PART I
Item 1.
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Identity of Directors, Senior Management and Advisers
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1.A Directors and Senior Management
Not
applicable in Annual Report on Form 20-F.
1.B Advisers
Not applicable in Annual Report on Form 20-F.
1.C Auditors
Not applicable in Annual Report
on Form 20-F.
Item 2.
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Offer Statistics and Expected Timetable
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2.A Offer Statistics
Not applicable in
Annual Report on Form 20-F.
2.B Method and Expected Timetable
Not applicable in Annual Report on Form 20-F.
3.A Selected Financial Data
The consolidated
statement of operations data set forth in this Item 3.A with respect to the years ended December 31, 2012, 2011 and 2010, and the consolidated balance sheet data as of December 31, 2012 and 2011, have been derived from the audited
Financial Statements listed in Item 18 (the
Financial Statements
), which have been prepared in accordance with generally accepted accounting principles (
GAAP
) in the United States, except as otherwise described
therein and set forth elsewhere in this Annual Report. The consolidated statement of operations data set forth in this Item 3.A with respect to the years ended December 31, 2009 and 2008, and the consolidated balance sheet data as of
December 31, 2010, 2009 and 2008, have been derived from audited consolidated financial statements not included herein that have been adjusted for discontinued operations and have also been prepared in accordance with U.S. GAAP, except as
otherwise described therein. The selected consolidated financial data set forth in this Item 3.A should be read in conjunction with Item 3Key InformationRisk Factors, Item 5Operating and Financial Review and
Prospects and the Financial Statements.
6
Statement of Operations Data:
(in thousands except per share data and footnotes)
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Year Ended December 31,
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2012
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2011
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2010
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2009
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2008
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Revenues
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$
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400,731
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$
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565,313
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$
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529,355
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$
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359,330
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$
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407,950
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Cost of revenues:
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Cost of products sold and services rendered
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235,223
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329,442
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312,901
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220,202
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241,946
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Write-down of inventories (1)
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14,255
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6,743
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3,348
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Total cost of revenues
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249,478
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336,185
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312,901
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220,202
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245,294
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Gross profit
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151,253
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229,128
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216,454
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139,128
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162,656
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Research and development costs:
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Expenses incurred
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73,636
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86,165
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81,191
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66,318
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75,353
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Lessgovernment participations (2)
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1,821
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1,985
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2,864
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2,212
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3,281
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Net research and development costs
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71,815
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84,180
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78,327
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64,106
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72,072
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Selling, general and administrative expenses
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75,142
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72,583
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66,264
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63,598
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71,723
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Amortization of intangible assets (3)
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9,907
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12,304
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14,176
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19,848
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5,743
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In-process research and development charges (4)
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6,537
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Restructuring charges (5)
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5,063
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8,621
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Impairment of intangible assets (6)
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30,142
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Impairment (adjustment of impairment) of goodwill (7)
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(3,300
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)
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93,368
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Operating income (loss)
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(40,816
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)
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60,061
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57,687
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(5,124
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)
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(95,408
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)
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Financial expensesnet (8)
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(5,100
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)
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(6,551
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)
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(7,284
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)
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(11,090
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)
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(1,474
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)
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Income (loss) from continuing operations before taxes on income
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(45,916
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)
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53,510
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50,403
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(16,214
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)
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(96,882
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)
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Income tax expense (benefit)
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456
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7,677
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7,397
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(372
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)
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800
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Income (loss) from continuing operations of the Company
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(46,372
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)
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45,833
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43,006
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(15,842
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)
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(97,682
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)
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Share in losses of an associated company
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(165
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)
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(179
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)
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Net income (loss) from continuing operations
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(46,537
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)
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45,654
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43,006
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(15,842
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)
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(97,682
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)
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Income (loss) from discontinued operations, net of tax (9)
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1,363
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(8,717
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(3,914
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)
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(37,391
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Net income (loss)
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(46,537
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)
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47,017
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34,289
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(19,756
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)
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(135,073
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)
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Net income (loss) attributable to non-controlling interests
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(958
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)
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(322
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)
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144
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168
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|
232
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Net income (loss) attributable to Orbotech Ltd.
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$
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(45,579
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)
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$
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47,339
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$
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34,145
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$
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(19,924
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)
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$
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(135,305
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)
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Amounts attributable to Orbotech Ltd.:
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Income (loss) from continuing operations
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(45,579
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)
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45,976
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42,862
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(16,010
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)
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(97,914
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)
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Income (loss) from discontinued operations, net of tax
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1,363
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(8,717
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(3,914
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)
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(37,391
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)
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Net Income (loss) attributable to Orbotech
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$
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(45,579
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)
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$
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47,339
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$
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34,145
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$
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(19,924
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)
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$
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(135,305
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)
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Earnings (loss) per share
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Income (loss) from continuing operations:
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basic
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$
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(1.05
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)
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$
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1.15
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$
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1.23
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$
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(0.46
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)
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$
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(2.92
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)
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diluted (10)
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$
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(1.05
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)
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$
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1.13
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$
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1.20
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$
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(0.46
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)
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|
$
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(2.92
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)
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Net income (loss):
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|
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basic
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$
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(1.05
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)
|
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$
|
1.19
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|
$
|
0.98
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|
$
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(0.58
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)
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|
$
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(4.04
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)
|
diluted (10)
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|
$
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(1.05
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)
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$
|
1.16
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$
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0.95
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$
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(0.58
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)
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$
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(4.04
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)
|
Weighted average number of shares used in computation of earnings (loss) per share (11):
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|
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Basic
|
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43,501
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|
|
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39,909
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|
|
|
34,911
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|
|
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34,501
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|
|
|
33,512
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
diluted (10)
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43,501
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|
|
|
40,816
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|
|
|
35,778
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|
|
|
34,501
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|
|
|
33,512
|
|
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7
Balance Sheet Data:
(in thousands)
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At December 31,
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2012
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2011
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2010
|
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2009
|
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2008
|
|
Working capital (12)
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$
|
401,265
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|
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$
|
482,756
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|
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$
|
356,378
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|
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$
|
324,188
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|
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$
|
165,285
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Long-term bank loan (13)
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64,000
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96,000
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|
|
|
128,000
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|
|
|
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Total assets
|
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653,318
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|
|
|
747,483
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|
|
|
628,341
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|
|
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605,762
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|
|
|
634,861
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|
Capital stock
|
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|
276,958
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|
|
|
273,058
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|
|
|
176,698
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|
|
|
171,494
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|
|
|
163,641
|
|
Equity (14)
|
|
|
447,513
|
|
|
|
490,132
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|
|
|
349,555
|
|
|
|
312,513
|
|
|
|
313,030
|
|
(1)
|
The write-downs of inventories of $14,255,000 in 2012 and $6,743,000 in 2011 primarily relate to excess inventories of components and non-cancelable commitments for
certain of the Companys FPD products. The write-down of inventories of $3,348,000 in 2008 primarily relates to excess inventories of components for certain of the Companys PCB products.
|
(2)
|
The Company receives certain government funding for the development of approved projects and is not required to pay royalties on sales of products developed on the
basis of such funding. See Note 1o to the Financial Statements.
|
(3)
|
The amortization of intangible assets is primarily attributable to the acquisition by Orbotech, on October 2, 2008, of PDI pursuant to the Agreement and Plan of
Merger and Reorganization dated June 26, 2008 (the
PDI Acquisition
). Based on factors as of the date of this Annual Report, estimated amortization expense associated with intangible assets for 2013 is $4,048,000. See Note 5b
to the Financial Statements.
|
(4)
|
In-process research and development charges in 2008 were associated with the PDI Acquisition.
|
(5)
|
The restructuring charges of $5,063,000 in 2012 and $8,621,000 in 2008, relate to reductions in the Companys workforce and rationalizations of certain of its
research and development, manufacturing and operating activities, in order to realign the Companys infrastructure.
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(6)
|
The impairment of intangible assets of $30,142,000 in 2012 is associated with the Companys FPD business. See Notes 1m and 5 to the financial statements.
|
(7)
|
The adjustment of impairment of goodwill in 2009 represents $3,300,000 of additional consideration from the sale of Salvador Imaging, Inc. (
Salvador
)
which was owned by PDI at the time of the PDI Acquisition. The impairment of goodwill of $93,368,000 in 2008 is comprised of a write-off of $87,977,000 of goodwill associated with the Companys FPD business and a write-off of $5,391,000 of
goodwill associated with the Companys assembled PCB business.
|
(8)
|
Includes interest expense associated with $160,000,000 borrowed in 2008 to complete the PDI Acquisition pursuant to the Loan Agreements (as defined below) entered into
with Israel Discount Bank Ltd. (
Discount Bank
), offset by interest income from cash and short term bank deposits. At December 31, 2012, $64,000,000 principal amount was outstanding under the Loan Agreements. On
February 11, 2013 the Company prepaid $32,000,000 of this amount and, as of the date of this Annual Report, $32,000,000 principal amount was outstanding under the Loan Agreements. See Notes 6 and 8c to the Financial Statements.
|
(9)
|
Income from discontinued operations, net of tax, of $1,363,000 in 2011, and losses from discontinued operations, net of tax, of $8,717,000 in 2010, $3,914,000 in 2009
and $37,391,000 in 2008, are attributable to the operations of Orbotech Medical Solutions Ltd. (
OMS
) and Orbotech Medical Denmark A/S (
OMD
).
|
(10)
|
Excludes equity awards outstanding at December 31, 2012, 2009 and 2008, as their inclusion would be anti-dilutive.
|
(11)
|
The actual number of Ordinary Shares outstanding at December 31, 2011 was 43,312,049.
|
(12)
|
Working capital is defined as current assets less current liabilities.
|
(13)
|
Net of current maturities.
|
(14)
|
Comprising Orbotech Ltd. shareholders equity and non-controlling interests.
|
8
As of December 31, 2012, the Company had outstanding indebtedness in an aggregate
principal amount of $64.0 million, $32.0 million of which was due to be repaid in 2013. On February 11, 2013, following the Partial Prepayment (as defined below), the Company had outstanding indebtedness in an aggregate principal amount of
$32.0 million, all of which is due to be repaid in 2013. The Company has not paid any cash dividends in the last five years. See Item 5Operating and Financial Review and ProspectsLiquidity and Capital Resources. On November 5,
2012, the Company announced a program for the repurchase of Ordinary Shares. See Item 16EPurchases of Equity Securities by the Issuer and Affiliated Purchasers.
3.B Capitalization and Indebtedness
Not
applicable in Annual Report on Form 20-F.
3.C Reasons for the Offer and Use of Proceeds
Not applicable in Annual Report on Form 20-F.
3.D Risk Factors
Our business faces significant risks. You should, in addition to the Cautionary Statement Regarding Forward-Looking Information noted above, give careful consideration to the information set forth below
and elsewhere in this Annual Report concerning risks and uncertainties in connection with any investment in our Ordinary Shares. Additional risks not currently known to us or that we currently believe are immaterial may also impair our business,
results of operations, financial condition and liquidity.
(a) We incurred a net loss in 2012 and
have incurred net losses in the past and we may not be profitable in the future.
We recorded a net loss of $45.6
million for the year ended December 31, 2012; and although we recorded net income of $47.3 million and $34.1 million for the years ended December 31, 2011 and 2010, respectively, we also recorded net losses of $19.9 million and $135.3
million for the years ended December 31, 2009 and 2008, respectively. Our ability to return to or sustain profitability in the future depends in part on the global economy, the rate of growth of, and changes in technology trends in, the PCB,
FPD and other industries in which we currently or may in the future operate, our ability to develop and manufacture new products and technologies in a timely manner, the competitive position of our products, the continued acceptance of our products
by our customers and in the industries that we serve and our ability to manage expenses. In 2012, and in prior years, we undertook cost cutting initiatives in response to economic conditions, including reducing our worldwide workforce. In the
future, we may have to undertake additional cost reduction initiatives to return to or sustain profitability, which may lead to a deterioration of our competitive position, and any difficulty in reducing our cost structure could negatively impact
our results of operations and cash flow in the future. We cannot assure you that we will not continue to report losses in future periods or that, if we return to profitability, we will remain profitable.
(b) We are dependent upon the worldwide electronics industry and unfavorable economic conditions and capital
expenditures may negatively impact our operating results.
Our revenue is dependent upon the strength of the worldwide
electronics industry. In particular, we depend upon the need by manufacturers of PCBs and FPDs to make continuing capital investments in systems and products, such as those marketed and sold by us, for use in their manufacturing processes. These
spending levels are impacted by the actual and expected worldwide level of demand for consumer end-products that utilize PCBs, FPDs and other electronic components in their production processes, including, among others, smartphones, tablets,
computers, televisions, automobiles and portable electronic devices and for products used in medical, industrial, telecommunications and military applications. Demand for consumer end-products is normally a function of prevailing global or regional
economic conditions and is negatively affected by a general economic slow-down and/or periods of economic uncertainty as consumers reduce discretionary spending on electronics. Although we implemented cost reduction and business realignment measures
in 2008 and 2012 in response to
9
prevailing economic conditions which had led to decreased demand, we are limited in our ability to further reduce expenses due to the ongoing need to invest in research and development and to
maintain our worldwide customer service and support operations. In circumstances of significantly reduced overall demand for electronic devices using PCBs and FPDs, or delays in capital investment due to uncertain economic and/or industry
conditions, or if orders received differ from our expectations with respect to the product, volume, price or other items, our fixed cost structure could have a material adverse effect on our business and results of operations.
Demand for our products is also created, in part, by technological developments that affect product functionality or give rise to new or
enhanced products, such as smartphones, tablets, liquid crystal display (
LCD
) televisions and other sophisticated devices. These developments generate an ongoing need on the part of electronics component manufacturers for the type
of improved yield-enhancing and production solutions we provide. If changes in these technologies do not continue to occur, or if other technologies were to emerge that lessened or obviated the need for the use of PCBs and FPDs in electronic
devices, the overall demand for our products could be reduced.
(c) Capital investments by PCB
and FPD manufacturers are highly cyclical and may remain at low levels or continue to decline in the future. If we fail to respond to industry cycles, our business could be seriously harmed.
Our business relies considerably upon continuing capital investments by manufacturers of PCBs and FPDs. The capital equipment procurement
practices of both PCB and FPD manufacturers have been, and continue to be, highly cyclical in nature, and have experienced both periodic and sustained downturns. For example, in the past, contractions in the credit markets have caused severe
financial system disruptions that have contributed to a significant downturn in the electronics industry, which, in turn, impacted our revenues and profitability. Our business may be negatively affected if the availability of capital resources for
investment is reduced, particularly in the computer, mobile connected devices, television or telecommunications industries. In addition, our business in 2012 was negatively affected by reductions in the capital expenditure programs of PCB or FPD
manufacturers and will continue to be negatively affected while low levels of investment persist and/or if further declines occur.
We cannot predict future levels of demand for electronic products and devices with accuracy. For example, the increase in demand for smartphones, tablets, e-readers and other mobile connected devices
during recent years may not continue at its current level, may not increase as anticipated and may decline. If this happens, our PCB business may be adversely impacted. In addition, the need for higher definition, more power efficient, low cost FPDs
may not increase as anticipated or even continue at current levels, and, as has occurred in the past, may decline, which would negatively affect our FPD business. The FPD industry is in an extended cyclical downturn, which commenced in the second
half of 2011, continued throughout 2012 and is ongoing through the date of this Annual Report. When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected. Given our limited ability to reduce
our significant expenditures for research and development and worldwide customer support operations, our cost reduction measures may not be implemented in a sufficiently timely manner in response to industry cycles. Our inability to respond to
industry cycles could have a material adverse effect on our business and results of operations.
(d) Our Korean subsidiary and six of its employees are subject to ongoing criminal prosecution in Korea and
we and certain of our employees remain under investigation in Korea. This matter has adversely impacted our business in Korea and elsewhere and harmed our reputation and may continue to do so.
In June 2012, charges were filed in the Seoul Central District Court of the Republic of Korea against the Korean subsidiary of Orbotech
Ltd. and six employees thereof related to the alleged acquisition and misuse of confidential customer information in violation of the Korean Act on Prevention of Divulgence and Protection of Industrial Technology and the Criminal Code of Korea (the
Korean Matter
). Hearings on these matters are ongoing.
Our involvement in the Korean Matter has been and
is expected to continue to be expensive, time-consuming, disruptive to our operations in Korea and elsewhere and distracting to management and technical personnel. We recorded $4.0 million net in fees and costs associated with the Korean Matter in
2012 and
10
anticipate that we will continue to incur associated expenses for the duration of the trial and investigation. The Korean Matter is expected to extend through at least the first half of 2013, but
the timing and results are subject to uncertainty. The investigation by the prosecutor into the actions of our employees outside of Korea is ongoing and the timing or outcome of such investigation cannot be predicted. Adverse outcomes in this
litigation or investigation may result in monetary penalties against our Korean subsidiary of up to 1.50 billion Korean Won (approximately $1.38 million at the exchange rate in effect on January 31, 2013 of Korean Won 1086.25 =$1.00), and in
fines against its employees, which may also be paid by us under certain circumstances. We have not recorded a provision related to the Korean Matter and ongoing investigation as of the date of this Annual Report because we cannot reasonably estimate
the amount of the financial impact of an adverse outcome in these matters. In addition, because the Korean Matter and investigation are ongoing, we and our employees could be subject to new criminal charges and additional monetary fines, and be
subject to the imposition of changes in the way we conduct our business in Korea and elsewhere, which may make it more expensive for us to make, sell and service our products. This litigation is expected to negatively impact FPD sales in Korea in
2013, particularly to certain of the large manufacturers located in that country. The Korean Matter and investigation have harmed our reputation and, although we have taken steps to review and implement improvements to our approach to safeguarding
customer information, we may not be able fully to repair the damage with our existing and new customers.
In the litigation,
two of our customers are co-operating with and providing evidence for the prosecution. In the future, we and our Korean subsidiary could also become subject to civil actions brought by third parties, including these or other customers. Any civil
litigation would increase the risks described above and may result in monetary judgments, settlements, requirements for us to change our business model or other loss of business. Any new litigation could also harm our reputation.
For more information about the Korean Matter, see Item 8Financial InformationLegal Proceedings.
(e) A substantial portion of our revenue is derived from sales to companies located in the Far East and
Japan, and a growing portion of our operations are conducted outside Israel, each of which exposes us to political, economic and other uncertainties.
We anticipate that, as in the past, sales of products and services outside Israel will continue to account for virtually all of our revenues. In 2012, approximately 87% of our revenues from equipment
sales were derived from sales in the Far East and Japan, including approximately 33% from sales in China, 20% from sales in Taiwan, 17% from sales in Korea and 10% from sales in Japan. The risks and complexities inherent in doing business in
international markets include those associated with the possibility of a concentration of sales within a particular country or region; the imposition of governmental controls, regulations and local standards, including the need to comply with
stringent and evolving technology and environmental protection laws and regulations, a wide variety of foreign and domestic import/export laws, customs and excises and foreign labor laws; the imposition of new and additional commercial terms by
foreign customers, which can have the effect of increasing our exposure to operational and foreign currency risks; political, economic and legal instability, including an increased amount of foreign government involvement in, and oversight of, our
operations; trade restrictions; exposure to multiple complex systems of taxation and international double taxation treaties; regulatory reform and changes in reimbursement rates, tariffs and taxes and their applications; difficulty in protecting
intellectual property; longer payment cycles usually characteristic of international sales; and the general difficulties associated with administering business overseas, as well as overall economic conditions. The Korean Matter has highlighted the
singular difficulties and complexities, in particular those associated with government classification of technology that can arise when doing business in Korea. Our business success depends in part on our ability to anticipate and manage these and
other regulatory, economic, social and political risks inherent in international business effectively. Failure to anticipate and manage these risks effectively may have a material adverse effect on our business, financial condition and results of
operations.
The risks and complexities outlined above may also prove to be particularly acute in China, where we have
deployed substantial resources in order to expand our PCB and FPD capabilities, including by establishing
11
relationships with Chinese manufacturers. The economy of China differs from the economies of most developed countries in many respects, including the amount of governmental involvement, level of
development, growth rate, control of foreign exchange and allocation of resources. The Chinese government also exercises significant control over the countrys economic growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Such government initiatives may inhibit our efforts to expand our business in China, or otherwise adversely affect
our financial results and results of operations.
(f) Our results of operations depend on our
ability to manage our supply chain effectively. We depend on a limited number of key suppliers to provide us with sufficient parts to meet our production requirements in a timely and cost-effective manner. In addition, certain of our facilities may
be subject to disruption.
Certain of the various key components and subassemblies included in some of our systems are
purchased from a single or limited group of suppliers. Should any of these suppliers be unable to meet our requirements in a timely manner, or should we otherwise experience an interruption in supply from any of these sources, the possible resulting
late deliveries of our products and services may have an adverse effect on our results of operations. While we seek to anticipate future increases in demand for our products, and communicate potential increases in a timely manner to suppliers, we
may be unable to do so with accuracy. If our suppliers are unable to deliver key components or subassemblies to meet our production needs, whether as a result of an unanticipated increase in demand for our products or otherwise, our production
process may be delayed causing us to be unable to meet all of our customers desired delivery dates. Although we generally maintain an inventory of critical components used in the manufacture and assembly of our systems, such supplies may not
be sufficient to avoid potential delays that could have an adverse effect on our business. In addition, were a major disruption (such as might be caused by factors including work stoppages, acts of war, terrorism, fire, earthquake, energy shortages,
flooding or other natural disasters) to occur at our offices or manufacturing facilities, or those of our key suppliers, we could not guarantee that alternate production capacity would be obtainable on favorable terms or at all. Such disruptions
could result in delays in shipments of products to our customers, cancellation of orders or loss of customers and could also adversely affect our business by causing substantial delays in our research and engineering efforts for the development of
new products.
A sudden increase (or decrease) in demand for our products, as well as a lengthening (or shortening) of
customer lead times, may also affect our manufacturing cycle and impose logistical constraints on our supply chain. In periods of greater demand for our PCB and FPD product lines, we would be required to increase our production and delivery rate
significantly. There can be no guarantee that we will, in the future, have the capacity necessary to ramp up production in order to meet increased orders without any delay. In addition, our manufacturing cycle involves significant fixed costs,
including those with respect to labor. While we seek to maintain a variable cost structure across our supply chain infrastructure, cyclical fluctuations in demand for our products may result in periodic inefficiencies in our cost structure. Certain
of our costs that are variable, such as procurement, may not decline proportionally with any increased purchasing of supplies by us, or may be increased beyond our expectations to meet customer timelines. While we have undertaken and expect to
continue to implement initiatives to realign our infrastructure with revenue levels and business conditions, including initiatives to consolidate production facilities, expenses relating to the production, shipping and delivery of our products,
which may involve facilities on more than one continent, remain a significant component of our overall cost of goods sold. Should we experience late deliveries of our products and services or be unsuccessful in implementing our infrastructure
realignment or otherwise mitigating expenses associated with our global supply chain, our results of operations and reputation may be adversely affected.
(g) Our future revenues are dependent in part upon existing customers continuing to use our products and renewing their maintenance agreements with us.
We depend on our existing customers for additional future revenues from ongoing service and support related primarily to our PCB products,
but increasingly to our FPD products as well. Our maintenance agreements are generally renewable after twelve months at the option of the customer and do not contain mandatory renewal
12
obligations. In periods of reduced capital expenditures, our service revenues represent a larger percentage of our revenues. A change in business conditions could alter current customer
purchasing plans and, as a result, our maintenance agreements may not be renewed and we may therefore not generate significant revenues and cash flow from product maintenance in future periods.
(h) Our operating results fluctuate from period to period, and period-to-period comparisons may not be
meaningful and may not be representative of our future performance.
The timing of revenue recognition for our
products, principally our FPD systems, may have a substantial effect on our periodic revenues and net income. Normally, revenue from the sale of products is recognized upon delivery, subject to the existence of a signed contract, purchase order or
letter of agreement and a fixed or determinable sale price, with reasonable assurance of collectability. Our revenues, expenses and operating results have fluctuated in the past, and are likely to fluctuate significantly in the future due to a
number of factors, many of which are beyond our control. We are not always able to control the timing of delivery because of customer requirements, possible production delays and other factors. Orders for our systems may also be subject to
cancellation by customers. In addition, in limited circumstances, principally in the case of newly developed products, recognition of income may be deferred. Our ability to foresee possible future changes in the total volume of PCB orders in
particular may be limited because we cannot rely on unfilled orders as a dependable and consistent indicator of future revenue in this area of our business. Our operating results may fluctuate significantly in the future, and such fluctuations could
be further exacerbated due to the timing of special charges and expenses. In 2012, for example, we recorded charges that include impairments with respect to intangible assets in our FPD business in the amount of $30.1 million; write-downs of
inventories and provision for open commitments related primarily to our FPD business in the amount of $14.3 million; restructuring charges in the amount of $5.1 million; and net costs associated with the Korean Matter in the amount of
$4.0 million. Accordingly, it may be difficult for investors to make period-to-period comparisons using our reported GAAP financial information.
(i) Our business with respect to the FPD industry is dependent on sales to a small number of large customers and a loss of any of our large customers could have a material
adverse effect on our financial condition, results of operations and cash flows.
The FPD industry is highly
concentrated with a small number of manufacturers producing the majority of the worlds LCDs. We market and sell our AOI, test and repair systems for FPDs to virtually all of the worlds LCD manufacturers, with significant concentration in
sales to a limited number of them. For the year ended December 31, 2012, approximately 55% of our total FPD revenues were derived from our three largest FPD customers. We cannot assure you that any of our FPD customers, including customers that
have in the past accounted for a substantial portion of our revenues, will continue to contribute significantly to our total FPD revenues in future periods. The loss of any major customer or a significant reduction in purchases from us by such a
customer could have a material adverse effect on our financial condition, results of operations and cash flows. In addition, the concentration of our FPD customer base means that if one or more of our major customers were to develop its own
competing technology or to experience economic difficulties, changes in purchasing policies, difficulties in fulfilling their obligations to us, bankruptcy or lack of success, our revenues, profitability and financial condition could be materially
and adversely affected.
(j) Our contracted orders for sales of FPD products are subject to
delay, cancellation or non-acceptance by customers.
Orders for sales of our FPD products consist, to a large degree,
of product orders for which written authorizations have been accepted and assigned shipment dates are expected within the ensuing three to twelve months. We do not include maintenance revenues in our determination of orders for this purpose.
However, our orders on any particular date are not necessarily indicative of actual sales for any succeeding period. Customers may delay delivery of products, cancel orders prior to shipment or refuse to provide acceptances due to unresolved
13
research and development issues, particularly in relation to new products. Moreover, since expense levels are based in part on our expectations of future revenue, we may be unable to adjust costs
in a timely manner in response to further revenue shortfalls. Furthermore, because certain parts used in the FPD manufacturing process entail relatively long lead times, a customer cancellation may require us to record inventory write-downs.
Historically, contracted orders have represented a substantial portion of revenue from the sale of FPD products in a twelve month period; however, more recently, contracted FPD orders represent a significantly smaller portion of our FPD revenue in
any period. In addition, lead times for our FPD products have become shorter, thereby decreasing our visibility into our FPD business. Delays in delivery or acceptance of our products or a reduction of our orders as a result of cancellations or as a
result of a further reduction in the level of orders during any particular period decreases the visibility into our business, exacerbates our manufacturing risks described below and could have a material adverse effect on our business, results of
operations, financial position and cash flow.
(k) We face intense competition in our business,
which may result in decreased demand or prices for our products and services.
We are subject to competition from
companies that either currently manufacture or are developing PCB and FPD products directly in competition with our systems and products, including from some of our customers and their affiliates. Because some of our competitors are associated with
certain of our customers, they have access to our products and technology which may make it easier for them to compete with us. For example, we faced continuing pricing pressure in 2012, particularly in China, as a result of competition from local
manufacturers of PCB and FPD inspection equipment. For economic, internal administrative, regulatory or other business reasons, our customers may purchase PCB and FPD products manufactured locally or in-house or by their affiliates, rather than by
us, even if such products may be inferior in quality and/or higher in price (on an arms-length basis) than our products. Orbograph faces competition from a number of companies which develop and market character recognition solutions. In recent years
we have experienced competition-induced pricing pressure from our customers that adversely affected our operating results, and competitive pressures in the future could lead to further price erosion that could have a material and adverse effect on
our operating results.
(l) We may not be able to develop new products or respond to
technological changes in a timely manner, which could reduce our ability to compete effectively.
Our products are used
to manufacture goods in consumer end markets that are characterized by rapidly changing technologies and frequent new product introductions. We believe that our future success will depend, in part, on our ability to develop new products and
introduce them in a timely manner. We expect our competitors in all product lines to continue to improve the design and performance of their products and to introduce new products with more competitive prices and performance features. In addition,
these or other companies may in the future offer a range of PCB or FPD yield-enhancing and production products or character recognition solutions that is broader and more comprehensive than ours. Although we attempt to maintain and strengthen our
competitive position through our policy of substantial investment in research, development, marketing, operations and customer support, we may not be able to continue to make such investments, particularly in challenging global economic conditions.
In addition, certain of our competitors are, or may be affiliated with companies that are, larger than Orbotech in terms of their operations and/or balance sheet, enabling them to invest a greater amount of resources, on both a relative and absolute
basis, in research and development. In the future, we may not be able to achieve, in a timely manner, the technological advances necessary to develop new products and product enhancements to meet the rapid change in manufacturing technologies
required for PCBs and FPDs. Any such failure could lead to deterioration in our competitive position.
(m) We may not receive significant revenues from our current research and development efforts for several
years.
Developing innovative product solutions is expensive, and our investment in product development may entail a
long payback cycle, particularly as we focus increasingly on long-term projects. In 2012 and 2011, net
14
research and development expenses were $71.8 million, or approximately 17.9% of our total revenues and $84.2 million, or approximately 14.9% of our total revenues, respectively. Our future
plans include significant investments in product research and development and related opportunities, efforts which we believe are critical to maintain our competitive position. However, we may not receive significant revenues from these investments
for several years, if at all.
(n) Deterioration of political, economic and security conditions
in Israel may adversely affect our profitability; and our operations may be negatively affected by the obligations of our personnel to perform military service.
We are incorporated under the laws of the State of Israel and our headquarters, as well as substantial research and development and production facilities, are located in Israel. As such, we are directly
influenced by political, economic and military conditions affecting Israel. Thus, 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. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying in degree and intensity, has led to security and economic problems for Israel. Beginning in September 2000, the overall relationship and security situation between Israel and the Palestinians deteriorated significantly and
continues to be marked by ongoing violence, also varying in its degree of severity. During the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party; and during the
winter of 2008-2009 and the autumn of 2012, Israel was engaged in armed conflicts with Hamas, a militia group and political party operating in the Gaza Strip. These conflicts involved missile strikes against civilian targets in various parts of
Israel, including in Yavne, where our headquarters and principal research and development and production facilities are located, and negatively affected business conditions in Israel. In addition, during 2011 and 2012, riots and uprisings in several
countries in the Middle East and neighboring regions have led to severe political instability in several neighboring states and to a decline in the regional security situation. Such instability may affect the local and global economy, could
negatively affect business conditions and, therefore, could adversely affect our operations. To date, these matters have not had any material effect on our business and results of operations; however, the regional security situation and worldwide
perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future.
Many of our male employees in Israel are obligated to perform annual reserve duty in the Israel Defense Forces. In addition, virtually all such employees are subject to being called to active military
duty in emergency circumstances. In response to increased hostilities, there have been periods of significant recruitment of military reservists, and it is possible that there will be additional recruitments in the future. No assessment can be made
of the full impact of such requirements on us in the future, particularly if emergency circumstances occur, or the effect on us of any expansion of these obligations. Our operations could be disrupted and harmed by the absence for a significant
period of time of one or more of our key employees or a significant number of our other employees due to military service. To date, these matters have not had any material effect on our business and results of operations, but there can be no
assurance that they will not do so in the future.
(o) We have experienced, and may continue to
experience, losses on inventories.
Frequent new product introductions in the electronics industry can result in the
obsolescence of existing manufacturing processes, which may in turn make our offerings of PCB and FPD yield-enhancement and production solutions outdated or obsolete. This can result in a decrease in the stated value of our inventory since we value
our inventory at the lower of cost or market value. The life cycles of our PCB and FPD yield-enhancement and production solutions are affected by the life cycles of the consumer electronic products that are manufactured utilizing our product
offerings. The life cycles of these consumer end-products vary based upon a number of factors, but in some cases can be relatively short. While we monitor our production and inventory levels closely, inventory may nonetheless become obsolete as a
result of changes in consumer demand and the
15
corresponding effects on the production processes employed by PCB and FPD manufacturers. During past periods of economic slowdown or rapid technological improvement this has resulted, and may
result in the future, in charges for inventory write-downs. For example, in 2012 and 2011, in connection with the extended cyclical downturn in the FPD industry, we recorded write-downs of inventories of $14.3 million and $6.7 million,
respectively, relating primarily to excess inventories of components and non-cancelable commitments for certain of our FPD products. Our operating results have been, and in the future may be, adversely affected by material levels of obsolete or
excess inventories.
(p) We extend unsecured credit in the form of accounts receivable to many of
our customers in connection with their purchases from us and we may be unable to collect accounts receivable.
We
extend unsecured credit, in the form of accounts receivable, to many of our customers in connection with their purchases of our products. In addition, diversification of the related credit risk is limited because we sell primarily to two industries,
the PCB and FPD industries. Our exposure to credit losses due to failure to collect accounts receivable will depend on the financial condition of our customers and other factors beyond our control, such as conditions in the world economy or in the
PCB, FPD or other industries that we serve. Credit losses, if significant, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
(q) Strategic initiatives, including acquisitions and other types of strategic initiatives have been and are
expected to continue to be an important element of our strategy, but we may not find suitable opportunities and we may not be able successfully to manage such initiatives in the future.
As part of our corporate strategy, we regularly evaluate strategic initiatives, including acquisitions. We seek to expand our
technological base and diversify into new growth areas through acquisitions, joint ventures and investments. In addition, we evaluate other types of strategic initiatives to enhance value. Risks associated with these activities include: accurately
assessing the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates; financing costs; the potential loss of key personnel of an acquired business; the ability to achieve projected
economic and operating synergies and any cost savings; difficulties in successfully integrating, operating, maintaining and managing newly acquired operations; accounting issues relating to the previous conduct of an acquired business; difficulties
in maintaining uniform standards, controls, procedures and policies; unanticipated changes in business and economic conditions affecting an acquired business; the possibility of impairment and restructuring charges if an acquired business performs
below expectations; and the diversion of management attention from our existing business. In addition, such transactions will often result in the acquisition of intangible assets required to be amortized in our consolidated statements of operations
over certain time periods and the recording of goodwill which may be subject to possible future impairment charges. Such amounts have been, and may continue to be, substantial and have a material effect on our operating results. Furthermore, we may
be restricted from entering into certain acquisitions, joint ventures, investments and other types of strategic initiatives due to limitations placed upon us under the Loan Agreements and the Hapoalim Debenture (as defined below) as well as under
the Partial Prepayment Arrangements (as defined below) and the Negative Pledges (as defined below) created pursuant thereto, for as long as these are in effect. Although we selectively pursue strategic opportunities, some or all of these
transactions may not be announced in the foreseeable future, or at all, and they may not be consummated even following announcement. The costs incurred in evaluating and consummating strategic transactions could result in incurring expenses and
losses even if any announced transaction may ultimately be beneficial.
(r) We obtain substantial
benefits by operating in Israel, but these benefits may not continue or in the future may be limited or restricted.
We
benefit from certain Israeli Government programs and tax legislation, particularly regarding our production facilities in Israel. Pursuant to these programs and legislation, a significant portion of our income is taxed at reduced rates. To be
eligible for these benefits, we must continue to meet certain conditions. Should we
16
fail to meet such conditions in the future, these benefits could be cancelled, resulting in higher effective tax rates, and we may be required to refund tax benefits previously received, if any,
together with interest and linkage differences to the Israeli Consumer Price Index (the
Israeli CPI
), or be subject to other monetary penalty. Additionally, if we increase our activities outside of Israel, for example, via
acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs, which could also have the effect of increasing our effective tax rate. In addition, we benefit from a Government of Israel program under which
we receive grants from the Office of the Chief Scientist at the Ministry of Industry, Trade and Labor of the State of Israel (the
OCS
) for the development of generic technologies without incurring any royalty obligations. These
programs and tax legislation may be terminated in the future or the available benefits may be reduced or impacted, including, among other possible circumstances, should we transfer certain research and development and/or manufacturing activities
outside the State of Israel. The termination or curtailment of these programs or the loss or reduction of such benefits could have a material adverse effect on our business, financial condition and results of operations.
Israeli Government consent is required to manufacture products developed with OCS participation outside of Israel and to transfer to
third parties know-how developed through projects in which the Israeli Government participates. Although such restrictions do not apply to the export from Israel of our products developed with such know-how, they may prevent us from engaging in
transactions with our affiliates or customers outside Israel, involving product or other asset transfers, which might otherwise be beneficial to us.
(s) Our future success depends in part on our ability to attract and retain highly qualified staff.
Our success depends, in significant part, upon our continuing ability to attract and retain highly qualified managerial, scientific,
technical, sales and marketing personnel. Our personnel are instrumental to our ability to develop increasingly advanced product solutions, market those products and provide ongoing support and service to our customers worldwide. The competition for
qualified personnel, particularly among computer software programmers and hardware engineers, has always been, and remains, a challenge. In addition, part of the way in which we remunerate our senior managerial, scientific, technical, sales and
marketing staff is through the grant of equity awards. The issuance of these awards will dilute the ownership of existing shareholders and may cause the price of our Ordinary Shares to decline. As we issue equity awards, we use availability under
our existing equity remuneration plans and, when availability is low, we will need to seek shareholder approval to increase availability thereunder. We cannot assure you that we will receive shareholder approval to increase the availability of
shares under our existing or new equity remuneration plans, and our ability to grant equity awards in the future may therefore be limited. Furthermore, demographic trends, a lack of appropriately qualified and skilled employees, financial market
conditions and future business decisions of both us and our competitors may all operate in a manner detrimental to our ability to attract and retain key personnel. If we are unable to attract and retain highly qualified employees to meet our needs
in the future, our business and results of operations could be adversely affected.
(t) Our
future success depends in part on our ability to maintain the proprietary nature of our technology.
Our future success
and competitive position are dependent, in significant part, on our proprietary technology. We protect our intellectual property through patent, trade secret, trademark and copyright law, as well as technical safeguards and non-disclosure agreements
with our employees, subcontractors and potential business associates. However, we may not be able successfully to protect our technology or deter infringement of our intellectual property rights or unauthorized copying by third parties or prevent
breach of our non-disclosure agreements, particularly in circumstances where we may transfer research and development or manufacturing activities outside the State of Israel, especially to the Far East. In addition, our patents and other
intellectual property may not prevent competitors from developing independently products and services similar to or duplicative of ours, nor can there be any assurance that the resources invested by us to protect our intellectual property will be
sufficient or that our intellectual property portfolio will deter adequately misappropriation or improper use of our technology. Patents that we own or license will eventually expire, could be invalidated or
17
challenged or could be insufficient to protect our intellectual property rights in certain countries. Our pending or future patent applications may not be issued with the scope of claims sought
by us, if at all. Patent coverage may not be extended to all countries sought, and effective copyright, trade secret and other intellectual property protection may be unavailable or limited in certain countries. The degree of future protection for
our proprietary technology is uncertain because legal means afford only limited protection and may not adequately protect our rights or keep our competitive advantage. For example, other companies may develop technologies that are similar or
superior to our technology, duplicate our technology or design around the patents or other proprietary rights held by us. Other companies may gain unauthorized access to our technology in situations where we test our products at customer sites with
co-operation from our customers. An inability to protect our intellectual property could have a material adverse effect on our business and operating results.
(u) If we or our customers are prosecuted or sued for infringing intellectual property rights or misusing intellectual property of third parties, litigation could be costly
and time consuming and an unfavorable outcome may adversely affect our business, operating results, financial condition and reputation.
As is characteristic of the electronics industry, there can be no assurance that our products do not or will not infringe the proprietary rights of third parties, that third parties will not claim
infringement by us (or by our customers who use our products) with respect to patents or other proprietary rights or that we would prevail in any such proceedings. We have received in the past, and may receive in the future, communications asserting
that the technology used in some of our products requires third-party licenses. We and our customers may also be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities, particularly in
China. Our customers may also be sued by third parties for using our products if those third parties believe that our products infringe on intellectual property rights. In some cases, we may be required or may choose to indemnify our customers for
the cost of any such claim. These types of claims could harm our customer relationships. Any infringement, legal proceedings or claims, whether or not meritorious, could result in costly litigation or arbitration, divert the attention of technical
and management personnel, give rise to indemnification claims, harm our customer relationships and inhibit our ability to sell our products and provide our services. For information about the Korean Matter, see Risk Factor (d). Any adverse outcome
in litigation alleging infringement or misuse could require us to develop non-infringing or other technology or enter into royalty or licensing agreements. If, in such situations, we are unable to obtain licenses on acceptable terms or develop new
technology, we may be prevented from manufacturing or selling products that infringe such intellectual property of a third party. If we are not able to resolve or settle legal proceedings or claims favorably, or in the event of any adverse findings
against us or any of our current or former employees, our business, results of operations and financial condition could be materially and adversely affected and we may suffer harm to our reputation.
