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(2) | The percentages shown are based on 10,396,548 ordinary shares issued and outstanding as of June 23, 2008. |
(3) | Includes Mr. Kirsh’s beneficial ownership of 1,485,852 ordinary shares held by Mira Mag Inc. and 445,501 shares held by KI Corporation Limited. The Eurona Foundation holds 100% of Ki Corporation Limited. Ki Corporation Limited holds 100% of the shares of Mira Mag Inc. The Eurona Foundation is a Lichtenstein trust controlled by Nathan Kirsh, who is also the trustee of such entity. |
(4) | Based solely upon, and qualified in its entirety with reference to, a Schedule 13G/A filed with the Securities and Exchange Commission on February 12, 2008. The Schedule 13G indicates that as the sole general partner of certain Diker partnerships with respect to stock directly owned by certain Diker funds, or the Diker Funds, Diker GP, has the power to vote and dispose of the shares owned by the Diker Funds and, accordingly, may be deemed the beneficial owner of such shares. Pursuant to investment advisory agreements, Diker Management serves as the investment manager of the Diker Funds. Accordingly, Diker Management may be deemed the beneficial owner of shares held by the Diker Funds. Charles M. Diker and Mark N. Diker are the managing members of each of Diker GP and Diker Management, and in that capacity direct their operations. Therefore, Charles M. Diker and Mark N. Diker may be deemed the beneficial owners of shares beneficially owned by Diker GP and Diker Management. The foregoing reporting persons disclaim all beneficial ownership, however, as affiliates of a registered investment adviser, and in any case disclaim beneficial ownership except to the extent of their pecuniary interest in the shares. |
(5) | Based solely upon, and qualified in its entirety with reference to, a Schedule 13G/A filed with the Securities and Exchange Commission on February 11, 2008. The Schedule 13G/A indicates that the shares include shares beneficially owned by investment companies, pooled investment vehicles and other accounts for which Clough Capital Partners L.P. serves as investment adviser. Such shares may be deemed beneficially owner by (a) Clough Capital Partners L.P., (b) Clough Capital Partners LLC, the general partner of Clough Capital Partners L.P., and (c) Messrs. Clough, Canty and Brock, the managing members of Clough Capital Partners LLC. Each such reporting person disclaims beneficial ownership of such shares except to the extent of its respective pecuniary interest therein. |
(6) | Based solely upon, and qualified in its entirety with reference to, a Schedule 13G filed with the Securities and Exchange Commission on February 4, 2008. |
(7) | Based solely upon, and qualified in its entirety with reference to, a Schedule 13G filed with the Securities and Exchange Commission on February 14, 2008. The Prescott Group includes Prescott Group Capital Management, L.L.C. (“Prescott Capital”), Prescott Group Aggressive Small Cap, L.P. (“Prescott Small Cap”), Prescott Group Aggressive Small Cap II, L.P. (“Prescott Small Cap II” and together with Prescott Small Cap, the “Small Cap Funds”), and Mr. Phil Frohlich. |
Significant Changes in the Ownership of Major Shareholders
On April 19, 2005, Mr. Kirsh, a trustee of the Eurona Foundation, Mira Mag Inc.’s controlling shareholder, and Mr. Jacob Even-Ezra participated in the follow-on offering of our ordinary shares and purchased 346,375 and 78,625 ordinary shares, respectively, at a purchase price of $9.92 per ordinary share, the closing price of our ordinary shares at the date of the offering.
On February 12, 2008, Diker GP, LLC, Diker Management LLC, or Diker Management, Messrs. Charles M. Diker and Mark N. Diker filed an amendment to its Schedule 13G with the Securities and Exchange Commission reflecting beneficial ownership of 1,014,425, or 9.76%, of our ordinary shares.
On February 11, 2008 Clough Capital Partners, L.P.filed an amendment to its Schedule 13G with the Securities and Exchange Commission reflecting beneficial ownership of 712,269 or 6.85% of our ordinary shares.
On February 4, 2008 Grace & White, Inc.filed a Schedule 13G with the Securities and Exchange Commission reflecting beneficial ownership of 574,254 or 5.52% of our ordinary shares.
On February 14, 2008 Prescott Capital, Prescott Small Cap, Prescott Group Aggressive Small Cap II, L.P., and Mr. Phil Frohlich filed a Schedule 13G with the Securities and Exchange Commission reflecting beneficial ownership of 539,097 or 5.19% of our ordinary shares.
Major Shareholders Voting Rights
The voting rights of our major shareholders do not differ from the voting rights of other holders of our ordinary shares.
Record Holders
Based on a review of the information provided to us by our transfer agent, as of June 23, 2008, there were 57 holders of record of our ordinary shares, of which 45 record holders holding approximately 78.00% of our ordinary shares had registered addresses in the United States and 10 record holders holding approximately 17.50% of our ordinary shares had registered addresses in Israel. These numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside since many of these ordinary shares were held of record by brokers or other nominees, including CEDE & Co., the nominee for the Depositary Trust Company (the central depositary for the U.S. brokerage community), which held approximately 72.43% of our outstanding ordinary shares as of said date.
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B. | Related Party Transactions. |
On April 19, 2005 Mr. Kirsh, a trustee of the Eurona Foundation, Mira Mag Inc.’s controlling shareholder, and Mr. Even-Ezra participated in the follow-on offering of our ordinary shares and purchased 346,375 and 78,625 ordinary shares, respectively, at a purchase price of $9.92 per ordinary share, the closing price of our ordinary shares at the date of the offering.
We have entered into a retirement agreement with Mr. Jacob Even-Ezra in January 2008, based on the terms that were approved by our shareholders in August 2007. Pursuant to the retirement agreement, Mr. Even- Ezra has undertaken not to compete with our company for a period of three years following his retirement on January 1, 2008. In consideration we agreed to pay Mr. Even-Ezra $360,000. In addition, in gratitude for his long and outstanding efforts to further our business and interests, we agreed to provide to Mr. Even-Ezra with certain benefits and services, the value thereof presently estimated to be $50,000 per year, for the rest of his life. As of December 31, 2007, the actuarial value of these perquisites is estimated by approximately $544,000.
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The chairman of our board of directors, Mr. Jacob Perry is also the chairman of the board of directors of Mizrahi Tefahot Bank B.M. We have a credit line with Mizrahi Tefahot Bank B.M., totaling approximately $3 million since July 2006. Our board of directors determined that this a transaction in the ordinary cause of business, that was made on an arms’-length basis and is in the best interest of our company.
Sales to a Principal Shareholder
Our former U.S. subsidiary, Smart, provided video monitoring services to companies controlled by Mr. Kirsh. The terms of the contracts under which we made sales to these companies were negotiated on an arms’-length basis and the terms of such contracts were no more favorable to these companies than those it could have obtained from an unaffiliated third party. Our sales to these companies during the years ended December 31, 2005, 2006 and 2007 were $671,000, $765,000 and $781,000 respectively. In December 2007, we disposed of our U.S. based video monitoring business.
Employment Agreements
We have entered into employment agreements with Mr. Izhar Dekel, our chief executive officer and Mr. Jacob Perry, the chairman of our board of directors, and to a retirement agreement with Mr. Jacob Even-Ezra, our director and our former chief executive officer and chairman of the board of directors. See Item 6B. “Directors, Senior Management and Employees - Compensation.’’
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C. | Interests of Experts and Counsel. |
Not applicable.
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ITEM 8. | Financial Information |
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A. | Consolidated Statements and Other Financial Information. |
The Financial Statements required by this item are found at the end of this annual report, beginning on page F-1.
In 2007, the total amount of our revenues from our facilities located outside of Israel to customers outside of Israel was approximately $49.1 million, or 67.9% of our total revenues. The total amount of our export revenues from our Israeli facilities to countries outside of Israel was approximately $7.6 million, or 10.5% of our total revenues.
Legal Proceedings
In May 2005 we entered into an agreement to supply comprehensive security solutions for a sensitive site in Eastern Europe. As part of the agreement, we received an advance payment, secured by a bank advanced payment guarantee that was to be reduced proportionally as execution of the project progressed. In addition, we issued the customer a performance bank guarantee. We commenced the project and delivered some of the equipment and other deliverables to the customer in 2005. In April 2006, the customer informed us that it was canceling the agreement due to errors in the design documents that we submitted. In addition, the customer did not make payments required under the agreement. Based on its cancellation of the agreement, the customer collected $3.2 million under the advanced payment guarantee on June 20, 2006. Due to this uncertainty, we did not recognize any revenues from this project.
On July 11, 2006 the customer made a demand for additional $1.4 million payment under a bank performance guarantee for. Upon our motion, the District Court in Haifa, Israel issued a temporary injunction against the payment of such guarantee pending a hearing in August 2006. At the hearing, we reached a settlement with the customer pursuant to which we paid the customer approximately $700,000 of the disputed amount and the balance will be repaid only if we are found liable for damages exceeding the amount paid by us. In view of the above and due to the uncertainty of our preventing the forfeiture of the bank performance guarantee, we included a $1.4 million provision in respect of this guarantee in our financial statements for the year ended December 31, 2005. Based on the settlement, we cancelled the balance of the provision made in our financial statements in 2006.
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On June 6, 2007 the Court of Arbitration gave its award in the arbitration and stated that the agreement concluded between us and the customer is void due to legal mistakes made by the customer in the tender process. As a result of this award and as agreed in the settlement agreement the performance guarantee was cancelled on February 2008. Based on the above we decided to institute a new legal action against the customer and seek compensation for the damages we incurred. We initiated the following motions: (1) on December 10, 2007 a motion for reconciliation was submitted with a Public Court; and (2) on December 11, 2007 a claim for compensation was submitted in the Court of Arbitration. In both actions the claim was in the amount of $21,533,998. On February 2008, the customer denied our request for reconciliation and as a result this process has been concluded. The arbitration proceeding is still pending.
In addition, we are subject to legal proceedings arising in the normal course of business. Based on the advice of our legal counsel, management believes that these proceedings will not have a material adverse effect on our financial position or results of operations.
Dividend Distribution Policy
On January 27, 2004 we paid a cash dividend to our shareholders of $0.05 per ordinary share, representing approximately 17.0% of our net income in 2003. In August 2004, we paid a 5.0% stock dividend to our shareholders as a final dividend for 2003.
In January 2008 we received a series of orders totaling approximately $45 million for a turnkey project to protect critical infrastructure facilities. The turnkey project incorporates fence perimeter protection systems, access control systems and CCTV products. We expect to recognize income from these orders over the next two years.
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ITEM 9. | The Offer and Listing |
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A. | Offer and Listing Details. |
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| Annual Stock Information |
Our shares have traded on the NASDAQ Global Market since our initial public offering in 1993 and on the Tel Aviv Stock Exchange since July 2001.
The following table sets forth, for each of the years indicated, the range of high ask and low bid prices of our ordinary shares on the NASDAQ Global Market and the Tel Aviv Stock Exchange:
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| | NASDAQ Global Market | | Tel Aviv Stock Exchange | |
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| | High | | Low | | High | | Low | |
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| |
| |
| |
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| | | | | | | | | | | | | |
2003 | | | 9.97 | | | 4.74 | | | 42.68 | | | 22.69 | |
2004 | | | 40.35 | | | 6.75 | | | 156.68 | | | 32.25 | |
2005 | | | 12.22 | | | 7.87 | | | 53.45 | | | 35.74 | |
2006 | | | 14.2 | | | 8.51 | | | 64.78 | | | 36.10 | |
2007 | | | 12.00 | | | 6.26 | | | 51.00 | | | 23.50 | |
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Quarterly Stock Information
The following table sets forth, for each of the full financial quarters in the two most recent full financial years and any subsequent period, the range of high ask and low bid prices of our ordinary shares on the NASDAQ Global Market and the Tel Aviv Stock Exchange:
| | | | | | | | | | | | | |
| | NASDAQ Global Market | | Tel Aviv Stock Exchange | |
| |
| |
| |
| | High | | Low | | High | | Low | |
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| |
| |
| |
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| | | | | | | | | | | | | |
2006 | | | | | | | | | | | | | |
First Quarter | | $ | 14.20 | | $ | 8.75 | | | NIS 64.78 | | | NIS 40.61 | |
Second Quarter | | | 13.36 | | | 9.01 | | | 61.15 | | | 40.57 | |
Third Quarter | | | 11.70 | | | 8.96 | | | 51.50 | | | 39.40 | |
Fourth Quarter | | | 10.60 | | | 8.51 | | | 44.00 | | | 36.10 | |
| | | | | | | | | | | | | |
2007 | | | | | | | | | | | | | |
First Quarter | | $ | 12.00 | | $ | 8.53 | | | NIS 51.00 | | | NIS 36.25 | |
Second Quarter | | | 11.18 | | | 9.91 | | | 46.06 | | | 40.20 | |
Third Quarter | | | 10.49 | | | 7.50 | | | 43.95 | | | 34.01 | |
Fourth Quarter | | | 9.15 | | | 6.26 | | | 36.99 | | | 23.50 | |
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2008 | | | | | | | | | | | | | |
First Quarter | | | 7.70 | | | 5.09 | | | 28.20 | | | 19.00 | |
Monthly Stock Information
The following table sets forth, for each of the most recent six months, the range of high ask and low bid prices of our ordinary shares on the NAS DAQ Global Market and the Tel Aviv Stock Exchange:
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| | NASDAQ Global Market | | Tel Aviv Stock Exchange | |
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| |
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| | High | | Low | | High | | Low | |
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| |
| |
| |
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| | | | | | | | | | | | | |
2007 | | | | | | | | | | | | | |
December | | $ | 8.15 | | $ | 6.26 | | | NIS 31.98 | | | NIS 23.50 | |
| | | | | | | | | | | | | |
2008 | | | | | | | | | | | | | |
January | | $ | 7.50 | | $ | 5.09 | | | NIS 27.30 | | | NIS 19.00 | |
February | | | 7.70 | | | 6.72 | | | 28.20 | | | 22.30 | |
March | | | 7.25 | | | 6.08 | | | 25.49 | | | 22.49 | |
April | | | 7.19 | | | 6.12 | | | 25.25 | | | 21.51 | |
May | | | 6.65 | | | 5.84 | | | 22.59 | | | 19.00 | |
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B. | Plan of Distribution. |
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| Not applicable. |
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C. | Markets. |
Our ordinary shares have traded on the NASDAQ Global Market under the symbol “MAGS” since our initial public offering in 1993. Our ordinary shares have also traded on the Tel Aviv Stock Exchange under the symbol MAGS since July 1, 2001.
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D. | Selling Shareholders. |
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| Not applicable. |
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E. | Dilution. |
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| Not applicable. |
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F. | Expenses of the Issue. |
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| Not applicable. |
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ITEM 10. | Additional Information |
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A. | Share Capital. |
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| Not applicable. |
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B. | Memorandum and Articles of Association. |
Purposes and Objects of the Company
We are registered with the Israeli Companies Registry and have been assigned company number 52-003892-8. Section 2 of our memorandum of association provides, among other things, that we were established for the purposes of acquiring from IAI a plant, known as the Magal Plant, engaged in the development, manufacture, sale and support of alarm devices and dealing in the development, manufacturing and support of security alarm devices and other similar products. In addition, the purpose of our company is to be eligible to perform and act in connection with any right or obligation of whatever kind or nature permissible under Israeli law.
Board of Directors
The strategic management of our business (as distinguished from the daily management of the our business affairs) is vested in our board of directors, which may exercise all such powers and do all such acts as our company is authorized to exercise and do, and which are not required to be exercised by a resolution of the general meeting of our shareholders. The board of directors may, subject to the provisions of the Israeli Companies Law, delegate some of its powers to committees, each consisting of one or more directors, provided that at least one member of such committee is an outside director.
According to the Israeli Companies Law, we may stipulate in our articles of association that the general meeting of shareholders is authorized to assume the responsibilities of the board of directors. In the event the board of directors is unable to act or exercise its powers, the general meeting of shareholders is authorized to exercise the powers of the board of directors, although the articles of association do not stipulate so. Our board of directors has the power to assume the responsibilities of our chief executive officer if he is unable to act or exercise his powers or if he fails to fulfill the instructions of the board of directors with respect to a specific matter.
Our articles of association do not impose any mandatory retirement or age-limit requirements on our directors and our directors are not required to own shares in our company in order to qualify to serve as directors.
For a discussion of the Israeli Companies Law regulations concerning a director’s duty of care and duty of loyalty, see Item 6.C. “Directors, Senior Management and Employees-Board Practices–Approval of Specific Related-Party Transactions.” For a discussion of the Israeli Companies Law regulations regarding indemnification of directors, see Item 6.C. “Directors, Senior Management and Employees-Board Practices–Indemnification of Directors and Officers and Limitations of Liability.” For a discussion regarding approval of director and office compensation see Item 6.C. “Directors, Senior Management and Employees-Board Practices - Approval of Related-Party Transactions under Israeli Law.”
Rights Attached to Shares
Our authorized share capital consists of NIS 19,748,000 ordinary shares, par value NIS 1.00 each. All our ordinary shares have the same rights, preferences and restrictions, some of which are detailed below. At the general meeting of shareholders, our shareholders may, subject to certain provisions detailed below, create different classes of shares, each class bearing different rights, preferences and restrictions.
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The rights attached to the ordinary shares are as follows:
Dividends Rights
Holders of ordinary shares are entitled to participate in the payment of dividends in accordance with the amounts paid-up or credited as paid up on the nominal value of such ordinary shares at the time of payment (without taking into account any premium paid thereon). However, under article 13 of our articles of association no shareholder shall be entitled to receive any dividends until he shall have paid all calls then currently due and payable on each ordinary share held by such shareholder.
Declaration of a final dividend requires the approval by ordinary resolution of our shareholders at a general meeting of shareholders. Such resolution may reduce but not increase the dividend amount recommended by the board of directors. Dividends may be paid, in whole or in part, by way of distribution of dividends in kind.
Dividends may be paid only out of our distributable earnings, as defined in the Israeli Companies Law. Prior to any distribution of dividends, our board of directors has to determine that there is no reasonable concern that such distribution will prevent us from executing our existing and foreseeable obligations as they become due.
Voting Rights
Holders of ordinary shares are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Voting is done by a show of hands, unless a poll is demanded prior to a vote by a show of hands. Generally, resolutions are adopted at the general meeting of shareholders by an ordinary resolution, unless the Israeli Companies Law or the articles of association require an extraordinary resolution.
An ordinary resolution, such as a resolution approving the declaration of dividends or the appointment of auditors, requires approval by the holders of a simple majority of the shares represented at the meeting, in person or by proxy, and voting thereon. An extraordinary resolution requires approval by the holders of at least 75% of the shares represented at the meeting, in person or by proxy, and voting thereon.
The primary resolutions required to be adopted by an extraordinary resolution of the general meeting of shareholders are resolutions to:
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| · | amend the memorandum or the articles of association; |
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| · | change the share capital, for example, increasing or canceling the authorized share capital or modifying the rights attached to shares; and |
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| · | approve mergers, consolidations or winding up of our company. |
Our articles of association do not contain any provisions regarding a classified board of directors or cumulative voting for the election of directors. Pursuant to our articles of association, our directors (except the outside directors) are elected at our annual general meeting of shareholders by a vote of the holders of a majority of the voting power represented and voting at such meeting and hold office until the next annual general meeting of shareholders and until their successors have been elected. All the members of our board of directors (except the outside directors) may be reelected upon completion of their term of office. For information regarding the election of outside directors, see “Item 6C. Directors, Senior Management and Employees – Directors and Senior Management - Board Practices - Election of Directors.”
