Payton Planar — Interim / Quarterly Report 2013

Aug 28, 2013

Payton Planar Magnetics Ltd. and its Consolidated Subsidiaries Financial Statements June 30, 2013 (Unaudited)

Contents

	Page
Board of Directors Report	2
Review Letter	9
Condensed Consolidated Interim Financial Statements:
Statement of Financial Position	10
Statements of Comprehensive Income	12
Statements of Changes in Equity	13
Statements of Cash Flows	15
Notes to the Consolidated Interim Financial Statements	17

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 six months ended on June 30, 2013.

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 does 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 June 2013

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.

Real-estate property - A purchase agreement of a real-estate property, was signed on March 10, 2011, for a total amount of NIS 13,250 thousand, excluding 16% VAT (about € 2.7 million excl. VAT). On August 16, 2011, the real-estate transaction was completed and the Company received the possession rights.

The industrial property houses the activities of the three formerly-leased local facilities in one single new building. Management expects that centralizing the activities in the new building will lead to economies of scale and also offer opportunities for synergies between product lines.

On July 18, 2012, the Company concluded and signed agreements with three main construction contractors (total value USD 4.5 million) in order to suit the industrial property to Payton's needs. For funding part of these investments, in October 2012, the Company received a USD 3.5 million long-term loan, against a mortgage of the building. On May 2013 the Company moved two out of its three locations into the new facility and on August 2013

¹ The financial statements as at June 30, 2013 form an integral part thereof.

the Company will complete the last phase of the transfer. To the report date no additional material costs required for the completion, total investment is estimated at about USD 10 million.

Himag Planar Magnetics (U.K.) - on December 28, 2012, further to M.O.U signed on 22.11.12 the Company, via its fully owned UK subsidiary - Himag Planar Magnetics (hereinafter-"Himag"), has executed an agreement to purchase the business activity of Himag Solutions Ltd., a UK company, engaged in the transformers global market. The purchase relates to the Selling Company's business activity (excluding all types of liabilities and obligations) regarding production, development, marketing and distribution of magnetic elements (transformers), including, among others, fixed assets, goodwill, inventory, agreements and intellectual property rights (hereinafter: "The Purchased Activity"). The consideration for the purchased activity has been set to USD 1.2 million paid on 31.12.12 and additional consideration for the purchased activity, conditional upon achieving a minimum annual sales turnover. Starting 1.1.13 Himag started its activity as a part of the Payton Group. The current focus is to increase Himag's efficiency and reach economies of scale in terms of manufacturing, engineering and marketing.

C. Principal customers

The consolidated sales revenues do not include sales to a major customer (which make up in excess of 10% of the sales of the Group).

	For the three-month period ended June 30	For the year ended December 31	For the three-month period ended June 30
	2013	2012	2012
Customer A	*	*	13%
Customer B	*	*	10%

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

D. Marketing

During 2013 the Group participated in the following exhibitions:

• March 2013, APEC in California, USA.
• May 2013, New-Tech in Tel-Aviv, Israel.
• May 2013, PCIM in Nuremberg, Germany.
• June 2013 , ITEC in Dearborn Michigan, USA.

In addition, during 2013, the Company initiated several seminars and conferences in the USA.

E. Order and Purchase Backlog

Order and purchase backlog of the Group as of June 30, 2013 were USD 8,253 thousand (December 31, 2012 - USD 6,217 thousand). The backlog is composed only of firm orders.

Management estimates that most of the backlog as of 30.6.13 will be supplied until March 31, 2014.

2. Financial position

A. Statement of Financial Position as at June 30, 2013

Cash and cash equivalents, Marketable securities held for trading and Short-term Deposits - these items amounted to a total of USD 15,669 thousand as at June 30, 2013 compared to USD 19,703 thousand as at December 31, 2012 and USD 18,363 thousand as at June 30, 2012. During the first six-months of 2013 these items decreased mostly due to the use of cash for investments in the real-estate property.

Fixed assets - these amounted to USD 12,690 thousand as at June 30, 2013, compared to USD 8,110 thousand as at December 31, 2012 and USD 6,401 thousand as at June 30, 2012. The increase in this item resulted mainly from investing in the industrial real-estate property in Israel (See paragraph 1.B above).

