UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

 

Form 10-KSB

 

(Mark One)

 

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

 

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934

 

FOR THE TRANSITION PERIOD FROM __________ TO __________

 

 COMMISSION FILE NUMBER 333-100979

LAPIS TECHNOLOGIES, INC.   (Name of small business issuer in its charter)

DELAWARE		27-0016420
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

19 W. 34th Street, Suite 1008, New York, NY 10001

(Address of principal executive offices) (Zip Code)

Issuer's telephone Number: (212) 937-3580

 

Securities registered under Section 12(b) of the Exchange Act: None.

 

Securities registered under Section 12(g) of the Exchange Act: None.

 

Check whether the issuer is not required to file reports pursuant to Section 13

or 15(d) of the Exchange Act. o

 

Check whether the issuer (1) filed all reports required to be filed by

 

Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

State issuer's revenues for its most recent fiscal year. $9,642,000

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the average high and low price of such common equity as of March 28, 2008, was $1,296,600.

 

As of March 28, 2008, the issuer had 6,483,000 outstanding shares of Common Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE: NONE

 

Transitional Small Business Disclosure Format (check one): Yes o No x

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TABLE OF CONTENTS

				Page
		PART I
Item 1.		Description of Business		1
Item 2.		Description of Property		10
Item 3.		Legal Proceedings		11
Item 4.		Submission of Matters to a Vote of Security Holders		11
		PART II
Item 5.		Market for Common Equity and Related Stockholder Matters		12
Item 6.		Management's Discussion and Analysis or Plan of Operation		12
Item 7.		Financial Statements		16
Item 8.		Changes In and Disagreements with Accountants on Accounting and Financial Disclosure		16
Item 8A.		Controls and Procedures		16
Item 8B.		Other Information		17
		PART III
Item 9.		Directors, Executive Officers, Promoters and Control Persons;
		Compliance With Section 16(a) of the Exchange Act		17
Item 10.		Executive Compensation		18
Item 11.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		19
Item 12.		Certain Relationship and Related Transactions		21
Item 13.		Exhibits		22
Item 14.		Principal Accountant Fees and Services		23
SIGNATURES				24

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ITEM 1. DESCRIPTION OF BUSINESS.

 

Lapis Technologies Inc. was formed in Delaware on January 31, 2002 under the name Enertec Electronics, Inc. and has filed two Certificates of Amendment changing our name to Opal Technologies, Inc. and then to Lapis Technologies, Inc. We conduct operations in Israel through our wholly owned subsidiary, Enertec Electronics Limited ("Enertec Electronics"), an Israeli corporation formed on December 31, 1991, and Enertec Systems 2001 LTD ("Enertec Systems"), an Israeli corporation formed on August 28, 2001, of which we own a 73% equity interest. We are manufacturers and distributors of various military and airborne systems, simulators, automatic test equipment (ATE), electronic components and products relating to power supplies, converters and related power conversion products, . Where the context requires, references to "we" "us" or "our" throughout this document include reference to Enertec Electronics and Enertec Systems.

 

Our revenues are derived from two main sources, the military and the commercial markets. In the military market we, design, develop and manufacture test systems, airborne, shipborne, land electronic equipment and other various military systems, for military manufacturers in accordance with their specifications. Most of this military business is carried out by the majority owned subsidiary Enertec Systems. In the commercial market we market and distribute, power supplies and other electronic components manufactured by other manufacturers who engage us to distribute their products. This activity is carried out primarily by Enertec Electronics, a wholly owned subsidiary. We have entered into representative and distribution agreements with seven such manufacturers, four of which have been reduced to written contracts.

 

OUR SUBSIDIARIES

 

In April 2002, we acquired all of the outstanding capital stock of Enertec Electronics, making it our wholly owned subsidiary. In this transaction, we acquired 99 ordinary shares of Enertec Electronics from Harry Mund, our President and Chief Executive Officer, in exchange for 4,750,000 shares of our common stock. The common stock issued to Mr. Mund represented 86.6% of our outstanding common stock after the transaction.

 

Enertec Management Limited (f/k/a Elcomtech Ltd.), a private Israeli company, is a wholly owned subsidiary of Enertec Electronics.

 

Enertec Systems, a private Israeli company, is owned by Enertec Management Limited ("Enertec Management") (73%), and Harry Mund (27%), our President and Chief Executive Officer of Enertec Electronics Limited. The President and Chief Executive Officer of Enertec Systems is Harry Mund, and the Chief Operating Officer is Zvika Avni. Enertec Systems commenced operations on January 1, 2002.

 

ENERTEC ELECTRONICS

 

Enertec Electronics is responsible for:

 

·

The marketing and distribution of power supplies and other related power products manufactured by third-party firms that engage us to distribute their products; and

·

The marketing and distribution of power supply testing equipment to our military and commercial customers.

 

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During 2005 we introduced several new products with long expected lifecycles, which are described below:

 

A compact, and economical optimized cost/performance redundant power supply for data communication application. The first samples were delivered during 2005 and have already resulted in a follow up order for 800 units delivered over 2007.

 

We introduced a customized external power supply for military note-book computers which will be installed by our customers to the US military within the army, navy, air-force etc. The first 25 power supplies have already been delivered and successfully passed all the stringent military qualification tests, followed by orders for additional 260 pcs during 2006 and 800 pcs during 2007.

In 2006, we introduced a new multiple output customized power supply for outdoor wireless application and have submitted for UL safety approvals. Upon receiving this approval orders for 800 units have been received during 2007.

We have introduced a new medical grade 250W power supply and already received the first order for samples from a big manufacturer of medical equipment. This project is still in the initial design phase at our customer.

We have introduced a new line of 150W dc/dc military converters and have received orders for first 75 units from four different manufacturers of defense systems during 2006 and additional 40 units during 2007.

During 2007 have not been able to introduce any additional new products. We concentrated our efforts on the implementation of the products previously introduced and the maintaining of the relationships with our strategic partners.

MARKETING STRATEGIES

We market our products to a diverse group of manufacturers of electronic equipment. Our products serve the various needs of local Israeli manufacturers of electronic systems in the following fields:

 

·

Military

·	Telecommunications;

·

Medical;

·	Industrial.

 

We currently sell only to Israeli companies that, in turn, incorporate our components into their products for resale to the global markets. However in the future we anticipate creating some kind of platform to market Enertec Systems' products to U.S. companies as well as creating a manufacturing base within the United States so as to benefit from U.S. government dollars directed to Israel's military aid with the condition of being spent on U.S manufactured products. Currently we advertise in the local Israeli technical magazines and participate in electronic seminars, exhibitions and shows four to six times a year. A substantial part of the business is from our existing customers. Many companies have engaged us from the inception of their new programs, and have implemented our custom designed solutions. Many of our customers rely on us for technical services, products and support, and consider us to be their own "power supply department" and "ATE systems department". Since 2004 we have been a "systems house" of military systems, making turn-key projects from design to production on behalf of our customers.

 

We also derive a considerable percentage of our business from word-of-mouth referrals. Our reputation is backed by many years of providing quality products and services. Our marketing strategy has been based on our brand name and reputation, which has grown substantially over the last twenty years, including eight years prior to the formation of Enertec Electronics, when business was conducted under the name "Enertec International."

 

Over the next 24 months, we plan on continuing our aggressive marketing efforts. Part of our success within Enertec Systems has been to anticipate the needs of our clients, invest in R&D and to start working on products that we believe they will need thus gaining an edge on our competition in our time to market. Furthermore, by having our ear close to the ground, we have been able to identify those of our clients and potential clients that look poised to get the big orders and focus our attention on gaining a foothold within that client. When successful, this strategy enables us to benefit from the large order flow that they receive both in terms of the typical products they would expect us to produce for them as well as the more sophisticated products that they might not expect that we are then in the perfect position to offer to them, especially if they are inundated with business we are able to step in and ease the burden of some of the non-core components as well as some of the core components.

 

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By continuously diversifying into new and more complex products, Enertec Systems has been able to set itself apart from its competition. In 2006 and 2007, following the trend we started in 2004, we continued to increase our suite of custom products based on our proprietary design and technology. These products are core components of several long term military programs spearheaded by our customers, with expected purchase lifecycles over periods of up to 10 years.

