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, 2002
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, Yahud 56100, Israel
-------------------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None 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:
7,696,517 Ordinary Shares, NIS 1.0 par value per share
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
Explanatory Note
This Amendment No. 1 on Form 20-F/A hereby amends Items 18 and 19 of
Magal Security Systems Ltd.'s annual report on Form 20-F for the fiscal year
ended December 31, 2002, which was filed on June 27, 2003. This Amendment No. 1
is being filed for the purpose of providing additional details to our
disclosures in the original report pursuant to comments we received from the
Staff of the U.S. Securities and Exchange Commission in connection with its
review of our periodic filings. The Amendment deals specifically with the
inclusion of a new Note 2x in the financial statements.
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, 2002 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. We are
not amending Item 15 with respect to our internal controls and procedures since
we do not believe that the cause of this Amendment was the result of any problem
with our internal controls and procedures.
As a result, this Amendment continues to speak as of June 27, 2003.
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 and a security management 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 and in
February 1997, we completed a public offering of an additional 2,085,000
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.
We urge you to consider that 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.
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 17, 2003 was NIS
4.353 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.
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.
TABLE OF CONTENTS
Page
----
PART III......................................................................1
ITEM 18. Financial Statements..........................................1
ITEM 19. Exhibits......................................................1
SIGNATURE.....................................................................3
i
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 Shares
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
10.1***** Form of Underwriting Agreement
21****** List of Subsidiaries of the Registrant
23.1 Consent of Kost Forer Gabbay & Kasierer
23.2 Consent of BDO Seidman, LLP
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended
32.1 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
32.2 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
_________
* Previously filed as an exhibit to our Registration Statement on Form F-1
(No. 33-57438), filed with the Commission on January 26, 1993, as
amended, and incorporated herein by reference.
** Previously filed as an exhibit to our Registration Statement on Form F-1
(No. 33-57438), filed with the Commission on January 26, 1993, as
amended, and incorporated herein by reference and an amendment thereto
previously filed as an exhibit to our Registration Statement on Form S-8
(No. 333-6246), filed with the Commission on January 7, 1997 and
incorporated herein by reference and further amendments thereto
previously filed as an exhibit to our Annual Report on Form
20-F for the fiscal year ended December 31, 2000, filed with the
Commission on June 29, 2001 and incorporated herein by reference.
*** Previously filed as an exhibit to our Registration Statement on Form
8-A, filed with the Commission on March 18, 1993, as amended, and
incorporated herein by reference.
**** Previously filed as an exhibit to our Registration Statement on Form S-8
(No. 333-6246), filed with the Commission on January 7, 1997 and
incorporated herein by reference and further amendments thereto
previously filed as an exhibit to our Annual Report on Form 20-F for the
fiscal year ended December 31, 2000, filed with the Commission on June
29, 2001 and incorporated herein by reference.
***** 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 Form 20-F for the Fiscal Year
ended December 31, 2002 and incorporated herein by reference.
2
MAGAL SECURITY SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
IN U.S. DOLLARS
INDEX
Page
----
Reports of Independent Auditors F-2
Consolidated Balance Sheets F-4 - F-5
Consolidated Statements of Income F-6
Statements of Changes in Shareholders' Equity F-7
Consolidated Statements of Cash Flows F-8 - F-9
Notes to Consolidated Financial Statements F-10 - F-37
- - - - - - - -
F-1
REPORT OF INDEPENDENT AUDITORS
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,
2001 and 2002, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of certain wholly owned subsidiaries, which statements reflect total
revenues of 11.4% of total consolidated revenues for the year ended December 31,
2000. Those statements were audited by other auditors, whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for those subsidiaries, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance as to whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
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, 2001 and 2002, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
Tel-Aviv, Israel /s/ Kost Forer Gabbay and Kasierer
KOST FORER GABBAY & KASIERER
(Formerly: KOST, FORER & GABBAY)
A Member of Ernst & Young Global
February 10, 2003
Except for Note 18 which the Date is June 26, 2003
Except for Note 2x which the Date is March 22, 2004
F-2
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Perimeter Products, Inc. (A Wholly Owned Subsidiary of Kobb, Inc.)
We have audited the statements of operations, shareholder's equity, and cash
flows of Perimeter Products, Inc. (A Wholly Owned Subsidiary of Kobb, Inc.) for
the year ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform our audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The value of inventory as of December 31, 2000 was overstated by $241,000 as a
result of a duplicate inventory adjustment. In addition, the balance for accrued
warranty expense as of December 31, 2000 was overstated by $35,000. If the
inventory and warranty accrual had been adjusted as of December 31, 2000, the
cost of revenue and loss before income taxes in 2000 would have increased by
$206,000, the income tax benefit in 2000 would have increased by $83,000, the
net loss in 2000 would have increased by $123,000 and retained earnings at
December 31, 2000 would have decreased by $123,000.
In our opinion, except for the effects of the prior year inventory overstatement
and the accrued warranty overstatement as described in the preceding paragraph,
the financial statements referred to above present fairly, in all material
respects, the results of operations and cash flows of Perimeter Products, Inc.
(A Wholly Owned Subsidiary of Kobb, Inc.) for the year ended December 31, 2000
in conformity with accounting principles generally accepted in the United States
of America.
