Ocean Harvest T Regulatory News (OHT)

13 Mar 2007 07:00

Orad Hi-Tec Systems13 March 2007 Orad Hi-Tec Systems Ltd ('Orad' or the 'Company') Results for the fiscal year 2006 and the quarter ended December 31, 2006 Orad Hi-Tec Systems Ltd (Frankfurt - Prime Standard; London - AIM. Symbol: OHT),a leading developer, marketer and distributor of state-of-the-art, 3D graphicalsolutions for the broadcasting, advertising and visual simulation markets,announced today its results for the fiscal year 2006 and the quarter endedDecember 31, 2006. Highlights : • Revenue increased by 15% to US$17.7 million in 2006 compared to US$15.4 million in 2005. • Revenues for Q4/06 increased by 10% to US$4.6 million compared to US$4.1 million in Q3/06. • Improved gross margin of 63% in Q4/2005 compared to 58% in Q4/2005 and 61% for 2006 compared to 53% for 2005. • Net profit of US$0.6 million in 2006 compared to net loss of US$2.9 million in 2005 • Cash climbed to US$9.7 million with positive cash flow of US$3.8 million in 2006 and positive cash flow of US$0.7 million in Q4/2006 • Orad strengthened its position in the graphic systems segment of the market, by signing contracts with Deutsch Welle, CCTV, Shanghai TV and Tele Madrid. • Orad continues to dominate the virtual studios market. Avi Sharir, Orad's President and Chief Executive Officer, commented: "We arepleased with the results for 2006 which represent significant improvements insales, gross margin, net profit and cash flow. With increased sales of graphicsystems, we begin to see the fruits of our strategy of expanding our presence inall broadcast graphics segments" and added: "Orad offers today a one stop shopto prime broadcasters. As a reflection we see more broadcasters buy Orad'sgraphic systems. In 2006 we managed to increase our market share in news graphicsystems, we strengthened our dominance in the virtual sets segment andmaintained our position in the sports systems. Our strong order back log keepsus optimistic regarding the results for 2007". Financial summery for the relevant periods: In thousand USD Q4/06 Q3/06 Q4/05 2005 2006Sales 4,607 4,196 4,716 15,401 17,719Gross Profit 2,916 2,615 2,715 7,708 10,818Gross Margin 63.29% 62.32% 57.57% 53.21% 61.05%R&D expenses 660 625 584 2,451 2,507S&M Expenses 1,840 1,602 1,440 6,079 6,631G&A expenses 362 376 423 1,754 1,506Net Profit/ (Loss) 185 54 256 (2,892) 636Cash Status 9,662 8,940 5,838 5,838 9,662 Comparission of quarters 2005/2006 all figures are in US$'000 Period Q1/05 Q2/05 Q3/05 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06Revenue 3,468 3,811 3,407 4,715 4,276 4,620 4,196 4,607Net Profit/ (1,078) (1,265) (804) 256 132 264 54 185(Loss)Cash Status 4,991 3,953 4,964 5,838 8,279 9,487 8,940 9,662 For further information: Orad (www.orad.tv)Ehud Ben-Yair, CFO 972 976 768 62 ehudb@orad.tv Shore Capital (London)Graham Shore 44 20 7408 4090 Edicto Investor Relations 49 608494859-1Dr. Sonke Knop, Frankfurt Germany ORAD HI-TEC SYSTEMS LTD. AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006 U.S. DOLLARS IN THOUSANDS INDEX Page Report of Independent Auditors 2 Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Changes in Shareholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 - 27 - - - - - - - - - - - - - - REPORT OF INDEPENDENT AUDITORS To the Shareholders of ORAD HI-TEC SYSTEMS LTD. We have audited the accompanying consolidated balance sheets of Orad Hi-TecSystems Ltd. ("the Company") and its subsidiaries as of December 31, 2005 and2006 and the related consolidated statements of operations, changes inshareholders' equity and cash flows for each of the three years in the periodended December 31, 2006. These financial statements are the responsibility ofthe Company's management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We did not audit the financial statements of certain wholly-owned subsidiaries,whose assets constitute 6% and 5% of total consolidated assets as of December31, 2005 and 2006, respectively, and whose revenues constitute 15%, 10% and 12%of total consolidated revenues for the years ended December 31, 2004, 2005 and2006, respectively. Those statements were audited by other auditors whosereports have been furnished to us, and our opinion, insofar as it relates toamounts included for those companies, is based solely on the reports of theother auditors. We conducted our audits in accordance with auditing standards generally acceptedin the United States. Those standards require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement. We were not engaged to perform an audit of theCompany's internal control over financial reporting. Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances but not forthe purpose of expressing an opinion on the effectiveness of the Company'sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits and the reports of the other auditors provide a reasonable basis for ouropinion. In our opinion, based on our audits and the reports of other auditors, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of the Company and itssubsidiaries as of December 31, 2005 and 2006, and the consolidated results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2006, in conformity with U.S. generally accepted accountingprinciples. Tel-Aviv, Israel KOST FORER GABBAY & KASIERERMarch 11, 2007 A Member of Ernst & Young Global CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands, except share and per share data December 31, 2005 2006ASSETS CURRENT ASSETS:Cash and cash equivalents $ 5,338 $ 9,091Restricted cash 500 571Trade receivables (net of allowance for doubtful accounts of $ 378 and $ 66 at 3,754 2,422December 31, 2005 and 2006, respectively)Other accounts receivable and prepaid expenses 719 837Inventories 2,817 2,696Work in process, net of advances from customers 466 444 Total current assets 13,594 16,061 SEVERANCE PAY FUND 817 1,017 PROPERTY AND EQUIPMENT, NET 1,914 1,530 Total assets $ 16,325 $ 18,608 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES:Trade payables $ 1,262 $ 1,354Deferred revenues 1,201 1,841Other accounts payable and accrued expenses 4,182 4,691 Total current liabilities 6,645 7,886 ACCRUED SEVERANCE PAY 1,173 1,503 SHAREHOLDERS' EQUITY:Share capital:Ordinary shares of NIS 0.01 par value:Authorized - 27,000,000 shares as of December 31, 2005 and 2006;Issued and outstanding - 10,790,621 shares