Annual and Transition Report (foreign Private Issuer) (20-f)

Date : 04/15/2019 @ 6:01PM
Source : Edgar (US Regulatory)
Stock : Magal Security Systems Ltd. - Ordinary Shares (MAGS)
Quote : 4.94  -0.13 (-2.56%) @ 9:18PM

Annual and Transition Report (foreign Private Issuer) (20-f)



SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 20-F
 
 ☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
 ☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2018
 
OR
 
 ☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
 ☐
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report
 
Commission file number: 0‑21388
 
MAGAL SECURITY SYSTEMS LTD.
(Exact Name of Registrant as specified in its charter
and translation of Registrant’s name into English)
 
Israel
(Jurisdiction of incorporation or organization)

P.O. Box 70, Industrial Zone, Yehud 5621617, Israel
(Address of principal executive offices)

Yaacov Vinokur , Chief Financial Officer
Magal Security Systems Ltd.
P.O. Box 70, Industrial Zone
 Yehud 5621617, Israel
+972-3-5391444 (phone), +972-3-5366245 (fax)
(Name, Telephone, E-mail and/or Facsimile number of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange on which registered
Ordinary Shares, NIS 1.0 Par Value
NASDAQ Global Market
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
 
Ordinary Shares, par value NIS 1.0 per share …….…23,049,639 (as of December 31, 2018)
 


 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes ☐ No ☒
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ☐ No ☒
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   
 
Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of "accelerated filer , " "large accelerated filer" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ☐
Accelerated filer ☐
   
Non-accelerated filer ☒
Emerging growth company ☐
 
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
     
U.S. GAAP
International Financial Reporting Standards as issued by the International Accounting Standards Board
Other
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
 
Item 17 ☐   Item 18 ☐
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ☐ No ☒
 
This Annual Report on Form 20-F is incorporated by reference into the Registrant’s Registration Statements on Form S-8, File Nos. 333-164696, 333-174127 and 333-190469.

 

 
TABLE OF CONTENTS
 
   
Page No.
1
1
1
1
A.
Selected Consolidated Financial Data.
1
B.
Capitalization and Indebtedness.
2
C.
Reasons for the Offer and Use of Proceeds.
2
D.
Risk Factors.
2
14
A.
History and Development of the Company.
14
B.
Business Overview.
15
C.
Organizational Structure.
27
D.
Property, Plants and Equipment.
27
27
28
A.
Operating Results.
28
B.
Liquidity and Capital Resources
42
C.
Research and Development, Patents and Licenses.
45
D.
Trend Information.
45
E.
Off-Balance Sheet Arrangements.
45
F.
Tabular Disclosure of Contractual Obligations.
46
46
A.
Directors and Senior Management.
46
B.
Compensation
50
C.
Board Practices
51
D.
Employees
62
E.
Share Ownership.
63
65
A.  .
Major Shareholders 65
B.
Related Party Transactions.
66
C.
Interests of Experts and Counsel.
66
66
A.
Consolidated Statements and Other Financial Information.
66
B.
Significant Changes.
67
67
A.
Offer and Listing Details.
67
B.
Plan of Distribution.
67
C.
Markets.
67
D.
Selling Shareholders.
67
E.
Dilution.
67
F.
Expenses of the Issue.
67
67
A.
Share Capital.
67
B.
Memorandum and Articles of Association.
67
C.
Material Contracts.
71
D.
Exchange Controls.
71
E.
Taxation.
71
F.
Dividends and Paying Agents.
82
G.
Statements by Experts.
82
 
- i -

 
H.
Documents on Display.
82
I.
Subsidiary Information.
82
82
83
83
83
83
84
[RESERVED] 84
84
84
85
85
85
85
85
Mine Safety Disclosure
85
 
86
86
86
87
 
- ii -


 
INTRODUCTION
 
Magal Security Systems Ltd. is a leading international provider of solutions and products for physical and video security solutions, as well as site management. Since 1969, we have delivered our products as well as tailor-made security solutions and turnkey projects to customers in over 100 countries under some of the most challenging conditions. We offer comprehensive integrated solutions for critical sites, which leverage our broad portfolio of homegrown PIDS (Perimeter Intrusion Detection Systems), advanced VMS (Video Management Software) with native IVA (Intelligent Video Analytics) security solutions, as well as a proprietary command and control platform.
 
Based on our multi decade industry experience and interaction with customers, we have developed a comprehensive set of solutions and products, optimized for perimeter, outdoor and general security applications. Our broad portfolio of critical infrastructure protection and site protection technologies includes a variety of smart barriers and fences, fence mounted sensors, virtual gates, buried and concealed detection systems and sophisticated sensors for sub-surface intrusion such as to secure pipelines, as well as advanced video analytics software and video management systems. Our turnkey solutions are typically integrated and managed by sophisticated modular command and control software, supported by expert systems for real-time decision support. We have successfully installed customized solutions and products in more than 100 countries worldwide. Our ordinary shares are traded on the NASDAQ Global Market under the symbol “MAGS”.  Our website is www.magalsecurity.com .  The information on our website is not incorporated by reference into this annual report.  As used in this annual report, the terms “we,” “us,” “our,” and “Magal” mean Magal Security Systems Ltd. and its subsidiaries, unless otherwise indicated.
 
AIMETIS, AIMETIS SYMPHONY, FIBERPATROL, FLARE, FLEXPI, FLEXPS, FLEXZONE, GUIDAR, INTELLI-FIELD, OMNITRAX, PANTHER, PINPOINTER, REPELS, SENNET, SENSTAR, SENSTAR & DESIGN, SENTIENT, ULTRAWAVE DESIGN, XFIELD, MAGAL, DTR, FORTIS, MAESTRO DB, FENSOR, and ROBOGUARD, are registered trademarks. ARMOURFLEX, CYBERSEAL, ENTERPRISE MANAGER, GALLIUM PDS, INTELLI-FLEX, INTELLIFIBER, LM100, the MAGAL logo, NETWORK MANAGER, RUBIDIUM, STARLED, STARNET, SYMPHONY, TUNGSTEN, VANADIUM  and all other marks used to identify particular products and services associated with our businesses are unregistered trademarks.  Any other trademarks and trade names appearing in this annual report are owned by their respective holders.
 
Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.  All references in this annual report to “dollars” or “$” are to U.S. dollars, all references to “NIS” are to New Israeli Shekels and all references to “CAD” are to Canadian dollars.
 
Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms.  If we filed any of these documents as an exhibit to this annual report or to any registration statement or annual report that we previously filed, you may read the document itself for a complete description of its terms.
 
This Annual Report on Form 20-F contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and within the Private Securities Litigation Reform Act of 1995, as amended.  Such forward-looking statements reflect our current view with respect to future events and financial results.  Forward-looking statements usually include the verbs, “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “understands” and other verbs suggesting uncertainty.  We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.  We have attempted to identify additional significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section which appears in Item 3.D “Key Information -Risk Factors.”
 
- iv -

 
PART I
 
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
ITEM 3.
KEY INFORMATION
 
A.              Selected Consolidated Financial Data .
 
The following selected consolidated financial data for and as of the five years ended December 31, 2018 are derived from our audited consolidated financial statements which have been prepared in accordance with U.S. GAAP.  We have derived the following selected consolidated financial data as of December 31, 2017 and 2018 and for each of the years ended December 31, 2016, 2017 and 2018 from our consolidated financial statements set forth elsewhere in this annual report that have been prepared in accordance with U.S. GAAP.  We have derived the following selected consolidated financial data as of December 31, 2014, 2015 and 2016 and for each of the years ended December 31, 2014 and 2015 from our audited consolidated financial statements not included in this annual report.  The selected consolidated financial data set forth below should be read in conjunction with and are qualified entirely by reference to Item 5.  “Operating and Financial Review and Prospects” and our audited consolidated financial statements and notes thereto included elsewhere in this annual report.
 
   
2014
   
2015
   
2016
   
2017
   
2018
 
                           
Revenues          
 
$
77,543
   
$
63,736
   
$
67,825
   
$
64,292
   
$
92,602
 
Cost of revenues          
   
43,049
     
32,722
     
34,570
     
32,967
     
52,299
 
Gross profit          
   
34,494
     
31,014
     
33,255
     
31,325
     
40,303
 
Operating expenses:
                                       
Research and development, net          
   
4,604
     
4,814
     
6,779
     
6,558
     
6,852
 
Selling and marketing          
   
17,130
     
14,785
     
17,536
     
18,158
     
18,557
 
General and administrative          
   
8,898
     
7,026
     
7,445
     
7,853
     
10,160
 
Impairment of goodwill and other intangible assets
   
2,439
     
-
     
-
     
-
     
979
 
Total operating expenses          
   
33,071
     
26,625
     
31,760
     
32,569
     
36,548
 
Operating income (loss)          
   
1,423
     
4,389
     
1,495
     
(1,244
)
   
3,755
 
Financial income (expenses), net          
   
1,979
     
642
     
(591
)
   
(3,961
)
   
1,361
 
Income (loss) before income taxes          
   
3,402
     
5,031
     
904
     
(5,205
)
   
5,116
 
Taxes on income (tax benefit)          
   
82
     
1,923
     
(122
)
   
1,695
     
2,072
 
Net income (loss)
 
$
3,320
   
$
3,108
   
$
1,026
   
$
(6,900
)
 
$
3,044
 
Less: net income (loss) attributable to non-controlling interest
   
(90
)
   
(33
)
   
(3
)
   
14
     
95
 
Net income (loss) attributable to Magal’s shareholders
 
$
3,410
   
$
3,141
   
$
1,029
   
$
(6,914
)
 
$
2,949
 
Basic and diluted net earnings (loss) per share
 
$
0.21
   
$
0.19
   
$
0.06
   
$
(0.30
)
 
$
0.12
 
Weighted average number of ordinary shares used in computing basic net earnings per share
   
16,186,148
     
16,347,948
     
17,999,779
     
22,989,009
     
23,040,436
 
Weighted average number of ordinary shares used in computing diluted net earnings per share
   
16,338,056
     
16,410,711
     
18,031,433
     
22,989,009
     
23,287,751
 
 
     
2014
     
2015
     
2016
     
2017
     
2018
 
                                         
Consolidated Balance Sheets Data :
                                       
Cash and cash equivalents          
 
$
21,602
   
$
27,319
   
$
19,692
   
$
22,463
   
$
38,665
 
Short and long-term deposits and restricted deposits
   
10,979
     
3,977
     
32,971
     
30,022
     
16,431
 
Working capital          
   
45,805
     
43,996
     
58,752
     
59,401
     
61,023
 
Total assets          
   
83,759
     
74,996
     
105,993
     
112,545
     
119,171
 
Short‑term bank credit (including current maturities of long-term loans)
   
3,071
     
-
     
-
     
-
     
-
 
Long‑term bank loans          
   
1,406
     
-
     
-
     
-
     
-
 
Total shareholders’ equity          
   
55,957
     
55,695
     
81,918
     
82,949
     
81,216
 
1

 
B.            Capitalization and Indebtedness.
 
Not applicable.

C.           Reasons for the Offer and Use of Proceeds.
 
Not applicable.

D.            Risk Factors.
 
Investing in our ordinary shares involves a high degree of risk and uncertainty.  You should carefully consider the risks and uncertainties described below before investing in our ordinary shares.  If any of the following risks actually occurs, our business, prospects, financial condition and results of operations could be harmed.  In that case, the value of our ordinary shares could decline, and you could lose all or part of your investment.
 
Risks Related to Our Business
 
We depend on large orders from a relatively small number of customers for a substantial portion of our revenues.  The loss of one or more of our key customers could result in a loss of a significant amount of our revenues.
 
Historically, a relatively small number of customers account for a significant percentage of our revenues.   The Israeli Ministry of Defense, or the MOD, and the Israeli Defense Forces, or the IDF accounted for 8.6%, 10.2% and 10.9% of our revenues in the years ended December 31, 2016, 2017 and 2018, respectively. In addition, revenues from a national electricity company in Latin America accounted for 11.91%, 14.6% and 25.3% of our revenues in the years ended December 31, 2016, 2017 and 2018, respectively. The MOD, the IDF or any of our other major continuing customers may not maintain their volume of business with us or, if such volume is reduced, other customers generating similar revenues may not replace the lost business. Our inability to replace business from large contracts will adversely affect our financial results.  Any unanticipated delays in a large project, changes in customer requirements or priorities during the project implementation period, or a customer’s decision to cancel a project, may adversely impact our operating results and financial performance. Our revenues may also be affected in the future if there is a reduction in Israeli government defense spending for our programs or a change in priorities to purchase products other than ours.  Accordingly, changes in government contracting policies, budgetary constraints and delays or changes in the appropriations process could have an adverse effect on our business, financial condition and results of operations.

While we were profitable in 2018, we have incurred major losses in past years and may not operate profitably in the future .
 
We reported an operating profit of $3.8 million and a net income of $3 million in the year ended December 31, 2018. We may not be able to regain and sustain profitable operations in the future.  If we do not generate sufficient cash from operations, we will be required to reduce our level of expenditure or cash balance.  Such financing may not be available in the future, or, if available, may not be on terms favorable to us.  If adequate funds are not available to us, our business, results of operations and financial condition will be materially and adversely affected.
 
2

 
Our operating results may fluctuate from quarter to quarter and year to year.

Our sales and operating results may vary significantly from quarter to quarter and from year to year in the future.  Our operating results are characterized by a seasonal pattern, with a higher volume of revenues towards the end of the year and lower revenues in the first part of the year.  In addition, our operating results are affected by a number of factors, many of which are beyond our control.  Factors contributing to these fluctuations include the following:

·
changes in customers’ or potential customers’ budgets as a result of, among other things, government funding and procurement policies;
 
·
changes in demand for our existing products and services;
 
·
our long and variable sales cycle;
 
·
our ability to maintain sales volumes at a level sufficient to cover fixed manufacturing and operating costs;
 
·
the timing of the introduction and market acceptance of new products, product enhancements and new applications.

Our expense levels are based, in part, on expected future sales.  If sales levels in a particular quarter do not meet expectations, we may be unable to adjust operating expenses quickly enough to compensate for the shortfall of sales, and our results of operations may be adversely affected.  Due to these and other factors, we believe that quarter to quarter and year to year comparisons of our past operating results may not be meaningful.  You should not rely on our results for any quarter or year as an indication of our future performance.  Our operating results in future quarters and years may be below expectations, which would likely cause the price of our ordinary shares to fall.

Our financial results may be significantly affected by currency fluctuations.
 
Most of our sales are made in North America, Latin America, Africa, Israel and Europe.  Our revenues are primarily denominated in Dollars, NIS, Mexican Pesos and Euros, 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 dollar and non-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 dollar.  In addition, the value of our non-dollar revenues could be adversely affected by the depreciation of the dollar against such currencies. Our financial expenses may also be adversely affected by the depreciation of a currency in which we maintain our monetary assets.
 
We recorded foreign exchange losses, net of $ 0.6 million and $4 million in the years ended December 31, 2016 and 2017, respectively and a foreign exchange gain, net of $1.1 million in the year ended December 31, 2018. As a result of our rights offering in late 2016, we held a significant amount of cash and cash equivalents in U.S. dollars at year end 2016 and during 2017 and 2018. These balances were translated into Israeli Shekels, which depreciated by 1.5% and 9.8% against the U.S. dollar in 2016 and 2017, respectively and which appreciated by 8.1% against the U.S. dollar in 2018. We may incur exchange losses in the future which may materially affect our operating results.

Because our project related sales tend to be concentrated among a small number of customers during any period, our operating results may be subject to substantial fluctuations. Accordingly, our revenues and operating results for any particular quarter may not be indicative of our performance in future quarters, making it difficult for investors to evaluate our future prospects based solely on the results of any one quarter.
 
Given the nature of our customers and projects, we receive relatively large orders for projects from a relatively small number of customers. Consequently, a single order from one customer may represent a substantial portion of our sales in any one period and significant orders by any customer during one period may not be followed by further orders from the same customer in subsequent periods. Our sales and operating results are subject to very substantial periodic variations. Since quarterly performance is likely to vary significantly, our results of operations for any quarter or calendar year are not necessarily indicative of the results that we might achieve for any subsequent period. Accordingly, quarter-to-quarter and year-to-year comparisons of our operating results may not be meaningful. In addition, we have a limited order backlog that is generally composed of orders that are mostly fulfilled within a period of three to twelve months after receipt, which makes revenues in any quarter substantially dependent upon orders received in prior quarters.
 
3


We may be unable to successfully integrate our recent acquisitions to fully realize targeted synergies, revenues and other expected benefits of the acquisitions.   We expect to make additional acquisitions in the future that could disrupt our operations and harm our operating results.
 
In April 2018, we completed the acquisition of a 55% controlling interest in ESC BAZ Ltd., an Israeli-based company, focused on the development and manufacturing of military-grade smart Security Video Observation and Surveillance systems. In April 2016, Senstar, our fully owned Canadian subsidiary, acquired Aimetis, a Canadian-based company, which specializes in advanced video analytics software and intelligent IP video management software (VMS). In July 2017 we amalgamated our two Canadian subsidiaries. Following the amalgamation, the company maintained the name Senstar Corporation.

Achieving the targeted synergies, such as operating and long-term strategic cost-savings, of the acquisitions will depend in part upon whether we can continue to integrate their businesses and technologies in an efficient and effective manner. We may not be able to accomplish this integration process smoothly or successfully. The integration of our respective operations will require the dedication of significant management resources, which may distract management’s attention from day-to-day operations. Employee uncertainty and lack of focus during the integration process may also disrupt our business and result in undesired employee attrition. An inability of management to successfully integrate the operations into our business could have a material adverse effect on our business, results of operations and financial condition.

An inability to realize the full extent of, or any of, the anticipated benefits and synergies of the acquisitions, as well as any delays encountered in the integration process, could have an adverse effect on our business, results of operations and financial condition. We may also be required in the future to record impairment charges relating to the carrying value of our intangible assets and goodwill arising from such acquisitions.  Moreover, future acquisitions by us could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to identifiable intangible assets, any of which could materially adversely affect our operating results and financial position.  Acquisitions also involve other risks, including risks inherent in entering markets in which we have no or limited prior experience.
 
Mergers and acquisitions of companies are inherently risky and subject to many factors outside of our control and no assurance can be given that our future acquisitions will be successful and will not adversely affect our business, operating results, or financial condition.  In the future, we may seek to acquire or make strategic investments in complementary businesses, technologies, services or products, or enter into strategic partnerships or alliances with third parties in order to expand our business. Failure to manage and successfully integrate such acquisitions could materially harm our business and operating results. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products technologies and professional services to a failure to do so.  Even when an acquired company has previously developed and marketed products, there can be no assurance that new product enhancements will be made in a timely manner or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products. If we acquire other businesses, we may face difficulties, including:
 
·
Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired businesses or enterprises;
 
·
Diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions;
 
·
Integrating financial forecasting and controls, procedures and reporting cycles;
 
·
Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
 
4

 
·
Insufficient revenue to offset increased expenses associated with acquisitions; and
 
·
The potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after announcement of acquisition plans.
 
Our revenues depend on government procurement procedures and practices.  A substantial decrease in our customers’ budgets would adversely affect our results of operations.
 
Our products are primarily sold to governmental agencies, governmental authorities and government-owned companies, many of which have complex and time consuming procurement procedures.  A substantial period of time often elapses from the time we begin marketing a product until we actually sell that product to a particular customer.  In addition, our sales to governmental agencies, authorities and companies are directly affected by these customers’ budgetary constraints and the priority given in their budgets to the procurement of our products.  A decrease in governmental funding for our customers’ budgets would adversely affect our results of operations.  This risk is heightened during periods of global economic slowdown.
 
Accordingly, governmental purchases of our systems, products and services may decline in the future as the governmental purchasing agencies may terminate, reduce or modify contracts or subcontracts if:
 
·
their requirements or budgetary constraints change;
 
·
they cancel multi-year contracts and related orders if funds become unavailable;
 
·
they shift spending priorities into other areas or for other products; or
 
·
they adjust contract costs and fees on the basis of audits.
 
Any such event may have a material adverse effect on us.
 
Because competition in our industry is intense, our business, operating results and financial condition may be adversely affected.
 
The global market for security, safety, site management solutions and products is highly fragmented and intensely competitive.  We compete principally in the market for perimeter intrusion detection systems, or PIDS, Video Management Software, or VMS, Intelligent Video Analytics, or IVA, and turnkey projects and solutions.  Some of our competitors and potential competitors have greater research, development, financial and personnel resources, including governmental support, as well as established greater penetration into certain vertical markets or geographical market segments. We cannot assure you that we will be able to compete effectively relative to our competitors or continue to develop and market new products effectively. Continued competitive pressures could cause us to lose significant market share or erode profitability margins.
 
Increased competition and bid protests in a budget-constrained environment may make it more difficult to maintain our financial performance.
 
A substantial portion of our business is awarded through competitive bidding. Governments increasingly have relied upon competitive contract award types and multi-award contracts, which has the potential to create pricing pressure and increase our cost by requiring that we submit multiple bids and proposals. The competitive bidding process entails substantial costs and managerial time to prepare bids and proposals for contracts that may not be awarded to us or may be split among competitors. Multi award contracts require that we make sustained efforts to obtain task orders under the contract. Following award, we may encounter significant expenses, delays, contract modifications, or even loss of the contract if our competitors protest or challenge contracts that are awarded to us.
 
5

 
Unfavorable global economic conditions may adversely affect our customers, which directly impact our business and results of operations.
 
During periods of slowing economic activity, our customers may reduce their demand for our products, technology and professional services, which would reduce our sales, and our business, operating results and financial condition may be adversely affected. The global and domestic economies continue to face a number of economic challenges , including threatened sovereign defaults, credit downgrades, restricted credit for businesses and consumers and potentially falling demand for a variety of products and services. These developments, or the perception that any of them could occur , could result in longer sales cycles, slower adoption of new technologies and increased price competition for our products and services. We could also be exposed to credit risk and payment delinquencies on our accounts receivable, which are not covered by collateral.
 
Significant portions of our operations are conducted outside the markets in which our products and solutions are manufactured or generally sold, and accordingly, we often export a substantial number of products into such markets. We may, therefore, be denied access to potential customers or suppliers or denied the ability to ship products from any of our subsidiaries into the countries in which we currently operate or wish to operate, as a result of economic, legislative, political and military conditions, including hostilities and acts of terrorism, in such countries.

We may also be required in the future to increase our reserves for doubtful accounts.  In addition, the fair value of some of our assets may decrease as a result of an uncertain economy and as a result, we may be required to record impairment charges in the future.  If global economic and market conditions or economic conditions in key markets remain uncertain or weaken further, our financial condition and operating results may be materially adversely affected.
 
We may be adversely affected by our long sales cycles.
 
We have in the past and expect in the future to experience long time periods between initial sales contacts and the execution of formal contracts for our products and completion of product installations.  The cycle from first contact to revenue generation in our business involves, among other things, selling the concept of our technology and products, developing and implementing a pilot program to demonstrate the capabilities and accuracy of our products, negotiating prices and other contract terms, and, finally, installing and implementing our products on a full-scale basis.  This cycle entails a substantial period of time, sometimes as much as one or more years, and the lack of revenues during this cycle and the expenses involved in bringing new sales to the point of revenue generation may put a substantial strain on our resources. Our business involves significant risks and uncertainties that may not be covered by indemnity or insurance.
 
Our business involves significant risks and uncertainties that may not be covered by indemnity or insurance.
 
A significant portion of our business relates to designing, developing, and manufacturing advanced security, site management and systems and products.  New technologies may be untested or unproven. Failure of some of these products and services could result in extensive loss of life or property damage. Accordingly, we also may incur liabilities that are unique to our products and services. In some, but not all circumstances, we may be entitled to certain legal protections or indemnifications from our customers, either through regulatory protections, contractual provisions or otherwise. The amount of insurance coverage that we maintain may not be adequate to cover all claims or liabilities, and it is not possible to obtain insurance to protect against all operational risks and liabilities.
 
Substantial claims resulting from an accident, failure of our products or services, or other incident, or liability arising from our products and services in excess of any indemnity and our insurance coverage (or for which indemnity or insurance is not available or not obtained) could adversely impact our financial condition, cash flows, or operating results. Any accident, even if fully indemnified or insured, could negatively affect our reputation among our customers and the public, and make it more difficult for us to compete effectively. It also could affect the cost and availability of adequate insurance in the future.
 
6

 
The market for our products may be affected by changing technology, requirements, standards and products, and we may be adversely affected if we do not respond promptly and effectively to these changes.
 
