SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F/A
Amendment No. 1
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
or
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-21388
Magal Security Systems Ltd.
(Exact name of Registrant as specified in its charter)
Israel
(Jurisdiction of incorporation or organization)
P.O. Box 70, Industrial Zone, Yehud 56100, Israel
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares, NIS 1.0 par value per share
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None
(Title of Class)
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, NIS 1.0 par value per share
as of December 31, 2004 ..................... 8,672,448
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 [X] No [ ]
Indicate by check mark which financial statement item the registrant has elected
to follow.
[ ]Item 17 [X]Item 18
This Annual Report on Form 20-F/A is incorporated by reference into the
Registrant's Registration Statements on Form F-3, File Nos. 333-9050 and
333-123265, as amended.
Explanatory Note
This Amendment No. 1 on Form 20-F/A hereby amends Items 18 and 19 of
Magal Security Systems Ltd. Annual Report on Form 20-F for the fiscal year ended
December 31, 2004, which was filed on June 30, 2005. This Amendment No. 1 is
being filed for the purpose of providing additional details to our disclosures
in the original report pursuant to comments received from the Staff of the U.S.
Securities and Exchange Commission in connection with its review of our periodic
filings.
This Amendment is not intended to revise other information presented in
our Annual Report on Form 20-F for the fiscal year ended December 31, 2004 as
originally filed and all such other information in the original filing, which
remains unchanged.
This Amendment does not reflect events occurring after the filing of
the original Form 20-F and does not modify or update the disclosure therein in
any way other than as required to reflect the amendments discussed above. As a
result, this Amendment continues to speak as of June 30, 2005.
i
INTRODUCTION
Magal Security Systems Ltd. develops, manufactures, markets and sells
complex computerized security systems, including a line of perimeter security
systems, a video motion detection system, a hardware and software "all in one"
security solution which integrates Closed Circuit Television related
applications, security management and control systems, personal emergency
location systems, a pipeline security system, and provides video monitoring
services. Our predecessor commenced operations in 1969 as a department
specializing in perimeter security systems within the electronics division of
Israel Aircraft Industries Ltd., or IAI. Effective April 1984, we purchased from
IAI substantially all of the assets, and assumed substantially all of the
related liabilities, of that department. In March 1993, we completed an initial
public offering of 1,380,000 ordinary shares, in February 1997, we completed a
public offering of an additional 2,085,000 ordinary shares and in April 2005, we
completed an offering of an additional 1,700,000 ordinary shares. Our ordinary
shares are traded on the NASDAQ National Market and on the Tel Aviv Stock
Exchange under the symbol MAGS.
Except for the historical information contained in this annual report,
the statements contained in this annual report are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to our business, financial condition and results of operations. Actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including all the risks discussed in
Item 3.D. "Key Information-Risk Factors" and elsewhere in this annual report.
Statements which use the terms "believe," "do not believe," "expect,"
"plan," "intend," "estimate," "anticipate" and similar expressions are intended
to identify forward-looking statements. These statements reflect our current
views with respect to future events and are based on assumptions and are subject
to risks and uncertainties. Except as required by applicable law, including the
securities laws of the U.S., we do not intend to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
We have trademark rights in the United States and other national
jurisdictions arising out of our trademark registrations, applications, and/or
use of the following trademarks and service marks: SENSTAR-STELLAR logo, the S
logos, SENSTAR-STELLAR, SENSTAR-STELLAR (and design) SENSTAR, STELLAR, STELLAR
SYSTEMS, STELLAR SYSTEMS (and design) PANTHER, GUIDAR, REPELS, SENNET,
PERIMITRAX, INTELLI-FLEX, INTELLI-FIELD, X-FIELD, OMNITRAX. FRONTLINE, E-FIELD,
H-FIELD, E-FLEX, ARMOURFLEX, OMNINET, SIMPL, CROSSFIRE, PLC, ECHOCHECK, FLASH,
FLARE, and all other marks used to identify particular products and services
associated with our businesses.
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 U.S. generally accepted
accounting principles, or U.S. GAAP. All references in this annual report to
"dollars" or "$"are to U.S. dollars and all references in this annual report to
"NIS" are to New Israeli Shekels. The representative exchange rate between the
NIS and the dollar as published by the Bank of Israel on June 24, 2005 was NIS
4.538 per $1.00.
As used in this annual report, the terms "we," "us" and "our" mean
Magal Security Systems Ltd. and its subsidiaries, unless otherwise indicated.
ii
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.
iii
TABLE OF CONTENTS
Page No.
--------
PART III....................................................................1
ITEM 18. Financial Statements.......................................1
ITEM 19. Exhibits...................................................1
SIGNATURE...................................................................3
iv
PART III
ITEM 18. Financial Statements
The Financial Statements required by this item are found at the end of
this annual report, beginning on page F-1.
ITEM 19. Exhibits
The exhibits filed with or incorporated into this annual report are
listed on the index of exhibits below:
Exhibit
No. Description
------- ---------------------------------------------------------------
1.1* Memorandum of Association of the Registrant
1.2** Articles of Association of the Registrant
2.1*** Specimen Share Certificate for Ordinary Share
2.2**** The Registrant's Stock Option Plan (1993), as amended
2.4***** Form of Underwriters' Warrant Agreement
2.5***** Registration Rights Agreement, dated as of November 18, 1996,
by and among the Registrant, Mira Mag Inc., Israel Aircraft
Industries Ltd. and Jacob Even-Ezra
4.1***** Form of Underwriting Agreement
8****** List of Subsidiaries of the Registrant
12.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended
12.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended
13.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
13.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
15.1****** Schedule of Valuation and Qualifying Accounts
15.2 Consent of Kost Forer Gabbay & Kasierer
---------------
* Previously filed as an exhibit to our Registration Statement on Form F-1 (No.
33-57438), filed with the Commission on January 26, 1993, as amended, and
incorporated herein by reference.
** Previously filed as an exhibit to our Registration Statement on Form F-1 (No.
33-57438), filed with the Commission on January 26, 1993, as amended, and
incorporated herein by reference and an amendment thereto previously filed as an
exhibit to our Registration Statement on Form S-8 (No. 333-6246), filed with the
Commission on January 7, 1997 and incorporated herein by reference and further
amendments thereto previously filed as an exhibit to our Annual Report on Form
20-F for the fiscal year ended December 31, 2000, filed with the Commission on
June 29, 2001 and incorporated herein by reference.
*** Previously filed as an exhibit to our Registration Statement on Form 8-A,
filed with the Commission on March 18, 1993, as amended, and incorporated herein
by reference.
1
**** Previously filed as an exhibit to our Registration Statement on Form S-8
(No. 333-6246), filed with the Commission on January 7, 1997 and incorporated
herein by reference and further amendments thereto previously filed as an
exhibit to our Annual Report on Form 20-F for the fiscal year ended December 31,
2000, filed with the Commission on June 29, 2001 and incorporated herein by
reference.
***** Previously filed as an exhibit to our Registration Statement on Form F-2
(No.333-5970), filed with the Commission on November 8, 1996, as amended, and
incorporated herein by reference.
****** Previously filed as an exhibit to our Annual Report on Form 20- F filed
with the Commission on June 30, 2005, and incorporated herein by reference.
2
MAGAL SECURITY SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
IN U.S. DOLLARS
INDEX
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Income F-5
Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-38
- - - - - - - -
F-1
ERNST & YOUNG
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
MAGAL SECURITY SYSTEMS LTD.
