CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2011 UNAUDITED U.S. DOLLAR IN THOUSANDS INDEX Page Auditors' Letter 2 Consolidated Balance Sheets 3 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Changes in Equity 6 10 Consolidated Statements of Cash Flows 11 13 Notes on consolidated financial statements 14 24
Kost Forer Gabbay & Kasierer 3 Aminadav St. TelAviv 67067, Israel Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com To Ophir Optronics Ltd. We have reviewed the financial information of Ophir Optronics Ltd. and its subsidiaries, which comprises the condensed consolidated balance sheet as of September 30, 2011 and the related condensed consolidated statements of comprehensive income, changes in equity and cash flows for the nine and three months then ended. We did not review the condensed interim financial information of certain subsidiaries, whose assets constitute approximately 5.61% of total consolidated assets as of September 30, 2011, and whose revenues constitute approximately 12.8% and 12.89% of total consolidated revenues for the nine and three months then ended, respectively. The condensed interim financial information of those companies was reviewed by other auditors, whose review reports have been furnished to us, and our conclusion, insofar as it relates to the financial information in respect of those companies, is based on the review reports of the other auditors. Based on our review and the review reports of other auditors, we stated that nothing came to our attention that caused us to believe that the abovementioned interim financial information is not prepared, in all material respects, in accordance with International Accounting Standard No. 34 (IAS 34). The accompanying financial statements, which are derived from the abovementioned financial statements, are condensed financial statements and do not include disclosures required by IAS 34. If the omitted disclosures were included in the accompanying financial statements, they might influence the user's conclusions about the consolidated financial position, results of operations and cash flows of the Company and subsidiaries. Accordingly, the accompanying financial statements are not designed for those who are not informed about such matters. TelAviv, Israel November 30, 2011 KOST FORER GABBAY & KASIERER A Member of Ernst & Young Global 2
CONSOLIDATED BALANCE SHEETS ASSETS September 30, December 31, 2011 2010 2010 Unaudited Audited U.S. dollars in thousands CURRENT ASSETS: Cash and cash equivalents 22,507 13,383 15,084 Shortterm deposits 114 152 93 Trade receivables 20,603 17,193 18,945 Other accounts receivable 2,618 2,248 2,194 Inventories 27,127 25,033 24,182 Financial derivatives 688 935 1,323 73,657 58,944 61,821 NONCURRENT ASSETS: Other receivables 748 782 734 Financial derivatives for marketable debenture hedges 625 1,127 1,153 Prepaid operating lease expenses of land 114 118 117 Employee benefit assets 902 645 775 Fixed assets 39,434 37,449 37,363 Intangible assets 12,506 (* 10,377 11,038 Goodwill 5,631 (* 5,631 5,631 Deferred taxes 766 907 1,065 60,726 57,036 57,876 134,383 115,980 119,697 *) Restated, see note 4. 3
CONSOLIDATED BALANCE SHEETS LIABILITIES AND EQUITY September 30, December 31, 2011 2010 2010 Unaudited Audited U.S. dollars in thousands CURRENT LIABILITIES: Credit from banks and others 2,499 1,805 2,497 Current maturities of marketable debentures 4,628 4,489 4,664 Trade payables 7,865 7,312 7,711 Current taxes payable 674 922 860 Other accounts payable 9,999 7,092 8,827 Financial derivatives 644 265 293 26,309 21,885 24,852 NONCURRENT LIABILITIES: Loans from banks 5,449 4,349 6,751 Marketable debentures 4,628 8,979 6,996 Stock options 843 1,048 Financial derivatives 112 49 Other noncurrent liabilities 2,019 1,425 2,261 Employee benefit liabilities 435 349 299 Deferred taxes 1,939 (* 1,350 1,797 14,470 17,407 19,201 EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY: Share capital 10,243 9,570 9,575 Share premium 44,736 27,311 27,342 Reserve for sharebased payment transactions 996 2,226 2,274 Retained earnings 36,720 (* 35,760 34,510 Reserve for hedges ( 246) 441 661 Reserve for transactions with noncontrolling interests ( 200) Foreign currency translation adjustments 64 92 28 92,313 75,400 74,390 Noncontrolling interests 1,291 1,288 1,254 Total equity 93,604 76,688 75,644 134,383 115,980 119,697 *) Restated, see note 4. 