20-F 1 zk1821338.htm 20-F


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 20-F
 
(Mark One)
 
☐ Registration statement pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
 
or
 
☒ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2017
 
or
 
☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
or
 
☐ Shell Company report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 
Date of event requiring this shall Company report ___________
 
For the transition period from ________ to ________
 
Commission file number 000-30664
 
Camtek Ltd.
(Exact name of Registrant as specified in its charter)
 
Israel
(Jurisdiction of incorporation or organization)
 
Ramat Gavriel Industrial Zone, P.O. BOX 544, Migdal Ha'Emek, Israel
(Address of principal executive offices)
 
Moshe Eisenberg, Telephone: (972) (4) 6048100, Facsimile: (972) (4) 6048300, E-mail:
moshee@camtek.com
Ramat Gavriel Industrial Zone, P.O. BOX 544, Migdal Ha'Emek, 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:
Ordinary Shares, nominal value NIS 0.01 per share
(Title of each Class)

Nasdaq Global Market
(Name of each Exchange on which registered)

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

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
 
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:

35,832,131 Ordinary Shares, par value NIS 0.01 per share.
 


 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
☐ Yes          ☒ No
 
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
 
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          ☐ 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          ☐ 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          ☒ Accelerated Filer          ☐ Non-Accelerated Filer
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP ☒
 
International Financial Reporting Standards as issued by the International Accounting Standards Board ☐
 
Other ☐
 
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 ☐          Item 18 ☐
 
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
 
 
2

 
TABLE OF CONTENTS
 
 
 
PAGE 
5
5
5
20
27
28
38
58
60
61
62
76
76
 
76
76
76
77
77
78
78
80
80
80
81
 
3


INTRODUCTION
 
Definitions
 
In this annual report, unless the context otherwise requires:
 
·
references to "Camtek," the "Company," "us," "we" and "our" refer to Camtek Ltd. (the "Registrant"), an Israeli company, and its consolidated subsidiaries (unless otherwise indicated);
 
·
references to "ordinary shares," "our shares" and similar expressions refer to the Registrant's ordinary shares, NIS 0.01 nominal (par) value per share;
 
·
references to "dollars," "U.S. dollars" and "$" are to United States Dollars;
 
·
references to "shekels" and "NIS" are to New Israeli Shekels, the Israeli currency;
 
·
references to the "Companies Law" are to Israel's Companies Law, 5759-1999;
 
·
references to the "Israeli Securities Law" are to Israel's Securities Law, 5728-1968;
 
·
references to the "SEC" are to the United States Securities and Exchange Commission; and
 
·
references to the "Nasdaq Rules" are to rules of the Nasdaq Global Market.
 
Cautionary Language Regarding Forward-Looking Statements

This annual report includes certain statements that are intended to be, and are hereby identified as, "forward-looking statements" for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future events.
 
Forward-looking statements can be identified by the use of forward-looking terminology words such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "seeks," "strategy," "potential" or "continue" or the negative or other variations of these words, or other comparable words or phrases, but are not the only way these statements are identified. These statements discuss future expectations, plans and events, contain projections of results of operations or of financial condition or state other "forward-looking" information. When a forward-looking statement includes an underlying assumption, we caution that, while we believe the assumption to be reasonable and make it in good faith, assumed facts almost always vary from actual results, and the difference between a forward-looking statement and actual results can be material. Forward-looking statements may be found in Item 4: "Information on the Company" and Item 5: "Operating and Financial Review and Prospects" and in this annual report generally. Our actual results could differ materially from those anticipated in these statements as a result of various factors, including all the risks discussed in "Risk Factors" and other cautionary statements in this annual report. All of our forward-looking statements are qualified by and should be read in conjunction with those disclosures. Except as may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur.
 
4

 
PART I
 
Item 1.          Identity of Directors, Senior Management and Advisers.
 
      Not applicable.
 
Item 2.          Offer Statistics and Expected Timetable.
 
      Not applicable.
 
Item 3.          Key Information.
 
A.            Selected Consolidated Financial Data.
 
We derived the selected data under the captions "Selected Statement of Operations Data" for the years ended December 31, 2017, 2016 and 2015, and "Selected Balance Sheet Data" as of December 31, 2017 and 2016 from the audited consolidated financial statements included elsewhere in this Annual Report. We derived the selected data under the captions "Selected Statement of Operations Data" for the years ended December 31, 2014 and 2013 and "Selected Balance Sheet Data" as of December 31, 2015, 2014 and 2013 from audited financial statements that are not included in this Annual Report.
 
For all fiscal periods for which consolidated financial data are set forth below, our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.
 
5

 

 
   
Year Ended December 31,
 
   
2017
   
2016
   
2015
   
2014
   
2013
 
   
U.S. Dollars (in thousands, except per share data)
 
Selected Statement of Operations Data:
                             
Revenues:
                             
Revenues          
   
93,485
     
79,228
     
69,387
     
58,134
     
54,230
 
                                         
Cost of revenues          
   
47,966
     
41,807
     
36,508
     
28,679
     
30,948
 
Reorganization and impairment          
   
-
     
4,931
     
1,041
     
-
     
-
 
                                         
Total cost of revenues          
   
47,966
     
46,738
     
37,549
     
28,679
     
30,948
 
Gross profit          
   
45,519
     
32,490
     
31,838
     
29,455
     
23,282
 
                                         
Research and development costs          
   
13,534
     
12,630
     
11,421
     
10,608
     
10,937
 
Selling, general and administrative expenses          
   
22,022
     
21,900
     
19,255
     
17,380
     
18,426
 
                                         
Patent litigation expense          
   
13,000
     
-
     
14,600
     
-
     
-
 
Reorganization and impairment          
   
-
     
(4,059
)
   
138
     
60
     
(3,466
)
Total operating expenses          
   
48,556
     
30,471
     
45,414
     
28,048
     
25,897
 
Operating income (loss)          
   
(3,037
)
   
2,019
     
(13,576
)
   
1,407
     
(2,615
)
Financial expenses, net          
   
(150
)
   
(847
)
   
(1,312
)
   
(1,021
)
   
(1,575
)
                                         
Income (loss) from continuing operations before income taxes
   
(3,187
)
   
1,172
     
(14,888
)
   
386
     
(4,190
)
Income tax (expense) benefit          
   
4,875
     
(303
)
   
2,072
     
(395
)
   
387
 
Net income (loss) from continuing operations          
   
1,688
     
869
     
(12,816
)
   
(9
)
   
(3,803
)
                                         
Discontinued operations          
                                       
Income from discontinued operations          
                                       
Income before tax expense          
   
18,302
     
4,450
     
2,952
     
3,530
     
3,588
 
Income tax benefit (expense)          
   
(6,028
)
   
(585
)
   
(249
)
   
(184
)
   
222
 
Income from discontinued operations          
   
12,274
     
3,865
     
2,703
     
3,346
     
3,810
 
Net income (loss)          
   
13,962
     
4,734
     
(10,113
)
   
3,337
     
7
 
                                         
Earnings (loss) per ordinary share:
                                       
Basic earnings (losses) from continuing operations
   
0.05
     
0.02
     
(0.38
)
   
(0.00
)
   
(0.13
)
Basic earnings from discontinued operations          
   
0.35
     
0.11
     
0.08
     
0.11
     
0.13
 
Basic net earnings          
   
0.40
     
0.13
     
(0.30
)
   
0.11
     
0.00
 
Diluted earnings (losses) from continuing operations
   
0.05
     
0.02
     
(0.38
)
   
(0.00
)
   
(0.13
)
Diluted earnings from discontinued operations          
   
0.34
     
0.11
     
0.08
     
0.11
     
0.13
 
Diluted net earnings          
   
0.39
     
0.13
     
(0.30
)
   
0.11
     
0.00
 
Weighted average number of ordinary shares outstanding (in thousands):
                                       
Basic          
   
35,441
     
35,348
     
33,352
     
30,464
     
30,040
 
Diluted          
   
35,964
     
35,376
     
33,352
     
30,545
     
30,094
 
 
6


 
   
Year Ended December 31,
 
   
2017
   
2016
   
2015
   
2014
   
2013
 
   
U.S. Dollars (in thousands, except per share data)
 
Selected Balance Sheet Data:
                             
Cash and cash equivalents          
   
43,744
     
19,740
1 
   
30,833
     
18,220
     
16,495
 
Short-term deposits          
   
-
     
-
     
-
     
8,607
     
6,000
 
Short-term restricted deposit          
   
-
     
-
     
7,875
     
-
     
-
 
Long-term restricted deposit          
   
-
     
-
     
-
     
729
     
729
 
Total assets          
   
113,036
     
105,558
     
116,266
     
96,511
     
91,850
 
Short and long term bank loans          
   
-
     
-
     
-
     
-
     
-
 
Total liabilities          
   
28,735
     
32,193
     
48,064
     
30,779
     
29,954
 
Additional paid in capital          
   
78,437
     
76,463
     
76,034
     
63,465
     
62,966
 
Total shareholders' equity2          
   
84,301
     
73,365
     
68,202
     
65,732
     
61,896
 
Ordinary issued and outstanding shares
   
35,832,131
     
35,348,176
     
35,348,176
     
30,494,522
     
30,405,526
 

B.            Capitalization and Indebtedness.
 
Not applicable.
 
C.            Reasons for the Offer and Use of Proceeds.
 
Not applicable.
 
D.            Risk Factors
 
There is a high degree of risk associated with our Company and business. If any of the following risks occur, our business, revenues, operating results and financial condition could be materially adversely affected and the trading price of our ordinary shares could decline.
 
Risk Factors Related to Our Business and Our Markets
 
We are dependent upon the semiconductor industry; unfavorable economic conditions or low capital expenditures may negatively impact our operating results.
 
Our revenue is dependent upon the strength of the worldwide electronics industry. In particular, following the sale of our Printed Circuit Board ("PCB") inspection business unit (the "PCB Sale Transaction") (see in Item 4.A below – "History and Development of the Company") all of our revenues are derived from sales of products and related services to the semiconductor fabrication industry. We depend upon the need by manufacturers in such industry, to make continuing capital investments in our products for use in their manufacturing processes and their need to keep pace with more technologically complex electronic devices.
 
The capital equipment procurement practices of these manufacturers have historically been cyclical in nature, and there have been both periodic and sustained downturns. These spending levels are impacted by the actual and expected worldwide level of demand for consumer end products that utilize our solutions in their production processes. Demand for consumer end products is normally a function of prevailing global or regional economic conditions and is negatively affected by a general economic slow-down and/or periods of economic uncertainty as consumers reduce discretionary spending on electronics. Although we have seen a more stable overall pattern of capital investments in the industries we serve in recent years, the occurrences of cyclical downturns in these industries are very difficult to predict. Due to the ongoing need to invest in R&D and the costs of maintaining a global infrastructure of customer service and support operations, we are limited in our ability to reduce expenses in response to circumstances of decreased demand, which could have a material adverse effect on our business and results of operations.
 

1 Reduction in cash, cash equivalents and short-term restricted deposit reflects the satisfaction of a $14.6 million judgment and interest, which was accrued in the year ended December 31, 2015.
2Authorized share capital of 100,000,000 ordinary shares, par value NIS 0.01.
7

 
The markets we serve are highly competitive and have dominant market participants with greater resources than us. Such competition could adversely affect the terms on which we sell our products and may negatively affect our financial results.
 
The markets that we serve are highly competitive. During market downturns competition is intensified due to the reduced demand for the products that we manufacture. When competitors respond to declining demand by offering discounts, free evaluation machines or more favorable credit terms, we may need to implement some or all of the same methods in order to maintain our market position. These could mean lower prices for our products and a corresponding reduction in our gross margin, as well as more favorable payment terms to our customers and a corresponding decline in our cash flow. If we have to lower prices to remain competitive and are unable to reduce our costs to offset price reductions or are unable to introduce new, higher performance products with higher prices, our operating results may be adversely affected.
 
Our main competitors are Rudolph Technologies, Inc., ATI Electronics Pty Ltd, KLA-Tencor Corporation, ASTI Holding Limited and Toray Industries, Inc.
 
Some of our competitors have greater financial, personnel and other resources and offer a broader range of products and services. These competitors may be able to respond more quickly to new or emerging technologies or changes in customer requirements, develop additional or superior products, benefit from greater economies of scale, offer more aggressive pricing or devote greater resources to the promotion of their products. If we are unsuccessful in effectively responding to our competition, our financial results will be adversely affected by reduced revenues as well as lower margins, which may lead to financial losses.

Our operating results have varied, and will likely continue to vary significantly from quarter to quarter, and from our expectations for any specific period making it difficult to predict future results.
 
Our quarterly operating results have varied in the past and could continue to vary from quarter to quarter or from our expectations for any specific period in the future. This complicates our planning processes, reduces the predictability of our earnings and subjects our stock to price and volume fluctuations. Period-to-period comparisons of our results of operations may be meaningless, and you should not rely on them as indications of our future performance.
 
Some of the factors that may influence our operating results include:
 
·
change in customer demand for our systems and installation schedules;
 
·
product introductions and the market penetration period of new products;
 
·
global economic conditions and worldwide demand for electronic equipment;
 
·
rapid shifts in industry capacity;
 
·
the size, timing and shipment of substantial orders;
 
·
timing of evaluation and qualification of our products by new customers;
 
·
lack of visibility/low levels of backlog from the preceding quarter;
             
·
product mixes;
 
·
pricing of our products;
 
·
timing of new product upgrades or enhancements
 
·
legal expenses and the impact of legal actions; and
 
·
fluctuations in interest and exchange rates
 
In light of these factors and the cyclical nature of the markets we target, we expect to continue to experience significant fluctuations in our quarterly operating results.
 
8


 
Technology in the markets in which we operate is rapidly evolving, and we may not be able to adequately predict these changes or keep pace with emerging industry standards, which could lead to a loss of revenues or adversely affect our profits.

The markets for our products are characterized by changing technology, evolving industry standards, changes in end-user requirements and new product introductions. Our future success will depend on our ability to accurately predict new market needs and requirements and to accordingly enhance our existing products and develop and introduce new technologies for the markets in which we operate. These products must keep pace with technological developments and address the increasingly sophisticated needs of our customers. If we fail to correctly anticipate, or if we are unable to keep pace with, technological changes, products offered by our competitors or emerging industry standards, our ability to generate revenues may be damaged. Adopting new technologies may also result in material inventory write-offs which would adversely affect our results of operations.
 
We may seek to expand our activity into adjacent markets, which may adversely affect our results of operations.
 
We may seek to expand our activity beyond our existing served markets, into adjacent markets such as the inspection of silicon wafers at various steps during their manufacturing process inside the wafer fabrication facility. Technological developments in production processes and in process control may reduce the growth we anticipate in demand for inspection systems in such markets. If this happens, we may not be able to cover our investments in penetrating these markets, or will have to increase our R&D and marketing expense to adapt our products to such changes.

Fluctuations in currency exchange rates may result in additional expenses being recorded or in the prices of our products becoming less competitive and thus may have negative impact on our profitability.
 
We are a global company that operates in a multi-currency environment. In recent months, foreign currency exchange rates have been subject to considerable fluctuations. As a major portion of the costs of our Israeli operations, such as personnel, subcontractors, materials and facility‑related costs, are incurred in NIS, an increase in the NIS value relative to the U.S. Dollar will increase our costs expressed in U.S. Dollars. We may, from time to time, take various measures designed to reduce our exposure to these effects, but any such steps may be inadequate to protect us from currency rate fluctuations.  In addition, although our products' prices in most countries are denominated in U.S. Dollars in certain territories (currently, Europe and Japan)  our products' prices are denominated in local currencies, and much of our service income in additional territories is denominated in local currencies. If there is a significant devaluation in the relevant local currencies in which we operate compared to the U.S. Dollar, we may be required to increase those prices and as a result our products and services may become less competitive.

A substantial majority of our sales have been to manufacturers in the Asia Pacific region. The concentration of our sales and other resources within a particular geographical region subjects us to additional risks that could impede harm our revenues, results of operations and cash flow.
 
In 2017, our sales in the Asia Pacific region accounted for approximately 85% of our total revenues, of which approximately 65% of our total revenues were from sales in China, Taiwan and Korea. A number of Asian countries have experienced or could experience political and economic instability. For example, Taiwan and China have had a number of disputes, as have North and South Korea. Changes in local legislation, changes in governmental controls and regulations, changes in tariffs and taxes, trade restrictions, a downturn in economic or financial conditions, political instability, an outbreak of hostilities or other political upheaval, as well as any further extraordinary events having an adverse effect on the economy or business environment in this region, would likely harm the operations of our customers in these countries, may cause a significant decline in our future revenues and may have an adverse effect on our results of operations and cash flow. These general risks are heightened in China, where the nature of the economy and the legal parameters are rapidly evolving and where foreign companies may face regulatory, business and cultural obstacles.

9

 
A longer sales process for new products may increase our costs and delay time to market of our products, both of which may negatively impact our revenues, results of operations, cash flow and may result in inventory write-offs.
 
Our sales process to new and existing customers usually involves: demonstrations and testing against industry benchmarks in our sales centers; sales and technical presentations and presentations regarding our products' competitive advantages; and installation of the systems at the customer's site for side-by-side competitive evaluations for a period of approximately six months. More evaluation time is devoted during the initial market penetration period for new products such as new products under our Eagle product line, and for new customers in new markets, since these circumstances usually require qualification of the systems by the customers and engineering efforts to fix errors, customize tasks and add new features. Considering the above factors, the length of time until we recognize revenue can vary and affect our revenues, cash flow and results of operations.

The long sales process may cause an increase in inventory levels and a risk for inventory write downs and write-offs; for more details regarding recent inventory write downs and write-offs see Item 5.A – "Operating Results Critical Accounting Policies– Valuation of Inventory".

We depend on a limited number of suppliers, and in some cases, a sole supplier and/or subcontractor. If one or more of our third‑party suppliers or subcontractors does not provide us with key components or subsystems, we may not be able to deliver our products to our customers in a timely manner, and we may incur substantial costs to obtain these components from alternate sources.
 
While a portion of our manufacturing process is performed in our production facilities in Israel, we outsource some of our manufacturing processes to contract manufacturers ("Contract Manufacturers"), including one significant contract manufacturer that is located in Israel. From time to time, we have experienced and may in the future experience delays in shipments from our Contract Manufacturers. In addition we rely on single source and limited source suppliers and subcontractors ("Key Suppliers") for a number of essential components and subsystems of our products. We do not have agreements with all of these suppliers and subcontractors for the continued supply of the components or subsystems they provide.
 
Although we believe that our Contract Manufacturers and Key Suppliers have sufficient economic incentive to perform our manufacturing and meet our supply needs, their performance is not within our control and manufacturing problems may occur in the future, including inferior quality and insufficient quantities of components. Delays, disruptions, quality control problems and loss in capacity could result in delays in deliveries of our products to our customers, which could subject us to penalties payable to our customers, increased warranty costs and possible cancellation of orders.
 
If our Contract Manufacturers and Key Suppliers experience financial, operational, manufacturing capacity or other difficulties, or shortages in components required for manufacturing, our supply may be disrupted and we may be required to seek alternate manufacturers. We may be unable to secure alternate manufacturers that meet our needs in a timely and cost-effective manner.
 
Third parties have asserted claims, and may assert additional claims, that our products infringe the intellectual property rights of others, which could expose us to costs and risks.

Third parties, including one of our competitors in the field of semiconductor wafer inspection equipment, Rudolph Technologies Inc. ("Rudolph"), previously asserted claims, and may assert additional claims in the future, that we have infringed their patents or intellectual property rights. Following the settlement and dismissal of all of Rudolph's outstanding claims in 2017 we do not currently have any outstanding intellectual property claims against us (and, in accordance with the terms of the settlement agreement with Rudolph, no such claims may be asserted by Rudolph within the three years following the execution thereof); however, we may in the future face such intellectual property claims against us, which, even if without merit, could lead to protracted litigation, could be costly to defend and could divert management's attention from our business. Successful claims against us (such as the claim asserted by Rudolph regarding our Falcon product in which a final ruling was granted in Rudolph's favor in 2016) could impose on us monetary awards for damages, as well as for plaintiff’s attorney's fees and other costs, and could limit our ability to sell products in certain jurisdictions. Additional costs and expenses may also be incurred in the event of out of court settlement of claims against us (such as the settlement of the Rudolph claims in 2017), which could impose on us monetary consequences; see in Item 8.A – "Consolidated Statements and Other Financial Information"- "Legal Proceedings" below.
 
10


We have expanded and may attempt to further expand our activity in the markets in which we operate through merger and acquisition (M&A) activity. Such activity has resulted and may further result in operating difficulties, losses and other adverse consequences.
 
We have in the past expanded our activity through merger and acquisitions, including the acquisition of assets and certain liabilities of Printar Ltd. ("Printar"), and the entire share capital of SELA – Semiconductor Engineering Laboratories Ltd. ("Sela") (see below in Item 4.B – "Business Overview –Our Business"), and we may further endeavor to acquire businesses and assets.
 
Such acquisitions could lead to post-merger integration difficulties; diversion of management's attention from our core business and operations; failure to estimate the acquired businesses' future performance and failure to execute on such expectations; failure to launch new products to our existing or new markets; inaccurate evaluation of expected competition and/or the fair value of certain assets acquired, liabilities assumed and contingent liabilities; and the loss of key employees of the acquired operations.
 
In addition, as a result of acquisition activity, our future results of operations may be influenced by the possibility of our incurring impairment charges as a result of decline in value of goodwill and other intangible assets, ongoing amortization of intangible assets acquired and financing expenses due to re-evaluation of contingent liabilities and other liabilities assumed presented at fair value, as was the case with the Printar and Sela acquisitions (see also in Item 5.A below - "Critical Accounting Policies" and in Note 9– "Goodwill and Intangible Assets, Net", of the consolidated financial statements). Future acquisitions could also result in potentially dilutive issuances of equity securities, a decrease in our cash resources, incurrence of debt, contingent liabilities or impairment charges related to goodwill and other intangible assets, any of which could harm our business. Furthermore, we compete for acquisition and investment opportunities with other well-established and well-capitalized entities. There can be no assurance that we will be able to locate acquisition or investment opportunities upon favorable terms.

Failure or delays in the development process and subsequent monetization of our functional inkjet technology ("FIT") could result in loss of capital investment and could have an adverse effect on our operating results.

Following our decision in 2017 to reorganize and reduce our functional ink technology ("FIT") business activity we have ceased development of our new FIT printer (after discontinuing support of our previous line of FIT systems, the Gryphon System, in 2016) and have shifted the focus of this reduced business unit solely to the development of the ink required for the commercialization of this technology (the "FIT Ink"), including by way of a strategic cooperation with a third party ink developer and manufacturer; (see in Item 4.A below – "History and Development of the Company").
 
We are still in the process of developing the FIT Ink and cannot guarantee the successful completion of such process, which, even if successfully completed, may take longer than anticipated. Challenges we may face in the development process include, inter alia, compliance with strict market requirements and difficulties relating to the collaboration with third party ink and/ or printer manufacturers. In addition, even if we are successful in the development of the FIT Ink, we may face further challenges in the monetization of this technology.

Failure in successful monetization of the FIT Ink and/ or related technology could result in loss of capital investment and in inventory write-offs (for information regarding inventory write-offs in 2017 and 2016 – see in Item 5.A below – "Operating Results Critical Accounting Policies– Valuation of Inventory"). In addition, even in case of successful monetization, the results of such monetization may not represent a fair return on our investment in this business.
 
11

 
We depend on a number of key personnel who would be difficult to replace.
 
Our continued growth and success significantly depend on the managerial and technical skills of the members of our senior management and key employees. If our operations rapidly expand, we believe that we will need to promote and hire qualified engineering, administrative, operational, financial and marketing personnel. In particular, we may find it difficult to hire key personnel with the requisite knowledge of our business, products and technologies. The process of locating, training and successfully integrating qualified personnel into our operations can be lengthy and expensive. During periods of economic growth, competition for qualified engineering and technical personnel is intense.

We have historically incurred significant losses and negative cash flows and may not sustain profitable operations or continue to have positive operating cash flows in the future.

We incurred significant losses and negative cash flows in the past (for example, in 2015 as well as in earlier periods prior to 2011), and may not sustain profitable operations or continue to have positive operating cash flows in the future. We have from time to time in the past undertaken cost cutting initiatives in response to economic conditions, including reducing our worldwide workforce, and may again in the future have to undertake cost reduction initiatives, which could lead to a deterioration of our competitive position, and any difficulty in reducing our cost structure could negatively impact our results of operations in the future and may result in additional losses in the future as well. Our failure to maintain profitability or to continue to have positive operating cash flows may impact our ability to compete in the market for the short and long term and impair our financial condition.
 
We may encounter difficulties in purchasing key components and subsystems, or overestimate our needs, to meet customer demand.
 
In the current highly competitive business environment, our customers require us to fill orders within a very short period of time. Our products are complex and require essential components and subsystems that are produced by a number of suppliers and subcontractors. In order to meet our customers' needs in the timeframe they require, we usually need to pre-order components and subsystems based on our forecasts of future orders, rather than on actual orders. While we believe that we have sufficient inventory to fill our customers' orders, our predictions may not correspond to our actual future needs and our suppliers and subcontractors cannot always supply such components and subsystems within a shorter than anticipated time frame. Our inability to anticipate rapid market changes may cause an increase of inventory which could result in material inventory write-offs, which we have incurred in the past, or may alternately limit our ability to satisfy customer orders, which could result in the loss of sales and could cause customers to seek products from our competitors.

If we are unable to protect our proprietary technologies, we may not be able to compete effectively.
 
We differentiate our products and technologies from those of our competitors by using our intellectual property for the development of our products. We rely on a combination of patents, copyrights, trade secrets, trademarks, confidentiality and non-disclosure agreements to protect our intellectual property. These measures may not be adequate to protect our proprietary technologies and it may be possible for a third party, including a competitor, to copy or otherwise obtain and use our products or technologies without authorization or to develop similar technologies independently. Inability to protect our intellectual property may affect our competitive advantage.