/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP
San Jose, California
February 2, 2001, except for the matters
discussed in the third paragraph of our report,
as to which the date is January 25, 2002
F-3
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
December 31,
---------------------
2001 2002
--------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 2,738 2,519
Short-term bank deposits (Note 11c) 8,289 3,708
Trade receivables:
Related parties 58 57
Other (net of allowance for doubtful accounts -
$ 192 in 2001 and $ 150 in 2002) 6,113 9,076
Unbilled accounts receivable 5,586 7,691
Other accounts receivable and prepaid expenses 575 2,256
Deferred income taxes 473 602
Inventories (Note 3) 8,549 8,251
--------- ----------
Total current assets 32,381 34,160
----- ---------- -----------
LONG-TERM INVESTMENTS AND TRADE RECEIVABLES:
Long-term trade receivables (Note 4) 2,213 1,510
Long-term bank deposits 3,560 8,649
Severance pay fund 1,592 1,724
--------- ----------
Total long-term investments and trade receivables 7,365 11,883
----- --------- ----------
PROPERTY AND EQUIPMENT, NET (Note 5) 8,550 8,989
--------- ----------
INTANGIBLE ASSETS AND OTHER (Note 6) 1,318 853
--------- ----------
GOODWILL (Note 6) 3,733 3,856
--------- ----------
Total assets 53,347 59,741
----- ========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
December 31,
-----------------------
2001 2002
--------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit (Note 7) 5,355 9,266
Current maturities of long-term loans (Note 9) 909 1,091
Trade payables 3,394 4,192
Other accounts payable and accrued expenses (Note 8) 4,332 3,784
--------- ----------
Total current liabilities 13,990 18,333
----- --------- ----------
LONG-TERM LIABILITIES:
Long-term loans (Note 9) 5,038 4,698
Accrued severance pay 1,619 1,679
--------- ----------
Total long-term liabilities: 6,657 6,377
----- --------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 10)
SHAREHOLDERS' EQUITY (Note 12):
Share capital:
Ordinary shares of NIS 1 par value:
Authorized: 9,748,000 and 19,748,000 shares at December 31,
2001 and 2002, respectively; Issued and outstanding:
7,363,866 and 7,666,370 shares at December 31, 2001 and
2002, respectively 2,583 2,600
Additional paid-in capital 21,670 21,791
Deferred stock compensation (20) (3)
Accumulated other comprehensive loss (1,294) (1,006)
Retained earnings 9,761 11,649
--------- ----------
Total shareholders' equity 32,700 35,031
----- --------- ----------
Total liabilities and shareholders' equity 53,347 59,741
----- ========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
U.S. dollars in thousands (except share and per share data)
Year ended December 31,
--------------------------------
2000 2001 2002
--------- --------- ---------
Revenues (Note 16) 38,571 41,020 42,966
Cost of revenues 20,523 21,505 23,924
---------- --------- ---------
Gross profit 18,048 19,515 19,042
---------- --------- ---------
Operating expenses:
Research and development, net (Note 17a) 2,975 3,054 3,128
Sales and marketing, net 7,129 7,933 8,642
General and administrative 4,661 4,949 4,938
---------- --------- ---------
Total operating expenses 14,765 15,936 16,708
---------- --------- ---------
Operating income 3,283 3,579 2,334
Financial income (expenses), net (Note 17b) (214) 40 199
---------- --------- ---------
Income before taxes on income 3,069 3,619 2,533
Taxes on income (Note 14) 180 452 645
---------- --------- ---------
Net income 2,889 3,167 1,888
========== ========= =========
Basic net earnings per share (Note 13) 0.39 0.42 0.25
========== ========= =========
Diluted net earnings per share (Note 13) 0.38 0.41 0.24
========== ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARTIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. dollars in thousands
Accumulated
Additional Deferred other Total Total
Deferred Ordinary paid-in stock comprehensive Retained comprehensive shareholders'
shares shares capital compensation loss earnings incomee equity
--------- --------- ----------- ------------ -------------- --------- -------------- ------------
Balance as of January 1, 2000 72 2,472 19,313 (30) (434) 7,481 28,874
Dividend paid - - - - - (722) (722)
Exercise of share options - 6 48 - - - 54
Deferred stock compensation - - 113 (113) - - -
Amortization of deferred stock
compensation - - - 85 - - 85
Comprehensive income:
Net income - - - - - 2,889 2,889 2,889
Foreign currency translation
adjustments - - - - (281) - (281) (281)
--------- --------- ----------- ------------ -------------- --------- ------------- ------------
Total comprehensive income 2,608
=============
Balance as of December 31, 2000 72 2,478 19,474 (58) (715) 9,648 30,899
Dividend paid - - - - - (942) (942)
Exercise of share options - 19 125 - - - 144
Exercise of warrants - 11 (11) - - - -
Purchase of deferred shares (72) - 11 - - - (61)
Deferred stock compensation - - 34 (34) - - -
Amortization of deferred stock
compensation - - - 72 - - 72
Stock dividend - 75 2,037 - - (2,112) -
Comprehensive income:
Net income - - - - - 3,167 3,167 3,167
Foreign currency translation
adjustments - - - - (579) - (579) (579)
--------- --------- ----------- ------------ -------------- --------- ------------- ------------
Total comprehensive income 2,588
=============
Balance as of December 31, 2001 - 2,583 21,670 (20) (1,294) 9,761 32,700
Exercise of share 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
========= ========= =========== ============ ============== ========= ============
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,
------------------------------------------
2000 2001 2002
------------- ------------ ------------
Cash flows from operating activities:
-------------------------------------
Net income 2,889 3,167 1,888
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,384 1,362 1,096
Gain on sale of property and equipment (2) (27) (15)
Accrued interest on short and long term deposits (620) 38 (508)
Amortization of deferred stock compensation 85 72 17
Decrease (increase) in trade receivables 648 (595) (2,861)
Decrease in related parties receivables 50 65 1
Decrease (increase) in unbilled accounts receivable 883 (3,151) (2,101)
Decrease (increase) in other accounts receivable and
prepaid expenses 399 (4) (1,822)
Decrease (increase) in deferred income taxes (259) (136) 444
Decrease (increase) in inventories (2,925) 766 400
Decrease (increase) in long-term trade receivables 115 (2,213) 705
Increase (decrease) in other payables and
accrued expenses 765 682 (532)
Increase (decrease) in trade payables 1,125 (392) 786
Accrued severance pay, net 15 (2) (72)
------------- ------------ ------------
Net cash provided by (used in) operating activities 4,552 (368) (2,574)
------------- ------------ ------------
Cash flows from investing activities:
-------------------------------------
Purchase of short-term and long-term bank deposits - (674) -
Proceeds from sale of property and equipment 31 48 35
Purchase of property and equipment (3,828) (1,158) (1,459)
Purchase of know-how and patents (265) (18) (14)
------------- ------------ ------------
Net cash used in investing activities (4,062) (1,802) (1,438)
------------- ------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
------------------------------------------
2000 2001 2002
------------- ------------ ------------
Cash flows from financing activities:
-------------------------------------
Short-term bank credit, net 116 1,085 3,911
Proceeds from long-term bank loans 2,200 1,350 -
Principal payment of long-term bank loans (584) (180) (158)
Purchase of deferred shares - (61) -
Proceeds from exercise of employee stock options 54 144 138
Dividend paid (722) (942) -
------------- ------------ ------------
Net cash provided by financing activities 1,064 1,396 3,891
------------- ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents 62 (67) (98)
------------- ------------ ------------
Increase (decrease) in cash and cash equivalents 1,616 (841) (219)
Cash and cash equivalents at the beginning of the year 1,963 3,579 2,738
------------- ------------ ------------
Cash and cash equivalents at the end of the year 3,579 2,738 2,519
============= ============ ============
Supplemental disclosures of cash flows activities:
--------------------------------------------------
Cash paid during the year for:
Interest 857 925 932
============= ============ ============
Taxes 102 202 1,415
============= ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 1:- GENERAL
Magal Security Systems Ltd. ("the Company") and its subsidiaries ("the
Group"), are engaged in the development, manufacturing and marketing
of computerized security systems used to automatically detect and
deter human intrusion for both civilian and military markets in Israel
and throughout the world. A majority of the Company's sales are made
in U.S.A., Canada, Europe and Israel. During March 2001, the Company
established Smart Interactive Systems, Inc., in order to meet the
growing need for real time video monitoring security services.
As for major customer data, see Note 16b.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States
("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:
Most of the Company and certain subsidiaries' revenues are
generated in U.S. dollars ("dollar"). 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 and certain subsidiaries is
the dollar.