(v) Our existing debt agreements could limit our ability to react to changes in the economy or the
industries that we serve. They also impose operating and financial restrictions, which could have a material adverse effect on our business, results of operations, cash flows or financial condition. In addition, we may not be able to generate
sufficient cash from operations to service all of our indebtedness.
As of December 31, 2012, we had an aggregate
of $64.0 million of principal outstanding indebtedness under the Loan Agreements. On December 20, 2012 we notified Discount Bank of our intention to prepay $32.0 million of this amount and on February 11, 2013, we prepaid $32.0 million of the
outstanding principal amount of the Discount Bank Loan (as defined below) (the
Partial Prepayment
), such that the debt outstanding under the Loan Agreements as of such date was $32.0 million. Of that $32.0 million, $12.0 million
is subject to a fixed interest rate (the
Fixed Interest Component
) and $20.0 million is subject to a variable interest rate (the
Variable Interest Component
). In connection with the Partial Prepayment, we and
Discount Bank agreed, during the beginning of 2013, to the allocation of the prepayment between the fixed interest rate and variable interest rate components of the indebtedness, that the remaining principal amount of the Discount Bank Loan and
accrued interest thereon will continue to be repaid quarterly through December 21, 2013, its new maturity date and to the replacement of the floating charge on Orbotech Ltd.s assets as security for our obligations under the Discount Bank
Loan with a Negative Pledge (as defined below) and on February 10, 2013 entered into a letter of agreement with Discount Bank with respect thereto (the
Partial Prepayment Arrangements
). We also have
18
an approved credit risk limit of up to an aggregate amount of $22.0 million granted by Bank Hapoalim Ltd. (
Hapoalim
) to Orbotech Ltd., $20.0 million of which was granted in
connection with performance of certain forward transactions and other related activities and $2.0 million of which was granted in connection with factoring activities (collectively, the
Hapoalim Banking Activities
). As part of the
Partial Prepayment and as a precondition thereto, the floating charges on Orbotech Ltd.s assets as security for our obligations under the Discount Bank Loan and the Hapoalim Banking Activities were replaced with an undertaking by Orbotech
Ltd., among other things, to each of Discount Bank and Hapoalim, not to sell or otherwise dispose of its assets without Discount Banks and Hapoalims consent, other than in the ordinary course of business and not to create charges on its
assets without Discount Banks and Hapoalims consent (collectively, the
Negative Pledges
and each, a
Negative Pledge
). In addition to these limitations, our existing debt agreements contain various
covenants that limit or prohibit our ability, among other things, to: guarantee and/or incur additional indebtedness; make certain loans, acquisitions or investments; sell certain assets, including shares of our subsidiaries; create or incur liens;
consolidate, merge, sell, transfer or otherwise dispose of all or substantially all of our assets; and enter into certain transactions with our affiliates. In addition, under our existing debt agreements, we are subject to various financial
covenants that are tested either quarterly or annually. In the past, including in connection with the Partial Prepayment, we have had to seek amendments to our existing debt agreements designed to facilitate our compliance with the financial
covenants thereunder. There can be no assurance that our lenders will agree to any further amendments to the extent they are required to facilitate such compliance. Failure to comply with the terms of existing debt agreements could result in
acceleration of our obligations thereunder.
Our indebtedness could also have other important consequences with respect to our
ability to manage our business successfully, including: limiting our ability to borrow additional money for our working capital, capital expenditures, debt service requirements, strategic initiatives or other purposes; requiring us to dedicate a
substantial portion of our cash flow to payments on our indebtedness, which would reduce the amount of cash flow available to fund working capital, capital expenditures, product development and other corporate requirements; limiting our flexibility
in planning for, or reacting to, changes in our operations or business; making us more vulnerable to downturns in our business or the economy; restricting us from making strategic acquisitions, introducing new technologies or realizing potential
business opportunities; and disposing of our assets.
Following the Partial Prepayment, our anticipated 2013 debt service
payment obligations are $32.0 million of principal, and based on the applicable interest rate at January 31, 2013, approximately $0.9 million in interest. If we are unable to meet our expenses and debt service and other obligations, we may need
to refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. We may not be able to refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause
us to default on our obligations and impair our liquidity. Our inability to generate sufficient cash flow from operations to satisfy our debt obligations or to refinance our obligations on commercially reasonable terms could have a material adverse
effect on our business, financial condition, results of operations or cash flows.
(w) We are
exposed to foreign currency exchange rate fluctuations which may adversely affect our business and results of operations.
In 2012, 2011 and 2010, approximately 36%, 27% and 28%, respectively, of our revenues, and approximately 44%, 46% and 42%, respectively, of our expenses, were denominated in currencies other than the
United States dollar (the
Dollar
or
$
). Because our financial results are reported in Dollars, fluctuations in exchange rates between the Dollar and non-Dollar currencies may have an adverse effect on our
results of operations. We are primarily exposed to the NIS, the Japanese Yen, the Korean Won, the Euro and the Chinese Renminbi. See Item 11Quantitative and Qualitative Disclosure About Market Riskfor more information. An increase
in the value of a particular currency relative to the Dollar will increase the Dollar reporting value for transactions in such currency, and a decrease in the value of a particular currency relative to the Dollar will decrease the Dollar reporting
value for such transactions. This effect on the Dollar reporting value for transactions is only partially offset by the impact that such fluctuations may have on our non-Dollar costs. We may, from time to time, take various measures designed to
reduce our exposure to these effects, but any such steps may be inadequate to protect us from currency
19
rate fluctuations. Failure to protect adequately against currency rate fluctuations could have a material adverse effect on our financial condition and results of operations.
(x) Our cash may be subject to a risk of loss and we may be exposed to fluctuations in the market values of
our portfolio investments and in interest rates.
Our assets include a significant component of cash and a relatively
small component of marketable securities; however, we may in the future increase our investment in marketable securities. We believe that our cash is held in institutions whose credit risk is minimal. Nevertheless, our cash and any marketable
securities that we hold or may acquire in the future may be subject to risks, including the risk of loss or of reduced value or liquidity, particularly in light of the increased volatility and worldwide pressures in the financial and banking
sectors. In the future, should we determine that there is a decline in value of any of our portfolio securities which is other-than-temporary in nature, this would result in a loss being recognized in our consolidated statements of operations.
(y) Changes in accounting standards or practices or in our effective tax rates can have a
significant effect on our reported results.
We prepare our financial statements to conform to U.S. GAAP, except as
otherwise described therein. From time to time, recognized authoritative bodies, including the Financial Accounting Standards Board of the United States and the SEC, issue new and/or revised accounting standards or guidance. Changes to existing
standards or the questioning of current practices may adversely or significantly affect the way in which we record and report our operating results, cash flows and financial position. In 2013, we will implement, with retroactive effect, a change in
the way we account for Frontline due to a change in Israeli GAAP. As a result of this accounting change, the financial statements included our annual reports on Form 20-F will change in future periods. For more information, see
Item 5Operating and Financial Review and ProspectsBasis of Presentation.
In addition, our effective tax rate
is influenced by a number of factors, including shifts in the mix of pre-tax profits and losses by tax jurisdiction, our ability to use tax credits, changes in tax laws or related interpretations in the jurisdictions in which we operate and tax
assessments resulting from income tax audits. We are routinely subject to tax audits in various jurisdictions. Although we regularly assess the likely outcomes of such audits in order to determine the appropriateness of our tax provisions, there can
be no assurance that we will predict the outcomes of these audits with accuracy, and the actual outcomes of these audits could have a material impact on our net income or financial condition.
There can be no assurance that the reduction in net income and earnings per share (or increase in net loss or loss per share) arising
from the adoption of such financial accounting standards or from changes in our effective tax rates in the future will not adversely affect our results of operations, cash flows or financial position, the market price of the Ordinary Shares or the
cost to us of raising capital.
(z) We have been and may in the future be subject to adverse
claims from our employees, customers and their employees as a result of the complex mechanical nature of some of our products.
Some of our products are complex machines requiring appropriate procedures and care to be taken in their handling, installation and use. As a result, we may face exposure relating to incidents involving
their improper handling, installation or use. For example, in November 2010, an accident occurred at a facility of one of our customers in Korea in which a third party worker was killed. This resulted in a criminal investigation which was concluded
in 2011 without any charges against Orbotech; and a settlement with the deceaseds family, a substantial portion of which was covered by insurance. Incidents of this type could occur again, and could result in criminal investigations or civil
actions which may entail criminal penalties and/or substantial damages awards against us. An unfavorable outcome in litigation with respect to any such matters may cause our profitability, business, financial condition and reputation to decline.
20
Item 4.
|
Information on the Company
|
4.A History and Development of the Company
(a) Corporate History
Orbotech Ltd. was incorporated in Israel, as a company limited by shares, on February 8, 1981 under the name Optrotech Ltd. pursuant to the provisions of the then current Israeli
Companies Ordinance. The legislative framework within which Orbotech Ltd. and its Israeli subsidiaries now operate is the Israeli Companies Law, 1999, as amended (the
Companies Law
), which originally became effective on
February 1, 2000, and the Israeli Companies Ordinance (New Version) 1983, as amended (the
Companies Ordinance
). The Ordinary Shares are listed on the NASDAQ Global Select Market (
Nasdaq
) and are traded
under the symbol ORBK.
Effective as of October 27, 1992, the Company acquired all the ordinary shares of Orbot Systems
Ltd. (
Orbot
), a private Israeli company which was engaged primarily in the design, development, manufacture and marketing of AOI systems for use in the manufacture of PCBs, and subsequently merged with Orbot, with Orbotech Ltd. as
the surviving entity (the
Merger
). In connection with the Merger, the Company changed its name to Orbotech Ltd. on October 27, 1992. The Merger was approved by the Tel Aviv-Jaffa District Court effective as of January 1,
1993.
(b) Major Business Developments
The Companys business initially centered upon the design, development, manufacture, marketing and service of AOI systems and imaging
solutions for use in the manufacture of PCBs, and since the Merger the Company has been a leader in providing such systems.
Since 1991, the Company has also been engaged, and subsequently became a leader, in the design, development, manufacture, marketing and
service of AOI systems for use in the manufacture of FPDs.
Since 1995, the Company has, through Orbograph, developed and
marketed character recognition solutions to banks, financial and other payment processing institutions, and has also developed a proprietary technology for web-based, location-independent data entry for use, among other things, in check and forms
processing. Since 2011, the Company has also been engaged in the business of healthcare revenue cycle management. For further information on character recognition and healthcare revenue cycle management solutions, see Item 4Information on
the CompanyBusiness OverviewOur Applications and ProductsRecognition Solutions.
In 1996, the Company
commenced the development of laser-based direct imaging technologies. For further information on laser-based direct imaging, see Item 4Information on the CompanyBusiness OverviewOur Applications and ProductsOur PCB and
other ECM Applications and Products.
In 1997, the Company commenced the design, development, manufacture and marketing of AOI
systems for assembled (as distinct from bare) PCBs, which are PCBs on which the electronic components needed to perform the specified tasks have been mounted. During 2008, the Company decided to phase out its assembled PCB
business and, accordingly, commencing from the beginning of 2009, the Company ceased to develop and market assembled PCB equipment. During 2009, the Company consummated an agreement with Orpro Services s.r.l. (
Orpro
) of Italy for
the sale of its assembled PCB business in Europe and the Americas and, in 2012, Orpro agreed to purchase all of the Companys remaining assembled PCB inventory.
In 1998, Orbotech Ltd. entered into an agreement with Valor Computerized Systems Ltd. (which, following an acquisition, was renamed Mentor Graphics Development Services (Israel) Ltd.)
(
Mentor
), an Israeli corporation, for the formation of Frontline, a joint venture with respect to CAM software for PCB fabrication applications. Frontline is owned equally by Orbotech Ltd. and Mentor and combines the former CAM
operations
21
of Orbotech Ltd. and Mentor. See Item 4Information on the CompanyBusiness OverviewOur Applications and ProductsOur PCB and other ECM Applications and Products. The
Companys interest in Frontline is presented in the Financial Statements using the proportionate method of consolidation; however, commencing from the first quarter of 2013, the Company will account for its interest in Frontline using the
equity method. For further information, see Item 5Operating and Financial Review and ProspectsBasis of Presentation and Note 2a to the Financial Statements.
In 1999, the Company acquired all the outstanding shares of KLA Acrotec Co. Ltd., a Japanese company then engaged in the design, development, manufacture and marketing of FPD-AOI systems. For further
information on FPDs, see Item 4Information on the CompanyBusiness OverviewOur Applications and ProductsOur FPD Applications and Products.
In 2005, OMS acquired all the assets of Imarad Imaging Systems Ltd., a then privately-held Israeli company that developed a technology to manufacture high performance, solid state cadmium zinc telluride
(
CZT
) gamma radiation detectors and in 2007 the Company acquired 3D Danish Diagnostic Development A/S (which was subsequently re-named OMD), a then privately-held Danish company engaged in the development, manufacture and
sale of gamma cameras for use in nuclear cardiac imaging. In February 2011, the Company sold the assets of OMS to a subsidiary of General Electric Company (
GE
); and in May 2011, the management of OMD acquired OMD from the Company.
As a result, OMS and OMD were classified as discontinued operations and certain financial data provided in this Annual Report and the Financial Statements give effect to this. For further information, see Note 2b to the Financial Statements.
In 2007, the Company acquired New System s.r.l. (
New System
), a privately-held Italian company engaged in
the design, development, manufacture and marketing of PCB inkjet legend digital printers. For further information on digital printers, see Item 4Information on the CompanyBusiness OverviewOur Applications and ProductsOur
PCB and other ECM Applications and Products.
In 2008, the Company acquired PDI, a leading provider of test and repair systems
for the FPD industry, and has since been a leader in the design, development, manufacture, marketing and service of test and repair systems for use in the manufacture of FPDs. For further information on test and repair systems for FPDs, see
Item 4Information on the CompanyBusiness OverviewOur Applications and ProductsOur FPD Applications and Products.
As part of the PDI Acquisition, the Company acquired an interest in certain research and development activity in the crystalline silicon photovoltaic manufacturing processes for the solar energy industry.
In 2009, OLTS was established as a limited liability company for the purpose of pursuing the Companys interest in this project. OLTS is held jointly by the Company and the two developers of the technology. For further information on
crystalline silicon photovoltaic manufacturing processes for the solar energy industry, see Item 4Information on the CompanyBusiness OverviewOur Applications and ProductsSolar Photovoltaic Manufacturing.
(c) Recent Major Capital Expenditures
Other than capital expenditures of the types and consistent with the amounts described below, there are no significant capital
expenditures in progress by the Company.
During the period from January 1, 2012 to December 31, 2012, the
Companys non-acquisition related capital expenditures totaled approximately $9.6 million (compared to $7.6 million during 2011 and $6.8 million during 2010), of which approximately $4.6 million (compared to $3.9 million during 2011 and $3.3
million during 2010) was expended at or upon the Companys facilities in Yavne, Israel, and approximately $5.0 million (compared to $3.7 million during 2011 and $3.5 million during 2010) was expended upon various facilities of the
Companys subsidiaries outside Israel. Of these expenditures, approximately $6.5 million during 2012 (compared to $3.8 million during 2011 and $2.9 million during 2010) was for capital equipment and leasehold
22
improvements and the balance of approximately $3.1 million (compared to $3.8 million during 2011 and $3.9 million during 2010) was for other capital expenditures. For information with respect to
significant capital divestitures made or committed to by the Company since January 1, 2008, see Major Business Developments.
All of the above non-acquisition related capital expenditures were paid from internally generated funds. These amounts do not include non-acquisition related capital expenditures by entities acquired by
the Company prior to their acquisition dates.
(d) Miscellaneous
The Companys corporate headquarters, executive and registered offices and principal research and development, engineering and
manufacturing facilities are located at Sanhedrin Boulevard, North Industrial Zone, Yavne, Israel. The Companys postal address and its telephone and facsimile numbers at that facility are P. O. Box 215, Yavne 81101, Israel, +972-8-9423533
and +972-8-9438769, respectively. The Companys internet address is: www.orbotech.com (the
Corporate Website
), where its annual reports on Form 20-F, current reports on Form 6-K and certain other SEC filings made by, or which
are relevant to, the Company may be accessed through the SEC Filings hyperlink contained in the Investors section. The Corporate Website is not incorporated by reference in this Annual Report and is included as an inactive
textual reference only.
The Companys agent for SEC matters in the United States is its wholly-owned subsidiary,
Orbotech, Inc., the headquarters of which are located at 44 Manning Road, Billerica, Massachusetts 01821; attention: Margaret Duncan.
There have been no public takeover offers by third parties with respect to the Company or by the Company during the last or current fiscal year.
4.B Business Overview
(a) General
Company Overview
We are a leading global provider of yield-enhancing and production solutions for PCBs and LCDs and provide similar
solutions to manufacturers of other electronic components, such as touch screens and interconnect (
IC
) substrates. We design, develop, manufacture and market inspection, test, repair and production solutions, with PCB and FPD
manufacturers as our main customers. For over 30 years, we have built our global installed base of systems at customers which include leading PCB, as well as virtually all FPD, manufacturers, for whom our solutions are designed to optimize
production yields, improve throughput and increase production process cost effectiveness.
We offer a technologically advanced
end-to-end solutions portfolio to address yield management at various manufacturing stages for PCBs, FPDs and other electronic components. Our products include AOI, AOR, laser direct imaging (
LDI
), digital printing, laser
drilling, laser plotters, CAM and engineering solutions for PCB and other electronics component manufacturing (
ECM
), as well as AOI, test, repair and process monitoring systems for FPD manufacturing. We also develop and market
character recognition solutions and services, primarily to banks, financial and other payment processing institutions, for use in check and healthcare payment processing. Additionally, we are engaged in the research and development of products for
the deposition of anti-reflective coating on crystalline silicon photovoltaic wafers for solar energy panels. Approximately 72%, 24% and 4%, respectively, of our 2012 revenues was derived from the sale of products and services in our PCB, FPD and
character recognition businesses.
Consumer end markets have been experiencing a fundamental shift in technology complexity,
driven primarily by the proliferation of high-end mobile devices such as smartphones and tablets, as well as by the
23
demand for large-size, internet enabled, three-dimensional LCD televisions. This shift has emphasized the importance of production quality because production is more challenging and there are
increased costs of lower yields compared to less technologically advanced devices.
We sell our solutions to PCB manufacturers
globally, including first-tier electronics companies and, as of December 31, 2012, we had an installed base of over 10,500 PCB systems. Our FPD manufacturing customers include the major LCD manufacturers and, as of December 31, 2012, we
had an installed base of over 1,700 FPD systems. Most of our PCB customers enter into service and maintenance agreements with us after the expiration of the warranty period with respect to our installed base of PCB products. In addition, we provide
utilization-based service arrangements for our FPD customers. We believe our proximity to our customers, together with our large installed base of products and ongoing service arrangements, enable us to understand and address our customers
rapidly changing technological and capacity needs. Approximately 38% of our 2012 revenues was derived from the service and support of our installed base of products.
We have long maintained our leadership position, with a specific focus on the high-end industry segments. For over 30 years, we believe we have consistently been the first to market in most key
technological cycles in the industries served by our products by continually investing in research and development and by working with our customers to understand their current and anticipated technological requirements. As of December 31,
2012, our intellectual property portfolio consisted of approximately 482 patents and patent applications worldwide. Our yield-enhancing and production solutions are designed to increase our customers production yields and significantly reduce
their costs. We have also established a strong global footprint, which enables us to be close to our key customers to provide them with real-time support.
We are in relatively close proximity to our customers, which allows us to provide them with ongoing services and support on a real-time basis. Through these services and our in-person contacts with our
customers, we believe we are able to hone our understanding of our customers current and future production requirements. We are then able to design solutions optimized to their needs and that are becoming an increasingly important part of
their product design and manufacturing processes.
Industry Trends
We believe that the current trends in mobile devices such as smartphones and tablets will drive the need for production, inspection, test
and repair solutions that are able to address the cutting edge technology embedded in these types of electronic products. We believe that strong growth in key consumer end markets will drive the need for more advanced manufacturing combined with
yield management capabilities to contain costs and that this need will lead manufacturers to make significant capital investments over time. We believe the potential key growth elements are:
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|
|
increased demand for smartphones, tablets, e-readers and other mobile connected devices that require complex and high performance components; and
|
|
|
|
increased demand for high definition, more power efficient, low cost FPDs across a number of sectors, such as consumer electronics, communications,
healthcare, government and industrial applications.
|
While manufacturers of PCBs, FPDs and other electronic
components create different products for diverse end-markets, they share similar production challenges in an increasingly competitive environment. They continuously seek to increase yields and enhance the efficiency of their manufacturing processes,
including by improving their manufacturing, inspection, testing and repair capabilities.
Printed Circuit Boards and Other
Electronic Components Manufacturing
Due to the proliferation of smartphones, tablets and other mobile devices, our
customers have faced increased demand for more complex, multilayer and high density PCBs. For such complex boards, production
24
yield drops dramatically as the number of likely defects increases, due ultimately to the increased sophistication, miniaturization and quality of these consumer end products.
The success of smaller and more sophisticated electronic devices, such as smartphones and tablets has been a key driver of this growth
for the past years, and is projected to drive growth in the future as well.
The Company has adapted its existing AOI, AOR,
direct imaging and production technologies and solutions for use by manufacturers of other electronic components, including manufacturers of touch screen modules, integrated circuit assemblers and photo chemical millers.
Flat Panel Displays
The demand for high definition and zero defect televisions requires FPD manufacturers to develop more complex panel designs and to implement tighter production process controls. The inspection of LCDs
poses distinct technological challenges due to the transparent materials used for some conductors and insulators, their multilayered structure and high-density features and the fine nature of potential defects. LCD inspection, test and repair
processes must also match the high production speeds of LCD facilities, a task made more challenging by the fact that LCD manufacturers have been utilizing high resolution for new complex displays.
A significant part of FPD manufacturing is expected to continue migrating to China, a move undertaken by PCB manufacturers over ten years
ago, and both industries are increasing production capacity in that country. We have an established commitment to the region, with more than 15 years of operating history in China, where we maintain an extensive infrastructure comprised of a large
installed base, a widespread customer support network and strong relationships with local manufacturers in the region.
Our
broad range of advanced and integrated inspection, test and repair technologies, applications insights and manufacturing capabilities provides our customers with differentiated, and in some cases, what we believe are must have solutions
that serve their critical requirements. We estimate that in a typical FPD fabrication plant, costing between $2 and $4 billion and taking about a year to construct, approximately 2.5% of the construction costs are allocated to yield-enhancement
products of the type we sell.
As of December 31, 2012, the Company had two reportable segments: Production Solutions for
the Electronics Industry, which, in 2012, accounted for approximately 96% of the Companys revenues; and Recognition Software, which, in 2012, accounted for approximately 4% of the Companys revenues. Our Productions Solutions for the
Electronics Industry segment includes our PCB and electronic components manufacturing and FPD manufacturing business because they share certain fundamental characteristics. In addition to its two reportable segments, certain research and development
initiatives concerning various products not related to the Companys two reportable segments are included in the Financial Statements under Other. See Note 13a to the Financial Statements for a description of each reportable segment
and information as to segment revenues, operating income or loss, assets and related data.
(b) Strengths and Strategies
We believe our key competitive strengths include:
Leadership position.
We have the largest installed base in our key PCB and FPD products and our installed base continues to grow. Our industry-leading position is further driven
by rapid growth in the high-end elements of the electronics industry, where we continue to focus our efforts. Given the embedded nature of our solutions in the manufacturing of our customers products, we believe that our advanced technology,
high performance, broad solutions portfolio and global footprint, as well as the lack of other available end-to-end solutions, provides us with a strong competitive advantage. Our large installed base of products provides us with a stable source of
revenue from services we provide to our customers. These services also allow us to enhance our customer relationships and provide us with an opportunity to understand our customers existing and anticipated technological and capacity needs on a
real-time basis.
25
Technological innovation.
For over 30 years, we believe we
have consistently been first to market in most key technological cycles by continually investing in research and development. The majority of our 2012 annual revenues from product sales was derived from products introduced in the previous two to
three years, which we believe reflects the success of our ongoing efforts to innovate. Our technological creativity enables us to sustain our strong competitive position and remain at the forefront of each industry we serve.
Industry-leading solution portfolio.
We believe that our broad solution portfolio is unmatched in terms of
performance, technical capability, defect detection, accuracy, speed and quality assurance, allowing for increased production yields and significant cost-savings. We are the only provider of certain of the solutions that we offer and we believe that
we have the broadest end-to-end yield management solutions portfolio for both PCB and FPD manufacturing.
Global
presence with strong foothold in attractive markets.
We have established a strong global footprint with a solid customer base, which includes most PCB and virtually all FPD manufacturers in the world. Our global organizational
infrastructure includes local management, strong customer service support, sales, operations and engineering, particularly in China, and enables us to maintain ongoing contact with our key customers.
The key elements of our growth strategy are to:
Maintain our technological leadership.
We will continue to invest to preserve our technological leadership, anticipate technological trends and provide innovative solutions
through continued research and development through economic cycles. We believe our geographic proximity and our ongoing contact with our customers through our service organization enhances our ability to maintain our technological leadership because
of our ability to understand customers technological needs on a real-time basis.
Enhance and extend our existing
product offering.
We will enhance our current product offerings and develop new generations of cutting-edge solutions in order to meet the existing and anticipated needs of our customers as their products and manufacturing
processes become increasingly complex.
Expand Use of Our Core Technologies.
We plan to utilize our
core competencies in machine vision, electro-optics, precision mechanics, artificial intelligence and imaging technologies, to reach additional customers in existing and new industries and expand into new applications. For example, the Company has
adapted certain of its existing AOI, AOR, direct imaging and production technologies and solutions for use by manufacturers of other electronic components, such as touch screens manufacturers, integrated circuit assemblers and photo chemical
millers.
Leverage our global footprint.
We believe our extensive worldwide marketing and
distribution organization and customer support network will allow us to capture an increasing share of attractive regional markets. As of December 31, 2012, we had approximately 160 employees dedicated to our global sales and marketing efforts
and 560 employees providing customer support and services.
Pursue strategic initiatives including complementary
acquisitions.
We regularly evaluate strategic initiatives to enhance value, including opportunities to expand our technological base and diversify into new growth areas through acquisitions, joint ventures and investments. We
intend to continue to pursue these initiatives to enhance value and expand our product offerings to our existing PCB and FPD customers, enter new industries and broaden and develop our character recognition, artificial intelligence and related forms
processing software platform.
(c) Our Technologies
We believe we have a unique combination of proprietary technologies, such as image acquisition, precision mechanics and motion control,
high resolution printing, laser machining, algorithms and image processing and
26
system integration capabilities by which we provide our customers with differentiated solutions serving their critical requirements. Our solutions are designed to enable our customers to realize
increased yields and drive down production costs.
Our AOI systems use our proprietary machine vision, electro-optics,
precision mechanics, artificial intelligence and imaging technologies to detect automatically flaws and defects in products being manufactured by our PCB, other electronic components and FPD customers. Some of our AOI systems incorporate several
parallel methods of inspection, utilizing pre-programmed algorithms and data stored in a computer-aided design/computer-aided manufacture (
CAD/CAM
) database to maximize the probability of defect detection and minimize the rate of
false calls. The proprietary structure of the electronic logic unit enables parallel processing, a requirement for performing defect detection tasks in real time, which, in turn, is one of the key factors in attaining the high throughput achieved by
our systems.
Our laser-based direct imaging technology enables the transfer of digital image data directly from the
electronic media on to the photoresist which translates into fewer manufacturing steps, lower material costs and greater accuracy. Our laser-based direct imaging technology enables the manufacture of higher density, more sophisticated PCBs, with
significantly higher yields and reduced manufacturing costs, through the elimination of artwork costs and the scrap created by traditional contact printing.
Our repair products employ advanced optics systems and image acquisition and processing techniques, combined with high-performance, high-power laser control, to achieve highly accurate, repeatable and
reliable results for advanced PCB, other electronic component and FPD applications, which cannot be replicated in manual repair processes.
Our ultraviolet (
UV
) laser drilling systems are used to achieve the small holes or vias required for the most advanced mobile phone boards and IC substrates at a quality
superior to that achievable by traditional mechanical drills or CO
2
lasers. A typical PCB or IC substrate panel can include hundreds of thousands of vias. Our UV laser drilling systems enable PCB and IC substrate manufacturers to drill several thousands of vias per
second with very high levels of position accuracy and drilling quality, through a wide variety of laminate and metal layers, in turn, enabling them to keep pace with the most up-to-date technology trends in PCB and IC substrate manufacturing.
Our FPD test systems utilize advanced digital imaging technology which enables LCD manufacturers to conduct electrical
testing of glass panels, based on examination and testing of their functionality, to identify and repair defects during the various stages of the cell and array manufacturing process thereby allowing manufacturers to reduce overall cost of materials
and improve throughput significantly.
Our CAM and engineering solutions facilitate automation and integration of the design,
tooling, production data and inspection needs associated with PCB production. These software solutions streamline the transfer of complex designs from the designer of the PCB to the production floor and enable system operators to perform a wide
range of data-related operations.
Our recognition software solutions use proprietary image processing, character recognition,
web-based work flow algorithms and other business rules to enable banks, financial and other payment processing institutions and healthcare providers to automate their check processing and healthcare revenue cycle operations, thereby reducing manual
labor costs and increasing their overall cost effectiveness. We have also developed a proprietary technology for web-based, location-independent data entry for use, among other things, in check and forms processing. We believe we are a leading
provider of automatic check reading software solutions.
(d) Our Industry
Printed Circuit Boards and Other Electronic Components
Virtually all electronic equipment uses PCBs, which are the basic interconnect platforms for the electronic components that comprise all electronic equipment. PCBs contain the electronic circuitry
required to interconnect
27
the components which are subsequently mounted on them and which, when operating together, perform a specified function. An assembly of one or more mounted PCBs working together forms an essential
part of most electronic products. These include computers, hand-held electronic devices such as cellular telephones, tablets and electronic book readers, consumer electronics, automotive equipment, telecommunications equipment, industrial and
medical equipment and military and aerospace applications.
PCBs are manufactured through a series of complex steps.
Generally, production starts with a sheet of epoxy-fiberglass (or other material with electric insulating qualities) laminated with a conducting material such as copper. The sheet is coated with a thin layer of light-sensitive material
(photoresist). A transparent film containing the desired circuitry pattern (production phototool), normally produced by a photoplotter connected to a CAD/CAM data base, is then laid on the photoresist. The sheet is then
exposed to light, which copies the conductor pattern from the production phototool into the photoresist. Alternatively, the conductor pattern may be transferred directly into the photoresist without the use of a production phototool using direct
imaging technologies. Subsequent development of the photoresist and a chemical etching process removes excess conducting material and leaves the desired conducting metal pattern printed on the layer.
Although PCBs may be single-sided or double-sided, the largest segment of the PCB industry consists of multilayer boards. In multilayer
board production several such layers with appropriate copper patterns (inner layers) are stacked up in registration and laminated together. Thereafter, holes are drilled through the stack in a specific pattern, using a mechanical or
laser driller, and plated with a conductive metal. Further steps of patterning the outermost layers, protecting the functional areas with a more inert conductor and the rest of the surface with insulating material (solder mask) and
marking the board with a screen printed or ink jetted legend result in the completed multilayer board. Still more advanced PCBs, known as build-up boards, are produced using high density interconnect (
HDI
) technology.
This involves adding thin additional electrical insulating layers to the top and bottom surface of the board, drilling miniature vias through each such layer using a laser drilling machine and then metalizing and patterning the surface as before.
This process may be repeated several times resulting in multiple build up layers on each side of the PCB.
As PCBs are
susceptible to various defects (electrical shorts, open circuits and insufficient or off-measure conductor widths), inspection is required throughout PCB production to identify such defects, which are then repaired, if possible. Early detection of
these defects, particularly in the case of multilayered boards where PCB layers are subsequently embedded inside the finished board, increases the possibility of successful repair and reduces the number of unusable boards, thereby reducing the
overall cost to the manufacturer.
The Companys ECM operations consist of the adaptation by the Company of its existing
AOI, AOR, direct imaging and production technologies and solutions for use by manufacturers of other electronic components such as manufacturers of touch screen modules, integrated circuit assemblers, who provide a service of connecting a
semiconductor die onto a substrate, wafer level packagers (which also form part of the integrated circuit assembly process) and photo chemical millers, who manufacture fine metal components used in various electronic products and components.
Flat Panel Displays
FPDs, which include LCDs, plasma displays, organic light-emitting diode (
OLED
) displays and other types of displays, are presently used for laptop and desktop computers, tablets,
televisions, mobile phones, public displays, car navigation systems, digital and video cameras and a variety of other devices for technical, medical, military, aerospace and consumer electronics applications.
The most common FPD technology currently in use is the thin film transistor (
TFT
) LCD (which are also known as
active matrix LCDs), and we believe that this technology will maintain its position of major importance in the foreseeable future. TFT LCDs enable the production of high resolution, high performance displays. Recent trends suggest that
promising developments in OLED technology may in the future lead to a replacement of TFT-LCDs by OLED displays, which are capable of producing faster response time and brighter
28
colors in consumer devices such as televisions, smartphones and tablets and offer potential savings in material costs to manufacturers and lower energy costs to consumers.
LCDs are susceptible to various defects, many of which result from the deposition, photolithography and etching processes used in
production. Detection and repair of these defects during the production process allows manufacturers to improve monitoring of their production processes, avoid the expense of further costly materials and improve their yields substantially.
29
(e) Our Applications and Products
We design, develop, manufacture and sell AOI, repair, production and imaging products for use in the manufacture of PCBs and other
electronic components, AOI, test and repair systems for use in the manufacture of FPDs and automatic check reading and healthcare payments processing products enabled through recognition software; and are engaged in the research, development and
marketing of products for the solar energy industry. We also market CAM and engineering solutions for PCB production. The following table provides an overview of our target industries and our key applications and products offerings:
|
|
|
|
|
Our Target
Industries
|
|
Our Applications
|
|
Our Product
Offerings
|
PCBs
|
|
AOI
|
|
Discovery II
Ultra Discovery
Fusion
Ultra Fusion
|
|
AOR
|
|
PerFix
Ultra PerFix
|
|
Imaging
|
|
|
|
Plotting
|
|
LP 9
|
|
Direct Imaging
|
|
Paragon
Paragon Ultra
Paragon-Xpress
|
|
Digital Printing
|
|
Sprint
|
|
Laser Drilling
|
|
Emerald
|
|
Pre-Production
|
|
|
|
CAM
|
|
InCAM
Genesis 2000
GenFlex
|
|
Engineering
|
|
InPlan
InStack
InPlan-Flex
InCoupon
InSolver
InSight PCB
|
Other Electronics
Components
|
|
AOI
|
|
AOI 100
|
|
AOR
|
|
AOR 100
|
|
Direct Imaging
|
|
LDI 150
LDI 1100
|
FPDs
|
|
AOI
|
|
EVision
XVision
SuperVision
FPI-6000 Series
|
|
Test
|
|
ArrayChecker
|
|
Repair
|
|
ArraySaver
|
|
Yield Management Systems
|
|
EYES-2020
|
Recognition Solutions
|
|
Check Processing
|
|
Accura XV
Apex
Automation Services
Sereno
|
|
Healthcare Revenue Cycle Management
|
|
P2Post
E2Post
|
Solar Photovoltaic
|
|
Anti-Reflective Coating
|
|
Aurora PECVD
|
30
Our PCB and other ECM Applications and Products
Our PCB-AOI products are of particular value to manufacturers of fine-line, advanced PCBs (where defects are especially difficult to
detect) and of multilayered PCBs (where the cost of undetected defects is very high) because they enable manufacturers to trace the source of defects in their manufacturing processes and increase their yield of usable finished products. Our PCB-AOR
products are capable of repairing PCBs by removing excess copper from places which cannot be accessed by the use of a knife or other manual instrument, such as shorts on materials that are too thin to be treated by knife repair or in spaces between
lines that are virtually invisible to the human eye. In addition, the capability of our digital production solutions, such as LDI, digital printing and UV laser drilling, to adapt production data and thereby compensate for random production process
inaccuracies enables manufacturers to improve their yield in the production of these complex boards. Our products for other ECM essentially perform similar functions as our AOI, AOR and direct imaging products, but on different materials and for
different applications.
In 2012, our PCB product lines, including those for other ECM, accounted for approximately $289.2
million of revenues (including approximately $107.8 million related to service and support of those products), representing approximately 72% of our revenues. This compared with approximately $319.7 million of revenues (including approximately $94.6
million related to service and support of those products), representing approximately 57% of our revenues, in 2011, and approximately $250.1 million of revenues (including approximately $77.8 million related to service and support of those
products), representing approximately 47% of our revenues, in 2010.
(i) PCB-AOI
PCB-AOI systems are computerized, electro-optical systems for inspection and identification of defects in the artwork design master,
production phototools and PCBs at various stages of production. Our PCB-AOI systems are designed for easy integration into the production processes of most PCB manufacturing facilities, as well as for flexibility, easy upgradeability, operational
simplicity and ease of maintenance and do not generally require highly specialized skills or experience to operate. Our PCB-AOI offering includes the Fusion series and the Discovery II series of AOI systems. The Fusion can handle resolutions down to
25 microns at very high throughput, and provides enhanced detection on semi transparent and multi-colored substrates.
(ii)
AOR Systems and Verification and Repair Stations
AOR systems are designed to address certain limitations inherent in the
manual repair of PCBs, by enabling the automatic repair of defects known as shorts and excess copper, thereby minimizing the scrapping of unusable panels during the manufacturing process and enabling a significant reduction
in manufacturers overall manufacturing costs. Our AOR products employ advanced image acquisition and image processing techniques, combined with high-performance laser control, to ablate the excess conductor material, thereby achieving highly
accurate, repeatable and reliable results, particularly for advanced PCB applications, which cannot be replicated in manual repair processes. The PerFix series of AOR systems are the first to offer an automated repair solution for shorts
and excess copper defects in PCBs.
Our offering of verification and repair stations is comprised of the
VeriSmart, the VeriWide and VeriFine and the Ultra VeriFine-A. Each of these models provides the operator with a crisp and magnified color image of the possible defect essential for verification of high-density PCBs.
(iii) Imaging Solutions
Laser plotters provide PCB manufacturers with the capability to transform, within a few minutes, circuit designs on electronic media or design data retrieved from CAM databases into accurate, reliable
artwork, or production phototools. Our latest generation of high performance, automated laser plotters is the LP-9 series.
Laser-based direct imaging eliminates the need for exposing photoresist through a production phototool by enabling the transfer of digital image data directly from the electronic media on to the
photoresist. This translates
31
into fewer manufacturing steps, lower material costs and greater accuracy and layer-to-layer registration. Laser-based direct imaging technology enables the manufacture of higher density, more
complex PCBs, with significantly higher yields and reduced manufacturing costs, through the elimination of artwork costs and the scrap created by contact printing. Our advanced Paragon systems are industry-leading, high accuracy, power efficient,
fast throughput LDI solutions.
Digital printing refers to a particular stage in the PCB manufacturing process during which
characters and other non-functional patterns (legends) are printed on the PCB under production. Using a digital, non-contact, inkjet-based printing technology, digital printers release droplets of ink from a small aperture directly to a
specified position on a given media to create the required image. The Sprint series systems provide substantial cost savings for PCB manufacturers by reducing significantly the legend printing cycle time and enabling functionality that cannot be
achieved through conventional legend printing processes, such as silk screen.
(iv) Laser drilling
UV laser drilling is used to generate the interconnection between different layers in HDI and flexible PCBs and
interconnect substrates. UV laser drilling is capable of achieving the small vias required for leading edge mobile phone boards and the most advanced IC substrates at a quality superior to that achievable by traditional mechanical drills or
CO
2
lasers. The Emerald high performance UV laser drilling
solution for IC substrates and HDI applications activates multiple beams and scanners in parallel to achieve very high drilling speed, accuracy and quality.
(v) Pre-Production
CAM and engineering solutions
are designed for use in the PCB pre-production phase to facilitate automation and integration of the sales, tooling, production data and inspection needs associated with PCB production. The Frontline products we market include CAM and engineering
software solutions, which streamline the transfer of complex designs from the designer of the PCB to the production floor and enable system operators to perform a wide range of data-related operations. Our CAM and engineering product lines include:
InCAM, Genesis 2000, GenFlex InPlan, InPlanFlex, InStack, InSolver, InSight PCB.
(vi) ECM-AOI
Systems
In 2011, the Company launched the AOI 100, which is designed to inspect the silver lines on touch screen panels.
The AOI 100 is based on the Discovery PCB-AOI product family, adapted to the specific needs of touch screen panel manufacturing.
(vii) ECM-AOR Systems
In 2011, the Company launched
the AOR 100, which is designed to repair defects in the silver lines on touch screen panels. The AOR 100 is based on the PerFix PCB-AOR product family, adapted to the specific needs of touch screen panel manufacturing.
