For the fiscal year ended December 31, 2003
Commission file no.
CROW TECHNOLOGIES 1977 LTD.
(Formerly: BARI TRUST INVESTMENTS LTD.)
(Exact name of Registrant as specified in its charter and translation of Registrant’s name into English)
Israel
(Jurisdiction of incorporation or organization)
57 Hamelacha Street, Holon 58855, Israel
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares, par value NIS 0.25 per share
(Title of Class)
Securities for which there is reporting obligation pursuant to Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
4,372,275 Ordinary Shares
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark which financial statement item the Registrant has elected to follow:
o Item 17 x Item 18
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This amendment to our annual report on Form 20-F for the fiscal year ended December 31, 2003 is filed for the purpose of amending Item 5 and Item 11 of the original annual report, as follows:
(1) Item 5 of our original Form 20-F for the year ended December 31, 2003 is hereby amended by adding an analysis of our operation results and cash flow for the year ended December 31, 2002 as compared to the year ended December 31, 2001, instead of incorporating the analysis of such results by reference to our annual report for the year ended December 31, 2002. In addition, a reference to note 21(j) of our consolidated financial statements for the year ended December 31, 2003 is hereby added in the last sentence of the paragraph “Deferred Income Taxes” under the section captioned “Significant Accounting Principles and Policies” in Item 5.A.
(2) Due to a clerical error with respect to Item 11 of our original Form 20-F for the year ended December 31, 2003, this Item 11 is hereby replaced in its entirety.
Therefore, this Form 20-F/A consists of a cover page, this explanatory note, Item 5 (as amended), Item 11 (as amended), the signature page and the required certifications of our chief executive officer and the person serving in the capacity of our financial officer.
This amendment does not reflect events occurring after the filing of the original Form 20-F for the fiscal year ended December 31, 2003, and should not be viewed as updating any information contained therein. Except as described above, no change has been made to our annual report on Form 20-F filed on July 15, 2004.
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| ITEM 5: | OPERATING AND FINANCIAL REVIEW AND PROSPECTS. |
| A. | OPERATING RESULTS |
The following discussion and analysis should be read in conjunction with our Financial Statements and notes thereto included elsewhere in this report.
We are engaged in the area of security alarm systems. We design, develop, manufacture, sell and distribute a broad range of sophisticated security detection and alarm systems consisting of a wide range of wired and wireless control panels, several lines of indoor and outdoor sensors, access control systems and communication systems for use in commercial and industrial facilities, residential homes and open areas. In addition to our security detection and alarm systems, we also design and produce microwave barriers and perimeter protection systems for civil and military applications.
Our principal business activities are conducted through our subsidiary Orev (acquired by us in 1999), which directly holds shares in, and directs the business operations of, its subsidiaries mentioned throughout this annual report.
We sell our security alarm products throughout the world, directly and through our distributors and security system integrators. In Israel we market and sell our products directly and our customers in Israel include central station monitoring providers and security systems integrators and installers. Our foreign customers outside of Israel consist primarily of independent distributors with whom we have distribution arrangements on both an exclusive and non-exclusive basis with respect to approximately fifty (50) countries throughout the world.
Our financial statements are prepared in accordance with accounting principles, and audited annually in accordance with auditing standards, generally accepted in Israel. A discussion of the significant accounting policies which we follow in preparing our financial statements is set forth in Note 2 to our consolidated financial statements included elsewhere in this annual report. The following is a summary of certain principles that have a substantial impact upon our financial statements and, we believe, are most important to keep in mind in assessing our financial condition and operating results:
Use of Estimates. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate, on an ongoing basis, our estimates, including those related to bad debts, income taxes and contingencies. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. The results of these assumptions are the basis for determining the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
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Principles of Consolidation. The consolidated financial statements include the accounts of Crow, its subsidiaries and 50% of the accounts of the jointly controlled entities. Inter-company transactions and balances between Crow, the consolidated subsidiaries and the jointly controlled entity are eliminated in consolidation. In accordance with Statement No. 57 of the Israeli Institute, the financial statements of jointly controlled entities are included in our consolidated financial statements according to proportionate consolidation method.
Investment in Affiliate. The investment in an affiliate over which we can exercise significant influence (generally entities in which we holds 20%-50%, except for jointly controlled entities) is presented using the equity method of accounting.
Allowance for Doubtful Accounts. The allowance for doubtful accounts is calculated primarily with respect to specific receivables that, in the opinion of our management, are doubtful of collection.
Deferred Income Taxes.Deferred income taxes are computed in respect of temporary differences between the amounts included in our financial statements and those to be considered for tax purposes. The main factors in respect of which deferred income taxes have been included are as follows: property and equipment, provision for vacation, accrued severance pay, net, and losses for tax purposes.
Deferred tax balances are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. The amount presented in the statement of operations represents the changes in the said balances during the reported year.
Taxes that would apply in the event of the realization of investments in subsidiaries were not included in computing the deferred taxes, since the sale of the said subsidiaries is not expected in the foreseeable future. In addition, taxes that we may incur in the event of a dividend distribution by the subsidiary have not been taken into account in computing deferred income taxes, since we do not intend to distribute taxable dividends in the foreseeable future.
For additional analysis of tax issues, please refer to Notes 17 and 21(j) of our consolidated financial statements included elsewhere in this report.
Revenue Recognition. Revenues from product sales are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable, and collection is probable.
Research and Development Cost. Research and development costs are charged to the statement of operations as incurred.
Advertising Expenses. Advertising expenses are charged to the statement of operations as incurred.