We have audited the accompanying consolidated balance sheets of Magal
Security Systems Ltd. (the "Company") and its subsidiaries as of December 31,
2003 and 2004, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2004. Our audits included the financial statement schedule listed in the
Index at Item 2. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries as of December 31, 2003
and 2004, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/Kost Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
February 13, 2005 A Member of Ernst & Young Global
F-2
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
December 31,
------------------
2003 2004
-------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,389 $11,964
Short-term bank deposits 9,000 -
Trade receivables (net of allowance for doubtful accounts of
$187 and $320 as of December 31, 2003 and 2004, respectively) 14,885 13,232
Unbilled accounts receivable 5,072 7,465
Other accounts receivable and prepaid expenses 3,857 3,858
Deferred income taxes 454 488
Inventories 11,777 12,702
------- -------
Total current assets 49,434 49,709
------- -------
LONG-TERM INVESTMENTS AND TRADE RECEIVABLES:
Long-term trade receivables 300 344
Long-term bank deposits - 2,994
Structured notes 3,051 3,000
Severance pay fund 1,960 2,142
------- -------
Total long-term investments and trade receivables 5,311 8,480
------- -------
PROPERTY AND EQUIPMENT, NET 11,505 14,659
------- -------
DEFERRED INCOME TAXES 335 186
------- -------
INTANGIBLE ASSETS, NET 713 656
------- -------
GOODWILL 4,145 4,286
------- -------
Total assets $71,443 $77,976
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and par value data)
December 31,
-------------------
2003 2004
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit $ 12,597 $ 15,618
Current maturities of long-term debt 3,841 1,849
Trade payables 5,077 3,189
Other accounts payable and accrued expenses 6,518 7,450
-------- --------
Total current liabilities 28,033 28,106
-------- --------
LONG-TERM LIABILITIES:
Unrealized losses on hedging forward contracts 561 650
Long-term debt 1,873 3,500
Accrued severance pay 1,992 2,172
-------- --------
Total long-term liabilities 4,426 6,322
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Share capital:
Ordinary shares of NIS 1 par value:
Authorized: 19,748,000 shares at December 31, 2003 and 2004;
Issued and outstanding: 8,035,779 and 8,672,448 shares at
December 31, 2003 and 2004, respectively 2,683 2,825
Additional paid-in capital 24,098 32,526
Deferred stock compensation - (477)
Accumulated other comprehensive income 479 1,639
Retained earnings 11,724 7,035
-------- --------
Total shareholders' equity 38,984 43,548
-------- --------
Total liabilities and shareholders' equity $ 71,443 $ 77,976
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
Year ended December 31,
-------------------------------
2002 2003 2004
-------- -------- --------
Revenues $ 42,966 $ 59,361 $ 60,974
Cost of revenues 23,924 33,378 33,725
-------- -------- --------
Gross profit 19,042 25,983 27,249
-------- -------- --------
Operating expenses:
Research and development, net 3,128 4,773 4,683
Selling and marketing, net 8,642 11,585 12,679
General and administrative 4,938 5,305 5,771
Award granted by principal shareholders - - 1,200
-------- -------- --------
Total operating expenses 16,708 21,663 24,333
-------- -------- --------
Operating income 2,334 4,320 2,916
Financial income (expenses), net 199 (1,003) (762)
-------- -------- --------
Income before taxes on income 2,533 3,317 2,154
Taxes on income 645 913 1,101
-------- -------- --------
Net income $ 1,888 $ 2,404 $ 1,053
======== ======== ========
Basic net earnings per share $ 0.24 $ 0.30 $ 0.12
======== ======== ========
Diluted net earnings per share $ 0.23 $ 0.30 $ 0.12
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. dollars in thousands
Accumulated
Additional Deferred other Total Total
Ordinary paid-in stock comprehensive Retained comprehensive shareholders'
shares capital compensation income (loss) earnings income equity
-------- ----------------------- ------------- -------- ------------- -------------
Balance as of January 1, 2002 $ 2,583 $ 21,670 $ (20) $ (1,294) $ 9,761 $ 32,700
Exercise of stock options 13 125 - - - 138
Exercise of warrants 4 (4) - - - -
Amortization of deferred stock compensation - - 17 - - 17
Comprehensive income:
Net income - - - - 1,888 $ 1,888 1,888
Foreign currency translation adjustments - - - 288 - 288 288
-------- ----------------------- ------------- -------- ------------- -------------
Total comprehensive income $ 2,176
=============
Balance as of December 31, 2002 2,600 21,791 (3) (1,006) 11,649 35,031
Declared dividend - - - - (401) (401)
Exercise of stock options 30 432 - - - 462
Amortization of deferred stock compensation - - 3 - - 3
Stock dividend 53 1,875 - - (1,928) -
Comprehensive income:
Net income - - - - 2,404 $ 2,404 2,404
Unrealized losses on forward contracts, net - - - (807) - (807) (807)
Foreign currency translation adjustments - - - 2,292 - 2,292 2,292
-------- ----------------------- ------------- -------- ------------- ------------
Total comprehensive income $ 3,889
=============
Balance as of December 31, 2003 $ 2,683 $ 24,098 $ - $ 479 $ 11,724 $ 38,984
Exercise of stock options 51 916 - - - 967
Deferred stock compensation related to
officers' options grant - 661 (661) - - -
Amortization of deferred stock compensation
related to officers' options grant - - 184 - - 184
Award granted by principal shareholders 1,200 - - 1,200
Stock dividend 91 5,651 - - (5,742) -
Comprehensive income:
Net income - - - - 1,053 $ 1,053 1,053
Unrealized gains on forward contracts, net - - - 103 - 103 103
Foreign currency translation adjustments - - - 1,057 - 1,057 1,057
-------- ----------------------- ------------- -------- ------------ ------------
Total comprehensive income $ 2,213
=============
Balance as of December 31, 2004 $ 2,825 $ 32,526 $ (477) $ 1,639 $ 7,035 $ 43,548
======== ======================= ============= ======== ============
Accumulated unrealized losses on forward
contracts, net $ (704)
Accumulated foreign currency translation
adjustments 2,343
-------------
Accumulated other comprehensive income as of
December 31, 2004 $ 1,639
==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
-----------------------------
2002 2003 2004
-------- -------- -------
Cash flows from operating activities:
-------------------------------------
Net income $ 1,888 $ 2,404 $ 1,053
Adjustments required to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,096 1,378 1,966
Gain on sale of property and equipment (15) (9) (18)
Decrease (increase) in accrued interest on
short-term and long-term bank deposits 133 (199) 657
Amortization of deferred stock compensation 17 3 184
Decrease (increase) in trade receivables (2,861) (4,103) 2,049
Decrease in related parties receivables 1 28 -
Decrease (increase) in unbilled accounts receivable (2,101) 2,708 (2,373)
Decrease (increase) in other accounts receivable and
prepaid expenses (1,822) (836) 16
Decrease (increase) in deferred income taxes 444 (88) 178
Decrease (increase) in inventories 468 (2,586) (588)
Decrease (increase) in long-term trade receivables 705 1,210 (44)
Increase (decrease) in trade payables 786 10 (1,956)
Increase (decrease) in other payables and accrued
expenses (532) 1,727 880
Accrued severance pay, net (72) 77 (2)
Award granted by principal shareholders - - 1,200
Realized losses on hedging forward contract - - 476
------- ------- -------
Net cash provided by (used in) operating activities (1,865) 1,724 3,678
------- ------- -------
Cash flows from investing activities:
-------------------------------------
Purchase of long-term bank deposits (8,389) - (3,000)
Purchase of structured notes - (3,000) -
Proceeds from sale of short-term bank deposits 7,748 3,505 8,400
Proceeds from sale of property and equipment 35 33 59
Purchase of property and equipment (1,527) (3,194) (4,858)
Purchase of know-how and patents (14) (48) (89)
Acquisition of the business activity of Dominion
Wireless Inc.(a) - (902) -
------- ------- -------
Net cash used in investing activities (2,147) (3,606) 512
------- ------- -------
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
--------------------------------
2002 2003 2004
-------- -------- --------
Cash flows from financing activities:
-------------------------------------
Short-term bank credit, net $ 3,911 $ 3,098 $ 2,895
Proceeds from long-term bank loans - 43 -
Principal payment of long-term bank loans (158) (103) (365)
Proceeds from exercise of employee stock options 138 462 967
Dividend paid - - (401)
-------- -------- --------
Net cash provided by financing activities 3,891 3,500 3,096
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents (98) 252 289
-------- -------- --------
Increase (decrease) in cash and cash equivalents (219) 1,870 7,575
Cash and cash equivalents at the beginning of the year 2,738 2,519 4,389
-------- -------- --------
Cash and cash equivalents at the end of the year $ 2,519 $ 4,389 $ 11,964
======== ======== ========
Supplemental disclosures of cash flows activities:
--------------------------------------------------
(i) Cash paid during the year for:
Interest $ 932 $ 1,099 $ 1,093
======== ======== ========
Taxes $ 1,415 $ 1,544 $ 1,164
======== ======== ========
(ii) Non-cash activities:
Declared dividend $ - $ 401 $ -
======== ======== ========
(a) Acquisition of the business activity of Dominion Wireless Inc.:
Net fair value of the assets acquired at the
acquisition date was as follows:
Inventory $ 376
Property and equipment 90
Technology 436
---------
$ 902
=========
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 1:- GENERAL
a. Magal Security Systems Ltd. (the "Company") and its subsidiaries
(together "the Group") are engaged in the development,
manufacturing, marketing and sales of compleHx computerized
security systems used to automatically detect and deter human
intrusion for both civilian and military markets. A majority of
the Group's sales is generated in the U.S.A., Canada, Europe and
Israel.
As for major customer data, see Note 14b.
b. Acquisition of the business activity of Dominion Wireless Inc.:
On July 1, 2003, the Company's subsidiary acquired the business
activity of Dominion Wireless Inc. ("DW") for a total
consideration of $902 (including $74 of transaction costs) paid
in cash.
The Asset Purchase Agreement with DW, stipulated for additional
payments to be made conditioned upon the achievement of operating
income milestones during the periods ending on December 31, 2003,
2004 and 2005. Since such goals have not been met, no additional
payments were due for the periods ending December 31, 2003 and
2004. Should DW reach the earn out goals as of December 31, 2005,
an additional payment will become due. Such payment will be
recorded as additional goodwill in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 141
"Business Combinations".