We may face risks of interruptions in our production capabilities.
 
Our corporate headquarters is located in Migdal Ha'Emek, in the northern part of Israel. Any event affecting this site, including a natural disaster, labor stoppages or armed conflict, may disrupt or indefinitely discontinue our ability to fulfill manufacturing demands and generate revenues, thus negatively impacting our business (see also in this Item 3.D above "We depend on a limited number of suppliers, and in some cases, a sole supplier and/or subcontractor" and below - "Risks Relating to Our Operations in Israel").
 
12

 
Compliance with environmental, health and other laws and potential liabilities could materially impact our business, results of operations and financial condition.
 
Due to our global operations we must comply with certain international and domestic laws, regulations and restrictions which may expose our business to risks, including as detailed below.
 
Pursuant to Section 1502 of the Dodd-Frank Act, United States publicly-traded companies are required to disclose use or potential use of certain minerals and their derivatives, including tantalum, tin, gold and tungsten, that are mined from the Democratic Republic of Congo and adjoining countries and deemed "conflict minerals". These requirements necessitate due diligence efforts to assess whether such minerals are used in our products in order to make the relevant required annual disclosures. We timely file our conflict mineral reports. Yet there are, and will be, ongoing costs associated with complying with these recent disclosure requirements, including due diligence to determine the sources of those minerals that may be used or necessary to the production of our products in order to make the relevant required annual disclosures. We may face reputational challenges that could impact future sales if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to verify with sufficient accuracy the origins of all conflict minerals used in our products.
 
In addition, our business is subject to numerous domestic laws and regulations designed to protect the environment, including with respect to discharges and management of hazardous substances, wastes and emissions and soil and ground water contamination. The failure to comply with current or future environmental requirements could expose us to criminal, civil and administrative charges and monetary liability. We believe that we have complied with these requirements and that such compliance has not had a material adverse effect on our results of operations, financial condition or cash flows. Although we are not presently aware of any liability that could be material to our business, financial condition or operating results, due to the nature of our business and environmental risks, we cannot provide assurance that any such material liability will not arise in the future.
 
Breaches of network or information technology security could have an adverse effect on our business.
 
      We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber security attacks which could include, but are not limited to, malicious software, viruses, attempts to gain unauthorized access, whether through malfeasance or error, either from within or outside of our organization, to our data or that of our customers or our customers’ customers which may be in our possession. The unauthorized release, corruption or loss of the data, loss of the intellectual property, theft of the proprietary or licensed technology, whether ours, that of our customers or their customers, loss or damage to our data delivery systems, other electronic security breaches could result in liabilities to us and other material costs. Breaches of our networks or IT systems could lead to disruptions in our critical systems, and increased costs to prevent, respond to or mitigate cyber security events. It is possible that our business, financial and other systems could be compromised, which might not be noticed for some period of time. Although we utilize various industry accepted procedures, technologies and controls to protect the security of our networks and IT infrastructure and mitigate our exposure to the risk of cyber security attacks, such attached are constantly evolving and are unpredictable and we cannot guarantee that any risk prevention measures implemented will be successful. In addition, while we maintain insurance coverage for some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain. The occurrence of such a cyber security attack could lead to financial losses and have a material adverse effect on our reputation, business, financial condition and results of operations.

We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
 
      The Sarbanes-Oxley Act of 2002 (the "Sarbanes Oxley Act") imposes certain duties on us and our executives and directors, including the requirements of Section 404 (Assessment of Internal Control), which requires (i) management’s annual review and evaluation of our internal control over financial reporting and (ii) an attestation report issued by an independent registered public accounting firm on our internal control over financial reporting, in connection with the filing of our Annual Report on Form 20-F for each fiscal year. We have documented and tested our internal control systems and procedures in order for us to comply with the requirements of Section 404. Our efforts to comply with such requirements 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 resources. In addition, while our assessment of our internal control over financial reporting resulted in our conclusion that as of December 31, 2017, our internal control over financial reporting was effective, we cannot predict the outcome of our testing in future periods. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation 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.

13

 
Risks Relating to Our Ordinary Shares
 
Our share price and trading volumes have demonstrated significant volatility in the past and may continue to fluctuate in the future. Such share price volatility could limit investors’ ability to sell our shares at a profit, could limit our ability to successfully raise funds and may cause additional exposure for securities class action litigation.
 
The stock market in general and the market price of our ordinary shares, in particular, are subject to fluctuation. As a result, changes in our share price may be unrelated to our operating performance. The price of our ordinary shares has experienced volatility in the past and may continue to do so in the future; during the period from January 1, 2017 through February 28, 2018, the closing price of our ordinary shares ranged from $3.24 to $7.67 (See in Item 9.A below- "Price History of Ordinary Shares"). The price volatility of our shares and periodic volatile trading volume may make it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance. Our ordinary shares may experience significant market price and volume fluctuations in response to numerous factors, many of which are beyond our control, such as the following:
 
·
global economic conditions, which generally influence stock market prices and volume fluctuations;
 
·
investors' views of the attractiveness of our new products;
 
·
changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts and investors;
 
·
quarterly variations in our operating results;
 
·
market conditions relating to our customers' industries;
 
·
announcements of technological innovations or new products by us or our competitors; for example, announcements concerning the potential of our FIT technology;
 
·
operating results that vary from the expectations of securities analysts and investors;
 
·
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
·
changes in the status of our intellectual property rights;
 
·
large block transactions in our ordinary shares.
 
·
additions or departures of our key personnel;
 
·
future offerings or sales of our ordinary shares; and
 
·
announcements of significant claims or proceedings against us
 
Securities class action litigations are being brought from time to time against companies following periods of volatility in the market price of their securities, and in the past, one was brought against us. Although this claim was dismissed, we cannot guarantee that similar litigation would not be brought against us in the future.
 
14


 
Our principal shareholder, Priortech, holds a controlling interest in us and will be able to exercise its control in ways that may be adverse to your interests. Our relationship with Priortech may give rise to a conflict of interests.
 
Priortech Ltd. ("Priortech") beneficially holds 43.73% of our issued and outstanding ordinary shares. As a result, Priortech has the ability to determine the outcome of certain matters submitted to a vote of our shareholders, including the election of members of our board of directors and the approval of significant corporate transactions. This concentration of ownership may also have the effect of making it more difficult to obtain approval for a change in control of the Company.

Mr. Rafi Amit, our CEO and a Board member, and Mr. Yotam Stern, through a voting agreement with David Kishon, Itzhak Krell (deceased)¸ Haim Langmas (deceased), Zehava Wineberg and Hanoch Feldstien (including the estates of the foregoing deceased founders, the "Founding Members"), governing inter-alia joint voting at Priortech's general meetings of shareholders and the right of first refusal among themselves, (the "Voting Agreement"), hold, as of February 28, 2018 aggregately approximately 35.15% of the voting power at Priortech's general meeting of shareholders and as such may be deemed to control Priortech.
 
Messrs. Rafi Amit and Mr. Yotam Stern also hold various positions in Priortech and its affiliated companies, which may give rise to conflict of interests. As of May 26, 2015 Mr. Amit serves as our Chief Executive Officer on a 90% position and also acts as Priortech's Chairman of the board of directors and provides consulting and management services to Priortech on a 10% basis. Mr. Yotam Stern who acts as one of our Directors, holds several other positions in the Priortech group including the position of Chief Executive Officer at Priortech and at P.C.B Technologies Ltd., an Israeli public company controlled by Priortech. In addition, we act jointly with Priortech or its affiliated companies with respect to governmental and administrative matters and the purchase from third parties of various products and services, which may also create conflicts of interest.
 
Despite our efforts to conduct ourselves by Israeli law procedural requirements, including regarding audit committee (also acting, as applicable, as our compensation committee), board of directors and, in certain cases, shareholder, approvals (including special majority requirement in certain cases) for interested party transactions, we cannot be certain that the possible conflict of interests in any of these transactions and activities is fully eliminated.
 
For more details regarding our senior management arrangements, see Item 6.B below - "Compensation – Employment Agreements".
 
The loan received by Priortech, for which Priortech has pledged its holdings in our shares, could lead to sales of such shares by Priortech or upon foreclosure, which could have an adverse effect on the market price of our shares.
 
During 2016, Priortech pledged all of its holdings in our ordinary shares to its principal lender, Meitav Dash Investment's Ltd. Six million of the pledged shares are registered for resale on a shelf registration statement; in the event of foreclosure and sale of these shares into the market during a short period of time, or if Priortech otherwise decides to sell any such shares in order to comply with its commitments under said loan, the market price of our ordinary shares could be adversely affected. In addition, should Priortech default on its loan, and the lender were to foreclose and sell the pledged shares, Priortech would cease to have a controlling interest in us, and, if the shares were sold to one or a small group of investors, an effective change of control of us could occur.
 
15

 
 
If we are classified as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences.
 
There is a risk that we may be classified as a passive foreign investment company ("PFIC"). Our treatment as a PFIC could result in a reduction in the after-tax return of U.S. holders of our ordinary shares and may generally cause a reduction in the value of our shares. For U.S. federal income tax purposes, we will generally be classified as a 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 our total assets (determined on a quarterly basis) for the taxable year produce or are held for the production of passive income. Based on an analysis of our income, assets, activities and market capitalization, we do not believe that we were a PFIC for the taxable year ended December 31, 2017. However, there can be no assurance that the U.S. Internal Revenue Service ("IRS") will not challenge our analysis or our conclusion regarding our PFIC status. There is also a risk that we were a PFIC for one or more prior taxable years or that we will be a PFIC in future years, including 2018. If we were a PFIC during any prior years, U.S. holders who acquired or held our ordinary shares during such years generally will be subject to the PFIC rules. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of our future income, assets, activities and market capitalization, which are relevant to this determination. If we were determined to be a PFIC for US federal income tax purposes, highly complex rules would apply to U.S. holders owning our ordinary shares and such U.S. holders could suffer adverse U.S. tax consequences. For more information, please see Item 10.E below - "U.S. Federal Income Tax Considerations– Tax Consequences if We Are a Passive Foreign Investment Company".

Changes to the U.S. federal tax laws, including the recent enactment of certain tax reform measures, could have an impact on a shareholder’s investment in our shares.
 
U.S. federal income tax laws and the administrative interpretations of those laws may be amended at any time, potentially with retroactive effect. On December 22, 2017, P.L. 115-97 was signed into law making significant changes to U.S. federal tax laws. The impact of these provisions on the Company’s operations and on its investors is uncertain, and may not become evident for some period of time. Prospective investors are urged to consult their tax advisors regarding the effect of these changes to the U.S. federal tax laws on an investment in our shares.

Our ordinary shares are traded on more than one market and this may result in price variations.
 
In addition to being traded on the Nasdaq Global Market, our ordinary shares are traded on the Tel Aviv Stock Exchange ("TASE"). Trading in our ordinary shares on these markets take place in different currencies (U.S. Dollars on Nasdaq and NIS on TASE) and at different times (resulting from different time zones, trading days and public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease in the price of our ordinary shares on one market could cause a decrease in the trading price of our ordinary shares on the other market.

As a foreign private issuer we are exempt from certain requirements and corporate governance practices imposed by the SEC and Nasdaq, which may result in less protection for investors.
 
We are a "foreign private issuer" within the meaning of rules promulgated by the SEC. As such, we are exempt from certain provisions under the Securities Exchange Act of 1934, as amended (the "Exchange Act") applicable to U.S. public companies, including, for example, rules prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and "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 periodic reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.
 
Further, we are permitted to follow certain home country corporate governance practices and law instead of those rules and practices otherwise required by Nasdaq for domestic issuers. For instance, we have relied on the foreign private issuer exemption with respect to shareholder approval requirements for equity-based compensation plans, with respect to the Nasdaq requirement to have a formal charter for the compensation committee, and with respect to the quorum requirement for the convening of general meetings of shareholders; See in Item 16.G. below "Corporate Governance".
 
Following our home country corporate governance practices, as opposed to the requirements that would otherwise apply to a U.S. company listed on Nasdaq, may provide less protection than is afforded to investors under the Nasdaq Rules applicable to domestic issuers.

16

 
Risks Relating to Our Operations in Israel
 
Conditions in the Middle East and Israel may adversely affect our operations.
 
Our headquarters and sole facility (including manufacturing facilities) are located in the State of Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly influence our operations. Specifically, we could be adversely affected by:
 
·
hostilities involving Israel;
 
·
the interruption or curtailment of trade between Israel and its present trading partners;
 
·
a downturn in the economic or financial condition of Israel; and
 
·
a full or partial mobilization of the reserve forces of the Israeli army.
 
Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. While Israel has entered into peace arrangements with both Egypt and Jordan, it has no peace arrangements with any other neighboring or Arab countries. Over the years, this state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. Further, all efforts to improve Israel's relationship with the Palestinian Authority have failed to result in a permanent solution, and there have been numerous periods of hostility in recent years. The high level of uncertainty in the region continued to intensify in 2017, with the continuation of the civil war and state of chaos experienced in Syria, adjacent to Israel's northern border, the continued involvement of regional extremist Islamic groups, based in Syria, in hostile activities against Israel, and the continued hostile activities of ISIS, the Islamic State, in Syria, and in the Sinai Peninsula - which all contribute to the tension in the region. Also, relations between Israel and Iran continue to be seriously strained, especially due to the fact that Iran is perceived by Israel as sponsor of these regional extremist Islamic groups, and also with regard to Iran's nuclear program.
 
All of the above raise a concern as to the stability in the region which may affect the political and security situation in Israel and therefore could adversely affect our business, financial condition and results of operations.
 
The continued conflict with the Palestinians is already disrupting some of Israel's trading activities. Certain countries, primarily in the Middle East, but also in Malaysia and Indonesia, as well as certain companies and organizations , continue to participate in a boycott of Israeli firms and others doing business with Israel and Israeli companies. The boycott, restrictive laws, policies or practices directed towards Israel or Israeli businesses could, individually or in the aggregate, have a material adverse effect on our business, for example by way of sales opportunities that we could not pursue or from which we will be precluded in the future. Further deterioration of our relations with the Palestinians or countries in the Middle East could expand the disruption of international trading activities in Israel, may materially and negatively affect our business conditions and could harm our results of operations.
 
Our business may also be disturbed by the obligation of personnel to perform military service. Our employees who are Israeli citizens are generally subject to a periodical obligation to perform reserve military service, until they reach the age of 45 (or older, for reservists with certain occupations), but during military conflicts, these employees may be called to active duty for longer periods of time. In response to the increase in violence and terrorist activity in the past years, there have been periods of significant call-ups for military reservists and it is possible that there will be further military reserve duty call-ups in the future. In case of further regional instability such employees, who may include one or more of our key employees, may be absent for extended periods of time, which may materially adversely affect our business.
 
We can give no assurance that the political and security situation in Israel, as well as the economic situation, will not have a material adverse impact on our business in the future.
 
17

 
Our ability to take advantage of Israeli government offers programs and tax benefits may change, which could increase our tax expenses.
 
We benefit from certain Israeli government programs and tax benefits, particularly from tax exemptions including "Approved Enterprise" status due to our manufacturing facilities in Israel. To be eligible for these programs and tax benefits or similar programs in the future, we must continue to meet certain conditions, including making specified investments in fixed assets and equipment. If we fail to meet such conditions in the future, these tax benefits could be cancelled, and we could be required to refund any tax benefits already received. Further, these programs and tax benefits may not be continued in the future at their current levels or at any level. The termination or reduction of these tax benefits would likely increase our tax liability. For information regarding the above-mentioned tax benefits, see in Item 10.E below – "Taxation – Israeli Taxation - Tax Benefits under the Law for the Encouragement of Capital Investments, 1959."
 
The government grants we received for research and development expenditures restrict our ability to manufacture products or to transfer technologies outside of Israel and may expose us to payment of increased royalties in connection with such transfer.
 
We have received government grants from the Israel Innovation Authority (formerly and more commonly known as the Office of the Chief Scientist) (the "IIA") for the financing of a portion of our product development expenditures, and have also assumed liabilities of Printar in connection with grants received by Printar from the IIA. The grants received, and Printar liabilities assumed, subject us to the requirements of the Encouragement of Industrial Research and Development Law, 1984 and regulations promulgated there under (together: the "R&D Law") including an obligation for repayment of such grants from sales of such products the development of which was financed by the IIA, if and when such sales occur; As of December 31, 2017, the amount of grants received and not yet repaid stood at $6.5 million, which, in addition to interest accrued by Camtek, includes liabilities assumed from Printar (see in Item 4.B below - "Business Overview – Our Business").
 
In addition to the obligation to pay royalties to the IIA, the R&D Law requires that products which incorporate know-how developed with IIA funds be manufactured in Israel, unless the IIA grants an exception. Approval of an exception may be subject to various conditions, including the repayment of increased royalties. Furthermore, it is generally prohibited to transfer the know-how developed with IIA funds and any right derived therefrom to third parties, unless approved by the IIA, in special cases, subject to the receipt of certain payments.
 
These restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with IIA funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the IIA.
 
Even following full repayment of all IIA grants, unless otherwise agreed by the applicable authority of the IIA, we must nevertheless continue to comply with the abovementioned requirements and restrictions under the R&D Law.
 
For information regarding the above-mentioned and other restrictions imposed by the R&D Law and regarding grants received by us from the IIA (and the repayment thereof), see in Item 4.B below - "The Israel Innovation Authority, formerly – the Israeli Office of Chief Scientist".
 
In 2017, we definitively settled the dispute which arose in 2010 between us and the IIA, regarding repayment of an increased amount of grants pertaining to certain products of our former PCB division the manufacturing and assembly of which had been moved to a foreign subsidiary, by payment to the IIA of the required increased amounts, totaling $2.1 million. For further information, see in Item 4.B below - "The Israel Innovation Authority, formerly – the Israeli Office of Chief Scientist".
 
18

 
 It may be difficult to enforce a U.S. judgment against us or our officers and directors, or to assert U.S. securities law claims in Israel.
 
We are incorporated under the laws of the State of Israel. Service of process upon our directors and officers, substantially all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of them may not be collectible within the United States.
 
Further, it may be difficult to enforce civil liabilities under U.S. securities law in original actions instituted in Israel; Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear such a claim, it is not certain whether Israeli law or U.S. law will be applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact by an expert witness, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing these matters.
 
Provisions of Israeli law could delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.
 
Israeli corporate law regulates mergers and requires that a tender offer be effected when certain thresholds of percentage ownership of voting power in a company are exceeded (subject to certain conditions), which may have the effect of delaying, preventing or making more difficult a merger with, or acquisition of, us; See Item 10.B below - "Anti-Takeover Effects of Israeli Laws; Mergers and Acquisitions Under Israeli Law". Further, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders whose country of residence does not have a tax treaty with Israel granting tax relief to such shareholders from Israeli tax. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which certain sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no actual disposition of the shares has occurred. For more information on the provisions of Israeli law in these contexts, please see in Item 10.E below - "Israeli Taxation". In addition, in accordance with the Restrictive Trade Practices Law, 1988 and the R&D Law, approvals regarding a change in control (such as a merger or similar transaction) may be required in certain circumstances. For more information regarding such required approvals please see in Item 4.B below - "The Israel Innovation Authority, formerly – the Israeli Office of Chief Scientist".

These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us or for our shareholders to elect different individuals to our board of directors, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares.

Your rights and responsibilities as a shareholder will be governed by Israeli law which differs in some respects from the rights and responsibilities of shareholders of U.S. companies.
 
Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association, as amended from time to time (our "Articles") and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in United States-incorporated companies. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters, such as an amendment to a company's articles of association, an increase of a company's authorized share capital, a merger of a company and approval of related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of an office holder in a company, or who otherwise has the power to direct a company's operations, has a duty to act in fairness towards such company. Israeli law does not define the substance of this duty of fairness and there is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of U.S. corporations.

19

 
Item 4.          Information on the Company.
 
A.
History and Development of the Company
 
Our legal and commercial name is Camtek Ltd. We were incorporated under the laws of the State of Israel in 1987 and operate under the Companies Law. Our headquarters are located in Ramat Gavriel Industrial Zone, P.O. Box 544, Migdal Ha'Emek 23150, Israel, and our telephone number is +972-4-604-8100. Other than Israel, we currently have operations in the Asia Pacific region, North America and Europe. Our agent for service of process in the United States is Camtek USA, Inc., located at Fremont Blvd., Ste. 112, Fremont, CA 48389, Tel: (408) 987-9484. Our website is located at www.camtek.com. The information on our website is not incorporated by reference into this Annual Report. We have been a public company since July 2000; our ordinary shares are listed on the Nasdaq Global Market and on TASE (see in Item 9.A. below - "Offer and Listing Details").
 
In our first years of operation, we provided manual optical inspection equipment to address the needs of the PCB industry. In September 2001, we acquired a developer and producer of Automatic Optical Inspection ("AOI") systems for the semiconductor fabrication industry. This acquisition allowed us to enter the back end semiconductor inspection market. After a period of intense internal research and development, in the fourth quarter of 2003, we shipped our first new Falcon system for the back end market of the semiconductor industry. The first revenue recognition of the Falcon system was in the second quarter of 2004. In the following years, applying our core technologies, we introduced three additional AOI product lines for the semiconductor industry - the Condor, the Gannet and the Eagle; sales of all four semiconductor AOI product lines have since accounted for a significant portion of our total sales. In 2017, we consolidated all of our products for the semiconductor industry (which, following the PCB Sale Transaction, constitute all of our product lines) under the Eagle product lines. See in Item 4.B below - "Business Overview".

In September 2017, we concluded the PCB Sale Transaction, pursuant to which we sold the entire assets and activity of our PCB business unit (including our subsidiaries in China and Taiwan which were engaged primarily in such activity), to Trophy Imaging Technology Co. Ltd., in consideration for a total cash payment of $32,000,000, and an additional cash amount of up to $3,000,000, the payment of which is conditioned upon the financial performance of the PCB business unit in 2018. Since the closing of the PCB Sale Transaction, we have devoted, and will continue to devote, our resources and attention to further developing and expanding our semiconductor inspection and metrology field of activity.

Further, we are involved in an additional field of activity as a result of our acquisition of the assets and certain liabilities of Printar in June 2009; Printar's two major fields of activity were: a FIT system for application of identification nomenclature on certain PCBs and designated ink (the "Legend System") and FIT system and designated solder mask ink for application during production of PCBs, which we evolved into the Gryphon System. In recent years, we have narrowed down our involvement in this activity, first by ceasing all activities relating to the Legend Systems, then, in 2016, by discontinuing commercialization of the Gryphon Systems, and, last, in 2017 by ceasing the development of the FIT printer. Accordingly, we are now focusing solely on the development of the FIT Ink (See in Item 4.B below - "Business Overview – Our Business"). We believe that, if and when available, the FIT Ink and related technology may be used in the future for various applications in the field of electronic manufacturing.
 
In 2009 we also completed the acquisition of the entire share capital of Sela which was engaged in the development, manufacturing and marketing of automated SEM (Scanning Electron Microscope) and TEM (Transmission Electron Microscope) sample preparation equipment, primarily for the front end semiconductor industry. Sela developed the Xact, a TEM sample preparation tool using adaptive ion milling (AIM™) technology. The first Xact system was sold in the first quarter of 2009, and sales of this system continued in 2010 and until 2013. The second generation of the Xact was introduced in the fourth quarter of 2011. In the fourth quarter of 2013 the Company announced that other than sale and support of existing Xact products it will not continue with further development of its Xact product line. In 2015, the Company concluded a definitive agreement for the transfer of the Sela division activity (assets and liabilities) to a company fully owned by Sela's long time business manager, thereby effectively terminating any and all involvement of the Company in the Sela business.
 
20

 
In July 2000, we sold 5,835,000 ordinary shares in an initial public offering, in which we received net proceeds of approximately $35 million. In August 2002, we sold 5,926,730 ordinary shares in a rights offering of ordinary shares to our then existing shareholders (of which 5,922,228 shares were sold to Priortech), in which we received net proceeds of $6.1 million. On August 23, 2005 we raised $5 million as a convertible loan from FIMI Opportunity Fund L.P and FIMI Israel Opportunity Fund, Limited Partnership (FIMI), which amount was repaid in full by August 2010. On April 30, 2006, we completed a private placement in which we issued 2,525,252 ordinary shares to Israeli institutional investors at a price of $5.94 per share, raising $14.5 million. In May 2015, we completed a public offering of our shares on Nasdaq in which we issued 4,655,982 shares at a price of $2.85 per share, raising net proceeds of $11.9 million.
 
For a discussion of capital expenditures, see Item 5.B below - "Operating and Financial Review and Prospects– Liquidity and Capital Resources."
 
B.             Business Overview.
 
Our Business
 
Camtek provides inspection and metrology solutions dedicated to increasing products yield and reliability, enabling and supporting customers' latest technologies in the semiconductor industry.

Camtek addresses specific needs of this industry with dedicated solutions based on our advanced core technologies including advanced image processing, optics related technologies, motion control and material handling.

Based on such core technologies we design, develop, manufacture and market AOI systems for the "mid end" semiconductor industry.
 
AOI systems optically inspect and measure various types of semiconductors wafers. Our AOI systems are used to enhance both production processes and yields for manufacturers in the semiconductor mid-end industry, and provide our customers with a high level of defect detection and measurement abilities, are easy to operate and offer high productivity. They incorporate proprietary advanced image processing software and algorithms, as well as advanced electro‑optics and precision mechanics and are designed for easy operation and maintenance. In addition, our AOI systems use technology that enables our customers to handle a wide range of inspection measurement and verification needs.
 
Our global direct customer support organization provides responsive, localized pre- and post- sales support for our customers through our wholly-owned subsidiaries.
 