as of December 31, 2005 and 10,800,621 28 28shares as of December 31, 2006Additional paid-in capital 75,281 75,357Foreign currency translation adjustments (547) (547)Accumulated deficit (66,255) (65,619) Total shareholders' equity 8,507 9,219 Total liabilities and shareholders' equity $ 16,325 $ 18,608 The accompanying notes are an integral part of the consolidated financialstatements. March 11, 2007 Date of approval of the Avi Sharir Ehud Ben Yair financial statements Director and Chief Financial Officer Chief Executive Officer CONSOLIDATED STATEMENTS OF OPERATIONS U.S. dollars in thousands, except share and per share data Year ended December 31, 2004 2005 2006 Revenues: Sales $ 15,728 $ 14,485 $ 17,719Long-term development contracts - 916 - Total revenues 15,728 15,401 17,719 Cost of revenues: Cost of sales 7,647 6,646 6,901Cost of long-term development contracts - 1,047 - Total cost of revenues 7,647 7,693 6,901 Gross profit 8,081 7,708 10,818 Operating expenses: Research and development, net 3,163 2,451 2,507Sales and marketing 7,257 6,078 6,631General and administrative 1,577 1,754 1,506 Total operating expenses 11,997 10,283 10,644 Operating income (loss) (3,916) (2,575) 174Financial income (expenses), net 189 (316) 467Other expenses, net 148 - 5 Net income (loss) $ (3,875) $ (2,891) $ 636 Basic net earnings (loss) per share $ (0.36) $ (0.27) $ 0.06 Weighted average number of shares used in computing basic net earnings 10,698 10,781 10,791(loss) per share (in thousands) Diluted net earnings (loss) per share $ (0.36) $ (0.27) $ 0.06 Weighted average number of shares used in computing diluted net 10,698 10,781 10,823earnings (loss) per share (in thousands) The accompanying notes are an integral part of the consolidated financialstatements. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY U.S. dollars in thousands, except share data Number of Share Additional Foreign Accumulated Total outstanding paid-in currency deficit Ordinary capital capital translation shares adjustments Balance as of January 1, 2004 10,650,726 $ 28 $ 75,107 $ (547) $ (59,489) $ 15,099 Comprehensive loss: Net loss - - - - (3,875) (3,875)Total comprehensive loss (3,875)Compensation expenses in respect of share - - 38 - - 38options whose terms have been modifiedIssuance of shares upon exercise of employee 100,000 *) - 96 - - 96share options Balance as of December 31, 2004 10,750,726 28 75,241 (547) (63,364) 11,358 Comprehensive loss: Net loss - - - - (2,891) (2,891)Total comprehensive loss (2,891)Issuance of shares upon exercise of employee 11,250 *) - 9 - - 9share options Issuance of earn-out shares 28,645 *) - 31 - - 31 Balance as of December 31, 2005 10,790,621 28 75,281 (547) (66,255) 8,507 Comprehensive income: Net income - - - - 636 636Total comprehensive income 636Issuance of shares upon exercise of employee 10,000 *) - 9 - - 9share options Share-based compensation - - 67 - - 67 Balance as of December 31, 2006 10,800,621 $ 28 $ 75,357 $ (547) $ (65,619) $ 9,219 *) Represents an amount lower than $ 1. The accompanying notes are an integral part of the consolidated financialstatements. CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars in thousands Year ended December 31, 2004 2005 2006Cash flows from operating activities:Net income (loss) $ (3,875) $ (2,891) $ 636Adjustments to reconcile net income (loss) to net cash provided by (usedin) operating activities:Depreciation 1,091 623 569Share-based compensation - - 67Compensation expense in respect of share options whose terms have been 38 - -modifiedDecrease in trade receivables, net and other accounts receivable and 890 591 1,214prepaid expensesDecrease in inventories 234 591 29Decrease in work in process, net of advances from customers 277 597 22Increase (decrease) in trade payables, other accounts payable and accrued (592) 429 731expenses and accrued severance pay, netIncrease in deferred revenues 217 460 640Other 28 31 5 Net cash provided by (used in) operating activities (1,692) 431 3,913 Cash flows from investing activities:Purchase of property and equipment (298) (231) (146)Proceeds from sale of property and equipment 88 127 48Decrease (increase) in restricted cash (227) 250 (71) Net cash provided by investing activities (437) 146 (169) Cash flows from financing activities:Payment of long-term bank loan (16) - -Issuance of shares upon exercise of employee share options 96 9 9 Net cash provided by financing activities 80 9 9 Increase (decrease) in cash and cash equivalents (2,049) 586 3,753Cash and cash equivalents at beginning of year 6,801 4,752 5,338 Cash and cash equivalents at end of year $ 4,752 $ 5,338 $ 9,091 Supplemental disclosure of cash flows activities:Cash received during the year for:Interest, net $ 62 $ 109 $ 297 The accompanying notes are an integral part of the consolidated financialstatements. NOTE 1:- GENERAL a. Orad Hi-Tec Systems Ltd. ("the Company") was incorporated in 1993. TheCompany and its subsidiaries provide innovative real-time video processingtechnologies for TV broadcasting, internet, production studio and sports events.The Company also develops and markets high-end three dimensional graphicalcomputer platforms for the visual simulation and virtual reality markets. The Company operates through its wholly-owned subsidiaries in the United States,France, Poland, Germany, the Netherlands, the United Kingdom, Spain, Israel andHong-Kong. During 2004, the Company became a sole owner of its Hong-Kongsubsidiary (previously held 60% of the subsidiary's shares). These subsidiariesare engaged in the development, selling and marketing of the Company's products.The Company sells its products directly and through its subsidiaries and itsdistribution networks worldwide. b. The Company reclassified certain overhead expenses in the prior years'statements of operations. The following reclassifications, which confirm withthe current years allocation of these overhead expenses had no effect on thereported operating loss, net loss, basic and diluted loss per share andshareholders equity. Year ended December 31, 2004 2005 As As As As previously currently previously currently reported Reclassification reported reported Reclassification reported Cost of revenues: Cost of sales $ 6,188 $ 1,459 $ 7,647 $ 5,287 $ 1,359 $ 6,646 Cost of long-term - - - 1,047 - 1,047development contracts Total cost of revenues 6,188 