excellenceexcellence on sighton sight - avt ltd.avt.drupal6.hosting.comrax.com/files... ·...

AVT Annual Report 2000

on Sighton Sight

Advanced Vision Technology Ltd.

ExcellenceExcellence

Notes of Consolidated Financial Statements

Revenues and Income

Revenues

Gross profit

Gross margin in %

Research and Development expenses, net

Sales and Marketing expenses, net

General and Administrative expenses

Operating Loss

Operating margin in %

Net Loss

Cash Flows

Cash Flows used in Operating Activities

Cash Flows provided by (used in) investing Activities

Cash Flows provided by Financing Activities

Balance Sheet as of December 31st

Cash and Equivalents

Total Assets

Total Liabilities

Total Shareholders’ Equity

Share

Net Loss per Share in USD

Share Price as of December 31st

Employees

Employees as of December 31st

(In thousands, except per share amounts) Years Ended December 31, 199819992000

12,038

6,637

55.13%

2,116

4,534

1,723

-1,736

-14.42%

-297

-2,580

-28,274

39,805

9,304

47,909

3,950

43,959

-0.03

2.85 Euro

115

8,832

5,018

56.82%

1,167

3,039

1,095

-283

-3.20%

-526

-3,280

106

1,664

353

7,241

4,771

2,470

-0.07

-

89

5,808

2,649

45.61%

1,463

2,161

831

-1,806

-31.10%

-1,840

-2,244

-890

3,588

1,863

6,032

3,056

2,976

-0.31

-

62

2-3 Preface by the CEO 4-5 The Management 6-15 Company Vision 16-17 The Share 18-21 Management

Discussion and Analysis 22 Financial Table of Contents 23 Report of Independent Auditors 24 Consolidated

Balance Sheets 26 Consolidated Statements of Operations 27 Statements of Changes in Shareholders’

Equity 28 Consolidated Statements of Cash Flows 29-44 Notes to Consolidated Financial Statements

45 Report of the Board of Directors 46-47 Members of the Board of Directors 48 AVT World Wide

Table of Contents

Advanced Vision Technology (AVT) Ltd. translates innovative machine

vision technologies into process control solutions for the

global printing industry.

AVT’s growing range of systems significantly boosts productivity,

reduces waste and enables its customers to set and maintain new

standards of quality. With deployments worldwide, AVT is the

recognized leader in the printing market.

In 2000 we delivered effectively on our strategic

business, technological and marketing goals.

Our successful IPO on Frankfurt’s Neuer Markt confirmed

the international financial community’s confidence in

our future. We are committed to increasing shareholder

value by building on the vast potential of the printing

industry, which has consistently validated its need for

our process control solutions.

In 2000, we significantly expanded our product offerings

for packaging printers, our current primary market.

At Drupa 2000, the showcase international trade show

of our industry, we introduced several new solutions

for this segment. PrintVision/Apollo delivers 100

percent web inspection and is targeted at printers whose

customers demand impeccable quality to maintain

brand image. PrintVision/Argus combines process

control and random defect detection, reducing the

lifetime of a print fault to just one second. PrintVision/Pro

introduces a new, exceptionally friendly and practical

interface for operators. Our pRegister controls color

cylinders on a press, and can be integrated with the

most popular Flexo press models on the market.

Simultaneously, we addressed a totally new market

segment by launching an exciting new solution that

we believe will transform process control in the commercial

printing market. PrintVision/Mercury addresses printers

of magazines, catalogues, as well as brochures, direct

mail materials and corporate documentation.

During 2000 our sales to the US grew by a phenomenal

85 percent. We are particularly proud of the repeat

orders from leading customers. Our marketing success

was also apparent in new territories: we penetrated the

promising South American and Southeast Asian markets.

Our revenues increased by 36 percent in 2000, and

by 65 percent in the first three quarters. The fourth

quarter was affected by the general economic slowdown,

particularly in the US. Another adverse factor was the

poor performance of our European subsidiary, which

has consequently been completely reorganized, with

highly professional new management in place.

Our goals are ambitious. We are determined to be

market leaders in each market segment we enter.

Dear Shareholders,

2

In the packaging industry, our dominant position is undisputed. We have formulated a clear strategy for achieving

a similar rank in the commercial print market. We plan to introduce a solution for the label industry, where there

are currently over 19,000 web-fed presses used for this application. This market offers very attractive opportunities,

as most inspection is currently error prone and time consuming. We intend to expand our marketing channels,

which are now direct or through press manufacturers, to include distributors, particularly in more distant territories.

AVT has an outstanding reservoir of proprietary enabling technologies, which through substantial investments

in R&D, is serving as the springboard for entry into new products and markets in the print industry. Furthermore,

we are exploring other industries where our machine vision technology can deliver competitive advantages

and benefits.

We welcome the challenges and opportunities the future offers. Our dedicated team has repeatedly demonstrated

that it shares our vision, and has the motivation, innovation and commitment to customer satisfaction that are

the key ingredients of healthy growth. We thank our employees, customers, business partners and shareholders

for their continued confidence in our potential.

Shlomo Amir

President and CEO

During 2000 our sales to the US grew by a phenomenal

85 percent. We are particularly proud of the repeat orders

from leading customers.

3

Shlomo Amir, President & CEO

Mr. Amir joined AVT in 1997. Before joining AVT, Mr. Amir served for two years as vice president of marketing

and sales at Nice Systems Ltd., an Israel-based international high-tech company in the area of digital voice

logging. Previously, Mr. Amir worked for 12 years at Scitex Corporation, an Israeli high-tech company serving

the pre-press industry. In his last nine years with Scitex he was based in its European subsidiary in Brussels,

serving in various marketing, sales and management positions. Mr. Amir holds the degrees of B.Sc. in Mathematics

and Computer Science from Tel Aviv University, Israel, and an MBA from Boston University, Massachusetts,

United States.

Noam Noy, Chief Technology Officer

Mr. Noy is one of the founders of AVT, and an expert in visual inspection and machine vision technologies.

Prior to joining AVT in 1993, he held the position of senior development manager at Orbotech (formerly Orbot),

a Nasdaq-listed Israeli technology firm that develops visual inspection systems for the printed circuit board

and liquid crystal display industries. Mr. Noy holds a B.Sc. in Electronic Engineering from the Technion,

Haifa, Israel.

Eli Velner, V.P. Research & Development

Mr. Velner has many years of experience in combined R&D, production, marketing and product-line management

of multi-disciplinary projects, as well as in Electronics, Physics and Software R&D and in application areas

such as visual inspection machines, image processing and vision algorithms. Prior to joining AVT in 2000, he

held the position of V.P. R&D in Combact Diagnostic Systems, a company in the medical diagnostics business.

Before that he held the position of R&D Manager in Matan Systems, Photon Instruments and other leading

hi-tech companies in Israel such as Optrotech and Tadiran. Mr. Velner holds a degree in Business Administration

and a B.Sc in Electronics Engineering from Tel Aviv University, Israel.

Zev Morgenstern, Chief Financial Officer

Prior to joining AVT in 1999, Mr. Morgenstern served for three years as finance manager at Precise Software

Solutions, an Israeli company that develops database performance tools, and for six years as a senior auditor

with a major Israeli accounting firm. Mr. Morgenstern, who is a certified public accountant, holds a B.A. in

Accounting and Economics from Bar-Ilan University, Ramat Gan, Israel.

The Management

4

5

Koby Shtaierman, V.P. Marketing and Sales

Prior to joining AVT in 1999, Mr. Shtaierman was vice president of marketing at Technomatix, a multinational

company headquartered in Israel that develops computer-aided production engineering software tools for the

automotive and aerospace industries as well as heavy industries worldwide. Previously Mr. Shtaierman served

at Scitex for 10 years in various positions, including as R&D project manager and later as director of marketing

for Scitex’s input systems division. Mr. Shtaierman holds B.Sc. and M.Sc. degrees in Electronics and Computer

Engineering from the Technion, Haifa, Israel.

