UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
[_] TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION
FILE NUMBER ________________________________
LAPIS TECHNOLOGIES, INC.
------------------------
(Name of small business issuer in its charter)
DELAWARE 27-001666420
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
19 W. 34TH STREET, SUITE 1008, NEW YORK, NY 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: None
Check whether the issuer (1) 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 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. [X]
State issuer's revenues for its most recent fiscal year: $6,176,000
The aggregate market value of the voting and non-voting common equity held
by non-affiliates, computed by reference to the average bid and asked price of
such common equity as of March 25, 2005, was $1,035,320.
As of March 25, 2005, the issuer had 5,483,000 outstanding shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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......... 11
Item 7. Financial Statements.............................................. 15
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 15
Item 8A. Controls and Procedures........................................... 15
Item 8B. Other Information................................................. 15
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act................ 16
Item 10. Executive Compensation............................................ 17
Item 11. Security Ownership of Certain Beneficial Owners and Management.... 18
Item 12. Certain Relationship and Related Transactions..................... 18
Item 13. Exhibits.......................................................... 19
Item 14. Principal Accountant Fees and Services............................ 19
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.
Our revenues are comprised of two main sources, the commercial and the
military markets. In the military market we, design, develop and manufacture
test systems, airborne, shipborne, land electronic equipment and other various
military systems, for military manufacturers in accordance with their
specifications. Most of this military business is carried out by the majority
owned subsidiary Enertec Systems 2001 Ltd. In the commercial market we market
and distribute test systems, power supplies and other electronic components
manufactured in-house, and by other manufacturers who engage us to distribute
their products. This activity is carried out primarily by Enertec Electronics, a
wholly owned subsidiary. We have entered into representative and distribution
agreements with seven such manufacturers, four of which have been reduced to
written contracts. Enertec Electronics owns 100% of Enertec Management which in
turn owns 55% of Enertec Systems 2001 Ltd., consequently the financial results
of Enertec Systems 2001 Ltd. are consolidated up to Lapis Technologies Inc,
through its wholly owned subsidiary Enertec Electronics.
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
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.
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ENERTEC ELECTRONICS
Enertec Electronics is responsible for:
o The marketing and distribution of power supplies and other related
power products manufactured by us and third-party firms that
engage us to distribute their products; and
o The marketing and distribution of power supply testing equipment
to our military and commercial 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
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.
Although Enertec Electronics is delivering its final customized systems
within the military industry, it is an area in which Enertec Electronics is no
longer generating new revenues and has specialized its focus almost exclusively
on power supplies and power supply testing equipment.
ENERTEC SYSTEMS 2001
Enertec Systems 2001 ltd. is responsible for designing, developing and
manufacturing test systems for electronics manufacturers in the military
industry 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.
Through our subsidiaries we cover distinct areas of power supplies and
ATE's. Enertec Electronics focuses on 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. In 2004 we upgraded our quality control system from ISO9001 to the new
ISO9001:2000. This is a much higher standard of product design and manufacture.
Only a few companies in our arena accomplished this.
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The International Organization of Standardization (ISO) designated
ISO9001:2000 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. ISO9001:2000 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 ISO9002:2000
approved, a standard that is less demanding than IS9001:2000. The ISO9002:2000
standard is related mainly to the quality assurance of the manufacturing
process, while the higher ISO9001:2000 standard includes both the quality
assurance of the manufacturing process component as well as the quality of the
design. The ISO9001:2000 standard is important to customers who are placing
orders for custom made products.
The ISO9001:2000 quality assurance model is made up of a combination of
quality system requirements. The key requirements are that an organization
should:
o Determine the needs and expectations of customers and other
interested parties;
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
ENERTEC SYSTEMS 2001
During 2004, Enertec Systems 2001, began focusing exclusively on the
military arena, and entered into numerous new fields of military technology in
addition to our "classic" ATE field of expertise.
We have successfully marketed a new line of ruggedized Command and
Control mobile stations of modular architecture, allowing
adaptation/customization to various applications for which we have already
received and delivered an order. This was followed in December for several more
units for delivery in the first half of 2005, and we expect this order to be
followed by a much larger order to be delivered over the next few years.
We also entered a new field of ruggedized mission computers for combat
vehicles. This new line has been well received and we have already received a
first order for three prototypes from the I.A.I. (Israeli Aircraft Industry) who
intends to replace their computers which were previously manufactured in-house
and have been active in the field for many years. The delivery of the prototypes
is expected to be in the second quarter of 2005. If the qualification test is
well received, we should get a significant follow on order.
3
We introduced a new line of military grade Power Distribution Units for
use in airborne, shipborne and ground applications. We have already received an
order for 113 Units, to be delivered over the next 4 years.
We introduced a new test system for the helicopter's flight computer.