DW develops manufactures, sells and supports personal duress
alarm systems that locate an individual with accuracy and
reliability in correctional and other institutions. The
acquisition of the business activity of DW has expanded the
Company's product line offerings and enabled it to provide its
customers a comprehensive range of security systems.
The acquisition was accounted for under the purchase method of
accounting in accordance with SFAS No. 141, and accordingly, the
purchase price has been allocated to the assets acquired based on
their estimated fair values at the date of acquisition.
Based upon a valuation of tangible and intangible assets
acquired, the Company's subsidiary allocated the total cost of
the acquisition to the assets acquired, as follows:
At July 1,
2003
---------------
Unaudited
---------------
Inventories $ 376
Property and equipment 90
Technology 436
---------------
$ 902
===============
The value assigned to the tangible and intangible assets has been
determined as follows:
a. DW's inventories and property and equipment are presented at
current replacement cost.
F-9
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 1:- GENERAL (Cont.)
b. The value assigned to technology was determined using the
Income Approach on the basis of the present value of cash
flows attributable to the intellectual property over its
expected future life. Technology is amortized on a
straight-line basis over a period of 8 years.
The results of operations of DW have been included in the
consolidated financial statements since July 1, 2003.
The following unaudited pro forma information does not purport
to represent what the Group's results of operations would have
been had the acquisition been consummated on January 1, 2002
and 2003, nor does it purport to represent the Group's results
of operations for any future period. Pro forma results of
operations for the period:
Year ended
December 31,
-------------------------
2002 2003
----------- -----------
Revenues $ 47,474 $ 59,933
=========== ===========
Net income $ 680 $ 1,910
=========== ===========
Basic net earnings per share $ 0.09 $ 0.24
=========== ===========
Diluted net earnings per share $ 0.08 $ 0.24
=========== ===========
c. Award granted by principal shareholders:
In June 2004, two principal shareholders awarded the Group's
employees an amount of net $1.2 million. The award was allocated
among the employees according to their position and seniority.
The Group recorded the award expense against additional paid in
capital in accordance with Staff Accounting Bulletin ("SAB")
Topic 5T "Accounting for Expenses or Liabilities Paid by
Principal Stockholder".
F-10
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with United States generally accepted accounting principles ("US
GAAP").
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that effect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
b. Financial statements in U.S. dollars:
Significant portion of the Company's revenues is generated in
U.S. dollars ("dollars"). Financing and investing activities
including credit, loans, equity transactions and cash investments
are executed in dollars. The Company's management believes that
the dollar is the primary currency of the economic environment in
which the Company operates. Thus, the functional and reporting
currency of the Company is the dollar.
The dollar was also determined to be the functional currency of
the Company's U.S. subsidiaries.
Accordingly, monetary accounts maintained in currencies other
than the dollar are remeasured into dollars in accordance with
SFAS No. 52, "Foreign Currency Translation". All transaction
gains and losses from the remeasured monetary balance sheet items
are reflected in the statement of income as financial income or
expenses, as appropriate.
The financial statements of all foreign subsidiaries whose
functional currency is their local currency, excluding the U.S.
ones, have been translated into dollars. All balance sheet
accounts have been translated using the exchange rates in effect
at the balance sheet date. Statement of income amounts have been
translated using the average exchange rate for the year. The
resulting translation adjustments are reported as a component of
shareholders' equity in accumulated other comprehensive income
(loss).
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany balances
and transactions including intercompany sales not yet realized
outside the Group, have been eliminated upon consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that
are readily convertible into cash with original maturities of
three months or less at the date acquired.
F-11
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
e. Short-term and long-term bank deposits:
Short-term bank deposits are deposits with maturities of more
than three months and less than one year, and presented at their
cost.
Bank deposits with maturities of more than one year are included
in long-term bank deposits, and presented at their cost. The
deposits are in U.S. dollars and bear interest at an average rate
of 2.3% and mature in 2006.
f. Structured Notes:
During 2003, the Company purchased structured notes ("the Notes")
at par value totaling $3 million to be settled in 2013. Under the
terms of the Notes, the Notes bear interest at 10% over the first
year. Thereafter, interest is determined based on six months
LIBOR rates using the following formula: 10% minus two times six
months LIBOR rate. The Notes are callable immediately after
accumulating 12% interest payments.
The Company accounts for investment in structured notes in
accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" and FASB Emerging Issues Task
Force Issue ("EITF") No. 96-12, "Recognition of Interest Income
and Balance Sheet Classification of Structured Notes". Management
determines the appropriate classification of its investments in
debt securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Structured notes
securities are classified as held-to-maturity since management
believes the Company has the intent and ability to hold these
securities to maturity and are stated at amortized cost. As of
December 31, 2003 and 2004, the investments in the Notes
approximate their fair market value.
g. Inventories:
Inventories are stated at the lower of cost or market value. The
Group periodically evaluates the quantities on hand relative to
historical and projected sales volumes, current and historical
selling prices and contractual obligations to maintain certain
levels of parts. Based on these evaluations, inventory write-offs
are provided to cover risks arising from slow-moving items,
discontinued products, excess inventories, market prices lower
than cost and adjusted revenue forecasts. Such write-offs are
included in cost of revenues.
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.
F-12
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
During 2002, 2003 and 2004, the Group recorded inventories
write-offs in the amount of $244, $601 and $224, respectively. A
significant portion of the 2003 write-off was attributed to
discontinued products.
h. Long-term trade receivables:
Long-term trade receivables derive from operating lease
arrangements and from long-term payment arrangements.
i. Property and equipment:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated by the straight-line
method over the estimated useful lives of the assets at the
following annual rates:
%
-----------------------------------
Buildings 4
Machinery and equipment
(including machinery
and equipment leased to
customers under
operating leases) 10-33 (mainly at 10)
Motor vehicles 15
Promotional display 25-50
Office furniture and equipment 6-33
Leasehold improvements By the shorter of the term of the
lease and the life of the assets
j. Intangible assets:
Intangible assets are amortized over their useful lives using a
method of amortization that reflects the pattern in which the
economic benefits of the intangible assets are consumed or
otherwise used up, in accordance with SFAS No. 142 "Goodwill and
Other Intangible Assets".
Know-how is amortized over 8 to 10 years, patents are amortized
over a period of 10 years and technology is amortized over 8
years.
F-13
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
k. Impairment of long-lived assets:
The Group's long-lived assets and certain identifiable
intangibles are reviewed for impairment in accordance with SFAS
No. 144 "Accounting for the Impairment or Disposal of Long- Lived
Assets" whenever events or changes in circumstances indicate that
the carrying amount of a group of assets may not be recoverable.
Recoverability of a group of assets to be held and used is
measured by a comparison of the carrying amount of the group to
the future undiscounted cash flows expected to be generated by
the group. If such group of assets is considered to be impaired,
the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds their fair value.
During 2002, 2003 and 2004, no impairment losses have been
identified.
l. Goodwill:
Goodwill represents excess of the costs over the net fair value
of the assets of the businesses acquired. Under SFAS No, 142,
goodwill acquired in a business combination on or after July 1,
2001, shall not be amortized, and goodwill acquired in prior
periods ceased to be amortized since January 1, 2002.
SFAS No. 142 requires goodwill to be tested for impairment on
adoption and at least annually thereafter or between annual tests
in certain circumstances, and written down when impaired, rather
than being amortized as previous accounting standards required.
Goodwill attributable to each of the reporting units is tested
for impairment by comparing the fair value of each reporting unit
with its carrying value. Fair value is determined using
discounted cash flows. Significant estimates used in the
methodologies include estimates of future cash flows, future
short-term and long-term growth rates and weighted average cost
of capital for each of the reportable units. During 2002, 2003
and 2004, no impairment losses have been identified.
Differences between the balance of goodwill as of December 31,
2003 and 2004 derive from functional currency translation
adjustments. The entire goodwill balance relates to the Perimeter
segment.
m. Revenue recognition:
The Group generates its revenues mainly from (1) installation of
comprehensive security systems for which revenues are generated
from long-term fixed price contracts; (2) sales of security
products; and (3) services and maintenance, which are performed
either on fixed-price basis or a time-and-materials basis
contracts.
Revenues from installation of comprehensive security systems are
generated from fixed price contracts according to which the time
between the signing of the contract and the final customer
acceptance is over a period generally exceeding one year. Such
revenues are recognized in accordance with Statement of Position
("SOP") No. 81-1 "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts," using contract accounting
on a percentage of completion method, in accordance with the
"Input Method". The amounts of revenues recognized are based on
the total fees under the agreements and the percentage to
completion achieved.
F-14
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Project costs include material purchased to produce the system,
related labor and overhead expenses and subcontractor's costs.
