
These products are often found in military applications (primarily avionics), medical and measurement equipment
and the automotive industry, among other uses.
Backplanes. Backplanes are large, high-density circuit boards with design features such as tight tolerance
finished hole sizes that require precise process controls. These products are commonly known as “motherboards” on
which connectors are mounted to receive and interconnect other PCBs and can be found primarily in
telecommunications applications.
PCB manufacturers can generally be classified based on two parameters, product sophistication and service
sophistication. Product sophistication is evident in the capability of a PCB manufacturer to offer products with
higher layer counts and more complex construction, as well as in the line width and the spacing of lines on the
circuit boards. The state-of-the-art HDI technology enables manufacturers to produce PCBs with line width and
spaces as narrow as 2-3 mils and hole diameters of 4 to 6 mils.
Industry Trends
We believe that several trends are impacting the PCB manufacturing industry. These trends include:
Shorter electronic product life cycles. Continual advances in technology have shortened the life cycles of
complex commercial electronic products, placing greater pressure on manufacturers to quickly bring new products
to market. The accelerated time-to-market and ramp-to-volume needs of manufacturers for high-end commercial
equipment create opportunities for PCB manufacturers that can offer engineering support in the prototype stage and
manufacturing scalability throughout the production life cycle.
Increasing complexity of electronic products. Manufacturers continue to design higher performance
electronic products which take advantage of advances in semiconductor technology. This in turn requires
technologically complex PCBs that can accommodate higher speeds and component densities, including HDI,
flexible and substrate PCBs. These complex PCBs can require very high layer counts, miniaturized circuit
connections, advanced manufacturing processes and materials, and high-mix production capabilities, which involve
processing small lots in a flexible manufacturing environment. Manufacturers increasingly rely upon larger PCB
manufacturers, which possess the financial resources necessary to invest in advanced manufacturing process
technologies and sophisticated engineering staff, often to the exclusion of smaller PCB manufacturers that do not
possess such technologies or resources.
Increasing concentration of global PCB production in Asia. In recent years, many electronics
manufacturers have moved their commercial production to Asia to take advantage of its exceptionally large,
relatively low-cost labor pool. In particular, the trend has favored China, which according to industry sources has
the largest PCB market in terms of both revenue and number of suppliers. The overall technical capability of
suppliers in China has improved dramatically in recent years, and China has emerged as a global production center
for cellular phones, smartphones, tablet PCs, computers and computer peripherals, and high-end consumer
electronics. According to N.T. Information LTD, approximately 58% of the world’s PCB production was forecasted
to come from China, Hong Kong and Taiwan in 2013. The continued outsourcing of production to China should
result in additional commercial market share potential for PCB manufacturers with a strong presence and reputation
in China.
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Decreased reliance on multiple PCB manufacturers. Manufacturers traditionally have relied on multiple
PCB manufacturers to provide different services as an electronic product moves through its life cycle. The transfer
of a product among different PCB manufacturers often results in increased costs and inefficiencies due to
incompatible technologies and manufacturing processes and production delays. In addition, manufacturers generally
find it easier and less costly to manage fewer PCB manufacturers. As a result, manufacturers are reducing the
number of PCB manufacturers and backplane assembly service providers on which they rely, presenting an
opportunity for those that can offer one-stop manufacturing capabilities — from prototype to volume production.
Increased requirements for aerospace and defense products. The aerospace and defense market is
characterized by increasingly time-consuming and complex certification processes, long product life cycles, and a
demand for leading-edge technology with extremely high reliability and durability. While the DoD budget faces
increasing scrutiny as part of overall U.S. budget deficit reduction efforts, we anticipate that a continued DoD
commitment to new product development and upgrades — incorporating leading-edge PCB technology in products
for intelligence, surveillance and reconnaissance, communications and weapon systems — combined with Foreign
Military Sales (the “FMS”) programs and a recovering global commercial aerospace industry will support a
significant long-term market for these products.
Reduction in backlog. Due to the costs involved, our customers are increasingly reluctant to maintain
inventory and refrain from placing orders significant time in advance. As a result, we experience a reduction in order
backlog and uncertainty in respect of future orders.
Manufacturing and Engineering Processes
Significant investments in equipment are necessary in order to maintain technological competitiveness in
the PCB industry. During the three years ended December 31, 2015, we invested approximately $6.1 million in
machinery and equipment for that purpose.
Manufacturing Capabilities. We have the capability to manufacture PCBs having in excess of 36 layers,
flex-rigid boards, blind and buried vias and designs using materials as thin as 1 mil. We are able to produce short
runs of five to 30 units of simple type PCBs within four to five working days, and a few hundred units within ten
working days, and are capable of producing such number of boards within five working days when production line
scheduling permits. During 2007, we applied new technologies to enable us to manufacture “via-in-pad” multilayer
PCBs, microvia filling, through hole via filling and copper overplating. In July 2012, we purchased a new Orbotech
Paragon™ Laser Direct Imaging, or LDI, system for increasing capacity and shortening production time and
improving product time-to-market. In 2012, we also acquired and installed a new Hakuto Cut-Sheet-Laminator and
the latest Chemplate Indubond model. In 2014 and in the beginning of 2015 we acquired a complete set of two
Lauffer hot presses and one cold press, a line for outer layer surface preparation, a laser router and a second Hakuto
cut-sheet-laminator (refurbished). These machines improve the outer layer accuracy and the registration between the
inner-layers. During 2015, we installed the new Orbotech Diamond DI for solder mask imaging, which improves the
solder mask registration and accuracy. Our new equipment enables us to offer our customers solutions and
participate in bids in which we were not able to participate in the past.
We continue to utilize advanced registration technologies and to improve the copper etching accuracy to
comply with new specifications and requirements of our customers and potential customers. We receive orders for
production with turnaround times of generally between several days to two months.
Computer Aided Design/Computer Aided Manufacturing (CAD/CAM). We utilize a state-of-the-art CAD
system developed by Frontline PCB Solutions Ltd., an Israeli-based company, and can receive CAD data by
electronic data transmission. Our CAD workstations perform design rule checks on transmitted designs, incorporate
any customer-specific design modifications and perform manufacturability enhancements that increase PCB quality.
Advanced Finishing Capabilities for Dense Packaging Designs. We provide a wide assortment of
alternative surface finishes, including hot air solder leveling, electroless gold over nickel, immersion silver,
outsource nickel/palladium/gold and immersion tin, for the attachment of components to PCBs.
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Other Advanced Process Capabilities. We provide fabrication of dense multi-layer PCBs. We use an
advanced inner-layer production line, a laser direct imaging system, mechanical and laser drilling equipment and
clean room environments (ISO-7) to produce technologically advanced products.
Quality, Environmental and Safety Standards. Our quality management system has been ISO 9001:2008
certified since July 2002 (and prior to such date, was ISO 9002 certified from January 1995). Such certification is
based on successful implementation of quality assurance requirements and includes ongoing monitoring of our
business and periodic compliance audits conducted by the Israeli Institute of Standards. We have obtained United
States Department of Defense Qualified Product List approval (MIL-PRF-55110G and MIL-P-50884E) for our
products. Since 1976, our rigid glass epoxy (FR4 and FR5) and flex-rigid boards have been UL 94V-0 certified by
Underwriters Laboratories Inc. (a standards organization that offers product safety testing and certification of
product safety). Our environmental management system has been ISO 14001:2004 certified since 2005 (and prior to
such date was ISO 14001 certified from 2003). We are OHSAS 18001:2007 certified for occupation health and
safety management systems since December 2007. In November 2009, we became certified to the AS 9100B
quality management standard for the aerospace industry and in August 2012 we were upgraded to AS 9100C.
Enterprise Resources Planning (ERP) Software. In 2014 we acquired a new ERP system dedicated to the
PCB industry from Proms. We expect to install and implement the system in 2016.
Sales, Customers and Marketing
Sales. In the years ended December 31, 2015, 2014 and 2013, the primary industries for which we
produced PCBs were defense and aerospace equipment (42.4%, 46.4% and 51.8% of production, respectively),
medical equipment (12.1%, 13.4% and 15.8% of production, respectively), industrial equipment (9.8%, 4.5% and
12.1% of production, respectively), distributors, contract electronic manufacturers and others (35.7%, 34.3% and
19.2% of production, respectively).
Customers. During the year ended December 31, 2015, we provided PCBs to approximately 219 customers
in Israel and approximately 238 customers outside of Israel. Our customers outside of Israel are located primarily in
North America, Germany, the Netherlands, China, Switzerland, Italy and India , Finland, South Africa. Sales to
non-Israeli customers were $20.7 million (50.0% of revenues) for the year ended December 31, 2015, $21.9 million
(47% of revenues) for the year ended December 31, 2014 and $22.2 million (44.3% of revenues) for the year ended
December 31, 2013. In the years ended December 31, 2015, 2014 and 2013, a group of 10 affiliated companies
accounted for 17.9%, 20.6%, and 18.4% of our total revenues, respectively.
Marketing. We market and sell our products primarily through our direct sales personnel, sales
representatives and through PCB trading and manufacturing companies. We currently have ten persons involved in
sales, of which six persons are in Israel, two persons are in the United States employed by our U.S. subsidiary, Eltek
USA, and two person are employed by our German subsidiary, Kubatronik. We also have sales representatives in
Germany, Sweden, Finland, France and Spain. In the Netherlands, Italy, and South Africa, PCB trading and
manufacturing companies act as distributors of our products. In North America we market and sell our products
through Eltek USA as well as through independent local sales representatives. In India, we market our products
through a local sales representative. We maintain technical support services for our customers world-wide. We also
maintain customer service support centers that handle all logistical matters relating to the delivery of our products
and receive and handle complaints relating to delivered products. Our customer service personnel currently consist
of eleven persons, of which seven persons are in Israel, one person is employed by our U.S. subsidiary, Eltek USA,
and three persons are employed by Kubatronik.
Our strategy is to focus on the high end of the PCB market, mainly in flex-rigid PCBs, in which margins
are better. We are currently focusing our marketing efforts on the defense and medical industries. To penetrate the
U.S. defense market, we applied for ITAR registration from the U.S. Department of State, Bureau of Political-
Military Affairs, which we received in January 2009. ITAR regulates the manufacture, export and transfer of
defense articles, information and services. ITAR is a set of U.S. government regulations that controls the export and
import of certain defense-related articles and services. The regulations restrict sensitive information and
technologies only to be shared with U.S. persons, unless special approval is acquired. To qualify for ITAR
registration, we met strict requirements for corporate structure, security, record keeping and procedures to allow us
to sell our PCBs for use in U.S. defense products. In November 2009, we became certified to the AS 9100B quality
22
management standard for the avionic industry in order to strengthen our position in the avionic and aerospace
market in North America and Europe. In January 2014, we received accreditation from Nadcap, a global
cooperative accreditation program for aerospace engineering and related industries, for our advanced circuitry
solutions, including rigid and flex-rigid printed circuit boards.
We have ongoing programs to upgrade our processes by implementing high-quality standards, employee
training and special training activities for clients. Marketing efforts include recruiting independent sales
representatives in various geographic areas, the distribution of promotional materials, seminars for engineers, the
supply of technical information to business publications and participation in trade shows and industry conferences.
Materials and Supplies
The materials used in the manufacture of PCBs are primarily laminates (copper clad, with an isolating core
separating them), prepreg composite materials, photo-chemical films, chemicals and inks. The materials we use are
manufactured in Europe, North America and South East Asia. Some of the materials are purchased directly from the
manufacturer, while others are purchased from local distributors.
During recent years, price negotiations with our suppliers resulted in lower price increases than requested
by our suppliers; however we may not continue to be successful in such negotiations in the future. We have also
faced pressure to raise our prices for our products to compensate for these price increases and although we have
managed to date to maintain our sales prices with moderate price increases, we may not be able to so in the future.
Future price changes for raw materials may materially affect our future profitability.
Competition
The global PCB industry is highly fragmented and intensely competitive, trends that we believe will
continue. The global PCB industry is characterized by rapidly changing technology, frequent new product
introductions and rapidly changing customer requirements. We compete principally in the market for complex, flex-
rigid multi-layer PCBs. In the Israeli market we mainly compete with PCB Technologies Ltd. and major PCB
exporters, mainly from South East Asia, North America and Europe. In the European market we mainly compete
with Advanced Circuit Boards NV (Belgium), AT&S Austria Technologie & Systemtechnik AG (Austria), Dyconex
and Cicor (Switzerland), Graphics, Exception PCB and Invotec (United Kingdom), Cistelaier and Somacis (Italy),
Schoeller-Electronics GmbH (formerly Ruwel Werke GmbH) (Germany) and certain other German companies. In
the North American market we mainly compete with TTM, Inc. (previously known as DDi Corp and Viasystems),
KCA Electronics Inc., Lenthor Engineering, Printed Circuits, Inc., Teledyne and Many of these competitors have
significantly greater financial, technical and marketing resources than us. Although capital requirements are a
significant barrier to entry for manufacturing complex PCBs, the basic interconnect technology is generally not
protected by patents or copyrights. Our current competition in the rigid PCB segment is mainly from PCB
manufacturers in the Far-East (mainly in China), which have substantially lower production costs than us.
Continued competitive pressures could cause us to lose market share and reduce prices.
Backlog
We estimate that our backlog of unfilled orders as of December 31, 2015, was approximately $6.5 million
compared to a backlog of approximately $5.7 million at December 31, 2014. We include in our backlog all
purchase orders scheduled for delivery within the next 12 months. Because unfilled orders may be cancelled prior to
delivery, the backlog outstanding at any point in time is not necessarily indicative of the level of business to be
expected in the ensuing period.
Environmental Matters
Since May 2003, our environmental management system has been ISO 14001 certified. This certification
was based on successful implementation of environmental management requirements and includes ongoing
monitoring of our processes, raw materials and products. The certification is subject to periodic compliance audits
conducted by the Israeli Institute of Standards.
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PCB manufacturing requires the use of metals and chemicals classified as hazardous substances. Water
used in the manufacturing process must be treated to remove metal particles and other contaminates before it can be
discharged into the local sewer systems. We operate and maintain effluent water treatment systems and use
approved testing procedures at our manufacturing facilities. There is no assurance, however, that violations will not
occur in the future. We are also subject to environmental laws and regulations relating to the storage, use and
disposal of chemicals, solid waste and other hazardous materials, as well as air quality regulations. Environmental
laws and regulations could become more stringent over time, and the costs of compliance with more stringent laws
could be substantial. Environmental regulations enacted in Israel in September 2000 provide that a company that is
found to have discharged water containing contaminates will be liable for quadruple the amount normally charged
for its water consumption. Over the years, we have undertaken various actions to reduce the use of water in our
manufacturing facilities. From 2008 through 2011, we invested in improving our effluent wastewater treatment
system to lower the amounts of inorganic salts and copper concentration in the discharged water. In January 2016
we completed the construction of a new wastewater treatment facility, which based on a recent sample, reduces the
amount of metal concentrations in our wastewater to the permitted levels.
A shortage of water in Israel may reduce the allocation of water available to manufacturing plants,
including ours, which could affect the concentrations of pollutants in our wastewater, making it harder to comply
with the foregoing regulations, in which event we would be required to invest additional funds to improve our
wastewater treatment systems.
In October 2015, we filed an application for an emissions permit with the Israeli Ministry of Environmental
Protection (the “Ministry”). In January 2016, we received notice of non-compliance from the Ministry, stating that
the application was incomplete, and that we are in breach of the Clean Air Law, 5768-2008 and the Licensing of
Businesses Law, 5728-1968. Following communications with the Ministry, we committed to submit an amended
application by April 2016.
For information regarding environmental claims, see Item 8A. “Financial Information – Consolidated and
Other Financial Information – Legal Proceedings.”
Intellectual Property Rights
Our success depends in part on our proprietary techniques and manufacturing expertise, particularly in the
area of complex multi-layer and flex-rigid PCBs. Like many companies in the PCB industry, we do not hold any
patents and rely principally on trade secret protection of our intellectual property. We believe that, because of the
rapid pace of technological change in the electronics industry, the legal protections for our products are less
significant factors in our success than the knowledge, ability and experience of our employees, the frequency of
product enhancements and the timeliness and quality of support services that we provide.
C.
Organizational Structure
In June 2002, we acquired a 76% interest in Kubatronik, a PCB manufacturer that specializes in short run
and prototype boards, including multi-layer, flex-rigid and HDI boards. Its customers include companies engaged in
the production of industrial equipment, defense and aerospace equipment, telecom and networking equipment, and
computer and data storage equipment as well as contract electronic manufacturers. Mr. Alois Kubat, Kubatronik’s
founder, holds the remaining 21% interest in Kubatronik (after we acquired from him an additional 3% of shares of
Kubatronik in May 2012). Mr. Kubat has the right to require us to purchase, and we have the right to require him
(or his permitted transferee) to sell to us, his remaining interest in Kubatronik. In May 2012, Mr. Kubat exercised
his option with respect to 3% of the shares of Kubatronik for approximately Euro 69,000 and reduced his ownership
percentage from 24% to 21%. The price for Mr. Kubat’s remaining holdings in Kubatronik under the put option is
Euro 483,000, while the price for such holdings under the call option is Euro 513,000. In recent years, Kubatronik
has incurred losses, which were financed by us. We have taken measures to improve Kubatronik's results, but we
cannot assure that we will be successful in our efforts. In such case we may be required to provide additional
financing to Kubatronik. As at December 31, 2015 Kubatronik's debt to Eltek was Euro 969,000 ($1.1 million]) -.
24
In July 2007, we established Eltek USA Inc., a wholly-owned subsidiary incorporated in Delaware, to
manage our sales and marketing activities in the North American market. Eltek USA Inc. commenced operations in
2008.
In December 2008, we established Eltek Europe GmbH, a wholly-owned subsidiary organized in Germany,
to manage our sales and marketing activities for certain European customers.
In November 2013, Nistec acquired a controlling 50.5% stake in our company and gained control of our
company.
D.
Property, Plants and Equipment
Leased Facilities
Our executive offices, as well as our design, production, storage and shipping facilities, aggregating
approximately 90,000 square feet, are located in an industrial building in the Sgoola Industrial Zone of Petach
Tikva, Israel. The lease for such facilities expires in February 2017 and we have an option to extend the lease for an
additional five year term upon six months prior notice. In the year ended December 31, 2015, we incurred
$780,000of rent expenses for these premises.
Kubatronik’s executive offices as well as its design, production, storage and shipping facilities, aggregating
approximately 15,000 square feet, are located in an industrial building in Geislingen, Germany, owned by the wife
of the former owner of Kubatronik. The lease for the facilities expires on December 31, 2018. In the year ended
December 31, 2015, Kubatronik paid an aggregate of approximately Euro 74,000 ($82,000) in rent for these
premises.
In June, 2015, our U.S. subsidiary, Eltek USA Inc., relocated, and now leases approximately 1,682 square
feet office space in New Hampshire. The lease for the facilities expires in February, 2020. In the year ended
December 31, 2015, we paid an aggregate of $29,000 for rent of the new and old premises.
Leased Equipment
We lease manufacturing equipment under an agreement that obligates us to pay a total of $1.1 million
through October 2020. Our monthly lease expense in 2016 under this agreement is $41,000.
Kubatronik leases manufacturing equipment under 62,000 Euro lease agreements, which as of December
31, 2015 require Kubatronik to pay a total of Euro 44,000 through May 2019 . Kubatronik’s monthly lease expense
under these agreements is approximately Euro 3,300($3,600).
ITEM 4A.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A.
Operating Results
The following discussion of our results of operations should be read together with our consolidated
financial statements and the related notes, which appear elsewhere in this annual report. The following discussion
contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and
uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include those discussed below and elsewhere in this
annual report.
25
Overview
We were incorporated under the laws of the State of Israel in 1970. Following our initial public offering in
January 1997, our ordinary shares were listed on the NASDAQ Stock Market (symbol: ELTK) and are presently
listed on the NASDAQ Capital Market. We have production facilities in Israel and Germany and marketing
subsidiaries in Germany and the United States.
In November 2013, Nistec acquired 50.5% of our issued share capital and gained control of our company.
We develop, manufacture, market and sell PCBs, including high density interconnect (HDI) multi-layered
and flex-rigid boards for electronic devices. Our principal customers include manufacturers of medical equipment,
defense and aerospace equipment, industrial equipment, and telecom and networking equipment, as well as contract
electronic manufacturers.
Our consolidated financial statements appearing in this annual report are prepared in dollars in accordance
with U.S. GAAP. Our functional currency is the NIS. The consolidated financial statements appearing in this
annual report are translated into dollars at the representative rate of exchange under the current rate method. Under
such method, the income statement and cash flows statement items for each year (or period) stated in this report are
translated into dollars using the average exchange rates in effect at each period presented, and assets and liabilities
for each year (or period) are translated using the exchange rate as of December 31 of each year (as published by the
Bank of Israel), except for equity accounts, which are translated using the rates in effect at the date of the
transactions. All resulting exchange differences that do not affect our earnings are reported in the accumulated other
comprehensive income as a separate component of shareholders’ equity.
Critical Accounting Policies
We have identified the policies below as critical to the understanding of our consolidated financial
statements. The application of these policies requires management to make estimates and assumptions that affect
the valuation of assets and expenses during the reporting period. There can be no assurance that actual results will
not differ from these estimates.
The significant accounting policies described in Note 1 of our consolidated financial statements, which we
believe to be most important to fully understand and evaluate our financial condition and results of operation under
U.S. GAAP, are discussed below.
26
Revenue Recognition. We recognize revenues when products are shipped and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an
arrangement exists and the sale price is fixable or determinable.
Inventories. Inventories are recorded at the lower of cost or market value. Cost is determined on the
weighted average basis for raw materials. For work in progress and finished goods, the cost is determined based on
calculation of accumulated actual direct and indirect costs.
Allowance for doubtful accounts receivable. The allowance for doubtful accounts receivable is calculated
on the basis of specific identification of customer balances. The allowance is determined based on management’s
estimate of the aged receivable balance considered uncollectible, based on historical experience, aging of the
receivable and information available about specific customers, including their financial condition and the volume of
their operations.
Fixed assets. Assets are recorded at cost. Depreciation on property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets. Machinery and equipment purchased under capital
lease arrangements are recorded at the present value of the minimum lease payments at lease inception. Such assets
and leasehold improvements are depreciated and amortized respectively, using the straight-line method over the
shorter of the lease term or estimated useful life of the asset.
Impairment in Value of Assets. Long-lived assets and certain identifiable intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the
asset or asset group to the undiscounted future net cash flows expected to be generated by the asset or the asset
group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Intangible assets. Intangible assets are amortized over their useful lives using a method of amortization
that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up,
in accordance with ASC 350, “Intangibles - Goodwill and Other.” Intangible assets were amortized based on the
straight-line method or acceleration method.
Goodwill. Goodwill represents the excess of the aggregate purchase price over the fair value of the net
assets acquired in a purchase business combination. Goodwill is reviewed for impairment at least annually. The
goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with
its carrying value. An indication of goodwill impairment exists if the fair value of the reporting unit is less than its
carrying value, and the enterprise must perform step two of the impairment test (measurement). Under step two, an
impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the
implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of
the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a
discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not
need to be performed.
The fair value of an asset is estimated using estimated future cash flows of the asset discounted by a rate
commensurate with the risk involved with such asset while incorporating marketplace assumptions. The estimate of
future cash flows requires management to make certain assumptions and to apply judgment, including forecasting
future sales, PCB market prices, raw material consumption, labor and other manufacturing expenses, and the useful
lives of the assets. We exercised our best judgment based on the most current facts and circumstances surrounding
our business when applying these impairment rules.
Use of estimates. The preparation of the consolidated financial statements in accordance with U.S. GAAP
requires us to make estimates and assumptions relating to the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the period. Actual results could differ from these estimates. Significant
items subject to such estimates and assumptions include the useful lives of fixed assets, allowance for doubtful
27
accounts, valuation of derivatives, deferred tax assets, inventory, goodwill, put/call option, income tax uncertainties
and other contingencies.
Commitments and contingencies. Liabilities for loss contingencies arising from claims, assessments,
litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred
and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are
expensed as incurred. Recoveries of environmental remediation costs from third parties that are probable of
realization are separately recorded as assets, and are not offset against the related environmental liability.
Accruals for estimated losses from environmental remediation obligations generally are recognized no later
than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or
circumstances change. Costs of expected future expenditures for environment remediation obligations are not
discounted to their present value.
Results of Operations
The following table sets forth, for the periods indicated, selected financial information expressed as a
percentage of our total revenues:
Year Ended December 31,
2014
2015
2013
Revenues ........................................................ 100%
Cost of revenues ............................................. (84.2)
Gross profit ..................................................... 15.8
(0.2)
R&D expenses
Selling, general and administrative
expenses .....................................................
Impairment loss on goodwill……….
Operating profit ..............................................
Financial expenses, net ................................
Other income, net ...........................................
Profit before income tax expense and
non-controlling interest ..............................
Income tax (expense) benefit ..........................
Net profit ........................................................
Net profit (loss) attributable to non-
controlling interest ................................
Net profit (loss) attributed to
shareholders ....................................................
___________________
* Less than 0.1%
(12)
-
3.6
(0.6)
*
3.0
(0.5)
2.5
*
2.5
100%
(87.1)
12.9
(0.1)
(14.5)
(0.2)
(1.9)
(0.8)
0.1
(2.6)
(3.5)
(6.1)
(0.4)
(5.7)
100%
(84.1)
15.9
-
(13.4)
-
2.5
(0.9)
*
1.6
6.0
7.6
*
7.6
Year Ended December 31, 2015 Compared with Year Ended December 31, 2014
Revenues. Revenues decreased by 11.3% to $41.4 million in the year ended December 31, 2015, from
$46.6 million in the year ended December 31, 2014. The decrease in revenues is primarily attributable to decreased
demand for our products, mainly from military customers.
Cost of Revenues. Cost of revenues decreased by 14.3% to $34.8 for the year ended December 31, 2015,
from $40.6 million for the year ended December 31, 2014. The decrease in cost of revenues is primarily attributable
to decreased revenues and to savings in manufacturing costs. Cost of revenues as a percentage of revenues
decreased to 84.2% for the year ended December 31, 2015, from 87.1% for the year ended December 31, 2014. The
increase in cost of revenues as a percentage of revenues is primarily attributable to savings in manufacturing costs.
Gross Profit. Gross profit increased by 8.7% to $6.5 million for the year ended December 31, 2015, from
$6 million for the year ended December 31, 2014. The increase in gross profit is primarily due to the decrease in
28
cost of sales. Gross profit as a percentage of revenues increased to 15.8% for the year ended December 31, 2015,
from 12.9% for the year ended December 31, 2014. The increase in gross profit as a percentage of revenues is
primarily attributable to the decrease in cost of sales as a percentage of sales.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by
26.7% to $6 million in the year ended December 31, 2015, from $6.8 million in the year ended December 31, 2014.
The decrease in Selling, general and administrative expenses is primarily attributable to cutting expenses and to the
decrease in revenues, which reduced the sales commission paid to our sales agents.
R&D expenses. In 2015 we recorded R&D expenses of $90,000 in connection with our participation in the
Printel program, a consortium within the framework of the MAGNET program of the Office of the Chief Scientist of
the Ministry of Economy and Industry of the State of Israel, or the OCS. We recorded $72,000 R&D expenses in
2014.
Impairment loss on goodwill. We did not record a goodwill impairment loss in 2015. In 2014 we recorded
a goodwill impairment loss of $80,000 associated with the acquisition of Kubatronik in 2002.
Operating Profit (Loss). We recorded operating profit of $1.5 million in the year ended December 31,
2015, compared to operating loss of $903,000 million in the year ended December 31, 2014. The improved
operating results are mainly attributable to reduced costs in 2015.
Financial Expenses, Net. Financial expenses, net decreased by 27.2% to $259,000 in the year ended
December 31, 2015, from $356,000 in the year ended December 31, 2014. Our financial expenses in 2015 were
primarily attributable to interest paid on short-term and long-term debt and the impact of the NIS exchange rate on
outstanding dollar and Euro denominated balances of our receivables from customers and debt to our suppliers. The
decrease in financial expenses in 2015 compared to 2014 is primarily attributable to the decrease in our financial
liabilities.
Other Income (Loss), Net. We had other income, net of $6,000 in the year ended December 31, 2015,
compared to other loss, net of $38,000 in the year ended December 31, 2014, primarily as a result of sale and
disposal of fixed assets.
