2004 ANNUAL REPORT 17
STATEMENT OF DIRECTORS' RESPONSIBILITY
After making enquiries, the Directors have a reasonable expectation that the Company and its
subsidiaries have adequate resources to continue in operational existence for the foreseeable
future. For this reason, they have adopted the going concern basis in preparing the financial
statements.
The UK and the Israeli Law requires the Directors to prepare financial statements for each financial
period, which give a true and fair view of the state of affairs of the Company and the group, and of
the profit and loss of the Company for the period. In preparing these financial statements, the
Directors are required to: select suitable accounting policies and then apply them consistently;
make judgments and estimates that are reasonable and prudent; state whether applicable
accounting standards have been followed, subject to any material departures disclosed and
explained in the financial statements; and prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the Company will continue in business. The
Directors consider that in preparing the financial statements from pages 18 to 50, the Company
and Group have used the accounting policies and adopted the principles as set out in this
paragraph.
The Directors believe that they fulfill their responsibility for keeping proper accounting records
which disclose with reasonable accuracy at any time the financial position of the Company and to
ensure that the financial statements comply with the Companies Act 1985. They are also
responsible for safeguarding the assets of the Company and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
VISONIC18
INDEPENDENT AUDITORS' REPORT
To the shareholders of VISONIC LTD.
We have audited the accompanying consolidated balance sheets of Visonic Ltd. and its
subsidiaries ("the Group") as of 31 December 2002, 2003 and 2004, and the related consolidated
statements of income, changes in equity and cash flows for each of the three years then ended.
These consolidated financial statements are the responsibility of the Group's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, whose assets included in
consolidation constitute approximately 31.8 per cent, 31.5 per cent and 33.4 per cent of total
consolidated assets as of 31 December 2002, 2003 and 2004, respectively, and whose revenues
included in consolidation constitute approximately 45 per cent, 56 per cent and 56.3 per cent of
total consolidated revenues for the years ended 31 December 2002, 2003 and 2004, respectively.
Those statements were audited by other auditors whose reports have been furnished to us, and
our opinion, insofar as it relates to amounts included for these subsidiaries is based solely on the
reports of the other auditors.
We conducted our audits in accordance with International Standards on Auditing. Those
Standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the consolidated financial
statements referred to above present fairly in all material respects the consolidated financial
position of the Group, as of 31 December 2002, 2003 and 2004, and the consolidated results of
its operations and its cash flows for each of the three years then ended, in accordance with
International Financial Reporting Standards.
Kost Forer Gabbay & Kasierer3 Aminadav St.Tel-Aviv 67067, IsraelPhone: 972-3-6232525Fax: 972-3-5622555
KOST FORER GABBAY & KASIERERA Member of Ernst & Young Global
Tel-Aviv, Israel15 March 2005
2004 ANNUAL REPORT 19
As of 31 December
2002 2003 2004
Note US$ '000 US$ '000 US$ '000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 5,406 5,562 5,844
Short-term deposits 3a - - 6,500
Available-for-sale financial assets 3b - - 751
Trade receivables 4 9,240 10,038 12,970
Other accounts receivable 5 1,331 1,666 2,494
Inventories 6 7,190 9,796 7,845
Total current assets 23,167 27,062 36,404
NON-CURRENT ASSETS:
Long-term deposits - - 500
Held-to-maturity investments 7 - - 5,206
Property and equipment, net 8 4,186 4,395 4,249
Deferred tax assets 16a5 820 1,482 1,771
Intangible assets, net 9 262 1,617 1,384
Severance pay fund - - 169
Total non-current assets 5,268 7,494 13,279
Total assets 28,435 34,556 49,683
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Credit from banks and current maturities of long-term loans 10 8,508 1,373 2,583
Trade payables 11 4,174 4,816 4,421
Employees and payroll accruals 1,707 1,913 1,922
Related company 12 726 743 805
Convertible debentures to related party 13 617 617 -
Other current liabilities 14 2,999 4,866 2,715
Total current liabilities 18,731 14,328 12,446
LONG-TERM LIABILITIES:
Bank loans 15 2,519 8,517 6,566
Accrued severance pay, net 675 924 1,115
Total long-term liabilities 3,194 9,441 7,681
MINORITY INTEREST - 96 -
SHAREHOLDERS' EQUITY 18
Share capital 16 16 21
Additional paid-in capital 6,362 6,362 21,965
Retained earnings 132 4,313 7,570
Total shareholders' equity 6,510 10,691 29,556
Total liabilities and shareholders' equity 28,435 34,556 49,683
The accompanying notes are an integral part of the consolidated financial statements.
15 March 2005
Date of approval of thefinancial statements
CONSOLIDATED BALANCE SHEETS
Yaacov KotlickiChairman of the Board of Directors
Dr. Avigdor SacharaiChief Executive Officer
VISONIC20
Year ended 31 December
2002 2003 2004
Note US$ '000 US$ '000 US$ '000
Sales 45,160 52,886 55,129
Cost of sales 19a (26,006) (29,258) (29,454)
Gross profit 19,154 23,628 25,675
Research and development costs, net 19b (3,607) (4,978) (5,068)
Selling and marketing expenses, net 19c (9,188) (11,118) (13,598)
General and administrative expenses 19d (3,180) (2,989) (3,582)
Restructuring costs 19e - (112) -
Total operating costs and expenses (15,975) (19,197) (22,248)
Operating profit 3,179 4,431 3,427
Financial income, net 19f 556 274 845
Other income (expenses), net 19g (1) 30 (159)
Profit before taxes on income 3,734 4,735 4,113
Taxes on income 16 (1,003) (608) (952)
Profit before losses of associate, net 2,731 4,127 3,161
Losses of associate, net (8) - -
Minority interest in losses of subsidiary - 54 96
Net profit 2,723 4,181 3,257
Basic earnings per share (in U.S. dollars) 20 0.09 0.14 0.09
Diluted earnings per share (in U.S. dollars) 20 0.09 0.14 0.09
Weighted average number of shares used for computing basic earnings per share 20 29,375,430 29,375,430 37,151,584
Weighted average number of shares used forcomputing diluted earnings per share 20 30,383,974 30,695,896 38,017,880
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
2004 ANNUAL REPORT 21
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Retainedearnings
(accumulateddeficit) Total
US$ '000 US$ '000 US$ '000 US$ '000
Balance as of 1 January 2002 16 6,362 (2,591) 3,787
Net profit - - 2,723 2,723
Balance as of 31 December 2002 16 6,362 132 6,510
Net profit - - 4,181 4,181
Balance as of 31 December 2003 16 6,362 4,313 10,691
Issuance of shares, net **) 5 15,494 - 15,499
Exercise of options *) - 109 - 109
Net profit - - 3,257 3,257
Balance as of 31 December 2004 21 21,965 7,570 29,556
*) Represents an amount lower than $ 1,000.
**) Net of issuance expenses in the amount of $ 1,798,000 (after tax benefit of $ 454,000).
The accompanying notes are an integral part of the consolidated financial statements.