The percentage to completion is measured by monitoring costs and
efforts devoted using records of actual costs incurred to date in
the project compared to the total estimated project requirement,
which corresponds to the costs related to earned revenues.
Estimates of total project requirements are based on prior
experience of installing and integrating security systems, a
history of no collection issues, delivery and acceptance of
similar services and a history of no cancellation problems, which
are reviewed and updated regularly by management. Provisions for
estimated losses on uncompleted contracts are made in the period
in which such losses are first determined, in the amount of the
estimated loss on the entire contract.
Estimated gross profit or loss from long-term contracts may
change due to changes in estimates resulting from differences
between actual performance and original forecasts. Such changes
in estimated gross profit are recorded in results of operations
when they are reasonably determinable by management, on a
cumulative catch-up basis.
The Group believes that the use of the percentage of completion
method is appropriate as the Group has the ability to make
reasonably dependable estimates of the extent of progress towards
completion, contract revenues and contract costs. In addition,
contracts executed include provisions that clearly specify the
enforceable rights regarding services to be provided and received
by the parties to the contracts, the consideration to be
exchanged and the manner and the terms of settlement, including
in cases of terminations for convenience. In all cases the Group
expects to perform its contractual obligations and its customers
are expected to satisfy their obligations under the contract.
Accounting for long-term contracts using the
percentage-of-completion method stipulates that revenue and
expense are recognized throughout the life of the contract, even
though the project is not completed and the purchaser does not
have possession of the project.
Fees are payable upon completion of agreed upon milestones and
subject to customer acceptance. Amounts recognized in advance of
contractual billing, mainly as a result of using the "Input
Method", are recorded as unbilled accounts receivable. The period
between most instances of advanced recognition of revenues and
the customers' billing generally range between one to six months.
The Group sells security products to customers according to
customers' orders without installation work. The customers are
not entitled to return the products. Revenues from security
product sales are recognized in accordance with SAB No. 104
"Revenue Recognition in Financial Statements", when delivery has
occurred, persuasive evidence of an agreement exists, the
vendor's fee is fixed or determinable, no further obligation
exists and collectability is probable.
Services and maintenance are performed under either fixed-price
basis or time-and-materials basis contracts. Under fixed-price
contracts, the Group agrees to perform certain work for a fixed
price. Under time-and-materials contracts, the Group is
reimbursed for labor hours
F-15
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
at negotiated hourly billing rates and for materials. Such
service contracts are not in the scope of SOP No. 81-1, and
accordingly, related revenues are recognized in accordance with
SAB No. 104, as those services are performed or over the term of
the related agreements provided that, an evidence of an
arrangement has been obtained, fees are fixed and determinable
and collectibillity is reasonably assured.
One of the Company's subsidiaries provides security video
monitoring services. The majority of contracts executed are for a
five year term and do not include terms that result in the
transfer of title of the equipment to the customer. Under the
contracts service is not dependent on specific equipment. The
subsidiary's obligation is related to the provision of monitoring
services. In accordance with EITF No. 01-08 "Determining Whether
an Arrangement Contains a Lease" and SFAS No. 13 "Accounting for
Leases," the service contract does not meet the definition of a
lease and as such the subsidiary recognizes monthly service fees
over the term of the agreement.
Deferred revenue includes unearned amounts under installation
services, service contracts and maintenance agreements.
n. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principle Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and FASB Interpretation ("FIN") No. 44, "Accounting
for Certain Transactions Involving Stock Compensation," in
accounting for its employee stock option plans. Under APB No. 25,
when the exercise price of the Company's share options is less
than the market price of the underlying shares on the date of
grant, compensation expense is recognized.
The Company adopted the disclosure provisions of SFAS No. 148
"Accounting for Stock-Based Compensation transition and
disclosure", which amended certain provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative
methods of transition for an entity that voluntarily changes to
the fair value based method of accounting for stock-based
employee compensation, effective as of the beginning of the prior
fiscal year. The Company continues to apply the provisions of APB
No. 25 in accounting for stock-based compensation.
Proforma information regarding net income and net earnings per
share is required by SFAS No. 123, and has been determined as if
the Company had accounted for its employee stock options under
the fair value method prescribed by SFAS No. 123.
The fair value for options granted in 2004 is amortized over
their vesting period and estimated at the grant date using the
Black and Scholes option pricing model with the following
weighted-average assumptions for 2004: risk-free interest rate of
2.46%, dividend yields of 0%, a volatility factor of the expected
market price of the Company's Ordinary shares of 0.979, and a
weighted average life of the option of 1.5 years.
F-16
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Proforma information under SFAS No. 123:
Year ended December 31,
-----------------------------------------
2002 2003 2004
------------ ------------ -----------
Net income as reported: $ 1,888 $ 2,404 $ 1,053
Add: stock based compensation
expenses determined under the
intrinsic value based method
included in the reported net income 17 3 184
Deduct: stock based compensation
expenses determined under fair
value based method for all awards (246) (111) (198)
------------ ------------ -----------
Proforma net income $ 1,659 $ 2,296 $ 1,039
============ ============ ===========
Basic net earnings per share-as reported $ 0.24 $ 0.30 $ 0.12
============ ============ ===========
Diluted net earnings per share-as
reported $ 0.23 $ 0.30 $ 0.12
============ ============ ===========
Proforma basic net earnings per share $ 0.21 $ 0.29 $ 0.12
============ ============ ===========
Proforma diluted net earnings per share $ 0.21 $ 0.29 $ 0.12
============ ============ ===========
o. Research and development costs:
Research and development costs incurred in the process of
developing product improvements or new products, are charged to
expenses as incurred, net of grants received and investment tax
credit.
p. Warranty costs:
The Group provides a warranty for up to 24 months, at no extra
charge. The Group estimates the costs that may be incurred under
its warranty and records a liability in the amount of such costs
at the time product revenue is recognized in accordance with FIN
No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others" and SFAS No. 5 "Accounting for Contingencies". Factors
that affect the Group's warranty liability include the number of
units, historical and anticipated rates of warranty claims and
cost per claim. The Group periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as
necessary. A tabular reconciliation of the changes in the Group's
aggregate product warranty liability is not provided due to
immateriality.
F-17
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
q. Royalty-bearing grants:
Royalty-bearing grants from the Government of Israel for funding
research and development projects are recognized at the time the
Company is entitled to such grants on the basis of the related
costs incurred and recorded as a reduction of research and
development costs. Research and development grants recognized
amounted to $318, $128 and $228 in 2002, 2003 and 2004,
respectively.
The Company also received royalty-bearing grants from the Fund
for Encouragement of Marketing Activity. These grants are
recognized at the time the Company is entitled to such grants on
the basis of the costs incurred and included as a deduction of
selling and marketing expenses. Total grants recognized amounted
to $82, $0 and $0 in 2002, 2003 and 2004, respectively.
r. Net earnings per share:
Basic net earnings per share is computed based on the weighted
average number of shares of Ordinary shares outstanding during
each year. Diluted net earnings per share is computed based on
the weighted average number of shares of Ordinary shares
outstanding during each year, plus dilutive potential shares of
Ordinary shares considered outstanding during the year, in
accordance with SFAS No. 128 , "Earnings Per Share."
s. Concentrations of credit risk:
Financial instruments that potentially subject the Group to
concentrations of credit risk consist principally of cash and
cash equivalents, short-term and long-term bank deposits,
structured notes, unbilled accounts receivable, trade receivables
and long-term trade receivables.
Cash and cash equivalents, short-term and long-term bank deposits
and structured notes are mainly invested in major Israeli and
U.S. banks. Cash and cash equivalents in the United States may be
in excess of insured limits and are not insured in other
jurisdictions. Management believes that the financial
institutions that hold the Group's investments are financially
sound and, accordingly, minimal credit risk exists with respect
to these investments.
The short-term and long-term trade receivables of the Group, as
well as the unbilled accounts receivable, are derived from sales
to large and solid organizations and government authorities
located mainly in Israel, the United States, Canada and Europe.
The Group performs ongoing credit evaluations of its customers
and to date have not experienced any material losses. An
allowance for doubtful accounts is determined with respect to
those amounts that the Group has determined to be doubtful of
collection and in accordance with an aging key. In certain
circumstances, the Group may require letters of credit, other
collateral or additional guarantees.
The Group has no significant off-balance sheet concentration of
credit risks, such as foreign exchange contracts or foreign
hedging arrangements, except derivative instruments, which are
detailed in Note 2x.
F-18
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
t. Income taxes:
The Group accounts for income taxes in accordance with SFAS No.
