ELTK 20-F DEF-14A Report Dec. 31, 2012 | Alphaminr
ALPHAMINR

ELTK 20-F Report ended Dec. 31, 2012

Balance Sheet
Cash Flow
Income Statement
Debt
20-F 1 zk1312956.htm 20-F zk1312956.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 20-F

o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
OR
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report...........
Commission file number 0-28884
ELTEK LTD.
(Exact name of Registrant as specified in its charter
and translation of Registrant's name into English)
Israel
(Jurisdiction of incorporation or organization)

4 Drezner Street, Sgoola Industrial Zone, P.O. Box 159, Petach Tikva 49101, Israel
(Address of principal executive offices)

Amnon Shemer, +972-3-9395025 (phone), +972-3- 9342584 (fax)
4 Drezner Street, Sgoola Industrial Zone, P.O. Box 159, Petach Tikva 49101, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange on which registered
Ordinary Shares, NIS 0.6 Par Value
NASDAQ Capital Market

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to section 15(d) of the act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

6,610,107 Ordinary Shares, par value NIS 0.6 per share (as of December 31, 2012)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes £ No S

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

Yes £ No S

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 S No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes S No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x
International Financial Reporting Standards as issued by the International Accounting Standards Board o
Other o

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 o Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes £ No S

INTRODUCTION

Eltek Ltd., incorporated in 1970 under the laws of the State of Israel, manufactures, markets and sells custom made printed circuit boards, or PCBs, including high density interconnect, or HDI, flex-rigid and rigid, with high layer count boards.  Our principal customers include manufacturers of defense and aerospace, medical, industrial, telecom and networking equipment, as well as contract electronic manufacturers.  Since our initial public offering in January 1997, our ordinary shares have been listed on the NASDAQ Stock Market (symbol: ELTK) and are presently listed on the NASDAQ Capital Market. As used in this annual report, the terms “we,” “us” and “our” mean Eltek Ltd. and its subsidiaries, unless otherwise indicated.
Our functional currency is New Israeli Shekel while our reporting currency is the U.S. dollar.  All references in this annual report to “dollars” or “$” are to U.S. dollars and all references in this annual report to “NIS” are to New Israeli Shekels.  Our consolidated financial statements appearing in this annual report are prepared in accordance with U.S. GAAP.  The consolidated financial statements appearing in this annual report are translated into U.S. dollars at the representative rate of exchange under the current rate method.  Under such method, the income statement and cash flows statement items for each year (or period) stated in this report are translated into U.S. dollars using the average exchange rates in effect at each period presented, and assets and liabilities for each year (or period) are translated using the exchange rate as of December 31 of each year as published by the Bank of Israel ($1.00 = NIS 3.733 as of December 31, 2012), except for equity accounts, which are translated using the rates in effect at the date of the transactions.  All resulting exchange differences that do not affect our earnings are reported in the accumulated other comprehensive income as a separate component of shareholders’ equity.
Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms.  If we filed any of these documents as an exhibit to this annual report or to any registration statement or annual report that we previously filed, you may read the document itself for a complete description of its terms.
Except for the historical information contained in this annual report, the statements contained in this annual report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, as amended, with respect to our business, financial condition and results of operations.  Such forward-looking statements reflect our current view with respect to future events and financial results.  We urge you to consider that statements which use the terms “anticipate,” “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate” and similar expressions are intended to identify forward-looking statements.  We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof.  We have attempted to identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears in Item 3.D. “Key Information- Risk Factors.”
TABLE OF CONTENTS
Page No.
PART I
1
ITEM 1.
1
ITEM 2.
1
ITEM 3.
1
A.
Selected Financial Data
1
B.
Capitalization and Indebtedness
3
C.
Reasons for the Offer and Use of Proceeds
3
D.
Risk Factors
3
ITEM 4.
14
A.
History and Development of the Company
14
B.
Business Overview
15
C.
Organizational Structure
19
D.
Property, Plants and Equipment
19
ITEM 4A.
19
ITEM 5.
20
A.
Operating Results
20
B.
Liquidity and Capital Resources
26
C.
Research and Development, Patents and Licenses
29
D.
Trend Information
29
E.
Off-Balance Sheet Arrangements
29
F.
Tabular Disclosure of Contractual Obligations
30
ITEM 6.
30
A.
Directors and Senior Management
30
B.
Compensation
34
C.
Board Practices
34
D.
Employees
40
E.
Share Ownership
41
ITEM 7.
41
A.
Major Shareholders
41
B.
Related Party Transactions
42
C.
Interests of Experts and Counsel
43
ITEM 8.
43
A.
Consolidated Statements and Other Financial Information
43
B.
Significant Changes
44
ITEM 9.
44
A.
Offer and Listing Details
44
B.
Plan of Distribution
45
C.
Markets
45
D.
Selling Shareholders
45
E.
Dilution
45
F.
Expense of the Issue
45
ITEM 10.
45
A.
Share Capital
45
B.
Memorandum and Articles of Association
46
C.
Material Contracts
49
D.
Exchange Controls
49
E.
Taxation
49
F.
Dividends and Paying Agents
59
ii
Page No.
G.
Statement by Experts
59
H.
Documents on Display
59
I.
Subsidiary Information
59
ITEM 11.
59
ITEM 12.
60
PART II
60
ITEM 13.
60
ITEM 14.
61
ITEM 15.
61
ITEM 16.
62
ITEM 16A.
62
ITEM 16B.
62
ITEM 16C.
62
ITEM 16D.
62
ITEM 16E.
62
ITEM 16F.
63
ITEM 16G.
63
ITEM 16H.
63
ITEM 17.
63
I TEM 18.
63
ITEM 19.
64

iii

PART I
Not applicable.
Not applicable.
A.           Selected Financial Data
The selected financial data, set forth in the table below, have been derived from our audited historical financial statements for the five years ended December 31, 2012.  The selected consolidated financial data as of December 31, 2012 and 2011 and for each of the three years ended December 31, 2012, have been prepared in accordance with U.S. GAAP, and are derived from our audited consolidated financial statements and accompanying notes included in Item 18, “Financial Statements.”  The selected consolidated financial data as of December 31, 2010, 2009 and 2008 and for the years ended December 31, 2009 and 2008 have been derived from our previously published audited consolidated financial statements, which are not included in this annual report.  The selected financial data set forth below should be read in conjunction with and are qualified entirely by reference to Item 5. “Operating and Financial Review and Prospects” and our consolidated financial statements and notes thereto included elsewhere in this annual report.
CONSOLIDATED STATEMENT OF OPERATIONS DATA :
Year Ended December 31,
2012
2011
2010
2009
2008
($ and share data in thousands, except per share data)
Revenues
45,646 $ 46,830 $ 37,514 $ 36,442 $ 43,138
Cost of revenues
(37,836 ) (38, 101 ) (32,690 ) (30,882 ) (37,282 )
Gross profit
7,810 8,729 4,824 5,560 5,856
Research and development (expenses) income, net
-- -- 100
Selling, general and administrative expenses
(6,040 ) (6,155 ) (6,033 ) (6,016 ) (7,199 )
Impairment on goodwill
(481 ) - -- -- (379 )
Total operating expenses
(6,521 ) (6,155 ) (6,033 ) (6,016 ) (7,478 )
Operating profit (loss)
1,289 2,574 (1,209 ) (456 ) (1,622 )
Financial expenses, net
(543 ) (740 ) (609 ) (424 ) (826 )
Other income, net
2 12 2 4 1
Profit (loss) before income tax expense
748 1,846 (1,816 ) (876 ) (2,447 )
Income tax expense
(52 ) (31 ) (19 ) (34 ) --
Net profit (loss)
696 1,815 (1,835 ) (910 ) (2,447 )
Net profit (loss) attributable to non-controlling interest
6 (31 ) (113 ) (30 ) 1
Net profit (loss) attributable to Eltek Ltd. shareholders
690 1,846 (1,722 ) (880 ) (2,446 )
Basic and diluted net profit (loss) per ordinary share attributable to Eltek Ltd.
0.1 0.28 (0.26 ) (0.13 ) (0.37 )
Weighted average number of ordinary shares used to compute basic and diluted net profit (loss) per ordinary share
6,610 6,610 6,610 6,610 6,610

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CONSOLIDATED BALANCE SHEETS DATA :
As at December 31,
2012
2011
2010
2009
2008
($ and share data in thousands)
Working capital (deficit)
(2,712 ) (1,787 ) (4,064 ) (1,984 ) (1,881 )
Total assets
23,449 22,869 23,837 23,771 25,453
Long-term liabilities
943 1,754 2,849 4,057 3,970
Total shareholders’ equity
5,412 4,631 3,149 4,829 5,629
Number of issued and outstanding shares
6,610 6,610 6,610 6,610 6,610

B.           Capitalization and Indebtedness
Not applicable.
C.           Reasons for the Offer and Use of Proceeds
Not applicable.
D.           Risk Factors
Investing in our ordinary shares involves a high degree of risk and uncertainty.  You should carefully consider the risks and uncertainties described below before investing in our ordinary shares.  Our business, prospects, financial condition and results of operations could be adversely affected due to any of the following risks.  In that case, the value of our ordinary shares could decline, and you could lose all or part of your investment.
Risks Relating to Our Business and Market
We have a history of operating losses and may not be able to achieve and sustain profitable operations.  We may not have sufficient resources to fund our operations in the future.
Although we were profitable in the past two years after four years of losses, there can be no assurance that we will continue to operate profitably in the future.   To the extent that we incur operating losses in the future, we may have insufficient working capital to fund our operations.  If we do not generate sufficient cash from operations, we will be required to obtain additional financing or reduce our level of expenditure.  Such financing may not be available in the future, or, if available, may not be on terms favorable to us.  If adequate funds are not available to us, our business, and results of operations and financial condition will be materially and adversely affected.
We will require additional capital in the future, which may not be available to us.
Our working capital requirements and cash flow provided by our operating and financing activities are likely to vary greatly from quarter to quarter, depending on the following factors: (i) the timing of orders and deliveries; (ii) the purchase of new equipment; (iii) the build-up of inventories; (iv)  the payment terms offered to our customers; (v) the payment terms offered by our suppliers; and (vi) approval of the current or additional lines of credit and long-term loans from banks.
As of December 31, 2012, we had revolving lines of credit aggregating $3.9 million with our banks, all of which were fully utilized as of such date, and $2.2 million of long-term loans, including supplier credits.  These credit facilities may not remain available to us in the future.  Furthermore, under certain circumstances the banks may require us to accelerate the repayment of our credit facilities.  All of our assets are pledged as security for our liabilities to our banks, whose consents are required for any future pledge of such assets.
During the last several years we were unable to fully fund our technological development requirements due to our losses and limited financial resources. In order to remain competitive, we will be required to acquire new equipment and implement new technologies, which are likely to require significant capital investment that may not be available to us. To the extent that the funds generated from our operations and from our existing capital resources are insufficient to fund our operating and financial requirements, we will be required to raise additional funds through public or private financing or other sources.  Any equity financing may cause dilution to our then current shareholders.  If additional funds are raised through the issuance of equity securities, the percentage ownership of then current shareholders will be diluted.  We do not have any committed sources of additional financing, and additional financing, if necessary, may not be available on commercially reasonable terms, if at all.  If adequate funds are not available on terms acceptable to us, we may be required to delay, scale back or eliminate certain aspects of our operations, and our business, financial condition and results of operations would be materially adversely affected.
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We may not be in compliance with banks’ covenants in the future.
We are subject to financial covenants from the banks that provide us with our credit facilities and long-term loans. The borrowings from our banks are secured by specific liens on certain assets, by a first priority charge on the rest of our now-owned or after-acquired assets and by a fixed lien on goodwill (intangible assets) and insurance rights (rights to proceeds on insured assets in the event of damage).  In addition, the agreements prohibit us from selling or otherwise transferring any assets except in the ordinary course of business or from placing a lien on our assets without the banks’ consent.
Both of our banks require us to maintain a specific set of covenants for each fiscal year. Our compliance with the financial covenants is measured annually based on our audited financial statements for December 31. In recent years, including the year ended December 31, 2011, we were forced to seek waivers of certain of these covenants. Both banks have the right to demand immediate repayment of the loans and lines of credit in the event of a change of control in our company, if such a change occurred without their prior approval.  Our failure to remain in compliance with each of the banks’ covenants, obtain waivers, negotiate agreements with new covenant terms, or obtain additional financing, if required, may adversely affect our business, results of operations and financial position.
Economic downturns and disruptions in financial markets can adversely affect our business and results of operations.
Our results of operations can be materially affected by adverse conditions in the financial markets and depressed economic conditions generally.  Worsening economic conditions, such as the continued European sovereign debt uncertainty, may result in diminished demand for our products and in decreased sales volumes.  Recessionary environments adversely affect the demand for our products as a result of constraints on capital spending by our customers.  In addition, this could result in longer sales cycles, slower acceptance of new products and increased competition for our products, which in turn could cause us to reduce prices for our products resulting in reduced gross margins.  Furthermore, the value of our investment in our Germany-based subsidiary, Kubatronik Leiterplatten GmbH, or Kubatronik, may decrease further as a result of the weak economy and as a result, we may record impairment losses in the future.  Any of these events would likely harm our business, operating results and financial condition.
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
Cyber attacks or other breaches of network or information technology (IT) security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our systems and operations.  Although we have not experienced any of these events as of the date of this annual report, we expect that our inability to operate our facilities as a result of such events, even for a limited period of time, may result in significant expenses and/or loss of market share to other competitors in the global PCB industry. While we maintain insurance coverage for some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain.  In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network or IT security could result in damage to our reputation.  Any of these occurrences could adversely affect our results of operations and financial condition.
In particular, both unsuccessful and successful cyber attacks on companies have increased in frequency, scope and potential harm in recent years.  We have been subject, and will likely continue to be subject, to attempts to breach the security of our networks and IT infrastructure through cyber attack, malware, computer viruses and other means of unauthorized access. However, to date, we have not been subject to cyber attacks or other cyber incidents which, individually or in the aggregate, resulted in a material impact to our operations or financial condition.  While we use firewall and anti-virus systems, there is no assurance that cyber attacks will always be blocked or discovered, and as a result, we may encounter damages to our computer network servers, manipulation of our data (including production, financial and other information).
- 4 -
Rapid changes in the Israeli and international electronics industries and recessionary pressure may adversely affect our business.
Our principal customers include manufacturers of defense and aerospace, medical, industrial, telecom and networking equipment, as well as contract electronic manufacturers.  The electronics industry is subject to rapid technological changes and products obsolescence.  Discontinuance or modification of products containing printed circuit boards, or PCBs, manufactured by us could have a material adverse effect on us.  In addition, the electronics industry is subject to sharp economic cycles.  Increased or excess production capacity by our competitors in the PCB industry and recessionary pressure in major electronics industry segments may result in intensified price competition and reduced margins.  As a result, our financial condition and results of operations may be adversely affected.  A decline in the Israeli and international electronic markets may adversely affect our operating results and financial condition in the future.
Technological change may adversely affect the market acceptance of our products.
Technological change in the PCB industry is rapid and continual.  To satisfy customers’ needs for increasingly complex products, PCB manufacturers must continue to develop improved manufacturing processes, provide innovative solutions and invest in new facilities and equipment.  To the extent we determine that new technologies and equipment are required to remain competitive, the acquisition and implementation of such technologies and equipment are likely to require significant capital investment.  We expect that we will need to invest large amounts in the next few years to replace or refurbish old equipment and to remain competitive in the market.  This capital may not be available to us in the future for such purposes and any new manufacturing processes developed by us may not become or remain commercially viable.  As a result, we may not be able to maintain our current technological position.  Furthermore, the PCB industry may in the future encounter competition from new technologies that may reduce demand for PCBs or may render existing technology less competitive or obsolete.  Our future process development efforts may not be successful or the emergence of new technologies, industry standards or customer requirements may render our technology, equipment or processes obsolete or uncompetitive.
Because competition in the PCB market is intense, our business, operating results and financial condition may be adversely affected.
The global PCB industry is highly fragmented and intensely competitive.  It is characterized by rapidly changing technology, frequent new product introductions and rapidly changing customer requirements.  We compete principally in the market for complex, flex-rigid and rigid multi-layer PCBs.  In the Israeli market we mainly compete with PCB Technologies Ltd. and major international PCB exporters, mainly from South East Asia, Europe and North America.  In the European market we mainly compete with Advanced Circuit Boards NV (Belgium), AT&S Austria Technologie & Systemtechnik AG (Austria), Dyconex and Cicor (Switzerland), Graphics, Exception PCB and Invotec (United Kingdom), Cistelaier and Somacis (Italy),  Schoeller-Electronics GmbH (formerly Ruwel Werke GmbH) (Germany) and certain other German companies.   In the North American market we mainly compete with Viasystems North America, Inc. (previously known as DDi Corp.), KCA Electronics Inc., Lenthor Engineering, Printed Circuits, Inc., Teledyne and TTM Technologies Inc. and certain other American companies.  Many of these competitors have significantly greater financial and marketing resources than us.  Our current competition in the rigid PCB segment is mainly from PCB manufacturers in South East Asia (mainly in China), which have substantially lower production costs than us.  Continued competitive pressures could cause us to lose significant market share.
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We depend on our key customers and the loss of one or more of our key customers would result in a loss of a significant amount of our revenues.
In the years ended December 31, 2012, 2011 and 2010, our ten largest customers accounted for 59.7%, 55% and 50% of our revenues, respectively, of which one customer (consisting of two affiliated companies) accounted for 17.2%, 14.9% and 13.7% of our total revenues, respectively.  We expect that a significant portion of our future revenues will continue to be dependent on a small number of customers.  If we are unable to retain our key customers or if we are unable to attract sufficient new business to compensate for the loss of any of our key customers, our results of operations and financial condition would be adversely affected.
Our results of operations may be harmed by currency fluctuations.
Our revenues and expenses are denominated in the NIS, U.S. dollar and Euros.  Due to the different proportions of currencies our revenues and expenses are denominated in, fluctuations in rates of exchange between NIS and other currencies may affect our operating results and financial condition.  The NIS value of our U.S. dollar and Euro denominated revenues are negatively impacted by the depreciation of the U.S. dollar and the Euro against the NIS.  The average exchange rate for the NIS against the U.S. dollar was 7.8% higher in 2012 than in 2011, which had a positive impact on our operating results in 2012.  In the past, the NIS exchange rate against the dollar and other foreign currencies fluctuated, generally reflecting inflation rate differentials.  We cannot predict any future trends in the rate of inflation in Israel or the rate of depreciation or appreciation of the NIS against the dollar.  If NIS value of our dollar or Euro denominated revenues decreases, our results of operations will be adversely affected.
We have recently encountered difficulties in obtaining lines of credits from our banks to perform hedging transactions in order to protect ourselves from currency fluctuations.  If we were to determine that it is in our best interests to enter into any other hedging transactions in the future in order to protect ourselves in part from currency fluctuations, we may not be able to do so, or such transactions, if entered into, may not materially reduce the effect of fluctuations in foreign currency exchange rates on our results of operations and may result in additional expenses .
Our quarterly operating results fluctuate significantly.
Our quarterly operating results have fluctuated significantly in the past and are likely to fluctuate significantly in the future.  Our future operating results will depend on many factors, including (but not limited to) the following:
·
the size and timing of significant orders and their fulfillment;
·
demand for our products and the mix of products purchased by our customers;
·
competition from lower priced manufacturers;
·
fluctuations in foreign currency exchange rates, primarily the NIS against the U.S. dollar and the Euro;
·
manufacturing yield;
·
plant utilization;
·
availability of raw materials;
·
plant or line shutdowns to repair or replace malfunctioning manufacturing equipment;
·
the length of our sales cycles;
·
changes in our strategy;
·
the number of working days in the quarter;
- 6 -
·
changes in seasonal trends; and
·
general domestic and international economic and political conditions.
Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast, and it is likely that there will be significant differences between the results of one quarter to another.
Quarterly sales and operating results are also difficult to forecast because quarterly sales and results are dependent, almost exclusively, on the volume and timing of orders during the quarter and our customers generally operate with a short delivery cycle and expect delivery of a significant portion of our production within 30 working days.  The delivery of such orders is subject to the number of available working days during the quarter, which can fluctuate significantly from quarter to quarter due to holidays and vacations.  Certain prototype and pre-production runs require even shorter turn-around times stemming from customers’ product launches and design changes.  In addition, there might be sudden increases, decreases or cancellations of orders for which there are commitments, which further characterize the electronics industry and the companies that operate in it.  The industry practice is to make such changes without any penalties, except for the time and materials expended on the order.
Our business involves highly complex manufacturing processes that are subject to periodic failure.  Process failures have occurred in the past and have resulted in delays in product shipments, and process failures may occur in the future.  Further, our expenses are, in significant part, relatively fixed in the short-term.  If revenue levels fall below expectations, our net income is likely to be disproportionately adversely affected because a proportionately smaller amount of the expenses varies with our revenues.  We may not be able to be profitable on a quarterly or annual basis in the future.  An ongoing pattern of cancellations, reductions in orders and delays could have a material adverse effect on our results of operations.  Due to all of the foregoing, it is very difficult to predict revenues for any future quarter with any significant degree of accuracy.  Accordingly, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as indications of future performance.
We are subject to environmental laws and regulations.  Compliance with those laws and regulations requires us to incur costs and we are subject to fines or other sanctions for non-compliance.
Our operations are regulated under various environmental laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water, as well as the handling, storage and disposal of such materials.  Compliance with these laws and regulations is a major consideration for PCB manufacturers because metals and chemicals classified as hazardous substances are used in the manufacturing process.  Since May 2003, our environmental management system has been ISO 14001 certified.  This certification was based on successful implementation of environmental management requirements and includes ongoing monitoring of our processes, raw materials and products.  The certification is subject to periodic compliance audits conducted by the Israeli Institute of Standards.  If, in the future, we are found to be in violation of environmental laws or regulations, we could be liable for damages, costs of remedial actions, may be subject to criminal prosecution including a range of potential penalties, and could also be subject to revocation of permits necessary to conduct our business or any part thereof.  Any such liability or revocation could have a material adverse effect on our business, financial condition and results of operations.  Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with a violation.  A shortage of water in Israel may reduce the allocation of water available to manufacturing plants, including ours, which could affect the concentrations of pollutants in our wastewater, making it harder to comply with the foregoing regulations, in which event we would be required to invest additional funds to improve our wastewater treatment systems.
The cost of compliance with environmental laws and regulations depends in part on the requirements in such laws and regulations and on the method selected to implement them.  If new or more restrictive standards are imposed, the cost of compliance could be very high and have an adverse impact on our revenues and results of operations if we cannot recover those costs through the rates that we charge our customers.
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We have in the past been, and currently are, subject to claims and litigation relating to environmental matters.  If we are found to be in violation of environmental laws, we could be liable for damages and costs of remediation and may be subject to a halt in production, which may adversely affect our business, operating results and financial condition.
We have in the past been, and currently are, subject to claims and litigation relating to environmental matters.  We may be subject to further environmental claims alleging that we are in violation of environmental laws.  If we are unsuccessful in such claims and other future claims and litigations or if actual results are not consistent with our assumptions and judgments, we may be exposed to losses that could be material to our company.
On August 25, 2009, we received a notice from the Petach Tikva Municipality claiming that random automatic wastewater sampling in proximity of our plant indicates high levels of metal concentrations which exceed the amounts permitted by law.  The Municipality requested our explanations to such alleged violation and further informed us that its environmental department has determined to initiate procedures against any plant that is not in compliance with the permitted concentrations.  On September 16, 2009, we sent a letter to the Municipality explaining that we have invested extensive funds and resources each year in order to comply with all environmental legal requirements.  We further indicated that we have been and are still engaged in several projects to reduce salt and metal concentrations in our plant wastewater and that we constantly update our procedures with respect to environmental matters.  In addition, we proposed to collaborate with the Municipality and conduct mutual tests to ensure maximum protection of the environment.  To date, we have not received any response from the Municipality to our letter dated September 16, 2009 . If we are found to be in violation of environmental laws, we could be liable for damages, costs of remedial actions and a range of potential penalties, and could also be subject to revocation of permits necessary to conduct our business or any part thereof.  Any such liability or revocation could have a material adverse effect on our business, financial condition and results of operations.
Claims that our products infringe upon the intellectual property of third parties may require us to incur significant costs.
Third parties may assert infringement claims against us or claims that we have violated a patent or infringed on a copyright, trademark or other proprietary right belonging to them.  Any infringement claim, even one without merit, could result in the expenditure of significant financial and managerial resources to defend against the claim.  Moreover, a successful claim of product infringement against us or a settlement could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology.  We might not be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all.  We also may not be able to obtain a license from another provider of suitable alternative technology to permit us to continue offering the product.  Infringement claims asserted against us could have a material adverse effect on our business, operating results and financial condition.
A supplier of one of our software packages requested to conduct an audit of our operation to verify that we do not breach any intellectual property rights he allegedly owns.  We believe that we have fully, diligently and timely complied with our obligation toward the supplier. We also believe that the supplier has no right to conduct any audit of our products or services and such audit may cause us to breach confidentiality obligations to other entities.  If we are found to be in violation of such supplier's intellectual property rights, we could be liable for compensation and costs of an unknown amount.  Such liability could have a material adverse effect on our business, financial condition and results of operations.
We may not succeed in our efforts to expand into the U.S. defense market.  If we are unsuccessful, our future revenues and profitability would be adversely affected.
In January 2009, we received International Traffic in Arms Regulations (ITAR) registration from the U.S. Department of State, which certifies us to sell our PCBs to the U.S. defense market.  Our business plan assumes an increase in revenues to the U.S. defense market based on our receipt of this certification.  However, our efforts to enter into to the U.S. defense market may not succeed and sales to the defense and aerospace industries may be affected by cutbacks in U.S. government spending, and this may not become a substantial market for us.  If we are unsuccessful in such efforts, our future revenues and profitability would be adversely affected.  In addition, in the event of a change in control of our company, the U.S. Department of State may investigate the transfer of control and oppose the transaction.  In such an event we may lose our ITAR certification, which could adversely affect our future revenues and profitability.
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We are dependent upon a select number of suppliers of key raw materials and the loss of one or more of these suppliers would adversely affect our manufacturing ability.  If these suppliers delay or discontinue the manufacture or supply of these raw materials, we may experience delays in production and shipments, increased costs and cancellation of orders for our products.
We currently obtain our key raw materials from a select number of suppliers.  We do not have long-term supply contracts with our suppliers and our principal suppliers may not continue to supply raw materials to us at current levels or at all.  Any delays in delivery of or shortages in these raw materials could interrupt and delay manufacturing of our products and may result in the cancellation of orders for our products.  One of our major raw material suppliers is Gadot Chemical Tankers and Terminals Ltd., or Gadot, which was owned by our controlling shareholder until December 2012.  In December 2012, a receiver was appointed for Gadot.  No assurances can be given that the appointment of a receiver will not affect Gadot’s operations or its ability to deliver raw materials to us; in such event our operations may be materially and adversely affected.
As the majority of PCB manufacturing is centered in South East Asia, raw material suppliers may focus their attention and give higher priority to manufacturers in those areas, which may interrupt the supply of raw materials to us.  In addition, these suppliers could discontinue the manufacture or supply of these raw materials at any time.  During the years ended December 31, 2012, 2011 and 2010, our purchases from one supplier accounted for 24.5%, 18.4% and 16.1% of our total consolidated raw material costs, respectively.  We may not be able to identify and integrate alternative sources of supply in a timely fashion.  Any transition to alternate suppliers may result in delays in production and shipment and increased expenses and may limit our ability to deliver products to our customers.  Furthermore, if we are unable to identify an alternative source of supply, we may have to modify our products or a large portion of our production process to use a substitute raw material, which may cause delays in production and shipments, increased design and manufacturing costs and increased prices for our products.
Our operating margins may be affected as a result of price increases for our principal raw materials.
In recent years, the significant increase in oil and energy costs and commodity prices (such as copper, gold and glass fibers) put pressure on our suppliers to increase their prices for most of our principal raw materials.  We may not be successful in our attempts to negotiate lower price increases than requested by our suppliers.  We have faced pressure to raise our prices for our products to compensate for supplier price increases in order to maintain our operating margins, and we may not be able to maintain moderate price increases as we have in the past.  Future price increases for our principal raw materials may materially affect our operating margins and future profitability.
We may encounter difficulties with our international operations and sales that may have a material adverse effect on our sales and profitability.
We have manufacturing facilities in Israel and Germany and generate a large percentage of our sales in Europe and North America.  Our sales in Europe for the years ended December 31, 2012, 2011 and 2010 accounted for 25.4%, 28.6% and 27% of our consolidated revenues, respectively, of which 9.4%, 12% and 10.5% was generated in Germany, respectively.  Our sales in North America for the years ended 2012, 2011 and 2010 accounted for 16.8%, 11.5% and 17.6% of our consolidated revenues, respectively.  We intend to increase our business in North America, including sales to U.S. military contractors.  However contracts with U.S. military agencies, as well as military equipment manufacturers in Europe, are subject to certain regulatory restrictions and approvals, which we may not be able to comply with or obtain.  We may not be able to maintain or increase international market demand for our products.  To the extent that we cannot do so, our business, operating results and financial condition may be adversely affected.
International operations are subject to inherent risks, including the following:
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the impact of possible recessionary environments in multiple foreign markets;
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changes in regulatory requirements and complying with a wide variety of foreign laws;
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tariffs and other trade barriers;
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the imposition of exchange or price controls or other restrictions on the conversion of foreign currencies;
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difficulties and costs of staffing and managing foreign operations; and
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political and economic instability.
Our results may be adversely affected by product liability claims.
The sale of our products may entail the risk of product liability claims, which are likely to be substantial in light of the use of our products in business-critical applications.  Over the years we have been involved in claims or litigations relating to allegedly defective products.  If such suits are brought against us in the future, our business, results of operations and financial condition may be adversely affected.
If our workforce will be represented by a labor union we could incur additional costs or experience work stoppages as a result of the renegotiation of our labor contracts.
In November 2011, we were notified by the General Federation of Labor in Israel, or the Histadrut, that more than one-third of our employees in Israel had decided to join the Histadrut and that they have established an employees’ union committee. In 2012, a significant portion of our employees decided to resign their membership in the Histadrut, which then ceased to represent our employees. If our employees decide to re-join the Histadrut, we could incur additional costs and/or experience work stoppages, which could adversely affect our business operations, including through a loss of revenue and strained relationships with customers.
We may encounter difficulty in realizing the potential financial or strategic benefits of future business acquisitions and investments.
We believe that the acquisition of and the investment in new subsidiaries could assist us in reaching our goals of focusing on the high end flex-rigid and specialty PCB market, and in expanding our exports mainly into Europe and North America.  Any acquisition or investment would present risks commonly encountered in the acquisition of or investment in other businesses.  The following are examples of such risks, one or more of which may apply to any such acquisition or investment:
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difficulty in combining the technology, operations or work force of the acquired business;
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adverse effects on our reported operating results due to the amortization or write-down of intangible assets associated with acquisitions;
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diversion of management attention from running our existing business; and
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increased expenses, including compensation expenses resulting from newly-hired employees.
We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which c ould have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares .
Our efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, governing internal control and procedures for financial reporting have resulted in increased general and administrative expenses and a diversion of management time and attention, and we expect these efforts to require the continued commitment of significant resources.  We may identify material weaknesses or significant deficiencies in our assessments of our internal control over financial reporting.  Failure to maintain effective internal control over financial reporting could result in investigations or sanctions by regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.
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Risk Factors Related to Our Ordinary Shares
Our share price has been volatile in the past and may continue to be susceptible to significant market price and volume fluctuations in the future.
Our ordinary shares have experienced significant market price and volume fluctuations in the past and may experience significant market price and volume fluctuations in the future in response to factors such as the following, some of which are beyond our control:
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quarterly variations in our operating results;
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operating results that vary from the expectations of securities analysts and investors;
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changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
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announcements of technological innovations or new products by us or our competitors;
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announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
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changes in the status of our intellectual property rights;
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announcements by third parties of significant claims or proceedings against us;
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announcements by governmental or regulatory authorities of significant investigations or proceedings against us;
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additions or departures of key personnel;
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changes in our cost structure due to factors beyond our control, such as new laws or regulations relating to environmental matters and employment;
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future sales of our ordinary shares;
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general stock market price and volume fluctuations; and
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devaluation of the dollar against the NIS.
Domestic and international stock markets often experience extreme price and volume fluctuations.  Market fluctuations, as well as general political and economic conditions, such as a recession, interest rate or currency rate fluctuations or political events or hostilities in or surrounding Israel, could adversely affect the market price of our ordinary shares.
The uncertainty surrounding the continued ownership of our shares by our principal shareholder may result in a change in control and our operations and share price may be adversely affected.
Mr. Josef Maiman, through Merhav M.N.F. Ltd. and Integral International Inc., holds 24.1% of our shares and exercises a substantial influence over our management. Mr. Maiman is currently facing financial difficulties and should he divest all or a significant portion of his interest in us, it may result in a change in control and in our management and our operations could be adversely affected. As a result, we are currently investigating the possible sale of our company or substantially all of its assets. The uncertainty arising from this situation may negatively affect our operations as well as the market price for our shares.
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If we fail to maintain NASDAQ’s continued listing requirement of a minimum bid price of at least $1.00 per share for a period of 30 consecutive business days, our shares may be delisted from the NASDAQ Capital Market.
Our ordinary shares are listed on the NASDAQ Capital Market under the symbol “ELTK.”  To continue to be listed on NASDAQ, we need to satisfy a number of requirements, including a minimum bid price for our ordinary shares of $1.00 per share for a period of 30 consecutive business days.  If we fail to comply with such requirement, we would have a period of 180 calendar days to achieve compliance by meeting the applicable standard for a minimum of ten consecutive business days.  If we are not deemed in compliance before the expiration of the 180 day compliance period, NASDAQ may afford us an additional 180 day compliance period, provided that on the 180th day of the first compliance period we have demonstrated that we meet all applicable standards for initial listing on the NASDAQ Capital Market (except the bid price requirement) based on our most recent public filings and market information.
Our ordinary shares have experienced significant market price and volume fluctuations in the past and for certain periods have traded below the $1.00 threshold requirement for continued trading.  In 2012, the price of our ordinary shares ranged from $0.87 to $1.69 and the closing price of our ordinary shares on December 31, 2012 was $1.10 per share.  If we fail to meet the minimum bid price requirement, our share may be delisted from the NASDAQ Capital Market.  If we are delisted from NASDAQ, trading in our ordinary shares would be conducted on a market where an investor would likely find it significantly more difficult to dispose of, or to obtain accurate quotations as to the value of, our ordinary shares.
We do not expect to distribute dividends in the foreseeable future .
We have never declared or paid any cash dividends on our ordinary shares.  We currently intend to retain our current and any future earnings to finance operations and expand our business and, therefore, do not expect to pay any dividends in the foreseeable future.  According to the Israeli Companies Law, a company may distribute dividends out of its profits (as defined by the Israeli Companies Law), provided that there is no reasonable concern that such dividend distribution will prevent the company from paying all its current and foreseeable obligations, as they become due, or otherwise upon the permission of the court . In the event cash dividends are declared, such dividends will be paid in NIS. The declaration of dividends is subject to the discretion of our board of directors and would depend on various factors, including our operating results, financial condition, future prospects and any other factors deemed relevant by our board of directors.  You should not rely on an investment in our company if you require dividend income from your investment.
Risks Relating to Our Operations in Israel
Political, economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of operations and adversely affect our share price.
We are incorporated under the laws of, and our principal executive offices, production or manufacturing and research and development facilities are located in, the State of Israel.  As a result, political, economic and military conditions affecting Israel directly influence us.  Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel could adversely affect our business, financial condition and results of operations.
Since its establishment in 1948, Israel has been involved in a number of armed conflicts with its Arab neighbors and a state of hostility, varying from time to time in intensity and degree, has continued into 2013. In recent years, there was an escalation in violence among Israel, Hamas, the Palestinian Authority and other groups. Also, since 2011, riots and uprisings in several countries in the Middle East and neighboring regions, including Egypt and Syria, have led to severe political instability in several neighboring states and to a decline in the regional security situation. Such instability may affect the local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in areas that neighbor Israel, such as Hamas in Gaza and Hezbollah in Lebanon. To date, these matters have not had any material effect on our business and results of operations; however, the regional security situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future.
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Furthermore, there are a number of countries, primarily in the Middle East, as well as Malaysia and Indonesia, that restrict business with Israel or Israeli companies, and we are precluded from marketing our products to these countries.  Restrictive laws or policies directed towards Israel or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion of our business.
Our results of operations may be negatively affected by the obligation of our personnel to perform military reserve service.
Some of our employees, directors and officers in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and may be called for active duty under emergency circumstances at any time.  If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time.  Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of other employees due to military service.  Any disruption in our operations could adversely affect our business.
Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
Service of process upon our directors and officers and the Israeli experts named herein, all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, since substantially all of our assets, all of our directors and officers and the Israeli experts named in this annual report are located outside the United States, any judgment obtained in the United States against us or these individuals or entities may not be collectible within the United States.
There is doubt as to the enforceability of civil liabilities under the Securities Act and the Securities Exchange Act in original actions instituted in Israel. However, subject to certain time limitations and other conditions, Israeli courts may enforce final judgments of United States courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions of those and similar acts.
Provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore impact the price of our shares.
Provisions of Israeli corporate and tax laws may have the effect of delaying, preventing or making more difficult a merger with, or other acquisition of, us.  This could cause our ordinary shares to trade at prices below the price for which third parties might be willing to pay to gain control of us.  Third parties who are otherwise willing to pay a premium over prevailing market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli law.
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
We are incorporated under Israeli law.  The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, articles of association and by Israeli law.  These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations.  In particular, each shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his or her power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters.  Israeli law provides that these duties are applicable in shareholder votes on, among other things, amendments to a company's articles of association, increases in a company's authorized share capital, mergers and interested party transactions requiring shareholder approval.  In addition, a controlling shareholder of an Israeli company, or a shareholder who knows that he or she possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company, has a duty of fairness toward the company.  Currently there is not a clear definition of the duty of fairness under Israeli law.  However, a recent decision by a District Court provided that in addition to the duty to act in fairness towards the company, a controlling shareholder holds a direct duty of fairness towards the minority shareholders in a going-private merger transaction.  Israeli corporate law has in recent years undergone and is currently undergoing extensive revision and there is relatively little case law available to assist in understanding the implications of these provisions that govern the rights and responsibilities of shareholders.
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As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.  We follow Israeli law and practice instead of NASDAQ rules regarding the composition of the board of directors, director nomination process and quorum at shareholders’ meetings.
As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Stock Market Rules.  We follow Israeli law and practice instead of the NASDAQ Stock Market Rules regarding the composition of the board of directors, director nomination process and quorum at shareholders’ meetings.  As a foreign private issuer listed on the NASDAQ Capital Market, we may also follow home country practice with regard to, among other things, compensation of officers and the requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company).  A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws.  In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission, or the SEC, each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement.  Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.
A.           History and Development of the Company
We were incorporated under the laws of the State of Israel on January 1, 1970.  We are a public limited liability company under the Israeli Companies Law 5759-1999 and operate under that law and associated legislation.  Our registered offices and principal place of business are located at 4 Drezner Street, Sgoola Industrial Zone, Petach Tikva 49101, Israel, and our telephone number is +972-3-9395025.  Our website is www.eltekglobal.com .  The information on our website is not incorporated by reference into this annual report.
We manufacture and supply technologically advanced, custom made circuitry solutions for use in sophisticated and compact electronic products.  We provide specialized services and are a solution provider in the PCB business, mainly in Israel, Europe and North America.  PCBs are platforms that conduct an electric current among active and passive microelectronics components, microprocessors, memories, resistors and capacitors and are integral parts of the products produced by high-technology industries.  Our focus is on short run quick-turnaround, prototype, pre-production and low to medium volume runs of high-end PCB products for high growth, advanced electronics applications, mainly flex-rigid PCBs.
We design and develop innovative manufacturing solutions pursuant to complex interconnect requirements of original equipment manufacturers, and provide our customers with a wide range of custom designed PCBs, including complex rigid, double-sided and multi-layer PCBs as well as flexible circuitry (flex and flex-rigid boards) made of several types of high-performance base material.  To complement our quick-turnaround, prototype, pre-production and low to medium volume production capability and provide our customers with single source service, we also act as an agent for the importation of PCBs from South East Asia when customers require high volume production runs, although such activity was not significant in recent years.
In June 2002, we acquired our majority-owned European manufacturing and marketing subsidiary, Kubatronik, located in Geislingen, Germany.  In July 2007, we established Eltek USA Inc., a wholly-owned subsidiary incorporated in Delaware, to manage our sales and marketing in the North American market.  In December 2008, we established Eltek Europe GmbH, a wholly-owned subsidiary organized in Germany, to manage our sales and marketing activities for certain European customers.
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During the three years ended December 31, 2012, we invested approximately $5.2 million in new equipment and the expansion of our facilities and infrastructure.  Subject to availability of financial resources, we expect to invest approximately $2.2 million in capital expenditures in 2013, primarily for our operations in Israel and Germany, mainly in manufacturing equipment to expand our manufacturing capacity and to upgrade our technological capabilities.  We intend to finance these expenditures with suppliers’ credit, cash flow from operations and bank loans; however, external financing may not be available, or, if available, may not be on terms favorable to us.  If adequate funds are not available to us, our business, and results of operations and financial condition may be adversely affected.
B.           Business Overview
Industry Overview
PCBs are constructed from a variety of base raw materials.  PCBs can be double-sided or multi-layered and made of rigid, flexible, flex-rigid or high-frequency materials.  In essence, they are platforms that conduct electrical signals among active and passive microelectronics components, microprocessors, memories, resistors and capacitors.  Photolithographic type processes transfer the images of the electrical circuit onto the layers, and chemical processes etch these lines on the boards.  There are several broad categories of PCBs:
Rigid PCBs. Rigid PCBs are the core product of the industry and can be found in virtually every electronics device.  The layer count of these products generally ranges from two to 30 layers, although some PCBs are composed of 42 layers.
Flexible and flex-rigid PCBs .  Flexible boards are thin, light-weight circuits used to interconnect other circuit boards and electronic devices within electronic equipment.  Flex-rigid boards are composed of rigid parts and flexible layers.  They generally range from two to 30 layers.  Flex-rigid boards provide solutions for electronic systems that impose space and shape restrictions and for systems in which reliability of connectivity is crucial. These products are often found in military applications (primarily avionics), medical and measurement equipment and the automotive industry, among other uses.
Backplanes .  Backplanes are large, high-density circuit boards with design features such as tight tolerance finished hole sizes that require precise process controls.  These products are commonly known as “motherboards” on which connectors are mounted to receive and interconnect other PCBs and can be found primarily in telecommunications applications.
PCB manufacturers can generally be classified based on two parameters, product sophistication and service sophistication.  Product sophistication is evident in the capability of a PCB manufacturer to offer products with higher layer counts and more complex construction, as well as in the line width and the spacing of lines on the circuit boards.  The state-of-the-art HDI technology enables manufacturers to produce PCBs with line width and spaces as narrow as 2-3 mils and hole diameters of 4 to 6 mils.
Manufacturing and Engineering Processes
In the PCB industry, significant investments in equipment are necessary to maintain technological competitiveness.  During the three years ended December 31, 2012, we invested approximately $4.7 million in machinery and equipment for that purpose.
Manufacturing Capabilities. We have the capability to manufacture PCBs with layer counts in excess of 36 layers, flex-rigid boards, blind and buried vias and designs using materials as thin as 1 mil.  We are able to produce short runs of five to 30 units of simple type PCBs within four to five working days, and a few hundred units within ten working days and are capable of producing such number of boards within five working days when production line scheduling permits.  During 2007, we applied new technologies to enable us to manufacture “via-in-pad” multilayer PCBs, microvia filling, through hole via filling and copper overplating.  In July 2012, we purchased a new Orbotech Paragon™ Laser Direct Imaging, or LDI, system for increasing capacity and shortening production time and improving product time-to-market.  We acquired and installed a new Hakuto Cut-Sheet-Laminator and the latest Chemplate Indubond model, both purchased during 2012.  These new pieces of equipment improve our technological capabilities. These machines improve the outer layer accuracy and the registration between the inner-layers, enabling us to offer our customers solutions and participate in bids in which we were not able to participate in the past.
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We continue to develop advanced registration technologies and to improve the copper etching accuracy to comply with new specifications and requirements of our customers and potential customers.  In the year ended December 31, 2012, approximately 15% of our revenues from manufactured products were for orders for delivery in less than 20 working days, of which approximately 3% were for orders for delivery within six to ten working days and approximately 4% in five or less working days.
Computer Aided Design/Computer Aided Manufacturing (CAD/CAM). We utilize a state-of-the-art CAD system developed by Frontline PCB Solutions Ltd., an Israeli-based company, and can receive CAD data by electronic data transmission.  Our CAD workstations perform design rule checks on transmitted designs, incorporate any customer-specific design modifications and perform manufacturability enhancements that increase PCB quality.
Advanced Finishing Capabilities for Dense Packaging Designs. We provide a wide assortment of alternative surface finishes, including hot air solder leveling, electroless gold over nickel, immersion silver, outsource nickel/palladium/gold and immersion tin, for the attachment of components to PCBs.
Other Advanced Process Capabilities. We provide fabrication of dense multi-layer PCBs.  We use an advanced inner-layer production line, a laser direct imaging system, mechanical and laser drilling equipment and clean room environments (ISO-7) to produce technologically advanced products.
Quality, Environmental and Safety Standards .  Our quality management system has been ISO 9001:2008 certified since July 2002 (and prior to such date, was ISO 9002 certified from January 1995).  Such certification is based on successful implementation of quality assurance requirements and includes ongoing monitoring of our business and periodic compliance audits conducted by the Israeli Institute of Standards.  We have obtained United States Department of Defense Qualified Product List approval (MIL-PRF-55110G and MIL-P-50884E) for our products.  Since 1976, our rigid glass epoxy (FR4 and FR5) and flex-rigid boards have been UL 94V-0 certified by Underwriters Laboratories Inc. (a standards organization that offers product safety testing and certification of product safety).  Our environmental management system has been ISO 14001:2004 certified since 2005 (and prior to such date was ISO 14001 certified from 2003).  We are OHSAS 18001:2007 certified for occupation health and safety management systems since December 2007.  In November 2009, we became certified to the AS 9100B quality management standard for the aerospace industry and in August 2012 we were upgraded to AS 9100C.
Sales, Customers and Marketing
Sales. In the years ended December 31, 2012, 2011 and 2010, the primary industries for which we produced PCBs were defense and aerospace equipment (48%, 52% and 43% of production, respectively), medical equipment (24%, 19% and 23% of production, respectively), industrial equipment (18%, 19% and 21% of production, respectively) and telecom and networking equipment (2%, 4% and 5% of production, respectively).  To a lesser degree we produce PCBs for distributors, contract electronic manufacturers and others (8%, 6% and 8% of production, respectively).
Customers .  During the year ended December 31, 2012, we provided PCBs to approximately 148 customers in Israel and approximately 235 customers outside of Israel.  Our customers outside of Israel are located primarily in North America, Germany, the Netherlands, China, Switzerland, Italy and India. Sales to non-Israeli customers were $23.7 (51.9% of revenues) for the year ended December 31, 2012, $23.9 million (50.9% of revenues) for the year ended December 31, 2011 and $20.4 million (54.2% of revenues) for the year ended December 31, 2010.