(viii) ECM-Imaging Solutions
In 2011, the Company launched two LDI solutions, the LDI 150 and the LDI 1100, which perform the imaging functions required in the lithographic processes of touch screen manufacturing. The LDI 150 and the
LDI 1100 are based on the Paragon LDI product family, adapted to the specific needs of touch screen panel manufacturing.
Our FPD
Applications and Products
The FPD-AOI and test systems manufactured and marketed by the Company identify and classify
defects that may impact the performance of the display panel; and the repair systems manufactured and marketed by the
32
Company are designed to enable customers to repair defects, thereby further improving manufacturers yield of non-defective or higher grade (quality) displays.
In 2012, our FPD product lines accounted for approximately $97.2 million of revenues (including approximately $40.2 million related to
service and support of such products), representing approximately 24% of our revenues. This compared with approximately $232.9 million of revenues (including approximately $40.9 million related to service and support of such products),
representing approximately 41% of our revenues, in 2011, and approximately $265.5 million of revenues (including approximately $36.0 million related to service and support of those products), representing approximately 50% of our revenues, in 2010.
(i) FPD-AOI and Value Added Applications
We offer a variety of inline and offline FPD-AOI systems that includes the EVision Series, the XVision Series, the SuperVision Series and
the FPI-6000 Series. The EVision series offers optimized glass handling, rapid image capture capabilities and compact footprint for seventh and eighth generation glass substrates. The EVision was developed to meet both the detection sensitivity and
throughput requirements of the industrys leading seventh and eighth generation glass manufacturers; with inline models designed to be integrated into process equipment to provide immediate feedback on process failures. The XVision systems,
which support tenth generation glass sizes, are designed to be integrated into process equipment to provide rapid feedback on process failures. The SuperVision series of FPD-AOI systems supports fourth through eighth generation glass substrates. The
latest models, the SuperVision670HR, the SuperVision870HR and the FPI-6098SHR, address the highly specialized inspection requirements of low temperature poly silicon (
LTPS
) and oxide-TFT backplanes (Indium Gallium Zinc Oxide) for
high-resolution, three dimensional and OLED displays. The FPI-6000 series FPD-AOI systems complement and expand the range of our FPD-AOI systems by employing high resolution optics and specific algorithms to achieve inspection capabilities required
for very intricate mobile devices, thus broadening the scope of inspection solutions that we are able to offer to manufacturers of LCDs intended for use in mobile devices.
In addition, we offer complementary features to our FPD-AOI systems that include: Peripheral Inspection, Advanced Video Classification (
AVC
), Digital Macro (
DM
)
inspection and Critical Dimension and Overlay Measurement (
CDO
). Peripheral Inspection provides full inspection coverage of the non-repetitive pattern of the peripheral area of the panel and features a simple setup. AVC employs
high quality video images to enable the automatic classification of defects identified by our FPD-AOI systems during the scanning process. DM inspection and warning are optional add-on features which obviate the need for manufacturers to purchase a
separate, stand alone macro inspection system. CDO is an optional add-on feature which enables accurate measurement of critical elements on the glass panel, such as conductor widths and layer to layer registration.
(ii) FPD Test
The ArrayChecker test systems detect, locate, quantify and characterize electrical, contamination and other defects in active matrix LCD after array fabrication. These systems use proprietary non-contact
voltage imaging technology to provide a high-resolution voltage map of the entire display and proprietary image analysis software which converts this voltage map into complete pixel defect data. The ArrayChecker test systems determine whether
individual pixels or lines of pixels are functional and also identify more subtle defects such as variations in individual pixel voltage. These defect data files are then used for repair and statistical process control. Our latest model
ArrayCheckers support the advanced small pixel panel designs used for high resolution smartphones and tablets, as well as new OLED panels.
(iii) FPD Repair
The ArraySaver repair systems
utilize multiple wavelength laser technology to repair short defects in FPDs during and after array fabrication. These systems can use defect data files downloaded from any test and inspection
33
systems to position the panel for repair automatically, thereby saving time which would otherwise be spent by operators in locating defects. The repair automation function has been further
upgraded by the introduction of the Parallel Repair System (PRS) which simplifies operator interaction with the system and improves repair tool capacity.
(iv) Yield Management Systems
Our EYES-2020 offers
an enhanced process monitoring system providing effective defect data analysis. It enables accurate process control, virtually in real time, and improves yields by automatically counting, accumulating and analyzing AOI-generated defect data.
We believe that the combination of our AOI, test, repair and EYES-2020 systems allows LCD manufacturers to achieve high
quality, comprehensive and reliable process control.
Recognition Solutions
Through Orbograph, we developed recognition software comprising automatic check processing and healthcare revenue cycle management
services which are marketed to banks, financial and other payment processing institutions and healthcare providers through system integrators and solution providers. Orbograph has also developed a proprietary technology, known as Key-Pay, for
web-based, location-independent data entry for use, among other things, in check and forms processing.
Orbographs
recognition software drives its suite of check processing solutions, which operate by acquiring or capturing the image of a check, identifying the amount as well as other important information which it contains, and converting that image
data into a computer readable, digital number. Orbographs latest check recognition product is Accura XV which is designed to read the numerical characters and alphabetical letters handwritten or printed on checks with read and accuracy rates
exceeding 90% and 99%, respectively. Other check processing products developed and marketed by Orbograph include: OrboCAR Apex, an innovative product based on Orbographs patented Key-Pay technology that provides a highly efficient solution to
check data entry by using a combination of artificial intelligence and human intervention; Automation Services, a unique Software as Service (SaaS) solution for check amount recognition offering banks guaranteed performance with no initial capital
investment; and Sereno, a product that employs proprietary algorithms which utilize recognition and image quality results, as well as verification of the signatures and the check-stock (or check template) and transaction related data
such as amount and serial number, against valid items from a banks profile database, to detect fraudulent checks.
In
2011, through an acquisition, Orbograph added a healthcare revenue cycle management business. Healthcare revenue cycle management solutions enable healthcare providers, financial institutions, service bureaus and medical billers to convert
explanation of benefits forms or electronic data into a variety of post-ready files within the revenue cycle management process, thereby reducing manual labor costs and increasing their overall cost effectiveness.
In 2012, our recognition software product lines accounted for approximately $14.3 million of revenues (including approximately $6.2
million related to service and support of those products), representing approximately 4% of our revenues. This compared with approximately $12.7 million of revenues (including approximately $5.8 million related to service and support of those
products), representing approximately 2% of our revenues, in 2011, and approximately $13.8 million of revenues (including approximately $6.0 million related to service and support of those products), representing approximately 3% of our revenues, in
2010.
Solar Photovoltaic Manufacturing
Through OLTS, we are engaged in the research and development of new products for the deposition of anti-reflective
coating on crystalline silicon photovoltaic wafers for solar energy panels. Anti-reflective coating is a thin film of
SiN
x
which is deposited by a process known as plasma-enhanced
chemical vapor deposition
34
(
PECVD
). This is an efficiency-enhancing technique intended to provide both an effective anti-reflective coating layer used to match refractive indexes and surface passivation.
The process is designed to maximize light absorption in the silicon and perform material passivation, thereby generating higher solar energy to electricity conversion efficiencies and, in turn, reducing the cost per watt of electricity produced by
photovoltaic systems. The system which was developed by OLTS combines the benefits of high efficiency performance of direct PECVD and the productivity of high throughput operation. In December 2012, the Company received notification from the
customer to whom it had delivered the first beta site order for this newly-developed product in mid-2011 that the system has successfully passed all of the customers technical tests and manufacturing qualifications and is deployed in the
customers production facility; however, because the customer retains, for a limited period, the right to return this product, the Company cannot yet recognize revenue from this sale. The Company will continue to develop and market this product
for commercial sales.
(f) Competition
We believe we are the only end-to-end yield management solutions provider to the PCB and FPD industries.
The competitive landscape we face in the PCB industry is highly fragmented. Within each of our product categories, we compete with a
number of small, independent suppliers or small business units of large companies which supply solutions for specific, and in many cases, single applications. Our main competitors in AOI include Camtek, Dainippon Screen, GigaVis and Inspec. Our main
competitors in LDI include ORC Imaging, Fuji Film, Hitachi Via Mechanics and Dainippon Screen. We also face competition in LDI from new entrants such as Maskless Lithography. Our main competitors in UV laser drilling are Hitachi Via Mechanics and
Electro Scientific Industries, Inc. Our main competitor in digital printing is MicroCraft. In both AOI and digital printing we face new competitors, mainly from China, which target the low-end of the industry. We believe that the key competitive
factors in this industry are product quality and reliability, technical expertise and development capability, breadth of product offerings, service capabilities and price.
The competitive landscape we face in the FPD industry is also highly sectionalized and within each of the principal product categories in our FPD business, we may compete with different divisions of
industrial corporations, or with companies who are local providers of yield management solutions to those corporations, including some which are affiliated with certain of our customers. Our main competitors in the FPD industry include HB Technology
Co. Ltd., LG PRI, ADP Engineering Co. Ltd., Applied Materials, Inc. (AKT Display Group), Digital Imaging Technology Co., Ltd., Top Engineering Co. Ltd., Charm Engineering Co. Ltd. and Omron Laserfront Inc. We believe that the key competitive factors
in this industry are technical expertise, product quality, reliability and price.
(g) Product
Research, Development and Intellectual Property
We deploy our core technology platforms across various product
families and applications in order to maximize the impact of our research, development and engineering investments, to increase economies of scale and to apply our technology-specific expertise across multiple consumer end markets.
Our global engineering team of 390 full time scientists and engineers dedicated to product research, development and engineering works
closely with our customers to meet and anticipate their evolving requirements and new product introductions.
We believe that
continued, focused investment in research, development and engineering activities are critical to our future growth and to maintaining our leadership position. We continue to invest in research and development in order to better serve our customers
with advanced yield management solutions. Our research and development investment accounted for approximately 18%, 15% and 15% of our total revenues in 2012, 2011 and 2010, respectively. Our research and development and engineering investments
enable us to consistently provide innovative, first to market and high quality products.
35
We believe that the development and use of our intellectual property is a key
differentiating factor in the marketplace. We protect our proprietary technologies by seeking patents and copyrights, retaining trade secrets and defending, enforcing and utilizing our intellectual property rights, where appropriate. We believe this
strategy allows us to preserve the advantages of our products and technologies, and helps us to improve the return on our investment in research and development. We also benefit from our large intellectual property portfolio, which, as of
January 31, 2013, consisted of approximately 484 United States and non-United States patents and patent applications.
(h) Sales, Marketing and Customers
We market our products and provide customer support through our wholly-owned subsidiaries in the United States, Europe and the Far East,
including Japan. Our subsidiaries employ local marketing, sales and customer support personnel. Worldwide marketing efforts are co-ordinated by the responsible marketing managers, who are based at our headquarters in Israel. Orbograph, utilizing
Orbotech, Inc. as its distributor, markets and sells its check processing products and services, both directly and through system integrators, to banks, financial and other payment processing institutions, principally in North America.
Our sales and marketing strategy focuses on deepening and expanding our relationships with leading PCB, other ECM and FPD customers and
becoming their trusted supplier of yield management solutions. We enjoy longstanding relationships with most of our customers.
We install, service and provide training to customers on all our products. After a minimum amount of site preparation by the customer,
installation of a system can normally be completed at the customers site, either by the Company or third parties, within a relatively short time after delivery. As part of the installation procedure, we provide our customers with system
documentation and basic training in maintenance and application. In addition, for a fee, we offer customers service and maintenance contracts commencing after the expiration of the warranty period. Software, whether contained in optional features or
forming an integral part of the functioning capacity of the system, is licensed. Software updates are typically included in the service fee.
(i) Production and Sources of Supply
The
Company maintains manufacturing facilities in Israel, the United States, Europe and Japan. The Companys manufacturing activities for systems consist primarily of the assembly and testing of components and subassemblies that are acquired from
third party vendors and subcontractors and then integrated into a finished system by the Company. In addition, the Company utilizes contract manufacturing suppliers to build and/or assemble some of its systems, into which certain core components,
such as proprietary software and optical devices, are then integrated by the Company or its selected contract manufacturers.
The Company increasingly utilizes subcontractors in Israel, the United States, Europe, China and Japan for the production of mechanical
parts, optical components, castings and casings, electronic cabinets, PCB fabrication and a portion of the required electronic assembly.
Most electronic components are imported from the United States, Europe, China and Japan. The Companys production capacity is sufficient for its level of sales and permits the Company, in most cases,
to ship products within two weeks to six months of receipt of customer orders if requested by the customer.
Certain key
components and subassemblies included in the Companys systems are purchased from a limited group of suppliers. The Company purchases certain key components from single sources of supply. To date, the Company has been able to obtain sufficient
units to meet its needs and does not foresee any short-term supply difficulty in obtaining timely delivery of any parts or components. However, an interruption in supply from any of these sources could disrupt production, thereby adversely affecting
the Companys results. The Company generally maintains several months inventory of critical components used in the manufacture and assembly of its systems and/or uses framework orders and other types of agreements to ensure the
availability of such components.
36
(j) Additional Considerations Relating to the Companys
Operations in Israel
The Company is incorporated under the laws of the State of Israel and its headquarters, as well
as substantial research and development and production facilities, are located in Israel.
The Company benefits from certain
government programs and tax legislation, particularly as a result of the Approved Enterprise, Benefiting Enterprise or Preferred Enterprise status of substantially all of the Companys existing production
facilities in Israel under the Law for the Encouragement of Capital Investments, 1959 (an
Approved Enterprise
, a
Benefiting Enterprise
a
Preferred Enterprise
and the
Investment
Law
, respectively). Pursuant to these programs and legislation, a significant portion of the Companys income is currently taxed at reduced rates. See Note 10a to the Financial Statements. To be eligible for these benefits, the
Company needs to meet certain conditions. Should the Company fail to meet such conditions, these benefits could be cancelled and the Company might be required to refund tax benefits previously received, if any, together with interest and linkage
differences to the Israeli CPI, or other monetary penalty. The Company also benefits from a Government of Israel program under which it receives grants from the OCS for the development of generic technologies without incurring any royalty
obligations. See Item 5Operating and Financial Review and ProspectsResearch and Development, Patents and Licenses, etc.Research and Development Policy. There can be no assurance that these programs and tax legislation will be
continued in the future or that the available benefits will not be reduced. For further information see Item 5Operating and Financial Review and ProspectsCritical Accounting Policies and EstimatesTaxes on Income; and Note 10a
to the Financial Statements.
The termination or curtailment of these programs or the loss or reduction of benefits under the
Investment Law (particularly those available to the Company as a result of the Approved Enterprise, Benefiting Enterprise or Preferred Enterprise status of the Companys existing facilities in Israel) could have a material adverse effect on the
Companys business, financial condition and results of operations.
For more information about the above considerations
and the risks associated with the Companys operations in Israel, see Item 3Key InformationRisk Factors (n) and (r).
4.C Organizational Structure
The
Companys corporate headquarters, executive and registered offices, as well as substantial research and development, engineering and manufacturing facilities, are located in Yavne, Israel. Orbotech, Inc., wholly-owned by Orbotech Ltd.,
maintains its headquarters in Billerica, Massachusetts. PDI and OLTS maintain their headquarters in San Jose, California. The Companys European operations are coordinated from the headquarters of its wholly-owned subsidiary in Brussels,
Orbotech S.A., and from regional offices in Italy and Germany. New System operates from offices in Gorizia, Italy. Laser Imaging Systems GmbH & Co. KG (
LIS
) operates from offices in Jena, Germany. Orbotech Pacific Ltd.
and Orbotech Asia Ltd., also wholly-owned subsidiaries of Orbotech Ltd., operate through their headquarters in Hong Kong, and Orbotech Pacific Ltd. also operates from regional offices or subsidiaries in Korea, Taiwan and China, and through Orbotech
Ltd. subsidiaries in Korea and Singapore. Orbotech Ltd.s wholly-owned subsidiary in Japan, Orbotech Japan Ltd., maintains its headquarters in Tokyo. The Companys principal Israeli subsidiary is Orbograph (owned approximately 91% by
Orbotech Ltd.). Frontline operates from headquarters in Rehovot, Israel. For more information about the Companys organizational structure, see Item 19ExhibitsExhibit 8.1List of Subsidiaries.
4.D Property, Plants and Equipment
The Company maintains substantial administrative, manufacturing, research and development, corporate sales, marketing and customer support
operations in and from leased premises located in Yavne, Israel, comprising a total area of approximately 291,000 square feet with an option to lease additional space. The current lease term will expire in September 2021, and the Company has a right
of first refusal to purchase the facility.
37
Additionally, the Company, generally through its subsidiaries, leases approximately 611,000
square feet of floor space, which is used in connection with sales, marketing, customer support, research and development, engineering and production operations. These leases expire on various dates up to 2021. Also, two of the Companys
European subsidiaries, Orbotech S.A. and New System, hold interests in real property in Brussels, Belgium and Gorizia, Italy, respectively.
The aggregate annual rental paid by the Company for all of the Companys facilities in and outside Israel in 2012 was approximately $7.6 million (compared to $8.0 million in 2011 and $8.1 million in
2010). For further information, see Note 8a to the Financial Statements.
The Company has invested substantial sums in
improving the leased properties that it occupies in order to adapt them to its various engineering and production activities. The majority of these improvements have been integrated into the leasehold facilities. As of the date of this Annual
Report, the facilities available to the Company in Yavne, Israel are generally utilized on a one-shift basis in the course of the Companys normal operations and the Company considers them to be adequate for such operations; however, the
Company has the capability to expand this capacity when needed, including, as it has done in the past, by scheduling additional production shifts. As of the date of this Annual Report, the Company is re-engineering and re-fitting its facility at San
Jose to accommodate its research and development activity for the solar energy industry; however, other than that, is not engaged in the construction or material expansion of any additional building at its facilities nor has it any present plans to
relocate its Yavne facilities. The Company is not aware of any environmental issues that may affect its ability to use its facilities in any material respect.
As part of the Loan Agreements, Orbotech Ltd. created a floating charge on all of its assets and a fixed charge on the shares of PDI held by Orbotech, Inc. in favor of Discount Bank as security for
repayment of amounts under the Loan Agreements. In addition, Orbotech Ltd. created a further floating charge on all of its assets, ranking equally to that granted to Discount Bank, in favor of Hapoalim to secure the repayment of potential losses on
positions taken by the Company in connection with the Hapoalim Banking Activities. Pursuant to the Partial Prepayment Arrangements and the Negative Pledges, these floating charges were removed and replaced with the Negative Pledges. For a
description of the Loan Agreements and the Hapoalim Debenture, including the security interests and the Negative Pledges, see Item 5Operating and Financial Review and ProspectsLiquidity and Capital Resources.
Item 4A.
|
Unresolved Staff Comments
|
None
Item 5.
|
Operating and Financial Review and Prospects
|
This Item 5 should be read in conjunction with, and is qualified by, the information included in Item 3Key InformationRisk Factors.
5.A Operating Results
(a) General
Orbotech Ltd. is an Israeli
corporation. The Company has two reportable segments:
(i) Production Solutions for the Electronics Industry, which comprises
the design, development, manufacture, marketing and service of yield-enhancing and production solutions for the supply chain of the electronics industry. The Companys products in this segment include AOI, AOR, imaging and production systems
used in the manufacture of PCBs and other electronic components and AOI, test and repair systems used in the manufacture of FPDs. The Company also markets CAM and engineering solutions for PCB production; and
(ii) Recognition Software, which comprises the development and marketing of check processing and healthcare revenue cycle management
solutions to banks, financial and other payment processing institutions by Orbograph.
38
In addition to its two reportable segments, certain research and development initiatives
concerning various products not related to the Companys two reportable segments are included in the Financial Statements under Other.
The Company derives revenues from two sources: (i) sales of the Companys products; and (ii) services provided with respect to the Companys products. In 2012, 2011 and 2010, revenues
derived from sales of the Companys products constituted approximately 62%, 75%, and 77%, respectively, of the Companys total revenues, with the remaining revenues being derived from service for product support. During 2012, 2011 and
2010, approximately 96%, 98% and 97%, respectively, of revenues from both product sales and service were derived from product lines related to the Companys yield-enhancement and production solutions for the electronics industry and
approximately 4%, 2% and 3%, respectively, were derived from product lines related to recognition software. The Company expects that revenues from its Production Solutions for the Electronics Industry segment will continue to account for a
predominant portion of product revenues and service revenues in the near future. Most of the Companys revenues are derived from repeat product sales to existing customers, and the Company expects that repeat product sales will continue to
account for a significant portion of such revenues in the future. As the Companys installed base of products grows service revenues are also expected to increase. See Note 13a to the Financial Statements for a description of each reportable
segment and information as to segment revenues, operating income or loss, assets and related data.
The currency of the
primary economic environment in which the operations of the Company and virtually all of its subsidiaries are conducted is the U.S. Dollar. Virtually all of the Companys sales are made outside Israel in non-Israeli currencies, mainly the
U.S. Dollar, and most of its purchases of materials and components are made in non-Israeli currencies, primarily the U.S. Dollar. Thus, the functional currency of the Company is the U.S. Dollar.
(b) Basis of Presentation
The Companys financial statements are generally prepared in accordance with U.S. GAAP. Nevertheless, having been advised by the SEC that its staff does not object to the Companys so doing, the
Company accounts for Frontline using the proportionate method of consolidation as long as, inter alia, this accounting treatment is required under Israeli GAAP, including summarized footnote disclosures of the amounts proportionately consolidated,
rather than the equity method as is required under U.S. GAAP. Due to the elimination of the proportionate method of consolidation for joint ventures under applicable Israeli GAAP, which became effective on January 1, 2013, commencing from the
first quarter of 2013 the Company will account for its interest in Frontline using the equity method and, as a result, will report its investment as one line item within investments and other non-current assets in the consolidated balance sheets;
and its share of earnings on one line in the Companys consolidated statement of operations. This presentation will be applied in the Companys financial statements for all prior periods for consistency. Accordingly, the Companys
reported financial statements for prior periods, including the financial statements in this Annual Report, will change in future periods. The Companys share in the earnings of Frontline will be presented under operating income since Frontline
is integrated into the operations of the Company.
In February 2011, the Company sold the assets of OMS to a subsidiary of GE
for approximately $9.0 million in cash at closing and up to an additional $5.0 million in cash, subject to the achievement of certain agreed performance-based milestones; and in May 2011, the management of OMD acquired OMD from the Company. As a
result, OMS and OMD have been classified as discontinued operations and certain financial data provided in this Annual Report and the Financial Statements give effect to this.
The Companys business was impacted by a number of factors in 2012, in particular the extended cyclical downturn in the FPD industry. Conditions in the FPD industry have led to significantly
decreased levels of capital spending by FPD manufacturers. In response to this, the Company has taken a number of actions, the impact of which is reflected in the Financial Statements. These actions include a restructuring initiative which resulted
in a $5.1 million
39
charge in 2012. The Company anticipates that its restructuring initiative will result in $10$12 million in cost savings annually and that the actions required to achieve these cost savings
will be fully implemented during the first quarter of 2013. In addition, the extended downturn in the FPD industry led the Company to take write-downs of inventory in 2012 and 2011 in the amounts of $14.3 million and $6.7 million, respectively. The
Company has also been involved in an ongoing litigation associated with the Korean Matter. The net costs associated with the Korean Matter in 2012 were $4.0 million and are recorded in general and administrative expenses. Accordingly, the
Companys underlying cost structure, results of operations and expense profile may not be comparable from period-to-period and the ability to predict fluctuations in results of operations has decreased. For a description of some of these items
and their impact on the Financial Statements, see Liquidity and Capital ResourcesCertain Non-GAAP Information.
(c) Critical Accounting Policies and Estimates
To improve understanding of the Financial Statements, it is important to obtain some degree of familiarity with the Companys
principal or significant accounting policies. These policies are described in Note 1 to the Financial Statements. The Company reviews its financial reporting, disclosure practices and accounting policies at least annually to ensure that the
Financial Statements, which are developed on the basis of these accounting policies, provide in all material respects complete, accurate and transparent information concerning the financial position and results of operations of the Company. As part
of this process, the Company has reviewed the selection and application of its critical accounting policies and financial disclosures as at December 31, 2012, and it believes that the Financial Statements present fairly, in all material
respects, the consolidated financial position of the Company as at that date and the operating results for the year then ended.
In preparing the Financial Statements in accordance with U.S. GAAP, the Companys management must often make judgments, estimates
and assumptions, which may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures as at the date of the Financial Statements and during the reporting period. Some of those judgments can be subjective and
complex, and consequently actual results may differ materially from those estimates and assumptions. In the current economic environment, the risks and uncertainties associated with those estimates and assumptions are exacerbated. For any given
individual estimate or assumption made by the Company, there may be alternative estimates or assumptions that are also reasonable. However, the Company believes that, given the facts and circumstances before it at the time of making the relevant
judgments, estimates or assumptions, it is unlikely that applying any such other reasonable approach would cause a material adverse effect on the Companys consolidated results of operations, financial position or liquidity for the periods
presented in the Financial Statements.
The Company is also subject to risks and uncertainties that may cause actual results
to differ from estimates and assumptions, such as cyclicality in the industries in which the Company operates, a sustained continuation or a deterioration of the worldwide economic slowdown, the timing and strength of product and service offerings
by the Company and its competitors, changes in business or pricing strategies, changes in the prevailing political and regulatory framework in which the relevant parties operate or in economic or technological trends or conditions, including
currency fluctuations, inflation and consumer confidence, on a global, regional or national basis. Certain of these risks, uncertainties and assumptions are discussed under the heading Cautionary Statement Regarding Forward-Looking Information and
in Item 3Key InformationRisk Factors.
The Company considers its most significant accounting policies to be
those discussed below.
(i) Revenue Recognition
The Company recognizes revenue from sale of non-software products to end users upon delivery, provided that appropriate signed
documentation of the arrangement, such as a signed contract, purchase order or letter of agreement has been received by the Company, the fee is fixed or determinable and collectability is reasonably assured. If the Company determines that any of
these criteria have not been met, revenue recognition is deferred until all of these criteria have been met. The Company does not, in the normal course of business, provide a right of return to its customers.
40
Commencing from January 1, 2011, the Company adopted the provisions of Accounting
Standards Update No. 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements (
ASU 2009-13
), which deal with the accounting by a vendor for contractual arrangements involving multiple
revenue-generating activities to be performed by it, addressing when, and if so how, an arrangement involving multiple deliverables should be divided into separate units of accounting. In such situations, revenue is recognized upon delivery of the
separate elements, based on their relative fair value. The Company determines the selling price using vendor specific objective evidence (
VSOE
), if it exists, and otherwise uses estimated selling price (
ESP
).
The determination of ESP involves consideration of several factors based on the specific facts and circumstances of the
arrangement. Specifically, the Company evaluates the cost to produce the deliverable, the anticipated margin on that deliverable, the selling price and profit margin for similar parts in different geographical regions, its ongoing pricing strategy
and policies and other economic conditions and trends.
The impact of the adoption of ASU 2009-13 was not material to the
results of operations for fiscal year 2011.
This accounting treatment is applied if the delivered elements have value on a
stand alone basis, the arrangement does not include a general right of return with respect to delivered items and delivery or performance of undelivered items is considered probable and is substantially within the Companys control. The maximum
revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.
Installation and training are not considered essential to the product capabilities since they do not require specialized skills and can be performed by other vendors. Accordingly, upon delivery, the
Company defers revenue in an amount equivalent to the fair value of installation and training and recognizes those deferred revenues once installation and training has been completed.
The Companys revenue arrangements contain multiple elements, as it grants its customers a warranty on products sold, which includes
the provision of post-sale service and maintenance, usually for a period of six to twelve months. Upon meeting the revenue recognition criteria of the product, the Company records a portion of the sale price that relates to the fair value of the
services and maintenance expected to be performed during the aforementioned period as deferred income, and recognizes it as service revenue ratably over such period. The cost to the Company of warranting that the product will perform according to
certain specifications and that the Company will repair or replace the product if it ceases to work properly is insignificant and is treated according to accounting principles for contingencies. After the warranty period, service revenue in respect
of the Companys systems is recognized ratably over the contractual period or as services are performed. Annual service fees are generally based on the list price of the Companys products. It has been the Companys experience that
many of its customers elect to receive maintenance services from the Company on a continuing contractual basis after the conclusion of the warranty period.
In the case of delivery of newly developed products, revenue is deferred until acceptance is received.
The Company recognizes revenue from sale of software to end users upon delivery, provided that appropriate signed documentation of the arrangement, such as a signed contract, purchase order or letter of
agreement, has been received by the Company, the fee is fixed or determinable, and collectability is reasonably assured. When software is made available to customers electronically, it is deemed to have been delivered once the Company has provided
the customer with the access codes necessary to enable immediate possession of the software. If collectability is in question, revenue is recognized when the fee is collected.
Maintenance revenues are comprised of revenue from support arrangements that include technical support and the right to unspecified upgrades on an if-and-when-available basis. Revenues from these services
are deferred and recognized on a straight-line basis, over the life of the related agreement, which is typically one year.
41
(ii) Inventory Valuation
Inventories are valued at the lower of cost or market value. Cost is determined as follows: componentson the weighted average basis;
and labor and overheadon the basis of actual manufacturing costs. If actual market conditions prove less favorable than those projected by management, inventory may be written down to estimated market value. Once written down, inventory is not
written up to reflect a favorable change in market conditions. Inventories are written down for estimated excess and obsolescence based upon assumptions about future demand and market conditions and such write-down reduces net income in the period
in which it occurs. Likewise, unexpected favorable future demand and market conditions could positively impact future operating results and gross profit if inventory that has been written down is sold for more than carrying value.
(iii) Concentration of Credit Risks and Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of its customers for the purpose of determining the appropriate allowance for doubtful
accounts. In respect of sales to customers in certain countries, the Company generally requires letters of credit from banks. The allowance for doubtful accounts is determined for specific debts the collection of which is doubtful. Under the current
adverse and unstable economic conditions, the Companys credit evaluations may not be accurate or may be based on historical information that does not adequately reflect the severity of the economic downturn. These factors could lead to
collection of accounts receivable at lower rates than in the past or than reserves would indicate.
(iv) Long-lived
and Intangible Assets
The Companys acquired intangible assets, other than goodwill, are comprised primarily of
intellectual property and are amortized on a straight-line basis over periods of up to twelve years, depending on the estimated useful life of such intangible assets, based on past experience. Intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the assets (or asset group) may not be recoverable. These indicators may include, but are not limited to, significant decreases in the market value of an asset and significant
changes in the extent or manner in which an asset is used.
At September 30, 2012, in light of the extended downturn in
the FPD industry, the Company tested whether the intangible assets acquired as part of the PDI Acquisition should be impaired, based on cash flow projections and fair value estimates. The determination of cash flow was based on the Companys
strategic plans and long-range planning forecasts. The growth rates included in the plans were based on industry and the Companys specific data. The profit margin assumptions included in the plans were projected based on the current cost
structure and anticipated cost changes. As a result of the foregoing, the Company determined that the carrying amount of certain intangible assets, primarily existing technology and customer relationship allocated to FPD division, exceeded their
fair value by $30.1 million. As a result, an impairment charge of $30.1 million was recorded in the third quarter of 2012. Had different assumptions been used in these plans, the measured impairment could have been different. For a description of
the remaining estimated amortization of the Companys long-lived and intangible assets, see Note 5b to the Financial Statements.
(v) Taxes on Income
Taxes on income are calculated based on the Companys assumptions as to its entitlement to various benefits under the Investment Law. SeeEffective Corporate Tax Rate.
The termination or curtailment of the Investment Law or the loss or reduction of such benefits could increase the Companys tax
rates, thereby reducing its net profits or increasing its net losses, and could have a material adverse effect on the Companys business, financial condition and results of operations.
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of
assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse under the applicable tax laws.
42
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. In making this determination, the Company considers
factors and evidence that both support and indicate against recording a valuation allowance, and will refrain from recording a valuation allowance if the former outweigh the latter. In the event that the tax assets are not realized, income tax
expense would increase or, conversely, if the valuation allowance is overestimated, the Company would benefit from a future tax credit.
The Company may incur additional tax liability in the event of intercompany dividend distributions by its subsidiaries. Such additional tax liability in respect of non-Israeli subsidiaries has not been
provided for in the Financial Statements, as it is the Companys policy permanently to reinvest the subsidiaries earnings and to consider distributing dividends only when this can be facilitated in connection with a specific tax
opportunity that may arise.
Taxes that would apply in the event of disposal of investments in subsidiaries have not been
taken into account in computing deferred income taxes, as it is the Companys intention to hold, and not to realize, these investments.
The Company may incur additional tax liability in the event of distribution of dividends from its tax-exempt income. The Company intends permanently to reinvest the amounts of tax-exempt income of its
Approved Enterprises and Benefiting Enterprises and does not intend to cause dividends to be distributed from such income. Therefore, no deferred taxes have been provided in respect of such tax-exempt income as the undistributed tax-exempt income is
essentially permanent in duration.
The Company implements the applicable accounting guidance dealing with: how tax benefits
for uncertain tax positions are to be recognized, measured and de-recognized in financial statements; certain disclosures of uncertain tax positions; how reserves for uncertain tax positions should be classified on the balance sheet; and transition
and interim-period guidance, among other matters. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of this accounting guidance.
Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. While the Company
believes the resulting tax balances are appropriately accounted, as applicable, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to its consolidated financial statements, which could be material.
The Company has filed and/or is in the process of filing local and foreign tax returns that are subject to audit by the respective tax
authorities. The amount of income tax the Company pays is subject to ongoing audits by the tax authorities, which often result in proposed assessments. Any estimation of the potential outcome of an uncertain tax issue is a matter for judgment, which
can be subjective and highly complex. The Company believes that it has provided adequately for any reasonably foreseeable outcomes related to tax audits and settlement. However, future results may include favorable or unfavorable adjustments to
estimated tax liabilities in the period when the assessments are made or resolved, audits are closed or statutes of limitation on potential assessments expire.
(vi) Business Combinations
From time to time, the
Company may engage in business combinations. The Company accounts for business combinations using the purchase method of accounting. Allocation of purchase price of acquired companies to the tangible and intangible assets acquired and liabilities
assumed, is based on their estimated fair values as of the closing date of any such acquisition. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.
43
Critical estimates in valuing intangible assets include but are not limited to: future
expected cash flows from customer contracts, customer lists, distribution agreements and acquired developed technologies and patents; and discount rates. Managements estimates of fair value are based upon assumptions believed to be reasonable,
but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
(vii) Goodwill
Goodwill is not amortized, but rather tested for impairment annually, as at September 30 of each year, or whenever events or circumstances present an indication of impairment by assessing the fair
value of the Companys various reporting units.
The goodwill impairment test is applied by performing a qualitative
assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is considered not more likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of
goodwill for impairment would not be required. Otherwise, goodwill impairment is tested using a two-step approach.
The first
step involves comparing the fair value of a companys reporting units to their carrying amount. If the fair value of the reporting unit is determined to be greater than its carrying amount, there is no impairment. If the reporting units
carrying amount is determined to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and
intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the carrying value of goodwill. If the implied fair
value of the goodwill is less than the carrying value of the goodwill, an impairment loss equivalent to the difference is recorded.
As a result of performing the annual impairment tests, on September 30, 2012, 2011 and 2010, the Company determined that there was no impairment with respect to goodwill.
(viii) Share-based Compensation
In accordance with applicable accounting guidance, the Company accounts for employees awards classified as equity awards using the grant-date fair value method. The fair value of share-based payment
transactions is recognized as an expense over the requisite service period net of estimated forfeitures. The Company estimates forfeitures based on historical experience and anticipated future conditions.
Share-based payment expenses are classified in the same expense line items as cash compensation.
The Company elected to recognize compensation cost for awards with only service conditions that have a graded vesting schedule using the
accelerated multiple-option approach.
Certain equity awards are subject to forfeiture should the Company fail to attain
specified performance goals. The fair value of these awards is estimated on the date of grant using the same option valuation model used by the Company for non-performance equity awards. For so long as the Company assumes that performance goals will
be achieved, compensation cost is recorded with respect thereto. If and when a point in time is reached that the Company believes the performance goals will not be achieved, it will then reverse the share-based compensation expenses for all vesting
periods completed through such date.
Total expenses recorded during 2012 were $3.1 million ($1.8 million in respect of
options and $1.3 million in respect of
Restricted Shares
(which are Ordinary Shares awarded subject to certain transfer restrictions, forfeiture conditions and/or other terms and conditions) and
RSU
s (which are
awards representing an unfunded and unsecured promise to deliver Ordinary Shares, cash, other securities or other property in accordance with certain terms and conditions)). The corresponding aggregate amounts in 2011 and 2010 were $3.7 million and
$4.7 million, respectively. Compensation expense for equity awards in 2012 was allocated as follows: $0.4 million to cost of revenues: $1.0 million to research and development costs and $1.7 million to selling, general
44
and administrative expenses. As a result of an election under Section 102 of the Israeli Income Tax Ordinance (New Version), 1961 (the
Tax Ordinance
), the Company
generally will not be allowed to claim an expense in Israel for tax purposes. For further information see Item 6Directors, Senior Management and EmployeesShare OwnershipEquity Plans.
The unrecorded maximum compensation expense for equity awards outstanding at January 1, 2013 is estimated at approximately $5.4
million at that date (without taking into account forfeiture rates) and will be recorded in the consolidated financial statements for the following periods:
|
|
|
|
|
|
|
Compensation Cost
|
|
Period
|
|
($ in millions)
|
|
|
2013
|
|
|
3.1
|
|
2014
|
|
|
1.7
|
|
2015
|
|
|
0.5
|
|
2016
|
|
|
0.1
|
|
These amounts reflect the compensation cost of all outstanding awards, including those granted in 2012
(which consisted of options to purchase a total of 449,938 Ordinary Shares, 1,956 Restricted Shares and 253,326 RSUs), but do not reflect the compensation cost of any equity awards granted commencing January 1, 2013, which will be reflected in
future consolidated financial statements over the applicable vesting period.
Compensation expense relating to future equity
awards will depend on a variety of factors including the level and type of future awards and their terms; valuation considerations such as expected option life, volatility of the market price of the Ordinary Shares and applicable risk-free interest
rates; and future levels of forfeitures of such awards. The Company is not currently able to estimate the additional compensation expense from future grants but will examine carefully this expense and its relation to net income (loss) when making
such grants.
For a discussion of the Companys equity remuneration plans, including the equity remuneration plans
assumed by the Company in connection with the PDI Acquisition, see Item 6Directors, Senior Management and EmployeesShare OwnershipEquity Plans.
(ix) Contingencies
From time to time, the Company
is subject to claims arising in the conduct of its business, including claims relating to product liability, employees, suppliers and public authorities. In determining whether liabilities should be recorded for pending litigation claims, an
assessment of the claims is made and the likelihood that the Company will be able to defend itself successfully against such claims is evaluated. When it is believed probable that the Company will not prevail in a particular matter, an estimate is
made of the amount of liability based, in part, on advice of legal counsel. For a discussion of the Companys contingencies, see Item 8Financial InformationLegal Proceedings and Note 8b to the Financial Statements.
(d) Newly Issued Accounting Pronouncement
For information with respect to recent accounting pronouncements, see Note 1(w) to the Financial Statements.
