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-Ezras 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. Perrys 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 companys 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
arms 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
arms length basis and the terms of such contracts were no more favorable to these
companies than those it could have obtained from an unaffiliated third party. Our sales to
these companies during the years ended 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. Dekels 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 Arbitration
awarded 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 companys
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 MAGSsince 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.
F.
|
Expenses
of the Issue.
|
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 directors 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 PracticesApproval
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.
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Provisions Restricting a
Change in Control of Our Company
The
Israeli Companies Law requires that mergers between Israeli companies be approved by the
board of directors and general meeting of shareholders of both parties to the transaction.
The approval of the board of directors of both companies is subject to such boards
confirmation that there is no reasonable doubt that after the merger the surviving company
will be able to fulfill its obligations towards its creditors. Each company must notify
its creditors about the contemplated merger. Under our articles of association, such
merger must be approved by a
resolution of the shareholders, as explained above.
The approval of the merger by the general meetings of shareholders of the companies is
also subject to additional approval requirements as specified in the Israeli Companies Law
and regulations promulgated thereunder. See also Item 6C. Directors, Senior
Management and Employees Board Practices Approval of Related Party
Transactions Under Israeli Law.
Disclosure of
Shareholders Ownership
The
Israeli Securities Law, 5728-1968 and regulations promulgated thereunder contain various
provisions regarding the ownership threshold above which shareholders must disclose their
share ownership. However, these provisions do not apply to companies, such as ours, whose
shares are publicly traded in Israel as well as outside of Israel.
As a result of
the listing of our ordinary shares on the Tel Aviv Stock Exchange, we are required
pursuant to the Israeli Securities Law and the regulations promulgated thereunder to
deliver to the Israeli Share Registrar, the Israeli Securities Exchange Commission and the
Tel Aviv Stock Exchange, all reports, documents, forms and information received by us from
our shareholders regarding their shareholdings, provided that such information was
published or required to be published under applicable foreign law.
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
arms 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.
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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 enterprises
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 companys 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 companys
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.
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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 companys 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 years
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 companys 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 companys
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:
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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
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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.
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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 companys 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:
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Amortization,
under certain conditions, of purchases of know-how and patents and of rights to use a
patent and know-how which are used for the development or advancement of the company,
over an eight-year period for tax purposes;
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Right
to elect, under specified conditions, to file a consolidated tax return with additional
related Israeli industrial companies; and
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Accelerated
depreciation rates on equipment and buildings; and
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Deductions
over a three-year period of expenses in connection with the issuance and listing of
shares on a recognized stock market.
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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 projects 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 OCSs 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:
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There
is a special tax adjustment for the preservation of equity whereby some corporate assets
are classified broadly into fixed assets and non-fixed assets.
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Where
a companys 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 companys
equity, then such excess multiplied by the applicable annual rate of inflation is added
to taxable income.
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Subject
to specified limitations, depreciation deductions on fixed assets and losses carried
forward are adjusted for inflation based on the increase in the Israeli consumer price
index.
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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:
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The
capital gain is not attributable to a permanent establishment in Israel.
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The
shares were purchased after the first initial public offering on the recognized stock
exchange outside of Israel.
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The
provisions of the Income Tax Law (Inflationary Adjustments), 1985 do not apply to such
gain
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However,
non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli
resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or
(ii) is the beneficiary of or is entitled to 25% or more of the revenues or profits of
such non-Israeli corporation, whether directly or indirectly.
Under
the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our ordinary shares by a
shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding
the ordinary shares as a capital asset is exempt from Israeli capital gains tax unless
either (i) the shareholder holds, directly or indirectly, shares representing 10% or more
of our voting capital during any part of the 12-month period preceding such sale, exchange
or disposition or (ii) the capital gains arising from such sale are attributable to a
permanent establishment of the shareholder located in Israel. However, under the
U.S.-Israel Tax
Treaty, such 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 shareholders 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
persons 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.
