SCHEDULE
14C INFORMATION
Information
Statement Pursuant to Section 14(c) of the Securities Exchange Act of
1934
Check
the
appropriate box:
x
Preliminary
Information Statement
o
Confidential,
for Use of the Commission Only (as permitted by Rule 14A-6(e)(2))
o
Definitive
Information Statement
Lapis
Technologies, Inc.
(Name
of
Registrant as Specified In Its Charter)
Payment
of Filing Fee (Check the appropriate box):
| o |
No
fee required.
|
| x |
Fee
computed on table below per Exchange Act Rules 14c-5(g) and
0-11.
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| 1) |
Title
of each class of securities to which transaction applies: Ordinary
shares of Enertec Systems 2001
Ltd.
|
| 2) |
Aggregate
number of securities to which transaction applies:
183,230
|
|
3)
|
Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is
calculated and state how it was determined): The
filing fee was determined based on multiplying 0.0002 by
$1,095,000.
|
|
4)
|
Proposed
maximum aggregate value of transaction:
$1,095,000
|
| 5) |
Total
fee paid: $219
|
| o |
Fee
paid previously with preliminary
materials.
|
|
o
|
Check
box if any part of the fee is offset as provided by Exchange Act
Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid
previously. Identify the previous filing by registration statement
number,
or the Form or Schedule and the date of its
filing.
|
| 1) |
Amount
Previously Paid:
________________________________
|
| 2) |
Form,
Schedule or Registration Statement No.:
_________________________________
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| 3) |
Filing
Party:
_______________________________
|
| 4) |
Date
Filed:
________________________________
|
Lapis
Technologies, Inc.
19
W. 34th
Street, Suite 1008
New
York, NY 10001
NOTICE
OF ACTION BY WRITTEN CONSENT OF STOCKHOLDERS
NOTICE
IS
HEREBY GIVEN that the holders of more than a majority of the outstanding common
stock of Lapis Technologies, Inc., a Delaware corporation, have approved the
following actions without a meeting of stockholders in accordance with Section
228 of the Delaware General Corporation Law:
The
approval of
the
sale of our subsidiary Enertec Electronics Ltd. and our controlling interest
in
our indirect subsidiary Enertec Systems 2001 Ltd.
The
action will become effective on the 20th
day
after the definitive Information Statement is mailed to our stockholders.
The
enclosed information statement contains information pertaining to the matters
acted upon.
WE
ARE NOT ASKING YOU FOR A PROXY,
AND
YOU ARE REQUESTED NOT TO SEND US A PROXY
|
By
order of the Board of Directors
|
|
Harry
Mund
|
|
Chairman,
Chief Executive Officer
|
New
York,
NY
[
],
2008
Lapis
Technologies, Inc.
19
W. 34th
Street, Suite 1008
New
York, NY 10001
INFORMATION
STATEMENT
Action
by Written Consent of Stockholders
GENERAL
INFORMATION
WE
ARE NOT ASKING YOU FOR A PROXY,
AND
YOU ARE REQUESTED NOT TO SEND US A PROXY
This
information statement is being furnished in connection with the action by
written consent of stockholders taken without a meeting of a proposal to approve
the actions described in this information statement. We are mailing this
information statement to our stockholders on or about [ ], 2008.
What
action was taken by written consent?
We
obtained stockholder consent for the approval of the sale of our subsidiary
Enertec Electronics Ltd. and our controlling interest in our indirect subsidiary
Enertec Systems 2001 Ltd.
How
many shares of common stock were outstanding on February 28,
2008?
On
February 28, 2008, the date we received the consent of the holders of more
than
a majority of the outstanding shares, there were 6,483,000 shares of common
stock outstanding.
What
vote was obtained to approve the transactions described in this information
statement?
We
obtained the approval of the holders of approximately 73.3% of our outstanding
shares of common stock that were entitled to give such consent. Our chief
executive officer, Harry Mund, owns 4,750,000 shares, or approximately 73.3%
of
our outstanding common stock.
Who
is paying the cost of this information statement?
We
will
pay for preparing, printing and mailing this information statement. Our costs
are estimated at approximately $60,000.
Sale
of Enertec Electronics Ltd. and the Company’s controlling interest
in Enertec
Systems 2001 Ltd.
Summary
Term Sheet
On
February 28, 2008, Lapis Technologies, Inc. (the “Company”, “we”, or “our”)
entered into: (i) an agreement for the issue and sale of shares in Lapis
Technologies, Inc. and the transfer of shares of Star Night Technologies Ltd.,
a
company traded on the Tel Aviv Stock Exchange (“Star Night”) to the Company (the
“Lapis SPA”), with Harry Mund and Mordechai Solomon (the “Investor”); and (ii)
an agreement with Mund Holdings Ltd., a company owned by Harry Mund for the
sale
of the entire issued and outstanding share capital of Enertec Electronics Ltd.
(“Enertec Electronics”) (the “Electronics SPA”). In addition, on February 28,
2008, the Company’s indirect wholly owned subsidiary, Enertec Management Ltd.
(“Enertec Management”) (which the Company owns through its direct wholly owned
subsidiary Enertec Electronics), entered into an agreement for the sale and
purchase of Enertec Systems 2001 Ltd. (“Enertec Systems”) (the “Systems SPA”,
and collectively with the Lapis SPA and the Electronics SPA, the “Agreements”),
with Harry Mund, and S.D.S. (Star Defense Systems) Ltd., a company traded on
the
Tel Aviv Stock Exchange (“S.D.S.”) whose majority stockholder is Star Night. Mr.
Mund is the Company’s chief executive officer, director, and majority
stockholder. Enertec Management’s sole asset is its 73% equity interest in
Enertec Systems.
The
Agreements will close (subject to the fulfillment or waiver of certain closing
conditions, and the performance of certain covenants) concurrently 21 days
following the date this Information Statement is mailed to stockholders of
the
Company (the “Closing Date”).
Upon
the
closing of the Agreements, Mr. Solomon will own 92% of the outstanding shares
of
common stock of the Company on a fully diluted basis. The Company will acquire
an approximately 34% equity and voting interest in Star Night, which will become
the Company’s sole asset. Enertec Systems will become a wholly owned subsidiary
of S.D.S. As Star Night owns an approximately 83% equity interest in S.D.S.,
the
Company will acquire an approximately 28% indirect equity interest in S.D.S.,
and the Company will retain an approximately 28% indirect equity interest in
Enertec Systems (compared to approximately 73% prior to the closing of the
Agreements). The Company will no longer have any interest in Enertec Electronics
or Enertec Electronics’ wholly owned subsidiary, Enertec Management, which is a
holding company and, upon the closing the Agreements, will have sold and
transferred its sole asset, its 73% equity interest in Enertec
Systems.
The
Company will receive US $250,000 (prior to payment of any applicable taxes)
for
the sale of Enertec Electronics. In addition, through the Company’s subsidiary
Enertec Management, the Company will receive the consideration of US $1,095,000
(prior to payment of any applicable tax) Enertec Management receives for the
sale of the controlling interest in Enertec Systems.
In
addition, pursuant to the Lapis SPA, the Investor agreed to grant to Mr. Mund
an
option to sell to the Investor, Mr. Mund’s 4,750,000 shares of the Company’s
common stock, during a period of 65 calendar days during a period of 24 months
following the Closing Date, subject to certain conditions set forth in the
Lapis
SPA.
The
closing of the Agreements and the consummation of the transactions contemplated
therein depends upon the fulfillment or waiver of certain conditions, including,
inter
alia,
the
following:
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·
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Enertec
Systems and Mr. Zvi Avni shall have entered into an employment agreement
pursuant to which Mr. Avni will serve as chief executive officer
of
Enertec Systems Mr. Avni is the Chief Operating Officer of Enertec
Systems, and owns 15.4% of the Company’s outstanding common
shares.
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·
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The
approval of the Systems SPA by the shareholders of
S.D.S.
|
In
addition, the parties undertook to perform certain covenants prior to the
Closing Date, including, inter
alia,
the
receipt of fairness opinions in respect of the transactions contemplated by
the
Agreements. The requisite fairness opinions have been received and are included
as Appendix B herein.
Subject
to the fulfillment or waiver of the requisite conditions and covenants, the
Agreements will close concurrently 21 days following the mailing of this
information statement to Lapis’s shareholders.
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2
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Reason
for the Transaction
The
Company, Enertec Management and Enertec Electronics entered into the respective
Agreements within the framework of a reorganization (the “Reorganization”) for
the following reasons: (i) to address the difficulties we currently encounter
to: (a) finance future long-term projects; (b) develop new products; (c) enhance
our existing products; and (d) obtain additional and/or alternative sources
of
credit and financing; (ii) to create a new holding company, whose subsidiaries
will be active globally in the manufacturing of defense equipment and which
will
seek opportunities in the US and elsewhere to grow its business through
acquisitions and otherwise; and (iii) to divest any business activities, which
do not complement the business of the Company as expected to be carried out
after the closing of the Agreements.
Risks
Upon
the
closing of the Agreements, the Company’s only asset will be its 34% equity
interest in Star Night. Accordingly, within a year following the closing of
the
Agreements, the Company may be deemed an “investment company” within the meaning
of the Investment Company Act of 1940, as amended (the “1940 Act”) and subject
to regulation under the 1940 Act.
After
completion and consummation of the transactions contemplated under the
Agreements and receipt of the proceeds thereunder, the Company intends to pursue
possible acquisitions and/or investments of a strategic nature. In
particular, the Company intends to exploit possible acquisitions of
entities and businesses that are active in the same field or complementary
to
the business of the Company as it will be conducted following the completion
and
consummation of the transactions contemplated under the Agreements. The
above plans may not be successful and we may not be able to grow our business
in
accordance with our plans.
Absence
of Dissenters’ Rights of Appraisals
Under
the
applicable provision of the Delaware General Corporation Law, the Company’s
stockholders will have no rights in connection with the proposed transactions
contemplated by the Agreements to seek appraisal for the fair value of their
shares of common stock.
For
a
more detailed discussion of the Agreements and the transactions contemplated
thereby please see “Approval of the Sale of Enertec Electronics Ltd. and a
controlling interest in Enertec Systems 2001 Ltd.” below.
APPROVAL
OF THE SALE OF ENERTEC ELECTRONICS LTD. AND A CONTROLLING INTEREST IN ENERTEC
SYSTEMS 2001 LTD.
Proposed
Transaction
On
February 28, 2008, Lapis Technologies, Inc. (the “Company”) entered into (i) an
agreement for the issue and sale of shares in Lapis Technologies, Inc. and
the
transfer of shares of Star Night Technologies Ltd., a company traded on the
Tel
Aviv Stock Exchange (the “Lapis SPA”), with Harry Mund and Mordechai Solomon
(the “Investor”); (ii) an agreement with Mund Holdings Ltd., a company owned by
Harry Mund (the “Electronics SPA”). In addition, on February 28, 2008, the
Company’s indirect wholly owned subsidiary, Enertec Management Ltd. (“Enertec
Management”) (which the Company owns through its direct wholly owned subsidiary
Enertec Electronics Ltd.), entered into an agreement for the sale and purchase
of Enertec Systems 2001 Ltd. (the “Systems SPA”, and collectively with the Lapis
SPA and the Electronics SPA, the “Agreements”), with Harry Mund, and S.D.S.
(Star Defense Systems) Ltd., a company traded on the Tel Aviv Stock Exchange
(“S.D.S.”) whose majority stockholder is Star Night Technologies Ltd. Mr. Mund
is the Company’s chief executive officer, director, and majority
stockholder.
The
Agreements will close (subject to the fulfillment or fulfillment or waiver
of
certain closing conditions, and the performance of certain covenants)
concurrently 21 days following the date this Information Statement is mailed
to
stockholders of the Company (the “Closing Date”).
Pursuant
to the Lapis SPA, the Company agreed to sell, and the Investor agreed to
purchase, 75,129,500 shares of the common stock of the Company, representing
92%
of the Company’s issued and outstanding common stock on a fully diluted basis.
The Investor agreed to transfer to the Company in consideration for the shares
of the common stock of the Company, the Investor’s 4,539,557 shares in Star
Night Technologies Ltd., (“Star Night”), a company traded on the Tel Aviv Stock
Exchange, representing approximately 34% of Star Night’s issued and outstanding
common stock.
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3
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In
addition, pursuant to the Lapis SPA, the Investor agreed to grant to Mr. Mund
an
option (the “Mund Option”), exercisable by Mr. Mund in his sole discretion, to
sell to the Investor, Mr. Mund’s 4,750,000 shares of the Company’s common stock
(the “Option Shares”) subject to certain terms and conditions set forth in the
Lapis SPA. The Mund Option will be exercisable during a period of 90 calendar
days immediately following the first anniversary of the Closing Date (with
respect to 50% of the Option Shares, at an exercise price of US $0.5434 per
share, subject to adjustment in the event of stock splits, stock dividends,
and
similar transactions) and/or the second anniversary of the Closing Date (with
respect to all of the Option Shares, at an exercise price of US $0.6038 per
share, subject to adjustment in the event of stock splits, stock dividends,
and
similar transactions). The Mund Option is subject to the aggregate value of
the
Option Shares during the term the Mund Option can be exercised, being no higher
than US $2,868,000, subject to certain adjustments, for a period of 65
consecutive calendar days commencing 120 days after the Closing Date (so long
as
Mr. Mund may sell his shares pursuant to Rule 144 under the Securities Act
of
1933, as amended, during a period of 65 consecutive calendar days during a
period of 24 months following the Closing Date).
Pursuant
to the Electronics SPA, the Company agreed to sell, and Mund Holdings Ltd.
agreed to purchase all of the issued and outstanding shares capital of Enertec
Electronics Ltd. (“Enertec Electronics”), being NIS (New Israeli Shekel) 100
divided into 100 shares of NIS 1 each, for a purchase price of US
$250,000.
Pursuant
to the Systems SPA, Enertec Management and Mr. Mund agreed to sell, and S.D.S.
agreed to purchase, on the Closing Date, an aggregate of 251,000 shares of
Enertec Systems 2001 Ltd. (“Enertec Systems”), representing all of the issued
and outstanding shares of Enertec Systems, for an aggregate purchase price
of US
$1,500,000. The 251,000 shares to be sold pursuant to the Systems SPA represent
67,770 shares to be sold by Mr. Mund, representing 27% of the issued and
outstanding shares of Enertec Systems, and 183,230 shares to be sold by Enertec
Management, representing 73% of the issued and outstanding shares of Enertec
Systems.
Upon
the
closing of the Agreements, Mr. Solomon will own 92% of the outstanding shares
of
common stock of the Company on a fully diluted basis. The Company will acquire
an approximately 34% equity and voting interest in Star Night, which will become
the Company’s sole asset. Systems will become a wholly owned subsidiary of
S.D.S. As Star Night owns an approximately 83% equity interest in S.D.S., the
Company, therefore, will indirectly acquire an approximately 28% indirect equity
interest in S.D.S., and the Company will indirectly retain an approximately
equity 28% indirect interest in Enertec Systems (compared to 73% prior to the
closing of the Agreements). The Company will no longer have any interest in
Enertec Electronics or Enertec Electronics’ wholly owned subsidiary, Enertec
Management (which will have sold its sole asset, its indirect 73% equity
interest in Enertec Systems).
The
Company will receive US $250,000 (prior to payment of any applicable taxes)
for
the sale of Enertec Electronics. In addition, through the Company’s subsidiary
Enertec Management, the Company will receive the consideration of US $1,095,000
(prior to payment of any applicable tax) Enertec Management receives for the
sale of the controlling interest in Enertec Systems.
The
closing of the Agreements and the consummation of the transactions contemplated
therein depends upon the fulfillment or waiver of certain conditions, including,
inter
alia,
the
following:
|
·
|
Enertec
Systems and Mr. Zvi Avni shall have entered into an employment agreement
pursuant to which Mr. Avni will serve as chief executive officer
of
Enertec Systems Mr. Avni is the Chief Operating Officer of Enertec
Systems, and owns 15.4% of the Company’s outstanding common
shares.
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|
·
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The
approval of the Systems SPA by the shareholders of
S.D.S.
|
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4
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In
addition, the parties undertook to perform certain covenants prior to the
Closing Date, including, inter
alia,
the
receipt of fairness opinions in respect of the transactions contemplated by
the
Agreements. The requisite fairness opinions have been received and are included
as Appendix B herein.
Subject
to the fulfillment or waiver of the requisite conditions and covenants, the
Agreements will close concurrently 21 days following the mailing of this
information statement to Lapis’s shareholders.
Opinions
of Jacob Eshed Tesuot Consultants
Jacob
Eshed Tesuot Consultants (“JET”) rendered its opinions, as set forth in Appendix
B to this Information Statement, as to the fairness, from a financial point
of
view, of (i) the consideration to be received for the sale of Enertec Systems
under the Systems SPA (the “Systems Opinion”), and (ii) the consideration to be
received for the issuance of 92% of the Company’s outstanding shares under the
Lapis SPA (the “Star Night Opinion”). Such opinions are based upon and subject
to the matters referenced therein. JET received a fee of $15,000 in connection
with rendering its opinions.
Lapis
solicited proposals for the issuance of the fairness opinions contemplated
by
the
Systems
SPA and the Lapis SPA from a number of persons and entities. Lapis selected
JET
to render the opinions on the basis of JET’s history, qualifications, and
experience in rendering fairness opinions. JET is a consulting and investment
banking firm based in Israel, specializing in going concern valuations, which
has provided consulting and investment banking services since 1980.
JET
has
not had any other relationship with Lapis and no relationship between Lapis
and
JET is contemplated.
In
rendering the Systems Opinion, JET examined and considered all available
information which JET deemed relevant, including:
(i)
Consolidated financial audited financial statements as of 31 December 2005,
2006
and 2007;
(ii)
Revenues forecast for 2008;
(iii)
Company background and activities (Word document provided by
Lapis);
(iv)
the
Systems SPA
(v)
Lapis’s Form 10K-SB for the periods ended 31 December 2005, 2006 and
2007;
(vi)
Conversations and email exchanges with Mr. Harry Mund; and
(vii)
Lapis management’s declaration that during the period from January 1, 2008 to
the closing of the Systems SPA, no major change event occurred that might
change
the valuation.
In
connection with the review conducted in preparing the Systems Opinion, JET
relied upon and assumed the accuracy and completeness of the financial and
other
information furnished to JET by Lapis. JET did not undertake any independent
verification of the accuracy or completeness of such information or any
independent appraisal or evaluation of the assets or liabilities of Enertec
Systems. JET did not solicit third parties who might be interested in making
an
investment in or acquiring Enertec Systems or all or any of its assets. The
consideration to be received under the Systems SPA was determined by the
parties
thereto and not recommended or negotiated by JET.
JET
did
not receive any instructions from Lapis or Star Night concerning the methodology
or results of the Systems Opinion. In addition, there were no limitations
imposed upon JET by Lapis or Star Night with respect to the Systems
Opinion.
In
rendering the Systems Opinion, JET utilized the discounted cash flow approach,
which derives the present value of a company from a future stream of free
cash
flows. JET concluded that the fair value of Enertec Systems is reasonably
stated
to be an average of $1,511,000, and ranges from $1,405,000 to $1,616,000.
Based
upon the foregoing and such other factors as it deemed relevant, JET is of
the
opinion that the consideration to be received for the sale of Enertec Systems
under the Systems SPA (consisting of $1,500,000, of which Lapis will receive
$1,095,000 and Harry Mund will receive $405,000) is fair.
For
further information relating to the matters considered, the basis for and
methods of arriving at the Systems Opinion, and limitations on the scope
of the
Systems Opinion, see the full text of the Systems Opinion, attached as part
of
Appendix B.
In
rendering the Star Night Opinion, JET examined and considered all available
information which JET deemed relevant, including:
(i)
audited financial statements for Star Night as of December 31,
2007;
(ii)
data
included in Star Night’s periodic report;
(iii)
Star Night management’s forecasts;
(iv)
audited financial statements for SDS as of December 31, 2007;
(v)
data
included in SDS’s periodic report;
(vi)
conversations with Star Night management; and
(vii)
draft financial statements of subsidiaries.
In
addition, in rendering the Star Night Opinion, JET performed valuations of
Star
Night’s subsidiaries SDS, New Noga Light (2000) Ltd., Night Light Ltd., Radom
Aviation Systems Ltd. and Magam Safety Ltd.
In
connection with the review conducted in preparing the Star Night Opinion,
JET
relied upon and assumed the accuracy and completeness of the financial and
other
information furnished to JET by Star Night. JET did not undertake any
independent verification of the accuracy or completeness of such information
or
any independent appraisal or evaluation of the assets or liabilities of Star
Night. JET did not solicit third parties who might be interested in making
an
investment in or acquiring Star Night or all or any of its assets. The
consideration to be received under the Lapis SPA was determined by the parties
thereto and not recommended or negotiated by JET.
JET
did
not receive any instructions from Lapis or Star Night concerning the methodology
or results of the Star Night Opinion. In addition, there were no limitations
imposed upon JET by Lapis or Star Night with respect to the Star Night
Opinion.
In
rendering the Star Night Opinion, JET utilized the discounted cash flow approach
and concluded that the value of the consideration received for the issuance
of
92% of the Company’s outstanding shares under the Lapis SPA (consisting of
33.82% of Star Night’s outstanding shares, transferred to Lapis by Mr. Moti
Solomon), is equal to $15,650,000, within the range of $14,000,000 to
$17,000,000. Based upon the foregoing and such other factors as it deemed
relevant, JET is of the opinion that the consideration to be received for
the
issuance of 92% of the Company’s outstanding shares under the Lapis SPA is
fair.
For
further information relating to the matters considered, the basis for and
methods of arriving at the Star Night Opinion, and limitations on the scope
of
the Star Night Opinion, see the full text of the Star Night Opinion, attached
as
part of Appendix B.
Opinion
of Neville Weitzman Consultants Ltd
Neville
Weitzman Consultants Ltd (“NWC”) rendered its opinion, as to the fairness, from
a financial point of view, of the consideration paid by Mund Holdings Ltd.
for
the acquisition of Enertec Electronics under the Electronics SPA (the
“Electronics Opinion”). The Electronics Opinion is based upon and subject to the
matters referenced therein. NWC received a fee of $5,000 in connection with
rendering the Electronics Opinion. A portion of the Electronics Opinion is
included in Appendix B to this Information Statement.
NWC
is a
consulting and investment banking firm based in Israel. NWS was founded in
1995
and offers a range of venture marketing, economic analysis, and business
development services.
NWC
was
initially introduced to Lapis by Lapis’s auditor, and Lapis engaged NWC in
2006-2007 to provide a fairness opinion with respect to an Enertec Electronics
transaction, for which NWC received a fee of $5,750. NWC has not otherwise
had
any other relationship with Lapis and no relationship between Lapis and NWC
is
contemplated.
Lapis
engaged NWC to render the Electronics Opinion on the basis of NWC’s history,
qualifications, and experience in rendering fairness opinions, and NWC’s
familiarity with Enertec Electronics from the prior engagement.
In
rendering the Electronics Opinion, NWC examined and considered all available
information which NWC deemed relevant, including:
(i)
audited financial statements of Enertec Electronics for the years ended December
31, 2005, 2006, and 2007;
(ii)
unaudited financial statements of Enertec Electronics for the three months
ended
March 31, 2008;
(iii)
financial forecasts of Enertec Electronics for the five years ending December
31, 2012;
(iv)
discussions with Mr. Harry Mund regarding future prospects of the Enertec
Electronics business and explanations for certain items referred to in the
financial statements; and
(v)
the
Electronics SPA.
In
connection with the review conducted in preparing the Electronics Opinion,
NWC
relied upon and assumed the accuracy and completeness of the financial and
other
information furnished to NWC by Lapis. NWC did not undertake any independent
verification of the accuracy or completeness of such information or any
independent appraisal or evaluation of the assets or liabilities of Enertec
Electronics. NWC did not solicit third parties who might be interested in
making
an investment in or acquiring Enertec Electronics or all or any of its assets.
The consideration to be received under the Electronics SPA was determined
by the
parties thereto and not recommended or negotiated by NWC.
NWC
did
not receive any instructions from Lapis concerning the methodology or results
of
the Electronics Opinion. In addition, there were no limitations imposed upon
NWC
by Lapis with respect to the Electronics Opinion.
In
rendering the Electronics Opinion, NWC utilized two valuation methodologies,
the
income approach (or discounted cash flow method) and the cost approach, which
is
based on the premise that the book value or cost of an asset is equal to
its
fair market value. NWC concluded that the fair value of Enertec Electronics
is
equal to $263,000, under the income approach, or $245,000 based on the cost
approach. Based upon the foregoing and such other factors as it deemed relevant,
NWC is of the opinion that the consideration paid by Mund Holdings Ltd. for
the
acquisition of Enertec Electronics under the Electronics SPA (consisting
of
$250,000) is fair.
For
further information relating to the matters considered, the basis for and
methods of arriving at the Systems Opinion, and limitations on the scope
of the
Systems Opinion, see the portion of the Systems Opinion, attached as part
of
Appendix B.
Background
of the Transaction
The
Company was formed in Delaware on January 31, 2002. It conducts operations
in
Israel through the Company’s wholly owned subsidiary Enertec Electronics, an
Israeli corporation incorporated on December 31, 1991, and Enertec Systems,
an
Israeli corporation incorporated on August 28, 2001, of which the Company owns
a
73% equity interest. The Company, through its subsidiaries, is a manufacturer
and distributor of various military and airborne systems, simulators, automatic
test equipment (ATE), electronic components and products relating to power
supplies, converters and related power conversion products.
Our
revenues are derived from two main sources, the military and the commercial
markets. In the military market we design, develop and manufacture test systems,
airborne, shipborne, land electronic equipment and other various military
systems, for military manufacturers in accordance with their specifications.
Most of this military business is carried out by Enertec Systems. In the
commercial market we market and distribute test systems, power supplies and
other electronic components manufactured by other manufacturers who engage
us to
distribute their products. This activity is carried out primarily by Enertec
Electronics. We have entered into representative and distribution agreements
with seven such manufacturers, four of which have been reduced to written
contracts.
Our
Subsidiaries
In
April
2002, we acquired all of the outstanding capital stock of Enertec Electronics.
In this transaction, we acquired 99 ordinary shares of Enertec Electronics
from
Harry Mund, our president and chief executive officer, in exchange for 4,750,000
shares of our common stock. The common stock issued to Mr. Mund represented
86.6% of our outstanding common stock after the transaction.
Enertec
Management, a private Israeli company, is a wholly owned subsidiary of Enertec
Electronics.
Enertec
Systems, a private Israeli company, is owned by Enertec Management (73%), and
Harry Mund (27%). Enertec Systems commenced operations in January 1,
2002.
Enertec
Electronics
Enertec
Electronics is responsible for:
|
·
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The
marketing and distribution of power supplies and other related power
products manufactured by third-party firms that engage Enertec Electronics
to distribute their products; and
|
|
·
|
The
marketing and distribution of power supply testing equipment to our
military and commercial customers.
|
Enertec
Electronics’ customers have products that require power supplies. Enertec
Electronics is contacted by them with their specifications, and based on that
data, Enertec Electronics provides a standard, or if necessary, a semi-custom
or
custom, power supply solution. Enertec Electronics’ technical sales staff in
Israel has a comprehensive understanding of Enertec Electronics’ customers'
product base, which allows Enertec Electronics to provide the most efficient
power supply solution to its customers. Our and Enertec Electronics’
professional marketing and sales teams include engineers who provide support
to
customers from the early stages of product definition and first sampling,
through the production stages and up to after-sales support. Examples of
products that require power supplies are computers, modems, printers, faxes,
telephones, transmitter/receivers for commercial and military communications,
radar, airborne infra-red cameras, surveillance equipment, telecom network
routers, video-conference routers, cellular telephone transmitters/receivers,
television on-routers, internet-routers, medical MRI scanners, x-ray equipment,
robots, drivers for electric motors, and industrial control
systems.
-
5
-
Enertec
Electronics has also entered into representative or distribution agreements
with
various international power supply manufacturers. These manufacturers granted
Enertec Electronics rights to sell their products in Israel. Enertec Electronics
solicits sales within Israel and, upon receipt of purchase orders, Enertec
Electronics contacts the supply manufacturers to fulfill such orders. With
some
of these manufactures Enertec Electronics has agreements that the supply
manufacturers will not promote their products directly within Israel.
Furthermore, if a customer contacts the supply manufacturers directly, such
manufacturer will redirect the customer to us, or advise Enertec Electronics
to
contact the customer regarding the order.
Enertec
Electronics is also a local Israeli distributor of power testing equipment.
This
includes DC and AC electronic loads, that is, equipment used for the testing
of
power supplies which utilize alternate current (AC) and direct current (DC)
technology.
Enertec
Electronics is focusing its efforts almost exclusively on developing its
business within the power supplies and power supply testing equipment
arena.
Enertec
Systems
Enertec
Systems is responsible for designing, developing and manufacturing of various
military systems for airborne, land and seaborne applications - for example,
electronic systems used in aircrafts such as power supplies, laser drivers,
mission computers and control systems for motor and pumps, radio transceivers,
altitude measuring devices, ground systems for missile control and
sub-assemblies, which are parts of a system developed with a customer's
specifications. Enertec Systems also designs and manufactures test systems
for
electronics manufacturers in the military industry based on their specifications
for the test and ground support of missiles, aircrafts and other various defense
systems.
Star
Night and S.D.S.
Star
Night is an Israeli corporation incorporated in the State of Israel in 1982.
Star Night is an Israel-based company engaged in two core activities. It
develops, manufactures and sells electronic and electro-optical systems for
night vision, which are based on star light amplification, and it also upgrades
aircraft weapons. Star Night owns an 82.6% equity interest in S.D.S.
Through
its subsidiary, S.D.S., Star Night is engaged in the field of defense
projects and has a worldwide customer base. S.D.S. is active in the
field of Aerospace, Land and Naval systems through its subsidiaries: (i) Radom
Aviation Systems Ltd. ("Radom"); (ii) New NogaLight Ltd. ("NogaLight"); and
(iii) Magam Safety Ltd. ("Magam"), which develop and provide both products
and
applications. Radom is a company, which provides turnkey solutions for
airborne application products. Radom provides avionics and weapon system suites
for planes, helicopters and dedicated mission aircraft. NogaLight provides
a wide range of night vision system solutions for both airborne and land
applications. Nogalight provides the latest night vision and night sight
technology. Magam provides
products and equipment for airborne, land and naval systems. The
products and equipment include pilot light helmets, anti-G-force suits,
inflatable life rafts and boats, life preserver jackets, parachutes, inflatable
decoys and dummy targets, and fuel tanks.
Both
Star
Night's and S.D.S.'s shares are listed for trading on the Tel Aviv Stock
Exchange.