Accordingly, monetary accounts maintained in currencies other
than the dollar are remeasured into U.S. dollars in accordance
with Statement of the Financial Accounting Standards Board
("FASB") 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 certain foreign subsidiaries whose
functional currency is not the dollar, have been translated into
U.S. 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 period. The resulting translation
adjustments are reported as a component of shareholders' equity
in accumulated other comprehensive loss.
F-10
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany balances and
transactions have been eliminated upon consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that
are readily convertible to cash with original maturities of three
months or less.
e. Short-term and long-term bank deposits:
The Company classifies bank deposits with maturities of more than
three months and less than one year as short-term deposits.
Deposits with maturities of more than one year are classified as
long-term deposits. Short-term and long-term deposits are
presented at cost, including accrued interest.
The deposits are in U.S. dollars and the weighted average
interest rate in 2002 for short-term and long-term bank deposits
was 4%, and 4.1%, respectively.
f. Inventories:
Inventories are stated at the lower of cost or market value.
Inventory write-offs are provided to cover risks arising from
slow-moving items, technological obsolesce, excess inventories,
discontinued products, and for market prices lower than cost.
Cost is determined as follows:
Raw materials, parts and supplies - using the "first-in,
first-out" method.
Work-in-progress - represents the cost of production in progress.
Finished products - on the basis of direct manufacturing costs
with the addition of allocable indirect manufacturing costs.
g. Long-term trade receivables
Long-term receivables from extended payment agreements are
recorded at estimated present values determined based on current
rates of interest and reported at the net amounts in the
accompanying financial statements. Imputed interest is
recognized, using the effective interest method as a component of
interest income in the accompanying statements.
F-11
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
h. Property and equipment:
Property and equipment are stated at cost, net of accumulated
depreciation.
Depreciation is computed by the straight-line method over the
estimated useful lives of the assets as follows:
%
------------------------------
Buildings 4
Machinery and equipment 10-33 (mainly at 10)
Motor vehicles 15
Promotional display 25-50
Office furniture and equipment 6-33
Leasehold improvements over the term of the lease
i. Impairment of long lived assets:
The Company's long-lived assets and certain identifiable
intangibles are reviewed for impairment in accordance with
Statement of Financial Accounting Standard No. 144 "Accounting
for the Impairment or Disposal of Long- Lived Assets" ("SFAS No.
144") whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the assets.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
j. Intangible assets:
Intangible assets subject to amortization arose from acquisitions
prior July 1, 2001, are being amortized on a straight-line basis
over their useful life in accordance with APB Opinion No. 17
"Intangible Assets" ("APB No. 17"). Know-how is amortized over
ten years, and patents are amortized over a period of ten years.
Intangible assets acquired in a business combination for which
date is on or after July 1, 2001, should be amortized over their
useful life 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 Statement
of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets", ("SFAS No. 142").
k. Goodwill:
Goodwill represents excess of the costs over the net assets of
businesses acquired. Goodwill arose from acquisitions prior July
1, 2001, was amortized until December 31, 2001, on a
straight-line basis over a period of fifteen years. Under
Statement of Financial Accounting Standard No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No, 142") goodwill acquired in a
business combination for which date is on or after July 1, 2001,
shall not be amortized.
F-12
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
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, market multiples and market
capitalization. Significant estimates used in the methodologies
include estimates of future cash flows, future short-term and
long-term growth rates, weighted average cost of capital and
estimates of market multiples for each of the reportable units.
SFAS No. 142 prescribes a two-phase process for impairment
testing of goodwill. The first phase screens for impairment;
while the second phase (if necessary) measures the impairment.
The Company completed its first phase impairment analysis related
to the adoption of Fas 142 during the first quarter of 2002 and
its annual impairment test during the fourth quarter of 2002 and
found no instances of impairment of its recorded goodwill;
accordingly, the second testing phase was not necessary. No
subsequent indicators of impairment have been noted by the
Company.
Year ended December 31,
-------------------------------
2000 2001 2002
-------- --------- ---------
Net income:
Reported net income 2,889 3,167 1,888
Goodwill amortization 336 404 -
-------- --------- ---------
Adjusted net income 3,225 3,571 1,888
======== ========= =========
Reported basic net earnings per share 0.39 0.42 0.25
======== ========= =========
Reported diluted net earnings per
share 0.38 0.41 0.24
======== ========= =========
Goodwill amortization 0.05 0.05 -
======== ========= =========
Adjusted basic net earnings per share 0.44 0.47 0.25
======== ========= =========
Adjusted diluted net earnings per
share 0.43 0.46 0.24
======== ========= =========
l. Research and development costs:
Research and development costs, net of grants received, are
charged to the statement of income as incurred.
m. Warranty costs:
The Company provides a warranty for up to 12 months, at no extra
charge. A provision is recorded for estimated warranty costs
based on the Company's experience.
F-13
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
n. Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standard No.
109 "Accounting for Income Taxes" ("SFAS No. 109"). 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 Company and its subsidiaries provide a
valuation allowance, if necessary, to reduce deferred tax assets
to their estimated realizable value.
o. Revenue recognition:
The Company generates revenues mainly from long-term projects and
also from sales of products and rendering maintenance services.
Revenues from long-term projects are recognized in accordance
with Statement of Position 81-1 "Accounting for Performance of
Construction - Type and Certain Production - Type Contracts"
("SOP 81-1"), using contract accounting on a percentage of
completion method, based on the relationship of actual costs
incurred to total costs estimated to be incurred over the
duration of the contract and in accordance with the "Input
Method". 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. As of
December 31, 2002, no such estimated losses were identified.
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 income when
they are reasonably determinable by management, on a cumulative
catch-up basis.
According to ("SOP 81-1"), costs that are incurred for a specific
anticipated contract are being deferred, subject to evaluation of
their probable recoverability, and only if the costs can be
directly associated with a specific anticipated contract.
Revenues from product sales are recognized in accordance with
Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements", ("SAB No. 101"), 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.
Deferred revenue includes unearned amounts received under
maintenance contracts but not yet recognized as revenues.
F-14
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
p. Advertising expenses:
Advertising expenses are charged to the statement of income as
incurred. Advertising expenses for the years ended 2000, 2001 and
2002, were $ 354, $ 349 and $ 372, respectively.
q. Concentrations of credit risk:
Financial instruments that potentially subject the Company and
its subsidiaries to concentrations of credit risk consist
principally of cash and cash equivalents, short and long-term
bank deposits, trade receivables and long-term trade receivables.
The Company's cash and cash equivalents, short-term and long-term
bank deposits are invested in major Israeli and U.S. banks. Such
deposits in U.S. banks may be in excess of insured limits and are
not insured in other jurisdictions. Management believes that the
financial institutions that hold the Company's investments are
financially sound and, accordingly, minimal credit risk exists
with respect to these investments.
The trade receivables of the Company and its subsidiaries are
derived from sales to large and solid organizations located
mainly in Israel, the United States, Canada and Europe. The
Company performs ongoing credit evaluations of its customers and
to date has not experienced any material losses. An allowance for
doubtful accounts is determined with respect to those amounts
that the Company has determined to be doubtful of collection.