Our Markets
 
The semiconductor manufacturing industry produces integrated circuits on silicon wafers; each wafer contains numerous integrated dices containing electronic circuits which are functional devices. The growth of the semiconductor manufacturing industry is heavily dependent on the mobile and automotive segments, which require increased reliability due to the functionalities of the related products, thus enhancing the need for high level inspection and metrology steps throughout the manufacturing process.
 
AOI is implemented at various stages along the manufacturing process at the front end, mid-end and the back end. Camtek serves the mid end of the process starting with probe mark inspection after the testing of the individual die, inspecting the finished wafers for defects, inspecting and measuring the bumps and conducting post-dicing inspection. The surface inspection process looks for defects such as cracks, foreign materials or mechanical damage, and also ensures dimensional conformity, thus eliminating subsequent testing of defective products, increasing overall yield and reducing overall production costs.
 
21

 
In the fast growing advanced packaging market segment, which is our main focus, the integrated circuits are attached to a substrate via an array of bumps, rather than being wire bonded. Wafers designed for such assembly inter-connect go through a process in which bumps ranging from 2 to 300 microns in height, or gold bumps of about 15-20 microns tall, are plated or stenciled on pads on the face of the integrated circuits. Camtek's AOI systems equipped with 3-D measurement capabilities are used to detect any missing, misplaced or deformed bump and to determine bumps conformity to shape and height specifications. Size, shape and placement deviations may cause damage to the integrated circuit or the substrate during the packaging process, leading to device failure. Each wafer has several million bumps that need to be inspected and measured, and AOI is becoming crucial to the manufacturing process.
 
A fast growing segment is "micro-electro mechanical systems" ("MEMS") which mainly serves the mobile and automotive markets, utilizing materials, manufacturing technologies and facilities from the semiconductor industry to produce miniature mechanisms, such as inkjet print heads, accelerometers, image sensors, video projection devices, sensors and microphones. Many MEMS products are packaged between layers of glass while still at the wafer format, and diced in several steps afterwards. The MEMS manufacturing segment relies heavily on testing to ensure product performance and reliability. This testing may constitute a significant amount of the overall product cost. Camtek's AOI is implemented at various stages along the manufacturing process to detect cracks, foreign materials or mechanical damage, as well as to confirm dimensional conformity, thus eliminating subsequent testing of defective products, increasing yield and reducing overall production costs.
 
The complementary metal oxide semiconductor image sensors ("CIS") is another growing market segment used for mobile devices, automotive and security products. The requirements of this market call for a simultaneous increase in the number of pixels per each sensor and reduction in the size of each pixel, which requires the manufacturing process to have a high resolution inspection for every sensor. Camtek has developed customized capabilities to address these requirements and its AOI systems are being used by large CIS manufacturers.

Product Lines
 
AOI Systems
 
Our AOI systems consist of:
 
·
An electro-optical assembly unit, either movable or fixed, which consists of a video camera, precision optics and illumination sources. The electro-optical unit captures the image of the inspected product;
 
·
A precise, either movable or fixed table, that holds the inspected product; and
 
·
An electronic hardware unit, which operates the entire system and includes embedded components that process and analyze the captured image by using our proprietary algorithms.
 
The inspected product is placed on a designated platform and is scanned under the optical assembly unit. The optical assembly unit then captures images of the product, while the electronic hardware unit processes the image using the analysis algorithms. Detected discrepancies are logged and reported as defects per the user preferences. The image of the defect is immediately available for verification by the system operator. Our systems can also compile and communicate statistical reports of inspection findings via the customer's factory information system.
 
We offer a broad range of systems for automated optical inspection of semiconductor wafers. We invest significant resources in R&D to provide our customers with advantageous performance, low cost of ownership, high reliability and ease of operation. We believe that a significant part of our competitive advantage derives from our R&D innovative capabilities which enable us to adapt our technologies to evolving market needs.

Over the years, our AOI products for the semiconductor industry included the Falcon, Condor, Gannet and Eagle products lines. In 2017, we finalized the implementation of our decision from 2015 to focus our semiconductor activity on the Eagle platform only, and have phased out all other product lines for this industry.

22


 
Product
Function
Eagle i
The Eagle i system is designed to meet the mid-end need of the semiconductor industry. This system delivers superior 2D inspection and metrology capabilities, utilizing the most advanced algorithms enabling detection of down to sub-micron defects and measuring two micron line and space redistribution layer ("RDL").
Eagle AP
The Eagle AP system addresses the fast growing advanced packaging market, using state of the art technologies, both software and hardware, that deliver superior 2D and 3D inspection and metrology capabilities on the same platform. The advanced packaging market uses a wide spectrum of bump types and sizes. The Eagle AP meets the current and future requirements in inspection and metrology including measurement of bumps down to 2µm (microns) and providing high throughput.
EagleT-i
EagleT-I is our most advanced inspection tool providing significantly higher throughput and improved optical resolution compared to our Eagle i product.
EagleT-AP
The EagleT-AP is our new metrology tool for the advanced packaging segment. This tool provides much higher throughput and accuracy and is targeted for customers that require high volume production and inspection of 100% of the wafers.
 
Software Solutions

Product
Function
YMS
Developed by BISTel America Inc. ("BISTel"), the Yield Management Solution ("YMS") incorporates BISTel's advanced data analytic solutions, providing a powerful tool for performance of data mining, data analysis and root cause analysis.
ADC
Developed by Camtek, the Automatic Defect Classification ("ADC") solution, provides automatic defect classification of color images, utilizing deep learning techniques, enabling our customers to reduce and even eliminate manual verification.
 
Customers

We target wafer manufacturers and companies involved in the testing, assembly and packaging of semiconductor devices.
 
Our customer base includes approximately 760 semiconductor manufacturers, among them outsourced semiconductor assembly and test (OSAT), integrated device manufacturers and wafer level packaging subcontractors. Our customers, many of whom have multiple facilities, are located throughout Asia, Europe and North America. In 2017, 2016 and 2015, no individual customer accounted for more than 10% of our total revenues.
 
The following table shows our revenues classified by geographical region for each of the last three years:
 
 
Year Ended December 31,
 
 
2017
   
2016
   
2015
 
 
U.S. Dollars (In thousands)
 
Asia Pacific
   
79,105
     
66,275
     
55,990
 
United States
   
9,484
     
8,151
     
8,016
 
Western Europe
   
4,896
     
4,802
     
5,381
 
                         
Total
   
93,485
     
79,228
     
69,387
 

23

 
Sales, Marketing and Customer Support
 
We have established a global distribution and support network throughout the territories in which we sell, install and support our products, including the Asia Pacific region, North America and Europe. We believe that this is an essential factor in our customers' decision to purchase our products. We primarily utilize our own employees to provide these customer support services. We may expand our network into additional territories as market conditions warrant.
 
We have one distribution rights agreement with a Japanese company, under which this company sells, installs and supports our products in Japan.

As of December 31, 2017, 104 of our employees were engaged in our worldwide sales, marketing and support efforts, including support and sales administration staff. Due to the concentration of sales in the Asia Pacific region, we have adjusted our sales organization accordingly, and significantly expanded our sales, marketing and support teams in this region.
 
Our marketing efforts include participation in various trade shows and conventions, publications and trade press, product demonstrations performed at our facilities and regular contact with customers by sales personnel. We generally provide a 12‑month warranty to our customers. In addition, for a fee, we offer service and maintenance contracts commencing after the expiration of the warranty period. Under our service and maintenance contracts, we provide prompt on-site customer support.
 
We take various measures to secure customers' payment on a case by case basis by means of letters of credit.
 
Manufacturing
 
Our manufacturing activities consist primarily of the assembly and integration of parts, components and subassemblies, which are acquired from third‑party vendors and subcontractors. The manufacturing process for our products generally lasts four to twelve weeks. We utilize subcontractors for the production of subsystems, and our current main product, the Eagle system, is manufactured by a single Israeli contractor who performs most of the material planning, procurement, manufacturing, testing, assembly and packaging work with respect to such systems.
 
We rely on single source and limited source suppliers and subcontractors for a number of essential components and subsystems of our products. We generally maintain several months' of inventory of critical components used in the manufacture and assembly of our products. During times of rapid increase in demand in the semiconductor fabrication industry, the delivery time of suppliers in this industry is extended. However, to date, we have been able to obtain sufficient units of these components to meet our needs in a timely fashion.
 
We have one manufacturing facility, located in Migdal Ha'Emek, Israel.
 
Competition
 
The markets in which we operate are highly competitive. Our main competitors are Rudolph, ATI Electronics Pty Ltd., KLA-Tencor Corporation, Cheng Mei Instrument Technology Co., ASTI Holding Limited and Toray Industries Inc.
 
We believe that the principal elements of a sustainable competitive advantage are:
 
·
Ongoing research, development and commercial implementation of new image acquisition, processing and analysis technologies;
 
·
Product architecture based on proprietary core technologies and commercially available hardware. Such architecture supports shorter time-to-market, flexible cost structure, longer service life and higher margins;
 
·
Fast response to evolving customer needs;
 
·
Ability to maintain competitive pricing;
 
·
Product compatibility with customer automation environment; and
 
·
Strong pre- and post-sale support (applications, service and training) deployed in immediate proximity to customer sites.
 
We believe that we compete effectively on all of these factors.
 
24

 
The Israel Innovation Authority, formerly – the Israeli Office of Chief Scientist
 
The Government of Israel encourages research and development projects in Israel through the Israel Innovation Authority, IIA, formerly and more commonly known as the Office of Chief Scientist (OCS), pursuant to and subject to the provisions of the R&D Law.
 
Under the R&D Law, research and development projects which are approved by the Research Committee of the IIA are eligible for grants, in exchange for payment of royalties from revenues generated by the products developed within the framework of such approved project and subject to compliance with certain requirements and restrictions under the R&D Law as detailed below, which must generally continue to be complied with even following full repayment of all IIA grants.
 
Under the R&D Law, in previous years prior to 2000 we applied for and were granted R&D grants. As a recipient of such grants we were required to pay the IIA royalties ranging between 3% to 5% (plus LIBOR interest). In March 2001, we commenced repayment of many of these grants pursuant to an understanding reached with the IIA. As of June 1, 2005, we had fully repaid all our previously received grants from the IIA at such time. Sela and Printar, from which we acquired businesses and assets, also received government grants from the IIA, prior to their acquisitions by us, for the financing of significant portion of their product development expenditures in previous years. As part of their respective acquisitions, we also assumed their liabilities to the IIA in connection with such grants. In 2015, as part of the transfer of the Sela activity, all of Sela's outstanding liabilities to the IIA, which then amounted to $2.4 million, were assumed by the transferee. As of the date of this Annual Report, the amount of non-repaid grants received by Printar, together with additional grants which we received in 2009 in connection with Printar's research and development program (in the amount of $598,000), stands at $6.7 million. However, we believe it is more likely than not that no payments will be made in respect of the foregoing Printar related grants, and have accordingly written off such liabilities, due to the fact that in 2016 we stopped supporting our previous line of FIT systems, developed based on the Printar technology  (See in Item 4.B above - "Business Overview – Our Business").
 
The R&D Law generally requires that a product developed under a grant program be manufactured in Israel. However, upon the approval of the IIA, some of the manufacturing volume may be performed outside of Israel. Such approval may only be granted under various conditions, such as the repayment of increased royalties, in an amount equal to up to 300% of the total grant amount, plus applicable interest, or an increase of 1% in the royalty rate, depending on the extent of the manufacturing that is to be conducted outside of Israel.
 
In 2017, in connection with the PCB Sale Transaction, we settled the dispute which had arisen in 2010 between us and the IIA regarding repayment of increased amount of grants pertaining to certain of our PCB products, the manufacturing and assembly of which has been moved to a foreign subsidiary, by paying to the IIA a one-time payment in the amount of $2.4 million.
 
The R&D Law also provides that know-how developed with funds received from the IIA and any right derived therefrom may not be transferred to third parties, unless such transfer was approved in accordance with the R&D Law. The research committee operating under the IIA may approve the transfer of know-how between Israeli entities, provided that the transferee undertakes all the obligations in connection with the R&D grant as prescribed under the R&D Law. In certain cases, such research committee may also approve a transfer of know-how outside of Israel, in both cases subject to the receipt of certain payments, calculated according to a formula set forth in the R&D Law, in amounts of up to six times the total amount of the grants plus applicable interest (in case of transfer outside of Israel), and three times of such total amount (in case the R&D activity related to the know-how remains in Israel). Such IIA approval for the transfer of knowledge to the purchasers under the PCB Sale Transaction was obtained from the IIA prior to the consummation of the PCB Sale Transaction and was subjected only to the abovementioned settlement of the dispute with the IIA. These approvals are not required for the sale or export of any products resulting from such R&D activity.
 
25

 
The R&D Law has been amended effective as of January 1, 2016. Under the amendment, a new Israel Innovation Authority has been established and is in charge of implementing the governmental policy regarding the R&D Law (and has been given discretion in the implementation of the R&D Law for such purpose). However, and until prescribed otherwise, the existing provisions relating to the transfer of knowhow and manufacturing outside of Israel, as detailed above, shall remain in full force and effect with respect to benefits and funding approved or received prior to such date.

For a discussion of the effects of Israeli governmental regulations and our operation in Israel on our business, see in item 3.D above "Risks relating to our Operations in Israel".
 
Capital Expenditures
 
The following table shows our capital expenditures in fixed assets for the last three years:

   
December 31,
 
   
2017
   
2016
   
2015
 
   
(U.S. Dollars in thousands)
 
Building and leasehold improvements          
   
2,200
     
434
     
616
 
Machinery and equipment*          
   
1,280
     
2,610
     
1,444
 
Office furniture and equipment          
   
53
     
94
     
69
 
Computer equipment and software          
   
655
     
510
     
429
 
Vehicle          
   
-
     
-
     
87
 
Total          
 
$
4,188
   
$
3,648
   
$
2,645
 

* including transfer of inventory to fixed assets in the aggregate of $1,050, $2,313,000, and $847,000 in 2017, 2016 and 2015, respectively.
 
Material Effects of Governmental Regulations
 
The following EU directives, which represent the European standard required in order to sell in Europe, apply to our business: Machinery Directive 2006/42/EC and EMC 2004/108/EC. The following SEMI Standards, which define uniform standards for manufacturers in the semiconductor fabrication industry and production equipment producers, apply to us: SEMI S-2 (safety requirements for sale of equipment in the semiconductor fabrication) and SEMI S-8 (ergonomic requirements for sale of equipment in the semiconductor fabrication industry). We comply with the above-mentioned governmental regulations during the systems' design process, which is conducted in accordance with the Company's quality assurance manual ISO9001:2008. In addition, all modules of systems are tested by independent laboratories that certify their compliance with these governmental regulations and have required accreditation.
 
C.
Organizational Structure
 
Through its affiliated companies, our principal shareholder, Priortech, engages in various aspects of electronic packaging, including the production and assembly of PCBs and the development and sale of integrated circuit substrates. Based on sales, PCB Technologies Ltd., a subsidiary of Priortech, is one of the largest PCB manufacturers in Israel. Priortech currently holds 43.73% of our outstanding ordinary shares. Our revenues from sales to affiliates and subsidiaries of Priortech totaled $0, $145,000, and $109,000 in 2017, 2016 and 2015, respectively; since these sales related to our PCB activity, following the PCB Sale Transaction, such sales have ceased. We act jointly with Priortech with regard to various governmental, administrative and commercial matters, which we believe is to the advantage of both parties.
 
26

 
The following table shows the Company's subsidiaries, all of which are wholly owned by us or by our subsidiaries (except for Camtek HK Ltd., in which Priortech holds no more than one percent of the voting rights), together with each subsidiary's jurisdiction of incorporation, as of the date of this report:
 
Name of Subsidiary
Jurisdiction of Incorporation
Camtek H.K. Ltd.
Hong Kong
Camtek USA Inc.
New Jersey, USA
Camtek (Europe) NV
Belgium
Camtek Germany GmbH
Germany
Camtek Inspection Technology (Suzhou) Ltd.*
China
SELA - Semiconductor Engineering Laboratories Ltd**
Israel
Camtek Japan Ltd.
Japan
Camtek Inspection Technology Limited ***
Taiwan
Camtek South East Asia Pte ltd.
Singapore
Camtek Korea Ltd.
South Korea
Penta-I Ltd.**
Israel
 

*Our previous Chinese subsidiary, Camtek Imaging Technology (CIT), was sold to the purchasers as part of the PCB Sale Transaction.
**Currently under liquidation.
*** Our previous Taiwanese subsidiary, Camtek Taiwan Ltd., was sold to the purchasers as part of the PCB Sale Transaction.
 
D.
Property, Plants and Equipment
 
Our main office, manufacturing and research and development facilities are located in the Ramat Gavriel Industrial Zone of Migdal Ha'Emek in northern Israel. These facilities occupy 74,000 square feet of which 16,000 square feet are devoted to the manufacturing of our products. In addition, we are currently in the final stages of the expansion of such facilities by approximately an additional 10,500 square feet. In accordance with agreements signed in 2010 and 2011 with Bank Leumi L'Israel and in 2011 with Bank Mizrahi, a lien has been placed on these facilities.
 
Our sales offices and demonstration centers, which we lease in various locations around the world, occupy an aggregate of approximately 21,900 square feet.

Aggregate office rent expenses in 2017 amounted to approximately $523 thousand.
 
Item 4A.       Unresolved Staff Comments
           
                      None.
 
27

 
Item 5.          Operating and Financial Review and Prospects.
 
A.
Operating Results
 
General
 
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements included therein, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.
 
Until the consummation of the PCB Sale Transaction on September 30, 2017, the Company had two reportable segments: the semiconductor fabrication industry ("Microelectronics Segment") and PCB industry ("PCB Segment"). As of October 1, 2017, the Company has no reportable segments.
 
Overview
 
We design, develop, manufacture and market automated solutions dedicated for enhancing production processes and yield for the semiconductor fabrication industry, principally based on our core technology, AOI; see in Item 4.B above "Business Overview- Our Business".
 
We sell our systems internationally. The majority of sales of our systems in 2017 were to manufacturers in the Asia Pacific region, including China, South East Asia, South Korea and Taiwan, due to, among other factors, the migration of the electronic manufacturers into this region following the development and growth of electronics industry centers.
 
In 2017, our sales in the Asia Pacific region accounted for approximately 85% of our total revenues, of which approximately 65% of our total revenues were from sales in China, Taiwan and South Korea.
 
In addition to revenues derived from the sale of systems and related products, we generate revenues from providing maintenance and support services for our products. We generally provide a one-year warranty with our systems. Accordingly, service revenues are not earned during the warranty period.
 
In regular market conditions, the demand for our systems is characterized by short notice. To meet customers' needs for quick delivery and to realize the competitive advantage of the ability to do so, we have to pre-order components and subsystems based on our forecast of future orders, rather than on actual orders. This need is compounded by the fact that, in times of increasing demand in our markets, our suppliers and subcontractors tend to extend their delivery schedules or fail to meet their delivery deadlines. To compensate for these unscheduled delays, we build inventories further into the future, which increases the risk that our forecast may not correspond to our actual future needs. The uncertainties involved in these longer-term estimates during regular times of business expansion tend to increase the level of component and subsystem inventories (See also in Item 3 above - "Risk Factors - A longer sales process for new products may increase our costs and delay time to market of our products, both of which may negatively impact our revenues, results of operations, cash flow and may result in inventory write-offs" and under Item 5.A below - "Critical Accounting Policies - Valuation of Inventory"). Compared to our sales cycles for repeat orders from existing customers, we have longer sales cycles for new customers in our markets as well as for new customers in new markets. In addition, the selling cycle in our markets typically takes several quarters from first contact to revenue recognition, including on-site evaluation. Naturally, repeat orders take less time; still, a significant portion of our finished goods inventory consists of systems under evaluation and demonstration systems.
 
Critical Accounting Policies
 
Critical accounting policies are those that, in management's view, are most important to the portrayal of a company's financial condition and results of operations and most demanding on their calls on judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. We believe our most critical accounting policies relate to:
 
Revenue Recognition. The Company recognizes revenue from sales of its products when the products are installed at the customer's premises and are operating in accordance with their specifications, signed documentation of the arrangement, such as a signed contract or purchase order, has been received, the price is fixed or determinable and collectability is reasonably assured. In the limited circumstances when the products are installed by a trained distributor acting as an end user, revenue is recognized upon delivery to the distributor assuming all other criteria for revenue recognition are met.
 
28

 
Our revenue recognition policy requires that we use judgment to determine whether collectability is reasonably assured. Judgment is used for each customer on a case-by-case basis, and, among other factors, we take into consideration the individual customer's payment history and its financial strength, as demonstrated by its financial reports or through a third‑party credit check. In some cases, we secure payments by a letter of credit or other instruments.
 
Service revenues consist mainly of revenues from maintenance contracts and are recognized ratably over the contract period.
 
We apply ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, and therefore for multiple-element arrangements the overall arrangement fee is allocated to each element (both delivered and undelivered items) based on management's best estimate of their selling price where other sources of evidence are unavailable. The revenue relating to the undelivered elements is deferred using the relative selling price method utilizing vendor-specific-objective evidence ("VSOE") until delivery of the deferred elements.
 
Our multiple deliverables usually consist of product sales and non-standard warranties. A non-standard warranty is one that is for a period longer than 12 months. Accordingly, a non-standard warranty is deferred as unearned revenue and is recognized ratably as revenue commencing with and over the applicable warranty term.
 
We routinely evaluate our products for inclusion of any embedded software that is more than incidental thereby requiring consideration of ASC Subtopic 985-605, "Software Revenue Recognition". Based on such evaluation, we concluded that none of our products have such embedded software.
 
Valuation of Accounts Receivable. We review accounts receivable to determine which are doubtful of collection. In making this determination of the appropriate allowance for doubtful accounts, we consider information at hand regarding specific customers, including aging of the receivable balance, evaluation of the security received from customers, our history of write-offs, relationships with our customers and the overall credit worthiness of our customers. Changes in the credit worthiness of our customers, the general economic environment and other factors may impact the level of our future write-offs.
 
Valuation of Inventory. Inventories consist of completed systems, partially completed systems and components, and are recorded at the lower of cost, determined by the moving – average basis, or market. We review inventory for obsolescence and excess quantities to determine that items deemed obsolete or excess inventory are appropriately reserved. In making the determination, we consider forecasted future sales or service/maintenance of related products and the quantity of inventory at the balance sheet date, assessed against each inventory item's past usage rates and future expected usage rates. Changes in factors such as technology, customer demand, competing products and other matters could affect the level of our obsolete and excess inventory in the future.

In the years 2017, 2016 and 2015 we wrote-off inventory in the amount of approximately$0.1, $4.8 million and $1.2 million, respectively. The write off amounts are included in the item line called "Cost of revenues", in the consolidated statements of operations. The write offs create a new cost basis and are a permanent reduction of inventory cost. The write-off in the amount of approximately $4.8 million in 2016 related to our decision to reorganize our current mode of operation with respect to our FIT activity. Inventory that is not expected to be converted or consumed in 2018 is classified as non-current. As of December 31, 2017, a $1.4 million portion of our inventory was classified as non-current. Management periodically evaluates our inventory composition, giving consideration to factors such as the probability and timing of anticipated usage and the physical condition of the items, and then estimates a charge (reducing the inventory) to be provided for slow moving, technologically obsolete or damaged inventory. These estimates could vary significantly from actual requirements based upon future economic conditions, customer inventory levels or competitive factors that were not foreseen or did not exist when the inventory write-offs were established.
 
Intangible assets. Patent registration costs are capitalized at cost and amortized, beginning with the first year of utilization, over its expected life of ten years.
 
29


Intangible assets as part of a business combination are recorded at their fair value and amortized based on their estimated revenue producing life span. Acquired in-process research and development is amortized starting at the initial date of recording revenues from the associated technology. We review our long-lived assets 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 an asset to undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the long lived asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as computed by subtracting the fair market value of the asset from its carrying value. In 2015, based on the Company's annual impairment tests, we recorded an impairment of intangible assets in the amount of $40,000, related to the Printar acquisition, representing the entire remaining goodwill and intangible assets related to the Printar acquisition.
 
Provisions for contingent liabilities. A contingency (provision) in accordance with ASC Topic 450-10-05, Contingencies, is an existing condition or situation involving uncertainty as to the range of possible loss to the entity. A provision for claims is recognized if it is probable (likely to occur) that a liability has been incurred and the amount can be estimated reasonably. Provisions in general are highly judgmental, especially in cases of legal disputes. We assess the probability of an adverse event if the probability is evaluated to be probable, we are required to fully provide for the total amount of the estimated contingent liability. We continually evaluate our pending provisions to determine if accruals are required. It is often difficult to accurately estimate the ultimate outcome of a contingent liability. Different variables can affect the timing and amount we provide for certain contingent liabilities. Our assessments are therefore subject to estimates made by us and our legal counsel, adverse revision in our estimates of the potential liability could materially impact our financial condition, results of operations or liquidity.

Valuation of Long Lived Assets. We apply ASC Subtopic 360-10, "Property, Plant and Equipment". This Statement requires that long-lived assets be 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 an asset to undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the long lived asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as computed by subtracting the fair market value of the asset from its carrying value. We prepare future cash flows based on our best estimates including projections and financial statements, future plans and growth estimates.

Income Taxes. We account for income taxes under ASC Subtopic 740-10 Income Taxes – Overall. Deferred tax assets or liabilities are recognized in respect of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts as well as in respect of tax losses and other deductions which may be deductible for tax purposes in future years, based on tax rates applicable to the periods in which such deferred taxes will be realized. The rates applied are those enacted in law as of December 31, 2017. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and during which the carry-forwards are available. Valuation allowances are established when necessary to reduce deferred tax assets to the amount considered more likely than not to be realized.

