28 April 2009
ZONE-IP LTD.
(LSE: ZIP)
("ZONE-IP" OR THE COMPANY")
FINAL results for the year ENDED 31 December 2008
Chairman's Statement
In the year ended 31 December 2008 the Company incurred a loss on continuing
operations of $3.9 million (2007: $2.75 million) on turnover of $4.8 million
(2007: $8.26 million). As at 31 December 2008, the Company had a cash portfolio
of $2.9 million (2007: $5.2 million).
During 2008, the Company continued to invest further efforts in the
development of its products. The Company has dramatically improved
videoconferencing experience of its products by launching the HD7000Pro, the
high definition room videoconferencing system. The Company has also released
the VCBPro7, an all-in-one, high definition Multipoint Control Unit
(MCU),which the Board believes is the first MCU on the market to deliver
integrated session-recording and streaming capabilities. The VCBPro7 includes
an embedded MXM, Emblaze-VCON's award-winning, full-feature management tool
for video network management and total gateway functionality for legacy and
advanced technologies. The Company has also begun work on a low-bandwidth
videoconferencing technology targeted at the satellite-based IP communications
market to allow video communications in remote regions of the world where
there is a lack of IP infrastructure.
On the operational side, ZONE-IP's subsidiary, Emblaze-VCON, has implemented
significant cost reductions in order to adjust to the general economic
climate.
Future Prospects
The Board expects that demand for video communication via desktop computers
will increase, specifically in light of the obvious need of organizations to
reduce costs of sales and traveling expenses. The convergence from legacy
analog systems into more advanced IP based products is taking place, however,
at a slower pace than we anticipated. Management will continue to work hard to
strengthen the Company's position. The board continues to seek ways to further
save costs and to operate in the most cost efficient way.
Dr Hans Wagner
Chairman
Enquiries:
Zone-IP Ltd.
Hagit Gal +972 9 7699339
John East & Partners Limited
David Worlidge + 44 20 7628 2200
CONSOLIDATED BALANCE SHEETS
31 December
Note 2008 2007
$'000 $'000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 2,316 1,968
Restricted cash 51 1,257
Short-term available-for-sale marketable 2
securities 526 150
Trade receivables 3 1,322 2,383
Other accounts receivable and prepaid
expenses 252 529
Inventories 2,547 2,730
Total current assets 7,014 9,017
NON-CURRENT ASSETS:
Long-term available-for-sale marketable 2
securities - 1,869
Property and equipment 349 397
Intangible assets 4 400 650
Total non-current assets 749 2,916
Total assets 7,763 11,933
CONSOLIDATED BALANCE SHEETS
31 December
Note 2008 2007
$'000 $'000
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term bank credit 2,282 2,330
Trade payables 882 3,042
Employees and payroll accruals 680 515
Related party 6 15 53
Government grants 804 767
Deferred revenues 92 203
Accrued expenses and other liabilities 642 429
Total current liabilities 5,397 7,339
NON-CURRENT LIABILITIES:
Government grants 480 593
Employees benefits liability 356 232
Loan from related party 6d 1,032 -
Total non-current liabilities 1,868 825
Liabilities attributed to discontinued
operations 111 111
Total liabilities 7,376 8,275
EQUITY:
Ordinary shares 109 109
Share premium 13,407 13,203
Net unrealized losses reserve - (139)
Capital reserve from transaction with 6d
controlling shareholder 250 -
Foreign currency translation reserve 17 4
Accumulated deficit (13,396) (9,519)
Total equity 387 3,658
Total liabilities and equity 7,763 11,933
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended
31 December
2008 2007
$'000 $'000
Continuing Operations:
Revenues 4,803 8,265
Cost of revenues (1,961) (3,294)
Gross profit 2,842 4,971
Operating expenses:
Research and development 3,052 3,019
Selling and marketing 2,044 2,682
General and administrative 2,418 1,840
Total operating expenses 7,514 7,541
Operating loss (4,672) (2,570)
Finance income 371 594
Finance costs (1,192) (832)
Other income (Note 4) 1,616 -
Loss for the period from continuing operations (3,877) (2,808)
Discontinued Operation:
Income for the period from a discontinued operation - 85
