As of December 26, 2005, Mr. Nathan Kirsh beneficially owned 1,832,227 or 17.66% of our ordinary shares, in accordance with a Schedule 13D/A filed with the Securities and Exchange Commission, or SEC on February 13, 2006. On January 10, 2008, Mr. Nathan Kirsh filed a Schedule 13D/A with the SEC reflecting beneficial ownership of 1,913,601, or 18.41% of our ordinary shares. On April 24, 2008, Mr. Nathan Kirsh filed a Schedule 13D/A with the SEC reflecting beneficial ownership of 2,191,162, or 21.08% of our ordinary shares. On April 25, 2008, Mr. Nathan Kirsh filed a Schedule 13D/A with the SEC reflecting beneficial ownership of 2,191,162, or 21.08% of our ordinary shares. On January 16, 2009, Mr. Nathan Kirsh filed a Schedule 13D/A with the SEC reflecting beneficial ownership of 2,516,268, or 24.20% of our ordinary shares.
On February 6, 2007, Clough Capital Partners, L.P. filed an amendment to its Schedule 13G, on Schedule 13G/A, with the SEC reflecting beneficial ownership of 711,669 or 6.85% of our ordinary shares. On February 11, 2008, Clough Capital Partners, L.P. filed an amendment to the Schedule 13G, on Schedule 13G/A, reflecting beneficial ownership of 712,269 or 6.85% of our ordinary shares. On February 10, 2009, Clough Capital Partners, L.P. filed with the SEC an amendment to the Schedule 13G, on Schedule 13G/A, reflecting beneficial ownership of 770,842 or 7.41% of our ordinary shares.
On February 2, 2007, Diker GP, LLC, Diker Management LLC, or Diker Management, Messrs. Charles M. Diker and Mark N. Diker filed a Schedule 13G with the SEC reflecting beneficial ownership of 1,007,601 or 9.70% of our ordinary shares. On February 12, 2008, the foregoing reporting persons filed with the SEC an amendment to the Schedule 13G, on Schedule 13G/A, reflecting beneficial ownership of 1,014,425, or 9.76%, of our ordinary shares. On February 17, 2009, the foregoing reporting persons filed with the SEC an amendment to the Schedule 13G, on Schedule 13G/A, reflecting beneficial ownership of 968,468 or 9.32% of our ordinary shares.
On February 4, 2008, Grace & White, Inc. filed a Schedule 13G with the SEC reflecting beneficial ownership of 574,254 or 5.52% of our ordinary shares. On February 10, 2009, Grace & White, Inc. filed with the SEC an amendment to the Schedule 13G, on Schedule 13G/A, reflecting beneficial ownership of 596,148 or 5.73% of our ordinary shares.
On February 14, 2008, Prescott Capital, Prescott Group Aggressive Small Cap, L.P., Prescott Group Aggressive Small Cap II, L.P. and Mr. Phil Frohlich filed a Schedule 13G with the SEC reflecting beneficial ownership of 539,097 or 5.19% of our ordinary shares. On February 10, 2009, the foregoing reporting persons filed with the SEC an amendment to the Schedule 13G, on Schedule 13G/A, reflecting beneficial ownership of 547,127 or 5.3% 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 July 10, 2009, there were 58 holders of record of our ordinary shares, of which 46 record holders holding approximately 77.14% of our ordinary shares had registered addresses in the United States. 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 76.93% of our outstanding ordinary shares as of such date.
| B. | Related Party Transactions. |
On January 22, 2008, we entered into a retirement agreement with Mr. Jacob Even-Ezra, who retired from his position as the chairman of our board of directors as of January 1, 2008, based on the terms approved by our shareholders in August 2007. Subsequent to the annual general meeting of our shareholders held in August 2007, our board of directors required that Mr. Even-Ezra’s retirement agreement be amended to include a non-compete undertaking. Pursuant to the retirement agreement, as amended, Mr. Even- Ezra has undertaken not to compete with our company for a period of three years following his retirement. In consideration, we agreed to pay Mr. Even-Ezra $360,000. Such amendment was approved in January 2008 by our audit committee and board of directors without shareholder approval in accordance with the Companies Regulations (Relief from Related Party Transactions) 5760-2000, promulgated under the Israeli Companies Law, since such amendment is solely for the benefit of the our company. In the event that within 14 days from the date of the disclosure of the resolution of the audit committee and the board of directors shareholders holding at least 1% of our voting rights will so request, such resolution will be subject to the approval of the general meeting of our shareholders. In addition, as gratitude for his long term 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, 2008, the actuarial value of these perquisites is estimated by approximately $603,000.
59
On August 21, 2008, we entered into an agreement with Mr. Jacob Perry, in connection with his services as the chairman of our board of directors. Pursuant to the terms of the agreement, Mr. Perry agreed to serve as the chairman of our board of directors on a part time basis and has undertaken to devote 50%-60% of his business time and attention to the development of our business. Mr. Perry’s service as the chairman of our board of directors is for an unlimited period, however each party may terminate the agreement without cause by giving 90 days’ notice to the other party. Mr. Perry is entitled to receive as compensation for his services as chairman of our board of directors a monthly fee of NIS 50,000 (approximately $13,000) effective as of the date of his appointment as chairman of our board of directors on January 1, 2008. Such compensation is linked to the Israeli consumer price index and will be adjusted every six months. In addition, in the event that our annual income before taxes (after deduction of any and all bonuses paid to all other employees including our chief executive officer, and excluding any non-recurring capital gain or loss), will be higher than $3,000,000, or the Base Amount we will pay Mr. Perry an annual bonus that will be equal to 5% of our company’s annual income before taxes, but in any event not more than $500,000 per year. On January 1 of each year, the Base Amount is increased by 10% per year. Mr. Perry is also entitled to receive all customary social benefits such as managers insurance and education fund, such amount will be paid to him or to third parties for his benefit. In November 2008, our agreement with Mr. Perry was amended, pursuant to which until September 1, 2008, Mr. Perry was engaged by us as an as independent contractor through a company controlled by him and after September 1, 2008, is an employee of our company. Such amendment was approved in January 2008 by our audit committee and board of directors without shareholder approval in accordance with the Companies Regulations (Relief from Related Party Transactions) 5760-2000, promulgated under the Israeli Companies Law, since such amendment is solely for the benefit of the our company. In the event that within 14 days from the date of the disclosure of the resolution of the audit committee and the board of directors shareholders holding at least 1% of our voting rights will so request, such resolution will be subject to the approval of the general meeting of our shareholders.
Mr. 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 $5.0 million since July 2006. Our board of directors determined that this a transaction in the ordinary cause of business, that was made on an arm’s length basis and is in the best interest of our company.
Our former U.S. subsidiary, Smart Interactive Systems Inc., provided video monitoring services to companies controlled by Mr. Nathan Kirsh, our principal shareholder and a director. The terms of the contracts under which we made sales to these companies were negotiated on an arm’s 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 2006 and 2007, were $765,000 and $781,000, respectively. In December 2007, we disposed of our U.S. based video monitoring business.
In November 2008, our audit committee and board of directors approved, subject to the approval of our shareholders, that Mr. Zeev Livne, a director, is entitled to a commission equal to 1.5% of the net revenues actually received by us from certain transactions in a number of Eastern European countries.
We have entered into retirement agreements with our certain of our officers under which we have paid post employment and retirement liabilities in the aggregate amount of approximately $2.6 million. Of such amount, approximately $1.7 million was paid to Mr. Izhar Dekel, our former President and chief executive officer, who had been employed by our company and served in various positions from 1984 until February 2009. These payments include consideration for a non-compete undertaking as well as severance payments and other retirement related payments in accordance with Mr. Dekel’s retirement agreement and Israeli law.
60
| C. | Interests of Experts and Counsel. |
Not applicable.
| ITEM 8. | | Financial Information |
| A. | Consolidated Statements and Other Financial Information. |
Consolidated Financial Statements
See the consolidated financial statements included under Item 18, “Financial Statements.”
Export Sales
In 2006, 2007 and 2008, the total amount of our revenues from our facilities located outside of Israel to customers outside of Israel was approximately $37.0 million, $49.1 million and $48.3 million, respectively, or 55.2%, 67.9% and 68.7% of our total revenues, respectively. In 2006, 2007 and 2008, the total amount of our export revenues from our Israeli facilities to countries outside of Israel was approximately $3.6 million, $7.6 million and $9.9 million, respectively, or 5.4%, 10.5% and 14.1% of our total revenues, respectively.
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 to 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 performance bank guarantee on June 20, 2006. Due to the 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 the performance bank guarantee. 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 performance bank 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.
On June 6, 2007, the Court of Arbitrationawarded its decision 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 bank guarantee was cancelled in 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 to a Public Court; and (2) on December 11, 2007 a claim for compensation was submitted to 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.
61
Dividend Distribution Policy
We currently intend to retain future earnings for use in our business and do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. Future dividend distributions are subject to the discretion of our board of directors and will depend on a number of factors, including our operating results, future capital resources available for distribution, capital requirements, financial condition, the tax implications of dividend distributions on our income, future prospects and any other factors our board of directors may deem relevant.
The distribution of dividends also may be limited by Israeli law, which permits the distribution of dividends only out of profits (as defined by the Israeli Companies Law) or otherwise upon the permission of the court. “Profits” are defined in the Israeli Companies Law as the balance of surpluses, or the surpluses accumulated over the past two years, whichever is the greater, in accordance with the latest adjusted financial statements, audited or reviewed, prepared by the company, provided that the date in respect of which the statements were prepared is no earlier than six months prior to the date of distribution. “Surplus” means sums included in a company’s shareholders’ equity originating from the net profit of the company, as determined according to generally accepted accounting principles, and sums other than share capital or premiums that are included in shareholders’ equity under generally accepted accounting principles and the Minister of Justice prescribed that they are to be considered surplus.
Since the date of the annual consolidated financial statements included in this annual report, no significant changes have occurred.
| ITEM 9. | | The Offer and Listing |
| A. | Offer and Listing Details. |
Annual Stock Information
The following table sets forth, for each of the years indicated, the high and low market 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
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| 2004 | | | $ | 40.35 | | $ | 6.75 | | NIS | 156.68 | | NIS | 32.25 | |
| 2005 | | | $ | 12.22 | | $ | 7.87 | | NIS | 53.45 | | NIS | 35.74 | |
| 2006 | | | $ | 14.20 | | $ | 8.51 | | NIS | 64.78 | | NIS | 36.10 | |
| 2007 | | | $ | 12.00 | | $ | 6.26 | | NIS | 51.00 | | NIS | 23.50 | |
| 2008 | | | $ | 9.30 | | $ | 4.61 | | NIS | 32.44 | | NIS | 18.60 | |
| | | | |
Quarterly Stock Information
The following table sets forth, for each of the full financial quarters in the years indicated and any subsequent period, the high and market 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
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| 2007 | | | | | | | | | | | | | | |
| First Quarter | | | $ | 12.00 | | $ | 8.53 | | NIS | 51.00 | | NIS | 36.25 | |
| Second Quarter | | | $ | 11.18 | | $ | 9.91 | | NIS | 46.06 | | NIS | 40.20 | |
| Third Quarter | | | $ | 10.49 | | $ | 7.50 | | NIS | 43.95 | | NIS | 34.01 | |
| Fourth Quarter | | | $ | 9.15 | | $ | 6.26 | | NIS | 36.99 | | NIS | 23.50 | |
| | | |
| 2008 | | |
| First Quarter | | | $ | 7.70 | | $ | 5.09 | | NIS | 28.20 | | NIS | 19.00 | |
| Second Quarter | | | $ | 8.81 | | $ | 5.84 | | NIS | 29.55 | | NIS | 19.00 | |
| Third Quarter | | | $ | 9.30 | | $ | 6.80 | | NIS | 32.44 | | NIS | 23.01 | |
| Fourth Quarter | | | $ | 8.87 | | $ | 4.61 | | NIS | 31.97 | | NIS | 18.60 | |
| | | |
| 2009 | | |
| First Quarter | | | $ | 6.40 | | $ | 3.79 | | NIS | 24.50 | | NIS | 16.00 | |
62
Monthly Stock Information
The following table sets forth, for each of the most recent six months, the high and low market 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
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| December 2008 | | | $ | 6.24 | | $ | 4.76 | | NIS | 23.00 | | NIS | 18.60 | |
| January 2009 | | | $ | 6.40 | | $ | 5.37 | | NIS | 24.50 | | NIS | 21.05 | |
| February 2009 | | | $ | 5.76 | | $ | 4.67 | | NIS | 23.78 | | NIS | 21.00 | |
| March 2009 | | | $ | 5.21 | | $ | 3.79 | | NIS | 22.15 | | NIS | 16.00 | |
| April 2009 | | | $ | 4.75 | | $ | 3.80 | | NIS | 18.94 | | NIS | 16.61 | |
| May 2009 | | | $ | 4.69 | | $ | 4.07 | | NIS | 19.70 | | NIS | 17.02 | |
Not applicable.
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.
Not applicable.
Not applicable.
Not applicable.
| ITEM 10. | | Additional Information |
Not applicable.
63
| B. | Memorandum and Articles of Association. |
Purposes and Objects of the Company
We are a public company registered with the Israeli Companies Registrar 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 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 external 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, even if 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.