109 "Accounting for Income Taxes." This statement prescribes the
use of the liability method whereby deferred tax assets and
liability account balances are determined based on differences
between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to
reverse. The Group provides a valuation allowance, if necessary,
to reduce deferred tax assets to their estimated realizable
value.
u. Severance pay:
The Company's liability for its Israeli employees severance pay
is calculated pursuant to Israel's Severance Pay Law based on the
most recent salary of the employees multiplied by the number of
years of employment, as of the balance sheet date. Employees are
entitled to one month's salary for each year of employment or a
portion thereof. The Company's liability for its employees in
Israel is fully provided by monthly deposits with insurance
policies and by an accrual. The value of these policies is
recorded as an asset in the Company's balance sheet.
The deposited funds include profits accumulated up to balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israel's Severance Pay
Law or labor agreements. The value of the deposited funds is
based on the cash surrendered value of these policies, and
includes immaterial profits.
Severance expenses for the years ended December 31, 2002, 2003
and 2004, amounted to approximately $60, $313 and $306,
respectively.
v. Fair value of financial instruments:
The following methods and assumptions were used by the Group in
estimating its fair value disclosures for financial instruments:
(i) The carrying amounts of cash and cash equivalents,
short-term bank deposits, trade receivables, unbilled
accounts receivable, short-term bank credit and trade
payables approximate their fair value due to the short-term
maturity of such instruments.
(ii) The carrying amount of the Group's long-term trade
receivables, long-term bank deposits and structured notes
approximate their fair value. The fair value was estimated
using discounted cash flows analyses, based on the Group's
investment rates for similar type of investment
arrangements.
F-19
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
(iii)The carrying amounts of the Group's long-term debt are
estimated by discounting the future cash flows using current
interest rates for loans of similar terms and maturities. As
of December 31, 2003, the fair value of the Group's
long-term borrowing was $5,564, compared to the carrying
amount of $5,714. As of December 31, 2004, the fair value of
the Company's long-term borrowing was $5,318, compared to
the carrying amount of $5,349.
(iv) The fair value of foreign currency contracts (used for hedge
purposes) is estimated by obtaining current quotes from
investment bankers.
w. Advertising expenses:
Advertising costs are charged to the statement of income as
incurred. Advertising expenses for the years ended December 31,
2002, 2003 and 2004, were $372, $422 and $495, respectively.
x. Derivative instruments:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", requires a company to recognize all of its
derivative instruments as either assets or liabilities in the
statement of financial position at fair value. The accounting for
changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the
type of hedging relationship. For those derivative instruments
that are designated and qualify as hedging instruments, a company
must designate the hedging instrument, based upon the exposure
being hedged.
To protect against the change in value of forecasted foreign
currency cash flows resulting from certain sale arrangements, the
Company has entered during 2003 and 2004 into forward contracts
in order to hedge portions of its forecasted revenue and unbilled
accounts receivable denominated in euro.
For derivative instruments designated as cash flow hedge (i.e.,
hedging the exposure to variability in expected future cash flows
that is attributable to a particular risk). The effective portion
of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income and reclassified into
earnings in the same line item associated with the forecasted
transaction in the same period or periods during which the hedged
transaction affects earnings. For derivative instruments that are
designated and qualify as a fair value hedge (i.e., hedging the
exposure to changes in the fair value of an asset or a liability
or an identified portion thereof that is attributable to a
particular risk), the gain or loss on the derivative instrument
as well as the offsetting loss or gain on the hedged item
attributable to the hedged risk are recognized in the same line
item associated with the hedged item in current earnings during
the period of the change in fair values.
F-20
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
As of December 31, 2004, the Company expects to reclassify $649
of net losses on derivative instruments from unrealized losses on
forward contracts to earnings during the next 12 months due to
actual sales and related payments.
y. Reclassification:
Certain amounts from prior years have been reclassified to
conform to the previous year's presentation. The reclassification
had no effect on previously reported net loss, shareholders'
equity or cash flows.
z. Impact of recently issued accounting standards:
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs,
an amendment of ARB No. 43, Chapter 4." SFAS No. 151 amends
Accounting Research Bulletin ("ARB") No. 43, Chapter 4, to
clarify that abnormal amounts of idle facility expense, freight
handling costs and wasted materials (spoilage) should be
recognized as current-period charges. In addition, SFAS No. 151
requires that allocation of fixed production overheads to the
costs of conversion be based on normal capacity of the production
facilities. SAFS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The
Company does not expect that the adoption of SFAS No. 151 will
have a material effect on its financial position or results of
operations.
On December 16, 2004, the FASB issued SFAS No. 123(R) (revised
2004), "Share-Based Payment," which is a revision of SFAS No.
123, "Accounting for Stock-Based Compensation." Generally, the
approach in Statement 123(R) is similar to the approach described
in SFAS No. 123. However, SFAS No. 123 permitted, but not
required, share-based payments to employees to be recognized
based on their fair values while SFAS 123(R) requires all
share-based payments to employees to be recognized based on their
fair values. SFAS 123(R) also revises, clarifies and expands
guidance in several areas, including measuring fair value,
classifying an award as equity or as a liability and attributing
compensation cost to reporting periods. The new standard will be
effective for the Company in the first interim period beginning
after June 15, 2005. The adoption of SFAS 123(R) will not have a
significant effect on the Company's results of operations.
F-21
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 3:- INVENTORIES
December 31,
-------------------------------
2003 2004
-------------- --------------
Raw materials $ 6,843 $ 6,806
Work in progress 2,513 2,320
Finished products 2,421 3,576
------------- -------------
$ 11,777 $ 12,702
============= =============
NOTE 4:- PROPERTY AND EQUIPMENT, NET
a. Composition:
December 31,
--------------------------------
2003 2004
--------------- ---------------
Cost:
Land and buildings $ 8,215 $ 8,790
Machinery and equipment 4,170 4,411
Machinery and equipment leased to customers
under operating leases 2,083 4,952
Motor vehicles 1,414 1,341
Promotional display 3,659 4,236
Office furniture and equipment 2,609 2,924
Leasehold improvements 23 784
-------------- --------------
22,173 27,438
-------------- --------------
Accumulated depreciation:
Buildings 2,098 2,404
Machinery and equipment 2,648 2,958
Machinery and equipment leased to customers
under operating leases 292 845
Motor vehicles 738 833
Promotional display 2,891 3,322
Office furniture and equipment 1,980 2,356
Leasehold improvements 21 61
-------------- --------------
10,668 12,779
-------------- --------------
Depreciated cost $ 11,505 $ 14,659
============== ==============
b. Depreciation expenses amounted to $1,014, $1,241 and $1,822 for
the years ended December 31, 2002, 2003 and 2004, respectively.
c. As for charges, see Note 9g.
F-22
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 5:- OTHER INTANGIBLE ASSETS, NET
a. Composition:
December 31,
------------------------------
2003 2004
------------- -------------
Cost:
Know-how $ 1,502 $ 502
Patents 2,381 2,639
Technology 436 436
------------- -------------
4,319 3,577
------------- -------------
Accumulated amortization:
Know-how 1,342 396
Patents 2,237 2,443
Technology 27 82
------------- -------------
3,606 2,921
------------- -------------
Amortized cost $ 713 $ 656
============= =============
b. Amortization expenses related to intangible assets amounted to
$82, $137 and $144 for the years ended December 31, 2002, 2003
and 2004, respectively.
c. Estimated amortization of intangible assets for the years ended:
December 31,
----------------
2005 148
2006 139
2007 77
2008 74
2009 73
----------------
511
================
NOTE 6:- SHORT-TERM BANK CREDIT
a. Classified by currency, linkage terms and interest rates:
Interest rate December 31,
--------------------- -----------------------------
2003 2004 2003 2004
--------- --------- ------------ --------------
%
---------------------
In or linked to U.S. Dollars (1) 3.02 4.08 $ 4,300 $ 8,600
In or linked to NIS (1) 6.83 5.47 6,613 5,556
In or linked to Canadian
Dollars (2) 5.01 4.75 1,684 1,462
------------ --------------
$ 12,597 $ 15,618
============ ==============
Weighted average interest
rates at the end of the year 5.28% 4.64%
============ ==============
Total authorized credit lines
approximate $ 33,245
==============
Unutilized credit lines
approximate $ 6,352
==============
F-23
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 6:- SHORT-TERM BANK CREDIT (Cont.)
(1) The Company has undertaken to maintain the following financial
ratios and terms in respect of its used credit line:
1. A ratio of at least 40% of consolidated shareholders' equity
out of the consolidated total assets.
2. Minimal annual consolidated net income in the amount of $
1,000.
3. The same shareholders maintain the core of control in the
Company.
As of December 31, 2004, management believes that the Company was
in compliance with these ratios and terms.
(2) The loan to a subsidiary is collateralized by a general security
agreement and has undertaken to maintain general covenants and
the following financial ratios, with respect to the subsidiary's
financial statements, and terms in respect of its used credit
lines:
1. A quick ratio of not less than 1.25.
2. A ratio of total liabilities to tangible net worth of not
greater than 0.75.