Our financial statements include deferred tax assets, net, which are calculated according to the above methodology. If there is an unexpected critical deterioration in our operating results and forecasts, we would have to increase the valuation allowance with respect to those assets. We believe that it is more likely than not that those net deferred tax assets included in our financial statements will be realized in subsequent years.

Stock Option and Restricted Share Plans. We account for our employee stock-based compensation awards in accordance with ASC Topic 718, Compensation - Stock Compensation. ASC Topic 718 requires that all employee stock‑based compensation is recognized as a cost in the financial statements and that for equity-classified awards such cost is measured at the grant date fair value of the award. We estimate grant date fair value using the Black‑Scholes-Merton option‑pricing model. When calculating this equity-based compensation expense we took into consideration awards that are ultimately expected to vest. Therefore, this expense has been reduced for estimated forfeitures.

30


Recently Issued and Adopted Accounting Standards and Interpretations
 
Effective January 1, 2017, the Company adopted ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." This simplifies subsequent measurement of inventory by having an entity measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation.  The adoption of ASU 2015-11 did not have any impact on the Company's consolidated financial position, results of operations, and cash flows.

In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes". ASU 2015-17 requires entities to present all deferred tax assets and liabilities, along with any related valuation allowance, as non-current on the balance sheet. The guidance is effective for interim and annual periods beginning after December 15, 2016 (early adoption is permitted). Due to the implementation of ASU No. 2015-17, the Company re-classified current tax assets as of December 31, 2016, to non-current, in the amount of $894.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic718): Scope of Modification Accounting."  This ASU amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718.  This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The Company chose to adopt ASU No. 2017-09 early and the adoption did not have any impact on the Company's consolidated financial position, results of operations, and cash flows.

New standards not yet adopted

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This ASU provides guidance on statement of cash flows presentation for eight specific cash flow issues where diversity in practice exists. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is does not expect that the adoption of ASU No. 2016-15 will have an effect on its consolidated financial position, results of operations, and cash flows.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This ASU requires that lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months.  ASU No. 2016-02 also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 with earlier adoption permitted. The expected impact for the Company is an increase in property, plant and equipment and in financial liabilities.

In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 became effective for the Company beginning in the first quarter of 2018.

Subsequently, the FASB issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations ("ASU 2016-08"); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ("ASU 2016-10"); and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ("ASU 2016-12"). The Company must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively, the "New Revenue Standards") commencing the first quarter of 2018.
 
31


The Company adopted the New Revenue Standards in the first quarter of 2018 retrospectively with the cumulative effect recognized as of the date of adoption.

The Company analyzed the impact of the New Revenue Standards on its contract portfolio by reviewing its current accounting policies and practices to identify potential differences that would result from applying the requirements of the New Revenue Standards to its revenue contracts. In addition, the Company identified and implemented appropriate changes to its business processes and related policies to support recognition and disclosure under the New Revenue Standards.

The cumulative effect of adopting the New Revenue Standards on the Company’s revenues and operating income is not material, as the analysis of the Company’s contracts under the New Revenue Standards supports the recognition of revenue at a point in time for the majority of its contracts, which is consistent with its current revenue recognition model. Revenue on the majority of the Company’s contracts will continue to be recognized upon delivery because this represents the point in time at which control is transferred to the customer. Revenues derived from performance obligations such as warranty and service contracts will continue to be recognized over the period of the service. In addition, the number of the Company’s performance obligations under the New Revenue Standards is not materially different from the Company’s contract elements under the existing standard. Finally, the accounting for the estimate of variable consideration is not materially different compared to the Company’s current practice.

The Company also does not expect the New Revenue Standards to have a material impact on its consolidated balance sheet.
 
Comparison of Period to Period Results of Operations
 
The following table presents consolidated statement of operations data for the periods indicated as a percentage of total revenues:
 
   
Year Ended December 31
 
   
2017
   
2016
   
2015
 
Total Revenues
   
100.00
%
   
100.00
%
   
100.0
%
Total Cost of revenues (*)
   
51.31
%
   
58.99
%
   
54.12
%
Gross profit
   
48.69
%
   
41.01
%
   
45.88
%
Operating expenses:
                       
Selling, general and administrative expenses
   
23.56
%
   
27.64
%
   
27.75
%
Reorganization and impairment (costs)
   
0.00
%
   
(5.12
)%
   
0.2
%
Expenses from settlement
   
13.91
%
   
0.00
%
   
0.00
%
Loss from litigation
   
0.00
%
   
0.00
%
   
21.01
%
Total operating expenses
   
51.94
%
   
38.46
%
   
65.45
%
Operating income (loss)
   
(3.25
)%
   
2.55
%
   
(19.57
)%
Financial income (expenses), net
   
(0.16
)%
   
(1.07
)%
   
(1.89
)%
Income tax (expenses) benefit
   
5.21
%
   
(0.38
)%
   
2.99
%
Net income (loss) from continuing operations
   
1.81
%
   
1.10
%
   
(18.47
)%
Net income from discontinued operations
   
13.13
%
   
4.88
%
   
3.90
%
Net income (loss)
   
14.94
%
   
5.98
%
   
(14.57
)%

32

 
Year Ended December 31, 2017 compared to Year Ended December 31, 2016
 
Revenues. Revenues increased by 18% to $93.5 million in 2017 from $79.2 million in 2016, due primarily to increase in number of product units sold.
 
Gross Profit. Gross profit consists of revenues less cost of revenues, which includes the cost of components, production materials, labor, depreciation, factory and service center overheads and provisions for warranties. These expenditures are only partially affected by sales volume. Our total gross profit increased to $45.5 million in 2017 from $32.5 million in 2016, an increase of $13.0 million, or 40%. Our gross margin increased to 48.7% in 2017, compared to a gross margin of 41.0% in 2016, due to the reorganization and impairment costs which were recorded in 2016. In 2016 we reported an inventory write-off in the amount of approximately $4.8 million reported in 2016 with respect to the discontinuation of the previous generation FIT product line (the Gryphon Systems). Our gross profit on product sales increased by $7.7 million - to $46.9 million in 2017 from $39.2 million in 2016.
 
Research and Development Costs. Research and development expenses consist primarily of salaries, materials consumption and costs associated with subcontracting certain development efforts. Total research and development expenses for 2017 increased to $13.5 million from $12.6 million in 2016 due to increased activity.
 
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of expenses associated with salaries, commissions, promotion and travel, professional services and rent costs. Our selling, general and administrative expenses increased by 1% to $22.0 million in 2017 from $21.9 million in 2016, mainly due to increased sales commissions.
 
Reorganization and impairment. During 2016 we recognized net income of $4.1 million regarding Printar, consisting of impairment charges of $0.9 million in respect of Printar-related fixed assets and other expenses, which was offset by income of $5.0 million from the write-off of IIA liabilities. For more information regarding the agreement with Printar see Item 4.A above – "History and Development of the Company".
 
Financial Expenses, Net. We had net financial expense of $0.2 million in 2017, compared to net financial expense of $0.8 million in 2016. These changes mainly relate to foreign currency expense, net. Foreign currency expense, net, resulting from transactions not denominated in U.S. Dollars, amounted to $41 thousand in 2017 compared to $0.4 million in 2016.

Provision for Income Taxes. Income tax benefit was $4.9 million in 2017 and we recorded a $0.3 million expense in 2016; the tax benefit in 2017 mainly relates to creation of a deferred tax asset which was utilized in the discontinued operation.
 
Net Income from continuing operations. We realized net income of $1.7 million in 2017 compared to net income of $0.9 million in 2016, due to increased revenues, offset by the expenses from the settlement of the Rudolph patent litigation (see in Item 8.A – "Consolidated Statements and Other Financial Information – Legal Proceedings").
 
Year Ended December 31, 2016 compared to Year Ended December 31, 2015
 
Revenues. Revenues increased by 14% to $79.2 million in 2016 from $69.4 million in 2015. Products sales increased by 16% to $74.7 million in 2016 from $64.5 million in 2015.
 
Within the Microelectronics Segment, AOI-related product revenues increased by 18% compared to previous year, from $63.4 million to $74.8 million, while Sela-related product sales decreased from $1.1 million in 2015 to zero in 2016 (due to the fact that the Sela products sold during 2015 were the last remaining products in our inventory), considering the termination of our involvement in the Sela business.
 
Service revenues decreased by 8% to $4.5 million in 2016 from $4.9 million in 2015.
 
33

 
Gross Profit. Our total gross profit increased to $32.5 million in 2016 from $31.8 million in 2015, an increase of $0.7 million, or 2%. Our gross margin decreased to 41.0% in 2016, compared to a gross margin of 45.9% in 2015, due to the effect of the FIT reorganization cost reflected in cost of revenues. In 2016 we reported an inventory write-off in the amount of approximately $4.8 million compared with an inventory write-off in the amount of approximately $1.2 million reported in 2015, with respect to the discontinuation of the previous generation FIT product line (the Gryphon Systems). Our gross profit on product sales increased by $6.9 million - to $39.2 million in 2016 from $32.2 million in 2015. Our gross loss on service revenue increased by $1.4 million - to $(1.7) million in 2016 from profit of $0.4 million in 2015.
 
Research and Development Costs. Total research and development expenses for 2016 increased to $12.6 million from $11.4 million in 2015 due to increased activity.
 
Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased by 14% to $21.9 million in 2016 from $19.3 million in 2015, mainly due to an increase in agents' commissions and in professional services, out of which approximately $1.4 million were related to our legal proceedings with Rudolph in 2016.
 
Reorganization and impairment. During 2016 we recognized net income of $4.1 million regarding Printar, consisting of impairment charges of $0.9 million in respect of Printar-related fixed assets and other expenses, which was offset by income of $5.0 million from the write-off of IIA liabilities. During 2015, impairment charges of $0.1 million were recognized related to Printar impairment charges in respect of goodwill and other intangible assets, offset by renegotiation of the liability to the shareholders of Printar. For more information regarding the agreement with Printar see Item 4.A above – "History and Development of the Company".
 
Financial Expenses, Net. We had net financial expense of $0.8 million in 2016, compared to net financial expense of $1.3 million in 2015. These changes mainly relate to foreign currency expense, net and interest on the bond posted with the United States Court of Appeals in connection with the Rudolph patent litigation (see in Item 8.A – "Consolidated Statements and Other Financial Information – Legal Proceedings"). Foreign currency expense, net, resulting from transactions not denominated in U.S. Dollars, amounted to $0.4 million in 2016 compared to $0.3 million in 2015.

Provision for Income Taxes. Income tax expense was $0.3 million in 2016 and we recorded a $2.1 million benefit in 2015; the increase in tax expense was mainly attributed to the creation of deferred tax assets in respect of the loss from litigation.
 
Net Income (Loss) from continuing operations. We realized a net income of $0.9 million in 2016 compared to a net loss of $12.8 million in 2015, due to the reserve of $14.6 million recorded in the Company's consolidated financial statements for 2015 in connection with the Rudolph patent litigation (see in Item 8.A – "Consolidated Statements and Other Financial Information – Legal Proceedings").
            
B.
Research and Development, Patents and Licenses.
 
At December 31, 2017, our cash and cash equivalent balances totaled approximately $43.8 million. At December 31, 2016, our cash and cash equivalent balances totaled approximately $19.7 million. The year-to-year increase in cash and cash equivalents mainly results from the consummation of the PCB Sale Transaction and operating cash flow, which was offset by the settlement payment to Rudolph. Our cash is invested in bank deposits spread among several banks, primarily in Israel.
 
From our inception through December 31, 2017 we raised approximately $36.0 million from our initial public offering in 2000, approximately $6.1 million in a rights offering of ordinary shares to our then existing shareholders in 2002, $14.5 million from a private placement to Israeli institutional investors in 2006, and $11.9 million in a public offering of our shares in May 2016.
 
Our working capital was approximately $63.6 million in 2017 and $54.1 million in 2016. The increase is mainly attributed to the increase in cash and cash equivalents, offset by the decrease in current assets held for sale.
 
Our capital expenditures during 2017 were approximately $3.2 million, mainly due to the building of new facilities in Migdal HaEmek and operating activities.
 
34


We anticipate that our existing capital resources and cash flows from operations will be adequate to satisfy our liquidity requirements for at least the next 12 months. If available liquidity is not sufficient to meet our operating obligations as they come due, our plans include pursuing alternative financing arrangements or reducing expenditures as necessary to meet our cash requirements (see also in Item 3.D above "We have historically incurred significant losses and negative cash flows and may not sustain profitable operations or continue to have positive operating cash flows in the future " under "Risk Factors").
 
Cash flow from operating activities
 
Net cash and cash equivalents provided by (used in) operating activities for the years ended December 31, 2017, 2016 and 2015 totaled $1.6 million, $(17.3 million) and $1.8 million, respectively.
 
During 2017, cash provided by operating activities was primarily attributed to continuing operations, offset by net cash used in operating activities from discontinued operations.
 
During 2016, cash (used in) operating activities was primarily attributed to net income of $4.7 million, adjusted to exclude the effect of a decrease in trade accounts payable of $1.2 million and of other current liabilities of $2.2 million, offset by the payment of $14.6 million relating to the Rudolph patent litigation, an increase in trade accounts receivable of $9.0 million, and the write off of liabilities to the OCS of $4.8 million.
 
During 2015, cash provided by operating activities was primarily attributed to a net loss, adjusted to exclude the effect of non-cash charges of $14.6 million relating to the Rudolph patent litigation, an increase in inventory of $4 million, and an increase of trade accounts payable of $2.3 million, partially offset by an increase in trade accounts receivable of $4.7 million, the revaluation of contingent liabilities and interest expenses on liabilities to the IIA of $0.9 million and an increase in deferred tax benefit of $2.4 million.
 
Cash flow from investing activities
 
Cash flow provided by investing activities in 2017 was $26.6 million, due to net cash received in the PCB Sale Transaction offset by investment of $3.2 million in fixed and intangible assets. Cash flow provided by investing activities in 2016 was $6.2 million, due to release from short term deposits of $7.9 million offset by investment of $1.6 million in fixed and intangible assets. Cash flow used in investing activities in 2015 was $0.7 million, primarily due to investment of $2.3 million in fixed and intangible assets offset by $1.5 million released from short term deposits.
 
Our capital expenditures in 2017 were used primarily for the construction of a new building adjacent to our headquarters. Our capital expenditures in 2016 were used primarily for investment in electronic equipment, machinery and a new clean room in our facility in Israel. Our capital expenditures in 2015 were used primarily for investment in electronic equipment, machinery and a new clean room in our facility in Israel.
 
Cash flow from financing activities
 
Cash flow used in financing activities in 2017 was $3.7 million, mainly due to a dividend payment offset by the proceeds from exercise of share options and RSUs.
 
Cash flow used in financing activities in 2016 was $4 thousand.
 
Cash flow provided by financing activities in 2015 was $11.8 million, mainly due to the public offering of our shares in May 2015.
 
Effective Corporate Tax Rate
 
Camtek's production facility in Israel has been granted "Approved Enterprise" status under the Investment Law (as defined in Item 10 below). We participate in the Alternative Benefits Program and, accordingly, income from our Approved Enterprise will be tax exempt for a period of 10 years, commencing on the first year in which the Approved Enterprise first generates taxable income, due to the fact that we operate in Zone "A" in Israel.
 
35

 
On April 1, 2005, an amendment to the Investment Law came into effect (the "Amendment") and significantly changed the provisions of the Investment Law. The Amendment limits the scope of an enterprise which may be approved by the Investment Center by setting criteria for the approval of a facility as a "Beneficiary Enterprise"; such criteria generally require that at least 25% of the Beneficiary Enterprise's income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.
 
In addition, the Amendment provides that terms and benefits included in any certificate of approval issued prior to December 31, 2004 will remain subject to the provisions of the Investment Law as they were on the date of such prior approval. Therefore, our existing Approved Enterprise will generally not be subject to the provisions of the Amendment. As a result of the Amendment, tax-exempt income generated under the provisions of the new law, as part of a new Beneficiary Enterprise, will subject us to taxes upon distribution or liquidation.
 
Camtek has been granted the status of Approved Enterprise, under the Investment Law, for investment programs for the periods which ended in 2007 and 2010, and the status of Beneficiary Enterprise according to the Amendment, for a period which ended in 2014. In addition, Camtek has elected 2010 as the year of election for a period ending 2021 (collectively, "Programs").

On December 29, 2010, the Investment Law was amended to significantly revise the tax incentive regime in Israel commencing on January 1, 2011. For more information, see Item 10.E below – "Taxation – Israeli Taxation - Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959."

Out of Camtek's retained earnings as of December 31, 2017 approximately $20.6 million are tax-exempt earnings attributable to its Approved Enterprise and approximately $14.9 million are tax-exempt earnings attributable to its Beneficiary Enterprise. The tax-exempt income attributable to the Approved and Beneficiary Enterprises cannot be distributed to shareholders without subjecting the Company to taxes. If these retained tax-exempt profits are distributed, the Company would be taxed at the reduced corporate tax rate applicable to such profits in the year in which they were generated. According to the Amendment, tax-exempt income generated under the Beneficiary Enterprise will be taxed upon dividend distribution or complete liquidation, whereas tax exempt income generated under the Approved Enterprise will be taxed only upon dividend distribution (but not upon complete liquidation, as the tax liability will be incurred by the shareholders).

As of December 31, 2017, if the income attributed to the Approved Enterprise was distributed as dividend, we would incur a tax liability of approximately $5.2 million. If income attributed to the Beneficiary Enterprise was distributed as dividend, or upon liquidation, we would incur a tax liability in the amount of approximately $3.7 million. These amounts would be recorded as an income tax expense in the period in which we would declare the dividend.
We intend to indefinitely reinvest the amount of our tax-exempt income and not distribute any amounts of our undistributed tax-exempt income as dividend. Accordingly, no deferred tax liabilities have been provided on income attributable to our Approved and Beneficiary Enterprise Programs as the undistributed tax exempt income is essentially permanent in duration.

The entitlement to the above benefits is conditional upon our fulfilling the conditions stipulated by the law and the regulations published there under as well as the criteria set forth in the approval for the specific investments in Approved Enterprises. In the event of failure to meet such requirements in the future, income attributable to our Programs could be subject to the statutory Israeli corporate tax rates and we could be required to refund a portion of the tax benefits already received, with respect to such Programs. Our management believes that we have met the aforementioned conditions.
 
36


Foreign Currency Fluctuation
 
See in Item 3.D above – "Risk Factors – Risk Factors Related to Our Business and Our Markets – Fluctuations in currency exchange rates may result in additional expenses being recorded or in the prices of our products becoming less competitive and thus may have negative impact on our profitability".
 
C.
Research and Development, Patents and Licenses.
 
We believe that intensive R&D is essential to our business. We devote substantial R&D resources to developing new products and to improving our existing products to meet our customers' evolving needs. We have dedicated teams with expertise in image processing software and algorithms, electronic hardware, electro‑optics, physics, mechanics and systems design.
 
Our R&D efforts are primarily focused on:
 
·
improving our defect detection capabilities while reducing the number of false alarms, simplifying operation and reducing the level of user expertise required to realize the benefits of our systems;
 
·
increasing the throughput of our AOI systems;
 
·
providing unique technological solutions to our customers; and
 
·
adding capabilities to expand our market segments.
 
In addition, we are focusing our efforts on leveraging our core technologies, expertise and experience into continually enhancing the value to the user and the return on investment from our products. We believe that our internal multi‑disciplinary expertise will enable us to maintain and enhance our technological edge.
 
As of December 31, 2017, we had 66 employees engaged in R&D, all of whom are based in our headquarters in Israel. We also use subcontractors for the development of some of the hardware components of our systems. Our R&D expenses were $13.5 million, $12.6 million and $11.4 million for the years ended December 31, 2017, 2016 and 2015, respectively, representing 14% 16% and 16% of the total revenues for the years then ended.
 
We will continue to devote our R&D resources to maintaining and extending our technology leadership position.

Our R&D costs are expensed as incurred.

In general, we rely on a combination of our copyrights, trade secrets, patents, trademarks and non-disclosure agreements to protect our proprietary know-how and intellectual property. We also enter into confidentiality agreements with key employees and with all of the subcontractors who develop and manufacture components for use in our products. We also employ specialists whose main role is to maintain and protect our intellectual property from both professional and legal perspectives. We cannot be certain that actions we take to protect our proprietary rights will be adequate nor can we be certain that we will be able to deter reverse engineering or that there will not be independent third-party development of our technology.
 
We have 46 patents pending worldwide and 11 U.S. provisional applications. In addition, we have 98 registered patents in the following countries: the United States (49), Israel (10), Europe (1), South Korea (4), Japan (3), Singapore (1), China (10) and Taiwan (20). These patents relate to our proprietary technology and know-how developed for AOI and Functional Digital Printing tools. We also have one registered trademark in Israel and seven registered trademarks in China.
 
37

 
D.
Trend Information
 
The semiconductor fabrication industry has historically been cyclical and highly influenced by weakness or uncertainties in global economic conditions. 2016 and 2017 were characterized by general improvement in the semiconductor industry and increased capital expenditure spending by the major manufacturers and OSAT companies. One of the key drivers for this trend was emerging new technologies such as advanced packaging. Although global economic uncertainties are still evident we believe that this positive momentum will continue into 2018. For specific trend information regarding the markets in which we operate see Item 4.B above - "Our Markets".
 
E.
Off-Balance Sheet Arrangements
 
We do not have any arrangements or relationships with entities that are not consolidated into our financial statements and are reasonably likely to materially affect our liquidity or the availability of our capital resources. However, we have entered into various non-cancelable operating lease agreements, principally for office space and vehicles, as disclosed in our consolidated financial statements.

As of December 31, 2017, minimum future rental payments under such non-cancelable operating lease agreements were approximately $2.6 million.

F.
Contractual Obligations and Other Commercial Commitments.
 
As of December 31, 2017, we had contractual obligations and commercial commitments of:

   
Payment Due by Period
 
Contractual Obligations
 
Total
   
Less than 1
Year
   
1‑3 years
   
3‑5 years
   
More than 5
years
 
   
(in thousands)
 
Purchase obligations (1)
   
6,570
     
6,570
     
-
     
-
     
-
 
Severance obligation
   
838
     
-
     
-
     
-
     
838
 
Other long‑term obligations (2)
   
2,571
     
1,070
     
1,347
     
154
     
-
 
Total
   
9,979
     
7,640
     
1,347
     
154
     
838
 
                                         
(1)
Purchase obligations mainly represent outstanding purchase commitments for inventory components ordered in the normal course of business.
(2)
In 2015, we entered into a new framework agreement for non-cancelable operating leases for vehicles for a period of 36 months. As of December 31, 2017, the minimum future rental payments (including future vehicle rental by our subsidiaries) were approximately $1.5 million.
Our subsidiaries have entered into various operating lease agreements, principally for office space. As of December 31, 2017, minimum future rental payments under these leases amounted to $1.1 million.
 
Item 6.
Directors, Senior Management and Key Employees
 
A.
Directors and Senior Management
 
The following table lists the name, age and position of each of our current directors and senior management:
 
Name
Age
Title
Rafi Amit
69
Director and Chief Executive Officer
Yotam Stern
65
Director
Gabi Heller
53
Director
Rafi Koriat
71
Director
Eran Bendoly
53
Director
Moty Ben-Arie
63
Chairman of the Board of Directors*
Moshe Eisenberg
51
Vice President – Chief Financial Officer
Ramy Langer
64
Vice President – Chief Operating Officer
Orit Geva Dvash
46
Vice President - Human Resources
 
*Mr. Ben-Arie serves as our Chairman of the Board as of March 28, 2017, pursuant to the approval of the Company's shareholders for his appointment as director, and replaced Mr. Amit, who was our Chairman prior to such date – see in Item 6.C below – "Board Practices – General Board Practices".
38

 
Set forth below is a biographical summary of each of the above-named directors and senior management.
 
Rafi Amit has served as our Chief Executive Officer as of January 2014. Between 2010 and March 2017, Mr. Amit also served as our Active Chairman of the Board of Directors. Previously, Mr. Amit served as our Chief Executive Officer from January 1998 until August 2010 and as Chairman of the Board of Directors from 1987 until April 2009. Since 1981, Mr. Amit has also served as the President and director of Priortech and has been the Chairman of the Board of Directors of Priortech since 1988. From 1981 until 2004, Mr. Amit served as Priortech's Chief Executive Officer. Mr. Amit holds a B.Sc. in Industrial Engineering and Management from Technion - Israel Institute of Technology.
 
Yotam Stern has served on our Board of Directors since 1987 (and as the Chairman of our Board of Directors from May 2009 until August 2010). From 2001 until 2012 Mr. Stern served as our Executive Vice President, Business & Strategy. From 1998 until 2001, Mr. Stern served as our Chief Financial Officer. Mr. Stern served in the past as the Chief Financial Officer of Priortech and has been serving as a director of Priortech since 1985 and as its Chief Executive Officer since 2004. As of November 2012 Mr. Stern also serves as Chief Executive Officer of PCB Technologies Ltd., our affiliate which is also controlled by Priortech. Mr. Stern holds a B.A. in Economics from Hebrew University of Jerusalem.
 
Gabi Heller has served on our Board of Directors since September 2006. Ms. Heller has extensive financial experience as an accountant, Chief Financial Officer and internal controller. Currently Ms. Heller serves as Chief Financial Officer of The Trendlines Group Ltd., an investment company holding three technology incubators, traded on the Singapore Exchange Ltd. as of November 2016. From 1994 until 2010 Ms. Heller served as the Chief Financial Officer of Walden Israel Ltd., which is the management company of Walden Israel Ventures, managing various venture capital funds operating in Israel. From 1989 to 1994 Ms. Heller served as Manager with Kost Forer Gabbay & Kasierer - Ernst & Young Israel, one of the leading accounting firms in Israel. In addition, from 1998 to 2000 Ms. Heller served as Internal Controller to Vilar International Ltd., traded on TASE. Ms. Heller currently serves on the Boards of Directors of Elco Holdings Ltd, and the Ashtrom Group Ltd., both traded on TASE. Ms. Heller is a CPA (Israel), holds a B.A. in Accounting and Economics from the Hebrew University of Jerusalem, School of Business Administration, and an LL.M from Bar Ilan University, Faculty of Law.
 