Reasons
for the Transaction
The
Company, Enertec Management and Enertec Electronics entered into the respective
Agreements within the framework of a reorganization (the “Reorganization”) for
the following reasons: (i) to address the difficulties we currently encounter
to: (a) finance future long-term projects; (b) develop new products; (c) enhance
our existing products; and (d) obtain additional and/or alternative sources
of
credit and financing; (ii) to create a new holding company, whose subsidiaries
will be active globally in the manufacturing of defense equipment and which
will
seek opportunities in the US and elsewhere to grow its business through
acquisitions and otherwise; and (iii) to divest any business activities, which
do not complement the business of the Company as expected to be carried out
after the closing of the Agreements.
-
6
-
Reasons
for the Systems SPA:
The
Systems SPA was entered into within the framework of the Reorganization, inter
alia, to improve the Company’s cash position.
To
finance our growth in productivity (our revenues increased by approximately
23%,
from $7,839,000 at December 31, 2006 to $9,642,000 at December 31, 2007) and
work in process over the year 2007, we significantly increased our bank debt
and
other short-term debt, which adversely affected our financial
liquidity. The increase of work completed, resulted in an increase in our
account receivables by approximately 16% (from $4,667,000 at December 31, 2006
to $5,414,000 at December 31, 2007). Our financial liquidity was further
affected by a further sharp decrease in the US$ - NIS exchange rate over
the year 2007 (the US$ - NIS exchange rate decreased by approximately 9% from
US$1=NIS4.22 as of December 31, 2006 to US$1=NIS3.846 as of December 31, 2007;
the US$ - NIS exchange rate decreased further to US$1=NIS3.535 as of March
31,
2008), which adversely affects our short-term debt commitments as our bank
debt and other loans are in NIS and a significant part of our receivables are
in
US$.
As
currently, there are no other lines of credit available to us to refinance
our
short-term financing commitments and, in addition, we currently do not have
any
other sources available for financing our short-term debt commitments, we expect
our financial liquidity to decrease and financing costs to increase. Such
increased costs and lack of further sources of credit may result, eventually,
in
the Company not being able to enter into new material commitments for capital
expenditures required to obtain and execute long-term projects, expand our
operations and to develop new products or enhance our existing products and
capabilities to a level required to respond to competitive pressures by our
direct competitors or our customers’ in-house capabilities. We note, however,
that our backlog of order for our products and services remained
stable.
Within
the framework of the Reorganization and as a condition to enter into the
transactions contemplated under the Systems SPA and the Lapis SPA, S.D.S. and
Mr. Solomon demanded a divesture of all the non-core operations and activities
that are not compatible and/or synergetic with the Company’s business as will be
conducted after the closing and consummation of the respective Agreements.
The
Company’s business to be conducted after the closing and consummation of the
respective Agreements will be designing, developing and manufacturing of various
systems, products and applications mainly for military use.
Reasons
for the Electronics SPA:
The
Electronics SPA was entered into pursuant to the above demand for divesture
of
non-core operations and activities, as Enertec Electronics’ activities of
marketing and distributing power supplies products and other related power
products manufactured by third-party firms are not compatible with the Company’s
business as will be conducted after the closing and consummation of the
respective Agreements.
Previous
attempts to sell the business of Enertec Electronics have not been successful
and due to the demand by the parties of the Agreements for divesture of non-core
business, Mr. Mund, through his wholly owned company, Mund Holdings Ltd., agreed
to purchase Enertec Electronics.
Reasons
for the Lapis SPA:
The
Lapis
SPA was entered within the framework of the Reorganization and to bring the
Company into a position under which the Company will: (i) have a stronger
position towards banks and other institutions to finance the Company’s extended
activities; and (ii) to create a new holding company, whose subsidiaries will
be
active globally in the manufacturing of defense equipment and which will seek
opportunities in the US and elsewhere to grow its business through acquisitions
and otherwise.
-
7
-
We
believe effecting the transactions contemplated under the above Agreements,
will
provide us with the opportunity to effectively address the difficulties and
adverse market conditions set out above. We believe that the cash proceeds
to be
received by us under the Agreements and the relationship with the Star Night
-
S.D.S. group of companies will improve our liquidity and our position and
bargaining power vis-à-vis our lenders, as well as enable us to grow at a faster
pace, either organically or by way of acquisitions.
In
addition, we believe there is a potential benefit to the Company from an
improved product variety through the Star Night – S.D.S. group of companies
and the Star Night – S.D.S. group of companies’ expertise and
know-how.
Risks
Upon
the
closing of the Agreements, the Company’s only asset will be its approximately
34% equity interest in Star Night. Accordingly, within a year following the
closing of the Agreements, the Company may be deemed an “investment company”
within the meaning of the Investment Company Act of 1940, as amended (the “1940
Act”) and subject to regulation under the 1940 Act.
After
completion and consummation of the transactions contemplated under the
Agreements and receipt of the proceeds thereunder, the Company intends to pursue
possible acquisitions and/or investments of a strategic nature. In
particular, the Company intends to exploit possible acquisitions of
entities and businesses that are active in the same field or complementary
to
the business of the Company as it will be conducted following the completion
and
consummation of the transactions contemplated under the Agreements. The
above plans may not be successful and we may not be able to grow our business
in
accordance with our plans.
Absence
of Dissenters’ Rights of Appraisals
Under
the
applicable provision of the Delaware General Corporation Law, the Company’s
stockholders will have no rights in connection with the proposed transactions
contemplated by the Agreements to seek appraisal for the fair value of their
shares of common stock.
Accounting
Treatment
The
transactions to be effected by the Agreements will be treated as a reverse
acquisition, whereby the accounting acquirer is determined to be the legal
acquirer.
Federal
Income Tax Consequences
The
proposed sale of Enertec Electronic and a controlling interest in Enertec
Systems should have no direct income tax consequences to the Company’s
shareholders. The proposed sale of Enertec Electronics and Enertec Systems
will
be reported by the Company as a sale of our investment in the respective
entities, with the gain or loss included in earnings.
Regulatory
Approvals
No
United
States federal or state regulatory requirements must be complied with or
approvals obtained as a condition of the proposed transactions contemplated
by
the Agreements other than federal securities laws.
Description
of the Company’s Capital Stock
The
Company’s authorized capital consists of 100,000,000 shares of common stock,
$0.001 par value, and 5,000,000 shares of preferred stock, par value $0.001.
As
of February 28, 2008, the Company had 6,483,000 shares of common stock issued
and outstanding, and no shares of Series A Preferred Stock issued and
outstanding.
-
8
-
The
Company’s common stock is the only class of its securities outstanding having
the right to vote. Each share of common stock entitles its record holder to
one
vote.
BENEFICIAL
OWNERSHIP OF SECURITIES AND SECURITY OWNERSHIP OF
MANAGEMENT
The
following table provides information about shares of common stock beneficially
owned as of February 28, 2008 by:
|
•
|
each
of our directors, executive officers and our executive officers and
directors as a group; and
|
|
•
|
each
person owning of record or known by us, based on information provided
to
us by the persons named below, to own beneficially at least 5% of
our
common stock;
|
|
Name
and Position
|
Shares of Common
Stock Beneficially
Owned
|
Percentage
|
|||||
|
Harry
Mund
Chief
Executive Officer and Director
|
4,750,000
|
73.3
|
%
|
||||
|
Miron
Markovitz
Chief
Financial Officer and Director
|
9,000
|
*
|
|||||
|
Zvi
Avni
Chief
Operating Officer of Enertec Systems
|
1,000,000
|
15.4
|
%
|
||||
|
All
officers and directors as a group (three individuals beneficially
owning
stock)
|
5,759,000
|
88.32
|
%
|
||||
*
Less
than 1%
Except
as
otherwise indicated each person has the sole power to vote and dispose of all
shares of common stock listed opposite his name. Each person is deemed to own
beneficially shares of common stock which are issuable upon exercise of warrants
or upon conversion of convertible securities if they are exercisable or
convertible within 60 days of February 28, 2008. Applicable percentage is based
on 6,483,000 shares of common stock outstanding as of February 28, 2008. None
of
the persons named in the table own any options or convertible
securities.
FINANCIAL
STATEMENTS
The
Company’s annual report on Form 10-KSB for the year ended December 31, 2007,
which includes our audited balance sheet at December 31, 2007, and statements
of
operations and cash flows for the two years in the period then ended, is being
delivered herewith. In addition, the Company’s quarterly report on Form 10-QSB
for the quarter ended March 31, 2008, which includes our unaudited balance
sheet
as of March 31, 2008, and unaudited statements of operations and cash flows
for
the quarter ended March 31, 2008, is being delivered herewith.
Where
You Can Find More Information About the Company
The
Company files annual, quarterly and current reports, proxy statements and other
information with the SEC. You can read and copy any materials that the Company
files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. You can obtain information about the operation of the
SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a Web site that contains information we file electronically with
the
SEC, which you can access over the Internet at http://www.sec.gov. Copies of
these materials may also be obtained by mail from the Public Reference Section
of the SEC, 100 F Street, N.E., Washington, D.C. 20549 at prescribed
rates.
-
9
-
|
By
Order of the Board of Directors
|
|
Harry
Mund
|
|
Chief
Executive Officer
|
[
],
2008
-
10
-
Appendix
A
LAPIS
TECHNOLOGIES, INC. AND SUBSIDIARY
PROFORMA
CONSOLIDATED BALANCE SHEET
DECEMBER
31,2007
|
PROFORMA
|
PROFORMA
|
||||||||||||||||||
|
LAPIS
|
STARNIGHT
|
ADJUSTMENTS
|
December 31, 2007
|
||||||||||||||||
|
ASSETS
|
|||||||||||||||||||
|
Current
Assets:
|
|||||||||||||||||||
|
Cash
and cash equivalents
|
$
|
-
|
$
|
19,144,000
|
$
|
1,345,000
|
$
|
249,744
|
1,3,4
|
$
|
20,239,256
|
||||||||
|
Accounts
receivable
|
25,317,000
|
25,317,000
|
|||||||||||||||||
|
Inventories
|
9,859,000
|
9,859,000
|
|||||||||||||||||
|
Prepaid
expenses and other current assets
|
1,561,000
|
1,561,000
|
|||||||||||||||||
|
Investment
in starnight
|
1,050,000
|
-
|
2,561,699
|
3,611,699
|
1,2,5,6
|
-
|
|||||||||||||
|
Total
current assets
|
1,050,000
|
55,881,000
|
56,976,256
|
||||||||||||||||
|
Property
and equipment, net
|
-
|
4,608,000
|
4,608,000
|
||||||||||||||||
|
Deferred
income taxes
|
-
|
3,785,000
|
3,785,000
|
||||||||||||||||
|
$
|
2,100,000
|
$
|
64,274,000
|
$
|
65,369,256
|
||||||||||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||||||||||||||
|
Current
Liabilities:
|
|||||||||||||||||||
|
Bank
line of credit
|
$
|
-
|
$
|
11,032,000
|
$
|
11,032,000
|
|||||||||||||
|
Accounts
payable and accrued expenses
|
249,744
|
19,569,000
|
249,744
|
4
|
19,569,000
|
||||||||||||||
|
Due
to stockholder
|
12,750
|
-
|
12,750
|
6
|
-
|
||||||||||||||
|
Total
current liabilities
|
262,494
|
30,601,000
|
30,601,000
|
||||||||||||||||
|
Term
loans, net of current portion
|
-
|
27,608,000
|
27,608,000
|
||||||||||||||||
|
Severance
payable
|
-
|
1,801,000
|
1,801,000
|
||||||||||||||||
|
Total
liabilities
|
262,494
|
60,010,000
|
60,010,000
|
||||||||||||||||
|
Minority
interest
|
-
|
397,000
|
397,000
|
||||||||||||||||
|
Stockholders'
Equity:
|
|||||||||||||||||||
|
Preferred
stock; $.001 par value, 5,000,000 shares authorized, none
issued
|
|||||||||||||||||||
|
Common
stock; $.001 par value, 100,000,000 shares authorized, 81,613,000
shares
issued and outstanding
|
6,483
|
75,130
|
2
|
81,613
|
|||||||||||||||
|
Additional
paid-in capital
|
1,083,467
|
2,511,393
|
2,441,569
|
2,6
|
1,013,643
|
||||||||||||||
|
Retained
Earnings
|
(302,444
|
)
|
3,867,000
|
302,444
|
6
|
3,867,000
|
|||||||||||||
|
Total
stockholders' equity
|
787,506
|
3,867,000
|
4,962,256
|
||||||||||||||||
|
$
|
1,050,000
|
$
|
64,274,000
|
$
|
6,680,586
|
$
|
6,680,586
|
$
|
65,369,256
|
||||||||||
-
11
-
LAPIS
TECHNOLOGIES, INC. AND SUBSIDIARY
PROFORMA
CONSOLIDATED STATEMENT OF OPERATIONS
FOR
THE YEAR ENDED DECEMBER 31, 2007
|
PROFORMA
|
PROFORMA
|
||||||||||||||||||
|
LAPIS
|
STARNIGHT
|
ADJUSTMENTS
|
December 31, 2007
|
||||||||||||||||
|
Sales
|
$
|
-
|
$
|
39,282,000
|
$
|
39,282,000
|
|||||||||||||
|
Cost
of sales
|
-
|
26,743,000
|
26,743,000
|
||||||||||||||||
|
Gross
profit
|
-
|
12,539,000
|
12,539,000
|
||||||||||||||||
|
Operating
expenses:
|
|||||||||||||||||||
|
Selling
expenses
|
-
|
4,118,000
|
4,118,000
|
||||||||||||||||
|
General
and administrative
|
101,744
|
6,593,000
|
6,694,744
|
||||||||||||||||
|
Total
operating expenses
|
101,744
|
10,711,000
|
10,812,744
|
||||||||||||||||
|
Income
from operations
|
(101,744
|
)
|
1,828,000
|
1,726,256
|
|||||||||||||||
|
Other
income (expense):
|
|||||||||||||||||||
|
Interest
expense, net
|
-
|
(3,757,000
|
)
|
(3,757,000
|
)
|
||||||||||||||
|
Other
income
|
-
|
76,000
|
76,000
|
||||||||||||||||
|
Gain
on sale of subsidiary
|
-
|
-
|
295,000
|
295,000
|
3,5,6
|
-
|
|||||||||||||
|
Total
other income (expense)
|
-
|
(3,681,000
|
)
|
(3,681,000
|
)
|
||||||||||||||
|
(Loss)
before provision for income taxes and minority interest
|
(101,744
|
)
|
(1,853,000
|
)
|
(1,954,744
|
)
|
|||||||||||||
|
Provision
for income taxes
|
-
|
(322,000
|
)
|
(322,000
|
)
|
||||||||||||||
|
Minority
interest
|
-
|
137,000
|
137,000
|
||||||||||||||||
|
Net
(loss)
|
(101,744
|
)
|
(2,038,000
|
)
|
(2,139,744
|
)
|
|||||||||||||
|
Other
comprehensive (loss) income, net of taxes Foreign translation (loss)
gain
|
-
|
-
|
-
|
||||||||||||||||
|
Comprehensive
(loss)
|
$
|
(101,744
|
)
|
$
|
(2,038,000.0
|
)
|
$
|
(2,139,744
|
)
|
||||||||||
|
Basic
net income (loss) per share
|
$
|
(0.03
|
)
|
||||||||||||||||
|
Basic
weighted average common shares outstanding
|
81,613,000
|
||||||||||||||||||
-
12
-
LAPIS
TECHNOLOGIES, INC. AND SUBSIDIARY
PROFORMA
ADJUSTMENTS
DECEMBER
31,2007
|
AJE
1
|
|||||||
|
Cash
|
1,095,000
|
||||||
|
investments
|
1,095,000
|
||||||
|
AJE
2
|
|||||||
|
investments
|
2,516,699
|
||||||
|
common
stock
|
75,130
|
||||||
|
apic
|
2,441,569
|
||||||
|
AJE
3
|
|||||||
|
cash
|
250,000
|
||||||
|
other
income
|
250,000
|
||||||
|
AJE
4
|
|||||||
|
accounts
payable
|
249,744
|
||||||
|
cash
|
249,744
|
||||||
|
AJE
5
|
|||||||
|
investments
|
45,000
|
||||||
|
other
income
|
45,000
|
||||||
|
AJE
6
|
|||||||
|
apic
|
2,511,393
|
||||||
|
due
to officers
|
12,750
|
||||||
|
other
income
|
295,000
|
||||||
|
investments
|
2,516,699
|
||||||
|
retained
earnings
|
302,444
|
||||||
-
13
-
Lapis
Technologies, Inc. and Subsidiary
Notes
to Pro Forma Consolidated Financial Statements
December
31, 2007
(Unaudited)
Note
1 – The pro forma adjustments to the consolidated financial statements is
as follows:
| (1) |
To
reflect the repayment of the advance to the former subsidiary for
the
acquisition of additional shares of its’ own
subsidiary.
|
| (2) |
To
record the investment in new subsidiary with the issuance of common
stock
|
| (3) |
To
record the sale of the former
subsidiary
|
| (4) |
To
record the repayment of accounts
payable
|
| (5) |
To
record the additional proceeds received in adjustment 1 as
income
|
| (6) |
To
adjust the combined financial statements to reflect the transaction
as a
reverse acquisition using the historical cost information of accounting
acquirer (the new subsidiary) and to eliminate the retained earnings
of
the parent.
|
-
14
-
Appendix
B
Enertec
Electronics
Limited
BUSINESS
DESCRIPTION &
FAIRNESS
OPINION
June
2008
V8
11-06-08
Prepared
by:
Neville
Weitzman Consultants Ltd
13
Hasadna Street, Raanana 43654, ISRAEL
Enertec
Electronics - Confidential
This
document has been prepared by Neville Weitzman Consultants ("NWC") on
instructions received from Lapis Technologies Inc ("Lapis").
The
document is based upon both internal and public information made available
by
the subject company, and upon estimates and assessments that may prove, over
time, to have been inaccurate or incomplete. This document is not a
comprehensive review of all information and data regarding or related to the
subject company.
Except
where stated specifically, no audit or verification work has been carried out
in
the preparation of this document.
Therefore,
this document is intended for use by professional institutional investors as
supporting information only. This document should not be used as the basis
for
making any investment decisions.
This
document does not purport to provide investment advice nor is it a
recommendation or offer to purchase or sell the securities mentioned herein.
This document does not, under any circumstances, substitute for advice that
takes into account the special needs or requirements and characteristics of
any
party.
NWC
takes
no responsibility for any damage or loss that may be incurred by any party
as a
result of relying upon this document.
NWC
may
act as advisor to Lapis for the Offering of its securities. Therefore, they
are
interested in the valuation of the aforementioned securities, and in the
successful offering of the aforementioned securities.
NWC
(or
persons related thereto) may from time to time perform investment banking or
other services for, or solicit investment banking or other business from, and
may have similar or other relationships with any of the companies mentioned
in
this report.
Enertec
Electronics - Confidential
3
1
Formal Report
Mr.
Harry Mund and the Board of Directors of Lapis Technologies
Inc
19
West 34th
Street
Suite
1008
New
York
New
York 10001
Gentlemen:
You
have
requested that Neville Weitzman Consultants Limited ("NWCL") provide you with
its opinion as to the fairness, from a financial point of view, of the
consideration to be paid by Mund Holdings Limited ("MHL") for the acquisition
of
Enertec Electronics Limited ("EEL") pursuant to an Agreement dated February
28
2008 between Lapis and MHL.
The
valuation date is December 31 2007.
It
is
understood that:
|
a)
|
Under
the agreement MHL will purchase the entire issued share capital of
EEL for
a total purchase price of $250,000 ("the
Consideration");
|
|
b)
|
Since
the founding of EEL the Company has been managed solely by Mr. Harry
Mund
who is the beneficial owner of MHL;
|
|
c)
|
Consequently,
a major part of the Company's goodwill, including its relationships
with
customers and suppliers, is dependent on the continued involvement
of Mr.
Harry Mund;
|
|
d)
|
Without
a commitment to such continued involvement it may be difficult to
find an
alternative purchaser for the shares of the Company, in which case
the
closure of the business and the liquidation of its net assets would
have
to be considered.
|
Fair
market value is generally defined as the price at which an entity or an interest
would change hands between a willing buyer and willing seller, neither being
under compulsion to buy or sell and both having reasonable knowledge of all
relevant facts as of the applicable valuation date.
Reliance
has been placed on documentation and information provided verbally or by email
by Mr. Harry Mund who, as stated above, is the beneficial owner of MHL and
therefore an interested party in the transaction.
Such
documentation and information, all made available by Mr. Harry Mund and by
the
subject company, includes estimates and assessments that may prove, over time,
to have been inaccurate or incomplete. We do not express an opinion or offer
any
form of assurance regarding their accuracy or completeness. All the information
provided is accountable for by the Company and its management
alone.
Enertec
Electronics - Confidential
4
In
arriving at the opinion set forth below, NWCL has completed the following
tasks:
|
a)
|
Reviewed
the audited financial statements of EEL for the years ended December
31
2005 to 2007;
|
|
b)
|
Reviewed
the unaudited financial statement of EEL for the three months ended
March
31 2008;
|
|
c)
|
Reviewed
financial forecasts of EEL for the five years ending December 31
2012;
|
|
d)
|
Conducted
discussions with Mr. Harry Mund regarding future prospects of the
business
and explanations for certain items referred to in the financial
statements;
|
|
e)
|
Perused
the company purchase agreement, dated February 28
2008.
|
In
rendering this opinion, NWCL did not assume responsibility for independently
verifying, and did not independently verify, any financial or other information
whatsoever.
NWCL
has
assumed that all such financial and other information is accurate and complete.
NWCL has further relied on the assurances of Lapis and EEL management that
they
are not aware of any facts that would make such financial or other information
inaccurate, incomplete or misleading.
With
respect to forecasts and financial projections of EEL provided by management,
NWCL has assumed, for the purpose of this opinion, that the forecasts have
been
reasonably prepared on bases reflecting the best available estimates and
judgments of management at the time of their preparation as to the future
performance of EEL. NWCL has further assumed, with your consent, that any
material liabilities (contingent or otherwise, known or unknown) of the Business
are as set forth in the financial statements.
NWCL
has
not been engaged to make, nor has it made, an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of the Business
nor has it been furnished with any such evaluation or appraisals except for
the
reports stated above. The opinion is based upon regulatory, economic, market
and
monetary conditions existing on the date hereof.
This
opinion has been prepared for your information in connection with the Agreement
and shall not be reproduced, summarized, described or referred to or provided
to
any person or otherwise made public without the prior written consent of NWCL.
Furthermore it relates only to the Consideration payable by MHL to the
shareholders of EEL, as defined above, and does not cover any other related
or
non-related transactions and payments, either referred to or not referred to
in
the Agreement or any other documentation in connection therewith.
Enertec
Electronics - Confidential
5
The
assessment of the Fair Price of the Business has been based on two valuation
methodologies – the Income Approach and the Cost Approach. Under these
valuation models the estimated value of EEL as at December 31 2007 is as
follows:
|
$
|
||||
|
Income
Approach
|
263,000
|
|||
|
Cost
Approach
|
245,000
|
|||
The
Cost
Approach total represents an estimate of the net proceeds to be recovered as
a
result of the possible closure of the business and the liquidation of its net
assets, as explained above.
On
the
basis of, and subject to the foregoing, as it falls within the range defined
by
the valuations based on the two selected approaches, NWCL is of the opinion
that
the Consideration can be regarded as fair from a financial point of
view.
This
Formal Report should be read together with the other chapters of this document,
which form an integral part thereof.
Yours
very truly,
Neville
Weitzman Consultants Limited
Enertec
Electronics - Confidential
6
Enertec
Systems 2001 Ltd.
Company
Valuation
As
of February 28th, 2008
Closing
of the Transaction for Sale and
Purchase
of all Ordinary Shares
Fairness
Opinion
April
2007
Table
of Contents
|
General
|
3
|
|
|
B.
|
Company
Overview
|
6
|
|
C.
|
Financial
Statements Analysis
|
13
|
|
Valuation
Methodology
|
18
|
|
|
E.
|
Valuation
|
20
|
2
May
25th,
2008
To:
Mr.
Harry
Mund
Lapis
Technologies, Inc.
RE:
Enertec
Systems 2001 Ltd.
Valuation
of Shares as of the Valuation Date
|
A.
|
General
|
We
were
requested by Harry Mund and Lapis Technologies, Inc. (hereinafter respectively:
“Mund” and “Lapis” to render our opinion as to the fairness, from a financial
point of view, of the consideration (hereinafter: the “Consideration”) to be
received by the sellers of the Ordinary Shares of Enertec Systems 2001 Ltd.
(hereinafter: “ESL” or “the Company”) under an agreement for the sale of the all
the issued and outstanding Ordinary Shares of the Company, dated February
28th, 2008, (hereinafter: the “Agreement”), between Mund and Enertec
Management Ltd. as the sellers and S.D.S. (Star Defense Systems) Ltd.
(hereinafter: “SDS”) as the buyer (hereinafter: the “Transaction”). In respect
of the above, we have made a valuation of the Fair Market
Value1 as
of the
date of closing and consummation of the Agreement ("Valuation Date"), based
on
the information set out below.
"Jacob
Eshed – Tesuot Consultants" is an independent consulting firm specializing
in 'going concern' valuations. We
have
extensive experience in performing fairness opinions for companies in diverse
fields of activities
_________________________
1
We have determined the fair market value to be the price at which an entity
or
an interest would change hands between a willing buyer and willing seller
both
acting in their own best interest, on the open market assuming a reasonable
period of time for an agreement to arise, neither being under compulsion
to buy
or sell and both having reasonable knowledge of all relevant facts as of
the
applicable valuation date.
3
Objective
and Scope
This
valuation has been prepared for the purpose of determining the fair market
value
of the Ordinary Shares of ESL and the fairness of the Consideration as at the
Valuation Date.
We
understand that our recommendation of fair market value and this valuation
report will be used and relied upon for ESL’s purchase by SDS. In this
valuation, we have relied on signed written material, unsigned written material
and information provided verbally or by email. It is based upon both internal
and public information made available by the Company and/or Mund, and upon
estimates and assessments that may prove, over time, to have been inaccurate
or
incomplete. We do not express an opinion or offer any form of assurance
regarding their accuracy or completeness. All the information provided is
accountable for by the Company and its management alone.
Material
Available in Performing the Valuation:
|
·
|
Consolidated
financial audited statements as of 31 December 2005, 2006 and
2007.
|
|
·
|
Revenues
Forecast for 2008.
|
|
·
|
Presentation
of products: “Enertec
Systems Products”
|
|
·
|
Company
Background and Activities (Word
document).
|
|
·
|
Purchase
Agreement for the sale and purchase of ESL, as of February 28,
2008.
|
|
·
|
Form
10KSB for Lapis Technologies Inc. for the periods ended at 31 December
2005, 2006 and 2007
|
|
·
|
Conversations
and e-mail exchanges with Mr. Harry
Mund.
|
|
·
|
Management
declaration that during the period starting January 1st.
2008 up until the closing day, no major event occurred that might
change
the valuation.
|
4
Results
Summary
In
reaching our conclusion as to the fair market value of the Company, we utilized
the Discounted Cash Flow Approach. Based upon the foregoing, and in reliance
thereon, the fair value of Enertec
Systems 2001 Ltd. is
reasonably stated to be average of US$
1,511 thousand, and
ranges from US$ 1,405 to US$ 1,616 thousand. Based upon the foregoing and such
other factors as we deem relevant, we are of the opinion that the Consideration
is fair.
The
accompanying report summarizes the principles and procedures that were applied
in this study as well as its findings, and is inseparable part of the report.
|
Respectfully
submitted,
|
 |
|
Jacob
Eshed
|
|
Jacob
Eshed – Tesuot
Consultants
|
5
|
B.
|
Company
Overview
|
Lapis
Technologies, Inc. was formed in Delaware on January 31, 2002 under the name
Enertec Electronics, Inc. and has filed two Certificates of Amendment changing
their name to Opal Technologies, Inc. and then to Lapis Technologies, Inc.
Lapis
became a public company in 2002. Since that time the activities of Enertec
Systems 2001 Ltd. ("ESL") in the military markets have grown significantly.
Lapis
Technologies, Inc. conducts operations in Israel through ESL, an Israeli
corporation formed on August 28, 2001, of which Lapis owns a 73% equity
interest, with the remaining 27% owned by Mr. Harry Mund, President and Chief
Executive Officer of Enertec Electronics Limited.
Chief
Operating Officer of Enertec Systems is Zvika Avni.
Lapis
manufacturers and distributes various military and airborne systems, simulators,
automatic test equipment (ATE), electronic components and products relating
to
power supplies, converters and related power conversion products.
In
order
to exploit improving market conditions in the military sector and build on
the
progress made by ESL, Lapis has been actively seeking outside investment. It
is
currently in discussion with an investor group which has declared its intention
to purchase shares of Lapis.
Lapis
is
a holding company and its shares are currently quoted on the OTC market in
New
York. The complete structure of Lapis and its subsidiaries is as
follows:
CORPORATE
PROFILE
6
Enertec
Systems
manufacture and supply electronic components and systems primarily for the
military market. These include automatic test equipment; simulators; and various
airborne, ship borne, land electronic equipment, and various other military
systems.
It
is
important to note that the products of Enertec Systems are usually a part of
their customers’ finished products (not stand-alone products) and that Enertec’s
success depends on the success and sales of their customers’ finished products.
This means that there exists a dual dependence with the client. In this
equation, it must be remembered that the client is always stronger.
Enertec
Systems is responsible for the designing, developing and manufacturing of
various military systems for airborne, land and seaborne applications - for
example, electronic systems used in aircrafts such as power supplies, laser
drivers, mission computers and control systems for motor and pumps, radio
transceivers, altitude measuring devices, ground systems for missile control
and
sub-assemblies, which are parts of a system developed according to a customer's
specifications It also designs and manufactures test systems for electronics
manufacturers in the military industry based on their specifications for the
test and ground support of missiles, aircrafts and other various defense
systems.
Enertec
Systems meets the stringent security clearance requirements for the most
sensitive defense programs involved.
The
Company’s quality control systems are compliant with ISO9001:2000.
New
Products
Enertec
Systems focuses almost exclusively on the military arena, and has entered into
numerous new fields of military technology in addition to the Company’s
"classic" ATE field of expertise.
Previous
Year’s Developments
During
2006-2007 Enertec introduced several new products:
7
|
·
|
A
Generic Test and Validation System for new anti-tank missiles. This
system
incorporates state of the art hardware and software designs and is
used
for the tests and validation of about 30 different modules of the
missile.
The first systems were ordered in the amount of about $1.4 Million
dollars
with scheduled delivery of the first unit during 2008.
|
An
additional order was received of about $ 300,000 for the implementation of
upgrades with scheduled delivery in 2008. This test system for anti-tank
missiles could generate orders for a couple of units a year for approximately
the next ten years.
|
·
|
A
Control System for airborne attack platforms for naval
application.
The
system receives data from aircrafts and transmits it in real time.
