Company Quick10K Filing
Magal Security Systems
20-F 2020-12-31 Filed 2021-04-26
20-F 2019-12-31 Filed 2020-04-23
20-F 2018-12-31 Filed 2019-04-15
20-F 2017-12-31 Filed 2018-03-28
20-F 2016-12-31 Filed 2017-03-29
20-F 2015-12-31 Filed 2016-03-29
20-F 2013-12-31 Filed 2014-03-27
20-F 2012-12-31 Filed 2013-03-21
20-F 2011-12-31 Filed 2012-04-04
20-F 2010-12-31 Filed 2011-04-11
20-F 2009-12-31 Filed 2010-05-03

MAGS 20F Annual Report

Item 17 O Item 18 O
Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchase of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Changes in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Note 1:- General
Note 2:- Significant Accounting Policies
Note 3:- Other Accounts Receivable and Prepaid Expenses
Note 4:- Inventories
Note 5:- Property and Equipment, Net
Note 6:- Intangible Assets, Net
Note 7:- Goodwill
Note 8:- Short-Term Bank Credit and Credit Lines
Note 9:- Other Accounts Payable and Accrued Expenses
Note 10:- Long-Term Bank Debt
Note 11:- Commitments and Contingent Liabilities
Note 12:- Shareholders' Equity
Note 13:- Basic and Diluted Net Earnings per Share
Note 14:- Taxes on Income
Note 15:- Balances and Transactions with Related Parties
Note 16:- Segment Information
Note 17:- Selected Statements of Income Data
Note 18:- Events After The Reporting Date
EX-8.1 exhibit_8-1.htm
EX-12.1 exhibit_12-1.htm
EX-12.2 exhibit_12-2.htm
EX-13.1 exhibit_13-1.htm
EX-13.2 exhibit_13-2.htm
EX-15.1 exhibit_15-1.htm

Magal Security Systems Earnings 2015-12-31

Balance SheetIncome StatementCash Flow

20-F 1 zk1618268.htm 20-F zk1618268.htm


SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 20-F
 
o
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, 2015
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report .................
 
Commission file number: 0-21388
 
MAGAL SECURITY SYSTEMS LTD.
(Exact Name of Registrant as specified in its charter
and translation of Registrant’s name into English)
 
Israel
(Jurisdiction of incorporation or organization)

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

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

Title of each class
Name of each exchange on which registered
Ordinary Shares, NIS 1.0 Par Value
NASDAQ Global Market
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
 
Ordinary Shares, par value NIS 1.0 per share …….…16,398,872
(as of December 31, 2015)

 
 

 

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

Yes o No x
 
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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   
 
Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
     
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
     
U.S. GAAP x
International Financial Reporting Standards as issued by the International Accounting Standards Board o
Other o
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
 
Item 17 o  Item 18 o
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o No x
 
This Annual Report on Form 20-F is incorporated by reference into the Registrant’s Registration Statements on Form S-8, File Nos. 333-127340, 333-164696, 333-174127 and 333-190469.
 
 
 

 
 
TABLE OF CONTENTS

     
Page No.
 
1
 
1
 
1
 
1
 
A.
Selected Consolidated Financial Data
1
 
B.
Capitalization and Indebtedness
3
 
C.
Reasons for the Offer and Use of Proceeds
3
 
D.
Risk Factors
3
 
14
 
A.
History and Development of the Company
14
 
B.
Business Overview
14
 
C.
Organizational Structure
25
 
D.
Property, Plants and Equipment
25
 
26
 
26
 
A.
Operating Results
26
 
B.
Liquidity and Capital Resources
39
 
C.
Research and Development, Patents and Licenses
42
 
D.
Trend Information
42
 
E.
Off-Balance Sheet Arrangements
42
 
F.
Tabular Disclosure of Contractual Obligations
43
 
43
 
A.
Directors and Senior Management
43
 
B.
Compensation
47
 
C.
Board Practices
48
 
D.
Employees
58
 
E.
Share Ownership
59
 
61
 
A.
Major Shareholders
61
 
B.
Related Party Transactions
62
 
C.
Interests of Experts and Counsel
62
 
62
 
A.
Consolidated Statements and Other Financial Information
62
 
B.
Significant Changes
63
 
63
 
A.
Offer and Listing Details
63
 
B.
Plan of Distribution
64
 
C.
Markets
64
 
D.
Selling Shareholders
64
 
E.
Dilution
64
 
F.
Expenses of the Issue
64
 
64
 
A.
Share Capital
64
 
B.
Memorandum and Articles of Association
65
 
C.
Material Contracts
68
 
D.
Exchange Controls
68
 
E.
Taxation
68
 
F.
Dividends and Paying Agents
79
 
G.
Statements by Experts
80
 
 
- i -

 
 
 
H.
Documents on Display
80
 
I.
Subsidiary Information
80
 
80
 
81
 
81
 
81
 
81
 
81
 
82
 
82
 
82
 
83
 
83
 
83
 
83
 
84
 
84
 
84
 
84
 
86

 
- ii -

 
 
INTRODUCTION

Magal Security Systems Ltd. is a leading international solutions provider of security, safety, and site management.  Based on more than 45 years of experience and interaction with customers, we have developed a unique set of solutions and products, optimized for perimeter, outdoor and general security applications. Our turnkey solutions are typically integrated and managed by sophisticated modular command and control software, supported by expert systems for real-time decision support. Our broad portfolio of critical infrastructure protection and site protection technologies includes a variety of smart barriers and fences, fence mounted sensors, virtual gates, buried and concealed detection systems and a sophisticated sensors for sub-surface intrusion such as to secure pipelines.  We have successfully installed customized solutions and products in more than 80 countries worldwide. Our ordinary shares are traded on the NASDAQ Global Market under the symbol “MAGS”.  Our website is www.magal-s3.com.  The information on our website is not incorporated by reference into this annual report.  As used in this annual report, the terms “we,” “us,” “our,” and “Magal S3” mean Magal Security Systems Ltd. and its subsidiaries, unless otherwise indicated.
 
ULTRAWAVE design, E-FIELD, FIBERPATROL, FLARE, FLEXPI, FLEXPS, FLEXZONE, GUIDAR, INTELLI-FIELD, LOGO DESIGN (old Senstar), MISCELLANEOUS DESIGN (Stellar logo), OMNITRAX, PANTHER, PERIMITRAX, PINPOINTER, REPELS, SENNET, SENSTAR, SENSTAR & DESIGN, SENTIENT, XFIELD, MAGAL, DTR, FORTIS, DREAMBOX, MAESTRO DB, FENSOR and ROBOGUARD are registered trademarks and INTELLI-FLEX, INTELLIFIBER, STARLED, STARNET, ARMOURFLEX, FLASH, FLEXZONE, CYBERSEAL, the Magal logo, Tungsten, Rubidium, Gallium-PDS, Vanadium  and all other marks used to identify particular products and services associated with our businesses are unregistered trademarks.  Any other trademarks and trade names appearing in this annual report are owned by their respective holders.
 
Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.  All references in this annual report to “dollars” or “$” are to U.S. dollars, all references to “NIS” are to New Israeli Shekels and all references to “CAD” are to Canadian dollars.  The representative exchange rate between the NIS and the dollar as published by the Bank of Israel and effective on December 31, 2015 was NIS 3.902 per $1.00.
 
Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms.  If we filed any of these documents as an exhibit to this annual report or to any registration statement or annual report that we previously filed, you may read the document itself for a complete description of its terms.
 
This Annual Report on Form 20-F contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and within the Private Securities Litigation Reform Act of 1995, as amended.  Such forward-looking statements reflect our current view with respect to future events and financial results.  Forward-looking statements usually include the verbs, “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “understands” and other verbs suggesting uncertainty.  We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.  We have attempted to identify additional significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section which appears in Item 3.D “Key Information -Risk Factors.”
 
 
- iii -

 
 
 
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.
 
OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
KEY INFORMATION
 
A.            Selected Consolidated Financial Data.
 
The following selected consolidated financial data for and as of the five years ended December 31, 2015 are derived from our audited consolidated financial statements which have been prepared in accordance with U.S. GAAP.  We have derived the following selected consolidated financial data as of December 31, 2014 and 2015 and for each of the years ended December 31, 2013, 2014 and 2015 from our consolidated financial statements set forth elsewhere in this annual report that have been prepared in accordance with U.S. GAAP.  We have derived the following selected consolidated financial data as of December 31, 2011, 2012 and 2013 and for each of the years ended December 31, 2011 and 2012 from our audited consolidated financial statements not included in this annual report.  The selected consolidated financial data set forth below should be read in conjunction with and are qualified entirely by reference to Item 5.  “Operating and Financial Review and Prospects” and our audited consolidated financial statements and notes thereto included elsewhere in this annual report.
 
   
2011
   
2012
   
2013
   
2014
   
2015
 
Revenues
  $ 88,591     $ 77,697     $ 51,517     $ 77,543     $ 63,736  
Cost of revenues
    49,089       44,163       31,059       43,049       32,722  
Gross profit
    39,502       33,534       20,458       34,494       31,014  
Operating expenses:
                                       
Research and development, net
    3,898       4,041       4,409       4,604       4,814  
Selling and marketing
    19,415       16,528       12,781       17,130       14,785  
General and administrative
    8,682       7,408       7,787       8,898       7,026  
Impairment of goodwill and other intangible assets
    -       -       -       2,439       -  
   Other income
    (2,304 )     -       -       -       -  
Total operating expenses
    29,691       27,977       24,977       33,071       26,625  
Operating income (loss)
    9,811       5,557       (4,519 )     1,423       4,389  
Financial expenses (income), net
    (756 )     472       (59 )     (1,979 )     (642 )
Income (loss) before income taxes
    10,567       5,085       (4,460 )     3,402       5,031  
Taxes on income
    723       991       69       82       1,923  
Net income (loss)
  $ 9,844     $ 4,094     $ (4,529 )   $ 3,320     $ 3,108  
Less: net loss attributable to non-controlling interest
    -       -       (66 )     (90 )     (33 )
Net income (loss) attributable to Magal’s shareholders
  $ 9,844     $ 4,094     $ (4,463 )   $ 3,410     $ 3,141  
Basic and diluted net earnings (loss) per share
  $ 0.78     $ 0.26     $ (0.28 )   $ 0.21     $ 0.19  

 
1

 
   
2011
   
2012
   
2013
   
2014
   
2015
 
Weighted average number of ordinary shares used in computing basic net earnings per share
    12,645,283       16,003,482       16,138,944       16,186,148       16,347,948  
Weighted average number of ordinary shares used in computing diluted net earnings per share
    12,645,283       16,030,816       16,138,944       16,338,056       16,410,711  
 
   
2011
   
2012
   
2013
   
2014
   
2015
 
                         
Consolidated Statements of Comprehensive Income:
                       
Net income (loss)
  $ 9,844     $ 4,094     $ (4,529 )   $ 3,320     $ 3,108  
Realized foreign currency translation adjustments from subsidiary
    -       (421 )     -       -       -  
Foreign currency translation adjustments
    (589 )     684       (875 )     (1,833 )     (3,891 )
Total comprehensive income (loss)
  $ 9,225     $ 4,357     $ (5,404 )   $ 1,487     $ (783 )
Less - comprehensive loss attributable to non-controlling interests
    -       -       (66 )     (90 )     (33 )
Comprehensive income (loss) attributable to Magal shareholders’
  $ 9,225     $ 4,357     $ (5,338 )   $ 1,577     $ (750 )

   
2011
   
2012
   
2013
   
2014
   
2015
 
               
Consolidated Balance Sheets Data:
                             
Cash and cash equivalents
  $ 30,005     $ 36,784     $ 32,235     $ 21,602     $ 27,319  
Short and long-term deposits and restricted deposits
    10,123       9,607       12,283       10,979       3,977  
Working capital
    40,493       49,202       46,922       45,805       43,996  
Total assets
    85,987       91,036       87,787       83,759       74,996  
Short-term bank credit (including current maturities of long-term loans)
    5,390       5,391       6,270       3,071       -  
Long-term bank loans
    38       6       1,912       1,406       -  
Total shareholders’ equity
    51,011       58,326       57,540       55,957       55,695  
Ordinary shares issued and outstanding
    15,819,822       16,098,022       16,147,522       16,269,022       16,398,872  

 
2

 
 
B. 
Capitalization and Indebtedness.
 
Not applicable.

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

D. 
Risk Factors.
 
Investing in our ordinary shares involves a high degree of risk and uncertainty.  You should carefully consider the risks and uncertainties described below before investing in our ordinary shares.  If any of the following risks actually occurs, our business, prospects, financial condition and results of operations could be harmed.  In that case, the value of our ordinary shares could decline, and you could lose all or part of your investment.
 
Risks Related to Our Business
 
We have a history of operating losses and may not be able to achieve and sustain profitable operations.  We may not have sufficient resources to fund our operations in the future.
 
Although we reported operating profits in 2015 and 2014 following an operating loss in 2013, we may not be able to achieve and sustain profitable operations in the future.  If we do not generate sufficient cash from operations, we will be required to obtain financing or reduce our level of expenditure or cash balance.  Such financing may not be available in the future, or, if available, may not be on terms favorable to us.  If adequate funds are not available to us, our business, and results of operations and financial condition will be materially and adversely affected.
 
We depend on large orders from a relatively small number of customers for a substantial portion of our revenues.  The loss of one or more of our key customers could result in a loss of a significant amount of our revenues.
 
Historically, a relatively small number of customers account for a large percentage of our revenues.   Revenues from the provision of the perimeter security solution to the port of Mombasa, Kenya accounted for 14.2%, 5.7% and 5% of our revenues in 2013, 2014 and 2015, respectively.  The Israeli Ministry of Defense, or the MOD, and the Israeli Defense Forces, or the IDF, have accounted for a significant amount of our revenues. For the years ended December 31, 2013, 2014 and 2015, they accounted for 15%, 14.8% and 13.3% of our revenues, respectively. Revenues from the national electricity company in Latin America, or CFE, accounted for 6.4% and 18.1% of our revenues in 2014 and 2015, respectively. In 2013 revenues from this customer were less than 1% of our revenues.
 
The MOD, the IDF or any of our other major continuing customers may not maintain their volume of business with us or, if such volume is reduced, other customers generating similar revenues may not replace the lost business. Our inability to replace business from large contracts will adversely affect our financial results.  Any unanticipated delays in a large project, changes in customer requirements or priorities during the project implementation period, or a customer’s decision to cancel a project, may adversely impact our operating results and financial performance. Our programs may also be affected in the future if there is a reduction in Israeli government defense spending for our programs or a change in priorities to purchase products other than ours.  Accordingly, changes in government contracting policies, budgetary constraints and delays or changes in the appropriations process could have an adverse effect on our business, financial condition and results of operations.
 
Because our sales tend to be concentrated among a small number of customers during any period, our operating results may be subject to substantial fluctuations. Accordingly, our revenues and operating results for any particular quarter may not be indicative of our performance in future quarters, making it difficult for investors to evaluate our future prospects based solely on the results of any one quarter.
 
Given the nature of our customers and products, we receive relatively large orders for projects from a relatively small number of customers. Consequently, a single order from one customer may represent a substantial portion of our sales in any one period and significant orders by any customer during one period may not be followed by further orders from the same customer in subsequent periods. Our sales and operating results are subject to very substantial periodic variations. Since quarterly performance is likely to vary significantly, our results of operations for any quarter or calendar year are not necessarily indicative of the results that we might achieve for any subsequent period. Accordingly, quarter-to-quarter and year-to-year comparisons of our operating results may not be meaningful. In addition, we have a limited order backlog that is generally composed of orders that are mostly fulfilled within a period of three to twelve months after receipt, which makes revenues in any quarter substantially dependent upon orders received in prior quarters.

 
3

 
We may be unable to successfully integrate our recent acquisitions to fully realize targeted synergies, revenues and other expected benefits of the acquisitions.

In January 2013, we purchased WebSilicon Ltd., an Israeli cyber security company whose products and services complement our physical security products and services, which later changed its name to CyberSeal Ltd. In April 2014 we acquired a U.S. based fiber-optic technology company which provides advanced solutions for sensing, security, and communication. These solutions include patented fiber-optic sensor technologies which provide security solutions for military bases, airports, power plants, water treatment facilities, pipelines, secure data networks and other critical infrastructures and high-value assets.
 
Achieving the targeted synergies, such as operating and long-term strategic cost-savings, of the acquisitions will depend in part upon whether we can continue to integrate their businesses and technologies in an efficient and effective manner. We may not be able to accomplish this integration process smoothly or successfully. The integration of our respective operations will require the dedication of significant management resources, which may distract management’s attention from day-to-day operations. Employee uncertainty and lack of focus during the integration process may also disrupt our business and result in undesired employee attrition. An inability of management to successfully integrate the operations into our business could have a material adverse effect on our business, results of operations and financial condition.
 
An inability to realize the full extent of, or any of, the anticipated benefits and synergies of the acquisitions, as well as any delays encountered in the integration process, could have an adverse effect on our business, results of operations and financial condition. Moreover, future acquisitions by us could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to identifiable intangible assets, any of which could materially adversely affect our operating results and financial position.  Acquisitions also involve other risks, including risks inherent in entering markets in which we have no or limited prior experience.
 
Our revenues depend on government procurement procedures and practices.  A substantial decrease in our customers’ budgets would adversely affect our results of operations.
 
Our products are primarily sold to governmental agencies, governmental authorities and government-owned companies, many of which have complex and time consuming procurement procedures.  A substantial period of time often elapses from the time we begin marketing a product until we actually sell that product to a particular customer.  In addition, our sales to governmental agencies, authorities and companies are directly affected by these customers’ budgetary constraints and the priority given in their budgets to the procurement of our products.  A decrease in governmental funding for our customers’ budgets would adversely affect our results of operations.  This risk is heightened during periods of global economic slowdown.
 
