UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
OR
[_] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT ________
Commission file number 001-14662
ACS - MOTION CONTROL LTD.
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(Exact name of Registrant as specified in its charter)
ISRAEL
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(Jurisdiction of incorporation or organization)
P.O.B. 5668, MIGDAL HA'EMEK, ISRAEL 10500
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Ordinary Shares, par value Nasdaq Capital(R) Market
NIS 0.01 per share
Securities registered or to be registered pursuant to Section 12(g) of the
Act.
None
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act.
None
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the Annual
Report.
3,266,751 ORDINARY SHARES
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Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes [_] No [X]
If this report is an annual or transition report, indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Securities Exchange Act 1934.
Yes [_] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 [_] Item 18 [X]
TABLE OF CONTENTS
PAGE
Forward Looking Statements 3
PART I
Item 1. Identity of Directors, Senior Management and Advisers 5
Item 2. Offer Statistics and Expected Timetable 5
Item 3. Key Information 5
Selected Financial Data 5
Risk Factors 6
Item 4. Information on the Company 14
Item 4A. Unresolved Staff Comments 22
Item 5. Operating and Financial Review and Prospects 23
Item 6. Directors, Senior Management and Employees 33
Item 7. Major Shareholders and Related Party Transaction 43
Item 8. Financial Information 44
Item 9. The Offer and Listing 46
Item 10. Additional Information 47
Memorandum and Articles of Association 47
Exchange Controls 51
United States Federal Income Tax Considerations 52
Israeli Taxation 55
Documents on Display 57
Item 11. Quantitative and Qualitative Disclosures about Market Risk 58
Item 12. Description of Securities Other than Equity Securities 58
PART II
Item 13. Defaults, Dividends Arrearages and Delinquencies 58
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds 58
Item 15. Controls and Procedures 59
Item 16. [Reserved] 59
Item 16A. Audit Committee Financial Expert 59
Item 16B. Code of Ethics 59
Item 16C. Principal Accountant's Fees and Services 60
Item 16D. Exemptions from Listing Standard for Audit Committees 60
Item 16E. Purchases of Equity Securities by the Issuers and
Affiliated Purchasers 60
PART III
Item 17. Financial Statements 61
Item 18. Financial Statements 61
Item 19. Exhibits 62
SIGNATURES 63
INTRODUCTION
As used in this Annual Report on Form 20-F, references to "we", "our",
"us", "ACS Motion Control" or the "Company" are references to ACS Motion Control
Ltd, a company organized under the laws of the State of Israel, and its
wholly-owned subsidiaries, unless indicated otherwise.
Our consolidated financial statements have been prepared in United States
dollars and in accordance with accounting principles generally accepted in
Israel, or Israeli GAAP. See Note 2 of the Notes to our Consolidated Financial
Statements. All references in this Annual Report to "U.S. dollars," "dollars" or
"$" are to United States dollars and all references in this Annual Report to
"NIS" or "shekels" are to New Israeli Shekels.
For the reader's convenience, some financial information has been
translated from New Israeli Shekels, or NIS, to U.S. dollars, using the
representative exchange rate as published by the Bank of Israel as of December
31, 2006 (U.S. $1.00 = NIS 4.225). The U.S. Dollar amounts reflected in these
convenience translations should not be construed as representing amounts that
actually can be received or paid in dollars or convertible into dollars (unless
otherwise indicated), nor do such convenience translations mean that the NIS
amounts (i) actually represent the corresponding dollar amounts stated, or (ii)
could be converted into dollars at the assumed rate.
FORWARD LOOKING STATEMENTS
This report, and the other reports we have filed from time to time with the
SEC, contain forward-looking statements. Forward-looking statements deal with
our current plans, intentions, beliefs and expectations and statements of future
economic performance. Statements containing terms like "believes," "does not
believe," "plans," "expects," "intends," "estimates," "anticipates" and other
phrases of similar meaning are considered to imply uncertainty and are
forward-looking statements. In particular, these statements include, among other
things, statements relating to:
o our business strategy;
o the development of our products;
o our business prospects; and
o our liquidity.
Forward-looking statements involve known and unknown risks and
uncertainties that may cause our actual results in future periods to differ
materially from what is currently anticipated, including those associated with
global economic downturns and the cyclical nature of specific market segments
that we target, as well as changes in Israeli economic and political conditions,
hostilities between Israel and the Palestinian Authority, Israel's relationships
with neighboring Arab countries, the availability of labor and other factors
discussed under "Item 3. Key Information - 3D. Risk Factors". We make cautionary
statements throughout this report, including under "Risk Factors." All
statements other than statements of historical facts included in this report are
forward-looking statements. You should read these cautionary statements as being
applicable to all related forward-looking statements wherever they appear in
this report, the materials referred to in this report, the materials
incorporated by reference into this report, and our press releases. However,
such cautionary statements should not be deemed to be all risks and
uncertainties to which we are or may in the future be subject. Although we
believe that the expectations reflected in such forward-looking statements are
reasonable, we can give no assurance that such expectations will prove to have
been correct. Furthermore, we operate in an industry sector where securities
values may be volatile and may be influenced by economic and other factors
beyond our control. Further information regarding these and other risks is
described from time to time in our filings with the Securities and Exchange
Commission.
3
We cannot guarantee our future results, levels of activity, performance or
achievements. Neither we nor any other person assumes responsibility for the
accuracy and completeness of these statements.
We undertake no obligation to update any of the forward-looking statements
after the date of this report.
4
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
3A. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial information of
ACS -Motion Control Ltd. You should read this table together with "Item 5.
Operating and Financial Review and Prospects" and our audited consolidated
financial statements, including the related notes, contained elsewhere in this
Annual Report. The selected consolidated financial data presented below as of
and for each of the last five fiscal years ended December 31, 2006 have been
derived from our audited consolidated financial statements for the relevant
years.
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
CONSOLIDATED
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
----------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
ISRAELI GAAP:
Revenues 13,503 11,428 14,376 9,205 7,907
Operating income (loss) 1,443 1,022 2,534 871 (354)
Net income (loss) 1,537 974 2,253 822 (201)
Net income (loss) per Ordinary Share:
Basic in U.S. dollars 0.48 0.32 0.75 0.28 (0.07)
Diluted in U.S. dollars 0.48 0.32 0.70 0.26 (0.07)
U.S. GAAP*:
Net income (loss) 1,388 558 2,253 822 (201)
Net income (loss) per Ordinary Share
Basic in U.S. dollars 0.43 0.18 0.73 0.29 (0.07)
Diluted in U.S. dollars 0.43 0.18 0.69 0.29 (0.07)
Weighted average number of shares used in
computation of earnings (loss) per share:
Basic 3,207 3,079 3,012 2,797 2,795
Diluted 3,213 3,079 3,218 2,797 2,795
BALANCE SHEET DATA:
ISRAELI GAAP:
Total assets 15,776 12,871 12,341 10,268 9,881
Net assets 12,908 10,589 9,584 6,460 5,635
Capital stock 10 10 9 9 9
U.S. GAAP*:
Total assets 16,315 13,224 12,852 10,680 10,228
Net assets 12,343 10,173 9,584 6,460 5,635
Capital stock 10 10 9 9 9
*For a discussion of the effect on net income of the application of U.S. GAAP,
see Item 5.A - Operating results.
5
EXCHANGE RATE DATA
The following table sets forth information concerning the representative
exchange rate of the NIS to the U.S. Dollar, as published by the Bank of Israel,
for the years 2002 through 2006 and for each of the months in the six-month
period ended February 28, 2007, expressed in US dollars per NIS.
The average rate for a year means the average of the exchange rates on the
last day of each month during a year. The average rate for a month means the
average of the daily exchange rates during that month.
EXCHANGE RATES
---------------------------------------------
RATE AT AVERAGE HIGHEST LOWEST
FOR THE YEAR ENDED DECEMBER 31 PERIOD END RATE RATE RATE
------------------------------ ----- ----- ----- -----
(USD PER NIS)
---------------------------------------------
2002 4.737 4.738 4.994 4.437
2003 4.379 4.548 4.924 4.283
2004 4.308 4.482 4.634 4.308
2005 4.603 4.486 4.740 4.299
2006 4.225 4.456 4.725 4.176
For the month ended:
September 30, 2006 4.302 4.353 4.394 4.297
October 31, 2006 4.288 4.273 4.294 4.238
November 30, 2006 4.247 4.300 4.331 4.247
December 31, 2006 4.225 4.202 4.234 4.176
January 31, 2007 4.260 4.228 4.260 4.187
February 28, 2007 4.211 4.218 4.254 4.183
On March 19, 2007, the representative exchange rate of the NIS to the US
Dollar, as published by the Bank of Israel, was NIS 4.208 to $1.00.
3B. CAPITALIZATION AND INDEBTEDNESS
Not applicable
3C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable
3D. RISK FACTORS
RISK FACTORS RELATED TO THE COMPANY:
WE HAVE THREE CUSTOMERS THAT ARE RESPONSIBLE FOR A SUBSTANTIAL PORTION OF OUR
REVENUES. THE LOSS OF ANY OF THESE CUSTOMERS OR A MATERIAL DECREASE IN THE
QUANTITY OF SALES TO ANY OF THEM COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
RESULTS OF OPERATIONS AND REVENUES.
For the years ended December 31, 2006, 2005 and 2004, three customers
represented approximately 44%, 37% and 52%, respectively, of our sales. For the
years ended December 31, 2006, 2005 and 2004 one customer accounted for 24%, 13%
and 24%, respectively, of our sales. In June 2006 we were notified by this
customer that due to a redesign of its system, it would no longer require the
products that it has been purchasing from us over the last years and would
therefore cease the purchase of most of our products as of the fourth quarter of
2006. We expect that we will continue to be dependent upon a limited number of
customers for a significant portion of our revenues. We do not have long-term
purchase contracts with our customers and our sales arrangements with them do
not have minimum purchase requirements.
6
We cannot assure that these customers will continue to buy our products at
all or in the same volumes or on the same terms as they have in the past. Their
failure to do so may significantly reduce our sales. In addition, we cannot
assure that we will be able to attract new customers. The loss of any of these
customers or a material decrease in the quantity of sales to any of them, or a
material adverse change in the terms of such sales, or a material adverse change
in the financial conditions of our principal customers could have a material
adverse effect on our results of operations and revenues.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE WITH LARGER INTERNATIONAL COMPANIES;
AS A SMALLER COMPANY WE MAY LACK THE OPERATIONS AND FINANCIAL, MARKETING, HUMAN,
AND OTHER RESOURCES NEEDED TO MAINTAIN OR CAPTURE INCREASED MARKET SHARE; OUR
REVENUES MAY DECREASE AS OUR COMPETITORS INTRODUCE EQUIVALENT PRODUCTS.
The segment of the market in which we compete is characterized by a high
degree of fragmentation. Companies concentrate their development and sales
efforts on specific small market niches because many customers, especially OEMs,
require high levels of support and technical expertise. Competition is primarily
on the basis of cost, performance, capabilities, reliability, support, and
safety. Many of our competitors are international companies with significantly
larger operations and greater financial, marketing, human, and other resources
than ours, which may give them competitive advantages, such as the ability to
market their products in larger quantities and at lower prices than us. Our
sales and our sale prices may decline significantly as our competitors introduce
equivalent or superior products. Our overall profitability depends on our
ability to continuously introduce new advanced products at competitive prices.
