UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2003
LAPIS TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
===============================================================================
Delaware 333-100979 27-0016420
- -------------------------------------------------------------------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
===============================================================================
19 W. 34th Street, Suite 1008, New York, New York 10001
------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 937-3580
Securities registered under Section 12 (b) of the Exchange Act: NONE
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, par value $.001 per share
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 [X]
No [_]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
State the issuer's revenues for the most recent fiscal year:
$6,490,000.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. There is currently no
public market for our common stock.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 5,483,000 shares of common
stock, $.001 par value per share, as of June 23, 2004.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
TABLE OF CONTENTS
Page
PART I
Item 1. DESCRIPTION OF BUSINESS...........................................1
Item 2. DESCRIPTION OF PROPERTY...........................................8
Item 3. LEGAL PROCEEDINGS.................................................9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............9
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.........10
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........10
Item 7. FINANCIAL STATEMENTS.............................................13
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................14
Item 8A. CONTROLS AND PROCEDURES..........................................14
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(b) OF THE EXCHANGE ACT.......15
Item 10. EXECUTIVE COMPENSATION...........................................16
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................17
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................18
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.................................19
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................20
SIGNATURES .................................................................21
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
We were formed in Delaware on January 31, 2002 under the name Enertec
Electronics, Inc. and have filed two Certificates of Amendment changing our name
to Opal Technologies, Inc. and then to Lapis Technologies, Inc. We conduct
operations in Israel through our wholly owned subsidiary, Enertec Electronics
Limited ("Enertec Electronics"), an Israeli corporation formed on December 31,
1991, and Enertec Systems 2001 LTD ("Enertec Systems"), an Israeli corporation
formed on August 28, 2001, of which we own a 55% equity interest. We are
manufacturers and distributors of electronic components and products relating to
power supplies, converters and related power conversion products, automatic test
equipment (ATE), simulators and various military and airborne systems. Where the
context requires, references to "we" or "us" throughout this document include
reference to Enertec Electronics and Enertec Systems.
Enertec Electronics maintains two divisions, the Systems Division and
the Electronics Division. The Systems Division designs, develops and
manufactures test systems for electronics manufacturers in accordance with their
specifications. The Electronics Division markets and distributes the test
systems, power supplies and other electronic components manufactured by us, and
by other manufacturers who engage us to distribute their products. We have
entered into representative and distribution agreements with seven such
manufacturers, four of which have been reduced to written contracts.
Test systems and testing solutions are used to examine systems,
electrical devices or products during their final stages of production. Such
systems are tested to ensure their integrity and to foster quality control. The
process involves analyzing the product to determine which of its functions are
vulnerable to error, and to determine which type of testing equipment would best
discover and solve potential problems.
OUR SUBSIDIARIES
In April 2002, we acquired all of the outstanding capital stock of
Enertec Electronics, making it our wholly owned subsidiary. In this transaction,
we acquired 99 ordinary shares of Enertec Electronics from Harry Mund, our
President and Chief Executive Officer, in exchange for 4,750,000 shares of our
common stock. The common stock issued to Mr. Mund represented 86.6% of our
outstanding common stock after the transaction.
Enertec Management Limited (f/k/a Elcomtech Ltd.), a private Israeli
company, is a wholly owned subsidiary of Enertec Electronics. It manages the
importing of raw materials, and our engineering and electronic design services.
Enertec Systems, a private Israeli company, is owned by Enertec
Management Limited ("Enertec Management") (55%), Harry Mund (27%), our President
and Chief Executive Officer, and Zvi Avni (18%), a former employee of Enertec
Electronics Limited. The President and Chief Executive Officer of Enertec
Systems is Harry Mund, and the Chief Operating Officer is Zvi Avni. Enertec
Systems commenced operations on January 1, 2002.
ELECTRONICS DIVISION
This division is responsible for:
o The marketing and distribution of power supplies manufactured by us
and third-party firms that engage us to distribute their products;
and
o The marketing and distribution of power testing equipment that we
manufacture to our customers.
Our customers have products that require power supplies. We are
contacted by them with their specifications, and based on that data, we provide
a standard, or if necessary, a semi-custom or custom, power supply solution. Our
technical sales staff in Israel has a comprehensive understanding of our
customers' product base, which allows us to provide the most efficient power
supply solution to our customers. Our professional marketing and sales teams
1
include engineers who provide support to customers from the early stages of
product definition and first sampling, through the production stages and up to
after-sales support. Examples of products that require power supplies are
computers, modems, printers, faxes, telephones, transmitter/receivers for
commercial and military communications, radar, airborne infra-red cameras,
surveillance equipment, telecom network routers, video-conference routers,
cellular telephone transmitters/receivers, television on-routers,
internet-routers, medical MRI scanners, x-ray equipment, robots, drivers for
electric motors, and industrial control systems.
We have also entered into representative contracts or distribution
contracts with various international power supply manufacturers, these
manufacturers granted us exclusive rights to sell their products in Israel. We
solicit sales within Israel and upon receipt of purchase orders, we contact the
supply manufacturers to fulfill such orders. We thereafter apply a mark-up to
the products. We have exclusive rights in that the supply manufacturers do not
promote their products directly within Israel. Further, if a customer contacts
the supply manufacturers directly, such manufacturer will redirect the customer
to us, or advise us to contact the customer regarding the order.
We are also a major local Israeli distributor of power testing
equipment. This includes DC and AC electronic loads, that is, equipment used for
the testing of power supplies which utilize alternate current (AC) and direct
current (DC) technology. We also provide various measurement devices that
measure factors such as electrical values, voltage, current, power, resistance,
and simulators - that is, pieces of equipment used during the testing process to
simulate different input/output conditions while monitoring the responses of the
unit to determine whether the equipment is functioning correctly. Additionally,
we provide complete ATE Systems (automatic test systems), which are complete
systems typically built to automatically test electronic systems in their
entirety. Examples of such systems are power supplies, computers, modems,
telecom systems, electronic motors, communication equipment, and various
military systems used on aircrafts, ships or tanks.
SYSTEMS DIVISION
This division is responsible for designing, developing and
manufacturing test systems for electronics manufacturers based on their
specifications. Our systems are highly sophisticated and we have achieved
recognition as a major local manufacturer of ATE Systems. We also design and
manufacture various airborne military systems - for example, electronic systems
used in aircrafts such as a power supply, mission computer or a control system
for a motor or a pump, a radio transceiver, an altitude measuring device, and
sub-assemblies, which are parts of a system developed with a customer's
specifications.
Military related products are divided into two sub-sections: the
customized systems and the standard (off-the-shelf) systems. Currently we are
utilizing our resources to focus on our primary business, manufacturing and
distributing standard and customized power supplies in the non-military arena,
as well as the distribution of standard military related power supplies. In
addition to this, we have increased our equity position in Enertec Systems, an
entity in which we currently own a 55% equity interest. Enertec Systems meets
the scrupulous customer standards who demand compliance with the stringent
security clearance standards. Enertec Systems exclusively manufactures
customized military related products.
We are an ISO9001 approved company. The International Organization of
Standardization (ISO) has created this model designation to apply to
organizations that design, develop, produce, install, and service products. ISO
expects organizations to apply this model, and to meet certain requirements, by
developing a quality control system. ISO9001 is the international standard for
quality assurance and quality design. This is the most common worldwide standard
and is implemented across all kinds of organizations, including manufacturers,
schools and shops. Most customers in our industry insist on doing business with
companies that are least ISO9002 approved, a standard that is less demanding
than IS9001. The ISO9002 standard is related mainly to the quality assurance of
the manufacturing process, while the higher ISO9001 standard includes both the
quality assurance of the manufacturing process component as well as the quality
of the design. The ISO9001 standard is important for customers who are placing
orders for custom made products.
The ISO9001 quality assurance model is made up of 20 sets of quality
system requirements. The key requirements are that an organization should:
o Determine the needs and expectations of customers and other
interested parties;
2
o Establish policies, objectives and a work environment necessary to
motivate the organization to satisfy these needs;
o Design, resource and manage a system of interconnected processes
necessary to implement the policy and attain the objectives;
o Measure and analyze the adequacy, efficiency and effectiveness of
each process in fulfilling its purpose and objectives; and
o Pursue the continual improvement of the system from an objective
evaluation of its performance.
A typical process for designing, planning and implementing a quality
system is likely to involve:
o Planning the quality initiative and obtaining executive
sponsorship;
o Establishing the quality policy for the organization;
o Designing and planning the Quality Management System (QMS),
usually based on international standards;
o Establishing the quality organization, developing the quality
manual and structure of quality records;
o Determining the scope of implementation;
o Assuring quality plans;
o Reviewing deliverables and determining any actions;
o Auditing quality records;
o Defining areas for process improvement; and
o Managing the improvement program.
NEW PRODUCTS
In the third quarter of 2001, we introduced into the market an ATE for
unmanned aircraft priced at approximately $90,000. This system is designed to
test the datalink, or the communication channels, between the ground station and
the unmanned aircraft. The market has responded well to this ATE. As of December
31, 2003, we have sold 10 units to one customer, generating revenues of
approximately $900,000. These products were delivered throughout the year 2003
and our customer has expressed the intention to purchase 8 additional units
during the next 12-18 months.
In the fourth quarter of 2002, we launched a handheld pre-loadline
tester. This device is intended to test the proper functioning of the
communication between the aircraft and the payload, which payload could be bombs
or missiles. This product cost approximately $100,000 in research and
development and has been sold to a first key customer at a unit price of $
30,000. The first order for 5 units was received and delivered during 2003. As
of December 31, 2002, we have received orders from a key client for five units,
for a total of $150,000. These units were delivered in the first quarter of 2003
We have introduced a new test system for the helicopter's flight
computer. The first customer was pleased with our presentation and expressed
interest to place order during 2004. We expect to price the initial units at
$240,000 and sell additional units at a cost of about $ 90,000 per unit over the
next twelve months.
We are trying to capitalize on our technical expertise in the testing
of missiles and have introduced a comprehensive test system to test and simulate
all stages of a ground-to-air anti-missile missile. We expect to price this new
product at $325,000.
We have also designed a new innovative, small size, airborne, multiple
output power supply specially designed for infrared payloads. We expect to sell
this product at an average unit price of about $ 3,000.
