UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20–F/A
(Amendment No. 2)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2004 |
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-50544
LIPMAN ELECTRONIC ENGINEERING LTD. | ||||||
(Exact name of Registrant as specified in its charter and translation of Registrant's name into English) | ||||||
ISRAEL | ||||||
(Jurisdiction of incorporation or organization) | ||||||
11 Haamal Street, Park Afek, Rosh Haayin 48092, Israel | ||||||
(Address of principal executive offices) | ||||||
Securities registered or to be registered pursuant to Section 12(b) of the Act. None | ||||||
Securities registered or to be registered pursuant to Section 12(g) of the Act. | ||||||
Ordinary Shares, par value NIS 1 per share | ||||||
(Title of Class) | ||||||
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2004, the Registrant had outstanding 28,484,796 Ordinary Shares, par value NIS 1 per share.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark which financial statement item the Registrant has elected to follow.
Item 17 Item 18
EXPLANATORY NOTE
THIS AMENDMENT NO. 2 TO FORM 20-F IS BEING FILED FOR THE PURPOSE OF AMENDING (A) A NOTE TO THE FINANCIAL STATEMENTS IN ITEM 18 TO CORRECT THE AMOUNTS PREVIOUSLY REPORTED FOR THE UNAUDITED PRO-FORMA REVENUES, NET INCOME, BASIC NET EARNINGS PER SHARE AND DILUTED NET EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004 ASSUMING THAT THE ACQUISITION OF DIONE LTD. OCCURRED ON JANUARY 1, 2003 AND 2004, RESPECTIVELY (SET FORTH IN THE LAST TABLE IN NOTE 1(B) ON PAGE F-10) AND (B) ITEM 19 TO ATTACH EXHIBIT 4.8 IN ACCORDANCE WITH AN APPLICATION FOR EXTENSION OF A PREVIOUSLY GRANTED ORDER GRANTING CONFIDENTIAL TREATMENT.
THIS AMENDMENT NO. 2 DOES NOT REFLECT EVENTS OCCURRING AFTER THE FILING OF THE ORIGINAL FORM 20-F AND DOES NOT MODIFY OR UPDATE THE DISCLOSURE THEREIN IN ANY WAY OTHER THAN FOR THE PURPOSES SET FORTH ABOVE. AS A RESULT, THIS AMENDMENT NO. 2 CONTINUES TO SPEAK AS OF FEBRUARY 23, 2005.
PART I
Unless the context otherwise requires, "Lipman," "us," "we" and "our" refer to Lipman Electronic Engineering Ltd. and its subsidiaries.
ITEM 18. FINANCIAL STATEMENTS
The following consolidated financial statements and related auditors' reports are filed as part of this Annual Report.
Report of Independent Auditors | F-2 | |||||
Consolidated Balance Sheets | F-3 - F-4 | |||||
Consolidated Statements of Income | F-5 | |||||
Statements of Changes in Shareholders' Equity | F-6 | |||||
Consolidated Statements of Cash Flows | F-7 - F-8 | |||||
Notes to Consolidated Financial Statements | F-9 - F-27 | |||||
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Lipman Electronic Engineering Ltd.
We have audited the accompanying consolidated balance sheets of Lipman Electronic Engineering Ltd. ("the Company") and its subsidiaries as of December 31, 2003 and 2004, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2003 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States.
Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
February 1, 2005 | A Member of Ernst & Young Global |
F-2
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In thousands
December 31, | ||||||||||
2003 | 2004 | |||||||||
ASSETS | ||||||||||
CURRENT ASSETS: | ||||||||||
Cash and cash equivalents | $ | 57,465 | $ | 117,396 | ||||||
Marketable securities | — | 1,176 | ||||||||
Trade receivables (net of allowance for doubtful accounts of $ 470 and $ 655 at December 31, 2003 and 2004, respectively) | 23,473 | 42,349 | ||||||||
Other receivables and prepaid expenses | 5,114 | 7,835 | ||||||||
Inventories | 28,889 | 31,941 | ||||||||
Total current assets | 114,941 | 200,697 | ||||||||
LONG-TERM ASSETS: | ||||||||||
Long-term marketable securities | 1,600 | — | ||||||||
Property, plant and equipment, net | 6,966 | 11,971 | ||||||||
Severance pay fund | 2,196 | 2,674 | ||||||||
Long-term receivable and other | 123 | 2,054 | ||||||||
Customers relations, net | 566 | 17,428 | ||||||||
Other intangible assets, net | 6,630 | 13,218 | ||||||||
Goodwill | 1,150 | 56,081 | ||||||||
19,231 | 103,426 | |||||||||
Total assets | $ | 134,172 | $ | 304,123 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-3
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In thousands (except share and per share data)
December 31, | ||||||||||
2003 | 2004 | |||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||
CURRENT LIABILITIES: | ||||||||||
Current maturities of long-term bank loans | $ | 145 | $ | — | ||||||
Trade payables | 11,917 | 20,028 | ||||||||
Employee and payroll accruals | 2,384 | 4,235 | ||||||||
Accrued expenses and other liabilities | 9,133 | 21,200 | ||||||||
Total current liabilities | 23,579 | 45,463 | ||||||||
LONG-TERM LIABILITIES: | ||||||||||
Long-term bank loans, net of current maturities | 1,119 | — | ||||||||
Deferred revenues | — | 8,160 | ||||||||
Deferred tax liability | — | 7,097 | ||||||||
Accrued severance pay | 3,083 | 3,810 | ||||||||
4,202 | 19,067 | |||||||||
Total liabilities | 27,781 | 64,530 | ||||||||
COMMITMENTS AND CONTINGENT LIABILITIES | ||||||||||
SHAREHOLDERS' EQUITY: | ||||||||||
Share capital − | ||||||||||
Ordinary shares of NIS 1.00 par value: | ||||||||||
Authorized: 70,000,000 shares at December 31, 2003 and 2004; | ||||||||||
Issued: 22,929,296 and 28,484,796 shares at December 31, 2003 and 2004, respectively; | ||||||||||
Outstanding: 21,003,636 and 26,559,136 shares at December 31, 2003 and 2004, respectively | 6,846 | 8,083 | ||||||||
Additional paid-in capital | 35,242 | 137,914 | ||||||||
Accumulated other comprehensive income | 829 | 4,470 | ||||||||
Retained earnings | 70,092 | 95,744 | ||||||||
Treasury stock − 1,925,660 shares at December 31, 2003 and 2004 | (6,618 | ) | (6,618 | ) | ||||||
Total shareholders' equity | 106,391 | 239,593 | ||||||||
Total liabilities and shareholders' equity | $ | 134,172 | $ | 304,123 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-4
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
In thousands (except per share data)
Year ended December 31, | ||||||||||||||
2002 | 2003 | 2004 | ||||||||||||
Revenues | $ | 85,534 | $ | 117,667 | $ | 180,553 | ||||||||
Cost of revenues (1) | 37,046 | 58,374 | 99,012 | |||||||||||
Amortization of acquired technology | — | — | 260 | |||||||||||
Gross profit | 48,488 | 59,293 | 81,281 | |||||||||||
Operating expenses: | ||||||||||||||
Research and development (1) | 4,043 | 4,770 | 7,829 | |||||||||||
Selling and marketing (1) | 12,422 | 16,317 | 20,665 | |||||||||||
General and administrative (1) | 5,466 | 6,122 | 10,556 | |||||||||||
Stock-based compensation | 2,746 | 2,579 | 4,783 | |||||||||||
Amortization of intangible assets | 206 | 206 | 699 | |||||||||||
Total operating expenses | 24,883 | 29,994 | 44,532 | |||||||||||
Operating income | 23,605 | 29,299 | 36,749 | |||||||||||
Financial income, net | 160 | 3,627 | 3,099 | |||||||||||
Other income (expenses), net | (472 | ) | 189 | 62 | ||||||||||
Income before income taxes | 23,293 | 33,115 | 39,910 | |||||||||||
Income taxes | 1,366 | 3,750 | 9,167 | |||||||||||
Net income | $ | 21,927 | $ | 29,365 | $ | 30,743 | ||||||||
Basic net earnings per share | $ | 1.09 | $ | 1.44 | $ | 1.20 | ||||||||
Diluted net earnings per share | $ | 1.06 | $ | 1.38 | $ | 1.15 | ||||||||
(1) Expenses exclude stock-based compensation expenses related to options granted to employees and others as follows: | ||||||||||||||
Cost of revenues | $ | 70 | $ | 39 | $ | 358 | ||||||||
Research and development | 654 | 258 | 1,111 | |||||||||||
Selling and marketing | 418 | 231 | 904 | |||||||||||
General and administrative | 1,604 | 2,051 | 2,410 | |||||||||||
$ | 2,746 | $ | 2,579 | $ | 4,783 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-5
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
In thousands