45
(e) Geographical Analysis; Worldwide Economic Situation; Cost
of Revenues
(i) Geographical Analysis and Worldwide Economic Situation
The following table sets forth the Companys product and service revenues by geographic area for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
in thousands
|
|
|
% of total
|
|
|
in thousands
|
|
|
% of total
|
|
|
in thousands
|
|
|
% of total
|
|
Sales of Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$
|
77,840
|
|
|
|
32
|
|
|
$
|
193,415
|
|
|
|
46
|
|
|
$
|
101,719
|
|
|
|
25
|
|
Taiwan
|
|
|
48,694
|
|
|
|
20
|
|
|
|
50,829
|
|
|
|
12
|
|
|
|
83,045
|
|
|
|
20
|
|
Korea
|
|
|
40,640
|
|
|
|
16
|
|
|
|
69,252
|
|
|
|
16
|
|
|
|
141,674
|
|
|
|
35
|
|
Japan
|
|
|
24,723
|
|
|
|
10
|
|
|
|
42,995
|
|
|
|
10
|
|
|
|
40,846
|
|
|
|
10
|
|
North America *
|
|
|
23,232
|
|
|
|
9
|
|
|
|
33,013
|
|
|
|
8
|
|
|
|
22,610
|
|
|
|
5
|
|
Europe
|
|
|
9,005
|
|
|
|
4
|
|
|
|
13,924
|
|
|
|
3
|
|
|
|
16,086
|
|
|
|
4
|
|
Other **
|
|
|
22,363
|
|
|
|
9
|
|
|
|
20,540
|
|
|
|
5
|
|
|
|
3,552
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
$
|
246,497
|
|
|
|
100
|
|
|
$
|
423,968
|
|
|
|
100
|
|
|
$
|
409,532
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services Rendered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$
|
48,986
|
|
|
|
32
|
|
|
$
|
39,014
|
|
|
|
27
|
|
|
$
|
28,978
|
|
|
|
24
|
|
Taiwan
|
|
|
26,064
|
|
|
|
17
|
|
|
|
24,212
|
|
|
|
17
|
|
|
|
21,263
|
|
|
|
18
|
|
Korea
|
|
|
22,314
|
|
|
|
14
|
|
|
|
23,602
|
|
|
|
17
|
|
|
|
19,494
|
|
|
|
16
|
|
Japan
|
|
|
20,886
|
|
|
|
14
|
|
|
|
20,811
|
|
|
|
15
|
|
|
|
20,171
|
|
|
|
17
|
|
North America *
|
|
|
19,944
|
|
|
|
13
|
|
|
|
18,427
|
|
|
|
13
|
|
|
|
17,275
|
|
|
|
15
|
|
Europe
|
|
|
10,866
|
|
|
|
7
|
|
|
|
11,301
|
|
|
|
8
|
|
|
|
9,899
|
|
|
|
8
|
|
Other **
|
|
|
5,174
|
|
|
|
3
|
|
|
|
3,978
|
|
|
|
3
|
|
|
|
2,743
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Service
|
|
$
|
154,234
|
|
|
|
100
|
|
|
$
|
141,345
|
|
|
|
100
|
|
|
$
|
119,823
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
400,731
|
|
|
|
|
|
|
$
|
563,313
|
|
|
|
|
|
|
$
|
529,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
mainly the United States.
|
**
|
mainly in the Far East.
|
Approximately 84% of the Companys revenues from product sales and services rendered during 2012 (compared to 86% during 2011 and
87% during 2010) were derived from the Far East and Japan, including approximately 32% from revenues in China, 19% from revenues in Taiwan, 16% from revenues in Korea and 11% from revenues in Japan. Of the Companys revenues from product sales
and services rendered that were derived from the Far East and Japan in 2011, approximately 41% were from revenues in China, 16% were from revenues in Korea, 13% were from revenues in Taiwan and 11% were from revenues in Japan. In addition, virtually
all of the Companys revenues from its recognition software products during 2012, 2011 and 2010 were derived from sales in North America. The Company monitors developments, including banking and currency difficulties, in the financial markets
and economies of all countries and regions in which it markets its products and their possible impact upon the Company.
During 2012, the Company recorded significantly reduced revenues from China, Korea and Japan compared with the previous year, which was
primarily a function of the reduced demand for the Companys FPD systems stemming, in turn, from the substantially lower levels of capital expenditures by FPD manufacturers in those countries. The decrease in revenues from North America and
Europe was a reflection of the general downturn in the global electronics industry, as a result of which PCB manufacturers reduced their investments in manufacturing facilities in those regions.
During 2011, the Company recorded significantly higher revenues from China compared with the previous year, which was primarily due to
the increased capital expenditures for two new LCD fabrication plants in China,
46
as well as increased PCB plant expansions. The Company recorded significantly lower total revenues from Korea and Taiwan compared with the previous year, reflecting decreased capital expenditures
by FPD manufacturers in those regions from the high levels of 2010.
During 2010, the Company recorded significantly higher
revenues from Korea compared with the previous year, which was primarily due to the increased capital expenditures by LG Display and Samsung Electronics in Korea. The Company also recorded significantly higher revenues from China compared with 2009
as a result of increased PCB plant expansions driven by the strong demand for sophisticated consumer electronic devices, primarily smartphones and other hand held devices, which use high-end PCBs. The Company recorded significantly lower revenues
total from Japan compared with the previous year, reflecting decreased capital expenditures by FPD manufacturers in Japan from the high levels of 2009.
The Companys ability to foresee future changes in the total volume of orders for its products and services remains limited, particularly, but not only, with respect to its PCB products. The inherent
uncertainties associated with the global economic environment and the financial markets and economies of those countries in which the Company markets its products, together with the related possible changes in demand for its products, means that
past operating results may not necessarily be indicative of the future. See Item 5Operating and Financial Review and ProspectsTrend Information.
(ii) Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012 *
|
|
|
2011 *
|
|
|
2010
|
|
|
|
in thousands
|
|
|
% of
sales/service
revenues
|
|
|
in thousands
|
|
|
% of
sales/service
revenues
|
|
|
in thousands
|
|
|
% of
sales/service
revenues
|
|
Cost of Products Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material and subcontractors
|
|
$
|
103,070
|
|
|
|
|
|
|
$
|
194,819
|
|
|
|
|
|
|
$
|
188,471
|
|
|
|
|
|
Labor costs
|
|
|
15,700
|
|
|
|
|
|
|
|
22,523
|
|
|
|
|
|
|
|
16,675
|
|
|
|
|
|
Overhead and other expenses
|
|
|
10,484
|
|
|
|
|
|
|
|
16,670
|
|
|
|
|
|
|
|
19,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
129,254
|
|
|
|
52.4
|
|
|
|
234,012
|
|
|
|
55.2
|
|
|
|
224,640
|
|
|
|
54.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services Rendered
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials consumed
|
|
$
|
45,704
|
|
|
|
|
|
|
$
|
36,728
|
|
|
|
|
|
|
$
|
37,691
|
|
|
|
|
|
Labor costs
|
|
|
37,481
|
|
|
|
|
|
|
|
33,557
|
|
|
|
|
|
|
|
30,633
|
|
|
|
|
|
Overhead and other expenses
|
|
|
22,784
|
|
|
|
|
|
|
|
25,145
|
|
|
|
|
|
|
|
19,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
105,969
|
|
|
|
68.7
|
|
|
|
95,430
|
|
|
|
67.5
|
|
|
|
88,261
|
|
|
|
73.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues
|
|
$
|
235,223
|
|
|
|
|
|
|
$
|
329,442
|
|
|
|
|
|
|
$
|
312,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Excludes the write-down of inventories of $14.3 million in 2012 and $6.7 million in 2011 relating primarily to excess inventories of components and non-cancelable
commitments for certain of the Companys FPD products and, to a small extent, for certain of the Company older PCB products.
|
(f) Effective Corporate Tax Rate
The
Companys income tax obligations consist of those of the Company in Israel and those of each of its subsidiaries in their respective taxing jurisdictions.
The corporate tax rate in Israel, effective as of January 1, 2012, is 25%, compared with 24% in 2011 and 25% in 2010. For information concerning statutory rates of taxation in certain other
jurisdictions in which the Company operates, see note 10c(ii) to the Financial Statements. However, Orbotechs effective tax rate in 2012 was 0% due to the combination of the factors described below.
47
The effective tax rate of Orbotech is primarily influenced by: (a) the split of taxable
income between the various tax jurisdictions; (b) the availability of tax loss carryforwards and the extent to which valuation allowance has been recorded against deferred tax assets; (c) the portion of Orbotech Ltd.s income which is
entitled to tax benefits due to those of its production facilities which are Approved Enterprises, Benefiting Enterprises or Preferred Enterprises; and (d) the changes in the exchange rate of the Dollar to the NIS.
Orbotech Ltd. has elected the alternative benefits route under the Investment Law with respect to its Approved Enterprises. Under this
route the Company waived government grants in return for a tax exemption on undistributed income. Due to the geographic location of the Companys facilities, such tax exemption on undistributed income applies for a limited period of two years.
During the remainder of the benefits period applicable to the Company (generally until the expiration of ten years) a corporate tax rate not exceeding 25% will apply. In the event that such tax exempt income is thereafter distributed as a dividend,
the Company will be required to pay the applicable corporate tax that would otherwise have been payable on such income. The Companys entitlement to such benefits is conditional upon its compliance with the terms and conditions prescribed in
the Investment Law. In the event of its failure to do so, these benefits may be cancelled and the Company 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, or other monetary penalty.
In April 2005, substantive amendments to the Investment Law came into
effect. Under these amendments, eligible investment programs of the type in which the Company participated prior to the amendment were eligible to qualify for substantially similar benefits as a Benefiting Enterprise, subject to meeting
certain criteria. This replaced the previous terminology of Approved Enterprise, which required pre-approval from the Investment Center of the Ministry of Industry, Trade and Labor of the State of Israel. As a result of these amendments,
tax-exempt income generated from Benefiting Enterprises under the provisions of the amended law will, if distributed upon liquidation or if paid to a shareholder for the purchase of his or her shares, be deemed distributed as a dividend and will
subject the Company to taxes. Therefore, the Company could be required to record deferred tax liability with respect to such tax-exempt income, which would have an adverse effect on its results of operations. To date, Orbotech Ltd. has not generated
tax exempt income from Benefiting Enterprises.
Additional amendments to the Investment Law became effective in January 2011
(the
2011 Amendment
). Under the 2011 Amendment, income derived by Preferred Companies from Preferred Enterprises (both as defined in the 2011 Amendment) would be subject to a uniform rate of corporate tax
as opposed to the incentives prior to the 2011 Amendment that were limited to income from Approved or Benefiting Enterprises during their benefits period. According to the 2011 Amendment, the uniform tax rate on such income, referred to as
Preferred Income, would be 10% in areas in Israel that are designated as Development Zone A and 15% elsewhere in Israel during 2011-2012, 7% and 12.5%, respectively, in 2013-2014, and 6% and 12%, respectively, thereafter. Income derived
by a Preferred Company from a Special Preferred Enterprise (as defined in the Investment Law) would enjoy further reduced tax rates for a period of ten years of 5% in Development Zone A and 8% elsewhere. As with dividends distributed
from taxable income derived from an Approved Enterprise or Benefiting Enterprise during the applicable benefits period, dividends distributed from Preferred Income would be subject to a 15% tax (or lower, if so provided under an applicable tax
treaty), which would generally be withheld by the distributing company, provided however that dividends distributed from Preferred Income from one Israeli corporation to another, would not be subject to tax. Under the transitional
provisions of the 2011 Amendment, companies may elect to irrevocably implement the 2011 Amendment with respect to their existing Approved and Benefiting Enterprises while waiving benefits provided under the legislation prior to the 2011 Amendment or
keep implementing the legislation prior to the 2011 Amendment during the next years. Should a company elect to implement the 2011 Amendment with respect to its existing Approved and Benefiting Enterprises prior to June 30, 2015, dividends
distributed from taxable income derived from Approved Enterprises or Benefiting Enterprises to another Israeli company would also not be subject to tax. Orbotech Ltd. has not elected to implement the 2011 Amendment. While the Company may incur
additional tax liability in the event of distribution of dividends from tax exempt income generated from its Approved and Benefiting Enterprises as previously described, no additional tax liability will be incurred by the Company in the event of
distribution of dividends from Preferred Income.
48
The 2011 Amendment had no material effect on the tax payable in respect of the
Companys Israeli operations during 2012.
Pursuant to a recent amendment to the Investment Law which became effective on
November 12, 2012 (the
2012 Investment Law Amendment
), companies that have retained earnings from Approved or Benefiting Enterprises may elect by November 11, 2013 to pay a reduced corporate tax rate as set-forth in the
2012 Investment Law Amendment on such undistributed income as of December 31, 2011 and thereafter distribute a dividend from such income without being required to pay additional corporate tax with respect to such income as the case would
otherwise be, as previously described. A company that makes this election, will be required to make certain investments in its Approved or Benefiting Enterprise by (i) purchasing productive assets (other than buildings), (ii) investing in
research and development in Israel and/or (iii) paying salaries of new employees (other than directors and officers of the company) who have joined the work force of the Approved or Benefiting Enterprise. The number of new employees for these
purposes will be determined in comparison to the number of employees employed by the Approved or Benefiting Enterprise at the end of the 2011 tax year. Such investment must be made over a period of five years commencing in the tax year in which the
election is made. The amount of the required investment is determined pursuant to a formula set-forth in the 2012 Investment Law Amendment. A company that has elected to apply the 2012 Amendment cannot withdraw from its election. As of the date of
this Annual Report the Company does not intend to make such election.
The combination of the factors described above produced
effective tax rates of 0%, 14.5% and 14.7% for the years 2012, 2011 and 2010, respectively.
See Item 4Information
on the CompanyBusiness OverviewAdditional Considerations Relating to the Companys Operations in Israel; Note 10 to the Financial Statements; and Taxes on Income.
(g) Impact of Currency Fluctuations
Because the Companys results are reported in Dollars, changes in the rate of exchange between the Dollar and local currencies in
those countries in which the Company operates (primarily the NIS, the Euro, the Japanese Yen and the Chinese Reminbi) will affect the Companys results of operations. During 2012, on a comparative annual average basis as against 2011, the main
currencies relevant to the Companys operations strengthened (weakened) against the Dollar, as follows: the NIS by 2.3%, the Japanese Yen by (11.2%), the Chinese Reminbi by 1.0% and the Euro by 2.0%.
For information with respect to currency hedging programs maintained by the Company, see Item 11Quantitative and Qualitative
Disclosures About Market Risk.
49
(h) Results of Operations
The following table sets forth certain financial data as a percentage of revenues for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31,
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
%
|
|
|
%
|
|
|
%
|
|
Revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenues
|
|
|
58.7
|
|
|
|
58.3
|
|
|
|
59.1
|
|
Inventory write-down
|
|
|
3.6
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37.7
|
|
|
|
40.5
|
|
|
|
40.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses incurred
|
|
|
18.4
|
|
|
|
15.2
|
|
|
|
15.3
|
|
Lessgovernment participations
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net research and development costs
|
|
|
17.9
|
|
|
|
14.9
|
|
|
|
14.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
18.7
|
|
|
|
12.8
|
|
|
|
12.5
|
|
Amortization of intangible assets
|
|
|
2.5
|
|
|
|
2.2
|
|
|
|
2.7
|
|
Impairment of intangible assets
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
47.9
|
|
|
|
29.8
|
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(10.2
|
)
|
|
|
10.7
|
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expensesnet
|
|
|
(1.3
|
)
|
|
|
(1.2
|
)
|
|
|
(1.4
|
)
|
Income (loss) from continuing operations before taxes on income
|
|
|
(11.5
|
)
|
|
|
9.5
|
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
|
0.1
|
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share in losses of an associated company
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(11.6
|
)
|
|
|
8.1
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
0.2
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(11.6
|
)
|
|
|
8.3
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to the non-controlling interest
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Orbotech Ltd.
|
|
|
(11.4
|
)
|
|
|
8.3
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Year Ended December 31, 2012 Compared To Year Ended
December 31, 2011
The Companys financial results for 2012 reflected a challenging year. The Company posted
significantly lower revenues, primarily as a result of the extended cyclical downturn in the FPD industry which led to a persistently low level of capital expenditures by LCD manufacturers during the year. In addition, these reduced revenues also
reflect the deferral of capital expenditures by PCB manufacturers in response to highly uncertain global economic conditions that were particularly prevalent during the second half of the year. In light of these factors, and in order to align its
cost structure to the evolving business environment, the Company initiated a number of cost cutting measures in the first quarter, and undertook further measures in the fourth quarter, of 2012, which included a reduction in its total workforce and
the consolidation of certain of its worldwide facilities. In connection with these measures, the Company recorded restructuring charges of $1.9 million and $3.2 million in the first and fourth quarters, respectively. The Company expects that the
measures taken in the fourth quarter of 2012 will result in annual operating expenses savings of approximately $10$12 million, which the Company expects will reflect the ongoing cost structure necessary to support higher revenues
anticipated once business conditions improve.
50
Revenues from the sale and service of the Companys equipment and software in 2012
totaled $400.7 million, compared with $565.3 million in 2011, a decrease of approximately 29.1%. Service revenues in 2012 were $154.2 million, compared with $141.3 million in 2011, an increase of approximately 9.1%, which reflects both the
Companys continued success in securing service contracts for its steadily expanding global installed base of PCB systems and additional service revenues generated from its growing installed base of FPD systems.
Revenues from the sale and service of PCB-related equipment in 2012 were $289.2 million, compared with $319.7 million in 2011. This
decrease reflected the severe impact of global economic conditions on some of the Companys PCB customers, particularly those involved in personal computers and notebooks and automotive and industrial applications, which was only partially
offset by the continued strong demand for the Companys PCB products from customers associated with smartphone and other mobile devices. This overall reduction in PCB-related revenues is illustrated by the decreased revenues from
Orbotechs sophisticated manufacturing solutions, especially its LDI systems. Additionally, 2012 revenues from the Companys ECM business were approximately $16.4 million, virtually unchanged from the $16.0 million recorded in 2011.
Revenues from the sale and service of FPD-related equipment in 2012 were $97.2 million, compared with $232.9 million in 2011.
The weakened consumer sales of LCD televisions, which commenced in the second half of 2011, led to lower capacity utilization rates and, in turn, to an oversupply of panels and a decrease in panel prices. While this overcapacity was initially
expected to dissipate by about the middle of 2012, making way for additional capital expenditures on fabrication facilities designated for the manufacture for LCD televisions, the Company believes that the continuing global economic uncertainty
again had the effect of delaying capital expenditure plans of LCD manufacturers for such facilities. This, in turn, resulted in a significant decrease in demand for the Companys FPD-related equipment. Nevertheless, the Company generated
revenues during the year from the sale of FPD equipment for use in the manufacture of mobile devices, as well as from upgrades of previously-installed equipment at existing plants designed to meet the specifications of newer and more demanding
applications in this part of the FPD industry.
Revenues from the sale and service of the Companys Recognition Software
segment in 2012 were $14.3 million, compared to the $12.7 million recorded in 2011. This increase highlights the strong reliance that Orbographs customers continue to place upon its innovative solutions and support services.
The decrease in the cost of products sold in 2012 of $104.7 million, or 44.8%, resulted from the decrease in revenues from products sold
of $177.5 million, or 41.9%. This primarily reflected the lower expenditures on materials and components labor costs, overhead and other expenses as a result of the decreased volume of products sold.
The increase in the cost of services rendered in 2012 of $10.5 million, or 11.0%, resulted from an increase in revenues from services
rendered of $12.9 million, or 9.1%. The cost of materials consumed increased by $9.0 million and the cost of labor and overhead increased by $3.9 million, both of which parallel the heightened activity of the Companys customer support
organization as a reflection of the increased installed base of Orbotech products, as well as increased investments in the Companys worldwide customer support infrastructure, primarily in China.
The write-down of inventories of $14.3 million in 2012 primarily relates to excess inventories of components and non-cancelable
commitments for certain of the Companys FPD products in connection with the extended cyclical downturn in the FPD industry.
Gross profit for 2012 was $151.3 million, or 37.7% of revenues, compared with $229.1 million, or 40.5% of revenues, in 2011. Gross profit for 2012 from sales of equipment was $117.2 million, or 47.6% of
product sales (excluding write-down of inventories of $14.3 million), compared to $189.9 million, or 44.8% of product sales, during 2011. Gross profit for 2012 from services rendered was $48.2 million, or 31.3%, of service revenues, compared with
$45.9 million, or 32.5%, of service revenues, during 2011.
51
Research and development costs net decreased to $71.8 million in 2012 from $84.2 million in
2011. This reflected certain cost cutting measures taken by the Company towards the end of 2011, including scaling back certain research and development projects to align its research and development costs to anticipated lower revenue levels.
Nevertheless, the Company continues to invest significant sums in developing new and innovative technologies and does not believe that the period over period reductions in research and development expenditures will weaken its competitive position in
the short or longer term. During 2012, the Company received $1.8 million (compared with $2.0 million received in 2011) in royalty-free participations in its research and development expenditures from the Israeli Government and from a European Union
sponsored consortium.
Selling, general and administrative expenses were $71.1 million (which excludes $4.0 million costs
associated with the Korean Matter after taking into account receipts from the Companys insurance carriers), compared to $72.6 million in 2011. This was partly attributable to the lower levels of investment by the Company in its sales and
marketing activities as a result of the decrease in product revenues for 2012. The costs associated with the Korean Matter were $5.6 million, net of $1.6 million in recoveries from insurance companies, and were recorded in selling, general and
administrative expenses.
At September 30, 2012, in light of the extended downturn in the FPD industry noted above, the
Company tested whether the intangible assets acquired as part of the PDI Acquisition should be impaired, based on cash flow projections and fair value estimates. As a result, an impairment charge of $30.1 million was recorded in the third quarter of
2012. For further information concerning the impairment charge, see Item 5Critical Accounting Policies and EstimatesLong-lived and Intangible Assets.
The amortization of other intangible assets, primarily attributable to the PDI Acquisition, decreased during 2012 to $9.9 million from $12.3 million in 2011. For further information concerning
amortization expenses for 2012, 2011 and 2010, see Item 5Operating and Financial Review and ProspectsCritical Accounting Policies and EstimatesLong-lived and Intangible Assets.
In accordance with accounting guidance, the Company performed its annual evaluation of the goodwill of each reporting unit on
September 30, 2012, as a result of which there were not any goodwill impairment charges recorded in 2012.
Net financial
expenses totaled $5.1 million in 2012, compared with net financial expenses of $6.6 million in 2011. This decrease reflects the lower debt service payment obligations to Discount Bank, which totaled $3.4 million in 2012, compared with $4.7 million
in 2011, as well as an increase in interest income received on cash and short term bank deposits, offset by foreign exchange losses. In 2012, the Company incurred $0.1 million of costs in connection with factoring letters of credit, compared with
costs of $0.4 million incurred in 2011.
Income tax expense for 2012 was $0.5 million, compared with income tax expense of
$7.7 million in 2011. The Companys effective tax rate for 2012 was 0% compared to 14.5% in 2011. Generally, the Companys effective tax rate varies largely as a function of income (loss), benefits received from the State of Israel,
particularly those relating to Approved Enterprises, Benefiting Enterprises or Preferred Enterprises, the split of taxable income between jurisdictions and the changes in various exchange rates to the NIS. See Item 5Operating and
Financial Review and ProspectsOperating ResultsEffective Corporate Tax Rate.
The net loss attributable to the
non-controlling interests was $1.0 million for 2012 compared to net loss of $0.3 in 2011. These non-controlling interests are comprised of the minority share in the losses of OLTS as well as the approximately 10% minority interest in Orbograph.
GAAP net loss attributable to Orbotech Ltd. for the year ended December 31, 2012 was $45.6 million, or $1.05 per share,
compared with GAAP net income attributable to Orbotech Ltd. of $47.3 million, or $1.16 per share (diluted), for the year ended December 31, 2011.
52
(i) Year Ended December 31, 2011 Compared To Year Ended
December 31, 2010
The Companys financial results for 2011 reflected a year in which the Company posted
record revenues and experienced strong demand for its PCB products, fueled by increased consumer demand for complex and sophisticated mobile electronic devices. The growing intricacy of these devices and their embedded electronic components gave
rise to improved demand on the part of PCB manufacturers for Orbotechs sophisticated manufacturing solutions. The FPD industry, by contrast, experienced a cyclical downturn in 2011, with manufacturers continuing to report lower utilization
rates due to weaker demand for LCD televisions. As a result, LCD manufacturers scaled back their capital expenditure plans for LCD televisions which, in turn, led to a decrease in second half 2011 revenues from sales of the Companys FPD
equipment.
Revenues in 2011 were $565.3 million, compared with $529.4 million in 2010, an increase of approximately 6.8%.
Service revenues in 2011 were $141.3 million, compared with $119.8 million in 2010, an increase of approximately 17.9%, which reflects the Companys continued success in securing service contracts for its steadily expanding global installed
base of PCB systems.
Revenues from the sale and service of PCB-related equipment for 2011 were $319.7 million, compared with
$250.1 million in 2010. This growth in revenues reflected the continued strong demand for the Companys PCB products, resulting from the heightened consumer sales of sophisticated electronic devices such as smartphones, mobile connected devices
and ultra thin laptop computers, in the manufacture of which the Companys PCB equipment has become critical. The growing complexity of electronic components embedded in these devices has led to increased demand for Orbotechs
sophisticated manufacturing solutions, especially its LDI systems. Additionally, in the third quarter of 2011, the Company received acceptance for its new Emerald UV laser drilling system and recognized initial revenues from this product. The
Company anticipates that this highly advanced production tool will form a strategic part of its PCB product portfolio in 2012 and beyond. At the same time, the continued strong consumer sales of mobile devices in 2011 gave rise to revenues from
opportunities realized in the ECM industry, particularly in the touch screen area, where the Companys recorded revenues of approximately $16.0 million for 2011.
Revenues from the sale and service of FPD-related equipment in 2011 decreased to $232.9 million from the $265.6 million recorded in 2010. During the first half of 2011, the Company delivered FPD equipment
to new LCD fabrication facilities constructed in China pursuant to orders received in 2010. However, as a result of the slower growth in consumer sales of LCD televisions, FPD manufacturers experienced lower capacity utilization rates, leading to an
oversupply of panels and a decrease in panel prices. This led to significantly lower order activity during 2011, as LCD manufacturers scaled back their capital expenditure plans for fabrication facilities designated for the manufacture of LCD
televisions. On the other hand, the Company received new orders during the year for FPD equipment for use in the manufacture of mobile devices and for upgrades of existing equipment at existing plants to cater for newer, more demanding applications
in this part of the industry.
Revenues from the Companys Recognition Software segment in 2011 were $12.7 million,
compared to the $13.8 million recorded in 2010. In the fourth quarter of 2011, as part of its program of diversification into new areas outside its core check processing business, Orbograph acquired the healthcare revenue cycle management business
of CorrectClaimsNow LLC and V MOM LLC, privately held companies that provided services in the field of healthcare revenue cycle management. No revenues were recorded by the Company during 2011 from this acquired healthcare revenue cycle management
business.
The increase in the cost of products sold in 2011 of $9.4 million, or 4.2%, was principally a result of the
increased expenditures on materials and components labor costs, overhead and other expenses as a reflection of the increased volume of products sold.
The cost of services rendered in 2011 increased by $7.2 million, or 8.1%, while the increase in revenues from services rendered was $21.5 million, or 18.0%. The cost of materials consumed decreased by
$1.0 million,
53
notwithstanding the growing installed base of the Companys systems. The cost of labor and overhead increased by $8.1 million, which reflected the increased activity of the Companys
customer support organization as a result of the Companys increased installed base and increased investments in the Companys worldwide customer support infrastructure, primarily in China.
The write-down of inventories of $6.7 million in 2011 primarily relates to excess inventories of components for certain of the
Companys FPD products in connection with the 2011 cyclical downturn in the FPD industry and, to a small extent, for certain of the Company older PCB products.
Gross profit for 2011 was $229.1 million, compared with $216.5 million in 2010. Gross profit for 2011 from sales of equipment was $189.9 million, or 44.8% of product sales, compared to $184.9 million
(excluding write-down of inventories of $6.7 million), or 45.2% of product sales, during 2010. Gross profit for 2011 from services rendered was $45.9 million, or 32.5%, of service revenues, compared with $31.6 million, or 26.4%, of service revenues,
during 2010.
Research and development costs net increased to $84.2 million in 2011 from $78.3 million in 2010. This increase
reflected the Companys strong commitment to ongoing research and development and in its efforts to expand into new technologies and product areas. These investments included the continued investment for the solar energy industry, as well as
investments in new and innovative technologies designed to provide state-of-the-art solutions for the Companys PCB manufacturing customers, such as the new UV laser drilling tool introduced in 2011. During 2011, the Company received $2.0
million (compared with $2.9 million received in 2010) in royalty-free participations in its research and development expenditures from the Israeli Government and from a European Union sponsored consortium.
Selling, general and administrative expenses increased by $6.3 million, or approximately 9.5% to $72.6 million in 2011 from $66.3 million
in 2010. This increase was partly attributable to the higher level of investment by the Company in its sales and marketing activities in the Far East, including increased expenditures for sales commissions, agent fees, exhibitions and other
marketing activities undertaken during 2011, as well as the strengthening of certain currencies against the Dollar.
The
amortization of other intangible assets, primarily attributable to the PDI Acquisition in 2008, decreased during 2011 to $12.3 million from $14.2 million in 2010. For further information concerning amortization expenses for 2011, 2010 and 2009, see
Item 5Operating and Financial Review and ProspectsCritical Accounting Policies and EstimatesLong-lived and Intangible Assets.
In accordance with accounting guidance, the Company performed its annual evaluation of the goodwill of each reporting unit on September 30, 2011, as a result of which no goodwill impairment charges
were recorded in 2011.
Net financial expenses totaled $6.6 million in 2011, compared with net financial expenses of $7.3
million in 2010. This decrease is a result of lower debt service payment obligations to Discount Bank, which totaled $4.7 million in 2011 compared with $5.9 million in 2010, as well as an increase in interest income received on short term bank
deposits, offset by foreign exchange losses. In 2011, the Company incurred $0.4 million of costs in connection with factoring letters of credit, compared with costs of $0.5 million incurred in 2010.
Income tax expense for 2011 was $7.7 million, compared with income tax expense of $7.4 million in 2010. The Companys effective tax
rate for 2011 was 14.5% compared to 14.7% in 2010. Generally, the Companys effective tax rate varies largely as a function of income (loss), benefits received from the State of Israel, particularly those relating to Approved Enterprises or
Benefiting Enterprises, the split of taxable income between jurisdictions and the changes in various exchange rates to the NIS. See Item 5Operating and Financial Review and ProspectsOperating ResultsEffective Corporate Tax
Rate.
54
The net loss attributable to the non-controlling interest was $0.3 million for 2011 compared
to net income of $0.1 in 2010. Commencing from the fourth quarter of 2011, the non-controlling interests includes the minority share in the losses of OLTS as well as the approximately 10% minority interest in Orbograph.
Gain from discontinued operations for 2011 was $1.4 million compared to a loss of $8.7 million in 2010. This gain in 2011 was comprised
of the consideration received from GE for the assets of OMS and was attributable to the re-classification during 2010 of OMS and OMD as discontinued operations.
GAAP net income attributable to Orbotech for the year ended December 31, 2011 was $47.3 million, or $1.16 per share (diluted), compared with GAAP net income attributable to Orbotech of $34.1 million,
or $0.95 per share (diluted), for the year ended December 31, 2010.
5.B Liquidity and
Capital Resources
The Companys equity as a percentage of its assets increased to 68.5% at December 31,
2012, compared with 65.5% at December 31, 2011.
Cash, cash equivalents, short-term bank deposits and marketable
securities (collectively,
Liquid Cash
) decreased to $278.8 million at December 31, 2012 from the $296.5 million recorded at December 31, 2011. Total debt at December 31, 2012 was $64.0 million, comprised of the
non-repaid portion as of such date of the Discount Bank Loan. As a result, at December 31, 2012, the Companys
Net Cash Position
(namely, total Liquid Cash less total debt) was $214.8 million.
Following the Partial Prepayment, the Companys total debt was reduced to $32.0 million, comprised of the remaining amount of the
Discount Bank Loan; and its Net Cash Position remained unchanged.
Cash generated from operating activities in 2012 was
approximately $22.9 million. Inventories decreased to $93.9 million at December 31, 2012, from $105.1 million at December 31, 2011. This was due primarily to the write-down of inventory in the Companys FPD business. Net trade
accounts receivable decreased by $31.7 million, to $164.5 million at December 31, 2012 from $196.2 million at year end 2011. The period trade receivables were outstanding at December 31, 2012 (calculated by dividing: (A) the product
of: (i) trade receivables at period end; and (ii) 365; by (B) the aggregate of the previous four quarter revenues) increased to 150 days on December 31, 2012 from 126 days on December 31, 2011. The Company did not record any
significant bad debts during 2012 and its allowance for doubtful accounts was $4.6 million or 2.7% of outstanding receivables at December 31, 2012. Aggregate accounts payable and accruals decreased to $79.5 million from their December 31,
2011 level of $89.9 million, primarily due to the decreased business levels in 2012. Deferred income decreased by $8.5 million to $17.4 million at December 31, 2012, primarily reflecting the lower levels of revenues from sales of products.
During 2012, the Company used $9.6 million for capital expenditures and expended $2.0 million for share repurchases and
received approximately $0.7 million from the exercise of stock options. The Company also received $3.0 million from the sale of its interest in real property in San Jose, California.
During 2012, the Company and OLTS entered into a new loan agreement pursuant to which the Company extended $4.0 million to OLTS in 2012
and also provided OLTS with other resources and support. Any amount extended under this loan agreement is secured by a security interest on all of OLTSs assets and rights, including its intellectual property. The Company may convert, at its
discretion, at any time any amount outstanding under this new loan agreement into equity interest units of OLTS. In addition, during 2010, the Company and OLTS entered into a loan agreement pursuant to which OLTS may borrow from the Company up to
$3.0 million. This loan agreement will expire on June 30, 2013. As of December 31, 2012, no amount had been borrowed under this loan agreement. Any amount extended under this loan agreement will be secured by a security interest on all of
OLTSs assets and rights, including its intellectual property. In addition, the Company has entered into a new investment agreement with OLTS pursuant to which it will invest an amount of up to $4.0 million in OLTS in 2013.
55
A portion of OLTSs equity interest is held by the two developers of certain of
OLTSs technology. The Company has granted each of these two developers a put option to sell a portion of his holdings in OLTS to the Company. There is a limit on the number of equity interest units that these two developers may require the
Company to purchase, upon exercise of this put option, during any twelve month period. These put options will expire on December 31, 2014. The purchase price to be paid by the Company upon the exercise of each put option will be based initially
on the Companys valuation of OLTS used in the framework of equity investments in OLTS prior to exercise of the put option. Upon the achievement of a certain financial milestone by OLTS, the purchase price shall be equal to the fair market
value of the equity interest being sold, as determined by an external appraiser. During 2011 and 2012, these put options were exercised by the two developers and the Company purchased a portion of their equity interests in OLTS for approximately
$0.7 million in cash in each of these years, recorded as research and development expenses. In addition to the put options referred to above, each of the two developers was granted an additional put option to sell his holdings in OLTS to, at the
Companys election, the Company and/or OLTS. These additional put options shall become exercisable starting in 2015, subject to their continued employment and the achievement of a certain financial milestone by OLTS in the fiscal year
immediately preceding the year in which the put option is exercised. The purchase price to be paid by the Company upon the exercise of this put option shall be equal to the fair market value of the equity interest being sold, as determined by an
external appraiser. There is a limit on the number of equity interest units that the two developers may require the Company to purchase, upon exercise of these put options, each year. Both put options shall expire upon the earlier of an initial
public offering, merger and acquisition transaction or a third party investment in OLTS that results in such third party holding at least 5% of OLTSs equity interest.
As a result of the Companys expenditures, commitments and purchase of equity interests, the Company increased its ownership percentage of OLTS to approximately 75.4% on a fully diluted basis as of
December 31, 2012 and it expects that its ownership percentage of OLTS will reach approximately 79.5%, on a fully-diluted basis, during 2013.
In 2011, the Company through its venture capital fund, Orbotech Technology Ventures L.P., entered into an investment agreement pursuant to which it paid $1.5 million to acquire approximately 19%
(calculated on a fully diluted basis) of the share capital of PixCell Medical Technologies Ltd. (
PixCell
), an Israeli company developing diagnostic equipment for point-of-care hematology applications, in particular low cost, high
speed complete blood count (CBC) and hemoglobin level tests (the
PixCell Investment Agreement
). The Company expects to invest an additional $2.0 million in PixCell in 2013 and to purchase shares from other shareholders of PixCell
for a total amount of $0.5 million. Should such additional investment and purchase occur, the Company would hold approximately 37% of the share capital of PixCell (on a fully diluted basis). Under the investment agreement, the Company is entitled to
invest additional amounts and to purchase additional shares from PixCells other shareholders in consideration for an aggregate amount of approximately $8.5 million, following which the Company would be expected to hold approximately 67% (on a
fully diluted basis) of the share capital of PixCell and, subject to its continuous investment in PixCell, the Company will also have the right to acquire 100% of the share capital of PixCell. In the event the Company invests the entire $8.5 million
as aforesaid, then upon the achievement of a certain financial milestone by PixCell the Company will be required, subject to certain terms and conditions, to purchase all (100%) of the shares of PixCell then held by the other shareholders of
PixCell at a price per share-based on a certain formula agreed within the framework of the PixCell Investment Agreement.
In
connection with the PDI Acquisition, Orbotech Ltd. entered into the Loan Agreements and utilized the Discount Bank Loan to finance, in part, the PDI Acquisition, of which $64.0 million was outstanding at December 31, 2012, repayable over a
five-year period ending December 21, 2014. The interest rate with respect to the $24.0 million Fixed Interest Component outstanding at December 31, 2012 is a fixed rate of 4.88%. The interest rate on the remaining $40.0 million Variable
Interest Component outstanding at December 31, 2012 was, until December 31, 2012, based on Discount Banks cost plus 2% and beginning January 1, 2013 became based on Discount Banks cost plus 2.5%. In 2012, the
Companys debt service payment obligations were $3.4 million, reflecting interest on the Discount Bank Loan for 2012 at a rate of 4.08%. The actual interest rate on the outstanding Variable Interest Component at December 31, 2012 was
3.33%. Following the Partial Prepayment, a
56
1/8% change in the annual interest rate would have an insignificant impact upon the annual interest expense on the outstanding $20.0 million Variable Interest Component of the Discount Bank Loan.
On February 11, 2013, Orbotech Ltd. made the Partial Prepayment and accordingly, as of that date, $32.0 million of
the Discount Bank Loan remained outstanding, repayable in four quarterly installments during 2013. The Discount Bank Loan matures on December 21, 2013. $12.0 million of the remaining outstanding amount is the Fixed Interest Component, the
interest rate on which is 4.88%; and the remaining outstanding amount of $20.0 million is the Variable Interest Component, the interest rate on which is based on Discount Banks cost plus 2.5%.
Taking into account the difference in the interest rates payable on the Discount Bank Loan and, based on historical data, the interest
rates the Company can expect to receive on its cash balances, the Company estimates that the Partial Prepayment will result in a reduction of approximately $1.8 million in its financial expenses for 2013.
The Loan Agreements and the Negative Pledge to Discount Bank contain provisions pursuant to which Orbotech Ltd. has agreed to comply with
various affirmative and negative covenants, including certain financial covenants, reporting requirements and covenants that restrict the creation of charges and pledges (other than certain specific charges as listed therein) on its assets in favor
of others, the sale of certain assets and certain acquisition and merger activities without Discount Banks consent. These covenants generally apply until the credit facility is repaid in full. The financial covenants require that the
Companys equity (defined according to the Companys consolidated financial statements as including loans made by the shareholders to the Company that are subordinate to the bank financing after deducting loans made by the Company to the
shareholders and shareholder withdrawals of any type whatsoever) for each quarter commencing from the consolidated balance sheet as of March 31, 2011 shall be no less than the greater of $300.0 million or 30% of the total assets as reflected on
the Companys consolidated balance sheet. The financial covenants also require that the Companys annual consolidated EBITDA (as defined below) commencing from the year ended December 31, 2011 and onwards shall be no less than $40.0
million. This covenant is tested annually by reference to the consolidated financial statements as of the end of each calendar year. In December, 2012, Discount Bank agreed with the Company that, for the year 2012 only, the Companys annual
consolidated EBITDA shall be not less than $28.0 million. The financial covenants also require that the ratio between the Companys Financial Debt (as defined below) and EBITDA beginning as of December 31, 2011 shall not exceed five.
EBITDA and our other non-GAAP measures are described below.
For purposes of the Loan Agreements, EBITDA is
defined as the cumulative amount of the Companys operating income (loss) from current operations as determined pursuant to its consolidated financial statements with respect to the four consecutive calendar quarters ending on the date of the
Companys latest financial statements, before financial income (expenses) (i.e., interest, linkage differentials, exchange rate differentials and fees) and taxes and after adding depreciation and amortization costs of fixed assets and
intangible assets, write-downs and impairment charges of investments, tangible assets, goodwill, intellectual property and other intangible assets, inventory write-offs, compensation costs for equity awards, in-process research and development
charges (not including current research and development expenses), charges due to changes in accounting principles, restructuring charges and losses (gains) from discontinued operations. The Companys EBITDA, calculated in accordance with the
foregoing, was $30.5 million in 2012.
57
The below table reconciles GAAP results to EBITDA as determined in accordance with the Loan
Agreements for the twelve months ended December 31, 2012, 2011 and 2010. As noted above, the financial covenant with respect to EBITDA did not become applicable until 2011 and, with respect to 2012, is $28.0 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollars in thousands
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Net income (loss) attributable to the Company
|
|
$
|
(45,579
|
)
|
|
$
|
47,339
|
|
|
$
|
34,145
|
|
Equity based compensation expenses
|
|
|
3,070
|
|
|
|
3,728
|
|
|
|
4,725
|
|
Write-down of inventories
|
|
|
14,255
|
|
|
|
6,743
|
|
|
|
|
|
Restructuring charges
|
|
|
5,063
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
456
|
|
|
|
7,677
|
|
|
|
7,397
|
|
Financial expenses
|
|
|
5,100
|
|
|
|
6,551
|
|
|
|
7,284
|
|
Fixed asset depreciation
|
|
|
8,057
|
|
|
|
7,654
|
|
|
|
9,489
|
|
Amortization of intangible assets
|
|
|
9,907
|
|
|
|
12,304
|
|
|
|
14,176
|
|
Impairment of intangible assets
|
|
|
30,142
|
|
|
|
|
|
|
|
|
|
Loss (gain) from discontinued operations, net of tax
|
|
|
0
|
|
|
|
(1,363
|
)
|
|
|
8,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (as defined)
|
|
$
|
30,471
|
|
|
$
|
90,633
|
|
|
$
|
85,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For an explanation of the limitations of EBITDA, see the information under the heading Certain
Non-GAAP Information below.
