Annual Report and Accounts
Orad Hi-Tec Systems
13 March 2007
Orad Hi-Tec Systems Ltd ('Orad' or the 'Company')
Results for the fiscal year 2006 and the quarter ended
December 31, 2006
Orad Hi-Tec Systems Ltd (Frankfurt - Prime Standard; London - AIM. Symbol: OHT),
a leading developer, marketer and distributor of state-of-the-art, 3D graphical
solutions for the broadcasting, advertising and visual simulation markets,
announced today its results for the fiscal year 2006 and the quarter ended
December 31, 2006.
Highlights :
• Revenue increased by 15% to US$17.7 million in 2006 compared to US$15.4
million in 2005.
• Revenues for Q4/06 increased by 10% to US$4.6 million compared to US$4.1
million in Q3/06.
• Improved gross margin of 63% in Q4/2005 compared to 58% in Q4/2005 and 61%
for 2006 compared to 53% for 2005.
• Net profit of US$0.6 million in 2006 compared to net loss of US$2.9 million
in 2005
• Cash climbed to US$9.7 million with positive cash flow of US$3.8 million in
2006 and positive cash flow of US$0.7 million in Q4/2006
• Orad strengthened its position in the graphic systems segment of the
market, by signing contracts with Deutsch Welle, CCTV, Shanghai TV and
Tele Madrid.
• Orad continues to dominate the virtual studios market.
Avi Sharir, Orad's President and Chief Executive Officer, commented: 'We are
pleased with the results for 2006 which represent significant improvements in
sales, gross margin, net profit and cash flow. With increased sales of graphic
systems, we begin to see the fruits of our strategy of expanding our presence in
all broadcast graphics segments' and added: 'Orad offers today a one stop shop
to prime broadcasters. As a reflection we see more broadcasters buy Orad's
graphic systems. In 2006 we managed to increase our market share in news graphic
systems, we strengthened our dominance in the virtual sets segment and
maintained our position in the sports systems. Our strong order back log keeps
us optimistic regarding the results for 2007'.
Financial summery for the relevant periods:
In thousand USD
Q4/06 Q3/06 Q4/05 2005 2006
Sales 4,607 4,196 4,716 15,401 17,719
Gross Profit 2,916 2,615 2,715 7,708 10,818
Gross Margin 63.29% 62.32% 57.57% 53.21% 61.05%
R&D expenses 660 625 584 2,451 2,507
S&M Expenses 1,840 1,602 1,440 6,079 6,631
G&A expenses 362 376 423 1,754 1,506
Net Profit/ (Loss) 185 54 256 (2,892) 636
Cash Status 9,662 8,940 5,838 5,838 9,662
Comparission of quarters 2005/2006 all figures are in US$'000
Period Q1/05 Q2/05 Q3/05 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06
Revenue 3,468 3,811 3,407 4,715 4,276 4,620 4,196 4,607
Net Profit/ (1,078) (1,265) (804) 256 132 264 54 185
(Loss)
Cash Status 4,991 3,953 4,964 5,838 8,279 9,487 8,940 9,662
For further information:
Orad (www.orad.tv)
Ehud Ben-Yair, CFO 972 976 768 62
ehudb@orad.tv
Shore Capital (London)
Graham Shore 44 20 7408 4090
Edicto Investor Relations 49 608494859-1
Dr. Sonke Knop, Frankfurt Germany
ORAD HI-TEC SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2006
U.S. DOLLARS IN THOUSANDS
INDEX
Page
Report of Independent Auditors 2
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 27
- - - - - - - - - - - - - -
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
ORAD HI-TEC SYSTEMS LTD.
We have audited the accompanying consolidated balance sheets of Orad Hi-Tec
Systems Ltd. ('the Company') and its subsidiaries as of December 31, 2005 and
2006 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2006. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We did not audit the financial statements of certain wholly-owned subsidiaries,
whose assets constitute 6% and 5% of total consolidated assets as of December
31, 2005 and 2006, respectively, and whose revenues constitute 15%, 10% and 12%
of total consolidated revenues for the years ended December 31, 2004, 2005 and
2006, respectively. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
amounts included for those companies, is based solely on the reports of the
other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. We were not engaged to perform an audit of the
Company's internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances but not for
the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2005 and 2006, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 11, 2007 A Member of Ernst & Young Global
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands, except share and per share data
December 31,
2005 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,338 $ 9,091
Restricted cash 500 571
Trade receivables (net of allowance for doubtful accounts of $ 378 and $ 66 at 3,754 2,422
December 31, 2005 and 2006, respectively)
Other accounts receivable and prepaid expenses 719 837
Inventories 2,817 2,696
Work in process, net of advances from customers 466 444
Total current assets 13,594 16,061
SEVERANCE PAY FUND 817 1,017
PROPERTY AND EQUIPMENT, NET 1,914 1,530
Total assets $ 16,325 $ 18,608
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 1,262 $ 1,354
Deferred revenues 1,201 1,841
Other accounts payable and accrued expenses 4,182 4,691
Total current liabilities 6,645 7,886
ACCRUED SEVERANCE PAY 1,173 1,503
SHAREHOLDERS' EQUITY:
Share capital:
Ordinary shares of NIS 0.01 par value:
Authorized - 27,000,000 shares as of December 31, 2005 and 2006;
Issued and outstanding - 10,790,621 shares as of December 31, 2005 and 10,800,621 28 28
shares as of December 31, 2006
Additional paid-in capital 75,281 75,357
Foreign currency translation adjustments (547) (547)
Accumulated deficit (66,255) (65,619)
Total shareholders' equity 8,507 9,219
Total liabilities and shareholders' equity $ 16,325 $ 18,608
The accompanying notes are an integral part of the consolidated financial
statements.