Share capital | Additional paid-in capital | Accumulated other comprehensive income | Retained earnings | Total comprehensive income | Treasury stock | Total shareholders' equity | ||||||||||||||||||||||||
Balance as of January 1, 2002 | $ | 6,632 | $ | 24,852 | $ | — | $ | 28,126 | $ | (6,618 | ) | $ | 52,992 | |||||||||||||||||
Dividend paid | — | — | — | (4,665 | ) | — | (4,665 | ) | ||||||||||||||||||||||
Exercise of options granted to employees | 32 | 626 | — | — | — | 658 | ||||||||||||||||||||||||
Stock-based compensation related to options issued to employees | — | 2,746 | — | — | — | 2,746 | ||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||
Net income | — | — | — | 21,927 | $ | 21,927 | — | 21,927 | ||||||||||||||||||||||
Total comprehensive income | $ | 21,927 | ||||||||||||||||||||||||||||
Balance as of December 31, 2002 | 6,664 | 28,224 | — | 45,388 | (6,618 | ) | 73,658 | |||||||||||||||||||||||
Dividend paid | — | — | — | (4,661 | ) | — | (4,661 | ) | ||||||||||||||||||||||
Exercise of options granted to employees | 182 | 3,647 | — | — | — | 3,829 | ||||||||||||||||||||||||
Stock-based compensation related to options issued to employees and others | — | 2,579 | — | — | — | 2,579 | ||||||||||||||||||||||||
Tax benefit related to exercise of options | — | 792 | — | — | — | 792 | ||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||
Unrealized gain on available-or-sale securities | — | — | 829 | — | $ | 829 | — | 829 | ||||||||||||||||||||||
Net income | — | — | — | 29,365 | 29,365 | — | 29,365 | |||||||||||||||||||||||
Total comprehensive income | $ | 30,194 | ||||||||||||||||||||||||||||
Balance as of December 31, 2003 | 6,846 | 35,242 | 829 | 70,092 | (6,618 | ) | 106,391 | |||||||||||||||||||||||
Dividend paid | — | — | — | (5,091 | ) | — | (5,091 | ) | ||||||||||||||||||||||
Exercise of options granted to employees | 179 | 4,308 | — | — | — | 4,487 | ||||||||||||||||||||||||
Stock-based compensation related to options issued to employees and others | — | 4,783 | — | — | — | 4,783 | ||||||||||||||||||||||||
Tax benefit related to exercise of options | — | 1,865 | — | — | — | 1,865 | ||||||||||||||||||||||||
Tax benefit related to issuance costs | — | 1,427 | — | — | — | 1,427 | ||||||||||||||||||||||||
Issuance of share capital, net | 1,058 | 90,289 | — | — | — | 91,347 | ||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||
Unrealized loss on available-for-sale securities | — | — | (424 | ) | — | $ | (424 | ) | — | (424 | ) | |||||||||||||||||||
Unrealized loss from hedging transactions, net | — | — | (1,001 | ) | — | (1,001 | ) | — | (1,001 | ) | ||||||||||||||||||||
Foreign currency translation adjustments | — | — | 5,066 | — | 5,066 | — | 5,066 | |||||||||||||||||||||||
Net income | — | — | — | 30,743 | 30,743 | — | 30,743 | |||||||||||||||||||||||
Total comprehensive income | $ | 34,384 | ||||||||||||||||||||||||||||
Balance as of December 31, 2004 | $ | 8,083 | $ | 137,914 | $ | 4,470 | $ | 95,744 | $ | (6,618 | ) | $ | 239,593 | |||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-6
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Year ended December 31, | ||||||||||||||
2002 | 2003 | 2004 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net income | $ | 21,927 | $ | 29,365 | $ | 30,743 | ||||||||
Adjustments required to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation | 864 | 1,145 | 1,417 | |||||||||||
Stock-based compensation related to options issued to employees and others | 2,746 | 2,579 | 4,783 | |||||||||||
Accrued severance pay, net | (19 | ) | (115 | ) | 249 | |||||||||
Amortization of intangible assets | 206 | 206 | 959 | |||||||||||
Impairment of investment in long-term available-for-sale marketable securities | 289 | — | — | |||||||||||
Loss (gain) on sale of available-for-sale marketable securities | 451 | (403 | ) | — | ||||||||||
Loss (gain) on sale of property, plant and equipment | 182 | 17 | (21 | ) | ||||||||||
Currency fluctuations of long-term bank loans | 130 | 124 | (29 | ) | ||||||||||
Increase in trade receivables | (98 | ) | (14,084 | ) | (3,423 | ) | ||||||||
Increase in other receivables and prepaid expenses | (82 | ) | (2,654 | ) | (1,271 | ) | ||||||||
Decrease (increase) in inventories | (8,329 | ) | (8,626 | ) | 634 | |||||||||
Increase (decrease) in trade payables | 187 | 6,699 | (1,183 | ) | ||||||||||
Increase in employee and payroll accruals, accrued expenses and other liabilities | 582 | 8,052 | 3,482 | |||||||||||
Deferred revenues | — | — | 2,859 | |||||||||||
Deferred taxes, net | (294 | ) | (391 | ) | (1,779 | ) | ||||||||
Tax benefit related to exercise of options | — | 792 | 1,865 | |||||||||||
Net cash provided by operating activities | 18,742 | 22,706 | 39,285 | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-7
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Year ended December 31, | ||||||||||||||
2002 | 2003 | 2004 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||
Purchase of property, plant and equipment | (1,330 | ) | (1,469 | ) | (4,306 | ) | ||||||||
Proceeds from sale of property, plant and equipment | 113 | 59 | 120 | |||||||||||
Investment in short-term available-for-sale marketable securities and short-term deposit | (1,189 | ) | (247 | ) | — | |||||||||
Proceeds from sales of available-for-sale marketable securities and short-term deposit | 515 | 1,854 | — | |||||||||||
Acquisition of Dione (a) | — | — | (64,896 | ) | ||||||||||
Net cash provided by (used in) investing activities | (1,891 | ) | 197 | (69,082 | ) | |||||||||
Cash flows from financing activities: | ||||||||||||||
Exercise of options granted to employees | 658 | 3,829 | 4,487 | |||||||||||
Issuance of share capital, net | — | — | 91,347 | |||||||||||
Principal payments of long-term bank loans | (124 | ) | (128 | ) | (1,235 | ) | ||||||||
Dividend paid | (4,665 | ) | (4,661 | ) | (5,091 | ) | ||||||||
Net cash provided by (used in) financing activities | (4,131 | ) | (960 | ) | 89,508 | |||||||||
Effect of exchange rate differences on cash and cash equivalents | — | — | 220 | |||||||||||
Increase in cash and cash equivalents | 12,720 | 21,943 | 59,931 | |||||||||||
Cash and cash equivalents at the beginning of the year | 22,802 | 35,522 | 57,465 | |||||||||||
Cash and cash equivalents at the end of the year | $ | 35,522 | $ | 57,465 | $ | 117,396 | ||||||||
Supplemental disclosure of cash flows activities: | ||||||||||||||
Cash paid during the year for: | ||||||||||||||
Income taxes | $ | 1,055 | $ | 974 | $ | 4,346 | ||||||||
(a) Acquisition of Dione: | ||||||||||||||
Fair value of assets acquired and liabilities assumed at the acquisition date: | ||||||||||||||
Working capital (excluding cash and cash equivalents) | $ | 1,921 | ||||||||||||
Property and equipment | 2,181 | |||||||||||||
Other long-term liabilities | (13,236 | ) | ||||||||||||
Goodwill | 51,220 | |||||||||||||
Other intangible assets | 22,810 | |||||||||||||
Amount paid in 2004 | $ | 64,896 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-8
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
NOTE 1:- | GENERAL |
a. | General: |
Lipman Electronic Engineering Ltd. (collectively with its subsidiaries, the "Company") is a worldwide provider of electronic payment systems. The Company's products include landline and wireless point-of-sale terminals, personal identification number pads, electronic cash registers, self-service systems that include automatic teller machines and related applications. |
The Company is headquartered in Israel, where its operations primarily consist of product development, manufacturing, sales and marketing, local distribution and customer service. The Company's United States operations primarily consist of product distribution and sales and support in the United States. The Company's European operations primarily consist of product distribution through the Company's subsidiaries and sales and support offices located in Turkey, Russia, Spain, Italy and the operation of the recently acquired subsidiary, Dione (see Note 1b). The Company's Latin American operations primarily consist of product distribution through the Company's subsidiary in Brazil and sales and support offices in Argentina. The Company's Far East operations primarily consist of product distribution through the Company's subsidiaries and sales and support offices in China. |
