Market Overview and Operational Activities

Transcription

1 The Management s Discussion and Analysis Report for the period from January 1 to June 30, 2013 (the "Report") 1. Market Overview and Operational Activities 1) General economic conditions 2) Business Overview 2. Operating and Financial Review 1) Earnings 2) The Company s Financial Position 3) Cash Flow 4) Employees 3. Risks and Opportunities 4. Additional Information 5. Outlook 6. Responsibility Statement Market Overview and Operational Activities General economic conditions Global growth remained subdued during the first half of 2013 due to a more protracted recession in the euro area, slower growth in several key emerging market economies and a weaker expansion than expected of the US economy. While low demand, depressed confidence, and the impact of tight fiscal and financial conditions interacted to exacerbate the effects on growth in Europe, stronger fiscal contraction weighed on improving private demand in the United States and infrastructure bottlenecks, slower external demand growth and lower commodity prices constrained growth prospects in emerging markets. Taken as a whole, downside risks to global growth prospects continue to dominate. Not only that old risks remain, but new risks have emerged: Especially the anticipated unwinding of monetary policy stimulus in the United States poses the threat of a longer growth slowdown in emerging market economies as sustained capital flow reversals could tighten financial conditions and restrain access to credit. As a consequence, the International Monetary Fund (IMF) in the July update of its World Economic Outlook (WEO), lowered its global growth projection for 2013 by 0.2 percentage points from 3.3% to 3.1%. The Middle East region is expected to grow at the same pace as the world economy down from 3.2% compared to the last WEO-update while emerging markets as total are predicted to grow at 5.0% instead of 5.3% with Russia, South Africa and Brazil being hit especially hard by lower demand. For the euro zone the IMF is even predicting a continuation of the recession in 2013, with economic output dropping by 0.6 percent. It has also cut its growth forecast for the USA. Since fiscal consolidation is holding back consumer spending to a greater extent than had been expected, the experts now only expect to see growth of 1.7% in On the contrary, the IMF has lifted its economic growth forecast for the UK from 0.7% to 0.9%. Although projections for the second part of 2013 are slightly more promising, global growth will not gather pace before 2014 when the recession in the euro area is expected to come to an end. According to Memoori research group analysis, the total value of the global physical security market products (factory gate prices) in 2012 was over $20.5 billion. Intruder alarms accounted for 27.5% (5.77 billion), Video surveillance $10 billion and Access control a little

2 less than $5 billion. The security market in total, grew during 2012 in 6%.the expected market growth for the next 5 (CAGR) is 5% on average. The main growth drivers will be the continued growth in demand from developing markets in Asia, Latin America and Eastern Europe, Crime and terror levels & Innovative solutions that suits customer demands and life style. Frost & Sullivan Research Company estimates that some businesses may switch from their CCTV systems to intrusion detection systems with access to video verification. The costs of transmitting data are diminishing and the data transfer is increasing. Frost & Sullivan also estimates that migration to IP may trigger the need for video or voice verification. Business Overview Electronics Line 3000 Ltd. ( EL or the Company ) is a pioneer in next-generation security solutions for the residential and small commercial markets. The Company designs and produces cutting-edge solutions for security and control of living and working environments. The EL line provides comprehensive security protection, as well as sophisticated system and home management functionality, for optimal comfort, safety and peace of mind. This new industry standard is further upgraded with enhanced remote management capabilities that give homeowners instant access to their system from anywhere in the world. Upgrading Everyday Security EL solutions enable new levels of control and maintenance in protected sites through the ELAS, a proprietary remote management server. The Company enjoys a unique market position in supplying ELAS-governed systems for the home and workplace, which provide the multiple benefits of a virtual security presence, convenient home automation, and energy efficiency, all customized by the end-user and/or the service provider. EL s extensive product line includes both wired and wireless solutions. EL solutions offer enhanced detection and PSTN/IP/GSM/GPRS-based event reporting, along with advanced remote management tools. The back-office support and customized branding of EL solutions provide superior security with significant business benefits and market expansion potential. Global Partnerships Nearly three decades of cutting-edge leadership have earned EL a solid market position, allowing users worldwide to benefit from EL s ongoing development of upgraded security solutions. The Company maintains long-term partnerships worldwide. EL has made emerging technology, user-friendly design and exceptional quality the benchmarks for serving its international network of clients and partners. Drawing on a tradition of pioneering expertise, EL specialists also provide security integration consultancy, installation service, training and technological support. EL was established in 1982 and is headquartered in Israel. The Company is publicly traded on the Frankfurt Stock Exchange (ELN) and is part of the RISCO Group, an established leader in the international security market. In March 2010 RISCO Ltd., ("Risco") a leading provider of integrated security solutions, acquired a controlling interest in the Company. RISCO Group intends to maintain the Company's product offerings and independence in the market by growing it as RISCO Group's