The Company has no off balance sheet concentration of credit risk
such as foreign exchange contracts option contracts or other
foreign hedging arrangements.
r. Stock-based compensation:
The Company has elected to follow Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
25") and Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN 44") in
accounting for its employee stock option plans. Under APB 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.
Pro-forma 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 of that Statement. The fair value for these
options was estimated at the grant date using a Black and Scholes
option pricing model with the following weighted-average
assumptions for 2000 and 2001: risk-free interest rates of 5% and
3%, respectively, dividend yields of 3% for each year, a
volatility factor of the expected market price of the Company's
Ordinary shares of 0.556 and 0.628, respectively, and a weighted
average life of the option of two years.
F-15
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period.
Pro-forma net information under FASB-123:
Year ended December 31,
------------------------------------------
2000 2001 2002
------------- ------------ ------------
Net income as reported 2,889 3,167 1,888
============ =========== ===========
Add: stock based compensation as
reported 85 72 17
============ =========== ===========
Deduction: total stock-based
compensation determined under fair
value based method for all awards 218 238 246
============ =========== ===========
Pro-forma net income 2,756 3,001 1,659
============ =========== ===========
Pro-forma basic net earnings per share 0.37 0.40 0.22
============ =========== ===========
Pro-forma diluted net earnings per
share 0.36 0.39 0.22
============ =========== ===========
s. 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 deduction of research and
development costs. Research and development grants recognized
amounted to $ 25, $ 0 and $ 318 in 2000, 2001 and 2002,
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
sales and marketing expenses.
F-16
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
t. Severance pay:
The Company's liability for severance pay is calculated pursuant
to Israeli 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 may be withdrawn only upon the fulfillment of
the obligation pursuant to Israeli 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, 2000, 2001
and 2002, amounted to approximately $ 225, $ 241 and $ 60,
respectively.
u. Fair value of financial instruments:
The following methods and assumptions were used by the Company
and its subsidiaries in estimating their fair value disclosures
for financial instruments:
The carrying amounts of cash and cash equivalents, short-term
bank deposits, trade receivables and other accounts receivable,
short-term bank credit, trade payables and other payables
approximate their fair value due to the short-term maturity of
such instruments.
The carrying amount of the Company's long-term trade receivables
and long-term deposits approximate their fair value. The fair
value was estimated using discounted cash flow analyses, based on
the Company's investment rates for similar type of investment
arrangements.
The fair value of the Company's long-term borrowing arrangements
was estimated using discounted cash flow analyses. Based on the
Company's incremental borrowing rate for similar types of
borrowing arrangements.
v. Basic and diluted earnings per share:
Basic earnings per share is computed based on the weighted
average number of Ordinary Shares outstanding during each year.
Diluted earnings per share is computed based on the weighted
average number of Ordinary shares outstanding during each year,
plus dilutive potential Ordinary shares considered outstanding
during the year, in accordance with FASB Statement of Financial
Accounting Standard No. 128, "Earnings Per Share" ("SFAS No.
128").
F-17
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
w. Reclassification:
Certain amounts from prior years have been reclassified to
conform to the current year's presentation. The reclassification
had no effect on previously reported net loss, shareholders'
equity or cash flows.
x. The unqualification of the auditors' report:
The report of BDO Seidman, LLP on the financial statements of
Perimeter Products, Inc, a subsidiary of the Company, was
qualified with respect to certain overstatements and the
resulting overstatement of net income in 2000 and understatement
of net income in 2001, as discussed in their report. These
effects on net income are in management's opinion, not material
in relation to the consolidated financial statements of the
Company.
y. Impact of recently issued accounting standards:
In June 2002, the FASB issues SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses
significant issue regarding the recognition, measurement, and
reporting of costs associated with exit and disposal activities,
including restructuring activities. SFAS No. 146 requires that
costs associated with exit or disposal activities be recognized
when they are incurred rather than at the date of a commitment to
an exit or disposal plan. SFAS No. 146 is effective for all exit
or disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of SFAS No. 146 to have a
material impact on our results of operations or financial
position.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34" ("FIN No. 45"). FIN
No. 45 elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN No. 45 does not
prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related
guarantee. It also incorporates, without change, the guidance in
FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others," which is being superseded. The
disclosure provisions of FIN No. 45 are effective for financial
statements of interim or annual periods that end after December
15, 2002 and the provisions for initial recognition and
measurement are effective on a prospective basis for guarantees
that are issued or modified after December 31, 2002, irrespective
of a guarantor's year-end. The Company does not expect the
adoption of FIN No. 45 to have a material impact on its results
of operations or financial position.
In November 2002, the Emerging Issues Task Force (EITF) of the
FASB reached a consensus on EITF No. 00-21, "Accounting for
Revenue Arrangements with Multiple Element Deliverables." The
issue addresses how to account for arrangements that may involve
multiple revenue-generating activities, i.e., the delivery or
performance of multiple products, services, and/or rights to use
assets. In applying this guidance, separate contracts with the
same party, entered into at or near the same time, will be
presumed to be a package, and the consideration will be measured
and allocated to the separate units based on their relative fair
values.
F-18
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
This consensus guidance will be applicable to agreements entered
into in quarters beginning after June 15, 2003. The Company will
adopt this new accounting effective July 1, 2003. The Company is
currently evaluating the impact of this change.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the
application of Accounting Research Bulletin 51, Consolidated
Financial Statements, for certain entities that do not have
sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from
other parties or in which equity investors do not have the
characteristics of a controlling financial interest ("variable
interest entities"). Variable interest entities within the scope
of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of
the entity's expected losses, receives a majority of its expected
returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it acquired
before February 1, 2003. The Company is in the process of
determining what impact, if any, the adoption of the provisions
of FIN 46 will have upon its financial condition or results of
operations. Certain transitional disclosures required by FIN 46
in all financial statements initially issued after January 31,
2003, have been included in the accompanying financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity. "This Statement establishes standards for
how an issuer classifies and measures in its statement of
financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances) because
that financial instrument embodies an obligation of the issuer.
This Statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective
at the beginning of the first interim period beginning after June
15, 2003, except for mandatory redeemable financial instruments
of nonpublic entities. The Company does not expect that the
adoption of this standard will have a material effect on its
financial position or results of operations.
NOTE 3:- INVENTORIES
December 31,
---------------------------
2001 2002
----------- -------------
Raw materials 5,269 4,702
Work in progress 1,255 1,242
Finished products 2,025 2,307
----------- ------------
8,549 8,251
=========== ============
F-19
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 4:- LONG-TERM TRADE RECEIVABLES
The Company signed an agreement with a customer, according to which
the payments schedule is for a period ending February, 2005.