We may not be able to introduce new advanced products on a timely basis. In
addition, many of our competitors are moving their manufacturing facilities to
countries where the cost of production is significantly lower than in Israel and
the United States, where we produce most of our products, thus decreasing their
cost and thereby the sale price of their products.
OUR ABILITY TO STAY COMPETITIVE AND OUR SUCCESS DEPENDS LARGELY ON OUR ABILITY
TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE ADDITIONAL MOTION CONTROL PRODUCTS IN
A TIMELY MANNER.
Our ability to stay competitive and future results of operations depend, to
a significant degree, upon our ability to successfully develop additional
products and achieve increased market penetration. We must develop, test and
manufacture products and prove that our products are competitive from both the
technological and cost aspects. Our products must meet industry standards in the
geographical regions in which we operate. The development and commercialization
process of our products is both time-consuming and costly and involves business
risks. Our future products, if and when fully developed and tested, may not
perform as we expect or compete successfully with products developed by our
competitors. Further, there can be no assurance that the cost of our future
development efforts will not materially increase due to technological or other
advancements.
WE DEPEND ON KEY SUPPLIERS FOR THE SUPPLY OF ESSENTIAL COMPONENTS FOR OUR
PRODUCTS. IF ANY OF OUR KEY SUPPLIERS WILL SUPPLY US COMPONENTS ON LESS
FAVORABLE TERMS, OR WILL STOP SUPPLYING SUCH COMPONENTS TO US AT ALL, OUR
PRODUCTION CAPABILITIES COULD BE MATERIALLY ADVERSELY AFFECTED.
We depend on the supply of essential components in our motion control
systems by suppliers who are the single source of supply of such items. Among
such components are processors, servo processors, and other motion controller
components. As we have no supply agreements with these companies, we cannot
guarantee that such suppliers will continue to make such components, will
continue to supply us with such components on favorable terms, or will supply
such components to us at all, in the future. The lack of guaranteed supply
arrangements can result in delays in obtaining components from time to time. In
any such event, our production capabilities could be materially adversely
affected.
7
THE DOLLAR COST OF OUR OPERATIONS IN ISRAEL WILL INCREASE TO THE EXTENT
INCREASES IN THE RATE OF INFLATION IN ISRAEL ARE NOT OFFSET BY A DEVALUATION OF
THE NIS IN RELATION TO THE U.S. DOLLAR, WHICH WOULD HARM OUR RESULTS OF
OPERATIONS.
Since a considerable portion of our expenses such as employees' salaries
are linked to an extent to rate of inflation in Israel, the dollar cost of our
operations is influenced by the extent any increase in the rate of inflation in
Israel is or is not offset by the devaluation of the NIS in relation to the
dollar. As a result, we are exposed to the risk that the NIS, after adjustment
for inflation in Israel, will appreciate in relation to the dollar. In that
event, the dollar cost of our operations in Israel will increase and our
dollar-measured results of operations will be adversely affected. In 2006 the
inflation adjusted NIS appreciated against the dollar, which raised the dollar
cost of our Israeli operations. We cannot predict whether in the future the NIS
will appreciate against the dollar or vice versa. Any increase in the rate of
inflation in Israel, unless the increase is offset on a timely basis by a
devaluation of the NIS in relation to the dollar, will increase labor and other
costs, which will increase the dollar cost of our operations in Israel and harm
our results of operations.
WE MAY BE SUBJECT TO CURRENCY FLUCTUATION.
The U.S. Dollar cost of our operations in Israel is influenced by the
differential between the rate of inflation in Israel and any change in the value
of the NIS in relation to the U.S. Dollar. Our U.S. Dollar costs will increase
if this "gap" widens and the devaluation rate fails to keep pace with the rate
of inflation in Israel, and conversely, we may benefit if the rate at which
Israeli currency devalues against the U.S. Dollar exceeds the rate of inflation
in Israel. In the years ending December 31, 2006, 2005 2004, 2003 and 2002, the
annual inflation rate in Israel as adjusted for the devaluation of the Israeli
currency in relation to the U.S. Dollar was 6.9%, (4.5)%, 2.8%, 5.7% and (0.8)%,
respectively. The closing representative exchange rate of the U.S. Dollar at the
end of each such period, as reported by the Bank of Israel, was NIS 4.225, NIS
4.603, NIS 4.308, NIS 4.379 and NIS 4.737, respectively. As a result, we
experienced increases in the U.S. Dollar costs of operations in Israel in 2006,
2004 and 2003, and decreases in 2005 and 2002. We cannot assure you that we will
not be materially adversely affected if inflation in Israel exceeds the
devaluation of the NIS against the U.S. Dollar or if the timing of such
devaluation lags behind increases in inflation in Israel. We do not currently,
and have no plans to, utilize currency hedging instruments, and we do not hold
or issue derivative securities.
OWNERSHIP OF OUR ORDINARY SHARES IS CONCENTRATED WHICH MAY DELAY, IMPEDE OR
DISCOURAGE A TRANSACTION BENEFICIAL TO OUR SHAREHOLDERS.
As of February 28, 2006, Ze'ev Kirshenboim, our Chairman of the Board of
the Directors and Chief Financial Officer, beneficially owned approximately 23%
of our outstanding ordinary shares, and Jacob Engel, one of our directors and a
brother-in-law to Mr. Kirshenboim, beneficially owned approximately 18% of our
ordinary shares. The concentration of our share ownership may:
o delay or prevent a change in control of the company;
o impede a merger, consolidation, takeover, or other transaction
involving the company; or
o discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of the company.
8
OUR TECHNOLOGY AND DESIGNS ARE NOT PROTECTED BY PATENTS; THE SUCCESS OF OUR
PRODUCTS DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEFEND OUR INTELLECTUAL PROPERTY
RIGHTS; OUR TECHNOLOGY MAY BE FOUND TO INFRINGE UPON THE PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH COULD CAUSE US TO LOSE MARKET
SHARE, LIMIT OUR GROWTH, REDUCE OUR PROFITABILITY, AND INCREASE OUR OPERATING
EXPENSES.
Our ability to compete effectively depends, and will depend, in large part,
on our ability to maintain the proprietary nature of our products and
technologies. We currently do not hold, have not filed for, and have no
intention of filing for, patent protection in any country with respect to our
proprietary technology. We depend on trade secret laws, copyright law, unfair
competition law and upon the execution by our officers, directors, employees,
consultants, and subcontractors of confidentiality agreements relating to the
proprietary nature of our technology to protect our intellectual property.
Confidentiality agreements do not, however, provide complete protection, and to
the extent that these intellectual property and other laws do not adequately
protect our technology, others may independently develop our know-how and
information or otherwise design around the confidentiality agreements entered
with us. Accordingly, we cannot assure you that we will be successful in
deterring others from developing or marketing, legally or otherwise, competitive
products utilizing our proprietary designs and technologies, which could cause
us to lose market share, limit our growth, reduce our profitability, and
increase our operating expenses.
Furthermore, there can be no assurance that our technology will not be
found to infringe upon the patents or other intellectual property rights of
others. If we should be found to infringe upon the patents or otherwise
impermissibly utilize the intellectual property of others, our ability to
utilize our technology could be materially restricted or prohibited. In such
event we may be required to obtain licenses from such third parties or otherwise
redesign our products so as not to utilize such intellectual property, each of
which may be uneconomical or otherwise impossible. We cannot assure you that any
license required under any such patents or proprietary rights could be obtained
on terms acceptable to us, or at all.
The trend toward litigation regarding patent and other intellectual
property rights in the technology industry exposes us to litigation by third
parties. Any litigation regarding patents or other intellectual property could
be costly and time-consuming and could divert our management and key personnel
from our business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks.
REAL OR PERCEIVED FUTURE SALES OF OUR ORDINARY SHARES IN THE PUBLIC MARKET AND
LOW TRADING VOLUME COULD CAUSE OUR SHARE PRICE TO SIGNIFICANTLY DECLINE, OR MAKE
IT MORE DIFFICULT FOR US TO RAISE ADDITIONAL FUNDS.
As of the date of this annual report we have approximately 3.3 million
ordinary shares outstanding. Approximately 41% of these shares are "restricted
securities" available for resale, subject, however, to volume limitations under
Rule 144. Future sales of these restricted shares, or the perception that these
sales could occur, could adversely affect the market price of our ordinary
shares. In addition, we have experienced a low trading volume of our ordinary
shares, and if one or a small number of parties buys or sells a large number of
our ordinary shares, we may experience volatility in our share price and our
share price may significantly decline. These factors could also make it more
difficult for us to raise additional funds through future offerings of our
ordinary shares or other securities.
OUR SHARE PRICE HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO FLUCTUATE IN THE
FUTURE.
The market price of our ordinary shares has experienced significant
fluctuations and may continue to fluctuate significantly. The market price of
our ordinary shares may be significantly affected by factors such as the
announcements of new products or product enhancements by us or our competitors,
technological innovations by us or our competitors or quarterly variations in
our results of operations.
9
In addition, any statements or changes in estimates by analysts covering our
shares or relating to the motion control systems industry could result in an
immediate effect that may be adverse on the market price of our shares.
Trading in shares of companies listed on the Nasdaq Capital in general, and
trading in shares of technology companies in particular, has been subject to
extreme price and volume fluctuations that have been unrelated or
disproportionate to operating performance. These factors may depress the market
price of our ordinary shares, regardless of our actual operating performance.
Securities litigation has also often been brought against companies
following periods of volatility in the market price of its securities. In the
future, we may be the target of similar litigation that could result in
substantial costs and diversion of our management's attention and resources.
OUR BUSINESS DEPENDS ON OUR ABILITY TO RECRUIT AND RETAIN PROFESSIONAL
PERSONNEL. IF WE ARE UNABLE TO ATTRACT AND RETAIN PERSONNEL WITH NECESSARY
SKILLS WHEN NEEDED, OUR BUSINESS AND EXPANSION PLANS COULD BE MATERIALLY
ADVERSELY AFFECTED.
Our ability to attract and retain highly skilled personnel is critical to
our operations and expansion, especially our research and development and
marketing capabilities. We face competition for such personnel from other
companies and organizations, many of which have significantly larger operations
and greater financial, marketing, human, and other resources than we do. Due to
the high level of mobility in our industry, we cannot assure you that we will be
able to continue to retain key personnel. If we are unable to attract and retain
personnel with necessary skills when needed, our business and expansion plans
could be materially adversely affected.
RISKS FACTORS RELATED TO THE INDUSTRY:
ECONOMIC DOWNTURNS AND CYCLICAL NATURE OF SPECIFIC MARKET SEGMENTS THAT WE
TARGET COULD RESULT IN SIGNIFICANT DECREASE IN SALES.