Dan Danziger, V.P. Operations

Prior to joining AVT in 2001, Mr. Danziger served for five years at Davidoff Group, an Israeli-based international

company in the area of insurance & medical services in various positions, including as CEO of Femi Medical

Services Ltd., and later as the CEO of Davidoff Group. Previously Mr. Danziger served for three years as the

CFO of Applicom Software Ltd., an Israeli public company, and as Chief Operations Officer of Solarom Ltd.,

a manufacturing company for another three years. Mr. Danziger holds a B.A. in Economics and Management

from Tel Aviv University, Israel.

Lance Shumaker, President, AVT Inc.Mr. Shumaker joined AVT in 1998. Before joining AVT, Mr. Shumaker held various positions in the graphic

arts market to include: Director of Sales for Indigo America, an Israel-based international high-tech company

in the field of digital printing and National Accounts Manager for Scitex America Corporation, an Israeli high-

tech company serving the pre-press industry. Most recently, prior to joining AVT, Mr. Shumaker was the V.P.

of sales for TeleServices International, a tele-marketing company. Mr. Shumaker holds a Marketing degree from

the University of Missouri.

Printing is part of the production process of virtually

every consumer good, from publications to packaging

and labels. For many manufacturers, their printed

material is one of the most powerful and important

extensions of their brand, conveying their brand image

to the consumer.

It is therefore not surprising that the printing industry

is one of the largest industries in the world, with

hundreds of billions of dollars in annual turnover.

Over 100,000 print shops are operating worldwide,

many of which have several presses, and some 10,000

new printing presses are sold annually. North America,

Western Europe and Japan together account for about

80 percent of the global market.

Today’s printers operate in an increasingly competitive

and demanding market. The cost of their raw materials

typically approximates 50-60 percent of revenues, yet

up to 20 percent of this material is wasted due to defects

that occur during the printing process. Waste is becoming

an even more severe challenge with printers called

upon to print on increasingly expensive and complex

flexible substrates, such as plastics, transparent films

and foil.

A MarketDemanding Effective Solutions

Faced with very tight single-digit profit margins, printers

are hungry for solutions that can help them to reduce

material waste and increase productivity.

This is indeed a challenge because human inspection

is the prevalent practice. Human operators are prone

to error due to inattention, false judgments and varying

levels of skills. Moreover, human inspectors are focused

on quality control of the end product, weeding out

defective output before it is delivered to a customer.

What printers really need, however, is process control:

identification of defects before they become a problem

and cause waste. Only process control enables printers

to provide consistently superior quality while cutting

the cost of quality.

AVT’s breakthrough machine vision technology has

made process and quality control for printers a reality.

6

Joachim Friebe,

Managing Director,

Reuther Verpackung GmbH,

Germany

The PrintVision/9000NT has been received

positively by the operators. They like that it helps them to produce

good quality and that it recognizes faults much earlier

than they themselves could do it.

7

Our machine vision technology integrates electronic imaging, image processing

and image analysis techniques. Built-in to our growing PrintVision family of

products, our proprietary technologies are delivering measurable benefits to our

customers worldwide.

Our customers report up to a 50 percent reduction in print waste when using

our systems. Our PrintVision systems automatically identify printing faults as

they occur, so that potential quality problems are quickly addressed. Spotting,

streaking, misregistration, inconsistent coverage–gone are the days when these

problems became increasingly magnified, leading to significant discards.

The superior accuracy and sensitivity of our solutions also enables printers to

increase press speed. Our customers report an average increase in press speeds

of 10-25 percent. Previously, when printers increased press speed they sacrificed

quality and waste grew.

TechnologyDelivers Measurable Benefits

With PrintVision solutions, process control is automated. The system “learns”

a master image, which is the “golden template” for the print run. PrintVision

machines use sophisticated algorithms and expert system technologies to analyze

and classify data. The operator is instantaneously made aware of defect alerts

and their severity level. A defect study module enables the operator to toggle

between the master image and the defective image, with an automatic camera

zoom to the defect. During the entire run, PrintVision systems track and store

the data for statistical analysis, providing valuable information for future runs.

Through this comprehensive automated approach to defect detection, we enable

printers to produce more output with higher quality and to reduce waste simultaneously.

The impact on profit margins is considerable. Just as important, printers have

the confidence they are delivering the best possible printed material. Customer

satisfaction grows, and business expands.

8

With PrintVision/9000NT we can run more jobs, increase

productivity, reduce waste and become more profitable.

We can make quality commitments and back them

up with performance.

Kevin Kelly,

Chief Executive Officer,

Emerald Packaging, USA

9

Productsthat Target Needs

PrintVision/9000NT is AVT’s flagship product, installed

worldwide. Based on the Windows NT operating

platform, PrintVision/9000NT alerts operators in real-

time to discrepancies between the master image and

the printed output. It detects defects smaller than

0.1mm and color variations of less than 1 percent on

most substrates, ensuring that a defect is caught before

it becomes an expensive problem on the remainder

of the run.

PrintVision/Genesis is an entry level model for narrower

web applications. PrintVision/Genesis enables virtually

every packaging printer to enter the machine vision age.

PrintVision/Apollo, launched in 2000, offers 100

percent web inspection and is aimed at markets such

as labels, cartons, cosmetics and pharmaceuticals, as

well as packaging, where brand image and print quality

must be optimal. The one hundred percent web inspection

offered by PrintVision/Apollo is available for both

press and rewinder applications, enabling printers to

ensure perfect quality throughout the process.

PrintVision/Argus, making its debut in 2000, combines

process control and random defect detection. Imagine

a satellite over the earth that can view the entire picture,

and instruct a reconnaissance plane to take a closer

look when a problem is identified. When the linear

CCD on the PrintVision/Argus notices a printing fault,

the sampling optical head is immediately sent to the

defect area. This powerful inspection combination

reduces the lifetime of a print fault to one second.

PrintVision/Pro brought to the market in 2000, features

a particularly friendly operator interface. Audio and

visual alarms make it possible for press operators to

continue their routine away from the console without

jeopardizing print quality. When a fault is detected,

the image of the area is frozen on the screen with the

defect outlined. Furthermore, the background color

on the monitor changes to indicate the type of fault,

so that it can be seen even from a distance.

PrintVision/Mercury is our entry into the commercial

heatset web offset market. PrintVision/Mercury

detects and alerts press operators to typical web

offset printing problems and defects, such as color

variations, hickeys, front-and-back mis-registration

and water ink balance problems.

PrintVision systems are enhanced by a variety of

options, including RiteSeal for cold seal inspection,

ABC for automatic bar code verification and PrintFlow,

which collects information on all printing events.

Today, we offer printers in the packaging market a

full range of solutions, and are now bringing the benefits

of PrintVision technology to commercial printers.

10

The result is better quality, less waste,

fewer hours per job, higher press speeds. Our experience

of the PrintVision/Genesis has been very positive.

Oystein Kleppang,

Chief Executive Officer,

TriFlex AB, Norway

11

Satisfied CustomersAcross the Globe

By the end of 2000, we had sold PrintVision systems to over 200 customers,

and had 330 installations worldwide. Our customers include such industry leaders

in the packaging printing industry as TetraPak of the US, Mexico and South

Africa, 4P of Germany, Italy, Turkey and India, International Paper of the US,

and others.

We are particularly proud that repeat orders account for approximately 50 percent

of our revenues, testifying to a high level of customer satisfaction. A considerable

number of our customers have acquired several PrintVision systems after their

first experience with our solution.

We back our sales with committed technical specialists, that work together with

customers to help them optimize the use of their PrintVision solutions. By

holding a continuous dialogue with customers, we have an in-depth view of

industry needs and trends, translating this insight into new products and features.

The variety of new products introduced by AVT in 2000 was a direct response

to expressed customer demands.

We are committed to building long-term relationships with our customers. By

combining state-of-the-art technologies with professional marketing and support

we offer customers the best process control and quality assurance solutions

available for the printing industry.

12

The first PrintVision/9000NT system we installed

met our desired quality control performance expectations.

International Paper is expecting to achieve similar results

from the new installations.

Jeffrey Greene,

Director of Operations,

International Paper Flexible Packaging, USA

13

Expanding

Today we are the world leader in machine vision

solutions for the packaging printing industry. We plan

to continue to maintain this leadership and to capture

additional markets through new technological solutions

and territorial expansion.