Within the commercial arena we have introduced a customized ATX power
supply and have introduced a custom designed compact PCI power supply. As of the
end of 2003 we also introduced a high voltage power supply to a new, high volume
manufacturer of support systems for the IC manufacturing process.
3
MARKETING STRATEGIES
We market our products to a diverse group of manufacturers. Our
products serve the various needs of local Israeli manufacturers of electronic
systems in the following fields:
o Telecommunications;
o Medical;
o Military; and
o Industrial.
We currently sell only to Israeli companies that, in turn, incorporate
our components into their products for resale to the global markets. We
advertise in all the local Israeli technical magazines and participate in
electronic shows three to five times a year. A substantial part of the business
is from "captive" customers who have been working with us for years. Many
companies have engaged us from their inception, and have implemented our custom
designed solutions. Many of our customers use us exclusively, and have become
dependent on us for technical services, products and support, and consider us to
be their own "power supply department."
Word-of-mouth also drives our business. Our reputation is backed by
many years of providing quality products and services. Our marketing strategy
has been based on our brand name and reputation, which has grown substantially
over the last eighteen years, including eight years prior to the formation of
Enertec Electronics, when Mr. Mund conducted business under the name "Enertec
International." Interest in our business has also been generated at seminars and
exhibitions.
Over the next 24 months, we plan to be more aggressive in our marketing
efforts by introducing an array of new advertisements, a web site and new
catalogs, as well as offering free samples of our products to new customers. We
intend to provide to new customers for free, custom designed samples, or
prototypes, in accordance with each of their specifications. For instance, a
potential customer in the process of designing a new electronic product will
require a power supply. We may provide a free sample power supply to the
customer to incorporate into its design. When the product enters the production
stage, our power supply will already be an intricate part of the product,
generating orders for us. Free sampling, or prototypes, will allow potential
customers to compare our products with those of our competition and discover our
product specialization and competitive pricing.
Within the Power Supply/Electronics Division, our main competitive
advantage of the standard unit is price. The main competitive factor for the
custom unit is sophistication and application results. Our Systems Division does
not use pricing as a competitive component because each application is unique
and proprietary. The Systems Division relies on detailed customization,
innovative state of the art solutions using cutting edge technology, and its
capacity to provide optimal and cost effective solutions based on technological
specialization in all areas of military and avionics systems.
MARKET CONDITIONS
Worldwide recession in high-tech, telecommunications, and Internet
related products has affected the Electronics Division's power supplies sales.
The overall market remained in a recession during 2003. Our power supplies sales
during 2003 remained steady at the 2002 level. Our military related business has
increased by about 15% in light of the current worldwide political situation and
the demand for military products
Additionally, manufacturers that sell end products such as missiles,
aircrafts or computers, also provide a support system (e.g., an ATE) to the
end-user. The end-user uses this support system for maintenance of the end
product. Historically, support systems were made by manufacturers selling the
end products. Recently, however, manufacturers have been focusing their
resources on the end products rather than on support systems. This has opened up
a market for us to develop these systems.
The local Israeli market for ATE and simulators is estimated at $100 to
$200 million annually. We have about 6% of this market, approximately the same
level of market penetration as our competitors. This market is largely
controlled by big local defense manufacturers However, there has been a
noticeable trend by these and other defense manufacturers to outsource test
systems to specialized firms so that large manufacturers can focus their
resources on designing their core products.
4
Eligible bidders for military contracts must be "approved companies,"
which are companies that a specific customer has pre-approved to design and
manufacture for it. Few of our competitors fall within this category.
The sales of military products; which include the combined sales of
Enertec Systems 2001 Ltd and the Systems Division of Enertec Electronics Ltd,
have increased by approximately 15% during 2003, from $3,675,000 to $ 4,240,000.
These results are the direct product of our work ethic, technical superiority,
innovations in testing solutions, and cost efficient productions. At the present
time, our plant is working at near full capacity.
Our stability is largely due to our diversified client base. We had
stable increases in sales in the telecommunications, industrial control, medical
and the military core business sectors and an increase the military business,
despite the adverse worldwide market conditions. This is for two reasons. First,
our sales force pays greater attention to our customer relationships, providing
more opportunities for consultation than our competition does. Second, we offer
more customized power supplies, which, we believe, makes it more difficult for
our competitors to bid successfully on the same projects.
A key element of our growth potential is our ability to enhance our
sales and marketing team. We will need to expand our sales and marketing team
significantly over the next several years to achieve our sales targets. We will
face significant challenges and risks in building and managing our sales and
marketing team, including managing geographically dispersed sales efforts and
adequately training our sales people in the use and benefits of our products. To
succeed in the implementation of our business strategy, our management team must
rapidly execute our sales and marketing strategy.
CUSTOMERS
Our customers are mostly local Israeli manufacturers of electronic
systems from different segments of the electronics industry, representing such
fields as military, commercial, medical, and telecommunications industries. Due
to the high level of diversification of our customers, we are not dependent on
any one specific market segment; so overall performance is less affected by
fluctuation in the markets.
Israeli Aircraft Industry (IAI) accounted for approximately 57% of our
sales in 2002 and approximately 38% in 2003. Although the loss of this account
is unlikely, we have made an effort to decrease this percentage by increasing
our sales to several of our other major customers, for example Rafael, as well
as some new customers.
BACKLOG
As of December 31, 2003 we had a backlog of written firm orders for our
products and services in the amount of approximately $ 1,137,000, as compared to
a backlog of approximately $2,300,000 as of December 31, 2002. The decrease in
the backlog as of Dec 2004 compared to Dec 2002 is due to:
- During the year 2002, there was a significant increase in orders for
military ATE systems, and a decrease in orders for commercial/telecommunications
power supplies. The delivery lead-time of ATE systems is six to twelve months,
which gives rise to a significant backlog. The delivery time for commercial
products, such as power supplies, is from one to two weeks to one to two months,
so that our backlog is generally small for this kind of product.
-During the last quarter of 2003 the amount of orders for
military/customized systems received has been much lower than the last quarter
of 2002,due to end-of-year 2003 budget cuts of the Israeli Ministry of Defense.
-The backlog is also a function of the economy. That is, in tougher
economic times, companies tend to order what they need immediately, rather than
making long-term commitments by placing large orders with deliveries over long
periods of time.
5
The amounts of orders included in the December 31, 2003 backlog figure
are as follows:
o $194,000 representing test systems for missiles;
o $92,000 representing airborne power supplies and test systems for
infra-red payloads;
o $193,000 representing airborne power supplies, flight computers
and test systems for avionics.
o $198,000 representing data link test equipment.
The backlog of firm orders for commercial products is approximately
$460,000.
This figure include a variety of order for commercial/telecom/medical/
industrial power supplies as well as several orders for standard test equipment
for commercial products.
COMPETITION
We face intense competition from the existing manufacturers and
distributors of electronic components and products. Presently, several competing
companies that have greater resources than we do, such as financial,
operational, sales, marketing, and research and development resources, are
actively engaged in the manufacture and distribution of electronic components
and products. Our main competitors include Chaban Electronics Ltd., Advise
Electronics Ltd., Appletec Ltd., Migvan Technologies Ltd., Boran Technologies
Ltd., Telkoor Power Supplies Ltd., and Horizon Electronics Ltd.
However, we have been able to compete effectively with these companies
for the following reasons:
o Our power supplies are high quality, low cost, and are backed by a
large number of experienced technicians - unique combination in
this industry. Most of our sales people are engineers, who have an
understanding of our customer's requirements, allowing us to
provide cost-effective solutions.
o We have comprehensive experience in test systems, which enables
our sales people to propose the most cost-effective testing
solutions, incorporating the highest grade of software and the
most sophisticated hardware.
o We maintain a strong technical team that provides solutions to our
customers' needs within our target niche.
o Our products are sold in diversified activity fields, namely,
commercial, industrial, military, medical, systems and components.
Our products have been incorporated into many high volume production
projects with long-term purchasing agreements of up to two years. That is, our
customers' products are sold in high volume intervals, and to ensure delivery in
a timely fashion, our customers place long-term orders with us to cover their
production needs over a period of several months to up to a year. For example,
we have backlog orders to December 2004 for ATE unmanned aircrafts, and from
another client who incorporates our control systems into three of their robot
models. Additionally, we mass-produce power supplies for a client's entry
control system. Moreover, we are the sole manufacturer of power supplies for a
Video On Demand provider. We currently have an order for five hundred (500)
power supplies that are incorporated into their switchboard wideband network.
There are three (3) separate power supply components in their switchboard.
SUPPLIES AND SUPPLIERS
Our suppliers are diversified and we are not dependent upon a limited
number of suppliers for essential raw materials, energy or other items. The
manufacturers that supply to us are all established companies with facilities
and products in compliance with all relevant international standards. However,
while we are not dependent on any one supplier, disruptions in normal business
arrangements by the loss of one or a few suppliers could cause possible
short-term losses. These disruptions may be experienced if our existing
suppliers are no longer able to meet our requirements. They may also occur if
there is an industry shortage of electronic or mechanical components. Not only
could these disruptions affect our product line and limit our production
capacity, but also, in relation to the shortage of components, could result in
higher costs due to the supply shortage or the need to use higher cost
substitute components.
6
The raw materials we use are either electronic components or mechanical
components. The electronic components are purchased from suppliers and the
mechanical components are mainly manufactured by local subcontractors.
EMPLOYEES
Number of Enertec
Electronics Limited Number of
Employees as of Employees Expected
Function December 31, 2003 in 2004
- ----------------------------------------------------- ------------------------- --------------------
Management & Administration 3 3
Engineering 3 3
Production 4 4
Quality Assurance 1 1
Buyer 1 1
Marketing and Sales 2 3
Programmers 1 1
------------------------- --------------------
Total 15 16
========================= ====================
Number of Enertec
Systems 2001Limited Number of
Employees as of Employees Expected
Function December 31, 2003 in 2004
- ----------------------------------------------------- ------------------------- --------------------
Management & Administration 3 3
Engineering 20 21
Production 15 15
Quality Assurance 1 1
Buyer 1 1
Marketing and Sales 2 2
Programmers 6 6
------------------------- --------------------
Total 48 49
========================= ====================
All technical employees must sign a two-year confidentiality agreement
and a two-year non-compete agreement, which prohibits our employees, if they
cease working for us, from directly competing with us or working for our
competitors. However, Israeli courts have required employers seeking to enforce
non-compete undertakings of a former employee to demonstrate that the
competitive activities of the former employee will harm one of a limited number
of material interests of the employer, such as the secrecy of a company's
confidential commercial information or its intellectual property. We may not be
able to demonstrate that harm would be caused to us, and therefore, may be
unable to prevent our competitors from hiring and benefiting from the expertise
of our former employees. None of our employees are subject to a collective
bargaining agreement. We do not employ any supplemental benefits or incentive
arrangements for our officers or employees. All of our employees are full-time.