Net loss for the year (3,877) (2,723)
Loss per share:
Basic and diluted loss per share from
continuing operations $(0.08) $(0.05)
Basic and diluted loss per share from a
discontinued operation $(0.00) $(0.00)
Basic and diluted loss per share $(0.08) $(0.05)
Weighted average number of shares used in
computing basic and diluted loss per share 51,120,253 51,120,253
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Capital
reserve
from Foreign
transaction Net currency
with unrealized translation
controlling loss
Share Share adjustments Accumulated Total
capital premium shareholder reserve reserve deficit equity
$'000 $'000 $'000 $'000 $'000 $'000 $'000
Balance as of 1 -
January 2007 109 12,989 (10) (2) (6,796) 6,290
Foreign currency
translation - - - 6 - 6
Net loss on
available-
for-sale financial
assets - - (129) - - (129)
Share-based payment - 214 - - - 214
Net loss - - - - - (2,723) (2,723)
Balance as of 31 -
December 2007 109 13,203 (139) 4 (9,519) 3,658
Foreign currency -
translation - - - 13 - 13
Capital reserve
from
controlling 250
shareholder's
loan - - - - - 250
Net gain on
available-
for-sale financial
assets - - - 139 - - 139
Share-based payment - 204 - - - - 204
Net loss - - - - - (3,877) (3,877)
Balance as of 31 250
December 2008 109 13,407 - 17 (13,396) 387
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
31 December
2008 2007
$'000 $'000
Cash flows from operating activities:
Net loss (3,877) (2,723)
Adjustments to reconcile the net loss to net cash
used in operating activities:
Income from discontinued operations - (85)
Depreciation and amortization 462 522
Capital gain from sale of intangible assets (1,616) -
Share-based payment 204 214
Increase in employee benefits liability 124 83
Impairment of marketable securities 228 -
Amortization of premium and discount of
marketable securities 62 41
Increase in short and long-term Government
grants payables (76) (64)
Working capital adjustments:
Decrease /(increase) in trade receivables 1,061 (722)
Decrease /(increase) in other accounts receivable
and prepaid expenses 277 (141)
Decrease /(increase) in inventories 115 (1,437)
Increase /(decrease) in trade payables (2,160) 1,459
(Decrease) /increase in employees and payroll
accruals 165 (112)
Decrease in deferred revenues (111) (268)
Increase in accrued expenses and other liabilities 213 41
Net cash flows used in continuing operating
activities (4,929) (3,192)
Net cash flows used in discontinued operating
activities - (54)
Net cash used in operating activities (4,929) (3,246)
Cash flows from investing activities:
Purchase of property and equipment (102) (26)
Proceeds from sale of intangible assets, net 1,622 -
Restricted cash 1,206 (1,020)
Investment in marketable securities (250) (2,680)
Proceeds from sale of marketable securities 1,592 5,970
Net cash provided by investing activities 4,068 2,244
Cash flows from financing activities:
(Decrease) /increase in short-term bank credit (48) 1,815
Loan from related party 1,282 -
Decrease in related party (38) (460)
Net cash provided by financing activities 1,196 1,355
Increase in cash and cash equivalents 335 353
Net foreign exchange difference 13 2
Cash and cash equivalents at beginning of year 1,968 1,613
Cash and cash equivalents at end of period 2,316 1,968
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
31 December
2008 2007
$'000 $'000
(1) Supplemental disclosure of cash flow activities:
Interest received 320 302
Interest paid 119 72
Tax paid 15 15
(2) Non-cash activities:
Transfer from inventories to property and
equipment 68 114
Property acquired through suppliers' credit - 34
Capital reserve from loan with controlling
shareholder 250 -
(3) Net cash flows used in discontinued operating
activities:
Profit from a discontinued operation - 85
Less: decrease in accrued expenses associated
with the discontinued operation - (139)
- (54)
NOTES TO THE FINANCIAL STATEMENTS
All references to $ are to US Dollars in thousands
NOTE 1:-. The financial information for the year ended 31 December 2007 is
extracted from the Group's financial statements to that date which received an
unqualified auditor's report. The financial information for the year ended 31
December 2008 is extracted from the Group's unaudited financial statements to
that date.