3. Tangible net worth of at least $9 million.
As of December 31, 2004, management believes that the subsidiary
was in compliance with these ratios and terms.
b. As for charges, see Note 9g.
NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31,
------------------------------
2003 2004
-------------- --------------
Employees and payroll accruals $ 1,951 $ 1,380
Accrued expenses 2,116 3,911
Deferred revenues 324 81
Unrealized losses on hedging forward contracts 489 781
Government authorities - 308
Declared dividend 401 -
Income tax payable 641 3
Others 596 986
-------------- -------------
$ 6,518 $ 7,450
============== =============
F-24
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 8:- LONG-TERM DEBT
a. Classified by currency, linkage terms and interest rates:
Interest rate December 31,
Linkage ----------------------- ---------------------------
terms 2003 2004 2003 2004
----------- ----------- ----------- ------------- -------------
%
-----------------------
Bank loan U.S. $ 4.60 3.10 $ 2,500 $ 2,500
Bank loan U.S. $ 4.60 - 250 -
Bank promissory note (1) U.S. $ 2.87 3.05 500 500
Bank promissory note (1) U.S. $ 5.66 3.50 500 500
------------- -------------
3,750 3,500
Mortgage payable U.S. $ 8.25 8.25 1,964 1,849
------------- -------------
5,714 5,349
Less - current
maturities 3,841 1,849
------------- -------------
$ 1,873 $ 3,500
============= =============
Weighted average
interest rates at the
end of the year 5.80% 4.91%
============= =============
(1) As for financial ratios and terms in respect of long-term loans,
the two $500 promissory notes both have covenants that require the
Group to maintain $1 million in deposits at all times otherwise the
interest rate on the notes become the bank's rate plus 0.25% until the
minimum deposit is maintained. The Group is also required to maintain
tangible net worth and subordinated debt of not less than $170 for one
note and not less than $100 for the second note.
As of December 31, 2004, management believes that the Group was in
compliance with these ratios and terms.
b. As of December 31, 2004, the aggregate annual maturities of the
long-term loans are as follows:
2005 $ 1,849
2006 3,500
------------
$ 5,349
============
c. As for charges, see Note 9g.
F-25
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Royalty commitments to the Office of the Chief Scientist of the
Israeli Ministry of Industry and Trade ("OCS"):
Under the research and development agreements of the Company with
the OCS and pursuant to applicable laws, the Company is required
to pay royalties at the rate of 3%-4.5% of sales of products
developed with funds provided by the OCS, up to an amount equal
to 100% of the OCS research and development grants received,
linked to the U.S. dollars plus interest on the unpaid amount
received based on the 12-month LIBOR rate applicable to dollar
deposits. The Company is obligated to repay the Israeli
Government for the grants received only to the extent that there
are sales of the funded products.
Royalties paid amounted to $131, $80 and $61 for the years ended
December 31, 2002, 2003 and 2004, respectively. As of December
31, 2004, the Company had remaining contingent obligations to pay
royalties in the amount of approximately $1,868.
b. Royalty commitments to the Fund of Encouragement of Marketing
Activities:
The Israeli Government, through the Fund for the Encouragement of
Marketing Activities, awarded the Company grants for
participation in expenses for foreign marketing. The Company is
committed to pay royalties at the rate of 3% of the increase in
export sales, up to the amount of the grants received.
Royalties paid during the years ended December 31, 2002, 2003 and
2004, amounted to $53, $0 and $0, respectively. As of December
31, 2004, the aggregate contingent obligation amounted to $95.
c. Royalty commitments to third party:
During 2002, the Company entered into a development agreement for
planning, developing and manufacturing a security system with a
third party. Under the agreement, the Company agreed to pay the
third party royalty fees, based on a formula as defined in the
agreement. Under this agreement the Company has also committed to
purchase a certain volume of products at a minimum amount of
approximately $300 over 2.5 years after achievement of certain
milestones. As of December 31, 2004, no royalty commitment, under
the agreement, exists.
d. Lease commitments:
The Group rents its facilities and some of its motor vehicles
under various operating lease agreements, which expire on various
dates, the latest of which is in 2008.
F-26
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
Future minimum lease payments under non-cancelable operating
lease agreements as of December 31, are as follows:
2005 $ 441
2006 290
2007 156
2008 99
-----------
$ 986
===========
Total rent expenses for the years ended December 31, 2002,
2003 and 2004, were approximately $183, $368 and $671,
respectively.
e. Guarantees:
1. As of December 31, 2004, the Group obtained bank performance
guarantees, advance payment guarantees and bid bond
guarantees from several banks mainly in Israel in the amount
of $3,837.
2. As of December 31, 2004, the Company obtained bank
guarantees in an amount of $1,849 in order to secure
mortgage payable by a subsidiary.
f. Legal proceedings:
1. In April 2003, a competitor filed a civil action suit
against the Company and others. The plaintiff alleged that
the failure of its perimeter systems in field trials
executed by the Ministry of Defense during 1996 and 1997,
resulted from intentional damage to the fence and diversion
of the results of certain tests by a former employee of the
Company, who was then a soldier in the Israeli Defense
Force. The plaintiff alleged that the Company, which was the
employer of this employee during 1995, still employed him as
an agent during the field trials, and directed the actions
of the former employee. The plaintiff requested the courts
to annul the field trial and sought, approximately $760 in
damages. The Company denied all of the above allegations and
claimed that the plaintiff's perimeter system failure was
not the result of the former employee's actions. The
Company's legal counsel believes that, the Company has valid
defenses against the aforementioned claims and, therefore,
no provision was recorded in the financial statements. The
action is in the preliminary stage.
2. In June 2000, Rapiscan Security Products Inc. ("Rapiscan")
filed a lawsuit against the Company claiming $1,600 was due
it in the context of an agreement between Rapiscan and the
Company. The Company filed a counter-claim in the amount of
approximately $1,350. The financial statements as of
December 31, 2003 included a reserve computed by management
for this litigation of approximately $1,000. On February 18,
2004, the court approved a settlement agreement between the
Company and Rapiscan, according to which, the Company paid
Rapiscan approximately $653. The reduction of $347 of the
$1,000 estimated reserve was recorded in operations during
the first quarter of 2004.
F-27
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
g. Charges:
As collateral for all of the Group liabilities to banks:
1. A fixed charge has been placed on the Company's property.
2. The Company agreed not to pledge any of its assets without
the consent of several banks.
3. A fixed charge in the amount of $3,000 has been placed on
the Company's bank deposits.
4. The Company's subsidiary has two bank promissory notes in
the aggregate amount of $1,000 due on April 15, 2006,
collateralized by substantially all of the subsidiary's
assets, and a $1,849 mortgage note payable, collateralized
by a first mortgage on its land and building.
NOTE 10:- SHAREHOLDERS' EQUITY
a. Pertinent rights and privileges conferred by Ordinary shares:
The Ordinary shares of the Company are listed for trade on NASDAQ
National Market and in Israel, on the Tel-Aviv Stock Exchange.
The Ordinary shares confer upon their holders the right to
receive notice to participate and vote in the General Meetings of
the Company and the right to receive dividends, if declared.
b. Stock Option Plan:
On October 27, 2003, the Company's Board of Directors approved
the 2003 Israeli Share Option Plan ("the 2003 Plan"). Under the
2003 Plan, stock options will be periodically granted to
employees, directors, officers and consultants of the Company or
its subsidiaries, in accordance with the decision of the Board of
Directors of the Company (or a committee appointed by it). The
Board of Directors has the authority to determine the number of
options, if any, which will be granted to each of the
aforementioned, the dates of the grant of such options, the date
of their exercise as well as their rate of conversion into shares
in respect of each stock option, and the purchase price thereof.
The 2003 Plan is effective for ten years and shall terminate on
October 2013. Any options that are cancelled or forfeited before
expiration become available for future grant.
As of December 31, 2004, there were 537,606 options available for
future grant.
F-28
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 10:- SHAREHOLDERS' EQUITY (Cont.)
A summary of the Company's stock options activities in 2002, 2003
and 2004, is as follows:
Year ended December 31,
-------------------------------------------------------------
2002 2003 2004
------------------ ------------------ ----------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
options price options price Options price
------- ----- ------- ----- ------- -----
Outstanding
at the
beginning
of the year 412,400 $ 3.93 358,234 $ 4.23 223,216 $ 4.61
Granted - $ - - $ - 100,000 $ 7.66
Adjustment as
a result of
stock
dividend 11,232 $ - 10,256 $ - 7,652 $ -
Exercised (63,750) $ 2.17 (137,446) $ 3.55 (225,338) 4.61
Forfeited (1,648) $ - (7,828) - (530) $ -
-------- -------- --------
Outstanding
at the
end of the
year 358,234 $ 4.23 223,216 $ 4.61 105,000 $ 7.66
======== ====== ======== ====== ======== =======
Exercisable
options
at the end
of the year 118,450 $ 2.14 223,216 $ 4.61 - $ -
======== ====== ======== ====== ======== =======
All options outstanding as of December 31, 2004 have an exercise
price of $7.66 and a weighted average remaining contractual life
of 1.5 years.