b. | Acquisition of Dione: |
On October 3, 2004, the Company acquired all of the outstanding shares of Dione, a UK-based company for a total consideration of $70,127, in cash, including $1,127 of related acquisition expenses. In addition, the Company will be required to pay a supplementary cash amount of up to $33,400, contingent upon Dione meeting certain financial targets in 2005 and 2006. If financial targets are met in 2006, the Company will also issue up to a maximum of 442,105 of its ordinary shares to the former shareholders of Dione under the terms of the acquisition agreement. The acquisition was accounted for by the purchase method of accounting and, accordingly, the purchase price has been allocated to the estimated fair value of the assets acquired and liabilities assumed of Dione. The results of Dione's operations have been included in the consolidated financial statements of the Company since October 2004. |
With the acquisition of Dione, the Company expanded its customer relation, its presence in Europe and its product portfolio. |
The Company has allocated the total cost of the acquisition of Dione's shares on October 3, 2004, as follows: |
Current assets | $ | 25,195 | ||||
Property and equipment | 2,181 | |||||
Technology | 5,200 | |||||
Customer relation | 16,400 | |||||
Other intangible assets | 1,210 | |||||
Goodwill | 51,220 | |||||
Current liabilities | (17,637 | ) | ||||
Long-term liabilities | (6,393 | ) | ||||
Deferred tax liability | (7,249 | ) | ||||
Net assets acquired | $ | 70,127 | ||||
F-9
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
A deferred tax liability of $6,843 was recorded for the difference between the assigned values and the tax bases of the acquired intangible assets. |
Acquired intangible assets in the amount of $21,896 with definite lives are amortized using the straight-line method at an annual weighted average rate of 14%. |
Trade name in the amount of $514 was accounted as acquired indefinite-lived intangible asset. |
Goodwill of $51,220 represents the excess of the purchase price over the fair market value of the net tangible and intangible assets acquired. Goodwill is not amortized and is reviewed for impairment at least annually. |
The following represents the unaudited pro-forma condensed results of operations for the years ended December 31, 2003 and for 2004, assuming that the acquisition occurred on January 1, 2003 and 2004, respectively. The following unaudited pro-forma information does not purport to represent what Dione's results of operations would have been had the acquisition occurred on January 1, 2003 and 2004, nor does it purport to represent the results of operations for any future period. |
Year ended December 31, | ||||||||||
2003 | 2004 | |||||||||
Unaudited | ||||||||||
Revenues | $ | 145,501 | $ | 229,717 | ||||||
Net income | $ | 29,244 | $ | 35,098 | ||||||
Basic net earnings per share | $ | 1.43 | $ | 1.37 | ||||||
Diluted net earnings per share | $ | 1.37 | $ | 1.32 | ||||||
c. | The Company derived 30%, 22% and 11% of its revenue in 2002, 2003 and 2004, respectively from two major customers, as described in Note 13b. |
d. | The Company depends on a limited number of suppliers and on a single supplier for custom designed components for its products. If this single supplier fails to deliver the necessary components, the Company will be required to seek alternative sources of supply. In 2002, 2003 and 2004, purchases of products from the single supplier accounted for 13%, 12% and 20%, respectively, of total purchases of raw materials. |
e. | In June 2004, the Company effected a two-for-one stock split in the form of a share dividend. All share and per share amounts have been retroactively adjusted to reflect this stock split. |
F-10
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES |
The consolidated financial statements were prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP"). |
a. | Use of estimates: |
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. |
b. | Financial statements in U.S. dollars: |
A majority of the Company's revenues are generated in U.S. dollars ("dollars"). In addition, a substantial portion of the Company's costs are incurred in dollars. The Company's management believes that the dollar is the primary currency of the economic environment in which the Company operates. Thus, functional and reporting currency of the Company is the dollar. |
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS No. 52"). All transaction gains and losses of the remeasured monetary balance sheet items are reflected in the statement of income as financial income or expenses, as appropriate. |
For those foreign subsidiaries whose functional currency has been determined to be their local currency, assets and liabilities are translated at year-end exchange rates and statement of income items are translated at average exchange rates prevailing during the year. Such translation adjustments are recorded as a separate component of accumulated other comprehensive income in shareholders' equity. |
c. | Principles of consolidation: |
The consolidated financial statements include the accounts of Lipman Electronic Engineering Ltd. and its subsidiaries. Intercompany transactions and balances have been eliminated upon consolidation. |
d. | Cash equivalents: |
Cash equivalents are short-term highly liquid investments that are readily convertible into cash with original maturities of three months or less. |
e. | Marketable securities: |
The Company accounts for investments in marketable equity securities in accordance with Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). Management determines the appropriate classification of its investments in marketable securities at the time of purchase and reevaluates such determinations at each balance sheet date. All marketable securities are classified as available-for-sale and are stated at fair value with unrealized gains and losses reported in accumulated other comprehensive income, a separate component of shareholders' equity, net of taxes. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the consolidated statement of income, and have been immaterial to date. |
F-11
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
According to Staff Accounting Bulletin No. 59 ("SAB No. 59") management is required to evaluate each period whether the securities decline in value is other than temporary. In 2002, the Company's available-for-sale securities declined in the amount of $289 which was included in the statement of income as other expenses. |
f. | Inventories: |
Inventories are stated at the lower of cost or market value. Inventory write-offs are provided to cover risks arising from obsolete or slow-moving items, excess inventories and market prices lower than cost. Cost is determined as follows: |
Raw materials, parts and supplies − using the "first-in, first-out" method. |
Work-in-progress and finished products − cost of manufacturing with the addition of allocable indirect manufacturing costs. |
Inventory provisions are provided to cover risks arising from slow-moving items, excess inventories and discontinued products. Inventory provisions for the years ended December 31, 2002, 2003 and 2004, were $250, $992 and $776, respectively, and have been included in cost of revenues. |
g. | Investment in affiliate: |
Investment in a company represents an investment in Cell-Time Ltd., a privately held company. The investment in Cell-Time is accounted for under the equity method of accounting in accordance with Accounting Principle Bulletin No. 18, "The Equity Method of Accounting for Investments in Common Stock". As of December 31, 2004, the investment in Cell-Time amounted to $0. |