NOTE 2:- Available-for-sale marketable securities
Short-term available-for-sale marketable securities as of 31
December 2007 (none in 2008) were all with contractual maturities of less than
1 year as follows:
31
December
2007
Effective
interest Amortized Unrealized Market
rate cost losses value
$'000 $'000 $'000
3.88 per
Corporate debentures cent. 150 - 150
Long-Term Available-for-Sale Marketable securities as of 31
December, 2008 and 2007 were all with contractual maturities of more than 1
year as follows:
31
December
2008
Effective
interest Amortized Realized Market
rate cost losses value
Mature after one year and
less than five years: $'000 $'000 $'000
2.28 per
Corporate debentures cent. 754 (228) 526
31
December
2007
Effective
interest Amortized Unrealized Market
rate cost losses value
Mature after one year and
less
than five years: $'000 $'000 $'000
5.54 per
Corporate debentures cent. 1,407 (144) 1,263
Foreign bonds denominated in 5.45 per
U.S. dollar cent. 601 5 606
2,008 (139) 1,869
During 2008, the Company recorded impairment losses of $ 228,000
due to the recent credit crisis which impacted the fair value of the Company's
investments in its available-for-sale marketable securities and caused a
severe decline in the fair value of its investments.
NOTE 3- Trade Receivables
Trade receivables are non-interest bearing. They are generally on 60-90 credit
day terms.
31 December
2008 2007
$'000 $'000
Trade receivables 1,784 2,514
Less - allowance for doubtful
accounts (462) (131)
Trade receivables, net 1,322 2,383
The movement in the allowance for doubtful accounts is as follows:
Allowance for
doubtful
accounts
$'000
Balance as of 1 January, 2007 179
Provision, net of recoveries 64
Write-off (112)
Balance as of 31 December, 2007 131
Provision, net of recoveries 331
Write-off -
Balance as of 31 December, 2008 462
Impaired debts are accounted for through recording an allowance for doubtful
accounts.
NOTE 4:- Intangible Assets
Core Developed
technology technology Total
$'000 $'000 $'000
Cost:
At 1 January 2007 577 648 1,225
At 31 December 2007 577 648 1,225
Disposals - (21) (21)
At 31 December 2008 577 627 1,204
Amortization and impairment:
At 1 January 2007 125 206 331
Amortization 82 162 244
Balance at 31 December 2007 207 368 575
Disposals - (15) (15)
Amortization 82 162 244
At 31 December 2008 289 515 804
Net book value:
At 31 December 2008 288 112 400
At 31 December 2007 370 280 650
At 1 January 2007 452 442 894
Amortization expense is recorded in cost of sales.
During 2008, EVC has entered into an agreement to sell certain of
its patents to Handheld Devices in consideration of $ 3,200 in cash. EVC
received out of the consideration $ 1,622, net of payments to the Office of
the Chief Scientist of the Ministry of Industry and net of commissions payable
to a firm of patent attorneys, which introduced the buyer to EVC, and
associated legal fees.
NOTE 5: - Income Taxes
a. Israeli taxation:
1. Corporate tax rate:
On 25 July 2005, the Israeli Parliament approved an amendment to
the Income Tax Ordinance (No. 147) 2005, which prescribes, among others, a
gradual decrease in the corporate tax rate in Israel to the following tax
rates: in 2008 - 27 per cent., in 2009 - 26 per cent., 2010 and thereafter -
25 per cent.
2. EVC submitted an application to assign the programs of VCON
under the Law for the Encouragement of Capital Investments, 1959 ("the Law")
to EVC and thus enjoy the tax benefits (primarily reduced tax rates) of an
"Approved Enterprise" as defined by the Law. The application was approved by
the Israel Investment Center (a department of the Ministry of Industry, Trade
and Labor).
The Company's production facilities in Israel have been granted
"Approved Enterprise" status, for 6 investment programs approved under the
Law. According to the provisions of the Law, the Company has elected the
"alternative benefits" track, the waiver of grants in return for a tax
exemption and, accordingly, the Company's income from the "Approved
Enterprise" is tax exempt for a period of two years commencing with the year
it first earns taxable income and afterwards is entitled to a reduced tax rate
of 10 per cent to 25 per cent for an additional period of five to eight years
(depending on the level of foreign investment in the Company).