Our products are designed especially for segments within the industrial
sector for systems such as advanced medical scanners, printing machinery,
electronic manufacturing and inspection, LCD monitors, and semi-conductor
manufacturing and inspection equipment. A slowdown in certain geographical
regions such as Western Europe, the Far East and the United States, or in
certain industries, such as the electronic and semiconductors industries, could
have a material adverse effect on our operations and financial results. The
manufacturing of motion control systems for the semiconductor and electronic
industry is our most significant field of activity, amounting to approximately
61% of our sales. Approximately 23% of our revenues are derived from the medical
scanning industry, 10% from the printing industry, and another 6% to others,
such as the general automation industry. The semiconductor and electronics
industry, which comprised approximately 61% of our revenues, is highly volatile
and unpredictable, and we are subject to the industry's business cycles, the
timing, length and volatility of which are difficult to predict. We must
effectively manage our resources and production capacity to meet changing
demand. During periods of decreasing demand for motion control products, we must
be able to appropriately align our cost structure with prevailing market
conditions and effectively manage our supply chain. During periods of increasing
demand, we must have sufficient manufacturing capacity and inventory to meet
customer demand and must be able to effectively manage our supply chain. If we
are not able to timely and appropriately align our cost structure with business
conditions and/or to effectively manage our resources and production capacity,
including our supply chain during changes in demand, our business, financial
condition or results of operations may be materially and adversely affected.
10
TECHNOLOGICAL ADVANCES MAY HINDER OUR GROWTH AND RESULT IN DECREASED SALES.
The motion control industry is characterized by rapid and significant
technological change. Our ability to compete successfully depends, and will
continue to depend, in large part, on our ability to maintain a technically
competent staff, to maintain rigorous quality control procedures, and to adapt
to technological changes and advances in the motion control industry. We cannot
assure you that we will be able to maintain such staff or keep pace with the
technological demands of the marketplace. In the event that we are unable to
maintain such staff or otherwise keep pace with the technological demands of the
marketplace, we might lose market share, and our prospects and sales could be
materially adversely affected.
BECAUSE WE OPERATE IN INTERNATIONAL MARKETS, WE ARE SUBJECT TO ADDITIONAL RISKS.
We currently sell our products in a number of countries and we are
considering entering additional geographic markets, such as the Chinese market.
Our business is subject to risks, which often characterize international
markets, including:
o potentially weak protection of intellectual property rights;
o economic and political instability;
o import or export licensing requirements;
o trade restrictions;
o difficulties in collecting accounts receivable;
o longer payment cycles;
o unexpected changes in regulatory requirements and tariffs;
o seasonal reductions in business activities in some parts of the world,
such as during the summer months in Europe;
o fluctuations in exchange rates; and
o potentially adverse tax consequences.
RISKS FACTORS RELATED TO OUR LOCATION:
WE RECEIVE TAX BENEFITS FROM THE STATE OF ISRAEL THAT MAY BE REDUCED OR
ELIMINATED IN THE FUTURE. THE TERMINATION OR REDUCTION OF THE TAX BENEFITS,
PARTICULARLY BENEFITS AVAILABLE TO US AS A RESULT OF THE APPROVED ENTERPRISE
STATUS OF OUR FACILITY IN ISRAEL, WOULD INCREASE OUR EFFECTIVE TAX RATE.
Our investment program at our manufacturing facility in Migdal Ha'emek,
Israel has been granted approved enterprise status by the State of Israel and we
are therefore eligible for tax benefits under the Israeli Law for Encouragement
of Capital Investments. By virtue of our approved enterprise status, a portion
of our income is tax-exempt. From time to time, the government of Israel has
discussed reducing or eliminating the tax benefits available to approved
enterprise programs such as ours. We cannot assure you that these tax benefits
will be continued in the future at their current levels or at all. If these tax
benefits were reduced or eliminated, particularly benefits available to us as a
result of the Approved Enterprise status of some of our facility in Israel, the
amount of taxes that we pay would likely increase, which in the aggregate, could
have a material adverse effect on our net income. In addition, our approved
enterprise status imposes certain requirements on us, such as the location of
our manufacturing facility and the location of certain subcontractors. If we do
not meet these requirements, the law permits the authorities to cancel the tax
benefits retroactively. See Item 10 "Additional Information Taxation."
11
THE GOVERNMENT GRANTS WE HAVE RECEIVED FOR RESEARCH AND DEVELOPMENT EXPENDITURES
LIMIT OUR ABILITY TO MANUFACTURE PRODUCTS AND TRANSFER TECHNOLOGIES OUTSIDE OF
ISRAEL AND REQUIRE US TO SATISFY SPECIFIED CONDITIONS. IF WE FAIL TO SATISFY
THESE CONDITIONS, WE MAY REQUIRED TO REFUND GRANTS PREVIOUSLY RECEIVED TOGETHER
WITH INTEREST AND PENALTIES.
From 1988 to 2006, we received grants totaling approximately $4.17 million
from the government of Israel through the Office of the Chief Scientist of the
Ministry of Industry and Trade for the financing of portion of our research and
development expenditures. The terms of the Chief Scientist grants prohibit us
from manufacturing products or transferring technologies developed using these
grants outside of Israel without special approvals. Even if we receive approval
to manufacture the Chief Scientist supported products outside of Israel, we
would be required to pay an increased total amount of royalties, which may be up
to 300% of the grant amount plus interest, depending on the manufacturing volume
that is performed outside of Israel. This restriction may impair our ability to
outsource manufacturing or engage in similar arrangement for those products or
technologies. In addition, we are prohibited from transferring to third parties
in Israel the technology developed with these grants without the prior approval
of a governmental committee. On March 29, 2005, the Israeli parliament approved
an amendment to Israeli Law for Encouragement of Industrial Research and
Development, which permits under certain conditions the transfer of such
technology outside of Israel, including the payment of a redemption price to be
determined under regulations that have not yet been promulgated.
If we fail to comply with any of the conditions imposed by the Office of
the Chief Scientist, we may be required to refund any grants previously received
together with interest and penalties. In recent years, the government of Israel
has accelerated the rate of repayment of Chief Scientist grants from 3% to 3.5%
and may further accelerate them in the future.
THE OFFICE OF THE CHIEF SCIENTIST HAS REQUESTED FROM US ADDITIONAL PAYMENT OF
ROYALTIES IN THE AMOUNT OF APPROXIMATELY U.S. $850 THOUSAND. IF WE WILL HAVE TO
MAKE SUCH PAYMENT IT WOULD HAVE AN ADVERSE AFFECT ON OUR PROFITABILITY.
The OCS claims that the royalties we owe in respect of past OCS funding of
part of our Research and Development activities should be computed on sales of
all of our products, and not only on sales of products that we claim were
developed with the OCS support. Accordingly, the OCS has asked for additional
royalties in the amount of approximately U.S. $850 thousand. We believe, based
on the opinion of our legal advisors, that we do not owe any additional
royalties to the OCS. We believe that our computations are correct and
discussions are held with the OCS in order to settle the matter. We have not
recorded a provision in respect of the above amount in our financial statements.
PROVISIONS OF ISRAELI LAW COULD DELAY, PREVENT OR MAKE DIFFICULT A CHANGE OF
CONTROL, AND THEREFORE DEPRESS THE PRICE OF OUR SHARES.
Provisions of Israeli law may delay, prevent or make an acquisition of all
or a significant portion of our shares or assets undesirable. Israeli corporate
law regulates acquisitions of shares through tender offers and mergers, requires
special approvals for transactions involving significant shareholders and
regulates other matters that may be relevant to these types of transactions.
These provisions of Israeli law could have the effect of delaying or preventing
a change in control and may make it more difficult for a third party to acquire
us, even if doing so would be beneficial to our shareholders. These provisions
may limit the price that investors may be willing to pay in the future for our
ordinary shares. See "Item 10. Additional Information - 10B. Memorandum and
Articles of Association - Approval of Certain Transactions" and "-Change of
Control". Furthermore, Israeli tax law treats some acquisitions, such as
stock-for-stock exchanges between an Israeli company and a foreign company, less
favorably than U.S. tax laws. For example, Israeli tax law may, under certain
circumstances, subject a shareholder who exchanges his ordinary shares for
shares in another corporation to taxation prior to the sale of the shares
received in such stock-for-stock swap.
12
SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS ON OUR OFFICERS AND DIRECTORS
MAY BE IMPOSSIBLE.
We are incorporated in Israel. The majority of our executive officers and
directors are not residents of the United States, and the majority of our assets
and the assets of these persons are located outside the United States.
Therefore, it may be difficult for an investor, or any other person or entity,
to enforce a U.S. court judgment based upon the civil liability provisions of
the U.S. federal securities laws in an Israeli court against us or any of these
persons or to effect service of process upon these persons in the United States.
Additionally, it may difficult for an investor, or any other person or entity,
to assert U.S. securities law claims in original actions instituted in Israel.
Israeli courts may refuse to hear a claim based on a violation of U.S.
securities laws because Israel is not the most appropriate forum to bring such a
claim. In addition, even if an Israeli court agrees to hear a claim, it may
determine that Israeli law and not U.S. law is applicable to the claim. Even if
U.S. law is found to be applicable, the content of applicable U.S. law must be
proved as a matter of fact which can be a time-consuming and costly process.
Certain matters of procedure will also be governed by Israeli law. There is
little binding case law in Israel addressing the matters described above.
OUR FINANCIAL RESULTS ARE SENSITIVE TO ECONOMIC CONDITIONS IN ISRAEL.
Inflation in Israel and devaluations of the NIS impact our financial
results. Although Israel has substantially reduced the rates of inflation and
devaluation in recent years we could experience losses due to inflation or
devaluation. If inflation rates in Israel increase again and hurt Israel's
economy as a whole, our operations and financial condition could be negatively
impacted.
WE MAY BE DIRECTLY AFFECTED BY LESS THAN STABLE POLITICAL AND MILITARY
CONDITIONS IN ISRAEL. ANY HOSTILITIES INVOLVING ISRAEL OR THREATENING ISRAEL, OR
THE INTERRUPTION OR CURTAILMENT OF TRADE BETWEEN ISRAEL AND ITS PRESENT TRADING
PARTNERS, COULD ADVERSELY AFFECT OUR OPERATIONS.
We are incorporated under the laws of the State of Israel and our principal
offices and manufacturing and research and development facilities are located in
Israel. As such, we are directly influenced by political, economic and military
conditions affecting Israel. Any major hostilities involving Israel, a
substantial decline in the prevailing regional security situation or the
interruption or curtailment of trade between Israel and its present trading
partners could have a material adverse effect on our operations.