Accordingly, governmental purchases of our systems, products and services may decline in the future as the governmental purchasing agencies may terminate, reduce or modify contracts or subcontracts if:
 
 
·
their requirements or budgetary constraints change;
 
 
·
they cancel multi-year contracts and related orders if funds become unavailable;
 
 
·
they shift spending priorities into other areas or for other products; or
 
 
·
they adjust contract costs and fees on the basis of audits.
 
Any such event may have a material adverse effect on us.
 
 
4

 
Because competition in our industry is intense, our business, operating results and financial condition may be adversely affected.
 
The global market for security, safety, site management solutions and products is highly fragmented and intensely competitive.  We compete principally in the market for perimeter intrusion detection systems, or PIDS, and turnkey projects and solutions.  Some of our competitors and potential competitors have greater research, development, financial and personnel resources, including governmental support.  We cannot assure you that we will be able to maintain the quality of our products relative to those of our competitors or continue to develop and market new products effectively. Continued competitive pressures could cause us to lose significant market share.
 
Increased competition and bid protests in a budget-constrained environment may make it more difficult to maintain our financial performance.
 
A substantial portion of our business is awarded through competitive bidding. Governments increasingly have relied upon competitive contract award types and multi-award contracts, which has the potential to create pricing pressure and increase our cost by requiring that we submit multiple bids and proposals. The competitive bidding process entails substantial costs and managerial time to prepare bids and proposals for contracts that may not be awarded to us or may be split among competitors. Multi award contracts require that we make sustained efforts to obtain task orders under the contract. Following award, we may encounter significant expenses, delays, contract modifications, or even loss of the contract if our competitors protest or challenge contracts that are awarded to us.
 
Unfavorable global economic conditions may adversely affect our customers, which directly impact our business and results of operations.
 
Our business and financial condition is affected by global economic conditions. For example, starting in late 2008 and lasting through much of 2009, a steep downturn in the global economy sparked by uncertainty in credit markets and deteriorating consumer confidence, reduced technology spending by many organizations. More recently, credit and sovereign debt issues destabilized certain European economies as well and thereby increased global macroeconomic uncertainties. Uncertainty about current global economic conditions continues to pose a risk as customers may postpone or reduce spending in response to restraints on credit. Should the economic slowdown increase and/or companies in our target markets reduce capital expenditures, it may cause our customers to reduce or postpone their capital spending significantly, potentially resulting in reductions in sales of our products, longer sales cycles, collectability delays, non-payment for product, slower adoption of new technologies and increased price competition, each of which could have a material adverse effect on our business, operating results and financial condition.

We may also be required in the future to record impairment charges relating to the carrying value of our intangible assets and goodwill, increase our reserves for doubtful accounts and further write-down our tax assets.  In addition, the fair value of some of our assets may decrease as a result of an uncertain economy and as a result, we may be required to record impairment charges in the future.  If global economic and market conditions or economic conditions in key markets remain uncertain or weaken further, our financial condition and operating results may be materially adversely affected.
 
We may be adversely affected by our long sales cycles.
 
We have in the past and expect in the future to experience long time periods between initial sales contacts and the execution of formal contracts for our products and completion of product installations.  The cycle from first contact to revenue generation in our business involves, among other things, selling the concept of our technology and products, developing and implementing a pilot program to demonstrate the capabilities and accuracy of our products, negotiating prices and other contract terms, and, finally, installing and implementing our products on a full-scale basis.  This cycle entails a substantial period of time, sometimes as much as one or more years, and the lack of revenues during this cycle and the expenses involved in bringing new sales to the point of revenue generation may put a substantial strain on our resources. Our business involves significant risks and uncertainties that may not be covered by indemnity or insurance.
 
 
5

 

 
Our business involves significant risks and uncertainties that may not be covered by indemnity or insurance.
 
A significant portion of our business relates to designing, developing, and manufacturing advanced security, site management and systems and products.  New technologies may be untested or unproven. Failure of some of these products and services could result in extensive loss of life or property damage. Accordingly, we also may incur liabilities that are unique to our products and services. In some, but not all circumstances, we may be entitled to certain legal protections or indemnifications from our customers, either through regulatory protections, contractual provisions or otherwise. The amount of insurance coverage that we maintain may not be adequate to cover all claims or liabilities, and it is not possible to obtain insurance to protect against all operational risks and liabilities.
 
Substantial claims resulting from an accident, failure of our products or services, or other incident, or liability arising from our products and services in excess of any indemnity and our insurance coverage (or for which indemnity or insurance is not available or not obtained) could adversely impact our financial condition, cash flows, or operating results. Any accident, even if fully indemnified or insured, could negatively affect our reputation among our customers and the public, and make it more difficult for us to compete effectively. It also could affect the cost and availability of adequate insurance in the future.
 
The market for our products may be affected by changing technology, requirements, standards and products, and we may be adversely affected if we do not respond promptly and effectively to these changes.
 
The market for our products may be affected by evolving technologies, changing industry standards, changing regulatory environments, new product introductions and changes in customer requirements.  The introduction of products embodying new technologies and the emergence of new industry standards and practices can render existing products obsolete and unmarketable.  Our future success will depend on our ability to enhance our existing products and to develop and introduce, on a timely and cost-effective basis, new products and product features that keep pace with technological developments and emerging industry standards. In the future:
 
 
·
we may not be successful in developing and marketing new products or product features that respond to technological change or evolving industry standards;
 
 
·
we may experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products and features; or
 
 
·
our new products and product features may not adequately meet the requirements of the marketplace and achieve market acceptance.
 
If we are unable to respond promptly and effectively to changing technologies and market requirements, we will be unable to compete effectively in the future.
 
Our failure to retain and attract personnel could harm our business, operations and product development efforts.
 
Our products require sophisticated research and development, marketing and sales and technical customer support.  Our success depends on our ability to attract, train and retain qualified research and development, marketing and sales and technical customer support personnel.  Competition for personnel in all of these areas is intense and we may not be able to hire adequate personnel to achieve our goals or support the anticipated growth in our business.  If we fail to attract and retain qualified personnel, our business, operations and product development efforts would suffer.
 
Our financial results may be significantly affected by currency fluctuations.
 
Most of our sales are made in North America, Europe, Africa and Israel.  Our revenues are primarily denominated in dollars, Euros and NIS, while a portion of our expenses, primarily labor expenses, is incurred in NIS and Canadian Dollars.  Additionally, certain assets, especially trade receivables, as well as part of our liabilities are denominated in NIS.  As a result, fluctuations in rates of exchange between the dollar and non-dollar currencies may affect our operating results and financial condition.  The dollar cost of our operations in Israel may be adversely affected by the appreciation of the NIS against the dollar.  In addition, the value of our non-dollar revenues could be adversely affected by the depreciation of the dollar against such currencies.  Foreign currency fluctuations had a positive impact on our results of operations and we recorded foreign exchange income, net of $89,000, $2,331,000 and $969,000, in the years ended December 31, 2013, 2014 and 2015, respectively, we may incur exchange losses in the future. Our results of operations may continue to be materially affected by currency fluctuations in the future.
 
 
6

 
 
Our international operations require us to comply with anti-corruption laws and regulations of various governments and different international jurisdictions, and our failure to comply with these laws and regulations could adversely affect our reputation, business, financial condition and results of operations.
 
Doing business on a worldwide basis requires us and our subsidiaries to comply with the laws and regulations of various governments and different international jurisdictions, and our failure to successfully comply with these rules and regulations may expose us to liabilities. These laws and regulations apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, as a company registered with the Securities and Exchange Commission, or the SEC, we are subject to the regulations imposed by the Foreign Corrupt Practices Act, or FCPA. The FCPA prohibits us from providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment, and requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company. As part of our business, we deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA. If our efforts to screen third-party agents and detect cases of potential misconduct fail, we could be held responsible for the noncompliance of these third parties under applicable laws and regulations, which may have a material adverse effect on our reputation and our business, financial condition and results of operations. In addition, some of the international locations in which we operate lack a developed legal system and have elevated levels of corruption. As a result of the above activities, we are exposed to the risk of violating anti-corruption laws. We have established policies and procedures designed to assist us and our personnel to comply with applicable U.S. and international laws and regulations. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, and such a violation could adversely affect our reputation, business, financial condition and results of operations.
 
We face risks associated with doing business in international markets.
 
A large portion of our sales is to markets outside of Israel.  For the years ended December 31, 2013, 2014 and 2015 approximately 77.6%, 78.7% and 80.6%, respectively, of our revenues were derived from sales to markets outside of Israel.  A key component of our strategy is to continue to expand in such international markets.  Our international sales efforts are affected by costs associated with the shipping of our products and risks inherent in doing business in international markets, including:
 
 
·
different and changing regulatory requirements in the jurisdictions in which we currently operate or may operate in the future;
 
 
·
fluctuations in foreign currency exchange rates;
 
 
·
export restrictions, tariffs and other trade barriers;
 
 
·
difficulties in staffing, managing and supporting foreign operations;
 
 
·
longer payment cycles;
 
 
·
difficulties in collecting accounts receivable;
 
 
·
political and economic changes, hostilities and other disruptions in regions where we currently sell or products or may sell our products in the future; and
 
 
·
seasonal reductions in business activities.
 
 
7

 
Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, difficulty in collecting receivables, and a higher cost of doing business, any of which could adversely affect our business, results of operations or financial condition.
 
We have significant operations in countries that may be adversely affected by political or economic instability, regime replacement, major hostilities or acts of terrorism.
 
We are a global security company with worldwide operations. Although approximately 59.7% of our sales in 2015 were generated in Israel, North America and Western Europe, we expect to derive an increasing portion of our sales and future growth from other regions or regime replacements which freeze the activity, budget allocation and execution decisions in these markets until the new regime is setting up, such as Africa or regime replacements which freeze the activity, budget allocation and execution decisions in these markets until the new regime is setting up, such as India, Latin America and Central and Eastern Europe, which may be susceptible to political or economic instability.
 
Significant portions of our operations are conducted outside the markets in which our products and solutions are manufactured or generally sold, and accordingly, we often export a substantial number of products into such markets. We may, therefore, be denied access to potential customers or suppliers or denied the ability to ship products from any of our subsidiaries into the countries in which we currently operate or wish to operate, as a result of economic, legislative, political and military conditions, including hostilities and acts of terrorism, in such countries.
 
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
 
Cyber attacks or other breaches of network or information technology (IT) security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber attacks, malware, computer viruses and other means of unauthorized access.  While we maintain insurance coverage for some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain.  A failure to protect the privacy of customer and employee confidential data against breaches of network or IT security could result in damage to our reputation.  To date, we have not been subject to cyber attacks or other cyber incidents which, individually or in the aggregate, resulted in a material impact to our operations or financial condition.
 
We may not be able to protect our proprietary technology and unauthorized use of our proprietary technology by third parties may impair our ability to compete effectively.
 
Our success and ability to compete depend in large part upon protecting our proprietary technology.  We have 7 patents and have 2 patent applications pending.  We also rely on a combination of trade secret and copyright law and confidentiality, non-disclosure and assignment-of-inventions agreements to protect our proprietary technology.  It is our policy to protect our proprietary rights in our products and operations through contractual obligations, including confidentiality and non-disclosure agreements with certain employees, distributors and agents, suppliers and subcontractors.  These measures may not be adequate to protect our technology from third-party infringement, and our competitors may independently develop technologies that are substantially equivalent or superior to ours.  Additionally, our products may be sold in foreign countries that provide less protection to intellectual property than that provided under U.S. or Israeli laws.
 
Claims that our products infringe upon the intellectual property of third parties may require us to incur significant costs, enter into licensing agreements or license substitute technology.
 
Third parties may in the future assert infringement claims against us or claims asserting that we have violated a patent or infringed upon a copyright, trademark or other proprietary right belonging to them.  Any infringement claim, even one without merit, could result in the expenditure of significant financial and managerial resources to defend against the claim.  In addition, we purchase components for our turnkey products from independent suppliers.  Certain of these components contain proprietary intellectual property of these independent suppliers.  Third parties may in the future assert claims against our suppliers that such suppliers have violated a patent or infringed upon a copyright, trademark or other proprietary right belonging to them.  If such infringement by our suppliers or us were found to exist, a party could seek an injunction preventing the use of their intellectual property.  Moreover, a successful claim of product infringement against us or a settlement could require us to pay substantial amounts or obtain a license to continue to use such technology or intellectual property.  Infringement claims asserted against us could have a material adverse effect on our business, operating results and financial condition.
 
 
8

 
Undetected defects in our products may increase our costs and impair the market acceptance of our products.
 
The development, enhancement and implementation of our complex systems entail substantial risks of product defects or failures.  Despite testing by us and our customers, errors may be found in existing or new products, resulting in delays, loss of revenues, warranty expense, loss of market share, failure to achieve market acceptance, adverse publicity, product returns, loss of competitive position or claims against us by customers. Any such problems could be costly to remedy and could cause interruptions, delays, or cessation of our product sales, which could cause us to lose existing or prospective customers and could negatively affect our results of operations.  Moreover, the complexities involved in implementing our systems entail additional risks of performance failures.  We may encounter substantial difficulties due to such complexities which could have a material adverse effect upon our business, financial condition and results of operations.
 
Systems and information technology interruptions or cyber attacks could adversely impact our ability to operate.
 
Our operations rely on computer, information and communications technology and related systems.  From time to time, we may experience system interruptions and delays.  If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of and protect our systems, our operations could be interrupted or delayed.  Our computer and communications systems and operations could be damaged or interrupted by natural disasters, telecommunications failures, acts of war, terrorism or similar events or disruptions.  Any of these or other events could cause system interruption, delays and loss of critical data, or delay or stoppage of our operations, and adversely affect our operating results.
 
If subcontractors and suppliers terminate our arrangements with them, or amend them in a manner detrimental to us, we may experience delays in production and implementation of our products and our business may be adversely affected.
 
We acquire most of the components utilized in our products, including our turnkey solutions, from a limited number of suppliers.  We may not be able to obtain such items from these suppliers in the future or we may not be able to obtain them on satisfactory terms.  Temporary disruptions of our manufacturing operations would result if we were required to obtain materials from alternative sources, which may have an adverse effect on our financial results.  In addition, the installation of our fence mounted vibration detection systems in Israel is outsourced primarily to two subcontractors.  If either or both of such subcontractors were to be unable or unwilling to continue to perform such services, we would have to identify and qualify one or more substitute subcontractors to perform such services.  This could cause delays in the implementation of our fence mounted vibration detection systems in Israel, the costs associated with installing such systems may increase and our business may be adversely affected.
 
We currently benefit from government programs and tax benefits that may be discontinued or reduced in the future, which would increase our future tax expenses.
 
We currently benefit from grants and tax benefits under Israeli government programs, which require us to meet specified conditions, including, but not limited to, making specified investments from our equity in fixed assets and paying royalties with respect to grants received.  In addition, some of these programs restrict our ability to manufacture particular products or transfer particular technology outside of Israel.  We also benefit from tax credits pursuant to the Scientific Research and Experimental Development Tax incentive Program in Canada.
 
If we fail to comply with the conditions imposed by the Israeli law or the Canadian tax program in the future, the benefits we receive could be cancelled and we could be required to refund any payments previously received under these programs, including any accrued interest, or pay increased taxes or royalties.  Such a result would adversely affect our results of operations and financial condition.
 
The Israeli government has reduced the benefits available under these programs in recent years and these programs and benefits may be discontinued or curtailed in the future. In addition, effective as of January 1, 2014 the Canadian CRA announced changes under its program reducing the benefits. If the Israeli or Canadian governments resolve to end these programs and benefits, our business, financial condition, results of operations and net income could be materially adversely affected.
 
 
9

 
 
We may fail to maintain effective internal control over financial reporting, which could result in material misstatements in our financial statements.
 
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.  Our efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 governing internal controls and procedures for financial reporting have resulted in increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require the continued commitment of significant resources.  Section 404 of the Sarbanes-Oxley Act requires management’s annual review and evaluation of our internal control over financial reporting in connection with the filing of the annual report on Form 20-F for each fiscal year.  We may identify material weaknesses or significant deficiencies in our internal control over financial reporting.  Failure to maintain effective internal control over financial reporting could result in material misstatements in our financial statements.  Any such failure could also adversely affect the results of our management’s evaluations and annual auditor reports regarding the effectiveness of our internal control over financial reporting.  Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities and could have a material adverse effect on our operating results, investor confidence in our reported financial information and the market price of our ordinary shares.
 
Regulations that impose disclosure requirements regarding the use of “conflict” minerals in our products will result in additional cost and expense and could result in other significant adverse effects.
 
Rules adopted by the SEC implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act impose diligence and disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries in our products. Compliance with these rules may result in additional cost and expense, including for due diligence to determine and verify the sources of any conflict minerals used in our products, in addition to the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities. These rules may also affect the sourcing and availability of minerals used in the manufacture of our products to the extent that there may be only a limited number of suppliers offering “conflict free” metals that can be used in our products. There can be no assurance that we will be able to obtain such metals in sufficient quantities or at competitive prices. Also, since our supply chain is complex, we may face reputational challenges with our customers, stockholders and other stakeholders if we are unable to sufficiently verify the origins of the metals used in our products. We may also encounter customers who require that all of the components of our products be certified as conflict free. If we are not able to meet customer requirements, such customers may choose to disqualify us as a supplier, which could impact our sales and the value of portions of our inventory.
 
Risks Relating to Our Ordinary Shares
 
Volatility of the market price of our ordinary shares could adversely affect our shareholders and us.
 