Intangible assets - as at June 30, 2013 amounted to USD 1,197 thousand compared to USD 1,279 thousand as at December 31, 2012 and USD 418 thousand as at June 30, 2012.

The increase in this item as at June 30, 2013 compared to June 30, 2012 arises from the intangible assets recognized as a result of the acquisition of the business activity of Himag Solutions, including: goodwill, production files and brand name rights. The fair value of these intangible assets have been determined based on a Purchase Price Allocation ("PPA") prepared by an external independent appraiser.

Trade payables - amounted to USD 2,612 thousand as at June 30, 2013 compared to USD 1,435 thousand as at December 31, 2012 and USD 1,801 thousand as at June 30, 2012. The increase in this item results mainly from increase in liability to main construction contractors of the new facility as a provision for their final payment.

Liabilities to bank and others (Current & Non-current Liabilities) - amounted to a total of USD 3,505 thousand as at June 30, 2013 compared to USD 3,650 thousand as at December 31, 2012 and USD 0 thousand as at June 30, 2012. As at June 30, 2013 these liabilities comprised of a 10 years bank loan in the amount of USD 3,302 thousand (out of which USD 360 thousand are presented as current liabilities) against a mortgage on the real estate property, repayable in monthly payments starting November 2012. The bank loan was taken in order to finance part of the industrial property construction costs. Additional USD 203 thousand (out of which USD 50 thousand are presented as current liabilities) represents the contingent consideration against the purchase of Himag Solutions Ltd.

B. Operating results

Summary of Consolidated quarterly Statements of Income US Dollars in thousands

Payton Planar Magnetics Ltd. Consolidated Income Statements

	Quarter 4-6/13	Quarter 1-3/13	Quarter 10-12/12	Quarter 7-9/12	Quarter 4-6/12
Sales revenues	4,926	4,186	4,502	4,063	4,989
Cost of sales	3,446	2,933	2,788	2,589	3,294
Gross profit	1,480	1,253	1,714	1,474	1,695
Development costs	(228)	(246)	(166)	(217)	(243)
Selling & marketing expenses	(484)	(532)	(483)	(376)	(450)
General & administrative expenses	(682)	(679)	(551)	(552)	(586)
Other (expenses) income	(147)	2	(1)	-	3
Operating (loss) income	(61)	(202)	513	329	419
Finance income, net	16	52	190	119	59
(Loss) profit before income taxes	(45)	(150)	703	448	478
Income taxes	(12)	(22)	(98)	(56)	(117)
(Loss) profit for the period	(57)	(172)	605	392	361
Remeasurement of defined benefit plan	-	-	(59)	-	-
Total comprehensive (loss) income for the period	(57)	(172)	546	392	361

General Note: The Group is exposed to erosion of the USD in relation to the NIS and to the Euro. Most of the Group's salaries and other operating costs are fixed in NIS. Revaluation of the local Israeli currency drives to an increase in labor costs and other operating costs, thus, negatively affects the operating results of the Company. The average rate of the USD with relation to the NIS in the first half of 2013 went down by 3.4% compared to average rate of first half of 2012 and went down by 4.9% compared to average rate of year 2012. The decrease in this rate reflects an increase in the above-mentioned costs when they are presented in USD.

Sales revenues - The Group's sales revenues for the six-month period ended June 30, 2013 were USD 9,112 thousand compared with USD 9,036 thousand in the six-month period ended June 30, 2012. Sales revenues in the second quarter of 2013 reflect increase of 18% compare to sales revenues in the first quarter of 2013.

Gross profit - The Group's gross profit for the six-month period ended June 30, 2013 amounted USD 2,733 thousand (30% of sales) compared with USD 3,179 thousand (35% of sales) in the six-month period ended June 30, 2012. The decrease in the gross profit relates to the product-mix sold during the period and to the consolidation of Himag activities characterized by lower gross margins.

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 six months ended June 30, 2013 amounted to USD 1,016 thousand compared with USD 869 thousand in the six months ended June 30, 2012. The increase in these expenses is mainly due to the incorporation of Himag Planar Magnetics starting 2013 and due to increase in other marketing expenses.