For purposes of the Loan Agreements, Financial Debt is defined as the
Companys liabilities to banks, financial institutions, affiliates, financial leasing and/or through the issue of debt securities. Financial Debt as of December 31, 2012 was $64.0 million and consisted of the Companys debt to
Discount Bank under the Loan Agreements (which, following the Partial Prepayment, was reduced to $32.0 million on February 11, 2013).
In addition, commencing as of January 1, 2010, the Company became required at all times to keep and maintain a cash reserve (or cash equivalent) that is free and clear of any liens, charges or
pledges (other than in favor of Discount Bank) in an aggregate amount exceeding the total amount of the principal and interest due on its Financial Debt within the immediately following one year period, as determined by reference to the
Companys consolidated balance sheet.
If the Company is unable to comply with the applicable covenants, Discount Bank
will be entitled to accelerate the Companys repayments of borrowings under the Loan Agreements. In addition, the Loan Agreements also contain customary provisions allowing for acceleration of repayment of all amounts outstanding under the Loan
Agreements as well as provisions allowing Discount Bank to accelerate repayment in certain other situations, including if an event shall have occurred and/or circumstances exist and/or any situations exist which, in Discount Banks opinion, may
materially prejudice the Companys value and substantially jeopardize the Companys ability to repay amounts outstanding under the Loan Agreements or if, in Discount Banks opinion, a material deterioration has occurred in the
Companys economic condition and/or financial repayment capacity, which substantially jeopardizes the Companys ability to repay amounts outstanding under the Loan Agreements.
As part of the Loan Agreements, Orbotech Ltd. created a floating charge on all of its assets and a fixed charge was created on the shares
of PDI held by Orbotech, Inc. as security for repayment of amounts under the Loan Agreements. The agreements creating the security interests in favor of Discount Bank contain customary terms and provisions and have been filed as exhibits to this
Annual Report.
The Company performs certain forward transactions and other related activities, primarily with respect to
currency hedging, and factoring activities, with Hapoalim. In connection with these activities, the Company is exposed to certain risks of loss. Hapoalim has granted the Company an approved credit risk limit of up to an aggregate amount of US$ 22.0
million. To secure this credit risk, on October 21, 2010, Orbotech Ltd. created the
58
Hapoalim Debenture under which an additional floating charge on all of its assets, that ranked equally with that granted to Discount Bank, was created in favor of Hapoalim. In addition, Orbotech
Ltd. agreed to comply with various operating covenants, including certain reporting requirements, covenants that restrict the creation of charges and pledges on its assets in favor of third parties, the sale of certain assets and certain acquisition
and merger activities, without Hapoalims consent. The Hapoalim Debenture also contained customary provisions allowing for acceleration of repayment of all amounts owed for positions taken by the Company in connection with the Hapoalim Banking
Activities.
In connection with the Partial Prepayment, Orbotech Ltd. entered into letters of agreement with Discount Bank and
with Hapoalim pursuant to which the floating charges created on behalf of Discount Bank and Hapoalim on all of Orbotech Ltd.s assets and the Hapoalim Debenture were cancelled and replaced with Negative Pledges to each of Discount Bank and
Hapoalim. The Negative Pledges provide that Orbotech Ltd. may not create any charges, except for certain specified permitted charges on fixed assets in connection with the financing of their purchase and on documents in connection with the import or
export of goods in connection with the financing of such import or export transaction, and may not sell or otherwise dispose of its assets other than in the ordinary course of business. In the event Orbotech Ltd. breaches its obligations under the
Negative Pledges, this would be deemed an event of default under the Loan Agreements and would entitle Discount Bank to accelerate and require immediate repayment of any amounts outstanding under the Loan Agreements and would also entitle
Hapoalim to accelerate and demand immediate repayment of any amounts owed, including in connection with the Hapoalim Banking Activities.
For more information about certain of the terms of the Loan Agreements and related documents and of the Hapoalim Debenture, including certain risks related to the Loan Agreements, the Partial Prepayment
Arrangements, the Hapoalim Debenture and the Negative Pledges, see, Item 3Key InformationRisk Factor (v); and Item 10Additional InformationMaterial Contracts.
Certain Non-GAAP Information
Non-GAAP net income from continuing operations for 2012 was $2.3 million, or $0.05 per share (diluted), compared with non-GAAP net income from continuing operations for 2011 of $62.2 million, or $1.52 per
share (diluted). The below table (the
Reconciliation
) reconciles GAAP to non-GAAP results from continuing operations for the years ended December 31, 2012, 2011 and 2010.
In this Annual Report, the Company presents certain non-GAAP measures, including non-GAAP net income and non-GAAP earnings per share,
which are described in the Reconciliation. Each measure presented below excludes charges or income, as applicable, related to one or more of the following: (i) equity-based compensation expenses; (ii) certain items associated with
acquisitions, including amortization of intangibles; (iii) restructuring and asset impairments; (iv) loss from discontinued operations; (v) share in losses of associated company; and (vi) tax credits relating to the above items,
in each case, as described in more detail in the Reconciliation.
Management regularly uses these non-GAAP measures to
evaluate the Companys operating and financial performance in light of business objectives and for planning purposes. In addition, these non-GAAP measures are among the primary factors management uses in planning for and forecasting future
periods. The Company also presents EBITDA, which is the basis of its covenant compliance under the Loan Agreements and the importance of such compliance is described below. None of these non-GAAP measures is prepared in accordance with GAAP and they
may differ from non-GAAP measures reported by other companies. The Company believes that these measures enhance investors ability to review and understand trends in the Companys business from the same perspective as management and
understand covenant compliance. If the Company does not comply with the covenants under the Loan Agreements this may, among other things, limit the Companys ability to run its business. The Company believes its presentation of some of these
non-GAAP measures facilitates comparisons between periods because they exclude certain financial expenses. However, the non-GAAP measures presented
59
are subject to limitations as analytical tools, and are not meant to be considered in isolation or as a substitute for the comparable GAAP measures to which they are reconciled. They should be
read only in conjunction with the Consolidated Financial Statements, which are prepared in accordance with GAAP, except as otherwise described therein. Some of the limitations of our non-GAAP measures, including EBITDA, are:
|
|
|
they do not include equity-based compensation, as further described below, and certain other non-cash charges;
|
|
|
|
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future,
and non-GAAP measures do not reflect any cash requirements for such replacements;
|
|
|
|
they do not reflect every cash expenditure, such as tax payments, that are required to be paid in cash and could be material to the Company;
|
|
|
|
they do not reflect changes in, or cash requirements for, working capital needs;
|
|
|
|
they do not reflect the interest expense or the cash requirements necessary to service interest or principal payments under the Loan Agreements;
|
|
|
|
they do not reflect the impact of income or charges resulting from matters the Company considers not to be indicative of its ongoing operations; and
|
|
|
|
other companies may calculate these measures differently than Orbotech does, limiting their usefulness as a comparative tool.
|
The effect of equity-based compensation expenses has been excluded from the non-GAAP net income measure.
Although equity-based compensation is a key incentive offered to employees, and the Company believes such compensation contributed to the revenues earned during the periods presented and also believes it will contribute to the generation of future
period revenues, the Company continues to evaluate its business performance excluding equity based compensation expenses. Equity based compensation expenses are expected to recur in future periods.
The effects of amortization of intangible assets and impairment charges have also been excluded from the non-GAAP net income measure.
These items are inconsistent in amount and frequency and are significantly affected by the timing and size of acquisitions. The use of intangible assets contributed to revenues earned during the periods presented and will also contribute to future
period revenues. Amortization of intangible assets will recur in future periods and the Company may be required to record additional impairment charges in the future. The Company believes that it is useful for investors to understand the effects of
these items on total operating expenses. Although these expenses are non-recurring with respect to past acquisitions, these types of expenses will generally be incurred in connection with any future acquisitions.
60
Reconciliation of GAAP to Non-GAAP Results from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
U.S. dollars in thousands
(except per
share data)
|
|
Reported operating income (loss) on GAAP basis
|
|
$
|
(40,816
|
)
|
|
$
|
60,061
|
|
|
$
|
57,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity based compensation expenses
|
|
|
3,070
|
|
|
|
3,728
|
|
|
|
4,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
5,063
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
9,907
|
|
|
|
12,304
|
|
|
|
14,176
|
|
Impairment of intangible assets
|
|
|
30,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP operating income
|
|
$
|
7,366
|
|
|
$
|
76,093
|
|
|
$
|
76,588
|
|
Reported net income (loss) attributable to Orbotech Ltd. on GAAP basis
|
|
$
|
(45,579
|
)
|
|
$
|
47,339
|
|
|
$
|
34,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity based compensation expenses
|
|
|
3,070
|
|
|
|
3,728
|
|
|
|
4,725
|
|
Restructuring charges, net of tax credit
|
|
|
4,593
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
9,907
|
|
|
|
12,304
|
|
|
|
14,176
|
|
Impairment of intangible assets
|
|
|
30,142
|
|
|
|
|
|
|
|
|
|
Loss (income) from discontinued operations, net of tax (1)
|
|
|
|
|
|
|
(1,363
|
)
|
|
|
8,717
|
|
Share in losses of associated company
|
|
|
165
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income from continuing operations
|
|
$
|
2,298
|
|
|
$
|
62,187
|
|
|
$
|
61,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income from continuing operations per sharediluted
|
|
$
|
0.05
|
|
|
$
|
1.52
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in non-GAAP net income per share calculation
|
|
|
44,071
|
|
|
|
40,816
|
|
|
|
35,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The income from discontinued operations, net of tax, of $1,363,000 in 2011, and losses from discontinued operations, net of tax, of $8,717,000 in 2010, are attributable
to the re-classification during 2010 of OMS and OMD as discontinued operations.
|
The Company routinely receives
letters of credit or promissory notes in connection with the sale of products in the Far East and Japan. From time to time, it sells some of these letters of credit and promissory notes to third parties at a discount in return for cash. During 2012,
the Company sold approximately $33.7 million of these instruments.
The Company uses financial instruments and derivatives in
order to limit its exposure to risks arising from changes in foreign currency exchange rates. The use of such instruments does not expose the Company to additional exchange rate risks since the derivatives are held against an asset (for example,
excess assets in Euros). See Item 11Quantitative and Qualitative Disclosures About Market Risk. The Companys policy in utilizing these financial instruments is to protect the Dollar value of its cash, cash equivalent and marketable
securities assets rather than to serve as a source of income.
The Company is not aware of any material commitments for
capital expenditures in the future and believes that its cash and cash equivalents available as of December 31, 2012 and funds generated from operations will be sufficient to meet its working capital requirements for the next twelve months.
5.C Research and Development, Patents and Licenses, etc.
(a) Research and Development Policy
The Company places considerable emphasis on research and development projects designed to upgrade its existing product lines and to
develop new technologies and additional industrial and service applications of its
61
existing technologies. Research and development expenses are incurred prior to the time that revenue is generated from new products. It may take many years to realize the benefit of research and
development expense, if any is realized at all. As of December 31, 2012, 390 employees were engaged primarily in research and development for the Company.
The following table shows the total research and development expenditures of the Company and participations in such expenditures (mainly by the Government of Israel) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Internally-funded research and development expenditures
|
|
$
|
71,815
|
|
|
$
|
84,180
|
|
|
$
|
78,327
|
|
Governmental participations
|
|
|
1,821
|
|
|
|
1,985
|
|
|
|
2,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outlay for research and development
|
|
$
|
73,636
|
|
|
$
|
86,165
|
|
|
$
|
81,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The governmental participations in the year ended December 31, 2012 represent funding of $1.1
million by the OCS through a royalty-free program for the development of generic technologies and $0.7 million by the Commission of the European Community.
Israeli Government consent is required to manufacture products developed with OCS participations outside of Israel and to transfer to third parties know-how developed through projects in which the Israeli
Government participates. Such restrictions do not apply to the export from Israel of the Companys products developed with such know-how.
(b) Intellectual Property
To safeguard its
proprietary product design and technology, the Company relies, in part, on patent, trade secret, trademark and copyright law, as well as technical safeguards. Proprietary software is generally protected under copyright law. Additionally, the Company
relies upon trade secrets and regularly enters into non-disclosure agreements with its employees, subcontractors and potential business associates. According to the Companys records as of January 31, 2013, at that date the Company held
101 United States patents, and 138 corresponding non-United States patents, and had 38 United States patent applications, and 207 non-United States patent applications, pending.
Notwithstanding the above, there can be no assurance that any patent owned or licensed by the Company will not be invalidated, designed
around, challenged or licensed to others, that any of the Companys pending or future patent applications will be issued with the scope of the claims sought by the Company, if at all, or that non-disclosure agreements will not be breached. In
addition, patent coverage may not be extended to all countries, and effective copyright and trade secret protection may be unavailable or limited in certain countries. There can also be no assurance that the steps taken by the Company will prevent
misappropriation of its technology. It is also possible that technology developed by the Company may be infringing on patents or other rights held by others. The Company has received in the past, and may in the future receive, communications
asserting that the technology used in some of its products requires third-party licenses. Any infringement claims, whether or not meritorious, could result in costly litigation or arbitration and divert the attention of technical and management
personnel. Any adverse outcome in any litigation alleging infringement could result in the loss of proprietary rights, require the Company to develop non-infringing technology or enter into royalty or licensing agreements (which it may not be
successful in achieving) or prevent the Company from manufacturing or selling its products.
The Company has in the past
received and may receive in the future notifications from customers with respect to possible indemnification or other action by the Company in connection with intellectual property
62
claims resulting from use of the Companys products. The Company typically undertakes, subject to various contractual conditions and other limitations, to defend intellectual property claims
against customers arising from the purchase and use of its products. The Companys obligations under these agreements generally provide that the Company may, at its option, either obtain the right to continue using the products or modify them
and, in some cases, take back the products with a refund to the customer. To date, no demands have been made by customers seeking indemnification against the Company with respect to intellectual property claims.
Although the Company continues actively to pursue the protection of its intellectual property in the belief that its patents have
significant value, it also believes that rapid technological improvement and factors such as the knowledge and experience of the Companys management personnel and employees and their continued ability to define, develop, enhance and market new
products and services afford additional protection which may, in some instances, exceed patent protection.
5.D Trend Information
Industry conditions for the Companys business were difficult during 2012 and the Company does not anticipate a significant improvement for at least the first half of 2013. The Company has continued
to be affected by the ongoing uncertainty and weakness in global economic conditions, which commenced towards the end of 2011 in the Euro zone and spread to other areas of the world. These conditions impacted the Companys financial position
and results for 2012. Conditions generally in the electronics industry, particularly in the Far East, are tied to the global economic climate and uncertainty, as well as downturns with respect thereto, negatively impact the electronics industry and
the Companys business.
As a result of these conditions and the associated oversupply of FPDs, during 2012 the FPD
industry experienced its lowest level of investments in facilities for more than a decade, with the only area to show steady expansion through capital expenditures being the LCD panels for mobile devices, which was driven by global demand for
tablets and smart phones. Most of these investments in 2012 were in Taiwan. Despite the fact that total sales of FPD-related equipment in 2012 were lower than originally expected, the Company continues to offer technology and productivity
enhancements for customers installed base of systems in order to better support their advanced and evolving production requirements and challenges. The Company has also improved its competitive position in the FPD industry by promoting
innovative solutions for high resolution, LTPS-based displays and screens with complex periphery designs. In addition, the Company is planning to launch new product models designed to support the latest technology trends. Many FPD manufacturers have
or are expected to report a return to profitability at the end of 2012 and industry analysts anticipate moderate growth in demand for FPDs and increased levels of investment in capital equipment in 2013. The Company expects that the majority of this
capital investment will be in greater China, where the Company is well placed to benefit from its substantial service and support infrastructure. As FPD manufacturers gradually overcome the technical and yield barriers associated with these new
technologies, and as demand for smart televisions and ultra high resolution displays begins to pick up, the Company plans to offer products designed to enable more efficient mass production of these advanced displays.
Global PCB production declined by approximately 1.8% in 2012 (based on the dollar value of production). The Companys PCB business
continues to be driven by demand for its yield-enhancing and production solutions, including its technologically advanced direct imaging, automated optical inspection and repair products and digital legend printing, some of which are critical in the
mass production of high-density interconnect PCBs. Industry analysts project that the PCB industry will return to growth in 2013, with the principal growing segments expected to be HDI and flexible PCBs. The Company expects in 2013 to record further
revenues from sales from its high-speed UV laser drilling product, as PCB manufacturers become increasingly aware of the benefits offered by this product. As a consequence of this and the other factors described above, the Company anticipates a
moderate improvement in its PCB and ECM businesses in 2013 as compared to 2012, although that improvement is expected to be weighted toward the latter part of 2013.
63
The Company believes it will benefit from its current positioning as a provider of solutions
designed to meet the production challenges associated with higher end technology as production of PCB and FPDs expands in China and shifts to these complex devices in response to the increasing local consumer demand for electronic devices. As a
result of this geographic trend, the Company is, however, increasingly exposed to the risks and complexities inherent in doing business in international markets, some of which, such as those associated with the effective regulation and protection of
intellectual property rights, are particularly acute in China. In addition, the Company faces continuing pricing pressure, particularly in China, as a result of competition from local manufacturers of PCB and FPD inspection equipment.
The Companys gross profit margin during 2012 was approximately 37.7% (after taking into account the write-down of inventories in
2012 of $14.3 million). The Company expects to experience continued pricing pressure, stemming mainly from competitive factors; however, it believes that the positive effects of its cost reduction steps, the improved utilization rates at its
facilities, a greater portion of its business attributable to sales rather than service and the more favorable product mix, including new and premium products, will lead to improved margins in its business during 2013 as compared with 2012. When
total revenues are disproportionately weighted in favor of service, as opposed to product, revenues, as can occur during periods of lower capital expenditure, such as was the case in 2012, the Company tends to experience lower overall profit margins
since service revenues typically result in lower margins than revenues derived from product sales.
During 2013, the Company
intends to continue to invest in its long-term research and development program at a level similar to its 2012 investments with a shift in emphasis towards long-term projects and new products. The Companys plans include focusing on expanding
and improving its portfolio of PCB and other ECM products. The Company will continue to focus on supporting its customers and expanding its product offerings, and believes that its longstanding commitment to providing dependable, first class service
and support to its customers will enable it to continue to generate service-related revenues throughout varied business cycles and to capitalize on improving business conditions.
The Company intends to continue to pursue strategic initiatives, including acquisitions, to expand its product offerings to its existing
PCB and FPD customers, enter new industries and broaden and develop its character recognition, artificial intelligence and related forms processing software platform.
5.E Off-Balance Sheet Arrangements
The
Company does not use off-balance sheet arrangements or transactions with unconsolidated, limited-purpose entities to provide liquidity, financing or credit support or to engage in leasing, hedging or research and development activities or which
would expose the Company to liability that is not reflected on the face of its financial statements. The Company is not a party to any off-balance sheet arrangements which are required to be disclosed under this Item 5.E of Form
20-F.
64
5.F Tabular Disclosure of Contractual Obligations
The following table summarizes the Companys contractual obligations as at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
Payment due
|
|
|
|
Total
|
|
|
At
December 31,
2012
|
|
|
in 2013
|
|
|
2013-2015
|
|
|
2016-2017
|
|
|
2018 and
beyond
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
46.6
|
|
|
|
46.6
|
|
|
|
9.1
|
|
|
|
22.3
|
|
|
|
8.5
|
|
|
|
15.8
|
|
Purchase obligations
|
|
|
77.0
|
|
|
|
77.0
|
|
|
|
63.0
|
|
|
|
77.0
|
|
|
|
|
|
|
|
|
|
Loan Agreements
|
|
|
64.0
|
|
|
|
64.0
|
|
|
|
64.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
187.6
|
|
|
|
187.7
|
|
|
|
136.1
|
|
|
|
99.3
|
|
|
|
8.5
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations represent commitments under various commercial facility and vehicle leases.
Purchase obligations mainly represent outstanding purchase commitments for inventory components ordered in the normal course of business. Loan Agreements obligations represent repayment of principal under the Loan Agreements and do not include
interest payments due thereunder. The Company made the Partial Prepayment on February 11, 2013 and as of such date total obligations under the Loan Agreements were reduced to $32.0 million, repayable in four quarterly installments during 2013.
The Company is not a party to any capital leases.
The total amount of gross unrecognized tax benefits for uncertain tax
positions, including positions impacting only the timing of tax benefits, was $20.1 million at December 31, 2012, of which $16.5 million was classified as long-term liabilities and $3.6 million was classified as short-term liabilities. Payment
of these obligations would result from settlements with taxing authorities. Due to the difficulty in determining the timing of settlements, these uncertain tax position obligations are not included in the table above.
5.G Safe Harbor
The safe harbor provided in Section 27A of the Securities Act and Section 21E of the Exchange Act shall apply to forward-looking information provided pursuant to Items 5.E and F.
65
Item 6.
|
Directors, Senior Management and Employees
|
6.A Directors and Senior Management
As of
January 31, 2013, the Directors and the Senior Management and Corporate Officers of the Company (the
Directors and/or Executives
) were as follows:
|
|
|
|
|
|
|
Name
|
|
Date of Birth
|
|
Director Since
|
|
Position with the Company
|
Yochai Richter (1)
|
|
September 17, 1942
|
|
1992
|
|
Active Chairman of the Board of Directors of the Company (the
Board
); Class I Director
|
Dr. Michael Anghel (2)
|
|
January 13, 1939
|
|
2008 (3)
|
|
Chairman of the Audit Committee of the Board; External Director
|
Yehudit Bronicki
|
|
December 29, 1941
|
|
2000 (4)
|
|
Class III Director
|
Dan Falk (5)
|
|
January 12, 1945
|
|
1997
|
|
Chairman of the Nominating Committee of the Board; Class II Director
|
Avner Hermoni (6)
|
|
December 4, 1947
|
|
2012
|
|
External Director
|
Gideon Lahav (7)
|
|
December 9, 1929
|
|
2009 (8)
|
|
Chairman of the Remuneration Committee of the Board; External Director
|
Dr. Jacob Richter (1)
|
|
December 24, 1945
|
|
2012 (9)
|
|
Class III Director
|
Eliezer Tokman (10)
|
|
May 13, 1950
|
|
2007
|
|
Class I Director
|
Prof. Shimon Ullman (11)
|
|
January 28, 1948
|
|
1992
|
|
Class II Director
|
Arie Weisberg
|
|
October 19, 1950
|
|
2010
|
|
Class III Director
|
Asher Levy
|
|
February 15, 1959
|
|
|
|
Chief Executive Officer
|
Amichai Steimberg
|
|
May 25, 1962
|
|
|
|
President and Chief Operating Officer
|
Abraham Gross
|
|
April 29, 1951
|
|
|
|
Executive Vice President and Chief Technology Officer (12)
|
Doron Abramovitch
|
|
September 29, 1968
|
|
|
|
Corporate Vice President and Chief Financial Officer
|
Adrian Auman
|
|
December 16, 1954
|
|
|
|
Corporate Vice President Investor Relations and Special Projects
|
Michael Havin
|
|
December 14, 1958
|
|
|
|
Corporate Secretary
|
The above table should be read in conjunction with Item 6Directors, Senior Management and EmployeesBoard PracticesMembership of Board; External Directors; Independent Directors;
Financial Experts.
(1)
|
Yochai Richter and Dr. Jacob Richter are brothers.
|
(2)
|
Member of the Audit Committee of the Board and the Remuneration Committee of the Board (the
Audit Committee
and the
Remuneration
Committee
, respectively).
|
(3)
|
Dr. Anghel also served as a director of the Company between April 1, 1986 and October 27, 1992 and between November 19, 1992 and June 25, 2006;
and as an external director between June 21, 2000 and June 25, 2006.
|
(4)
|
Mrs. Bronicki also served as a director of the Company between August 15, 1993 and February 27, 1994.
|
(5)
|
Member of the Audit Committee, the Remuneration Committee and the Nominating Committee of the Board (the
Nominating Committee
).
|
(6)
|
Member of the Audit Committee and the Remuneration Committee.
|
(7)
|
Member of the Audit Committee, the Remuneration Committee and the Nominating Committee.
|
(8)
|
Mr. Lahav also served as a director of the Company between December 28, 1998 and June 25, 2006; and as an external director between June 21, 2000
and June 25, 2006.
|
66
(9)
|
Dr. Richter also served as a director of the Company between October 27, 1992 and August 15, 1993 and between September 29, 1997 and
February 11, 2009.
|
(10)
|
Member of the Remuneration Committee.
|
(11)
|
Member of the Nominating Committee.
|
(12)
|
Dr. Gross is currently on unpaid leave of absence until October 2013, at which time he is expected to return to the Company.
|
* * * * * * * * * *
Yochai Richter has been the Active Chairman of the Board since May 8, 2006, and was the Chief Executive Officer of the Company from
November 2002 to May 8, 2006. He was the President and Chief Executive Officer from November 1994 to November 2002 and was a joint Managing Director and Chief Executive Officer from October 1992 to November 1994. Mr. Richter was among the
founders of Orbot and served as a member of the board of directors and as a managing director of that company from its organization in 1983 until the Merger. He received his degree in mathematics from the Technion-Israel Institute of Technology (the
Technion
) in Haifa in 1972.
Dr. Michael Anghel is a member of the board of directors of Partner
Communications Company Ltd., a cellular telephone company and Syneron Medical Ltd., which designs, develops and markets aesthetic medical products, both of which are Israeli Nasdaq-listed companies. He is also a director of the Strauss-Group Ltd.,
Dan Hotels Corporation Ltd, Evogene Ltd. and BioLineRx Ltd., all of which are Israeli companies listed on the Tel Aviv Stock Exchange (the
TASE
). Dr. Anghel is chairman of Gravity Ltd., and also serves as chairman of the
board of directors of the Israeli Center for Educational Technology. From 2004 to 2005, he served as the president and chief executive officer of Discount Capital Markets Ltd. In 1999, he founded CAP Ventures Ltd., and served as its managing
director from 1999 to 2004. From 1977 to 1999, he served as director and senior manager of Discount Investment Corporation Ltd. (
DIC
). Dr. Anghel has been instrumental in founding several major Israeli communications
operating companies including the principal Israeli cable television company and the major Israeli cellular telephone company, as well as a variety of other advanced technology ventures. Dr. Anghel was formerly a full-time member of the faculty
of the Graduate School of Business Administration of Tel Aviv University and currently serves as chairman of Lahav, its Executive Program. Dr. Anghel received his bachelors degree in economics from the Hebrew University of Jerusalem (the
Hebrew University
) and his masters degree in business administration and a doctorate in finance and business from Columbia University.
Yehudit Bronicki has, since 1991, been the Managing Director of Ormat Industries Ltd. (
Ormat
), an Israeli manufacturer and developer of renewable energy power plants, the predecessor of
which, Ormat Turbines Ltd., she co-founded in 1965. Mrs. Bronicki is the chief executive officer, and a member of the boards of directors, of Ormat Technologies, Inc. (
Ormat Technologies
), a subsidiary of Ormat and a Delaware
company listed on the New York Stock Exchange, and its subsidiaries. She served as a member of the Advisory Board of the Bank of Israel between 1994 and 2001. Mrs. Bronicki received her bachelors degree in social sciences from the Hebrew
University, followed by advanced studies in management, finance and marketing.
Dan Falk serves as a member of the boards of
directors of Nice Systems Ltd. (
Nice
), which develops and provides multimedia digital recording solutions, Attunity Ltd., which develops and provides technology solutions for integrating disparate data sources and Nova Measuring
Instruments Ltd., which develops, produces and markets monitoring, measurement and process control systems for the semiconductor manufacturing industry, all of which are Israeli Nasdaq-listed companies, and of Ormat Technologies. He is also chairman
of the board of directors of Orad Hi-Tec Systems Ltd. and is a member of the boards of directors of Plastopil Ltd. and Amiad Water Systems Ltd., all of which are Israeli companies. From July 1999 to November 2000, he served as the president and
chief operating officer of Sapiens International Corporation N.V., a Netherlands Antilles company
67
engaged in the development of software solutions for large-scale, cross-platform systems. He was Executive Vice President of the Company from August 1995 to July 1999 and, between June 1994 and
August 1995, served as its Executive Vice President and Chief Financial Officer. Prior thereto, he was Vice President and Chief Financial Officer of the Company from October 1992 until June 1994. He was director of finance and chief financial
officer of Orbot from 1985 until consummation of the Merger. He received a masters degree in business administration in 1973 from the Hebrew University School of Business and had 15 years experience in finance and banking, including senior
positions at Discount Bank, prior to joining Orbot.
Avner Hermoni has, since 2007, served as chief executive officer of
NaanDanJain Irrigation Ltd., an Israeli corporation which produces and markets tailor-made irrigation solutions globally. From 2003 to 2005, he was chief operations officer of Nice and, from 2000 to 2003, was chief executive officer of Shiron
Satellite Communications Ltd., a company that develops and deploys two-way, broadband, internet protocol-over-satellite solutions. From 1997 to 1999, he simultaneously held the positions of President at Kulicke & Soffa (Israel) Ltd. and
Corporate Vice President at Kulicke & Soffa Industries, Inc., a Nasdaq-listed company that designs and manufactures semiconductor assembly equipment. From 1990 to 1997 he served as president of Orbot Instruments Ltd., a company that
produced systems for inspecting patterned silicon wafers for yield enhancement and masks used during the patterning process. From 1986 to 1989 he served as co-managing director of Orbots subsidiary in Belgium. Mr. Hermoni holds a
bachelors degree in economics from the University of Haifa.
Gideon Lahav serves as a member of the boards of directors
of DIC, Koor Industries Ltd. and The First International Bank of Israel Ltd., all of which are Israeli publicly-traded companies. From 1991 to 1997, he served as the chairman of the boards of directors of Discount Bank and its major banking
subsidiaries, Israel Discount Bank of New York, Mercantile Discount Bank Ltd. and Discount Mortgage Bank Ltd. From 1986 to 1991, he served as the managing director of Discount Bank and, from 1979 to 1986, as its deputy general manager. From 1974 to
1979 Mr. Lahav held the position of general manager of Barclays Discount Bank Ltd. (subsequently renamed Mercantile Discount Bank Ltd.). Between 1953 and 1974 he served in various capacities with the Government of Israel, including with the
Ministry of Finance and the Ministry of Foreign Affairs, and, from 1969 to 1974, as the Director General of the Ministry of Industry and Trade. Mr. Lahav received his bachelors degree in economics from the Hebrew University in 1953.
Dr. Jacob Richter serves as the chairman of the board of directors and chief technology officer of Medinol Ltd., an
Israeli company that designs, manufactures and sells stents, and has been a director of that company since 1993 and also serves on the boards of directors of a number of other privately held companies. He was managing director of
MarathonCapital Development Fund Ltd., an Israeli venture capital fund, from 1992 to 1994, and was director of marketing of Orbot from January 1992 until consummation of the Merger. Previously, he was director of new product development of
Orbot from January 1990 until 1992, and director of product development of Orbot from 1986 until 1990. Prior to joining Orbot he was head of research and development of the Israeli Air Force. He holds a doctorate in brain research from Tel Aviv
University and has worked as a post-doctoral and research fellow at the Artificial Intelligence Laboratory of The Massachusetts Institute of Technology (
MIT
).
Eliezer Tokman currently serves as the chief executive officer of Siemens Israel and on the boards of directors of a number of
privately-held companies. From 2001 to 2002, he served as senior vice president at Philips Medical Systems responsible for business integration, and from 1998 to 2001, he was employed by Marconi Medical Systems in the positions of senior vice
president for product strategies and director of global computed tomography (CT) engineering. From 1977 to 1998, Mr. Tokman was employed within the Elscint group of companies in a variety of managerial roles, including as president of Elscint
America and general manager of the CT division. Mr. Tokman holds a bachelors degree in electrical engineering from the Technion.
Prof. Shimon Ullman holds the position of professor of computer science in the Computer Science and Applied Mathematics Department of the Weizmann Institute of Science and served as head of that
department from 1994 to 2003. He was the chief scientist of Orbot from its organization in 1983 until consummation of the
68
Merger and of the Company following the Merger until 2005. Prof. Ullman was previously a full professor at the Artificial Intelligence Laboratory of MIT. From 1997 to 2003, he served on a
part-time basis as the chief scientist for new products development in the process diagnostic and control product business group of Applied Materials, Inc. Prof. Ullman is a member of the Israel Academy of Sciences and Humanities and was the 2008
recipient of the international Rumelhart award in human cognition.
Arie Weisberg serves as a member of the board of directors
of Lumenis Ltd., an Israeli Nasdaq-listed company, and Advanced Vision Technology Ltd. From May 2006 to June 2009, he was President and Chief Operating Officer of the Company. From November 2002 to May 2006, he was Co-President for Global Resources,
and from August 2000 to November 2002 he served as Executive Vice President for Global Resources. From January to August 2000, he was Corporate Executive Vice President for Global Resources and Chief Financial Officer. From August 1995 to January
2000, he was Corporate Vice President for Finance and Administration and Chief Financial Officer. From January 1993 to August 1995, he was co-general manager of Orbotech S.A. and from July 1991 to January 1993, he was director of finance and
operations of Orbots subsidiary in Belgium. Prior to joining Orbot he was, from 1988 to 1991, general manager of Sinus Ltd., a manufacturer of internal combustion valves, and from 1984 to 1988, he was west region general manager of Solcoor
Inc. He received his bachelors degree in agricultural economics from the Hebrew University.
Asher Levy has been the
Chief Executive Officer of the Company since January 1, 2013, and served as President Global Business from June 2010 to December 2012, and as Deputy Chief Executive OfficerGlobal Business from July 2009 to May 2010. From July 2006 to June
2009, he served as Executive Vice President for Business and Strategy, prior to which he had, from November 2002 to July 2006, served as Corporate Vice President and President of the Printed Circuit Board Division. From November 2000 to October
2002, he served as the managing director of Orbotech Technology Ventures, the wholly-owned venture capital fund of the Company, and from June 1997 to July 2000, he served as the President of Orbotech Pacific Ltd. He joined Orbot in 1990, and between
that time and 1997 he held various managerial and marketing positions with Orbot and, following the Merger, with the Company, including vice president for sales and marketing at Orbotech, Inc. Prior to joining Orbot, Mr. Levy worked for Digital
Equipment Corporation. Mr. Levy holds a bachelors degree in industrial engineering and management from Ben-Gurion University of the Negev in Israel and a masters degree in business administration from Tel Aviv University. He is a
graduate of the advanced management program at Harvard Business School.
Amichai Steimberg has been the President and Chief
Operating Officer of the Company since January 1, 2013, and served as Chief Operating Officer from June 2010 to December 2012, and as Deputy Chief Executive OfficerGlobal Finance and Operations from July 2009 to May 2010. From May 2006 to
June 2009, he served as Executive Vice President and Chief Financial Officer, prior to which he had, from August 2000 to May 2006, served as Corporate Vice President for Finance and Chief Financial Officer. From January 1997 to July 2000, he served
as the Executive Vice President of Orbotech, Inc., and from 1995 to January 1997, he served as that companys Vice President Finance and Operations. Prior to joining Orbotech, Mr. Steimberg was Chief Financial Officer of Orbot Instruments
Ltd. Mr. Steimberg obtained his bachelors degree in agricultural economics and business administration from the Hebrew University.
Dr. Abraham Gross has been Executive Vice President and Chief Technology Officer since July 2009. Commencing from October 13, 2012, he has been on a period of leave of absence from the Company which
is scheduled to last for one year, during which he is serving as the Deputy Chief Scientist of the OCS. From May 2006 to June 2009, Dr. Gross served as Executive Vice President and Chief Technology Officer. From 2000 to May 2006, he served as
Chief Scientist of the Company. From 1998 to 2000, during a leave of absence from Orbotech, he served as the chief engineer of Microvision, Inc., a Seattle-based developer of high resolution, scanned beam display and imaging systems. Prior to 1998,
and since joining the Company in 1985, Dr. Gross held various managerial and research positions, in the course of which he has been involved in the research and development of optical techniques for testing and inspection of electronic
materials, laser plotter technologies and laser matter interaction. Dr. Gross has authored numerous scientific publications in the field of electro-optics
69
and optical engineering. He received both his bachelors and masters degrees in physics from the Technion, and holds a doctorate in physics and atmospheric sciences from Drexel
University.
Doron Abramovitch has been Corporate Vice President and Chief Financial Officer since May 1, 2011. Prior to
joining Orbotech, from April 2010 to April 2011, Mr. Abramovitch served as senior executive vice president and chief operating officer of Bagir Group Ltd. (
Bagir
), until 2007 an Israeli TASE-listed company, where he was
responsible for worldwide operations. From 2005 to April 2010, he served as chief financial officer of Bagir and, from April 2009 to April 2011, as chief executive officer of Bagirs German subsidiary. Prior to joining Bagir,
Mr. Abramovitch served, from 2000 to 2005, as chief financial officer and, from 2004 to 2005, as chief executive officer and chief financial officer, of Phytech Technologies (2000) Ltd., then an Israeli TASE-listed company.
Mr. Abramovitch is a certified public accountant and received a bachelors degree and his masters degree in business administration from Tel Aviv University.
Adrian Auman has been Corporate Vice President Investor Relations and Special Projects since September 2008. From May 2006 to September 2008 he was Vice President for Finance and Investor Relations, prior
to which he had, since January 2000, served as Director of Finance and Investor Relations and, from July 1997 to January 2000, as Director of Finance. He was the financial controller of the Company from October 1992 to July 1997 and was the
financial controller of Orbot from 1988 until the Merger. Prior to joining Orbot, he was an audit supervisor at Kesselman & Kesselman, independent registered public accountants in Israel, from 1986 to 1988 and a tax manager at Goldstein,
Golub, Kessler & Co., certified public accountants, from 1979 to 1985. He is a certified public accountant both in Israel and the United States and has a masters of science degree from Pace University in New York.
Michael Havin has been Corporate Secretary since August 1996. Prior to joining the Company he practiced as a commercial attorney in
Jerusalem from 1991 to 1995 and in Melbourne, Australia, from 1983 to 1989. He is qualified to practice law both in Israel and in Australia and holds bachelor of laws and bachelor of arts degrees from Monash University in Melbourne.
The Articles of Association of the Company (the
Articles
) provide that a director may, by written notice to the
Company, appoint another person to serve as an alternate director provided that such appointment is approved by a majority of the directors then in office, and that such appointing director may remove such alternate. Any alternate director shall be
entitled to notice of meetings of the Board and of relevant committees and to attend and vote accordingly, except that the alternate has no standing at any meeting at which the appointing director is present or at which the appointing director is
not entitled to participate as provided in the Companies Law. A person who is not qualified to be appointed as a director, or a person who already serves as a director or an alternate director, may not be appointed as an alternate director. Unless
the appointing director limits the time or scope of the appointment, the appointment is effective for all purposes until the earlier of (i) the appointing director ceasing to be a director; (ii) the appointing director terminating the
appointment; or (iii) the occurrence, with respect to the alternate, of any of the circumstances under which a director shall vacate his or her office. The appointment of an alternate director does not in itself diminish the responsibility of
the appointing director, as a director. An alternate director is solely responsible for his or her actions and omissions and is not deemed an agent of the appointing director. Under the Companies Law, external directors cannot generally appoint
alternate directors, and a person who is not qualified to be appointed as an independent director may not be appointed as an alternate to an independent director. See Membership of Board; External Directors; Independent Directors;
Financial Experts below with respect to independent directors. At present, there are no appointments of alternate directors in effect.
The Articles also provide that the Board may delegate any, or all, of its powers to one or more committees of the Board, and may entrust to and confer upon a Managing Director such of its powers as it
deems appropriate. However, the Companies Law provides that certain powers and authorities (for example, the power to approve the financial statements) may not be delegated and may be exercised only by the Board.
70
Yochai Richter and Dr. Jacob Richter are brothers. Other than that, there are no family
relationships among any of the Directors and/or Executives. None of the Directors and/or Executives is elected or appointed under any arrangement or understanding with any major shareholder, customer, supplier or otherwise.
6.B Compensation
The following table sets forth, with respect to the Directors and/or Executives as a group, all remuneration paid by the Company during the fiscal year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, fees,
directors
fees,
and
bonuses
(including
deferred
compensation)
|
|
|
Securities or
property,
insurance
premiums
or
reimbursement,
personal benefits
(including
benefits in kind)
and payments or
accruals for
retirement,
severance,
disability or
similar payments
|
|
|
Amount
recognized for
financial
statement
reporting
purposes for
stock
options,
Restricted
Shares and RSUs
|
|
All Directors and/or Executives as a group (consisting of 18 persons including two who are no longer Directors and/or
Executives)
|
|
$
|
4,169,769
|
|
|
$
|
380,367
|
|
|
$
|
862,298
|
|
(a) Approval Required for Directors and/or Executives Compensation
Prior to a recent amendment to the Companies Law which became effective on December 12, 2012 (the
2012
Amendment
), arrangements with respect to the terms of office and employment of office holders required the approval of the audit committee and of the board of directors and, with respect to the terms of office and employment of directors,
also the approval of the shareholders by a simple majority. Following the 2012 Amendment, public companies are required to appoint a remuneration committee that meets certain independence criteria as described below, and that replaces the audit
committee with respect to the approval of these matters.