Rights to Share in the Company’s Profits
Our shareholders have the right to share in our profits distributed as a dividend or any other permitted distributions. See this Item 10B. “Additional Information – Memorandum and Articles of Association – Rights Attached to Shares – Dividend Rights.”
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Liquidation Rights
Article 111 of our articles of association provides that upon any liquidation, dissolution or winding-up of our company, our remaining assets shall be distributed pro-rata to our ordinary shareholders.
Redemption
Under Article 38 of our articles of association, we may issue redeemable stock and redeem the same.
Transfer of shares
The transfer of a fully paid-up ordinary share does not require the approval of our board of directors. However, according to Article 17 of our articles of association, any transfer of an ordinary share requires an instrument of transfer in the form designated by the board of directors together with any other evidence of title as the board of directors may reasonably request.
Substantial limitations on shareholders
See Item 6.C. “Directors, Senior Management and Employees-Board Practices–Approval of Related Party Transactions.”
Capital Calls
Under our memorandum of association and the Israeli Companies Law, the liability of our shareholders is limited to the par value of the shares held by them.
Modifications of Share Rights
Shares which confer preferential or subordinate rights relating to, among other things, dividends, voting, and payment of capital may be created only by an extraordinary resolution of the general meeting of shareholders. The rights attached to a class of shares may be altered by an extraordinary resolution of the general meeting of shareholders, provided the holders of 75% of the issued shares of that class approve such change by the adoption of an extraordinary resolution at a separate meeting of such class, subject to the terms of such class. The provisions of the articles of association pertaining to general meetings of shareholders also apply to a separate meeting of a class of shareholders.
General Meetings of Shareholders
Under the Israeli Companies Law a company must convene an annual meeting of shareholders at least once every calendar year and within fifteen months of the last annual meeting. Depending on the matter to be voted upon, notice of at least 21 days or 35 days prior to the date of the meeting is required. Our board of directors may, in its discretion, convene additional meetings as “special general meetings.” In addition, the board must convene a special general meeting upon the demand of two of the directors, 25% of the nominated directors, one or more shareholders having at least 5% of the outstanding share capital and at least 1% of the voting power in the company, or one or more shareholders having at least 5% of the voting power in the company. See this “Additional Information - Memorandum and Articles of Association- Rights Attached to Shares-Voting Rights.”
A shareholder present, in person or by proxy, at the commencement of a general meeting of shareholders may not seek the cancellation of any proceedings or resolutions adopted at such general meeting of shareholders on account of any defect in the notice of such meeting relating to the time or the place thereof. Shareholders who are registered in our register of shareholders at the record date may vote at the general meeting of shareholders. The record date is set in the resolution to convene the general meeting of shareholders, provided, however, that such record date must be between fourteen to twenty-one days or, in the event of a vote by ballots, between twenty eight to forty days prior the date the general meeting of shareholders is held.
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The quorum required for a general meeting of shareholders consists of at least two record shareholders, present in person or by proxy, who hold, in the aggregate, at least one third of the voting power of our outstanding shares. A general meeting of shareholders will be adjourned for lack of a quorum after half an hour from the time appointed for such meeting to the same day in the following week at the same time and place or any other time and place as the board of directors designates in a notice to the shareholders. At such reconvened meeting, if a quorum is not present within half an hour from the time appointed for such meeting, two or more shareholders, present in person or by proxy, will constitute a quorum. The only business that may be considered at an adjourned general meeting of shareholders is the business that might have been lawfully considered at the general meeting of shareholders originally convened and the only resolutions that may be adopted are the resolutions that could have been adopted at the general meeting of shareholders originally convened.
Limitations on the Right to Own Our Securities
Neither our memorandum or articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of our ordinary shares by non-residents, except that the laws of the State of Israel may restrict the ownership of ordinary shares by residents of countries that are in a state of war with Israel.
Provisions Restricting a Change in Control of Our Company
The Israeli Companies Law requires that mergers between Israeli companies be approved by the board of directors and general meeting of shareholders of both parties to the transaction. The approval of the board of directors of both companies is subject to such boards’ confirmation that there is no reasonable doubt that after the merger the surviving company will be able to fulfill its obligations towards its creditors. Each company must notify its creditors about the contemplated merger. Under our articles of association, such merger must be approved by a resolution of the shareholders, as explained above. The approval of the merger by the general meetings of shareholders of the companies is also subject to additional approval requirements as specified in the Israeli Companies Law and regulations promulgated thereunder. See also Item 6C. “Directors, Senior Management and Employees – Board Practices – Approval of Related Party Transactions Under Israeli Law.”
Disclosure of Shareholders’ Ownership
The Israeli Securities Law, 5728-1968 and regulations promulgated thereunder contain various provisions regarding the ownership threshold above which shareholders must disclose their share ownership. However, these provisions do not apply to companies, such as ours, whose shares are publicly traded in Israel as well as outside of Israel. As a result of the listing of our ordinary shares on the Tel Aviv Stock Exchange, we are required pursuant to the Israeli Securities Law and the regulations promulgated thereunder to deliver to the Israeli Share Registrar, the Israeli Securities Exchange Commission and the Tel Aviv Stock Exchange, all reports, documents, forms and information received by us from our shareholders regarding their shareholdings, provided that such information was published or required to be published under applicable foreign law.
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C. | Material Contracts. |
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| None. |
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D. | Exchange Controls. |
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new “general permit” was issued under the Israeli Currency Control Law, 1978, which removed most of the restrictions that previously existed under such law, and enabled Israeli citizens to freely invest outside of Israel and freely convert Israeli currency into non-Israeli currencies.
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Non-residents of Israel who purchase our ordinary shares will be able to convert dividends, if any, thereon, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, into freely repatriable dollars, at the exchange rate prevailing at the time of conversion, provided that the Israeli income tax has been withheld (or paid) with respect to such amounts or an exemption has been obtained.
The following is a discussion of Israeli and United States tax consequences material to us and to our shareholders. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, the views expressed in the discussion might not be accepted by the tax authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust all possible tax considerations.
Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
ISRAELI TAX CONSIDERATIONS
The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of material Israeli tax consequences concerning the ownership of and disposition of our ordinary shares. This summary does not discuss all the acts of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Since some parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion.
The discussion below should not be construed as legal or professional tax advice and does not cover all possible tax considerations. Potential investors are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, including in particular, the effect of any foreign, state or local taxes.
General Corporate Tax Structure
Israeli companies are subject to income tax on their worldwide income regardless of the territorial source of such income. Pursuant to tax reform legislation that came into effect in 2003, the corporate tax rate is to undergo staged reductions to 25% by the year 2010. In order to implement these reductions, the corporate tax rate declined from 31% in 2006, to 29% in 2007 and scheduled to decline to 27% in 2008, and 26% in 2009. Capital gains derived after January 1, 2003 (other than gains derived from the sale of listed securities that are taxed at the prevailing corporate tax rates) are subject to tax at a rate of 25%.
However, the effective tax rate payable by a company that derives income from an approved enterprise, discussed further below, may be considerably less. See “–Tax Benefits under the Law for the Encouragement of Capital Investments, 1959.”
Encouragement of Capital Investments Law, 5719-1959
General
The Encouragement of Capital Investments Law, 5719-1959, commonly referred to as the Investment Law, provides that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry, Trade and Labor of the State of Israel, commonly referred to as the Investment Center, be designated as an approved enterprise. Each certificate of approval for an approved enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, for example, the equipment to be purchased and utilized under the program. The tax benefits derived from any certificate of approval relates only to taxable income attributable to the specific approved enterprise. If a company has more than one approval or only a portion of its capital investments is approved, its effective tax rate is the result of a weighted average of the applicable rates.
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The tax benefits under the Investment Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed by the approved enterprise, income generated from royalties, and income derived from a service which is ancillary to such usage right or royalties, provided that such income is generated within the approved enterprise’s ordinary course of business. Income derived during the benefit period from sources other than the approved enterprise, will be subject to tax at the regular corporate tax rate.
If a company has more than one approval or only a portion of its capital investments is approved, its effective tax rate is the result of a weighted average of the applicable rates. The tax benefits under the Investments Law are not, generally, available with respect to income derived from products manufactured outside of Israel.
Certain of our production facilities have been granted approved enterprise status pursuant to the Investment Law, which provides certain tax and financial benefits to investment programs that have been granted this status.
Tax Benefits
Taxable income of a company derived from an approved enterprise is generally subject to company tax at the maximum rate of 25%, rather than 29%, for the benefit period. This period is ordinarily seven years, or ten years if the company qualifies as a foreign investors’ company as described below, commencing with the year in which the approved enterprise first generates taxable income. However, this period is limited to the earlier of twelve years from commencement of production or fourteen years from the date of approval.
A company that owns an approved enterprise may elect to receive an alternative package of benefits. Under the alternative package of benefits, a company’s undistributed income derived from an approved enterprise will be exempt from company tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location of the approved enterprise within Israel, and the company will be eligible for a reduced tax rate for the remainder of the benefits period.
A company that has an approved enterprise program is eligible for further tax benefits if it qualifies as a foreign investors’ company. A foreign investors’ company is a company more than 25% of whose share capital and combined share and loan capital is owned by non-Israeli residents. A company that qualifies as a foreign investors’ company and has an approved enterprise program is eligible for tax benefits for a ten year benefit period. Income derived from the approved enterprise program will be exempt from tax for a period of two years and will be subject to a reduced tax rate for an additional eight years, provided that the company qualifies as a foreign investors’ company. The tax rate for the additional eight-year period is 25%. However, if the level of foreign investment exceeds 49% but is less than 74%, then the tax rate for the additional eight-year period is 20%. If the level of foreign investment exceeds 74% but is less than 90%, then the tax rate for the additional eight-year period is 15%. If the level of foreign investment exceeds 90%, then the tax rate for the additional eight-year period is 10%. If the company does not qualify as a foreign investors’ company, the period of the reduced tax rate will be five years.
A company that has elected the alternative package of benefits and that subsequently pays a dividend out of income derived from the approved enterprise during the tax exemption period will be subject to tax on the amount distributed at the rates mentioned above. The tax rate will be the rate that would have been applicable had the company not elected the alternative package of benefits. This rate is generally 10%-25%, depending on the percentage of the company’s shares held by foreign shareholders. The dividend recipient is taxed at the reduced rate applicable to dividends from approved enterprises, which is 15% if the dividend is distributed during the tax benefit period and within 12 years after the period. The company must withhold this tax at the source.
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Subject to applicable provisions concerning income under the alternative package of benefits, all incomes are considered to be attributable to the entire enterprise and their effective tax rate is the result of a weighted average of the various applicable tax rates. Under the Investment Law, a company that has elected the alternative package of benefits is not obliged to distribute exempt retained profits, and may generally decide from which year’s profits to declare dividends.
The benefits available to an approved enterprise program are dependent upon the fulfillment of conditions stipulated in applicable law and in the certificate of approval. If we fail to comply with these conditions with regard to our approved enterprises, the tax and other benefits we receive could be rescinded, in whole or in part, and we may be required to refund the amount of previously received benefits in addition to Israeli CPI linkage adjustments and interest costs. We believe that our approved enterprises currently substantially comply with all such conditions.
On April 1, 2005, comprehensive amendment to the Investments Law came into force. Pursuant to the amendment, a company’s facility will be granted the status of approved enterprise only if it is proven to be an industrial facility (as defined in the Investments Law) that contributes to the economic independence of the Israeli economy and is a competitive facility that contributes to the Israeli gross domestic product. The amendment provides that the Israeli Tax Authority and not the Investment Center will be responsible for an approved enterprise under the alternative package of benefits, referred to as a benefiting facility. A company wishing to receive the tax benefits afforded to a benefiting facility is required to select the tax year from which the period of benefits under the Investment Law are to commence by simply notifying the Israeli Tax Authority within 12 months of the end of that year. In order to be recognized as owning a benefiting facility, a company is required to meet a number of conditions set forth in the amendment, including making a minimal investment in manufacturing assets for the benefiting facility and having completed a cooling-off period of no less than two to four years from the company’s previous year of commencement of benefits under the Investments Law.
The amended Investment Law specifies certain conditions that a privileged enterprise, which is either an Approved Enterprise or a company with a benefiting facility, has to comply with in order to be entitled to benefits. These conditions include among others:
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| · | That the privileged enterprise’s revenues during the applicable tax year from any single market (i.e. country or a separate customs territory) do not exceed 75% of the privileged enterprise’s aggregate revenues during such year; or |
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| · | That 25% or more of the privileged enterprise’s revenues during the applicable tax year are generated from sales into a single market (i.e. country or a separate customs territory) with a population of at least 12 million residents. |
Pursuant to the amendment, a company with a benefiting facility is entitled, in each tax year, to accelerated depreciation for the manufacturing assets used by the benefiting facility and to certain tax benefits, provided that no more than 12 years have passed since the beginning of the year of commencement of benefits under the Investments Law. The tax benefits granted to a Benefiting Factory are determined according one of the following new tax routes:
(a) Similar to the currently available alternative route, exemption from corporate tax on undistributed income for a period of two to ten years, depending on the geographic location of the Benefiting Facility within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in each year. Benefits may be granted for a term of from seven to ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the Benefiting Facility during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%). The company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the Benefiting Facility.
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(b) A special tax route enabling companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefiting Facility. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at source at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents.
(c) A special tax route that provides a full exemption from corporate tax and from tax with respect to dividends for companies with an annual income of at least NIS 13-20 billion that have invested a total of between NIS 600–900 million in facilities in certain geographical locations in Israel.
Generally, a company that is Abundant in Foreign Investment (as defined in the Investments Law) is entitled to an extension of the benefits period by an additional five years, depending on the rate of its income that is derived in foreign currency.
The amendment changes the definition of “foreign investment” in the Investments Law so that instead of an investment of foreign currency in the company, the definition now requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder; provided that the company’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the aforementioned definition will take effect retroactively from 2003.
As a result of the amendment, tax-exempt income generated under the provisions of the Investment Law, will subject us to taxes upon distribution of such income, purchase of shares from shareholder by the company or liquidation, and we may be required to record a deferred tax liability with respect to such tax-exempt income.
The amendment will apply to approved enterprise programs in which the year of commencement of benefits under the Investments Law is 2004 or later, unless such programs received approval from the Investment Center on or prior to December 31, 2004 in which case the provisions of the amendment will not apply.
Pursuant to the amendment to the Investment Law, only approved enterprises receiving cash grants require the approval of the Investment Center. The Investment Center is entitled, to approve such programs only until December 31, 2007. Approved enterprises which do not receive benefits in the form of governmental cash grants, such as benefits in the form of tax benefits, are no longer required to obtain this approval (such enterprises are referred to as privileged enterprises). However, a privileged enterprise is required to comply with certain requirements and make certain investments as specified in the amended Investment Law.
A privileged enterprise may, at its discretion, in order to provide greater certainty, elect to apply for a pre-ruling from the Israeli tax authorities confirming that it is in compliance with the provisions of the amended Investment Law and is therefore entitled to receive such benefits provided under the amended Investment Law. The amendment to the Investment Law addresses benefits that are being granted to privileged enterprises and the length of the benefits period.
On March 3, 2007, we received a pre-ruling from the Israeli Tax Authority for our request for a Benefiting Facility, regarding eligibility for benefits under the Amendment. Our income from this program is tax-exempt for a period of two years, and is subject to a reduced tax rate of 10%-25 for a period of five to eight years (depending upon the percentage of foreign ownership of the Company). We did not enjoy from tax benefits in this program yet.
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Financial Benefits
An approved enterprise is also entitled to a grant from the Government of Israel for investments in certain production facilities located in designated areas within Israel, provided it did not elect the alternative benefits program. Grants are available for enterprises situated in development areas and for high-technology or skill-intensive enterprises in Jerusalem. The investment grant is computed as a percentage of the original cost of the fixed assets for which the approved enterprise has been granted.
From time to time, the Government of Israel has discussed reducing the benefits available to companies under the Investment Law. In 1996, the investment grant was decreased from 38% to 34% and in January 1997 the grant was reduced to 20%. Currently, grants generally range between 10% and 20%. If the benefits available under the Investment Law are terminated or substantially reduced, it could have a material adverse effect on our future investments in Israel.
For companies such as ours, whose foreign shareholders hold more than 25% of the company’s outstanding ordinary shares, future approved enterprises would entitle such companies to receive reduced tax rates for up to ten tax years, rather than the maximum seven tax years applicable to companies with a smaller foreign investment.
As long as we are in compliance with the conditions set forth in the certificates of approval granted to us, our income derived from our approved enterprise expansion programs will be tax exempt for the prescribed period and thereafter will enjoy reduced tax rates as detailed above. If we violate these conditions, we may be required to refund the amount of tax benefits we previously received in addition to Israeli CPI linkage adjustments and interest costs.
We currently have two approved enterprise expansion programs which were approved in 1997 and 2001, and under which we are entitled to tax benefits. The periods of benefits for two of our approved enterprise programs will expire in 2007 and in 2012, respectively. The benefits we receive in connection with our approved enterprise programs are conditioned upon the fulfillment of a marketing plan filed by us with the Investment Center.
There can be no assurance that we will comply with the above conditions or any other conditions of the amended Investment Law in the future or that we will be entitled to any additional benefits under the amended Investment Law.
Encouragement of Industry (Taxes) Law, 5729-1969
Under the Encouragement of Industry (Taxes) Law, 5729-1969, or the Industry Encouragement Law, “Industrial Companies” are entitled to certain corporate tax benefits, including, among others:
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| · | Amortization, under certain conditions, of purchases of know-how and patents and of rights to use a patent and know-how which are used for the development or advancement of the company, over an eight-year period for tax purposes; |
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| · | Right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli industrial companies; and |
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| · | Accelerated depreciation rates on equipment and buildings; and |
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| · | Deductions over a three-year period of expenses in connection with the issuance and listing of shares on the Tel Aviv Stock Exchange, or TASE or, following January 1, 2003, on a recognized stock market outside of Israel. |
Eligibility for benefits under the Industry Encouragement Law is not subject to the prior approval of any governmental authority. Under the Industry Encouragement Law, an “Industrial Company” is a company resident in Israel, at least 90% of the income of which, in any tax year, determined in Israeli currency, exclusive of income from government loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is an enterprise owned by an Industrial Company, whose major activity in a given tax year is industrial production activity.
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We believe that we currently qualify as an industrial company as defined by the Industry Encouragement Law. We cannot assure you that we will continue to qualify as an industrial company or that the benefits described above will be available to us in the future.
Encouragement of Industrial Research and Development Law, 5744-1984
Under the Encouragement of Industrial Research and Development Law, 5744-1984, or the Research Law, research and development programs that meet specified criteria and are approved by a governmental committee of the OCS are eligible for grants between 20%-50% of certain of the project’s expenditures, as determined by the research committee.
In exchange, the recipient of such grants is required to pay the OCS royalties from the revenues derived from products incorporating technology developed within the framework of the approved research and development program or derived from such program (including ancillary services in connection with such program), usually up to100% of the U.S. dollar-linked value of the total grants received in respect of such program, plus LIBOR interest.