The first customer was pleased with our presentation and during the last quarter
of 2004 placed an order for the first unit which we hope to be followed with
more going forward.
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 have also introduced a
new test system for air-to-air missiles.
We have also designed an innovative, very small airborne
multiple-output power supply that has been specially designed for infrared
payloads. It uses a proprietary technology that was developed in-house to power
a planar switching transformer which enables further miniaturization and a
higher output power to size ratio. This new line has been well received by our
customers, and the first samples have already passed the stringent military
screening tests.
ENERTEC ELECTRONICS
We started distributing an external power supply for a Network Security
Product. The first order of 1000 units was received during the third quarter of
2004.
We successfully completed the UL safety approvals for a new custom-made
power supply. It is implemented in a series of modems for fast network access of
data and voice over the IP network for which we have already received the first
order of 1000 units with an expected delivery in the first quarter of 2005.
We delivered the first samples of DC/DC converters for military CDU
(Command Display Units) in the fourth quarter of 2004. These samples were
followed with an order for 1500 units with an expected delivery during 2005.
We entered into a new arena of customized power supplies for fast data
networking systems. We customized compact PCI power supplies and during 2004
received orders for 200 units. We also designed a customized small- size
multiple-output power supply this product generated an order for 290 units which
were delivered in 2004.
We customized a redundant power supply for IP Storage Networking which
generated an order for 200 units.
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. However
going forward we anticipate creating some kind of platform to market Enertec
Systems 2001 products to U.S. Companies as well as creating a manufacturing base
within the States so as to benefit from US government dollars directed to
Israel's military aid with the condition of being spent on U.S manufactured
products. Currently we advertise in all the local Israeli technical magazines
and participate in electronic shows three to five times a year. A substantial
4
part of the business is from "captive" customers who have been working with us
for many 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" and "ATE
systems 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. Part of our success within Enertec Systems has been to anticipate the
needs of our clients and to start working on products that we know they will be
needing thus gaining an edge on our competition in our time to market.
Furthermore by having our ear close to the ground, we have been able to identify
those of our clients and potential clients that look poised to get the big
orders and focus our attention on gaining a foothold within that client. When
successful this strategy enables us to benefit from the large order flow that
they receive both in terms of the typical products they would expect us to
produce for them as well as the more sophisticated products that they might not
expect that we are then in the perfect position to offer to them, especially if
they are inundated with business we are able to step in and ease the burden of
some of the non-core components.
Unlike Enertec Systems 2001 whose competitive edge lies much more with
the sophistication and complex nature of the products, Enertec Electronics
maintains its competitive advantage primarily through its range of products and
their price.
By continuously diversifying into new and more complex products,
Enertec Systems 2001 has been able to set itself apart from its competition.
MARKET CONDITIONS
Worldwide recession in high-tech, telecommunications, and Internet
related products has affected the Electronics Division's power supplies sales.
The overall market experienced a recession during 2003 and the first quarter of
2004. During 2004 our power supply sales remained steady at the 2003 level.
However starting in the second half of 2004 this market started to improve and
we received more new orders resulting in a significantly increased backlog of
$1,226,000. During the last quarter of 2003 the market for military/customized
systems was reduced due to end-of-year 2003 budget cuts by the Israeli Ministry
of Defense. However during the last two quarters of 2004 the local military
market improved significantly resulting in many new orders received which
contributed to a large backlog of military products of about $1,913,000.
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 4% 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.
The local market for outsourced custom designed military systems is
above $ 500 million. We have just begun to penetrate parts of this market with
products in the field of avionic systems, ruggedized control systems to name but
a few.
5
Our stability is largely due to our diversified client base. We service
clients in the telecommunications, industrial control, medical and the military
core business sectors. In addition to this our sales force pays a significant
amount of attention to our customer relationships, providing more opportunities
to gain our foothold into a contract than our competition does. Furthermore we
offer more customized power supplies, which, we believe, makes it more difficult
for our competitors to bid successfully on the same projects or replace our
product down the road in production or for follow on orders.
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.
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. Until 2003 IAI (Israel Aircraft Industries) was our
major customer representing approx 38% of our sales. During 2004 we made effort
to increase our sales in other fields of technologies, for example avionic
equipment and combat stations. This resulted in an increase in our sales to
Rafael to approx 25% of our total sales in 2004 as compared to 10% in 2003. In
2004 Israeli Aircraft Industry (IAI) accounted for approximately only 18% of our
sales.
BACKLOG
As of December 31 2004 we had a backlog of written firm orders for our
products and services in the amount of approximately $3,139,000 as compared to a
backlog of approximately $1,137,000 as of December 31, 2003. The increase of
176% in the backlog as of Dec 2004 compared to Dec 2003 is due to the fact that
during the second half of 2004, there was a significant increase in orders for
military systems. The delivery lead-time for military systems is six to twelve
months, which gives rise to a significant backlog.