Rafi Koriat has served on our Board of Directors since September 2006 and is the Chairman of our Audit Committee and Compensation Committee. Mr. Koriat has extensive experience as Chief Executive Officer and Board member in companies in the fields of semiconductor assembly and processing equipment, optical network components and nanotechnology and as Co-Chairman of NanoIsrael International Conference; Prior to his present position as founder and Chief Executive Officer of Korel Business Ltd., which specializes in strategic management and positioning of high tech companies and management, Mr. Koriat was Chief Executive Officer of Lambda Crossing Ltd. engaged in the development and manufacturing of optical components for the networks (2001-2006), and Founder and Chief Executive Officer of Steag CVD Systems Ltd. and its subsidiary, Steag CVD Inc. in San Jose, California (1992-2001); both companies are engaged in the development and manufacturing of advanced front-end semiconductor capital equipment. Previously, Mr. Koriat worked for 20 years (1972 -1992) at Kulicke and Soffa Industries Inc., mostly at the headquarters in the United States and earlier in Israel, and held executive positions including Corporate Vice President for Engineering and Technology, Corporate Director for Business and Marketing and Division Manager. Mr. Koriat is also the founder and chairman of the Sub Micron Semiconductor Consortium, OptiPac Consortium (optical communication networks) and nanotechnology consortium (NES), all three under the Israel Chief Scientist Magnet program. Mr. Koriat holds a B.Sc. from the Technion-Israel Institute of Technology and a M.Sc. from Drexel University in Philadelphia, Pennsylvania, and has completed an Executive Management Program at Stanford University.
 
39


Eran Bendoly has served on our Board of Directors since November 2000. Currently, Mr. Bendoly serves as the Chief Executive Officer of Oliben Ltd., a private business consulting firm. From 2009 to 2012 Mr. Bendoly served as the Chief Financial Officer of Expand Networks Ltd., a leading provider of WAN optimization technology. From 2006 to 2008 Mr. Bendoly served as Chief Financial Officer of Personeta Inc., a leading vendor of intelligent network service creation platforms. From 2003 to 2006, Mr. Bendoly served as Chief Executive Officer of Xenia Management Ltd., which is the managing partner of Xenia Ventures LP, a limited partnership that operates a technology incubator in Kiryat Gat, Israel. From 2000 to 2002, Mr. Bendoly served as Director of Finance for Europe, Middle East & Africa of Mindspeed Technologies, Inc., a U.S.-based fabless semiconductor manufacturer. From 1998 to 2000, Mr. Bendoly served as Chief Financial Officer of Novanet Semiconductor Ltd., and from 1996 to 1998, he served as Vice President, Finance and Operations of Novacom Technologies Ltd. Mr. Bendoly holds a B.A. in International Relations from the Hebrew University of Jerusalem and an M.B.A. from the KU Leuven University of Belgium.
 
Moty Ben-Arie serves as our Chairman of the Board of Directors since March 28, 2017. Mr. Ben Ben-Arie has served as a consultant to entrepreneurs and investors since 2014. Previously, Mr. Ben-Arie served as the CEO of Sital Technology from 2012 until 2014. From 2006 until 2011 Mr. Ben-Arie also served as a managing partner of Vertex Ventures, where he focused on investments in Israeli-related hi-tech companies and evaluation of companies in the field of telecommunication, IT, test equipment, medical equipment and multidisciplinary systems. During these years Mr. Ben-Arie served as a member of the fund investment committee, managed investments in several companies and served as a board member in companies in their early stages, including Color Chip Inc., Multiphi, Expand Networks, Comability and Ethos Networks. From 2000 until 2006 Mr. Ben-Arie also served as a partner of Walden Israel Ventures, where he focused on investments in Israeli-related hi-tech companies. During these years Mr. Ben-Arie managed investments in several companies and served as a board member in companies from early stage, including Color Chip Inc. and Passave. From 1998 until 2000 Mr. Ben-Arie served as a director in Radcom Ltd., as a consultant in Walden Israel, and financed seed phases for new startups. From 1991 until 1998 Mr. Ben-Arie served as the co-founder and CEO of Radcom Ltd., Israel. From 1978 until 1982 Mr. Ben-Arie served as an electronic engineer and a project manager in Elisra Ltd. Mr. Ben-Arie holds a MBA from Tel Aviv University, and a B.Sc. in Electrical Engineering from the Technion - Israel Institute of Technology.
 
Moshe Eisenberg has served as our Chief Financial Officer since November 2011. From 2010 to 2011 Mr. Eisenberg served as the Chief Financial Officer of Exlibris, a global provider of library automation solution for the academic market. Prior to that, from 2005 to 2009, Mr. Eisenberg served as the Chief Financial Officer of Scopus Video Networks Ltd., a leading provider of digital compression, decoding & video processing equipment. Prior to that, Mr. Eisenberg held various professional and managerial positions at Gilat Satellite Networks Ltd. and its wholly owned US subsidiary, Spacenet Inc. Mr. Eisenberg holds an MBA from Tel Aviv University and a B.Sc. in Agricultural Economics from the Hebrew University of Jerusalem.
 
Ramy Langer has served as our Chief Operating Officer since November 2017, following the consummation of the PCB Sale Transaction. Prior to his appointment as Chief Operating Officer he served as Vice President - Semiconductors Division from February 2014. From 2007 until 2012, Mr. Langer served as the Chief Executive Officer (and co-founder) of Infinite Memory Ltd., a fab-less developer of products based on Saifun Semiconductors Ltd.'s technology. From 2005 until 2007, Mr. Langer served as Vice President- Business Development of Saifun, where he marketed non-volatile memory IP. From 2002 until 2005 Mr. Langer served as Managing Director of Infineon Flash, a fab-less developer of products based on Saifun's technology using Infineon DRAM process. From 1999-2002 Mr. Langer served as Vice President- Marketing & Sales of Tower Semiconductors Ltd., manufacturer of integrated circuits. Prior to that, Mr. Langer held various executive positions at Kulicke and Soffa Industries, Inc., a leading global semiconductor assembly equipment manufacturer. Mr. Langer holds a B.Sc. in Electronic Engineering from the Technion – Israel Institute of Technology and a M.Sc. in Electronic Engineering from Drexel University, Philadelphia.
 
Orit Geva Dvash has served as our VP Human Resources ("HR") since November 2017. Previously, since 2014, Ms. Geva Dvash served as our HR Director. Prior to that, from 2008 to 2014, Ms. Geva Dvash served as our HR manager. Prior to that, from 2002 to 2008, Ms. Geva Dvash served at various HR positions at IBM research lab. Ms. Geva Dvash holds an Masters in political science from Haifa University and B.A. in political science and English literature from Haifa university.
 
40

 
Arrangements Involving Directors and Senior Management
 
There are no arrangements or understandings of which we are aware relating to the election of our directors or the appointment of executive officers in our Company. In addition, there are no family relationships among any of the individuals listed in this section A (Directors and Senior Management).
 
B.
Compensation
 
Aggregate Executive Compensation
 
The aggregate remuneration paid by us for the year ended December 31, 2017 to all persons listed in Section A above (Directors and Senior Management), in addition to Mr. Amir Tzhori who served as our Vice President – PCB Division (until the consummation of the PCB Sale Transaction) was approximately $2.3 million, which includes $0.13 million paid to provide pension, retirement or similar benefits, as well as amounts expended by us for automobiles made available to all our executive officers and other fringe benefits commonly reimbursed or paid by companies in Israel.
 
We have a performance-based bonus plan which includes our executive officers. The plan is based on our overall performance, and individual performance. Up to 50% of the performance objectives of our executive officers may be qualitative, provided that with respect to our Chief Executive Officer such portion shall not exceed three monthly base salaries. The measureable performance objectives can change year over year, and are a combination of financial parameters, such as revenues, booking, operating or net income and collection. The plan for our executive officers is reviewed and approved by our Audit Committee (in its capacity as our Compensation Committee) and Board of Directors annually, as is any bonus payment to an executive officer made under such plan (provided that with respect to the bonus plan for our CEO we also obtain shareholder approval – see in Item 6.B below - "Compensation – Employment Agreements").
 
Other than payment of fees to our independent directors in accordance with regulations promulgated under the Companies Law concerning the remuneration of external directors (the "Remuneration Regulations"), reimbursement for expenses and the award of share options, we do not compensate our directors for serving on our board of directors. Messrs. Rafi Amit and Yotam Stern do not receive any additional compensation for their service as our directors; see in item 6.C below "Board Practices - Remuneration of Directors".
 
Individual Compensation of Covered Office Holders

The table below presents the compensation granted to our five most highly compensated Office Holders (as such term is defined in the Companies Law; see in Item 6.C below - "Board PracticesExternal DirectorsQualification") during or with respect to the year ended December 31, 2017. We refer to the five individuals for whom disclosure is provided herein as our "Covered Office Holders". All amounts specified below are in terms of cost to the Company, as recorded in our financial statements.
 
41

 
Name and Principal Position(1)
 
Salary Cost (USD) (2)
   
Bonus (USD) (3)
   
Equity-Based Compensation (USD) (4)(5)
   
Other (USD) (6)
   
Total (USD)
 
Rafi Amit
   
313,134
     
164,941
     
71,758
     
120,176
     
670,009
 
Amir Tzhori
   
158,129
     
59,835
     
66,581
     
158,705
     
443,250
 
 Moshe Eisenberg
   
270,135
     
94,513
     
70,476 (123,230
)    
-
     
435,125
 
Ramy Langer
   
255,135
     
62,545
     
73,290 (123,230
)    
-
     
390,970
 
Orit Geva-Dvash
   
157,029
     
51,833
     
26,359 (56,220
)    
-
     
235,221
 
Total
   
1,153,562
     
433,667
     
308,464 (302,680
)    
278,881
     
2,174,574
 
 
(1)
All Covered Office Holders are (or were, with respect to Amir Tzhori, whose employment by the Company ended on September 30 2017, pursuant to the consummation of the PCB Sale Transaction) employed on a full-time (100%) basis, except for Mr. Amit who dedicates 90% of his time to his role as our Chief Executive Officer.
(2)
Salary cost includes the Covered Office Holder's gross salary plus payment of social benefits made by the Company on behalf of such Covered Office Holder. Such benefits may include, to the extent applicable to the Covered Office Holder, payment, contributions and/or allocations for saving funds (e.g. Managers' Life Insurance Policy), education funds (referred to in Hebrew as "Keren Hishtalmut"), pension, severance, risk insurances (e.g. life, or work disability insurance), payments for social security and tax gross-up payments, vacation, car, medical insurance and benefits, phone, convalescence or recreation pay and other benefits and perquisites consistent with the Company's policies.
(3)
Represents annual bonuses paid in accordance with the Covered Office Holder's performance of targets as set forth in his bonus plan and approved by the Company's Audit Committee and Board of Directors and/ or any special one-time bonuses as approved by the Company's Audit Committee and Board of Directors in accordance with the Company's Compensation Policy.
(4)
Bracketed numbers represent the fair value on the grant date of equity based compensation granted to the Covered Office Holder during the year ended December 31, 2017.
(5)
Represents the equity based compensation expenses recorded in the Company's consolidated financial statements for the year ended December 31, 2017 for each Covered Office Holder, based on the options' fair value on the grant date, calculated in accordance with accounting guidance for equity-based compensation.
(6)
Includes relocation expenses which may consist of, to the extent applicable to the Covered Office Holder: housing, schooling, car, medical insurance and travel expenses for the Covered Office Holder and family members residing with him abroad. Also includes Mr. Tzhori's Separation Package as approved by the Company's Audit Committee and Board of Directors, and in accordance with the Company's Compensation Policy.
 
Employment Agreements
 
We maintain written employment agreements with our employees, including all of our executive officers, that contain customary provisions, including non-compete and confidentiality agreements.
 
Effective May 26, 2015 we entered into an amended employment agreement with Mr. Amit, Chief Executive Officer and our former Chairman of the Board of Directors. Under his amended employment agreement, as approved by our shareholders in August 2015, Mr. Amit increased of his scope of services provided to the Company - from 75% to 90%. His compensation includes: (i) an annual base salary in the amount of $313,133; and (ii) an annual performance-based bonus. Our Compensation Committee, Board of Directors and shareholders approved a three-year Cash Bonus Plan for Mr. Amit for the years 2015-2017, such that Mr. Amit's annual on target cash bonus for the years 2015-2017 shall be equal to six monthly salaries, conditioned upon his performance in each of these years measured against criteria pre-determined by our Compensation Committee and Board of Directors with respect to the applicable year. Pursuant to such Cash Bonus Plan and in line therewith, in 2017, Mr. Amit received a cash bonus for the year 2016, in a sum of 164,941.
 
Further, Mr. Amit's amended agreement contains confidentiality provisions for the term of Mr. Amit's services and thereafter, and non-compete provisions for the term of Mr. Amit's services and for a six month period after the termination of his services. It provides that all intellectual property developed by Mr. Amit, or in which he took part, during or in connection with his services, is our sole property. It may be terminated by the Company at any time, by written notice of termination delivered to Mr. Amit six months in advance. We may, however, immediately terminate the engagement of Mr. Amit in various circumstances, including a breach of fiduciary duty.
 
As Mr. Amit may be deemed, together with the Priortech Founding Members, to control the Company (as a result of the Voting Agreement, pursuant to which Mr. Amit, together with the Priortech Founding Members, may be deemed to control Priortech, our principal shareholder), in accordance with the Companies Law, his terms of employment must be approved by the Company's shareholders at least once every three years, and, accordingly, will be brought for shareholder approval in our 2018 annual general meeting of shareholders.
 
Mr. Amit does not receive any additional compensation in respect of his services as a member of our Board of Directors.
 
42

 
C.
Board Practices
 
Corporate Governance Practices
 
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Companies Law, relating to matters such as external directors, audit committee, internal auditor and approvals of interested parties transactions. These matters are in addition to the Nasdaq Rules and other relevant provisions of U.S. securities laws. Under applicable Nasdaq Rules, a foreign private issuer such as us may generally follow its home country rules of corporate governance in lieu of comparable Nasdaq Rules, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members; See Item 3.D above – "Risk Factors - As a foreign private issuer we are exempt from certain requirements and corporate governance practices imposed by the SEC and Nasdaq, which may result in less protection for investors". For information regarding home country rules followed by us see Item 16G – below "Corporate Governance".
 
General Board Practices
 
Our Articles provide that our Board of Directors shall consist of not less than five and not more than ten directors, including the external directors. Currently, our board consists of six members; Each of Messrs. Rafi Amit, Yotam Stern and Eran Bendoly were re-appointed at our 2017 annual general meeting of shareholders, following their recommendation by the Company's independent directors, and are each serving an approximately one-year term, which is due to expire at our 2018 annual general meeting of shareholders. As Mr. Eran Bendoly is considered an independent director under the Nasdaq Rules, he did not participate in the recommendation with respect to his nomination. In addition, following the recommendation of our Nomination Committee and Board of Directors, our shareholders approved, at our 2017 Annual General Meeting of shareholders, the appointment of Mr. Moti Ben-Arie as a member of our Board of Directors, following which the Board appointed him as Chairman of the Board. Our two additional directors, Ms. Gabi Heller and Mr. Rafi Koriat, serve as external directors in accordance with the Companies Law.

In accordance with the Companies Law, our Board of Directors retains all the powers in managing our Company that are not specifically granted to the shareholders; for example, the board may make decisions to borrow money for our Company, and may set aside reserves out of our profits, for whatever purposes it thinks fit.

The Board of Directors may pass a resolution when a quorum is present (in person or via telecommunication), and by a vote of at least a majority of the directors present when the resolution is put to vote. A quorum is defined as at least a majority of the directors then in office who are lawfully entitled to participate in the meeting but not less than two directors. The Chairman of the Board is elected and removed by the board members. Minutes of the meetings of the Board of Directors are recorded and kept at our offices. In addition, the Board of Directors may pass a resolution by way of a written resolution signed by all members of our Board of Directors.

The Board of Directors may, subject to the provisions of the Companies Law, appoint a committee of the Board and delegate to such committee all or any of the powers of the Board, as it deems appropriate. Notwithstanding the foregoing and subject to the provisions of the Companies Law, the Board may, at any time, amend, restate or cancel the delegation of any of its powers to any of its committees. Our Board of Directors has appointed an Audit Committee, a Compensation Committee and a Nomination Committee; for information regarding the duties, responsibilities and composition of each of our committees, see Item 6.C below – "Committees of the Board of Directors".
 
43


Our Articles provide that any director may appoint as an alternate director, by written notice to us or to the Chairman of the Board, any individual who is qualified to serve as director and who is not then serving as a director or alternate director for any other director. An alternate director has all of the rights and obligations of a director, excluding the right to appoint an alternate for himself. Currently no alternate directors serve on our board.
 
Election, Terms and Skills of Directors
 
Directors, other than external directors, are elected by a resolution of the shareholders at the annual general meeting and serve until the conclusion of the next annual general meeting of the shareholders, unless earlier terminated in the event of such director’s death, resignation, bankruptcy, incapacity or removal by a resolution of the shareholders.

According to the Companies Law, a person who does not possess the skills required and the ability to devote the appropriate time to the performance of the office of director in a company, taking into consideration, among other things, the special requirements and size of that company, shall neither be appointed as a director nor serve as a director in a public company. A public company shall not summon a general meeting the agenda of which includes the appointment of a director, and a director shall not be appointed, unless the candidate has submitted a declaration that he or she possesses the skills required and the ability to devote the appropriate time to the performance of the office of director in the company, that sets forth the aforementioned skills and further states that the limitations set forth in the Companies Law regarding the appointment of a director do not apply in respect of such candidate.
 
A director who ceases to possess any qualification required under the Companies Law for holding the office of director or who becomes subject to any ground for termination of his/her office must inform the company immediately and his/her office shall terminate upon such notice.
 
Independent Directors
 
Under the Nasdaq Rules, a majority of our directors is required to be independent. The independence standard under the Nasdaq Rules excludes, among others, any person who is: (i) a current or former (at any time during the past three years) employee of a company or its affiliates; or (ii) an immediate family member of an executive officer (at any time during the past three years) of a company or its affiliates. Ms. Gabi Heller and Messrs. Rafi Koriat, Eran Bendoly and Moti Ben Arie qualify as independent directors under the Nasdaq Rules.
 
External Directors
 
Under the Companies Law, we are required to appoint at least two external directors. Each committee of a company's board of directors which is authorized to exercise the board of directors' authorities is required to include at least one external director, except for the audit committee and the compensation committee, which are required to include all of the external directors.
 
Qualification. To qualify as an external director, an individual or his or her relative, partner, employer, any person to whom such person is directly or indirectly subject to, or any entity under his or her control may not have, as of the date of appointment, or may not have had during the previous two years, any affiliation with the company, any entity controlling the company on the date of the appointment or with any entity controlled, at the date of the appointment or during the previous two years, by the company or by its controlling shareholder (and in a company that does not have a shareholder or an affiliated group of shareholders holding 25% or more of the company's voting rights, such person may not have any affiliation with any person who, at the time of appointment, is the chairman, the chief executive officer, the chief financial officer or a 5% shareholder of the company). In general, the term "affiliation" includes: an employment relationship, a business or professional relationship maintained on a regular basis, control and service as an office holder; "Control" is defined in the Israeli Securities Law as the ability to direct the actions of a company but excluding a power that is solely derived from a position as a director of the company or any other position with the company; a person who is holding 50% or more of the "controlling power" in the company – voting rights or the right to appoint a director or a general manager – is automatically considered to possess control. The Companies Law defines the term "office holder" of a company to include a director, the chief executive officer, an executive vice president, a vice president, any other person fulfilling or assuming any of the foregoing positions without regard to such person's title, and any manager who is directly subordinated to the chief executive officer.
 
44

 
In addition, no person can serve as an external director if the person's position or other business creates, or may create conflicts of interest with the person's responsibilities as an external director or may otherwise interfere with the person's ability to serve as an external director. Until the lapse of two years from termination of office, a company or its controlling shareholder may not give any direct or indirect benefit to a former external director.

Election and Term of External Directors. External directors are elected by a majority vote at a shareholders' general meeting, provided that either:
 
·
a majority of the shares voted at the meeting, which are not held by controlling shareholders or shareholders with personal interest in approving the appointment (excluding personal interest not resulting from contacts with the controlling shareholder), not taking into account any abstentions, vote in favor of the election; or
 
·
a vote in which the total number of shares voting against the election of the external director,  does not exceed two percent of the aggregate voting rights in the company.
 
In a company in which, at the date of appointment of an external director, all the directors are of the same gender, the external director to be appointed shall be of the other gender.
 
An external director can be removed from office only by: (i) the same majority of shareholders that is required to elect an external director; or (b) a court, and provided that either (a) the external director ceases to meet the statutory qualifications with respect to his or her appointment, or (b) the external director violates his or her duty of loyalty to the company. The court may also remove an external director from office if he or she is unable to perform his or her duties on a regular basis.
 
An external director who ceases to possess any qualification required under the Companies Law for holding the office of an external director must inform the company immediately and his/her office shall terminate upon such notice.

In general, external directors serve a three-year term, which may then be extended for two additional three-year periods. Thereafter, in accordance with regulations promulgated under the Companies Law, an external director may be appointed for additional terms of service of not more than three years each provided that: (a) a company's audit committee, followed by the board of directors, have approved that considering the expertise and special contribution of the external director to the work of the board of directors and its committees, the appointment for an additional term of service is beneficial to the company; (b) the appointment for an additional term of service is approved in accordance with the requirements of the Companies Law; and (c) the prior periods of service of such external director, as well as the reasoning of the audit committee and board of directors for the approval of the extension of the term of service, were presented to the shareholders prior to their approval.
 
Re-election of an external director may be effected through one of the following mechanisms:

·
a shareholder holding one percent or more of a company's voting rights proposed the re-election of the nominee;
 
·
the board of directors proposed the re-election of the nominee and the election was approved by the shareholders by the majority required to appoint external directors for their initial term; or
 
·
the external director who is up for renewal has proposed himself or herself for re-election.
 
 
45


With respect to mechanisms 1 and 3 above, the re-election is required to fulfill all of the following terms: (i) to be approved by a majority of the votes cast by the shareholders of the Company, excluding the votes of controlling shareholders and shareholders who have a personal interest in approving such nomination resulting from their relations with the controlling shareholders; (ii) to include votes cast in favor of the re-election by such non-excluded shareholders constituting more than two percent of the voting rights in the Company; and (iii) the external director is not a related or competing shareholder or a relative of such a related or competing shareholder, at the time of the appointment, and does not and did not have any affiliation with a related or competing shareholder, at the time of the appointment or within the two years preceding the appointment. A "related or competing shareholder" is a shareholder proposing the re-appointment or a shareholder holding 5% or more of the outstanding shares or voting rights of the company, provided that at the time of the re-appointment, such shareholder, a controlling shareholder thereof or a company controlled by such shareholder or by a controlling shareholder thereof, have business relationships with the Company or are competitors of the Company.
 
Financial and Accounting Expertise. Pursuant to the Companies Law and regulations promulgated there under, (1) each external director must have either "accounting and financial expertise" or "professional qualifications" and (2) at least one of the external directors must have "accounting and financial expertise". A director with "accounting and financial expertise" is a director whose education, experience and skills qualifies him or her to be highly proficient in understanding business and accounting matters and to thoroughly understand the company's financial statements and to stimulate discussion regarding the manner in which financial data is presented. A director with "professional qualifications" is a person who meets any of the following criteria: (i) has an academic degree in economics, business management, accounting, law, public administration; (ii) has a different academic degree or has completed higher education in an area relevant to the company's business or which is relevant to his or her position; or (iii) has at least five years' experience in any of the following, or has a total of five years' experience in at least two of the following: (A) a senior position in the business management of a corporation with substantial business activities, (B) a senior public position or a senior position in the public service, or (C) a senior position in the company's main fields of business.
 
Compensation. An external director is entitled to compensation as provided in the Remuneration Regulations and is otherwise prohibited from receiving any other compensation, directly or indirectly, from the Company. For more information, please see "Remuneration of Directors" below.

Our External Directors. Ms. Gabi Heller and Mr. Rafi Koriat were initially appointed as our external directors in September 2006. They served three consecutive three-year terms which expired in September of each of the years 2009, 2012 and 2015. Following resolutions by our Audit Committee and Board of Directors, to approve and to recommend that, considering the expertise and special contribution of each of Ms. Heller and Mr. Koriat to the work of the Board of Directors and its committees, the appointment of each of them for an additional term as external director would be beneficial to the Company, Ms. Gabi Heller and Mr. Rafi Koriat were re-elected at our 2015 annual general meeting of shareholders for a further three-year-term, which will expire in September 2018. Our Board of Directors has determined that Ms. Heller has the "accounting and financial expertise" and that Mr. Koriat has the "professional qualifications" required by the Companies Law.
 
Remuneration of Directors
 
Generally, directors' remuneration should be consistent with a company’s compensation policy for office holders (see "Compensation Policy" below) and requires the approval of the compensation committee, the board of directors and the shareholders (in that order). Notwithstanding the above, in certain circumstances shareholder approval may be waived (see below) and, under different circumstances, the compensation committee and the board of directors may approve an arrangement that deviates from the compensation policy, provided that such arrangement is approved by a special majority of the company's shareholders, including (i) at least a majority of the shareholders, present and voting (abstentions are disregarded), who are not controlling shareholders and who do not have a personal interest in the matter, or (ii) the non-controlling shareholders and shareholders who do not have a personal interest in the matter who were present and voted against the matter hold two percent or less of the voting power of the Company.
 
