Payton Planar — Annual Report 2016

Mar 28, 2017

Payton Planar Magnetics Ltd.

Annual Report 2016

Contents

	Page
Board of Directors Report	2
Auditors' Report	14
Consolidated Financial Statements:
Statements of Financial Position	18
Statements of Comprehensive Income	20
Statements of Changes in Equity	21
Statements of Cash Flows	22
Notes to the Financial Statements	23

The Board of Directors' Report¹ on Corporate Affairs

We are pleased to present the Board of Directors' report on the affairs of Payton Planar Magnetics Ltd. and its consolidated subsidiaries for the year ended on December 31, 2016

Notice: This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of the Management of the Company as well as assumptions made by and information currently available to the Management of the Company. Such statements reflect the current views of the Company with respect to future events. Management emphasizes that the assumptions do not in any way imply commitment towards realization. The outcome of which is subject to certain risks and other factors, which may be outside of the Company's control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as projected, anticipated, believed, estimated, expected or intended.

Reference in this report to forward looking statement shall be by stating that such information is given by way of estimation, evaluation, assessment, intentions, expectations, beliefs and similar terms, but it is possible that such information shall be given under other phrases.

1. A concise description of the corporation and its business environment

A. The Group

Payton Planar Magnetics Ltd. ("the Company") and its consolidated subsidiaries: Payton America Inc. ("Payton America"), Himag Planar Magnetics Ltd. ("Himag") and Payton Planar Holdings (1996) Ltd. ("Payton Holdings").

B. The Group's main fields of activity and changes that occurred in the period from January to December 2016

The Company, an Israeli high-tech enterprise, develops manufactures and markets Planar and Conventional transformers worldwide. The Company was founded in order to revolutionize the traditional approach to the design and manufacture of transformers through the concept of planar transformers. The Company completed its initial public offering in 1998 on the EuroNext Stock Exchange.

No material changes in the Group's business activity occurred during the year 2016.

C. Sales

The Group main customer base is related to the telecom, automotive and power electronic market. Additional markets the Group aims are Industrial, medical and Hi-Reliability ("Hi-Rel") markets. During 2016, the Company keeps operating to expand its activity in: UK, North America, Japan, China and S. Korea. Sales for the year ended December 31, 2016 amounted to USD 32,354 thousand compared with USD 27,372 thousand for the year ended December 31, 2015.

Revenues for the year ended 2016 consisted of recurring sales to existing customers and sales to new ones. The Sales were generated primarily from large telecom companies, automotive companies, industrial companies and Hi-Rel applications manufacturers.

¹ The financial statements as at December 31, 2016 form an integral part thereof.

D. Principal customers

The consolidated sales revenues include sales to major customers (which make up in excess of 10% of the sales of the Group).

	For the year ended December 31	For the year ended December 31
	2016	2015
Customer A	18%	10%
Customer B	11%	10%
Customer C	*	11%

* Less than 10% of the Group's consolidated sales.

E. Global Environment and External factors effect on the Group's activity

Nowadays market fluctuations are very rapid and unpredictable, therefore 2017 trend is very hard to foresee. The economy in Europe seems to keep slowing down; however, the U.S. economy is catching up.

The challenge in this global economy is to catch up increasing demands, raise productivity, address and develop new markets and to expand the Group's core business.

Along with the above-mentioned global fluctuations, there are additional effects in Israel and in the UK, generated from fluctuations in the exchange rates of the main currency (USD) vis-à-vis the NIS and the GBP. It is noted that the Brexit in the UK caused to a significant decrease in the exchange rate of the GBP versus the USD.

Company Management is closely monitoring all above-mentioned market fluctuations and will continue to track their developments and effects. In addition, Company's Management is taking the necessary actions in order to cope with the situation, to the greatest extent possible.

As result of the Company's conservative cash policy, management estimates that the Group is financially strong and no liquidity problems are expected in the foreseeable future.

F. Marketing

The Group participates in most leading electronic exhibitions. During 2016 the Group participated in

• APEC in Long Beach California, USA (April 2016), PCIM Europe 2016 Exhibition, Nuremberg, Germany (May, 2016), New-Tech Exhibition, Tel-Aviv, Israel (May, 2016), Electronica Exhibition, Munich, Germany (November, 2016) and others.
• In addition, during 2016, the Company initiated several seminars and conferences in the USA.

The Company strategy, which enables fulfilling the mission of gaining worldwide recognition and market share growth, is:

• Targeting world leaders in their fields. Having these leaders as our customers is convincing other second tier companies to adopt the Planar Technology.
• Focusing on Automotive (EV/HEV), medical and Hi-Rel segments in addition to the Telecom and power electronic markets.
• Use representatives network as sales channels.

• Expanding our activity in China, Japan, North America and S. Korea markets.

• Deepening activity with existing customers.

• Maintaining the wide presence and global recognition.

G. Manufacturing

The group intends to maintain and also diversify its manufacturing capacity and capabilities, through manufacturing partners in the Far East. This activity objective is to increase flexible production capacity, to enable mass production quantities, lower products costs and increase competitiveness.

H. Competition

In the recent years there has been an increasing interest of conventional transformer manufacturers to get into the Planar field. We can note that there are more and more companies that are trying to design and manufacture the planar components. However, the Company believes in its technology advantage and capabilities and estimates it could generally benefit from an increasing competition in the market due to greater exposure of the technology. The Company cannot estimate its future market share. The following companies are considered as its potential competitors: Pulse and Coilcraft - from the U.S.A. and Premo - from Spain.

I. Order Backlog

As at December 31, 2016 this backlog amounted to USD 10,681 thousand, and as of March 19, 2017 to USD 12,188 thousand (December 31, 2015 - USD 11,010 thousand). The backlog is composed of the Company and its two fully owned subsidiaries firm orders.

Management estimates that most of the backlog as of 31.12.16 will be supplied until the end of September 2017. It is noted that the above statement is a forward-looking statement as defined above.

J. Human Resources

A factor of importance to the Company's success is its ability to attract, train and retain highly-skilled technical, and more specifically, qualified electronics engineers with experience in high frequency magnetics and with a comprehensive understanding of high frequency magnetics, managerial and sales and marketing personnel. Competition for such personnel is intense. The Company constantly betterments its personnel and has so far succeeded in recruiting the appropriate personnel as required. This personnel is important in maintaining the pace in research, design and technical customer support. The Company is confident however, that the challenges inherent in its operations will satisfy its Company's future recruitment needs. By the end of 2016, the Group employed 189 people. The Company retains employment contracts with most of its key employees and is of the opinion that relations with its employees are satisfactory.

K. Quality Control

Payton Group has the ISO9001:2008 certification for its quality system. It has UL recognition for the use of several Electrical Insulation Systems classes B, F and H in its products, also has recognition of the construction of a family of magnetic components as complying with the requirements of UL and IEC 60950 standards of safety. Payton is authorized by an accredited testing agency to apply the CE mark to many of its commercial transformers.

Payton also meets recognized international safety standards and conforms to MIL.T, CSA VDE and other standards. The Company is certified with ISO14001:2004 (Environmental standard). Payton is a Lead Free company as required by the 2002/95/EC RoHS directive.

The Company is certified with two important International Quality Management Standards: for Automotive - TS16949:2009 and for Space & Avionic - AS9100 (at Payton America only).

L. Objective and Business Strategy

Since its incorporation, Payton has provided innovative and affordable Planar Magnetic solutions to the Power Electronic Industry.

By doing so, it has become the undisputable worldwide market leader in the Planar Magnetics Technology, with a blue-chip customer base of leading technology-driven OEM's.

Over the next years, Payton plans to maintain its lead and continue to facilitate the transition of the Magnetics market to the Planar Technology by:

• 1. Maintaining business efficiency and operational efficiency and constant search for cost saving solutions.
• 1. Maintaining and strengthening its current blue-chip customer base. This will enable Payton to build a track record as a reliable high-volume Planar component supplier to leading OEM's.
• 1. Selectively developing additional key strategic customers, especially in China, Japan, North America and UK in order to further propagate Payton Planar unique technology.
• 1. Aiming and focusing on new high growth segments such as Automotive (EV/HEV) in addition to the present Telecom market, Hi-Rel, Avionics, Space and medical applications.
• 1. Continuing to educate the Power Electronics industry about Planar technology.
• 1. Continuing to develop its mass production expertise and capacities to a level that will enable Payton to address the large price-sensitive segments and mass production quantities segments of the global Magnetics market.
• 1. Payton is constantly looking for business opportunities to extend its core business with synergetic product lines.

It is noted that the above statement is a forward-looking statement as defined above.

M. Coming year outlook

In the coming year (2017) Payton plans to continue improving the efficiency as well as increasing marketing team efforts aiming to expand products exposure and enlarging market share.

Furthermore, during 2017 the Group plans to continue its regular course of business and to maximize the business challenge to the greatest possible extent.

In addition, the group will continue its ongoing search for business and M&A opportunities, synergetic to its core business, in order to expand its activity.

It is noted that the above statement is a forward-looking statement as defined above.

N. Risk Factors

	Major Impact	Medium Impact	Small Impact
Macro Risks		 Chinese currency evaluation against the USD increases cost of goods sold. In addition, the increase of the minimum wages in China may increase the labor costs.  Evaluation/Devaluation of the local currencies, NIS and GBP reflects an increase/decrease in labor costs and other operating costs.	 Currency exposure during credit term period with regards to invoices issued in local currency.  Currency exposure against the Group's functional currency (USD), in relation to sales priced in other currencies, mainly, GBP and Euro.
Market Risks			 Metals prices fluctuations especially: Copper, Steel, Tin and Silver, which are part of the transformers bill of materials.
Specific Risks		 Manufacturing partners dependency.

O. Current Shareholders position

Shareholder name	Number of shares	Percentage of the	Comments
		outstanding shares
Payton Industries Ltd.	11,694,381	66.2%	Israeli company traded in the Tel
			Aviv stock exchange.
Public	5,976,394	33.8%	Listed on the EuroNext since June
			1998.
Total	17,670,775	100.0%	Total outstanding shares.

2. Financial position

A. Statement of Financial Position as at December 31, 2016

Cash and cash equivalents and Short-term Deposits - these items amounted to a total of USD 20,201 thousand as at December 31, 2016 compared to USD 19,522 thousand as at December 31, 2015.

Teh Company profitability during year 2016 helped to retain back its solid cash position after the cash paid out as dividend payment, at the amount of USD 3,092 thousand, on January 14, 2016.

Trade accounts receivable - amounted to USD 7,793 thousand as at December 31, 2016 compared to USD 4,314 thousand as at December 31, 2015. The increase in this item is in line with the sales increase in the period near the reports date.

