LEM Annual Report 2004/05

Transcription

1 Client Job-N Date LE LEM Holding SA Produit/ Cover Brochure Sujet Annual Report 2004/05 Insertion 6 mm in the Spine Printout in % 70 DTP-Studio Selim Couleur 4c Pantone U Prod. Art Acount Korr. Signature Postal address LEM Holding SA P.O. BOX 785 CH 1212 Grand-Lancy 1 Visitors address LEM Holding SA 8, chemin des Aulx CH 1228 Plan-les-Ouates Phone Fax 20:53 LEM Annual Report 2004/ x 297 mm 426 x 297 mm Lithomère 426 x 297 mm Visible Format K Geneva Electronic Publishing Studio 1204 Genève Phone ( ) Fax ( ) ISDN ( ) LEM Report 04_05 Cover Page 1 Spine 6 mm Annual Report 2004/05 At the heart of power electronics

2 Annual Report 2004/05 Period 1 st April 2004 to 31 st March LEM at a glance Foreword Business report ABC of transducers Corporate Governance Financial results Summary and comment LEM Group Consolidated balance sheet Consolidated profit and loss account Consolidated cash flow statement Consolidated statement of changes in equity Accounting policies Notes to the consolidated financial statements Group auditor s report LEM Holding SA Balance sheet Profit and loss account Notes to the financial statements Auditor s report Information for investors Group Subsidiaries

3 LEM AT A GLANCE Key figures 2004/05 in million 2002/ / /05 Sales Continuing Operations EBIT Continuing Operations in % of sales Net earnings (loss) (4.1) Shareholders equity Net debt Return on capital employed 2.2% 4.2% 11.4% Market capitalization (per 31.3.) After restatement for the treatment of fair value of financial instruments PRODUCTION CENTERS (PDCs) Geneva, Switzerland Beijing, China Tokyo, Japan ADAPTATION CENTERS Milwaukee, USA TVER, Russia SALES OFFICES Geneva, Switzerland Milwaukee, USA TVER, Russia Beijing, Shanghai, China Tokyo, Japan Braine-le-Comte, Belgium Frankfurt, Germany Paris, France Skelmersdale, UK Padova, Italy Vienna, Austria Barcelona, Spain AGENTS/DISTRIBUTORS LEM At the heart of power electronics LEM is a focused manufacturer and a global market leader. Its core products, transducers for measuring electrical parameters like current and voltage, are used in a broad range of applications. Although these devices are not visible to the outside world, they are vital for application functionality and the benefits provided to end users. Starting with products for locomotives in the seventies, LEM expanded into a vast area of industrial applications, including variable speed drives for motors and power supplies for industrial applications. Today LEM s current and voltage transducers are also used in AC/DC converters, uninterrupted power supply systems for computers as well as in new innovative energy applications like micro-turbines, and wind and solar power generation. New opportunities have recently been developed in the automotive market for battery management and electrical motor controls for steering and braking systems. This evolution underscores the company s exceptional skills in adapting to rapidly changing industrial trends, such as miniaturization, higher performance levels as well as a greater degree of application integration and complexity. LEM has the strongest brand recognition in its markets. Its products commonly called LEMs are at the heart of many power electronics applications. LEM s strategy is to exploit the intrinsic strengths of its core business and develop opportunities in new markets with new applications. At the same time, LEM is committed to maintaining customer focus and operational excellence by running cost-effective and service-oriented production platforms. Profitable growth is a key objective. Worldwide presence LEM is a global organization with production plants in Geneva (Switzerland), Machida (Japan) and Beijing (China). The company has sales offices close to its main clients locations and offers seamless service around the globe. 2