The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in the same manner as any other transaction by us.
For a discussion of Israeli law concerning a director’s fiduciary duties and the approval of transactions with office holders, 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.
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 the shareholder has paid all calls then currently due and payable on each ordinary share held by such shareholder.
64
The board of directors may declare interim dividends and propose the final dividend with respect to any fiscal year only out of the retained earnings, in accordance with the provisions of the Israeli Companies Law. 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. See “Item 8A. Financial Information – Consolidated Statements and Other Financial Information – Dividend Distributions Policy.”
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. Such voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Generally, resolutions are adopted at the general meeting of shareholders by an ordinary resolution, unless the Israeli Companies Law or our 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 on the matter. 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 on the matter. The primary resolutions required to be adopted by an extraordinary resolution of the general meeting of shareholders are resolutions to:
| | — | amend the memorandum of association or articles of association; |
| | — | change the share capital, for example, increasing or canceling the authorized share capital or modifying the rights attached to shares; and |
| | — | 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 external 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 external directors) may be reelected upon completion of their term of office. For information regarding the election of external 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.”
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.
65
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.
Substantial limitations on shareholders
See Item 6.C. “Directors, Senior Management and Employees-Board Practices–Approval of Related PartyTransactions.”
Modifications of Share Rights
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. 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.
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 15 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 Item 10B. “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 14 to 21 days or, in the event of a vote by ballots, between 28 to 40 days prior the date the general meeting of shareholders is held.
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.
66
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 aresolution 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.
None.
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.
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.
67
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. Generally, Israeli companies are subject to “corporate tax” on their taxable income. On July 25, 2005, the Knesset (Israeli Parliament) approved the Law of the Amendment of the Income Tax Ordinance (No. 147), 2005, or the Israel Tax Ordinance, 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%. 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 generally 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.”
Following an amendment to the Israeli Tax Ordinance, which came into effect on January 1, 2009, an Israeli corporation may elect a 5% rate of corporate tax (instead of 25%) for income from dividend distributions received from a foreign subsidiary which is used in Israel in 2009, or within one year after actual receipt of the dividend, whichever is later. The 5% tax rate is subject to various conditions, which include conditions with regard to the identity of the corporation that distributes the dividends, the source of the dividend, the nature of the use of the dividend income, and the period during which the dividend income will be used in Israel.
Israeli Transfer Pricing Regulations
On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Israeli Tax Ordinance, came into effect, or the TP Regs. Section 85A of the Tax Ordinance and the TP Regs generally require that all cross-border transactions carried out between related parties be conducted on an arm’s length principle basis and will be taxed accordingly. The TP Regs are not expected to have a material affect on us.
Tax Benefits for Research and Development
Israeli tax law allows, under specified conditions, a tax deduction for expenditures, including capital expenditures, in the year incurred relating to scientific research and development projects, if the expenditures are approved by the relevant Israeli Government ministry, determined by the field of research, and the research and development is for the promotion of the company and is carried out by or on behalf of the company seeking such deduction. However, the amount of such deductible expenses shall be reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. Expenditures not so approved are deductible over a three-year period.
68
Encouragement of Capital Investments Law, 5719-1959
The Investments Law Prior to the 2005 Amendment
The Law for the Encouragement of Capital Investments, 1959, or the Investments Law, as in effect prior to April 1, 2005 provided that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Commerce of the State of Israel, be designated as an approved enterprise. The Investment Center based its decision as to whether or not to approve an application, among other things, on the criteria set forth in the Investments Law and regulations, the then prevailing policy of the Investment Center, and the specific objectives and financial criteria of the applicant. 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, such as the equipment to be purchased and utilized pursuant to the program.
The Investments Law provides that an approved enterprise is eligible for tax benefits on taxable income derived from its approved enterprise programs. The tax benefits under the Investments 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 auxiliary to such usage right or royalties, provided that such income is generated within the approved enterprise’s ordinary course of business. If a company has more than one approval enterprise or only a portion of its capital investments are 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. In addition, the tax benefits available to an approved enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and regulations and the criteria set forth in the specific certificate of approval, as described above. In the event that a company does not meet these conditions, it would be required to refund the amount of tax benefits, plus a consumer price index linkage adjustment and interest.
The Investments Law also provides that an approved enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved enterprise program.
Taxable income of a company derived from an approved enterprise is subject to corporate tax at the maximum rate of 25%, rather than the regular corporate tax rate, for the benefit period. This period is ordinarily seven years commencing with the year in which the approved enterprise first generates taxable income (after the commencement of production), and is limited to 12 years from commencement of production or 14 years from the date of approval, whichever is earlier, referred to as the “Years Limitation.”
A company may elect to receive an alternative package of benefits. Under the alternative package of benefits, a company’s undistributed income derived from the approved enterprise will be exempt from corporate tax for a period of between two and ten years from the first year the company derives taxable income under the program, depending on the geographic location of the approved enterprise within Israel, and such company will be eligible for a reduced tax rate for the remainder of the benefits period. The Years Limitation does not apply to the exemption period. A company that has elected the alternative package of benefits, such as us, that subsequently pays a dividend out of income derived from the approved enterprise during the tax exemption period will be subject to corporate tax in respect of the gross amount distributed, including any taxes thereon, at the rate which would have been applicable had it not elected the alternative package of benefits, generally 10%-25%, depending on the percentage of the company’s ordinary shares held by foreign shareholders. The dividend recipient is subject to withholding tax at the rate of 15% applicable to dividends from approved enterprises, if the dividend is distributed during the tax exemption period or within twelve years thereafter. The company must withhold this tax at source.
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 which more than 25% of its 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. As specified above, depending on the geographic location of the approved enterprise within Israel, income derived from the approved enterprise program may be exempt from tax on its undistributed income for a period of between two to ten years, and will be subject to a reduced tax rate for the remainder of the benefits period. The tax rate for the remainder of the benefits period will be 25%, unless the level of foreign investment exceeds 49%, in which case the tax rate will be 20% if the foreign investment is more than 49% and less than 74%; 15% if more than 74% and less than 90%; and 10% if 90% or more.
69
Subject to applicable provisions concerning income under the alternative package of benefits, dividends paid by a company are considered to be attributable to income received from the entire company and the company’s effective tax rate is the result of a weighted average of the various applicable tax rates, excluding any tax-exempt income. Under the Investments Law, a company that has elected the alternative package of benefits is not obliged to distribute retained profits, and may generally decide from which year’s profits to declare dividends. We currently intend to reinvest any income derived from our approved enterprise program and not to distribute such income as a dividend.
The Israeli government may reduce or eliminate tax benefits available to approved enterprise programs in the future. We cannot assure you that our approved program and the benefits thereunder shall continue in the future at its current level or at any level.
Currently, we have two valid expansion programs that were granted approved enterprise status under the Investments Law prior to its amendment.
2005 Amendment to the Investments Law
An amendment to the Investments Law, which was published on April 1, 2005, or the Amendment, has changed certain provisions of the Investments Law. As a result of the Amendment, a company is no longer obliged to acquire approved enterprise status in order to receive the tax benefits previously available under the alternative benefits provisions, and therefore generally 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 Investments 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.
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, referred to as a “Benefited Enterprise.” In order to receive the tax benefits, the Amendment states that the company must make an investment in the Benefited Enterprise exceeding a certain percentage or a minimum amount specified in the Investments Law. Such investment may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise, referred to as the Year of Election. Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Benefited 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 Benefited Enterprise is required to exceed a certain percentage or a minimum amount of the company’s production assets before the expansion.
The duration of tax benefits is subject to a limitation of the earlier of seven to ten years from the commencement year, or 12 years from the first day of the Year of Election. The tax benefits granted to a Benefited Enterprise are determined, as applicable to its geographic location within Israel, according to one of the following new tax routes, which may be applicable to us:
| | — | 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 Benefited Enterprise 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 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 Benefited Enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%) with respect to the gross amount of dividend distributed. The company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the Benefited Enterprise; and |
70
| | — | A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited Enterprise. 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. |
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 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 are retroactive from 2003.
The Amendment applies to approved enterprise programs in which the year of election under the Investments Law is 2004 or later, unless such programs received “Approved Enterprise” approval from the Investment Center on or prior to December 31, 2004, in which case the Amendment provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the Investments Law as they were on the date of such approval.
Should we elect to utilize tax benefits under the Amendment to the Investments Law, any such tax exempt profits might be subject to future taxation on the corporate level upon distribution to shareholders by a way of dividend or liquidation. Accordingly, we may be required to recognize deferred tax liability with respect to such tax exempt profits.
A substantial portion of our taxable operating income is derived from our approved enterprise program and we expect that a substantial portion of any taxable operating income that we may realize in the future will be also derived from such program. There is no assurance that our facilities will continue to enjoy such status in the future.
On March 3, 2007, we received a pre-ruling from the Israeli Tax Authority confirming that our most recent development program will be deemed a Benefiting Enterprise under the amended Investments Law. 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 have not enjoyed any tax benefits under this program to date.
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:
| | — | 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; |
| | — | Right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli industrial companies; and |
| | — | Accelerated depreciation rates on equipment and buildings; and |
71
| | — | Deductions over a three-year period of expenses in connection with the issuance and listing of shares on a recognized stock market. |
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.
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 Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the OCS, are eligible for grants between 20%-50% of certain of the project’s expenditures, as determined by the research committee of the OCS. 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 to 100% 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 regulations promulgated under 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 of the OCS 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 of the OCS. 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.
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.
72
The Israeli authorities have indicated that the government may 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:
| | — | 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. |
| | — | 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. |
| | — | Subject to specified limitations, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the Israeli consumer price index. |
The 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 consumer price index 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.
Capital Gains Tax on Sales of Our Ordinary Shares by Foreign Holders
Under income tax regulations foreign residents of Israel, 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:
| | — | The capital gain is not attributable to a permanent establishment in Israel. |
73
| | — | The shares were purchased after the first initial public offering on the recognized stock exchange outside of Israel. |
| | — | 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 TaxTreaty, such U.S. resident (for purposes of the U.S.-Israel Tax Treaty) 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 of Foreign Holders 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), is liable for tax on the portion of his or her income attributed to holdings in such corporation, as if such income was distributed to him or her as a dividend.
74
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.
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.
75
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.
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.
76
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, or 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,” or 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. |
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.
77
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.
| F. | Dividends and Paying Agents. |
Not applicable.
Not applicable.
We are subject to certain of the reporting requirements of the Securities and Exchange Act of 1934, as amended, or the Exchange Act, as applicable to “foreign private issuers” as defined in Rule 3b-4 under the Exchange Act. As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and transactions in our equity securities by our officers and directors are exempt from reporting and the “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 as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we file with the Securities and Exchange Commission an annual report on Form 20-F containing financial statements audited by an independent accounting firm. We also submit to the Securities and Exchange Commission reports on Form 6-K containing (among other things) press releases and unaudited financial information. We post our annual report on Form 20-F on our website (www.magal-ssl.com) promptly following the filing of our annual report with the Securities and Exchange Commission. The information on our website is not incorporated by reference into this annual report.
This annual report and the exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge and copied at prescribed rates at the Securities and Exchange Commission public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Securities and Exchange Commission’s public reference room in Washington, D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Exchange Act file number for our Securities and Exchange Commission filings is 000-21388.
78
The Securities and Exchange Commission maintains a website atwww.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the Securities and Exchange Commission using its EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.
The documents concerning our company that are referred to in this annual report may also be inspected at our executive offices in Israel.
In addition, since we are also listed on the Tel Aviv Stock Exchange, we submit copies of all our filings with the SEC to the Israeli Securities Authority and Tel Aviv Stock Exchange. Such copies can be retrieved electronically through the Tel Aviv Stock Exchange’s internet messaging system (www.maya.tase.co.il) and, for filings after November 2003, also through the MAGNA distribution site of the Israeli Securities Authority (www.magna.isa.gov.il).
| 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 prime interest rates, since our short-term loans bear prime-based interest rates and of our $3.2 million long-term loans, $1.4 million bear a fixed interest rate and $1.8 million bear LIBOR 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 Date and Weighted Average Interest Rate
|
|---|
| (U.S. dollars in thousands) |
|---|
Liabilities
| 2009
| 2010
| 2011
| 2012
| Total
| Fair
Value at
December
31, 2008
|
|---|
| | | | | | | |
|---|
| | | | | | |
|---|
| Short-term loans | | | | 23,182 | | | - | | | - | | | - | | | 23,182 | | | 23,182 | |
| Weighted average interest rate | | | | 4.25 | | | - | | | - | | | - | | | 4.25 | | | - | |
| Long-term loans | | | | 813 | | | 1,802 | | | 480 | | | - | | | 3,095 | | | 3,035 | |
| Weighted average interest rate | | | | 3.32 | | | 4.49 | | | 2.75 | | | - | | | 3.91 | | | - | |
Foreign Currency Exchange Risk
We sell most of our products in North America, Europe and Israel. Our revenues are primarily denominated in U.S. dollars, Euros and NIS, while a portion of our expenses, primarily labor expenses, is incurred in NIS and Canadian Dollars. Additionally, certain assets, especially trade receivables, as well as part of our liabilities are denominated in NIS. As a result, fluctuations in rates of exchange between the U.S. dollar and non-U.S. dollar currencies may affect our operating results and financial condition. The dollar cost of our operations in Israel may be adversely affected by the appreciation of the NIS against the U.S. dollar. In addition, the value of our non-U.S. dollar revenues could be adversely affected by the depreciation of the U.S. dollar against such currencies. In 2006, 2007 and 2008, the NIS appreciated by approximately 8.2%, 9.0% and 1.1%, respectively, against the U.S. dollar, which had a significant adverse affect on our results of operations. In 2008, the Euro depreciated against the U.S. dollar by 5.3%, while in 2007 and 2006, the Euro appreciated against the U.S. dollar by 11.7% and 11.3%, respectively.