The Company is not applying the equity method, because the investment balance is zero and the Company is not committed to provide further financial support. |
h. | Property, plant and equipment, net: |
Property, plant and equipment are stated at cost, net of accumulated depreciation. |
Depreciation and amortization are calculated using the straight-line method over the following estimated useful lives of the assets: |
Years | ||||||
Computers and peripheral equipment | 3 | |||||
Office furniture and equipment | 7 − 17 | |||||
Motor vehicles | 7 | |||||
Buildings | 20 | |||||
Leasehold improvements | Over the term of the lease or the life of the asset, whichever is shorter | |||||
i. | Impairment of long-lived assets: |
The Company's long-lived assets are reviewed for impairment in accordance with Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. During 2002, 2003 and 2004, no impairment losses have been identified. |
F-12
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
j. | Goodwill, indefinite-lived intangible assets and other intangible assets: |
Goodwill, indefinite-lived intangible assets and other purchased intangible assets have been recorded as a result of the Company's acquisitions. Goodwill and indefinite-lived intangible assets are not amortized, but rather are subject to an annual impairment test. Other intangible assets are amortized using straight-line basis over the weighted average remaining useful lives of approximately 7 years. |
The Company is required to perform an annual impairment test of goodwill and indefinite-lived intangible assets. An intangible asset that is not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. The impairment test shall consist of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. SFAS No. 142 requires goodwill to be tested for impairment at least annually or between annual tests if certain events or indicators of impairment occur. Goodwill is tested for impairment at the reporting unit level by a comparison of the fair value of a reporting unit with its carrying amount. During 2002, 2003 and 2004, no impairment losses were identified. |
k. | Revenue recognition: |
The Company generates revenues mainly from sales of products and, to a lesser extent, from periodic rentals of equipment, maintenance and support services. The Company sells its products to distributors, independent sales organizations, value-added resellers, payment processors, financial institutions and, to a lesser extent, directly to end-users, all of whom are considered final customers. |
Revenues are recognized provided that all criteria outlined in Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" are met: delivery has occurred, persuasive evidence of an agreement exists, the fee is fixed or determinable, no further obligation exists, and collectibility is probable. When collectibility is not probable, revenue is recognized on a cash basis. When a right of return exists, the Company defers revenues until the right of return expires. |
Revenues from operating lease and maintenance are recognized ratably over the term of the contract. |
Revenues derived from product sales to distributors that contain a price protection guarantee are recorded net of such estimated allowances. To date, no allowance for such price protection has been provided since the Company has not been required to grant any credits or incur obligations in connection with such guarantee. |
Deferred revenue includes amounts received from customers but not recognized as revenues. |
The Company records cash rebates as a reduction of revenues. |
l. | Warranty costs: |
The Company provides a warranty for its products to end-users for up to three years at no extra charge. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company's warranty liability include the |
F-13
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
number of installed units, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. To date, warranty costs and warranty liability have not been material. |
m. | Shipping and handling costs: |
Shipping and handling fees billed to customers are reflected as revenues while the related shipping and handling costs are included in cost of revenues. To date, shipping and handling costs have not been material. |
n. | Research and development costs: |
Research and development costs are charged to the statement of income as incurred. |
o. | Income taxes: |
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This Statement prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. |
p. | Concentration of credit risk: |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. The Company's cash and cash equivalents are invested in deposits with major banks in Israel and the United States. Management believes that the financial institutions that hold the Company's investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments. |
The Company's trade receivables are derived from sales to customers located primarily in the United States, United Kingdom, Turkey, Israel, Spain and Latin America. The Company performs ongoing credit evaluations of its customers and to date has not experienced any material losses. In certain circumstances, the Company may require from its customers letters of credit. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection, and a general provision is provided for the remaining balance. |
q. | Derivatives instruments: |
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. |
For derivative instruments that are designated and qualify as a cash flows 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. |
F-14
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
To protect against foreign currency fluctuations resulting from payments to manufactures during 2005, the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its anticipated payments for a period of one to twelve months with forward contracts. |
These forward contracts are designated as cash flow hedges, as defined by SFAS No. 133 and are all effective as hedges of these expenses. As of December 31, 2004, the Company recognized a comprehensive loss of $1,001 related to its forward contracts in respect of anticipated payments expected in 2005. Such amounts are expected to be reclassified to earnings during 2005. |
r. | Severance pay: |
The Company's liability for severance pay to its Israeli employees is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month's salary for each year of employment, or a portion thereof. The Company's liability is fully provided by monthly deposits in insurance policies, severance pay funds and by an accrual. |
The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrender value of these policies, and includes immaterial profits. |
Severance expenses for the years ended December 31, 2002, 2003 and 2004, amounted to $265, $392 and $727, respectively. |
s. | 401(k) Plan: |
The Company's subsidiary in the U.S. has a 401(K) plan covering all eligible employees. The plan requires a matching contributions. Expenses for the years ended December 31, 2002, 2003 and 2004 amounted to $65, $74 and $103, respectively. |
t. | Basic and diluted net earnings per share: |
Basic net earnings per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus the dilutive potential equivalent of Ordinary shares considered to be outstanding during the year, in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". |
The total weighted average number of shares related to the outstanding options excluded from the calculations of diluted net earning per share since they would have had an anti-dilutive effect, was 352,000, 0 and 72,340, for 2002, 2003 and 2004, respectively. |