4 Achievements 2004/05 Focus on core technology and fast-growing applications of current and voltage transducers. Organic sales growth of 26% in the Continuing business. Sales in China more than doubled. EBIT in Continuing business increased more than fivefold. Delivery of one million current transducers for automotive battery management in just 8 months. Reduction of net debt to nearly 0 thanks to CTN divestment. LEM AT A GLANCE SHARE PRICE EVALUATION LEM HOLDING SA COMPARED TO SPI 200 LEM HOLDING 150 SPI ADJUSTED LEM has been listed on the SWX Swiss Exchange since 1986; the company s ticker symbol is LEHN. 150 Millions REGIONAL SALES BREAKDOWN FOR CONTINUING OPERATIONS IN 2004/ SALES IN CONTINUING OPERATIONS OVER 5 YEARS PER SEGMENT EUROPE 49.2% / / / / /05 INDUSTRIAL SEGMENT AUTOMOTIVE SEGMENT NORTH AMERICA ASIA REST OF THE WORLD (ROW) 23.3% 25.8% 1.7% 3

5 On the whole, we reinforced our position as the undisputed market leader.

6 5FOREWORD Dear Shareholders, The past financial year was one of significant change for LEM. We have reviewed our strategy and decided to divest the Instruments business in order to focus on our core product of transducers for measuring electrical parameters. In addition, we completed the divestment of CTN (Centre de Technologies Nouvelles). Thanks to the positive economic environment, business picked up considerably. In addition, the commitment of our employees and our expertise as the world s leading manufacturer of current and voltage transducers allowed us to successfully create added value for our customers through innovation, premium quality and services, and our global reach. Today, we are glad to say that LEM is active in attractive markets and is in good financial shape. Strong development of Continuing Operations The Industrial Segment of the current and voltage transducer business developed favorably during the past 12 months, driven by the success of our new products, penetration of new markets, focus on growth areas and operational improvements as well as by an upturn in economic activity in all regions, especially in China and Japan. The major contributor to growth were various industrial applications whereas the traction market remained stable. The Automotive Segment achieved a major breakthrough with its battery management transducers. In early December 2004, the Geneva plant delivered its one millionth current transducer only eight months after the launch of this highly innovative application. On the whole, we reinforced our position as the undisputed market leader in designing, manufacturing and selling transducers for measuring electrical parameters for use in a wide variety of applications. Focus on profitable growth In the course of 2004 we thoroughly analyzed our performance and the prospective future trends in the various market segments in which we were active. As a result of this strategy review, we announced a major realignment of our company s activities in May 2004 and are now focusing on the Industrial and Automotive businesses, which contribute approximately two-thirds of the Group s total sales. In the future, we will concentrate all of LEM s resources on those activities that offer the best opportunities for growth and increased profitability. To this end, we decided to divest the Instruments business. On 23 December 2004, LEM signed a sale and purchase agreement with Danaher Corporation for the sale of LEM Instruments. The agreement provides that closing of the transaction is subject to clearance from antitrust authorities in Germany and Austria, which have been obtained in January and in March respectively. The closing has been delayed due to a pending investigation in the UK. Felix Bagdasarjanz Chairman of the Board of Directors Paul Van Iseghem President & CEO Continuing Operations

7 6FOREWORD Expand core business to new applications Encouraged by the success of new products in the automotive market as well as that of the dedicated industrial products for renewable energy applications, we are actively seeking and developing opportunities in new markets, using our core know-how as a springboard. We will exploit the market trends toward miniaturization and enhanced performance, thereby continuously increasing the level of integration of our products. At the same time, we are committed to maintaining a high level of customer satisfaction, following our customers to Asia, in particular China, and thereby further improving operational excellence by running the most costeffective and service-oriented production platform in the industry. The earnings outlook for LEM s Continuing Operations is positive. Our global reach, and our focus on Asia, should facilitate sustainable profitable growth going forward. Changes in Executive Management At the end of August 2004, Patrick De Bruyne stepped down from his position as Chief Executive Officer and Member of the Board of Directors. He continues to act as the project leader for the divestment of LEM Instruments. Patrick De Bruyne spent more than 10 successful years as CEO and Member of the Board of LEM. The Board of Directors thanks him for his valuable contribution to the successful development of LEM. Paul Van Iseghem was appointed CEO Continuing Operations in November He has more than 30 years of experience in the electronic components industry, in R&D, corporate development, operations, and general management. Paul Van Iseghem has headed LEM s Industrial transducer business since late Proposals to the Annual Shareholders Meeting In view of both the operational earnings and the cash inflow following the sale of the Real Estate holding CTN, the Board of Directors will propose a reduction in nominal share value at the Annual Shareholders Meeting on 1 July 2005 as a means of returning excess cash to shareholders. The shares shall then be split in the proportion of 4 new shares for each registered share. The capital repayment reflects the Board s confidence in LEM s future earnings and its capability to finance growth with its internal cash flow generation.