The
design was based on upgraded versions of previous designs already
proven
in the field. Orders have already been received for several units
scheduled for delivery during 2008. In 2007 the Company received
an order
from a new customer for delivery during
2008-2010.
|
|
·
|
Generic
System for Simulation and Test of multiple stage missiles. This very
complex high technology system simulates each stage of the missile
and
performs a comprehensive suite of tests. During 2008 the Company
is
expected to deliver the first two systems and expect to receive new
orders
for an additional two systems with scheduled delivery over the next
four
years.
|
|
·
|
During
2007 a new Generic ATE System was introduced based on VXI technology
for
testing air-to-air missiles. The first order was received for 15
units
which is expected to generate revenues of about $ 2M over the following
years. The first prototype is expected to be completed by the end
of 2008
and scheduled to begin deliveries during
2009.
|
|
·
|
During
2004-2007 the Company marketed a new line of “ruggedized” Command and
Control mobile stations of modular architecture, allowing
adaptation/customization to various applications. During 2006 the
Company
delivered several units for qualification and
integration.
|
8
|
·
|
During
the year 2005, the Company sold “ruggedized” mission computers for combat
vehicles, and delivered three different prototypes to I.A.I. (Israeli
Aircraft Industry) with the intention of replacing their computers
previously manufactured in-house and active in the field for many
years
with updated modern design models from a new outsourced supplier
to
fulfill I.A.I's need over the following 5-10 years. The first units
that
were delivered successfully passed all qualification and validation
tests.
As a result of the success of the first prototypes, in 2006 a new
order
was placed for three new prototypes for three different products
that were
delivered during 2007. During 2008 the Company anticipates receiving
additional orders of about 20-40 pcs. for each of the three models
to be
delivered during 2009-2010.
|
|
·
|
In
2005 Enertec Systems introduced a new line of military grade Power
Distribution Units for use in airborne, ship-borne and ground
applications. The first batch of orders received generated about
$800,000
in revenues. The first set was submitted to stringent electrical
and
environmental qualification tests. Further units were delivered during
2007 and new orders are expected for about 30-40 sets with deliveries
from
2008-2012.
|
MARKET
CONDITIONS
Manufacturers
that sell defense end products such as missiles, aircrafts or computers, also
provide a support system (e.g., an ATE) to the end-user. The end-user uses
this
support system for maintenance of the end product. Historically, support systems
were made by manufacturers selling the end products. Recently, however,
manufacturers have been focusing their resources on the end products rather
than
on support systems. This has opened up a market for the company to develop
these
systems.
The
local
Israeli market for ATE's simulators and support systems is estimated at $100
to
$200 million annually. The company has about 5% of this market, approximately
the same level of market penetration as the competitors. This market is largely
controlled by big local defense manufacturers. However, there has been a
noticeable trend by these and other defense manufacturers to outsource test
and
support systems to specialized firms so that large manufacturers can focus
their
resources on designing their core products.
9
The
local
market for outsourced custom designed military systems is more than $500
million. The company has just begun to penetrate parts of this market with
products in the field of avionic systems and ruggedized control systems, to
name
but a few. The company is actively working to increase its product portfolio.
During 2006 and 2007 Enertec introduced several new military products
implemented in high volume long term defense programs.
Since
2005, the local military market has improved significantly, resulting in many
new orders which contributed to a backlog of military products totaling
increasing from $ 3.6 million dollars. This trend continued through 2006 and
2007 resulting in a further increase in the backlog, which as of the year ended
December 31, 2006 totaled $6.0686 Million dollars and $ 6,766 by the end of
2007.
A
key
element of the Company’s growth potential is the ability to enhance its sales
and marketing team. It plans to expand its Sales and Marketing team
significantly over the next several years to achieve its sales targets, but
the
company will face significant challenges in doing so due to difficulties in
finding financial resources to meet the working capital growing needs.
CUSTOMERS
Until
2003 IAI (Israel Aircraft Industries) was the company’s major customer
representing approx 74% of its sales. During 2004 several Rafael divisions
received an increasingly high number of new orders as a result of their
aggressive marketing around the world, but they did not increase their technical
and manufacturing staff to accommodate this growth. Enertec positioned itself
to
become their outsourcing team for new orders in the areas of design, engineering
and production. For that reason the company increased its investment in R&D
which resulted in new designs and products that enabled it to successfully
bid
on large numbers of projects. During 2004, the company focused its efforts
on
diversifying its sales across other technologies, like avionic equipment and
combat stations. This resulted in increased sales to Rafael, comprising
approximately 44.7% of total sales in 2004 as compared to 17% in 2003. By the
end of 2005 Rafael became the major customer representing approximately 74%
of
Enertec’s total sales.
10
Investing
in R&D has given an edge with “time to market” which resulted in several
agreements, with Rafael bringing out products utilizing systems within long
project cycles, in many cases up to 10 years. This created a significant
increase in the backlog of orders from Rafael.
By
the
end of 2006 Rafael accounted for 55% of the total sales and by the end of 2007
accounted for 61.1% of total sales.
In
2004
Israeli Aircraft Industry (IAI) accounted for approximately 31% of the sales
and
in 2005 accounted for approximately 18%. During 2005 IAI started to design
and
manufacture a range of new products for which the company was asked to provide
Test Equipment, Simulators and Support Systems. It received several new orders
for the first units delivered during 2006 and worked on a large number of new
proposals which resulted in an increase of sales to IAI's as a percentage of
total sales to 28.5% in 2006 and 32.4% in 2007.
The
rest
of the sales are pretty much evenly spread among other main customers: Elbit,
El-Op and Tadiran Spectralink
BACKLOG
As
of
December 31, 2007, Enertec had a backlog of product orders and services in
the
amount of approximately $6,068,600 as compared to a backlog of approximately
$6,182,000 as of December 31, 2006. The decrease of approximately 2% in the
backlog as of December 31 2007 compared to December 31 2006 is mainly due to
the
receipt of new orders at “ESL” being postponed from the end of year 2007 to the
first quarter of the year 2008; that, combined with higher than usual deliveries
during Dec 2007.
The
orders included in the December 31, 2007 backlog figure are as
follows:
Enertec
Systems
|
$
|
Representing
airborne power supplies, laser systems, flight computers and test
systems
for avionics and military systems
|
|
|
2,912,430
|
$
|
Representing
test systems for IAI missiles and avionic systems
|
|
35,000
|
$
|
Representing
airborne power supplies and test systems for infra-red
payloads
|
|
136,500
|
$
|
Representing
data link test equipment.
|
|
216,000
|
$
|
Representing
medical systems
|
|
6,068,600
|
$
|
TOTAL
backlog for Enertec Systems
|
11
Competition
The
chief
source of competition for Enertec Systems is the clients themselves.
Most
of
Enertec’s clients have done their own testing systems and core component
manufacturing in house. But as their volume of sales increases it is easier
for
Enertec to provide an outsourcing capability for them. Furthermore as the
company continues to prove its expertise and the clients allow them to create
increasingly complex products for them, they start to build their trust and
begin taking over many of the functions that they previously would have produced
in house. Outside competitors faced by Enertec are: Chaban Electronics Ltd,
Symcotech Ltd, and Rada Electronic Industries Ltd.
Employees
As
of
December 31, 2007, Enertec Systems had 59 employees. All key technical employees
must sign a two-year confidentiality agreement and a two-year non-compete
agreement, which prohibits the employees, if they cease working for “ESL”, from
directly competing with or working for their competitors. However, Israeli
courts have required employers seeking to enforce non-compete undertakings
of a
former employee to demonstrate that the competitive activities of the former
employee will harm one of a limited number of material interests of the
employer, such as the secrecy of a company's confidential commercial information
or its intellectual property. None of the company employees are subject to
a
collective bargaining agreement. No supplemental benefits or incentive
arrangements are offered officers or employees. All employees are full-time.
Management considers its employee relations to be good.
12
| C. |
Financial
Statements Analysis
|
Following
is Enertec’s statement of income as at December 31, 2007, and annual statement
of income for the years 2005, 2006:
(Original
statements were prepared in New Israeli Shekels)
Enertec
Profit and Loss
|
Backlog
beginning of the year($)
|
1,900,000
|
3,600,000
|
6,100,000
|
||||||||||||||||
|
P
& L (In Thousands NIS)
|
2005
|
2006
|
2007
|
||||||||||||||||
|
Income(1)
|
20,350
|
100.0
|
%
|
20,397
|
100.0
|
%
|
25,675
|
100.0
|
%
|
||||||||||
|
COGS
|
|||||||||||||||||||
|
Materials(2)
|
8,105
|
39.8
|
%
|
6,272
|
30.7
|
%
|
8,765
|
34.0
|
%
|
||||||||||
|
Wages(3)
|
5,351
|
26.3
|
%
|
6,228
|
30.5
|
%
|
8,566
|
33.4
|
%
|
||||||||||
|
Out
Sourcing(3)
|
818
|
4.0
|
%
|
1,092
|
5.4
|
%
|
916
|
3.6
|
%
|
||||||||||
|
Depreciation
|
146
|
0.7
|
%
|
111
|
0.5
|
%
|
92
|
0.4
|
%
|
||||||||||
|
Total
COGS
|
14,420
|
70.9
|
%
|
13,703
|
67.2
|
%
|
18,339
|
71.4
|
%
|
||||||||||
|
Gross
Profit
|
5,930
|
29.1
|
%
|
6,694
|
32.8
|
%
|
7,336
|
28.6
|
%
|
||||||||||
|
Marketing
& Sales Expenses
|
|||||||||||||||||||
|
Wages(4)
|
197
|
1.0
|
%
|
158
|
0.8
|
%
|
330
|
1.3
|
%
|
||||||||||
|
Advertising
and printed Materials(3)
|
42
|
0.2
|
%
|
85
|
0.4
|
%
|
59
|
0.2
|
%
|
||||||||||
|
Total
M&S Expenses
|
239
|
1.2
|
%
|
243
|
1.2
|
%
|
389
|
1.5
|
%
|
||||||||||
|
R&D(5)
|
1,699
|
1,461
|
1,004
|
||||||||||||||||
|
General
and Administrative Expenses
|
|||||||||||||||||||
|
Wages(6)
|
1,175
|
5.8
|
%
|
1,201
|
5.9
|
%
|
1,180
|
4.6
|
%
|
||||||||||
|
Rent
(7)
|
468
|
2.3
|
%
|
563
|
2.8
|
%
|
601
|
2.3
|
%
|
||||||||||
|
Office
Expenses
|
214
|
1.1
|
%
|
263
|
1.3
|
%
|
207
|
0.8
|
%
|
||||||||||
|
Professional
Services
|
208
|
1.0
|
%
|
272
|
1.3
|
%
|
266
|
1.0
|
%
|
||||||||||
|
Insurance
|
69
|
0.3
|
%
|
53
|
0.3
|
%
|
92
|
0.4
|
%
|
||||||||||
|
Travel
Expenses
|
118
|
0.6
|
%
|
79
|
0.4
|
%
|
106
|
0.4
|
%
|
||||||||||
|
Car
Maintenance
|
69
|
0.3
|
%
|
86
|
0.4
|
%
|
163
|
0.6
|
%
|
||||||||||
|
Taxes
and Fees
|
61
|
0.3
|
%
|
70
|
0.3
|
%
|
75
|
0.3
|
%
|
||||||||||
|
Depreciation(8)
|
365
|
1.8
|
%
|
214
|
1.0
|
%
|
166
|
0.6
|
%
|
||||||||||
|
Gifts
|
110
|
0.5
|
%
|
64
|
0.3
|
%
|
92
|
0.4
|
%
|
||||||||||
|
Transportation
& Deliveries
|
171
|
0.8
|
%
|
302
|
1.5
|
%
|
478
|
1.9
|
%
|
||||||||||
|
Total
Gen. & Admin. Expenses
|
3,028
|
14.9
|
%
|
3,167
|
15.5
|
%
|
3,426
|
13.3
|
%
|
||||||||||
|
Operation
Profit
|
964
|
4.7
|
%
|
1,823
|
8.9
|
%
|
2,517
|
9.8
|
%
|
||||||||||
13
It
is
very difficult to analyze the company's activity since there is no serial
production in the company; each product consists of different inputs. For some,
a majority of the product is produced by outsourcing (with the Company's
know-how) and the remainder is produced in the company plant. Since the company
deals with many different products there is no similarity in the product pricing
and profitability. Nevertheless, the company manages to maintain a gross profit
of 30%-32%. Another important issue is the proportion between company backlog
in
the beginning of the year and the activity volume during this year. In the
year
2005 the proportion was 2.35 sales compared to the backlog. In 2006, the
proportion decreased to 1.26 sales comparing backlog. In the year 2007, there
was an additional decrease to 1.16. Also, it is important to note that in the
year 2007, the second half of the year was 1.58 compared to the first half.
The
management forecast is that a similar situation will occur in 2008. Despite
that
prediction, there is no certainty that this situation will be permanent; the
volume in each quarter depends on completion of the orders.
Sales
and
Marketing expenses are relatively low. This can be a result of costs that were
placed in ‘General and Administrative’ expenses which are also dealing with
Marketing and Sales. We understand that for the time being the marketing system
of the Company is mainly passive, reflecting unexploited market potential.
According to management, the Company is not aggressive in marketing, which
is
crucial for growth due to lack of working capital financing. The ‘Management and
Administrative’ expenses are steady and reasonable. As stated previously, the
main problem of the Company is financing the working capital needs. In this
market, the Company is obligated to grant
its
customers long-term credit. Also, due to the lengthy time frame of the projects,
the Company maintains a large inventory from projects in process.
Normally,
the Company does not receive advance payment from customers or partial payments
upon completion of a substantial part of the project; only upon completion
of
the finished product. Conversely, the Company receives some credit from its
suppliers, but that amount covers only a minimal part of its needs.
The
Company needs to realize some financial solutions and enlarge its equity.
Otherwise it will be very difficult to maintain the growth rate that potentially
exists.
The
Company received a status of “Approved Enterprise” according to the Capital
Investment Law of Israel, starting in the year 2002. According to this status,
the Company was granted tax-free status on a portion of its income. Since the
Company is able, it will most likely submit a new request to receive tax-free
status for its plant enlargement. We can assume that this request will result
in
approval of an additional tax-free income. Since the Company plant is located
in
a preferred area of the country it will likely be approved.
Therefore,
it can be assumed that the long-run average effective corporate tax rate of
the
Company will be less than the maximum 25% on all its earnings.
14
Balance
Sheet
|
(000NIS)
|
||||||||||
|
|
2005
|
|
2006
|
|
2007
|
|||||
|
Current
Assets
|
|
|||||||||
|
Cash
|
22
|
393
|
||||||||
|
Customers
|
13,411
|
14,226
|
17,055
|
|||||||
|
Other
Payables
|
574
|
1,387
|
22
|
|||||||
|
Inventory
|
9,385
|
11,639
|
13,541
|
|||||||
|
Total
|
23,370
|
27,274
|
31,011
|
|||||||
|
|
||||||||||
|
Fixed
Assets (Net)
|
1,265
|
908
|
735
|
|||||||
|
|
||||||||||
|
Total
Assets
|
24,635
|
28,182
|
31,746
|
|||||||
|
|
||||||||||
|
|
||||||||||
|
Current
Liabilities
|
||||||||||
|
Short
Term Bank Credit
|
5,216
|
5,844
|
4,636
|
|||||||
|
Short
Term Loans
|
4,261
|
6,022
|
12,522
|
|||||||
|
Suppliers
|
7,814
|
8,279
|
5,464
|
|||||||
|
Other
Creditors
|
3,257
|
2,228
|
3,297
|
|||||||
|
Total
|
20,548
|
22,373
|
25,919
|
|||||||
|
|
||||||||||
|
Long
Term Liabilities
|
242
|
1,345
|
951
|
|||||||
|
|
||||||||||
|
|
122
|
122
|
447
|
|||||||
|
|
||||||||||
|
Equity
|
3,723
|
4,342
|
4,429
|
|||||||
|
|
||||||||||
|
Total
Equity & Liabilities
|
24,635
|
28,182
|
31,746
|
|||||||
The
Company balance sheet reflects high needs for working
capital. Due to long-term credit lines given to customers (over 60% of the
company sales) the size of the inventory is 50% of sales.
15
The
financial short-term credit is 38.5% of the total assets, 42.1% in 2006. The
long term financial loans in 2006 were 5.2% and 4.4% in 2007. The company equity
has increased slightly but has decreased comparing total assets, from 15.4%
in
2006 to 13.9% in 2007.
The
company investment in fixed assets is relatively low. Also, there are no
investments in Intangible Assets. The company has invested and continues to
invest in R&D, but the development is attached to specific clients for
specific products, even if there is no order.
Working
Capital Needs
|
2005
|
2006
|
2007
|
||||||||
|
Customers
|
13,411
|
14,226
|
17,055
|
|||||||
|
Other
Payables
|
574
|
1,387
|
22
|
|||||||
|
Inventory
|
9,385
|
11,639
|
13,541
|
|||||||
|
Suppliers
|
(7,814
|
)
|
(8,279
|
)
|
(5,464
|
)
|
||||
|
Other
Creditors
|
(3,257
|
)
|
(2,228
|
)
|
(3,297
|
)
|
||||
|
Total
|
12,299
|
16,745
|
21,858
|
|||||||
|
Total
needs in % of sales
|
60.44
|
%
|
82.10
|
%
|
81.9
|
%
|
||||
The
81.9% working
capital needs is extremely high. The increasing needs, specifically the increase
in inventory, are a result of longer timeframes needed to complete the new
projects. We therefore adopted the 90% working capital needs as the future
needs
(in the forecast).
16
| D. |
Valuation
Methodology
|
The
company valuation is based upon accepted methodology for valuating ongoing
concerns.
Accepted
Valuation Approaches
There
are
several generally accepted approaches in use for valuating businesses, none
of
which is necessarily superior to the others. It is more a question of which
of
the approaches or combination of approaches is best suited to the business,
industry, and economic circumstances of the particular assets being appraised
at
the specific valuation date. The following discussion summarizes the three
most
common approaches to the valuation of businesses and the circumstances in which
they generally apply.
The
Cost Approach
In
this
approach, also referred to as the Adjusted Net Assets Method, a valuation
analysis is performed for a company’s identified fixed, financial, and other
assets. The cost approach is typically not employed when valuing an on-going
business or business interest since it assumes a liquidation of the company.
Another reason for not using this approach here is that, while the value of
the
fixed assets and accounts receivable is determinable, it is difficult to
estimate the value of the intangible assets and/or goodwill associated with
a
business. As such, we did not employ a cost approach in our analysis. In the
company’s case, the net asset value is insignificant.
Market
Approach
Two
commonly applied methodologies in the Market Approach to value are the Guideline
Public Company and the Similar Transactions Methods. The Guideline Public
Company Method focuses on comparing the subject company’s
risk profile and growth prospects to select reasonably similar (or “guideline”)
publicly traded companies. In the Similar Transactions Method,
consideration is given to prices paid in
recent
similar transactions that have occurred in the subject company’s industry or in
related industries. This approach is not appropriate in the case of the company
since, as far as we know, there are no similar companies in the Israeli stock
market who are similar to ESL’s combination of activities and products.
There
are
some companies in which ESL’s activity constitutes only a small percentage of
their overall activities.
17
Income
Approach
This
approach, which most commonly incorporates the use of the Discounted Cash Flow
(DCF) Method, focuses on the income-producing capability of the business
enterprise subject to the assumption of a 'going concern', and incorporates
the
specific operating and risk characteristics of the subject company in a
prospective analysis.
The
DCF
method is based on a company's discounted cash flow throughout a predetermined,
planned period. The cash flow is discounted by applying a risk-adjusted
capitalization rate, which reflects the desired yield. At the end of the period,
in the event that there is no reason to assume liquidation of the company,
but
rather its continued existence as an ongoing concern, an "expected value in
perpetuity" must be determined for it. The value of the continued activity
is
the average profit at the end of the period, multiplied by the multiplier
equivalent to the capitalization rate. The present value of the appraised
continuing business activity following the planned period is added to the
discounted cash flow.
The
capitalization rate to be applied in determining the required yield of the
company, and used for the capitalization of cash flow (discounted cash flow
rate), is calculated on the basis of the yield rate on non-risk
investments (government
debentures for the relevant planned period) supplemented by a risk premium.
The
risk premium has to be based on the company’s existing risk factors at the
valuation date reduced by the expected growth rate (Gordon’s
Formula).
In
addition, in determining the required yield (capitalization rate) of the
company, the size (small) and the lack of marketability should be taken into
consideration.
18
| E. |
Valuation
|
Financial
Model Structure
As
aforesaid, the company is valuated using the DCF method, the layout of which
is
provided below. Following is the company’s projected revenue breakdown and the
assumptions it is based on, as well as the valuation results (each item has
a
number associated with it, which refers to the same item in the forecast
below):
| · |
Income
(1): Revenue
forecasts are based on backlog forecast. According to Company management,
due to shortage of credit lines the potential future growth rate
is higher
than the growth rate that the company can maintain.
|
The
backlog in the beginning of 2008 was 6.1 M USD. The management’s estimated
forecast for the end of 2008 is 7.8 M USD. Less certain is the backlog forecast
for the next 3 years.
|
·
|
Materials:
(2): We
adopted the past average rates-34% (materials from income).
|
|
·
|
Wages
and Other Expenditures (3): We
adopted the same rate as it was in the year
2007.
|
|
·
|
Marketing
& Selling Expenses (4):
The wages will be 1.3% of the annual income. Advertising and printed
materials, about 5% annual growth.
|
|
·
|
R
& D Expenses (5):
According to new products planning, the R& D expenses are management’s
decision. We assumed the same expenditures as in
2007.
|
|
·
|
General
& Administrative (6):
G
& A – same rate of income as in
2007.
|
|
·
|
Rent
(7):
The same expenditures as in
2007.
|
19
|
·
|
Depreciation
(8): The
Company has determined a set amount that reflects its depreciation
values;
Capital
expenditures set
equal to depreciation.
|
|
·
|
Working
Capital Needs (9):
(See table, pg. 18). The working capital calculations, based on the
December 31, 2005-2007 results indicate growing working capital needs
caused by growth in revenues. We therefore adopted the high 2007
result of
85.1% working capital needs of sales, as the future needs (in the
forecast).
|
|
·
|
Income
Tax (10):
The Company received a status of “Approved Enterprise” according to the
Capital Investment Law of Israel, starting in the year 2002. According
to
this status, the Company was granted tax-free status on a portion
of its
income. The portion of its income which is taxable is fixed. Therefore,
any growth in the net revenue of the company reduces the average
tax rate
on the total net revenue. According to our calculations, in 2008
the tax
rate will be 8%, 2009 7.5%, 7% in 2010, 6.7% in 2011 and in 2012
it will
be 6.2%.
|
|
·
|
Capitalization
Period (11):
The cash flow should be capitalized from the middle of the period
to the
valuation date each year.
|
|
·
|
Financial
Liabilities (12):
Financial Liabilities are calculated based on December 31 2007 balance
sheets, and include all financial assets and liabilities.
|
|
Net
Financial Liabilities
|
|||||||
|
|
2006
|
2007
|
|||||
|
Cash
|
22
|
393
|
|||||
|
Short
Term Bank credit
|
(5,844
|
)
|
(4,636
|
)
|
|||
|
Short
Term loans
|
(6,022
|
)
|
(12,522
|
)
|
|||
|
Long
Term Liabilities
|
(1,345
|
)
|
(951
|
)
|
|||
|
Severance
pay Fund
|
(122
|
)
|
(447
|
)
|
|||
|
Total
|
(13,311
|
)
|
(18,163
|
)
|
|||
20
|
·
|
Capitalization
Rate (13):
The Capitalization rate we used was 14.5%, based on the following
calculations:
|
In
our
assessment of the risk associated with the expected cash flow of the company,
we
consider the Weighted Average Cost of Capital ("WACC”), which measures a
company’s cost of debt and equity financing weighted by the percentage of debt
and percentage of equity in a company’s target capital structure.
Arithmetically,
the formula for calculating the after-tax WACC is:
Where:
|
D
|
=
|
Estimated
market value (or book value) of debt
|
|
E
|
=
|
Estimated
market value of equity
|
|
V
|
=
|
D
+
E
|
|
T
|
=
|
Assumed
tax rate
|
|
RD
|
=
|
Cost
of debt financing
|
|
RE
|
=
|
Cost
of equity financing, calculated according to the CAPM
methodology
|
To
estimate the cost of equity financing, an adjusted version of the Capital Asset
Pricing Model (“CAPM”) was utilized. The CAPM measures the return required by
investors given the company’s risk profile. This model (as adjusted) is
expressed arithmetically by the following equation:
Where:
|
Rf
|
=
|
Risk-free
interest rate, typically the yield available on long-term Government
Securities.
|
|
RM
|
=
|
Average
market rate of return.
|
|
Rf+RM
|
=
|
Equity
risk premium expected on an equity investment in a fully diversified
portfolio.
|
|
b
|
=
|
A
measure of a stock’s volatility relative to an average risk stock or a
fully diversified portfolio of stocks (market portfolio). In this
case we
adopted "Beta” of mid-size and small cap “financial services providers”
traded in Tel-Aviv Stock Exchange.
|
21
The
WACC
is based upon market return premiums and unique risk associated with each
operator, with risk-free rate of return being derived from 10-year US government
bond net yields after tax.
Based
on
the above, the cost of equity was estimated to be approximately
18.40%,
as
summarized below:
|
Risk
Free Rate
|
4.2%
|
|
Based
on 10 years net rate for government bonds.
|
||||
|
Equity
Risk
Premium
|
6.6%
|
|
Historical
risk premium (i.e., historical return on market less historical risk
free
rate).
|
||||
|
Beta
|
1.7
|
Beta
of: a publicly traded company in the electronic industry and similar
other
Israeli companies.
|
|||||
|
Small
Cap
Premium
+ Special
risk
premium
|
3.0%
|
|
Small
Cap Premium. Based on the difference on yield required by a regular
investor when comparing a company on the scale of TASE traded companies,
with a small private company like “ESL”
|
||||
|
Cost
of Capital
|
18.40%
|
|
|
·
|
We
base this risk factor on the uncertainty associated with the Company's
revenue structure, having two customers which hold 65% of the company’s
total revenue and the volatility associated with these revenues.
|
|
·
|
Assuming
a long term normative capital structure of 40%, and based on the
formula
provided above, the WACC calculation for the company is as
follows:
|
18.40%
x
0.70 + 7.5% x (1-0.22) x 0.30= 14.5%
We
therefore used 14.5 % as the capitalization rate.
|
·
|
Perpetual
Growth Rate (14) of
2% was chosen according to the long term growth rate in the developed
countries.
|
22
|
·
|
Effective
Tax Rate Starting 2013 (15): Since
the Company has the ability, it will most likely submit a new request
to
receive tax-free status for its plant enlargement when the present
one
will be expired, in the year 2012. We can assume that this request
will
result in approval of an additional tax-free income. Since the Company
plant is located in a preferred area of the country it will likely
be
approved.
|
Therefore,
after consulting the company management, we adopted an effective tax rate of
22%. It can be assumed that the long-run average effective corporate tax rate
of
the Company will be less than the maximum 25% on all its earnings.
|
·
|
Terminal
Value (16) calculations
- we defined a perpetual annual income based on the following assumptions:
|
|
-
|
We
took the net operating income from 2012.
|
|
-
|
We
assume that capital expenditure is equal to depreciation.
|
|
-
|
Working
capital is calculated assuming a 2% growth of revenues.
|
We
used
Gordon's formula, at a capitalization rate of 14.5% and annual growth of 2%.
23
P
& L Forecast (Thousands NIS)
24
Cash
Flow of Operations
|
(In
Thousands NIS)
|
||||||||||||||||||||||
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
|
||||||||||||||||
|
Net
Operation Profit
|
4,043
|
4,370
|
4,743
|
5,053
|
5,389
|
4,571
|
||||||||||||||||
|
CapEx
after depreciation(8)
|
-
|
|||||||||||||||||||||
|
Net
Working Capital Needs(%)(9)
|
85
|
%
|
||||||||||||||||||||
|
Net
Working capital needs (K-NIS)(9)
|
(6,236
|
)
|
(1,703
|
)
|
(1,490
|
)
|
(1,251
|
)
|
(1,301
|
)
|
(677
|
)
|
||||||||||
|
Net
CF of Operations(10)
|
(2,193
|
)
|
2,667
|
3,253
|
3,802
|
4,087
|
3,894
|
|||||||||||||||
|
Capitalization
Period(11)
|
0.5
|
1.5
|
2.5
|
3.5
|
4.5
|
|||||||||||||||||
|
NPV
|
(2,049
|
)
|
2,177
|
2,319
|
2,367
|
2,222
|
||||||||||||||||
Company
Valuation
(In
Thousands NIS)
|
Company
Value (In Thousands NIS)
|
||||
|
Capitalization
Rate (13)
|
14.5
|
%
|
||
|
Perpetual
Growth Rate (14)
|
2.0
|
%
|
||
|
Effective
Tax Rate starting 2013 (15)
|
22.0
|
%
|
||
|
Total
NPV -up to 2012
|
7,036
|
|||
|
Terminal
Value (16)
|
16,938
|
|||
|
Value
of Operations
|
23,974
|
|||
|
Less
Net financial Liabilities (12)
|
(18,163
|
)
|
||
|
Total
Company Value (000NIS)
|
5,811
|
|||
|
Total
Company Value (000$)
|
1,511
|
|||
25
Sensitivity
Analysis- checking the change in company value due to changes
In
the capitalization rate (rows) and changes in sales forecast (column)
|
1,511
|
15.5
|
%
|
15.0
|
%
|
14.5
|
%
|
14.0
|
%
|
13.5
|
%
|
13.0
|
%
|
12.5
|
%
|
||||||||
|
90%
|
(997
|
)
|
(886
|
)
|
(769
|
)
|
(643
|
)
|
(507
|
)
|
(361
|
)
|
(202
|
)
|
||||||||
|
93%
|
(505
|
)
|
(357
|
)
|
(198
|
)
|
(27
|
)
|
158
|
359
|
577
|
|||||||||||
|
96%
|
67
|
258
|
465
|
688
|
930
|
1,194
|
1,482
|
|||||||||||||||
|
100%
|
970
|
1,230
|
1,511
|
1,816
|
2,148
|
2,510
|
2,907
|
|||||||||||||||
|
102%
|
1,488
|
1,787
|
2,111
|
2,462
|
2,845
|
3,264
|
3,723
|
|||||||||||||||
|
105%
|
2,357
|
2,722
|
3,117
|
3,546
|
4,014
|
4,527
|
5,090
|
|||||||||||||||
|
108%
|
3,348
|
3,786
|
4,261
|
4,779
|
5,344
|
5,963
|
6,644
|
26
Star
Night Technologies Ltd.
Valuation
of
Magam
Safety Ltd. and the Safety Sector
as
of February 28th,
2008
Signing
of the Agreement with
Lapis
Technologies, Inc.
Fairness
Opinion
May
2008
Table
of contents
|
A.
General
|
3
|
|
B.
The transaction and the purchase price
|
6
|
|
C.
Overview of Magam and the safety and Rubber
Sector
|
9
|
|
D.