The market price of our ordinary shares has been, and is likely to be, highly volatile and could be subject to wide fluctuations in response to numerous factors, including the following:
 
 
·
actual or anticipated variations in our quarterly operating results or those of our competitors;
 
 
·
announcements by us or our competitors of technological innovations or new and enhanced products;
 
 
·
developments or disputes concerning proprietary rights;
 
 
·
introduction and adoption of new industry standards;
 
 
·
changes in financial estimates by securities analysts;
 
 
·
market conditions or trends in our industry;
 
 
10

 
 
·
changes in the market valuations of our competitors;
 
 
·
announcements by us or our competitors of significant acquisitions;
 
 
·
entry into strategic partnerships or joint ventures by us or our competitors;
 
 
·
additions or departures of key personnel;
 
 
·
political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events; and
 
 
·
other events or factors in any of the countries in which we do business, including those resulting from war, incidents of terrorism, natural disasters or responses to such events.
 
In addition, the stock market in general, and the market for Israeli companies and homeland security companies in particular, has been highly volatile.  Many of these factors are beyond our control and may materially adversely affect the market price of our ordinary shares, regardless of our performance.  In the past, following periods of market volatility, shareholders have often instituted securities class action litigation relating to the stock trading and price volatility of the company in question.  If we were involved in any securities litigation, it could result in substantial cost to us to defend and divert resources and the attention of management from our business.
 
We have not distributed dividends in the past.
 
While we have historically retained our earnings to finance operations and expand our business, we have not determined whether we will maintain such policy for the future.  According to the Israeli Companies Law, a company may distribute dividends out of its profits (as defined by the Israeli Companies Law), provided that there is no reasonable concern that such dividend distribution will prevent the company from paying all its current and foreseeable obligations, as they become due, or otherwise upon the permission of the court.  The declaration of dividends is subject to the discretion of our board of directors and would depend on various factors, including our operating results, financial condition, future prospects and any other factors deemed relevant by our board of directors.  You should not rely on an investment in our company if you require dividend income from your investment.
 
As a foreign private issuer whose shares are listed on the NASDAQ Global Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.  We follow Israeli law and practice instead of NASDAQ rules regarding the director nomination process, compensation of executive officers and the requirement that our independent directors have regularly scheduled meetings at which only independent directors are present.
 
As a foreign private issuer whose shares are listed on the NASDAQ Global Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of The NASDAQ Stock Market Rules.  We follow Israeli law and practice instead of NASDAQ rules regarding the director nomination process, compensation of executive officers and the requirement that our independent directors have regularly scheduled meetings at which only independent directors are present.  As a foreign private issuer listed on the NASDAQ Global Market, we may also follow home country practice with regard to, among other things, the composition of the board of directors and quorum at shareholders’ meetings.  In addition, we may follow home country practice instead of the NASDAQ requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company).  A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws.  In addition, a foreign private issuer must disclose in its annual reports filed with the SEC, each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement.  Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.
 
 
11

 

We may in the future be classified as a passive foreign investment company, or PFIC, which will subject our U.S. investors to adverse tax rules.

U.S. holders of our ordinary shares may face income tax risks. There is a risk that we will be treated as a “passive foreign investment company” or PFIC.  Our treatment as a PFIC could result in a reduction in the after-tax return to the holders of our ordinary shares and would likely cause a reduction in the value of such shares. A foreign corporation will be treated as a PFIC for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive income,” or (2) at least 50% of the average value of the corporation’s gross assets produce, or are held for the production of, such types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income”. If we are treated as a PFIC, U.S. Holders of shares (or rights) would be subject to a special adverse U.S. federal income tax regime with respect to the income derived by us, the distributions they receive from us, and the gain, if any, they derive from the sale or other disposition of their ordinary shares (or rights). In particular, any dividends paid by us, if any, would not be treated as “qualified dividend income” eligible for preferential tax rates in the hands of non-corporate U.S. shareholders.  We believe that we were not a PFIC for the taxable year of 2015.  However, since PFIC status depends upon the composition of our income and the market value of our assets from time to time, there can be no assurance that we will not become a PFIC in any future taxable year. U.S. Holders should carefully read Item 10E. “Additional Information – Taxation” for a more complete discussion of the U.S. federal income tax risks related to owning and disposing of our ordinary shares(or rights).

Risks Relating to Our Location in Israel
 
Political, economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of operations and adversely affect our share price.
 
We are incorporated under the laws of Israel and our principal executive offices, as well as approximately half of our manufacturing and research and development facilities are located in the State of Israel.  As a result, political, economic and military conditions affecting Israel directly influence us.  Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel could adversely affect our business, financial condition and results of operations.
 
Since its establishment in 1948, Israel has been involved in a number of armed conflicts with its Arab neighbors and a state of hostility, varying from time to time in intensity and degree, has continued into 2016.  In recent years, there was an escalation in violence among Israel, Hamas, the Palestinian Authority and other groups, as well as an escalation in terrorist attacks since October 2015 and extensive hostilities along Israel’s border with the Gaza Strip such as the missiles fired from the Gaza Strip into Israel during July-August 2014. Also, riots and uprisings in several countries in the Middle East and neighboring regions and armed conflicts, including by ISIS, have led to severe political instability in several neighboring states and to a decline in the regional security situation. Such instability may affect the local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations.   To date, these matters have not had any material effect on our business and results of operations; however, the regional security situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future.
 
Furthermore, we could be adversely affected by the interruption or reduction of trade between Israel and its trading partners.  Some countries, companies and organizations continue to participate in a boycott of Israeli companies and others doing business with Israel or with Israeli companies.  As a result, we are precluded from marketing our products to these countries, companies and organizations.  Foreign government defense export policies towards Israel could also make it more difficult for us to obtain the export authorizations necessary for our activities.  Also, over the past several years there have been calls in Europe and elsewhere to reduce trade with Israel.  Restrictive laws, policies or practices directed towards Israel or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion of our business.
 
 
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Our results of operations may be negatively affected by the obligation of our personnel to perform reserve military service.
 
Many of our employees and some of our directors and officers in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and may be called for active duty under emergency circumstances at any time.  If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time.  Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of other employees due to military service.  Any disruption in our operations could adversely affect our business.
 
The rights and responsibilities of the shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
 
We are incorporated under Israeli law.  The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association and articles of association and by Israeli law.  These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations.  In particular, a shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters.  Israeli law provides that these duties are applicable in shareholder votes on, among other things, amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and interested party transactions requiring shareholder approval.  In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company.  However, Israeli law does not define the substance of this duty of fairness.  Because Israeli corporate law has undergone extensive revision in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
 
Provisions of Israeli law may delay, prevent or make difficult a change of control and therefore depress the price of our shares.
 
Some of the provisions of Israeli law could discourage potential acquisition proposals, delay or prevent a change in control and limit the price that investors might be willing to pay in the future for our ordinary shares. Israeli corporate law regulates mergers and acquisitions of shares through tender offers, requires approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore, Israel tax law treats stock-for-stock acquisitions between an Israeli company and a foreign company less favorably than does U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in a foreign corporation to immediate taxation or to taxation before his investment in the foreign corporation becomes liquid. These provisions may adversely affect the price of our shares.
 
Our shareholders generally may have difficulties enforcing a U.S. judgment against us, our executive officers and directors and some of the experts named in this annual report, or asserting U.S. securities law claims in Israel.
 
We are incorporated in Israel and all of our executive officers and directors named in this annual report reside outside the United States. Service of process upon them may be difficult to effect within the United States. Furthermore, since substantially all of our assets and all of our directors and officers are located outside the United States, any judgment obtained in the United States against us or these individuals may not be collectible within the United States and may not be enforced by an Israeli court. It also may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel.
 
There is doubt as to the enforceability of civil liabilities under the Securities Act and the Securities Exchange Act in original actions instituted in Israel.  However, subject to certain time limitations and other conditions, Israeli courts may enforce final judgments of U.S. courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions of those and similar acts.
 
 
13

 
Information on the Company
 
A. 
History and Development of the Company.
 
We were incorporated under the laws of the State of Israel on March 27, 1984 under the name Magal Security Systems Ltd.  We are a public limited liability company under the Israeli Companies Law, 5759-1999, and operate under this law and associated legislation.  Our principal executive offices and primary manufacturing and research and development facilities are located near Tel Aviv, Israel, in the Yehud Industrial Zone.  Our mailing address is P.O. Box 70, Industrial Zone, Yehud 5621617, Israel and our telephone number is +972-3-539-1444.  Our agent for service of process in the United States is Senstar Inc., 13800 Coppermine Road, Second Floor, Herndon, Virginia 20171.  Our website address is www.magal-S3.com.  The information on our website is not incorporated by reference into this annual report.
 
We are a leading international provider of products and solutions for physical security, safety and site management. For more than 45 years, we have delivered products and tailor-made solutions and turnkey projects to hundreds of satisfied customers in over 80 countries in some of the world’s most demanding locations.
 
We offer comprehensive integrated solutions for critical sites, managed by Fortis4G – our 4th generation cutting edge Physical Security Information Management system (PSIM). The solutions leverage our broad portfolio of homegrown Perimeter Intrusion Detection Systems (PIDS), advanced outdoors Close Circuit Television (CCTV)/ Intelligent Video Analysis (IVA), technology and cyber security solutions.
 
We intend to increase our revenues in the perimeter products segment and cyber security segment by (i) locating new channels to promote and market our products; (ii) maintaining technology leadership; (iii) investing in research and development; (iv) entering into OEM agreements; and (v) acquiring new technologies independently or through mergers and acquisitions.
 
  We established a new joint venture in India in 2012 and intend to continue to focus on and enhance our presence in emerging markets such as India and China, in order to increase our exposure to small and medium size business opportunities for both our perimeter products and solutions and turnkey projects segments.  In January 2013, we purchased WebSilicon Ltd., an Israeli cyber security company, which later changed its name to CyberSeal Ltd. CyberSeal products and services complement our physical security products and services. In April 2014 we acquired a U.S. based fiber-optic technology company which provides advanced solutions for sensing, and security. The fiber based products provide advantages to our overall security solutions and its technology adds key advanced fiber optic sensing technology to our offerings and strengthens our position in the market. Fiber optic sensors are gaining momentum in many regions and the new acquired technology may become one of our primary product lines.
 
Our capital expenditures for the years ended December 31, 2013, 2014 and 2015 were approximately $1.2 million, $0.7 million and $0.9 million, respectively.  These expenditures were principally for the purchase of vacant land in Cuernavaca, Mexico, on which we built facilities for our Mexican subsidiary and the purchase of vehicles, computers software, demo and promotional equipment. In addition, part of the acquisition of CyberSeal in 2013 was paid for in cash of approximately $2.6 million and the acquisition of the fiber company in 2014 was paid for in cash of approximately $4.3 million.
 
B.
Business Overview.
 
Overview and Strategy
 
We develop, manufacture, market and sell comprehensive lines of physical and cyber security products and systems to high profile customers.  Our systems are used in more than 80 countries to protect sensitive facilities, including national borders, military bases, power plants, airports, seaports, prisons, industrial sites, oil and gas facilities, Olympic villages and stadiums and municipalities from intrusion, terror, crime, sabotage or vandalism to infrastructure, assets and personnel.
 
Based on more than 45 years of experience and interaction with customers, we have developed a comprehensive set of solutions and products, optimized for perimeter, outdoor and general security applications.  Our portfolio of mission critical infrastructure and site protection technologies includes a variety of smart fences and barriers, fence mounted sensors, virtual (volumetric) fences and gates, buried and concealed detection systems and anti digging sensors to secure prisons, bank vaults and pipelines.  We deliver comprehensive IP technology and traditional closed circuit television, or CCTV, solutions, supported by our own Video Motion Detection, or VMD and Intelligent Video Analysis, or IVA.
 
 
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With the addition of CyberSeal’s products and expertise, we are now able to address new markets and offer solutions incorporating cyber security for physical security networks as well as ICT (Industrial Control Systems) networks. With the addition of the newly acquired state of the art technology and expertise, we are able to expand our overall solution, offer a wider range of products and address new markets.
 
Our integrated solutions are based on a broad in-house product portfolio, complemented by OEM and third party products.  A typical turnkey solution is integrated and managed by our Fortis4G - a sophisticated, geospatial information system, or GIS, based command and control system. Fortis4G can also manage the cyber solutions that we provide.
 
A typical turnkey project consists of the following phases:
 
 
·
Studying and understanding customers’ requirements and conducting an environmental and site analysis;
 
 
·
Conducting a site and terrain survey;
 
 
·
Detailed planning that is focused and tailored around the users – first responders and operators in the command and control center(s);
 
 
·
Project Implementation - manufacturing, purchasing, integrating, testing and installing the solution;
 
 
·
Commissioning and training; and
 
 
·
Post-sales support, including upgrades, especially for the cyber security portion of our solutions.
 
Our revenues are principally derived from:
 
 
·
Sales of security products;
 
 
·
Installation of comprehensive security solutions and / or turnkey projects derived from process bids leading to fixed-price contracts; and
 
 
·
Services and maintenance based on post-sale maintenance contracts.
 
Our primary objective is to become a leading international solution provider of safety, security and site management solutions and products.  To achieve this objective, we are implementing a business strategy incorporating the following key elements:
 
 
·
Leverage existing customer relationships.  We believe that we have the capability to offer certain of our customers a comprehensive security package.  As part of our product development process, we seek to maintain close relationships with our customers to identify market needs and to define appropriate product specifications.  We intend to expand the depth and breadth of our existing customer relationships while initiating similar new relationships. Our new cyber security offering is an excellent opportunity to revisit our existing customers.
 
 
·
Refine and broaden our product portfolio.  We have identified the security needs of our customers and intend to enhance our current products’ capabilities, develop new products, acquire complementary technologies and products and enter into OEM agreements with third parties in order to meet those needs.
 
 
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·
Refine and broaden our integration and turnkey delivery capabilities.  As a solution provider we depend on our capability to tailor specific solutions for each customer.  Our integration building blocks and our execution skills are key factors in achieving our growth and profitability.
 
 
·
Enter new markets and strengthen presence in existing markets.  We intend to continue to penetrate new geographic markets by various means, including the establishment of alliances with local distributors and international integrators of security systems.  We also intend to increase our marketing efforts in our existing markets and to acquire or invest in complementary businesses and joint ventures.
 
Emerging Opportunities
 
We believe that the proliferation of digital communication and information technology into the security market provides us with the opportunity to consolidate safety and site management with security applications.  Cities and municipalities, air and sea ports, chemical factories, Olympic villages and stadiums and critical infrastructure sites are currently utilizing the benefits of this approach to security management.  This integration allows users to share diverse sensors (such as cameras and emergency buttons), IT systems, traffic management tools, Cyber solutions and other resources and feed them into a single command and control platform.  Users from different departments within organizations can now share the same information, allowing for improved communication and coordination, whether it is a routine operation or crisis situation.  We believe that we are well positioned and are in the forefront of this emerging market opportunity.  We can also address the increasing cyber threats that the trend towards networking imposes on sites we traditionally protect with physical security.
 
The recent unrest in Africa and the Middle East along with terror by ISIS / Boco Haram / El Shabab and massive migration of refugees may require new requirements in these regions and in Europe.
 
Products and Services
 
General
 
Our principal physical and cyber security products and solutions include:
 
 
·
Perimeter Intrusion Detection Systems (PIDS);
 
 
·
CCTV systems, including a perimeter security Robot;
 
 
·
Pipeline security and third party interference (TPI) detection systems;
 
 
·
Passive and active cell phone detection systems;
 
 
·
Cyber security systems for security networks;
 
 
·
Life safety/duress alarm systems;
 
 
·
Command and control systems; and
 
 
·
Miscellaneous systems tailored for specific vertical market needs.
 
 
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The following table shows the breakdown of our consolidated revenues for the calendar years 2013, 2014 and 2015 by operating segments:
 
   
Years ended December 31,
 
   
2013
   
2014
   
2015
 
      (In thousands)  
Perimeter products                                                                      
  $ 30,551     $ 37,554     $ 30,761  
Turnkey projects                                                                      
    20,137       39,198       34,128  
Cyber security                                                                      
    1,638       1,329       1,596  
Eliminations                                                                      
    (809 )     (538 )     (2,749 )
Total                                                                      
  $ 51,517     $ 77,543     $ 63,736  
 
Perimeter Security Products
 
Perimeter security products enable customers to monitor, limit and control access by unauthorized personnel to specific regions or areas.  High-end perimeter products are sophisticated in nature and are used for correctional facilities, borders, nuclear and conventional power plants, air and sea ports, military installations and other high security installations.  Two independent researches from 2012 (Frost & Sullivan and IMS Research), recognized our company as the number one provider of PIDS technology.
 
Our line of perimeter security products utilizes sophisticated sensor devices to detect and locate intruders and identify the nature of intrusions.  Our perimeter security products have been installed along thousands of kilometers of borders and facility boundaries throughout the world, including more than 600 correctional institutions and prisons in the United States and in several other countries.  In addition, we have installed several hundred kilometers of high security smart perimeter systems along Israel’s borders.
 
Our line of outdoor perimeter security products consists of the following:
 
 
·
Taut wire – hybrid perimeter intrusion detection systems with physical barrier;
 
 
·
Fence mounted vibration detection systems – mechanical, copper “microphonic” wire sensors, fiber optic sensors or electronic ranging  sensors;
 
 
·
Smart barriers – a variety of robust detection grids, gates and innocent looking fences, designed to protect water passages, VIP residences and other outdoor applications;
 
 
·
Buried sensors - volumetric buried cable sensors for PIDS and seismic and fiber sensors to secure pipelines and critical assets against digging;
 
 
·
Electrical field disturbance sensors (volumetric); and
 
 
·
Microwave sensors.
 