8 LEM s currently valid Articles of Incorporation foresee the possibility for the Board of Directors to restrict the voting rights of shareholders to 10% of issued shares. The Board has never applied this clause and is of the opinion that this restriction is no longer compatible with modern corporate governance practices and will therefore propose that the aforementioned clause be abrogated. The intent in so doing is to enhance the attractiveness of LEM s shares, which is ultimately in the best interest of all shareholders. Thanks We would like to extend our thanks to our shareholders for standing by LEM and placing their confidence in us. We will endeavor to reward your loyalty through sustainable and profitable growth in the future. We also thank our clients for their trust and partnership with us. Finally, we would like to thank our employees, who have worked hard and remain committed to the company; we are most sincerely grateful for their dedication and contribution to LEM s success. We are confident that we will keep the company on its successful path. Felix Bagdasarjanz Chairman of the Board of Directors Paul Van Iseghem President & CEO Continuing Operations 7

9 BUSINESS REPORT LEM Group s last financial year was a successful one. In the 2004/05 financial year, ended on 31 March 2005, Continuing Operations EBIT grew to 13.7 million from 2.6 million and net earnings to 6.9 million from 0.46 million. The net loss from Discontinued Operations comprising LEM Instruments and the real estate activity CTN reached -6.6 million compared to positive earnings of 0.5 million in the previous year due to the one-off loss on the disposal of the CTN property of 6.4 million. This leads to net earnings of the Group attributable to LEM shareholders of 0.3 million compared to 0.8 million for the previous year. Continuing Operations current and voltage transducers for measuring electrical parameters contributed significantly to this result, which proves the case for the strategic focus on these businesses. Continuing Operations comprises the two business segments Industrial and Automotive, whereas Discontinued Operations consists of the Instruments business. Industrial Segment: Organic sales growth plus 17%, strong pipeline of new products In the Industrial Segment, sales reached million, plus 17% compared to the previous year. EBIT improved significantly to 14.3 million from 6.6 million in 2003/04. This result represents the second consecutive year of substantial profitable growth. The major part of the sales increase in Industrial markets was derived from transducers for the control and protection of variable speed drives as well as for new market applications in electric forklifts and new energy sources (wind and photo-voltaic solar). One factor that negatively influenced margins was the weakness of US dollar and USD-related currencies. Despite the ongoing price pressure in the markets, optimized absorption of fixed manufacturing costs, primarily thanks to the higher sales level and substantial productivity improvements, enabled an increase in the operating margin. The overall gross margin in the financial year 2004/05 reached 44.8%, up by 1.4%. Sales in China more than doubled The markets in all main regions developed ahead of expectations. Europe and North America performed well, while Asia recorded strong growth, China in particular (plus 119%). Other areas of significant growth were Japan (plus 13%) and Western Europe (plus 13%). Despite the weak dollar, the NAFTA region grew by 6% in Swiss francs. In the reporting period, LEM successfully strengthened its relationships with most of the leading OEMs in the power electronics industry for motor drives and power supplies in general and uninterrupted power supplies, welding equipment, forklifts, transportation on board as well as medical and renewable energy equipment. 8