March 11, 2007
Date of approval of the Avi Sharir Ehud Ben Yair
financial statements Director and Chief Financial Officer
Chief Executive Officer
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands, except share and per share data
Year ended December 31,
2004 2005 2006
Revenues:
Sales $ 15,728 $ 14,485 $ 17,719
Long-term development contracts - 916 -
Total revenues 15,728 15,401 17,719
Cost of revenues:
Cost of sales 7,647 6,646 6,901
Cost of long-term development contracts - 1,047 -
Total cost of revenues 7,647 7,693 6,901
Gross profit 8,081 7,708 10,818
Operating expenses:
Research and development, net 3,163 2,451 2,507
Sales and marketing 7,257 6,078 6,631
General and administrative 1,577 1,754 1,506
Total operating expenses 11,997 10,283 10,644
Operating income (loss) (3,916) (2,575) 174
Financial income (expenses), net 189 (316) 467
Other expenses, net 148 - 5
Net income (loss) $ (3,875) $ (2,891) $ 636
Basic net earnings (loss) per share $ (0.36) $ (0.27) $ 0.06
Weighted average number of shares used in computing basic net earnings 10,698 10,781 10,791
(loss) per share (in thousands)
Diluted net earnings (loss) per share $ (0.36) $ (0.27) $ 0.06
Weighted average number of shares used in computing diluted net 10,698 10,781 10,823
earnings (loss) per share (in thousands)
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands, except share data
Number of Share Additional Foreign Accumulated Total
outstanding paid-in currency deficit
Ordinary capital capital translation
shares adjustments
Balance as of January 1, 2004 10,650,726 $ 28 $ 75,107 $ (547) $ (59,489) $ 15,099
Comprehensive loss:
Net loss - - - - (3,875) (3,875)
Total comprehensive loss (3,875)
Compensation expenses in respect of share - - 38 - - 38
options whose terms have been modified
Issuance of shares upon exercise of employee 100,000 *) - 96 - - 96
share options
Balance as of December 31, 2004 10,750,726 28 75,241 (547) (63,364) 11,358
Comprehensive loss:
Net loss - - - - (2,891) (2,891)
Total comprehensive loss (2,891)
Issuance of shares upon exercise of employee 11,250 *) - 9 - - 9
share options
Issuance of earn-out shares 28,645 *) - 31 - - 31
Balance as of December 31, 2005 10,790,621 28 75,281 (547) (66,255) 8,507
Comprehensive income:
Net income - - - - 636 636
Total comprehensive income 636
Issuance of shares upon exercise of employee 10,000 *) - 9 - - 9
share options
Share-based compensation - - 67 - - 67
Balance as of December 31, 2006 10,800,621 $ 28 $ 75,357 $ (547) $ (65,619) $ 9,219
*) Represents an amount lower than $ 1.
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Year ended December 31,
2004 2005 2006
Cash flows from operating activities:
Net income (loss) $ (3,875) $ (2,891) $ 636
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation 1,091 623 569
Share-based compensation - - 67
Compensation expense in respect of share options whose terms have been 38 - -
modified
Decrease in trade receivables, net and other accounts receivable and 890 591 1,214
prepaid expenses
Decrease in inventories 234 591 29
Decrease in work in process, net of advances from customers 277 597 22
Increase (decrease) in trade payables, other accounts payable and accrued (592) 429 731
expenses and accrued severance pay, net
Increase in deferred revenues 217 460 640
Other 28 31 5
Net cash provided by (used in) operating activities (1,692) 431 3,913
Cash flows from investing activities:
Purchase of property and equipment (298) (231) (146)
Proceeds from sale of property and equipment 88 127 48
Decrease (increase) in restricted cash (227) 250 (71)
Net cash provided by investing activities (437) 146 (169)
Cash flows from financing activities:
Payment of long-term bank loan (16) - -
Issuance of shares upon exercise of employee share options 96 9 9
Net cash provided by financing activities 80 9 9
Increase (decrease) in cash and cash equivalents (2,049) 586 3,753
Cash and cash equivalents at beginning of year 6,801 4,752 5,338
Cash and cash equivalents at end of year $ 4,752 $ 5,338 $ 9,091
Supplemental disclosure of cash flows activities:
Cash received during the year for:
Interest, net $ 62 $ 109 $ 297
The accompanying notes are an integral part of the consolidated financial
statements.
NOTE 1:- GENERAL
a. Orad Hi-Tec Systems Ltd. ('the Company') was incorporated in 1993. The
Company and its subsidiaries provide innovative real-time video processing
technologies for TV broadcasting, internet, production studio and sports events.
The Company also develops and markets high-end three dimensional graphical
computer platforms for the visual simulation and virtual reality markets.
The Company operates through its wholly-owned subsidiaries in the United States,
France, Poland, Germany, the Netherlands, the United Kingdom, Spain, Israel and
Hong-Kong. During 2004, the Company became a sole owner of its Hong-Kong
subsidiary (previously held 60% of the subsidiary's shares). These subsidiaries
are engaged in the development, selling and marketing of the Company's products.
