All committees are acting according to written charters that were approved by our board of directors. In February 2012, we adopted an internal enforcement plan which was approved by our board of directors. The internal enforcement plan, as part of which we adopted and implementing procedures and policies in order to comply with the provisions of the Israeli Securities Law, 5728-1968 (the “Israeli Securities Law”), the Companies Law and the applicable guidelines issued by Israeli Securities Authority. The internal enforcement plan includes, among others, the board committees’ charters, procedures with respect to related party transactions, insider trading, which prohibits hedging activities, reporting and complaints, anti-bribery policy and a code of conduct. WeEach of our committees have recently startedthe power to retain, terminate and approve the related fees and other retention terms, as it deems appropriate, outside counsel and other experts and consultants to assist the committee in connection with its responsibilities without our board of directors approval and at the Company's expense.
Set forth below is a chart showing the number of people we employed at the times indicated:
We were a member of the Industrialists Association in Israel, an employer’s union until December 31, 2006. Under applicable Israeli law, we and our employees are subject to protective labor provisions such as restrictions on working hours, minimum wages, paid vacation, sick pay, severance pay and advance notice of termination of employment as well as equal opportunity and anti-discrimination laws. Orders issued by the Israeli Ministry of Economy and Industry make certain industry-wide collective bargaining agreements applicable to us. These agreements affect matters such as cost of living adjustments to salaries, length of working hours and week, recuperation and travel expenses. In Israel, Nova is subject to the instructions of the Extension Order in the Industrial Field for Extensive Pension Insurance 2006 according to the Israeli Collective Bargaining Agreements Law, 1957 (the “Extension Order”). The Extension Order ensuresdetermines the pension insuranceterms of mostthe employees which fall under its criteria.
Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary shares that are subject to warrants or options that are presently exercisable or exercisable within 60 days of the date of February 15, 201714, 2018 are deemed to be outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.
Employee Benefit Plans
The share option plans active throughout 2016,under which we have outstanding equity grants, are described below:
2007 Incentive Plan
(which was active until October 2017) - The maximum number of ordinary shares to be issued under the plan, which was adopted by our shareholders on October 25, 2007, was 2,500,000, subject to future increases or decreases by the Company. On May 1, 2012, the board of directors resolved to increase the aggregate number of shares issuable under the 2007 Incentive Plan by one million shares, and amend the 2007 Incentive Plan to address a change in the clearing procedures of the TASE
. On December 17, 2014, the board of directors resolved to increase the aggregate number of shares issuable under the 2007 Incentive Plan by two million shares, and to amend the 2007 Incentive Plan. Such amendment includes, among others, a change of the exercise period in the event of termination, and in case of death, disability or retirement of the optionee.
In connection with the aforementioned increases, we have not obtained a shareholder approval as required under NASDAQNasdaq Listing Rules and followed in lieu home practice rules that do not require such approval. As of December 31, 2016,2018, options to purchase 4,094,7773,354,112 ordinary shares at an exercise prices which range from $0.43 to $
12.4524.70, the fair market value of Nova’s stock based on the dates of grant, were granted under this plan of which, as of December 31, 2016, 1,712,8272018, 2,288,813 options were exercised, 734,384691,720 options were outstanding and exercisable, 603,085 932,227 options had been cancelled and 1,044,481391,352 were outstanding and unvested. As
of December 31,
20162018, 762,237834,142 RSU’s had been
issued,granted, of which
447,095622,993 had vested,
36,82297,411 had been cancelled and
278,320113,738 RSU's were outstanding.
Following adoption of 2017 share incentive plan, as detailed herein, we have ceased granting equity under the 2007 incentive plan.
2017 Share Incentive Plan - The maximum number of ordinary shares to be issued under the plan, which was adopted by our board of directors on August 1, 2017, is 2,500,000, subject to future increases or decreases by the Company. The Company has used its option as a foreign private issuer to opt out of Nasdaq requirement for a shareholders’ approval of the plan, by providing a legal opinion letter to Nasdaq on August 25, 201767. As of December 31, 2018, options to purchase 314,681 ordinary shares at an exercise prices which range from $22.56 to
$31.26, the closing price of the Company's ordinary shares on Nasdaq on the day of grant, were granted under this plan of which, as of December 31, 2018, no options were exercised, 36,345 options were outstanding and exercisable, 5,680 options had been cancelled and 410,656 were outstanding and unvested. As of December 31, 2018, 226,303 RSU’s had been granted, of which 12,450 RSU’s had vested, 3,696 had been cancelled and 210,157 RSU's were outstanding.
On September 12, 2013, our shareholders (following an approval by our compensation committee and board of directors), approved the Company's compensation policy, which includes, among others, provisions relating to equity basedequity-based compensation for Nova's executive officers. On August 2, 2016, our board of directors (per the recommendation of our compensation committee) has concluded that the approval of the proposed amended and restated compensation plan is in the interest of the Company, and based on detailed arguments and in accordance with the provisions of the Companies Law, has resolved to approve our amended and restated compensation policy despite the objection of our shareholders. Accordingly, our amended compensation policy is effective as of that date.
The amended and restated compensation policy provides, among others, that: (i) such equity based compensation is intended to be in a form of share options and/or other equity based awards, such as RSUs, in accordance with the Company's equity incentive plan in place as may be updated from time to time; (ii) all equity-based incentives granted to executive officers will be subject to vesting periods in order to promote long-term retention of the awarded executive officers. Unless determined otherwise in a specific award agreement approved by the compensation committee and the board of directors, grants to executive officers (other than directors) will vest gradually over a period of between three to five years; and (iii) all other terms of the equity awards will be in accordance with Nova's incentive plans and other related practices and policies. The board of directors may, following approval by the compensation committee, extend the period of time for which an award is to remain exercisable and make provisions with respect to the acceleration of the vesting period of any executive officer's awards, including, without limitation, in connection with a corporate transaction involving a change of control, subject to any additional approval as may be required by the Companies Law. The compensation policy also provides that the equity basedequity-based compensation will be granted from time to time and be individually determined and awarded according to the performance, educational background, prior business experience, qualifications, role and the personal responsibilities of the executive officer. The fair market value of the equity basedequity-based compensation for the executive officers will be determined according to acceptable valuation practices at the time of grant.
Our equity basedequity-based compensation policy, which was initially adopted in February 2007 and was most recently amended in February 2016,December 2018, provides, among others, that the exercise price for each option will be equal to the average closing sale price of the Company's ordinary shares on NASDAQ during the 30-trading day period precedingNasdaq on the day of allocation.grant.
For additional information regarding our employees'employees’ incentive plans, see Note 9 of our consolidated financial statements, contained elsewhere in this report.
Item 7. Major Shareholder and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of the dates indicated below for each person who we know beneficially owns five percent or more of the outstanding ordinary shares.
Beneficial ownership of shares is determined under rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Applicable percentages are based on 27,490,63927,925,149 ordinary shares outstanding as of February 15, 2017.14, 2018.
Name | | Number of Ordinary Shares Beneficially Owned | | | Percentage of Ordinary Shares Beneficially Owned | |
| | | | | | |
Itshak Sharon (Tshuva), Delek Group Ltd., The Phoenix Holdings Ltd. and Excellence Holdings Ltd.(1) | | | 2,337,083 | | | | 8.50 | % |
Renaissance Technologies LLC and Renaissance Technologies Holdings Corporation(2) | | | 2,071,300 | | | | 7.53 | % |
Clal Insurance Enterprises Holdings Ltd.(3) | | | 1,978,960 | | | | 7.20 | % |
Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP and Wellington Management Company LLP(4) | | | 1,835,260 | | | | 6.68 | % |
Migdal Insurance & Financial Holdings Ltd.(5) | | | 1,705,805 | | | | 6.21 | % |
Yelin Lapidot Holdings Management Ltd.(6) | | | 1,620,271 | | | | 5.89 | % |
Harel Insurance Investments & Financial Services Ltd.(7) | | | 1,455,884 | | | | 5.30 | % |
| | | | | | | | |
Name | | Number of Ordinary Shares Beneficially Owned | | | Percentage of Ordinary Shares Beneficially Owned | |
Menora Mivtachim Holdings Ltd. and Menora Mivtachim Pensions and Gemel Ltd. (1) | | | 2,748,785 | | | | 9.84 | % |
The Phoenix Holdings Ltd., Itshak Sharon (Tshuva), and Delek Group Ltd. (2) | | | 2,228,397 | | | | 7.98 | % |
Harel Insurance Investments & Financial Services Ltd. (3) | | | 2,095,493 | | | | 7.50 | % |
Clal Insurance Enterprises Holdings Ltd., IDB Development Corporation Ltd. and Eduardo Sergio Elsztain. (4) | | | 2,025,849 | | | | 7.25 | % |
Renaissance Technologies LLC. (5) | | | 2,013,700 | | | | 7.21 | % |
Psagot Investment House Ltd. (6) | | | 1,505,717 | | | | 5.39 | % |
(1) BasedThe information is based upon information provided Amendment no. 2 to Schedule 13G/A filed with the Company SEC by Itshak Sharon (Tshuva), Delek Group Ltd., The PhoenixMenora Mivtachim Holdings Ltd. and Excellence HoldingsMenora Mivtachim Pensions and Gemel Ltd. as ofon February 1, 2017 and consist of 187,664 shares held for their own account.14, 2019.
(2) The information is based upon Amendment No. 3no. 1 to Schedule 13G/A filed with the SEC by The Phoenix Holdings Ltd., Delek Group Ltd. and Itshak Sharon (Tshuva) as of February 14, 2019.
(3) The information is based upon Amendment no. 5 to Schedule 13G/A filed with the SEC by Harel Insurance Investments & Financial Services Ltd. on January 29, 2019.
(4) The information is based upon Amendment no. 1 to Schedule 13G/A filed with the SEC by Clal Insurance Enterprises Holdings Ltd., and IDB Development Corporation Ltd. and Eduardo Sergio Elsztain on February 14, 2019.
(5) The information is based upon Amendment no. 5 to Schedule 13G filed with the SEC by Renaissance Technologies LLC and Renaissance Technologies Holdings Corporation on February 14, 2017.13, 2019.
(4) The information is based upon Schedule 13G filed with the SEC by Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP, Wellington Management Company LLP. on February 9, 2017.
(5) The information is based upon Schedule 13G filed with the SEC by Migdal Insurance & Financial Holdings Ltd. on January 26, 2017.
(6) The information is based upon Amendment No. 2 to Schedule 13G filed with the SEC by Dov Yelin, Yair Lapidot and Yelin Lapidot Holdings ManagementPsagot Investment House Ltd. on February 8, 2017.21, 2019.
(7) The information is based upon Amendment No. 3 to Schedule 13G filed with the SEC by Harel Insurance Investments & Financial Services Ltd. on January 31, 2017.
All the shareholders of the Company have the same voting rights.
To our knowledge, the significant changes in the percentage of ownership held by our major shareholders during the past three years have been: (i); the increase in the percentage of ownership held by Clal Insurance Enterprises Holdings Ltd. above 5% as of 2012 and the decrease in the percentage of ownership in 2015 and in 2016: (ii) the increase in the percentage of ownership held as a group by Delek Group Ltd., The PhoenixClal Insurance Enterprises Holdings Ltd. & Excellence Holdings Ltd. abovebelow 5% as of 2012, thein 2017 and increase in the percentage of ownership in 2013 and 2014 and the decrease in the percentage of ownership in 2015 and 2016; (iii) the increase in 2013 and afterwards the decrease in 2014 in the percentage of ownership held by Invicta Capital Management, LLC. As reported on Amendment 8 to Schedule 13G filed with the SEC by Invicta Capital Management on February 14, 2014, Invicta Capital Management beneficially owned 1,157,376 of our ordinary shares (then representing 4.2% of our issued and outstanding share capital); (iv) the decrease in the percentage of ownership held by Federated Investors, Inc., Voting Shares Irrevocable Trust, John F. Donahue and Rhodora J. Donahue (collectively, "Federated Investors"). As reported on Amendment 3 to Schedule 13G filed with the SEC by Federated Investors on June 7, 2013, Federated Investors beneficially owned 1,286,534 of our ordinary shares (then representing 4.82% of our issued and outstanding share capital); (v) the increase in the percentage of ownership held by Migdal Insurance & Financial Holdings Ltd., above 5% as of 2012, the increase in the percentage of ownership in 2013, 2014 and 2015 and the decrease in the percentage of ownership in 2016; (vi) the increase in the percentage of ownership held by Renaissance Technologies LLC and Renaissance Technologies Holdings Corporation above 5% in 2013, 2014 and 2015; (vii) the increase in the percentage of ownership held by Harel Insurance Investments & Financial Services Ltd., above 5% in 2014, 2015 and 2016; (vii) the increase and then the decrease in the percentage of ownership held by Yelin Lapidot Holdings Management Ltd., above and then below 5% in 2014 and the increase in the percentage of ownership held by Yelin Lapidot Holdings Management Ltd., above 5% in 2015 and in 2016; and (viii)2018; (ii) the increase in the percentage of ownership held by Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP and Wellington Management Company LLP above 5% in 2016.2016, and the decrease in the percentage of ownership below 5% in 2017; (iii) the increase in the percentage of ownership held by Menora Mivtachim Holdings Ltd. above 5% in 2017, (iv) the increase in the percentage of ownership of Psagot Investment House Ltd. above 5% in 2018; (v) the decrease in the percentage of ownership of Yelin Lapidot Holdings Management Ltd., Dov Yelin, Yair Lapidot below 5% in 2018, and (vi) the decrease of in the percentage of ownership of Migdal Insurance & Financial Holdings below 5% in 2018.
As of February 15, 2017,14, 2019, our ordinary shares were held by 1514 registered holders (not including CEDE & Co.). Based on the information provided to us by our transfer agent, as of February 15, 2017, 1314, 2018, 12 registered holders were U.S. domicile holders and held approximately 0.15%0.13% of our outstanding ordinary shares.
Control of Registrant
To the Company’s knowledge, it is not owned or controlled by a foreign government. Except for the shareholders identified above owning more than five percent of the Company’s ordinary shares, the Company has no knowledge of any corporation or other natural or legal person owning a controlling interest in the Company.
B. Related Party Transactions
Pursuant to our amended and restated compensation policy,In June 2018, we may provide “directors’obtained directors’ and officers’ liability insurance”insurance for our officers and directors with coverage in an aggregate amount of $50,000,000 (including $5,000,000 Side A DIC). This directors’ and officers’ liability insurance was presented and approved by our compensation committee in accordance with the framework approved by our shareholders on June 22, 2017(the “Policy”).
The resolution of our compensation committee and Board in May 2017, and the approval of our shareholders in June 2017, authorized the Company, from time to time and for up to a period of three years in the aggregate (effective immediately as of the approval of our shareholders), to extend and/or renew the Policy or enter into a new insurance policy, with the same insurers or any other insurers, in Israel or overseas, for the insurance of directors and officers liability with respect to the directors and/or officers serving in the Company and its subsidiaries, as follows:may serve from time to time, and with the directors and/or officers serving in associated companies on behalf of the Company and/or on behalf of its subsidiaries, provided however, that the insurance transaction complies with the following conditions: (i) the annual premium to be paid by us will not exceed 1.5% of the aggregate coverage of the insurance policy; (ii) the limit of liability of the insurer will not exceed the greater of $50 million or 30% of our shareholders equity based on our most recent financial statements at the time of approval by the compensation committee; and (iii) the insurance policy, as well as the limit of liability and the premium for each extension or renewal will be approved by the compensation committee (and, if required by law, by the board of directors) which will determine that the sums are reasonable considering our exposures, the scope of coverage and the market conditions and that the insurance policy reflects the current market conditions, and it will not materially affect our profitability, assets or liabilities. The amended and restated compensation policy also provides that
Further, upon circumstances to be approved by the compensation committee (and, if required by law, by the board of directors), we will be entitled to enter into a "run off" insurance policy of up to seven years, with the same insurer or any other insurance, as follows: (i) the limit of liability of the insurer will not exceed the greater of $50 million or 30% of our shareholders equity based on our most recent financial statements at the time of approval by the compensation committee; (ii) the annual premium will not exceed 300% of the last paid annual premium; and (iii) the insurance policy, as well as the limit of liability and the premium for each extension or renewal will be approved by the compensation committee (and, if required by law, by the board of directors) which shall determine that the sums are reasonable considering our exposures covered under such policy, the scope of cover and the market conditions, and that the insurance policy reflects the current market conditions and that it will not materially affect our profitability, assets or liabilities. According to the amended and restated compensation policy, we
We may also extend the insurance policy in place to include cover for liability pursuant to a future public offering of securities as follows: (i) the additional premium for such extension of liability coverage will not exceed 50% of the last paid annual premium; and (ii) the insurance policy as well as the additional premium will be approved by the compensation committee (and if required by law, by the board of directors) which will determine that the sums are reasonable considering the exposures pursuant to such public offering of securities, the scope of cover and the market conditions and that the insurance policy reflects the current market conditions, and it does not materially affect our profitability, assets or liabilities. Since our amended and restated compensation policy was approved by our compensation committee and our board of directors in accordance with the authority granted by the Companies Law (and not by our shareholders), we currently intend to submit the above directors’ and officers’ liability insurance framework to the approval of our shareholders during 2017.
In November 2016, we obtained directors' and officers’ liability insurance for our officers and directors with coverage in an aggregate amount of $40,000,000 (including $5,000,000 Side A DIC). This directors’ and officers’ liability insurance was presented and approved by our compensation committee and board of directors and will be submitted to the approval of our shareholders during 2017.
In addition, we undertook to indemnify our officers and directors. On June 21, 2012, the shareholders at the annual general meeting approved an amended letter of indemnification to be given to our directors and officers. The aggregate indemnification amount that the Company can pay to all its officers and directors pursuant to these letters of indemnification will not exceed 25% of the Company’s shareholdersshareholders’ equity, according to the most recent consolidated financial statement prior to the date of indemnification payment. Prior to that, we undertook to indemnify our officers and directors up to an aggregate amount of $10,000,000 or 25% of the Company’s shareholders equity, the higher of the two. Pursuant to our amended and restated compensation policy, we may indemnify our directors and officers to the fullest extent permitted by applicable law, for any liability and expense that may be imposed on the director or the officer, as provided in the indemnity agreement between us and such individuals, all subject to applicable law and our articles of association. Our amended and restated compensation policy also provides that we may exempt our directors and officers in advance for all or any of their liability for damage in consequence of a breach of the duty of care vis-a-vis our company, to the fullest extent permitted by applicable law.
For information relating to options granted to officers and directors, see “Item 6E. Share Ownership” in this annual report on Form 20-F. For information regarding our compensation policy and compensation arrangements with our directors and executive officers (including our chairman and chief executive officer), please refer to “Item 6B. Compensation” in this annual report on Form 20-F.
7.C Interest of Experts and Counsel
Not applicable.
Item 8. Financial Information
8.A Consolidated Statements and Other Financial Information
See “Item 17. Financial Statements” in this annual report on Form 20-F and pages F-1 through F-30.
Legal Proceedings
From time to time, we or our subsidiaries may be a party to legal proceedings and claims in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, we do not believe they will have a material effect on our consolidated financial position, results of operations, or cash flows.
We are currently not involved in any significant legal proceedings, except as noted below:proceedings.
Based on publicly available information, we have been informed that on February 20, 2017, an employee of our U.S. subsidiary filed a collective action complaint with the U.S. District Court of Northern District of California asserting failure to pay overtime compensation in violation of the Fair Labor Standards Act. As of the date of this report, we haven’t been served with the complaint. Once we have the opportunity to review the allegations, we’ll respond appropriately with the court.
Dividend Policies
We anticipate that, for the foreseeable future, we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends for at least the next several years.
The distribution of dividends may be limited by the Companies Law, which permits the distribution of dividends only out of retained earnings or earnings derived over the two most recent fiscal years, whichever is higher, provided that there is no reasonable concern that payment of a dividend will prevent a company from satisfying its existing and foreseeable obligations as they become due. Our Amended and Restated Articles of Association provide that dividends will be paid at the discretion of, and upon resolution by, our board of directors.