Taut Wire Perimeter Intrusion Detection Systems
 
Our taut wire perimeter systems consist of wire strung at high tension between anchor posts.  Sensor posts are located at the middle between anchor posts.  These sensor posts contain one or more devices that detect changes in the tension being exerted on and by the taut wires.  Any abnormal force applied against these wires or released from them (such as by cutting automatically triggers an alarm. Taut wire technology provides three critical elements of protection against unauthorized intruders: deterrence, detection and delaying (until first responders may react and intercept the intruder).
 
Our sealed sensors are not affected by radio frequency interference, climatic or atmospheric conditions, or electrical transients from power lines or passing vehicles. The sensors self-adjust to, or remain unaffected by, extreme temperature variation, minor soil movements and other similar environmental changes that might trigger false alarms in less sophisticated systems. Our taut wire perimeter systems are designed to distinguish automatically between fence tension changes such as caused by small animals, violent weather or forces more typically exerted by a human intruder.
 
 
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Our taut wire perimeter systems offer customers a wide range of installation options. Sensor posts can be as far as 200 feet apart, with relatively inexpensive ordinary fence anchor posts between them. These systems may stand alone, be mounted on a variety of fence posts or added to an existing wall or other structure, or mounted on short posts, with or without outriggers.
 
Taut wire perimeter systems have been approved by various Israeli and U.S. security and military authorities.  We have installed several hundred kilometers of these perimeter systems along Israel’s borders to assist in preventing unauthorized entry and infiltration.
 
Fence Mounted Vibration Detection Systems
 
We offer various types of vibration detection systems. While less robust than taut wire installations, the adaptability of these systems to a wide range of pre-existing barrier structures makes these products viable alternatives for cost-conscious customers.  Our vibration detection devices are most effective when installed on common metal fabric perimeter systems, such as chain link or welded mesh. In our BARRICADE system, electro-mechanical sensors are attached to fence panels approximately three meters apart on any of several common types of fence structures.  Once attached to the fence, each sensor detects vibrations in the underlying structures.  The sensor system’s built-in electro-mechanical filtering combines with system input from a weather analysis to minimize the rate of false alarms from wind, hail or other sources of nuisance vibrations.  Our most recent product is the Fensor – an accelerometer based fence mounted vibration detection system that is capable of locating the exact location of an intrusion within 3 meters and is optimized for rigid fences such as palisade.
 
Intelli-FLEX, FLEX PS and FPS are all triboelectric and electric cable fence sensors processed by a field microprocessor.  These systems detect any attempt to cut, climb or penetrate the fence and have microphonic properties. The microphonic feature permits audio to be used for low-cost alarm assessment, providing users with an additional tool for determining the nature of an attempted intrusion.
 
In the second quarter of 2014 we launched our latest coaxial cable based fence mounted ranging sensor – FlexZone. FlexZone can pinpoint intrusions to within ±3 m (±10 ft); it provides long physical zones (up to 600 m per processor) configurable through software to many smaller virtual zones. Power and data between processors is supported through the sensor cable and thus it reduces the requirement for multiple feeds per site. We intend to retire as soon as practical all the previous generations of triboelectric and electric cable fence sensors upgrading our offering and the legacy installed base to this new product.

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

Buried Sensors

Omnitrax is a fifth generation covert outdoor perimeter security intrusion detection sensor that generates an invisible radar detection field around buried sensor cables.  An alarm is emitted and the exact location identified within one meter if an intruder disturbs the field.  Targets are detected by their conductivity, size and movement and the digital processor is able to filter out common alarms caused by environmental conditions and small animals.
 
PipeGuard and TunnelGuard are products developed around commercial off-the-shelf seismic sensors in order to detect digging around critical assets. TunnelGuard is installed in Latin America to protect bank vaults and prisons, archeological sites in China and a critical oil and gas site in Europe.
 
FiberPatrol, our new fiber product, is also offered to protect pipelines against sabotage, or accidental third party interference (TPI), with the capability to protect up to 72 km of a pipeline with a single processor.
 
 
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Electrical Field Disturbance Sensors
 
Terrain following volumetric sensors can detect intrusions before the intruder touches the sensor.  They can be installed on buildings, free-standing posts, existing fences, walls or rooftops, and will sense changes in the electrostatic field when events, such as intruders penetrating through the wires, take place.  The system’s tall, narrow, well contained detection zone allows the sensor to be installed in almost any application and minimizes nuisance alarms caused by nearby moving objects.  Our flagship product is X-Field; it consists of a set of four and up to eight parallel field sensing wires.
 
Microwave Products
 
We also offer a K-band all digital bi-static microwave system, designed for stable, reliable operation in extreme outdoor environments.  Coverage distance range from 5 meters to 200 meters. Older generations of X band microwaves are retired but still supported.
 
Perimeter Security Robot
 
In 2014, we introduced our new product for perimeter security, called RoboGuard, a robot that runs on an elevated rail along the perimeter of protected sites or border lines, carrying an assortment of sensors. The robot can respond promptly and rush to the exact zone or location where intrusions are suspected, or automatically patrol and inspect the fence integrity, looking for holes or suspicious nearby objects, by using a sophisticated laser scanner. The robot is powered by a removable battery, which is recharged automatically every few hours.
 
A typical RoboGuard configuration includes:
 
 
·
One or two fixed cameras with IR illuminators for fence surveillance;
 
 
·
One PTZ camera with IR illuminator; and
 
 
·
A two-way intercom in order to communicate with intercepted would-be intruders.
 
CCTV Systems
 
We have a proven track record in delivering CCTV and IVA solutions that are designed for use in outdoor applications. In the past Magal offered a dedicated Video Management System (VMS). These capabilities are now fully embedded as part of Magal’s PSIM system – the Fortis4G.
 
MTC-1500I is a high-end yet affordable, dual technology (thermal Imaging and CCD) outdoor surveillance system.  A high-quality image rendered by the thermal sensor provides long distance detection and recognition of humans in day, night and under poor visibility conditions.  The two cameras are mounted on a single pedestal and controlled through an agile and accurate pan-tilt-zoom-focus engine.
 
Cyber Security Solutions
 
In January 2013, we acquired CyberSeal and started to initiate our strategy to expand our product offerings to include cyber security solutions. This strategy was predicated on the ongoing convergence of physical and logical security.
 
 
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Our new solutions monitor, detect and protect against abnormal network activity, both landline and wireless, within and close to protected sites.  The following new products were developed after the acquisition of CyberSeal:
 
 
·
Tungsten – A hardened managed switch with built in security capabilities to monitor unauthorized traffic which is optimized for outdoors security and ICS networks (Industrial Control System).
 
 
·
Vanadium - An IMSI Catcher Detector designed to protect cellular subscribers within a secured site against diversion of their mobile devices (calls and data) through unauthorized pseudo operators.
 
 
·
Rubidium – An easily operated SIEM (Security Information & Event Management) application, designed to manage CyberSeal’s products as well as third party network and cyber monitoring devices.
 
 
·
Gallium-PDS – An innovative passive detection system (PDS) for cell phones and other mobile devices.  Optimized for correctional facilities, Gallium-PDS detects and locates the use of illegal mobile devices to within an inmate’s cell.
 
Command and Control Systems
 
The development of communication and IT technology has significantly affected the security market.  Multiple security systems and technologies, sometimes supplied by different vendors, can now be integrated into a unified command and control system.  We offer three types of command and control systems:
 
 
·
Fortis4G – a fourth generation high-end comprehensive command and control system;
 
 
·
StarNet 2 -  our new security management system, or SMS, was launched in the latter part of 2015 and replaces the legacy StarNet 100; and
 
 
·
Network Manager – a middleware (software) package which is essential for integration with 3rd party control systems and offers an entry level alarm management system called AIM.
 
Fortis 4G
 
FORTIS4G is our latest Physical Security Information Management (PSIM) system.  It is a comprehensive, wide area and real time command and control solution, designed for entities requiring management of security, safety and site management as well as cyber events (Integrated PSIM with SEIM).  It is designed to manage daily routines and site activities, security, regular and irregular events as well as crisis situations.
 
FORTIS4G architecture integrates with legacy systems and sensors from the physical and logical (cyber) levels through a configuration and business logic layer and up to the situational awareness and management levels.  It is based on a strong GIS engine (Geospatial Information System), which creates a common layer for inputs, outputs and presentation.  The GIS engine enables the display of synchronized information in time and space across all screens such as location of mobile forces, located alarms from stationary sensors, video of related cameras, pop-ups of associated radar screens and managed voice communication related to the managed area.  Real-time information enables security personnel to respond immediately, while maintaining a full two-way communication and situational awareness between the command and control center(s) and the first responder(s). The target markets for Fortis4G are safe city applications, airports, seaports, border and homeland security applications. Fortis4G incorporates the advanced video management capacities with full IVA features:
 
 
·
Our investments in IVA tools help eliminate dependency on constant human monitoring.  Automatic tools and algorithms extract abnormalities and only irregular events are transferred and analyzed for verification.  This approach saves bandwidth and storage and more importantly requires human intervention only when needed.
 
 
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·
Our IVA / VMD have been developed to meet the challenge of the outdoor environment (such as weather effects, moving objects like trees, glare and flashing lights).
 
 
·
Our video solutions have a proven track record in high-end vertical markets that require outdoor security such as military bases, government organizations, airports, seaports, mass transportation, correctional facilities, utilities and industrial sites.
 
StarNet 2
 
StarNet 2, an SMS, is designed to manage basic sites, consisting of a PIDS with a few other devices.
 
Network Manager
 
Network Manager is a middleware (software) package interfacing between our family of PIDS sensors and any command and control solution, be it our own system or an external third party application. It is provided to integrators with a full software development kit to enable fast integration of our PIDS into any other SMS and physical security information system.  It offers an entry level operator display system called the Alarm Information Module (AIM), typically for management of a single PIDS sensor.
 
Other Products
 
Life Safety / Duress Alarm Systems
 
Our products include high reliability, personal, portable duress alarm systems to protect personnel in prisons.  These products identify individuals in distress and can pinpoint the location of the distress signal with an indoor-to-outdoor and floor-to-floor accuracy unmatched by any other product.
 
Flash and flare personal emergency locating systems use radio frequency technology to provide a one touch emergency system that can be worn on a belt.  The systems, sold to prisons, consist of transmitters that send distress signals to receivers mounted throughout the building.  Receivers relay the signal to a central location, indicating that someone requires assistance and their location in the building.  The systems employ an automated testing mechanism that helps to reduce maintenance costs.
 
PAS is another personal alarm system that uses an ultrasonic based emergency notification system. The system, sold mainly to prisons in the United States, allows individuals moving throughout a facility to quickly indicate their exact location in a crisis situation.
 
Marketing, Sales and Distribution
 
We believe that our reputation as a vendor of sophisticated security products in one of the world’s most security conscious countries often provides us and our sales representatives with direct access to senior government and corporate officials in charge of security matters elsewhere.
 
Our sales efforts focus on:
 
 
·
Products (mainly PIDS and cyber).  Products are sold indirectly through system integrators and distribution channels.  Due to the sophistication of our products, we often need to approach end-users directly and be in contact with system integrators; however sales are directed through third-parties.
 
 
·
Solutions.  This part of the business deals with end-customers or high-end system integrators.  We offer full comprehensive solutions, which include our in-house portfolio of products and products manufactured by third parties.  Solutions are focused around our core competencies -outdoor and cyber security, safety and site management.  In many cases we take responsibility for the full turnkey solution and we integrate and deliver a full solution, including civil works infrastructure, installation, training, warranty and after sale support. Cyber security is now offered as an integrated part of our comprehensive solutions.
 
 
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In addition to our two main sales offices in Israel and Canada, we have sales offices in the United States, Mexico, the United Kingdom, Germany, Spain, Romania, Russia, China, Singapore, Malaysia and Australia. We also have a joint venture in India covering this emerging market.
 
Customers
 
The following table shows the geographical breakdown of our consolidated revenues for the three years ended December 31, 2015:
 
   
Year Ended December 31,
 
   
2013
   
2014
   
2015
 
   
(In thousands)
 
North America                                                                      
  $ 13,614     $ 21,165     $ 17,749  
South and Latin America                                                                      
    3,118       8,813       13,443  
Israel                                                                      
    11,517       16,525       12,406  
Europe                                                                      
    7,311       9,591       7,891  
Africa                                                                      
    8,182       12,393       6,611  
Others                                                                      
    7,775       9,056       5,636  
Total                                                                
  $ 51,517     $ 77,543     $ 63,736  
 
For the years ended December 31, 2013, 2014 and 2015, revenues generated from sales to the MOD and IDF accounted for 15%, 14.8% and 13.3% of our revenues, respectively. Our revenues from the provision of the perimeter security solution to the port of Mombasa, Kenya accounted for 14.2%, 5.7% and 5% of our revenues in the years ended December 31, 2013, 2014 and 2015, respectively. In addition, revenues from the national electricity company in Latin America, or CFE, accounted for 6.4% and 18.1% of our revenues in 2014 and 2015, respectively. In 2013 revenues from this customer were less than 1% of our revenues. We cannot assure you that any of our major customers will maintain their level of business with us or that, if such business is reduced, other customers generating similar revenues will replace the lost business. The failure to replace these customers with one or more customers generating similar revenues will have a material adverse effect on our financial results.
 
Installation, Support and Maintenance
 
Our systems are installed by us or by the customer after appropriate training, depending on the size of the specific project and the location of the customer’s facilities, as well as on the customer’s prior experience with our systems.  We generally provide our customers with training on the use and maintenance of our systems, that we conduct either on-site or at our facilities.  In addition, some of our local perimeter security products customers have signed maintenance contracts with us.  The life expectancy of a high-security perimeter system is approximately ten years.  Consequently, many miles of perimeter systems need to be replaced each year.
 
For systems installed outside of Israel, maintenance is provided by an independent third party, by partners or by the end-user.  We also provide services, maintenance and support on an “as needed” basis. During the years ended December 31, 2013, 2014 and 2015, we derived approximately 16.7%, 8.6% and 16.6% of our total revenues, respectively, from maintenance and services.
 
Research and Development; Royalties
 
We place considerable emphasis on research and development to improve our existing products and technology and to develop new products and technology.  We believe that our future success will depend upon our ability to enhance our existing products and technology and to introduce on a timely basis new commercially viable products and technology addressing the needs of our customers.  We intend to continue to devote a significant portion of our personnel and financial resources to research and development.  As part of our product development process, we seek to maintain close relationships with our customers to identify market needs and to define appropriate product specifications.  Our development activities are a direct result of the input and guidance we receive from our marketing personnel during our annual meetings with such personnel.  In addition, the heads of research and development for each of our development centers discussed below meet annually to identify market needs for new products.
 
 
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We have development centers in Israel, Canada and the United States, each of which develops products and technologies based on its area of expertise:
 
 
·
In Israel - we develop a wide range of perimeter products including Smart barriers (taut wire, and integrated robust grids), vibration sensors, CCTV products (VMS, high end cameras and the RoboGuard system), high-end command and control systems (PSIM), seismic sensors (PipeGuard and TunnelGuard) and Cyber products.
 
 
·
In Canada - we develop our volumetric sensors (buried and terrain following), fence mounted detection systems (copper and zone based fiber-optic), microwave systems, personal alarm systems and small to medium control systems (SMS).
 
 
·
In the United States - we develop FiberPatrol - our new generation of ranging fiber-optic ranging sensors.
 
Our research and development expenses during 2013, 2014 and 2015 were $4.4 million, $4.6 million and $4.8 million, respectively.  In addition to our own research and development activities, we also acquire know-how from external sources.  We cannot assure you that any of our research and development projects will yield profitable results in the future.
 
Manufacturing and Supply
 
Our manufacturing operations consist of engineering, fabricating, assembly, quality control, final testing and shipping of finished products.  Substantially all of our manufacturing operations are currently performed at our facilities in Yehud, Israel and Ottawa, Canada.  See Item 4D. “Information on the Company - Property, Plants and Equipment.” Our cyber manufacturing operations are currently performed at our facilities in Tel Aviv, Israel.
 
We acquire most of the components utilized in our products, including our turnkey products, and certain services from a limited number of suppliers and subcontractors.  We cannot assure you that we will continue to be able to obtain such items from these suppliers on satisfactory terms.  Alternative sources of supply are available, and therefore we are not dependent upon these suppliers and subcontractors.  We also maintain an inventory of systems and spare parts in order to enable us to overcome potential temporary supply shortages until an alternate source of supply is available.  Nevertheless, temporary disruptions of our manufacturing operations would result if we were required to obtain materials from alternative sources, which may have an adverse effect on our financial results.
 
Competition
 
PIDS Sensors.  The principal factors affecting competition in the market for security systems are a system’s high probability for detection and low probability of false and nuisance alarms.  We believe that a manufacturer’s reputation for reliable equipment is a major competitive advantage, and that such a reputation will usually be based on the performance of the manufacturer’s installed systems.  Additional competitive factors include quality of customer support, maintenance and price.
 
The PIDS market is very fragmented.  Our competition includes Elfar Ltd. and RB-Tec Ltd. in Israel, and outside of Israel our competitors are South West Microwave Inc., Future Fiber Technologies, Optasense, Detection Security Systems Inc., Fiber Sensys Inc., Geoquip Ltd., GPS Standard SpA, Cias Elettronica, Srl and Gallagher (Australia).
 
We believe that our principal competitors for our pipeline security products (FiberPatrol and PipeGuard) are Future Fibre Technologies Pty. Ltd., Optasense, OmniSense and FOTech and that our principal competitors for personal emergency location systems are Actall Corp. and Visonic Networks.
 
There are a large number of entrants into the cyber security market which is still in its embryonic phase, but is expected to mature and grow rapidly over the next few years.
 
Turn Key Projects and Solutions.   Thousands of solution providers offer security products and services.  Most of the integrators focus on indoor applications, but some also offer outdoor solutions.  Most of the market players are local to their countries; however some are global, such as ADT, Honeywell and Siemens.  In some cases we may cooperate with global integrators or may supply equipment to them.  We believe that our principal competitors in Israel for security solutions are C. Mer Industries Ltd., Afcon Industries Ltd., Shamrad Electronics (1977) Ltd., EL-FAR Electronics Systems and Orad Ltd.
 