Income Tax (Expense) Benefit. During the year ended December 31, 2015 we recorded a tax expense of
$218,000 compared to a tax expense of $1.6 million in 2014. In 2014 we reduced certain of our deferred tax assets
due to changes in the market conditions affecting the PCB markets and increased uncertainty about our ability to
utilize these tax assets in the foreseeable future. Such uncertainty results from a reduced demand for our products, a
change in the PCB buying patterns of our domestic military customers, which shifted some PCB acquisitions
overseas, increased competition coupled with reduced prices in the local market, on-going manufacturing
challenges, and possible devaluation of the U.S. dollar against the NIS, all of which may adversely affect our future
profitability. Other tax expenses in 2015 were attributable to our subsidiaries in the United States and Germany.
The amount of the deferred tax assets considered realizable could be further reduced in the near term if estimates of
future taxable income during the carryforward period are reduced. For the years ended December 31, 2015 and
2014, we did not record a deferred tax asset and related tax benefit with respect to the net operating losses of
Kubatronik due to uncertainty about its ability to utilize such losses in the foreseeable future.
Non-controlling interest. Non-controlling interest of $17,000 reflects the other shareholder’s proportionate
share in Kubatronik’s net loss for the year ended December 31, 2015, as compared to Non-controlling interest of
$190,000 in Kubatronik’s net loss for the year ended December 31, 2014.
Year Ended December 31, 2014 Compared with Year Ended December 31, 2013
Revenues. Revenues decreased by 7.2% to $46.6 million in the year ended December 31, 2014, from $50.2
million in the year ended December 31, 2013. The decrease in revenues is primarily attributable to decreased
demand for our products, mainly from military customers.
Cost of Revenues. Cost of revenues decreased by 3.9% to $40.6 for the year ended December 31, 2014,
from $42.2 million for the year ended December 31, 2013. The decrease in cost of revenues is primarily attributable
29
to decreased revenues and to savings in manufacturing costs. Cost of revenues as a percentage of revenues
increased to 87.1% for the year ended December 31, 2014, from 84.1% for the year ended December 31, 2013. The
increase in cost of revenues as a percentage of revenues is primarily attributable to the decrease in revenues which
was at a greater percentage than the reduction in costs.
Gross Profit. Gross profit decreased by 24.7% to $6 million for the year ended December 31, 2014, from
$8 million for the year ended December 31, 2013. The decrease in gross profit is primarily due to the decrease in
revenues and the increase in cost of sales as a percentage of sales. Gross profit as a percentage of revenues
decreased to 12.9% for the year ended December 31, 2014, from 15.9% for the year ended December 31, 2013. The
decrease in gross profit as a percentage of revenues is primarily attributable to the decrease in revenues and the
increase in cost of sales as a percentage of sales.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by
0.8% to $6.8 million in the year ended December 31, 2014, from $6.7 million in the year ended December 31, 2013.
Impairment loss on goodwill. In 2014 we recorded a goodwill impairment loss of $80,000. We did not
record a goodwill impairment loss in 2013.
Operating Profit (Loss). As a result of the foregoing, we recorded operating loss of $903,000 in the year
ended December 31, 2014, compared to operating profit of $1.3 million in the year ended December 31, 2013.
Financial Expenses, Net. Financial expenses, net decreased by 18.9% to $356,000 in the year ended
December 31, 2014, from $439,000 in the year ended December 31, 2013. Our financial expenses in 2014 were
primarily attributable to interest paid on short-term and long-term debt and the impact of the NIS exchange rate on
outstanding dollar and Euro denominated balances of our receivables from customers and debt to our suppliers. The
decrease in financial expenses in 2014 compared to 2013 is primarily attributable to the decrease in our financial
liabilities and to a lower interest rate we paid on our loans.
Other Income (Loss), Net. We had other income, net of $38,000 in the year ended December 31, 2014,
compared to other loss, net of $26,000 in the year ended December 31, 2013, primarily as a result of sale and
disposal of fixed assets.
Income Tax (Expense) Benefit. During the year ended December 31, 2014 we recorded a tax expense of
$1.6 million compared to a tax benefit of $3 million in 2013. In 2014 we reduced certain of our deferred tax assets
due to changes in the market conditions affecting the PCB markets and increased uncertainty about our ability to
utilize these tax assets in the foreseeable future. Such uncertainty results from a reduced demand for our products, a
change in the PCB buying patterns of our domestic military customers, which shifted some PCB acquisitions
overseas, increased competition coupled with reduced prices in the local market, on-going manufacturing
challenges, and possible devaluation of the U.S. dollar against the NIS, all of which may adversely affect our future
profitability. Other tax expenses in 2014 were attributable to our subsidiaries in the United States and Germany. In
2013 we determined that certain of our deferred tax assets were more likely than not to be realized in future years,
based on three years of consistent profits. Accordingly, we reversed the valuation allowances, in the amount of $2.5
million. The amount of the deferred tax assets considered realizable could be further reduced in the near term if
estimates of future taxable income during the carryforward period are reduced. For the years ended December 31,
2014 and 2013, we did not record a deferred tax asset and related tax benefit with respect to the net operating losses
of Kubatronik due to uncertainty about its ability to utilize such losses in the foreseeable future.
Non-controlling interest. Non-controlling interest of $190,000 reflects the other shareholder’s
proportionate share in Kubatronik’s net loss for the year ended December 31, 2014, as compared to $42,000 in
Kubatronik’s net profit for the year ended December 31, 2013.
Impact of Currency Fluctuations and Inflation
Our revenues and expenses are denominated in the NIS, dollars and Euros. Due to the different proportions
of currencies our revenues and expenses are denominated in, fluctuations in rates of exchange between NIS and
other currencies may affect our operating results and financial condition. For example, the NIS value of our dollar
or Euro denominated revenues are negatively impacted by the depreciation of the dollar and the Euro against the
30
NIS. The average exchange rate for the NIS against the dollar was 8.6% higher in 2015 than 2014 and the average
exchange rate for the NIS against the Euro was 9.2% lower in 2015 than 2014, and in total, these changes had a
positive impact on our operating results in 2015. The average exchange rate for the NIS against the dollar was 0.9%
lower in 2014 than 2013 and the average exchange rate for the NIS against the Euro was 1.1% lower in 2014 than
2013, and in total, these changes had a negative impact on our operating results in 2014.
The following table sets forth, for the periods indicated, (i) depreciation or appreciation of the NIS against
the most important currencies for our business, the dollar and Euro, between December 31 each year and December
31 of the year before, and (ii) inflation as reflected in changes in the Israeli consumer price index, or the CPI.
Dollar ................................
Euro................................
Israeli CPI ................................0.6%
2015
0.3%
(10.1%)
Year Ended December 31,
2013
(7%)
(2.8%)
1.8%
2014
12%
(1.2%)
(0.2%)
2012
(2.3%)
(0.4%)
1.6%
2011
7.7%
4.2%
2.2%
From time to time in the past we have used currency hedging instruments in order to partially protect
ourselves from currency fluctuation and may use hedging instruments from time to time in the future.
Because exchange rates between the NIS and the dollar and Euro fluctuate continuously, exchange rate
fluctuations, particularly larger periodic devaluations, may have an impact on our profitability and period-to-period
comparisons of our results. We cannot assure you that in the future our results of operations may not be materially
adversely affected by currency fluctuations.
Conditions in Israel
We are incorporated under the laws of, and our executive offices, principal production facilities and
research and development facilities are located in, the State of Israel. See Item 3D. “Key Information – Risk Factors
– Risks Relating to Our Operations in Israel” for a description of governmental, economic, fiscal, monetary or
political polices or factors that have materially affected or could materially affect our operations.
Trade Relations
Israel is a member of the United Nations, the International Monetary Fund, the International Bank for
Reconstruction and Development and the International Finance Corporation. Israel is a member of the World Trade
Organization and is a signatory to the General Agreement on Tariffs and Trade. In addition, Israel has been granted
preferences under the Generalized System of Preferences from Australia and Canada. These preferences allow
Israel to export the products covered by such programs either duty-free or at reduced tariffs. Israel is also a member
of the Organization for Economic Co-operation and Development, or the OECD, an international organization
whose members are governments of mostly developed economies. The OECD’s main goal is to promote policies
that will improve the economic and social well-being of people around the world.
Israel and the European Union Community, known now as the European Union, concluded a Free Trade
Agreement in July 1975 that confers some advantages with respect to Israeli exports to most European countries and
obligated Israel to lower its tariffs with respect to imports from these countries over a number of years. In 1985,
Israel and the United States entered into an agreement to establish a Free Trade Area. The Free Trade Area has
eliminated all tariff and some non-tariff barriers on most trade between the two countries. On January 1, 1993, an
agreement between Israel and the European Free Trade Association, known as the EFTA, established a free-trade
zone between Israel and the EFTA nations. In November 1995, Israel entered into a new agreement with the
European Union, which includes a redefinition of rules of origin and other improvements, such as allowing Israel to
become a member of the Research and Technology programs of the European Union. In June 2014, Israel joined the
European Union's Horizon 2020 Research and Innovation program. In recent years, Israel has established
commercial and trade relations with a number of other nations, including Russia, China, India, Turkey and other
nations in Eastern Europe and Asia.
31
Effective Corporate Tax Rate
Israeli companies are generally subject to income tax on their taxable income under the Income Tax
Ordinance, 5721-1961. The applicable rate for 2015 was 26.5%. However, one of our production facilities qualifies
as a “benefited enterprise” under the Law for the Encouragement of Capital Investments, 5719-1959, as amended.
Subject to certain time limitations, a certain portion of our income derived from such benefited enterprise will be
subject to a zero tax rate, while the remainder will be taxed at a rate of up to 26.5%. Alternatively we may select a
“preferred enterprise” status, which will allow us to be taxed at a rate of 16% on all of our income. For additional
information see Item 10E. “Additional Information – Taxation - Tax Benefits Under the Law for the Encouragement
of Capital Investments, 5719-1959” and Note 14 to our consolidated financial statements.
As of December 31, 2015, we had approximately $14.6 million in tax operating loss carryforwards and
$4.2 million in capital loss carry forwards in Israel, which can be offset against future income in Israel without time
limitation. In Israel, we have received final tax assessments through the 1995 tax year and the tax assessments we
received for the 1996-2008 tax years are considered final due to the statute of limitations. Our European
subsidiaries, Kubatronik and Eltek Europe, have received final tax assessments through the 2010 tax year. As of
December 31, 2015, Kubatronik had approximately Euro 1.5 million ($1.7 million) in tax loss carry forwards in
Germany for corporate tax and Euro 1.5 million ($1.7 million) for municipal corporate tax. Our U.S. subsidiary has
not yet received any final tax assessments since its incorporation.
During 2015, we recorded tax expenses of $218,000 for profits generated in the year. In the 2014, we
reduced a portion of our deferred tax assets based on our estimation of the amount that could be realized in the
foreseeable future. The amount of the deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are reduced. The ultimate realization of
deferred tax assets depends on the generation of future taxable income during the periods in which those temporary
differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected
taxable income, and tax-planning strategies in making this assessment.
Recently Issued Accounting Standards
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial
Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as
a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there are conditions or
events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going
concern for a period of one year after the date that the financial statements are issued. If such conditions or events
exist, an entity should disclose that there is substantial doubt about the entity’s ability to continue as a going concern
for a period of one year after the date that the financial statements are issued. Disclosure should include the
principal conditions or events that raise substantial doubt, management’s evaluation of the significance of those
conditions or events in relation to the entity’s ability to meet its obligations, and management’s plans that are
intended to mitigate those conditions or events. ASU 2014-15 will be effective for the annual period ending after
December 15, 2016, and for annual periods and interim periods thereafter.
In January 2015, the FASB issued Accounting Standards Update No. 2015-01, Income Statement –
Extraordinary and Unusual items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the
Concept of Extraordinary Items (ASU 2015-01). The amendment eliminates from U.S. GAAP the concept of
extraordinary items. This guidance is effective for the Company in the first quarter of fiscal 2017. Early adoption is
permitted and allows the Company to apply the amendment prospectively or retrospectively. The adoption of this
guidance is not expected to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17) “Income
Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. ASU 2015-17 simplifies the presentation of
deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into
current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments
in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance
32
sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and prior
interim periods and may be applied either prospectively or retrospectively to all periods presented. Early adoption is
permitted. We have early adopted this standard in the fourth quarter of 2015 on a retrospective basis. Prior periods
have been retrospectively adjusted.
B.
Liquidity and Capital Resources
Historically, we have financed our operations through cash generated by operations, shareholder loans,
long-term and short-term bank loans, borrowings under available credit facilities and the proceeds from our initial
public offering in 1997 (approximately $5.8 million).
As of December 31, 2015, we had $1 million in cash and cash equivalents and working capital of $2.1
million compared to $1.1 million in cash and cash equivalents and working capital of $300,000 at December 31,
2014.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Year ended December 31,
2015
($ in thousands)
2014
2013
Net cash provided by operating activities ....................
Net cash used in investing activities.............................
Net cash used in financing activities ............................
Effect of translation adjustments ..................................
Net increase (decrease) in cash and cash equivalents ...
Cash and cash equivalents at beginning of year ...........
Cash and cash equivalents at end of year .....................
1,720
(866)
(1,068)
123
(91)
1,129
1,038
79
(2,643)
1,248
(69)
(1,385)
2,514
1,129
1,618
(950)
(113)
24
579
1,935
2,514
The changes in assets and liabilities reflected in the cash flow statement do not correspond exactly to the
respective amounts in the balance sheets included with this annual report, mainly because our functional currency is
the NIS and our reporting currency is the dollar.
Net cash provided by operating activities was $1.7 million in the year ended December 31, 2015. This
amount was primarily attributable to our net profit of $1.0 million, adjustments for a non-cash item of depreciation
of $1.7 million, a $85,000 capital loss with respect to fixed assets, a decrease in trade receivables of $171,000, a
decrease in other receivables and prepaid expenses of $249,000, a decrease in inventories of $213,000, a change in
the severance benefits of $41,000, a decrease in deferred tax benefits of $133,000 and the revaluation of a long term
loan of $10,000. This amount was offset in part by a decrease in trade payable of $1.4 million and a decrease in
other liabilities and accrued expenses of $543,000.
Net cash provided by operating activities was $79,000 in the year ended December 31, 2014. This amount
was primarily attributable to our net loss of $2.9 million, adjustments for non-cash item of depreciation and
amortization of $1.9 million, a $101,000 capital loss with respect to fixed assets, an increase in other liabilities and
accrued expenses of $445,000, a decrease in deferred tax benefits of $1.5 million, and a $848,000 decrease in
inventories (mainly work in process). This amount was offset in part by an increase of other receivables and prepaid
expenses of $319,000, a decrease in trade payables of $1.4 million, a change in the severance benefits of $59,000
and an increase in trade receivables of $78,000.
Net cash provided by operating activities was $1.6 million in the year ended December 31, 2013. This
amount was primarily attributable to our net income of $3.8 million, adjustments for non-cash item of depreciation
and amortization of $1.7 million, an increase in trade payables of $655,000, an increase in other liabilities and
accrued expenses of $147,000, decrease of other receivables and prepaid expenses of $46,000 and a change in
33
employee severance benefits, net of $217,000. This amount was offset in part by an increase in deferred tax benefits
of $3 million, an increase in trade receivables of $1.5 million, and a $451,000 increase in inventories (mainly
finished goods and work in process).
Net cash used in investing activities was $866,000 in the year ended December 31, 2015 compared to $2.6
million in the year ended December 31, 2014 and $950,000 in the year ended December 31, 2013. Net cash used in
investing activities in the years ended December 31, 2015, 2014, and 2013 was primarily for the purchase of fixed
assets for our production lines, expansion of our manufacturing facilities, including leasehold improvements, and the
purchase of information technology software and hardware.
Net cash used in financing activities was $1.1 million in the year ended December 31, 2015, which was
primarily attributable to a decrease in short-term credit of $2.1 million, repayments of long term loans of $207,000
and repayments of credit from fixed asset payables of $505,000. These amounts were partially offset by proceeds
from a long term loan of $1.7 million.
Net cash used in financing activities was $1.2 million in the year ended December 31, 2014, which was
primarily attributable to a decrease in short-term credit of $ 1.4 million, repayment of long term loans of $806,000,
and the repayment of credit from fixed assets payable of $477,000. These amounts were partially offset by proceeds
from a long term loan of $1.2 million.
Net cash used in financing activities was $113,000 in the year ended December 31, 2013, which was
primarily attributable to our major shareholder’s $3.5 million investment in our company, which was offset by a
decrease in short-term credit of $2.6 million, repayment of long term loans of $564,000, and repayment of credit
from fixed assets payable of $515,000.
As of December 31, 2015, we had a revolving line of credit of approximately $200,000 with Bank
Hapoalim B.M., a revolving line of credit of approximately $385,000 with Bank Leumi B.M. and a long-term loan
from Bank Hapoalim B.M. of $1.9 million and a long-term loan of $837,000 from Bank Leumi B.M. .
As of December 31, 2015, we also had long-term loans from suppliers of fixed assets in the aggregate
amount of $1.5 million. Of such amount, $394,000 is linked to the Euro, $844,000 is linked to the dollar and
$55,000 is not linked.
Our credit lines and short-term loans bear annual interest at Prime+ 0.85% - 0.9%.
Our long-term bank loans and loan from fixed asset suppliers bear annual interest as follows:
•
•
linked to the dollar - from 5 % to 8.56%.
linked to the Euro – from 2.17% .
• NIS not linked 5%-6%.
The borrowings from our banks are secured by specific liens on certain assets, by a first priority charge on
the rest of our now-owned or after-acquired assets and by a fixed lien on goodwill (intangible assets) and insurance
rights (rights to proceeds on insured assets in the event of damage). In addition, the agreements with our banks
prohibit us from selling or otherwise transferring any assets except in the ordinary course of business or from
placing a lien on our assets without the banks’ consent.
Bank Hapoalim and Bank Leumi require us to maintain a specific set of covenants each fiscal year. We are
required to meet all of the following financial covenants: (i) maintaining adjusted shareholders’ equity equal to the
greater of $4.5 million or 17% of our consolidated total assets; and (ii) a debt service ratio of 1.5. For this purpose,
adjusted shareholders’ equity excludes certain intangible and other assets. Debt service ratio is defined as the ratio
of EBITDA to current maturities of long-term debt plus interest expenses. As of December 31, 2015, we were in
compliance with these covenants.
34
Capital expenditures on a cash flow basis for the years ended December 31, 2015 and 2014 were
approximately $866,000 and $2.6 million, respectively. In addition, purchases of fixed assets not yet paid as at
December 31, 2015 amounted to $100,000. Our capital expenditures in such periods mainly related to our
investments in production and manufacturing equipment, and in leasehold improvements. We intend to finance our
2016 capital expenditures mainly with bank loans, suppliers’ credit and operational cash flow; however, such
financing may not be available, or, if available, may not be on terms favorable to us. Our principal commitments
consist of obligations outstanding under our bank loans and credit facilities, suppliers’ credit and operating leases.
We expect to finance our 2016 budget from operational cash flow, revolving bank credit lines and long-
term bank loans, and supplier financing. Although we anticipate that these capital resources will be adequate to
satisfy our liquidity requirements through 2016, our liquidity could be negatively affected by a decrease in demand
for our products, including the impact of changes in customer buying that may result from the general economic
downturn, the stability of the dollar/NIS exchange rate, our results of operations, our suppliers’ payment terms, our
customers’ demand for extending their payment terms and other factors detailed in Item 3D. “Key Information -
Risk Factors.” If available liquidity is not sufficient to meet our operating and debt service obligations as they come
due, we would need to pursue alternative financing arrangements or reduce expenditures to meet our cash
requirements through 2016. Such additional financing may not be available to us or, if available, may not be
obtained on terms favorable to us, and there is no assurance that we would be able to reduce discretionary spending
to provide the required liquidity.
C.
Research and Development, Patents and Licenses
We generally do not engage in research and development. In 2014, we were granted membership in
Printel, a consortium within the framework of the MAGNET program of the Office of the Chief Scientist of the
Ministry of Economy and Industry of the State of Israel, or the OCS. Printel was created specifically to develop
printed electronic technologies that are an alternative innovative technology for the electronics industry. Under the
terms of the consortium, each member of the consortium received an advance for its research and development costs
for a specific research and development project assigned to it by the consortium. The OCS reimburses 66% of the
approved research and development expenses, less certain consortium expenses. These reimbursements are
contingent upon our submitting periodic reports prepared in accordance with the requirements of the OCS. We are
not required to pay the OCS royalties with respect to this grant.
D.
Trend Information
Following a decline in revenues caused by the global financial crisis in 2008 and 2009, our revenues began
to increase in 2010 and 2011, slightly declined in 2012, increased in 2013, declined again in 2014 and declined in
2015, primarily due to a reduced demand for our products, mainly by military customers.
Our backlog at December 31, 2015 was approximately $6.5 million compared to a backlog of
approximately $5.7 million at December 31, 2014. We include in our backlog all purchase orders scheduled for
delivery within the next 12 months. The increase in our backlog was primarily due to the increase in demand for our
products. For a variety of reasons, including the timing of orders, delivery intervals, customer and product mix and
the possibility of customer changes in delivery schedules, backlog as of any particular date may not be a reliable
measure of sales for any succeeding period. Cancellation charges generally vary depending upon the time of
cancellation and, therefore, a substantial portion of our backlog may be subject to cancellation without penalty.
E.
Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated
special purpose financing or partnership entities that are likely to create material contingent obligations.
35
F.
Tabular Disclosure of Contractual Obligations
The following table summarizes our minimum contractual obligations as of December 31, 2015.
Contractual Obligations
Short-term bank credit (1) .......................
Long-term debt obligations (1)................
Operating lease .....................................
Other contractual obligations .................
Purchase obligations
Other short-term liabilities reflected on the
company’s balance sheet (2) ................
Other long-term liabilities reflected on the
company’s balance sheet ...................
Estimate of interest payments on long-term
debt obligations (3)
Total
1,275
4,199
1,518
1,600
220
4,594
289
295
Total .......................................................
13,90
Payments due by period
($ in thousands)
2-3 years
-
1,964
367
632
-
4-5 years
-
898
144
141
-
more than 5
years
-
-
-
72
-
less than 1
year
1,275
1,337
1,007
755
220
4,594
130
9,318
136
3,099
28
1,211
289
1
362
_________________________
(1)
For information on the interest rates of our short-term bank credit and long-term debt obligations, see Item
5B. “Operating and Financial Review and Prospects - Liquidity and Capital Resources.”
(2)
(3)
Includes the estimated net value of our liability attributable to Mr. Kubat’s put option relating to his 21%
ownership interest in Kubatronik under the agreement relating to the acquisition of our 76% ownership
interest in Kubatronik in June 2002, which increased to 79% in May 2012. Under U.S. GAAP, such an
arrangement gives rise to a derivative instrument, which must be marked to market every reporting period.
The estimate of interest payments on long-term debt obligations is based on current interest rates as of
December 31, 2015 (including current variable rates on the existing long-term debt obligations) and on the
current volume of debt obligations, assuming loan repayment in future years as disclosed in Note 8 to the
consolidated financial statements.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
Directors
Set forth below are the name, age, principal position and a biographical description of each of our directors:
Age Position
66 Chairman of the Board of Directors and CEO
Name
Yitzhak Nissan (3)
Mordechai Marmorstein (1)(2) 69 Director
63 Director
Gavriel David Meron
76 Director
David Rubner
58 Director
Erez Meltzer
Gad Dovev(1)(2)(3)
69 External Director
Yodfat Harel Buchris(1)(2)(3)
43 External Director
__________________________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
36
(3) Member of the Banking Committee
Ms. Yodfat Harel Buchris was elected to serve as an external director at our 2015 annual general meeting
of shareholders for a three-year term, pursuant to the provisions of the Companies Law. Mr. Gad Dovev was elected
to serve as an external director at our 2014 annual general meeting of shareholders for a three-year term. Yitzhak
Nissan, Mordechai Marmorstein, Gavriel David Meron, David Rubner and Erez Meltzer were re-elected to serve as
a directors at our 2015 annual general meeting of shareholders on October 27, 2015 until our the next annual general
meeting of shareholders.
Yitzhak Nissan has served as our Chairman of the Board of Directors since November 2013, and is a
member of our Banking Committee. As of October 2014, Mr. Nissan serves also as our Chief Executive Officer.
Mr. Nissan is the founder of Nistec Group and has served as its chief executive officer since 1985. Mr. Nissan
served as a Presiding Member of ILTAM (Israeli Users' Association of Advanced Technologies in Hi-Tech
Integrated Systems) between 2008 and 2009, and as a Presiding Member of the Israeli Association of Electronics
and Software Industries since 2012. Mr. Nissan also established the VPs Operations Forum, which brings thought
leadership to 200 VPs of operations from diverse hi-tech companies in Israel. In 2008, Mr. Nissan received the
Distinguished Industry Award from the mayor of Petach Tikva Municipality. Mr. Nissan holds a BSc. degree in
Electronic Engineering from the University of Buffalo, New York.
Dr. Mordechai Marmorstein has served on our Board of Directors since October 2013 and is a member of
our audit and compensation committees. From 1992 to 2001, Dr. Marmorstein was the chief financial officer of
Pazchim Co. Ltd. Dr. Marmorstein was also an internal auditor and accountant at Negev Phosphate Works. Dr.
Marmorstein served as the chairman of Teshet (Tourist Enterprises and Aviation Services Co. Ltd.), a subsidiary of
El-Al, the Israeli national airline, from 1999 to 2000. Dr. Marmorstein holds a B.A. degree in Economics, an M.A.
degree in Contemporary Jewry Studies and a Ph.D. in Jewish History Studies, all from Bar-Ilan University.
Gavriel David Meron was elected to serve on our Board of Directors in October 2013. Mr. Meron
currently serves as the chairman and the chief executive officer of Hygieacare Inc., and provides managerial services
to numerous companies as the chairman and chief executive officer of M.G.D. Management Services & Investments
Ltd. since November 2006. Mr. Meron was the founder, president and chief executive officer of Given Imaging Ltd.
from 1998 to 2006. Mr. Meron holds a B.A. degree in Economics and Statistics from the Hebrew University of
Jerusalem and an MBA degree in International Business from Tel Aviv University.
David Rubner was elected to serve on our Board of Directors in October 2013. Mr. Rubner has served as
the Chairman and Chief Executive Officer of Rubner Technology Ventures Ltd. and as a Partner in Hyperion Israel
Advisors Ltd., a venture capital firm since 2000. During the years 1991 to 2000, he was the President and Chief
Executive Officer of ECI Telecom Ltd. Mr. Rubner serves on the board of directors of Check Point Software Ltd.,
Radware Ltd., Telemessage International Ltd. and several private companies. He also serves on the boards of
trustees and executive council of Shaare Zedek Hospital. Mr. Rubner holds a B.Sc. degree in engineering from
Queen Mary College, University of London and an M.S. degree from Carnegie Mellon University.
Erez Meltzer has served as the Chairman of our Board of Directors from 2011 to 2013 and has served as a
director since 2009. Mr. Meltzer is the Executive Chairman of Hadassah Medical Center and the chairman of MIS
Implants Technologies Ltd. Mr. Meltzer also serves as a director of Ericom Software Ltd. From 2008 to 2013, Mr.
Meltzer has served as the Chief Executive Officer of Gadot Chemical Tankers & Terminals Ltd. From 2006 to 2007,
Mr. Meltzer served as the Chief Executive Officer of Africa Israel Group. From 2002 to 2006, Mr. Meltzer served
as the President and Chief Executive Officer of Netafim Ltd. From 1999 to 2001, Mr. Meltzer served as the
President and Chief Executive Officer of CreoScitex. Mr. Meltzer served is a colonel in the Israeli Defense Forces –
Armored Corps (reserve). Mr. Meltzer serves as the Chairman of the Lowenstein Hospital Friends Association since
1999 and is the honorary chairman of the Israeli Chapter of YPO (the Young Presidents Organization). Mr. Meltzer
studied Economics and Business at the Hebrew University of Jerusalem and Boston University, and is a graduate of
the Advanced Management Program at Harvard Business School.