In addition, distribution of dividends may be subject to certain tax implication. For additional information regarding tax implication of dividends' distribution, see “Item 10E. Taxation – Israeli Taxation” in this annual report on Form 20-F.
Export Sales
Substantially all of our products are sold to customers located outside Israel.Israel and the United States.
8.B Significant Changes
Not applicable.
Item 9. The Offer and Listing
9.A Offer and Listing Details
The information presented in the table below presents, for the periods indicated, the reported high and low market prices on NASDAQ. The Our ordinary shares began trading on NASDAQNasdaq on April 11, 2000 at a price of $18 per share.under the symbol “NVMI”. Our ordinary shares were registered for trading on the Tel Aviv Stock Exchange Ltd. in 2002 andunder the table below presents, for the periods indicated, the reported high and low market prices on the Tel Aviv Stock Exchange.symbol “נובה”.
NASDAQ | |
| Price per share (US$) |
| High | Low |
Yearly highs and lows | | |
| | |
2011 | 11.79 | 5.11 |
2012 | 9.28 | 6.82 |
2013 | 10.31 | 7.68 |
2014 | 12.25 | 9.5 |
2015 | 13.34 | 9.43 |
2016 | 13.96 | 8.57 |
Quarterly highs and lows | | |
| | |
2014 | | |
First quarter | 12.25 | 9.82 |
Second quarter | 12.13 | 9.63 |
Third quarter | 12.19 | 9.77 |
Fourth quarter | 10.83 | 9.5 |
2015 |
First quarter | 12.10 | 10.04 |
Second quarter | 13.34 | 10.57 |
Third quarter | 13.06 | 9.43 |
Fourth quarter | 11.20 | 9.55 |
2016 | | |
First quarter | 11.47 | 8.57 |
Second quarter | 11.96 | 10.38 |
Third quarter | 12.26 | 10.77 |
Fourth quarter | 13.96 | 11.64 |
2017 | | |
First quarter (until February 15, 2017) | 16.78 | 13.04 |
Monthly highs and lows | | |
| | |
August 2016 | 12.15 | 10.94 |
September 2016 | 12.26 | 11.20 |
October 2016 | 12.49 | 11.64 |
November 2016 | 12.76 | 11.83 |
December 2016 | 13.96 | 12.47 |
January 2017 | 15.05 | 13.04 |
February 2017 (until February 15, 2017) | 16.78 | 15.08 |
Tel Aviv Stock Exchange |
| Price per share (NIS) |
| High | Low |
Yearly highs and lows | | |
| | |
2011 | 40.99 | 20.00 |
2012 | 36.58 | 26.04 |
2013 | 36.99 | 29.02 |
2014 | 42.55 | 33.99 |
2015 | 50.67 | 37.53 |
2016 | 53.86 | 34.10 |
Quarterly highs and lows | | |
| | |
2014 | | |
First quarter | 42.55 | 34.35 |
Second quarter | 41.50 | 33.99 |
Third quarter | 41.98 | 34.50 |
Fourth quarter | 41.78 | 36.51 |
2015 | | |
First quarter | 48.50 | 39.77 |
Second quarter | 50.67 | 40.93 |
Third quarter | 48.96 | 37.66 |
Fourth quarter | 43.89 | 37.53 |
2016 | | |
First quarter | 43.41 | 34.10 |
Second quarter | 45.80 | 38.61 |
Third quarter | 46.95 | 41.35 |
Fourth quarter | 53.86 | 43.60 |
2017 | | |
First quarter (until February 15, 2017) | 60.95 | 50.23 |
Monthly highs and lows | | |
| | |
August 2016 | 45.99 | 42.40 |
September 2016 | 45.95 | 42.60 |
October 2016 | 47.21 | 43.60 |
November 2016 | 49.91 | 45.72 |
December 2016 | 53.86 | 48.00 |
January 2017 | 56.98 | 50.23 |
February 2017 (until February 15, 2017) | 60.95 | 56.25 |
9.B Plan of Distribution
Not applicable.
9.C Markets
Our ordinary shares are quoted on The NASDAQthe Nasdaq Global Select Market under the symbol “NVMI” and on the Tel Aviv Stock Exchange.
9.D Selling Shareholders
Not applicable.
9.E Dilution
Not applicable.
9.F Expenses on the Issue
Not applicable.
Item 10. Additional Information
10.A Share Capital
Not applicable.
10.B Memorandum and Articles of Association
Set forth below is a summary of certain provisions of the Company’s Amended and Restated Articles of Association, as adopted by the Company’s shareholders on September 25, 2008, our “Amended Articles” and Israeli law affecting shareholders of the Company. This summary does not purport to be complete and is qualified in its entirety by reference to our memorandumAmended Articles and Amended and Restated Articles of Association and suchthe applicable law.On September 25, 2008, our shareholders adopted the Amended and Restated Articles of Association of the Company, which were later amended on June 21, 2012 (for the purposes of this Item, the “Amended Articles”).
Registration.
The Company was incepted and registered with the Israeli Registrar of Companies on May 17, 1993, under registration number 51-181-246-3.
Purpose of the Company. The purposes of the Company, as provided by Article 4 of our Amended Articles, are (a) to invent, design, plan, develop, manufacture, market and trade in the field of measuring instruments in electronics, micro-electronics, medicine, chemistry, metallurgy, ceramics and any other field, (b) to initiate, participate, manage, execute, import and export any kind of project within the borders of the State of Israel and/or outside Israel, (c) to register patents, trademarks, trade names, intellectual property rights, marketing rights and any other right of any kind whatsoever, both in Israel and abroad and (d) to engage in any legal activity, both in Israel and abroad.
Approval of Related Party Transaction; Corporate Borrowings. The Companies Law requires that office holders of a company, including directors and executive officers, promptly disclose to the board of directors any personal interest they may have and all related material information known to them about any existing or proposed transaction with such company. The approval of the board of directors is required for 'non-extraordinary' transactions between a company and its office holders, or between a company and other persons in which an office holder has a personal interest, unless such company's articles of association provide otherwise. Under the Companies Law, a 'non-extraordinary' transaction between a company or between the company and a third party in which an office holder of a company has a personal interest, will require the approval of the board of directors or a committee authorized by the board of directors, unless such company's articles of association provide otherwise. Our Amended Articles do not provide otherwise, and therefore such transaction requires the approval of our board of directors. If a transaction is an “extraordinary transaction”, it is subject to the approval of the audit committee prior to its approval by the board of directors. For information regarding the necessary approvals under the Companies Law for transactions with office holders and directors regarding their terms of engagement with the company, see "— Compensation of Officers and Directors" in this Item below.
In addition, an extraordinary transaction between a public company and a controlling shareholder (i.e. a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from its position on the board of directors or any other position with the company), or in which a controlling shareholder has a personal interest, including a private placement in which the controlling shareholder has a personal interest, a transaction between a public company and a controlling shareholder, the controlling shareholders' relative, or entities under its control, directly or indirectly, with respect to services to be provided to the public company, and a transaction concerning the terms of compensation of the controlling shareholder or the controlling shareholder’s relative, who is an office holder or an employee, requires the approval of the audit committee or, in some cases, the compensation committee (see "— Compensation of Officers and Directors" in this Item below), the board of directors and a majority of the shares voted by the shareholders of the company participating and voting on the matter in a shareholders’ meeting. In addition, the shareholder approval must fulfill one of the following requirements: (i) the majority must include at least a majority of the shares of the voting shareholders who have no personal interest in the transaction (in counting the total votes of such shareholders, abstentions are not taken into account); or (ii) the total of opposition votes among the shareholders who have no personal interest in the transaction may not exceed 2% of the aggregate voting rights in the company. Any such transaction the term of which is more than three years, must be approved in the same manner every three years, unless the audit committee has determined that longer term is reasonable under the circumstances.
According to the Companies Law, if an extraordinary transaction is discussed by the board of directors or the audit committee, directors and office holders that have personal interest in the proposed transaction, may not participate in the discussion or vote. However, if the majority of the members of the audit committee or the board of directors (as applicable) have personal interest in the proposed transaction, then all directors (including those with personal interest) may participate in the discussion and vote, provided that in the event the majority of the members of the board of directors have personal interest in the transaction, said transaction will also be subject to the approval of the Company's shareholders meeting.
Under regulations promulgated under the Companies Law regarding payment of compensation to external directors, compensation of external directors is comprised of annual compensation and a per meeting payment ranging as stated in the regulations. These amounts are adjusted once every year in accordance with the Israeli consumer price index. With regard to a company, which shares are traded in an exchange outside of Israel, and is subject to laws which impose upon the external directors duties which exceed the duties imposed upon them under Israeli law, the maximum amount payable to the external directors is approximately NIS 134,180 per annum and approximately NIS 4,035 per meeting, as adjusted for changes in the Israeli CPI once every year. The approval of the shareholders of the company is required for such compensation, unless it is between the maximum and fixed amounts set forth in these regulations. If the shareholder's approval is required, it has to be done in the same manner as the approval of transactions with office holders and directors regarding their terms of engagement with the company (see "— Compensation of Officers and Directors" in this Item below). The compensation of external directors may also be linked to the compensation of other directors, subject to certain restrictions. Additionally, external directors may be entitled to compensation in stock (including by way of granting options to purchase the Company’s stock), provided that such compensation is granted within the framework of a stock incentive plan applicable to all other directors and further provided the amount of stock granted or purchasable does not fall below the lowest amount granted to any other director and does not exceed the average amount of stock granted to all other directors. The regulations also allow an increased compensation to external directors that are considered “expert external directors” under the terms set forth in said regulations.
Share Capital.
The Company currently has one class of ordinary shares, 0.01 NIS par value per share. The Amended Articles provide that the board of directors may decide on a distribution, subject to the provisions set forth under the Companies Law and the Amended Articles. Under the Companies Law, dividends may be paid out of net earnings, as calculated under that law, for the two years preceding the distribution of the dividend and retained earnings, provided that there is no reasonable concern that the dividend will prevent the company from satisfying its existing and foreseeable obligations as they become due. For more information, see the Company’s balance sheet and the statement of shareholders’ equity in the financial statements. Each ordinary share is entitled to one vote at all shareholders meetings.
Changes of Rights of Holders of the Shares.
According to the Amended Articles, any change in the rights and privileges of the holders of any class of shares requires the approval of a class meeting of such class of shares by a simple majority (unless otherwise provided by the Companies Law or the regulations thereto or by the terms of issue of the shares of that class).
Shareholders Meetings.
An annual meeting should be convened at least once every calendar year, and no later than 15 months after the preceding annual meeting, to review the Company’s financial statements and to transact any other business required pursuant to the Amended Articles or to the Companies Law, and any other matter which the board of directors places on the agenda of the annual meeting, at a time and place that the board of directors will determine. A special meeting may be called by the board of directors and at the demand of any of the following: two directors or one-quarter of the directors then serving; one or more shareholders who hold at least five per centpercent of the issued and outstanding capital stock and at least one percent of the voting rights in the Company; or one or more shareholders who hold at least five percent of the voting rights in the Company.
According to the Amended Articles, the quorum required for an ordinary meeting of shareholders is at least two shareholders present in person or by proxy who together hold or represent in the aggregate 33 1/3 % or more than one third (33.33%) of the voting power. A meeting adjourned for lack of a quorum is reconvened one day thereafter at the same time and place or to such other day, time and place as our board of directors may indicate in a notice to the shareholders. At the reconvened meeting, the required quorum consists of any number of members present in person or by proxy, regardless of the number of shares represented. The Companies Law and regulations determine that prior notice of no less than 21 days should be given to the company’s shareholders, prior to convening a meeting. In the event that the issue to be resolved is an issue subject to the Israeli proxy rules, a notice of no less than 35 days should be given to the company’s shareholders. In some cases, a prior notice of not less than 14 days may be given to the company’s shareholders.
Subject to anti-terror legislations, there are no limitations on the rights of non-resident or foreign owners to hold or vote ordinary shares imposed under Israeli law or under the Amended Articles.
Board of Directors. The Amended Articles provide that directors may be elected either at our annual general meeting or a special meeting of shareholders by a vote of the holders of more than 50% of the total number of votes represented at such meeting. In addition, our board of directors is authorized to appoint directors, at its discretion, provided that the total number of directors does not exceed the maximum number of directors permitted by the Amended Articles. Each of our directors (except our external directors) holds office until the next annual general meeting of shareholders. The Companies Law provides that a person, who is, directly or indirectly subordinated to the chief executive officer of a public company, may not serve as the chairman of its board of directors. In addition, neither the chief executive officer nor his relative is eligible to serve as chairman of the board of directors (and vice versa), unless such nomination was approved by a majority of the company’s shareholders for a term not exceeding three years, and either: (i) such majority included the majority of the voting shareholders (shares held by abstaining shareholders are not considered) which are not controlling shareholders and have not personal interest regarding the decision; or (ii) the aggregate number of shares voting against the proposal did not exceed 2% of company voting shareholders. The term can be extended for additional three year terms, in the same manner.
The Companies Law provides that Israeli public companies must have at least two external directors, and following Amendment 27 any and all of such external directors are no longer required to be Israeli residents in case of a company listed on a foreign stock exchange (such as our Company). External directors may be elected at our annual general meeting or a special meeting of our shareholders in a number and manner stipulated by the Companies Law, i.e., for an initial term of three years, which may be extended for two additional three-year terms (provided that the re-election for additional term was presented by the external director whose tenure is about to end or by the board of directors or by one or more shareholders that own, in the aggregate, 1% or more of the Company's outstanding share capital), and thereafter for additional three-year terms, if both the audit committee and the board of directors confirm that in light of the expertise and contribution of the external director, the extension of such external director’s term would be in the interest of the Company. The election and re-election of external directors, requires the affirmative vote of a majority of the shares and in addition either that (i) a majority of the shares held by shareholders who are not controlling shareholders or a have personal interest in the election (other than a personal interest unrelated to the controlling shareholders) attending in person or represented by proxy have voted in favor of the proposal (shares held by abstaining shareholders are not be considered) or (ii) the aggregate number of shares voting against the proposal held by such shareholders has not exceeded 2% of the company’s voting shareholders. External directors may be removed from office only under the following circumstances: (i) an external director ceases to meet the legal requirements for appointment as an external director or breaches his or her fiduciary duty to the company and a resolution to remove such external director is made by the shareholders at a meeting at which such external director is granted a reasonable opportunity to express his position (such a resolution requires the same majority of votes that elected the external director); (ii) an external director ceases to meet the legal requirements for appointment as an external director or breaches his or her fiduciary duty to the Company and a court orders that such director be removed; or (iii) an external director is unable to perform his or her duties or is convicted of certain felonies and a court orders that such director be removed. An external director is qualified for nomination as an external director, only if he/she has either professional qualifications or accounting and financial expertise. At least one of the external directors must have accounting and financial expertise. However, a company whose shares are traded in certain exchanges outside of Israel, including The NASDAQ Global Select Market, such as our company, is not required to nominate at least one external director who has accounting and financial expertise, as long as another independent director for audit committee purposes who has such expertise serves on the board of directors pursuant to the applicable foreign securities laws. In such case all external directors will have professional qualification.
Regulations adopted under the Companies Law provide that a director with accounting and financial expertise is a director that due to his education, experience and skills has high expertise and understanding in business-accounting matters and financial statements in a way that enables him to deeply understand the financial statements of the company and to facilitate discussion with respect to the way the financial data should be presented. The assessment of the accounting and financial expertise of a director should be made by the board of directors, who has to take into consideration, inter alia, the education, experience and knowledge of the director in the following subjects:
| (1) | Accounting matters and audit accounting matters, which are typical to the sector in which the company works and of companies with the same size and complexity as of the company; |
| (2) | The duties and obligations of the auditing accountant; and |
| (3) | Preparing of financial statements and their approval according to applicable law, including securities law. |
The regulations also provide that a director with professional qualifications is a director who meets one of the following conditions:
| (1) | A holder of an academic degree in one of the following: economics, business administration, accounting, law, or public administration; |
| (2) | A holder of another academic degree or is otherwise a graduate of higher education in a major field of business of the company or in other field which is relevant to the role; and |
| (3) | He has experience of at least five years in one of the following, or that he has cumulative experience of at least five years in two or more of the following: |
| (a) | A senior position in the business management of a corporation which has a significant scope of business; |
| (b) | A senior public position or in a senior role in the public service; or |
| (c) | A senior position in the company’s major fields of business. |
According to the Companies Law, the board of directors of a public company must establish the minimum number of board members that are to have accounting and financial expertise while considering, inter alia, the nature of the company, its size, the scope and complexity of its operations and the number of directors stated in the Amended Articles.
In April 2006, our board of directors resolved that the minimum number of board members that need to have accounting and financial expertise, including the external director with accounting and financial expertise, is one (1).
Our board of directors determined that each of Ms. Dafna Gruber and Ms. Zehava Simon has accounting and financial expertise as described in the regulations promulgated pursuant to the Companies Law, and that, therefore, the requirements of the minimum number of board members that need to have accounting and financial expertise, as set by the board of directors, has been met.
Under the Companies Law, the majority of the members of the audit committee must be independent directors. A public company may classify a director as independent only if (i) the audit committee has determined that he or she is qualified to serve as an external director (with the exception that such director does not have to have professional qualifications or accounting and financial expertise in order to serve as an independent director), and (ii) he or she is not serving as a director in the company for more than consecutive nine years (only a period of two or more years, in which such person did not serve as a director in the company, will be deemed to discontinue the nine year sequence), provided that a company listed on NASDAQ, such as our company, may extend such nine year period by additional three-year periods in certain circumstances. In February 2017, our audit committee and board of directors acted accordingly and resolved to extend the classification of Mr. Avi Cohen as an independent director under the Companies Law. All of our board members are independent, in accordance with NASDAQ Listing Rules and the Companies Law.
Compensation of Officers and Directors. Under the Companies Law, Israeli public companies are required to establish a compensation committee and adopt a policy regarding the compensation and terms of employment of their directors and officers. For information on the composition, roles and objectives of the compensation committee pursuant to the Companies Law and our compensation committee charter, see "Item 6C. Board Practices –Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F.
Pursuant to the Companies Law, the compensation policy must be approved by the company's board of directors after reviewing the recommendations of the compensation committee. The compensation policy also requires the approval of the general meeting of the shareholders, which approval must satisfy one of the following (the "Majority Requirement"): (i) the majority should include at least a majority of the shares of the voting shareholders who are non-controlling shareholders or do not have a personal interest in the approval of the compensation policy (in counting the total votes of such shareholders, abstentions are not be taken into account) or (ii) the total number of votes against the proposal among the shareholders mentioned in paragraph (i) does not exceed two percent of the aggregate voting power in the company. Under certain circumstances and subject to certain exceptions, the board of directors may approve the compensation policy despite the objection of the shareholders, provided that the compensation committee and the board of directors determines that it is for the benefit of the company, following an additional discussion and based on detailed arguments. In August 2016, our compensation committee and board of directors acted accordinary and adopted our amended and restated compensation plan despite our shareholders’ objection.
The Companies Law provides that the compensation policy must be re-approved (and re-considered) every three years, in the manner described above. Moreover, the board of directors is responsible for reviewing from time to time the compensation policy and deciding whether or not there are any circumstances that require an adjustment to the company's compensation policy. When approving the compensation policy, the relevant organs must take into consideration the goals and objectives listed in the Companies Law, and include reference to specific issues listed in the Companies Law. Such issues include, among others (the "Compensation Policy Mandatory Criteria"): (i) the relevant person’s education, qualifications, professional experience and achievements; (ii) such person's position within the company, the scope of his responsibilities and previous compensation arrangements with the company; (iii) the proportionality of the employer cost of such person in relation to the employer cost of other employees of the company, and in particular, the average and median pay of other employees in the company, including contract workers, and the impact of the differences between such person's compensation and the other employees' compensation on the labor relations in the company; (iv) the authority, at the board of director's sole discretion, to lower any variable compensation components or set a maximum limit (cap) on the actual value of the non-cash variable components, when paid; and (v) in the event that the terms of engagement include any termination payments - the term of employment of the departing person, the company’s performance during that term, and the departing person’s contribution to the performance of the company.