We are aggressively marketing our new PrintVision/

Mercury in the commercial printing market, where

we estimate there are currently over 10,000 quality

web-fed presses printing magazines, catalogues, direct

mail materials, brochures and corporate documentation.

We are working closely with printers in this market

to adopt our solutions to their needs.

We are adapting our PrintVision/9000NT for the high

potential label market, where products are currently

inspected manually. It is estimated that there are some

19,000 web-fed presses used for printing labels, which

often have very exacting quality demands to maintain

legal requirements and brand image.

We are exploring opportunities for the application of

machine vision to sheet-fed presses, of which there

are currently some 100,000 installed worldwide. This

is a huge market that is in need of process control

solutions that can reduce waste, accelerate press runs

and reduce costs.

We continue to support our customers with add-ons

and upgrades that add value and features to their

PrintVision investment.

North America and Western Europe are currently our

main markets. In 2000 we began a successful drive

in Latin America and Southeast Asia and plan to move

vigorously into Japan.

In 2000, we significantly expanded our product line

and marketing reach. The achievements of this year,

strengthened by our intensive R&D and marketing

ambitions, are a sound foundation for future growth

and prosperity.

the Vision to New Markets

14

It was important for us ensure print quality and with the speed

at which the Mitsubishi press operates the AVT inspection system,

PrintVision/Mercury, is the only one that gives us confidence

to run it at maximum speed.

Colin Shaylor,

Commercial Director

Howard Hunt, UK

15

During 2000 Stock Markets viewed a major change in market trends. A great start with many successful IPO's

have turned into a free fall of all Capital Markets. All markets have experienced a fundamental disillusionment

with technology equities losing more than 50% of their value. There was no clear direction in the markets

between March and July, however from mid August and on the markets direction was down. Most technology

equities were caught in a continuing downward spiral. The drop in "Neuer Markt" share prices from March

to December exceeded 65%, share prices across industries around the world.

AVT went public on February 28th 2000 on a very successful IPO with an issue price of 14 Euro. 3.5 million

new shares were floated into the market together with additional 900 thousand shares floated by selling

shareholders, corresponding to a subscription for over 90 million shares. The share price climbed right after

the IPO to over 20 Euro and remained at the 18-22 Euro level until the end of July. Share price was above

issue price until the beginning of September when it was hit by the market conditions and commenced the

down spiral hitting the 2-3 Euro level towards the end of the year.

The 41 million dollars that were raised during the IPO strengthened the company's equity basis and stability.

With over 37 million dollars as of December 31, the company can finance its growth strategy, investing in

research and development as well as in sales channels to leverage its success in the industry.

The Share

Shareholders Structure

Free Float

OtherTamar

TechnologiesCentro Bank

Evergreen

Star Ventures

40%

7%4% 5%

23%

21%


Since Going Public the company had opened communication channels to its investors- partners. We see active

and open Investor Relations as a fundamental component of the corporate strategy. The management presented

the company in road shows and conferences in Europe and the US, hosted visits of fund managers and analysts

in its headquarters in Israel and conducted numerous one-on-one meetings with leading European and American

Institutional Investors as well as quarterly conference calls.

In order to provide easy access to data the company opened a new section on its web page (www.avt-inc.com)

intended for investors, incorporating the company's quarterly reports, press releases and company news. The

web page was designed with a user friendly interface and is updated continuously.

We believe Investor Relations is essential to obtain the exposure and appreciation of the investment community

and intend to raise the level of awareness to our innovative technology, products and great potential during

2001.

Neuer Markt indexes and AVT’s stock performance (12 Month)

Neuer Markt indexes and AVT’s stock performance (12 Month)

31.3.00

26.1.01

14.4.00

05.5.00

19.5.00

02.6.00

16.6.00

30.6.00

14.7.00

28.7.00

11.8.00

25.8.00

08.9.00

22.9.00

06.10.00

20.10.00

03.11.00

31.3.00

17.11.00

01.12.00

15.12.00

29.12.00

30

40

50

60

70

80

90

100

110

0.00

5.00

10.00

15.00

20.00

25.00

30.00

10.3.00

04.4.00

02.5.00

25.5.00

19.6.00

12.7.00

04.8.00

29.8.00

21.9.00

17.10.00

09.11.00

04.12.00

29.12.00

Advanced Vision Technology AG NEMAX All Share NEMAX50 NM-Technology

17

Overview

AVT was incorporated in October, 1992 and introduced the prototype of its first product, the PrintVision/9000,

in 1996. Commercial sales of PrintVision/9000 commenced in the second quarter of 1997. By December 31,

1999 over 180 PrintVision/9000 and PrintVision/9000NT systems were installed in over 18 countries.

AVT established AVT America in October, 1996 and AVT Europe in November, 1997 to serve as its direct

distribution channels in North America and Europe. The Company conducts its worldwide sales activities

both through these subsidiaries and through indirect distribution channels.

The Company’s future revenues and operating results may fluctuate on a quarterly and on an annual basis

due to a combination of factors, including but not limited to: variations in the timing of orders and deliveries

of the Company’s products; variations in the size of orders by the Company’s customers; new product introductions

by the Company and its competitors; market acceptance of new products; the expansion and effectiveness of

the Company’s distribution network; variations in capital spending budgets of print shops; foreign currency

exchange rates; and general economic conditions and economic conditions specific to the printing industry.

Revenues from products sales are recognized upon shipment. Cost of revenues includes materials, labor, and

an estimate of costs associated with installation, warranty and training. The Company generally provides a

one-year warranty to the end-user. A provision, based on the Company’s experience and engineering estimates,

is recorded to cover probable costs in connection with such warranty. Revenues from services generate from

services, training and support fees. The Company recognizes revenues progressively over the contractual period

or as services are performed Research and Development costs are charged to the Statement of Operations as

incurred. Government funding for the development of approved projects is recognized as a reduction of

expenses as the related costs are incurred.

The Company’s Consolidated Financial Statements are prepared in dollars in accordance with U.S. GAAP. The

Company’s transactions are recorded in NIS; however, the majority of the Company’s sales are made outside

Israel in U.S. dollars, and a significant portion of the Company’s costs are incurred in U.S. dollars. Since the

U.S. dollar is the primary currency in the economic environment in which the Company operates, the dollar is

its functional currency and accordingly, monetary accounts maintained in currency other than the dollar are

remeasured using the foreign exchange rate at the balance sheet date and transaction gains and losses from

remeasurements reflect in the Statement of Operations as financial income or expenses, as appropriate.

Year ended December 31, 1999-2000, compared with year ended December 31, 1998-1999.

Management’s Discussion and Analysis of Financial Condition and Results of Operations


Revenues

Revenues are derived primarily from the sale of the Company’s systems; additional revenues are generated

through the sale of support services, training and software updates to customers.

Total revenues increased 52% in 1999 and 36% in 2000. This increase was attributed primarily to the expansion

of the Company’s direct sales force in North America, penetration into South America and Southeast Asia

and to wider recognition of the Company’s technology and products as a solution for printing process control.

During the first nine months of 2000 revenues increased 65% as compared to the respective period of 1999.

However, the economic slowdown in the fourth quarter which had a significant effect in the US had a major

impact on annual results.

During 2000, US revenues increased 85% as compared to 1999. Revenues generated in the US constituted

57.7% of total revenues. Revenues from North and South America constituted 61.5% of total revenues,

compared with 40.6% in 1999.

Cost of Revenues

The gross margin decreased from 56.8% in 1999 to 55.1% in 2000, primarily due to lower volume of revenues

compared with the Company's projections for the year, lower average sale prices and a higher cost of materials

per unit shipped during the fourth quarter as compared with previous quarters.

The higher cost of materials was attributable primarily to advanced PrintVision/9000 systems shipped with

no additional cost to customers during the fourth quarter, in order to launch this new model in the marketplace.

The advanced systems, which provide the user with better functionality, bear a higher bill of materials, which

decreases the gross margin on one hand, while the lower volume of revenues increased the average labor costs

per unit, leading to a greater impact on gross margin.