79
In addition, the U.S. dollar cost of our operations in Canada is influenced by the exchange rate between the U.S. dollar and the Canadian dollar. In 2008, the Canadian dollar depreciated against the U.S. dollar by approximately 19.7%, while in 2007 and 2006, the Canadian dollar appreciated against the U.S. dollar by 18.4% and 0.4%, respectively.
During the years ended December 31, 2007 and 2008, foreign currency fluctuations had an adverse impact on our results of operations and we recorded foreign exchange losses, net of $792,000 and $246,000, respectively. During the year ended December 31, 2006, we recorded foreign currency exchange gains, net of $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 rate, from time to time we have entered into forward contracts to hedge portions of our forecasted revenue and unbilled accounts receivable denominated in foreign currencies. We have 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.
We recorded $915,000, $666,000 and $291,000 of financial expenses related to forward contracts transactions in 2006, 2007 and 2008, respectively.
| ITEM 12. | | Description of Securities Other Than Equity Securities |
Not applicable.
PART II
| ITEM 13. | | Defaults, Dividend Arrearages and Delinquencies |
Not applicable.
| ITEM 14. | | Material Modifications to the Rights of Security Holders and Use of Proceeds |
Not applicable.
| ITEM 15. | | Controls and Procedures |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our chief executive officer and chief financial officer to allow timely decisions regarding required disclosure. Our management, including our chief executive officer and chief financial officer, conducted an evaluation of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period covered by this Annual Report on Form 20-F. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective at a reasonable level of assurance as of December 31, 2008, in that we had insufficient personnel with appropriate level of knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting requirements in our newly acquired European subsidiary.
80
Management’s Report on Internal Control over Financial Reporting
Our management, including our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our 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 accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In conducting its assessment of internal control over financial reporting, management based its evaluation on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations, or the COSO, of the Treadway Commission.
During the fourth quarter of 2008, we experienced the following problems with our internal control over financial reporting with respect to the recording of the financial results of our new European subsidiary that we acquired in September 2007: certain revenues with respect to certain projects in Africa that are reflected in the financial statements using the percentage of completion basis of accounting were misvalued and the provision for warranties and penalties with respect to these projects was under accrued. As a result, as of December 31, 2008, we applied the completed contract method of accounting only with respect to these projects, in order to provide adequate information. We performed sufficient procedures to determine that all material errors were identified and corrected before the company publicly reported its results of operations. We also concluded that these errors in accounting and financial reporting reflect material weaknesses in internal control over financial reporting resulting from insufficient personnel in the European subsidiary with the appropriate level of knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting requirements. Therefore, our management concluded that, as of December 31, 2008, our internal control over financial reporting was not effective because of the material weaknesses in internal control over financial reporting described above.
Remediation of Material Weaknesses
Under the direction of our chief executive officer and chief financial officer and in consultation with our audit committee, we have begun to implement measures to remediate the effectiveness of our internal control over financial reporting. Since the beginning of 2009, we have appointed a new financial officer to the European subsidiary. In addition, we are reexamining the design of the internal controls in the European subsidiary, as well as implementing measures to appropriately staff and provide appropriate training to the subsidiary’s financial and accounting personnel. We believe that these measures, as well as additional measures that are planned for 2009, will remediate the material weakness of our internal control over financial reporting.
Attestation Report of Registered Public Accounting Firm
Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, our independent registered public accounting firm that audited our consolidated financial statements for the year ended December 31, 2008 included in this annual report, has issued an attestation report on our internal control over financial reporting. The report is included on page F-3 of this annual report on Form 20-F.
81
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. However, subsequent to December 31, 2008, we made changes to our internal control over financial reporting and took remedial actions, as described above.
| ITEM 16A. | | Audit Committee Financial Expert |
Our board of directors has determined that Ms. 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 Ms. 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.
| ITEM 16C. | | Principal Accountant Fees and Services |
Independent Public Accountant Fees and Services
The following table sets forth, for each of the years indicated, the fees billed by 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
| 2007
| 2008
|
|---|
| | U.S. dollars in thousands |
|---|
| | | |
|---|
| | | |
|---|
| Audit (1) | | | $ | 617 | | $ | 707 | |
| Audit-related | | | | - | | | - | |
| Tax (2) | | | | 126 | | | 131 | |
| Other (3) | | | | 7 | | | 38 | |
| |
| |
| |
| Total | | | $ | 750 | | $ | 876 | |
| | (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), 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, employee benefits, tax assessment deliberation, and in connection with the approval of our investment program for our approved enterprise. |
| | (3) | Other fees relate to out of pocket reimbursement of expenses, primarily traveling expenses of our auditors. |
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.
82
| ITEM 16D. | | Exemptions from the Listing Standards for Audit Committees |
Not applicable.
| ITEM 16E. | | Purchase of Equity Securities by the Issuer and Affiliated Purchasers |
Neither we nor any affiliated purchaser has purchased any of our securities during 2008.
| ITEM 16F. | | Changes In Registrant’s Certifying Accountant |
Not applicable.
| ITEM 16G. | | Corporate Governance |
Under NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers, such as our company, are permitted to follow certain home country corporate governance practices instead of certain provisions of Rule 4350. A foreign private issuer that elects to follow a home country practice instead of any of such provisions of Rule 4350 must submit to NASDAQ, in advance, a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws.
On July 7, 2005, we provided NASDAQ with notices of non-compliance with Rule 4350. We informed NASDAQ that we do not comply with the following requirements of Rule 4350, and instead follow Israeli law and practice in respect of such requirements:
| | — | the requirement regarding the process of nominating directors. Instead, we follow Israeli law and practice in accordance with which our directors are recommended by our board of directors for election by our shareholders. See Item 6.C. "Directors, Senior Management and Employees - Board Practices - Election of Directors." |
| | — | the requirement regarding the compensation of our chief executive officer and all other executive officers. Instead, we follow Israeli law and practice in accordance with which our board of directors must approve all compensation arrangements for our chief executive officer and all compensation arrangements for officers are subject to the chief executive officer’s approval. See Item 6.C. “Directors, Senior Management and Employees – Compensation.” |
| | — | the requirement that our independent directors have regularly scheduled meetings at which only independent directors are present. Under Israeli law independent directors are not required to hold executive sessions. |
In addition, on June 30, 2006, we provided NASDAQ with a notice of non-compliance with respect to the requirement to maintain a majority of independent directors, as defined under NASDAQ Marketplace Rules. Instead, under Israeli law and practice we are required to appoint at least two external directors, within the meaning of the Israeli Companies Law, to our board of directors. However, despite such notification of non-compliance, we maintain a majority of independent directors.
PART III
| ITEM 17. | | Financial Statements |
We have elected to furnish financial statements and related information specified in Item 18.
83
| 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-5 |
| |
| Consolidated Statements of Operations | F-6 |
| |
| 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-45 |
| |
| Reports of Independent Registered Public Accounting Firm with Respect to Subsidiary | F-46 - F-47 |
| |
| Schedule of Valuation and Qualifying Accounts | 86 |
| 1.1 | | Memorandum of Association of the Registrant(1) |
| 1.2 | | Articles of Association of the Registrant(2) |
| 2.1 | | Specimen Share Certificate for Ordinary Share(3) |
| 2.2 | | The Registrant's Stock Option Plan (1993), as amended(4) |
| 8 | | List of Subsidiaries of the Registrant |
| 12.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act, as amended |
| 12.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under 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 | | Consent of Kost Forer Gabbay & Kasierer |
| 15.2 | | Consent of Salles, Sainz - Grant Thornton, S. C. (relating to Senstar Stellar Latin America, S. A. de C.V.) |
| (1) | Filed as an exhibit to our Registration Statement on Form F-1 (File No. 33-57438), filed with the Securities and Exchange Commission on January 26, 1993, as amended, and incorporated herein by reference. |
84
| (2) | Filed as an exhibit to our Registration Statement on Form F-1 (No. 33-57438), filed with the Securities and Exchange Commission on January 26, 1993, as amended, and incorporated herein by reference, as amended by an amendment filed as an exhibit to our Registration Statement on Form S-8 (File No. 333-6246), filed with the Commission on January 7, 1997 and incorporated herein by reference, and as further amended by an amendment filed as an exhibit to our Annual Report on Form 20-F for the fiscal year ended December 31, 2000, filed with the Securities and Exchange Commission on June 29, 2001 and incorporated herein by reference. |
| (3) | Filed as an exhibit to our Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on March 18, 1993, as amended, and incorporated herein by reference. |
| (4) | Filed as an exhibit to our Registration Statement on Form S-8 (File No. 333-6246), filed with the Securities and Exchange Commission on January 7, 1997 and incorporated herein by reference, as amended by an amendment 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. |
85
MAGAL SECURITY SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008
IN U.S. DOLLARS
INDEX
| |
|---|
 | 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 the accompanying consolidated balance sheets of Magal Security Systems Ltd. (“the Company”) and its subsidiaries as of December 31, 2007 and 2008, 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, 2008. 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% and 3.5% of total consolidated assets as of December 31, 2007 and 2008, respectively, and whose revenues constitute approximately 11.1%, 9.4% and 4.9% of total consolidated revenues for the years ended December 31, 2006, 2007 and 2008, 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, 2007 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
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, 2008, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 12, 2009 expressed an adverse opinion thereon.
| |
|---|
| |
|---|
| |
|---|
| |
|---|
| |
|---|
| /s/ Kost Forer Gabbay & Kasierer |
| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
| July 12, 2009 | 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, 2008, 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.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment management has identified material weaknesses at insufficient personnel in the European subsidiary with the appropriate level of knowledge, experience and training in the application of generally accepted accounting principles which resulted in misevaluation of certain revenues with respect to certain projects in Africa that are reflected in the financial statements using the percentage of completion basis of accounting and the under accrual of the provision for warranties and penalties with respect to these projects .This material weakness is considered in determining the nature, timing and extent of audit tests applied in our audit of the 2008 financial statements, and this report does not affect our report dated July 12, 2009 on those financial statements.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as December 31, 2008, based on the COSO criteria.