The orders included in the December 31, 2004 backlog figure are as
follows:
Enertec Systems 2001
$413,000 representing test systems for IAI missiles and avionic systems
$162,000 representing airborne power supplies and test systems for
infra-red payloads
$1,273,000 representing airborne power supplies, flight computers and
test systems for avionics and military systems.
$65,000 representing data link test equipment.
Enertec Electronics
$1,226,000
This figure includes a variety of orders for commercial/telecom/medical
/industrial power supplies as well as several orders for standard test
equipment for both the commercial and military industry.
COMPETITION
ENERTEC ELECTRONICS
We face intense competition within Enertec Electronics 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; Advise
Electronics Ltd., Appletec Ltd., Migvan Technologies Ltd., Boran Technologies
Ltd., Telkoor Power Supplies Ltd., and Horizon Electronics Ltd.
6
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 and even longer
in some cases. Additionally, we mass-produce power supplies for a client's entry
control system and are the major manufacturer of power supplies for a Video On
Demand provider. Due to the significant approval process these products must
pass to get to the market, it is not cost effective to replace our component
with a cheaper competitor's product because they would have to resubmit the
product for re-approval with the new component inside.
ENERTEC SYSTEMS 2001
Our chief source of competition for Enertec Systems 2001 are our
clients themselves. Heretofore most of our clients have done their own systems
testing and core component manufacturing in house. But as their volume of sales
start increasing it is easier for us to provide an outsourcing capability for
them. Furthermore as we continue to prove our expertise and our clients allow us
to create increasingly complex products for them, we have started to build their
trust and are overtaking a lot of the functions that previously they would have
produced in house. Outside competitors that we face are:
Chaban Electronics Ltd
Symcotech Ltd
Rada Electronic Industries ltd
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.
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.
7
EMPLOYEES
As of December 31, 2004, Enertec Electronics Limited had 15 employees
and Enertec Systems 2001 Limited had 47 employees. 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 $110,000 and
$100,000 for the twelve months ended December 31, 2004 and 2003 respectively
which equates to approximately 1.8% and 1.5% of revenues respectively for both
periods. These expenditures have adequately satisfied our research and
development requirements. The reason for the relatively low budget dedicated to
R&D as a percentage of our revenues is that our clients drive our R and D with
projects that they want us to develop, consequently these costs are passed on as
cost of sales to our clients who request the new product development.
SEASONAL ASPECTS OF OUR BUSINESS
The sales of military products experience seasonal variations this is
due to the fact that the Israeli Ministry of Defense 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 push 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 often causes an upward spike in our fourth quarter results.
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.
8
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.
ITEM 3. LEGAL PROCEEDINGS.
Except as described below, we are not subject to any pending or
threatened legal proceedings, nor is our property the subject of a pending or
threatened legal proceeding. None of our directors, officers or affiliates is
involved in a proceeding adverse to our business or has a material interest
adverse to our business.
On April 16, 2002, Orckit Communications brought an action in the Tel
Aviv District Court against Gaia Converter, a French company and Alcyon
Production Systems, also a French company and a subcontractor of Gaia Converter,
seeking $1,627,966, 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. Enertec Electronics was joined in the action as a
local Israeli distributor of the Gaia Converter products. 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 response
to this claim 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.
Neither Gaia Converter nor Alcyon Production Systems have filed a response 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. Enertec Electronics is defending and is
continuing to defend this action vigorously and we do not believe that it will
have a material adverse impact on our business. Orkit has filed affidavits
setting out the evidence supporting their allegations and Enertec will file
answering affidavits in response.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock began quotation on the OTC Bulletin Board on June 1,
2004 under the symbol LPST.OB. For the periods indicated, the following table
sets forth the high and low bid prices per share of common stock. These prices
represent inter-dealer quotations without retail markup, markdown, or commission
and may not necessarily represent actual transactions.
Fiscal 2005 Fiscal 2004
-------------------------- -------------------------
Calendar Quarter High Low High Low
- ------------------------ ------------- ------------ ------------ ------------
First Quarter $1.75 $1.75 N/A N/A
Second Quarter N/A N/A $1.20 $1.01
Third Quarter N/A N/A $1.75 $1.01
Fourth Quarter N/A N/A $2.00 $1.01
HOLDERS
As of March 25, 2005, we had 5,483,000 shares of common stock
outstanding and such shares were held by approximately 36 stockholders of
record.
DIVIDENDS
We have not declared any dividends to date. We have no present
intention of paying any cash dividends on our common stock in the foreseeable
future, as we intend to use earnings, if any, to generate growth. The payment by
us of dividends, if any, in the future, rests within the discretion of our Board
of Directors and will depend, among other things, upon our earnings, our capital
requirements and our financial condition, as well as other relevant factors.