Reclassification. Certain amounts from prior years have been reclassified to conform to the current year’s presentation.
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The following table sets forth for the periods indicated, selected items from our consolidated statements of operations as a percentage of our total sales.
Year Ended December 31 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | 2003 | |||||||||
| Sales | 100 | % | 100 | % | 100 | % | |||||
| Cost of Sales | 74 | .6% | 65 | .7% | 64 | .4% | |||||
| Gross Profit | 25 | .4% | 34 | .3% | 35 | .6% | |||||
| Research & Development Expenses | 6 | .2% | 5 | .8% | 5 | .2% | |||||
| Sales and Marketing Expenses | 9 | .5% | 7 | .3% | 8 | .6% | |||||
| General & Administrative Expenses | 13 | .3% | 12 | .1% | 12 | .3% | |||||
| Amortization of Other Assets | 0 | .9% | 1 | .0% | 0 | .9% | |||||
| Operating Income (Loss) | (4 | .5)% | 8 | .1% | 8 | .6% | |||||
| Income (Loss) Before Tax | (0 | .9)% | 4 | .6% | 3 | .4% | |||||
| Net Income (Loss) | (6 | .2)% | 2 | .2% | 0 | .9% | |||||
Analysis of our Operation Results for the Year ended December 31, 2003 Compared to Year ended December 31, 2002.
Revenue.In the year ended December 31, 2003, our revenues amounted to approximately NIS 100.1 million as compared to approximately NIS 92.3 million in the year ended December 31, 2002. This increase of approximately NIS 7.8 million derived primarily from an increase in our export sales, mainly in Europe, Australia and New Zealand. In addition, sales of our control panels have increased during 2003 which resulted in an increase of the sales of our detectors.
Most of our revenues are received in U.S. dollars. During the year 2003, the prices of our products in dollars have not materially changed; however, due to the revaluation of the NIS as compared to the dollar, the prices of our products in NIS have decreased.
Cost of Sales. In the year ended December 31, 2003 our cost of sales amounted to approximately NIS 64.5 million as compared to approximately NIS 60.7 million in the year ended December 31, 2002. This increase of approximately NIS 3.8 million resulted from the increase of our volume of sales as described above.
Gross Profit. In the year ended December 31, 2003 our gross profit amounted to approximately NIS 35.7 million as compared to approximately NIS 31.6 million in the year ended December 31, 2002. This increase of approximately NIS 4.1 million resulted from the increase of our sales volume. Our gross profit margins reached 35.6% in the year 2003 as compared to gross profit margins of 34.3% in the year 2002. Such increase reflects the increase in our sales which was higher than the increase in our overhead expenses.
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Research and Development. In the year ended December 31, 2003, our research and development expenses amounted to approximately NIS 5.23 million as compared to approximately NIS 5.38 million in the year ended December 31, 2002 (reflecting a decrease of approximately 0.15 million). Orev performs most of our research and development and the amount expended for that purpose during the years 2002 and 2003 remained substantially the same, as we believe it to be sufficient to implement our growth and development strategy.
Selling and Marketing Expenses. In the year ended December 31, 2003, our selling and marketing expenses amounted to approximately NIS 8.6 million as compared to approximately NIS 6.8 million in the year ended December 31, 2002. This increase of approximately NIS 1.8 million resulted from an increase in our export expenses, an increase in our salary expenses, and an increase in our marketing expenses for the Australian market due to our increased marketing efforts in the Australian Market.
General and Administrative Expenses. In the year ended December 31, 2003, our general and administrative expenses amounted to approximately NIS 12.4 million as compared to approximately NIS 11.2 million in the year ended December 31, 2002. This increase of approximately NIS 1.2 million is due primarily to an increase in the provision for doubtful debts, recorded for the year ended December 31, 2003, in a total amount of approximately NIS 1.5 million, with respect to our distributors in the U.S. and South and Central America. In addition, general and administrative expenses of our subsidiaries in Australia and New Zealand have increased in the year 2003 as compared to the year 2002. The other general and administrative expenses in Orev have decreased.
Amortization of Other Assets. In the years ended December 31, 2002 and 2003 we incurred amortization expenses amounting to approximately NIS 0.9 million with respect to the amortization of the marketing rights assets resulting from Orev’s acquisition of its subsidiary in Australia in April 2001. These assets are amortized over a period of 5 years commencing on the day of acquisition. Our amortization expenses with respect to the marketing rights assets referred to above for the year ended December 31, 2001 amounted only to approximately NIS 0.7 million due to the fact that in the year 2001 such assets were amortized over a 9 month period (as compared to amortization over a 12 month period in the years 2002 and 2003).
Operating Income. In the year ended December 31, 2003, our operating income amounted to approximately NIS 8.6 million as compared to approximately NIS 7.3 million in the year ended December 31, 2002. This increase of approximately NIS 1.3 million resulted primarily from the increase in our gross profit (resulting from the increase in sales), which was higher than the increase of the selling and marketing expenses and the general and administrative expenses.
Financial Expenses. In the year ended December 31, 2003, our financial expenses amounted to approximately NIS 3.7 million as compared to approximately NIS 2.4 million for the year ended December 31, 2002. This increase of approximately NIS 1.3 million resulted mainly from the revaluation of the NIS during the year 2003 as compared to the U.S. dollar. Such revaluation decreased our dollar-linked trade receivables which are higher than our dollar-linked liabilities.