Intangible assets - amounted to USD 44 thousand as at December 31, 2016 compared to USD 880 thousand as at December 31, 2015. The decrease in this item resulted mainly due to amortization of goodwill. The said goodwill derived from the acquisition of the business operations of Himag Solutions Ltd. (UK) by Payton Planar through its wholly-owned UK subsidiary "Himag". Following the Company's examination of the fair value of the goodwill as of December 31, 2016, it was found that an impairment for the total value of this goodwill (USD 709 thousand) needs to be recorded.

Trade payables - amounted to USD 3,738 thousand as at December 31, 2016 compared to USD 3,061 thousand as at December 31, 2015. The increase in this item is in line with the increase in the business activity near the reports date.

Dividend payable - the dividend at the amount of USD 3,092 thousand as at December 31, 2015 was announced on November 23, 2015 (USD 0.175 per share) and paid in full on January 14, 2016.

Current tax liabilities - amounted to USD 676 thousand as at December 31, 2016 compared to USD 71 thousand as at December 31, 2015. The increase in this item is due to the increase in the Company profitability.

B. Interest rate, Currency and Market exposure - Data and Policy

Interest rate exposure

The Group's interest rate exposure relates mainly to its balance of cash equivalents and short-term bank deposits. These balances are mostly held in USD bearing interest rates given by banks (interest rate - about 1.7%), which changes from time to time.

Data on linkage terms

The financial statements of the Company reflect the functional currency of the Company, which is the USD. Most of the Group's sales (90%) in the reported periods were in USD or were linked to the USD. Approximately 4% of the Group's sales in 2016 were in Euro, 2% were in NIS, and about 4% were in GBP.

During 2016, approximately 97% of the costs of raw material and finished goods purchased by the Group were in USD or were linked to the USD.

During 2016, approximately 97% of the Group's salaries were in New Israeli Shekel ("NIS") and about 9% were in GBP.

Currency exposure risks

Since most of the Group's sales and purchases were in USD or linked to the USD, the Group's gross profit was exposed to the changes in exchange rates of the USD in relation to the Euro, the GBP and to the local New Israeli Shekel ("NIS") mostly with regards to labor costs and other operating (see also Data on linkage terms, above).

The Group is exposed to erosion of the USD in relation to the NIS and the GBP. Most of the Group's salaries and other operating costs are fixed in the local currencies. Fluctuation of the U.S. Dollar with relation to local currencies (NIS & GBP) has an influence on the operating results of the Company. During year 2016 the Brexit in the UK caused a revaluation of the USD with relation to the GBP leading to a decrease in these local labor costs presented in USD.

The Company is subcontracting in China. Devaluation of the U.S. Dollar with relation to the Chinese currency has an indirect effect on the Group's cost of goods sold.

Market risks

During 2016 the Company slightly used derivatives as a tool for hedging, especially in order to hedge mostly its labor costs paid in NIS. With regards to all other operating costs, there is no need to use derivatives, since hedging is being kept inherently as part of the operational activity.

C. Operating results

Summary of Consolidated quarterly Statements of Income US Dollars in thousands

Payton Planar Magnetics Ltd. Consolidated Comprehensive Income Statements

	Total 2016	Total 2015	Quarter 10-12/16	Quarter 7-9/16	Quarter 4-6/16	Quarter 1-3/16
Sales revenues	32,354	27,372	9,980	8,306	7,498	6,570
Cost of sales	20,279	17,335	5,694	5,060	5,120	4,405
Gross profit	12,075	10,037	4,286	3,246	2,378	2,165
Development costs	(1,012)	(949)	(243)	(253)	(273)	(243)
Selling & marketing expenses	(2,254)	(2,149)	(580)	(532)	(592)	(550)
General & administrative expenses	(2,959)	(2,850)	(691)	(810)	(790)	(668)
Other (expenses) income, net	(633)	6	(632)	-	-	(1)
Operating income	5,217	4,095	2,140	1,651	723	703
Finance income, net	143	4	35	15	10	83
Profit before income taxes	5,360	4,099	2,175	1,666	733	786
Income taxes	(1,107)	(795)	(503)	(328)	(127)	(149)
Net profit for the period	4,253	3,304	1,672	1,338	606	637
Other comprehensive income items that will not be transferred to profit &loss Remeasurement of defied
benefit plan, net of taxes	13	23	12	-	-	1
Total other comprehensive
income	13	23	12	-	-	1
Total comprehensive income
for the period	4,266	3,327	1,684	1,338	606	638

General Note: The Group is exposed to abrasion of the USD in relation to the NIS, Euro (€) and the Pound (£). Most of the Group's salaries and other operating costs are fixed in the local currencies. Revaluation of the local currencies drives to an increase or decrease in labor costs and other operating costs, thus, affects the operating results of the Company.

Sales revenues - The Group's sales revenues for year 2016 were USD 32,354 thousand compared with USD 27,372 thousand in year 2015, an increase of 18%. The sales increase in 2016 was mainly attributed to increasing demand in few major projects.

Gross profit - The Group's gross results for the year ended December 31, 2016 were USD 12,075 thousand (37%), compared with USD 10,037 thousand (37%), in the year ended December 31, 2015 . The Group maintained its gross profit margin together with a sales increase. Usually the gross profit is influenced by the products mix and the production locations of each year sales.

Development costs - Payton's R&D strategy is aimed on maintaining the leadership of the Planar Technology. The R&D department works in conjunction with R&D departments of the forerunners of today's global technology, and together they define tomorrow's technological needs. Costs were based upon time expended by the department's employees. The Group's development costs for the year ended December 31, 2016 were USD 1,012 thousand compared with USD 949 thousand in the year ended December 31, 2015.

Selling & marketing expenses - The Group's selling & marketing expenses are mainly comprised of: (1) commissions to the Group's reps' and Marketing Personnel, which are calculated as a portion of sales and of (2) other selling expenses (fixed) based on management policy. The Group's marketing efforts are concentrated through participation in major power electronic shows around the world and by collaborating with its worldwide rep's Network.

The Group's selling & marketing expenses for the year ended December 31, 2016 amounted to USD 2,254 thousand compared with USD 2,149 thousand in the year ended December 31, 2015. The increase in these expenses is consistent with the sales increase and also explained by an expansion of marketing teams and efforts worldwide.

General & Administrative expenses - The Group's General & Administrative expenses for the year ended December 31, 2016 amounted to USD 2,959 thousand compared with USD 2,850 thousand in the year ended December 31, 2015. The increase in these expenses relates mainly due to an increase in other non-reoccurring G&A expenses and by increase in management incentives derived from the profits increase.

Other (expenses) income, net - The Group's other expenses for the year ended December 31, 2016 amounted to USD 633 thousand compared with an income of USD 6 thousand in the year ended December 31, 2015. During 2016 the UK subsidiary recorded an impairment of goodwill at the amount of USD 709 thousand, in addition to, an income at the amount of USD 69 thousand resulting from a decrease in contingent consideration (originated from the purchase of Himag Solutions business activity).

Finance income, net - The Group's Finance income for the year ended December 31, 2016 amounted to USD 143 thousand compared with USD 4 thousand in the year ended December 31, 2015. The increase in this income relates mainly due to a decrease in interest paid for long term loan which was repaid in full by October 2015, and due to decrease in exchange rate differences arising from erosion of the USD in relation to the NIS, Euro(€) and Pound(£).

Income Taxes - tax expenses for the year ended December 31, 2016 amounted to USD 1,107 thousand compared with USD 795 thousand for the year ended December 31, 2015. The increase in tax expenses resulted mainly from the profits increase.

Information regarding - Transactions with related parties (pursuant to note 17 G to the Consolidated Financial Statements as at December 31, 2016)

	For the year ended December 31
	2016 2015
	\$ thousands	\$ thousands
Management fees and related benefits to Wichita Ltd*	660	609
Fees to directors	33	33
Short-term employee benefits (2016 and 2015: 5 personnel)	697	639
Post-employment benefits (2016 and 2015: 5 personnel)	67	48

* Management fees and related benefits to Wichita Ltd. (see Note 14A) include an amount of USD 135 thousand (year ended December 31, 2015: USD 129 thousand) allocated as selling and marketing expenses.

Information regarding - Balances with related parties (pursuant to note 17 G to the Consolidated Financial Statements as at December 31, 2016)

	December 31 2016	December 31 2015
	\$ thousands	\$ thousands
Included in other accounts receivable: The Parent Company	111	90
Presented under other payables: Wichita Ltd. Directors not employed by the Company	230 9	188 8

3. Liquidity

A. Liquidity Ratios

The following table presents the financial ratios in the Statement of Financial Position:

Payton Planar Magnetics Ltd. Consolidated financial ratios
	December 31, 2016 December 31, 2015
Current ratio2	5.15	3.58
Quick ratio3	4.57	3.06

B. Operating activities

Cash flows generated from operating activities for the year ended December 31, 2016 amounted USD 4,558 thousand, compared with the cash flows generated from operating activities of USD 6,225 thousand for the year ended December 31, 2015. The decrease in the cash flows from operating activities resulted mostly from the increase in trade accounts receivable (due to sales increase near the report date) as well as from other changes in assets and liabilities.

² Current ratio calculation – Current assets / Current liabilities

³ Quick ratio calculation – (Current assets – Inventory) / Current liabilities

C. Investing activities

Cash flows generated from investing activities in the year ended December 31, 2016 amounted USD 863 thousand compared with cash flows used for investing activities of USD 2,961 thousand in the year ended December 31, 2015. During year 2016 the cash flows mostly stemmed from proceeds from bank deposits.

D. Financing activities

Cash flows used for financing activities in the year ended December 31, 2016 amounted USD 3,251 thousand compared with cash flows used for financing activities of USD 1,925 thousand in the year ended December 31, 2015. A dividend at the amount of USD 3,092 thousand announced on November 23, 2015 (USD 0.175 per share) was paid in full on January 14, 2016.

4. Financing sources

The Group financed its activities during the reported periods from its own resources.

5. External factors effects

Revaluation/devaluation of the local currencies, NIS and GBP, in relation to the U.S. Dollar leads to an increase/decrease (respectively) in labor costs and other operating costs. Most of the Group's salaries and other operating costs are fixed in local currencies; therefore, the operating results are affected.

Devaluation of the Euro(€) and Pound(£) in relation to the U.S. Dollar leads to a decrease in Group's assets in those currencies.

To the best of the Board of Directors' and management's knowledge, except the above mentioned, there have been no significant changes in external factors that may materially affect the Company's financial position or results of operations.