The contingent maximum of 442,105 shares, that could be issued to Dione's former shareholders (see Note 1b), were also excluded from the calculation, since as of December 31, 2004, the necessary conditions have not yet been satisfied. |
u. | Accounting for stock-based compensation: |
F-15
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
The Company accounts for options granted to employees under the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which requires the use of an option valuation model to measure the fair value of options at the date of grant. |
The fair value of options granted by the Company to employees was estimated at the date of grant using Black-Scholes option pricing model with the following assumptions for grants in 2003 and 2004: risk-free interest rates of 2.0% and 3.2%, respectively; dividend yield of 0%; volatility factors of the expected market price of the Company's Ordinary shares of 46.0% and 36.0%, respectively and a weighted average expected life of the options of 2.4 and 3.0 years, respectively. |
The Company used a 0% dividend yield in years prior to 2004 in accordance with the terms of the option agreements, which state that if dividends are declared, the exercise price of the options will be reduced by the dividends per share amount. |
The Company applies SFAS No. 123 and Emerging Issue Task Force No. 96-18 "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF No. 96-18") with respect to options issued to non-employees. |
Stock-based compensation is charged to expense over the vesting period of two to five years using the graded method, an accelerated method which results in charging a greater portion of the value of options granted in the earlier years of their vesting period. |
v. | Fair value of financial instruments: |
The carrying amount reported in the consolidated balance sheet for cash and cash equivalents, trade receivables and trade payables approximates their fair value due to the short-term maturities of such instruments. |
w. | Advertising expenses: |
Advertising expenses are charged to the statement of income, as incurred. Advertising expenses for the years ended December 31, 2002, 2003 and 2004 were $505, $403 and $503, respectively. |
x. | Impact of recently issued accounting standards: |
In November 2004, the FASB issued Statement of Financial Accounting Standard No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." ("SFAS 151"). SFAS 151 amends Accounting Research Bulletin ("ARB") No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facilities. SAFS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect that the adoption of SFAS 151 will have a material effect on its financial position or results of operations. |
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004), "Share-Based Payment" ("Statement 123R"), which is a revision of SFAS No. 123. Generally, the approach in Statement 123(R) is similar |
F-16
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
to the approach described in SFAS No. 123. The new standard will be effective for the Company in the first interim period beginning after June 15, 2005. The adoption of Statement 123(R) will not have a significant effect on the Company's results of operations, since the Company has already adopted SFAS No. 123. |
NOTE 3:- | OTHER RECEIVABLES AND PREPAID EXPENSES |
December 31, | ||||||||||
2003 | 2004 | |||||||||
Government authorities | $ | 2,546 | $ | 2,677 | ||||||
Deferred taxes | 733 | 3,517 | ||||||||
Prepaid expenses | 251 | 757 | ||||||||
Offering expenses | 374 | — | ||||||||
Advance to suppliers | 368 | 342 | ||||||||
Other | 842 | 542 | ||||||||
$ | 5,114 | $ | 7,835 | |||||||
NOTE 4:- | INVENTORIES |
Raw materials | $ | 12,488 | $ | 12,323 | ||||||
Work-in-progress | 1,117 | 1,417 | ||||||||
Finished products | 15,284 | 18,201 | ||||||||
$ | 28,889 | $ | 31,941 | |||||||
NOTE 5:- | PROPERTY, PLANT AND EQUIPMENT, NET |
December 31, | ||||||||||
2003 | 2004 | |||||||||
Cost: | ||||||||||
Computers and peripheral equipment | $ | 3,875 | $ | 7,747 | ||||||
Office furniture and equipment | 2,260 | 2,296 | ||||||||
Motor vehicles | 1,403 | 1,853 | ||||||||
Buildings, land and leasehold improvements | 4,600 | 6,442 | ||||||||
12,138 | 18,338 | |||||||||
Accumulated depreciation and amortization | 5,172 | 6,367 | ||||||||
Depreciated cost | $ | 6,966 | $ | 11,971 | ||||||
Depreciation expenses totaled $864, $1,145 and $1,417 for the years ended December 31, 2002, 2003 and 2004, respectively. |
F-17
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
NOTE 6:- | CUSTOMER RELATIONS AND OTHER INTANGIBLE ASSETS, NET |
Intangible assets, net, consisted of the following: |
Original amount | Accumulated amortization | Foreign currency translation adjustments | Amortized balance | |||||||||||||||||||
December 31, | ||||||||||||||||||||||
2004 | 2004 | 2004 | 2003 | 2004 | ||||||||||||||||||
Technology | $ | 5,200 | $ | 260 | $ | 358 | $ | — | $ | 5,298 | ||||||||||||
Customer relations | 17,841 | 1,566 | 1,153 | 566 | 17,428 | |||||||||||||||||
Sole agent franchise | 9,770 | 3,140 | — | 6,630 | 6,630 | |||||||||||||||||
Other intangible assets (mainly – trade names) | 1,210 | 8 | 88 | — | 1,290 | |||||||||||||||||
$ | 34,021 | $ | 4,974 | $ | 1,599 | $ | 7,196 | $ | 30,646 | |||||||||||||
Amortization of intangible assets amounted to $206, $206 and $959 for the years ended December 31, 2002, 2003 and 2004, respectively. As of December 31, 2004, the estimated aggregate amortization of intangible assets for the next five years is as follows: 2005 − $3,438; 2006 − $3,386; 2007 − $3,230; 2008 − $3,226 and 2009 − $2,946. |
NOTE 7:- | GOODWILL |
The changes in the carrying amount of goodwill for the years ended December 31, 2003 and 2004, are as follows: |
Balance as of January 1, 2003 | $ | 1,150 | ||||
Balance as of January 1, 2004 | 1,150 | |||||
Goodwill acquired during the year | 51,220 | |||||
Foreign currency translation adjustments | 3,711 | |||||
Balance as of December 31, 2004 | $ | 56,081 | ||||
NOTE 8:- | ACCRUED EXPENSES AND OTHER LIABILITIES |
December 31, | ||||||||||
2003 | 2004 | |||||||||
Accrued expenses | $ | 4,209 | $ | 6,916 | ||||||
Income tax payable | 2,843 | 6,565 | ||||||||
Deferred revenues | 1,957 | 5,321 | ||||||||
Customer advances | 93 | 160 | ||||||||
Hedging transactions | — | 1,430 | ||||||||
Other | 31 | 808 | ||||||||
$ | 9,133 | $ | 21,200 | |||||||
F-18
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
NOTE 9:- | LONG-TERM BANK LOANS |
The Company had long-term bank loans which were linked to the Japanese Yen, bore interest at the three-month Yen LIBOR rate plus 1.5% per annum and were payable in equal quarterly installments through 2012. The loans were received to finance the acquisition of a building. |
During 2004, the Company fully repaid those loans. |
NOTE 10:- | COMMITMENTS AND CONTINGENT LIABILITIES |
a. | Lease commitments: |
The Company rents certain of its offices under various operating lease agreements. Aggregate minimum rental commitments under non-cancelable leases as of December 31, 2004, were as follows: |
2005 | $ | 1,447 | ||||
2006 | 1,404 | |||||
2007 | 1,203 | |||||
2008 | 1,131 | |||||
2009 | 991 | |||||
Thereafter | 3,751 | |||||
$ | 9,927 | |||||
Total rent expenses were approximately $377, $584 and $1,010 for the years ended December 31, 2002, 2003 and 2004, respectively. |
b. | Guarantees: |
Guarantees in the amount of approximately $320 were issued by a bank to secure certain warranty obligations on behalf of the Company. |
c. | Registration right agreement |