 

At Enertec Systems the competitive edge lies with the sophistication and the complex nature of the products. Enertec Electronics however, maintains its competitive advantage primarily through its range of products, their pricing, cost effective adaptation to the customers' needs and the strong technical application support provided to customers.

 

MARKET CONDITIONS

Enertec Systems

Manufacturers that sell defense end products such as missiles, aircrafts or computers, also provide a support system (e.g., an ATE) to the end-user. The end-user uses this support system for maintenance of the end product. Historically, support systems were made by manufacturers selling the end products. Recently, however, manufacturers have been focusing their resources on the end products rather than on support systems. This has opened up a market for us to develop these systems.

The local Israeli market for ATE's simulators and support systems is estimated at $100 to $200 million annually. We have about 5% of this market, approximately the same level of market penetration as our competitors. This market is largely controlled by big local defense manufacturers. However, there has been a noticeable trend by these and other defense manufacturers to outsource test and support systems to specialized firms so that large manufacturers can focus their resources on designing their core products.

The local market for outsourced custom designed military systems is above $500 million. We have just begun to penetrate parts of this market with products in the field of avionic systems, ruggedized control systems to name but a few. We are actively working to increase our product portfolio. During 2006 and 2007 have introduced several new military products implemented in high volume long term defense programs.

Since 2005, the local military market is improving significantly resulting in many new orders received which contributed to a backlog of military products totaling increasing from $ 4.5 million dollars. This trend continued through 2006 and 2007 resulting in a further increase in the backlog, which as of the year ended December 31, 2006 totaled $6.182 Million dollars and $ 6,070 by the end of 2007.

A key element of our growth potential is our ability to enhance our sales and marketing team. We will need to expand our sales and marketing team significantly over the next several years to achieve our sales targets. We will face significant challenges and risks in building and managing our sales and marketing team, including managing geographically dispersed sales efforts and adequately training our sales people in the use and benefits of our products.

Enertec Electronics

The worldwide market for high-tech, telecommunications, and Internet related products affects the Electronics Division's power supplies sales. The overall market started to improve, during 2005 resulting in an increase of sales of our customers to this sector and this trend continued during 2006-2007. Our stability is largely due to our diversified client base. We service clients in the telecommunications, industrial control, medical and the military core business sectors. In addition to this our sales force pays a significant amount of attention to our customer relationships, providing more opportunities to gain our foothold into a contract than our competition does. Furthermore we offer more customized power supplies than our competitors, which, we believe, makes it more difficult for our competitors to bid successfully on the same projects or replace our product down the road in production or for follow- on orders.

Enertec Electronics prospects are fully dependent on the electronics and electrical product industries in Israel. Although these sectors are seeing good growth, the industry is being affected by the strong trend of outsourcing. Many Israeli companies manufacture their initial quantities using power supplies purchased locally from suppliers such as Enertec Electronics. However, when volumes increase they move production overseas, especially to China, leaving the subcontractors to source the components locally. This trend affects the receiving of high volume orders from our customers.

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CUSTOMERS

 

Our customers are mostly local Israeli manufacturers of electronic systems from different segments of the electronics industry, within the military, industrial, commercial, medical, and telecommunications fields. Due to this level of diversification of our customers, we are not that dependent on any one specific market segment; so our overall performance is less affected by fluctuation in the markets. Until 2003 IAI (Israel Aircraft Industries) was our major customer representing approx 38% of our sales. During 2004 we realized that several Rafael divisions were receiving an increasingly high number of new orders as a result of their aggressive marketing around the world but that they had not increased their technical and manufacturing staff to accommodate this growth. We positioned ourselves to become their outsourcing team for their new orders in the areas of design, engineering and production. We increased our investment in R&D that resulted in new designs and products that enabled us to successfully bid on a large number of projects. During 2004, we focused our efforts in diversifying our sales across other technologies, for example avionic equipment and combat stations. This resulted in increased sales to Rafael comprising approximately 25% of our total sales in 2004 as compared to 10% in 2003. By the end of 2005 Rafael became our major customer representing approximately 40% of our total sales.

 

Investing in R&D has given us an edge with our time to market which resulted in several agreements, with Rafael bringing out products utilizing our systems within long project cycles, in many cases up to 10 years. This has created a significant increase in the backlog of orders from Rafael.

 

By the end of 2006 Rafael accounted for 32.1% of our total sales and by the end of 2007 accounted for 39.6% of our total sales.

 

In 2004 Israeli Aircraft Industry (IAI) accounted for approximately 18% of our sales. During 2005 IAI started to design and manufacture a range of new products for which we have been asked to provide Test Equipment, Simulators and Support Systems We have received several new orders for the first units delivered during 2006 and have worked on a large number of new proposals which have resulted in an increase of our sales to IAI's as a percentage of our total sales to 24.3% in 2006 and 21% in 2007.

 

The rest of our sales are pretty much evenly spread between our other main customers: Elbit, El-Op and Tadiran Spectralink, at the military field and a very large number of customers at the commercial field.

 

BACKLOG

 

As of December 31, 2007, we had a backlog of orders for our products and services in the amount of approximately $6,766,000 as compared to a backlog of approximately $6,917,000 as of December 31, 2006. The decrease of approximately 2% in the backlog as of December 31 2007 compared to December 31 2006 is mainly due to some new orders at Enertec Systems being postponed from the end of year 2007 to the first quarter of the year 2008 combined with a higher than usual deliveries during Dec 2007 .

 

The raw materials we use are either electronic components or mechanical components. The electronic components are purchased from suppliers and the mechanical components are mainly manufactured by local subcontractors.

 

EMPLOYEES

 

As of December 31, 2007, Enertec Electronics had 11 employees and Enertec Systems had 59 employees. All key technical employees must sign a two-year confidentiality agreement and a two-year non-compete agreement, which prohibits our employees, if they cease working for us, from directly competing with us or working for our competitors. However, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer, such as the secrecy of a company's confidential commercial information or its intellectual property. We may not be able to demonstrate that harm would be caused to us, and therefore, may be unable to prevent our competitors from hiring and benefiting from the expertise of our former employees. None of our employees are subject to a collective bargaining agreement. We do not employ any supplemental benefits or incentive arrangements for our officers or employees. All of our employees are full-time. Management considers its employee relations to be good.

 

RESEARCH AND DEVELOPMENT EXPENDITURES

 

Research and Development costs totaled approximately $244,000 and $399,000 for the twelve months ended December 31, 2007 and 2006, respectively, which equates to approximately 2.5 % and 5.1% of revenues, respectively, for both periods. These expenditures have adequately satisfied our research and development requirements.

 

The decrease of our R&D expenditures as compared to 2006 is a result of allocating of larger percentage of our engineering resources to the task of making progress in the design of the long term projects and big military programs which incorporated the developed technologies, the result of the R&D spendings during 2005 and 2006.

 

The sales of military products experience seasonal variations this is due to the fact that the Israeli Ministry of Defense frequently delays the release of budgets near the end of the fiscal year. Therefore new orders to the military industry are delayed, leading to delays of orders to the local subcontractors. When this happens it negatively affects the sales volume of the 1st quarter of the year. In addition, some of our customers push for increased deliveries during the last weeks of the year in order to fulfill contractual delivery obligations to their customers and also to show better business results. This often causes an upward spike in our fourth quarter sales.

 

SEASONAL ASPECTS OF OUR BUSINESS

 

The sales of military products experience seasonal variations this is due to the fact that the Israeli Ministry of Defense frequently delays the release of budgets near the end of the fiscal year. Therefore new orders to the military industry are delayed, leading to delays of orders to the local subcontractors. When this happens it negatively affects the sales volume of the 1st quarter of the year. In addition, some of our customers push for increased deliveries during the last weeks of the year in order to fulfill contractual delivery obligations to their customers and also to show better business results. This often causes an upward spike in our fourth quarter sales.

 

PATENTS AND TRADEMARKS

 

We are not dependent on patents or trademark protection with regards to the operation of our business and do not expect to be at any time in the future.