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Nine months ended September 30, Three months ended September 30, Year ended December 31, 2011 2010 2011 2010 2010 Unaudited Audited U.S. dollars in thousands (except per share data) Revenues from sales 90,733 76,703 30,279 25,532 107,759 Cost of sales 53,742 (** 46,328 18,292 (** 14,758 65,412 Gross profit 36,991 30,375 11,987 10,774 42,347 Research and development expenses, net 6,659 (* 6,229 2,249 2,027 8,812 Selling and marketing expenses 9,626 (** 8,139 3,150 (** 2,924 11,642 General and administrative expenses 10,555 (* 8,398 3,597 (* 2,797 11,568 Other expenses (income), net 1,339 (* 247 974 (* 42 (165) 28,179 23,013 9,970 7,790 31,857 Operating income 8,812 7,362 2,017 2,984 10,490 Finance income 455 219 53 580 338 Finance expenses ( 1,742) ( 1,057) ( 819) ( 308) (1,553) Gain (loss) from revaluation of stock options ( 3,449) 29 ( 4,302) ( 203) (176) Income before taxes on income 4,076 6,553 ( 3,051) 3,053 9,099 Taxes on income 1,708 (** 923 992 (** 509 1,510 Net income 2,368 5,630 ( 4,043) 2,544 7,589 Other comprehensive income (loss) (after tax effect): Gain (loss) from cash flow hedges ( 907) 130 ( 938) 303 350 Foreign currency translation adjustments 93 63 178 101 8 Total other comprehensive income (loss) ( 814) 193 ( 760) 404 358 Total comprehensive income 1,554 5,823 ( 4,803) 2,948 7,947 Net income attributable to: Equity holders of the Company 2,210 5,497 ( 4,081) 2,541 7,499 Noncontrolling interests 158 133 38 3 90 2,368 5,630 ( 4,043) 2,544 7,589 Total comprehensive income attributable to: Equity holders of the Company Noncontrolling interests 1,339 215 5,618 205 ( 4,863) 60 2,917 31 7,776 171 1,554 5,823 ( 4,803) 2,948 7,947 Net earnings per share attributable to equity holders of the Company (in U.S. dollars): Basic and diluted net earnings 0.08 0.21 (0.15) 0.10 0.29 *) Reclassified. **) Restated, see note 4. 5
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OPHIR OPTRONICS LTD. Share capital Share premium Unaudited U.S. dollars in thousands Foreign currency translation adjustments Total Attributable to equity holders of the Company Reserve for Reserve for transactions sharebased with noncontrolling payment transactions Retained Reserve earnings for hedges interests Noncontrolling interests Total equity Balance at January 1, 2011 (audited) 9,575 27,342 2,274 34,510 661 28 74,390 1,254 75,644 Net income Other comprehensive income (loss): 2,210 2,210 158 2,368 Loss from cash flow hedges (907) (907) (907) Foreign currency translation adjustments 36 36 57 93 Total comprehensive income (loss) 2,210 (907) 36 1,339 215 1,554 Exercise of stock options into shares 470 9,329 9,799 9,799 Premium addition due to warrant liability employees 198 3,568 ( 1,376) 2,390 2,390 removal Exercise of stock options into shares for 4,921 4,921 4,921 Stock purchase from noncontrolling interests Cost of sharebased payment, net 98 ( 200) ( 200) 98 ( 178) (378) 98 Update of proceeds from options issued in the past (*) ( 424) ( 424) (424) Balance at September 30, 2011 10,243 44,736 996 36,720 ( 246) ( 200) 64 92,313 1,291 93,604 *) see note 3a 6
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OPHIR OPTRONICS LTD. Share capital Share premium Attributable to equity holders of the Company Reserve for sharebased payment Retained Reserve transactions earnings for hedges Unaudited U.S. dollars in thousands Foreign currency translation adjustments Total Noncontrolling interests Total equity Balance at January 1, 2010 (audited) 9,437 26,428 2,088 31,879 311 101 70,244 1,083 71,327 Net income Other comprehensive income (loss): (* 5,497 5,497 133 5,630 Loss from cash flow hedges Foreign currency translation adjustments 130 ( 9) 130 ( 9) 72 130 63 Total comprehensive income (loss) 5,497 130 ( 9) 5,618 205 5,823 Exercise of stock options into shares Cost of sharebased payment, net 133 883 138 1,016 138 1,016 138 Dividend declared and paid ( 1,616) ( 1,616) (1,616) Balance at September 30, 2010 9,570 27,311 2,226 35,760 441 92 75,400 1,288 76,688 *) Restated, see note 4. 7
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OPHIR OPTRONICS LTD. Share capital Share premium Reserve for sharebased payment transactions Retained earnings Unaudited U.S. dollars in thousands Attributable to equity holders of the Company Reserve for transactions with noncontrolling Foreign currency Reserve for hedges interests translation adjustments Total Noncontrolling interests Total equity Balance at July 1, 2011 9,586 26,996 2,347 40,801 692 ( 92) 80,330 1,409 81,739 Net income (loss) ( 4,081) ( 4,081) 38 (4,043) Other comprehensive income (loss): Loss from cash flow hedges Foreign currency translation adjustments ( 938) 156 ( 938) 156 22 (938) 178 Total comprehensive income (loss) ( 4,081) ( 938) 156 ( 4,863) 60 (4,803) Exercise of stock options into shares 470 9,329 9,799 9,799 Premium addition due to warrant liability removal 4,921 4,921 4,921 Exercise of stock options into shares for employees 187 3,490 (1,376) 2,301 2,301 Stock purchase from noncontrolling interests ( 200) ( 200) ( 178) (378) Cost of sharebased payment, net 25 25 25 Balance at September 30, 2011 10,243 44,736 996 36,720 ( 246) ( 200) 64 92,313 1,291 93,604 8