Financial statements analysis
|
21
|
|
E.
Methodology – valuation method for intangible
assets
|
23
|
|
F.
Valuation
|
25
|
May
25th,
2008
To
Mr. Harry Mund
Lapis
Technologies, Inc.
Re:
Valuation
of Magam
Safety Ltd. And the Safety Sector
as
of the Valuation Date
A.
General
We
were
requested by Mr. Harry Mund and Lapis Technologies, Inc. (hereinafter
respectively: “Mund” and “Lapis” to render our opinion as to the fair value of
Magam Safety Ltd. and the safety sector ("Magam") as a part of fairness opinion
of Star night that we are preparing under an agreement between LAPIS and Star
Night, dated February 28th,
2008
(hereinafter: the “Agreement). Night Vision Sector is a division placed in
several wholly owned subsidiaries of Star Night Group, the subsidiary SDS (Star
Defense Systems) Ltd. ("SDS") and its subsidiary Magam Safety Ltd. This
valuation is an integral part of the valuation of Star Night's shares.
In
respect of the above, we have made a valuation of the Fair Market
Value1 as
of the
date of signing and consummation of the Agreement ("Valuation Date"), based
on
the information set out below.
"Jacob
Eshed – Tesuot Consultants" is an independent consulting firm specializing
in 'going concern' valuations.
Previous
works–
the
present contract, involving this work, is the first agreement between Jacob
Eshed Tesuot Consultants and Lapis. Our first engagement with Star Night
Technologies Ltd. took place on May 15, 2006. The second was in August 7, 2006,
and within that framework we valuated other subsidiaries of Star, Night Light
and New Noga Light, in relation to their sale to Magam. This valuation was
included in a report in respect to a transaction between Magam and its
controlling shareholder, in accordance with Securities Regulations (A
Transaction Between a Company and its Controlling Shareholder) – 2001, published
in August 2006. The third agreement involved an impairment study under Standard
15, requested by Star in respect to its purchase of Radom. On December 28,
2006
we valuated the subsidiary “Prizmatech”, concerning a transaction for its sale
to Magam by an interested party. In addition, we made several Employee Stock
Option Valuations granted by Star to managers, and tested for the necessity
of
writing off intangible assets.
| 1 |
We
have determined the fair market value to be the price at which
an entity
or an interest would change hands between a willing buyer and willing
seller both acting in their own best interest, on the open market
assuming
a reasonable period of time for an agreement to arise, neither
being under
compulsion to buy or sell and both having reasonable knowledge
of all
relevant facts as of the applicable valuation date.
|
3
Material
Available in Performing the Valuation:
· Audited
financial statements of SDS as of December 31, 2007.
· Data
from
the Audited financial statements of Magam Safety Ltd. as of December 31,
2007.
· The
purchase agreement and all its appendices.
· Valuation
by Prof. Yoram Eden on the eve of the transaction in respect thereof.
· Purchase
Price Allocation conducted by us.
· Customer
list, including revenues thereof, for the year 2007.
· List
of
employees, salaries and training periods.
· Conversations
with management.
We
did
not audit the written and verbal data provided to us by the management, other
than for reasonability and compliance. The aforesaid list of data constitutes
the main basis for the work provided below.
4
Results
Summary:
The
fair
value of the safety segment according to the attached document is NIS 29
Million. SDS Share in the safety segment is 100%. The value can range from
NIS
27 Million to NIS 31 million.
The
accompanying report summarizes the principles and procedures that were applied
in this study as well as its findings.
|
|
|
Jacob
Eshed
|
|
Jacob
Eshed – Tesuot Consultants
|
5
B.
Transaction
and Purchase Price
On
October 5, 2006 a transaction was completed, by which Star purchased from Oron
B.P. Ltd. ("Oron"), the former controlling shareholder of Magam, and from the
controlling shareholders in Oron, Messrs. Ehud Fromkin and Ronen Bechor (the
three will be called hereinafter jointly "the Previous controlling
Shareholders"), the controlling interest in Magam, by purchasing most of the
holdings of the Previous controlling Shareholders in Magam, and by effecting
a
private placement of additional shares of Magam to Star, as specified below.
In
frame of the transaction, Star reorganized the holdings of the Group so that
its
holdings in most of Group companies will be held through Magam.
The
principles of the transaction are as follows:
On
June
1, 2006 Star and Oron entered into an agreement which was subsequently amended
on August 1, 2006 ("the Agreement"), according to which Star purchased 6,802,824
of Magam’s ordinary shares ("Magam's Shares") from Oron. At their purchase date
these shares represented about 60.07% of Magam's issued and paid up share
capital, in consideration for NIS 10,500 thousand ("the Consideration"). Of
this, NIS 4,500 thousand was paid to Oron on October 5, 2006 and the remainder,
in the amount of NIS 6,000 thousand, linked to the CPI and bearing interest
at a
rate of 6% per annum, was paid from Star's own resources until July 5, 2007.
To
ensure
the second payment on account of the Consideration, Star pledged in favor of
a
trustee, under a fixed first lien, Magam's Shares representing about 28.6%
of
Magam's issued and paid up capital; all rights attached to the Shares will
be
held by Star's including the voting rights, the rights to receive dividends
etc.
(while the pledge on the Shares are not realized).
According
to the provisions of the Agreement, should Magam's financial statements as
of
the transaction completion date show that Magam's shareholders' equity is lower
than NIS 4,500 thousand, the Consideration will be reduced by the difference
between NIS 4,500 thousand and the shareholders' equity, as the said financial
statements shall reflect, multiplied by 93%. In addition, Oron will be eligible
for additional consideration at 1% of Magam's market value based on the average
closing price in the 30 trading days prior to September 30, 2007, in the event
that during a 12 month period (October 2006 to September 2007) the total sales
amount of the safety operations exceeds NIS 12,150 thousand and the net profit
after tax exceeds NIS 1,700 thousand. During this period, the safety operations
will continue the ordinary course of business, Magam Safety will not pay
dividends, will not pay management fees to Magam, to Star in relation to Magam,
or to officers therein, nor will it participate in the expenses of Magam and
of
any of the companies related to it.
6
According
to the provisions of the Agreement, Magam's financial statements according
to
which the said review will be conducted, are statements reflecting Magam's
assets and liabilities in the safety products field of activity only, subsequent
to the sale of Magam's subsidiary that engages in the marketing of electronic
components and of the holdings in the additional corporations to the Previous
Controlling Shareholders, and subsequent to the distribution of dividends to
Magam's shareholders, in the amount of NIS 12,800 thousand. The parties have
agreed that the financial statements based on which the review will be conducted
will be the statements as of September 30, 2006.
In
addition, on October 5, 2006 Magam allotted 53,278,152 of Magam's Shares to
Star, representing immediately subsequent to their allotment about 82.47% of
Magam's issued and paid up share capital, in consideration for the transfer
of
Star's holdings in New Noga and in Night Light (100% of their issued and paid
up
share capital) to Magam ("the First Allotment"). Immediately subsequent to
the
purchase of Magam's Shares and completion of the First Allotment, as specified
above, Star transferred to third parties, without obtaining any securities,
5,908,256 of Magam's Shares held by it, representing about 9.15% of Magam's
issued and paid up share capital, inter alia to meet the threshold required
in
the TASE's preservation rules in respect of the public's holdings in Star's
shares ("the Transferred Shares" and "the Shares Transfer"). The Transferred
Shares were transferred in part to a third party that undertook to pay for
the
purchased shares only subsequent to their sale to third parties, less NIS 0.05
from the sale price. The profit in respect of the sale of these shares will
be
recognized upon the actual receipt of the consideration. Some of the Transferred
Shares were transferred to service providers in return for services provided
to
Star in respect of the Magam transaction.
Subsequent
to completing the Shares Transfer, Star held about 83.86% of Magam's issued
and
paid up share capital. All rights attached to these shares, including the voting
rights, the rights to receive dividends etc., are owned by the third parties
to
whom the shares were transferred.
7
During
a
12 month period commencing July 2007, Oron may require Star to sell up to about
4.9% of Magam's issued and paid up share capital held by Oron. Where Star
undertook close to a minimum sales price of NIS 0.974 for each Magam Share,
linked to the CPI and bearing interest at a rate of 6% per annum, commencing
on
the completion date of the Magam transaction. Star's undertaking to pay a
minimum price will expire in the event that during 30 trading days within a
time
period of 45 consecutive trading days, commencing in July 5, 2007 and ending
on
July 5, 2008, the closing price of Magam's Share will be higher than NIS 1.10,
linked to the CPI and bearing interest at a rate of 6% per annum, commencing
on
the completion date of the Magam transaction.
Concurrent
with the completion of the Magam transaction, Star entered into an agreement
with Magam according to which Star will provide management services to Magam
for
a 9 month period until and including June 2007 ("the Management Agreement").
In
accordance with the provisions of the Management Agreement, Star will provide
the following management services to Magam: Chairman, Board of Directors, CEO,
Star's secretary and CFO services, at NIS 200,000 plus VAT per month. In
addition, Star's rights, under the management agreement between Star, New Noga
and Night Light, will be assigned to Magam in a manner that Magam will provide
the said companies management services in consideration for an amount equaling
Magam's general and administrative expenses, plus 10%. New Noga and Night
Light's shares in the management fees will be determined based on their pro
rata
shares in their joint revenues turnover.
Immediately
subsequent to completion of the transaction, Star transferred 1,280,000 of
Magam's Shares to Miller Ltd., signifying 1.98% of Magam's issued and paid
up
share capital, in return for Chanoch Miller's mediation in the purchase of
the
control in Radom by Star, as well as in return for the sale of Radom's holdings
in Miller Ltd. and in S.T.H.N. Real Estate and Investments Ltd. ("S.T.H.N.").
As
at the transaction completion date, Star holds about 81.87% of Magam's issued
share capital.
The
intangible assets were created in the initial purchase, when Magam included
only
the operations of Magam Safety.
8
C.
Overview
of Magam and the Safety and Rubber Sector
|
1.
|
Overview
of the Safety Sector
|
The
sector includes Magam safety and parts of Magam Investments that are related
to
the safety segment based on a report published by Star Night, dated December
31,
2007.
|
1.1.
|
General
information –Safety
Sector
|
|
1.1.1
|
Structure
of and Changes in the Safety Sector
|
Most
of
the operations involve the production and marketing of safety products that
are
designed mainly for security industries. This sector is characterized by the
demand to meet strict consumer requirements and compliance with international
standards.
Magam's
safety products operations are conducted through Magam and Magam Safety in
the
facility in Tziporit.
Most
of
the operations involve the production and marketing of safety products that
are
designed primarily for the security industries. The production layout is divided
into three main departments:
| (a) |
The
textile division, developing and manufacturing various types of
parachutes, acceleration pants for pilots, harnesses
etc;
|
| (b) |
The
inflatable products division, manufacturing boats, life rafts, inner
lining and inflatable products for various
uses;
|
|
(c)
|
The
rubber department that manufactures rubber fuel tanks, metal coatings
etc.
|
Since
its
founding, Magam has accumulated significant knowledge and gained a high
reputation, both of which are required for the safety products field in
complying with the strict requirements of the consumers and international
standards. This experience provides Magam with a competitive advantage in its
safety operations, opposite potential competitors, in respect to quality
assurance and compliance with safety standards.
|
1.1.2
|
Legislative
restrictions, regulations and special constraints
|
|
(a)
|
Magam
manufactures some of its safety products in accordance with international
standards.
|
|
(b)
|
In
the safety field, Magam operates according to quality assurance procedures
at standards that have been acquired and assimilated during Magam's
years
of operation, and in accordance with rules and methods that are dictated
by its customers, mainly by the Ministry of Defense and the remaining
security industries that are among its safety product customers.
|
9
|
(c)
|
As
authorized by some of its security industry customers, such as the
Israeli
Air Force, the Navy, the Ordnance corps, IAI etc., Magam's employees
are
qualified to independently test the safety products.
|
| (d) |
Magam
Safety holds a certificate from the Israeli Standards Institution,
valid
until April 30, 2008,according to which Magam Safety's quality management
system is in compliance with the requirements of ISO 9000 and Israeli
Standard 2000 in respect of safety products. The certification department
of the Israeli Standards Institution certifies the quality systems
periodically. In order to ensure the reliability and maintenance
of the
quality management system, Magam Safety has a quality assurance system,
which allows it to ensure the quality of its products and its compliance
with the aforesaid quality standards.
|
|
(e)
|
Magam
Safety holds an essential facility certificate in accordance with
the
Emergency Work Service Law -1967, which means that in times of emergency
Magam Safety is required to carry out manufacturing tasks (both new
products and refurbishment of existing products). The scope of the
tasks
changes every year, in accordance with the instructions of the Ministry
of
Defense. This certificate is in effect until December 2008, and is
renewed
regularly. The company's management assesses that there is no reason
that
may prevent renewal of this
certificate.
|
|
(f)
|
The
facility in Tziporit has a business license in accordance with the
Business Licensing Law - 1968.
|
|
1.1.3.
|
Changes
in the scope of activity in the field and in profitability
|
The
sales
of the safety products are affected by changes in the security budget and scope
of orders of the Ministry of Defense, a major customer of Magam. In 2006 and
2007 the sales to the Ministry of Defense constituted about 59% and about 56%
of
the total safety products sales, respectively. The scope of orders of the
Ministry of Defense might decrease due to the Ministry of Defense's policy,
which involves purchasing various products, including the Group's products,
in
the US, from US manufacturers under the US military aid budget, and changes
made
in the Ministry of Defense's policy in respect of the manner of utilization
of
this budget. Purchases made using US military aid funds reduce the extent of
orders from Israeli manufacturers and at times lead to the avoidance of any
orders from Israeli manufacturer's altogether.
10
In
addition, due to the security situation, the budget allocation of the Ministry
of Defense was changed. This change has led to the conversion of general current
budgets to budgets that are specifically designated budgets, including Magam's
safety products.
Magam's
revenues from this field in the years 2005, 2006 and 2007 amounted to
approximately NIS 13,515 thousand, approximately NIS 13,422 thousand and
approximately NIS 17,386 thousand respectively.
|
1.1.4
|
Critical
success factors and changes occurring in
them
|
The
safety products field has several critical success factors associated with
it,
as follows:
|
(a)
|
The
development of new products and upgrade of existing products.
|
|
(b)
|
Penetration
of new geographic markets and utilization of the reputation gained
by
Magam in the field of safety products for the Israeli security industries,
in order to promote sales of the Group's products in additional markets.
|
|
(c)
|
Compliance
with standards and quality assurance requirements to the satisfaction
of
its customers.
|
|
(d)
|
Experience
in dealing with market changes – Magam's vast accumulated experience
in its field, as well as that of its employees and managers, allows
it to
react relatively quickly to changes in customer demands and in the
characterization of products required by the customers in the safety
field.
|
|
1.1.5
|
Entry
and Exit barriers in the field and changes occurring in
them:
|
The
main
entry barrier derives from the need to be counted among the approved suppliers
of the major safety product customers as well as the need to accumulate
extensive know-how and expertise, the need to purchase unique machinery and
maintain it and the lack of economic profitability upon entering the field
of
activity of the Group, due to the small scope of the local market.
The
main
exit barrier derives from the long term warranty (up to 10 years) granted by
Magam for the safety products manufactured and supplied by it. Nevertheless,
based on Magam's past experience in the safety products market, the financial
scope involved in the realization of the warranty granted by Magam is
insignificant.
11
|
1.1.6
|
Alternatives
Products and changes occurring in
them
|
To
the
best of Magam's knowledge, there are no technological alternatives to the vast
majority of the products manufactured by Magam in the safety products field.
However, there are competitors to the entire range of products manufactured
and/or marketed by Magam in this area.
|
1.1.7
|
Structure
of the Competition and changes occurring in
it
|
In
general, there are no local manufacturers that compete with Magam's products
in
its field. In addition, since the Group's safety products facility is located
in
Tziporit, which is considered Development Area A, Magam is entitled to
preference in tenders that are issued by the State authorities and by
government-owned companies.
The
global market is saturated with competition, in a manner that makes it difficult
for Magam's safety products to enter the international markets.
A
description of the main safety products manufactured by Magam is provided
below:
|
1.1.8
|
Parachute
kits and air rescue equipment
|
Manufacture
of parachutes for the defense market, aircraft deceleration nets and pressure
suits for pilots.
|
1.1.9
|
Rescue
and inflatable
equipment
|
Manufacture
of rescue equipment and inflatable items for air and sea use, including commando
boats, VIP security equipment, rafts, inflatable life rafts of various sizes
and
models for passengers and crews of ships and airplanes, as well as life jackets
of various types for sea and air passengers and crews, and advanced technology
inflatable pneumatic equipment.
|
1.1.10
|
Rubber
products
|
Manufacture
of rubber fuel tanks for tanks and aircraft, profiles used mostly in industry
and rubber coatings for metals (such as tanks for the chemical
industries).
The
vast
majority of Magam's sales in the safety products field are made for customers
in
the local market. Some of Magam's products which are sold to customers in Israel
are then sold by them to overseas markets. Magam has no data with respect to
the
percentage of safety products sold overseas by its local customers, but it
assesses that these sales represent about 10% of Magam's total sales in Israel.
12
The
scope
of direct sales of Magam's safety products to markets overseas is negligent.
Some of Magam's safety products are unique products that are integrated into
the
end products of leading security companies in Israel. The company's management
assesses that the marketing prospects of these unique products in international
markets are higher, relative to the prospects of Magam's remaining safety
products penetrating these markets.
In
2007
Magam sold fuel tanks for armored tanks to the US army, in the amount of
approximately NIS 1 million.
|
1.2
|
Revenue
Segmentation - profitability of products and services
|
The
table
below provides data on Magam's revenues in the safety products field and its
gross profit for the years 2005-2007:
|
In
the year
|
|
|||||||||
|
|
|
2007
|
|
2006
|
|
2005
|
||||
|
Revenues
(NIS thousands)
|
17,386
|
13,422
|
13,515
|
|||||||
|
%
from Magam's revenues
|
38
|
%
|
20
|
%
|
27.8
|
%
|
||||
|
Gross
profit (NIS thousands)
|
6,547
|
3,299
|
3,605
|
|||||||
|
Gross
profit rate
|
37.7
|
%
|
24.6
|
%
|
26.6
|
%
|
||||
There
is
no product group in the safety products field that provides revenues of 10%
or
more of Magam's revenues.
There
is
no material variance in the gross profitability rates of the
various
products and services in this field of activity.
|
1.3
|
New
products
|
As
of the
date of this report, Magam is developing several new products,
mainly:
13
|
1.3.1
|
Fuel
tanks for the civilian
market
|
In
July
2006 Magam Safety entered into an agreement, unlimited in time, with a third
party, for the establishment of a joint venture for the development of fuel
tanks for civilian use. According to the provisions of the agreement, the third
party will own the product (the intellectual property), Magam Safety will hold
the exclusive product manufacturing rights for a limited period of three years,
and the third party will market the product. The Company was not provided any
guarantee that it will continue manufacturing the product beyond the said
exclusivity period. Due to changes in the customer's requirements, the
development is not yet complete and Magam believes that it will be completed
towards the end of 2008.
|
1.3.2
|
Rubber
fuel tanks for the military
market
|
Magam
Safety is in the advanced stages of developing rubber based fuel tanks for
armored vehicles for the military market. As of the date of this report, the
development process is complete and Magam received two orders for the supply
of
samples for field tests to be carried out by the customers.
|
1.3.3
|
Magam,
as a subcontractor, is developing braking cushions for aircraft.
As of the
date of this report, the project was delayed by the customer. Magam
will
continue developing the product during 2008, using its own
resources.
|
|
1.4
|
Customers
|
|
|
The
Company has a wide and varied reserve of several hundred customers,
of
which dozens are regular customers.
|
Magam's
principal customers in the safety products field are the Israeli Ministry of
Defense and other defense industries in Israel. Magam also sells its products
to
civilian customers, such as chemical facilities.
In
most
cases, Magam does not engage in frame agreements with its customers, and enters
into contracts with them on an individual order basis, according to the
customer's needs.
As
of the
date of this report, Magam has significant dependency on one customer -
the
Ministry of Defense. Below are details of the total sales to the Ministry
of
Defense and their percentage of Magam's sales in the safety field and out
of
Magam's consolidated sales (based on pro-forma statements):
14
|
In
the year
|
|
|||||||||||||||||||||||||||
|
|
|
2007
|
|
2006
|
|
2005
|
||||||||||||||||||||||
|
Customer
|
Revenues
(NIS thousands)
|
|
|
Percentage
out of segment revenues
|
|
|
Percentage
out of Magam's revenues
|
|
|
Revenues
(NIS thousands)
|
|
|
Percentage
out of segment revenues
|
|
|
Percentage
out of Magam's revenues
|
|
|
Revenues
(NIS thousands)
|
|
|
Percentage
out of segment revenues
|
|
|
Percentage
out of Magam's revenues
|
|||
|
Ministry
of Defense
|
9,801
|
56
|
%
|
8
|
%
|
7,862
|
59
|
%
|
12
|
%
|
6855
|
51
|
%
|
14
|
%
|
|||||||||||||
|
Customer
B.
|
1,468
|
8
|
%
|
1
|
%
|
1,348
|
10
|
%
|
2
|
%
|
776
|
6
|
%
|
2
|
%
|
|||||||||||||
|
|
Magam's
contracts with the Ministry of Defense
-
in an insignificant part of Magam's contracts with the Ministry of
Defense
and all its branches, the Ministry of Defense orders the development
of
products based on definitions and specifications provided by it.
In these
contracts, that are short-term contracts (up to two-three months),
prices
are set based on the hourly rate of Magam's employees. However, the
development process may be long-term and comprise several short-term
contracts. Upon completion of the development, the Ministry of Defense
usually purchases the products. The Ministry of Defense is not obligated
to Magam to purchase its products as aforesaid.
|
In
other
contracts between Magam and the Ministry of Defense for the purchase of
products, the price of the products is set according to the tender published,
with the general work order terms issued by the Ministry of Defense
("the
general terms")
or in
accordance with negotiations between Magam and the Ministry of Defense.
According
to general terms, Magam agrees to be accountable to the Ministry of Defense
and
anyone on its behalf, for any claim due to damage or loss caused for any reason
whatsoever, while an order is prepared or due to this order, to the body or
property of any person, including Magam employees, employees of the Ministry
of
Defense and anyone on its behalf, and to indemnify the Ministry of Defense
and
anyone on its behalf for any amount it shall be required to pay for any such
damage or loss. In addition, Magam undertakes to insure at its expense, at
their
full value, all goods, raw or processed material, equipment, instruments,
specifications and drawings that the Ministry of Defense has submitted to the
Company or has borne the purchase costs thereof, for any risks, its said
undertaking and the employees of the Ministry of Defense and anyone on its
behalf. In addition, all intellectual property accumulated by Magam while
developing products ordered by the Ministry of Defense is owned by the Ministry
of Defense, and should Magam wish to sell any such product to another customer,
the consent of the Ministry of Defense thereto will be required. To the best
of
Magam's knowledge, it is in compliance with the said terms.
15
In
addition, Magam is accountable for any design discrepancy and fault in the
ordered items or in work or service ordered or in any of the same, evolving
of
execution, materials, design, work or service that are faulty, defective or
that
do not meet the required standards or that do not comply with the quality or
properties required for the use they are intended for or with the
specifications. To the best of Magam's knowledge, no material claims have been
received in respect of Magam's accountability for its products until the date
of
this report.
|
|
The
consideration from sales to customers that are not the Ministry of
Defense
is usually set in negotiations between Magam and its customers, in
respect
of each order separately.
|
Below
is the distribution of Magam's sales in the safety field, by customer category:
|
|
In
the year
|
||||||||||||||||||
|
|
2007
|
|
2006
|
|
2005
|
||||||||||||||
|
Customer
Category
|
Revenues
(NIS
thousands)
|
|
Percentage
of
total
revenues
in
the
field
|
|
Revenues
(NIS
thousands)
|
|
Percentage
of
total
revenues
in
the field
|
|
Revenues
(NIS
thousands)
|
|
Percentage
of
total
revenues
in
the
field
|
||||||||
|
Defense
|
13,490
|
77.6
|
%
|
10,002
|
74.5
|
%
|
10,562
|
78.2
|
%
|
||||||||||
|
Civilian
|
3,896
|
22.4
|
%
|
3,420
|
25.5
|
%
|
2,953
|
21.8
|
%
|
||||||||||
|
Total
|
17,386
|
100
|
%
|
13,422
|
100
|
%
|
13,515
|
100
|
%
|
||||||||||
1.5. Marketing
and distribution
Magam's
safety products are marketed and distributed by Magam and Magam safety
themselves. Marketing of the safety products is conducted by the CEO of Magam
Safety and another marketing person, who assists in the business development
and
in the strategic layout of Magam's marketing activity development. In addition,
in 2007 Magam Safety recruited a senior marketing person for overseas marketing.
In 2007 Magam invested approximately NIS 1 million in the marketing of safety
field products overseas. Marketing in the international market included
participation in shows, manufacturing of demonstration products, travel etc.
16
1.6. Backlog
Magam's
safety products backlog is based on binding orders signed by the customers.
The
table
below provides backlog details as of December 31, 2006, as of December 31,
2007
and immediately prior to the date of this report, by the period of recognition
of the expected income (in NIS thousand):
|
Period
of recognition of
the
expected income
|
Backlog
as of December 31, 2006
|
|
Backlog
as of December 31, 2007
|
|
Backlog
immediately
prior
to
publication date
of
annual report
(march
16,
2008)
|
|||||
|
2007
|
5,262
|
-
|
-
|
|||||||
|
First
Quarter 2008
|
-
|
3,000
|
1,559
|
|||||||
|
Second
Quarter 2008
|
-
|
2,000
|
4,000
|
|||||||
|
Third
Quarter 2008
|
-
|
1,000
|
1,796
|
|||||||
|
Fourth
Quarter 2008
|
-
|
1,077
|
1,084
|
|||||||
|
2009
-
|
-
|
-
|
-
|
|||||||
|
Total
|
5,262
|
7,077
|
8,439
|
|||||||
The
backlog as of December 31, 2007 and as of the date of this report comprises
about 50% rubber products, compared with 7% rubber products included in the
backlog as of December 31, 2006.
|
1.7.
|
Competition
|
There
are
many competitors in the civilian sector of safety and rubber products in which
Magam operates. Since there is no available official information about the
civilian safety products market, the company cannot assess its share in this
market.
There
are
several companies in Israel and abroad that supply products which compete with
several of Magam's safety products (the rubber products). Magam's management
is
unable to assess Magam's share in the rubber products market, due to the large
number of competitors and in the absence of full details concerning the
competing companies.
17
Competition
in Israel
In
Israel, in practice, Magam has exclusivity with respect to some of the products
in respect to which it enters into agreements with the Ministry of Defense.
With
respect to the remaining products for the Ministry of Defense and for the
balance of the customers in the safety field, Magam has many competitors and
it
is unable to assess its share in this market; to the best of its knowledge
it is
of medium size in Israel. Magam's main competitors in Israel, for certain
products, are Rabintex Industries Ltd. 2
and
Achidatex. In addition, there are many entities in Israel who compete in the
rubber products field (profiles and coatings), such as: Haifa Rubber, Gumiyan
Rubber Ltd., Simon Engineering Ltd. and others. Since Magam's safety products
facility is in Tziporit (defined as Development Area A) it entitles Magam to
priority regarding tenders in the safety products field, which are issued by
the
State authorities and government companies
|
Competition
abroad
|
As
aforesaid, Magam Safety's product sales to markets abroad (both directly and
through its customers in Israel that sell the company's products abroad), are
negligent in international terms. Magam's managers assess, based on their
familiarity with the market, that there are dozens of companies worldwide that
manufacture products that compete with Magam's products, such as Zodiac, Viking,
Aerazur, Dunlop, Mills and others.
To
contend with the competitors overseas, Magam is expanding its efforts towards
marketing and sales to end customers, and creating joint ventures with competing
companies in such a manner that Magam will serve as the subcontractor for these
companies.
|
1.8.
|
Restrictions
and supervision
|
Magam
Safety holds an essential facility certificate in accordance with the provisions
of the Emergency Work Service Law - 1967. Magam is also recognized as an
approved unlimited supplier in terms of the financial scope of the Ministry
of
Defense's orders.
Magam's
facility in Tziporit holds a business license in accordance with the Business
Licensing Law - 1968.
|
2
|
To
the best of Magam's knowledge, Rabintex Industries Ltd. is a public
company whose shares are listed on the Tel Aviv Stock Exchange
Ltd.
|
18
Magam
operates in accordance with quality assurance procedures acquired and
assimilated during its years of operation, and in accordance with rules and
methods that are dictated, inter alia, by its customers and mainly by the
Ministry of Defense and the remaining security industries that are among its
safety product customers. Under authorization from some of its customers, such
as the Israeli Air Force, the Navy and the Ordnance corps, Magam's employees
are
qualified to independently test the safety products.
In
the
safety products field, Magam Safety has adopted in-house quality assurance
procedures in compliance with its certification to Israeli Standard 2000 ISO
9001 by the Israeli Standards Institution in respect of its products. Magam
Safety has a certificate from the Israeli Standards Institution, according
to
which Magam Safety's quality management system is in compliance with the
requirements of ISO 9000 and Israeli Standard 2000. The certification department
of the Israeli Standards Institution certifies the quality systems periodically.
In order to ensure the reliability and maintenance of the quality management
system, Magam Safety has a Quality Assurance Department that acts to keep and
maintain the system.
|
1.9.
|
Goals
and business strategy
|
| 1.9.1 |
Magam
intends to dedicate additional resources to marketing its products,
mainly
in international markets, in view of the exhaustion of most of the
marketing potential in the local market.
|
| 1.9.2 |
Expansion
of the products basket in the field of activity through the manufacturing
of new rubber and textile based products, constituting the core of
Magam's
safety operations. For this purpose, Magam approaches its customers
in the
safety products field, to learn their needs pertaining to safety
products.
|
| 1.9.3 |
Increase
of the business operations opposite several strategic customers from
the
defense industries, in order to reduce Magam's existing dependence
on the
Ministry of Defense - its principal customer. For this reason, Magam
initiates meetings with the procurement and engineering employees
of these
customers, in order to illustrate its capabilities in the safety
products
field to additional target public, thus increasing the awareness
of its
target public to Magam's manufacturing and development capabilities
in the
safety field.
|
| 1.9.4 |
Development
of products for the civilian market, using experience and know
how
acquired during Magam Safety's years of
operations.
|
19
|
1.9.5
|
Using
its existing safety workforce resources, by conducting think tanks,
in
order to locate new products and technologies and/or improve existing
products as a means for providing response to changes in the civilian
markets.
|
|
1.10.
|
Expected
development in the upcoming year
|
In
2008
Magam intends to continue the same manufacturing and marketing trends it has
followed in recent years in regard to the safety products field.
Magam
does not expect material changes in the safety products field in the upcoming
year.
20
D.