General& Administrative expenses - The Group's General & Administrative expenses for the six months ended June 30, 2013 amounted to USD 1,361 thousand compared with USD 1,222 thousand in the six months ended June 30, 2012. The increase in these expenses relates mainly to the incorporation of Himag Planar Magnetics administrative personnel starting 2013.

Other expenses, net - Other expenses for the six months ended June 30, 2013 amounted to USD 145 thousand. An amount of USD 129 thousand out of these expenses arising from the transfer to the new facility on May 2013.

Income Taxes - the tax expenses for the six-month period ended June 30, 2013 amounted to USD 34 thousand, whereas, tax income for the six-month period ended June 30, 2012 amounted to USD 722 thousand. In the first half last year (2012) income taxes were mostly affected by the write-off of excess tax liability following a final tax assessment concluded.

3. Liquidity

A. Liquidity Ratios

Payton Planar Magnetics Ltd. Consolidated financial ratios
	June 30, 2013	December 31, 2012	June 30, 2012
Current ratio2	5.40	8.99	8.35
Quick ratio3	4.63	7.81	7.31

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

² Current ratio calculation – Current assets / Current liabilities

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

B. Operating activities

Cash flows used for operating activities for the six-month period ended June 30, 2013 amounted USD 9 thousand, compared with cash flows generated from operating activities at the amount of USD 714 thousand for the sixmonth period ended June 30, 2012. The decrease in this cash flows resulted mainly from the decrease in the profit for the period.

C. Investing activities

Cash flows used for investing activities in the six-month period ended June 30, 2013, amounted USD 161 thousand, compared with cash flows used for investing activities of USD 768 thousand in the six-month period ended June 30, 2012.

During the first half of 2013 the Company used these cash flows for building its new industrial real-estate property, mostly covered by materializing short-term bank deposits.

4. Financing sources

The Group financed its activities during the reported periods from its own resources and from a long term bank loan.

5. External factors effects

• 5.1 Revaluation/devaluation of the local Israeli currency 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 NIS, therefore, the operating results of the Company are being affected.
• 5.2 Since the Company conducted the construction process of the industrial real-estate property, revaluation/devaluation of the local Israeli currency in relation to the U.S. Dollar lead to an increase/decrease (respectively) in the accumulated value of the building (fixed assets). All engagement with construction contractors are fixed in the local NIS, therefore costs allocated as fixed assets were affected.
• 5.3 Devaluation of the Euro in relation to the U.S. Dollar leads to a decrease in company's assets in Euro.

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 12 § 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 June 30, 2013 are drawn up in accordance with IFRS and with IAS 34 "Interim Financial 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 first six months of year 2013, their impact on the financial statements, the main risk factors and uncertainties for the remaining months of the financial year, as well as the main transactions with related parties and their possible impact on the abbreviated 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 extent its sincere thanks to the entire personnel for their efforts and contribution to the Group's affairs.

Ness Ziona, August 28, 2013.

David Yativ Chairman of the Board of Directors

Doron Yativ Director and C.E.O.

Somekh Chaikin Telephone 972 3 684 8000 KPMG Millennium Tower Fax 972 3 684 8444 17 Ha'arba'a Street, PO Box 609 Internet www.kpmg.co.il Tel Aviv 61006 Israel

Review Report to the Shareholders of Payton Planar Magnetics Ltd.

Introduction

We have reviewed the accompanying financial information of Payton Planar Magnetics Ltd. and its subsidiaries comprising of the condensed consolidated interim statement of financial position as of June 30, 2013 and the related condensed consolidated interim statements of comprehensive income, changes in equity and cash flows for the six and three-month periods then ended. The Board of Directors and Management are responsible for the preparation and presentation of this interim financial information in accordance with IAS 34 "Interim Financial Reporting". Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review nothing has come to our attention that causes us to believe that the accompanying financial information was not prepared, in all material respects, in accordance with IAS 34 "Interim Financial Reporting."