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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 holders 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. Holders 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:
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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,
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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,
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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
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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.
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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. Holders 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.
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Dividends
and Paying Agents.
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Not
applicable.
G.
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Statements
by Experts.
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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 Commissions 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 at
www.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 Exchanges
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.
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Subsidiary
Information.
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Not
applicable.
ITEM 11.
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Quantitative and Qualitative Disclosures about Market Risk
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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
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(U.S. dollars in thousands)
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Liabilities
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2009
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2010
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2011
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2012
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Total
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Fair
Value at
December
31, 2008
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Short-term loans
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23,182
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-
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-
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-
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23,182
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23,182
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Weighted average interest rate
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4.25
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-
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-
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-
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4.25
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-
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Long-term loans
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813
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1,802
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480
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-
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3,095
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3,035
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Weighted average interest rate
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3.32
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4.49
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2.75
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-
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3.91
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-
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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.
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Description of Securities Other Than Equity Securities
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Not
applicable.
PART II
ITEM 13.
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Defaults, Dividend Arrearages and Delinquencies
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Not
applicable.
ITEM 14.
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Material
Modifications to the Rights of Security Holders and Use of Proceeds
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Not
applicable.
ITEM 15.
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Controls and Procedures
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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
Commissions 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
Managements 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
subsidiarys 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.
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Audit Committee Financial Expert
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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. Winners 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 at
www.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.
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Principal Accountant Fees and Services
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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.
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Year Ended December 31
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Services Rendered
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2007
|
2008
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U.S. dollars in thousands
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Audit (1)
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$
|
617
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$
|
707
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Audit-related
|
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-
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-
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Tax (2)
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126
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131
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Other (3)
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7
|
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38
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Total
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$
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750
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$
|
876
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(1)
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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.
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(2)
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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.
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(3)
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Other
fees relate to out of pocket reimbursement of expenses, primarily
traveling expenses of our auditors.
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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 committees 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 Registrants 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 issuers home
country certifying that the issuers practices are not prohibited by the home
countrys 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
officers 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 Companys 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 Companys 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 Companys 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 Managements Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Companys 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
companys 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 companys 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 companys 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 Companys
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 Groups 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
Companys 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
Companys 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
Companys revenues are generated in NIS, U.S. dollars and Euro. In addition, most of
the Companys costs are incurred in NIS and Canadian dollars. The Companys
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 Companys 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 Companys 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.
|
|
e.
|
Marketable
securities:
|
|
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 investments 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
Groups 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 units
goodwill with the carrying amount of that goodwill. If the carrying amount of the
reporting units 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 subcontractors 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 Companys 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 vendors 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 Companys 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 Companys 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 Companys 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, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
and SFAS No. 5, Accounting for Contingencies. Factors that affect the
Groups 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 Groups 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 Companys 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
Companys 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
Companys 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-likelythan-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
Companys 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
Companys liability for its Israeli employees severance pay is calculated pursuant to
Israels 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 months salary for each year of employment or a portion thereof.
The Companys 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 Companys 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 Israels
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 Companys 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 Companys 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 CEOs 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 Groups 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 Groups
investment rates for similar type of investment arrangements.
|
|
(iii)
|
The carrying amounts of the Groups 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 Companys 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
Companys 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 Companys 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 acquirers 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 Companys 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 Companys
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 Companys 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 Companys 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 Companys 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 partys
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 Companys 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 Companys 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 Companys
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 Companys 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 Companys 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 Companys
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 Companys 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 companys 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 companys 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 Companys 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
Companys 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 Companys 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.
|
|
e.
|
Investment
tax credit:
|
|
Two
of the Companys 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.)
|
h.
|
Deferred
income taxes:
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Groups 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
Companys 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 Companys 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 Groups operating segments as follows:
|
|
1.
|
Perimeter
security systems The Groups 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 Companys 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 Groups 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 customers
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 Groups 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 Companys
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 Companys 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 Companys 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 Companys 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 Companys 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
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