7,647 7,647 6,334 1,359 7,693 Gross profit 9,540 (1,459) 8,081 9,067 (1,359) 7,708 Operating expenses: Research and development, 2,844 319 3,163 2,300 151 2,451netSales and marketing 8,224 (967) 7,257 6,813 (735) 6,078General and 2,388 (812) 1,577 2,529 (775) 1,754administrative Total operating expenses 13,456 (1,459) 11,997 11,642 (1,359) 10,283 Operating loss $ 3,916 $ - $ 3,916 $ 2,575 $ - $ 2,575 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States ("U.S. GAAP"). a. Use of estimates: The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates. b. Financial statements in U.S. dollars: A majority of the revenues of the Company and its subsidiaries are generated inU.S. dollars ("dollar"). In addition, a substantial portion of the Company's andits subsidiaries' costs are incurred in dollars. A substantial portion of theCompany's funds are held in U.S. dollars. The Company's management believes thatthe dollar is the currency of the primary economic environment in which theCompany and its subsidiaries operate. Thus, the functional and reportingcurrency of the Company and its subsidiaries is the dollar. Accordingly, monetary assets, and liabilities and transactions in currenciesother than the dollar are remeasured into U.S. dollars in accordance withStatement of Financial Accounting Standards No. 52, "Foreign CurrencyTranslation" ("SFAS No. 52"). All transactions gains and losses from theremeasurement are reflected in the consolidated statements of operations asfinancial income or expenses, as appropriate. c. Principles of consolidation: The consolidated financial statements include the accounts of the Company andits subsidiaries. Intercompany balances and transactions have been eliminatedupon consolidation. d. Cash equivalents: Cash equivalents are short-term highly liquid investments that are readilyconvertible to cash with original maturities of three months or less. e. Restricted cash: Restricted cash is primarily invested in highly liquid deposits, which are usedas a security for sales agreements and office lease agreements. f. Inventories: Inventories are stated at the lower of cost or market value. Inventorywrite-offs are provided to cover risks arising from slow-moving items,technological obsolescence, excess inventories. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) Cost is determined as follows: Raw materials, parts and supplies - by the moving average method. Products in process and finished products:Raw materials, parts and supplies - by the moving average method.Subcontracting costs - on the basis of actual costs. g. Property and equipment: Property and equipment are stated at cost, net of accumulated depreciation.Depreciation is calculated by the straight-line method over the estimated usefullives of the assets at the following annual rates: % Computers and peripheral equipment 20 - 33Office furniture and equipment 6 - 15Motor vehicles 15Leasehold improvements Over the shorter of the term of the lease or the life of the asset The Company leases under operating leases computers and peripheral equipment,mobile broadcasting and demonstrating units ("leased equipment") to itscustomers. Leased equipment is stated at cost, net of accumulated depreciation.Depreciation is calculated by the straight-line method over the estimated usefullives of the assets (three years). h. Impairment of long-lived assets: The Company's and its subsidiaries' long-lived assets are reviewed forimpairment in accordance with Statement of Financial Accounting Standards No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.144"), whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Recoverability of assets to be heldand used is measured by a comparison of the carrying amount of an asset to thefuture undiscounted cash flows expected to be generated by the assets. If suchassets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the assets exceeds thefair value of the assets. As of December 31, 2006, no impairment losses havebeen identified. i. Revenue recognition: The Company and its subsidiaries generate revenues mainly from sales of systems,software licenses, development contracts and from operating leases of equipment. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The Company and its subsidiaries implement Statement of Position No. 97-2,"Software Revenue Recognition" ("SOP No. 97-2"), as amended. Revenues fromsystems sales are recognized upon delivery of the system or upon installation atthe customer site, where applicable, provided that collection is probable, thesystem fee is fixed or determinable and persuasive evidence of an arrangementexists. In cases where a significant installation is required after the deliveryof the system, revenues from the system are deferred until the installationoccurs. Revenues in arrangements with multiple deliverables are recognized underthe "residual method" when Vendor Specific Objective Evidence ("VSOE") of fairvalue exists for all undelivered elements, no VSOE exists for the deliveredelements, and all other revenue recognition criteria are satisfied. Revenuesfrom training and installation included in multiple element arrangements arerecognized at the time they are rendered. Revenues from development contracts are recognized based on SOP No. 81-1,"Accounting for Performance of Construction Type and Certain Production TypeContracts", using contract accounting on the completed-contract method or whenapplicable, as specific milestones are met. A provision for estimated losses onuncompleted contracts is recorded in the period in which such losses are firstidentified, in the amount of the estimated loss on the entire contract. Aprovision for losses as of December 31, 2005 and 2006 amounted to $ 200 and $200, respectively. Revenues from operating leases of equipment are recognized ratably over thelease period, in accordance with Statement of Financial Accounting Standards No.13, "Accounting for Leases" ("SFAS No. 13"). The Company and its subsidiaries generally do not grant a right of return totheir customers. Deferred revenue includes amounts received from customers but not recognized asrevenues. j. Warranty costs: The Company offers a one year warranty for all of its systems. Provision forwarranty costs is provided at the time revenues are recognized, for estimatedmaterial costs during the warranty period based on the Company's experience. k. Research and development costs: Research and development costs are charged to the statement of operations asincurred. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) l. Non-royalty-bearing grants: Non-royalty-bearing grants from the European Union for funding of approvedresearch and development projects are recognized at the time the Company isentitled to such grants, on the basis of the costs incurred. These grants arepresented as a reduction of research and development expenses. During the years2004, 2005, 2006, the Company received grants in the amount of $ 0, $ 141 and $163, respectively. m. Royalty-bearing grants: Royalty-bearing grants from the Government of Israel for funding of approvedresearch and development projects are recognized at the time the Company isentitled to such grants, on the basis of the costs incurred. These grants arepresented as a reduction of research and development expenses. During the years2004, 2005, 2006, no development grants were received. n. Income taxes: The Company and its subsidiaries account for income taxes in accordancewith Statement of Financial Accounting Standards No. 109, "Accounting for IncomeTaxes" ("SFAS No. 109"). This Statement prescribes the use of the liabilitymethod whereby deferred tax assets and liabilities are determined based on thedifferences between financial reporting and tax bases of assets and liabilitiesand are measured using the enacted tax rates and laws that will be in effectwhen the differences are expected to reverse. The Company and its subsidiariesprovide a valuation allowance, if necessary, to reduce deferred tax assets totheir estimated realizable value. o. Concentrations of credit risks: Financial instruments that potentially subject the Company and its subsidiariesto concentrations of credit risk consist principally of cash and cashequivalents, restricted cash, work in process, net of advances from customersand trade receivables. Cash and cash equivalents and restricted cash are mainly invested in U.S.dollars with major banks in Cayman and in Israel. Management believes that thefinancial institutions that hold the Company's investments are financially soundand, accordingly, minimal credit risk exists with respect to these investments. Work in process, net of advances from customers is derived from long termdevelopment contracts. The Company performs ongoing credit evaluations of itscustomers. A provision for estimated losses on uncompleted contracts is recordedin the period in which such losses are first identified, in the amount of theestimated loss on the entire contract. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) Trade receivables are mainly derived from sales to customers located primarilyin Europe, Asia, North America and South America. The Company performs ongoingcredit evaluations of its customers. An allowance for doubtful accounts isdetermined with respect to those amounts that the Company and its subsidiarieshave determined to be doubtful of collection. As of December 31, 2005 and 2006, the Company and its subsidiaries have nosignificant off-balance-sheet concentration of credit risk such as forwardexchange contracts, option contracts or other foreign hedging arrangements. p. Severance pay: The Company's liability for severance pay for its Israeli employees iscalculated pursuant to the Israeli Severance Pay Law based on the most recentsalary of the employees multiplied by the number of years of employment, as ofthe balance sheet date. Employees are entitled to one month's salary for eachyear of employment or a portion thereof. The Company's liability for all of its employees is fully provided by monthlydeposits with insurance policies deposited funds and by an accrual. The deposited funds include profits accumulated up to the balance sheet date.The deposited funds may be withdrawn only upon the fulfillment of the obligationpursuant to Israeli Severance Pay Law or labor agreements. The value of thedeposited funds is based on the cash surrender value of the insurance policies. Severance expenses for the years ended December 31, 2005 and 2006amounted to approximately $ 244 and $ 313, respectively. q. Net earnings (loss) per share: Basic net earnings (loss) per share are computed based on the weightedaverage number of Ordinary shares outstanding during each year. Diluted netearnings (loss) per share are computed based on the weighted average number ofOrdinary shares outstanding during each year, plus dilutive potential Ordinaryshares considered outstanding during the year, in accordance with Statement ofFinancial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). r. Fair value of financial instruments: The carrying amounts of cash and cash equivalents, restricted cash, tradereceivables, other accounts receivable and prepaid expenses, trade payables andother accounts payable and accrued expenses approximate their fair value due tothe short-term maturity of such instruments. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) s. Accounting for share-based compensation: On January 1, 2006, the Company adopted Statement of Financial AccountingStandards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") whichrequires the measurement and recognition of compensation expense based onestimated fair values for all share-based payment awards made to employees anddirectors. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25,"Accounting for Stock Issued to Employees" ("APB 25"), for periods beginning infiscal 2006. In March 2005, the Securities and Exchange Commission issued StaffAccounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company hasapplied the provisions of SAB 107 in its adoption of SFAS 123(R). SFAS 123(R) requires companies to estimate the fair value of equity-basedpayment awards on the date of grant using an option-pricing model. The value ofthe portion of the award that is ultimately expected to vest is recognized as anexpense over the requisite service periods in the Company's consolidated incomestatement. Prior to the adoption of SFAS 123(R), the Company accounted forequity-based awards to employees and directors using the intrinsic value methodin accordance with APB 25 as allowed under Statement of Financial AccountingStandards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company adopted SFAS 123(R) using the modified prospective transitionmethod, which requires the application of the accounting standard starting fromJanuary 1, 2006, the first day of the Company's fiscal year 2006. Under thattransition method, compensation cost recognized in the year ended December 31,2006, includes: (a) compensation cost for all share-based payments granted priorto, but not yet vested as of January 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of SFAS 123, and (b)compensation cost for all share-based payments granted subsequent to January 1,2006, based on the grant-date fair value estimated in accordance with theprovisions of SFAS 123(R). Results for prior periods have not been restated. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The Company recognizes compensation expenses for the value of its awards, whichhave graded vesting, based on the straight line method over the requisiteservice period of each of the awards, net of estimated forfeitures. Estimatedforfeitures are based on actual historical pre-vesting forfeitures. As a result of adopting SFAS 123(R) on January 1, 2006, the Company's net incomefor the year ended December 31, 2006, is approximately $ 67 lower than if it hadcontinued to account for stock-based compensation under APB 25. Basic anddiluted net earnings per share for the year ended December 31, 2006, are $ 0.01lower than if the Company had continued to account for share-based compensationunder APB 25. Prior to January 1, 2006, the Company applied the intrinsic value method ofaccounting for stock options as prescribed by APB 25, whereby compensationexpense is equal to the excess, if any, of the quoted market price of the stockover the exercise price at the grant date of the award. In 1996, the Company approved an employee share option plan, which was expandedin 2000 and 2002 ("the 1996 Share Option Plan"). Under the 1996 share optionplan, 974,465 options to purchase Ordinary shares have been reserved forissuance. These options may be granted to directors, officers and employees ofthe Company and its subsidiaries. Any options, which are canceled or forfeited before expiration, become availablefor future grants. During 2003, the Company approved a new share option plan ("the 2003 ShareOption Plan"). The Company's Board of Directors approved treating sharesallotment under the 1996 Share Option Plan as being reserved for allotment underthe 2003 Share Option Plan. Options granted in 2006 are mainly vested as follows: 25% after the first year,25% after the second year, 25% after the third year and 25% after the fourthyear starting from the date of grant. If not exercised, the options will expireon the sixth anniversary of the date of the grant. Total number of options available for future grants as of December 31, 2006amounted to 22,729. The Company estimates the fair value of stock options granted using theBlack-Scholes-Merton option-pricing model. The option-pricing model requires anumber of assumptions, of which the most significant are expected stock pricevolatility and the expected option term. Expected volatility was calculatedbased upon actual historical stock price movements. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The expected option term represents the period that the Company's stock optionsare expected to be outstanding and was determined based on the simplified methodpermitted by SAB 107 as the average of the vesting period and the contractualterm. The risk-free interest rate is based on the yield from U.S. Treasuryzero-coupon bonds with an equivalent term. The Company has historically not paiddividends and has no foreseeable plans to pay dividends. The fair value of the Company's stock options granted to employees and directorsfor the years ended December 31, 2005 and 2006 was estimated using the followingweighted average assumptions: Year ended December 31, 2005 2006 Risk free interest 4.36% 4.89%Dividend yields 0% 0%Volatility 69% 66%Expected term (in years) 4 4 4.2 During the year ended December 31, 2006, the Company recognized stock-basedcompensation expense related to employee stock options in the amount of $ 67. A summary of the Company's options activity, and related information is asfollows: Number Weighted Weighted Aggregate of options average average intrinsic value exercise remaining (in thousands) price contractual term (in years) Outstanding at beginning of year 454,584 $ 8.81Granted 270,000 $ 1.79Exercised (10,000) $ 0.89Expired or forfeited (42,130) $ 7.62 Outstanding at end of year 672,454 $ 6.18 5.07 $ 510 Exercisable at end of year 352,454 $ 10.27 4.44 $ 207 Vested and expected to vest at end of 672,454 $ 6.18 5.07 $ 510year NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The weighted-average grant-date fair value of options granted during the yearsended December 31, 2005 and 2006 was $ 0.65 and $ 0.99, respectively. Theaggregate intrinsic value in the table above represents the total intrinsicvalue (the difference between the Company's closing stock price on the lasttrading day of the fourth quarter of fiscal 2006 and the exercise price,multiplied by the number of in-the-money options) that would have been receivedby the option holders had all option holders exercised their options on December31, 2006. This amount changes based on the fair market value of the Company'sstock. Total intrinsic value of options exercised for the year ended December 31, 2006was approximately $ 9.8. As of December 31, 2006, there was approximately $ 245of total unrecognized compensation cost related to non-vested share-basedcompensation arrangements granted under the Company's stock option plans. Thatcost is expected to be recognized over a weighted-average period of 3.33 years.Total grant-date fair value of vested options vested for the year ended December31, 2006 was approximately $ 62. The following table summarizes information about options outstanding andexercisable as of December 31, 2006: Options Weighted Options Weighted outstanding average Weighted exercisable average exercise Range of as of remaining average as of price of exercise December 31, contractual exercise December 31, options price 2006 life (years) price 2006 exercisable $ 0.80 - 1.19 130,000 6.75 $ 1.00 80,000 $ 0.95$ 1.28 - 1.90 333,000 5.27 $ 1.78 63,000 $ 1.77$ 2.14 - 2.85 68,214 5.92 $ 2.41 68,214 $ 2.41$ 9.08 - 11.71 38,522 1.56 $ 10.36 38,522 $ 10.36$ 20.71 49,218 2.92 $ 20.71 49,218 $ 20.71$ 33.18 - 34.95 53,500 3.13 $ 34.60 53,500 $ 34.60 672,454 5.07 $ 6.18 352,454 $ 10.27 All of the options granted to employees officers and directors in 2005 and 2006(no options were granted during 2004), have an exercise price equal to the fairmarket value of the share at date of grant. During 2004, the Company's Board ofDirectors determined to accelerate vesting for 100,000 options held by one ofthe Company's senior officers, who resigned from his job. Accordingly, theCompany recorded compensation expense in respect of these options whose termshave been modified for a total compensation amount of $ 38. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The pro-forma table below illustrates the effect on the net income (loss) andnet earnings (loss) per share for the years ended December 31, 2004 and 2005,assuming that the Company had applied the fair value recognition provision ofSFAS 123 on its stock-based employee compensation: Year ended December 31, 2004 2005 Net loss as reported $ (3,875) $ (2,891)Add: share-based compensation expense included in reported net loss 38 -Deduct: share-based compensation expense determined under fair value (227) (63)method Pro forma net loss $ (4,064) $ (2,954) Basic and diluted net loss per share as reported $ (0.36) $ (0.27) Pro forma basic and diluted net loss per share $ (0.38) $ (0.27) For the purposes of pro-forma disclosures, stock-based compensation is amortizedover the vesting period using the straight line method. t. Impact of recently issued accounting standards: In July 2006, the FASB issued FASB Interpretation No. 48 "Accounting forUncertainty in Income Taxes an Interpretation of FASB Statement No. 109" ("FIN48"). FIN 48 clarifies the accounting for income taxes by prescribing theminimum recognition threshold a tax position is required to meet before beingrecognized in the financial statements. FIN 48 utilizes a two-step approach forevaluating tax positions. Recognition (step one) occurs when an enterpriseconcludes that a tax position, based solely on its technical merits, ismore-likely-than-not to be sustained upon examination. Measurement (step two) isonly addressed if step one has been satisfied (i.e., the position ismore-likely-than-not to be sustained). Under step two, the tax benefit ismeasured as the largest amount of benefit, determined on a cumulativeprobability basis that is more-likely-than-not to be realized upon ultimatesettlement. FIN 48 applies to all tax positions related to income taxes subjectto the Financial Accounting Standard Board Statement No. 109, "Accounting forincome taxes" ("FAS 109"). This includes tax positions considered to be "routine" as well as those with a high degree of uncertainty. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) FIN 48 has expanded disclosure requirements, which include a tabular rollforward of the beginning and ending aggregate unrecognized tax benefits as wellas specific detail related to tax uncertainties for which it is reasonablypossible the amount of unrecognized tax benefit will significantly increase ordecrease within twelve months. These disclosures are required at each annualreporting period unless a significant change occurs in an interim period. FIN 48is effective for fiscal years beginning after December 15, 2006. The cumulativeeffect of applying FIN 48 will be reported as an adjustment to the openingbalance of retained earnings. The Company is currently evaluating the effect ofthe adoption of FIN 48 on its financial statements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFASNo. 157"). This statement provides a single definition of fair value, aframework for measuring fair value, and expanded disclosures concerning fairvalue. Previously, different definitions of fair value were contained in variousaccounting pronouncements creating inconsistencies in measurement anddisclosures. SFAS No. 157 applies under those previously issued pronouncementsthat prescribe fair value as the relevant measure of value, except SFAS No. 123(R) and related interpretations. The statements does not apply to accountingstandard that require or permit measurement similar to fair value but are notintended to measure fair value. This pronouncement is effective for fiscal yearsbeginning after November 15, 2007. The Company is currently evaluating theimpact of adopting SFAS 157. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option forFinancial Assets and Financial Liabilities. This statement provides companieswith an option to report selected financial assets and liabilities at fairvalue. Generally accepted accounting principles have required differentmeasurement attributes for different assets and liabilities that can createartificial volatility in earnings. The Standard's objective is to reduce bothcomplexity in accounting for financial instruments and the volatility inearnings caused by measuring related assets and liabilities differently. ThisStatement is effective as of the beginning of an entity's first fiscal yearbeginning after November 15, 2007. The Company is currently evaluating theimpact of adopting SFAS 159. NOTE 3: - OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES December 31, 2005 2006 Government authorities $ 285 $ 386Prepaid expenses 264 271Other 170 180 $ 719 $ 837 NOTE 4:- INVENTORIES December 31, 2005 2006 Raw materials $ 719 $ 697 Products in process and finished products 2,098 1,999 $ 2,817 $ 2,696 Inventory write-off provision expense recorded in 2004, 2005 and 2006 amountedto $ 190, $ 469 and $ 219, respectively. The write-offs are included in cost ofrevenues. NOTE 5:- WORK IN PROCESS, NET OF ADVANCES FROM CUSTOMERS December 31, 2005 2006 Work in process $ 1,923 $ 2,172Advances from customers (1,257) (1,528)Provision for estimated losses (200) (200) $ 466 $ 444 NOTE 6:- PROPERTY AND EQUIPMENT December 31, 2005 2006Cost:Computers and peripheral equipment $ 7,621 $ 7,688Office furniture and equipment 348 358Motor vehicles 203 88Leasehold improvements 2,340 2,347 10,512 10,481Accumulated depreciation:Computers and peripheral equipment 7,066 7,232Office furniture and equipment 200 222Motor vehicles 103 58Leasehold improvements 1,229 1,439 8,598 8,951 Depreciated cost $ 1,914 $ 1,530 Depreciation expense amounted to $ 1,091, $ 623 and $ 569 for the years endedDecember 31, 2004, 2005 and 