In the years ended December 31, 2012, 2011 and 2010 our ten largest customers accounted for 59.7%, 55.3% and 49.7% of our revenues, respectively, of which one customer accounted for 17.2%, 14.9% and 13.7% of our total revenues, respectively.  We expect that a significant portion of our future revenues will continue to be dependent on a small number of customers.
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Marketing. We market and sell our products primarily through our direct sales personnel, sales representatives and through PCB trading and manufacturing companies.  We currently have eleven persons involved in sales, of which seven persons are in Israel, two persons are in the United States employed by our U.S. subsidiary, Eltek USA Inc. and two persons are employed by our German subsidiary, Kubatronik.  We also have sales representatives in Germany and Sweden.  In the Netherlands and Italy, PCB trading and manufacturing companies act as distributors of our products.  In North America we market and sell our products through Eltek USA Inc. as well as through two independent local sales representatives and a PCB manufacturing company.  In India we market our products through a local sales representative.  We maintain technical support services for our customers world-wide.  We also maintain customer service support centers that handle all logistical matters relating to the delivery of our products and receive and handle complaints relating to delivered products.  Our customer service personnel currently consist of fifteen persons, of which seven persons are in Israel, one person is employed by our U.S. subsidiary, Eltek USA Inc. and seven persons are employed by our German subsidiary, Kubatronik.
Our strategy is to focus on the high end of the PCB market, mainly in flex-rigid PCBs, in which margins are better.  We are currently focusing our marketing efforts on the defense and medical industries . To penetrate the U.S. defense market, we applied for ITAR registration from the U.S. Department of State, Bureau of Political-Military Affairs, which we received in January 2009.  ITAR regulates the manufacture, export and transfer of defense articles, information and services.  ITAR is a set of U.S. government regulations that controls the export and import of certain defense-related articles and services.  The regulations restrict sensitive information and technologies only to be shared with U.S. persons, unless special approval is acquired.  To qualify for ITAR registration, we met strict requirements for corporate structure, security, record keeping and procedures to allow us to sell our PCBs for use in U.S. defense products.  In November 2009, we became certified to the AS 9100B quality management standard for the avionic industry in order to strengthen our position in the avionic and aerospace market in North America and Europe. In June 2012, we expanded our sales network with the appointment of Endicott Interconnect Technologies, Inc. as a sales partner in the United States.  We believe that Endicott Interconnect Technologies, one of the world's leading providers of full turnkey services for printed circuit board and integrated circuits assembly, will strengthen our presence in the U.S. market.
We have ongoing programs to upgrade our processes by implementing high-quality standards, employee training and special training activities for clients.  Marketing efforts include recruiting independent sales representatives in various geographic areas, the distribution of promotional materials, seminars for engineers, the supply of technical information to business publications and participation in trade shows and industry conferences.
Materials and Supplies
The materials used in the manufacture of PCBs are primarily laminates (copper clad, with an isolating core separating them), prepregs, photo-chemical films, chemicals and inks.  The materials we use are manufactured in Europe, North America and South East Asia.  Some of the materials are purchased directly from the manufacturer, while others are purchased from local distributors.
Other than the price of gold, there were no significant price increases for our principal raw materials in 2012. We expect some suppliers will seek to increase their prices in 2013, especially for chemicals.  During recent years, price negotiations with our suppliers resulted in lower price increases than requested by our suppliers; however we may not continue to be successful in such negotiations in the future.  We have also faced pressure to raise our prices for our products to compensate for these price increases and although we have managed to date to maintain our sales prices with moderate price increases, we may not be able to so in the future.  Future price changes for raw materials may materially affect our future profitability.
Competition
The global PCB industry is highly fragmented and intensely competitive, trends that we believe will continue.  The global PCB industry is characterized by rapidly changing technology, frequent new product introductions and rapidly changing customer requirements.  We compete principally in the market for complex, flex-rigid multi-layer PCBs.  In the Israeli market we mainly compete with PCB Technologies Ltd. and major PCB exporters, mainly from South East Asia, North America and Europe . In the European market we mainly compete with Advanced Circuit Boards NV (Belgium), AT&S Austria Technologie & Systemtechnik AG (Austria), Dyconex and Cicor (Switzerland), Graphics, Exception PCB and Invotec (United Kingdom), Cistelaier and Somacis (Italy),  Schoeller-Electronics GmbH (formerly Ruwel Werke GmbH) (Germany) and certain other German companies.  In the North American market we mainly compete with Viasystems North America, Inc (previously known as DDi Corp), KCA Electronics Inc., Lenthor Engineering, Printed Circuits, Inc., Teledyne and TTM Technologies Inc.  Many of these competitors have significantly greater financial, technical and marketing resources than us.  Although capital requirements are a significant barrier to entry for manufacturing complex PCBs, the basic interconnect technology is generally not protected by patents or copyrights.  Our current competition in the rigid PCB segment is mainly from PCB manufacturers in the Far-East (mainly in China), which have substantially lower production costs than us.  Continued competitive pressures could cause us to lose market share and reduce prices.
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Environmental Matters
Since May 2003, our environmental management system has been ISO 14001 certified.  This certification was based on successful implementation of environmental management requirements and includes ongoing monitoring of our processes, raw materials and products.  The certification is subject to periodic compliance audits conducted by the Israeli Institute of Standards.
PCB manufacturing requires the use of metals and chemicals classified as hazardous substances.  Water used in the manufacturing process must be treated to remove metal particles and other contaminates before it can be discharged into the local sewer systems.  We operate and maintain effluent water treatment systems and use approved testing procedures at our manufacturing facilities.  There is no assurance, however, that violations will not occur in the future.  We are also subject to environmental laws and regulations relating to the storage, use and disposal of chemicals, solid waste and other hazardous materials, as well as air quality regulations.  Environmental laws and regulations could become more stringent over time, and the costs of compliance with more stringent laws could be substantial.  Environmental regulations enacted in Israel in September 2000 provide that a company that is found to have discharged water containing contaminates will be liable for quadruple the amount normally charged for its water consumption.  Over the years, we have undertaken various actions to reduce the use of water in our manufacturing facilities.  From 2008 through 2011, we invested in improving our effluent wastewater treatment system to lower the amounts of inorganic salts and copper concentration in the discharged water.  All our actions were coordinated with the Israeli Ministry of Environment and in August 2008, we received a waiver for a period of two years that enabled us to increase the amount of minerals disposed of by wastewater.  The waiver was subsequently extended until August 2014.  During 2013, we expect to further invest in reducing the amount of metal concentrations in our wastewater to the permitted levels.  A shortage of water in Israel may reduce the allocation of water available to manufacturing plants, including ours, which could affect the concentrations of pollutants in our wastewater, making it harder to comply with the foregoing regulations, in which event we would be required to invest additional funds to improve our wastewater treatment systems.
For information regarding environmental claims, see Item 8A. “Financial Information – Consolidated and Other Financial Information – Legal Proceedings.”
Intellectual Property Rights
Our success depends in part on our proprietary techniques and manufacturing expertise, particularly in the area of complex multi-layer and flex-rigid PCBs.  Like many companies in the PCB industry, we do not hold any patents and rely principally on trade secret protection of our intellectual property.  We believe that, because of the rapid pace of technological change in the electronics industry, the legal protections for our products are less significant factors in our success than the knowledge, ability and experience of our employees, the frequency of product enhancements and the timeliness and quality of support services that we provide.
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C.           Organizational Structure
In May 2002, we acquired a 76% interest in Kubatronik.  Kubatronik is a PCB manufacturer that specializes in short run and prototype boards, including multi-layer, flex-rigid and HDI boards.  Its customers include companies engaged in the production of industrial equipment, defense and aerospace equipment, telecom and networking equipment, and computer and data storage equipment as well as contract electronic manufacturers. Mr. Alois Kubat, Kubatronik’s founder, holds the remaining 21% interest in Kubatronik.  Mr. Kubat has the right to require us to purchase, and we have the right to require him (or his permitted transferee) to sell to us, his remaining interest in Kubatronik. In May 2012, Mr. Kubat exercised his option with respect to 3% of his remaining shares of Kubatronik for approximately Euro 69,000 and reduced his ownership percentage from 24% to 21%. The price for Mr. Kubat’s remaining holdings in Kubatronik under the put option is Euro 483,000, while the price for such holdings under the call option is Euro 513,000.
In July 2007, we established Eltek USA Inc., a wholly-owned subsidiary incorporated in Delaware, to manage our sales and marketing activities in the North American market.  Eltek USA Inc. commenced operations in 2008.
In December 2008, we established Eltek Europe GmbH, a wholly-owned subsidiary organized in Germany, to manage our sales and marketing activities for certain European customers.
D.           Property, Plants and Equipment
Leased Facilities
Our executive offices, as well as our design, production, storage and shipping facilities, aggregating approximately 90,000 square feet, are located in an industrial building in the Sgoola Industrial Zone of Petach Tikva, Israel.  The lease for such facilities expires in February 2017 and we have an option to extend the lease for an additional five year term upon six months prior notice.  In the year ended December 31, 2012, we incurred $775,000 of rent expenses for these premises.
Kubatronik’s executive offices as well as its design, production, storage and shipping facilities, aggregating approximately 15,000 square feet, are located in an industrial building in Geislingen, Germany, owned by the wife of the former owner of Kubatronik.  The lease for the facilities expires on June 30, 2014.  In the year ended December 31, 2012, Kubatronik paid an aggregate of approximately Euro 87,000 ($114,000) in rent for these premises.
Our U.S. subsidiary, Eltek USA Inc., leases approximately 950 square feet office space in New Hampshire.  The lease for the facilities will expire on November 30, 2013.  In the year ended December 31, 2012, we paid $27,000 in rent for these premises and expect to pay the same amount on a pro-rated basis in 2013.
Leased Equipment
We lease manufacturing equipment under an agreement that obligates us to pay a total of $1.3 million through June 2017.  Our monthly lease expense under this agreement is $33,000 in 2013.
Kubatronik leases manufacturing equipment under six lease agreements, which as of December 31, 2012 require Kubatronik to pay a total of Euro 33,000 through May 2015.  Kubatronik’s monthly lease expense under these agreements is approximately Euro 3,835 ($5,000).
Not applicable.
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A.           Operating Results
The following discussion of our results of operations should be read together with our consolidated financial statements and the related notes, which appear elsewhere in this annual report.  The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties.  Our actual results may differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report.
Overview
We were incorporated under the laws of the State of Israel in 1970.  Since our initial public offering in January 1997, our ordinary shares have been listed on the NASDAQ Stock Market (symbol: ELTK) and are presently listed on the NASDAQ Capital Market.  We have production facilities in Israel and Germany and marketing subsidiaries in Germany and the United States.
Mr. Josef Maiman, through Merhav M.N.F. Ltd. and Integral International Inc., holds 24.1% of our shares and exercises a substantial influence over our management. Mr. Maiman is currently facing financial difficulties and should he divest all or a significant portion of his interest in us, it may result in a change in control and in our management, and our operations could be adversely affected. As a result, we are currently investigating the possible sale of our company or substantially all of its assets.
We develop, manufacture, market and sell PCBs, including high density interconnect (HDI) multi-layered and flex-rigid boards for the defense and aerospace, medical technology, telecommunications and electronics industries.  Our principal customers include manufacturers of medical equipment, defense and aerospace equipment, industrial equipment, and telecom and networking equipment, as well as contract electronic manufacturers.
Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars in accordance with U.S. GAAP.  Our functional currency is the NIS.  The consolidated financial statements appearing in this annual report are translated into U.S. dollars at the representative rate of exchange under the current rate method.  Under such method, the income statement and cash flows statement items for each year (or period) stated in this report are translated into U.S. dollars using the average exchange rates in effect at each period presented, and assets and liabilities for each year (or period) are translated using the exchange rate as of December 31 of each year (as published by the Bank of Israel), except for equity accounts, which are translated using the rates in effect at the date of the transactions.  All resulting exchange differences that do not affect our earnings are reported in the accumulated other comprehensive income as a separate component of shareholders’ equity.
Critical Accounting Policies
We have identified the policies below as critical to the understanding of our consolidated financial statements.  The application of these policies requires management to make estimates and assumptions that affect the valuation of assets and expenses during the reporting period.  There can be no assurance that actual results will not differ from these estimates.
The significant accounting policies described in Note 1 of our consolidated financial statements, which we believe to be most important to fully understand and evaluate our financial condition and results of operation under U.S. GAAP, are discussed below.
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Revenue Recognition. We recognize revenues when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sale price is fixable or determinable.  Commission income is accounted for on the accrual basis.
Inventories. Inventories are recorded at the lower of cost or market value. Cost is determined on the weighted average basis for raw materials. For work in progress and finished goods, the cost is determined based on calculation of accumulated actual direct and indirect costs.
Allowance for doubtful accounts receivable. The allowance for doubtful accounts receivable is calculated on the basis of specific identification of customer balances.  The allowance is determined based on management’s estimate of the aged receivable balance considered uncollectible, based on historical experience, aging of the receivable and information available about specific customers, including their financial condition and the volume of their operations.
Fixed assets. Assets are recorded at cost.  Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets.  Machinery and equipment purchased under capital lease arrangements are recorded at the present value of the minimum lease payments at lease inception.  Such assets and leasehold improvements are depreciated and amortized respectively, using the straight-line method over the shorter of the lease term or estimated useful life of the asset.
Impairment in Value of Assets. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset or asset group to the undiscounted future net cash flows expected to be generated by the asset or the asset group.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Goodwill. Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination.  Goodwill is reviewed for impairment at least annually.  The goodwill impairment test is a two-step test.  Under the first step, the fair value of the reporting unit is compared with its carrying value.  An indication of goodwill impairment exists if the fair value of the reporting unit is less than its carrying value, and the enterprise must perform step two of the impairment test (measurement).  Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.  The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.  The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.  Fair value of the reporting unit is determined using a discounted cash flow analysis.  If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.
Following an evaluation performed for our investment in Kubatronik, we determined that the value of our investment in Kubatronik decreased and that as a result, goodwill in the amount of $481,000 relating to our investment in Kubatronik had been impaired. As a result, for the year ended December 31, 2012, we recorded a goodwill impairment loss of $481,000.  We did not record any impairment of goodwill for the years ended December 31, 2011 and 2010.
The fair value of an asset is estimated using estimated future cash flows of the asset discounted by a rate commensurate with the risk involved with such asset while incorporating marketplace assumptions. The estimate of future cash flows requires management to make certain assumptions and to apply judgment, including forecasting future sales, PCB market prices, raw material consumption, labor and other manufacturing expenses, and the useful lives of the assets. We exercise our best judgment based on the most current facts and circumstances surrounding our business when applying these impairment rules.  The estimates used in these calculations are based upon our historical experience, knowledge of the PCB industry and by incorporating third-party data. Nevertheless, changes in the assumptions used could have an impact on our assessment of recoverability. For example, changing the terminal growth rate from 2% to 1% will result in a net change of Euro 23,000 in the fair value of Kubatronik (and Euro 18,000 for our 79% holding). Changing the discount rate from 15.31% to 17% will result in a net change of Euro 60,000 in the fair value of Kubatronik (and Euro 47,000 for our 79% holding). Changing the short term revenue growth by 1% each year until 2017 will result in a net change of Euro 199,000 in the fair value of Kubatronik (and Euro 157,000 for our 79% holding).
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Use of estimates. The preparation of the consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, allowance for doubtful accounts, valuation of derivatives, deferred tax assets, inventory, goodwill, put/call option, income tax uncertainties and other contingencies.
Commitments and contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Recoveries of environmental remediation costs from third parties that are probable of realization are separately recorded as assets, and are not offset against the related environmental liability.
Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of expected future expenditures for environment remediation obligations are not discounted to their present value.
Results of Operations
The following table sets forth, for the periods indicated, selected financial information expressed as a percentage of our total revenues:
Year Ended December 31,
2012
2011
2010
Revenues
100 % 100 % 100.0 %
Cost of revenues
(82.9 ) (81.4 ) (87.1 )
Gross profit
17.1 18.6 12.9
Selling, general and administrative
expenses
(13.2 ) (13.1 ) (16.1 )
Impairment loss on goodwill
(1 ) - -
Operating profit (loss)
2.8 5.5 (3.2 )
Financial expenses, net
(1.2 ) (1.6 ) (1.6 )
Other income, net
* * *
Profit (loss) before income tax expense and non-controlling  interest
1.6 3.9 (4.8 )
Income tax expense
(0.1 ) (0.1 ) (0.1 )
Net profit (loss)
1.5 3.8 (4.9 )
Net profit (loss) attributable to non-controlling interest
* 0.1 0.3
Net profit (loss) attributed to shareholders
1.5 3.9 (4.6 )
___________________
* Less than 0.1%
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
Revenues. Revenues decreased by 2.5% to $45.6 million for the year ended December 31, 2012 from $46.8 million for the year ended December 31, 2011.  The decrease in revenues is primarily attributable to a temporary production line problem, which reduced our revenues in the third quarter of 2012.
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Cost of Revenues .  Cost of revenues decreased by 0.7% to $37.8 million for the year ended December 31, 2012 from $38.1 million for the year ended December 31, 2011.  The decrease in cost of revenues is primarily attributable to the decrease in revenues.  Cost of revenues as a percentage of revenues increased to 82.9% for the year ended December 31, 2012 from 81.4% for the year ended December 31, 2011.  The increase in cost of revenues as a percentage of revenues is primarily attributable to the decrease in revenues in 2012, without a corresponding reduction in the fixed portion of our cost of sales.
Gross Profit. Gross profit decreased by 10.5% to $7.8 million for the year ended December 31, 2012 from $8.7 million for the year ended December 31, 2011.  The decrease in gross profit is primarily due to the decrease in revenues.  Gross profit as a percentage of revenues decreased to 17.1% for the year ended December 31, 2012 from 18.6% for the year ended December 31, 2011.  The decrease in gross profit as a percentage of revenues is primarily attributable to decrease in revenues in 2012, without corresponding reduction in the fixed portion of our cost of sales
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by 1.9% to $6 million for the year ended December 31, 2012 from $6.2 million for the year ended December 31, 2011.  The decrease in selling, general and administrative expenses is mainly attributable to commissions paid to sales representatives.
Impairment loss on goodwill. We recorded a goodwill impairment loss of $481,000 in 2012 following our annual impairment test of goodwill, in which we determined that the value of our investment in Kubatronik had decreased by that amount.  We did not record any impairment of goodwill for the year ended December 31, 2011.
Operating Profit (Loss)) .  As a result of the foregoing, we recorded operating profit of $1.3 million for the year ended December 31, 2012 compared to an operating profit of $2.6 million for the year ended December 31, 2011.
Financial Expenses, Net. Financial expenses, net, decreased by 26.6% to $543,000 for the year ended December 31, 2012 from $740,000 for the year ended December 31, 2011.  Our financial expenses in 2012 were primarily attributable to interest paid on short-term and long-term debt, the impact of the NIS exchange rate on outstanding U.S. dollar and Euro denominated balances of our creditors and debtors, gains and losses on hedging transactions and changes in the fair value of the put/call option held by the owner of 21% interest in Kubatronik.  The decrease in financial expenses compared to 2011 is primarily attributable to a decrease in interest expenses, mainly as a result of loan repayments to our banks.
Other Income, Net .  We had other income, net of $2,000 for the year ended December 31, 2012, compared with other income, net of $12,000 for the year ended December 31, 2011, both of which are attributable to gains recorded on the disposal of fixed assets.
Income Tax Expense .  During the years ended December 31, 2012 and 2011, we recorded income tax expenses of $52,000 and $31,000, respectively, attributable to our subsidiaries in the United States and Germany.  During the years ended December 31, 2012 and 2011, we did not record a deferred tax asset and related tax benefit with respect to our net operating losses generated in Israel due to uncertainty about our ability to utilize such losses in the foreseeable future.  Such uncertainty is primarily due to the global economic climate, the fluctuations of the PCB industry, possible fluctuations of the NIS against the U.S. dollar, which may have an adverse impact on our financial results and our history of losses.  For the years ended December 31, 2012 and 2011, we did not record a deferred tax asset and related tax benefit with respect to the net operating losses of Kubatronik due to uncertainty about its ability to utilize such losses in the foreseeable future.
Non-controlling interest. Non-controlling interest reflects the $6,000 other shareholder’s proportionate share in Kubatronik’s net profit for the year ended December 31, 2012, as compared to the $31,000 minority share in Kubatronik’s net loss for the year ended December 31, 2011.
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
Revenues. Revenues increased by 24.8% to $46.8 million for the year ended December 31, 2011 from $37.5 million for the year ended December 31, 2010.  The increase in revenues is primarily attributable to an improvement in our manufacturing process, which enabled us to translate the increased demand into increased revenues and reduced manufacturing capacity in the local market.
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Cost of Revenues .  Cost of revenues increased by 16.5% to $38.1 million for the year ended December 31, 2011 from $32.7 million for the year ended December 31, 2010.  The increase in cost of revenues is primarily attributable to the increase in revenues.  Cost of revenues as a percentage of revenues declined to 81.4% for the year ended December 31, 2011 from 87.1% for the year ended December 31, 2010.  The reduction in cost of revenues as a percentage of revenues is primarily attributable to the increase in revenues in 2011, while our expenses increased at a lesser rate than the increase in our revenues.
Gross Profit. Gross profit increased by 80.9% to $8.7 million for the year ended December 31, 2011 from $4.8 million for the year ended December 31, 2010.  The increase in gross profit is primarily due to the increase in revenues.  Gross profit as a percentage of revenues increased to 18.6% for the year ended December 31, 2011 from 12.9% for the year ended December 31, 2010.  The increase in gross profit as a percentage of revenues is primarily attributable to the reduction in cost of revenues as a percentage of revenues, since our expenses increased at a lesser rate than the increase in our revenues.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by 2% to $6.2 million for the year ended December 31, 2011 from $6.0 million for the year ended December 31, 2010.
Operating Profit (Loss)) .  As a result of the foregoing, we recorded operating profit of $2.6 million for the year ended December 31, 2011 compared to an operating loss of $1.2 million for the year ended December 31, 2010.
Financial Expenses, Net. Financial expenses, net, increased by 21.5% to $740,000 for the year ended December 31, 2011 from $609,000 for the year ended December 31, 2010.  Our financial expenses in 2011 were primarily attributable to interest paid on short-term and long-term debt and the impact of the NIS exchange rate on outstanding U.S. dollar and Euro denominated balances of our creditors and debtors, as well as gains and losses on hedging transactions.  The increase in financial expenses compared to 2010 is primarily attributable to losses on hedging transactions.
Other Income, Net .  We had other income, net of $12,000 for the year ended December 31, 2011, compared with other income, net of $2,000 for the year ended December 31, 2010, both of which are attributable to gains recorded on the disposal of fixed assets.
Income Tax Expense .  During the years ended December 31, 2011 and 2010, we recorded income tax expenses of $31,000 and $19,000, respectively, attributable to our subsidiaries in the United States and Germany.  During the years ended December 31, 2011 and 2010, we did not record a net deferred tax asset and related tax benefit with respect to our net operating losses generated in Israel due to uncertainty about our ability to utilize such losses in the foreseeable future.  Such uncertainty is primarily due to the global economic climate, the fluctuations of the PCB industry, possible fluctuations of the NIS against the U.S. dollar, which may have an adverse impact on our financial results and our history of losses.  For the years ended December 31, 2011 and 2010, we did not record a net deferred tax asset and related tax benefit with respect to the net operating losses of Kubatronik due to uncertainty about its ability to utilize such losses in the foreseeable future.
Non-controlling interest. Non-controlling interest reflects the $31,000 other shareholders propionate share in Kubatronik’s net loss for the year ended December 31, 2011, as compared to the $113,000 minority share in Kubatronik’s net loss for the year ended December 31, 2010.
Impact of Currency Fluctuations and Inflation