In November 2003, the Company entered into a registration rights agreement with certain shareholders. Pursuant to this agreement the shareholders may, subject to the conditions set forth in the agreement, require the Company on an aggregate of three occasions to register its ordinary shares under the Securities Act. The shareholders will also have piggyback registration rights. The Company agreed to pay all expenses incurred in connection with a registration, other than underwriting commissions for shares to be sold. The Company has also agreed to indemnify the Shareholders against certain liabilities, including liabilities under the Securities Act, in connection with any registration statement filed pursuant to this agreement. This agreement will remain in effect until all shares owned by these shareholders can be sold within a six month period without registration under the provisions of Rule 144. |
F-19
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
NOTE 11:- | INCOME TAXES |
a. | Israeli taxation: |
1. | Corporate tax structure: |
Taxable income of Israeli companies is subject to tax at the rate of 35% in 2004, 34% in 2005, 32% in 2006 and 30% in 2007 and thereafter. |
2. | Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the "Law"): |
Practically, all of the Company's production facilities have been granted the status of an "Approved Enterprise", according to the Law under five investment programs (the "Programs"). |
According to the Law, the Company has chosen the alternative system of benefits. Accordingly, taxable income derived from the "Approved Enterprise" is tax exempt for a period of two to four years and is liable to a reduced corporate tax rate of up to 25% for an additional period of three to eight years, based on the percentage of foreign investment in the Company. The abovementioned tax benefits are scheduled to gradually expire through 2011. |
The benefit period for each of the Programs is limited to twelve years from the year that the enterprise began operations, or fourteen years from the year in which the approval was granted, whichever is earlier. |
The entitlement to the above benefits is conditioned upon the fulfillment of the conditions stipulated by the Law, regulations published thereunder and the instruments of approval for the specific investments in an "Approved Enterprise". In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. |
The tax-exempt income attributable to the "Approved Enterprise" can be distributed to shareholders without subjecting the Company to taxes only upon the complete liquidation of the Company. Through December 31, 2004, approximately $78,555 of the Company's net income have been derived from tax-exempt income. The Company has decided not to declare dividends out of such tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the Company's "Approved Enterprises". |
If the net retained tax-exempt income is distributed in a manner other than in the complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected the alternative system of benefits (currently 25% on the gross distributed amount) and an income tax liability of approximately $19,639 would be incurred as of December 31, 2004. |
Income from sources other than the "Approved Enterprise" during the benefit period will be subject to tax at the statutory tax rate. |
3. | Tax benefits under the Israeli Law for the Encouragement of Industry (Taxation), 1969: |
The Company is an "industrial company", as defined by this law and, as such, is entitled to certain tax benefits, including accelerated depreciation and deduction of public issuance expenses in three equal annual installments. |
F-20
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
b. | Deferred taxes: |
Deferred taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: |
December 31, | ||||||||||
2003 | 2004 | |||||||||
Deferred tax assets: | ||||||||||
Reserves and allowances | $ | 205 | $ | 1,241 | ||||||
Tax benefit related to issuance costs | — | 951 | ||||||||
Unrecognized intercompany gains | 622 | 1,857 | ||||||||
Total deferred tax asset | 827 | 4,049 | ||||||||
Deferred tax liabilities: | ||||||||||
Intangible assets | — | (7,097 | ) | |||||||
Net deferred tax assets (liabilities) | $ | 827 | $ | (3,048 | ) | |||||
c. | A reconciliation between the theoretical tax expenses, assuming all income is taxed at the statutory tax rate applicable to income of the Company, and the actual tax expense as reported in the consolidated statements of income, is as follows: |
Year ended December 31, | ||||||||||||||
2002 | 2003 | 2004 | ||||||||||||
Income before income taxes, as reported in the consolidated statements of income | $ | 23,293 | $ | 33,115 | $ | 39,910 | ||||||||
Tax based on statutory tax rate in Israel (36% in 2002 and 2003, 35% in 2004) | $ | 8,385 | $ | 11,921 | $ | 13,969 | ||||||||
Decrease in taxes resulting from effect of "Approved Enterprise" benefits (*) | (7,735 | ) | (8,685 | ) | (6,352 | ) | ||||||||
Increase in taxes resulting from stock-based compensation | 989 | 867 | 1,534 | |||||||||||
Non-deductible expenses, tax-exempt income, net | 289 | (118 | ) | 74 | ||||||||||
Other | (562 | ) | (235 | ) | (58 | ) | ||||||||
Actual tax expense | $ | 1,366 | $ | 3,750 | $ | 9,167 | ||||||||
*) Per share amounts (basic) of the tax benefit resulting from the "Approved Enterprise" status | $ | 0.39 | $ | 0.43 | $ | 0.25 | ||||||||
*) Per share amounts (diluted) of the tax benefit resulting from the "Approved Enterprise" status | $ | 0.37 | $ | 0.41 | $ | 0.24 | ||||||||
F-21
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
d. | Income before income taxes is comprised as follows: |
Year ended December 31, | ||||||||||||||
2002 | 2003 | 2004 | ||||||||||||
Domestic (Israel) | $ | 21,643 | $ | 31,035 | $ | 35,618 | ||||||||
Foreign | 1,650 | 2,080 | 4,292 | |||||||||||
$ | 23,293 | $ | 33,115 | $ | 39,910 | |||||||||
e. | The provision for income taxes is comprised as follows: |
Current taxes | $ | 1,660 | $ | 4,141 | $ | 10,946 | ||||||||
Deferred taxes | (294 | ) | (391 | ) | (1,779 | ) | ||||||||
$ | 1,366 | $ | 3,750 | $ | 9,167 | |||||||||
Domestic (Israel) | $ | 743 | $ | 3,022 | $ | 7,540 | ||||||||
Foreign | 623 | 728 | 1,627 | |||||||||||
$ | 1,366 | $ | 3,750 | $ | 9,167 | |||||||||
NOTE 12:- | SHAREHOLDERS' EQUITY |
a. | On January 28, 2004, the Company effected an initial public offering of its Ordinary shares in the United States. The Company issued 4,752,800 shares at a price of $20.80 per share before underwriting discount and issuance expenses. |
b. | The Ordinary shares of the Company confer upon their holders the right to receive notice to participate and vote in general meetings of the Company, and the right to receive dividends, if and when, declared. |
c. | Stock options: |
The Company granted stock options to employees, officers and directors of the Company at an exercise price equal to or below the fair market value of the Company's shares at the date of grant. Options granted generally vest over a period of two to five years, and expire up to seven years from the date of grant. |
Under the Company's stock option plans, options to purchase 5,747,000 Ordinary shares were reserved for future grants. As of December 31, 2004, 199,450 options are available for future grants. Any options which are cancelled or forfeited before expiration become available for future grants. |
F-22
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
A summary of the Company's stock option activity excluding options granted to a service provider and related information is as follows: |
Year ended December 31, | ||||||||||||||||||||||||||
2002 | 2003 | 2004 | ||||||||||||||||||||||||
Amount of options | Weighted average exercise price | Amount of options | Weighted average exercise price | Amount of options | Weighted average exercise price | |||||||||||||||||||||
$ | $ | $ | ||||||||||||||||||||||||
Outstanding at the beginning of the year | 3,183,000 | 7.25 | 1,978,200 | 5.49 | 1,605,700 | 7.11 | ||||||||||||||||||||
Granted | — | 548,700 | 11.00 | 1,738,650 | 22.43 | |||||||||||||||||||||
Exercised | (146,800 | ) | 4.5 | (801,200 | ) | 4.78 | (652,700 | ) | 5.13 | |||||||||||||||||
Forfeited / cancelled | (1,058,000 | ) | 10.3 | (120,000 | ) | 10.79 | (189,800 | ) | 19.82 | |||||||||||||||||