13
OUR RESULTS OF OPERATIONS COULD BE NEGATIVELY AFFECTED BY THE OBLIGATIONS OF OUR PERSONNEL TO PERFORM MILITARY SERVICE All male adult citizens under the age of approximately 48, unless exempt, are obligated to perform military service duty annually for a period of up to approximately 36 days. Additionally, they can be called to active duty at any time under emergency circumstances. Should the hostilities in the region continue to escalate, some of our officers and employees could be called to substantial active military duty, possibly resulting in delays in shipments to customers and other adverse impacts on our business and operations which we can not currently assess. ITEM 4. INFORMATION ON THE COMPANY 4A. HISTORY AND DEVELOPMENT OF THE COMPANY ACS Motion Control Ltd was incorporated under the laws of the State of Israel on June 9, 1985. Our executive offices are located at P.O.B. 5668, Migdal Ha'Emek, Israel 10500, and our telephone number is 011-972-4-6546440. In March 2006 we changed our name from ACS Tech80 Ltd. to our current name. Our wholly owned subsidiary, Technology 80 Inc. (doing business under the name ACS Motion Control, Inc.) (Tech80). is located in Minneapolis, U.S.A. Tech80 manufactures motion control products that are complementary to our products, and markets our products in North America. See "Technology 80, Inc." below. We are not a capital-intensive company in terms of fixed assets, but rather invest in research and development and marketing. We expect the amount of capital expenditures during 2007 to be higher than in 2006 and to be funded from our cash flows from operations. During 2006, 2005 and 2004 our capital expenditures totaled U.S. $183 thousand, U.S. $116 thousand and U.S. $153 thousand, respectively. We currently plan to increase capital expenditures in 2007, mainly in Israel, where our primary production facilities are located, by approximately U.S. $87 thousand to an approximate total of U.S. $270 thousand, mainly to continue to acquire advanced automated test equipment. The capital expenditures will be financed from internal resources. In 1998, we invested in Netzer Precision Motion Sensors Ltd., an Israeli start-up company, focusing on development and production of motion sensors based on a proprietary technology. As of December 31, 2006, we owned 11.5% of the capital stock of Netzer. In January 2006 Netzer signed an agreement with "Sick AG" ("Sick"), a German company, and with "Sick Sensors Ltd.", Sick's wholly owned Israeli subsidiary, whereby Sick Sensors purchased all Netzer's IP, including patents, production files, development projects database, and general database. Netzer reserves the right to continue to market and develop its Non Industrial Automation products, for military, aerospace, avionics, marine, transportation and other specific applications. Netzer continues to operate in the Non Industrial Automation market. The consideration for the assets sold is as follows: - Three million Euros upon closing, which took place in January 2006; - Three million Euros following completion in accordance with timetable of R&D milestones by Sick Sensors, three projects, 1 million Euros for each milestone achieved; and - 20 Euro royalty payment per each sensor head sold by Sick until 2012, Sick Sensors has reported that two of the three milestones, (Read Head A and Read Head C) were achieved and 2 Million Euros are expected to be paid in Q2 of 2007. The last milestone (SEK-52) is expected to be completed in June 2007. 14
In January 2006, Netzer's shareholders resolved that the total
consideration received will be solely distributed to the existing shareholders
pro rata to the holdings of all shareholders. Further according to the
resolution, all legal and other fees related to the transaction, and repayment
of U.S $300 thousand loan granted to Netzer by a shareholder, are to be deducted
from the transaction funds prior to any distribution. Netzer continues to
operate in the Non Industrial Automation market, financed by self generated
resources from operations. In April 2006 we received a U.S. $207 thousand
dividend from Netzer. An additional dividend of U.S. $155 thousand was received
in February 2007.
We reviewed the fair value of the investment in Nezter as at December 31,
2006, and determined that an impairment in the amount of U.S. $216 thousand was
required.
4B. BUSINESS OVERVIEW
OVERVIEW
We develop, manufacture, and sell motion control products. Motion control
products are products that are integrated into other equipment and machinery
such as medical scanners, imaging systems, semi conductor manufacturing
equipment, electronic testing and inspection stations, and printing machinery.
The purpose of Motion Control products is to provide automated systems with the
ability to move accurately, quickly, and in accordance with the needs of a
specific application. For example, our products control the movement of a
patient table within and through a medical scanner and the movement of a
semiconductor wafer under an optical inspection microscope.
A basic motion control system consists of three parts: (i) a servo motor
which converts electrical energy into mechanical energy providing force and
speed, (ii) a drive (sometimes called driver or amplifier) that provides the
motor with the needed electrical energy voltage and current, and (iii) a
controller which provides the driver with the desired current and voltage
commands to ensure that the motor moves at the proper speed and force. The
controller also receives feedback from sensors that measure the actual speed,
force and current of the motor and issues correction commands to ensure proper
operation. Actual systems may include many motors and require multi-axis
controllers and drives.
We develop, produce and market multi-axis motion controllers and control
modules (motion controllers with integrated drives) that provide accurate, fast
and reliable motion control for automated equipment. We offer both standard
products and customized products tailored directly to the customer's needs. Our
products are integrated into many high-end OEM applications, including
semiconductor manufacturing, electronic assembly and testing, medical imaging,
packaging, and advanced digital printing.
Our customer base includes (i) leading international original equipment
manufacturers (OEMs), such as Philips Medical Systems and GE Medical Systems,
producers of medical scanners, Applied Materials Ltd., a subsidiary of Applied
Materials, Inc., a leading producer of automatic optical inspection systems for
the semiconductor industry; Orbotech Ltd, a producer of optical inspection
systems for the printed circuit industry and flat panel display, and Anorad
Corporation, a Rockwell Automation subsidiary, producer of turnkey
high-performance positioning systems used by many OEMs that produce
manufacturing and inspection systems for the semiconductor and electronic
industries; and (ii) a network of distributors in Europe, Israel, North America
and Asia who sell our products to their local customers and provide the customer
with training, installation and service.
Our products are software intensive, user-programmable, and store motion
sequences and comprehensive application programs.
15
Since our establishment we have been conducting extensive research and
development with respect to our motion control products. As a result of such
efforts, we have developed an advanced proprietary technology combining diverse
and complementary disciplines, including control theory, software, digital,
analog, and power electronics.
The prices of our products range from $500 to $7,000 per product, and we
believe our products provide a high performance/cost ratio.
In 1980, our wholly owned subsidiary, Tech80, was formed under the laws of
the State of Minnesota. Tech80 markets our products in North America and
manufactures motion control products that are complementary our products,
consisting mainly of motion controller cards that plug into standard computers.
INDUSTRY OVERVIEW
The international market for industrial motion control systems consists of
various sectors of industry and technology, including medical, automotive,
science, engineering, production automation, and computer and electronic
manufacturing and test equipment. Our products are designed especially for
segments within the industrial sector for systems such as advanced medical
scanners, printing machinery, electronic manufacturing and inspection, LCD
monitors, and semi-conductor manufacturing and inspection equipment. The
potential of this targeted segment of the market for our current products is
estimated to be between $600 million and $700 million per year.
Past industry downturns resulted in a significant decrease in demand for
our products in the semiconductor and electronics manufacturing equipment
segment, which in 2006 comprised approximately 61% of our revenues. In 2003 and
in most of 2004 customers made increased investments in capacity and technology,
reflecting an improving business environment in the semiconductor and
electronics industries. This upturn leveled off in 2005, and in 2006 we
witnessed increased demand for our products by customers in the semiconductor
and electronics industry.
BUSINESS STRATEGY
Our goal is to grow and capture a larger share of our target segment of the
motion control market. In order to attain this goal, we use a significant
portion of our resources to implement the following strategies:
o MAINTAIN AND ENHANCE OUR TECHNOLOGICAL EDGE THROUGH RESEARCH AND
DEVELOPMENT EFFORTS. We develop and produce advanced electronic- and
software-intensive products for applications in segments of the motion control
marketplace. In order to meet the ever-changing requirements of present and new
customers and to maintain our competitiveness, our existing products are
subjected to a program of continual critical refinement and new, improved, and
more advanced products are developed. We perceive the development of new
products as a continuum, with the end of development for one product marking the
beginning of the development process for the successor product. Therefore, we
intend to continue expending substantial resources on research and development.
o ENHANCE OUR PRESENCE IN THE NORTH AMERICAN AND EUROPEAN MARKETS. We
intend to continue to increase our marketing efforts to address large OEMs in
the fields of medical equipment, semiconductor manufacturing equipment,
electronic testing and inspection systems, and production of automation systems
in North America, through our U.S. subsidiary, Tech80.
o INCREASE THE NUMBER OF DISTRIBUTORS IN THE FAR EAST. We perceive the
Japanese and Korean markets as major targets for expansion, and in 2003 we
signed distribution agreements with two new distributors in these countries. As
a result of these efforts, sales to the Far East increased by 14% in 2006 as
compared to 2005, and by 61% in 2005 as compared to 2004, in spite of an overall
decline in sales in 2005. In 2006 we concentrated further on marketing efforts
in the Far East. We established a liason office in South Korea and we are also
studying the motion control market in China, which we believe is one of the
fastest growing markets in industrial automation.
16
o ACHIEVE BRAND NAME RECOGNITION. To gain more brand recognition, we
continue our advertising efforts, including articles and news releases in trade
magazines, and enhancing our Internet web site. We continue to conduct and plan
to increase the number of seminars and training sessions to end customers, OEMs
and distributors in Israel, the U.S., Europe, and the Far East. We participate
in major industry trade-shows around the globe. Our website presents and
introduces our products, and includes advanced simulation tools for
demonstration of the mode of operation.
THE COMPANY'S PRODUCTS
We offer several types of motion control products. All products are
designed to include advanced features that are aimed at the specific markets
that we serve, such as support for high resolution encoders, advanced control
algorithms, fast communication to the host, multi-axis synchronization,
multi-tasking programming environment and a set of software development and
support tools.
Our products consist of the following:
o THE SPIIPLUS SERIES OF HIGH PERFORMANCE CONTROLLERS
The SPiiPlus Series was originally introduced in 2000. In the years
thereafter we introduced new products in that series, including the
SPiiPlus-PCI four and eight axis motion controllers and the SPiiPlus-CM two
and three axis control module which was introduced in 2004. The
SPiiPlus-PCI is a PC plug-in card. It supports fast PCI communication,
Ethernet and serial communication.
The SPiiPlus-CM control module includes the controller, the drivers and the
power supply in one compact box and supports Ethernet and serial
communication. This series is designed with motion control features and
powerful software support tools to enable the user to implement complex and
demanding applications in a short period and with little engineering
effort. This is our flagship series, and we believe it to be one of the
best families of motion controllers in the market. It is based on the
latest technology that we have developed during the last five years.
o LINE OF SB SERIES OF CONTROLLERS AND CONTROL MODULES
This line includes the SB214PC two and four axis, PC plug-in controller,
the SB214SA stand-alone two and four axis controller with serial
communication, the SB1381 and SB1391 single axis control modules that
include the controller , the driver and power supply and support serial
communication. This line is based on the technology that we developed prior
to 2000.
o LINE OF LIBRARY PROGRAMMABLE MOTION CONTROLLERS
This line includes the 5000 PC plug-in 1-3 axis stepper controller, the
565X PC plug-in 2-4 axis servo controller and the 595X PC104 2-4 axis
universal controller.
o CUSTOMIZED PRODUCTS
Specially designed products for certain large OEM customers. Such products
include sixteen axis control modules for miniature motors, dynamic
auto-focus control system, and drivers for electronic assembly robot.
17
TECHNOLOGY
THE SERVO PROCESSOR
Our control modules and controllers are based on our proprietary,
cost-effective technology, which we have designated the "servo processor". The
servo processor has been designed entirely by us in order to provide what we
believe are superior solutions to the growing needs of current and future
machinery and industrial automation. The first generation of the servo processor
incorporates a processor core that we have fully designed and optimized for real
time motion control algorithms, combined with all the peripheral components that
are needed to implement a complete high performance, all-digital control system.