Financial
Statements Analysis
The
financial statements are not audited, although the data presented in them is
processed, towards audited statements.
21
The
financial statements are not audited, although the data presented in them
are
processed, towards audited statements.
The
shareholders’ equity of the safety segment is NIS 6,985,685.
It
derives from a write down of the investment in subsidiaries belonging to other
segments, out of Magam’s shareholders’ equity.
22
E.
Methodology –
valuation method for intangible assets
The
MAGAM
valuation is based upon accepted methodology for valuating ongoing
concerns.
Accepted
Valuation Approaches
There
are
several generally accepted approaches in use for valuating businesses, none
of
which is necessarily superior to the others. It is more a question of which
of
the approaches or combination of approaches is best suited to the business,
industry, and economic circumstances of the particular assets being appraised
at
the specific valuation date. The following discussion summarizes the three
most
common approaches to the valuation of businesses and the circumstances in which
they generally apply.
| 1. |
Cost
approach
|
In
this
approach, also referred to as the Adjusted Net Assets Method, a valuation
analysis is performed for a company’s identified fixed, financial, and other
assets. The cost approach is typically not employed when valuing an on-going
business or business interest since it assumes a liquidation of the company.
Another reason for not using this approach here is that, while the value of
the
fixed assets and accounts receivable is determinable, it is difficult to
estimate the value of the intangible assets and/or goodwill associated with
a
business. As such, we did not employ a cost approach in our analysis. In the
company’s case, the net asset value is insignificant. This approach is not
suitable for the case before us.
| 2. |
Market
approach
|
Two
commonly applied methodologies in the Market Approach to value are the Guideline
Public Company and the Similar Transactions Methods. The Guideline Public
Company Method focuses on comparing the subject
company’s risk profile and growth prospects to select reasonably similar (or
“guideline”) publicly traded companies. In the Similar Transactions Method,
consideration is given to prices paid in recent similar transactions that have
occurred in the subject company’s industry or in related industries. This
approach is not appropriate in the case of the company since, as far as we
know,
there is only one similar company in the Israeli stock market that is similar
to
the night vision sector combination of activities and products. This approach
is
not suitable for the case before us.
23
| 3. |
Income
approach
|
This
approach, which most commonly incorporates the use of the Discounted Cash Flow
(DCF) Method, focuses on the income-producing capability of the business
enterprise subject to the assumption of a 'going concern', and incorporates
the
specific operating and risk characteristics of the subject company in a
prospective analysis.
The
DCF
method is based on a company's discounted cash flow throughout a predetermined,
planned period. The cash flow is discounted by applying a risk-adjusted
capitalization rate, which reflects the desired yield. At the end of the period,
in the event that there is no reason to assume liquidation of the company,
but
rather its continued existence as an ongoing concern, an "expected value in
perpetuity" must be determined for it. The value of the continued activity
(Terminal Value) is the average profit at the end of the period, multiplied
by
the multiplier equivalent to the capitalization rate. The present value of
the
appraised continuing business activity following the planned period is added
to
the discounted cash flow.
The
capitalization rate to be applied in determining the required yield of the
company, and used for the capitalization of cash flow (discounted cash flow
rate), is calculated on the basis of the yield rate on non-risk
investments (government
debentures for the relevant planned period) supplemented by a risk premium.
The
risk premium has to be based on the company’s existing risk factors at the
valuation date reduced by the expected growth rate (Gordon’s
Formula).
In
addition, in determining the required yield (capitalization rate) of the
company, the size (small) and the lack of marketability should be taken into
consideration.
| 4. |
Selecting
the correct
approach
|
MAGAM
as
an ongoing concern is valuated using the DCF method, the layout of which is
provided (see below). Following is the company’s projected revenue breakdown and
the assumptions it is based on, as well as the valuation results.
24
F.
Valuation
The
valuation model is provided below, followed by notes that are an integral part
of it.
Safety
segment valuation
NIS
thousand
|
|
10.0%
|
10.0%
|
10.0%
|
10.0%
|
||||||||||||
|
2008
|
2009
|
2010
|
2011
|
2012
|
||||||||||||
|
Sales
(1)
|
19,000
|
20,900
|
22,990
|
25,289
|
27,818
|
|||||||||||
|
Cost
of sales (2)
|
12,540
|
13,794
|
15,173
|
16,691
|
18,360
|
|||||||||||
|
Gross
profit
|
6,460
|
7,106
|
7,817
|
8,598
|
9,458
|
|||||||||||
|
|
||||||||||||||||
|
Sales
expenses (3)
|
950
|
1,045
|
1,150
|
1,264
|
1,391
|
|||||||||||
|
Administrative
expenses (4)
|
2,660
|
2,793
|
2,933
|
3,079
|
3,233
|
|||||||||||
|
Expenses
|
3,610
|
3,838
|
4,082
|
4,344
|
4,624
|
|||||||||||
|
|
||||||||||||||||
|
Operating
profit (5)
|
2,850
|
3,268
|
3,734
|
4,255
|
4,834
|
|||||||||||
|
Tax
expenses
|
770
|
850
|
934
|
1,064
|
1,208
|
|||||||||||
|
Operating
profit after tax
|
2,081
|
2,418
|
2,801
|
3,191
|
3,625
|
|||||||||||
|
Working
capital needs
|
(307
|
)
|
(361
|
)
|
(397
|
)
|
(437
|
)
|
(480
|
)
|
||||||
|
Net
capital investments
|
0
|
0
|
0
|
0
|
0
|
|||||||||||
|
Net
operating cash flow
|
1,774
|
2,057
|
2,404
|
2,754
|
3,145
|
|||||||||||
|
|
||||||||||||||||
|
Capitalization
periods (6)
|
0.5
|
1.5
|
2.5
|
3.5
|
4.5
|
|||||||||||
|
Capitalized
value
|
1,665
|
1,701
|
1,751
|
1,768
|
1,779
|
|||||||||||
|
Working
capital needs rate (7)
|
19
|
%
|
|
|||||||||||||
|
Capitalization
rate (8)
|
13.5
|
%
|
|
|||||||||||||
|
Perpetual
growth rate (9)
|
2.0
|
%
|
|
|||||||||||||
|
Net
present value
|
12,424
|
|
||||||||||||||
|
Terminal
value (10)
|
17,658
|
|
||||||||||||||
|
Net
financial Assets (11)
|
2,700
|
|
||||||||||||||
|
Total
company value
|
29,022
|
|
||||||||||||||
Notes
| 1. |
The
revenues growth rates in upcoming years was set based on new products
that
Magam is developing, and that will allow it to achieve its forecasted
growth rates. In order to be cautious, we elected to settle for a
relatively low growth rate.
|
| 2. |
Cost
of sales – in 2007 there was a decrease in the ratio between the cost
of sales and sales, from 71% in 2006 to 62% in 2007. We have set
the cost
of sales at 66%.
|
| 3. |
Sales
and marketing expenses - we have set a rate of 10% per year, Most
of these
expenses are variable.
|
25
| 4. |
General
and administrative expenses – were set at 14% in the first year.
These expenses were raised every year by half of the projected rate
of
increase in sales, due to their fixed component.
|
| 5. |
Operating
profit – this profit is purely from current operations, excluding
management fees payable to the parent company or revenues from net
financial assets.
|
| 6. |
Capitalization
periods – the capitalization starts from mid-2008 - half a year, then
mid-2009 - a year and a half, and so
on.
|
| 7. |
The
working capital needs rate in the forecast is based on an updated
calculation of the working capital needs in the safety segment in
2007,
namely 19%. This result is consistent with the figure of 20% obtained
by
Prof. Eden in his valuation.
|
| 8. |
Capitalization
rate - the long term risk free interest rate of government bonds
is about
4.2%. The return on the Israeli stock market 10 years past is 10.8%.
The
un-leveraged beta of the companies engaged in the military field
is 1.56.
Magam's beta, based on the ratio of the credit it is able to obtain
based
on its asset structure and the nature of its regular operations,
to its
value, 25%, and an effective tax rate of 25% for a significant number
of
years, is 1.8. the paragraph is not
cleare
|
26
4.2%
+
(10.8%-4.2%)*1.8=16%
Magam
is
a small, privately held company, Normaly a liquidity premium should be added.
We
have decided not to add a premium for special liquidity risk. since the Company
has existed for many years, and has shown revenues and profitability stability,
In
our
opinion Magam is able to obtain credit from financial institutions without
relying on external sources, due to the nature of its operations and the quality
of its customers. Magam is able to obtain short term credit by pledging the
expected proceeds and even credit against orders from its safest customers,
at
25% of its value at the most. Accordingly, the WACC will be:
16%*75%+7.5%*0.75*25%=13.50%
This
capitalization rate takes into account the fact that the safety segment is
able
to obtain credit but does not utilize this, and has financial surplus.
| 9. |
Perpetual
growth rate - the terminal growth rate was set at 2%, which reflects
the
annual perpetual growth in Israel and in the developed countries
for the
long term.
|
| 10. |
Calculation
of the terminal value - calculated using the Gordon formula, based
on the
cash flow in 2013 and thereafter, based on a growth rate of 1% per
annum.
|
| 11. |
Net
financial liabilities - from the balance sheets dated December 31,
2007.
|
Net
Financial Assets Calculation
|
Banks
|
146,516
|
|||
|
Cash
|
218,886
|
|||
|
Short
term investments
|
2,483,883
|
|||
|
Loans
to employees
|
19,588
|
|||
|
|
2,868,874
|
|||
|
|
|
|||
|
Long
term liabilities
|
168,795
|
|||
|
|
|
|||
|
Net
financial assets
|
2,700,079
|
27
Sensitivity
Analysis – valuation changes due to changes in the
capitalization
rate (columns) and perpetual growth rate (rows)
|
Capitalization
Rate
|
|||||||||||||||||||||||||
|
Perpetual
Growth Rate
|
|
12.0
|
%
|
12.5
|
%
|
13.0
|
%
|
13.5
|
%
|
14.0
|
%
|
14.5
|
%
|
15.0
|
%
|
||||||||||
|
0.0
|
%
|
29,806
|
28,633
|
27,553
|
26,554
|
25,629
|
24,770
|
23,969
|
|||||||||||||||||
|
0.5
|
%
|
30,551
|
29,303
|
28,158
|
27,102
|
26,127
|
25,222
|
24,382
|
|||||||||||||||||
|
1.0
|
%
|
31,362
|
30,030
|
28,811
|
27,692
|
26,661
|
25,708
|
24,824
|
|||||||||||||||||
|
1.5
|
%
|
32,249
|
30,822
|
29,521
|
28,330
|
27,237
|
26,229
|
25,298
|
|||||||||||||||||
|
2.0
|
%
|
33,223
|
31,687
|
30,293
|
29,022
|
27,859
|
26,791
|
25,807
|
|||||||||||||||||
|
2.5
|
%
|
34,297
|
32,637
|
31,138
|
29,776
|
28,535
|
27,399
|
26,355
|
|||||||||||||||||
|
3.0
|
%
|
35,490
|
33,686
|
32,065
|
30,600
|
29,271
|
28,058
|
26,948
|
|||||||||||||||||
|
3.5
|
%
|
36,820
|
34,850
|
33,089
|
31,506
|
30,075
|
28,776
|
27,592
|
|||||||||||||||||
Valuation results:
The
fair
value of the safety segment according to the attached document is NIS 29
Million. SDS Share in the safety segment is 100%. The value can range from
NIS
27 Million to NIS 31 million.
28
Star
Night Technologies Ltd.
Valuation
of
Night
Vision Sector Systems Ltd.
as
of February
28th, 2008
Signing
of the Agreement with
Lapis
Technologies Inc.
Fairness
Opinion
May
2008
Table
of Contents
|
General
|
3
|
|
|
B.
|
Sector
Overview
|
6
|
|
C.
|
Financial
Statements Analyses
|
18
|
|
Valuation
Methodology
|
20
|
|
|
E.
|
Valuation
|
22
|
May
25th,
2008
To:
Mr.
Harry Mund
Lapis
Technologies, Inc.
Re:
Valuation
of Night Vision Sector Systems, Ltd.
as
of the Valuation Date
|
A.
|
General
|
We
were
requested by Mr.
Harry
Mund and Lapis Technologies, Inc. (hereinafter respectively: “Mund” and “Lapis”
to render our opinion as to the fair value of Night Vision Sector, (Hereinafter:
“Night Vision” or "the sector") as a part of fairness opinion of Star night that
we are preparing under an agreement between LAPIS and Star Night, dated February
28th,
2008
(hereinafter: the “Agreement). Night Vision Sector is an division placed in
several wholly owned subsidiaries of Star Night Group, the subsidiary SDS (Star
Defense Systems) Ltd. ("SDS")
and
its subsidiary New Noga Light (2000) Ltd. (hereinafter "New
Noga")
and
Night Light Ltd.( hereinafter: "Night
Light").
This
valuation is an integral part of the valuation of Star Night's shares.
In
respect of the above, we have made a valuation of the Fair Market
Value1
as
of the
date of signing and consummation of the Agreement ("Valuation Date"), based
on
the information set out below.
"Jacob
Eshed – Tesuot Consultants" is an independent consulting firm specializing in
'going concern' valuations. We have extensive experience in performing
fairness
opinions for companies in diverse fields of activities.
1 We
have
determined the fair market value to be the price at which an entity or
an
interest would change hands between a willing buyer and willing seller
both
acting in their own best interest, on the open market assuming a reasonable
period of time for an agreement to arise, neither being under compulsion
to buy
or sell and both having reasonable knowledge of all relevant facts as of
the
applicable valuation date.
Since
the
year 2005, our office has prepared a series of valuation studies for Star Night
and for SDS, including a valuation of the investment in Radom for the year
2005,
as of December 31, 2006. There is no dependence of the valuator on the ordering
party or other companies in the Star Night Group.
Objective
and Scope
The
purpose of this study is to determine the fair value of the assets included
in
the agreement. We understand that our recommendation of fair market value and
this valuation report will be used and relied upon for the agreement. In this
valuation, we have relied on signed written material, unsigned written material
and information provided verbally or by email. It is based upon both internal
and public information made available by the Company, and upon estimates and
assessments that may prove, over time, to have been inaccurate or incomplete.
We
do not express an opinion or offer any form of assurance regarding their
accuracy or completeness. All the information provided is accountable for by
the
Company and its management alone.
Materials
Available in Performing the Valuation:
| · |
Audited
financial statements for the sector as of December 31,
2007.
|
| · |
Data
included in Star Night's periodic
report.
|
| · |
Data
regarding the sector's backlog as of December 31,
2007.
|
| · |
Star
Night management’s forecasts – which served as the basis for the company's
cash flow projections.
|
| · |
Draft
of SDS’s periodic report for the year
2007.
|
| · |
Conversations
and email exchanges with the management.
|
4
Valuation
Method
In
valuating the Fair Value of the Night Vision Sector we adopted the DCF method.
This Method is based on a company's discounted cash flow throughout a
predetermined, planned period. The cash flow is discounted by applying a
risk-adjusted capitalization rate, which reflects the desired yield. At the
end
of the period, in the event that there is no reason to assume liquidation of
the
company, but rather its continued existence as an ongoing concern, an "expected
value in perpetuity" must be determined for it. The value of the continued
activity (Terminal Value) is the average profit at the end of the period,
multiplied by the multiplier equivalent to the capitalization rate. The present
value of the appraised continuing business activity following the planned
period is added to the discounted cash flow.
Results
Summary
In
reaching our conclusion as to the fair market value of the sector, we utilized
the Discounted Cash Flow Approach. Based upon the foregoing, and in reliance
thereon,, the fair value of Night Vision Sector is reasonably stated to be
average of NIS 88
Million,
and ranges from NIS 81.8 to NIS 94.2 Million.
Based
upon the foregoing and such other factors as we deem relevant, we are of the
opinion that the Consideration is fair from a financial point of
view.
The
accompanying report summarizes the principles and procedures that were applied
in this study as well as its findings.
Respectfully
submitted,
Jacob
Eshed
Jacob
Eshed – Tesuot Consultants
5
|
B.
|
Sector
Overview
|
The
company engages in the development, assembly, manufacturing and marketing in
Israel and worldwide of electro-optical night-vision systems and products,
for
armies, police forces and other security defense bodies. The company's systems
significantly improve vision in the dark.
Demand
for night-vision systems has grown in recent years, due to changes in the combat
doctrines of the various armies worldwide, resulting in growing emphasis on
improving night-time combat capabilities, including in urban areas.
As
a
result of the increase in the demand for night vision systems, the company
acts
to establish its position as a night vision systems and products supplier
through new developments, expansion of its operations in Israel and worldwide,
and strategic cooperation with leading companies in Israel and
worldwide.
During
the Second Lebanon War in the summer of 2006, IDF forces successfully used
the
company's night vision products.
Previous
Year’s Developments
The
company's strategy is to expand its deployment in the markets in which it
operates, and in new markets outside Israel. An increase is seen in its sales
to
various countries in Africa in 2005-2007, an increase in its sales to central
European countries in 2005 and in its backlog in 2007, and an increase in its
sales to countries in Southeast Asia in 2006-2007. In 2004-2007 there was a
gradual decrease in the company's sales in the USA, due to completion of most
of
the order under the agreement with ITT.
6
Sector
Companies structure
In
its
field of activity, the company engages in the development, assembly, marketing
and production of electronic and electro-optical night-vision systems, based
mainly on star light enhancement. Among the company's products:
PR-1910BM4
– binocular
-
Magnifier binocular (times 4) that improves night vision quality and range;
Designed for the individual soldier.
NL-61
(M1, M2, M3) Mini Night Sight series
- Night
sights in star light intensifier technology, designed for assembly on weapons
such as Tavor, M-16 or M-4. The sights weigh about 850 grams and are designed
to
locate targets up to 300-400 meters away.
NL-91
- Night Vision Goggle
- Helmet
or head-strap mounted with a single night vision monocular for the individual
soldier.
Helmet
binocular -NL-93 – Ansis Goggle
- A
night vision goggle for helicopter pilots, helmet mounted. Dual channel device
with two tubes, designated for night flying only.
Ground
monocular for the driver and commanding officer - NL-93
- Helmet
mounted, dual channel device with two tubes, designated for driving and night
observation.
Night
Vision CCD Camera - NL-87/89
- Camera
with an X7-X9 magnifier for long range observation of up to 4 km; vehicle borne
or ground based.
7
Mini
Night Vision CCD Camera - C8HTV
- Night
camera for an optical head for a machine gun, via which the machine gun prepares
for the shot.
Night
vision tubes - Refurbishment
- The
group refurbishes night vision tubes, used as components in the production
of
civilian, military and police night vision devices. The company forecasts that
the demand for refurbished tubes will increase over the next few years, in
view
of the shortage of new tubes in the market.
The
company adapts its products to its customers' needs, and initiates, from time
to
time, new products that in its opinion may be purchased by potential
customers.
Products
that constitute alternatives to the field of activity products include both
products using a technology similar to that used by the company's products
(namely products based on star light enhancement), that are produced by the
company's competitors, and products operating based on heat energy emitted
from
objects and/or from the human body (thermal products).
The
company has two products (Binocular – PR-1910BM4 and Monocular - PR-1910B), of
which total sales in 2007 were about 62% of the sector revenues. There is no
significant variance in the gross profitability rates among the night vision
products.
|
|
YEARS
|
||||||||||||
|
PRODUCT
|
2007
|
2006
|
2005
|
||||||||||
|
Binocular
– PR-
|
Income
(NIS thousand)
|
|
37,516
|
-
|
-
|
||||||||
|
1910BM4
|
Percentage
of sector
revenues
|
42.5
|
%
|
-
|
-
|
||||||||
|
Monocular
- PR-
|
Income
(NIS thousand)
|
|
17,114
|
-
|
-
|
||||||||
|
1910B-1
|
Percentage
of sector
revenues
|
19.4
|
%
|
-
|
-
|
||||||||
|
Helmet
binocular
|
Income
(NIS thousand)
|
|
2,443
|
8,554
|
6,030
|
||||||||
|
NL-93
|
Percentage
of sector
revenues
|
2.8
|
%
|
29.7
|
%
|
21.0
|
%
|
||||||
8
New
Product Development
The
company strives to develop two new night vision products every year, based
on
the knowledge of its customers' needs. As of the report date, and as part of
the
company's strategy, it is developing products that combine star light
enhancement technology and thermal capabilities. Such a product combines the
advantage of each method and allows the user to choose between the two
technologies based on the existing environmental conditions (weather, time
in
the day, topography etc.).
Products
under development as of the report date:
A
long-range sight (NL67) based on star light enhancement for a range of up to
1,000 meters - During 2005 the product model was approved by the customers,
and
its development is expected to be completed in 2008. The product has undergone
a
highly successful field trial, and as of the date of this report the equipping
plan for elite units is in review; several preliminary pilot orders were
obtained from customers.
Data
transfer display for helicopter pilots and fighter pilots - The preliminary
development commenced in the beginning of 2004 and the feasibility trials that
commenced in 2005 had been highly successful; as of the date of this report
the
product is in the end stages of development and has been approved for on-site
demonstration in the second half of 2008.
Advanced
head systems and day-night helmet display for helicopter pilots - In May 2005,
New Noga Light entered into an agreement with IAI for the development of a
prototype. The development of the prototype was scheduled to be completed until
the end of the second quarter of 2006, but it has not yet been completed, since
IAI has decided to freeze this development. The completion date was postponed
to
the second half of 2008. As of the date of this report, the company has
completed phase A of the prototype development from its own sources.
A
long
range sight that includes a laser range finder - The first development stage
has
been completed and as of the date of this report the company serves as the
sub-contractor if an Israeli company that has won a tender for the sights.
Thermal
cameras, designed for light and heavy vehicles - Development commenced in 2005
and was approved by the customer. The company received approval from an Israeli
defense company budget to complete this development by the end of 2006. The
development of the product was originally scheduled to be completed until the
end of 2007. Due to changes in the customer's requirements, the company will
complete development by the end of 2008.
9
Light
thermal binocular - As of the report date, the company is in the end development
stages. Development of the product is scheduled to be completed in the second
half of 2008.
Thermal
sight for snipers - As of the report date, the company is in the end development
stages. Development of the product is scheduled to be completed in the second
half of 2008.
Warranty
policy for company products
The
night
vision products are granted a warranty for a period of 12-24 months, according
to the product type. In frame of this warranty, the end customer returns a
faulty product and receives a new product in its place, or the company replaces
faulty parts in systems sold by it, within the warranty period. According to
the
company information, insignificant numbers of faulty products are replaced.
MARKET
& Competition
In
the
night vision field, the Group has several competitors in Israel and abroad.
Competition is based on the extent of compliance with the customers'
requirements, performance, price, reputation, the maintenance and support
services provided, technological parameters and the extent of cooperation with
the local industry. The company assesses, that in many cases it had competitive
advantage over its competitors outside Israel in the sale of its military
systems and products to the Defense Ministry, due to the operational experience
accumulated in IDF in the use of its products as well as due to its
technological expertise and its compliance with IDF's requirements.
In
the
absence of official and available information about the night vision products
market in Israel, the company is unable to assess its market share in its field
of activity in Israel. The company estimates that its market share of the global
night vision products market is insignificant.
To
the
best of the company's knowledge, its potential Israeli competitors are ITL,
Ortec, Pulse Inteco, and Meprolight. The sectors major competitors include
several foreign corporations. Among them:
10
· Litton
Systems Inc.
· ITT
Night
Vision
· “OIP”
Optiquneet Instruments de Precision
These
companies have significantly greater financial, marketing and other resources
than the company has, and some of them enjoy government support in the
development and financing of transactions. The company has commercial relations
with some of these companies (both as suppliers and as customers). In the
company's opinion these relations are due to the fact that these competitors
of
the company do not consider it a threat, due to its size
CUSTOMERS
Most
of
the company's customers are defense ministries and defense bodies worldwide.
The
purchase agreements are usually signed following a tender issued by the relevant
defense bodies. Most of the company's sales derive from tenders it wins. At
times, the agreements entered into as a result of tenders are multi-year frame
agreements according to which the customers periodically place orders. Many
times, these frame agreements include options for additional product orders
at a
scope beyond the frame amount subject to predetermined conditions.
Mostly,
a
threshold condition for participation in an international tender is that the
company is in possession of a permit to hold negotiations as well as an export
permit, from the country in which it operates.
The
tender usually examines several major parameters: (a) the required technical
specification must be adhered to; (b) target price; (c) the product model that
has successfully passed the relevant tests and sent to the customer must be
approved (model approval); and (d) financial stability. Several additional
parameters that are examined are experience and past engagements with the
customer and knowledge of the company's other customers.
In
some
cases, the company enters into cooperation agreements in order to enter a
tender. As of the date of the report, these engagements have no significant
impact on the company's results of operation.
In
some
of the company's purchase agreements with various customers, the customer
partially manufactures or assembles the product. In these cases, even though
the
company transfers the technology to the customer and professional know-how
required for the production process, the customer does not usually receive
the
source of the technology itself, since the knowledge provided is restricted
to
the specific product manufacturing process. The company's new management
believes that the said transfer of specific professional knowledge does not
provide its customers with tools that would allow them to compete with it.
11
All
agreements entered into with the company's customers contain product warranty
in
respect of the products' quality, for a period of 12-24 months, as part of
the
purchase price. Product returns are at an insignificant scope.
The
company sells its night vision products both to customers in Israel and to
customers outside Israel (in 2007 mainly Asia, Africa and Europe). Night vision
product sales are detailed below, by geographic segment:
|
GEOGRAPHIC
SEGMENT
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Sales
(NIS
thousand)
|
Percentage
of all sales
in the field
|
Sales
(NIS
thousand)
|
Percentage
of all sales
in the field
|
Sales
(NIS
thousand)
|
Percentage
of all sales
in the field
|
||||||||||||||
|
Asia
|
69,666
|
78.93
|
%
|
8,226
|
29
|
%
|
-
|
-
|
|||||||||||
|
Israel
|
8,016
|
9.08
|
%
|
9,364
|
33
|
%
|
7,398
|
25
|
%
|
||||||||||
|
Africa
|
5,216
|
5.91
|
%
|
2,564
|
9
|
%
|
8,698
|
29
|
%
|
||||||||||
|
Europe
|
3,255
|
3.69
|
%
|
954
|
3
|
%
|
4,938
|
16
|
%
|
||||||||||
|
USA
|
2,109
|
2.39
|
%
|
6,115
|
21
|
%
|
8,851
|
29
|
%
|
||||||||||
|
Others
|
-
|
-
|
1,549
|
5
|
%
|
362
|
1
|
%
|
|||||||||||
|
Total
|
88,262
|
100
|
%
|
28,772
|
100
|
%
|
30,247
|
100
|
%
|
||||||||||
12
Significant
Customers of the Company:
Israel
Defense Forces–
In
the
middle of 2007 and in the beginning of 2008 the company won two IDF contracts
for supplying night vision equipment in the amount of 33 Million NIS and 18
Million NIS respectively.
Ugandan
government
- In
April 2005 New Noga entered into an agreement with Uganda's government ("the
agreement") for the supply of night vision devices for the Ugandan Defense
Forces. The engagement scope is NIS 22,000 thousand. The supply of the products
was completed in September 2007.
The
Indian military
- during
2007 sales to the Indian military were 71.5% of sector’s income compare to 22.6%
at 2006. The agreement signed with the Indian military is in fact responsible
for the company growth. Termination of the agreement with the Indian military
could have a materially adverse impact on the company's financial results.
As of
the report date, the backlog from the Indian military amounts to NIS 47 million.
The company is scheduled to provide the ordered products during the years
2008-2009.
The
table
below provides details about the company's night vision systems major customers:
|
IN
YEARS
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
Customer
|
Income
(NIS
thousand)
|
Percentage
of sector
income
|
Income
(NIS
thousand)
|
Percentage
of sector
pro-forma
income
|
Income
(NIS
thousand)
|
Percentage
of sector
pro-forma
income
|
|||||||||||||
|
Indian
military
|
63,155
|
71.5
|
%
|
6,504
|
22.6
|
%
|
3,023
|
9.9
|
%
|
||||||||||
|
Ugandan
government
|
4,986
|
4.0
|
%
|
2,564
|
8.5
|
%
|
8,074
|
26.7
|
%
|
||||||||||
|
Total
|
68,141
|
75.5
|
%
|
9,068
|
31.1
|
%
|
11,097
|
36.6
|
%
|
||||||||||
BACKLOG
The
sector Revenues are closely related to the backlog orders, at the end of the
previous year. The nature of the field of activity is the long term preparation
and survey of products during tender period, hopefully followed by a mid term
supply contract, usually two to four years.
13
The
proportion between company backlog in the beginning of the year and the activity
volume during the year were: 1.7 sales compared to backlog. In 2006 and 2007
the
proportion was increased to 1.85. At the end of 2007 the sector backlog for
2008
amounted to 66 millions NIS which is 75% of total sector sales for the ended
year.
Seasonality
- The
sector sales are a direct result of the budgets of government and of defense
bodies in Israel and in countries outside Israel in which the company operates;
these budgets are usually approved in the first quarter of every year, and
orders are therefore received beginning in the second quarter, their delivery
dates falling in the second half of the year, so that income increases in this
period. A large backlog helps the sector to smooth the seasonality factor and
operate more efficiently.
|
PERIOD
OF
RECOGNITION
OF THE
EXPECTED
INCOME
|
BACKLOG AS
OF DECEMBER
31, 2005
|
BACKLOG AS
OF DECEMBER
31, 2006
|
BACKLOG AS
OF DECEMBER
31, 2007
|
|||||||
|
2006
|
16,814
|
|||||||||
|
2007
|
1,105
|
36,616
|
||||||||
|
First
quarter, 2008
|
5,697
|
11,532
|
||||||||
|
Second
quarter,2008
|
5,697
|
11,534
|
||||||||
|
Third
quarter, 2008
|
29,729
|
|||||||||
|
Fourth
quarter, 2008
|
12,989
|
|||||||||
|
2009
and thereafter
|
32,429
|
|||||||||
|
Total
|
17,919
|
48,010
|
98,213
|
|||||||
Sales
in Israel - At the moment, the company has signed two important contracts
with the Israeli Defense Forces in the amount of approximately 50 Million NIS.
Export
-
In
addition to the backlog, the company is participating in two big tenders: one
in
Southeast Asia, in the amount of 100 Million USD and one in South America,
in
the amount of 18 Million USD. The company considers its chances good for winning
those tenders.
Raw
materials and suppliers
The
main
raw material for the company's products is night vision tubes. A tube is an
electronic component that receives rays of light at night which is transmitted
to it through a lens installed at the front of the product. The tube multiplies
the intensity of the night light (up to 6,000 times) that cannot be seen with
naked eye, allowing the user to see at a distance of hundreds of meters in
nearly complete darkness
14
The
company purchases the tubes primarily from one European supplier named Dep
Photonix, which the company is significantly dependent upon, in light of the
sharp increase in the demand for tubes as well as the decreasing availability
of
tubes in the US. Should the company be unable to purchase tubes from the said
manufacturer, it would be forced to purchase tubes from alternative sources,
which could decrease their availability. In addition, it would be forced to
conduct thorough quality tests on all tubes at its expense, which could delay
delivery times and cost the company substantial amounts.