The Company sells its products directly and through its subsidiaries and its
distribution networks worldwide.
b. The Company reclassified certain overhead expenses in the prior years'
statements of operations. The following reclassifications, which confirm with
the current years allocation of these overhead expenses had no effect on the
reported operating loss, net loss, basic and diluted loss per share and
shareholders equity.
Year ended December 31,
2004 2005
As As As As
previously currently previously currently
reported Reclassification reported reported Reclassification reported
Cost of revenues:
Cost of sales $ 6,188 $ 1,459 $ 7,647 $ 5,287 $ 1,359 $ 6,646
Cost of long-term - - - 1,047 - 1,047
development contracts
Total cost of revenues 6,188 7,647 7,647 6,334 1,359 7,693
Gross profit 9,540 (1,459) 8,081 9,067 (1,359) 7,708
Operating expenses:
Research and development, 2,844 319 3,163 2,300 151 2,451
net
Sales and marketing 8,224 (967) 7,257 6,813 (735) 6,078
General and 2,388 (812) 1,577 2,529 (775) 1,754
administrative
Total operating expenses 13,456 (1,459) 11,997 11,642 (1,359) 10,283
Operating loss $ 3,916 $ - $ 3,916 $ 2,575 $ - $ 2,575
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ('U.S. GAAP').
a. Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
b. Financial statements in U.S. dollars:
A majority of the revenues of the Company and its subsidiaries are generated in
U.S. dollars ('dollar'). In addition, a substantial portion of the Company's and
its subsidiaries' costs are incurred in dollars. A substantial portion of the
Company's funds are held in U.S. dollars. The Company's management believes that
the dollar is the currency of the primary economic environment in which the
Company and its subsidiaries operate. Thus, the functional and reporting
currency of the Company and its subsidiaries is the dollar.
Accordingly, monetary assets, and liabilities and transactions in currencies
other than the dollar are remeasured into U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52, 'Foreign Currency
Translation' ('SFAS No. 52'). All transactions gains and losses from the
remeasurement are reflected in the consolidated statements of operations as
financial income or expenses, as appropriate.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Intercompany balances and transactions have been eliminated
upon consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that are readily
convertible to cash with original maturities of three months or less.
e. Restricted cash:
Restricted cash is primarily invested in highly liquid deposits, which are used
as a security for sales agreements and office lease agreements.
f. Inventories:
Inventories are stated at the lower of cost or market value. Inventory
write-offs are provided to cover risks arising from slow-moving items,
technological obsolescence, excess inventories.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Cost is determined as follows:
Raw materials, parts and supplies - by the moving average method.
Products in process and finished products:
Raw materials, parts and supplies - by the moving average method.
Subcontracting costs - on the basis of actual costs.
g. Property and equipment:
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is calculated by the straight-line method over the estimated useful
lives of the assets at the following annual rates:
%
Computers and peripheral equipment 20 - 33
Office furniture and equipment 6 - 15
Motor vehicles 15
Leasehold improvements Over the shorter of the term of the
lease or the life of the asset
The Company leases under operating leases computers and peripheral equipment,
mobile broadcasting and demonstrating units ('leased equipment') to its
customers. Leased equipment is stated at cost, net of accumulated depreciation.
Depreciation is calculated by the straight-line method over the estimated useful
lives of the assets (three years).
h. Impairment of long-lived assets:
The Company's and its subsidiaries' long-lived assets are reviewed for
impairment in accordance with Statement of Financial Accounting Standards No.
144, 'Accounting for the Impairment or Disposal of Long-Lived Assets' ('SFAS No.
144'), whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by the assets. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. As of December 31, 2006, no impairment losses have
been identified.
i. Revenue recognition:
The Company and its subsidiaries generate revenues mainly from sales of systems,
software licenses, development contracts and from operating leases of equipment.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company and its subsidiaries implement Statement of Position No. 97-2,
'Software Revenue Recognition' ('SOP No. 97-2'), as amended. Revenues from
systems sales are recognized upon delivery of the system or upon installation at
the customer site, where applicable, provided that collection is probable, the
system fee is fixed or determinable and persuasive evidence of an arrangement
exists. In cases where a significant installation is required after the delivery
of the system, revenues from the system are deferred until the installation
occurs. Revenues in arrangements with multiple deliverables are recognized under
the 'residual method' when Vendor Specific Objective Evidence ('VSOE') of fair
value exists for all undelivered elements, no VSOE exists for the delivered
elements, and all other revenue recognition criteria are satisfied. Revenues
from training and installation included in multiple element arrangements are
recognized at the time they are rendered.
Revenues from development contracts are recognized based on SOP No. 81-1,
'Accounting for Performance of Construction Type and Certain Production Type
Contracts', using contract accounting on the completed-contract method or when
applicable, as specific milestones are met. A provision for estimated losses on
uncompleted contracts is recorded in the period in which such losses are first
identified, in the amount of the estimated loss on the entire contract. A
provision for losses as of December 31, 2005 and 2006 amounted to $ 200 and $
200, respectively.
Revenues from operating leases of equipment are recognized ratably over the
lease period, in accordance with Statement of Financial Accounting Standards No.