According to the Remuneration Regulations, external directors are generally entitled to an annual fee, a participation fee for each meeting of the board of directors or any committee of the board on which he or she serves as a member, and reimbursement of travel expenses for participation in a meeting which is held outside of the external director's place of residence. The minimum, fixed and maximum amounts of the annual and participation fees are set forth in the Remuneration Regulations, based on the classification of the company according to the amount of its capital. The remuneration of external directors must be made known to the candidate for such office prior to his/her appointment and, subject to certain exceptions, will not be amended throughout the three-year period during which he or she is in office. A company may also compensate an external director in shares or rights to purchase shares, other than convertible debentures which may be converted into shares, in addition to the annual and participation remuneration and the reimbursement of expenses, subject to certain limitations set forth in the Remuneration Regulations.
 
46

 
According to regulations promulgated under the Companies Law with respect to relief in approval of certain related party transactions (the "Relief Regulations"), shareholders' approval for directors’ compensation and employment arrangements is not required if both the Compensation Committee and the board of directors resolve that either (i) the directors’ compensation and employment arrangements are solely for the benefit of the company or (ii) the remuneration to be paid to any such director does not exceed the maximum amounts set forth in the Remuneration Regulations. Further, according to the Relief Regulations, shareholders' approval for directors' compensation and employment arrangements is not required if (i) both the Compensation Committee and the board of directors resolve that such terms (a) are not more beneficial than the former terms, or are essentially the same in their effect; and (b) are in line with the company's compensation policy; and (ii) such terms are brought for shareholder approval at the next general meeting of shareholders. Also, according to the Remuneration Regulations, shareholder's approval may be waived if the remuneraon to be paid to the external directors is between the fixed and maximum amounts set forth in such regulations. 
 
We pay each of our external and independent directors (all Board members except for Mr. Amit and Mr. Stern), for their service as directors and their participation in each meeting of the Board or Board's committees, a fixed annual fee, a fixed participation fee and reimbursement of expenses. These cash amounts are subject to annual adjustments for changes in the Israeli consumer price index and in the classification of the Company according to the amount of its capital, and currently stand at: NIS 70,280 (approximately $20,270) as annual fee, NIS 2,540 (approximately $733) as in-person participation fee, NIS 1,524 (approximately $440) for conference call participation and NIS 1,270 (approximately $366) for written resolutions. Messrs. Rafi Amit and Yotam Stern do not receive any payment with respect to their service as our directors. As payment is made in the accordance with the fixed fees under the Remuneration Regulations – no shareholder approval is required for payment of such fees.
 
In addition, in previous years we have granted options to our directors. The following table sets forth the options granted to each of our directors, exercisable as of March 12, 2018:
 
Name
Number of Options Exercisable as of March 12, 2018
Rafi Amit
121,193
Yotam Stern
30,000
 
The options were granted pursuant to our then in effect option plan and in accordance with the grant terms included therein. For additional information regarding the main terms of the option grants, please see item 6.E below – "Share Ownership – Option Plans and Restricted Share Unit Plan"
 
Committees of the Board of Directors
 
Audit Committee
 
SEC and Nasdaq Requirements. In accordance with the Exchange Act, rules of the SEC under the Exchange Act and Nasdaq Rules, we are required to have an audit committee consisting of at least three directors, each of whom is (i) independent; (ii) does not receive any compensation from the Company (other than directors' fees); (iii) is not an affiliated person of the Company or any of its subsidiaries; (iv) has not participated in the preparation of the Company's (or subsidiary's) financial statements during the past three years; and (v) financially literate and one of whom has been determined by the board to be the audit committee financial expert. The duties and responsibilities of the audit committee under the Nasdaq Rules include: (i) recommending the appointment of the Company's independent auditor to the board of directors, determining its compensation and overseeing the work performed by it; (ii) pre-approving all services of the independent auditor; (iii) overseeing our accounting and financial reporting processes and the audits of our financial statements; and (iv) handling complaints relating to accounting, internal controls and auditing matters.
 
47

 
We have adopted an audit committee charter as required by the Nasdaq Rules.
 
Companies Law Requirements. Under the Companies Law, the board of directors of any Israeli company whose shares are publicly traded must appoint an audit committee, comprised of at least three directors including all of the external directors. In addition, the majority of the members must meet certain independence criteria and may not include: (i) the chairman of the board; (ii) any controlling shareholder or a relative thereof; (iii) any director employed by or providing services or a regular basis to the Company, a controlling shareholder or a company owned by a controlling shareholder; or (iv) any director whose main income is provided by a controlling shareholder (the "Non-Permitted Members"). The chairman of such audit committee must be an external director.

The duties and responsibilities of our audit committee under the Companies Law include (1) identification of irregularities and deficiencies in the management of our business, in consultation with the internal auditor and our independent auditors, and suggesting appropriate courses of action to amend such irregularities; (2) reviewing and approval of certain transactions and actions of the Company, including the approval of related party transactions, that require approval by the audit committee under the Companies Law; defining whether certain acts and transactions that involve conflicts of interest are material or not and whether transactions that involve conflict of interests are material or not and whether transactions that involve interested parties are extraordinary or not, and to approve such transactions; (3) determining with respect to transactions with controlling shareholders, even if such are not extraordinary transactions, a duty to conduct a competitive process, under the supervision of the committee or under the supervision of whomever designated by the committee and according to standards determined by the committee, or determining other proceedings, prior to entering into such transactions, all in accordance with the type of transaction; (4) determining the method of approval of transactions which are not insignificant, including the types of transactions which shall require approval of the committee; (5) recommending the appointment of the internal auditor and its compensation to the board of directors; (6) examining the performance of our internal auditor and whether he is provided with the required resources and tools necessary for him to fulfill his role, considering, among others, the Company's size and special needs; and (7) setting procedures for handling complaints made by Company's employees in connection with management deficiencies and the protection to be provided to such employees.
 
Non Permitted Members shall not attend audit committee's meetings or take part in its decisions, unless the chairman of the audit committee has determined that such person is required for the presentation of a certain matter. Nevertheless, an employee who is not a controlling shareholder or a relative thereof may be present at the discussion part only, pursuant to the Committee's request, and the Company's legal counsel and secretary, who are not controlling shareholders or relatives thereof, may be present during both discussion and decision making parts - pursuant to the Committee's request.
 
The quorum for discussions and decisions shall be the majority of the members, provided that the majority of the members present meet the independence criteria set forth in the Companies Law and at least one of them is an external director.
 
Our Audit Committee. The members of our Audit Committee are Ms. Gabi Heller and Messrs. Eran Bendoly and Rafi Koriat; all of whom are independent directors in accordance with Nasdaq Rules. Mr. Bendoly and Ms. Heller qualify as financial experts while Ms. Heller and Mr. Koriat qualify as external directors and meet the independence criteria set forth in the Companies Law. Mr. Koriat is the Chairman of our Audit Committee.
 
Compensation Committee
 
Nasdaq Requirements. Under Nasdaq Rules, the compensation payable to our executive officers must be determined or recommended to the board for determination either by a majority of the independent directors on the board, in a vote in which only independent directors participate, or by a compensation committee comprised solely of independent directors, subject to certain exceptions. As all of the members of our Audit Committee meet the independence requirements for compensation committee members set forth in the Nasdaq Rule 5605(d)(2), as a foreign private issuer, we have elected, pursuant to Nasdaq Rule 5615(a)(3), to follow Israeli practice, in lieu of compliance with the certain provisions of NASDAQ Listing Rule 5605(d), which would require us to have a separate compensation committee (see below).
 
48

 
Companies Law Requirements. We follow the provisions of the Companies Law with respect to the composition and responsibilities of our Compensation Committee, office holder compensation and any required approval of such compensation by our shareholders.
 
According to the Companies Law, the board of directors of any Israeli company whose shares are publicly traded, must appoint a compensation committee, comprised of at least three directors, including all of the external directors which shall be the majority of its members and one thereof must serve as the chairman of the committee. The remaining members of the committee must satisfy the criteria for remuneration applicable to the external directors and qualified to serve as members of the audit committee pursuant to Companies Law requirements, as described above.
 
Further, under the Companies Law, a compensation committee is responsible for: (i) making recommendations to the board of directors with respect to the approval of the compensation policy (see below - "Compensation Policy") and any extensions thereto; (ii) periodically reviewing the implementation of the compensation policy and providing the board of directors with recommendations with respect to any amendments or updates thereto; (iii) reviewing and resolving whether or not to approve arrangements with respect to the terms of office and employment of office holders; and (iv) determining whether or not to exempt a transaction with a candidate for chief executive officer, who is not affiliated with the Company or its controlling shareholder, from shareholder approval if subjection of such transaction to shareholder approval may prevent its conclusion, and provided that the terms approved are consistent with the compensation policy.

The attendance and participation in meetings of the compensation committee are subject to the same limitations that apply to the Audit Committee. The quorum for discussions and decisions shall be the majority of the members, provided that those members present are independent directors and at least one of them is an external director.

Our Compensation Committee. Pursuant to the Companies Law, an audit committee that satisfies the requirements of the Companies Law regarding the composition of a compensation committee, may be authorized to carry out all duties and responsibilities of the compensation committee. Accordingly, our Board of Directors has authorized our Audit Committee to carry out the duties and responsibilities of the compensation committee. This practice is compliant with Israeli law and, as a foreign private issuer, we have elected, pursuant to NASDAQ Rule 5615(a)(3), to follow Israeli practice, in lieu of compliance with NASDAQ Rule 5605(d), requiring us to have a separate compensation committee.
 
Nomination Committee
 
The Nasdaq Rules require that director nominees be selected or recommended for the board's selection either by a nomination committee composed solely of independent directors or by a majority of independent directors, in a vote in which only independent directors participate, subject to certain exceptions. In January 2017 our Board of Directors appointed a Nomination Committee, comprised of our two external directors, Ms. Heller and Mr. Koriat. Following such appointment, our Nomination Committee has assumed the responsibility for recommending to the Board nominees for election (including re-election) to the Company's Board of Directors, in lieu of the recommendation by our independent directors.
 
As approved by our Board of Directors and consistent with the requirements of the Nasdaq Rules, our Nomination Committee is responsible for: (i) identifying potential new candidates for membership on the Company's Board of Directors, taking into account, inter alia, the candidate's applicable experience, expertise and/ or familiarity with the Company's field of business, as well as the candidate's ethical character, independent judgment and industry reputation; (ii) conducting appropriate inquiries into the backgrounds and qualifications of potential candidates; and (iii) reviewing and resolving whether or not to approve arrangements with respect to candidates for appointment (or re-appointment) to the Company's Board of Directors.
 
49

 
Approval of Office Holders Terms of Employment
 
The terms of office and employment of office holders (other than directors and the chief executive officer) require the approval of the compensation committee and the board of directors, provided such terms are in accordance with the company's compensation policy. Shareholder approval is also required if the compensation of such officer is not in accordance with such policy. However, in special circumstances the compensation committee and then the board of directors may nonetheless approve such compensation even if such compensation was not approved by the shareholders, following a further discussion and for detailed reasoning.
 
The terms of office and employment of directors, the chief executive officer or controlling shareholders (or a relative thereof), regardless of whether such terms conform to the company's compensation policy or not - should be approved by the compensation committee, the board of directors and the shareholders, by a special majority, except for: (a) approval of terms of office and employment of directors, which are consistent with the company's compensation policy, and require shareholder approval by a regular majority; or (b) approval of terms of office and employment of directors pursuant to certain reliefs provided for under the Remuneration Regulations  and/or the Relief Regulations, with respect to which shareholder approval is waived. Shareholder special majority should include (i) at least a majority of the shareholders who are not controlling shareholders and who do not have a personal interest in the matter, present and voting (abstentions are disregarded), or (ii) the non-controlling shareholders and shareholders who do not have a personal interest in the matter who were present and voted against the matter hold two percent or less of the voting power of the company ("Special Majority"). Notwithstanding the above, in special circumstances the compensation committee and then the board of directors may nonetheless approve compensation for the chief executive officer, even if such compensation was not approved by the shareholders, following a further discussion and for detailed reasoning.
 
In addition, amendment of existing terms of office and employment of office holders who are not directors requires the approval of the compensation committee only, if the compensation committee determines that the amendment is not material.
 
Compensation Policy
 
Under the Companies Law we are required to adopt a compensation policy, which sets forth company policy regarding the terms of office and employment of office holders, including compensation, equity awards, severance and other benefits, exemption from liability and indemnification, and which takes into account, among other things, providing proper incentives to directors and officers, management of risks by the company, the officer's contribution to achieving corporate objectives and increasing profits, and the function of the officer or director.
 
Our Compensation Policy is designed to balance between the importance of incentivizing office holders to reach personal targets and the need to assure that the overall compensation meets our Company's long-term strategic performance and financial objectives. The Policy provides our Compensation Committee and our Board of Directors with adequate measures and flexibility to tailor each of our office holder's compensation package based, among other matters, on geography, tasks, role, seniority and capability. Moreover, the Policy is intended to motivate our office holders to achieve ongoing targeted results in addition to a high level business performance in the long term, without encouraging excessive risk taking.
 
The compensation policy and any amendments thereto must be approved by the board of directors, after considering the recommendations of the compensation committee, and by a Special Majority of our shareholders. The compensation policy must be reviewed from time to time by the board, and must be re-approved or amended by the board of directors and the shareholders no less than every three years. If the compensation policy is not approved by the shareholders, the compensation committee and the board of directors may nonetheless approve the policy, following further discussion of the matter and for detailed reasons.
 
Our Compensation Policy for office holders was originally approved by our shareholders at a special general meeting of shareholders held in October 2013, following the favorable recommendation of the Compensation Committee and approval by the Board of Directors. The Compensation Policy was amended three times since; in November 2014 our shareholders approved an increase of the maximum yearly equity value which may be granted to any of our office holders, in August 2015 our shareholders approved an amendment increasing the maximum annual salary which may be granted to our Chief Executive Officer, and in November 2016 our shareholders approved certain additional amendments to our Compensation Policy, mainly: (1) allowing the Company's Chief Executive Officer to approve insignificant changes in the terms of office and employment of executives (i.e., not exceeding 5% of the aggregate value of the total cash compensation for such calendar year) who are directly subordinated to him, without the need for Compensation Committee approval, provided that such changes are in accordance with the Compensation Policy; (2) increasing the cap for the portion of the targets for annual bonuses of executives (other than our Chief Executive Officer) which may be based on non-measurable criteria, up to 50%; and (3) with respect to our Chief Executive Officer – setting the cap for the portion of the targets for his annual bonuses which may be based on non-measurable criteria, at 50%, provided however, that such portion shall not exceed three monthly salaries.
 
50

 
Approval of Certain Transactions with Related Parties
 
The Companies Law requires the approval of the audit committee or the compensation committee, thereafter the approval of the board of directors and in certain cases — the approval of the shareholders, in order to effect specified actions and extraordinary transactions, such as the following:
 
·
transactions with office holders and third parties - where an office holder has a personal interest in the transaction;
 
·
employment terms of office holders; and
 
·
extraordinary transactions with controlling parties, and extraordinary transactions with a third party -where a controlling party has a personal interest in the transaction, or any transaction with the controlling shareholder or his relative regarding terms of service - provided directly or indirectly (including through a company controlled by the controlling shareholder) - and terms of employment (for a controlling shareholder who is not an office holder). A "relative" is defined in the Companies Law as spouse, sibling, parent, grandparent, descendant, spouse's descendant, sibling or parent and the spouse of any of the foregoing.
 
Such extraordinary transactions with controlling shareholders require the approval of the audit committee, or the compensation committee, the board of directors and the majority of the voting power of the shareholders present and voting at the general meeting of the company (not including abstentions), provided that either:
 
·
the majority of the shares of shareholders who have no personal interest in the transaction and who are present and voting, vote in favor; or
 
·
shareholders who have no personal interest in the transaction who vote against the transaction do not represent more than two percent of the aggregate voting rights in the company.
 
Any shareholder participating in the vote on approval of an extraordinary transaction with a controlling shareholder must inform the company prior to the voting whether or not he or she has a personal interest in the approval of the transaction, and if he or she fails to do so, his or her vote will be disregarded.
 
Further, such extraordinary transactions as well as any transactions with a controlling shareholder or his relative concerning terms of service or employment need to be re-approved no less than every three years provided however that with respect to certain such extraordinary transactions the audit committee may determine that a longer duration is reasonable given the circumstances related thereto and such extended period has been approved by the shareholders.
 
In accordance with regulations promulgated under the Companies Law, certain defined types of extraordinary transactions between a public company and its controlling shareholder(s) are exempt from the shareholder approval requirements.
 
In addition, the approval of the audit committee, followed by the approval of the board of directors and the shareholders, is required to effect a private placement of securities, in which either: (i) 20% or more of the company's outstanding share capital prior to the placement is offered, and the payment for which (in whole or in part) is not in cash, in tradable securities registered in a stock exchange or not under market terms, and which will result in an increase of the holdings of a shareholder that holds 5% or more of the company's outstanding share capital or voting rights or will cause any person to become, as a result of the issuance, a holder of more than 5% of the company's outstanding share capital or voting rights or (ii) a person will become a controlling shareholder of the company.
 
51

 
A "controlling shareholder" is defined in the Israeli Securities Law and in the Companies Law for purposes of the provisions governing related party transactions as a person with the ability to direct the actions of a company but excluding a person whose power derives solely from his or her position as a director of the company or any other position with the company, and with respect to approval of transactions with related parties also a person who holds 25% or more of the voting power in a public company if no other shareholder owns more than 50% of the voting power in the company, and provided that two or more persons holding voting rights in the company, who each have a personal interest in the approval of the same transaction, shall be deemed to be one holder for the evaluation of their holdings with respect to approval of transactions with related parties.
 
Compensation committee approval is also required and thereafter, in most cases, the approval of the board of directors (and in certain cases – the additional approval of the shareholders) to approve the grant of an exemption from the responsibility for a breach of the duty of care towards the company, for the provision of insurance and for an undertaking to indemnify any office holder of the company; see below under "Insurance, Indemnification and Exemption".
 
Duties of Office Holders and Shareholders
 
Duties of Office Holders
 
Fiduciary Duties
 
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company, including directors and officers. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty includes avoiding any conflict of interest between the office holder's position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others, and revealing to the company any information or documents relating to the company's affairs which the office holder has received due to his position as an office holder.
 
The company may approve an action by an office holder from which the office holder would otherwise have to refrain due to its violation of the office holder's duty of loyalty if: (i) the office holder acts in good faith and the act or its approval does not cause harm to the company, and (ii) the office holder discloses the nature of his or her interest in the transaction to the company a reasonable time before the company's approval.
 
Each person listed in the table under "Directors and Senior Management" above is considered an office holder under the Companies Law (for definition of "office holder" under the Companies Law see above under "External directors" – "Qualification").
 
Disclosure of Personal Interests of an Office Holder
 
The Companies Law requires that an office holder of a company promptly disclose any personal interest that he or she may and all related material information and documents known to him or her relating to any existing or proposed transaction by the company. If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by the office holder's spouse, siblings, parents, grandparents, descendants, spouse's siblings, parents and descendants and the spouses of any of these people, or any corporation in which the office holder: (i) holds at least 5% of the company's outstanding share capital or voting rights; (ii) is a director or general manager; or (iii) has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction that is either (i) not in the ordinary course of business; (ii) not on market terms; or (iii) likely to have a material impact on the company's profitability, assets or liabilities.
 
In the case of a transaction which is not an extraordinary transaction, after the office holder complies with the above disclosure requirements, only board approval is required unless the articles of association of the company provide otherwise. The transaction must be for the benefit of the company. If a transaction is an extraordinary transaction, or is with respect to the terms of office and employment then, in addition to any approval stipulated by the articles of association, it also must be approved by the company's audit committee (or with respect to terms of office and employment, the compensation committee) and then by the board of directors, and, under certain circumstances, by a meeting of the shareholders of the company. A director who has a personal interest in a transaction, may be present if a majority of the members of the board of directors or the audit committee (or with respect to terms of office and employment, the compensation committee), as the case may be, has a personal interest. If a majority of the board of directors has a personal interest, then shareholders' approval is also required.
 
52

 
Duties of Shareholders
 
Under the Companies Law, a shareholder has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his or her power over the company, including, among other things, voting in a general meeting of shareholders on any amendment to the articles of association, an increase of the company's authorized share capital, a merger or approval of interested party transactions which require shareholders' approval.
 
In addition, any controlling shareholder, any shareholders who knows that it possess power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a company's articles of association, has the power to appoint or prevent the appointment of an office holder in the company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty but states that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty of fairness, taking into account such shareholder's position.
 
Insurance, Indemnification and Exemption
 
Pursuant to the Companies Law and the Israeli Securities Law, the Israeli Securities Authority is authorized to impose administrative sanctions, including monetary fines, against companies like ours and their officers and directors for certain violations of the Israeli Securities Law (for further details regarding such amendments see in "Administrative Enforcement" below) or the Companies Law; and the Companies Law provides that companies like ours may indemnify their officers and directors and purchase an insurance policy to cover certain liabilities, if provisions for that purpose are included in their articles of association.
 
Our Articles allow the Company to indemnify and insure its office holders to the fullest extent permitted by law.
 
Office Holders' Exemption
 
Under the Companies Law, an Israeli company may not exempt an office holder from liability for a breach of his or her duty of loyalty, but may exempt in advance an office holder from his or her liability to the company, in whole or in part, for a breach of his or her duty of care (except in connection with distributions), provided that the company's articles of association allow it to do so. Our Articles allow us to exempt our office holders to the fullest extent permitted by law.
 
Office Holders' Insurance
 
Our Articles provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of all or part of the liability of any of our office holders imposed on the office holder in respect of an act performed by him or her in his or her capacity as an office holder for, in respect of each of the following:
 
·
a breach of his or her duty of care to us or to another person;
 
·
a breach of his or her duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his or her act would not prejudice our interests; and
 
·
a financial liability imposed upon him or her in favor of another person.
 
Without derogating from the aforementioned, subject to the provisions of the Companies Law and the Israeli Securities Law, we may also enter into a contract to insure an office holder, in respect of expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative proceeding instituted against such office holder or payment required to be made to an injured party, pursuant to certain provisions of the Israeli Securities Law.
 
53

 
Office Holder's Indemnification
 
Our Articles provide that, subject to the provisions of the Companies Law and the Israeli Securities Law, we may indemnify any of our office holders in respect of an obligation or expense specified below, imposed on or incurred by the office holder in respect of an act performed in his capacity as an office holder, as follows:
 
·
a financial liability imposed on him or her in favor of another person by any judgment, including a settlement or an arbitration award approved by a court;
 
·
reasonable litigation expenses, including attorney's fees, incurred by the office holder as a result of an investigation or proceeding instituted against him by a competent authority which concluded without the filing of an indictment against him and without the imposition of any financial liability in lieu of criminal proceedings, or which concluded without the filing of an indictment against him but with the imposition of a financial liability in lieu of criminal proceedings concerning a criminal offense that does not require proof of criminal intent or in connection with a financial sanction (the phrases "proceeding concluded without the filing of an indictment" and "financial liability in lieu of criminal proceeding" shall have the meaning ascribed to such phrases in section 260(a)(1a) of the Companies Law);
 
·
reasonable litigation expenses, including attorneys' fees, expended by an office holder or charged to the office holder by a court, in a proceeding instituted against the office holder by the Company or on its behalf or by another person, 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 an offense that does not require proof of criminal intent; and
 
·
expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative proceeding instituted against such office holder, or payment required to be made to an injured party, pursuant to certain provisions of the Israeli Securities Law.
 
The Company may undertake to indemnify an office holder as aforesaid, (a) prospectively, provided that, in respect of the first act (financial liability) the undertaking is limited to events which in the opinion of the board of directors are foreseeable in light of the Company's actual operations when the undertaking to indemnify is given, and to an amount or criteria set by the board of directors as reasonable under the circumstances, and further provided that such events and amount or criteria are set forth in the undertaking to indemnify, and (b) retroactively; provided, however, that the total aggregate indemnification amount that the Company shall be obligated to pay to all of its Office Holders, for all matters and circumstances described above, shall not exceed an amount equal to twenty five percent (25%) of the shareholders' equity at the time of the indemnification.
 
Limitations on Insurance and Indemnification
 
The Companies Law provides that a company may not insure, exempt or indemnify an office holder for any breach of his or her liability arising from any of the following:
 
a breach by the office holder of his or her duty of loyalty, except that the company may enter into an insurance contract or indemnify an office holder if the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
 
a breach by the office holder of his or her duty of care if such breach was intentional or reckless, but unless such breach was solely negligent;
 
any act or omission done with the intent to derive an illegal personal benefit; or
        
any fine, civil fine, financial sanction or monetary settlement in lieu of criminal proceedings imposed on such office holder.
 
54

 
Under the Companies Law, exemption and indemnification of, and procurement of insurance coverage for, our office holders must be approved by our compensation committee and our board of directors and, with respect to an office holder who is a director also by our shareholders. However, according to the Relief Regulations, shareholders' approval for the procurement of directors' insurance is not required if the insurance policy is approved by our compensation committee and (i) the terms of such policy are within the framework for insurance coverage as approved by our shareholders and set forth in our compensation policy; (ii) the premium paid under the insurance policy is at fair market value; and (iii) the insurance policy does not and may not have a substantial effect on the Company's profitability, assets or obligations. Further, as our insurance coverage includes office holders who are controlling shareholders – namely Mr. Rafi Amit and Mr. Yotam Stern - in accordance with the Relief Regulations, shareholders' approval may be waived, if, in addition to the approval of the compensation committee as set forth above, our board of directors approves all such matters approved by the compensation committee, and both organs approve that the terms of the insurance policy are identical with respect to all office holders, including the controlling shareholders.''
 