Our revenues and expenses are denominated in the NIS, U.S. dollar and Euros.   Due to the different proportions of currencies our revenues and expenses are denominated in, fluctuations in rates of exchange between NIS and other currencies may affect our operating results and financial condition.  In addition, the NIS value of our U.S. dollar or Euro denominated revenues are negatively impacted by the depreciation of the U.S. dollar and the Euro against the NIS.  The average exchange rate for the NIS against the U.S. dollar was 7.8% higher in 2012 than 2011 and the average exchange rate for the NIS against the Euro was 0.5% lower in 2012 than 2011, and in total, these changes had a positive impact on our operating results in 2012.  The average exchange rate for the NIS against the U.S. dollar was 4.1% lower in 2011 than 2010 and the average exchange rate for the NIS against the Euro was 0.6% higher in 2011 than 2010, which had a negative impact on our operating results in 2011.
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The following table sets forth, for the periods indicated, (i) depreciation or appreciation of the NIS against the most important currencies for our business, the U.S. dollar and Euro, between December 31 each year and the year before, and (ii) inflation as reflected in changes in the Israeli consumer price index, or the CPI.
Year Ended December 31,
2012
2011
2010
2009
2008
U.S. dollar
(2.3 )% 7.7 % (6.0 )% (0.7 )% (1.1 )%
Euro
(0.4 )% 4.2 % (12.9 )% 2.7 % (6.4 )%
Israeli CPI
1.6 % 2.2 % 2.7 % 3.9 % 3.8 %
We have engaged external consultants to assist us to manage our foreign exchange risk.  From time to time in the past we have used currency hedging instruments in order to partially protect ourselves from currency fluctuation and may use hedging instruments from time to time in the future.  However, we have recently encountered difficulties in obtaining lines of credits from our banks to perform such hedging transactions.
Because exchange rates between the NIS and the dollar and Euro fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on our profitability and period-to-period comparisons of our results.  We cannot assure you that in the future our results of operations may not be materially adversely affected by currency fluctuations.
Conditions in Israel
We are incorporated under the laws of, and our executive offices, principal production facilities and research and development facilities are located in, the State of Israel.  See Item 3D “Key Information – Risk Factors – Risks Relating to Our Location in Israel” for a description of governmental, economic, fiscal, monetary or political polices or factors that have materially affected or could materially affect our operations.
Trade Relations
Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation.  Israel is a member of the World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade.  In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan.  These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs.  Israel is also a member of the Organization for Economic Co-operation and Development, or the OECD, an international organization whose members are governments of mostly developed economies.  The OECD’s main goal is to promote policies that will improve the economic and social well-being of people around the world.
Israel and the European Union Community, known now as the European Union, concluded a Free Trade Agreement in July 1975 that confers some advantages with respect to Israeli exports to most European countries and obligated Israel to lower its tariffs with respect to imports from these countries over a number of years.  In 1985, Israel and the United States entered into an agreement to establish a Free Trade Area.  The Free Trade Area has eliminated all tariff and some non-tariff barriers on most trade between the two countries.  On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as the EFTA, established a free-trade zone between Israel and the EFTA nations.  In November 1995, Israel entered into a new agreement with the European Union, which includes a redefinition of rules of origin and other improvements, such as allowing Israel to become a member of the Research and Technology programs of the European Union.  In recent years, Israel has established commercial and trade relations with a number of other nations, including Russia, China, India, Turkey and other nations in Eastern Europe and Asia.
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Effective Corporate Tax Rate
Israeli companies are generally subject to income tax on their taxable income under the Income Tax Ordinance.  The applicable rate for 2012 was 25% and is expected to remain the same for the foreseeable future.  However, one of our production facilities qualifies as a “benefited enterprise” under the Law for the Encouragement of Capital Investments, 1959, as amended.  Subject to certain time limitations, income derived from such benefited enterprise will be subject to lower tax rates of up to 25%.  For additional information see Item 10E. “Additional Information – Taxation - Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959” and Note 14 to our consolidated financial statements.
As of December 31, 2012, we had approximately $14.5 million in tax loss carry forwards in Israel, which can be offset against future income in Israel without time limitation.  In Israel, we have received final tax assessments through the 1995 tax year and the tax assessments we received for the 1996-2007 tax years are considered final due to the statute of limitations.  Our foreign subsidiaries, Kubatronik and Eltek Europe, have received final tax assessments through the 2010 tax year. As of December 31, 2012, Kubatronik  had approximately Euro 973,000 ($1.3 million) in tax loss carryforwards in Germany for corporate tax and Euro 1.1 million ($1.4 million) for municipal corporate tax.  Our other foreign subsidiaries have not yet received any final tax assessments since their incorporation. We do not believe, on a “more likely than not” basis, that we will be able to utilize the tax asset attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and to our loss carry-forwards in the foreseeable future.  Therefore we have recorded a full valuation allowance on the deferred tax asset in respect of these differences and loss carry-forwards.
Recently Issued Accounting Standards
In December 2011, the Financial Accounting Standards Board issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, or ASU 2011-11.  ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under International Financial Reporting Standards (IFRS). The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. We will implement the provisions of ASU 2011-11 as of January 1, 2013.
B.           Liquidity and Capital Resources
Historically, we have financed our operations through cash generated by operations, shareholder loans, long-term and short-term bank loans, borrowings under available credit facilities and the proceeds from our initial public offering in 1997 (approximately $5.8 million).
Cash Flows
The following table summarizes our cash flows for the periods presented:
Year ended December 31,
2012
2011
2010
($ in thousands)
Net cash provided by operating activities
4,772 2,414 1,504
Net cash used in investing activities
(1,234 ) (882 ) (451 )
Net cash used in financing activities
(2,390 ) (2,002 ) (815 )
Effect of translation adjustments
(107 ) (151 ) 17
Net increase (decrease) in cash and cash equivalents
1,041 (621 ) 255
Cash and cash equivalents at beginning of year
892 1,513 1,258
Cash and cash equivalents at end of year
1,933 892 1,513
Net cash provided by operating activities was $4.8 million for the year ended December 31, 2012.  This amount was primarily attributable to our net income of $696,000, adjustments for non-cash items (consisting of depreciation and amortization) of $2.3 million, a decrease in trade receivables of $2.3 million since we received $1.3 million from two large customers, a decrease in other liabilities and accrued expenses of $281,000, a decrease in employee severance benefits, net of $53,000 and a revaluation of long term loans of $25,000. This amount was offset in part by a $670,000 increase in inventories for production in the first quarter of 2013, a decrease in trade payables of $147,000 and an increase in other receivables and prepaid expenses of $58,000.
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Net cash provided by operating activities was $2.4 million for the year ended December 31, 2011.  This was primarily attributable to net income of $1.8 million, adjustments for non-cash items (consisting of fixed asset depreciation and amortization) of $2.1 million, revaluation of long-term loans of $58,000 and an increase in current assets, net of $1.6 million (comprised of an increase in trade receivables of $2.0 million, an increase in other receivables and prepaid expenses of $68,000,  an increase in inventories of $487,000, an increase in trade payables of $621,000, an increase in other liabilities and accrued expenses of $324,000 and an increase in employee severance benefits, net of $68,000).  Net cash provided by operating activities was $1.5 million for the year ended December 31, 2010.  This amount was primarily attributable to fixed asset depreciation and amortization of $2.1 million, an increase in current assets, net of $146,000 (comprised of an increase in trade receivables of $186,000, a decrease in other receivables and prepaid expenses of $178,000 and an increase in inventories of $138,000), an increase in trade payables of $1.2 million, an increase in other liabilities and accrued expenses of $203,000 and an increase in employee severance benefits, net of $45,000.  This amount was partially offset by a net loss of $1.7 million ($1.8 million less minority share of subsidiary's net loss of $113,000) and revaluation of long-term loans of $49,000.
Net cash used in investing activities was $1.2 million for the year ended December 31, 2012, $882,000 for the year ended December 31, 2011 and $451,000 for the year ended December 31, 2010.  Net cash used in investing activities for the years ended December 31, 2012, 2011 and 2010 was primarily for the purchase of fixed assets for our production lines, expansion of our manufacturing facilities, including leasehold improvements, and the purchase of information technology software and hardware.
Net cash used in financing activities was $2.4 million for the year ended December 31, 2012, which was primarily attributable to repayments of long-term loans, net of $1.1 million, a repayment of credit from fixed assets payable of $1.0 million and a decrease of $192,000 in short term credit.  Net cash used in financing activities was $2.0 million for the year ended December 31, 2011, which was primarily attributable to repayments of long-term loans, net of $1.1 million, repayments of short-term credit of $802,000 and the repayment of credit received from fixed asset suppliers of $539,000, which amounts were partially offset by new long-term bank loans of $474,000 in lieu of the reduced short-term credit of a similar amount.  Net cash used in financing activities was $815,000 for the year ended December 31, 2010, which was primarily attributable to repayments of long-term loans, net of $1.2 million and the repayment of credit received from fixed assets suppliers of $400,000, which amounts were partially offset by an increase in short-term bank credit of $355,000 and new long-term bank loans of $452,000.
As of December 31, 2012, we had $1.9 million in cash and cash equivalents, and a working capital deficit of $2.7 million, as compared to $892,000 in cash and cash equivalents, and a working capital deficit of $1.8 million at December 31, 2011.
As of December 31, 2012, the following revolving lines of credit were outstanding:
·
a revolving line of credit of approximately $1.4 million with Bank Hapoalim B.M.  Of such amount, $110,000 is linked to the U.S. dollar and $1.3 million is not linked.
·
a revolving line of credit of approximately $2.4 million with Israel Discount Bank Ltd., which is not linked to the U.S. dollar.
·
a revolving line of credit of approximately $54,000 with First International Bank of Israel Ltd., which is not linked to the U.S. dollar.
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As of December 31, 2012, the following long-term banks loans were outstanding:
·
long-term loans from Bank Hapoalim B.M. aggregating $304,000.  Of such amount, $118,000 is linked to the U.S. dollar, and $186,000 is not linked.
·
long-term loans from Israel Discount Bank Ltd. in the aggregate amount of $992,000.  Of such amount, $198,000 is linked to the U.S. dollar and $794,000 is not linked.
As of December 31, 2012, we also had long-term loans from suppliers of fixed assets in the aggregate amount of $718,000. Of such amount, $95,000 is linked to the Euro and $623,000 is linked to the U.S. dollar.
Our credit lines and short-term loans bear annual interest as follows:
·
linked to the Prime rate - from Prime+1.75% to Prime+3.5%
·
linked to the U.S. dollar - from LIBOR+2.3% to LIBOR+4.0%
Our long-term bank loans bear annual interest as follows:
·
linked to the CPI - from 4.5% to 6.5%
·
linked to the U.S. dollar - from LIBOR+1.88% to LIBOR+.5%
·
linked to the Prime rate - from  Prime+0.9% to Prime+3.0%
·
non-linked - from 7.6% to 8.4%
The borrowings from our banks are secured by specific liens on certain assets, by a first priority charge on the rest of our now-owned or after-acquired assets and by a fixed lien on goodwill (intangible assets) and insurance rights (rights to proceeds on insured assets in the event of damage).  In addition, the agreements with our banks prohibit us from selling or otherwise transferring any assets except in the ordinary course of business or from placing a lien on our assets without the banks’ consent.
One of our banks requires us to maintain a specific set of covenants for each fiscal year.  For the year ended December 31, 2012, we were required to maintain all of the following financial covenants: (i) maintaining the greater of adjusted shareholders’ equity of $2.1 million or 9% of our consolidated total assets; (ii) EBITDA of $3.0 million; and (iii) a coverage ratio of 1.5.  For this purpose, shareholders’ equity excludes leasehold improvements and certain intangible assets. Coverage ratio is defined as annual EBITDA divided by annual repayments of debt including interest. As of December 31, 2012, we were in compliance with the set covenants.  For the year ending December 31, 2013 we must meet the following: (i) maintaining the greater of adjusted shareholders’ equity of $2.6 million or 12% of our consolidated total assets; (ii) EBITDA of $3.4 million; and (iii) a coverage ratio of 1.5. These amounts increase every year until December 31, 2016 when we must meet the following targets: (i) maintaining the greater of adjusted shareholders’ equity of $4.2 million or 20% of our consolidated total assets, (ii) EBITDA of $4.0 million and (iii) coverage ratio of 1.5.
Financial covenants in respect of our credit facilities and long-term debt with another bank require us to maintain the greater of shareholders’ equity, excluding certain intangible assets and prepaid expenses (except insurance premiums), of NIS 10.0 million ($2.6 million) or 11% of our total assets on a non-consolidated basis. As of December 31, 2012 we were in compliance with such covenants. As part of our discussions for obtaining new lines of credits from this bank, the financial covenants may be amended, including a possible requirement of  our subsidiaries, Eltek Europe GmbH and Eltek USA Inc. to pledge all their assets towards, and to sign a letter of guaranty in favor of the bank.
Capital expenditures on a cash flow basis for the years ended December 31, 2012 and 2011 were approximately $1.2 million and $882,000, respectively.  In addition, purchases of fixed assets not yet paid as at December 31, 2012 amounted to $1.2 million. Our capital expenditures in such periods mainly related to our investments in production and manufacturing equipment, and leasehold improvements.  As of December 31, 2012 we had existing commitments to purchase $413,000 of equipment.  We intend to finance our 2013 capital expenditures mainly with suppliers’ credit and from operational cash flow; however, such financing may not be available, or, if available, may not be on terms favorable to us. Our principal commitments consist of obligations outstanding under our bank loans and credit facilities, suppliers’ credit and operating leases.
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We expect to finance our 2013 budget from operational cash flow, revolving bank credit lines and long-term bank loans, and supplier financing.  In April 2010, two of our banks agreed to a deferral of all the principal payments due for the months April through July 2010 and 80% of the principal payments due for the months August through December 2010.  We are obligated to repay the deferred payment amounts over a three-year period with one bank, and a two to three-year period with another bank, beginning January 2011.  Interest is payable and has been paid regularly.  A third bank reduced our line of credit by approximately $360,000 over the course of 2011, and by an additional $240,000 over the course of 2012.
Although we anticipate that these capital resources will be adequate to satisfy our liquidity requirements through 2013, our liquidity could be negatively affected by a decrease in demand for our products, including the impact of changes in customer buying that may result from the general economic downturn, the stability of the U.S. dollar/NIS exchange rate, our results of operations, our suppliers’ payment terms, our customers’ demand for extending their payment terms and other factors detailed in Item 3D “Key Information - Risk Factors.”  If available liquidity is not sufficient to meet our operating and debt service obligations as they come due, we would need to pursue alternative financing arrangements or reduce expenditures to meet our cash requirements through 2013.  Such additional financing may not be available to us or, if available, may not be obtained on terms favorable to us, and there is no assurance that we would be able to reduce discretionary spending to provide the required liquidity.
C.           Research and Development, Patents and Licenses
We generally do not engage in research and development.
D.           Trend Information
Following a decline in revenues caused by the global financial crisis in 2008 and 2009, our revenues began to increase in 2010 and further increased in 2011, primarily due to the improvement in the PCB market, both globally and domestically, along with improvements in our manufacturing process, which enabled us to translate the increased demand into additional revenues.
Our backlog at December 31, 2012 was approximately $14.9 million compared to a backlog of approximately $8.3 million at December 31, 2011.  We include in our backlog all purchase orders scheduled for delivery within the next 12 months. For a variety of reasons, including the timing of orders, delivery intervals, customer and product mix and the possibility of customer changes in delivery schedules, backlog as of any particular date may not be a reliable measure of sales for any succeeding period.  Cancellation charges generally vary depending upon the time of cancellation and, therefore, substantially all of our backlog may be subject to cancellation without penalty.
E.            Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements.  In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.
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F.            Tabular Disclosure of Contractual Obligations
The following table summarizes our minimum contractual obligations as of December 31, 2012.
Contractual Obligations
Payments due by period
($ in thousands)
Total
less than 1 year
2-3 years
4-5 years
more than 5 years
Short-term bank credit (1)
3,884 3,884
Long-term debt obligations (1)
2,208 1,480 447 281
Operating lease
4,508 1,077 2,000 1,245 186
Other contractual obligations
1,794 704 769 321
Purchase obligations
2,539 2,539
Other short-term liabilities reflected on the company’s balance sheet (2)
4,419 4,419
Other long-term liabilities reflected on the company’s balance sheet
215 215
Estimate of interest payments on long-term debt obligations (3)
107 72 35
Total
19,674 14,175 3,251 1,847 401
_________________________
(1)
For information on the interest rates of our short-term bank credit and long-term debt obligations, see Item 5B. “Operating and Financial Review and Prospects - Liquidity and Capital Resources.”
(2)
Includes the estimated net value of our liability attributable to Mr. Kubat’s put option relating to his 21% ownership interest in Kubatronik under the agreement relating to the acquisition of our 76% ownership interest in Kubatronik in June 2002, which increased to 79% in May 2012.  Under U.S. GAAP, such an arrangement gives rise to a derivative instrument, which must be marked to market every reporting period.
(3)
The estimate of interest payments on long-term debt obligations is based on current interest rates as of December 31, 2012 (including current variable rates on the existing long-term debt obligations) and on the current volume of debt obligations, assuming loan repayment in future years as disclosed in Note 8 to the consolidated financial statements.
A.           Directors and Senior Management
Directors
Set forth below are the name, age, principal position and a biographical description of each of our directors:
Name
Age
Position
Erez Meltzer
55
Chairman of the Board of Directors
David Banitt (1)(2)
61
Independent Director
Eytan Barak (1)(2)
68
Outside Director
Amit Mantsur
42
Director
Ophira Rosolio-Aharonson(1)(2)
63
Outside Director
Irit Eluz
45
Director
__________________________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
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Mr. David Banitt and Ms. Irit Eluz, Class II directors, will serve as directors until our 2013 annual general meeting of shareholders.  Messrs. Amit Mantsur and Erez Meltzer, Class III directors, will serve as directors until our 2014 annual general meeting of shareholders.  Ms. Ophira Rosolio-Aharonson was elected to serve as an outside director at our 2012 annual general meeting of shareholders for a third three-year term, pursuant to the provisions of the Israeli Companies Law.  Mr. Eytan Barak was elected to serve as an outside director at our 2011 annual general meeting of shareholders for a second three-year term, pursuant to the provisions of the Israeli Companies Law, following which the service of Mr. Barak as an outside director may be renewed for one additional three-year term.
Mr. Yaron Malka submitted his resignation as a director in February 2012. Professor Joseph Yerushalmi submitted his resignations as a director in November 2012. Mr. Itamar Levy submitted his resignation as a director in April 2013.
Erez Meltzer has served the Chairman of our Board of Directors since April 1, 2011 and has served as a director since August 2009.  Mr. Meltzer has served as the Chief Executive Officer of Gadot, a wholly-owned subsidiary of Ampal-American Israel Corporation, or Ampal, since November 2008.  Mr. Meltzer also serves as a director of Ampal and Ericom Software Ltd.  From 2006 to 2007, Mr. Meltzer served as the Chief Executive Officer of Africa Israel Group.  From 2002 to 2006, Mr. Meltzer served as the President and Chief Executive Officer of Netafim Ltd.  From 1999 to 2001, Mr. Meltzer served as the President and Chief Executive Officer of CreoScitex.  Mr. Meltzer served as a colonel in the Israeli Defense Forces – Armored Corps. (reserves).  Mr. Meltzer has served as the Chairman of the Lowenstein Hospital Friends Association since 1999 and is the honorary chairman of the Israeli Chapter of YPO (the Young Presidents Organization).  Mr. Meltzer studied Economics and Business at the Hebrew University of Jerusalem and Boston University, and is a graduate of the Advanced Management Program at Harvard Business School.
David Banitt , an independent director, has served as a director since March 1997 and is a member of our audit committee and executive committee.  Since June 2011, Mr. Banitt has served  as the chief executive officer of Newco2fuels, a start-up company he founded, developing an innovative product using solar energy to produce liquid fuels for transportation out of carbon dioxide and water.  Between September 2010 and June 2011, Mr. Banitt was self-employed, providing consulting services in marketing and business development, as well as preparing for the launch of Newco2fuels.    From January 2009 until September 2010, Mr. Banitt founded and served as the chief executive officer of Lautus and Meitech, companies engaged in industrial wastewater treatment.  From January 2007 until January 2009 Mr. Banitt founded and served as the chief operating officer of HelioFocus Ltd., a company that develops solar thermal energy generation products.  From January 2006 until January 2007, Mr. Banitt served as the chief executive officer of YDesign Ltd., a company that he co-founded, involved in the development of consumer products.  From July 2005 until January 2006, Mr. Banitt was self-employed, providing consulting services in marketing, primarily in the PCB market.  From August 2001 until July 2005, Mr. Banitt served as chief executive officer and member of the board of directors of Nano-OR Ltd., an Israeli start-up company engaged in the development of electro-optics systems.  Prior to joining Nano-OR Technology Ltd. and from January 2001, Mr. Banitt was self-employed.  From September 1997 until January 2001, Mr. Banitt served as President and member of the board of directors of Exsight Electro Optical Systems Ltd., an Israeli start-up company engaged in the development of electro-optics systems for the printed circuit boards industry.  From 1993 until 1997, Mr. Banitt served as general manager of Nitzanim Initiative Center.  From 1985 until 1992, Mr. Banitt served as Vice President of Marketing of Optrotech Ltd., an Israeli company that provided optical inspection systems to the PCB industry.  Mr. Banitt holds a B.Sc. degree in Electronics Engineering from Tel Aviv University.
Eytan Barak was elected to serve as an outside director (within the meaning of the Israeli Companies Law) in December 2008 and is a member of our audit committee and executive committee.  He is joint owner and chief executive officer of Dovrat - Barak, Investments in Advanced Technologies Ltd., a company that provides financial resources and management assistance to start-up companies.  Mr. Barak also serves as a member of the board of directors, audit committee and investment committee of various companies, including Mer Telemanagement Solutions Ltd. (NASDAQ:MTSL), Menora–Mivtachim Mutual Funds, Meshulam Levinstein Contracting & Engineering Ltd. (listed on the Tel Aviv Stock Exchange) and Spectronix Ltd. (listed on the Tel Aviv Stock Exchange).  From 1997 to 2006, Mr. Barak served as a member of the board of directors, audit committee and investment committee of various Israeli companies.  From 1973 to 1997, Mr. Barak was with The Israel Corporation Ltd., initially serving as its chief financial officer and corporate controller, and also served as chairman or member of the boards of directors of some of its subsidiaries.  From 1967 until 1973, Mr. Barak was associated with Kesselman & Kesselman, the Israeli member firm of PricewaterhouseCoopers International Limited.  Mr. Barak holds a B.A. degree in Accounting and social science from Tel Aviv University and a degree in Accounting from the Hebrew University of Jerusalem and has been a certified public accountant (Israel) since 1971.
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Amit Mantsur has served as a director since August 2009.  Mr. Mantsur has served as the Vice President – Investments of  Ampal since March 2003.  From September 2000 to December 2002, Mr. Mantsur served as Strategy and Business Development Manager at Alrov Group.  From February 1997 to September 2000, Mr. Mantsur was a projects manager at the Financial Advisory Services of Somekh Chaikin, registered public accounting firm, a member firm of KPMG International.  Mr. Mantsur holds a B.A. degree in Economics and Accounting and an M.B.A. degree, both from Ben-Gurion University, and is a certified public accountant (Israel).
Ophira Rosolio-Aharonson was elected to serve as an outside director (within the meaning of the Israeli Companies Law) in December 2006 and is a member of our audit committee and executive committee.  Ms. Rosolio-Aharonson is a co-founder of Seagull Tech Inc. and KeyScan Inc.  In addition, Ms. Rosolio-Aharonson serves as an executive director of several private and publicly traded companies, a strategic business consultant to high-technology companies and an advisor to venture capital firms in Israel and the United States.  Among others, Ms. Rosolio-Aharonson serves as a director of Cimatron Ltd and Scailex Corp.  From 1992 through 1999, Ms. Rosolio-Aharonson served as the chief executive officer of Terra Computers, Inc. in the United States.  From 1980 to 1989, Ms. Rosolio-Aharonson served as a senior executive, holding managerial positions, at Clal Ltd., an Israeli company publicly traded on the Tel Aviv Stock Exchange, including director, chief executive officer, chief operations officer and vice president of sales and marketing of Clal Ltd.’s subsidiaries.  Ms. Rosolio-Aharonson holds a B.Sc. degree in applied mathematics and physics, and has completed courses required for a M.Sc. degree in bio-medical engineering, both from the Technion – Israel Institute of Technology and is a graduate of the executive business and management program of Tel Aviv University.
Irit Eluz was elected to serve as a director in December 2012. Ms. Eluz has served as the Chief Financial Officer and Senior Vice President – Finance and Treasurer of Ampal-American Israel Corporation since October 2004.  From May 2002 until October 2004, Ms. Eluz was Chief Financial Officer and Vice President – Finance and Treasurer of Ampal-American Israel Corporation.  Prior to that, Ms. Eluz was the Associate Chief Financial Officer of Merhav and the Chief Financial Officer of Kamor Group. Ms. Eluz serves as a director of Ampal-American Israel Corporation and Gadot Chemical Tankers and Terminals Ltd.  Since July 2006, Ms. Eluz has been an external director of Kamor Ltd.
Executive Officers
Set forth below are the name, age, principal position and a biographical description of each of our executive officers:
Name
Age
Position
Arieh Reichart
59
President and Chief Executive Officer
Amnon Shemer
54
Vice President, Finance and Chief Financial Officer
Dan Eshed
62
General Manager, Kubatronik
Eli Dvora
56
Vice President, Operations
Shay Shahar
51
Vice President, Marketing and Sales
Roberto Tulman
54
Vice President, Technologies and Chief Technology Officer
Shlomo Danino
50
Vice President, Engineering
Galit Odded
41
Vice President, Human Resources
Avi Gal
49
Vice President, 5S and Chief Information Officer
Eva Zilberleib
61
Vice President, Quality Assurance and Product Marketing Director
James Barry
54
President of Eltek USA Inc.
Axel Herrmann
55
General Manager, Eltek Europe