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Other Expenses. In the year ended December 31, 2003, our other expenses amounted to approximately NIS 1.5 million as compared to approximately NIS 0.7 million for the year ended December 31, 2002. This net increase of approximately NIS 0.8 million resulted from the increase in the amount of company interest in losses of jointly controlled entities attributed to the other partners (primarily Freelink), which we recorded due to guarantees and loans that we provided to those controlled entities. The increased losses resulted from a decrease in the year 2003 in the revenues and profitability of Freelink as compared to the year 2002.
Net Income. In the year ended December 31, 2003 our net income amounted to approximately NIS 0.9 million as compared to approximately NIS 2.1 million for the year ended December 31, 2002. Although our operating income increased as compared to the year 2002, our net income decreased due to an increase in our financial expenses, other expenses and minority interest in earnings of subsidiaries.
Analysis of our Operation Results for the Year ended December 31, 2002 Compared to Year ended December 31, 2001.
Revenue. In the year ended December 31, 2002, our revenues amounted to approximately NIS 92.3 million as compared to approximately NIS 78.5 million in the year ended December 31, 2001. The increase of approximately NIS 13.8 million derived from the additional sales generated by our two subsidiaries in Australia and New Zealand, which increased their sales by 78% from approximately NIS 12.8 million in 2001 to approximately NIS 22.8 million in 2002.
Most of our revenues are received in U.S. dollars. During the year 2002, the prices of our products in dollars have not materially changed; however, due to the devaluation of the NIS as compared to the dollar, the prices of our products in NIS have increased. Sales of new products constituted 6% of our sales for the year ended December 31, 2002.
Cost of Sales. In the year ended December 31, 2002 our cost of sales amounted to approximately NIS 60.7 million as compared to approximately NIS 58.5 million in the year ended December 31, 2001.
Gross Profit.In the year ended December 31, 2002 our gross profit amounted to approximately NIS 31.6 million as compared to approximately NIS 19.9 million in the year ended December 31, 2001. This increase of approximately NIS 11.7 million resulted from the increase of our sales volume. Our gross profit margins reached 34.3% in the year 2002 as compared to gross profit margins of 25.4% in the year 2001. Orev’s gross profit was affected primarily by the devaluation of the NIS as compared to the U.S. dollar in the year 2002, which caused an increase in our sales in terms of NIS. Furthermore, the increase in our cost of sales in NIS linked to the U.S. dollars was offset by a reduction in our production costs in U.S. dollars, thus contributing to an overall increase in our gross profit.
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Research and Development.In the year ended December 31, 2002, our research and development expenses amounted to approximately NIS 5.38 million as compared to approximately NIS 4.85 million in the year ended December 31, 2001. This increase resulted from a continuation of Orev’s growth strategy which it began implementing in 2000 and reflects an overall increase in Orev’s research and development expenses due to an expansion of Orev’s R&D activities and staff during the year 2002.
Selling and Marketing Expenses.In the year ended December 31, 2002, our selling and marketing expenses amounted to approximately NIS 6.8 million as compared to approximately NIS 7.5 million in the year ended December, 31, 2001. This decrease of approximately NIS 0.7 million is due primarily to a relative decrease in the overall cost of Orev’s participation in the marketing expenditures of its worldwide distributors during the year 2002, and a relative increase at the end of 2002 in its marketing efforts aimed towards its original equipment manufacturing (OEM) market.
General and Administrative Expenses. In the year ended December 31, 2002, our general and administrative expenses amounted to approximately NIS 11.2 million as compared to approximately NIS 10.4 million in the year ended December 31, 2001. This increase of approximately NIS 0.8 million is due primarily to an increase in the general and administrative expenses of our subsidiaries in Australia and New Zealand.
Amortization of Other Assets. In the year ended December 31, 2002 we incurred amortization expenses amounting to approximately NIS 0.9 million as compared to approximately NIS 0.7 million in the year ended December 31, 2001. Such expenses were incurred with respect to the amortization of the marketing rights assets resulting from Orev’s acquisition of its subsidiary in Australia in April 2001. These assets are amortized over a period of 5 years commencing on the day of acquisition. The amortization costs in the year 2001 were lower than the costs in 2002 due to the fact that in 2001 the marketing rights assets referred to above were amortized over a 9 month period as compared to amortization over a 12 month period in the year 2002.
Operating Income/Loss. In the year ended December 31, 2002, our operating income amounted to NIS 7.3 million as compared to an operating loss of NIS 3.5 million in the year ended December 31, 2001. This change of approximately NIS 10.8 million resulted primarily from the increase in our gross profits for the year 2002 (resulting from the increase in our sales).
Financial Expenses.In the year ended December 31, 2002, our financial expenses amounted to approximately NIS 2.4 million as compared to approximately NIS 1.8 million for the year ended December 31, 2001. This increase of approximately NIS 0.6 million resulted mainly from the decrease in the rate of devaluation of the NIS versus the U.S. dollar in the year 2002 as compared to the year 2001.
Other Income/Expenses. In the year ended December 31, 2002, our other expenses amounted to approximately NIS 0.7 million as compared to the year ended December 31, 2001, in which our other income amounted to approximately NIS 4.6 million. This change is attributed to a capital gain of approximately NIS 5 million that we recorded in the year 2001 due to a decrease in our holdings of Video Domain Technologies Ltd.
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Net Income/Loss.As a result of the items set forth above, in the year ended December 31, 2002 our net income amounted to NIS 2.1 million as compared to the year ended December 31, 2001, in which our loss amounted to approximately NIS 4.9 million.