13, 'Accounting for Leases' ('SFAS No. 13').
The Company and its subsidiaries generally do not grant a right of return to
their customers.
Deferred revenue includes amounts received from customers but not recognized as
revenues.
j. Warranty costs:
The Company offers a one year warranty for all of its systems. Provision for
warranty costs is provided at the time revenues are recognized, for estimated
material costs during the warranty period based on the Company's experience.
k. Research and development costs:
Research and development costs are charged to the statement of operations as
incurred.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
l. Non-royalty-bearing grants:
Non-royalty-bearing grants from the European Union for funding of approved
research and development projects are recognized at the time the Company is
entitled to such grants, on the basis of the costs incurred. These grants are
presented as a reduction of research and development expenses. During the years
2004, 2005, 2006, the Company received grants in the amount of $ 0, $ 141 and $
163, respectively.
m. Royalty-bearing grants:
Royalty-bearing grants from the Government of Israel for funding of approved
research and development projects are recognized at the time the Company is
entitled to such grants, on the basis of the costs incurred. These grants are
presented as a reduction of research and development expenses. During the years
2004, 2005, 2006, no development grants were received.
n. Income taxes:
The Company and its subsidiaries account for income taxes in accordance
with Statement of Financial Accounting Standards No. 109, 'Accounting for Income
Taxes' ('SFAS No. 109'). This Statement prescribes the use of the liability
method whereby deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company and its subsidiaries
provide a valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value.
o. Concentrations of credit risks:
Financial instruments that potentially subject the Company and its subsidiaries
to concentrations of credit risk consist principally of cash and cash
equivalents, restricted cash, work in process, net of advances from customers
and trade receivables.
Cash and cash equivalents and restricted cash are mainly invested in U.S.
dollars with major banks in Cayman and in Israel. Management believes that the
financial institutions that hold the Company's investments are financially sound
and, accordingly, minimal credit risk exists with respect to these investments.
Work in process, net of advances from customers is derived from long term
development contracts. The Company performs ongoing credit evaluations of its
customers. A provision for estimated losses on uncompleted contracts is recorded
in the period in which such losses are first identified, in the amount of the
estimated loss on the entire contract.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Trade receivables are mainly derived from sales to customers located primarily
in Europe, Asia, North America and South America. The Company performs ongoing
credit evaluations of its customers. An allowance for doubtful accounts is
determined with respect to those amounts that the Company and its subsidiaries
have determined to be doubtful of collection.
As of December 31, 2005 and 2006, the Company and its subsidiaries have no
significant off-balance-sheet concentration of credit risk such as forward
exchange contracts, option contracts or other foreign hedging arrangements.
p. Severance pay:
The Company's liability for severance pay for its Israeli employees is
calculated pursuant to the Israeli Severance Pay Law based on the most recent
salary of the employees multiplied by the number of years of employment, as of
the balance sheet date. Employees are entitled to one month's salary for each
year of employment or a portion thereof.
The Company's liability for all of its employees is fully provided by monthly
deposits with insurance policies deposited funds and by an accrual.
The deposited funds include profits accumulated up to the balance sheet date.
The deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to Israeli Severance Pay Law or labor agreements. The value of the
deposited funds is based on the cash surrender value of the insurance policies.
Severance expenses for the years ended December 31, 2005 and 2006
amounted to approximately $ 244 and $ 313, respectively.
q. Net earnings (loss) per share:
Basic net earnings (loss) per share are computed based on the weighted
average number of Ordinary shares outstanding during each year. Diluted net
earnings (loss) per share are computed based on the weighted average number of
Ordinary shares outstanding during each year, plus dilutive potential Ordinary
shares considered outstanding during the year, in accordance with Statement of
Financial Accounting Standards No. 128, 'Earnings per Share' ('SFAS No. 128').
r. Fair value of financial instruments:
The carrying amounts of cash and cash equivalents, restricted cash, trade
receivables, other accounts receivable and prepaid expenses, trade payables and
other accounts payable and accrued expenses approximate their fair value due to
the short-term maturity of such instruments.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
s. Accounting for share-based compensation:
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), 'Share-Based Payment' ('SFAS 123(R)') which
requires the measurement and recognition of compensation expense based on
estimated fair values for all share-based payment awards made to employees and
directors. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25,
'Accounting for Stock Issued to Employees' ('APB 25'), for periods beginning in
fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 ('SAB 107') relating to SFAS 123(R). The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123(R).
SFAS 123(R) requires companies to estimate the fair value of equity-based
payment awards on the date of grant using an option-pricing model. The value of
the portion of the award that is ultimately expected to vest is recognized as an
expense over the requisite service periods in the Company's consolidated income
statement. Prior to the adoption of SFAS 123(R), the Company accounted for
equity-based awards to employees and directors using the intrinsic value method
in accordance with APB 25 as allowed under Statement of Financial Accounting
Standards No. 123, 'Accounting for Stock-Based Compensation' ('SFAS 123').
The Company adopted SFAS 123(R) using the modified prospective transition
method, which requires the application of the accounting standard starting from
January 1, 2006, the first day of the Company's fiscal year 2006. Under that
transition method, compensation cost recognized in the year ended December 31,
2006, includes: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123(R). Results for prior periods have not been restated.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company recognizes compensation expenses for the value of its awards, which
have graded vesting, based on the straight line method over the requisite
service period of each of the awards, net of estimated forfeitures. Estimated
forfeitures are based on actual historical pre-vesting forfeitures.