Management considers its employee relations to be good.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and Development costs totaled approximately $100,000 and
$226,000 for the twelve months ended December 31, 2003 and 2002 respectively (or
approximately 1.5% and 5% of revenues respectively) for both periods. These
expenditures have adequately satisfied our research and development
requirements.
The reasons for the reduced budget dedicated to R&D during 2003 include the
following:
a. During 2002 we assigned part of our engineering resources to the task of
designing new products in order to create a larger platform of new technologies.
For example: the know-how for testing the datalink of UAV's and for testing
flight computers. As a result of that R&D spending, orders were received during
the fourth quarter of 2002 and during 2003 for products which incorporated the
developed technologies.
7
b. During 2003 part of the technical resources previously engaged in R&D have
been assigned to the task of engineering the new products evolved from the R&D
for which we have received orders.
c. During 2003 we managed to pass on a significant part of the R&D cost for new
product development to our customers.
SEASONAL ASPECTS
The sales of military products experience seasonal variations: The
Ministry of Defense/Government of Israel frequently delays the release of
budgets near the end of the fiscal year, therefore new orders to the military
industry are delayed, leading to delays of orders to the local subcontractors.
When this happens it negatively affects the sales volume of the 1st quarter of
the year. In addition, some of our customers are pushing for increased
deliveries during the last weeks of the year in order to fulfill contractual
delivery obligations to their customers and also to show better business
results. This could skew our 4Q results upwards.
PATENTS AND TRADEMARKS
We are not dependent on patents or trademark protection with regards to
the operation of our business and do not expect to be at any time in the future.
GOVERNMENT REGULATION
Every electronic product must comply with the UL standards of the
United States and CE standards of Europe to be eligible for sale in the
respective countries subject to these standards. Every system must be tested,
qualified and labeled under the relevant standards. This is a complicated and
expensive process and once completed, the approved product may not be altered
for sale. The power supply system has the most stringent approval standards.
ITEM 2. DESCRIPTION OF PROPERTY
We currently maintain plants in both Haifa and Carmiel. We have no
plans to secure more space, as we believe both locations are suitable for our
needs.
Our Haifa plant is 400 square meters and includes a production hall and
management offices. We lease this property for $16,800 per annum from Mund
Holding Limited, an entity wholly owned by our President and Chief Executive
Officer, Harry Mund. We entered into this lease in January 2001. The Haifa plant
houses the headquarters and accounting offices, the imports department, sales
and administration employees, application engineers, and a service laboratory.
This plant is suitable for our present and near future needs. There is enough
space to accommodate an additional two to four sales engineers, if needed. This
space is also used to sell standard power supplies products.
Our Carmiel plant is 800 square meters and also includes a production
hall, with a research and development and engineering facility for our Systems
Division. The Carmiel property is leased at $38,400 per annum. We use the
Carmiel plant for manufacturing. It houses engineers, software programmers,
electronic hardware designers, mechanical designers, and electronic and
mechanical assembly personnel. It consists of office rooms for one to three
people, and contains one room for electronics assembly, one for mechanical
assembly, and two for final testing of finished products. The Systems Division
manufactures its customized products in this facility, and accordingly, it is
not a plant for high volume production. It is located in the Carmiel industrial
area, and is in close proximity to many of our Systems Division clients. Every
engineer has individual workstations, which contain computers that are
inter-connected by our own local network for fast communication. The plant has
been updated to satisfy all our present and near future needs. In this facility,
there is space for five additional offices, which would accommodate
approximately 15 more people, and the existing assembly rooms could accommodate
three to eight additional workers.
8
ITEM 3. LEGAL PROCEEDINGS
We are not subject to any pending or threatened legal proceedings,
except for the lawsuit described below.
Orckit Communications brought an action in the Tel Aviv District Court
on April 16th 2002, against Gaia Converter, a company for which we act as sales
representative, Alcyon Production Systems, a subcontractor of Gaia Converter,
and Enertec Electronics in the amount of one million, six hundred and twenty
thousand dollars ($1,620,000), alleging that the DC converters supplied to it by
Gaia Converter were defective and caused Orckit to replace the converters at a
substantial financial expense. Gaia Converter has advised us that the converters
in issue were free from any and all defects and were in good working order and
that it was the faulty performance of Orckit's product into which the converters
were incorporated that caused them to fail at a greater rate than anticipated by
Orckit. Enertec Electronics filed a defense to this claim on the basis that
there is no cause of action against it, as among other things, Enertec
Electronics is merely the local Israeli sales representative of Gaia Converter
and did not make any implied or express representations or warranties to Orckit
regarding the suitability of the converters or otherwise, nor was Enertec
Electronics required to do so by law. Technical specifications required by
Orckit for the converters were determined and communicated directly by Orckit to
Gaia Converter and all other communications regarding the converters were
directly between Orckit and Gaia Converter. Moreover, Orckit conducted a
qualification test of the converters and confirmed to Gaia Converter that the
converters complied with their requirements subsequent to such testing. Enertec
Electronics has had initial informal discussions with Orkit Communications about
removing Enertec Electronics as a Defendant in the action. Neither Gaia
Converter nor Alcyon Production Systems have filed a defense to this action, and
consequently Orkit Communications requested and obtained default judgments from
the Tel Aviv District Court against both Gaia Converter and Alcyon Production
Systems. The granting of these judgments renders the continuation of the action
against Enertec Electronics highly improbable. However, if the proceedings are
continued, Enertec Electronics intends to defend this action vigorously and we
do not believe that it will have a material adverse impact on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended December 31, 2003.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On June 1, 2004 the National Association of Securities Dealers, Inc.
approved the quotation of our common stock on the OTC Bulletin Board. Although
our common stock was approved for trading on the OTC Bulletin Board, historic
sales prices are not available due to inactivity since our common stock was
approved for quotation.
As of June 23, 2004, we had 5,483,000 shares of common stock issued and
outstanding owned by approximately 36 holders of record.
We have not declared cash dividends on our common stock and we do not
anticipate paying cash dividends in the foreseeable future
The following table sets forth certain information relating to equity
securities authorized for issuance under compensation plans:
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans -0- -0- -0-
approved by security holders
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders -0- -0- 500,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Total -0- -0- 500,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
Some of the information in this annual report under this caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains "forward-looking statements" that involve substantial risks
and uncertainties. You can identify these statements by forward-looking words
such as "may," "expect," "anticipate," "believe," "estimate" and "continue," or
similar words. You should read statements that contain these words carefully
because they:
o Discuss our future expectations;
o Contain projections of our future results of operations or of our
financial condition; and
o State other "forward-looking" information.
We believe it is important to communicate our expectations. However,
there may be events in the future that we are not able to accurately predict or
over which we have no control. Our actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors" and "Description of Business". and elsewhere in this prospectus.
10
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, our cash balance was $181,000, as compared to
$313,000 at December 31, 2002. Total current assets at December 31, 2003 were
$5,332,000, as compared to $4,652,000 at December 31, 2002.
Our accounts receivable at December 31, 2003 was $3,083,000, as
compared to $1,976,000 at December 31, 2002. This change in accounts receivable
is primarily due to our decision in early 2003 to extend the terms of our
accounts receivable from 60 days to 90 days. We have also granted certain of our
governmental customers additional credit terms of up to 110 days. The majority
of these firms are triple A companies and have large governmental contracts.
Accordingly, we believe that these amounts will be collected in full. The
decision to increase the payment terms of our accounts receivable was partly in
response to our local competitors providing this accommodation and partly due to
the softer Israeli economy.
We do not expect much effect on our net profitability due to the
increased period of credit granted to our customers from 60 to 90 days, and up
to 110 days for certain of our governmental customers. This increased period has
become an industry standard in Israel, and accordingly, financial institutions
have also increased their periods of credit, alleviating pressures on us.
Although this change of payment terms will minimize the overall cash flow to us,
we expect that our tight control will enable us to detect adverse situations
immediately. Such control entails credit control and constant monitoring of
clients' financial position. If we detect a problem with a customer, we will
more aggressively seek payment from, and suspend any work in process for, this
customer.
As of December 31, 2003 our working capital was $713,000, as compared
to $302,000 at December 31, 2002. Bank Leumi and Bank Hapoalim have together
extended us a total available bank debt of $3,201,000 as opposed to $2,680,000
at December 31. We have used this debt in a combination of ways; as short-term
debt, as long-term debt and in the form of lines of credit, which we use from
time to time to satisfy our temporary cash flow needs. Bank Leumi has provided
us with $2,325,000 of total debt based on our pledging of $1,900,000 of our
working capital and customers' receivables due from Israeli Aircraft Industry,
and $425,000 by the pledging of some of the financial assets of our president,
Harry Mund. Bank Hapoalim has provided us with $876,000 of total debt based on
our pledging of $541,000 of our customers' receivables due from Tadiran
Spectralink Ltd. and Elbit Systems Ltd., and $335,000 by the pledging of some of
the financial assets of Mr. Mund. Mr. Mund has personally on deposit with our
banks monies in excess of $1,000,000 which he has pledged as collateral against
our bank debt.
The current portion of long-term debt at December 31, 2003 consisted of
$ 202,000 as opposed to $23,000 at December 31 2002. Our total short-term loan
consisted of $ 1,643,000 of short-term loans and $ 202,000 of current portion of
long-term debt as follows:
$226,000 due January 2004, $54,000 due Feb 2004, $226,000 due March
2004, $186,000 due April 2004, $93,000 due May 2004, $230,000 due June 2004,
$699,000 due July 2004 and $131,000 due August 2004.