The following is a breakdown of the percentage of our sales by geographic regions:
| Year ending December 31, | Europe | Australia, New Zealand, South and East Asia | America | Israel | Other |
|---|---|---|---|---|---|
| 2003 | 52% | 27% | 9% | 11% | 1% |
| 2002 | 47% | 27% | 10% | 15% | 1% |
| 2001 | 51% | 18% | 12% | 18% | 1% |
Our focus on the European market resulted in an increase of our total sale in Europe as compared to the year 2002. Consequently, the share of the American and Israeli markets as a percentage of our total sales has decreased. The changes between the years 2001 and 2002 in the share of the various regions as a percentage of total sales, resulted from the acquisition in 2001 of Orev’s subsidiaries in Australia and New Zealand.
We are incorporated under the laws of the State of Israel and our principal offices are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our operations.
Israel’s economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices and military conflicts. The Israeli Government has, for these and other reasons, intervened in the economy by utilizing, among other things, fiscal and monetary policies, import duties, foreign currency restrictions and control of wages, prices and exchange rates. The Israeli Government has periodically changed its policies in all of these areas.
Until 1998, transactions in foreign currency were strictly regulated. In May 1998, the Bank of Israel liberalized its foreign currency regulations by issuing a new “general permit” providing that foreign currency transactions are generally permitted, although some restrictions still apply. Under the new general permit, foreign currency transactions prescribed by the Israeli Currency Control Law, 1978 must be reported to the Bank of Israel; and a foreign resident must provide his financial mediator with certain details regarding a transaction in which Israeli currency is being deposited in, or withdrawn from, his account. We cannot predict the future impact of exchange controls on the value of the NIS as compared to the dollar and the corresponding effect on our financial statements. The Israeli Government and the Israeli Central Bank’s monetary policies contributed to relative price and exchange rate stability in recent years, despite fluctuating rates of economic growth and a high rate of unemployment. There can be no assurance that the Israeli Government and the Israeli Central Bank will be successful in their attempts to keep prices and exchange rates stable. Price and exchange rate instability may have a material adverse effect on our business.
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As a result of the above economic policies, our operations have been affected by governmental intervention in interest rates, foreign currency exchange rates and inflation. See the information set forth below in this Item 5 and in Item 11 – Quantitative and Qualitative Disclosures about Market Risk, for a discussion of these effects on our business.
The following table sets forth, for the periods indicated, information with respect to the Israeli Consumer Price Index (CPI), the rate of inflation in Israel, the rate of devaluation/revaluation of the NIS against the dollar and the rate of inflation adjusted for devaluation/revaluation. For purposes of this table, the Israeli CPI figures use 1993 as a base equal to 100. These figures are based on reports of the Israel Central Statistics Bureau. Inflation is the percentage change in the Israeli CPI between the last month of the period indicated and December of the preceding year. Devaluation/revaluation is the percentage increase/decrease in the value of the dollar in relation to Israeli currency during the period indicated. Inflation adjusted for devaluation/revaluation is obtained by multiplying by 100 the results obtained from dividing the Israeli inflation rate plus 100 by the annual devaluation/revaluation rate plus 100, and then subtracting 100.
| Year Ended December 31 | Israeli Consumer Price Index | Israeli Inflation (Deflation) Rate % | Devaluation (Revaluation) Rate % | Inflation/Deflation Adjusted for Devaluation/ Revaluation % | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1999 | 168 | .5 | 1 | .3 | (0 | .1) | 1 | .4 | ||||||
| 2000 | 168 | .5 | 0 | (0 | .02) | 0 | .02 | |||||||
| 2001 | 170 | .9 | 1 | .4 | 9 | .3 | (7 | .2) | ||||||
| 2002 | 182 | .0 | 6 | .5 | 7 | .3 | (0 | .74) | ||||||
| 2003 | 178 | .6 | (1 | .9) | (7 | .6) | 6 | .2 | ||||||
Since the institution of the Israeli Economic Program in 1985, the rate of inflation, while continuing, has been significantly reduced, and the rate of devaluation has been substantially diminished. The annual rates of inflation(deflation) during the years ended December 31, 1999, 2000, 2001, 2002 and 2003 were approximately 1.3%, 0%, 1.4%, 6.5%, and (1.9%) respectively, while during such periods Israel effected a devaluation(revaluation) of the NIS against the U.S. dollar of approximately (0.1%), (0.02%), 9.3%, 7.3% and (7.6%), respectively. During each of the two years ended December 31, 1999 and 2000, the rate of inflation in Israel exceeded the rate of revaluation of the NIS against the U.S. dollar; during each of the two years ended December 31, 2001 and 2002 the rate of devaluation of the NIS against the U.S. dollar exceeded the rate of inflation in Israel; and during the year 2003, the rate of revaluation of the NIS against the U.S dollar exceeded the rate of deflation in Israel.
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The dollar costs in Israel increase if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags behind the inflation in Israel. Conversely, the dollar costs in Israel decrease if devaluation of the NIS against the U.S. dollar exceeds the rate of inflation in Israel.