10 9BUSINESS REPORT New Open-Loop ASiC-based product range The traditional products, based on LEM s technologies for current and voltage transducers, continued to perform well. Newer products, particularly those with the ASiC technology and integrated sensors and electronics, did even better. LEM developed a new range of Open-Loop transducers based on this technology platform that offer high performance and low costs. The new series is now ready for production ramp-up. Innovation is a guaranty of sustainable growth in the future. The company invested a considerable amount of its financial resources in R&D last year: 7.3 million or 5.9% of 2004/05 sales. This amount shall be increased as the company moves forward. Besides the ASiC-based Open-Loop products, a new range of products for current and voltage transducers for the traction market was launched during the past 12 months. The percentage of products less than four years old has nearly doubled in the last 5 years and now accounts for 20% of total sales. The high level of R&D spending underlines LEM s commitment to high-performance products based on the latest technology. LEM s R&D processes follow state-of-the-art standards and are designed to assure highest quality standards and short time to volume. Moving towards manufacturing excellence The general market pressure on prices and the trend to shift production to lowcost countries like China exert continual pressure on margins and global service capabilities. As a consequence, LEM accelerated its internal efficiency programs and the expansion of its fully owned operations in China, which are for local and global supply. A professional management team has now been established in China, which sets the stage for future growth and the same high quality and service levels provided by the other production centers. It is satisfying to note that the strong sales growth in 2004/05 was realized with nearly unchanged structural costs. Operational improvements, especially in the Geneva (Switzerland) and Machida (Japan) plants, enabled LEM to build additional volumes without increasing overhead costs. The production center in Beijing (China) also contributed to the positive development. Production growth varied: whilst sales in the so far smallest production center in Beijing grew by 57%, output in Machida increased by 32% and by 13% in Geneva. The service centers in Tver (Russia) and Milwaukee (USA) contributed to the encouraging growth. Both centers make product adaptations and service the market with technical solutions and logistics. The key priorities at all factories were to enhance service levels, improve quality and reduce costs. All achieved substantial progress in this regard, which prompted some very positive comments from many customers. One key global customer has just awarded LEM its World Class Award for Quality, On-time delivery and Cooperation for the third consecutive quarter.

11 BUSINESS REPORT Automotive Segment: Successful introduction of new products for battery management applications In the Automotive Segment, sales grew to 11.7 million from 1.6 million in the previous year. EBIT improved significantly to 0.6 million from 4.0 million in 2003/04 and was close to the target. LEM has been awarded frame agreements worth approximately 50 million that will be filled over the next three years. Furthermore, new frame contracts with existing and new customers have been awarded representing a revenue value of approximately 30 million over the next seven years. Growth in this business segment, which is still in an early stage of development, was driven by the mass production of transducers for battery management applications, primarily for the North American market. The new products manufactured in series successfully met the highest quality requirements of the automotive customers. Battery management is crucial for making batteries a more reliable source of power. It also leads to some valuable savings in energy consumption. In addition, LEM Automotive started the production of its transducers for Electric Power Steering (EPS). The new products are initially being used in Japan and represent the first application developed under the drive strategy. Going forward, LEM is preparing the second generation of automotive products for battery management and further applications in drive technology. Instruments Segment: Ongoing significant order commitments In the Discontinued Instruments Segment, sales reached 54.4 million, plus 2%. EBIT amounted to 0.4 million, down from 0.6 million in 2003/04. Nevertheless, the fundamentals of the business remain sound, as the opening order book in the new year of 15.8 million was 66% above last year s level. Key customers made significant long-term order commitments. The strongest demand has come from the specification and project-oriented businesses, such as Digital Fault Recorders (DFR) and Probes. The uncertainties surrounding the pending divestment of the Instruments business have impacted the product businesses, such as the Portable Power Quality (PPQ) and Service, Installation and Maintenance (SIM) products. In the Americas, sales grew significantly above expectations, with Probes and DFR leading the way in North America. 10