19

13%

49%

Southeast Asia

ROW

Europe

Latin America

North America

5%

7%

2000 Revenue Distribution

26%

Research and Development Costs

Gross Research and Development expenses increased 46.9% in 2000. This increase was primarily due to the

recruitment of new employees and the expansion of the Company’s R&D activities in Israel, attributable to

the products launched during DRUPA: PrintVision/Apollo, PrintVision/Mercury, PrintVision/Pro and pRegister.

Net R&D expenses increased 90% over 1999: R&D expenses were partially offset by certain government

grants and participations. In 2000, total government grants and participations increased 3% over 1999.

Selling and Marketing Expenses

In 2000, net Sales and Marketing expenses increased 49.2%. This increase was primarily due to the expansion

of the direct sales force in North America, an increase in trade shows costs, most notably the DRUPA trade

show, considered the largest in the printing market, and an increase in sales promotion and public relations

activities. The increase was offset in part by certain government grants. In 2000, total government grants and

participations were $300,000 compared with $200,000 in 1999.

General and Administrative Expenses

General and Administrative expenses increased 49.4% in 2000, primarily due to the expansion of the Company’s

overall activities, an increase in Investor Relations expenses and an increase in other expenses related to the

Company’s new status as a public company.

Financial Income, Net

Financial Income consists of interest incurred on time deposits and bonds less interest expenses on loans, lines

of credit and exchange rate differences.

Net Financial Income in 2000 was $1,439,000 compared with financial expenses of $243,000 in 1999.

Net Loss

The net loss for 2000 constituted 2.5% of revenues, compared with 6% in 1999. Loss per share decreased

42.8% from $0.07 per basic and diluted share to $0.03.


Liquidity and Capital Resources

The Company used $2.58 million in 2000, compared with $3.28 million in 1999. Cash used in operating

activities in each of these years was primarily the result of the Company’s net loss for such year, as adjusted

for depreciation, increases in payables and, for increases in trade receivables, accrued interest on time deposits

and other accounts receivable. The increase in trade receivables was primarily due to extended payment terms

as well as sales that were made at the end of the year.

Cash used in investing activities was $28.27 million in 2000, compared with $(0.11) million in 1999. Cash

was used mainly in the purchase of time deposits and fixed assets (computers and peripheral equipment). The

Company’s capital expenditures on fixed assets were approximately $440,000 in 2000, compared with $360,000

in 1999.

Net cash from financing activities was $39.8 million in 2000, and $1.66 million in 1999. $41.6 million were

derived from the issuance of shares and exercise of options during the Company's IPO on February 2000. Cash

generated from these sources was offset by $83,000 in 1999, attributable to the repayment of long-term loans

and $1.74 million attributable to the repayment of the line of credit.

Employees

We welcome the challenges and opportunities the future offers. Our employees consistently remain our major

assets, committed to the drive for technological leadership and outstanding customer service. Our dedicated

team has repeatedly demonstrated that it shares our vision, and has the motivation, innovation and commitment

to customer satisfaction that are the key ingredients of healthy growth.

21

Manpower - Total of 115

Operation & Manufacturing

R&D

Marketing & Sales

General & Administration 12

38 25

40

Report of Independent Auditors

Consolidated Balance Sheets

Consolidated Statements of Operations

Statements of Changes in Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Financial table of contents


23

24

26

27

28

29

To the shareholders of

Advanced Vision Technology (A.V.T.) Ltd.

We have audited the accompanying balance sheets of Advanced Vision Technology (A.V.T.) Ltd. (the “Company”)

and its subsidiaries as of December 31, 2000, 1999 and 1998, and the related consolidated statements of

operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended

December 31, 2000. These financial statements are the responsibility of the Company’s management. Our

responsibility is to express an opinion on these financial statements based on our auditors.

We conducted our audits in accordance with generally accepted auditing standards in the United States. Those

standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting

the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles

used and significant estimates made by management, as well as evaluating the overall financial statement

presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements, referred to above, present fairly, in all material respects,

the consolidated financial position of the Company and its subsidiaries as of December 31, 2000, 1999 and 1998,

and the consolidated results of their operations and their cash flows for each of the three years in the period ended

December 31, 2000, in conformity with generally accepted accounting principles in the United States.

Tel Aviv, Israel

January 28, 2001

Report of Independent Auditors

Kost Forer & Gabbay

A Member of Ernst and Young International

23



The accompanying notes are an integral part of the consolidated financial statements.

U.S. dollars in thousands December 31, 2000 1999 1998

Assets

Current Assets:

Cash and cash equivalents 9,304 353 1,863

Short-term bank deposits and marketable securities (Note 3) 21,765 – –

Trade receivables (net of allowance for

doubtful accounts of $202, $173 and $194 as of

December 31, 2000, 1999 and 1998, respectively) 5,496 3,681 1,578

Other accounts receivable and prepaid expenses (Note 4) 2,307 1,269 572

Inventories (Note 5) 1,620 792 618

Total current assets 40,492 6,095 5,058

Long-Term Investment (Note 3) 6,007 – –

Severance Pay Fund 523 338 229

Property and Equipment, net (Note 6) 887 808 745

47,909 7,241 6,032

25


U.S. dollars in thousands (except share and per share amounts) December 31, 2000 1999 1998

Liabilities and Shareholders’ Equity

Current Liabilities:

Short-term bank line of credit (Note 7) – 1,730 –

Current portion of long-term loans (Note 9) – 63 66

Trade payables 1,061 849 773

Employees and payroll accruals 908 494 445

Accrued expenses and other liabilities (Note 8) 830 750 866

Total current liabilities 2,799 3,886 2,150

Long-Term Liabilities:

Long-term loans, net of current portion (Note 9) 305 334 397

Accrued severance pay 846 551 509

1,151 885 906

Shareholders’ Equity (note 12):

Ordinary shares of NIS 1 par value: 14,027,000, 3,155,219

and 3,155,219 shares authorized as of December 31, 2000,

1999 and 1998; 10,929,032, 2,596,518 and 2,596,518 shares

issued and outstanding as of December 31, 2000, 1999 and

1998, respectively Ordinary “A” shares of NIS 1 par value;

1,000,000 shares authorizedas of December 31, 1999 and 1998 ,

and 0 shares as of December 31, 2000.

Preferred “A”, “A1”, “B” and “B1” shares of NIS 1 par value:

5,130,288 shares authorized as of December 31, 1999 and

1998, and 0 shares as of December 31, 2000; 4,671,877

shares issued and outstanding as of December 31, 1999

and 1998, and 0 shares as of December 31, 2000 3,043 2,137 2,137

Additional paid-in capital 53,480 11,923 11,903

Deferred stock compensation (677) – –

Accumulated deficit (11,887) (11,590) (11,064)

43,959 2,470 2,976

47,909 7,241 6,032


January 28, 2001 Alan Adler Shlomo Amir

Date of approval Chairman of the Board Chief Executive Officer

of the financial statements of Directors and President


Consolidated Statements of Operations


U.S. dollars in thousands (except per share amounts) Year ended December 31, 2000 1999 1998

Revenues (Note 13) 12,038 8,832 5,808

Cost of revenues 5,401 3,814 3,159

Gross Profit 6,637 5,018 2,649

Operating Expenses:

Research and development, net (Note 14) 2,116 1,167 1,463

Selling and marketing, net 4,534 3,039 2,161

General and administrative (1) 1,660 1,078 824

Amortization of deferred compensation 63 17 7

Total operating expenses 8,373 5,301 4,455

Operating Loss 1,736 283 1,806

Financial expenses (income), net (Note 14) (1,439) 243 34

Loss for the year 297 526 1,840

Basic and diluted loss per share (0.03) (0.07) (0.31)

Weighted average number of shares used

for computing basic and diluted loss per share 10,339,018 7,268,395 5,924,703

(1) Excludes $63, $17 and $7 in amortization of deferred stock compensation in 2000, 1999

and 1998, respectively.