Additionalpaid-in capital
Sharecapital
VISONIC22
Year ended 31 December
2002 2003 2004
Note US$ '000 US$ '000 US$ '000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit 2,723 4,181 3,257
Adjustments to reconcile net profit to net cashprovided by operating activities (a) 3,147 (708) (2,591)
Net cash provided by operating activities 5,870 3,473 666
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term deposits - - (6,500)
Purchase of long-term deposits - - (500)
Purchase of available-for-sale financial assets - - (734)
Purchase of held to maturity investments - - (5,332)
Acquisition of know-how - - (22)
Acquisition of newly consolidated subsidiaries (c) (102) 35 -
Investment in associate (6) - -
Proceeds from sale of property and equipment 32 3 31
Purchase of property and equipment (1,405) (1,382) (1,182)
Net cash used in investing activities (1,481) (1,344) (14,239)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares, net of expenses - - 15,045
Exercise of options - - 109
Issuance expenses - (6) -
Increase (decrease) in balances with related party (16) 17 62
Receipt of long-term loans from banks 2,500 13,514 849
Repayment of long-term loans from banks (2,508) (13,519) (687)
Repayment of liability to related party (295) -
Repayment of convertible debentures to related party - - (617)
Short-term bank credit, net (2,386) (1,979) (906)
Net cash provided by (used in) financing activities (2,705) (1,973) 13,855
Increase in cash and cash equivalents 1,684 156 282
Cash and cash equivalents at the beginning of the year 3,722 5,406 5,562
Cash and cash equivalents at the end of the year 5,406 5,562 5,844
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
2004 ANNUAL REPORT 23
Year ended 31 December
2002 2003 2004
US$ '000 US$ '000 US$ '000
A. ADJUSTMENTS TO RECONCILE NET PROFIT TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
INCOME AND EXPENSES NOT INVOLVING CASH FLOWS:
Equity in losses of associate, net 8 - -
Minority interest in losses of subsidiary - (54) (96)
Depreciation and amortisation 1,297 1,420 1,542
Deferred taxes, net (25) (662) 165
Increase (decrease) in accrued severance pay (27) 168 22
Loss from sale of property and equipment, net 1 - 10
Exchange rate differences on liability to related party (22) - -
Revaluation of bank loan - 10 3
Gain on issuance of shares by a subsidiary - (30) -
Fair value revaluation of available-for-sale financial assets - - (17)
Premium amortization - - 126
CHANGES IN OPERATIONS ASSET AND LIABILITIES:
Increase in trade receivables (627) (470) (2,932)
Increase in other accounts receivable (115) (290) (828)
Decrease (increase) in inventories 2,450 (2,164) 1,951
Increase (decrease) in trade payables (22) 134 (395)
Increase in employees and payroll accruals 258 206 9
Increase (decrease) in other current liabilities (29) 1,024 (2,151)
3,147 (708) (2,591)
B. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest 317 277 314
Income taxes 456 190 596
C. ACQUISITION OF NEWLY CONSOLIDATED SUBSIDIARIES:
THE NET FAIR VALUE OF THE ASSETS AT THE DATE OF ACQUISITION WAS AS FOLLOWS:
Working capital (excluding cash) (163) 713 -
Property and equipment, net (28) (106) -
Excess of losses over investment in associate (39) - -
Long-term liabilities 377 741 -
Goodwill created upon acquisition (249) - -
Know-how - (1,493) -
Shares issuance to minority in subsidiary - 180 -
(102) 35 -
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
VISONIC24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 I GENERAL
A. COMPANY DESCRIPTION:
The Company was founded in 1973 under the laws of the State of Israel and it is engaged in the
design, development, manufacture and marketing of security systems and components for
institutional, commercial and residential customers for both personal and property protection.
The Company's products are marketed in Europe, Australia and the U.S. through its various wholly-
owned subsidiaries in each region and in Asia, through its 50 per cent owned joint-venture in
Hong-Kong.
On 15 April 2004, the Company effected an IPO on the London Stock Exchange. The proceeds of
the placing were approximately $ 15,499,000, net of issuance expenses in the amount of
$ 1,798,000 (after the tax effect) - see Note 18.
B. DEFINITIONS:
In these financial statements:
The Company - Visonic Ltd.
Subsidiaries - companies over which the Company exercises control (as defined in IAS 27)
and whose accounts are consolidated with those of the Company.
Jointly controlled entity - company owned by various entities that have a contractual consent for joint
control, and whose accounts are consolidated with those of the Company
using the proportionate consolidation method. The jointly controlled entity in
these financial statements is:
Visonic Deson Limited - 50 per cent owned and controlled through
Visonic Ltd. ("Visonic Deson")
Investees - subsidiaries and jointly controlled entity.
Related parties - as defined in IAS 24 of the IASB.
C. THE FOLLOWING ACTIVE COMPANIES ARE CONSOLIDATED AND PROPORTIONATE
CONSOLIDATED AS OF 31 DECEMBER 2004:
Consolidated companies Share (per cent)
Visonic Technologies Ltd. (“VT”) (1) 85
Visonic Marketing (1988) Ltd. (“VM”) (1) 100
Visonetix Ltd. (“Visonetix”) (1) (2) 85
Elpas Electro-Optic Systems Ltd. (“Elpas”) (1) (2) 85
Visonic Inc. (3) (4) 100
Visonic Iberica de Seguridad S.L. (“Visonic Iberica”) (4) (5) 100
Visonic Sicherheitstechnik GmbH (“Visonic GmbH”) (4) (6) 100
Visonic Sp.Zo.O (“Visonic Sp”) (4) (7) 100
Visonic Limited (4) (8) 100
Visonic Security Pty Limited (“Visonic Pty”) (4) (9) 100
Visonic Technologies Americas Inc. (“VTA”) (3) (10) 85
Visonic Technologies UK Limited (“VT UK”) (8) (10) 85
Proportionate consolidation
Visonic Deson Limited ("Visonic Deson") (4) (11) 50
2004 ANNUAL REPORT 25
Visonic and its subsidiary VM focus on residential security and provide global technical and marketing support
throughout the network of subsidiaries and distributors in over 70 countries. VT focuses on location tracking systems
in the institutional and commercial markets through Elpas and Visonetix Ltd.
NOTE 2 I SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies applied in the preparation of the consolidated financial statements, on
a consistent basis, are as follows:
A. BASIS OF PREPARATION:
The consolidated financial statements of the Group have been prepared in accordance with
International Financial Reporting Standards ("IFRS").
B. FOREIGN CURRENCY TRANSLATION:
The majority of the Group's sales are made outside of Israel in non Israeli currencies, mainly the US
dollar. A substantial portion of the Group's expenses, mainly selling and marketing expenses and
service costs is incurred in US dollars. Accordingly, the US dollar is the currency of the primary
economic environment of the Company and its subsidiaries, and thus its functional and presentation
currency.
Transactions in non-US dollar currencies are translated into US dollars at the exchange rate on the
transaction date. Monetary assets and liabilities in non-US dollar currencies are translated into US
dollars at the exchange rate on balance sheet date. All exchange rate differences are recorded in the
statement of income.
C. PRINCIPLES OF CONSOLIDATION:
Subsidiaries are consolidated from the date on which control is transferred to the Company and
cease to be consolidated from the date on which control is transferred out of the Company.
Intercompany balances and transactions including profits from inter-company sales not yet realised
outside the group, have been eliminated upon consolidation.
D. INVESTMENTS:
All investments are initially recognised at cost, being the fair value of the consideration given and
including acquisition charges associated with the investment.
After initial recognition, investments which are classified as available-for-sale, are measured at fair
value. Changes in fair value are presented in the statement of income
Investments with fixed or determinable payments and fixed maturity are classified as held-to-maturity
when the Company has the positive intention and ability to hold to maturity. Held-to-maturity
investments are measured at amortised cost using the effective interest method. Amortised cost is
calculated by taking into account any discount or premium on acquisition, over the period to maturity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Operates in Israel.
(2) Owned through Visonic Technologies Ltd.
(3) Operates in the United States.
(4) Owned through VM.
(5) Operates in Spain.
(6) Operates in Germany.
(7) Operates in Poland.
(8) Operates in the United Kingdom.
(9) Operates in Australia.
(10) Owned through Elpas.
(11) Proportionately consolidated - see Note 24.
VISONIC26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 I SIGNIFICANT ACCOUNTING POLICIES (cont.)
E. INTEREST IN JOINT-VENTURE:
The Group's interest in a joint venture is accounted for by proportionate consolidation, which involves
recognising a proportionate share of the joint venture’s assets, liabilities, income and expenses with
similar items in the consolidated financial statements on a line-by-line basis.
F. CASH EQUIVALENTS:
The Company considers all highly liquid investments originally purchased with maturities of three
months or less to be cash equivalents.
G. TRADE RECEIVABLES:
Trade receivables are recognised and carried at original invoice amount less an allowance for any
uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no
longer probable. Bad debts are written-off as identified.
H. INVENTORIES:
Inventories are presented at the lower of cost or net realisable value. Cost is determined as follows:
Raw materials - at weighted average cost.
Work in progress and finished goods - on the basis of weighted average costs of materials and other
direct and indirect manufacturing costs.
I. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is
calculated using the straight-line method over the estimated useful lives of the assets, at the following
annual rates:
per cent
Machinery and equipment 10 - 20 (mainly 10 per cent)
Computers and peripheral equipment 20 - 33 (mainly 33 per cent)
Office furniture and equipment 6 - 20 (mainly 7 per cent)
Motor vehicles 15
Leasehold improvements 10 over the term of the lease
The carrying values of property and equipment are reviewed for impairment when events or changes
in circumstances indicate the carrying value may not be recoverable. If any such indication exists and
where the carrying values exceed the estimated recoverable amount, the assets or cash-generating
units are written down to their recoverable amount. The recoverable amount of property and
equipment is the greater of net selling price and value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset. For an
asset that does not generate largely independent cash inflows, the recoverable amount is determined
for the cash-generating unit to which the asset belongs.