As of December 2002, the aggregate annual maturities of the long-term
trade receivables are as follows:
2003 1,284
2004 1,284
2005 226
------
2,794
Less - current maturities 1,284
------
1,510
======
NOTE 5:- PROPERTY AND EQUIPMENT
a. Comprised as follows:
December 31,
--------------------
2001 2002
-------- ----------
Cost:
Land and buildings 7,717 7,846
Machinery and equipment 2,782 3,406
Motor vehicles 1,288 1,333
Promotional display 2,624 2,895
Office furniture and equipment 1,952 2,186
Leasehold improvements 24 23
-------- ---------
16,387 17,689
-------- ---------
Accumulated depreciation:
Buildings 1,500 1,744
Machinery and equipment 2,149 2,416
Motor vehicles 618 608
Promotional display 2,011 2,229
Office furniture and equipment 1,537 1,682
Leasehold improvements 22 21
-------- ---------
7,837 8,700
-------- ---------
Depreciated cost 8,550 8,989
======== =========
b. Depreciation expenses amounted to $ 743, $ 858 and $ 1,014 for
the years ended December 31, 2000, 2001 and 2002, respectively.
c. As for charges, see Note 11.
F-20
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 6:- GOODWILL, INTANGIBLE ASSETS AND OTHER
a. Intangible assets:
December 31,
---------------------------
2001 2002
------------ ----------
Original amounts:
Know-how 1,502 1,502
Patents 1,884 1,913
----------- -----------
3,386 3,415
----------- -----------
Accumulated amortization:
Know-how 1,212 1,267
Patents 1,765 1,806
----------- -----------
2,977 3,073
------------ -----------
Amortized cost 409 342
----------- -----------
b. Other:
Deferred income taxes 909 511
------------ -----------
1,318 853
============ ===========
Amortization expenses amounted to $ 305, $ 100 and $ 82 for the
years 2000, 2001 and 2002, respectively.
c. Goodwill:
December 31,
------------------------------
2001 2002
------------- -------------
Original amounts 5,257 5,443
Accumulated amortization 1,524 1,587
------------- -------------
3,733 3,856
============= =============
Amortization expenses amounted to $ 336, $ 404 and $ 0 for the
years 2000, 2001 and 2002, respectively.
F-21
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 7:- SHORT-TERM BANK CREDIT
a. As of December 31, 2002, the Company and its subsidiaries have
authorized credit lines totaling $ 24,000, and unused credit
lines in the amount of $ 3,975.
The Company has undertaken to maintain the following financial
ratios and terms in respect of its short-term and long-term bank
credit and loans:
1. A ratio of at least 40% of shareholders' equity out of the
total balance sheet.
2. Minimal annual net income in the amount of $ 1,000.
3. That the same shareholders maintain the core of control in
the Company.
As of December 31, 2002, the Company was in compliance with these
ratios.
Interest rate December 31,
Linkage ------------------------- --------------------------
terms 2001 2002 2001 2002
----------- --------- ------------ ------------ ------------
%
-------------------------
Bank U.S. $ 3.10 2.28 1,000 500
Bank U.S. $ 2.62-2.87 2.87-3.25 1,950 4,600
Canadian Prime+0.5
Bank $ Prime+0.5 31 843
Bank NIS Prime+0.5 9.9-10.4 2,374 3,323
----- -----
5,355 9,266
===== =====
b. As for charges, see note 11.
NOTE 8:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31,
-------------------------------
2001 2002
-------------- --------------
Employees and payroll accruals 1,488 1,414
Accrued expenses 1,901 1,922
Income tax payable 555 124
Government authorities 91 -
Other 297 324
--- ---
4,332 3,784
===== =====
F-22
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 9:- LONG-TERM LOANS
Interest rate December 31,
Linkage --------------------------- -------------------------
terms 2001 2002 2001 2002
----------- ----------- ------------- ----------- -----------
%
---------------------------
Bank (1) U.S. $ 7.87 4.60 2,500 2,500
Bank (2) U.S. $ LIBOR+0.5 LIBOR+0.5 250 250
Bank (3) U.S. $ 3.68 2.87 500 500
Bank (4) U.S. $ 5.66 5.66 500 500
------------ ------------
3,750 3,750
Canadian
Mortgage payable (5) $ LIBOR+0.75 LIBOR+0.75 75 -
Mortgage payable (6) U.S. $ 8.25 8.25 2,122 2,039
------------ ------------
5,947 5,789
Less - current
maturities 909 1,091
------------ ------------
5,038 4,698
============ ============
As for financial ratios and terms in respect of long-term loans, see
also Note 7a.
As for charges, see Note 11.
As of December 2002, the aggregate annual maturities of the long-term
loans are as follows:
2003 1,091
2004 2,849
2005 1,849
------
5,789
======
(1) Interest on the outstanding balance is due monthly. The note
is due in one installment on April 1, 2004, extended from
April 1, 2002.
(2) Interest on the outstanding balance is due each quarter. The
note is due in one installment on April 2, 2004, extended from
April 2, 2002.
(3) The note is due on April 2, 2003.
(4) The note is due on April 2, 2003.
(5) The mortgage is payable in equal quarterly installments of $
25.2 thousand each, plus interest.
(6) The note is due in 18 quarterly installments of $ 64.7
thousand each, commencing from February 28, 2001 and
thereafter, until a final payment of $ 1,806.6 on November 30,
2005.
F-23
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Royalty commitments to the Chief Scientist:
The Company participated in programs sponsored by the Israeli
Government for the support of research and development
activities. Through the year 2002, the Company had obtained
grants from Office of the Chief Scientist of the Israeli Ministry
of Industry and Trade ("the OCS") of $ 318 for certain research
and development projects of the Company. The Company is obligated
to pay royalties to the OCS, amounting to 3%-4% of the sales of
the products and other related revenues generated from such
projects, up to 100%-150% of the grants received, linked to the
U.S. dollar and grants received after January 1, 1999 will also
bear interest at the rate of LIBOR. The obligation to pay these
royalties is contingent on actual sales of the products and in
the absence of such sales no payment is required.
Royalties paid amounted to $ 86, $ 0 and $ 131 for the years
ended December 31, 2000, 2001 and 2002, respectively.
As of December 31, 2002, the Company had remaining contingent
obligations to pay royalties in the amount of approximately $
1,538 upon the successful sale of products developed using such
research and development programs sponsored by the Chief
Scientist.
b. The Israeli Government, through the Fund for the Encouragement of
Marketing Activities, awarded the Company grants for
participation in expenses for overseas 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.
Grants received for the years up to and including 2002, amounted
to $ 310 and royalties paid during 2001 and 2002, amounted to $
104 and $ 53, respectively. As of December 31, 2002, the
aggregate contingent obligation amounted to $ 153.
c. Lease commitments:
The subsidiaries rent their facilities under various operating
lease agreements, which expire on various dates, the latest of
which is in 2006.
Future minimum lease payments under non-cancelable lease
agreements as of December 31, are as follows:
2003 $ 117
2004 $ 105
2005 $ 69
2006 $ 30
--------
$ 321
========
Rental expenses amounted to $ 196, $ 122 and $ 183 in 2000, 2001
and 2002, respectively.
F-24
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
d. Guarantees:
1. As of December 31, 2002, the Company and its subsidiaries
obtained bank performance guarantees and advance payment
guarantees from several banks mainly in Israel in the amount
of $ 4,616.