6. Statement by senior management in accordance with article 12, § 2 (3°( of the Royal Decree per 14.11.2007

Pursuant to article 13 § 2,3 of the Royal Decree of 14 November 2007, David Yativ Chairman of the Board of Directors declares, on behalf of and for the account of Payton Planar Magnetics that, as far as is known to him,

a) The financial statements at December 31, 2016 are drawn up in accordance with IFRS-reporting as adopted by the European Union and present a true and fair view of the equity, financial situation and results of the company

b) The report gives a true and fair view of the main events of the financial year, their impact on the financial statements, the main risk factors and uncertainties, as well as the main transactions with related parties and their possible impact on the financial statements.

The Company's Board of Directors wishes to thank our shareholders for their continuance trust and belief.

The Company's Board of Directors wishes to express its sincere thanks to the entire personnel for their efforts and contribution to the Group's affairs.

Ness-Ziona, March 28, 2017.

David Yativ Chairman of the Board of Directors

Doron Yativ Director and C.E.O.

Somekh Chaikin KPMG Millennium Tower 17 Ha'arba'a Street, PO Box 609 Tel Aviv 61006, Israel +972 3 684 8000

Independent Auditors' Report

To the Shareholders of Payton Planar Magnetics Ltd.

Opinion

We have audited the consolidated financial statements of Payton Planar Magnetics Ltd ("the Company"), which comprise the consolidated statement of financial position as at December 31, 2016, the consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2016, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Israel, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Revenue recognition

Revenue is a key performance indicator and of importance to the financial statements users. The Company has issued clear guidelines to its executives not to take any account of the pressure to meet expectations when preparing the financial statements. Nevertheless, the pressure to report on high revenues to the investors, form an inherent risk that revenue at year-end may be recognized prematurely.

With respect to this audit matter, our audit procedures included extended sampling of transactions recorded close to the end of the year and checking that such transactions had met all criteria for revenue recognition in 2016, and therefore were included in the appropriate period. Such sampling included obtaining evidence from external sources as to the delivery of the products before year-end, based on the various shipping terms. We also checked if any credit notes were issued in the subsequent period for revenues that were recognized in 2016, in order to obtain evidence of proper revenue recognition in 2016.

Impairment of goodwill

The Company acquired the business operations of Himag Solutions Ltd. (UK) ("Himag"), through its UK subsidiary, Himag Planar Magnetics Ltd. ("Himag"), a UK based company, at the end of 2012. As part of the purchase price allocation, the Company determined that an amount of \$709,000 was allocated to goodwill. The Company performs annual goodwill impairment tests (see note 9A), which are based on a calculation of discounted future cash flows. The calculation takes into account various assumptions, such as forecasts, growth rates and discount rates. As part of the 2016 annual goodwill impairment test, the Company determined that goodwill was impaired and that an impairment charge of the entire goodwill was required.

The audit team focused on the appropriateness of such determination, and the rational for the writeoff during the current reporting period.

In this area, our audit procedures included analyzing the reasonableness of the main assumptions used in the calculation of Himag's fair value, based on our knowledge of the business and industry. We performed sensitivity analyses on the key assumptions, where we adjusted the discount rates and growth rates used in the forecasts, as these were the key assumptions used in the calculation. We compared the forecasts used in previous years to actual results, in order to assess the Company's ability to predict Himag's results. In addition, we evaluated the changes that took place in the macroeconomic environment in order to understand the Company's conclusion that an impairment charge should be recorded in 2016.

Other Information

Management is responsible for the other information. The other information comprises the Board of Directors' Report on Corporate Affairs.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company's financial reporting process.

Auditors' Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors' report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditors' report is Ehud Lev.

Somekh Chaikin Certified Public Accountants (Isr.) (A member of KPMG International)

March 28, 2017

Consolidated Statements of Financial Position as at December 31

		2016	2015
	Note	\$ thousands	\$ thousands
Current assets
Cash and cash equivalents	4	8,150	6,004
Short-term deposits	5	12,051	13,518
Trade accounts receivable	6	7,793	4,314
Other accounts receivable	6	554	317
Inventory	7	3,668	4,149
Total current assets		32,216	28,302
Non-current assets
Fixed assets	8	11,985	12,323
Intangible assets	9	44	880
Deferred taxes	18	39	33
Total non-current assets		12,068	13,236

Total assets 44,284 41,538

Chairman of the Board of Directors Chief Executive Officer V.P. Finance & CFO

David Yativ Doron Yativ Michal Lichtenstein

Date of approval of the financial statements: March 28, 2017

Consolidated Statements of Financial Position as at December 31 (cont'd)

		2016	2015
	Note	\$ thousands	\$ thousands
Liabilities and equity
Current liabilities
Other liabilities	10	24	158
Trade payables		3,738	3,061
Other payables	11	1,401	1,174
Dividend payable	16	-	3,092
Current tax liability		676	71
Employee benefits	12	412	350
Total current liabilities		6,251	7,906
Non-current liabilities
Other liabilities	10	-	82
Employee benefits	12	359	319
Deferred tax liabilities	18	611	434
Total non-current liabilities		970	835
Total liabilities		7,221	8,741
Equity
Share capital	16	4,836	4,836
Share premium		8,993	8,993
Retained earnings		23,234	18,968
Total equity		37,063	32,797
Total liabilities and equity		44,284	41,538

Consolidated Statements of Comprehensive Income for the year ended December 31

	Note	2016 \$ thousands	2015 \$ thousands
Revenues	17A	32,354	27,372
Cost of sales	17B	(20,279)	(17,335)
Gross profit		12,075	10,037
Development costs		(1,012)	(949)
Selling and marketing expenses	17C	(2,254)	(2,149)
General and administrative expenses	17D	(2,959)	(2,850)
Other (expenses) income, net	17E	(633)	6
Operating profit		5,217	4,095
Finance income	17F	190	160
Finance expenses	17F	(47)	(156)
Finance income, net		143	4
Profit before income taxes		5,360	4,099
Income taxes	18	(1,107)	(795)
Profit for the year		4,253	3,304
Other comprehensive income items that will not be transferred to profit and loss
Remeasurement of defined benefit plan, net of taxes	12	13	23
Total other comprehensive income		13	23
Total comprehensive income for the year		4,266	3,327
Basic earnings per share (in \$)	19	0.24	0.19

Consolidated Statements of Changes in Equity for the year ended December 31

	Share capital		Share	Retained
	Number of		premium	earnings	Total
	shares	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Balance at
January 1, 2015	17,670,775	4,836	8,993	18,733	32,562
Total comprehensive
income for the year
Profit for the year	-	-	-	3,304	3,304
Other comprehensive income	-	-	-	23	23
Total comprehensive
income for the year	-	-	-	3,327	3,327
Transactions with owners, recognized directly in equity
Dividend to owners	-	-	-	(3,092)	(3,092)
Balance at
December 31, 2015	17,670,775	4,836	8,993	18,968	32,797
Total comprehensive income for the year
Profit for the year	-	-	-	4,253	4,253
Other comprehensive income	-	-	-	13	13
Total comprehensive
income for the year	-	-	-	4,266	4,266
Balance at
December 31, 2016	17,670,775	4,836	8,993	23,234	37,063

Consolidated Statements of Cash Flows for the year ended December 31

		2016	2015
	Note	\$ thousands	\$ thousands
Operating activities
Profit for the year		4,253	3,304
Adjustments to reconcile profit to net cash generated from
operating activities:
Depreciation and amortization	8, 9	1,011	1,049
Income taxes	18		795
		1,107
Capital gain on sale of fixed assets	17E	(7)	(16)
Changes in the fair value of contingent consideration	17E	(69)	10
Impairment loss on goodwill	9, 17E	709	-
Finance income, net	17F	(105)	(22)
Increase in employee benefits	12	115	27
(Increase) decrease in trade accounts receivable	6	(3,479)	1,605
(Increase) decrease in other accounts receivable	6	(237)	105
Decrease (increase) in inventory	7	481	(616)
Increase in trade payables		753	15
Increase in other payables	11	227	99
Interest received	17F	130	140
Interest paid	17F	-	(55)
Tax paid	18	(529)	(476)
Tax received	18	198	261
Cash flows generated from operating activities		4,558	6,225
Investing activities
Proceeds from sale of marketable securities held for trading		-	205
Proceeds from (investment in) deposits, net	5	1,478	(2,076)
Investment in fixed assets	8	(651)	(1,120)
Proceeds from sale of fixed assets	8	36	30
Cash flows generated from (used for) investing activities		863	(2,961)
Financing activities
Repayment of loan		-	(1,766)
Payment of contingent consideration	10	(159)	(159)
Dividend paid	16	(3,092)	-
Cash flows used for financing activities		(3,251)	(1,925)
Net increase in cash and cash equivalents		2,170	1,339
Cash and cash equivalents at beginning of the year		6,004	4,692
Effect of exchange rate fluctuations on cash and cash equivalents		(24)	(27)
Cash and cash equivalents at end of the year		8,150	6,004

Note 1 - General

A. Reporting entity

Payton Planar Magnetics Ltd. ("the Company") was incorporated in December 1992. The address of the Company's registered office is 3 Ha'avoda Street, Ness-Ziona.

The Company is a subsidiary of Payton Industries Ltd. (the "Parent Company") and its ultimate controlling shareholder is Mr. David Yativ. The securities of the Company are registered for trade on the Euronext stock exchange in Brussels.

The consolidated financial statements of the Group as at and for the year ended December 31, 2016 comprise the Company and its subsidiaries (together referred to as the "Group").

The Group develops, manufactures and markets planar and conventional transformers and operates abroad through its subsidiaries and distributors.

B. Definitions

In these financial statements –

• 1. The Company Payton Planar Magnetics Ltd.
• 1. The Group The Company and its subsidiaries.
• 1. Payton Industries Ltd. Parent company, traded on the Tel Aviv Stock Exchange.
• 1. Subsidiaries Companies, the financial statements of which are fully consolidated, directly or indirectly, with the financial statements of the Company.
• 1. Related party Within its meaning in IAS 24 (2009), "Related Party Disclosures".
• 1. Israeli CPI The Consumer Price Index as published by the Central Bureau of Statistics in Israel.
• 1. NIS The Israeli currency New Israeli Shekel.
• 1. \$ U.S. Dollar.
• 1. GBP Great Britain Pound.

Note 2 - Basis of Preparation

A. Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and its interpretations adopted by the International Accounting Standards Board ("IASB").

The consolidated financial statements were authorized for issue by the Company's Board of Directors on March 28, 2017.

B. Functional and presentation currency

These consolidated financial statements are presented in U.S. dollars, which is the Company's functional currency, and have been rounded to the nearest thousand. The U.S. dollar is the currency that represents the principal economic environment in which the Company operates.

C. Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for the following assets and liabilities:

• * Financial instruments, including derivatives, measured at fair value through profit or loss;
• * Deferred tax assets and liabilities;
• * Employee benefit assets and liabilities

For further information regarding the measurement of these assets and liabilities see Note 3 regarding significant accounting policies.

D. Operating cycle

The operating cycle of the Group is one year. Thus, current assets and current liabilities include items the realization of which is intended and anticipated to take place within one year.

E. Use of estimates and judgments

The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

The preparation of accounting estimates used in the preparation of the Group's financial statements requires management of the Company to make assumptions regarding circumstances and events that involve considerable uncertainty. Management of the Company prepares the estimates on the basis of past experience, various facts, external circumstances, and reasonable assumptions according to the pertinent circumstances of each estimate.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Note 2 - Basis of Preparation (cont'd)

E. Use of estimates and judgments (cont'd)

Determination of fair value

Preparation of the financial statements requires the Group to determine the fair value of certain assets and liabilities.

When determining the fair value of an asset or liability, the Group uses observable market data as much as possible. There are three levels of fair value measurements in the fair value hierarchy that are based on the data used in the measurement, as follows:

• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
• Level 2: inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly
• Level 3: inputs that are not based on observable market data (unobservable inputs).

Further information about the assumptions that were used to determine fair value is included in Note 15, on financial instruments.

Note 3 - Significant Accounting Policies

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities.

A. Basis of consolidation

1. Business combinations

Business combinations, including business combinations under common control are accounted for using the acquisition method.

The acquisition date is the date on which the acquirer obtains control over the acquiree. Control exists when the Group is exposed, or has rights, to variable returns from its involvement with the acquiree and it has the ability to affect those returns through its power over the acquiree. Substantive rights held by the Group and others are taken into account when assessing control.

The Group recognizes goodwill on acquisition according to the fair value of the consideration transferred less the net amount of the fair value of the identifiable assets acquired and the liabilities assumed.

On the acquisition date the acquirer recognizes a contingent liability assumed in a business combination if there is a present obligation resulting from past events and its fair value can be reliably measured.

The consideration transferred includes the fair value of the assets transferred to the previous owners of the acquiree and the liabilities incurred by the acquirer to the previous owners of the acquiree. In addition, the consideration transferred includes the fair value of any contingent consideration. After the acquisition date, the Group recognizes changes in the fair value of contingent consideration classified as a financial liability in profit or loss.

Costs associated with the acquisition that were incurred by the acquirer in the business combination such as legal and valuation consulting fees are expensed in the period the services are received.

A. Basis of consolidation (cont'd)

2. Subsidiaries

Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group.

3. Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealized income or expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.

B. Foreign currency transactions

Transactions in foreign currencies are translated to the functional currency of the Group at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the end of the year.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

Foreign currency differences arising on translation are recognized in profit or loss.

C. Financial instruments

1. Non-derivative financial assets

Initial recognition of financial assets

The Group initially recognizes loans and receivables and deposits on the date that they are created. All other financial assets acquired in a regular way purchase, are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument, meaning on the date the Group undertook to purchase or sell the asset. Nonderivative financial instruments comprise trade and other receivables, deposits and cash and cash equivalents.

Derecognition of financial assets

Financial assets are derecognized when the contractual rights of the Group to the cash flows from the asset expire, or the Group transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred.

Regular way sales of financial assets are recognized on the trade date, meaning on the date the Company undertook to sell the asset.

See 2 hereunder regarding the offset of financial assets and financial liabilities.

C. Financial instruments (cont'd)

1. Non-derivative financial assets (cont'd)

Classification of financial assets into categories and the accounting treatment of each category

The Group classifies its financial assets according to the following categories:

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses.

Loans and receivables comprise cash and cash equivalents, trade and other receivables.

Cash and cash equivalents comprise cash balances available for immediate use and call deposits. Cash equivalents comprise short-term highly liquid investments (with original maturities of three months or less) that are readily convertible into known amounts of cash and are exposed to insignificant risks of change in value.

2. Non-derivative financial liabilities

The Group has the following non-derivative financial liabilities: dividend payable and trade and other payables.

Initial recognition of financial liabilities

Financial liabilities are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

Financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method.

Derecognition of financial liabilities

Financial liabilities are derecognized when the obligation of the Group, as specified in the agreement, expires or when it is discharged or cancelled.

Offset of financial instruments

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

C. Financial instruments (cont'd)

3. Derivative financial instruments

Economic hedges

Hedge accounting is not applied to derivative instruments that economically hedge financial assets and liabilities denominated in foreign currencies. Change in the fair value of such derivatives are recognized in profit or loss under financing income or expenses.

4. Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity.

D. Fixed assets

1. Recognition and measurement

Fixed asset items are measured at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditure that is directly attributable to the acquisition of the asset.

Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.

When major parts of a fixed asset item have different useful lives, they are accounted for as separate items (major components) of fixed assets.

Gains and losses on disposal of a fixed asset item are determined by comparing the proceeds from disposal with the carrying amount of the asset, and are recognized net within "other income" or "other expenses", as relevant, in profit or loss.

2. Subsequent costs

The cost of replacing part of a fixed asset item and other subsequent expenses are capitalized if it is probable that the future economic benefits associated with them will flow to the Group and their cost can be measured reliably. The carrying amount of the replaced part of a fixed asset item is derecognized. The costs of day-to-day servicing are recognized in profit or loss as incurred.

3. Depreciation

Depreciation is a systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of the asset, less its residual value.

An asset is depreciated from the date it is ready for use, meaning the date it reaches the location and condition required for it to operate in the manner intended by management.

Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of fixed asset item, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the assets. Leased assets under finance lease agreements including lands are depreciated over the shorter of the lease term and their useful lives, unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Freehold land is not depreciated.

D. Fixed assets (cont'd)

3. Depreciation (cont'd)

The estimated useful lives for the current and comparative periods are as follows:

Buildings	7-50 years	(mainly 50 years)
Machinery and equipment	3-7 years	(mainly 7 years)
Motor vehicles	7 years
Computers	3-7 years	(mainly 3 years)
Office equipment	3-14 years	(mainly 14 years)
Land under finance leases	70 years

Leasehold improvements are depreciated over the shorter of the lease period or the useful life of the leasehold improvement.

Depreciation methods, useful lives and residual values are reviewed at the end of each reporting year and adjusted if appropriate.

E. Intangible assets

1. Goodwill

Goodwill that arises upon a business acquisition is presented as part of intangible assets. For information on measurement of goodwill at initial recognition, see Paragraph A(1) of this note.

Goodwill, having an indefinite useful life, is not systematically amortized but is tested for impairment at least once a year.

In subsequent periods goodwill is measured at cost less accumulated impairment losses.

2. Other intangible assets

The intangible assets that were acquired by the Group, which have definite useful lives, are measured at cost less accumulated amortization.

Amortization is a systematic allocation of the amortizable amount of an intangible asset over its useful life. The amortizable amount is the cost of the asset less its residual value.

Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of the intangible assets from the date they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in each asset.

The estimated useful lives for the current and comparative periods are as follows:

• Production files 5 years
• Brand name 4 years
• Non-competition agreement 5 years

Amortization methods, useful lives and residual values are reviewed at the end of each reporting year and adjusted if appropriate.

F. Inventories

Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the first-in first-out (FIFO) principle and includes expenditure incurred in acquiring the inventories and the costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

G. Impairment

1. Non-derivative financial assets

A financial asset not carried at fair value through profit or loss is tested for impairment when objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

Objective evidence that financial assets are impaired can include default by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy.

The Group considers evidence of impairment for receivables at both a specific asset and collective level. All individually significant receivables are assessed for specific impairment. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management's judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

An impairment loss is recognized in profit or loss and reflected in a provision for loss against receivables.

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset's original effective interest rate. Losses are recognized in profit or loss and reflected in a provision for loss against the balance of the financial asset measured at amortized cost.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortized cost, the reversal is recognized in profit or loss.

G. Impairment (cont'd)

2. Non-financial assets

The carrying amounts of the Group's non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated.

Once a year and on the same date, or more frequently if there are indications of impairment, the Group estimates the recoverable amount of each cash generating unit that contains goodwill.

For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit").

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the assessments of market participants regarding the time value of money and the risks specific to the asset or cashgenerating unit, for which the estimated future cash flows from the asset or cash-generating unit were not adjusted.

Goodwill acquired in a business combination is allocated to groups of cash-generating units, including those existing in the Group before the business combination, that are expected to benefit from the synergies of the combination.

An impairment loss is recognized if the carrying amount of an asset or cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. As regards cash-generating units that include goodwill, an impairment loss is recognized when the carrying amount of the cash-generating unit, after including the balance of goodwill, exceeds its recoverable amount. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the cash-generating unit on a pro rata basis.

H. Employee benefits

1. Post-employment benefits

The Group has a number of post-employment benefit plans. The plans are usually financed by deposits with insurance companies or with funds managed by a trustee, and they are classified as defined contribution plans and as defined benefit plans.

(a) Defined contribution plans

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and has no legal or constructive obligation to pay further amounts.

Obligations for contributions to defined contribution pension plans are recognized as an expense in profit or loss in the periods during which related services are rendered by employees.

(b) Defined benefit plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan.

The Group's net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value, and the fair value of any plan assets is deducted. The Group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset). The discount rate is the yield at the reporting date on high quality NIS-denominated corporate debentures, that have maturity dates approximating the terms of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit credit method.

Remeasurements of the net defined benefit liability (asset) comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest). Remeasurements are recognized immediately directly in retained earnings through other comprehensive income.

Net interest costs on a net defined obligation are presented under salaries expenses.

The Group has executive insurance policies that were issued before 2004 according to which the profit in real terms accumulated on the severance pay component will be paid to the employees upon their retirement. In respect of such policies, plan assets include both the balance of the severance pay component and the balance of the profit in real terms (if any) on the severance pay deposits that accumulated until the reporting date, and are presented at fair value.

H. Employee benefits (cont'd)

2. Short term benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided or upon the actual absence of the employee when the benefit is not accumulated (such as maternity leave).

A liability is recognized for the amount expected to be paid under short term cash bonus if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

The employee benefits are classified, for measurement purposes, as short-term benefits or as other long-term benefits depending on when the Group expects the benefits to be wholly settled.

I. Revenue

Revenue from the sale of goods in the ordinary course of business is measured at the fair value of the consideration received or receivable. When the credit period is short and constitutes the accepted credit in the industry, the future consideration is not discounted.

Revenue is recognized when persuasive evidence exists (usually in the form of an executed sales agreement) that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably.