In addition, the Companies Law provides that the following matters must be included in the compensation policy (the "Compensation Policy Mandatory Provisions"): (i) the award of variable components must be based on long term and measurable performance criteria (other than non-material variable components, which may be based on non-measurable criteria taking into account the relevant person's contribution to the performance of the company); (ii) the company must set a ratio between fixed and variable pay, set a cap on the payment of any cash variable compensation components as of the payment of such components, and set a cap on the maximum cash value all non-cash variable components as of their grant date; (iii) the compensation policy must include a provision requiring the relevant person to return to the company any compensation that was awarded on the basis of financial figures that were subsequently restated; (iv) equity based variable compensation components should have an appropriate minimum vesting periods, which should be linked to long term performance objectives; and (v) the company must set a clear limit on termination payments.
Pursuant to the Companies Law, any transaction with an office holder (except directors and the chief executive officer of the company) with respect to such office holder's compensation arrangements and terms of engagement, requires the approval of the compensation committee and the board of directors. Such transaction must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (also see "Item 6C. Board Practices –Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement. Notwithstanding the above, the compensation committee and the board of directors may, under special circumstances, approve such transaction even if the shareholders' meeting objected to its approval, provided that (i) both the compensation committee and the board of directors re-discussed the transactions and decided to approve it despite the shareholder's objection, based on detailed arguments, and (ii) the company is not a 'Public Pyramid Held Company'. For the purpose hereof, a "Public Pyramid Held Company" is a public company that is controlled by another public company (including companies that issued only debentures to the public), which is also controlled by another public company (including companies that issued only debentures to the public) that has a controlling shareholder.
Transactions between public companies (including companies that have issued only debentures to the public) and their chief executive officer, with respect to his or her compensation arrangement and terms of engagement, require the approval of the compensation committee, the board of directors and the shareholder's meeting, provided that the approval of the shareholders' meeting must satisfy the Majority Requirement. Notwithstanding the above, the compensation committee and the board of directors may, under special circumstances, approve such transaction with the chief executive officer even if the shareholders' meeting objected to its approval, provided that (i) both the compensation committee and the board of directors re-discussed the transactions and decided to approve it despite the shareholder's objection, based on detailed arguments, and (ii) the company is not a Public Pyramid Held Company. Such transaction with the chief executive officer must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (see "Item 6C. Board Practices –Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement. In addition, the compensation committee may determine that such transaction with the CEO does not have to be approved by the shareholders of the company, provided that: (i) the chief executive officer is independent based on criteria set forth in the Companies Law; (ii) the compensation committee determined, based on detailed arguments, that bringing the transaction to the approval of the shareholders may compromise the chances of entering into the transaction; and (iii) the terms of the transaction are consistent with the provisions of the company's compensation policy. Under the Companies Law, non-material amendments of transactions relating to the compensation arrangement or terms of engagement of office holders (including the chief executive officer), require only the approval of the compensation committee.
With respect to transactions relating to the compensation arrangement and terms of engagements of directors in public companies (including companies that have issued only debentures to the public), the Companies Law provides that such transaction is subject to the approval of the compensation committee, the board of directors and the shareholders' meeting. Such transaction must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (see "Item 6C. Board Practices –Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement.
Pursuant to the Companies Law a compensation policy must be re-approved (and re-considered) at least once in every three years. Our shareholders voted on June 30, 2016 against the amended and restated compensation policy recommended by our board of directors. On August 2, 2016, our board of directors (per the recommendation of our compensation committee) has concluded that the approval of the proposed amended and restated compensation plan is in the interest of the Company, and based on detailed arguments and in accordance with the provisions of the Companies Law, has resolved to approve our amended and restated compensation policy despite the objection of our shareholders. Accordingly, our amended compensation policy is effective as of that date. For the full text of the amended and restated compensation policy see our report on Form 6-K furnished to the Securities and Exchange Commission on May 26, 2016.
Changes in Capital.
Our share capital may be increased or decreased by a vote of our shareholders in accordance with the Companies Law.
Borrowing Powers
Pursuant to the Companies Law and our articles of association, our board of directors may exercise all powers and take all actions that are not required under law or under our articles of association to be exercised or taken by a certain organ of the Company, including the power to borrow money for company purposes.
Acquisition of a Controlling Stake.
According to the
Companies Law, an acquisition pursuant to which a purchaser will hold a “controlling stake”, that is defined as 25% or more of the voting rights if no other shareholder holds a controlling stake, or an acquisition pursuant to which such purchaser will hold more than 45% of the voting rights of the company if no other shareholder owns more than 45% of the voting rights, may not be performed by way of market accumulation, but only by way of a special tender offer (as defined in the Companies Law) made to all of the company’s shareholders on a pro rata basis. A special tender offer may not be consummated unless a majority of the shareholders who announced their stand on such offer have accepted it (in counting the total votes of such shareholders, shares held by the controlling shareholders, shareholders who have personal interest in the offer, shareholders who own 25% or more of the voting rights in the company, relatives or representatives of any of the above or the bidder and corporations under their control, shall not be taken into account). A shareholder may be free to object to such an offer without such objection being deemed as a waiver of his right to sell its respective shares if the transaction is approved by a majority of the company’s shareholders despite his objection. Shares purchased not in accordance with those provisions will become “dormant shares” and will not grant the purchaser any rights so long as they are held by the purchaser.
Acquisition.
A person wishing to acquire shares or a class of shares of an Israeli public company and who would, as a result, own more than 90% of the target company’s issued and outstanding share capital or of certain class of its shares, is required by the Companies Law to make a full tender offer (as defined in the Companies Law) to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company or class of shares. If either (i) the shareholders who do not accept the offer hold, in the aggregate, less than 5% of the issued and outstanding share capital of the company or of the applicable class, and more than half of the shareholders who do not have a personal interest in the offer accept the offer, or (ii) the shareholder who do not accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable class, then all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However, a shareholder that had its shares so transferred, whether or not it accepted the tender offer (unless otherwise provided in the offering memorandum), may, within six (6) months from the date of acceptance of the tender offer, 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. If the shareholders who did not accept the tender offer hold at least 5% of the issued and outstanding share capital of the company or of the applicable class of shares, the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of the company’s issued and outstanding share capital or of the applicable class from shareholders who accepted the tender offer.
The Companies Law provides that corporate mergers require the approval of both companies’ boards of directors and shareholders. In the event, however, that shares of the target company are held by the acquiring company or by a person holding 25% or more of any type of controlling means of the acquiring company, the merger will not be approved if a majority of the shareholders of the target company attending and voting at the meeting at which the merger is considered (without taking into account, for that purpose, the shares held by the acquiring company or by a person holding 25% or more of any type of controlling means of the acquiring company) object to and do not vote in favor of the merger. If a person holds 25% or more of any type of controlling means of more than one merging company, the same provisions shall apply with regard to the shareholders’ vote with respect to each such company. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if the court concludes that there exists a reasonable concern that as a result of the merger the surviving company will be unable to satisfy the target company’s obligations. Furthermore, a merger may not close unless at least 30 days have passed from the time that the general meeting of each of the merging companies was held and at least 50 days have passed from the date on which the merger proposal was sent to the Israeli Registrar of Companies.
83
10.C Material Contracts
In addition,Israeli Lease Agreement
On May 3, 2018, we entered into a lease agreement, or the Companies Law preserves provisionsLease Agreement, with Bayside Land Corporation Ltd., or Bayside. Pursuant to the Lease Agreement, we will lease from Bayside a total of its predecessor,approximately 12,000 square meters at a new building being built at the Companies Ordinance, dealingScience Park in Rehovot, with arrangements betweenthe intention to move the our headquarters in Israel to such premises.
The lease period for approximately 10,000 square meters, or the Initial Space, is expected to begin in the fourth quarter of 2019 and extend for a companyperiod of ten years, or the Initial Lease Period. We will have the option to extend the lease period by two periods of five years each, subject to customary conditions. The lease period for the additional approximately 2,000 square meters, or the Additional Space, is expected to begin in 2021, and its shareholders. These arrangements may be used to effect squeeze out transactions in whichextended through the target company becomes a wholly owned subsidiary ofsame lease periods as the acquirer. These provisions generally require thatInitial Space. The lease cannot be terminated by us during the merger be approved by at least 75% ofInitial Lease Period. Under certain circumstances, Bayside may terminate the shares of participating shareholders and a majority of the shareholders voting at a shareholders meeting. In addition to shareholder approval, court approval of the transaction is required, which entails further delay.
A merger, the acquisition of a controlling stake or any transaction in which all or substantially all the assets of a company are de facto transferred to another company, may require the approval of the Israeli Commissioner of Restrictive Trade Practices,Agreement in the event that the aggregate annual sales volume in Israel of all the companies which are parties to such transactionchange of control in the year precedingCompany.
The average monthly lease, parking and management costs for the merger, exceedsInitial Space in the Initial Lease Period are expected to be approximately NIS 150 million (approximately $39.6 million), adjusted annually665,000 per month. During each of the additional lease option periods, the monthly lease and parking payments for the Initial Space will be increased by 2.5%. The monthly lease, parking and management costs for the Additional Space are expected to be NIS 175,000 per month. The monthly lease, parking and management costs will be linked to the Israeli consumer price index,index.
On February 3, 2019, we entered into a construction contractor agreement with A. Weiss Construction and Supervision Ltd. in order to set the terms under which the contractor will perform the main construction and adjustment works in connection our new Israeli Lease Agreement. The services include, among others, adjustments of electro-mechanical systems as well as works related to electricity, plumbing, air conditioning, flooring, cladding and carpentry, all in accordance with the specifications, plans and the annual sales volume in Israel of at least two ofquantities schedule (Ktav-Kamuyot) enclosed to the companies which are partiesagreement. The agreement may be terminated by the us for convenience, by providing to such transaction exceeds NIS 10 million each (approximately $2.64 million), and also if after the consummation of such transactions, the joint market, in Israel, or at any identified geographic part of Israel will be in excess of 50% with respect to such products and services.Contractor a seven-days prior written notice.
10.C Material Contracts82
In April 2015, we consummated the acquisition of 100% of the equity of ReVera Incorporated, a privately held company headquartered in Santa Clara, California for $46.5 million in cash from existing funds, on a cash free, debt free basis. The Agreement and Plan of Merger dated March 11, 2015 by and among Nova Measuring Instruments Ltd., ReVera Incorporated, Neptune Acquisition Inc., and the Representative (named therein) was previously filed as exhibit to our annual report on Form 20-F, filed with the SEC on February 29, 2016.
10.D Exchange Controls
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares.
Dividends, if any, paid to holders of our ordinary shares, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted into freely repatriable dollars at the rate of exchange prevailing at the time of conversion.
Israeli Taxation
The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some Israeli tax consequences to persons owning our ordinary shares. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on a new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax considerations.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate
tax on their taxable income at the rate of
25%23% for the
20162018 tax year
(to and thereafter. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise (as discussed below) may be
reducedlower. Capital gains derived by an Israeli company are generally subject to
24% in 2017 and to 23% in 2018 and thereafter).the prevailing regular corporate tax rate.
Income Tax Regulations (Rules on Bookkeeping by Foreign Invested Companies and Certain Partnerships and Determination of their Taxable Income), 1986
As a “foreign invested company” (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company's management has elected to apply Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986. Accordingly, its taxable income or loss is calculated in US Dollars.
Tax Benefits under the Law for the Encouragement of Capital Investments, 1959
Tax benefits prior to the 2005 Amendment
The Law for the Encouragement of Capital Investments, 1959, generally referred to as
the “Investments
Law”
, provides that a capital investment in eligible facilities may, upon application to the Investment CenterIsraeli Authority for Investments and Development of the
Ministry ofIndustry and Economy
and Industry of the State of Israel the ((the “
Investment Center”)
, be granted the status of
an Approved Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources or funds, and by its physical characteristics or the facility or other assets, e.g., the equipment to be purchased and utilized pursuant to the program.
A
company owning
an Approved Enterprise is eligible for a combination of grants and tax benefits (the “Grant Track”). The tax benefits under the Grant Track include, among others, accelerated depreciation and amortization for tax purposes
. The benefitbenefits period is ordinarily
seven years commencing with
the year in which the Approved Enterprise first generates taxable income. The benefitbenefits period
is limited to 12
years fromthe earlier of
the commencement of production by
the Approved Enterprise or 14 years from the date of approval of the Approved Enterprise.
The tax benefits under the Investments Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed pursuant to the Approved Enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided that such income is generated within the ordinary course of business of the company investing in the Approved Enterprise. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted average of the applicable rates. The
Tax Benefitstax benefits under the Investments Law are not generally available with respect to income derived from products manufactured outside of Israel. In addition, the
Tax Benefitstax benefits available to
a company investing in
an Approved Enterprise are contingent
upon the fulfillment of conditions stipulated in the
Investments
Law and related
regulations and the criteria set forth in the
specific certificate of approval, as described above. In the event that
a company does not meet
these conditions, it
would may be required to refund the amount of tax benefits, plus a consumer price index linked adjustment and interest.
A company
whichthat has an Approved Enterprise program that qualifies as a foreign investment company
(a(an “FIC”) will be eligible for a three-year extension of tax benefits following the expiration of the
available seven-year
period referenced above.period. In addition, in the event that
the level of foreign ownership in
an Approved Enterprise reaches 49% or higher, the corporate
tax rate applicable to income earned from the
Approved Enterprise is reduced
as follows:
% of Foreign Ownership | Tax Rate |
Over 25% but less than 49% | Up to 25% |
49% or more but less than 74% | 20% |
74% or more but less than 90% | 15% |
90% or more | 10% |
A
company qualifies as a FIC if (i) it has received at least NIS 5 million in loans (for a minimum period of three years) or as investment in share capital from a foreign resident who is consequently entitled to at least 25% of the “rights” in the company (consisting of profit sharing rights, voting rights and appointment of directors), or (ii) if a foreign resident has purchased the company’s shares from an existing shareholder, consequently entitling the foreign shareholder to at least 25% of such rights in the company provided that the company’s outstanding and paid-up share capital exceeds NIS 5 million.Additionally, a company owning an Approved Enterprise
on or after April 1, 1986, may elect to
forgoforego its entitlements to grants and tax benefits under the Grant Track and apply for
alternative package of tax benefits
for a benefit period of between seven and ten years (the “Alternative Track”). Under the Alternative Track, a company’s undistributed income derived from the Approved Enterprise will be exempt from corporate tax for a period of between two and ten years, starting from the first year the company derives taxable income under the Approved Enterprise program. The length
of time of this exemption will depend on the geographic location of the Approved Enterprise within
Israel and the type of the approved enterprise.Israel. After the exemption period lapses, the company subject to tax at a
reduced corporate tax rate
between of
10% to 25%
(or a lower ratedepending on the level of foreign investment in the
case of a FIC)company in each year, as detailed above, for the remainder of the
benefitbenefits period.
We elected to be taxed under the Alternative Track. A company that has elected the Alternative Track and subsequently
pays a dividend out of income derived from the Approved Enterprise during the tax exemption period will be subject to corporate tax on the amount
whichthat is determined by the distributed amount
grossed(grossed up
to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) with the effective corporate tax rate which would have been applied had the company not elected the Alternative Track, which is at referred above ranged between 10%-25%
., depending on the level of foreign investment in the company in each yare year as explained above. Under the Investments Law, the transfer of funds from the Company to shareholders and other related parties may be deemed to be regarded as a dividend distribution for this purpose in certain circumstances. Dividends paid out of
any income derived from an Approved Enterprise are generally subject to withholding tax at source at the reduced rate of 15%
(or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the Israel Tax Authority (“ITA”), allowing for a reduced tax rate), if the dividend is distributed during the tax exemption period or within 12 years thereafter.
After such period, the withholding tax will be applied at a rate of up to 30%, or at a lower rate under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). In the event, however, which the company qualifies as a FIC, there is no such time limitation.
Under the Alternative Track, dividends paid by a company
are considered to be attributable to income received from the entire company and the company’s effective tax rate
is the result of a weighted average
of the various applicable tax rates, excluding any tax-exempt income. Under the Investments Law, a company that has elected the Alternative Track
is not obliged to distribute retained profits, and
may generally decide from which year’s profits to declare dividends.
We currently intend to reinvest any income derived from our Approved Enterprise program and not to distribute such income as a dividend.
Tax benefits under the 2005
Amendment
An
amendment to the Investments Law, which is effective as of April 1, 2005, has changed certain provisions of the Investments Law, or (the
“2005 Amendment”)2005 Amendment. An eligible investment program under the 2005 Amendment qualifies for benefits as a “Benefited Enterprise” (rather than as an Approved Enterprise, which status is still applicable for
investment programs approved prior to December 31, 2004 and/or investment programs under the Grant Track).
According to the 2005 Amendment
, only Approved Enterprises receiving cash grants require the prior approval of the Investment Center. As a result, a company is no longer required to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under the alternative benefits program. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment. A company that has a Benefited Enterprise may, at its discretion, approach the ITA for a pre-ruling confirming that it is in compliance with the provisions of the Investment Law.
The duration of the
tax benefitsdescribed herein
is limited to the earlier of seven
(7) or ten
(10) years (depending on the geographic location of the
ApprovedBenefited Enterprise within Israel)
from the Commencement Year (as described below)
or 12 or 14 years from the first day of the Year of Election (as described below)
, depending on the location of the company within Israel. Commencement Year is defined as the later of the first tax year in which a company had derived liable income for tax purposes from the Benefited Enterprise
, or the Year of Election, which is defined as
the year in which a company requested to have the tax benefits apply to the Benefited Enterprise
. The tax benefits granted to a Benefited Enterprise
are determined, depending on the geographic location of the Benefited Enterprise
within Israel,, according to one of the following, which may be applicable to us
:
(i)
Similar to the currently available Alternative Track, exemption from corporate tax may be available on undistributed income for a period of two to ten years, depending on the geographic location of the Benefited Enterprise
within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefitbenefits period, depending on the level of foreign investment in each year. Benefits may be granted for a term of seven to ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the Benefited Enterprise
during the tax exemption period and such dividend is actually paid at any time up to 12 years thereafter, except with respect to an FIC, in which case the 12-year limit does not apply, such income will be subject to deferred
corporate tax with respect to the amount distributed (grossed up
withto reflect such pre-tax income that it would have had to earn in order to distribute the
effectivedividend) at the corporate tax rate which would have
applied had the company not enjoyed the exemption) at the rate which would have applied had such company had the status of a Benefited Enterpriseotherwise been. The company is required to withhold tax on such distribution at a rate of 15%(or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate); or
(ii)
A special track which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at a
flat rate of 11.5% on income the Benefited Enterprise
(the “Ireland Track”). The benefit period under the Ireland Track is for a period of ten years. Upon payment of dividends, the company is required to withhold tax on such dividend at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents.
availableGenerally, to a Benefited Enterprise are subject to the continued fulfillment of conditions stipulated in the Investment Law and its regulations. If a company that is Abundant in Foreign Investment (owneddoes not meet these conditions, it would be required to refund the amount of tax benefits, as adjusted by at least 74% foreign shareholdersthe Israeli consumer price index and has undertaken to invest a minimum sum of $20 million in the Benefited Enterprise) is entitled to an extension of the benefit period by an additional five years, depending on the rate of its income that is derived in foreign currency.interest, or other monetary penalty.
As a result of the 2005 Amendment, tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income.
We had three Approved Enterprise plans under the Investments Law, which entitled us to certain tax benefits. In addition, in 2011, based on Company investments in property and equipment in the years 2008 and 2009, the Company submitted the applicable form as a BenefittedBenefited Enterprise in accordance with the 2005 Amendment to the Investments Law. The year of election was 2010.
Tax benefits under the 2011
Amendment
On December 29, 2010, the Israeli Parliament approved the 2011 amendment to the Investments Law (the “2011 Amendment”). The 2011 Amendment significantly revised the tax incentive regime in Israel, commencing on January, 1 2011.
The 2011 Amendment introduced a new status of “Preferred Enterprise”, replacing the existed status of “Benefited Enterprise”
. Similarly to “Beneficiary and introduced new benefits for income generated by a “Preferred Company”
, a through its Preferred Enterprise. A Preferred Company is an industrial company
meetingthat meets certain conditions (including a minimum threshold of 25% export). However, under the 2011 Amendment the requirement for a minimum investment in productive assets in order to be eligible for the benefits granted under the Investments Law as with respect to “Benefited Enterprise” was cancelled.