27

Statements of Changes in Shareholders’ Equity


U.S. dollars in thousands

Share Additional Deferred Accumulated Total

capital paid-in stock deficit shareholders’

capital compensation equity

Balance as of January 1, 1998 1,672 8,707 – (9,224) 1,155

Issuance of shares, net 465 3,189 – – 3,654

Amortization of deferred compensation – 7 – – 7

Loss for the year – – – (1,840) (1,840)

Balance as of December 31, 1998 2,137 11,903 – (11,064) 2,976

Amortization of deferred compensation – 17 – – 17

Financial expenses related to issuance

of warrants to bank – 3 – – 3

Loss for the year – – – (526) (526)

Balance as of December 31, 1999 2,137 11,923 – (11,590) 2,470

Issuance of shares, net 893 40,539 – – 41,432

Exercise of options 13 182 – – 195

Financial expenses related to issuance

of securities to bank – 96 – – 96

Deferred stock compensation 740 (740) – –

Amortization of deferred compensation – – 63 – 63

Loss for the year – – – (297) (297)

Balance as of December 31, 2000 3,043 53,480 (677) (11,887) 43,959


Consolidated Statements of Cash Flows


U.S. dollars in thousands Year ended December 31, 2000 1999 1998

Cash flows from operating activities:

Net loss (297) (526) (1,840)

Adjustments to reconcile loss to net cash used in

operating activities:

Amortization of deferred stock compensation 63 17 7

Financial expenses related to issuance of warrants to bank 96 3 -

Depreciation 423 258 190

Increase in trade receivables (1,815) (2,103) (1,084)

Increase in other accounts receivable and prepaid expenses (219) (697) (352)

Increase in accrued interest (819) – –

Decrease (increase) in inventories (828) (174) 176

Increase in trade payables 212 76 51

Increase (decrease) in accrued expenses and other liabilities 494 (67) 562

Increase (decrease) in accrued severance pay, net 110 (67) 46

Net cash used in operating activities (2,580) (3,280) (2,244)

Cash flows from investing activities:

Purchase short-term bank deposits (40,443) – (402)

Proceeds from sale of short-term bank deposits 23,730 427 –

Purchase of long-term deposit (11,128) – –

Purchase of property and equipment (439) (361) (528)

Proceeds from sale of property and equipment 6 40 40

Net cash provided by (used in) investing activities (28,274) 106 (890)

Cash flows from financing activities:

Short-term bank line of credit, net (1,730) 1,730 –

Proceeds from issuance of shares, net 41,432 – 3,654

Proceeds from exercise of options 195 – –

Repayment of long-term loans (92) (66) (66)

Net cash provided by financing activities 39,805 1,664 3,588

Increase (decrease) in cash and cash equivalents 8,951 (1,510) 454

Cash and cash equivalents at the beginning of the year 353 1,863 1,409

Cash and cash equivalents at the end of the year 9,304 353 1,863

Supplemental disclosure of cash flows information:

Cash paid during the year for interest 89 128 26

29

Notes to Consolidated Financial Statements

1 General

a. Advanced Vision Technology (AVT) Ltd. was incorporated under the laws of the State of Israel on October

10, 1992 and commenced operations thereafter. Advanced Vision Technology (AVT) Ltd. and its wholly-owned

subsidiaries (“the Company”) design, develop, manufacture, market and support an intelligence online vision

inspection system that automatically detects defects in various types of printing processes.

The Company’s products are marketed and supported in Europe and U.S through its wholly-owned

subsidiaries, Advanced Vision Technologies Inc. which is located in the United States and Advanced Vision

Technology (Europe) S.A which is located in Belgium.

b. The Company has reclassified certain 1998 and 1999 amounts to conform to the 2000 presentation. The

reclassification had no effect on previously reported net loss, stockholders’ deficit or cash flows.

2 Significant Accounting Policies

The financial statements have been prepared in accordance with generally accepted accounting principles in the

United States (“U.S. GAAP”). The significant policies followed in the preparation of the consolidated financial

statements are:

a. Use of estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires

management to make estimates and assumptions that effect the amounts reported in the financial statements

and accompanying notes. Actual results could differ from those estimates.

b. Financial statements in U.S. dollars:

A majority of the revenues of the Company is generated in U.S. dollars (“dollar”). In addition, a substantial

portion of the Company’s costs is incurred in dollars. The Company’s management believes that the dollar is

the primary currency of the economic environment in which the Company operates. Thus, the functional and

reporting currency of the Company and its subsidiaries is the dollar.

Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars

in accordance with Statement No. 52 of the Financial Accounting standard Board (“FASB”). All transactions

gains and losses of the remeasurement of monetary balance sheet items are reflected in the statements of

operations as financial income or expenses as appropriate.

c. Principles of consolidation:

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries

(the Group). Intercompany transactions and balances, including profits from intercompany sales not yet

realized outside the Group, have been eliminated upon consolidation.


d. Cash equivalents:

Cash equivalents are short-term highly liquid investments originally purchased with maturities of three months

or less.

e. Short-term deposits:

The Company classifies deposits with maturities of more than three months and less than one year as short-term

deposits. The short-term deposits are presented at their cost, including accrued interest.

f. Long-term investments and marketable securities:

Management determines the proper classification of investments in debt marketable equity securities at the time

of purchase. At December 31, 2000, all securities covered by SFAS No. 115, “Accounting for Certain

Investments in Debt and Equity Securities”, were designated as held to maturity (see Note 5) and as such

were stated at amortized cost.

g. Inventories:

Inventories are stated at the lower of cost or market value. Inventory write-offs are provided to cover risks

arising from slow-moving items or technological obsolescence. Cost is determined as follows:

Raw materials - by the “average cost method”.

Work in progress and finished products - on the basis of direct manufacturing costs.

Finished products - on the basis of direct manufacturing costs with the addition of allocable indirect

manufacturing costs.

h. Property and equipment:

Property and equipment are stated at cost, net of accumulated depreciation and are depreciated using the straight-

line method, over the estimated useful lives of the related assets, at the following annual depreciation rates:

%

Computers and peripheral equipment 20 - 33

Machinery and equipment 6 - 20

Office furniture and equipment 6 - 20

Motor vehicles 15

Leasehold improvements Over the term of the lease

The Company periodically assesses the recoverability of the carrying amount of property and equipment and

provides for any possible impairment loss based upon the difference between the carrying amount and fair

value of such assets. As of December 31, 2000, no impairment losses have been identified.

31

i. Research and development costs:

Research and development costs are charged to the statements of operations as incurred. Government funding

for the development of approved projects is recognized as a reduction in the expenses as the related costs

are incurred.

j. Revenue recognition:

Revenues from product sales are upon shipment. Cost of sales includes an estimate of costs associated with

installation, warranty and training.

Revenues from services are derived from services, training and support fees. The company recognizes revenues

over the contractual period or as services are preformed.

k. Warranty costs:

The Company provides a free warranty for up to two years. A provision is recorded for probable costs in

connection with a warranty based on the Company’s experience and engineering estimates. As of December

31, 2000, the provision was $288.

l. Concentrations of credit risk:

SFAS No. 105, “Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and

Financial Instruments with Concentrations of Credit Risk”, requires disclosure of any significant off-balance-

sheet and credit risk concentrations. The Company has no significant off-balance-sheet concentration of

credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally

of cash, cash equivalents, short and long term deposits and trade receivables. Cash and cash equivalents and

short and long term deposits are deposited with major banks in Israel, the United States and Belgium.

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 the United States and Europe. The Company has

adopted credit policies and standards intended to accommodate industry growth and inherent risk. Management

believes that credit risks are moderated by the diversity of its end customers and geographic sales areas.