| |
|---|
| |
|---|
| |
|---|
| |
|---|
| |
|---|
| /s/ Kost Forer Gabbay & Kasierer |
| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
| July 12, 2009 | 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,
|
|---|
| 2007
| 2008
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| ASSETS | | | | | | | | |
| | | |
| CURRENT ASSETS: | | |
| Cash and cash equivalents | | | $ | 9,205 | | $ | 16,835 | |
| Marketable securities (Note 3) | | | | 9,464 | | | 1,000 | |
| Short-term bank deposits | | | | 11,220 | | | 1,228 | |
| Restricted deposit | | | | - | | | 3,223 | |
| Trade receivables (net of allowance for doubtful accounts of $ 343 and $ 1,506 at | | |
| December 31, 2007 and 2008, respectively) | | | | 26,775 | | | 15,800 | |
| Unbilled accounts receivable | | | | 4,053 | | | 5,055 | |
| Other accounts receivable and prepaid expenses (Note 4) | | | | 5,753 | | | 5,214 | |
| Deferred income taxes | | | | 1,936 | | | 714 | |
| Inventories (Note 5) | | | | 23,785 | | | 12,728 | |
| Costs incurred on long-term contracts (Note 2m) | | | | - | | | 7,646 | |
|
| |
| |
| | | |
| Total current assets | | | | 92,191 | | | 69,443 | |
|
| |
| |
| | | |
| LONG-TERM INVESTMENTS AND RECEIVABLES: | | |
| Long-term trade receivables | | | | 2,019 | | | 1,839 | |
| Long-term loan (Note 11h) | | | | 808 | | | 519 | |
| Long-term bank deposits | | | | 1,846 | | | 1,826 | |
| Escrow deposit (Note 1b) | | | | 4,442 | | | 860 | |
| Severance pay fund | | | | 2,765 | | | 2,763 | |
|
| |
| |
| | | |
| Total long-term investments and receivables | | | | 11,880 | | | 7,807 | |
|
| |
| |
| | | |
| PROPERTY AND EQUIPMENT, NET (Note 6) | | | | 8,429 | | | 8,441 | |
|
| |
| |
| | | |
| DEFERRED INCOME TAXES | | | | 763 | | | 37 | |
|
| |
| |
| | | |
| OTHER INTANGIBLE ASSETS, NET (Note 7) | | | | 7,040 | | | 2,888 | |
|
| |
| |
| | | |
| GOODWILL (Note 1b, 2l) | | | | 5,610 | | | 1,874 | |
|
| |
| |
| | | |
| ASSETS ATTRIBUTED TO DISCONTINUED OPERATIONS (Note 18) | | | | 244 | | | 47 | |
|
| |
| |
| | | |
| Total assets | | | $ | 126,157 | | $ | 90,537 | |
|
| |
| |
| | |
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,
|
|---|
| 2007
| 2008
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
| | | |
| CURRENT LIABILITIES: | | |
| Short-term bank credit (Note 8) | | | $ | 16,434 | | $ | 23,182 | |
| Current maturities of long-term bank debt (Note 10) | | | | 4,303 | | | 813 | |
| Trade payables | | | | 7,344 | | | 13,145 | |
| Customer advances | | | | 11,703 | | | 1,735 | |
| Other accounts payable and accrued expenses (Note 9) | | | | 10,881 | | | 14,189 | |
|
| |
| |
| | | |
| Total current liabilities | | | | 50,665 | | | 53,064 | |
|
| |
| |
| | | |
| LONG-TERM LIABILITIES: | | |
| Long-term bank debt (Note 10) | | | | 3,095 | | | 2,282 | |
| Deferred income taxes | | | | 2,097 | | | 482 | |
| Accrued severance pay | | | | 3,873 | | | 3,823 | |
|
| |
| |
| | | |
| Total long-term liabilities | | | | 9,065 | | | 6,587 | |
|
| |
| |
| | | |
| LIABILITIES ATTRIBUTED TO DISCONTINUED OPERATIONS (Note 18) | | | | 849 | | | 168 | |
|
| |
| |
| | | |
| 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, 2007 and 2008; Issued and | | |
| outstanding: 10,396,548 shares at December 31, 2007 and 2008. | | | | 3,225 | | | 3,225 | |
| Additional paid-in capital | | | | 47,806 | | | 48,043 | |
| Accumulated other comprehensive income | | | | 5,671 | | | 2,472 | |
| Foreign currency translation (Company's stand alone financial statements) | | | | 2,589 | | | 3,293 | |
| Retained earnings (accumulated deficit) | | | | 6,287 | | | (26,315 | ) |
|
| |
| |
| | | |
| Total shareholders' equity | | | | 65,578 | | | 30,718 | |
|
| |
| |
| | | |
| Total liabilities and shareholders' equity | | | $ | 126,157 | | $ | 90,537 | |
|
| |
| |
| | |
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
| | MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES |
|
|---|
| CONSOLIDATED STATEMENTS OF OPERATIONS |
|
| U.S. dollars in thousands (except per share data) |
| Year ended December 31,
|
|---|
| 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| Revenues | | | $ | 63,600 | | $ | 72,375 | | $ | 70,355 | |
| Cost of revenues | | | | 37,236 | | | 43,510 | | | 49,205 | |
|
| |
| |
| |
| | | |
| Gross profit | | | | 26,364 | | | 28,865 | | | 21,150 | |
|
| |
| |
| |
| | | |
| Operating expenses: | | |
| Research and development, net (Note 17a) | | | | 5,378 | | | 5,764 | | | 6,195 | |
| Selling and marketing, net | | | | 11,603 | | | 12,930 | | | 17,179 | |
| General and administrative | | | | 5,547 | | | 6,561 | | | 10,888 | |
| Impairment of goodwill and other intangible assets (Note 1) | | | | - | | | - | | | 12,887 | |
| Post employment and termination benefits (Note 2t) | | | | - | | | 904 | | | 2,582 | |
|
| |
| |
| |
| | | |
| Total operating expenses | | | | 22,528 | | | 26,159 | | | 49,731 | |
|
| |
| |
| |
| | | |
| Operating income (loss) | | | | 3,836 | | | 2,706 | | | (28,581 | ) |
| Financial expenses, net (Note 17b) | | | | 864 | | | 2,137 | | | 2,006 | |
|
| |
| |
| |
| | | |
| Income (loss) before income taxes | | | | 2,972 | | | 569 | | | (30,587 | ) |
| Income taxes (Note 14) | | | | 943 | | | 373 | | | 1,618 | |
|
| |
| |
| |
| | | |
| Income (loss) from continuing operations | | | | 2,029 | | | 196 | | | (32,205 | ) |
| Income (loss) from discontinued operations, net (Note 18) | | | | (1,219 | ) | | 1,686 | | | (397 | ) |
|
| |
| |
| |
| | | |
| Net income (loss) | | | $ | 810 | | $ | 1,882 | | $ | (32,602 | ) |
|
| |
| |
| |
| | | |
| Basic and diluted earnings (loss) per share from continuing operations | | | $ | 0.20 | | $ | 0.02 | | $ | (3.11 | ) |
| Basic and diluted earnings (loss) per share from discontinued | | |
| operations | | | $ | (0.12 | ) | $ | 0.16 | | $ | (0.03 | ) |
|
| |
| |
| |
| | | |
| Basic earnings (loss) per share (Note 13) | | | $ | 0.08 | | $ | 0.18 | | $ | (3.14 | ) |
|
| |
| |
| |
| | | |
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
earning
(accumulated
deficit)
| Total
comprehensive
income (loss)
| Total
shareholders'
equity
|
|---|
| | | | | | | | | | |
|---|
| | | | | | | | | |
|---|
| | | | | | | | | |
|---|
| | | | | | | | | |
|---|
| Balance as of January 1, 2006 | | | | 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 | | | - | | | - | | | - | | | | | | - | |
| 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 | ) |
| 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 loss from | | |
| available-for-sale securities, net | | | | - | | | - | | | - | | | - | | | (134 | ) | | - | | | | | | (134 | ) | | (134 | ) |
Foreign currency translation
adjustments | | | | - | | | - | | | - | | | - | | | 3,460 | | | 2,292 | | | | | | 3,460 | | | 5,752 | |
|
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | $ | 5,239 | | | | |
| | | | | | | | | | | | | | |
| | | |
| | | |
| Balance as of December 31, 2007 | | | | 10,396,548 | | | 3,225 | | | 47,806 | | | - | | | 5,671 | | | 2,589 | | | 6,287 | | | | | | 65,578 | |
| Stock-based compensation | | | | - | | | - | | | 237 | | | - | | | - | | | - | | | - | | | | | | 237 | |
| Comprehensive income (loss): | | |
| Net loss | | | | - | | | - | | | - | | | - | | | - | | | - | | | (32,602 | ) | | (32,602 | ) | | (32,602 | ) |
Realized loss from available-for-sale
securities | | | | - | | | - | | | - | | | - | | | 151 | | | - | | | - | | | 151 | | | 151 | |
Foreign currency translation
adjustments | | | | - | | | - | | | - | | | - | | | (3,350 | ) | | 704 | | | - | | | (3,350 | ) | | (2,646 | ) |
|
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | $ | (35,801 | ) | | | |
| | | | | | | | | | | | | | |
| | | |
| | | |
| Balance as of December 31, 2008 | | | | 10,396,548 | | $ | 3,225 | | $ | 48,043 | | $ | - | | $ | 2,472 | | $ | 3,293 | | $ | (26,315 | ) | | | | $ | 30,718 | |
|
| |
| |
| |
| |
| |
| |
| | | |
| |
| | | |
Accumulated foreign currency
translation adjustments | | | | | | | | | | | | | | | | 2,472 | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
Accumulated other comprehensive
income as of December 31, 2008 | | | | | | | | | | | | | | | $ | 2,472 | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
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,
|
|---|
| 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| Cash flows from operating activities: | | | | | | | | | | | |
| Net income (loss) | | | $ | 810 | | $ | 1,882 | | $ | (32,602 | ) |
| Adjustments required to reconcile net income (loss) to net cash | | |
| provided by (used in) operating activities: | | |
| Loss (income) from discontinued operations | | | | 1,219 | | | (1,686 | ) | | 397 | |
| Depreciation and amortization | | | | 1,203 | | | 2,055 | | | 3,063 | |
| Impairment of goodwill and other intangible assets | | | | - | | | - | | | 12,887 | |
| Gain on sale of property and equipment | | | | (40 | ) | | (2 | ) | | (31 | ) |
| Decrease (increase) in accrued interest and exchange differences | | |
| on marketable securities, short-term and long-term bank deposits | | |
| and long term loans | | | | 293 | | | 1,811 | | | 2,139 | |
| Write off of long term loan | | | | - | | | - | | | 550 | |
| Accrued interest and exchange rate changes of long-term loans | | | | (58 | ) | | (300 | ) | | 66 | |
| Stock based compensation | | | | 51 | | | 83 | | | 237 | |
| Losses (gains) on forward contract, net | | | | 431 | | | (565 | ) | | 291 | |
| Decrease (increase) in trade receivables, net | | | | (4,402 | ) | | 4,273 | | | 10,595 | |
| Decrease (increase) in unbilled accounts receivable | | | | 3,482 | | | 1,805 | | | (1,201 | ) |
| Decrease (increase) in other accounts receivable and prepaid | | |
| expenses | | | | 437 | | | (210 | ) | | 2,624 | |
| Decrease (increase) in deferred income taxes | | | | (134 | ) | | 1,081 | | | 498 | |
| Decrease (increase) in inventories | | | | (2,728 | ) | | (874 | ) | | 8,953 | |
| Decrease (increase) in costs incurred on long-term contracts | | | | - | | | - | | | (7,646 | ) |
| Decrease (increase) in long-term trade receivables | | | | 66 | | | (1,848 | ) | | 216 | |
| Increase (decrease) in trade payables | | | | (666 | ) | | (6,332 | ) | | 6,454 | |
| Increase (decrease) in other accounts payable and accrued expenses | | | | 717 | | | (1,807 | ) | | 3,411 | |
| Increase (decrease) in customer advances | | | | (2,760 | ) | | 10,473 | | | (9,265 | ) |
| Accrued severance pay, net | | | | 60 | | | 581 | | | (40 | ) |
|
| |
| |
| |
| | | |
| Net cash provided by (used in) continuing operations | | | | (2,019 | ) | | 10,420 | | | 1,596 | |
| Net cash provided by (used in) discontinued operations | | | | 643 | | | (519 | ) | | (881 | ) |
|
| |
| |
| |
| | | |
| Net cash provided by (used in) operating activities | | | | (1,376 | ) | | 9,901 | | | 715 | |
|
| |
| |
| |
| | | |
| Cash flows from investing activities: | | |
| Purchase of short-term deposits | | | | (13,726 | ) | | - | | | (1,412 | ) |
| Investment in restricted deposit | | | | - | | | - | | | (3,223 | ) |
| Proceeds from sale of short-term bank deposits | | | | 13,645 | | | 5,714 | | | 11,100 | |
| Escrow deposit | | | | - | | | (4,442 | ) | | - | |
| Purchase of long-term bank deposits | | | | (3,000 | ) | | - | | | - | |
| Proceeds from sale of long-term deposits | | | | 3,000 | | | - | | | - | |
| Purchase of marketable securities | | | | (8,219 | ) | | (10,771 | ) | | (1,968 | ) |
| Proceeds from sale of marketable securities | | | | 5,202 | | | 5,570 | | | 5,114 | |
| Investment in long-term loan | | | | (622 | ) | | (97 | ) | | (187 | ) |
| Proceeds from sale of property and equipment | | | | 215 | | | 86 | | | 59 | |
| Purchase of property and equipment | | | | (906 | ) | | (890 | ) | | (1,704 | ) |
| Purchase of know-how and patents | | | | (148 | ) | | (28 | ) | | (1,140 | ) |
| Acquisition of subsidiary (a) | | | | - | | | (4,081 | ) | | - | |
|
| |
| |
| |
| | | |
| Net cash provided by (used in) continuing activities | | | | (4,559 | ) | | (8,939 | ) | | 6,639 | |
| Net cash provided by (used in) discontinued operations | | | | (689 | ) | | 8,475 | | | - | |
|
| |
| |
| |
| | | |
| Net cash provided by (used in) investing activities | | | | (5,248 | ) | | (464 | ) | | 6,639 | |
|
| |
| |
| |
| | | |
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,
|
|---|
| 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| Cash flows from financing activities: | | | | | | | | | | | |
| Short-term bank credit, net | | | $ | (1,369 | ) | $ | (4,724 | ) | $ | 6,968 | |
| Proceeds from long-term bank loans | | | | 3,200 | | | - | | | - | |
| Principal payment of long-term bank loans | | | | (306 | ) | | (796 | ) | | (4,303 | ) |
| Proceeds from exercise of employee stock options | | | | 163 | | | 43 | | | - | |
| | | |
| Net cash provided by (used in) financing activities | | | | 1,688 | | | (5,477 | ) | | 2,665 | |
|
| |
| |
| |
| | | |
| Effect of exchange rate changes on cash and cash equivalents | | | | (255 | ) | | 337 | | | (2,389 | ) |
|
| |
| |
| |
| | | |
| Increase (decrease) in cash and cash equivalents | | | | (5,191 | ) | | 4,297 | | | 7,630 | |
| Cash and cash equivalents at the beginning of the year | | | | 10,099 | | | 4,908 | | | 9,205 | |
|
| |
| |
| |
| | | |
| Cash and cash equivalents at the end of the year | | | $ | 4,908 | | $ | 9,205 | | $ | 16,835 | |
|
| |
| |
| |
| | | |
| Supplemental disclosures of cash flows activities: | | |
| | | |
| Cash paid during the year for: | | |
| Interest | | | $ | 1,518 | | $ | 1,736 | | $ | 1,686 | |
|
| |
| |
| |
| | | |
| Income taxes | | | $ | 1,486 | | $ | 1,189 | | $ | 1,286 | |
|
| |
| |
| |
| | | |
| Non-cash activities: | | |
| Purchase of know-how | | | $ | 430 | | $ | - | | $ | - | |
|
| |
| |
| |
| | | |
| Sale of marketable security to a former shareholder of subsidiary | | |
| (Note 1) | | | | | | | | | $ | 4,410 | |
| | | | |
| |
| | | |
| 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) |
NOTE 1:- GENERAL
| | 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 6,800 thousand Euros (approximately $ 9,300), of which 3,000 thousand Euros are payable upon compliance of certain conditions. The 3,000 thousand Euros were deposited in an escrow account of which 2,400 thousand Euros was paid during 2008 and recorded as goodwill. |
| | In addition to the 6,800 thousand Euros the Company will pay over the years 2007-2012 an amount based on the European subsidiary pre tax income and will record such payments to goodwill. During 2007, the Company incurred an amount of $ 1,065 in respect of the earn out provision which was paid in 2008. |
| | In 2008, the European subsidiary sold to its former owner $ 4,400 of marketable securities of which $ 3,300 was paid as a set-off of future earn out payments and $ 1,100 was paid on account of a payable accrued per the original consideration. |
| | The financial statements of the European subsidiary have been consolidated with the Company’s financial statements from September 1, 2007, the date the transaction was closed. |
| | The acquisition was accounted for using the purchase method of accounting as determined in Statement of Financial Accounting Standards (“SFAS”) 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 an evaluation of the tangible and intangible assets acquired and liabilities assumed, the Company allocated the total cost of the acquisition, as follows: |
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Working capital, net | | | $ | 119 | |
| Property and equipment | | | | 254 | |
| Customer related intangible assets | | | | 6,423 | |
| Deferred taxes | | | | (2,387 | ) |
| Accrued severance pay, net | | | | (328 | ) |
| |
| |
| | | |
| | | | | 4,081 | |
| |
| |
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 1:- GENERAL (Cont.)