2006, respectively. NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES December 31, 2005 2006 Employees and payroll accruals $ 759 $ 897Accrued expenses 2,839 3,302Government authorities 289 124Warranty provision 250 315 Other 45 53 $ 4,182 $ 4,691 NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES a. Royalty commitments: 1. Royalties to the Office of the Chief Scientist ("the OCS"): Under the Company's research and development agreements with the OCS andpursuant to applicable laws, the Company is required to pay royalties at therate of 3.5% of sales of products developed with funds provided by the OCS, upto an amount equal to 100% of the OCS research and development grants received,linked to the dollar. The Company is obligated to repay the Israeli Governmentfor the grants received only to the extent that there are sales of the fundedproducts. Royalty expenses amounted to $ 197, $ 217 and $ 276 for the years ended December 31, 2004, 2005 and 2006, respectively, relating to the accrual and repayment ofsuch grants. As of December 31, 2006, the Company had a contingent obligation to payroyalties in the amount of $ 2,298. 2. Royalty obligation to the Marketing Fund of the Government of Israel: The Israeli Government, through the Fund for the Encouragement of MarketingActivities, awarded the Company grants for participation in foreign marketingexpenses. The Company is committed to pay royalties at the rate of 4% of theincrease in foreign sales, up to an amount equal to 100% of the grant receivedplus interest. Royalty expenses amounted to $ 144, $ 194 and $ 182 for the years ended December 31, 2004, 2005 and 2006, respectively, relating to the repayment of suchgrants. As of December 31, 2006, the Company had a contingent obligation to payroyalties in the amount of $ 149. b. Operating leases: The Company and its subsidiaries lease their facilities under various operatinglease agreements, which expire on various dates. Aggregate minimum rentalcommitments under non-cancelable leases as of December 31, 2006, are as follows: 2007 $ 4472008 4432009 4202010 and thereafter 1,027 $ 2,337 Total rental expense for the years ended December 31, 2004, 2005 and 2006,amounted to $ 695, $ 565 and $ 546, respectively. NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) c. Liens: As of December 31, 2006, fixed pledges on bank accounts in the amount of $ 571were recorded to secure sales agreements and office lease agreements. d. Litigation: Claims have been lodged against the Company in respect of various matters in theordinary course of business and legal proceedings in respect thereof are underway. The Company's management is of the opinion, based upon the opinions of thelegal advisors handling the claims, that the likelihood of the claims to prevailis remote. NOTE 9:- SHAREHOLDERS' EQUITY The Company's shares are listed for trading on the Frankfurt Stock Exchange(Prime Standard) and on the Alternative Investment Market ("AIM") in the LondonStock Exchange, both under the symbol "OHT". a. Ordinary shares: Ordinary shares confer upon their holders voting rights, the right to receivecash dividends, and the right to a share in excess assets upon liquidation ofthe Company. b. Employee share option plan: See detailed information in Note 2s. c. Acquisition of Art Technologies GmbH ("Art"): According to the purchase agreement with Art, the issuance of 57,290 Ordinaryshares was conditional upon achieving certain revenue targets from the productdeveloped by Art ("contingent shares"). During 2002, upon achievement of certainof the revenue targets, 28,645 of the contingent shares with a fair value of $54 were issued. During 2003 and 2004, certain of the revenue targets were notachieved in the prescribed time frame and therefore, the remaining 28,645 shareswere not issued. However, the Company agreed to issue such shares during 2005,and accordingly, the remaining 28,645 shares with a fair value of $ 31 wereissued. d. Dividends: Dividends, if any, will be paid in New Israeli Shekels ("NIS"). Dividends paidto shareholders outside Israel may be converted to U.S. dollars on the basis ofthe exchange rate prevailing at the date of the conversion. The Company does notintend to pay cash dividends in the foreseeable future. NOTE 10:- INCOME TAXES a. Domestic - Israeli income taxes: 1. Measurement of taxable income under the Income Tax (InflationaryAdjustments) Law, 1985: Results for tax purposes are measured in terms of earnings in NIS after certainadjustments for increases in the Israeli Consumer Price Index ("CPI"). Asexplained in Note 2b, the financial statements are measured in U.S. dollars. Thedifference between the annual change in the Israeli CPI and in the NIS/dollarexchange rate causes a further difference between taxable income and the incomebefore taxes shown in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on thedifference between the functional currency and the tax basis of assets andliabilities. 2. Tax rates: On July 25, 2005, the Knesset (Israeli Parliament) approved the Law for theAmendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, amongothers, a gradual decrease in the corporate tax rate in Israel to the followingtax rates: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in2010 and thereafter - 25%. The amendment is not expected to have a materialeffect on the Company's financial position and results of operations. 3. Tax benefits under the Law for the Encouragement of CapitalInvestments, 1959: The Company's production facilities in Israel have been granted an "ApprovedEnterprise" status under the above law. Four expansion programs of the Companyhave been granted the status of an "Approved Enterprise". According to theprovisions of such Israeli law, the Company has been granted an "AlternativeBenefit" status, under which the main benefits are tax exemption and a reducedtax rate. Consequently, the Company's income derived from the "ApprovedEnterprise" is tax exempt for a period of two years and for an additional periodof five to eight years is subject to a reduced tax rate of 10% - 25% (based onthe percentage of foreign ownership in each taxable year). The Company completed implementation of its first, second and third expansionprograms in 1996, 1999 and in 2000, respectively. The fourth program has not yetbeen completed. The period of tax benefits, detailed above, is subject