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OPHIR OPTRONICS LTD. Share capital Share premium Attributable to equity holders of the Company Reserve for sharebased payment transactio ns Retained Reserve earnings for hedges Unaudited U.S. dollars in thousands Foreign currency translation adjustments Total Noncontrollin g interests Total equity Balance at July 1, 2010 9,516 26,990 2,184 33,219 138 19 72,066 1,257 73,323 Net income (* 2,541 2,541 3 2,544 Other comprehensive income (loss): Gain from cash flow hedges 303 303 303 Foreign currency translation adjustments 73 73 28 101 Total comprehensive income (loss) 2,541 303 73 2,917 31 2,948 Exercise of stock options into shares 54 321 375 375 Cost of sharebased payment, net 42 42 42 Balance at September 30, 2010 9,570 27,311 2,226 35,760 441 92 75,400 1,288 76,688 *) Restated, see note 4. 9
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OPHIR OPTRONICS LTD. Share capital Share premium Attributable to equity holders of the Company Reserve for sharebased payment transactio Retained Reserve ns earnings for hedges Audited U.S. dollars in thousands Foreign currency translation adjustments Total Noncontrollin g interests Total equity Balance at January 1, 2010 9,437 26,428 2,088 31,879 311 101 70,244 1,083 71,327 Net income Other comprehensive income (loss): 7,499 7,499 90 7,589 Gain from cash flow hedges Foreign currency translation adjustments 350 (73) 350 (73) 81 350 8 Total comprehensive income (loss) 7,499 350 (73) 7,776 171 7,947 Exercise of stock options into shares Cost of sharebased payment, net 138 914 186 1,052 186 1,052 186 Dividend declared and paid (4,868) (4,868) (4,868) Balance at December 31, 2010 9,575 27,342 2,274 34,510 661 28 74,390 1,254 75,644 10
CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Nine months ended September 30, Three months ended September 30, Year ended December 31, 2011 2010 2011 2010 2010 Unaudited Audited U.S. dollars in thousands Net income (loss) 2,368 (* 5,630 ( 4,043) (* 2,544 7,589 Adjustments to reconcile net income to net cash provided by operating activities: Adjustments to the profit or loss items: Depreciation and amortization 5,686 (* 5,227 2,008 (* 1,862 7,208 Write down of prepaid operating lease expenses of land 3 3 1 1 4 Cost of sharebased payment, net Finance expenses, net 98 82 138 412 25 ( 21) 42 ( 53) 186 662 Loss from revaluation of noncurrent marketable debentures and financial derivatives, net 728 359 90 76 779 Loss (gain) from revaluation of stock options, net 3,449 ( 29) 4,302 203 176 Capital loss from sale of fixed assets 45 ( 12) 31 ( 4) 7 Revaluation of noncurrent liabilities, net Taxes on income 396 1,708 ( 18) (* 923 171 992 48 (* 509 1,021 1,510 Change in employee benefit assets and liabilities, net ( 16) 180 74 ( 52) Changes in asset and liability items: 12,179 7,183 7,673 2,632 11,553 Decrease (increase) in trade receivables Decrease (Increase) in other accounts receivable ( 1,513) ( 604) 1,291 ( 497) 1,800 386 ( 445) 86 (464) (303) Decrease (increase) in inventories Increase (decrease) in trade payables ( 2,829) 63 ( 134) 250 ( 581) ( 1,918) ( 804) ( 972) 751 687 Increase (decrease) in other accounts payable ( 81) ( 915) 135 60 58 Cash paid and received during the period for: ( 4,964) ( 5) ( 178) ( 2,075) 729 Interest paid ( 574) ( 435) ( 80) ( 5) (946) Interest received 131 25 50 87 Taxes paid ( 534) ( 1,916) ( 56) ( 136) (2,274) Taxes received 18 301 18 295 300 ( 959) ( 2,025) ( 68) 154 (2,833) Net cash provided by operating activities 8,624 10,783 3,384 3,255 17,038 *) Restated, see note 4. 11
CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from investing activities: Nine months ended September 30, Three months ended September 30, Year ended December 31, 2011 2010 2011 2010 2010 Unaudited Audited U.S. dollars in thousands Withdrawal of (investment in) shortterm deposits, net ( 14) ( 52) 111 99 5 Purchase of fixed assets ( 6,669) ( 4,826) ( 2,852) ( 1,073) (6,241) Acquisition of initially consolidated subsidiary (a) ( 1,796) (1,862) Investment in intangible assets ( 2,933) ( 1,916) ( 1,047) ( 681) (3,141) Proceeds from sale of fixed assets 476 26 476 17 65 Net cash used in investing activities ( 9,140) ( 8,564) ( 3,312) ( 1,638) (11,174) Cash flows from financing activities: Exercise of stock options into shares 12,189 1,016 12,100 375 1,052 Dividends paid ( 1,616) (4,868) Receipt of noncurrent loans 793 583 80 9 4,643 Repayment of noncurrent loans ( 2,236) ( 2,155) ( 938) ( 709) (2,619) Repayment of debentures ( 2,554) ( 2,165) (4,520) Stock purchase from noncontrolling interests ( 378) ( 378) Receipt (repayment) of shortterm credit from banks and others, net 80 ( 20) ( 4,314) ( 37) 8 Net cash provided by (used in) financing activities 7,894 ( 4,357) 6,550 ( 362) (6,304) Exchange differences on balances of cash and cash equivalents 45 46 ( 67) 39 49 Increase (decrease) in cash and cash equivalents 7,423 ( 2,092) 6,555 1,294 (391) Cash and cash equivalents at the beginning of the period 15,084 15,475 15,952 12,089 15,475 Cash and cash equivalents at the end of the period 22,507 13,383 22,507 13,383 15,084 12