A Preferred Company is entitled to a reduced flat tax rate with respect to the income attributed to the Preferred Enterprise, at the following rates:
| | Other Areas within Israel | Development Region “A” | Other Areas within Israel |
| | | 10% | 15% |
| | | 7% | 12.5% |
2014-2016 | 9% | 16% | 9% | 16% |
2017 onwards1 | 7.5% | 16% | |
2017 onwards | | 7.5% | 16% |
* In December 2016, the Israeli Parliament (the Knesset) approved an amendment to the Investments Law pursuant to which the tax rate applicable to Preferred Enterprises in Development Region "A" would be reduced to 7.5% as of January 1, 2017. The classification of income generated from the provision of usage rights in know-how or software that were developed in the Preferred Enterprise, as well as royalty income received with respect to such usage, as Preferred Enterprise income is subject to the issuance if a pre-ruling from the ITA stipulates that such income is associated with the productive activity of the Preferred Enterprise in Israel.
In addition, the 2011 Amendment introduced a new status of “Special Preferred Company” which is an Industrial company meeting, in addition to the conditions prescribed for “Preferred Company” certain additional conditions (including that the total Preferred Enterprise income is at least NIS 1.5 billion in 2016 and NIS 1 billion in 2017 and thereafter). The tax rate applicable for a period of 10 years to income generated by such an enterprise will be reduced to 5%, if located in Development Region “A”, or to 8%, if located in other area within the State of Israel.
1 In December 2016, the Israeli Parliament (the Knesset) approved an amendment to the Investments Law pursuant to which the tax rate applicable to Preferred Enterprises in Development Region “A” will be reduced to 7.5% as of 2017. It should be noted that the amendment to the Investments Law also include new tax tracks for technology-based activities and enterprises: (i) Preferred Technology Enterprise, which under certain conditions is entitled to a reduced flat tax rate of 12% if located in other area within Israel (instead of 16% for a Preferred Enterprise), and a 4% tax rate on dividend distributions out of such income to a foreign resident parent company (or a lower rate under a tax treaty); (ii) Special Preferred Technology Enterprise – an enterprise that meets all the conditions of a Preferred Technology Enterprise and in addition, the total annual revenue of such enterprise together with other companies in the group is NIS 10 billion or more. Under such conditions, a reduced flat tax rate of 6% shall apply, and a 4% tax rate on dividend distributions out of such income to a foreign resident parent company (or a lower rate under a tax treaty). These tax tracks will enter into force starting January 1, 2017.
Dividends distributed from income which is attributed to a “Preferred Enterprise” or a “Special Preferred Enterprise” will be subject to withholding tax at source at the following rates: (i) Israeli resident corporations – 0% (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply), (ii) Israeli resident individuals – 20% (iii) non-Israeli residents - 20%, (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). In 2017 to 2019, dividends paid out of preferred income attributed to a Special Preferred Enterprise, directly to a foreign parent company, are subject to withholding tax at source at the rate under the provisions of an applicable double tax treaty. The5% (temporary provisions).The 2011 Amendment also revised the Grant Track to apply only to the approved programs located in Development Region “A” and shall provide not only cash grants (as prior to the 2011 Amendment) but also the granting of loans. The rates for grants and loans shall not be fixed but up to 20% of the amount of the approved investment (may be increased with additional 4%). In addition, a company owning a Preferred Enterprise under the Grant Track may be entitled also to the tax benefits which are prescribed for a Preferred Company.Enterprise.
The provisions of the 2011 Amendment do not apply to existing “Benefited Enterprises” or “Approved Enterprises”, which will continue to be entitled to the tax benefits under the Investments Law, as has been in effect prior to the New2011 Amendment, unless the company owning such enterprises had made an election to apply the provisions of the 2011 Amendment (such election cannot be later rescinded), which is to be filed with the Israeli Tax Authority,ITA, not later than the date prescribed for the filing of the company’s annual tax return for the respective year. A company owning a Benefited Enterprise or Approved Enterprise which made such election by JulyJune 30, 2015, will be entitled to distribute income generated by the Approved/Benefited Enterprise to its Israeli corporate shareholders tax free.
Until the end of 2015, we did not utilize tax benefits related to Preferred Enterprises. StartingIn 2016, we started utilizing such benefits, with a related tax rate which could range 12% to 16%.
The New Technological Enterprise Incentives Regime—the 2017 Amendment
The 2017 Amendment was enacted as part of 16%the Economic Efficiency Law that was published on December 29, 2016, and became effective on January 1, 2017. The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.
The new incentives regime will apply to “Preferred Technological Enterprises” that meet certain conditions, including: (1) the R&D expenses in the three years preceding the tax year were at least 7% of the company's turnover or exceeded NIS 75 million (approximately $21 million); and (2) one of the following: (a) at least 20% of the workforce (or at least 200 employees) are employed in R&D; (b) a venture capital investment approximately equivalent to at least $2 million was previously made in the company and the company did not change its line of business; (c) growth in sales by an average of 25% over the three years preceding the tax year, provided that the turnover was at least NIS 10 million (approximately $2.8 million), in the tax year and in the preceding three years; or (d) growth in workforce by an average of 25% over the three years preceding the tax year, provided that the company employed at least 50 employees, in the tax year and in the preceding three years.
A “Special Preferred Technological Enterprise” is an enterprise that meets conditions 1 and 2 above, and in addition has total annual consolidated revenues above NIS 10 billion (approximately $2.8 billion).
Preferred Technological Enterprises will be subject to a reduced corporate tax rate of 12% on their income that qualifies as “Preferred Technology Income”, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in Development Region "A". These corporate tax rates shall apply only with respect to the portion of intellectual property developed in Israel. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefited Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefited Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million (approximately $56 million), and the sale receives prior approval from the IIA. Special Preferred Technological Enterprises will be subject to 6% on “Preferred Technology Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefited Intangible Assets” to a related foreign company if the Benefited Intangible Assets were either developed by an Israeli company or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from IIA. A Special Preferred Technology Enterprise that acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million (approximately $142 million), will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld. If such dividends are, distributed to a parent foreign company holding at least 90% of the shares of the distributing company and other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate).
We reviewed the criteria for the tax rate of a “Special Preferred Technological Enterprise” and concluded that we are entitled to the reduced tax rate under the “Preferred Technological Enterprises” tax incentive regime starting 2017. We have notified the ITA that we elected applying this status starting 2017. We cannot asses at this stage the ITA position.
Law for the Encouragement of Industry (Taxes), 19695729-1969
We believe that we qualify as an “Industrial Company” within the meaning ofT thehe Law for the Encouragement of Industry (Taxes), 1969, or the
Industry Encouragement Law. The Industry Encouragement Law defines
“Industrial Company” as an Israeli
resident company
which was incorporated in Israel, of which
90% or more
of its income in any tax year (exclusive of income from certain defensegovernment loans)
, capital gains, interest and dividends is generated
from an “Industrial Enterprise” that
it owns.owns and located in Israel. An “Industrial Enterprise
” is defined as an enterprise whose principal
activity in aany given tax year is industrial manufacturing.
An
Industrial Company is entitled to certain tax benefits, including: (i)
a deduction of the cost of purchases
of patents, know-how and
certain other intangible property rights (other than goodwill) ) that were purchased in good faith and are used for the development or promotion of the Industrial Enterprise
over a period of eight years,
beginning from
the year in which such rights were first used, (ii) the right to
elect to file consolidated tax returns with additional Israeli Industrial Companies controlled by it,
and (iii) the right to
deduct expenses related to public offerings in equal amounts over a period of three yearsbeginning from the year of the offering
.
Eligibility for benefits under the Encouragement of Industry Law is not contingent upon the approval of any governmental authority.
We believe that we qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law. There is no assurance that we qualify or will continue to qualify as an Industrial Company or that the benefits described above will be available
to us in the future.
Taxation of the Company
Shareholders
Capital gain tax is imposed on the disposition of capital assets by an Israeli resident, and on the disposition of such assets by a non-Israel resident if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights to assets located in Israel.Israel, unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Ordinance distinguishes between “Real Gain” and the “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increase in the Israeli CPIConsumer Price Index (CPI) or, in certain circumstances, according to the change in the foreign currency exchange rate, between the date of purchase and the date of disposition.
TheGenerally, the capital gain accrued by individuals on the sale of our ordinary shares
will be taxed at the rate of 25%. However, if the individual shareholder is a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with such person’s relative or another
person who collaborates with such person on a permanent basis, 10% or more of one of the Israeli resident company’
s means of control) at the time of sale or at any time during the preceding twelve (12) months period, such gain will be taxed at the rate of 30%.
The Real Gain derived by
corporations will be generally subject to the ordinary corporate tax
(25% in 2016, to be reduced to 24% in 2017 and to 23%(2% in 2018 and thereafter).
Individual and corporate shareholder dealing in securities in Israel are taxed at the tax rates applicable to business income –
25% 23% for corporations in 2018 2016 (to be reduced to 24% in 2017 and to 23% in 2018 and
thereafter)thereafter and a marginal tax rate of up to 50%47% in 20162018 for individuals, includingindividuals, unless the benefiting provisions of an excess tax for high earning individuals whose taxable income from Israeli sources exceeds a certain threshold (NIS 810,720 in 2016 applicable treaty applies.and NIS 640,000 in 2017 and thereafter, as discussed below ). Notwithstanding the foregoing, capital gain derived from the sale of our ordinary shares
by a non-Israeli shareholder may be exempt under the Ordinance from Israeli taxation provided that the following cumulative conditions are met: (i) the shares
were purchased upon or after the registration of the securities on the stock exchange (this condition will not apply to shares purchased on or after January 1, 2009
), and (ii) the seller does no
t have a permanent establishment in Israel to which the derived capital gain is attributed. ; and (iii) with respect our ordinary shares listed on a recognized stock exchange outside of Israel, so long as neither the shareholder nor the particular capital gain is otherwise subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. Non-Israeli corporations will not be entitled to the foregoing exemptions if (i) an Israeli resident has a controlling interest, directly or indirectly, alone or together with another (i.e., together with a relative, or together with someone who is not a relative but with whom, according to an agreement, there is regular cooperation in material matters of the company, directly or indirectly), or together with another Israeli resident, exceed 25% in one or more of the means of control in such non-Israeli resident corporation or (ii) Israeli residents are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli resident corporation, whether directly or indirectly.
In addition, the sale of shares
may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example
, the U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital gain tax in connection with such sale, exchange or disposition provided, among others (i) the U.S. resident owned, directly or indirectly, less than 10% of an Israeli resident company’
s voting power at any time within the 12 month period preceding such sale; (ii) the seller, being an individual, is present in Israel for a period or periods of less than 183 days in the aggregate at the taxable year; and (iii) the capital gain from the sale was not derived through a permanent establishment of the U.S. resident which is maintained in Israel.Israel the capital gain arising from such sale, exchange or disposition is not attributed to real estate located in Israel; (v) the capital gains arising from such sale, exchange or disposition is not attributed to royalties; and (vi) the shareholder is a U.S. resident (for purposes of the U.S.-Israel Double Tax Treaty) is holding the shares as a capital asset. Either the purchaser, the stockbrokers or financial institution, through which payment to the seller is made, are obliged, subject to the above-mentioned exemptions, to withhold Israeli tax at source from such payment. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in the form of a merger or otherwise, the ITA may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from the ITA to confirm their status as non-Israeli resident.
Either the purchaser, the Israeli stockbrokers or financial institution through which the shares are held is obliged, subject to the above mentioned exemptions, to withhold tax uponAt the sale of securities from the Real Gain at the rate of 25% in respect of a corporation and/or an individual.At the sale of securities traded on a stock exchange
a detailed return, including a computation of the tax due, must be filed and an advanced payment must be paid on January 31 and June 30July 31 of every tax year in respect of sales of securities made within the previous six months. However, if all tax due was withheld at source according to applicable provisions of the Ordinance and regulations promulgated thereunder the aforementioned return need not be filed and no advance payment must be paid. Capital gain is also reportable on the annual income tax return.
As of January 1, 2014, any distribution of dividends from income attributed to a Preferred Enterprise is generally subject to a tax at a rate of 20%. However, if such dividends are distributed to an Israeli company, no tax is imposed. As of January 1, 2014, dividends distributed from income attributed to an Approved Enterprise and/or a Benefited Enterprise are subject to a tax rate of 20%. Notwithstanding the above, a reduced 15% tax rate will be applicable if the dividend was distributed out of income of: (i) Approved Enterprise activated prior to 2014; or (ii) Benefited Enterprise with a Year of Election prior to 2014. Those rates may be further reduced under the provisions of any applicable double tax treaty.
A distribution of dividends from income, which is not attributed to an Approved Enterprise/Benefited Enterprise/Preferred Enterprise
to an Israeli resident individual, will generally be subject to income tax at a rate of 25%. However, a 30% tax rate will apply if the dividend recipient is a “Controlling Shareholder” (as defined above) at the time of distribution or at any time during the preceding 12 months period. If the recipient of the dividend is an Israeli resident corporation, such dividend will be exempt from income tax provided the income from which such dividend is distributed was derived or accrued within Israel.
Distribution of dividends from income attributed to a Preferred Enterprise is generally subject to a tax at a rate of 20%. However, if such dividends are distributed to an Israeli company, no tax is imposed (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for an exemption)). Dividends distributed from income attributed to an Approved Enterprise and/or a Benefited Enterprise are generally subject to a tax rate of 15%. Those rates may be further reduced under the provisions of any applicable double tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate).
The Ordinance generally provides that a non-Israeli resident (either individual or corporation) is subject to an Israeli income tax on the receipt of dividends at the rate of 25% (30% if the dividends recipient is a “Controlling Shareholder” (as defined above), at the time of distribution or at any time during the preceding 12 months period); those rates are subject to a reduced tax rate under the provisions of an applicable double tax treaty. Thus,treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). For example, under the U.S.-Israel Double Tax Treaty the following rates will apply in respect of dividends distributed by an Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of the taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of the outstanding shares of the voting stock of the Israeli resident paying corporation and not more than 25% of the gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain type of interest or dividends – the maximum tax rate is 12.5% on dividends, not generated by an Approved Enterprise or Benefited Enterprise, (ii) if both the conditions mentioned in section (i) above are met and the dividend is paid from an Israeli resident company’
s income which was entitled to a reduced tax rate applicable to an Approved Enterprise or Benefited Enterprise – the tax rate is 15%, and (iii) in all other cases, the tax rate is 25%, or the domestic rate (if such is lower). The aforementioned rates under the Israel U.S.U.S.-Israel Double Tax Treaty will not apply if the dividend income was derived through a permanent establishment of the U.S. resident maintained in Israel.
If the dividend is attributable partly to income derived from an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. Payors of dividends on our shares, including the Israeli stockbroker effectuating the transaction, or the financial institution through which the securities are held, are generally required, subject to any of the foregoing exemption, reduced tax rates and the demonstration of a shareholder of his, her or its foreign residency, to withhold taxes upon the distribution of dividends at a rate of 25%, provided that the shares are registered with a Nominee Company (for corporations and individuals).
Excess Tax
Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 2% in 2016 (to be increased to 3% in 2017 and thereafter) on annual income exceeding a certain threshold (NIS 810,720 for 2016 and NIS 640,000641,880 for 2017 2018 and thereafter, (linkedwhich amount is linked to the Israeli Consumer Price Index)), including, but not limited to income derived from dividends, interest and capital gains.
Foreign Exchange Regulations
Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is generally required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of currency exchange control has not been eliminated, and may be restored at any time by administrative action.
U.S. Taxation
The following discussion describes certain material United States (“U.S.”) federal income tax consequences generally applicable to U.S. holders (as defined below) of the purchase, ownership and disposition of our ordinary shares. This summary addresses only holders who acquire and hold ordinary shares as “capital assets” for U.S. federal income tax purposes (generally, assets held for investment purposes).
For purposes of this discussion, a “U.S. holder” is a beneficial owner of ordinary shares who is:
| · | An individual citizen or resident of the U.S. (as determined under U.S. federal income tax rules); |
| · | a corporation (or another entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S., any state thereof, or the District of Columbia; |
| · | an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or |
· | · | a trust, if (a) a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions,decisions; or (b) the trust has in effect a valid election in effect under applicable Treasury Regulations (as defined below) to be treated as a United States person. person. |
This summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase, hold or dispose of the Company’s ordinary shares. In addition, the possible application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws is not considered. This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations) (the “Treasury Regulations”), rulings, current administrative interpretations and official pronouncements by the Internal Revenue Service (the “IRS”), and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, with a retroactive effect. Such changes could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder based on the holder’s particular circumstances, including, but not limited to,to:
| · | persons who own, directly, indirectly or constructively, 10% or more (by voting power or value) of our outstanding voting shares; |
| · | persons who hold the ordinary shares as part of a hedging, straddle or conversion transaction; |
| · | persons whose functional currency is not the U.S. dollar; |
| · | persons who acquire their ordinary shares in a compensatory transaction; |
| · | regulated investment companies; |
| · | real estate investment companies; |
| · | qualified retirement plans, individual retirement accounts and other tax-deferred accounts; |
| · | traders who elect to mark-to-market their securities; |
| · | tax-exempt organizations; |
| · | banks or other financial institutions; |
| · | persons subject to special tax accounting rules as a result of any item of gross income with respect to ordinary shares being taken into account in an applicable financial statement; |
| · | U.S. expatriates and certain former citizens and long-term residents of the United States; and |
| · | persons subject to the alternative minimum tax. |
The tax treatment of a partner in a partnership (or other entity or arrangement classified as a partnership for U.S. federal income tax purposes) may depend on both the partnership’s and the partner’s status and the activities of the partnership. Partnerships (or other entities or arrangements classified as a partnership for U.S. federal income tax purposes) that are beneficial owners of ordinary shares, and their partners and other owners, should consult their own tax advisers regarding the tax consequences of the acquisition, ownership and disposition of ordinary shares.
THIS SUMMARY OF MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO IT OF AN INVESTMENT IN THE ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE UNITED STATES FEDERAL INCOME TAX LAWS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY FOREIGN, STATE OR LOCAL JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
Distributions on the Ordinary Shares
We currently do not intend to distribute dividends for at least the next several years. However, if we make any distributions of cash or other property to a U.S. holder of our ordinary shares, the amount of the distribution for U.S. federal income tax purposes will equal the amount of cash and the fair market value of any property distributed and will also include the amount of Israeli taxes withheld, if any, as described above under
“—“[Israel Taxation] — Dividends” above. In general (and subject to the PFIC rules discussed below), any distribution paid by us on the ordinary shares to a U.S. holder will be treated as dividend income to the extent the distribution does not exceed our current and/or accumulated earnings and profits, as determined under U.S. federal income tax
principles. The amount of any distribution which exceeds these earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. holder’s tax basis in its ordinary shares to the extent thereof, and then as capital gain
income (long-term capital gain if the U.S. holder’s holding period exceeds one year),
from the deemed disposition of the ordinary shares
(subject to the PFIC rules discussed below).
Corporate holders generally will not be allowed a deduction for dividends received on the ordinary shares.
The amount of any dividend paid in NIS (including amounts withheld to pay Israeli withholding taxes) will equal the U.S. dollar value of the NIS calculated by reference to the exchange rate in effect on the date the dividend is received by the U.S. holder, regardless of whether the NIS are converted into U.S. dollars. A U.S. holder will have a tax basis in the NIS equal to their U.S. dollar value on the date of receipt. If the NIS received are converted into U.S. dollars on the date of receipt, the U.S. holder should generally not be required to recognize foreign currency gain or loss in respect of the distribution. If the NIS received are not converted into U.S. dollars on the date of receipt, a U.S. holder may recognize foreign currency gain or loss on a subsequent conversion or other disposition of the NIS. Such gain or loss will be treated as U.S. source ordinary income or loss.