The
availability of the tubes changes in accordance with the developments in the
industry – its delivery time ranges from immediate to 12 months. The costs
entailed in purchasing the tubes represented about 44% of the total purchases
in
the field of activity in 2005, about 47% in 2006 and about 45% in 2007. The
company purchases the tubes after conducting quality tests.
The
company purchases surplus night vision equipment from the Ministry of Defense,
refurbishes it and sells it to the American market under the relevant licenses
from the State of Israel and the US government. As of 2008, the company began
refurbishing advanced generation tubes for the Ministry of Defense.
Other
than the tubes, the company purchases other items and materials (oculars and
magnifiers, laser diodes, cards and electronic components) from optical products
and electronic components. The company does not depend on any specific supplier
for these items. In addition, it contracts subcontractors for various works,
such as: metal assemblies for optic lenses and machining works on metal bodies
in accordance with the technical specifications required by the customer.
The
company engages its suppliers through a purchase order and import licenses,
granted by the US government or the European country from which the tubes are
imported.
In
2005,
2006 and 2007 the company purchased raw materials from five, four and two major
suppliers, respectively, at about 57%, about 66% and about 45% of the total
raw
material purchases in the field of activity.
A
segmentation of the company's purchases in the field of activity, by major
supplier, and the agreements with them are provided below:
15
|
Supplied
products /
|
% from the total purchases
In the years
|
|||||||||||||||
|
Supplier
|
raw materials
|
2007
|
2006
|
2005
|
Agreements
|
|||||||||||
|
Supplier A (*)
|
Tubes
|
44.8
|
%
|
44.5
|
%
|
28
|
%
|
Specific
orders –
delivery
times:
Immediate
to 12
months
|
||||||||
|
Supplier B
|
0
|
%
|
0
|
%
|
10
|
%
|
Immediate
to 90
days
|
|||||||||
|
Supplier C
|
0
|
%
|
2.4
|
%
|
6
|
%
|
Immediate
to 90
days
|
|||||||||
|
Supplier D
|
Magnifiers
-
oculars
|
3.4
|
%
|
6.1
|
%
|
1
|
%
|
Immediate
to 90
days
|
||||||||
|
Supplier E
|
0
|
%
|
0
|
%
|
8.4
|
%
|
Immediate
to 90
days
|
|||||||||
|
Supplier F
|
Machining
|
4.2
|
%
|
12.8
|
%
|
4.7
|
%
|
Immediate
to 90
days
|
||||||||
(*)
Dep-Photonis (a French - Dutch corporation) The purchase of tubes from Dep
has
increased because, since 2004, due to the war in Iraq, ITT (an American
corporation the company previously purchased tubes from at a considerable
amount, is encountering difficulties supplying tubes to customers other than
the
US military.
Employees
As
of the
end of 2007, the company employs 65 people in the field of activity. Most of
the
increase in the workforce as of the date of this report results from the
recruitment of production employees and production managers.
The
Group
does not have significant dependency on any of its employees in the field of
activity.
The
company's employees, mainly the production employees, undergo regular training,
among others in matters of quality assurance, control, safety and various
professional subjects. Most training sessions are conducted in-house and by
the
employees.
The
company's employees are employed under personal employment
contracts.
16
|
Employees
|
As of December 31
|
||||||
|
2007
|
2006
|
||||||
|
Management
|
2
|
2
|
|||||
|
Finance
|
3
|
3
|
|||||
|
Research
and development
|
10
|
10
|
|||||
|
Marketing
|
3
|
2
|
|||||
|
Procurement
and logistics
|
4
|
4
|
|||||
|
Administration
|
11
|
4
|
|||||
|
Quality
assurance
|
4
|
3
|
|||||
|
Production
|
26
|
10
|
|||||
|
Total
|
63
|
38
|
|||||
Legislation
restrictions, regulation and special constraints applying to the field of
activity
Since
most of the company's products in this field of activity are intended for the
use of defense forces, the items used by these forces may be exported only
if
permission is obtained in advance from the Ministry of Defense.
In
addition, the company's activity is subject to laws, regulations and various
administrative orders applying to defense contracts, and to personal defense
permits and security clearance requirements being met, set within the frame
of
defense procurement regulations in Israel and in the US.
The
production of new products in the company's facilities is contingent upon the
supply of night vision tubes, based on star light enhancement. Import of the
tubes to Israel is contingent on obtaining the appropriate licences from the
supplying countries. Any delay in obtaining licenses for import of the tubes
to
Israel causes in turn delay in the supply of finished products to the company's
customers. During 2007 there were no significant delays.
17
|
C.
|
Financial
Statements Analyses
|
Following
is Sector’s statement of income as at December 31, 2007, and annual Performa
statement of income for the year 2006:
(Original
statements were prepared in New Israeli Shekels)
Profit
and Loss
18
Balance
Sheet
Working
Capital Needs
19
| D. |
Valuation
Methodology
|
The
Sector valuation is based upon accepted methodology for valuating ongoing
concerns.
Accepted
Valuation Approaches
There
are
several generally accepted approaches in use for valuating businesses, none
of
which is necessarily superior to the others. It is more a question of which
of
the approaches or combination of approaches is best suited to the business,
industry, and economic circumstances of the particular assets being appraised
at
the specific valuation date. The following discussion summarizes the three
most
common approaches to the valuation of businesses and the circumstances in which
they generally apply.
The
Cost Approach
In
this
approach, also referred to as the Adjusted Net Assets Method, a valuation
analysis is performed for a company’s identified fixed, financial, and other
assets. The cost approach is typically not employed when valuing an on-going
business or business interest since it assumes a liquidation of the company.
Another reason for not using this approach here is that, while the value of
the
fixed assets and accounts receivable is determinable, it is difficult to
estimate the value of the intangible assets and/or goodwill associated with
a
business. As such, we did not employ a cost approach in our analysis. In the
company’s case, the net asset value is insignificant.
Market
Approach
Two
commonly applied methodologies in the Market Approach to value are the Guideline
Public Company and the Similar Transactions Methods. The Guideline Public
Company Method focuses on comparing the subject company’s
risk profile and growth prospects to select reasonably similar (or “guideline”)
publicly traded companies. In the Similar Transactions Method,
consideration is given to prices paid in
recent
similar transactions that have occurred in the subject company’s industry or in
related industries. This approach is not appropriate in the case of the company
since, as far as we know, there is only one similar company in the Israeli
stock
market that is similar to the night vision sector combination of activities
and
products.
There
are
some companies in which ESL’s activity constitutes only a small percentage of
their overall activities.
20
Income
Approach
This
approach, which most commonly incorporates the use of the Discounted Cash Flow
(DCF) Method, focuses on the income-producing capability of the business
enterprise subject to the assumption of a 'going concern', and incorporates
the
specific operating and risk characteristics of the subject company in a
prospective analysis.
The
DCF
method is based on a company's discounted cash flow throughout a predetermined,
planned period. The cash flow is discounted by applying a risk-adjusted
capitalization rate, which reflects the desired yield. At the end of the period,
in the event that there is no reason to assume liquidation of the company,
but
rather its continued existence as an ongoing concern, an "expected value in
perpetuity" must be determined for it. The value of the continued activity
(Terminal Value) is the average profit at the end of the period, multiplied
by
the multiplier equivalent to the capitalization rate. The present value of
the
appraised continuing business activity following the planned period is added
to
the discounted cash flow.
The
capitalization rate to be applied in determining the required yield of the
company, and used for the capitalization of cash flow (discounted cash flow
rate), is calculated on the basis of the yield rate on non-risk
investments (government
debentures for the relevant planned period) supplemented by a risk premium.
The
risk premium has to be based on the company’s existing risk factors at the
valuation date reduced by the expected growth rate (Gordon’s
Formula).
In
addition, in determining the required yield (capitalization rate) of the
company, the size (small) and the lack of marketability should be taken into
consideration.
21
| E. |
Valuation
|
Financial
Model Structure
As
aforesaid, the sector is valuated using the DCF method, the layout of which
is
provided below. Following is the company’s projected revenue breakdown and the
assumptions it is based on, as well as the valuation results (each item has
a
number associated with it, which refers to the same item in the forecast
below):
| · |
Income
(1): It
is extremely difficult to forecast the sector sales. Winning or loosing
a
Tender has a substantial impact on the actual results. As described
earlier winning new important contracts could result in doubling
the
sector sales. Management sales forecast are based on mean sales
predictions.
|
| · |
Sales
forecasts for the next year are based on backlog and assumptions
as
described below. According to Company management, the backlog at
the
beginning of 2008 for delivery in 2008 was 66,000 Thousands NIS.
Assumptions for other future sales are less certain. Based on history
performance ratio between total revenue and backlog at
the beginning of the year,
of
1.8 the forcast for 2008 is quite solid.
|
| · |
Local
Market – Sales forecasts are based on signed, long-term contracts and with
a forecast of additional orders for new
products.
|
| · |
Export
sales – based on management forecasts. The managements expects that
activities that are made today in new markets would materialized
during
2010, 2011 with a new significant increase in revenues.
|
| · |
Income
Recognition
-
Income from works carried out under a contract is recognized as prescribed
in Accounting Standard No. 4, according to which revenues are recognized
in accordance with the percentage of completion method, when the
following
condition are met: the revenues are known or may be reliably estimated,
revenues collection is more likely than not, the costs entailed in
the
work are either known or may be reliably estimated, there is no
significant uncertainty as to the contractor's ability to complete
the
work and to meet the contractual terms with the customer, and the
percentage of completion may be reliably estimated. The percentage
of
completion is determined based on the completion of engineering stages
of
the work. For works that are expected to entail loss, a provision
is made
for the entire anticipated loss.
|
22
|
·
|
Materials
(2): for
materials (not included in work in progress), we
adopted the past average rates of – 23.5% (materials from income).
|
|
·
|
Wages
and Other Expenditures (3): (not
included in work in progress) we
adopted a basic raise according to the increase in technicians and
supervisors during last year. This growth should be sufficient to
maintain
the new standard of sales. In addition we adopted a perpetual growth
rate
in wages of 2%. A
raise
of 50% in wages was made during the next jump in sales ( 2010 ).
|
|
·
|
Work
in progress (4):
As
mentioned above (see Income recognition), we adopted past average
rate of
35.5%.
|
|
·
|
Depreciation
(5): Due
to the increase in sales during 2007 an additional investment of
5
Millions NIS is required for the year 2008. The depreciation includes
the
new investment at 20% annually, plus past equipment depreciation.
Additional investment of 3 million NIS must been made during 2010
to
support the increase in sector revenues. Except for those investment,
we
have assumed a capital investment equal to the yearly
depreciation
|
|
·
|
Marketing
& Selling Expenses (6): a)
Wages- a basic raise to 650 thousands NIS plus perpetual annual growth
of
2%. b) Commissions are paid to agents on the basis of success, and
amount
to 12.5% of export sales. c) Other marketing expenses, 0.5% of total
sales
according past year.
|
23
|
·
|
R
& D Expenses (7):
R&D expenses are salary based 2% annual
raise.
|
|
·
|
General
& Administrative (8):
the significant main factor in management fees is agreement to pay
4% of
total sales to mother company. Wages are raised at 2 % per year and
are
increased by 50 % during 2010 to support growth. other G & A at
perpetual raise of 2% every year due to their fixed
factor.
|
|
·
|
Income
Tax (9):
The Company received a status of “Approved Enterprise” according to the
Capital Investment Law of Israel, starting in the year 2004. According
to
this status, the Company was granted tax-free status on a portion
of its
income. The portion of its income which is taxable is fixed. Therefore,
any growth in the net revenue of the company reduces the average
tax rate
on the total net revenue. We have calculated the taxes for the period
ended at 2013 (the end of the “Approved Enterprise” period).
|
|
·
|
Working
Capital Needs (10):
(See table, pg. 19). The working capital calculations are based on
the
December 31 2007 results and are estimated at 51.3% of total revenues.
|
|
·
|
Capitalization
Period (11):
Due to the seasonality nature of the sector revenues we have capitalized
the cash flow from the end of the third quarter to the valuation
date each
year. Meaning 0.75 for the year 2008, 1.75 for the year 2009 and
so
on.
|
|
·
|
Financial
Liabilities (12):
Financial Liabilities are calculated based on December 31 2007 balance
sheets, and include all financial assets and liabilities.
|
24
|
·
|
Capitalization
Rate (13):
The Capitalization rate we used was 14.5%, based on the following
calculations:
|
In
our
assessment of the risk associated with the expected cash flow of the
company, we consider the Weighted Average Cost of Capital ("WACC”), which
measures a company’s cost of debt and equity financing weighted by the
percentage of debt and percentage of equity in a company’s target capital
structure.
Arithmetically,
the formula for calculating the after-tax WACC is:
Where:
|
D
|
=
|
Estimated
market value (or book value) of debt
|
|
E
|
=
|
Estimated
market value of equity
|
|
V
|
=
|
D
+
E
|
|
T
|
=
|
Assumed
tax rate
|
|
RD
|
=
|
Cost
of debt financing
|
|
RE
|
=
|
Cost
of equity financing, calculated according to the CAPM
methodology
|
To
estimate the cost of equity financing, an adjusted version of the Capital Asset
Pricing Model (“CAPM”) was utilized. The CAPM measures the return required by
investors given the company’s risk profile. This model (as adjusted) is
expressed arithmetically by the following equation:
25
Where:
|
Rf
|
=
|
Risk-free
interest rate, typically the yield available on long-term
Government Securities.
|
|
RM
|
=
|
Average
market rate of return.
|
|
Rf+RM
|
=
|
Equity
risk premium expected on an equity investment in a
fully diversified portfolio.
|
|
b
|
=
|
A
measure of a stock’s volatility relative to an average risk stock or a
fully diversified portfolio of stocks (market portfolio). In this
case we
adopted "Beta” of mid-size and small cap “financial services providers”
traded in Tel-Aviv Stock Exchange.
|
The
WACC
is based upon market return premiums and unique risk associated with each
operator, with risk-free rate of return being derived from 10-year US government
bond net yields after tax.
Based
on
the above, the cost of equity was estimated to be approximately 18.40%, as
summarized below:
|
Risk
Free Rate
|
4.2%
|
Based
on 10 years net rate for government bonds.
|
||
|
Equity
Risk Premium
|
6.6%
|
Historical
risk premium (i.e., historical return on market less historical risk
free
rate).
|
||
|
Beta
|
1.7
|
Beta
of: a publicly traded company in defense industry and similar other
Israeli companies.
|
||
|
Small
Cap Premium + Special risk premium
|
3.0%
|
Small
Cap Premium. Based on the difference on yield required by a regular
investor when comparing a company on the scale of TASE traded companies,
with a small private company.
|
||
|
Cost
of Capital
|
18.40%
|
|
·
|
We
base this risk factor on the uncertainty associated with the Company's
revenue structure, having one customer which holds 71.5% of the sectors
total revenue and the volatility associated with these
revenues.
|
|
·
|
In
addition the companies in the night vision sector are dependent upon
a
sole supplier of the night vision tubes, which is the main raw material
for the company's products.
|
26
|
·
|
Assuming
a long term normative capital structure of 30%, and based on the
formula
provided above, the WACC calculation for the company is as
follows:
|
18.40%
x
0.70 + 7.5% x (1-0.22) x 0.30= 14.5%
We
therefore used 14.5% as the capitalization rate.
|
·
|
Perpetual
Growth Rate (14) of
2% was chosen according to the long term growth rate in the developed
countries.
|
|
·
|
Effective
Tax Rate Starting 2013 (15): Since
the Company has the ability, it will most likely submit a new request
to
receive tax-free status for its plant enlargement when the present
one
will be expired, in the year 2013. We can assume that this request
will
result in approval of an additional tax-free income. Since the Company
plant is located in a preferred area of the country it will likely
be
approved.
|
Therefore,
after consulting the company management, we adopted an effective tax rate of
16.7%. It can be assumed that the long-run average effective corporate tax
rate
of the Company will be less than the maximum 25% on all its
earnings.
|
·
|
Terminal
Value (16) calculations
- we defined a perpetual annual income based on the following assumptions:
|
|
-
|
We
took the net operating income from 2012.
|
|
-
|
We
assume that capital expenditure is equal to depreciation.
|
|
-
|
Working
capital is calculated assuming a 2% growth of revenues.
|
We
used
Gordon's Model, at a capitalization rate of 14.5% and annual growth of 2%.
27
28
Valuation
|
Capitalization
Rate (13)
|
14.5
|
%
|
||
|
Perpetual
Growth Rate (14)
|
2.0
|
%
|
||
|
Perpetual
Growth in Salary (3)
|
2.0
|
%
|
||
|
Effective
Tax Rate starting 2013 (15)
|
16.7
|
%
|
||
|
Total
NPV -up to 2013
|
51,576
|
|||
|
Terminal
Value (16)
|
69,586
|
|||
|
Value
of Operations
|
121,161
|
|||
|
Less
Net financial Liabilities (12)
|
(33,175
|
)
|
||
|
Total
Company Value (000NIS)
|
87,986
|
|
Sensitivity
Analysis- Changes in the company value due to changes in
|
|||||||
|
Capitalization
Rate (rows) and Sales Forecast (columns)NIS
|
|
|
13.0
|
%
|
13.5
|
%
|
14.0
|
%
|
14.5
|
%
|
15.0
|
%
|
15.5
|
%
|
16.0
|
%
|
||||||||
|
92
|
% |
138,532
|
129,666
|
121,562
|
114,126
|
107,282
|
100,963
|
95,112
|
||||||||||||||
|
95
|
% |
126,516
|
118,461
|
111,091
|
104,324
|
98,090
|
92,329
|
86,991
|
||||||||||||||
|
98
|
% |
114,499
|
107,255
|
100,620
|
94,521
|
88,897
|
83,696
|
78,870
|
||||||||||||||
|
100
|
% |
106,488
|
99,784
|
93,639
|
87,986
|
82,769
|
77,940
|
73,456
|
||||||||||||||
|
102
|
% |
98,477
|
92,314
|
86,659
|
81,452
|
76,641
|
72,184
|
68,042
|
||||||||||||||
|
105
|
% |
86,461
|
81,108
|
76,188
|
71,649
|
67,449
|
63,551
|
59,921
|
||||||||||||||
|
108
|
% |
74,444
|
69,902
|
65,717
|
61,847
|
58,257
|
54,917
|
51,800
|
29
Results
Summary
In
reaching our conclusion as to the fair market value of the sector, we utilized
the Discounted Cash Flow Approach. Based upon the foregoing, and in reliance
thereon, the fair value of Night Vision Sector is reasonably stated to be
average of NIS 88
Million,
and ranges from NIS 81.8 to NIS 94.2 Million..
30
Star
Night Technologies Ltd.
Valuation
of Radom Ltd.
as
of February
28th, 2008
Signing
of the Agreement with Lapis
Technologies
Inc.
May
2008
Table
of Contents
|
A.
|
General
|
3
|
|
B.
|
Company
overview
|
7
|
|
C.
|
Financial
Statements Analysis
|
26
|
|
D.
|
Risk
and Opportunity Factors
|
30
|
|
E.
|
Valuation
Methodology
|
32
|
|
F.
|
Valuation –
Radom
|
33
|
May
25th,
2008
To: Mr.
Harry Mund
Lapis
Technologies, Inc.
Re:
Radom
Aviation Systems, Ltd.
Valuation
of Shares as of the Valuation Date
|
A.
|
General
|
We
were
requested by Mr.
Harry
Mund and Lapis Technologies, Inc. (hereinafter respectively: “Mund” and “Lapis”
to render our opinion as to the fair value of Radom Aviation Systems Ltd,
(Hereinafter: “Radom”) as a part of fairness opinion of Star night that we are
preparing under an agreement between LAPIS and Star Night, dated February
28th,
2008
(hereinafter:
the “Agreement.) Radom Aviation Systems Ltd. (hereinafter "Radom"
or
"the
Company")
is a
wholly owned subsidiary of Star Night Group, the subsidiary SDS (Star Defense
Systems) Ltd. ("SDS")
and
its subsidiary New Noga Light (2000) Ltd. (hereinafter "New
Noga").
This
valuation is an integral part of the valuation of Star Night's shares.
In
respect of the above, we have made a valuation of the Fair Market
Value1 as
of the
date of signing and consummation of the Agreement ("Valuation Date"), based
on
the information set out below.
"Jacob
Eshed - Tesuot Consultants" is an independent consulting firm specializing
in
'going concern' valuations. We have extensive experience in performing fairness
opinions for companies in diverse fields of activities.
Since
the
year 2005, our office has prepared a series of valuation studies for Star Night
and for SDS, including a valuation of the investment in Radom for the year
2005,
as of December 31, 2006. There is no dependence of the valuator on the ordering
party or other companies in the Star Night Group.
1
We
have
determined the fair market value to be the price at which an entity or an
interest would change hands between a willing buyer and willing seller both
acting in their own best interest, on the open market assuming a reasonable
period of time for an agreement to arise, neither being under compulsion to
buy
or sell and both having reasonable knowledge of all relevant facts as of the
applicable valuation date.
Objective
and Scope
The
purpose of this study is to determine the fair value of the assets included
in
the agreement. We understand that our recommendation of fair market value and
this valuation report will be used and relied upon for the agreement. In this
valuation, we have relied on signed written material, unsigned written material
and information provided verbally or by email. It is based upon both internal
and public information made available by the Company, and upon estimates and
assessments that may prove, over time, to have been inaccurate or incomplete.
We
do not express an opinion or offer any form of assurance regarding their
accuracy or completeness. All the information provided is accountable for by
the
Company and its management alone.
Materials
Available in Performing the Valuation:
·
Audited
financial statements for Radom as of December 31, 2006.
·
Unaudited
data for Radom as of December 31, 2007.
·
Data
included in Star Night's periodic report .
·
Data
regarding Radom's backlog as of December 31, 2007.
·
Star
Night management’s forecasts - which served as the basis for the company's cash
flow projections.
·
Draft
of
SDS’s periodic report for the year 2007.
·
Conversations
and email exchanges with Mr. Harry Mund, CEO.
4
Valuation
Method
Radom's
business activity has existed for many years, which indicates continuity and
a
history that allows building a limited future forecast. In addition, Radom
has
established contact that is not one-time in nature, with customers that may
return to it in the future. Therefore, in our opinion the most suitable method
for valuating the business activity is the discounted cash flows (DCF) method.
This valuation will be based on a forecast of the business results in the years
2008 to 2012, and on assumptions about Radom's permanent growth rate after
2012.
Once the business activity is valuated, including the terminal value, the net
financial liabilities will be deducted from this value (after deducting the
financial assets value). See Appendix A for a detailed explanation of the
method.
Nevertheless,
one should not disregard the fact that Radom operates based on projects the
duration of which is two to three years at the most. There is no way to forecast
at present the projects that Radom will carry out over the next few years.
There
is more information about the year 2008, since its forecast is based on ongoing
projects specified in the backlog. Some projects are currently being negotiated
by Radom, and some significant engagements cannot be disclosed for security
reasons.
Despite
the financial statements, which reflect the severe state Radom was in as of
December 31, 2007, I was convinced by conversations with the Company's
management that there are positive occurrences in Radom, at a wide scope, and
that its chances of recovering from its state as reflected in the financial
statements are good. In this valuation, I assign considerable weight to the
strategic changes that took place in Radom and to the supposed results of these
efforts. Nevertheless, realization of the Company's forecasts should be followed
up.
Results
Summary
In
reaching our conclusion as to the fair market value of the Company, we utilized
the Discounted Cash Flow Approach. Based upon the foregoing, and in reliance
thereon, the fair value of Radom Aviation Systems Ltd. is reasonably stated
to
be average of NIS
60.6 Million, and
ranges from NIS 56.4 to NIS 64.8 Million. Based upon the foregoing and such
other factors as we deem relevant, we are of the opinion that the Consideration
is fair from a financial point of view.
5
The
accompanying report summarizes the principles and procedures that were applied
in this study as well as its findings.
|
Respectfully
submitted,
|
|
|
|
Jacob
Eshed
|
|
Jacob
Eshed - Tesuot
Consultants
|
6
Company
overview
| 1. |
General
|
Radom
was
established in 1988, and has been operating for the past 18 years in a variety
of fields of activity, including the conversion and upgrade of fighter jets,
airliners, transport airplanes and helicopters, such as: the conversion of
airliners to transport airplanes, airplane upgrade through a combination of
advanced systems etc. New Noga, which at the acquisition date was a wholly
owned
subsidiary of Star Night, acquired 70% of Chanoch Miller, a holding company
that
held directly and indirectly (through S.T.H.N. Ltd. – a holding company)
54.45% of Radom.
Within
the framework of the Star Night and SDS transaction, the latter acquired about
65.18% of Radom's issued and paid up share capital, in consideration for $175
thousand, and against a $660 thousand guarantee provided to secure Radom's
liabilities. The consideration for the acquisition of Radom's shares, as
aforesaid, was provided as a loan from Star Night to SDS, in accordance with
the
provisions of a loan agreement entered into by Star Night and SDS upon
completion of the star transaction on October 5, 2005. The said loan bears
no
interest, and is linked to the representative rate of the US dollar known at
its
grant date; it was granted for a period of no less than two years and no more
than five years, to allow SDS to repay the loan out of its current revenues
and/or out of credit facilities provided it by Star Night and/or under its
guarantee.
Soon
after the completion of Star Night's transaction and the acquisition of Star
Night's holdings (through New Noga) in Chanoch Miller Ltd. ("Miller
Ltd."),
Star
Night transferred to Miller Ltd. 1,280,000 ordinary shares of SDS, which
represented at the time about 1.98% of its issued and paid up share capital,
in
return for Chanoch Miller's mediation in the acquisition of the control in
Radom
by Star Night, as well as in return for his agreement to the sale of Radom's
holdings in Miller Ltd. and in S.T.H.N. Real Estate and Investments Ltd. Star
Night and Miller Ltd. have entered into an agreement, according to which Star
Night will purchase 1,280,000 ordinary shares of SDS that were transferred
to
Miller Ltd. as aforesaid.
The
boards of directors of Miller Ltd. and S.T.H.N. resolved to distribute the
entire consideration as a dividend (subject to the relevant provisions of the
Companies Law). Upon payment of dividend, if approved, Noga Light will be
eligible, for its holdings in Miller Ltd.'s shares prior to the Star Night
transaction (70%), of approximately $110 thousand. In addition, upon completion
of the Star Night transaction, Mr. Chanoch Miller acquired from New Noga its
entire holdings in Miller Ltd. (70%) in return for Mr. Chanoch Miller's share
in
the said dividend, amounting to approximately $47 thousand. As of the report
date, the said consideration was deposited with a trustee, who will transfer
it
directly to those entitled to the dividend payments, but only after the trustee
is convinced that the Companies Law provisions relevant to the said dividend
distribution were complied with.
7
On
November 14, 2006, SDS submitted an immediate report according to which, subject
to the General Meeting's approval of the change in Radom's capital structure,
received on December 6, 2006, SDS acquired all holdings of the remaining
shareholders of Radom ("the
Sellers").
In
frame of this acquisition, SDS acquired from the Sellers about 34.82% of Radom's
share capital and voting rights, together with the Sellers' rights in
shareholders' loans provided to Radom, in consideration for the allotment of
2,156,000 ordinary shares of Radom to the Sellers, representing (subsequent
to
the allotment) about 3.22% of SDS' share capital and voting rights. Subsequent
to the said acquisition of Radom's shares and the allotment, SDS holds, as
of
December 31, 2006, about 73.22% of the said shares; subsequent to the balance
sheet date the acquisition was completed, so that Radom's entire share capital
and voting rights (100%) were ultimately acquired. The acquisition of all of
Radom's shares (100%) was recorded in SDS' financial statements as of December
31, 2006.
|
2.
|
Description
of the field of activity – aircraft
upgrades
|
|
2.1.
|
General
information about the field of
activity
|
|
2.1.1
|
Structure
of the field of activity and changes occurring in
it
|
Radom's
operations in this field are conducted through the subsidiary Radom, control
of
which was purchased by Radom in October 2006, within the frame of the Star
Night
transaction. Radom engages in the upgrade and conversion of aircraft in relation
to various projects and in accordance with tenders and customer orders. In
addition, Radom initiates projects in its field of engagement, in accordance
with the occasional needs of its customers, which include the development of
various assemblies for defense aircraft.
The
main
market Radom operates in is the upgrade and conversion of airplanes and
helicopters (jointly: "aircraft").
This
market is affected by the economic and political situation worldwide, and by
the
defense budgets of countries that are Radom's potential customers. In general,
a
decrease in defense budgets might actually increase the aircraft upgrading
and
conversion market, since aircraft upgrading constitutes a less expensive
solution to the defense needs of countries, than the production and purchase
of
new aircraft. Still, an extensive decrease in budgets could lead to the
cancellation of upgrading and conversion projects, or to a decrease in the
scope
of such projects. The economic and political situation worldwide and the
relative power of countries affect the decisions of government and safety bodies
pertaining to aircraft conversion and upgrading projects.
8
As
of the
date of this report, Radom operates mainly in the military market in Israel
and
abroad, as well as in the civilian market in Israel, at smaller scopes. Most
of
Radom's customers outside Israel are African and East European countries.
Aircraft
upgrading and conversion projects in the civilian market are characterized
by a
significant financial scope (hundreds of millions to billions of dollars) and
are carried out by international concerns and government bodies such as IAI
and
Elbit in Israel, and international companies such as THALES, BAE and
EADS.
The
military market is characterized by projects of a more varied scope, ranging
from one million to hundreds of millions of dollars, and in this field Radom
competes as the prime contractor for projects at scopes of up to 20 million
dollars. However, Radom's policy is to also invest in the execution of projects
of greater scopes. There are dozens of companies around the world who operate
in
Radom's areas of activity and in projects of scopes that are similar to Radom's.
Due to the international character of the market, the companies' geographic
location is of no importance.
| 2.1.2. |
Changes
in the scope of activity and profitability
|
A
difference can be seen in profitability between projects for local customers
with relatively low profitability and projects outside Israel where the
profitability is higher. For this reason, Radom directs most of its marketing
efforts outside Israel. Most of the projects planned for 2008 are for foreign
bodies.
|
2.1.3.
|
Legislative
restrictions, regulations and special constraints applying to the
area of
activity
|
There
are
restrictions and constraints in the industry that also apply to Radom in its
engagements with defense parties; Radom is required to obtain permission from
the Ministry of Defense to carry out export transactions. National security
considerations and foreign affairs considerations sometimes prevent the Ministry
of Defense from permitting Radom to engage in certain transactions.