2. As of December 31, 2002, the Company obtained bank
guarantees in the amount of $262, in order to secure a
credit facility of a subsidiary.
3. As of December 31, 2002, the Company obtained bank
guarantees in an amount of $2,039 in order to secure
mortgage payable by a subsidiary.
4. As of December 31, 2002, the Company and its subsidiaries
issued a letter of credit in the amount of $ 88, as per the
suppliers' demand.
e. Legal proceedings:
In June 2000, Rapiscan Security Products Inc. ("Rapiscan") filed
a lawsuit against the Company claiming sums allegedly due to
Rapiscan in the context of an agreement between Rapiscan and the
Company amounting to $ 1.6 thousand. The Company filed a
counter-claim for the balance of approximately $ 1.35 thousand.
The Company recorded an accrual regarding this lawsuit of
approximately $ 1.2 thousand, which is an appropriate liability
as estimated by the Company's management and its legal counsel.
In addition, during 2002, several claims were filed against the
Company by competitors in the sector concerning the Company's
winning a specific tender. The main claim was that the conditions
for the tender gave an advantage to the Company. The Company
filed a counter claim alleging that the competitors delayed in
filing their claim. The request to cancel the tender is still
being deliberated by the court. According to the Company's legal
counsel, the Company has good defenses against the aforementioned
claims, therefore, no allowance was recorded in the financial
statements.
NOTE 11:- CHARGES
As collateral for all of the Company and its subsidiaries' liabilities
to banks:
a. A fixed charge has been placed on the Company's property.
b. The Company agreed not to pledge any of its assets without the
consent of several banks.
c. A fixed charge in the amount of $ 3,250 has been placed on the
Company's bank deposits.
d. The Company's subsidiary has two notes payable in the aggregate
amount of $ 1,000 due on April 2, 2003, collateralized by
substantially all of the subsidiary's assets, and a $ 2,039
mortgage note payable, collateralized by a first mortgage on the
land and building.
F-25
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 12:- SHAREHOLDERS' EQUITY
a. Pertinent rights and privileges conferred by Ordinary shares:
The Ordinary shares of the Company are traded on Nasdaq National
Market and in Israel, on the Tel-Aviv Stock Exchange ("TASE").
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. Deferred shares:
Prior to the Company's Initial Public Offering in 1993, the
Company's existing shareholders agreed to put into escrow 252,000
(after taking into account the effect of the stock dividend) of
the Ordinary shares held by them and to convert all, or a
portion, of such escrowed shares into "Deferred shares", in the
event that specified audited after tax net income levels were not
achieved by the Company in each of the three fiscal years in the
period ended December 31, 1995.
Since the Company did not achieve such levels of net income,
252,000 Ordinary shares have been converted into Deferred shares
of NIS 1 par value each. The deferred shares entitle their
holders, upon the liquidation of the Company, to the par value of
these shares, but confer no other rights.
During 2001, the Company registered its shares in the Tel-Aviv
Stock Exchange. Pursuant to the Israeli Securities Law, the
Company was required to cancel all its Deferred shares. The
annual general meeting that was held on May 16, 2001 approved the
purchase of 252,000 Deferred shares by the Company at their
nominal value and to remove them from the Company's registered,
issued and outstanding share capital.
c. Stock Option Plan:
On February 25, 1993, the Company's Board of Directors authorized
a stock option plan (the "plan"), under which options may be
granted to employees, directors, officers and consultants of the
Company or its subsidiaries.
According to the plan, the exercise price shall be at least 75%
of the average of the closing prices of the shares of the Company
on the Nasdaq National Market during the 90 days period preceding
such grant. The plan was supposed to be terminated on February
25, 2001.
On May 31, 2000, the Company's Board of Directors approved an
extension period to the plan in which options may be granted to
employees until February 2005. Stock options that have not been
exercised will expire, in any case, after five years from the
date of grant. All the options have a vesting period of two
years. Any options that are cancelled or forfeited before
expiration become available for future grant.
During 2000, the Company's board of directors and the general
meeting of shareholders, also approved an increase in the number
of options that may be granted to employees by 250,000 options,
and during 2002, was increased by another 500,000 options.
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 12:- SHAREHOLDERS' EQUITY (Cont.)
Under the plan, stock options will be periodically granted in
accordance with the decision of the Board of Directors of the
Company (or a committee appointed by them). The Board of
Directors has the authority to determine the amount 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.
A summary of the Company's stock options activities in 2000, 2001
and 2002, is as follows:
Options outstanding
--------------------------------------------
Weighted
Number Range of averagee Market price
Available of options exercise exercise at the date of
for grant outstanding price price grant
--------- ----------- -------- -------- --------------
Balance at January 1, 2000 160,200 191,325 2-2.36 2 -
Options granted (94,000) 94,000 2.36 2.36 3.563
Options forfeited - (500) - - -
Options available for
grant 250,000 - - - -
Options exercised - (27,525) 2 2 -
--------- --------- --------- -------- ----------
Balance at December 31,
2000 316,200 257,300 2-2.36 2.09 -
Options granted (234,400) 234,400 2.43-5.62 5.27 5.42
Options exercised - (79,300) 1.61-2 1.80 -
--------- --------- --------- -------- ----------
Balance at December 31,
2001 81,800 412,400 1.61-5.62 3.93 -
Options available for
grant 500,000 - - - -
Options forfeited 1,648 (1,648) - - -
Options granted upon
stock dividend 2,454 11,232 - - -
Options exercised - (63,750) 2-2.36 2.17 -
--------- --------- --------- -------- ----------
Balance at December 31,
2002 585,902 358,234 1.61-5.62 4.23 -
========= ========= ========= ======== ==========
The weighted average fair values of options granted during the
years ended December 31, 2000, 2001 and 2002, were:
For exercise price on the grant date that:
----------------------------------------------------------
Equals market price Less than market price
--------------------------- -----------------------------
Year ended December 31, Year ended December 31,
--------------------------- -----------------------------
2000 2001 2002 2000 2001 2002
------- ------- -------- ------- ------- ----------
Weighted average
exercise prices - 5.62 - 2.36 2.69 -
======= ======= ======== ======= ======= ==========
Weighted average fair
value on grant date - 2.04 - 2.36 1.91 -
======= ======= ======== ======= ======= ==========
F-27
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
The options outstanding as of December 31, 2002 have been separated
into ranges of exercise price as follows:
Options Options
outstanding exercisable
as of as of
December 31, Remaining December 31,
2002 Exercise price contractual life 2002
---------------- --------------- ---------------- --------------
(in months)
29,870 2 4 29,870
20,600 1.61 12 20,600
6,180 2.29 18 6,180
61,800 2.36 25 61,800
12,360 2.43 37 -
16,480 2.89 40 -
210,944 5.62 43 -
--------------- --------------- --------------
358,234 4.23 118,450
=============== =============== ==============
157,300, 84,000 and 118,450 options were exercisable on December
31, 2000, 2001 and 2002, respectively, with a weighted average
exercise price of $ 1.85, $ 1.93 and $ 2.14.