Gad Dovev has served as an external director (within the meaning of the Companies Law) in October 2014
and is a member of our audit, compensation and banking committees. Mr. Dovev retired from the Israeli Ministry of
Defense in August 2012. Mr. Dovev served as head of the Israeli Ministry of Defense Mission to the United States
from August 2008 to August 2011. From August 2005 to August 2008, Mr. Dovev served as head of the Israeli
37
Ministry of Defense Mission to Germany. Prior to that, from 2001 to 2005, Mr. Dovev acted as Deputy General
Manager of the Israeli Ministry of Defense and Head of the Rehabilitation Department. From 1993 to 2001, Mr.
Dovev served as Director of the Finance Department and the Financial Comptroller of the Israeli Ministry of
Defense. Mr. Dovev served as member of the Board of Directors of Bank Otsar Ha-Hayal Ltd., IMI-Israel Military
Industries Ltd., Shekem Ltd. and Gapim Ltd. Mr. Dovev holds a BSc in Financial and Agricultural Administration
from the Hebrew University of Jerusalem.
Yodfat Harel Buchris was elected to serve as an external director (within the meaning of the Companies
Law) in October 2015 and is a member of our audit and compensation committees. Ms. Harel Buchris has since
2014 served as an employer representative in Israel's National Labor Court. Since October 2013, Ms. Harel Buchris
is a partner at YP Partners, a private consulting and investment banking company. From 2006 to September 2013,
Ms. Harel Buchris served as a managing director of Tamares Capital Ltd. From 2004-2006, Ms. Harel
Buchris served as a corporate director of Orbotech Ltd. From 1994 to 2003, Ms. Harel Buchris served as a
managing director in Harel-Hertz Invetment House Ltd. Ms. Harel Buchris serves as a member of the Board of
Directors of Protalix Biotherapeutics Inc., and has served as a member of the Board of Directors of British Israel
LTD, El Al Airlines, Halman – Aldubi Provident Founds Ltd., BioView Ltd., Advance Vision Technologies AVT,
and Mapal Plastic Products Israel. Ms. Harel Buchris holds a B.A. degree in Communication and Political Sciences
from Bar-Ilan University, and an MBA degree from Bradforf University, U.K.
Executive Officers
Set forth below are the name, age, principal position and a biographical description of each of our executive
officers:
Age Position
Name
Yitzhak Nissan ................................66 Chief Executive Officer
Roberto Tulman ..............................57 Deputy CEO, and Chief Technology Officer
Amnon Shemer ...............................57 Vice President, Finance and Chief Financial Officer
Eliyahu Dvora ................................ 59 Vice President, Operations
Avraham Gal ................................ 52 Vice President, Chief Information Officer and General Manager of
Kubatronik and Eltek Europe.
James Barry .....................................57 President of Eltek USA Inc.
Axel Herrmann ................................58 General Manager, Eltek Europe
Roberto Tulman joined us in August 2005 as vice president, technologies and chief technology officer, and
was appointed as our Deputy CEO in October 2014. During the 22 years prior to joining our company, Mr. Tulman
served in the electronic research department of the Israel Defense Forces, where he held various research and
development and management positions, and managed the printed circuits division during his last eight years of
service. Mr. Tulman holds a B.Sc. degree (Cum Laude) in Chemistry, an M.Sc degree in Chemistry
(Electrochemistry) and an M.B.A. degree, all from Tel-Aviv University.
Amnon Shemer joined us in February 2004 as vice president-finance and chief financial officer. From
January 2003 until November 2003, Mr. Shemer served as managing director of Mea Control Transfer Ltd., a
company that provides investment banking services. From June 1995 until August 2002, Mr. Shemer was vice
president of finance for Mentergy Ltd., a publicly-traded company that provides e-learning solutions and satellite
communications services. Mr. Shemer holds a B.A. degree in Economics and Business Administration and M.A.
degree in Economics, both from Bar-Ilan University, and complementing accounting courses at Seneca College in
Toronto, Canada.
Eli Dvora joined us in 1993 after our merger with TPC Ltd. and served as our comptroller until August
1997. From September 1997 until February 1998, Mr. Dvora was self-employed. In March 1998, Mr. Dvora
rejoined our company and in September 1999, was appointed as our vice president - operations. Mr. Dvora holds a
B.A. degree in Economics and an M.B.A. degree, both from Bar Ilan University.
Avraham Gal was appointed as our vice president and chief information officer in December 2009, as
General Manager of Kubatronik in July 2013 and as General Manager of Eltek Europe in May 2015. Mr. Gal joined
38
us in August 1986 as an industrial engineer in our shop floor control department. In 1988, Mr. Gal established our
IT department and led the adaptation of a generic ERP system to the PCB sector. Between 1994 and 2005, Mr. Gal
managed his own business, mainly in developing and implementing an ERP System for maintenance, repair and
overhaul for the aviation sector. In 2005, Mr. Gal returned to our company as chief information officer. Mr. Gal
holds a B.Sc. degree in Management and Industrial Engineering from the Technion - Israel Institute of Technology.
James Barry joined us in September 2008 as the president of Eltek USA Inc. Prior to that and from May
2003, Mr. Barry served as a consultant to us in a sales, marketing and applications engineering role. Mr. Barry has
over 30 years’ experience within the PCB industry. Mr. Barry has held management positions within engineering,
sales and operations for some major PCB producers. Mr. Barry attended Northern Essex Community College.
Axel Herrmann joined us in March 2006 as commercial manager of Kubatronik, our German subsidiary
and was appointed as general manager, Eltek Europe in August 2009. From July 2003 until February 2006, Mr.
Herrmann served as commercial manager for Heinrich Heiland GmbH, a supplier for the automotive industry. From
October 2000 until June 2003, Mr. Herrmann worked as commercial manager for Helukabel GmbH, a company that
produces and sells cables and wires. From July 1989 until September 2000, Mr. Herrmann worked at Pfisterer, a
producer of electrical devices for power plants, initially as a department head in bookkeeping, advanced to
commercial manager and his last position was managing director. Mr. Herrmann holds a B.A. degree in economics
from Hohenheim University in Stuttgart, Germany.
There are no family relationships between any of our directors and executive officers.
B.
Compensation
The following table sets forth all compensation we paid with respect to all of our directors and executive
officers as a group for the year ended December 31, 2015.
All directors and executive officers as a group ( then
consisting of 15 persons) .............................................
___________
Salaries, fees,
commissions and
bonuses
Pension, retirement
and similar benefits
$1.5 million (1)(2)(3)
$280,000
(1) The compensation amount includes $297,688 paid to our former CEO in respect of termination of his
employment.
(2) During the year ended December 31, 2015, we paid each of our external and independent directors an
annual fee of $10,030 and an attendance fee of $637 per meeting. Other directors received an annual
fee of $7,539 and an attendance fee of $279 per meeting. These fees are included in the above amount.
(3) The salaries amount includes expenses for automobiles and other benefits that we provide to certain of
our executive officers.
For as long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules
applicable to U.S. domestic companies, including the requirement to disclose information concerning the amount
and type of compensation paid to the chief executive officer, chief financial officer and the three other most highly
compensated executive officers, rather than on an aggregate basis. Nevertheless, a recent amendment to the
regulations promulgated under the Companies Law requires us to disclose the annual compensation of our five most
highly compensated officers (or all the named executive officers if there are less than five) on an individual basis,
rather than on an aggregate basis, as was previously permitted for Israeli public companies listed overseas. Under
the Companies Law regulations, this disclosure is required to be included in the notice of our annual meeting of
shareholders each year or in a public document that accompanies such notice, which we furnish to the SEC under
cover of a Report of Foreign Private Issuer on Form 6-K. The Companies Law regulations permit us to refer to a
report filed pursuant to the laws of the country in which our shares are listed for trading that includes the required
information in lieu of its inclusion in the notice of annual meeting. Because of that disclosure requirement under
Israeli law, we are including such information in this annual report, pursuant to the disclosure requirements of Form
20-F.
39
The table below reflects the compensation granted to our five most highly compensated office holders
during or with respect to the year ended December 31, 2015. All amounts reported in the table reflect the cost to the
company, as recognized in our financial statements for the year ended December 31, 2015.
Name of Officer
Position of
Officer
Holdings
Compensation for services (USD)(1)
Base salary Benefits(2) Cash
bonuses
Equity-
based
Total
compensation
Arieh Reichart Former CEO
Yitzhak Nissan Chief Executive
James Barry
Officer
President of
Eltek USA Inc
Roberto Tulman Deputy CEO
Amnon Shemer Vice President,
Finance and
Chief Financial
Officer
-
296,430(3) 1,258(3)
50.5% 278,069(4)
-
-
-
218,625
40,476
151,799
132,076
57,899
53,882
297,688
278,069
259,101
209,698
185,958
(1) Cash compensation amounts denominated in NIS were converted into U.S. dollars at the rate of NIS
3.884 per $1.00 (the average exchange rate in 2015).
(2) Benefits include car related expenses, managers' insurance and pension funds, payments to the
National Insurance Institute, advanced education funds, medical insurance, vacation allowance and
other customary benefits.
(3) paid to our former CEO in respect of termination of his employment in 2014.
(4) paid to Nistec as management fees.
C.
Board Practices
Introduction
According to the Companies Law, the role of the board of directors is to formulate a company's policy and
to supervise the chief executive officer' exercise of his roles and operations. According to our articles of association,
our chief executive officer has the power to appoint our other executive officers who, together with our chief
executive officer, are responsible for our day-to-day management. The board of directors may exercise any power
of the company which was not assigned to another organ of the company by law or by the articles of association.
The executive officers have individual duties as determined by our chief executive officer and board of directors.
Election of Directors
Our articles of association provide for a board of directors consisting of no less than three and no more than
nine members or such other number as may be determined from time to time at a general meeting of shareholders.
Our board of directors is currently composed of seven directors.
Generally, at each annual meeting of shareholders, directors are elected by a vote of the holders of a
majority of the voting power represented and voting at such meeting. All the members of our board of directors
(except the external directors as detailed below) may be reelected upon completion of their term of office. Directors
(other than external directors) may be removed earlier from office by a resolution passed at a general meeting of our
shareholders. Our board of directors may temporarily fill vacancies in the board or add to their body until the next
annual meeting of shareholders, provided that the total number of directors will not exceed the maximum number
permitted under our articles of association.
The board of directors of an Israeli public company is required to determine that at least one or more
directors will have “accounting and financial expertise,” as defined by regulations promulgated under the
40
Companies Law. Our board of directors determined, accordingly, that at least one director must have “accounting
and financial expertise.” Our board of directors has further determined that Mr. Gad Dovev (an external director
within the meaning of the Companies Law) has the requisite “accounting and financial expertise.”
We do not follow the requirements of the NASDAQ Stock Market Rules with regard to the nomination
process of directors, and instead, we follow Israeli law and practice, in accordance with which our board of directors
is authorized to recommend to our shareholders director nominees for election. See Item 16G. “Corporate
Governance.”
External and Independent Directors
External directors. Under the Companies Law, Israeli companies whose shares have been offered to the
public are required to appoint at least two external directors. The Companies Law provides that a person may not be
appointed as an external director if (i) the person is a relative of a controlling shareholder; (ii) the person, or the
person’s relative, partner, employer or an entity under that person’s control, has or had during the two years
preceding the date of appointment any affiliation with the company, or the controlling shareholder or its relative;
(iii) in a company that does not have a controlling shareholder, such person has an affiliation (as such term is
defined in the Companies Law), at the time of his appointment, to the chairman of the board of directors, chief
executive officer, a shareholder holding at least 5% of the share capital of the company or the chief financial officer;
(iv) such person is an employee of the Israeli Securities Authority or an Israeli stock exchange; and (v) such person's
relative, partner, employer, supervisor, or an entity he controls, has other than negligible business or professional
relations with any of the persons mentioned in subsection (ii) above, even if such relations are not maintained on a
regular basis. The term “relative” means a spouse, sibling, parent, grandparent, child or child, sibling or parent of
spouse or spouse of any of the above. The term “affiliation” includes an employment relationship, a material
business or professional relationship maintained on a regular and continuous basis, control and service as an office
holder excluding service as an external director of a company that is offering its shares to the public for the first
time. In addition, no person may serve as an external director if the person’s position or other activities create or
may create a conflict of interest with the person’s responsibilities as director or may otherwise interfere with the
person’s ability to serve as director. If, at the time an external director is appointed all members of the board of
directors who are not the controlling shareholders or their relatives, are of the same gender, then that external
director must be of the other gender. A director of one company may not be appointed as an external director of
another company if a director of the other company is acting as an external director of the first company at such
time.
At least one of the external directors elected must have “accounting and financial expertise” and any other
external director must have “accounting and financial expertise” or “professional qualification,” as such terms are
defined by regulations promulgated under the Companies Law. Our external director, Mr. Gad Dovev, has
“accounting and financial expertise” and our other external director, Ms. Yodfat Harel Buchris, has “professional
qualification,” as such terms are defined by regulations promulgated under the Companies Law.
External directors are elected by shareholders. The shareholders voting in favor of their election must
include at least a majority of the shares of the non-controlling shareholders (and those who do not have a personal
interest in the matter as a result of their relationship with the controlling shareholders) of the company voting on the
matter (not including abstaining votes). This majority approval requirement need not be met if the total
shareholdings of those non-controlling shareholders (and those who do not have a personal interest in the matter as a
result of their relationship with the controlling shareholders) voting against their election represent 2% or less of all
of the voting rights in the company.
External directors serve for a three-year term, which may be renewed for two additional three year periods
through one of the following mechanisms:
(i) the board of directors proposed the nominee and his appointment was approved by the shareholders in the
manner required to appoint external directors for their initial term;
(ii) a shareholder holding 1% or more of the voting rights proposed the nominee, and the nominee is
approved by a majority of the votes cast by the shareholders of the company on the matter, excluding the
votes of controlling shareholders and those who have a personal interest in the matter as a result of their
41
relationship with any controlling shareholder and excluding abstentions, provided that the aggregate votes
cast by shareholders who are not controlling shareholders and do not have a personal interest in the matter
as a result of their relationship with the controlling shareholders voted in favor of the reelection of the
nominee constitute more than 2% of the voting rights in the company, and provided further that at the
time of such nomination or in the two years preceding such nomination, such external director or his
relative are neither the shareholder who proposed such nomination, or a shareholder holding 5% or more
of the company's issued share capital or voting power, in each case who, or whose controlling shareholder
or any entity controlled by them (i) has business relations with the company, or (ii) is a competitor of the
company; or
(iii) such external director nominates himself or herself for each such additional term and his or her election is
approved at a shareholders meeting by the same disinterested majority as required for the election of an
external director nominated by a 1% or more shareholder (as described above).
External directors cannot be dismissed from office unless: (i) the board of directors determines that the
external director no longer meets the statutory requirements for holding the office, or that the external director has
breached the external director´s fiduciary duties and the shareholders vote, by the same majority required for the
appointment, to remove the external director after the external director has been given the opportunity to present his
or her position; (ii) a court determines, upon a request of a director or a shareholder, that the external director no
longer meets the statutory requirements of an external director or that the external director has breached his or her
fiduciary duties to the company; or (iii) a court determines, upon a request of the company or a director, shareholder
or creditor of the company, that the external director is unable to fulfill his or her duty or has been convicted of
specified crimes. Each committee that is authorized to exercise powers that are usually vested in the board of
directors must include at least one external director and the audit committee and compensation committee must each
include all of the external directors. An external director is entitled to compensation as provided in regulations
promulgated under the Companies Law and is otherwise prohibited from receiving any other compensation, directly
or indirectly, in connection with such service.
Ms. Yodfat Harel Buchris was elected to serve as an external director at our 2015 annual general meeting
of shareholders for a three-year term, and Mr. Gad Dovev was elected to serve as an external director at our 2014
annual general meeting for a three-year term.
Independent Directors. In general, NASDAQ Stock Market Rules require that the board of directors of a
NASDAQ-listed company have a majority of independent directors and its audit committee must have at least three
members and be comprised only of independent directors, each of whom satisfies the respective “independence”
requirements of NASDAQ and the SEC. However, on June 9, 2005, we provided NASDAQ with a notice of non-
compliance with respect to (among other things) the requirement to maintain a majority of independent directors, as
defined under NASDAQ Stock Market Rules. Instead, we follow Israeli law and practice which requires that we
appoint at least two external directors, within the meaning of the Companies Law, as previously discussed. In
addition, in accordance with the rules of the SEC and NASDAQ, we have the mandated three independent directors,
as defined by the rules of the SEC and NASDAQ, on our audit committee.
Also, pursuant to the Companies Law, a director may be qualified as an independent director if such
director is either (i) an external director; or (ii) a director who complies with the following requirements: (y) he or
she is eligible for nomination as an external director and the audit committee has approved such eligibility; and (z)
he or she has not acted as a director of the company for a period exceeding nine consecutive years. For this purpose,
a hiatus of less than two years of service will not be deemed to be an interruption in the continuation of service.
Our Audit Committee is comprised only of directors who are independent under the requirements of the
Companies Law and also meet the independence requirements under the NASDAQ and the SEC rules.
Chairman of the Board
Our articles of association provide that the chairman of the board is appointed by the members of the board of
directors. Under the Companies Law, the chief executive officer (referred to as a “general manager” under the
Companies Law) or a relative of the chief executive officer may not serve as the chairman of the board of directors
42
of a public company, and the chairman or a relative of the chairman may not be vested with authorities of the Chief
Executive Officer without shareholder approval consisting of a majority vote of the shares present and voting at a
shareholders meeting, provided that either (i) such majority includes at least two-thirds of the shares held by all
shareholders who are not controlling shareholders and do not have a personal interest in such appointment, present
and voting at such meeting; or (ii) the total number of shares of non-controlling shareholders and shareholders who
do not have a personal interest in such appointment voting against such appointment does not exceed two percent of
the aggregate voting rights in the company.
In addition, a person subordinated, directly or indirectly, to the Chief Executive Officer may not serve as
the chairman of the board of directors; the chairman of the board may not be vested with authorities that are granted
to those subordinated to the Chief Executive Officer; and the chairman of the board may not serve in any other
position in the company or a controlled company, but he may serve as a director or chairman of a subsidiary.
On October 7, 2014, our shareholders approved the appointment of our chairman of the board to also serve
as our Chief Executive Officer. This dual office term will be for three years and can be extended for additional
three-year terms, subject to shareholder approval.
Committees of the Board of Directors
Audit Committee
Under the Companies Law, the board of directors of any public company must establish an audit
committee. The audit committee must consist of at least three directors, must include all of the external directors
and must have a majority of independent directors.
The audit committee may not include the chairman of the board of directors, the controlling shareholder (or
any of the controlling shareholder's relatives), any director employed by the company or by its controlling
shareholder or by an entity controlled by the controlling shareholder, any director who regularly provides services to
the company or to its controlling shareholder or to an entity controlled by the controlling shareholder, and any
director who derives most of his or her income from the controlling shareholder. The chairman of the audit
committee must be an external director. A majority of the members of the audit committee constitutes a quorum,
provided that the majority of the members present at the meeting are independent directors (within the meaning of
the Companies Law) and at least one external director is present at the meeting.
In addition, the NASDAQ Stock Market Rules require us to establish an audit committee comprised of at
least three members, all of whom must be independent directors, each of whom is financially literate and satisfies
the respective “independence” requirements of the SEC and NASDAQ and one of whom has accounting or related
financial management expertise at senior levels within a company.
Our audit committee meets at least once each quarter. Under the Companies Law, the roles of the audit
committee are (i) to identify deficiencies in the management of our business, including in consultation with the
internal auditor and our independent auditors, and to suggest appropriate courses of action to amend such
deficiencies; (ii) to define whether certain acts and transactions that involve conflicts of interest are material or and
to define whether transactions that involve interested parties are extraordinary or not, and to approve such
transactions (which may be approved according to certain criteria set out by our audit committee on an annual
basis); (iii) to establish procedures to be followed in respect of related party transactions with a controlling
shareholder (where such are not extraordinary transactions), which may include, where applicable, the establishment
of a competitive process for such transaction, under the supervision of the audit committee, or individual, or other
committee or body selected by the audit committee, in accordance with criteria determined by the audit committee;
(iv) to determine whether to approve related party transactions, that are subject to the audit committee's approval
according to the Companies Law; (v) to determine procedures for approving certain related party transactions with a
controlling shareholder, which having been determined by the audit committee not to be extraordinary transactions,
were also determined by the audit committee not to be negligible transactions; (vi) in companies where the internal
auditor's work plan is subject to Board of Directors approval, to examine and propose revisions to the internal
auditor's work plan before it is presented to the Board of Directors; (vii) to examine the performance of our internal
auditor and whether he is provided with the required resources and tools necessary for him to fulfill his role,
43
considering, among others, the company’s size and special needs, and to review his annual plan and approve it
should the company's articles of association require the approval of the Board for such plan; (viii) to oversee and
approve the retention, performance and compensation of our independent auditors and to establish and oversee the
implementation of procedures concerning our systems of internal accounting and auditing control; and (ix) to set
procedures for handling of complaints made by company’s employees in connection with management deficiencies
and the protection to be provided to such employees.
The audit committee may consult from time to time with our independent auditors and internal auditor with
respect to matters involving financial reporting and internal accounting controls.
In the event the audit committee has discovered a material deficiency in the company’s business operations,
it must hold at least one meeting regarding such deficiency, at which the internal auditor or the independent
accountants must be present and in which office holders who are not members of the audit committee may not
participate, except for the presentation of their position.
Our audit committee consists of three members of our board of directors who satisfy the respective
requirements of the SEC, NASDAQ and Israeli law for the composition of the audit committee. Our audit
committee is currently composed of Messrs. Dovev (Chairman), Marmorstein and Ms. Harel Buchris.
Compensation Committee
Effective December 2012, Israeli law requires our Board of Directors to appoint a compensation committee
which must be comprised of at least three directors, including all of the external directors, which shall be a majority
of the members of the compensation committee and one of whom must serve as chairman of the committee.
However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as
NASDAQ, and who do not have a controlling party, do not have to meet this majority requirement; provided,
however, that the compensation committee meets other Companies Law composition requirements, as well as the
requirements of the non-Israeli jurisdiction where the company’s securities are traded. Other than the external
directors, the rest of the members of the compensation committee shall be directors who will compensation for their
role as directors only in accordance with Companies Law regulations applicable to the compensation of external
directors, or amounts paid pursuant to indemnification and/or exculpation contracts or commitments and insurance
coverage.
On January 9, 2014, our shareholders approved a compensation policy for our company. The
compensation policy must be approved every three years by our compensation committee, board of directors and
shareholders, voting with a special majority (in that order). The compensation policy is based on and references
certain matters and provisions set forth in the Companies Law, which include: (i) promoting our company’s goals,
work plan and policy with a long-term view; (ii) creating appropriate incentives for our company’s office holders,
considering, among other things, our company’s risk management policy; (iii) our company’s size and nature of
operations; and (iv) with respect to variable elements of compensation (such as annual cash bonuses), the office
holder’s contribution to achieving company objectives and maximization of our company’s profits, with a long-term
view and in accordance with his or her position. For further details, see our proxy statement for a special general
meeting held on January 9, 2014, which we furnished to the SEC on December 5, 2013 under Form 6-K.
Our compensation committee is currently composed of Ms. Harel Buchris and Messrs. Marmorstein and
Dovev.
Banking Committee
In March 2014, our Board of Directors established a banking committee, which was authorized to adopt
resolutions on behalf of the Board of Directors in respect of banking activities, including opening of new accounts
and signing credit agreements of up to $9 million. Our banking committee is currently composed of Mr. Nissan and
Mr. Dovev.
44
Internal Audit
The Companies Law also requires the Board of Directors of a public company to appoint an internal auditor
nominated by the audit committee. The internal auditor must meet certain statutory requirements of independence.
The role of the internal auditor is to examine, among other things, the compliance of the company’s conduct with
applicable law and orderly business practice.
Mr. Gali Gana, Certified Public Accountant (Israel), has resigned his position as our internal auditor in
February 2016 in circumstances not involving any disagreements with management. We appointed Doron Cohen of
Fahn Kanne as our new internal auditor commencing March 2016.
Directors’ Service Contracts
There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and
any of our directors, on the other hand, providing for benefits upon termination of their employment or service as
directors of our company or any of our subsidiaries.
Exculpation, Indemnification and Insurance of Directors and Officers
Exculpation of Office Holders
The Companies Law provides that an Israeli company cannot exculpate an office holder from liability with
respect to a breach of his or her duty of loyalty. If permitted by its articles of association, a company may exculpate
in advance an office holder from his or her liability to the company, in whole or in part, with respect to a breach of
his or her duty of care. However, a company may not exculpate in advance a director from his or her liability to the
company with respect to a breach of his duty of care with respect to distributions.
Our articles of association allow us to exculpate any office holder from his or her liability to us for breach
of duty of care, to the maximum extent permitted by law, before or after the occurrence giving rise to such liability.
We provided an exemption letter to each of our directors and officers, and agreed to provide the same to our future
office holders.
Insurance of Office Holders
The Companies Law provides that a company may, if permitted by its articles of association, enter into a
contract to insure office holders in respect of liabilities incurred by the office holder with respect to an act or
omission performed in his or her capacity as an office holder, as a result of: (i) a breach of the office holder’s duty of
care to the company or to another person; (ii) a breach of the office holder’s duty of loyalty to the company,
provided that the office holder acted in good faith and had reasonable grounds to assume that his or her act would
not prejudice the company’s interests; and (iii) a monetary liability imposed upon the office holder in favor of
another person.
Our articles of association provide that, subject to any restrictions imposed by applicable law, we may
procure, and/or undertake to procure, insurance covering any past or present or future office holder against any
liability which he or she may incur in such capacity, including insurance covering us for indemnifying such office
holder, to the maximum extent permitted by law.
Without derogating from the above, we may enter into a contract to insure the liability of an office holder
for an obligation imposed on such office holder in consequence of an act or omission done in such office holder’s
capacity as an office holder, in the following case: (i) expenses, including reasonable litigation expenses and legal
fees, incurred by the office holder as a result of a proceeding instituted against such office holder in relation to (A)
infringements that may result in imposition of financial sanction pursuant to the provisions of Chapter H'3 under the
Israeli Securities Law, 5728-1968 (as amended), or the “Securities Law”, or (B) administrative infringements
pursuant to the provisions of Chapter H'4 under the Securities Law or (C) infringements pursuant to the provisions
of Chapter I'1 under the Securities Law; and (ii) payments made to the injured parties of such infringement under
Section 52ND(a)(1)(a) of the Securities Law.
45
Indemnification of Office Holders
The Companies Law provides that a company may, if permitted by its articles of association, indemnify an
office holder for liabilities or expenses imposed on him or her, or incurred by him or her concerning acts or
omissions performed by the office holder in such capacity for: (i) a monetary liability imposed on the office holder
in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court; (ii)
reasonable litigation expenses, including attorney’s fees, incurred by the office holder as a result of an investigation
or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding
concluded without the filing of an indictment against the office holder or the imposition of any monetary liability in
lieu of criminal proceedings, or concluded without an indictment against the office holder but with the imposition of
a monetary liability on the office holder in lieu of criminal proceedings with respect to a criminal offense that does
not require proof of criminal intent; and (iii) reasonable litigation expenses, including attorneys’ fees, incurred by
the office holder or which were imposed on him or her by a court, in an action instituted by the company or on the
company’s behalf, or by another person, against the office holder, or in a criminal charge from which the office
holder was acquitted, or in a criminal proceeding in which the office holder was convicted of a criminal offense
which does not require proof of criminal intent.
The Companies Law provides that a company’s articles of association may permit the company to
indemnify an office holder following a determination to this effect made by the company after the occurrence of the
event in respect of which the office holder will be indemnified. It also provides that a company’s articles of
association may permit the company to undertake in advance to indemnify an office holder, except that with respect
to a monetary liability imposed on the office holder by any judgment, settlement or court-approved arbitration
award, the undertaking must be limited to types of events which the company’s board of directors deems foreseeable
considering the company’s actual operations at the time of the undertaking, and to an amount or standard that the
board of directors has determined as reasonable under the circumstances.