A devaluation of the NIS in relation to the U.S. dollar will have the effect of decreasing the dollar value of any of our assets that consist of NIS or receivables payable in NIS. Such a devaluation would also have the effect of reducing the U.S. dollar amount of any of our liabilities, which are payable in NIS (unless such payables are linked to the U.S. dollar). Conversely, any increase in the value of the NIS in relation to the U.S. dollar will have the effect of increasing the dollar value of any of our linked assets and the dollar amount of any of our linked NIS liabilities. The representative rate on December 31, 2003 was NIS 4.379 per $1.00.
| TABLE OF EXCHANGE RATES (NIS TO US DOLLAR) | High | Low | ||||||
|---|---|---|---|---|---|---|---|---|
| Annually | ||||||||
| Fiscal 2001 | 4 | .416 | 4 | .041 | ||||
| Fiscal 2002 | 4 | .994 | 4 | .416 | ||||
| Fiscal 2003 | 4 | .924 | 4 | .283 | ||||
| Quarterly | ||||||||
| First Quarter 2003 | 4 | .924 | 4 | .687 | ||||
| Second Quarter 2003 | 4 | .671 | 4 | .312 | ||||
| Third Quarter 2003 | 4 | .532 | 4 | .283 | ||||
| Fourth Quarter 2003 | 4 | .537 | 4 | .352 | ||||
Our dollar-linked trade receivables are higher than our dollar-linked liabilities. Therefore, if there is a revaluation of the NIS as compared to the U.S. dollar, we incur financial expenses; and if there is a devaluation of the NIS as compared to the U.S. dollar, we gain financial income.
We do not engage in currency hedging transactions.
Our financial assets are not linked to the Israeli CPI. However, some of our financial liabilities are linked to the Israeli CPI. Therefore, if there is inflation in Israel we incur financial expenses.
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| B. | LIQUIDITY AND CAPITAL RESOURCES |
As of December 31, 2003, we had a working capital of approximately NIS 8.4 million, which consists of current assets of approximately NIS 60.5 million less current liabilities of approximately NIS 52.1 million, as compared to our working capital as of December 31, 2002, which amounted to approximately NIS 16.6 million, consisting of the then current assets of approximately NIS 56.4 million less the then current liabilities of approximately NIS 39.8 million.
The main current assets as of December 31, 2003 are cash (approximately NIS 5.5 million), inventory (approximately NIS 23.7 million) and trade receivables (approximately NIS 24.4 million) compared to the main current assets as of December 31, 2002 which were cash (approximately NIS 2.9 million), inventory (approximately NIS 26.3 million) and trade receivables (approximately NIS 20.3 million).
Most of our cash and cash equivalents are held in U.S. dollar.
The statement of cash flows for the year ended December 31, 2003 indicates net cash provided by operating activities of approximately NIS 8.6 million as compared to approximately NIS 9.4 million and NIS (6.5) million provided by/(used in) operating activities for the years ended December 31, 2002 and December 31, 2001, respectively. The decrease of approximately NIS 0.8 in the year 2003 as compared to the year 2002 resulted from the decrease in net income and the increase of trade receivables in the year 2003 as compared to the year 2002, which were higher than the decrease in inventory and the increase in trade and other payables in the year 2003 as compared to the year 2002. The increase of approximately NIS 15.9 million in the year 2002 as compared to the year 2001 resulted from the increase in our net income and the decrease in trade receivables in the year 2002 as compared to the year 2001.
We financed the purchase of substantially all of the assets, liabilities and business of Orev with a loan from Bank Hapoalim in the principal amount of approximately NIS 54 million. In addition, Bank Hapoalim has been providing us with a credit line. Since 1999, we have been repaying the initial loan and the utilized credit balances. As of July 13, 2004, Crow owes Bank Hapoalim an aggregate amount of approximately NIS 29.6 million. This amount is composed of loans in NIS (approximately NIS 19.6 million) and loans in foreign currency. The foreign currency loans total, as of July 13, 2004, approximately $1.2 million and Japanese yen 108.3 million (equivalent in the aggregate to approximately $1 million). These foreign currency loans are payable in fixed payments through 2004 (the yen loan) and 2006 (the dollar loan) and accrue annual interest at variable rates between 1.87% and 2.25% above the London Inter-Bank Offering Rate. The NIS loans are payable upon demand and accrue interest at the prime rate as determined by Bank Hapoalim plus 0.5%. The initial terms of the NIS loan provided that NIS 35 million of the loan shall be repaid over a seven years period commencing in the year 2000. We are currently negotiating an extension to allow payment over a six years period commencing in the year 2004. Fluctuations in the prime rate and LIBOR could result in a material increase in interest expenses incurred in connection with these loans. In 2001, 2002 and 2003 the loans in NIS accrued interest at a weighted average of 8.8%, 8.9% and 9.2%, respectively, while on December 31, 2003 the interest rate on our short-term NIS loans was approximately 7.2%.
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The loans provided to Orev by Bank Hapoalim consist of an on call NIS loan currently amounting to NIS 2.7 million; $200,000 outstanding loan payable on October 2004; and a total of $1.2 million payable until October 2006. These loans bear the same interest rates as the loans provided to Crow.
The foreign currency loans are used, among other things, to minimize the affect of currency fluctuations on our foreign currency trade receivables.