The Company performs ongoing credit evaluations of its customers’ financial condition and requires collateral

as deemed necessary. Management periodically evaluates the collectibility of these receivables and adjusts

the allowance for doubtful accounts to reflect the amounts estimated to be uncollectible.

m.Stock-based compensation:

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock

Issued to Employees” (“APB-25”),and interpretation No. 44 “Accounting for Certain Transactions Involving

Stock Compensation” in accounting for its employee stock option plans. Under APB-25, when the exercise

price of the Company’s employee stock options is less than the market price of the underlying stock on the date


of grant, compensation expense is recognized. The pro forma information with respect to the fair value of the

options is provided in accordance with the provisions of SFAS 123 (see Note 11c). SFAS No. 123 requires

the use of option valuation models to measure the fair value of the warrants at the grant date.

n. Royalty-bearing grants:

Royalty-bearing grants from the Chief Scientist of the Ministry of Industry and Trade in Israel for funding

certain approved research projects and from the Fund for the Encouragement of Marketing Activities for

funding marketing activities are recognized at the time the Company is entitled to such grants on the basis of

the related costs incurred and are presented as a reduction of research and development costs and of selling and

marketing costs, respectively. Development grants amounted to $941 in 2000, $914 in 1999, and $279 in 1998.

Marketing grants amounted to $300 in 2000, $200 in 1999 and $0 in 1998.

o. Fair value of financial instruments:

The following methods and assumptions were used by the Company and its subsidiaries in estimating their fair

value disclosures for financial instruments:

The carrying amounts of cash and cash equivalents, short and long-term deposits and accounts receivable

approximate their fair value due to the terms of maturity of such instruments.

The carrying amount of the Company’s long-term borrowing approximates its fair value. The fair value was

estimated using discounted cash flow analyses, based on the Company’s incremental borrowing rates for

similar type of borrowing arrangements.

p. Severance pay:

The Company’s liability for severance pay is calculated pursuant to the 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 provided by monthly deposits with severance pay funds,

insurance policies and by an accrual.

The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be

withdrawn only upon complying with the Israeli severance pay law or labor agreements. The value of the

deposited funds are based on the cash surrendered value of these policies, and include immaterial profits. The

value of these policies is recorded as an asset in the Company’s balance sheets.

Severance pay expenses for the years ended December 31, 2000, 1999 and 1998 amounted to $295, $42 and

$146, respectively.

q. Basic and diluted loss per share:

Basic loss per share is computed based on the weighted average number of shares outstanding during each year.

Diluted loss per share is computed based on the weighted average number of shares outstanding during each

33

year, plus dilutive potential of equivalent shares considered outstanding during the year, in accordance with

FASB Statement No. 128, “Earnings per Share”.

All outstanding convertible preferred shares, stock options and warrants have been excluded from the

calculation of the diluted loss per Ordinary share because all such securities are anti-dilutive for all periods

presented. The total numbers of shares related to the outstanding options and warrants excluded from the

calculations of diluted loss per share were 1,423,893, 335,876 and 549,963 for the years ended December 31,

2000, 1999 and 1998, respectively.

r. Impact of recently issued accounting standards:

In June 1998, the Financial Accounting Standards Board issued (SFAS 133), “Accounting for Derivative

instruments and Hedging Activities” (as amended) which will be effective for all fiscal quarters of all fiscal

years beginning after June 15, 2000. Because the Company do not use any derivatives, management does not

anticipate that the adoption of new statement will have significant effect on earnings or the financial position

of the Company.

3 Short-Term Deposits and Bank Deposits Marketable Securities

A summery of the Company’s investments is as follows:

December 31, 2000

Amortized cost

Short-term investments:

Marketable securities 5,052

Short- term deposits 16,713

21,765

Long-term investments:

Marketable securities 3,007

Long-term deposits 3,000

6,007

The following is a summary of held-to-maturity securities:

December 31, 2000

Amortized Gross Market

cost unrealized value

loss

Held-to-maturity:

U.S. corporate debts 8,059 50 8,109


The amortized cost and estimated fair value of marketable equity securities as of December 31, 2000 by

contractual maturity, are shown below.

December 31, 2000

Amortized Gross Market

cost unrealized value

loss

Held-to-maturity:

Matures in one year 5,052 24 5,076

Matures after one year through three years 3,007 26 3,033

8,059 50 8,109

The following is a summary of the bank deposits:

December 31, 2000

Amortized Linked to Rate of

cost interest

Bank deposits:

Matures in one year 16,146 US $ 6.75%

Matures in one year 567 EURO 4.25%

Matures after one year through two years 3,000 US $ 6.625%

19,713

4 Other Accounts Receivable and Prepaid Expenses

December 31, 2000 1999 1998

Government authorities for grants and participation 757 650 –

Government authorities 274 189 169

Accrued interest 819 – –

Employees 20 76 59

Prepaid expenses 292 296 233

Other accounts receivable 145 58 111

2,307 1,269 572

35

5 Inventories

December 31, 2000 1999 1998

Raw materials 761 510 372

Work in progress 238 220 169

Finished products 621 62 77

1,620 792 618

6 Property and Equipment

Cost:

Computers and peripheral equipment 1,069 731 503

Machinery and equipment 370 308 288

Office furniture and equipment 124 100 32

Motor vehicles – – 84

Leasehold improvements 104 95 47

1,667 1,234 954

Accumulated depreciation:

Computers and peripheral equipment 588 315 131

Machinery and equipment 156 95 42

Office furniture and equipment 17 6 2

Motor vehicles – – 33

Leasehold improvements 19 10 1

780 426 209

Depreciated cost 887 808 745

Depreciation expenses for the years ended December 31, 2000, 1999 and 1998 were $360, $258 and

$190, respectively.

7 Short-Term Bank Line of Credit

Balances, linkage terms and rates of interest:

Linked Rate of December 31,

to interest 2000 1999 1998

%

Short-term line of credit NIS 13.2 – 18 –

Short-term loans NIS 11.95 – 838 –

Short-term loans NIS 13.2 – 874 –

– 1,730 –


8 Accrued Expenses and Other Liabilities

December 31, 2000 1999 1998

Deferred revenues 44 108 332

Provision of warranty costs 288 190 204

Accrued expenses and other liabilities 498 452 330

830 750 866

9 Long-Term Loans

a. Balances, linkage terms and rates of interest:


to interest 2000 1999 1998

%

Bank U.S. $ 8.38 – 92 137

DMA-TEK (1) U.S. $ – 305 305 305

Others U.S. $ 10 – – 21

305 397 463

Less - current portion – 63 66

305 334 397

b. Aggregate maturities:


to interest 2000 1999 1998

%

First year (current portion) – 63 66

Second year – 29 63

Third year – – 29

– 29 92

Maturity date has not yet been determined (1) 305 305 305

305 397 463

(1) In September 1997, DMA-TEK Ltd., AVT’s former holding company, which held 73.6% of the issued share

capital of the Company, signed an agreement with investors, to sell its entire holdings in AVT Ltd.

37

The agreement determined, among other things, the repayment terms of the Company’s debt of $305 to

DMA-TEK. The debt was supposed to be repaid following an IPO.

As of the balance sheet date the loan has not been repaid.

10 Commitments and Contingent Liabilities

a. Lease commitment:

The Company’s operations are conducted in facilities which are occupied under operating leases. The leases

require payment of taxes, maintenance expenses and insurance. Rental expense for continuing operations

incurred under operating leases (including leases which have expired) was $351, $274 and $38, in fiscal

years 2000, 1999 and 1998, respectively.

The Company and its Belgian subsidiary lease motor vehicles for periods ending in 2003.

Future minimum lease commitments as of December 31, 2000, are as follows:

Year Facilities Motor vehicles

2001 288 292

2002 267 210

2003 41 94

2004 14 –

As of December 31, 2000, the Company has provided bank guarantees in favor of a lessor, totaling $63 and a

promissory notes in the amount of $202.

b. Royalty commitment:

1. The Company is committed to pay royalties to the Chief Scientist of Israel’s Ministry of Industry and

Trade at a rate of 3.5%-5% of all revenues from the sales and services of products that are developed with the

assistance of the Chief Scientist by his participation in the form of grants.

The total royalties which the Company will be obligated to pay will not exceed 100% of the amount of the grant.

As of December 31, 2000, the Company has a contingent obligation to pay royalties in respect of the

aforementioned grants in the amount of $1,914.

2. The Israeli Government, through the Fund for Encouragement of Marketing Activities (“the Fund”), awarded

the Company grants for participation in its foreign marketing expenses. The Company is committed to pay

royalties at the rate of 4% of the increase in export sales up to the amount of the grants plus interest at LIBOR.