The terms of the Israeli government participation also require that products developed with government grants be manufactured in Israel. However, under the regulations of the Research Law, upon the approval of the OCS, some of the manufacturing volume may be performed outside Israel, provided that the grant recipient pays royalties at an increased rate. The Research Law also allows for the approval of grants in cases in which the applicant declares that part or all of the manufacturing will be performed outside of Israel or by foreign residents and the research committee is convinced that this is essential for the execution of the program. The Research Law also provides that know-how developed under an approved research and development program may not be transferred to third parties in Israel without the prior approval of the research committee. The Research Law further provides that the know-how developed under an approved research and development program may not be transferred to any third parties outside Israel. No approval is required for the sale or export of any products resulting from such research and development.
However, In June 2005, an amendment to the Research Law became effective, which amendment was intended to make the Research Law more compatible with the global business environment by, among other things, relaxing restrictions on the transfer of manufacturing rights outside Israel and on the transfer of OCS-funded know-how outside of Israel. The amendment permits the OCS, among other things, to approve the transfer of manufacturing rights outside Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of demanding the recipient to pay increased royalties as described above. The amendment further permits, under certain circumstances and subject to the OCS’s prior approval, the transfer outside Israel of know-how that has been funded by OCS, generally in the following cases: (a) the grant recipient pays to the OCS a portion of the consideration paid for such funded know-how (according to certain formulas), (b) the grant recipient receives know-how from a third party in exchange for its funded know-how, or (c) such transfer of funded know-how arises in connection with certain types of cooperation in research and development activities.
The Research Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and interested parties to notify the OCS and obtaining the approval of the OCS for, any change in control of the recipient or a change in the holdings of the means of control of the recipient that results in a foreign resident becoming an interested party directly in the recipient and requires the new interested party to undertake to the OCS to comply with the Research Law. In addition, the rules of the OCS may require prior approval of the OCS or additional information or representations in respect of certain of such events. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company. A person is presumed to have control if such person holds 50% or more of the means of control of a company. “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer. An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any foreign resident who acquires 5% or more of our ordinary shares will be required to notify the OCS that it has become an interested party and to sign an undertaking to comply with the Research Law.
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The funds generally available for grants by the OCS were reduced as of 2003, and the Israeli authorities have indicated that the government may further reduce or abolish grants from the OCS in the future. Even if these grants are maintained, we cannot assure you that we will receive OCS grants in the future. In addition, each application to the OCS is reviewed separately, and grants are based on the program approved by the research committee. Generally, expenditures supported under other incentive programs of the State of Israel are not eligible for grants from the OCS.
Taxation under Inflationary Conditions
The Income Tax (Inflationary Adjustments) Law, 5745- 1985, generally referred to as the Inflationary Adjustments Law, represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex. Its features which are material to us can be described as follows:
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| · | There is a special tax adjustment for the preservation of equity whereby some corporate assets are classified broadly into fixed assets and non-fixed assets. |
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| · | Where a company’s equity, as defined in such law, exceeds the depreciated cost of fixed assets, a deduction from taxable income that takes into account the effect of the applicable annual rate of inflation on such excess is allowed up to a ceiling of 70% of taxable income in any single tax year, with the unused portion permitted to be carried forward on a linked basis. If the depreciated cost of fixed assets exceeds a company’s equity, then such excess multiplied by the applicable annual rate of inflation is added to taxable income. |
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| · | Subject to specified limitations, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the Israeli CPI. |
The Minister of Finance may, with the approval of the Knesset Finance Committee, determine by decree, during a certain fiscal year (or until February 28th of the following year) in which the rate of increase of the Israeli consumer price index would not exceed or did not exceed, as applicable, 3%, that some or all of the provisions of the Inflationary Adjustments Law shall not apply with respect to such fiscal year, or, that the rate of increase of the Israeli consumer price index relating to such fiscal year shall be deemed to be 0%, and to make the adjustments required to be made as a result of such determination.
Inflationary Adjustments Law was abolished, effective as of January 1 2008, and subject to transitional provisions and special provisions to prevent a distortion in the tax calculations. In February 2008, the Knesset passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law with effect from 2008 and thereafter. From 2008, the results for tax purposes will be measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, 2007. The amended law includes, among other things, the elimination of the inflationary additions and deductions and the additional deduction for depreciation with effect from 2008.
Stamp Tax
Documents signed following January 1, 2006, are not subject to stamp tax.
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Capital Gains Tax on Sales of Our Ordinary Shares
Under income tax regulations foreign residents, who sell shares of an Israeli company publicly traded on a recognized stock exchange outside of Israel, will be exempt from tax subject to the satisfaction of all following conditions:
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| · | The capital gain is not attributable to a permanent establishment in Israel. |
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| · | The shares were purchased after the first initial public offering on the recognized stock exchange outside of Israel. |
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| · | The provisions of the Income Tax Law (inflationary adjustments), 1985 do not apply to such gain. |
However, non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
Under the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our ordinary shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding the ordinary shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting capital during any part of the 12-month period preceding such sale, exchange or disposition or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel. However, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against the U.S.federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The Treaty does not relate to U.S. state or local taxes.
Taxation ofForeignHolders of Shares
Foreign residents of Israel are subject to income tax on income accrued or derived from sources in Israel. Such sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. On distributions of dividends after January 1, 2006 other than bonus shares or stock dividends, income tax at the rate of 20% will be withheld on dividends distributed to Israeli individual shareholders or to foreign residents, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. With respect to a person who is a “substantial shareholder” at the time receiving the dividend or on any date in the twelve months preceding it, the applicable tax rate is 25%. A “substantial shareholder” is generally a person who alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, and all regardless of the source of such right. Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by our approved enterprise, that are paid to a U..S. corporation holding 10% or more of our outstanding voting capital throughout the tax year in which the dividend is distributed as well as the previous tax year, is 12.5%. Furthermore, dividends paid from income derived from our approved enterprise are subject, under certain conditions, to withholding at the rate of 15%. We cannot assure you that we will designate the profits that are being distributed in a way that will reduce shareholders’ tax liability.
A non-resident of Israel who receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable sources of income in Israel.
Controlled Foreign Corporation
In general, and subject to the provisions of all relevant legislation, an Israeli resident who holds, directly of indirectly, 10% or more of the rights in a foreign corporation whose shares are not publicly traded, in which more than 50% of the rights are held directly or indirectly by Israeli residents, and a majority of whose income in a tax year is considered passive income (generally referred to as a Controlled Foreign Corporation, or CFC), is liable for tax on the portion of his income attributed to holdings in such corporation, as if such income was distributed to him as a dividend.
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Share Allocation to Employees
In general, section 102 of the Tax Ordinance that deals with taxation of share allocations to employees and/or officers (excluding controlling members) provides that a company may choose one of three courses of taxation which course must be approved by the assessing officer: (i) work income course for shares held 12 months in trust; (ii) capital gains course for shares held 24 months in trust; and (iii) allocation not through a trustee. Each of these courses has different tax consequences.
As of January 1, 2006, the periods mentioned in the first two courses commence as of the date of grant and not as of the end of the tax year in which the shares were granted.
United States Federal Income Tax Consequences
�� The following is a summary of certain material U.S. federal income tax consequences that apply to U.S. Holders who hold ordinary shares as capital assets. This summary is based on the United States Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof, and the U.S.-Israel Tax Treaty, all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively. This summary does not address all tax considerations that may be relevant with respect to an investment in ordinary shares. This summary does not discuss all the tax consequences that may be relevant to a U.S. Holder in light of such holder’s particular circumstances or U.S. Holders subject to special rules, including persons that are non-U.S. Holders, broker-dealers, financial institutions, certain insurance companies, investors liable for alternative minimum tax, tax-exempt organizations, regulated investment companies, taxpayers whose functional currency is not the U.S. dollar, persons who hold the ordinary shares through partnerships or other pass-through entities, persons who acquired their ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation for services, investors that actually or constructively own 10 percent or more of our voting shares, and investors holding ordinary shares as part of a straddle or appreciated financial position or as part of a hedging or conversion transaction.
If a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns ordinary shares, the U.S. federal income tax treatment of a partner in such a partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership that owns ordinary shares and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of holding and disposing of common shares.
This summary does not address the effect of any U.S. federal taxation other than U.S. federal income taxation. In addition, this summary does not include any discussion of state, local or foreign taxation.
You are urged to consult your tax advisors regarding the foreign and United States federal, state and local tax considerations of an investment in ordinary shares.
For purposes of this summary, the term “U.S. Holder” means an individual who is a citizen or, for U.S. federal income tax purposes, a resident of the United States, a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any political subdivision thereof, an estate whose income is subject to U.S. federal income tax regardless of its source, or a trust that (a) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons or (b) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
Taxation of Dividends
Subject to the discussion below under the heading “Passive Foreign Investment Companies,” the gross amount of any distributions received with respect to ordinary shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. federal income tax purposes, to the extent of our current and accumulated earnings and profits as determined for U.S. federal income tax purposes. You will be required to include this amount of dividends in gross income as ordinary income. Distributions in excess of our current and accumulated earnings and profits will be treated as a non taxable return of capital to the extent of your tax basis in the ordinary shares and any amount in excess of your tax basis will be treated as gain from the sale of ordinary shares. See “Disposition of Ordinary Shares” below for the discussion on the taxation of capital gains. Dividends will not qualify for the dividends received deduction generally available to corporations under Section 243 of the Code.
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Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day such dividends are received. A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in effect on such day may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss. U.S. Holders should consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
Subject to complex limitations, any Israeli withholding tax imposed on such dividends will be a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability (or, alternatively, for deduction against income in determining such tax liability). The limitations set out in the Code include computational rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income. Dividends generally will be treated as foreign source passive category income or, in the case of certain U.S. Holders, general category income for United States foreign tax credit purposes. Further, there are special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to a reduced rate of tax, see discussion below. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the ordinary shares to the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the 16-day holding period required by the statute. The rules relating to the determination of the foreign tax credit are complex, and you should consult with your personal tax advisors to determine whether and to what extent you would be entitled to this credit.
Subject to certain limitations, “qualified dividend income” received by a noncorporate U.S. Holder in tax years beginning on or before December 31, 2010 will be subject to tax at a reduced maximum tax rate of 15 percent. Distributions taxable as dividends paid on the ordinary shares should qualify for the 15 percent rate provided that either: (i) we are entitled to benefits under the income tax treaty between the United States and Israel (the “Treaty”) or (ii) the ordinary shares are readily tradable on an established securities market in the United States and certain other requirements are met. We believe that we are entitled to benefits under the Treaty and that the ordinary shares currently are readily tradable on an established securities market in the United States. However, no assurance can be given that the ordinary shares will remain readily tradable. The rate reduction does not apply unless certain holding period requirements are satisfied. With respect to the ordinary shares, the U.S. Holder must have held such shares for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date. The rate reduction also does not apply to dividends received from a passive foreign investment company see discussion below, or in respect of certain hedged positions or in certain other situations. The legislation enacting the reduced tax rate contains special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to the reduced tax rate. U.S. Holders of ordinary shares should consult their own tax advisors regarding the effect of these rules in their particular circumstances.
Disposition of Ordinary Shares
If you sell or otherwise dispose of ordinary shares, you will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis in the ordinary shares. Subject to the discussion below under the heading “Passive Foreign Investment Companies,” such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if you have held the ordinary shares for more than one year at the time of the sale or other disposition. In general, any gain that you recognize on the sale or other disposition of ordinary shares will be U.S.-source for purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source income. Deduction of capital losses is subject to certain limitations under the Code.
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In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of ordinary shares, the amount realized will be based on the U.S. dollar value of the NIS received with respect to the ordinary shares as determined on the settlement date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into United States dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss.
An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of ordinary shares, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the Internal Revenue Service (the “IRS”). In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the U.S. dollar value of the currency received prevailing on the trade date and the settlement date. Any such currency gain or loss would be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such ordinary shares.
Passive Foreign Investment Companies
For U.S. federal income tax purposes, we will be considered a passive foreign investment company (“PFIC”) for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules.
Based on our current and projected income, assets and activities, we believe that we are not currently a PFIC nor do we expect to become a PFIC in the foreseeable future. However, because the determination of whether we are a PFIC is based upon the composition of our income and assets from time to time, there can be no assurances that we will not become a PFIC in this or any future taxable year.
If we are treated as a PFIC for any taxable year, dividends would not qualify for the reduced maximum tax rate, discussed above, and, unless you elect either to treat your investment in ordinary shares as an investment in a “qualified electing fund” (a “QEF election”) or to “mark to market” your ordinary shares, as described below:
| | |
| · | you would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of ordinary shares ratably over the holding period for such ordinary shares, |
| | |
| · | the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, in effect for that year and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year, |
| | |
| · | the amount allocated to the current taxable year and any taxable year before we became a PFIC would be taxable as ordinary income in the current year, and |
| | |
| · | you would be required to file an annual return on IRS Form 8621 regarding distributions received with respect to ordinary shares and any gain realized on your ordinary shares. |
74
If you make either a timely QEF election or a timely mark-to-market election in respect of your ordinary shares, you would not be subject to the rules described above. If you make a timely QEF election, you would be required to include in your income for each taxable year your pro rata share of our ordinary earnings as ordinary income and your pro rata share of our net capital gain as long-term capital gain, whether or not such amounts are actually distributed to you. You would not be eligible to make a QEF election unless we comply with certain applicable information reporting requirements.
Alternatively, if the ordinary shares are considered “marketable stock” and if you elect to “mark-to-market” your ordinary shares, you will generally include in income any excess of the fair market value of the ordinary shares at the close of each tax year over your adjusted basis in the ordinary shares. If the fair market value of the ordinary shares had depreciated below your adjusted basis at the close of the tax year, you may generally deduct the excess of the adjusted basis of the ordinary shares over its fair market value at that time. However, such deductions generally would be limited to the net mark-to-market gains, if any, that you included in income with respect to such ordinary shares in prior years. Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of ordinary shares with respect to which the mark-to-market election is made, is treated as ordinary income or loss (except that loss on a disposition of ordinary shares is treated as capital loss to the extent the loss exceeds the net mark-to-market gains, if any, that you included in income with respect to such ordinary shares in prior years). Gain or loss from the disposition of ordinary shares (as to which a mark-to-market election was made) in a year in which we are no longer a PFIC, will be capital gain or loss.
Backup Withholding and Information Reporting
Payments in respect of ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and to U.S. backup withholding tax at a rate equal to the third highest income tax rate applicable to individuals (which, under current law, is 28%). Backup withholding will not apply, however, if you (i) are a corporation or come within certain exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct taxpayer identification number and make any other required certification.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.
Any U.S. holder who holds 10% or more in vote or value of our ordinary shares will be subject to certain additional United States information reporting requirements.
U.S. Gift and Estate Tax
An individual U.S. Holder of ordinary shares will be subject to U.S. gift and estate taxes with respect to ordinary shares in the same manner and to the same extent as with respect to other types of personal property.
| |
F. | Dividends and Paying Agents. |
| |
| Not applicable. |
| |
G. | Statements by Experts. |
| |
| Not applicable. |
| |
H. | Documents on Display. |
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill the obligations with respect to such requirements by filing reports with the Securities and Exchange Commission. You may read and copy any document we file with the Securities and Exchange Commission without charge at the Securities and Exchange Commission’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and on the Securities and Exchange Commission Internet site (http://www.sec.gov) and on our website www.magal-ssl.com. Copies of such material may be obtained by mail from the Public Reference Branch of the Securities and Exchange Commission at such address, at prescribed rates. Please call the Securities and Exchange Commission at l-800-SEC-0330 for further information on the public reference room.
75
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. A copy of each report submitted in accordance with applicable U.S. law is available for public review at our principal executive offices.
In addition, since we are also listed on the TASE, we submit copies of all our filings with the SEC to the Israeli Securities Authority and TASE. Such copies can be retrieved electronically through the TASE internet messaging system (www.maya.tase.co.il) and, in addition, with respect to filings made as of November 2003, through the MAGNA distribution site of the Israeli Securities Authority (www.magna.isa.gov.il).
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I. | Subsidiary Information. |
| |
| Not applicable. |
| |
ITEM 11. | Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to a variety of risks, including changes in interest rates and foreign currency fluctuations.
Interest Rate Risk
Our exposure to market risk for changes in interest rates is related to our long-term and short-term loans.
Our financial expenses are sensitive to the LIBOR and the Prime, since our short-term loans bear a LIBOR and Prime -based interest rate.
The table below presents principal amounts and related weighted average interest rates by date of maturity for our loans:
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Weighted Average Interest Rate
(U.S. dollars in thousands)
| | | | | | | | | | | | | | | | | | | |
Liabilities: | | 2008 | | 2009 | | 2010 | | 2011-
2012 | | Total | | Fair
Value at
December 31, 2007 | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | |
Short Term Loans | | $ | 16,434 | | | – | | | – | | | – | | $ | 16,434 | | $ | 16,434 | |
Weighted Average Interest Rate | | | 5.72 | % | | – | | | – | | | – | | | 5.72 | % | | – | |
Long Term Loans | | $ | 4,303 | | $ | 813 | | $ | 1,802 | | $ | 480 | | $ | 7,398 | | $ | 7,439 | |
Weighted Average Interest Rate | | | 5.94 | % | | 5.49 | % | | 5.47 | % | | 5.5 | % | | 6.04 | % | | – | |
Foreign Currency Exchange Risk
We sell most of our products in North America, Europe and Israel. A portion of our revenues in Israel are made in NIS, and we expect to make NIS denominated revenues in 2008 as well. Our foreign currency exposure with respect to our revenues is mitigated, and we expect it will continue to be mitigated, through salaries, materials and support operations, in which part of these costs are denominated in NIS. Since the beginning of 2008, the NIS has appreciated by approximately 12.8% against the dollar. We are also subject to exchange rate fluctuations related to our activities in Canada.
76
Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on our profitability and period-to-period comparisons of our results. In 2005, the rate of devaluation of the NIS against the dollar was 6.8%, while in 2003, 2004, 2006 and 2007 the NIS was revaluated in relation to the dollar by 7.6%, 1.6%, 8.2% and 9.0%, respectively. A portion of our expenses, primarily labor expenses, is incurred in NIS and a part of our revenues are quoted in NIS. Additionally, certain assets especially trade receivables, as well as part of our liabilities are denominated in NIS. Our results may be adversely affected by devaluation of the NIS in relation to the dollar (or if such devaluation is on lagging basis), if our revenues in NIS are higher than our expenses in NIS and/or the amount of our assets in NIS are higher than our liabilities in NIS. On the contrary, our results may be adversely affected by the revaluation of the NIS in relation to the dollar (or if such revaluation is on a lagging basis), if the amount of our expenses in NIS are higher than the amount of our revenues in NIS and/or the amount of our liabilities in NIS are higher than our assets in NIS.
We are also subject to exchange rate fluctuations related to our activities in Canada.
During the years ended December 31, 2005 and 2007, foreign currency fluctuations had an adverse impact on our results of operations, and our foreign exchange losses, net were $145,000 and $792,000 respectively. During the year ended December 31, 2006, our foreign exchange gains, net were $276,000. We cannot assure you that in the future our results of operations may not be materially adversely affected by currency fluctuations.