2004 ANNUAL REPORT 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. DEFERRED TAXES:
Deferred taxes are calculated using the liability method for temporary differences between the tax
base of assets and liabilities and their carrying amounts for financial reporting purposes. A deferred
tax asset has been recognised for tax loss carryforwards only to the extent that it is probable that
these will be utilised in the foreseeable future.
Deferred taxes are not recorded in respect of temporary differences associated with investments in
subsidiaries and interests in joint ventures, as the timing of the reversal of the temporary differences
can be controlled and it is probable that the temporary differences will not reverse in the foreseeable
future.
K. REVENUE RECOGNITION:
Revenues are recognised when the significant risks and rewards of ownership of the goods have
passed to the buyer and the amount of revenues can be measured reliably.
The Company sells products on consignment to Visonic Deson. The Company recognises revenues
from sales on consignment when Visonic Deson recognises revenues from the end customer.
Consigned inventories totalled $ 68,000, $ 102,000 and $ 62,000 at Visonic Deson for 2002, 2003
and 2004, respectively.
L. RESEARCH AND DEVELOPMENT COSTS:
Research and development costs are expensed as incurred.
M. INTANGIBLE ASSETS:
Intangible assets acquired separately are capitalised at cost. Intangible assets acquired as part of an
acquisition of a business are capitalised separately from goodwill at fair value created within the
business are not capitalised and expenditure is charged against profits in the year in which it is
incurred.
GOODWILL:
Goodwill represents the excess of the cost of the acquisition over the fair value of identifiable net
tangible assets of a subsidiary or associate at the date of acquisition. Goodwill is amortised using the
straight-line method over its useful economic life of 10 years. The amortisation is included in general
and administrative expenses.
Goodwill is reviewed for impairment when events or changes in circumstances indicate that the
carrying value may not be recoverable.
KNOW-HOW:
Know-how is amortised using the straight-line method over its useful economic life of 8 years. The
amortisation is included in general and administrative expenses.
N. BASIC AND DILUTED EARNINGS PER SHARE:
Basic earnings per share are computed using the weighted average number of Ordinary shares
outstanding during the period. Diluted earnings per share are computed based on the weighted
average number of Ordinary shares outstanding during each period, adjusted for the effects of dilutive
options.
VISONIC28
NOTE 2 I SIGNIFICANT ACCOUNTING POLICIES (cont.)
O. ACCRUED SEVERANCE PAY, NET:
The Company's liability for severance pay for Israeli resident employees, is calculated pursuant to
Israeli Severance Pay Law, based on the most recent salary of the employees multiplied by the
number of years of employment as of the balance sheet date. Employees are entitled to one month's
salary for each year of employment or a portion thereof. The Company's liability for all of its
employees is partly provided by monthly deposits with severance pay funds, insurance policies and
by an accrual.
The amounts deposited with managers' insurance policies on behalf of the employees and the
respective liabilities are not included in the balance sheet as they are not under the control and
management of the Company.
The amounts deposited in severance pay funds may be withdrawn only in accordance with Israeli
Severance Pay Law or labour agreements.
P. CONVERTIBLE DEBENTURES:
A convertible debenture comprises two components: a financial liability and an equity instrument (a
call option granting the holder the right, for a specified period of time, to convert the debenture into
Ordinary shares). Accordingly, the liability and equity elements are measured at fair value and
presented separately on the balance sheet.
On the issue of the convertible debenture, the fair value of the liability component is determined using
a market rate for an equivalent non-convertible bond and this amount is carried as a long-term liability
at amortised cost using the effective interest method until extinguished on conversion or redemption.
The remainder of the proceeds is allocated to the conversion option that is recognised and included
in shareholders’ equity, net of issuance costs. The value of the conversion option is not changed in
subsequent periods.
Q. GOVERNMENT GRANTS:
Royalty-bearing grants from the Government of Israel for funding approved research and development
projects are recognised at the time the Company is entitled to such grants, on the basis of the costs
incurred and included as a deduction of research and development costs.
The liability for these grants with a corresponding charge to profit and loss may need to be recorded
in the future to the extent of the Group’s estimate of sales from products developed of these projects.
Non-royalty-bearing grants from the Fund for Encouragement of Marketing Activity are recognised at
the time the Company is entitled to such grants on the basis of the costs incurred and included as a
deduction from sales and marketing expenses.
R. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In December 2003, the International Accounting Standards Board ("IASB") released revised IAS 32,
Financial Instruments: Disclosure and Presentation and IAS 39, Financial Instruments: Recognition
and Measurement. These standards replace IAS 32 (revised 2000), and supersedes IAS 39 (revised
2000), and should be applied for annual periods beginning on or after January 1, 2005. The
amendments are not expected to have a material impact on the Group's consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 ANNUAL REPORT 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2003, as a part of the IASB's project to improve International Accounting Standards, the
IASB released revisions to the following standards that supersede the previously released versions of
those standards: IAS 1, Presentation of Financial Statements; IAS 2, Inventories; IAS 8, Accounting
Policies, Changes in Accounting Estimates and Errors; IAS 10, Events after Balance Sheet Date;
IAS 16, Property, Plant and Equipment; IAS 17, Leases; IAS 21, The Effects of Changes in Foreign
Exchange Rates; IAS 24, Related Party Disclosures; IAS 27, Consolidated and Separate Financial
Statements; IAS 28, Investments in Associates; IAS 31, Interests in Joint Ventures; IAS 33,
Earnings per Share and IAS 40, Investment Property. The revised standards should be applied for
annual periods beginning on or after January 1, 2005. The amendments are not expected to have a
material impact on the Group's consolidated financial statements. In March 2004, the IASB issued
IFRS 3 ‘Business Combinations’. IFRS 3 applies to accounting for business combinations for which
the agreement date is on or after 31 March 2004.
IFRS 3 requires all business combinations to be accounted for by applying the purchase method.
Further, upon acquisition the identifiable assets and liabilities acquired are measured at their fair values
at the acquisition date and any minority interest in the acquiree is stated at the minority proportion of
the net fair values of those items.
In respect of goodwill acquired in a business combination for which the agreement date was before
31 March 2004, IFRS 3 requires that the Group discontinue amortising such goodwill commencing
from 1 January 2005 and to test the goodwill for impairment annually at the cash generating unit level
(unless an event occurs during the year which requires the goodwill to be tested more frequently).
In February 2004, the IASB issued International Financial Reporting Standard 2, Share-Based
Payment (IFRS 2), on the accounting for share-based payment transactions, including grants of share
options to employees. IFRS 2 requires an entity that follows IAS to recognise the effect of share-
based payment transactions in the financial statements based on the award's fair value. IFRS 2 will
be effective for annual periods beginning on or after January 1, 2005 and will apply to grants of
shares, share options or other equity instruments that were granted after November 7, 2002 and had
not yet vested at the effective date. The Company is currently evaluating the impact of this standard.
NOTE 3 I SHORT-TERM INVESTMENTS
As of 31 December
2002 2003 2004
US$ '000 US$ '000 US$ '000
(a) Short-term deposits - - 6,500
The deposits bear interest at annual rates ranging between 1.5 per cent to 2.47 per cent.
(b) Available-for-sale financial assets:
Bonds - listed - - 751
The bonds are traded in Israel and United States and mature in 2005.
VISONIC30
NOTE 4 I TRADE RECEIVABLES
As of 31 December
2002 2003 2004
US$ '000 US$ '000 US$ '000
Trade receivables 9,223 10,073 13,115
Checks receivable 317 430 357
9,540 10,503 13,472
Allowance for doubtful accounts (300) (465) (502)
9,240 10,038 12,970
NOTE 5 I OTHER ACCOUNTS RECEIVABLE
Government authorities 569 882 853
Prepaid expenses 347 464 573
Income receivable 52 17 322
Employees 42 33 83
Advances to suppliers 89 124 176
Other 232 146 487
1,331 1,666 2,494
NOTE 6 I INVENTORIES
Raw materials 4,021 5,426 3,885
Work in progress 933 1,345 1,198
Finished goods 2,236 3,025 2,762
7,190 9,796 7,845
NOTE 7 I HELD-TO-MATURITY INVESTMENTS
Held-to-maturity investments (1) - - 5,206
(1) Marketable bonds which will mature through April 2007.