During the years 1998 and 1999 we developed the second generation of the "servo
processor", named SPii, that further enhances the performance and features of
the first generation unit. The servo processor technology provides each motion
control system among others, with the following features:
o High performance/cost ratio;
o Accurate position, velocity and current control capabilities;
o Universal digital drive implementation that fits most motors by
modifying software parameters;
o Abilities and advanced features that are specifically tailored for the
control of linear motors, which are used in many sub-micron accuracy
systems, such as automatic identification of some critical parameters
of these motors;
o Programming capabilities that enable the implementation of complete
applications without an additional host computer;
o The ability to work with many types of feedback devices, including
encoders, resolvers, and ultra-high resolution laser interferometers
that are used in connection with sub-micron semi-conductor
manufacturing and test equipment;
o Coordination of many axes as required by robots and other multi-axis
systems;
o Accurate synchronization of movement, time, and events; and
o Advanced features, including real time position event generator,
smoothness measurement, and system identification, which are not
offered by many other manufacturers.
COMPETITION
In the markets that we target most of the competitors are private companies
with estimated annual sales of between 5 to 40 million dollars. Galil Motion
Control, Delta-Tau Data Systems and Motion Engineering Inc. (MEI) are some of
these competitors and we compete with them on many occasions. Lately, MEI was
acquired by Danaher Corporation, which is engaged in the design, manufacture and
marketing of industrial and consumer products. Competition is primarily on the
basis of cost, performance, capabilities, reliability, support, and safety. Some
of our competitors are companies with greater financial, marketing and human
resources than ours, which may give them competitive advantages, such as the
ability to market their products in larger quantities and at lower prices than
us. Our sales and our sale prices may decline significantly as our competitors
introduce equivalent or superior products. Our overall profitability depends on
our ability to continuously introduce new products incorporating advanced
features at competitive prices. In addition, many of our competitors are moving
their manufacturing facilities to countries where the cost of production is
significantly lower than in Israel and the United States, where we produce most
of our products thus decreasing their cost and thereby the sale price of their
products. In addition, we may be adversely affected by our Israeli location, as
prospective customers are concerned about the unstable political situation in
our region, and as a result may prefer to work with our competitors.
SOFTWARE SUPPORT TOOLS
The software environment, development, and debugging tools for the servo
processor are built into the product itself. In addition, we offer our customers
proprietary Microsoft(R) Windows(R)-based software which may downloaded from our
website, such as diagnostics and tuning tool user's, application debugging tool,
communication tool and full simulator that simplifies the development work and
reduces the time and required effort by the user. With such software tools,
knowledgeable users are able to adapt and optimize the motion control system
according to the needs of their particular application.
18
MARKETING AND SALES
We market our products through the following channels: (i) direct sales to
leading OEMs; (ii) a network of distributors around the globe which act as value
added resellers (VARs) by offering customers a variety of motion control
products and services; and (iii) a network of representatives and distributors
in the USA.
Our marketing and sales efforts have been directed mainly toward the
medical scanners, semiconductor manufacturing and inspection, electronic
manufacturing and inspection, digital printing and special production automation
markets.
Marketing and sales efforts are carried out directly by us, as well as by
our distributors and representatives. We promote our products and services
primarily through advertising, articles and news releases in technical journals,
sales meetings, and training seminars to our distributors and customers. Our
distributors and representatives promote our products through local advertising,
participation in trade fairs, and organization of seminars for potential and
existing customers. In 2006 we established a liaison office in Korea.
CUSTOMERS
Set forth below is the approximate breakdown of our sales to OEMs and
distributors for the years ended December 31, 2006, 2005 and 2004.
CUSTOMER TYPE YEAR ENDED DECEMBER 31,
------------- ------------------------------------------------------------------------------
2006 2005 2004
-------------------- -------------------- --------------------
U.S. Dollars in % of Total U.S. Dollars in % of Total U.S. Dollars % of Total
thousands sales thousands sales in thousands sales
------ ------ ------ ------ ------ ------
OEMs 9,818 73% 8,291 73% 10,907 76%
Distributors 3,685 27% 3,137 27% 3,469 24%
------ ------ ------ ------ ------ ------
Total 13,503 100% 11,428 100% 14,376 100%
In 2006, 2005 and 2004 our sales to OEMs consisted of approximately 33%,
28% and 32% respectively, to the semi-conductors industry, 28%, 17% and 29%
respectively, to the electronics industry, 23%, 35% and 20% respectively, to the
medical scanning industry, 10%, 11% and 13% respectively, to the printing
industry, 3%, 4% and 3% respectively, to the general automation industry, and
3%, 6% and 3% respectively, to others.
19
Set forth below is the approximate breakdown of our sales in the different
geographic regions in which we operate for the years ended December 31, 2006,
2005, and 2004.
GEOGRAPHIC REGION YEAR ENDED DECEMBER 31,
----------------- ------------------------------------------------------------------------------
2006 2005 2004
-------------------- -------------------- --------------------
U.S. Dollars % of Total U.S. Dollars % of Total U.S. Dollars % of Total
in thousands sales in thousands sales in thousands sales
------ ------ ------ ------ ------ ------
Israel 4,276 32% 3,747 33% 4,824 34%
Europe 4,961 37% 3,246 28% 5,666 39%
Asia 552 4% 485 4% 301 2%
North America 3,714 27% 3,947 35% 3,580 25%
Other - - 3 - 5 -
------ ------ ------ ------ ------ ------
Total 13,503 100% 11,428 100% 14,376 100%
SEASONALITY
We have not identified a clear seasonal pattern to our business.
RESEARCH AND DEVELOPMENT
We believe that our future success will depend upon our ability to enhance
our existing products and develop and introduce new products that address the
increasingly sophisticated needs of our customers. We work closely with existing
and potential customers, distributors and major resellers, which provide
significant feedback for product development and innovation. Our research and
development efforts have resulted in the evolution of product lines, all of
which have been internally designed and programmed. Our efforts have emphasized
the development of advanced technology and new products and the enhancement and
refinement of existing products in response to rapidly changing customer
specifications and industry needs. As a result, we offer advanced solutions to
the growing needs of new automated machinery.
Our research and development department consists of highly skilled
personnel. As of December 31, 2006, approximately 38% of our total workforce was
engaged in research and development.
Our expenditures for research and development for 2006, 2005 and 2004 were
as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2006 2005 2004
------ ------ ------
U.S. Dollars in thousands
------------------------------------
Gross R&D Expenses 2,065 1,629 1,668
Grants and Participations (340) (17) (247)
------ ------ ------
Net R&D Expenses 1,725 1,612 1,421
Our research and development activity is supported by grants provided by
the Israeli government through the Ministry of Industry and Trade -- Office of
the Chief Scientist (OCS). The terms of the Chief Scientist grants prohibit us
from manufacturing products or transferring technologies developed using these
grants outside of Israel without special approvals. Even if we receive approval
to manufacture the Chief Scientist supported products outside of Israel, we
would be required to pay an increased total amount of royalties, which may be up
to 300% of the grant amount plus interest, depending on the manufacturing volume
that is performed outside of Israel. On March 29, 2005, the Israeli parliament
approved an amendment to Israeli Law for Encouragement of Industrial Research
and Development, which permits under certain conditions the transfer of such
technology outside of Israel, including the payment of a redemption price to be
determined under regulations that have not yet been promulgated. Separate
Israeli Government consent is required to transfer to third parties technologies
developed through projects in which the Israeli Government participates. Such
restrictions do not apply to exports from Israel of products developed with such
technologies. In 2005 we did not submit an application for funding from the OCS,
and we funded our research and development activity using our own internal
resources. However, we anticipate that, for so long as such governmental
research and development grants continue to be available we may seek, from time
to time, to utilize such grants. There is no guarantee that we shall continue to
receive OCS funding in the future. We are committed to pay to the Israeli
Government royalties on proceeds from the sale of products, which are funded by
such Government grants. Under the terms of our funding from the OCS, royalties
of 4% were payable from January 1, 1997 to December 31, 1999, and 5% are payable
thereafter. Notwithstanding the foregoing, temporary regulations have been
changed and royalties of only 3% were paid from January 1, 1997 to December 31,
1999 and royalties of 3.5% were payable in the years 2000 through 2005, in
accordance therewith. In 2006 the regulations changed, and 3% royalties were
payable by companies such as ours, with total annual revenues of under 70
million U.S. dollars. Such royalty payments discontinue when 100% of the grant
has been repaid. The royalties are linked to the U.S. Dollar, and for grants
received after January 1, 1999 also bear interest at the rate of the LIBOR.
20
PRODUCTION AND SOURCES OF SUPPLY
We manufacture our products at our plant located in Migdal Ha'Emek, Israel.
Legacy products that were developed by Technology 80 Inc. prior to the
acquisition in 1999 are manufactured at Tech80's plant in Minneapolis. Both
plants use subcontractors to assemble electronic boards and for the
manufacturing of mechanical and electrical components.
Most electronic components are imported to Israel from the United States,
Europe and the Far East. Our production capacity is sufficient for our level of
sales and permits us, in most cases, to ship products within three months of
receipt of customer orders if requested by the customer.
Most of the components required for our products are available from a
number of sources throughout the world at competitive prices. In respect to most
of the components, we do not anticipate the loss of any of their source of
supply to have a material adverse effect on us. Notwithstanding the foregoing,
we depend on the supply of certain key components in our motion control systems
by suppliers who are our single source of supply of such items. Among such
components are processors, manufactured by Intel and the customized components
manufactured by LSI Logic. In addition, Tech80 depends on the supply of motion
controller components manufactured by Performance Motion Devices (PMD), LSI
Computer Systems, and by National Semiconductor. The prices of the raw materials
used in our production process are generally not volatile, although they may
increase with increased demand.
We have no written supply agreements with most of these companies, and
there can be no guaranty that such suppliers will continue to make such
components, will continue to supply us with such components on favorable terms,
or continue to supply us with such components at all, in the future. In such an
event, our production capabilities could be materially adversely affected. To
date, none of such events has occurred.
Our products meet the safety and electromagnetic compatibility (EMC)
requirements of the European Community market and are CE marked. Some of our
products also satisfy the safety requirements of the Underwriters' Laboratory
(UL) and are UL listed. Our quality system in Israel only is ISO 9001 certified.
21
MANAGEMENT INFORMATION SYSTEMS
In the first quarter of 2002, we implemented an Enterprise Resource
Planning system (ERP) to improve efficiency and increase the potential for
greater profitability through increased productivity, enhanced asset management,
better inventory handling and production planning. In January 2005 we
implemented the same ERP system in our wholly owned subsidiary in the United
States.
INTELLECTUAL PROPERTY
We currently hold no patents in any country and have no intention of filing
for patent protection in any country with respect to our technology. See "Item
3. Key Information -- 3D. Risk Factors "Our proprietary technology and designs
are not protected by patents ...". We depend on trade secret laws, copyright
law, unfair competition law and upon the execution by our officers, directors,
employees, consultants, and subcontractors of confidentiality agreements
relating to the proprietary nature of our technology to protect our intellectual
property.
4C. ORGANIZATIONAL STRUCTURE
ACS Motion Control Ltd. Is organized under the laws of the State of Israel
and, as of December 31, 2006, held directly the percentage indicated of the
outstanding capital stock of the following subsidiaries:
NAME OF SUBSIDIARY COUNTRY OF INCORPORATION PERCENTAGE OWNERSHIP
------------------ ------------------------ --------------------
ACS Motion Control Inc.