To protect against the change in the forecasted foreign currency cash flows of certain sale arrangements resulting from changes in the exchange rateduring 2003, 2005 and 2006 we entered into forward contracts in order to hedge portions of our forecasted revenue and unbilled accounts receivable denominated in Euros and Polish Zlotys. We designated the forward instruments as cash flow hedges for accounting purposes.
For derivative instruments designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings.
In 2005 a sales arrangement in Polish Zlotys that was to take place from 2005 to 2007 was canceled. Accordingly, changes in the fair value of the forward contracts were recorded as financial expenses in the years ended December 31, 2005, 2006 and 2007.
On October 1, 2006, we changed our functional currency from the dollar to the NIS. From the date of change in functional currency, the hedge of the revenues in Euros is no longer effective. Changes in the fair value of the forward contracts from October 1, 2006 were charged to financial expenses.
We recorded $110,000, $915,000 and $666,000 as financial expenses related to forward contracts transactions, in 2005, 2006 and 2007, respectively.
| |
ITEM 12. | Description of Securities Other Than Equity Securities |
Not applicable.
PART II
| |
ITEM 13. | Defaults, Dividend Arrearages and Delinquencies |
Not applicable.
77
| |
ITEM 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
Not applicable.
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ITEM 15. | Controls and Procedures |
Not applicable.
| |
ITEM 15T. | Controls and Procedures |
Disclosure Controls and Procedures
Our principal executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of December 31, 2007, have concluded that, as of such date, our disclosure controls and procedures were effective and ensured that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our principal executive officer and chief financial officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the rules of the Securities and Exchange Commission.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| | |
| · | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the company; |
| | |
| · | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| | |
| · | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting, as of December 31, 2007. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on that assessment, our management concluded that as of December 31, 2007, our internal control over financial reporting is effective.
78
Our independent auditors, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, have issued an audit report on the effectiveness of our internal control over financial reporting. The report is included in page F-3 of this Annual Report on Form 20-F.
Changes in Internal Control over Financial Reporting
During the period covered by this Annual Report on Form 20-F, no changes in our internal control over financial reporting have occurred that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 16A. | Audit Committee Financial Expert |
Our board of directors has determined that Mrs. Anat Winner, an independent director, meets the definition of an audit committee financial expert, as defined by rules of the Securities and Exchange Commission. For a brief description of Mrs. Winner’s relevant experience, see Item 6.A. “Directors, Senior Management and Employees - Directors and Senior Management.”
We have adopted a code of ethics that applies to our chief executive officer and all senior financial officers of our company, including our chief financial officer, chief accounting officer or controller, or persons performing similar functions. The code of ethics is publicly available on our website atwww.magal-ssl.com. Written copies are available upon request. If we make any substantive amendment to the code of ethics or grant any waivers, including any implicit waiver, from a provision of the codes of ethics, we will disclose the nature of such amendment or waiver on our website.
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ITEM 16C. | Principal Accountant Fees and Services |
Fees Paid to Independent Public Accountants
The following table sets forth, for each of the years indicated, the fees paid to our principal independent registered public accounting firm,Kost Forer Gabbay & Kasierer. All of such fees were pre-approved by our Audit Committee.
| | | | | | | |
| | Year Ended December 31, | |
| |
| |
Services Rendered | | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
Audit (1) | | $ | 359,013 | | $ | 405,201 | |
Audit-related | | | – | | | – | |
Tax (2) | | | 25,169 | | | 125,908 | |
Other (3) | | | 19,393 | | | 6,845 | |
| |
|
| |
|
| |
Total | | $ | 403,575 | | $ | 537,954 | |
| | |
| (1) | Audit fees are for audit services for each of the years shown in the table, including fees associated with the annual audit (including audit of our internal control over financial reporting) and reviews of our quarterly financial results submitted to the Securities and Exchange Commission on Form 6-K, consultations on various accounting issues and audit services provided in connection with other statutory or regulatory filings. |
| (2) | Tax fees are for professional services rendered by our auditors for tax compliance, tax planning and tax advice on actual or contemplated transactions, tax consulting associated to international taxation and employee benefits |
| (3) | Other fees in 2007 relate to consultation in connection with a tax return for a subsidiary based in Germany. |
79
Pre-Approval Policies and Procedures
Our audit committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent public accounting firm, Kost Forer Gabbay & Kasierer and their affiliates. Pre-approval of an audit or non-audit service may be given as a general pre-approval, as part of the audit committee’s approval of the scope of the engagement of our independent auditor, or on an individual basis. Any proposed services exceeding general pre-approved levels also requires specific pre-approval by our audit committee. The policy prohibits retention of the independent public accountants to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act or the rules of the SEC, and also requires the audit committee to consider whether proposed services are compatible with the independence of the public accountants.
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ITEM 16D. | Exemptions from the Listing Standards for Audit Committee |
Not applicable.
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ITEM 16E. | Purchase of Equity Securities by the Issuer and Affiliated Purchasers |
Issuer Purchase of Equity Securities
Neither we nor any affiliated purchaser has purchased any of our securities during 2007.
PART III
| |
ITEM 17. | Financial Statements |
We have responded to Item 18 in lieu of this item.
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ITEM 18. | Financial Statements |
The Financial Statements required by this item are found at the end of this annual report, beginning on page F-1.
Consolidated Financial Statements
| |
Index to Financial Statements | F-1 |
|
Reports of Independent Registered Public Accounting Firm | F-2 - F-3 |
|
Consolidated Balance Sheets | F-4 - F-4 |
|
Consolidated Statements of Income | F-6 |
|
Consolidated Statements of Changes in Shareholders’ Equity | F-7 |
|
Consolidated Statements of Cash Flows | F-8 -F-9 |
|
Notes to Consolidated Financial Statements | F-10- F-47 |
|
Report of Independent Auditors with Respect to Subsidiary | F-48 |
80
The exhibits filed with or incorporated into this annual report are listed on the index of exhibits below:
| | |
Exhibit
No. | | Description |
| |
|
| | |
1.1* | | Memorandum of Association of the Registrant |
| | |
1.2** | | Articles of Association of the Registrant |
| | |
2.1*** | | Specimen Share Certificate for Ordinary Share |
| | |
2.2**** | | The Registrant’s Stock Option Plan (1993), as amended |
| | |
12.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended |
| | |
12.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended |
| | |
13.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
13.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
15.1 | | Schedule of Valuation and Qualifying Accounts |
| | |
15.2 | | Consent of Kost Forer Gabbay & Kasierer |
| | |
15.3 | | Consent of Salles, Sáinz - Grant Thornton, S. C. |
* Previously filed as an exhibit to our Registration Statement on Form F-1 (No. 33-57438), filed with the Commission on January 26, 1993, as amended, and incorporated herein by reference.
** Previously filed as an exhibit to our Registration Statement on Form F-1 (No. 33-57438), filed with the Commission on January 26, 1993, as amended, and incorporated herein by reference and an amendment thereto previously filed as an exhibit to our Registration Statement on Form S-8 (No. 333-6246), filed with the Commission on January 7, 1997 and incorporated herein by reference and further amendments thereto previously filed as an exhibit to our Annual Report on Form 20-F for the fiscal year ended December 31, 2000, filed with the Commission on June 29, 2001 and incorporated herein by reference.
*** Previously filed as an exhibit to our Registration Statement on Form 8-A, filed with the Commission on March 18, 1993, as amended, and incorporated herein by reference.
**** Previously filed as an exhibit to our Registration Statement on Form S-8 (No. 333-6246), filed with the Commission on January 7, 1997 and incorporated herein by reference and further amendments thereto previously filed as an exhibit to our Annual Report on Form 20-F for the fiscal year ended December 31, 2000, filed with the Commission on June 29, 2001 and incorporated herein by reference.
81
MAGAL SECURITY SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
IN U.S. DOLLARS
INDEX
F - 1
| |
| Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel:972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
MAGAL SECURITY SYSTEMS LTD.
We have audited the accompanying consolidated balance sheets of Magal Security Systems Ltd. (“the Company”) and its subsidiaries as of December 31, 2006 and 2007, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of a certain subsidiary, whose assets constitute approximately 4.1% and 4% of total consolidated assets as of December 31, 2006 and 2007, respectively, and whose revenues constitute approximately 5.2%, 11.1% and 9.4% of total consolidated revenues for the years ended December 31, 2005, 2006, and 2007, respectively. The financial statements of this company were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to amounts included for this subsidiary, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2006 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 2n to the consolidated financial statements, in 2006 the Company adopted Statement of Financial Accounting Standard Board No. 123 (revised 2004) “Share Based Payment”.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 29, 2008 expressed an unqualified opinion thereon.
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Tel-Aviv, Israel
| /s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER |
June 29, 2008 | A Member of Ernst & Young Global |
F - 2
| |
| Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel:972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
MAGAL SECURITY SYSTEMS LTD.
We have audited Magal Security Systems Ltd. (the “Company”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and its subsidiaries as of December 31, 2006 and 2007, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007 and our report dated June 29, 2008 expressed an unqualified opinion thereon.
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Tel-Aviv, Israel
| /s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER |
June 29, 2008 | A Member of Ernst & Young Global |
F - 3
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
CONSOLIDATED BALANCE SHEETS |
|
U.S. dollars in thousands |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
ASSETS | | | | | | | |
| | | | | | | |
CURRENT ASSETS: | | | | | | | |
Cash and cash equivalents | | $ | 4,908 | | $ | 9,205 | |
Marketable securities (Note 3) | | | 3,067 | | | 9,464 | |
Short-term bank deposits | | | 14,186 | | | 11,220 | |
Trade receivables (net of allowance for doubtful accounts of $ 384 and $ 343 at December 31, 2006 and 2007, respectively) | | | 27,754 | | | 26,775 | |
Unbilled accounts receivable | | | 5,389 | | | 4,053 | |
Other accounts receivable and prepaid expenses (Note 4) | | | 3,821 | | | 5,753 | |
Deferred income taxes | | | 1,604 | | | 1,936 | |
Inventories (Note 5) | | | 13,971 | | | 23,785 | |
| |
|
| |
|
| |
| | | | | | | |
Total current assets | | | 74,700 | | | 92,191 | |
| |
|
| |
|
| |
| | | | | | | |
LONG-TERM INVESTMENTS AND RECEIVABLES: | | | | | | | |
Long-term trade receivables | | | 40 | | | 2,019 | |
Long-term loan (Note 11i) | | | 622 | | | 808 | |
Long-term bank deposits | | | 4,800 | | | 1,846 | |
Escrow deposit (Note 1b) | | | – | | | 4,442 | |
Severance pay fund | | | 2,401 | | | 2,765 | |
| |
|
| |
|
| |
| | | | | | | |
Total long-term investments and receivables | | | 7,863 | | | 11,880 | |
| |
|
| |
|
| |
| | | | | | | |
PROPERTY AND EQUIPMENT, NET (Note 6) | | | 7,707 | | | 8,429 | |
| |
|
| |
|
| |
| | | | | | | |
DEFERRED INCOME TAXES | | | 686 | | | 763 | |
| |
|
| |
|
| |
| | | | | | | |
OTHER INTANGIBLE ASSETS, NET (Note 7) | | | 1,031 | | | 7,040 | |
| |
|
| |
|
| |
| | | | | | | |
GOODWILL | | | 4,285 | | | 5,610 | |
| |
|
| |
|
| |
| | | | | | | |
ASSETS ATRIBUTED TO DISCONTINUED OPERATIONS | | | 7,409 | | | 244 | |
| |
|
| |
|
| |
| | | | | | | |
Total assets | | $ | 103,681 | | $ | 126,157 | |
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 4
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
CONSOLIDATED BALANCE SHEETS |
|
U.S. dollars in thousands (except share and per share data) |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
CURRENT LIABILITIES: | | | | | | | |
Short-term bank credit (Note 8) | | $ | 17,026 | | $ | 16,434 | |
Current maturities of long-term bank debt (Note 10) | | | 795 | | | 4,303 | |
Trade payables | | | 5,954 | | | 7,344 | |
Customer advances | | | 1,230 | | | 11,703 | |
Other accounts payable and accrued expenses (Note 9) | | | 9,215 | | | 10,881 | |
Forward contracts | | | 596 | | | – | |
| |
|
| |
|
| |
| | | | | | | |
Total current liabilities | | | 34,816 | | | 50,665 | |
| |
|
| |
|
| |
| | | | | | | |
LONG-TERM LIABILITIES: | | | | | | | |
Long-term bank debt (Note 10) | | | 7,399 | | | 3,095 | |
Long-term accounts payable | | | 178 | | | – | |
Deferred income taxes | | | – | | | 2,097 | |
Accrued severance pay | | | 2,524 | | | 3,873 | |
| |
|
| |
|
| |
| | | | | | | |
Total long-term liabilities | | | 10,101 | | | 9,065 | |
| |
|
| |
|
| |
| | | | | | | |
LIABILITIES ATRIBUTED TO DISCONTINUED OPERATIONS | | | 614 | | | 849 | |
| |
|
| |
|
| |
| | | | | | | |
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11) | | | | | | | |
| | | | | | | |
SHAREHOLDERS’ EQUITY (Note 12): | | | | | | | |
Share capital - | | | | | | | |
Ordinary shares of NIS 1 par value - | | | | | | | |
Authorized: 19,748,000 shares at December 31, 2006 and 2007; Issued and outstanding: 10,391,548 and 10,396,548 shares at December 31, 2006 and 2007, respectively | | | 3,224 | | | 3,225 | |
Additional paid-in capital | | | 47,681 | | | 47,806 | |
Accumulated other comprehensive income | | | 2,314 | | | 5,671 | |
Foreign currency translation (Company’s stand alone financial statements) | | | 297 | | | 2,589 | |
Retained earnings | | | 4,634 | | | 6,287 | |
| |
|
| |
|
| |
| | | | | | | |
Total shareholders’ equity | | | 58,150 | | | 65,578 | |
| |
|
| |
|
| |
| | | | | | | |
Total liabilities and shareholders’ equity | | $ | 103,681 | | $ | 126,157 | |
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
CONSOLIDATEDSTATEMENTS OF OPERATIONS |
|
U.S. dollars in thousands (except per share data) |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Revenues | | $ | 58,385 | | $ | 63,600 | | $ | 72,375 | |
Cost of revenues | | | 36,658 | | | 37,236 | | | 43,510 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Gross profit | | | 21,727 | | | 26,364 | | | 28,865 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Research and development, net (Note 17a) | | | 5,265 | | | 5,378 | | | 5,764 | |
Selling and marketing, net | | | 12,385 | | | 11,603 | | | 12,930 | |
General and administrative | | | 4,965 | | | 5,547 | | | 6,561 | |
Special post employment benefit (Note 15c) | | | – | | | – | | | 904 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total operating expenses | | | 22,615 | | | 22,528 | | | 26,159 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating income (loss) | | | (888 | ) | | 3,836 | | | 2,706 | |
Financial expenses, net (Note 17b) | | | 813 | | | 864 | | | 2,137 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Income (loss) before income taxes | | | (1,701 | ) | | 2,972 | | | 569 | |
Income taxes (tax benefit) (Note 14) | | | (28 | ) | | 943 | | | 373 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Income (loss) from continuing operations | | | (1,673 | ) | | 2,029 | | | 196 | |
Income (loss) from discontinued operations, net (Note 18) | | | (1,538 | ) | | (1,219 | ) | | 1,686 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net income (loss) | | $ | (3,211 | ) | $ | 810 | | $ | 1,882 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Basic net earnings (loss) per share from continuing operations | | $ | (0.17 | ) | $ | 0.20 | | $ | 0.02 | |
Basic net earnings (loss) per share from discontinued operations | | | (0.15 | ) | | (0.12 | ) | | 0.16 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Basic net earnings (loss) per share (Note 13) | | $ | (0.32 | ) | $ | 0.08 | | $ | 0.18 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Diluted net earnings (loss) per share from continuing operations | | $ | (0.17 | ) | $ | 0.20 | | $ | 0.02 | |
Diluted net earnings (loss) per share from discontinued operations | | | (0.15 | ) | | (0.12 | ) | | 0.16 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Diluted net earnings (loss) per share (Note 13) | | $ | (0.32 | ) | $ | 0.08 | | $ | 0.18 | |
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY |
|
U.S. dollars in thousands (except share data) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of shares | | Ordinary shares | | Additional paid-in
capital | | Deferred
stock compensation | | Accumulated other comprehensive
income (loss) | | Foreign currency translation - the Company | | Retained earnings | | Total comprehensive income (loss) | | Total shareholders’ equity | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of January 1, 2005 | | | 8,672,448 | | $ | 2,825 | | $ | 32,526 | | $ | (477 | ) | $ | 1,639 | | $ | – | | $ | 7,035 | | | | | $ | 43,548 | |
Issuance of share capital, net | | | 1,700,000 | | | 395 | | | 14,793 | | | – | | | – | | | – | | | – | | | | | | 15,188 | |
Amortization of deferred stock-based compensation | | | – | | | – | | | – | | | 439 | | | – | | | – | | | – | | | | | | 439 | |
Deferred taxes on stock options | | | – | | | – | | | 190 | | | – | | | – | | | – | | | – | | | | | | 190 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | – | | | – | | | – | | | – | | | – | | | – | | | (3,211 | ) | $ | (3,211 | ) | | (3,211 | ) |
Unrealized gains on forward contracts, net | | | – | | | – | | | – | | | – | | | 709 | | | – | | | – | | | 709 | | | 709 | |
Foreign currency translation adjustments | | | – | | | – | | | – | | | – | | | 87 | | | – | | | – | | | 87 | | | 87 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | $ | (2,415 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2005 | | | 10,372,448 | | | 3,220 | | | 47,509 | | | (38 | ) | | 2,435 | | | – | | | 3,824 | | | | | | 56,950 | |
Reclassification of deferred stock compensation into additional paid-in capital upon adoption of SFAS 123(R) | | | – | | | – | | | (38 | ) | | 38 | | | – | | | – | | | – | | | | | | – | |
Amortization of deferred stock-based compensation | | | – | | | – | | | 51 | | | – | | | – | | | – | | | – | | | | | | 51 | |
Exercise of stock options | | | 19,100 | | | 4 | | | 159 | | | – | | | – | | | – | | | – | | | | | | 163 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | – | | | – | | | – | | | – | | | – | | | – | | | 810 | | $ | 810 | | | 810 | |
Unrealized losses on forward contracts, net | | | – | | | – | | | – | | | – | | | (36 | ) | | – | | | – | | | (36 | ) | | (36 | ) |
Unrealized loss from available-for-sale securities, net | | | – | | | – | | | – | | | – | | | (13 | ) | | – | | | – | | | (13 | ) | | (13 | ) |
Foreign currency translation adjustments from change of functional currency, net | | | – | | | – | | | – | | | – | | | – | | | (355 | ) | | – | | | – | | | (355 | ) |
Foreign currency translation adjustments | | | – | | | – | | | – | | | – | | | (72 | ) | | 652 | | | – | | | (72 | ) | | 580 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | $ | 689 | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2006 | | | 10,391,548 | | | 3,224 | | | 47,681 | | | | | | 2,314 | | | 297 | | | 4,634 | | | | | | 58,150 | |
Cumulative impact of change in accounting for uncertainty in income taxes (Fin 48) | | | – | | | – | | | – | | | – | | | – | | | – | | | (229 | ) | | (229 | ) | | (229 | ) |
Amortization of deferred stock-based compensation | | | | | | | | | 83 | | | | | | | | | | | | | | | | | | 83 | |
Exercise of stock options | | | 5,000 | | | 1 | | | 42 | | | | | | | | | | | | | | | | | | 43 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | | | | | | 1,882 | | $ | 1,882 | | | 1,882 | |
Unrealized gain on forward contracts, net | | | | | | | | | | | | | | | 31 | | | | | | | | | 31 | | | 31 | |
Unrealized gain from available-for-sale securities, net | | | | | | | | | | | | | | | (134 | ) | | | | | | | | (134 | ) | | (134 | ) |
Foreign currency translation adjustments | | | | | | | | | | | | | | | 3,460 | | | 2,292 | | | | | | 3,460 | | | 5,752 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | $ | 5,010 | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2007 | | | 10,396,548 | | $ | 3,225 | | $ | 47,806 | | $ | – | | $ | 5,671 | | $ | 2,589 | | $ | 6,287 | | | | | $ | 65,578 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated unrealized losses from available for sale securities, net | | | | | | | | | | | | | | | (151 | ) | | | | | | | | | | | | |
Accumulated foreign currency translation adjustments | | | | | | | | | | | | | | | 5,822 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | |
Accumulated other comprehensive income as of December 31, 2006 | | | | | | | | | | | | | | $ | 5,671 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
U.S. dollars in thousands |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | |
Net income (loss) | | $ | (3,211 | ) | $ | 810 | | $ | 1,882 | |
Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | |
Loss (income) from discontinued operations | | | 1,538 | | | 1,219 | | | (1,686 | ) |
Depreciation and amortization | | | 1,251 | | | 1,203 | | | 2,055 | |
Gain on sale of property and equipment | | | (10 | ) | | (40 | ) | | (2 | ) |
Decrease (increase) in accrued interest and exchange differences on marketable securities, short-term and long-term bank deposits and long term loans | | | (322 | ) | | 293 | | | 1,811 | |
Accrued interest and exchange rate changes of long-term loans | | | – | | | (58 | ) | | (300 | ) |
Amortization of deferred stock compensation | | | 439 | | | 51 | | | 83 | |
Decrease (increase) in trade receivables, net | | | (8,672 | ) | | (4,402 | ) | | 4,273 | |
Decrease (increase) in unbilled accounts receivable | | | (2,819 | ) | | 3,482 | | | 1,805 | |
Decrease (increase) in other accounts receivable and prepaid expenses | | | (580 | ) | | 437 | | | (210 | ) |
Decrease (increase) in deferred income taxes | | | (1,020 | ) | | (134 | ) | | 1,081 | |
Decrease (increase) in inventories | | | 1,676 | | | (2,728 | ) | | (874 | ) |
Decrease (increase) in long-term trade receivables | | | 54 | | | 66 | | | (1,848 | ) |
Increase (decrease) in trade payables | | | 3,190 | | | (666 | ) | | (6,332 | ) |
Increase in other accounts payable and accrued expenses | | | 1,991 | | | 717 | | | (1,807 | ) |
Increase (decrease) in customer advances | | | 3,990 | | | (2,760 | ) | | 10,473 | |
Accrued severance pay, net | | | 31 | | | 60 | | | 581 | |
Losses (gains) on hedging forward contract, net | | | (441 | ) | | 431 | | | (565 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net cash provided by (used in) continuing operations | | | (2,915 | ) | | (2,019 | ) | | 10,420 | |
Net cash provided by (used in) discontinued operations | | | (1,224 | ) | | 643 | | | (519 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (4,139 | ) | | (1,376 | ) | | 9,901 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Purchase of short-term deposits | | | (16,731 | ) | | (13,726 | ) | | – | |
Proceeds from sale of short-term bank deposits | | | – | | | 13,645 | | | 5,714 | |
Escrow deposit | | | – | | | – | | | (4,442 | ) |
Purchase of long-term bank deposits | | | – | | | (3,000 | ) | | – | |
Proceeds from sale of long-term deposits | | | 1,194 | | | 3,000 | | | – | |
Purchase of marketable securities | | | – | | | (8,219 | ) | | (10,771 | ) |
Proceeds from sale of marketable securities | | | – | | | 5,202 | | | 5,570 | |
Redemption of structured notes | | | 3,000 | | | – | | | – | |
Investment in long-term loan | | | – | | | (622 | ) | | (97 | ) |
Proceeds from sale of property and equipment | | | 71 | | | 215 | | | 86 | |
Purchase of property and equipment | | | (750 | ) | | (906 | ) | | (890 | ) |
Purchase of know-how and patents | | | (46 | ) | | (148 | ) | | (28 | ) |
Acquisition of subsidiary (a) | | | – | | | – | | | (4,081 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net cash used in continuing activities | | | (13,262 | ) | | (4,559 | ) | | (8,939 | ) |
Net cash provided by (used in) discontinued operations | | | (1,986 | ) | | (689 | ) | | 8,475 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net cash used in investing activities | | | (15,248 | ) | | (5,248 | ) | | (464 | ) |
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
U.S. dollars in thousands |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Short-term bank credit, net | | | 2,402 | | | (1,369 | ) | | (4,724 | ) |
Proceeds from long-term bank loans | | | 1,800 | | | 3,200 | | | – | |
Principal payment of long-term bank loans | | | (1,849 | ) | | (306 | ) | | (796 | ) |
Proceeds from exercise of employee stock options | | | – | | | 163 | | | 43 | |
Proceeds from issuance of shares, net | | | 14,916 | | | – | | | – | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 17,269 | | | 1,688 | | | (5,477 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | 253 | | | (255 | ) | | 337 | |
| |
|
| |
|
| |
|
| |
Increase (decrease) in cash and cash equivalents | | | (1,865 | ) | | (5,191 | ) | | 4,297 | |
Cash and cash equivalents at the beginning of the year | | | 11,964 | | | 10,099 | | | 4,908 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash and cash equivalents at the end of the year | | $ | 10,099 | | $ | 4,908 | | $ | 9,205 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Supplemental disclosures of cash flows activities: | | | | | | | | | | |
| | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | | |
Interest | | $ | 828 | | $ | 1,518 | | $ | 1,736 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Income taxes | | $ | 887 | | $ | 1,486 | | $ | 1,189 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Non-cash activities: | | | | | | | | | | |
Purchase of know-how | | $ | – | | $ | 430 | | $ | – | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
a. Acquisition of Subsidiary | | | | | | | | | | |
| | | | | | | | | | |
Fair value of assets acquired and liabilities assumed at date of acquisition; | | | | | | | | | | |
| | | | | | | | | | |
Working capital, net | | | | | | | | $ | (119 | ) |
Property and equipment | | | | | | | | | (254 | ) |
Customer related intangible assets | | | | | | | | | (6,423 | ) |
Deferred taxes | | | | | | | | | 2,387 | |
Accrued severance pay | | | | | | | | | 328 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | | | | | | | $ | 4,081 | |
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| | |
| a. | Magal Security Systems Ltd. (“the Company”) and its subsidiaries (together - “the Group”) are engaged in the development, manufacture, marketing and sale of complex computerized security systems used to automatically detect and deter human intrusion for both civilian and military markets. The Group’s systems are used in more than 75 countries around the world. |
| | |
| | As for major customer data, see Note 16b. |
| | |
| b. | On August 31, 2007, the Company entered into an agreement to purchase all of the shares of a European company engaged in the installation and integration of security systems (Hereinafter - the European subsidiary), in consideration for 6.8 million Euros (approximately $9.3 million). Of such amount 3 million Euros are payable subject to the fulfillment of certain conditions. The unpaid portion is held in an Escrow deposit. Additional consideration is payable over the next five years, based on the European subsidiary’s pre-tax income. |
| | |
| | The financial statements of the European subsidiary have been consolidated with the Company’s financial statements effective September 1, 2007. |
| | |
| | The acquisition was accounted for using the purchase method of accounting as determined in Statement of Financial Accounting Standards (“SAFS”) No. 141, “Business Combinations” (“SFAS No. 141”) and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. |
| | |
| | Based upon a valuation of tangible and intangible assets acquired and liabilities assumed, the Company allocated the total cost of the acquisition, as follows: |
| | | | |
| | U.S. dollars in thousands | |
| | | | |
Working capital, net | | $ | 119 | |
Property and equipment | | | 254 | |
Customers related intangible assets | | | 6,423 | |
Deferred taxes | | | ( 2,387 | ) |
Accrued severance pay, net | | | (328 | ) |
| |
|
| |
| | | | |
| | | 4,081 | |
| |
|
| |
| | |
| | Additional amounts paid upon the fulfillment of the abovementioned conditions will be allocated to goodwill. As of December 31, 2007, the Company accrued an amount of $1,065 in respect of the earn out provision. |
| | |
| | In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), goodwill will not be amortized. In lieu of amortization, the Company is required to perform an annual impairment review. If the Company will determine, through the impairment review process, that goodwill has been impaired, it will record the impairment charge in its statement of operations. The Company will also assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. As of December 31, 2007, the Company has determined that no impairment with respect to goodwill exists. |
F - 10
|
MAGAL SECURITY SYSTEMS LTD. |
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES |
| | |
| The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). |
| | |
| a. | Use of estimates: |
| | |
| | The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. |
| | |
| b. | Financial statements in U.S. dollars: |
| | |
| | Statement of the Financial Accounting Standards Board (“SFAS”) No. 52, “Foreign Currency Translation” sets the standards for translating foreign currency financial statements of consolidated subsidiaries. The first step in the translation process is to identify the functional currency for each entity included in the financial statements. The accounts of each entity are then “remeasured” in its functional currency. All transaction gains and losses from the remeasurement of monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate. |
| | |
| | After the remeasurement process is complete the financial statements are translated into the reporting currency, which is the U.S. dollar (“dollar”), using the current rate method. Equity accounts are translated using historical exchange rates. All other balance sheet accounts are translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange rate for the year. The resulting translation adjustments are reported as a component of shareholders’ equity in accumulated other comprehensive income (loss). |
| | |
| | In accordance with U.S. Securities and Exchange Commission Regulation S-X 3-20 (“SX 3-20”), the Company has determined its reporting currency to be the dollar. The measurement process of SX 3-20 is conceptually consistent with that of SFAS 52. |
| | |
| | The Company has determined that as of October 1, 2006 its functional currency changed from the dollar to the New Israeli Shekel (“NIS”). Translation adjustments resulting from translating the Company’s financial statements from the NIS to the dollar are reported as a separate component in shareholders’ equity. |
| | |
| c. | Principles of consolidation: |
| | |
| | The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and balances including profits from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation. |
F - 11
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
�� | |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| d. | Cash equivalents: |
| | |
| | Cash equivalents are short-term highly liquid investments that are readily convertible into cash with original maturities of three months or less at the date acquired. |
| | |
| e. | Marketable securities: |
| | |
| | The Company accounts for investments in debt securities in accordance with Statement of Financial Accounting Standard 115, “Accounting for Certain Investments in Debt and Equity Securities” (“FAS 115”). Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. The debt securities are classified as “available-for-sale” since the Company does not have the intent to hold the securities to maturity, and are stated at fair value. Available-for-sale securities are carried at fair value with unrealized gains, and losses as reported in accumulated “other comprehensive income” as a separate component of shareholders equity. |
| | |
| | FASB Staff Position (“FSP”) No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investment” (“FSP 115-1”) and SAB Topic 5M “Other Than Temporary Impairment Of Certain Investments In Debt And Equity Securities” provides guidance for determining when an investment is considered impaired, whether impairment is other-than temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment decreased below its cost in an other-than temporary manner. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other than - temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. |
| | |
| f. | Short-term and long-term bank deposits: |
| | |
| | Short-term bank deposits are deposits with maturities of more than three months and less than one year, and presented at their cost. |
| | |
| | A bank deposit with maturities of more than one year is included in long-term bank deposits, and presented at cost. |
| | |
| g. | Inventories: |
| | |
| | Inventories are stated at the lower of cost or market value. The Group periodically evaluates the quantities on hand relative to historical and projected sales volumes, current and historical selling prices and contractual obligations to maintain certain levels of parts. Based on these evaluations, inventory write-offs are provided to cover risks arising from slow-moving items, discontinued products, excess inventories, market prices lower than cost and adjusted revenue forecasts. |
F - 12
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| | Cost is determined as follows: |
| | |
| | Raw materials, parts and supplies - using the “first-in, first-out” method. |
| | |
| | Work in progress and finished products - on the basis of direct manufacturing costs with the addition of allocable indirect manufacturing costs. |
| | |
| | During 2005, 2006 and 2007, the Group recorded inventory write-offs from continued operations in the amount of $420, $760 and $646, respectively. Such write-offs were included in cost of revenues. |
| | |
| h. | Long-term trade receivables: |
| | |
| | Long-term trade receivables derive from long-term payment arrangements. |
| | |
| i. | Property and equipment: |
| | |
| | Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets at the following annual rates: |
| | | | |
| | % | |
| |
| |
| | | | |
Buildings | | | 3 - 4 | |
Machinery and equipment | | | 10 - 33 (mainly 10%) | |
Motor vehicles | | | 15 | |
Promotional displays | | | 25 - 50 | |
Office furniture and equipment | | | 6 - 33 | |
Leasehold improvements | | | By the shorter of the term of the lease or the useful life of the assets | |
| | |
| j. | Intangible assets: |
| | |
| | Intangible assets are amortized over their useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). |
| | |
| | Know-how is amortized over 5 to 10 years, patents are amortized over a period of 10 years and technology is amortized over 8 years. Customer related assets is amortized based on the related revenues. |
F - 13
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| k. | Impairment of long-lived assets: |
| | |
| | The Group’s long-lived assets and certain identifiable intangibles are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” whenever events or changes in circumstances indicate that the carrying amount of a group of assets may not be recoverable. Recoverability of a group of assets to be held and used is measured by a comparison of the carrying amount of the group to the future undiscounted cash flows expected to be generated by the group. If such group of assets is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. During 2005, 2006 and 2007, no impairment losses have been identified. |
| | |
| l. | Goodwill: |
| | |
| | Goodwill represents excess of the costs over the net fair value of the assets of the businesses acquired. SFAS No. 142 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired, rather than being amortized. FAS 142 prescribes a two phase process for impairment testing of goodwill. The first phase screens for impairment, while the second phase (if necessary) measures impairment. In the first phase of impairment testing, goodwill attributable to each of the reporting units is tested for impairment by comparing the fair value of each reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second phase is then performed. The second phase of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Fair value is determined using discounted cash flows. Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates and weighted average cost of capital for each of the reportable units. During 2005, 2006 and 2007, no impairment losses have been identified. |
| | |
| m. | Revenue recognition: |
| | |
| | The Group generates its revenues mainly from (1) installation of comprehensive security systems for which revenues are generated from long-term fixed price contracts; (2) sales of security products; and (3) services and maintenance, which are performed either on a fixed-price basis or as time-and-materials based contracts. |
F - 14
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| | Revenues from installation of comprehensive security systems are generated from fixed-price contracts according to which the time between the signing of the contract and the final customer acceptance is usually over one year. Such contracts require significant customization for each customer specific needs and, as such, revenues from these type of contracts are recognized in accordance with Statement of Position (“SOP”) No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” using contract accounting on a percentage of completion method. Accounting for long-term contracts using the percentage-of-completion method stipulates that revenue and expense are recognized throughout the life of the contract, even though the project is not completed and the purchaser does not have possession of the project. Percentage of completion is calculated based on the “Input Method”. |
| | |
| | Project costs include materials purchased to produce the system, related labor and overhead expenses and subcontractor’s costs. The percentage to completion is measured by monitoring costs and efforts devoted using records of actual costs incurred to date in the project compared to the total estimated project requirement, which corresponds to the costs related to earned revenues. The amounts of revenues recognized are based on the total fees under the agreements and the percentage to completion achieved. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contract. |
| | |
| | Estimated gross profit or loss from long-term contracts may change due to changes in estimates resulting from differences between actual performance and original forecasts. Such changes in estimated gross profit are recorded in results of operations when they are reasonably determinable by management, on a cumulative catch-up basis. |
| | |
| | The Group believes that the use of the percentage of completion method is appropriate as the Group has the ability to make reasonably dependable estimates of the extent of progress towards completion, contract revenues and contract costs. In addition, contracts executed include provisions that clearly specify the enforceable rights regarding services to be provided and received by the parties to the contracts, the consideration to be exchanged and the manner and the terms of settlement, including in cases of terminations for convenience. In all cases the Group expects to perform its contractual obligations and its customers are expected to satisfy their obligations under the contract. |
| | |
| | Fees are payable upon completion of agreed upon milestones and subject to customer acceptance. Amounts of revenues recognized in advance of contractual billing, are recorded as unbilled accounts receivable. The period between most instances of advanced recognition of revenues and the customers’ billing generally ranges between one to six months. |
| | |
| | The Group sells security products to customers according to customer orders without installation work. The customers are not entitled to return the products. Revenues from security product sales are recognized in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements”, when delivery has occurred, persuasive evidence of an agreement exists, the vendor’s fee is fixed or determinable, no further obligation exists and collectibility is probable. |
F - 15
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| | Services and maintenance are performed under either fixed-price based or time-and-materials based contracts. Under fixed-price contracts, the Group agrees to perform certain work for a fixed price. Under time-and-materials contracts, the Group is reimbursed for labor hours at negotiated hourly billing rates and for materials. Such service contracts are not in the scope of SOP No. 81-1, and accordingly, related revenues are recognized in accordance with SAB No. 104, as those services are performed or over the term of the related agreements provided that, an evidence of an arrangement has been obtained, fees are fixed and determinable and collectibility is reasonably assured. |
| | |
| | Deferred revenue includes unearned amounts under installation services, service contracts and maintenance agreements. |
| | |
| n. | Accounting for stock-based compensation: |
| | |
| | On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), under which the Company previously accounted for its share based awards granted to employees and directors, for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). |
| | |
| | SFAS 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated income statement. Prior to the adoption of SFAS 123(R), the Company accounted for equity-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). |
| | |
| | The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard starting from January 1, 2006, the first day of the Company’s fiscal year 2006. Under that transition method, compensation cost recognized in 2006, includes only compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123. The Company did not grant stock options in 2006. Results for prior periods have not been restated. |
| | |
| | The Company recognizes compensation expenses for the value of its awards, which have graded vesting, based on the accelerated attribution method over the vesting period, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures. |
F - 16
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| | As a result of adopting SFAS 123(R) on January 1, 2006, the Company’s net income for the year ended December 31, 2006, was approximately $15 lower than if it had continued to account for stock-based compensation under APB 25. The influence on the basic and diluted net earnings per share for the year ended December 31, 2006 was immaterial. |
| | |