Dividends paid by us generally will be foreign source, “passive income” for U.S. foreign tax credit purposes,purposes. U.S. holders may elect to claim as a foreign tax credit against their U.S. federal income tax liability the Israeli income tax withheld from dividends received on the ordinary shares. The Code provides limitations on the amount of foreign tax credits that a U.S. holder may claim. U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld, but only for a year in which these U.S. holders elect to do so for all foreign income taxes. The rules relating to foreign tax credits are complex (and may also be impacted by the tax treaty between the United States and Israel), and you should consult your tax advisor to determine whether you would be entitled to this credit.
Under current law, certain distributions treated as dividends that are received by an individual U.S. holder from a “qualified foreign corporation” generally qualify for a 20% reduced maximum tax rate so long as certain holding period and other requirements are met. A non-U.S. corporation (other than a corporation that is treated as a PFIC with respect to the U.S. holder for the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program, or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. Dividends paid by us in a taxable year in which we are not a PFIC and with respect to which we were not a PFIC in the preceding taxable year with respect to the U.S. holder are expected to be eligible for the 20% reduced maximum tax rate, although we can offer no assurances in this regard. However, any dividend paid by us in a taxable year in which we are a PFIC or were a PFIC in the preceding taxable year with respect to the U.S. holder will be subject to tax at regular ordinary income rates (along with any applicable additional PFIC tax liability, as discussed below).
The additional 3.8% tax on “net investment income” (described below) may apply to dividends received by certain U.S. holders who meet certain modified adjusted gross income thresholds.
Sale, Exchange or Other Taxable Disposition of the Ordinary Shares
Upon the sale, exchange or other taxable disposition of the ordinary shares (subject to the PFIC rules discussed below)
, a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. holder’s tax basis in the ordinary shares. The gain or loss recognized on the sale or exchange of the ordinary shares generally will be long-term capital gain (currently taxable at a reduced rate for non-corporate U.S. holders) or loss if the U.S. holder’s holding period of the ordinary shares is more than one year at the time of the disposition. The deductibility of capital losses is subject to limitations.
Gain or loss recognized by a U.S. holder on a sale or exchange of ordinary shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. Under the tax treaty between the United States and Israel, gain derived from the sale, exchange or other taxable disposition of ordinary shares by a holder who is a resident of the U.S. for purposes of the treaty and who sells the ordinary shares within Israel may be treated as foreign source income for U.S. foreign tax credit purposes.
The additional 3.8% tax on “net investment income” (described below) may apply to certain U.S. holders who meet certain modified adjusted gross income thresholds, including capital gains.
Passive Foreign Investment Companies
In general, a foreign (i.e., non-U.S.) corporation will be a PFIC for any taxable year
in which, after applying the relevant look-through rules with respect to the income and assets of its subsidiaries, either (1) 75% or more of its gross income in the taxable year is “passive income,” or (2)
assets held for the production of, or that produce, passive income comprise 50% or more of the average of its total asset value in the taxable year. For purpose of the income test, passive income
generally includes dividends, interest, royalties, rents, annuities and net gains from the disposition of assets, which produce passive income. For purposes of the asset test, assets held for the production of passive income includes assets held for the production of, or that produce dividends, interest, royalties, rents, annuities, and other income
included inthat are considered passive income for purposes of the income test.
In determining whether we meet the asset test, cash is considered a passive asset and the total value of our assets generally will be treated as equal to the sum of the aggregate fair market value of our outstanding stock plus our liabilities. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income. The income test is conducted at the taxable year-end. The asset test is conducted on a quarterly basis and the quarterly results are then averaged together.
If a corporation is treated as a PFIC for any year during a U.S. holder’s holding period and the U.S. holder does not timely elect to treat the corporation as a “qualified electing fund” under Section 1295 of the Code or elect to mark its ordinary shares to market (both elections described below), any gain on the disposition of the shares will be treated as ordinary income, rather than capital gain, and the holder will be required to compute its tax liability on that gain, as well as on dividends and other distributions, as if the income had been earned ratably over each day in the U.S. holder’s holding period for the shares. The portion of the gain and distributions allocated to prior taxable years in which a corporation was a PFIC will be ineligible for any preferential tax rate otherwise applicable to any “qualified dividend income” or capital gains, and will be taxed at the highest ordinary income tax rate in effect for each taxable year to which this portion is allocated. An interest charge will be imposed on the amount of the tax allocated to these taxable years. A U.S. holder may elect to treat a corporation as a qualified electing fund only if the corporation complies with requirements imposed by the IRS to enable the shareholder and the IRS to determine the corporation’s ordinary income and net capital gain. Additionally, if a corporation is a PFIC, a U.S. holder who acquires shares in the corporation from a decedent will be denied the normally available step-up in tax basis to fair market value for the shares at the date of death of the decedent and instead will have a tax basis equal to the decedent’s tax basis if lower than fair market value.
These adverse tax consequences associated with PFIC status could result in a material increase in the amount of tax that a U.S. holder would owe and an imposition of tax earlier than would otherwise be imposed and additional tax form filing requirements.
Unless otherwise provided by the IRS, if a corporation is classified as a PFIC, a U.S.
person that is a direct or indirect holder generally will be required to file IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form, to report its ownership interest in such entity.
Status of Nova as a PFIC. Under the income test, less than 75% of our gross income was passive income in
2016.2017. For
2016,2018, while we continued to have substantial amounts of cash and short-term deposits and the market value of our ordinary shares continued to be volatile, a determination of the value of our assets by reference to the average market value of our ordinary shares and our liabilities results in a conclusion that the average value of our passive assets did not exceed 50% of the average value of our gross assets in
2016.2017. Nonetheless, there is a risk that we were a PFIC in
20162018 or we will be a PFIC in
20172019 or subsequent
years because there are no definitive rules regarding the manner in which a company should value its assets for purposes of the PFIC asset test.years. For example, taking into account our existing cash balances, if the value of our stock were to decline materially, it is possible that we could become a PFIC in
20172019 or a subsequent year. Additionally, due to the complexity of the PFIC provisions and the limited authority available to interpret such provisions, there can be no assurance that our determination regarding our PFIC status could not be successfully challenged by the IRS.
Available Elections. If we become a PFIC for any taxable year, U.S. holders should consider whether or not to elect to treat us as a “qualified electing fund” or to elect to “mark-to-market” their ordinary shares
in order to mitigate the adverse tax consequences of PFIC status.
If a U.S. holder makes a qualified electing fund election (a “QEF election”) for
its ordinary shares that is effective from the first taxable year that the U.S. holder holds our ordinary shares and during which we are a PFIC, the electing U.S. holder will avoid the adverse consequences of our being classified as a PFIC, but will instead be required to include in income a pro rata share of our net capital gain, if any, and other earnings and profits (“ordinary earnings”) as long-term capital gains and ordinary income, respectively,
on a current basis, in each case whether or not distributed, in the taxable year of the U.S. holder in which or with which our taxable year ends. A subsequent distribution of amounts that were previously included in the gross income of U.S. holders should not be taxable as a dividend to those U.S. holders who made a QEF election. In the event we incur a net loss for a taxable year, such loss will not be available as a deduction to an electing U.S. holder, and may not be carried forward or back in computing our net capital gain or ordinary earnings in other taxable years. The tax basis of the shares of an electing U.S. holder generally will be increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the QEF rules described above. In order to make (or maintain) a QEF election, the U.S. holder must annually complete and file IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form. However, we do not expect that we will prepare or provide to U.S. Holders a “PFIC annual information statement,” which would enable a U.S. Holder to make one type of a QEF election.
In addition, each U.S. Holder of a PFIC is required to file an annual report containing such information as the U.S. Department of the Treasury may require. U.S. Holders are advised to consult with their own tax advisors regarding the details of the PFIC rules and any elections that may be available.
Alternatively, if a U.S. holder elects to “mark-to-market” its ordinary shares, the U.S. holder generally will include in its income any excess of the fair market value of our ordinary shares at the close of each taxable year over the holder’s adjusted basis in such ordinary
shares. If a U.S. holder makes a valid mark-to-market election with respect to our ordinary shares for the first taxable year of the U.S. holder in which the U.S. holder holds (or is deemed to hold) our ordinary shares and for which we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect of its common shares. A U.S. holder generally will be allowed an ordinary deduction for the excess, if any, of the adjusted tax basis of the ordinary shares over the fair market value of the ordinary shares as of the close of the taxable year, or the amount of any net mark-to-market gains recognized for prior taxable years, whichever is less. A U.S. holder’s adjusted tax basis in the ordinary shares generally will be adjusted to reflect the amounts included or deducted under the mark-to-market election. Additionally, any gain on the actual sale or other disposition of the ordinary shares generally will be treated as ordinary income. Ordinary loss treatment also will apply to any loss recognized on the actual sale or other disposition of ordinary shares to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included with respect to such ordinary shares.
If a U.S. holder makes a valid mark-to-market election with respect to our ordinary shares for the first taxable year of the U.S. holder in which the U.S. holder holds (or is deemed to hold) our ordinary shares and for which we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect of its ordinary shares. A mark-to-market election applies to the tax year for which the election is made and to each subsequent year, unless our ordinary shares cease to be marketable, as specifically defined, or the IRS consents to revocation of the election. No view is expressed regarding whether our ordinary shares are marketable for these purposes or whether the election will be available.
If a U.S. holder makes either the QEF election or the mark-to-market election, distributions and gain will not be recognized ratably over the U.S. holder’s holding period or be subject to an interest charge as described above. Further, the denial of basis step-up at death described above will not apply. If a U.S. holder makes the QEF election, gain on the sale of the ordinary shares will be characterized as capital gain. However, U.S. holders making one of these two elections may experience current income recognition, even if we do not distribute any cash. The elections must be made with the U.S. holder’s federal income tax return for the year of election, filed by the due date of the return (as it may be extended) or, under certain circumstances provided in applicable Treasury Regulations, subsequent to that date.
The foregoing discussion relating to the QEF election and mark-to-market elections assumes that a U.S. holder makes the applicable election with respect to the first year in which Nova qualifies as a PFIC. If the election is not made for the first year in which Nova qualifies as a PFIC, the procedures for making the election and the consequences of election will be different.
SPECIFIC RULES AND REQUIREMENTS APPLY TO BOTH THE QEF ELECTION AND THE MARK-TO-MARKET ELECTION, AND YOU ARE URGED TO CONSULT YOUR TAX ADVISOR CONCERNING OUR PFIC STATUS AND THE VARIOUS ELECTIONS YOU CAN MAKE.
Medicare Tax on Net Investment Income
A U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% tax on the lesser of (1) the U.S. holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. holder’s 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 individual’s circumstances).threshold. A U.S. holder’s “net investment income” generally may include its dividend income and its net gains from the disposition of shares, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a U.S. holder that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the shares and the interaction of these rules with the rules applicable to income included as a result of the QEF election.
Withholdable Payments to Foreign Financial Entities and Other Foreign EntitiesThe Hiring Incentives to Restore Employment Act of March 2010 (the “HIRE Act”), including the Foreign Account Tax Compliance Act (“FATCA”) provisions promulgated thereunder, generally provides that (1) a 30% withholding tax may be imposed on certain payments of U.S. source income (such as dividends) to certain non-U.S. holders, and (2) beginning January 1, 2019, a 30% withholding tax may be imposed on the proceeds from the sale of property by certain non-U.S. holders that could give rise to certain types of U.S. source payments. Withholding generally is required unless such non-U.S. holders enter into an agreement with the IRS to disclose the name, address and taxpayer identification number of certain U.S. persons that own, directly or indirectly, interests in such non-U.S. holders, as well as certain other information relating to such interests. Non-U.S. holders should consult their own tax advisors regarding the possible implications and obligations of FATCA and the HIRE Act on the purchase, ownership and disposition of our common stock.United States Information Reporting and Backup Withholding
In general, U.S. holders may be subject to certain information reporting requirements under the Code relating to their purchase and/or ownership of stock of a foreign corporation such as the Company. Failure to comply with these information reporting requirements may result in substantial penalties.
Specifically,
certain U.S. Holders holding specified foreign financial assets, including our ordinary shares, with an aggregate value in excess of the applicable U.S. dollar threshold are subject to certain exceptions, required to report information relating to our Ordinary Shares by attaching a complete IRS Form 8938, Statement of Specified Foreign Financial Assets, to their tax returns, for each year in which they hold our ordinary shares. U.S. Holders are urged to consult their own tax advisors regarding information reporting requirements relating to the ownership of our Ordinary Shares.
In addition, and as discussed in the section of this annual report entitled “U.S. Taxation – Passive Foreign Investment Companies”, if a corporation is classified as a PFIC, a U.S. person that is a direct or indirect holder generally will be required to file an informational return annually on IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form, to report its ownership interest in such entity, unless otherwise provided by the IRS.
Dividend payments and proceeds from the sale or disposal of ordinary shares may be subject to information reporting to the IRS and possible U.S. federal backup
withholding, currently at the rate of 28%. withholding. Certain holders (including, among others, corporations) generally are not subject to information reporting and backup withholding. A U.S. holder generally will be subject to backup withholding if such holder is not otherwise exempt and such holder:
| · | fails to furnish its taxpayer identification number, or TIN, which, for an individual, is ordinarily his or her social security number, number; |
| · | furnishes an incorrect TIN, TIN; |
| · | is notified by the IRS that it is subject to backup withholding because it has previously failed to properly report payments of interest or dividends,dividends; or |
| · | fails to certify, under penalties of perjury, that it has furnished a correct TIN and that the IRS has not notified the U.S. holder that it is subject to backup withholding. |
Any U.S. holder who is required to establish exempt status generally must file IRS Form W-9 (“Request for Taxpayer Identification Number and Certification”).
Backup withholding is not an additional tax and may be claimed as a refund or a credit against the U.S. federal income tax liability of a U.S. Holder, provided that the required information is timely furnished to the IRS.
10.F Dividends and Paying Agents
Not applicable.
10.G Statements by Experts
Not applicable.
10.H Documents on Display
The documents referred to herein, including the Amended Articles, can be obtainedAs a foreign private issuer, are exempt from the Company at its registered office at Weizmann Science Park, Building 22, 2nd Floor, Ness-Ziona, Israel.rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Furthermore, as a foreign private issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. In addition, we are not be required under the Company is subject to certain informational requirements of the Securities Exchange Act of 1934to file annual or other reports and the rules and regulations promulgated thereunder. In accordance therewith, the Company files reportsconsolidated financial statements with the Commission. Reports andSEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. Instead, we must file with the SEC, within 120 days after the end of each fiscal year, or such other applicable time as required by the SEC, an annual report on Form 20-F containing consolidated financial statements audited by an independent registered public accounting firm. We also intend to furnish certain other material information provided to the Commission by the Company may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 100 Fifth Street, N.E., Washington, D.C. 20549. Information on the operationSEC under cover of the public reference facilities may be obtained by calling the Commission at 1-800-SEC-0330. In addition, certain of the Company’s reports filed with the Commission are available on-line at www.sec.gov.Form 6-K.
We maintain a corporate website at www.novameasuring.com. Information contained on, or that can be accessed through, our website does not constitute a part of this annual report on Form 20-F. We have included our website address in this annual report on Form 20-F solely as an inactive textual reference.
10.I Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of the Company. The Company is exposed to market risk in the area of foreign exchange rates, as described below.
The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments that could expose it to significant market risk.
Impact of Currency Fluctuation
Because our results are reported in Dollars, changes in the rate of exchange between the Dollar and local currencies in those countries in which we operate (primarily the NIS, the Euro and the Japanese Yen) will affect the results of our operations. The dollar cost of our operations in countries other than the U.S., is negatively influenced by revaluation of the U.S. dollar against other currencies. During
2016,2018, the value of the U.S. dollar
devaluatedrevaluated against the NIS by
1.46%8.1%, devaluated against the Yen by approximately
2.8%2.0% and revaluated against the Euro by approximately
3.6%4.6%. During the first six months of
2016 the value of the U.S. dollar devaluated against the NIS by approximately 1.5%, devaluated against the Yen by approximately 14.6% and devaluated against the Euro by 1.9%. During the last six months of 20162018 the value of the U.S. dollar revaluated against the NIS by approximately
0.03%5.3%,
revaluateddevaluated against the Yen by approximately
13.6%2.1% and revaluated against the Euro by 3.6%. During the last six months of 2018 the value of the U.S. dollar revaluated against the NIS by approximately 2.7%, devaluated against the Yen by approximately 0.1% and revaluated against the Euro by approximately
5.5%1.0%.
As of December 31, 2016,2018, the majority of our net monetary assets were denominated in dollars and the remainder was denominated mainly in NIS. Net monetary assets that are not denominated in dollars or dollar-linked NIS were affected by the currency fluctuations in 2016,2018, and are expected to continue to be affected by such currency fluctuations in 2017.2019. Starting January 1st, 2019, under the implementation of ASC 842 for lease accounting, we expect to record a NIS and Israel CPI linked liability, in the amount of approximately $16 million This liability is also expected to be affected by such currency fluctuations across the term of the lease.
In 2014,2017, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $67$58 million with settlement dates through 2014-2015,2017-2018, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $67$58 million. In accordance with ASC 815-10, we recorded in 2014 a decrease2017 an increase of approximately $1.7$0.16 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as of December 31, 2014,2017, with all other variables held constant, would decreaseincrease the fair value of our net assets denominated in foreign currency, held at December 31, 2014,2017, by approximately $0.6$0.11 million.
In 2015,2018, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $59$77 million with settlement dates through 2015-2016,2018-2019, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $59$77 million. In accordance with ASC 815-10, we recorded in 2015 an increase2018 a decrease of approximately $1.1$0.3 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as of December 31, 2015,2018, with all other variables held constant, would decreaseincrease the fair value of our net assets denominated in foreign currency, held at December 31, 2015,2018, by approximately $0.75$0.25 million.
In 2016, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $60 million with settlement dates through 2016-2017, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $60 million. In accordance with ASC 815-10, we recorded in 2016 an increase of approximately $0.1 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as of December 31, 2016, with all other variables held constant, would decrease the fair value of our net assets denominated in foreign currency, held at December 31, 2016, by approximately $0.8 million.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modification to the Rights of Security Holders and Use of Proceeds
Not applicable.
Item 15. Controls and Procedures
(a) Our management, including our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016. Based on such review, our chief executive officer2018. The term “disclosure controls and chief financial officer have concludedprocedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we havefile or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in place effectivethe rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the our management, including our principalchief executive officer and principalchief financial officers,officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the foregoing, our chief executive officer and chief financial officer have concluded that, as of December 31, 2018, our disclosure controls and is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
101
procedures were effective.
(b) Our management, under the supervision of our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over our financial reporting,. The Company’s internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act, of 1934, as amended. The Company’s internal control over financial reporting is defined asmeans a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that:
| — | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions; |
| — | provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| — | provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements. |
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of ourOur management including our principal executive officer and principal financial officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this evaluation, we used2018, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management concluded that, the Company’s internal controls over financial reporting were effective as of December 31, 2016.2018, the Company’s internal control over financial reporting was effective.
(c) Kost Forer Gabbay & Kasierer, an independent registered accounting firm and a member firm of Ernst & Young, has issued an attestation report on the effectiveness of our internal control over financial reporting, as stated in their report included herein. See “Report of Independent Registered Public Accounting Firm” on page F-3.
(d) There were no changes in our internal controls over financial reporting identified with the evaluation thereof that occurred during the period covered by this annual report that have materially affected, or are reasonable likely to materially affect our internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that our audit committee includes one audit committee financial expert, as defined by Item 16A of Form 20-F. Our board of directors has determined that Ms. Dafna Gruber is an “audit committee financial expert” as defined by the SEC rules as well as an independent director as such term is defined by Rule 5605(a)(2) of The NASDAQthe Nasdaq Stock Market.Market and has the requisite financial experience as defined by the Nasdaq rules.
The Company has adopted a written code of conduct that applies to all Company employees, including the Company’s directors, principal executive officer, principal financial officer and principal accounting officer.
You may review our code of conduct on our website: http://www.novameasuring.com, under “Corporate/Corporate Governance”.
Item 16C. Principal Accountant Fees and Services
During each of the last twothree fiscal years, Kost Forer Gabbay & Kasierer, an independent registered accounting firm and a member firm of Ernst & Young (“Kost Forer Gabbay & Kasierer”) has acted as our registered public accounting firm and independent auditors.