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Arieh Reichart joined us in September 1984 as our chief financial officer and assumed the position of president and chief executive officer in May 1991.  Mr. Reichart holds a B.A. degree in Economics and M.B.A. degree from Bar-Ilan University.
Amnon Shemer joined us in February 2004 as vice president-finance and chief financial officer.  From January 2003 until November 2003, Mr. Shemer served as managing director of Mea Control Transfer Ltd., a company that provides investment banking services.  From June 1995 until August 2002, Mr. Shemer was vice president of finance for Mentergy Ltd., a publicly-traded company that provides e-learning solutions and satellite communications services.  Mr. Shemer holds a B.A. degree in Economics and Business Administration and M.A. degree in Economics, both from Bar-Ilan University, and complementing accounting courses at Seneca College in Toronto, Canada.
Dan Eshed joined us in April 1987 as a production manager.  During his employment with our company, Mr. Eshed has served as operation manager, senior vice president – technology and infrastructure and was appointed as general manager, Kubatronik in February 2005.  Mr. Eshed holds a B.Sc. degree in Management and Industrial Engineering from Ben Gurion University.
Eli Dvora joined us in 1993 after our merger with TPC Ltd. and served as our comptroller until August 1997.  From September 1997 until February 1998, Mr. Dvora was self-employed.  In March 1998, Mr. Dvora rejoined our company and in September 1999, was appointed as our vice president - operations.  Mr. Dvora holds a B.A. degree in Economics and an M.B.A. degree, both from Bar Ilan University.
Shay Shahar was appointed as our vice president, marketing and sales in December 2009.  Mr. Shahar joined us in July 1992 and since such time has held various positions in our marketing and sales department, from Regional Sales Manager to Corporate Sales Director, and was appointed to his current position of vice president, marketing and sales in December 2009.  Mr. Shahar holds an Electronic Practical Engineer degree from Ort Technology College in Israel, a B.Sc. degree in General Business from Champlain College, Burlington, Vermont and an M.S.M. degree in Management from the Polytechnic University, New York.
Roberto Tulman joined us in August 2005 as vice president, technologies and chief technology officer.  During the 22 years prior to joining our company, Mr. Tulman served in the electronic research department of the Israel Defense Forces, where he held various research and development and management positions, and managed the printed circuits division during his last eight years of service.  Mr. Tulman holds a B.Sc. degree (Cum Laude) in Chemistry, an M.Sc degree in Chemistry (Electrochemistry) and an M.B.A. degree, all from Tel-Aviv University.
Shlomo Danino joined us in August 1985.  During his employment with our company, Mr. Danino has served as product engineering manager and was appointed as vice president, engineering in February 2000.  Mr. Danino holds a B.Sc. degree in Mechanics from Ort Technology College in Israel and a B.Sc. degree in general business from Champlain College, in Burlington, Vermont.
Galit Odded joined us in December 2012 as vice president, human resources. Prior to joining us, from 1999 to 2012, Ms. Odded held training and organizational development positions in the following companies: Intel Corp (from 1999 to 2006); Eltek Ltd. (from February 2007 to July 2010); and Siemens (from September 2010 to October 2012), where she gained experience in training, employee and talent development, organizational change, recruiting, team building and employee integration. Ms. Odded holds a B.Sc degree in Biology and Nutrition Science from the Hebrew University of Jerusalem and an M.A degree in Labor Studies from the Tel Aviv University, graduated with honors.
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Avi Gal was appointed as our vice president, 5S and chief information officer in December 2009.  Mr. Gal joined us in August 1986 as an Industrial engineer in shop floor control department.  In 1988, Mr. Gal established our IT department and led the adaptation of a generic ERP system to the PCB sector.  Between 1994 and 2005, Mr. Gal managed his own business, mainly in developing and implementing an ERP System for maintenance, repair and overhaul for the aviation sector.  In 2005, Mr. Gal returned to our company as chief information officer.  Mr. Gal holds a B.Sc. degree in Management and Industrial Engineering from the Technion - Israel Institute of Technology.
Eva Zilberleib was appointed as our vice president, quality assurance and product marketing director in December 2009.  Ms. Zilberleib joined us in January 1979 and during her over 30 years of employment with our company, she has served as final inspection and quality assurance lab manager and technical customer support manager.  Ms. Zilberleib holds B. Sc. degree in Chemistry from the Hebrew University of Jerusalem.
James Barry joined us in September 2008 as the president of Eltek USA Inc.  Prior to that and from May 2003, Mr. Barry served as a consultant to us in a sales, marketing and applications engineering role.  Mr. Barry has over 30 years’ experience within the PCB industry.  Mr. Barry has held management positions within engineering, sales and operations for some of the top PCB producers.  Mr. Barry attended Northern Essex Community College.
Axel Herrmann joined us in March 2006 as commercial manager of Kubatronik, our German subsidiary and was appointed as general manager, Eltek Europe in August 2009. From July 2003 until February 2006, Mr. Herrmann served as commercial manager for Heinrich Heiland GmbH, a supplier for the automotive industry.  From October 2000 until June 2003, Mr. Herrmann worked as commercial manager for Helukabel GmbH, a company that produces and sells cables and wires.  From July 1989 until September 2000, Mr. Herrmann worked at Pfisterer, a producer of electrical devices for power plants, initially as a department head in bookkeeping, advanced to commercial manager and his last position was managing director.  Mr. Herrmann holds a B.A. degree in economics from Hohenheim University in Stuttgart, Germany.
There are no family relationships between any of our directors and executive officers.
B.           Compensation
The following table sets forth all compensation we paid with respect to all of our directors and executive officers as a group for the year ended December 31, 2012.
Salaries, fees,
commissions and bonuses
Pension, retirement
and similar benefits
All directors and executive officers as a group (then consisting of 19 persons)
$ 2,311,000 (1)(2) $ 197,000
___________