Outstanding at the end of the year | 1,978,200 | 5.49 | 1,605,700 | 7.11 | 2,501,850 | 17.2 | ||||||||||||||||||||
Exercisable at the end of the period | 752,400 | 5.46 | 456,400 | 5.35 | 262,900 | 4.52 | ||||||||||||||||||||
The options outstanding as of December 31, 2004, have been separated into exercise price categories as follows: |
Exercise Price | Options outstanding as of December 31, 2004 | Weighted average remaining contractual life | Weighted average exercise price | Options exercisable as of December 31, 2004 | Weighted average exercise price of options exercisable | |||||||||||||||||||||
$ | (Years) | $ | $ | |||||||||||||||||||||||
3.84 | 358,500 | 1.75 | 3.84 | 236,400 | 3.84 | |||||||||||||||||||||
10.59 | 56,800 | 0.16 | 10.59 | 26,500 | 10.59 | |||||||||||||||||||||
10.80 | 590,500 | 3.75 | 10.80 | — | — | |||||||||||||||||||||
20.80 | 944,000 | 4 | 20.80 | — | — | |||||||||||||||||||||
26.85 | 412,050 | 4.83 | 26.85 | — | — | |||||||||||||||||||||
28.43 | 140,000 | 4.92 | 28.43 | — | ||||||||||||||||||||||
2,501,850 | 3.72 | 17.2 | 262,900 | 4.52 | ||||||||||||||||||||||
Weighted-average fair values and weighted average exercise prices of options on the date of grant are as follows: |
Weighted average fair values of options on the date of grant | Weighted average exercise prices of options on the date of grant | |||||||||||||||||||||||||
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||||||||
Adjusted NIS in thousands | ||||||||||||||||||||||||||
Less than market value | $ | — | $ | — | $ | 10.95 | $ | — | $ | — | $ | 14.36 | ||||||||||||||
Equal to market value | $ | — | $ | 8.88 | $ | 8.00 | $ | — | $ | 10.8 | $ | 23.22 | ||||||||||||||
F-23
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
d. | Options granted to the chairman of the Board of Directors: |
On February 9, 2003, the Company entered into in a management services agreement ("the Agreement") with a company wholly owned and controlled by its then newly appointed Chairman of the Board of Directors ("the Chairman"). According to the Agreement, the Chairman would dedicate to the Company at least two days a week in consideration for a monthly payment of NIS 42 (approximately $10), payable to the management services company. In addition, the Company granted the management services company 240,000 options to purchase Ordinary shares of the Company, with an exercise price of $7.58 per share following a reduction of $0.225 per option as a result of the dividend paid in June 2003 and by $0.196 as a result of the dividend paid in September 2004. 120,000 options vested on December 31, 2003 and 60,000 options were to vest on each of December 31, 2004 and December 31, 2005. Pursuant to the terms of the options, the options scheduled to vest in 2004 and 2005 vested upon completion of an initial public offering in the United States in January 2004. |
The Company accounted for these options as a variable plan under the fair value method under SFAS No. 123 and EITF No. 96-18, because these options were granted to the Chairman in his capacity as a service provider and not as the chairman of the Board of Directors. The fair value of these options was measured in accordance with EITF 00-18 on December 31, 2003 and was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 2.53%, dividend yield of 0%, volatility factors of the expected market price of the Company's Ordinary shares of 32.2%, and contractual life of the options of 3.5 years. The Company recorded stock-based compensation expense in the amount of $1,913 and $1,100 in the years ended December 31, 2003 and 2004, respectively, relating to these options. |
e. | Cancellation of options. |
During 2002, by mutual agreement between them and the Company, certain employees of the Company cancelled out-of-the-money options they held. In accordance with SFAS No. 123 all remaining unrecognized compensation expense, measured at their grant date, in the amount of $514 was charged to expense at the time of cancellation. No replacement awards were granted to these employees. |
f. | Acceleration: |
According to the option agreement between the Company's Chief Executive Officer ("CEO") and the Company, in case of a dividend payment, all of the CEO's unvested options will become vested. As a result of the dividend payment on December 26, 2002, the vesting of the CEO's 120,000 unvested options was accelerated. In accordance with SFAS No. 123, the unrecognized compensation expenses related to the accelerated options, measured at their grant date, totaling approximately $70, was charged to expense on the acceleration date. Modification date accounting did not have an effect. |
g. | Dividends: |
1. | Dividends are paid in NIS. Dividends paid to shareholders outside Israel may be converted into dollars on the basis of the exchange rate prevailing at the date of conversion. |
F-24
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
2. | In August 2002, two of the major shareholders of the Company agreed with each other to use their best efforts to cause the Company during each of the five years commencing July 1, 2002 to distribute cash dividends to the Company's shareholders out of all current profits, up to an annual amount (net of Israeli taxes) of $4,500 per year. This agreement terminates on the date the aggregate amount of dividends distributed after July 1, 2002 equals $22,500. As of December 31, 2004, dividends in the aggregate amount of $14,417 had been distributed. Pursuant to this agreement. The Company is not a party to this agreement. |
3. | In November 2002, the Board of Directors announced a dividend payment in the amount of $4,665, or $0.235 per share. The dividend was paid on December 26, 2002. |
4. | On May 18, 2003, the Board of Directors announced a dividend payment in the amount of $4,661, or $0.225 per share. The dividend was paid on June 12, 2003. |
5. | On August 9, 2004, the Board of Directors announced a dividend payment in the amount of $5,091, or $0.196 per share. The dividend was paid on September 8, 2004. |
NOTE 13:- | MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION |
a. | Summary information about geographic areas: |
The Company manages its business on a basis of one reportable segment. See Note 1a for a brief description of the Company's business. The following data is presented in accordance with Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information". Total revenues are attributed to geographic areas based on the location of the customers. |
The following data presents total revenues for the years ended December 31, 2002, 2003 and 2004 and long-lived assets as of December 31, 2002, 2003 and 2004: |
December 31, | ||||||||||||||||||||||||||
2002 | 2003 | 2004 | ||||||||||||||||||||||||
Total Revenues | Long-lived assets | Total revenues | Long-lived assets | Total revenues | Long-lived assets | |||||||||||||||||||||
United States | $ | 45,866 | $ | 9,035 | $ | 50,560 | $ | 8,984 | $ | 46,243 | $ | 8,577 | ||||||||||||||
Turkey | 19,608 | — | 24,934 | 213 | 46,224 | 474 | ||||||||||||||||||||
Latin America | — | — | 10,109 | — | 22,470 | 15 | ||||||||||||||||||||
UK | — | — | — | — | 19,568 | 82,570 | ||||||||||||||||||||
Spain | 3,669 | — | 14,302 | — | 15,753 | 215 | ||||||||||||||||||||
China | 1,200 | — | 5,090 | — | 13,488 | 147 | ||||||||||||||||||||
Israel | 7,698 | 6,235 | 7,974 | 6,047 | 10,710 | 8,171 | ||||||||||||||||||||
Europe (except Turkey, UK and Spain) | 1,167 | — | 4,005 | — | 3,762 | 50 | ||||||||||||||||||||
Other | 6,326 | — | 693 | 68 | 2,335 | — | ||||||||||||||||||||
$ | 85,534 | $ | 15,270 | $ | 117,667 | $ | 15,312 | $ | 180,553 | $ | 100,219 | |||||||||||||||
b. | Sales to major customers representing more than 10% of total revenues are as follows: |
F-25
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
Year ended December 31, | ||||||||||||||
2002 | 2003 | 2004 | ||||||||||||
% | ||||||||||||||