Our articles of association provide that we may indemnify an office holder retroactively for certain
obligations or expenses imposed on such office holder in consequence of an act or omission done in such office
holder’s capacity as an officer in our company. These obligations and expenses include:
i.
ii.
iii.
iv.
v.
a monetary obligation imposed on the office holder in favor of another person pursuant to a
judgment, including a judgment given in settlement or an arbitrator's award that has been approved
by a court;
reasonable litigation expenses, including advocates’ professional fees, incurred by the office
holder pursuant to an investigation or a proceeding commenced against the office holder by a
competent authority and that was terminated without an indictment and without having a monetary
charge imposed on the office holder in exchange for a criminal procedure (as such terms are
defined in the Companies Law), or that was terminated without an indictment but with a monetary
charge imposed on the office holder in exchange for a criminal procedure in a crime that does not
require proof of criminal intent or in connection with a financial sanction;
reasonable litigation expenses, including advocates’ professional fees, incurred by the office
holder or which the office holder is ordered to pay by a court, in proceedings filed against the
office holder by the company or on its behalf or by another person, or in a criminal indictment in
which the office holder is acquitted, or in a criminal indictment in which the office holder is
convicted of an offence that does not require proof of criminal intent;
expenses, including reasonable litigation expenses and legal fees, incurred by an office holder as a
result of a proceeding instituted against such office holder in relation to (A) infringements that
may result in imposition of financial sanction pursuant to the provisions of Chapter H'3 under the
Securities Law or (B) administrative infringements pursuant to the provisions of Chapter H'4
under the Securities Law or (C) infringements pursuant to the provisions of Chapter I'1 under the
Securities Law; and
payments to an injured party of infringement under Section 52ND(a)(1)(a) of the Securities Law.
46
Our articles of association also provide that we may undertake to indemnify in advance an office holder, in
accordance with the conditions set under applicable law, in respect of the obligations or expenses specified in (i)-(v)
above, provided that such undertaking is limited to types of events which in the board of directors’ opinion may be
anticipated, in light of our company’s activities, at the time of granting the indemnity undertaking, and to an amount
or criteria which the board of directors determines is reasonable in the circumstances of the case, both of which are
to be specified in the indemnification undertaking.
According to our compensation policy, the total amount of indemnification that our company undertakes
towards all persons whom it has resolved to indemnify, jointly and in the aggregate, shall not exceed an amount
equal to $2 million but in no event more than 25% of the net equity of our company.
Limitations on Exculpation, Insurance and Indemnification
The Companies Law provides that neither a provision of the articles of association permitting the company
to enter into a contract to insure the liability of an office holder, nor a provision in the articles of association or a
resolution of the board of directors permitting the indemnification of an office holder, nor a provision in the articles
of association exempting an office holder from duty to the company shall be valid, where such insurance,
indemnification or exemption relates to any of the following: (i) a breach by the office holder of his duty of loyalty,
except with respect to insurance coverage or indemnification if the office holder acted in good faith and had
reasonable grounds to assume that the act would not prejudice the company; (ii) a breach by the office holder of his
duty of care if such breach was committed intentionally or recklessly, unless the breach was committed only
negligently; (iii) any act or omission committed with intent to derive an unlawful personal gain; and (iv) any fine or
forfeiture imposed on the office holder.
Under the Companies Law, exculpation of, procurement of insurance coverage for, and an undertaking to
indemnify or indemnification of, an office holder (other than the chief executive officer) must be approved by the
company’s compensation committee and board of directors and, if such office holder is a director, also by the
company’s shareholders. Exculpation of, procurement of insurance coverage for, and an undertaking to indemnify
or indemnification of, the chief executive officer must be approved by the company’s compensation committee,
board of directors and by a special majority of the shareholders.
We have agreed to indemnify our office holders for certain liabilities and expenses that may be imposed on
them due to acts performed, or failures to act, in their capacity as office holders as defined in the Companies Law,
including financial liabilities imposed by judgments or settlements in favor of third parties, and reasonable litigation
expenses imposed by a court in relation to criminal charges from which the indemnitee was acquitted or criminal
proceedings in which the indemnitee was convicted of an offense that does not require proof of criminal intent, all
subject to Israeli law and certain limitations in the agreements. The aggregate amount we may pay our office
holders pursuant to our indemnification undertaking may not exceed, jointly and in the aggregate, $2 million but in
any event not more than 25% of our company’s net equity. We currently maintain directors and officers liability
insurance with a per claim and aggregate coverage limit of $10 million. Under our current directors and officers
liability insurance policy, losses will be paid in accordance with the following order of priority: first, on behalf of
officers and directors, for all loss that they will be obligated to pay as a result of a claim made against them;
thereafter, on our behalf, for all loss that an officer or director will be obligated to pay as a result of a claim made
against them, to the extent that we are required or permitted by law to indemnify our officers and directors; and
thereafter, on our behalf, for all loss that we will be obligated to pay as a result of a securities claim made against us.
D.
Employees
As of December 31, 2015, we employed 349 full-time employees in Israel, of which 222 were employed in
manufacturing services, 41 in process and product engineering, 51 in quality assurance and control, 16 in sales and
marketing and 19 in finance, accounting, information service and administration. As of December 31, 2014, we
employed 325 full-time employees in Israel, of which 208 were employed in manufacturing services, 39 in process
and product engineering, 43 in quality assurance and control, 13 in sales and marketing and 22 in finance,
accounting, information service and administration. As of December 31, 2013, we employed 345 full-time
employees in Israel, of which 220 were employed in manufacturing services, 40 in process and product engineering,
47
46 in quality assurance and control, 15 in sales and marketing and 24 in finance, accounting, information service and
administration.
In addition, Kubatronik, our subsidiary in Germany, employed 37 full-time employees and 4 part-time
employees as of December 31, 2015, 38 full-time employees and 2 part-time employees as of December 31, 2014,
and 44 full-time employees and five part-time employees as of December 31, 2013.
Eltek USA, a wholly-owned Delaware subsidiary, employed 3 full-time employees as of December 31,
2015, 2014 and 2013.
Our relationships with our employees in Israel are governed by Israeli labor law, extension orders of the
Israeli Ministry of Economy and Industry and personal employment agreements. We are subject to various Israeli
labor laws, general collective bargaining agreements entered into, from time to time, between the Histadrut and the
Manufacturers Association, as well as specific and local agreements and arrangements. Such laws, agreements, and
arrangements cover the wages and employment conditions of our employees, including length of the workday,
minimum daily wages for professional workers, contribution to pension fund, insurance for work related accidents,
procedures for dismissing employees, determination of severance pay, benefit programs and annual leave. We
generally provide our Israeli employees with benefits and working conditions beyond the minimums required by
law.
In November 2011, we were notified by the Histadrut that more than one-third of our employees in Israel
had decided to join the Histadrut and that they have established an employees’ union committee. In 2012, a
significant portion of our employees decided to resign their membership in the Histadrut, which then ceased to
represent our employees.
In addition, certain of our officers, key employees and other employees are party to individual employment
agreements. We have entered into a non-disclosure and non-competition agreement with some of our executive
officers. All of our officers and employees are subject to confidential and proprietary information provisions set
forth in our Code of Business Conduct and Ethics.
Pursuant to Israeli law, we are legally required to pay severance benefits upon certain circumstances,
including the retirement or death of an employee or the termination of employment of an employee without due
cause, equivalent to a one month salary for each year of employment with the company. Most of our employees are
covered by pension plans providing customary benefits including retirement and severance benefits. Some of our
employees are covered by life and pension insurance policies providing similar benefits. We contribute 8.33% of
base salaries to the employees’ pension funds or life pension insurance policies to cover our liability for severance
pay. Pursuant to Section 14 of the Israeli Severance Pay Law, 5729-1963, if a company contributes to an
employee’s pension fund or severance fund, then the employee is entitled only to the severance amounts
accumulated in such fund(s) upon resignation from the company or termination by the company, and the company is
not obligated to make additional payments to the employee upon termination of employment with the company.
With respect to pension benefits, we contribute between 6.0% to 7.5% of base salaries to the employees’
pension plans and between 6.2% to 7.5% to those employees who have life insurance policies. The employees who
have pension plans contribute between 5.5% to 7.0% of base salaries to their pension plans, and the employees who
have life insurance policies contribute 5.0% of their base salaries to their policies. In addition, we contribute 8.33%
for severance pay into the employees' life insurance policies, pension plans or similar funds of their choice.
We also contribute between 1% to 7.5% of base salaries to certain “professional advancement” funds for
managers, engineers and certain others and such employees have to match one third of such contribution, up to 2.5%
of their base salaries.
Israeli employers and employees are required to pay predetermined sums to the National Insurance Institute
of Israel, which is similar to the United States Social Security Administration. Subject to minimum thresholds, the
employer contribution to the National Insurance Institute is at the rate of 7.5% of the salary (7.25% in 2015) and the
employee contribution to the National Insurance Institute is at the rate of 12.0% of the salary (of which 5% relates to
payments for national health insurance), both of which are limited to a maximum salary of NIS 43,240
(approximately $11,140) in 2015, the same as in 2014 and 2013. In the year ended December 31, 2015, our
48
aggregate payments as an employer to the National Insurance Institute amounted to approximately 4.4% of the
salaries.
E.
Share Ownership
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information as of March 22, 2016 regarding the beneficial ownership
of our ordinary shares by our directors and executive officers and all of our executive officers and directors as a
group:
Name
Yitzhak Nissan*
Number of
Ordinary
Shares
Beneficially
Owned
5,122,095
Percentage
of
Outstanding
Ordinary
Shares
50.5%
All executive officers and directors as a group (19 persons)*
5,122,095
50.5%
__________
* Except for Mr. Nissan, none of our directors or executive officers held any ordinary shares or options.
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
The following table sets forth certain information as of March 22, 2016 regarding the beneficial ownership
by all shareholders known to us to own beneficially 5% or more of our ordinary shares:
Name
Nistec Ltd. (3)
Yitzhak Nissan (3)
Number of Ordinary Shares
Beneficially Owned (1)
5,122,095
5,122,095
Percentage
of Ownership (2)
50.5%
50.5%
___________
(1)
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Ordinary shares relating to options or
convertible notes currently exercisable or exercisable within 60 days of the date of this table are
deemed outstanding for computing the percentage of the person holding such securities but are not
deemed outstanding for computing the percentage of any other person. Except as indicated by
footnote, and subject to community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares shown as beneficially
owned by them.
The percentages shown are based on 10,142,762 ordinary shares issued and outstanding as of
March 22, 2016.
Nistec Ltd. is an Israeli private company controlled by Yitzhak Nissan. Accordingly, Mr. Nissan
may be deemed to be the beneficial owner of the ordinary shares held directly by Nistec.
(2)
(3)
49
Significant Changes in the Ownership of Major Shareholders
On August 19, 2013, we entered into an agreement to issue and sell 3,532,655 ordinary shares of our
company, nominal value NIS 0.6 each, to Nistec for $4.2 million. Nistec is controlled by Yitzhak Nissan, who
beneficially owns all of the shares owned by Nistec. Also on August 19, 2013, Nistec purchased 1,589,440 of our
ordinary shares from Merhav M.N.F. Ltd., which at the time held 24.1% of our outstanding ordinary shares. The
total consideration paid by Nistec in the two transactions was $6.5 million. Nistec obtained a portion of those funds
from a loan extended by Bank Leumi Le’Israel, and the shares that Nistec acquired constitute collateral for the loan.
As a result of these transactions, which were closed on November 1, 2013, Nistec acquired 50.5% of our
ordinary shares, which constitute 50.5% of our issued share capital on a fully diluted basis, and Nistec gained
control of our company. Several of our directors resigned, and four new directors were nominated and elected,
including Yitzhak Nissan, who was elected Chairman of our Board of Directors. We also approved compensation
terms for the directors, indemnification agreements between our company and our new directors, granted
exculpation letters to our directors and officers, granted waiver and release letters to our then-current directors and
officers, and purchased a run-off insurance policy for our then-current directors and officers. We also amended our
Articles of Association along with our issuance of the shares to Nistec. Nistec and Yitzhak Nissan have the shared
power to vote, dispose of, direct the vote of, and direct the disposition of the 5,122,095 ordinary shares of our
company beneficially owned by Nistec.
Major Shareholders Voting Rights
Our principal shareholders do not have different voting rights attached to their ordinary shares.
Record Holders
Based on the information provided to us by our transfer agent, as of March 21, 2016, there were 12 holders
of record of our ordinary shares, of which 8 record holders holding approximately 0.16% of our ordinary shares had
registered addresses in the United States. These numbers are not representative of the number of beneficial holders
of our shares nor are they representative of where such beneficial holders reside, since many of our ordinary shares
were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held
approximately 49.2% of our outstanding ordinary shares as of such date).
B.
Related Party Transactions
Until November 2013, our former principal shareholder Mr. Josef Maiman (through entities under his
control) owned Gadot, one of our major raw material suppliers. From January 1, 2013 through October 31, 2013 we
purchased raw materials from Gadot in the aggregate amount of $3.4 million. As of December 31, 2013, Gadot was
no longer a related party. Our transactions with Gadot were carried out on an arm’s-length basis.
In connection with our investment agreement signed in August 2013 with Nistec for Nistec’s acquisition of
a controlling stake in our company, we entered into several transactions with Nistec and undertook several
undertakings in favor of Mr. Yitzhak Nissan, who is the owner of Nistec, and other directors who were elected
pursuant to Nistec’s acquisition of a controlling interest in our company. These transactions and undertakings
included, among others:
• A registration rights agreement with Nistec;
• A management agreement with Nistec;
• A finder’s fee paid to Merhav M.N.F. Ltd.; and
• Approvals of compensation, indemnification, exculpation, waiver and release, run-off
insurance, and directors’ and officers’ insurance policies, in favor of directors and officers of
our company.
50
For details regarding these transactions, see the proxy statement we furnished to the SEC under Form 6-K
on September 12, 2013.
On April 27, 2014 our Audit Committee and Board of Directors approved: (i) our engagement with Nistec
in a shared insurance purchase transaction; and (ii) the distribution of costs of a shared insurance consultant. For
details regarding these transactions, see the notice regarding purchase of joint insurance with Nistec furnished to the
SEC under Form 6-K on May 27, 2014.
The Companies Law requires that extraordinary transactions of a company with its controlling shareholders
shall be subject to shareholder approval at a special majority. Under a recent amendment to the Companies Law, the
Audit Committee is required to classify a related party transaction as extraordinary, ordinary or negligible. The
classification can be based on pre-set parameters that shall apply for a one year term. On June 30, 2014 and on July
3, 2014, the Audit Committee and the Board of Directors, respectively, approved such parameters that shall be used
for the classifications of transactions of our company with Nistec, as ordinary or negligible transactions.
On October 27, 2015, our shareholders approved five related party transactions, following approval by our
Audit Committee and Board of Directors:
(i) the employment of Ms. Cohen-Tzemach, the daughter of our Chairman, Chief Executive Officer and
controlling shareholder, as an assistant to the Chief Executive Officer;
(ii) an Imported PCB Purchase Agreement with Nistec;
(iii) a PCB Purchase Procedure with Nistec;
(iv) a Soldering and Assembly Services Procedure with Nistec; and
(v) terms and conditions for sharing expenses with Nistec.
For details regarding these transactions, see the notice furnished to the SEC under Form 6-K on September 16, 2015.
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
See the consolidated financial statements, including the notes thereto, and the exhibits listed in Item 18
hereof.
Legal Proceedings
From time to time we are involved in legal proceedings arising from the operation of our business. Based
on the advice of our legal counsel, management believes that except for the proceedings discussed below, such
current proceedings, if any, will not have a material adverse effect on our financial position or results of operations.
Environmental Related Matters
In January 2014, July 2014 and September 2015, we received notices from Meitav, the water company of
the Petach Tikva municipality, requiring payment of fees totaling NIS 3.8 million ($980,000) excluding VAT, for
discharges of industrial wastewater allegedly not meeting the applicable standards into the municipal sewage
system. The payment demands were made on the basis of several samplings conducted by Meitav in our premises
during 2013-2015. We presented to Meitav our plans for a new wastewater treatment facility, in an effort to have
Meitav rescind or reduce its demand for payment. Our management believes that that we have good arguments
51
against such demand for payment and that we will not be required to pay to Meitav any amounts exceeding the
amounts provided for in our financial statements. In December 2015, our new wastewater treatment facility was
completed. The first sample of our plant's wastewater that was tested by the Ministry in January 2016, indicated that
we were in compliance with the environmental laws and regulations.
If we are found to be in violation of environmental laws, then in addition to fees, we could be liable for
damages, costs of remedial actions and a range of potential penalties, and could also be subject to revocation of
permits necessary to conduct our business or any part thereof. Any such liability or revocation could have a material
adverse effect on our business, financial condition and results of operations.
In connection with the change of control of our company that resulted from Nistec’s acquisition of a
controlling stake in our company, Israeli law requires us to obtain a new business permit in order to continue
operating our business. We have submitted an application for this permit, but we have not yet received the new
permit. The new permit is expected to be subject to certain conditions, especially certain conditions imposed by the
Israeli Ministry for Environmental Protection. Compliance with these conditions may be costly.
In October 2015, we filed an application for an emissions permit with the Ministry. In January 2016, we
received notice of non-compliance from the Ministry, stating that the application was incomplete, and that we are in
breach of the Clean Air Law, 5768-2008 and the Licensing of Businesses Law, 5728-1968. Following
communications with the Ministry, we committed to submit an amended application by April 2016
Employee Related Matters
Three lawsuits were filed against us in May 2008, in December 2014 and in August 2015 by three
employees alleging that they had suffered personal injuries during their employment with us and are seeking
aggregate financial compensation of approximately $173,000 for past damages and additional amounts for future
lost income, pain and suffering as the court may determine.
Four other employees notified us between January 2011 and July 2013 that they allegedly suffered personal
injuries during their employment with us. Of these four employees, one is seeking compensation of $150,000 and
the others did not state their claim amount. We submitted the claims to our insurance company, which informed us
that it is reviewing the statements of claim without prejudicing its rights to deny coverage.
In September 2015, in November 2015, in January 2016, and in February 2016, four former employees
filed law suits seeking additional payments in connection with their employment with the company and subsequent
termination. The aggregate amount claimed is approximately $1.0 million.
Software License
A supplier of one of our software packages asked to conduct an audit of our operation to verify that we are
not in breach of any intellectual property rights he allegedly owns. We believe that we have fully, diligently and
timely complied with our obligation toward the supplier. We also believe that the supplier has no right to conduct
any audit of our products or services and such audit may cause us to breach confidentiality obligations to other
entities. If a claim is made and we are found to be in violation of such supplier's intellectual property rights, we
could be liable for compensation and costs of an unknown amount. Such liability could have a material adverse
effect on our business, financial condition and results of operations.
Dividend Distribution Policy
We have never declared or paid any cash dividends to our shareholders. We currently intend to retain
future earnings for use in our business and do not anticipate paying cash dividends on our ordinary shares in the
foreseeable future. Any future dividend policy will be determined by our board of directors and will be based upon
conditions then existing, including our results of operations, financial condition, current and anticipated cash needs,
contractual restrictions and other conditions.
According to the Companies Law, a company may distribute dividends out of its profits provided that there
is no reasonable concern that such dividend distribution will prevent the company from paying all its current and
52
foreseeable obligations, as they become due. Notwithstanding the foregoing, dividends may be paid even if not out
of profits, with the approval of a court, provided that there is no reasonable concern that such dividend distribution
will prevent the company from satisfying its current and foreseeable obligations, as they become due. Profits, for
purposes of the Companies Law, means the greater of retained earnings or earnings accumulated during the
preceding two years, after deducting previous distributions that were not deducted from the surpluses. In the event
cash dividends are declared, such dividends will be paid in NIS.
B.
Significant Changes
None.
ITEM 9.
THE OFFER AND LISTING
A.
Offer and Listing Details
Annual Stock Information
The following table sets forth, for each of the years indicated, the high and low market prices of our
ordinary shares on the NASDAQ Capital Market:
Year
2011...............................................................................
2012...............................................................................
2013...............................................................................
2014...............................................................................
2015...............................................................................
High
$1.85
$1.69
$3.95
$2.87
$1.65
Low
$0.91
$0.87
$1.07
$1.14
$0.81
Quarterly Stock Information
The following table sets forth, for each of the full financial quarters in the two most recent full financial
years and any subsequent period, the high and low market prices of our ordinary shares on the NASDAQ Capital
Market:
High
Low
2014
First Quarter ................................................................. .
Second Quarter ..............................................................
Third Quarter ................................................................ .
Fourth Quarter ...............................................................
2015
First Quarter ................................................................. .
Second Quarter ..............................................................
Third Quarter ................................................................ .
Fourth Quarter ...............................................................
$2.87
$2.44
$1.78
$2.35
$1.30
$1.21
$1.39
$1.65
$2.18
$1.26
$1.40
$1.14
$1.02
$0.84
$0.81
$1.08
2016
First Quarter (through March 21, 2016) ....................... .
$1.34
$1.05
53
Monthly Stock Information
The following table sets forth, for each of the most recent six months, the high and low market prices of our
ordinary shares on the NASDAQ Capital Market:
Month
October 2015 .................................................................
November 2015 .............................................................
December 2015 .............................................................
January 2016 .................................................................
February 2016 ...............................................................
March 2015 (through March 21, 2016) .........................
High
$1.26
$1.65
$1.35
$1.27
$1.29
$1.34
Low
$1.08
$1.15
$1.19
$1.09
$1.05
$1.23
B.
Plan of Distribution
Not applicable.
C.
Markets
Our ordinary shares were listed on the NASDAQ National Market from our initial public offering on
January 22, 1997 until May 19, 1999, at which date the listing of our ordinary shares was transferred to the
NASDAQ Capital Market (symbol: ELTK).
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expense of the Issue
Not applicable.
ITEM 10.
ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
Set out below is a description of certain provisions of our memorandum of association and articles of
association and of the Companies Law related to such provisions. This description is only a summary and does not
purport to be complete and is qualified by reference to the full text of the memorandum of association and articles of
association, which are incorporated by reference as exhibits to this Annual Report, and to Israeli law.
Purposes and Objects of the Company
We are registered with the Israeli Registrar of Companies and have been assigned company number 52-
004295-3. Section 2 of our memorandum of association provides that we were established for the purpose of
54
engaging in the business of developing, manufacturing, producing, vending, importing, exporting, supplying,
distributing and dealing in printed, multi-layer, flexible, thick film, hybrid and integrated circuits, components or
portions thereof, processes for making the same and related products. In addition, the purpose of our company is to
perform various corporate activities permissible under Israeli law.
The Powers of the Directors
Under the provisions of the Companies Law and our articles of association, a director cannot vote on a
proposal, arrangement or contract in which he or she is has personal interest in, nor be present in the discussion
relating to such transaction is considered. In addition, our directors' compensation is approved through special
procedures prescribed in the Companies Law. In general, with respect to a director’s compensation, approval is
required by the (i) compensation committee; (ii) board of directors; and (iii) company’s shareholders with a regular
majority (in that order).
The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in
the same manner as any other transaction by us.
Under our articles of association, the service of directors in office is not subject to any age limitation and
our directors are not required to own shares in our company in order to qualify to serve as directors.
Rights Attached to Shares
Our authorized share capital consists of NIS 30,000,000 divided into 50,000,000 ordinary shares, nominal
value of NIS 0.6 each. All outstanding ordinary shares are validly issued, fully paid and non-assessable. The rights
attached to the ordinary shares are as follows:
Dividend rights. Holders of our ordinary shares are entitled to the full amount of any cash or share
dividend subsequently declared. The board of directors may declare interim dividends and propose the final
dividend with respect to any fiscal year only out of its profits, as defined under the Companies Law. See Item 8A.
“Financial Information – Consolidated and Other Financial Information – Dividend Distributions Policy.” If after
30 days a dividend has been declared and it is still unclaimed, the dividend may be invested or otherwise used by us
for our own account, as we deem fit, until such dividend is claimed; and we will not be deemed a trustee in respect
thereof. We are not obliged to pay, and may not pay interest on declared but unpaid dividends if the shareholders
entitled to such dividends fail to collect the same or to provide us the necessary information for the payment thereof,
or if we are for any other reason unable to pay the dividend to such shareholder.
Voting rights. Holders of ordinary shares have one vote for each ordinary share held on all matters
submitted to a vote of shareholders. Such voting rights may be affected by the grant of any special voting rights to
the holders of a class of shares with preferential rights that may be authorized in the future.
Unless otherwise required by law or our articles of association, all resolutions require approval of no less
than a majority of the voting rights represented at the meeting in person or by proxy and voting thereon.
Generally, at each annual meeting of shareholders, directors are elected by a vote of the holders of a
majority of the voting power represented and voting on the matter. All the members of our board of directors
(except our external directors) may be reelected upon completion of their term of office. For information regarding
the election of our external directors, see Item 6C. “Directors, Senior Management and Employees – Board Practices
– External and Independent Directors.”
Rights to share in our profits. Our shareholders have the right to share in our profits distributed as a
dividend and any other permitted distribution. See this Item 10B. “Additional Information – Memorandum and
Articles of Association – Rights Attached to Shares – Dividend Rights.”
Rights to share in surplus in the event of liquidation. In the event of our liquidation, after satisfaction of
liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to the nominal
55
value of their holdings. This right may be affected by the grant of preferential dividend or distribution rights to the
holders of a class of shares with preferential rights that may be authorized in the future.
Changing Rights Attached to Shares
According to our articles of association, in order to change the rights attached to any class of shares, such
change must be adopted by a resolution in writing by the holders of the majority of the issued shares of such class or
by an ordinary resolution at a separate general meeting of the holders of the affected class.
Annual and Extraordinary Meetings of Shareholders
The board of directors must convene an annual general meeting of shareholders at least once every calendar
year, within 15 months of the last annual meeting. Depending on the matter to be voted upon, notice of at least 21
days or 35 days prior to the date of the meeting is required. In addition, the board of directors must convene a
special general meeting of the shareholders upon the demand of any of: (1) two of the directors; (ii) 25% of the
nominated directors; (iii) one or more shareholders holding at least 5% of our company's issued and outstanding
share capital and at least 1% of the voting power in the company; or (iv) one or more shareholders holding at least
5% of the voting power in our company. See this Item 10B. “Additional Information - Memorandum and Articles of
Association- Rights Attached to Shares-Voting Rights.”
The quorum required for a shareholders meeting consists of at least two shareholders present in person or
represented by proxy who hold or represent, in the aggregate, at least one third of the voting rights of the issued
share capital. A meeting adjourned for lack of a quorum is adjourned by seven business days, at the same time and
place, or any later time and place as the board of directors designate in a notice to the shareholders. The requisite
quorum at an adjourned general meeting will be: (i) if the original meeting was convened upon requisition by
shareholders pursuant to the Companies Law - the number of shareholders holding the minimum number of voting
shares necessary to make such requisition, present in person or by proxy; and (ii) in any other event - one or more
shareholders, present in person or by proxy, holding at least one share. We do not follow the requirements of the
NASDAQ Stock Market Rules regarding the quorum at shareholder meetings. See Item 16G. “Corporate
Governance.”
Limitations on the Rights to Own Securities in Our Company
Neither our memorandum of association nor our articles of association nor the laws of the State of Israel
restrict in any way the ownership or voting of shares by non-residents, except with respect to subjects of countries
that are in a state of war with Israel.
Provisions Restricting Change in Control of Our Company
Full Tender Offer. A person wishing to acquire shares of a publicly traded Israeli company who would as a
result hold over 90% of the company’s issued and outstanding share capital, or of a certain class of shares, is
required by the Companies Law to make a full tender offer to all of the company’s shareholders for the purchase of
all of the remaining issued and outstanding shares of the company, or the class of shares, as the case may be. If: (i)
the shareholders who do not accept the offer hold less than 5% of the issued share capital of the company, or of the
relevant class of shares, and the majority of shareholders having no personal interest in the offer accepted it; or (ii)
shareholders who do not accept the offer hold less than 2% of the issued share capital of the company; then all of the
shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However, the
shareholders may petition the court to determine the consideration for the acquisition if the consideration is less than
the shares’ fair value (unless the acquirer has specified in the tender offer that any shareholder tendering his shares
will not be entitled to such appraisal rights). If the dissenting shareholders hold more than 5% of the issued and
outstanding share capital of the company, or of the relevant class of shares, as the case may be, the acquirer may not
acquire additional shares of the company from shareholders who accepted the tender offer if following such
acquisition the acquirer would own over 90% of the company’s issued and outstanding share capital, or of the
relevant class of shares.