At December 31, 2003, our total bank debt was $3,201,000 as opposed to
$2,680,000 at December 31, 2002. These funds were borrowed as follows:
$1,845,000 which includes the current portion of long term debt, as various
short term loans due through August 2004; $400,000 of long-term debt due through
September 2007 and $956,000 borrowed using the bank lines of credit. As a
result, we increased the amount borrowed for the year ended December 31, 2003 by
$521,000 from $2,680,000 as of Dec 31 2002 compared with $ 3,201,000 as of Dec
31 2003. There are no other lines of credit available to us to refinance our
short-term bank loans. Additionally, we currently do not have any other sources
of financing available to us for refinancing our short-term loans. At December
31, 2003 we are current with all of our bank debt and compliant with all the
terms of our bank debt.
At December 31, 2002, and at December 31, 2003, we had receivables from
Harry Mund, our Chief Executive Officer and President, in the amounts of
$296,000 and $147,000 respectively, and from Mund Holding Limited, an entity
wholly owned by Harry Mund, in the amounts of $57,000 and zero dollars ($0.00)
as of December 31, 2002 and December 31, 2003, respectively. The loan to Mr.
Mund was extended as salary advances. The loan to Mund Holding Limited was made
pursuant to the sale of a building by us to Mund Holding Limited. The building
was sold for part cash and the balance by this loan. There are no written
agreements setting out repayment terms of either loan. The parties have orally
agreed that the amounts outstanding are due on demand. Throughout the year of
2003 Mr. Mund has made repayments in the amount of $149,000. We believe that the
current payment status will not affect our future cash flow or liquidity.
11
FINANCING NEEDS
Although we currently do not have any material commitments for capital
expenditures, we expect our capital requirements to increase over the next
several years as we continue to develop and test our suite of products, increase
marketing and administration infrastructure, and embark on developing in-house
business capabilities and facilities. Our future liquidity and capital funding
requirements will depend on numerous factors, including, but not limited to, the
levels and costs of our research and development initiatives, the cost of hiring
and training additional sales and marketing personnel to promote our products
and the cost and timing of the expansion of our marketing efforts.
FINANCINGS
During the period June 2002 through September 2002, we entered into 31
subscription agreements with private investors, pursuant to which we issued an
aggregate of 233,000 shares of our common stock at $.15 per share. These private
investments generated total proceeds to us of $34,950. The costs relating to
this offering were $45,000.
Based on our current business plan, we anticipate that our existing
cash balances and cash generated from future sales will be sufficient to permit
us to conduct our operations and to carry out our contemplated business plans
for the next twelve months. Currently, the only external sources of liquidity
are our banks, and we may seek additional financing from them or through
securities offerings to expand our operations, using new capital to develop new
products, enhance existing products or respond to competitive pressures. At the
present time, we do not have definitive plans to seek additional financing.
RESULTS OF OPERATIONS
Fiscal Year ended December 31, 2003 compared to Fiscal Year ended December 31,
2002.
For the fiscal year ended December 31, 2003 we had total revenue of
$6,490,000 versus revenue of $4,414,000 for the fiscal year ended December 31,
2002. This increase in revenue of $2,076,000, or 47%, is a result of our
consolidation of Enertec Systems for the fiscal year ended December 31,2003
versus Enertec System not being part of consolidation for the fiscal year ended
December 31,2002.
Gross profit totaled $1,871,000 for the fiscal year ended December 31,
2003 as compared to $1,765,000 for the fiscal year ended December 31, 2002, an
increase of $106,000 or 6%. Gross profit as a percentage of sales for the fiscal
year ended December 31, 2003 was 29% as compared to 40.0% for the fiscal year
ended December 31, 2002. The decrease in our gross profit percentage is a result
of our consolidation of Enertec Systems for the fiscal year ended December 31,
2003 versus Enertec System not being part of consolidation for the fiscal year
ended December 31,2002, since the gross profit margins in Enertec Systems is
lower than that of Enertec Electronics, and because of lower introductory prices
of several large orders booked by Enertec Systems during 2003 in order to gain a
foothold in the market for some new products.
Total operating expenses in each of the fiscal years ended December 31,
2003 and December 31, 2002 were comprised of selling, general and administrative
expenses. Operating expenses for the fiscal years ended December 31, 2003 and
2002 were $1,110,000 and $1,091,000, respectively, an increase of $19,000, or
1.7%. The increase in operating expenses is attributable to the general increase
in overhead which accompanied the expansion of the capacity of our business.
Our net income was $252,000 in the fiscal year ended December 31, 2003
compared to $332,000 in the fiscal year ended December 31, 2002. This decrease
was due to increase in our total debt as compared to 2002 and thereby increasing
our interest expenses by $ 138,000. The total debt was increased to manage our
cash flow as a result of the increase in days outstanding for our receivables as
explained above.
Our non-military business for the year 2003 remained steady as compared
to year 2002. For the fiscal year ended December 31, 2003, our revenue, costs of
sales and gross profits from our non-military business were $2,248,000,
12
$1,200,000 and $1,048,000 respectively, and $2,245,000, $1,058,000 and
$1,187,000 respectively for the fiscal year ended December 31, 2002. Revenue and
costs of sales increased approximately 0.13%, 13.4% and gross profits have
decreased 11.7 % for the fiscal year ended December 31, 2003, as compared to the
same period in the prior year. This decrease in the gross profit is due to the
booking of several large orders at lower unit prices in order to meet the
customers' target prices as imposed by competitors and local market conditions.
For the twelve months ended December 31, 2003, our revenue, costs of
sales and gross profits from customized military business were $4,242,000,
$3,419,000 and $823,000 respectively, and $2,169,000, $1,591,000 and $578,000,
respectively for twelve months ended December 31, 2002. Revenue, costs of sales
and gross profits have increased approximately 95%, 115% and 42.3% for the
twelve months ended December 31, 2003, as compared to the same period in the
prior year. The increase is a result of our consolidation of Enertec Systems for
the fiscal year ended December 31,2003 versus Enertec System not being part of
consolidation for the fiscal year ended December 31,2002.
Our military sales for the year ending December 31 2002 have been
focused on few major customers with one accounting for more than 50% of the
sales. During 2003 we made effort to diversify the customer's base and in order
to accomplish this strategic decision we had to accept several orders at lower
introductory prices.
On January 1, 2002, Enertec Management, a wholly owned subsidiary of
Enertec Electronics, acquired 25% of Enertec Systems from Harry Mund. This 25%
represented founding equity and was acquired by Enertec Management for $57. On
December 31, 2002, Enertec Management increased its equity position to 55% of
Enertec Systems' outstanding stock by purchasing additional shares from Zvi Avni
for $71,000. A total of 300 shares of Enertec Systems' outstanding stock were
acquired from Mr. Avni for $236.66 per share. The objective of the acquisition
was to consolidate control of Enertec Systems, bring more structure to
management, and increase the ownership position of Enertec Electronics' in a
company dedicated to carrying out specialized military contracts. The purchase
price was paid by Enertec Electronics through Enertec Management. The source of
the funds was Enertec Electronics' cash from operations. No liabilities were
assumed as a result of the purchases.
At December 31, 2003 we had two customers that accounted for
approximately 64% of accounts receivable. During the twelve months ended
December 31, 2003 and 2002, we had two customers in both periods which accounted
for approximately 51% and 80%, respectively, of our sales. For the twelve months
ended December 31, 2003, approximately 51% of our sales were to: Israeli
Aircraft Industry (38%) and Tadiran Spectralink Ltd. (13%). For the twelve
months ended December 31, 2002, approximately 80% of our sales were to: Israeli
Aircraft Industry (57%) and Tadiran Spectralink Ltd. (23%).
ITEM 7. FINANCIAL STATEMENTS
All financial information required by this Item is attached hereto
beginning on Page F-1.
13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 1, 2004, Rogoff & Company, P.C. informed the Company that they
were resigning as the Company's principal independent auditors because they were
no longer going to do audit work for public companies. Going forward from April
1, 2004 our principal independent auditor will be Gvilli & Co. C.P.A. The
decision to engage Gvilli & Co. was taken upon the unanimous approval of our
Board of Directors.
During the last two fiscal years ended December 31, 2003 and December
31, 2002 and through April 1, 2004, (i) there were no disagreements between the
Company and Rogoff & Company on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure which,
if not resolved to the satisfaction of Rogoff & Company would have caused Rogoff
& Company to make reference to the matter in its reports on the Company's
financial statements, and (ii) Rogoff & Company's reports on the Company's
financial statements did not contain an adverse opinion or disclaimer of
opinion, or was modified as to uncertainty, audit scope or accounting
principles. During the last two most recent fiscal years ended December 31, 2003
and December 31, 2002 and through April 1, 2004, there were no reportable events
as the term described in Item 304(a)(1)(iv) of Regulation S-B.
During the two most recent fiscal years and through April 1, 2004, the
Company has not consulted with Gvilli & Co. regarding either:
1. the application of accounting principles to any specific
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements, and neither a written
report was provided to the Company nor oral advice was provided that KC
concluded was an important factor considered by the Company in reaching a
decision as to the accounting, auditing or financial reporting issue; or
2. any matter that was either subject of disagreement or event, as
defined in Item 304(a)(1)(iv)(A) of Regulation S-B and the related instruction
to Item 304 of Regulation S-B, or a reportable event, as that term is explained
in Item 304(a)(1)(iv)(A) of Regulation S-B.
The Company has requested that Rogoff & Company furnish it with a
letter addressed to the Securities and Exchange Commission stating whether it
agrees with the above statements.
ITEM 8A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer, of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
Act). Based upon this evaluation, our chief executive officer and chief
financial officer concluded that the our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. There was no significant change in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation.
14
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The members of our board of directors and our executive officers,
together with their respective ages and certain biographical information are set
forth below. Our directors receive no compensation for their services as board
members but are reimbursed for expenses incurred by them in connection with
attending board meetings. All directors hold office until the next annual
meeting of our stockholders and until their successors have been duly elected
and qualified. Our executive officers are elected by, and serve at the
designation and appointment of, the board of directors. There are no family
relationships among any of our directors or executive officers.
Name Age Position
------------------ ----- ------------------------------------------------
Harry Mund 56 Chairman of the Board, Chief Executive Officer,
President and Secretary
Miron Markovitz 56 Director and Chief Financial Officer
The following is a brief account of the business experience of each of
our directors and executive officers during the past five years or more.