| | Prior to January 1, 2006, the Company applied the intrinsic value method of accounting for stock options as prescribed by APB 25, whereby compensation expense is equal to the excess, if any, of the quoted market price of the stock over the exercise price at the grant date of the award. |
| | |
| | During the years ended December 31, 2005, 2006 and 2007, the Company recognized stock-based compensation expenses related to employee stock options in the amounts of $439, $51 and $83, respectively. |
| | |
| | The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing model. The option-pricing model requires a number of assumptions, of which the most significant are expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements. |
| | |
| | The expected option term represents the period that the Company’s stock options are expected to be outstanding and was determined based on the simplified method permitted by SAB 107 and SAB 110 as the average of the vesting period and the contractual term. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. |
| | |
| | Fair values were estimated using the following weighted average assumptions: |
| | | | | | | | | |
| | 2005 | 2006 | | 2007 | |
| | | | | | | | | |
Dividend yield | | 0 | % | | – | | 0 | % | |
Expected volatility | | 83.4 | % | | – | | 62.4 | % | |
Risk-free interest | | 4 | % | | – | | 4.15 | % | |
Expected life of up to | | 2.5 years | | | – | | 3.5 years | | |
F - 17
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| | A summary of employee option activity under the Company’s stock option plans as of December 31, 2007 and changes during the year ended December 31, 2007 are as follows: |
| | | | | | | | | | | | | |
| | Number of options | | Weighted-average
exercise price | | Weighted- average remaining contractual
life
(in months) | | Aggregate intrinsic
value (in thousands) | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
Outstanding at January 1, 2007 | | | 322,100 | | $ | 8.34 | | | 40.3 | | $ | 218 | |
Granted | | | 100,000 | | | | | | | | | | |
Exercised | | | (5,000 | ) | | | | | | | | | |
Forfeited | | | (13,600 | ) | | | | | | | | | |
| |
|
| | | | | | | | | | |
| | | | | | | | | | | | | |
Outstanding at December 31, 2007 | | | 403,500 | | $ | 8.32 | | | 35.3 | | | – | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Exercisable at December 31, 2007 | | | 303,500 | | $ | 8.35 | | | 28.6 | | | – | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Vested and expected to vest at December 31, 2007 | | | 403,500 | | $ | 8.32 | | | 35.3 | | | – | |
| |
|
| |
|
| |
|
| |
|
| |
| | |
| | The weighted-average grant-date fair value of options granted during the years ended December 31, 2005 and 2007 was $4.39 and $3.94 respectively. The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on the last trading day of the fourth quarter of fiscal 2007 and the exercise price, multiplied by the number of in-the-money options). This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised for the year ended December 31, 2007 was approximately $7. As of December 31, 2007, there was approximately $320 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 1.62 years. Total grant-date fair value of options that vested during the year ended December 31, 2007 was approximately $18. |
F - 18
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| | The following table illustrates the effect on the net loss and net earnings loss per share, assuming that the Company had applied the fair value recognition provision of SFAS 123 on its stock-based employee compensation for all prior periods: |
| | | | |
| | Year ended
December 31,
2005 | |
| |
| |
| | | | |
Net loss as reported: | | $ | (3,211 | ) |
Add: stock-based compensation expenses determined under the intrinsic value based method included in the reported net income | | | 439 | |
Deduct: stock-based compensation expenses determined under fair value based method for all awards | | | (1,493 | ) |
| |
|
| |
| | | | |
Pro forma net loss | | $ | (4,265 | ) |
| |
|
| |
| | | | |
Basic net loss per share, as reported | | $ | (0.32 | ) |
| |
|
| |
Diluted net loss per share, as reported | | $ | (0.32 | ) |
| |
|
| |
| | | | |
Pro forma basic net loss per share | | $ | (0.43 | ) |
| |
|
| |
Pro forma diluted net loss per share | | $ | (0.43 | ) |
| |
|
| |
| | |
| o. | Research and development costs: |
| | |
| | Research and development costs incurred in the process of developing product improvements or new products, are charged to expenses as incurred, net of grants received and investment tax credit. |
| | |
| p. | Warranty costs: |
| | |
| | The Group provides a warranty for up to 24 months, at no extra charge. The Group estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized in accordance with FASB interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and SFAS No. 5, “Accounting for Contingencies”. Factors that affect the Group’s warranty liability include the number of units, historical and anticipated rates of warranty claims and cost per claim. The Group periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. A tabular reconciliation of the changes in the Group’s aggregate product warranty liability is not provided due to immateriality. |
F - 19
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| q. | Net earnings (loss) per share: |
| | |
| | Basic net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance with SFAS No. 128, “Earnings Per Share”. |
| | |
| r. | Concentrations of credit risk: |
| | |
| | Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities, short-term and long-term bank deposits, trade receivables, unbilled accounts receivable, long-term trade receivables and long-term loan. |
| | |
| | The Company’s cash and cash equivalents, marketable securities and short-term and long-term bank deposits at December 31, 2007, $19.9 million is invested in major Israeli and U.S. banks, approximately $16.3 million is invested in other banks, mainly with Deutsche Bank, RBC Royal Bank, Leutkircher Bank, Commerzbank and Natwest Bank. Deposits, cash and cash equivalents in the United States may be in excess of insured limits and are not insured in other jurisdictions. The Company believes that the financial institutions that hold its investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments. |
| | |
| | The Company’s marketable securities include investments in U.S. government debentures; foreign banks shares, shares, mutual funds and money market funds. Management believes that those securities are financially sound and that the portfolios are well-diversified, and accordingly, minimal credit risk exists with respect to these marketable securities. Moreover, the Company’s investment policy, limits the amount the Company may invest. |
| | |
| | During the recent turmoil in capital markets, the Company tightened its control and monitoring over its marketable securities portfolio. The Company has taken several measures in order to minimize potential risks stemming from the current capital markets environment. |
| | |
| | The short-term and long-term trade receivables of the Group, as well as the unbilled accounts receivable, are primarily derived from sales to large and solid organizations and governmental authorities located mainly in Israel, the United States, Canada, Mexico, Africa and Europe. The Group performs ongoing credit evaluations of its customers and to date has not experienced any material losses. An allowance for doubtful accounts is determined with respect to those amounts that the Group has determined to be doubtful of collection and in accordance with an aging policy. During the years ended December 31, 2005, 2006 and 2007, the Group recorded $(54), $138 and $(68) of expenses (income) related to doubtful accounts, respectively. In certain circumstances, the Group may require letters of credit, other collateral or additional guarantees. |
F - 20
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| | The loan granted to a third party is secured by personal guarantee of the beneficial owner (see Note 11i). The management believes that the loan is well secured, and accordingly, minimal credit risk exists with respect to this loan. |
| | |
| | The Group has no significant off-balance sheet concentration of credit risks, such as foreign exchange contracts or foreign hedging arrangements, except derivative instruments, which are detailed in w. below. |
| | |
| s. | Income taxes: |
| | |
| | The Group accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” This Statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Group provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. |
| | |
| t. | Severance pay: |
| | |
| | The Company’s liability for its Israeli employees severance pay is calculated pursuant to Israel’s Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment or a portion thereof. The Company’s liability for its employees in Israel is fully provided by monthly deposits with insurance policies and by an accrual. The value of these policies is recorded as an asset in the Company’s balance sheet. |
| | |
| | The deposited funds include profits accumulated up to balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel’s Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits. |
| | |
| | On December 31, 2007, the Chairman of the Company’s Board of Directors, retired from his position. Pursuant to his retirement agreement, the retired Chairman will be entitled to receive certain perquisites from the Company for the rest of his life. As of December 31, 2007, the actuarial value of these perquisites is estimated be approximately $544. This provision was included as part of accrued severance pay |
| | |
| | Severance expenses for the years ended December 31, 2005, 2006 and 2007, amounted to approximately $362, $476 and $1,020, respectively. |
F - 21
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | | |
| u. | Fair value of financial instruments: |
| | | |
| | The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments: |
| | | |
| | (i) | The carrying amounts of cash and cash equivalents, marketable securities, short-term bank deposits, trade receivables, unbilled accounts receivable, short-term bank credit and trade payables approximate their fair value due to the short-term maturity of such instruments. |
| | | |
| | (ii) | The carrying amount of the Group’s long-term trade receivables and long-term bank deposits approximate their fair value. The fair value was estimated using discounted cash flows analyses, based on the Group’s investment rates for similar type of investment arrangements. |
| | | |
| | (iii) | The carrying amounts of the Group’s long-term debt are estimated by discounting the future cash flows using current interest rates for loans of similar terms and maturities. As of December 31, 2006, the fair value of the Company’s long-term borrowing was $ 8,158, compared to the carrying amount of $ 8,194. As of December 31, 2007, the fair value of the Company’s long-term borrowing was $ 7,439, compared to the carrying amount of $ 7,398. |
| | | |
| v. | Advertising expenses: |
| | | |
| | Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2005, 2006 and 2007, were $ 420, $ 447 and $ 250, respectively. |
| | | |
| w. | Derivative instruments: |
| | | |
| | SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, requires a company to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged. |
| | | |
| | To protect against the change in the forecasted foreign currency cash flows of certain sale arrangements resulting from changes in the exchange rate, the Company has entered during 2005 and 2006 entered into forward contracts in order to hedge portions of its forecasted revenue and unbilled accounts receivable denominated in Euros and Polish Zlotys. The Company designated the forward instruments as cash flow hedges for accounting purposes. |
F - 22
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| | For derivative instruments designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings. |
| | |
| | The Company determined that the sales arrangement in Polish Zlotys and the related forecasted revenues and accounts receivable will not occur by the end of the specified time period. Accordingly, changes in the fair value of the forward contracts were recorded in financial expenses in the years ended December 31, 2005, 2006 and 2007. |
| | |
| | On October 1, 2006, the Company changed its functional currency from dollars to NIS (see also Note 2b). From the date of change in functional currency, the hedge against the dollar of the revenues in Euros is no longer effective. Changes in the fair value of the forward contracts from October 1, 2006 were charged to financial expenses. |
| | |
| | The Company recorded $110, $915 and $666 as financial expenses related to forward contracts transactions, in 2005, 2006 and 2007, respectively. |
| | |
| x. | Reclassification: |
| | |
| | Certain financial statement data for prior years have been reclassified to conform to current year financial statement presentation. The reclassification did not impact net income, working capital or cash flows from operations as previously reported. |
| | |
| y. | Impact of recently issued Accounting Standards: |
| | |
| | In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis, and should be applied prospectively. The adoption of the provisions of SFAS 157 related to financial assets and liabilities and other assets and liabilities that are carried at fair value on a recurring basis is not anticipated to materially impact the Company’s consolidated financial position and results of operations. Subsequently, the FASB provided for a one-year deferral of the provisions of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis. The Company is currently evaluating the impact of adopting the provisions of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed on a non-recurring basis. |
F - 23
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| | In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). Under this Standard, the Company may elect to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings. This election is irrevocable. SFAS 159 provides an opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were previously required to use a different accounting method than the related hedging contracts when the complex provisions of SFAS 133 hedge accounting are not met. SFAS 159 is effective for years beginning after November 15, 2007. As the Company did not elect the fair value option in the date of adoption, the Company does not expect the adoption of SFAS 159 will have a material impact on its consolidated financial statements. |
| | |
| | In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007) (SFAS 141R), Business Combinations. SFAS 141R will change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141R will have an impact on accounting for future business combinations once adopted and not on prior acquisitions. |
| | |
| | In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This standard is effective for fiscal years beginning after December 15, 2008and should be applied prospectively. However, the presentation and disclosure requirements of the statement shall be applied retrospectively for all periods presented. The adoption of the provisions of Statement No. 160 is not anticipated to materially impact the Company’s consolidated financial position and results of operations. |
| | |
| | In December 2007, the SEC staff issued Staff Accounting Bulletin (“SAB”) 110, Share-Based Payment, which amends SAB 107, Share-Based Payment, to permit public companies, under certain circumstances, to use the simplified method in SAB 107 for employee option grants after December 31, 2007. Use of the simplified method after December 2007 is permitted only for companies whose historical data about their employees’ exercise behavior does not provide a reasonable basis for estimating the expected term of the options. Based on the significant restrictions on employee trading during the restatement periods, the Company has not experienced regular employee exercise behavior since the implementation of SFAS No. 123R on January 20, 2006. The Company expects to continue to use the simplified method as allowed under SAB 110. |
F - 24
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| | In June 2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3 “Accounting for Nonrefundable Advance Payments for Goods or Services to be Used in Future Research and Development Activities” (“EITF Issue No. 07-3”) which is effective for fiscal years beginning after December 15, 2007. EITF Issue No. 07-3 requires that nonrefundable advance payments for future research and development activities be deferred and capitalized. Such amounts will be recognized as an expense as the goods are delivered or the related services are performed. The Company does not expect the adoption of EITF Issue No. 07-3 to have a material impact on the financial results of the Company. |
| |
NOTE 3:- | MARKETABLE SECURITIES |
| |
| The Group invests in marketable debt securities, which are classified as available-for-sale investments. The following is a summary of marketable debt securities: |
| | | | | | | | | | | | | | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | Amortized
cost | | Unrealized
losses | | Market
value | | Amortized
cost | | Unrealized
Losses, net | | Market
value | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
Available-for-sale: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
U.S. Government debentures | | $ | 3,080 | | $ | 13 | | $ | 3,067 | | $ | 1,260 | | $ | – | | $ | 1,260 | |
Share, Mutual funds and money market funds | | | | | | | | | | | | 8,355 | | | 151 | | | 8,204 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | |
Total available-for-sale marketable securities | | $ | 3,080 | | $ | 13 | | $ | 3,067 | | $ | 9,615 | | $ | 151 | | $ | 9,464 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
| The unrealized losses on available-for-sale securities included in other comprehensive income, as a separate component of shareholders’ equity, totaled $ 134 as of December 31, 2007. |
| |
| The unrealized losses on the Company’s investments in available-for-sale securities are a result of interest rate changes. Since the Company has the ability and intent to hold these investments until a recovery of fair value, which may be until maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2007. |
| |
| The amortized cost and estimated fair value of available-for-sale investments as of December 31, 2006 and 2007, by contractual maturity, are as follows: |
| | | | | | | | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | Amortized
cost | | Market value | | Amortized cost | | Market value | |
| |
| |
| |
| |
| |
| | | | | | | | | |
Available-for-sale: | | | | | | | | | | | | | |
Matures in one year | | $ | – | | $ | – | | $ | 6,483 | | $ | 6,326 | |
Matures in one to three years | | | 3,080 | | | 3,067 | | | 3,132 | | | 3,138 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
| | $ | 3,080 | | $ | 3,067 | | $ | 9,615 | | $ | 9,464 | |
| |
|
| |
|
| |
|
| |
|
| |
F - 25
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 4:- | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
Government authorities | | $ | 1,756 | | $ | 2,823 | |
Employees | | | 207 | | | 86 | |
Prepaid expenses | | | 450 | | | 648 | |
Advances to suppliers | | | 1,159 | | | 1,473 | |
Others | | | 249 | | | 723 | |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 3,821 | | $ | 5,753 | |
| |
|
| |
|
| |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
Raw materials | | $ | 7,650 | | $ | 7,919 | |
Work in progress | | | 2,213 | | | 4,064 | |
Finished products | | | 4,108 | | | 11,802 | |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 13,971 | | $ | 23,785 | |
| |
|
| |
|
| |
| |
NOTE 6:- | PROPERTY AND EQUIPMENT |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
Cost: | | | | | | | |
Land and buildings | | $ | 8,982 | | $ | 9,913 | |
Machinery and equipment | | | 6,775 | | | 7,958 | |
Motor vehicles | | | 1,133 | | | 1,480 | |
Promotional displays | | | 1,083 | | | 1,321 | |
Office furniture and equipment | | | 2,746 | | | 3,375 | |
Leasehold improvements | | | 42 | | | 46 | |
| |
|
| |
|
| |
| | | | | | | |
| | | 20,761 | | | 24,093 | |
| |
|
| |
|
| |
Accumulated depreciation: | | | | | | | |
Buildings | | | 3,144 | | | 3,734 | |
Machinery and equipment | | | 5,662 | | | 6,807 | |
Motor vehicles | | | 896 | | | 1,053 | |
Promotional displays | | | 991 | | | 1,197 | |
Office furniture and equipment | | | 2,349 | | | 2,857 | |
Leasehold improvements | | | 12 | | | 16 | |
| |
|
| |
|
| |
| | | | | | | |
| | | 13,054 | | | 15,664 | |
| |
|
| |
|
| |
| | | | | | | |
Depreciated cost | | $ | 7,707 | | $ | 8,429 | |
| |
|
| |
|
| |
| | |
| b. | Depreciation expenses amounted to $ 1,110, $ 1,053 and $ 1,027 for the years ended December 31, 2005, 2006 and 2007, respectively. |
| | |
| c. | As for charges, see Note 11g. |
F - 26
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 7:- | OTHER INTANGIBLE ASSETS, NET |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
|
Cost: | | | | | | | |
Know-how | | $ | 982 | | $ | 1,050 | |
Patents | | | 2,859 | | | 3,412 | |
Customer related assets | | | – | | | 6,920 | |
Technology | | | 436 | | | 451 | |
| |
|
| |
|
| |
| | | | | | | |
| | | 4,277 | | | 11,833 | |
| |
|
| |
|
| |
Accumulated amortization: | | | | | | | |
Know-how | | | 429 | | | 560 | |
Patents | | | 2,626 | | | 3,152 | |
Customer related assets | | | | | | 825 | |
Technology | | | 191 | | | 256 | |
| |
|
| |
|
| |
| | | | | | | |
| | | 3,246 | | | 4,793 | |
| |
|
| |
|
| |
| | | | | | | |
Amortized cost | | $ | 1,031 | | $ | 7,040 | |
| |
|
| |
|
| |
| | |
| b. | Amortization expenses related to intangible assets amounted to $ 141, $ 150 and $ 1,028 for the years ended December 31, 2005, 2006 and 2007, respectively. |
| | |
| c. | Estimated amortization of intangible assets for the years ended: |
| | | | | | | |
December 31, | | | | | | | |
| | | | | | | |
| | | | | | | |
2008 | | $ | 4,448 | | | | |
2009 | | | 954 | | | | |
2010 | | | 1,117 | | | | |
2011 | | | 204 | | | | |
2012 and thereafter | | | 317 | | | | |
| |
|
| | | | |
| | | | | | | |
| | $ | 7,040 | | | | |
| |
|
| | | | |
F - 27
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 8:- | SHORT-TERM BANK CREDIT |
| | |
| a. | Classified by currency, linkage terms and interest rates: |
| | | | | | | | | | | | | |
| | Interest rate | | December 31, | |
| |
| |
| |
| | 2006 | | 2007 | | 2006 | | 2007 | |
| |
| |
| |
| |
| |