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

August 28, 2013

Condensed Consolidated Interim Statement of Financial Position as at

		June 30 2013	June 30 2012	December 31 2012
		(Unaudited)	(Unaudited)	(Audited)
	Note	\$ thousands	\$ thousands	\$ thousands
Current assets
Cash and cash equivalents		7,397	10,894	7,684
Short-term deposits		7,303	6,122	10,837
Marketable securities held for trading		969	1,347	1,182
Trade accounts receivable		4,181	3,967	3,519
Other accounts receivable		409	192	469
Current tax assets		338	61	180
Inventory		3,434	3,232	3,629
Total current assets		24,031	25,815	27,500
Non-current assets
Fixed assets		12,690	6,401	8,110
Intangible assets	4	1,197	418	1,279
Deferred taxes		149	119	125
Total non-current assets		14,036	6,938	9,514
Total assets		38,067	32,753	37,014

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

David Yativ Doron Yativ Michal Lichtenstein

August 28, 2013

Condensed Consolidated Interim Statement of Financial Position as at (cont'd)

	June 30 2013 (Unaudited)	June 30 2012 (Unaudited)	December 31 2012 (Audited)
	\$ thousands	\$ thousands	\$ thousands
Liabilities and equity
Current liabilities
Liabilities to bank and others	410	-	408
Trade payables	2,612	1,801	1,435
Other payables	1,006	845	879
Current tax liability	-	57	-
Employee benefits	424	388	336
Total current liabilities	4,452	3,091	3,058
Non-current liabilities
Liabilities to bank and others	3,095	-	3,242
Employee benefits	434	285	399
Total non-current liabilities	3,529	285	3,641
Equity
Share capital	4,836	4,836	4,836
Share premium	8,993	8,993	8,993
Retained earnings	16,257	15,548	16,486
Total equity	30,086	29,377	30,315
Total liabilities and equity	38,067	32,753	37,014

					Year ended
	For the six months ended June 30 2013	2012	For the three months ended June 30 2013	2012	December 31 2012
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Audited)
	\$ thousands	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Revenues Cost of sales	9,112 (6,379)	9,036 (5,857)	4,926 (3,446)	4,989 (3,294)	17,601 *(11,234)
Gross profit	2,733	3,179	1,480	1,695	*6,367
Development costs Selling and marketing	(474)	(463)	(228)	(243)	*(846)
expenses General and administrative	(1,016)	(869)	(484)	(450)	*(1,728)
expenses	(1,361)	(1,222)	(682)	(586)	*(2,325)
Other (expenses) income, net	(145)	(4)	(147)	3	(5)
Operating (loss) income	(263)	621	(61)	419	*1,463
Finance income	105	257	47	79	581
Finance expenses	(37)	(155)	(31)	(20)	(170)
Finance income, net	68	102	16	59	411
(Loss) profit before
income taxes	(195)	723	(45)	478	*1,874
Income taxes	(34)	722	(12)	(117)	568
(Loss) profit for the period	(229)	1,445	(57)	361	*2,442
Other comprehensive income items that will not be transferred to profit and loss
Remeasurement of defined benefit plan	-	-	-	-	*(59)
Total other comprehensive income	-	-	-	-	*(59)
Total comprehensive (loss) income for the period	(229)	1,445	(57)	361	2,383
Basic (loss) earnings per ordinary share (in \$)	(0.01)	0.08	(0.00)	0.02	*0.14

Condensed Consolidated Interim Statements of Comprehensive Income

* Retrospective application – see Note 3B(1) regarding initial application of amended IAS 19, Employee Benefits.