| | In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), goodwill is not amortized. In lieu of amortization, the Company is required to perform an annual impairment test. If the Company determines, through the impairment test 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. Customer related intangible assets are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) by a comparison of the carrying amount to the future undiscounted cash flows expected to be generated by the assets. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. |
| | In 2008, following the annual goodwill impairment test, the Company determined that the fair value of its European subsidiary had decreased and, as a result recorded a goodwill impairment charge of $ 8,423 (including $ 3,300 of funds prepaid on account of future earn-out payments). In addition, the Company determined that intangible assets attributable to customers of the European subsidiary in the amount of $ 1,692 had been impaired, and as a result, recorded an impairment charge attributable to such intangible assets. |
| | c. | Due to a decrease in the operating activities and slowdown in the business the Company’s U.S. subsidiary, the Company determined that a goodwill impairment of $ 2,421 exists in respect of the U.S. subsidiary as of December 31, 2008 and recorded an impairment charge accordingly. |
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
| | The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). |
| | The preparation of financial statements in conformity with U.S. 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: |
| | The Company’s revenues are generated in NIS, U.S. dollars and Euro. In addition, most of the Company’s costs are incurred in NIS and Canadian dollars. The Company’s management believes that the NIS is the primary currency of the economic environment in which the Company operates. Therefore, the functional currency of the Company is the NIS and its reporting currency is the U.S. dollar. |
| | The functional currency of the Company’s foreign subsidiaries is the local currency in which each subsidiary operates. |
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.)
| | 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 Regulation S-X 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. |
| | 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. |
| | The Company accounts for investments in debt securities in accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 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 net of tax in accumulated “other comprehensive income” as a separate component of shareholders equity. |
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.)
| | The Financial Accounting Standards Board (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. |
| | 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. |
| | 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 costs, representing allocable operating overhead expenses manufacturing costs. |
| | During 2006, 2007 and 2008, the Group recorded inventory write-offs from continued operations in the amount of $ 760 ,$ 646 and $ 2,041, respectively. Such write-offs were included in cost of revenues. |
| | h. | Long-term trade receivables: |
| | Long-term trade and other receivables from extended payment agreements, are recorded at their estimated present values. |
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.)
| | 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 |
| | 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 five to ten years, patents are amortized over a period of ten years and technology is amortized over eight years. Customer related asset is amortized based on the related revenues. |
| | 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. For 2006 and 2007, the Company did not record any impairment charges attributable to long-lived assets. In 2008, the Company recorded an impairment charge of $ 2,043 attributable to such intangible assets. |
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.)
| | 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. For 2006 and 2007, the Company did not record any impairment charges. In 2008, the Company recorded an impairment charge in the amount of $ 10,844. |
| | 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. |
| | 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. |
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.)
| | 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. |
| | Although the Company’s basic accounting policy is percentage-of-completion, the completed-contract method is used for certain contracts when the Company cannot make reasonably dependable estimates for such contracts due to inherent hazards. Inherent hazards are conditions and events that do not occur in the normal course of business. Under the completed-contract method, billings and costs are accumulated on the balance sheet under the caption “cost incurred on long-term contracts” while the contract is in progress, but no revenue is recognized until the contract is completed or substantially completed. When revenues and costs are recognized based upon substantial completion of the contract, an accrual is recorded for the estimated remaining costs to be incurred and for the estimated amounts of any unresolved claims or disputes related to the contract that are probable of payment. During 2008, the Company concluded that the projects in Africa are not typical in comparison to its other projects and identified inherent hazards related to these projects and delays in payments from the customer. The above caused the Company to conclude in 2008 that it cannot make reasonably dependable estimates to calculate the percentage of completion of these projects, therefore, the Company applied from 2008 the completed-contracts method with respect to these projects. |
| | The Group sells security products to customers according to customer orders without installation work. The customers do not have a right 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. |
| | 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. |
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.)
| | n. | Accounting for stock-based compensation: |
| | The Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“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. |
| | 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. |
| | During the years ended December 31, 2006, 2007 and 2008, the Company recognized stock-based compensation expenses related to employee stock options in the amounts of $ 51, $ 83 and $ 237, respectively. |
| | The Company estimated the fair value of stock options granted using the Black-Scholes-Merton option-pricing model for the years ended December 31, 2006 and 2007 and the Binomial Model (“Binomial Model”) model thereafter. The fair value of the options was estimated by applying the Binomial Model for option pricing with adjustments for employees stock options and for the specific terms and conditions of the options. The Company believes that a lattice model (such as the Binomial Model) is more appropriate fair valuation technique in this case, because of its flexible construction that allows the Company to represent its relevant experience more accurately than the closed-form models (such as Black and Scholes model). |
| | Since during the year ended December 31, 2008 no expenses were recorded due to options granted in prior years, but solely from those related to new awards granted in 2008, which were measured using the binomial model, there is no impact on the net income or on the basic and diluted net income per share and for the period ended December 31, 2008, as a result of the change in the model. |
| | The fair value for the Company’s stock options granted to employees and directors was estimated using the following weighted-average assumptions: |
| | The Black-Scholes 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 to the expected life of the options. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. |
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.)
| | The following assumptions were used in the Black-Scholes pricing model for 2006 and 2007: |
| | 2006
| 2007
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Dividend yield | | | | - | | | 0% | |
| Expected volatility | | | | - | | | 62.4% | |
| Risk-free interest | | | | - | | | 4.15% | |
| Expected life of up to | | | | - | | | 1-7 years | |
| Forfeiture rate | | | | - | | | 0% | |
| | The Binomial model for option pricing requires a number of assumptions, of which the most significant are the suboptimal exercise factor and expected stock price volatility. The suboptimal exercise factor is estimated using historical option exercise information. The suboptimal exercise factor is the ratio by which the stock price must increase over the exercise price before employees are expected to exercise their stock options. Expected volatility is based upon actual historical stock price movements and was calculated as of the grant dates for different periods, since the Binomial model can be used for different expected volatilities for different periods. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term to the contractual term of the options. |
| | The following assumptions were used in the Binomial option pricing model for 2008: |
| | 2008
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Dividend yield | | | | 0% | |
| Expected volatility | | | | 28%-69% | |
| Risk-free interest | | | | 0.36%-3.39% | |
| Contractual term | | | | 1-7 years | |
| Forfeiture rate | | | | 0% | |
| Suboptimal exercise multiple | | | | 1-2 | |
| | 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 credits. |
| | 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 - 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.)
| | 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. |
| | Of the Company’s cash and cash equivalents, marketable securities and short-term and long-term bank deposits at December 31, 2008, $14.6 million is invested in major Israeli and U.S. banks, approximately $ 10.4 million is invested in other banks, mainly with Deutsche Bank, RBC Royal Bank, Leutkircher Bank and Bank of Nova Scotia. Deposits, cash and cash equivalents in the United States may be in excess of insured limits and are not insured in other jurisdictions. Generally these deposits may be redeemed upon demand and, therefore, bear low risk. |
| | The Company’s marketable securities include investments in U.S. corporate bonds. |
| | 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. As of December 31, 2008, the Company’s allowance for doubtful accounts amounted to $ 1,506. During the years ended December 31, 2006, 2007 and 2008, the Group recorded $ 138, $ (68) and $ 1,223 of expenses (income) related to doubtful accounts, respectively. In certain circumstances, the Group may require letters of credit, other collateral or additional guarantees. |
| | A loan granted to a third party is secured by a personal guarantee of the beneficial owner of the third party, however, management anticipates difficulties in the full repayment of the loan, (see Note 11h). |
| | 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. |
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.)
| | 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. |
| | Effective January 1, 2007, the Company adopted the provisions of FIN 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 in 2007 was $ 229, which was recognized as an adjustment to retained earnings.
In 2008, the Company recorded tax benefit of $59. |
| | 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 former Chairman of the Company’s Board of Directors, (hereinafter – the retired Chairman) 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, 2008, the actuarial value of these perquisites is estimated to be approximately $ 603. This provision was included as part of accrued severance pay. |
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.)
| | On November 10, 2008, the Company’s former President and chief executive officer (hereinafter – the retired CEO) resigned. The retirement agreement entered into with the retired CEO in the amount of $ 1,645 included consideration for a non compete undertaking as well as severance payments and other retirement related payments in accordance with the retired CEO’s retirement agreement and Israeli law. In addition, in 2008, certain senior employees were entitled to termination benefits in the aggregate amount $ 881 related to their respective retirement from the Company. In connection with such terminations, the Company recorded an expense of $ 2,526 of which $ 500 was paid in 2008 and the balance will be paid during the years 2009-2010. |
| | Severance expenses for the years ended December 31, 2006, 2007 and 2008, amounted to approximately $ 476, $ 1,020 and $ 3,135, respectively. |
| | 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 analysis, 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, 2008, the fair value of the Company’s long-term borrowing was $ 3,035 compared to the carrying amount of $ 3,095. |
| | Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2006, 2007 and 2008, were $ 447, $ 250 and $ 334, 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. |
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.)
| | In 2006, the Company 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. |
| | 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 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 the change of functional currency, hedges against the dollar for 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 group recorded $ 915, $ 666 and $ 291 in financial expenses related to forward contracts transactions, in 2006, 2007 and 2008, respectively. |
| | The carrying amount reported in the balance sheet for cash and cash equivalents, short-term bank deposits, trade receivables, short-term bank credit and loans and trade payables approximate their fair values due to the short-term maturities of such instruments. |
| | Effective January 1, 2008, the Company adopted SFAS 157 and effective October 10, 2008, the Company adopted FSP No. SFAS 157-3, Determining the Fair Value of a Financial Asset when the Market for that asset is not active, except as it applies to the nonfinancial assets and nonfinancial liabilities subject to FSP 157-2. The Company chose to adopt the delay of the effective date of SFAS 157 for one year for goodwill and customers related intangible assets. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157 establishes a three tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: |
| Level 1 | – | Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| Level 2 | – | Include other inputs that are directly or indirectly observable in the marketplace. |
| Level 3 | – | Unobservable inputs which are supported by little or no market activity. |
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.)