3 residential arm through product portfolio expansion into video and management solutions together with its major partners worldwide. In order to increase the Company's global coverage and to have better penetration into new and existing markets, in August 2010, the Company entered into management and distribution agreements with Risco as Risco has the facilities to import, promote, sell, market and distribute the products in the territory (as defined in the agreement) and is willing to act as the supplier's non-exclusive distributor of the Products in the Territory. The Company reorganized its sales force in order to achieve a better coverage in its target markets. Mr. Douglas Luscombe, the Company's CEO, was located in the UK and several regional Sales Managers (RSM) were assigned to cover the rest of Europe and the Russian markets. The Company is well positioned in important markets around the world, in particular Northern and Western Europe and consistently strengthens its position in additional regions in Latin America, Asia Pacific and more. The Company s brand is associated with high quality products and solutions. The Company continues to develop and expand its marketing and sales capabilities with a focus on strategic customers and markets, while at the same time, providing more marketing and technical support to existing customers. Products and Product Families The Company offers an array of security solutions for every need. EL s wireless control systems enable end-users to choose the level of control and monitoring they require using innovative remote solutions. Advanced security detectors supply excellent interior and perimeter protection while safety detectors offer enhanced environmental and personal safety including: smoke, gas and water leak detection, panic buttons and much more. The systems can be activated using a variety of local control devices such as keyfobs and keypads. EL also offers end-users and providers advanced remote management applications for comprehensive control over the system from any location. Complementing accessories and add-ons include home automation modules, zone expanders, receivers, sirens and more for a complete security offering. The EL Application Server (ELAS) is a 24/7 dedicated application server, which provides an answer to the growing demand for customer autonomy. The ELAS offers private remote access to EL security systems, allowing homeowners to easily check, activate, modify and communicate with their security system from anywhere in the world, through web-based or smartphone applications. The sophisticated iconnect system, with its sleek design, serves as the command center for a residential and small commercial Security and Home Automation network.

4 Powered by the full range of ELAS remote management functions, iconnect effortlessly integrates remote signaling from end-users, monitoring stations, service providers and technicians. The ELAS enables remote programming and maintenance of the iconnect system by Internet or smartphones, built-in interface with PSTN/GSM/GPRS or PSTN/IP communication modules, configuration of and SMS event notification to users, and much more. The two-way wireless RF technology built into iconnect also enables the use of PIR Cameras with event triggered images, for verification to both the monitoring station and the end users via web and Smartphone Applications. The compatible EL two-way peripherals communicate with the iconnect control panel and respond to RF signals with top-level data security. Designed for superior efficiency, the peripherals only respond to signals when the control panel is armed, and then they act with enhanced speed to minimize energy consumption and signal traffic congestion. CommPact, named for its streamlined, space-saving design (21x15.2x4cm), offers cost effective security and connectivity, with all the essential functions of one-way wireless technology available in one small high-powered package. The simple wireless installation and advanced remote management capabilities of CommPact provide an ideal value-for-money solution, which allows users to enjoy a complete sense of control and peace of mind. CommPact s remote management is driven by the ELAS, which enables a virtual presence via video look-in on the premises. The advanced features include remote programming and maintenance of the CommPact system by Internet or smartphone, built-in interface with PSTN/GSM/GPRS communication modules, configuration of and SMS event notification to users, and stand-alone two-way audio capability.