There are no restrictions in our articles of incorporation or bylaws that
restrict us from declaring dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table shows information with respect to each equity
compensation plan under which the Company's common stock is authorized for
issuance as of the fiscal year ended December 31, 2004.
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------ ------------------------ ----------------------- ---------------------------
PLAN CATEGORY NUMBER OF SECURITIES WEIGHTED AVERAGE NUMBER OF SECURITIES
TO BE ISSUED UPON EXERCISE PRICE OF REMAINING AVAILABLE FOR
EXERCISE OF OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS (EXCLUDING SECURITIES
REFLECTED IN COLUMN (a)
- ------------------------------------ ------------------------ ----------------------- ---------------------------
(a) (b) (c)
- ------------------------------------ ------------------------ ----------------------- ---------------------------
EQUITY COMPENSATION PLANS APPROVED
BY SECURITY HOLDERS -0- -0- 500,000
- ------------------------------------ ------------------------ ----------------------- ---------------------------
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS
-0- -0- -0-
- ------------------------------------ ------------------------ ----------------------- ---------------------------
TOTAL -0- -0- 500,000
- ------------------------------------ ------------------------ ----------------------- ---------------------------
10
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 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 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
The information in this annual report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so long
as they identify these statements as forward looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact made in this report are forward looking. In
particular, the statements herein regarding industry prospects and future
results of operations or financial position are forward-looking statements.
Forward-looking statements reflect management's current expectations and are
inherently uncertain. Our actual results may differ significantly from
management's expectations.
11
The following discussion and analysis should be read in conjunction
with the financial statements of Lapis Technologies, Inc., included herewith.
This discussion should not be construed to imply that the results discussed
herein will necessarily continue into the future, or that any conclusion reached
herein will necessarily be indicative of actual operating results in the future.
Such discussion represents only the best present assessment of our management.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, our cash balance was $124,000, as compared to
$181,000 at December 31, 2003. The decrease in cash balance is mainly due to a
decrease in the total bank debt. Total current assets at December 31, 2004 were
$5,739,000, as compared to $5,332,000 at December 31, 2003. The increase in
current assets is mainly due to the increase in work in process inventory.
Our accounts receivable at December 31, 2004 was $2,544,000, as
compared to $3,083,000 at December 31, 2003. This change in accounts receivable
is primarily due to a large increase of revenues from Rafael with shorter
payment terms, 45-60 days as compared to 90-120 days of most of our other
customers. Another reason is the lower revenue of 2004 as compared to 2003.
As of December 31, 2004 our working capital was $1,249,000, as compared
to $713,000 at December 31, 2003 and an accumulated loss of $57,000. The
increase in the working capital is mainly due to increase in work in process
inventory and decrease in short term bank loans. Bank Leumi and Bank Hapoalim
have together extended us a total available bank debt of $3,027,000 as opposed
to $3,201,000 at December 31,2003. 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 $2,358,000 of total debt based on our pledge of
$1,900,000 of our working capital and customers' receivables due from Israeli
Aircraft Industry and Rafael, and $458,000 by the pledge of some of the
financial assets of our president, Harry Mund. Bank Hapoalim has provided us
with $669,000 of total debt based on our pledging of $500,000 of our customers'
receivables due from Tadiran Spectralink Ltd. and Bigband, Zycon and Rad., and
$169,000 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 our term loans at December 31, 2004 consisted of
$163,000 compared to $202,000 at December 31, 2003. Our total short-term loan
consisted of $1,926,000 of short-term loans and $163,000 of current portion of
long-term debt broken down as follows:
$279,000 due January 2005,
$10,000 due Feb 2005,
$745,000 due March 2005,
$736,000 due July 2005 and
$319,000 due December 2005.
At December 31, 2004, our total bank debt was $3,027,000 as opposed to
$3,201,000 at December 31, 2003. These funds were borrowed as follows:
$2,089,000 which includes the current portion of long term debt, as various
short term bank loans due through 2005, $236,000 of long-term debt due through
September 2007 and $702,000 borrowed using our bank lines of credit. As a
result, we decreased the amount borrowed for the year ended December 31, 2004 by
$174,000 from $3,201,000 as of December 31, 2003. The decrease in bank debt is
mainly due to a decrease in account receivables.
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. As of
December 31, 2004 we are current with all of our bank debt and compliant with
all the terms of our bank debt.
At December 31, 2004, and at December 31, 2003, we had receivables from
Harry Mund, our Chief Executive Officer and President, in the amounts of
$359,000 and $147,000 respectively. The loan to Mr. Mund was extended as a
salary advance. We believe that the current payment status will not affect our
future cash flow or liquidity.
12
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.