| | The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. |
| | The Company’s marketable securities trade in markets that are considered to be active, and are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency and accordingly are categorized as Level 1. |
| | The following table presents assets and liabilities measured at fair value on a recurring basis at December 31, 2008: |
| | Fair value measurements using input type
|
|---|
| | Level 1
| Level 2
| Level 3
| Total
|
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Marketable securities: | | | | | | | | | | | | | | |
| | | |
| Short-term available for sale | | |
| securities | | | $ | 1,000 | | $ | - | | $ | - | | $ | 1,000 | |
| | | |
| Total financial assets | | | $ | 1,000 | | $ | - | | $ | - | | $ | 1,000 | |
| | The carrying amounts of financial instruments carried at cost, including cash and cash equivalents, short-term bank deposits, trade receivables and trade payables approximate their fair value due to the short-term maturities of such instruments. |
| | y. | Impact of recently issued accounting standards: |
| | In December 2007, the FASB issued SFAS 141(R), “Business Combinations” (“SFAS 141(R)”). This Statement replaces SFAS No. 141, “Business Combinations”, and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)‘s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer. The impact of SFAS 141R on the Company’s consolidated results of operations will result in an adjustment to the income tax expenses, subsequent to the effective date. The Company does not expect the adoption of SFAS 141(R) to have a material impact on its consolidated financial position, results of operations and cash flows. |
| | In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of FSP 142-3 to have a material impact on its consolidated financial position, results of operations and cash flows. |
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 October 29, 2008, the FASB issued FSP FAS No.132 (R)-a, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to require that an employer disclose the following information about the fair value of plan assets: 1) the level within the fair value hierarchy in which fair value measurements of plan assets fall; 2) information about the inputs and valuation techniques used to measure the fair value of plan assets; and 3) a reconciliation of beginning and ending balances for fair value measurements of plan assets using significant unobservable inputs. The FSP will be effective for fiscal years ending after December 15, 2009, with early application permitted. Application of the FSP will not be required for earlier periods that are presented for comparative purposes. The Company is currently evaluating the potential impact of adopting this FSP on its disclosures in the financial statements. |
| | In April 2009, the FASB issued FSP FAS No. 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“the FSP”). The FSP is intended to provide greater clarity to investors about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. The FSP applies to fixed maturity securities only and requires separate display of losses related to credit deterioration and losses related to other market factors. When an entity does not intend to sell the security and it is more likely than not that an entity will not have to sell the security before recovery of its cost basis, it must recognize the credit component of an other-than-temporary impairment in earnings and the remaining portion in other comprehensive income. upon adoption of the FSP, an entity will be required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income. The FSP will be effective for the Company for the quarter ending June 30, 2009. The Company is currently evaluating the impact of adopting the FSP. |
| | In April 2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 provides additional authoritative guidance to assist both issuers and users of financial statements in determining whether a market is active or inactive, and whether a transaction is distressed. The FSP will be effective for us for the quarter ending June 30, 2009. The Company does not expect the adoption of FSP 157-4 to have a material impact on its consolidated financial position and results of operations. |
| | In November 2008, the EITF issued EITF Issue No. 08-7, “Defensive Intangible Assets” (“EITF 08-7”), requires an acquiring entity to account defensive intangible assets as a separate unit of accounting. Defensive intangible assets should not be included as part of the cost of the acquirer’s existing intangible assets because the defensive intangible assets are separately identifiable. Defensive intangible assets must be recognized at fair value in accordance with SFAS 141(R) and SFAS 157. EITF 08-7 will be effective for the reporting period beginning after December 15, 2008. The Company does not expect the adoption of EITF 08-7 to have a material impact on its consolidated financial statements. |
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 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,
|
|---|
| | 2007
| 2008
|
|---|
| | Amortized
cost
| Unrealized
losses
| Market
Value
| Amortized
cost
| Unrealized
Losses
| Market
Value
|
|---|
| | | | | | | |
|---|
| | | | | | | |
|---|
| Available-for-sale: | | | | | | | | | | | | | | | | | | | | |
| | | |
| U.S. Government debentures | | | $ | 1,260 | | $ | - | | $ | 1,260 | | $ | - | | $ | - | | $ | - | |
| Corporate debt | | | | 8,355 | | | 151 | | | 8,204 | | | 1,000 | | | - | | | 1,000 | |
| |
| |
| |
| |
| |
| |
| |
| | | |
| Total available-for-sale | | |
| marketable securities | | | $ | 9,615 | | $ | 151 | | $ | 9,464 | | $ | 1,000 | | $ | - | | $ | 1,000 | |
| |
| |
| |
| |
| |
| |
| |
| | The unrealized losses on available-for-sale securities included in other comprehensive income, as a separate component of shareholders’ equity, totaled $ 134 and $ 0 as of December 31, 2007 and 2008, respectively. |
| | As of December 31, 2008, the Company recognized an impairment loss of $ 315 related to other than temporary impairment of securities that were subsequently sold in February 2009. |
| | The amortized cost and estimated fair value of available-for-sale investments as of December 31, 2007 and 2008, by contractual maturity, are as follows: |
| | December 31,
|
|---|
| | 2007
| 2008
|
|---|
| | Amortized
cost
| Market
value
| Amortized
cost
| Market
value
|
|---|
| | | | | |
|---|
| | | | | |
|---|
| Available-for-sale: | | | | | | | | | | | | | | |
| Matures in one year | | | $ | 6,483 | | $ | 6,326 | | | 1,000 | | | 1,000 | |
| Matures in one to three years | | | | 3,132 | | | 3,138 | | | - | | | - | |
| |
| |
| |
| |
| |
| | | |
| | | | $ | 9,615 | | $ | 9,464 | | | 1,000 | | | 1,000 | |
| |
| |
| |
| |
| |
NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
| | December 31,
|
|---|
| | 2007
| 2008
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Government authorities | | | $ | 2,823 | | $ | 2,850 | |
| Employees | | | | 86 | | | 134 | |
| Prepaid expenses | | | | 648 | | | 844 | |
| Advances to suppliers | | | | 1,473 | | | 444 | |
| Others | | | | 723 | | | 942 | |
| |
| |
| |
| | | |
| | | | $ | 5,753 | | $ | 5,214 | |
| |
| |
| |
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 5:- INVENTORIES
| | December 31,
|
|---|
| | 2007
| 2008
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Raw materials | | | $ | 7,919 | | $ | 4,801 | |
| Work in progress | | | | 4,064 | | | 3,088 | |
| Finished products | | | | 11,802 | | | 4,839 | |
| |
| |
| |
| | | |
| | | | $ | 23,785 | | $ | 12,728 | |
| |
| |
| |
NOTE 6:- PROPERTY AND EQUIPMENT
| | | December 31,
|
|---|
| | | 2007
| 2008
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Cost: | | | | | | | | |
| Land and buildings *) | | | $ | 9,913 | | $ | 9,957 | |
| Machinery and equipment | | | | 7,958 | | | 7,210 | |
| Motor vehicles | | | | 1,480 | | | 1,445 | |
| Promotional displays | | | | 1,321 | | | 1,135 | |
| Office furniture and equipment | | | | 3,375 | | | 3,498 | |
| Leasehold improvements | | | | 46 | | | 36 | |
| |
| |
| |
| | | |
| | | | | 24,093 | | | 23,281 | |
| |
| |
| |
| Accumulated depreciation: | | |
| Buildings | | | | 3,734 | | | 3,802 | |
| Machinery and equipment | | | | 6,807 | | | 6,209 | |
| Motor vehicles | | | | 1,053 | | | 934 | |
| Promotional displays | | | | 1,197 | | | 1,047 | |
| Office furniture and equipment | | | | 2,857 | | | 2,833 | |
| Leasehold improvements | | | | 16 | | | 15 | |
| |
| |
| |
| | | |
| | | | | 15,664 | | | 14,840 | |
| |
| |
| |
| | | |
| Property and equipment, net | | | $ | 8,429 | | $ | 8,441 | |
| |
| |
| |
| | b. | Depreciation expenses amounted to $ 1,053, $ 1,027 and $ 1,092 for the years ended December 31, 2006, 2007 and 2008, respectively. |
| | c. | For charges, see Note 11g. |
| | *) | The Company pledged a deposit of $ 1,800 as a guarantee for a building of its subsidiary in the United States. |
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,
|
|---|
| | | 2007
| 2008
|
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Cost: | | | | | | | | |
| Know-how | | | $ | 1,050 | | $ | 1,062 | |
| Patents | | | | 3,412 | | | 2,764 | |
| Customer related assets | | | | 6,920 | | | 6,552 | |
| Technology | | | | 451 | | | 450 | |
| |
| |
| |
| | | |
| | | | | 11,833 | | | 10,828 | |
| |
| |
| |
| Accumulated amortization: | | |
| Know-how | | | | 560 | | | 996 | |
| Patents | | | | 3,152 | | | 2,564 | |
| Customer related assets | | | | 825 | | | 4,068 | |
| Technology | | | | 256 | | | 312 | |
| |
| |
| |
| | | |
| | | | | 4,793 | | | 7,940 | |
| |
| |
| |
| | | |
| Other intangibles, net | | | $ | 7,040 | | $ | 2,888 | |
| |
| |
| |
| | b. | Amortization expenses related to intangible assets amounted to $ 150, $ 1,028 and $ 4,014 for the years ended December 31, 2006, 2007 and 2008, respectively. |
| | The amortization expenses include impairment of customer related assets and know-how in the amount of $ 1,692 and $ 351, respectively, for the year ended December 31, 2008. |
| | c. | Estimated amortization of intangible assets for the years ended: |
| December 31,
| |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| 2009 | | | | 810 | |
| 2010 | | | | 999 | |
| 2011 | | | | 804 | |
| 2012 | | | | 275 | |
| |
| |
| | | |
| | | | $ | 2,888 | |
| |
| |
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,
|
|---|
| | 2007
| 2008
| 2007
| 2008
|
|---|
| | %
| | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| In or linked to U.S. dollars | | | | 5.82 | | | - | | $ | 8,100 | | $ | - | |
| In or linked to NIS | | | | 5.58 | | | 4.25 | | | 8,189 | | | 23,152 | |
| In or linked to EURO | | | | 7.5 | | | - | | | 145 | | | - | |
| In or linked to Canadian dollar | | | | - | | | 4 | | | - | | | 30 | |
| | | | | |
| |
| |
| | | |
| | | | | | | | | | $ | 16,434 | | $ | 23,182 | |
| | | | | |
| |
| |
| Weighted average interest rates at | | |
| the end of the year | | | | 5.72 | | | 4.25 | | | | | | | |
| | | | | | | | | | | | | | | |
| Short-term bank credit | | | | | | | | | $ | 16,434 | | $ | 23,182 | |
| Long-term bank credit | | | | | | | | | | 7,398 | | | 3,095 | |
| Performance guarantees | | | | | | | | | | 9,753 | | | 11,350 | |
| Letters of credit | | | | | | | | | | 1,202 | | | - | |
| | | | | |
| |
| |
| | | |
| | | | | | | | | | | 34,787 | | | 37,627 | |
| | | | | |
| |
| |
| | | |
| Unutilized credit lines approximate | | | | | | | | | | 28,801 | | | 24,264 | |
| | | | | |
| |
| |
| | | |
| Total authorized credit lines | | |
| approximate | | | | | | | | | $ | 63,588 | | $ | 61,891 | |
| | | | | |
| |
| |
| | c. | The Company’s Canadian subsidiary has undertaken to maintain general covenants and the following financial ratios and terms in respect of its outstanding credit lines: a quick ratio of not less than 1.25; a ratio of total liabilities to tangible net worth of not greater than 0.75; and tangible net worth of at least $9.0 million As of December 31, 2008, the Company’s subsidiary was in compliance with the ratios and terms. |
| | d. | For charges, see Note 11g. |
NOTE 9:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| | December 31,
|
|---|
| | 2007
| 2008
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Employees and payroll accruals | | | $ | 2,519 | | $ | 2,577 | |
| Accrued expenses | | | | 5,812 | | | 9,599 | |
| Deferred revenues | | | | 587 | | | 259 | |
| Government authorities | | | | 341 | | | 174 | |
| Income tax payable | | | | 989 | | | 175 | |
| Others | | | | 633 | | | 1,405 | |
| |
| |
| |
| | | |
| | | | $ | 10,881 | | $ | 14,189 | |
| |
| |
| |
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,
|
|---|
| | 2007
| 2008
| 2007
| 2008
|
|---|
| | | %
| | |
|---|
| | | | | | |
|---|
| | | | | | |
|---|
| Bank loans | | | | U.S. | $ | | 5.79 | | | 2.75 | | $ | 4,900 | | $ | 1,760 | |
| Bank promissory notes | | | | U.S. | $ | | 5.99 | | | - | | | 1,000 | | | - | |
| Mortgage payable | | | | U.S. | $ | | 5.45 | | | 5.45 | | | 1,498 | | | 1,335 | |
| | | | | | | |
| |
| |
| | | |
| | | | | | | | | | | | | | 7,398 | | | 3,095 | |
| Less - current maturities | | | | | | | | | | | | | 4,303 | | | 813 | |
| | | | | | | |
| |
| |
| | | |
| | | | | | | | | | | | | $ | 3,095 | | $ | 2,282 | |
| | | | | | | |
| |
| |
| Weighted average | | |
| interest rates at the | | |
| end of the year | | | | | | | 5.75 | | | 3.91 | | | | | | | |
| | b. | As of December 31, 2008, the aggregate annual maturities of the long-term loans are as follows: |
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| 2009 | | | | 813 | |
| 2010 | | | | 1,802 | |
| 2011 | | | | 480 | |
| |
| |
| | | | | | |
| | | | $ | 3,095 | |
| |
| |
| | c. | As for charges, see Note 11g. |
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 revenues derived from sales of products developed with funds provided by the OCS and ancillary services, 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 obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales no payment is required. |
| | Royalties paid to the OCS amounted to $ 79, $ 143 and $ 125 for the years ended December 31, 2006, 2007 and 2008, respectively. As of December 31, 2008, the Company had remaining contingent obligations to pay royalties in the amount of approximately $ 1,365. |
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 (Cont.)