5 An established, field-proven solution using one-way wireless FM technology, Prime features modular flexibility. Security, safety and comfort receive equal priority, with features that enable Home Automation. The robust Prime system takes advantage of PSTN and/or GSM connectivity and is compatible with all of EL s wireless keypads and other peripherals. Service providers and end-users can customize Prime in all its essential functions: SMS event notifications, remote installation of software, upgrades, audio communication, range extension and more. Operating and Financial Review The financial statements of the Company as at June 30, 2013 have been prepared in accordance with the International Financial Reporting Standards (IFRS). During the period from January 1 to June 30 of fiscal year 2013 ( Reporting Period ) the Company focused on marketing of its new product line (ELAS, iconnect and CommPact) in order to expand the market and to increase sales. Earnings US $ in thousands Jan. 1 st June. 30 rd 2013 (Reviewed) Jan. 1 st June. 30 rd 2012 (Reviewed) Jan. 1st- Dec. 31st 2012 (Audited) Revenues 8,505 8,752 14,331 Gross Profit 3,566 3,871 5,324 % 42% 44% 37% Research and development ,247 Selling and marketing ,556 General and administrative ,678 Other expenses - (404) (402) Financial Exp Net Income 1,276 1,852 1,079

6 The Company s revenues in the Reporting Period amounted to US$ 8.5 million, compared to revenues of US$ 8.7 million during the same period last year. Gross profit decreased from US$ 3.9 million (44% of sales) in the first half of the previous year to US$ 3.6 million (42% of sales) in the Reporting Period. Accordingly total operating expenses for the Reporting Period increased to US$ 2.3 million compared to operational expenses of US$ 1.9 million during the same period last year. Research and Development expenses in the Reporting Period dropped to US$ 552,000, compared to US$ 677,000 in the first six months On the contrary, Selling and Marketing expenses rose to US$ 884,000, compared to US$ 767,000 in the respective period 2012 as the Company continued to expand its market and sales capabilities - participating for example at the annual exhibition (IFSEC) in ongoing efforts to recruit new customers. General and Administrative expenses accounted for US$ 854,000 during the Reporting Period, compared to US$ 817,000 in the same period of last year. While other income amounted to US$ 404,000 in the comparable period 2012, the company recorded no other income in the reporting period. This change reflects reversal of provisions due to a settlement agreement with the Company landlord in the comparable period Financing expenses in total amount of US$60,000 in the Reporting Period were completely offset by financial income in the same amount resulting from beneficial changes in the currency exchange rate. In the comparable period of last year, net financing expenses had amounted to US$ 162,000. During the last 12 months, the Company repaid loans in a total amount of US$ 0.8 million and successfully reorganized its loan structure. As a result the company's financing costs decreased significantly, which in turn lead to a decline of the overall financial expenses. In sum, the net profit for the Reporting Period amounted to US$ 1.3 million, compared to a net profit of US$ 1.8 million in the respective period The Company s Financial Position The Company s cash and cash equivalents as at June 30, 2013 (hereinafter: the Reporting Date ) were US$ 1.9 million, compared to US$ 0.8 million on December 31, The increase is mainly due to the bank loan repayment mentioned earlier on and a reduction of inventory levels. The Company s trade receivables on the Reporting Date were US$ 1.8 million, compared to US$ 658,000 as at December 31, The Company s prepaid expenses, other accounts receivables, advance payments to suppliers accounted for US$ 145,000, as at June , compared to US$ 170,000 on December 31, The Company s inventory on the Reporting Date recorded US$ 2.1 million down from US$ 4.0 million as at December 31, The decrease of inventory is in line with the Company s strategy to reduce its inventory levels and to optimize its working capital management.