9
|
2.1.4.
|
Critical
success factors and changes.
|
The
area
of activity has several critical success factors associated with it, as
follows:
|
(a)
|
Reputation
and know-how – Radom has a reputation and know-how acquired over a
period of about 18 years.
|
|
(b)
|
Close
relations with customers - Radom has long-lasting close relations
with its
customers.
|
|
(c)
|
Establishment
and maintenance of a marketing layout and distribution
relations.
|
|
(d)
|
Flexibility
and immediate delivery - Radom, being a medium size Israeli company,
is
able to provide quick response to customer needs at attractive prices.
|
|
(e)
|
Reliability
and efficiency in the execution of works for overseas
customers.
|
|
(f)
|
Company
size- the company size in very important when dealing with big projects.
Radom being a very small company has difficulties in receiving big
projects.
|
|
2.1.5.
|
Main
entry and exit barriers and changes occurring in them
|
|
(a)
|
Entry
barriers
|
Operations
in the international aircraft upgrade market require permits that are issued
by
standards institutes, aviation authorities and aircraft manufacturers. Radom
has
obtained such permits in countries in which it operates, providing it with
an
advantage in the execution of return projects on the same platforms. These
standards are updated periodically and aeronautic companies are required to
update their work methods periodically in order to maintain their permits.
These
standards constitute material barriers for new companies attempting to compete
in the market.
|
(b)
|
Exit
barriers
|
Regarding
the company’s warranty for the quality of its products, the company grants
warranty for its products, for an average period of 12 months. In addition,
it
occasionally engages in long term agreements (for terms of up to two years).
10
| 2.1.6. |
Alternatives
to the products and changes occurring in them
|
The
market for aircraft upgrading provides a response to the need of air forces
and
airliners to adapt their aircraft fleets to accelerated technological
developments. The alternative to the aircraft upgrading market is the market
for
the development and production of new aircraft. The company estimates that
the
field of aircraft upgrading has an advantage over the aircraft development
and
production field, since the cost of upgrading and renovating and aircraft is
substantially lower than the cost of purchasing new aircraft.
|
2.2
|
Products
and services
|
| 2.2.1 |
Within
the frame of its field of activity, Radom engages in planning and
production as well as in research and development, and provides products
to the military and commercial markets. Radom engages mainly in the
development of airplane systems and participates in projects involving
the
upgrade of military and civilian airplanes, including integration
if new
avionic systems in a variety of fighter jets, trainer aircraft, transport
aircraft and helicopters.
|
11
| 2.2.2 |
In
frame of the military projects, Radom provides the following services:
|
| (a) |
Conversion
of civilian airplanes and their adaptation to military
operations;
|
| (b) |
Upgrade
of Russian made airplanes and helicopters (e.g. Mig 21, the Antonov
24,
26, 32 transport aircraft and the MI-8/MI-17 helicopters) with western
avionics, armament systems and observation
payloads;
|
| (c) |
Conversion
of commercial and military aircraft for special military or government
missions (marine patrol, surveillance, electronic warfare etc.) by
installing electronic and electro-optic equipment in the aircraft.
The
variety of services provided in this framework ranges between integration
of systems provided by the customer in an existing airplane and the
acquisition of the airplane and provision of the systems integrated
in it;
|
| (d) |
Upgrade
of old fighter aircraft by integration of modernized
systems;
|
| (e) |
Upgrade
of transport airplanes for adaptation to international requirements,
increased efficiency and operational
safety;
|
| (f) |
Upgrade
of trainer airplanes;
|
| (g) |
Upgrade
of helicopters.
|
| 2.2.3 |
In
frame of the civilian projects, Radom engages in the supply of tools
for
the manufacture of passenger airplanes, design of parts of IAI's
business
airplanes, upgrade of transport airplanes, upgrade of trainer airplanes
and simulation systems and upgrade of
helicopters.
|
| 2.2.4 |
In
frame of its engineering projects, Radom engages in analysis of
aerodynamic systems, dynamics systems and flight control systems,
structural analyses (loads, static and dynamic pressure etc.) and
initial
estimate and detailed configuration design (including wind tunnel
testing,
fluid dynamics, data analysis and flight
tests).
|
| 2.2.5 |
In
addition, Radom engages in design (aeronautical planning) and production
activity, including flight control content, software simulations,
design
and production of electronic systems
etc.
|
| 2.2.6 |
For
the most part, Radom provides its services to government and defense
customers as their primary contractor, and to its civilian customers,
who
include large aeronautics companies and bodies, as sub-contractor
(see
details in Section 8.5 below).
|
12
| 2.2.7 |
The
table below provides details of completed projects, the results of
which
were recorded in Radom's income statements for the year ended December
31,
2007 (in NIS thousands):
|
|
2007
|
|||||||||||||
|
Project Description
|
Revenues
attributed to
the financial
statements
|
Costs
attributed to
the financial
statements
|
Recognized
gross profit
|
Gross profit
rate
|
|||||||||
|
Aircraft defense systems Installation
|
573
|
161
|
412
|
72
|
%
|
||||||||
|
Design
of elements compatible to aircraft
|
427
|
140
|
287
|
67
|
%
|
||||||||
|
Mechanical
production
|
166
|
166
|
0
|
0
|
|||||||||
|
Spare
parts
|
988
|
987
|
1
|
0
|
|||||||||
|
Helicopter
upgrade
|
1,096
|
1034
|
65
|
6
|
%
|
||||||||
|
Production
|
58
|
14
|
44
|
75
|
%
|
||||||||
| 2.2.8 |
The
table below illustrates Radom's revenues from military and civilian
projects in the years 2005-2007:
|
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
Revenues
(NIS
thousands)
|
Percentage
of revenues
|
Revenues
(NIS
thousands)
|
Percentage
of revenues
|
Revenues
(NIS
thousands)
|
Percentage
of revenues
|
||||||||||||||
|
Military
projects
|
19,754
|
100
|
%
|
21,499
|
91
|
%
|
10,893
|
75
|
%
|
||||||||||
|
Civilian
projects (*)
|
-
|
-
|
2,167
|
9
|
%
|
3,677
|
25
|
%
|
|||||||||||
|
Total
|
19,754
|
100
|
%
|
23,666
|
100
|
%
|
14,570
|
100
|
%
|
||||||||||
(*)
Most
of Radom's revenues are from military projects. Occasionally, the company enters
into civilian projects, as a subcontractor.
| 2.2.9 |
Approximately
55% of all revenues from existing projects are obtained by Radom
as a
subcontractor, and the balance is earned by it as a primary contractor.
Project profitability is determined, inter alia, by the nature of
the
project (the type of work), its scope, the customer's identity and
the
destination country. No repeat pattern is apparent in the profitability
rate of projects where Radom serves as a primary contractor and projects
where it serves as a subcontractor, other than with respect to certain
projects in Africa, where Radom serves as a primary contractor, and
the
profitability rates of which ate higher.
|
13
|
2.2.10
|
Radom's
approximated gross profits in 2005, 2006 and 2007 amounted to NIS
5,974
thousand, NIS 8,697 thousand, and NIS 3,116 thousand,
respectively.
|
Radom's
gross profit rate in the field in 2005, 2006 and 2007 was about 41%, about
36%
and about 16%, respectively.
It
is
clarified that the average gross profit rate from military projects and from
civilian projects is similar.
|
2.3
|
New
products
|
The
company is finalizing its development, as a subcontractor, of two military
aviation products, one in the UAV field and the other in the airplane armament
field; the rights to each product are held by the customer. The company projects
that in the second half of 2008 these products will enter serial production.
The
cost of finalizing the development of these products is insignificant.
|
2.4
|
Customers
|
Most
of
Radom's customers are governments and government bodies in Israel and abroad
(most of its sales outside Israel are in Eastern Europe), or aeronautic
companies and large bodies. For customers of the first type, Radom conducts
mainly aircraft upgrades as a primary contractor, while for customers of the
second type, Radom conducts mainly design, integration and installations of
specific systems and engineering services as subcontractor. In 2007, all of
Radom's revenues were derived from ventures carried out by Radom for the
military market, in some of which Radom acts as the primary contractor. Below
are additional details of the distribution of Radom's sales in the field of
aircraft upgrade in Israel and abroad (the data were taken from Radom)
14
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Sales
(NIS
thousands)
|
Percentage
of total
revenues in
the field
|
Sales
(NIS
thousands)
|
Percentage
of total
revenues
in the field
|
Sales
(NIS
thousands)
|
Percentage
of total
revenues in
the field
|
|||||||||||||
|
Outside
Israel
|
12,665
|
64
|
%
|
13,399
|
57
|
%
|
9,719
|
67
|
%
|
|||||||||
|
Israel
|
7,089
|
36
|
%
|
10,267
|
43
|
%
|
4,853
|
33
|
%
|
|||||||||
|
Total
|
19,754
|
100
|
%
|
23,666
|
100
|
%
|
14,570
|
100
|
%
|
|||||||||
Major
projects carried out by Radom as the primary contractor are usually military
projects, while in the civilian sector Radom operates mainly as a subcontractor;
projects carried out as subcontractor are naturally of a smaller scope. The
reason for this is that in the civilian field the scope of projects is usually
in the hundreds of millions of dollars (at least), a scope in which Radom is
unable to compete, and that is controlled by a number of international
aeronautic concerns.
Radom
usually engages its customers, both as primary contractor and as subcontractor,
by participating in a closed tender for a number of bodies in its area of
activity (three to five bodies on average) or through direct contact established
between Radom and the customer though prior knowledge or the mediation of an
agent.
Radom
customarily invests in preparing proposals for its customers, comprising an
analysis of the project, drawings, plans and at times also prototypes, 2% to
3%
of the total consideration expected from the project.
The
period of time elapsing from the bid date to the date on which a binding
agreement is signed between the parties is two years on average for projects
in
which Radom is the primary contractor, and up to six months for projects in
which it is the sub-contractor.
Radom
carries out contractual works mainly for major Israeli bodies in the aeronautics
field, such as IAI, Elta, the Ministry of Defense, Elisra etc. For projects
in
which Radom serves as the primary contractor, it sometimes engages these bodies
as subcontractors for these projects. It engages these bodies through work
orders to be carried out by Radom in accordance with a pre-set specification.
The vast majority of the works carried out by Radom are paid for in a lump
sum,
rather than on the number of work hours.
15
The
work
orders are accompanied by general terms of engagement that differ between
customers and comprise mainly the terms of payment, the right of the customer
to
change or cancel the order, NDA, faults liability and liability insurance that
apply to Radom, and at times, non-competition agreement for a limited period.
The payment terms are usually set based on milestones and progress of the works.
The
customers' terms of payment range, in all the above alternatives, between cash
and 120 days from the invoice date, and on an average of 60 days. These
alternatives reflect the terms of engagement with the customers and the actual
situations.
The
table
below specifies main customers of the aircraft upgrade sector:
|
Customer
|
2007
|
% of revenues
from Radom's
total revenues in
2007
|
Percentage of
revenues from
the sector's
total revenues
2007
|
|||||||
|
Rafael
(Armament Development Authority)
|
2,877
|
2.3
|
%
|
14.6
|
%
|
|||||
|
Government
defense corporation (Israeli)
|
1,595
|
1.3
|
%
|
8.1
|
%
|
|||||
|
Customer
A
|
5,692
|
4.5
|
%
|
28.8
|
%
|
|||||
|
Customer
B
|
6,927
|
5.5
|
%
|
35.1
|
%
|
|||||
|
Total
|
17,091
|
13.6
|
%
|
86.6
|
%
|
|||||
|
2.5
|
Marketing
and Distribution
|
Radom
markets its operations through its employees, sales persons worldwide in
locations where agents may operate or by marketing itself, through security
bodies in Israel and worldwide.
Radom
has
written agreements with about 30 agents in various countries worldwide, to
whom
it undertook to pay commissions for projects it obtains through these agents.
The commissions range from 5% to 25% and on average about 15% of the revenues
deriving from the project, depending on the country and on the scope of the
project. In most of the agreements, agents are not granted exclusivity in the
country where they operate. The agents are usually experts in aeronautics and/or
in fields that are similar to Radom's activity, and many times thy have close
relationships with potential customers in the countries where they operate.
16
The
marketing commissions paid by Radom to it agents in 2005, 2006 and 2007 amounted
to approximately NIS 223 thousand, NIS 2,427 thousand, and NIS 1,817 thousand,
respectively.
|
2.6
|
Backlog
|
|
2.6.1
|
The
table below provides backlog details as of December 31, 2006, December
31,
2007 and immediately prior to the date of this report, by the period
of
recognition of the expected income (in NIS thousand):
|
|
Period
of recognition
of
the expected
income
|
Backlog
as of
December 31,
2006
|
Backlog
as of
December 31,
2007
|
Backlog
immediately prior to
the publication date
of the annual report
(March 31, 2008)
|
|||||||
|
2007
|
15,535
|
-
|
||||||||
|
First
Quarter, 2008
|
2,228
|
3,000
|
921
|
|||||||
|
Second
Quarter, 2008
|
2,360
|
4,000
|
5,668
|
|||||||
|
Third
Quarter, 2008
|
1,731
|
1,731
|
1,731
|
|||||||
|
Fourth
Quarter, 2008
|
-
|
-
|
-
|
|||||||
|
2009
(and thereafter)
|
-
|
-
|
-
|
|||||||
|
Total
|
21,854
|
8,731
|
8,320
|
|||||||
|
2.6.2
|
Orders
in the amount of NIS 10,221 thousand, that were included in the backlog
as
of December 31, 2006, were not realized, and as of the date of this
report
there is no certainty that they will be carried out. The orders were
not
included in the backlog as of the report date.
|
| 2.6.3 |
The
revenues from works in accordance with the execution agreement are
recognized based on the percentage of completion method, provided
that the
following conditions are complied with: the revenues are known or
can be
estimated reliably, the revenues are likely to be collected successfully,
the costs entailed in carrying out the work are known or can be estimated
reliably, no significant uncertainty exists as to the ability of
the
executing contractor to complete the work and comply with the contractual
terms it has entered into with the customer, and the percentage of
completion can be estimated reliably. The percentage of completion
is
determined based on the completion of engineering stages of the work.
In
respect to jobs where a loss is expected, a provision is made for
the
entire expected loss.
|
17
| 2.7 |
Competition
|
Radom
has
several competitors in Israel and abroad.
In
Israel, most of the competitors are leading defense bodies in Israel, that
have
a higher professional capability than Radom's, as well as engineering companies
that have lesser professional capability than Radom's, however this capability
is sufficient to obtain work as subcontractors.
Most
of
the competitors abroad are companies that are considerably larger than Radom,
such as Lockheed Martin, Boeing, Thales and Bae, that attempt to gain projects
by utilizing inter-country relations, government support and prevention of
competition. Radom usually has an advantage over its competitors due to its
ability to offer lower prices than theirs, inter alia based on the calculation
of a working hour and accompanying overhead (mainly because Radom's salary
expenses are relatively lower than those of its competitors - the defense
industries in Israel).
Radom
has
further advantage due to the flexibility that characterizes its work and that
allows it to work at the customer's site. In addition, Israeli companies have
the advantage of being able to obtain qualified workforce in the aeronautics
field, due to the experience this workforce gains while it serves in the Israeli
air force. Radom has a disadvantage in certain countries, those that do not
have
diplomatic relations with Israel and that exclude it from participating in
tenders for the sole reason that it is an Israeli company.
The
company assesses that its market share out of the entire aircraft upgrade field
in Israel and/or abroad is insignificant.
| 2.8 |
Production
capacity
|
The
production capacity of Radom's facility in Petach Tikvah cannot be measured
quantitatively, since Radom manufactures for various projects according to
the
order level and in accordance with customer demands. Radom's management
estimates, that the actual production capacity was about 70% of the maximum
operational capability in 2005 and 2006 (based mainly on workforce).
Radom
effects regular improvements and upgrades of the equipment and machinery in
its
facility in order to maintain the quality of its work.
18
The
scope
of investments and upgrades in the production capacity in the years 2005-2007
was insignificant.
| 2.9 |
Fixed
assets and facilities
|
|
2.9.1
|
Radom
owns the first floor of a building in Kiryat Arye, Petach Tikvah,
including 24 parking spaces. The area of the structure is about 2,000
sq.m. (including the additional area acquired in 2007 as specified
below)
and it is attached in favor of Bank Leumi. Radom's offices, New Noga's
offices and Radom's aircraft upgrade production facility are located
in
this building, as are machinery and computerized
equipment.
|
In
2007,
Radom entered into an agreement with a third party for the purchase of about
430
sq.m. (gross), adjacent to the structure in which Radom's facility and offices
are located, in consideration for 430 thousand dollars ("the
Additional Area").
| 2.9.2 |
Radom
owns capitalized lease rights, in accordance with lease agreements
entered
into with the Israel Land Administration, in respect of a property
in
Migdal Haemek, in effect until August 31, 2029. A building area of
850
sq.m. is built on the property. The property is rented to a third
party
for monthly rental fees in the amount of approximately NIS 13 thousands.
|
| 2.9.3 |
Radom
owns several vehicles under financial and operational leasing that
are
used by its employees.
|
| 2.9.4 |
Radom
further owns computer equipment, including servers, desktop computers
and
laptops, and accompanying equipment and furniture.
|
|
2.9.5
|
The
depreciated cost of the fixed assets used for this activity as of
December
31, 2007 is approximately NIS 12,117 thousand.
|
| 2.10 |
Research
and Development, Engineering
Department
|
As
of the
date of this report, Radom does not conduct research and development projects
that are not financed by its customers. Most of its research and development
activity is conducted by its engineers. In frame of the various aeronautics
projects, most of the products are integrative, and are therefore protected
not
by patent but rather through the accumulated know-how.
As
of
December 31, 2007, Radom employed 2 engineers and practical engineers in various
fields.
In
2005-2007 Radom invested in the development of 2 products for Rafael, in the
amount of NIS 2 million. Radom assesses that the investment will be repaid
in
upcoming years through orders that will be received from Rafael or from
customers overseas.
19
| 2.11 |
Human
Resources
|
Radom's
workforce comprises mostly skilled engineers, practical engineers and production
personnel, who have accumulated considerable experience in the aeronautics
field. Such experience is required, since this field requires training and
many
years of experience, being a conservative field with strict demands, some
deriving from standards with which compliance is required in the field, and
others from Radom's accumulated aircraft upgrade experience. A large part of
Radom's workforce has seniority of over 10 years in the company. Radom has
no
dependence on any of its employees in its field of activity.
The
company invests, from time to time, in professional training of its employees
according to the type of the employee and the field of activity; mainly in
the
fields of computerization and software that are relevant to its field of
activity.
Radom's
workforce, 2006 -2007:
|
As
of December 31
|
|||||||
|
Occupation
|
2007
|
2006
|
|||||
|
Management
|
1
|
2
|
|||||
|
Administration
|
1
|
6
|
|||||
|
Marketing
|
1
|
1
|
|||||
|
Finance
|
2
|
3
|
|||||
|
Production
|
11
|
14
|
|||||
|
Quality
Assurance
|
1
|
2
|
|||||
|
Engineering
|
12
|
23
|
|||||
|
Procurement
and Logistics
|
1
|
3
|
|||||
|
Total
|
30
|
54
|
|||||
As
of the
publication date of the financial statements, Radom employs about 30 people.
Due
to
the decrease in Radom's business, in the second half of 2007 it reduced the
number of its employees. This reduction corresponded to the new management's
wish to change the workforce structure in view of the planned change in Radom's
operation strategy.
20
The
employees in the company's field of activity are employed under personal
contracts, which include social benefits (such as Directors insurance
etc.).
| 2.12 |
Raw
materials and suppliers
|
Radom
carries out some of its works through subcontractors, mainly in projects in
which it serves as the primary contractor, according to the type of work and
its
scope.
Radom
tends to employ subcontractors, mainly in works that are related to aeronautics
equipment and mission equipment used by it to carry out aircraft upgrades and
system integration, and it purchases engineering services in specific fields
of
expertise, such as flight services for pilot tests, procedure writing and
training services etc.
For
projects in which subcontractors serve at a significant scope, Radom customarily
obtains the customer's approval of the subcontractors' identity. For every
project, Radom identifies all bodies that may be suitable sub-contractors and
requests proposals from them, based on specifications dictated by the Company.
The proposals received are reviewed on the technical level as well as on
financial and management levels.
Engagement
with the subcontractors is contractual, includes technical and financial terms,
and many times it also includes the relevant part of Radom's undertakings
towards the customer, back to back (including warranty for components that
are
purchased by it from the subcontractor).
Radom
does not depend on a specific supplier and/or subcontractor.
| 2.13 |
Working
Capital
|
| 2.13.1 |
Raw
materials inventory policy
|
Radom
does not equip itself with raw materials, but rather purchases them as required
in practice for the projects in-progress.
| 2.13.2 |
Finished
products inventory policy
|
Radom
does not hold a finished products inventory. It does not manufacture for
inventory.
| 2.13.3 |
Finished
products inventory policy
|
Radom
grants a 12-month warranty for works in projects carried out by it. In 2006
and
2007, the scope of repairs carried out in the frame of the warranty was
insignificant amounts.
21
| 2.13.4 |
Customer
credit
|
Radom
grants customers in Israel and abroad credit for periods ranging from cash
to
120 days from the end of the present calendar month, according to the type
of
customer, the type of engagement with it, and the scope of the order. Radom
sells to customers abroad, mainly in cash or against letters of credit. The
average credit periods granted to customers in the years 2005, 2006 and 2007
was
about 67 days, 57 days and 70 days, respectively. The average credit volume
granted to customers in the years 2005, 2006 and 2007 was approximately NIS
3,000 thousand, NIS 3,992 thousand and NIS 1,584 thousand,
respectively.
| 2.13.5 |
Supplier
credit
|
Radom
customarily enters with its principal subcontractors and suppliers into back
to
back agreements, for agreements it has with its customers, in respect of the
credit terms granted. Radom enjoys the credit terms that are customary in the
market.
The
average periods of credit from customers in 2005, 2006 and 2007 were about
164
days, 200 days and 100 days, respectively. The average credit volume granted
by
suppliers in the years 2005, 2006 and 2007 was approximately NIS 3,970
thousands, NIS 4,925 thousands and NIS 3,650 thousands,
respectively.
Most
of
the increase in payable days outstanding between 2005 and 2006 is due to
improvement of its terms opposite suppliers following Radom's purchase in the
fourth quarter of 2005.
| 2.14 |
Goals
and Business Strategy
|
| 2.14.1 |
Strategic
Organizational Goals
|
Radom’s
strategic goal in its area of activity is to tighten its contact and relations
with defense bodies in Israel and worldwide, and to expand its operations and
marketing efforts worldwide. This, inter alia, by creating joint ventures
involving developing technologies with the large defense industries, in fields
that are not in its business core, based on its capabilities. This is in light
of the strategic changes in the large defense industries that are increasingly
focusing on their principal business cores and directing advanced technologies
outside their business cores. Radom is a natural partner to these activities,
in
view of the management focus, the flexibility and the low overheads
characterizing small companies such as itself.
In
frame
of Radom's effort to minimize the uncertainty entailed in and dependency on
receipt of future projects, and in order to create continuity of revenues,
it is
examining a new approach, in frame of which it will examine the possibility
of
manufacturing its own on-the-shelf products in 2008, other than only in frame
of
specific projects, as a subcontractor.
22
| 2.14.2 |
Marketing
and Geographic Deployment Strategy
|
Strategy
entails marketing through agents, while placing an emphasis on maximum
deployment in most countries worldwide and tightening of relations with safety
bodies in Israel and worldwide and marketing the company through
them.
| 2.14.3 |
Manufacturing
Strategy
|
Radom
intends to expand its operations in the field of mission airplanes, trainer
airplanes and helicopter upgrades - fields that are expanding now that the
safety budgets of countries are decreasing, since the cost of training in
trainer airplanes offered by Radom are significantly cheaper than that of its
competitors, and Radom has know-how and relative advantage in the mission
airplanes and helicopters fields that are also used for civilian and police
uses.
| 2.15 |
Intangible
Assets
|
Radom
markets and distributes its products and services in its field of activity
under
the RADOM brand. It has not registered the name as trademark, and assesses
that
this does not lead to exposure for the company.
| 2.16 |
Restrictions
and Supervision
|
Radom
operates in accordance with ISO 9001, and an equivalent standard awarded by
I-QNet (international standards pertaining to the quality management system),
in
effect until October 31, 2009.
Radom
complies with all the requirements that prescribe these approvals and that
are
required for its activity as an approved contractor of the Ministry of Defense,
leading aeronautical industries and dozens of countries
worldwide.
23
3.
Recent Developments
Radom
presented poor financial statements for the year 2007 (see below), that reflect
failure to meet projections, a decline in sales towards the end of the year,
a
sharp increase in production costs, a substantial operating loss, a sharp
increase in the deficit, to over NIS 12 million, and a backlog that does not
indicate the sharp increase that would allow Radom to recover from its present
state. This is indeed an outlook that requires a thorough examination of Radom's
ability to continue existing as a standalone company.
Nevertheless,
during the past nine months several changes occurred in Radom. In the middle
of
the past year, the management was replaced. Under the new management: a sharp
decrease in the number of employees to 30, and transfer of the simpler
production works to subcontractors in Israel and worldwide. A concurrent
decrease was affected in the general and administrative expenses. Radom's
strategy changed, and at present it strives to focus on a narrower and more
profitable number of fields. It was made clear that the management, with the
assistance of the Group's management and with its active participation, has
initiated a sales promotion campaign with an emphasis on more prestigious
airplanes and helicopters upgrade works, on a larger scale. This activity places
Radom opposite two giants in this field of activity, IAI and Elbit. Naturally,
attention was removed from the marketing of the ordinary projects that Radom
has
engaged in recently.
| · |
Radom
has engaged in the development of products together with Rafael;
in 2007,
approximately NIS 4 million of the expenses were development expenses
derived from these products. The product belongs to Rafael, but it
was
agreed that Radom will be the product's manufacturer and that it
will
market it worldwide. This R&D expense should lead to Radom's loss in
2007 being perceived differently, since most of this loss in is due
to the
R&D that is more of an investment than an expense. The product will
be
marketed in Israel commencing at the end of 2008, and budgets have
already
been allocated for this. Since it is a defense product, it has great
worldwide marketing potential, and two NATO members have shown substantial
interest in it. The second product is an attack product, a type of
air to
air launcher. An Eastern European country was the first to order
this
product, in the amount of approximately $700,000. The project is
conducted
though Rafael.
|
24
| · |
In
the second half of 2007, Radom began returning to the market in which
it
was active for many years in the past - aircraft upgrade. Since Radom
is
small, but has substantial accumulated knowledge, the direction was
cooperation with large local companies. The first contact was created
in
the beginning of this year, with a large company and NATO member,
who is
connected to the local navy; the transaction involves the upgrade
of 8
navy aircraft and 3 more aircraft in the future. The engagement will
be
completed during the present year. The engagement with the local
Radom
already exists. These are projects of scopes that Radom hasn't known
for
many years.
|
| · |
An
upgrade project in an African country - Radom is competing with IAI
for a
project in the range of $11 million. Negotiations are taking place
between
Radom's representatives and IAI about collaboration. The results
will be
known soon.
|
In
a
conversation with Radom's CEO it was learned that the present perception of
Radom in the group has changed, and it is believed that this change in approach
will soon be reflected in the Company's business results. This will happen
not
in 2008, but later. Radom's projection for 2008 is based mainly on backlog
and
certain projects. The management is unable to present a projection for the
period subsequent to 2008, since each of the projects mentioned is at a very
high financial scope relative to Radom's annual scope of operations in recent
years, including the projections for 2008. Radom's management is now cautiously
optimistic about its chances of recovery and future breakthrough.
25
|
B.
|
Financial
Statements Analysis
|
Current
Assets
-
sharply declined in 2007, to approximately NIS 10,021 thousand. In 2006 this
item amounted to approximately NIS 18,143 thousand, compared with NIS 5,287
thousand in 2005, which constitutes an increase of about 240%. This item
increased in 2005 (by about 1%) compared with 2004 - approximately NIS 5,229
thousand. The changes in this item derive from changes in scope of
activity.
26
Trade
receivables decreased significantly in 2007, to NIS 5,853 thousand, which is
due
to a decrease in sales at the end of the year. Cash and short term investments
in 2007 declined to a very low level, since the case was used to finance the
accumulated losses.
Fixed
Assets
- there
was no significant change in Radom's fixed assets. In the past three years,
Radom maintained fixed assets in the amount of NIS 10 to 12 million, through
current investments in the depreciation amount.
Current
Liabilities -
as of
December 31, 2007, this item amounted to approximately NIS 24,830 thousand,
compared with approximately NIS 31,301 thousand in 2006, which reflects a
substantial increase of about 86% compared with 2005, when the current
liabilities amounted to approximately NIS 17,030 thousand (nearly 16% increase).
In 2004 it amounted to approximately NIS 14,628 thousand. The change derives
directly and reflects the change in the scope of business activity, and the
improvement in credit terms that Radom has obtained from its suppliers, and
mainly from an advance payment received from a customer, that significantly
increased the accounts payable.
Long-Term
Liabilities
- the
long term liabilities increased due to capital raised from a related party,
in
the amount of almost NIS 9 million. As of December 31, 2006 this amounted to
approximately NIS 4,692 thousand, a decrease compared with approximately NIS
6,488 thousand in 2005, while in 2004 this item amounted to approximately NIS
7,263 thousand. The changes derive mainly from the repayment of a long term
bank
credit, which increased the short term bank credit, and financing provided
by a
related party. Radom also reduces the severance pay fund
accordingly.
Shareholders'
Equity
-
Radom’s shareholders' equity is at a substantially negative amount, and amounted
in 2007 to approximately NIS 12,680 thousand. In 2006 the negative shareholders'
equity amounted to approximately NIS 6,547 thousand, compared with approximately
minus NIS 7,670 thousand as of December 31, 2005 and compared with 2004, when
this item amounted to approximately minus NIS 5,605 thousand. The increase
in
the shareholders' equity deficit derives from a loss in 2007 (see the table
below for analysis of this loss).
27
In
summary, Radom's financial state worsened significantly, and the gap between
its
financial assets and liabilities increased. Radom relies on credit provided
by
the Group, and it certainly cannot continue to stand on its own without this
massive assistance.