Our obligations to Bank Hapoalim are secured by a fixed lien on our shares of Orev, floating liens on Crow’s and Orev’s assets and mutual guarantees of Crow and Orev for the obligation of the other toward Bank Hapoalim (without limitation of amount). Pursuant to the terms of these liens and related documents, we are required by Bank Hapoalim to comply with a number of covenants so long as any amount is outstanding. For example, we undertook to continue to hold 100% of the shares of Orev; not to invest more than $1 million in one year without the consent of the bank; and to avoid certain changes in our financial condition. Additional covenants prohibit, among other things, grant of guarantees to any third party or the grant of new liens on our property; advancement of loans to our shareholders; and restructuring or change of control without the prior consent of the bank. We have not complied with all of these covenants on a consistent basis, and although Bank Hapoalim has not acted upon any breach, it may still do so. Bank Hapoalim may demand immediate repayment upon the occurrence of certain events, including: a default with respect to our repayment obligations or with respect to the other covenants under the liens; cessation of our commercial activities; an event which, in the discretion of the bank, could hamper our financial ability; and an adverse change in the value of the lien. With respect to the floating liens, a default by either company (Orev or Crow) could result in the demand for immediate repayment of the amount owed by the non-defaulting company as well. In addition, Bank Hapoalim may assign its rights under the floating liens to a third person without our consent. Furthermore, we covenanted that any proceeds that we will receive from Orev or any other subsidiary in the form of a dividend or management fees will be used to repay our debt to Bank Hapoalim. In addition, Crow may not distribute any dividends to its shareholders as long as any amount owed to Bank Hapoalim is outstanding. We believe that these restrictions will not have an adverse affect on our ability to meet our cash obligations. See also “Recent Developments – New Encumbrances” in Item 4.A.
Presently, Crow’s and Orev’s material unused sources of liquidity consist of an unused amount of approximately NIS 5.5 million under the credit line provided to us by Bank Hapoalim.
Loans and guarantees granted to our subsidiaries.
Freelink Ltd. –In 2000, Orev made an interest-free loan to Freelink Ltd., an entity jointly controlled by Orev and Royalinks Ltd., in the aggregate principal amount of approximately $200 thousand. The maturity date of this loan has not yet been determined. This loan is linked to the U.S. dollar and currently amounts to $175 thousand. At the end of 2002, Orev converted $25 thousand of this loan into equity of Freelink. In addition, Orev provided a guarantee to secure a $250 thousand credit facility provided by Bank Hapoalim to Freelink.
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ArrowHead Alarm Products Ltd. – Pursuant to the agreement for the acquisition of 51% of the ordinary shares of ArrowHead in 2001, Orev committed to provide ArrowHead with a loan in the amount of $72 thousand if ArrowHead should require this funding. In 2003, Orev provided ArrowHead with a two-year loan in the amount of approximately $65 thousand bearing an annual accruing interest equal to LIBOR. The purpose of this loan is to permit ArrowHead to repay a loan that it received from its other shareholders in 2001. Should ArrowHead require additional funding, it maintains the right to request that Orev provide it with the remainder of the committed loan, in an amount of approximately $7 thousand. See Item 4 – Property, Plants and Equipment and Item 7 – Related Party Transactions, for a discussion concerning the purchase of property in New Zealand, a 15-years bank loan taken by ArrowHead from a local New Zealand bank in order to finance this transaction, and guarantees provided with respect thereto by Orev in the amount of approximately NZD 266 thousand.
Crow Australia Pty Ltd. – Pursuant to an agreement from April 2001 for the acquisition of 60% of Crow Australia Pty Ltd., Orev committed to provide Crow Australia with a loan of $100 thousand, bearing interest at the rate of LIBOR and the shareholders agreed that if additional funding shall be required they shall all participate in such funding in accordance with each shareholder’s share of the company. As of the date of this report, Orev has converted debts into shareholders’ loans of $430 thousand (which include the $100 thousand initially committed), and the other shareholders have converted debts into shareholders’ loans of $220 thousand.
ScanVision Technologies Ltd. – Pursuant to the agreement for the establishment of ScanVision, Orev agreed to provide ScanVision, in its first year of operations, a loan of up to $200 thousand. Furthermore, Orev agreed to provide ScanVision with an additional amount of up to $200 thousand in the form of a loan or guarantee for its second year of operations, if and to the extent that such funding shall be necessary. As of the date of this report, Orev has loaned ScanVision a total amount of NIS 798 thousand (which is equivalent to approximately $177 thousand). All loans provided to ScanVision are adjusted to the CPI and carry an adjusted interest rate equal to 4%.
Actech Access Technologies Ltd. – In June 2001, Orev entered into an agreement with Camden Trading Ltd. Inc. for the establishment of a new Israeli company, Actech Access Technologies Ltd., which would develop, manufacture and market electronic access control systems. Orev holds 50% of the outstanding share capital of Actech. Under the agreement, Orev committed to provide Actech with an initial loan in the amount of $65 thousand, and with further loans in an aggregate amount of up to $90 thousand in the event that further financing shall be required for development purposes. As of the date of this annual report, Orev has provided Actech with loans in the aggregate amount of approximately $183 thousand (which is more than the amount which Orev committed to provide under the agreement). These loans are linked to the U.S. dollar and bear an annual interest rate of LIBOR plus 2%. Furthermore, Orev has committed to provide manufacturing and design services for Actech, at cost plus ten percent. As part of this agreement, Orev purchased from Camden Trading Ltd., Inc. know-how in the field of access control systems in consideration for $65 thousand.
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Secucell Ltd. – Orev provided a guarantee to secure a $200 thousand credit facility provided by Bank Hapoalim to Secucell.
Video Domain Technologies Ltd. – In January 2003, a guarantee previously provided to Video Domain (covering up to $1.1 million) was cancelled. Please see “Capital Expenditures and Divestitures – Other Capital Expenditures” in Item 4.A. In addition, Video Domain has an outstanding debt toward Orev amounting to approximately $382 thousand (representing a shareholders’ loan of $300 thousand and a debt resulting from returned inventory in the amount of $82 thousand). This amount is linked to the U.S. dollar and does not bear an interest. Under an agreement between Orev and Video Domain, dated March 16, 2004, this amount shall be gradually repaid by Video Domain from the sales of its products and we estimate that the amount outstanding shall be fully repaid within four years. For a description of this agreement, please see Item 7.B – Related Party Transactions.