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, 2004 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2003
For the fiscal year ended December 31, 2004 we had total revenue of
$6,176,000 compared to revenue of $6,490,000 for the fiscal year ended December
31, 2003. The decrease in revenue of $314,000, or 5%, is a result of a lower
number of orders for military systems received at the end of year 2003 and first
half of 2004, due to 2003 end-of-year budget cuts of Israeli Ministry of
Defense, which affected the sales in the first three quarters of 2004. The
impact of the government cuts at the end of the year usually lasts two to three
quarters since the average lead-time for military products is 6-12 months. There
has also been a delay in new orders for the Arrow project since the customer has
been involved preparing the August 2004 USA tests.
Gross profit totaled $2,046,000 for the fiscal year ended December 31,
2004 as compared to $1,871,000 for the fiscal year ended December 31, 2003, an
increase of $175,000 or 9%. Gross profit as a percentage of sales for the fiscal
year ended December 31, 2004 was 33% as compared to 29% for the fiscal year
ended December 31, 2003. The increase in our gross profit was a result of an
increased number of repeat orders delivered during 2004 and more orders with
higher profit margins.
Total operating expenses in each of the fiscal years ended December 31,
2004 and December 31, 2003 were comprised of selling, general and administrative
expenses. Operating expenses for the fiscal years ended December 31, 2004 and
2003 were $1,221,000 and $1,110,000, respectively, an increase of $111,000, or
10%. The increase in operating expenses is attributable to an increase of
$40,000 in salary expenses, approximately $55,000 in cost of professional
services legal and accounting associated with being a public company and $16,000
in selling expenses as a result of our effort to develop the market for our new
airborne products.
Our net income was $343,000 in the fiscal year ended December 31, 2004
compared to $252,000 in the fiscal year ended December 31, 2003. This increase
in net income by $91,000 or 36% was due to the increase in gross profit of $
175,000 and the decrease of interest expenses and provisions for income taxes.
The decrease in net interest expenses is due to lower interest rates and lower
total bank debt.
As detailed in this annual report, our business is comprised of Enertec
Electronics which derives its revenues from the commercial arena and from
standard military power supplies that it sells to the military industry and a
few orders that were received in 2002 and are still being fulfilled out till
2005 that are systems for the military industry. Consequently from hereon
forward when we refer to commercial revenues we will be referring exclusively to
Enertec Electronics commercial business and when we refer to military business
we will be referring to Enertec Systems 2001 and the military part of Enertec
Electronics business.
13
For the fiscal year ended December 31, 2004, our non-military revenue,
costs of sales and gross profits were $2,403,000, $1,792,000 and $611,000
respectively, and $2,248,000, $1,200,000 and $1,048,000 respectively for the
fiscal year ended December 31, 2003. Revenue increased $155,000 or 6.9% because
the market for non-military goods started to recover towards the end of 2004,
costs of sales increased approximately $572,000 or 47.7% because of efforts to
increase our market share and penetrate new markets. Gross profit decreased
$437,000 or 41.7% because of the higher cost of sales which was directly due to
several orders booked at lower unit prices in order to meet customer's target
prices.
For the twelve months ended December 31, 2004, revenues, costs of sales
and gross profits from our military business were $3,773,000, $2,338,000 and
$1,435,000 respectively, and $4,242,000, $3,419,000 and $823,000, respectively
for twelve months ended December 31, 2003. Revenue decreased $469,000 or 11%
because fewer orders for military systems were received due to 2003 end of year
budget cuts from the Israeli Ministry of Defense, as well as a strategic
decision to focus on fewer but more profitable projects. Cost of sales decreased
approximately $1,081,000 or 31.6 % because an increased number of repeat orders
were delivered during 2004 as well as projects with a lower cost of sales than
the previous year December 2003. Gross Profit increased $612,000 or 74.4 %
because we focused on a significant amount of projects with higher profit
margin.
At December 31, 2004, we had three customers that accounted for
approximately 62% of accounts receivable. For the years ended December 31, 2004
and 2003, approximately 43% and 61%, of our sales were to two and three
customers, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
CRITICAL 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.
Revenue Recognition and Customer Deposits - Revenue is recorded as
product is shipped, the price has been fixed or determined, collectibility 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, 2004 and 2003 revenue relating to service contracts is less than one percent
of net sales.
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, 2004 and 2003 were approximately $110,000 and $100,000,
respectively.
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, 2004 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, 2004.
The carrying value of the long-term debt approximate fair value at December 31,
2004 based upon debt terms available for companies under similar terms.
14
Foreign Currency Translation - Lapis Technologies, Inc. has one wholly
owned subsidiary, Enertec Electronics Limited, an Israeli corporation, and one
majority owned subsidiary, Enertec Systems 2001 Ltd., an Israeli corporation..
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 accumulated other comprehensive income or
loss.