Transfer of risks and rewards occurs when the goods are transferred to the customer or to its forwarder.

J. Development costs

Development costs are mainly incurred to customize products for individual contracts. These development costs are expensed as incurred.

K. Leases

Lease of a land from the Israel Lands Administration where the Group assumes substantially all the risks and rewards of ownership is classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Future payments for exercising an option to extend the lease from the Israel Lands Administration are not recognized as part of an asset and corresponding liability since they constitute contingent lease payments that are derived from the fair value of the land on the future dates of renewing the lease agreement.

Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Other leases are classified as operating leases, and the leased assets are not recognized on the Group's statement of financial position.

Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease.

L. Financing income and expenses

Financing income comprises interest income on funds invested, dividend income and changes in the fair value of financial assets at fair value through profit or loss. Interest income is recognized as it accrues, using the effective interest method. Dividend income is recognized on the date that the Group's right to receive payment is established, which in the case of quoted securities is the ex-dividend date.

Changes in the fair value of financial assets at fair value through profit or loss also include income from dividends and interest.

Financing expenses comprise interest expenses on borrowings, changes in the fair value of contingent consideration from a business combination due to the passage of time, changes in the fair value of financial assets at fair value through profit or loss and impairment losses recognized on financial assets (other than losses on trade receivables that are presented under general and administrative expenses).

Borrowing costs, which are not capitalized to qualifying assets, are recognized in profit or loss using the effective interest method.

In the statement of cash flows, interest paid, interest received and dividends received are presented as part of cash flows from operating activities.

Foreign currency gains and losses are reported on a net basis as either financing income or financing expenses depending on whether foreign currency movements are in a net gain or net loss position.

M. Income tax

Income tax comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss, or are recognized directly in other comprehensive income to the extent they relate to items recognized directly in other comprehensive income.

Current taxes

Current tax is the expected tax payable (or receivable) on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date. Current taxes also include taxes in respect of prior years.

Offset of current tax assets and liabilities

Current tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and there is intent to settle current tax liabilities and assets on a net basis or the tax assets and liabilities will be realized simultaneously.

Uncertain tax positions

A provision for uncertain tax positions, including additional tax and interest expenses, is recognized when it is more probable than not that the Group will have to use its economic resources to pay the obligation.

M. Income tax (cont'd)

Deferred taxes

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of goodwill and differences relating to investments in subsidiaries, to the extent that it is probable that they will not reverse in the foreseeable future and to the extent the Group controls the date of reversal.

The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

A deferred tax asset is recognized for unused tax losses, tax benefits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Deferred tax assets that were not recognized are reevaluated at each reporting date and recognized if it has become probable that future taxable profits will be available against which they can be utilized.

Offset of deferred tax assets and liabilities

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity.

N. New standards and interpretations not yet adopted

(1) IFRS 9 (2014), Financial Instruments

IFRS 9 (2014) is a final version of the standard, which includes revised guidance on the classification and measurement of financial instruments, and a new model for measuring impairment of financial assets.

Classification and measurement

In accordance with IFRS 9 (2014), there are three principal categories for measuring financial assets: amortized cost, fair value through profit and loss and fair value through other comprehensive income. The basis of classification for debt instruments is the entity's business model for managing financial assets and the contractual cash flow characteristics of the financial asset. Investments in equity instruments will be measured at fair value through profit and loss (unless the entity elected at initial recognition to present fair value changes in other comprehensive income).

IFRS 9 (2014) requires that changes in fair value of financial liabilities designated at fair value through profit or loss that are attributable to changes in its credit risk, should usually be recognized in other comprehensive income.

N. New standards and interpretations not yet adopted (cont'd)

(1) IFRS 9 (2014), Financial Instruments (cont'd)

Impairment of financial assets

IFRS 9 (2014) presents a new 'expected credit loss' model for calculating impairment. For most financial assets, the new model presents a dual measurement approach for impairment: if the credit risk of a financial asset has not increased significantly since its initial recognition, an impairment provision will be recorded in the amount of the expected credit losses that result from default events that are possible within the twelve months after the reporting date.

If the credit risk has increased significantly, in most cases the impairment provision will increase and be recorded at the level of lifetime expected credit losses of the financial asset.

IFRS 9 (2014) is effective for annual periods beginning on or after January 1, 2018 with early adoption being permitted. It will be applied retrospectively with some exemptions.

The Group is planning to adopt IFRS 9 (2014) as from January 1, 2018.

The Group has examined the effects of applying IFRS 9 (2014), and in its opinion the effect on the financial statements will be immaterial.

(2) IFRS 15, Revenue from Contracts with customers

IFRS 15 replaces the current guidance regarding recognition of revenues and presents a new model for recognizing revenue from contracts with customers. IFRS 15 provides two approaches for recognizing revenue: at a point in time or over time. The model includes five steps for analyzing transactions so as to determine when to recognize revenue and at what amount. Furthermore, IFRS 15 provides new and more extensive disclosure requirements than those that exist under current guidance.

IFRS 15 is applicable for annual periods beginning on or after January 1, 2018 and earlier application is permitted. IFRS 15 includes various alternative transitional provisions, so that companies can choose between one of the following alternatives at initial application: full retrospective application, full retrospective application with practical expedients, or application as from the mandatory effective date, with an adjustment to the balance of retained earnings at that date in respect of transactions that are not yet complete.

The Group's revenue is generated from sale of goods manufactured according to customer specifications. Customer-specific goods cannot be sold to any other customer and therefore have no alternative use.

Currently, revenue is recognized when the goods are transferred to the customer or to its forwarder. Under IFRS 15, revenue from goods with no alternative use is expected to be recognized prior to shipment. Based on the Group's on-going evaluation, this could result in earlier recognition of revenue than under current guidance.

The Group is currently assessing the impact of any change in the timing of revenue recognition and is planning on implementing the standard as from January 1, 2018 using the cumulative catch-up method, and adjusting the balance of retained earnings as at January 1, 2018.

Note 4 - Cash and Cash Equivalents

	December 31 2016	December 31 2015
	\$ thousands	\$ thousands
Bank balances	8,150	3,003
Call deposits	-	3,001
	8,150	6,004

The Group's exposure to interest rate and currency risks concerning cash and cash equivalents is disclosed in Note 15 on financial instruments.

Note 5 - Short-term Deposits

Short-term deposits in dollars, bearing interest at an annual rate of approximately 0.10% - 0.62% (December 31, 2015: 0.60% - 1.35%).

The Group's exposure to interest rate and currency risks concerning deposits is disclosed in Note 15 on financial instruments.

Note 6 - Trade and Other Accounts Receivable

	December 31 2016	December 31 2015
	\$ thousands	\$ thousands
Trade accounts receivable
Trade receivables	7,796	4,326
Less provision for doubtful debts	(3)	(12)
	7,793	4,314
Other accounts receivable
Government institutions	31	13
Related parties	111	90
Derivative instruments	5	-
Other receivables	407	214
	554	317

The Group's exposure to credit and currency risks concerning trade and other accounts receivable is disclosed in Note 15 on financial instruments.

Note 7 - Inventory

	December 31 2016	December 31 2015
	\$ thousands	\$ thousands
Raw and packing material	2,588	2,612
Work-in-process	233	201
Finished products	847	1,336
	3,668	4,149

Note 8 - Fixed Assets

			Computers and
	Machinery	Motor	Office	Land and
	and equipment	vehicles	equipment	Buildings	Total
			\$ thousands
December 31, 2016
Cost
Balance as of
January 1, 2016	2,538	415	1,082	12,009	16,044
Acquisitions	245	196	43	91	575
Disposals	-	(157)	-	-	(157)
Balance as of
December 31,
2016	2,783	454	1,125	12,100	16,462
Accumulated
depreciation
Balance as of
January 1, 2016	1,704	172	580	1,265	3,721
Depreciation for
the year	259	63	115	447	884
Disposals	-	(128)	-	-	(128)
Balance as of
December 31,
2016	1,963	107	695	1,712	4,477
Carrying amounts
as of
December 31,
2016	820	347	430	10,388	11,985
Carrying amounts
January 1, 2016	834	243	502	10,744	12,323
December 31, 2016	820	347	430	10,388	11,985

Note 8 - Fixed Assets (cont'd)

			Computers and
	Machinery	Motor	Office	Leasehold	Land and
	and equipment	vehicles	equipment	improvements	Buildings	Total
			\$ thousands
December 31, 2015
Cost Balance as of January 1, 2015 Transfer to real estate property -	2,315	412	946	110	11,241	15,024
see A below Acquisitions Disposals	- 244 (21)	- 69 (66)	- 137 (1)	(43) - (67)	43 725 -	- 1,175 (155)
Balance as of December 31, 2015	2,538	415	1,082	-	12,009	16,044
Accumulated
depreciation Balance as of January 1, 2015 Transfer to real	1,441	161	438	79	821	2,940
estate property - see A below Depreciation for	-	-	-	(12)	12	-
the year Disposals	284 (21)	63 (52)	143 (1)	- (67)	432 -	922 (141)
Balance as of December 31, 2015	1,704	172	580	-	1,265	3,721
Carrying amounts as of December 31, 2015	834	243	502	-	10,744	12,323
Carrying amounts January 1, 2015	874	251	508	31	10,420	12,084
December 31, 2015	834	243	502	-	10,744	12,323

A. Real Estate Property in UK

On March 9, 2015, Himag Planar Magnetics (hereinafter: "Himag Planar"), a fully owned subsidiary of the Company, purchased an industrial property in Gloucester, UK, the same property that Himag Planar used previously to rent. The property area is of 607m² and its total cost amounted to GBP 435 thousand (USD 663 thousand). Following the purchase, leasehold improvements to the property were reclassified as "land and buildings".

B. Details on land rights used as fixed assets by the Group

The land on which the Company's premises in Israel are built, has a carrying amount of USD 1,327 thousand as at December 31, 2016 (December 31, 2015: USD 1,348 thousand) and is leased from the Israel Lands Administration under a capital lease ending on June 30, 2032. The Company has the right to extend the lease period by another 49 years under certain circumstances.

Note 8 - Fixed Assets (cont'd)

C. Acquisition of fixed assets on credit

During the year ended December 31, 2016, the Company acquired fixed assets on credit in the amount of USD 6 thousand (December 31, 2015: USD 82 thousand).

D. Additional information

The Group has assets that have been fully depreciated and are still in use. As at December 31, 2016 the original cost of such assets is USD 1,302 thousand (December 31, 2015: USD 999 thousand).