Audit Fees
The following table provides information regarding fees paid by us to Kost Forer Gabbay & Kasierer for all services, including audit feeservices, for each of the fiscal year 2016years ended December 31, 2017 and 2015 were approximately $250,000 and $240,000, respectively, including2018:
| | 2017 | | | 2018 | |
| | | | | | |
Audit Fees | | $ | 285,000 | | | $ | 310,000 | |
Tax Fees | | | 10,000 | | | $ | 58,000 | |
Other Fees | | | 2,500 | | | $ | 4,000 | |
Total | | $ | 297,500 | | | $ | 372,000 | |
“Audit fees” are fees associated with the annual audit and reviews of the Company’s quarterly consolidated financial results submitted on Form 6-K, consultations on various accounting issues and performance of local statutory audits. The audit fee includeincludes fees associated with the audit of management assessment of internal control over financial reporting, annual tax returns and audit of reports to OCS.
Audit-Related FeesIIA.
103
We did not incur expenses for any audit-related services by Kost Forer Gabbay & Kasierer in 2016 or 2015, except as included under the caption “Audit Fees”.
Tax Fees
We did not incur expenses for any “Tax Fees”. The tax advice services by Kost Forer Gabbay & Kasierer in 2016 or 2015.
All Other Fees
Other than the audit fees described above, we incurred in 2016 fees to Kost Forer Gabbay & Kasierer induring the amount of approximately $9,000 for otheryear ended December 31, 2017 included services related to tax assessment. The tax fees during the year ended December 31, 2018 include services related to ad- hoc tax advice.
“Other Fees” include services related to SEC regulation consulting, IIA application support and Europe funding reporting requirements. In fiscal year 2015 we incurred approximately $28,000 for other fees of Kost Forer Gabbay & Kasierer for services related to SEC regulation consulting and OCS application support.
Pre-Approval Policies for Non-Audit Services
Our audit committee has adopted a pre-approval policy for the engagement of our independent accountant to perform certain services. Pursuant to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, all audit, audit related and tax services must be specifically approved by the audit committee and certain other non-audit, non-audit related and non-tax services may be approved without consideration of specific case-by-case provided certain terms and procedures are met. The Company’s audit committee approved all of the services provided by Kost Forer Gabbay & Kasierer in fiscal years 20162018 and 2015.2017.
Item 16D. Exemptions from the Listing Standards for Audit Committees
The Company has not obtained any exemption from applicable audit committee listing standards.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliates Purchasers
In
March 2014,November 2018, we announced a
$12$25 million repurchase program of
the Company’sour ordinary shares. Through
February 28, 2017,December 31, 2018, we spent an aggregate of
$12$4.8 million to repurchase
1,084,778200,000 ordinary shares under our share repurchase program.
The repurchase program was ended in May 2016. The following table provides information regarding our repurchases of our ordinary shares for each month included in the period covered by this annual report on Form 20-F:
Period | | (a) Total Number of Ordinary Shares Purchased | | | (b)Average Price Paid per Ordinary Share | | | (c)Total Number of Ordinary Shares Purchased as Part of Publicly Announced Plans or Programs | | | (d)Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) | |
January, 2016 | | | -- | | | | -- | | | | -- | | | | -- | |
February, 2016 | | | -- | | | | -- | | | | -- | | | | -- | |
March, 2016 | | | -- | | | | -- | | | | -- | | | | -- | |
April, 2016 | | | -- | | | | -- | | | | -- | | | | -- | |
May, 2016 | | | 81,000 | | | | 11.54 | | | | 1,084,778 | | | | 35 | |
June, 2016 | | | -- | | | | -- | | | | -- | | | | -- | |
July, 2016 | | | -- | | | | -- | | | | -- | | | | -- | |
August, 2016 | | | -- | | | | -- | | | | -- | | | | -- | |
September, 2016 | | | -- | | | | -- | | | | -- | | | | -- | |
October, 2016 | | | -- | | | | -- | | | | -- | | | | -- | |
November, 2016 | | | -- | | | | -- | | | | -- | | | | -- | |
December, 2016 | | | -- | | | | -- | | | | -- | | | | -- | |
Period | | (a) Total Number of Ordinary Shares Purchased | | | (b) Average Price Paid per Ordinary Share | | | (c) Total Number of Ordinary Shares Purchased as Part of Publicly Announced Plans or Programs | | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) | |
| | | | | | | | | | | | |
January-October 2018 | | N\A | | | N\A | | | N\A | | | N\A | |
November 2018 | | | 100,000 | | | $ | 23.51 | | | | 100,000 | | | $ | 22.65 | |
December 2018 | | | 100,000 | | | $ | 24.50 | | | | 200,000 | | | $ | 20.2 | |
Item 16F. Change In Registrant’s Certifying Accountant
See ITEM 16F in our annual report on Form 20-F for the year ended December 31, 2015.
Item 16G. Corporate Governance
There are no significant ways in which the Company’s corporate governance practices differ from those followed by domestic companies listed on Thethe NASDAQNasdaq Global Select Market. However, on August 1, 2017, our board of directors resolved to adopt the 2017 Share Incentive Plan, in connection of which, we have elected to follow home country practice rules which do not require the approval of our shareholders for such action rather than the applicable Nasdaq’s shareholder approval requirement.
Item 16H. Mine Safety Disclosure
Not applicable.
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
See pages F-1 through F-30.
See Exhibit Index.
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 2016
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20162018
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2018
Contents
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| Kost Forer Gabbay & Kasierer 3 Aminadav St.144 Menachem Begin Road, Building A,
Tel-Aviv 6706703,6492102, Israel | Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF NOVA MEASURING INSTRUMENTS LTD.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Nova Measuring Instruments Ltd. and its subsidiaries (collectively, the "Company"(the “Company”) as of December 31, 20162018, and 2015, and2017, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the twothree years in the period ended December 31, 2016. These2018, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements arepresent fairly, in all material respects, the responsibilityfinancial position of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.Company at December 31, 2018, and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We conducted our auditalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report, dated February 28, 2019, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all material respects, the consolidated financial position/s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
A Member of Nova Measuring Instruments Ltd. and its subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.Ernst & Young Global
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),served as the Company's internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)auditor since 2015.
Tel-Aviv, Israel
February 28, and our report dated March 3, 2017, expressed an unqualified opinion thereon.2019
Tel-Aviv, Israel | /s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
|
March 3, 2017 | A Member of Ernst & Young Global |
| Kost Forer Gabbay & Kasierer 3 Aminadav St.144 Menachem Begin Road, Building A,
Tel-Aviv 6706703,6492102, Israel | Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Shareholders of
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF NOVA MEASURING INSTRUMENTS LTD.
Opinion on Internal Control over Financial Reporting
We have audited Nova Measuring Instruments Ltd.'s (the "Company") internal control over financial reporting as of December 31, 2016,2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018, and 2017, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, of the Company and our report dated February 28, 2019, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’sCompany's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
| Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
| Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as/s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
A Member of December 31, 2016, based on the COSO criteria.Ernst & Young Global
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows, for each of the two years in the period ended December 31, 2016, and our report dated March 3, 2017, expressed an unqualified opinion thereon.
Tel-Aviv, Israel | /s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
|
March 3, 2017 | A Member of Ernst & Young GlobalFebruary 28, 2019 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED BALANCE SHEETS We have audited the
| | As of December 31, | |
| | 2 0 1 8 | | | 2 0 1 7 | |
ASSETS | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 22,877 | | | $ | 27,697 | |
Short-term interest-bearing bank deposits | | | 152,951 | | | | 121,390 | |
Trade accounts receivable, net of allowance for doubtful accounts of $94 and $94 at December 31, 2018 and 2017, respectively | | | 53,531 | | | | 40,949 | |
Inventories (Note 3) | | | 41,786 | | | | 34,921 | |
Other current assets | | | 10,432 | | | | 6,951 | |
Total current assets | | | 281,577 | | | | 231,908 | |
| | | | | | | | |
Non-Current assets | | | | | | | | |
Long-term interest-bearing bank deposits | | | 2,000 | | | | 750 | |
Deferred tax assets (Note 10) | | | 3,873 | | | | 1,957 | |
Other long-term assets | | | 529 | | | | 362 | |
Severance pay funds (Note 7) | | | 1,394 | | | | 1,503 | |
Property and equipment, net (Note 4) | | | 13,756 | | | | 13,891 | |
Intangible assets, net (Note 5) | | | 10,187 | | | | 12,800 | |
Goodwill (Note 5) | | | 20,114 | | | | 20,114 | |
Total non-current assets | | | 51,853 | | | | 51,377 | |
| | | | | | | | |
TOTAL ASSETS | | $ | 333,430 | | | $ | 283,285 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Current liabilities | | | | | | | | |
Trade accounts payable | | $ | 19,015 | | | $ | 15,754 | |
Deferred revenues | | | 3,984 | | | | 10,334 | |
Other current liabilities (Note 6) | | | 25,079 | | | | 26,038 | |
Total current liabilities | | | 48,078 | | | | 52,126 | |
| | | | | | | | |
Non-Current liabilities | | | | | | | | |
Accrued severance pay (Note 7) | | | 2,254 | | | | 2,590 | |
Other long-term liability | | | 2,358 | | | | 1,833 | |
Total non-current liabilities | | | 4,612 | | | | 4,423 | |
| | | | | | | | |
Commitments and contingencies (Note 8) | | | | | | | | |
| | | | | | | | |
TOTAL LIABILITIES | | | 52,690 | | | | 56,549 | |
| | | | | | | | |
SHAREHOLDERS’ EQUITY (Note 9) | | | | | | | | |
Ordinary shares, NIS 0.01 par value - Authorized 40,000,000 shares at December 31, 2018 and 2017; Issued and Outstanding 27,917,505, and 27,898,304 at December 31, 2018 and 2017, respectively | | | 74 | | | | 74 | |
Additional paid-in capital | | | 122,312 | | | | 122,426 | |
Accumulated other comprehensive income (loss) | | | (188 | ) | | | 112 | |
Retained earnings | | | 158,542 | | | | 104,124 | |
Total shareholders’ equity | | | 280,740 | | | | 226,736 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 333,430 | | | $ | 283,285 | |
The accompanying consolidated balance sheet of Nova Measuring Instruments LTD. and subsidiaries (the "Company") as of December 31, 2014 and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for the year then ended. These financial statementsnotes are the responsibilityan integral part of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Nova Measuring Instruments LTD. and subsidiaries as of December 31, 2014 and the results of their operations and their cash flows for the year ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.statements.
/s/ Brightman Almagor Zohar & Co.
Brightman Almagor Zohar & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
February 25, 2015
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF OPERATIONS (U.S. dollars in thousands, except per share data)
| | As of December 31, | |
| | 2 0 1 6 | | | 2 0 1 5 | |
ASSETS | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 20,406 | | | $ | 27,733 | |
Short-term interest-bearing bank deposits | | | 70,546 | | | | 69,298 | |
Trade accounts receivable, net of allowance for doubtful accounts of $90 and $124 at December 31, 2016 and 2015, respectively | | | 42,626 | | | | 19,046 | |
Inventories (Note 4) | | | 29,260 | | | | 27,683 | |
Deferred tax assets (Note 10) | | | - | | | | 3,540 | |
Other current assets | | | 4,838 | | | | 2,677 | |
Total current assets | | | 167,676 | | | | 149,977 | |
| | | | | | | | |
Non-Current assets | | | | | | | | |
Long-term interest-bearing bank deposits | | | 750 | | | | 750 | |
Deferred tax assets (Note 10) | | | 3,020 | | | | 5,735 | |
Other long-term assets | | | 230 | | | | 211 | |
Severance pay funds (Note 7) | | | 1,425 | | | | 1,514 | |
Property and equipment, net (Note 5) | | | 10,017 | | | | 11,062 | |
Intangible assets, net (Note 3) | | | 15,361 | | | | 17,906 | |
Goodwill (Note 3) | | | 20,114 | | | | 20,114 | |
Total non-current assets | | | 50,917 | | | | 57,292 | |
| | | | | | | | |
TOTAL ASSETS | | $ | 218,593 | | | $ | 207,269 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Current liabilities | | | | | | | | |
Trade accounts payable | | $ | 16,501 | | | $ | 14,378 | |
Deferred revenues | | | 4,072 | | | | 5,828 | |
Deferred tax liabilities (Note 10) | | | - | | | | 956 | |
Other current liabilities (Note 6) | | | 18,461 | | | | 15,996 | |
Total current liabilities | | | 39,034 | | | | 37,158 | |
| | | | | | | | |
Non-Current liabilities | | | | | | | | |
Accrued severance pay (Note 7) | | | 2,418 | | | | 2,469 | |
Deferred tax liabilities (Note 10) | | | 1,094 | | | | 5,760 | |
Other long-term liability | | | 1,330 | | | | 822 | |
Total non-current liabilities | | | 4,842 | | | | 9,051 | |
| | | | | | | | |
Commitments and contingencies (Note 8) | | | | | | | | |
| | | | | | | | |
TOTAL LIABILITIES | | | 43,876 | | | | 46,209 | |
| | | | | | | | |
SHAREHOLDERS’ EQUITY (Note 9) | | | | | | | | |
Ordinary shares, NIS 0.01 par value - authorized 40,000,000 shares at December 31, 2016 and 2015, 27,351,431 shares issued | | | | | | | | |
and outstanding at December 31, 2016 and 27,093,937 shares issued and outstanding at December 31,2015 | | | 74 | | | | 73 | |
Additional paid-in capital | | | 128,993 | | | | 123,977 | |
Accumulated other comprehensive loss | | | (50 | ) | | | (114 | ) |
Treasury shares | | | (11,965 | ) | | | (11,028 | ) |
Retained earnings | | | 57,665 | | | | 48,152 | |
Total shareholders’ equity | | | 174,717 | | | | 161,060 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 218,593 | | | $ | 207,269 | |
| | Year ended December 31, | |
| | 2 0 1 8 | | | 2 0 1 7 | | | 2 0 1 6 | |
| | | | | | | | | |
Revenues: | | | | | | | | | |
Products | | $ | 193,298 | | | $ | 174,343 | | | $ | 122,439 | |
Services | | | 57,836 | | | | 47,649 | | | | 41,464 | |
Total revenues | | | 251,134 | | | | 221,992 | | | | 163,903 | |
| | | | | | | | | | | | |
Cost of revenues: | | | | | | | | | | | | |
Products | | | 71,706 | | | | 62,242 | | | | 50,386 | |
Services | | | 34,194 | | | | 28,563 | | | | 25,362 | |
Expense related to royalty buyout agreement with the Israel Innovation Authority (Note 8) | | | - | | | | - | | | | 12,875 | |
Total cost of revenues | | | 105,900 | | | | 90,805 | | | | 88,623 | |
| | | | | | | | | | | | |
Gross profit | | | 145,234 | | | | 131,187 | | | | 75,280 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Research and development expenses, net (Note 2m) | | | 45,451 | | | | 38,956 | | | | 34,998 | |
Sales and marketing expenses | | | 28,847 | | | | 24,554 | | | | 21,523 | |
General and administrative expenses | | | 8,735 | | | | 8,100 | | | | 6,835 | |
Amortization of intangible assets (Note 5) | | | 1,759 | | | | 1,758 | | | | 1,758 | |
Total operating expenses | | | 84,792 | | | | 73,368 | | | | 65,114 | |
| | | | | | | | | | | | |
Operating income | | | 60,442 | | | | 57,819 | | | | 10,166 | |
| | | | | | | | | | | | |
Financing income, net | | | 2,984 | | | | 2,276 | | | | 1,216 | |
| | | | | | | | | | | | |
Income before tax on income | | | 63,426 | | | | 60,095 | | | | 11,382 | |
| | | | | | | | | | | | |
Income tax expenses | | | 9,051 | | | | 13,636 | | | | 1,738 | |
| | | | | | | | | | | | |
Net income for the year | | $ | 54,375 | | | $ | 46,459 | | | $ | 9,644 | |
| | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | |
Basic | | $ | 1.94 | | | $ | 1.68 | | | $ | 0.35 | |
Diluted | | $ | 1.89 | | | $ | 1.63 | | | $ | 0.35 | |
| | | | | | | | | | | | |
Shares used in calculation of earnings per share: | | | | | | | | | | | | |
Basic | | | 28,022,486 | | | | 27,695,723 | | | | 27,174,850 | |
Diluted | | | 28,765,329 | | | | 28,524,259 | | | | 27,503,497 | |
The accompanying notes are an integral part of the consolidated financial statements.
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE INCOME (U.S. dollars in thousands, except per share data)thousands)
| | Year ended December 31, | |
| | 2 0 1 6 | | | 2 0 1 5 | | | 2 0 1 4 | |
| | | | | | | | | |
Revenues: | | | | | | | | | |
Products | | $ | 122,439 | | | $ | 111,178 | | | $ | 92,208 | |
Services | | | 41,464 | | | | 37,336 | | | | 28,410 | |
Total revenues | | | 163,903 | | | | 148,514 | | | | 120,618 | |
| | | | | | | | | | | | |
Cost of revenues: | | | | | | | | | | | | |
Products | | | 50,386 | | | | 50,691 | | | | 39,784 | |
Services | | | 25,362 | | | | 20,743 | | | | 17,221 | |
Expense related to royalty buyout agreement with the Office of the Chief Scientist (Note 8) | | | 12,875 | | | | - | | | | - | |
Total cost of revenues | | | 88,623 | | | | 71,434 | | | | 57,005 | |
| | | | | | | | | | | | |
Gross profit | | | 75,280 | | | | 77,080 | | | | 63,613 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Research and development expenses, net (Note 2N) | | | 34,998 | | | | 39,703 | | | | 29,498 | |
Sales and marketing expenses | | | 21,523 | | | | 15,967 | | | | 12,747 | |
General and administrative expenses | | | 6,835 | | | | 8,511 | | | | 4,457 | |
Amortization of intangible assets (Note 3) | | | 1,758 | | | | 1,318 | | | | - | |
Total operating expenses | | | 65,114 | | | | 65,499 | | | | 46,702 | |
| | | | | | | | | | | | |
Operating income | | | 10,166 | | | | 11,581 | | | | 16,911 | |
| | | | | | | | | | | | |
Financing income, net | | | 1,216 | | | | 643 | | | | 563 | |
| | | | | | | | | | | | |
Income before tax on income | | | 11,382 | | | | 12,224 | | | | 17,474 | |
| | | | | | | | | | | | |
Income tax expenses (benefit) | | | 1,738 | | | | (3,501 | ) | | | (1,178 | ) |
| | | | | | | | | | | | |
Net income for the year | | $ | 9,644 | | | $ | 15,725 | | | $ | 18,652 | |
| | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | |
Basic | | $ | 0.35 | | | $ | 0.58 | | | $ | 0.68 | |
Diluted | | $ | 0.35 | | | $ | 0.57 | | | $ | 0.67 | |
| | | | | | | | | | | | |
Shares used in calculation of earnings per share: | | | | | | | | | | | | |
Basic | | | 27,175 | | | | 27,185 | | | | 27,447 | |
Diluted | | | 27,503 | | | | 27,510 | | | | 27,807 | |
| | Year ended December 31, | |
| | 2 0 1 8 | | | 2 0 1 7 | | | 2 0 1 6 | |
| | | | | | | | | |
Net income for the year | | $ | 54,375 | | | $ | 46,459 | | | $ | 9,644 | |
| | | | | | | | | | | | |
Other comprehensive income (loss) ("OCI") (Note 13) related to: | | | | | | | | | | | | |
Unrealized gain (loss) from cash flow hedges | | | (489 | ) | | | 863 | | | | 114 | |
Less: reclassification adjustment for net gain (loss) included in net income (loss) | | | 189 | | | | (701 | ) | | | (50 | ) |
Other comprehensive income (loss) | | | (300 | ) | | | 162 | | | | 64 | |
Total comprehensive income for the year | | $ | 54,075 | | | $ | 46,621 | | | $ | 9,708 | |
The accompanying notes are an integral part of the consolidated financial statements.