The market for our products may be affected by evolving technologies, changing industry standards, changing regulatory environments, new product introductions and changes in customer requirements.  The introduction of products embodying new technologies and the emergence of new industry standards and practices can render existing products obsolete and unmarketable.  Our future success will depend on our ability to enhance our existing products and to develop and introduce, on a timely and cost-effective basis, new products and product features that keep pace with technological developments and emerging industry standards. In the future:
 
·
we may not be successful in developing and marketing new products or product features that respond to technological change or evolving industry standards;
 
·
we may experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products and features; or
 
·
our new products and product features may not adequately meet the requirements of the marketplace and achieve market acceptance.
 
If we are unable to respond promptly and effectively to changing technologies and market requirements, we will be unable to compete effectively in the future.
 
Our failure to retain and attract personnel could harm our business, operations and product development efforts.
 
Our products require sophisticated research and development, marketing and sales and technical customer support.  Our success depends on our ability to attract, train and retain qualified research and development, marketing and sales and technical customer support personnel.  Competition for personnel in all of these areas is intense and we may not be able to hire adequate personnel to achieve our goals or support the anticipated growth in our business. Competition may be amplified by evolving restrictions on immigration, travel, or availability of visas for skilled technology workers. If we fail to attract and retain qualified personnel, our business, operations and product development efforts would suffer.
 
Our international operations require us to comply with anti-corruption laws and regulations of various governments and different international jurisdictions, and our failure to comply with these laws and regulations could adversely affect our reputation, business, financial condition and results of operations.
 
Doing business on a worldwide basis requires us and our subsidiaries to comply with the laws and regulations of various governments and different international jurisdictions, and our failure to successfully comply with these rules and regulations may expose us to liabilities. These laws and regulations apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, as a company registered with the Securities and Exchange Commission, or the SEC, we are subject to the regulations imposed by the Foreign Corrupt Practices Act, or FCPA . The FCPA prohibits us from providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment, and requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company. As part of our business, we deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA. If our efforts to screen third-party agents and detect cases of potential misconduct fail, we could be held responsible for the noncompliance of these third parties under applicable laws and regulations, which may have a material adverse effect on our reputation and our business, financial condition and results of operations. In addition, some of the international locations in which we operate lack a developed legal system and have elevated levels of corruption. As a result of the above activities, we are exposed to the risk of violating anti-corruption laws. We have established policies and procedures designed to assist us and our personnel to comply with applicable U.S. and international laws and regulations. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, and such a violation could adversely affect our reputation, business, financial condition and results of operations.
 
7

 
We face risks associated with doing business in international markets.
 
A large portion of our sales is to markets outside of Israel.  For the years ended December 31, 2016, 2017 and 2018 approximately 87.1% , 85.1% and 85.3%, respectively, of our revenues were derived from sales to markets outside of Israel.  A key component of our strategy is to continue to expand in such international markets.  Our international sales efforts are affected by costs associated with the shipping of our products and risks inherent in doing business in international markets, including:
 
·
different and changing regulatory requirements in the jurisdictions in which we currently operate or may operate in the future;
 
·
fluctuations in foreign currency exchange rates;
 
·
export restrictions, tariffs and other trade barriers;
 
·
difficulties in staffing, managing and supporting foreign operations;
 
·
longer payment cycles;
 
·
difficulties in collecting accounts receivable;
 
·
political and economic changes, hostilities and other disruptions in regions where we currently sell or products or may sell our products in the future; and
 
·
seasonal changes in business activity.
 
Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, difficulty in collecting receivables, and a higher cost of doing business, any of which could adversely affect our business, results of operations or financial condition.
 
We have significant operations in countries that may be adversely affected by political events , economic instability, regime replacement, major hostilities or acts of terrorism.
 
We are a global security company with worldwide operations. Significant portions of our operations are conducted outside the markets in which our products and solutions are manufactured or generally sold, and accordingly, we often export a substantial number of products into such markets. We may be denied access to potential customers or suppliers or denied the ability to ship products from any of our subsidiaries into the countries in which we currently operate or wish to operate, as a result of economic, legislative, political and military conditions, including hostilities and acts of terrorism, in such countries.

The UK's decision to exit the European Union (referred to as  Brexit ) has caused additional volatility in the markets and currency exchange rates. Market conditions and exchange rates could continue to be volatile in the near term as this decision is implemented.   The impacts of Brexit are still uncertain while the UK’s future trading and transition relationship with the EU is determined. There is the potential for our costs to increase, for example through any changes required to our systems to reflect new taxes or customs duties or other processes. Our regulatory risk could increase if there were to be future divergence with the EU regime. Our suppliers may face disruption as a result of challenges in their own organizations and supply chains. Also, delivering a great customer experience and great network will become more challenging if it is harder for us to recruit and retain skilled talent and to source sufficient construction workforce. The UK economy may also suffer as a result of this uncertainty.

In the United States, market volatility accelerated during the second quarter of 2018, resulting from increasing concerns about global trade wars, the slowing pace of global growth, inflation and more aggressive monetary policy in the U.S. and global equity markets were mixed, with U.S. markets trading higher while global and emerging markets traded in negative territory. The U.S. Federal Reserve, based on strong economic data and low unemployment, increased interest rates in 2018. As a result, the U.S. dollar strengthened against the Euro and most other currencies. In China, the industrial sector slowed and the risk of decreased growth rose as the U.S. and China each imposed tariffs on various goods and services.

These developments, or the perception that any of them could occur, could have a material adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates and credit ratings may be especially subject to increased market volatility. Any of these events would likely harm our business, operating results and financial condition.
 
8

 
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.

Cyber-attacks or other breaches of network or information technology (IT) security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber-attacks, malware, computer viruses and other means of unauthorized access.  While we maintain insurance coverage for some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain.  A failure to protect the privacy of customer and employee confidential data against breaches of network or IT security could result in damage to our reputation.  To date, we have not been subject to cyber-attacks or other cyber incidents which, individually or in the aggregate, resulted in a material impact to our operations or financial condition.
 
We may not be able to protect our proprietary technology and unauthorized use of our proprietary technology by third parties may impair our ability to compete effectively.
 
Our success and ability to compete depend in large part upon protecting our proprietary technology.  We have 2 4 patents and have 8 patent applications pending.  We also rely on a combination of trade secret and copyright law and confidentiality, non-disclosure and assignment-of-inventions agreements to protect our proprietary technology.  It is our policy to protect our proprietary rights in our products and operations through contractual obligations, including confidentiality and non-disclosure agreements with certain employees, distributors and agents, suppliers and subcontractors.  These measures may not be adequate to protect our technology from third-party infringement, and our competitors may independently develop technologies that are substantially equivalent or superior to ours.  Additionally, our products may be sold in foreign countries that provide less protection to intellectual property than that provided under U.S. or Israeli laws.
 
Claims that our products infringe upon the intellectual property of third parties may require us to incur significant costs, enter into licensing agreements or license substitute technology.
 
Third parties may in the future assert infringement claims against us or claims asserting that we have violated a patent or infringed upon a copyright, trademark or other proprietary right belonging to them.  Any infringement claim, even one without merit, could result in the expenditure of significant financial and managerial resources to defend against the claim.  In addition, we purchase components for our turnkey products from independent suppliers.  Certain of these components contain proprietary intellectual property of these independent suppliers.  Third parties may in the future assert claims against our suppliers that such suppliers have violated a patent or infringed upon a copyright, trademark or other proprietary right belonging to them.  If such infringement by our suppliers or us were found to exist, a party could seek an injunction preventing the use of their intellectual property.  Moreover, a successful claim of product infringement against us or a settlement could require us to pay substantial amounts or obtain a license to continue to use such technology or intellectual property.  Infringement claims asserted against us could have a material adverse effect on our business, operating results and financial condition.
 
Undetected defects in our products may increase our costs and impair the market acceptance of our products.
 
Despite our regular quality assurance testing, the development, enhancement and implementation of our complex systems entail substantial risks of product defects or failures.  Undetected errors or “bugs” may be found in existing or new products, resulting in delays, loss of revenues, warranty expense, loss of market share, failure to achieve market acceptance, adverse publicity, product returns, loss of competitive position or claims against us by customers. Any such problems could be costly to remedy and could cause interruptions, delays, or cessation of our product sales, which could cause us to lose existing or prospective customers and could negatively affect our results of operations.   Moreover, the complexities involved in implementing our systems entail additional risks of performance failures.  We may encounter substantial difficulties due to such complexities which could   have a material adverse effect upon our business, financial condition and results of operations.
 
Systems and information technology interruptions or cyber-attacks could adversely impact our ability to operate.
 
Our operations rely on computer, information and communications technology and related systems.  From time to time, we may experience system interruptions and delays.  If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of and protect our systems, our operations could be interrupted or delayed.  Our computer and communications systems and operations could be damaged or interrupted by natural disasters, telecommunications failures, acts of war, terrorism or similar events or disruptions.  Any of these or other events could cause system interruption, delays and loss of critical data, or delay or stoppage of our operations, and adversely affect our operating results.
 
9

 
If subcontractors and suppliers terminate our arrangements with them, or amend them in a manner detrimental to us, we may experience delays in production and implementation of our products and our business may be adversely affected.
 
We acquire most of the components utilized in our products, including our turnkey solutions, from a limited number of suppliers.  We may not be able to obtain such items from these suppliers in the future or we may not be able to obtain them on satisfactory terms.  Temporary disruptions of our manufacturing operations would result if we were required to obtain materials from alternative sources, which may have an adverse effect on our financial results.
 
We currently benefit from government programs and tax benefits that may be discontinued or reduced in the future, which would increase our future tax expenses.  
 
We currently benefit from grants and tax benefits under Israeli government programs, which require us to meet specified conditions, including, but not limited to, making specified investments from our equity in fixed assets and paying royalties with respect to grants received.  In addition, some of these programs restrict our ability to manufacture particular products or transfer particular technology outside of Israel.  We also benefit from tax credits pursuant to the Scientific Research and Experimental Development Tax incentive Program in Canada, and from research grant programs such as the “Industrial Research Assistance Program” (IRAP).
 
If we fail to comply with the conditions imposed by the Israeli law or the Canadian tax program in the future, the benefits we receive could be cancelled and we could be required to refund any payments previously received under these programs, including any accrued interest, or pay increased taxes or royalties.  Canadian research grant programs are dependent on the Government’s continued commitment to support R&D, on availability of funding, and may be more difficult to realize or may not be available in the future.  Such a result would adversely affect our results of operations and financial condition.
 
The Israeli government has reduced the benefits available under these programs in recent years and these programs and benefits may be discontinued or curtailed in the future. If the Israeli or Canadian governments resolve to end these programs and benefits, our business, financial condition, results of operations and net income could be materially adversely affected.
 
We may fail to maintain effective internal control over financial reporting, which could result in material misstatements in our financial statements.
 
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.  Our efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 governing internal controls and procedures for financial reporting have resulted in increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require the continued commitment of significant resources.  Section 404 of the Sarbanes-Oxley Act requires management’s annual review and evaluation of our internal control over financial reporting in connection with the filing of the annual report on Form 20-F for each fiscal year.  We may identify material weaknesses or significant deficiencies in our internal control over financial reporting.  Failure to maintain effective internal control over financial reporting could result in material misstatements in our financial statements.  Any such failure could also adversely affect the results of our management’s evaluations and annual auditor reports regarding the effectiveness of our internal control over financial reporting.  We have documented and tested our internal control systems and procedures in order for us to comply with the requirements of Section 404. While our assessment of our internal control over financial reporting resulted in our conclusion that as of December 31, 2018, our internal control over financial reporting was effective, we cannot predict the outcome of our testing in future periods. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities and could have a material adverse effect on our operating results, investor confidence in our reported financial information and the market price of our ordinary shares.
 
10

 
Regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain metals used in the manufacturing of our solutions.
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes disclosure requirements regarding the use in components of our products of “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries, whether the components of our products are manufactured by us or third parties. These requirements could affect the pricing, sourcing and availability of minerals used in the manufacture of components we use in our products. Although the SEC has provided guidance with respect to a portion of the conflict mineral filing requirements that may somewhat reduce our reporting practices, there are costs associated with complying with the disclosure requirements and customer requests, such as costs related to our due diligence to determine the source of any conflict minerals used in our products. We may face difficulties in satisfying customers who may require that all of the components of our products are certified as conflict mineral free or free of numerous other hazardous materials.

Risks Relating to Our Ordinary Shares
 
Volatility of the market price of our ordinary shares could adversely affect our shareholders and us.
 
The market price of our ordinary shares has been, and is likely to be, highly volatile and could be subject to wide fluctuations in response to numerous factors, including the following:
 
·
actual or anticipated variations in our quarterly operating results or those of our competitors;
 
·
announcements by us or our competitors of technological innovations or new and enhanced products;
 
·
developments or disputes concerning proprietary rights;
 
·
introduction and adoption of new industry standards;
 
·
changes in financial estimates by securities analysts;
 
·
market conditions or trends in our industry;
 
·
changes in the market valuations of our competitors;
 
·
announcements by us or our competitors of significant acquisitions;
 
·
entry into strategic partnerships or joint ventures by us or our competitors;
 
·
additions or departures of key personnel;
 
·
political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events; and
 
·
other events or factors in any of the countries in which we do business, including those resulting from war, incidents of terrorism, natural disasters or responses to such events.
 
In addition, the stock market in general, and the market for Israeli companies and homeland security companies in particular, has been highly volatile.  Many of these factors are beyond our control and may materially adversely affect the market price of our ordinary shares, regardless of our performance.  In the past, following periods of market volatility, shareholders have often instituted securities class action litigation relating to the stock trading and price volatility of the company in question.  If we were involved in any securities litigation, it could result in substantial cost to us to defend and divert resources and the attention of management from our business.
 
The FIMI Partnerships owned approximately 43% of our outstanding ordinary shares as of April 12, 2019. For as long as FIMI has a controlling interest in our company, it will have the ability to exercise a controlling influence over our business and affairs, including any determinations with respect to potential mergers or other business combinations involving us, our acquisition or disposition of assets, our incurrence of indebtedness, our issuance of any additional ordinary shares or other equity securities, our repurchase or redemption of ordinary shares and our payment of dividends. Because the interests of FIMI may differ from the interests of our other shareholders, actions taken by FIMI with respect to us may not be favorable to our other shareholders.
 
11


We have not distributed dividends in the past.
 
While we have historically retained our earnings to finance operations and expand our business, we have not determined whether we will maintain such policy for the future.  According to the Israeli Companies Law, a company may distribute dividends out of its profits (as defined by the Israeli Companies Law), provided that there is no reasonable concern that such dividend distribution will prevent the company from paying all its current and foreseeable obligations, as they become due, or otherwise upon the permission of the court.  The declaration of dividends is subject to the discretion of our board of directors and would depend on various factors, including our operating results, financial condition, future prospects and any other factors deemed relevant by our board of directors.  You should not rely on an investment in our company if you require dividend income from your investment.
 
As a foreign private issuer whose shares are listed on the NASDAQ Global Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.  We follow Israeli law and practice instead of NASDAQ rules regarding the director nomination process, compensation of executive officers and the requirement that our independent directors have regularly scheduled meetings at which only independent directors are present.
 
As a foreign private issuer whose shares are listed on the NASDAQ Global Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of The NASDAQ Stock Market Rules.  We follow Israeli law and practice instead of NASDAQ rules regarding the director nomination process, compensation of executive officers and the requirement that our independent directors have regularly scheduled meetings at which only independent directors are present.  As a foreign private issuer listed on the NASDAQ Global Market, we may also follow home country practice with regard to, among other things, the composition of the board of directors and quorum at shareholders’ meetings.  In addition, we may follow home country practice instead of the NASDAQ requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company).  A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws.  In addition, a foreign private issuer must disclose in its annual reports filed with the SEC, each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement.  Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.

We may in the future be classified as a passive foreign investment company, or PFIC, which will subject our U.S. investors to adverse tax rules.
 
U.S. holders of our ordinary shares may face income tax risks. There is a risk that we will be treated as a “passive foreign investment company” or PFIC.  Our treatment as a PFIC could result in a reduction in the after-tax return to the holders of our ordinary shares and would likely cause a reduction in the value of such shares. A foreign corporation will be treated as a PFIC for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive income,” or (2) at least 50% of the average value of the corporation’s gross assets produce, or are held for the production of, such types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income”. If we are treated as a PFIC, U.S. Holders of shares (or rights) would be subject to a special adverse U.S. federal income tax regime with respect to the income derived by us, the distributions they receive from us, and the gain, if any, they derive from the sale or other disposition of their ordinary shares (or rights). In particular, any dividends paid by us, if any, would not be treated as “qualified dividend income” eligible for preferential tax rates in the hands of non-corporate U.S. shareholders.  We believe that we were not a PFIC for the taxable year of 2018.  However, since PFIC status depends upon the composition of our income and the market value of our assets from time to time, there can be no assurance that we will not become a PFIC in any future taxable year. U.S. Holders should carefully read Item 10E. “Additional Information – Taxation” for a more complete discussion of the U.S. federal income tax risks related to owning and disposing of our ordinary shares (or rights).
 
12


Risks Relating to Our Location in Israel 
 
Political, economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of operations and adversely affect our share price.
 
We are incorporated under the laws of Israel and our principal executive offices, as well as approximately one-third of our manufacturing and research and development facilities are located in the State of Israel.  As a result, political, economic and military conditions affecting Israel directly influence us.  Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel could adversely affect our business, financial condition and results of operations.
 
Conflicts in North Africa and the Middle East, including in Egypt and Syria which border  Israel, have resulted in continued  political uncertainty and violence in the region. Efforts to improve Israel’s relationship with the Palestinian Authority have failed to result in a permanent solution, and there have been numerous periods of hostility in recent years. In addition, relations between  Israel and Iran continue to be seriously strained, especially with regard to Iran’s nuclear program. Such instability may affect the local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations. To date, these matters have not had any material effect on our business and results of operations; however, the regional security situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future.
 
Furthermore, we could be adversely affected by the interruption or reduction of trade between Israel and its trading partners.  Some countries, companies and organizations continue to participate in a boycott of Israeli companies and others doing business with Israel or with Israeli companies.  As a result, we are precluded from marketing our products to these countries, companies and organizations.  Foreign government defense export policies towards Israel could also make it more difficult for us to obtain the export authorizations necessary for our activities.  Over the past several years there have also been calls in Europe and elsewhere to reduce trade with Israel.  Restrictive laws, policies or practices directed towards Israel or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion of our business.
 
Our results of operations may be negatively affected by the obligation of our personnel to perform reserve military service.
 
Many of our employees and some of our directors and officers in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and may be called for active duty under emergency circumstances at any time.  If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time.  Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of other employees due to military service.  Any disruption in our operations could adversely affect our business.
 
The rights and responsibilities of the shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
 
We are incorporated under Israeli law.  The rights and responsibilities of holders of our ordinary shares are governed by our Memorandum of Association and Articles of Association and by Israeli law.  These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations.  In particular, a shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters.  Israeli law provides that these duties are applicable in shareholder votes on, among other things, amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and interested party transactions requiring shareholder approval.  In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company.  However, Israeli law does not define the substance of this duty of fairness.  There is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
 
13

 
Provisions of Israeli law may delay, prevent or make difficult a change of control and therefore depress the price of our shares.
 
Some of the provisions of Israeli law could discourage potential acquisition proposals, delay or prevent a change in control and limit the price that investors might be willing to pay in the future for our ordinary shares. Israeli corporate law regulates mergers and acquisitions of shares through tender offers, requires approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore, Israel tax law treats stock-for-stock acquisitions between an Israeli company and a foreign company less favorably than does U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in a foreign corporation to immediate taxation or to taxation before his investment in the foreign corporation becomes liquid. These provisions may adversely affect the price of our shares.
 
Our shareholders generally may have difficulties enforcing a U.S. judgment against us, our executive officers and directors and some of the experts named in this annual report, or asserting U.S. securities law claims in Israel.
 
We are incorporated in Israel and all of our executive officers and directors named in this annual report reside outside the United States. Service of process upon them may be difficult to effect within the United States. Furthermore, since substantially all of our assets and all of our directors and officers are located outside the United States, any judgment obtained in the United States against us or these individuals may not be collectible within the United States and may not be enforced by an Israeli court. It also may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel.
 
There is doubt as to the enforceability of civil liabilities under the Securities Act and the Securities Exchange Act in original actions instituted in Israel.  However, subject to certain time limitations and other conditions, Israeli courts may enforce final judgments of U.S. courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions of those and similar acts.
 
ITEM 4.
Information on the Company
 
A.            History and Development of the Company. 
 
We were incorporated under the laws of the State of Israel on March 27, 1984 under the name Magal Security Systems Ltd.  We are a public limited liability company under the Israeli Companies Law, 5759-1999, and operate under this law and associated legislation.  Our principal executive offices are located near Tel Aviv, Israel, in the Yehud Industrial Zone.  Our mailing address is P.O. Box 70, Industrial Zone, Yehud 5621617, Israel and our telephone number is +972-3-539-1444.  Our agent for service of process in the United States is Senstar Inc., 13800 Coppermine Road, Second Floor, Herndon, Virginia 20171. Our website address is www.magalsecurity.com . The information on our website is not incorporated by reference into this annual report.
 
We are a leading international provider of products and solutions for physical security, safety and site management. We commenced operations in 1969 as a department of Israel Aircraft Industries Ltd., specializing in perimeter security systems and have delivered products, tailor-made solutions and turnkey projects to thousands of satisfied customers in over 100 countries in some of the world’s most demanding locations.
 
We offer broad portfolio of homegrown Perimeter Intrusion Detection Systems (PIDS),Video Management Software (VMS), Intelligent Video Analytics (IVA), technology and cyber security solutions. Our offering is complemented by our comprehensive integrated solutions for critical sites, managed by Fortis 4G – our 4 th generation cutting edge Physical Security Information Management system (PSIM).
 
14

 
We intend to increase our revenues in the perimeter products segment as well as the VMS/IVA segments by (i) locating new channels to promote and market our products; (ii) maintaining technology leadership; (iii) investing in research and development; (iv) entering into OEM agreements; and (v) acquiring new technologies independently or through mergers and acquisitions.
 
In April 2018, we completed the acquisition of a 55% controlling interest in ESC BAZ Ltd. an Israeli-based company, focused on the development and manufacturing of military-grade smart security video observation and surveillance systems .

In April 2016, we acquired Aimetis, a Canadian-based company, which specializes in advanced video analytics software and intelligent IP video management software (VMS). In July 2017 we amalgamated our two Canadian subsidiaries. Following the amalgamation, the company maintained the name Senstar Corporation.

In April 2014, we acquired a U.S. based fiber-optic technology company which provides advanced solutions for sensing, security, and communication. In January 2013, we purchased CyberSeal Ltd., an Israeli cyber security company whose products and services complement our physical security products and services.

Our capital expenditures (not including acquisition costs) for the years ended December 31, 2016, 2017 and 2018 were approximately $0.8 million, $0.9 million and $2.1 million, respectively.

B.            Business Overview.
 
Overview and Strategy
 
We develop, manufacture, market and sell comprehensive lines of perimeter intrusion detection sensors, physical barriers, video analytics and video management systems, cyber security products and systems as well as security video observation and surveillance systems to high profile customers.  Our systems are used in more than 100 countries to protect sensitive facilities, including national borders, military bases, power plants, airports, seaports, prisons, industrial sites, large retailer organizations, banks, oil and gas facilities, sporting events including athlete villages and stadiums, and municipalities from intrusion, terror, crime, sabotage or vandalism to infrastructure, assets and personnel.
 
Based on our decades of experience and interaction with customers, we have developed a comprehensive set of solutions and products, optimized for perimeter, outdoor and general security applications.  Our portfolio of mission critical infrastructure and site protection technologies includes a variety of smart fences and barriers, fence mounted sensors, fence mounted sensors with perimeter lighting, virtual (volumetric) fences and gates, buried and concealed detection systems and tunneling sensors to secure prisons, bank vaults and pipelines.  We deliver comprehensive IP technology and traditional closed circuit television, or CCTV, solutions, supported by our own advanced Video Management Software, or VMS solutions, which include Video Motion Detection, or VMD and Intelligent Video Analytics, or IVA.
 
Since the addition of Aimetis’ products and expertise, we were able to address new markets and offer solutions incorporating advanced video analytics and VMS for physical indoor and outdoor security applications. Since the addition of the newly acquired state of the art technology and expertise, we were able to expand our overall solution, offer a wider range of products in addition to our PSIM, PIDS and Cyber solutions, and address new markets.
 
Our primary objective is to become a leading international solution provider of security products and site security management solutions.  To achieve this objective, we are implementing a business strategy incorporating the following key elements:
 
·
Leverage existing customer relationships.  We believe that we have the capability to offer certain of our customers a comprehensive security package.  As part of our product development process, we seek to maintain close relationships with our customers to identify market needs and to define appropriate product specifications.  We intend to expand the depth and breadth of our existing customer relationships while initiating similar new relationships. Our VMS offering is an excellent opportunity to revisit our existing customers.
 