(Technology 80 Inc.) United States 100
ACS-Tech80 Europe B.V* The Netherlands 100
ACS Motion Control 1998 Ltd.* Israel 99.8
* Inactive company
4D. PROPERTY, PLANTS AND EQUIPMENT
Our principal administrative and research and development activities occupy
a 1,487 square meter (16,000 square feet) facility in Migdal Ha'Emek, Israel. We
lease this facility pursuant to a lease that expires on January 31, 2008. In
February 2007, we extended the term of the lease for an additional three years.
The updated lease agreement contains two two-year renewal options. We estimate
that the current size of our facilities in Israel allows for a certain degree of
growth and is adequate for our needs for the next 12 months.
Tech80 has an office and production facility in Plymouth, Minnesota. We
lease this 5,460 square foot facility under a lease that expires December 2008.
Tech80 manufactures motion control products that are complementary to our
products produced in Israel, and markets our products in North America. We
estimate that, if necessary, the present facilities can support an increase in
our production activity in the United States to answer demand in the region.
The majority of our fixed assets, both in Israel and Minnesota, consist of
machinery, computers and other advanced equipment used for the production,
assembly, testing and quality control of our products.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
22
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5A. OPERATING RESULTS
The following discussion and analysis is based on and should be read in
conjunction with the Company's consolidated financial statements, including the
related notes, contained in "Item 18 - Financial Statements."
OVERVIEW
ACS Motion Control Ltd. is an Israeli corporation, engaged in the
development, production and marketing of universal, fully-digital motion control
products, combining software and advanced electronics. The market which we serve
includes the semi-conductor, electronic assembly, testing and inspection,
medical, digital printing, and production automation markets. Demand for our
products can change significantly from period to period as a result of numerous
factors, including, but not limited to, changes in: (1) global economic
conditions; (2) market conditions of the industrial automation market; (3)
advanced technology and/or capacity requirements of the manufacturers served by
us; (4) local economic and political conditions, and (5) relative
competitiveness of our products. For these and other reasons, our results of
operations for the year ended December 31, 2006 may not necessarily be
indicative of future operating results.
The industrial motion control market has historically been affected by
general economic downturns in the industries which we serve, including
electronics and semiconductors. The semiconductor industry experienced a
downturn that has started in the fourth quarter of 2004 and continued into 2005.
These worldwide economic slowdowns and recoveries affected our financial results
in 2005 and 2006. Following a market decline in 2005 the market grew in 2006.
Industry analysts believe that the semiconductor market will undergo a minor
correction in 2007, followed by a stronger 2008. However, we are not presently
able to anticipate how such matters will affect our results in 2007 and no
assurances as to future developments in respect of such matters can be given.
See "- 5.D - Trend Information".
In 2006 we continued to expand our customer base by expanding our sales and
marketing activities in the Far East and Europe, strengthening our long-term
relationships with distributors in Japan, Korea, Germany and Switzerland. In
2006 we established a liaison office in South Korea. We participate in major
industry trade-shows around the globe. In 2004 we launched a new website which
presents and introduces our products, and includes advanced simulation tools for
demonstration of the mode of operation.
Our growth continues to be largely dependent on the success of our
semiconductor and electronic business. Revenue from sales to the semiconductor
and electronic industries represented approximately 61% of our revenue in 2006,
and is expected to continue to account for a significant portion of our revenues
in the future.
Our consistent and selective investments in research and development have
enabled us to maintain our position in the industries that we serve, by
introducing new and innovative lower cost products to answer our customers'
needs. We continue to focus our efforts towards the enhancement and cost
reduction of existing products and the introduction of new products, and expect
to increase our research and development expenses in 2007 to further those
goals.
23
For the years ended December 31, 2006, 2005 and 2004, our three largest
customers represented approximately 44%, 37% and 52%, respectively, of our
sales. For the years ended December 31, 2006, 2005 and 2004 one customer
accounted for 24%, 13% and 24% of our sales, respectively. This customer is an
OEM customer to whom we sell customized products. In June 2006 we were notified
by this customer that due to a redesign of its system, it would no longer
require the products that it has been purchasing from us over the last years and
would therefore cease the purchase of most of our products as of the fourth
quarter of 2006. Our margin on sales to this customer was lower than our
traditional margin, due to the high volume of sales.
The Company decided to contribute each year 1% of its pre-tax income to
various social projects in Israel.
In July 2006, the Israel Accounting Standards Board issued Accounting
Standard No. 29, "Adoption of International Reporting Standards (IFRS)". The
Standard will be applicable to financial statements of companies that are
subject to the Israel Securities Law - 1968, and are required to report
according to its provisions, for periods commencing on January 1, 2008. We are
an Israeli public company, therefore we are subject to the Israel Securities Law
- 1968, but in our opinion, based on our legal advisors, we are not required to
report according to its provisions, as our shares are not traded in a stock
exchange in Israel. Therefore the standard is not applicable to us and we will
continue to report according to Israel Generally Accepted Accounting Principles.
CRITICAL ACCOUNTING ESTIMATES
The methods, estimates and judgments we use in applying our accounting
policies have a significant impact on the results we report in our financial
statements. Some of our accounting policies require us to make difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Our most critical accounting estimates include
the valuation of investments, which will impact net gains (losses) if we record
impairment; the valuation of marketable debt securities, which will impact our
financial income (expenses) if we record impairment; valuation of inventory,
which impacts gross margins; recognition and measurement of current and deferred
income tax assets and liabilities, which impacts our tax provision; the
allowance for doubtful accounts, which impacts our general and administrative
expenses; revenue recognition and the provision for warranty, which impact our
revenues and gross margin. Below, we discuss these policies further, as well as
the estimates and judgments involved. We also have other policies that we
consider key accounting policies; however, these policies do not meet the
definition of critical accounting estimates because they do not generally
require us to make estimates or judgments that are difficult or subjective. We
prepare our financial statements in accordance with Israeli GAAP. Differences
between Israeli GAAP and U.S. GAAP as they relate to our financial statements
are described in Note 17 to our financial statements.
INVESTMENT IN OTHER COMPANY. Our investment in non-marketable shares if
Netzer Motion Sensors Ltd. (Netzer) is presented at cost. We evaluate our
investment for evidence of other than temporary declines in value. When relevant
factors indicate a decline in value that is other than temporary, we record a
provision for the decline in value. A judgmental aspect of accounting for
investments involves determining whether an other-than-temporary decline in
value of the investment has been sustained. Such evaluation is dependent on the
specific facts and circumstances. Accordingly, we evaluate financial information
in determining whether an other-than-temporary decline in value exists. Factors
indicative of an other-than-temporary decline include recurring operating
losses, credit defaults and subsequent rounds of financings at an amount below
the cost basis of the investment. This list is not all inclusive and we weigh
all quantitative and qualitative factors in determining if an
other-than-temporary decline in value of an investment has occurred. In 2006,
part of Netzer's operations - the Industrial Operations segment was sold, and we
recorded U.S. $216 thousand impairment to the remaining segment of our
investment, the Non-Industrial segment.
24
MARKETABLE DEBT SECURITIES. Marketable debt securities consist of
held-to-maturity securities, which are debt securities in which we have invested
with the intention of holding until the maturity dates of the securities. If it
is determined, based on valuations, that a decline in the fair value of any of
the investments is other than temporary, an impairment loss is recorded and
included in the consolidated statements of income as financial expenses.
INVENTORIES. Inventories are stated at the lower of cost and market. Cost
is determined on the basis of first-in, first-out for raw materials and
packaging materials, and on the basis of actual production cost for work in
process and finished goods. The valuation of inventory requires us to estimate
obsolete or excess inventory as well as inventory that is not of saleable value.
We periodically review the valuation of inventory and make an assessment of
the realizable value. The factors that we consider in determining whether or not
a reserve should be established includes: (a) expected usage during the next
twenty four months, (b) risk of obsolescence, and (c) estimated future market
demand. We provide for inventory write-offs for slow-moving items or
technological obsolescence or other situations for which recoverability is not
probable. If our estimated market demand is greater than actual demand and we
fail to reduce manufacturing output accordingly, we could be required to record
additional inventory reserves, which would have a negative impact on our gross
margin.
TAXES ON INCOME. We operate within two taxing jurisdictions, Israel, the
U.S. and, until December 2004, the Netherlands, and may be subject to audits in
these jurisdictions. We must make certain estimates and judgments in determining
income tax expense for financial statement purposes. These estimates and
judgments occur in the calculation of certain tax assets and liabilities, which
arise from differences in the timing of recognition of revenue and expense for
tax and financial statement purposes. In our opinion, adequate provisions for
income taxes have been made for all years. Although we believe that our
estimates are reasonable, no assurance can be given that the final tax outcome
will not be different than those reflected in our historical income tax
provisions. Such differences could have a material effect on our income tax
provision and net income in the period in which such outcome occurs.
Deferred income taxes are determined utilizing the asset and liability
method based on the estimated future tax effects of differences between the
financial accounting and tax bases of assets and liabilities under the
applicable tax laws. Deferred income tax provisions and benefits are based on
the changes in the deferred tax asset or tax liability from period to period.
Valuation allowance is included in respect of deferred tax assets when it is
considered more likely than not that such assets will not be realized. As of
December 31, 2006, we believed that all of the deferred tax assets, net of the
valuation allowance, recorded on our balance sheet would ultimately be
recovered. However, should there be a change in our ability to recover our
deferred tax assets, our tax provision would increase in the period in which we
determine that the recovery is not probable. In accordance with Israeli GAAP,
valuation allowances in respect of deferred tax assets are provided when it is
not probable that all or part of the deferred tax assets will be realized.
One difference between Israeli GAAP and U.S. GAAP which affects net income
and earnings per share, relates to the establishment of deferred taxes in
respect of tax exempt income. Under Israeli GAAP, deferred tax should not be
provided in respect to undistributed tax-exempt earnings if the Company's policy
is not to initiate such a dividend distribution. Under U.S GAAP, a deferred tax
liability normally would be recorded relating to taxes that would be owed on the
distribution of profits even if we do not intend currently to declare dividends.
On April 1, 2005, an amendment to the Israeli Investment Law became effective,
which has significantly changed the provisions of the Investment Law. Under the
previous law, a company could be liquidated with no tax liability to the company
on distributed profits. According to the new amendment we will be liable upon
liquidation for taxes on distributed profits derived from tax-exempt income. As
a result, under U.S. GAAP we would be required to record in 2006 and 2005 a
deferred tax liability and tax expenses in the amount of $149 thousands and $416
thousands, respectively, in respect of our tax exempt profits which are subject
to the provisions of the said amendment.
25
In addition, taxes on income in Israel are calculated based on our
assumptions as to our entitlement to benefits under the Approved Enterprise Law.
Our entitlement to such benefits is conditional upon our compliance with the
terms and conditions prescribed in this law. In the event of our failure to do
so, these benefits may be canceled and we may be required to refund the amount
of the benefits already received, in whole or in part, with the addition of
Israeli CPI linkage differentials and interest.
Our policy is to reinvest the amounts of tax-exempt income of our Approved
Enterprise and not to cause dividends to be distributed from such income.
Therefore, no deferred taxes have been provided in respect of such tax-exempt
income.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. As of each balance sheet date, we evaluate
the collectibility of accounts receivable and record the allowance for doubtful
accounts based on current information regarding each customer. Based on actual
losses in the last three years, the uncertainty connected with the allowance for
doubtful account is considered limited. In the event that our estimates as to
the collectibility of accounts receivable prove to be inaccurate we may be
required to record additional expenses.