As a result of adopting SFAS 123(R) on January 1, 2006, the Company's net income
for the year ended December 31, 2006, is approximately $ 67 lower than if it had
continued to account for stock-based compensation under APB 25. Basic and
diluted net earnings per share for the year ended December 31, 2006, are $ 0.01
lower than if the Company had continued to account for share-based compensation
under APB 25.
Prior to January 1, 2006, the Company applied the intrinsic value method of
accounting for stock options as prescribed by APB 25, whereby compensation
expense is equal to the excess, if any, of the quoted market price of the stock
over the exercise price at the grant date of the award.
In 1996, the Company approved an employee share option plan, which was expanded
in 2000 and 2002 ('the 1996 Share Option Plan'). Under the 1996 share option
plan, 974,465 options to purchase Ordinary shares have been reserved for
issuance. These options may be granted to directors, officers and employees of
the Company and its subsidiaries.
Any options, which are canceled or forfeited before expiration, become available
for future grants.
During 2003, the Company approved a new share option plan ('the 2003 Share
Option Plan'). The Company's Board of Directors approved treating shares
allotment under the 1996 Share Option Plan as being reserved for allotment under
the 2003 Share Option Plan.
Options granted in 2006 are mainly vested as follows: 25% after the first year,
25% after the second year, 25% after the third year and 25% after the fourth
year starting from the date of grant. If not exercised, the options will expire
on the sixth anniversary of the date of the grant.
Total number of options available for future grants as of December 31, 2006
amounted to 22,729.
The Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing model. The option-pricing model requires a
number of assumptions, of which the most significant are expected stock price
volatility and the expected option term. Expected volatility was calculated
based upon actual historical stock price movements.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The expected option term represents the period that the Company's stock options
are expected to be outstanding and was determined based on the simplified method
permitted by SAB 107 as the average of the vesting period and the contractual
term. The risk-free interest rate is based on the yield from U.S. Treasury
zero-coupon bonds with an equivalent term. The Company has historically not paid
dividends and has no foreseeable plans to pay dividends.
The fair value of the Company's stock options granted to employees and directors
for the years ended December 31, 2005 and 2006 was estimated using the following
weighted average assumptions:
Year ended December 31,
2005 2006
Risk free interest 4.36% 4.89%
Dividend yields 0% 0%
Volatility 69% 66%
Expected term (in years) 4 4 4.2
During the year ended December 31, 2006, the Company recognized stock-based
compensation expense related to employee stock options in the amount of $ 67.
A summary of the Company's options activity, and related information is as
follows:
Number Weighted Weighted Aggregate
of options average average intrinsic value
exercise remaining (in thousands)
price contractual term
(in years)
Outstanding at beginning of year 454,584 $ 8.81
Granted 270,000 $ 1.79
Exercised (10,000) $ 0.89
Expired or forfeited (42,130) $ 7.62
Outstanding at end of year 672,454 $ 6.18 5.07 $ 510
Exercisable at end of year 352,454 $ 10.27 4.44 $ 207
Vested and expected to vest at end of 672,454 $ 6.18 5.07 $ 510
year
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The weighted-average grant-date fair value of options granted during the years
ended December 31, 2005 and 2006 was $ 0.65 and $ 0.99, respectively. The
aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between the Company's closing stock price on the last
trading day of the fourth quarter of fiscal 2006 and the exercise price,
multiplied by the number of in-the-money options) that would have been received
by the option holders had all option holders exercised their options on December
31, 2006. This amount changes based on the fair market value of the Company's
stock.
Total intrinsic value of options exercised for the year ended December 31, 2006
was approximately $ 9.8. As of December 31, 2006, there was approximately $ 245
of total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Company's stock option plans. That
cost is expected to be recognized over a weighted-average period of 3.33 years.
Total grant-date fair value of vested options vested for the year ended December
31, 2006 was approximately $ 62.
The following table summarizes information about options outstanding and
exercisable as of December 31, 2006:
Options Weighted Options Weighted
outstanding average Weighted exercisable average exercise
Range of as of remaining average as of price of
exercise December 31, contractual exercise December 31, options
price 2006 life (years) price 2006 exercisable
$ 0.80 - 1.19 130,000 6.75 $ 1.00 80,000 $ 0.95
$ 1.28 - 1.90 333,000 5.27 $ 1.78 63,000 $ 1.77
$ 2.14 - 2.85 68,214 5.92 $ 2.41 68,214 $ 2.41
$ 9.08 - 11.71 38,522 1.56 $ 10.36 38,522 $ 10.36
$ 20.71 49,218 2.92 $ 20.71 49,218 $ 20.71
$ 33.18 - 34.95 53,500 3.13 $ 34.60 53,500 $ 34.60
672,454 5.07 $ 6.18 352,454 $ 10.27
All of the options granted to employees officers and directors in 2005 and 2006
(no options were granted during 2004), have an exercise price equal to the fair
market value of the share at date of grant. During 2004, the Company's Board of
Directors determined to accelerate vesting for 100,000 options held by one of
the Company's senior officers, who resigned from his job. Accordingly, the
Company recorded compensation expense in respect of these options whose terms
have been modified for a total compensation amount of $ 38.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The pro-forma table below illustrates the effect on the net income (loss) and
net earnings (loss) per share for the years ended December 31, 2004 and 2005,
assuming that the Company had applied the fair value recognition provision of
SFAS 123 on its stock-based employee compensation:
Year ended December 31,
2004 2005
Net loss as reported $ (3,875) $ (2,891)
Add: share-based compensation expense included in reported net loss 38 -
Deduct: share-based compensation expense determined under fair value (227) (63)
method
Pro forma net loss $ (4,064) $ (2,954)
Basic and diluted net loss per share as reported $ (0.36) $ (0.27)
Pro forma basic and diluted net loss per share $ (0.38) $ (0.27)
For the purposes of pro-forma disclosures, stock-based compensation is amortized
over the vesting period using the straight line method.