Customer A | 12 | 6 | 6 | |||||||||||
Customer B | 18 | 16 | 5 | |||||||||||
It is impracticable to provide revenues by product lines for the years ended December 31, 2002, 2003 and 2004. |
NOTE 14:- | EARNINGS PER SHARE |
The following table sets forth the computation of historical basic and diluted net earnings per share: |
Year ended December 31, | ||||||||||||||
2002 | 2003 | 2004 | ||||||||||||
Net income | $ | 21,927 | $ | 29,365 | $ | 30,743 | ||||||||
Weighted average number of Ordinary shares outstanding | 20,078 | 20,422 | 25,599 | |||||||||||
Dilutive effect: | ||||||||||||||
Employee and others stock options | 664 | 932 | 1,081 | |||||||||||
Diluted weighted average number of Ordinary shares outstanding | 20,742 | 21,354 | 26,680 | |||||||||||
Basic net earnings per share | $ | 1.09 | $ | 1.44 | $ | 1.20 | ||||||||
Diluted net earnings per share | $ | 1.06 | $ | 1.38 | $ | 1.15 | ||||||||
NOTE 15:- | SELECTED STATEMENTS OF INCOME DATA |
Year ended December 31, | ||||||||||||||
2002 | 2003 | 2004 | ||||||||||||
Financial income, net: | ||||||||||||||
Financial income: | ||||||||||||||
Interest | $ | 962 | $ | 1,358 | $ | 1,854 | ||||||||
Foreign currency translation adjustments | — | 2,481 | 1,610 | |||||||||||
962 | 3,839 | 3,464 | ||||||||||||
Financial expenses: | ||||||||||||||
Interest | 249 | 207 | 271 | |||||||||||
Foreign currency translation adjustments | 546 | — | — | |||||||||||
Other | 7 | 5 | 94 | |||||||||||
802 | 212 | 365 | ||||||||||||
$ | 160 | $ | 3,627 | $ | 3,099 | |||||||||
F-26
LIPMAN ELECTRONIC ENGINEERING LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands (except share and per share data)
NOTE 16:- | RELATED PARTIES TRANSACTIONS |
The Company owned 19.5%, 18.8% and 18.6% of the outstanding shares of Wizcom Ltd. ("Wizcom") as of December 31, 2002, 2003 and 2004, respectively, and Mr. Meir Shamir, a director of the Company, is also a director of Wizcom. In 2002, 2003 and 2004, the Company paid Wizcom $29, $53 and $47 for services and products rendered by Wizcom to the Company. On February 10, 2005, the Company entered an agreement to sell all of its shares in Wizcom (see Note 17). |
The Company paid SDSA Technologies Ltd., a company controlled by the son of Mr. Aharon Lipman, who served as the chairman of the board of directors of the Company from 1983 to February 2003, $53 in 2002, $17 in 2003 and $20 in 2004 for software development services provided by SDSA Technologies to the Company. The Company received $4 in 2002 from SDSA Technologies for bookkeeping services that the Company provided. |
NOTE 17:- | SUBSEQUENT EVENTS (UNAUDITED) |
On February 10, 2005, the Company and Mivtach Shamir entered into an agreement with a third party to sell all of their shares in Wizcom for the aggregate consideration of approximately $2.2 million, of which the Company would receive approximately $1.3 million. As a result of the selling, the Company expects to reclassify an amount of $405 from comprehensive income to financial income in 2005. |
F-27
ITEM 19. EXHIBITS
(b) Exhibits:
The following exhibits are filed as part of this Annual Report on Form 20-F:
EXHIBIT NO. | EXHIBIT | |||||
1.1 | Memorandum of Association of Registrant.* | |||||
1.2 | Amended and Restated Articles of Association of Registrant. *** | |||||
2.1 | Registration Rights Agreement, dated November 18, 2003, by and among Lipman Electronic Engineering Ltd., Mivtach Shamir Holdings Ltd. and Mez-Op Holdings Ltd.* | |||||
4.1 | Lease Agreement, dated as of March 17, 2002, between Lipman Electronic Engineering Ltd. and Mivnei Ta'asiya Ltd. (English translation).* | |||||
4.1A | Addendum to Lease Agreement, dated as of January 16, 2005, between Lipman Electronic Engineering Ltd. and Mivnei Ta'asiya Ltd. (English translation). ** | |||||
4.2 | Management Contract, dated as of April 4, 2003, between Lipman Electronic Engineering Ltd. and Jacob Perry Management Services Ltd. (English translation).* | |||||
4.3 | Shareholders Agreement, dated as of August 13, 2002, between Mivtach Shamir Holdings Ltd. and Mez-Op Holdings Ltd.* | |||||
4.4 | Purchase Agreement, dated June 1, 2003, among Seiko Instruments GmbH, RCM LTD and Lipman Electronic Engineering Ltd.+* | |||||
4.5 | Lipman Electronic Engineering Ltd. Stock Option Plan (2003) (English Translation).* | |||||
4.6 | Framework Agreement, dated April 29, 2003, among Philips Semiconductors, Avnet ASIC Israel Ltd., Wizcom Technologies Ltd. and Lipman Electronic Engineering Ltd. ++* | |||||
4.7 | Lipman Electronic Engineering Ltd. Stock Option Plan (2004) (English Translation).* | |||||
4.7A | Lipman Electronic Engineering Ltd. Stock Option Plan (November 2004) (Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 333-122374), filed on January 28, 2005). | |||||
4.7B | Lipman Electronic Engineering Ltd. Global Employee Share Purchase Plan. ** | |||||
4.7C | Lipman Electronic Engineering Ltd. U.S. Employee Share Purchase Plan. ** | |||||
4.8 | Reseller Agreement between TASQ Technology, Inc. and Lipman U.S.A. Inc., dated November 26, 1999, and Addendum No. 4 thereto, dated December 18, 2002. ++ | |||||
4.9 | Form of Underwriting Agreement.* | |||||
3
EXHIBIT NO. | EXHIBIT | |||||
4.10 | Share Purchase Agreement, dated October 3, 2004, between Lipman Electronic Engineering Ltd. and the shareholders of Dione Ltd. ** | |||||
4.11 | Manufacture and Supply Agreement dated March 6, 2002, between Dione Ltd. and Wincor Nixdorf PTE. +++** | |||||
8.0 | List of significant subsidiaries. ** | |||||
12.1 | Certification of Isaac Angel, President and Chief Executive Officer of Lipman Electronic Engineering Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
12.2 | Certification of Mike Lilo, Chief Financial Officer of Lipman Electronic Engineering Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
13.1 | Certification of Isaac Angel, President and Chief Executive Officer of Lipman Electronic Engineering Ltd., pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
13.2 | Certification of Mike Lilo, Chief Financial Officer of Lipman Electronic Engineering Ltd., pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
14 | (a) | Consent of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global. | ||||
+ | Certain portions of this exhibit have been omitted pursuant to an order granting confidential treatment by the United States Securities and Exchange Commission. The omitted non-public information has been filed with the United States Securities and Exchange Commission. |
++ | Certain portions of this exhibit have been omitted pursuant to an application for extension of a previously granted order granting confidential treatment by the United States Securities and Exchange Commission. The omitted non-public information has been filed with the United States Securities and Exchange Commission. |
+++ | Certain portions of this exhibit have been omitted pursuant to a request for an order granting confidential treatment by the United States Securities and Exchange Commission. The omitted non-public information has been filed with the United States Securities and Exchange Commission. |
* | Incorporated herein by reference to Registrant's Registration Statement on Form F-1 (File No. 333-111849) filed on January 12, 2004. |
** | Incorporated by reference to the Registrant's Annual Report on Form 20-F for the fiscal year ended December 31, 2004 filed on February 23, 2005. |
*** | Incorporated by reference to Amendment No. 1 on Form 20-F/A to the Registrant's Annual Report on Form 20-F for the fiscal year ended December 31, 2004 filed on March 24, 2005. |
4
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this Amendment No. 2 to the Annual Report on its behalf.
LIPMAN ELECTRONIC ENGINEERING LTD. | ||||||||||
By: | /s/ Isaac Angel | |||||||||
Name: Isaac Angel | ||||||||||
Title: President and Chief Executive Officer | ||||||||||
Date: April 26, 2005 | ||||||||||
5