Where the Company has recorded deferred stock compensation for
options issued with an exercise price below the fair market value
of the Ordinary shares, the deferred stock compensation has been
amortized and recorded as compensation expense ratably over the
vesting period of the options. Compensation expense of
approximately $17, $3 and $184 were recognized during the years
ended December 31, 2002, 2003 and 2004, respectively.
c. Dividends:
1. Dividends, if any, will be declared and paid in U.S.
dollars. Dividends paid to shareholders in Israel will be
converted into NIS on the basis of the exchange rate
prevailing at the date of payment. The Company has
determined that it will not distribute dividends out of
tax-exempt profits.
2. The Company's Board of Directors decided on a distribution
of stock dividends of 3%, 3% and 5% in May 2002, May 2003
and July 2004, respectively. All shares, options and net
earnings per share data have been retroactively adjusted to
reflect the stock dividend.
3. At the Annual General Meeting of Shareholders held on July
29, 2004, the shareholders approved the payment of an
interim cash dividend in the amount of $0.05 per Ordinary
Share of NIS 1 par value each, which was declared in
December 2003.
F-29
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 10:- SHAREHOLDERS' EQUITY (Cont.)
d. Warrants to underwriters:
In connection with the 1997 follow-on Offering, the Company
issued to the underwriters, 200,000 warrants to purchase 200,000
Ordinary shares of the Company. The warrants were initially
exercisable at an exercise price of 120% of the 1997 offering
price per share ($5.50) for a period of four years, commencing
one year from the date of the 1997 offering. As of December 31,
2002, all 200,000 warrants were exercised on a net cash basis and
60,703 Ordinary shares of NIS 1 par value were issued.
e. In May 2002, the Company's Board of Directors approved an
increase in the authorized Ordinary share capital to 19,748,000
shares of NIS 1 par value.
NOTE 11:- BASIC AND DILUTED NET EARNINGS PER SHARE
Year ended December 31,
------------------------------------------
2002 2003 2004
------------- ------------- ------------
Numerator:
Net income $ 1,888 $ 2,404 $ 1,053
============= ============= ============
Denominator:
Denominator for basic net earnings per share
- weighted-average number of shares
outstanding 7,866,477 7,947,778 8,581,348
Effect of diluting securities:
Employee stock options and warrants to
underwriters 202,661 80,848 55,031
------------- ------------- ------------
Denominator for diluted net earnings per
share - adjusted weighted average shares
and assumed exercises 8,069,138 8,028,626 8,636,379
============= ============= ============
NOTE 12:- TAXES ON INCOME
a. Tax benefits in Israel under the Law for the Encouragement of
Capital Investments, 1959, (the "Law"):
The Company has been granted the status of an "Approved
Enterprise" under the Law. Currently, there are three expansion
programs under which the Company is entitled to tax benefits:
1. In 1992, a program of the Company was granted the status of
an "Approved Enterprise". The Company has elected to enjoy
the "alternative benefits" track - waiver of grants in
return for tax exemption - and, accordingly, the Company's
income from this program was tax-exempt for a period of four
years, and was subject to a reduced tax rate of 15%-25% for
a period ranging between three to six years (depending on
the percentage of foreign ownership of the Company). The
period of benefits under this program began in 1994 and
terminated in 2003.
F-30
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 12:- TAXES ON INCOME (Cont.)
2. On March 18, 1997, a program of the Company was granted the
status of an "Approved Enterprise". The Company elected to
enjoy the "alternative benefits" track - waiver of grants in
return for tax exemption and accordingly, the Company's
income from this program was tax-exempt for a period of four
years, and is subject to a reduced tax rate of 15%-25% for a
period ranging between three to six years (depending on the
percentage of foreign ownership of the Company). The period
of benefits under this program began in 1998 and will
terminate in 2007.
3. On August 13, 2002, a program of the Company was granted the
status of an "Approved Enterprise". The Company elected to
enjoy the "alternative benefits" track - waiver of grants in
return for tax exemption - and, accordingly, the Company's
income from this program is tax-exempt for a period of two
years, and is subject to a reduced tax rate of 15%-25% for a
period of five to eight years (depending upon the percentage
of foreign ownership of the Company). The benefit period for
this program began in 2003 and will terminate in 2012.
The entitlement to the above benefits is conditional upon the
Company fulfilling the conditions stipulated by the Law,
regulations published there under and the letters of approval for
the specific investments in "approved enterprises". In the event
of failure to comply with these conditions, the benefits may be
canceled and the Company may be required to refund the amount of
the benefits, in whole or in part, including interest. As of
December 31, 2004, management believes that the Company is in
compliance with all of the aforementioned conditions.
The period of tax benefits detailed above is subject to limits of
the earlier of 12 years from the commencement of production or 14
years from receiving the approval.
Income from sources other than "Approved Enterprise", during the
benefit period will be subject to tax at regular rate of 35%.
By virtue of the Law, the Company is entitled to claim
accelerated depreciation on equipment used by the "Approved
Enterprise" during five tax years.
Since the Company is operating under more than one approval and
since part of its taxable income is not entitled to tax benefits
under the aforementioned law and is taxed at regular rates
(currently 35%), its effective tax rate is the result of a
weighted combination of the various applicable rates and
tax-exemptions. The computation is made for income derived from
each program on the basis of formulas determined in the law and
in the approvals.
The tax-exempt income attributable to the "Approved Enterprises"
can be distributed to shareholders without subjecting the Company
to taxes only upon the complete liquidation of the Company. If
the retained tax-exempt income is distributed in a manner other
than in the complete liquidation of the Company, it would be
taxed at the corporate tax rate applicable to such profits as if
the Company had not chosen the alternative tax benefits
(currently - 15%).
F-31
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 12:- TAXES ON INCOME (Cont.)
b. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Under the Income Tax (Inflationary Adjustments) Law, 1985,
results for tax purposes are measured in real terms, in
accordance with the changes in the Israeli Consumer Price Index
("Israeli CPI"). Accordingly, until 2002, results for tax
purposes were measured in terms of earnings in NIS after certain
adjustments for increases in the Israeli CPI. Commencing in
taxable year 2003, the Company has elected to measure its taxable
income and file its tax return under the Israeli Income Tax
Regulations (Principles Regarding the Management of Books of
Account of Foreign Invested Companies and Certain Partnerships
and the Determination of Their Taxable Income), 1986. Such an
elective obligates the Company for three years. Accordingly,
commencing taxable year 2003, results for tax purposes are
measured in terms of earnings in dollar.
c. Tax benefits (in Israel) under the Law for the Encouragement of
Industry (Taxes), 1969:
The Company is an "industrial company" as defined by this law
and, as such, is entitled to certain tax benefits including
accelerated depreciation, deduction of the purchase price of
patents and know-how and deduction of public offering expenses.
d. Tax rates:
1. On June 29, 2004, the Israeli Government passed the
Amendment to the Income Tax Ordinance (No. 140 and Temporary
Provision), 2004, which progressively reduces the tax rates
applicable to companies from 36% to 35% in 2004 to a rate of
30% in 2007. The amendment had no impact on the Company's
financial statements.
2. The tax rates of the Company's subsidiaries range between
25%-40%.
e. Investment tax credit:
One of the Company's subsidiaries is eligible for investment tax
credits on its research and development activities and on certain
current and capital expenditures. During fiscal year 2004, the
subsidiary recognized $176 of investment tax credits as a
reduction of research and development expenses. In total, the
subsidiary has investment tax credits available to reduce future
federal income taxes payable, amounting to $436, which will
expire at various dates from 2012 through 2014.