7 Net investment in property, plant and equipment amounted to US$ 566,000 as at the Reporting Date, slightly less than the US$ 609,000 recorded on December 31, The short term credit balance from banks did not change during the Reporting Period, amounted to US$ 355,000 on June 30, The Company s trade payables decreased from US$ 2.0 million on December 31, 2012 to US$ 1.3 million at the end of the Reporting Period. Other current liabilities were US$ 0.5 million, compared to US$ 0.8 as at December 31, Financial Ratios June 30, 2013 December 31, 2012 Current Ratio Quick Ratio As at the Reporting Date, the Company complies with bank covenants. Shareholders equity as at June 30, 2013 amounted to US$ 4.96 million, corresponding in an equity ratio of 68%, compared to US$ 3.7 million (52%) as at December 31, Cash Flow In the Reporting Period net cash provided by operating activities amounted to US$ 1.4 million compared to US$ 0.3 million provided by operating activities during the respective six months period last year. The Company directed US$ 51,000 towards investment activities, compared to proceeds of US$ 430,000 during the comparable period last year. Cash used in financing activities - mainly loan repayments -amounted to US$ 175,000 during the Reporting Period. In the first half year of 2012, net cash used in financing activities accounted for US$ 621,000. Employees The number of employees remains 34 - unchanged from December 31, Risks and Opportunities The management report in the annual report for 2012 provides full details of risk factors that could affect the business performance of Electronics Line, see section 3 Risk Report, while business potential is discussed in section 6 Outlook. There was no material change in the risk/opportunity profile of Electronics Line in the Reporting Period.

8 Additional Information The interim financial statements for Electronics Line as at June 30, 2013 have been drawn up in accordance with the International Financial Reporting Standards (IFRS). An audit review has been conducted of the interim financial statements. On April 14, 2013 the Company s audit committee approved the following agreements: Manufacturing services agreement - a three year extension of the Manufacturing services agreement with Risco Ltd. (Which was originally approved of on August, 2010). The extension is subject to the approval of the Company s shareholders meeting. Management services agreement - an amendment to the Management services agreement with the parent company (Risco Ltd.). The revised agreement (i) includes additional services which will be rendered by Risco to the Company and (ii) revises the annual amount payable to Risco so that the base amount will be US$ 800,000 instead of US$ 300,000 and (iii) extends the existing agreement for additional three years. The revised Management Services Agreement shall retroactively be in effect for a term of 3 years as of January 1, The amendment is subject to the approval of the Company s shareholders meeting; hence no provision was recorded in its financial statements for the period ended at June 30, During the reporting period one of the Company's customers filed a lawsuit against the Company. The plaintiff claimed that the Company s products caused him damages, claiming compensation of NIS 5 million (US$ 1.38 million). Based on the estimation of the Company and its legal advisors, EL is not expected to pay any material compensation. Accordingly the Company did not record any provision to this claim in its financial statements. Outlook The Company launched a pilot of its cloud-based solution ( among a small group of customers, enabling them to independently register their wireless alarm systems to the cloud and thereby monitor and control their premises as well as receiving images from the motion detector cameras. In addition, customers can manage their installer base via the web admin application. The Company expects that these new services, in addition to the smartphone applications for iphone and Android, will help to increase sales of the iconnect and CommPact panels. The Company continues to focus on its Two-way-wireless iconnect product line and its PIR camera detector with a built-in camera for video verification. In addition the Company will release further new complimentary products such as the two-way repeater for extending

9 the detectors range and the two-way vibration detector. This strategy will help to extend EL s market and to increase sales. In view of the success in gaining new customers for the Company s two-way iconnect and CommPact systems for the residential and small commercial markets, at the moment the Company believes that it will achieve the financial targets for fiscal 2013 and expects that sales will amount to approximately US$ 18 million. However, in view of the economic difficulties in many European markets and the continuing recession in southern Europe, the Company also realizes that there are risks for the development of sales in those countries. Responsibility Statement To the best of our knowledge and in accordance with the applicable reporting principles for financial reporting, the financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company, and the management report of the Company includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal opportunities and risks associated with the expected development of the Company for the remaining months of the financial year. Douglas Luscombe CEO Moshe Alkelai Chairman of the Board Rishon Le Zion, August 14, 2013

10 INTERIM CONDENSED FINANCIAL STATEMENTS AS OF JUNE 30, 2013

11 INTERIM CONDENSED FINANCIAL STATEMENTS AS OF JUNE 30, 2013 IN U.S. DOLLARS UNAUDITED INDEX Page Auditors' review report 2 Statements of Financial Position 3-4 Statements of Comprehensive Income 5 Statements of Changes in Shareholders' Equity 6-7 Statements of Cash Flows 8-9 Notes to Interim Condensed Financial Statements