Payton Planar Magnetics Ltd. and its Subsidiaries

Condensed Consolidated Interim Statement of Changes in Equity

	Share capital		Share	Retained
	Number of		premium	earnings	Total
	shares	\$ thousands	\$ thousands	\$ thousands	\$ thousands
For the six months ended June 30, 2013 (Unaudited) Balance at January 1, 2013 Total comprehensive loss for the period	17,670,775	4,836	8,993	16,486	30,315
Loss for the period	-	-	-	(229)	(229)
Total comprehensive loss for the period	-	-	-	(229)	(229)
Balance at June 30, 2013	17,670,775	4,836	8,993	16,257	30,086
For the six months ended June 30, 2012 (Unaudited) Balance at January 1, 2012 Total comprehensive income for the period Profit for the period	17,670,775 -	4,836 -	8,993 -	14,103 1,445	27,932 1,445
Total comprehensive income for the period	-	-	-	1,445	1,445
Balance at June 30, 2012	17,670,775	4,836	8,993	15,548	29,377
For the three months ended June 30, 2013 (Unaudited) Balance at April 1, 2013 Total comprehensive loss for the period Loss for the period	17,670,775 -	4,836 -	8,993 -	16,314 (57)	30,143 (57)
Total comprehensive loss for the period	-	-	-	(57)	(57)
Balance at June 30, 2013	17,670,775	4,836	8,993	16,257	30,086
For the three months ended June 30, 2012 (Unaudited) Balance at April 1, 2012 Total comprehensive income for the period Profit for the period	17,670,775 -	4,836 -	8,993 -	15,187 361	29,016 361
Total comprehensive
income for the period	-	-	-	361	361
Balance at June 30, 2012	17,670,775	4,836	8,993	15,548	29,377

Condensed Consolidated Interim Statement of Changes in Equity (cont'd)

	Share capital		Share	Retained
	Number of shares	\$ thousands	premium \$ thousands	earnings \$ thousands	Total \$ thousands
For the year ended December 31, 2012 (Audited) Balance at January 1, 2012 Total comprehensive	17,670,775	4,836	8,993	14,103	27,932
income for the year Profit for the year Other comprehensive income	- -	- -	- -	2,442 (59)	2,442 (59)
Total comprehensive income for the year	-	-	-	2,383	2,383
Balance at December 31, 2012	17,670,775	4,836	8,993	16,486	30,315

* Retrospective application – see Note 3B(1) regarding initial application of amended IAS 19, Employee Benefits.

				Year ended
	For the six months ended June 30 2013	2012	For the three months ended June 30 2013 2012		December 31 2012
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Audited)
	\$ thousands	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Operating activities
(Loss) profit for the period Adjustments to reconcile (loss) profit to net cash (used for) generated from operating	(229)	1,445	(57)	361	*2,442
activities:
Depreciation and amortization	337	353	182	178	596
Income taxes	34	(722)	12	117	(568)
Capital loss (gain) on sale of
fixed assets	16	4	18	(3)	5
Increase in employee
benefits	123	113	76	26	*116
Increase in trade accounts
receivable	(662)	(467)	(701)	(824)	(19)
Decrease (increase) in other accounts receivable		225		503	(52)
Decrease (increase) in inventory	60 195	(202)	267 153	(31)	(269)
Increase in trade payables	250	545	282	341	160
Increase (decrease) in other
payables	127	33	13	(20)	67
Finance income, net	(60)	(103)	(1)	(48)	(302)
Interest received	28	71	12	45	234
Interest paid	(12)	(138)	(12)	(138)	(138)
Tax paid	(216)	(443)	(53)	(308)	(779)
Cash flows (used for) generated from operating activities	(9)	714	191	199	1,493
Investing activities Proceeds from sale of marketable securities held
for trading	205	-	105	-	200
Proceeds from (investments in)
short-term deposits, net	3,566	1,015	1,566	1,015	(3,766)
Investment in fixed assets	(3,942)	(383)	(1,274)	(142)	(2,100)
Proceeds from sale of
fixed assets	10	37	-	14	37
Acquisition of business activity
from related party Acquisition of other business	-	(1,437)	-	(875)	(1,437)
activity	-	-	-	-	(1,200)
Cash flows (used for) generated from investing
activities	(161)	(768)	397	12	(8,266)

Condensed Consolidated Interim Statements of Cash Flows

* Retrospective application – see Note 3B(1) regarding initial application of amended IAS 19, Employee Benefits.