CONSOLIDATED STATEMENTS OF CASH FLOWS (a) Acquisition of initially consolidated subsidiary: Nine months ended September 30, Three months ended September 30, Year ended December 31, 2011 2010 2011 2010 2010 Unaudited Audited U.S. dollars in thousands Subsidiary's assets and liabilities at date of acquisition: Working capital (excluding cash and cash equivalents) Noncurrent receivables (6) (6) (6) (6) Fixed assets Intangible assets (16) *) (1,390) (16) (1,390) Goodwill *) (1,192) (1,192) Payables for acquisition 66 Contingent liability on acquisition 270 270 Deferred taxes *) 478 478 (b) Significant noncash activities: (1,796) (1,862) Premium addition due to warrant liability removal 4,921 4,921 Purchase of fixed and intangible assets on credit 56 7 19 *) Restated, see note 4. 13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: GENERAL These financial statements have been prepared in a condensed format as of September 30, 2011 and for the nine and three months then ended ("interim consolidated financial statements"). These financial statements should be read in conjunction with the Company's annual financial statements as of December 31, 2010 and for the year then ended and the accompanying notes ("annual financial statements"). NOTE 2: SIGNIFICANT ACCOUNTING POLICIES a. Basis of preparation of the interim consolidated financial statements: The interim consolidated 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", and in accordance with the disclosure requirements of Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970. The significant accounting policies and methods of computation adopted in the preparation of the interim consolidated financial statements are consistent with those followed in the preparation of the annual financial statements, except as noted below: IFRS 3 (Revised) Business Combinations: The amendments to IFRS 3 (Revised) address the following issues: 1. Measurement of noncontrolling interests: The amendment limits the circumstances in which it is possible to choose the measurement of noncontrolling interests based on their fair value on the date of acquisition or at their proportionate share in the recognized amounts of the acquiree's identifiable net assets. According to the amendment, this possibility is only available for components of noncontrolling interests that are present ownership interests and entitle their holders to a pro rata share of the acquiree's net assets in the event of liquidation (usually shares). In contrast, for other components of noncontrolling interests (such as options that represent equity instruments of the acquiree) no such choice is available, and they are measured at fair value on the acquisition date, unless another measurement basis is required by IFRS such as IFRS 2. The amendment is applied retrospectively from the date of original adoption of IFRS 3 (Revised). The retrospective adoption of the amendment did not have a material effect on the Company's financial statements. 14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.) 2. Sharebased payment awards in a business combination: The amendment prescribes the accounting treatment in a business combination of an exchange of the acquiree's sharebased payment awards (whether the acquirer is obligated or chooses to exchange them) with the acquirer's sharebased payment awards. According to the amendment, the acquirer allocates a portion of the value of the award to the consideration for the business combination and a portion as an expense in the period following the acquisition. However, if the award expires as a result of the business combination and is exchanged for a new award, the value of the new award in accordance with IFRS 2 is recognized as an expense in the period following the acquisition and is not included as part of the consideration for the acquisition. Furthermore, if sharebased payment awards are not exchanged, then, if the instruments have vested, they form part of the noncontrolling interests and are measured pursuant to the provisions of IFRS 2. If the instruments have not vested, they are measured at the value that would have been used had they been granted on the acquisition date and this amount is allocated between the noncontrolling interests and a postacquisition expense. The amendment is applied retrospectively from the date of original adoption of IFRS 3 (Revised). The retrospective adoption of the amendment did not have a material effect on the Company's financial statements. 3. Transition provisions for accounting for contingent consideration in a business combination that occurred prior to the adoption of IFRS 3 (Revised): According to the amendment, the amendments to IFRS 7, IAS 32 and IAS 39 which prescribe that contingent consideration in a business combination is within the scope of these Standards, do not apply to contingent consideration in respect of a business combination whose acquisition date preceded the date of adoption of IFRS 3 (Revised). Such contingent consideration will continue to be accounted for under the provisions of IFRS 3 prior to its amendment. The amendment is applied retrospectively from January 1, 2011. The retrospective adoption of the amendment did not have a material effect on the Company's financial statements. IAS 1 Presentation of Financial Statements: According to the amendment to IAS 1, the changes between the opening and the closing balances of each component of other comprehensive income may be presented in the statement of changes in equity or in the notes accompanying the annual financial statements. Accordingly, the Company has elected to present said disclosure in the statement of changes in equity / in the notes accompanying the annual financial statements. The amendment is applied retrospectively from January 1, 2011. 