12 Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv , Israel Tel: Fax: ey.com Report on review of interim condensed financial statements Board of Directors of Electronics Line 3000 Ltd. Introduction We have reviewed the accompanying interim condensed statements of financial position of Electronics Line 3000 Ltd. ("the Company") as of June 30, 2013 and the related interim condensed statements of comprehensive income, changes in equity and cash flows for the six and three month periods then ended and explanatory notes. Management is responsible for the preparation and presentation of these interim condensed financial statements in accordance with IAS 34, "Interim Financial Reporting"(IAS 34). Our responsibility is to express a conclusion on these interim condensed financial statements based on our review. Scope of review We conducted our review in accordance with International Standard on Review Engagements 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim condensed financial statements are not prepared, in all material respects, in accordance with IAS 34. Tel-Aviv, Israel August 14, 2013 KOST FORER GABBAY & KASIERER A Member of Ernst & Young Global - 2 -

13 STATEMENTS OF FINANCIAL POSITION June 30, December 31, Unaudited Audited ASSETS CURRENT ASSETS: Cash and cash equivalents 1, Restricted deposit Trade receivables 1,787 2, Other accounts receivable Inventories 2,110 3,121 4,042 Total current assets 5,978 7,860 5,673 NON-CURRENT ASSETS: Property, plant and equipment, net Intangible assets Deferred taxes Security deposits Total non-current assets 1,347 1,528 1,427 Total assets 7,325 9,388 7,100 The accompanying notes are an integral part of the interim financial statements

14 STATEMENTS OF FINANCIAL POSITION June 30, December 31, Unaudited Audited LIABILITIES AND EQUITY CURRENT LIABILITIES: Short-term credit from banks Trade payables 1,309 3,042 1,956 Other current liabilities Total current liabilities 2,126 4,533 3,118 NON-CURRENT LIABILITIES: Loans from banks Employee benefit liabilities, net Total non-current liabilities EQUITY: Share capital 15,933 15,933 15,933 Additional paid-in capital 6,608 6,520 6,584 Accumulated deficit (17,581) (18,084) (18,857) Total equity 4,960 4,369 3,660 Total liabilities and equity 7,325 9,388 7,100 The accompanying notes are an integral part of the interim financial statements. August 14, 2013 Date of approval of the Moshe Alkelai Douglas Luscombe Sharon Sheep financial statements Chairman of the Board President and CEO Responsible for finance - 4 -

15 STATEMENTS OF COMPREHENSIVE INCOME (except per share data) Six months ended June 30, Three months ended June 30, Year ended December 31, Unaudited Unaudited Audited Revenues 8,505 8,752 4,194 5,549 14,331 Cost of revenues 4,939 *) 4,881 2,401 *) 2,951 *) 9,007 Gross profit 3,566 3,871 1,793 2,598 5,324 Operating costs and expenses: Research and development 552 *) *) 299 *) 1,247 Selling and marketing ,556 General and administrative ,678 Other expenses (income), net - (404) - (415) (402) Total operating costs and expenses 2,290 1,857 1, ,079 Operating income 1,276 2, ,884 1,245 Financial income Financial expenses Net income 1,276 1, ,776 1,079 Total comprehensive income 1,276 1, ,776 1,079 Net income per share (basic and diluted) *) Reclassified, see Note 2b. The accompanying notes are an integral part of the interim financial statements

16 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Share capital Additional paid-in capital Accumulated deficit Total equity Balance as of January 1, 2012 (audited) 15,933 6,474 (19,936) 2,471 Net income and comprehensive income - - 1,079 1,079 Cost of share-based payments Balance as of December 31, 2012 (audited) 15,933 6,584 (18,857) 3,660 Net income and comprehensive income - - 1,276 1,276 Cost of share-based payments Balance as of June 30, 2013 (unaudited) 15,933 6,608 (17,581) 4,960 Share capital Additional paid-in capital Accumulated deficit Total equity Balance as of January 1, 2012 (audited) 15,933 6,474 (19,936) 2,471 Net income and comprehensive income - - 1,852 1,852 Cost of share-based payments Balance as of June 30, 2012 (unaudited) 15,933 6,520 (18,084) 4,369 The accompanying notes are an integral part of the interim financial statements