HARRY MUND, our Chairman of the Board, Chief Executive Officer,
President and Secretary since our inception, and has been the Chief Executive
Officer and President of our subsidiary, Enertec Electronics Limited, since
1987. Mr. Mund is also the Chief Executive Officer and managing director of
Enertec Management Limited (f/k/a Elcomtech Limited), a wholly owned subsidiary
of Enertec Electronics Limited. From 1983 to 1987, Mr. Mund was the President
and Chief Executive Officer of Enercon International, a marketing and sales firm
of military and commercial power supplies and test equipment. Enercon
International's activities were transferred to Enertec International in 1987,
which subsequently became Enertec Electronics Limited in 1992. From 1975 to
1983, Mr. Mund worked for Elbit Systems as a design engineer of advanced test
systems and as the head of the ATE engineering group. Mr. Mund attended
Ben-Gurion University from 1970 to 1974 and earned a Bachelor of Science as an
Electronic Engineer.
MIRON MARKOVITZ, a Director and our Chief Financial Officer since our
inception, has been the Chief Financial Officer of our subsidiary, Enertec
Electronics Limited, since 1992, responsible for its accounting and financial
management. He attended Haifa University from 1975 to 1978 and earned a BA in
economics and accounting.
SIGNIFICANT EMPLOYEES
The following is a brief description of the business experience of each
of our significant employees:
ZVI AVNI, 40, was the System Division Manager for our subsidiary,
Enertec Electronics Limited, from February 1997 to January 2002. His
responsibilities included the design and manufacture of automatic test systems.
Mr. Avni has 18 years of experience with ATE systems for the military market and
worked at Elbit Systems for 12 years as an ATE group leader. Since January 2002,
Mr. Avni has worked for Enertec Systems 2001 Ltd., which is owned by Enertec
Management Limited (55%), Harry Mund (27%) and Mr. Avni (18%), and continues to
be responsible for the design and manufacture of the Automatic Test Systems. Mr.
Avni graduated from Haifa Technion Institute of Technology in 1982 and earned a
degree as a Practical Electronic Engineer.
YAAKOV OLECH, 51, has been employed by our subsidiary, Enertec
Electronics Limited, since March 1991. Mr. Olech is head of our customer service
electronic lab and technical support, providing after-sales customer support and
repair services for products under warranty or by utilizing service contracts
for repair of power supplies. He attended Radiotechnical Institute, Minsk, USSR
from 1976 to 1979 and has earned a Master in Science in electronic engineering.
DR. ALEXANDER VELICHKO, 55, has 28 years of experience as leading
research and development engineer and head of the research and development group
at several companies. From 1981 to 1990, he was a lecturer of electronics and
automation at the Engineering Institute, Karatau, Kazahtan. From 1990 to 1999,
Dr. Velichko was chief engineer of the Laboratory of Electronics and
15
Automatization Karatau, Kazakhtan, responsible for development of compact
analog/digital measurement devices. Since February 2000 he has been Enertec
Electronics Limited's chief scientist and head of research and development. Dr
Velichko is responsible for the design of custom-made power supplies. He earned
a PhD in Automatic Control at the Moscow Institute of Mining, which he attended
from 1964 to 1969, and earned a Master in Science at Tomsk Institute of
Electronic Engineering.
Our future success depends, in significant part, on the continued
service of Mr. Mund, and certain other key executive officers, managers, and
sales and technical personnel, who possess extensive expertise in various
aspects of the our business, including Mr. Markovitz, Mr. Avni, Mr. Olech, and
Dr. Velichko. We may not be able to find an appropriate replacement for any of
our key personnel. Any loss or interruption of our key personnel's services
could adversely affect our ability to implement our business plan. It could also
result in our failure to create and maintain relationships with strategic
partners that are critical to our success. We do not presently maintain key-man
life insurance policies on any of our officers.
AUDIT COMMITTEE
We do not have a separately designated standing audit committee, or a
committee performing similar functions. We also do not have an audit committee
financial expert (as defined in Item 401 of Regulation S-B).
CODE OF ETHICS
We have adopted our Code of Ethics and Business Conduct for Officers,
Directors and Employees that applies to all of our officers, directors and
employees. The Code of Ethics is filed herewith as Exhibit 14.1
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT:
Based on our review of copies of all disclosure reports filed by our
directors and executive officers pursuant to Section 16(a) of the Securities
Exchange Act of 1934, as amended, the following directors and executive officers
of the Company failed to timely file reports: Mr. Harry Mund and Miron Markovitz
have never filed a Form 3 with the Securities and Exchange Commission.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows compensation earned by our Chief Executive
Officer and President during fiscal 2003, 2002 and 2001. Since Lapis
Technologies, Inc. did not compensate any executive during fiscal 2003, 2002 and
2001, the information in the table includes compensation paid or awarded by
Enertec Electronics Limited only. No executive officer other than Mr. Mund
received total annual compensation in excess of $100,000 during fiscal 2003,
2002 and 2001.
EXECUTIVE COMPENSATION TABLE
LONG-TERM
COMPENSATION
---------------------------- ------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ---------------------------- ------------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDER-LYING OTHER
NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($) AWARD(S) ($) SARS (#) PAYOUTS ($) SATION ($)
- --------------------------------- ----- ----------- ----------- ------------- --------------- ------------ ------------ -----------
Harry Mund, 2003 216,000 -0- -0- -0- -0- -0- -0-
Chief Executive Officer and 2002 145,550 -0- -0- -0- -0- -0- -0-
President 2001 405,900 330,000 -0- -0- -0- -0- -0-
16
2002 STOCK OPTION PLAN
We adopted, subject to stockholder approval, our 2002 Stock Option Plan
on October 16, 2002. The plan provides for the grant of options intended to
qualify as "incentive stock options", options that are not intended to so
qualify or "nonstatutory stock options" and stock appreciation rights. The total
number of shares of common stock reserved for issuance under the plan is
500,000, subject to adjustment in the event of a stock split, stock dividend,
recapitalization or similar capital change, plus an indeterminate number of
shares of common stock issuable upon the exercise of "reload options" described
below. We have not yet granted any options or stock appreciation rights under
the plan.
The plan is will be administered by our board of directors, which will
select the eligible persons to whom options shall be granted, determines the
number of common shares subject to each option, the exercise price therein and
the periods during which options are exercisable, interprets the provisions of
the plan and, subject to certain limitations, may amend the plan. Each option
granted under the plan shall be evidenced by a written agreement between us and
the optionee.
Options may be granted to our employees (including officers) and
directors, any of our subsidiaries, and certain of our consultants and advisors.
Incentive stock options can be issued to all employees (including officers).
Nonstatutory stock options can be issued to employees, non-employee directors,
or consultants and advisors.
The exercise price for incentive stock options granted under the plan
may not be less than the fair market value of the common stock on the date the
option is granted, except for options granted to 10% stockholders which must
have an exercise price of not less than 110% of the fair market value of the
common stock on the date the option is granted. The exercise price for
nonstatutory stock options is determined by the board of directors, in its sole
discretion, but may not be less than 85% of the fair market value of the
Company's common stock at the date of grant. Incentive stock options granted
under the plan have a maximum term of ten years, except for 10% stockholders who
are subject to a maximum term of five years. The term of nonstatutory stock
options is determined by the Board of Directors. Options granted under the plan
are not transferable, except by will and the laws of descent and distribution.
The board of directors may grant options with a reload feature.
Optionees granted a reload feature shall receive, contemporaneously with the
payment of the option price in common stock, a right to purchase that number of
common shares equal to the sum of (i) the number of shares of common stock used
to exercise the option, and (ii) with respect to nonstatutory stock options, the
number of shares of common stock used to satisfy any tax withholding requirement
incident to the exercise of such nonstatutory stock option.
Also, the plan allows the board of directors to award to an optionee
for each share of common stock covered by an option, a related alternate stock
appreciation right, permitting the optionee to be paid the appreciation on the
option in lieu of exercising the option. The amount of payment to which an
optionee shall be entitled upon the exercise of each stock appreciation right
shall be the amount, if any, by which the fair market value of a share of common
stock on the exercise date exceeds the exercise price per share of the option.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of December 31, 2003. The information in this
table provides the ownership information for:
o each person known by us to be the beneficial owner of more than 5%
of our common stock;
o each of our directors;
o each of our executive officers; and
o our executive officers and directors as a group.
The percentages in the table have been calculated on the basis of
treating as outstanding for a particular person, all shares of our common stock
outstanding on December 31, 2003 and all shares of our common stock issuable to
that person in the event of the exercise of outstanding options and other
derivative securities owned by that person which are exercisable within 60 days
of December 31, 2003. Presently, there are no options or derivative securities
17
outstanding. Except as otherwise indicated, the persons listed below have sole
voting and investment power with respect to all shares of our common stock owned
by them, except to the extent such power may be shared with a spouse.
Unless otherwise indicated, the address of each beneficial owner is c/o
Enertec Electronics Limited, 27 Rechov Ha'Mapilim, Kiriat Ata, Israel, P.O. BOX
497, Kiriat Motzkin 26104, Israel.
Number of Shares Beneficially Percentage
Name of Beneficial Owner Owned Outstanding
- ----------------------------------- ------------------------------- -------------------
Harry Mund 4,750,000 86.63%
Miron Markovitz 9,000 0.16%
------------------------------- -------------------
All directors and executive 4,759,000 86.79%
========= ======
officers as a group (2 persons)
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 26, 2002, we issued 4,750,000 shares of our common stock to
Harry Mund in exchange for his 99 shares of Enertec Electronics Limited, our
wholly owned subsidiary, which constituted all of its issued and outstanding
shares. The 4,750,000 shares were valued at a price of $.10 per share or a total
of $475,000.
At December 31, 2001, our subsidiary Enertec Electronics Limited had a
loan receivable from Harry Mund, our Chief Executive Officer and President, in
the amount of $687,000 bearing interest at a rate of 4% per annum. This loan was
extended to Mr. Mund in October 2001. At December 31, 2003 the loan receivable
was $296,000. The loan was extended as a salary advance to Mr. Mund. There are
no written agreements setting out repayment terms. The parties have orally
agreed that the amount outstanding is due on demand.