t. Impact of recently issued accounting standards:
In July 2006, the FASB issued FASB Interpretation No. 48 'Accounting for
Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109' ('FIN
48'). FIN 48 clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 utilizes a two-step approach for
evaluating tax positions. Recognition (step one) occurs when an enterprise
concludes that a tax position, based solely on its technical merits, is
more-likely-than-not to be sustained upon examination. Measurement (step two) is
only addressed if step one has been satisfied (i.e., the position is
more-likely-than-not to be sustained). Under step two, the tax benefit is
measured as the largest amount of benefit, determined on a cumulative
probability basis that is more-likely-than-not to be realized upon ultimate
settlement. FIN 48 applies to all tax positions related to income taxes subject
to the Financial Accounting Standard Board Statement No. 109, 'Accounting for
income taxes' ('FAS 109'). This includes tax positions considered to be
'routine' as well as those with a high degree of uncertainty.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
FIN 48 has expanded disclosure requirements, which include a tabular roll
forward of the beginning and ending aggregate unrecognized tax benefits as well
as specific detail related to tax uncertainties for which it is reasonably
possible the amount of unrecognized tax benefit will significantly increase or
decrease within twelve months. These disclosures are required at each annual
reporting period unless a significant change occurs in an interim period. FIN 48
is effective for fiscal years beginning after December 15, 2006. The cumulative
effect of applying FIN 48 will be reported as an adjustment to the opening
balance of retained earnings. The Company is currently evaluating the effect of
the adoption of FIN 48 on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ('SFAS
No. 157'). This statement provides a single definition of fair value, a
framework for measuring fair value, and expanded disclosures concerning fair
value. Previously, different definitions of fair value were contained in various
accounting pronouncements creating inconsistencies in measurement and
disclosures. SFAS No. 157 applies under those previously issued pronouncements
that prescribe fair value as the relevant measure of value, except SFAS No. 123
(R) and related interpretations. The statements does not apply to accounting
standard that require or permit measurement similar to fair value but are not
intended to measure fair value. This pronouncement is effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact of adopting SFAS 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. This statement provides companies
with an option to report selected financial assets and liabilities at fair
value. Generally accepted accounting principles have required different
measurement attributes for different assets and liabilities that can create
artificial volatility in earnings. The Standard's objective is to reduce both
complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently. This
Statement is effective as of the beginning of an entity's first fiscal year
beginning after November 15, 2007. The Company is currently evaluating the
impact of adopting SFAS 159.
NOTE 3: - OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
December 31,
2005 2006
Government authorities $ 285 $ 386
Prepaid expenses 264 271
Other 170 180
$ 719 $ 837
NOTE 4:- INVENTORIES
December 31,
2005 2006
Raw materials $ 719 $ 697
Products in process and finished products 2,098 1,999
$ 2,817 $ 2,696
Inventory write-off provision expense recorded in 2004, 2005 and 2006 amounted
to $ 190, $ 469 and $ 219, respectively. The write-offs are included in cost of
revenues.
NOTE 5:- WORK IN PROCESS, NET OF ADVANCES FROM CUSTOMERS
December 31,
2005 2006
Work in process $ 1,923 $ 2,172
Advances from customers (1,257) (1,528)
Provision for estimated losses (200) (200)
$ 466 $ 444
NOTE 6:- PROPERTY AND EQUIPMENT
December 31,
2005 2006
Cost:
Computers and peripheral equipment $ 7,621 $ 7,688
Office furniture and equipment 348 358
Motor vehicles 203 88
Leasehold improvements 2,340 2,347
10,512 10,481
Accumulated depreciation:
Computers and peripheral equipment 7,066 7,232
Office furniture and equipment 200 222
Motor vehicles 103 58
Leasehold improvements 1,229 1,439
8,598 8,951
Depreciated cost $ 1,914 $ 1,530
Depreciation expense amounted to $ 1,091, $ 623 and $ 569 for the years ended
December 31, 2004, 2005 and 2006, respectively.
NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31,
2005 2006
Employees and payroll accruals $ 759 $ 897
Accrued expenses 2,839 3,302
Government authorities 289 124
Warranty provision 250 315
Other 45 53
$ 4,182 $ 4,691
NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Royalty commitments:
1. Royalties to the Office of the Chief Scientist ('the OCS'):
Under the Company's research and development agreements with the OCS and
pursuant to applicable laws, the Company is required to pay royalties at the
rate of 3.5% of sales of products developed with funds provided by the OCS, up
to an amount equal to 100% of the OCS research and development grants received,
linked to the dollar. The Company is obligated to repay the Israeli Government
for the grants received only to the extent that there are sales of the funded
products.