| | 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, 2008, royalty commitments under the agreement amounted to $ 53. |
| | 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 a perimeter security system based on fiber-optic lines that is used mainly to protect marine sites. The contract period is two years and the Company has the right to extend the contract for an additional five years. In September 2008, the management decided to extend the option. 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. As of December 31, 2008, the Company recorded an impairment charge attributable to know how of $ 351. |
| | 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, 2008. |
| | 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: |
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| 2009 | | | | 697 | |
| 2010 | | | | 566 | |
| 2011 | | | | 230 | |
| 2012 and thereafter | | | | 1,443 | |
| |
| |
| | | | $ | 2,936 | |
| |
| |
| | Total rent expenses for the years ended December 31, 2006, 2007 and 2008, were approximately $ 700, $ 664 and $ 876 respectively. |
| | As of December 31, 2008, the Group obtained bank performance guarantees and advance payment guarantees and bid bond guarantees from several banks mainly in Israel in the aggregate amount of $ 11,350. |
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.)
| | 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 to 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 $ 3,200 under the performance bank guarantee on June 20, 2006. Due to this uncertainty, the Company did not recognize any revenues from this project. |
| | On July 11, 2006, the customer made a demand for an additional $ 1,400 payment under the performance bank 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 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 performance bank guarantee, the Company included a $ 1,400 provision in respect of this guarantee in its financial statements for the year ended December 31, 2005. Based on the August 2006 settlement, in 2006, the Company 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 concluded 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 in February 2008. Based on the above the Company decided to institute a new legal action against the customer and seek compensation for the damages incurred. The Company initiated the following motions: (1) on December 10, 2007 a motion for reconciliation was submitted to a Public Court; and (2) on December 11, 2007 a claim for compensation was submitted to the Court of Arbitration. In both actions the claim was in the amount of $ 21,534. In February 2008, the customer denied our request for reconciliation and as a result this process was concluded. The arbitration proceeding is still pending. |
| | 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. |
| | As collateral for all of the Group liabilities to banks: |
| | 1. | A fixed charge has been placed on the property of the Company‘s subsidiary in the United States. |
| | 2. | The Company agreed not to pledge any of its assets without the consent of certain banks. |
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.)
| | h. | In October 2006, the Company signed an agreement with a third party, who 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 granted a loan to the third party in the amount of $ 600. The Company also agreed to 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 will be repaid 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”) until October 2008. The Company was obligated to exercise the option if the third party met certain milestones. The exercise price of the option was comprised of the outstanding loan and the monthly amounts mentioned above and an additional $ 400 in cash. In the event that the Company had elected to exercise the option, the beneficial owner of the third party would have been entitled to receive 50% of the operating profit of certain projects, as defined in the agreement. As of December, 31 2008, the option expired. |
| | The Company evaluated the anticipated repayment of the loan and due to anticipated difficulties in the implementation of the projects management estimated that 50% of the loan would not be repaid and therefore recorded a provision of $ 550. |
NOTE 12:- SHAREHOLDERS’ EQUITY
| | a. | Pertinent rights and privileges conferred by Ordinary shares: |
| | The Ordinary shares of the Company are listed on the NASDAQ Global Market and 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. |
| | 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 may 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 also has the authority to determine the vesting schedule and exercise price of options, granted under the 2003 Plan. |
| | The 2003 Plan is effective for ten years and will terminate in October 2013. Any options that are cancelled or forfeited before expiration become available for future grant. |
| | In May 2008, the Board of Directors approved an amendment to the 2003 Plan, which was approved by the shareholders in August 2008, in accordance with which the number of Ordinary shares available for issuance under the 2003 Plan increased by an additional 1,000,000 Ordinary shares and the termination of the 2003 Plan was extended from October 2013 to October 2018. |
| | As of December 31, 2008, 894,075 Ordinary shares were available for future option grants under the 2003 Plan. |
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 12:- SHAREHOLDERS’ EQUITY (Cont.)
| | A summary of employee option activity under the Company’s stock option plans as of December 31, 2008 and changes during the year ended December 31, 2008 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, 2008 | | | | 403,500 | | $ | 8.32 | | | 35.3 | | | - | |
| Granted | | | | 430,000 | |
| Exercised | | | | - | |
| Forfeited | | | | (109,000 | ) | | | | | | | | | |
| |
| | | | | | | |
| | | |
| Outstanding at December 31, 2008 | | | | 724,500 | | $ | 7.92 | | | 43.7 | | | - | |
| |
| |
| |
| |
| |
| | | |
| Vested and expected to vest at December | | |
| 31, 2008 | | | | 704,500 | | $ | 7.92 | | | 43.7 | | | - | |
| |
| |
| |
| |
| |
| | | |
| Exercisable at December 31, 2008 | | | | 294,500 | | $ | 8.35 | | | 16.74 | | | - | |
| |
| |
| |
| |
| |
| | The weighted-average grant-date fair value of options granted during the years ended December 31, 2007 and 2008 was $ 3.94 and $ 2.84 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 2008 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, 2008 was $ 0, as none of the options were exercised in the aforementioned period. As of December 31, 2008, there was approximately $ 945 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Company’s stock option plans. This cost is expected to be recognized over a weighted-average period of 3.64 years. |
| | The options outstanding as of December 31, 2008 are follows: |
| Options
outstanding
as of
December 31,
2008
| Exercise
price
| Weighted
average
remaining
contractual
life
| Options
exercisable
as of
December 31,
2008
|
|---|
| | | (In months)
| |
|---|
| | | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | | 94,500 | | $ | 7.66 | | | 0.93 | | | 94,500 | |
| | | | | 195,000 | | $ | 8.56 | | | 23.67 | | | 195,000 | |
| | | | | 5,000 | | $ | 13 | | | 23.67 | | | 5,000 | |
| | | | | 100,000 | | $ | 8.22 | | | 43.50 | | | - | |
| | | | | 30,000 | | $ | 6.12 | | | 72.5 | | | - | |
| | | | | 300,000 | | $ | 7.59 | | | 67.67 | | | - | |
|
| |
| |
| |
| |
| | | |
| | | | | 724,500 | | $ | 7.92 | | | 43.7 | | | 294,500 | |
|
| |
| |
| |
| |
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.)
| | 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. |
NOTE 13:- BASIC AND DILUTED NET EARNINGS PER SHARE
| | Year ended December 31,
|
|---|
| | 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Numerator: | | | | | | | | | | | |
| | | |
| Income (loss) from continuing operations | | | $ | 2,029 | | $ | 196 | | $ | (32,205 | ) |
| Income (loss) on discontinued operations | | | | (1,219 | ) | | 1,686 | | | (397 | ) |
| |
| |
| |
| |
| | | |
| Net income (loss) | | | $ | 810 | | $ | 1,882 | | $ | (32,602 | ) |
| |
| |
| |
| |
| | | |
| Denominator: | | |
| | | |
| Denominator for basic net earnings per share | | |
| weighted-average number of shares outstanding | | | | 10,384,047 | | | 10,394,989 | | | 10,396,548 | |
| Effect of diluting securities: | | |
| Employee stock options | | | | 57,777 | | | 36,114 | | | - | |
| |
| |
| |
| |
| | | |
| Denominator for diluted net earnings per share - adjusted | | |
| weighted average shares and assumed exercises | | | | 10,441,824 | | | 10,431,103 | | | 10,396,548 | |
| |
| |
| |
| |
| | | |
| Basic net earnings (loss) per share from continuing | | |
| operations | | | $ | 0.20 | | $ | 0.02 | | $ | (3.11 | ) |
| Basic net earnings (loss) per share from discontinued | | |
| operations | | | | (0.12 | ) | | 0.16 | | | (0.03 | ) |
| |
| |
| |
| |
| | | |
| Basic net earnings (loss) per share | | | $ | 0.08 | | $ | 0.18 | | $ | (3.14 | ) |
| |
| |
| |
| |
| | | |
| Diluted net earnings (loss) per share from continuing | | |
| operations | | | $ | 0.20 | | $ | 0.02 | | $ | (3.11 | ) |
| Diluted net earnings (loss) per share from discontinued | | |
| operations | | | | (0.12 | ) | | 0.16 | | | (0.03 | ) |
| |
| |
| |
| |
| | | |
| Diluted net earnings (loss) per share | | | $ | 0.08 | | $ | 0.18 | | $ | (3.14 | ) |
| |
| |
| |
| |
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 14:- TAXES ON INCOME
| | 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 a tax exemption. 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 terminated in 2007. |
| | 2. | On August 13, 2002, another 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 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 (“The years limitation”). The years limitation does not apply to the exemption period. |
| | An amendment to the Law, which was published effective as of April 1, 2005 (“the Amendment”), changed certain provisions of the Law. As a result of the Amendment, a company is no longer obliged to acquire Approved Enterprise status in order to receive the tax benefits previously available under the alternative benefits provisions, and therefore generally 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 entitled to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Amendment. |
| | 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, referred to as a Beneficiary Enterprise. 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 seven years from the Commencement Year, or 12 years from the first day of the Year of Election. |
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) |
NOTE 14:- TAXES ON INCOME (Cont.)
| | On March 3, 2007, the Company received a pre-ruling from the Israeli Tax Authority for its request for a Beneficiary Enterprise, 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 an “Approved Enterprise” during the benefit period was subject to tax at regular rate of 27% in 2008 (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 for an Approved Enterprise and since part of its taxable income is not entitled to tax benefits under the Law and is taxed at regular rates (27% in 2008), 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%). |
| | The Company’s Board of Directors has decided that its policy is not to declare dividends out of such tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the companies. “Approved Enterprises” and “Beneficiary Enterprise”, as such retained earnings are essentially permanent in duration. |
| | 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. |
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.)
| | 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, among other things, 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. |
| | 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%. |
| | Following an additional amendment to the Tax Ordinance, which came into effect on January 1, 2009, an Israeli corporation may elect a 5% rate of corporate tax (instead of 25%) for income from dividend distributions received from a foreign subsidiary which is used in Israel in 2009, or within one year after actual receipt of the dividend, whichever is later. The 5% tax rate is subject to various conditions, which include conditions with regard to the identity of the corporation that distributes the dividends, the source of the dividend, the nature of the use of the dividend income, and the period during which the dividend income will be used in Israel. |
| | 2. | The tax rates of the Company’s subsidiaries range between 16%-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. |
| | Two of the Company’s subsidiaries are eligible for investment tax credits on their research and development activities and on certain current and capital expenditures. During the year ended December 31, 2008, the subsidiaries recognized $ 234 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 $ 706, which will expire in 2019-2028. |
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.)
| | 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,
|
|---|
| | 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Income (loss) before taxes as reported in the | | | | | | | | | | | |
| statements of operations | | | $ | 2,972 | | $ | 569 | | $ | (30,587 | ) |
| |
| |
| |
| |
| | | |
| Tax rate | | | | 31 | % | | 29 | % | | 27 | % |
| |
| |
| |
| |
| | | |
| Theoretical tax expense (tax benefit) | | | $ | 921 | | $ | 165 | | | (8,258 | ) |
| Increase (decrease) in taxes: | | |
| Non-deductible items, net | | | | 45 | | | 113 | | | 194 | |
| Difference due to the basis of measurement of | | |
| income reported for tax | | | | - | | | (449 | ) | | - | |
| Deferred taxes on losses for which valuation | | |
| allowance was provided | | | | 51 | | | 765 | | | 9,567 | |
| Tax exemption applicable to "Approved | | |
| Enterprises" and exempted income | | | | (75 | ) | | - | | | - | |
| Reduction and tax rate differences in | | |
| subsidiaries | | | | - | | | (472 | ) | | (19 | ) |
| Taxes in respect of prior years | | | | 1 | | | 357 | | | 48 | |
| Tax benefit due to discontinued operations | | | | - | | | (134 | ) | | - | |
| Other | | | | - | | | 28 | | | 86 | |
| |
| |
| |
| |
| | | |
| Taxes on income (tax benefit) in the statements of | | |
| operations | | | $ | 943 | | $ | 373 | | $ | 1,618 | |
| |
| |
| |
| |
| | g. | Taxes on income (tax benefit) included in the statements of operations: |
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Current: | | | | | | | | | | | |
| Foreign | | | $ | 1,036 | | $ | 1,097 | | $ | 1,072 | |
| | | |
| Deferred: | | |
| Domestic | | | | 248 | | | (594 | ) | | 2,357 | |
| Foreign | | | | (342 | ) | | (487 | ) | | (1,859 | ) |
| | | |
| Taxes in respect of prior years: | | |
| Domestic | | | | 1 | | | 402 | | | 48 | |
| Foreign | | | | - | | | (45 | ) | | - | |
| |
| |
| |
| |
| Taxes on income (tax benefit) from continuing | | |
| operations | | | | 943 | | | 373 | | | 1,618 | |
| Tax benefit from discontinued operations | | | | (29 | ) | | 134 | | | - | |
| |
| |
| |
| |
| | | |
| Total taxes on income (tax benefit) | | | $ | 914 | | $ | 507 | | $ | 1,618 | |
| |
| |
| |
| |
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.)