The bonds bear annual interest at rates of between 2.56 per cent and 3.75 per cent.
The market value of these bonds at 31 December 2004 amounted to $ 5,222,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 ANNUAL REPORT 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 I PROPERTY AND EQUIPMENT
Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
COST:
Balance as of 1 January 2002 6,975 2,525 1,835 250 1,174 12,759
Property and equipmentof newly consolidated subsidiary - 18 16 55 - 89
Additions during the year 398 498 293 33 183 1,405
Disposals during the year - (3) (23) (107) - (133)
Balance as of 31 December 2002 7,373 3,038 2,121 231 1,357 14,120
Property and equipmentof newly consolidated subsidiary 19 341 110 15 27 512
Additions during the year 700 380 101 161 40 1,382
Disposals during the year - (1) (17) (2) - (20)
Balance as of December 2003 8,092 3,758 2,315 405 1,424 15,994
Additions during the year 545 478 71 35 53 1,182
Disposals during the year - - (24) (59) - (83)
Balance as of 31 December 2004 8,637 4,236 2,362 381 1,477 17,093
ACCUMULATED DEPRECIATION:
Balance as of 1 January 2002 5,093 2,073 967 154 422 8,709
Property and equipment of newly consolidated subsidiary - 10 11 40 - 61
Additions during the year 586 316 155 29 178 1,264
Disposals during the year - (2) (23) (75) - (100)
Balance as of 31 December 2002 5,679 2,397 1,110 148 600 9,934
Property and equipment of newly consolidated subsidiary 3 310 57 15 21 406
Additions during the year 537 354 182 41 162 1,276
Disposals during the year - - (17) - - (17)
Balance as of 31 December 2003 6,219 3,061 1,332 204 783 11,599
Additions during the year 569 364 185 37 132 1,287
Disposals during the year - - (5) (37) - (42)
Balance as of 31 December 2004 6,788 3,425 1,512 204 915 12,844
Depreciated cost as of 31 December 2004 1,849 811 850 177 562 4,249
Depreciated cost as of 31 December 2003 1,873 697 983 201 641 4,395
Depreciated cost as of 31 December 2002 1,694 641 1,011 83 757 4,186
Machineryand
equipment
Computersand
peripheralequipment
Officefurniture
andequipment
Motorvehicles
Leaseholdimprovements
VISONIC32
NOTE 9 I INTANGIBLE ASSETS
Goodwill derives from the acquisition of Visonic Sp, a Polish company, in April 2002 by VM.
IssuanceKnow-how Goodwill expenses Total
US$ '000 US$ '000 US$ '000 US$ '000
Balance as of 1 January 2002 46 - - 46
Acquisition of subsidiary - 249 - 249
Amortisation charge for the year (9) (24) - (33)
Balance as of 31 December 2002net of accumulated amortisation 37 225 - 262
Issuance expense - - 6 6
Acquisition of subsidiary 1,493 - - 1,493
Amortisation charge for the year (121) (23) - (144)
Balance as of 31 December 2003 net of accumulated amortisation 1,409 202 6 1,617
Acquisition of know-how 22 - - 22
Amortisation charge for the year (223) (26) (6) (255)
Balance as of 31 December 2004 net of accumulated amortisation 1,208 176 - 1,384
NOTE 10 I CREDIT FROM BANKS AND CURRENT MATURITIES OF LONG-TERM LOANS
As of 31 December
2002 2003 2004
per cent US$ '000 US$ '000 US$ '000
Credit from banks in NIS 5.45 - 204 282
Current maturities of long-term bank loans 5,500 167 2,301
Short-term loan linked to the US dollar 3,008 1,002 -
8,508 1,373 2,583
The bank credit is secured by a floating charge over certain of the Company’s assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted averageinterest rate 31.12.04
2004 ANNUAL REPORT 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 I TRADE PAYABLES
As of 31 December
2002 2003 2004
US$ '000 US$ '000 US$ '000
Open accounts 4,100 4,745 4,383
Notes payable 74 71 38
4,174 4,816 4,421
NOTE 12 I RELATED COMPANY
The current balance represents a liability to S.M.D., a company under the control of the Company's controlling
shareholders, linked to the Israeli CPI and has no maturity date.
NOTE 13 I CONVERTIBLE DEBENTURES TO RELATED PARTY
On 19 March 2004, the Company repaid the convertible loan in the amount of $ 617,000.
NOTE 14 I OTHER CURRENT LIABILITIES
As of 31 December
2002 2003 2004
US$ '000 US$ '000 US$ '000
Accrued expenses 1,604 2,293 1,393
Income taxes payable 922 1,988 739
Customer advances 130 60 43
Related party (1) 225 391 99
Other 118 134 441
2,999 4,866 2,715
(1) The balance is linked to the Israeli CPI.
NOTE 15 I BANK LOANS
A. COMPOSITION:
As of 31 December
2002 2003 2004
per cent US$ '000 US$ '000 US$ '000
Linked to the dollar 3.33 8,019 8,684 8,705
Linked to the NIS 5.35 - - 162
Less - current maturities 5,500 167 2,301
2,519 8,517 6,566
B. THE LOANS MATURE IN THE FOLLOWING YEARS
subsequent to the balance sheet date:
First year (current maturities) 2,301
Second year and thereafter 6,404
8,705
C. AS FOR CHARGES, SEE NOTE 17C.
Weighted averageinterest rate 31.12.04
VISONIC34
NOTE 16 I TAXES ON INCOME
A. ISRAELI INCOME TAXES:
1. Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the Law"):
a) The Company:
Four expansion programs of the Company have been granted "Approved Enterprise" status, under
the Law. For these expansion programs, the Company has elected alternative benefits, waiving grants
in return for tax exemptions. Pursuant thereto, the income of the Company derived from the following
"Approved Enterprise" expansion programs is tax-exempt for the periods stated below and will be
eligible for reduced tax rates thereafter, as described below.
1. The Company received special approval regarding four of the expansion programs described
henceforth. The special approval determines a specific ratio in respect of allocating the income
deriving from the Approved Enterprise between income deriving from the plant in the centre of
Israel (Development Region C) and income deriving from the plant in Kiryat Gat (Development
Region A). The Company's management estimates that most of the income deriving from those
programs will be attributed to the plant in Development Region A.
2. The first program that commenced in 1999 and is to expire in 2007 was an expansion of S.M.D.
Income deriving from the first program and attributed to the plant in Development Region A will be
tax-exempt for the six-year period ending 31 December 2007. Income deriving from the first
program and attributed to the plant in Development Region C is not entitled to benefits and is
liable to tax at the regular rate. See Note 16f.
3. Income deriving from the second program, which commenced in 2002 and is to expire in 2011,
entitles the Company to a tax exemption for the 10-year period ending 31 December 2011 in
respect of income attributed to the plant in Development Region A. Income attributed to the plant
in Development Region C is liable to tax at the regular rate. See Note 16f.
4. Income deriving from the third program, which commenced in 2002 and is to expire in 2011,
entitles the Company to a tax exemption for the 10-year period ending 31 December 2011 in
respect of income attributed to the plant in Development Region A. Income attributed to the plant
in Development Region C is liable to tax at the regular rate. See Note 16f.
5. In February 2004, the Company received approval for an additional expansion. The Centre of
Investment approved an investment plan in property and equipment to be carried until 15
February 2006, in the amount of $ 2,400,000.
The entitlement to the above benefits is conditional upon the fulfilment of the conditions stipulated by
the above law, regulations published thereunder and the letter of approval for the investments in the
Approved Enterprises. In the event of failure to comply with these conditions, the benefits may be
cancelled and the Company may be required to refund the amount of the benefits, in whole or in part,
including interest.
Management of the Company believes that the Company has complied with all the conditions
described above.
Any income derived from sources other than Approved Enterprise is subject to the regular corporate
tax rate. See Note 16f.
In the event of distributions of dividends out of income deriving from an Approved Enterprise, which is
entitled to tax exemptions, the distributing company shall be liable to pay tax at the rate of 25 per
cent on the distributed earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 ANNUAL REPORT 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dividend distributions derived from an approved enterprise are subject to 15 per cent withholding tax.