ITEM 7. FINANCIAL STATEMENTS.
All financial information required by this Item is attached hereto at
the end of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On April 1, 2004, Rogoff & Company, P.C. informed us that they were
resigning as our 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 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 recent fiscal years ended December 31, 2003 and December 31,
2002 and through April 1, 2004, we did not consult 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 our financial statements, and
neither a written report was provided to us nor oral advice was
provided that Gvilli & Co. concluded was an important factor
considered by us in reaching a decision as to an 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.
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 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 change in our internal controls or in other
factors that could affect these controls during our last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 8B. OTHER INFORMATION.
None.
15
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
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 57 Chairman of the Board, Chief Executive Officer,
President and Secretary
- ----------------------- ----- -----------------------------------------------
Miron Markovitz 57 Director, Chief Financial Officer and Principal
Accounting 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, our Chief Financial Officer and Principal
Accounting 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, 43, 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, 53, 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.
16
DR. ALEXANDER VELICHKO, 58, 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
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 FINANCIAL EXPERT
We do not have an audit committee financial expert, as that term is
defined in Item 401 of Regulation S-B. We have not been able to identify a
suitable nominee to serve as an audit committee financial expert.
CODE OF ETHICS
We have adopted a 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 as Exhibit 14.1 to our annual report on
Form 10-KSB for the fiscal year ended December 31, 2003, filed with the
Securities and Exchange Commission on June 28, 2004. Upon request, we will
provide to any person without charge a copy of our Code of Ethics. Any such
request should be made to Attn: Harry Mund, 19 W. 34th Street, Suite 1008, New
York, NY 10001. Our telephone number is (212) 937-3580.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the annual and
long-term compensation of our Chief Executive Officer, for services as executive
officer for the last three fiscal years. Since we did not compensate any
executive during fiscal 2004, 2003 and 2002, 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 $100,000 during fiscal 2004, 2003 and 2002.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ------------------------------ ------------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDER-LYING OTHER
NAME AND COMPEN- STOCK AWARD(S) OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($) ($) SARS (#) PAYOUTS ($) SATION ($)
- ------------------------- ----------- ------------- ---------- ------------ ----------------- ------------ ------------ -----------
Harry Mund, Chief 2004 $261,000 -0- -0- -0- -0- -0- -0-
Executive Officer 2003 $216,000 -0- -0- -0- -0- -0- -0-
and President 2002 $145,550 -0- -0- -0- -0- -0- -0-
17
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 25, 2005. 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.
Unless otherwise indicated, the persons named in the table below have
sole voting and investment power with respect to the number of shares indicated
as beneficially owned by them. Enertec Electronics Limited, 27 Rechov
Ha'Mapilim, Kiriat Ata, Israel, P.O. Box 497, Kiriat Motzkin 26104, Israel.
Number of Shares Percentage
Name of Beneficial Owner Beneficially Owned * Ownership *
- ------------------------------------ --------------------- ----------------
Harry Mund 4,750,000 86.6%
Miron Markovitz 9,000 0.2%
- ------------------------------------ --------------------- ----------------
All Directors and Executive Officers 4,759,000 86.8%
as a Group (2 persons)
* Applicable percentage ownership is based on 5,483,000 shares of common
stock outstanding as of March 25, 2005, together with securities
exercisable or convertible into shares of common stock within 60 days of
March 25, 2005 for each stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock that are currently exercisable or exercisable
within 60 days of March 25, 2005 are deemed to be beneficially owned by
the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person.
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.
18
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.
ITEM 13. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
3.1 Certificate of Incorporation of Enertec Electronics, Inc. filed January
31, 2002 (Incorporated by reference to our registration statement on
Form SB-2 (File No. 333-100979), filed with the Securities and Exchange
Commission on November 4, 2002)
3.2 Certificate of Amendment of Enertec Electronics, Inc. filed April 23,
2002 (Incorporated by reference to our registration statement on Form
SB-2 (File No. 333-100979), filed with the Securities and Exchange
Commission on November 4, 2002)
3.3 Certificate of Amendment of Opal Technologies, Inc. filed October 17,
2002 (Incorporated by reference to our registration statement on Form
SB-2 (File No. 333-100979), filed with the Securities and Exchange
Commission on November 4, 2002)
3.4 By-Laws of Lapis Technologies, Inc. (Incorporated by reference to our
registration statement on Form SB-2 (File No. 333-100979), filed with
the Securities and Exchange Commission on November 4, 2002)
14.1 Code of Ethics (Incorporated by reference to our annual report on Form
10-KSB for the fiscal year ended December 31, 2003, filed with the
Securities and Exchange Commission on June 28, 2004)
21.1 List of Subsidiaries
31.1 Certification by Chief Executive Officer, required by Rule 13a-14(a) or
Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer, required by Rule 13a-14(a) or
Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Chief Executive Officer, required by Rule 13a-14(b) or
Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of
Title 18 of the United States Code, promulgated pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer, required by Rule 13a-14(b) or
Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of
Title 18 of the United States Code, promulgated pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
The aggregate fees billed for professional services rendered by our
principal accountants for the audit of our financial statements, for the reviews
of the financial statements included in our annual report on Form 10-KSB, and
for other services normally provided in connection with statutory filings were
$8,250 and $10,500 for the years ended December 31, 2004 and December 31, 2003,
respectively.