 
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Some of our competitors and potential competitors have greater research, development, financial and personnel resources, including governmental support, or more extensive business experience than we do.  We cannot assure you that we will be able to maintain the quality of our products relative to those of our competitors or continue to develop and market new products effectively.
 
Intellectual Property Rights
 
We have 7 patents issued and have 2 patent applications pending in the U.S. and in several other countries and have obtained licenses to use proprietary technologies developed by third parties.  We cannot assure you:
 
 
·
that patents will be issued from any pending applications, or that the claims allowed under any patents will be sufficiently broad to protect our technology;
 
 
·
that any patents issued or licensed to us will not be challenged, invalidated or circumvented; or
 
 
·
as to the degree or adequacy of protection any patents or patent applications may or will afford.
 
In addition, we claim proprietary rights in various technologies, know-how, trade secrets and trademarks relating to our principal products and operations.  We cannot assure you as to the degree of protection these claims may or will afford.  It is our policy to protect our proprietary rights in our products and operations through contractual obligations, including confidentiality and non-disclosure agreements with certain employees and distributors.  We cannot assure you as to the degree of protection these contractual measures may or will afford.  Although we are not aware that we are infringing upon the intellectual property rights of others, we cannot assure you that an infringement claim will not be asserted against us in the future.  We believe that our success is less dependent on the legal protection that our patents and other proprietary rights may or will afford than on the knowledge, ability, experience and technological expertise of our employees.  We cannot provide any assurance that we will be able to protect our proprietary technology.  The unauthorized use of our proprietary technology by third parties may impair our ability to compete effectively.  We could become subject to litigation regarding intellectual property rights, which could seriously harm our business.
 
We have registered trademarks for ULTRAWAVE design, E-FIELD, FIBERPATROL, FLARE, FLEXPI, FLEXPS, FLEXZONE, GUIDAR, INTELLI-FIELD, LOGO DESIGN (old Senstar), MISCELLANEOUS DESIGN (Stellar logo), OMNITRAX, PANTHER, PERIMITRAX, PINPOINTER, REPELS, SENNET, SENSTAR, SENSTAR & DESIGN, SENTIENT, XFIELD, MAGAL, DTR, FORTIS, DREAMBOX, MAESTRO DB, FENSOR and ROBOGUARD.
 
INTELLI-FLEX, INTELLIFIBER, STARLED, STARNET, ARMOURFLEX, FLASH, FLEXZONE, CYBERSEAL, the Magal logo, Tungsten, Rubidium, Gallium-PDS, Vanadium and all other marks used to identify particular products and services associated with our businesses are unregistered trademarks.  Any other trademarks and trade names appearing in this annual report are owned by their respective holders.
 
Government Regulations
 
Current Israeli governmental policy encourages the export of security related products to approved customers, as long as the export is consistent with Israeli government policy.  We are also subject to regulations related to the export of “dual use” items (items that are typically sold in the commercial market, but which may also be used for military use).  Israel enhanced enforcement of export control legislation under the Defense Export Control Law, 2007, under which a license is required to initiate marketing activities and a specific export license is required for any hardware, software and knowhow exported from Israel.  The law provides for certain exemptions from the licensing requirement and broadens certain areas of licensing, particularly with respect to transfer of technology.
 
At present, only a limited number of our products require a permit or license for export. We cannot assure that we will receive all the required permits and licenses for which we may apply in the future. In addition, our participation in governmental procurement processes in Israel and other countries is subject to specific regulations governing the conduct of the process of procuring defense contracts.  Furthermore, solicitations for procurements by governmental purchasing agencies in Israel and other countries are governed by laws, regulations and procedures relating to procurement integrity, including avoiding conflicts of interest and corruption in the procurement process.
 
 
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In addition, antitrust laws and regulations in Israel and other countries often require governmental approvals for transactions that are considered to limit competition.  Such transactions may include cooperative agreements for specific programs or areas, as well as mergers and acquisitions.
 
C.            Organizational Structure.
 
We have wholly owned active subsidiaries that operate in Israel (CyberSeal), Canada, the United States, Colombia, Germany, Mexico, the United Kingdom, Romania and Spain. We also own 51% of the outstanding capital stock of our Indian subsidiary.   Set forth below are our significant subsidiaries.
 
Subsidiary Name
 
Country of Incorporation/Organization
 
Ownership Percentage
Senstar Corp
 
Canada
 
100%
Senstar Inc.
 
United States
 
100%
Senstar Latin America, S.A. DE C.V
 
Mexico
 
100%
 
D.            Property, Plants and Equipment.
 
We own a two-story 2,533 square meter facility located on a 4,352 square meter parcel in the Yehud Industrial Zone, Israel, which is used as our principal facility.  Approximately 600 square meters are devoted to administrative, marketing and management functions and approximately 800 square meters are used for engineering, system integration and customer service.  We use the remaining area of approximately 1, 100 square meters for production management and production operations, including manufacturing, assembly, testing, warehousing, shipping and receiving.  We also lease a one-story 810 square meter facility located on a 1,820 square meter parcel in the Yehud Industrial Zone for $102,000 per year for use in production and operations.  The lease terminates in 2029.  The products that we manufacture at our facilities in the Yehud Industrial Zone include our taut-wire intrusion detection systems, our vibration detection systems, our video-motion detection systems, Fortis4G, MTC-1500, MSS-1500 and other perimeter systems.
 
We own a 33,000 square foot facility in Carp, Ontario, Canada.  Approximately 9,000 square feet are devoted to administrative, marketing and management functions, and approximately 8,000 square feet are used for engineering, system integration and customer service.  We use the remaining area of approximately 16,000 square feet for production operations, including cable manufacturing, assembly, testing, warehousing, shipping and receiving.  We own an additional 182,516 square feet of vacant land adjacent to this property, which is being held for future expansion.  We also lease 358,560 square feet of land near this facility for use as an outdoor sensor test and demonstration site for our products including the Omnitrax buried cable intrusion detection system, the X-Field volumetric system, the FlexZone microphonic fence detection system, Flash and Flare, and various perimeter monitoring and control systems.  The lease for this site is approximately $3,500 per year plus taxes under a lease that expires in November 2024.  In addition, we lease a 1,900 square feet facility adjacent to our Carp, Ontario property for use as additional storage and system integration space under a month to month tenancy costing approximately $1,300 per month.
 
In June 2012, we purchased 1,408 square meters of vacant land in Cuernavaca, Mexico, on which we built a 999 square meter facility for our Mexican subsidiary. This facility officially opened in August 2013.
 
We also lease small office spaces in China, Germany, Romania, Spain, the United Kingdom, India and Singapore and have offices in Virginia, Pennsylvania and California in the United States. The aggregate annual rent for such offices was approximately $615,000 in 2015.
 
We believe that our facilities are suitable and adequate for our current operations and the foreseeable future.
 
 
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ITEM 4A.               Unresolved Staff Comments
 
Not applicable.
 
Operating and Financial Review and Prospects
 
The following discussion of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this annual report.  This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in Item 3.D. “Key Information–Risk Factors.”
 
A.            Operating Results.
 
Overview
 
We develop, manufacture, market and sell complex computerized security systems.  Our systems are used in more than 80 countries to protect aircraft, national borders and sensitive facilities, including military bases, power plant installations, airports, postal facilities, prisons, Olympic villages and stadiums and industrial locations from terrorism, theft and other security threats.
 
Our revenues are derived from our three operating segments:
 
 
·
Perimeter Products segment - sales of perimeter products, including services and maintenance that are performed either on a fixed-price basis or pursuant to time-and-materials based contracts.
 
 
·
Turnkey Projects segment - installation of comprehensive turnkey solutions for which revenues are generated from long-term fixed price contracts.
 
 
·
Cyber Security segment - provides hardware and software products, in the field of Cyber security, for monitoring, securing, and the active management of wired, wireless, and fiber optic communication networks.
 
Perimeter Products Segment
 
The Perimeter Products segment sells its products worldwide and this segment includes mainly the operations of Senstar Canada, Senstar Germany, Senstar UK, Senstar Inc. and Senstar U.S. as one reporting unit within the Perimeter Products segment.  The Israeli operations of the Perimeter Products segment are considered as separate reporting units within that segment.
 
Turnkey Projects Segment
 
The Turnkey Projects segment has operations worldwide and the segment includes a number of reporting units operating in Israel, Mexico, Romania, Colombia, India, Spain and a division of Senstar Canada.
 
Cyber Security Segment
 
The Cyber Security segment operates mainly in the U.S. and in Israel. As of December 31, 2015, this segment mainly includes the operations of CyberSeal Ltd.
 
Business Challenges/Areas of Focus
 
Our primary business challenges and areas of focus include:
 
 
·
continuing the growth of revenues and profitability of our perimeter security system line of products;
 
 
·
enhancing the introduction and recognition of our new products into the markets;
 
 
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·
penetrating new markets and strengthening our presence in existing markets;
 
 
·
succeeding in selling our comprehensive turnkey solutions; and
 
 
·
succeeding in selling our comprehensive physical and cyber products as a combined solution.
 
Our business is subject to the effects of general global economic conditions.  If general economic conditions or economic conditions in key markets will be uncertain or weaken further, demand for our products could be adversely affected.
 
Key Performance Indicators and Sources of Revenues
 
Our management believes that our revenues and operating income are the two key performance indicators for our business.
 
Our revenues from our perimeter products, turnkey projects and Cyber segments for the three years ended December 31, 2015 were as follows:
 
   
Year Ended December 31,
 
   
2013
   
2014
   
2015
 
   
(In thousands)
 
Perimeter products                                                                      
  $ 30,551     $ 37,554     $ 30,761  
Turnkey projects                                                                      
    20,137       39,198       34,128  
Cyber                                                                      
    1,638       1,329       1,596  
Eliminations                                                                      
    (809 )     (538 )     (2,749 )
Total                                                                
  $ 51,517     $ 77,543     $ 63,736  
 
The decrease in revenues from products and turnkey projects was primarily due to the completion of several projects in certain territories at the end of 2014. In addition, we faced a decrease in governmental spending in certain territories in 2015, while in 2014, we benefited  from an increase in governmental spending in certain territories compared to 2013.
 
Our operating income (loss) from our perimeter products, turnkey projects and Cyber segments for the three years ended December 31, 2015 were as follows:
 
   
Year Ended December 31,
 
   
2013
   
2014
   
2015
 
   
(In thousands)
 
Perimeter products                                                                      
  $ 542     $ 6,770     $ 6,023  
Turnkey projects                                                                      
    (3,571 )     (148 )     1,095  
Cyber                                                                      
    (1,184 )     (4,995 )     (1,684 )
Eliminations                                                                      
    (306 )     (204 )     (1,045 )
Total                                                                
  $ (4,519 )   $ 1,423     $ 4,389  
 
Our operating profit improved in 2015 as a result of profitable operations in the turnkey projects segment and a $3.3 million decrease in the operating loss of our Cyber segment which recorded charges of $2.4 million for the impairment of goodwill and intangible assets in the year ended December 31, 2014.  We also benefitted from  the positive impact of the depreciation of the NIS and the CAD against the U.S. dollar in 2015.
 
Key Factors Affecting our Business
 
Our operations and the operating metrics discussed below have been, and will likely continue to be affected by certain key factors as well as certain historical events and actions. The key factors affecting our business and results of operations include among others, reliance on large orders from a small number of customers, reliance on government contracts and competition. For further discussion of the factors affecting our results of operations, see “Risk factors.”
 
 
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Reliance on large orders from a small number of customers
 
We receive relatively large orders for products from a relatively small number of customers. Consequently, a single order from one customer may represent a substantial portion of our sales in any one period and significant orders by any customer during one period may not be followed by further orders from the same customer in subsequent periods. Our sales and operating results are subject to very substantial periodic variations. Since quarterly performance is likely to vary significantly, our results of operations for any quarter or calendar year are not necessarily indicative of the results that we might achieve for any subsequent period. Accordingly, quarter-to-quarter and year-to-year comparisons of our operating results may not be meaningful. In addition, we have a limited order backlog that is generally composed of orders that are fulfilled within a period of three to twelve months after receipt, which makes revenues in any quarter substantially dependent upon orders received in prior quarters.
 
Growth Strategy
 
In the last quarter of 2013 we adopted a growth strategy beyond the core of our PIDS activity. Pursuant to this growth strategy, we determined to focus our business on our sensor activity, expand our sales channels and close certain technology gaps in response to new demands in the market place.  We intend to continue to implement the plan though organic growth and investment through in the acquisition of businesses, products and technologies that complement our security business within the PIDS and Cyber fields.
 
We may not be able to implement our growth strategy plan and may not be able to successfully expand our business activity and increase our sales.  If we are successful in the implementation of our strategic plan, we may be required to hire additional employees in order to meet customer demands. If we are unable to attract or retain qualified employees, our business could be adversely affected.
 
Our failure to successfully integrate the operations of an acquired business or to retain key employees of acquired businesses and integrate and manage our growth may have a material adverse effect on our business, financial condition, results of operation or prospects.  We may not be able to realize the anticipated benefits of any acquisition.  Moreover, future acquisitions by us could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to identifiable intangible assets, any of which could materially adversely affect our operating results and financial position.  Acquisitions also involve other risks, including risks inherent in entering markets in which we have no or limited prior experience.
 
Reliance on government contracts
 
Our products are primarily sold to governmental agencies, governmental authorities and government-owned companies, many of which have complex and time consuming procurement procedures.  A substantial period of time often elapses from the time we begin marketing a product until we actually sell that product to a particular customer.  In addition, our sales to governmental agencies, authorities and companies are directly affected by these customers’ budgetary constraints and the priority given in their budgets to the procurement of our products.  A decrease in governmental funding for our customers’ budgets would adversely affect our results of operations.  This risk is heightened during periods of global economic slowdown. Accordingly, governmental purchases of our systems, products and services may decline in the future if governmental purchasing agencies terminate, reduce or modify contracts.
 
Competition
 
The global market for safety, security, site management solutions and products is highly fragmented and intensely competitive.  It is characterized by changing technology, new product introductions and changing customer requirements.  We compete principally in the market for perimeter intrusion detection systems, or PIDS, and turnkey projects and solutions.  Some of our competitors and potential competitors have greater research, development, financial and personnel resources, including governmental support.  We cannot assure you that we will be able to maintain the quality of our products relative to those of our competitors or continue to develop and market new products effectively. Continued competitive pressures could cause us to lose significant market share.
 
 
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Explanation of Key Income Statement Items
 
Cost of revenues.  Our cost of revenues for perimeter products consists of component and material costs, direct labor costs, subcontractor costs, shipping expenses, overhead related to manufacturing and depreciation.  Our cost of revenues for turnkey projects consists primarily of component and material costs, subcontractor costs, direct labor costs and overhead related to the turnkey projects. Our cost of revenues for Cyber sales consists primarily of direct labor costs, some component, material and subcontractor costs and overhead related to those sales.
 
Our gross margin is affected by the proportion of our revenues generated from perimeter products, turnkey projects and the Cyber segment.  Our revenues from perimeter products generally have higher gross margins than our other segments.
 
Research and development expenses, net.  Research and development expenses, net consists primarily of expenses for on-going research and development activities and other related costs.
 
Selling and marketing expenses.  Selling and marketing expenses consist primarily of commission payments, compensation and related expenses of our sales teams, attendance at trade shows and advertising expenses and related costs for facilities and equipment.
 
General and administrative expenses.  Our general and administrative expenses consist primarily of salary and related costs associated with our executive and administrative functions, public company related expenses, legal and accounting expenses, allowances for doubtful accounts and bad debts and other miscellaneous expenses.  Staff costs include direct salary costs and related costs, such as severance pay, social security and retirement fund contributions, vacation and other pay.
 
Depreciation and Amortization. The amount of depreciation and amortization attributable to our perimeter products, turnkey projects and Cyber segments for the three years ended December 31, 2015 were as follows:
 
   
Years Ended December 31,
 
   
2013
   
2014
   
2015
 
   
(in thousands)
 
Perimeter products                                                                      
  $ 606     $ 1,006     $ 787  
Turnkey projects                                                                      
    629       641       602  
Cyber                                                                      
    484       320       114  
Total                                                                      
  $ 1,719     $ 1,967     $ 1,503  
 
Impairment of goodwill and intangible assets. During 2014, there was a significant decrease in our legacy Cyber activities. Based on the annual impairment test conducted during the fourth quarter of 2014, we concluded that an impairment charge with respect to our goodwill and intangible assets associated with the Cyber segment was required.  Accordingly, we recorded a non-cash $2.4 million impairment charge with respect to goodwill and intangible assets attributable to our Cyber segment. During the years ended December 31, 2013 and 2015, the Company did not record any impairment charges relating to the goodwill.
 
Financial Expenses, Net. Financial expenses, net include exchange rate differences arising from changes in the value of monetary assets and monetary liabilities stated in currencies other than the functional currency of each entity, currency and hedge transactions, interest charged on loans from banks as well as interest income on our cash and cash equivalents and short term investments.
 
Discussion of Critical Accounting Policies
 
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and the use of different assumptions would likely result in materially different results of operations.  Critical accounting policies are those that are both most important to the portrayal of our financial position and results of operations and require management’s most difficult, subjective or complex judgments.  Although not all of our significant accounting policies require management to make difficult, subjective or complex judgments or estimates, the following policies and estimates are those that we deem most critical.
 
 
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Revenue Recognition
 
We generate our revenues mainly from (i) long-term fixed price contracts for installation of comprehensive turnkey systems; (ii) sales of products; and (iii) services and maintenance, which are performed either on a fixed-price basis or as time-and-materials based contracts.
 