The Company may distribute dividends from earnings that do not derive from tax exempt income by
virtue of the Approved Enterprise status.
b) Visonic Networks (“VN”):
VN was granted Approved Enterprise status according to the Law under a letter of approval, which
VN received during May 2000.
On 30 November 2003, VN's operations were acquired by Elpas. In October 2003, VN filed an
application to the Investment Centre to transfer its status as Approved Enterprise to Elpas.
On 22 December 2004, VN received temporary approval from the Centre of Investment , regarding
the transfer of its status as an "Approved Enterprise" to Elpas. The approval will become effective only
if Elpas will finance 30 per cent of the investment in property and equipment which was purchased by
VN according to VN’s Approved Enterprise by a share issuance. If the abovementioned condition
remains unfulfilled 60 days from 22 December 2004, then the temporary approval will expire.
In January and February 2005, Elpas complied with the abovementioned condition.
Income deriving from this program entitles VN to a tax exemption for a period of over 10 years.
The benefit period in respect of the investment program has not yet commenced and it is limited until
the end of 2013.
The entitlement to the above benefits is conditional upon the fulfilment of the conditions stipulated by
the above law, regulations published thereunder and the letter of approval for the investments in the
Approved Enterprises. In the event of failure to comply with these conditions, the benefits may be
cancelled and the Company may be required to refund the amount of the benefits, in whole or in part,
including interest.
The management of VN believes that VN has complied with all the conditions stipulated above.
In the event of distributions of dividends out of income deriving from an Approved Enterprise, which is
entitled to tax exemptions, the distributing company shall be liable to pay tax at the rate of 25 per
cent on the distributed earnings.
Any income derived from sources other than Approved Enterprise is subject to the regular corporate
tax rate. See Note 16f.
c) Visonetix:
According to the Law, Visonetix is entitled to various tax benefits by virtue of the Approved Enterprise
status that was granted to its plant.
Income deriving from this program, which commenced in 2001 and is to expire in 2005, entitles
Visonetix to a tax exemption for a period of four years ending 31 December 2004 and to a reduced
tax rate of 25 per cent for an additional one year ending 31 December 2005.
The entitlement to the above benefits is conditional upon the fulfilment of the conditions stipulated by
the above Law, regulations published thereunder and the letter of approval for the investments in the
Approved Enterprises. In the event of failure to comply with these conditions, the benefits may be
cancelled and the Company may be required to refund the amount of the benefits, in whole or in part,
including interest.
The management of Visonetix believes that Visonetix has complied with all the conditions stipulated
above.
VISONIC36
NOTE 16 I TAXES ON INCOME (cont.)
In the event of a distribution of dividends out of income deriving from an Approved Enterprise which is
entitled to a tax exemption, the distributing company shall be liable to pay tax at the rate of 25 per
cent on the distributed earnings.
Any income derived from sources other than Approved Enterprise is subject to the regular corporate
tax rate. See Note 16f.
d) Elpas:
Elpas' production facilities in Development Area C have been granted the status of an Approved
Enterprise under the above Law. Pursuant to the provisions of the Law, Elpas' undistributed income
will be tax-exempt for a period of two years commencing with the year it first realises taxable income.
In the remaining five years of benefits, Elpas will be subject to corporate tax at a reduced rate of 25
per cent.
The period of tax benefits, described above, is subject to limits of the earlier of 12 years from the
commencement of production, or 14 years from the approval date, whichever is earlier.
If a dividend is distributed out of such tax-exempt profits deriving from the Approved Enterprise, Elpas
will be liable to corporate tax at the rate of 25 per cent.
Any income derived from sources other than Approved Enterprise is subject to the regular corporate
tax rate. See Note 16f.
The entitlement to the abovementioned benefits is conditional upon Elpas fulfiling the terms stipulated
by the Law, regulations published thereunder and letters of approval for the specific investments in
the Approved Enterprises. In the event of failure to comply with these conditions, the benefits may be
cancelled and the Elpas may be required to refund the amount of the benefits, in whole or in part,
including interest.
The management of Elpas believe that Elpas has complied with all the conditions stipulated above.
2. The provisions of the Income Tax (Inflationary Adjustments) Law, 1985 apply to the Company and
certain of its Israeli investees. According to the law, the results for tax purposes are measured based
on changes in the Israeli CPI.
3. Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:
The Company and certain investees are "industrial companies", as defined by this law and, as such,
are entitled to certain tax benefits, mainly accelerated depreciation of machinery and equipment, as
prescribed by regulations published under the Inflationary Adjustments Law, and the right to claim
public issuance expenses and amortisation of patents and other intangible property rights as a
deduction for tax purposes.
4. Subsidiaries which were incorporated outside Israel are taxed according to their countries of
residence.
5. Deferred taxes:
The deferred tax assets reported in the balance sheet are based on the following temporary
differences. The deferred taxes were determined using tax rates in Israel ranging between 21 per cent
to 30 per cent.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 ANNUAL REPORT 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax assets are as follows:
Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Balance as of 1 January 2002 (115) 40 252 203 377 38 - 795
Amounts chargedto statement of income 42 194 (13) (71) (152) 25 - 25
Balance as of31 December 2002 (73) 234 239 132 225 63 - 820
Amounts charged tostatement of income 48 252 74 21 250 17 - 662
Balance as of31 December 2003 (25) 486 313 153 475 80 - 1,482
Amounts charged toadditional paid-in capital - - - - - - 454 454
Amounts charged tostatement of income 79 (40) (80) 13 - (15) (122) (165)
Balance as of31 December 2004 54 446 233 166 475 65 332 1,771
B. THEORETICAL TAX:
Year ended 31 December
2002 2003 2004
US$ '000 US$ '000 US$ '000
Profit before taxes on income, as reported 3,734 4,735 4,113
Provision at statutory rate - 2002 and 2003 - 36 per cent, 2004 - 35 per cent 1,344 1,705 1,439
Effect of benefits to approved enterprises (886) (875) (517)
Adjustment of the tax rates in the computation of deferred taxes 233 168 (114)
Non-deductible expenses 87 75 152
Increase in losses for which deferred taxes were not provided(utilisation of losses for tax purposes) 202 (248) 639
Difference between measurement basis of income for taxpurposes and for reporting purposes, net 19 (247) (514)
Other 4 30 (133)
1,003 608 952
per cent
Effective tax rate 26.9 12.81 23.11
C. TAXES ON INCOME CONSISTS OF THE FOLLOWING:
Current 1,028 1,270 787
Deferred (25) (662) 165
1,003 608 952
D. LOSS CARRYFORWARDS:
Certain subsidiaries have tax loss carryforwards in the amount of $ 14,571,000 in respect of which deferred
taxes in the amount of $ 3,697,000 were not provided.
Property and
equipment Inventories
Accruedseverance
pay
Accruedvacation and
recreation pay
Tax losscarry-
forward
Allowancefor doubtful
accounts
Issuanceexpensesaccounts
VISONIC38
NOTE 16 I TAXES ON INCOME (cont.)
E. TAX ASSESSMENTS:
The Company and the subsidiaries have received final assessments or assessments considered as
final as detailed below:
Up to and including tax year
The Company 1999
Elpas 2000
Visonetix 1999
Visonic GmbH 2002
Visonic Pty 2003
The other subsidiaries have not yet been assessed since their inception.
F. TAX RATES:
Until December 31, 2003, the regular tax rate applicable to income of companies (which are not
entitled to benefits due to "approved enterprise", as described above) was 36 per cent. In June 2004,
an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision), 2004 was passed
by the "Knesset" (Israeli parliament), which determines, among other things, that the corporate tax
rate is to be gradually reduced to the following tax rates: 2004 - 35 per cent, 2005 - 34 per cent,
2006 - 32 per cent and 2007 and thereafter - 30 per cent.
NOTE 17 I COMMITMENTS AND CONTINGENT LIABILITIES
A. ROYALTIES:
The Company and a subsidiary received from the Government of Israel grants for participation in
research and development and, in return, it is committed to pay royalties at the rate of 2 per cent -
5 per cent on sales proceeds of the financed research and development in an amount not to exceed
100 per cent of the total amount of the grants received. As of 31 December 2004, total grants
received amounted to approximately $ 3,755,000 and total royalties paid and accrued amounted to
approximately $ 1,248,000. As of 31 December 2004, total commitments amounted to $ 2,507,000.