15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.) IAS 24 Related Party Disclosures: The amendment to IAS 24 clarifies the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised Standard introduces a partial exemption of disclosure requirements for governmentrelated entities. The amendment is applied retrospectively from January 1, 2011. IAS 32 Financial Instruments: Presentation Classification of Rights Issues: The amendment to IAS 32 provides that rights, options or warrants to acquire a fixed number of the Company's equity instruments for a fixed amount of any currency are classified as equity instruments if the Company offers the rights, options or warrants pro rata to all of its existing owners of the same class of its nonderivative equity instruments. The amendment is applied retrospectively from January 1, 2011. IAS 34 Interim Financial Reporting: Pursuant to the amendment to IAS 34, new disclosure requirements were introduced to interim financial reporting regarding the circumstances that are likely to affect the fair value of financial instruments and their classification, the transfers of financial instruments between different fair value levels and changes in the classification of financial assets. The retrospective adoption of the amendment did not have a material effect on the Company's financial statements. c. New IFRS Standards that have been issued but are not yet effective: In May 2011, the IASB issued four new Standards: IFRS 10, "Consolidated Financial Statements", IFRS 11, "Joint Arrangements", IFRS 12, "Disclosure of Interests in Other Entities" ("the new Standards") and IFRS 13, "Fair Value Measurement", and amended two existing Standards, IAS 27R (Revised 2011), "Separate Financial Statements", and IAS 28R (Revised 2011), "Investments in Associates and Joint Ventures". The new Standards are to be applied retrospectively in financial statements for annual periods commencing on January 1, 2013 or thereafter. Earlier application is permitted. However, if the Company chooses earlier application, it must adopt all the new Standards as a package (excluding the disclosure requirements of IFRS 12 which may be adopted separately). The Standards prescribe transition provisions with certain modifications upon initial adoption. The main provisions of the Standards and their expected effects on the Company are as follows: IFRS 10 Consolidated Financial Statements: IFRS 10 supersedes IAS 27 regarding the accounting treatment of consolidated financial statements and includes the accounting treatment for the consolidation of structured entities previously accounted for under SIC 12, "Consolidation Special Purpose Entities". 16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.) IFRS 10 does not prescribe changes to the consolidation procedures but rather modifies the definition of control for the purpose of consolidation and introduces a single consolidation model. According to IFRS 10, in order for an investor to control an investee, the investor must have power over the investee and exposure, or rights, to variable returns from the investee. Power is defined as the ability to influence and direct the investee's activities that significantly affect the investor's return. According to IFRS 10, when assessing the existence of control, potential voting rights should be considered only if they are substantive, as opposed to the provisions of IAS 27 prior to its amendment which required consideration of potential voting rights only if they could be exercised immediately while disregarding management's intentions and financial ability to exercise such rights. IFRS 10 also prescribes that an investor may have control even if it holds less than a majority of the investee's voting rights (de facto control), as opposed to the provisions of the existing IAS 27 which permits a choice between two consolidation models the de facto control model and the legal control model. IFRS 10 is to be applied retrospectively in financial statements for annual periods commencing on January 1, 2013, or thereafter. The Company is evaluating the possible impact of the adoption of IFRS 10 but is presently unable to assess the effects, if any, on its financial statements. IAS 27R Separate Financial Statements: IAS 27R supersedes IAS 27 and only addresses separate financial