Count Wise Ltd. – In June 2003, a guarantee previously provided to Count Wise (covering up to $88 thousand) was cancelled when we transferred our entire holdings in Count Wise (constituting 15% of its share capital) to a private entity.
We intend to fund any remaining commitment with our working capital and if necessary, with bank credit.
We believe that our working capital is sufficient for our present requirements and future plans and we do not anticipate any liquidity problems arising from any legal or economic restrictions that may affect our ability to transfer funds from our subsidiaries.
| C. | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES |
All of our manufacturing and research and development activities take place in Israel, except for a portion of our development and research that is performed in New Zealand. We are engaged in programs to develop and improve products, as well as to develop new and improved manufacturing methods. Expenditures for research and development activities engaged by us were approximately NIS 5.2 million in 2003, NIS 5.4 million in 2002 and NIS 4.9 million in 2001. Following an increase of our research and development expenses since 1999, during the years 2002 and 2003, our research and development expenses remained substantially the same, as we believe them to be sufficient to implement our growth and development strategy.
| D. | TREND INFORMATION |
The events of September 11, 2001 (9/11) have altered the way security functions are performed, and the means by which security functions are performed has changed accordingly. As a result of the events of 9/11 we have observed that large corporations and organizations upgraded their security systems. Furthermore, we have also observed an increase in the purchase of home security systems by private customers as well as changes in the purchase of security systems by the governmental sector. Governmental entities have provided funding for the acquisition and implementation of multi-technology detection and defense systems.
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In addition to a general increase in the quantity of security systems being purchased from the security systems industry, we have observed that security system customers’ needs have also changed. Today there is an increasing demand for detection systems to detect intrusions or threats at a much earlier stage, thus requiring that the security systems be capable of monitoring an expanded detection area. The increase in the needs of security systems users has caused larger turnovers and increased research and development spending in the security market.
The security and alarm industry is evolving through the introduction of new technologies, particularly specialized systems such as integrating wireless video and high performance detection applications. Orev has responded to these worldwide trends by expanding its product lines in those areas and enhancing its direct sales and marketing efforts through our recent acquisitions of local distributors and business partners. We have been focusing our research and development efforts in the area of outdoor detection security systems, alarm panels and communication solutions.
As part of our strategy, we have recently developed improved external sensing devices systems. In addition, the proprietary technologies of our subsidiaries, Freelink Ltd. and ArrowHead Alarm Products Ltd. are serving as the basis for the development of Orev’s newest wired and wireless alarm panels and accessories.
| E. | OFF-BALANCE SHEET ARRANGEMENTS |
We do not have off-balance sheet arrangements (as such term is defined in Item E(2) of the Form 20-F) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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| F. | TABULAR DISCLOSRE OF CONTRACTUAL OBLIGATIONS |
The following is a schedule showing our aggregate financial commitments (in NIS thousands):
Payment Due in NIS by Period
(in thousands as of December 31, 2003)
| Contractual Obligations | Total | Less than 1 Year | 2-3 Years | 4-5 Years | After 5 Years | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Long Term Debt* | 19,585 | 9,078 | 7,453 | 3,054 | - | ||||||||||||
| Operating Leases | 1,720 | 1,245 | 475 | - | - | ||||||||||||
| Other Long-Term | |||||||||||||||||
| Obligations | 5,306 | - | - | - | 5,306 | ||||||||||||
| Total Contractual | |||||||||||||||||
| Obligations | 26,611 | 10,323 | 7,928 | 3,054 | 5,306 | ||||||||||||
* We have a line of short-term and long-term credit with our bank amounting to approximately NIS 50 million, of which approximately NIS 5.5 million have not been utilized.
Amount in NIS of Commitment Expiration Per Period
(in thousands as of December 31, 2003)
| Other Commitment Obligations | Total Amounts Committed | Less than 1 Year | 2-3 Years | 4-5 Years | After 5 Years | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Short Term Loans* | 25,030 | 25,030 | - | - | - | ||||||||||||
| Standby Letters of | |||||||||||||||||
| Credit | 663 | - | - | 663 | - | ||||||||||||
| Guarantees | 1,971 | - | - | - | 1,971 | ||||||||||||
| Total Other | |||||||||||||||||
| Commitment | |||||||||||||||||
| Obligations | 27,664 | 25,030 | - | 663 | 1,971 | ||||||||||||
* We have a line of short-term and long-term credit with our banks amounting to approximately NIS 50 million, of which approximately NIS 5.5 million have not been utilized.
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| ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The principal market risks to which we are exposed as a result of our operations are currency exchange rate risks, interest rate risks and commodity prices risks.
Currency Exchange Rate Risks
We are exposed to risks relating to currency exchange rate fluctuations primarily due to the following factors: our financial statements are prepared in NIS and as of December 31, 2003, our dollar linked assets were higher than our dollar-linked liabilities; and a substantial amount of our sales are made in, or linked to, foreign currencies. Therefore, revaluation or devaluation of the NIS as compared to the relevant foreign currency affects our financial expenses, our total sales in terms of NIS and our cash flow.
As of December 31, 2003, our U.S. dollar linked assets amounted to approximately NIS 27 million and our U.S. dollar linked liabilities amounted to approximately NIS 20 million. Therefore, as of December 31, 2003, our dollar-linked assets were higher than our dollar-linked liabilities in approximately NIS 7 million.