15

 
·
Refine and broaden our product portfolio.  We have identified the security needs of our customers and intend to enhance our current products’ capabilities, develop new products, acquire complementary technologies and products and enter into OEM agreements with third parties in order to meet those needs.
 
·
Refine and broaden our integration and turnkey delivery capabilities.  As a solution provider we depend on our capability to tailor specific solutions for each customer.  Our integration building blocks and our execution skills are key factors in achieving our growth and profitability.
 
·
Develop and enhance our presence in new and existing verticals. We intend to enhance our presence in vertical markets as pharmaceutical marijuana , oil and gas   terminals and infrastructure. Both verticals are highly regulated and require unique security solutions. As a solution provider with a wide selection of security technologies and products we believe that we can offer a comprehensive security solution that meets the standards required by the applicable regulations. Additionally, we intend to improve our position in a number of legacy vertical markets, such as correctional, utilities and transportation.
 
·
Enhance our presence in emerging markets. We intend to enhance our presence in emerging markets such as India and China, in order to increase our exposure to small and medium size business opportunities for both our perimeter products and solutions and turnkey projects segments.
 
·
Strengthen our presence in existing markets .   We intend to increase our marketing efforts in our existing markets mainly in North America and the APAC region and to acquire or invest in complementary businesses and joint ventures
 
Emerging Opportunities
 
We believe that the proliferation of digital communication and information technology into the security market provides us with the opportunity to consolidate safety and site management with security applications.  Cities and municipalities, air and sea ports, chemical factories, sporting event villages and stadiums, and critical infrastructure sites are currently utilizing the benefits of this approach to security management.  This integration allows users to share diverse sensors (such as cameras and emergency buttons), IT systems, traffic management tools, Cyber solutions and other resources and feed them into a single command and control platform. Users from different departments within organizations can now share the same information, allowing for improved communication and coordination, whether it is a routine operation or crisis situation.  We believe that we are well positioned and are in the forefront of this emerging market opportunity.  We can also address the increasing cyber threats that the trend towards networking imposes on sites we traditionally protect with physical security.
 
The unrest in Africa and the Middle East along with terrorist actions by ISIS, Boco Haram and El Shabab and massive migration of refugees may generate new requirements in these regions and in Europe.
 
Products and Services
 
General
 
Our principal physical, VMS, and cyber security products and solutions include:
 
·
Perimeter Intrusion Detection Systems (PIDS);
 
·
PIDS fence sensor with perimeter LED based lighting;
 
·
VMS, including IVA applications;
 
·
CCTV systems, including a perimeter security robotic camera platform;
 
·
Security Video Observation & Surveillance systems;
 
16

 
·
Pipeline security, third party interference (TPI);
 
·
Cyber security systems for security networks;
 
·
Life safety/duress alarm systems;
 
·
Command and control systems; and
 
·
Miscellaneous systems tailored for specific vertical market needs.
 
The following table shows the breakdown of our consolidated revenues for the calendar years 2016, 2017 and 2018 by operating segments:
 
   
Year ended December 31,
 
   
2016
   
2017
   
2018
 
   
(In thousands)
 
Products          
 
$
32,372
   
$
22,301
   
$
27,626
 
Turnkey projects          
   
31,823
     
34,742
     
57,072
 
Video & Cyber security           
   
5,626
     
8,350
     
9,461
 
Eliminations          
   
(1,996
)
   
(1,101
)
   
(1,557
)
Total          
 
$
67,825
   
$
64,292
   
$
92,602
 
 
Perimeter Security Products
 
Perimeter security products enable customers to monitor, limit and control access by unauthorized personnel to specific regions or areas.  High-end perimeter products are sophisticated in nature and are used for correctional facilities, borders, nuclear and conventional power plants, air and sea ports, military installations and other high security installations.
 
Our line of perimeter security products utilizes sophisticated sensor devices to detect and locate intruders and identify the nature of intrusions.  Our perimeter security products have been installed along tens of thousands of kilometers of borders and facility boundaries throughout the world, including more than 600 correctional institutions and prisons in the United States and several other countries.  We have installed several hundred kilometers of high security smart perimeter systems along Israel’s borders.
 
Our line of outdoor perimeter security products consists of the following:
 
·
Fence mounted detection systems – mechanical sensors, “microphonic” wire sensors, fiber optic sensors and electronic ranging sensors;
 
·
Smart barriers – a variety of robust detection grids, gates and innocent looking fences, designed to protect water passages, VIP residences and other outdoor applications;
 
·
Buried sensors – volumetric buried cable sensors for PIDS and seismic and fiber sensors to secure pipelines and critical assets against digging, and a new fiber based pipeline leak detection system;
 
·
Taut wire – hybrid perimeter intrusion detection system with physical barrier;
 
·
Electrical field disturbance sensors (volumetric);
 
·
Microwave sensors; and
 
·
Our new hybrid perimeter intrusion detection and intelligent lighting system.
 
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Fence Mounted Detection Systems
 
We offer various types of detection systems. While less robust than taut wire installations, the adaptability of these systems to a wide range of pre-existing barrier structures makes these products viable alternatives for cost-conscious customers.  Our detection devices are most effective when installed on common metal fabric perimeter systems, such as chain link or welded mesh. In our BARRICADE system, electro-mechanical sensors are attached to fence panels approximately three meters apart on any of several common types of fence structures.  Once attached to the fence, each sensor detects vibrations in the underlying structures.  The sensor system’s built-in electro-mechanical filtering combines with system input from a weather analysis to minimize the rate of false alarms from wind, hail or other sources of nuisance vibrations.  Our most recent product is the FENSOR  –  an accelerometer based fence mounted detection system that is capable of locating the exact location of an intrusion within 3 meters and is optimized for rigid fences such as palisade.
 
FlexZone, our latest coaxial cable based fence mounted ranging sensor can pinpoint intrusions to within ±3 m (±10 ft); it provides long physical cable lengths (up to 600 m per processor) configurable through software to many smaller virtual zones. Power and data between processors is supported through the sensor cable and thus it reduces the requirement for supporting infrastructure. A novel wireless gate sensor module is available with FlexZone providing an accelerometer based gate sensor integrated via wireless communications into a FlexZone network eliminating the need to have sensor cables attached to sliding gates.

Intelli-FIBER is a zone based fence mounted detection system based on a fiber optic sensor. During 2014, we acquired a U.S. based company with advanced fiber technology and completed the merger of its business into the group. This acquisition added new state-of-the-art products, designed for mid and long range perimeters under the product family name FiberPatrol.

Buried Sensors

Omnitrax is a fifth generation covert outdoor perimeter security intrusion detection sensor that generates an invisible radar detection field around buried sensor cables.  An alarm is emitted and the exact location identified within one meter if an intruder disturbs the field.  Targets are detected by their conductivity, size and movement and the digital processor is able to filter out nuisance alarms that could be caused by environmental conditions and small animals.
 
FiberPatrol, our new fiber product, is also offered to protect pipelines against sabotage  or accidental third party interference (TPI). FiberPatrol has the capability to protect up to 80 km of a pipeline with a single processor.
 
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Taut Wire Perimeter Intrusion Detection Systems
 
Our taut wire perimeter systems consist of wire strung at high tension between anchor posts.  Sensor posts are located at the middle between anchor posts.  These sensor posts contain one or more devices that detect changes in the tension being exerted on and by the taut wires.  Any abnormal force applied against these wires or released from them (such as by cutting) automatically triggers an alarm. Taut wire technology provides three critical elements of protection against unauthorized intruders: deterrence, detection and delaying (until first responders may react and intercept the intruder).
 
Our sealed sensors are not affected by radio frequency interference, climatic or atmospheric conditions, or electrical transients from power lines or passing vehicles. The sensors self-adjust to, or remain unaffected by, extreme temperature variation, minor soil movements and other similar environmental changes that might trigger false alarms in less sophisticated systems. Our taut wire perimeter systems are designed to distinguish automatically between fence tension changes such as caused by small animals, violent weather or forces more typically exerted by a human intruder.
 
Our taut wire perimeter systems offer customers a wide range of installation options. Sensor posts can be as far as 200 feet apart, with relatively inexpensive ordinary fence support posts and anchor posts between them. These systems may stand alone, be mounted on a variety of fence posts or added to an existing wall or other structure, or mounted on short posts, with or without outriggers.
 
Taut wire perimeter systems have been approved by various Israeli and U.S. security and military authorities.  We have installed several hundred kilometers   of these perimeter systems along Israel’s borders to assist in preventing unauthorized entry and infiltration.
 
Electro-static Field Disturbance Sensors
 
Terrain following volumetric sensors can detect intrusions before the intruder touches the sensor.  They can be installed on buildings, free-standing posts, existing fences, walls or rooftops, and will sense changes in the electrostatic field when events, such as intruders penetrating through the wires, take place.  The system’s tall, narrow, well contained detection zone allows the sensor to be installed in almost any application and minimizes nuisance alarms caused by nearby moving objects.  Our flagship product is X-Field; it consists of a set of four to as many as eight parallel field generating and sensing wires that can form a volumetric detection field as much as 5m (16.4’) in height.
 
Microwave Products
 
We also offer a K-band all digital bi-static microwave system, designed for stable, reliable operation in extreme outdoor environments.  Coverage distance range from 5 meters to 200 meters. Older generations of X band microwaves are retired but still supported.
 
Hybrid Perimeter Intrusion Detection and Intelligent Lighting System
 
The Senstar LM100 is the world’s first 2-in-1 perimeter intrusion detection and intelligent lighting system. Combining high performance LED lighting with accelerometer-based sensors, the LM100 deters potential intruders by detecting and illuminating them at the fence line.
 
Video and Cyber Security
 
VMS / IVA Solutions
 
Senstar Symphony 7, scheduled for release in first half 2019, has been designed to become a new benchmark for intelligent Video Management Software (VMS). The Symphony software package includes a proprietary seamless set of EAC Electronic Access Control (EAC) features.  Symphony Access Control will provide  control over a broad array of security functions, integrating Symphony’s VMS feature set to one of the broadest arrays of trusted hardware brands for access control, intrusion, HVAC and elevator control.
 
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Senstar Symphony 7 is highly scalable, easy to set up and use, and can be used in both single server installations and multi-server deployments. Symphony 7 offers web-based administrator capabilities, centralized cloud management, native analytics applications which include motion tracking, auto-PTZ (pan–tilt–zoom) tracking, people counting,  and high security and server and storage failover which reduces the need for expensive Microsoft clustering and extra servers. We intend to expand the Symphony product line over time to address a broad new market of applications.
 
Our intelligent video analytics (IVA) transforms IP video into more than a passive monitoring tool with video analytics that are seamlessly incorporated into Senstar Symphony 7. Each video analytic is specially designed for physical security and business intelligence applications, providing value across many vertical markets.
 
Our intelligent video analytics (IVA) capabilities include:
 
·
Face Recognition - A robust video analytic, ideally suited for securing facilities that require a stronger layer of protection for access control. With real-time alarms and intuitive searching when paired with Senstar Symphony, the Face Recognition video analytic transforms what is possible with a video surveillance system.
 
·
Automatic License Plate Recognition - Automatically recognize and record vehicle license plates from over 100 countries. Set alarms for specific plates to deny or approve entry.
 
·
Outdoor People and Vehicle Tracking - Detect and track all moving objects and classify them as a person, vehicle, or unknown. Movement tracks are recorded to know exactly where each object came from and where it left the camera’s point-of-view.
 
·
Left and Removed Item Detection - Monitor changes in an environment to detect when objects are added or removed from a scene. Set alarms to notify security staff when an item has been removed from an area or left unattended for a designated amount of time. This solution designed for use in airports, train stations, and other public spaces.
 
·
Indoor People Tracking - Detect and track people moving within the frame of a camera. Alarms can be set when unauthorized entry into an area is detected and dwell times can be tracked and recorded for the detection of unwanted loitering. Heat maps can also be created in retail stores and public spaces to determine areas of highest traffic and interest.
 
·
Crowd Detection - Real-time occupancy estimation for indoor and outdoor deployments, ideal for monitoring public spaces, event venues, and capacity restricted environments. Crowd Detection also offers numerous business intelligence applications.
 
·
PTZ Auto-Tracking (Auto PTZ) - Auto PTZ can automatically control a PTZ camera, enabling it to zoom in and follow moving people and vehicles within the field of the camera. This is designed for use in outdoor perimeter monitoring and provides a closer look at people and vehicles for future forensic purposes.
 
Hardware solutions offered supporting our VMS software products are an “R series” of preconfigured servers, “E series” of physical appliances for smaller applications and a novel POE powered Thin Client device for convenient network access for monitors or other applications.
 
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Cyber Security
 
Our solutions monitor, detect and protect against abnormal network activity, both landline and wireless, within and close to protected sites. Our current solutions are:
 
·
Tungsten – A hardened managed edge switch with built in security capabilities to monitor unauthorized traffic which is optimized for outdoors security and ICS networks (Industrial Control System); and
 
·
Rubidium – An easily operated SIEM (Security Information & Event Management) application, designed to manage an array of Tungsten products as well as third party network and cyber monitoring devices.
 
Perimeter Security Robot
 
In 2014, we introduced our new concept for perimeter security called RoboGuard, a robotic platform that runs on an elevated rail along the perimeter of protected sites or border lines, carrying an assortment of sensors. The robot can respond promptly and rush to the exact zone or location where intrusions are suspected, or automatically patrol and inspect fence integrity, looking for holes or suspicious nearby objects by using a sophisticated laser scanner. The robot is powered by a battery which is recharged automatically.
 
A typical RoboGuard configuration includes:
 
·
One or two fixed cameras with IR illuminators for fence surveillance;
 
·
One PTZ camera with IR illuminator; and
 
·
Two-way intercom in order to communicate with intercepted would-be intruders.
 
Other Products
 
Life Safety / Duress Alarm Systems
 
Our products include high reliability, personal, portable duress alarm systems to protect personnel in prisons.  These products identify individuals in distress and can pinpoint the location of the distress signal with an indoor-to-outdoor and floor-to-floor accuracy unmatched by any other product.
 
Flash and Flare personal emergency locating systems use radio frequency technology to provide a one touch emergency system that can be worn on a belt, or used with our newly released pendant style alarm initiation device  The systems, sold to prisons, consist of transmitters that send distress signals to receivers mounted throughout the building.  Receivers relay the signal to a central location, indicating that someone requires assistance and their exact location in the building.  As a radio frequency based product, it can also perform its function in outdoor areas surrounding a building. The systems employ an automated testing mechanism that helps to reduce maintenance costs.
 
PAS is another personal alarm system that uses an ultrasonic based emergency notification system. The system, sold mainly to prisons in the United States, allows individuals moving throughout a facility to quickly indicate location of an indoor crisis situation.
 
CCTV Systems
 
We have a proven track record in delivering CCTV and IVA solutions that are designed for use in outdoor applications. Following the ESC BAZ and Aimetis acquisitions, our VMS outdoor and indoor solutions present advanced technologies. These capabilities are now fully embedded as part of our Fortis4G Physical Security Information Management (PSIM) system.
 
21

 
Following the ESC BAZ acquisition, our portfolio includes a wide range of modular and customizable medium and long range dual technology (thermal Imaging and CCD) surveillance systems for distances of 500m up to 25km. These surveillance systems include:
 
·
AVIV - a short to mid-range surveillance system designed for perimeter defense and border protection.
 
·
Giraffe - a long-range surveillance system designed to provide powerful Intelligence, Surveillance and Reconnaissance capabilities (ISR) for commercial ports and merchant ships.
 
·
TOM Vehicle - a vehicle-mounted surveillance system that offers any type of patrol vehicle patrol vehicles a high quality, mobile video surveillance unit that gives vehicles operators real-time video enabling them to be fully aware of what is happening outside and around the vehicle.
 
·
Hawk-Eye - a surveillance system, designed for perimeter defense and border protection. It is ideal for strategic locations such as airports, borders, critical utilities, nuclear plants and oil refineries.
 
·
C-HAWK - a surveillance system designed for maritime environments, such as civilian ports and ships that are often difficult to protect.
 
·
MODOS - a discreet early-warning multi-sensor intruder detection and observation system that includes motion-detection radar, seamlessly integrated with an AVIV Video Surveillance system that can play a significant role in urban security architecture.
 
Command and Control Systems
 
The development of communication and IT technology has significantly affected the security market.  Multiple security systems and technologies, sometimes supplied by different vendors, can now be integrated into a unified command and control system.  We offer three types of command and control systems:
 
·
Fortis 4G – a fourth generation high-end comprehensive command and control system;
 
·
StarNet 2 –  our security management system, or SMS, was launched in the latter part of 2015 and replaces the legacy StarNet 100; and
 
·
Network Manager – a middleware (software) package which is essential for integration with 3rd party control systems and offers an entry level alarm management system called AIM.
 
Fortis 4G
 
FORTIS 4G is our PSIM system.  It is a comprehensive, wide area and real time command and control solution, designed for entities requiring management of security, safety and site management as well as cyber events (Integrated PSIM with SEIM).  It is designed to manage daily routines and site activities, security, regular and irregular events as well as crisis situations.
 

22

 
FORTIS 4G architecture integrates with legacy systems and sensors from the physical and logical (cyber) levels through a configuration and business logic layer and up to the situational awareness and management levels.  It is based on a strong GIS engine (Geospatial Information System), which creates a common layer for inputs, outputs and presentation.  The GIS engine enables the display of synchronized information in time and space across all screens such as location of mobile forces, located alarms from stationary sensors, video of related cameras, pop-ups of associated radar screens and managed voice communication related to the managed area.  Real-time information enables security personnel to respond immediately, while maintaining a full two-way communication and situational awareness between the command and control center(s) and the first responder(s). The target markets for Fortis 4G are safe city applications airports, seaports border and homeland security applications. Fortis 4G incorporates the Symphony advanced video management system with its full suite of native IVA features:
 
·
Our investments in IVA tools help eliminate dependency on constant human monitoring.  Automatic tools and algorithms extract abnormalities and only irregular events are transferred and analyzed for verification.  This approach saves bandwidth and storage and more importantly requires human intervention only when needed.
 
·
Our IVA / VMD have been developed to meet the challenge of the outdoor environment (such as weather effects, moving objects like trees, glare and flashing lights).
 
·
Our video solutions have a proven track record in high-end vertical markets that require outdoor security such as military bases, government organizations, airports, seaports, mass transportation, correctional facilities, utilities, banks, retail chains, hospitals and industrial sites.
 
StarNet 2
 
StarNet 2, an SMS, is designed to manage basic sites, consisting of a PIDS with a few other devices.
 
Network Manager
 
Network Manager is a middleware (software) package interfacing between our family of PIDS sensors and any command and control solution, be it our own system or an external third party application. It is provided to integrators with a full software development kit to enable fast integration of our PIDS into any other SMS and physical security information system.  It offers an entry level operator display system called the Alarm Information Module (AIM), typically for management of a single PIDS sensor.
 
Marketing, Sales and Distribution
 
We believe that our reputation as a vendor of sophisticated security products in one of the world’s most security conscious countries often provides us and our sales representatives with direct access to senior government and corporate officials in charge of security matters elsewhere.
 
Our sales efforts focus on:
 
·
PIDS products  are sold indirectly through system integrators and distribution channels.  Due to the sophistication of our products, we often need to approach end-users directly and be in contact with system integrators; however, sales are directed through third-parties.
 
·
Video and Cyber Security.  Video management system software licenses, the associated maintenance and support services, as well as Cyber security products are sold primarily through locally based distributor partners. Some key accounts are managed directly with the end-users.
 
·
Projects.  This part of the business deals with end-customers or high-end system integrators.  We offer full comprehensive solutions, which include our in-house portfolio of products and products manufactured by third parties.  Solutions are focused around our core competencies -outdoor and cyber security, safety and site management, VMS and IVA applications.  In many cases we take responsibility for the full turnkey solution and we integrate and deliver a full solution, including civil works infrastructure, installation, training, warranty and after sale support. Cyber security solutions are now offered as an integrated part of our comprehensive solutions.
 
In addition to our main facilities in Israel, Canada, the United States and Mexico, we have sales and technical support offices in India, the United Kingdom, Germany, Spain, China, the Philippines and other countries.
 
23

 
Customers 
 
The following table shows the geographical breakdown of our consolidated revenues for the three years ended December 31, 2018:
 
   
Year Ended December 31,___
 
   
2016
   
2017
   
2018
 
   
(In thousands)
 
Israel          
 
$
8,727
   
$
9,599
   
$
13,577
 
North America          
   
23,467
     
15,547
     
24,324
 
Europe          
   
8,330
     
11,232
     
14,021
 
South and Latin America          
   
10,364
     
13,152
     
25,471
 
Africa          
   
7,585
     
9,370
     
7,126
 
Others          
   
9,352
     
5,392
     
8,083
 
Total          
 
$
67,825
   
$
64,292
   
$
92,602
 
 
For the years ended December 31, 2016, 2017 and 2018, revenues generated from sales to the MOD and IDF accounted for 8.6%, 10.2% and 10.9% of our revenues, respectively. In addition, revenues from the national electricity company in Latin America, or CFE accounted for 11.9%, 14.6% and 25.3% of our revenues in 2016, 2017 and 2018, respectively. We cannot assure you that any of our major customers will maintain their level of business with us or that, if such business is reduced, other customers generating similar revenues will replace the lost business. The failure to replace these customers with one or more customers generating similar revenues will have a material adverse effect on our financial results.

Installation, Support and Maintenance
 
Our systems are installed by us or by an integrating partner or in some cases by the customer after appropriate training, depending on the size of the specific project and the location of the customer’s facilities, as well as prior experience with our systems. We generally provide our customers with training on the use and maintenance of our systems, that we conduct either on-site or at our facilities. In addition, some of our local perimeter security products customers have signed maintenance contracts with us. The life expectancy of a high-security perimeter system is approximately ten years. Consequently, many miles of perimeter systems need to be replaced each year.
 
For systems installed outside of Israel, maintenance is provided by our local subsidiaries, by an independent third party, by partners or by the end-user. We also provide services, maintenance and support on an “as needed” basis. During the years ended December 31, 2016, 2017 and 2018, we derived approximately 20.4%, 26.7% and 19.3% of our total revenues, respectively, from maintenance and services.
 
Research and Development; Royalties
 
We place considerable emphasis on research and development to improve our existing products and technology and to develop new products and technology.  We believe that our future success will depend upon our ability to enhance our existing products and technology and to introduce on a timely basis new commercially viable products and technology addressing the needs of our customers.  We intend to continue to devote a significant portion of our personnel and financial resources to research and development.  As part of our product development process, we seek to maintain close relationships with our customers to identify market needs and to define appropriate product specifications.  Our development activities are a direct result of the input and guidance we receive from our marketing personnel during our annual meetings with such personnel.  In addition, the heads of research and development for each of our development centers discussed below meet annually to identify market needs for new products.
 
24

 
We have development centers in Israel, Canada and the United States, each of which develops products and technologies based on its area of expertise.
 
Our research and development expenses during 2016, 2017 and 2018 were $6.8 million, $6.6 million and $6.9 million, respectively.  In addition to our own research and development activities, we also acquire know-how from external sources.  We cannot assure you that any of our research and development projects will yield profitable results in the future.
 
Manufacturing and Supply
 
Our manufacturing operations consist of engineering, fabricating, assembly, quality control, final testing and shipping of finished products.  Substantially all of our manufacturing operations are currently performed at our facilities in Canada and Israel. In 2018 we launched a “Made in USA” version of our FlexZone product to better serve our US- based partners and customers.   See Item 4D. “Information on the Company – Property, Plants and Equipment.”
 
We acquire most of the components utilized in our products, including our turnkey products, and certain services from a limited number of suppliers and subcontractors.  We cannot assure you that we will continue to be able to obtain such items from these suppliers on satisfactory terms.  Alternative sources of supply are available, and therefore we are not dependent upon these suppliers and subcontractors.  We also maintain an inventory of systems and spare parts in order to enable us to overcome potential temporary supply shortages until an alternate source of supply is available.  Nevertheless, temporary disruptions of our manufacturing operations would result if we were required to obtain materials from alternative sources, which may have an adverse effect on our financial results.
 
Competition
 
PIDS Sensors.  The principal factors affecting competition in the market for security systems are a system’s high probability for detection and low probability of false and nuisance alarms.  We believe that a manufacturer’s reputation for reliable equipment is a major competitive advantage, and that such a reputation will usually be based on the performance of the manufacturer’s installed systems.  Additional competitive factors include quality of customer support, maintenance and price.
 