As of December 31, 2000, the Company has an outstanding contingent liability of $500.


c. Liens:

To secure its line of credit and loans from banks, the Company has recorded a fixed lien on its share capital,

goodwill, notes and other documents, equipment and property.

11 Taxes on Income

a. Tax benefits under the Law for the Encouragement of Capital Investments, 1959:

The Company has been granted, in respect to certain of its assets, the status of an “Approved Enterprise”, under

the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”) with respect to two

investment programs, one of which was completed in October 1994. The second program is not yet completed.

Pursuant to the programs, the income of the Company derived from the “Approved Enterprise” program is

tax-exempt for two years and will enjoy a reduced tax rate, thereafter, of 25% for an eight-year period. (Subject

to an adjustment of 10%-20% based upon the percentage of foreign investor ownership of the Company).

The period of tax benefits detailed above is subject to limits of 12 years from the year of commencement of

production, or 14 years from the year of granting the approval, whichever is earlier.

As the Company currently has no taxable income, these benefit have not yet commenced.

The tax-exempt profits that will be earned by the Company’s “Approved Enterprise” can be distributed to

shareholders without tax liability to the Company only upon the complete liquidation of the Company. If

these retained tax-exempt profits are distributed in a manner other than in the complete liquidation of the

Company, they would be taxed at the corporate tax rate applicable to such profits as if the Company had not

elected the alternative tax benefits (currently - 10%-20% for an “Approved Enterprise”).

The Investment Law also grants entitlement to claim accelerated depreciation rates on equipment used by the

“Approved Enterprise” during five tax years.

Should the Company derive income from sources other than the “Approved Enterprise” during the periods of

benefits, such income shall be taxable at the regular corporate tax rate of 36%.

b. Tax benefits under the Israeli Law for the Encouragement of Industry (Taxes), 1969:

The Company is an “industrial company” under the above law and, as such, is entitled to certain tax benefits,

mainly accelerated depreciation of machinery and equipment and the right to amortize know-how.

c. Measurement of taxable income under the Income Tax Law (Inflationary Adjustments), 1985:

Results for tax purposes are measured in terms of earnings in NIS after certain adjustments for increases in

the CPI.

d. Net operating losses carryforwards:

As of December 31, 2000, the Company had approximately $9,166 thousand of Israeli net operating loss

carryforwards. The Israeli operating loss carryforwards have no expiration date.

39

As of December 31, 2000, the Company had a U.S. federal net operating loss carryforward of approximately

$1,853. The U.S. operating loss carryforwards can be offset against taxable income for 15-20 years and

expire from 2015-2020.

e. Deferred income taxes:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of

assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The

Company has provided a valuation allowance against substantially all of the deferred tax assets, in respect of

its tax loss carryforwards and other temporary differences, due to a history of losses and the current uncertainty

concerning its ability to realize these deferred tax assets in the future.

The Company expects that during the period in which the Company’s tax losses are utilized, its income would

be substantially tax exempt. Accordingly, there will be no tax benefits available from such losses, and no

deferred income taxes have been included in these financial statements.

Significant components of the Company’s deferred tax liabilities and assets are as follows:

Year ended December 31, 2000 1999 1998

Deferred tax assets:

Operating loss carryforwards 1,924 1,402 1,170

Reserves and allowances not currently deductible 289 143 80

Net deferred tax asset before valuation allowance 2,213 1,545 1,250

Valuation allowance (2,213) (1,545) (1,250)

Net deferred tax asset – – –

f. Loss before taxes on income consists of the following:

Domestic (916) 18 1,351

Foreign 1,213 508 489

297 526 1,840


12 Share Capital

a. Composed as follows:

Authorized December 31, Issued and outstanding December 31,

2000 1999 1998 2000 1999 1998

Number of shares

Ordinary shares of

NIS 1 par value 14,027,000 3,155,219 3,155,219 10,939,032 2,596,518 2,596,518

Ordinary “A” shares

NIS 1 par value – 1,000,000 1,000,000 – – –

Preferred “A” shares

NIS 1 par value – 2,587,533 2,587,533 – 2,587,533 2,587,533

Preferred “A1” shares

NIS 1 par value – 292,755 292,755 – 292,755 292,755

Preferred “B” shares

NIS 1 par value – 2,000,000 2,000,000 – 1,541,589 1,541,589

Preferred “B1” shares

NIS 1 par value – 250,000 250,000 – 250,000 250,000

The Ordinary shares of NIS 1 par value confer upon the holders the right to receive notice to participate and

vote in general meetings of the Company and the right to receive dividends, if declared. The Ordinary “A”

shares of NIS 1 par value have no voting rights and were convertible into Ordinary shares. The Preferred “A”

and “B” shares of NIS 1 par value had the same rights as the Ordinary shares. In addition, these shares were

convertible into Ordinary shares and have preference in liquidation. The Preferred “A1” and “B1” shares of NIS

1 par value had no voting rights, were convertible into Ordinary shares and had preference in liquidation.

b. The Preferred shares and the Ordinary “A” shares were automatically converted into Ordinary shares at the

time of the Company’s Initial Public Offering (“IPO”), which took place on February 2000. Since then the

Ordinary shares have been traded on Neuer Markt Germany.

c. Stock option plan:

Under the 1998 Stock Option Plan, the Company is authorized to grant options to purchase Ordinary shares

to its employees and consultants. Under the 1999 U.S. Option Plan, the Company is authorized to grant

incentive stock options to employees, officers and consultants of non-Israeli subsidiaries of the Company.

Options granted under the two plans expire ten years from the date of grant and terminate upon termination

of the optionee’s employment or other relationship with the Company. The options generally vest over a four-

year period.

41

As of December 31, 2000, there were 75,300 options which remained available for future grant.

A summary of the stock options activities in 2000, 1999 and 1998 is as follows:


Amount Weighted Amount Weighted Amount Weighted

average average average

exercise exercise exercise

price price price

Beginning of the year 1,755,049 2.19 1,001,398 0.55 188,285 0.06

Granted 175,961 3.79 913,461 4.08 813,113 0.65

Exercised (156,270) 1.27 – – – –

Forfeited (42,000) 7.84 (159,810) 2.08 – –

Outstanding at the end

of the year 1,732,740 2.09 1,755,049 2.19 1,001,398 0.55

The options outstanding as of December 31, 2000, have been separated into ranges of exercise prices as follows:

Options Exercise Weighted Weighted Options Weighted

outstanding price average average exercisable average

as of remaining exercise as of exercise

Dec. 31, contractual price Dec. 31, price of

2000 life 2000 options

exercisable

352,550 0.01 8.68 0.01 40,139 0.01

72,684 0.25 4.41 0.25 72,684 0.25

529,206 0.50 7.48 0.50 374,503 0.50

117,524 1.04 7.89 1.04 55,024 1.04

482,590 2.04 8.15 2.04 11,629 2.04

133,168 7.50 8.93 7.50 – –

45,018 12.69 9.54 12.69 – –

1,732,740 2.09 7.91 2.09 573,979 0.50

The number of options exercisable as of December 31, 2000, 1999 and 1998, were 573,979, 497,216, and

355,377 , respectively.

Weighted-average fair values and weighted average exercise prices of options whose exercise price is equal

or less than the market price of the shares at the date of grant are as follows:


Weighted average fair value of options grants at an exercise price

2000 1999 1998 2000 1999 1998

Less than fair value

at date of grant $ 2.25 $ 1.26 $ – $ 0.01 $ 1.04 $ –

Equal to fair value

at date of grant $ 8.81 $ 0.88 $ 0.11 $ 12.68 $ 4.31 $ 0.50

More than fair value

at date of grant $ – $ – $ 0 $ – $ – $ 1.04

Pro forma information regarding net loss and loss per share is required by SFAS No. 123 and has been

determined as if the Company had accounted for its employee stock options under the fair value method of that

Statement. The fair value for these options was estimated at the date of grant, using the Black-Scholes Option

Valuation Model, with the following weighted-average assumptions for 2000, 1999 and 1998: a risk-free

interest rate as published, dividend yields of 0%. Volatility of factors of the expected market price of the

Company’s shares are 1, 0 and 0 for 2000, 1999 and 1998, respectively, and a weighted-average expected life

of the option of one year after the vesting period.