The term office holder as defined in the Companies Law includes a
general manager, chief executive officer, executive vice president, vice president, any other person fulfilling or assuming any of the foregoing positions without regard to such persons title, as well as a director or a manager directly
subordinate to the general manager or chief executive officer.
Pursuant to the 2012 Amendment, any arrangement between a
public company and an office holder of the company as to such office holders terms of office and employment, including exemption and release of the office holder from liability for breach of his or her duty of care to the company, an
undertaking to indemnify the office holder, post factum indemnification or insurance; any grant, payment, remuneration, compensation, or other benefit provided in connection with termination of service; and any benefit, other payment or undertaking
to provide any payment as aforesaid (
Terms of Office and Employment
), now generally requires the approval of the companys remuneration committee and the board of directors and, with respect to directors and the chief
executive officer, also the companys shareholders.
In addition, pursuant to the 2012 Amendment, the Terms of Office and
Employment of office holders need to be in accordance with the terms of a compensation policy which companies are required to adopt by September 11, 2013 (the
Compensation Policy
). The Compensation Policy must be based on
those considerations, must include those provisions and needs to reference those matters as are detailed in the Companies Law. The Compensation Policy must be approved by the companys board of directors, after
71
considering the recommendations of the remuneration committee. In addition, the Compensation Policy needs to be approved by the companys shareholders by a simple majority, provided that
(i) such majority includes at least a majority of the shareholders who are not controlling shareholders and who do not have a personal interest in the matter, present and voting (abstentions are disregarded), or (ii) the non-controlling
shareholders or shareholders who do not have a personal interest in the matter who were present and voted against the policy, hold two percent or less of the voting power of the company (the
Compensation Majority
).
The board of directors and the remuneration committee may override the resolution of the shareholders following a re-discussion of the
matter and for specified reasons.
A Compensation Policy that is for a period of more than three years generally needs to be
brought for approval in accordance with the above procedure every three years.
Notwithstanding the above, the amendment of
existing Terms of Office and Employment of office holders (other than directors), requires the approval of the remuneration committee only, if the committee determines that the amendment is not material in relation to its existing terms.
During the transition period, until a Compensation Policy is adopted, the Terms of Office and Employment of an office holder, including
any amendment thereof, are required to be approved as described below with respect to the different categories of office holders and must be based on, must include and need to reference the same matters as those required with respect to the
Compensation Policy described above.
Directors
Pursuant to the 2012 Amendment, any arrangement between a company and a director as to his or her Terms of Office and Employment must be in line with the Compensation Policy and requires the approval of
the remuneration committee, the board of directors and the shareholders by a simple majority.
Under certain circumstances and
conditions, the remuneration committee and the board of directors may approve an arrangement that deviates from the Compensation Policy, provided that such arrangement is approved by the companys shareholders by the Compensation Majority. Such
approval will also be required with respect to determining the Terms of Office and Employment of a director during the transition period until the company adopts a Compensation Policy.
Under the Companies Law and regulations promulgated pursuant thereto, the compensation payable to external directors and independent
directors is subject to certain further limitations (see Item 6Directors, Senior Management and EmployeesCompensationOther Directors Remuneration;Board Practices below).
Chief Executive Officer
Pursuant to the 2012 Amendment, any arrangement between a company and its chief executive officer as to his or her Terms of Office and
Employment must be in line with the Compensation Policy and requires the approval of the remuneration committee, the board of directors and the companys shareholders by the Compensation Majority.
Under certain circumstances and conditions, the remuneration committee and the board of directors may approve an arrangement that
deviates from the Compensation Policy provided it is approved by the shareholders by the Compensation Majority. Such approval will also be required with respect to determining the Terms of Office and Employment of a chief executive officer during
the transition period until the company adopts a Compensation Policy. In addition, under certain circumstances, a company may be exempt from receiving the shareholders approval with respect to the Terms of Office and Employment of a candidate
for chief executive officer.
72
In special circumstances the board of directors and the remuneration committee may override
the resolution of the shareholders following a re-discussion of the matter and for specified reasons.
Other Office Holders
Pursuant to the 2012 Amendment, any arrangement between a company and an office holder (other than a director or the chief executive
officer) as to his or her Terms of Office and Employment must be in line with the Compensation Policy and requires the approval of the remuneration committee and the board of directors.
Under certain circumstances and conditions, the remuneration committee and the board of directors may approve an arrangement that
deviates from the Compensation Policy, provided that such arrangement is approved by the companys shareholders by the Compensation Majority. In special circumstances the board of directors and the remuneration committee may override the
resolution of the shareholders following a re-discussion of the matter and for specified reasons. During the transition period until the company adopts a Compensation Policy, the remuneration committee and the board of directors may approve the
Terms of Office and Employment of such office holder.
(b) Remuneration of the Active Chairman of
the Board
Yochai Richter has an employment agreement with the Company pursuant to which he currently serves as Active
Chairman of the Board. The agreement is terminable by Mr. Richter on 60 days notice and by the Company on 30 days notice as required by law. Upon termination, Mr. Richter is entitled to a lump sum payment equal to twelve times
his monthly salary in effect at the time of termination plus certain benefits. He is also entitled to receive severance pay equal to 150% of his last monthly salary payment times the number of years employed by the Company (commencing with his
employment by Orbot in 1982) if he resigns and 200% of such payment times the number of years employed if the Company terminates the agreement other than for cause (in which case his severance payment would be between zero and half such amount).
The Remuneration Committee, the Audit Committee, the Board and the shareholders have approved the terms of
Mr. Richters continued employment with the Company, including a monthly salary of $33,000 and an annual bonus equivalent to 1% of the net annual profit of the Company. No bonus will be paid to Mr. Richter in respect of 2012. Pursuant
to shareholder approval, commencing from the 2010 Annual General Meeting of the Company, Mr. Richter became eligible to participate in the 2005 Directors Plan (as defined below) and will, for as long as he remains the Chairman of the Board,
continue to receive annual equity-based remuneration with an aggregate value equal to the lesser of $43,750 and the value of 3,750 Restricted Shares. In addition, as a continuing employee, equity awards made to Mr. Richter prior to his becoming
so eligible continued to vest and become exercisable on their original terms and all such awards have now vested in full.
The
above terms of Mr. Richters employment and service were approved prior to the 2012 Amendment. Any change to the terms described above will be subject to the approval process and other conditions set forth in the 2012 Amendment.
(c) Other Directors Remuneration
Under arrangements previously approved by the Audit Committee, the Board and the shareholders of the Company, each of the members of the
Board who is not, or will in the future cease to be, an employee of the Company is remunerated, as of September 2008, as follows: (i) an annual payment to each such director of NIS 65,000 plus applicable value added tax
(
VAT
); and (ii) participation compensation to each such director of NIS 2,500 plus VAT for every meeting of the Board or any committee thereof that the director attends. In addition, the Audit Committee, the Board and the
shareholders of the Company have resolved that: (iii) the annual payment and the participation compensation of all such directors will be adjusted bi-annually to reflect changes in the Israeli CPI in the manner provided in the regulations
promulgated pursuant to the Companies Law
73
governing the terms of compensation payable to external directors (the
Compensation Regulations
); (iv) in the event that a director participates in a meeting by means of
communication pursuant to Section 101 of the Companies Law, the Company shall pay 60% of the participation compensation; (v) in the event a resolution is adopted by the Board without a meeting pursuant to Section 103 of the Companies
Law, the Company shall pay 50% of the participation compensation; and (vi) the annual payment shall be paid in four equal installments, and the participation compensation shall be remitted to the directors on a quarterly basis, in each case at
the beginning of each calendar quarter with respect to the previous quarter, all as provided for in the Compensation Regulations. On December 31, 2012, after adjustment as described in (iii) above, the annual payment to each non-employee
director stood at NIS 72,551.31; and the participation compensation to each non-employee director stood at NIS 2,790.44.
On
July 14, 2005, the shareholders of the Company approved a directors equity remuneration plan for certain directors of the Company (the
2005 Directors Plan
), which was amended with shareholder approval at the 2010 Annual
General Meeting of the Company. Under the 2005 Directors Plan (as amended), each director who is in office immediately after any annual general meeting of shareholders of the Company, including external directors and directors who are employees of
the Company, but not including the Chief Executive Officer (even if a director), in addition to the existing annual and per meeting fees, will be granted equity awards, comprised of options to purchase Ordinary Shares and Restricted Shares or RSUs,
with an aggregate value equal to the lesser of $43,750 and the value of 3,750 Restricted Shares with respect to the Chairman of the Board, and with an aggregate value equal to the lesser of $35,000 and the value of 3,000 Restricted Shares with
respect to each other eligible director under the 2005 Directors Plan. Awards will be granted to the extent that there are sufficient Ordinary Shares reserved under the 2000 Plan, the 2010 Plan and any other equity remuneration plan of the Company.
Equity awards under the 2005 Directors Plan will, to the extent that there are sufficient options available for grant under the applicable Company equity plan, be apportioned at a ratio of one Restricted Share or RSU for every 2.5 Ordinary Shares
subject to an option. All awards vest in full on May 31 of the calendar year following the year in which they are granted and are otherwise generally subject to the terms of the applicable Company equity plan under which they are awarded.
Options expire no later than seven years after the date on which they were granted, subject to earlier expiration if, at any annual general meeting prior to the expiration of such seven-year period, a directors term expires and he or she is
not re-elected. In such case, options expire upon the last to occur of: (i) 90 days following that annual general meeting; (ii) three years from date of grant; and (iii) the expiration of such period as is prescribed in the 2000 Plan
in circumstances of retirement after the age of 60. Should a director not serve until the end of his or her term for any other reason (apart from death or disability), any options unexercised, or Restricted Shares or RSUs unvested, at the time of
ceasing to serve will expire and be cancelled and forfeited immediately.
(d) Equity Awards to
Directors
During the year ended December 31, 2012: (i) an option to purchase 4,889 Ordinary Shares, at an
exercise price of $9.40 per share and expiring on June 23, 2019, was granted and 1,956 Restricted Shares were awarded, to the Active Chairman of the Board; and (ii) an option to purchase 3,911 Ordinary Shares, at an exercise price of $9.40
per share and expiring on June 23, 2019, was granted and 1,564 RSUs were awarded, to each other director of the Company. All of these awards were made as part of the 2005 Directors Plan, are subject to the terms of the 2000 Plan and will vest
in full on May 31, 2013. For information concerning the method of calculation of the number of Ordinary Shares subject to stock options and Restricted Shares or RSUs awarded to directors under the 2005 Directors Plan, seeOther
Directors Remuneration.
During 2012, no options to purchase Ordinary Shares were exercised by any directors of the
Company. In addition, during 2012, a total of 13,569 Restricted Shares held by directors (all of which were granted during 2011) vested.
Pursuant to shareholder approval, each of the above equity awards, as well as any other equity awards which may in the future be awarded by the Company to directors of the Company through a trustee under
the 2000 Plan
74
or the 2010 Plan, will benefit from the capital gains tax treatment which became available as part of the 2003 Israeli tax reform and pursuant to an election made by the Company thereunder. For
further information see Item 6.EShare OwnershipThe 2000 Plan.
So long as any member of the Board, including
the Active Chairman of the Board, remains a director of the Company, any future equity awards to such director, other than under the 2005 Directors Plan, would require approval in accordance with the 2012 Amendment.
For information as to equity awards during 2012 to Directors and/or Executives as a group, see Item 6.EShare
OwnershipCertain Information Concerning Equity Awards to Directors and/or Executives.
6.C Board Practices
(a) Membership of Board; External Directors; Independent Directors; Financial Experts
The Board consists of three classes of directors (not including external directors who do not form part of any class), with one class being elected each year by shareholders at the Companys annual
general meeting for a term of approximately three years. Directors so elected cannot be removed from office by the shareholders until the expiration of their term of office (other than the Active Chairman, as detailed above
(seeCompensation Remuneration of the Active Chairman of the Board). No benefits are received by the Directors upon the expiration of their term of office. At the Companys 2001 annual general meeting, all of the directors of the
Company (other than the external directors) were designated into one of the three different classes. The external directors, who currently serve three year terms as required by Israeli law, do not form part of any class and are elected according to
the Companies Law.
The three classes of directors are designated Class I Directors, Class II Directors and Class III
Directors. The current terms of the Class III Directors will expire at the annual general meeting of shareholders to be held in 2013, the current terms of the Class I Directors will expire at the annual general meeting of shareholders to be held in
2014 and the current terms of the Class II Directors will expire at the annual general meeting of shareholders to be held in 2015. Mr. Yochai Richter and Mr. Eliezer Tokman are the current Class I Directors; Mr. Dan Falk and Prof.
Shimon Ullman are the current Class II Directors; and Mrs. Yehudit Bronicki, Dr. Jacob Richter and Mr. Arie Weisberg are the current Class III Directors. In accordance with the Articles, any vacancies on the Board, including unfilled
positions, may be filled by a majority of the directors then in office, and each director chosen in this manner would hold office until the next annual general meeting of the Company (or until the earlier termination of his or her appointment as
provided for in the Companies Law or the Articles).
The Articles provide that the minimum number of members of the Board is
three and the maximum number is eleven. The Board is presently comprised of ten members, three of whom were elected as external directors under the provisions of the Companies Law (discussed below); one by the shareholders at the Companys 2011
annual general meeting of shareholders and the other two by the shareholders at the Companys 2012 annual general meeting of shareholders.
Under the Companies Law and the regulations promulgated pursuant thereto, Israeli companies whose shares have been offered to the public in, or that are publicly traded outside of, Israel are required to
appoint at least two natural persons as external directors. No person may be appointed as an external director if such person is a relative of a controlling shareholder, or if such person, a relative, partner or employer of such person,
or anyone to whom such person is directly or indirectly subordinate, or any entity under such persons control, has or had, on or within the two years preceding the date of the persons appointment to serve as an external director, any
affiliation with the company to whose board the external director is proposed to be appointed, with any controlling shareholder of the company, with a relative of such controlling shareholder at the time of the appointment, or with any entity
controlled by the company or by a controlling shareholder of the company, or, if the company has no controlling shareholder or a shareholder holding 25% or more of the companys voting
75
rights, any affiliation, at the time of the appointment, to the chairman of the board of directors, the chief executive officer or the most senior financial officer of the company, or to a
shareholder holding 5% or more of the outstanding shares or voting rights of the company. The term affiliation includes an employment relationship, a business or professional relationship maintained on a regular basis or control, as well as service
as an office holder.
In addition, no person may serve as an external director if: (a) the persons position or
other activities create, or may create, a conflict of interest with the persons responsibilities as an external director or interfere with the persons ability to serve as an external director; (b) at the time such person serves as a
non-external director of another company on whose board of directors a director of the reciprocal company serves as an external director; (c) the person is an employee of the Israel Securities Authority or of an Israeli stock exchange;
(d) such person or such persons relative, partner, employer or anyone to whom such person is directly or indirectly subordinate, or any entity under such persons control, has business or professional relations with any person or
entity he or she should not be affiliated with, as described in the previous paragraph, unless such relations are negligible; or (e) such person received compensation, directly or indirectly, in connection with such persons services as an
external director, other than as permitted under the Companies Law and the regulations promulgated thereunder. If, at the time of election of an external director, all other directors who are not controlling shareholders of such company or their
relatives, are of the same gender, then the external director to be elected must be of the other gender.
External directors
may receive compensation solely as provided for in the Compensation Regulations.
Pursuant to the Companies Law, an external
director is required to have either financial and accounting expertise or professional qualifications according to criteria set forth in regulations promulgated by the Israeli Minister of Justice, provided that at least one of the external directors
has financial and accounting expertise. The board of directors must make the determinations as to the financial and accounting expertise, and as to the professional qualifications, of a director taking into consideration those criteria and matters
set forth in the regulations. In addition, the boards of directors of publicly traded companies are required to make a determination as to the minimum number of directors who must have financial and accounting expertise as aforesaid based, among
other things, on the type of company, its size, the volume and complexity of the companys activities and the number of directors. The Board has determined that the minimum number of directors with financial and accounting expertise, in
addition to the external director or directors who have such expertise, will be one, and that Mr. Dan Falk qualifies as such.
External directors are elected for a term of three years at the general meeting of shareholders by a simple majority, provided that the majority includes at least a majority of the shareholders who are
not controlling shareholders and who do not have a personal interest in the matter (other than a personal interest which is not the result of an affiliation with a controlling shareholder), who are present and voting (abstentions are disregarded),
or that the non-controlling shareholders or shareholders who do not have a personal interest in the matter (other than a personal interest which is not the result of an affiliation with a controlling shareholder) who are present and voted against
the election hold two percent or less of the voting power of the company.
External directors may be re-elected to two
additional terms of three years each, provided that with respect to the appointment for each such additional three-year term, one of the following has occurred: (a) the reappointment of the external director has been proposed by one or more
shareholders holding together one percent or more of the aggregate voting rights in the company, and the appointment was approved at the general meeting of the shareholders by a simple majority, provided that: (i) in calculating the majority,
votes of controlling shareholders or shareholders having a personal interest in the appointment (other than a personal interest which is not the result of an affiliation with a controlling shareholder) and abstentions are disregarded, and
(ii) the total number of shares of shareholders who do not have a personal interest in the appointment (other than a personal interest which is not the result of an affiliation with a controlling shareholder) and/or who are not controlling
shareholders, present and voting in favor of the appointment exceed two percent of the aggregate voting rights in the company; or (b) the reappointment of the external director has been proposed by the board of directors and the appointment was
approved by the majority of shareholders required for the initial appointment of an external director, as described in the previous paragraph.
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However, under regulations promulgated pursuant to the Companies Law, companies, such as the
Company, whose shares are listed for trading on specified exchanges outside of Israel, including the Nasdaq Global Market and the Nasdaq Global Select Market, may elect external directors for additional terms that do not exceed three years each,
beyond the three three-year terms generally applicable, provided that, if an external director is being re-elected for an additional term or terms beyond the three three-year terms: (i) the audit committee and board of directors must determine
that, in light of the external directors expertise and special contribution to the board of directors and its committees, the re-election for an additional term is to the companys benefit; (ii) the external director must be
re-elected by the majority of shareholders required for the initial appointment of an external director and subject to the terms specified in the Companies Law; and (iii) the term during which the nominee has served as an external director and
the reasons given by the audit committee and board of directors for extending his or her term of office must be presented to the shareholders prior to their approval.
Following the termination of service of an external director, a public company, a controlling shareholder thereof and any entity controlled by a controlling shareholder, may not grant any benefit,
directly or indirectly, to such external director, or to his or her relative, including, not appointing such external director, or his or her relative, as an office holder of such public company or of any entity controlled by a controlling
shareholder of such public company, not employing such external director or his or her relative and not receiving professional services for pay from such external director or his or her relative, either directly or indirectly, including through a
corporation controlled by such external director, or his or her relative, all until the lapse of two years from termination of office with respect to the external director, his or her spouse or child and until the lapse of one year from termination
of office with respect to other relatives of the former external director.
Each committee of a companys board of
directors that has the authority to exercise powers of the board of directors must include at least one external director, and its audit committee and remuneration committee must include all external directors.
Under the Companies Law, an external director cannot be dismissed from office unless: (i) the board of directors determines that the
external director no longer meets the statutory requirements for holding the office, or that the external director is in breach of the external directors fiduciary duty of loyalty and the shareholders vote, by the same majority required for
the appointment, to remove the external director after the board of directors reasoning has been brought before the shareholders and the external director has been given the opportunity to present his or her position; (ii) a court
determines, upon a request of a director or a shareholder, that the external director no longer meets the statutory requirements of an external director or that the external director is in breach of his or her fiduciary duty of loyalty to the
company; or (iii) a court determines, upon a request of the company or a director, shareholder or creditor of the company, that the external director is unable to fulfill his or her duty or has been convicted of specified crimes.
Under the Companies Law an independent director is either an external director or a director appointed or classified as such
who meets the same non-affiliation criteria as an external director, as determined by the subject companys audit committee, and who has not served as a director of the company for more than nine consecutive years. For these purposes, ceasing
to serve as a director for a period of two years or less would not be deemed to sever the consecutive nature of such directors service. An independent director may be removed from office in the same manner that an external director may be
removed and, upon termination of service as an independent director, is subject to the same restrictions with respect to receipt of benefits, service as an office holder, employment and provision of professional services as are applicable to
external directors.
Regulations promulgated pursuant to the Companies Law provide that a director in a company, such as the
Company, whose shares are listed for trading on specified exchanges outside of Israel, including the Nasdaq Global Market and the Nasdaq Global Select Market, who qualifies as an independent director under the relevant non-Israeli rules relating to
independence standards and who meets certain non-affiliation criteria, which are less stringent than those applicable to external directors, could be considered an independent director pursuant to the Companies Law provided: (i) he
or she has been approved as such by the audit committee; (ii) he or she has not
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served as a director for more than nine consecutive years; and (iii) his or her remuneration shall be the same as that applicable to external directors. For these purposes, ceasing to serve
as a director for a period of two years or less would not be deemed to sever the consecutive nature of such directors service.
Furthermore, pursuant to these regulations, such company may reappoint a person as an independent director for additional terms, beyond nine years, which do not exceed three years each, if the audit
committee and the board of directors determine that in light of the independent directors expertise and special contribution to the board of directors and its committees, the reappointment for an additional term is to the companys
benefit.
Pursuant to the Companies Law, a public company, such as the Company, may include in its articles of association a
provision providing that a specified number of its directors be independent directors or may adopt a standard provision providing that a majority of its directors be independent directors or, if there is a controlling shareholder or a 25% or more
shareholder, that at least one-third of its directors be independent directors.
Although the Company has not included in its
Articles a provision providing that a specified number of its directors be independent directors, it believes that four of its current ten directors qualify as independent directors and an additional three of its current ten directors could qualify
as independent directors under the Companies Law, including two of its current directors who have served as directors for more than nine consecutive years, if its Audit Committee and Board were to make the determination as aforesaid and eight of
them would qualify as independent under Nasdaq independence standards.
A nominee for service as a director in a public
company may not be elected without submitting a declaration to the company, prior to his or her election, specifying that he or she has the requisite qualifications to serve as a director, independent director or external director, as applicable,
and the ability to devote the appropriate time to performing his or her duties as such.
A director, including an external
director or an independent director, who ceases to meet the statutory requirements to serve as a director, external director or independent director, as applicable, must notify the company to that effect immediately and his or her service as a
director will expire upon submission of such notice.
There are not any directors service contracts with the Company
providing for benefits on termination of service. For information as to the employment agreement of the Active Chairman of the Board with the Company, which provides for benefits on termination of employment, see Item 6Directors, Senior
Management and EmployeesCompensationRemuneration of the Active Chairman of the Board.
(b) Committees of the Board
(i) Audit Committee
The Companies Law requires
public companies to appoint an audit committee comprised of at least three directors, including all of the external directors, the majority of whom must be independent directors. The Companies Law further stipulates that the following may not be
members of the audit committee: (a) the chairman of the board of directors; (b) any director employed by or providing services on an ongoing basis to the company, to a controlling shareholder of the company or an entity controlled by a
controlling shareholder of the company; (c) a director whose livelihood depends on a controlling shareholder; and (d) a controlling shareholder or any relative of a controlling shareholder.
The Companies Law further requires that: (i) the chairperson of the audit committee must be an external director;
(ii) generally, any person who is not entitled to be a member of the audit committee may not attend the audit committees meetings; and (iii) the quorum required for the convening of meetings of the audit committee and for adopting
resolutions by the audit committee be a majority of the members of the audit committee, provided that the majority of the members present are independent directors and at least one of them is an external director.
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The responsibilities of the audit committee under the Companies Law include:
(a) identifying flaws in the management of a companys business and making recommendations to the board of directors as to how to correct them; (b) with respect to certain actions involving conflicts of interest and with respect to
certain related party transactions, deciding whether such actions are material actions and whether such transactions are extraordinary transactions, respectively, all for the purpose of approving such actions or transactions; (c) reviewing and
deciding whether to approve certain related party transactions and certain actions involving conflicts of interest; (d) reviewing the internal auditors work program; (e) examining the companys internal control structure and
processes, the performance of the internal auditor and whether the internal auditor has at his or her disposal the tools and resources required to perform his or her duties, considering, inter alia, the special needs of the company and its size;
(f) examining the external auditors scope of work as well as the external auditors fees and providing the corporate organ responsible for determining the external auditors fees with its recommendations; and (g) providing
for arrangements as to the manner in which the company will deal with employee complaints with respect to deficiencies in the management of the companys business and the protection to be provided to such employees.
Dr. Michael Anghel, Mr. Dan Falk, Mr. Avner Hermoni and Mr. Gideon Lahav are the current members of the Audit
Committee. Each of them is an independent director in accordance with the Nasdaq listing standards, and, as external directors, each of Dr. Anghel, Mr. Avner Hermoni and Mr. Lahav is an independent director under the
Companies Law. In addition, the Audit Committee and the Board have determined that Mr. Dan Falk also qualifies as an independent director under the Companies Law.
The Audit Committee oversees the accounting and financial reporting processes of the Company. It also provides assistance to the Board in fulfilling its legal and fiduciary obligations with respect to
matters involving the accounting, auditing, financial reporting and internal control functions of the Company. In carrying out its duties, the Audit Committee meets with management at least once in each fiscal quarter at which time, among other
things, it reviews, and either approves or disapproves, the financial results of the Company for the immediately preceding fiscal quarter and conveys its conclusions in this regard to the Board. The Audit Committee also monitors generally the
services provided by the Companys external auditors to ensure their independence, and reviews all audit and non-audit services provided by them. See Item 16CPrincipal Accountant Fees and Services. The Companys external and
internal auditors also report regularly to the Audit Committee at its meetings, and the Audit Committee discusses with the Companys external auditors the quality, not just the acceptability, of the accounting principles, the reasonableness of
significant judgments and the clarity of disclosures in the Companys financial statements, as and when it deems it appropriate to do so.
Under the provisions of the Sarbanes-Oxley Act of 2002 (the
Sarbanes-Oxley Act
), the Audit Committee is responsible for the appointment, compensation, retention and oversight of the
work of the Companys external auditors. However, under Israeli law, the appointment of external auditors and their compensation require the approval of the shareholders of the Company. Pursuant to Israeli law, the shareholders may delegate the
authority to determine the compensation of the external auditors to the Board, and the Companys shareholders have done so in the past. In addition, pursuant to the Companies Law, the Audit Committee is required to examine the external
auditors fees and to provide its recommendations with respect thereto to the appropriate corporate organ. Accordingly, the appointment of the external auditors will be required to be approved and recommended to the shareholders by the Audit
Committee and approved by the shareholders. The compensation of the external auditors will be required to be approved by the Audit Committee and recommended to the shareholders or, if so authorized by the shareholders, to the Board and approved by
either the shareholders or the Board, as the case may be.
(ii) Remuneration Committee
Under the 2012 Amendment, the Companies Law requires public companies to appoint a remuneration committee comprised of at least three
directors, including all of the external directors, who must generally also constitute a majority of the members. All other members of the committee, who are not external directors, must be directors who receive compensation that is in compliance
with the Compensation Regulations. In addition, the chairperson of the remuneration committee must be an external director.
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The Companies Law further stipulates that directors who are not qualified to serve on the
audit committee, as described above, may not serve on the remuneration committee either and that similar to the audit committee, generally, any person who is not entitled to be a member of the remuneration committee may not attend the remuneration
committees meetings.
The responsibilities of the remuneration committee under the Companies Law include:
(i) making recommendations to the board of directors with respect to the approval of the Compensation Policy and any extensions thereto; (ii) periodically reviewing the implementation of the Compensation Policy and providing the board of
directors with recommendations with respect to any amendments or updates thereto; (iii) reviewing and resolving whether or not to approve arrangements with respect to the Terms of Office and Employment of office holders; and (iv) resolving
whether or not to exempt a transaction with a candidate for chief executive officer from shareholder approval.
The
Remuneration Committee also oversees the administration of the Companys various compensation plans and arrangements, in particular, the incentive compensation, deferred compensation and equity based plans of the Company (and to the extent
appropriate, the subsidiaries of the Company) and assists the Board in fulfilling its responsibilities relating to the compensation of directors, the chief executive officer and other office holders of the Company. In carrying out these duties, the
Remuneration Committee meets on an ad hoc basis (usually at least once in each fiscal quarter). Under the Companies Law, the Remuneration Committee may need to seek the approval of the Board and the shareholders for certain compensation decisions as
described above (see Item 6Directors, Senior Management and EmployeesCompensationApproval Required for Directors and/or Executives Compensation). Each member of the Remuneration Committee is an independent
director in accordance with the Nasdaq listing standards. Dr. Michael Anghel, Mr. Dan Falk, Mr. Avner Hermoni, Mr. Gideon Lahav and Mr. Eliezer Tokman are the current members of the Remuneration Committee.
(iii) Nominating Committee
The principal role of the Nominating Committee is to identify individuals qualified to become members of the Board, to recommend such individuals for nomination for election to the Board and to make
recommendations to the Board concerning committee appointments. In undertaking this task, the Nominating Committee takes into account the composition requirements and qualification criteria set forth in the Companies Law and the Nasdaq listing
standards, and determines the other criteria, objectives and procedures for selecting members of the Board and committee members, including factors such as independence, diversity, age, integrity, skills, expertise, breadth of experience, knowledge
about the Companys business or industry and willingness to devote adequate time and effort to the responsibilities of the Board in the context of the existing composition and needs of the Board and its committees. Membership of the Nominating
Committee is limited to independent directors in accordance with the Nasdaq listing standards who meet the composition requirements of the Companies Law, as in effect from time to time. Mr. Dan Falk, Mr. Gideon Lahav and Prof.
Shimon Ullman are the current members of the Nominating Committee.
(c) Executive Sessions
At least twice per annum the independent directors of the Company meet in Executive Sessions, which no
other persons have the right to attend. These meetings are intended to provide a forum in which the Companys independent directors can discuss any issues that they consider relevant in their capacity as such.
6.D Employees
As of December 31, 2012, the Company employed 1,642 people, of whom 556 were based in Israel, 629 in the Far East, 161 in Europe, 103 in Japan and 193 in the United States; and of whom 390 were
employed in research and development, 720 in marketing, sales and service, 230 in production and 302 in management and administration. As of December 31, 2011, the Company employed 1,755 people, of whom 600 were based in
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Israel, 687 in the Far East, 149 in Europe, 102 in Japan and 217 in the United States; and of whom 429 were employed in research and development, 764 in marketing, sales and service, 258 in
production and 304 in management and administration. As of December 31, 2010, the Company employed 1,770 people, of whom 629 were based in Israel, 647 in the Far East, 166 in Europe, 107 in Japan and 221 in the United States; and of whom 456
were employed in research and development, 713 in marketing, sales and service, 290 in production and 311 in management and administration.
The Company considers its relations with its employees to be satisfactory and has not experienced a significant labor dispute or strike. The Company is not a party to any collective bargaining agreement
with respect to its Israeli employees. However, the Company is subject to certain labor related statutes and to certain provisions of collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating
Bureau of Economic Organizations and/or the Industrialists Association, which are applicable to the Companys Israeli employees by virtue of expansion orders of the Israeli Minister of Industry, Trade and Labor. These statutes and
provisions cover a wide range of subjects and provide certain minimum employment standards, including the length of the work day and work week, minimum wages, travel expenses, contributions to a pension fund, insurance for work-related accidents,
procedures for dismissing employees, determination of severance pay, annual and other vacations, sick pay and other conditions of employment. The Company generally provides its employees with benefits and working conditions beyond the required
minimum. An additional provision applicable to all employees in Israel under collective bargaining agreements and expansion orders is the automatic adjustment of wages in relation to increases in the Israeli CPI. The amount and frequency of these
adjustments are modified from time to time; however, no such adjustments have been made in recent years pursuant to expansion orders due to the relatively low prevailing inflation rates.
The severance pay liability of the Company and its Israeli subsidiary to their Israeli employees, based upon the number of years of
service and the latest monthly salary, is in large part covered by regular deposits with recognized pension funds, deposits with severance pay funds and purchases of insurance policies. Pursuant to section 14 of the Israeli Severance Pay Law,
certain of the Companys liabilities for employee rights upon retirement are covered by regular contributions to defined contribution plans so that upon termination of employment of the relevant employees, the Company is only required to
release the payments made by it to such funds on account of severance and by doing so is deemed to have complied with all of its severance payment obligations relating to the service of applicable employees with respect to the period during which
the provisions of such section apply. For information concerning the Companys liability for severance pay, see Note 7 to the Financial Statements.
6.E Share Ownership
(a) General
The Company presently administers the 2000 Plan and the 2010 Plan, both of which were adopted with shareholder approval, as well as a number of equity remuneration plans which were administered by PDI
prior to consummation of the PDI Acquisition and were assumed by the Company as part of the PDI Acquisition (the
PDI Equity Remuneration Plans
). These plans are discussed in further detail below.
Awards under the Companys equity remuneration plans (other than: (i) to directors under the 2005 Directors Plan; or
(ii) under the PDI Equity Remuneration Plans) generally vest as to 50% after two years from the effective date of grant, 75% after three years and 100% after four years. Upon resignation by a grantee, options to the extent unexercised,
Restricted Share awards to the extent that the applicable restrictions have not lapsed and unvested RSUs, held by the grantee generally expire or are forfeited on the earlier of the date of notice of resignation and the date of termination of
employment or services. In any other case in which a grantee ceases to be an employee of, or consultant to, the Company (e.g. dismissal or departure by mutual agreement): (i) the vesting of all such equity awards ceases immediately upon notice;
and (ii) unless the notice provides, or the Company and grantee agree, otherwise, the grantee may exercise awards, to the extent vested at the time of notice, until the termination of his or her employment or services. Ordinary Shares subject
to equity awards granted under the 2000 Plan become
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available for purposes of future equity awards under the 2000 Plan upon the expiration, termination, forfeiture or cancellation of such equity awards. Ordinary Shares subject to equity awards
granted under the 2010 Plan become available for purposes of future equity awards under the 2010 Plan upon the expiration, termination, forfeiture or lapse of such equity awards unless such expiration, termination, forfeiture or lapse occurred
solely because the performance goals with respect thereto were not attained, in which case the Ordinary Shares subject to such equity awards do not again become available for purposes of the 2010 Plan.
Pursuant to Section 102 of the Tax Ordinance and to an election made by the Company thereunder, gains derived by employees (which
term includes directors) in Israel arising from the sale of Restricted Shares (and, the Company believes, shares delivered in settlement of RSUs) or acquired pursuant to the exercise of options granted to them through a trustee under
Section 102 of the Tax Ordinance after January 1, 2003, will generally be subject to a flat capital gains tax rate of 25%, although these gains may also include a salary income component. As a result of this election under
Section 102, the Company will not, in the case of equity awards made on or after January 1, 2003, be allowed to claim as an expense for tax purposes in Israel the amounts credited to the employee as capital gains, although it will
generally be entitled to do so in respect of the salary income component (if any) of such awards when the related tax is paid by the employee.
Stock options under the PDI Equity Remuneration Plans generally vested over a 48-60 month period, in monthly installments after an initial cliff vesting event six months from the grant date,
and expire either seven or ten years from the grant date. RSUs under the PDI Equity Remuneration Plans generally vested in equal annual installments over two, three or four year periods from the grant date. Equity awards (including both options and
RSUs) under the PDI Equity Remuneration Plans usually expire upon termination of the grantees continuous service; however, in most cases optionees will, for a period of three months from the date of termination of continuous service, be
entitled to exercise options to the extent that they had vested on the date of termination of continuous service.
For further
information concerning equity awards, see Notes 1t and 9 to the Financial Statements.
(b) Equity
Plans
(i) The 2000 Plan
On June 21, 2000, the Board adopted, and the Companys shareholders subsequently approved, the Employee Share Ownership and Option Plan (2000), which was amended in 2003 with shareholder
approval, and was broadly amended, restated and renamed in 2005, also with shareholder approval. The 2000 Plan is intended to provide incentives to employees, officers, directors and/or consultants of the Company, other companies, partnerships or
entities in Israel in which the Company holds, directly or indirectly, at least a 50% equity interest and/or the Companys subsidiary entities and their respective subsidiary entities outside Israel, by providing them with the opportunity to
purchase or receive shares of the Company.
The 2000 Plan is designed to enable the Company to grant options to purchase
Ordinary Shares and issue shares under various and different tax regimes including, without limitation: (i) pursuant and subject to Section 102 of the Tax Ordinance or any provision which may amend or replace it and any regulations, rules,
orders or procedures promulgated thereunder and to designate them as either grants made through a trustee or not through a trustee; (ii) pursuant and subject to Section 3(i) of the Tax Ordinance; (iii) as incentive stock
options within the meaning of Section 422(b) of the U.S. Internal Revenue Code of 1986, as amended from time to time (the
Code
); (iv) as options to U.S. taxpayers which would not qualify as incentive stock
options; (v) to grantees in jurisdictions other than Israel and the United States; and (vi) as Restricted Shares (provided that the aggregate number of Restricted Shares awarded (net of forfeitures, as described in the 2000 Plan) may
not exceed 400,000). The 2000 Plan will terminate on June 4, 2015 (except as to awards outstanding on that date).
During
2012, under the 2000 Plan: (i) options to purchase a total of 449,938, 119,950 and 414,139 Ordinary Shares (having respective weighted average exercise prices of $8.58, $4.29 and $17.62 per share) were awarded,
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exercised and cancelled, respectively; and (ii) a total of 1,956 Restricted Shares were granted and no Restricted Shares were forfeited. As of January 31, 2013, under the 2000 Plan:
(i) options to purchase a total of 3,666,218 Ordinary Shares, expiring on various dates between February 7, 2013 and November 7, 2019 and having a weighted average remaining life of 3.63 years and a weighted average exercise price of
$10.75 per share, were outstanding (of which 2,544,178 with a weighted average remaining life of 2.79 years and a weighted average exercise price of $11.29 per share had vested); (ii) 349,620 Ordinary Shares remained available for future equity
awards (including up to 6,427 Restricted Shares); and (iii) a total of 36,397 Restricted Shares had been forfeited.
(ii) The 2010 Plan
On July 15, 2010, the Board adopted, and the Companys shareholders subsequently approved, the 2010 Plan. The 2010 Plan is intended to assist the Company in attracting, retaining, motivating and
rewarding employees, officers, directors and/or consultants of the Company and/or of companies, partnerships or other entities and their respective subsidiary companies, partnerships or entities inside or outside of Israel in which the Company
holds, directly or indirectly, at least a 50% equity interest, by providing them with equity-based incentives.
1,000,000
Ordinary Shares were reserved for issuance pursuant to awards granted under the 2010 Plan. The 2010 Plan: (i) provides only for the awarding of Restricted Shares and RSUs and does not provide for the awarding of options to purchase Ordinary
Shares; (ii) introduces performance-based equity awards to the Companys equity program and provides that an aggregate of 250,000 or more of the Ordinary Shares subject to awards made under the 2010 Plan are to be subject to
performance-based criteria to be established by the Board (but which shall be linked to the Companys profitability); (iii) provides that if any award granted under the 2010 Plan expires, terminates or is forfeited or cancelled, settled in
cash, or otherwise terminates for any reason without a delivery to the participant of the full number of Ordinary Shares to which the award related, the Ordinary Shares under such award which were not so delivered shall again be available for the
purposes of the 2010 Plan; but that Ordinary Shares not delivered pursuant to performance-based Restricted Shares or RSUs which expire, terminate or are forfeited or lapse solely because the performance goals with respect thereto were not attained
will not again be available for purposes of the 2010 Plan; and (iv) provides that if the employment or services of a grantee of Restricted Shares or RSUs with or to the Company is or are terminated prior to the full vesting of, and lapsing of
forfeiture provisions on, such award for any reason, the Restricted Shares or RSUs held by such participant that have not theretofore vested and on which the forfeiture provisions have not theretofore lapsed shall immediately be forfeited upon the
earlier of such termination or notice of termination irrespective of the effective date of such termination (unless the applicable agreement provides otherwise). The Companys general policy is to settle RSUs granted under the 2010 Plan through
the issuance of Ordinary Shares rather than in cash, other securities, other awards under the 2010 Plan or other property. The 2010 Plan will terminate on July 14, 2020 (except as to awards outstanding on that date).
During 2012, under the 2010 Plan: (i) 157,868 non-performance-based, and 95,458 performance-based, RSUs were awarded; (ii) no
Restricted Shares were awarded; (iii) 70,650 RSUs were settled; and (iv) 6,760 RSUs were cancelled. As of January 31, 2013, under the 2010 Plan: (i) a total of 321,372 non-performance-based, and 202,844 performance-based, RSUs
were outstanding; (ii) no Restricted Shares had been awarded; and (iii) 405,134 Ordinary Shares remained available for future equity awards.
(iii) The PDI Equity Remuneration Plans
During
2012, under the PDI Equity Remuneration Plans collectively: (i) options to purchase a total of 25,342 and 29,011 Ordinary Shares (having respective weighted exercise prices of $5.86 and $12.64 per share) were exercised and cancelled,
respectively; and (ii) a total of 110,249 and 10,117 RSUs vested and were cancelled, respectively. As of January 31, 2013, under the PDI Equity Remuneration Plans collectively: (i) options to purchase a total of 164,161 Ordinary
Shares, expiring on various dates between April 13, 2013 and November 10, 2015 and having a weighted average remaining life of 1.52 years and a weighted average exercise price of $11.39 per share, were outstanding (all of which had
vested); and (ii) no RSUs were outstanding.