Special Tender Offer. The Companies Law provides that an acquisition of control bloc of shares in a public
Israeli company must be made by means of a special tender offer if as a result of the transaction the acquirer could
56
become a holder of 25% or more of the voting rights in the company, unless one of the exemptions in the
Companies Law (as described below) is met. This rule does not apply if there is already another holder of at least
25% of the voting rights in 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 could become
a holder of more than 45% of the voting rights in the company, if there is no other shareholder of the company who
holds more than 45% of the voting rights in the company, unless one of the exemptions in the Companies Law is
met. Such exemptions include: (a) acquisition of shares issued pursuant to a private placement approved by a
general meeting of the company as a private placement intended to provide the purchaser with holdings of 25% or
more of the voting rights in the company, if there is no other shareholder of the company who holds more than 25%
of the voting rights in the company, or with holdings of more than 45% of the voting rights in the company, if there
is no other shareholder of the company who holds more than 45% of the voting rights in the company, (b)
acquisition of shares from a holder of 25% or more of the voting rights in the company following which the
purchaser will hold 25% or more of the voting rights in the company, or (c) acquisition of shares from a holder of
45% or more of the voting rights in the company following which the purchaser will hold 45% or more of the voting
rights in the company.
A special tender offer must be extended to all shareholders of a company, but the offeror is not required to
purchase shares representing more than 5% of the voting power attached to the company’s outstanding shares,
regardless of how many shares are tendered by shareholders. A special tender offer may be consummated only if (1)
at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror and (2)
the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer
(disregarding holders who control the offeror or have a personal interest in the acceptance of the offer or holders of
25% or more of the voting rights of the company, any of their relatives, or corporations controlled by any of the
above).
If a special tender offer is accepted, then the purchaser, any corporation controlled by it, or any person or
entity controlling it or under common control with the purchaser may not make a subsequent tender offer for the
purchase of shares of the target company and may not enter into a merger with the target company for a period of
one year from the date of the offer, unless the purchaser or such person or entity undertook to effect such an offer or
merger in the initial special tender offer.
Merger. The Companies Law permits merger transactions between Israeli companies, if approved by each
party’s board of directors and, unless certain requirements described under the Companies Law are met, the majority
of each party’s shares voted on the proposed merger at a shareholders meeting convened with prior notice of at least
35 days. A merger is defined as the transfer of all assets and liabilities, including conditional, future, known and
unknown debts of the target company to the surviving company, as a result of which the target company is
liquidated, and stricken out of the Companies Register.
Since our company was incorporated prior to the entry into effect of the Companies Law, a merger
transaction requires the approval of a special majority of 75% or more of the shareholders voting on the matter
(disregarding abstentions for purposes of the shareholder vote, unless a court rules otherwise, the merger will not be
deemed approved if a majority of the votes of shares represented at the shareholders meeting (disregarding
abstentions) that are held by any of: (1) parties other than the other party to the merger; (2) parties who hold 25% or
more of the voting rights or any means of control or the right to appoint 25% or more of the directors of the other
party; or (3) anyone on such parties’ behalf, including relatives of such parties and corporations controlled them,
vote against the merger. If, however, the merger involves a merger with a company’s own controlling party or if the
controlling party has a personal interest in the merger, then the merger is instead subject to the same special majority
approval that governs all extraordinary transactions with controlling parties.
If the transaction would have been approved by the shareholders of a merging company but for the separate
approval of each class or 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 appraisal of the value of the parties to the merger and
the consideration offered to the shareholders of the company.
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
57
will be unable to satisfy the obligations of any of the parties to the merger, and may further give instructions to
secure the rights of creditors.
In addition, a merger may not be consummated until at least 50 days have passed from the date on which a
proposal for approval of the merger was filed by each party with the Israeli Registrar of Companies and at least 30
days have passed from the date on which the merger was approved by the shareholders of each party.
Notwithstanding the foregoing, a merger is not subject to the approval of the shareholders of the target
company if the target company is a wholly-owned subsidiary of the acquiring company. A merger is not subject to
the approval of the shareholders of the acquiring company in any of the following events:
•
•
•
the merger does not require the alteration of the memorandum or articles of association of the
acquiring company;
the acquiring company would not issue more than 20% of the voting rights thereof to the shareholders
of the target company in the course of the merger and no person will become, as a result of the merger,
a controlling shareholder of the acquiring company, on a fully diluted basis;
neither the target company, nor any shareholder that holds 25% of the means of control of the target
company is a shareholder of the acquiring company and there is no person that holds 25% or more of
the means of control in both companies.
Disclosure of Shareholders Ownership
The Securities Law and regulations promulgated thereunder do not require a company whose shares are
publicly traded solely on a stock exchange outside of Israel, as in the case of our company, to disclose its share
ownership in the records of the Israeli Companies Registrar.
Changes in Our Capital
Changes in our capital are subject to the approval of a simple majority of shareholders present and voting at
any shareholders meeting.
C.
Material Contracts
August 2013 Investment Agreement. On August 19, 2013, we entered into an agreement to issue and sell
3,532,655 ordinary shares of our company, nominal value NIS 0.6 each, to Nistec for $4.2 million. Nistec is
controlled by Yitzhak Nissan, who beneficially owns all of the shares owned by Nistec. Also on August 19, 2013,
Nistec purchased 1,589,440 of our ordinary shares from Merhav M.N.F. Ltd, which at the time held 24.1% of our
outstanding ordinary shares. The total consideration paid by Nistec in the two transactions was $6,500,000. Nistec
obtained a portion of those funds from a loan extended by Bank Leumi Le’Israel in the amount of approximately
$4,755,165 (based on the exchange rate between the NIS and the dollar published by the Bank of Israel on the date
of the transactions), and the shares that Nistec acquired constitute collateral for the loan. As a result of these
transactions, Nistec acquired 50.5% of our ordinary shares, which constitute 50.5% of our issued share capital on a
fully diluted basis, and Nistec gained control of our company. Several of our directors resigned, and four new
directors were nominated and elected, including Yitzhak Nissan, who was elected Chairman of our Board of
Directors. We also amended our Articles of Association along with our issuance of the shares to Nistec. Nistec and
Yitzhak Nissan have the shared power to vote, dispose of, direct the vote of, and direct the disposition of the
5,122,095 ordinary shares of our company beneficially owned by Nistec.
Registration Rights Agreement. In connection with our investment agreement with Nistec, on August 19,
2013 we entered into a registration rights agreement with Nistec, pursuant to which we agreed to register under the
Securities Act some or all of the ordinary shares sold to Nistec upon its “demand,” at any time after one year
following the consummation of the sale. Nistec is entitled to an aggregate of four demand registrations, subject to
certain conditions. We also agreed to grant Nistec “piggyback” registration rights that allow it to include its
ordinary shares in any public offering of equity securities initiated by us. We may postpone or withdraw the filing or
58
the effectiveness of a piggyback registration at any time in our sole discretion. Under the registration rights
agreement, we also agreed to indemnify Nistec against any losses or damages resulting from any untrue statement or
omission of material fact in any registration statement or prospectus pursuant to which they sell ordinary shares,
unless such liability arose in reliance upon information furnished in writing by Nistec. We will pay all expenses
incurred by our company in connection with any such registrations in addition to reasonable fees and disbursements
of counsel to Nistec. The selling expenses relating to the ordinary shares owned by Nistec will be borne and paid by
Nistec.
Management Agreement. Under the terms of the investment agreement with Nistec and as a condition
thereof, and since Nistec has significant experience and skills in the markets in which we operate, on August 19,
2013 we entered into a management agreement with Nistec which became effective as of the closing of the
investment agreement. Under the management agreement, Mr. Yitzhak Nissan, the owner of Nistec, will serve as
the chairman of our Board of Directors. As such, Mr. Nissan will provide us with the following services: (a)
coordination of the activities of our Board of Directors with respect to the development of the long term strategy for
our company; (b) guidance to our Board of Directors with respect to the implementation by management of its
strategy, work plans and budget, as shall be determined from time to time by our Board of Directors; (c)
coordination of the activities of our Board of Directors with respect to the regulation and implementation of proper
corporate governance practices; (d) coordination of the activities of our Board of Directors for the purpose of the
approval of quarterly and annual financial statements and reports; (e) development and retention of relations with
current and future strategic investors; (f) general guidance and management of the activities of our Board of
Directors; (g) advancement of our company’s efforts with respect to the realization of its business development
strategy, including the pursuit of mergers and acquisition opportunities in cooperation with the chief executive
officer of our company; (h) coordination of the activities of our Board of Directors with respect to the definition of
strategic financial targets and in attaining said targets; and (i) guidance in the optimization and steps to be taken to
increase the efficiency of our company’s production and operation systems. In consideration for performing the
above services, we agreed to pay Nistec a monthly fixed fee of NIS 90,000, plus applicable VAT. Reimbursement
of expenses will be subject to our company’s policy approved in advance by the Audit Committee and shall not
exceed an aggregate amount of NIS 10,000 per calendar quarter. The management agreement will be in force for a
term of three years, subject to any applicable law.
Finder’s Fee. Also in connection with our investment agreement with Nistec, on August 19, 2013 we
agreed to pay a one-time finder’s fee of $200,000 (plus applicable VAT) to Merhav, for introducing Nistec to us and
facilitating the transaction contemplated by the investment agreement.
D.
Exchange Controls
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders
of our ordinary shares. Non-residents of Israel who purchase our ordinary shares will be able to convert dividends,
if any, thereon, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of
any sale in Israel of our ordinary shares to an Israeli resident, into freely repatriable dollars, at the exchange rate
prevailing at the time of conversion, provided that the Israeli income tax has been withheld (or paid) with respect to
such amounts or an exemption has been obtained.
E.
Taxation
The following is a discussion of Israeli and United States tax consequences material to our shareholders.
To the extent that the discussion is based on tax legislation which has not been subject to judicial or administrative
interpretation, the views expressed in the discussion might not be accepted by the tax authorities in question or by
court. The discussion is not intended, and should not be construed, as legal or professional tax advice and does not
exhaust all possible tax considerations.
Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli
or other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in
particular, the effect of any foreign, state or local taxes.
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ISRAELI TAX CONSIDERATIONS
General Corporate Tax Structure
Israeli companies are generally subject to income tax on their taxable income. The regular corporate tax
rate in Israel for 2015 is 26.5% and was reduced to 25% for 2016 onwards. However, the effective rate of tax
payable by a company which is qualified under Israeli law as an “Industrial Company” and/or which derives income
from an “approved enterprise” or a “benefited enterprise” (as further discussed below) may be lower. See this Item
10E. “Additional Information – Taxation - Tax Benefits Under the Law for the Encouragement of Capital
Investments, 5719-1959.”
Tax Benefits under the Law for the Encouragement of Industry (Taxes), 5729-1969
Pursuant to the Law for the Encouragement of Industry (Taxes), 5729-1969, or the Industry Encouragement
Law, a company qualifies as an “Industrial Company” if it is a resident of Israel, was incorporated in Israel and at
least 90% of its income in any tax year (exclusive of income raising from certain governmental security loans) is
derived from an “Industrial Enterprise” it owns, which is located in Israel. An “Industrial Enterprise” is defined for
purposes of the Industry Law as an enterprise whose principal activity in a given tax year is production.
We believe that we are currently an Industrial Company. An Industrial Company is entitled to certain tax
benefits, including a deduction of the purchase price of patents or the right to use a patent or know-how used for the
development or promotion of the Industrial Enterprise at the rate of 12.5% per annum, commencing the year in
which such rights were first exercised.
Prior to January 1, 2011, the tax laws and regulations dealing with the adjustment of taxable income for
local inflation provided that Industrial Enterprises, such as us, were eligible for special rates of depreciation
deductions. These rates vary in the case of plant and equipment. With respect to equipment, the applicable rates of
depreciation are determined according to the number of shifts in which the equipment is being operated and
generally range from 20% to 40% on a straight-line basis, a 30% to 50% on a declining balance basis for equipment
first put into operation on or after June 1, 1989 (instead of the regular rates which are applied on a straight-line
basis). The applicable regulations are valid for equipment whose first operation was not later than December 31,
2013.
Moreover, companies which own Industrial Enterprises that are approved enterprises or benefited
enterprises (see below) can choose, with respect to income deriving from such enterprises, between (a) the special
depreciation rates referred to above or (b) accelerated regular rates of depreciation applied on a straight-line basis in
respect of property and equipment, generally ranging from 200% (for equipment) to 400% (for buildings) of the
ordinary depreciation rates during the first five years of service of these assets, provided that the depreciation on a
building may not exceed 20% per annum, multiplied by the applicable adjustment rate.
Eligibility for benefits under the Industry Encouragement Law is not contingent upon the prior approval of
any Government agency. There can be no assurance that we will continue to so qualify, or will be able to avail
ourselves of any benefits under the Industry Law in the future.
Tax Benefits under the Law for the Encouragement of Capital Investments, 5719-1959
General
One of our production facilities qualifies as a “benefited enterprise” under the Law for the Encouragement
of Capital Investments, 5719-1959, as amended in 2005, or the Investment Encouragement Law, which provides
certain tax benefits to investment programs of an “approved enterprise” or “benefited enterprise.” Our benefited
enterprise was converted from a previously approved enterprise program pursuant to the approval of the Israel Tax
Authority that we received in September 2006. As of yet, it was not necessary for us to utilize these tax benefits. In
the event that we do not commence use of the tax benefits until the 2017 tax year (the “Expiration Date”), the tax
benefits granted to our benefited enterprise shall expire.
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The Investment Encouragement Law stipulates certain criteria which need be met with respect to
investment programs carried out by an enterprise, in order for such an enterprise to be classified as a “benefited
enterprise”. Israeli resident companies which own benefited enterprise are generally classified as Benefited
Companies. Benefited Companies may claim tax benefits (as further discussed below) granted by the Investment
Encouragement Law in its tax returns (and there is no need to obtain prior approval to qualify for such benefits).
There is no requirement to file reports with the Investment Center. Audits are the responsibility of the Israeli
Income Tax Authority as part of their tax audits. Companies may also approach the Israeli Tax Authority for a pre-
ruling regarding their eligibility for benefits under the Investment Encouragement Law.
A company that owns an approved enterprise is eligible for governmental grants, but may elect to receive
an alternative package comprised of tax benefits, referred to as the “previous alternative benefits track”. The tax
benefits of an approved enterprise include lower tax rates or no tax depending on the area and the track chosen,
lower tax rates on dividends and accelerated depreciation. In order to receive benefits in the grant track or the
alternative benefit track, the industrial enterprise must contribute to the economic independence of the Israeli
economy, be competitive and contribute to the gross local product in one of the manners stipulated in the Investment
Encouragement Law. Tax benefits would be available, subject to certain conditions (described below), to
production facilities that generally derive more than 25% of their annual revenue from export, or that do not derive
75% or more of their annual revenue in a single market.
On September 20, 2006, we received a pre-ruling from the Israeli Tax Authority confirming that our most
recent investment program will be deemed a “benefited enterprise” instead of its former “approved enterprise”
status. Pursuant to such pre-ruling, the former approved enterprise status of that investment plan was terminated by
the Investment Center. The benefited enterprise status granted to our investment program provides for a tax
exemption on undistributed earnings derived from the program for two years and a reduced tax rate for five
additional years (i.e., a total benefits period of seven years). However, the benefits period with respect to such
program has not yet commenced, and therefore will expire on the Expiration Date, unless such period commences
prior to the Expiration Date In the event that the benefits period commences prior to the Expiration Date, such
period will lapse no later than the end of the 2024 tax year.
If, (i) only a part of a company’s taxable income is derived from an approved enterprise or a benefited
enterprise, as in our case; or (ii) a company owns more than one approved enterprise or benefited enterprise, the
resulting effective corporate tax rate of the company represents the weighted combination of the various applicable
rates. A company owning a “mixed enterprise” (which is a company that derives income from one or more sources
in addition to an approved enterprise or benefited enterprise) generally may not distribute a dividend that is
attributable only to the approved enterprise or benefited enterprise.
Subject to certain provisions concerning income subject to the alternative benefits track with respect to a
benefited enterprise (see below), any distributed dividends are deemed attributable to the entire enterprise, and the
effective tax rate represents the weighted combination of the various applicable tax rates. A company may elect to
attribute dividends distributed by it only to income not subject to the alternative benefits track.
Tax Benefits
The tax benefits available to benefited enterprises are: (1) benefited enterprise situated in zone A may
choose between (a) reduced corporate tax at the rate of 11.5% (“Ireland Track”); or (b) tax exemption from
corporate tax on undistributed income; (2) benefited enterprises situated in zone B or elsewhere (“Zone C”) are
entitled to tax exemption on undistributed income for six or two years, respectively, and to beneficial tax rate
(generally 25% or less in the case of a qualified foreign investor’s company that is at least 49% owned by non-
Israeli residents) for the remainder of the applicable period of benefits. Our plant is located in Zone C.
Dividends paid out of income derived from an approved enterprise (or out of dividends received from a
company whose income is derived from an approved enterprise) are generally subject to withholding tax at the rate
of 15%. Dividends paid out of income derived from 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
20%. The rate of 20% with respect to dividends paid from income derived from a benefited enterprise, as set forth
above, is limited to dividends distributed out of income derived during the benefits period and actually paid at any
time up to 12 years following the lapse of the benefits period (the “12 Years Limitation”), excluding in the event of
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dividends paid by foreign investor's company, as provided below. A company which elects the alternative benefits
track and pays a dividend out of income derived from its benefited enterprise during the tax exemption period will
be subject to corporate tax in respect of the amount of the dividend distributed at the rate otherwise applicable to the
company in the year the income was earned (the applicable tax rate is generally 25%, or lower in the case of a
qualified foreign investor’s company which is at least 49% owned by non-Israeli residents) on an amount consisting
of such dividend grossed up by the otherwise applicable corporate tax rate. . Dividends paid to a qualifying non-
resident out of the profits of a benefited enterprise which is subject to the Ireland Track (i.e., subject to 11.5%
corporate tax) are generally subject to withholding tax at the rate of 4%.
The tax benefits available to a benefited enterprise relate only to taxable income attributable to that specific
enterprise and are contingent upon the fulfillment of the conditions stipulated by the Investment Law and its
regulations and the terms of the pre-ruling that we received from the Israeli Tax Authority. If we fail to comply with
these conditions, the tax and/or other benefits may be discontinued, in whole or in part, and we might be required to
refund the amount of tax benefits, adjusted to the consumer price index (“CPI”) and interest, or other monetary
penalty, as the case may be.
A company that qualifies as a foreign investor’s company is entitled to further tax benefits relating to its
benefited and/or approved enterprises. Subject to certain conditions, a foreign investor company is generally a
company that more than 25% of each of the rights of the company (in terms of shares, rights to profits, voting and
appointment of directors), is owned, directly or indirectly, by persons who are not residents of Israel. Such a
company with a foreign investment of over 25% will be eligible for an extension of the period of tax benefits for its
approved and benefited enterprises (up to a total period of ten years, compared to a normal period of seven years)
and further tax benefits (a reduced corporate tax rate of 10%-20%) should the foreign investment reach or exceed
49%. In addition, dividends distributed by a foreign investor’s company from income attributed to its benefited
enterprise shall be subject to a rate of 20%, regardless to the date on which such dividend is distributed (i.e., the 12
Years Limitation shall not apply). No assurance can be given that we currently qualify or will qualify in the future
as a foreign investor’s company.
Amendment to Investment Encouragement Law
In December 2010, the Israeli Parliament passed the Law for Economic Policy for the Years 2011 and 2012
(Amended Legislation), 5771-2011, which prescribes, among other things, amendments to the Investment
Encouragement Law, effective as of January 1, 2011 (the “2011 Amendment”). The 2011 Amendment introduced
new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such terms are
defined in the Investment Encouragement Law), if certain criteria are met. The new tax benefits (described below)
would be available, subject to certain conditions, to production facilities that generally derive more than 25% of
their annual revenue from export, or that do not derive 75% or more of their annual revenue in a single market, or, to
competitive facilities in the field of renewable energy. A “Preferred Company” is defined in the amendment as
either (i) a company incorporated in Israel and not wholly-owned by governmental entities; or (ii) a partnership (a)
that was registered under the Israeli Partnerships Ordinance; and (b) all of its partners are companies incorporated in
Israel, but not all of them are fully owned by governmental entities and such companies or partnerships own, among
other conditions, Preferred Enterprises and are controlled and managed from Israel.
In accordance with the 2011 Amendment and a further amendment made during 2013, a Preferred
Company is entitled to reduced corporate tax with respect to income derived by it Preferred Enterprise (and subject
to certain conditions) at the rate of 15% in 2011-2012, unless it is located in a certain development zone, in which
case the rate will be 10%. Such corporate tax rate was reduced to 12.5% and 7%, respectively, in 2013 and was
raised to 16% and 9% in 2014 and thereafter, respectively.
Under the amendments, dividends distributed out of income which is generally attributed to a Preferred
Enterprise are subject to withholding tax at the rate of 20% (or lower, under an applicable tax treaty). However,
upon distribution of a dividend attributed to income generated in Israel, to an Israeli company , no withholding tax
will apply.
The 2011 Amendment applies to income generated as of January 1, 2011. Under the transitional provisions
of the 2011 Amendment, we may elect to irrevocably implement the 2011 Amendment to the Investment
Encouragement Law while waiving benefits provided under the Investment Encouragement Law as in effect prior to
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the 2011 Amendment or to remain subject to the Investment Encouragement Law as in effect prior to the 2011
Amendment. We may elect to implement the 2011 Amendment by May 31 of any year, and such an election shall
apply as of the tax year following the year on which the company's tax return (and the election) was filed. Electing
to implement the 2011 Amendment is irreversible.
We qualify for the status of a “Preferred Company” pursuant to the 2011 Amendment. We intend to
implement the 2011 Amendment in future tax year. Therefore, the deferred tax balance as of December 31, 2014
was calculated based on the rate provided by the 2011 Amendment.
The termination or substantial reduction of any of the benefits available under the Investment
Encouragement Law could have a material adverse effect on our future investments in Israel, and could adversely
affect our results of operations and financial condition.
Taxation Under Inflationary Conditions
The Income Tax (Inflationary Adjustments) Law, 5745-1985, or the Inflationary Adjustments Law, is
intended to neutralize the erosion of capital investments in business and to prevent tax benefits resulting from
deduction of inflationary expenses. This law applies a supplementary set of inflationary adjustments to the nominal
taxable profits computed under regular historical cost principles.
The Inflationary Adjustments Law introduced a special tax adjustment for the preservation of equity based
on changes in the CPI, whereby certain corporate assets are classified broadly into fixed (inflation-resistant) assets
and non-fixed assets. In the event that the "equity summary", as defined in the Inflationary Adjustments Law,
exceeds, in general, the depreciated cost of fixed assets (as defined in the Inflationary Adjustment Law), a tax
deduction which takes into account the effect of the annual rate of inflation on such excess is allowed (up to a
ceiling of 70% of taxable income for companies in any single year, with the unused portion carried forward on a
linked basis, without limit). If the depreciated cost of such fixed assets exceeds shareholders’ equity, then such
excess, multiplied by the annual inflation rate, is added to taxable income. In addition, subject to certain limitations,
depreciation of fixed assets and losses carried forward are adjusted for inflation on the basis of changes in the CPI.
Pursuant to the Inflationary Adjustments Law to which we are subject, results for tax purposes are
measured in real terms in accordance with the changes in the CPI.
On February 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments) (Amendment No. 20), 5768-
– 2008 was passed by the Israeli parliament. According to the amendment, the inflationary adjustments law will no
longer be applicable following the 2007 tax year, excluding certain Sections as provided in the transitional
provisions whose objectives are to prevent distortion of the income tax calculations.
According to the amendment commencing in the 2008 tax year, the adjustment of the income for the effects
of inflation for tax purposes will no longer be calculated. Additionally, depreciation on the protected assets and tax
loss carryforward will no longer be linked to the CPI, subsequent to the 2007 tax year, and the balances that have
been linked to the CPI through the end of 2007 tax year, will be used going forward. As a result, our carryforward
tax loss will no longer be linked to the Israeli CPI.
Taxation of Gains Upon Disposition of, and Dividends Paid on, our Ordinary Shares
Taxation of Israeli Resident Shareholders
Israeli law imposes a capital gains tax on the sale of capital assets. The law distinguishes between real gain
and inflationary surplus. The inflationary surplus is a portion of the total capital gain that is equivalent to the
increase of the relevant asset’s purchase price which is attributable to the increase in the CPI between the date of
purchase and the date of sale. Foreign residents who purchased an asset in foreign currency may request that the
inflationary surplus will be computed on the basis of the devaluation of the NIS against such foreign currency. The
real gain is the excess of the total capital gain over the inflationary surplus. The inflationary surplus accumulated
from and after December 31, 1993, is exempt from any capital gains tax in Israel while the real gain is taxed at the
applicable rate discussed below.
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Dealers in securities in Israel are taxed at regular tax rates applicable to business income.
Subject to certain provisions relating to the linear calculation method applicable to the determination of the
capital gain tax pertaining to capital gains derived from the sale of assets, purchased prior to January 1, 2003, or
prior to January 1, 2012 (with respect to sale of assets or securities not listed in a stock exchange prior to 1.1.2012),
the tax rate on capital gains, including capital gain from the sale of securities listed on a stock exchange and on
dividends, is generally 25% for individuals (and 26.5% for corporations) and 30% for substantial individual
shareholders (that are, generally, holders of 10% or more of the shares of the company on the date of the sale of the
shares or at any date during the 12 months period preceding such sale). Dividends paid to an Israeli company by
another Israeli company are not subject to tax, unless received out of income derived from a benefited enterprise, or
an approved enterprise, or stems from income derived or accrued outside of Israel.
Under the convention between the United States and Israel concerning taxes on income, Israeli capital
gains tax will generally not apply to the sale, exchange or disposition of ordinary shares by a person who qualifies as
a resident of the United States within the meaning of the U.S.-Israel tax treaty. However, this exemption will not
apply, among other cases, if the gain is attributable to a permanent establishment of such person in Israel, or if the
qualified U.S. resident holds, directly or indirectly, shares representing 10% or more of our voting power during any
part of the 12-month period preceding the sale, exchange or disposition, subject to specified conditions. In this case,
the sale, exchange or disposition would be subject to Israeli tax, to the extent applicable under Israeli domestic law.
However, under the U.S.-Israel tax treaty, a U.S. resident generally would be permitted to claim a credit for the
Israeli tax against the U.S. federal income tax imposed on the sale, exchange or disposition, subject to the limitations
in U.S. laws applicable to foreign tax credits. The U.S.-Israel tax treaty does not relate to U.S. state or local taxes.
For residents of other countries, the purchaser of the shares may be required to withhold capital gains tax
on all amounts paid by it for the purchase of shares for the sale of our ordinary shares, for so long as the capital gain
from such a sale is not exempt from Israeli capital gains tax, and unless a different rate is provided in a treaty
between Israel and the shareholder’s country of residence.
Notwithstanding the above, the capital gain from the sale of our shares by non-Israeli residents would be
tax exempt as long as our shares are listed on the NASDAQ Capital Market or any other stock exchange recognized
by the Israeli Ministry of Finance, and provided that certain other conditions are met. The most relevant conditions
are as follows: (i) the capital gain is not attributed to the foreign resident’s permanent establishment in Israel, and
(ii) the shares were acquired by the foreign resident after the company’s shares had been listed for trading on the
foreign Exchange.
If the shares were sold by Israeli residents, then (i) for the period ending December 31, 2002 their sale
would generally be tax exempt so long as (1) the shares were listed on a stock exchange, such as, in our case, the
NASDAQ Capital Market, which is recognized by the Israeli Ministry of Finance on December 31, 2002, and (2) we
qualified as an Industrial Company or Industrial Holding Company under the law for Industry Encouragement Law,,
at the relevant times as provided by the Income Tax Ordinance [New Version], 5721-1961, which we believe we so
qualified and (ii) for the period commencing January 1, 2003, the sale of the shares would be, generally, subject to a
25% tax if sold by non-substantial individual shareholders and corporate bodies and 30% tax if sold by a substantial
individual shareholders. We cannot provide any assurance that the Israeli tax authorities will agree with the
determination that we qualified as an Industrial Company at the relevant times.
On the distribution of dividends other than bonus shares (stock dividends) to individual Israeli residents
shareholders or to non-Israeli shareholders, income tax applies at the rate of 25% or 30%, as described above, or the
lower rate payable with respect to dividends received out of income derived from a preferred or benefited enterprise
(see the Investment Encouragement Law), unless a double taxation treaty is in effect between Israel and the
shareholder's country of residence which provides for a lower tax rate in Israel on dividends. The Convention
between the State of Israel and the Government of the United States relating to relief from double taxation provides
for a maximum tax of 25% on dividends paid to a resident of the United States. As set forth above, dividends paid
to an Israeli company by another Israeli company are not subject to corporate tax, unless received out of income
derived from a benefited enterprise or unless the dividend stems from income produced or accrued abroad.