The total employee stock compensation expenses recorded in 2000,
2001 and 2002, were $ 85, $ 72 and $ 17, respectively, and were
amortized based on the vesting period.
d. Dividends:
Dividends, if any, will be declared and paid in NIS. Dividends
paid to shareholders outside Israel will be converted into U.S.
dollars 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.
e. Warrants to underwriters:
In connection with the 1997 Offering, the Company issued to the
underwriters, 200,000 warrants to purchase from the Company
200,000 Ordinary shares. 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.
F-28
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands (except per share data)
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
f. In May 2002, the Company's Board of Directors decided on a
distribution of a 3% stock dividend. All basic net earnings per
share data and diluted net earnings per share data have been
retroactively adjusted to reflect the stock dividend.
g. In May 2002, the Company's Board of Directors decided on an
increase of the authorized Ordinary share capital to 19,748,000
shares of NIS 1 par value.
NOTE 13:- NET EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
net earnings per share:
Year ended December 31,
------------------------------------------
2000 2001 2002
------------ ------------ -------------
Numerator:
Net income 2,889 3,167 1,888
============ ============ =============
Denominator:
Denominator for basic earnings per share -
weighted-average number of shares outstanding 7,439,622 7,512,148 7,637,356
Effect of diluted securities:
Employee stock options and warrants to
underwriters 84,905 181,880 196,759
------------ ------------ -------------
Denominator for diluted net earnings per share-
adjusted weighted average
shares and
Assumed conversions 7,524,527 7,694,028 7,834,115
============ ============ =============
Basic net earnings per share 0.39 0.42 0.25
============ ============ =============
Diluted net earnings per share 0.38 0.41 0.24
============ ============ =============
F-29
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 14:- TAXES ON INCOME
a. Tax benefits in Israel under the Law for the Encouragement of
Capital Investments, 1959, ("the law"):
The Company has been granted the status of an "Approved
Enterprise" under the law. Currently, there are 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
"alternative benefits" - waiver of grants in return for tax
exemption - and, accordingly, the Company's income from the
second program is 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
will terminate in 2003.
The Company received final status of "Approved Enterprise"
for this expansion.
2. On March 18, 1997, a program of the Company was granted the
status of an "Approved Enterprise". The Company elected to
enjoy "alternative benefits" - waiver of grants in return
for tax exemption and accordingly, the Company's income from
this program is 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 Company had completed its investment program and,
accordingly, the period of benefits under this program began
in 1998 and will terminate in 2007.
3. On August 13, 2001, a program of the Company was granted the
status of an "Approved Enterprise". The Company elected to
enjoy "alternative benefits" - 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,
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 has not yet begun.
F-30
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 14:- TAXES ON INCOME (Cont.)
The entitlement to the above benefits is conditional upon the
Company fulfilling the conditions stipulated by the above law,
regulations published thereunder and the instruments 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.
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 36%.
By virtue of this 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 36%), 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%), and an income tax liability would be incurred
of approximately $ 0.7 thousand.
b. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results for tax purposes in Israel, are measured and reflected in
real terms in accordance with the change in the Israeli Consumer
Price index ("CPI"). As explained in Note 2b the consolidated
financial statements are presented in U.S. dollars. The
differences between the change in the Israeli CPI and in the
NIS/U.S. dollar exchange rate causes a difference between taxable
income or loss and the income or loss before taxes reflected in
the consolidated financial statements. In accordance with
paragraph 9(f) of SFAS No. 109, the Company has not provided
deferred income taxes on this difference between the reporting
currency and the tax bases of assets and liabilities.
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.
F-31
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 14:- TAXES ON INCOME (Cont.)
d. Israeli tax reform:
On January 1, 2003, the Law for Amendment of the Income Tax
Ordinance (Amendment No. 132) 5762-2002, known as the tax reform,
became effective. The tax reform changed the Israeli tax system
from a territorial tax method into a personal tax method on a
global basis.
e. A 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,
------------------------------------------
2000 2001 2002
------------- ------------- ------------
Income before taxes as reported in the 3,069 3,619 2,533
statements of income
============= ============= ============
Tax rates 36% 36% 36%
============= ============= ============
Theoretical tax expense 1,105 1,303 912
Increase (decrease) in taxes:
Tax adjustments in respect of inflation
in Israel - 214 11
Non-deductible items, net (126) 75 (24)
Unrecognized tax losses - - 442
Realized benefit of prior year's losses (371) - -
Tax exemption applicable to "Approved
Enterprises" and exempted income (126) (928) (293)
Tax credits (256) - -
Taxes in respect of prior years - (200) (279)
Other (46) (12) (124)
------------- ------------- ------------
Taxes on income in the statements of
income 180 452 645
============= ============= ============
Net earnings per share amounts of
the tax benefit from the exempt income:
Basic and diluted 0.02 0.12 0.04
============= ============= ============
The tax rates of the Company's subsidiaries range between
35%-42%.
f. Taxes on income included in the statement of income:
Year ended December 31,
--------------------------------------
2000 2001 2002
----------- ----------- -----------
Current taxes:
Domestic 365 500 269
Foreign 74 138 211
Deferred income taxes:
Domestic - (39) (30)
Foreign (259) 53 474
Taxes in respect of prior years:
Domestic - (200) (279)
----------- ----------- -----------
Taxes on income 180 452 645
=========== =========== ===========
F-32
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 14:- TAXES ON INCOME (Cont.)
g. 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 Company
and its subsidiaries deferred tax assets are as follows:
December 31,
--------------------------
2001 2002
------------ ------------
Operating loss carryforwards 424 1,409
Reserves and allowances 1,988 1,308
------------ -----------
Total deferred assets before
valuation allowance 2,412 2,717
Valuation allowance (1,030) (1,604)
------------ -----------
Net deferred tax assets 1,382 1,113
============ ===========
Domestic 39 69
Foreign 1,343 1,044
------------ -----------
1,382 1,113
============ ===========
h. The domestic and foreign components of income before taxes are as
follows:
Year ended December 31,
-----------------------------------------
2000 2001 2002
------------- ------------ -----------
Domestic 2,424 3,320 2,217
Foreign 645 299 316
------------- ------------ -----------
3,069 3,619 2,533
============= ============ ===========
i. 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 of 2002, the
subsidiary recognized $ 304 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 $ 618,
which will expire at various dates from 2006 through 2011.
F-33
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 14:- TAXES ON INCOME (Cont.)
j. Net operating losses carryforwards:
As of December 31, 2002, the Company's subsidiaries in the U.S,
Latin America and the United Kingdom had total net available
carryforward tax losses of approximately $ 3,625.
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.
As of December 31, 2002, net operating losses from subsidiaries
in U.S. are approximately $ 2,733.
NOTE 15:- RELATED PARTIES TRANSACTIONS
Year ended December 31,
------------------------------
2000 2001 2002
-------- -------- ---------
Sales to related party 211 261 111
======== ======== =========
In addition, see Note 12b.