 

GOVERNMENT REGULATION

 

 

SUBSEQUENT EVENT

On February 28, 2008, we entered into an agreement for the issue and sale of shares in Lapis Technologies, Inc. and the transfer of shares of Star Night Technologies Ltd. to us (the “Lapis SPA”), with Harry Mund, and Mordechai Solomon (the “Investor”). Mr. Mund is the Company’s chief executive officer, director, and majority stockholder. The Lapis SPA will close (subject to fulfillment or waiver of certain closing conditions or the waiver thereof prior to closing, as well as the performance of certain covenants by the parties that include, inter alia, the receipt of a fairness opinion) 21 days following the date on which an information statement on Schedule 14C under the Securities Exchange Act of 1934, as amended, is mailed to stockholders of the Company (the “Closing Date”), which closing shall occur concurrently with that of the Systems SPA (defined below) and the Electronics SPA (defined below). Pursuant to the Lapis SPA, we agreed to issue to the Investor, on the Closing Date, 75,129,500 shares of the Company’s common stock, representing 92% of the Company’s issued and outstanding shares on a fully diluted basis. The Investor agreed to transfer to the Company, on the Closing Date, 4,539,557 shares in Star Night Technologies Ltd., a company traded on the Tel Aviv Stock Exchange, held by the Investor in person.

 

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In addition, pursuant to the Lapis SPA, the Investor agreed to grant to Mr. Mund an option (the “Mund Option”), exercisable by Mr. Mund in his sole discretion, to sell to the Investor, Mr. Mund’s 4,750,000 shares of the Company’s common stock (the “Option Shares”). The Mund Option will be exercisable during a period of 90 calendar days immediately following the first anniversary of the Closing Date (with respect to 50% of the Option Shares, at an exercise price of US $0.5434 per share, subject to adjustment in the event of stock splits, stock dividends, and similar transactions) and/or the second anniversary of the Closing Date (with respect to all of the Option Shares, at an exercise price of US $0.6038 per share, subject to adjustment in the event of stock splits, stock dividends, and similar transactions). The Mund Option is subject to the aggregate value of the Option Shares being no higher than US $2,868,000, subject to certain adjustments, for a period of 65 consecutive calendar days commencing 120 days after the Closing Date (so long as Mr. Mund may sell his shares pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”)) during a period of 65 consecutive calendar days during a period of 24 months following the Closing Date.

In connection with the Lapis SPA, on February 28, 2008, our indirect wholly owned subsidiary, Enertec Management Ltd. (“Enertec Management”) (which we own through its direct wholly owned subsidiary Enertec Electronics Ltd.), entered into an agreement for the sale and purchase of Enertec Systems 2001 Ltd. (the “Systems SPA”), with Harry Mund, and S.D.S. (Star Defense Systems) Ltd., a company traded on the Tel Aviv Stock Exchange (“S.D.S.”) whose majority stockholder is Mordechai Solomon. The Systems SPA will close on the Closing Date concurrently with the Lapis SPA and the Electronics SPA (defined below). Pursuant to the Systems SPA, Etertec Management and Mr. Mund agreed to sell, and S.D.S. agreed to purchase, on the Closing Date, an aggregate of 251,000 shares of Enertec Systems 2001 Ltd. (“Enertec Systems”), representing all of the issued and outstanding capital stock of Enertec Systems, for an aggregate purchase price of US $1,500,000. The 251,000 shares to be sold pursuant to the Systems SPA represent 67,770 shares to be sold by Mr. Mund and 183,230 shares to be sold by Enertec Management.

In connection with the Lapis SPA and the Systems SPA, we also entered into, on February 28, 2008, an agreement with Mund Holdings Ltd., a company owned by Harry Mund (the “Electronics SPA”). The Electronics SPA will close on the Closing Date concurrently with the Lapis SPA and the Systems SPA. Pursuant to the Electronics SPA, we agreed to sell, and Mund Holdings Ltd. agreed to purchase, on the Closing Date, NIS (New Israeli Shekel) 100 divided into 100 shares of NIS 1 each, of Enertec Electronics Ltd. (“Enertec Electronics”), representing all of the issued and outstanding capital stock of Enertec Electronics, for a purchase price of US $250,000.

Our issuance of shares of common stock to Mr. Solomon under the Lapis SPA will be made pursuant to the exemption from registration requirements under Regulation D and/or Regulation S of the Securities Act of 1933, as amended (the “Securities Act”). No form of general solicitation or general advertising was conducted in connection with the issuance. The certificates representing the shares will contain restrictive legends preventing the sale, transfer of such shares unless registered under the Securities Act or pursuant to an exemption therefrom. Mr. Mordechai is an “accredited investor” as defined under Regulation D and/or is not a “U.S. Person” as defined under Regulation S.

 

ITEM 2. DESCRIPTION OF PROPERTY.

 

We currently maintain plants in both Haifa and Carmiel. We have no plans to secure more space, as we believe both locations are suitable for our needs.

 

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Our Haifa plant is 400 square meters and includes a production hall and management offices. We lease this property for $27,329 per annum from Mund Holding Limited, an entity wholly owned by our President and Chief Executive Officer, Harry Mund. We entered into this lease in January 2001. The Haifa plant houses the headquarters and accounting offices, the imports department, sales and administration employees, application engineers, and a service laboratory. This plant is suitable for our present and near future needs. There is enough space to accommodate an additional two to four sales engineers, if needed. This space is also used to sell standard power supplies products.

 

 

ITEM 3. LEGAL PROCEEDINGS.

 

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

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MARKET INFORMATION

 

Our common stock began quotation on the OTC Bulletin Board on June 1, 2004 under the symbol LPST.OB. For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.

 

		Fiscal 2007						Fiscal 2006
Fiscal Quarter		High			Low			High			Low
First Quarter Ended March 31		$	1.11		$	1.01		$	1.11		$	1.01
Second Quarter Ended June 30		$	1.10		$	1.10		$	1.11		$	1.01
Third Quarter Ended September 30		$	1.10		$	.80		$	1.11		$	1.01
Fourth Quarter Ended December 31		$	.85		$	.20		$	1.11		$	1.01

 

HOLDERS

 

As of March 27, 2008, we had 6,483,000 shares of common stock outstanding and such shares were held by approximately 43 stockholders of record. The transfer agent of our common stock is Continental Stock Transfer and Trust Company.

 

DIVIDENDS

 

We have not declared any dividends to date. We have no present intention of paying any cash dividends on our common stock in the foreseeable future, as we intend to use earnings, if any, to generate growth. The payment by us of dividends, if any, in the future, rests within the discretion of our Board of Directors and will depend, among other things, upon our earnings, our capital requirements and our financial condition, as well as other relevant factors. There are no restrictions in our articles of incorporation or bylaws that restrict us from declaring dividends.

 

RECENT SALES OF UNREGISTERED SECURITIES

 

During the fiscal year ended December 31, 2007 we did not issue any securities without registration under the Securities Act of 1933, as amended (the "Securities Act").

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash balance at Dec 31, 2007 has increased compared to the cash balance at Dec 21,2006. As of December 31, 2007, our cash balance was $ 133,000 as compared to $7,000 at December 31, 2006.Total current assets at December 31, 2007 were $ 9,450,000 as compared to $8,047,000 at December 31, 2006. The increase in current assets is mainly due to the increase in accounts receivables and the increase in inventories.

 

Our accounts receivable at December 31, 2007 was $ 5,414,000 as compared to $4,667,000 at December 31, 2006. This increase is attributable to an increase in sales of $ 1,803,000 in 2007 as compared to the sales of 2006, and the decrease in USD/Shekel exchange rate since the receivables are in Shekels. The USD/shekel exchange rates decreased by 9% from 4.225 as of Dec 2006 to 3.846 as of Dec 2007.

 

As of December 31, 2007 our working capital was $ 1,715,000 as compared to $1,310,000 at December 31, 2006. The increase in the working capital is mainly due to the decrease in accounts payable.