to limits of the earlierof 12 years from the commencement of production, or 14 years from the approvaldate. NOTE 10:- INCOME TAXES (Cont.) The entitlement to the above benefits is conditional upon the fulfillment of theconditions stipulated by the above law, regulations published thereunder and theinstruments of approval for the specific investments in "Approved Enterprises".In the event of failure to comply with these conditions, the benefits may becanceled and the Company may be required to refund the amount of the benefits,in whole or in part, including interest. If the retained tax-exempt profits are distributed, they would be taxed at thecorporate tax rate applicable to such profits as if the Company had not electedthe alternative system of benefits, currently 20%-25% for an "ApprovedEnterprise". As of December 31, 2006, accumulated deficit included approximately$ 6,721 of tax exempt profits earned by the Company's "Approved Enterprises".The Company has decided not to distribute dividends out of such tax-exemptprofits. Accordingly, no deferred income taxes have been provided on incomeattributable to the Company's "Approved Enterprise". Income from sources other than the "Approved Enterprise" during the benefitperiod will be subject to the tax at the regular rate. 4. Tax benefits under the Law for the Encouragement of Industry (Taxes),1969: The Company is an "Industrial Company", as defined by this law and, as such, isentitled to certain tax benefits, mainly accelerated depreciation of machineryand equipment, as prescribed by regulations published under the InflationaryAdjustments Law and the right to deduct public issuance expenses andamortization of intangible property rights for tax purposes. b. Tax assessments: The Company has obtained final tax assessments from the Israeli Tax Authoritiesfor the tax years through 2002. c. Stamp duty: An amendment of the Stamp Duty on Documents Law, 1961, or the Stamp Duty Law,came into effect on June 1, 2003 determining, among other things, that the StampDuty on most agreements shall be paid by the parties that signed such agreement,jointly or severally, or by the party that undertook under such agreement to paythe Stamp Duty. The Stamp Duty Law determined that a document (or part thereof)that is signed in Israel or relates to an asset or obligation in Israel would besubject to a tax rate between 0.4% and 1% of the value of the subject matter ofsuch document. Under an order published in December 2005, the requirements to pay Stamp Dutywere cancelled with respect to documents signed on or after January 1, 2006. NOTE 10:- INCOME TAXES (Cont.) During 2006, based on the opinion of its legal counsel, the Company's managementdecided to reduce a previously recorded accrual by approximately $ 75 (reductionof general and administrative expenses). d. Net operating carryforward losses: The Company has accumulated losses for tax purposes as of December 31, 2006, inthe amount of approximately $ 15,460 which may be carried forward and offsetagainst taxable income in the future for an indefinite period. The carryforward losses of the Israeli subsidiary, amounting to approximately $720. Foreign: The carryforward losses of the French subsidiary, amounting to approximately $13,600, which may be carried forward and offset against taxable income in thefuture, for an indefinite period. The carryforward losses of the U.S. subsidiary, amounting to approximately $9,460 as of December 31, 2006, can be utilized mainly through 2017 to 2027.Utilization of U.S. net operating losses may be subject to the substantialannual limitation due to the "change in ownership" provisions of the InternalRevenue Code of 1986 and similar state provisions. The annual limitation mayresult in the expiration of net operating losses before utilization. The carryforward losses of the Dutch subsidiary, amounting to approximately $5,880 as of December 31, 2006, can be utilized indefinitely. The carryforward losses of the other subsidiaries amount to approximately $4,000 as of December 31, 2006. The majority of these carryforward losses can beutilized indefinitely. e. Deferred income taxes: Deferred income taxes reflect the net tax effects of temporarydifferences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for income tax purposes. Significantcomponents of the Company and its subsidiaries deferred tax liabilities andassets are as follows: December 31, 2005 2006 Deferred tax assets in respect of operating loss carryforwards $ 10,147 $ 11,253Valuation allowance (10,147) (11,253) Net deferred tax asset $ - $ - NOTE 10:- INCOME TAXES (Cont.) Management currently believes that since the Company and its subsidiaries have ahistory of losses it is more likely than not that the deferred tax assetsregarding the loss carryforwards will not be realized in the foreseeable future. f. Reconciliation of the theoretical tax expense (benefit) to the actualtax expense (benefit): In 2004, 2005 and 2006, the main reconciling items between the statutory taxrate of the Company and the effective tax rate (0%) are carryforward tax losses,for which a full valuation allowance was provided. g. Net income (loss) is comprised of the following: Year ended December 31, 2004 2005 2006 Domestic $ (2,342) $ (2,031) $ 2,851Foreign (1,533) (860) (2,215) $ (3,875) $ (2,891) $ 636 NOTE 11:- GEOGRAPHIC INFORMATION The Company manages its business on the basis of one reportable segment. a. Revenues classified by geographic destinations based on customerlocations: Year ended December 31, 2004 2005 2006 Europe $ 8,332 $ 8,239 $ 9,930Asia 3,587 3,844 3,969North America 1,381 1,234 473South America 2,258 1,836 2,848Other 170 248 499 $ 15,728 $ 15,401 $ 17,719 b. Long-lived assets by geographic region: December 31, 2005 2006 Israel $ 1,465 $ 1,222Europe 354 255North America 39 6Other 56 47 $ 1,914 $ 1,530 NOTE 12:- FINANCIAL INCOME (EXPENSES), NET Year ended December 31, 2004 2005 2006Financial income:Foreign currency translation adjustments, net $ 188 $ - $ 244Interest on bank deposits 63 108 358 251 108 602 Financial expenses:Foreign currency translation adjustments, net - (379) -Bank charges (61) (45) (78)Interest on short-term bank credit (1) - (57) (62) (424) (135) $ 189 $ (316) $ 467 - - - - - - - - - - - - - - - - - This information is provided by RNS The company news service from the London Stock Exchange