| | % | | | | | |
| |
| | | |
| | | | | | | | | | | | | |
In or linked to U.S. dollars (1) | | 5.71 | | | 5.82 | | | $ | 13,600 | | $ | 8,100 | |
In or linked to NIS (1) | | 5.85 | | | 5.58 | | | | 3,426 | | | 8,189 | |
In or linked to EURO | | | | | 7.5 | | | | | | | 145 | |
| | | | | | | |
|
| |
|
| |
| | | | | | | | | | | | | |
| | | | | | | | $ | 17,026 | | $ | 16,434 | |
| | | | | | | |
|
| |
|
| |
Weighted average interest rates at the end of the year | | 5.74 | | | 5.72 | | | | | | | | |
| | | | | | | |
Short-term bank credit | | | 17,026 | | | 16,434 | |
Long-term bank credit | | | 8,194 | | | 7,398 | |
Performance guarantees | | | 6,488 | | | 9,753 | |
Letters of credit and forward contracts | | | 1,696 | | | 1,202 | |
| |
|
| |
|
| |
| | | 33,404 | | | 34,787 | |
| |
|
| |
|
| |
|
Unutilized credit lines approximate | | $ | 21,437 | | $ | 28,802 | |
| |
|
| |
|
| |
| | | | | | | |
Total authorized credit lines approximate | | $ | 54,841 | | $ | 63,588 | |
| |
|
| |
|
| |
| | |
| c. | As for charges, see Note 11g. |
| |
NOTE 9:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
Employees and payroll accruals | | $ | 1,759 | | $ | 2,519 | |
Accrued expenses | | | 5,462 | | | 5,812 | |
Deferred revenues | | | 309 | | | 587 | |
Government authorities | | | 528 | | | 341 | |
Income tax payable | | | 635 | | | 989 | |
Others | | | 522 | | | 633 | |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 9,215 | | $ | 10,881 | |
| |
|
| |
|
| |
F - 28
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 10:- | LONG-TERM BANK DEBT |
| | |
| a. | Classified by currency, linkage terms and interest rates: |
| | | | | | | | | | | | | | | | | |
| | Linkage
terms | | Interest rate | | December 31, | |
| | |
| |
| |
| | | 2006 | | 2007 | | 2006 | | 2007 | |
| |
| |
| |
| |
| |
| |
| | | | % | | | |
| | | |
| | | |
| | | | | | | | | | | | | | | | | |
Bank loans | | U.S. $ | | | 5.96 | | | | 5.79 | | | $ | 5,540 | | $ | 4,900 | |
Bank promissory notes(1) | | U.S. $ | | | 6.215 | | | | 5.99 | | | | 1,000 | | | 1,000 | |
Mortgage payable | | U.S. $ | | | 5.45 | | | | 5.45 | | | | 1,654 | | | 1,498 | |
| | | | | | | | | | | |
|
| |
|
| |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | 8,194 | | | 7,398 | |
Less - current maturities | | | | | | | | | | | | | 795 | | | 4,303 | |
| | | | | | | | | | | |
|
| |
|
| |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | $ | 7,399 | | $ | 3,095 | |
| | | | | | | | | | | |
|
| |
|
| |
Weighted average interest rates at the end of the year | | | | | 5.89 | | | | 6.04 | | | | | | | | |
| | | |
| | (1) | The promissory notes contain covenants that require the Group to maintain $ 1,000 in deposits at all times otherwise the interest rate on the notes becomes the bank’s rate plus 0.25% until the minimum deposit is maintained. As of December 31, 2007, management believes that the Group was in compliance with these ratios and terms. |
| | |
| b. | As of December 31, 2007, the aggregate annual maturities of the long-term loans are as follows: |
| | | | | | | |
2008 | | $ | 4,303 | | | | |
2009 | | | 813 | | | | |
2010 | | | 1,802 | | | | |
2011 | | | 480 | | | | |
| |
|
| | | | |
| | | | | | | |
| | $ | 7,398 | | | | |
| |
|
| | | | |
| | |
| c. | As for charges, see Note 11g. |
F - 29
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 11:- | COMMITMENTS AND CONTINGENT LIABILITIES |
| | |
| a. | Royalty commitments to the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade (“OCS”): |
| | |
| | Under the research and development agreements between the Company and the OCS and pursuant to applicable laws, the Company is required to pay royalties at the rate of 3%-4.5% of sales of products developed with funds provided by the OCS, up to an amount equal to 100% of the OCS research and development grants received, linked to the U.S. dollars plus interest on the unpaid amount received based on the 12-month LIBOR rate applicable to dollar deposits. The Company is obligated to repay the Israeli Government for the grants received only to the extent that there are sales of the funded products. |
| | |
| | Royalties paid amounted to $ 83, $ 79 and $ 143 for the years ended December 31, 2005, 2006 and 2007, respectively. As of December 31, 2007, the Company had remaining contingent obligations to pay royalties in the amount of approximately $ 1,509. |
| | |
| b. | Royalty commitments to a third party: |
| | |
| | During 2002, the Company entered into a development agreement for planning, developing and manufacturing a security system with a third party. Under the agreement, the Company agreed to pay the third party royalty fees, based on a defined formula. Under this agreement, the Company also committed to purchase a certain volume of products at a minimum amount of approximately $ 300 over 2.5 years after achievement of certain milestones. As of December 31, 2007, royalty commitments under the agreement amounted to $ 31. |
| | |
| c. | In September 2006, the Company signed a non exclusive agreement with a third party for the rights to use certain intangible assets such as know-how and patents for the production, sale and marketing of perimeter security system based on fiber-optic lines that is used mainly to protect marine sites. The contract period is 2 years and the Company has the right to extend the contract for an additional 5 years. The consideration for the license is $ 548, payable in 24 monthly installments. In addition, the Company agreed to pay royalties based on a defined formula. |
| | |
| | In addition, the parties have signed an unlimited agreement that grants the Company the rights to provide maintenance and support for the systems previously sold by the third party. The Company agreed to pay royalties based on a defined formula. No royalties were paid or accrued as of December 31, 2007. |
F - 30
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 11:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) |
| | |
| d. | Lease commitments: |
| | |
| | The Group rents certain of its facilities and some of its motor vehicles under various operating lease agreements, which expire on various dates, the latest of which is in 2011. |
| | |
| | Future minimum lease payments under non-cancelable operating lease agreements are as follows: |
| | | | |
2008 | | $ | 693 | |
2009 | | | 562 | |
2010 | | | 301 | |
2011 | | | 63 | |
| |
|
| |
| | | | |
| | $ | 1,619 | |
| |
|
| |
| | |
| | Total rent expenses for the years ended December 31, 2005, 2006 and 2007, were approximately $ 593, $ 700 and $ 664, respectively. |
| | |
| e. | Guarantees: |
| | |
| | As of December 31, 2007, the Group obtained bank performance guarantees and advance payment guarantees and bid bond guarantees from several banks mainly in Israel in the amount of $ 10,955. |
| | |
| f. | Legal proceedings: |
| | |
| | In May 2005, the Company entered into an agreement to supply comprehensive security solutions for a sensitive site in Eastern Europe. As part of the agreement, the Company received an advance payment, secured by a bank advanced payment guarantee that was to be reduced proportionally as execution of the project progressed. In addition, the Company issued the customer a performance bank guarantee. The Company commenced the project and delivered some of the equipment and other deliverables to the customer in 2005. In April 2006, the customer informed the Company that it was canceling the agreement due to errors in the design documents that the Company submitted. In addition, the customer did not make payments required under the agreement. Based on its cancellation of the agreement, the customer collected $3.2 million under an advanced payment guarantee on June 20, 2006. Due to this uncertainty, the Company did not recognize any revenues from this project. |
F - 31
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 11:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) |
| | | |
| | On July 11, 2006 the customer made a demand for an additional $1.4 million payment under a bank performance guarantee. Upon the Company’s motion, the District Court in Haifa, Israel issued a temporary injunction against the payment of such guarantee pending a hearing in August 2006. At the hearing, the Company reached a settlement with the customer pursuant to which the Company paid the customer approximately $700,000 of the disputed amount and agreed that the balance would be repaid only if the Company is found liable for damages exceeding the amount paid by it. In view of the above and due to the uncertainty of the Company being able to prevent the forfeiture of the bank performance guarantee, the Company included a $1.4 million provision in respect of this guarantee in its financial statements for the year ended December 31, 2005. Based on the August 2006 settlement, the Company in 2006 cancelled the balance of the provision it made in its financial statements. |
| | |
| | On June 6, 2007, the Court of Arbitration issued its decision in the arbitration and stated that the agreement between the Company and the customer was void due to legal mistakes made by the customer in the tender process. As a result of such award and as agreed in the settlement agreement the performance guarantee was cancelled on February 2008. |
| | | |
| | In addition, the Group is subject to legal proceedings arising in the normal course of business. Based on the advice of legal counsel, management believes that these proceedings will not have a material adverse effect on the Company’s financial position or results of operations. |
| | |
| g. | Charges: |
| | |
| | As collateral for all of the Group liabilities to banks: |
| | |
| | 1. | A fixed charge has been placed on the Company’s property. |
| | | |
| | 2. | The Company agreed not to pledge any of its assets without the consent of several banks. |
| | | |
| | 3. | A fixed charge in the amount of $ 3,000 has been placed on the Company’s bank deposits. |
| | | |
| | 4. | A subsidiary of the Company has two bank promissory notes in the aggregate amount of $ 1,000 due on July 17, 2008, collateralized by substantially all of the subsidiary’s assets. |
F - 32
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 11:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) |
| | | |
| h. | In October 2006, the Company signed an agreement with a third party, which consults, markets and implements projects in the security field. According to the agreement, during the first 12 months (“the agreement period”), the parties agreed to cooperate in the development of the business of the third party. |
| | | |
| | The Company has granted a loan to the third party in the amount of $600. The Company will also provide the third party with additional monthly amounts to fund its activities during the agreement period, that will not exceed $ 23 per month. The loan and the monthly amounts will bear an annual interest rate of 5%, and shall be paid in October 2011. |
| | | |
| | The Company received an option to purchase all of the assets of the third party’s business, exercisable during the agreement period (“the option”). The Company is obligated to exercise the option if the third party will meet certain milestones. The exercise price of the option is comprised of the outstanding loan and the monthly amounts mentioned above and an additional $ 400 in cash. In the event that the Company will exercise the option, the beneficial owner of the third party will be entitled to receive 50% of the operating profit of certain projects, as defined in the agreement. |
| |
NOTE 12:- | SHAREHOLDERS’ EQUITY |
| | | |
| a. | Pertinent rights and privileges conferred by Ordinary shares: |
| | |
| | The Ordinary shares of the Company are listed for trade on the NASDAQ Global Market and in Israel, on the Tel-Aviv Stock Exchange. The Ordinary shares confer upon their holders the right to receive notice to participate and vote in the general meetings of the Company and the right to receive dividends, if declared. |
| | |
| b. | Issued and outstanding share capital: |
| | |
| | On April 19, 2005, the Company completed a public offering of $ 16.3 thousand in consideration of the sale of 1,700,000 of the Company’s Ordinary shares at a price per share of $ 9.5 and at a price of $ 9.92 (the closing price of the Ordinary shares on the date of the transaction) with respect to shares sold to two principal shareholders of the Company. |
| | |
| c. | Stock Option Plan: |
| | |
| | On October 27, 2003, the Company’s Board of Directors approved the 2003 Israeli Share Option Plan (“the 2003 Plan”). Under the 2003 Plan, stock options will be periodically granted to employees, directors, officers and consultants of the Company or its subsidiaries, in accordance with the decision of the Board of Directors of the Company (or a committee appointed by it). The Board of Directors has the authority to determine the number of options, if any, which will be granted to each of the aforementioned, the dates of the grant of such options, the date of their exercise as well as their rate of conversion into shares in respect of each stock option, and the purchase price thereof. |
F - 33
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 12:- | SHAREHOLDERS’ EQUITY (Cont.) |
| | | |
| | The 2003 Plan is effective for ten years and shall terminate in October 2013. Any options that are cancelled or forfeited before expiration become available for future grant. |
| | | |
| | As of December 31, 2007, there were 215,075 options available for future grant. |
| | | |
| | A summary of the Company’s stock options activities in 2005, 2006 and 2007, is as follows: |
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | Number
of options | | Weighted
average
exercise
price | | Number
of options | | Weighted
average
exercise
price | | Number
of options | | Weighted
average
exercise
price | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | |
Outstanding at beginning of year | | | 105,000 | | $ | 7.66 | | | 343,000 | | $ | 8.35 | | | 322,100 | | $ | 8.34 | |
Granted | | | 238,000 | | $ | 8.65 | | | – | | | | | | 100,000 | | $ | 8.22 | |
Exercised | | | – | | $ | – | | | (19,100 | ) | $ | 8.56 | | | (5,000 | ) | $ | 8.56 | |
Forfeited | | | – | | $ | – | | | (1,800 | ) | $ | 8.56 | | | (13,600 | ) | $ | 7.87 | |
| |
|
| | | | |
|
| | | | |
|
| | | | |
| | | | | | | | | | | | | | | | | | | |
Outstanding at end of year | | | 343,000 | | $ | 8.35 | | | 322,100 | | $ | 8.34 | | | 403,500 | | $ | 8.32 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | |
Exercisable options at end of year | | | 231,200 | | $ | 8.56 | | | 317,100 | | $ | 8.26 | | | 303,500 | | $ | 8.35 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
| | The options outstanding as of December 31, 2007 are follows: |
| | | | | | | | | | | |
Options outstanding
as of
December 31, 2007 | | | Exercise price | | Weighted average remaining contractual life | | Options exercisable as of
December 31,
2007 | |
| | |
| |
| |
| |
| | | | | (in months) | | | |
| | | | |
| | | |
| | | | | | | | | | | |
94,500 | | | $ | 7.66 | | | 12.9 | | | 94,500 | |
204,000 | | | $ | 8.56 | | | 35.7 | | | 204,000 | |
5,000 | | | $ | 13.00 | | | 35.7 | | | 5,000 | |
100,000 | | | $ | 8.22 | | | 55.5 | | | | |
| | | | | | | | | |
| |
| | | | | | | | | | | |
403,500 | | | $ | 8.32 | | | | | | 303,500 | |
| | |
|
| | | | |
|
| |
| | |
| d. | Dividends: |
| | |
| | Dividends, if any, will be declared and paid in U.S. dollars. Dividends paid to shareholders in Israel will be converted into NIS on the basis of the exchange rate prevailing at the date of payment. The Company has determined that it will not distribute dividends out of tax-exempt profits. |
F - 34
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 13:- | BASIC AND DILUTED NET EARNINGS PER SHARE |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Numerator: | | | | | | | | | | |
| | | | | | | | | | |
Income (loss) from continuing operations | | $ | (1,673 | ) | $ | 2,029 | | $ | 196 | |
Income (loss) on discontinued operations | | | (1,538 | ) | | (1,219 | ) | | 1,686 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net income (loss) | | $ | (3,211 | ) | $ | 810 | | $ | 1,882 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Denominator: | | | | | | | | | | |
| | | | | | | | | | |
Denominator for basic net earnings per share - weighted-average number of shares outstanding | | | 9,883,407 | | | 10,384,047 | | | 10,394,989 | |
Effect of diluting securities: | | | | | | | | | | |
Employee stock options | | | 16,926 | | | 57,777 | | | 36,114 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Denominator for diluted net earnings per share - adjusted weighted average shares and assumed exercises | | | 9,900,333 | | | 10,441,824 | | | 10,431,103 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Basic net earnings (loss) per share from continuing operations | | $ | (0.17 | ) | $ | 0.20 | | $ | 0.02 | |
Basic net earnings (loss) per share from discontinued operations | | | (0.15 | ) | | (0.12 | ) | | 0.16 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Basic net earnings (loss) per share | | $ | (0.32 | ) | $ | 0.08 | | $ | 0.18 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Diluted net earnings (loss) per share form continuing operations | | $ | (0.17 | ) | $ | 0.20 | | $ | 0.02 | |
Diluted net earnings (loss) per share from discontinued operations | | | (0.15 | ) | | (0.12 | ) | | 0.16 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Diluted net earnings (loss) per share | | $ | (0.32 | ) | $ | 0.08 | | $ | 0.18 | |
| |
|
| |
|
| |
|
| |
F - 35
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| | | |
| |
| a. | Tax benefits in Israel under the Law for the Encouragement of Capital Investments, 1959 (“the Law”): |
| | |
| | The Company has been granted the status of an “Approved Enterprise” under the Law. Currently, there are two expansion programs under which the Company is entitled to tax benefits: |
| | |
| | 1. | On March 18, 1997, a program of the Company was granted the status of an “Approved Enterprise”. The Company elected to enjoy the “alternative benefits” track - waiver of grants in return for tax exemption and accordingly, the Company’s income from this program was tax-exempt for a period of four years, and is subject to a reduced tax rate of 10%-25% for a period ranging between three to six years (depending on the percentage of foreign ownership of the Company). The period of benefits under this program began in 1998 and will terminate in 2007. |
| | | |
| | 2. | On August 13, 2002, a program of the Company was granted the status of an “Approved Enterprise”. The Company elected to enjoy the “alternative benefits” track - waiver of grants in return for tax exemption - and, accordingly, the Company’s income from this program is tax-exempt for a period of two years, and is subject to a reduced tax rate of 10%-25% for a period of five to eight years (depending upon the percentage of foreign ownership of the Company). The benefit period for this program began in 2003 and will terminate in 2012. |
| | | |
| | The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the Law, regulations published there under and the letters of approval for the specific investments in “Approved Enterprises”. In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. As of December 31, 2007, management believes that the Company is in compliance with all of the aforementioned conditions. |
| | |
| | The period of tax benefits detailed above is subject to limits of the earlier of 12 years from the commencement of production or 14 years from receiving the approval. |
| | |
| | An amendment to the Law, which has been officially published effective as of April 1, 2005 (“the Amendment”), has changed certain provisions of the Law. As a result of the Amendment, a company is no longer obliged to implement an Approved Enterprise status in order to receive the tax benefits previously available under the Alternative Benefits provisions, and therefore there is no need to apply to the Investment Center for this purpose (Approved Enterprise status remains mandatory for companies seeking grants). Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set out by the Amendment. A company is also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Amendment. |
F - 36
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 14:- | TAXES ON INCOME (Cont.) |
| | | |
| | Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business income from export. In order to receive the tax benefits, the Amendment states that a company must make an investment in the Beneficiary Enterprise exceeding a minimum amount specified in the Law. Such investment may be made over a period of no more than three years ending at the end of the year in which a company requested to have the tax benefits apply to the Beneficiary Enterprise (“the Year of Election”). Where a company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Beneficiary Enterprise and the company’s effective tax rate will be the result of a weighted combination of the applicable rates. In this case, the minimum investment required in order to qualify as a Beneficiary Enterprise is required to exceed a certain percentage of the company’s production assets before the expansion. The duration of tax benefits is subject to a limitation of the earlier of 7 years from the Commencement Year, or 12 years from the first day of the Year of Election. |
| | |
| | On March 3, 2007, the Company received a pre-ruling from the Israeli Tax Authority for its request for a Benefiting Facility, regarding eligibility for benefits under the Amendment. The Company’s income from this program is tax-exempt for a period of two years, and is subject to a reduced tax rate of 10%-25% for a period of five to eight years (depending upon the percentage of foreign ownership of the Company). The Company has not yet obtained any tax benefits from this program. |
| | | |
| | Income from sources other than “Approved Enterprise”, during the benefit period was subject to tax at regular rate of 29% in 2007 (see e. below). |
| | |
| | By virtue of the Law, the Company is entitled to claim accelerated depreciation on equipment used by the “Approved Enterprise” during five tax years. |
| | |
| | Since the Company is operating under more than one approval and since part of its taxable income is not entitled to tax benefits under the aforementioned law and is taxed at regular rates (29% in 2007), its effective tax rate is the result of a weighted combination of the various applicable rates and tax-exemptions. The computation is made for income derived from each program on the basis of formulas determined in the law and in the approvals. |