Revenues from installation of comprehensive turnkey systems are generated from fixed-price contracts according to which the time between the signing of the contract and the final customer acceptance is usually over one year.  Such contracts require significant customization for each customer’s specific needs and, as such, revenues from this type of contract are recognized in accordance with ASC, 605-35 “Revenue Recognition -Construction-Type and Production-Type Projects,” using contract accounting on a percentage of completion method.  Accounting for long-term contracts using the percentage-of-completion method stipulates that revenue and expense are recognized throughout the life of the contract, even though the project is not completed and the purchaser does not have possession of the project.  Percentage of completion is calculated based on the “Input Method.”
 
Turnkey projects costs include materials purchased to produce the solutions, related labor and overhead expenses and subcontractor’s costs.  The percentage to completion is measured by monitoring costs and efforts devoted using records of actual costs incurred to date in the project compared to the total estimated project requirement, which corresponds to the costs related to earned revenues.  The amounts of revenues recognized are based on the total fees under the agreements and the percentage of completion achieved.  Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contract.
 
Estimated gross profit or loss from long-term contracts may change due to changes in estimates resulting from differences between actual performance and original forecasts.  Such changes in estimated gross profit are recorded in results of operations when they are reasonably determinable by management, on a cumulative catch-up basis.
 
We believe that the use of the percentage of completion method is generally appropriate as we have the ability to make reasonably dependable estimates of the extent of progress towards completion, contract revenues and contract costs.  In addition, executed contracts include provisions that clearly specify the enforceable rights regarding services to be provided and received by the parties to the contracts, the consideration to be exchanged and the manner and the terms of settlement, including in cases of termination for convenience.  In most cases we expect to perform our contractual obligations and our customers are expected to satisfy their obligations under the contract.
 
Fees are payable upon completion of agreed upon milestones and subject to customer acceptance. Revenues recognized in advance of contractual billing are recorded as unbilled accounts receivable.  The period between most instances of advanced recognition of revenues and the billing of the customers generally ranges between one to six months.  As of December 31, 2015, we had recorded $5.6 million of such unbilled receivables.
 
We also sell security products to customers according to customer orders without performing any installation work. Revenues from security product sales are recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements,” or SAB No. 104, 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. Customers do not have a right to return the products.
 
Services and maintenance are performed under either fixed-price based or time-and-materials based contracts.  Under fixed-price contracts, we agree to perform certain work for a fixed price.  Under time-and-materials contracts, we are reimbursed for labor hours at negotiated hourly billing rates and for materials.  Such service contracts are not in the scope of  ASC 605-35, and accordingly, related revenues are recognized in accordance with SAB No. 104, as those services are performed or over the term of the related agreements provided that, an evidence of an arrangement has been obtained, fees are fixed and determinable and collectability is reasonably assured.
 
 
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Deferred revenue includes unearned amounts under installation service contracts, service contracts and maintenance agreements.
 
Inventories
 
Inventories are stated at the lower of cost or market value.  We periodically evaluate the quantities on hand relative to historical and projected sales volumes, current and historical selling prices and contractual obligations to maintain certain levels of parts.  Based on these evaluations, inventory write-offs are provided to cover risks arising from slow-moving items, discontinued products, excess inventories, market prices lower than cost and adjusted revenue forecasts.  Cost is determined as follows:
 
 
·
Raw materials, parts and supplies - using the “first-in, first-out” method.
 
 
·
Work-in-progress and finished products - on the basis of direct manufacturing costs with the addition of allocable indirect manufacturing costs.
 
During the years ended December 31, 2013, 2014 and 2015 we recorded inventory write-offs from continuing operations in the amounts of $0.6 million, $0.4 million and $0.5 million, respectively.  Such write-offs were included in cost of revenues.
 
Income taxes
 
We account for income taxes in accordance with ASC 740 “Income Taxes.”  This statement prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
 
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.  This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.  We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and we must establish a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.  Increases in the valuation allowance result in additional expense to be reflected within the tax provision in the consolidated statement of income.
 
As of December 31, 2015, we had a net deferred tax asset of $0.9 million attributable to our subsidiaries.  We had total estimated available tax loss carryforwards of $11.8 million with respect to our operations in Israel, and our non-Israeli subsidiaries had estimated total available tax loss carryforwards of $10.1 million, of which $7.1 million was attributable to our U.S. subsidiaries, which may be used as an offset against future taxable income for periods ranging between 1 and 20 years.  As of December 31, 2015, we recorded a partial valuation allowance on these carryforward tax losses due to the uncertainty of their future realization.  Utilization of U.S. net operating losses may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions.  The annual limitation may result in the expiration of net operating losses before utilization.
 
Goodwill
 
We have recorded goodwill as a result of acquisitions, which represents the excess of the cost over the net fair value of the assets of the businesses acquired.  We follow ASC 350, “Intangibles – Goodwill and Other,” which requires goodwill to be tested for impairment, at the reporting unit level, at least annually or between annual tests in certain circumstances, and written down when impaired, rather than being amortized.  We perform our annual goodwill impairment test at December 31 of each year, or more often if indicators of impairment are present.
 
ASC 350 prescribes a two phase process for impairment testing of goodwill.  The first phase screens for impairment, while the second phase (if necessary) measures impairment.  In the first phase of impairment testing, goodwill attributable to each of the reporting units is tested for impairment by comparing the fair value of each reporting unit with its carrying value.  If the carrying value of the reporting unit exceeds its fair value, the second phase is then performed.  The second phase of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.  Fair value is determined using discounted cash flows, based on the income approach, as we believe that this approach best approximates the reporting unit’s fair value at this time.  Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates and weighted average cost of capital for each of the reportable units.
 
 
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The goodwill on our balance sheet as of December 31, 2015 relates to certain of our subsidiaries within the Perimeter Products segment (including with respect to our acquisition of a U.S. based fiber company in 2014) and to our Cyber segment.
 
The material assumptions used for the goodwill annual impairment test for the Perimeter Products segment, according to the income approach for 2015 were five years of projected net cash flows, a weighted average cost of capital rate of 16% and a long-term growth rate of 1%. Our company considered historical rates and current market conditions when determining the discount and growth rates to use in its analyses. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our goodwill. During the years ended December 31, 2013, 2014 and 2015, we did not record any impairment charges relates to the goodwill allocated to the reporting unit within the Perimeter Products segment.
 
The material assumptions used for the goodwill annual impairment test for the Cyber segment (which comprises one reporting unit), according to the income approach for 2015 were five years of projected net cash flows, a weighted average cost of capital rate of 16% and a long-term growth rate of 3%. We considered current market conditions when determining the discount and growth rates to use in our analyses. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our goodwill.
 
During the years ended December 31, 2013 and 2015, we did not record any impairment charges.
 
In our 2014 annual impairment test, the first step indicated that the carrying amount of such reporting unit, including goodwill, exceeded its fair value. The second step was then conducted in order to measure the amount of impairment loss, by means of a comparison between the implied fair value of the goodwill and the carrying amount of the goodwill. In the second step, we assigned the fair value of the reporting unit within the Cyber segment, as determined in the first step, to the reporting unit’s individual assets and liabilities, including intangible assets. The excess of the fair value of the Cyber segment reporting unit over the amounts assigned to its assets and liabilities represented the amount of the implied fair value of goodwill. The carrying amount of the goodwill over its implied fair value represented an impairment loss of goodwill in the amount of $2.1 million.
 
Intangible assets
 
Our intangible assets are comprised of patents, acquired technology, customer relations and backlog. Intangible assets are amortized over their useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, in accordance with ASC 350, “Intangibles - Goodwill and Other.”
 
Impairment of long lived assets
 
We periodically evaluate our intangible assets and long-lived assets (mainly property and equipment) in all of our reporting units for potential impairment indicators in accordance with ASC 360, “Property, Plant and Equipment”, or “ASC 360”.  Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions, operational performance and prospects of our acquired businesses and investments. Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. In measuring the recoverability of assets, we are required to make estimates and judgments in assessing our future cash flows which derive from the estimated useful life of our current primary assets, and compare that with the carrying amount of the assets. Additional significant estimates used by management in the methodologies employed to assess the recoverability of our long-lived assets include estimates of future short-term and long-term growth rates, useful lives of assets, market acceptance of products and services, our success in winning bids and other judgmental assumptions, which are also affected by factors detailed in our risk factors section in this annual report.

 
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During 2014, we recorded an impairment charge for intangible assets allocated to the reporting unit within the Cyber segment in the amount of $ 0.3 million. During the years ended December 31, 2013 and 2015, we did not record any impairment charges relating to intangible assets.
 
Functional Currency and Financial Statements in U.S. Dollars
 
While our functional currency in Israel is the NIS, our reporting currency is the U.S. dollar.  Translation adjustments resulting from translating our financial statements from NIS to the U.S. dollar are reported as a separate component in shareholders’ equity.  As of December 31, 2013, 2014 and 2015, our foreign currency translations totaled $4.6 million, $0.6 million and $0.4 million, respectively.
 
During the years ended December 31, 2013, 2014 and 2015, we recorded accumulated foreign currency translation loss of approximately $0.9 million, $1.8 million and $3.9 million, respectively.  As of December 31, 2013, 2014 and 2015, foreign currency translation adjustments, net of $3.9 million, $2 million and $(1.9) million, respectively, were included under “accumulated other comprehensive income.”
 
The first step in the translation process is to identify the functional currency for each entity included in the financial statements.  The accounts of each entity are then “re-measured” in its functional currency.  All transaction gains and losses from the re-measurement of monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate. Non-monetary assets and liabilities denominated in foreign currency and measured at cost are translated at the exchange rate at the date of the transaction.
 
After the re-measurement process is complete the financial statements are translated into our reporting currency, which is the U.S. dollar, using the current rate method.  Equity accounts are translated using historical exchange rates.  All other balance sheet accounts are translated using the exchange rates in effect at the balance sheet date.  Statement of operations amounts have been translated using the average exchange rate for the year.  The resulting translation adjustments are reported as a component of shareholders’ equity in accumulated other comprehensive income (loss).
 
Concentrations of credit risk
 
Financial instruments that are potentially subject to concentrations of credit risk consist principally of cash and cash equivalents, short and long-term bank deposits, unbilled accounts receivable, trade receivables, long-term trade receivables and long-term loans.
 
Of our cash and cash equivalents and short-term and restricted bank deposits at December 31, 2015, $16.3 million was deposited with major Israeli banks.  An additional $14.9 million was deposited mainly with the Royal Bank of Canada, BBVA Bankcomer, Comerica Bank, Deutsche Bank, La Caixa and TD Bank. Cash and cash equivalents deposited with U.S. banks or other banks may be in excess of insured limits and are not insured in other jurisdictions.  Generally these deposits maybe redeemed upon demand and therefore bear low risk.
 
The short-term and long-term trade receivables and the unbilled accounts receivable of our company and our subsidiaries are derived from sales to large and solid organizations located mainly in Israel, the United States, Canada, Africa, Mexico and Europe.  We perform ongoing credit evaluations of our customers and to date have not experienced any material losses.  An allowance for doubtful accounts is determined with respect to those amounts that we have determined to be doubtful of collection and in accordance with an aging policy.  In certain circumstances, we may require letters of credit, other collateral or additional guarantees.  During the years ended December 31, 2013, 2014 and 2015 we recorded $0.2 million, $1.2 million and $0.7 million of expenses related to doubtful accounts, respectively.  As of December 31, 2015, our allowance for doubtful accounts amounted to $2.3 million.
 
We have no significant off-balance sheet concentration of credit risks, such as foreign exchange contracts or foreign hedging arrangements, except derivative instruments, which are detailed below.
 
 
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Results of Operations
 
In 2015, we faced a decrease in governmental spending in certain territories compared to 2014, while in 2014, we benefitted from an increase in governmental spending in certain territories compared to 2013. We believe that this trend is continuing and that government spending in certain territories will continue to decline.
 
Due to the nature of our customers and products, our revenues are often generated from a relatively small number of large orders.  Consequently, individual orders from individual customers can represent a substantial portion of our revenues in any one period and significant revenues from a customer during one period may not be followed by additional significant revenues from the same customer in subsequent periods.  Accordingly, our revenues and operating results may vary substantially from period to period.  Consequently, we do not believe that our revenues and operating results should necessarily be judged on a quarter-to-quarter comparative basis.
 
The following table presents certain financial data expressed as a percentage of revenues for the periods indicated:
 
   
Year Ended December 31,
 
   
2013
   
2014
   
2015
 
Revenues
    100 %     100 %     100 %
Cost of revenues
    60.3       55.5       51.3  
Gross profit
    39.7       44.5       48.7  
Operating expenses:
                       
Research and development, net
    8.6       5.9       7.6  
Selling and marketing, net
    24.8       22.1       23.2  
General and administrative
    15.1       11.5       11.0  
Impairment of goodwill and intangible assets
    -       3.1       -  
Operating income (loss)
    (8.8 )     1.8       6.9  
Financial income (expenses), net
    0.1       2.6       1.0  
Income (loss) before income taxes
    (8.7 )     4.4       7.9  
Taxes on income
    (0.1 )     (0.1 )     (3.0 )
Net income (loss)
    (8.8 )     4.3       4.9  
 
Year Ended December 31, 2015 Compared with Year Ended December 31, 2014
 
Revenues. Revenues decreased by 17.8% to $63.7 million for the year ended December 31, 2015 from $77.5 million for the year ended December 31, 2014.  Revenues from sales of perimeter systems decreased by 18% to $30.8 million in 2015 from $37.6 million in 2014, primarily due to the depreciation of the NIS and the CAD against the U.S. dollar and to the completion of a large order in 2014 in North America.  Revenues from turnkey projects decreased by 12.9% to $34.1 million in 2015 from $39.2 million in 2014, primarily due to a decrease in governmental spending.
 
Cost of revenues. Cost of revenues decreased by 24% to $32.7 million for the year ended December 31, 2015 from $43 million for the year ended December 31, 2014.  This decrease was primarily due to the decrease in revenues.  Cost of revenues as a percentage of revenues decreased to 51.3% in 2015 from 55.5% in 2014, primarily due to the mix of products sold and projects completed and  the depreciation of the NIS and the CAD against the U.S. dollar in 2015.
 
Research and development expenses, net.  Research and development expenses, net increased by 4.6% to $4.8 million for the year ended December 31, 2015 from $4.6 million for the year ended December 31, 2014.
 
Selling and marketing expenses, net.  Selling and marketing expenses, net decreased by 13.7% to $14.8 million for the year ended December 31, 2015 from $17.1 million for the year ended December 31, 2014.  The decrease in selling and marketing expenses in 2015 was primarily due to a decrease in sales commissions as a result of the decrease in revenues and due to the positive impact of the depreciation of the NIS and the CAD against the U.S. dollar in 2015. Selling and marketing expenses amounted to 23.2% and 22.1% of revenues in 2015 and 2014, respectively.
 
 
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General and administrative expenses.  General and administrative expenses decreased by 21% to $7 million for the year ended December 31, 2015 from $8.9 million for the year ended December 31, 2014.  The decrease in general and administrative expenses in 2015 was primarily due to a decrease in compensation to our management, as well as due to the positive impact of the depreciation of the NIS and the CAD against the U.S. dollar in 2015. General and administrative expenses amounted to 11% of revenues in 2015 compared to 11.5% in 2014.
 
Operating income.  We had operating income of $4.4 million for the year ended December 31, 2015 compared to operating income of $1.4 million for the year ended December 31, 2014.  The operating income (loss) of our business segments for the years ended December 31, 2015 and 2014 were as follows:
 
   
Year Ended December 31,
 
   
2014
   
2015
 
   
(In thousands)
 
Perimeter products                                                                      
  $ 6,770     $ 6,023  
Turnkey projects                                                                      
    (148 )     1,095  
Cyber                                                                      
    (4,995 )     (1,684 )
Eliminations                                                                      
    (204 )     (1,045 )
Total                                                                      
  $ 1,423     $ 4,389  
 
Our perimeter products segment recorded operating income of $6 million for the year ended December 31, 2015 compared to operating income of $6.8 million for the year ended December 31, 2014, primarily as a result of a decrease in sales due to a large order that we completed in 2014 in North America. Our turnkey project segment recorded operating income of $1.1 million in the year ended December 31, 2015 compared to an operating loss of $0.1 million for the year ended December 31, 2014. Our Cyber segment recorded an operating loss of $1.7 million in the year ended December 31, 2015 compared to an operating loss of $5.0 million for the year ended December 31, 2014, mainly due to the $2.4 million of charges for the impairment of goodwill and intangible assets we recorded in the year ended December 31, 2014.
 
Financial income, net.  Our financial income, net, for the year ended December 31, 2015 was $0.6 million compared to financial income, net of $2.0 million for the year ended December 31, 2014.  The decrease in financial income in 2015 was primarily attributable to lower foreign exchange rate income, net in the year ended December 31, 2015 compared to foreign exchange rate income, net in the year ended December 31, 2014.
 
Income taxes. We recorded taxes on income of $1.9 million for the year ended December 31, 2015 compared to taxes on income of $0.1 million for the year ended December 31, 2014. The increase in taxes in 2015 was primarily due to increased withholding taxes that were paid by some of our subsidiaries.
 
Year Ended December 31, 2014 Compared with Year Ended December 31, 2013
 
Revenues.  Revenues increased by 50.5% to $77.5 million for the year ended December 31, 2014 from $51.5 million for the year ended December 31, 2013.  Revenues from sales of perimeter systems increased by 22.9% to $37.6 million in 2014 from $30.6 million in 2013, primarily due to improved economic conditions in North America and Europe.  Revenues from turnkey projects increased by 94.7% to $39.2 million in 2014 from $20.1 million in 2013, primarily due to the release of government budgets.
 