Profit
and Loss
|
For
the year ended December 31
|
||||||||||
|
in
NIS thousands
|
2005
|
2006
|
2007
|
|||||||
|
|
|
|
|
|||||||
|
Sales
Revenues
|
14,570
|
23,955
|
19,857
|
|||||||
|
Change
in sales
|
||||||||||
|
|
||||||||||
|
Salaries
|
3,301
|
4,489
|
4,263
|
|||||||
|
Materials
procurement
|
1,522
|
4,958
|
4,768
|
|||||||
|
Subcontractors
|
2,935
|
4,965
|
5,842
|
|||||||
|
Depreciation
|
131
|
110
|
236
|
|||||||
|
Manufacturing
and miscelleneous
|
408
|
|||||||||
|
Overseas
Travel and miscelleneous
|
407
|
736
|
1,497
|
|||||||
|
Inventory
Reduction
|
300
|
(50
|
)
|
|||||||
|
Cost
of sales
|
8,596
|
15,258
|
16,964
|
|||||||
|
|
||||||||||
|
Gross
Profit
|
5,974
|
8,697
|
2,893
|
|||||||
|
|
||||||||||
|
Research
and Development Expenses, net
|
0
|
0
|
0
|
|||||||
|
Sales
and Marketing Expenses
|
1,580
|
3,618
|
2,971
|
|||||||
|
General
and Administrative Expenses
|
4,954
|
3,503
|
5,935
|
|||||||
|
Total
Expenses
|
6,534
|
7,121
|
8,906
|
|||||||
|
Operations
Profit
|
(560
|
)
|
1,576
|
(6,013
|
)
|
|||||
|
Balances
cancellation
|
1,681
|
|||||||||
|
Financing
|
1,162
|
1,348
|
914
|
|||||||
|
|
||||||||||
|
Loss
before income tax
|
(1,722
|
)
|
228
|
(5,246
|
)
|
|||||
|
|
||||||||||
|
Profit
|
(1,722
|
)
|
228
|
(5,246
|
)
|
|||||
Sales
revenues–
Radom's sales
declined in 2007 approximately NIS 19,857 thousand, compared with NIS 23,955
thousand last year, a sharp 17.1% decline. Last year, there was a 64.4% increase
compared with approximately NIS 14,570 thousand as of December 31, 2005. In
2005
there was an 18% decline in Radom's sales relative to 2004. 2007 was a
disappointing year. Radom's sales declined, contrary to the projections prepared
last year, according to which 2007 should have shown an increase in revenues.
Another worrying phenomenon apparent in the company's sales conduct is the
substantial volatility in the scope of activity.
28
Production
costs–
the ratio of
production costs to sales has increased. While in 2005 this ratio amounted
to
about 59%, and in 2006 it increased to 64%. In 2007 the production costs
increased sharply to over 85%. The sharp increase in 2007 is due to substantial
expenses entailed in the development of two products together with Rafael.
A
considerable share of the development expenses were absorbed by the company,
creating a significant loss that was expressed in the relative increase in
production costs. The company's basic production function did not change.
Expenses–
Radom's expenses
increased in 2007. An especially significant increase was recorded in the
general and administrative expenses, partially due to the management's
replacement.
Operating
profit–
as
a
result of the aforesaid, that is a combination of decreased sales, increased
development costs and decreased gross profit, and increased expenses, Radom
incurred extraordinary operating loss, compared with last year's profit. Radom's
operating loss amounted to approximately NIS 6,013 thousand, about two thirds
of
which derive from the company's decision to absorb a substantial part of the
development expenses of the two products. Of the remaining third, some derives
from an increase in administrative expenses resulting from the decision to
replace the company's management. There is no doubt that such an outlook,
reflected by the financial statements, requires a thorough examination of the
profitability Radom's continued operation, both in view of the poor results
and
in view of the considerable deficit accumulated in Radom's equity, which burdens
it and makes it a financial burden on the parent company.
Net
profit–
Radom's
net loss amounted in 2007 to approximately NIS 5,246 thousand. This amount
joins
the considerable loss accumulated in Radom’s equity, significantly increasing
the equity deficit.
Taxes–
Radom
has accumulated losses for tax purposes, which will be taken into account in
future tax payments, should the company generate profits.
29
|
C.
|
Risk
and Opportunity
Factors
|
Risk
factors:
| · |
Radom
operates mainly in the defense military and aviation market, in Israel
and
worldwide. Decisions in this market are made by government bodies
and are
dependant on defense budgets. Failure to gain a project, or delay
or
cancellation of a project, could cause significant fluctuations in
the
company's sales turnover and its
profitability.
|
| · |
Sales
of security products to countries outside Israel require the approval
of
the Ministry of Defense, which may choose to direct the company to change
its areas of export as well as to terminate existing contracts. Radom
has
a general permit granted by the Ministry of Defense and renewed annually,
enabling it to negotiate for the provision of its products to many
countries. Entering into each specific transaction requires receiving
special approval from the Ministry of
Defense.
|
| · |
Some
of Radom's sales are abroad and are denominated in dollars. Sales
in
Israel are in shekels, and some are linked to the dollar. Some of
the
expenses of the parent company, such as salary expenses and local
services, are in shekels. Most of the raw materials are purchased
in
dollars and in euros. Exchange rate fluctuations (mainly in the US
dollar
and euro) against the NIS could improve or erode the company's
profitability. This factor has a significant effect on the company's
business.
|
| · |
Radom
is unable to participate in major tenders due to its size. It therefore
participates in the projects of large manufacturers in the industry.
As
Radom grows, its ability to integrate into larger projects as a leading
manufacturer will grow. At its present size, Radom is finding it
considerably difficult to function in a market where most of the
players
are large companies.
|
| · |
As
a company that operates in the aviation field, Radom is exposed to
decisions of the US government with respect to certain technologies
that
are allowed to be sold to certain countries abroad.
|
| · |
At
any given moment, Radom has several major customers that represent
a large
part of its sales turnover. Due to the small number of customers,
discontinued engagement with any customer could reduce its revenues
significantly. The management estimates that this factor has a medium
effect on the company's
business.
|
30
| · |
The
company has short term and long term shekel credit from banks, and
is
therefore exposed to the fluctuations in the shekel interest. The
management estimates that this factor has a medium effect on the
company's
business.
|
| · |
Credit
risks: the company sells mainly to major government, institutional
and
business entities, that are financially stable, so that only a low
exposure exists to customer credit risks.
|
Opportunity
factors:
| · |
As
aforesaid, Radom engages in the various aviation fields and obtains
projects through participation in tenders. Joining the Star Night
Group
will allow it to portray to customers a more substantial general
scope of
activity and more established financial backing, which increases
its
ability to participate in and win larger tenders than those it has
participated in and won to date.
|
| · |
Radom
has existed for many years, during which it succeeded in accumulating
vast
amounts of specific and general knowledge in a wide variety of activities.
Its ability to provide immediate solutions in multiple fields is
high, in
light of the vast technology at its disposal.
|
| · |
The
worldwide market has expanded with respect to the war on terrorism.
Smaller tenders are published and less large scope tenders, which
fits the
company's nature. Many of the projects are upgrade projects, a field
that
is expanding at the expense of the purchase of new tools. The purchase
of
new platforms is expensive, while the cost of communication systems,
night
photography, navigation systems and other inclusive systems is declining.
These two facts make upgrading more
worthwhile.
|
| · |
The
direction of Radom's operations tends towards activities with high
added
value. According to Radom's strategy, there is no advantage in the
basic
"garage" type activity. Radom attempts to compete mainly in projects
of an
engineering nature, systems integration and implementation of its
advantages for projects involving a small number of
aircraft.
|
| · |
Radom
has a skilled engineering workforce, some of it with significant
seniority, that provides the company with an advantage in projects
involving system and platform integration, in which the company has
the
advantage of proven know how and experience.
|
| · |
Cooperation
with leading companies in Israel, in the security field, such as:
IAI,
IMI, Rafael and others.
|
31
|
D.
|
Valuation
Methodology
|
Radom's
business activity has existed for many years, which indicates continuity and
a
history that allows building a limited future forecast. In addition, Radom
has
established contact that is not one-time in nature, with customers that may
return to it in the future (see also "recent developments" above). Therefore,
in
my opinion the most suitable method for valuating the business activity is
the
discounted cash flows (DCF) method. This valuation will be based on a forecast
of the business results in the years 2008 to 2012, and on assumptions about
Radom's permanent growth rate after 2012. Once the business activity is
valuated, including the terminal value, the net financial liabilities will
be
deducted from this value (after deducting the financial assets value). See
Appendix A for a detailed explanation of the method.
Nevertheless,
one should not disregard the fact that Radom operates based on projects the
duration of which is two to three years at the most. There is no way to forecast
at present the projects that Radom will carry out over the next few years.
There
is more information about the years 2008-2012, and the basis for this forecast
is ongoing projects specified in the backlog. Some projects are currently being
negotiated by Radom, and some significant engagements cannot be disclosed for
security reasons.
32
|
E.
|
Valuation
–
Radom
|
Detailed
notes to the forecast model
Sales (1)
– As aforesaid, most of Radom's sales are to defense bodies.
The management of the parent company Radom provided us a sales forecast for
2008; the forecast for 2008 is based on a backlog. As for the subsequent years,
the forecast is based on expected sales. The forecast is contingent of the
receipt of orders and on winning tenders, and the management has calculated
a
respective win probability for each of the included transactions, the sales
for
each year, as provided in our valuation below, reflect this probability.
Since
the
transactions cannot be specified and explained for confidentiality reasons,
we
will settle for presenting Radom's total forecast activity scope for the years
2008 – 2012. The sales data specified in the forecast reflect
Radom's sales expectation for each year, subject to the probability of the
work
being carried out that year. The forecast presented is the management's
forecast.
Cost
of sales (2)
– Radom's cost of sales makes forecasting difficult, since
some
of the projects are material rich but in most the material component is small.
On the other hand, in some of the projects wither the work component or the
subcontractor’s component is dominant. Radom tried to maintain gross
profitability regardless of the composition of the production expenses.
Therefore, it is possible that the internal structure of the production cost
components will be very different in practice, compared with the forecast.
Radom
strives to maintain a gross profitability rate of at least 40%. Examining past
results, we have reached the conclusion that to date Radom has achieved an
average gross profitability rate of 38% only, and this will be the rate used
in
the model. This rate was not maintained in 2007, but this is due to the fact
that Radom's costs included development costs that Radom has decided to absorb
for business advantage reasons; therefore, Radom's gross profitability in 2007
is not representative.
Research
and development (3)
–
Radom has substantial know how that has accumulated in its employees for many
years. Renewal and update should be invested in of course, but Radom's
management has decided in this stage to refrain from investing in R&D in its
traditional fields of activity. This, of course, until its shareholders' equity
improves and its deficit declines. The forecast reflects this policy. Radom
engages in R&D only in cooperation with other large bodies, and at present
it does not have a defined R&D program of this type.
33
Sales
and marketing
(4) –
the sales and marketing expenses comprise fixed marketing expenses and agent
commissions. Agent commissions are paid in transactions with parties overseas.
There are no marketing commissions on transactions in Israel, so the sales
composition determines also the amount of the sales and marketing expenses.
The
forecast is based on the mix of expected projects.
General
and administrative expenses (5)
–
Radom maintain the scope of general and administrative expenses, and do no
intend to increase them substantially. In 2007 its expenses were extraordinary.
Depreciation
(6) –
includes depreciation on buildings, computer equipment, furniture, vehicles
and
demonstrative inventory. This item includes the depreciation usually recorded
in
several expense items (sales cost, marketing, and general and administrative).
Income
tax
(7) –
Radom has losses for tax purposes in the amount of approximately NIS 19 million.
As of the draft of financial statements for the year 2006, Radom has yet to
present these losses as a tax asset, but it will not be taxed for several years.
Investments (8)
–
Radom has investment plans designed to increase its production capacity. It
has
also acquired another real estate property, in the beginning of 2007 (see
details above).
34
Working
Capital requirements
(9) –
Radom
has
negative working capital, meaning that it obtains business credit in amounts
exceeding the business credit it grants and needs. Due to the substantial
deviation in the other payables item, we will set the working capital needs
at
34%. The decrease in 2007 was due to a decline in the activity and to R&D
activity (expense without revenues), hence it is not representative.
Capitalization
rate
(10) -
the long term risk free interest rate of government bonds is about 4.2%. The
return on the Israeli stock market 10 years back is 10.8%. The un-leveraged
beta
of the companies engaged in the military field is 1.56. Radom's beta based
on a
credit to value ratio of 10% and an effective tax rate of 0 for a significant
number of years is 1.79.
4.2%
+
6.6*1.79=15.8%
Since
Radom is a small, private company, whose shares are not listed on the stock
exchange, in our opinion a premium of 4% should be added for additional risk.
The capitalization rate obtained is around 20%.
In
our
opinion Radom is unable to obtain credit from financial institutions without
relying on external sources, due to its capital deficit and its consistent
losses to date. The credit that Radom has relies inter alias on securities
provided by the Group. By pledging proceeds from its very secure customers,
Radom is able to obtain short term credit at 10% of its value at the most.
Accordingly, the WACC will be:
20%*90%+7.5%*10%=15.50%
35
Growth
rate
(11) -
the terminal growth rate was set at about 2%, based on the expected worldwide
annual GDP growth rates for the long term.
Value
at the end of the period - terminal value (12)
-
calculated using the Gordon formula, based on the perpetual cash flow, that
is
based on a forecast drawn for this purpose for the year 2008, and assuming
a
growth rate. The terminal value was capitalized for 3.5 years, as in the last
forecast year.
Net
financial liabilities (13)
-
according to the balance sheets dated December 31, 2007, in NIS thousands:
36
|
Income
statement forecast
|
||||||||||||||||
|
For
the year ended December 31
|
||||||||||||||||
|
in
NIS thousands
|
2008
|
2009
|
2010
|
2011
|
2012
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Sales
revenues
|
26,150
|
40,000
|
60,000
|
75,000
|
85,000
|
|||||||||||
|
Salaries
|
3,500
|
3,850
|
4,235
|
4,659
|
5,124
|
|||||||||||
|
Materials
procurement
|
5,492
|
8,400
|
12,600
|
15,750
|
17,850
|
|||||||||||
|
Subcontractors
|
6,408
|
9,802
|
14,703
|
18,379
|
20,829
|
|||||||||||
|
Depreciation
|
400
|
800
|
1,000
|
1,200
|
1,200
|
|||||||||||
|
Manufacturing
and miscelleneous
|
700
|
1,071
|
1,606
|
2,008
|
2,275
|
|||||||||||
|
Overseas
travel and miscelleneous
|
1,500
|
1,700
|
2,000
|
2,100
|
2,150
|
|||||||||||
|
Cost
of sales
|
18,000
|
25,623
|
36,144
|
44,095
|
49,429
|
|||||||||||
|
|
||||||||||||||||
|
Gross
profit
|
8,150
|
14,377
|
23,856
|
30,905
|
35,571
|
|||||||||||
|
|
||||||||||||||||
|
Research
and development expenses, net
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Sales
and marketing expenses
|
2,310
|
3,533
|
5,300
|
6,625
|
7,509
|
|||||||||||
|
General
and administrative expenses
|
3,533
|
4,100
|
4,900
|
5,500
|
5,900
|
|||||||||||
|
Total
expenses
|
5,843
|
7,633
|
10,200
|
12,125
|
13,409
|
|||||||||||
|
Operating
profit
|
2,307
|
6,744
|
13,656
|
18,780
|
22,163
|
|||||||||||
|
Tax
|
-
|
927
|
4,695
|
5,541
|
||||||||||||
|
Profit
|
2,307
|
6,744
|
12,729
|
14,085
|
16,622
|
|||||||||||
|
Cash
Flow Projection
|
||||||||||||||||
|
in
NIS thousands
|
2008
|
2009
|
2010
|
2011
|
2012
|
|||||||||||
|
Net
profit (loss)
|
2,307
|
6,744
|
12,729
|
14,085
|
16,622
|
|||||||||||
|
|
||||||||||||||||
|
Depreciation
(6)
|
400
|
800
|
1,000
|
1,200
|
1,200
|
|||||||||||
|
Investments
(8)
|
(1,000
|
)
|
(1,600
|
)
|
(2,000
|
)
|
(1,200
|
)
|
(1,200
|
)
|
||||||
|
Working
capital (9)
|
1,761
|
3,878
|
5,600
|
4,200
|
2,800
|
|||||||||||
|
Net
operating cash flow
|
3,468
|
9,822
|
17,329
|
18,285
|
19,422
|
|||||||||||
|
Capitalization
period
|
0.5
|
1.5
|
2.5
|
3.5
|
4.5
|
|||||||||||
|
Capitalized
cash flow
|
3,179
|
7,566
|
11,218
|
9,947
|
8,878
|
|||||||||||
37
|
Valuation
(NIS thousand)
|
|
|||
|
Capitalization
rate (10)
|
19.0
|
%
|
||
|
Growth
rate after 2008 (11)
|
2
|
%
|
||
|
Long
term annual representative cash flow
|
16,954
|
|||
|
Present
value of the cash flow until 2012
|
40,788
|
|||
|
Terminal
value, capitalized (12)
|
45,590
|
|||
|
Net
financial liabilities (13)
|
(25,731
|
)
|
||
|
|
||||
|
Total
company value
|
60,648
|
|||
Sensitivity Analysis – valuation changes due to changes in the capitalization rate (rows) and in the perpetual growth rate (columns)
Change
in Capitalization Rate
|
Change in perpetual
Growth Rate
|
60,648
|
16%
|
17%
|
18%
|
19.0%
|
20%
|
21%
|
|
0
|
71,416
|
65,315
|
59,895
|
55,049
|
50,690
|
46,750
|
|
|
0.50%
|
73,410
|
67,026
|
61,374
|
56,335
|
51,816
|
47,740
|
|
|
1.00%
|
75,536
|
68,843
|
62,939
|
57,693
|
53,001
|
48,780
|
|
|
1.50%
|
77,809
|
70,777
|
64,599
|
59,128
|
54,250
|
49,874
|
|
|
2.00%
|
80,244
|
72,841
|
66,363
|
60,648
|
55,569
|
51,025
|
|
|
2.50%
|
82,860
|
75,046
|
68,240
|
62,260
|
56,962
|
52,238
|
Conclusion
The
fair
value of Radom Aviation Systems Ltd. is reasonably stated to be average of
NIS
60.6 Million, and
ranges from NIS 56.4 to NIS 64.8 Million. Based upon the foregoing and such
other factors as we deem relevant, we are of the opinion that the Consideration
is fair from a financial point of view.
38
Star
Night Technologies Ltd.
Valuation
of the Company
as
of February 28th, 2008
Signing
Date of the Agreement with Lapis
Technologies
Inc.
May
2008
May
25, 2008
To:
Mr. Harry Mund
Lapis
Technologies, Inc.
Re:
Star
Night Technologies Ltd.
Valuation
of Shares as of the Valuation Date
|
A.
|
General
|
We
were
requested by Mr.
Harry
Mund and Lapis Technologies, Inc. (hereinafter respectively: “Mund” and “Lapis”)
to render our opinion as to the fair value of Star Night Technologies Ltd
(hereinafter: “Star Night” or “the Company”) as part of the fairness opinion
that we are preparing under an agreement between LAPIS and Star Night, dated
February 28th,
2008
(hereinafter: the “Agreement.) Star Night is a holding company which fully owns
the subsidiary SDS (Star Defense Systems) Ltd. ("SDS")
and
its subsidiary New Noga Light (2000) Ltd. (hereinafter "New
Noga"),
Night
Light Ltd.( hereinafter: "Night
Light")
,
Radom Aviation Systems Ltd. (hereinafter "Radom")
and
Magam Safety Ltd
(hereinafter:
Magam)
and
more. The valuation of the subsidiaries, attached herein, is an integral part
of
the valuation of Star Night's shares.
In
respect of the above, we have made a valuation of the Fair Market
Value1 as
of the
date of signing and consummation of the Agreement ("Valuation Date"), based
on
the information set out below.
"Jacob
Eshed – Tesuot Consultants" is an independent consulting firm specializing
in 'going concern' valuations. We have extensive experience in performing
fairness opinions for companies in diverse fields of activities.
1 We
have
determined the fair market value to be the price at which an entity or an
interest changes hands between a willing buyer and willing seller both acting
in
their own best interest, on the open market assuming a reasonable period of
time
for an agreement to arise, neither being under compulsion to buy or sell and
both having reasonable knowledge of all relevant facts as of the applicable
valuation date.
2
Since
the
year 2005, our office has prepared a series of valuation studies for Star Night
and for SDS, including a valuation of the investment in Radom for the year
2005,
as of December 31, 2006. There is no dependence of the valuator on the ordering
party or other companies in the Star Night Group.
Objective
and Scope
The
purpose of this study is to determine the fair value of the assets included
in
the agreement. We understand that our recommendation of fair market value and
this valuation report will be used and relied upon for the agreement. In this
valuation, we have relied on signed written material, unsigned written material
and information provided verbally or by email. It is based upon both internal
and public information made available by the Company, and upon estimates and
assessments that may prove, over time, to have been inaccurate or incomplete.
We
do not express an opinion or offer any form of assurance regarding their
accuracy or completeness. All the information provided is accountable for by
the
Company and its management alone.
Previous
works –
The
present contract, involving this work, is the first agreement between Jacob
Eshed Tesuot Consultants and Lapis. Our first engagement with Star Night
Technologies Ltd. took place on May 15, 2006. The second was in August 7, 2006,
and within that framework we valuated other subsidiaries of Star, Night Light
and New Noga Light, in relation to their sale to Magam. This valuation was
included in a report in respect to a transaction between Magam and its
controlling shareholder, in accordance with Securities Regulations (A
Transaction Between a Company and its Controlling Shareholder) – 2001,
published in August 2006. The third agreement involved an impairment study
under
Standard 15, requested by Star in respect to its purchase of Radom. On December
28, 2006 we valuated the subsidiary “Prizmatech”, concerning a transaction for
its sale to Magam by an interested party. In addition, we made several Employee
Stock Option Valuations granted by Star to managers, and tested for the
necessity of writing off intangible assets.
Materials
Available in Performing the Valuation:
| · |
Audited
financial statements for Star Night as of December 31,
2007.
|
| · |
Data
included in Star Night's periodic
report.
|
3
| · |
Star
Night management’s forecasts – which served as the basis for the
company's cash flow projections.
|
| · |
Audited
financial statements for SDS's as of December 31,
2007.
|
| · |
Data
included in SDS's periodic report.
|
| · |
Conversations
with Star Night management.
|
| · |
Drafts
financial statements of subsidiaries.
|
Valuation
Method
STAR
NIGHT Accumulated valuation – Methodology
The
accumulated valuation of Star night is based on the “Asset Value Methodology.”
The financial statements of the company and its subsidiary, SDS, as of the
date
31 December 2007, were adjusted in order to present the fair value of their
activity.
STAR
NIGHT and SDS are holding companies; all their activity is located in the SDS
subsidiaries. Their General and Administrative expenses are forecast to be
covered by management fees from subsidiaries.
Adjustments
in the Accumulated Financial Statements were prepared in order to present the
fair value, as follows:
The
financial statements were prepared and presented according to the Israeli
accounting regulations. The first adjustment was made for each company
separately, in order to present the financial statements according to IFRS
regulations.
The
subsidiary company SDS (Star Defense Systems) Ltd holds 100% equity in : Magam
Safety Ltd ( Safety Sector ), New Noga Light (2000) Ltd, Night Light Ltd,
Prizmatec Ltd. ( the Night Vision Sector ), and Radom Aviation Systems, Ltd
(conversion and upgrade of airplanes ). Each of those activities was valuated
separately according to the DCF methodology (See below). The Investment in
subsidiaries was replaced by the combined valuation of the three sectors
according their valuation. The total value of SDS is then presented as the
net
value of assents minus obligations.
STAR
NIGHT holds 86.2% of the equity of SDS, and again the investment in subsidiary
was replaced by the fair value of its holdings in SDS.
The
total
value of STAR NIGHT represents its holdings in the fair value of its
subsidiaries and their activity.
4
Valuation
of the Subsidiaries according to sectors of activity
Star
Night’s business activities are divided into three sectors. It has existed for
several years, indicating continuity and a history that allows building a
limited future forecast. In addition, all sectors have well established contacts
which are not of a one-time basis, and are potentially “return” customers.
Therefore, in our opinion, the most suitable method for valuating the business
activity is the “Discounted Cash Flow” (DCF) method. This valuation will be
based on a forecast of the business results from 2008 to 2012, and on
assumptions regarding each sector's permanent growth rate after the year 2012.
Once the business activity is valuated, including the terminal value, the net
financial liabilities will be deducted from this value (after deducting the
financial assets value).
One
should not disregard the fact that the Defense and Military Supply Industry
operates based mainly on short-term projects, the duration of which is two
to
three years maximum. It is impossible to forecast at present the projects that
will be carried out over the next few years. More information exists for the
year 2008, since its forecast is based on ongoing projects specified in the
backlog. Some projects are currently being negotiated, and some significant
engagements cannot be disclosed for security reasons. In each and every sector
we have detailed the specific valuation methodology.
5
Conclusion
-
The
average USD exchange rate to NIS, in recent weeks, has been approximately 3.5
NIS. Therefore, the company value is equal to USD 38.7 Million within the range
of USD 35.2 to USD 42.6 Million.
Mr.
Moti
Solomon holds 33.82% of the shares and full control of the company. The value
of
his stake should contain a control premium. Since his holdings are less than
51%, we added only 10% for the control premium to his stake, as follows:
38.7*0.9*33.82%+(38.7*0.1)=15.65
USD Millions
"Based
upon the foregoing and such other factors as we deem relevant, we are of the
opinion that the Consideration is fair from a financial point of
view."
The
company value of Mr. Moti Solomon's share is equal to USD 15.65 Million, within
the range of USD 14.0 to USD 17.0 Million.
|
|
Respectfully
submitted,
|
|
|
|
|
|
Jacob
Eshed
|
|
|
Jacob
Eshed – Tesuot
Consultants
|
6
Subsidiaries
- Value
(See
below valuation studies - per sector)
SDS
|
In thousands NIS
|
Table No. 1
|
|||||||||
|
Low
|
High
|
Average
|
||||||||
|
Safety
Sector
|
27,000
|
31,000
|
29,000
|
|||||||
|
Night
Vision Sector
|
80,000
|
96,000
|
88,000
|
|||||||
|
Radom
|
56,400
|
64,800
|
60,600
|
|||||||
|
163,400
|
191,800
|
177,600
|
||||||||
Valuation
|
Table No. 2
|
|||||||||||||
|
SDS- NAV Valuation
|
|
|
|
||||||||||
|
(In thousands NIS)
|
BALANCE SHEET
2007
|
NAV
|
|||||||||||
|
|
Israeli GAAP
|
Adjustments
|
IFRS
|
Fair Value
|
|||||||||
|
Cash
|
8,744
|
8,744
|
8,744
|
||||||||||
|
Short
Term F. Investments
|
15,987
|
15,987
|
15,987
|
||||||||||
|
Customers
|
1,457
|
(100
|
)
|
1,357
|
1,357
|
||||||||
|
Other
Debtors
|
876
|
(414
|
)
|
462
|
462
|
||||||||
|
Loans
to Subsidiaries
|
32,492
|
32,492
|
32,492
|
||||||||||
|
Inventory
|
732
|
732
|
732
|
||||||||||
|
Total
Current Assets
|
60,288
|
59,774
|
59,774
|
||||||||||
|
Investment
in Subsidiaries
|
16,396
|
16,396
|
177,600
|
||||||||||
|
Net
Surplus Investment in Severance Pay
|
1,831
|
1,831
|
1,831
|
||||||||||
|
Fixed
Assets
|
466
|
(73
|
)
|
393
|
393
|
||||||||
|
Total
Assets
|
77,150
|
78,394
|
239,598
|
||||||||||
|
Liabilities
|
|||||||||||||
|
Other
Creditors
|
2,240
|
2,240
|
2,240
|
||||||||||
|
Total
Current Liabilities
|
2,240
|
2,240
|
2,240
|
||||||||||
|
Convertible
Bonds
|
50,148
|
191
|
50,339
|
||||||||||
|
Convertible
Bonds- Capital Segment
|
2,183
|
2,183
|
2,183
|
||||||||||
|
warrants
|
3,135
|
3,135
|
3,135
|
||||||||||
|
Employees
warrants
|
314
|
||||||||||||
|
Capital
Note
|
9,603
|
9,603
|
9,603
|
||||||||||
|
Bank
loans
|
-
|
-
|
-
|
||||||||||
|
Employees
|
6
|
6
|
6
|
||||||||||
|
Total
long term Liabilities
|
59,757
|
65,580
|
65,580
|
||||||||||
|
Equity
|
15,153
|
(4,579
|
)
|
10,574
|
171,778
|
||||||||
|
Total
Assets
|
77,150
|
78,394
|
239,598
|
||||||||||
7
SDS
FAIR VALUE –
|
Table No 3
|
|||||||
|
SDS שווי
|
|||||||
|
CAPITAL
|
171,778
|
||||||
|
Employees
Warrants
|
Fair
value
|
-969
|
|||||
|
Net
Value
|
170,809
|
||||||
Star
Night Valuation
|
(In thousands NIS)
|
Table No. 4
|
||||||||||||
|
Star Night NAV Valuation
|
|||||||||||||
|
BALANCE SHEET
2007
|
NAV
|
||||||||||||
|
Israeli
GAAP
|
Adjustments
|
IFRS
|
Fair
Value
|
||||||||||
|
Cash
|
27,997
|
27,997
|
27,997
|
||||||||||
|
Short
Term F. Investments
|
10,837
|
10,837
|
10,837
|
||||||||||
|
Other
Debtors
|
781
|
781
|
781
|
||||||||||
|
Loans
to Subsidiary
|
12,362
|
12,362
|
12,362
|
||||||||||
|
Total
Current Assets
|
51,977
|
0
|
51,977
|
51,977
|
|||||||||
|
Investment
in Subsidiaries
|
13,043
|
980
|
14,023
|
141,088
|
(*) | ||||||||
|
Loans
to Subsidiary
|
1,558
|
1,558
|
1,558
|
||||||||||
|
Net
Surplus Investment in Severance Pay
|
52
|
52
|
52
|
||||||||||
|
|
|||||||||||||
|
Fixed
Assets
|
947
|
947
|
947
|
||||||||||
|
Other
Assets
|
-
|
||||||||||||
|
Total
Assets
|
67,577
|
0
|
68,557
|
195,622
|
|||||||||
|
Liabilities
|
|
||||||||||||
|
Other
Creditors
|
2,566
|
2,566
|
2,566
|
||||||||||
|
Total
Liabilities
|
2,566
|
0
|
2,566
|
2,566
|
|||||||||
|
|
|
||||||||||||
|
Convertible
Bonds
|
50,131
|
-1,669
|
48,462
|
48,462
|
|||||||||
|
Warrants
|
602
|
602
|
602
|
||||||||||
|
Employees
warrants
|
254
|
254
|
254
|
||||||||||
|
Capital
Notes
|
6,720
|
6,720
|
6,720
|
||||||||||
|
Total
Liabilities
|
50,131
|
-
|
56,038
|
137,018
|
|||||||||
|
|
|||||||||||||
|
Net
Equity
|
14,880
|
8,973
|
195,622
|
||||||||||
(*)
82.6% of SDS Value
8
|
(In thousands NIS)
|
Table No 5
|
|||
|
STAR
NIGHT- Fair Value
|
||||
|
Fair
Value of Equity
|
137,018
|
|||
|
Adding
capital note fair value
|
870
|
|||
|
Bank
Mizrahi Warrents fair value
|
(2,314
|
)
|
||
|
Net
value
|
135,574
|
|||
The
average USD exchange rate to NIS, in recent weeks, was approximately 3.5 NIS.
Therefore, the company value is equal to USD 38.7 Million within the range
of
USD 35.2 to USD 42.6 Million.
9