REVENUE RECOGNITION: We recognize revenues from product sales, net of
discounts when (i) delivery has occurred in accordance with the agreed upon
terms (usually ex-factory or FOB shipping point), (ii) there is persuasive
evidence of an agreement in the form of a signed detailed purchase order, (iii)
the fee is fixed or determinable, (iv) collection of the related receivable is
probable based on past experience in respect of existing customers. With regard
to new customers, we either require advance payment, or perform credit checks
prior to extending any credit (v) no further obligations exist on our part. We
do not grant a right of return. We market our products through our direct sales
force and through distributors that are considered as final customers.
PROVISION FOR WARRANTY. Our standard policy is to warrant products against
defects in design and materials by replacing failed parts during the first year
of ownership. Our estimate of costs to service the warranty obligations is based
on historical experience and current product performance trends. These costs are
included in cost of revenue at the time revenue is recognized. The warranty
provision is reduced by material and labor costs used for replacement activities
over the warranty period.
A review of the obligations is performed regularly to determine the
adequacy of the reserve. Based on the outcome of this review, revisions to the
estimated warranty liability are recorded as appropriate. Consequently the
provision for warranty is made based on historical statistical warranty usage.
The pattern in such usage in the future may be different from what has been.
5A. OPERATING RESULTS
Most of our sales are made substantially outside of Israel in non-Israeli
currencies, mainly in U.S. Dollars or linked thereto, as are most of our
purchases of materials and components. Therefore, our functional currency is the
U.S. Dollar. Transactions denominated in currencies other than the U.S. Dollar
are recorded based on the exchange rate at the time of the transaction. Monetary
balances in currencies other than the U.S. Dollars are translated into dollars
using year-end exchange rates.
26
The following table presents, for the periods indicated, information
concerning our results of operations:
YEAR ENDED DECEMBER 31,
--------------------------------------
2006 2005 2004
------ ------ ------
U.S. DOLLARS IN THOUSANDS
Revenues 13,503 11,428 14,376
Cost of revenues 6,877 5,657 7,602
Gross profit 6,626 5,771 6,774
Research & development expenses 2,065 1,629 1,668
Less grant received (340) (17) (247)
Net R&D expenses 1,725 1,612 1,421
Proceeds from insurance claim - - (182)
Selling 1,783 1,553 1,324
General and Administration 1,675 1,584 1,677
Operating income 1,443 1,022 2,534
Financing income (expenses), net 167 12 (26)
Other income (expenses), net (9) 4 (20)
Income before taxes on income 1,601 1,038 2,488
Income taxes 64 64 235
Net income 1,537 974 2,253
The following table presents, for the periods indicated, information
concerning our results of operations as a percentage of our revenues:
Year Ended December 31
2006 2005 2004
------ ------ ------
% % %
Revenues 100.0 100.0 100.0
Cost of revenues 50.9 49.5 52.9
Gross profit 49.1 50.5 47.1
Research & development expenses 15.3 14.3 11.6
Less grant received (2.5) (0.1) (1.7)
Net R&D expenses 12.8 14.1 9.9
Proceeds from insurance claim - - (1.3)
Selling 13.2 13.6 9.2
General and Administration 12.4 13.9 11.7
Operating income 10.7 8.9 17.6
Financing income (expenses), net 1.2 0.1 (0.2)
Income before taxes on income 11.9 9.1 17.3
Income taxes 0.5 0.6 1.6
Net income 11.4 8.5 15.7
YEARS ENDED DECEMBER 31, 2006 AND DECEMBER 31, 2005
Our financial results for 2006 were marked by an increase in demand in the
semi conductor and electronics industry, as well as by strong economic
conditions. We operate in two geographic segments, Israel and the U.S.A. The
respective increase in revenues and operating income in 2006 as compared to 2005
originated from the Israel segment.
REVENUES. Revenues in 2006 totaled U.S. $13,503 thousand compared with U.S.
$11,428 thousand in 2005, an increase of U.S. $2,075. This increase of
approximately 18.2% was attributable to two factors. The first and the most
significant, was the increase in the business of one major customer in the
electronics industry, who in 2005 accounted for 13% of our business versus 24%
in 2006. This increase accounted for approximately 85% of the total increase in
revenues. The second factor is the increase in sales to the semi conductor and
electronics industry, which accounted for approximately 15% of the increase in
revenues.
GROSS PROFIT. Gross profit for 2006 was U.S. $6,626 thousand, or 49.1% of
revenues, compared to U.S. $5,771 thousand, or 50.5% of revenues, in 2005. The
decrease in the gross profit percentage reflects primarily the increase in the
business of the one major customer who in 2006 accounted for 24% of our sales,
and in 2005 accounted for 13% of our sales. Our margin on sales to this customer
was lower than our traditional margin.
27
NET RESEARCH AND DEVELOPMENT EXPENSES. Net research and development
expenses increased by U.S. $113 thousand, or approximately 7%, to U.S.$ 1,725
thousand for the year ended December 31, 2006, as compared to U.S.$1,612
thousand for the year ended December 31, 2005. In 2006 we received OCS funding
of U.S. $340 thousand for part of our research and development expenditures,
whereas in 2005 we chose not to apply for OCS funding. Gross research and
development expenses increased by approximately 26.8%, to U.S.$ 2,065 thousand
for the year ended December 31,2006, as compared to U.S.$ 1,629 thousand for the
year ended December 31, 2005. In 2006 we increased our investment in research
and development efforts towards the enhancement and cost reduction of existing
products as well as introduction of new products. We plan to continue to
increase our investment in research and development in 2007 as compared to 2006.
SELLING EXPENSES. Selling expenses increased by approximately 14.8% to
U.S.$ 1,783 thousand in 2006, from the U.S.$ 1,553 thousand recorded in 2004.
This increase of approximately U.S.$230 thousand is due primarily to increased
spending on sales and marketing infrastructure, including the establishment of a
liaison office in South Korea.
GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and administrative
expenses increased by approximately 5.7% to U.S.$ 1,675 thousand in 2006, from
the U.S.$ 1,584 thousand recorded in 2005.
OPERATING INCOME. In 2006 operating income increased by approximately
41.2%, or U.S.$421 thousand, from U.S.$1,022 thousand in 2005 to U.S.$1,443
thousand in 2006. The increase was due to the 18.2% increase in revenues, which
led to an increase of 14.8%, or U.S.$855 thousand in gross profit.
TAXES ON INCOME. Taxes on income in 2006 were U.S. $64 thousand, the same
as in 2005. The effective tax rates for 2006 and 2005 were 4.0% and 6.2%,
respectively. Generally, our effective tax rate varies largely as a function of
benefits received from the State of Israel, particularly those relating to
Approved Enterprises.
NET INCOME. Net income for the year ended December 31, 2006 was U.S.$ 1,537
thousand, or $0.48 per share (basic and diluted), compared with net income of
U.S.$ 974 thousand, or $0.32 per share (basic and diluted) for the year ended
December 31, 2005. This increase is due to primarily to the increase in
revenues.
YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004
Our financial results for 2005 were marked by a downturn in the semi
conductor and electronics industry that started in the fourth quarter of 2004
and continued into 2005. We operate in two geographic segments, Israel and the
U.S.A. In 2005 approximately 63% of our revenues and 64% of our operating income
were generated by the Israel segment, and approximately 37% and of our revenues
and 36% of our operating income were generated by the U.S.A segment, compared to
75% of our revenues and 84% of our operating income generated by the Israel
segment, and 25% of our revenues and 16% of our operating income generated by
the U.S.A segment in 2004. The respective decline in revenues and operating
income in 2005 as compared to 2004 originated from the Israel segment.
REVENUES. Revenues in 2005 totaled U.S. $11,428 thousand compared with U.S.
$14,376 thousand in 2004, a decrease of U.S. $2,948. This decrease of
approximately 20.5% was attributable to two factors. The first and the most
significant, was the decline in the business of one major customer, who in 2004
accounted for 24% of our business versus 13% in 2005. This decline accounted for
approximately 70% of the total decrease in revenues. The business decline of
this customer was due to specific circumstances unrelated to the industry
downturn. This customer has forecasted to us that its orders to us are expected
to increase by 80% in 2006 as compared to 2005. The second factor is the
decrease in sales to the semi conductor and electronics industry, which
accounted for approximately 30% of the decrease in revenues.
28
GROSS PROFIT. Gross profit for 2005 was U.S. $5,771 thousand, or 50.5% of
revenues, compared to U.S. $6,774 thousand, or 47.1% of revenues, in 2004. The
increase in the gross profit percentage reflects changes in product and
customers mix, especially of one major customer who in 2004 accounted for 24% of
our sales, and in 2005 accounted for 13% of our sales. Our margin on sales to
this customer is lower than our traditional margin. In addition, we implemented
cost reductions in some of our leading products. However, we may experience
future declines in gross profit margins from historical levels due to increasing
competition and pricing pressures.
NET RESEARCH AND DEVELOPMENT EXPENSES. Net research and development
expenses increased by U.S. $191 thousand, or approximately 13%, to U.S.$ 1,612
thousand for the year ended December 31, 2005, as compared to U.S.$1,421
thousand for the year ended December 31, 2004 The increase was due to a decrease
of U.S.$ 230 in the funding by the OCS (Office of the Chief Scientist) of our
research and development activity. In 2005 we chose not to submit an application
for OCS funding, and to fund our research and development using our own internal
resources. Gross research and development expenses decreased slightly by
approximately 2%, to U.S.$ 1,629 thousand for the year ended December 31,2005,
as compared to U.S.$ 1,668 thousand for the year ended December 31, 2004.
Despite the decline in revenues we continued to invest in research and
development efforts towards the enhancement and cost reduction of existing
products as well as introduction of new products.
SELLING EXPENSES. Selling expenses increased by approximately 17.3% to
U.S.$ 1,553 thousand in 2005, from the U.S.$ 1,324 thousand recorded in 2004.
This increase of approximately U.S.$229 thousand is due primarily to increased
spending on sales and marketing infrastructure, including the establishment of a
Control and Application Development group as an additional fee-based service for
our OEM customers world-wide.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by approximately 5.5% to U.S.$ 1,584 thousand in 2005, from the U.S.$
1,677 thousand recorded in 2004.
OPERATING INCOME. In 2005 operating income decreased by approximately 60%,
or U.S.$1,512 thousand, from U.S.$2,534 thousand in 2004 to U.S.$1,022 thousand
in 2005. The decrease was due to a number of factors. First is the 20.5%
decrease in revenues, which led to a decrease of 14.8%, or U.S.$1,003 thousand
in gross profit. The rate of the decrease in gross profit is lower than the rate
of the decrease in revenues due to the improvement in the gross profit
percentage of sales, from 47.1% in 2004 to 50.5% in 2005. In addition, in 2005
we did not apply for OCS funding of our research and development activities and
thus increased net Research and Development expenses by 13%, or $191 thousand.