The entitlement to the above benefits is conditional upon the
fulfillment of the conditions stipulated by the above Law, regulations
published there under and the letters of approval for the specific investments
in "Approved Enterprises". In the event of failure to comply with these
conditions, the benefits may be cancelled and the Company may be required to
refund the amount of the benefits, in whole or in part, including interest.
The period of tax benefits, detailed above, is subject to limits of
the earlier of 12 years from the commencement of production, or 14 years from
the approval date. These limitation do not apply to the tax exempt period of
the first two years.
Income from sources other than the "Approved Enterprise" during the
benefit period will be subject to tax at the regular corporate tax rate.
3. On 1 April 2005, an amendment to the Investment Law came into
effect ("the Amendment") and has significantly changed the provisions of the
Investment Law. The Amendment limits the scope of enterprises which may be
approved by the Investment Center by setting criteria for the approval of a
facility as an Approved Enterprise, such as provisions generally requiring
that at least 25 per cent. of the Approved Enterprise's income will be derived
from export. Additionally, the Amendment enacted major changes in the manner
in which tax benefits are awarded under the Investment Law so that companies
no longer require Investment Center approval in order to qualify for tax
benefits.
4. However, the Investment Law provides that terms and benefits
included in any letter of approval already granted will remain subject to the
provisions of the law as they were on the date of such approval. Therefore the
Israeli subsidiary's existing Approved Enterprise will generally not be
subject to the provisions of the Amendment.
EVC is an "industrial company" under the Law for the Encouragement
of Industry (Taxation), 1969 and as such is entitled to certain tax benefits,
including a reduction in the purchase price for patents or certain other
intangible property rights at the rate of 12.5 per cent. per year beginning
with the first year the Company used such intangible property rights and the
deduction of public offering expenses over three years.
b. Carry forward tax losses:
As of 31 December 2008, the Company has carry forward tax losses of
approximately $ 11,000 (2007: approximately $ 11,000) that can be carried
forward indefinitely.
As of 31 December 2008, EVC has carry forward tax losses of
approximately $ 7,800 (2007: approximately $ 5,000) that can be carried
forward indefinitely.
As of 31 December 2008, the U.S. subsidiary had U.S. federal carry
forward tax losses of approximately $ 4,700 (2007: $ 4,900) that can be
carried forward and offset against taxable income for 15-20 years and expire
between 2020 and 2025.
Management currently believes that since the Company and its
subsidiaries have no history of ongoing profits it is not probable that the
deferred tax asset in respect of the loss carry forwards and other temporary
differences, in the amount of $ 2,034 (2007 - $ 2,013), mainly due to research
and development differences, will be realized.
c. Tax assessments:
The Company received final tax assessments through 2004.
NOTE 6: - Related Party Disclosure
a. Compensation of key management personnel of the Group:
31 December,
2008 2007
$'000 $'000
Short-term employee benefits 158 308
Severance pay - 18
Share-based payments - 61
Total compensation paid to key
management personnel 158 387
Directors' interests in an employee stock option plan:
Share options held by executive members of the Board of Directors
to purchase ordinary shares have the following expiry dates and exercise
prices:
Exercise
Issue date Expiry date price 2008 2007
Number Number
outstanding outstanding
2006 2016 $0.44 250,000 250,000
2007 2017 $0.49 1,278,006 1,278,006
No share or options have been granted to the non-executive members
of the Board of Directors under this scheme.
b. Entities with significant influence over the Group:
Emblaze Ltd. owns 64.88 per cent. of the ordinary shares in Zone IP
Ltd.
Transactions
Year ended
31 December,
2008 2007
$'000 $'000
Rent and utilities expenses 146 80
c. Balances
Amount owed to Emblaze at 31 December 2008 and 2007 was $ nil and
$53, respectively.
d. During December 2008, the Company received a loan in the amount
of $ 1,282 from certain of the Company's controlling shareholders ("lenders").
The loan does not bear any interest and will be repaid to the lenders five
years following the effective date. The Company recorded a capital reserve in
the amount of $ 250 in respect with the loan received from the lenders.
NOTE 7:- Dividends
No dividends have been declared for the year ended 31 December 2008.
NOTE 8:- Copies of the Report and Accounts will be sent to shareholders in due
course and will be available from the Company's website at www.zone-ip.com.