 

Bank Leumi and Bank Hapoalim have extended us a combined total bank debt of $5,716,000 in 2007 as opposed to $ 4,139,000 at December 31,2006. This debt is made up of a number of different components: short-term debt, long-term debt and in the form of lines of credit, which we use from time to time to satisfy our temporary cash flow needs. Bank Leumi has provided us with $4,203,000of total debt based on our pledge of $ 3,200,000 of our working capital and customers' receivables due from Israeli Aircraft Industry and Rafael and $1,203,000 by the pledge of some of the financial assets of our president, Harry Mund. Bank Hapoalim has provided us with $ 1,513,000 of total debt based on our pledging of $ 215,000 of our customers' receivables due from USR,Expand and DataSafe and $1,100,000 by the pledging of some of the financial assets of Mr. Mund. Mr. Mund has personally on deposit with our banks, monies in excess of $1,500,000 which he has pledged as collateral against our bank debt.

 

The current portion of our term loans at December 31, 2007 consisted of $200,000 as compared to $271,000 at December 31, 2006. Our total short-term loans consisted of $ 3,907,000 of short-term loans and $200,000 of current portion of long-term debt broken down as follows:

 

$1,184,000 due January 2008, $180,000 due March 2008, $129,000 due April 2008, $848,000 due June 2008, $335,000 due July 2008, $523,000 due October 2008, $547,000 due November 2008, $361,000 due December 2008.

 

At December 31, 2007, our total bank debt was $ 5,716,000 as opposed to $4,139,000 at December 31, 2006. These funds were borrowed as follows:

 

$ 4,107,000 which includes the current portion of long term debt, as various short term bank loans due through 2008, $247,000 of long-term debt due through March 2010 and $ 1,362,000 borrowed using our bank lines of credit. As a result, we increased the amount borrowed for the year ended December 31, 2007 by $1,577,000 from $ 4,139,000. The increase in bank debt is mainly due to the increase in accounts receivable, the financing of the increase in work in process and the decrease in USD/Shekel exchange rate since the loans are in Shekels. The USD/shekel exchange rates decreased by 9% from 4.225 as of Dec 2006 to 3.846 as of Dec 2007.

 

There are no other lines of credit available to us to refinance our short-term bank loans. Additionally, we currently do not have any other sources of financing available to us for refinancing our short-term loans. As of December 31, 2006 we are current with all of our bank debt and compliant with all the terms of our bank debt.

 

 

ITEM 7. FINANCIAL STATEMENTS.

 

 

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

N/A

 

 

 

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

 

 

Name		Age		Position
Harry Mund		60		Chairman of the Board, Chief Executive Officer,
				President and Secretary
Miron Markovitz		60		Director, Chief Financial Officer and Principal
				Accounting Officer

 

The following is a brief account of the business experience of each of our directors and executive officers during the past five years or more.

 

HARRY MUND, our Chairman of the Board, Chief Executive Officer, President and Secretary since our inception, and has been the Chief Executive Officer and President of our subsidiary, Enertec Electronics Limited, since 1987. Mr. Mund is also the Chief Executive Officer and managing director of Enertec Management Limited (f/k/a Elcomtech Limited), a wholly owned subsidiary of Enertec Electronics Limited. From 1983 to 1987, Mr. Mund was the President and Chief Executive Officer of Enercon International, a marketing and sales firm of military and commercial power supplies and test equipment. Enercon International's activities were transferred to Enertec International in 1987, which subsequently became Enertec Electronics Limited in 1992. From 1975 to 1983, Mr. Mund worked for Elbit Systems as a design engineer of advanced test systems and as the head of the ATE engineering group. Mr. Mund attended Ben-Gurion University from 1970 to 1974 and earned a Bachelor of Science as an Electronic Engineer.

 

MIRON MARKOVITZ, a Director, our Chief Financial Officer and Principal Accounting Officer since our inception, has been the Chief Financial Officer of our subsidiary, Enertec Electronics Limited, since 1992, responsible for its accounting and financial management. He attended Haifa University from 1975 to 1978 and earned a BA in economics and accounting.

 

DIRECTOR COMPENSATION:

 

During 2007, our directors did not receive any compensation for serving on our board.

 

SIGNIFICANT EMPLOYEES

 

The following is a brief description of the business experience of each of our significant employees:

 

ZVI AVNI, age 46, was the System Division Manager for our subsidiary, Enertec Electronics Limited, from February 1997 to January 2002. His responsibilities included the design and manufacture of automatic test systems. Mr. Avni has 18 years of experience with ATE systems for the military market and worked at Elbit Systems for 12 years as an ATE group leader. Since January 2002, Mr. Avni has worked for Enertec Systems 2001 Ltd., which is owned by Enertec Management Limited 73 % and Harry Mund (27%) and continues to be responsible for the design and manufacture of the Automatic Test Systems and military systems. Mr. Avni graduated from Haifa Technion Institute of Technology in 1982 and earned a degree as a Practical Electronic Engineer.

 

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YAAKOV OLECH, age 58, has been employed by our subsidiary, Enertec Electronics Limited, since March 1991. Mr. Olech is head of our customer service electronic lab and technical support, providing after-sales customer support and repair services for products under warranty or by utilizing service contracts for repair of power supplies. He attended Radiotechnical Institute, Minsk, USSR from 1976 to 1979 and has earned a Master in Science in electronic engineering.

 

DR. ALEXANDER VELICHKO, age 61, has 28 years of experience as leading research and development engineer and head of the research and development group at several companies. From 1981 to 1990, he was a lecturer of electronics and automation at the Engineering Institute, Karatau, Kazahtan. From 1990 to 1999, Dr. Velichko was chief engineer of the Laboratory of Electronics and Automatization Karatau, Kazakhtan, responsible for development of compact analog/digital measurement devices. Since February 2000 he has been Enertec Electronics Limited's chief scientist and head of research and development. Dr Velichko is responsible for the design of custom-made power supplies. He earned a PhD in Automatic Control at the Moscow Institute of Mining, which he attended from 1964 to 1969, and earned a Master in Science at Tomsk Institute of Electronic Engineering.

 

Our future success depends, in significant part, on the continued service of Mr. Mund, and certain other key executive officers, managers, and sales and technical personnel, who possess extensive expertise in various aspects of the our business, including Mr. Markovitz, Mr. Avni, Mr. Olech, and Dr. Velichko. We may not be able to find an appropriate replacement for any of our key personnel. Any loss or interruption of our key personnel's services could adversely affect our ability to implement our business plan. It could also result in our failure to create and maintain relationships with strategic partners that are critical to our success. We do not presently maintain key-man life insurance policies on any of our officers.

 

AUDIT COMMITTEE FINANCIAL EXPERT

 

We do not have an audit committee financial expert, as that term is defined in Item 401 of Regulation S-B. We have not been able to identify a suitable nominee to serve as an audit committee financial expert.

 

CODE OF ETHICS

 

We have adopted a Code of Ethics and Business Conduct for Officers, Directors and Employees that applies to all of our officers, directors and employees. The Code of Ethics is filed as Exhibit 14.1 to our annual report on Form 10-KSB for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on June 28, 2004. Upon request, we will provide to any person without charge a copy of our Code of Ethics. Any such request should be made to Attn: Harry Mund, C/O Ira Strassberg, Rogoff and Company, 275 Madison Avenue, NY, NY, 10016. Our telephone number is (212) 937-3580.

 

SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE

 

 

ITEM 10. EXECUTIVE COMPENSATION.

 

EXECUTIVE COMPENSATION

 

SUMMARY COMPENSATION TABLE

 

The following information is furnished for the years ended December 31, 2007 and 2006 for our principal executive officer. No executive officer other than Mr. Mund received total annual compensation in excess of $100,000, during fiscal 2007 and 2006.

 

Name and Principal Position		Year			Salary $			Bonus $ (3)			Stock Awards $			Option Awards $ (5)			Non-Equity Incentive Plan Compensation $			Nonqualified Deferred Compensation Earnings $			All Other Compensation $			Total $
Harry Mund			2007		$	315,076			—			—			—			—			—		$	21,473	*	$	336,549
Chief Executive Officer and President			2006		$	288,000			—						—			—			—		$	38,000	*	$	326,500

 

* Represents compensation in lieu of accrued vacation and recreation days pursuant to Company policies. In Israel it is customary to offer financial compensation in lieu of vacation and recreation days (days set aside for employees to enjoy recreational activities)

 

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Name of Beneficial Owner			Number of Shares Beneficially Owned *			Percentage Ownership *
Harry Mund			4,750,000			73.3	%
Miron Markovitz			9,000			*	%
Zvi Avni			1,000,000			15.4	%
All Directors and Executive Officers
as a Group (2 persons)			4,759,000			73.44	%

 

·

Applicable percentage ownership is based on 6,483,000 shares of common stock outstanding as of March 21, 2007, together with securities exercisable or convertible into shares of common stock within 60 days of March 21, 2007 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of March 21, 2007 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

The following table shows information with respect to each equity compensation plan under which the Company's common stock is authorized for issuance as of the fiscal year ended December 31, 2007.