17 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Share capital Additional paid-in capital Accumulated deficit Total equity Balance as of April 1, 2013 (unaudited) 15,993 6,596 (18,178) 4,351 Net income and comprehensive income Cost of share-based payments Balance as of June 30, 2013 (unaudited) 15,993 6,608 (17,581) 4,960 Share capital Additional paid-in capital Accumulated deficit Total equity Balance as of April 30 1, 2012 (unaudited) 15,933 6,504 (19,860) 2,577 Net income and comprehensive income - - 1,776 1,776 Cost of share-based payments Balance as of June 30, 2012 (unaudited) 15,933 6,520 (18,084) 4,369 The accompanying notes are an integral part of the interim financial statements

18 STATEMENTS OF CASH FLOWS Six months ended June 30, Three months ended June 30, Year ended December 31, Unaudited Unaudited Audited Cash flows from operating activities: Net income 1,276 1, ,776 1,079 Adjustments to reconcile net income to net cash provided by operating activities: Adjustments to profit or loss items: Depreciation and amortization Loss from sale of property, plant and equipment Increase (decrease) in employee benefit liabilities, net 96 (10) 41 (28) 3 Cost of share-based payments Financial expenses, net Changes in operating asset and liability items: Decrease (increase) in trade receivables (1,129) (817) (674) (911) 1,359 Decrease (increase) in other accounts receivable 26 1,208 (8) 354 1,735 Decrease (increase) in inventories 1,932 (1,698) 309 (753) (2,619) Decrease (increase) in security deposits (14) - (3) - 63 Increase (decrease) in trade payables (647) (840) Decrease in other long-term liabilities - (426) - (340) (426) Increase (decrease) in other current liabilities (349) (228) 31 (84) (114) Cash paid and received during the period for: (181) (1,715) 78 (1,159) (842) Interest paid (54) (162) (30) (99) (128) Income taxes paid (1) (15) (1) (13) (8) (55) (177) (31) (112) (136) Net cash provided by operating activities 1, Cash flows from investing activities: Acquisition of property, plant and equipment (51) (230) (8) (73) (274) Proceeds from sale of equipment Investment in restricted bank deposits - (200) Net cash used in investing activities (51) (430) (8) (73) (260) The accompanying notes are an integral part of the interim financial statements

19 STATEMENTS OF CASH FLOWS Six months ended June 30, Three months ended June 30, Year ended December 31, Unaudited Unaudited Audited Cash flows from financing activities: Repayment of long-term loans from banks (175) (621) (88) (312) (1,241) Net cash used in financing activities (175) (621) (88) (312) (1,241) Increase (decrease) in cash and cash equivalents 1,133 (753) (884) Cash and cash equivalents at beginning of period 803 1,687 1, ,687 Cash and cash equivalents at end of period 1, , The accompanying notes are an integral part of the interim financial statements

20 NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS NOTE 1:- GENERAL These interim financial statements have been prepared in a condensed format as of June 30, 2013 and for the six and three months then ended ("financial statements"). These financial statements should be read in conjunction with the Company's annual financial statements and the accompanying notes as of December 31, 2012 ("the annual financial statements") and for the year then ended. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES a. Basis of preparation of the interim financial statements: The interim financial statements have been prepared in accordance with generally accepted accounting principles for the preparation of financial statements for interim periods, as prescribed in IAS 34, "Interim Financial Reporting". The significant accounting policies and methods of computation adopted in the preparation of the interim financial statements are consistent with those followed in the preparation of the annual financial statements, except as noted below: IAS 19R - Employee Benefits: In June 2011, the IASB issued IAS 19R whose adoption is required effective from January 1, The main amendments in IAS 19R relate to the accounting treatment of a defined benefit plan. The first-time adoption of IAS 19R did not have a material impact on the Company's financial statements. b. Reclassification: Amounts related to amortization of capitalized development costs previously presented in research and development expenses are now included in cost of revenues. Comparative data were reclassified, and accordingly, $102, $50 and $25 respectively were reclassified from research and development expenses, to cost of revenues for the year ended December 31, 2012 and for the six and three month ended June 30, 2012, respectively. c. Disclosure of new IFRSs in the period prior to their adoption: Amendments to IAS 36 - Impairment of Assets: In May 2013, the IASB issued amendments to IAS 36, "Impairment of Assets" ("the Amendments") regarding the disclosure requirements of fair value less costs of disposal. The Amendments include additional disclosure requirements of the recoverable amount and fair value. The additional disclosures will be based on the fair value hierarchy, the valuation techniques and changes therein, the discount rates and the principal assumptions underlying the valuations