Indemnification letters, covering exemption from, indemnification and insurance of those liabilities imposed under the Companies Law and the Israeli Securities Law discussed above, were granted to each of our present office holders and were approved for future office holders. Hence, we indemnify our office holders to the fullest extent permitted under the Companies Law.
 
We currently hold directors' and officers' liability insurance policy for the benefit of our office holders, including our directors. This policy was approved by our Compensation Committee and Board of Directors on November 6, 2017, and did not require shareholder approval as its terms are within the framework set forth under our Compensation Policy, and do not have a substantial effect on the Company's profitability, assets or obligations.
 
Insofar as indemnification for liabilities arising under the United States Securities Act of 1933, as amended, may be permitted to our directors, officers and controlling persons, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
 
Administrative Enforcement

The Israeli Securities Law includes an administrative enforcement procedure to be used by the Israeli Securities Authority, or ISA, to enhance the efficacy of enforcement in the securities market in Israel. This administrative enforcement procedure may be applied to any company or person (including director, officer or shareholder of a company) performing any of the actions specifically designated as breaches of law under the Securities Law. Furthermore, the Israeli Securities Law requires that the Chief Executive Officer of a company supervise and take all reasonable measures to prevent the company or any of its employees from breaching the Israeli Securities Law. The Chief Executive Officer is presumed to have fulfilled such supervisory duty if the company adopts internal enforcement procedures designed to prevent such breaches, appoints a representative to supervise the implementation of such procedures and takes measures to correct the breach and prevent its reoccurrence.

As detailed above, under the Israeli Securities Law, a company cannot obtain insurance against or indemnify a third party (including its officers and/or employees) for any administrative procedure and/or monetary fine (other than for payment of damages to an injured party). The Israeli Securities Law permits insurance and/or indemnification for expenses related to an administrative procedure, such as reasonable legal fees, provided that it is permitted under the company's articles of association.

We have adopted and implemented an internal enforcement plan to reduce our exposure to potential breaches of the Companies Law and sections in the Israeli Securities Law, applicable to us. Our Articles and letters of indemnification permit, among others, insurance and/or indemnification as contemplated under the Israeli Securities Law (see in "Insurance, Indemnification and Exemption" above).
 
55


D.
Employees
 
Employees
 
The following table sets forth for the last three years, the number of our employees engaged in the specified activities at the end of each year:
 
   
As of December 31,
 
   
2017
   
2016
   
2015
 
Executive management          
   
4
     
4
     
4
 
Research and development          
   
66
     
67
     
69
 
Sales support          
   
72
     
64
     
62
 
Sales and marketing          
   
32
     
33
     
36
 
Administration          
   
45
     
45
     
45
 
Operations          
   
55
     
49
     
50
 
                         
Total          
   
274
     
262
     
266
 

The following table sets forth for the last three years, the number of our employees located in the following geographic regions at the end of each year:
 
   
As of December 31,
 
   
2017
   
2016
   
2015
 
China (including Hong Kong)          
   
27
     
24
     
30
 
Taiwan          
   
22
     
23
     
19
 
Japan          
   
3
     
3
     
2
 
Other Asia          
   
30
     
26
     
24
 
Europe          
   
6
     
6
     
5
 
North America          
   
14
     
13
     
14
 
Israel          
   
172
     
167
     
172
 
Total          
   
274
     
262
     
266
 

With respect to our Israeli employees, no collective bargaining agreements apply to our employees. However, by virtue of extension orders, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations, relating primarily to the length of the work day, minimum wages, pension contributions, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment, are applicable to our employees. In accordance with these provisions, the salaries of our Israeli employees are partially indexed to the cost of living expenses in Israel, depending on its applicable rate of increase
 
With respect to our (or any of our subsidiaries) Chinese employees, certain provisions of Chinese Labor Contract Law and Social Insurance Law primarily govern the formation of employer-employee relations, termination of employment, severance pay, worker dispatch, part-time employment and social insurance.
 
We consider our relationship with our employees to be good, and we have never experienced a labor dispute, strike or work stoppage.
 
E.
Share Ownership.
 
The following table sets forth certain information with respect to the beneficial ownership of our outstanding ordinary shares by our directors and executive officers.
 
Beneficial ownership is determined in accordance with the rules of the SEC and generally means sole or shared power to vote or direct the voting or to dispose or direct the disposition of any ordinary shares. Except as indicated by footnote, the persons named in the table below have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them. The percentage of beneficial ownership is based upon 35,930,660 ordinary shares outstanding as of March 12, 2018.
 
56

 
Name
 
Number of Ordinary Shares Owned(1)
   
Percentage of Total Outstanding Ordinary Shares
 
Priortech Ltd.
   
15,667,695
     
43.61
%
Rafi Amit(2)
   
152,476
     
0.42
%
Yotam Stern(3)
   
138,200
     
0.38
%
Gabi Heller(4)
   
*
     
*
 
Rafi Koriat(4)
   
*
     
*
 
Eran Bendoly(4)
   
*
     
*
 
Moti Ben-Arie(4)
   
*
     
*
 
Moshe Eisenberg(4)
   
*
     
*
 
Ramy Langer(4)
   
*
     
*
 
 
 
(1)
 Ordinary shares relating to options currently exercisable or exercisable within 60 days as of March 12, 2018, are deemed outstanding for computing the percentage of the persons holding such securities but are not deemed outstanding for computing the percentage of any other person. As of the date of this Annual Report, the total number of options held by the persons included in the above table that are currently exercisable or exercisable within 60 days as of March 12, 2018, was 294,148
 
 
(2)
Mr. Amit directly owns 24,560 of our ordinary shares. In addition, as a result of a voting agreement relating to a majority of Priortech's voting equity, Mr. Amit may be deemed to control Priortech. As a result, Mr. Amit may be deemed to beneficially own the shares of the Company held by Priortech. Mr. Amit disclaims beneficial ownership of such shares.
 
(3)
Mr. Stern directly owns 108,200 of our ordinary shares. In addition, as a result of a voting agreement relating to a majority of Priortech's voting equity, Mr. Stern may be deemed to control Priortech. As a result, Mr. Stern may be deemed to beneficially own the shares of the Company held by Priortech. Mr. Stern disclaims beneficial ownership of such shares.
 
(4)
Holding less than 1% of our outstanding ordinary shares (including options held by each such person which have vested or will vest within 60 days as of March 12, 2018) and have therefore not been listed separately.
 
Option Plans and Restricted Share Unit Plan
 
General
 
We currently maintain two active share option plans and one restricted share unit plan.
 
The purpose of our option plans and restricted share unit plan is to afford an incentive to our officers, directors, employees and consultants and those of our subsidiaries, to acquire a proprietary interest in us, to increase their efforts on our behalf and to promote the success of our business.
 
Option Plans
 
General. As of December 31, 2017, there were 384,589 outstanding options to acquire our ordinary shares pursuant to our 2003 Share Option Plan at a weighted average exercise price of $3.54, exercisable at various dates through 2021, and 788,844 outstanding options to acquire our ordinary shares under our 2014 Share Option Plan at a weighted average exercise price of $2.44, exercisable at various dates through 2024.
 
Administration of Our Share Option Plans. Our option plans are administered by our Board of Directors. Under these option plans, options to purchase our ordinary shares may be granted to our officers, directors, employees or consultants and those of our subsidiaries. The exercise price of options is determined, under our option plans, by our Board of Directors, and is generally set as the fair market value. The vesting schedule of the options is also determined by the Board of Directors; generally the options vest over a four-year period, with 25% of the options vest on the first anniversary of the vesting start date, an additional 25% of the options to vest on the second anniversary of the Start Date (as defined in the applicable option plan) and the remaining vesting on a monthly basis. Each option granted under the option plans is usually exercisable between its vesting time and up to ten years from the date of the grant of the option, according to the plan under which they were granted and subject to certain early expiration provisions, such as in the event of termination.
 
57

 
The Share Option Plans. In October 2014, we adopted our 2014 Share Option Plan and its corresponding Sub-Plan for Grantees Subject to United States Taxation and Sub-Plan for Grantees Subject to Israeli Taxation, which replaced our 2003 Share Option Plan (expired on June 30, 2014). The total number of options that may be granted under the 2014 Share Option Plan is 3,000,000 options.
 
Future options to be granted by us to our employees, officers, directors and consultants, or those of our affiliates, will only be made pursuant to the 2014 Share Option Plan.
 
As of December 31, 2017, under the 2003 Share Option Plan there were options exercisable and vested for 364,748 ordinary at a weighted average exercise price of $3.52 per share, and unvested options exercisable for 19,841 ordinary shares at a weighted average exercise price of $3.49, and under the 2014 Share Option Plan there were options exercisable and vested for 125,338 ordinary shares at a weighted average exercise price of $2.91, and unvested options exercisable for 663,506 ordinary shares at a weighted average exercise price of $2.33.
 
Restricted Share Unit Plan
 
In August 2007, the Company approved the 2007 Restricted Share Unit Plan (the "RSU Plan"), for the grant of restricted share units ("RSUs"), each of which imparts the right to an ordinary share of the Company, to selected employees, officers, directors and consultants of the Company. The RSU Plan is being administered by our Board of Directors. The RSU Plan is effective until August 2018.
 
Under the RSU Plan, RSUs are granted for no consideration and the exercise price for each grantee is not more than the underlying share's nominal value, unless otherwise determined by the Board. The RSUs vest according to a four-year vesting schedule, with 25% of the shares vest on the first anniversary of the date of grant and the remaining vesting on a quarterly basis, unless otherwise determined by our Board of Directors.

In September 2017, our Audit Committee and Board of Directors approved the grant of 86,500 RSUs to certain office holders and employees of the Company. No RSUs were granted in 2016 and 2015.
 
The total number of RSUs which can be granted pursuant to the RSU Plan is 1,500,000, out of which 583,629 are available for grant as of the date of this Annual Report.
 
Item 7.
Major Shareholders and Related Party Transactions.
 
A.
Major Shareholders.
 
The following table provides information regarding the beneficial ownership of our ordinary shares as of March 12, 2018, held by each person or entity who beneficially owns more than 5% of our outstanding ordinary shares. None of these shareholders has different voting rights than any of the Company's other shareholders.
 
Beneficial Ownership
 
Beneficial ownership is determined in accordance with the rules of the SEC and generally means sole or shared power to vote or direct the voting or to dispose or direct the disposition of any ordinary shares. Except as indicated by footnote, the person named in the table below has sole voting and investment power with respect to all ordinary shares shown as beneficially owned by it. The percentage of beneficial ownership is based upon 35,930,660 ordinary shares outstanding as of March 12, 2018.
 
58

 
   
Number of Ordinary Shares*
   
Percentage
 
Priortech Ltd.(1)
   
15,667,695
     
43.61
%
Yelin Lapidot Holdings Management Ltd. ("Yelin Lapidot") (2)
   
2,823,478
     
7.86
%
Phoenix Holding Ltd. ("Phoenix")(3)
   
1,919,781.59
     
5.34
%
 
(1)
A majority of the voting equity in Priortech Ltd. is subject to a voting agreement. As a result of this agreement, Messrs. Rafi Amit, Yotam Stern, David Kishon, Zehava Wineberg and Hanoch Feldstien and the estates of Itzhak Krell (deceased) and Haim Langmas (deceased), may be deemed to control Priortech Ltd. The voting agreement does not provide for different voting rights for our major shareholder than the voting rights of other holders of our ordinary shares. Priortech's principal executive offices are located at South Industrial Zone, Migdal Ha'Emek 23150, Israel.
 
(2)
Based on the Schedule 13G filed by Yelin Lapidot, Yair Lapidot and Dov Yelin on January 29, 2018, which presented ownership as of December 31, 2017. The 2,823,478 Ordinary Shares reported under such Schedule 13G by Yelin Lapidot are beneficially owned by provident funds managed by Yelin Lapidot Provident Funds Management Ltd. (606,152 Ordinary Shares) and mutual funds managed by Yelin Lapidot Mutual Funds Management Ltd. (2,217,326 Ordinary Shares), each a wholly owned subsidiary of Yelin Lapidot (the "Yelin Lapidot Subsidiaries"). Messrs. Yelin and Lapidot each own 24.38% of the share capital and 25% of the voting rights of Yelin Lapidot, and are responsible for the day-to-day management of Yelin Lapidot. The Yelin Lapidot Subsidiaries operate under independent management and make their own independent voting and investment decisions. Any economic interest or beneficial ownership in any of the Company's Ordinary Shares is held for the benefit of the members of the provident funds or mutual funds, as the case may be. Each of Messrs. Yelin and Lapidot, Yelin Lapidot, and the Yelin Lapidot Subsidiaries disclaims beneficial ownership of the Ordinary Shares covered by the abovementioned Schedule 13G. Yelin Lapidot's principle address is 50 Dizengoff St., Dizengoff Center, Gate 3, Top Tower, 13th floor, Tel Aviv 64332, Israel.
 
(3)
Based on the Schedule 13G filed by Itshak Sharon (Tshuva), Delek Group Ltd. (the "Delek Group") and The Phoenix Holding Ltd. ("Phoenix") on February 19, 2018, which presented ownership as of December 31, 2017. The 1,919,781.59 Ordinary Shares reported under such Schedule 13G by Phoenix are beneficially owned by various direct or indirect, majority or wholly-owned subsidiaries of Phoenix (the "Phoenix Subsidiaries"). The Phoenix Subsidiaries manage their own funds and/or the funds of others, including for holders of exchange-traded notes or various insurance policies, members of pension or provident funds, unit holders of mutual funds, and portfolio management clients.  Each of the Phoenix Subsidiaries operates under independent management and makes its own independent voting and investment decisions. Phoenix is a majority-owned subsidiary of the Delek Group. The majority of Delek Group's outstanding share capital and voting rights are owned, directly and indirectly, by Itshak Sharon (Tshuva) through private companies wholly-owned by him, and the remainder is held by the public. Each of Itshak Sharon (Tshuva), the Delek Group, Phoenix and the Phoenix Subsidiaries disclaims the existence of a group for purposes of Section 13(d) of the Exchange Act, as well as the existence of any beneficial ownership of the Company's Ordinary Shares in excess of their actual pecuniary interest therein. Phoenix's princiapl address is Derech Hashalom 53, Givataim 53454, Israel.
 
B.
Related Party Transactions.
 
Registration Rights Agreement with Priortech
 
On March 1, 2004, we entered into a registration rights agreement providing for us to register with the SEC certain of our ordinary shares held by Priortech. This registration rights agreement may be used in connection with future offerings of our ordinary shares, and includes, among others, the following terms: (a) Priortech is entitled to make up to three demands that we register our ordinary shares held by Priortech, subject to delay due to market conditions; (b) Priortech will be entitled to participate and sell our ordinary shares in any future registration statements initiated by us, subject to delay due to market conditions; (c) we will indemnify Priortech in connection with any liabilities incurred in connection with such registration statements due to any misstatements or omissions other than information provided by Priortech, and Priortech will indemnify us in connection with any liabilities incurred in connection with such registration statements due to any misstatements or omissions in written statements by Priortech made for the purpose of their inclusion in such registration statements; and (d) we will pay all expenses related to registrations which we have initiated, except for certain underwriting discounts or commissions or legal fees, and Priortech will pay all expenses related to a registration initiated at its demand in which we are not participating.
 
59

 
On December 30, 2004, the Registration Rights Agreement with Priortech was amended. The amendment concerns primarily the grant of unlimited shelf registration rights there under to Priortech with respect to its holdings in us, and the assignability of those shelf registration rights to its transferees.
 
On May 13, 2015, following the approval of our Audit Committee and Board of Directors, the Registration Rights Agreement with Priortech was renewed for an additional 5 year period effective as of December 31, 2014.
 
Employment Agreement with Mr. Rafi Amit
 
For a description of the employment agreement with our Chief Executive Officer, Mr. Rafi Amit, see in Item 6.B above - "Compensation – Employment Agreements".
 
C.
Interests of Experts and Counsel.
 
Not applicable.
 
Item 8.
Financial Information.
 
A.
Consolidated Statements and Other Financial Information.
 
 Please see the consolidated financial statements listed in Item 18 for audited consolidated financial statements prepared in accordance with this Item.
 
Legal Proceedings
 
Litigation with Rudolph Technologies Inc.
 
On July 14, 2005, Rudolph filed a lawsuit against the Company in the United States District Court for the District of Minnesota (the "Court"). This suit alleged that the Company's Falcon inspection system infringed Rudolph's U.S. Patent No. 6,826,298 (the "'298 Patent") and sought injunctive relief and damages. After the entry of a jury verdict in Rudolph’s favor and two appeals to the Federal Circuit Court of Appeals, judgment was eventually entered in favor of Rudolph on February 3, 2016 for approximately $14.5 million in damages and plus interest, together amounting to approximately $14.6 million. An injunction also issued preventing Camtek from selling the Falcon or colorable imitations of it in the United States. Camtek has not sold the Falcon in the United States for a number of years.
 
In August 2016 the abovementioned amount of approximately $14.6 million was paid to Rudolph, by forfeiture of a bond that had been posted on Camtek's behalf for the appeal, and a satisfaction of judgment was filed. In connection with such satisfaction of judgment, the Israeli tax authorities contacted the Company regarding a deduction of tax at source in the amount of approximately $2.4 million. Based on the advice of its professional consultants, the Company maintains its position that no tax deduction at source was required in connection with the forfeiture of bond, and is in the process of discussing the issue with applicable Israeli tax authorities. No tax assessment was issued by the tax authorities on the matter.
 
After the first jury verdict in the ‘298 case, Rudolph filed suit in the District of Minnesota alleging that Camtek’s Condor and Gannett inspection products infringed U.S. Patent 7,779,528 (the "'528 Patent") relating to semiconductor wafer inspection technology similar to that described in the ‘298 patent. The Company filed a inter partes reexamination request with the U.S Patent and Trademark Office (the "PTO") seeking reexamination of the '528 Patent. The PTO reexamination was concluded in February 2017 by affirmation of the finding of invalidity on 15 of the 18 claims. The District Court litigation had been stayed at regular three-month intervals pending the outcome of the PTO proceedings. Following the conclusion of the reexamination proceedings, the stay was not renewed on March 1, 2017.
 
60

 
On March 2015, Rudolph initiated a new lawsuit against the Company in the District Court alleging that the Eagle product infringes the '298 Patent in the United States. Rudolph sought a preliminary injunction which was denied, and also sought lost profits and/or reasonable royalty damages for Eagle systems sold by the Company in the United States, along with interest and a possible multiplier of up to three times for willful infringement.
 
In July 2017, the Company reached a settlement with Rudolph relating to the abovementioned pending lawsuits (the "Settlement"). Pursuant to the terms of the Settlement, the Company paid Rudolph a sum of $13,000,000 and each side dismissed its claims against the other, with prejudice. The Settlement further gave the Company a perpetual right to sell its existing products, the Condor, Gannet and Eagle, as well as future products, without any claim of patent infringement from any of the patent families that the Company had been sued on. The Company granted similar rights to Rudolph with respect to the Company's patent for Kerf inspection. In addition, the Company and Rudolph agreed to a quiet period of three years, during which neither party may file any action seeking damages against the other party.
 
We are not a party to any other material legal proceedings.
 
B.
Significant Changes.
 
None.
 
Item 9.
The Offer and Listing.
 
A.
Offer and Listing Details.
 
Price History of Ordinary Shares
 
Since April 22, 2004, the primary trading market for our ordinary shares has been the Nasdaq Global Market. From July 28, 2000 through February 4, 2003, our ordinary shares were listed and traded on the Nasdaq National Market and from February 5, 2003 through April 21, 2004, our ordinary shares were listed and traded on the Nasdaq SmallCap Market (now the Nasdaq Capital Market).

For the period between November 26, 2001 and October 21, 2003, our ordinary shares were also listed on TASE. During such period, the trading activity in our ordinary shares on the TASE was insignificant, and therefore, at our request, our ordinary shares were de-listed from the TASE. In December 2005, we re-listed our ordinary shares on the TASE. In both Nasdaq and TASE our shares are traded under the symbol "CAMT".
 
61

 
The following table sets forth, for the periods indicated, the high and low reported sales prices of our ordinary shares:

   
TASE (1)
   
Nasdaq
 
   
High
   
Low
   
High
   
Low
 
Annual and Quarterly Market Prices
                       
Fiscal Year Ended December 31, 2012:
   
2.85
     
1.36
     
2.77
     
1.35
 
Fiscal Year Ended December 31, 2013:
   
5.45
     
1.37
     
5.75
     
1.34
 
Fiscal Year Ended December 31, 2014:
   
5.64
     
2.80
     
5.40
     
2.90
 
Fiscal Year Ended December 31, 2015:
   
3.51
     
2.08
     
3.67
     
2.12
 
2016:
                               
First Quarter
   
2.19
     
1.70
     
2.15
     
1.70
 
Second Quarter
   
2.16
     
1.88
     
2.34
     
1.81
 
Third Quarter
   
2.98
     
2.10
     
3.01
     
2.03
 
Fourth Quarter
   
3.23
     
2.75
     
3.27
     
2.82
 
Fiscal Year Ended December 31, 2016:
   
3.23
     
1.70
     
3.27
     
1.70
 
2017:
                               
First Quarter
   
4.02
     
3.23
     
4.07
     
3.24
 
Second Quarter
   
7.40
     
3.66
     
7.67
     
3.65
 
Third Quarter
   
5.56
     
4.22
     
5.61
     
4.19
 
Fourth Quarter
   
6.50
     
5.12
     
6.44
     
5.41
 
Fiscal Year Ended December 31, 2017:
   
7.40
     
3.23
     
7.67
     
3.24
 
Monthly Market Prices for the Most Recent Six Months:
                               
September 2017
   
5.13
     
4.44
     
5.20
     
4.50
 
October 2017
   
5.82
     
5.12
     
5.81
     
5.42
 
November 2017
   
6.50
     
5.43
     
6.44
     
5.48
 
December 2017
   
5.89
     
5.34
     
5.89
     
5.41
 
January 2018
   
7.05
     
5.81
     
7.08
     
5.75
 
February 2018
   
7.00
     
6.30
     
6.98
     
6.22
 
 
1)
The closing prices of our ordinary shares on the TASE have been translated into U.S. Dollars, using the daily representative rate of exchange of the NIS to the U.S. dollar, as published by the Bank of Israel for the applicable day of the high/low amount in the specified period.
 
B.
Plan of distribution.
 
Not applicable.
 
C.
Markets.
 
As noted above, the Company's ordinary shares are traded on the Nasdaq Global Market and on TASE under the symbol "CAMT" and we are subject to Israeli securities legislation which applies to companies that are traded in dual listing.
 
D.
Selling Shareholders.
 
Not applicable.
 
E.
Dilution.
 
Not applicable.
 
F.
Expenses of the Issue.
 
Not applicable.
 
Item 10.
Additional Information.
 
A.
Share Capital
 
Not applicable.
62


 
B.
Memorandum and Articles
 
Following is a summary of material information concerning our share capital and a brief description of the material provisions contained in our Memorandum of Association and our Articles, which were last amended in November 2016.
 
Register
 
Our registration number at the Israeli registrar of companies is 51-123543-4.

Objectives and Purposes

Our Memorandum of Association and Articles provide that our purpose is to engage in any legal business and may contribute a reasonable amount for a worthy cause, even if such contribution is not within the framework of the Company's business considerations.

Share Capital
 
Our authorized share capital consists of one class of shares, which are our ordinary shares. Out of our authorized share capital of 100,000,000 ordinary shares, par value NIS 0.01 per ordinary share, 35,832,131 ordinary shares were outstanding and fully-paid as of December 31, 2017.

The ordinary shares do not have preemptive rights. The ownership and voting of our ordinary shares are not restricted in any way by our Articles, or by the laws of the State of Israel, except for shareholders who are citizens of countries in a state of war with Israel. Under the Companies Law, Israeli companies may purchase and hold their own shares, subject to the same conditions that apply to distribution of dividends (see Item 10.B below - "Dividend and Liquidation Rights"). These shares do not confer any rights whatsoever for as long as they are held by us. Additionally, a subsidiary may purchase or hold shares of its parent company to the same extent that the parent company is entitled to purchase its own shares, and these shares do not confer any voting rights for as long as they are held by the subsidiary.
 
Transfer of Shares
 
Ordinary shares are issued in registered form. Ordinary shares registered on the books of the transfer agent in the United States may be freely transferred on the transfer agent's books.
 
Dividend and Liquidation Rights
 
Our Board of Directors may, without seeking shareholder approval, declare a dividend to be paid to the holders of ordinary shares out of our retained earnings or our earnings derived over the two most recent years, whichever is higher, as reflected in the last audited or reviewed financial report prepared less than six months prior to distribution, provided that there is no reasonable concern that a payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Dividends are distributed to shareholders in proportion to the nominal value of their respective holdings.
 
On November 7, 2017, following the approval of our Board of Directors, we declared a cash dividend in the amount of $0.14 per ordinary share, representing an aggregate distribution of approximately $5 million, which was paid on November 30, 2017 to all shareholders of record on the Nasdaq Global Market at the close of trade on November 22, 2017. Other than such dividend declaration, we have not declared or distributed any other dividend to date. See note 19.B to our consolidated financial statements for the financial year ended December 31, 2017.
 
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 respective holdings. This right may be affected by the grant of preferential dividend or distribution rights to the holders of any class of shares with preferential rights that may be authorized in the future. Our shareholders would need to approve any class of shares with preferential rights.
 
63

 
Modification of Class Rights
 
The Companies Law provides that the articles of a company may not be modified in such a manner that would have a detrimental effect on the rights of a particular class of shares without the vote of a majority of the affected class. Under our Articles, subject to the provisions of the Companies Law, the Company may, by a resolution adopted by its shareholders, amend the rights attached to all or any of its authorized share capital, whether issued or not, create new classes of shares, and/or attach different rights to each class of shares, including special or preferential rights and/or different rights from those attached to the existing shares, including redeemable shares, deferred shares, etc.
 