The PIDS market is very fragmented.   Our most frequently encountered competition includes EL-FAR Electronics Systems   2000 LTD. and Afcon Security and Parking Ltd. in Israel and outside of Israel our competitors include Southwest Microwave Inc., Future Fiber Technologies, Fiber Sensys Inc., Geoquip Ltd., GPS Standard SpA, CIAS Elettronica Srl, Sorhea   and   Gallagher (New Zealand).
 
We believe that our principal competitors for our pipeline security products (FiberPatrol) are; Future Fibre Technologies Pty. Ltd., Optasense, a QinetiQ Company, Omnisens SA, and Fotech Solutions Ltd; and that our principal competitors for personal emergency location systems are Actall Corp., Bosch LLC and Visonic Networks.
 
The video management software market is well developed internationally with several large manufacturers.  Our most frequently encountered competitors are Genetec Inc., Avigilon Corp., Milestone Systems A/S, and SeeTec GmbH.  There are a large number of entrants into the cyber security market which is expected to mature over the next few years.
 
Indirect competition from competing technologies such as Ground Based Radar and thermal cameras as sensors with principle competitors being, Spotter RF, Navtech, and FLIR.
 
Turn Key Projects and Solutions .   Thousands of solution providers offer security products and services.  Most of the integrators focus on indoor applications, but some also offer outdoor solutions.  Most of the market players are local to their countries; however, some are global, such as ADT, Honeywell, Johnson Controls and Siemens.  In some cases, we may cooperate with global integrators or may supply equipment to them.  We believe that our principal competitors in Israel for security solutions are C. Mer Industries Ltd., Afcon Industries Ltd., Shamrad Electronics (1977) Ltd., EL-FAR Electronics Systems 2000 LTD and Orad Ltd.
 
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Some of our competitors and potential competitors have greater research, development, financial and personnel resources, including governmental support, or more extensive business experience than we do.  We cannot assure you that we will be able to maintain the quality of our products relative to those of our competitors or continue to develop and market new products effectively.
 
Intellectual Property Rights 
 
We have 24 patents issued and have 8 patent applications pending in the U.S. and in several other countries and have obtained licenses to use proprietary technologies developed by third parties.  We cannot assure you:
 
·
that patents will be issued from any pending applications, or that the claims allowed under any patents will be sufficiently broad to protect our technology;
 
·
that any patents issued or licensed to us will not be challenged, invalidated or circumvented; or
 
·
as to the degree or adequacy of protection any patents or patent applications may or will afford.
 
In addition, we claim proprietary rights in various technologies, know-how, trade secrets and trademarks relating to our principal products and operations.  We cannot assure you as to the degree of protection these claims may or will afford.  It is our policy to protect our proprietary rights in our products and operations through contractual obligations, including confidentiality and non-disclosure agreements with certain employees and distributors.  We cannot assure you as to the degree of protection these contractual measures may or will afford.  Although we are not aware that we are infringing upon the intellectual property rights of others, we cannot assure you that an infringement claim will not be asserted against us in the future.  We believe that our success is less dependent on the legal protection that our patents and other proprietary rights may or will afford than on the knowledge, ability, experience and technological expertise of our employees.  We cannot provide any assurance that we will be able to protect our proprietary technology.  The unauthorized use of our proprietary technology by third parties may impair our ability to compete effectively.  We could become subject to litigation regarding intellectual property rights, which could seriously harm our business.
 
We have registered trademarks for AIMETIS, AIMETIS SYMPHONY, FIBERPATROL, FLARE, FLEXPI, FLEXPS, FLEXZONE, GUIDAR, INTELLI-FIELD, OMNITRAX, PANTHER, PINPOINTER, REPELS, SENNET, SENSTAR, SENSTAR & DESIGN, SENTIENT, ULTRAWAVE design, XFIELD, MAGAL, DTR, FORTIS, MAESTRO DB, FENSOR and ROBOGUARD.
 
ARMOURFLEX, CYBERSEAL, ENTERPRISE MANAGER, GALLIUM PDS, INTELLI-FLEX, INTELLIFIBER, LM100, the MAGAL logo, NETWORK MANAGER, RUBIDIUM, STARLED, STARNET, SYMPHONY, TUNGSTEN, VANADIUM GALLIUM-PDS, VANADIUM and all other marks used to identify particular products and services associated with our businesses are unregistered trademarks.  Any other trademarks and trade names appearing in this annual report are owned by their respective holders.
 
Government Regulations
 
Current Israeli governmental policy encourages the export of security related products to approved customers, as long as the export is consistent with Israeli government policy.  We are also subject to regulations related to the export of “dual use” items (items that are typically sold in the commercial market, but which may also be used for military use).  Israel enhanced enforcement of export control legislation under the Defense Export Control Law, 2007, under which a license is required to initiate marketing activities and a specific export license is required for any hardware, software and knowhow exported from Israel.  The law provides for certain exemptions from the licensing requirement and broadens certain areas of licensing, particularly with respect to transfer of technology.
 
At present, only a limited number of our products require a permit or license for export. We cannot assure that we will receive all the required permits and licenses for which we may apply in the future. In addition, our participation in governmental procurement processes in Israel and other countries is subject to specific regulations governing the conduct of the process of procuring defense contracts.  Furthermore, solicitations for procurements by governmental purchasing agencies in Israel and other countries are governed by laws, regulations and procedures relating to procurement integrity, including avoiding conflicts of interest and corruption in the procurement process.
 
26

 
In addition, antitrust laws and regulations in Israel and other countries often require governmental approvals for transactions that are considered to limit competition.  Such transactions may include cooperative agreements for specific programs or areas, as well as mergers and acquisitions.
 
C.            Organizational Structure.
 
We have wholly owned and majority-owned active subsidiaries that operate world-wide.   Set forth below are our significant subsidiaries.
 
Subsidiary Name
 
Country of Incorporation/Organization
 
Ownership Percentage
Senstar Corporation
 
Canada
 
100%
Senstar Inc.
 
United States (Delaware)
 
100%
Senstar Latin America, S.A. DE C.V.
 
Mexico
 
100%
MAGAL-S3 CANADA INC.
 
Canada
 
100%
ESC BAZ LTD.
 
Israel
 
55%
 
 D.           Property, Plants and Equipment.
 
We own a two-story 2,533 square meter facility located on a 4,352 square meter parcel in the Yehud Industrial Zone, Israel, which is used as our principal facility.  Approximately 600 square meters are devoted to administrative, marketing and management functions and approximately 800 square meters are used for engineering, system integration and customer service.  We use the remaining area of approximately 1,100 square meters for production management and production operations, including manufacturing, assembly, testing, warehousing, shipping and receiving.  We also lease a one-story 810 square meter facility located on a 1,820 square meter parcel in the Yehud Industrial Zone for $120,000 per year for use in production and operations.  The lease terminates in 2029 .  The products that we manufacture at our facilities in the Yehud Industrial Zone include our taut-wire intrusion detection systems, our detection systems Fortis 4G , MTC-1500, MSS-1500, RoboGuard, Fensor and other perimeter systems.
 
We own a 33,000 square foot facility in Carp, Ontario, Canada.  Approximately 9,000 square feet are devoted to administrative, marketing and management functions, and approximately 8,000 square feet are used for engineering, system integration and customer service.  We use the remaining area of approximately 16,000 square feet for production operations, including cable manufacturing, assembly, testing, warehousing, shipping and receiving.  We own an additional 182,516 square feet of vacant land adjacent to this property, which is being held for future expansion.  We also lease 358,560 square feet of land near this facility for use as an outdoor sensor test and demonstration site for our products including the Omnitrax buried cable intrusion detection system, the X-Field volumetric system, the FlexZone microphonic fence detection system, Flash and Flare, and various perimeter monitoring and control systems.  The lease for this site is approximately $3,500 per year plus taxes under a lease that expires in November 2024.
 
We own a 999 square meter facility in Cuernavaca, Mexico, which we built in August 2013.
 
We lease office space in Waterloo, Canada, providing the facility which houses our video management software operations. We also lease office space in two sites in the U.S. and sites world-wide. The aggregate annual rent for such offices was approximately $660,000 in 2018.
 
We believe that our facilities are suitable and adequate for our current operations and the foreseeable future.
 
                ITEM 4A .                Unresolved Staff Comments
 
Not applicable.
 
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ITEM 5.
Operating and Financial Review and Prospects
 
The following discussion of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this annual report.  This discussion contains forward‑looking statements that involve risks and uncertainties.  Our actual results may differ materially from those anticipated in these forward‑looking statements as a result of certain factors, including, but not limited to, those set forth in Item 3.D. “Key Information–Risk Factors.”
 
A.            Operating Results.
 
Overview
 
We develop, manufacture, market and sell complex computerized security systems.  Our systems are used in more than 100   countries to protect aircraft, national borders and sensitive facilities, including military bases, power plant installations, airports, sea ports, postal facilities, prisons, banks, retail operations, hospitals, municipal security, sporting events including athlete villages and stadiums, and industrial locations from terrorism, theft and other security threats.
 
Following organizational changes adopted in the course of 2016, we operate in three business segments:
 
·
Perimeter Products segment sales of perimeter products, including services and maintenance that are performed either on a fixed-price basis or pursuant to time-and-materials based contracts.
 
·
Turnkey Projects segment installation of comprehensive turnkey solutions for which revenues are generated from long-term fixed price contracts.
 
·
Video and Cyber Security segment (includes Video Management Software , Intelligent Video Analytics  and Cyber Security) – sales of integrated intelligent video management solutions for security surveillance and business intelligence applications complemented by cyber-security products for monitoring, securing, and the active management of wired, wireless, and fiber optic communication networks.
 
Perimeter Products Segment
 
The Perimeter Products segment sells its products worldwide and this segment primarily includes the operations of Senstar Canada, Senstar US, and Senstar Germany. as one reporting unit. The Israeli operation of the Perimeter Products segment is considered as separate reporting unit within this segment.
 
Turnkey Projects   Segment
 
The Turnkey Projects segment has operations worldwide and the segment includes a number of reporting units operating in Israel, Mexico, Romania, India, Spain and Canada.
 
Video and Cyber Security Segment
 
This segment includes Video Management Software (VMS), Intelligent Video Analytics (IVA) and Cyber-Security products. The VMS and IVA activity which is operated and managed by Senstar, following the amalgamation of Senstar and Aimetis (acquired in 2016) offers integrated intelligent video management solutions for security surveillance and business intelligence applications worldwide. Cyber security sales are mainly in the U.S., Mexico and Israel. In early 2017, product management as well as sales management of this business activity was transferred to our facility in Waterloo, Canada.

Business Challenges/Areas of Focus

Our primary business challenges and areas of focus include:
 
·
continuing the growth of revenues and profitability of our perimeter security system and video management system lines of products;
 
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·
enhancing the introduction and recognition of our new products into the markets;
 
·
penetrating new markets and strengthening our presence in existing markets; and
 
·
succeeding in selling our comprehensive turnkey solutions.
 
·
succeeding in selling our comprehensive physical and cyber products as a combined solution.
 
Our business is subject to the effects of general global economic conditions.  If general economic conditions or economic conditions in key markets will be uncertain or weaken further, demand for our products could be adversely affected.
 
Key Performance Indicators and Sources of Revenues
 
Our management believes that our revenues and operating income are the two key performance indicators for our business.
 
Our revenues from our perimeter products, turnkey projects and Video and Cyber-Security segments for the three years ended December 31, 2018 were as follows:
 
   
Year Ended December 31,
 
   
2016
   
2017
   
2018
 
   
(In thousands)
 
Products          
 
$
32,372
   
$
22,301
   
$
27,626
 
Turnkey projects          
   
31,823
     
34,742
     
57,072
 
Video and Cyber-Security          
   
5,626
     
8,350
     
9,461
 
Eliminations          
   
(1,996
)
   
(1,101
)
   
(1,557
)
Total          
 
$
67,825
   
$
64,292
   
$
92,602
 

 
The increase in revenues from products was primarily due to the change in our leadership in the USA  and EMEA, including better management of our sales force. In addition, the increase in revenues of the Video and Cyber security segment was attributable to the Aimetis operation, which we acquired in April 2016. The increase in revenues from turnkey projects was primarily due to the positive performance of our Israeli and Mexican based projects activity.

Our operating income (loss) from our perimeter products, turnkey projects and Video and Cyber Security segments for the three years ended December 31, 2018 were as follows:
 
   
Year Ended December 31,
 
   
2016
   
2017
   
2018
 
   
(In thousands)
 
Products          
 
$
5,799
   
$
242
   
$
2,863
 
Turnkey projects          
   
(163
)
   
1,762
     
2,782
 
Video and Cyber Security          
   
(3,383
)
   
(2,830
)
   
(1,298
)
Eliminations          
   
(758
)
   
(418
)
   
(592
)
Total          
 
$
1,495
   
$
(1,244
)
 
$
3,755
 
 
Our operating profit in 2018 increased mainly due to the increase in sales in all of our segments of operations and major business units, as well as the results of our cost saving initiatives.
 
Key Factors Affecting our Business
 
Our operations and the operating metrics discussed below have been, and will likely continue to be affected by certain key factors as well as certain historical events and actions. The key factors affecting our business and results of operations include among others,   reliance on large orders from a small number of customers, reliance on government contracts and competition. For further discussion of the factors affecting our results of operations, see “Risk Factors.”
 
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Reliance on large orders from a small number of customers
 
We receive relatively large orders for products from a relatively small number of customers. Consequently, a single order from one customer may represent a substantial portion of our sales in any one period and significant orders by any customer during one period may not be followed by further orders from the same customer in subsequent periods. Our sales and operating results are subject to very substantial periodic variations. Since quarterly performance is likely to vary significantly, our results of operations for any quarter or calendar year are not necessarily indicative of the results that we might achieve for any subsequent period. Accordingly, quarter-to-quarter and year-to-year comparisons of our operating results may not be meaningful. In addition, we have a limited order backlog that is generally composed of orders that are fulfilled within a period of three to twelve months after receipt, which makes revenues in any quarter substantially dependent upon orders received in prior quarters.

Growth Strategy

In the first quarter of 2016 we initiated a strategic plan to implement our growth strategy for the following 3-4 years. The strategic plan was adopted by our board of directors in the third quarter of 2016. Pursuant to the plan, we reorganized our group structure and  clearly separated our two core areas of operation - Products and  Projects. We also streamlined our product sales activity to concentrate on three regions, the Americas, EMEA and APAC.  We intend to continue to expand our sales team in the U.S., which is the main strategic market for our product activity. In 2018, we  consolidated, our EMEA operations under a  new in-region leadership.
 
We may not be able to implement our growth strategy   plan and may not be able to successfully expand our business activity and increase our sales.  If we are successful in the implementation of our strategic plan, we may be required to hire additional employees in order to meet customer demands. If we are unable to attract or retain qualified employees, our business could be adversely affected.
 
Our failure to successfully integrate the operations of an acquired business or to retain key employees of acquired businesses and integrate and manage our growth may have a material adverse effect on our business, financial condition, results of operation or prospects.  We may not be able to realize the anticipated benefits of any acquisition.  Moreover, future acquisitions by us could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to identifiable intangible assets, any of which could materially adversely affect our operating results and financial position.  Acquisitions also involve other risks, including risks inherent in entering markets in which we have no or limited prior experience.
 
Reliance on government contracts
 
Our products are primarily sold to governmental agencies, governmental authorities and government-owned companies, many of which have complex and time consuming procurement procedures.  A substantial period of time often elapses from the time we begin marketing a product until we actually sell that product to a particular customer.  In addition, our sales to governmental agencies, authorities and companies are directly affected by these customers’ budgetary constraints and the priority given in their budgets to the procurement of our products.  A decrease in governmental funding for our customers’ budgets would adversely affect our results of operations.  This risk is heightened during periods of global economic slowdown. Accordingly, governmental purchases of our systems, products and services may decline in the future if governmental purchasing agencies terminate, reduce or modify contracts.
 
Competition
 
The global market for safety, security, video management, site management solutions and products is highly fragmented and intensely competitive.  It is characterized by changing technology, new product introductions and changing customer requirements.  We compete principally in the market for perimeter intrusion detection systems, or PIDS, video management systems, and turnkey projects and solutions.  Some of our competitors and potential competitors have greater research, development, financial and personnel resources, including governmental support.  We cannot assure you that we will be able to maintain the quality of our products relative to those of our competitors or continue to develop and market new products effectively. Continued competitive pressures could cause us to lose significant market share.
 
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Explanation of Key Income Statement Items
 
Cost of revenues.  Our cost of revenues for perimeter products consists of component and material costs, direct labor costs, subcontractor costs, shipping expenses, overhead related to manufacturing and depreciation.  Our cost of revenues for turnkey projects consists primarily of component and material costs, subcontractor costs, direct labor costs and overhead related to the turnkey projects. Our cost of revenues for Video and Cyber Security sales consists primarily of direct labor costs, some component, material and subcontractor costs and overhead related to those sales.
 
Our gross margin is affected by the proportion of our revenues generated from perimeter products, turnkey projects and the Video and Cyber Security segments.  Our revenues from Video and Cyber Security products generally have higher gross margins than our other segments.
 
Research and development expenses, net.   Research and development expenses, net consists primarily of expenses for on-going research and development activities and other related costs.
 
Selling and marketing expenses.  Selling and marketing expenses consist primarily of commission payments, compensation and related expenses of our sales teams, attendance at trade shows and advertising expenses and related costs for facilities and equipment.
 
General and administrative expenses.   Our general and administrative expenses consist primarily of salary and related costs associated with our executive and administrative functions, public company related expenses, legal and accounting expenses, allowances for doubtful accounts and bad debts and other miscellaneous expenses.  Staff costs include direct salary costs and related costs, such as severance pay, social security and retirement fund contributions, vacation and other pay.
 
Depreciation, Amortization and Impairment of goodwill . The amount of depreciation, amortization and Impairment of goodwill attributable to our perimeter products, turnkey projects and Video and Cyber-security segments for the three years ended December 31, 2018 were as follows:
 
   
Year Ended December 31,
 
   
2016
   
2017
   
2018
 
   
(in thousands)
 
Products          
 
$
632
   
$
614
   
$
586
 
Turnkey projects          
   
512
     
498
     
879
 
Video and Cyber-security          
   
596
     
764
     
1,759
 
Total          
 
$
1,740
   
$
1,876
   
$
3,224
 
 
Financial Expenses, Net.   Financial expenses, net include exchange rate differences arising from changes in the value of monetary assets and monetary liabilities stated in currencies other than the functional currency of each entity, currency transactions as well as interest income on our cash and cash equivalents and short term investments.

Discussion of Critical Accounting Policies
 
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and the use of different assumptions would likely result in materially different results of operations.  Critical accounting policies are those that are both most important to the portrayal of our financial position and results of operations and require management’s most difficult, subjective or complex judgments.  Although not all of our significant accounting policies require management to make difficult, subjective or complex judgments or estimates, the following policies and estimates are those that we deem most critical.
 
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Revenue Recognition
 
We generates our 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; (3) services and maintenance, which are performed either on a fixed-price basis or as time-and-materials based contracts; and (4) software license fees and related services.

Revenues from our contracts are recognized using the five-step model in ASC 606 - "Revenue from Contracts with Customers" ("ASC 606"). At first, we determine if an agreement with a customer is considered to be a contract to the extent it has a commercial substance, it is approved in writing by both parties, all rights and obligations including payment terms are identifiable, the agreement between the parties creates enforceable rights and obligations, and collectability in exchange for goods and services that will be transferred to the customer is considered as probable. We then assesse the transaction price for a contract in order to determine the consideration we expects to receive for satisfying the performance obligations called for in the contract. To the extent, the transaction price includes variable consideration (e.g., contract penalties, unpriced change orders or like measures), we usually estimate the most likely amount that should be included in the transaction price subject to constraints based on the specific facts and circumstances.

At the inception of a contract, we also evaluate and determines if a contract should be separated into more than one performance obligation. Our installation of comprehensive security systems contracts usually includes one-performance obligations due to a significant customization for each customer's specific needs and integrated system or solution.
 
For most of our installation of comprehensive security systems contracts, where our performance does not create an asset with an alternative use, we recognizes revenue over performance time because of continuous transfer of control to the customer. For these performance obligations that are satisfied over time, we generally recognize revenue using an input method with revenue amounts being recognized proportionately as costs are incurred relative to the total expected costs to satisfy the performance obligation. We believe that costs incurred as a portion of total estimated costs is an appropriate measure of progress towards satisfaction of the performance obligation since this measure reasonably depicts the progress of the work effort and we have 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, the manner, and the terms of settlement, including in cases of termination for convenience. Project costs include materials purchased to produce the system, related labor, overhead expenses and subcontractor's costs. The performance costs are measured by monitoring costs and efforts devoted using records of actual costs incurred to date in the project compared to the total estimated project requirements, which corresponds to the costs related to earned revenues. We estimate the profit on a contract as the difference between the total estimated transaction price and the total expected performance costs of the contract and recognizes revenue and costs over the life of the 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.
 
For contracts that are deemed to be loss contracts, we establishe forward loss reserves for total estimated costs that are in excess of total estimated consideration under a contract in the period in which they become probable.
 
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. In most instances, the period between the advanced recognition of revenues and the customers' billing generally ranges between one to six months.
 
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Revenues for performance obligations that are not recognized over time are recognized at the point in time when control is transferred to the customer (which is generally upon delivery) and include mainly revenues from the sales of security products and software license fees without significant installation work. We generally do not provide a right of return to our customers. For performance obligations that are satisfied at a point in time, we evaluates the point in time when the customer can direct the use of, and obtain the benefits from, the products. Shipping and handling costs are not considered performance obligations and are included in cost of sales as incurred.
 
Services and maintenance are performed under either fixed-price or time-and-materials based contracts. Under fixed-price contracts, we agree to perform certain work for a fixed price. Under time-and-materials contracts, we are reimbursed for labor hours at negotiated hourly billing rates and for materials. Our service contracts include contracts in which the customer simultaneously receives and consumes the benefits provided as the performance obligations are satisfied, accordingly, related revenues are recognized, as those services are performed or over the term of the related agreements.
 
Maintenance and support agreements provide customers with rights to unspecified software product updates, if and when available. These services grant the customers on line and telephone access to technical support personnel during the term of the service. We recognize maintenance and support services revenues ratably over the term of the agreement, usually one year.
 
We generate revenues from the sales of our software products user licenses as well as from maintenance, support, consulting and training services.
 
As required by ASC 606, following the determination of the performance obligations in the contract, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised license fees or services underlying each performance obligation. Standalone selling price is the price at which we would sell a promised license or service separately to a customer.
 
We capitalizes sales commission as costs of obtaining a contract when they are incremental and if they are expected to be recovered. Amortization of sales commission expense is included in selling and marketing expenses in the accompanying consolidated statements of income. For costs that we would have capitalized and amortized over one year or less, we have elected to apply the practical expedient and expense these contract costs as incurred.
 
Inventories
 
Inventories are stated at the lower of cost or market value.  We periodically evaluate 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 manufacturing costs.
 
During the years ended December 31, 2016, 2017 and 2018 we recorded inventory write-offs from continuing operations in the amounts of $0.2 million, $0.1 million and $0.1 million, respectively.  Such write-offs were included in cost of revenues.
 
Income taxes
 
We account for income taxes in accordance with ASC 740 “Income Taxes.”  This statement prescribes the use of the liability method whereby deferred tax asset 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.  We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
 
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As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.  This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.  We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and we must establish a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.  Increases in the valuation allowance result in additional expense to be reflected within the tax provision in the consolidated statement of income.
 
As of December 31, 2018, we had a net deferred tax asset of $3.3 million attributable to our subsidiaries.  We had total estimated available tax loss carryforwards of $8.9 million with respect to our operations in Israel and our non-Israeli subsidiaries, had estimated total available tax loss carryforwards of $8.7 million, of which $6.1 million was attributable to our U.S. subsidiaries, which may be used as an offset against future taxable income for periods ranging between 1 and 20 years As of December 31, 2018, we recorded a partial valuation allowance on these 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.

Goodwill
 
We have recorded goodwill as a result of acquisitions, which represents the excess of the cost over the net fair value of the assets of the businesses acquired.  We follow ASC 350, “Intangibles – Goodwill and Other,” which requires goodwill to be tested for impairment, at the reporting unit level, at least annually or between annual tests in certain circumstances, and written down when impaired, rather than being amortized.

ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the quantitative impairment test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test.   We perform annual impairment test of goodwill as of December 31 of each year, or more frequently if impairment indicators are present

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): - Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the goodwill impairment test) for the purpose of measuring a goodwill impairment charge. Instead, an impairment charge shall be recognized based on the excess of a reporting unit’s carrying amount over its fair value. The standard shall be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019, for public entities. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We early adopted the new guidance on January 1, 2018.