| | 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,
|
|---|
| | 2007
| 2008
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Operating loss carryforward | | | $ | 4,212 | | $ | 7,315 | |
| Reserves and tax allowances | | | | (127 | ) | | 2,803 | |
| |
| |
| |
| | | |
| Total deferred taxes before valuation allowance | | | | 4,085 | | | 10,118 | |
| Valuation allowance | | | | (3,483 | ) | | (9,849 | ) |
| |
| |
| |
| | | |
| Net deferred tax assets | | | $ | 602 | | $ | 269 | |
| |
| |
| |
| | | |
| Domestic | | | $ | 2,197 | | $ | - | |
| Foreign | | | | (1,595 | ) | | 269 | |
| |
| |
| |
| | | |
| | | | $ | 602 | | $ | 269 | |
| |
| |
| |
| | i. | The domestic and foreign components of income (loss) before taxes are as follows: |
| | Year ended December 31,
|
|---|
| | 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Domestic | | | $ | 564 | | $ | (3,980 | ) | $ | (13,199 | ) |
| Foreign | | | | 2,408 | | | 4,549 | | | (17,388 | ) |
| |
| |
| |
| |
| | | |
| | | | $ | 2,972 | | $ | 569 | | $ | (30,587 | ) |
| |
| |
| |
| |
| | j. | Net operating carryforward tax losses: |
| | The Company has estimated total available carryforward tax losses of $ 14,846 to offset against future taxable income. As of December 31, 2008, the Company recorded a full valuation allowance on these carryforward tax losses due to the uncertainty of their future realization. |
| | The Company’s subsidiaries have estimated total available carryforward tax losses of $ 9,091, which may be used to offset against future taxable income, for periods ranging between 13 to 20 years. As of December 31, 2008, the Company recorded a valuation allowance for most of its subsidiaries’ carryforward tax losses due to the uncertainty of their future realization. |
| | 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. |
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.)
| | k. | In December 2007, the Company finalized with the Israeli Tax Authority the tax assessment with respect to the years 2001-2004. |
| | l. | The Company adopted the provisions of FIN 48 on January 1, 2007. 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. |
| | In 2008, the Company recorded a tax benefit of $59. |
NOTE 15:- BALANCES AND TRANSACTIONS WITH RELATED PARTIES
| | a. | Balances with related parties: |
| | December 31,
|
|---|
| | 2007
| 2008
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Balances with related parties | | | $ | (167 | ) | | - | |
| |
| |
| |
| | b. | Sales to related parties: |
| | Year ended December 31,
|
|---|
| | 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Sales to related parties | | | $ | 765 | | $ | 781 | | | - | |
| |
| |
| |
| |
| | c. | Sales and balances to related parties represent services provided by discontinued operation, see note 18a below. |
| | d. | On December 31, 2007, the retired Chairman retired from his position. Pursuant to his retirement agreement as amended, the retired Chairman undertook not to compete with the Company for a period of three years following his retirement. In consideration, the Company agreed to pay the retired Chairman a one time payment of $ 360 payable within three months. In addition, the retired Chairman is entitled to receive certain perquisites from the Company for the rest of his life. The liability as for December 31, 2008 and the post employment and retirement benefits expense related to the retirement agreement amounted to $ 603. |
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 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 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 are classified and presented as discontinued operations, see Note 18a. |
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 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,
|
|---|
| 2006
| 2007
| 2008
|
|---|
| Perimeter
| Projects
| Other
| Eliminations
| Total
| Perimeter
| Projects
| Other
| Eliminations
| Total
| Perimeter
| Projects
| Other
| Eliminations
| Total
|
|---|
| | | | | | | | | | | | | | | | |
|---|
| | | | | | | | | | | | | | | |
|---|
| Revenues | | | $ | 47,186 | | $ | 16,167 | | $ | 247 | | | | | $ | 63,600 | | $ | 43,781 | | $ | 28,167 | | $ | 427 | | | | | $ | 72,375 | | $ | 41,126 | | $ | 28,977 | | $ | 252 | | | - | | $ | 70,355 | |
|
| |
| |
| | | |
| |
| |
| |
| | | |
| |
| |
| |
| |
| |
| |
| Depreciation and | | |
| amortization | | | $ | 1,070 | | $ | 133 | | $ | - | | | | | $ | 1,203 | | $ | 1,087 | | $ | 966 | | $ | 2 | | | | | $ | 2,055 | | $ | 1,078 | | $ | 1,985 | | $ | - | | | - | | $ | 3,063 | |
| | | | | | | | | | |
| |
| |
| |
| |
| |
| Impairment of goodwill | | |
| and other intangible | | |
| assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 2,772 | | $ | 10,115 | | $ | - | | | - | | $ | 12,887 | |
| | | | | | | | | | |
| |
| |
| |
| |
| |
| | | |
| Operating income | | |
| (loss), before | | |
| financial expenses and | | |
| taxes on income | | | $ | 3,070 | | $ | 935 | | $ | (138 | ) | $ | (31 | ) | $ | 3,836 | | $ | 2,421 | | $ | 506 | | $ | (193 | ) | $ | (28 | ) | $ | 2,706 | | $ | (9,103 | ) | $ | (19,485 | ) | $ | 7 | | $ | - | | $ | (28,581 | ) |
|
| |
| |
| |
| | | |
| |
| |
| |
| | | |
| |
| |
| |
| | | |
| Financial expenses, net | | | | | | | | | | | | | | | | 864 | | | | | | | | | | | | | | | 2,137 | | | | | | | | | | | | | | | 2,006 | |
| Taxes on income | | |
| (tax benefit) | | | | | | | | | | | | | | | | 943 | | | | | | | | | | | | | | | 373 | | | | | | | | | | | | | | | 1,618 | |
| Income (loss) from | | |
| discontinued | | |
| operations, net | | | | | | | | | | | | | | | | (1,219 | ) | | | | | | | | | | | | | | 1,686 | | | | | | | | | | | | | | | (397 | ) |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| |
| | | |
| Net income | | |
| (loss) | | | | | | | | | | | | | | | $ | 810 | | | | | | | | | | | | | | $ | 1,882 | | | | | | | | | | | | | | $ | (32,602 | ) |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| |
| December 31,
|
|---|
| 2006
| 2007
| 2008
|
|---|
| Perimeter
| Projects
| Other
| Total
| Perimeter
| Projects
| Other
| Total
| Perimeter
| Projects
| Other
| Total
|
|---|
| | | | | | | | | | | | | |
|---|
| | | | | | | | | | | | |
|---|
| Total long-lived assets | | | $ | 12,451 | | $ | 552 | | $ | 20 | | $ | 13,023 | | $ | 12,518 | | $ | 8,560 | | $ | 1 | | $ | 21,079 | | $ | 9,575 | | $ | 3,623 | | $ | 5 | | $ | 13,203 | |
|
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
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 16:- SEGMENT INFORMATION (Cont.)
| | b. | Major customer data (percentage of total revenues): |
| | Year ended December 31,
|
|---|
| | 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Customer A | | | | 33.7 | % | | 13.0 | % | | *) - | |
| |
| |
| |
| |
| | | |
| Customer C | | | | - | | | 13.4 | % | | 18.8 | % |
| |
| |
| |
| |
| | *) | 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,
|
|---|
| | | 2006
| 2007
| 2008
|
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| 1. | | | Revenues: | | | | | | | | | | | |
| | | |
| | | | Israel | | | $ | 26,385 | | $ | 15,663 | | $ | 12,097 | |
| | | | Europe | | | | 9,793 | | | 18,342 | | | 15,603 | |
| | | | North America | | | | 14,176 | | | 14,869 | | | 15,648 | |
| | | | South and Latin America | | | | 7,456 | | | 6,818 | | | 4,542 | |
| | | | Africa | | | | 321 | | | 10,879 | | | 14,569 | |
| | | | Others | | | | 5,469 | | | 5,804 | | | 7,896 | |
| | |
| |
| |
| |
| | | |
| | | | | | | $ | 63,600 | | $ | 72,375 | | $ | 70,355 | |
| | |
| |
| |
| |
| 2. | | | Long-lived assets: | | |
| | | |
| | | | Israel | | | | | | $ | 2,955 | | $ | 3,148 | |
| | | | Europe | | | | | | | 8,472 | | | 3,954 | |
| | | | USA | | | | | | | 5,244 | | | 2,610 | |
| | | | Canada | | | | | | | 4,189 | | | 3,309 | |
| | | | Others | | | | | | | 219 | | | 182 | |
| | | |
| |
| |
| | | |
| | | | | | | | | | $ | 21,079 | | $ | 13,203 | |
| | | |
| |
| |
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 17:- SELECTED STATEMENTS OF INCOME DATA
| | a. | Research and development expenses, net: |
| | Year ended December 31,
|
|---|
| | 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Expenses | | | $ | 5,540 | | $ | 5,924 | | $ | 6,429 | |
| Less - investment tax credits and a royalty | | |
| bearing grant ( $8K in 2005) | | | | 162 | | | 160 | | | 234 | |
| |
| |
| |
| |
| | | |
| | | | $ | 5,378 | | $ | 5,764 | | $ | 6,195 | |
| |
| |
| |
| |
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Financial expenses: | | | | | | | | | | | |
| Interest on long-term debt | | | $ | (698 | ) | $ | (563 | ) | $ | (183 | ) |
| Interest on short-term bank credit | | | | (689 | ) | | (1,337 | ) | | (1,195 | ) |
| Forward contracts losses | | | | (915 | ) | | (666 | ) | | (291 | ) |
| Foreign exchange losses | | | | (337 | ) | | (792 | ) | | (875 | ) |
| Marketable securities losses | | | | - | | | - | | | (955 | ) |
| |
| |
| |
| |
| | | |
| | | | | (2,639 | ) | | (3,358 | ) | | (3,499 | ) |
| |
| |
| |
| |
| Financial income: | | |
| Interest on short-term and long-term bank | | |
| deposits, structured notes and marketable | | |
| securities | | | | 1,162 | | | 1,221 | | | 864 | |
| Foreign exchange gains | | | | 613 | | | - | | | 629 | |
| |
| |
| |
| |
| | | |
| | | | | 1,775 | | | 1,221 | | | 1,493 | |
| |
| |
| |
| |
| | | |
| | | | $ | (864 | ) | $ | (2,137 | ) | $ | (2,006 | ) |
| |
| |
| |
| |
NOTE 18:- DISCONTINUED OPERATIONS
| | On July 28, 2005, the Company decided to dispose of its indoor security sensors operations. |
| | On December 24, 2007, the Company decided to sell its U.S. based video monitoring business for $ 8,500. The video monitoring business was previously reported as a separate segment in the Group’s financial statements. |
| | 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. |
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 18:- DISCONTINUED OPERATIONS (Cont.)
| | b. | The following are the results of the discontinued operations for the years ended December 31, 2006, 2007 and 2008: |
| | Indoor security sensors operations: |
| | Year ended
December 31,
2006
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Revenues | | | $ | 48 | |
| Cost of revenues | | | | 198 | |
| |
| |
| | | |
| Gross loss | | | | 150 | |
| |
| |
| | | |
| Operating expenses: | | |
| Sales and marketing, net | | | | 12 | |
| |
| |
| | | |
| Operating loss | | | | 162 | |
| Tax benefit | | | | (34 | ) |
| |
| |
| | | |
| Net loss | | | $ | 128 | |
| |
| |
| | Year ended December 31,
|
|---|
| | 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Revenues | | | $ | 3,358 | | $ | 3,435 | | $ | - | |
| Cost of revenues | | | | 2,995 | | | 2,937 | | | - | |
| |
| |
| |
| |
| | | |
| Gross profit | | | | 363 | | | 498 | | | - | |
| |
| |
| |
| |
| | | |
| Operating expenses: | | |
| Sales and marketing | | | | 476 | | | 267 | | | - | |
| General and administrative | | | | 986 | | | 885 | | | 397 | |
| |
| |
| |
| |
| | | |
| Operating loss | | | | 1,099 | | | 654 | | | 397 | |
| | | |
| Capital gain from sale of video monitoring | | |
| activity | | | | - | | | 2,427 | | | - | |
| Financial income, net | | | | 13 | | | 55 | | | - | |
| Tax expense | | | | 5 | | | 142 | | | - | |
| |
| |
| |
| |
| | | |
| Net income (loss) | | | $ | (1,091 | ) | $ | 1,686 | | $ | (397 | ) |
| |
| |
| |
| |
F - 45
| | |
| Salles, Sáinz-Grant Thornton, S.C. | 
|
Certified Public Accountants
Member of Grant Thornton International | | |
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. |
|
| 
|
|
|
| By: Hector Bautista CPA |
Mexico City, Mexico
January 31, 2008
F - 46
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, 2008 and 2007, 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, 2008 and 2007, 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. |
|
|
|
|
|
| By: Hector Bautista C.P.A. |
Mexico City, Mexico
March 27, 2009
F - 47
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(U.S. dollars in thousands)
| Balance at end of
period
| Translation
adjustments
| Provision for
doubtful
accounts
| Balance at
beginning
of period
| |
|---|
| | | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | | | | | | | | | | | | Year ended December 31, 2008: | | |
| | | | $ | 1,506 | | $ | (60 | ) | $ | 1,223 | | $ | 343 | | Allowance for doubtful debts | | |
| | | |
| | | | | | | | | | | | | | | | Year ended December 31, 2007: | | |
| | | | $ | 343 | | $ | 27 | | $ | (68 | ) | $ | 384 | | Allowance for doubtful debts | | |
| | | |
| | | | | | | | | | | | | | | | Year ended December 31, 2006: | | |
| | | | $ | 384 | | $ | - | | $ | 138 | | $ | 246 | | Allowance for doubtful debts | | |
86
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/ Jacob Perry
——————————————
Jacob Perry
Chairman of the Board of Directors |
Date: July 12, 2009
87