Cost of revenues. Cost of revenues increased by 38.6% to $43 million for the year ended December 31, 2014 from $31.1 million for the year ended December 31, 2013.  This increase was primarily due to the increase in revenues.  Cost of revenues as a percentage of revenues decreased to 55.5% in 2014 from 60.3% in 2013, primarily due to the higher volume of revenues in 2014 compared to 2013. Our cost of revenues as a percentage of revenues was negatively impacted by the appreciation of the NIS and the CAD against the U.S. dollar in 2014.
 
 
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Research and development expenses, net.  Research and development expenses, net increased by 4.4% to $4.6 million for the year ended December 31, 2014 from $4.4 million for the year ended December 31, 2013. The increase in research and development expenses in 2014 was primarily due to the acquisition of the fiber company.
 
Selling and marketing expenses, net.  Selling and marketing expenses, net increased by 34% to $17.1 million for the year ended December 31, 2014 from $12.8 million for the year ended December 31, 2013.  The increase in selling and marketing expenses in 2014 was primarily due to the acquisition of the fiber company, the launch of new products and an increase in sales commissions as a result of the increase in revenues. Selling and marketing expenses amounted to 22.1% and 24.8% of revenues in 2014 and 2013, respectively.
 
General and administrative expenses.  General and administrative expenses increased by 14.2% to $8.9 million for the year ended December 31, 2014 from $7.8 million for the year ended December 31, 2013.  The increase in general and administrative expenses in 2014 was primarily due to the acquisition of the fiber company as well as increased compensation to our management arising from our annual performance. General and administrative expenses amounted to 11.5% of revenues in 2014 compared to 15.1% in 2013.
 
Impairment of goodwill and intangible assets.  Impairment of goodwill and intangible assets amounted to $2.4 million for the year ended December 31, 2014, which related to our Cyber segment.  Impairment of goodwill and intangible assets amounted to 3.1% of revenues in 2014.
 
Operating income.  We had operating income of $1.4 million for the year ended December 31, 2014 compared to an operating loss of $4.5 million for the year ended December 31, 2013.  The operating income (loss) of our business segments for the years ended December 31, 2014 and 2013 were as follows:
 
   
Year Ended December 31,
 
   
2013
   
2014
 
   
(In thousands)
 
Perimeter products
  $ 542     $ 6,770  
Turnkey projects
    (3,571 )     (148 )
Cyber
    (1,184 )     (4,995 )
Eliminations
    (306 )     (204 )
Total
  $ (4,519 )   $ 1,423  
 
Our perimeter products segment recorded operating income of $6.8 million for the year ended December 31, 2014 compared to operating income of $0.5 million for the year ended December 31, 2013, primarily as a result of an increase in sales due to improvement in economic condition in North America and Europe. Our turnkey project segment recorded an operating loss of $0.1 million in the year ended December 31, 2014 compared to an operating loss of $3.6 million for the year ended December 31, 2013. Our Cyber segment recorded an operating loss of $5.0 million in the year ended December 31, 2014, mainly due to charges for the  impairment of goodwill and intangible assets in the amount of $2.4 million.
 
Financial income, net.  Our financial income, net, for the year ended December 31, 2014 was $2 million compared to financial income, net of $0.1 million for the year ended December 31, 2013.  The increased in financial income in 2014 was primarily attributable to $2.3 million of foreign exchange rate income, net in the year ended December 31, 2014.
 
Income taxes. We recorded taxes on income of $0.1 million for the year ended December 31, 2014 compared to taxes on income of $0.1 million for the year ended December 31, 2013.
 
Seasonality
 
Our operating results are characterized by a seasonal pattern, with a higher volume of revenues towards the end of the year and lower revenues in the first part of the year.  This pattern, which is expected to continue, is mainly due to two factors:
 
 
·
our customers are mainly budget-oriented organizations with lengthy decision processes, which tend to mature late in the year; and
 
 
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·
due to harsh weather conditions in certain areas in which we operate during the first quarter of the calendar year, certain projects and services are put on hold and consequently revenues are delayed.
 
Our revenues are dependent on government procurement procedures and practices, and because we receive large product orders from a relatively small number of customers, our revenues and operating results are subject to substantial periodic variations.
 
Impact of Inflation and Currency Fluctuations on Results of Operations, Liabilities and Assets
 
We sell most of our products in Africa, Latin America, North America, Europe and Israel.  Our financial results, which are reported in U.S. dollars, are affected by changes in foreign currency.  Our revenues are primarily denominated in U.S. dollars, Euros, Mexican Peso and NIS, while a portion of our expenses, primarily labor expenses, is incurred in NIS, CAD and Mexican Peso.  Additionally, certain assets, especially cash, trade receivables and other accounts receivables, as well as part of our liabilities are denominated in NIS and CAD.  As a result, fluctuations in rates of exchange between the U.S. dollar and non-U.S. dollar currencies may affect our operating results and financial condition.  The dollar cost of our operations in Israel and Canada may be adversely affected by the appreciation of the NIS and the CAD against the U.S. dollar.  In addition, the value of our non-U.S. dollar revenues could be adversely affected by the depreciation of the U.S. dollar against such currencies.
 
The appreciation of the NIS, the Mexican Pesos and the CAD in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of any unlinked assets and the U.S. dollar amounts of any unlinked liabilities and increasing the U.S. dollar value of revenues and expenses denominated in other currencies.  Conversely, the depreciation of the NIS, the Mexican Peso and the CAD in relation to the U.S. dollar has the effect of reducing the U.S. dollar value of any of our liabilities which are payable in NIS, Mexican Pesos or in Canadian dollars (unless such costs or payables are linked to the U.S. dollar).  Such depreciation also has the effect of decreasing the U.S. dollar value of any asset that is denominated in NIS, Mexican Pesos and CADs or receivables payable in NIS, Mexican Pesos or CAD (unless such receivables are linked to the U.S. dollar).  In addition, the U.S. dollar value of revenues and expenses denominated in NIS, Mexican Pesos or CAD would increase.  Because foreign currency exchange rates fluctuate continuously, exchange rate fluctuations may have an impact on our profitability and period-to-period comparisons of our results.  The effects of foreign currency re-measurements are reported in our consolidated financial statements in current operations.
 
The following table presents information about the rate of inflation in Israel, the rate of devaluation or appreciation of the NIS against the dollar, and the rate of inflation in Israel adjusted for the devaluation:
 
Year ended
December 31,
 
Israeli inflation
rate %
   
NIS devaluation (appreciation)
rate %
   
Israeli inflation adjusted for devaluation (appreciation) %
 
                   
2011
    2.2       7.7       (5.5 )
2012
    1.6       (2.3 )     3.9  
2013
    1.8       (7.0 )     8.8  
2014
    (0.2 )     12.0       (12.2 )
2015
    (1.0 )     (0.3 )     (0.7 )

In addition, the U.S. dollar cost of our operations in Canada is influenced by the exchange rate between the U.S. dollar and the CAD.  In 2013, 2014 and 2015 the CAD appreciated against the U.S. dollar by 6.8%, 8.9% and 19.7%, respectively.
 
In 2015, foreign currency fluctuations had a positive impact on our results of operations as we recorded foreign exchange income, net of $1 million, compared to $2.3 million of foreign exchange income, net in 2014.  We expect that our results of operations will continue to be affected by currency fluctuations in the future.
 
In 2013, we entered into forward exchange contracts to hedge some of our foreign currency exposure relating to bank deposits and unbilled accounts receivable denominated in foreign currencies.  We recorded $39,000 in financial income from such contracts in 2013. During 2014 and 2015, we did not enter into such contracts.
 
 
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Conditions in Israel
 
We are incorporated under the laws of, and our principal executive offices and manufacturing and research and development facilities are located in, the State of Israel.  See Item 3D “Key Information – Risk Factors – Risks Relating to Our Location in Israel” for a description of governmental, economic, fiscal, monetary and political policies or factors that have materially affected or could materially affect our operations.
 
Effective Corporate Tax Rate
 
The Israeli corporate tax rate was 25% in 2013 and 26.5% in 2014 and 2015. Beginning January 1, 2016, the Israeli corporate tax rate was reduced to 25%.

On December 5, 2011, the “Knesset” (Israeli parliament) passed the Law for Tax Burden Reform (Legislative Amendments), 2011 (“the Law”) which, among others, cancels effective from 2012, the scheduled reduction in the corporate tax rate. The Law also increases the corporate tax rate to 25% in 2012. In view of this increase in the corporate tax rate to 25%, as above, the real capital gain tax rate and the real betterment tax rate were also increased accordingly.

On August 5, 2013, the “Knesset” issued the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 (“the Budget Law”), which consists, among others, of fiscal changes whose main aim is to enhance the collection of taxes in those years.
 
These changes include, among others, increasing the corporate tax rate from 25% to 26.5%, cancelling the reduction in the tax rates applicable to privileged enterprises (9% in development area A and 16% elsewhere) and, in certain cases, increasing the rate of dividend withholding tax within the scope of the Law for the Encouragement of Capital Investments to 20% effective from January 1, 2014. There are also other changes such as taxation of revaluation gains effective from August 1, 2013.
 
Our effective corporate tax rate may substantially exceed the Israeli tax rate since our U.S.-based subsidiaries will generally be subject to applicable federal, state, local and foreign taxation, and we may also be subject to taxation in the other foreign jurisdictions in which we own assets, have employees or conduct activities.  Because of the complexity of these local tax provisions, it is not possible to anticipate the actual combined effective corporate tax rate, which will apply to us.
 
As of December 31, 2015, we had net deferred tax assets of $0.9 million attributable to our subsidiaries.  We had total estimated available carryforward tax losses of $11.8 million with respect to our operations in Israel to offset against future taxable income.  We have recorded a full valuation allowance for such carryforward tax losses due to the uncertainty of their future realization. As of December 31, 2015, our subsidiaries outside of Israel had estimated total available carryforward tax losses of $10.1 million, which may be used as an offset against future taxable income for periods ranging between 1 and 20 years.  Utilization of U.S. net operating losses may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state tax law provisions.  The annual limitation may result in the expiration of net operating losses before utilization.
 
Trade Relations
 
Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation.  Israel is a member of the World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade.  Israel is also a member of the Organization for Economic Co-operation and Development, or the OECD, an international organization whose members are governments of mostly developed economies.  The OECD’s main goal is to promote policies that will improve the economic and social well-being of people around the world.  In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan.  These preferences allow Israel to export products covered under such programs either duty-free or at reduced tariffs.
 
 
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Israel and the European Union Community, known as the “European Union,” concluded a Free Trade Agreement in July 1975 that confers some advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years.  In 1985, Israel and the United States entered into an agreement to establish a Free Trade Area.  The Free Trade Area has eliminated all tariff and some non-tariff barriers on most trade between the two countries.  On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as the “EFTA,” established a free-trade zone between Israel and the EFTA nations.  In November 1995, Israel entered into a new agreement with the European Union, which includes a redefinition of rules of origin and other improvements, such as allowing Israel to become a member of the Research and Technology programs of the European Union.  In recent years, Israel has established commercial and trade relations with a number of other nations, including Russia, China, India, Turkey and other nations in Eastern Europe and the Asia-Pacific region.  In addition, Israel has entered into a free trade agreement with the MercoSur countries (Brazil, Paraguay, Argentina and Uruguay) which became fully effective in September 2011.  Generally, the purpose of this agreement is to reduce the custom rates between Israel and these countries and to abolish them completely in certain cases.  Israel is the first country outside of Latin America to enter into such an agreement with the MercoSur countries.
 
B.            Liquidity and Capital Resources
 
Our working capital at December 31, 2015 and 2014 was $44 million and $45.8 million, respectively.  Cash and cash equivalents amounted to $27.3 million at December 31, 2015 compared to $21.6 million at December 31, 2014.  Short-term and long-term deposits, restricted bank deposits and escrow deposits amounted to $4 million at December 31, 2015 compared to $11 million at December 31, 2014.  Our cash and cash equivalents, short and long-term bank deposits are held in various banks, mainly in U.S. dollars, Euros, NIS and CAD.
 
From our inception until our initial public offering in March 1993, we financed our activities mainly through cash flow from operations and bank loans.  In March 1993, we received proceeds of $9.8 million from our initial public offering of 1,380,000 ordinary shares.  Subsequently, we made follow-on public offerings, in February 1997 (of 2,085,000 ordinary shares) and in April 2005 (of 1,700,000 ordinary shares), in which we raised $9.4 million and $14.9 million, respectively.  To allow us to begin to implement our 2010 strategic plan, on September 8, 2010, KI Corporation Limited, a company affiliated with Mr. Nathan Kirsh, our former principal shareholder, provided us with a bridge loan of $10.0 million.  To repay the loan and to raise permanent capital for general working capital purposes including facilitating the implementation of our new business strategy, in July and August 2011 we raised $16.2 million from a rights offering of 5,273,274 ordinary shares and a private placement of 150,000 of our ordinary shares.
 
On August 7, 2013 we obtained a bank loan in the amount of $2.5 million bearing annual interest of Libor + 3.4%. We repaid the loan in 2015.
 
We expect that our total research and development expenses in 2016 will be approximately $5.4 million. Our research and development plan for 2016 covers the following main areas:
 
 
·
Sensor developments - We intend to continue the development of new and innovative sensors, Cyber products and advanced systems such as the RoboGuard; these will be based on existing, new and hybrid technologies.  Most of the development will be based on in-house competencies; however, we may acquire some know-how externally.
 
 
·
Sensor improvements – We are conducting an ongoing program of improvement of our existing sensors in order to enhance performance, reliability and capability to source and produce and reduce cost.
 
 
·
Security Management Systems – We intend to continue to develop several levels of security management systems:
 
 
o
High-end systems – PSIM, mainly used as part of a turnkey solution, is a comprehensive command and control solution, designed for entities requiring management of security, safety, site management and dispatching. These systems are designed to manage both daily routines and crisis situations. Cyber security management is being developed as part of our PSIM system with the concept of integrated logical and physical security solutions.
 
 
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o
Low-end systems – Basic SMS typically used for managing and controlling the PIDS of a site.
 
 
o
We are also developing an interface package to facilitate integration of our sensors into a third party SMS/command and control system.
 
We believe that our cash and cash equivalents, bank facilities, bank deposits and our expected cash flows from operations in 2016 will be sufficient to meet our ongoing cash requirements through 2016.  However, our liquidity could be negatively affected by a decrease in demand for our products, including the impact of potential reductions in customer purchases that may result from the current general economic climate.
 
Cash Flows
 
The following table summarizes our cash flows for the periods presented:
 
   
Year ended December 31,
 
   
2013
   
2014
   
2015
 
   
(in thousands)
 
Net cash provided by (used in) operating activities
    (2,590 )     (1,710 )     5,458  
Net cash provided by (used in) investing activities
    (5,760 )     (3,643 )     6,397  
Net cash provided by (used in) financing activities
    2,583       (2,783 )     (3,968 )
Effect of exchange rate changes on cash and cash equivalents
    1,218       (2,497 )     (2,170 )
Increase (decrease) in cash and cash equivalents
    (4,549 )     (10,633 )     5,717  
Cash and cash equivalents at the beginning of the year
    36,784       32,235       21,602  
Cash and cash equivalents at the end of the year
  $ 32,235     $ 21,602     $ 27,319  
 
Net cash provided by operating activities was approximately $5.5 million in the year ended December 31, 2015 compared to net cash used in operating activities of approximately $1.7 million in the year ended December 31, 2014 and net cash used in operating activities of $2.6 million in the year ended December 31, 2013.  Net cash provided by operating activities in the year ended December 31, 2015 was primarily attributable to 2015 income, as well as a decrease of $6.3 million in trade receivables, net, an increase of $1.4 million in customer advances and $1.5 million of depreciation and amortization expenses. This was offset in part by a decrease of $3.4 million in trade payables and other accounts payable and accrued expenses, an increase of $1.6 million in unbilled accounts receivables, an increase of $0.6 million in inventory, a decrease of $0.6 million in accrued severance pay, net and an increase of $0.4 million in long-term trade receivables.
 
Net cash used in operating activities in the year ended December 31, 2014 was primarily attributable to an increase of $9.9 million in trade receivables, net, an increase of $1.9 million in unbilled accounts receivables and a decrease of $2.7 million in customer advances. This was offset in part by 2014 income, as well as an increase of $3.1 million in other accounts payable, an increase of $2.7 million in trade payables, $2.4 million of impairment of goodwill and intangible assets charges and $2 million of depreciation and amortization expenses.
 
Net cash used in operating activities in the year ended December 31, 2013 was primarily attributable to our loss in 2013 as well as to the decrease of $3.1 million in customer advances, the decrease of $3 million in trade payables and a decrease of $1.5 million in other accounts payable and accrued expenses. This was offset in part by a decrease of $6.2 million in short and long term trade receivables, net, $1.7 million of depreciation and amortization expenses and $0.5 million of stock based compensation.
 
Net cash provided in investing activities was approximately $6.4 million in the year ended December 31, 2015 compared to net cash used in investing activities of approximately $3.6 million for the year ended December 31, 2014 and net cash used in investing activities of approximately $5.8 million for the year ended December 31, 2013. In the year ended December 31, 2015, our net cash used in investing activities was primarily attributable to release of short-term bank deposits, long-term bank deposits and restricted deposit of $7.8 million. These amounts were offset in part by purchase of property and equipment for $0.9 million and investment in short-term deposits for $0.6 million. In the year ended December 31, 2014, our net cash used in investing activities was primarily attributable to short-term deposits, net of sale of short-term bank deposits for $1.9 million, payments for business acquisitions of the U.S. based fiber company for $3.9 million and a purchase of property and equipment for $0.7 million. These amounts were offset in part by the release of long-term bank deposits and restricted deposit of $2.8 million.
 