We evaluate the risk of goodwill impairment at a reporting unit level. Our goodwill as of December 31, 2018, relates to our Video reporting unit, PIDS reporting unit and BAZ reporting unit.  As of December 31, 2018, the fair values of these reporting units significantly exceeded their carrying values. Accordingly, we determined that (i) the estimated fair value of each reporting unit was substantially in excess of its carrying value, (ii) each reporting unit's goodwill balance was not at risk of impairment, and (iii) therefore, no additional disclosure was required.

During the three years ended December 31, 2018, we did not record any impairment charges relating to the goodwill allocated to our Product segment, BAZ reporting unit within the Project segment and Video reporting unit within the Video and Cyber security segment.

In 2018, we recorded an impairment loss of goodwill in the amount of $1 million with respect to our Cyber security reporting unit within the Video and Cyber security segment. During the years ended December 31, 2017 and 2016, we did not record any impairment charges relates to the goodwill allocated to the Cyber security reporting unit within the Video and Cyber security segment.
 
34


Goodwill annual impairment tests

As required by ASC 820, "Fair Value Measurements and Disclosures," we apply assumptions that marketplace participants would consider in determining the fair value of the reporting unit.

The material assumptions used for the goodwill annual impairment test for the PIDS reporting unit within the Products segment, according to the income approach for 2018, were five years of projected net cash flows, a weighted average cost of capital rate of 13% and a long-term growth rate of 3%. We consider historical rates and current market conditions when determining the discount and growth rates to use in its analyses. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for the goodwill associated with the PIDS reporting unit within the Products segment.

The material assumptions used for the goodwill annual impairment test for the Cyber security reporting unit within the Video and Cyber security segment, according to the income approach for 2018, were five years of projected net cash flows, a weighted average cost of capital rate of 14% and a long-term growth rate of 2%. We consider current market conditions when determining the discount and growth rates to use in our analyses. As a result of our impairment testing we have determined that an impairment charge of $1 million was recorded, which was the remaining good will for that reporting unit.

The material assumptions used for the goodwill annual impairment test for the Video reporting unit within the Video and Cyber security segment, according to the income approach for 2018, were five years of projected net cash flows, a weighted average cost of capital rate of 16.4% and a long-term growth rate of 3%. We considered historical rates and current market conditions when determining the discount and growth rates to use in our analyses. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for goodwill.

The material assumptions used for the goodwill annual impairment test for the BAZ reporting unit within the Project segment, according to the income approach for 2018, were five years of projected net cash flows, a weighted average cost of capital rate of 15% and a long-term growth rate of 1.5%. We considered historical rates and current market conditions when determining the discount and growth rates to use in our analyses. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for goodwill.

Intangible assets
 
Our intangible assets are comprised of patents, acquired technology, customer relations and backlog. 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 ASC 350, “Intangibles – Goodwill and Other.”
 
During the three years ended December 31, 2018, we did not record any impairment charges relating to intangible assets.
 
Impairment of long lived assets
 
We periodically evaluate our intangible assets and long-lived assets (mainly property and equipment) in all of our reporting units for potential impairment indicators in accordance with ASC 360, “Property, Plant and Equipment”, or “ASC 360”.  Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions, operational performance and prospects of our acquired businesses and investments. Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. In measuring the recoverability of assets, we are required to make estimates and judgments in assessing our future cash flows which derive from the estimated useful life of our current primary assets, and compare that with the carrying amount of the assets. Additional significant estimates used by management in the methodologies employed to assess the recoverability of our long-lived assets include estimates of future short-term and long-term growth rates, useful lives of assets, market acceptance of products and services, our success in winning bids and other judgmental assumptions, which are also affected by factors detailed in our risk factors section in this annual report.
 
35


During the three years ended December 31, 2018, we did not record any impairment charges relating to long lived assets.

Functional Currency and Financial Statements in U.S. Dollars
 
While our functional currency in Israel is the NIS, our reporting currency is the U.S. dollar.  Translation adjustments resulting from translating our financial statements from NIS and other local operation currencies to the U.S. dollar are reported as a separate component in shareholders’ equity.
 
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 “re-measured” in its functional currency.  All transaction gains and losses from the re-measurement of monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate. Non-monetary assets and liabilities denominated in foreign currency and measured at cost are translated at the exchange rate at the date of the transaction.
 
After the re-measurement process is complete the financial statements are translated into our reporting currency, which is the U.S. 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. For the years ended December 31, 2016, 2017 and 2018, our foreign currency translation adjustments totaled $0.4 million, $5.9 million and $2.8 million, respectively. The losses in 2016 and 2017 were exacerbated as a result of our increased cash balances.  In late 2016 we completed a rights offering that provided us with proceeds of $ 23.6 million, which we deposited into our bank accounts in Israel. These balances were translated into NIS, which depreciated by 1.5% and 9.8% against the U.S. dollar in 2016 and 2017, respectively and in 2018 we recorded a gain of approximately $ million as the NIS appreciated by 8.1% against the U.S. dollar.
 
Concentrations of credit risk
 
Financial instruments that are potentially subject to concentrations of credit risk consist principally of cash and cash equivalents, short and long-term bank deposits, unbilled accounts receivable, trade receivables, long-term trade receivables and long-term loans.
 
Of our cash and cash equivalents and short-term and restricted bank deposits at December 31, 2018, $25.6 million was deposited with major Israeli banks.  An additional $29.4   million was deposited mainly with the Royal Bank of Canada, BBVA Bankcomer, Comerica Bank and Deutsche Bank. Cash and cash equivalents deposited with U.S. banks or other banks may be in excess of insured limits and are not insured in other jurisdictions. Generally these deposits maybe redeemed upon demand and therefore bear low risk.
 
The trade receivables and the unbilled accounts receivable of our company and our subsidiaries are derived from sales to large and solid organizations located mainly in Israel, the United States, Canada, Africa, Mexico and Europe.  We perform ongoing credit evaluations of our customers and to date have generally not experienced any material losses.  An allowance for doubtful accounts is determined with respect to those amounts that we have determined to be doubtful of collection and in accordance with an aging policy.  In certain circumstances, we may require letters of credit, other collateral or additional guarantees.  During the years ended December 31, 2016, 2017 and 2018 we recorded $0.4 million, $0.3 million and $1.5 million of expenses related to doubtful accounts, respectively.  As of December 31, 2018, our allowance for doubtful accounts amounted to $2.8 million.
 
We have no significant off-balance sheet concentration of credit risks, such as foreign exchange contracts or foreign hedging arrangements, except derivative instruments, which are detailed below.
 
36

 
Results of Operations
 
Due to the nature of our customers and products, our revenues are often generated from a relatively small number of large orders.  Consequently, individual orders from individual customers can represent a substantial portion of our revenues in any one period and significant revenues from a customer during one period may not be followed by additional significant revenues from the same customer in subsequent periods.  Accordingly, our revenues and operating results may vary substantially from period to period.  Consequently, we do not believe that our revenues and operating results should necessarily be judged on a quarter-to-quarter comparative basis.
 
The following table presents certain financial data expressed as a percentage of revenues for the periods indicated:
 
   
Year Ended December 31
 
   
2016
   
2017
   
2018
 
Revenues           
   
100
%
   
100
%
   
100
%
Cost of revenues           
   
51 .0
     
51 .3
     
56 .5
 
Gross profit           
   
49.0
     
48.7
     
43.5
 
Operating expenses:
                       
Research and development, net           
   
10.0
     
10.2
     
7.4
 
Selling and marketing, net           
   
25.9
     
28.2
     
20.0
 
General and administrative           
   
11.0
     
12.2
     
11.0
 
Impairment of goodwill           
   
-
     
-
     
1.1
 
Operating income (loss)           
   
2.2
     
(1.9
)
   
4.1
 
Financial income (expenses), net           
   
(0.9
)
   
(6.2
)
   
1.5
 
Income before income taxes           
   
1.3
     
(8.1
)
   
5.5
 
Taxes on income (tax benefit)
   
0.2
     
(2.6
)
   
(2.2
)
Net income           
   
1.5
     
(10.8
)
   
3.3
 
 
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
 
Revenues.     Revenues increased by 44% to $92.6 million for the year ended December 31, 2018 from $64.3 million for the year ended December 31, 2017.  Revenues from sales of perimeter products increased by 23.9% to $27.6 million in 2018 from $22.3 million in 2017, primarily due to the improved management and improved market conditions in North America and EMEA markets. Revenues from turnkey projects increased by 64.3% to $57.1 million in 2018 from $34.7 million in 2017, primarily due to the increased bookings and executions in our worldwide projects mainly in the Americas and Israel, as well as consolidation of revenues from the ESC BAZ reporting unit. Revenues of the Video and Cyber security segment increased by 13.3% to $9.5 million in 2018 from $8.4 million in 2017, primarily due to the increase in VMS software and hardware sales.
 
Cost of revenues.   Cost of revenues increased by 58.6% to $52.3 million for the year ended December 31, 2018 from $33 million for the year ended December 31, 2017.  This increase was primarily due to the increase in revenues. Cost of revenues as a percentage of revenues increased slightly to 56.5% in 2018 from 51.3% in 2017, primarily due to the increased percentage of lower margin projects and video hardware sales within our revenue mix.
 
Research and development expenses, net.   Research and development expenses, net increased by 4.5 % to $6.9 million for the year ended December 31, 2018 from $6.6   million for the year ended December 31, 2017. The increase in mainly due to the acquisition of ESC BAZ during 2018.
 
Selling and marketing expenses.  Selling and marketing expenses increased by 2.2% to $18.6 million for the year ended December 31, 2018 from $18.2 million for the year ended December 31, 2017.  Selling and marketing expenses as a percentage of revenues, decreased to 20% in 2018 from 28.2% in 2017, primarily due to the increase in revenues in 2018.
 
37

 
General and administrative expenses General and administrative expenses increased by 29.4% to $10.2 million for the year ended December 31, 2018 from $7.9 million for the year ended December 31, 2017. The increase is mainly due to the acquisition of ESC BAZ, an increase in the provision for a doubtful account and to severance costs.  General and administrative expenses amounted to 11% and 12.2% of revenues in 2018 and 2017, respectively.
 
Impairment of goodwill.  Impairment of goodwill amounted to $1 million for the year ended December 31, 2018, which impairment relates to our Cyber security reporting unit within the Video and Cyber security segment. There were no impairment charges in 2017.
 
Operating income (loss) We had operating income of $3.8 million for the year ended December 31, 2018 compared to an operating loss of $1.2 million for the year ended December 31, 2017. The increase in operating income was primarily attributable to increase in sales and gross profit, as well as the beneficial impact of operating cost reduction initiatives. The operating income (loss) of our business segments in the years ended December 31, 2017 and 2018 were as follows:
 
   
Year Ended December 31
 
   
2017
   
2018
 
   
(In thousands)
 
Perimeter products           
 
$
242
   
$
2,863
 
Turnkey projects           
   
1,762
     
2,782
 
Video and Cyber Security           
   
(2,830
)
   
(1,298
)
Eliminations           
   
(418
)
   
(592
)
Total           
 
$
(1,244
)
 
$
3,755
 
 
Our perimeter products segment recorded operating income of $2.9 million for the year ended December 31, 2018 compared to operating income of $0.2 million for the year ended December 31, 2017, primarily as a result of an increase in revenues and gross profit, partially offset by the increase in the provision for a doubtful account. Our turnkey project segment recorded operating income of $2.8 million in the year ended December 31, 2018 compared to an operating income of $1.8 million for the year ended December 31, 2017, primarily as a result of an increase in revenues. Our Video and Cyber security segment recorded an operating loss of $1.3 million in the year ended December 31, 2018 compared to an operating loss of $2.8 million for the year ended December 31, 2017. The improved result is primarily due to an increase in revenues and operating costs reductions, partially offset by the goodwill impairment.
 
Financial income, net.   Our financial income, net, for the year ended December 31, 2018 was $1.4 million compared to financial expense, net of $4 million for the year ended December 31, 2017.  The financial income in 2018 were primarily attributable to foreign exchange gain, net of $1.1 million compared to foreign exchange loss, net of $4 million in 2017.
 
Income taxes.   We recorded tax expenses of $2.1 million in the year ended December 31, 2018 compared to tax expenses of $1.7 million in the year ended December 31, 2017, primarily due to the increase in pre-tax income and changes in our net deferred tax assets.

Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
 
Revenues.     Revenues decreased by 5.2% to $64.3 million for the year ended December 31, 2017 from $67.8 million for the year ended December 31, 2016.  Revenues from sales of perimeter products decreased by 31.1% to $22.3 million in 2017 from $32.4 million in 2016, primarily due to the decrease in sales in North America.  Revenues from turnkey projects increased by 9.2% to $34.7 million in 2017 from $31.8 million in 2016, primarily due to the executions in our worldwide projects. Revenues of the Video and Cyber security segment increased by 48.4% to $8.4 million in 2017 from $5.6 million in 2016, primarily due to additional quarter of revenues in 2017, as Aimetis was acquired on April 1, 2016 and to an  increase in sales.
 
Cost of revenues.   Cost of revenues decreased by 4.6% to $33 million for the year ended December 31, 2017 from $34.6 million for the year ended December 31, 2016.  This decrease was primarily due to the decrease in revenues.  Cost of revenues as a percentage of revenues increased slightly to 51.3% in 2017 from 51% in 2016, primarily due to the revenue mix.
 
38

 
Research and development expenses, net.   Research and development expenses, net decreased by 3.3 % to $6.6 million for the year ended December 31, 2017 from $6.8   million for the year ended December 31, 2016.
 
Selling and marketing expenses.  Selling and marketing expenses increased by 3.5% to $18.2 million for the year ended December 31, 2017 from $17.5 million for the year ended December 31, 2016.  Selling and marketing expenses amounted to 28.2% and 25.9% of revenues in 2017 and 2016, respectively.
 
General and administrative expenses General and administrative expenses increased by 5.5% to $7.9 million for the year ended December 31, 2017 from $7.4 million for the year ended December 31, 2016. General and administrative expenses amounted to 12.2% and 11% of revenues in 2017 and 2016, respectively.
 
Operating income (loss) We had operating loss of $1.2 million for the year ended December 31, 2017 compared to operating income of $1.5 million for the year ended December 31, 2016. The decrease in operating income was primarily attributable to loss incurred by the Video and Cyber Security segment. The operating income (loss) of our business segments in the years ended December 31, 2016 and 2017 were as follows:
 
   
Year Ended December 31
 
   
2016
   
2017
 
   
(In thousands)
 
Perimeter products           
 
$
5,799
   
$
242
 
Turnkey projects           
   
(163
)
   
1,762
 
Video and Cyber Security           
   
(3,383
)
   
(2,830
)
Eliminations           
   
(758
)
   
(418
)
Total           
 
$
1,495
   
$
(1,244
)
 
Our perimeter products segment recorded operating income of $0.2 million for the year ended December 31, 2017 compared to operating income of $5.8 million for the year ended December 31, 2016, primarily as a result of reduction in revenues. Our turnkey project segment recorded operating income of $1.8 million in the year ended December 31, 2017 compared to an operating loss of $0.2 million for the year ended December 31, 2016, primarily as a result of the increase in revenues. Our Video and Cyber security segment recorded an operating loss of $2.8 million in the year ended December 31, 2017 compared to an operating loss of $3.4 million for the year ended December 31, 2016.
 
Financial income, net.   Our financial expenses, net, for the year ended December 31, 2017 was $4 million compared to financial expense, net of $0.6 million for the year ended December 31, 2016.  The financial expenses in 2017 were primarily attributable to foreign exchange loss, net of 4 million compared to foreign exchange loss, net of $0.6 million in 2016.
 
Income taxes.   We recorded tax expenses of $1.7 million in the year ended December 31, 2017 compared to a tax benefit of $0.2 million in the year ended December 31, 2016, primarily due to changes in our net deferred tax assets.

39

 
Seasonality
 
Our operating results are characterized by a seasonal pattern, with a higher volume of revenues towards the end of the year and lower revenues in the first part of the year.  This pattern, which is expected to continue, is mainly due to two factors:
 
·
our customers are mainly budget-oriented organizations with lengthy decision processes, which tend to mature late in the year; and
 
·
due to harsh weather conditions in certain areas in which we operate during the first quarter of the calendar year, certain projects and services are put on hold and consequently revenues are delayed.
 
Our revenues are dependent on government procurement procedures and practices, and because we receive large product orders from a relatively small number of customers, our revenues and operating results are subject to substantial periodic variations.
 
Impact of Inflation and Currency Fluctuations on Results of Operations, Liabilities and Assets
 
We sell most of our products in North America, Africa, Latin America Europe and Israel.  Our financial results, which are reported in U.S. dollars, are affected by changes in foreign currency.  Our revenues are primarily denominated in U.S. dollars, Euros, Mexican Peso and NIS, while a portion of our expenses, primarily labor expenses, is incurred in NIS, CAD and Mexican Peso.  Additionally, certain assets, especially cash, trade receivables and other accounts receivables, as well as part of our liabilities are denominated in NIS and CAD.  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 and Canada may be adversely affected by the appreciation of the NIS and the CAD 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.
 
The appreciation of the NIS, the Mexican Pesos and the CAD in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of any unlinked assets and the U.S. dollar amounts of any unlinked liabilities and increasing the U.S. dollar value of revenues and expenses denominated in other currencies.  Conversely, the depreciation of the NIS, the Mexican Peso and the CAD in relation to the U.S. dollar has the effect of reducing the U.S. dollar value of any of our liabilities which are payable in NIS, Mexican Pesos or in Canadian dollars (unless such costs or payables are linked to the U.S. dollar).  Such depreciation also has the effect of decreasing the U.S. dollar value of any asset that is denominated in NIS, Mexican Pesos and CADs or receivables payable in NIS, Mexican Pesos or CAD (unless such receivables are linked to the U.S. dollar).  In addition, the U.S. dollar value of revenues and expenses denominated in NIS, Mexican Pesos or CAD would increase.  Because foreign currency exchange rates fluctuate continuously, exchange rate fluctuations may have an impact on our profitability and period-to-period comparisons of our results.  The effects of foreign currency re-measurements are reported in our consolidated financial statements in current operations.
 
The following table presents information about the rate of inflation in Israel, the rate of devaluation or appreciation of the NIS against the dollar, and the rate of inflation in Israel adjusted for the devaluation:
 
Year ended
December 31,
 
Israeli inflation
rate %
   
NIS devaluation (appreciation)
rate %
   
Israeli inflation adjusted for devaluation (appreciation) %
 
2014
   
(0.2
)
   
12.0
     
(12.2
)
2015
   
(1.0
)
   
(0.3
)
   
(0.7
)
2016
   
(0.2
)
   
(1.5
)
   
1.3
 
2017
   
0.4
     
(9.8
)
   
10.2
 
2018
   
1.3
     
8.1
     
(6.8
)
 
40

 
The U.S. dollar cost of our operations in Canada is influenced by the exchange rate between the U.S. dollar and the CAD.  In 2016 and 2017 the CAD appreciated against the U.S. dollar by 2.7% and 7%, respectively. In 2018 the CAD depreciated against the U.S. dollar by 8.6%. In addition, the U.S. dollar cost of our operations in Mexico is influenced by the exchange rate between the U.S. dollar and the Mexican Peso.  In 2016 Peso depreciated against the U.S. dollar by 19.2%. In 2017 and 2018 the Mexican Peso appreciated against the U.S. dollar by 4.5% and 0.4%, respectively.
 
In 2018, foreign currency fluctuations had a positive impact on our results of operations as we recorded foreign exchange gain, net of $1.1 million, compared to $4 million of foreign exchange loss, net in 2017.  We expect that our results of operations will continue to be affected by currency fluctuations in the future.

Conditions in Israel
 
We are incorporated under the laws of, and our principal executive offices and manufacturing and research and development facilities are located in, the State of Israel.  See Item 3D “Key Information – Risk Factors – Risks Relating to Our Location in Israel” for a description of governmental, economic, fiscal, monetary and political policies or factors that have materially affected or could materially affect our operations.
 
Effective Corporate Tax Rate
 
The Israeli corporate tax rate was 25% in 2016, 24% in 2017 and 23% in 2018.

Our effective corporate tax rate may substantially exceed the Israeli tax rate since our U.S.-based subsidiaries will generally be subject to applicable federal, state, local and foreign taxation, and we may also be subject to taxation in the other foreign jurisdictions in which we own assets, have employees or conduct activities.  Because of the complexity of these local tax provisions, it is not possible to anticipate the actual combined effective corporate tax rate, which will apply to us.
 
As of December 31, 2018, we had net deferred tax assets of $3.3 million attributable to our subsidiaries.  We had total estimated available carryforward tax losses of $8.9 million with respect to our operations in Israel to offset against future taxable income.  We have recorded a full valuation allowance for such carryforward tax losses due to the uncertainty of their future realization. As of December 31, 2018, our subsidiaries outside of Israel had estimated total available carryforward tax losses of $8.7 million, which may be used as an offset against future taxable income for periods ranging between 1 and 20 years.  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 tax law provisions.  The annual limitation may result in the expiration of net operating losses before utilization.
 
Trade Relations
 
Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation.  Israel is a member of the World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade.  Israel is also a member of the Organization for Economic Co-operation and Development, or the OECD, an international organization whose members are governments of mostly developed economies.  The OECD’s main goal is to promote policies that will improve the economic and social well-being of people around the world.  In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan.  These preferences allow Israel to export products covered under such programs either duty-free or at reduced tariffs.
 
41


 
Israel and the European Union Community, known as the “European Union,” concluded a Free Trade Agreement in July 1975 that confers some advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years.  In 1985, Israel and the United States entered into an agreement to establish a Free Trade Area.  The Free Trade Area has eliminated all tariff and some non-tariff barriers on most trade between the two countries.  On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as the “EFTA,” established a free-trade zone between Israel and the EFTA nations.  In November 1995, Israel entered into a new agreement with the European Union, which includes a redefinition of rules of origin and other improvements, such as allowing Israel to become a member of the Research and Technology programs of the European Union.  In recent years, Israel has established commercial and trade relations with a number of other nations, including Russia, China, India, Turkey and other nations in Eastern Europe and the Asia-Pacific region.  In addition, Israel has entered into a free trade agreement with the MercoSur countries (Brazil, Paraguay, Argentina and Uruguay) which became fully effective in September 2011.  Generally, the purpose of this agreement is to reduce the custom rates between Israel and these countries and to abolish them completely in certain cases.  Israel is the first country outside of Latin America to enter into such an agreement with the MercoSur countries.
 
B.            Liquidity and Capital Resources
 
Our working capital at December 31, 2018 and 2017 was $60.8 million and $59.4 million, respectively.  Cash and cash equivalents amounted to $38.7 million at December 31, 2018 compared to $22.5 million at December 31, 2017.  The increase in cash and cash equivalents is primarily due to the decrease in Short-term and long-term deposits, restricted bank deposits and escrow deposits, which amounted to $16.4 million at December 31, 2018 compared to $30 million at December 31, 2017.  Our cash and cash equivalents, short and long-term bank deposits are held in various banks, mainly in U.S. dollars, Euros, NIS and CAD.
 
From our inception until our initial public offering in March 1993, we financed our activities mainly through cash flow from operations and bank loans.  In March 1993, we received proceeds of $9.8 million from our initial public offering of 1,380,000 ordinary shares.  Subsequently, we made follow-on public offerings, in February 1997 (of 2,085,000 ordinary shares) and in April 2005 (of 1,700,000 ordinary shares), in which we raised $9.4 million and $14.9 million, respectively.  To allow us to begin to implement a new strategic plan, on September 8, 2010, a company affiliated with Mr. Nathan Kirsh, our former principal shareholder, provided us with a bridge loan of $10.0 million.  To repay the loan and to raise permanent capital for general working capital purposes including facilitating the implementation of our new business strategy, in July and August 2011 we raised $16.2 million from a rights offering of 5,273,274 ordinary shares and a private placement of 150,000 of our ordinary shares.
 
In October 2016, we completed a rights offering in which we received gross proceeds of approximately $23.8 million from the sale of 6,170,386 ordinary shares . Our controlling shareholders, FIMI V Funds purchased 3,392,869 ordinary shares including through an exercise of over-subscription rights.
 
In 2016, we paid approximately $12.1 million, (including $0.8 million placed in escrow to secure potential indemnity obligations and net of cash acquired) in consideration of our acquisition of Aimetis in 2016, and approximately $0.4 million (net of $2.4 million of acquired cash) in consideration of our acquisition of a majority interest in ESC BAZ Ltd. in 2018.
 