 

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EQUITY COMPENSATION PLAN INFORMATION
Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted average  exercise price  of outstanding options, warrants  and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
			(a)			(b)			(c)
Equity compensation plans approved
by security holders			-0-			-0-			500,000
Equity compensation plans not
approved by security holders			-0-			-0-			-0-
Total			-0-			-0-			500,000

2002 STOCK OPTION PLAN

 

We adopted, subject to stockholder approval, our 2002 Stock Option Plan on October 16, 2002. Our stockholders approved the plan on October 16 2002. The plan provides for the grant of options intended to qualify as "incentive stock options", options that are not intended to so qualify or "nonstatutory stock options" and stock appreciation rights. The total number of shares of common stock reserved for issuance under the plan is 500,000, subject to adjustment in the event of a stock split, stock dividend, recapitalization or similar capital change, plus an indeterminate number of shares of common stock issuable upon the exercise of "reload options" described below. We have not yet granted any options or stock appreciation rights under the plan.

 

The plan is administered by our board of directors, which will select the eligible persons to whom options shall be granted, determines the number of common shares subject to each option, the exercise price therein and the periods during which options are exercisable, interprets the provisions of the plan and, subject to certain limitations, may amend the plan. Each option granted under the plan shall be evidenced by a written agreement between us and the optionee.

 

Options may be granted to our employees (including officers) and directors, any of our subsidiaries, and certain of our consultants and advisors. Incentive stock options can be issued to all employees (including officers). Nonstatutory stock options can be issued to employees, non-employee directors, or consultants and advisors.

 

The exercise price for incentive stock options granted under the plan may not be less than the fair market value of the common stock on the date the option is granted, except for options granted to 10% stockholders which must have an exercise price of not less than 110% of the fair market value of the common stock on the date the option is granted. The exercise price for nonstatutory stock options is determined by the board of directors, in its sole discretion, but may not be less than 85% of the fair market value of the Company's common stock at the date of grant. Incentive stock options granted under the plan have a maximum term of ten years, except for 10% stockholders who are subject to a maximum term of five years. The term of nonstatutory stock options is determined by the Board of Directors. Options granted under the plan are not transferable, except by will and the laws of descent and distribution.

 

The board of directors may grant options with a reload feature. Optionees granted a reload feature shall receive, contemporaneously with the payment of the option price in common stock, a right to purchase that number of common shares equal to the sum of (i) the number of shares of common stock used to exercise the option, and (ii) with respect to nonstatutory stock options, the number of shares of common stock used to satisfy any tax withholding requirement incident to the exercise of such nonstatutory stock option.

 

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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

Our management believes the terms of each of the below transactions are at least as favorable as could be obtained from unrelated third parties.

 

During 2001, our subsidiary Enertec Electronics Limited sold a building to Mund Holding Limited, an entity wholly owned by Harry Mund, our Chief Executive Officer and President, for approximately $170,320. An independent appraiser and governmental body, The Capital Gains Authority, determined the sale price. The building was paid in part with cash in the amount of $93,245, and the balance by a non-interest bearing loan. There are no written agreements setting forth repayment terms. The parties have orally agreed that the amount outstanding is due on demand. As of December 31, 2007, the amount of the loan outstanding was $ 77,644

 

Enertec Electronics rents the building's office and manufacturing space from Mund Holding Limited for $29,860 annually for twenty-four months ending December 31, 2009.

On February 28, 2008, we entered into an agreement for the issue and sale of shares in Lapis Technologies, Inc. and the transfer of shares of Star Night Technologies Ltd. to us (the “Lapis SPA”), with Harry Mund, and Mordechai Solomon (the “Investor”). Mr. Mund is the Company’s chief executive officer, director, and majority stockholder. The Lapis SPA will close (subject to fulfillment or waiver of certain closing conditions or the waiver thereof prior to closing, as well as the performance of certain covenants by the parties that include inter alia, the receipt of a fairness opinion) 21 days following the date on which an information statement on Schedule 14C under the Securities Exchange Act of 1934, as amended, is mailed to stockholders of the Company (the “Closing Date”), which closing shall occur concurrently with that of the Systems SPA (defined below) and the Electronics SPA (defined below). Pursuant to the Lapis SPA, we agreed to issue to the Investor, on the Closing Date, 75,129,500 shares of the Company’s common stock, representing 92% of the Company’s issued and outstanding shares on a fully diluted basis. The Investor agreed to transfer to the Company, on the Closing Date, 4,539,557 shares in Star Night Technologies Ltd., a company traded on the Tel Aviv Stock Exchange, held by the Investor in person.

In addition, pursuant to the Lapis SPA, the Investor agreed to grant to Mr. Mund an option (the “Mund Option”), exercisable by Mr. Mund in his sole discretion, to sell to the Investor, Mr. Mund’s 4,750,000 shares of the Company’s common stock (the “Option Shares”). The Mund Option will be exercisable during a period of 90 calendar days immediately following the first anniversary of the Closing Date (with respect to 50% of the Option Shares, at an exercise price of US $0.5434 per share, subject to adjustment in the event of stock splits, stock dividends, and similar transactions) and/or the second anniversary of the Closing Date (with respect to all of the Option Shares, at an exercise price of US $0.6038 per share, subject to adjustment in the event of stock splits, stock dividends, and similar transactions). The Mund Option is subject to the aggregate value of the Option Shares being no higher than US $2,868,000, subject to certain adjustments, for a period of 65 consecutive calendar days commencing 120 days after the Closing Date (so long as Mr. Mund may sell his shares pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”)) during a period of 65 consecutive calendar days during a period of 24 months following the Closing Date.

In connection with the Lapis SPA, on February 28, 2008, our indirect wholly owned subsidiary, Enertec Management Ltd. (“Enertec Management”) (which we own through its direct wholly owned subsidiary Enertec Electronics Ltd.), entered into an agreement for the sale and purchase of Enertec Systems 2001 Ltd. (the “Systems SPA”), with Harry Mund, and S.D.S. (Star Defense Systems) Ltd., a company traded on the Tel Aviv Stock Exchange (“S.D.S.”) whose majority stockholder is Mordechai Solomon. The Systems SPA will close on the Closing Date concurrently with the Lapis SPA and the Electronics SPA (defined below). Pursuant to the Systems SPA, Enertec Management and Mr. Mund agreed to sell, and S.D.S. agreed to purchase, on the Closing Date, an aggregate of 251,000 shares of Enertec Systems 2001 Ltd. (“Enerec Systems”), representing all of the issued and outstanding capital stock of Enertec Systems, for an aggregate purchase price of US $1,500,000. The 251,000 shares to be sold pursuant to the Systems SPA represent 67,770 shares to be sold by Mr. Mund and 183,230 shares to be sold by Enertec Management.

In connection with the Lapis SPA and the Systems SPA, we also entered into, on February 28, 2008, an agreement with Mund Holdings Ltd., a company owned by Harry Mund (the “Electronics SPA”). The Electronics SPA will close on the Closing Date concurrently with the Lapis SPA and the Systems SPA. Pursuant to the Electronics SPA, we agreed to sell, and Mund Holdings Ltd. agreed to purchase, on the Closing Date, NIS (New Israeli Shekel) 100 divided into 100 shares of NIS 1 each, of Etertec Electronics Ltd. (“Enertec Electronics”), representing all of the issued and outstanding capital stock of Enertec Electronics, for a purchase price of US $250,000.