The Black-Scholes Option Valuation Model was developed for use in estimating the fair value of traded options

that have no vesting restrictions and are fully transferable. In addition, option valuation models require the

input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s

stock options have characteristics significantly different from those traded options, and because changes in

the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the

existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

For purposes of pro forma disclosure, the estimated fair value of the options is amortized as an expense over

the options’ vesting period. The Company’s pro forma information is as follows:


Net loss as reported 297 526 1,840

Pro forma loss 718 611 1,849

Pro forma basic and diluted loss per share 0.07 0.08 0.31

d. Warrants:

In November 1999, in connection with a line of credit, the Company granted two banks warrants to purchase

the Company’s Ordinary shares. The first bank received warrants to acquire the number of the Company’s

Ordinary shares having an aggregate exercise price equivalent to $180 to $450 (depending on the amount that

will be borrowed by the Company), at a price per share of 75% of the price per share paid by purchasers of

43

the Company’s Ordinary shares. The warrants were exercised into Ordinary shares upon the consummation

of the IPO and financial expenses of $59 were recorded.

The second bank received warrants to acquire the Company’s Ordinary shares having an aggregate exercise

price equivalent to $300 at a price per share of 75% of the price per share paid by purchasers of the Company’s

Ordinary shares. The warrants may be exercised in the event that the Company will offer its shares to the public

and for a period of two years. Financial expenses of $37 were recorded.

The Company recorded $96 and $3 as compensation expense in 2000 and 1999 respectively, which was

included in interest expense.

13 Geographic Information

The Company manages its business on a basis of one reportable segment, see Note 1 for a brief description of

the Company’s businesses.

Operations in Israel include research and development, marketing and sales. Operations in the U.S. and Europe

include marketing, support and sales. The following is a summary of operations within geographic areas, based

on location of the entity making the sale.


Revenues based on the geographic destinations

Israel 456 374 25

Italy 512 1,154 1,008

Germany 692 816 1,320

Great Britain 689 588 578

United States and others 9,689 5,900 2,877

12,038 8,832 5,808

Long-lived assets by country of domicile:

Israel 816 732 703

United States 52 62 32

Belgium 19 14 10

887 808 745

Revenues by country of domicile:

Israel 4,689 5,186 4,365

United States 7,301 3,588 1,406

Belgium 48 58 37

12,038 8,832 5,808


14 Selected Statements of Operations Data

a. Research and development, net:


Total costs 3,057 2,081 1,742

Less grants and participation (941) (914) (279)

2,116 1,167 1,463

b. Financial expenses (income), net:

Financial income:

Bank charges and interest 1,993 122 22

Foreign currency translation differences 90 216 –

2,083 338 22

Financial expenses:

Bank charges and interest 154 10 25

Foreign currency translation differences 325 85 31

Other 165 – –

644 95 56

(1,439) 243 34

During 2000 the Board of Directors supervised the management decisions and activities. In four meetings

the Board of Directors was updated by the management on the business trends, R&D activities and Financial

results. Constructive discussions were held assisting the management in taking the right business decisions.

Material transactions were reported and discussed on a current basis between the BOD meetings.

The Annual Consolidated Financial Statements were prepared by the management based on US GAAP and

were audited by Ernst & Young (Israel). The Board of Directors recommended the Annual General Meeting

of Shareholders to approve the Annual Report.

On the 28th January, 2001 Board of Directors Meeting, the Board recommended to appoint Mrs. Anat Segal

and Mr. Dan Falk as external directors, it also recommended to extend the term of all the other directors for

an additional year.

2000 was a very important year for the company from a strategic perspective. It was its first as a public company

and drew a lot of attention to the management and Board of Directors performance. The contribution of our

employees and all levels of management assisted in the growth of the company during this year. Capital Markets

collapsed during 2000 imposing additional responsibility on the management to exercise extra caution in all

business decisions taken.

I want to take the opportunity and thank all those involved for their efforts and contribution to the Company's

growth and success during the past year.

Alan Adler

Chairman of the Board

Report of the Board of Directors

45


Alan Adler

Mr. Adler joined the Company in 1997. In addition to serving as Chairman of the Board of Directors of the

Company, he is managing director of Evergreen International NV, the Evergreen Group’s offshore venture

fund, which is domiciled in Belgium. He is also the fund manager of Periscope, the Evergreen Group’s largest

fund. Prior to joining the Company, Mr. Adler was a partner with the management-consulting firm McKinsey

& Co., where he worked for fourteen years. Subsequently, Mr. Adler was an advisor for eight years to Radiometer

A/S, a Danish medical instrumentation company. Mr. Adler was also a principal in an equity investment venture

in Scandinavia and a director of a firm specializing in corporate restructuring and corporate finance services.

He holds a M.Sc. in Mathematics from Rensselaer Polytechnic Institute, New York, United States and an MBA

with honors from Stanford University, California, United States.

Michael Goldstein

Mr. Goldstein co-founded AVT in 1992. He is also a co-founder of DMA-TEK, which produces electronic

wristlets for home arrests and is traded on the AIM London Stock Exchange (DTK. L). Formerly, he was product

line manager in the Advanced Development Center of Elron, an Israeli technology company, where he developed

machine-vision based inspection systems for the metal industry. He serves as director of several high-tech

companies and has published numerous articles and been granted numerous patents in the field of machine vision.

Mr. Goldstein holds a B.Sc. in Physics and an M.Sc. in Engineering from Tel Aviv University, Israel.

Members of the Board of Directors

47

Meir Barel

Dr. Barel joined the Company in 1996. He is the principal managing partner of the Star venture capital funds

and has been active for the last twelve years in venture capital investments in Germany, other European countries,

Israel and the United States. From 1986 until 1992, Dr. Barel was an investment manager and later a managing

partner of TVM Techno Venture Management GmbH & Co. KG, one of the largest venture capital companies

in Germany. Dr. Barel established Star at the beginning of 1992 with the objective of actively investing in

Israeli companies. Star has made more than 90 investments and has 27 exits in the form of IPOs or trade sales.

Dr. Barel is a member of the boards of directors of several German, American and Israeli companies. He holds

a Master’s degree and a doctorate (Dr.-Ing.) in Electrical Engineering from the Department of Data Communication

at the Technical University of Aachen, Germany.

Israel Adir

Mr. Adir joined the Company in 1995. He is founder and chairman of the boards of directors of the companies

in the RDT Group, a sales organization and solution provider to the Israel high-tech industry. Mr. Adir is the

ex-commander of the Electronics School of the Israeli Air Force and is a member of the board of directors

of the Israeli Chamber of Commerce. He is chairman of the Electronic Representatives Association and has

made investments in, and successful exits from, numerous high-tech start-ups in Israel. Mr. Adir holds a degree

in Electronic Engineering from the Technion - Israel Institute of Technology, Haifa, Israel.

Zohar Gilon

Mr. Gilon, who joined the Company in 1998, is a successful private enterpreneur who has made extensive

investments in high-tech companies in Israel. Over the past several years, he has worked actively with the

Israel-based RAD Group. Mr. Gilon currently serves as a general partner and managing director of Tamar

Technology Ventures, an Israeli-based venture capital fund investing primarily in Israel. Mr. Gilon holds a

B.Sc. in Electrical Engineering from the Technion and an MBA from Tel Aviv University.

AVT LTD.5 Hanagar St.P.O.B 7295Hod-Hasharon 45241, IsraelTel. +972 9 761 4444Fax. +972 9 761 4555

AVT EuropeAvenue Louise 2871050 BrusselsBelgiumTel. +32 2 5342545Fax. +32 2 5382265

AVT INC.900 Circle 75 ParkwaySuite 150Atlanta, Georgia 30339, USATel. +1-770-541-9780Fax. +1-770-541-9342

www.avt-inc.com

AVT Worldwide

excellenceexcellence on sighton sight - avt ltd.avt.drupal6.hosting.comrax.com/files... ·...

Documents