statements. The existing guidance for separate financial statements has remained unchanged in IAS 27R. IFRS 12 Disclosure of Interests in Other Entities: IFRS 12 prescribes disclosure requirements for the Company's investees, including subsidiaries, joint arrangements, associates and structured entities. IFRS 12 expands the disclosure requirements to include the judgments and assumptions used by management in determining the existence of control, joint control or significant influence over investees, and in determining the type of joint arrangement. IFRS 12 also provides disclosure requirements for material investees. The required disclosures will be included in the Company's financial statements upon initial adoption of IFRS 12. IFRS 13 Fair Value Measurement: IFRS 13 establishes guidance for the measurement of fair value, to the extent that such measurement is required according to IFRS. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. IFRS 13 also specifies the characteristics of market participants and determines that fair value is based on the assumptions that would have been used by market participants. According to IFRS 13, fair value measurement is based on the assumption that the transaction will take place in the asset's or the liability's principal market, or in the absence of a principal market, in the most advantageous market. 17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.) IFRS 13 requires an entity to maximize the use of relevant observable inputs and minimize the use of unobservable inputs. IFRS 13 also includes a fair value hierarchy based on the inputs used to determine fair value as follows: Level 1 quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 unobservable inputs (valuation techniques that do not make use of observable inputs). IFRS 13 also prescribes certain specific disclosure requirements. The new disclosures, and the measurement of assets and liabilities pursuant to IFRS 13, are to be applied prospectively for periods commencing after the Standard's effective date, in financial statements for annual periods commencing on January 1, 2013 or thereafter. Earlier application is permitted. The new disclosures will not be required for comparative data. The appropriate disclosures will be included in the Company's financial statements upon initial adoption of IFRS 13. The Company is evaluating the possible impact of the adoption of IFRS 13 but is presently unable to assess the effects, if any, on its financial statements. IAS 19R Employee Benefits: In June 2011, the IASB issued IAS 19R. The principal amendments included in IAS 19R are: Actuarial gains and losses will only be recognized in other comprehensive income and not carried to profit or loss. The "corridor" approach which allowed the deferral of actuarial gains or losses has been eliminated. The return on the plan assets is recognized in profit or loss based on a discount rate used to measure the employee benefit liabilities, regardless of the actual composition of the investment portfolio. The distinction between shortterm employee benefits and longterm employee benefits will be based on the expected settlement date and not on the date on which the employee first becomes entitled to the benefits. The cost of past services arising from changes in the plan will be recognized immediately. IAS 19R is to be applied retrospectively in financial statements for annual periods commencing on January 1, 2013, or thereafter. Earlier application is permitted. The Company is evaluating the possible impact of the adoption of IAS 19R but is presently unable to assess the effects, if any, on its financial statements. 18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: MATERIAL BUSINESS DEVELOPMENTS DURING THE QUARTER a. In the first quarter of 2011 the company has updated the reference proceeds from issuance of package shareholder (since 2008) liability in respect of stock options and premium on shares. The update is correcting the parameter in the valuation of the liability in respect of options due to the 2008 agreement between the company owners to adjust the exercise price of shares in respect of dividends which is not taken into account before calculating the value of the liability. Respect of such update, attributed the first quarter of 2011 Statement of comprehensive income of $ 182 thousand dollars arising from prior periods. The comparative figures are not corrected in light of the fact that the amendment is not significant for the previous reporting period from the date of issuance of the package. b. On July 7, 2011, the Company signed a merger agreement with Newport Corporation, a public corporation incorporated according to the laws of the State of Nevada, USA, the shares of which are traded on NASDAQ (herein: Newport) and with Helios Merger Sub Ltd (herein: the Special Purpose Corporation), a private company incorporated in Israel which is fullyowned and controlled by the Purchaser. The Special