Condensed Consolidated Interim Statements of Cash Flows (cont'd)

					Year ended
	For the six months ended June 30		For the three months ended June 30	December 31
	2013	2012	2013	2012	2012
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Audited)
	\$ thousands	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Financing activities
Loan received from bank	-	-	-	-	3,500
Repayment of loan	(147)	-	(59)	-	(58)
Cash flows (used for) generated from financing
activities	(147)	-	(59)	-	3,442
Net (decrease) increase in cash and cash equivalents	(317)	(54)	529	211	(3,331)
Cash and cash equivalents at the beginning of the period	7,684	10,964	6,854	10,737	10,964
Effect of exchange rate fluctuations on cash and cash
equivalents	30	(16)	14	(54)	51
Cash and cash equivalents
at the end of the period	7,397	10,894	7,397	10,894	7,684

Note 1 - General

Payton Planar Magnetics Ltd. ("the Company") was incorporated in December 1992.

In May 2013 the Company moved to its new premises located at 3 Ha'avoda Street, Ness-Ziona.

The Company is a subsidiary of Payton Industries Ltd. (the "Parent Company"). In June 1998, the Company completed its initial public offering in the Euro NM.

The condensed consolidated interim financial statements of the Group as at June 30, 2013 comprise the Company and its subsidiaries (together referred as the "Group").

The Group develops, manufactures and markets planar and conventional transformers and operates abroad through its subsidiaries and distributors. Its manufacturing includes the manufacture of printed circuits.

Note 2 - Basis of Preparation

A. Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting". They do not include all the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements as at December 31, 2012 (hereinafter "annual financial statements"). These condensed consolidated interim financial statements were authorized for issue by the Group's Board of Directors on August 28, 2013.

B. Use of estimates and judgments

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

In preparing these condensed consolidated interim financial statements, the significant judgments made by management in applying the Company's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the annual financial statements.

Note 3 - Significant Accounting Policies

A. Except as described in B. hereunder, the accounting policies applied by the Group in these condensed consolidated interim financial statements are the same as those applied by the Group in its annual financial statements.

B. Initial application of new standards

(1) Amendment to IAS 19, Employee Benefits (hereinafter – "the Amendment")

As from January 1, 2013 the Group applies the amendment to IAS 19. The amendment to IAS 19 introduces a number of changes to the accounting treatment of employee benefits, including the recognition of all actuarial gains and losses immediately through other comprehensive income directly to retained earnings. Furthermore, the interest that is recognized in profit or loss will be calculated on the balance of the net defined benefit liability (asset), according to the discount rate that is used to measure the liability. In addition, employee benefits will be classified as short or long term depending on when the Group expects the benefits to be wholly settled.

Following application of the amended standard the Group immediately recognized the gains/losses from remeasurement of a defined benefit program directly to retained earnings instead of to profit or loss. Consequently, comparative figures have been restated as follows:

Effect on the statement of comprehensive income:

	For the year ended December 31, 2012
	As presented in the past (audited) \$ thousands	Effect of retrospective application of IAS 19 \$ thousands	As presented in these financial statements \$ thousands
Cost of sales	(11,248)	14	(11,234)
Gross profit	6,353	14	6,367
Development costs	(859)	13	(846)
Selling and marketing expenses	(1,740)	12	(1,728)
General and administrative expenses	(2,345)	20	(2,325)
Operating income	1,404	59	1,463
Profit before income taxes	1,815	59	1,874
Profit for the year	2,383	59	2,442
Other comprehensive income items that will not be transferred to profit or loss Remeasurement of defined benefit plan	-	(59)	(59)
Basic earnings per ordinary share (in \$)	0.13	0.01	0.14

Note 3 - Significant Accounting Policies (cont'd)

B. Intial application of new standards (cont'd)

(2) IFRS 10, Consolidated Financial Statements (hereinafter - "IFRS 10")

IFRS 10 introduces a new single control model for determining whether an investee should be consolidated, which is to be implemented with respect to all investees.

De facto power is to be considered when assessing control, which means that the existence of effective control of an investee will require consolidation.

When assessing the existence of control, all substantive potential voting rights will be taken into account, and not only potential voting rights that are currently exercisable.

IFRS 10 is applicable retrospectively (other than certain relief in the transitional provisions).

The application of IFRS 10 did not have a material effect on the financial statements.

(3) IFRS 13, Fair Value Measurement (hereinafter - "IFRS 13")

On publication of IFRS 13 the disclosure requirements regarding fair value of financial instruments in interim financial statements were expanded. IFRS 13 is applicable on a prospective basis where the disclosure requirements need not be applied in comparative information for periods before initial application.