During 2001, our subsidiary Enertec Electronics Limited sold a building
to Mund Holding Limited, an entity wholly owned by Harry Mund, our Chief
Executive Officer and President, for approximately $170,320. An independent
appraiser and governmental body, The Capital Gains Authority, determined the
sale price. The building was paid in part with cash in the amount of $93,245,
and the balance by a non-interest bearing loan. This loan is unrelated to the
interest bearing loan receivable from Mr. Mund discussed above. A portion of the
loan was paid down on June 6, 2003 in the amount of $12,600, and again on July
1, 2003 in the amount of $10,971. There are no written agreements setting out
repayment terms. The parties have orally agreed that the amount outstanding is
due on demand. As of December 31, 2003, the amount of the loan outstanding was
$51,000.
Enertec Electronics rents the building's office and manufacturing space
from Mund Holding Limited for $16,800 annually for twenty-four months ending
December 31, 2003. We have exercised our option to lease the building for an
additional twenty-four months ending December 31, 2005 for approximately $18,000
annually.
On December 31, 2000, Enertec Management Limited (f/k/a Elcomtech
Limited), a wholly-owned subsidiary of Enertec Electronics Limited, and of which
Harry Mund is the Chief Executive Officer and managing director, loaned an
aggregate amount of $23,000 to Enertec Electronics Limited at an interest rate
of 4% per annum due December 31, 2002. This loan was repaid on December 31,
2002.
Enertec Systems 2001 Ltd. ("Enertec Systems"), an Israeli company, is
owned by Enertec Management Limited (55%) ("Enertec Management"), Harry Mund
(27%) and Zvi Avni (18%), an employee of Enertec Systems. Enertec Systems
commenced operations on January 1, 2002. Enertec Management initially acquired
25% of Enertec Systems from Harry Mund on January 1, 2002. This 25% represented
founding equity and was acquired by Enertec Management for 250 NIS. On December
31, 2002, Enertec Management increased its securities position to 55% of
Systems' outstanding stock by purchasing additional shares from Zvi Avni for
$71,000. A total of 300 shares of Systems' outstanding stock were acquired from
Mr. Avni for $236.66 per share. The purchase price was paid by Enertec
Electronics through Enertec Management. The source of the funds was Enertec
Electronics' cash from operations. No liabilities were assumed as a result of
the purchases.
18
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation of Enertec Electronics, Inc. filed January 31, 2002*
3.2 Certificate of Amendment of Enertec Electronics, Inc. filed April 23, 2002*
3.3 Certificate of Amendment of Opal Technologies, Inc. filed October 17, 2002*
3.4 By-Laws of Lapis Technologies, Inc.*
4.1 Specimen Common Stock Certificate**
10.1 Stock Option Plan of 2002*
10.2 An Agreement for an Unprotected Tenancy, dated in June 2002 between Amnoni Brothers - Carmiel
Transporters Ltd. and Enertec Systems Ltd.**
10.3 Lease Agreement dated October 31, 2002 between Mund Holdings Ltd., and Enertec Electronics Ltd.**
10.4 Manufacturer's Representative Agreement dated December 20, 1988 between Cytec Corporation and
Enertec International.**
10.5 Exclusive Distribution Agreement dated June 26, 2002 between Gaia Converter by the Company
Enertec (Israel) Gaia Converter Sa and Enertec Electronics Ltd.**
10.6 Annual Agreement dated February 05, 2001 between BigBand Networks Ltd. and Enertec Electronics Ltd.**
10.7 Supply Agreement between Enertec Ltd. and The Israeli Aeronautical Industries Ltd.**
10.8 Distributor Agreement dated January 1, 1998 between Christie Electric Corp. and Enertec Electronics Ltd.**
10.9 Sale Representative Agreement dated July 6, 1998 between EMCO High Voltage Co. and Enertec International.**
14.1 Code of Ethics and Business Conduct for Officers, Directors and Employees.***
21 List of Subsidiaries**
31.1 Certification by Harry Mund, Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.***
31.2 Certification by Miron Markovitz, Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.***
32.1 Certification by Harry Mund, Chief Executive Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.***
32.2 Certification by Miron Markovitz, Chief Financial Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.***
* Previously filed with Amendment No. 2 to the Form SB-2 registration statement
filed with the Securities and Exchange Commission on May 14, 2003, and
incorporated herein by reference.
** Previously filed with Amendment No. 1 to the Form SB-2 registration statement
filed with the Securities and Exchange Commission on February 11, 2003, and
incorporated herein by reference.
*** Filed herewith.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.
19
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDIT FEES
The aggregate fees billed for professional services rendered by our
independent auditors for the audit of our financial statements, for the reviews
of the financial statements included in our annual on Form 10K, and for other
services normally provided in connection with statutory filings were $10,500 and
$10,500 for the years ended December 31, 2003 and December 31, 2002,
respectively.
AUDIT-RELATED FEES
We incurred fees of $0 and $0 for the years ended December 31, 2003 and
December 31, 2002, respectively, for professional services rendered by our
independent auditors that are reasonably related to the performance of the audit
or review of our financial statements and not included in "Audit Fees."
TAX FEES
The aggregate fees billed for professional services rendered by our
independent auditors for tax compliance, tax advice, and tax planning were
$1,500.00 and $0, for the years ended December 31, 2003 and December 31, 2002,
respectively. The services for which such fees were paid consisted of filing the
2003 tax return.
ALL OTHER FEES
We did not incur any fees for other professional services rendered by
our independent auditors during the years ended December 31, 2003 and December
31, 2002.
20
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LAPIS TECHNOLOGIES, INC.
Dated: June 25, 2004 By: /s/ Harry Mund
-----------------------------------
Harry Mund,
Chief Executive Officer, President,
Secretary and Chairman
Dated: June 25, 2004 By: /s/ Miron Markovitz
-----------------------------------
Miron Markovitz,
Chief Financial Officer and Director
21
Independent Auditors' Report
To the Stockholders' and the Board of Directors
of Lapis Technologies, Inc.
We have audited the accompanying consolidated statements of income, changes in
stockholders' equity and comprehensive income and cash flows of Lapis
Technologies, Inc. and Subsidiary (the "Company") for the year ended December
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based upon our audit. We did not audit the consolidated financial
statements of Enertec Electronics, Ltd. and Subsidiary, a 100% wholly owned
subsidiary as of December 31, 2002, which statements reflected net income of
approximately $440 for the years ended December 31, 2002. Those statements were
audited by other auditors whose report has been furnished to us, and in our
opinion, insofar as it relates to the amounts included for Enertec Electronics
Ltd. is based solely on the report of the other auditors.
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 of Lapis Technologies,
Inc. and Subsidiary referred to above present fairly, in all material respects,
the consolidated results of their operations and their cash flows for the year
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Rogoff & Company, PC
- -------------------------
New York, New York
April 1, 2003
Independent Auditors' Report
To the Stockholders' and the Board of Directors
of Lapis Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Lapis
Technologies, Inc. and Subsidiaries (the "Company") at December 31, 2003, and
the related consolidated statements of income, changes in stockholders' equity
and comprehensive income and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 financial condition of the Lapis
Technologies, Inc. and subsidiaries at December 31, 2003, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Gvilli & Co.
- ----------------------
June 25, 2004
Casarca, Israel
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Amounts)
ASSETS
December 31,
2003
---------
Current Assets:
Cash and cash equivalents $ 181
Accounts receivable 3,083
Inventories 1,658
Prepaid expenses and other current assets 235
Due from stockholder 175
---------
Total Current Assets 5,332
Property and equipment, net 550
Deferred income taxes 20
---------
$ 5,902
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 956
Short term bank loans 1,643
Current portion of term loans 202
Accounts payable and accrued expenses 1,704
Income taxes payable 114
---------
Total Current Liabilities 4,619
Term loans, net of current portion 400
Severance payable 59
---------
5,078
Commitments and contingencies
Minority interest 157
Stockholders' Equity:
Preferred stock; $.001 par value,
5,000,000 shares authorized, none issued --
Common stock; $.001 par value,
100,000,000 shares authorized, 5,483,000
shares issued and outstanding 5
Additional paid-in capital 78
Accumulated other comprehensive loss (63)
Retained Earnings 647
---------
Total Stockholders' Equity 667
---------
$ 5,902
=========
F-1
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Earnings Per Share and Share Amounts)
Years Ended
December 31,
--------------------------
2003 2002
----------- -----------
Sales $ 6,490 $ 4,414
Cost of sales 4,619 2,649
----------- -----------
Gross profit 1,871 1,765
----------- -----------
Operating Expenses:
Selling expenses 40 68
General and administrative 1,070 1,023
----------- -----------
Total operating expenses 1,110 1,091
----------- -----------
Income from operations 761 674
----------- -----------
Other Income (Expense):
Interest expense, net (327) (189)
Gain on sale of property and equipment -- 51
Equity in income of investee -- 42
Foregiveness of debt 15 --
----------- -----------
Total other income (expense) (312) (96)
----------- -----------
Income before provision for
income taxes and minority interest 449 578
Provision for income taxes 120 246
Minority interest (77) --
----------- -----------
Net income $ 252 $ 332
=========== ===========
Basic net loss per share $ 0.05 $ 0.06
=========== ===========
Basic weighted average
common shares outstanding 5,483,000 5,218,129
=========== ===========
F-2
LAPIS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31, 2002 AND 2003
(In Thousands, Except Share Amounts)
Accumulated
Common Stock Additional Other Total
--------------------- Paid-in Comprehensive Retained Stockholders' Comprehensive
Shares Amount Capital Loss Earnings Equity Income
--------- --------- --------- --------- --------- --------- ---------
Balance, January 1, 2002 4,750,000 $ 5 $ (5) $ (76) $ 472 $ 396
Common stock issued for services 500,000 -- 50 -- -- 50
Sale of common stock under a private
placement, net of expenses of $45 233,000 -- (11) -- -- (11)
Recapitalization on
acquisition of subsidiary -- -- 44 -- -- 44
Dividend paid -- -- -- -- (409) (409)
Foreign currency translation adjustment -- -- -- (28) -- (28) $ (28)
Net income -- -- -- -- 332 332 332
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2002 5,483,000 5 78 (104) 395 374 $ 304
=========
Foreign currency translation adjustment -- -- -- 41 -- 41 $ 41
Net income -- -- -- -- 252 252 252
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2003 5,483,000 $ 5 $ 78 $ (63) $ 647 $ 667 $ 293
========= ========= ========= ========= ========= ========= =========
F-3
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended
December 31,
------------------
2003 2002
------- -------
Cash flows from operating activities:
Net income $ 252 $ 332
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 137 77
Minority interest 77 --
Foregiveness of debt (16) --
Equity in income of investee -- (42)
Common stock issued for services -- 50
Recapitalization -- 44
Gain on sale of property and equipment -- (51)
Deferred income tax (4) 17
Change in operating assets and liabilities:
Accounts receivable (910) (392)
Inventories 266 (382)
Prepaid expenses and other current assets 86 20
Accounts payable and accrued expenses (98) (495)
Income taxes payable 52 113
Customer deposits (212) 192
Severance payable (36) (59)
------- -------
Net cash used in operating activities (406) (576)
------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment -- 192
Purchase of property and equipment (213) (48)
Decrease in due from stockholder 121 391
Decrease in due from affiliates 57 142
------- -------
Net cash (used in) provided by investing activities (35) 677
------- -------
Cash flows from financing activities:
Increase (decrease) in bank line of credit, net (495) 494
Proceeds from long term debt 5,180 6,236
Repayment of long-term debt (4,395) (6,178)
Expense on sale of common stock -- (11)
Dividends paid -- (409)
------- -------
Net cash provided by financing activities 290 132
------- -------
Effects of exchange rates on cash 19 (6)
------- -------
Increase (decrease) in cash (132) 227
Cash, beginning of period 313 86
------- -------
Cash, end of period $ 181 $ 313
======= =======
F-4
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended
December 31,
----------------
2003 2002
------ ------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 327 $ 249
====== ======
Income taxes $ 172 $ 235
====== ======
Supplemental disclosure of non-cash financing activities:
Common stock issued for services $ -- $ 50
====== ======
F-5
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(In Thousands, Except Share and Per Share Amounts)
NOTE 1 - DESCRIPTION OF BUSINESS AND ACQUISITION
Lapis Technologies, Inc. (the "Company") was incorporated in the State of
Delaware on January 31, 2002. The Company's operations are conducted
through its wholly owned Israeli Subsidiary, Enertec Electronics Ltd.