Transfer Agent
 
The transfer agent and registrar for our ordinary shares is the American Stock Transfer & Trust Company, New York, New York.
 
Voting, Shareholders' Meetings and Resolutions
 
Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of the shareholders. These voting rights may be affected by the grant of special voting rights to the holders of any class of shares with preferential rights that may be authorized in the future; however, currently no holders of our securities have any special voting rights.
 
An annual meeting of the shareholders must be held every year (to the extent required by the Companies Law, such annual meeting must be not later than 15 months following the last annual meeting). A special meeting of the shareholders may be convened by the board of directors at its decision to do so or upon the demand of any of: (1) two of the directors or 25% of the then serving directors, whichever is fewer; (2) shareholders owning at least 5% of the issued share capital and at least 1% of the voting rights in the Company; or (3) shareholders owning at least 5% of the voting rights in the Company. If the Board of Directors does not convene a meeting upon a valid demand of any of the above, then whoever made the demand, and in the case of shareholders, those shareholders holding more than half of the voting rights of the persons making the demand, may convene a meeting of the shareholders to be held within three months of the demand. Alternatively, upon petition by the individuals making the demand, a court may order that a meeting be convened.
 
The quorum required for a meeting of shareholders consists of at least two shareholders present in person or by proxy within one half hour of the time scheduled for the beginning of the meeting, who hold or represent together at least 25% of the voting power in our company.
 
A meeting adjourned due to lack of a quorum is generally adjourned to the same day in the following week at the same time and place or any time and place as the directors designate in a notice to the shareholders. If a quorum is not present at the reconvened meeting, the meeting may be held with any number of participants. However, if the meeting was convened following a demand by the shareholders, the quorum will be that minimum number of shareholders authorized to make the demand.
 
In any shareholders' meeting, a shareholder can vote either in person or by proxy provided such proxy is received by the Company up to 4 hours prior to the time set for the meeting. Alternatively, shareholders who hold shares through members of TASE may vote electronically via the electronic voting system of the Israel Securities Authority General meetings of shareholders will be held in Israel, unless decided otherwise by our Board of Directors.
 
Most resolutions at a shareholders' meeting may be passed by a majority of the voting power of the company represented at the shareholders' meeting and voting on the matter. Resolutions requiring special voting procedures include the appointment and removal of external directors, approval of transactions with controlling shareholders, the terms of office and employment of directors (except for terms which are consistent with the company's compensation policy, and require approval by a regular majority), the chief executive officer or controlling shareholders, approval of the Company's compensation policy and any amendments thereto, and approval of a merger or a tender offer. See in Item 6.C above - "Committees of the Board of Directors" and "Approval of Certain Transactions with Related Parties" and in "Anti-Takeover Effects of Israeli Laws; Mergers and Acquisitions under Israeli Law" below.
 
64


Anti-Takeover Effects of Israeli Laws; Mergers and Acquisitions under Israeli Law
 
In general, a merger of a company that was incorporated before the enactment of the Companies Law requires the approval of the holders of a majority of 75% of the voting power represented at the annual or special general meeting in person or by proxy or by a written ballot, as shall be permitted, and voting thereon in accordance with the provisions of the Companies Law. Upon the request of a creditor of either party of 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 any of the parties to the merger. In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the requisite proposal for the merger has been filed by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each party.
 
The Companies Law also provides that, an acquisition of shares in a public company must be made by means of a tender offer (a) if there is no existing shareholder in the company holding shares conferring 25% or more of the voting rights at the general meeting (a "control block") and as a result of the acquisition the purchaser would become a holder of a control block; or (b) if there is no existing shareholder in the company holding shares conferring 45% or more of the voting rights at the general meeting and as a result of the acquisition the purchaser would become a holder of 45% or more of the voting rights at the general meeting. Notwithstanding, the above requirements do not apply if the acquisition (1) was made in a private placement that received shareholders' approval (which includes an explicit approval of the purchaser becoming a holder of a "control block", or 45% or more, of the voting power in the company, unless there is already a holder of a "control block" or 45% or more, respectively, of the voting power in the company); (2) was from a holder of a "control block" in the company and resulted in the acquirer becoming a holder of a "control block"; or (3) was from a holder of 45% or more of the voting power in the company and resulted in the acquirer becoming a holder of 45% or more of the voting power in the company. The tender offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the company's outstanding shares, regardless of how many shares are tendered by shareholders. The tender offer may be consummated only if: (i) at least 5% of the company's outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
 
If as a result of an acquisition of shares, the acquirer will hold more than 90% of a company's outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares. If as a result of such full tender offer the acquirer would own more than 95% of the outstanding shares, then all the shares that the acquirer offered to purchase will be transferred to it. The law provides for appraisal rights if any shareholder files a request in court within six months following the consummation of a full tender offer, but the acquirer will be entitled to stipulate that tendering shareholders forfeit their appraisal rights. If as a result of a full tender offer the acquirer would own 95% or less of the outstanding shares, then the acquirer may not acquire shares that will cause his shareholding to exceed 90% of the outstanding shares.
 
Furthermore, certain provisions of other Israeli laws may have the effect of delaying, preventing or making more difficult an acquisition of or merger with us; see in Item 3.D – "Risk Factors - Provisions of Israeli law could delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets."
 
C.
Material Contracts.
 
None.
 
D.
Exchange Controls
 
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions. However, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
 
The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with Israel, is not restricted in any way by our memorandum of association or articles of association or by the laws of the State of Israel.
 
65

 
E.
Taxation
 
U.S. Federal Income Tax Considerations
 
Subject to the limitations described herein, this discussion summarizes certain U.S. federal income tax consequences of the purchase, ownership and disposition of our ordinary shares to a U.S. holder. A U.S. holder is a holder of our ordinary shares who is:
 
·
an individual citizen or resident of the United States for U.S. federal income tax purposes;
 
·
a corporation (or another entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any political subdivision thereof, or the District of Columbia;
 
·
an estate, the income of which may be included in gross income for U.S. federal income tax purposes regardless of its source; or
 
·
a trust (i) if, in general, a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions, or (ii) that has in effect a valid election under applicable U.S. Treasury Regulations to be treated as a U.S. person.
 
Unless otherwise specifically indicated, this discussion does not consider the U.S. tax consequences to a person that is not a U.S. holder, including a partnership, (a "non-U.S. holder") and considers only U.S. holders that will own ordinary shares as capital assets (generally, for investment).
 
This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), current and proposed Treasury Regulations promulgated under the Code and administrative and judicial interpretations of the Code, all as currently in effect and all of which are subject to change, possibly with retroactive effect. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder based on the U.S. holder's particular circumstances. In particular, this discussion does not address the U.S. federal income tax consequences to U.S. holders who are broker‑dealers, insurance companies, tax-exempt organizations, financial institutions, grantor trusts, S corporations, real estate investment trusts, regulated investment companies, certain former citizens or former long-term residents of the United States, or U.S. holders who own, directly, indirectly or constructively, 10% or more of our shares (by vote or value), U.S. holders who have elected mark-to-market accounting, U.S. holders holding the ordinary shares as part of a hedging, straddle or conversion transaction, U.S. holders that received ordinary shares as a result of exercising employee stock options or otherwise as compensation, U.S. holders whose functional currency is not the U.S. dollar, and U.S. holders who are subject to the alternative minimum tax.

If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares, the tax treatment of the partnership and a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax advisor as to its tax consequences.

You are advised to consult your tax advisor with respect to the specific U.S. federal, state, local and foreign income tax consequences of purchasing, holding or disposing of our ordinary shares.
 
66

 
Taxation of Distributions on the Ordinary Shares
 
The amount of a distribution with respect to the ordinary shares will equal the amount of cash and the fair market value of any property distributed and will also include the amount of any non-U.S. taxes withheld from such distribution. A distribution paid by us with respect to the ordinary shares to a U.S. holder will be treated as dividend income to the extent that the distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. Dividends that are received by U.S. holders that are individuals, estates or trusts will be taxed at the rate applicable to long-term capital gains (currently a maximum rate of 20%), provided that such dividends meet the requirements of "qualified dividend income." For this purpose, qualified dividend income generally includes dividends paid by a non-U.S. corporation if certain holding period and other requirements are met and either (a) the stock of the non-U.S. corporation with respect to which the dividends are paid is "readily tradable" on an established securities market in the U.S. (e.g., the NASDAQ Global Market) or (b) the non-U.S. corporation is eligible for benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The IRS has determined that the U.S.-Israel income tax treaty is satisfactory for this purpose. Dividends that fail to meet such requirements, and dividends received by corporate U.S. holders, are taxed at ordinary income rates. No dividend received by a U.S. holder will be a qualified dividend (1) if the U.S. holder held the ordinary share with respect to which the dividend was paid for less than 61 days during the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules of Code Section 246(c), any period during which the U.S. holder has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such ordinary share (or substantially identical securities); or (2) to the extent that the U.S. holder is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or related to the ordinary share with respect to which the dividend is paid. If we were to be a "passive foreign investment company" or PFIC (as such term is defined in the Code) for any taxable year, dividends paid on our ordinary shares in such year or in the following taxable year would not be qualified dividends. See discussion below regarding our PFIC status at "Tax Consequences if We Are a Passive Foreign Investment Company". In addition, a non-corporate U.S. holder will be able to take a qualified dividend into account in determining its deductible investment interest (which is generally limited to its net investment income) only if it elects to do so; in such case the dividend will be taxed at ordinary income rates.
 
The amount of any distribution which exceeds the amount treated as a dividend will be treated first as a non-taxable return of capital, reducing the U.S. holder's tax basis in its ordinary shares to the extent thereof, and then as capital gain from the deemed disposition of the ordinary shares. Corporate holders will not be allowed a deduction for dividends received in respect of the ordinary shares.
 
Distributions paid by us in NIS generally will be included in the income of U.S. holders at the dollar amount of the distribution (including any non-U.S. taxes withheld therefrom), based upon the exchange rate in effect on the date the distribution is included in income, regardless of whether the payment is, in fact, converted into U.S. dollars. U.S. holders will have a tax basis in the NIS for U.S. federal income tax purposes equal to that dollar value. Any subsequent gain or loss in respect of the NIS arising from exchange rate fluctuations will generally be taxable as U.S. source ordinary income or loss.
 
Subject to the limitations set forth in the Code and the Treasury Regulations thereunder, U.S. holders may elect to claim a foreign tax credit against their U.S. federal income tax liability for non-U.S. income taxes withheld from dividends received in respect of the ordinary shares. The conditions and limitations on claiming a foreign tax credit include, among others, computation 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. In this regard, dividends paid by us generally will be foreign source "passive income" for U.S. foreign tax credit purposes. U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for the non-U.S. income taxes withheld if such U.S. holders itemize their deductions for U.S. federal income tax purposes. The rules relating to foreign tax credits are complex, and you should consult your tax advisor to determine whether and to what extent you would be entitled to this credit. A U.S. holder will be denied a foreign tax credit for non-U.S. income taxes withheld from a dividend received on the ordinary shares (i) if the 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 with respect to such dividend or (ii) to the extent the U.S. holder is under an obligation to make related payments with respect to positions in 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 required 16-day holding period.
 
The discussion above is subject to the discussion below entitled "Tax Consequences if We Are a Passive Foreign Investment Company".
 
67

 
Taxation of the Disposition of Ordinary Shares
 
Subject to the discussion below under "Tax Consequences if We Are a Passive Foreign Investment Company" upon the sale, exchange or other disposition of our ordinary shares (other than in certain non recognition transactions), a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on the disposition and the U.S. holder's tax basis in such ordinary shares. The gain or loss recognized on the disposition of such ordinary shares will be long-term capital gain or loss if the U.S. holder held the ordinary shares for more than one year at the time of the disposition. Long-term capital gains of certain non-corporate shareholders are generally subject to a maximum rate of 20%. Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of ordinary shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes.
 
A U.S. holder that uses the cash method of accounting calculates the dollar value of the proceeds received on the sale as of the date that the sale settles. However, a U.S. holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the trade date and may therefore realize foreign currency gain or loss. A U.S. holder may avoid realizing foreign currency gain or loss by electing to use the settlement date to determine the proceeds of sale for purposes of calculating the foreign currency gain or loss. In addition, a U.S. holder that receives foreign currency upon disposition of ordinary shares and converts the foreign currency into U.S. Dollars after the settlement date or trade date (whichever date the U.S. holder is required to use to calculate the value of the proceeds of sale) may have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the dollar, which will generally be U.S. source ordinary income or loss.
 
Net Investment Income Tax
 
Non-corporate U.S. holders may be subject to an additional 3.8% surtax on all or a portion of their "net investment income", which may include dividends on, or capital gains recognized from the disposition of, our ordinary shares. U.S. holders are urged to consult their own tax advisors regarding the implications of the additional Net Investment Income tax on their investment in our ordinary shares.
 
Tax Consequences if We Are a Passive Foreign Investment Company
 
For U.S. federal income tax purposes, we will be a passive foreign investment company, or PFIC, if either (1) 75% or more of our gross income in a taxable year is passive income, or (2) 50% or more of the value (determined on the basis of a quarterly average) of our assets in a taxable year produce or are held for the production of passive income. If we own (directly or indirectly) at least 25% by value of the stock of another corporation, we will be treated for purposes of the foregoing tests as owning our proportionate share of that other corporation's assets and as directly earning our proportionate share of that other corporation's income. If we are a PFIC, a U.S. holder must determine under which of three alternative taxing regimes it wishes to be taxed:
 
·          The "QEF" regime applies if the U.S. holder elects to treat us as a "qualified electing fund" ("QEF") for the first taxable year in which the U.S. holder owns our ordinary shares or in which we are a PFIC, whichever is later, and if we comply with certain reporting requirements. A U.S. holder may not make a QEF election with respect to warrants. If the QEF regime applies, then, for each taxable year that we are a PFIC, such U.S. holder will include in its gross income a proportionate share of our ordinary earnings (which is taxed as ordinary income) and net capital gain (which is taxed as long-term capital gain), subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. These amounts would be included in income by an electing U.S. holder, whether or not such amounts are actually distributed to the U.S. holder. A U.S. holder's basis in our ordinary shares for which a QEF election has been made would be increased to reflect the amount of any taxed but undistributed income. Generally, a QEF election allows an electing U.S. holder to treat any gain realized on the disposition of his ordinary shares as capital gain.
 
68

 
Special rules apply if a QEF election is made after the first taxable year in which a U.S. holder holds our ordinary shares and we are a PFIC. In such an event, the U.S. holder would be treated as if it had sold our ordinary shares for their fair market value on the last day of the taxable year immediately preceding the taxable year for which the QEF election is made and will recognize gain (but not loss) on such deemed sale in accordance with the excess distribution regime described below. Under certain circumstances, a U.S. holder may be eligible to make a retroactive QEF election with respect to a taxable year in the U.S. holder's holding period if such U.S. holder (1)(a) reasonably believed that we were not a PFIC as of the QEF election due date for the prior taxable year, and (b) filed a protective statement in which the U.S. holder described the basis for its reasonable belief and extended the statute of limitation on the assessment of PFIC related taxes for all taxable years to which the protective statement applies; (2) obtains IRS consent; or (3) is a "qualified shareholder" within the meaning of the Treasury Regulations.
 
Once made, the QEF election applies to all subsequent taxable years of the U.S. holder in which it holds our ordinary shares and for which we are a PFIC and can be revoked only with the consent of the IRS.
 
·          A second regime, the "mark-to-market" regime, may be elected so long as our ordinary shares are "marketable stock" (e.g., "regularly traded" on the NASDAQ Global Market). Under current law, a mark-to-market election cannot be made with respect to warrants. Pursuant to this regime, in any taxable year that we are a PFIC, an electing U.S. holder's ordinary shares are marked-to-market each taxable year and the U.S. holder recognizes as ordinary income or loss an amount equal to the difference as of the close of the taxable year between the fair market value of our ordinary shares and the U.S. holder's adjusted tax basis in our ordinary shares. Losses are allowed only to the extent of net mark-to-market gain previously included by the U.S. holder under the election for prior taxable years. An electing U.S. holder's adjusted basis in our ordinary shares is increased by income recognized under the mark-to-market election and decreased by the deductions allowed under the election.
 
Under the mark-to-market election, in a taxable year that we are a PFIC, gain on the sale of our ordinary shares is treated as ordinary income, and loss on the sale of our ordinary shares, to the extent the amount of loss does not exceed the net mark-to-market gain previously included, is treated as ordinary loss. The mark-to-market election applies to the taxable year for which the election is made and all later taxable years, unless the ordinary shares cease to be marketable stock or the IRS consents to the revocation of the election.
 
If the mark-to-market election is made after the first taxable year in which a U.S. holder holds our ordinary shares and we are a PFIC, then special rules would apply.
 
·          A U.S. holder making neither the QEF election nor the mark-to-market election is subject to the "excess distribution" regime. Under this regime, "excess distributions" are subject to special tax rules. An excess distribution includes (1) a distribution with respect to our ordinary shares that is greater than 125% of the average distributions received by the U.S. holder from us over the shorter of either the preceding three taxable years or such U.S. holder's holding period for our ordinary shares prior to the distribution year and (2) gain from the disposition of our ordinary shares.
 
Excess distributions must be allocated ratably to each day that a U.S. holder has held our ordinary shares. A U.S. holder must include amounts allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a PFIC, in its gross income as ordinary income for that year. All amounts allocated to other taxable years of the U.S. holder would be taxed at the highest tax rate for each such year applicable to ordinary income and the U.S. holder also would be liable for interest on the deferred tax liability for each such year calculated as if such liability had been due with respect to each such year. The portions of gains and distributions that are not characterized as "excess distributions" are subject to tax in the current taxable year as ordinary income under the normal tax rules of the Code.
 
A U.S. person who inherits shares in a foreign corporation that was a PFIC in the hands of the decedent, is generally denied the otherwise available step-up in the tax basis of such shares to fair market value at the date of death. Instead, such U.S. holder's basis would generally be equal to the lesser of the decedent's basis or the fair market value of the ordinary shares on the date of death. Furthermore, if we are a PFIC, each U.S. holder will generally be required to file an annual report with the IRS.
 
69

 
Based on an analysis of our assets and income, we believe that we were not a PFIC for our taxable year ended December 31, 2017. We currently expect that we will not be a PFIC in 2018. However, PFIC status is determined as of the end of the taxable year and is dependent on a number of factors, including the relative value of our passive assets and our non‑passive assets, our market capitalization and the amount and type of our gross income. There can be no assurance that we will not become a PFIC for the current taxable year ending December 31, 2018 or in a future taxable year. We will notify U.S. holders in the event we conclude that we will be treated as a PFIC for any taxable year to enable U.S. holders to consider whether or not to elect to treat us as a QEF for U.S. federal income tax purposes, to "mark-to-market" the ordinary shares, or to become subject to the "excess distribution" regime, and we expect that in such event we will provide U.S. holders with the information needed to make a QEF election.
 
U.S. holders are urged to consult their tax advisors regarding the application of the PFIC rules, including eligibility for and the manner and advisability of making, the QEF election or the mark-to-market election.
 
Non-U.S. Holders of Ordinary Shares
 
Except as described below, a non-U.S. holder of ordinary shares will not be subject to U.S. federal income or withholding tax on the receipt of dividends on, and the proceeds from the disposition of, an ordinary share, unless, in the case of U.S. federal income taxes, that item is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States and, in the case of a resident of a country which has an income tax treaty with the United States, that item is attributable to a permanent establishment in the United States or, in the case of an individual, a fixed place of business in the United States. In addition, gain recognized by an individual non-U.S. holder on the disposition of ordinary shares will be subject to income tax in the United States if the non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.
 
Information Reporting and Backup Withholding
 
A U.S. holder (except for certain exempt recipients, such as corporations) generally is subject to information reporting and may be subject to backup withholding with respect to dividends paid on, and the receipt of the proceeds from the disposition of, our ordinary shares. A U.S. holder of our ordinary shares who does not provide a correct taxpayer identification number may be subject to penalties imposed by the IRS. Backup withholding will generally not apply if a U.S. holder provides a correct taxpayer identification number, certifies that such holder is not subject to backup withholding or otherwise establishes an exemption from backup withholding applies.
 
Non-U.S. holders generally will not be subject to information reporting or backup withholding with respect to the payment of dividends on, or proceeds from the disposition of, our ordinary shares provided the non-U.S. holder provides its taxpayer identification number, certifies to its foreign status or otherwise establishes an exemption from backup withholding applies.
 
Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a holder, or alternatively, the holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules, in either case, provided that the required information is timely furnished to the IRS.
 
Certain U.S. holders (and to the extent provided in IRS guidance, certain non-U.S. holders) who hold interests in "specified foreign financial assets" (as defined in Section 6038D of the Code) are generally required to file an IRS Form 8938 as part of their U.S. federal income tax returns to report their ownership of such specified foreign financial assets, which may include our common shares, if the total value of those assets exceed certain thresholds. Substantial penalties may apply to any failure to timely file IRS Form 8938. In addition, in the event a holder that is required to file IRS Form 8938 does not file such form, the statute of limitations on the assessment and collection of U.S. federal income taxes of such holder for the related tax year may not close until three years after the date that the required information is filed. Holders should consult their own tax advisors regarding their tax reporting obligations.
 
70

 
ISRAELI TAXATION
 
The following summary describes the current tax structure applicable to companies in Israel, with special reference to its effect on us. It also discusses Israeli tax consequences material to persons purchasing our ordinary shares. We recommend that you consult your tax advisor as to the particular tax consequences of an investment in our ordinary shares.
 
General Corporate Tax Structure
 
The corporate tax rate applicable in 2017 was 24%, and was reduced as of 2018 to 23%.
 
However, the effective tax rate payable by a company that derives income from an approved enterprise, discussed further below, may be considerably less. See below in Item 10.E - "Tax Benefits under the Law for the Encouragement of Capital Investments, 1959".
 
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the "Investment Law")

The Company's production facility has been granted "Approved Enterprise" status under the Investment Law. The Company participates in the Alternative Benefits Program and, accordingly, income from its approved enterprises will be tax exempt for a period of 10 years (or up to 14 years commencing in the year in which the company was granted "Approved Enterprise" status), commencing in the first year in which the Approved Enterprise first generates taxable income; this is due to the fact that the Company operates in Zone "A" in Israel.
 
On April 1, 2005, an amendment to the Investment Law came into effect (the "Amendment") and has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a "Beneficiary Enterprise", such as provisions generally requiring that at least 25% of the Beneficiary Enterprise's income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.
 
In addition, the Amendment provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Company's existing Approved Enterprise will generally not be subject to the provisions of the Amendment. As a result of the Amendment, tax-exempt income generated under the provisions of the Amendment, as part of a new Beneficiary Enterprise, will subject the Company to taxes upon distribution or liquidation.
 
The Company has been granted the status of Approved Enterprises, under the Investment Law, for investment programs for the periods which ended in 2007 and 2010, and the status of Beneficiary Enterprise according to the Amendment, for a period ending in 2014. In addition Camtek has elected 2010 as the year of election for a period ending 2021 (collectively, "Programs").

The Investment Law and the criteria for receiving an "Approved Enterprise" or "Beneficiary Enterprise" status may be amended from time to time and there is no assurance that we will be able to obtain additional benefits under the Investment Law.
 
On December 29, 2010, the Investment Law was amended to significantly revise the tax incentive regime in Israel commencing on January 1, 2011 (the "December 2010 Amendment"). The December 2010 Amendment introduced a new status of "Preferred Enterprise," replacing the existing status of "Beneficiary Enterprise." Similarly to "Beneficiary Enterprise," a Preferred Enterprise is an industrial company meeting certain conditions, including deriving a minimum of 25% of its income from export activities. However, under the December 2010 Amendment, the requirement for a minimum investment in production assets in order to be eligible for the benefits granted under the Investments Law was cancelled. A Preferred Enterprise is entitled to a reduced flat tax rate with respect to preferred enterprise income at the following rates:
 
Tax Year
 
Development "Zone A"
   
Other Areas within Israel
   
Regular Corporate Tax Rate
 
2011-2012
   
10
%
   
15
%
   
24%-25
%
2013
   
7
%
   
12.5
%
   
25
%
2014-2015
   
9
%
   
16
%
   
26.5
%
2016
   
9
%
   
16
%
   
25
%
2017
   
7.5
%
   
16
%
   
24
%
2018
   
7.5
%
   
16
%
   
23
%
 
71

 
Dividends distributed from income which is attributed to "Preferred Enterprise" will be subject to withholding tax at source at the following rates: (i) Israeli resident corporation at 0%;(ii) Israeli resident individual at 20%; and (iii) non-Israeli resident at 20%, such withholding rate can be reduced subject to a reduced tax rate under the provisions of an applicable double tax treaty.
 
The December 2010 Amendment was also revised to allow financial assistance to companies located in development Zone A to be granted not only as a cash grant but also as a loan. The rates for grants and loans could be up to 20% of the amount of the approved investment.
 
In December, 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment 73 to the Investment Law (the "December 2016 Amendment")) was published. The investment law was amended to introduce a new tax incentive regime for intellectual property (IP) based companies. Effective January 1, 2017, the December 2016 Amendment enhanced tax incentives for certain industrial companies by reducing the corporate tax rate and tax withholding obligation.
 
According to the December 2016 Amendment, a Preferred Enterprise located in development Zone A will be subject to a tax rate of 7.5% instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%). The December 2016 Amendment also prescribes special tax tracks for Technological Enterprises, which are subject to regulation issued by the Minister of Finance on May 28, 2017.
 
The new tax tracks under the December 2016 Amendment are as follows:
 
Technological Preferred Enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion. A Technological Preferred Enterprise, as defined in the Law, which is located in the center of Israel will be subject to tax at a rate of 12% on profits deriving from intellectual property (in development zone A - a tax rate of 7.5%).