NOTE 16:- SEGMENT INFORMATION AND SALES TO SIGNIFICANT CUSTOMERS
a. The Company develops, manufactures, markets and sells complex
computerized security systems on a worldwide basis. These
products are grouped into three major categories which represent
the Company's operating and reportable segments as follows:
1. Perimeter Security Systems - The Company'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 and field disturbance sensors.
2. Security Turnkey Projects - The Company is executing turnkey
projects under the Company's security management system, and
acting as integrator.
3. Video monitoring services - The Company supplies Video
Monitoring Services through Smart Interactive Systems, Inc.,
a subsidiary established in the U.S. in June 2001.
The data is presented in accordance with SFAS 131, "Disclosure
About Segments of an Enterprise and Related Information".
F-34
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 16:- OPERATING SEGMENTS DATA (Cont.)
a. The following data present the revenues, assets and other
data of the Company's operating segments:
Year ended December 31,
---------------------------------------------------------------------------------------------------------------------
2000 2001 2002
------------------------------- ----------------------------------------- -------------------------------------------
Video Video
Perimeter Projects Other Total Perimeter Projects monitoring Other Total Perimeter Projects monitoring Other Total
--------- -------- ----- ----- --------- -------- ---------- ----- ----- --------- -------- ---------- ----- -------
Revenues 33,910 3,802 859 38,571 34,893 5,004 142 981 41,020 36,435 5,340 238 953 42,966
====== ===== === ====== ====== ===== === === ====== ====== ===== === === ======
Depreciation
and
amortization 1,330 6 48 1,384 1,304 9 28 21 1,362 927 9 149 11 1,096
===== = == ===== ===== = == == ===== === = === == =====
Operating
income,
before
financial
expenses and
taxes on
income 2,473 1,234 (424) 3,283 2,583 2,478 (626) (856) 3,579 2,316 2,656 (1,556) (1,082) 2,334
===== ===== ==== ===== ===== ==== ==== ===== ===== ====== ======
Financial
expenses
(income), net 214 (40) (199)
Taxes on income 180 452 645
--- --- ---
Net income 2,889 3,167 1,888
===== ===== =====
December 31,
---------------------------------------------------------------------------------------------------------------------
2000 2001 2002
------------------------------- ----------------------------------------- -------------------------------------------
Video Video
Perimeter Projects Other Total Perimeter Projects monitoring Other Total Perimeter Projects monitoring Other Total
--------- -------- ----- ----- --------- -------- ---------- ----- ----- --------- -------- ---------- ----- -------
Segment assets 12,500 27 58 12,585 11,911 18 324 30 12,283 12,066 30 728 21 12,845
====== == == ====== ====== == === == ====== ====== == === == ======
F-35
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 16:- OPERATING SEGMENTS DATA (Cont.)
b. Major customer data (percentage of total revenues):
Year ended December 31,
---------------------------------------
2000 2001 2002
------------ ----------- ------------
Israeli Ministry of Defense and
the Israeli Defense Forces 24.4% 22.5% 15.9%
============ =========== ============
The state concern civil
aviation airlines "AZAL" 2.0% 10.5% 1.8%
============ =========== ============
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,
------------------------------------------
2000 2001 2002
------------- ------------ ------------
1. Revenues:
Israel 13,150 13,135 11,350
Europe 6,126 5,420 6,399
USA 10,721 11,358 12,641
Azerbaijan 789 4,577 756
Canada 1,860 2,035 4,324
Others 5,925 4,495 7,496
------------- ------------ ------------
38,571 41,020 42,966
============= ============ ============
2. Long-lived assets:
Israel 3,664 3,623 3,566
Europe 776 666 786
USA 5,886 5,812 6,160
Canada 2,238 2,133 2,286
Others 21 49 47
------------- ------------ ------------
12,585 12,283 12,845
============= ============ ============
F-36
MAGAL SECURITY SYSTEMS LTD.
AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 17:- SELECTED STATEMENTS OF INCOME DATA
a. Research and development expenses, net:
Year ended December 31,
---------------------------------------
2000 2001 2002
------------ ------------ -----------
Expense 3,173 3,331 3,750
Less - royalty-bearing grants and
investment tax credit 198 277 622
------------ ------------ -----------
2,975 3,054 3,128
============ ============ ===========
b. Financial income (expenses), net:
Financial expenses:
Interest on long-term debt (294) (398) (371)
Interest on short-term bank credit (650) (502) (640)
Foreign exchange losses (53) (42) (6)
----------- ----------- ----------
(997) (942) (1,017)
----------- ----------- ----------
Financial income:
From interest 783 705 732
Foreign exchange gains - 277 484
----------- ----------- ----------
783 982 1,216
----------- ----------- ----------
(214) 40 199
=========== =========== ==========
NOTE 18:- SUBSEQUENT EVENTS
a. In May 2003, the Company's Board of Directors decided to
distribute a 3% stock dividend. The annual general meeting of
shareholders has not yet approved this decision.
b. In April 2003, Rav-Tec Ltd filed a claim against the Company, the
Ministry of Defense ("MOD") and a former employee of the Company.
In the claim, Rav-Tec Ltd. alleges that the failure of a field
trial by the MOD was due to intentional damages caused by the
former employee and is seeking cash relief in the amount of about
$ 730 for the aforesaid damages and that the court will annul the
field trial. The Company denies the above allegations. In the
opinion of the Company's attorneys, the Company has good defenses
against the claim and, therefore, no provision in respect thereto
was recorded in the financial statements.
- - - - - - - - -
F-37
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: March 25, 2004
3
EXHIBIT INDEX
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 Shares
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
10.1***** Form of Underwriting Agreement
21****** List of Subsidiaries of the Registrant
23.1 Consent of Kost Forer Gabbay & Kasierer
23.2 Consent of BDO Seidman, LLP
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended
32.1 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
32.2 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
_________
* Previously filed as an exhibit to our Registration Statement on Form F-1
(No. 33-57438), filed with the Commission on January 26, 1993, as
amended, and incorporated herein by reference.
** Previously filed as an exhibit to our Registration Statement on Form F-1
(No. 33-57438), filed with the Commission on January 26, 1993, as
amended, and incorporated herein by reference and an amendment thereto
previously filed as an exhibit to our Registration Statement on Form S-8
(No. 333-6246), filed with the Commission on January 7, 1997 and
incorporated herein by reference and further amendments thereto
previously filed as an exhibit to our Annual Report on Form
20-F for the fiscal year ended December 31, 2000, filed with the
Commission on June 29, 2001 and incorporated herein by reference.
*** Previously filed as an exhibit to our Registration Statement on Form
8-A, filed with the Commission on March 18, 1993, as amended, and
incorporated herein by reference.
**** Previously filed as an exhibit to our Registration Statement on Form S-8
(No. 333-6246), filed with the Commission on January 7, 1997 and
incorporated herein by reference and further amendments thereto
previously filed as an exhibit to our Annual Report on Form 20-F for the
fiscal year ended December 31, 2000, filed with the Commission on June
29, 2001 and incorporated herein by reference.
***** 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 Form 20-F for the Fiscal Year
ended December 31, 2002 and incorporated herein by reference.