Purpose Company merged with and into the Company (herein: the Merger).Upon closing of the Merger, on October 4, 2011 each ordinary 1 NIS par value share of the Company was converted into a right to receive 8.43 US dollars in cash All of the options for the purchase of shares in the Company and the Stock Appreciation Rights were cancelled upon closing of the Merger. Options and Stock Appreciation Rights which have vested and have not yet been exercised at the closing date of the Merger were converted to a right to receive the difference in cash between the Merger Consideration and the exercise price of the options or the base price of the Stock Appreciation Rights, respectively (herein: the Options Consideration). Options and Stock Appreciation Rights which have not yet vested at the closing date of the Merger were converted to a right to receive the Options Consideration according to the original vesting conditions. The Option Consideration with respect to these options was deposited with a trustee at the closing date of the Merger on October 4, 2011 and will be paid to holders of the options and the Stock Appreciation Rights at their original vesting dates as determined at the time they were granted and subject to its conditions. On September 4, 2011 a general meeting of the shareholders of the Company was held and approved the Merger. On October 4, 2011, upon completion of the Merger, the company has became a private company, however, the Company remains a reporting company within the meaning of such term in the Securities Law, and this until full redemption of the Company's Series A debentures, (see note 6 hereafter) c. On September 15, 2011 an agreement was signed with a private company in Europe which is engages in the development, engineering, marketing, sales and manufacturing of optical components and coatings optic (herein the "Seller") pursuant to which the Company will acquire, through the Purchaser Subsidiary, subject to the completion of the transaction, all activities of the Seller as for the total amount of 3 Million USD, out of which 2 Million USD will be paid to the Seller at closing of the agreement, and total amount of 1 Million USD will be held by the merged purchase company, to ensure Seller liabilities met and presentation verification, and will be paid in accordance with liabilities fulfilled at the following dates: Total amount of 850 thousand dollars at one year following closing of the deal and total amount of 150 thousand dollars two years following the closing of the deal. 19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: BUSINESS COMBINATION On May 17, 2010 the acquisition of all shares of PHOTON INC, An American private company which develops, engineering, marketing and production of laser surveying instruments in the field, was completed, through a subsidiary abroad. The transaction was handled in the purchase method according to IFRS 3. Determining the fair value dated May 17, 2010 were temporary, during the fourth quarter of 2010 the Company completed the fair value determinations. The company found that there is a surplus to make adjustments to purchase price, and the attribution of other provisions. Financial statements at September 30, 2010, for the nine and three months then ended were corrected by restatement to reflect the impact of retroactive adjustments. Below is an effect of the adjustments: As reported adjustment Reported in this financials unaudited US dollars in thousands Balance sheet: As of September 30, 2010 Intangible assets, net Goodwill recognized at acquisition Deferred tax liability Retained earnings Total equity 9,932 5,937 ( 1,198) 35,773 76,701 445 ( 306) ( 152) ( 13) ( 13) 10,377 5,631 ( 1,350) 35,760 76,688 20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: BUSINESS COMBINATION (Cont.) As reported adjustment Reported in this financials unaudited US dollars in thousands Statements of comprehensive income: For the nine months ended in September 30, 2010 Cost of sales Selling and marketing expenses Taxes on income Net income 46,319 8,120 938 5,643 9 19 (15) ( 13) 46,328 8,139 923 5,630 For the three months ended in September 30, 2010 Cost of sales Selling and marketing expenses Taxes on income Net income 14,749 2,905 524 2,557 9 19 (15) ( 13) 14,758 2,924 509 2,544 Statements of cash flow: Assets and liabilities of the consolidated companies as of the date of acquisition May 17, 2010: Working capital (net of cash and cash equivalents) Noncurrent debit balance Fixed assets Intangible assets Goodwill Payables for acquisition Contingent liability on acquisition Deferred taxes 6 6 16 917 1,498 (66) (270) (311) 473 (306) (167) 6 6 16 1,390 1,192 (66) (270) (478) 21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: OPERATING SEGMENTS a. GENERAL For executive purposes, the company is divided to three operational business units, based on the products and services of its operational units, as follows : Infrared optics Development