Royalty expenses amounted to $ 197, $ 217 and $ 276 for the years ended December
31, 2004, 2005 and 2006, respectively, relating to the accrual and repayment of
such grants.
As of December 31, 2006, the Company had a contingent obligation to pay
royalties in the amount of $ 2,298.
2. Royalty obligation to the Marketing Fund of the Government of Israel:
The Israeli Government, through the Fund for the Encouragement of Marketing
Activities, awarded the Company grants for participation in foreign marketing
expenses. The Company is committed to pay royalties at the rate of 4% of the
increase in foreign sales, up to an amount equal to 100% of the grant received
plus interest.
Royalty expenses amounted to $ 144, $ 194 and $ 182 for the years ended December
31, 2004, 2005 and 2006, respectively, relating to the repayment of such
grants.
As of December 31, 2006, the Company had a contingent obligation to pay
royalties in the amount of $ 149.
b. Operating leases:
The Company and its subsidiaries lease their facilities under various operating
lease agreements, which expire on various dates. Aggregate minimum rental
commitments under non-cancelable leases as of December 31, 2006, are as follows:
2007 $ 447
2008 443
2009 420
2010 and thereafter 1,027
$ 2,337
Total rental expense for the years ended December 31, 2004, 2005 and 2006,
amounted to $ 695, $ 565 and $ 546, respectively.
NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
c. Liens:
As of December 31, 2006, fixed pledges on bank accounts in the amount of $ 571
were recorded to secure sales agreements and office lease agreements.
d. Litigation:
Claims have been lodged against the Company in respect of various matters in the
ordinary course of business and legal proceedings in respect thereof are under
way. The Company's management is of the opinion, based upon the opinions of the
legal advisors handling the claims, that the likelihood of the claims to prevail
is remote.
NOTE 9:- SHAREHOLDERS' EQUITY
The Company's shares are listed for trading on the Frankfurt Stock Exchange
(Prime Standard) and on the Alternative Investment Market ('AIM') in the London
Stock Exchange, both under the symbol 'OHT'.
a. Ordinary shares:
Ordinary shares confer upon their holders voting rights, the right to receive
cash dividends, and the right to a share in excess assets upon liquidation of
the Company.
b. Employee share option plan:
See detailed information in Note 2s.
c. Acquisition of Art Technologies GmbH ('Art'):
According to the purchase agreement with Art, the issuance of 57,290 Ordinary
shares was conditional upon achieving certain revenue targets from the product
developed by Art ('contingent shares'). During 2002, upon achievement of certain
of the revenue targets, 28,645 of the contingent shares with a fair value of $
54 were issued. During 2003 and 2004, certain of the revenue targets were not
achieved in the prescribed time frame and therefore, the remaining 28,645 shares
were not issued. However, the Company agreed to issue such shares during 2005,
and accordingly, the remaining 28,645 shares with a fair value of $ 31 were
issued.
d. Dividends:
Dividends, if any, will be paid in New Israeli Shekels ('NIS'). Dividends paid
to shareholders outside Israel may be converted to U.S. dollars on the basis of
the exchange rate prevailing at the date of the conversion. The Company does not
intend to pay cash dividends in the foreseeable future.
NOTE 10:- INCOME TAXES
a. Domestic - Israeli income taxes:
1. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results for tax purposes are measured in terms of earnings in NIS after certain
adjustments for increases in the Israeli Consumer Price Index ('CPI'). As
explained in Note 2b, the financial statements are measured in U.S. dollars. The
difference between the annual change in the Israeli CPI and in the NIS/dollar
exchange rate causes a further difference between taxable income and the income
before taxes shown in the financial statements. In accordance with paragraph 9
(f) of SFAS No. 109, the Company has not provided deferred income taxes on the
difference between the functional currency and the tax basis of assets and
liabilities.
2. Tax rates:
On July 25, 2005, the Knesset (Israeli Parliament) approved the Law for the
Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among
others, a gradual decrease in the corporate tax rate in Israel to the following
tax rates: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in
2010 and thereafter - 25%. The amendment is not expected to have a material
effect on the Company's financial position and results of operations.
3. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959:
The Company's production facilities in Israel have been granted an 'Approved
Enterprise' status under the above law. Four expansion programs of the Company
have been granted the status of an 'Approved Enterprise'. According to the
provisions of such Israeli law, the Company has been granted an 'Alternative
Benefit' status, under which the main benefits are tax exemption and a reduced
tax rate. Consequently, the Company's income derived from the 'Approved
Enterprise' is tax exempt for a period of two years and for an additional period
of five to eight years is subject to a reduced tax rate of 10% - 25% (based on
the percentage of foreign ownership in each taxable year).
The Company completed implementation of its first, second and third expansion
programs in 1996, 1999 and in 2000, respectively. The fourth program has not yet
been completed.
The period of tax benefits, detailed above, is subject to limits of the earlier
of 12 years from the commencement of production, or 14 years from the approval
date.
NOTE 10:- INCOME TAXES (Cont.)
The entitlement to the above benefits is conditional upon the fulfillment of the
conditions stipulated by the above law, regulations published thereunder and the
instruments of approval for the specific investments in 'Approved Enterprises'.
In the event of failure to comply with these conditions, the benefits may be
canceled and the Company may be required to refund the amount of the benefits,
in whole or in part, including interest.