21 NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.) The Amendments are effective for annual periods beginning on or after January 1, Earlier application is permitted. The required disclosures will be included in the Company's financial statements upon the firsttime adoption of the Amendments. NOTE 3:- TRANSACTIONS WITH RELATED PARTY a. Balances with related parties: June 30, December 31, Unaudited Audited Trade payables - Parent company (537) (2,087) (1,048) Trade receivable - Fellow subsidiary 608 1, Key management personnel (including directors) (35) (21) (26) b. Transactions with related parties: June 30, December 31, Unaudited Audited Manufacturing services agreement Raw material sales *) - Parent company (290) (32) (115) Purchases of finished goods - Parent company 774 2,842 4,571 Management service agreement - Parent company Distribution agreement - Fellow subsidiary and parent company (1,234) (1,554) (1,989) Research and development services- Related party Key management personnel (including directors) *) Based on Company's cost, used for manufacturing

22 NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS NOTE 3:- TRANSACTIONS WITH RELATED PARTY (Cont.) c. In continuance to Note 28(d)(2) to the Company's annual financial statements, on April 14, 2013 the Company's audit committee approved a three year extension of the Manufacturing services agreement with the parent company (Risco), which was originally approved in August, The extension is subject to the approval of the Company's shareholders. d. In continuance to Note 28(d)(1) to the Company s annual financial statements, on April 14, 2013, the Company s audit committee approved an amendment to the Management services agreement with the parent company (Risco). The revised agreement includes; (i) additional services which will be rendered by Risco to the Company and (ii) revises the annual amount payable to Risco so that the base amount will be an amount of $800 instead of $300, and (iii) the agreement has been extended for an additional three years period. The revised Management Services Agreement shall be in effect for a term of 3 years as of January 1, The amendment is subject to the approval of the Company's shareholders. e. On April 14, 2013 The Board of directors and the compensation committee has recommended the approval of the Company s Compensation Policy to the company s CEO. The compensation policy includes base salary increase and annual sales commission in accordance to accomplishment of the sales and gross profit targets. The Compensation Policy is a multi-year policy which shall be in effect for a period of three years from the date of its approval. The compensation policy is subject to approval of the Company s shareholders. NOTE 4:- SIGNIFICANT EVENTS DURING THE REPORTING PERIOD During the reporting period one of the Company's customers filed a lawsuit against the Company. The customer claimed that the Company s products caused him and his clients damages, and therefore claiming compensation of 5 million NIS ($ 1.38 million). Based on the estimation of the Company and its legal advisors, the Company is not expected to pay any material compensation and accordingly the Company did not record any provision to this claim in its financial statements

23 NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS NOTE 5:- EVENTS AFTER THE REPORTED PERIOD On July 30, 2013, the Israeli Parliament (the Knesset) approved the second and third readings of the Economic Plan for ("Amended Budget Law") which consists, among others, of fiscal changes whose main aim is to enhance long-term collection of taxes. These changes include, among others, raising the Israeli corporate tax rate from 25% to 26.5%, cancelling the lowering of the tax rates applicable to preferred enterprises (9% in development area A and 16% in other areas), taxing revaluation gains and increasing the tax rates on dividends within the scope of the Law for the Encouragement of Capital Investments to 20% effective from January 1, The deferred tax balances included in the financial statements as of June 30, 2013 are calculated according to the tax rates that were in effect as of the balance sheet date and do not take into consideration the possible effects of the Amended Budget Law. These effects will be included in the financial statements starting from the actual enactment date, namely in the third quarter of The Company is evaluating the possible effects of the change in tax rates on the financial statements but is presently unable to assess the effects, if any F:\W2000\w2000\5440\M\13\E$6-ELECTRONICS.docx