activities, manufacturing and marketing complexes and lens uses advanced optical components and night vision systems, thermal imaging observation in the military and civil systems into powerful lasers. Activity mainly through the subsidiary company and Ophir Optics LLC. Laser Measurement Instruments Development activities, manufacturing and marketing of instruments for measuring and analyzing the characteristics of various lasers and other light sources in terms of energy, power, and measuring the fund profile spectrum / wavelengths. Activity mainly through the subsidiary company and Ophir Spiricon LLc Other Development and marketing sensors and measuring systems in three dimensions without contact, through its subsidiary Optical Metrology inc. Management monitors the operating results of its business units separately for making decisions about resource allocation and performance assessment. Performance of the sectors are estimated based on operating profit or loss in some cases, as explained in the table below, measured in different operating loss margin or the consolidated financial statements. Most of the adjustments due to neutralization effects for Actuaries, reducing excess cost and expensing stock options. Group financing (including financing and financial income) and income taxes are managed on a group basis and are not attributed to segments of activity. Transfer prices between operating segments are made on market conditions as transactions with third parties. b. Report regarding operational sectors Information on Profit and Loss Infrared optics For the nine months ended on the 30 st of September 2011 Laser Measurement Instruments Other Adjustments Consolidated total Thousands of dollars Revenue Revenue 53,131 31,025 6,494 83 90,733 Results Sectoral Profit 2,191 7,945 207 (1,531) 8,812 Financing Expenses, net (4,736) Profit Before Income Taxes 4,076 22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: OPERATING SEGMENTS (cont) Infrared optics For the nine months ended on the 30 st of September 2011 Laser Measurement Instruments Other Adjustments Consolidated total Thousands of dollars Revenue Total Revenue 47,590 23,767 7,246 (1,900) 76,703 Results Sector Results 2,452 4,799 484 (373) 7,362 Financing Expenses, net (809) Profit Before Income Taxes 6,553 Infrared optics For the three months ended on the 30 st of September 2011 Laser Measurement Instruments Other Adjustments Consolidated total Thousands of dollars Revenue Total Revenue 17,280 10,395 2,427 177 30,279 Results Sector Results 467 2,312 281 (1,043) 2,017 Financing Expenses, net (5,068) Loss Before Income Taxes (3,051) Infrared optics For the three months ended on the 30 st of September 2010 Laser Measurement Instruments Other Adjustments Consolidated total Thousands of dollars Revenue Total Revenue 15,482 9,093 1,445 (488) 25,532 Results Sector Results 1,030 2,163 (211) 2 2,984 Financing Income, net 69 Profit Before Income Taxes 3,053 23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: OPERATING SEGMENTS (cont) Infrared optics For the year ended on the 31 st of December 2010 Laser Measurement Consolidated Instruments Other Adjustments total Thousands of dollars Revenue Total Revenue 65,878 33,246 9,333 (698) 107,759 Results Sector Results 4,042 6,363 177 (92) 10,490 Financing Expenses, net (1,391) Profit Before Income Taxes 9,099 NOTE 6: EVENTS AFTER THE REPORTING PERIOD a. On October 4, 2011 merger transaction with Newport Corporation (hereinafter, Newport) has been completed and all of the issued shares of the Special Purpose Corporation were converted into shares of the Company, and are all held by Newport. As a result of completion of the merger, the Special Purpose Company has been liquidated and the Company became a private fullyowned subsidiary of Newport. Results of the company's operations do not include transaction costs for their payment was conditioned on the completion of the transaction, which amounted to a total of approximately 1.74 million dollars for legal expenses and employee benefits totaling approximately 4 million. b. On November 15, 2011 the Company held an extraordinary general meeting of its bonds holders (Series A), which approved and adopted the resolution to perform a full and early redemption of the bonds according to which each holder of 1 NIS par value bonds will receive, an amount equal to the value of the bond at the date of early redemption (i.e., principal, accrued interest and indexation accrued up to the date of actual payment of the early redemption) plus interest at a rate of 3.33%. All holders of bonds at the end of trading on November 28, 2011 will be eligible for payment of early redemption of the bonds. The full early redemption of the bonds shall be made on December 11, 2011. After the Early Redemption of Bonds, the bonds will be deleted from the trade in the Tel Aviv Stock Exchange and from the stock exchange clearing house and the Company will cease to be a reporting corporation. 24