83
(c) Certain Information Concerning Equity Awards to Directors
and/or Executives
The following table sets forth for all Directors and/or Executives as a group, including all persons
who were at any time during the period indicated Directors and/or Executives, certain information in respect of both the 2000 Plan and the 2010 Plan concerning: (i) equity awards granted by the Company between January 1, 2012 and
December 31, 2012; (ii) options which were exercised and paid, and Restricted Shares and RSUs which vested, between such dates; (iii) equity awards which were cancelled between such dates; and (iv) equity awards which were
outstanding on, and as at, December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
Equity Awards Granted:
|
|
2000
|
|
|
2010
|
|
Number of Ordinary Shares subject to options
|
|
|
65,538
|
|
|
|
N/A
|
|
Weighted average option exercise price per Ordinary Share
|
|
$
|
9.05
|
|
|
|
N/A
|
|
Year of expiration of options
|
|
|
2019
|
|
|
|
N/A
|
|
Number of Restricted Shares
|
|
|
1,956
|
|
|
|
0
|
|
Number of RSUs
|
|
|
N/A
|
|
|
|
67,776
|
|
|
|
Options Exercised/Paid; Restricted Shares and RSUs Vested:
|
|
|
|
|
Number of Ordinary Shares subject to options
|
|
|
14,625
|
|
|
|
N/A
|
|
Weighted average option exercise price per Ordinary Share
|
|
$
|
4.15
|
|
|
|
N/A
|
|
Restricted Shares vested
|
|
|
40,506
|
|
|
|
0
|
|
RSUs vested
|
|
|
N/A
|
|
|
|
40,850
|
|
|
|
Equity Awards Cancelled:
|
|
|
|
|
Number of Ordinary Shares subject to options
|
|
|
87,897
|
|
|
|
N/A
|
|
Weighted average option exercise price per Ordinary Share
|
|
|
24.27
|
|
|
|
N/A
|
|
Number of Restricted Shares
|
|
|
0
|
|
|
|
0
|
|
Number of RSUs
|
|
|
N/A
|
|
|
|
0
|
|
|
|
Equity Awards Outstanding:
|
|
|
|
|
Number of Ordinary Shares subject to options
|
|
|
1,015,209
|
|
|
|
N/A
|
|
Weighted average option exercise price per Ordinary Share
|
|
$
|
10.90
|
|
|
|
N/A
|
|
Weighted average remaining option life (years)
|
|
|
3.04
|
|
|
|
N/A
|
|
Number of Restricted Shares
|
|
|
235,213
|
|
|
|
0
|
|
Number of RSUs
|
|
|
N/A
|
|
|
|
136,476
|
|
(d) Certain Information Concerning Ordinary Shares Owned by Directors and/or
Executives
The following table sets forth information as of January 31, 2013, concerning the shareholdings of
those Directors and/or Executives known to the Company beneficially to own, on an individual basis, more than 1% of the outstanding Ordinary Shares and of each other director of the Company.
|
|
|
|
|
|
|
|
|
Name
|
|
Number of
Shares
(1)
|
|
|
Percentage of
Ordinary
Shares
Outstanding
|
|
Yochai Richter
|
|
|
1,274,030
|
|
|
|
2.94%(2)
|
|
Michael Anghel
|
|
|
8,058
|
|
|
|
(3)
|
|
Yehudit Bronicki
|
|
|
9,738
|
|
|
|
(3)
|
|
Dan Falk
|
|
|
17,738
|
|
|
|
(3)
|
|
Avner Hermoni
|
|
|
0
|
|
|
|
(3)
|
|
Gideon Lahav
|
|
|
5,937
|
|
|
|
(3)
|
|
Jacob Richter
|
|
|
3,033,945
|
|
|
|
7.01%(2)
|
|
Eliezer Tokman
|
|
|
8,206
|
|
|
|
(3)
|
|
Shimon Ullman
|
|
|
123,093
|
|
|
|
(3)
|
|
Arie Weisberg
|
|
|
81,481
|
|
|
|
(3)
|
|
84
(1)
|
Does not include Ordinary Shares issuable upon the exercise of options, whether vested or unvested, held by such Directors and/or Executives. Includes 35,106 Ordinary
Shares (in the case of Mr. Weisberg), 33,275 Ordinary Shares (in the case of Mr. Richter), 9,738 Ordinary Shares (in the case of each of Mrs. Bronicki, Mr. Falk and Prof. Ullman), 8,206 Ordinary Shares (in the case of
Mr. Tokman), 8,058 Ordinary Shares (in the case of Dr. Anghel), 5,937 Ordinary Shares (in the case of Mr. Lahav) and 2,440 Ordinary Shares (in the case of Dr. Richter) issued as Restricted Sharesregardless of whether the
applicable restrictions have lapsed. For information as to outstanding option awards to directors, see the below table.
|
(2)
|
The percentage of Ordinary Shares beneficially owned is calculated in accordance with Rule 13d-3(d) promulgated under the Exchange Act.
|
Ordinary Shares
held by Directors and/or Executives have equal voting rights with those held by other holders of Ordinary Shares.
The
following table sets forth information, as of January 31, 2013, concerning all outstanding option awards to directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
award
|
|
|
Exercise price
per share ($)
|
|
|
Shares subject
to option
|
|
|
Shares vested
and unexercised
|
|
|
Shares unvested
|
|
|
Scheduled date
of expiration
|
|
Yochai Richter
|
|
|
Sep-18-2008
|
|
|
|
9.89
|
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
0
|
|
|
|
Sep-17-2015
|
|
|
|
Jun-23-2009
|
|
|
|
7.21
|
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
0
|
|
|
|
Jun-22-2016
|
|
|
|
Sep-1-2010
|
|
|
|
10.28
|
|
|
|
4,966
|
|
|
|
4,966
|
|
|
|
0
|
|
|
|
Aug-31,2017
|
|
|
|
Jun-26-2011
|
|
|
|
12.48
|
|
|
|
4,583
|
|
|
|
4,583
|
|
|
|
0
|
|
|
|
Jun-25-2018
|
|
|
|
Jun-24-2012
|
|
|
|
9.40
|
|
|
|
4,889
|
|
|
|
0
|
|
|
|
4,889
|
|
|
|
Jun-23-2019
|
|
|
|
|
|
|
|
|
Michael Anghel
|
|
|
Sep-18-2008
|
|
|
|
9.89
|
|
|
|
5,301
|
|
|
|
5,301
|
|
|
|
0
|
|
|
|
Sep-17-2015
|
|
|
|
Jun-23-2009
|
|
|
|
7.21
|
|
|
|
5,301
|
|
|
|
5,301
|
|
|
|
0
|
|
|
|
Jun-22-2016
|
|
|
|
Sep-1-2010
|
|
|
|
10.28
|
|
|
|
3,972
|
|
|
|
3,972
|
|
|
|
0
|
|
|
|
Aug-31,2017
|
|
|
|
Jun-26-2011
|
|
|
|
12.48
|
|
|
|
3,667
|
|
|
|
3,667
|
|
|
|
0
|
|
|
|
Jun-25-2018
|
|
|
|
Jun-24-2012
|
|
|
|
9.40
|
|
|
|
3,911
|
|
|
|
0
|
|
|
|
3,911
|
|
|
|
Jun-23-2019
|
|
|
|
|
|
|
|
|
Yehudit Bronicki
|
|
|
Jun-25-2006
|
|
|
|
23.23
|
|
|
|
1,931
|
|
|
|
1,931
|
|
|
|
0
|
|
|
|
Jun-24-2013
|
|
|
|
Sep-6-2007
|
|
|
|
21.77
|
|
|
|
2,270
|
|
|
|
2,270
|
|
|
|
0
|
|
|
|
Sep-5-2014
|
|
|
|
Sep-18-2008
|
|
|
|
9.89
|
|
|
|
5,301
|
|
|
|
5,301
|
|
|
|
0
|
|
|
|
Sep-17-2015
|
|
|
|
Jun-23-2009
|
|
|
|
7.21
|
|
|
|
5,301
|
|
|
|
5,301
|
|
|
|
0
|
|
|
|
Jun-22-2016
|
|
|
|
Sep-1-2010
|
|
|
|
10.28
|
|
|
|
3,972
|
|
|
|
3,972
|
|
|
|
0
|
|
|
|
Aug-31,2017
|
|
|
|
Jun-26-2011
|
|
|
|
12.48
|
|
|
|
3,667
|
|
|
|
3,667
|
|
|
|
0
|
|
|
|
Jun-25-2018
|
|
|
|
Jun-24-2012
|
|
|
|
9.40
|
|
|
|
3,911
|
|
|
|
0
|
|
|
|
3,911
|
|
|
|
Jun-23-2019
|
|
|
|
|
|
|
|
|
Dan Falk
|
|
|
Jun-25-2006
|
|
|
|
23.23
|
|
|
|
1,931
|
|
|
|
1,931
|
|
|
|
0
|
|
|
|
Jun-24-2013
|
|
|
|
Sep-6-2007
|
|
|
|
21.77
|
|
|
|
2,270
|
|
|
|
2,270
|
|
|
|
0
|
|
|
|
Sep-5-2014
|
|
|
|
Sep-18-2008
|
|
|
|
9.89
|
|
|
|
5,301
|
|
|
|
5,301
|
|
|
|
0
|
|
|
|
Sep-17-2015
|
|
|
|
Jun-23-2009
|
|
|
|
7.21
|
|
|
|
5,301
|
|
|
|
5,301
|
|
|
|
0
|
|
|
|
Jun-22-2016
|
|
|
|
Sep-1-2010
|
|
|
|
10.28
|
|
|
|
3,972
|
|
|
|
3,972
|
|
|
|
0
|
|
|
|
Aug-31,2017
|
|
|
|
Jun-26-2011
|
|
|
|
12.48
|
|
|
|
3,667
|
|
|
|
3,667
|
|
|
|
0
|
|
|
|
Jun-25-2018
|
|
|
|
Jun-24-2012
|
|
|
|
9.40
|
|
|
|
3,911
|
|
|
|
0
|
|
|
|
3,911
|
|
|
|
Jun-23-2019
|
|
|
|
|
|
|
|
|
Avner Hermoni
|
|
|
Jun-24-2012
|
|
|
|
9.40
|
|
|
|
3,911
|
|
|
|
0
|
|
|
|
3,911
|
|
|
|
Jun-23-2019
|
|
|
|
|
|
|
|
|
Gideon Lahav
|
|
|
Jun-23-2009
|
|
|
|
7.21
|
|
|
|
5,301
|
|
|
|
5,301
|
|
|
|
0
|
|
|
|
Jun-22-2016
|
|
|
|
Sep-1-2010
|
|
|
|
10.28
|
|
|
|
3,972
|
|
|
|
3,972
|
|
|
|
0
|
|
|
|
Aug-31,2017
|
|
|
|
Jun-26-2011
|
|
|
|
12.48
|
|
|
|
3,667
|
|
|
|
3,667
|
|
|
|
0
|
|
|
|
Jun-25-2018
|
|
|
|
Jun-24-2012
|
|
|
|
9.40
|
|
|
|
3,911
|
|
|
|
0
|
|
|
|
3,911
|
|
|
|
Jun-23-2019
|
|
|
|
|
|
|
|
|
Jacob Richter
|
|
|
Jun-24-2012
|
|
|
|
9.40
|
|
|
|
3,911
|
|
|
|
0
|
|
|
|
3,911
|
|
|
|
Jun-23-2019
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
award
|
|
|
Exercise price
per share ($)
|
|
|
Shares subject
to option
|
|
|
Shares vested
and unexercised
|
|
|
Shares unvested
|
|
|
Scheduled date
of expiration
|
|
|
|
|
|
|
|
|
Eliezer Tokman
|
|
|
Sep-6-2007
|
|
|
|
21.77
|
|
|
|
2,270
|
|
|
|
2,270
|
|
|
|
0
|
|
|
|
Sep-5-2014
|
|
|
|
Sep-18-2008
|
|
|
|
9.89
|
|
|
|
5,301
|
|
|
|
5,301
|
|
|
|
0
|
|
|
|
Sep-17-2015
|
|
|
|
Jun-23-2009
|
|
|
|
7.21
|
|
|
|
5,301
|
|
|
|
5,301
|
|
|
|
0
|
|
|
|
Jun-22-2016
|
|
|
|
Sep-1-2010
|
|
|
|
10.28
|
|
|
|
3,972
|
|
|
|
3,972
|
|
|
|
0
|
|
|
|
Aug-31,2017
|
|
|
|
Jun-26-2011
|
|
|
|
12.48
|
|
|
|
3,667
|
|
|
|
3,667
|
|
|
|
0
|
|
|
|
Jun-25-2018
|
|
|
|
Jun-24-2012
|
|
|
|
9.40
|
|
|
|
3,911
|
|
|
|
0
|
|
|
|
3,911
|
|
|
|
Jun-23-2019
|
|
|
|
|
|
|
|
|
Shimon Ullman
|
|
|
Jun-25-2006
|
|
|
|
23.23
|
|
|
|
1,931
|
|
|
|
1,931
|
|
|
|
0
|
|
|
|
Jun-24-2013
|
|
|
|
Sep-6-2007
|
|
|
|
21.77
|
|
|
|
2,270
|
|
|
|
2,270
|
|
|
|
0
|
|
|
|
Sep-5-2014
|
|
|
|
Sep-18-2008
|
|
|
|
9.89
|
|
|
|
5,301
|
|
|
|
5,301
|
|
|
|
0
|
|
|
|
Sep-17-2015
|
|
|
|
Jun-23-2009
|
|
|
|
7.21
|
|
|
|
5,301
|
|
|
|
5,301
|
|
|
|
0
|
|
|
|
Jun-22-2016
|
|
|
|
Sep-1-2010
|
|
|
|
10.28
|
|
|
|
3,972
|
|
|
|
3,972
|
|
|
|
0
|
|
|
|
Aug-31,2017
|
|
|
|
Jun-26-2011
|
|
|
|
12.48
|
|
|
|
3,667
|
|
|
|
3,667
|
|
|
|
0
|
|
|
|
Jun-25-2018
|
|
|
|
Jun-24-2012
|
|
|
|
9.40
|
|
|
|
3,911
|
|
|
|
0
|
|
|
|
3,911
|
|
|
|
Jun-23-2019
|
|
|
|
|
|
|
|
|
Arie Weisberg
|
|
|
Aug-10-2006
|
|
|
|
22.44
|
|
|
|
28,100
|
|
|
|
28,100
|
|
|
|
0
|
|
|
|
Aug-9-2013
|
|
|
|
Aug-8-2007
|
|
|
|
21.65
|
|
|
|
16,000
|
|
|
|
16,000
|
|
|
|
0
|
|
|
|
Aug-8-2014
|
|
|
|
Aug-7-2008
|
|
|
|
11.84
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
0
|
|
|
|
Aug-6-2015
|
|
|
|
Nov-20-2008
|
|
|
|
3.86
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
0
|
|
|
|
Nov-19-2015
|
|
|
|
Feb-26-2009
|
|
|
|
4.15
|
|
|
|
33,750
|
|
|
|
33,750
|
|
|
|
0
|
|
|
|
Feb-25-2016
|
|
|
|
Sep-1-2010
|
|
|
|
10.28
|
|
|
|
3,972
|
|
|
|
3,972
|
|
|
|
0
|
|
|
|
Aug-31,2017
|
|
|
|
Jun-26-2011
|
|
|
|
12.48
|
|
|
|
3,667
|
|
|
|
3,667
|
|
|
|
0
|
|
|
|
Jun-25-2018
|
|
|
|
Jun-24-2012
|
|
|
|
9.40
|
|
|
|
3,911
|
|
|
|
0
|
|
|
|
3,911
|
|
|
|
Jun-23-2019
|
|
(e) Option Exchange
On November 4, 2010, the Company filed a Tender Offer Statement with the SEC, thereby commencing a tender offer (the
Exchange Offer
) pursuant to which certain employees of the Company were offered the right to exchange certain of their outstanding options to purchase Ordinary Shares for new options (the
New Options
) to
purchase a lesser number of Ordinary Shares on the terms described in the Exchange Offer. Only outstanding options granted in the years 2005, 2006 or 2007, that had an exercise price greater than $20 per share and that were held by persons who were,
on the date of commencement and expiration of the Exchange Offer, residents of Israel, the United States, Germany, Hong Kong, Japan, Korea or Taiwan and were not otherwise ineligible to participate in the Exchange Offer (the
Eligible
Options
) were able to be tendered for exchange pursuant to the Exchange Offer. The directors and the senior management and corporate officers of the Company, as well as certain additional members of the Companys senior management,
were not eligible to participate in the Exchange Offer.
The Exchange Offer was made on the basis of a fixed exchange ratio,
which was determined in accordance with the year in which the Eligible Option was granted. The exchange ratio for (i) Eligible Options granted in 2005 was 5-to-1, (ii) Eligible Options granted in 2006 was 3-to-1 and (iii) Eligible
Options granted in 2007 was 2-to-1, rounded down (if necessary) to the nearest whole number to avoid the issuance of fractional Ordinary Shares.
The Exchange Offer expired at 4:00 pm., Israel time, on December 15, 2010. Pursuant to the Exchange Offer, the Company accepted for exchange Eligible Options to purchase an aggregate of 429,600
Ordinary Shares, representing approximately 77.6% of the Ordinary Shares subject to all Eligible Options. On December 16, 2010, the Company granted New Options to purchase 157,638 Ordinary Shares, in exchange for the Eligible Options tendered
and accepted pursuant to the Exchange Offer. The exercise price per share of the New Options granted pursuant to the Exchange Offer is $12.26, which was the mean average between the high and the low sale prices of the Ordinary Shares, as reported by
Nasdaq on December 16, 2010. Each New Option was issued pursuant to the 2000 Plan and is subject to a two-year vesting schedule commencing on the grant date and, with the exception of New Options issued in exchange for Eligible Options granted
in September 2005, is for a term equal to the remaining term of the Eligible Option for which it was exchanged. New Options granted
86
in exchange for Eligible Options granted in September 2005 will expire on February 28, 2013. In addition, Ordinary Shares tendered to the Company pursuant to the Exchange Program have been
permanently retired by the Company and are no longer available for future issuances under the 2000 Plan. 271,962 Ordinary Shares were retired under the Exchange Offer in this manner.
Item 7.
|
Major Shareholders and Related Party Transactions
|
7.A Major Shareholders
The following table
sets forth information as of January 31, 2013 (except with respect to the shareholders as noted below), concerning: (i) the only persons or entities known to the Company beneficially to own 5% or more of the outstanding Ordinary Shares;
and (ii) the number of outstanding Ordinary Shares beneficially owned by all Directors and/or Executives as a group.
|
|
|
|
|
|
|
|
|
Identity of Person or Group
|
|
Number
of
Shares (1)
|
|
|
Percentage
of
Ordinary
Shares
Outstanding (1)
|
|
Harris Associates L.P. (2)
Two North LaSalle Street, Suite 500
Chicago, Illinois 60602
|
|
|
5,670,998
|
|
|
|
13.10
|
%
|
MAK Capital One L.L.C. (3)
590 Madison Avenue, 9th Floor
New York, NY 10022
|
|
|
4,186,345
|
|
|
|
9.67
|
%
|
FMR LLC (4)
82 Devonshire Street
Boston, Massachusetts 02109
|
|
|
3,100,000
|
|
|
|
7.16
|
%
|
Dr. Jacob Richter (5)
Medinol Ltd.
Building No. 7, Entrance A, 5th Floor
Kiryat Atidim
P.O. Box 58165
Tel Aviv, 61581 Israel
|
|
|
3,033,945
|
|
|
|
7.01
|
%
|
Clal Insurance Enterprises Holdings Ltd.
(6)
48 Menachem Begin Street
Tel Aviv, 66180 Israel
|
|
|
2,873,442
|
|
|
|
6.64
|
%
|
Directors and/or Executives as a group
(consisting of 16 persons) (7)
|
|
|
5,339,427
|
|
|
|
12.15
|
%
|
(1)
|
The Company had outstanding, on January 31, 2013, 43,274,986 Ordinary Shares. This number does not include a total, as at that date, of 5,109,349 Ordinary Shares
that were either subject to outstanding equity awards granted pursuant to equity remuneration plans adopted or assumed by the Company or available for grant pursuant to such plans, of which: 3,830,379 were subject to outstanding stock options
(2,708,339 of which had vested); 524,216 were subject to outstanding and unvested RSUs; and 754,754 remained available for future equity awards pursuant to such plans, comprised of:
|
|
(a)
|
4,015,838 Ordinary Shares issuable pursuant to equity awards under the 2000 Plan, of which:
|
|
(i)
|
3,666,218 were subject to outstanding options (2,544,178 of which had vested); and
|
|
(ii)
|
349,620 remained available for future equity awards pursuant to the 2000 Plan;
|
|
(b)
|
929,350 Ordinary Shares issuable pursuant to equity awards under the 2010 Plan, of which:
|
|
(i)
|
524,216 were subject to outstanding and unvested RSUs; and
|
|
(ii)
|
405,134 remained available for future equity awards pursuant to the 2010 Plan; and
|
|
(c)
|
164,161 Ordinary Shares issuable pursuant to options under the PDI Equity Remuneration Plans (all of which had vested).
|
87
The above number of Ordinary Shares outstanding also does not include a total of 2,368,778
Ordinary Shares held at that date as treasury shares, virtually all of which were repurchased by the Company, of which: (a) 1,993,293 were owned by Orbotech Ltd. as dormant shares under Israeli law and, for so long as they are owned by Orbotech
Ltd., confer no rights and, accordingly, are neither eligible to participate in or receive any future dividends which may be paid to shareholders of the Company nor entitled to participate in, be voted at or be counted as part of the quorum for, any
meetings of shareholders of the Company; and (b) 375,485 were owned by a subsidiary of Orbotech Ltd. and, for so long as they are owned by a subsidiary of Orbotech Ltd., confer no voting rights and, accordingly, are not entitled to participate
in, be voted at or be counted as part of the quorum for, any meetings of shareholders of the Company.
Because the Company uses
the above number of Ordinary Shares outstanding as the calculation base, the percentage of Ordinary Shares beneficially owned for each listed person or entity may differ from the percentage, if any, in the reports filed by such person or entity with
the SEC.
(2)
|
As of December 31, 2012, based on a report filed with the SEC on February 11, 2013. The report indicated sole voting and dispositive power as to 4,182,200
Ordinary Shares by Harris Associates L.P. and by Harris Associates Inc., its general partner, and voting power as to 1,488,798 Ordinary Shares by reason of advisory and other relationships with the person who owns the Ordinary Shares. The report
states that Harris Associates L.P. has been granted the power to vote the Ordinary Shares in circumstances it determines to be appropriate in connection with assisting its advised clients to whom it renders financial advice in the ordinary course of
business, by either providing information or advice to the persons having such power, or by exercising the power to vote.
|
(3)
|
As of December 31, 2012, based on a report filed with the SEC dated February 14, 2013. The report disclosed shared voting and dispositive power: (1) by MAK Capital
One L.L.C., a Delaware limited liability company (
MAK Capital
), MAK Capital Fund LP, a Bermuda limited partnership (
MAK Fund
), and Michael A. Kaufman as to 2,665,100 Ordinary Shares owned by MAK Fund,
(2) by MAK Capital, MAK-ro Capital Master Fund LP, a Cayman Islands exempted company (
MAK-ro Fund
), and Mr. Kaufman as to 1,178,521 Ordinary Shares owned by MAK-ro Fund, and (3) by Paloma International L.P., a
Delaware limited partnership (
Paloma
), S. Donald Sussman, MAK Capital and Mr. Kaufman as to 342,724 Ordinary Shares owned indirectly by Paloma.
|
(4)
|
As of December 31, 2011, based on a report filed with the SEC dated February 14, 2012. The report indicated dispositive power as to all 3,100,000 Ordinary
Shares by FMR LLC and by Edward C. Johnson 3d, members of whose family may be deemed to form a controlling group with respect to FMR LLC. Fidelity Management & Research Company (
Fidelity
), a wholly-owned subsidiary of FMR
LLC, is an investment advisor registered under the IAA and is also a beneficial owner of all such Ordinary Shares, all of which are also beneficially owned by Fidelity Low Priced Stock Fund, an investment company registered under the ICA. Neither
FMR LLC nor Edward C. Johnson 3d, Chairman of FMR LLC, has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds Boards of Trustees. The power to vote all such
Ordinary Shares resides with the Fidelity Funds Boards of Trustees. Fidelity votes the shares under written guidelines established by the Fidelity Funds Boards of Trustees.
|
At the time of filing this Annual Report, FMR LLC had not filed any ownership reports related to the Registrant since February 14, 2012
and, accordingly, the Registrant is using the most recent publicly-available information
(5)
|
As of January 3, 2012, based on a report filed with the SEC dated January 3, 2012. The report indicated sole voting and dispositive power as to none of such
Ordinary Shares, and shared voting and dispositive power as to all 3,033,945 Ordinary Shares, with Dr. Judith Richter. Dr. Jacob Richter serves as a member of the Board. Dr. Jacob Richter and Yochai Richter, the Active Chairman of the
Board, are brothers.
|
(6)
|
As of December 31, 2012, based on a report filed with the SEC dated February 19, 2013. The report disclosed shared dispositive power and shared voting
power as to 2,873,442 Ordinary Shares by Clal
|
88
|
Insurance Enterprises Holdings Ltd. (
Clal
), an Israeli public corporation, IDB Development Corporation Ltd. (
IDB Development
), an Israeli private
corporation, IDB Holding Corporation Ltd. (
IDB Holding
), an Israeli public corporation, Mr. Nochi Dankner, Mrs. Shelly Bergman, Mrs. Ruth Manor and Mr. Avraham Livnat. Of the 2,873,442 Ordinary Shares reported
as beneficially owned by Clal, the report disclosed that: (i) 170,400 Ordinary Shares are beneficially held for its own account; and (ii) 2,703,042 Ordinary Shares are held for members of the public through a variety of investment funds
that are managed by subsidiaries of Clal which operate under independent management and make independent voting decisions. The report also disclosed that by reason of IDB Developments majority ownership of Clal, it may be deemed to be the
beneficial owner of, and to share the power to vote and dispose of, the shares owned by Clal. Further disclosed is that by reason of IDB Holdings control of Clal through its 100% ownership of IDB Development, IDB Holding may be deemed
beneficial owner of, and to share the power to vote and dispose of, the shares owned by Clal. Finally, by reason of their control of Clal through their interests in, and relationships among them with respect to, IDB Holding, Mr. Dankner,
Mrs. Bergman, Mrs. Manor and Mr. Livnat may be deemed beneficial owners of, and to share the power to vote and dispose of, the shares owned by Clal. The report notes that it should not be construed as an admission by: (i) Clal
that it is the beneficial owner of more than 170,400 Ordinary Shares; and (ii) the other reporting persons that they are the beneficial owners of any of the Ordinary Shares deemed to be beneficially owned by Clal.
|
(7)
|
Includes 672,531 Ordinary Shares issuable upon the exercise of options referred to in footnote (1) above which had either vested as of, or will vest within 60 days
from, January 31, 2013. Also includes 179,586 Restricted Shares, regardless of whether the applicable restrictions have lapsed. The percentage of Ordinary Shares beneficially owned is calculated in accordance with Rule 13d-3(d) promulgated
under the Exchange Act.
|
On January 31, 2013, there were 40 shareholders of record of the Ordinary Shares
in the United States, who, among them, held a total of 41,418,591 Ordinary Shares (net of 2,048,259 Ordinary Shares held of record in the United States at such date as treasury shares), constituting approximately 95.71% of the outstanding Ordinary
Shares as at that date.
The Articles provide that each Ordinary Share shall confer upon its holder the right to vote in
general meetings of the Company. All outstanding Ordinary Shares (other than treasury shares) have equal voting rights.
7.B Related Party Transactions
Yochai Richter has an employment agreement with the Company pursuant to which he serves as Active Chairman of the Board. For information
concerning this agreement, see Item 6Directors, Senior Management and EmployeesCompensationRemuneration of the Active Chairman of the Board.
For information concerning the eligibility and participation of directors in the 2005 Directors Plan and information concerning unexercised options and unvested Restricted Shares held by directors,
including awards made during 2012, see Item 6Directors, Senior Management and EmployeesCompensationRemuneration of the Active Chairman of the Board; Other Directors Remuneration; Equity Awards to Directors.
Certain equity awards held by certain officers of the Company are subject to immediate vesting in the event of death or a change in
control of the Company. In addition, certain officers of the Company are, under certain circumstances, eligible for increased severance pay.
7.C Interests of Experts and Counsel
Not
applicable in Annual Report on Form 20-F.
89
Item 8.
|
Financial Information
|
8.A Consolidated Statements and Other Financial Information
(a) Consolidated Financial Statements
See
Item 18Financial Statements and pages F-1 through F-52.
(b) Export Sales
See Item 5Operating and Financial Review and ProspectsOperating ResultsGeographical Analysis;
Worldwide Economic Situation; Cost of RevenuesGeographical Analysis and Worldwide Economic Situation and Note 13a(ii) to the Financial Statements.
(c) Legal Proceedings
The Company has not
been party to any legal or arbitration proceedings, including any relating to bankruptcy, receivership or similar matters or any governmental proceedings known to the Company, the resolution of which against the Company has had in the recent past a
material adverse effect on the Companys financial position or profitability.
In June 2012, charges were filed in the
Seoul Central District Court of the Republic of Korea against the Korean subsidiary of the Company and six employees thereof related to the alleged acquisition and misuse of confidential information of certain of the Companys significant
customers in violation of the Korean Act on Prevention of Divulgence and Protection of Industrial Technology (the
ITA
) and the Criminal Code of Korea (the
CC
). The charges include (1) the unlawful
acquisition by unjust means of certain industrial technology related to the production of active matrix OLED panels of Samsung Mobile Display Co., Ltd. and LG Display Co. Ltd., customers of the Companys Korean subsidiary, that has allegedly
been designated as Korean national core technology (the
Customer Technology
), (2) use of the Customer Technology by preparing certain presentation materials, (3) unlawful divulgence of the Customer Technology to other
employees of the Company inside and outside of Korea, and (4) breach of trust in office by copying and divulging the Customer Technology without the customers permission for financial gain. On October 26, 2012, the Korean court
released on bail the three Korean employees who had previously been arrested, and hearings on this matter remain ongoing. In addition, the investigation by the prosecutor into the actions of employees of the Company outside of Korea is ongoing. The
Company recorded $4.0 million in net costs in 2012 in connection with the ongoing Korean litigation, which are recorded in selling, general and administrative expenses, and expects to continue to incur fees and expenses associated therewith. The
trial is expected to continue through at least the first half of 2013; however, it could extend beyond that time frame as a result of many factors that are outside the Companys control. A portion of the costs have been or are expected to be
reimbursed under the Companys applicable insurance policies. The Companys Korean subsidiary continues to co-operate with the Korean authorities in this matter. However, because this is an ongoing matter, the Company is unable to predict
the outcome or what additional actions, if any, might be taken in the future by the Korean authorities as a result of matters related to this proceeding, and the timing and amount of costs associated with the existing and any future matters.
However, the ITA and the CC provide that fines of up to 1.50 billion Korean Won (at the exchange rate on January 31, 2013 of Korean Won 1086.25 =$1.00, approximately U.S. $1.38 million) may be levied on employers based on vicarious liability
for convicted employees. Employees may also be subject to monetary penalties in addition to, or in lieu of, prison sentences. These amounts may be paid by the Company under certain circumstances. The Company has not recorded a provision related to
the Korean Matter and ongoing investigation as of the date of this Annual Report because the Company cannot reasonably estimate the amount of the financial impact of an adverse outcome in these matters. The Company and its Korean subsidiary may also
become subject to civil actions brought by third parties, including the Companys customers, which may result in monetary judgments, settlements or loss of business or which may require the Company to change its business model. For further
information about the Korean Matter, see Risk Factor (d).
One of the Companys AOI products is the subject of patent
infringement litigation in China, which the Company and a customer are involved in defending. This lawsuit is in the early stages and the Company is still assessing the claims made related to its product and the procedural aspects of the case. It
may involve
90
counterclaims by the Company and its customer; and although the Company believes there are meritorious defenses to the alleged claims it is unable to predict the timing, scope, cost and/or
outcome of this matter.
From time to time, the Company is involved in other claims and legal and administrative proceedings
that arise in the conduct of its business. Based on information available as of the date hereof, the Company does not believe that the ultimate outcome of any such unresolved matters, individually or in the aggregate, is likely to have a material
adverse effect on the Companys financial position or results of operations. However, litigation and administrative proceedings are subject to inherent uncertainties and the Companys view of these matters, including settlement thereof,
may change in the future. An unfavorable outcome or settlement may have a material adverse impact on the Companys financial position and results of operations for the period in which it occurs, and potentially in future periods.
See Note 8b(ii) to the Financial Statements.
(d) Dividend Policy
The Company does not
have any current plans to pay dividends. On November 5, 2012, the Company announced a program for the repurchase of Ordinary Shares. See Item 16EPurchases of Equity Securities by the Issuer and Affiliated Purchasers.
8.B Significant Changes
For information as to any significant change which has occurred since the date of the annual financial statements included in this Annual Report, see Item 5Operating and Financial Review and
ProspectsTrend Information.
Item 9.
|
The Offer and Listing
|
9.A Offer and Listing Details
Except as set forth below, the
information called for in this Item is not applicable in an Annual Report on Form 20-F.
The following table sets forth, in
Dollars, the intraday high and low reported sales prices of the Ordinary Shares on Nasdaq during the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Period
|
|
High
|
|
|
Low
|
|
2008
|
|
Full Year
|
|
|
19.10
|
|
|
|
2.90
|
|
2009
|
|
Full Year
|
|
|
12.17
|
|
|
|
3.35
|
|
2010
|
|
Full Year
|
|
|
13.44
|
|
|
|
8.57
|
|
2011
|
|
Full Year
|
|
|
15.62
|
|
|
|
8.95
|
|
|
|
First Quarter
|
|
|
15.62
|
|
|
|
12.66
|
|
|
|
Second Quarter
|
|
|
14.39
|
|
|
|
12.01
|
|
|
|
Third Quarter
|
|
|
13.00
|
|
|
|
8.95
|
|
|
|
Fourth Quarter
|
|
|
11.05
|
|
|
|
9.06
|
|
2012
|
|
Full Year
|
|
|
11.85
|
|
|
|
6.43
|
|
|
|
First Quarter
|
|
|
11.70
|
|
|
|
10.06
|
|
|
|
Second Quarter
|
|
|
11.85
|
|
|
|
6.43
|
|
|
|
Third Quarter
|
|
|
8.83
|
|
|
|
7.10
|
|
|
|
Fourth Quarter
|
|
|
9.09
|
|
|
|
7.74
|
|
|
|
October
|
|
|
9.09
|
|
|
|
7.74
|
|
|
|
November
|
|
|
8.76
|
|
|
|
7.75
|
|
|
|
December
|
|
|
8.70
|
|
|
|
7.81
|
|
2013
|
|
Full Year (through February 15)
|
|
|
9.88
|
|
|
|
8.05
|
|
|
|
First Quarter (through February 15)
|
|
|
9.88
|
|
|
|
8.05
|
|
|
|
January
|
|
|
9.88
|
|
|
|
8.05
|
|
|
|
February (through February 15)
|
|
|
9.80
|
|
|
|
9.10
|
|
91
* * * * * * * * * *
On December 31, 2012, there were 42 shareholders of record of the Ordinary Shares in the United States who, among them, held a total
of 41,547,499 Ordinary Shares (net of 1,909,076 Ordinary Shares held of record in the United States at such date as treasury shares), constituting approximately 95.72% of the outstanding. Ordinary Shares as at that date. Such holders of record
include several who are nominees for certain beneficial owners, the exact number of whom is not known to the Company. The Company believes that, as of December 31, 2012, there were in excess of 1,250 beneficial holders of the Ordinary Shares.
9.B Plan of Distribution
Not applicable in Annual Report on Form 20-F.
9.C Markets
The Companys Ordinary
Shares are quoted on Nasdaq under the symbol ORBK.
9.D Selling Shareholders
Not applicable in Annual Report on Form 20-F.
9.E Dilution
Not applicable in Annual Report
on Form 20-F.
9.F Expenses of the Issue
Not applicable in Annual Report on Form 20-F.
Item 10.
|
Additional Information
|
10.A Share Capital
Not applicable in Annual
Report on Form 20-F.
10.B Memorandum and Articles of Association
The Memorandum of Association of Orbotech Ltd. (the
Memorandum
) and the Articles (each in their original form) were
registered on February 8, 1981, under registration number 51-087517-2 with the Israeli Registrar of Companies (the
Registrar
). In July 1984, the Company became a public company under Israeli company law, under registration
number 52-003521-3. At the 2001 annual general meeting of shareholders held on November 8, 2001, the shareholders adopted new articles of association as well as amendments to the Memorandum and the new articles of association. At the 2006
annual general meeting of shareholders held on June 25, 2006, the shareholders resolved to increase the authorized (registered) share capital of the Company and to amend the Memorandum and the Articles accordingly.
Set forth below is a summary of certain provisions of the Memorandum, the Articles and the Companies Law. This description does not
purport to be complete and is qualified in its entirety by reference to the full text of the Memorandum and Articles and by Israeli law. The Memorandum, in a form which reflects, integrated into the text, all amendments thereto since the
Companys incorporation, and the Articles, in a form which reflects, integrated into the text, all amendments thereto since being adopted on November 8, 2001, are exhibits to this Annual Report.
(a) Objects of the Company
Pursuant to Section 2.A. of the Memorandum the principal objects for which the Company was established include to engage in any form in the design, development, production, marketing and servicing of
products and
92
systems in the field of electro-optics and other kinds of electronic equipment, including electro-mechanical equipment, medical equipment and industrial instrumentation and control equipment.
(b) Directors
The Board consists of three classes of directors (not including external directors who do not form part of any class), with one class being elected each year by shareholders at the Companys annual
general meeting for a term of approximately three years. Directors so elected cannot be removed from office by the shareholders until the expiration of their term of office. Ordinary Shares do not have cumulative voting rights. As a result, the
holders of Ordinary Shares that represent a simple majority of the voting power represented at a shareholders meeting and voting at the meeting have the power to elect all of the directors put forward for election, subject to specific
requirements under the Companies Law with respect to the election of external directors. Under the Companies Law, the Company is required to appoint at least two natural persons as external directors; such appointments are to be for a
term of three years and may be extended for additional three-year terms, subject to certain conditions as provided under the Companies Law and regulations promulgated pursuant thereto. For further information as to these appointments, see
Item 6Directors, Senior Management and Employees; Board PracticesMembership of Board; External Directors; Independent Directors; Financial Experts.
Under the Articles, a director shall vacate his or her office if that director dies; is declared bankrupt; is declared to be of unsound mind; resigns such office by notice in writing given to the Company;
or is not re-elected by the shareholders upon expiration of his or her term at the relevant annual general meeting.
In
general, the management of the business of the Company is vested in the Board which may exercise all such powers of the Company, including the power to borrow or secure the payment of any sum or sums of money for the purposes of the Company, in such
manner, at such times and upon such terms and conditions in all respects, as it thinks fit. The directors may, from time to time, appoint any one or more persons, whether or not directors, to be managing director(s), general manager(s), chief
executive officer(s), president(s) or any similar function with a different title, for such period, subject to the provisions of the Companies Law, and upon such terms as the directors think fit, and, subject to the limitations imposed by the
Companies Law upon the delegation by a board of directors of certain powers and authorities, may entrust to and confer upon such managing director(s), general manager(s), chief executive officer(s) or president(s) such of the powers of the Board as
the directors think fit, and such powers may be made exercisable for such period or periods, and for such objects and purposes, and upon such terms and conditions, and subject to such restrictions, as the directors may determine.
(c) Conflict of interest
(i) Approval of related party transactions
The
Companies Law requires that transactions between a company and its office holders or that benefit its office holders be approved as provided for in the Companies Law and the companys articles of association. The approval of a majority of the
disinterested members of the audit committee and of the board of directors is generally required and, in some circumstances, shareholder approval may also be required. With respect to the Terms of Office and Employment of office holders, the
approval of the Remuneration Committee would be required in lieu of that of the Audit Committee. See Item 6Directors, Senior Management and Employees; Compensation.
(ii) Disclosure by office holders
The Companies Law
requires that an office holder of a company promptly disclose to the company any personal interest that the office holder may have in an existing or proposed transaction by the company. The office holder must also disclose related material
information and documents that the office holder has about the
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existing or proposed transaction. The office holder must further disclose the interests of any entity in which he or she is a 5% or greater shareholder, director or general manager, or in which
the office holder has the power to appoint one or more directors or the general manager. If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest of his or her spouse, siblings, parents,
grandparents, descendants, spouses descendants, siblings and parents and the spouses of any of these people. This disclosure must be made no later than the first meeting of the board of directors at which the transaction is discussed. The
disclosure is made to the board of directors and to the audit committee if it must approve the transaction. In those circumstances in which shareholder approval is also required, shareholders have the right to review any documents in the
companys possession related to the proposed transaction. However, the company may prohibit a shareholder from reviewing the documents if the company believes the request was made in bad faith, the documents include trade secrets or patents or
their disclosure could otherwise harm the companys interests.