If the retained tax-exempt profits are distributed, they would be taxed at the
corporate tax rate applicable to such profits as if the Company had not elected
the alternative system of benefits, currently 20%-25% for an 'Approved
Enterprise'. As of December 31, 2006, accumulated deficit included approximately
$ 6,721 of tax exempt profits earned by the Company's 'Approved Enterprises'.
The Company has decided not to distribute dividends out of such tax-exempt
profits. Accordingly, no deferred income taxes have been provided on income
attributable to the Company's 'Approved Enterprise'.
Income from sources other than the 'Approved Enterprise' during the benefit
period will be subject to the tax at the regular rate.
4. Tax benefits under the Law for the Encouragement of Industry (Taxes),
1969:
The Company is an 'Industrial Company', as defined by this law and, as such, is
entitled to certain tax benefits, mainly accelerated depreciation of machinery
and equipment, as prescribed by regulations published under the Inflationary
Adjustments Law and the right to deduct public issuance expenses and
amortization of intangible property rights for tax purposes.
b. Tax assessments:
The Company has obtained final tax assessments from the Israeli Tax Authorities
for the tax years through 2002.
c. Stamp duty:
An amendment of the Stamp Duty on Documents Law, 1961, or the Stamp Duty Law,
came into effect on June 1, 2003 determining, among other things, that the Stamp
Duty on most agreements shall be paid by the parties that signed such agreement,
jointly or severally, or by the party that undertook under such agreement to pay
the Stamp Duty. The Stamp Duty Law determined that a document (or part thereof)
that is signed in Israel or relates to an asset or obligation in Israel would be
subject to a tax rate between 0.4% and 1% of the value of the subject matter of
such document.
Under an order published in December 2005, the requirements to pay Stamp Duty
were cancelled with respect to documents signed on or after January 1, 2006.
NOTE 10:- INCOME TAXES (Cont.)
During 2006, based on the opinion of its legal counsel, the Company's management
decided to reduce a previously recorded accrual by approximately $ 75 (reduction
of general and administrative expenses).
d. Net operating carryforward losses:
The Company has accumulated losses for tax purposes as of December 31, 2006, in
the amount of approximately $ 15,460 which may be carried forward and offset
against taxable income in the future for an indefinite period.
The carryforward losses of the Israeli subsidiary, amounting to approximately $
720.
Foreign:
The carryforward losses of the French subsidiary, amounting to approximately $
13,600, which may be carried forward and offset against taxable income in the
future, for an indefinite period.
The carryforward losses of the U.S. subsidiary, amounting to approximately $
9,460 as of December 31, 2006, can be utilized mainly through 2017 to 2027.
Utilization of U.S. net operating losses may be subject to the substantial
annual limitation due to the 'change in ownership' provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses before utilization.
The carryforward losses of the Dutch subsidiary, amounting to approximately $
5,880 as of December 31, 2006, can be utilized indefinitely.
The carryforward losses of the other subsidiaries amount to approximately $
4,000 as of December 31, 2006. The majority of these carryforward losses can be
utilized indefinitely.
e. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company and its subsidiaries deferred tax liabilities and
assets are as follows:
December 31,
2005 2006
Deferred tax assets in respect of operating loss carryforwards $ 10,147 $ 11,253
Valuation allowance (10,147) (11,253)
Net deferred tax asset $ - $ -
NOTE 10:- INCOME TAXES (Cont.)
Management currently believes that since the Company and its subsidiaries have a
history of losses it is more likely than not that the deferred tax assets
regarding the loss carryforwards will not be realized in the foreseeable future.
f. Reconciliation of the theoretical tax expense (benefit) to the actual
tax expense (benefit):
In 2004, 2005 and 2006, the main reconciling items between the statutory tax
rate of the Company and the effective tax rate (0%) are carryforward tax losses,
for which a full valuation allowance was provided.
g. Net income (loss) is comprised of the following:
Year ended December 31,
2004 2005 2006
Domestic $ (2,342) $ (2,031) $ 2,851
Foreign (1,533) (860) (2,215)
$ (3,875) $ (2,891) $ 636
NOTE 11:- GEOGRAPHIC INFORMATION
The Company manages its business on the basis of one reportable segment.
a. Revenues classified by geographic destinations based on customer
locations:
Year ended December 31,
2004 2005 2006
Europe $ 8,332 $ 8,239 $ 9,930
Asia 3,587 3,844 3,969
North America 1,381 1,234 473
South America 2,258 1,836 2,848
Other 170 248 499
$ 15,728 $ 15,401 $ 17,719
b. Long-lived assets by geographic region:
December 31,
2005 2006
Israel $ 1,465 $ 1,222
Europe 354 255
North America 39 6
Other 56 47
$ 1,914 $ 1,530
NOTE 12:- FINANCIAL INCOME (EXPENSES), NET
Year ended December 31,
2004 2005 2006
Financial income:
Foreign currency translation adjustments, net $ 188 $ - $ 244
Interest on bank deposits 63 108 358
251 108 602
Financial expenses:
Foreign currency translation adjustments, net - (379) -
Bank charges (61) (45) (78)
Interest on short-term bank credit (1) - (57)
(62) (424) (135)
$ 189 $ (316) $ 467
- - - - - - - - - - - - - - - - -
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