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN COMPREHENSIVE INCOMESHAREHOLDERS’ EQUITY (U.S. dollars in thousands, except per share data)amounts)
| | Year ended December 31, | |
| | 2 0 1 6 | | | 2 0 1 5 | | | 2 0 1 4 | |
| | | | | | | | | |
Net income for the year | | $ | 9,644 | | | $ | 15,725 | | | $ | 18,652 | |
| | | | | | | | | | | | |
Other comprehensive income (loss) ("OCI") related to: | | | | | | | | | | | | |
Gain (loss) recognized in OCI (Note 13) | | | 114 | | | | (142 | ) | | | (1,844 | ) |
Gain (loss) reclassified from OCI to income (Note 13) | | | (50 | ) | | | 1,205 | | | | 126 | |
Other comprehensive income (loss) | | | 64 | | | | 1,063 | | | | (1,718 | ) |
| | | | | | | | | | | | |
Total comprehensive income for the year | | $ | 9,708 | | | $ | 16,788 | | | $ | 16,934 | |
| | | | | | | | Accumulated | | | | | | | |
| | Ordinary | | | Additional | | | Other | | | | | | Total | |
| | Shares | | | Paid-in | | | Comprehensive | | | Retained | | | Shareholders’ | |
| | Number | | | Amount | | | Capital | | | Income (Loss) | | | Earnings | | | Equity | |
| | | | | | | | | | | | | | | | | | |
Balance as of January 1, 2016 | | | 27,093,937 | | | $ | 73 | | | $ | 112,949 | | | $ | (114 | ) | | $ | 48,152 | | | $ | 161,060 | |
Cumulative effect to share based compensation from adoption of a new accounting standard | | | - | | | | - | | | | 131 | | | | - | | | | (131 | ) | | | - | |
Issuance of shares in connection with employee share-based plans | | | 268,022 | | | | 1 | | | | 2,151 | | | | - | | | | - | | | | 2,151 | |
Issuance of shares upon exercise of options | | | 70,472 | | | | (* | ) | | | (* | ) | | | - | | | | - | | | | (* | ) |
Share based compensation | | | - | | | | - | | | | 2,735 | | | | - | | | | - | | | | 2,735 | |
Share repurchase | | | (81,000 | ) | | | (* | ) | | | (937 | ) | | | - | | | | - | | | | (937 | ) |
Other comprehensive income | | | - | | | | - | | | | - | | | | 64 | | | | - | | | | 64 | |
Net income for the year | | | - | | | | - | | | | - | | | | - | | | | 9,644 | | | | 9,644 | |
Balance as of December 31, 2016 | | | 27,351,431 | | | | 74 | | | | 117,028 | | | | (50 | ) | | | 57,665 | | | | 174,717 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares in connection with employee share-based plans | | | 457,810 | | | | (* | ) | | | 2,619 | | | | - | | | | - | | | | 2,619 | |
Issuance of shares upon exercise of options | | | 89,063 | | | | (* | ) | | | (* | ) | | | - | | | | - | | | | | |
Share based compensation | | | - | | | | - | | | | 2,779 | | | | - | | | | - | | | | 2,779 | |
Other comprehensive income | | | - | | | | - | | | | - | | | | 162 | | | | - | | | | 162 | |
Net income for the year | | | - | | | | - | | | | - | | | | - | | | | 46,459 | | | | 46,459 | |
Balance as of December 31, 2017 | | | 27,898,304 | | | | 74 | | | | 122,426 | | | | 112 | | | | 104,124 | | | | 226,736 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative effect from adoption of a new accounting standard – ASC 606 (Note 2l) | | | - | | | | - | | | | - | | | | - | | | | 43 | | | | 43 | |
Issuance of shares in connection with employee share-based plans | | | 99,285 | | | | (* | ) | | | 361 | | | | - | | | | - | | | | 361 | |
Issuance of shares upon exercise of options | | | 119,916 | | | | (* | ) | | | (* | ) | | | - | | | | - | | | | | |
Share based compensation | | | - | | | | - | | | | 4,326 | | | | - | | | | - | | | | 4,326 | |
Share repurchase at cost | | | (200,000 | ) | | | (* | ) | | | (4,801 | ) | | | - | | | | - | | | | (4,801 | ) |
Other comprehensive income | | | - | | | | - | | | | - | | | | (300 | ) | | | - | | | | (300 | ) |
Net income for the year | | | - | | | | - | | | | - | | | | - | | | | 54,375 | | | | 54,375 | |
Balance as of December 31, 2018 | | | 27,917,505 | | | $ | 74 | | | $ | 122,312 | | | $ | (188 | ) | | $ | 158,542 | | | $ | 280,740 | |
(*) Less than $1
The accompanying notes are an integral part of the consolidated financial statements.
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY(U.S. dollars in thousands, except share amounts which are reflected in thousands)
| | | | | | | | Accumulated | | | | | | | | | | |
| | Ordinary | | | Additional | | | Other | | | | | | | | | Total | |
| | Shares | | | Paid-in | | | Comprehensive | | | Treasury | | | Retained | | | Shareholders’ | |
| | Number | | | Amount | | | Capital | | | Income (Loss) | | | Shares | | | Earnings | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | |
Balance as of January 1, 2014 | | | 27,281 | | | | 72 | | | | 114,276 | | | | 541 | | | | - | | | | 13,775 | | | | 128,664 | |
Issuance of shares in connection with employee share-based plans | | | 474 | | | | 1 | | | | 2,585 | | | | | | | | | | | | | | | | 2,586 | |
Issuance of shares upon exercise of options | | | 22 | | | | (* | ) | | | (* | ) | | | | | | | | | | | | | | | (* | ) |
Stock based compensation | | | | | | | | | | | 2,124 | | | | | | | | | | | | | | | | 2,124 | |
Share repurchase | | | (640 | ) | | | | | | | | | | | | | | | (6,726 | ) | | | | | | | (6,726 | ) |
Other comprehensive income | | | | | | | | | | | | | | | (1,718 | ) | | | | | | | | | | | (1,718 | ) |
Net income for the year | | | | | | | | | | | | | | | | | | | | | | | 18,652 | | | | 18,652 | |
Balance as of December 31, 2014 | | | 27,137 | | | | 73 | | | | 118,985 | | | | (1,177 | ) | | | (6,726 | ) | | | 32,427 | | | | 143,582 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares in connection with employee share-based plans | | | 288 | | | | 1 | | | | 2,318 | | | | | | | | | | | | | | | | 2,319 | |
Issuance of shares upon exercise of options | | | 33 | | | | (* | ) | | | (* | ) | | | | | | | | | | | | | | | (* | ) |
Stock based compensation | | | | | | | | | | | 2,674 | | | | | | | | | | | | | | | | 2,674 | |
Share repurchase | | | (364 | ) | | | (1 | ) | | | | | | | | | | | (4,302 | ) | | | | | | | (4,303 | ) |
Other comprehensive income | | | | | | | | | | | | | | | 1,063 | | | | | | | | | | | | 1,063 | |
Net income for the year | | | | | | | | | | | | | | | | | | | | | | | 15,725 | | | | 15,725 | |
Balance as of December 31, 2015 | | | 27,094 | | | | 73 | | | | 123,977 | | | | (114 | ) | | | (11,028 | ) | | | 48,152 | | | | 161,060 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares in connection with employee share-based plans | | | 268 | | | | 1 | | | | 2,150 | | | | | | | | | | | | | | | | 2,151 | |
Issuance of shares upon exercise of options | | | 70 | | | | (* | ) | | | (* | ) | | | | | | | | | | | | | | | (* | ) |
Stock based compensation | | | | | | | | | | | 2,735 | | | | | | | | | | | | | | | | 2,735 | |
Share repurchase | | | (81 | ) | | | (* | ) | | | | | | | | | | | (937 | ) | | | | | | | (937 | ) |
Cumulative effect to stock based compensation from adoption of a new accounting standard (Note 2P) | | | | | | | | | | | 131 | | | | | | | | | | | | (131 | ) | | | - | |
Other comprehensive income | | | | | | | | | | | | | | | 64 | | | | | | | | | | | | 64 | |
Net income for the year | | | | | | | | | | | | | | | | | | | | | | | 9,644 | | | | 9,644 | |
Balance as of December 31, 2016 | | | 27,351 | | | | 74 | | | | 128,993 | | | | (50 | ) | | | (11,965 | ) | | | 57,665 | | | | 174,717 | |
(*) Less than $1
The accompanying notes are an integral part of the consolidated financial statements.
NOVA MEASURING INSTRUMENTS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in thousands)
| | Year ended December 31, | | | Year ended December 31, | |
| | 2 0 1 6 | | | 2 0 1 5 | | | 2 0 1 4 | | | 2 0 1 8 | | | 2 0 1 7 | | | 2 0 1 6 | |
| | | | | | | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Net income for the year | | $ | 9,644 | | | $ | 15,725 | | | $ | 18,652 | | | $ | 54,375 | | | $ | 46,459 | | | $ | 9,644 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation | | | 4,049 | | | | 4,597 | | | | 3,951 | | | | 5,071 | | | | 3,618 | | | | 4,049 | |
Amortization of acquired intangible assets | | | 2,545 | | | | 5,023 | | | | - | | | | 2,613 | | | | 2,561 | | | | 2,545 | |
Loss related to equipment | | | 222 | | | | - | | | | - | | | | - | | | | - | | | | 222 | |
Stock-based compensation | | | 2,735 | | | | 2,674 | | | | 2,124 | | |
Loss (gain) on securities | | | - | | | | (10 | ) | | | 175 | | |
Share-based compensation | | | | 4,326 | | | | 2,779 | | | | 2,735 | |
Change in deferred tax assets, net | | | 633 | | | | (5,046 | ) | | | (1,626 | ) | | | (1,916 | ) | | | (31 | ) | | | 633 | |
Increase (decrease) in accrued severance pay, net | | | 38 | | | | 70 | | | | (71 | ) | |
Increase (decrease) in accrued severance pay, net | | | | (227 | ) | | | 94 | | | | 38 | |
Decrease (increase) in trade accounts receivables, net | | | (23,580 | ) | | | (1,959 | ) | | | 12,381 | | | | (12,539 | ) | | | 1,677 | | | | (23,580 | ) |
Decrease (increase) in inventories | | | (1,670 | ) | | | (1,949 | ) | | | 2,226 | | |
Decrease (increase) in other current and long-term assets | | | (2,180 | ) | | | 370 | | | | 408 | | |
Increase in inventories | | | | (8,123 | ) | | | (6,858 | ) | | | (1,670 | ) |
Increase in other current and long-term assets | | | | (3,648 | ) | | | (2,245 | ) | | | (2,180 | ) |
Increase (decrease) in trade accounts payables | | | 2,123 | | | | 1,604 | | | | (4,038 | ) | | | 3,261 | | | | (747 | ) | | | 2,123 | |
Increase in other current and long-term liabilities | | | 3,037 | | | | 3,329 | | | | 64 | | |
Increase (decrease) in other current and long-term liabilities | | | | (734 | ) | | | 8,242 | | | | 3,037 | |
Increase (decrease) in short term deferred revenues | | | (1,756 | ) | | | 1,361 | | | | (703 | ) | | | (6,350 | ) | | | 6,262 | | | | (1,756 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (4,160 | ) | | | 25,789 | | | | 33,543 | | | | 36,109 | | | | 61,811 | | | | (4,160 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from investment activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Decrease (increase) in short-term interest-bearing bank deposits | | | (1,248 | ) | | | 37,991 | | | | (27,737 | ) | |
Proceeds from short-term available for sale securities | | | - | | | | - | | | | 1,617 | | |
Proceeds from (investments in) short-term held for trading securities | | | - | | | | 2,005 | | | | (1,942 | ) | |
Acquisition of subsidiary, net of acquired cash (Note 3) | | | - | | | | (45,344 | ) | | | - | | |
Increase in short-term interest-bearing bank deposits | | | | (31,561 | ) | | | (50,844 | ) | | | (1,248 | ) |
Additions to property and equipment | | | (3,133 | ) | | | (4,373 | ) | | | (5,234 | ) | | | (3,678 | ) | | | (6,295 | ) | | | (3,133 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (4,381 | ) | | | (9,721 | ) | | | (33,296 | ) | | | (35,239 | ) | | | (57,139 | ) | | | (4,381 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Purchases of treasury shares | | | (937 | ) | | | (4,303 | ) | | | (6,726 | ) | | | (4,801 | ) | | | - | | | | (937 | ) |
Shares issued under employee share-based plans | | | 2,151 | | | | 2,319 | | | | 2,586 | | | | 361 | | | | 2,619 | | | | 2,151 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 1,214 | | | | (1,984 | ) | | | (4,140 | ) | | | (4,440 | ) | | | 2,619 | | | | 1,214 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | (7,327 | ) | | | 14,084 | | | | (3,893 | ) | |
Cash and cash equivalents - beginning of year | | | 27,733 | | | | 13,649 | | | | 17,542 | | |
Cash and cash equivalents - end of year | | $ | 20,406 | | | $ | 27,733 | | | $ | 13,649 | | |
Increase (decrease) in cash and cash equivalents and restricted cash | | | | (3,570 | ) | | | 7,291 | | | | (7,327 | ) |
Cash, cash equivalents and restricted cash - beginning of year | | | | 28,447 | | | | 21,156 | | | | 28,483 | |
Cash and cash equivalents and restricted cash- end of year | | | $ | 24,877 | | | $ | 28,447 | | | $ | 21,156 | |
| | | | | | | | | | | | | |
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheet | | | | | | | | | | | | | |
Cash and cash equivalents | | | $ | 22,877 | | | $ | 27,697 | | | $ | 20,406 | |
Restricted cash included in Long-term interest-bearing bank deposits | | | | 2,000 | | | | 750 | | | | 750 | |
Total cash, cash equivalents, and restricted cash | | | $ | 24,877 | | | $ | 28,447 | | | $ | 21,156 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid during the year for income taxes | | $ | 1,902 | | | $ | 83 | | | $ | 136 | | | $ | 13,048 | | | $ | 8,158 | | | $ | 1,902 | |
The accompanying notes are an integral part of the consolidated financial statements.
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. dollars in thousands,, except share and per share data)data)
NOTE 1 - GENERAL
Business Description:
Nova Measuring Instruments Ltd. (the “Company”(”Nova” or the “Parent Company”) was incorporated in May 1993 and commenced operations in October 1993 in the design, development and production of integrated process control systems, used in the manufacturing of semiconductors. In October 1995,Nova has wholly owned subsidiaries in the Company began manufacturingUnited States of America (the “U.S.”), Japan, Taiwan, Korea and marketing its systems. In recent years,Germany (together defined as the Company expanded its product offering to include stand-alone systems.“Company”).
The Company continues research and development for the next generation of its products and additional applications for such products. The Company operates in one operating segment.
The Company has wholly owned subsidiaries in the United States of America (the “U.S.”), Japan, Taiwan, Korea and Germany. In 2016, the wholly owned subsidiary in the Netherlands was liquidated. The subsidiaries (the “subsidiaries”) are engaged in pre-sale activities and providing technical support to customers.
On April 2, 2015, the Company completed the acquisition of 100% shares of ReVera Inc. (hereinafter – ReVera) a privately-held U.S. company. For more details see Note 3.On December 31, 2017, ReVera, merged into Nova Measuring Instruments, Inc.
The ordinary shares of the Company are traded on Thethe NASDAQ Global Market since April 2000 and on the Tel-Aviv Stock Exchange since June 2002.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America.
The following is a summary of the significant accounting policies, which were applied in the preparation of these financial statements, on a consistent basis:
| A. | Principles of Consolidation and Basis of Presentation |
The Company’s consolidated financial statements include the financial statements of the Parent Company and its wholly owned subsidiaries (“the Company”), after elimination of materialsubsidiaries. All intercompany balances and transactions and balances.have been eliminated.
| B. | Use of Estimates in the Preparation of Financial Statements |
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The Company's management evaluates its estimates on an ongoing basis, including those related to, but not limited to income taxes and tax uncertainties, collectability of accounts receivable, inventory accruals, fair value and useful lives of intangible assets, and revenue recognition. These estimates are based on management's knowledge about current events and expectations about actions the Company may undertake in the future. Actual results could differ from those estimates.
| C. | Financial Statements in U.S. Dollars |
The currency of the primary economic environment in which the operations of the Company and its subsidiaries are conducted is the U.S. dollar (the “dollar”). Accordingly, the Company uses the dollar as its functional and reporting currency. Certain of the dollar amounts in the financial statements may represent the dollar equivalent of other currencies, including the New Israeli Shekel (“NIS”).
Transactions and balances denominated in dollars are presented at their dollar amounts. Non-dollar transactions and balances are re-measured into dollars in accordance with the principles set forth in Accounting Standards Codification Topic No.ASC 830, (“ASC 830”), “Foreign Currency Translation”.
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
All transaction gains and losses of the re-measured monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate.
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| D. | Cash and Cash Equivalents, and restricted cash |
Cash and cash equivalents represent short-term highly liquid investments (mainly interest-bearing deposits) with maturity dates not exceeding three months from the date of deposit.
Certain restricted cash balances are presented within long-term interest-bearing bank deposits
on the consolidated balance sheets based upon the term of the remaining restrictions. The restricted cash balance is related to lease obligations.
| E. | Short Term Bank Deposit |
Short term bank deposits consist of bank deposits with original maturities of more than three months and up to twelve months.
| F. | Allowance for Doubtful Accounts |
Trade accounts receivables are stated at realizable value, net of an allowance for doubtful accounts. The Company evaluates its outstanding accounts receivable and establishes an allowance for doubtful accounts is computedaccording to specific identification basis, based on information available on the specific identification basis.relevant customer credit condition, current aging, historical experience and based on Company policy. These allowances are re-evaluated and adjusted periodically as additional information is available.
The companyCompany accounts for business combination in accordance with ASC No, 805, “Business Combination” (ASC 805). ASC No. 805 requires recognition of assets acquired and liabilities assumed at the acquisition date, measured at their fair values as of that date. Any access of the fair value of net assets acquired over purchased price and any subsequent changes in estimated contingencies are to be recorded in the consolidated statements of operations.
Inventories are presentedstated at the lower of cost or market. net realizable value. Inventory write-downs are provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories, discontinued products, and for market prices lower than cost, if any. The Company periodically evaluates the quantities on hand relative to historical and projected sales volume (which is determined based on an assumption of future demand and market conditions) and the age of the inventory. At the point of the loss recognition, a new lower cost basis for that inventory is established. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.
Inventory includes costs of products delivered to customers and not recognized as cost of sales, where revenues in the related arrangements were not recognized.
Cost is determined as follows:
Raw materials-on the average cost basis. | · | Raw materials – based on the moving average cost method. |
| · | Finished goods and work in process – based on actual production cost basis (materials, labor and indirect manufacturing costs). |
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and work in process - on actual production cost basis (materials, labor and indirect manufacturing costs).per share data)
The Company writes down product inventory, based on slow moving items, and assumptions about future demands and market conditions.NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Property and equipment are presented at cost, net of accumulated depreciation. Annual depreciation is calculated based on the straight-line method over the shorter of the estimated useful lives of the related assets. Estimated useful life, in years, is as follows:
| Years |
| |
Electronic equipment | 3-7 |
Office furniture and equipment | 7-157-17 |
Leasehold improvements | Over the shorter of the term of the lease or the useful life of the asset |
Depreciation methods, useful lives and residual values are reviewed at the end each reporting year and adjusted if appropriate.
| J. | Goodwill and Intangible Assets |
Goodwill and other purchased intangible assets have been recorded as a result of the acquisition of ReVera. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired, and related liabilities.
Goodwill is not amortized, but rather is subject to an impairment test, in accordance with ASC 350, “Intangibles – Goodwill and Other”, at least annually (in the fourth quarter), or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Company has an option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value prior to performing the quantitative goodwill impairment test. The Company operates in one operating segment, and this segment comprises its only reporting unit.
Following the adoption of ASU 2017-04, "Simplifying the Test for Goodwill Impairment", any excess of the carrying value of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to the fair value of the reporting unit.
Intangible assets with finite life (refer to note 2T for impairment assessment of Intangible assets with finite life) are amortized over their useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used, or, if that pattern cannot be reliably determined, using a straight-line amortization method.
| | Weighted Average Useful Life (Years) |
Technology | | 7 |
Customer relationships | | 10 |
Backlog | | 1 |
IPR&D | | | (*) |
(*) To be determined upon successful launch of the related product, subject to annual impairment assessment.