B. LEASE AGREEMENTS:
1. Lease agreements with related parties:
The Company and certain of its subsidiaries rent their facilities under various operating lease
agreements, which expire on various dates, the latest of which is in 2015.
The minimum rental payments under non-cancellable operating leases are as follows:
31 December
US$ '000
2005 877
2006 854
2007 699
2008 590
2009 590
2010 - 2015 3,019
6,629
Total rental expense for the years ended 31 December 2002, 2003 and 2004 were approximately
$ 361,000, $ 504,000 and $ 873,000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 ANNUAL REPORT 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Other lease agreements:
The minimum rental payments under non-cancelable operating leases are as follows:
31 December
US$ '000
2005 260
2006 203
2007 31
494
Total rental expenses for the years ended 31 December 2002, 2003 and 2004 were approximately
$ 412,000, $ 446,000 and $ 328,000, respectively.
C. CHARGES:
As collateral for a bank loan in the amount of $ 8,122,000 at 31 December 2004, an unlimited first
priority fixed charge was recorded on all the past and future notes of the Company, on the unpaid
share capital and on the goodwill, and a first priority floating charge was recorded on the plant and
equipment in favour of the bank.
D. A LETTER OF CREDIT:
Pursuant to a letter of credit dated 25 December 2003, Bank Leumi Le-Israel B.M. ("Bank Leumi" or
the "Bank") makes available credit facilities to the Company. The letter provides for a total credit
facility for an amount not exceeding $ 12,700,000 ("the Loan Facility") available for a period of three
years from the date of the letter. In addition, the letter specifies that Bank Leumi will provide bank
guarantees ("the guarantee Facility") for a total amount not exceeding $ 200,000 for a period of one
year from the date of the letter. As at 31 December 2004, $ 8,122,000 of the Loan Facility.
The approved Loan Facility and guarantee Facility shall be valid up until 31 January 2006, and subject
to fulfilment of the following terms:
1. There shall have been no material adverse change in the value of the collateral which the
Company has provided in favour of the Bank.
2. The Tangible Equity (as defined in the agreement) of the Company shall not, at any time, be less
than 29 per cent of its total assets as set forth in its balance sheet on a consolidated basis in the
quarterly and annual financial statements. In addition, said tangible equity of the Company shall
not, at any time, be less than NIS 45,554,326 ($ 9,500,000) linked to the Israeli Consumer Price
Index known on the date of signature thereof; and all such data shall appear in the quarterly and
annual financial statements of the Company on a consolidated basis.
3. At all times, the EBITDA of the Company shall be not less than the total amount of current
maturities of long-term loans, which the Company has undertaken with the addition of all of the
Company's financing costs, as the same appear in the quarterly and annual financial statements
(as defined in the agreement).
4. There will not be any change whatsoever in the control (as defined in the agreement) of the
Company, without the prior written consent of the Bank.
Notwithstanding the aforesaid, it was agreed that the Company shall be entitled to issue up to
30 per cent of its shares to the public (as defined below), provided that, following such a public
offering, Yaacov Kotlicki shall remain the controlling shareholder of the Company.
VISONIC40
NOTE 17 I COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
There will not be any change whatsoever in the Company’s control of Visonic Inc., Visonic Limited
and Visonic Iberica, without the prior written consent of the Bank.
As of 31 December 2004, the Company is complying with the abovementioned terms.
E. CLAIMS:
On 17 March 2004, the Company received notice of a claim filed in US courts by Versus Technology,
Inc. (“Versus”) against several subsidiaries of a Group customer, Hill-Rom, Inc. and naming two of the
Group’s subsidiaries, Visonic Technologies Limited and Visonic, Inc. as co-defendants. The two Group
subsidiaries are named in only two out of the eight counts of the claim alleging, inter alia, that the
Hill-Rom defendants and the Visonic defendants have infringed at least one of four of Versus' patents.
The remedies claimed against the two Group companies are an injunction to prevent further
infringement and damages for past infringement arising from sales of certain products by the Group
companies. Hill-Rom has also indicated that it intends to defend the claim vigorously.
The Company strongly denies the allegations made against its two subsidiaries and the claim will be
vigorously defended. The Company has obtained preliminary legal advice from its US counsel and
firmly believe that Versus will not be successful in its claim against the Company's two subsidiaries.
Recently the Michigan court decided to move the lawsuit North Carolina. Since the complaint was
filed, Versus has amended its complaint twice. The present amendment names the Group
subsidiaries defendants VT, VTA and Elpas. Furthermore, Versus amended the complaint to include
also products sold by VTA to other customers (and not only those products sold to Hill-Rom).
Furthermore, the Company received from its US legal counsels an legal opinion, according to which
Hill-Rom is obligated to indemnify VTA and Elpas for liabilities, cost and legal fees actually incurred by
VTA and Elpas in relation to the Versus litigation.
On January 5, 2005, VTA filed a counter claim against Versus alleging an infringement of a VTA patent
by Versus.
Group sales of the relevant products in the financial year ended 31 December 2004 represent less
than 3 per cent of 2004 Group sales. The Company does not consider that the claim, even if upheld,
would have a significant effect on the Group’s financial position.
NOTE 18 I SHARE CAPITAL
A. On 15 April 2004, the Company effected an IPO in the London Stock Exchange. The proceeds of the
Placing were approximately $ 15,499,000, net of issuance expenses in the amount of $ 1,798,000
(after the tax effect). The Company issued 10,864,885 Ordinary shares representing approximately 27
per cent of the issued and outstanding Ordinary shares. The shares were listed on the London Stock
Exchange under the symbol VSC.L and trade commenced on 15 April 2004.
B. SHARE CAPITAL:Year ended 31 December
2002 2003 2004
1. Authorised:
Ordinary shares of NIS 0.002 par value 497,475,000 497,475,000 500,000,000
Ordinary A shares of NIS 0.002 par value 2,525,000 2,525,000 -
2. Issued and outstanding:
Ordinary shares of NIS 0.002 par value 29,157,240 29,157,240 40,400,815
Ordinary A shares of NIS 0.002 par value 218,190 218,190 -
In April 2004, the Company redesignated the Ordinary A shares as Ordinary shares.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 ANNUAL REPORT 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. STOCK OPTION PLAN:
1) The Company
a) The Company has three Stock Option Plans authorised in 2001; Israeli Stock Option Plan 2001,
Global Stock Option Plan 2001 and US Stock Option Plan 2001. Under the Company's three
Stock Option Plans, the Company may issue up to 1,843,500 stock options exercisable into
Ordinary shares.
The options expire within 10 years from the date of grant. The options were equally granted
throughout four vesting periods over four consecutive years, with the first vesting period
scheduled 12 months after the date of grant. The exercise prices of the options granted under the
plans range between $ 0.68 - $ 1.08 per share.
b) In December 2003, the Company authorised three new stock option plans to the employees of
the Company and to services providers; Israeli Stock Option Plan 2003, Global Stock Option Plan
2003 and US Stock Option Plan 2003. The plan addressed tax reforms enacted since the 2001
Stock Option Plan. As a result, most of the non-vested options from the former plan were
cancelled and were re-granted under the new plan, under the same terms as the former plan. On
15 April 2004, the Company granted 1,120,750 options to its employees. According to the plan,
as of 31 December 2004, the Company may issue up to 123,750 options exercisable into
Ordinary shares. Any options under the Israeli Stock Option Plan 2001 that will be forfeited will be
reissued under the Israeli Stock Option Plan 2003.
The total pool option balance of the six stock option plans as of 31 December 2004 is 2,839,500
options.
The options to the employees in Israel were granted under section 102 to Israel's Income Tax
Ordinance and the options to the Israeli service providers were granted under section 3(i) to the
Income Tax Ordinance.
A summary of the Company's stock options activities in 2002, 2003 and 2004 is as follows:
Options outstanding
Weighted Average exercise Number of options price per share
US$
Balance as of 1 January 2002 2,173,500 0.68
Options granted 412,000 0.77
Options forfeited (59,000) 0.68
Balance as of 31 December 2002 2,526,500 0.69
Options forfeited (683,000) 0.68
Balance as of 31 December 2003 1,843,500 0.70
Options granted 1,120,750 1.70
Options forfeited (88,000) 0.85
Options exercised (160,500) 0.68
Balance as of 31 December 2004 2,715,750 1.11
VISONIC42
NOTE 18 I SHARE CAPITAL (cont.)