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Taxation of Non-Israeli Resident Shareholders
Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel.
Such sources of income include passive income such as dividends, royalties and interest, as well as non-passive
income from services rendered in Israel. Distributions of dividends other than bonus shares or stock dividends, are
subject to income tax at the rate of 25% or 30% pursuant to Israeli domestic law as described above. However,
under the Investment Encouragement Law, dividends generated by an approved enterprise are, generally, taxed at
the rate of 15%, and dividends generated by a benefited enterprise are generally subject to tax at a rate of 20%.
Pursuant to the Convention between the State of Israel and the Government of the United States relating to
relief from double taxation, the maximum tax rate on dividends paid to a holder of ordinary shares who is a Treaty
U.S. Resident will be 25%. However, dividends which are not generated by an approved enterprise will generally
be subject to Israeli tax at a rate of 12.5% if paid to a U.S. corporation which holds 10% of our voting power for a
designated period and provided that not more than 25% of our gross income for such period consists of certain types
of dividends and interest. Notwithstanding the foregoing, dividends distributed from income attributed to an
approved enterprise are generally subject to a withholding tax rate of 15% for such a U.S. corporation shareholder
(which meets both conditions set forth above).
Subject to certain conditions, non-Israeli residents will be tax exempt on capital gain derived from
investments in Israeli companies without derogating from any other capital gain tax exemption applying to non-
Israeli resident under Israeli law or under any applicable double tax treaty.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain material U.S. federal income tax consequences of the acquisition,
ownership and disposition of our ordinary shares. This description addresses only the U.S. federal income tax
considerations that are relevant to U.S. Holders (as defined below) who hold our ordinary shares as capital assets.
This summary is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations
promulgated thereunder, judicial and administrative interpretations thereof, and the U.S.-Israel Tax Treaty, or the
Treaty, all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively.
There can be no assurance that the U.S. Internal Revenue Service, or the IRS, will not take a different position
concerning the tax consequences of the acquisition, ownership and disposition of our ordinary shares or that such a
position would not be sustained. This description does not address all tax considerations that may be relevant with
respect to an investment in our ordinary shares. This summary does not account for the specific circumstances of
any particular investor, such as:
•
•
•
•
•
•
•
•
•
•
•
broker dealers,
financial institutions,
certain insurance companies,
regulated investment companies or real estate investment trusts,
investors liable for alternative minimum tax,
tax exempt organizations,
non-resident aliens of the United States or taxpayers whose functional currency is not the U.S.
dollar,
persons who hold the ordinary shares through partnerships or other pass-through entities,
persons who acquire their ordinary shares through the exercise of employee stock options or
otherwise as compensation for services,
investors who actually or constructively own, or have owned, 10 percent or more of our voting
shares, and
investors holding ordinary shares as part of a straddle, appreciated financial position, a hedging
transaction or a conversion transaction.
If a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns ordinary
shares, the U.S. federal income tax treatment of a partner in such a partnership will generally depend upon the status
of the partner and the activities of the partnership. A partnership that owns ordinary shares and the partners in such
partnership should consult their tax advisors about the U.S. federal income tax consequences of holding and
65
disposing of ordinary shares.
This summary does not address the effect of any U.S. federal taxation (such as estate and gift tax) other
than U.S. federal income taxation. In addition, this summary does not include any discussion of state, local or
foreign taxation. You are urged to consult your tax advisors regarding the foreign and U.S. federal, state and local
tax consequences of an investment in ordinary shares.
For purposes of this summary, a U.S. Holder is:
•
•
•
•
an individual who is a citizen or, for U.S. federal income tax purposes, a resident of the United
States;
a corporation, or other entity treated for tax purposes as a corporation, created or organized in or
under the laws of the United States or any political subdivision thereof;
an estate whose income is subject to U.S. federal income tax regardless of its source; or
a trust that (a) is subject to the primary supervision of a court within the United States and the
control of one or more U.S. persons or (b) has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a U.S. person.
Taxation of Distributions
Subject to limitations, including the discussion below, under the heading “—Passive Foreign Investment
Companies,” the gross amount of any distributions received with respect to our ordinary shares, including the
amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. federal income tax purposes to the
extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes.
Because we do not expect to maintain calculations of our earnings and profits under U.S. federal income tax
principles, it is expected that the entire amount of any distribution will generally be reported as dividend income to
you. Dividends are included in gross income as ordinary income. Distributions in excess of our current and
accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of your tax basis in
our ordinary shares and any amount in excess of your tax basis will be treated as capital gain from the sale of
ordinary shares. See “—Disposition of Ordinary Shares” below for a discussion of the taxation of capital gains. Our
dividends will not qualify for the dividends-received deduction generally available to corporations under section 243
of the Code.
Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be
included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day
such dividends are distributed, regardless of whether the payment is in fact converted into dollars. A U.S. Holder
who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in effect on
such day may have a foreign currency exchange gain or loss that would generally be treated as U.S.-source ordinary
income or loss. U.S. Holders should consult their own tax advisors concerning the U.S. tax consequences of
acquiring, holding and disposing of NIS and converting NIS into U.S. dollars.
Subject to complex limitations, some of which vary depending upon the U.S. Holder’s circumstances, any
Israeli withholding tax imposed on dividends paid with respect to our ordinary shares will be a foreign income tax
that is eligible for credit against a U.S. Holder's U.S. federal income tax liability (or, alternatively, for deduction
against U.S. income tax in determining such tax liability). The limitation on foreign income taxes eligible for credit
is calculated separately with respect to specific classes of income. Dividends generally are treated as foreign-source
passive category income or, in the case of certain U.S. Holders, general category income for purposes of computing
the U.S. foreign tax credit. Further, there are special rules for computing the foreign tax credit limitation of a
taxpayer who receives dividends subject to a reduced tax rate (see discussion below).
The U.S. rules relating to the foreign tax credit are complex, and you should consult with your own tax
advisors to determine whether and to what extent you would be entitled to this credit.
Subject to certain limitations, including the 3.8% net investment tax, discussed below, “qualified dividend
income” received by a non-corporate U.S. Holder will be subject to tax at the lower long-term capital gain rates
(currently a maximum of 20%). Distributions taxable as dividends paid on our ordinary shares should qualify for a
reduced rate provided that either: (i) we are entitled to benefits under the Treaty, or (ii) our ordinary shares are
66
readily tradable on an established securities market in the United States and certain other requirements are met. We
believe that we are entitled to benefits under the Treaty and that our ordinary shares currently are readily tradable on
an established securities market in the United States. However, no assurance can be given that our ordinary shares
will remain readily tradable. The reduced rate does not apply unless certain holding period requirements are
satisfied. With respect to the ordinary shares, the U.S. Holder must have held such shares for at least 61 days during
the 121-day period beginning 60 days before the ex-dividend date. The reduced rate also does not apply to
dividends received from a PFIC (see discussion below), in respect of certain hedged positions, or in certain other
situations. The legislation enacting the reduced tax rate on qualified dividend income contains special rules for
computing the foreign tax credit limitation of a taxpayer who receives dividends subject to the reduced tax rate.
U.S. Holders of our ordinary shares should consult their own tax advisors regarding the effect of these rules in their
particular circumstances.
Disposition of Ordinary Shares
If you sell or otherwise dispose of our ordinary shares, you will generally recognize gain or loss for U.S.
federal income tax purposes in an amount equal to the difference between the amounts realized on the sale or other
disposition and your adjusted tax basis in our ordinary shares. Subject to the discussion below under the heading
“Passive Foreign Investment Companies,” such gain or loss will generally be capital gain or loss and will be long-
term capital gain or loss if you have held the ordinary shares for more than one year at the time of the sale or other
disposition. Long-term capital gain realized by a non-corporate U.S. Holder is generally eligible for a preferential
tax rate (currently a maximum of 20%). In general, any gain that you recognize on the sale or other disposition of
ordinary shares will be U.S.-source for purposes of the foreign tax credit limitation and any losses will generally be
allocated against U.S. source income. Deduction of capital losses is subject to certain limitations under the Code.
In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of our
ordinary shares, the amount realized will be based on the U.S. dollar value of the NIS received with respect to the
ordinary shares as determined on the settlement date of such sale of other disposition. A cash basis U.S. Holder who
receives payment in NIS and converts NIS into U.S. dollars at a conversion rate other than the rate in effect on the
settlement date may have a foreign currency exchange gain or loss, which would generally be treated as ordinary
income or loss.
An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to
foreign currency gain or loss realized on a sale or disposition of our ordinary shares that are traded on an established
securities market, provided that the election is applied consistently from year to year. Such election may not be
changed without the consent of the IRS. In the event that an accrual basis U.S. Holder does not elect to be treated as
a cash basis taxpayer for this purpose (pursuant to the Treasury regulations applicable to foreign currency
transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income tax purposes
because of differences between the dollar value of the currency received prevailing on the trade date and the
settlement date. Any such currency gain or loss would be treated as ordinary income or loss and would be in
addition to the gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of our ordinary shares.
Any foreign currency gain or loss a U.S. Holder realizes will generally be U.S. source ordinary income or loss.
The U.S. rules relating to foreign currency gains and losses are complex, and you should consult with your
tax advisor to determine whether and to what extent you would have to recognize such foreign currency gains or
losses.
Passive Foreign Investment Companies
If we were to be classified as a PFIC in any taxable year, a U.S. Holder would be subject to special rules
intended to reduce or eliminate any benefits from the deferral of U.S. federal income tax that a U.S. Holder could
otherwise derive from investing in a non-U.S. company that does not distribute all of its earnings on a current basis.
We will be treated as a PFIC for any taxable year in which either (i) 75% or more of our gross income is passive
income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the
production of passive income. For this purpose, passive income generally includes dividends, interest, royalties,
rents, annuities and the excess of gains over losses from the disposition of assets that produce passive income.
Included in the calculation of our income and assets is our proportionate share of the income and assets of each
corporation in which we own, directly or indirectly, at least a 25% interest, by value. If we were determined to be a
67
PFIC for U.S. federal income tax purposes, unfavorable and highly complex rules would apply to you as a U.S.
Holder of ordinary shares, whether you own your ordinary shares directly or indirectly. Accordingly, you are urged
to consult your own tax advisors regarding the application of such rules.
Based on our current and projected income, assets and activities, we believe that we are not currently a
PFIC. However, because the determination of whether we are a PFIC is based upon the composition of our income
and assets from time to time, there can be no assurances that we will not become a PFIC in any future taxable year.
If we are treated as a PFIC for any taxable year, dividends on our ordinary shares would not qualify for the
reduced tax rate on qualified dividend income, discussed above, and, unless you elect to "mark to market" your
ordinary shares, as described below:
•
•
•
•
you would be required to allocate income recognized upon receiving certain dividends or gain recognized
upon the disposition of ordinary shares ratably over your holding period for such ordinary shares,
the amount allocated to the current taxable year, and to any taxable years in your holding period prior to the
first day in which we were treated as a PFIC will be treated as ordinary income in the current year, and
the amount allocated to each prior taxable year during which we are considered a PFIC would be subject to
tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be
imposed with respect to the resulting tax liability allocated to each such year.
If we are a PFIC and any of our non-U.S. subsidiaries is also a PFIC, you will generally be treated as
owning a proportionate amount (by value) of the underlying shares of each such subsidiary PFIC. U.S.
Holders are urged to consult their tax advisers regarding the application of the PFIC rules to any of our
subsidiaries.
A U.S. Holder may make a mark-to-market election only if our ordinary shares are “regularly traded” on a
“qualified exchange”. In general, our ordinary shares will be treated as “regularly traded” for a given calendar year
if more than a de minimis quantity of our ordinary shares is traded on a qualified exchange on at least 15 days
during each calendar quarter of such calendar year. Our ordinary shares are listed on the NASDAQ. However, no
assurance can be given that our ordinary shares will be regularly traded for purposes of the mark-to-market election.
In addition, because a mark-to-market election cannot be made for a subsidiary PFIC, if you make a mark-to-market
election you may continue to be subject to the PFIC rules with respect to your indirect interest in any PFICs we own.
If you elect to mark to market your ordinary shares, you will generally include in income, in each year in
which we are considered a PFIC, any excess of the fair market value of your ordinary shares at the close of each tax
year over your adjusted basis in the ordinary shares. If the fair market value of the ordinary shares had depreciated
below your adjusted basis at the close of the tax year, you may generally deduct the excess of the adjusted basis of
the ordinary shares over its fair market value at that time. However, such deductions would generally be limited to
the net mark-to-market gains, if any, that you included in income with respect to such ordinary shares in prior years.
Your adjusted tax basis in your ordinary shares would be increased by the amount of any income inclusion and
decreased by the amount of any deductions under the mark-to-market rules. Income recognized and deductions
allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of ordinary shares with
respect to which the mark-to-market election has been made, in a year in which we are classified as a PFIC, would
be treated as ordinary income or loss (except that loss on a disposition of ordinary shares is treated as capital loss to
the extent the loss exceeds the net mark-to-market gains, if any, that you included in income with respect to such
ordinary shares in prior years), and the source of such gain or loss will be U.S.-source for purposes of the foreign tax
credit limitation. Gain or loss from the disposition of ordinary shares (as to which a mark-to-market election was
made) in a year in which we are no longer classified as a PFIC, would be capital gain or loss.
If you own our ordinary shares during any year in which we are a PFIC, you will generally be required file
an IRS Form 8621 with respect to our company, typically with your federal income tax return for that year. U.S.
Holders should consult their own tax advisors regarding whether we are a PFIC and the potential application of the
PFIC rules to them, including the application of the mark-to-market election.
Net Investment Income Tax
68
In addition to the income taxes described above, U.S. Holders that are individuals, estates or trusts and
whose income exceeds certain thresholds will be subject to a 3.8% Medicare contribution tax on net investment
income, which includes dividends and capital gains.
Backup Withholding and Information Reporting
Payments in respect of our ordinary shares may be subject to information reporting to the IRS and to U.S.
backup withholding tax at the rate (currently) of 28%. Backup withholding will not apply, however, if you (i) are a
corporation or fall within certain exempt categories, and demonstrate the fact when so required, or (ii) furnish a
correct taxpayer identification number and make any other required certification.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may
be credited against your U.S. tax liability. You may obtain a refund of any excess amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the IRS.
Information Reporting by Certain U.S. Holders
U.S. citizens and individuals taxable as resident aliens of the United States that own “specified foreign
financial assets” with an aggregate value in a taxable year in excess of certain thresholds (as determined under rules
in Treasury regulations) and that are required to file a U.S. federal income tax return generally will be required to
file an information report with respect to those assets with their tax returns. IRS Form 8938 has been issued for that
purpose. “Specified foreign financial assets” include any financial accounts maintained by foreign financial
institutions, foreign stocks held directly, and interests in foreign estates, foreign pension plans or foreign deferred
compensation plans. Under those rules, our ordinary shares, whether owned directly or through a financial
institution, estate or pension or deferred compensation plan, would be “specified foreign financial assets”. Under
Treasury regulations, the reporting obligation applies to certain U.S. entities that hold, directly or indirectly,
specified foreign financial assets. Penalties can apply if there is a failure to satisfy this reporting obligation. A U.S.
Holder is urged to consult his tax adviser regarding its reporting obligation.
Any U.S. Holder who holds 10% or more in vote or value of our ordinary shares will be subject to certain
additional U.S. information reporting requirements.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
We are subject to certain of the reporting requirements of the Exchange Act as applicable to “foreign
private issuers” as defined in Rule 3b-4 under the Exchange Act. As a foreign private issuer, we are exempt from
certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not subject to the disclosure and
procedural requirements of Regulation 14A under the Exchange Act, and transactions in our equity securities by our
officers and directors are exempt from reporting and the “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 quarterly reports
and financial statements. However, we file with the SEC an annual report on Form 20-F containing financial
statements audited by an independent accounting firm. We also submit to the SEC reports on Form 6-K containing
(among other things) press releases and unaudited financial information. We post our annual report on Form 20-F
on our website promptly following the filing of our annual report with the SEC. The information on our website is
not incorporated by reference into this annual report.
69
This annual report and the exhibits thereto and any other document we file pursuant to the Exchange Act
may be inspected without charge and copied at prescribed rates at the SEC public reference room at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public
reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The Exchange Act file number for our
SEC filings is 0-28884.
The SEC maintains a website at that contains reports, proxy and information statements, and other
information regarding registrants that make electronic filings with the SEC using its EDGAR (Electronic Data
Gathering, Analysis, and Retrieval) system.
The documents concerning our company that are referred to in this annual report may also be inspected at
our offices located at Sgoola Industrial Zone, Petach Tikva 4910101, Israel.
I.
Subsidiary Information
Not applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to a variety of market risks, including foreign currency fluctuations and changes in interest
rates affecting primarily the interest on short-term credit lines and long-term loans.
Foreign Currency Exchange Risk
Our reporting currency is the dollar. Our revenues are primarily denominated in the dollar, NIS and Euros,
while our expenses are primarily denominated in NIS, dollars and Euros. As a result, the NIS value of our dollar
and Euro denominated revenues are negatively impacted by the depreciation of the dollar and the Euro against the
NIS. In addition, fluctuations in rates of exchange between NIS and other currencies may affect our operating
results and financial condition. The average exchange rate for the NIS against the dollar was 8.6% higher in 2015
than 2014 and the average exchange rate for the NIS against the Euro was 9.2% lower in 2015 than 2014, and in
total, these changes had a positive impact on our operating results in 2015. The average exchange rate for the NIS
against the dollar was 0.9% lower in 2014 than 2013 and the average exchange rate for the NIS against the Euro was
1.1% lower in 2014 than 2013, and in total, these changes had a negative impact on our operating results in 2014.
We estimate that a devaluation of 1% of the dollar against the NIS would result in a decrease of approximately
$200,000 in our operating income. As of December 31, 2015, we estimate that a devaluation of 1% of the Euro
against the NIS would not have a material impact on our operating and financial results.
If we were to determine that it is in our best interests to enter into hedging transactions in the future in order
to protect ourselves in part from currency fluctuations, we may not be able to do so, or such transactions, if entered
into, may not materially reduce the effect of fluctuations in foreign currency exchange rates on our results of
operations and may result in additional expenses.
Commodity Price Risk
Cost of raw materials is a significant component of our cost of revenues. In 2015, the cost of raw materials
used in production was $12.0 million compared to $13.0 million in 2014. A 1% increase or decrease in the cost of
raw materials used in production would increase or decrease our cost of raw materials by approximately $120,000.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our short-term credit lines,
short-term loans and long-term loans. For information on the interest rates of our short-term credit lines, short-term
loans and long-term loans, see Item 5B. “Operating and Financial Review and Prospects - Liquidity and Capital
Resources.” For purposes of specific risk analysis, we use sensitivity analysis to determine the impact that market
risk exposure may have on the financial expenses derived from our short-term credit lines and long-term loans.
Based on our loans balance at December 31, 2015, a hypothetical increase of 1% in the interest rates would result in
70
an increase of approximately $23,000 in our financial expenses. A hypothetical increase of 1% in the CPI would not
have a material impact on our financial and operational expenses.
Credit Risk
We may be subject to significant concentrations of credit risk consisting principally of cash and cash
equivalents and trade accounts receivable. Cash and cash equivalents are deposited with major financial institutions
in Israel, Europe and the United States.
The risk of collection associated with trade receivables is reduced by the geographical dispersion of our
customer base. However, our business involves selling products to customers for whose credit we do not have
insurance coverage, and we are exposed to risk with respect to our receivables from them.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14.
None.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
ITEM 15.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our chief
executive officer and chief financial officer to allow timely decisions regarding required disclosure. Our
management, including our chief executive officer and chief financial officer, conducted an evaluation of our
disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period
covered by this Annual Report on Form 20-F. Based upon that evaluation, our chief executive officer and chief
financial officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our
financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated
under the Securities Exchange Act as a process designed by, or under the supervision of, our company’s principal
executive and principal financial officers and effected by our company’s board of directors, management and other
personnel, 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 and includes
those policies and procedures that:
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of our company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
71
expenditures of our company are being made only in accordance with authorizations of management
and directors of our company; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of our company’s assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. 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.
Our management assessed the effectiveness of our internal control over financial reporting as of December
31, 2015. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that
assessment, our management concluded that as of December 31, 2015, our internal control over financial reporting
is effective.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the period
covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
ITEM 16.
[RESERVED]
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Gad Dovev, an external director, meets the definition of an
audit committee financial expert, as defined by rules of the SEC. For a brief listing of Mr. Dovev’s relevant
experience, see Item 6A. “Directors, Senior Management and Employees - Directors and Senior Management.”
ITEM 16B.
CODE OF ETHICS
We have adopted a code of ethics that applies to our chief executive officer and all senior financial
employees of our company, including the chief financial officer and the comptroller. The code of ethics is publicly
available on our website. Written copies are available upon request. If we make any substantive amendment to the
code of ethics or grant any waivers, including any implicit waiver, from a provision of the codes of ethics, we will
disclose the nature of such amendment or waiver on our website.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Registered Public Accounting Firm Fees
The following table sets forth, for each of the years indicated, the fees billed by our independent registered
public accountants. Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, serve as our principal
independent registered public accounting firm since October 2014. Somekh Chaikin, a member firm of KPMG
International, has served as our independent registered public accounting firm prior to the appointment of Kost Forer
Gabbay & Kasierer.
All of such fees were pre-approved by our Audit Committee.
Services Rendered.
Audit (1) ...........................
Audit Related Fees ..........
Tax (2) ..............................
All other Fees (3)
2015
2014
$67,000
-
3,000
12,000
$67,000
-
$3,000
$12,000
2013
$108,000
-
$5,000
72
Total ................................
______________
(1)
82,000
$82,000
$113,000
Audit fees relate to audit services provided for each of the years shown in the table, including fees
associated with the annual audit, consultations on various accounting issues and audit services
provided in connection with statutory or regulatory filings.
Tax fees relate to services performed regarding tax compliance.
Other fees are fees for professional services other than audit or tax related fees.
(2)
(3)
Pre-Approval Policies and Procedures
Our audit committee has adopted a policy and procedures for the pre-approval of audit and non-audit
services rendered by our independent registered public accounting firm, Kost Forer Gabbay and Kasierer, a member
of Ernst and Young Global. Pre-approval of an audit or non-audit service may be given as a general pre-approval,
as part of the audit committee’s approval of the scope of the engagement of our independent auditor, or on an
individual basis. Any proposed services exceeding general pre-approved levels also require specific pre-approval by
our audit committee. The policy prohibits retention of the independent registered public accounting firm to perform
the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act or the rules of the SEC, and
also requires the audit committee to consider whether proposed services are compatible with the independence of the
registered public accountants.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
Neither we nor any affiliated purchaser has purchased any of our securities during 2015.
ITEM 16F.
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G.
CORPORATE GOVERNANCE
Under NASDAQ Stock Market Rule 5615(a)(3), foreign private issuers, such as our company, are
permitted to follow certain home country corporate governance practices instead of certain provisions of the
NASDAQ Stock Market Rules. A foreign private issuer that elects to follow a home country practice instead of any
of such NASDAQ rules must submit to NASDAQ, in advance, a written statement from an independent counsel in
such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws.
We have notified NASDAQ that we do not comply with the following NASDAQ requirements, and instead
follow Israeli law and practice in respect of such requirements:
• The requirement to maintain a majority of independent directors, as defined under the NASDAQ Stock
Market Rules. Instead, we follow Israeli law and practice which requires that we appoint at least two
external directors, within the meaning of the Companies Law, to our board of directors. We do have
the mandated three independent directors, within the meaning of the rules of the SEC and NASDAQ,
on our audit committee. See Item 6C. “Directors, Senior Management and Employees - Board
Practices - External and Independent Directors.”
• The requirements regarding the directors’ nominations process. Under Israeli law and practice our
board of directors is authorized to recommend to our shareholders director nominees for election. See
Item 6C. – “Directors, Senior Management and Employees - Board Practices - Election of Directors.”
73
• The requirement regarding the quorum for any meeting of shareholders. Instead, we follow Israeli law
and practice which provides that, unless otherwise provided by a company’s articles of association, the
quorum required for a general meeting of shareholders is at least two shareholders present who hold, in
the aggregate, 25% of the company’s voting rights. Our articles of association provide that the quorum
required for a shareholder meeting consists of at least two shareholders present in person or
represented by proxy who hold or represent, in the aggregate, at least 33% of the voting rights of the
issued share capital. See Item 10A. “Additional Information - Share Capital - Annual and
Extraordinary Meetings of Shareholders.”
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 17.
FINANCIAL STATEMENTS
Not applicable.
ITEM 18.
FINANCIAL STATEMENTS
Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms ............................................................F-2
Consolidated Balance Sheets ...............................................................................................................F-4
Consolidated Statements of Comprehensive Income ..........................................................................F-6
Consolidated Statements of Changes in Shareholders’ Equity ............................................................F-7
Consolidated Statements of Cash Flows .............................................................................................F-8
Notes to the Consolidated Financial Statements .................................................................................F-9
74
ITEM 19.
EXHIBITS
Index to Exhibits
Exhibit
Description
1.1
1.2
2.1
4.1
4.2
4.3
4.4
8.1
12.1
12.2
13.1
13.2
Memorandum of Association of the Registrant (1)
Articles of Association of the Registrant, as amended (2)
Specimen of Share Certificate (1)
Compensation Policy dated November 28, 2013, approved on January 9, 2014. (3)
Bank Hapoalim B.M. Agreement dated April 27, 2014: Summary of Economic Terms;
Irrevocable Undertakings (4)
Bank Leumi B.M. Agreement dated May 27, 2014: Summary of Economic Terms;
Irrevocable Undertakings (4)
English summary of terms of Wasterwater Treatment Facility Building and Operation
Agreement, dated July 3, 2014, by and between the Registrant and Elad Technologies
(L.S.) (4)
List of Subsidiaries of the Registrant (5)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended. (5)
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1924, as amended. (5)
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (5)
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (5)
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.PRE*
XBRL Taxonomy Presentation Linkbase Document.
101.CAL*
XBRL Taxonomy Calculation Linkbase Document.
101.LAB*
XBRL Taxonomy Label Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
_____________________
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a
registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as
amended, are deemed not filed for the purposes of Section 18 of the Securities and Exchange Act of
1934, as amended, and otherwise are not subject to liability under those sections.
(1) Filed as an exhibit to our registration statement on Form F-1, registration number 333-5770, as
amended, and incorporated herein by reference.
(2) Included in Exhibit 99.1 to our Report of Foreign Issuer on Form 6-K filed on September 12, 2013 and
incorporated herein by reference.
75
(3) Included as Exhibit A to Exhibit 99.1 to our Report of Foreign Issuer on Form 6-K filed on December
5, 2013 and incorporated herein by reference.
(4) Filed as Exhibits 4.11 - 4.13 to our Annual Report on form 20-F for the year ended December 31,
2014, and incorporated herein by reference.
(5) Filed herewith.
76
[FINANCIAL STATEMENTS TO BE INSERTED HERE]
F-0
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.
S I G N A T U R E S
ELTEK LTD.
/s/ Yitzhak Nissan
By:
Name: Yitzhak Nissan
Title: Chairman and Chief Executive Officer
/s/ Amnon Shemer
By:
Name: Amnon Shemer
Title: Vice President, Finance and Chief Financial Officer
Dated: March 23, 2016
66
LIST OF SUBSIDIARIES
Exhibit 8.1
We have the following active subsidiaries:
Subsidiary Name
Eltek USA Inc. ................................................................................
Delaware
Eltek Europe GmbH ................................................................Germany
Germany
Kubatronik Leiterplatten GmbH .....................................................
Country/State of
Incorporation
Ownership
Percentage
100%
100%
79%
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 12.1
I, Yitzhak Nissan, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Eltek Ltd.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
company as of, and for, the periods presented in this report;
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and
have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that
occurred during the period covered by the annual report that has materially affected, or is
reasonably likely to materially affect, the company’s internal control over financial reporting; and
5.
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the company’s auditors and the audit committee of the
company’s board of directors (or persons performing the equivalent function):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the company’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the company’s internal control over financial reporting.
Date: March 23, 2016
/s/ Yitzhak Nissan *
Yitzhak Nissan Chairman and Chief Executive Officer
*
made available for inspection upon request.