(1) During the year ended December 31, 2012, we paid each of our outside and independent directors an annual fee of $9,800 and a per meeting attendance fee of $600.  These fees are included in the above amount.
(2) The salaries amount includes expenses for automobiles and other benefits that we provide to certain of our executive officers.

C.           Board Practices
Introduction
According to the Israeli Companies Law, the role of the board of directors is to formulate a company's policy and to supervise the chief executive officer and his acts.  According to our articles of association, our chief executive officer has the power to appoint our other executive officers who, together with our chief executive officer, are responsible for our day-to-day management.  The board of directors may exercise any power of the company which was not assigned to another organ of the company by law or by the articles of association.  The executive officers have individual duties as determined by our chief executive officer and board of directors.
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Election of Directors
Our articles of association provide for a board of directors consisting of no less than three and no more than nine members or such other number as may be determined from time to time at a general meeting of shareholders, and the number of directors must be odd.  Our board of directors is currently composed of six directors after the resignation of Mr. Itamar Levy on April 25, 2013. We intend to fill this vacancy promptly.
Pursuant to our articles of association, our board of directors is divided into three classes (other than outside directors).  Generally, at each annual meeting of shareholders one of such classes of directors is elected for a term of three years by a vote of the holders of a majority of the voting power represented and voting at such meeting.  All the members of our board of directors (except the outside directors as detailed below) may be reelected upon completion of their term of office.  Directors (other than outside directors) may be removed earlier from office by a resolution passed at a general meeting of our shareholders, provided that shareholders holding in the aggregate no less than forty-percent of our outstanding share capital vote in favor of such resolution.  Our board of directors may temporarily fill vacancies in the board or add to their body until the next annual meeting of shareholders, provided that the total number of directors will not exceed the maximum number permitted under our articles of association.
The board of directors of an Israeli public company is required to determine that at least one or more directors will have “accounting and financial expertise,” as defined by regulations promulgated under the Israeli Companies Law.  Our board of directors determined, accordingly, that at least one director must have “accounting and financial expertise.”  Our board of directors has further determined that Mr. Eytan Barak (an outside director within the meaning of the Israeli Companies Law) has the requisite “accounting and financial expertise.”
We do not follow the requirements of the NASDAQ Stock Market Rules with regard to the nomination process of directors, and instead, we follow Israeli law and practice, in accordance with which our board of directors is authorized to recommend to our shareholders director nominees for election.  See Item 16G. “Corporate Governance.”
Outside and Independent Directors
Outside Directors .  Under the Israeli Companies Law, Israeli companies whose shares have been offered to the public are required to appoint at least two outside directors.  The Israeli Companies Law provides that a person may not be appointed as an outside director if (i) the person is a relative of a controlling shareholder; (ii) the person, or the person’s relative, partner, employer or an entity under that person’s control, has or had during the two years preceding the date of appointment any affiliation with the company, or the controlling shareholder or its relative; (iii) in a company that does not have a controlling shareholder, such person has an affiliation (as such term is defined in the Israeli Companies Law), at the time of his appointment, to the chairman, chief executive officer, a shareholder holding at least 5% of the share capital of the company or the chief financial officer; (iv) such person is an employee of the Israeli securities authority or stock exchange; and (v) such person's relative, partner, employer, supervisor, or an entity he controls, has other than negligible business or professional relations with any of the persons with which the outside director himself may not be affiliated. The term “relative” means a spouse, sibling, parent, grandparent, child or child, sibling or parent of spouse or spouse of any of the above.  The term “affiliation” includes an employment relationship, a material business or professional relationship maintained on a regular and continuous basis, control and service as an office holder excluding service as an outside director of a company that is offering its shares to the public for the first time.  In addition, no person may serve as an outside director if the person’s position or other activities create or may create a conflict of interest with the person’s responsibilities as director or may otherwise interfere with the person’s ability to serve as director.  If, at the time an outside director is appointed all members of the board of directors who are not the controlling shareholders or their relatives, are of the same gender, then that outside director must be of the other gender.  A director of one company may not be appointed as an outside director of another company if a director of the other company is acting as an outside director of the first company at such time.
At least one of the outside directors elected must have “accounting and financial expertise” and any other outside director must have “accounting and financial expertise” or “professional qualification,” as such terms are defined by regulations promulgated under the Israeli Companies Law.  Our outside director, Mr. Eytan Barak, has “accounting and financial expertise” and our other outside director, Ms. Ophira Rosolio-Aharonson, has “professional qualification,” as such terms are defined by regulations promulgated under the Israeli Companies Law.
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Outside directors are elected by shareholders.  The shareholders voting in favor of their election must include at least a majority of the shares of the non-controlling shareholders (and those who do not have a personal interest in the matter as a result of their relationship with the controlling shareholders) of the company who voted on the matter (not including abstaining votes).  This majority approval requirement need not be met if the total shareholdings of those non-controlling shareholders (and those who do not have a personal interest in the matter as a result of their relationship with the controlling shareholders) who vote against their election represent 2% or less of all of the voting rights in the company.  Outside directors serve for a three-year term, which may be renewed for two additional three year periods through one of the following mechanisms: (i) the board of directors proposed the nominee and his appointment was approved by the shareholders in the manner required to appoint outside directors for their initial term; or (ii) a shareholder holding 1% or more of the voting rights proposed the nominee, and the nominee is approved by a majority of the votes cast by the shareholders of the company on the matter, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relationship with any controlling shareholder, provided that the aggregate votes cast by shareholders who are not controlling shareholders and do not have a personal interest in the matter as a result of their relationship with the controlling shareholders voted in favor of the reelection of the nominee constitute more than 2% of the voting rights in the company.
Outside directors can be removed from office only by the same special percentage of shareholders as can elect them, or by a court, and then only if the outside directors cease to meet the statutory qualifications with respect to their appointment or if they violate their duty of loyalty to the company.
Each committee that is authorized to exercise powers that are usually vested in the board of directors must include at least one outside director and the audit committee must include all of the outside directors.  An outside director is entitled to compensation as provided in regulations promulgated under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with such service.
Ms. Ophira Rosolio-Aharonson was elected to serve as an outside director at our 2012 annual general meeting of shareholders for a third three-year term, pursuant to the provisions of the Israeli Companies Law.  Mr. Eytan Barak was elected to serve as an outside director at our 2011 annual general meeting of shareholders for a second three-year term, pursuant to the provisions of the Israeli Companies Law, following which the service of Mr. Barak as an outside director may be renewed for one additional three-year term.
Independent Directors .  In general, NASDAQ Stock Market Rules require that the board of directors of a NASDAQ-listed company have a majority of independent directors and its audit committee must have at least three members and be comprised only of independent directors, each of whom satisfies the respective “independence” requirements of NASDAQ and the SEC.  However, on June 9, 2005, we provided NASDAQ with a notice of non-compliance with respect to (among other things) the requirement to maintain a majority of independent directors, as defined under NASDAQ Stock Market Rules.  Instead, we follow Israeli law and practice which requires that we appoint at least two outside directors, within the meaning of the Israeli Companies Law, as previously discussed.    In addition, in accordance with the rules of the SEC and NASDAQ, we have the mandated three independent directors, as defined by the rules of the SEC and NASDAQ, on our audit committee.
Also, pursuant to the Israeli Companies Law, a director may be qualified as an independent director if such director is either (i) an outside director; or (ii) a director who complies with the following requirements: (y) he or she is eligible for nomination as an outside director and the audit committee has approved such eligibility; and (z) he or she has not acted as a director of the company for a period exceeding nine consecutive years.
Our board of directors has determined that each of Messrs. Banitt and Barak and Ms. Rosolio-Aharonson qualifies as an independent director under the requirements of the SEC and NASDAQ. Our outside directors, Mr. Barak and Ms. Rosolio-Aharonson also qualify as independent directors under the Israeli Companies Law.
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Committees of the Board of Directors
Audit Committee
Under the Israeli Companies Law, the board of directors of any public company must establish an audit committee.  The audit committee must consist of at least three directors, must include all of the outside directors and must have a majority of independent directors.
The audit committee may not include the chairman of the board of directors, the controlling shareholder (or any of the controlling shareholder's relatives), any director employed by the company or by its controlling shareholder or by an entity controlled by the controlling shareholder, a director who regularly provides services to the company or to its controlling shareholder or to an entity controlled by the controlling shareholder, and any director who derives most of his income from the controlling shareholder.  The chairman of the audit committee must be an outside director.  A majority of the members of the audit committee constitutes a quorum, provided that the majority of the members present at the meeting are independent directors (within the meaning of the Israeli Companies Law) and at least one outside director is present at the meeting.
In addition, the NASDAQ Stock Market Rules require us to establish an audit committee comprised of at least three members, all of whom must be independent directors, each of whom is financially literate and satisfies the respective “independence” requirements of the SEC and NASDAQ and one of whom has accounting or related financial management expertise at senior levels within a company.
Our audit committee meets at least once each quarter.  Our audit committee assists our board of directors in overseeing the accounting and financial reporting processes of our company and audits of our financial statements, including the integrity of our financial statements, compliance with legal and regulatory requirements, our independent registered public accountants’ qualifications and independence, the performance of our internal audit function and independent registered public accountants, finding any defects in the business management of our company and proposing to the board of directors ways to correct such defects, approving related-party transactions as required by Israeli law, and such other duties as may be directed by our board of directors.  The audit committee may consult from time to time with our independent auditors and internal auditor with respect to matters involving financial reporting and internal accounting controls.
In the event the audit committee has discovered a material defect in the company’s business operations, it must hold at least one meeting regarding such defect, at which the internal auditor or the independent accountants must be present and office holders who are not members of the audit committee may not participate in the meeting, except for the presentation of their position.
Our audit committee consists of three members of our board of directors who satisfy the respective requirements of the SEC, NASDAQ and Israeli law for the composition of the audit committee.  Our audit committee is currently composed of Messrs. Banitt and Barak and Ms. Rosolio-Aharonson.
Compensation Committee
Effective December 2012, Israeli law requires our Board of Directors to appoint a compensation committee, composed of at least three members, and can include only those persons who are eligible to serve as a member of the audit committee. All of our outside directors must be members of the Compensation Committee and must constitute the majority of the committee. The committee’s chairman must be an outside director. The compensation of the committee's members shall be as prescribed by Israeli law for outside directors.
The compensation committee is required to recommend a compensation policy to the Board of Directors by September 2013.  The policy must describe the terms of office and employment of office holders, including compensation, equity awards, severance and other benefits, exemption from liability and indemnification. The policy must be approved every three years by the Board of Directors, after having considered the recommendations of the compensation committee and by a majority of our shareholders, provided that (i) such majority includes at least a majority of the shares of the non-controlling shareholders (and those who do not have a personal interest in the matter as a result of their relationship with the controlling shareholders) of the company who voted on the matter (not including abstaining votes), or (ii) the total shares of the non-controlling shareholders (and those who do not have a personal interest in the matter as a result of their relationship with the controlling shareholders) who vote against the policy, represent 2% or less of all voting rights in the company. Even in the absence of such shareholders' approval, the compensation committee and the board of directors may nonetheless approve the policy, following further discussion of the matter and for specified reasons.
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Our compensation committee is currently composed of Ms. Rosolio-Aharonson (Chairman of the committee) and Messrs. Banitt and Barak.
Internal Audit
The Israeli Companies Law also requires the board of directors of a public company to appoint an internal auditor nominated by the audit committee.  The internal auditor must meet certain statutory requirements of independence.  The role of the internal auditor is to examine, among other things, the compliance of the company’s conduct with applicable law and orderly business practice.  Mr. Gali Gana, Certified Public Accountant (Israel), serves as our internal auditor.
Directors’ Service Contracts
There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.
Exculpation, Indemnification and Insurance of Directors and Officers
Exculpation of Office Holders
The Israeli Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his or her duty of loyalty.   If permitted by its articles of association, a company may exculpate in advance an office holder from his or her liability to the company, in whole or in part, with respect to a breach of his or her duty of care.  However, a company may not exculpate in advance a director from his or her liability to the company with respect to a breach of his duty of care in the event of distributions.  Our articles of association allow us to exculpate any office holder from his or her liability to us for breach of duty of care, to the maximum extent permitted by law, before or after the occurrence giving rise to such liability .
Insurance of Office Holders
The Israeli Companies Law provides that a company may, if permitted by its articles of association, enter into a contract to insure office holders in respect of liabilities incurred by the office holder with a respect to an act or omission performed in his or her capacity as an office holder, as a result of: (i) a breach of the office holder’s duty of care to the company or to another person; (ii) a breach of the office holder’s duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that his or her act would not prejudice the company’s interests; or (iii) a monetary liability imposed upon the office holder in favor of another person.
Our articles of association provide that, subject to any restrictions imposed by applicable law, we may procure, and/or undertake to procure, insurance covering any past or present or future office holder against any liability which he or she may incur in such capacity, including insurance covering us for indemnifying such office holder, to the maximum extent permitted by law.
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Indemnification of Office Holders
The Israeli Companies Law provides that a company may, if permitted by its articles of association, indemnify an office holder for liabilities or expenses imposed on him or her, or incurred by him or her concerning acts or omissions performed by the office holder in such capacity for: (i) a monetary liability imposed on the office holder in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court; (ii) reasonable litigation expenses, including attorney’s fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any monetary liability in lieu of criminal proceedings, or concluded without an indictment against the office holder but with the imposition of a monetary liability on the office holder in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal intent; and (iii) reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or which were imposed on him or her by a court, in an action instituted by the company or on the company’s behalf, or by another person, against the office holder, or in a criminal charge from which the office holder was acquitted, or in a criminal proceeding in which the office holder was convicted of a criminal offense which does not require proof of criminal intent.
The Israeli Companies Law provides that a company’s articles of association may permit the company to indemnify an office holder following a determination to this effect made by the company after the occurrence of the event in respect of which the office holder will be indemnified.  It also provides that a company’s articles of association may permit the company to undertake in advance to indemnify an office holder, except that with respect to a monetary liability imposed on the office holder by any judgment, settlement or court-approved arbitration award, the undertaking must be limited to types of events which the company’s board of directors deems foreseeable considering the company’s actual operations at the time of the undertaking, and to an amount or standard that the board of directors has determined as reasonable under the circumstances.
Our articles of association provide that we may undertake to indemnify in advance an office holder, in accordance with the conditions set under applicable law, against any liabilities he or she may incur in such capacity, provided that such undertaking is limited with respect to categories of events that can be expected as determined by our board of directors when authorizing such undertaking, and with respect to such amounts determined by our board of directors as reasonable in the circumstances.  Furthermore, under our articles of association, we may indemnify any past or present office holder, in accordance with the conditions set under any law, with respect to any past occurrence, whether or not we are obligated under any agreement to indemnify such office holder in respect of such occurrence.
Limitations on Exculpation, Insurance and Indemnification
The Israeli Companies Law provides that neither a provision of the articles of association permitting the company to enter into a contract to insure the liability of an office holder, nor a provision in the articles of association or a resolution of the board of directors permitting the indemnification of an office holder, nor a provision in the articles of association exempting an office holder from duty to the company shall be valid, where such insurance, indemnification or exemption relates to any of the following: (i) a breach by the office holder of his duty of loyalty, except with respect to insurance coverage or indemnification if the office holder acted in good faith and had reasonable grounds to assume that the act would not prejudice the company; (ii) a breach by the office holder of his duty of care if such breach was committed intentionally or recklessly, unless the breach was committed only negligently; (iii) any act or omission committed with intent to derive an unlawful personal gain; and (iv) any fine or forfeiture imposed on the office holder.
Under the Israeli Companies Law, exculpation of, procurement of insurance coverage for, and an undertaking to indemnify or indemnification of, an office holder (other than the chief executive officer) must be approved by the company’s compensation committee and board of directors and, if such office holder is a director, also by the company’s shareholders. Exculpation of, procurement of insurance coverage for, and an undertaking to indemnify or indemnification of, the chief executive officer must be approved by the company’s compensation committee, board of directors and by a special majority of the shareholders.
We have agreed to indemnify our office holders to the fullest extent permitted by law.  The aggregate amount we may pay our office holders pursuant to our indemnification undertaking may not exceed, jointly and in the aggregate, $2 million but in any event not more than 25% of our company’s net equity. We currently maintain directors and officers liability insurance with a per claim and aggregate coverage limit of $10 million.  Under our current directors and officers liability insurance policy, losses will be paid in accordance with the following order of priority: first, on behalf of officers and directors, for all loss that they will be obligated to pay as a result of a claim made against them; thereafter, on our behalf, for all loss that an officer or director will be obligated to pay as a result of a claim made against them, to the extent that we are required or permitted by law to indemnify our officers and directors; and thereafter, on our behalf, for all loss that we will be obligated to pay as a result of a securities claim made against us.
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D.           Employees
As of December 31, 2012, we employed 343 full-time employees in Israel, of which 221 were employed in manufacturing services, 39 in process and product engineering, 43 in quality assurance and control, 15 in sales and marketing and 25 in finance, accounting, information service and administration.  As of December 31, 2011, we employed 335 full-time employees in Israel, of which 215 were employed in manufacturing services, 39 in process and product engineering, 43 in quality assurance and control, 15 in sales and marketing and 23 in finance, accounting, information service and administration. As of December 31, 2010, we employed 312 full-time employees in Israel, of which 203 were employed in manufacturing services, 37 in process and product engineering, 37 in quality assurance and control, 12 in sales and marketing and 23 in finance, accounting, information service and administration.
In addition, Kubatronik, our subsidiary in Germany, employed 45 full-time employees and five part-time employees as of December 31, 2012, compared to employed 46 full-time employees and five part-time employees as of December 31, 2011 and 41 full-time employees and three part-time employees as of December 31, 2010.
Eltek USA, a wholly-owned Delaware subsidiary, employed 4 full-time employees as of December 31, 2012, the same as of December 31, 2011 and 2010.
Our relationships with our employees in Israel are governed by Israeli labor law, extension orders of the Israeli Ministry of Labor and personal employment agreements.  We are subject to various Israeli labor laws, general collective bargaining agreements entered into, from time to time, between the Histadrut and the Manufacturers Association, as well as specific and local agreements and arrangements.  Such laws, agreements, and arrangements cover the wages and employment conditions of our employees, including length of the workday, minimum daily wages for professional workers, contribution to pension fund, insurance for work related accidents, procedures for dismissing employees, determination of severance pay, benefit programs and annual leave.  We generally provide our Israeli employees with benefits and working conditions beyond the minimums required by law.
In November 2011, we were notified by the Histadrut that more than one-third of our employees in Israel had decided to join the Histadrut and that they have established an employees’ union committee. In 2012, a significant portion of our employees decided to resign their membership in the Histadrut, which then ceased to represent our employees.
In addition, certain of our officers, key employees and other employees are party to individual employment agreements.  We have entered into a non-disclosure and non-competition agreement with some of our executive officers.  All of our officers and employees are subject to confidential and proprietary information provisions set forth in our Code of Business Conduct and Ethics.
Pursuant to Israeli law, we are legally required to pay severance benefits upon certain circumstances, including the retirement or death of an employee or the termination of employment of an employee without due cause, equivalent to a one month salary for each year of employment with the company.  Most of our employees are covered by pension plans providing customary benefits including retirement and severance benefits.  Some of our employees are covered by life and pension insurance policies providing similar benefits.  We contribute 8.33% of base salaries to the employees’ pension funds or life pension insurance policies to cover our liability for severance pay.  Pursuant to Section 14 of the Israeli Severance Pay Law, if a company contributes to an employee’s pension fund or severance fund, then the employee is entitled only to the severance amounts accumulated in such fund(s) upon resignation from the company, and the company is not obligated to make additional payments to the employee upon termination of employment with the company.
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With respect to pension benefits, we contribute between 6.0% to 7.5% of base salaries to the employees’ pension plans and 6.0% to those employees who have life insurance policies.  The employees who have pension plans contribute between 5.5% to 7.0% of base salaries to their pension plans, and the employees who have life insurance policies contribute 5.0% of their base salaries to their policies.
We also contribute 7.5% of base salaries to certain “professional advancement” funds for managers, engineers and others and such employees contribute 2.5% of base salaries. For non-management employees who have completed 10 years of service with us, we contribute between 1% to 5% of their base salaries, based on their tenure, while such employees have to match such contribution, up to 2.5% of base salaries.
Israeli employers and employees are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration.  Subject to minimum thresholds, the employer contribution to the National Insurance Institute is at the rate of 6.5% of the salary (5.9% in 2012) and the employee contribution to the National Insurance Institute is at the rate of 12.0% of the salary (of which 5% relates to payments for national health insurance), both of which are limited to a maximum salary of NIS 42,435 (approximately $ 11,360) in 2013, NIS 41,850 in 2012 (approximately $10,850), and NIS 73,422 in 2011.  In the year ended December 31, 2012, our aggregate payments as an employer to the National Insurance Institute amounted to approximately 4.2% of the salaries.
E.            Share Ownership
Beneficial Ownership of Executive Officers and Directors
As of April 29, 2013, our directors and executive officers as a group held 85,515 (1.3%) of our ordinary shares, all of which shares were held by Mr. Arieh Reichart.
As of December 31, 2012, none of our directors and executive officers held any options.
A.           Major Shareholders
The following table sets forth certain information as of April 29, 2013 regarding the beneficial ownership by all shareholders known to us to own beneficially 5% or more of our ordinary shares:
Name
Number of Ordinary Shares
Beneficially Owned (1)
Percentage
of Ownership (2)
Josef Maiman
1,589,440 (3) 24.1 %
Merhav M.N.F. Ltd.
989,696 (4) 15.0 %
Integral International Inc.
599,744 (5) 9.1 %
___________
The number of shares held by Merhav M.N.F. Ltd. and Integral International Inc. are included in the number of shares held by Josef Maiman.
(1)
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Ordinary shares relating to options or convertible notes currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.  Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
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(2)
The percentages shown are based on 6,610,107 ordinary shares issued and outstanding as of April 29, 2013.
(3)
Based upon a Schedule 13D/A filed with the SEC on May 29, 2007 and other information available to the company.  Includes 989,696 ordinary shares held of record by Merhav M.N.F. Ltd., an Israeli private company controlled by Mr. Maiman and 599,744 ordinary shares held of record by Integral International Inc., a Panama corporation controlled by Mr. Maiman.  Accordingly, Mr. Maiman may be deemed to be the beneficial owner of the ordinary shares held directly by Merhav M.N.F. Ltd. and Integral International Inc.
(4)
Merhav M.N.F. Ltd. is an Israeli private company controlled by Mr. Maiman.  Accordingly, Mr. Maiman may be deemed to be the beneficial owner of the ordinary shares held directly by Merhav M.N.F. Ltd.
(5)
Integral International Inc. is a Panama corporation controlled by Mr. Maiman.  Accordingly, Mr. Maiman may be deemed to be the beneficial owner of the ordinary shares held directly by Integral International Inc.
Significant Changes in the Ownership of Major Shareholders
There have been no significant changes in the percentage ownership of any major shareholder during the past three years.
Major Shareholders Voting Rights
Our principal shareholders do not have different voting rights attached to their ordinary shares.
Record Holders
Based on the information provided to us by our transfer agent, as of April 15, 2013, there were 18 holders of record of our ordinary shares, of which 12 record holders holding approximately 75% of our ordinary shares had registered addresses in the United States.  These numbers are not representative of the number of beneficial holders of our shares nor are they representative of where such beneficial holders reside, since many of these ordinary shares were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 74% of our outstanding ordinary shares as of such date).
B.           Related Party Transactions
Until December 2012, our principal shareholder, Mr. Maiman (through entities under his control) owned Gadot, one of our major raw material suppliers.  For the years ended December 31, 2012, 2011 and 2010, we purchased from Gadot raw materials in the aggregate amount of $3.3 million, $2.7 million and $2.0 million, respectively.  As of December 31, 2012, 2011 and 2010, our accounts payable to Gadot amounted to $1.3 million, $1.0 million and $742,000, respectively.  Our transactions with Gadot are carried out on an arm’s-length basis.  The nature of our business relationship with Gadot did not change following the acquisition of Gadot by Mr. Maiman in 2008, nor did the scope of our annual purchases of alternative raw materials, other than to the extent that the amount of our purchases has increased as our use of raw materials has increased.  According to the Israeli Companies Law, we were required to present the transaction for the approval of our shareholders, and it was approved in our 2011 annual general meeting of shareholders.
In connection with the retirement of Mr. Nissim Gilam, the former chairman of our board of directors, in October 2010, at our 2010 annual general meeting of shareholders, our shareholders approved the award of the following retirement compensation to Mr. Gilam: (i) a one-time retirement payment of $10,000 (equal to payment for two months of Mr. Gilam’s service as the Chairman of our Board of Directors); (ii) the use of a company car until December 31, 2010 and all expenses in connection with such use of a company car.
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C.           Interests of Experts and Counsel
Not applicable.
A.           Consolidated Statements and Other Financial Information
See the consolidated financial statements, including the notes thereto, and the exhibits listed in Item 18 hereof and incorporated herein by this reference.
Legal Proceedings
From time to time we are involved in legal proceedings arising from the operation of our business.  Based on the advice of our legal counsel, management believes that except for the proceedings discussed below, such current proceedings, if any, will not have a material adverse effect on our financial position or results of operations.
Environmental Related Matters
On August 25, 2009, we received a notice from the Petach Tikva Municipality claiming that random automatic wastewater sampling in proximity of our plant indicates high levels of metal concentrations which exceed the amounts permitted by law.  The Municipality requested our explanations to such alleged violation and further informed us that its environmental department has determined to initiate procedures against any plant that is not in compliance with the permitted concentrations.  On September 16, 2009, we sent a letter to the Municipality explaining that we have invested extensive funds and resources each year in order to comply with all environmental legal requirements.  We further indicated that we have been and are still engaged in several projects to reduce salt and metal concentrations in our plant wastewater and that we constantly update our procedures with respect to environmental matters.  In addition, we proposed to collaborate with the Municipality and conduct mutual tests to ensure maximum protection of the environment.  To date, we have not received any response from the Municipality to our letter dated September 16, 2009.  If we are found to be in violation of environmental laws, we could be liable for damages and costs of remedial actions and could also be subject to revocation of permits necessary to conduct our business or any part thereof.  Any such liability or revocation could have a material adverse effect on our business, financial condition and results of operations.
Employee Related Matters
Three lawsuits have been filed against us by a current employee and two former employees alleging that they had suffered personal injuries during their employment with us and are seeking aggregate financial compensation of approximately $330,000 for past damages and additional amounts for future lost income, pain and suffering as the court may determine.
Four other employees notified us that they allegedly suffered personal injuries during their employment with us. Of these four employees, one is seeking compensation of $150,000 and the others did not state their claim amount. We submitted the claims to our insurance company, which informed us that it is reviewing the statements of claim without prejudicing its rights to deny coverage.
Software License
A supplier of one of our software packages requested to conduct an audit of our operation to verify that we are not in breach of any intellectual property rights he allegedly owns.  We believe that we have fully, diligently and timely complied with our obligation toward the supplier. We also believe that the supplier has no right to conduct any audit of our products or services and such audit may cause us to breach confidentiality obligations to other entities. If a claim is made and we are found to be in violation of such supplier's intellectual property rights, we could be liable for compensation and costs of an unknown amount. Such liability could have a material adverse effect on our business, financial condition and results of operations.
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Dividend Distribution Policy
We have never declared or paid any cash dividends to our shareholders.  We currently intend to retain future earnings for use in our business and do not anticipate paying cash dividends on our ordinary shares in the foreseeable future.  Any future dividend policy will be determined by our board of directors and will be based upon conditions then existing, including our results of operations, financial condition, current and anticipated cash needs, contractual restrictions and other conditions.
According to the Israeli Companies Law, a company may distribute dividends out of its profits provided that there is no reasonable concern that such dividend distribution will prevent the company from paying all its current and foreseeable obligations, as they become due. Notwithstanding the foregoing, dividends may be paid with the approval of a court, provided that there is no reasonable concern that such dividend distribution will prevent the company from satisfying its current and foreseeable obligations, as they become due.  Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years, after deducting previous distributions that were not deducted from the surpluses. In the event cash dividends are declared, such dividends will be paid in NIS.
B.           Significant Changes
None.
A.           Offer and Listing Details
Annual Stock Information
The following table sets forth, for each of the years indicated, the high and low market prices of our ordinary shares on the NASDAQ Capital Market:
Year
High
Low
2008
$ 3.10 $ 0.50
2009
$ 1.70 $ 0.66
2010
$ 1.82 $ 0.84
2011
$ 1.85 $ 0.91
2012
$ 1.69 $ 0.87

Quarterly Stock Information
The following table sets forth, for each of the full financial quarters in the two most recent full financial years and any subsequent period, the high and low market prices of our ordinary shares on the NASDAQ Capital Market:
High
Low
2011
First Quarter
$ 1.55 $ 1.04
Second Quarter
$ 1.85 $ 1.07
Third Quarter
$ 1.54 $ 0.91
Fourth Quarter
$ 1.59 $ 0.94
2012
First Quarter
$ 1.69 $ 1.21
Second Quarter
$ 1.67 $ 1.14
Third Quarter
$ 1.52 $ 1.03
Fourth Quarter
$ 1.39 $ 0.87
2013
First Quarter
$ 1.40 $ 1.09

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Monthly Stock Information
The following table sets forth, for each of the most recent six months, the high and low market prices of our ordinary shares on the NASDAQ Capital Market:
High
Low
Month
September 2012
$ 1.20 $ 1.03
October 2012
$ 1.14 $ 1.00
November 2012
$ 1.39 $ 0.87
December 2012
$ 1.28 $ 1.06
January 2013
$ 1.31 $ 1.09
February 2013
$ 1.33 $ 1.15
March 2013
$ 1.40 $ 1.15
April 2013 (thorough April 26, 2013)
$ 1.40 $ 1.14