The options outstanding as of 31 December 2004 have been separated into ranges of exercise price as follows:
US$ US$ US$
0.68 1,507,000 7 0.68 1,058,540 0.68
1.08 88,000 7 1.08 44,000 1.08
1.70 1,120,750 9.25 1.70 - 1.70
2,715,750 1,102,540
2) VT:
In December 2003, VT authorised three stock option plans to its employees and to service providers;
Israeli Stock Option Plan 2003, Global Stock Option Plan 2003 and US Stock Option Plan 2003.
According to the plan VT reserved 2,300,000 options exercisable into VT shares. The options expire
within 10 years from the date of grant. As of 31 December 2004, VT granted 1,631,001 options of VT
to employees and 54,000 option of VT to service providers.
The options were equally granted throughout four vesting periods over four consecutive years, with
the first vesting period scheduled 12 months after the date of grant, except for 605,001 options of VT
granted in November 2003 which vest in equal tranches on a monthly basis over a three year period
from the date of grant.
The exercise price of the options granted under the plan is $ 0.07 per share.
As of 31 December 2004, the Company hold 85 per cent of VT's shares. On a fully diluted basis, the
Company will hold 77.7 per cent of VT's shares. (See Note 26).
NOTE 19 I SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF INCOME
Year ended 31 December
2002 2003 2004
US$ ‘000 US$ ‘000 US$ ‘000
A. COST OF SALES:
Materials consumed (1) 13,545 20,522 (1) 16,524
Salary and related benefits 6,482 7,355 6,831
Subcontractors 1,139 1,582 1,809
Depreciation 1,042 1,022 1,047
Other manufacturing costs 2,426 2,675 2,833
Decrease (increase) in inventory of work in progress (2) 813 (275) 147
Decrease (increase) in inventory of finished goods 559 (3,623) 263
26,006 29,258 29,454
(1) Including $ 520,000 in respect of write down of raw materials.
(2) Including write down of $ 100,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WeightedOptions Weighted Options average
outstanding average Weighted exercisable exerciseas of remaining average as of price of
Exercise 31 December contractual exercise 31 December optionsprice 2004 life (years) price 2004 exercisable
2004 ANNUAL REPORT 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended 31 December
2002 2003 2004
US$ ‘000 US$ ‘000 US$ ‘000
B. RESEARCH AND DEVELOPMENT COSTS:
Salary and related benefits 2,868 3,599 3,651
Purchase of materials 77 117 188
Subcontractors 106 525 753
Foreign travel 124 137 161
Maintenance of vehicles 271 341 333
Other expenses 212 259 399
Research and development costs, gross 3,658 4,978 5,485
Less – participation of the Chief Scientist 51 - 417
Research and development costs, net 3,607 4,978 5,068
C. SELLING AND MARKETING EXPENSES:
Salary and related benefits 4,461 5,170 6,785
Lease of offices and maintenance 615 625 777
Advertising and marketing expenses 1,389 1,264 1,748
Depreciation 137 177 147
Professional consultation 95 299 360
Foreign travel 531 876 1,100
Delivery, export and insurance 521 530 826
Participation of the Fund for Encouragement of Marketing (35) - -
Other 1,474 2,177 1,855
9,188 11,118 13,598
D. GENERAL AND ADMINISTRATIVE EXPENSES:
Salary and related benefits 1,534 1,654 1,563
Maintenance of offices 262 258 205
Professional consultation 421 329 600
Depreciation and amortisation 118 221 348
Bad debts, net 199 (24) 255
Other 646 551 611
3,180 2,989 3,582
E. RESTRUCTURING COSTS - 112 -
F. FINANCIAL INCOME, NET:
Interest from related parties, net (42) - -
Interest expenses, net (590) (271) (197)
Linkage differences income 1,188 545 1,042
556 274 845
VISONIC44
NOTE 19 I SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF INCOME
Year ended 31 December
2002 2003 2004
US$ ‘000 US$ ‘000 US$ ‘000
G. OTHER INCOME (EXPENSES), NET:
Capital loss from sale of property and equipment (1) - (10)
Profit from issuance of shares by a subsidiary - 30 -
Other - - (149)
(1) 30 (159)
(1) In November 2003, the Company restructured the activities of its subsidiaries, Elpas and VN. In the framework
of the restructure, the Company elected to compensate several employees in an amount aggregating to $ 112,000.
H. STAFF NUMBERS AND COSTS:
The average number of persons employed by Visonic (including directors) during the period and their cost were as
follows:Number of employees - Year ended 31 December
2002 2003 2004
Salaried 331 352 385
Other 126 130 52
457 482 437
Year ended 31 December
2002 2003 2004
US$ '000 US$ '000 US$ '000
Salary 10,952 12,924 14,555
Manpower employees 1,593 1,849 984
National Insurance 642 809 952
Pension expenses 1,188 1,411 1,580
Other expenses 970 897 759
15,345 17,890 18,830
NOTE 20 I EARNINGS PER SHARE
The following reflects the income and share data used in the basic and diluted earnings per share computations:
Year ended 31 December
2002 2003 2004
Net profit attributable to Ordinary shareholders forbasic and diluted earnings per share 2,723 4,181 3,257
Weighted average number of Ordinary shares forbasic earnings per share 29,375,430 29,375,430 37,151,584
EFFECT OF DILUTION:
Share options 1,008,544 1,320,466 866,296
Adjusted weighted average number of Ordinaryshares for diluted earnings per share 30,383,974 30,695,896 38,017,880
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 ANNUAL REPORT 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 I FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions are used by the Company and its investees in estimating the fair
value of their financial instruments:
The carrying amounts of cash and cash equivalents, short-term deposits, trade receivables, other
accounts receivable, credit from banks, employees and payroll accruals, trade payables and other current
liabilities, approximate their fair value due to the short-term maturity of such instruments.
The carrying amount of the Company’s long-term bank loans approximates their fair value based on the
Company's incremental borrowing rates for similar type of borrowing arrangements.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company and its subsidiaries to concentration of credit
risk consist principally of cash and cash equivalents, short and long-term deposits, held to maturity
securities and trade receivables.
Cash and cash equivalents are invested in major banks in Israel, Europe and the United States. Such
deposits in the United States and Europe may be in excess of insured limits and are not insured in other
jurisdictions. Management believes that the financial institutions that hold the Company's investments are
financially sound and, accordingly, minimal credit risk exists with respect to these investments.
The Company's trade receivables are mainly derived from sales to customers in Europe, North America
and the Far East.
The Company performs ongoing credit evaluations of its customers and to date has not experienced any
material losses. An allowance for doubtful accounts is determined with respect to those amounts that the
Company has determined to be doubtful of collection.
FOREIGN CURRENCY RISK:
The Company sells its products in several countries and, as a result, is exposed to movements in foreign
currency exchange rates. The primary purpose of the Company’s foreign currency hedging activities is to
protect against the volatility associated with foreign currency created in the normal course of business.
The Company primarily utilises forward exchange contracts with maturities of less than 12 months and
foreign currency options to hedge foreign-currency-denominated firm financial commitments. Any gains
or losses arising from changes in the fair value of the hedged item and the hedging instruments are
carried directly to the net profit and loss for the period.
The Company does not use foreign currency forward exchange contracts or purchased currency options
for trading purposes.
When possible, it is the Company's policy to negotiate the terms of the hedged derivatives to match the
terms of the hedged item to maximise hedge effectiveness.
As of 31 December 2004, the Company has no forward exchange contracts and no foreign currency
options.
The total gain resulting from derivative financial instruments for the year ended 31 December 2004 was
$ 15,000.
VISONIC46
NOTE 22 I BALANCES AND TRANSACTIONS WITH RELATED PARTIES
A. BALANCES WITH RELATED PARTIES:
As of 31 December
Linkage basis 2002 2003 2004
US$ '000 US$ '000 US$ '000
CURRENT ASSETS:
Trade receivables - related company US dollar 104 134 107
CURRENT LIABILITIES:
Related party CPI 225 391 99
Related company CPI 726 743 805
Related party - convertible debentures - 617 617 -
B. TRANSACTIONS WITH RELATED PARTIES:
Year ended 31 December
2002 2003 2004
US$ '000 US$ '000 US$ '000
REVENUES:Sales to investees (1) 237 329 292
EXPENSES:Salary bonus and other benefits to 200 268 760related party employed by the Company
Non executive directors fee - - 64
Rental fees payable to related party (2) 361 504 873
(1) In 2002, the amount shown represents sales to Visonic Sp (an associate until May 2002) and to Visonic Deson,
a jointly controlled entity. In 2003 and 2004, the amount shown represents sales to Visonic Deson.