19
AUDIT-RELATED FEES
We incurred fees of $0 and $0 for the years ended December 31, 2004 and
December 31, 2003, respectively, for professional services rendered by our
principal accountants 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
principal accountants for tax compliance, tax advice, and tax planning were
$1,500 and $1,500 for the years ended December 31, 2004 and December 31, 2003,
respectively. The services for which such fees were paid consisted of filing our
tax returns for 2003 and 2004.
ALL OTHER FEES
We did not incur any fees for other professional services rendered by
our principal accountants during the years ended December 31, 2004 and December
31, 2003.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
Not applicable
20
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LAPIS TECHNOLOGIES, INC.
Dated: March 28, 2005 By: /s/ Harry Mund
-------------------------------
Harry Mund
Chief Executive Officer
Dated: March 28, 2005 By: /s/ Miron Markovitz
-------------------------------
Miron Markovitz
Chief Financial Officer and
Principal Accounting Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Harry Mund Chairman of the Board March 28, 2005
--------------------
Harry Mund
/s/ Miron Markovitz Director March 28, 2005
--------------------
Miron Markovitz
21
Gvilli & Co. C.P.A. (isr.)
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, 2004, 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 position of the Lapis
Technologies, Inc. and Subsidiaries at December 31, 2004, 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 and Co.
Gvilli & Co.
March 17, 2005
Casarea, Israel
F-1
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
F-2
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Amounts)
ASSETS
December 31,
2004
------------
Current Assets:
Cash and cash equivalents $ 124
Accounts receivable 2,544
Inventories 2,274
Prepaid expenses and other current assets 438
Due from stockholder 359
------------
Total Current Assets 5,739
Property and equipment, net 414
Deferred income taxes 20
------------
$ 6,173
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 702
Short term bank loans 1,926
Current portion of term loans 163
Accounts payable and accrued expenses 1,520
Income taxes payable 179
------------
Total Current Liabilities 4,490
Term loans, net of current portion 236
Severance payable 59
------------
4,785
Commitments and contingencies
Minority interest 372
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 (57)
Retained Earnings 990
------------
Total Stockholders' Equity 1,016
------------
$ 6,173
The accompanying notes are an integral part of these financial statements.
F-3
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Earnings Per Share and Share Amounts)
Years Ended
December 31,
--------------------------
2004 2003
----------- -----------
Sales $ 6,176 $ 6,490
Cost of sales 4,130 4,619
----------- -----------
Gross profit 2,046 1,871
----------- -----------
Operating Expenses:
Selling expenses 56 40
General and administrative 1,165 1,070
----------- -----------
Total operating expenses 1,221 1,110
----------- -----------
Income from operations 825 761
----------- -----------
Other Income (Expense):
Interest expense, net (238) (327)
Other income 8 --
Foregiveness of debt -- 15
----------- -----------
Total other income (expense) (230) (312)
----------- -----------
Income before provision for income taxes and minority interest 595 449
Provision for income taxes 61 120
Minority interest (191) (77)
----------- -----------
Net income $ 343 $ 252
=========== ===========
Basic net loss per share $ 0.06 $ 0.05
=========== ===========
Basic weighted average common shares outstanding 5,483,000 5,483,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
LAPIS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31, 2003 AND 2004
(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, 2003 5,483,000 $ 5 $ 78 $ (104) $ 395 $ 374
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
=========
Foreign currency translation adjustment -- 6 6 6
Net income -- 343 343 343
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2004 5,483,000 $ 5 $ 78 $ (57) $ 990 $ 1,016 $ 349
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-5
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended
December 31,
------------------
2004 2003
------- -------
Cash flows from operating activities:
Net income $ 343 $ 252
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 146 137
Minority interest 215 77
Foregiveness of debt -- (16)
Gain on sale of property and equipment (8) --
Deferred income tax (4)
Change in operating assets and liabilities:
Accounts receivable 539 (910)
Inventories (616) 266
Prepaid expenses and other current assets (203) 86
Accounts payable and accrued expenses (184) (98)
Income taxes payable 65 52
Customer deposits -- (212)
Severance payable -- (36)
------- -------
Net cash used in operating activities 297 (406)
------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment 19 --
Purchase of property and equipment (11) (213)
Decrease in due from stockholder (139) 121
Decrease in due from affiliates (24) 57
------- -------
Net cash (used in) provided by investing activities (155) (35)
------- -------
Cash flows from financing activities:
Increase (decrease) in bank line of credit, net (254) (495)
Proceeds from long term debt 3,682 5,180
Repayment of long-term debt (3,608) (4,395)
------- -------
Net cash provided by financing activities (180) 290
------- -------
Effects of exchange rates on cash (19) 19
------- -------
Increase (decrease) in cash (57) (132)
Cash, beginning of period 181 313
------- -------
Cash, end of period $ 124 $ 181
======= =======
The accompanying notes are an integral part of these financial statements.