Our issuance of shares of common stock to Mr. Solomon under the Lapis SPA will be made pursuant to the exemption from registration requirements under Regulation D and/or Regulation S of the Securities Act of 1933, as amended (the “Securities Act”). No form of general solicitation or general advertising was conducted in connection with the issuance. The certificates representing the shares will contain restrictive legends preventing the sale, transfer of such shares unless registered under the Securities Act or pursuant to an exemption therefrom. Mr. Mordechai is an “accredited investor” as defined under Regulation D and/or is not a “U.S. Person” as defined under Regulation S.

 

Neither of our directors are independent.

 

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22

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31.1		Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
31.2		Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
32.1		Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code
32.2		Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code

 

Item 14. Principal Accountant Fees and Services.

 

AUDIT FEES

 

The aggregate fees billed for professional services rendered by our principal accountants for the audit of our financial statements, for the reviews of the financial statements included in our annual report on Form 10-KSB, and for other services normally provided in connection with statutory filings were $17,568 and $12,185 for the years ended December 31, 2007 and 2006, respectively.

 

AUDIT-RELATED FEES

 

We incurred fees of $40,000 and $24,200 for the years ended December 31, 2007 and 2006, respectively, for professional services rendered by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and not included in "Audit Fees."

 

TAX FEES

 

The aggregate fees billed for professional services rendered by our principal accountants for tax compliance, tax advice, and tax planning were $1,750 and $1,500 for the years ended December 31, 2007 and December 31, 2006, respectively. The services for which such fees were paid consisted of filing our tax returns for 2007 and 2006.

 

ALL OTHER FEES

 

We did not incur any fees for other professional services rendered by our principal accountants during the years ended December 31, 2007 and December 31, 2006.

 

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

 

Our Board of Directors acts as our audit committee, and consults with respect to audit policy, choice of auditors, and approval of out of the ordinary financial transactions.

 

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24

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Independent Auditors' Report

 

To the Stockholders' and the Board of Directors of Lapis Technologies, Inc.

 

We have audited the accompanying consolidated balance sheet of Lapis Technologies, Inc. and Subsidiaries (the "Company") at December 31, 2007, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Lapis Technologies, Inc. and Subsidiaries at December 31, 2007, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

			/s/ Gvilli and Co.
			Gvilli & Co.
			March 31, 2008 Casarea, Israel

 

F-1

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(In Thousands, Except Share Amounts)

 

		December 31,
		2007
ASSETS
Current Assets:
Cash and cash equivalents		$	133
Accounts receivable			5,414
Inventories			3,736
Prepaid expenses and other current assets			118
Due from stockholder			49
Total Current Assets			9,450
Property and equipment, net			267
Deferred income taxes			20
		$	9,737
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank line of credit		$	1,362
Short term bank loans			3,907
Current portion of term loans			200
Accounts payable and accrued expenses			2,361
Due to affiliates			(97	)
Income taxes payable			2
Total Current Liabilities			7,735
Term loans, net of current portion			247
Severance payable			176
			8,158
Commitments and contingencies
Minority interest			448
Stockholders' Equity:
Preferred stock; $.001 par value, 5,000,000 shares authorized, none issued			-
Common stock; $.001 par value, 100,000,000 shares authorized, 6,483,000
shares issued and outstanding			6
Additional paid-in capital			78
Accumulated other comprehensive loss			92
Retained Earnings			955
Total Stockholders' Equity			1,131
		$	9,737

The accompanying notes are an integral part of these financial statements.

 

F-2

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Earnings Per Share and Share Amounts)
		Years Ended
		December 31,
		2007			2006
Sales		$	9,642		$	7,839
Cost of sales			7,104			5,676
Gross profit			2,538			2,163
Operating Expenses:
Research and development expenses			244			399
Selling expenses			193			110
General and administrative			1,345			1,226
Total operating expenses			1,782			1,735
Income from operations			756			428
Other Income (Expense):
Interest expense, net			(419	)		(378	)
Other income			-			6
Foregiveness of debt
Total other income (expense)			(419	)		(372	)
Income before provision for income taxes and minority interest			337			56
Provision for income taxes			234			134
Minority interest			(6	)		(37	)
Net income (loss)		$	97		$	(115	)
Basic net income (loss) per share		$	(0.00	)	$	(0.02	)
Basic weighted average common shares outstanding			6,483,000			6,483,000

 

The accompanying notes are an integral part of these financial statements.

 

F-3

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LAPIS TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

YEARS ENDED DECEMBER 31, 2007 AND 2006

(In Thousands, Except Share Amounts)

											Accumulated
								Additional			Other						Total
		Common Stock						Paid-in			Comprehensive			Retained			Stockholders'			Comprehensive
		Shares			Amount			Capital			Loss			Earnings			Equity			Income
Balance, January 1, 2006			6,483,000			6			78			(120	)		942			906
Foreign currency translation adjustment												90			15			105		$	105
Net income (loss)															(115	)		(115	)		(115	)
Balance, 12-31-06			6,483,000			6			78		$	(30	)	$	842		$	896		$	(10	)
Foreign currency translation adjustment												122			16			138		$	138
Net income (loss)															97			97			97
Balance, 12-31-07			6,483,000		$	6		$	78		$	92		$	955		$	1,131		$	235

 

The accompanying notes are an integral part of these financial statements.

 

F-4

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

		Years Ended
		December 31,
		2007			2006
Cash flows from operating activities:
Net income (loss)		$	97		$	(115	)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization			144			84
Minority interest			34			59
Gain on sale of property and equipment			-			(10	)
Deferred income tax			2			(6	)
Change in operating assets and liabilities:
Accounts receivable			(737	)		(965	)
Inventories			(767	)		(534	)
Prepaid expenses and other current assets			288			(30	)
Accounts payable and accrued expenses			(493	)		564
Income taxes payable			2			-
Severance payable			92			26
Net cash used in operating activities			(1,338	)		(927	)
Cash flows from investing activities:
Proceeds from sale of property and equipment			-			69
Purchase of property and equipment			(112	)		(130	)
(Increase) decrease in due from stockholder			(59	)		4
(Increase) decrease in due from affiliates			(161	)		82
Net cash (used in) provided by investing activities			(332	)		25
Cash flows from financing activities:
Increase (decrease) in bank line of credit, net			(127	)		180
Proceeds from long term debt			6,227			3,880
Repayment of long-term debt			(4,523	)		(3,237	)
Net cash provided by financing activities			1,577			823
Effects of exchange rates on cash			219			8
Increase (decrease) in cash			126			(71	)
Cash, beginning of period			7			78
Cash, end of period		$	133		$	7

 

The accompanying notes are an integral part of these financial statements.

 

F-5

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

		Years Ended
		December 31,
		2007			2006
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	419		$	372
Income taxes		$	98		$	201
Supplemental disclosure of non-cash financing activities:
Common stock issued for services		$	-		$	-

 

The accompanying notes are an integral part of these financial statements.

 

F-6

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 1 - DESCRIPTION OF BUSINESS AND ACQUISITION

Lapis Technologies, Inc. (the “Company”) was incorporated in the State of Delaware on January 31, 2002. The Company’s operations are conducted through its wholly owned Israeli Subsidiary, Enertec Electronics Ltd. (“Enertec”) and its majority owned Israeli subsidiary Enertec Systems 2001 Ltd. (“Systems”). Enertec is engaged in the manufacturing, distribution and marketing of electronic components and products relating to power supplies, converters and related power conversion products, automatic test equipment, simulators and various military and airborne systems, within the State of Israel.

On January 1, 2002 Enertec assisted in the organization of Systems in exchange for 25% of the common stock of Systems. This investment was accounted for under the equity method. Systems is engaged in the manufacturing of electronic components primarily for military use. On December 31, 2002 Enertec increased its common stock ownership interest in Systems to 55% for $71, which was included in accounts payable and accrued expenses in the accompanying consolidated balance sheet at December 31, 2002. This amount was paid during January 2003.

NOTE 2 - BASIS OF PRESENTATION

The accompanying consolidated financial statements present the results of operations of the Company for the years ended December 31, 2007 and 2006 and their wholly owned subsidiary Enertec Electronics Ltd. and their ownership interest in Enertec Systems 2001 Ltd. All material intercompany accounts and transactions have been eliminated in consolidation.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Concentration of Credit Risk

Concentrations of credit risk with respect to trade receivables are limited to customers dispersed primarily across Israel. All trade receivables are concentrated in the manufacturing and distribution of electronic components segment of the economy; accordingly the Company is exposed to business and economic risk. Although the Company does not currently foresee a concentrated credit risk associated with these trade receivables, repayment is dependent upon the financial stability of this segment of the economy.