(2) See Note 17b(1).
NOTE 23 I DIRECTORS REMUNERATION
A. In April 2004, the Board of Directors of the Company resolved to enter into new employment
agreements with each of Yaacov Kotlicki (see (1) below), Avigdor Shachrai (see (2) below) and Shmuel
Koren (see (3) below) and to appoint Mr. Walter Goldsmith and Mr. Anthony McCann as non-
executive directors of the Company. (See (4) below).
(1) Yaacov Kotlicki’s annual salary under the agreement is NIS 360,000 (equivalent to $ 79,000)
(linked to the Israeli Consumer Price Index) and the agreement also entitles him to social benefits
and a bonus of 2.5 per cent of the annual operating profit of the Group and, in addition, a bonus
of up to 50 per cent of his annual salary depending upon the success and profitability of the
Group and a company car. The agreement is terminable by either party on three months’ prior
written notice to the other.
(2) Avigdor Shachrai’s annual salary under the agreement is NIS 660,000 (equivalent to $ 145,000)
and the agreement also entitles him to social benefits and a bonus of up to 25 per cent of his
annual salary in the event the Company achieves its annual targets and up to 50 per cent of his
annual salary in the event the Company significantly exceeds its annual targets and a company
car. The agreement is terminable by either party on six months’ prior written notice to the other.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 ANNUAL REPORT 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Shmuel Koren’s annual salary under the agreement is NIS 516,000 (equivalent to $ 113,000) and
the agreement also entitles him to social benefits and a bonus of up to 50 per cent of his annual
salary (linked to his individual performance, the annual turnover of the Company and the annual
operating profit of the Company) and a company car. The agreement is terminable by either party
on three months’ prior written notice to the other.
(4) According to the agreements, the appointment of Mr. Walter Goldsmith and Mr. Anthony McCann
as non-executive directors of the Company shall be for an initial period of 12 month from the
appointment date but it may be terminable by either party upon three months prior written notice
to the other party. The non-executive directors annual fee under the agreement is £ 20,000 each
(equivalent to $ 38,000 each).
C. DIRECTORS:
Year ended 31 December
2002 2003 2004
US$ '000 US$ '000 US$ '000
Salary (1) 76 (1) 79 (2) 343
Fee - - (3) 64
Bonus 76 120 160
Other benefits 48 69 192
200 268 759
(1) Includes one director.
(2) Includes three directors.
(3) Includes two directors.
D. DIRECTORS SHAREHOLDINGS IN THE COMPANY:
Shareholder Ordinary shares Per cent of issue share capital
Yaacov Kotlicki 25,829,000 63.92
Batia Kotlicki 500 *) -
Akiva Laxer (held in trust for Yaacov Kotlicki) 1,828,620 4.53
S.M.D. Advanced Technologies Limited (1) 1,868,620 4.62
Avi Shachrai 20,000 0.05
Shmuel Koren 1,000 0.01
Walter Goldsmith 30,000 0.07
Antony McCann 6,000 0.01
29,583,740 73.21
(1) A company wholly owned by Yaacov Kotlicki.
E. YAACOV KOTLICKI AND S.M.D. rent properties to the Company. The rental fee is mentioned in
Note 22(b) and Note 17(b)(1).
*) Less than 0.01 per cent.
VISONIC48
NOTE 24 I INTEREST IN JOINT VENTURE
The Company has a 50 per cent interest in the assets, liabilities, expenses and output of Visonic Deson
Limited, which is involved in the marketing and support of electronic security and alarm systems.
The Company's share of the assets, liabilities, revenue and expenses of the joint venture, which are
included in the consolidated financial statements, were as follows:
As of 31 December
2002 2003 2004
US$ '000 US$ '000 US$ '000
BALANCE SHEET ITEMS:
Current assets 166 213 173
Current liabilities 110 145 140
Year ended 31 December
2002 2003 2004
US$ '000 US$ '000 US$ '000
STATEMENT OF OPERATIONS ITEMS:
Revenue 285 385 315
Cost of revenues 241 331 265
Operating expenses 29 41 68
Net profit (loss) 15 12 (18)
NOTE 25 I BUSINESS SEGMENTS
A. GENERAL
1. The Group companies operate in two principal business segments: location tracking systems and
security and home management.
2. The segment's assets include all the operating assets which are used by the segment and are
composed mainly of cash and cash equivalents, checks receivable, trade receivables, equipment
and other assets. Most of the assets are attributed to a specific segment. The amounts for certain
assets that are used together by two or more segments are attributed to the segments on a
reasonable basis.
3. The segment's liabilities include all the operating liabilities that derive from the operating activities
of the segment and are composed mainly of trade payables and other accounts payable. The
segment's assets and liabilities do not include taxes on income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 ANNUAL REPORT 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. THE FOLLOWING DATA IS PRESENTED IN ACCORDANCE WITH IAS 14:
Year ended 31 December 2002
US$ '000 US$ '000 US$ '000 US$ '000
Total revenues 40,076 5,084 - 45,160
Segment operating profit (loss) 3,361 (65) (117) 3,179
Unallocated financial income, net 556
Other expenses, net (1)
Taxes on income (1,003)
Equity in losses of investee companies (8) - - (8)
Profit from continuing operations 2,723
Minority interest in losses of subsidiaries -
Net profit 2,723
ADDITIONAL INFORMATION:
Assets of the segment 27,223 1,279 (887) 27,615
Unallocated joint assets 820
Total assets in consolidation 28,435
Liabilities of the segment 8,932 2,236 (887) 10,281
Joint unallocated liabilities 11,644
Total liabilities in consolidation 21,925
Capital investments 1,616 32 - 1,648
Depreciation and amortisation 1,218 79 - 1,297
Year ended 31 December 2003
US$ '000 US$ '000 US$ '000 US$ '000
Total revenues 47,340 5,546 - 52,886
Segment operating profit (loss) 4,704 (208) (65) 4,431
Unallocated financial income, net 274
Other income, net 30
Taxes on income (608)
Profit from continuing operations 4,127
Minority interest in losses of subsidiaries - 54 - 54
Net profit 4,181
ADDITIONAL INFORMATION:
Assets of the segment 30,534 4,032 (1,492) 33,074
Unallocated joint assets 1,482
Total assets in consolidation 34,556
Liabilities of the segment 12,857 2,793 (2,388) 13,262
Joint unallocated liabilities 10,603
Total liabilities in consolidation 23,865
Capital investments 1,326 1,549 - 2,875
Depreciation and amortisation 1,210 210 - 1,420
Security Location and home tracking Total
management systems Adjustments consolidated
Security Location and home tracking Total
management systems Adjustments consolidated
VISONIC50
NOTE 25 I BUSINESS SEGMENTS (cont.)
Year ended 31 December 2004
US$ '000 US$ '000 US$ '000 US$ '000
Total revenues 49,231 5,898 - 55,129
Segment operating profit (loss) 4,749 (1,322) - 3,427
Unallocated financial income, net 845
Other expenses, net (159)
Taxes on income (952)
Profit from continuing operations 3,161
Minority interest in losses of subsidiaries 96
Net profit 3,257
ADDITIONAL INFORMATION:
Assets of the segment 47,378 4,085 (3,720) 47,743
Unallocated joint assets 1,771
Total assets in consolidation 49,514
Liabilities of the segment 10,130 4,417 (3,720) 10,827
Joint unallocated liabilities 9,131
Total liabilities in consolidation 19,958
Capital investments 1,103 101 - 1,204
Depreciation and amortisation 1,259 283 - 1,542
C. GEOGRAPHICAL SPLIT OF SALES: Below are the consolidated sales of the Group according to
geographic markets without taking into account the location where the product was
manufactured.
Year ended 31 December
2002 2003 2004
US$ '000 US$ '000 US$ '000
Mainland Europe 22,784 24,669 29,720
North America 9,403 10,777 11,774
U.K. 5,650 11,930 7,411
Israel 2,807 2,305 3,253
Far East and Pacific 3,367 2,063 1,895
Other 1,149 1,142 1,076
45,160 52,886 55,129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Security Location and home tracking Total
management systems Adjustments consolidated