 
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In the year ended December 31, 2013, our net cash used in investing activities was primarily attributable to short-term deposits net of sale of short-term bank deposits for $4.4 million, payments for business acquisitions of CyberSeal for $2.4 million and a purchase of property and equipment for $1.2 million. These amounts were offset in part by the release of long-term bank deposits and restricted deposit of $2.3 million.
 
In the year ended December 31, 2015, net cash used in financing activities was $4 million, primarily due to the repayment of short-term and long-term bank debt of $4.5 million. These amounts were offset in part by $0.5 million proceeds from issuance of shares upon exercise of options and employee stock purchase plan.
 
In the year ended December 31, 2014, net cash used in financing activities was $2.8 million, primarily repayment of short-term and long-term bank debts by $3.3 million. These amounts were offset in part by $0.5 million proceeds from issuance of shares upon exercise of options and employee stock purchase plan.
 
In the year ended December 31, 2013, net cash provided by financing activities was $2.6 million, primarily attributable to $2.5 million of proceeds from long-term bank debt.
 
We had capital expenditures of approximately $1.2 million, $0.7 million and $0.9 million in the years ended December 31, 2013, 2014 and 2015, respectively.  These capital expenditures were principally for computers, other machinery and equipment and for expanding and renovating our facilities.  We estimate that our capital expenditures for 2016 will total approximately $1.1 million.  We expect to finance these expenditures primarily from our cash and cash equivalents and our operating cash flows.  However, the actual amount of our capital expenditures will depend on a variety of factors, including general economic conditions and changes in the demand for our products. In addition, approximately $2.6 million of the CyberSeal acquisition was paid in cash and $4.3 million of the fiber company’s purchase price was paid in cash.
 
Credit Lines and Other Debt
 
As of December 31, 2015 we did not have any short-term or long-term bank borrowings. Short-term and long-term bank borrowings at December 31, 2014 totaled $4.4 million.  Our highest level of short-term and long-term bank borrowings in the years ended December 31, 2014 and 2015 was $8 million and $4.4 million, respectively.
 
As of December 31, 2015, we had credit lines with Bank Leumi Le-Israel B.M., or Bank Leumi, Union Bank of Israel Ltd., or Union Bank, and Bank Hapoalim B.M., or Bank Hapoalim, totaling $19.1 million in the aggregate (of which $6.2 million is reserved exclusively for guarantees out of which $3 million was available as of December 31, 2015).  Our credit lines at Bank Leumi and Union Bank have no restrictions as to our use of the credit.  We are not under any obligation to maintain financial ratios or other terms in respect of our credit lines. In addition, as of December 31, 2015, our foreign subsidiaries had credit lines with the Royal Bank of Canada and Deutsche Bank of $3.7 million in the aggregate, of which $1.1 million was available at December 31, 2015.
 
Our Canadian subsidiary, which is primarily engaged in sale of perimeter products and turnkey projects, has undertaken to maintain general covenants and the following financial ratios and terms in respect of its outstanding credit lines: a quick ratio of not less than 1.25:1; a ratio of total liabilities to tangible net worth of not greater than 0.75:1; and tangible net worth of at least $10 million.  As of December 31, 2015, our Canadian subsidiary was in compliance with these ratios and terms.
 
As of December 31, 2015, our outstanding balances under our credit lines in Israel consisted of several bank performance, advance payment and bid guarantees totaling approximately $3.2 million, at an annual cost of 1%-1.5%; and
 
 
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As of December 31, 2015, the outstanding balances under the credit lines of our subsidiaries consisted of several bank performance, advance payment and bid guarantees totaling approximately $2.6 million, at an annual cost of 1% -2%.
 
C.            Research and Development, Patents and Licenses.
 
Government Grants
 
We participate in programs sponsored by the Israeli Government for the support of research and development activities.  In the past we have received royalty-bearing grants from the OCS for certain of our research and development projects for perimeter security products. We are obligated to pay royalties to the OCS amounting to 3.5%  of revenues derived from sales of the products funded with these grants and ancillary services, up to 100% of the grants received, linked to the U.S. dollar.  All grants received after January 1, 1999 also bear interest equal to the 12 month LIBOR rate.  The obligation to pay these royalties is contingent on actual sales of the products, and in the absence of such sales no payment is required.
 
During 2013, 2014 and 2015, CyberSeal received $32,000, $118,000 and $134,000, respectively, from the OCS. Following the cancelation of a 2015 project, CyberSeal might be required to return the $134,000 grant received in 2015.
 
For the years ended December 31, 2013, 2014 and 2015, we paid the OCS royalties of $123,000, $83,000 and $42,000, respectively.  These royalties related to sales of perimeter security products and management security systems. As of December 31, 2015, we had a contingent obligation to pay royalties to the OCS of approximately $1.9 million upon the successful sale of perimeter security products developed under research and development programs sponsored by the OCS.
 
Investment Tax Credit
 
Our Canadian subsidiary is eligible for investment tax credits for its research and development activities and for certain current and capital expenditures.  For the years ended December 31, 2015, 2014 and 2013, our Canadian subsidiary recognized $155,000, $190,000 and $270,000, respectively, of investment tax credits.
 
In addition, as of December 31, 2015, our Canadian and U.S. subsidiaries had available investment tax credits of approximately $0.5 million in Canada and $0.3 million in the U.S. to reduce future federal and provincial income taxes payable.  These credits will expire in 2029 through 2035 in Canada and 2019 through 2025 in the U.S. As of December 31, 2015, our subsidiaries made a full valuation allowance in respect of such investment tax credits.
 
D.            Trend Information.
 
We recorded a profit in 2015 and 2014 compared with a loss in 2013.  The shift to profit in 2015 and 2014 from loss in 2013 is mainly attributable to the release of governmental spending in certain territories which led to release of new projects in 2015 and 2014, while in 2013 the market was influenced by the global economic slowdown and the reduction in governmental spending, mainly in Europe and Latin America.
 
E.             Off-Balance Sheet Arrangements.
 
We are not a party to any material off-balance sheet arrangements.  In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.
 
 
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F.             Tabular Disclosure of Contractual Obligations.
 
The following table summarizes our minimum contractual obligations and commercial commitments as of December 31, 2015 and the effect we expect them to have on our liquidity and cash flow in future periods.
 
   
Payments due by period
 
Contractual Obligations
 
Total
   
Less than 1 year
   
1-2 years
   
3-5 years
   
More than 5 years
 
   
(in thousands)
 
Operating lease obligations
  $ 3,127     $ 659     $ 737     $ 716     $ 1,015  
Other long-term liabilities reflected on our balance sheet under U.S. GAAP
  $ 2,660       -       -       -     $ 2,660  
Total
  $ 5,787     $ 659     $ 737     $ 716     $ 3,675  
 
In addition, we have guaranteed advance payments, the performance of our work and provided warranties for the performance of our work to certain of our customers (usually governmental entities).  Such guarantees are required by contract for our performance during the installation and operational period of projects throughout Israel and the rest of the world.  The performance guarantees typically expire soon after certain milestones are met and warranty guarantees typically expire at the end of the warranty period.  The maximum potential amount of future payments we could be required to make under our guarantees at December 31, 2015 was $5.7 million.  We have not recorded any liability for such amounts as we believe our performance will not result in any claims.
 
Directors, Senior Management and Employees
 
A.            Directors and Senior Management.
 
Set forth below are the name, age, principal position and a biographical description of each of our directors and executive officers:
 
Name
 
Age
 
Position
Gillon Beck
 
54
 
Chairman of the Board of Directors
Barry Stiefel
 
66
 
Director
Liza Singer (1)(2)
 
45
 
External Director
Jacob Berman
 
68
 
Director
Ron Ben-Haim
 
45
 
Director
Pinchas Barel Buchris
 
59
 
Director
Avraham Bigger (1)(2)
 
69
 
Director
Moshe Tsabari (1)(2)
 
61
 
External Director
Saar Koursh
 
43
 
Chief Executive Officer
Hagai Katz
 
65
 
Senior Vice President – Marketing and Business Development
Ilan Ovadia
 
49
 
Senior Vice President – Finance, Chief Financial Officer
Brian Rich
 
59
 
Deputy CEO, CTO and President of Senstar Corporation
Doron Kerbel
 
44
 
Vice President – General Counsel and Company Secretary
Yaniv Shahar
 
42
 
Vice President – Projects and Operations
Ezra Shemesh
 
49
 
Vice President –Sales
____________
(1)  Member of our Israeli and U.S. Audit Committees.
(2) Member of our Compensation Committee

 
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Gillon Beck has served as a director and Executive Chairman of our board of directors since September 2014. Mr. Beck has been, since 2003, a Senior Partner at FIMI Opportunity Funds, as well as a Director of the General Partners of the FIMI Opportunity Funds, the largest shareholder of our company. Mr. Beck currently serves as Chairman of the Boards of Directors of Ormat Technologies Inc. (NYSE), Ham-Let (Israel-Canada) Ltd. (TASE), Rivulis Irrigation Ltd., Inrom Industries Ltd., H.R. Givon Ltd. Oxygen and Argon Works Ltd and Overseas Commerce Ltd., and is a director of Inrom Construction Industries Ltd. (TASE). In the last 5 years,  Mr. Beck formerly served as a member of the Boards of Directors of the following public companies:  Retalix Ltd and Ormat Industries Ltd. From 1999 to 2003, Mr. Beck served as Chief Executive Officer and President of Arad Ltd., a publicly-traded water measurement and automatic meter reading company and from 1995 to 1999, as COO of Arad Ltd. Mr. Beck received a Bachelor of Science degree (Cum Laude) in Industrial Engineering in 1990 from the Technion – Israel Institute of Technology and an M.B.A. degree  in Finance in 1992 from Bar-Ilan University.
 
Barry Stiefel has served as a director since November 2008 and as the chairman of our board of directors from February 2013 until September 2014.   Mr. Stiefel has served as the Manager of the Kirsh Family Office in London, England since 2006. The Kirsh Family Office administers and monitors the investments made by the Kirsh Group worldwide. Ki Corporation, which is owned by the Kirsh Group, is the former principal shareholder of our company. Mr. Stiefel also serves as a Director of Ki Corporation Limited since 2013. From 2001 to 2006, Mr. Stiefel served as a consultant for a number of companies, including Premedia Limited and its subsidiaries.  Previously, Mr. Stiefel was the chief executive officer of Meridian VAT Reclaim Group, which he founded, as a consultant in the field of trade finance and as finance director of Fisher Brothers Lumber Company Limited, a South African company.  Mr. Stiefel holds a B.Sc. degree in Mathematics and Chemistry and a B.A. degree in Accounting, both from the University of the Witwatersrand.  Mr. Stiefel is a chartered accountant in South Africa and is registered as an auditor (not in public practice) in the United Kingdom.
 
Saar Koursh joined Magal S3 as Chief Executive Officer on March 2015.  Prior to joining our company and for more than twelve years, Mr. Koursh served in various positions with Elbit Systems Ltd., a leading international defense electronics company. During the last two years, Mr. Koursh was the Vice President responsible for the Brazil Business Unit, as well as a member of the Aerospace Division’s executive management and a member of the Board of Directors of AEL Sistemsas, Elbit’s subsidiary in Brazil. Prior to that, Mr. Koursh served as the Vice President for Programs & Business Development of AEL Sistemas and held several other positions with Elbit as director and program manager and finance and commercial manager. Mr. Koursh holds an M.B.A. degree in Financial Management from the Lubin School of Business of Pace University, New York and a B.Sc.AGR and Economics and Management from the Hebrew University in Jerusalem.
 
Liza Singer has served as an external director since June 2010.  Since 2003, Ms. Singer has served as the owner’s representative of the Lewis Trust Group, an investment assessment and development entity that focuses on tourist projects and the development of marine and hotels resorts.  During 2007, Ms. Singer also served as the chief operating officer and country manager of Brack Capital Real Estate.  Previously, Ms. Singer served as the Vice President of Business Development of the Baran Group, a provider of engineering and construction services, as investment director of Syntek Capital, a private-equity investment company and as an associate at APAX Partners & Co., a venture capital fund.  Previously Ms. Singer worked at Kesselman & Kesselman, the Israeli member firm of PriceWaterhouseCoopers and at Gornitzky & Co. a leading Israeli law firm.   Ms. Singer has an LL.B degree, a B.A. degree in accounting and an M.B.A. degree, all from Tel Aviv University.  Ms. Singer is a certified public accountant (Israel) and a registered lawyer with the Israeli Bar Association.
 
Jacob Berman has served as a director since November 2013.  Since November 2014, Mr. Berman serves as the chairman of the board of directors of Israel Discount Bank of New York and acted as a member of our audit committee and compensation committee between September 2014 and December 2014. Mr. Berman has been President of JB Advisors, Inc., a New York based financial advisory firm with extensive experience in international private banking, real estate investment counseling, and commercial/retail banking since 2002.  Mr. Berman serves as a director of Micronet Enertec Technologies, Inc. Previously, Mr. Berman was the founder, President and CEO of Commercial Bank of New York.
 
 
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Ron Ben-Haim has served as a director since September 2014.  Mr. Ben-Haim has been a partner in FIMI Opportunity Funds since 2006. Mr. Ben-Haim currently serves on the boards of directors of TAT Technologies Ltd. (NASDAQ, TASE), Hadera Papers Ltd. (TASE), Politram Plastic Industries Ltd., Oxygen and Argon Works Ltd, Tadir-Gan (Precision Products) 1993, Ltd. (TASE), Rivulis Irrigation Ltd., Inrom Industries Ltd., and Overseas Commerce, Ltd. Mr. Ben Haim formerly served as a member of the boards of directors of the following public companies: Medtechnica, Ltd., Ginegar Plastic Products, Ltd., Merhav Ceramic and Building Materials Center, Ltd. and Ophir Optronics, Ltd. Mr. Ben Haim was previously with Compass Advisers, LLP, an investment banking firm based in New York and in Tel Aviv and with the Merrill Lynch Mergers and Acquisitions group in New York. Prior to Merrill Lynch, Mr. Ben-Haim worked at Teva Pharmaceuticals in production management. Mr. Ben-Haim holds a B.Sc. degree in industrial engineering from the Tel Aviv University and an M.B.A. degree from New York University.
 
Pinchas Barel Buchris has served as a director since September 2014.  Brigadier General (Ret.) Buchris has been, since 2014, a partner at Shibolet Venture Capital. In addition, Mr. Buchris currently serves as a member of the Board of Directors of Discount Investments Corporation Ltd. (TASE) and ABS - Shva Automatic Bank Services Ltd. and an advisor and member of the boards of directors of several private cyber security companies. Mr. Buchris formerly served as Chief Executive Officer of Oil Refineries Ltd. (BAZAN), Chairman of the Cyber Security subcommittee (at the office of the Prime Minister), Managing Director of the State of Israel’s Ministry of Defense and Head of the Homeland Security Sector at Apax Partners. Prior to that, Mr. Buchris served as an officer in the Israel Defense Forces, where he founded the cyber security capabilities within the Israeli intelligence and was awarded with the Israel Security award before retiring as a Brigadier General. Mr. Buchris formerly served as a member of the Boards of Directors of Gilat Satellite Networks Ltd. (NASDAQ, TASE), Bezeq, the Israel Telecommunication Corp. Ltd. (TASE) and Protalix Biotherapeutics, Inc. (TASE, NYSE). Mr. Buchris participated in the Advanced Management Program at Harvard University, received a Bachelor of Science in Computer Science from the Technion – Israel Institute of Technology and an M.B.A. degree from the Israeli extension of Derby University, UK.
 
Avraham Bigger has served as a director since September 2014.  Mr. Bigger has been, since 2010, the owner and a member of the Board of Directors of Bigger Investments Ltd and formerly served as the Chief Executive Officer and Chairman of the Board of Directors of Makhteshim Agam Industries Ltd., Chairman of the Boards of Directors of Supersol Ltd. (TASE), Caniel Beverages & Caniel Packaging Industries Ltd., the Edmond Benjamin de Rothschild Caesarea Foundation and as managing director of Paz Oil Company Ltd. (TASE) and Israel General Bank (U Bank). Mr. Bigger also served as a member of the Boards of Directors of Bank Leumi Le-Israel Ltd. (TASE), First International Bank of Israel Ltd. (TASE), Strauss Group Ltd. (formerly known as Strauss-Elite Ltd.)(TASE), Partner Communications Company Ltd. (TASE), Cellcom Israel Ltd. (TASE, NYSE), El-Al Israel Airlines Ltd. and various private companies. Mr. Bigger received a Bachelor of Economics degree and an M.B.A. degree, both from the Hebrew University of Jerusalem.
 
Moshe Tsabari has served as an external director since December 2014.  Mr. Tsabari is the owner and serves as the joint CEO of GME Trust, a company that advises on crisis management and improvement of work processes, in Israel and worldwide.  Since 2005, Mr. Tsabari has served  as the owner and director of Osher – Training & Consulting Ltd.  From 2006 to 2011 Mr. Tsabari served as a senior partner in the International Company for Defense and Rescue Ltd. and in QG Company, two companies that are engaged in the provision of consultancy and training projects in the security field in Israel.  In addition, Mr. Tsabari is the founder of the International Institute for Researching the Arab World, is a former director in Links Aviation and is the former CEO of SYS-TRY, an electronic equipment development company.  Prior to that, Mr. Tsabari served for 15 years, until 2004, in the Israeli Security Agency (ISA) in a number of positions, including Director of Personal in the Human Resources Division, Director of Security Assistance Division (rank in both positions equivalent to Major General) and Head of the Operations Division (rank equivalent to Brigadier).  Mr. Tsabari holds a B.Sc. degree in Geodetic Engineering, a M.A. degree in Industrial and Management Engineering and a PhD degree in Science, all from the Technion – The Israeli Institute of Technology. In addition, Mr. Tsabari is an A.M.P. graduate from the Wharton School of the University of Pennsylvania.