Note 9 - Intangible Assets

	Production files \$ thousands	Brand name \$ thousands	Non competition agreement \$ thousands	Goodwill \$ thousands	Total \$ thousands
Cost
Balance as at January 1, 2016 and December 31,2016	536	71	11	731	1,349
Amortization and impairment losses
Balance as at
January 1, 2016	409	54	6	-	469
Amortization for the year	108	17	2	-	127
Impairment loss	-	-	-	709	709
Balance as at
December 31, 2016	517	71	8	709	1,305
Carrying amounts
January 1, 2016	127	17	5	731	880
December 31, 2016	19	-	3	22	44

Note 9 - Intangible Assets (cont'd)

	Production files	Brand name	Non competition agreement	Goodwill	Total
	\$ thousands	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Cost Balance as at January 1, 2015 and December 31, 2015	536	71	11	731	1,349
Amortization Balance as at
January 1, 2015 Amortization for the	302	36	4	-	342
year	107	18	2	-	127
Balance as at December 31, 2015	409	54	6	-	469
Carrying amounts
January 1, 2015	234	35	7	731	1,007
December 31, 2015	127	17	5	731	880

A. Impairment testing for cash-generating units containing goodwill

Goodwill is allocated to the following cash-generating units:

	December 31 2016	December 31 2015
	\$ thousands	\$ thousands
Payton Planar Israeli operations Himag Planar Magnetics Ltd. (1)	22 -	22 709
	22	731

(1) The recoverable amount of Himag Planar cash-generating unit was based on its value in use and was determined by discounting the future cash flows to be generated from Himag Planar. As at December 31, 2015 the recoverable amount of Himag Planar exceeds its carrying amount, thus no impairment loss was recognized. As at December 31, 2016 the carrying amount of Himag Planar was determined to be higher than its recoverable amount of USD 647 thousand, thus an impairment loss in the amount of USD 709 thousand was recognized and is included in other expenses.

Note 9 - Intangible Assets (cont'd)

B. Key assumptions used in calculation of recoverable amount

(1) Discount rate

The discount rate used for calculating Himag Planar recoverable amount is 14.3% (2015: 14.1%). Himag Planar discount rate is based on the risk-free rate for 10-year debentures issued by USA government, and adjusted for a risk premium to reflect both the increased risk of investing in equities and the systematic risk of Himag Planar.

(2) Terminal value growth rate

The terminal value growth rate of Himag Planar is 2% (2015: 2%), based on the growth prospects of the subsidiary.

Note 10 - Other Liabilities

	December 31 2016	December 31 2015
	\$ thousands	\$ thousands
Current liabilities
Contingent consideration (*)	24	158
Non-current liabilities
Contingent consideration (*)	-	82
	24	240

(*) See Note 14C.

The Group's exposure to interest rate, currency and liquidity risks and maturities concerning other liabilities is disclosed in Note 15 on the financial instruments.

Note 11 - Other Payables

	December 31 2016	December 31 2015
	\$ thousands	\$ thousands
Employees and related benefits	646	615
Government institutions	1	37
Derivative instruments	-	6
Other payables and accrued expenses	754	516
	1,401	1,174

The Group's exposure to currency and liquidity risks concerning other payables is disclosed in Note 15 on financial instruments.

Note 12 - Employee Benefits

Employee benefits denominated in NIS include post-employment benefits and short-term benefits.

Composition of employee benefits:

	December 31 2016	December 31 2015
	\$ thousands	\$ thousands
Presented under current liabilities:
Short-term employee benefits	412	350
Presented under non-current liabilities:
Net liability for defined benefit plan	359	319
Total employee benefits	771	669

A. Post-employment benefit plans - defined benefit plan

The Group has defined benefit plans for which it makes contributions to appropriate insurance policies.

	December 31 2016	December 31 2015
	\$ thousands	\$ thousands
Present value of defined benefit obligation	1,479	1,354
Fair value of plan assets	(1,120)	(1,035)
Recognized liability for defined benefit obligations	359	319

1. Movements in the present value of the defined benefit obligations

	2016	2015
	\$ thousands	\$ thousands
Defined benefit obligations as at January 1	1,354	1,339
Benefits paid	(1)	(77)
Current service costs	84	92
Interest costs	65	58
Changes in respect of foreign exchange differences	23	(5)
Remeasurement of defined benefit plan	(46)	(53)
Defined benefit obligation as at December 31	1,479	1,354

Note 12 - Employee Benefits (cont'd)

A. Post-employment benefit plans - defined benefit plan (cont'd)

2. Movements in plan assets

	2016	2015
	\$ thousands	\$ thousands
Fair value of plan assets as at January 1	1,035	1,026
Contributions by employer	72	69
Funded benefits paid	-	(61)
Interest income	31	28
Changes in respect of foreign exchange differences	15	(3)
Remeasurement of defined benefit plan	(33)	(24)
Fair value of plan assets as at December 31	1,120	1,035

3. Expenses recognized in profit or loss

	For the year ended December 31
	2016	2015
	\$ thousands	\$ thousands
Current service costs	84	92
Interest costs	65	58
Interest income	(31)	(28)
Net change in respect of foreign exchange differences	8	(2)
	126	120

4. Recognized in other comprehensive income

	For the year ended December 31
	2016	2015
	\$ thousands	\$ thousands
Defined benefit obligation:
Actuarial gains from changes in financial assumptions	1	31
Actual return less interest income	12	(5)
Other actuarial gains	30	27
Changes in respect of foreign exchange differences	3	-
	46	53
Plan assets:
Actual return less interest income	33	14
Other actuarial gains	-	10
	33	24
Net actuarial gains in the year	13	29

Note 12 - Employee Benefits (cont'd)

A. Post-employment benefit plans - defined benefit plan (cont'd)

5. Actual return

For the year ended December 31
2016	2015
%	%
1.65	2.98

6. Actuarial assumptions and Sensitivity analyses

Principal actuarial assumptions at the reporting date (expressed as weighted averages):

	2016
	%	%
Discount rate as at December 31	2.65	2.64
Future salary growth	3	3
Leave rates for employees:
Less than 10 years of service	5	5
10 years of service or more	2	2

Assumptions regarding future mortality are based on published statistics and mortality tables.

Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below:

	1% Increase		1% Decrease December 31
		December 31
	2016	2015	2016	2015
	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Future salary growth	149	141	(100)	(91)
Discount rate	(99)	(91)	148	140

7. Effect of the plan on the Group's future cash flows

The Group expects to pay approximately USD 74 thousand in contributions to the funded defined benefit plan in 2017.

The Group estimates the plan's duration (based on weighted average) to be 12.51 years at the end of the reporting period (2015: 13.50 years).

Note 12 - Employee Benefits (cont'd)

B. Post-employment benefit plans – defined contribution plan

	For the year ended December 31
	2016	2015
	\$ thousands	\$ thousands
Amount recognized as expense in respect of defined
contribution plan	364	341
C. Short-term employee benefits
	December 31	December 31
	2016	2015

\$ thousands \$ thousands Provision for vacation and recreation 334 279 Liabilities for bonus 78 71 412 350

Note 13 - Investments in Subsidiaries

Details of the subsidiaries, their activities and the Company's interest therein as at December 31, 2016:

A. Payton Planar Holdings (1996) Ltd. (hereinafter "Payton Holdings"):

The Company holds 89% of the equity of Payton Holdings (an Israeli company). Payton Holdings is a non-operative company. The investment in Payton Holdings constitutes a capital note in NIS which is not linked to the CPI and does not bear any interest.

B. Payton America Inc. (hereinafter "Payton America"):

Payton America, a fully owned U.S. corporation, located in Florida U.S.A., manufactures and sells Planar transformers and inductors.

C. Himag Planar Magnetics Ltd. (hereinafter "Himag Planar"):

Himag Planar, a fully owned UK subsidiary, incorporated during December 2012 for the purpose of the business activity acquisition of Himag Solutions Ltd. The investment in Himag Planar constitutes capital notes in USD which do not bear any interest.

Note 14 - Commitments, Contingent Liabilities and Liens

• A. According to a Management Services Agreement signed between the Company and David Yativ Technologies and Management Ltd.*, a management company under the full control of Mr. David Yativ (approved by the Company's General meeting dated October 21, 2014), David Yativ will continue to provide management services as the Active Chairman of the Company. For providing these services by David Yativ his management company will be entitled to management fee at a monthly amount of USD 38 thousand (linked to the local Israeli index) which shall be raised by 3% in April 2016 and April 2017, and a yearly bonus calculated as 3.4% of the annual profit before income taxes and before any other profit based bonus.
• * In March 2015 the management company changed its name to Wichita Ltd.

Note 14 - Commitments, Contingent Liabilities and Liens (cont'd)

• B. According to the employment agreement as from October 2014, the Company's CEO is entitled to a yearly bonus calculated as 2% of the annual profit before income taxes and before any other profit based bonus.
• C. On December 28, 2012 the Company executed an agreement for the purchase, via its fully owned UK subsidiary, Himag Planar, of the business activity of Himag Solutions Ltd.

According to the purchase agreement, Himag Planar has a commitment for additional consideration for the purchased activity, conditional upon achieving a minimum annual sales turnover of at least USD 1.6 million (hereinafter: "The Minimal Turnover") that shall be paid as per the following:

• 1. During 2013-2015 a fixed annual amount starting from USD 30 thousand should the Minimal Turnover be achieved and up to a sum of USD 70 thousand per year, should the annual sales turnover exceed USD 2 million.
• 1. During 2013-2016 an annual amount to be calculated as a percentage of the annual sales turnover starting from 1.5% should the Minimal Turnover be achieved and up to 3.5% should the annual sales turnover exceed USD 2 million.

As a result, the Group recorded a financial liability for contingent consideration. Regarding the fair value of the contingent consideration as at December 31, 2016 - see Note 15E on financial instruments.

Note 15 - Financial Instruments

A. Overview

The Group has exposure to the following risks from its use of financial instruments:

• Credit risk
• Liquidity risk
• Market risk (including currency and interest risks)

This note presents quantitative and qualitative information about the Group's exposure to each of the above risks, and the Group's objectives, policies and processes for measuring and managing risk. The Board of Directors has overall responsibility for the establishment and oversight of the Group's risk management framework.

B. Credit risk

The Group's revenues are derived from sales to customers in Israel, Asia, Europe, America and other countries around the world. The Company's Management regularly monitors the customers' balances and includes specific provisions for doubtful debts in the financial statements that adequately reflect, in the opinion of management, the loss inherent in debts the collection of which is doubtful.

The Group has credit risk insurance for most of its local and other customers, whose yearly activity exceeds USD 5 thousand and USD 10 thousand, respectively.

The Group's cash surpluses are invested in banks. The Group has a surplus cash investment policy for the purpose of reducing risk or maintaining liquidity. This policy is reviewed and updated from time to time according to market changes.

1. Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

	December 31
	2016	2015
	Carrying amount
	\$ thousands	\$ thousands
Cash and cash equivalents	8,150	6,004
Short-term deposits	12,051	13,518
Trade accounts receivable	7,793	4,314
Other accounts receivable	111	90
	28,105	23,926

The aforementioned balances are presented under the items of cash and cash equivalents, short-term deposits, trade accounts receivable and other accounts receivable.

The maximum exposure to credit risk for cash and cash equivalents at the reporting date by geographic region was:

December 31
2016	2015
Carrying amount
\$ thousands	\$ thousands
4,134	5,089
4,001	780
15	135
8,150	6,004

B. Credit risk (cont'd)

1. Exposure to credit risk (cont'd)

The maximum exposure to credit risk for short term deposits at the reporting date by geographic region was:

		December 31
	2016	2015
	Carrying amount
	\$ thousands	\$ thousands
Israel	12,051	10,509
U.S.A.	-	3,009
	12,051	13,518

The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:

	December 31
	2016	2015
	Carrying amount
	\$ thousands	\$ thousands
Israel	223	648
Asia	4,011	1,653
U.K.	152	225
Other countries in Europe	1,237	569
U.S.A.	2,169	1,219
Canada	1	-
	7,793	4,314

Principal customers of the Group at the reporting date:

	December 31
	2016	2015
	Carrying amount
	\$ thousands	\$ thousands
Customer A	1,647	490
Customer B	831	534
Customer C	*	401

* Less than 10% of the Group's consolidated sales (see Note 17A).

B. Credit risk (cont'd)

2. Aging of debts and impairment losses

The aging of trade receivables at the reporting date was:

	December 31
	2016		2015
	Gross	Impairment	Gross	Impairment
	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Not past due	6,373	-	3,575	-
Past due 0-30 days	1,155	-	604	-
Past due 31-120 days	179	-	106	-
Past due 121 days to one year	75	-	41	(12)
Past due more than one year	14	(3)	-	-
	7,796	(3)	4,326	(12)

C. Liquidity risk

The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.

The following are the contractual maturities of financial liabilities based on the actual rates at the reporting date, including estimated interest payments:

	December 31, 2016
	Carrying amount	Contractual cash flows	6 months or less	1-2 years
		\$ thousands
Non-derivative financial liabilities
Trade payables	3,738	3,738	3,738	-
Other payables	754	754	754	-
Other liabilities	24	24	24	-
	4,516	4,516	4,516	-

	December 31, 2015
	Carrying amount	Contractual cash flows	6 months or less	1-2 years
	\$ thousands
Non-derivative financial liabilities
Trade payables	3,061	3,061	3,061	-
Other payables	516	516	516	-
Dividend payable	3,092	3,092	3,092	-
Other liabilities (1)	240	252	158	94
	6,909	6,921	6,827	94

(1) The future cash flows on contingent consideration may be different from the amounts in the above table.

D. Market risk

The Group's normal course of business is being managed in the U.S. dollar currency, thus, most of the market risks are hedged.

Group uses, from time to time, derivatives as a tool for hedging, in order to neutralize fluctuations in profit or loss.

1. Foreign currency risk

Currency risk

Since most of the Group's sales are in US dollar, the Group's gross profit is exposed to the changes in exchange rates of the US dollar in relation to the NIS and to the Chinese currency with regards to labor costs and costs of raw materials. The Company uses derivatives, from time to time, as a tool for economic hedging, especially in order to hedge labor costs and other costs paid in NIS.

As at December 31, 2016, the Group has open future transactions as following:

• 1. Purchase of an option to sell USD 1,800 thousand for NIS 6,966 thousand, the market value of which was estimated at an income of USD 17 thousand.
• 1. Sale of an option to purchase USD 2,000 thousand for NIS 7,800 thousand, the market value of which was estimated at an expense of USD (12) thousand.

As at December 31, 2015, the Group has open future transactions as following:

• 1. Purchase of an option to sell USD 700 thousand for NIS 2,728 thousand, the market value of which was estimated at an income of USD 9 thousand.
• 1. Sale of an option to purchase USD 1,300 thousand for NIS 5,085 thousand, the market value of which was estimated at an expense of USD (15) thousand.

(a) The exposure to foreign currency risk

The Group's exposure to foreign currency risk was as follows based on notional amounts:

			December 31, 2016
	Dollar	NIS	Euro	GBP	Total
	\$ thousands
Current assets:
Cash and cash equivalents	7,683	273	175	19	8,150
Short-term deposits	12,051	-	-	-	12,051
Trade and other receivables	7,148	336	159	261	7,904
Current liabilities:
Other liabilities	(24)	-	-	-	(24)
Trade payables	(3,352)	(320)	(16)	(50)	(3,738)
Other payables	(657)	(94)	(2)	(1)	(754)
	22,849	195	316	229	23,589

• D. Market risk (cont'd)
• 1. Foreign currency risk (cont'd)

(a) The exposure to foreign currency risk (cont'd)

Dollar	NIS	Euro	GBP	Total
	\$ thousands
				6,004
				13,518
3,577	440	63	324	4,404
				(158)
				(3,061)
				(516)
(3,092)	-	-	-	(3,092)
(82)	-	-	-	(82)
				17,017
	5,696 13,518 (158) (2,446) (398) 16,615	59 - - (527) (107) (135)	December 31, 2015 104 - - (4) (11) 152	145 - - (84) - 385

Information regarding significant exchange rates:

	Year ended December 31		Year ended December 31
	2016	2015	2016	2015
	Rate of change		Reporting date spot rate
	%	%	NIS	NIS
1 US dollar	(1.46)	0.33	3.845	3.902

		Year ended December 31		Year ended December 31
	2016	2015	2016	2015
		Rate of change		Reporting date spot rate
	%	%	Euro	Euro
1 US dollar	3.48	11.66	0.951	0.919

		Year ended December 31		Year ended December 31
	2016	2015	2016	2015
		Rate of change		Reporting date spot rate
	%	%	GBP	GBP
1 US dollar	20.59	5.30	0.814	0.675

• D. Market risk (cont'd)
• 1. Foreign currency risk (cont'd)
• (b) Sensitivity analysis

A weakening of the USD against the following currencies as at December 31 would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2015.

	Profit or loss
	December 31 2016	December 31 2015
	\$ thousands	\$ thousands
Increase in the exchange rate of:
5% in the NIS	10	(7)
5% in the Euro	16	8
5% in the GBP	11	19

A strengthening of the USD against the above currencies as at December 31 would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.

2. Interest rate risk

The Group's exposure to market risk for changes in interest rates relates primarily to short-term deposits (in US dollars) which bear interest rates given by or affected by banks in the range of 0.10%-0.62% which changes from time to time.

(a) Profile

At the reporting date the interest rate profile of the Group's interest-bearing financial instruments was:

		December 31
	2016	2015
	Carrying amount
	\$ thousands	\$ thousands
Fixed rate instruments
Financial assets	12,051	16,519

• D. Market risk (cont'd)
• 2. Interest rate risk (cont'd)

(b) Fair value sensitivity analysis for fixed rate instruments

The Group does not account for any fixed rate financial assets at fair value through profit or loss. Therefore a change in interest rates at the reporting date would not affect profit or loss.

E. Fair value

The carrying amounts of financial assets and liabilities, including cash and cash equivalents, trade receivables, other receivables, other short-term investments, trade payables, other payables, derivative instruments, dividend payable and other liabilities are the same or proximate to their fair value. The fair values of the other financial assets and liabilities carried at fair value, by valuation method, are as follows:

As at December 31, 2016 the fair value of the contingent consideration liability has decreased to USD 24 thousand, following a payment of USD 159 thousand referring to year 2015. In addition, a decrease in the net amount of USD 57 thousand has been recognized in the statement of income as follows:

• 1. An amount of USD 69 thousand that reflects the changes related to the actual annual sales turnover has been recognized as other income.
• 1. An amount of USD 12 thousand that reflects the changes related to the time value of the liability has been recognized as financing expenses.

Note 16 - Share Capital and Reserves

A. Share capital - Composition

Number of shares
Authorized Issued and paid
December 31, 2016 and 2015
20,000,000 17,670,775

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to Company's residual assets.

B. Dividends

The following dividends were paid by the Company:

December 31
2016	2015
\$ thousands	\$ thousands
3,092	-

The following dividends were declared but have not yet been paid at the end of each reporting period:

	2016
		2015
	\$ thousands	\$ thousands
USD 0.175 per ordinary share	-	3,092

Note 17 - Income Statement Data

A. Revenues

1. Revenues

		For the year ended December 31
	2016	2015
	\$ thousands	\$ thousands
Export	31,539	26,317
Local	815	1,055
	32,354	27,372

Note 17 - Income Statement Data (cont'd)

A. Revenues (cont'd)

1. Principal customers

The sales revenues include sales to principal customers (which make up in excess of 10% of the sales of the Group):

	For the year ended December 31
	2016	2015
	%	%
Customer A	18	10
Customer B	11	10
Customer C	*	11

* Less than 10% of the Group's consolidated sales.

B. Cost of sales

	For the year ended December 31
	2016	2015
	\$ thousands	\$ thousands
Materials consumed	13,626	11,358
Salaries and related benefits	4,448	4,574
Depreciation and amortization	743	755
Other manufacturing expenses	1,005	1,019
Change inventory of finished products and work in process	457	(371)
	**20,279	**17,335

** Includes inventory write-off of USD 122 thousand and USD 201 thousand for the years ended December 31, 2016 and 2015, respectively.

C. Selling and marketing expenses

	For the year ended December 31
	2016	2015
	\$ thousands	\$ thousands
Salaries and related benefits	1,028	999
Sales commissions	770	709
Advertising and marketing	64	78
Exhibits and travel abroad	332	306
Other	60	57
	2,254	2,149

Note 17 - Income Statement Data (cont'd)

D. General and administrative expenses

	For the year ended December 31
	2016	2015
	\$ thousands	\$ thousands
Salaries and related benefits	1,159	1,044
Office rent, maintenance and communications	204	216
Depreciation	268	294
Professional services	211	271
Management fees and related benefits to a related party	525	480
Other	592	545
	2,959	2,850

E. Other (expenses) income, net

	For the year ended December 31
	2016	2015
	\$ thousands	\$ thousands
Capital gain on sale of fixed assets	7	16
Changes in the fair value of contingent consideration (see Note 15E)	69	(10)
Impairment loss on goodwill (see Note 9A(1))	(709)	-
	(633)	6

F. Finance income and expenses

	For the year ended December 31
	2016	2015
	\$ thousands	\$ thousands
Finance income
Interest income from bank deposits	135	115
Income from marketable securities held for trading	-	5
Interest from tax overpayments	8	12
Other	47	28
	190	160
Finance expenses
Bank charges and others	26	35
Interest on bank loan	-	51
Changes in fair value of contingent consideration
due to the passage of time (see Note 15E)	12	27
Exchange rate differences, net	9	43
	47	156

Note 17 - Income Statement Data (cont'd)

G. Transactions and balances with related parties

	For the year ended December 31
	2016	2015
	\$ thousands	\$ thousands
Management fees and related benefits to Wichita Ltd *	660	609
Fees to directors	33	33
Short-term employee benefits (2016 and 2015: 5 personnel)	697	639
Post-employment benefits (2016 and 2015: 5 personnel)	67	48

* Management fees and related benefits to Wichita Ltd. (see Note 14A) include an amount of USD 135 thousand (year ended December 31, 2015: USD 129 thousand) allocated as selling and marketing expenses.