IPR&D is tested for impairment annually or more frequently when indicators of impairment exist. The Company first assesses qualitative factors to determine if it is more likely than not that the IPR&D is impaired and whether it is necessary to perform a quantitative impairment test. The qualitative assessment considers various factors, including changes in demand, the abandonment of the IPR&D or significant economic slowdowns in the semiconductor industry and macroeconomic environment. If adverse qualitative trends are identified that could negatively impact the fair value of the asset, then quantitative impairment test is performed to compare the carrying value of the asset to its undiscounted expected future cash flows.
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
If this test indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using discounted expected future cash flows utilizing an appropriate discount rate.
No impairment losses have been identified during 2016, 2017 and 2018 relating to goodwill and IPR&D.
Accrued warranty costs are calculated inwith respect ofto the warranty period on the Company’s products and are based on the Company’s prior experience and in accordance with management’s estimate. The estimated future warranty obligations are affected by the warranty periods, install base, labor and other related costs incurred in correcting a product failure.
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Intangible assets that are not considered to have an indefinite useful life are amortized using mainly the straight-line basis over their estimated useful lives, as noted below. Recoverability of these assets is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated by the assets. If the assets are considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets.
| Weighted Average Useful Life (Years) |
Technology | 7 |
Customer relationships | 10 |
Backlog | Per occurrence |
IPR&D | (*) |
(*) Will be determined upon successful launch of the related product.
As of December 31, 2016 and 2015 no impairment losses were identified.
Goodwill and certain other purchased intangible assets have been recorded as a result of acquisitions of ReVera. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill is not amortized, but rather is subject to an impairment test. The Company performs an annual impairment test during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present. The Company operates in one operating segment, and this segment comprises its only reporting unit.
ASC 350, "Intangibles – Goodwill and Other", prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment, while the second phase (if necessary) measures impairment. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. In such case, the second phase is then performed, and the Company measures impairment by comparing the carrying amount of the reporting unit's goodwill to the implied fair value of that goodwill. An impairment loss is recognized in an amount equal to the excess. The Company has an option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more-likely-than-not that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.
For the period ended December 31, 2016 and for the period ended December 31, 2015 the Company performed an annual impairment analysis and no impairment losses have been identified.
RevenuesAdoption of ASC 606
Effective January 1, 2018, the Company adopted ASU No. 2014-9, “Revenue from Contracts with Customers” and the related amendments (“ASC 606”) which supersedes ASC 605, "Revenue Recognition", using the modified retrospective method. ASC 606 was applied to all uncompleted contracts as of January 1, 2018, by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings at January 1, 2018 and a reduction of $43 in the deferred revenues balance. As part of its assessment process, the Company identified a change in the timing of revenue recognition associated with certain transactions in which recognition was previously subject to final acceptance from the salecustomer. Following the adoption of productsASC 606, the associated revenues are recognized when allupon delivery.
The Company applied the following criteriapractical expedient for incremental costs of obtaining contracts, in which the associated asset would have been met: a persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, collection of resulting receivables is probable and there are no remaining significant obligations.amortized over up to one year.
AllocationResults for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period have not been adjusted and continue to be reported in accordance with ASC 605 guidance. As of arrangement consideration amongDecember 31, 2018, the balance sheet changes attributable to ASC 606 related to accounts receivable and deferred revenue were not materially different than the impact upon adoption. In addition, the application of ASC 606 did not have a material impact to either the Company's revenues, cost of sales or its operating expenses during 2018.
Revenue Recognition Policy
The Company enters into revenue arrangements that include products and services which are generally distinct and accounted for as separate units of accounting isperformance obligations. The Company determines whether arrangements are distinct based on their relative selling prices. whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether the Company's commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract.
The selling price for each unitcompany derives revenue from sales of accounting is determined based onadvanced process control systems, spare parts, labor hours (mainly related to installation) and service contracts.
Revenues derived from sales of advanced process control systems, spare parts and labor hour are recognized at a selling price hierarchy using either vendor specific objective evidence (“VSOE”) of selling price, third party evidence of selling price (“TPE”) or the vendor’s best estimate of estimated selling price (“ESP”) for that deliverable. Usepoint in time, when control of the residual methodpromised goods or services is prohibited.transferred to the customers, upon fulfillment of the contractual terms (typically upon shipment of the systems and spare parts or when the service is completed for labor hours).
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands,, except share and per share data)data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| M. | Revenue Recognition. (Cont.) |
The objective of ESP is to determine the price at which the Company would transact a sale if the product orRevenues derived from service were sold on a stand-alone basis.
Revenues from Service contracts, generally specify fixed payment amounts for periods longer than one month, and are recognized on a straight line basisratably over time in accordance with the term of the contract.contract since the Company has a stand-ready obligation to provide the service. Such contracts generally include a fixed fee.
Revenues from sales which were not yet determined to be final sales due to certain acceptance provisions are deferreddeferred.
Significant Judgments - Contracts with Multiple Performance Obligations
Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative Standalone Selling Price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. The Company uses a range of amounts to estimate SSP when it sells each of the products and included in deferred revenues. In cases where collectabilityservices separately and needs to determine whether there is not probable,a discount to be allocated based on the relative SSP of the various products and services.
Remaining Performance Obligations
Remaining performance obligations (RPOs) represent contracted revenues are deferred and recognized upon collection.
Deferred revenues include amounts invoiced to customers for which revenue hasthat had not yet been recognized.recognized and include deferred revenues and invoices that have been issued to customers but were uncollected and have not been recognized as revenues. As of December 31, 2018, the aggregate amount of the RPOs was $7,983 comprised of $3,985 deferred revenues and $3,998 of uncollected amounts that were not recognized yet as revenues. The Company expects the RPO to be recognized as revenues over the next year.
Contract Balances
Contract balances are presented separately on the consolidated balance sheets.
Revenues recognized during 2018 from amounts included within the deferred revenues balance at the beginning of the period amounted to $21,639.
The Company’s general payment terms are less than 1 year; therefore, the company doesn’t record any financing components.
For more disaggregated information of revenues refer to Note 11.
| N.M. | Research and Development |
Research and development costs are charged to operations as incurred. Amounts received or receivable from the Government of Israel through the Israeli Innovation Authority (“IIA”, formerly known as the Office of the Chief Scientist (“OCS”)Scientist) or from the European Community as participation in certain research and development programs are offset against research and development costs. The accrual for grants receivable is determined based on the terms of the programs, provided that the criteria for entitlement are expected to be met. Royalty expenses are determined based on actual revenues and presented in cost of revenues. During 2016 the Company entered into a royalty buyout agreement with the OCS referIsrael Innovation Authority (“IIA”). Refer to note 8A for further details. Research and development grants recognized during the years ended December 31, 2018, 2017 and 2016 2015were $5,763, $4,634 and 2014 were $4,261 $1,237 and $3,490, respectively.
The Company accounts for income taxes utilizing the asset and liability method in accordance with ASC 740, “Income Taxes”. Current tax liabilities are recognized for the estimated taxes payable on tax returns for the current year. Deferred tax liabilities or assets are recognized for the estimated future tax effects attributable to temporary differences between the income tax bases of assets and liabilities and their reported amounts in the financial statements, and for tax loss carryforwards.
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax laws, and deferred tax assets are reduced, if necessary, by the amount of tax benefits, the realization of which is not considered more likely than not based on available evidence.
ASC 740-10 requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.
ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, requires a reporting entity to classify all deferred tax assets and liabilities as noncurrent in a classified balance sheet.
| P.O. | Share-Based Compensation |
The Company accounts for equity basedequity-based compensation using ASC 718-10 “Share-Based Payment,” which requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant-date fair value of those awards.
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| P. | Share-Based Compensation (Cont.) |
StockShare Options
Under ASC 718, the fair market value of each option grant is estimated on the date of grant using the “Black-Scholes option pricing” method with the following weighted-average assumptions:
| 2 0 1 6 | | 2 0 1 5 | | 2 0 1 4 | | 2 0 1 8 | | | 2 0 1 7 | | | 2 0 1 6 | |
Risk-free interest rate | 1.08% | | 1.41% | | 1.61% | | | 2.79% | | | | 1.81% | | | | 1.08% | |
Expected life of options | 4.62 years | | 4.62 years | | 4.75 years | | 4.76 years | | | 4.70 years | | | 4.62 years | |
Expected volatility | 28.41% | | 35.67% | | 45.29% | | | 31.82% | | | | 28.01% | | | | 28.41% | |
Expected dividend yield | 0% | | 0% | | 0% | | | 0% | | | | 0% | | | | 0% | |
Expected volatility was calculated based on actual historical share price movements over a term that is equivalent to the expected term of granted options. The expected term of options granted is based on historical experience and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.
The Company elected to early adopt ASU-2016-19 starting January 1, 2016 and to account for forfeitures as they occur. The net cumulative effect of this change, in a total amount of $131 thousands, was recognized as a reduction to retained earnings as of January 1, 2016.
Earnings per share are presented in accordance with ASC 260-10, “Earnings per Share”. Pursuant to which, basic earnings per share excludes the dilutive effects of convertible securities and is computed by dividing income (loss) available to common shareholders by the weighted-average number of ordinary shares outstanding for the period, net of treasury shares. Diluted earnings per share reflect the potential dilutive effect of all convertible securities. The number of potentially dilutive securities excluded from diluted earnings per share due to the anti-dilutive effect of out of the money options amounted to 446,301 in 2018, 275,594 in 2017 and 1,134,971 in 2016, 946,8292016.
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in 2015thousands, except share and 526,381 in 2014.per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Basic earnings per share in 2018, 2017 and 2016 2015were $1.94, $1.68 and 2014 were $0.35 $0.58 and $0.68 respectively. Diluted earnings per share in 2018, 2017 and 2016 2015were $1.89, $1.63 and 2014 were $0.35 $0. 57 and $0. 67 respectively.
Treasury shares are recorded at cost and presented as a reduction of shareholders' equity.
| S.Q. | Concentrations of Credit Risk |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, bank deposits, trade receivables and foreign currency derivative contracts.
The majority of the Company’s cash and cash equivalents and bank deposits are invested in dollar instruments with major banks in Israel. Management believes that the financial institutions that hold the Company's investments are corporations with high credit standing. Accordingly, management believes that low credit risk exists with respect to these financial investments.
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| S. | Concentrations of Credit Risk (Cont.) |
The trade receivables of the Company are derived from sales to customers located primarily in Taiwan R.O.C., Korea, China and USA. The management of the Company performed risk assessment on an ongoing basis and believes it bears low risk.
The Company entered into options and forward contracts to hedge against the risk of overall changes in future cash flow from payments of payroll and related expenses as well as other expenses denominated in NIS. The derivative instruments hedge a portion of the Company's non-dollar currency exposure. Counterparty to the Company’s derivative instruments is major financial institution.
| T.R. | Fair Value Measurements |
The fair values of the Company cash and cash equivalents, accounts receivable, and accounts payable approximate their carrying amounts due to their short-term nature.
The Company follows the provisions of ASC No. 820, “Fair Value Measurement” (“ASC 820”), which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In determining a fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions that market participants would use in pricing an asset or liability, based on the best information available under given circumstances.
The hierarchy is broken down into three levels, based on the observability of inputs and assumptions, as follows:
Level 1 - Observable inputs obtained from independent sources, such as quoted prices for identical assets and liabilities in active markets.
Level 2 - Other inputs that are directly or indirectly observable in the market place.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The estimated fair values of the derivative instruments are calculateddetermined based on market rates to settle the instruments. These values represent the estimated amounts the Company would receive upon sale or pay upon transfer, taking into consideration current market rates. The Company calculate derivative asset and liability amounts using a variety of valuation techniques, depending on the specific characteristics of the hedging instrument, taking into account credit risk. The fair value of the Company derivative contracts (including forwards and options) is determined using standard valuation models. The significant inputs used in these models are readily available in public markets or can be derived from observable market transactions and, therefore, the Company derivative contracts have been classified as Level 2.
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Inputs used in these standard valuation models include the applicable spot, forward, and discount rates. The standard valuation model for the Company optionoptions contracts also includes implied volatility, which is specific to individual options and is based on rates quoted from a widely used third-party resource.
| U.S. | Derivative Financial Instruments |
ASC 815 requires the presentation of all derivatives as either assets or liabilities on the balance sheet and the measurement of those instruments at fair value.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings (as part of the financing income, net, in the consolidated statement of operations) during the period of change. See Note 13 for disclosure of the derivative financial instruments in accordance with such pronouncements.
| V.T. | Impairment of Long-Lived Assets |
Long-lived assets (tangible and intangible assets with finite life), held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets (or asset Company)Group) may not be recoverable. In the event that the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment charge would be recognized, and the assets (or asset Company)Group) would be written down to their estimated fair values.
The Company performed an impairment review and did not identify any indicators.
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except shareindicators for impairment as of each of 2018, 2017 and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES2016.
| W.U. | New Accounting Pronouncements |
Recently adopted
In 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. The standard provides companies with a single model for accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. In 2016, the FASB issued four amendments to the ASU. The standard is effective for public companies for annual periods beginning after December 15, 2017. The Company will adopt this ASU effective January 1, 2018. The guidance is required to be adopted on either a full or modified retrospective basis. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company does not expect that this new guidance will have a material impact onadopted the Company’s consolidated Financial Statements.ASU in 2018.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard that changes the accounting for certain aspects of share-based payments to employees (ASU No. 2016-19). The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled. The standard also allows the Company to repurchase more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the Company’s cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016. The Company elected to early adopt the new guidance in 2016, which requires the Company to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the year of adoption. The Company elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The net cumulative effect of this change was recognized as a $131 thousands reduction to retained earnings as of January 1, 2016.
In 2015,2017, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.2017-04, Simplifying the Test for Goodwill Impairment. Under this ASU,the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity is required to classifydetermine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all deferred taxof its assets and liabilities as noncurrentif that reporting unit had been acquired in a classified balance sheet. Current guidance requiring the offsetting of deferred tax assets and liabilities of a tax-paying component of an entity and presentation as a single noncurrent amount is not affected. The Company early adopted this ASU prospectively and the Company 2016 consolidated balance sheet reflects the new guidance for classification of deferred taxes. Prior periods were not reclassified.business combination.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”, which clarifies that a change in the counter party to a derivative instrument designated as a hedging instrument does not require de-designation of that hedging relationship, provided that all other hedge accounting criteria are met. The new guidance is effective for fiscal years beginning after December 15, 2016.2019 with early adoption permitted. The Company does not expect that thishas early adopted the new guidance willon January 1, 2018. The adoption of the new guidance did not have a materialany impact on the Company’s Consolidated Financial Statements.
NOTE 3- ACQUISITION OF REVERA INC.Company's consolidated financial statements.
On April 2, 2015 (“the Closing Date”), The Company completed the acquisition of ReVera Inc. (“ReVera”) a privately held company headquartered in Santa Clara, California, which develops, manufactures, and sells stand-alone metrology tools for measurements of thin-films and composition applications in the semiconductor industry. The company paid $46,500 in cash, of which $2,475 were paid to ReVera noteholders prior to the acquisition.
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands,, except share and per share data)data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
In August 2017, the FASB issued ASU 2017-12, derivatives and hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, amendments to hedge accounting guidance. These amendments are intended to better align a Company’s risk management strategies and financial reporting for hedging relationships. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. In addition, the new guidance amends presentation and disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The guidance requires the use of a modified retrospective approach. The Company early adopted the new guidance on January 1, 2018. The adoption of the ASU did not have any impact on the Company's consolidated financial statements.
Recently Issued
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements.
The Company elected to apply the new standard effective January 1, 2019 on a modified retrospective basis and will not restate comparative periods. The Company intends to elect the package of practical expedients permitted under the transition guidance, which allows it to carry forward our historical lease classification, its assessment on whether a contract is or contains a lease, and its initial direct costs for any leases that exist prior to adoption of the new standard. The Company will also elect to combine lease and non-lease components. The Company expects an amount of approximately $29,161 would be recognized as total right-of-use assets and total lease liabilities on its consolidated balance sheet as of January 1, 2019.
The Company implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
In January 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses on Financial Instruments”, which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available for sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available for sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for interim and annual periods beginning after January 1, 2020, and early adoption is permitted. The Company is currently evaluating the potential impact of adoption of the ASU on its consolidated financial statements.
NOTE 3 - ACQUISITION OF REVERA INC. (Cont.)INVENTORIES
The financial results of ReVera are included in the consolidated financial statements from the closing date.
Upon acquisition, ReVera became the Company’s wholly-owned subsidiary. The acquisition was accounted for as a business combination. This method requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date.
The Company allocated the total consideration to ReVera's tangible and intangible assets and liabilities based on their estimated fair values as of the acquisition date and allocated the remaining amount to goodwill. The allocation is as follows:
Cash and cash equivalents | | $ | 1,158 | |
Net assets excluding cash and cash equivalents | | | 7,991 | |
Deferred tax current assets | | | 563 | |
Deferred tax long-term assets | | | 3,753 | |
Intangible assets | | | 22,929 | |
Goodwill | | | 20,114 | |
Deferred revenues, net | | | (1,409 | ) |
Deferred tax current liabilities | | | (2,122 | ) |
Deferred tax long-term liabilities | | | (6,477 | ) |
Total purchases price | | $ | 46,500 | |
The valuation of intangible assets were as follows:
| | As of December 31, | |
| | 2 0 1 6 | | | 2 0 1 5 | |
Original amount: | | | | | | |
Technology | | $ | 12,305 | | | $ | 12,305 | |
Customer relationships | | | 5,191 | | | | 5,191 | |
Backlog | | | 3,506 | | | | 3,506 | |
IPR&D | | | 1,927 | | | | 1,927 | |
| | | 22,929 | | | | 22,929 | |
| | | | | | | | |
Accumulated amortization: | | | | | | | | |
Technology | | | 3,076 | | | | 1,318 | |
Customer relationships | | | 986 | | | | 199 | |
Backlog | | | 3,506 | | | | 3,506 | |
IPR&D | | | - | | | | - | |
| | | 7,568 | | | | 5,023 | |
Net book value | | $ | 15,361 | | | $ | 17,906 | |
Annual amortization expenses are expected as follows:
Year ending December 31, | | | |
2017 | | $ | 2,561 | |
2018 | | | 2,614 | |
2019 | | | 2,625 | |
2020 | | | 2,503 | |
2021 and thereafter | | | 5,058 | |
| | $ | 15,361 | |
| | As of December 31, | |
| | 2 0 1 8 | | | 2 0 1 7 | |
| | | | | | |
Raw materials | | $ | 11,166 | | | $ | 10,634 | |
Work in process | | | 18,736 | | | | 15,507 | |
Finished goods | | | 11,884 | | | | 8,780 | |
| | $ | 41,786 | | | $ | 34,921 | |
| B. | In the years ended December 31, 2018, 2017 and 2016, the Company wrote-off inventories in a total amount of $3,413, $3,418 and $4,038, respectively. |
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands,, except share and per share data)data
NOTE 3- ACQUISITION OF REVERA INC. (Cont.)
Measurement of Fair Values
The fair value of technology is based on the discounted estimated royalty payments that have been avoided as a result of the technology being owned.
The fair value of customer relationships has been determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows.
The fair value of Backlog has been calculated using the income approach. The backlog is considered a valuable intangible asset, which can be separately sold.
The fair value of in-process research and development ("IPR&D") intangible assets represent the value assigned to acquired research and development projects that, as of the acquisition date had not established technological feasibility and had no alternative future use. The IPR&D intangible assets are capitalized and accounted for as indefinite-lived intangible assets and are subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project and launch of the product, the Company will make a separate determination of useful life of the IPR&D intangible assets and the related amortization will be recorded as an expense over the estimated useful life of the specific projects.
Goodwill generated from the ReVera acquisition is primarily attributable to expected synergies. All goodwill generated during this period is not deductible for tax purposes.
In 2015, the Company incurred acquisition-related expenses of $1,979. These expenses have been included in operating expenses in the statement of operation.
NOTE 4- INVENTORIES