B.           Plan of Distribution
Not applicable.
C.           Markets
Our ordinary shares were listed on the NASDAQ National Market from our initial public offering on January 22, 1997 until May 19, 1999, at which date the listing of our ordinary shares was transferred to the NASDAQ Capital Market (symbol: ELTK).
D.           Selling Shareholders
Not applicable.
E.            Dilution
Not applicable.
F.            Expense of the Issue
Not applicable.
A.           Share Capital
Not applicable.
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B.           Memorandum and Articles of Association
Set out below is a description of certain provisions of our memorandum of association and articles of association and of the Israeli Companies Law related to such provisions.  This description is only a summary and does not purport to be complete and is qualified by reference to the full text of the memorandum of association and articles of association, which are incorporated by reference as exhibits to this Annual Report, and to Israeli law.
Purposes and Objects of the Company
We are registered with the Israeli Registrar of Companies and have been assigned company number 52-004295-3.  Section 2 of our memorandum of association provides that we were established for the purpose of engaging in the business of developing, manufacturing, producing, vending, importing, exporting, supplying, distributing and dealing in printed, multi-layer, flexible, thick film, hybrid and integrated circuits, components or portions thereof, processes for making the same and related products.  In addition, the purpose of our company is to perform various corporate activities permissible under Israeli law.
The Powers of the Directors
Under the provisions of the Israeli Companies Law and our articles of association, a director cannot vote on a proposal, arrangement or contract in which he or she is materially interested, nor attend a meeting during which such transaction is considered.  In addition, our directors cannot vote compensation to themselves or any members of their body without the approval of our audit committee and our shareholders at a general meeting.  The requirements for approval of certain transactions are set forth above in Item 6C. “Directors, Senior Management and Employees – Board Practices – Approval of Related Party Transactions Under Israeli Law.”
The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in the same manner as any other transaction by us.
Under our articles of association, the service of directors in office is not subject to any age limitation and our directors are not required to own shares in our company in order to qualify to serve as directors.
Rights Attached to Shares
Our authorized share capital consists of NIS 30,000,000 divided into 50,000,000 ordinary shares of a nominal value of NIS 0.6 each.  All outstanding ordinary shares are validly issued, fully paid and non-assessable.  The rights attached to the ordinary shares are as follows:
Dividend rights . Holders of our ordinary shares are entitled to the full amount of any cash or share dividend subsequently declared.  The board of directors may declare interim dividends and propose the final dividend with respect to any fiscal year only out of its profits, as defined under the Israeli Companies Law.  See Item 8A. “Financial Information – Consolidated and Other Financial Information – Dividend Distributions Policy.”  If after 30 days a dividend has been declared and it is still unclaimed, the dividend may be invested or otherwise used by us for our own account, as we deem fit, until such dividend is claimed; and we will not be deemed a trustee in respect thereof.  We are not obliged to pay, and may not pay interest on declared but unpaid dividends if the shareholders entitled to such dividends fails to collect the same or to provide us the necessary information for the payment thereof, or if we are for any other reason unable to pay the dividend to such shareholder.
Voting rights . Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders.  Such voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Unless otherwise required by law or our articles of association, all resolutions require approval of no less than a majority of the voting rights represented at the meeting in person or by proxy and voting thereon.
Pursuant to our articles of association, our board of directors is divided into three classes (other than outside directors).  Generally, at each annual meeting of shareholders one of such classes of directors is elected for a term of three years by a vote of the holders of a majority of the voting power represented and voting at such meeting.  All the members of our board of directors (except our outside directors) may be reelected upon completion of their term of office.  For information regarding the election of our outside directors, see Item 6C. “Directors, Senior Management and Employees – Board Practices – Election of Directors.”
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Rights to share in our profits. Our shareholders have the right to share in our profits distributed as a dividend and any other permitted distribution.  See this Item 10B. “Additional Information – Memorandum and Articles of Association – Rights Attached to Shares – Dividend Rights.”
Rights to share in surplus in the event of liquidation. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to the nominal value of their holdings.  This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Limitations on any existing or prospective major shareholder. See Item 6C. “Directors and Senior Management – Board Practices - Approval of Related Party Transactions Under Israeli Law.”
Changing Rights Attached to Shares
According to our articles of association, in order to change the rights attached to any class of shares, such change must be adopted by a resolution in writing by the holders of the majority of the issued shares of such class or by an ordinary resolution at a separate general meeting of the holders of the affected class.
Annual and Extraordinary Meetings of Shareholders
The board of directors must convene an annual general meeting of shareholders at least once every calendar year, within 15 months of the last annual meeting.  Depending on the matter to be voted upon, notice of at least 21 days or 35 days prior to the date of the meeting is required.  In addition, the board of directors must convene a special general meeting of shareholders upon the demand of two of the directors, 25% of the nominated directors, one or more shareholders having at least 5% of the outstanding share capital and at least 1% of the voting power in the company, or one or more shareholders having at least 5% of the voting power in the company.  See this Item 10B.  “Additional Information - Memorandum and Articles of Association- Rights Attached to Shares-Voting Rights.”
The quorum required for a shareholder meeting consists of at least two shareholders present in person or represented by proxy who hold or represent, in the aggregate, at least 40% of the voting rights of the issued share capital.  A meeting adjourned for lack of a quorum is adjourned by three business days, at the same time and place, or any time and place as the board of directors unanimously designate in a notice to the shareholders.  The requisite quorum at an adjourned general meeting will be: (i) if the original meeting was convened upon requisition by shareholders pursuant to the Israeli Companies Law - the number of shareholders holding the minimum number of voting shares necessary to make such requisition, present in person or by proxy; and (ii) in any other case - one or more shareholders, present in person or by proxy, holding at least one share.  We do not follow the requirements of the NASDAQ Stock Market Rules regarding the quorum at shareholder meetings.  See Item 16G. “Corporate Governance.”
Limitations on the Rights to Own Securities in Our Company
Neither our memorandum of association nor our articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of shares by non-residents, except with respect to subjects of countries that are in a state of war with Israel.
Provisions Restricting Change in Control of Our Company
Tender Offer. A person wishing to acquire shares, or any class of shares, of a publicly traded Israeli company and who would as a result hold over 90% of the company’s issued and outstanding share capital, or a class of shares, is required by the Israeli Companies Law to make a full tender offer to all of the company’s shareholders for the purchase of all of the remaining issued and outstanding shares of the company, or the class of shares, as the case may be.  If the shareholders who do not respond to the offer hold less than 5% of the issued share capital of the company, or of the relevant class of shares, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law.  However, the shareholders may petition the court to determine the consideration for the acquisition if the consideration is less than the shares’ fair value (unless the acquirer has specified in the tender offer that any shareholder tendering his shares will not be entitled to such appraisal rights).  If the dissenting shareholders hold more than 5% of the issued and outstanding share capital of the company, or of the relevant class of shares, as the case may be, the acquirer may not acquire additional shares of the company from shareholders who accepted the tender offer if following such acquisition the acquirer would own over 90% of the company’s issued and outstanding share capital, or of the relevant class of shares.
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The Israeli Companies Law provides that an acquisition of shares of a public company be made by means of a tender offer if as a result of the acquisition the purchaser would become the holder of a “control block.”  Under the Israeli Companies Law shares conferring 25% or more of the voting rights in the company constitute a “control block.”  The requirement for a tender offer does not apply if there is already another holder of a “control block”.  Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the acquirer would hold more than 45% of the voting rights in the company, unless there is another person holding more than 45% of the voting rights in the company.  These requirements do not apply if:
·
the acquisition was made in a private placement the object of which was to confer to the acquirer a “control block” where there is no holder of a "control block", or to confer to the acquirer more than 45% of the voting rights in the company where there is no holder of more than 45% of the voting rights in the company, and the private placement received the general meeting's  approval; or
·
the acquisition was from the holder of a "control block" and resulted in the acquirer becoming the holder of a “control block”; or
·
the acquisition was from a shareholder holding more than 45% of the voting rights in the company and resulted in the acquirer becoming a holder of more than 45% of the voting rights in the company.
Merger. The Israeli Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described under the Israeli Companies Law are met, the majority of each party’s shares voted on the proposed merger at a shareholders meeting convened with prior notice of at least 35 days. A merger is defined as the transfer of all assets and liabilities, including conditional, future, known and unknown debts of the target company to the surviving company, as a result of which the target company is liquidated, and stricken out of the Companies Register.
Under the Israeli Companies Law and our articles of association, if the approval of a general meeting of the shareholders is required, merger transactions may be approved by holders of a simple majority of the shares present and voting, in person or by proxy or by written ballot, at the general meeting convened to approve the transaction.  If one of the merging companies, or a shareholder that holds 25% or more of the means of control of one of the merging companies, or a substantial shareholder, holds shares of the other merging company, then a dissenting vote of holders of the majority of the shares of the other merging company present and voting, excluding shares held by the merging company or a substantial shareholder thereof, or by anyone acting on behalf of either of them, their relatives and corporations controlled thereby, is sufficient to reject the merger transaction. Means of control are defined as any of the following: (i) the right to vote at a general meeting of a company and (ii) the right to appoint a director of a company. If the transaction would have been approved but for the exclusion of the votes as previously indicated, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of the company. The court will not approve a merger unless it is convinced that the merger is fair and reasonable, taking into account the values of the merging companies and the consideration offered to the shareholders.  Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of the merged company.  In addition, a merger may not be completed unless at least 50 days have passed from the date that a proposal for approval of the merger was filed with the Israeli Registrar of Companies and 30 days from the date that shareholder approval of both merging companies was obtained.
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A merger transaction in which the controlling shareholder has personal interest, requires (i) the affirmative vote of at least a majority of the votes cast by shareholders who have no personal interest in the merger transaction; or (ii) that the votes cast by shareholders who have no personal interest in the merger transaction and voted against the merger transaction must not represent more than 2% of the voting rights in the company.
Notwithstanding the foregoing, a merger is not subject to the approval of the shareholders of the target company if the target company is a wholly-owned subsidiary of the acquiring company. A merger is not subject to the approval of the shareholders of the acquiring company if:
·
the merger does not require the alteration of the memorandum or articles of association of the acquiring company;
·
the acquiring company would not issue more than 20% of the voting rights thereof to the shareholders of the target company in the course of the merger and no person will become, as a result of the merger, a controlling shareholder of the acquiring company, on a fully diluted basis;
·
neither the target company, nor any shareholder that holds 25% of the means of control of the target company is a shareholder of the acquiring company; and
·
there is no person that holds 25% or more of the means of control in both companies.
Disclosure of Shareholders Ownership
The Israeli Securities Law and regulations promulgated thereunder do not require a company whose shares are publicly traded solely on a stock exchange outside of Israel, as in the case of our company, to disclose its share ownership in the records of the Israeli Companies Registrar.
Changes in Our Capital
Changes in our capital are subject to the approval of a simple majority of shareholders present and voting at any shareholders meeting.
C.           Material Contracts
None.
D.           Exchange Controls
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares.  Non-residents of Israel who purchase our ordinary shares will be able to convert dividends, if any, thereon, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, into freely repatriable dollars, at the exchange rate prevailing at the time of conversion, provided that the Israeli income tax has been withheld (or paid) with respect to such amounts or an exemption has been obtained.
E.            Taxation
The following is a discussion of Israeli and United States tax consequences material to our shareholders.  To the extent that the discussion is based on tax legislation which has not been subject to judicial or administrative interpretation, the views expressed in the discussion might not be accepted by the tax authorities in question or by court.  The discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust all possible tax considerations.
Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
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Israeli Tax Considerations
General Corporate Tax Structure
Israeli companies are generally subject to income tax on their taxable income.  The applicable rate for 2012 was 25% and under the Income Tax Ordinance is scheduled to remain for an indefinite period.  However, the effective rate of tax payable by a company which is qualified under Israeli law as an “Industrial Company” and/or which derives income from an “approved enterprise” or a “benefited enterprise” (as further discussed below) may be lower.  See this Item 10E. “Additional Information – Taxation - Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959.”
Tax Benefits Under the Law for the Encouragement of Industry (Taxes) 1969
Pursuant to the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Law, a company qualifies as an “Industrial Company” if it is resides in Israel and at least 90% of its income in any tax year, determined in Israeli currency (exclusive of income from defense loans, capital gains, interest and dividends) is derived from an “Industrial Enterprise” it owns.  An “Industrial Enterprise” is defined for purposes of the Industry Law as an enterprise whose majority activity in a given tax year is industrial production.
We believe that we are currently an Industrial Company.  An Industrial Company is entitled to certain tax benefits, including a deduction of the purchase price of patents or certain other intangible property rights at the rate of 12.5% per annum.
Prior to January 1, 2011, the tax laws and regulations dealing with the adjustment of taxable income for local inflation provided that Industrial Enterprises, such as us, were eligible for special rates of depreciation deductions.  These rates vary in the case of plant and machinery according to the number of shifts in which the equipment is being operated and generally range from 20% to 40% on a straight-line basis, a 30% to 50% on a declining balance basis for equipment first put into operation on or after June 1, 1989 (instead of the regular rates which are applied on a straight-line basis).  The applicable regulations are valid until December 31, 2013.
Moreover, Industrial Enterprises that are approved enterprises or benefited enterprises (see below) can choose between (a) the special depreciation rates referred to above or (b) accelerated regular rates of depreciation applied on a straight-line basis in respect of property and equipment, generally ranging from 200% (for equipment) to 400% (for buildings) of the ordinary depreciation rates during the first five years of service of these assets, provided that the depreciation on a building may not exceed 20% per annum.
Eligibility for benefits under the Industry Law is not contingent upon the approval of any Government agency.  There can be no assurance that we will continue to so qualify, or will be able to avail ourselves of any benefits under the Industry Law in the future.
Tax Benefits Under The Law for the Encouragement of Capital Investments, 1959
General
One of our production facilities qualifies as a “benefited enterprise” under the Law for the Encouragement of Capital Investments, 1959, as amended in 2005, or the Investment Law, which provides certain tax benefits to investment programs of an “approved enterprise” or “benefited enterprise.”  Our benefited enterprise was converted from a previously approved enterprise program pursuant to the approval of the Israel Tax Authority that we received in September 2006.  The period of tax benefits for the benefited enterprise has not yet commenced and will expire no later than 2016 (as further discussed below).
The Investment Law stipulates criteria for investment programs qualified to receive tax benefits, which, if qualified, are referred to as a “benefited enterprise.”  Companies that meet those criteria may claim the tax benefits (as further discussed below) offered by the Investment Law directly in its tax returns (and there is no need to obtain prior approval to qualify for the benefits).  There is no requirement to file reports with the Investment Center.  Audits are the responsibility of the Israeli Income Tax Authorities as part of their tax audits.  Companies may also approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Investment Law.
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A company that owns a benefited enterprise is eligible for governmental grants, but may elect to receive an alternative package comprised of tax benefits, referred to as the “alternative benefits track.”  The tax benefits of a benefited enterprise include lower tax rates or no tax depending on the area and the track chosen, lower tax rates on dividends and accelerated depreciation.  In order to receive benefits in the grant track or the alternative benefit track, the industrial enterprise must contribute to the economic independence of the Israeli economy, be competitive and contribute to the gross local product in one of the manners stipulated in the Investment Law.  Tax benefits would be available, subject to certain conditions (described below), to production facilities that generally derive more than 25% of their annual revenue from export, or that do not derive 75% or more of their annual revenue in a single market.
On September 20, 2006, we received a pre-ruling from the Israeli Tax Authority confirming that our most recent investment program will be deemed a “benefited enterprise” instead of its former “approved enterprise” status.  Pursuant to such pre-ruling, the former approved enterprise status of that investment plan was terminated by the Investment Center.  The benefited enterprise status granted to our investment program provides for a tax exemption on undistributed earnings derived from the program for two years and a reduced tax rate for the remainder of the benefit period (see below).  The benefit period with respect to such program has not yet commenced, and will expire no later than 2016.
If, (i) only a part of a company’s taxable income is derived from an approved enterprise or a benefited enterprise, as in our case; or (ii) a company owns more than one approved enterprise or benefited enterprise, the resulting effective corporate tax rate of the company represents the weighted combination of the various applicable rates.  A company owning a “mixed enterprise” (which is a company that derives income from one or more sources in addition to an approved enterprise or benefited enterprise) generally may not distribute a dividend that is attributable only to the approved enterprise or benefited enterprise.
Subject to certain provisions concerning income subject to the alternative benefits track (see below), any distributed dividends are deemed attributable to the entire enterprise, and the effective tax rate represents the weighted combination of the various applicable tax rates.  A company may elect to attribute dividends distributed by it only to income not subject to the alternative benefits track.
Tax Benefits
The tax benefits available to benefited enterprises are: (1) benefited enterprise situated in zone A may choose between (a) limited corporate tax rate of 11.5%; and (b) tax exemption from corporate tax on undistributed income; (2) benefited enterprises situated in zone B or elsewhere (“zone C”) are entitled to tax exemption on undistributed income for six or two years, respectively, and to beneficial tax rate (25% or less in the case of a qualified foreign investor’s company that is at least 49% owned by non-Israeli residents) for the remainder of the applicable period of benefits. Our plant is located in zone C.
Dividends paid out of income derived from an approved enterprise or benefited enterprise (or out of dividends received from a company whose income is derived from an approved enterprise or benefited enterprise) are generally subject to withholding tax at the rate of 15% (deductible at source).  The rate of 15% is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter.  A company which elects the alternative benefits track will be subject to corporate tax at the otherwise applicable rate of not more than 25% (or lower in the case of a qualified foreign investor’s company which is at least 49% owned by non-Israeli residents) in respect of the gross amount of the dividend if it pays a dividend out of income derived from its approved enterprise or benefited enterprise during the tax exemption period.  Dividends paid to a qualifying non-resident out of the profits of a benefited enterprise subject to 11.5% corporate tax are subject to withholding tax at the rate of 4%.
The tax benefits available to a benefited enterprise relate only to taxable income attributable to that specific enterprise and are contingent upon the fulfillment of the conditions stipulated by the Investment Law and its regulations and the terms of the pre-ruling that we received from the Israeli Tax Authority.  If we fail to comply with these conditions, the tax and other benefits may be discontinued, in whole or in part, and we might be required to pay the monetary equivalent of the tax benefits we received, plus CPI linkage differences and interest
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A company that qualifies as a foreign investor’s company is entitled to further tax benefits relating to its benefited enterprises.  Subject to certain conditions, a foreign investor company is a company more than 25% of whose share capital (in terms of shares, rights to profits, voting and appointment of directors), and of whose combined share and loan capital, is owned, directly or indirectly, by persons who are not residents of Israel.  Such a company with a foreign investment of over 25% will be eligible for an extension of the period of tax benefits for its approved and benefited enterprises (up to ten years) and further tax benefits (a reduced corporate tax rate of 10%-20%) should the foreign investment reach or exceed 49%.  The rate of 15% applicable to dividends is effective for an unlimited period.  No assurance can be given that we currently qualify or will qualify in the future as a foreign investor’s company.
Amendment to Investment Law
In December 2010, the Israeli Parliament passed the Law for Economic Efficiency for 2011 and 2012 (Amended Legislation), 2011, which prescribes, among other things, amendments to the Investment Law, effective as of January 1, 2011.  The amendment introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such terms are defined in the Investment Law).  The new tax benefits (described below) would be available, subject to certain conditions, to production facilities that generally derive more than 25% of their annual revenue from export, or that do not derive 75% or more of their annual revenue in a single market.  A “Preferred Company” is defined in the amendment as either (i) a company incorporated in Israel and not wholly-owned by the government or (ii) a partnership (a) that was registered under the Israeli Partnerships Ordinance and (b) all of its partners are companies incorporated in Israel, but not all of them are fully owned by the government and such companies or partnerships have, among other conditions, Preferred Enterprise status and are controlled and managed from Israel.
In accordance with the amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to income derived by its Preferred Enterprise in 2011-2012, unless it is located in a certain development zone, in which case the rate will be 10%.  Such corporate tax rate will be reduced to 12.5% and 7%, respectively, in 2013-2014 and to 12% and 6% in 2015 and thereafter, respectively.
Under the amendment, dividends distributed out of income attributed to a Preferred Enterprise are subject to withholding tax at source at the rate of 15% (or lower, under an applicable tax treaty).  However, upon the distribution of a dividend to an Israeli company, no withholding tax will be remitted.
The amendment applies to income generated as of January 1, 2011.  Under the transitional provisions of the amendment, we may decide to irrevocably implement the amendment to the Investment Law while waiving benefits provided under the Investment Law as in effect prior to the amendment or to remain subject to the Investment Law as in effect prior to the amendment.  We may elect to implement the amendment at any time.  We are currently examining the possible effect of the amendment to our financial statements, if at all, and have not yet decided whether to apply the amendment
The termination or substantial reduction of any of the benefits available under the Investment Law could have a material adverse effect on our future investments in Israel, and could adversely affect our results of operations and financial condition.
Taxation Under Inflationary Conditions
The Income Tax (Inflationary Adjustments) Law, 1985, or the Inflationary Adjustments Law, is intended to neutralize the erosion of capital investments in business and to prevent tax benefits resulting from deduction of inflationary expenses.  This law applies a supplementary set of inflationary adjustments to the nominal taxable profits computed under regular historical cost principles.
The Inflationary Adjustments Law introduced a special tax adjustment for the preservation of equity based on changes in the CPI, whereby certain corporate assets are classified broadly into fixed (inflation-resistant) assets and non-fixed assets.  Where shareholders’ equity, as defined in the Inflationary Adjustments Law, exceeds the depreciated cost of fixed assets (as defined in the Inflationary Adjustment Law), a tax deduction which takes into account the effect of the annual rate of inflation on such excess is allowed (up to a ceiling of 70% of taxable income for companies in any single year, with the unused portion carried forward on a linked basis, without limit).  If the depreciated cost of such fixed assets exceeds shareholders’ equity, then such excess, multiplied by the annual inflation rate, is added to taxable income. In addition, subject to certain limitations, depreciation of fixed assets and losses carried forward are adjusted for inflation on the basis of changes in the CPI.
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Pursuant to the Inflationary Adjustments Law to which we are subject, results for tax purposes are measured in real terms in accordance with the changes in the CPI.
On February 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments) (Amendment No. 20) (Restriction of Period of Application) – 2008 was passed by the Israeli parliament. According to the amendment, the inflationary adjustments law will no longer applicable subsequent to the 2007 tax year accept for the transitional provisions whose objectives are to prevent distortion of the income tax calculations.
In addition, according to the amendment commencing in the 2008 tax year, the adjustment of the income for the effects of inflation for tax purposes will no longer be calculated.  Additionally, depreciation on the protected assets and tax loss carryforward will no longer be linked to the CPI, subsequent to the 2007 tax year, and the balances that have been linked to the CPI through the end of 2007 tax year, will be used going forward.  As a result, our carryforward tax loss will no longer be linked to the Israeli CPI.
Taxation of Gains Upon Disposition of, and Dividends Paid on, our Ordinary Shares
Taxation of Israeli Resident Shareholders
Israeli law imposes a capital gains tax on the sale of capital assets.  The law distinguishes between real gain and inflationary surplus.  The inflationary surplus is a portion of the total capital gain that is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the CPI between the date of purchase and the date of sale.  Foreign residents who purchased an asset in foreign currency may request that the inflationary surplus will be computed on the basis of the devaluation of the NIS against such foreign currency.  The real gain is the excess of the total capital gain over the inflationary surplus.  The inflationary surplus accumulated from and after December 31, 1993, is exempt from any capital gains tax in Israel while the real gain is taxed at the applicable rate discussed below.
Dealers in securities in Israel are taxed at regular tax rates applicable to business income.
Subject to certain transitional provisions relating to capital gains derived from the sale of assets, including our shares, purchased prior to January 1, 2003, the tax rate on capital gains, including capital gain from the sale of securities listed on a stock exchange and on dividends, is generally a uniform rate of 25% for individuals and corporate bodies and 30% for substantial individual shareholders (who are, generally, shareholders of 10% or more of the shares of the company on the date of the sale of the shares or at any date during the 12 months before the sale).  Dividends paid to an Israeli company by another Israeli company are not subject to tax, unless received out of income derived from a benefited enterprise or stems from income derived or accrued outside of Israel.
Under the convention between the United States and Israel concerning taxes on income, Israeli capital gains tax will generally not apply to the sale, exchange or disposition of ordinary shares by a person who qualifies as a resident of the United States within the meaning of the U.S.-Israel tax treaty.  However, this exemption will not apply, among other cases, if the gain is attributable to a permanent establishment of such person in Israel, or if the qualified U.S. resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding the sale, exchange or disposition, subject to specified conditions.  In this case, the sale, exchange or disposition would be subject to Israeli tax, to the extent applicable.  However, under the U.S.-Israel tax treaty, a U.S. resident generally would be permitted to claim a credit for the taxes against the U.S. federal income tax imposed on the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits.  The U.S.-Israel tax treaty does not relate to U.S. state or local taxes.
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For residents of other countries, the purchaser of the shares may be required to withhold capital gains tax on all amounts received for the sale of our ordinary shares, for so long as the capital gain from such a sale is not exempt from Israeli capital gains tax, and unless a different rate is provided in a treaty between Israel and the stockholder’s country of residence.
The capital gain from the sale of our shares by non-Israeli residents would be tax exempt as long as our shares are listed on the NASDAQ Capital Market or any other stock exchange recognized by the Israeli Ministry of Finance, and provided certain other conditions are met, the most relevant of which are: (i) the capital gain is not attributed to the foreign resident’s permanent establishment in Israel, and (ii) the shares were acquired by the foreign resident after the company’s shares had been listed for trading on the foreign Exchange.
If the shares were sold by Israeli residents, then (i) for the period ending December 31, 2002 their sale would be tax exempt so long as (1) the shares were listed on a stock exchange, such as, in our case, the NASDAQ Capital Market, which is recognized by the Israeli Ministry of Finance on December 31, 2002, and (2) we qualified as an Industrial Company or Industrial Holding Company under the law for Encouragement of Industry (Taxes) 1969, at the relevant times as provided by the Income Tax Ordinance [New Version], 1961, which we believe we so qualified and (ii) for the period commencing January 1, 2003, the sale of the shares would be, generally, subject to a 25% tax if sold by non-substantial individual shareholders and corporate bodies and 30% tax if sold by a substantial individual shareholders.  We cannot provide any assurance that the Israeli tax authorities will agree with the determination that we qualified as an Industrial Company at the relevant times.
On the distribution of dividends other than bonus shares (stock dividends) to individual Israeli residents shareholders or to non-Israeli shareholders, income tax applies at the rate of 25% or 30%, as described above, but is generally withheld at source at the rate of 20% (for as long as we are listed) or the lower rate payable with respect to dividends received out of income derived from a benefited enterprise (see “Law for the Encouragement of Capital Investments, 1959”), unless a double taxation treaty is in effect between Israel and the shareholder's country of residence which provides for a lower tax rate in Israel on dividends.  The Convention between the State of Israel and the Government of the United States relating to relief from double taxation provides for a maximum tax of 25% on dividends paid to a resident of the United States.  Dividends paid to an Israeli company by another Israeli company are not subject to corporate tax, unless received out of income derived from a benefited enterprise or unless the dividend stems from income produced or accrued abroad.
Taxation of Non-Israeli Resident Shareholders
Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel.  Such sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel.  On distributions of dividends other than bonus shares or stock dividends, income tax at the rate of 25% or 30% as described above), 12.5% for dividends not generated by a benefited enterprise if the non-resident is a U.S. corporation and holds 10% of our voting power for a designated period, and 15% for dividends generated by a benefited enterprise applies, unless a different rate is provided for based on a treaty between Israel and the shareholder's country of residence.  Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a Treaty U.S. Resident will be 25%.  However, under the Investment Law, dividends generated by an approved enterprise or benefited enterprise are, generally, taxed at the rate of 15%.
Subject to certain conditions, non-Israeli residents will be tax exempt on capital gain derived from investments in Israeli companies without derogating from any other capital gain tax exemption applying to non-Israeli resident under Israeli law or under any applicable double tax treaty.
Foreign Exchange Regulation and Withholding Taxes
Non-residents of Israel who purchase ordinary shares and receive dividends, if any are declared, or any amounts payable upon the dissolution, liquidation or winding up of our affairs will be able to freely repatriate such amounts in non-Israeli currencies, pursuant to the general permit issued by the Controller of Foreign Currency at the Bank of Israel under the Currency Control Law, 1978, provided that we have withheld Israeli income tax with respect to such amounts, as may be applicable.
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Under the general permit issued by the Controller of Foreign Currency, Israeli residents, including corporations, may generally purchase securities, including the ordinary shares, outside of Israel.
United States Federal Income Tax Consequences
The following is a summary of the material U.S. federal income tax consequences that apply to U.S. Holders who hold ordinary shares as capital assets.  This summary is based on the United States Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof, and the U.S.-Israel Tax Treaty, all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively.  This summary does not address all tax considerations that may be relevant with respect to an investment in ordinary shares. This summary does not account for the specific circumstances of any discuss all the tax consequences that may be relevant to a U.S. Holder in light of such holder’s particular investor circumstances or U.S. Holders subject to special rules, such as:
·
broker-dealers,
·
financial institutions,
·
certain insurance companies,
·
regulated investment companies or real estate investment trusts,
·
investors liable for alternative minimum tax,
·
tax-exempt organizations,
·
taxpayers whose functional currency is not the U.S. dollar,
·
persons who hold the ordinary shares through partnerships or other pass-through entities,
·
persons who acquire their ordinary shares through the exercise of employee stock options or otherwise as compensation for services,
·
investors who actually or constructively own, or have owned, 10 percent or more of our voting shares, and
·
investors holding ordinary shares as part of a straddle or appreciated financial position or a hedging or conversion transaction.
If a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns ordinary shares, the U.S. federal income tax treatment of a partner in such a partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership that owns ordinary shares and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of holding and disposing of ordinary shares.
This summary does not address the effect of any U.S. federal taxation other than U.S. federal income taxation. In addition, this summary does not include any discussion of state, local or foreign taxation.  You are urged to consult your tax advisors regarding the foreign and United States federal, state and local tax considerations of an investment in ordinary shares.
For purposes of this summary, a U.S. Holder is:
·
an individual who is a citizen or, for U.S. federal income tax purposes, a resident of the United States;
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·
a corporation, or other entity treated for tax purposes as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof;
·
an estate whose income is subject to U.S. federal income tax regardless of its source; or
·
a trust that (a) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons or (b) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
Taxation of Dividends
Subject to the discussion below under the heading “Passive Foreign Investment Companies,” the gross amount of any distributions received with respect to ordinary shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. federal income tax purposes to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes.  You will be required to include this amount of dividends in gross income as ordinary income.  Distributions in excess of our current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of your tax basis in the ordinary shares, and any amount in excess of your tax basis will be treated as gain from the sale of ordinary shares. See "--Disposition of Ordinary Shares" below for the discussion on the taxation of capital gains. Dividends will not qualify for the dividends-received deduction generally available to corporations under Section 243 of the Code.
Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day such dividends are received.  A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in effect on such day may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss.  U.S. Holders should consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
Subject to complex limitations set out in the Code, any Israeli withholding tax imposed on such dividends will be a foreign income tax eligible for credit against a U.S. Holder's U.S. federal income tax liability (or, alternatively, for deduction against income in determining such tax liability).  The limitations set out in the Code include computational rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income.  Dividends generally will be treated as foreign-source passive income for United States foreign tax credit purposes.  A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the ordinary shares to the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property.  Any days during which a U.S. Holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the 16-day holding period required by the statute.  Further, there are special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to a reduced tax rate.  The rules relating to the determination of the foreign tax credit are complex, and you should consult with your personal tax advisors to determine whether and to what extent you would be entitled to this credit.
Subject to certain limitations, “qualified dividend income” received by a non-corporate U.S. Holder in tax years beginning after December 31, 2012 will be subject to tax at a reduced maximum tax rate of 20 percent.  Distributions taxable as dividends paid on the ordinary shares should qualify for the 20 percent rate provided that either: (i) we are entitled to benefits under the income tax treaty between the United States and Israel (the "Treaty") or (ii) the ordinary shares are readily tradable on an established securities market in the United States and certain other requirements are met.  We believe that we are entitled to benefits under the Treaty and that the ordinary shares currently are readily tradable on an established securities market in the United States.  However, no assurance can be given that the ordinary shares will remain readily tradable.  The rate reduction does not apply unless certain holding period requirements are satisfied.  With respect to the ordinary shares, the U.S. Holder must have held such shares for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date.  The rate reduction also does not apply to dividends received from passive foreign investment companies, see discussion below, or in respect of certain hedged positions or in certain other situations.  U.S. Holders of ordinary shares should consult their own tax advisors regarding the effect of these rules in their particular circumstances.
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Disposition of Ordinary Shares
If you sell or otherwise dispose of ordinary shares, you will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis in the ordinary shares. Subject to the discussion below under the heading “Passive Foreign Investment Companies,” such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if you have held the ordinary shares for more than one year at the time of the sale or other disposition. In general, any gain that you recognize on the sale or other disposition of ordinary shares will be U.S.-source for purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source income.  Deduction of capital losses is subject to certain limitations under the Code.
In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of ordinary shares, the amount realized will be based on the U.S. dollar value of the NIS received with respect to the ordinary shares as determined on the settlement date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into United States dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss.
An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of ordinary shares, provided that the election is applied consistently from year to year.  Such election may not be changed without the consent of the Internal Revenue Service, or the IRS.  In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the U.S. dollar value of the currency received prevailing on the trade date and the settlement date.  Any such currency gain or loss would be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such ordinary shares.
Passive Foreign Investment Companies
For U.S. federal income tax purposes, we will be considered a passive foreign investment company, or PFIC, for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income.  If we were determined to be a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules.
Based on our current and projected income, assets and activities, we believe that we are not currently a PFIC nor do we expect to become a PFIC in the foreseeable future.  However, because the determination of whether we are a PFIC is based upon the composition of our income and assets from time to time, there can be no assurances that we will not become a PFIC for any taxable year.
If we are treated as a PFIC for any taxable year, you may be required to file IRS Form 8621. If we are treated as a PFIC for any taxable year, dividends would not qualify for the reduced maximum tax rate discussed above and, unless you elect either to treat your investment in ordinary shares as an investment in a "qualified electing fund," or a QEF election, or to "mark to market" your ordinary shares, as described below:
·
you would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of ordinary shares ratably over the holding period for such ordinary shares,
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·
the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, in effect for that year, and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year, and
·
the amount allocated to the current taxable year and any taxable year before we became a PFIC would be taxable as ordinary income in the current year.
If you make either a timely QEF election or a timely mark-to-market election in respect of your ordinary shares, you would not be subject to the rules described above.  If you make a timely QEF election, you would be required to include in your income for each taxable year your pro rata share of our ordinary earnings as ordinary income and your pro rata share of our net capital gain as long-term capital gain, whether or not such amounts are actually distributed to you.  You would not be eligible to make a QEF election unless we comply with certain applicable information reporting requirements.
Alternatively, if the ordinary shares are considered “marketable stock” and if you elect to “mark-to-market” your ordinary shares, you will generally include in income, in each year in which we are considered a PFIC, any excess of the fair market value of the ordinary shares at the close of each tax year over your adjusted basis in the ordinary shares. If the fair market value of the ordinary shares had depreciated below your adjusted basis at the close of the tax year, you may generally deduct the excess of the adjusted basis of the ordinary shares over its fair market value at that time. However, such deductions generally would be limited to the net mark-to-market gains, if any, that you included in income with respect to such ordinary shares in prior years. Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of ordinary shares with respect to which the mark-to-market election is made, is treated as ordinary income or loss (except that loss on a disposition of ordinary shares is treated as capital loss to the extent the loss exceeds the net mark-to-market gains, if any, that you included in income with respect to such ordinary shares in prior years).  Gain or loss from the disposition of ordinary shares (as to which a mark-to-market election was made) in a year in which we are no longer a PFIC, will be capital gain or loss.
Additional Tax on Investment Income
In addition to the income taxes described above, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds will be subject to a 3.8% Medicare contribution tax on net investment income, which includes dividends and capital gains.
Backup Withholding and Information Reporting
Payments in respect of ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and to U.S. backup withholding tax at a rate equal to the fourth lowest income tax rate applicable to individuals which, under current law, is 28%.  Backup withholding will not apply, however, if you (i) are a corporation or come within certain exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct taxpayer identification number and make any other required certification.
Backup withholding is not an additional tax.  Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.
U.S. individuals that hold certain specified foreign financial assets, including stock in a foreign corporation, with values in excess of certain thresholds are required to file Form 8938 with their U.S. Federal income tax return. Such form requires disclosure of information concerning such foreign assets, including the value of the assets. Failure to file the form when required is subject to penalties. An exemption from reporting applies to foreign assets held through a U.S. financial institution, generally including a non- U.S. branch or subsidiary of a U.S. institution and a U.S. branch of a non- U.S. institution. Investors are encouraged to consult with their own tax advisors regarding the possible application of this disclosure requirement to their investment in ordinary shares.
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Any U.S. holder who holds 10% or more in vote or value of our ordinary shares may be subject to certain additional United States information reporting requirements.
F.            Dividends and Paying Agents
Not applicable.
G.           Statement by Experts
Not applicable.
H.           Documents on Display
We are subject to certain of the reporting requirements of the Exchange Act as applicable to “foreign private issuers” as defined in Rule 3b-4 under the Exchange Act.  As a foreign private issuer, we are exempt from certain provisions of the Exchange Act.  Accordingly, our proxy solicitations are not subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and transactions in our equity securities by our officers and directors are exempt from reporting and the “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act.  In addition, we are not required under the Exchange Act to file quarterly reports and financial statements.  However, we file with the SEC an annual report on Form 20-F containing financial statements audited by an independent accounting firm.  We also submit to the SEC reports on Form 6-K containing (among other things) press releases and unaudited financial information.  We post our annual report on Form 20-F on our website ( www.eltekglobal.com ) promptly following the filing of our annual report with the SEC.  The information on our website is not incorporated by reference into this annual report.
This annual report and the exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge and copied at prescribed rates at the SEC public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.  You may obtain information on the operation of the SEC’s public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330.  The Exchange Act file number for our SEC filings is 0-28884.
The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.
The documents concerning our company that are referred to in this annual report may also be inspected at our offices located at Sgoola Industrial Zone, Petach Tikva 49101, Israel.
I.             Subsidiary Information
Not applicable.
We are exposed to a variety of market risks , including foreign currency fluctuations and changes in interest rates affecting primarily the interest on short-term credit lines and long-term loans.
Foreign Currency Exchange Risk
Our reporting currency is the U.S. dollar.  Our revenues are primarily denominated in the U.S. dollar, while our expenses are primarily denominated in NIS, U.S. dollars and Euros.  As a result, fluctuations in rates of exchange between NIS and other currencies may affect our operating results and financial condition.  In addition, the NIS value of our U.S. dollar and Euro denominated revenues are negatively impacted by the depreciation of the U.S. dollar and the Euro against the NIS.  The average exchange rate for the NIS against the U.S. dollar was 7.8% higher in 2012 than 2011 and the average exchange rate for the NIS against the Euro was 0.5% lower in 2012 than 2011, which had a positive impact on our operating results in 2012.  The average exchange rate for the NIS against the U.S. dollar was 4.1% lower in 2011 than 2010 and the average exchange rate for the NIS against the Euro was 0.6% higher in 2011 than 2010, which had a negative impact on our operating results in 2011.
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We estimate that a devaluation of 1% of the U.S. dollar against the NIS would result in a decrease of approximately $220,000 in our operating income.  As of December 31, 2012, we estimate that a devaluation of 1% of the Euro against the NIS would not have a material impact on our operating and financial results.
We have engaged external consultants to assist us to manage our foreign exchange risk.  From time to time in the past we have engaged in hedging transactions in order to partially protect ourselves from currency fluctuation risks and may use hedging instruments from time to time in the future. We have recently encountered difficulties in obtaining lines of credits from our banks to perform hedging transactions in order to protect ourselves from currency fluctuations.  If we were to determine that it is in our best interests to enter into any other hedging transactions in the future in order to protect ourselves in part from currency fluctuations, we may not be able to do so, or such transactions, if entered into, may not materially reduce the effect of fluctuations in foreign currency exchange rates on our results of operations and may result in additional expenses.
Commodity Price Risk
Cost of raw materials is a significant component of our cost of revenues.  In 2012, the cost of raw materials used in production was $14.3 million, compared to $14.5 million in 2011.  A 1% increase or decrease in the cost of raw materials used in production would increase or decrease our cost of raw materials by approximately $143,000.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our short-term credit lines, short-term loans and long-term loans.  For information on the interest rates of our short-term credit lines, short-term loans and long-term loans, see Item 5B. “Operating and Financial Review and Prospects - Liquidity and Capital Resources.”  For purposes of specific risk analysis, we use sensitivity analysis to determine the impact that market risk exposure may have on the financial expenses derived from our short-term credit lines and long-term loans.  A hypothetical increase of 1% in the interest rates would result in an increase of approximately $46,000 in our financial expenses. A hypothetical increase of 1% in the CPI would not have a material impact on our financial and operational expenses.
Credit Risk
We may be subject to significant concentrations of credit risk consisting principally of cash and cash equivalents and trade accounts receivable. Cash and cash equivalents are deposited with major financial institutions in Israel, Europe and the United States.
We perform ongoing credit evaluations of the financial condition of our customers.  The risk of collection associated with trade receivables is reduced by the large number and geographical dispersion of the our customer base, and our policy of obtaining credit evaluations of the financial condition of certain customers, purchase of insurance for certain receivables, or requiring collateral or security with respect to certain other receivables.
Not applicable.
PART II
None.
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None.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our chief executive officer and chief financial officer to allow timely decisions regarding required disclosure.  Our management, including our chief executive officer and chief financial officer, conducted an evaluation of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period covered by this Annual Report on Form 20-F.  Based upon that evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  Based on that assessment, our management concluded that as of December 31, 2012, our internal control over financial reporting is effective.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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ITEM 16.
Our board of directors has determined that Mr. Eytan Barak, an outside director, meets the definition of an audit committee financial expert, as defined by rules of the SEC.  For a brief listing of Mr. Barak’s relevant experience, see Item 6.A. “Directors, Senior Management and Employees - Directors and Senior Management.”
We have adopted a code of ethics that applies to our chief executive officer and all senior financial employees of our company, including the chief financial officer and the comptroller.  The code of ethics is publicly available on our website at www.eltekglobal.com .  Written copies are available upon request.  If we make any substantive amendment to the code of ethics or grant any waivers, including any implicit waiver, from a provision of the codes of ethics, we will disclose the nature of such amendment or waiver on our website.
Independent Registered Public Accounting Firm Fees
The following table sets forth, for each of the years indicated, the fees billed by our independent registered public accountants, Somekh Chaikin, a member firm of KPMG International. All of such fees were pre-approved by our Audit Committee.
Services Rendered
2012
2011
Audit (1)
$ 105,000 $ 105,000
Audit Related Fees
-- --
Tax (2)
$ 5,000 $ 9,253
Total
$ 110,000 $ 114,253
______________
(1)
Audit fees relate to audit services provided for each of the years shown in the table, including fees associated with the annual audit, consultations on various accounting issues and audit services provided in connection with statutory or regulatory filings.
(2)
Tax fees relate to services performed regarding tax compliance.
Pre-Approval Policies and Procedures
Our audit committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered public accounting firm, Somekh Chaikin, a member firm of KPMG International.  Pre-approval of an audit or non-audit service may be given as a general pre-approval, as part of the audit committee’s approval of the scope of the engagement of our independent auditor, or on an individual basis.  Any proposed services exceeding general pre-approved levels also require specific pre-approval by our audit committee.  The policy prohibits retention of the independent registered public accounting firm to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act or the rules of the SEC, and also requires the audit committee to consider whether proposed services are compatible with the independence of the registered public accountants.
Not applicable.
Neither we nor any affiliated purchaser has purchased any of our securities during 2012.
- 62 -
None.