Selling, general and administration also increased by approximately 4.5%,
contributing to the decrease in operating income. In addition, in 2004, we
received U.S.$182 thousand proceeds from an insurance claim, as settlement for a
product liability claim we filed against a vendor in 2003, which increased our
profitability. The proceeds comprised 1.3% of total revenues and 7.2% of total
operating income in 2004.
TAXES ON INCOME. Taxes on income in 2005 were U.S.$64 thousand, compared to
U.S.$235 thousand in 2004. In 2005 we concluded a final tax assessment with the
Israeli tax authorities for the years 2000, 2001, 2002 and 2003, and recorded a
prior year tax adjustment of U.S. $93 thousand, which reduced our tax expense.
The tax expense for the current year was U.S. $ 157 thousand. The effective tax
rates for 2005 and 2004 were 6.2% and 9.4%, respectively. Generally, our
effective tax rate varies largely as a function of benefits received from the
State of Israel, particularly those relating to Approved Enterprises.
NET INCOME. Net income for the year ended December 31, 2005 was U.S.$ 974
thousand, or $0.32 per share (basic and diluted), compared with net income of
U.S.$ 2,253 thousand, or $0.75 per share (basic) for the year ended December 31,
2004. This decline is due to primarily to the factors discussed above, i.e. the
decrease in revenues simultaneously with the increase in net research and
development expenses and the increase in selling, general and administration
expenses.
29
IMPACT OF CURRENCY FLUCTUATIONS AND INFLATION
The U.S. Dollar cost of our operations in Israel is influenced by the
differential between the rate of inflation in Israel and any change in the value
of the NIS in relation to the U.S. Dollar. Our U.S. Dollar costs will increase
if this "gap" widens and the devaluation rate fails to keep pace with the rate
of inflation in Israel, and conversely, we may benefit if the rate at which
Israeli currency devalues against the U.S. Dollar exceeds the rate of inflation
in Israel.
The table below sets forth the annual rate of inflation, the annual rate of
devaluation of the NIS against the U.S. Dollar and the gap between them.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Inflation (CPI) (0.1)% 2.4% 1.2% (1.9)% 6.5%
Devaluation/(Revaluation) (8.2)% 6.8% (1.6)% (7.6)% 7.3%
Inflation devaluation gap 8.1% (4.4)% 2.8% 5.7% (0.8)%
Set forth below are details of the representative exchange rate of the US
dollar in the periods indicated:
EXCHANGE RATE OF 1 AVERAGE RATE HIGH FOR LOW FOR
DECEMBER 31 OF US DOLLAR FOR THE YEAR THE YEAR THE YEAR
-------------- --------- ------------ -------- --------
2006 4.23 4.46 4.73 4.18
2005 4.60 4.49 4.74 4.30
2004 4.31 4.48 4.63 4.31
2003 4.38 4.55 4.92 4.28
2002 4.74 4.74 4.99 4.44
As a result, we experienced increases in the U.S. Dollar costs of
operations in Israel in 2006, 2003 and 2004, and decreases in 2002 and 2005. The
changes in the U.S. Dollar cost of our operations in Israel relate primarily to
the cost of salaries in Israel, which are paid in NIS, and constitute a
substantial portion of our expenses in NIS. These NIS related expenses
constituted approximately 24%, 32% and 20% of our total expenses for 2006, 2005
and 2004, respectively. We cannot assure you that we will not be materially
adversely affected if inflation in Israel exceeds the devaluation of the NIS
against the Dollar or if the timing of such devaluation lags behind increases in
inflation in Israel. In addition, a devaluation of the NIS in relation to the
U.S. Dollar will have the effect of decreasing the U.S. Dollar value of any of
our assets, which consist of NIS or liabilities in NIS (unless such liability is
linked to the U.S. Dollar). Conversely, any increase in the value of the NIS in
relation to the U.S. Dollar will have the opposite effect. We do not currently,
and have no plans to, utilize currency hedging instruments, and we do not hold
or issue derivative securities.
The representative exchange rate for converting NIS into Dollars, as
published by the Bank of Israel on March 19, 2007 was NIS 4.208 = $1.00.
30
EFFECTIVE CORPORATE TAX RATE
The taxable income of Israeli corporations is subject to corporate tax at
the statutory rate. Until December 31, 2003, the regular tax rate applicable to
income of companies in Israel was 36%. In June 2004, an amendment to the Income
Tax Ordinance (No. 140 and Temporary Provision), 2004 was passed by the
"Knesset" (Israeli parliament) and on July 25, 2005, another law was passed, the
amendment to the Income Tax Ordinance (No. 147) 2005, according to which the
corporate tax rate is to be progressively reduced to the following tax rates:
2004 - 35%, 2005 - 34%, 2006 - 32%, 2007 - 27%, 2009 - 26%, 2010 and thereafter
- 25%. Because we have elected to participate in the alternative package of tax
benefits for our approved enterprise programs, the income derived from our
approved enterprise programs will be exempt from Israeli taxes on corporate
income during certain benefit periods. On April 1, 2005, an amendment to the
Israeli Investment Law came into effect ("Amendment No. 60"). In respect of
expansion programs pursuant to Amendment No. 60 to the law, the benefit period
commences in the later of the year elected by the Company or the first year in
which the Company has taxable income, provided that 14 years have not elapsed
from the beginning of the year of election. According to Amendment No. 60 a
"Privileged track" will replace the current "Alternative track". We adopted the
amendment and replaced our "Alternative track" with a "Privileged track"
effective as of 2004.
If dividends are distributed out of tax exempt profits and according to
Amendment No. 60, in case of liquidation, we will then become liable for tax at
the rate applicable to our profits from the approved enterprise in the year in
which the income was earned, as if we had not chosen the privileged track of
benefits. Our policy is not to distribute dividends out of these profits.
The overall corporate tax rate for 2006, 2005 and 2004 for our company was
4.0%, 6.2% and 9.4% respectively. The period of benefits for the investment
plans in effect expires 2013.
As of December 31, 2006 our subsidiary in the U.S. had approximately U.S.
$460 thousand in tax loss carry-forwards, which expire on various dates through
2026. We have established deferred tax assets which reflect the impact of
temporary differences between the amounts of assets and liabilities recorded for
financial reporting purposes and such amounts as measured in accordance with tax
laws. The principal component relates to the loss carry-forwards. Realization of
deferred tax assets is contingent on future taxable earnings. A valuation
allowance has been provided for the portion of those assets which we consider
not probable of realization.
5B. LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
We had cash, cash equivalents, bank deposits, short-term marketable
securities and long-term financial investments of U.S. $7,594 thousand at the
end of 2006, including U.S. $4,552 thousand invested in corporate debt
securities, reflecting an increase of U.S. $2,517 thousand from the U.S. $5,077
thousand recorded a year earlier. We generated cash from operating activities of
U.S. $1,925thousand in 2006, U.S. $1,524 thousand in 2005 and U.S. $1,501
thousand in 2004. The primary sources of cash from operating activities have
been net income, as adjusted to exclude the effect of non-cash charges, and
changes in working capital levels, including accounts receivable and
inventories. We generated cash from financing activities by the raising of
equity funds in the amount of U.S. $759 thousand in 2006 and U.S. $31 thousand
in 2005 through the exercise of employee stock options. The cash flow from
operations and from financing activities was used to finance U.S. $183 thousand
in 2006 and U.S. $116 thousand in 2005 of capital expenditures. Computers,
software and testing equipment comprised the majority of the capital spending.
As of December 31, 2006 and 2005 respectively, we had no liability to banks. We
have not undertaken any external financing activities for several years. Of the
U.S. $4,552 thousand invested in corporate debt securities, U.S. $2,619 thousand
will mature in 2007 and U.S. $1,933 thousand will mature in 2008. We view this
investment as a long-term investment, and it is our intention to hold the
securities to maturity. We believe that our currently available cash and cash
equivalents and funds generated from operations will be sufficient to meet our
working capital requirements for the next twelve months.
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Capital expenditures during 2006 totaled U.S. $183 thousand, compared with
U.S.$116 thousand in 2005.
Inventories grew from U.S. $2,833 thousand as at December 31, 2005 to U.S.
$3,658 thousand as at December 31, 2006. Inventories as a percentage of revenues
increased to 27.1% as at December 31, 2006, as compared to 24.8% as at December
31, 2005. This increase in inventory as a percentage of sales was due primarily
to last time buys of critical components and other logistics factors, such as
the shortening of lead time of customer shipments. Net trade receivables
decreased by U.S.$182 thousand at year end, from U.S.$ 2,517 thousand as at
December 31, 2005, to U.S.$ 2,335 thousand as at December 31, 2006, primarily
because the period trade receivables were outstanding (calculated by dividing
trade receivables at year-end into latest quarter revenues), decreased to 73
days on December 31, 2006 from 80 days on December 31, 2005 as we continued to
focus on improved collections. We did not record any significant bad debts
during 2006.
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CONTRACTUAL OTHER COMMITMENTS The following table summarizes our contractual obligations as at December 31, 2006: PAYMENTS DUE IN --------------------------------------------------------- AFTER TOTAL 2007 2008 2009 2009 ----- ----- ----- ----- ----- U.S. DOLLARS IN THOUSANDS --------------------------------------------------------- CONTRACTUAL OBLIGATIONS: Operating Rental Leases 630 120 120 73 317 Vehicle Leases 354 183 121 50 - Severance Pay 202 - - - 202 Total 1,186 303 241 123 519 ===== ===== ===== ===== ===== Operating rental lease obligations represent commitments under commercial facility leases, and vehicle lease obligations cover vehicle lease commitments for vehicles used by our employees. As at December 31, 2006, and as at December 31, 2005 we had no debt outstanding. Our existing cash is invested in short-term investments which bear floating interest rates and in long-term corporate bonds which we intend to hold to maturity, bearing a fixed interest rate. We are not aware of any material commitments for capital expenditures in the future. 5C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES We place considerable emphasis on research and development projects designed to upgrade our existing product lines and to develop new applications of our technologies. As of December 31, 2006, 25 employees were engaged primarily in research and development. The following table shows the total research and development expenditures of the Company and participation in such expenditures by the Government of Israel for the periods indicated:YEAR ENDED DECEMBER 31 --------------------------------------- 2006 2005 2004 ------- ------- ------- U.S DOLLARS IN THOUSANDS --------------------------------------- Internally-funded research and development expenditures $ 2,065 $ 1,629 $ 1,668 Governmental participation (340) (17) 247 ------- ------- ------- Total outlay for research and development 1,725 $ 1,612 $ 1,421 33
5D. TREND INFORMATION The industries that we serve strengthened in 2006, after recovering from a downturn which started in the last quarter of 2004 and continued through most of 2005. Industry analysts believe that the semiconductor market will undergo a minor correction in 2007, followed by a stronger 2008. However, we cannot predict the duration and the extent of slowdowns and upturns in the semiconductor and electronics industry and our ability to foresee future trends in the flow of orders for certain of our products remains generally limited, as is our ability to forecast the extent to which these factors may affect our revenues and profitability during 2007. As sales to the semiconductor and electronics industries account for approximately 61% of our revenues, our business, financial condition and results of operations may be materially and adversely affected by the industry's business cycles, the timing, length and volatility of which are difficult to predict. The industry has historically been cyclical due to sudden changes in demand and manufacturing capacity, including capacity using the latest technology. 5E. OFF-BALANCE SHEET ARRANGEMENTS We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.