F-32
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 12:- TAXES ON INCOME (Cont.)
f. Reconciliation between the theoretical tax expense, assuming all
income is taxed at the Israeli statutory rate, and the actual tax
expense, is as follows:
Year ended December 31,
------------------------------------
2002 2003 2004
----------- ----------- ----------
Income before taxes as reported in the $ 2,533 $ 3,317 $ 2,154
statements of income
=========== =========== ==========
Tax rate 36% 36% 35%
=========== =========== ==========
Theoretical tax expense $ 912 $ 1,194 $ 754
Increase (decrease) in taxes:
Tax adjustments in respect of
inflation in Israel 11 - -
Non-deductible items, net (24) 17 (400)
Deferred taxes on losses for which
valuation allowance was provided 442 298 1,163
Tax exemption applicable to "Approved
Enterprises" and exempted income (293) (443) (281)
Taxes in respect of prior years (279) (107) (23)
Other (124) (46) (112)
----------- ----------- ----------
Taxes on income in the statements of
income $ 645 $ 913 $ 1,101
=========== =========== ==========
Per share amounts (basic and diluted)
of the tax benefit resulting from
"Approved Enterprises" $ 0.04 $ 0.06 $ 0.03
=========== =========== ==========
g. Taxes on income included in the statements of income:
Year ended December 31,
------------------------------------
2002 2003 2004
----------- ----------- ----------
Current taxes:
Domestic $ 269 $ 398 $ 428
Foreign 211 534 518
Deferred income taxes:
Domestic (30) - (70)
Foreign 474 88 248
Taxes in respect of prior years:
Domestic (279) (107) -
Foreign - - (23)
----------- ----------- ----------
Taxes on income $ 645 $ 913 $ 1,101
=========== =========== ==========
F-33
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 12:- TAXES ON INCOME (Cont.)
h. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Group
deferred tax assets are as follows:
December 31,
----------------------------
2003 2004
------------ ------------
Operating loss carryforward $ 1,813 $ 2,992
Reserves and tax allowances 658 (26)
------------ ------------
Total deferred assets before valuation allowance 2,471 2,966
Valuation allowance (1,682) (2,292)
------------ ------------
Net deferred tax assets $ 789 $ 674
============ ============
Domestic $ 212 $ 288
Foreign 577 386
------------ ------------
$ 789 $ 674
============ ============
During 2004, the Company's subsidiaries have increased the
valuation allowance in the amount of approximately $300, as a
result of change in circumstances that caused a change in
judgment about the certainty of realization of related deferred
tax assets in future years. The total net change in valuation
allowance during 2004 amounted to $610.
i. The domestic and foreign components of income before taxes are as
follows:
Year ended December 31,
------------------------------------
2002 2003 2004
----------- ----------- ----------
Domestic $ 2,217 $ 2,217 $ 2,137
Foreign 316 1,100 17
----------- ----------- ----------
$ 2,533 $ 3,317 $ 2,154
=========== =========== ==========
F-34
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 12:- TAXES ON INCOME (Cont.)
j. Net operating losses carryforward:
The Company's subsidiaries in the U.S. and the U.K. have
estimated total available carryforward tax losses of $7,139 and
$795, respectively, to offset against future taxable profit for
16 to 20 years, and an indefinite period, respectively. As of
December 31, 2004, the Company recorded a full valuation
allowance due to the uncertainty of the tax assets 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.
NOTE 13:- RELATED PARTIES TRANSACTIONS
Year ended December 31,
----------------------------------
2002 2003 2004
---------- ---------- ----------
Sales to related parties (1) $ 188 $ 196 $ 386
========== ========== ==========
(1) Sales to related parties represent services provided b the
Company's subsidiary.
NOTE 14:- SEGMENTS INFORMATION
The Group adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". The Group operates in three major
reportable segments, which represent the Group's operating segments as
follows:
1. Perimeter security systems - The Group's line of perimeter
security systems consists of the following: Microprocessor-based
central control units, taut wire perimeter intrusion detection
systems, INNO Fences, vibration detection systems, field
disturbance sensors, and other.
2. Security turnkey projects - The Group is executing turnkey
projects based on the Company's security management system and
acting as an integrator.
3. Video monitoring services - The Group supplies video monitoring
services through Smart Interactive Systems, Inc., a subsidiary
established in the U.S. in June 2001.
F-35
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 14:- SEGMENTS INFORMATION (Cont.)
a. The following data present the revenues, expenditures, assets and
other operating data of the Group's operating segments:
Year ended December 31,
----------------------------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------------- ---------------------------------------------------------
Video Video
Perimeter Projects monitoring Other Total Perimeter Projects monitoring Other Total
--------- -------- ---------- ----- ----- --------- -------- ---------- ----- -----
Revenues $ 36,435 $ 5,340 $ 238 $ 953 $42,966 $ 51,077 $ 6,720 $ 403 $ 1,161 $59,361
======== ========= ======= ======= ======= ========= ======== ======== ======== =======
Depreciation
and
amortization $ 927 $ 9 $ 149 $ 11 $ 1,096 $ 1,056 $ 20 $ 292 $ 10 $1,378
======== ========= ======= ======= ======= ========= ======== ======== ======== ======
Operating
income,
before
financial
expenses and
taxes on
income $ 4,045 $ 794 $(1,556) $ (949) $ 2,334 $ 5,803 $ 936 $ (1,870) $ (549) $4,320
======== ========= ======= ======= ========= ========= ======== ========
Financial
income
(expenses),
net 199 (1,003)
Taxes on income 645 913
--- ---
Net income $ 1,888 $2,404
======= ======
Year ended December 31,
---------------------------------------------------
2004
---------------------------------------------------
Video
Perimeter Projects monitoring Other Total
--------- -------- ---------- ----- -----
Revenues $ 46,341 $11,375 $ 2,060 $ 1,198 $60,974
======== ======= ======= ======= =======
Depreciation
and
amortization $ 1,252 $ 11 $ 698 $ 5 $1,966
======== ======= ======= ======= ======
Operating
income,
before
financial
expenses and
taxes on
income $ 4,978 $ 1,430 $(2,262) $(1,230) $2,916
======== ======= ======= =======
Financial
income
(expenses),
net (762)
Taxes on income 1,101
-----
Net income $1,053
======
December 31,
----------------------------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------------- ---------------------------------------------------------
Video Video
Perimeter Projects monitoring Other Total Perimeter Projects monitoring Other Total
--------- -------- ---------- ----- ----- --------- -------- ---------- ----- -----
Total
long-lived
assets $ 12,408 $ 30 $ 867 $ 21 $ 13,326 $ 13,476 $ 88 $ 2,787 $ 12 $ 16,363
======== ======= ====== ====== ======== ======== ======= ======== ===== ========
December 31,
----------------------------------------------------
2004
---------------------------------------------------
Video
Perimeter Projects monitoring Other Total
--------- -------- ---------- ----- -----
Total
long-lived
assets $ 13,576 $ 192 $ 5,814 $ 19 $19,601
======== ======= ======= ===== =======
F-36
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 14:- SEGMENTS INFORMATION (Cont.)
b. Major customer data (percentage of total revenues):
Year ended December 31,
-----------------------------------------
2002 2003 2004
------------- ------------- -----------
Israel's Ministry of Defense and
Israel's Defense Forces 15.9% 27.2% *) -%
============= ============= ===========
C.N. Aeroportul international Bucuresti
Otopeni *) -% *) -% 15.6%
============= ============= ===========
*) Less then 10% of total revenues.
c. Geographical information:
The following is a summary of revenues within geographic areas
based on end customer's location and long-lived assets:
Year ended December 31,
------------------------------------------
2002 2003 2004
------------- ------------- ------------
1. Revenues:
Israel $ 11,350 $ 20,503 $ 10,123
Romania 1,023 5,151 9,521
Europe (excluding Romania) 5,376 5,465 9,150
USA 12,641 13,292 17,871
Canada 4,324 6,338 4,068
Others 8,252 8,612 10,241
------------- ------------- ------------
$ 42,966 $ 59,361 $ 60,974
============= ============= ============
December 31,
------------------------------------------
2002 2003 2004
------------- ------------- ------------
2. Long-lived assets:
Israel $ 3,802 $ 3,626 $ 3,211
Europe 786 980 1,069
USA 6,299 8,655 11,518
Canada 2,392 2,998 3,649
Others 47 104 154
------------- ------------- ------------
$ 13,326 $ 16,363 $ 19,601
============= ============= ============
F-37
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
NOTE 15:- SELECTED STATEMENTS OF INCOME DATA
a. Research and development expenses, net:
Year ended December 31,
------------------------------------------
2002 2003 2004
------------ ------------ -------------
Expenses $ 3,750 $ 5,128 $ 5,088
Less - royalty-bearing grants and
investment tax credit 622 355 405
------------ ------------ -------------
$ 3,128 $ 4,773 $ 4,683
============ ============ =============
b. Financial income (expenses):
Financial expenses:
Interest on long-term debt $ (371) $ (298) $ (289)
Interest on short-term bank credit (640) (808) (849)
Foreign exchange losses (6) (692) (161)
------------- ------------- ------------
(1,017) (1,798) (1,299)
------------- ------------- ------------
Financial income:
Interest on short-term and long-term
bank deposits and structured notes 732 672 496
Foreign exchange gains 484 123 41
------------- ------------- ------------
1,216 795 537
------------- ------------- ------------
$ 199 $ (1,003) $ (762)
============= ============= ============
NOTE 16:- SUBSEQUENT EVENTS (UNAUDITED)
In 2005, the Company intends to raise additional equity to fund future
growth.
- - - - - - - - -
F-38
SIGNATURE
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F/A and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
MAGAL SECURITY SYSTEMS LTD.
By: /s/Jacob Even-Ezra
------------------
Name: Jacob Even-Ezra
Title: Chairman of the Board
and Chief Executive Officer
Date: September 8, 2005
3