Under NASDAQ Stock Market Rule 5615(a)(3), foreign private issuers, such as our company, are permitted to follow certain home country corporate governance practices instead of certain provisions of the NASDAQ Stock Market Rules.  A foreign private issuer that elects to follow a home country practice instead of any of such NASDAQ rules must submit to NASDAQ, in advance, a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws.
On June 9, 2005, we provided NASDAQ with a notice of non-compliance with Rule 4350 with respect to the following NASDAQ rules:
·
The requirement to maintain a majority of independent directors, as defined under the NASDAQ Stock Market Rules.  Instead, we follow Israeli law and practice which requires that we appoint at least two outside directors, within the meaning of the Israeli Companies Law, to our board of directors.  In addition, we have the mandated three independent directors, within the meaning of the rules of the SEC and NASDAQ, on our audit committee.  See Item 6C. “Directors, Senior Management and Employees - Board Practices - Outside and Independent Directors.”
·
The requirements regarding the directors’ nominations process.  Under Israeli law and practice our board of directors is authorized to recommend to our shareholders director nominees for election.  See Item 6C. – “Directors, Senior Management and Employees - Board Practices - Election of Directors.”
·
The requirement regarding the quorum for any meeting of shareholders.  Instead, we follow Israeli law and practice which provides that, unless otherwise provided by a company’s articles of association, the quorum required for a general meeting of shareholders is at least two shareholders present who hold, in the aggregate, 25% of the company’s voting rights.  Our articles of association provide that the quorum required for a shareholder meeting consists of at least two shareholders present in person or represented by proxy who hold or represent, in the aggregate, at least 40% of the voting rights of the issued share capital.  See Item 10A. “Additional Information - Share Capital - Annual and Extraordinary Meetings of Shareholders.”
Not applicable.
FINANCIAL STATEMENTS
Not applicable.
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheets
F-2
Consolidated Statements of Comprehensive Income (Loss)
F-4
Consolidated Statements of Changes in Shareholders’ Equity
F-5
Consolidated Statements of Cash Flows
F-6
Notes to the Consolidated Financial Statements
F-7
- 63 -
ITEM 19.
Index to Exhibits
Exhibit Description
1.1
Memorandum of Association of the Registrant (1)
1.2
Articles of Association of the Registrant, as amended (2)
2.1
Specimen of Share Certificate (1)
4.1
Form of Indemnification Agreement between Registrant and its officers and directors (3)
4.2
Share Purchase Agreement, dated June 10, 2002, by and among En-Eltek Netherlands 2000 B.V., Kubatronik-Leiterplatten GmbH, Mr. Alois Kubat, Mr. Thomas Kubat and Ms. Heike Heidenreich (4)
4.3
Extension of Put/Call Option Agreement, dated May 4, 2005, by and between En-Eltek Netherlands 2000 B.V. and Mr. Alois Kubat (5)
4.4
Second Extension of Put/Call Option Agreement Provisions under the Share Purchase Agreement, dated December 28, 2007, by and between En-Eltek Netherlands 2000 B.V. and Mr. Alois Kubat (6)
4.5
English Translation of Lease Agreement dated June 26, 2002, by and between the Registrant and A.Z. Baranovitz – Assets and Rental Ltd. (7)
4.6
Addendum to Lease Agreement dated May 13, 2007, by and between the Registrant and A.Z. Baranovitz – Assets and Rental Ltd. (8)
4.7
Amendment and Supplement to a Lease Agreement dated June 7, 2002, by and between Kubatronik Leiterplatten GmbH and Ms. Karin Kubat. (9)
4.8
English Translation of Letter of Extension dated December 18, 2007 to Lease Agreement dated June 7, 2002, by and between Kubatronik Leiterplatten GmbH and Ms. Karin Kubat. (10)
8.1
List of Subsidiaries of the Registrant
12.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
12.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1924, as amended.
13.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
XBRL Instance Document. (11)
101.SCH*
XBRL Taxonomy Extension Schema Document. (11)
101.PRE*
XBRL Taxonomy Presentation Linkbase Document. (11)
101.CAL*
XBRL Taxonomy Calculation Linkbase Document. (11)
101.LAB*
XBRL Taxonomy Label Linkbase Document. (11)
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document. (11)
- 64 -
_____________________
*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for the purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
(1)
Filed as an exhibit to our registration statement on Form F-1, registration number 333-5770, as amended, and incorporated herein by reference.
(2)
Filed as Exhibit 3.2 to our Annual Report on Form 20-F for the year ended December 31, 2003 and incorporated herein by reference.
(3)
Filed as Exhibit 4.1 to our Annual Report on Form 20-F for the year ended December 31, 2008 and incorporated herein by reference.
(4)
Filed as Exhibit 4.5 to our Annual Report on Form 20-F for the year ended December 31, 2004 and incorporated herein by reference.
(5)
Filed as Exhibit 4.6 to our Annual Report on Form 20-F for the year ended December 31, 2004 and incorporated herein by reference.
(6)
Filed as Exhibit 4.7 to our Annual Report on Form 20-F for the year ended December 31, 2007 and incorporated herein by reference.
(7)
Filed as Exhibit 4.6 to our Annual Report on Form 20-F for the year ended December 31, 2008 and incorporated herein by reference.
(8)
Filed as Exhibit 4.7 to our Annual Report on Form 20-F for the year ended December 31, 2008 and incorporated herein by reference.
(9)
Filed as Exhibit 4.8 to our Annual Report on Form 20-F for the year ended December 31, 2009 and incorporated herein by reference.
(10)
Filed as Exhibit 4.9 to our Annual Report on Form 20-F for the year ended December 31, 2009 and incorporated herein by reference.
(11)
To be filed by amendment to this Annual Report on Form 20-F for the year ended December 31, 2012.
- 65 -
Consolidated Financial Statements as of December 31, 2012
Contents

Page
F - 0
The Board of Directors and Shareholders of
Eltek Ltd.

We have audited the accompanying consolidated balance sheets of Eltek Ltd. and its Subsidiaries (the “Company”) as of December 31, 2012 and 2011 and the related consolidated statements of comprehensive income (loss), changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits 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 statements presentation. We believe that our audits provide 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 Company as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
Member firm of KPMG International

Tel-Aviv, Israel,
April 29, 2013
F - 1
Eltek Ltd. and its Subsidiaries
December 31
Note
2012
2011
$ in thousands
Assets
Current assets
Cash
2 1,935 892
Trade accounts receivable, net of allowance for doubtful
accounts
6,662 8,885
Inventories
3 5,244 4,434
Prepaid expenses and other current assets
417 355
14,258 14,566
Assets held for employees' severance benefits
9 47 39
Fixed assets, net
4 9,075 7,746
Goodwill
5 69 518
Total assets
23,449 22,869

The accompanying notes are an integral part of these consolidated financial statements.
F - 2
Eltek Ltd. and its Subsidiaries
Consolidated Balance Sheets
December 31
Note
2012
2011
$ in thousands
Liabilities and shareholders’ equity
Current liabilities
Short-term credit and current maturities of long-term debt
6 5,105 4,856
Accounts payable:
Trade
6,110 6,456
Related parties
16 1,336 1,046
Other current liabilities
7 4,419 3,995
16,970 16,353
Long-term liabilities
Long-term debt, excluding current maturities
8 728 1,604
Employee severance benefits
9 215 150
Total long-term liabilities
943 1,754
Commitments and contingent liabilities
10
Shareholders’ equity
11
Ordinary shares, NIS 0.6 par value
Authorized 50,000,000  shares, issued and
outstanding 6,610,107 shares as of December 31, 2012
and 2011
1,384 1,384
Additional paid-in capital
14,328 14,328
Cumulative foreign currency translation adjustments
2,713 2,622
Capital reserves
695 695
Accumulated deficit
(13,708 ) (14,398 )
Total Eltek Ltd. shareholders’ equity
5,412 4,631
Non-controlling interest
124 131
Total equity
5,536 4,762
Total liabilities, shareholders’ equity and non-
controlling interest
23,449 22,869
/s/ Arieh Reichart /s/ Amnon Shemer /s/ Erez Meltzer
Arieh Reichart
Amnon Shemer
Erez Meltzer
President, Chief Executive Officer
Vice President, Finance and Chief Financial Officer
Chairman of the Board of Directors

Date: April 30, 2013

The accompanying notes are an integral part of these consolidated financial statements.
F - 3
Eltek Ltd. and its Subsidiaries
Year ended December 31
Note
2012
2011
2010
$ in thousands
(except loss per share data)
Revenues
12 45,646 46,830 37,514
Cost of revenues
16B (37,836 ) (38,101 ) (32,690 )
Gross profit
7,810 8,729 4,824
Operating expenses
Selling, general and administrative expenses
(6,040 ) (6,155 ) (6,033 )
Impairment on goodwill
(481 ) - -
Operating profit (loss)
1,289 2,574 (1,209 )
Financial expenses, net
13 (543 ) (740 ) (609 )
Other income, net
2 12 2
Profit (loss) before income tax expense
748 1,846 (1,816 )
Income tax expense
14 (52 ) (31 ) (19 )
Net profit (loss)
696 1,815 (1,835 )
Net (profit) loss attributable to non-controlling
Interest
(6 ) 31 113
Net profit (loss) attributable to Eltek Ltd.
690 1,846 (1,722 )
Basic and diluted net profit (loss) per ordinary
share attributable to Eltek Ltd. shareholders
0.1 0.28 (0.26 )
Weighted average number of ordinary
shares used to compute basic and diluted net
profit (loss) per ordinary share attributable to
Eltek Ltd. shareholders
6,610,107 6,610,107 6,610,107
Other comprehensive income (loss):
Foreign currency translation adjustments
78 (377 ) 20
Comprehensive income (loss)
774 1,438 (1,815 )
Comprehensive income (loss) attributable to
non-controlling interest
(7 ) (44 ) (135 )
Comprehensive income (loss) attributable to
Eltek Ltd.
781 1,482 (1,680 )

The accompanying notes are an integral part of these consolidated financial statements.
F - 4
Eltek Ltd. and its Subsidiaries
Company’s shareholders
Equity
Accumulated
attributed to
Other
Eltek
Non-
Ordinary
Additional
comprehensive
Capital
Accumulated
Ltd. and
controlling
shares
Amount
Paid-in capital
income
reserves
deficit
Subsidiaries
interest
Total
($ thousands, except number of shares)
Balance as of January 1, 2010
6,610,107 1,384 14,328 2,944 695 (14,522 ) 4,829 310 5,139
Changes during the year
Foreign currency translation adjustments
- - - 42 - - 42 (22 ) 20
Net loss
- - - - - (1,722 ) (1,722 ) (113 ) (1,835 )
Comprehensive loss
- - - - - - (1,680 ) (135 ) (1,815 )
Balance as of December 31, 2010
6,610,107 1,384 14,328 2,986 695 (16,244 ) 3,149 175 3,324
Changes during the year
Foreign currency translation adjustments
- - - (364 ) - - (364 ) (13 ) (377 )
Net loss
- - - - - 1,846 1,846 (31 ) 1,815
Comprehensive income ( loss)
- - - - - - 1,482 (44 ) 1,438
Balance as of December 31, 2011
6,610,107 1,384 14,328 2,622 695 (14,398 ) 4,631 131 4,762
Changes during the year
Foreign currency translation adjustments
- - - 91 - - 91 (13 ) 78
Net profit (loss)
- - - - - 690 690 6 696
Comprehensive income (loss)
- - - - - - 781 (7 ) 774
Balance as of December 31, 2012
6,610,107 1,384 14,328 2,713 695 (13,708 ) 5,412 124 5,536
*           Less than one thousand.

The accompanying notes are an integral part of these consolidated financial statements.
F - 5

Eltek Ltd. and its Subsidiaries

Year ended December 31
2012
2011
2010
$ thousands
Cash flows from operating activities:
Net profit (loss)
696 1,815 (1,835 )
Adjustments to reconcile net profit ( loss) to net
cash flows provided by operating activities:
Depreciation and Amortization
2,253
2,091 2,054
Capital gain on disposal of fixed assets, net
- (18 )
Revaluation of long term loans
25 58 49
Increase in employee severance benefits, net
53 68 45
Decrease (increase) in trade receivables
2,339 (2,016 ) (186 )
Decrease (increase) in other receivables and prepaid
expenses
(58 ) (68 ) 178
Increase in inventories
(670 ) (487 ) (138 )
Increase  in income tax payable
- 8 -
Increase (decrease) in trade payables
(147 ) 621 1,152
Increase  in other liabilities and accrued expenses
281
324 203
Net cash provided by operating activities
4,772 2,414 1,504
Cash flows from investing activities:
Purchase of fixed assets
(1,234 ) (882 ) (489 )
Proceeds from sale of fixed assets
- - 38
Net cash used in investing activities
(1,234 ) (882 ) (451 )
Cash flows from financing activities:
Increase (decrease) in short- term credit
(192 ) (802 ) 355
Repayment of long-term loans
(1,149 ) (1,135 ) (1,222 )
Proceeds from long-term loans
- 474 452
Repayment of credit from fixed asset payables
(1,049 ) (539 ) (400 )
Net cash used in financing activities
(2,390 ) (2,002 ) (815 )
Effect of translation adjustments
(105 ) (151 ) 17
Net increase (decrease) in cash
1,043 (621 ) 255
Cash at beginning of the year
892 1,513 1,258
Cash at end of the year
1,935 892 1,513
Supplemental cash flow information:
Income tax paid
43 55 -
Interest paid
386 480 421
Non-cash activities:
Purchase of fixed assets not yet paid
1,212 1,377 124

The accompanying notes are an integral part of these consolidated financial statements.
F - 6
Eltek Ltd. and its Subsidiaries
(All amounts in thousands of $, except where otherwise stated)
Note 1 - Organization and Summary of Significant Accounting Policies

A.           General

Eltek Ltd. ("the Parent”) was incorporated in Israel in 1970, and the Parent’s shares have been publicly traded on the NASDAQ Capital Market since 1997. Eltek Ltd. and its subsidiaries (see below) are collectively referred to as “the Company”.

The Company manufactures, markets and sells custom made printed circuit boards (“PCBs”), including high density interconnect, flex-rigid and multi-layered boards.  The principal markets of the Company are in Israel, Europe and North America.

The Company markets its product mainly to the medical technology, defense and aerospace, industrial, telecom and networking equipment, as well as to contract electronic manufacturers, among other industries, and its business is subject to numerous risks. The major risks include, but are not limited to, (1) the impact of currency exchange rates (mainly NIS/US$), (2) the Company’s success in implementing its sales and manufacturing plans, (3) the impact of competition from other companies, (4) the Company’s ability to receive regulatory clearance or approval to market its products or changes in regulatory environment, (5) domestic and global economic conditions and industry conditions, and (6) compliance with environmental laws and regulations. Further, the Company’s liquidity position, as well as its operating performance, may be negatively affected by other financial business factors, many of which are beyond its control.
F - 7
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)

Note 1 - Organization and Summary of Significant Accounting Policies (cont’d)

A.           General (cont’d)

Kubatronik Leiterplatten GmbH

In June 2002, the Parent established a wholly-owned subsidiary, EN-Eltek Netherlands 2002 B.V. ("EN-Eltek"), for the purpose of the acquisition of Kubatronik Leiterplatten GmbH (“Kubatronik”).

On June 10, 2002, the Parent acquired 76% of the shares of Kubatronik for the consideration of € 2.6 million ($2.4 million as of the date of acquisition). The acquisition resulted in the recognition of goodwill in the amount of €1.1 million ($1 million as of the date of acquisition) - see Note 5. Goodwill has subsequently been impaired by approximately $1 million and its balance as of December 31, 2012 is $69.

Pursuant to the acquisition agreement, the seller has until December 31, 2014, (at which time the period is automatically extended for additional consecutive two-year periods unless otherwise notified in writing by either party upon at least six months prior notice) the right to require the Parent to purchase ("Put Option"), and the Parent has the right to require the seller to sell to the Parent ("Call Option") the seller’s remaining 24% interest in Kubatronik. In May 2012, the seller exercised his option with respect to 3% of his remaining shares of Kubatronik for approximately Euro 69 ($89) for such shares and reduced his share in Kubatronik from 24% to 21%. The exercise price for the seller’s 21% interest in Kubatronik under the Put Option is Euro 483 ($628), and the exercise price for the seller’s remaining holdings in Kubatronik under the Call Option is Euro 513 ($667). The fair value of the above options is calculated based on the Binomial model. Changes in fair value are recorded in the Consolidated Statement of Operations. See Note 15.
Eltek USA Inc.

In 2007, the Parent established a wholly-owned subsidiary, Eltek USA Inc. for the purpose of sales, promotion and marketing in the North American market. Eltek USA Inc. commenced operations in 2008.

Eltek Europe GmbH

In 2008, the Parent established a wholly-owned subsidiary, Eltek Europe GmbH for the purpose of sales, promotion and marketing to certain customers in Europe.  Eltek Europe GmbH commenced operations in 2009.
F - 8
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

B.           Basis of presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

The consolidated financial statements include the accounts of the Parent and its subsidiaries.
The Parent sells goods through its subsidiaries that function as distributors.
All intercompany transactions and balances were eliminated in consolidation.

C.           Functional and reporting currency

The Parent’s functional currency is the New Israeli Shekel (“NIS”). Transactions denominated in foreign currencies are translated into NIS using the prevailing exchange rates at the date of the transactions.  Gains and losses from the translation of foreign currency transactions are recorded in financial income or expenses.

The Company’s reporting currency is the U.S. dollar. Assets and liabilities are translated to the reporting currency using the exchange rate at the end of the year. Revenues and expenses are translated to the reporting currency using the average exchange rate for each quarter. Translation adjustments are reported separately as a component of accumulated other comprehensive income.

D. Translation of foreign entity operations

The financial statements of foreign subsidiaries are translated into the Parent's functional currency as follows:

1.
Assets and liabilities are translated according to the exchange rate on the consolidated balance sheet date including goodwill arising from the acquisition of the subsidiary.

2.
Income and expense items are translated according to the weighted average exchange rate on a quarterly basis.

3.
The resulting exchange rate differences are classified as a separate item in shareholders’ equity.
F - 9
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

E.            Exchange rates and linkage bases

1.
Balances linked to the Israeli Consumer Price Index (“CPI”) are recorded pursuant to contractual linkage terms of the specific assets and liabilities.

2.
Details of the CPI and the representative exchange rates are as follows:

Israeli
Exchange rate
Exchange rate
CPI
of one US dollar
of one Euro
Points
NIS
NIS
For the year ended:
December 31, 2012
219.80 3.733 4.9206
December 31, 2011
216.26 3.821 4.938
December 31, 2010
211.67 3.549 4.738
%
%
%
Changes during the year ended:
December 31, 2012
1.6 (2.30 ) (0.35 )
December 31, 2011
2.2 7.66 4.22
December 31, 2010
2.7 (5.99 ) (12.94 )

F.            Use of estimates

The preparation of the consolidated financial statements in accordance with U.S. GAAP requires the management of the Company to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, allowance for doubtful accounts, valuation of derivatives, deferred tax assets, inventory, goodwill, put/call options, income tax uncertainties and other contingencies.

G.           Cash equivalents

Cash equivalents are highly-liquid investments which include short-term bank deposits with an original maturity of three months or less from deposit date and which are not restricted by a lien.

H.           Trade accounts receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the Consolidated Statements of Cash Flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio.
F - 10
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

H.           Trade accounts receivable (cont’d)

The allowance for doubtful accounts receivable is calculated on the basis of specific identification of customer balances. The allowance is determined based on management’s estimate of the aged receivable balance considered uncollectible, based on historical experience, aging of the receivable and information available about specific customers, including their financial condition and volume of their operations.

The activity in the allowance for doubtful accounts for the three years ended December 31, 2012 is as follows:

Year ended December 31
2012
2011
2010
$ thousands
Opening balance
93 340 347
Additions during the year
1 14 10
Write off of allowance
- (263 ) (20 )
Foreign currency translation adjustments
1 2 3
Closing balance
95 93 340

I.             Inventories
Inventories are recorded at the lower of cost or market value. Cost is determined on the weighted average basis for raw materials. For work in progress and finished goods, the cost is determined pursuant to calculation of accumulated actual direct and indirect costs.

J.            Assets held for employees' severance payments

Assets held for employees' severance payments represent contributions to insurance policies and deposits to a central severance pay fund, and are recorded at their current redemption value.

K.           Fixed assets

Fixed assets are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets at the following annual rates:

%
Machinery and equipment
5-33
Leasehold improvements
6-14
Motor vehicles
15
Office furniture and equipment
6-33
F - 11
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)

Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

K.           Fixed assets (cont’d)

Machinery and equipment purchased under capital lease arrangements are recorded at the present value of the minimum lease payments at lease inception.  Such assets and leasehold improvements are depreciated and amortized respectively, using the straight-line method over the shorter of the lease term or estimated useful life of the asset.

Long-lived assets, such as property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

L.            Goodwill

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is reviewed for impairment at least annually. In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which provides an entity the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more-likely-than-not that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. The Company adopted this guidance in 2011.

If the two-step goodwill impairment test is required, first, the fair value of the reporting unit is compared with its carrying amount (including goodwill). If the fair value of the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying amount, step two does not need to be performed.
The Company performs its impairment review of goodwill on an annual basis and if a triggering event occurs between annual impairment tests. For 2012, the Company performed a qualitative assessment of goodwill based on a valuation for the Kubatronik, utilizing a forecast of expected cash inflows and cash outflows and determined that the fair value of Kubatronik was lower than its carrying value. As a result, the Company recorded an impairment loss of $481 in 2012. Based on a similar qualitative assessment of Kubatronik, no impairment loss was recorded for 2011.  See Note 5.
F - 12
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

M.           Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.  The Company records interest related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expense.

N.           Revenue recognition

The Company recognizes revenue upon shipment of the product and after the customer takes ownership and assumes risk of loss, collection of the corresponding receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Commission income is accounted for on the accrual basis.

O.           Earnings (loss) per ordinary share

Diluted earnings per ordinary share calculation is similar to basic earnings per share except that the weighted average of ordinary shares outstanding is increased to include the number of additional ordinary shares that would have been outstanding if the outstanding options had been exercised, to the extent that these options had a diluted effect. The Company does not presently have such dilutive instruments.

P.           Derivative financial instruments

The Company utilizes derivative financial instruments principally to manage market risks and reduce its exposure resulting from fluctuations in foreign currency exchange rates. The Company holds put/call options with the minority shareholder of Kubatronik for the purchase/sale of the minority holding in Kubatronik (see Note 15). Derivatives and the put/call options are adjusted to fair value through income.

Changes in fair value are recognized in the consolidated statements of operations as a financing item.

The fair value of derivative financial instruments is determined on the basis of their market values or the quotations of financial institutions. In the absence of a market value or financial institution quotation the fair value is determined on the basis of a valuation model.
F - 13
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)

Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

Q.           Concentration of credit risk

Financial instruments that may subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. Cash and cash equivalents are deposited with major financial institutions in Israel, Europe and the United States.

The Company performs ongoing credit evaluations of the financial condition of its customers.  The risk of collection associated with trade receivables is reduced by the large number and geographical dispersion of the Company's customer base, and the Company’s policy of obtaining credit evaluations of the financial condition of certain customers, requiring collateral or security with respect to certain receivables, or purchase of insurance for certain other receivables.

R.           Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

S.           Fair value measurements

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
·
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
·
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
·
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The new standard does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it is already required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. The ASU also requires additional disclosures for nonpublic entities to provide quantitative information about significant unobservable inputs used for all Level 3 measurements and a description of the valuation process used. The provisions of the ASU are effective for annual or interim reporting periods beginning after December 15, 2011.  The Company adopted the provisions of the ASU in 2012.  The adoption of ASU 2011-04 did not have a material effect on the Company’s consolidated financial statements. See Note 15.
F - 14
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 1 - Organization and Summary of Significant Accounting Policies (cont'd)

T.           Recently issued accounting standards (cont’d)

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under International Financial Reporting Standards (IFRS). The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Company does not expect the new standards to have a significant impact on its consolidated financial statements.

Note 2 - Cash

December 31
2012
2011
Denominated in U.S. dollars
431 204
Denominated in NIS
872 196
Denominated in Euro
632 492
1,935 892

Note 3 - Inventories

December 31
2012
2011
Raw materials
2,078 2,185
Work-in-process
2,270 1,475
Finished products
896 774
5,244 4,434
F - 15
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 4 - Fixed Assets, Net

December 31
2012
2011
Machinery and equipment
36,424 34,678
Leasehold improvements
8,558 8,149
Motor vehicles
102 99
Office furniture and equipment
1,530 1,481
Fixed assets
46,614 44,407
Accumulated depreciation
(37,539 ) (36,661 )
Fixed assets less accumulated depreciation
9,075 7,746

Depreciation expense for the years ended December 31, 2012, 2011 and 2010 were $1,772, $2,091 and $2,054 respectively.

Note 5 - Goodwill

Changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 are as follows:

December 31
2012
2011
Balance at the beginning of the year
518 530
Increase due to increase in holding
20 -
Impairment on goodwill
(481 ) -
Effect of translation adjustments
12 (12 )
69 518
Note 6 - Short-Term Credit and Current Maturities of Long-Term Debt

Banks

Annual
interest rate at
December 31
December 31
2012
2012
2011
%
In NIS (linked to the Prime rate)
5.25 - 7.0 3,774 3,795
In U.S. dollars
3.81 - 4.41 110 110
Current maturities of long-term
debt from banks (Note 8)
1,221 951
5,105 4,856

F - 16
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 7 – Other Current Liabilities

December 31
2012
2011
Accrued payroll and related benefits
1,177 1,064
Provision for vacation and other employee benefits
1,642 1,321
Net written put option (Note 1A)
497 366
Accrued expenses
859 1,022
Other liabilities
244 222
4,419 3,995

Note 8 - Long-Term Debt, Excluding Current Maturities

Banks and others

Annual
interest rate at
December 31
December 31
2012
2012
2011
%
Linkage terms
U.S. dollar
1.88 - 5 1,133 950
NIS - linked to the CPI
4.5 - 6.5 - 57
Euro
2.17 - 3 95 554
NIS - linked to the Prime rate
P+0.9 - P+3
980 472
NIS - not linked
7.6 - 8.4 - 746
2,208 2,779
Less - current maturities (banks and others)
(1,480 ) (1,175 )
728 1,604

Minimum future payments at December 31, 2012 due under the long term debt is as follows:

Long-Term
Loan
First year
1,480
Second year
259
Third year and thereafter
469
2,208
F - 17
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)

Note 8 - Long-Term Debt, Excluding Current Maturities (cont’d)

Long-term debt (excluding current maturities) includes capital leases in the amounts of $650 and $330 for the years ended December 31, 2012 and 2011, respectively.