("Enertec") and its majority owned Israeli subsidiary Enertec Systems 2001
Ltd. ("Systems"). Enertec is engaged in the manufacturing, distribution and
marketing of electronic components and products relating to power supplies,
converters and related power conversion products, automatic test equipment,
simulators and various military and airborne systems, within the State of
Israel.
On January 1, 2002 Enertec assisted in the organization of Systems in
exchange for 25% of the common stock of Systems. This investment was
accounted for under the equity method. Systems is engaged in the
manufacturing of electronic components primarily for military use. On
December 31, 2002 Enertec increased its common stock ownership interest in
Systems to 55% for $71, which was included in accounts payable and accrued
expenses in the accompanying consolidated balance sheet at December 31,
2002. This amount was paid during January 2003. Due to the Company's
increased ownership of Systems at December 31, 2002 the Systems balance
sheet has been consolidated at December 31, 2002 and System's statement of
income is being consolidated beginning in 2003.
The acquisition of the additional 30% was accounted for using the purchase
method of accounting. The purchase price as of December 31, 2002 has been
allocated over the fair value of the assets acquired and the liabilities
assumed based upon their fair values at the date of acquisition. The
purchase price of the additional 30% has been allocated at December 31,
2002 as follows:
Current assets $ 741
Fixed assets 196
Accounts payable and accrued expenses (470)
Long-term debt (361)
Severance payable (35)
--------------
$ 71
=============
NOTE 2 - BASIS OF PRESENTATION
The accompanying consolidated financial statements present the results of
operations of the Company for the years ended December 31, 2003 and 2002
and their wholly owned subsidiary Enertec Electronics Ltd. and their
ownership interest in Enertec Systems 2001 Ltd. All material intercompany
accounts and transactions have been eliminated in consolidation.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Concentration of Credit Risk
Concentrations of credit risk with respect to trade receivables are limited
to customers dispersed primarily across Israel. All trade receivables are
concentrated in the manufacturing and distribution of electronic components
segment of the economy; accordingly the Company is exposed to business and
economic risk. Although the Company does not currently foresee a
concentrated credit risk associated with these trade receivables, repayment
is dependent upon the financial stability of this segment of the economy.
F-6
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(In Thousands, Except Share and Per Share Amounts)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Cash and Cash Equivalents
For the purpose of the statement of cash flows the Company considers all
highly liquid investments with an original maturity of three months or less
at the time of purchase to be cash equivalents.
Allowance for Doubtful Accounts
The Company estimates uncollectibility of accounts receivable by analyzing
historical bad debts, customer concentrations, customer credit worthiness
and current economic trends when evaluating the adequacy of the allowance
for doubtful accounts. At December 31, 2003 the Company has not recorded an
allowance for doubtful accounts.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Routine maintenance and repairs and minor replacement costs
are charged to expense as incurred, while expenditures that extend the life
of these assets are capitalized. Depreciation and amortization are provided
for in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives. The Company uses the same
depreciation method for both financial reporting and tax purposes. Upon the
sale or retirement of property and equipment, the cost and related
accumulated depreciation and amortization will be removed from the accounts
and the resulting profit or loss will be reflected in the statement of
income. The estimated lives used to determine depreciation and amortization
are:
Leasehold improvements 10 years
Machinery and equipment 10 years
Furniture and fixtures 14 years
Transportation equipment 7 years
Computer equipment 3 years
Equity in Subsidiary
An investment where the Company controls 20% or more but less than 50% of
the voting stock of another entity will be recorded using the equity
method. Under the equity method the initial investment is recorded at cost.
Subsequently, the investment is increased or decreased to reflect the
Company's share of income, losses and dividends actually received.
F-7
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(In Thousands, Except Share and Per Share Amounts)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Income Taxes
The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax basis of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse. Valuation allowances
are established when it is determined that it is more likely than not that
the deferred tax assets will not be realized.
Warranty Reserves
The Company includes a one-year warranty on all products sold. A provision
for estimated warranty costs, if material, is recorded at the time of sale.
Based upon historical experience the Company has not incurred material
costs relating to its warranty and has therefore not recorded a warranty
provision at December 31, 2003.
Revenue Recognition and Customer Deposits
Revenue is recorded as product is shipped, the price has been fixed or
determined, collectability is reasonably assured and all material specific
performance obligations have been completed. The product sold by the
Company is made to the specifications of each customer; sales returns and
allowances are allowed on a case-by-case basis, are not material to the
financial statements and are recorded as an adjustment to SALES. Cash
payments received in advance are recorded as customer deposits.
Revenue relating to service is recognized on the straight-line basis over
the life of the agreement, generally one year. For the years ended December
31, 2003 and 2002 revenue relating to service contracts is less than one
percent of net sales.
Shipping and Handling Costs
Shipping and handling costs are included in cost of sales in accordance
with guidance established by the Emerging Issues Task Force ("EITF") issue
No. 00-10, "Accounting for Shipping and Handling Costs."
Stock Based Compensation
Effective January 1, 2003 the Company adopted the fair method value
alternative of SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." Under the fair value based method,
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period, which is usually the
vesting period. For stock options, fair value is determined using an
option-pricing model that takes into account the stock price at the grant
date, the exercise price, the expected life of the option, the volatility
of the underlying stock and the expected dividends on it, and the risk-free
interest rate over the expected life of the option. For the years ended
December 31, 2003 and 2002 the Company did not issued any stock options.
F-8
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(In Thousands, Except Share and Per Share Amounts)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Research and Development Costs
Research and development costs are charged to general and administrative
expense in the accompanying statement of income and consist of salaries.
Research and development cost for the years ended December 31, 2003 and
2002 were approximately $100 and $226, respectively.
Earnings per Share
The Company presents basic earnings per share and, if appropriate, diluted
earnings per share in accordance with the provisions of SFAS No. 128
"Earnings per Share" ("SFAS 128").
Under SFAS 128 basic net earnings per share is computed by dividing the net
earnings for the year by the weighted average number of common shares
outstanding during the year. Diluted net earnings per share is computed by
dividing the net earnings for the year by the weighted average number of
common shares and common share equivalents outstanding during the year.
Common stock equivalents would arise from the granting of stock options.
For the years ended December 31, 2003 and 2002 the Company did not grant
any stock options. Diluted earnings per share is not included as it is the
same as basic for all periods shown.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever circumstances
and situations change such that there is an indication that the carrying
amounts may not be recovered. In such circumstances, the Company will
estimate the future cash flows expected to result from the use of the asset
and its eventual disposition. Future cash flows are the future cash inflows
expected to be generated by an asset less the future outflows expected to
be necessary to obtain those inflows. If the sum of the expected future
cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, the Company will recognize an impairment loss
to adjust to the fair value of the asset. Management believes that there is
no impairment of long-lived assets at December 31, 2003.
Minority Interest
Minority interest represents the minority stockholders' proportionate share
of the equity of the Company's subsidiary at December 31, 2003. The
minority interest is adjusted for the minority's share of the earnings or
loss of Systems.
Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, bank line of credit, short term bank
loans and accounts payable and accrued expenses approximate fair value at
December 31, 2003 because of the relatively short maturity of the
instruments. The fair value of due from stockholder is not practical to
estimate without incurring excessive cost and is carried at cost at
December 31, 2003. The carrying value of the long-term debt approximate
fair value at December 31, 2003 based upon debt terms available for
companies under similar terms.
F-9
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(In Thousands, Except Share and Per Share Amounts)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income for the year and foreign
currency translation adjustments.
Foreign Currency Translation
The assets and liabilities of the foreign subsidiaries are translated at
current exchange rates and related revenues and expenses at average
exchange rates in effect during the year. Resulting translation
adjustments, if material, are recorded as a separate component of
stockholders' equity.
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Reclassification
Certain reclassifications have been made to the prior year's financial
statements in order to conform to the current year presentation.
New Accounting Pronouncements
During November 2002, the FASB issued EITF Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21
addresses certain aspects of the accounting by a company for arrangements
under which it will perform multiple revenue-generating activities. EITF
00-21 addresses when and how an arrangement involving multiple deliverables
should be divided into separate units of accounting. EITF 00-21 provides
guidance with respect to the effect of certain customer rights due to
company nonperformance on the recognition of revenue allocated to delivered
units of accounting. EITF 00-21 also addresses the impact on the
measurement and/or allocation of arrangement consideration of customer
cancellation provisions and consideration that varies as a result of future
actions of the customer or the company. Finally, EITF 00-21 provides
guidance with respect to the recognition of the cost of certain
deliverables that are excluded from the revenue accounting arrangement. The
provisions of EITF 00-21 will apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21
has not had a material effect on the Company's financial position or
results of operations.