In connection with our acquisition of CyberSeal, we issued warrants to purchase 898,203 of our ordinary shares at an exercise price of $ 4.16 per share to CyberSeal's former owners.  Of such warrants, 60,000 warrants were  exercised in 2017. In October 2018, we agreed to purchase the remaining 838,203 warrants from the warrant holders for an aggregate consideration of $375,000. Under Israeli law, the consummation of such transaction was subject to court approval, which was granted on January 16, 2019. The closing of the purchase of the warrants occurred on March 2019.
 
We expect that our total research and development expenses in 2019 will be approximately $7.7 million.   Our research and development plan for 2019 covers development of new and innovative products, as well as improvement of existing technologies.

42

 
We believe that our cash and cash equivalents, bank facilities, bank deposits and our expected cash flows from operations will be sufficient to meet our ongoing cash requirements through 2019.  However, our liquidity could be negatively affected by a decrease in demand for our products, including the impact of potential reductions in customer purchases that may result from the current general economic climate.

Cash Flows

The following table summarizes our cash flows for the periods presented:
 
   
Year ended December 31,
 
   
2016
   
2017
   
2018
 
   
(in thousands)
 
Net cash provided by (used in) operating activities
   
8,933
     
(1,952
)
   
7,326
 
Net cash provided by (used in) investing activities
   
(40,703
)
   
3,176
     
10,121
 
Net cash provided by (used in) financing activities
   
25,006
     
504
     
77
 
Effect of exchange rate changes on cash and cash equivalents
   
160
     
2,076
     
(1,029
)
Increase (decrease) in cash, cash equivalents and restricted cash
   
(6,604
)
   
3,804
     
16,495
 
Cash, cash equivalents and restricted cash at the beginning of the year
   
28,105
     
21,501
     
25,305
 
Cash, cash equivalents and restricted cash at the end of the year
 
$
21,501
   
$
25,305
   
$
41,800
 
 
Net cash provided by operating activities was approximately $8.9 million and $7.3 million in the years ended December 31, 2016 and 2018, respectively compared to net cash used in operating activities of approximately $2 million in the year ended December 31, 2017.
 
Net cash provided by operating activities in the year ended December 31, 2018 was primarily attributable to 2018 profit, as well as $3.2 million of depreciation and amortization expenses, an increase of $3.2 million in customer advances, an increase of $3.1 million in other accounts payable and accrued expenses and deferred revenues, an increase of $1.1 million in trade payables and a decrease of $0.6 million in trade receivables. This was offset in part by an increase of $4 million in inventories, an increase of $1 million in deferred income taxes, an increase of $1.3 million in other accounts receivables and prepaid expenses and an increase of $0.5 million in accrued interest and exchange differences on short-term and other long-term liabilities.
 
Net cash used in operating activities in the year ended December 31, 2017 was primarily attributable to our 2017  loss, as well as an increase of $2.1 million in inventories, an increase of $1.6 million in unbilled receivables and an increase of $0.5 million in deferred income taxes. This was offset in part by an increase of $3 million in accrued interest and exchange differences on short-term and other long-term liabilities, $1.9 million of depreciation and amortization expenses, an increase of $1.5 million in other accounts payable and accrued expenses and deferred revenues, an increase of $1.2 in customer advances, an increase of $0.8 million in trade payables and a decrease of $0.5 million in short-term and long-term trade receivables.
 
Net cash provided by operating activities in the year ended December 31, 2016 was primarily attributable to 2016 income, as well as an increase of $3.4 million in customer advances, a decrease of $1.5 million in trade receivables, net, a decrease of $1.4 million in unbilled receivables, a decrease of $1.2 million in inventory and $1.7 million of depreciation and amortization expenses. This was offset in part by an increase of $1.7 million in deferred income taxes.
 
Net cash provided by investing activities was approximately $10.1 million in the year ended December 31, 2018 compared to net cash provided by investing activities of approximately $3.2 million in the year ended December 31, 2017 and net cash used in investing activities was approximately $40.7 million in the year ended December 31, 2016.
 
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In the year ended December 31, 2018, our net cash provided by investing activities was primarily attributable sale of short-term bank deposits of $ 12.9 . This was offset in part by purchase of property and equipment for $2.1 million, payments for business acquisitions of ESC BAZ of $0.4 million (net of acquired cash) and investment in technology of $0.3 million.
 
In the year ended December 31, 2017, our net cash provided by investing activities was primarily attributable sale of short-term bank deposits of $ 4.1 million. This was offset in part by purchase of property and equipment for $0.9 million.
 
In the year ended December 31, 2016, our net cash used in investing activities was primarily attributable to investments of short-term bank deposits and restricted deposit of $ 28.9 million , payments for business acquisitions of Aimetis of $12.1 million and a purchase of property and equipment for $0.8 million.
 
Net cash provided by financing activities was $0.1 million in the year ended December 31, 2018 compared to net cash provided by financing activities of approximately $0.5 million in the year ended December 31, 2017 and net cash used in financing activities of approximately $25 million in the year ended December 31, 2016.
 
In the year ended December 31, 2018, our net cash provided by financing activities was attributable to issuance of shares upon exercise of options of $0.1 million.
 
In the year ended December 31, 2017, our net cash provided by financing activities was primarily attributable to issuance of shares upon exercise of options and warrants of $0.6 million.
 
In the year ended December 31, 2016, net cash provided by financing activities was $25 million. In 2016 we received net proceeds of $23.6 million from a rights offering and $1.4 million from the exercise of options and issuance of shares under our employee stock purchase plan.
 
We had capital expenditures of approximately $0.8 million, $0.9 million and $2.1 million in the years ended December 31, 2016, 2017 and 2018, respectively.  We estimate that our capital expenditures for 2019 will total approximately $0.7 million.  We expect to finance these expenditures primarily from our cash and cash equivalents and our operating cash flows.  However, the actual amount of our capital expenditures will depend on a variety of factors, including general economic conditions and changes in the demand for our products.
 
Credit Lines and Other Debt
 
As of December 31, 2018, we had credit lines with Bank Leumi Le-Israel B.M., or Bank Leumi and Union Bank of Israel Ltd., or Union Bank, totaling $15 million in the aggregate (of which $11.9 million is reserved exclusively for guarantees out of which $2.8 million was available as of December 31, 2018).  Our credit lines at Bank Leumi and Union Bank have no restrictions as to our use of the credit.  We are not under any obligation to maintain financial ratios or other terms in respect of our credit lines. In addition, as of December 31, 2018, our foreign subsidiary had credit lines with the Royal Bank of Canada of $1.4 million in the aggregate, of which $1.2 million was available at December 31, 2018.
 
Our Canadian subsidiary has undertaken to maintain a general covenant and the following financial ratio and term in respect of its outstanding credit lines: a ratio of total liabilities to tangible net worth of not greater than 0.75:1. As of December 31, 2018, the Canadian subsidiary was in a default of its covenant. After the balance sheet date, the bank acknowledged the default and agreed to the Company's plan to remedy such default until May 31, 2019. Such default has no impact on the Company's financial statements as of December 31, 2018.
 
As of December 31, 2018, our outstanding balances under our credit lines in Israel consisted of several bank performance, advance payment and bid guarantees totaling approximately $9.1 million, at an annual cost of 0.65%-1.15%.  As of December 31, 2018, the outstanding balances under the credit lines of our subsidiary consisted of several bank performance, advance payment and bid guarantees totaling approximately $0.2 million, at an annual cost of 1% -2%.
 
44

 
C.            Research and Development, Patents and Licenses.
 
Government Grants
 
We participate in programs sponsored by the Israeli Government for the support of research and development activities.  In the past we have received royalty-bearing grants from the Innovation Authority (formerly the Office of the Chief Scientist) for certain of our research and development projects for perimeter security products. We are obligated to pay royalties to the Innovation Authority amounting to 3.5% of revenues derived from sales of the products funded with these grants and ancillary services, up to 100% of the grants received, linked to the U.S. dollar.  All grants received after January 1, 1999 also bear interest equal to the 12 month LIBOR rate.  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.
 
In 2015, CyberSeal received $134,000 from the Innovation Authority. Following the cancelation of the 2015 project, CyberSeal returned the $134,000 grant received in 2015.
 
In 2018, Magal received approval for a grant of $301,000 from the Innovation Authority, subject to development milestones achievement. The grant is for further development of  Roboguard.
 
For the years ended December 31, 2016, 2017 and 2018, we paid the Innovation Authority royalties in the amount of $17,000, $33,000 and $6,000, respectively.  These royalties related to sales of perimeter security products and management security systems. As of December 31, 2018, we had a contingent obligation to pay royalties to the Innovation Authority in the amount of approximately $1.7 million upon the successful sale of perimeter security   products developed under research and development programs sponsored by the Innovation Authority.
 
We participate in programs sponsored by the Industrial Research Assistance Program (IRAP) in Canada. During 2018 our Canadian subsidiary received grants in the amount of $ 6,000.
 
Investment Tax Credit
 
Our Canadian subsidiary is eligible for investment tax credits for its research and development activities and for certain current and capital expenditures.  For the years ended December 31, 2018, 2017 and 2016, our Canadian subsidiary recognized $179,000, $117,000 and $149,000, respectively, of investment tax credits.
 
In addition, as of December 31, 2018, our U.S. subsidiary had available investment tax credits of approximately $245,000 million to reduce future federal and state income taxes payable.  These credits will expire in 2019 through 2025 in the U.S. As of December 31, 2018, our subsidiaries made a full valuation allowance in respect of such investment tax credits.
 
D.            Trend Information.
 
Our 2018 results were impacted by delays in infrastructure security spending in North America. On the other hand, the continuous spending on critical infrastructure security in developing regions, coupled with the growth in VMS and IVA global demand and the signs of gradual recovery in North America will affect the industry in the near future.
 
E.             Off-Balance Sheet Arrangements.
 
We are not a party to any material off-balance sheet arrangements.  In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.
 
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F.              Tabular Disclosure of Contractual Obligations.
 
The following table summarizes our minimum contractual obligations and commercial commitments as of December 31, 2018 and the effect we expect them to have on our liquidity and cash flow in future periods.
 
 
Payments due by period
 
Contractual Obligations
 
Total
   
Less than 1 year
   
1-2 years
   
3-5 years
   
More than 5 years
 
   
(in thousands)
 
Operating lease obligations
   
4,893
     
1,119
     
720
     
1,581
     
1,473
 
Other long-term liabilities reflected on our balance sheet under U.S. GAAP
   
2,181
     
-
     
-
     
-
     
2,181
 
Total          
   
7,074
     
1,119
     
720
     
1,581
     
3,654
 
 
In addition, we have guaranteed advance payments, the performance of our work and provided warranties for the performance of our work to certain of our customers (usually governmental entities).  Such guarantees are required by contract for our performance during the installation and operational period of projects throughout Israel and the rest of the world.  The performance guarantees typically expire soon after certain milestones are met and warranty guarantees typically expire at the end of the warranty period.  The maximum potential amount of future payments we could be required to make under our guarantees at December 31, 2018 was $9.3 million.  We have not recorded any liability for such amounts as we believe our performance will not result in any claims.
 
ITEM 6.
Directors, Senior Management and Employees
 
A.            Directors and Senior Management.
 
Set forth below are the name, age, principal position and a biographical description of each of our directors and executive officers:
 
Name
 
Age
 
Position
Gillon Beck          
 
57
 
Chairman of the Board of Directors
Ron Ben-Haim          
 
4 9
 
Director
Jacob Berman          
 
70
 
Director
Avraham Bigger (1)(2)           
 
73
 
Director
Liza Singer (1)(2)           
 
48
 
External Director
Moshe Tsabari (1)(2)           
 
65
 
External Director
Dror Sharon          
 
53
 
Chief Executive Officer
Yaacov Vinokur           
 
41
 
Chief Financial Officer
Brian Rich          
 
62
 
Deputy CEO, CTO and President of Senstar Corporation
Doron Kerbel          
 
47
 
Vice President – General Counsel and Company Secretary
Yaniv Shachar          
 
45
 
Senior Vice President & General Manager Magal Israel
Jeremy Weese          
 
42
 
Senior Vice President & COO of Senstar Corporation
Kristen Cory          
 
36
 
Vice President North America Sales
Carlos Garcia Almeida          
 
48
 
General Manager Latin America
Fabien Haubert
 
44
 
Vice President EMEA Sales
Gord Loney          
 
66
 
Vice President APAC Sales
____________
(1) Member of our Audit Committees.
(2) Member of our Compensation Committee

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Gillon Beck has served as a director and Executive Chairman of our board of directors since September 2014. Since 2003, Mr. Beck has been a Senior Partner at FIMI Opportunity Funds, the controlling shareholder of Magal, as well as a Director of the FIMI Opportunity Funds’ General Partners and SPV companies. In addition, Mr. Beck currently serves as Chairman of the Board of ImageSat NV, Bet Shemesh Engines LTD (TASE), Ham-Let (Israel-Canada) Ltd. (TASE), Rivulis Irrigation Ltd., Inrom Industries Ltd., Oxygen and Argon Works Ltd and Overseas Commerce Ltd., Bird Aerosystems Ltd, and is a director of Inrom Construction Industries Ltd. (TASE), Orbit Technologies Ltd (TASE), Carmel Forge Ltd., Monfort Medical Ltd,  AITECH Ltd,  and Unitronics (1989) (R”G) Ltd (TASE).  During the past five years, Mr. Beck had served as a member of the Board of Directors of the following public companies: Overseas Commerce Ltd (TASE), Ormat Technologies Inc. (NYSE) and Ormat Industries Ltd. From 1999 to 2003, Mr. Beck served as Chief Executive Officer and President of Arad Ltd., a publicly-traded water measurement and automatic meter reading company, and from 1995 to 1999, he served as Chief Operating Officer of Arad Ltd. Mr. Beck received a Bachelor of Science degree (Cum Laude) in Industrial Engineering in 1990 from the Technion – Israel Institute of Technology, and a Master of Business Administration in Finance in 1992 from Bar-Ilan University .

Ron Ben-Haim   has served as a director since September 2014.  Mr. Ben-Haim has been a partner in FIMI Opportunity Funds since 2006. Mr. Ben-Haim currently serves on the boards of directors of  Poliram Plastic Industries Ltd., Oxygen and Argon Works Ltd., Tadir-Gan (Precision Products) 1993, Ltd. (TASE), Aitech Rugged Group, Inc., Rivulis Irrigation Ltd., Inrom Industries Ltd., Inrom Construction Industries Ltd. (TASE), Nirlat Paints Ltd., Alony Ltd., Orbit Technologies, Ltd. (TASE), G1 Security Solutions, Ltd (TASE) and TAT Technologies, Ltd. (TASE, NASDAQ). Mr. Ben Haim formerly served as a member of the boards of directors of the following public companies: Hadera Paper Ltd., Overseas Commerce, Ltd., Medtechnica, Ltd., Ginegar Plastic Products, Ltd., Raval Acs, Ltd.,  Merhav Ceramic and Building Materials Center, Ltd. and Ophir Optronics, Ltd. Mr. Ben Haim was previously with Compass Advisers, LLP, an investment banking firm based in New York and in Tel Aviv and with the Merrill Lynch Mergers and Acquisitions group in New York. Prior to Merrill Lynch, Mr. Ben-Haim worked at Teva Pharmaceuticals in production management. Mr. Ben-Haim holds a B.Sc. degree in industrial engineering from the Tel Aviv University and an M.B.A. degree from New York University .

Jacob Berman has served as a director since November 2013.  Since November 2014, Mr. Berman serves as the chairman of the board of directors of Israel Discount Bank of New York and acted as a member of our audit committee and compensation committee between September 2014 and December 2014. Mr. Berman has been President of JB Advisors, Inc., a New York based financial advisory firm with extensive experience in international private banking, real estate investment counseling, and commercial/retail banking since 2002.  Mr. Berman served as a director of Micronet Enertec Technologies, Inc. Previously, Mr. Berman was the founder, President and CEO of the Commercial Bank of New York.

Avraham Bigger has served as a director since September 2014.  Mr. Bigger has been, since 2010, the owner and a member of the Board of Directors of Bigger Investments Ltd. Mr. Bigger currently serves as a board member of Migdal insurance, chairman of the board at Recha, board member at MCA (car import and distributor), international board member of the Weitzman Science Institute and president of the Israel Nature and Heritage Foundation. He formerly served as the Chief Executive Officer and Chairman of the Board of Directors of Makhteshim Agam Industries Ltd., Chairman of the Boards of Directors of Supersol Ltd. (TASE), Caniel Beverages & Caniel Packaging Industries Ltd., the Edmond Benjamin de Rothschild Caesarea Foundation and as managing director of Paz Oil Company Ltd. (TASE) and Israel General Bank (U Bank). Mr. Bigger also served as a member of the Boards of Directors of Bank Leumi Le-Israel Ltd. (TASE), First International Bank of Israel Ltd. (TASE), Strauss Group Ltd. (formerly known as Strauss-Elite Ltd.) (TASE), Partner Communications Company Ltd. (TASE), Cellcom Israel Ltd. (TASE, NYSE), El-Al Israel Airlines Ltd. and various private companies. Mr. Bigger received a Bachelor of Economics degree and an M.B.A. degree, both from the Hebrew University of Jerusalem.

Liza Singer   has served as an external director since June 2010.  Since 2003, Ms. Singer has served as the owner’s representative of the Lewis Trust Group, an investment assessment and development entity that focuses on tourist projects and the development of marine and hotels resorts.  Ms. Singer serves as a director of the Haifa Port and Diners Club Israel Ltd. During 2007, Ms. Singer served as the chief operating officer and country manager of Brack Capital Real Estate.  Previously, Ms. Singer served as the Vice President of Business Development of the Baran Group, a provider of engineering and construction services, as investment director of Syntek Capital, a private-equity investment company and as an associate at APAX Partners & Co., a venture capital fund.  Previously Ms. Singer worked at Kesselman & Kesselman, the Israeli member firm of PriceWaterhouseCoopers and at Gornitzky & Co. a leading Israeli law firm.  Ms. Singer has an LL.B degree, a B.A. degree in accounting and an M.B.A. degree, all from Tel Aviv University.  Ms. Singer is a certified public accountant (Israel) and a registered lawyer with the Israeli Bar Association.
 
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Moshe Tsabari has served as an external director since December 2014.  Mr. Tsabari is the owner and serves as the joint CEO of GME Trust, a company that advises on crisis management and improvement of work processes, in Israel and worldwide.  Since 2005, Mr. Tsabari has served as the owner and director of Osher – Training & Consulting Ltd.  From 2006 to 2011 Mr. Tsabari served as a senior partner in the International Company for Defense and Rescue Ltd. and in QG Company, two companies that are engaged in the provision of consultancy and training projects in the security field in Israel.  In addition, Mr. Tsabari is the founder of the International Institute for Researching the Arab World, is a former director in Links Aviation and is the former CEO of SYS-TRY, an electronic equipment development company.  Prior to that, Mr. Tsabari served for 15 years, until 2004, in the Israeli Security Agency (ISA) in a number of positions, including Director of Personal in the Human Resources Division, Director of Security Assistance Division (rank in both positions equivalent to Major General) and Head of the Operations Division (rank equivalent to Brigadier).  Mr. Tsabari holds a B.Sc. degree in Geodetic Engineering, a M.A. degree in Industrial and Management Engineering and a PhD degree in Science, all from the Technion – The Israeli Institute of Technology. In addition, Mr. Tsabari is an A.M.P. graduate from the Wharton School of the University of Pennsylvania.

Dror Sharon  has served as our Chief Executive Officer since June 24, 2018 following a six years career as President and CEO at Controp Precision Technology Ltd., a company specializing in developing, manufacturing and selling Electro Optical and Precision Motion Control Systems for the global defense and homeland security (HLS) markets. Prior to that, Mr. Sharon served in various positions at Opgal Optronics Ltd., the last four years as its President and CEO. Mr. Sharon holds an MBA degree from Derby University, United Kingdom and a B.Sc. degree in Mechanical Engineering (Dean’s award of excellence) from the Technion -Israel Institute of Technology, Haifa, Israel.

Yaacov (Kobi) Vinokur joined our company as Chief Financial Officer in September 2016. Prior to joining our company, Mr. Vinokur served for three years as Chief Financial Officer of Miya (Arison Group), a global provider of comprehensive water efficiency solutions and a water utilities operator. Prior to that, Mr. Vinokur served in several key leadership positions at Brink’s Company (NYSE: BCO), a global leader in cash logistics, including Chief Financial Officer - Developing Markets division, Director of Procurement - EMEA division and Director of Finance - Global Services division. Prior to his career with Brink’s, Mr. Vinokur served as an Executive Director at Shapira Films, one of the leading film distribution and production companies in Israel, as well as a Head of Treasury at the Ministry of Defense of Israel. In 2017, the Israeli CFO Forum honored Mr. Vinokur with its annual CFO Excellence award. Mr. Vinokur, a certified public accountant in the United States and Israel, holds a B.A. degree in Accounting and Economics (magna cum laude) from Haifa University and a M.B.A. degree (cum laude) from Tel Aviv University. Mr. Vinokur is also a graduate of Harvard Business School’s Leadership Development Program.
 
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Brian Rich serves as Deputy CEO, CTO and President of Senstar Corporation, our Canadian subsidiary since May 2015.  Prior to such date, he served as President of Senstar Corporation since September 2000.  Prior to joining Magal, Mr. Rich served as Vice President, Engineering and Operations at Intelligent Detection Systems (IDS), a designer and manufacturer of trace explosives and narcotics detection equipment.  Prior to IDS he was a founding member of Senstar Corporation Canada from October 1981 to February 1998, during which time he held positions of increasing responsibility ending as Vice President, Engineering and Systems, and prior to that was a research engineer at Computing Devices Company of Canada (a Control Data company).  Mr. Rich holds a B.A.Sc. degree in Electrical Engineering from the University of Toronto.

Doron Kerbel has served as our General Counsel since July 2015.  Prior to joining Magal, Mr. Kerbel had served for more than eight years as legal counsel at Elbit Systems Ltd. (NASDAQ: ESLT) Aerospace Division.  Mr. Kerbel has extensive experience in advising on variety of commercial legal issues, mergers and acquisitions as well as (private finance initiatives) PFI and BOT (Build Operate Transfer) projects, both locally and internationally.  Prior to his work at Elbit Systems, Mr. Kerbel was an associate lawyer at M. Firon & Co. and Senior Legal Counsel for International Law at the Israeli Embassy to the Netherlands.  Mr. Kerbel holds a LL.B. degree from the Interdisciplinary Center (IDC) Herzliya and a LL.M. degree (with distinction) from the International Law School, University of Amsterdam.

Yaniv Shachar serves as Vice President Projects and Operations. Mr. Shachar joined Magal in June 2015. Prior to joining Magal, he worked for five and half years at Logic Industries Ltd. (a subsidiary of AGT International) as Project, Program, and Division Manager, leading large-scale homeland security projects and operations in the Middle East. Prior to joining Logic, Mr. Shachar served for 17 years in the Israeli Navy. Mr. Shachar is a graduate of the Executive M.B.A. program of the Hebrew University in Jerusalem, where he majored in integrative management. He also holds a B.A. degree in Economics and Communications from Haifa University.

Jeremy Weese joined Magal in 1999 in a design engineering role. During his tenure with the company Mr. Weese has moved through progressive levels of responsibility within the research and development department. Prior to taking the position of Chief Operations Officer, Mr. Weese was responsible for the Company’s product portfolio and research and development activities as VP of Engineering. Mr. Weese has served in his current role as Senior VP & COO since April 2016. Mr. Weese is a Professional Engineer and member of the IEEE. He holds a B.A.Sc. degree in Computer Engineering from the University of Ottawa.

Kristen Cory joined our company in January 2019 as Vice President - North American Sales of Senstar Corporation, our Canadian subsidiary.  Prior to Senstar, Ms. Cory held the position of Director of Business Development with Hikvision USA – world’s largest provider of video surveillance solutions – where she focused on the demand creation side of generating rapid business growth. Prior to Hikvision, Ms. Cory controlled the operations (sales, technical, support, etc.) for Raytec Systems, Inc.; a high end security LED lighting solution for the enterprise and oil & gas industries.

Carlos Garcia Almeida joined our company in February 2013 with more than 23 years of experience in the security market. Prior to joining our company, Mr. Garcia served as General Manager of Prosegur Mexico.  Prior to Prosegur, Mr. Garcia served in several leadership and general management roles in leading security organizations, among them UTC Fire & Security and Tyco Fire & Security.  Mr. Garcia holds a degree in Telecom Engineering and has successfully participated in various executive programs, including the Management Development Program (D-1) from the IPADE Business School.