Therefore, a revaluation of one percent of the NIS as compared to the U.S. dollar will cause an increase in our financial expenses of approximately NIS 0.07 million; and a devaluation of one percent of the NIS as compared to the U.S. dollar will cause a decrease in our financial expenses of approximately NIS 0.07 million. An increase/decrease in our financial expenses will also affect our cash flow and net income.
In addition, 78% of our sales are made in U.S. dollars or are linked to U.S. dollars; 70% of our cost of sales are made in U.S. dollars or are linked to U.S. dollars; 13% of our sales are made in Australian dollars; and 9% of our sales are made in New Zealand dollars.
Therefore, a revaluation of one percent of the NIS as compared to the U.S. dollar will cause a decrease of 0.78% in our sales and a decrease of 0.7% in our costs of sales; and a devaluation of the one percent of the NIS as compared to the U.S. dollar will cause an increase of 0.78% in our sales and an increase of 0.7% in our costs of sales. A revaluation of one percent of the NIS as compared to the Australian dollar will cause a decrease of 0.13% in our sales; and a devaluation of one percent of the NIS as compared to the Australian dollar will cause an increase of 0.13% in our sales. A revaluation of one percent of the NIS as compared to the New Zealand dollar will cause a decrease of 0.09% in our sales; and a devaluation of one percent of the NIS as compared to the New Zealand dollar will cause an increase of 0.09% in our sales. Changes in our sales and costs of sales will also affect our cash flow and net income.
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We do not engage in currency hedging transactions but our dollar-linked loans are used, among other things, to decrease the affect of currency fluctuations on our dollar-linked assets.
For a further discussion of the affects of the devaluation of the U.S. dollar as compared to the NIS, please see “Results of Operations – Analysis of our Operation Results for the year ended December 31, 2003 compared to Year ended December 31, 2002 – Revenues; Financial Expenses” in Item 5.A. Please refer also to the section captioned “Impact of Inflation and Currency Fluctuations on Results of Operations, Liabilities and Assets” in Item 5.A.
Interest Rate Risks
We have outstanding loans to banks which bear interest rates that are linked to the prime rate and LIBOR. As a result, we are exposed to risks relating to increases in the prime rate and LIBOR.
As of December 31, 2003, our outstanding debt to banks amounted to approximately NIS 44.6 million, which include the following: approximately NIS 25 million short term loans in NIS (accruing an annual interest rate of approximately 9.2%); approximately NIS 15.1 million long-term loans and current maturities of long-term loans linked to the U.S. dollar (accruing an annual interest rate of approximately 3.12%); and approximately NIS 4.5 million current maturities of long term loan linked to the Japanese Yen (accruing an annual interest rate of approximately 2.37%). The NIS loans are linked to the prime rate as determined by Bank Hapoalim and the foreign currency loans are linked to the LIBOR. An increase of one percent in the prime rate or LIBOR to which the above loans are linked will cause an increase in our financial expenses of approximately NIS 0.25 million (with respect to the NIS loans), NIS 0.15 million (with respect to the U.S. dollar loans), and NIS 0.045 million (with respect to the Japanese Yen loan). Such increase in our financial expenses will affect our net income and our cash flow.
We do not engage in interest rates hedging transactions.
Commodity Prices Risks
Our raw materials (specifically electronic components) are purchased from suppliers in Israel and outside of Israel and their prices are determined by the global markets. An increase of one percent in the prices of our raw materials will cause an increase of one percent in our purchases.
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The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Amendment No. 1 to the annual report on its behalf.
| CROW TECHNOLOGIES 1977 LTD. (Registrant) BY: /S/ Shmuel Melman —————————————— Shmuel Melman Chief Executive Officer |
Dated: August 5, 2004
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Exhibit 12.1
I, Shmuel Melman, certify that:
1. I have reviewed this annual report on Form 20-F of Crow Technologies 1977 Ltd., as amended by Form 20-F/A (Amendment No. 1);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.�� Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
| a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| c) disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting. |
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent function):
| a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
August 5, 2004
| /S/ Shmuel Melman —————————————— Shmuel Melman, Chief Executive Officer |
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Exhibit 12.2
I, Jacob Batchon, certify that:
1. I have reviewed this annual report on Form 20-F of Crow Technologies 1977 Ltd., as amended by Form 20-F/A (Amendment No. 1);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
| a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| c) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting. |
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent function):
| a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
August 5, 2004
| /S/ Jacob Batchon —————————————— Financial Officer of Crow Electronic Engineering Ltd. also serves in the capacity of financial officer of Crow Technologies 1977 Ltd. |
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Exhibit 13
In connection with the Annual Report of Crow Technologies 1977 Ltd. (the “Company”) on Form 20-F for the year ended December 31, 2003, as amended by Form 20-F/A (Amendment No. 1), as filed with the Securities and Exchange Commission (the “Report”), I, Shmuel Melman, Chief Executive Officer of the Company, and I, Jacob Batchon, Financial Officer of Crow Electronic Engineering Ltd., serving also in the capacity of financial officer of the Company, certify, pursuant to 18 U.S.C. 1350 that to my knowledge:
| 1. | the Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and |
| 2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /S/ Shmuel Melman —————————————— Shmuel Melman Chief Executive Officer | /S/ Jacob Batchon —————————————— Jacob Batchon Financial Officer of Crow Electronic Engineering, serving also in the capacity of financial officer of the Company |
August 5, 2004
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