F-6
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended
December 31,
------------------
2004 2003
------- -------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 238 $ 327
======= =======
Income taxes $ 40 $ 172
======= =======
Supplemental disclosure of non-cash financing
activities:
Common stock issued for services $ -- $ 50
======= =======
The accompanying notes are an integral part of these financial statements.
F-7
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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.
NOTE 2 - BASIS OF PRESENTATION
The accompanying consolidated financial statements present the results of
operations of the Company for the years ended December 31, 2004 and 2003
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-8
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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, 2004 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
F-9
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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, 2004.
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, 2004 and 2003 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, 2004 and 2003 the Company did not issued any stock options.
F-10
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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, 2004 and
2003 were approximately $110 and $100, 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, 2004 and 2003 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, 2004.
Minority Interest
Minority interest represents the minority stockholders' proportionate share
of the equity of the Company's subsidiary at December 31, 2004. 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, 2004 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, 2004. The carrying value of the long-term debt approximate
fair value at December 31, 2004 based upon debt terms available for
companies under similar terms.
F-11
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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
accumulated other comprehensive income or loss.
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-12
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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, 2004:
Raw materials $ 671
Work in process 1,046
Finished goods 557
---------
$ 2.274
=========
F-13
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(In Thousands, Except Share and Per Share Amounts)
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2004:
Leasehold improvements $ 96
Machinery and equipment 6
Furniture and fixtures 172
Transportation equipment 245
Computer equipment 322
-----
841
Less accumulated depreciation and amortization (427)
-----
$ 414
=====
NOTE 6 - INCOME TAXES
The provision for income taxes consists of the following for the years
ended December 31:
2004 2003
--------- ---------
Current:
Foreign $ 60 $ 124
Deferred:
Foreign 1 (4)
--------- ---------
$ 61 $ 120
========= =========
At December 31, 2004, the Company has a net operating loss carryforward of
approximately $70, 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, 2004 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, 2004:
Severance payable $ 20
Net operating loss carryforward 10
Valuation allowance (10)
---------
Deferred tax assets $ 20
=========
F-14
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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:
2004 2003
--------- ---------
Federal statutory rate 34.0% 34.0%
Valuation Allowance (34.0) (34.0)
Effect on foreign taxes 10.3 26.7
--------- ---------
10.3% 26.7%
========= =========
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2004:
Bank line of credit due December 31, 2004
at 6.7% per annum $ 702
Short-term bank loans, payable within
twelve months at rates ranging from
7% per annum and 9.5% per annum 1,926
Term loans, due between February 2005 and
September 2007 at rates ranging from 7.0%
per annum and 8.5% per annum 399
---------
3,027
Less current portion of term loans 2,791
---------
$ 236
=========
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,
2004:
Year Ended
2005 $ 2,089
2006 145
2007 91
---------
$ 2,325
=========
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-15
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(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 - RELATED PARTIES
Due from Stockholder
At December 31, 2004 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-16
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(In Thousands, Except Share and Per Share Amounts)
NOTE 10 - 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 11 - 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 $59 and $52, respectively, for the years ended
December 31, 2004 and 2003.
At December 31, 2004, 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:
------------
2005 $ 59
2006 59
2007 59
---------
$ 177
=========
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-17
LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(In Thousands, Except Share and Per Share Amounts)
NOTE 12 - CONCENTRATIONS
The Company had deposits with commercial financial institutions, which, at
times, may exceed the FDIC insured limits of $100 in the United States.
Management has placed these funds in high quality institutions in order to
minimize the risk. Cash held in Israel at December 31, 2004 was $124.
At December 31, 2004 the Company had three customers that accounted for
approximately 62% of accounts receivable. For the years ended December 31,
2004 and 2003 approximately 43% and 51%, respectively, of the Company's
sales were to two and three customers, respectively.
NOTE 13- SEGMENT AND GEOGRAPHIC INFORMATION
Information about the Company's assets in different geographic locations at
December 31, 2004 is shown below pursuant to the provisions of SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information."
Total assets:
Israel $ 6,173
United States 0
---------
$ 6,173
=========
F-18