The originally executed copy of this Certification will be maintained at the company’s offices and will be
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 12.2
I, Amnon Shemer, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Eltek Ltd.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
company as of, and for, the periods presented in this report;
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and
have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that
occurred during the period covered by the annual report that has materially affected, or is
reasonably likely to materially affect, the company’s internal control over financial reporting; and
5.
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the company’s auditors and the audit committee of the
company’s board of directors (or persons performing the equivalent function):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the company’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the company’s internal control over financial reporting.
Date: March 23, 2016
/s/ Amnon Shemer*
Amnon Shemer
Vice President, Finance
and Chief Financial Officer
*
made available for inspection upon request.
The originally executed copy of this Certification will be maintained at the company’s offices and will be
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the Annual Report of Eltek Ltd. (the “Company”) on Form 20-F for the period ending December
31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Yitzhak Nissan,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Yitzhak Nissan *
Yitzhak Nissan
Chairman and Chief Executive Officer
March 23, 2016
*
made available for inspection upon request.
The originally executed copy of this Certification will be maintained at the Company’s offices and will be
This Certification accompanies this Annual Report on Form 20-F pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). This Certification will not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
In connection with the Annual Report of Eltek Ltd. (the “Company”) on Form 20-F for the period ending December
31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Amnon
Shemer, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906
of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Amnon Shemer*
Amnon Shemer
Vice President, Finance
and Chief Financial Officer
March 23, 2016
*
made available for inspection upon request.
The originally executed copy of this Certification will be maintained at the Company’s offices and will be
This Certification accompanies this Annual Report on Form 20-F pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). This Certification will not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference.
ELTEK LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2015
US DOLLARS IN THOUSANDS
INDEX
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
- - - - - - - - - - -
Page
F-2
F-4
F-6
F-7
F-8
F-9
7593838.1 7593838.1
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
ELTEK LTD.
We have audited the accompanying consolidated balance sheets of Eltek Ltd. and its Subsidiaries (the
"Company") as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive
income, changes in shareholders' equity and cash flows for each of the two years in the period ended
December 31, 2015. These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits 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. We were not
engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included
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, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2015
and 2014, and the consolidated results of their operations and their cash flows for each of the two years in the
period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
Tel-Aviv, Israel
March 23, 2015
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
7593838.1 7593838.1
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Eltek Ltd.
We have audited the accompanying consolidated statements of comprehensive income, changes in
shareholders' equity and cash flows for the year ended December 31, 2013 of Eltek Ltd. and its Subsidiaries
(the “Company”). These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the results of its operations and its cash flows for the year ended December 31, 2013, in conformity with U.S.
generally accepted accounting principles.
Somekh Chaikin
Certified Public Accountants (Isr.)
Member firm of KPMG International
April 27, 2014
7593838.1 7593838.1
F-3
CONSOLIDATED BALANCE SHEETS
ELTEK LTD. AND ITS SUBSIDIARIES
December 31,
2015
2014
Note
US Dollars in thousands
ASSETS
Current Assets
Cash and cash equivalents
Trade accounts receivable, net of allowance for doubtful accounts
Inventories
Prepaid expenses and other current assets
Total current assets
Severance pay fund
Fixed assets, net
Deferred tax assets, net
Intangible assets
Total assets
2
1h
3
9
4
14
1,038
8,015
4,450
460
1,129
8,227
4,670
857
13,963
14,883
49
49
10,067
10,070
1,064
1,056
276
208
25,419
26,266
The accompanying notes are an integral part of these consolidated financial statements.
7593838.1 7593838.1
F-4
CONSOLIDATED BALANCE SHEETS
ELTEK LTD. AND ITS SUBSIDIARIES
December 31,
2015
2014
Note
US Dollars in thousands
6
7
8
9
10
11
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term credit and current maturities of long-term debt
Accounts payable:
Trade
Other current liabilities
Total Current liabilities
Long-term liabilities
Long-term debt, excluding current maturities
Employees' severance benefits
Total long-term liabilities
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Ordinary shares, NIS 0.6 par value Authorized 50,000,000 shares,
issued and outstanding 10,142,762 shares as of December 31, 2015
and 10,142,762 as of December 31, 2014
Additional paid-in capital
Cumulative foreign currency translation adjustments
Capital reserves
Accumulated deficit
Total Eltek Ltd. shareholders' equity
Non-controlling interest
Total equity
1,275
2,722
6,112
4,594
7,077
5,156
11,981
14,955
2,905
289
3,194
1,838
249
2,087
1,985
17,270
1,892
695
(11,507)
1,985
17,270
1,907
695
(12,550)
10,335
9,307
(91)
(83)
10,244
9,224
Total liabilities, shareholders' equity and non- controlling interest
25,419
26,266
The accompanying notes are an integral part of these consolidated financial statements.
March 22, 2016
Date of approval of the
financial statements
Amnon Shemer
Vice President, Finance and
Chief Financial Officer
Yitzhak Nissan
Chairman of the Board
of Directors and Chief
Executive Officer
F-5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
ELTEK LTD. AND ITS SUBSIDIARIES
REVENUES
Cost of revenues
Gross profit
Operating expenses
R&D expenses
Selling, general and administrative expenses
Impairment of goodwill
Operating profit (loss)
Financial expenses, net
Other income (loss), net
Profit (loss) before income tax (expense) benefit
Income tax (expense) benefit
Net profit (loss)
Net loss attributable to non-controlling
interest
Note
12
16B
13
14
2015
Year ended
December 31,
2014
US Dollars in thousands
(except profit per share data)
2013
41,350
(34,802)
46,626
(40,604)
50,235
(42,242)
6,548
6,022
7,993
(90)
(4,961)
-
1,497
(259)
6
1,244
(218)
(72)
(6,773)
(80)
(903)
(356)
38
(1,221)
(1,634)
-
(6,722)
-
1,271
(439)
(26)
806
2,975
1,026
(2,855)
3,781
17
190
42
Net profit (loss) attributable to Eltek Ltd.
1,043
(2,665)
3,823
Other comprehensive income (loss):
Foreign currency translation adjustments
(6)
(1,268)
487
Comprehensive income (loss)
1,020
(4,123)
4,268
Comprehensive loss attributable to non-controlling
interest
(8)
(179)
(28)
Comprehensive income (loss) attributable to Eltek Ltd.
1,028
(3,944)
4,296
Basic and diluted net profit (loss) per ordinary share
attributable to Eltek Ltd. shareholders
Weighted average number of ordinary shares used to
compute basic and diluted net profit (loss) per
ordinary share attributable to Eltek Ltd. shareholders
0.1
(0.26)
0.53
10,142,762 10,142,762
7,198,883
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ELTEK LTD. AND ITS SUBSIDIARIES
Company's shareholders
Ordinary
shares
Amount
Additional
paid-in
capital
Accumulated
other
comprehensive
income
Capital
reserves
US Dollars in thousands (except profit per share data)
Accumulated
deficit
Equity
attributed to
Eltek Ltd. and
subsidiaries
Non
controlling
interest
Total
Balance as of January 1, 2013
6,610,107
1,384
14,328
2,713
695
(13,708)
5,412
124
5,536
Changes during the year
Foreign currency translation adjustments
Net profit
Comprehensive income
-
-
-
-
-
-
-
-
Issuance of shares, net of costs
3,532,655
601
2,942
473
-
-
-
-
-
-
-
-
3,823
-
-
473
3,823
4,296
3,543
Balance as of December 31, 2013
10,142,762
1,985
17,270
3,186
695
(9,885)
13,251
Changes during the year
Foreign currency translation adjustments
Net profit (loss)
Comprehensive loss
-
-
-
-
-
-
-
-
-
(1,279)
-
(1,279)
-
-
-
-
(2,665)
(1,279)
(2,665)
(2,665)
(3,944)
14
(42)
(28)
-
96
11
(190)
(179)
487
3,781
4,268
3,543
13,347
(1,268)
(2,855)
(4,123)
Balance as of December 31, 2014
10,142,762
1,985
17,270
1,907
695
(12,550)
9,307
(83)
9,224
Changes during the year
Foreign currency translation adjustments
Net income ( loss)
Comprehensive income (loss)
-
-
-
-
-
-
-
-
-
(15)
-
(15)
-
-
-
-
1,043
1,043
(15)
1,043
1,028
Balance as of December 31, 2015
10,142,762
1,985
17,270
1,892
695
(11,507)
10,335
9
(17)
(8)
(91)
(6)
1,026
1,020
10,244
The accompanying notes are an integral part of these consolidated financial statements.
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
ELTEK LTD. AND ITS SUBSIDIARIES
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss)
1,026
(2,855)
3,781
Year ended
December 31,
2014
US Dollars in thousands
2013
2015
Adjustments to reconcile net profit to net cash flows provided by
operating activities:
Depreciation and goodwill amortization
Capital loss on disposal of fixed assets
Revaluation of long term loans
Decrease (increase) in deferred tax benefit
Changes in employee severance benefits, net
Decrease (increase) in trade receivables
Decrease (increase) in other receivables and prepaid expenses
Decrease (increase) in inventories
Increase (decrease) in trade payables
Increase (decrease) in other liabilities and accrued expenses
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible assets
Purchase of fixed assets, net
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short- term credit
Repayment of long-term loans
Proceeds from long-term loans
Proceeds from issuance of shares
Repayment of credit from fixed asset payables
Effect of exchange rate on cash and cash equivalents
Net increase (decrease) in cash
Cash at beginning of the year
Cash at end of the year
SUPPLEMENTAL CASH FLOW INFORMATION:
Income tax paid
Interest paid
Non-cash activities:
Purchase of fixed assets
1,731
85
10
133
41
171
249
213
(1,396)
(543)
1,720
1,893
101
16
1,528
(59)
(78)
(319)
848
(1,441)
445
1,739
26
1
(3,012)
217
(1,531)
46
(451)
655
147
79
1,618
(69)
(797)
(212)
(2,431)
(866)
(2,643)
(2,063)
(207)
1,707
-
(505)
1,352
(806)
1,179
-
(477)
123
(69)
(91)
1,129
(1,385)
2,514
-
(950)
(950)
(2,577)
(564)
-
3,543
(515)
(113)
24
579
1,935
1,038
1,129
2,514
43
175
40
146
110
356
984
523
514
Net cash provided by (used in) financing activities
(1,068)
1,248
The accompanying notes are an integral part of these consolidated financial statements.
F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 1:- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a.
General:
Eltek Ltd. ("the Parent") was organized in Israel in 1970, and the Parent's shares have
been publicly traded on the NASDAQ Capital Market since 1997. Eltek Ltd. and its
subsidiaries (see below) are collectively referred to as "the Company".
The Company manufactures, markets and sells custom made printed circuit boards
("PCBs"), including high density interconnect, flex-rigid and multi-layered boards. The
principal markets of the Company are in Israel, Europe and North America.
The Company markets its product mainly to the medical technology, defense and
aerospace, industrial, telecom and networking equipment, as well as to contract electronic
manufacturers, among other industries. The Company’s business is subject to numerous
risks including, but not limited to, (1) the impact of currency exchange rates (mainly
NIS/US$ ), (2) the Company's success in implementing its sales and manufacturing plans,
(3) the impact of competition from other companies, (4) the Company's ability to receive
regulatory clearance or approval to market its products, (5) changes in regulatory
environment, (6) domestic and global economic conditions and industry conditions, and
(7) compliance with environmental laws and regulations. Further, the Company's liquidity
position, as well as its operating performance, may be negatively affected by other
financial and business factors, many of which are beyond its control.
On August 19, 2013, the Parent entered into an agreement to issue and sell 3,532,655 of
its ordinary shares, par value NIS 0.6 each, to Nistec Ltd. ("Nistec"), a private company
organized under the laws of the State of Israel, for $ 4.2 million. Nistec is controlled by
Yitzhak Nissan, who owns all of the shares of Nistec. Also, on August 19, 2013, Nistec
purchased 1,589,440 of the Parent's ordinary shares from Merhav M.N.F. Ltd., a
company owned by Mr. Yosef Maiman, which at the time held 24.1% of the Parent's
outstanding ordinary shares. The total consideration paid by Nistec in the two transactions
was $ 6.5 million, $ 2.3 directly to Merhav M.N.F Ltd. and $ 4.2 million to the Parent.
Nistec financed a portion of those funds from a loan extended by Bank Leumi Le'Israel,
and the shares that Nistec acquired constitute collateral for the loan.
As a result of these transactions, which closed on November 1, 2013, Nistec acquired
50.5% of the Parent's ordinary shares on a fully diluted basis, and Nistec gained control
of the Parent.
Kubatronik Leiterplatten GmbH
In June 2002, the Parent established a wholly-owned subsidiary, EN-Eltek Netherlands
2002 B.V. ("EN-Eltek"), for the purpose of the acquisition of Kubatronik Leiterplatten
GmbH ("Kubatronik").
F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 1:- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont.)
On June 10, 2002, the Parent acquired 76% of the shares of Kubatronik for € 2.6 million
($ 2.4 million as of the date of acquisition). The acquisition resulted in the recognition of
goodwill in the amount of € 1.1 million ($ 1 million as of the date of acquisition) see Note
5.
The Parent subsequently incurred a goodwill impairment of approximately $ 1 million
and the goodwill balance was nil as of December 31, 2015 and December 31, 2014.
Pursuant to the Kubatronik acquisition agreement, the seller has the right to require the
Parent to purchase ("Put Option"), and the Parent has the right to require the Seller to sell
to the Parent ("Call Option") the Seller's remaining 24% interest in Kubatronik. The
options periods are until December 31, 2016, and are automatically extended for
additional consecutive two-year periods unless otherwise notified in writing by either
party upon at least six months prior notice. In May 2012, the seller exercised his option
with respect to 3% of the shares of Kubatronik for approximately Euro 69 ($ 89) and
reduced his share in Kubatronik from 24% to 21%. The exercise price for the seller's 21%
interest in Kubatronik under the Put Option is Euro 483 ($ 587), and the exercise price for
the seller's remaining holdings in Kubatronik under the Call Option is Euro 513 ($ 623).
As of December 31, 2015 the option is presented at the maximum exercise price of $587
in the short term liabilities. Changes in fair value are recorded in the Consolidated
Statement of Comprehensive Income. The fair value of the above options is calculated
based on the Binomial model. Changes in fair value are recorded in the Consolidated
Statement of Comprehensive income. See Note 15
Eltek USA Inc.
In 2007, the Parent established a wholly-owned subsidiary, Eltek USA Inc. for the
purpose of sales, promotion and marketing in the North American market. Eltek USA Inc.
commenced operations in 2008.
Eltek Europe GmbH
In 2008, the Parent established a wholly-owned subsidiary, Eltek Europe GmbH for the
purpose of sales, promotion and marketing to certain customers in Europe. Eltek Europe
GmbH commenced operations in 2009.
b.
Basis of presentation:
The consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America ("U.S. GAAP").
The consolidated financial statements include the accounts of the Parent and its
subsidiaries.
The Parent sells goods through its subsidiaries that function as distributors. All
in consolidation. The
intercompany
transactions and balances were eliminated
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
consolidated financial statements include the accounts of the Parent Company and its
subsidiaries. Intercompany transactions and balances including profits from intercompany
sales not yet realized outside the Company, have been eliminated upon consolidation.
Changes in the Parent Company's ownership interest with no change of control are treated
as equity transactions, rather than step acquisitions or dilution gains or losses.
Non-controlling interests in subsidiaries represent the equity in subsidiaries not
attributable, directly or indirectly, to a parent. Non-controlling interests are presented in
equity separately from the equity attributable to the equity holders of the Company. Profit
or loss and components of other comprehensive income are attributed to the Company
and to non-controlling interests. Losses are attributed to non-controlling interests even if
they result in a negative balance of non-controlling interests in the consolidated statement
of financial position.
NOTE 1:- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont.)
c.
Functional and reporting currency:
The Parent's functional currency is the New Israeli Shekel ("NIS"). Transactions
denominated in foreign currencies are translated into NIS using the prevailing exchange
rates at the date of the transaction. Gains and losses from the translation of foreign
currency transactions are recorded in financial income or expenses.
The Company's reporting currency is the U.S. dollar. Assets and liabilities are translated
to the reporting currency using the exchange rate at the end of the year. Revenues and
expenses are translated into the reporting currency using the average exchange rate for
each quarter. Translation adjustments are reported separately as a component of
accumulated other comprehensive income.
d.
Translation of foreign entity operations:
The financial statements of foreign subsidiaries are translated into the Parent's functional
currency as follows:
1.
2.
3.
Assets and liabilities are translated according to the exchange rate on the
consolidated balance sheet date including goodwill arising from the acquisition of
the subsidiary.
Income and expense items are translated according to the weighted average
exchange rate on a quarterly basis.
The resulting exchange rate differences are classified as a separate item in
shareholders' equity.
e.
Exchange rates and linkage bases:
1.
Balances linked to the Israeli Consumer Price Index ("CPI") are recorded pursuant
to contractual linkage terms of the specific assets and liabilities.
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 1:- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont.)
2.
Details of the CPI and the representative exchange rates are as follows:
Exchange rate
Israeli CPI of one US dollar
Points
NIS
Exchange rate
of one Euro
NIS
December 31, 2015
December 31, 2014
December 31, 2013
221.13
219.80
220.20
3.902
3.889
3.471
%
4.2468
4.7246
4.7819
December 31, 2015
December 31, 2014
December 31, 2013
0.6
(0.2)
1.8
0.3
12.2
(7.02)
(10.1)
(1.2)
(2.82)
f.
Use of estimates:
The preparation of the consolidated financial statements in accordance with U.S. GAAP
requires the management of the Company to make estimates and assumptions relating to
the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from these estimates.
Significant items subject to such estimates and assumptions include the useful lives of
fixed assets, allowance for doubtful accounts, valuation of derivatives, deferred tax assets,
inventory, goodwill, put/call options, income tax uncertainties and other contingencies.
g.
Cash and cash equivalents:
Cash and cash equivalents are highly-liquid investments which include short-term bank
deposits with an original maturity of three months or less from deposit date and which are
not restricted by a lien.
h.
Trade accounts receivable:
Trade accounts receivable are recorded at the invoiced amount and do not bear interest.
Amounts collected on trade accounts receivable are included in net cash provided by
operating activities in the consolidated statements of cash flows. The Company maintains
an allowance for doubtful accounts for estimated losses inherent in its accounts receivable
portfolio.
The allowance for doubtful accounts receivable is calculated on the basis of specific
identification of customer balances. The allowance is determined based on management's
estimate of the aged receivable balance considered uncollectible, based on historical
experience, aging of the receivable and information available about specific customers,
including their financial condition and volume of their operations.
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 1:- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont.)
The activity in the allowance for doubtful accounts for the three years ended December
31, 2015 is as follows:
Year ended
December 31,
2014
US Dollars in thousands
2013
2015
Opening balance
Additions during the year
Write off of allowance
Foreign currency translation adjustments
Closing balance
i.
Inventories:
62
19
-
5
86
82
21
(32)
(9)
62
95
-
(9)
(4)
82
Inventories are recorded at the lower of cost or market value. Cost is determined on the
weighted average basis for raw materials. For work in progress and finished goods, the
cost is determined pursuant to calculation of accumulated actual direct and indirect costs.
In the years ended December 31, 2013, 2014 and 2015, the Company wrote off
inventories in the amount of $219, $519 and $376, respectively.
j.
Assets held for employees' severance payments:
Assets held for employees' severance payments represent contributions to insurance
policies and deposits to a central severance pay fund, and are recorded at their current
redemption value.
k.
Fixed assets:
Fixed assets are stated at cost. Depreciation is computed by the straight-line method over
the estimated useful lives of the assets at the following annual rates:
Machinery and equipment
Leasehold improvements
Motor vehicles
Office furniture and equipment
%
5-33
6-14
15
6-33
Machinery and equipment purchased under capital lease arrangements are recorded at the
present value of the minimum lease payments at lease inception. Such assets and
leasehold improvements are depreciated and amortized respectively, using the straight-
line method over the shorter of the lease term or estimated useful life of the asset.
NOTE 1:- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont.)
F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Impairment of long-lived assets:
ELTEK LTD. AND ITS SUBSIDIARIES
Long-lived assets, such as property, plant, and equipment are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If circumstances require a long-lived asset or asset group be
tested for possible impairment, the Company first compares undiscounted cash flows
expected to be generated by that asset or asset group to its carrying value. If the carrying
value of the long-lived asset or asset group is not recoverable on an undiscounted cash
flow basis, impairment is recognized to the extent that the carrying value exceeds its fair
value. Fair value is determined through various valuation techniques including discounted
cash flow models, quoted market values and third-party independent appraisals, as
considered necessary.
As of December 31, 2015 and 2014, the Company had equipment under capital leases of
$2.5 and $1.4 million, respectively, net of accumulated depreciation of $174 and $215.
The future minimum payments under capital leases at December 31, 2015 were as
follows:
2016
2017
2018
2019
2020
Total minimum capital lease payments
l.
Intangible assets:
Long-term
651
344
249
185
35
1,464
Intangible assets are amortized over their useful lives using a method of amortization that
reflects the pattern in which the economic benefits of the intangible assets are consumed
or otherwise used up, in accordance with ASC 350, "Intangibles - Goodwill and Other."
The Parent acquired software technology during 2014-2015 which is expected to
be amortized starting in 2016.
Intangible assets are stated at cost. Depreciation is computed by the straight-line method
over the estimated useful life of 10 years.
m. Goodwill:
Goodwill is an asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately
recognized. Goodwill is reviewed for impairment at least annually. In September 2011,
the Financial Accounting Standards Board ("FASB") issued ASU 2011-08, Testing
Goodwill for Impairment, which provides an entity the option to perform a qualitative
assessment to determine whether it is more-likely-than-not that the fair value of a
reporting unit is less than its carrying amount prior to performing the two-step goodwill
impairment test. If this is the case, the two-step goodwill impairment test is required. If it
is more-likely-than-not that the fair value of a reporting unit is greater than its carrying
amount, the two-step goodwill impairment test is not required. The Company adopted this
F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
guidance in 2011.
ELTEK LTD. AND ITS SUBSIDIARIES
If the two-step goodwill impairment test is required, first, the fair value of the reporting
unit is compared with its carrying amount (including goodwill). If the fair value of the
reporting unit is less than its carrying amount, an indication of goodwill impairment
exists for the reporting unit and the entity must perform step two of the impairment test
(measurement). Under step two, an impairment loss is recognized for any excess of the
carrying amount of the reporting unit's goodwill over the implied fair value of that
goodwill. The implied fair value of goodwill is determined by allocating the fair value of
the reporting unit in a manner similar to a purchase price allocation and the residual fair
value after this allocation is the implied fair value of the reporting unit goodwill. Fair
value of the reporting unit is determined using a discounted cash flow analysis. If the fair
value of the reporting unit exceeds its carrying amount, step two does not need to be
performed.
The Company performs an annual impairment review of goodwill at the beginning of the
following year, and when a triggering event occurs between annual impairment tests. For
2013, the Company performed a qualitative assessment of goodwill and determined that it
is not more-likely-than-not that the fair values of its reporting units are less than the
carrying amounts. Accordingly, no impairment loss was recorded in 2013. Due to
ongoing losses of Kubatronik, the Company recorded impairment losses of $80 in 2014.
As of December 31, 2015, the Company had no goodwill balance.
n.
Income taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The Company
recognizes the effect of income tax positions only if those positions are more-likely–than-
not of being sustained. Recognized income tax positions are measured at the largest
amount that is greater than 50% likely of being realized. Changes in recognition or
measurement are reflected in the period in which the change in judgment occurs.
o.
Revenue recognition:
The Company recognizes revenue upon shipment of the product and after the customer
takes ownership and assumes risk of loss, collection of the corresponding receivable is
probable, persuasive evidence of an arrangement exists, and the sales price is fixed or
determinable. -
p.
Earnings per ordinary share:
Diluted earnings per ordinary share calculation is similar to basic earnings per share
except that the weighted average of ordinary shares outstanding is increased to include
the number of additional ordinary shares that would have been outstanding if the
outstanding options had been exercised, to the extent that these options had a diluted
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
effect. The Company does not presently have such dilutive instruments.
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 1:- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont.)
q.
Derivative financial instruments:
The Company may utilize derivative financial instruments principally to manage its
exposure resulting from fluctuations in foreign currency exchange rates. The Company
holds put/call options with the minority shareholder of Kubatronik for the purchase/sale
of the minority holding in Kubatronik (see Note 15).
Changes in fair value are recognized in the consolidated statements of comprehensive
income as a financing item.
The fair value of derivative financial instruments is determined on the basis of their
market values or the quotations of financial institutions. In the absence of a market value
or financial institution quotation the fair value is determined on the basis of a valuation
model.
r.
Concentration of credit risk:
Financial instruments that may subject the Company to significant concentrations of credit
risk consist principally of cash and trade accounts receivable. Cash is deposited with major
financial institutions in Israel, Europe and the United States.
The Company performs ongoing credit evaluations of the financial condition of its
customers. The risk of collection associated with trade receivables is reduced by the large
number and geographical dispersion of the Company's customer base, and the Company's
policy of obtaining credit evaluations of the financial condition of certain customers,
requiring collateral or security with respect to certain receivables, or purchase of insurance
for certain other receivables.
s.
Research and development costs:
Research and development costs incurred in the process of developing product
improvements or new products, are charged to expenses as incurred.
t.
Commitments and contingencies:
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and
penalties and other sources are recorded when it is probable that a liability has been
incurred and the amount can be reasonably estimated. Legal costs incurred in connection
with loss contingencies are expensed as incurred.
u.
Fair value measurements:
The Company utilizes valuation techniques that maximize the use of observable inputs
and minimize the use of unobservable inputs to the extent possible. The Company
determines fair value on assumptions that market participants would use in pricing an
NOTE 1:- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont.)
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
asset or liability in the principal or most advantageous market. When considering market
participant assumptions in fair value measurements, the following fair value hierarchy
distinguishes between observable and unobservable inputs, which are categorized in one
of the following levels:
•
•
•
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or
liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are
observable for the asset or liability, either directly or indirectly, for substantially
the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair
value to the extent that observable inputs are not available, thereby allowing for
situations in which there is little, if any, market activity for the asset or liability at
measurement date.
See Note 15.
v.
Recently issued accounting standards:
the FASB
issued Accounting Standards Update No. 2014-
In August 2014,
15, Presentation of Financial Statements Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entity’s Ability to Continue as a Going Concern ("ASU 2014-
15"). ASU 2014-15 requires management to evaluate whether there are conditions or
events, considered in the aggregate, that raise substantial doubt about the entity’s ability
to continue as a going concern for a period of one year after the date that the financial
statements are issued. If such conditions or events exist, an entity should disclose that
there is substantial doubt about the entity’s ability to continue as a going concern for a
period of one year after the date that the financial statements are issued. Disclosure
should include the principal conditions or events that raise substantial doubt,
management’s evaluation of the significance of those conditions or events in relation to
the entity’s ability to meet its obligations, and management’s plans that are intended to
mitigate those conditions or events. ASU 2014-15 will be effective for the annual period
ending after December 15, 2016, and for annual periods and interim periods thereafter.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU
2015-17) “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”.
ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the
separate classification of deferred income tax liabilities and assets into current and
noncurrent amounts in the consolidated balance sheet statement of financial position. The
amendments in the update require that all deferred tax liabilities and assets be classified
as noncurrent in the consolidated balance sheet. The amendments in this update are
effective for annual periods beginning after December 15, 2016, and prior interim periods
and may be applied either prospectively or retrospectively to all periods presented. Early
adoption is permitted. The Company early adopted this standard in the fourth quarter of
2015 on a prospective basis.
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 2:- CASH AND CASH EQUIVALENTS
Denominated in U.S. dollars
Denominated in NIS
Denominated in Euro
NOTE 3:- INVENTORIES
Raw materials
Work-in-process
Finished products
December 31,
2015
US Dollars in thousands
2014
537
362
139
773
150
206
1,038
1,129
December 31,
2015
US Dollars in thousands
2014
1,928
1,844
678
4,450
1,954
1,686
1,030
4,670
Raw materials inventory is net of $120 and $59 of obsolete items as of December 31, 2015, and
2014, respectively.