Fabien Haubert joined our company in February 2018 as Vice President Sales – EMEA Region, based in Paris, France.  Mr. Haubert’s most recent experience (February 2014 – February 2018) was with UK based CCTV solution provider Indigo Vision located in Edinburgh where he was Regional Director – EMEA South.  Previous to his 4 years at Indigo he worked with several companies in the VMS, IP CCTV, intrusion, access control and integration areas since 2002.  He has extensive experience in sales management with past responsibility for the EMEA region.  Mr. Haubert has a technical background with a Master of Science degree in Electronics Engineering (Ecole Supérieure d’Ingénieurs en Electrontechnique et Electronique) as well as a Master of Strategy and Engineering of International business (Ecole Supérieure des Sciences Economiques et Commerciales).  He speaks French, English, Spanish, and Italian and has a working knowledge of Dutch.
 
49

 
Gord Loney joined our company in 1995 when he was responsible for product sales in Canada, the Middle East and Africa, before assuming responsibility for strategic OEM accounts and the Far East.  During 2016 Mr. Loney was appointed as Vice President for Sales - Asia Pacific. In this role Mr. Loney is responsible for establishment of an office in the Clark Freeport Zone in the Philippines, from which he is leading a support and sales team to better serve the high growth Asian market.  Mr. Loney is an engineering graduate of the Royal Military College of Canada who served twenty-five years in the Royal Canadian Air Force.
 
The terms of office of Messrs. Beck, Berman, Ben-Haim and Bigger will expire at our 2019 annual general meeting of shareholders.  The terms of our external directors, Mr. Tsabari and Ms. Singer, expire in 2020 and 2019, respectively.
 
Mr. Dror Sharon replaced Saar Koursh as our CEO in June 2018. Mr. Yaniv Shachar, E.V.P. and General Manager of Magal Israel, acted as CEO in the interim period after Mr. Koursh left our company on April 30, 2018.

B.              Compensation
 
Compensation of Directors and Executive Officers
 
The aggregate compensation costs on behalf of our directors and executive officers as a group during 2018 (including the former Chief Executive Officer who was replaced during the course of 2018) consisted of approximately $3.1 million in salary, fees, bonus, equity based compensation, commissions and directors’ fees, but excluding dues for professional and business associations, business travel and other expenses commonly reimbursed or paid by companies. As of December 31, 2018, the aggregate amount set aside or accrued for pension, retirement and vacation or similar benefits for our directors and executive officers was approximately $0.1 million.  In addition, we e provide automobiles to our executive officers at our expense.
 
We pay our directors an annual fee of NIS 90,000 (approximately $24,000) and a fee of NIS 4,000 (approximately $1,050) for each board or committee meeting that they attend.  Such amounts are linked to the Israeli consumer price index, or CPI, and are updated on a semi-annual basis and accordingly, are adjusted to reflect changes in the CPI in February and August, each year. In addition, we pay to our Executive Chairman a monthly payment of NIS 15,000 (approximately $4,000).
 
As of December 31, 2018, our directors and executive officers as a group, then consisting of 16 persons, held options to purchase an aggregate of 669,500 ordinary shares, having exercise prices ranging from $4.15 to $5.61.  Generally, the options vest over a two to four year period.  Of such options, no options to purchase ordinary shares expire in 2019; and options to purchase 669,500 ordinary shares expire in each of 2020 -2026.  See this Item 6E. “Directors, Senior Management and Employees – Share Ownership – Stock Option Plans.”
 
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Compensation of Senior Office Holders – Israel Companies Law Disclosure
 

The table below sets forth the compensation paid to our five most highly compensated senior office holders (as defined in the Israeli Companies Law) during the year ended December 31, 2018 (which include one former executive officer), in the disclosure format of Regulation 21 of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
 
Information Regarding the Covered Executive (1)
(in thousands)
 
 
Name and Principal Position (2)
Base Salary
Benefits and
Perquisites (3)
Variable  Compensation (4)
Equity-Based
Compensation (5)
Total
Dror Sharon – Chief Executive Officer
        148
73
134
116
471
Saar Koursh – Former Chief Executive Officer
102
219
146
(63)
404
Yaniv Shachar - Senior Vice President & General Manager Magal Israel
167
74
58
31
330
Fabien Haubert - Vice President EMEA Sales
161
76
51
15
303
Yaacov Vinokur - Chief Financial Officer
        141
60
63
11
275
(1)
All amounts reported in the table are in terms of cost to our company, as recorded in our financial statements.
(2)
All current Covered Executives listed in the table are full-time employees. Cash compensation amounts denominated in currencies other than the U.S. dollar were converted into U.S. dollars at the average conversion rate for the year ended December 31, 2018.
(3)
Amounts reported in this column include benefits and perquisites or on account of such benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may include, to the extent applicable to each executive, payments, contributions and/or allocations for savings funds, pension, severance, vacation, car or car allowance, medical insurances and benefits, risk insurances (e.g., life, disability, accident), convalescence pay, payments for social security, tax gross-up payments and other benefits and perquisites consistent with our guidelines.
(4)
Amounts reported in this column refer to Variable Compensation such as commission, incentive and bonus payments as recorded in our financial statements for the year ended December 31, 2018.
(5)
Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2018.
 
Pursuant to the Israeli Companies Law, we have adopted a compensation policy and are required to follow certain approval requirements with respect to the compensation of our directors and executive officers.  See below “Board of Directors – Compensation Committee” and Item 10. Additional Information –– Office Holders.
 
We follow Israeli law and practice instead of the requirements of the NASDAQ Stock Market Rules regarding the compensation of our chief executive office and other executive officers.  See Item 16G. “Corporate Governance.”
 
C.            Board Practices 
 
Introduction
 
According to the Israeli Companies Law and our articles of association, the management of our business is vested in our board of directors.  The board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders.  Our executive officers are responsible for our day-to-day management.  The executive officers have individual responsibilities established by our chief executive officer and board of directors.  Executive officers are appointed by and serve at the discretion of the board of directors, subject to any applicable agreements.
 
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Election of Directors
 
Our articles of association provide for a board of directors of not less than three and not more than 11 members, as may be determined from time to time at our annual general meeting.  Our board of directors is currently composed of seven (6) directors.
 
Our directors (except the external directors, as detailed below), are elected by our shareholders at our annual general meeting and hold office until the next annual general meeting.  All the members of our board of directors (except the external directors), may be reelected upon completion of their term of office.  Our annual general meetings of shareholders are held at least once every calendar year, but not more than 15 months after the last preceding annual general meeting.  In the intervals between our annual general meetings of shareholders, the board of directors may from time to time appoint a new director to fill a casual vacancy or to add to their number, and any director so appointed will remain in office until our next annual general meeting of shareholders and may be re-elected.
 
Under the Israeli Companies Law, our board of directors is required to determine the minimum number of directors who must have “accounting and financial expertise,” as such term is defined in regulations promulgated under the Israeli Companies Law.  Our board of directors has determined that at least one director must have “accounting and financial expertise.”  Our board of directors has further determined that Ms. Liza Singer has the requisite “accounting and financial expertise.”
 
We do not follow the requirements of the NASDAQ Stock Market Rules regarding the nomination process of directors, and 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 16G. “Corporate Governance.”
 
External and Independent Directors
 
External directors .  The Israeli Companies Law requires Israeli companies with shares that have been offered to the public in or outside of Israel to appoint at least two external directors.  The Israeli Companies Law provides that a person may not be appointed as an external director if the person, or the person’s relative, partner, employer or an entity under that person’s control, has or had during the two years preceding the date of appointment any affiliation with the company, or any entity controlling, controlled by or under common control with the company.  The term “relative” means a spouse, sibling, parent, grandparent, child or child of spouse or spouse of any of the above as well as a sibling, brother, sister or parent of the foregoing relatives.  In general, the term “affiliation” includes an employment relationship, a business or professional relationship maintained on a regular basis, control and service as an office holder.  Furthermore, if the company does not have a controlling shareholder or a shareholder holding at least 25% of the voting rights, “affiliation” also includes a relationship, at the time of the appointment, with the chairman of the board, the chief executive officer, a substantial shareholder or the most senior financial officer of such company. Regulations promulgated under the Israeli Companies Law include certain additional relationships that would not be deemed an “affiliation” with a company for the purpose of service as an external director. In addition, no person may serve as an external director if the person’s position or other activities create, or may create a conflict of interest with the person’s responsibilities as director or may otherwise interfere with the person’s ability to serve as director or if such person is an employee of the Israel Securities Authority or of an Israeli stock exchange.  If, at the time an external director is appointed, all current members of the board of directors are of the same gender, then that external director must be of the other gender.  A director of one company may not be appointed as an external director of another company if a director of the other company is acting as an external director of the first company at such time.
 
At least one of the elected external directors must have “accounting and financial expertise” and any other external director must have “accounting and financial expertise” or “professional qualification,” as such terms are defined by regulations promulgated under the Israeli Companies Law.
 
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The external directors are elected by shareholders at a general meeting.  The shareholders voting in favor of their election must include at least a majority of the shares voted by shareholders other than controlling shareholders or shareholders who have a personal interest in the election of the external director (unless such personal interest is not related to such persons relationship with the controlling shareholder) present and voting at such meeting (excluding abstentions).  This majority requirement will not be required if the total number of shares of such non-controlling shareholders and disinterested shareholders who vote against the election of the external director represent 2% or less of the voting rights in the company.
 
In general, under the Israeli Companies Law, external directors serve for a three-year term and may be reelected to two (2) additional three-year terms.  However, Israeli companies listed on certain stock exchanges outside Israel, including The NASDAQ Global Market, such as our company, may appoint an external director for additional terms of not more than three years subject to certain conditions.  Such conditions include the determination by the audit committee and board of directors, that in view of the director’s professional expertise and special contribution to the company’s board of directors and its committees, the appointment of the external director for an additional term is in the best interest of the company.  External directors can be removed from office only by the same special percentage of shareholders that can elect them, or by a court order, and then only if the external directors cease to meet the statutory qualifications with respect to their appointment or if they violate their fiduciary duty to the company.
 
Pursuant to the Israeli Companies Law, external directors up for re-election are nominated either by the board of directors or by any shareholder(s) holding at least 1% of the voting rights in the company.  If the board of directors proposed the nominee, the reelection must be approved by the shareholders in the same manner required to appoint external directors for an initial term, as described above. If such reelection is proposed by shareholders, such reelection requires the approval of the majority of the shareholders voting on the matter, and satisfaction of all of the following requirements: (i) In calculating the majority votes, the votes of the controlling shareholders and other shareholders that have personal interest in such reelection (unless such personal interest is not related to such persons relationship with the controlling shareholder) as well as abstentions are not included; (ii) the votes of the non-controlling shareholders in favor of the reelection and of the shareholders who do not have personal interest in the reelection (unless such personal interest is not related to such person’s relationship with the controlling shareholder) is greater than 2% of the voting rights in the company; and (iii) the external director is not, at the time of such reelection, a related shareholder or competitor or a relative thereof and does not have any affiliation to any related shareholder, competitor or any relative thereof during the two years prior to such re-election. A related shareholder or a competitor are defined as the shareholder proposing the reelection, any substantial shareholder (within the meaning of the Israeli Companies Law) if at the time of reelection either such shareholder, its controlling shareholder or any company controlled by either of them has business relations with the company or that either such shareholder, its controlling shareholder or a company controlled by either of them is a competitor of the company.
 
Each committee of the board of directors that is authorized to exercise powers vested in the board of directors must include at least one external director and the audit committee must include all the external directors.  An external director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with such service.
 
Ms. Singer and Mr. Tsabari serve as our external directors under the Israeli Companies Law.  Ms. Singer’s term will expire in 2019 and Mr. Tsabari’s term will expire in 2020.
 
Independent Directors .  Pursuant to the Israeli Companies Law, a director may be qualified as an independent director if such director is either (i) an external director; or (ii) or a director who is appointed or classified as such, and who meets the qualifications of an external director (other than the professional qualifications/accounting and financial expertise requirement), who the audit committee has confirmed meets the external director qualifications, and who has not served as a director for more than nine consecutive years (with any period of up to two years during which such person does not serve as a director not being viewed as interrupting a nine-year period).
 
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In general, NASDAQ Stock Market Rules require that the board of directors of a NASDAQ-listed company has a majority of independent directors and that its audit committee has at least three members and be comprised only of independent directors, each of whom satisfies the “independence” requirements of NASDAQ and the SEC.  However, foreign private issuers, such as our company, may follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Stock Market Rules.  On June 30, 2006, we provided NASDAQ with a notice that instead of maintaining a majority of independent directors, we follow Israeli law, under which we are required to appoint at least two external directors, within the meaning of the Israeli Companies Law, to our board of directors.  In addition, in accordance with the rules of the SEC and NASDAQ, our audit committee is composed of three independent directors, as defined in the rules of the SEC and NASDAQ.  At present the majority of our directors satisfy the independence requirements of NASDAQ and the SEC.
 
Our board of directors has determined that our external directors, Ms. Singer and Mr. Tsabari, qualify as independent directors under the requirements of the SEC and NASDAQ.  Our board of directors has further determined that Messrs. Bigger and Berman also qualify as independent directors under the requirements of the SEC and NASDAQ.
 
Audit Committee under Israeli Law
 
Under the Israeli Companies Law, the board of directors of any public company must establish an audit committee, or the Israeli Audit Committee.  The Israeli Audit Committee must consist of at least three directors and must include all of the external directors, the majority of which must be independent directors.  The Israeli Audit Committee may not include the chairman of the board of directors; any director employed by the company or providing services to the company on an ongoing basis (other than as a director); a controlling shareholder or any of the controlling shareholder’s relatives; and any director who is employed by, or rendered services to, the controlling shareholder or an entity controlled by the controlling shareholder, or a director whose main livelihood is from the controlling shareholder.  Any person who is not permitted to be a member of the Israeli Audit Committee may not be present in the meetings of the Israeli Audit Committee unless the chairman of the Israeli Audit Committee determines that such person’s presence is necessary in order to present a specific matter.  However, an employee who is not a controlling shareholder or relative of a controlling shareholder may participate in the audit committee’s discussions but not in any vote, and at the request of the Israeli Audit Committee, the secretary of the company and its legal counsel may be present during the meeting. The chairman of the Israeli Audit Committee must be an external director.
 
The role of the Israeli Audit Committee, pursuant to the Israeli Companies Law, includes:
 
·
monitoring deficiencies in the management of the company, including in consultation with the independent auditors or the internal auditor, and to advise the board of directors on how to correct such deficiencies. If the audit committee finds a material deficiency, it will hold at least one meeting regarding such material deficiency, with the presence of the internal auditor or the independent auditors but without the presence of the senior management of the company. However, a member of the company’s senior management can participate in the meeting in order to present an issue which is under his or her responsibility;
 
·
determining, on the basis of detailed arguments, whether to classify certain engagements or transactions as material or extraordinary, as applicable, and therefore as requiring special approval under the Israeli Companies Law. The audit committee may make such determination according to principles and guidelines predetermined on an annual basis;
 
·
determining if transactions (excluding extraordinary transactions) with a controlling shareholder, or in which a controlling shareholder has a personal interest, are required to be rendered pursuant to a competitive procedure;
 
·
deciding whether to approve engagements or transactions that require the Israeli Audit Committee approval under the Israeli Companies Law;
 
·
determining the approval procedure of non-extraordinary transactions, following classification as such by the Israeli Audit Committee, including whether such specific non-extraordinary transactions require the approval of the Israeli Audit Committee;
 
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·
examining and approving the annual and periodical working plan of the internal auditor;
 
·
overseeing the company’s internal auditing and the performance of the internal auditor; confirm that the internal auditor has sufficient tools and resources at his disposal, taking into account, among other, the special requirements of the company and its size;
 
·
examining the scope of work of the independent auditor and its pay, and bringing such recommendations on these issue before the Board;
 
·
determining the procedure of addressing complaints of employees regarding shortcomings in the management of the company and ensure the protection of employees who have filed such complaints;
 
·
determining with respect to transactions with the controlling shareholder or in which such controlling shareholder has personal interest, whether such transactions are extraordinary or not, an obligation to conduct competitive process under supervisions of the audit committee or determination that prior to entering into such transactions the company shall conduct other process as the audit committee may deem fit, all taking into account the type of the company; and
 
·
determining the manner of approval of transactions with the controlling shareholder or in which it has personal interest which (i) are not negligible transactions (pursuant to the committee’s determination) and (ii) are not qualified by the Israeli Audit Committee as extraordinary transactions.
 
Our Israeli Audit Committee is currently composed of Ms. Singer and Messrs. Bigger and Tsabari. Both Ms. Singer and Mr. Tsabari satisfy the “independence” requirements of the Israeli Companies Law.  Our board of directors has determined that Ms. Singer has the requisite accounting and financial expertise to serve as our audit committee financial expert. Ms. Singer also serves as the chairperson of our Israeli Audit Committee. The Israeli Audit Committee meets at least once each quarter.
 
Audit Committee under U.S. Laws and Regulations
 
The NASDAQ Stock Market Rules require us to establish an audit committee consisting of at least three members, each of whom must be financially literate and satisfy the respective ‘‘independence’’ requirements of the SEC and NASDAQ and one of whom has accounting or related financial management expertise.  Such audit committee is established for the primary purpose of assisting the Board in overseeing the:
 
·
integrity of the Company’s financial statements;
 
·
independent auditor’s qualifications, independence and performance;
 
·
Company’s financial reporting processes and accounting policies; performance of the Company’s internal audit function; and
 
·
Company’s compliance with legal and regulatory requirements.
 
Ms. Singer and Messrs. Bigger and Tsabari satisfy the respective “independence” requirements of the SEC and NASDAQ.  Our board of directors has determined that Ms. Singer has the requisite accounting and financial expertise to serve as our Audit Committee financial expert and that both Mr. Bigger and Mr. Tsabari are financially literate, having a basic understanding of financial controls and reporting.  The U.S. Audit Committee meets at least once each quarter. Mr. Bigger serves as chairperson of our U.S. Audit Committee for purposes of compliance with U.S. law and regulations.
 
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Compensation Committee
 
Pursuant to the Israeli Companies Law, each publicly traded company is required to establish a compensation committee which must be comprised of at least three directors, including all of the external directors. The additional members of the compensation committee must be directors that receive compensation in accordance with the provisions and limitations set forth in the regulations promulgated under the Israeli Companies Law with respect to external directors. An external director shall serve as the chairman of the compensation committee. Under the Israeli Companies Law, the external directors shall constitute a majority of the compensation committee. Similar to the rules that apply to the audit committee, the compensation committee may not include the chairman of the board, or any director employed by us, by a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any director whose primary income is dependent on a controlling shareholder, and may not include a controlling shareholder or any of its relatives.  Individuals who are not permitted to be compensation committee members may not participate in the committee’s meetings other than to present a particular issue; provided, however, that an employee that is not a controlling shareholder or relative may participate in the committee’s discussions but not in any vote, and the company’s legal counsel and corporate secretary may participate in the committee’s discussions and votes if requested by the committee.
 
The compensation committee is responsible for (i) recommending the compensation policy to the board of directors for its approval (and subsequent approval by shareholders) and (ii) duties related to the compensation policy and to the approval of the terms of engagement of office holders, including: recommending whether a compensation policy should continue in effect, if the then-current policy has a term of greater than three (3) years (approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three years), recommending to the board of directors periodic updates to the compensation policy, assessing implementation of the compensation policy; determining whether the compensation terms of a proposed new Chief Executive Officer of the company need not be brought to approval of the shareholders; and determining whether to approve transactions concerning the terms of engagement and employment of the company’s officers and directors that require compensation committee approval under the Israeli Companies Law or the company’s compensation plans and policies.
 
We have established a compensation committee that is currently composed of Ms. Singer and Messrs. Bigger and Tsabari. Mr. Tsabari serves as the chairperson of our Compensation Committee. The composition and function of the Compensation Committee comply with the requirements of the Israeli Companies Law and NASDAQ Stock Market Rules.
 
Israeli Regulations
 
In March 2016, the Israeli Companies Law Regulations were amended to reduce certain duplicative regulatory burden to which Israeli companies publicly-traded on NASDAQ are subject to.
 
Generally, pursuant to the new regulations, an Israeli company traded on NASDAQ that does not have a “controlling shareholder” (as defined in the Israeli Companies Law) will be able to elect not to appoint External Directors to its Board of Directors and not to comply with the Audit Committee and Compensation Committee composition and chairman requirements of the Israeli Companies Law (as described above under); provided, the company complies with the applicable NASDAQ independent director requirements and the NASDAQ Audit Committee and Compensation Committee composition requirements.
 
Since our largest shareholder, the limited partnerships managed by FIMI FIVE 2012 Ltd., are deemed to be a “controlling shareholder” under the Israeli Companies Law, we are not currently eligible to benefit from the relief provided by these new amended Israeli regulations.
 
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Internal Auditor
 
Under the Israeli Companies Law, the board of directors of a publicly traded company must appoint an internal auditor nominated by the audit committee.  The role of the internal auditor is to examine whether the company’s actions comply with the law, integrity and orderly business practice.  Under the Israeli Companies Law, the internal auditor may not be an interested party, an office holder, or an affiliate, or a relative of an interested party, office holder or affiliate, nor may the internal auditor be the company’s independent accountant or its representative.  KPMG serves as our Internal Auditor.
 
Directors’ Service Contracts
 
There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.
 
Chairman of the Board

Under the Israeli Companies Law, the general manager of a company (or a relative of the general manager) may not serve as the chairman of the board of directors, and the chairman of the board of directors (or a relative of the chairman of the board of directors) may not serve as the general manager, unless approved by the shareholders by a special majority vote prescribed by the Israeli Companies Law.  The shareholder vote cannot authorize the appointment for a period of longer than three years, which period may be extended from time to time by the shareholders with a similar special majority vote.  The chairman of the board of directors shall not hold any other position with the company (except as general manager if approved in accordance with the above procedure) or in any entity controlled by the company, other than as chairman of the board of directors of a controlled entity, and the company shall not delegate to the chairman duties that, directly or indirectly, make him or her subordinate to the general manager.

Approval of Related Party Transactions under Israeli Law
 
Fiduciary Duties of Office Holders
 
The Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company.  An “office holder” is defined in the Israeli Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions without regard to such person’s title.  An office holder’s fiduciary duties consist of a duty of care and a fiduciary duty. The duty of care requires an office holder to act at a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to utilize reasonable means to obtain (i) information regarding the appropriateness of a given action brought for his approval or performed by him by virtue of his position and (ii) all other information of importance pertaining to the foregoing actions. The fiduciary duty includes (i) avoiding any conflict of interest between the office holder’s position in the company and any other position he holds or his personal affairs, (ii) avoiding any competition with the company’s business, (iii) avoiding exploiting any business opportunity of the company in order to receive personal gain for the office holder or others, and (iv) disclosing to the company any information or documents relating to the company’s affairs that the office holder has received due to his position as an office holder.
 
Disclosure of Personal Interests of an Office Holder; Approval of Transactions with Office Holders
 
The Israeli Companies Law requires that an office holder promptly, and no later than the first board meeting at which such transaction is considered, disclose any personal interest that he or she may have and all related material information known to him or her and any documents in their position, in connection with any existing or proposed transaction by us. In addition, if the transaction is an extraordinary transaction, that is, a transaction other than in the ordinary course of business, other than on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of the foregoing, or by any corporation in which the office holder or a relative is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager.
 
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Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has an interest) must be approved by the board of directors or as otherwise provided for in a company’s articles of association, however, a transaction that is adverse to the company’s interest may not be approved. In some cases, such a transaction must be approved by the audit committee and by the board of directors itself, and under certain circumstances shareholder approval may also be required. A director who has a personal interest in a transaction that is considered at a meeting of the board of directors or the audit committee may not be present during the board of directors or audit committee discussions and may not vote on the transaction, unless the transaction is not an extraordinary transaction or the majority of the members of the board or the audit committee have a personal interest, as the case may be. In the event the majority of the members of the board of directors or the audit committee have a personal interest, then the approval of the general meeting of shareholders is also required.
 
Approval of a Compensation Policy for Office Holders
 
The Israeli Companies Law and the regulations adopted thereunder require the compensation committee to adopt a policy for director and office holders.  In adopting the compensation policy, the compensation committee must take into account factors such as the office holder’s education, experience, past compensation arrangements with the company, and the proportional difference between the person’s cost of compensation and the average cost of compensation of the company’s employees.
 
The compensation policy must be approved at least once every three years at the company’s general meeting of shareholders, and is subject to the approval of a majority vote of the votes of the shareholders present and voting at a shareholders’ meeting, provided that either: (i) such majority includes at least a majority of the votes of  all shareholders who are not controlling shareholders and do not have a personal interest in the approval of the compensation policy, present and voting at such meeting (excluding abstentions); or (ii) the total number of ordinary shares of non-controlling shareholders and shareholders who do not have a personal interest in the approval of the compensation policy,  voting against the resolution does not exceed 2% of the aggregate voting rights in the company.
 