| | |
| | The tax-exempt income attributable to the “Approved Enterprises” can be distributed to shareholders without subjecting the Company to taxes only upon the complete liquidation of the Company. If the retained tax-exempt income is distributed in a manner other than in the complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not chosen the alternative tax benefits (currently - 15%). |
F - 37
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 14:- | TAXES ON INCOME (Cont.) |
| | | |
| b. | Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985: |
| | |
| | Under the Income Tax (Inflationary Adjustments) Law, 1985, results for tax purposes are measured in real terms, in accordance with the changes in the Israeli Consumer Price Index (“Israeli CPI”). Accordingly, until 2002, results for tax purposes were measured in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI. Commencing in taxable year 2003 through 2006, the Company elected to measure its taxable income and file its tax returns under the Israeli Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain Partnerships and the Determination of Their Taxable Income), 1986. Such an election obligated the Company for three years. Accordingly, commencing in the 2003 taxable year, results for tax purposes are measured in terms of earnings in dollar. |
| | |
| | Changes in the tax laws applicable to the Group: |
| | |
| | In February 2008, the “Knesset” (Israeli Parliament) passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law with effect from 2008 and thereafter. From 2008, the results for tax purposes will be measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, 2007. The amended law includes, inter alia, the elimination of the inflationary additions and deductions and the additional deduction for depreciation with effect from 2008. |
| | |
| c. | Tax benefits (in Israel) under the Law for the Encouragement of Industry (Taxes), 1969: |
| | |
| | The Company is an “industrial company” as defined by this law and, as such, is entitled to certain tax benefits including accelerated depreciation, deduction of the purchase price of patents and know-how and deduction of public offering expenses. |
| | |
| d. | Tax rates: |
| | |
| | 1. | On July 25, 2005, the Knesset (Israeli Parliament) passed the Law for the Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among others, a gradual decrease in the corporate tax rate in Israel to the following tax rates: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and thereafter - 25%. |
| | | |
| | 2. | The tax rates of the Company’s subsidiaries range between 25%-40%. In December 2007, the tax rate in Germany was reduced to 30% from 38%. The tax reduction is effective beginning January 1, 2008. Deferred taxes had been adjustment according. |
F - 38
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 14:- | TAXES ON INCOME (Cont.) |
| | | |
| e. | Investment tax credit: |
| | |
| | Two of the Company’s subsidiaries is eligible for investment tax credits on its research and development activities and on certain current and capital expenditures. During the year ended December 31, 2007, the subsidiaries recognized $ 160 of investment tax credits as a reduction of research and development expenses. |
| | |
| | In total, the subsidiaries have investment tax credits available to reduce future federal income taxes payable, amounting to $ 738, which will expire in 2014-2027. |
| | | |
| f. | Reconciliation between the theoretical tax expense, assuming all income is taxed at the Israeli statutory rate, and the actual tax expense, is as follows: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Income (loss) before taxes as reported in the statements of operations | | $ | (1,701 | ) | $ | 2,972 | | $ | 569 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Tax rate | | | 34 | % | | 31 | % | | 29 | % |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Theoretical tax expense (tax benefit) | | $ | (578 | ) | $ | 921 | | $ | 165 | |
Increase (decrease) in taxes: | | | | | | | | | | |
Non-deductible items, net | | | 25 | | | 45 | | | 113 | |
Difference between the basis of measurement of income reported for tax | | | – | | | – | | | (449 | ) |
Deferred taxes on losses for which valuation allowance was provided | | | 43 | | | 51 | | | 765 | |
Tax exemption applicable to “Approved Enterprises” and exempted income | | | 347 | | | (75 | ) | | – | |
Reduction of tax rate in subsidiary | | | | | | | | | (472 | ) |
Taxes in respect of prior years | | | 52 | | | 1 | | | 357 | |
Tax benefit due to discontinued operation | | | | | | | | | (134 | ) |
Other | | | 83 | | | | | | 28 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Taxes on income (tax benefit) in the statements of operations | | $ | (28 | ) | $ | 943 | | $ | 373 | |
| |
|
| |
|
| |
|
| |
F - 39
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 14:- | TAXES ON INCOME (Cont.) |
| | | |
| g. | Taxes on income (tax benefit) included in the statements of operations: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Current: | | | | | | | | | | |
Foreign | | $ | 615 | | $ | 1,036 | | | 1,097 | |
| | | | | | | | | | |
Deferred: | | | | | | | | | | |
Domestic | | | (642 | ) | | 248 | | | (594 | ) |
Foreign | | | (53 | ) | | (342 | ) | | (487 | ) |
| | | | | | | | | | |
Taxes in respect of prior years: | | | | | | | | | | |
Domestic | | | – | | | 1 | | | 402 | |
Foreign | | | 52 | | | – | | | (45 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Taxes on income (tax benefit) from continuing operations | | | (28 | ) | | 943 | | | 373 | |
Tax benefit from discontinued operations | | | (31 | ) | | (29 | ) | | 134 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total taxes on income (tax benefit) | | $ | (59 | ) | $ | 914 | | $ | 507 | |
| |
|
| |
|
| |
|
| |
F - 40
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 14:- | TAXES ON INCOME (Cont.) |
| | |
| h. | Deferred income taxes: |
| | |
| | Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Group’s deferred tax assets are as follows: |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
Operating loss carryforward | | $ | 4,549 | | $ | 4,212 | |
Reserves and tax allowances | | | 2,372 | | | (127 | ) |
| |
|
| |
|
| |
| | | | | | | |
Total deferred taxes before valuation allowance | | | 6,921 | | | 4,085 | |
Valuation allowance | | | (4,631 | ) | | (3,483 | ) |
| |
|
| |
|
| |
| | | | | | | |
Net deferred tax assets | | $ | 2,290 | | $ | 602 | |
| |
|
| |
|
| |
| | | | | | | |
Domestic | | $ | 1,442 | | $ | 2,197 | |
Foreign | | | 848 | | | (1,595 | ) |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 2,290 | | $ | 602 | |
| |
|
| |
|
| |
| | |
| i. | The domestic and foreign components of income (loss) before taxes are as follows: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Domestic | | $ | (2,998 | ) | $ | 564 | | $ | (3,980 | ) |
Foreign | | | 1,297 | | | 2,408 | | | 4,549 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | $ | (1,701 | ) | $ | 2,972 | | $ | 569 | |
| |
|
| |
|
| |
|
| |
| | |
| j. | Net operating carryforward tax losses: |
| | |
| | The Company has estimated total available carryforward tax losses of $ 7,047 to offset against future taxable income. |
| | |
| | The Company’s subsidiaries in the U.S. and the U.K. have estimated total available carryforward tax losses of $ 5,332 and $ 930, respectively, to offset against future taxable income for 16 to 20 years, and an indefinite period, respectively. As of December 31, 2007, the Company recorded a full valuation allowance of the subsidiaries’ abovementioned tax assets due to the uncertainty of their future realization. |
F - 41
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 14:- | TAXES ON INCOME (Cont.) |
| | |
| | Utilization of U.S. net operating losses may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization. |
| | |
| k. | In December 2007 the Company signed on tax assessment agreement for the years 2001-2004. According to the agreement, the Company paid $402. An additional amount of $467 will be paid to the tax authority if the Company will not receive “Approved enterprise” status under the law for encouragement of capital investments 1959. |
| | |
| l. | Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainties in income taxes by establishing minimum standards for the recognition and measurement of tax positions taken or expected to be taken in a tax return. Under the requirements of FIN 48, the Company must review all of its tax positions and make a determination as to whether its position is more-likely-than-not to be sustained upon examination by regulatory authorities. If a tax position meets the more-likely–than-not standard, then the related tax benefit is measured based on a cumulative probability analysis of the amount that is more-likely-than-not to be realized upon ultimate settlement or disposition of the underlying issue. The impact on the Company’s consolidated financial position and results of operations as a result of the adoption of the provisions of FIN 48 was $ 229, which was recognized as an adjustment to retained earnings. |
| |
NOTE 15:- | BALANCES AND TRANSACTIONS WITH RELATED PARTIES |
| | |
| a. | Balances with related parties: |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
Balances with related parties | | $ | 59 | | $ | (167 | ) |
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|
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|
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| b. | Sales to related parties: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Sales to related parties (1) | | $ | 671 | | $ | 765 | | $ | 781 | |
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| | |
| (1) | Sales and balances to related parties represent services provided by discontinued operation, see note 18a below. |
F - 42
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 15:- | BALANCES AND TRANSACTIONS WITH RELATED PARTIES (Cont.) |
| | |
| c. | On December 31, 2007, the Chairman of the Company’s Board of Directors (Hereinafter – the retired Chairman), retired from his position. Pursuant to his retirement agreement, the retired Chairman agreed not to compete with the Company for a period of three years following his retirement in consideration of a one time payment of $ 360 payable within three months. In addition the Chairman is entitled to receive certain perquisites from the Company for the rest of his life. The liability as for December 31, 2007 and the special post benefit expense related to the retirement agreement amounted to $904. |
| |
NOTE 16:- | SEGMENT INFORMATION |
| | |
| The Group adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. The Group operates in three major reportable segments, which represent the Group’s operating segments as follows: |
| | |
| 1. | Perimeter security systems - The Group’s line of perimeter security systems consists of the following: Microprocessor-based central control units, taut wire perimeter intrusion detection systems, INNO fences, vibration detection systems, field disturbance sensors, and other. |
| | |
| 2. | Security turnkey projects - The Group executes turnkey projects based on the Company’s security management system and acts as an integrator. |
| | |
| 3. | Video monitoring services - The Group supplied video monitoring services through Smart Interactive Systems, Inc., a U.S. subsidiary whose assets and business was sold on December 24, 2007. Therefore all balances and operations attributed to the video monitoring services segment were classified and presented as discontinued operation, see note 18a. |
F - 43
|
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 16:- | SEGMENT INFORMATION (Cont.) |
| | |
| a. | The following data present the revenues, expenditures, assets and other operating data of the Group’s operating segments: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | Perimeter | | Projects | | Other | | Eliminations | | Total | | Perimeter | | Projects | | Other | | Eliminations | | Total | | Perimeter | | Projects | | Other | | Eliminations | | Total | |
| |
| |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 40,143 | | $ | 17,970 | | $ | 272 | | | | | $ | 58,385 | | $ | 47,186 | | $ | 16,167 | | $ | 247 | | | | | $ | 63,600 | | | 43,781 | | | 28,167 | | | 427 | | | | | | 72,375 | |
| |
|
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|
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | $ | 1,228 | | $ | 19 | | $ | 4 | | | | | $ | 1,251 | | $ | 1,070 | | $ | 133 | | $ | – | | | | | $ | 1,203 | | | 1,087 | | | 966 | | | 2 | | | | | | 2,055 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income (loss), before financial expenses and taxes on income | | $ | 4,334 | | $ | (5,290 | ) | $ | 53 | | $ | 15 | | $ | (888 | ) | $ | 3,070 | | $ | 935 | | $ | (138 | ) | $ | (31 | ) | $ | 3,836 | | | 2,421 | | | 506 | | | (193 | ) | | (28 | ) | | 2,706 | |
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| | | | |
Financial expenses, net | | | | | | | | | | | | | | | 813 | | | | | | | | | | | | | | | 864 | | | | | | | | | | | | | | | 2,137 | |
Taxes on income (tax benefit) | | | | | | | | | | | | | | | (28 | ) | | | | | | | | | | | | | | 943 | | | | | | | | | | | | | | | 373 | |
Income (loss) from discontinued operations, net | | | | | | | | | | | | | | | (1,538 | ) | | | | | | | | | | | | | | (1,219 | ) | | | | | | | | | | | | | | 1,686 | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | | | | | | | | | | | | $ | (3,211 | ) | | | | | | | | | | | | | $ | 810 | | | | | | | | | | | | | | $ | 1,882 | |
| | | | | | | | | | | | | |
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| | | | | | | | | | | | | |
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| | | | | | | | | | | | | |
|
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
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| |
| | Perimeter | | Projects | | Other | | Total | | Perimeter | | Projects | | Other | | Total | | Perimeter | | Projects | | Other | | Total | |
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Total long-lived assets | | $ | 13,042 | | $ | 194 | | $ | 19 | | $ | 13,255 | | $ | 12,451 | | $ | 552 | | $ | 20 | | $ | 13,023 | | | 12,518 | | | 8,560 | | | 1 | | | 21,079 | |
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F - 44
|
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 16:- | SEGMENT INFORMATION (Cont.) |
| | |
| b. | Major customer data (percentage of total revenues): |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Customer A | | | 23.9 | % | | 33.7 | % | | *) 13 | % |
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| | | | | | | | | | |
Customer B | | | 10.2 | % | | *) – | | | *) – | |
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| | | | | | | | | | |
Customer C | | | – | | | – | | | 13.4 | % |
| |
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|
| |
| | | |
| | *) | Less than 10% of total revenues. |
| | | |
| c. | Geographical information: |
| | | |
| | The following is a summary of revenues within geographic areas based on end customer’s location and long-lived assets: |
| | | | | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2005 | | 2006 | | 2007 | |
| | |
| |
| |
| |
| | | | | | | | | | | |
1. | Revenues: | | | | | | | | | | |
| | | | | | | | | | | |
| Israel | | $ | 19,309 | | $ | 26,385 | | $ | 15,663 | |
| Europe | | | 9,935 | | | 9,793 | | | 18,342 | |
| North America | | | 19,047 | | | 14,176 | | | 14,869 | |
| South and Latin America | | | 3,165 | | | 7,456 | | | 6,818 | |
| Africa | | | 700 | | | 321 | | | 10,879 | |
| Others | | | 6,229 | | | 5,469 | | | 5,804 | |
| | |
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| |
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| | | | | | | | | | | |
| | | $ | 58,385 | | $ | 63,600 | | $ | 72,375 | |
| | |
|
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|
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|
| |
2. | Long-lived assets: | | | | | | | | | | |
| | | | | | | | | | | |
| Israel | | $ | 2,930 | | $ | 2,763 | | $ | 2,955 | |
| Europe | | | 921 | | | 1,001 | | | 8,472 | |
| USA | | | 5,627 | | | 5,469 | | | 5,244 | |
| Canada | | | 3,656 | | | 3,648 | | | 4,189 | |
| Others | | | 121 | | | 142 | | | 219 | |
| | |
|
| |
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| | | | | | | | | | | |
| | | $ | 13,255 | | $ | 13,023 | | $ | 21,079 | |
| | |
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F - 45
|
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 17:- | SELECTED STATEMENTS OF INCOME DATA |
| | |
| a. | Research and development expenses, net: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Expenses | | $ | 5,427 | | $ | 5,540 | | $ | 5,924 | |
Less - investment tax credits and a royalty bearing grant ($8K in 2005) | | | 162 | | | 162 | | | 160 | |
| |
|
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| | | | | | | | | | |
| | $ | 5,265 | | $ | 5,378 | | $ | 5,764 | |
| |
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| | | | | | | | | | |
| | Year ended December 31, | |
| |
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| | 2005 | | 2006 | | 2007 | |
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| | | | | | | | | | |
Financial expenses: | | | | | | | | | | |
Interest on long-term debt | | $ | (622 | ) | $ | (698 | ) | $ | (563 | ) |
Interest on short-term bank credit | | | (630 | ) | | (689 | ) | | (1,337 | ) |
Forward contracts loss | | | (110 | ) | | (915 | ) | | (666 | ) |
Foreign exchange losses | | | (314 | ) | | (337 | ) | | (792 | ) |
| |
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| | | | | | | | | | |
| | | (1,676 | ) | | (2,639 | ) | | (3,358 | ) |
| |
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| |
Financial income: | | | | | | | | | | |
Interest on short-term and long-term bank deposits, structured notes and marketable securities | | | 694 | | | 1,162 | | | 1,221 | |
Foreign exchange gains | | | 169 | | | 613 | | | – | |
| |
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| | | | | | | | | | |
| | | 863 | | | 1,775 | | | 1,221 | |
| |
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| | | | | | | | | | |
| | $ | (813 | ) | $ | (864 | ) | $ | (2,137 | ) |
| |
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NOTE 18:- | DISCONTINUED OPERATIONS |
| | |
| a. | General: |
| | |
| | On July 28, 2005, the Company decided to dispose of the indoor security sensors operations. |
| | |
| | On December 24, 2007 the Company decided to sell its U.S. based video monitoring business that was operated by Smart Interactive Systems Inc. for $ 8.5 million. The video monitoring business was previously reported as a separate segment in the Group’s financial statements. |
F - 46
|
|
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands (except share and per share data) |
| |
NOTE 18:- | DISCONTINUED OPERATIONS (Cont.) |
| | |
| | In view of the above, the operating results and cash flows attributed to the indoor security sensors operations and video monitoring business were presented in the Company’s statements of operations and cash flows as discontinued operations. Accordingly, the comparative figures were reclassified for all periods presented. |
| | |
| b. | The following are the results of the discontinued operations for the years ended December 31, 2005, 2006 and 2007: |
| | |
| | Indoor security sensors operations |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Revenues | | $ | 427 | | $ | 48 | | $ | – | |
Cost of revenues | | | 470 | | | 198 | | | – | |
| |
|
| |
|
| |
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| |
| | | | | | | | | | |
Gross loss | | | 43 | | | 150 | | | – | |
| |
|
| |
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| |
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| |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Sales and marketing, net | | | 149 | | | 12 | | | – | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating loss | | | 192 | | | 162 | | | – | |
Tax benefit | | | (36 | ) | | (34 | ) | | – | |
| |
|
| |
|
| |
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| |
| | | | | | | | | | |
Net loss | | $ | 156 | | $ | 128 | | $ | – | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Revenues | | $ | 2,897 | | $ | 3,358 | | $ | 3,435 | |
Cost of revenues | | | 2,496 | | | 2,995 | | | 2,937 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Gross profit | | | 401 | | | 363 | | | 498 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Sales and marketing | | | 795 | | | 476 | | | 267 | |
General and administrative | | | 996 | | | 986 | | | 885 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating loss | | | 1,390 | | | 1,099 | | | 654 | |
| | | | | | | | | | |
Capital gain from sale of video monitoring activity | | | – | | | – | | | 2,427 | |
Financial income, net | | | 13 | | | 13 | | | 55 | |
Tax expense | | | 5 | | | 5 | | | 142 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net Income (loss) | | $ | (1,382 | ) | $ | (1,091 | ) | $ | 1,686 | |
| |
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| |
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F - 47
Report of Independent Registered Public Accounting Firm
To the Shareholders’ of
Senstar Stellar Latin America, S. A. de C.V.:
We have audited the accompanying balances sheets of SENSTAR STELLAR LATIN AMERICA, S.A. DE C.V. (incorporated in Mexico), as of December 31, 2007 and 2006, and the related statements of operations, changes in shareholders’ equity, and cash flows for each of the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the translated financial statements referred to above present fairly, in all material respects, the financial position of Senstar Stellar Latin America, S.A. de C.V. as of December 31, 2007 and 2006, and the related statements of operations, changes in shareholders’ equity and cash flows for each of the years then ended in conformity with the accounting principles generally accepted in the United States of America.
| | |
| SALLES, SAINZ – GRANT THORNTON, S.C. |
|
| | /S/ Hector Bautista |
| |
|
| | |
| | By: Hector Bautista CPA |
| | |
Mexico City, Mexico | | |
January 31, 2008 | | |
F - 48
SIGNATURE
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 to annual report on its behalf.
| | MAGAL SECURITY SYSTEMS LTD.
By: /s/ Izhar Dekel
——————————————
Name: Izhar Dekel
Title: Chief Executive Officer
Date: June 30, 2008 |
82