NOTE 4:- FIXED ASSETS, NET
Cost:
Machinery and equipment
Leasehold improvements
Motor vehicles
Office furniture and equipment
Accumulated depreciation:
Machinery and equipment
Leasehold improvements
Motor vehicles
Office furniture and equipment
Depreciated cost
F-18
December 31,
2015
US Dollars in thousands
2014
35,604
8,525
45
1,356
36,735
8,542
45
1,472
45,530
46,794
(27,489)
(6,695)
(35)
(1,244)
(35,463)
(28,896)
(6,469)
(33)
(1,326)
(36,724)
10,067
10,070
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense for the years ended December 31, 2015, 2014 and 2013 were $1,731,
$ 1,813 and $ 1,827, respectively.
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 5:- GOODWILL
Changes in the carrying amount of goodwill for the years ended December 31, 2015 and 2014
are as follows:
Balance at the beginning of the year
Impairment on goodwill
Effect of translation adjustments
December 31,
2015
US Dollars in thousands
2014
-
-
-
-
75
(80)
5
NOTE 6:- SHORT-TERM CREDIT AND CURRENT MATURITIES OF LONG-TERM DEBT
Banks:
Annual interest
rate at
December 31
2015
%
December 31,
2015
US Dollars in thousands
2014
In NIS (linked to the Prime rate)
2.45% – 2.5%
589
2,674
Current maturities of long-term debt
from banks (Note 8)
686
1,275
48
2,722
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 7:-
OTHER CURRENT LIABILITIES
Accrued payroll including amounts due to government
authorities
Provision for vacation and other employee benefits
Written put option (Note 1A)
Accrued expenses
Employees' severance benefits (Note 9D)
Provision for contingent liabilities (Note 10D)
Other liabilities
December 31,
2015
US Dollars in thousands
2014
1,066
1,455
526
600
69
363
515
4,594
1,129
1,416
587
871
401
298
454
5,156
NOTE 8:- LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES
Banks and others
Linkage terms
U.S. dollar
NIS - not linked
Euro
NIS - linked to the Prime rate
Less - current maturities (banks and others)
Annual
interest
rate at
December 31
2015
%
5 - 8.56
5 - 6
2.17
P+0.9
December 31,
2015
US Dollars in thousands
2014
844
55
394
2,906
4,199
(1,294)
2,905
403
128
659
1,157
2,347
(509)
1,838
Minimum future payments at December 31, 2015 due under the long-term (including capital
lease) debt are as follows:
First year
Second year
Third year
Forth year
Fifth year and thereafter
Long-term loan
1,337
1,029
934
846
53
4,199
Long-term debt includes capital leases in the amounts of $1,464 and $ 1,190 and current
maturities of long-term debt of $492 and $431 at December 31, 2015 and 2014, respectively.
F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The current maturities are classified to the trade payable balance as of December 31, 2015 and
2014, respectively.
ELTEK LTD. AND ITS SUBSIDIARIES
F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 8:- LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES (Cont.)
In April 2014, the Company signed a new financial undertakings letter with one bank and in
May 2014 with another bank, effective for the financial statements for the year ended December
31, 2013 and onward. The Company is required to maintain certain financial covenants,
including: (i) adjusted shareholders' equity (excluding certain intangible and other assets) equal
to the greater of $ 4.5 million or 17% of its consolidated total assets; and (ii) a debt service ratio
of 1.5. Debt service ratio is defined as the ratio of EBITDA to current maturities of long-term
debt plus interest expenses. As of December 31, 2015, the Company was in compliance with
such covenants.
As to pledges securing the loans, see Note 10a.
NOTE 9:- EMPLOYEE SEVERANCE BENEFITS
Under Israeli law and labor agreements, the Parent is required to make severance and pension
payments to retired, dismissed or resigned employees.
a.
b.
The Parent has an approval from the Israeli Ministry of Labor and Social Welfare,
pursuant to the terms of Section 14 of the Israeli Severance Pay Law, 1963, according to
which the Parent's current deposits in the pension fund and/or with the insurance
company exempt it from any additional severance obligations to the employees for whom
such depository payments were made.
The Parent's employees participate in a pension plan or individual insurance policies that
are purchased by them. The Parent's liability for severance obligations for the employees
employed for one year or more is discharged by making regular deposits with a pension
fund or the insurance policies. Under Israeli law, there is no liability for severance pay in
respect of employees who have not completed one year of employment. The amount
deposited with the pension fund or the insurance policies is based on salary components
as prescribed in the employment agreement. The custody and management of the amounts
so deposited are independent of the Parent and accordingly, such amounts funded and
related liabilities are not reflected in the balance sheet.
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 9:- EMPLOYEE SEVERANCE BENEFITS (Cont.)
For non-management employees, the Parent deposits 72% of its liability for severance
obligations with a pension fund for such employees, and upon completion of one year of
employment with the Parent, it makes a one-time deposit with the pension fund for the
remaining balance.
In 2011, the Parent, pursuant to Section 14 of the Israeli Severance Pay Law, made a
transfer of funds from a central severance fund to individual funds in the name of the
employees for the unfunded liability and discharged its liability in respect of such
employees' severance pay.
c.
Kubatronik owns an insurance policy and makes regular deposits with an insurance
company for securing pension rights on behalf of one of its former employees. Such
amounts deposited and the related liabilities are reflected in the consolidated balance
sheet.
In respect of its other employees, Kubatronik does not make any deposits for pension or
retirement rights, since such deposits are not required under German law.
d.
Total liability for employees' severance benefits as at December 31, 2015 amounted to
$ 217. The current portion amounting to $ 17 is recorded in the short-term liabilities.
Expenses recorded in respect of the unfunded liability for employee severance payments
for the years ended December 31, 2015, 2014, and 2013 were $ 40, $ 284 and $ 231,
respectively.
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES
a.
Pledges:
1.
2.
The Company has pledged certain items of its equipment and the rights to any
insurance claims on such items to secure its indebtedness to banks, as well as
placed floating liens on all of its remaining assets in favor of the banks.
The Company has pledged certain items of its equipment as a guarantee for the
implementation of its benefited enterprise for tax proposes. The Company has
determined that it is in compliance with the conditions of the approval (see Note
14a).
3.
The Company has also pledged machines to secure its indebtedness to certain
suppliers that provided financing for such equipment.
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
b.
Operating leases and other agreements:
1.
2.
3.
4.
5.
The premises occupied by the Parent and Kubatronik are leased under two
operating agreements that expire in December 2022 and May 2019, respectively.
The Parent has signed several lease and maintenance agreements for production
equipment with suppliers of equipment and software. Of such agreements, the main
principal agreement expires in September 2017.
Several production machines are leased by Kubatronik under operating agreements
which will expire in May 2019.
The Parent has an obligation to purchase inventory that is held by a supplier in the
total amount of $412.
The Parent's motor vehicles are leased under operating lease agreements, mainly
for three-year terms.
6. Minimum future payments at December 31, 2015 due under the above agreements
over the next five years and thereafter are as follows:
First year
Second year
Third year
Fourth year
Fifth year and thereafter
Premises
leases
US Dollars in thousands
Other
agreements
1,007
258
109
36
108
1,518
755
467
165
112
101
1,600
Payments required under these agreements are charged to expense by the straight-
line method over the periods of the respective leases.
Expenses recorded under these agreements for the years ended December 31, 2015,
2014, and 2013 were $1,463, $ 1,480 and $ 1,471, respectively.
c.
Indemnification agreement:
The Parent entered into an indemnification agreement with its directors and officers and
undertook to enter into the same agreement with future directors and officers, for losses
incurred by a director or officer. Such indemnification amount is limited to the lesser of
$ 2,000 or 25% of the Parent's shareholders' equity.
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
The Israeli Companies Law provides that an Israeli company cannot exculpate an officer
from liability with respect to a breach of his or her duty of loyalty. If permitted by its
articles of association, a company may exculpate in advance an officer from his or her
liability to the company, in whole or in part, with respect to a breach of his or her duty of
care. However, a company may not exculpate in advance a director from his or her
liability to the company with respect to a breach of his duty of care with respect to
distributions.
The Company's articles of association allow it to exculpate any officer from his or her
liability for breach of duty of care, to the maximum extent permitted by law, before or
after the occurrence giving rise to such liability. The Parent provided an exculpation letter
to each of its directors and officers, and agreed to provide the same to future officers.
d.
Contingent Liabilities:
Environmental Related Matters
In January 2014, July 2014, September 2015 and February 2016, the Parent received notices
from Meitav, the water company of the Petach Tikva municipality, requiring payment of
fees totaling $980 excluding VAT, for discharges of industrial wastewater allegedly not
meeting the applicable standards into the municipal sewage system. The payment demands
were made on the basis of four samplings conducted by Meitav in its premises during the
years 2013 through 2015. In December 2015, the Parent's new wastewater treatment facility
was completed. The first sample of the plant's wastewater, tested by the Israeli Ministry for
Environmental Protection (the "Ministry") in January 2016, indicated that the Parent was in
compliance with the environmental laws and regulations.
If the Parent is found to be in violation of environmental laws, then in addition to fines, it
could be liable for damages, costs of remedial actions and a range of potential penalties, and
could also be subject to a shutting down of its factory. Such sanctions could have a material
adverse effect on its business, financial condition and results of operations.
In connection with the change of control of the Parent that resulted from Nistec’s acquisition
of a controlling stake in the Parent, Israeli law requires it to obtain a new business permit in
order to continue operating its business. The Parent has submitted an application for this
permit, but has not yet received the new permit. The new permit is expected to be subject to
certain conditions, especially certain conditions imposed by the Ministry . If the Parent is
unable to comply with such requirements, certain sanctions may be imposed, including
significant fines and possibly an order shutting down the factory.
In October 2015, the Parent filed an application for an emissions permit with the Ministry.
In January 2016, the Parent received a notice of non-compliance from the Ministry, stating
that the application was incomplete and that the Parent is in breach of the Clean Air Law,
5768-2008 and the Licensing of Businesses Law, 5728-1968. Following communications
with the Ministry, the Parent committed to submit an amended application by April 2016.
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
Employee Related Matters
Three lawsuits were filed against the Parent in May 2008, in December 2014 and in
August 2015 by three employees alleging that they had suffered personal injuries during
their employment and are seeking aggregate financial compensation of approximately
$173 for past damages and additional amounts for future lost income, pain and suffering
as the court may determine.
Four other employees notified the Parent, between January 2011 and July 2013, that they
allegedly suffered personal injuries during their employment with the Company. Of these
four employees, one is seeking compensation of $150 and the others did not state their
claim amount.
The Parent submitted all these claims to its insurance company, which informed the
Parent that it is reviewing the statements of claim without prejudicing its rights to deny
coverage.
In September 2015, in November 2015, in January 2016, and in February 2016, four
former employees have filed law suits seeking additional payments in connection with
their employment with the Parent and subsequent termination. The aggregate amount
claimed is approximately $1.0 million.
NOTE 11:- SHAREHOLDERS' EQUITY
Authorized, issued and outstanding share capital in historical terms is as follows:
Authorized
December 31
2015 and 2014
Issued and outstanding
December 31,
2015
Number of shares
2014
Ordinary shares of par value NIS 0.6 each
50,000,000
10,142,762
10,142,762
Amount in US$
Ordinary shares of par value NIS 0.6 each
1,985,280
1,985,280
F-26
ELTEK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12:- ENTITY WIDE DISCLOSURES
a.
Customers who accounted for over 10% of the total consolidated revenues:
Year ended
December 31,
2014
US Dollars in thousands
2013
2015
Customer A - Sales of manufactured
products
17.9%
20.6%
18.4%
b.
Revenues by geographic areas:
Year ended
December 31,
2014
US Dollars in thousands
2013
2015
Israel
Europe
North America
India
Rest of the world
20,647
8,382
7,504
4,135
682
24,807
9,383
5,892
5,240
1,304
41,350
46,626
27,992
10,623
6,227
3,294
2,099
50,235
c.
Fixed assets, net by geographic areas:
Year ended
December 31,
2014
US Dollars in thousands
2013
2015
Israel
Europe
North America
9,388
675
4
9,161
901
8
10,067
10,070
9,534
561
13
10,108
NOTE 13:- FINANCIAL EXPENSES, NET
Year ended
December 31,
2014
US Dollars in thousands
2013
2015
Interest and exchange rate expenses on long-
term loans
Expenses on short-term credit and bank charges
Effect of exchange rate differences on other
expenses and net loss from derivative
instruments
Other financing expenses (income), net
134
143
(59)
41
259
95
54
117
90
356
106
284
19
30
439
F-27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
The Company uses forward contracts and options to manage some of its foreign exchange rate
exposures. Such transactions were not designated as hedging instruments for accounting
purposes.
NOTE 14:- TAXES ON INCOME
a.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959
(the "Law"):
1.
Beneficiary enterprise:
The Parent has production facilities in Israel qualified as "Beneficiary Enterprises"
in accordance with the Law, as amended in 2005, which provides certain tax
benefits to investment programs of an "Approved Enterprise" or "Beneficiary
Enterprise." The Parent's first Beneficiary Enterprise was converted from a
previously "Approved Enterprise" program pursuant to the approval of the Israel
Tax Authority that the Parent received in September 2006. In the past, certain of the
Parent's production facilities were granted approved enterprise status pursuant to the
Law; however, the benefit periods for such approved enterprises expired in 2005.
Additionally, the Parent has elected 2012 as the year of election.
The income generated by the "Beneficiary Enterprise" is exempt from tax over a
period of two years, beginning with the year in which the Parent first had taxable
income. The period of tax benefit of the first Beneficiary Enterprise has not yet
commenced and will expire not later than 2017. The period of tax benefit of the
second beneficiary enterprise has not yet commenced and will expire not later than
2024. The benefits are contingent upon compliance with the terms of the
Encouragement Law (export rate, etc.). The Parent is currently in compliance with
these terms.
F-28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14:- TAXES ON INCOME (Cont.)
ELTEK LTD. AND ITS SUBSIDIARIES
A company having a Beneficiary Enterprise that distributes a dividend from
exempt income, will be required in the tax year of the dividend distribution to pay
company tax on the amount of the dividend distributed (including the company tax
required as a result of the distribution) at the tax rate that would have been
applicable to it in the year the income was produced if it had not been exempt from
tax. The Parent did not have exempt income from the above "Beneficiary
Enterprise".
2.
Amendment to the Law:
On December 29, 2010 the Knesset approved the Economic Policy Law for 2011-
2012, which includes an amendment to the Law for the Encouragement of Capital
Investments – 1959 (hereinafter – "the Amendment"). The Amendment is effective
from January 1, 2011 and its provisions apply to preferred income derived or
accrued in 2011 and thereafter by a preferred company, per the definition of these
terms in the Amendment.
Companies can choose not to be included in the scope of the amendment to the
Encouragement Law and to stay in the scope of the law before its amendment until
the end of the benefits period of its approved/beneficiary enterprise. The 2012 tax
year was the last year companies could have chosen as the year of election,
providing that the minimum qualifying investment began in 2010.
The Amendment provides that only companies in Development Area A will be
entitled to the grants track and that they will be entitled to receive benefits under
this track and under the tax benefits track at the same time. In addition, the existing
tax benefit tracks were eliminated (the tax exempt track, the "Ireland" track and the
"Strategic" track) and two new tax tracks were introduced in their place, a preferred
enterprise and a special preferred enterprise, which mainly provide a uniform and
reduced tax rate for all the company's income entitled to benefits, such as: for a
preferred enterprise – in the 2011-2012 tax years – a tax rate of 10% for
Development Area A and of 15% for the rest of the country, in the 2013-2014 tax
years – a tax rate of 7% for Development Area A and of 12.5% for the rest of the
country, and as from the 2015 tax year – 6% for Development Area A and 12% for
the rest of the country. On August 5, 2013 the Knesset passed the Law for the
Change in National Priorities (Legislative Amendments for Achieving Budget
Objectives in the Years 2013 and 2014) – 2013, which cancelled the planned tax
reduction so that as from the 2014 tax year the tax rate on preferred income will be
9% for Development Area A and 16% for the rest of the country.
The Amendment also provides that no income tax will apply to a dividend
distributed out of preferred income to a shareholder that is a company, for both the
distributing company and the shareholder. A tax rate of 15% shall apply to a
dividend distributed out of preferred income to an individual shareholder or foreign
resident, subject to double taxation prevention treaties. The Law for the Change in
National Priorities (Legislative Amendments for Achieving Budget Objectives in
the Years 2013 and 2014) – 2013 raised to 20% the tax rate on a dividend
distributed to an individual and foreign resident out of preferred income as from
January 1, 2014.
F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 14:- TAXES ON INCOME (Cont.)
Furthermore, the Amendment provides relief with respect to the non-payment of
tax on a dividend received by an Israeli company from profits of an
approved/alternative/beneficiary enterprise that accrued in the benefits period
according to the version of the law before its amendment, if the company
distributing the dividend notifies the tax authorities by June 30, 2015 that it is
applying the provisions of the Amendment and the dividend is distributed after the
date of the notice (hereinafter – "the relief"). Furthermore, a distribution from
profits of the exempt enterprise will be subject to tax by the distributing company.
The Parent complies with the conditions provided in the amendment to the Law for
the Encouragement of Capital Investments for inclusion in the scope of the tax
benefits track. The Parent intends to implement the Amendment in future tax years.
Therefore, the deferred tax balance as of December 31, 2013 was calculated based
on the rate provided by the Amendment.
b.
Corporate tax rate:
Presented hereunder are the tax rates relevant to the Parent in the years 2012-2014:
2013 and 2012 - 25%, 2014 - 26.5%.
On August 5, 2013, the Knesset passed the Law for the Change in National
Priorities (Legislative Amendments for Achieving Budget Objectives in the Years
2013 and 2014) - 2013, by which, among other things, the corporate tax rate would
be raised by 1.5% to a rate of 26.5% as from 2014.
On January 4, 2016 the Knesset approved the Economic Policy Law for 2015 that
includes a decrease in the tax rate by 1.5% to 25%.
The deferred tax balances included in the financial statements as of December 31,
2015 are calculated according to the tax rates that were in effect as of the reporting
date and do not take into account the potential effects of the reduction in the tax
rate. Said effects will be included in the financial statements that will be issued
starting from the date on which the new tax rate is substantially enacted, namely in
the first quarter of 2016.
Current taxes for the reported periods are calculated according to the tax rates
presented above.
c.
Tax losses and tax credits carryforwards:
As of December 31, 2015, the Parent's tax loss carryforwards were approximately
$14.6 million of operating losses and $ 4.2 million of capital losses and
Kubatronik's tax loss carryforwards were Euro 1.5 million ($ 1.7 million) for
corporate tax and Euro 1.5 million ($ 1.7 million) for municipal corporate tax.
Additionally, the Parent's tax credits carryforward was $ 905.
The Parent's tax loss carryforward and tax credits carryforward do not have
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
expiration dates. Kubatronik's tax loss carryforward may be subject to restrictions
if a change of control in Kubatronik occurs.
ELTEK LTD. AND ITS SUBSIDIARIES
d.
Income tax assessments:
The Parent files its income tax return in Israel. Kubatronik and Eltek Europe file
their income tax returns in Germany and Eltek USA files its income tax return in
the United States.
NOTE 14:- TAXES ON INCOME (Cont.)
In Israel, the Parent has received final tax assessments through the 1995 tax year.
Assessments through the 2010 tax year are considered final due to statute of limitations.
The Israeli tax returns of the Parent may be audited by the Israeli Tax Authorities for the
tax years beginning in 2011.
Kubatronik and Eltek Europe have received final tax assessments through the 2011 tax
year. The tax returns of Kubatronik and Eltek Europe remain subject to audit for the tax
years beginning in 2012. The tax returns of Eltek USA remain subject to audit for the tax
years beginning in 2010. The Parent's other foreign subsidiaries have not yet received any
final tax assessments since their incorporation.
e.
Profit before tax and income tax expense (benefit) included in the consolidated statements
of comprehensive income:
Year ended
December 31,
2014
US Dollars in thousands
2013
2015
Profit (loss) before income tax expense:
Israel
Foreign jurisdictions
Current tax expense (benefit):
Israel
Foreign jurisdictions
Deferred taxes:
Israel
Foreign jurisdictions
Income tax expense (benefit)
1,038
206
1,244
(483)
(738)
(1,221)
(3)
72
69
149
-
149
218
-
19
19
1,581
34
1,615
1,634
782
24
806
(41)
78
37
(3,079)
67
(3,012)
(2,975)
The deferred tax assets utilized in 2015 and in 2013 were $ 181 and $ 299 respectively.
f.
Reconciliation of the theoretical income tax expense (benefit) to the actual income tax
expense:
F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the theoretical income tax expense (benefit), assuming all income is
taxable at the statutory rates applicable in Israel, and the actual income tax expense, is as
follows:
ELTEK LTD. AND ITS SUBSIDIARIES
F-32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 14:- TAXES ON INCOME (Cont.)
Year ended
December 31,
2014
US Dollars in thousands
2013
2015
Profit (loss) before income tax expense
(benefit) as reported in the consolidated
statements of comprehensive income
Statutory tax rates
Theoretical tax expense calculated
Other
Changed in liability for undistributed income of
subsidiaries
Change in valuation allowance
Adjustment to net loss carryforward
Change in effective corporate tax rates
Tax benefit arising from "Beneficiating and
Preferred enterprises" (*)
Foreign tax rate differential in subsidiaries
Total
Income tax expense (benefit)
-
g.
Deferred tax assets and liabilities:
1,244
(1,221)
26.5%
26.5%
330
36
38
(92)
-
-
(109)
15
(112)
218
(324)
182
29
1,724
-
-
40
(17)
1,958
1,634
806
25%
202
(118)
132
(2,540)
142
(757)
(70)
34
(3,177)
(2,975)
Deferred taxes reflect the tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and such amounts for
income tax purposes. Significant components of the Company's deferred tax liabilities
and assets are as follows:
F-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 14:- TAXES ON INCOME (Cont.)
Deferred tax assets:
Net operating loss carryforwards (in Israel)
Net operating loss carryforwards (outside Israel)
Capital loss carryforwards (in Israel)
Severance benefits
Provision for vacation pay
Tax credit carryforward
Allowance for doubtful accounts
Total gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Undistributed income of subsidiaries
Fixed assets - differences in depreciation
Total gross deferred tax liabilities
December 31,
2015
2014
US Dollars in thousands
2,350
492
1,110
27
200
905
14
5,098
2,532
530
1,113
29
199
869
10
5,282
(3,100)
(3,192)**
1,998
2,090**
(197)
(737)
(934)
(156)**
(721)
(877)**
Net deferred tax assets
1,064
1,213
Despite the Company's accumulated profits in Israel during the years ended December
31, 2015 and 2014, the Company recorded a full valuation allowance for deferred tax
assets with respect to its deferred tax assets in Israel due to uncertainty about its ability to
utilize such losses in the future.
During the year ended December 31, 2014 the Company recorded a tax expense of $1.6
million compared to a tax benefit of $3 million in 2013. In 2014, the Company reduced
certain of its deferred tax assets due to changes in the PCB market conditions and
increased uncertainty about its ability to utilize these tax assets in the foreseeable future.
Such uncertainty results from a reduced demand for the Company's products, a change in
the PCB buying patterns by domestic military customers, which shifted some PCB
acquisitions overseas, increased competition coupled with reduced prices in the local
market, on-going manufacturing challenges, and the possible devaluation of the US
Dollar against the NIS, all of which may adversely affect the Company’s future
profitability. Other tax expenses in 2014 were attributable to subsidiaries in the United
States and Germany.
In 2013, the Parent determined that the deferred tax assets were more-likely–than-not to
be realized in future years, based on three years of consistent profits. Accordingly, the
Company reversed the valuation allowance, in the amount of $ 2.5 million. The amount
of the deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are reduced.
F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14:- TAXES ON INCOME (Cont.)
ELTEK LTD. AND ITS SUBSIDIARIES
The ultimate realization of deferred tax assets depends on the generation of future taxable
income during the periods in which those temporary differences are deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected taxable
income, and tax-planning strategies in making this assessment. The valuation allowance
for deferred tax assets as of December 31, 2015 and 2014 was $3,100 and $ 3,192
respectively. The net change in the total valuation allowance for each of the years ended
December 31, 2015, 2014 and 2013, was an increase (decrease) of $(192), $1,597 and
$(2,540), respectively
Certain comparative figures in Notes 14F and 14G have been changed to reflect changes
in the deferred tax assets and liabilities and related valuation allowance in order to
confirm with current period presentation.
h.
Accounting for uncertainty in income taxes:
For the twelve-month periods ended December 31, 2015, 2014 and 2013, the Company
did not have any unrecognized tax benefits and thus, no interest and penalties related to
unrecognized tax benefits were recorded. In addition, the Company does not expect that
the amount of unrecognized tax benefits will change significantly within the next twelve
months.
NOTE 15:- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company measures its written put option (see Note 1A) at fair value. In accordance with
ASC 820-10, foreign currency derivative contracts are classified within Level 2, because they are
valued utilizing market observable inputs. The written put option is classified within Level 3 because
it is valued using a B&S model which utilizes significant inputs that are unobservable in the market
such as expected stock price volatility, risk-free interest rate and the dividend yield, and remaining
period of time the options will be outstanding before they expire.
The Company’s outstanding loans as of December 31, 2015 were received during 2014 and 2015,
and are presented at book value.
In addition to the above, the Company's financial instruments at December 31, 2015 and 2014,
consisted of cash and cash equivalents, bank deposits, trade and other accounts receivable, other
current assets, short-term credit provided by financial institutions, and trade and other payables. The
carrying amounts of all the aforementioned financial instruments, at face value or cost plus accrued
interest, approximate fair value due to the short maturity of these instruments.
NOTE 15:- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Cont.)
The changes in the Company's liabilities measured at fair value using significant unobservable inputs
(Level 3) during the years ended December 31, 2015 and 2014, were changes in the fair value of the
net written put option charged to financial expense in the Consolidated Statement of Comprehensive
Income, of nil and $ 93, respectively, and translation adjustments included in financial income in the
Consolidated Statement of Comprehensive Income of $ (59) and $ 60, respectively.
F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
These Consolidated Financial Statements do not include any nonrecurring fair value measurements
relating to assets and liabilities for which the Company has adopted the provisions of ASC Topic
820.
ELTEK LTD. AND ITS SUBSIDIARIES
NOTE 16:- RELATED PARTY BALANCES AND TRANSACTIONS
The Company carries out transactions with related parties as detailed below. Until November
2013, the Company's principal shareholder was also the principal shareholder of an affiliated
supplier.
One of the Company's customers, Nistec, became a related party in November 2013. The
Company sells products to Nistec, pays management fees to Nistec, purchases certain services
from Nistec and shares certain expenses with Nistec, for services that it acquires jointly with
Nistec. The Company's transactions with its related parties were carried out on an arm's-length
basis.
a.
Balances with related parties:
Trade accounts receivable
Trade accounts payable
b.
Transactions with related parties:
December 31,
2015
US Dollars in thousands
2014
173
37
74
32
Year ended
December 31,
2014
US Dollars in thousands
2013
2015
Revenues
Cost of revenues (*)
Selling, general and administrative
expenses
644
-
340
370
-
339
6
3,402
52
Insurance Expenditures - the Company may share with Nistec costs of insurance
consulting and insurance premiums in the event the Company determines that a joint
insurance policy with Nistec reduces the Company’s costs as compared to purchasing
insurance separately. Insurance expenditures will be divided between the Company and
Nistec as follows: (i) insurance consulting services costs will be divided in proportion to
the insurance premiums paid by the Company and Nistec in the preceding year; (ii) the
joint insurance premiums will be divided in proportions indicated by the insurer for each
of the Company and Nistec, had they purchased the insurance separately. The Company
will solicit updated insurance proposals at least bi-annually. The decision to enter into
such a joint insurance policy with Nistec will be subject to the approval of the Audit
Committee and the Board of Directors of Parent.
Employees Social Activities - the Company may purchase social activities for the benefit
of its employees together with Nistec. The cost of such activities will be divided between
the Company and Nistec in accordance with the ratio of the number of Company's
F-36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
employees and Nistec employees to whom the applicable activity was directed, regardless
of actual participation.
ELTEK LTD. AND ITS SUBSIDIARIES
Marketing Activities - the Company may purchase services together with Nistec.
Marketing costs will be divided between the Company and Nistec as follows: (i) to the
extent the portion of the marketing material applicable to the Company can be quantified,
costs will be divided accordingly; (ii) in the event that such costs cannot be quantified,
each of Nistec and the Company will bear 50% of the marketing costs.
(*)
The Company's purchases from such supplier accounted for 23.1% of its raw
material costs in 2013.
- - - - -
F-37