The Board may approve the compensation policy even if such policy was not approved by the shareholders, provided that the compensation committee and the board of directors resolve, based on detailed consideration of the compensation policy that approval of the policy, is in the best interest of the company, despite the fact that it was not approved at the shareholders’ meeting.
 
The compensation policy serves as the basis for decisions concerning the financial terms of employment or engagement of officer holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy must relate to certain factors, including advancement of the company’s objectives, the company’s business and its long-term strategy, and creation of appropriate incentives for executives. It must also consider, among other things, the company’s risk management, size and the nature of its operations. The compensation committee must also consider among others, the ratio between the cost of terms offered to the relevant director or office holder and the average  and median cost of compensation of the other employees of the company, including those employed through manpower companies, the effect of disparities in salary upon work relationships in the company, the possibility of reducing variable compensation at the discretion of the board of directors; the possibility of setting a limit on the exercise value of non-cash variable compensation; and as to severance compensation (in excess of those promulgated by applicable labor law), the period of service of the director or office holder, the terms of his or her compensation during such service period, the company’s performance during that period of service, the person’s contribution towards the company’s achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company.
 
The compensation policy must also include the link between variable compensation and long-term performance and measurable criteria, the relationship between variable and fixed compensation, and the upper limit for the value of variable compensation, the conditions under which a director or an office holder would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required to be restated in the company’s financial statements, the minimum holding or vesting period for variable, equity-based compensation whilst referring to appropriate a long-term perspective based incentives; and maximum limits for severance compensation.
 
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Once a compensation policy is properly adopted, the Israeli Companies Law requires the compensation policy to be approved by the company’s compensation committee, with subsequent approval of the board of directors. In addition, compensation of the directors and the chief executive officer is also subject to the approval of the shareholders at a general meeting. The approval of the compensation of the chief executive officer that complies with the compensation policy is subject to the same majority requirements as the approval of a transaction between a company and its controlling shareholder.  Where the director is also a controlling shareholder, the requirements for approval of transactions with controlling shareholders apply.  The terms of employment of the company’s directors and executive officers must satisfy the requirements of the compensation policy in respect of matters relating to compensation. Any deviations from the compensation policy in respect of the compensation of the office holders require the approval of the compensation committee, the board of directors and the shareholders. If the deviation is with respect to the compensation of the chief executive office then such approval must be made by the majority of the shareholders provided that such majority includes the majority of the votes of the non-controlling shareholder and other shareholders who have personal interest in the proposal (unless such personal interest is not related to the controlling shareholder) present and voting (excluding abstention). Such special majority is not required if the number of votes of the non-controlling shareholders and shareholder who do not have personal interest in the proposal as previously mentioned is lower than 2% of the aggregate voting rights in the company.
 
Under the Israeli Companies Law, all arrangements as to compensation of office holders who are not directors require the approval of the compensation committee prior, and in addition, to the approval of the board of directors.  However, if the Company duly adopts a compensation plan for its office holders, the approval of the board of directors is not required if the new arrangement only modifies an existing arrangement and the compensation committee determines that such modification is not material.  Generally, the compensation of the CEO must be approved by the compensation committee, the board of directors and by the majority of the shareholders provided that either: (i) such majority includes a majority of the total votes of shareholders who are not controlling shareholders and do not have a Personal Interest in the approval of the compensation policy and who participate in the voting, in person, by proxy or by written ballot, at the meeting (abstentions not taken into account); or (ii) the total number of votes of shareholders mentioned in (i) above that are voted against the approval of the compensation policy do not represent more than 2% of the total voting rights in the company .  The compensation of office holders who are directors must be approved by the compensation committee, board of directors and simple majority vote of the shareholders.
 
External directors of the company are prohibited from receiving, directly or indirectly, any compensation from the company, other than for their services as external directors pursuant to the provisions and limitations set forth in regulations promulgated under the Israeli Companies Law, which compensation is determined prior to their appointment and may not be changed throughout the term of their service as external directors (except for certain exceptions set forth in such regulations).
 
Disclosure of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders
 
Pursuant to the Israeli Companies Law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, but excludes a shareholder whose power derives solely from its position on the board of directors or any other position at the company. A person is presumed to be a “controlling shareholder” if it holds or controls, by itself or together with others, one half or more of any one of the “Means of Control” of the company. “Means of Control” is defined as any one of the following: (i) the right to vote at a General Meeting of the company, or (ii) the right to appoint directors of the company or its chief executive officer. For the purpose of related party translations, under the Israeli Companies Law, a controlling shareholder is also a shareholder who holds 25% or more of the voting rights if no other shareholder who holds more than 50% of the voting rights. For this purpose, the holdings of all shareholders who have a personal interest in the same transaction will be aggregated.
 
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Certain shareholders also have a duty of fairness toward the company. These shareholders include any controlling shareholder, together with any shareholder who knows that it has the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or to prevent the appointment of an office holder of the company or exercise any other rights available to it under the company’s articles of association with respect to the company. The Israeli Companies Law does not define the substance of this duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty of fairness.
 
An extraordinary transaction between a public company and a controlling shareholder, or in which a controlling shareholder has a personal interest, including a private placement in which the controlling shareholder has a personal interest, and the terms of engagement of the company, directly or indirectly, with a controlling shareholder or a controlling shareholder’s relative (including through a corporation controlled by a controlling shareholder), regarding the company’s receipt of services from the controlling shareholder, and if such controlling shareholder is also an office holder of the company, regarding his or her terms of employment, require the approval of a company’s audit committee (or compensation committee with respect to compensation arrangements), board of directors and shareholders, in that order. Such transaction must be elected by a majority vote of the Ordinary Shares present and voting at a shareholders’ meeting, provided that either: (i) such majority includes at least a majority of votes held by all shareholders who do not have a personal interest in such transaction, present and voting at such meeting (excluding abstentions); or (ii) the total number of votes of shareholders who do not have a personal interest in such transaction voting against the approval of the transaction, does not exceed 2% of the aggregate voting rights in the company.
 
Pursuant to the Israeli Companies Law, the audit committee of the company should determine in connection with such transaction if it requires rendering pursuant to a competitive procedure or pursuant to other proceedings. See “Audit Committee” above.
 
To the extent that any such transaction with a controlling shareholder or his relative is for a period extending beyond three years, shareholder approval is required once every three years, unless, in respect to certain transactions, the audit committee determines that the longer duration of the transaction is reasonable under the circumstances.
 
Pursuant to regulations promulgated pursuant to the Israeli Companies Law, a transaction with a controlling shareholder that would otherwise require approval of the shareholders is exempt from shareholders’ approval if each of the audit committee and the board of directors determine that the transaction meets certain criteria that are set out in specific regulations promulgated under the Israeli Companies Law. Under these regulations, a shareholder holding at least 1% of the issued share capital of the company may require, within 14 days of the publication of such determination, that despite such determination by the audit committee and the board of directors, such transaction will require shareholder approval under the same majority requirements that otherwise apply to such transactions.
 
The Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company. This rule does not apply if there is already another 25% or greater shareholder of the company. Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would hold greater than a 45% interest in the company, unless there is another shareholder holding more than a 45% interest in the company. These requirements do not apply if, in general, (i) the acquisition was made in a private placement that received shareholder approval, (ii) was from a 25% or greater shareholder of the company which resulted in the acquirer becoming a 25% or greater shareholder of the company, if there is not already a 25% or greater shareholder of the company, or (iii) was from a shareholder holding a 45% interest in the company which resulted in the acquirer becoming a holder of a 45% interest in the company if there is not already a 45% or greater shareholder of the company.

If, as a result of an acquisition of shares, the acquirer will hold more than 90% of a public company’s outstanding shares or a class of shares, the acquisition must be made by means of a tender offer for all of the outstanding shares or a class of shares. If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to the acquirer.  If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares.  The Israeli Companies Law provides for appraisal rights if any shareholder files a request in court within six months following the consummation of a full tender offer.  However, in the event of a full tender offer, the offeror may determine that any shareholder who accepts the offer will not be entitled to appraisal rights.  Such determination will be effective only if the offeror or the company has timely published all the information that is required to be published in connection with such full tender offer pursuant to all applicable laws.
 
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Exculpation, Indemnification and Insurance of Directors and Officers

Exculpation of Office Holders .  The Israeli Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his or her fiduciary duty.  If permitted by its articles of association, a company may exculpate in advance an office holder from his or her liability to the company, in whole or in part, with respect to a breach of his or her duty of care.  However, a company may not exculpate in advance a director from his or her liability to the company with respect to a breach of his duty of care in the event of distributions.
 
Office Holders’ Insurance .  Israeli law provides that a company may, if permitted by its articles of association, enter into a contract to insure its office holders for liabilities incurred by the office holder with a respect to an act performed in his or her capacity as an office holder, as a result of: (i) a breach of the office holder’s duty of care to the company or another person; (ii) a breach of the office holder’s fiduciary duty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that the act would not prejudice the company’s interests; and (iii) a financial liability imposed upon the office holder in favor of another person.
 
Indemnification of Office Holders .  Under Israeli law a company may, if permitted by its articles of association, indemnify an office holder for acts performed by the office holder in such capacity for (i) a monetary liability imposed upon the office holder in favor of another person by any court judgment, including a settlement or an arbitration award approved by a court; (ii) reasonable litigation expenses, including attorney’s fees, actually incurred by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any monetary liability in lieu of criminal proceedings, or concluded without the filing of an indictment against the office holder and a monetary liability was imposed on him or her in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal intent; and (iii) reasonable litigation expenses, including attorneys’ fees, actually incurred by the office holder or imposed upon the office holder by a court: in an action, suit or proceeding brought against the office holder by or on behalf of the company or another person, or in connection with a criminal action in which the office holder was acquitted, or in connection with a criminal action in which the office holder was convicted of a criminal offence that does not require proof of criminal intent.
 
Israeli law provides that a company’s articles of association may permit the company to (a) indemnify an office holder retroactively, following a determination to this effect made by the company after the occurrence of the event in respect of which the office holder will be indemnified; and (b) undertake in advance to indemnify an office holder, except that with respect to a monetary liability imposed on the office holder by any judgment, settlement or court-approved arbitration award, the undertaking must be limited to types of occurrences, which, in the opinion of the company’s board of directors, are, at the time of the undertaking, foreseeable due to the company’s activities and to an amount or standard that the board of directors has determined is reasonable under the circumstances.
 
Limitations on Exculpation, Insurance and Indemnification .  The Israeli Companies Law provides that neither a provision of the articles of association permitting the company to enter into a contract to insure the liability of an office holder, nor a provision in the articles of association or a resolution of the board of directors permitting the indemnification of an office holder, nor a provision in the articles of association exculpating an office holder from duty to the company shall be valid, where such insurance, indemnification or exculpation relates to any of the following: (i) a breach by the office holder of his fiduciary duty unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; (ii) a breach by the office holder of his duty of care if such breach was committed intentionally or recklessly, unless the breach was committed only negligently; (iii) any act or omission done with the intent to unlawfully yield a personal benefit; or (iv) any fine or forfeiture imposed on the office holder.
 
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Pursuant to the Israeli Companies Law, exculpation of, procurement of insurance coverage for, and an undertaking to indemnify or indemnification of, our office holders must be approved by our audit committee and board of directors and, if the office holder is a director, also by our shareholders.
 
Our articles of association allow us to insure, indemnify and exempt our office holders to the fullest extent permitted by Israeli law.  We maintain a directors’ and officers’ liability insurance policy with a per claim and aggregate coverage limit of $10 million, including legal costs incurred in Israel.  In addition, our audit committee, board of directors and shareholders resolved to indemnify our office holders, pursuant to a standard indemnification agreement that provides for indemnification of an office holder in an amount up to $5 million.  To date, we have provided letters of indemnification to all of our officers and directors.
 
D.            Employees
 
As of December 31, 2018, we employed 411 full-time employees, of whom 55 were employed in general management and administration, 79 were employed in selling and marketing, 18 were employed in projects management, 194 were employed in production, installation and maintenance, and 65 were employed in engineering and research and development.  Of such full-time employees, 158 were located in Israel, 29 were in the United States, 119 were in Canada and 105 were in various other countries.
 
As of December 31, 2017, we employed 360 full-time employees, of whom 45 were employed in general management and administration, 83 were employed in selling and marketing, 16 were employed in projects management, 158 were employed in production, installation and maintenance, and 58 were employed in engineering and research and development.  Of such full-time employees, 112 were located in Israel, 31 were in the United States, 110 were in Canada and 107 were in various other countries.
 
As of December 31, 2016, we employed 406 full-time employees, of whom 50 were employed in general management and administration, 81 were employed in selling and marketing, 21 were employed in projects management, 182 were employed in production, installation and maintenance, and 72 were employed in engineering and research and development.  Of such full-time employees, 128 were located in Israel, 29 were in the United States, 133 were in Canada and 116 were in various other countries.
 
Our relationships with our employees in Israel are governed by Israeli labor legislation and regulations, extension orders of the Israeli Ministry of Labor and personal employment agreements.  We are subject to various Israeli labor laws, collective bargaining agreements entered into from time to time between the Manufacturers Association and the New General Federation of Workers (the Histadrut), as well as collective bargaining arrangements.  Such laws, agreements and arrangements cover a wide range of areas, including minimum employment standards, such as working hours, minimum wages, vacation, procedures for dismissing employees, severance pay and pension plans and special issues, such as equal pay for equal work, equal opportunity in employment and employment of youth and army veterans. We are currently engaged in negotiations with the Histadrut in relation to a collective agreement which will apply to our employees in Israel. Israeli law requires severance pay upon certain circumstances, including upon the retirement or death of an employee or termination of employment without due cause.  Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the U.S. Social Security Administration, which amounts also include payments for national health insurance.  In addition, certain of our employees are parties to individual employment agreements.  We generally provide our employees with benefits and working conditions beyond the required minimums.  Each of our subsidiaries provides a benefits package and working conditions which we believe are competitive with other companies in their field of operations.
 
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E.            Share Ownership.
 
The following table sets forth certain information regarding the ownership of our ordinary shares by our directors and executive officers as of April 12, 2019.
 
Name
 
Number of Ordinary Shares Owned (1)
   
Percentage of Outstanding Ordinary Shares (2)
 
Gillon Beck (3)           
   
-
     
-
 
Ron Ben-Haim (3)           
   
-
     
-
 
Jacob Berman           
   
13,750
     
*
 
Avraham Bigger           
   
-
     
-
 
Liza Singer           
   
-
     
-
 
Moshe Tsabari           
   
-
     
-
 
Dror Sharon           
   
-
     
*
 
Yaacov Vinokur (4)           
   
8,000
     
-
 
Brian Rich (5)           
   
8,333
     
*
 
Doron Kerbel (6)           
   
13,166
     
*
 
Yaniv Shachar (7)           
   
24,000
     
*
 
Jeremy Weese (8)           
   
16,548
     
*
 
Kristen Cory
   
-
     
-
 
Carlos Garcia Almeida           
   
-
     
-
 
Fabien Haubert           
   
-
     
-
 
Gord Loney           
   
100
     
*
 
All directors and executive officers as   a group (16   persons)
   
83,897
     
*
 
_______________
* Less than 1%

(1)
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Ordinary shares relating to options or convertible debenture notes currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.  Except as indicated by footnote, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
 
(2)
The percentages shown are based on 23,143,985 ordinary shares issued and outstanding as of April 12, 2019.
 
(3)
Does not include any ordinary shares held by the FIMI Funds.
 
(4)
Includes 8,000 ordinary shares issuable upon the exercise of currently exercisable options.
 
(5)
Includes 8,333 ordinary shares issuable upon the exercise of currently exercisable options.
 
(6)
Includes 13,166 ordinary shares issuable upon the exercise of currently exercisable options.
 
(7)
Includes 24,000 ordinary shares issuable upon the exercise of currently exercisable options.
 
(8)
Includes 16,548 ordinary shares issuable upon the exercise of currently exercisable options.
 

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Share Option Plans
 
2010 Israeli Share Option Plan
 
In June 2010, we adopted our 2010 Israeli Share Option Plan, or the 2010 Plan.  Under the 2010 Plan, stock options to purchase 510,575 ordinary shares may be granted to our employees, officers, directors and consultants of our company and subsidiaries.  In addition, an aggregate 498,384 ordinary shares that remained available for future option grants under the 2003 Plan and any ordinary shares that become available in the future under the 2003 Plan as a result of expiration, cancellation or relinquishment of any option were rolled over to the 2010 Plan. In June 2013, our shareholders approved an increase to the number of ordinary shares available for issuance under the 2010 Plan by additional 500,000 shares. The 2010 Plan has a term of ten years.
 
The 2010 Plan is designed to allow the grantees to benefit from the tax benefits under Section 102 of the Israeli Income Tax Ordinance [ New Version ] , 1961.  Our Board of Directors has resolved that all options that will be granted to Israeli residents under the 2010 Plan will be taxable under the “capital gains route.”  Pursuant to this route, the profit realized by an employee is taxed as a capital gain (25%) if the options or underlying shares are held by a trustee for at least 24 months from their date of the grant or issuance.  Any difference between the   exercise price of the options and the average price of the company’s shares   during the 30 trading days before the date of grant of the options will be   treated as ordinary income and will be taxed according to the employee’s   marginal tax rates plus social contribution.  If the underlying shares are sold before the elapse of such period, the profit is re-characterized as ordinary income. As of December 31, 2018, options to purchase 889,118 ordinary shares were outstanding under the 2010 Plan, exercisable at an average exercise price of $4.865 per share. During 2018, 555,000  options were awarded under the 2010 Plan. Options to purchase 17,191 ordinary shares were exercised during 2018.
 
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ITEM 7.
Major Shareholders and Related Party Transactions
 
A.            Major Shareholders
 
The following table sets forth certain information as of April 12, 2019 regarding the beneficial ownership of our ordinary shares, by each person or entity known to us to own beneficially 5% or more of our ordinary shares.
 
Name
 
Number of
Ordinary Shares
Beneficially Owned (1)
   
Percentage of
Outstanding
Ordinary Shares (2)
 
FIMI Opportunity Five (Delaware), Limited Partnership (3)
   
4,646,924
     
20.1
%
FIMI Israel Opportunity Five, Limited Partnership (3)
   
5,207,235
     
22.5
%
Grace & White, Inc. (4)           
   
1,409,399
     
6.1
%
                 
____________________
(1)
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Ordinary shares relating to options or convertible notes currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.  Except as indicated by footnote, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.
 
(2)
The percentages shown are based on 23,143,985 ordinary shares issued and outstanding as of April 12, 2019.
 
(3)
Based on Schedule 13D/A filed with the SEC on October 11, 2016 and other information available to us.  The address of FIMI Opportunity Five (Delaware), Limited Partnership and FIMI Israel Opportunity Five, Limited Partnership is c/o FIMI FIVE 2012 Ltd., Electra Tower, 98 Yigal Alon St., Tel-Aviv 6789141, Israel.
 
(4)
Based upon a Schedule 13G/A filed with the SEC on January 29, 2019 by Grace & White, Inc. The Schedule 13G/A indicates that Grace & White, Inc. is a registered investment adviser.  The address of Grace & White, Inc. is 515 Madison Avenue, Suite 1700, New York, NY 10022.
 
Significant Changes in the Ownership of Major Shareholders 
 
On October 11, 2016, FIMI Five 2012 Ltd., FIMI Opportunity Five (Delaware), Limited Partnership and FIMI Israel Opportunity Five, Limited Partnership, or the FIMI Partnerships, filed a Schedule 13D/A reflecting beneficial ownership of 9,854,159 ordinary shares, or 42.6 %, of our issued and outstanding ordinary shares, as of such date.
 
On February 7, 2017, Grace & White, Inc. filed an amendment to its Schedule 13G reflecting beneficial ownership of 1,569,833, or 6.8%, of our issued and outstanding ordinary shares. On February 1, 2018, Grace & White, Inc. filed an amendment to its Schedule 13G reflecting beneficial ownership of 1,415,703, or 6.15%, of our issued and outstanding ordinary shares. On January 29, 2019, Grace & White, Inc. filed an amendment to its Schedule 13G reflecting beneficial ownership of 1,409,399, or 6.12%, of our issued and outstanding 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.
 
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Record Holders
 
Based on a review of the information provided to us by our transfer agent, as of March 26, 2019, there were 29 holders of record of our ordinary shares, of which 26 record holders holding approximately 91.2% 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 91.1% of our outstanding ordinary shares as of such date.
 
B.            Related Party Transactions.
 
In October 2017, we completed a rights offering in which we received gross proceeds of approximately $23.8 million from the sale of 6,170,386 ordinary shares. In the rights offering, we distributed to each of our shareholders one subscription right for each eight ordinary shares held by such holder. Our controlling shareholders, FIMI V Funds, purchased 3,392,870 ordinary shares including through an exercise of over-subscription rights for a total subscription price of $ 13,096,478.20. 
 
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 the years ended December 31, 2016, 2017 and 2018, our operations based outside of Israel generated income to customers outside of Israel of approximately $48.2 million, $45.2 million and $67.4 million, respectively, or 71.1%, 70.2% and 72.8% of our total revenues, respectively.  In the years ended December 31, 2016, 2017 and 2018, the total amount of our export revenues generated by our Israeli facilities to countries outside of Israel was approximately $10.9 million, $9.6 million and $11.7 million, respectively, or 16.%, 14.9% and 12.6%, of our total revenues, respectively.
 
Legal Proceedings
 
We are subject to legal proceedings arising in the normal course of business.  Based on the advice of our legal counsel, management believes that these proceedings will not have a material adverse effect on our financial position or results of operations.
 
Dividend Distribution Policy
 
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, and only if the Board of Directors determines that such distribution will not jeopardize the ability of the company to repay its debts on the due date thereof.  “Profits’’ are defined in the Israeli Companies Law as the balance of surpluses, or the surpluses accumulated over the past two years, whichever is the greater, in accordance with the latest adjusted financial statements, audited or reviewed, prepared by the company, provided that the date in respect of which the statements were prepared is no earlier than six months prior to the date of distribution.  ‘‘Surplus’’ means sums included in a company’s shareholders’ equity originating from the net profit of the company, as determined according to generally accepted accounting principles, and sums other than share capital or premiums that are included in shareholders’ equity under generally accepted accounting principles and that the Minister of Justice has prescribed to be considered surplus.
 
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B.            Significant Changes.
 
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.
 
Our ordinary shares are traded on the NASDAQ Global Market.  Our ticker symbol is “MAGS.”
 
B.            Plan of Distribution.
 
Not applicable.
 
C.            Markets.
 
Our ordinary shares have traded on the NASDAQ Global Market under the symbol “MAGS” since our initial public offering in 1993.
 
D.           Selling Shareholders.
 
Not applicable.
 
E.            Dilution.
 
Not applicable.
 
F.            Expenses of the Issue.
 
Not applicable.
 
ITEM 10.
Additional Information
 
A.            Share Capital.
 
Not applicable.
 
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.  Under our memorandum of association, we were established for the purposes of acquiring a plant from Israel Aircraft Industries known as the Magal Plant, which was 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.
 
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Board of Directors
 
The strategic management of our business (as distinguished from the daily management of our business affairs) is vested in our board of directors, which may exercise all such powers and do all such acts as our company is authorized to exercise and do, and which are not required to be exercised by a resolution of the general meeting of our shareholders.  The board of directors may, subject to the provisions of the Israeli Companies Law, delegate some of its powers to committees, each consisting of one or more directors, provided that at least one member of such committee is an external director.
 
According to the Israeli Companies Law, we may stipulate in our articles of association that the general meeting of shareholders is authorized to assume the responsibilities of the board of directors.  In the event the board of directors is unable to act or exercise its powers, the general meeting of shareholders is authorized to exercise the powers of the board of directors, even if the articles of association do not stipulate so.  Our board of directors has the power to assume the responsibilities of our chief executive officer if he is unable to act or exercise his powers or if he fails to fulfill the instructions of the board of directors with respect to a specific matter.
 
Our articles of association do not impose any mandatory retirement or age limit requirements on our directors and our directors are not required to own shares in our company in order to qualify to serve as directors.
 
The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in the same manner as any other transaction by us.
 
For a discussion of Israeli law concerning a director’s fiduciary duties and the approval of transactions with office holders, see Item 6.C. “Directors, Senior Management and Employees – Board Practices – Approval of Related Party Transactions under Israeli Law.”
 
Rights Attached to Shares
 
Our authorized share capital consists of NIS  39,748,000 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:
 
Dividend 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 will 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.
 
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.