	December 31
	2016
	\$ thousands	\$ thousands
Presented under other accounts receivable:
The Parent Company	111	90
Presented under other payables:
Wichita Ltd.	230	188
Directors not employed by the Company	9	8

Note 18 - Income Taxes

A. Details regarding the tax environment of the Company

1. Corporate tax rate

(a) Presented hereunder are the tax rates relevant to companies that are not entitled to benefits according to the Law for the Encouragement of Capital Investments in the years 2015 – 2016:

2015 – 26.5% 2016 – 25%

On January 4, 2016 the Knesset plenum passed the Law for the Amendment of the Income Tax Ordinance (Amendment 216) - 2016, by which, inter alia, the corporate tax rate would be reduced by 1.5% to a rate of 25% as from January 1, 2016.

Furthermore, on December 22, 2016 the Knesset plenum passed the Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016, by which, inter alia, the corporate tax rate would be reduced from 25% to 23% in two steps. The first step will be to a rate of 24% as from January 2017 and the second step will be to a rate of 23% as from January 2018.

As a result of the reduction in the tax rate to 25%, the deferred tax balances as at January 4, 2016 were calculated according to the new tax rate specified in the Law for the Amendment of the Income Tax Ordinance, at the tax rate expected to apply on the date of reversal.

A. Details regarding the tax environment of the Company (cont'd)

1. Corporate tax rate (cont'd)

As a result of the reduction in the tax rate to 23% in two steps, the deferred tax balances as at December 31, 2016 were calculated according to the new tax rate specified in the Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018), at the tax rate expected to apply on the date of reversal. The effect of the changes described above on the financial statements as at December 31, 2016 is reflected in a decrease in the deferred tax liabilities in the amount of USD 25 thousand. The adjustment in deferred liabilities was recognized against deferred tax income in the amount of USD 23 thousand and against other comprehensive income in the amount of USD 2 thousand.

Current taxes for the reported periods are calculated according to the tax rates presented above. See also Note 18A(4) hereunder.

(b) According to various amendments to the Income Tax Ordinance (New Version) – 1961, IFRS shall not apply when determining the taxable income for the 2007 through 2013 tax years even if IFRS was applied when preparing the financial statements.

2. The Dollar regulations

The Company, being a "foreign investment company", elected to be taxed as from the year 2009, based upon its results in dollars and according to applicable income tax regulations (hereinafter - "the Dollar regulations").

3. Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969

The Company currently qualifies as an "Industrial Company" as defined in the Law for the Encouragement of Industry (Taxes) - 1969 and accordingly it is entitled to benefits, of which the most significant one is higher rates of depreciation.

4. Tax benefits under the Law for the Encouragement of Capital Investments - 1959 ("the Investment Law")

Amendment to the Law for the Encouragement of Capital Investments – 1959

The Company is subject to the Law for the Encouragement of Capital Investments – 1959 which was amended last in 2010 (hereinafter - "the Amendment to the Law"). The Amendment to the Law provisions apply to preferred income derived or accrued in 2011 and thereafter by a preferred company, per the definition of these terms in the Amendment to the Law.

The Amendment provides that only companies in Development Area A will be entitled to the grants track and that they will be entitled to receive benefits under this track and under the tax benefits track at the same time. In addition, a preferred enterprise track was introduced, which mainly provide a uniform and reduced tax rate for all the company's income entitled to benefits. On August 5, 2013 the Knesset passed the Law for Changes in National Priorities (Legislative Amendments for Achieving Budget Objectives in the Years 2013 and 2014) – 2013, which raised the tax rates on preferred income as from the 2014 tax year as follows: 9% for Development Area A and 16% for the rest of the country.

A. Details regarding the tax environment of the Company (cont'd)

4. Tax benefits under the Law for the Encouragement of Capital Investments - 1959 ("the Investment Law") (cont'd)

The Amendment to the Law also provides that no tax will apply to a dividend distributed out of preferred income to a shareholder that is a company, for both the distributing company and the shareholder. A tax rate of 20% shall apply to a dividend distributed out of preferred income to an individual shareholder or foreign resident, subject to double taxation prevention treaties.

On December 22, 2016, the Israeli parliament passed a law that reduces the tax rate on preferred income for companies located in Development Area A from 9% to 7.5%, commencing on January 1, 2017.

The Company complies with the conditions provided in the amendment to the Law for the Encouragement of Capital Investments for inclusion in the scope of the tax benefits track.

B. Details regarding the tax environment of the subsidiary in USA

Payton America is subject to the tax rate of its country of domicile. The primary tax rates applicable to the subsidiary are Federal Tax at gradual rates up to 34% and 5% State Tax.

C. Details regarding the tax environment of the subsidiary in UK

Himag Planar is subject to the tax rate of its country of domicile. The primary tax rate applicable to the subsidiary is 20%.

D. Final tax assessments

The Company has received final tax assessments up to and including the 2010 tax year.

With few exceptions the U.S. subsidiary is no longer subject to U.S. Federal income tax examinations by tax authorities for years before 2013.

E. Composition of income tax expense

	For the year ended December 31
	2016	2015
	\$ thousands	\$ thousands
Current year taxes	936	581
Deferred tax expense - creation and reversal of temporary differences, net	194	214
Deferred tax income - effect of changes in tax rate	(23)	-
	1,107	795

F. Reconciliation between the theoretical tax on the pre-tax profit and the tax expense

A reconciliation of the statutory tax expense, assuming all income is taxed at the statutory rate applicable to the income of companies in Israel, and their actual tax expense, is as follows:

	For the year ended December 31
	2016	2015
	\$ thousands	\$ thousands
Tax rate	25%	26.5%
Profit before tax	5,360	4,099
Income tax using the domestic corporations tax rate	1,340	1,086
Additional tax saving in respect of foreign subsidiary	(48)	(9)
Non-deductible expenses and tax exempt income, net	3	2
Tax benefits due to Preferred Enterprise status	(421)	(350)
Current year tax losses and other differences for which
deferred taxes were not created	253	53
Changes in tax rate	(23)	-
Others	3	13
	1,107	795

G. Deferred tax assets and liabilities

(1) Recognized deferred tax assets and liabilities

Deferred taxes in respect of companies in Israel are calculated according to the tax rate anticipated to be in effect on the date of reversal as stated above. Deferred taxes in respect of foreign subsidiary are calculated according to the relevant tax rates.

Deferred tax assets and liabilities are attributable to the following items:

	Carry forward tax losses	Employee benefits	Fixed assets	Other	Total
			\$ thousands
Balance as at January 1, 2015 Changes recognized in profit	33	122	(337)	1	(181)
or loss	-	2	(215)	(1)	(214)
Changes recognized in other comprehensive income	-	(6)	-	-	(6)
Balance as at December 31, 2015	33	118	(552)	-	(401)
Effect of changes in tax rate	-	(7)	32	-	25
Changes recognized in profit or loss	6	16	(216)	-	(194)
Changes recognized in other comprehensive income	-	(2)	-	-	(2)
Balance as at
December 31, 2016	39	125	(736)	-	(572)

G. Deferred tax assets and liabilities (cont'd)

(1) Recognized deferred tax assets and liabilities (cont'd)

	Carry forward tax losses	Employee benefits \$ thousands	Fixed assets	Total
Deferred tax assets	39	125	-	164
Offset of balances				(125)
Deferred tax asset in statement of financial position as at December 31, 2016				39
Deferred tax liability	-	-	(736)	(736)
Offset of balances				125
Deferred tax liability in statement of financial position as at December 31, 2016				(611)
	Carry forward tax losses	Employee benefits	Fixed assets	Total
Deferred tax assets	33	118	-	151
Offset of balances				(118)
Deferred tax asset in statement of financial position as at December 31, 2015				33
Deferred tax liability	-	-	(552)	(552)
Offset of balances				118
Deferred tax asset in statement of financial position as at December 31, 2015				(434)

(2) Unrecognized deferred tax liabilities

As at December 31, 2016 a deferred tax liability in the amount of USD 164 thousand (2015: USD 128 thousand) for temporary differences in the amount of USD 657 thousand (2015: USD 481 thousand) related to an investment in a subsidiary was not recognized because the decision as to whether to incur the liability rests with the Group and it is satisfied that it will not be incurred in the foreseeable future.

(3) Unrecognized deferred tax assets

As at December 31, 2016 deferred tax assets have not been recognized mainly in respect of tax losses in the amount of USD 1,507 thousand (2015: USD 801 thousand) since currently it is not probable that future taxable profit will be available, against which the Group can utilize the benefits.

Note 19 - Earnings Per Share

Basic earnings per share

	For the year ended December 31
	2016	2015
Profit for the year (\$ thousands)	4,253	3,304
Issued ordinary shares (in thousands of shares)	17,671	17,671
Basic earnings per ordinary share (in US\$)	0.24	0.19

Note 20 - Entity Wide Disclosures

Non-current

A. The Group has one operating segment, the transformer segment. The Group's chief operating decision maker makes decisions and allocates resources with respect to all the transformers as a whole.

Management observes the operating data up to the net profit, in consistent of the consolidated financial reports presented in accordance with IFRS.

In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers and segment assets are based on the geographical location of the assets.

	For the year ended December 31, 2016
	Israel	Europe	America	Asia	Total
	\$ thousands	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Revenues	1,352	6,720	7,967	16,315	32,354
Non-current assets	10,366	937	726	-	12,029
			For the year ended December 31, 2015
	Israel	Europe	America	Asia	Total
	\$ thousands	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Revenues	1,856	5,967	7,865	11,684	27,372

assets 10,822 1,635 746 - 13,203

B. Information about sales to principal customers - see Note 17A(2).