For the year ended December 31, 2012, financial covenants in respect of the Company’s credit facilities and long-term debt with one of the Company’s banks require the Company to maintain all of the following financial covenants: (i) maintaining the greater of adjusted shareholders’ equity of $2.1 million or 9% of its consolidated total assets; (ii) EBITDA of $3.0 million; and (iii) a debt service ratio of 1.5.  For this purpose, shareholders’ equity excludes leasehold improvements and certain intangible assets. Debt service ratio is defined as annual EBITDA divided by annual repayments of debt including interest. As of December 31, 2012, the Company was in compliance with such covenants. For the year ending December 31, 2013 the Company must meet the following: (i) maintaining the greater of adjusted shareholders’ equity of $2.6 million or 12% of its consolidated total assets; (ii) EBITDA of $3.4 million; and (iii) a debt service ratio of 1.5. These amounts increase every year until December 31, 2016 when the Company must meet the following targets: (i) maintaining the greater of adjusted shareholders’ equity of $4.2 million or 20% of its consolidated total assets, (ii) EBITDA of $4.0 million and (iii) debt service ratio of 1.5.

Financial covenants in respect of the Company’s credit facilities and long-term debt with another bank require the Company to maintain the greater of shareholders’ equity, excluding certain intangible assets and prepaid expenses (except insurance premiums), of NIS 10 million ($2.6 million), or 11% of the Parent’s total assets (on a non-consolidated basis). As of December 31, 2012, the Company was in compliance with such covenants. As part of the Company's discussions with this bank for obtaining new lines of credits, the financial covenants may be amended including a possible requirement of the Parent's subsidiaries, Eltek Europe GmbH and Eltek USA Inc. to pledge all their assets towards, and to sign a letter of guaranty in favor of the bank.

As to pledges securing the loans, see Note 10A.

Note 9 - Employee Severance Benefits

Under Israeli law and labor agreements, the Parent is required to make severance and pension payments to their retired or dismissed employees and to employees leaving employment in certain other circumstances.

1.
The Parent has an approval from the Israeli Ministry of Labor and Social Welfare, pursuant to the terms of Section 14 of the Israeli Severance Pay Law, 1963, according to which the current deposits in the pension fund and/or with the insurance company exempt it from any additional obligation to the employees for whom such depository payments were made.
F - 18
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 9 - Employee Severance Benefits (cont’d)

2.
The Parent’s employees participate in a pension plan or individual insurance policies are purchased. The Parent’s liability for severance obligations for the employees employed for one year or more is discharged by making regular deposits with a pension fund or the insurance policies. Under Israeli law, there is no liability for severance pay in respect of employees who have not completed one year of employment. The amount deposited with the pension fund or the insurance policies is based on salary components as prescribed in the existing labor agreement. The custody and management of the amounts so deposited are independent of the Parent and accordingly, such amounts funded and related liabilities are not reflected in the balance sheet.

For the non-management employees, the Parent deposits 72% of its liability for severance obligations with a pension fund for such employees, and upon completion of one year of employment with the Parent, it makes a one-time deposit with the pension fund for the remaining balance.

In 2011, the Parent made a transfer of funds from a central severance fund to individual funds in the name of the employees for the unfunded liability in respect of the employees, which pursuant to Section 14 of the Israeli Severance Pay Law, it discharged its liability in respect of such employees severance pay. As a result, the balance of assets held for employees severance pay was reduced, and the liability was reduced accordingly.

3.
Kubatronik owns an insurance policy and makes regular deposits with an insurance company for securing pension rights on behalf of one of its key employees.  Such amounts deposited and the related liabilities are reflected in the consolidated balance sheet. In December 2012 the employee resigned from Kubatronik, however his pension entitlement up to the end of his employment with the Company continues.

In respect of its other employees, Kubatronik does not make any deposits for pension or retirement rights, since such deposits are not required under the German law.

4.
Expenses recorded in respect of the unfunded liability for employee severance payments for the years ended December 31, 2012, 2011, and 2010 are $57 $102 and $157, respectively.

Note 10 - Commitments and Contingent Liabilities

A.
Pledges and guarantees

1.
The Company has pledged certain items of its equipment and the rights to any insurance claims on such items to secure its indebtedness with banks, as well as floating liens on all of its remaining assets in favor of the banks.

2.
The Company has pledged certain items of its equipment as a guarantee for the implementation of its benefited enterprise. The Company has determined that it is in compliance with the conditions of the approval (see Note 14A).

3.
The Company has also pledged machines to secure its indebtedness to certain suppliers that provided financing to such equipment.
F - 19
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 10 - Commitments and Contingent Liabilities (cont’d)

B.
Operating leases and other agreements

1.
The premises occupied by the Parent and Kubatronik are leased under two operating agreements that expire in February 2017 and June 2014, respectively.
2.
The Parent has signed several lease and maintenance agreements for production equipment with suppliers of equipment and software. Of such agreements, the main principal agreement expires in January 2015.
3.
Several production machines are leased by Kubatronik under operating agreements which will expire in June 2014.
4.
The Parent’s motor vehicles are leased under operating lease agreements, mainly for three-year terms.
5.
Minimum future payments at December 31, 2012 due under the above agreements over the next five years and thereafter are as follows:
Premises
Other
leases
agreements
First year
1,077 704
Second year
1,025 476
Third year
975 293
Fourth year
975 212
Fifth year and thereafter
456 109
4,508 1,794

Payments required under these agreements are charged to expense by the straight-line method over the periods of the respective leases.

Expenses recorded under these agreements for the years ended December 31, 2012, 2011, and 2010 were $ 1,183, $1,519, and $1,330, respectively.

C.           Indemnification agreement

The Parent entered into an indemnification agreement with its directors and officers and undertook to enter into the same agreement with future directors and officers, for losses incurred by a director or officer. Such indemnification amount is limited to the lesser of $2,000 or 25% of the Parent’s shareholders' equity.
F - 20
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 10 - Commitments and Contingent Liabilities (cont’d)

D.           Contingent Liabilities

Environmental Related Matters

On August 25, 2009, the Parent received a notice from the Petach Tikva Municipality claiming that random automatic wastewater samplings in proximity of its plant indicate high levels of metal concentrations which exceed the amounts permitted by law.  The Municipality requested an explanation of such alleged violation and further informed the Parent that its environmental department had determined to initiate procedures against any plant that is not in compliance with the permitted concentrations.  On September 16, 2009, the Parent sent a letter to the Municipality explaining that it had invested significant funds and resources each year in order to comply with all environmental legal requirements.  The Parent further indicated that it had been and continued to be engaged in several projects to reduce salt and metal concentrations in its plant wastewater and that it constantly updates its procedures with respect to environmental matters.  In addition, the Parent proposed to collaborate with the Municipality and conduct mutual tests to ensure maximum protection of the environment.  To date, the Parent has not received a response from the Municipality to its letter dated September 16, 2009.  If the Parent is found to be in violation of environmental laws, it could be liable for damages and costs of remedial actions and could also be subject to revocation of the permits necessary to conduct its business.  Any such liability or revocation could have a material adverse effect on the Company’s business, financial condition and results of operations.
On May 4, 2010, the Parent received legal notice from the Magistrate's Court that the Public Council for the Prevention of Noise and Pollution in Israel (the “Public Council”) had filed a lawsuit against it and certain of its directors regarding several alleged environmental damages caused by its release of industrial waste water. On May 3, 2011, the Parent and its directors entered into a settlement agreement with the Public Council.  The settlement agreement recognizes the significant improvement in the quality of the Parent’s wastewater and the contribution of the Public Council to this effort.  The Public Council undertook not to take any action (civil, criminal, or administrative) against the Parent and its directors or file any complaint with any regulatory agency regarding the matter for a one year period from the date on which the Court approves the settlement.  The Parent undertook to pay the Public Council NIS 75 ($22) (plus applicable V.A.T.) for its expenses.  On May 4, 2011, the Court approved the settlement agreement and the settlement was given the effect of a judgment.
F - 21
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 10 - Commitments and Contingent Liabilities (cont’d)

D.           Contingent Liabilities (cont’d)

Employee Related Matters

Three lawsuits were filed against the Parent by an employee and two former employees regarding personal injuries that they allegedly had suffered during their employment with the Parent, seeking financial compensation of approximately $330 for past damages and an additional amount for future lost income, pain and suffering in such amount as the Court may determine. Four other employees notified the Parent that they also allegedly suffered personal injuries during their employment. Of these four employees, one is seeking compensation of $150 and the others did not state their claim amount. The Parent submitted the claims to its insurance company, which informed the Parent that it is reviewing the statements of claims without prejudicing its rights to deny coverage.

Note 11 - Shareholders' Equity

Authorized, issued and outstanding share capital in historical terms is as follows:
Authorized
Issued and outstanding
December 31
December 31
December 31
2011 and 2012
2012
2011
Number of shares:
Ordinary shares of par value NIS 0.6 each
50,000,000 6,610,107 6,610,107
Amount in US$
Ordinary shares of par value NIS 0.6 each
1,384,318 1,384,318
F - 22
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 12 - Revenues

A.           Customers who accounted for over 10% of the total consolidated revenues:

Year ended December 31
2012
2011
2010
Customer A  - Sales of
manufactured products
17.2 % 14.9 % 13.7 %

B.           Revenues by geographic areas

Year ended December 31
2012
2011
2010
Israel
21,965 22,866 17,182
Europe
11,583 13,400 10,119
North America
7,664 5,400 6,623
Rest of the world
4,434 5,164 3,590
45,646 46,830 37,514

C.           Fixed assets, net by geographic areas

Year ended December 31
2012
2011
2010
Israel
8,617 7,233 7,769
Europe
445 503 379
North America
13 10 14
9,075 7,746 8,162

Note 13 - Financial Expenses, Net

Year ended December 31
2012
2011
2010
Interest and exchange rate expenses on
long-term loans
126 166 159
Expenses on  short-term credit and bank
charges
281 464 342
Effect of exchange rate differences on other
expenses and net loss (gain) from derivative
instruments
137 110 109
Other financing expenses (income), net
(1 ) - (1 )
543 740 609

The Company uses forward contracts and options to manage its foreign exchange rate exposures. Such transactions were not designated as hedging instruments for accounting purposes.
F - 23
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 14 - Taxes on Income

A.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “Law")

1.
One of the Parent’s production facilities in Israel qualifies as a “benefited enterprise” in accordance with the Law, as amended in 2005, which provides certain tax benefits to investment programs of an “approved enterprise” or “benefited enterprise.” The Parent’s benefited enterprise was converted from a previously “approved enterprise” program pursuant to the approval of the Israel Tax Authority that the Parent received in September 2006.  The period of tax benefits for the benefited enterprise has not yet commenced and will expire no later than 2016 (as further discussed below).  In the past certain of the Parent’s production facilities were granted approved enterprise status pursuant to the Law; however, the benefit periods for such approved enterprises expired in 2005.

A company that owns a benefited enterprise is eligible for governmental grants, but may elect to receive an alternative package comprised of tax benefits, referred to as the “alternative benefits track.”  The tax benefits of a benefited enterprise include lower tax rates or no tax depending on the area and the track chosen, lower tax rates on dividends and accelerated depreciation.  In order to receive benefits in the grant track or the alternative benefit track, the industrial enterprise must contribute to the economic independence of the Israeli economy, be competitive and contribute to the gross local product in one of the manners stipulated in the Investment Law.  Tax benefits would be available, subject to certain conditions (described below), to production facilities that generally derive more than 25% of their annual revenue from export, or that do not derive 75% or more of their annual revenue in a single market.

On September 20, 2006, the Parent received a pre-ruling from the Israeli Tax Authority confirming that its most recent investment program will be deemed a “benefited enterprise” instead of its former “approved enterprise” status.  Pursuant to such pre-ruling, the former approved enterprise status of that investment plan was terminated by the Investment Center.  The benefited enterprise status granted to the Parent’s investment program provides for a tax exemption on undistributed earnings derived from the program for two years and a reduced tax rate for the remainder of the benefit period (see below).  The benefit period with respect to such program has not yet commenced, and will expire no later than 2016.

If, (i) only a part of a company’s taxable income is derived from an approved enterprise or a benefited enterprise, as in the Parent’s case; or (ii) a company owns more than one approved enterprise or benefited enterprise, the resulting effective corporate tax rate of the company represents the weighted combination of the various applicable rates.  A company owning a “mixed enterprise” (which is a company that derives income from one or more sources in addition to an approved enterprise or benefited enterprise) generally may not distribute a dividend that is attributable only to the approved enterprise or benefited enterprise.
F - 24
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 14 - Taxes on Income (cont’d)

A.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “Law") (cont’d)

Subject to certain provisions concerning income subject to the alternative benefits track (see below), any distributed dividends are deemed attributable to the entire enterprise, and the effective tax rate represents the weighted combination of the various applicable tax rates.  A company may elect to attribute dividends distributed by it only to income not subject to the alternative benefits track.

The tax benefits available to benefited enterprises are: (1) benefited enterprise situated in zone A may choose between (a) limited corporate tax rate of 11.5%; and (b) tax exemption from corporate tax on undistributed income; (2) a benefited enterprises qualified as a “strategic investment” is entitled to a tax exemption; (3) benefited enterprises situated in zone B or elsewhere (“zone C”) are entitled to tax exemption on undistributed income for six or two years, respectively, and to beneficial tax rate (25% or less in the case of a qualified foreign investor’s company that is at least 49% owned by non-Israeli residents) for the remainder of the applicable period of benefits.  The Parent’s plant is located in zone C.

Dividends paid out of income derived from an approved enterprise or benefited enterprise (or out of dividends received from a company whose income is derived from an approved enterprise or benefited enterprise) are generally subject to withholding tax at the rate of 15% (deductible at source).  The rate of 15% is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter.  A company which elects the alternative benefits track will be subject to corporate tax at the otherwise applicable rate of 25% (or lower in the case of a qualified foreign investor’s company which is at least 49% owned by non-Israeli residents) in respect of the gross amount of the dividend if it pays a dividend out of income derived from its approved enterprise or benefited enterprise during the tax exemption period.  Dividends paid to a qualifying non-resident out of the profits of a benefited enterprise subject to 11.5% corporate tax are subject to withholding tax at the rate of 4%.
F - 25
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 14 - Taxes on Income (cont’d)

A.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “Law") (cont’d)

Subject to certain provisions concerning income subject to the alternative
The tax benefits available to a benefited enterprise relate only to taxable income attributable to that specific enterprise and are contingent upon the fulfillment of the conditions stipulated by the Law and its regulations and the terms of the pre-ruling that the Parent received from the Israeli Tax Authority.  If the Parent fails to comply with these conditions, the tax and other benefits may be discontinued, in whole or in part, and the Parent might be required to pay the monetary equivalent of the tax benefits it received, plus Israeli consumer price index linkage differences and interest A company that qualifies as a foreign investor’s company is entitled to further tax benefits relating to its benefited enterprises.  Subject to certain conditions, a foreign investor company is a company more than 25% of whose share capital (in terms of shares, rights to profits, voting and appointment of directors), and of whose combined share and loan capital, is owned, directly or indirectly, by persons who are not residents of Israel.  Such a company with a foreign investment of over 25% will be eligible for an extension of the period of tax benefits for its approved and benefited enterprises (up to ten years) and further tax benefits (a reduced corporate tax rate of 10%-20%) should the foreign investment reach or exceed 49%.  The rate of 15% applicable to dividends is effective for an unlimited period.  No assurance can be given that the Parent currently qualifies or will qualify in the future as a foreign investor’s company.

The termination or substantial reduction of any of the benefits available under the Law could have a material adverse effect on the Parent’s future investments in Israel, and could adversely affect the Parent’s results of operations and financial condition.
2.
Amendment to the Law

In December 2010, the Israeli Parliament passed the Law for Economic Efficiency for 2011 and 2012 (Amended Legislation), 2011, which prescribes, among other things, amendments to the Law, effective as of January 1, 2011.  The amendment introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such term is defined in the Law).  The new tax benefits (described below) would be available, subject to certain conditions, to production facilities that generally derive more than 25% of their annual revenue from export, or that do not derive 75% or more of their annual revenue in a single market. A “Preferred Company” is defined in the amendment as either (i) a company incorporated in Israel and not wholly- owned by the government or (ii) a partnership (a) that was registered under the Israeli Partnerships Ordinance and (b) all of its partners are companies incorporated in Israel, but not all of them are wholly- owned by the government and such companies or partnerships have, among other conditions, Preferred Enterprise status and are controlled and managed from Israel.
F - 26
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 14 - Taxes on Income (cont’d)

A.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “Law") (cont’d)

2.
Amendment to the Law (cont’d)

Subject to certain provisions concerning income subject to the alternative.
In accordance with the amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to income derived by its Preferred Enterprise in 2011-2012, unless it is located in a certain development zone, in which case the rate will be 10%.  Such corporate tax rate will be reduced to 12.5% and 7%, respectively, in 2013-2014 and to 12% and 6% in 2015 and thereafter, respectively.

Under the amendment, dividends distributed out of income attributed to a Preferred Enterprise are subject to withholding tax at source at the rate of 15% (or lower, under an applicable tax treaty).  However, upon the distribution of a dividend to an Israeli company, no withholding tax will be remitted.

The amendment applies to income generated as of January 1, 2011.  Under the transitional orders of the amendment, the Parent may decide to irrevocably implement the amendment to the Law while waiving benefits provided under the Law as in effect prior to the amendment or to remain subject to the Law as in effect prior to the amendment.  The Parent may elect to implement the amendment at any time.  The Parent is currently examining the possible effect of the amendment on its financial statements, if at all, and has not yet decided whether to apply the amendment.

B.           Amendments to the Income Tax Ordinance

On December 5, 2011 the Knesset approved the Law to Change the Tax Burden (Legislative Amendments) - 2011. According to the law the tax reduction that was provided in the Economic Efficiency Law, as aforementioned, will be cancelled and the company tax rate will be 25% as from 2012. The change in the tax rates had no material effect on the financial statements.
F - 27
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)

Note 14 - Taxes on Income (cont'd)

C.
Taxation under Inflationary Conditions

The Israeli Income Tax Law (Inflationary Adjustments) - 1985 (hereinafter – "the Inflationary Adjustments Law") is effective from the 1985 tax year. The Inflationary Adjustments Law introduced the concept of measurement of results for tax purposes on a real (net of inflation) basis.  The various adjustments required by the Inflationary Adjustments Law are designed to achieve taxation of income on a real basis. However, the earnings adjusted according to the Inflationary Adjustments Law are not identical to the earnings reported according to the accounting standards. As a result, differences arise between the reported income in the financial statements and the adjusted income for tax purposes.

On February 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments) (Amendment No. 20) (Restriction of Period of Application) – 2008 (“the Amendment”) was passed by the Knesset. According to the Amendment, the Inflationary Adjustments Law is no longer applicable subsequent to the 2007 tax year, except for the transitional provisions whose objectives are to prevent distortion of the income tax calculations.

In addition, according to the Amendment, commencing in the 2008 tax year, the adjustment of income for the effects of inflation for tax purposes will no longer be calculated. Additionally, depreciation on protected assets and tax loss carryforwards will no longer be linked to the CPI, subsequent to the 2007 tax year, and the balances that have been linked to the CPI through the end of the 2007 tax year, will be used going forward.

D.
Tax loss carryforwards

As of December 31, 2012, the Parent’s tax loss carryforwards were approximately $14.5 million and Kubatronik’s tax loss carryforwards were Euro 973,000 ($1.3 million) for corporate tax and Euro 1.1 million ($1.4 million) for municipal corporate tax.

The Parent and Kubatronik’s tax loss carryforwards do not have expiration dates.

E.
Income tax assessments

In Israel, the Parent has received final tax assessments through the 1995 tax year. Assessments through the 2007 tax year are considered final due to statute of limitations.
Kubatronik and Eltek Europe have received final tax assessments through the 2010 tax year.
The Company’s other foreign subsidiaries have not yet received any final tax assessments since their incorporation.
The Parent files its income tax return in Israel, Kubatronik and Eltek Europe file their income tax returns in Germany and Eltek USA files its income tax return in the United States. The Israeli tax returns of the Parent may be audited by the Israeli Tax Authorities for the tax years beginning in 2008.  The tax returns of Kubatronik and Eltek Europe remain subject to audit for the tax years beginning in 2011, and the tax returns of Eltek USA remain subject to audit for the tax years beginning in 2009.
F - 28
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)

Note 14 - Taxes on Income (cont'd)

F.
Profit (Loss) before income tax expense included in the statement of operations

Year ended
Year ended
Year ended
December 31
December 31
December 31
2012
2011
2010
Profit (loss) before income tax
expense: Israel
495
1,867
(1,460 )
Foreign jurisdictions
253
(21
) (356 )
Total
748
1,846 (1,816 )

G.
Reconciliation of the theoretical income tax expense to the actual income tax expense

A reconciliation of the theoretical income tax expense (benefit), assuming all income (loss) is taxable at the statutory rates applicable in Israel, and the actual income tax expense (benefit), is as follows:

Year ended
Year ended
Year ended
December 31
December 31
December 31
2012
2011
2010
Profit (loss) before income taxes as
reported in the consolidated
statements of operations
748
1,846 (1,816 )
Statutory tax rates
25 % 24 % 25 %
Theoretical tax benefit calculated
187
443 (454 )
Differences between the definition
of capital and assets for tax
purposes, goodwill impairment and
other
14
14 (44 )
Change in valuation allowance
(148 ) 669 500
Effective change in corporate tax
rates
- (1,103 ) -
Foreign tax rate differential in
subsidiaries
(1 ) 8 17
Total
(135 ) (412 ) 473
Income tax expense
52 31 19

F - 29
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)

Note 14 - Taxes on Income (cont'd)

H.
Deferred tax assets and liabilities

Deferred taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for income tax purposes.  Significant components of the Company’s deferred tax liabilities and assets are as follows:

December 31
December 31
2012
2011
Deferred tax assets:
Tax loss carryforwards (in Israel)
3,885 4,071
Tax loss carryforwards (outside Israel)
485 484
Severance benefits
17 16
Provision for vacation pay
363 315
Allowance for doubtful accounts
24 23
Total gross deferred tax assets
4,774 4,909
Less valuation allowance
(4,052 ) (4,200 )
Net deferred tax assets
722 709
Deferred tax liabilities:
Fixed assets - differences in depreciation
(722 ) (709 )
Total gross deferred tax liabilities
(722 ) (709 )
Net deferred tax assets
- -

Despite the Company's accumulated profits in Israel during the years ended December 31, 2012 and 2011, the Company recorded a full valuation allowance for deferred tax assets with respect to its net operating losses generated in Israel due to uncertainty about its ability to utilize such losses in the foreseeable future.  Such uncertainty is primarily due to fluctuations of the NIS against the U.S. dollar, which may have an adverse impact on the Company's financial results in such periods, the concentrated risk of a high volume of revenue from small number of customers, the fluctuations of the PCB industry and the Company's history of losses. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making this assessment.
The valuation allowance for deferred tax assets as of December 31, 2012 and 2011, was $4,052 and $4,200, respectively. The net change in the total valuation allowance for each of the years ended December 31, 2012, 2011 and 2010, was an increase (decrease) of $(148), $669 and $500, respectively.
F - 30
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 14 - Taxes on Income (cont'd)

I.
Accounting for uncertainty in income taxes

For the twelve-month periods ended December 31, 2012, 2011 and 2010, the Company did not have any unrecognized tax benefits and thus, no interest and penalties related to unrecognized tax benefits were recognized. In addition, the Company does not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.
Note 15 - Financial Instruments and Risk Management

The Company measures its long-term bank loans, net written put option (see Note 1A) at fair value. In accordance with ASC 820-10, the Company’s long-term bank loans and foreign currency derivative contracts are classified within Level 2, because they are valued utilizing market observable inputs. The net written put option is classified within Level 3 because it is valued using a Binomial model which utilizes significant inputs that are unobservable in the market such as expected stock price volatility, risk-free interest rate and the dividend yield, and remaining period of time the options will be outstanding before they expire.

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011, aggregated by the level in the fair-value hierarchy within which those measurements fall:

Quoted prices
Significant
December 31,
December 31,
in active
other
Significant
2012
2012
markets for
observable
unobservable
Carrying
identical assets
inputs
inputs
Amount
Fair value
(Level 1)
(Level 2)
(Level 3)
Liabilities :
Long-term debt
1,296 1,271 - 1,271 -
Net written put
option
497 497 - - 497
Total
1,793 1,768 - 1,271 497
F - 31
Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 15 - Financial Instruments and Risk Management (cont’d)

Quoted prices
Significant
December 31,
December 31,
in active
other
Significant
2011
2011
markets for
observable
unobservable
Carrying
identical assets
inputs
inputs
Amount
Fair value
(Level 1)
(Level 2)
(Level 3)
Liabilities :
Long-term debt
2,226 2,102 - 2,102 -
Net written put
option
366 366 - - 366
Total
2,592 2,468 - 2,102 366

In addition to the above, the Company's financial instruments at December 31, 2012 and 2011, consisted of cash and cash equivalents, bank deposits, trade and other accounts receivable, other current assets, short-term credit provided by financial institutions, and trade and other payables. The carrying amounts of all the aforementioned financial instruments, at face value or cost plus accrued interest, approximate fair value due to the short maturity of these instruments.

The changes in the Company’s liabilities measured at fair value using significant unobservable inputs (Level 3), during the years ended December 31, 2012 and 2011 were changes in the fair value of the net written put option charged to financial expense in the Consolidated Statement of Comprehensive Income (Loss) of $135 and $79, respectively, and translation adjustments included in financial income in the Consolidated Statement of Comprehensive Income (Loss) $(9) and $12, respectively.
These Consolidated Financial Statements do not include any nonrecurring fair value measurements relating to assets and liabilities for which the Company has adopted the provisions of ASC Topic 820.
Note 16 - Related Party Balances and Transactions

The Company carries out transactions with related party as detailed below.  The Company’s principal shareholder is also the principal shareholder of an affiliated supplier. In December 2012, a receiver was appointed for such supplier. The Company’s transactions with related party are carried out on an arm’s-length basis.

A.           Balances with related parties

December 31
2012
2011
Trade accounts payable
1,336 1,046
F - 32

Eltek Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements
(All amounts in thousands of $, except where otherwise stated)
Note 16 - Related Party Balances and Transactions (cont’d)

B.           Transactions with related parties

Year ended December 31
2012
2011
2010
Cost of revenues (*)
3,287 2,674 1,963

(*)
The Company’s purchases from such supplier accounted for 24.5%, 18.4% and 16.1% of its raw material costs in 2012, 2011 and 2010, respectively.
F - 33
S I G N A T U R E S

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
ELTEK LTD.
By:
/s/ Arieh Reichart
Name: Arieh Reichart
Title: President and Chief Executive Officer
By:
/s/ Amnon Shemer
Name: Amnon Shemer
Title: Vice President, Finance and Chief Financial Officer
Dated: April 29, 2013
- 66 -
TABLE OF CONTENTS
Part IItem 1. Identity Of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on The CompanyItem 4A. Unresolved Staff CommentsItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Quantitative and Qualitative Disclosures About Market RisksItem 12. Description Of Securities Other Than Equity SecuritiesPart IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16. [reserved]Item 16A. Audit Committee Financial ExpertItem 16B. Code Of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions From The Listing Standards For Audit Committee SItem 16E. Purchases Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Changes in Registrant S Certifying AccountantItem 16G. Corporate GovernanceItem 16H. Mine Safety DisclosureItem 17. Financial StatementsItem 18. Financial StatementsItem 19. ExhibitsNote 1 - Organization and Summary Of Significant Accounting PoliciesNote 1 - Organization and Summary Of Significant Accounting Policies (cont D)Note 1 - Organization and Summary Of Significant Accounting Policies (cont'd)Note 2 - CashNote 3 - InventoriesNote 4 - Fixed Assets, NetNote 5 - GoodwillNote 6 - Short-term Credit and Current Maturities Of Long-term DebtNote 7 Other Current LiabilitiesNote 8 - Long-term Debt, Excluding Current MaturitiesNote 8 - Long-term Debt, Excluding Current Maturities (cont D)Note 9 - Employee Severance BenefitsNote 9 - Employee Severance Benefits (cont D)Note 10 - Commitments and Contingent LiabilitiesNote 10 - Commitments and Contingent Liabilities (cont D)Note 11 - Shareholders' EquityNote 12 - RevenuesNote 13 - Financial Expenses, NetNote 14 - Taxes on IncomeNote 14 - Taxes on Income (cont D)Note 14 - Taxes on Income (cont'd)Note 15 - Financial Instruments and Risk ManagementNote 15 - Financial Instruments and Risk Management (cont D)Note 16 - Related Party Balances and TransactionsNote 16 - Related Party Balances and Transactions (cont D)