F-7

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Cash and Cash Equivalents

For the purpose of the statement of cash flows the Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents.

Allowance for Doubtful Accounts

The Company estimates uncollectibility of accounts receivable by analyzing historical bad debts, customer concentrations, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. At December 31, 2007 the Company has not recorded an allowance for doubtful accounts.

Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or market.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Routine maintenance and repairs and minor replacement costs are charged to expense as incurred, while expenditures that extend the life of these assets are capitalized. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. The Company uses the same depreciation method for both financial reporting and tax purposes. Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation and amortization will be removed from the accounts and the resulting profit or loss will be reflected in the statement of income. The estimated lives used to determine depreciation and amortization are:

	Leasehold improvements		10 years
	Machinery and equipment		10 years
	Furniture and fixtures		14 years
	Transportation equipment		7 years
	Computer equipment		3 years

 

F-8

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Income Taxes

The Company uses the liability method of accounting for income taxes as required by Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when it is determined that it is more likely than not that the deferred tax assets will not be realized.

Warranty Reserves

The Company includes a one-year warranty on all products sold. A provision for estimated warranty costs, if material, is recorded at the time of sale. Based upon historical experience the Company has not incurred material costs relating to its warranty and has therefore not recorded a warranty provision at December 31, 2007

Revenue Recognition and Customer Deposits

Revenue is recorded as product is shipped, the price has been fixed or determined, collectability is reasonably assured and all material specific performance obligations have been completed. The product sold by the Company is made to the specifications of each customer; sales returns and allowances are allowed on a case-by-case basis, are not material to the financial statements and are recorded as an adjustment to sales. Cash payments received in advance are recorded as customer deposits.  

Revenue relating to service is recognized on the straight-line basis over the life of the agreement, generally one year. For the years ended December 31, 2007 and 2006 revenue relating to service contracts is less than one percent of net sales.

Shipping and Handling Costs

Shipping and handling costs are included in cost of sales in accordance with guidance established by the Emerging Issues Task Force (“EITF”) issue No. 00-10, “Accounting for Shipping and Handling Costs.”

Stock Based Compensation

Effective January 1, 2003 the Company adopted the fair method value alternative of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. For stock options, fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. For the years ended December 31, 2007 and 2006 the Company did not issued any stock options.

 

F-9

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Research and Development Costs

Research and development costs are charged to general and administrative expense in the accompanying statement of income and consist of salaries. Research and development cost for the years ended December 31, 2007 and 2006 were approximately $ 244 and $399, respectively.

Earnings per Share

The Company presents basic earnings per share and, if appropriate, diluted earnings per share in accordance with the provisions of SFAS No. 128 “Earnings per Share” (“SFAS 128”).

Under SFAS 128 basic net earnings per share is computed by dividing the net earnings for the year by the weighted average number of common shares outstanding during the year. Diluted net earnings per share is computed by dividing the net earnings for the year by the weighted average number of common shares and common share equivalents outstanding during the year. Common stock equivalents would arise from the granting of stock options. For the years ended December 31, 2007 and 2006 the Company did not grant any stock options. Diluted earnings per share is not included as it is the same as basic for all periods shown.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. In such circumstances, the Company will estimate the future cash flows expected to result from the use of the asset and its eventual disposition. Future cash flows are the future cash inflows expected to be generated by an asset less the future outflows expected to be necessary to obtain those inflows. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, the Company will recognize an impairment loss to adjust to the fair value of the asset. Management believes that there is no impairment of long-lived assets at December 31, 2007.

 

Minority Interest

Minority interest represents the minority stockholders' proportionate share of the equity of the Company's subsidiary at December 31, 2007. The minority interest is adjusted for the minority's share of the earnings or loss of Systems.

Financial Instruments

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, bank line of credit, short term bank loans and accounts payable and accrued expenses approximate fair value at December 31, 2007 because of the relatively short maturity of the instruments. The fair value of due from stockholder is not practical to estimate without incurring excessive cost and is carried at cost at December 31, 2007. The carrying value of the long-term debt approximate fair value at December 31, 2007 based upon debt terms available for companies under similar terms.

 

F-10

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income for the year and foreign currency translation adjustments.

Foreign Currency Translation

The assets and liabilities of the foreign subsidiaries are translated at current exchange rates and related revenues and expenses at average exchange rates in effect during the year. Resulting translation adjustments, if material, are recorded as a separate component of accumulated other comprehensive income or loss.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassification

Certain reclassifications have been made to the prior year’s financial statements in order to conform to the current year presentation.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 153 “Exchange of Non-monetary Assets - an amendment of APB Opinion No. 29”. Statement 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance, defined as transactions that are not expected to result in significant changes in the cash flows of the reporting entity. This standard, which is effective for exchanges of nonmonetary assets occurring in fiscal periods beginning after June 15, 2005, is not applicable to the Company’s current operations.

F-11

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

In December 2004, FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (SFAS 123 (revised 2004), effective for public entities that file as small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. This Statement is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS 123 (revised 2004) eliminates the alternative to use Opinion No. 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This Statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). Recognition of that compensation cost helps users of financial statements to better understand the economic transactions affecting an entity and to make better resource allocation decisions. The Company is required to adopt Statement 123 (revised 2004) as of January 1, 2006, and does not expect this statement to have a material effect on its results of operations.

In May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections - a Replacement of APB Opinion No. 20 (Accounting Changes) and FASB No. 3 (Reporting Accounting Changes in Interim Financial Statements),” that changes requirements for the accounting for and reporting of a change in accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable.

Statement 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005 (calendar year 2006). Early adoption is permitted.

F-12

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement 109,” (“FIN 48”). FIN 48 prescribes a comprehensive model as to how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. The adoption of FIN 48 is effective January 1, 2007. The Company has not yet determined what the effect will be, if any, on their financial statements.

 

In June 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43.” EITF Issue No. 06-2 requires companies to accrue the costs of compensated absences under a sabbatical or similar benefit arrangement over the requisite service period. EITF Issue No. 06-2 is effective for us beginning July 1, 2007. The cumulative effect of the application of this consensus on prior period results should be recognized through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Elective retrospective application is also permitted. We do not expect the application of this consensus to have a material impact on our financial statements.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R),” (“FAS 158”). Among other things, FAS 158 requires companies to prospectively recognize a net liability or asset and to report the funded status of their defined benefit pension and other postretirement benefit plans on their balance sheets, with an offsetting adjustment to accumulated other comprehensive income; such recognition will not affect the Company’s statement of income. The adoption of FAS 158 is effective for the year ending December 31, 2006. The Company has not yet determined what the effect will be, if any, on their financial statements. 

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 gives us the irrevocable option to carry many financial assets and liabilities at fair values, with changes in fair value recognized in earnings. SFAS No. 159 is effective for us beginning July 1, 2008, although early adoption is permitted. We are currently assessing the potential impact that adoption of SFAS No. 159 will have on our financial statements.

In December 2007 the FASB issued SFAS No. 141R “Business Combinations”. FAS 141R amends and replaces FAS 141 in order to improve the relevance, representational faithfulness, and comparability of information that an entity provides in its financial reports about business combinations and its effects. This statement applies to business combinations for acquisitions with an effective date for the first fiscal period after December 15, 2008. The Company has not yet determined what the effect will be, if any, on their financial statements.