The standard's requirements were included in these financial statements as part of Note 6 regarding financial instruments.

Note 4 - Acquisition of Other Business Activity

Further to Note 5B to the consolidated financial statements as at December 31, 2012, a Purchase Price allocation ("PPA"), prepared by an external independent appraiser, has been completed.

The following summarizes the recognized amounts of identifiable assets acquired based on the PPA (no adjustment is required to the amounts recognized in the financial statements as at December 31, 2012):

	December 31 2012
	\$ thousands
Inventories	330
Intangible assets (1)	905
Fixed assets	165
Net assets	1,400

Note 4 - Acquisition of Other Business Activity (cont'd)

(1) Intangible assets recognized as a result of the acquisition are as follows:

	Estimated useful Life	\$ thousands
Production files	5 years	96
Order and purchase backlog	0.5 years	18
Brand name	4 years	71
Non-competition agreement	5 years	11
Goodwill		709
		905

Note 5 - Material Events in the Reporting Period

A. Acquisitions and disposals of Fixed Assets

• (1) The investment in fixed assets during the six-month period ended June 30, 2013 amounted USD 4,825 thousand, most of which relates to investments in the real estate property (see Note 11 to the consolidated financial statements as at December 31, 2012). This investment includes acquisition of fixed assets on credit in the amount of USD 946 thousand.
• (2) Assets with a carrying amount of USD 26 thousand were disposed of during the six-month period ended June 30, 2013, some of which were abandoned following the move to the new facility. As a result, the Group recorded a capital loss in the amount of USD 16 thousand included in other expenses in the statement of comprehensive income.

B. As noted in Note 1, in May 2013 the Company moved to its new premises. Expenses incurred by the Company arising from the move to the new facility amounted to USD 129 thousand. These expenses are presented as part of other expenses in the statement of comprehensive income.

Note 6 - Financial Instruments

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 and liabilities to banks and others are the same or proximate to their fair value.

Fair value hierarchy

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

• Level 1: quoted prices (unadjusted) in active markets for identical instruments.
• 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).

Note 6 - Financial Instruments (cont'd)

	June 30, 2013
	Level 1	Level 3	Total
	\$ thousands	\$ thousands	\$ thousands
Marketable securities held for trading	969	-	969
Contingent consideration	-	203	203

The fair value of contingent consideration is calculated at the time of the business combination using the income approach based on the expected payment amounts and their associated probabilities (i.e. probability-weighted). The liability is discounted to present value using the market interest rate at the reporting date.

Significant unobservable inputs include the expected annual sales turnover and the discount rate (16.6%). The estimate of fair value will increase as the expected annual sales turnover increases and the discount rate decreases.

As at June 30, 2013 the fair value of the contingent consideration has increased to USD 203 thousand, an increase that reflects the changes related to the time value of the liability since the date of acquisition. Therefore, the Group has recognized an amount of USD 3 thousand as financing expenses in the statement of income.

Note 7 - Subsequent Events

On July 30, 2013 the Knesset passed the Law for the change in the order of National Priorities (Legislative amendments to achieve budget objectives for 2013 and 2014) - 2013. As part of the legislation Company Tax was increased to 26.5% as from January 1, 2014 and the Law for the Encouragement of Capital Investments was amended so that the tax rate applicable to a beneficiary enterprise in this period in Development Area A will be 9% and the tax rate in other parts of the country will be 16%. Similarly, it was determined that the tax rate on dividends distributed to individuals and foreign residents out of exempt income will be increased to 20% as from January 1, 2014 as opposed to the current rate of 15%. The increase in the tax rate will also be effective for dividends sourced out of tourism approved enterprises or agricultural approved enterprises (for those enterprises approved from January 1, 2014 and subsequently), and also to a tourism beneficiary enterprise whose exempt income was achieved during the benefit period starting in the elected year, being the 2014 tax year and subsequently.

Were the legislation to have been substantially enacted by June 30, 2013 the effect of the change on the financial statements as at June 30, 2013 would be reflected in an increase in deferred tax balances of USD 14 thousand. The adjustment in the deferred tax balances would have been recognized against deferred tax expenses.