During November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34" ("FIN
45"). FIN 45 requires the recognition of an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for
the initial recognition and measurement of the liability will be applied on
a prospective basis to guarantees issued or modified after December 31,
2002. The adoption of FIN 45 has not had a material affect on the Company's
financial position or results of operations.
F-10
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(In Thousands, Except Share and Per Share Amounts)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
During January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). The consolidation requirements
of FIN 46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older entities in
the first fiscal year or interim periods beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the variable interest
entity was established. The Company does not have variable interest
entities so the adoption of this statement will have no effect on the
Company's financial position or results of operations.
During April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). This
statement amends SFAS 133 to provide clarification on the financial
accounting and reporting of derivative instruments and hedging activities
with similar characteristics entered into or modified after June 30, 2003
to be accounted to be accounted for on a comparable basis. The Company does
not have any derivative instruments or hedging activities so the adoption
of this statement will have no effect on the Company's financial position
or results of operations.
During May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards on the classification and
measurement of financial instruments with characteristics of both
liabilities and equity. SFAS 150 will become effective for financial
instruments entered into or modified after May 31, 2003. The adoption of
SFAS 150 has not had a material effect on the Company's financial position
or results of operations.
During December 2003 the FASB issued SFAS No. 132 (revised) "Employers'
Disclosures about Pensions and Other Post Retirement Benefits," that
improves the financial statement disclosures for defined benefit plans. The
revision changes the existing disclosure requirements for pensions by
requiring company's to provide more details about their plan assets,
benefit obligations, cash flows, benefit costs and other relevant
information. The Company does not have a defined benefit pension plan so
the adoption of this statement will have no effect on the Company's
financial position or results of operations.
NOTE 4 - INVENTORIES
Inventories consist of the following at December 31, 2003:
Raw materials $ 633
Work in process 552
Finished goods 473
-------------
$ 1,658
F-11
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(In Thousands, Except Share and Per Share Amounts)
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2003:
Leasehold improvements $ 94
Machinery and equipment 3
Furniture and fixtures 166
Transportation equipment 280
Computer equipment 322
-------------
865
Less accumulated depreciation and amortization (315)
-------------
$ 550
NOTE 6 - INCOME TAXES
The provision for income taxes consists of the following for the years
ended December 31:
2003 2002
----------- -----------
Current:
Foreign $ 124 $ 232
Deferred:
Foreign (4) 14
----------- -----------
$ 120 $ 246
=========== ===========
At December 31, 2003, the Company has a net operating loss carryforward of
approximately $65, which may be utilized to offset future taxable income
for United States Federal tax purposes. This net operating loss
carryforward begins to expire in 2022. The only timing difference which
creates a deferred tax asset is the net operating loss carryforward. This
net operating loss carryforward creates a deferred tax asset of
approximately $10. Since it is more likely than not that the Company will
not realize a benefit from these net operating loss carryforwards a 100%
valuation allowance has been recorded to reduce the deferred tax asset to
its net realizable value.
Deferred tax assets are classified as current or non-current, according to
the classification of the related asset or liability for financial
reporting. At December 31, 2003 the Company's wholly owned Israeli
subsidiary has a deferred tax asset of approximately $20, due to timing
differences relating to severance payable. The Israeli subsidiary has not
recorded a valuation allowance as it is more likely than not that the
timing differences will be utilized.
The following is a summary of the components of non-current deferred tax
assets at December 31, 2003:
Severance payable $ 20
Net operating loss carryforward 10
Valuation allowance (10)
-------------
Deferred tax assets $ 20
=============
F-12
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(In Thousands, Except Share and Per Share Amounts)
NOTE 6 - INCOME TAXES - continued
Differences between the United States Federal statutory income tax rate and
the effective tax rate are as follows for the years ended December 31:
2003 2002
--------- ---------
Federal statutory rate 34.0% 34.0%
Valuation Allowance (34.0) (34.0)
Effect on foreign taxes 26.7 42.6
--------- ---------
26.7% 42.6%
========= =========
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2003:
Bank line of credit due July 23, 2004
at 6.7% per annum $ 956
Short-term bank loans, payable within
twelve months at rates ranging from
7% per annum and 9.5% per annum 1,643
Term loans, due between February 2005 and
September 2007 at rates ranging from 7.0%
per annum and 8.5% per annum 602
------------
3,201
Less current portion of term loans 202
------------
$ 2,999
============
The Company has pledged its accounts receivables as collateral against its
long term debt, which is payable to one financial institution. In addition,
the president has guaranteed personal assets, as defined in the agreement,
against the Company's long term debt.
The aggregate maturities of long-term debt are as follows at December 31,
2003:
Year Ended
----------
2004 $ 2,801
2005 154
2006 158
2007 88
----------
$ 3,201
NOTE 8 - SEVERANCE PAYABLE
Severance payable represents amounts computed on employees' most recent
salary and the number of years working in Israel. The Company's liability
is partially offset by amounts deposited to insurance policies, which are
under the company's control.
F-13
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(In Thousands, Except Share and Per Share Amounts)
NOTE 9 - STOCK OPTION PLAN
On October 16, 2002 the Board of Directors of the Company authorized the
formation of the 2002 Stock Option Plan (the "Plan"), subject to
stockholder approval. The Plan provides for the granting of incentive stock
options, non-statutory stock options and stock appreciation rights. The
incentive stock options can be granted to employees, including officers, or
any subsidiary of the Company. The non-statutory stock options can be
granted to all employees, including officers, non-employee directors,
consultants or any subsidiary of the Company. Non-statutory stock options
can only be granted to consultants that have rendered a bona fide service
to the Company, so long as the service is not in connection with the offer
or sale of securities in a capital raising transaction. The number of
shares of common stock reserved for issuance under the Plan is 500,000,
subject to adjustment in the event of a stock split, stock dividend,
recapitalization or similar change in the Company's capital structure.
Incentive stock options must be granted prior to ten years from the date
the Plan was initially adopted by the Board of Directors. The option price
for shares issued as incentive stock options shall not be less than the
fair market value of the Company's common stock at the date of grant unless
the option is granted to an individual who, at the date of the grant, owns
more than 10% of the total combined voting power of all classes of the
Company's stock (the "Principal Stockholder"). Then the option price shall
be at least 110% of the fair market value at the date the option is
granted. No incentive stock option granted under the Plan shall be
exercisable after ten years from its grant date. If the incentive stock
option is granted to a Principal Stockholder then the exercise period is
five years from the date of grant. Every incentive stock option granted
under the Plan shall be subject to earlier termination as expressly
provided for in the Plan.
The option price for shares issued under the non-statutory stock options
shall be determined at the sole discretion of the Board of Directors, but
may not be less than 85% of the fair market value of the Company's common
stock at the date of grant. A non-statutory stock option granted under the
Plan may be of such duration as shall be determined by the Board of
Directors.
NOTE 10 - EQUITY TRANSACTIONS
On June 4, 2002 the Company sold 233,000 shares of its common stock at a
price of $.15 per share. The Company received aggregate cash proceeds of
$34 and had offering costs of $45.
On April 26, 2002 the Company issued 150,000, 200,000, and 100,000 shares
of its common stock to certain entities in exchange for services provided
in connection with the Company's corporate organization. The Company valued
these services at $.10 per share of common stock.
On April 26, 2002 the Company issued 50,000 shares of its common stock to
its legal counsel for services provided and valued at $.10 per share of
common stock.
NOTE 11 - RELATED PARTIES
Due from Stockholder
At December 31, 2003 the majority stockholder had advances due to the
Company that accrue interest at 4% per annum. These advances are repayable
within the next twelve months.
F-14
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(In Thousands, Except Share and Per Share Amounts)
NOTE 11 - RELATED PARTIES - continued
Due from Affiliate
During 2001 the Company entered into a sale-leaseback transaction with an
entity owned by the majority stockholder of the Company. The Company sold a
building for approximately $170 and received approximately $113 in cash and
a note receivable for $57, which was paid in full during the year ended
December 31, 2003. No gain or loss was recorded on this transaction, as the
book value of the building equaled the fair market value. The Company has
agreed to exercise its option to rent this property through December 31,
2005 at approximately $18 annually with an option to renew the lease for an
additional two years ending December 31, 2007. This lease has been
classified as an operating lease.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Lease commitments
The Company leases certain office and manufacturing space under two
noncancellable operating leases expiring at December 31, 2005 and March 31,
2007. Rent expense, including municipal taxes and utilities associated with
the leases approximated $51 and $59, respectively, for the years ended
December 31, 2003 and 2002.
At December 31, 2003, total minimum rentals under noncancellable operating
leases with an initial or remaining term lease term of one year or more are
as follows:
Year Ending
December 31:
2004 $ 59
2005 59
2006 59
2007 59
----------
$ 236
Legal proceedings
A Customer has brought an action in the Tel Aviv District Court for an
unspecified monetary amount against one of the Company's suppliers, a
subcontractor of the supplier and Enertec, alleging that the materials
supplied were defective and caused the Customer to replace the materials at
a substantial financial expense. Enertec filed a defense claim that there
is no cause of action against them as Enertec is only the local Israeli
sales representative and did not make any implied or express representation
or warranty to the Customer regarding the suitability of its materials.
Management believes that the chance of losing this suit is remote, intends
to defend this action vigorously and does not believe that it will have a
materially adverse impact on the Company's operations and liquidity.
F-15
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(In Thousands, Except Share and Per Share Amounts)
NOTE 13 - CONCENTRATIONS
The Company had deposits with commercial financial institutions, which, at
times, may exceed the FDIC insured limits of $100. Management has placed
these funds in high quality institutions in order to minimize the risk.
Cash held in Israel at December 31, 2003 was $180.
At December 31, 2003 the Company had two customers that accounted for
approximately 64% of accounts receivable. For the years ended December 31,
2003 and 2002 approximately 51% and 71%, respectively, of the Company's
sales were to two and three customers, respectively.
NOTE 14- SEGMENT AND GEOGRAPHIC INFORMATION
Information about the Company's assets in different geographic locations at
December 31, 2003 is shown below pursuant to the provisions of SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information."
Total assets:
Israel $ 5,901
United States 1
----------
$ 5,902
==========
F-16