(iii) Approval procedure
After the office holder complies with these disclosure requirements, the company may approve the transaction under the provisions of
applicable law and its articles of association. If the transaction is with an office holder or with a third party in which the office holder has a personal interest, the approval must confirm that the transaction is not adverse to the companys
interest. If the transaction is an extraordinary transaction, it must be approved as required by the articles of association and must also be approved by the audit committee and the board of directors. An extraordinary transaction is a transaction:
(i) other than in the ordinary course of business; (ii) on terms other than on market terms; or (iii) that is likely to have a material impact on the companys profitability, assets or liabilities. The audit committee is
responsible for determining if a transaction is extraordinary or not. If the transaction is not an extraordinary transaction, it must be approved as required by the articles of association and must also be approved by the board of directors. The
Terms of Office and Employment of office holders are subject to the approval of the remuneration committee and the board of directors, in line with the Companys Compensation Policy. See Item 6Directors, Senior Management and
Employees; Compensation.
In some circumstances, shareholder approval is required. A person with a personal interest in any
matter may not generally be present at any audit committee or board of directors meeting where the matter is being considered, and if a member of the committee or a director may not generally vote on the matter.
(iv) Transactions with controlling shareholders
The Companies Law extends the disclosure requirements applicable to an office holder to a controlling shareholder in a public company. A shareholder that holds 25% or more of the voting rights in a
company would be considered a controlling shareholder for the purposes of these disclosure requirements if no other shareholder holds more than 50% of the voting rights. If two or more shareholders are interested parties in the same transaction,
their shareholdings are combined for the purposes of calculating percentages. Extraordinary transactions of a public company with a controlling shareholder or in which a controlling shareholder has a personal interest, as well as any engagement by a
public company of a controlling shareholder or of such controlling shareholders relative, directly or indirectly, with respect to the provision of services to the company, and, if such person is also an office holder of such company, with
respect to such persons Terms of Office and Employment as an office holder, and if such person is an employee of the company but not an office holder, with respect to such persons employment by the company, generally require the approval
of the audit committee (or with respect to Terms of Office and Employmentthe remuneration committee), the board of directors and the shareholders of the company. If required, shareholder approval must include at least a majority of the
shareholders who do not have a personal interest in the transaction and are present and voting at the meeting (abstentions are disregarded). Alternatively, the total shareholdings of the disinterested shareholders who vote against the transaction
must not represent more than two percent of the voting rights in the company. The Israeli Minister of Justice may determine a different percentage. Transactions that are for a period of more than three years generally need to be brought for approval
in accordance with the above procedure every three years.
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According to Article 73(a) of the Articles, subject to the provisions of the Companies Law,
no office holder of the Company (which includes a director) shall be disqualified by such office from holding any office or place of profit within or outside the Company or with any company in which the Company shall be a shareholder or otherwise
interested, or with any company which is a shareholder of, or otherwise interested in, the Company, or from contracting with the Company either as vendor, purchaser or otherwise, either on his or her own behalf or as a director of another company or
member of a firm or otherwise, nor (unless and to the extent provided otherwise in the Companies Law) shall any such contract, or any contract or arrangement entered into by or on behalf of the Company in which any office holder shall be in any way
interested, be void or voidable nor shall any office holder be liable to account to the Company for any profit arising from any such office or place of profit or realized by any such contract or arrangement by reason only of such office
holders holding that office or of the fiduciary relations thereby established. An office holder who knows that he or she has, directly or indirectly, a personal interest in any existing or contemplated contract or arrangement of the Company of
the type described in Article 73(a) shall disclose to the Company the nature of this interest, as well as any material fact or document, without delay and no later than the meeting of the Board at which such contract or arrangement is first
considered. Should the office holder acquire, or become aware of, such personal interest subsequently, that interest shall be disclosed without delay, and no later than the first meeting of the Board after the time at which it was acquired.
According to Article 73(b) of the Articles, unless and to the extent provided otherwise in the Companies Law, every director
shall be entitled, after such disclosure, to vote as a director in respect of any contract or arrangement in which he or she is so interested as aforesaid. Unless and to the extent provided otherwise in the Companies Law, a general notice that a
director is a member of any firm or company and is to be regarded as interested in all transactions with that firm or company shall be a sufficient disclosure under Article 73(a) as regards such director and the said transactions, and after such
general notice (unless and to the extent provided otherwise in the Companies Law), it shall not be necessary for such director to give a special notice relating to any particular transaction with that firm or company. Pursuant to Article 73(c) of
the Articles, the duty of a director or other office holder to disclose his or her interest as aforesaid shall not apply to transactions in which the interest of such director or office holder arises solely due to the interest of a relative in a
transaction which is not an extraordinary transaction (as defined in the Articles).
(d) Dividends
Dividends may be distributed only out of profits available for dividends as determined by the Companies Law, provided that there is no reasonable concern that the distribution will prevent the Company
from being able to meet its existing and anticipated obligations when they become due. Generally, under the Companies Law, the decision to distribute dividends and the amount to be distributed is made by a companys board of directors. The
Articles provide that the Board may from time to time declare, and cause the Company to pay, such dividends as may appear to it to be justified by the profits of the Company and that the Board has the authority to determine the time for payment of
such dividends and the record date for determining the shareholders entitled to receive such dividends, provided the date is not before the date of the resolution to distribute the dividend. Declaration of dividends does not require shareholder
approval.
(e) Ordinary Shares
The registered capital of Orbotech Ltd. is NIS 11,200,000 divided into 80,000,000 Ordinary Shares. All issued and outstanding Ordinary
Shares are fully paid and non-assessable. Holders of Ordinary Shares have one vote for each Ordinary Share held on all matters to be voted on by shareholders, including the election of directors. Ordinary Shares do not entitle their holders to
preemptive rights. The Memorandum and Articles and Israeli law do not restrict in any way the ownership or voting of Ordinary Shares by non-residents or persons who are not citizens of Israel, except with respect to subjects of nations which are in
a state of war with Israel.
Subject to the rights of holders of shares with special rights (which may be issued in the
future), holders of paid up Ordinary Shares are entitled to participate in the payment of dividends and, in the event of a winding-up
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of the Company, in the distribution of assets available for distribution, in proportion to the amount paid up or credited as paid up on account of the nominal value of the shares held by them
respectively and in respect of which such dividend is being paid or such distribution is being made, without considering any premium those holders might have paid in excess of that nominal value.
Shares with preferential rights relating, among other things, to dividends, voting and repayment of share capital can be created by
adoption of a resolution of the shareholders at a general meeting of shareholders at which a quorum is present, by a simple majority of the voting power represented at the meeting in person or by proxy and voting thereon. The Company can similarly
subdivide issued and outstanding Ordinary Shares. Modification or abrogation of the rights of any class of shares requires the written consent of the holders of 75% of the issued shares of such a class or adoption of a resolution passed by a simple
majority of those present in person or by proxy and voting at a separate general meeting of the holders of the shares of that class.
Ordinary Share certificates registered in the names of two or more persons are deliverable to the person first named in the share register and such delivery shall be deemed sufficient delivery to all
co-owners. If two or more such persons tender a vote, the vote of the person whose name first appears in the share register will be accepted to the exclusion of any other. Notices may be given only to the person whose name first appears in the
register. If two or more persons jointly hold or are entitled to a share, any one of them may give effectual receipt for any dividend payable or property distributable in respect of such share.
(f) Transfer of Shares
Ordinary Shares which have been fully paid-up are transferable, by submission of a proper instrument of transfer to the Company or its transfer agent together with the certificate of the shares to be
transferred and such other evidence, if any, as the directors may require to prove the rights of the intending transferor in the transferred shares.
(g) Shareholders Meetings
The Articles
provide that an annual general meeting must be held at least once in every calendar year, not later than 15 months after the last preceding annual general meeting, at such time and place as may be determined by the Board. The Board may, in its
discretion, convene additional shareholder meetings and, pursuant to the Companies Law, must convene a meeting upon the demand of two directors or one quarter of the directors in office or upon the demand of the holder or holders of five percent or
more of the Companys issued share capital and one percent or more of its voting rights or upon the demand of the holder or holders of five percent or more of its voting rights. All demands for shareholder meetings must set forth the items to
be considered at that meeting. Pursuant to the Companies Law, the holder or holders of one percent or more of the Companys voting rights may request the inclusion of an item on the agenda of a future shareholder meeting, provided the item is
appropriate for discussion at a shareholder meeting. The agenda for a shareholder meeting is determined by the Board and must include matters in respect of which the convening of a shareholder meeting was demanded and any matter requested to be
included by holder(s) of one percent or more of the Companys voting rights, as detailed above.
Pursuant to the
Companies Law and regulations promulgated thereunder with respect to the convening of general meetings in a public company, shareholder meetings generally require prior notice of not less than 21 days. The function of the annual general meeting is
to elect directors in accordance with the Articles, receive and consider the profit and loss account, the balance sheet and the ordinary reports and accounts of the directors and auditors, appoint auditors and fix their remuneration and transact any
other business which under the Articles or applicable law may be transacted by the shareholders of a company in general meeting.
The quorum required for either an annual (regular) or an extraordinary (special) general meeting of shareholders consists of at least two shareholders present in person or by proxy holding shares
conferring in the
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aggregate more than 50% of the voting rights of the Company. If a meeting is convened by the Board upon the demand of shareholders or upon the demand of less than 50% of the directors then in
office or directly by such shareholders or directors and no quorum is present within half an hour from the time appointed, it shall be cancelled. If a meeting is otherwise called and no quorum is present within such time, the meeting is adjourned to
the same day one week later at the same time and place or at such other time and place as the Board may determine and specify in the notice of the general meeting and it shall not be necessary to give notice of such adjournment. If a quorum is not
present within half an hour from the time stated for such adjourned meeting, any shareholders present in person or by proxy at such meeting shall constitute a quorum. Generally, under the Companies Law and the Articles, shareholder resolutions are
deemed adopted if approved by the holders of a simple majority of the voting rights represented at a meeting and voting unless a different majority is required by law or pursuant to the Articles. The Companies Law provides that resolutions on
certain matters, such as amending a companys articles of association, assuming the authority of the board of directors in certain circumstances, appointing auditors, appointing external directors, approving certain transactions, increasing or
decreasing the registered share capital and approving most mergers must be made by the shareholders at a general meeting. A company may determine in its articles of association certain additional matters in respect of which resolutions by the
shareholders in a general meeting will be required.
A company such as Orbotech Ltd., incorporated prior to February 1,
2000, is subject to various rules with respect to the transition from being governed by the Companies Ordinance to being governed by the Companies Law. These rules provide, among other things, that any amendment to the Memorandum or Articles will
generally require a resolution adopted by the holders of 75% or more of the voting power represented and voting at a general meeting and that the approval of a merger will require a resolution adopted by the holders of 75% or more of the voting
power represented and voting at a general meeting, unless and until the Company amends the Articles in such manner to provide for a different majority. The Articles provide that all shareholder resolutions, other than with respect to the amendment
or replacement of the Memorandum or Articles and certain other matters which by law require a different majority, but including with respect to certain actions which, pursuant to Israeli law, would otherwise require a majority of 75% of the votes
cast, such as a change of corporate name, an increase in authorized share capital, a consolidation or division of the Companys share capital into shares of larger or smaller nominal value, a cancellation of unissued shares, a reduction of
share capital, the creation of new classes, or the modification of the rights of classes, of shares and the approval of mergers, require only a simple majority of the votes cast. Subject to the Companies Law, a resolution in writing signed by the
holders of all of the Ordinary Shares entitled to vote at a meeting of shareholders or to which all such shareholders have given their written consent will be sufficient to adopt the resolution in lieu of a meeting. The Companies Law does not
currently provide for public companies such as the Company to have shareholder resolutions adopted by means of written consent in lieu of a shareholder meeting.
(h) Changes in Control
Under the Companies
Law, a merger is generally required to be approved by the shareholders and board of directors of each of the merging companies. If the share capital of the company that will not be the surviving company is divided into different classes of shares,
the approval of each class is also required, unless determined otherwise by the court. Similarly, unless an Israeli court determines otherwise, a merger will not be approved if it is objected to by shareholders holding a majority of the voting
rights participating and voting at the meeting (abstentions are disregarded), after excluding the shares held by the other party to the merger, by any person who holds 25% or more of the other party to the merger or by anyone on their behalf,
including by the relatives of or corporations controlled by these persons. In addition, upon the request of a creditor of either party to the proposed merger, an Israeli court may delay or prevent the merger if it concludes that there exists a
reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. Further, a merger can be completed only after all approvals have been submitted to the Registrar
and 30 days have passed from the time that shareholder resolutions were adopted in each of the merging companies and 50 days have passed from the time that a proposal for approval of the merger was filed with the Registrar. In addition, subject to
certain exceptions, an acquisition of shares in a public company must be made by means of a tender offer
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to the extent that as a result of such acquisition the acquirer will hold 25% or more of the voting rights in the company if there is no other holder of 25% or more of the companys voting
rights, or hold more than 45% of the voting rights in the company if there is no other holder of more than 45% of the companys voting rights. These tender offer requirements do not apply to companies whose shares are listed for trading outside
of Israel if, under local law or the rules of the stock exchange on which their shares are traded, there is a limitation on the percentage of control which may be acquired or the purchaser is required to make a tender offer to the public.
Under the Companies Law, a person may not acquire shares in a public company if, after the acquisition, he will hold more
than 90% of the shares or more than 90% of any class of shares of that company, unless a tender offer is made to purchase all of the shares or all of the shares of the particular class. The Companies Law also provides (subject to certain exceptions
with respect to shareholders who held more than 90% of a companys shares or of a class of its shares as of February 1, 2000) that as long as a shareholder in a public company holds more than 90% of the companys shares or of a class
of shares, that shareholder shall be precluded from purchasing any additional shares. In order that all of the shares that the purchaser offered to purchase be transferred to him by operation of law, one of the following needs to have occurred:
(i) the shareholders who declined or do not respond to the tender offer hold less than 5% of the companys outstanding share capital or of the relevant class of shares and the majority of offerees who do not have a personal interest in
accepting the tender offer accepted the offer, or (ii) the shareholders who declined or do not respond to the tender offer hold less than 2% of the companys outstanding share capital or of the relevant class of shares.
A shareholder that had his or her shares so transferred, whether he or she accepted the tender offer or not, has the right, within six
months from the date of acceptance of the tender offer, to petition the court to determine that the tender offer was for less than fair value and that the fair value should be paid as determined by the court. However, the purchaser may provide in
its offer that shareholders who accept the tender offer will not be entitled to such rights.
If the conditions set forth
above are not met, the purchaser may not acquire additional shares of the company from shareholders who accepted the tender offer to the extent that following such acquisition, the purchaser would own more than 90% of the companys issued and
outstanding share capital.
The above restrictions apply, in addition to the acquisition of shares, to the acquisition of
voting power.
In addition, certain provisions of the Memorandum and Articles may have the effect of rendering more difficult
or discouraging an acquisition of the Company deemed undesirable by the Board. Those provisions include: limiting the ability of the Companys shareholders to convene general meetings of the Company (as discussed above); controlling procedures
for the conduct of shareholder and Board meetings, including quorum and voting requirements; and the election and removal of directors.
Moreover, the classification of the Board into three classes with terms of approximately three years each, which was approved by shareholders of the Company in 2001, and the requirement under Israeli
company law to have at least two external directors, who cannot readily be removed from office, may make it more difficult for shareholders who oppose the policies of the Board to remove a majority of the then current directors from office quickly.
It may also, in some circumstances, together with the other provisions of the Memorandum, Articles and Israeli law, deter or delay potential future merger, acquisition, tender or takeover offers, proxy contests or changes in control or management of
the Company, some of which could be deemed by certain shareholders to be in their best interests and which could affect the price some investors are willing to pay for Ordinary Shares.
Israeli tax law treats some acquisitions, including stock-for-stock swaps between an Israeli company and a foreign company, less
favorably than U.S. tax law. Israeli tax law may, for instance, subject a shareholder who exchanges Ordinary Shares for shares in a non-Israeli corporation to immediate taxation.
(i) Duration and Liquidation
The Articles do not limit the Companys duration.
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10.C Material Contracts
On September 18, 2008, in connection with the PDI Acquisition, the Company borrowed $160.0 million from Discount Bank pursuant to a
Financing Agreement entered into and signed on July 22, 2008, between Orbotech Ltd. and Discount Bank, as amended by the Financing AgreementFirst Amendment entered into and signed on February 22, 2009, between Orbotech Ltd. and IDB,
both of which were subsequently replaced and superseded by the Amended Financing Agreement, entered into and signed on December 21, 2009, between Orbotech Ltd. and Discount Bank as amended and clarified on May 27,
2010, February 15, 2011, February 22, 2011, August 11, 2011 and December 18, 2012 (collectively, as so amended, the
Loan Agreements
and the loan thereunder, the
Discount Bank Loan
).
English translations of the Loan Agreements and the floating charge are filed as exhibits to this Annual Report and reference is made to those agreements, which are incorporated by reference herein. The English translations are not binding
agreements. Any disputes under the Loan Agreements and the floating charge will be determined by reference to the original agreements which are in Hebrew. The Loan Agreements and the floating charge are governed by Israeli law and the exclusive
venue for purposes of disputes thereunder is in the competent courts in Israel. For a discussion of the Loan Agreements, see Item 5Operating and Financial Review and ProspectsLiquidity and Capital Resources.
On October 21, 2010, Orbotech Ltd. issued a debenture in favor of Hapoalim (the
Hapoalim Debenture
) under which
an additional floating charge on all of its assets equal in priority to the one granted to Discount Bank was created in favor of Hapoalim to secure the repayment of amounts owed for positions taken by the Company in connection with the Hapoalim
Banking Activities. An English translation of the Hapoalim Debenture is filed as an exhibit to this Annual Report and reference is made to such document, which is incorporated by reference herein. The English translation is not a binding agreement.
Any dispute under the Hapoalim Debenture will be determined by reference to the original debenture which is in Hebrew. The Hapoalim Debenture is governed by Israeli law and the exclusive venue for purposes of disputes thereunder is in the competent
courts in Israel. For a discussion of the Hapoalim Debenture, see Item 5Operating and Financial Review and ProspectsLiquidity and Capital Resources.
On December 20, 2012, the Company notified Discount Bank of its intention to prepay $32.0 million of its outstanding principal indebtedness under the Loan Agreements and on February 11, 2013 made the
Partial Prepayment. During the beginning of 2013, Orbotech Ltd. and Discount Bank agreed to the allocation of the prepayment between the fixed interest rate and variable interest rate components of the indebtedness and to certain other matters and
on February 10, 2013, Orbotech Ltd. entered into the Partial Prepayment Arrangements with Discount Bank and the Negative Pledges with Discount Bank and Hapoalim. English translations of the Partial Prepayment Arrangements, the letter of agreement
with Hapoalim and the Negative Pledges are filed as exhibits to this Annual Report and reference is made to such documents which are incorporated by reference herein. The English translations are not binding agreements. Any dispute in connection
with the Partial Prepayment Arrangements, the letter of agreement with Hapoalim and the Negative Pledges will be determined by reference to the original agreements which are in Hebrew. The Partial Prepayment Arrangements, the letter agreement with
Hapoalim and the Negative Pledges are governed by Israeli law and although there is no specific reference to jurisdiction in these documents, the competent courts in Israel will have jurisdiction over any disputes thereunder.
10.D Exchange Controls
There are currently no exchange controls in effect in Israel that restrict the repatriation by non-residents of Israel in non-Israeli currency of any dividends, if any are declared and paid, and
liquidation distributions or the Companys ability to import and export capital.
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10.E Taxation
To the extent that the following discussion is based on new or existing tax or other legislation that has not been subject to judicial or
administrative interpretation, there can be no assurance that the views expressed herein will be accepted by the tax or other authorities in question. The summary below does not address all of the tax consequences that may be relevant to all
purchasers of Ordinary Shares in light of each purchasers particular circumstances and specific tax treatment. For example, the summary below does not address the tax treatment of residents of Israel and traders in securities who are subject
to specific tax regimes. As individual circumstances may differ, holders of Ordinary Shares should consult their own tax advisors as to United States, Israeli or other tax consequences of the purchase, ownership and disposition of Ordinary Shares.
This discussion is not intended, nor should it be construed, as legal or professional tax advice and it is not exhaustive of all possible tax considerations. Each individual should consult his or her own tax or legal advisor.
(a) Israeli Taxation
(i) Taxation of Capital Gains Applicable to Non-Israeli Shareholders
Israeli law generally imposes a capital gains tax on the sale of securities of an Israeli company traded on the TASE, on an authorized stock exchange outside Israel or on a regulated market (which
includes a system through which securities are traded pursuant to rules prescribed by the competent authority in the relevant jurisdiction) in or outside Israel. Pursuant to amendments to the Tax Ordinance, effective as of January 1, 2012, the
capital gains tax rate applicable to individuals upon the sale of such securities is such individuals marginal tax rate but not more than 25% (or 30% with respect to a Substantial Shareholder). A 30% tax rate will apply to an individual who
meets the definition of a Substantial Shareholder on the date of the sale of the securities or at any time during the 12 months preceding such date. A Substantial Shareholder is defined as a person who, either alone or
together with any other person, holds, directly or indirectly, at least 10% of any of the means of control of a company (including, among other things, the right to receive profits of the company, voting rights, the right to receive the
companys liquidation proceeds and the right to appoint a director). Different tax rates apply to capital gains accrued from the sale by individuals of securities that are not publicly traded as aforesaid.
With respect to corporate investors, effective January 1, 2012, capital gain tax equal to the corporate tax rate (as of
January 1, 201225%) will be imposed on the sale of traded shares.
These rates are subject to the provisions of any
applicable bilateral double taxation treaty. The treaty concerning double taxation between the United States and Israel (the Convention between the Government of the State of Israel and the Government of the United States of America With Respect to
Taxes on Income (the
Treaty
)) is discussed below.
In addition, if the Ordinary Shares are traded on the
TASE, on an authorized stock exchange outside Israel or on a regulated market (which includes a system through which securities are traded pursuant to rules prescribed by the competent authority in the relevant jurisdiction) in or outside Israel,
gains on the sale of Ordinary Shares held by non-Israeli tax resident investors will generally be exempt from Israeli capital gains tax. Notwithstanding the foregoing, dealers in securities in Israel are taxed at regular tax rates applicable to
business income. In addition, persons paying consideration for shares, including purchasers of shares, Israeli securities dealers effecting a transaction, or a financial institution through which securities being sold are held, are required, subject
to any applicable exemptions and the demonstration of the selling shareholder of its non-Israeli residency, to withhold tax upon the sale of publicly traded securities at a rate of 25% for corporations and for individuals.
Israeli law generally exempts non-resident individuals and entities from capital gains tax on the sale of securities of Israeli
companies, provided that the securities were acquired on or after January 1, 2009.
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(ii) Income Taxes on Dividend Distribution to Non-Israeli Shareholders
Non-Israeli residents (whether individuals or corporations) are generally subject to Israeli income tax on the receipt of
dividends paid on the shares of companies that are not publicly traded at the rate of 25% (30% if the dividend recipient is a Substantial Shareholder, at the time of distribution or at any time during the preceding 12-month period), which tax is to
be withheld at source, unless a different rate is provided under an applicable tax treaty. Dividends paid on the shares of companies that are publicly traded, like our Ordinary Shares, to non-Israeli residents, although generally subject to the same
tax rates applicable to dividends paid on the shares of companies that are not publicly traded, are generally subject to Israeli withholding tax at a rate of 25% (whether or not the recipient is a Substantial Shareholder), unless a different rate is
provided under an applicable tax treaty. The distribution of dividends to non-Israeli residents (either individuals or corporations) from income derived from an Approved Enterprise or a Benefiting Enterprise during the applicable benefits period or
from Preferred Income is subject to withholding tax at a rate of 15%, unless a different tax rate is provided under an applicable tax treaty.
A non-resident of Israel who has dividend income derived from or accrued in Israel, from which the full amount of tax was withheld at source, is generally exempt from the duty to file tax returns in
Israel in respect of such income, provided that: (i) such income was not derived from a business conducted in Israel by the taxpayer; and (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return
is required to be filed.
Residents of the United States generally will have withholding tax in Israel deducted at source. As
discussed below, they may be entitled to a credit or deduction for U.S. federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in U.S. tax legislation.
(iii) U.S.Israel Tax Treaty
The Treaty is generally effective as of January 1, 1995. Under the Treaty, the maximum Israeli withholding tax on dividends paid to a holder of Ordinary Shares who is a Treaty U.S. Resident (as
defined below) is generally 25%. However, pursuant to the Investment Law, dividends distributed by an Israeli company and derived from income eligible for benefits under the Investment Law will generally be subject to a reduced 15% dividend
withholding tax rate, subject to the conditions specified in the Treaty. The Treaty further provides that a 12.5% Israeli dividend withholding tax will apply to dividends paid to a U.S. corporation owning 10% or more of an Israeli companys
voting shares during, in general, the current and preceding tax year of the Israeli company. The lower 12.5% rate applies only on dividends distributed from income not derived from an Approved Enterprise or a Benefiting Enterprise in the applicable
period or, presumably, from a Preferred Enterprise, and does not apply if the company has certain amounts of passive income.
Pursuant to the Treaty, the sale, exchange or disposition of Ordinary Shares by a person who qualifies as a resident of the United States
within the meaning of the Treaty and who is entitled to claim the benefits afforded to such residents under the Treaty (a
Treaty U.S. Resident
) generally will not be subject to the Israeli capital gains tax unless such Treaty U.S.
Resident holds, directly or indirectly, shares representing 10% or more of the voting power of the Company during any part of the 12-month period preceding such sale, exchange or disposition subject to certain conditions. A sale, exchange or
disposition of Ordinary Shares by a Treaty U.S. Resident who holds, directly or indirectly, shares representing 10% or more of the voting power of the Company at any time during such preceding 12-month period would not be exempt under the Treaty
from such Israeli tax; however, under the Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against U.S. federal income tax imposed on any gain from such sale, exchange or disposition, under the circumstances and
subject to the limitations specified in the Treaty.
(iv) Estate Taxes
Israel presently has no estate tax.
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(b) United States Federal Income Taxation
The following general discussion sets forth the material U.S. Federal income tax consequences that are applicable to the following persons
who invest in Ordinary Shares and hold such Ordinary Shares as capital assets (
U.S. Shareholders
): (a) individuals who are citizens or residents (as specifically defined for U.S. Federal income tax purposes) of the United
States; (b) corporations (or entities treated as corporations for U.S. Federal income tax purposes) created or organized in the United States or under the laws of the United States or of any state thereof or the District of Columbia; and
(c) estates or trusts the income of which is subject to U.S. Federal income taxation regardless of its source. This discussion does not deal with: (i) all aspects of U.S. Federal income taxation that may be relevant to particular U.S.
Shareholders based on their particular circumstances (including potential application of the alternative minimum tax); (ii) certain U.S. Shareholders subject to special treatment under the U.S. Federal income tax laws such as broker-dealers,
insurance companies, tax-exempt organizations, financial institutions, taxpayers whose functional currency is not the Dollar; (iii) U.S. Shareholders owning directly or by attribution 10% or more of the Ordinary Shares; (iv) any aspect of
state, local or non-U.S. tax laws; or (v) U.S. taxes that are not income taxes. Additionally, the following discussion does not consider the tax treatment of persons who hold Ordinary Shares through a partnership (or other entity treated as a
partnership for U.S. Federal income tax purposes). If a partnership holds Ordinary Shares, the tax treatment of a partner will generally depend on the status of the partner and on the activities of the partnership. Partners in a partnership holding
Ordinary Shares should consult their tax advisors.
The summary of U.S. Federal income tax laws set out below is based on the
Code, Treasury regulations, judicial decisions and published positions of the Internal Revenue Service (the
IRS
) as of the date hereof and is subject to any changes occurring in United States law after that date, which could have
retroactive effect.
(i) Distributions on Ordinary Shares
Distributions on Ordinary Shares paid (before reduction for Israeli withholding taxes) out of the Companys current or accumulated
earnings and profits, as determined under U.S. tax principles, will be dividends and will be includible in a U.S. Shareholders ordinary income when received. If a U.S. Shareholder is an individual, trust or estate, dividends received from the
Company will generally be taxed at a maximum rate of 15% or 20%, depending on the income level of the individual, provided the taxpayer has held the stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date
and certain other conditions are satisfied. Dividends will not be eligible for the dividends-received deduction generally allowed to U.S. corporations. The Company does not intend to compute earnings and profits under U.S. tax principles. If the
Company does not compute earnings and profits under U.S. tax principles, the entire distributions will likely be treated as paid out of the Companys current or accumulated earnings and profits.
The amount of any dividend paid in Israeli currency will equal the Dollar value of the Israeli currency received calculated by reference
to the exchange rate in effect on the date the dividend is received by the U.S. Shareholder, regardless of whether the Israeli currency is converted into Dollars. If the Israeli currency received as a dividend is not converted into Dollars on the
date of receipt, the U.S. Shareholder will have a basis in the Israeli currency equal to the Dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Israeli currency will be treated as
ordinary income or loss, and generally will be income or loss from sources within the United States for U.S. foreign tax credit purposes.
To the extent that the amount of any distribution exceeds the Companys current and accumulated earnings and profits for a taxable year, the distribution will first be treated as a tax-free return of
capital to the extent of the U.S. Shareholders basis, and any excess will be treated as capital gain. Such distributions would not give rise to income from sources outside the United States.
There is no assurance that dividends received by U.S. Shareholders from the Company will be eligible for the preferential tax rates
mentioned above. Dividends that are not eligible for the preferential tax rates will be taxed at ordinary income rates.
102
(ii) Credit for Israeli Taxes Withheld
U.S. Shareholders may be entitled to deduct, or claim a U.S. foreign tax credit for, Israeli taxes that are withheld on dividends
received, subject to applicable limitations in the Code, including separate limitations with respect to specific classes of income. Dividends paid with respect to Ordinary Shares will generally be treated as passive category income for
purposes of computing allowable foreign tax credits for U.S. foreign tax credit purposes. The rules governing the U.S. foreign tax credit are complex, and additional limitations on the credit apply to individuals receiving dividends eligible for the
preferential tax rates on dividends described in (i) above.
(iii) Disposition of Ordinary Shares
A U.S. Shareholder will generally recognize capital gain or loss upon the sale or exchange of Ordinary Shares in an amount
equal to the difference between the amount realized and the U.S. Shareholders adjusted tax basis in the Ordinary Shares. Such gain or loss will be long-term capital gain or loss if the U.S. Shareholders holding period exceeds one year
and otherwise will be short-term capital gain or loss. The deductibility of capital losses is subject to limitations. Gain or loss from the sale, exchange or other disposition of Ordinary Shares will generally be treated as from U.S. sources for
U.S. foreign tax credit purposes. (See U.S.-Israel Tax Treaty above). Long-term capital gains are generally taxed at a maximum rate of 15% or 20%, depending on the income level of the individual. U.S. Shareholders should consult their
own tax advisors regarding the treatment of any foreign currency gain or loss on any Israeli currency received in respect of the sale, exchange or other disposition of Ordinary Shares.
(iv) Unearned Income Medicare Contribution Tax
For
taxable years beginning on or after January 1, 2013, each U.S. Shareholder who is an individual, estate or trust will generally be subject to a 3.8% Medicare tax on the lesser of (i) such U.S. Shareholders net investment
income for the relevant taxable year, and (ii) the excess of such U.S. Shareholders modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals will be between $125,000 and
$250,000, depending on the individuals circumstances). For this purpose, net investment income generally includes dividends on and capital gains from the sale, exchange or other disposition of Ordinary Shares, subject to certain exceptions.
U.S. Shareholders are encouraged to consult their own tax advisors regarding the applicability of the Medicare tax to income and gains from ownership of Ordinary Shares.
(v) Passive Foreign Investment Company
A
passive foreign investment company (
PFIC
) is defined as any foreign corporation at least 75% of whose consolidated gross income for the taxable year is passive income, or at least 50% of the value of whose consolidated
assets is attributable to assets that produce or are held for the production of passive income. For this purpose, passive income generally includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the
disposition of assets which produce passive income. The Company believes that it is not and has not been a PFIC for U.S. Federal income tax purposes for taxable years through 2012, and the Company expects that it will not become a PFIC for taxable
years after 2012. If the Company were to become a PFIC, then all U.S. Shareholders would be required either: (i) to include in their taxable income certain undistributed amounts of the Companys income if a qualified electing fund election
has been made (and certain information is provided by the Company); or (ii) to pay an interest charge together with tax calculated at maximum ordinary income rates on certain excess distributions (defined to include gain on the sale
of Ordinary Shares). In addition, if the Company is a PFIC, individual U.S. Shareholders will not be eligible for the preferential tax rates on dividends described above.
(vi) Backup Withholding and Information Reporting
A
U.S. Shareholder may, under certain circumstances, be subject to information reporting requirements and backup withholding at a 28% rate on cash payments in the United States of dividends on, and the proceeds of
103
disposition of, Ordinary Shares. Backup withholding will apply only if a U.S. Shareholder: (a) fails to furnish its social security or other taxpayer identification number
(
TIN
) within a reasonable time after the request therefor; (b) furnishes an incorrect TIN; (c) is notified by the IRS that it has failed properly to report payments of interest and dividends; or (d) under certain
circumstances, fails to certify, under penalty of perjury, that it has furnished a correct TIN and has not been notified by the IRS that it is subject to backup withholding for failure to report interest and dividend payments. U.S. Shareholders
should consult their tax advisors regarding their qualification for exemption, if applicable. The amount of backup withholding from a payment to a U.S. Shareholder generally will be allowed as a credit against such U.S. Shareholders U.S.
Federal income tax liability and may entitle such U.S. Shareholder to a refund, provided that the required information is furnished to the IRS.
(vii) Tax Return Disclosure
U.S. individuals that hold certain specified foreign financial assets (which include stock of a non-U.S. corporation) are subject to U.S. return disclosure obligations (and related penalties for failure
to disclose). Such U.S. individuals are required to file IRS Form 8938 with their U.S. Federal income tax returns, unless an exception applies. U.S. Shareholders that are individuals are encouraged to consult their tax advisors regarding the filing
of IRS Form 8938.
10.F Dividends and Paying Agents
Not applicable in Annual Report on Form 20-F.
10.G Statements by Experts
Not applicable in
Annual Report on Form 20-F.
10.H Documents on Display
The material documents referred to herein to which the Company is a party, to the extent that their disclosure is not otherwise limited or
restricted, may, by prior arrangement, be inspected at the offices of the Company in Yavne, Israel. In addition, the Company believes that all publicly filed documents referred to herein should be available for inspection, upon payment of any
prescribed fees and otherwise upon such terms and conditions as may be specified, at the respective public archives or institutions with which they are filed.
10.I Subsidiary Information
Not applicable
in Annual Report on Form 20-F.
Item 11.
|
Quantitative and Qualitative Disclosures About Market Risk
|
(a) General
The Company uses financial instruments and derivatives in order to limit its exposure to risks arising from changes in exchange rates. The use of such instruments does not expose the Company to additional
exchange rate risks since the derivatives are held against an asset (for example, excess assets in Euros).
The Companys
derivative transactions in 2012 were executed through Israeli banks. The Company is exposed to counterparty risk arising from certain of its financial instruments and derivative contracts and it could be adversely affected by the soundness of
counterparties, which include customers, suppliers and financial institutions. The Company uses derivatives to hedge certain exchange rate risk by entering into exchange rate-based derivative instruments with financial institution counterparties,
such as broker/dealers, commercial banks and investment banks. These transactions are typically entered into on an unsecured basis and should the counterparty fail to honor its obligations under the relevant agreements, the Company could sustain
losses which could have an adverse effect on its business, financial condition and results of operations.
104
(b) Exchange Rate Risk Management
Since the Companys functional currency and that of virtually all of its subsidiaries is the Dollar, the Company, including through
its subsidiaries, protects itself against exposure arising from the difference between assets and liabilities in each currency other than the Dollar (
Balance Sheet Exposure
). The majority of the Balance Sheet Exposure in such
subsidiaries is in Japanese Yen, Euros, Chinese RMB and NIS.
The Company endeavors to limit its Balance Sheet Exposure
through natural hedging, i.e., by attempting to match its non-dollar denominated assets and liabilities in any given currency. The currency exposure that is not able to be hedged through the matching of assets and liabilities is managed
through the use of derivative instruments. To the extent possible, the Company engages in its exchange rate hedging on a consolidated basis.
The table below details the Balance Sheet Exposure, expressed in currency and geographical terms, as at December 31, 2012 (at fair valueas explained below). All data in the table have been
converted for convenience into Dollar equivalents (in millions). The Company does not have any Balance Sheet Exposure maturing beyond 2013 that would have a material effect on its business, financial condition or results of operations.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
|
Japanese
Yen
|
|
|
Chinese
RMB
|
|
|
Other Far Eastern
Currencies**
|
|
|
NIS
|
|
|
Total
|
|
Israel*
|
|
|
0.1
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(8.5
|
)
|
|
|
(9.5
|
)
|
Europe*
|
|
|
11.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.7
|
|
Japan*
|
|
|
|
|
|
|
18.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.1
|
|
China*
|
|
|
|
|
|
|
|
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
21.0
|
|
Far East*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.6
|
|
|
|
|
|
|
|
17.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11.8
|
|
|
|
17.1
|
|
|
|
21.0
|
|
|
|
17.6
|
|
|
|
(8.5
|
)
|
|
|
58.9
|
|
**
|
Includes Korean won and Taiwanese dollar.
|
Explanatory notes:
(1)
|
Total exposure is the sum of the absolute value figures.
|
(2)
|
The data presented in the table reflects the net exposure after taking into account set-offs between matching non-Dollar denominated assets and liabilities.
|
The Company enters into forward exchange contracts to hedge its Balance Sheet Exposure as well as certain
future cash flows in connection with payroll and related expenses and anticipated probable transactions which are expected to be denominated in non-Dollar currencies. The terms of most existing currency derivatives are less than three months and
none exceed one year. The table below details the hedging acquired in forward exchange contracts in order to limit foreign currency exposure risks. The notional amounts of these forward exchange contracts as of December 31, 2012, were as
follows (in millions).
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
|
Korean
Won
|
|
|
Taiwanese
Dollar
|
|
|
Japanese
Yen
|
|
|
NIS
|
|
|
Total
|
|
Israel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.7
|
|
|
|
29.7
|
|
Europe
|
|
|
44.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44.8
|
|
Japan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62.7
|
|
|
|
|
|
|
|
62.7
|
|
Far East
|
|
|
|
|
|
|
11.1
|
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
20.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
44.8
|
|
|
|
11.1
|
|
|
|
9.5
|
|
|
|
62.7
|
|
|
|
29.7
|
|
|
|
157.8
|
|
105
(c) Fair Value of Derivatives
The fair value of derivatives as of December 31, 2012 constituted an asset and a liability of approximately $2.3 million and $0.6
million, respectively. The fair value of the derivatives generally reflects the estimated amounts that the Company would receive or pay upon termination of the contracts at the reporting date.
(d) Interest Rate Risk Management
Substantially all of the Companys cash, cash equivalents and short-term bank deposits bear interest. The annual interest rates as of
December 31, 2012 ranged up to 0.85%. Due to the relatively short-term maturities of the Companys cash and deposits portfolio, an immediate 10% change in interest rates is not expected to have a material effect on the Companys
near-term financial condition or results of operations.
Following the Partial Prepayment, the outstanding principal balance
of the Discount Bank Loan as of the date of this Annual Report is $32.0 million comprised of a Fixed Interest Component of $12.0 million and a Variable Interest Component of $20.0 million. The interest rate with respect to the $12.0 million
Fixed Interest Component is fixed at 4.88%. The interest rate on the $20.0 million Variable Interest Component was, until December 31, 2012, based on Discount Banks cost plus 2% and, beginning January 1, 2013, became based on
Discount Banks cost plus 2.5%. In 2012, the Companys debt service payment obligations were $3.4 million, reflecting interest under the Loan Agreements for that year at a rate of 4.08%, compared with debt service payment obligations of
$4.7 million for the year ended December 31, 2011. The actual interest rate on the outstanding Variable Interest Component at December 31, 2012 was 3.33%. Following the Partial Prepayment, a 1/8% change in the annual interest rate would
have an insignificant impact upon the annual interest expense on the outstanding $20.0 million Variable Interest Component of the Discount Bank Loan.
The Company does not enter into interest rate hedging agreements with respect to its debt.
Item 12.
|
Description of Securities Other than Equity Securities
|
12.A Debt Securities
Not applicable in Annual Report on Form 20-F.
12.B Warrants and Rights
Not applicable in Annual Report on Form 20-F.
12.C Other Securities
Not applicable in Annual Report on Form 20-F.
12.D American Depositary Shares
None
106