F-13

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

In December 2007 the FASB issued SFAS No. 160 “Non-controlling Interests in Consolidated Financial Statements”. FAS 160 seeks to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards. This statement is effective for fiscal years beginning after December 15, 2008. The Company has not yet determined what the effect will be, if any, on their financial statements.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

NOTE 4 - INVENTORIES

Inventories consist of the following at December 31, 2007:

Raw materials		$	967
Work in process			2,554
Finished goods			215
		$	3,736

 

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 2007:

Leasehold improvements		$	121
Machinery and equipment			7
Furniture and fixtures			219
Transportation equipment			250
Computer equipment			422
			1019
Less accumulated depreciation and amortization
		$	267

NOTE 6 - INCOME TAXES

The provision for income taxes consists of the following for the years ended December 31:

		2007			2006
Current:
Foreign		$	234		$	134
Deferred:
Foreign		$	-		$	-
Total provision for income taxes		$	234		$	134

F-14

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 6 - INCOME TAXES - (continued)

At December 31, 2007, the Company has a net operating loss carryforward of approximately $206 which may be utilized to offset future taxable income for United States Federal tax purposes. This net operating loss carryforward begins to expire in 2022. The only timing difference which creates a deferred tax asset is the net operating loss carryforward. This net operating loss carryforward creates a deferred tax asset of approximately $10. Since it is more likely than not that the Company will not realize a benefit from these net operating loss carryforwards a 100% valuation allowance has been recorded to reduce the deferred tax asset to its net realizable value.

Deferred tax assets are classified as current or non-current, according to the classification of the related asset or liability for financial reporting. At December 31, 2007 the Company’s wholly owned Israeli subsidiary has a deferred tax asset of approximately $20, due to timing differences relating to severance payable. The Israeli subsidiary has not recorded a valuation allowance as it is more likely than not that the timing differences will be utilized.

The following is a summary of the components of non-current deferred tax assets at December 31, 2007:

Severance payable		$	20
Net operating loss carryforward			206
Valuation allowance			(206	)
Deferred tax assets		$	20

F-15

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 6 - INCOME TAXES - continued

Differences between the United States Federal statutory income tax rate and the effective tax rate are as follows for the years ended December 31:

		2007			2006
Federal statutory rate			34.0	%		34.0	%
Valuation Allowance			(34.0	)		(34.0	)
Effect of foreign taxes			69.0			239.0
			69.0			239.0

 

NOTE 7 - LONG-TERM DEBT

Long-term debt consists of the following at December 31, 2007:

Bank line of credit due December 31, 2007 at 6.7% per annum		$	1,362
Short-term bank loans, payable within twelve months at rates ranging from 7% per annum and 8.5% per annum			3,907
Long Term loans, due between Sept 2007 to March 2010 at rates ranging from 7.0% per annum and 8.5% per annum			447
			5,716
Less current portion of term loans			5,469
		$	247

The Company has pledged its accounts receivables as collateral against its long term debt, which is payable to one financial institution. In addition, the president has guaranteed personal assets, as defined in the agreement, against the Company’s long term debt.

The aggregate maturities of long-term debt are as follows at December 31, 2007:

Year Ended
2008		$	4,108
2009			198
2010			49
2011			0
		$	4,355

 

F-16

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 8 - SEVERANCE PAYABLE

Severance payable represents amounts computed on employees’ most recent salary and the number of years working in Israel. The Company’s liability is partially offset by amounts deposited to insurance policies, which are under the company’s control.

NOTE 9 - STOCK OPTION PLAN

On October 16, 2002 the Board of Directors of the Company authorized the formation of the 2002 Stock Option Plan (the “Plan”), subject to stockholder approval. The Plan provides for the granting of incentive stock options, non-statutory stock options and stock appreciation rights. The incentive stock options can be granted to employees, including officers, or any subsidiary of the Company. The non-statutory stock options can be granted to all employees, including officers, non-employee directors, consultants or any subsidiary of the Company. Non-statutory stock options can only be granted to consultants that have rendered a bona fide service to the Company, so long as the service is not in connection with the offer or sale of securities in a capital raising transaction. The number of shares of common stock reserved for issuance under the Plan is 500,000, subject to adjustment in the event of a stock split, stock dividend, recapitalization or similar change in the Company’s capital structure.

Incentive stock options must be granted prior to ten years from the date the Plan was initially adopted by the Board of Directors. The option price for shares issued as incentive stock options shall not be less than the fair market value of the Company’s common stock at the date of grant unless the option is granted to an individual who, at the date of the grant, owns more than 10% of the total combined voting power of all classes of the Company’s stock (the “Principal Stockholder”). Then the option price shall be at least 110% of the fair market value at the date the option is granted. No incentive stock option granted under the Plan shall be exercisable after ten years from its grant date. If the incentive stock option is granted to a Principal Stockholder then the exercise period is five years from the date of grant. Every incentive stock option granted under the Plan shall be subject to earlier termination as expressly provided for in the Plan.

F-17

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 9 - STOCK OPTION PLAN - continued

The option price for shares issued under the non-statutory stock options shall be determined at the sole discretion of the Board of Directors, but may not be less than 85% of the fair market value of the may be of such duration as shall be determined by the Board of Directors.

NOTE 10 - RELATED PARTIES

Due to Stockholder

At December 31, 2007 the Company had receivables from the majority stockholder $ 49 that accrue interest at 4% per annum.

F-18

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 10 - RELATED PARTIES - continued

Due from Affiliate

During 2001 the Company entered into a sale-leaseback transaction with an entity owned by the majority stockholder of the Company. The Company sold a building for approximately $170 and received approximately $93 in cash and the balance by a non-interest bearing loan due on demand.The ammount of the loan outstanding at December 31, 2007 was $77.6 . No gain or loss was recorded on this transaction, as the book value of the building equaled the fair market value. The Company has agreed to exercise its option to rent this property through December 31, 2009 at approximately $29,860 annually with an option to renew the lease for an additional two years ending December 31, 2011 This lease has been classified as an operating lease.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Lease commitments

The Company leases certain office and manufacturing space under two non-cancellable operating leases expiring at December 31,2009 . Rent expense, not including municipal taxes and utilities associated with the leases approximated $65 and $59  , for the years ended December 31, 2007 and 2006.

At December 31, 2007, total minimum rentals under noncancellable operating leases with an initial or remaining term lease term of one year or more are as follows:

Year Ending
December 31:
2008		$	75

Legal proceedings

 

A Customer had brought an action in the Tel Aviv District Court for an unspecified monetary amount against one of the Company’s suppliers, a subcontractor of the supplier and Enertec, alleging that the materials supplied were defective and caused the Customer to replace the materials at a substantial financial expense. Enertec filed a defense claim that there is no cause of action against them as Enertec is only the local Israeli sales representative and did not make any implied or express representation or warranty to the Customer regarding the suitability of its materials.

 

During the year 2006 the plaintiff withdrew its action against Enertec Electronics.

 

We are not subject to any pending or threatened legal proceedings,nor is our property the subject of a pending or threatened legal proceeding.none of our directors,officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

F-19

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LAPIS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

(In Thousands, Except Share and Per Share Amounts)

NOTE 12 - CONCENTRATIONS

The Company had deposits with commercial financial institutions, which, at times, may exceed the FDIC insured limits of $100 in the United States. Management has placed these funds in high quality institutions in order to minimize the risk. Cash held in Israel at December 31, 2006 was $ 133.

At December 31, 2007 the Company had two customers that accounted for approximately 73.1% of accounts receivable. For the years ended December 31, 2007 and 2006 approximately 60.6%  and 48.7% , respectively, of the Company's sales were to two customers, respectively.

NOTE 13- SEGMENT AND GEOGRAPHIC INFORMATION

Information about the Company's assets in different geographic locations at December 31, 2007 is shown below pursuant to the provisions of SFAS 131, “Disclosures About Segments of an Enterprise and Related Information.”

Total assets:
Israel		$	9,970
United States			1,037
		$	11,007

 

NOTE 14 - SUBSEQUENT EVENT

On February 28, 2008 the Company entered into an agreement with an Israeli Company that currently trades on the Tel Aviv Stock Exchange. Under this agreement Lapis will exchange approximately 75,000,000 of its shares (92% based upon the current outstanding amounts) in exchange for approximately 4,500,000 shares of Star Night Technologies Ltd. In addition, the Company’s chief executive officer has been granted certain options to sell his Lapis shares to Star Night under certain circumstances.

The agreement also calls for the sale of the Company’s wholly owned subsidiary, as well as the subsidiary’s own marority owned subsidiary. The result of these transactions will be the ownship of approximately 4,500,000 shares of Star Night Technologies, Ltd.

For further information please refer to Form 8-K filed with the Securities and Exchange Commission on March 5, 2008 which is incorporated by reference into this filing.

 

F-20

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