12 Probes benefited from long-term contracts for automotive diagnostics as well as test and measurement applications with key customers in Europe and North America. Substantial new business contracts were won in automotive diagnostics. In the growing market for permanently installed Power Quality Systems a notable success was achieved when a major utility transmission company entered into a ten year contract with LEM. The most important product launch in 2004/05 was the new cost effective DFR recorder BEN In addition, the first intelligent probe was developed with a partner in France for the automotive markets and a new hand-held instrument, the Analyst 3P, was launched for energy management and for troubleshooting the most common power quality problems in three-phase systems. The Probes segment benefited from the continuous improvement programs at the UK and Paris operations, which reported an 18% increase in sales while improving the gross margin by 4 percentage points over last year. Similar continuous improvement programs in the Austrian operations were unable to compensate for the 10% decrease in sales in the Power segment and the gross margin decreased by 0.4 percentage points. The DFR operations in Belgium reported a 19% increase in demand. Its gross margin increased by 3% despite the weak US dollar. Outlook for Continuing Operations: New growth momentum LEM s products are at the heart of power electronics applications. The company is ideally positioned to take maximum advantage of various fundamental growth drivers. In many fields of electrical applications, demand for new current and voltage transducers is strong due to their performance-enhancing capability. These transducers are used for example in: Variable speed motor drives for various motors in existing and new applications e.g. compressors used in heating and cooling systems leading to substantial energy savings (up to 30%); many other applications including various power supplies and invertors, which are steadily growing due to the rapid replacement of a multitude of energy sources by electricity; automotive applications like battery management and drive technology products, which are ideally suited for meeting the increasing requirements for electrical and electronic management in new cars and trucks. 11

13 ABC OF TRANSDUCERS Transducers are hidden at the heart of power electronics applications. Without noticing it, you probably walk by and even use several LEM transducers every day. They are present in trains, buses, elevators, and all sorts of technical equipment such as industrial drives on motors, welders, inverters, electric vehicles and battery-backed uninterruptible power supplies (UPS) in computer servers. LEM offers the right transducer with the right technology for each type of application. The function of a transducer is not, as with an ammeter, to take a measurement and record it, but to supply a signal indicating the exact value of a constantly varying current. Used as a feedback for control purposes, this signal allows accurate and smooth adjustment of equipment operation. LEM transducers provide the feedback signal needed for controlling and monitoring complex currents and voltages from 3 A (e.g. in a drilling machine) to 10,000A (e.g. in current monitoring for electrolysis) and up to 10,000 V (e.g. in the traction network for railways) in a wide range of applications. For example in traction (locomotives, etc.), the current to be supplied to the motor varies according to the load (train going uphill or downhill), the control request (accelerate, maintain constant speed, decelerate) and power grid variations. Similarly with a machine tool, the current flow increases abruptly when the tool starts working on the part to be machined. The better and faster the feedback signal, the smoother the control of equipment operation. Intelligent power control is also a way of optimizing the use of electricity. Upgrading variable speed drives of electrical motors brings substantial energy savings. The following examples may serve as an illustration: In elevators, the signals provided by transducers cause the motor to adjust its torque to the effective weight of the cabin for smooth acceleration and stopping. Signals are also used to lift the cabin exactly level to its destination. In high-speed trains, transducers associated with the converter allow the train s speed to be fine-tuned. In photovoltaic panels, transducers control the energy flow to the grid and are used for ensuring the safety of equipment and people. 12

14 ELEVATORS All major elevator manufacturers do business with us. Our close cooperation with them has led to many successful developments over the years. Hans Dieter Huber, Vice President Industrial At the heart of elevators From low-rise buildings to skyscrapers soaring more than sixty floors high, elevators are ubiquitous. When you enter an elevator, a dedicated motor opens and closes the door. To operate safely, the door must retract if a person or an object hinders its closure. Obstacle detection is very often performed by current transducers in the motor wires. Obstacles cause a higher torque and therefore a higher current in the motor; this extra current is detected and triggers the open-the-door signal. As for the elevator cabin, it hangs on cables or belts driven by a motor and a converter. When passengers enter the cabin, it has to stay at exactly the same level although the cable length changes. After the closure of the door, smooth acceleration and deceleration are required for the comfort of the passengers. An elevator ride must end at exactly the right position. This requires very accurate control of position, speed and current in the motor. The current feedback is provided by a LEM transducer. 13

15 HIGH-SPEED TRAINS The Asia market potential: While 50% of all locomotives, railcars or multiple unit-sets run in Europe, only 16% of trains run in Asia. Europe, however, accounts for only 16% of world population while Asia accounts for 61%. Luc Colombel, Vice President Traction Regardless of the primary energy used (diesel or electricity), traction is ensured by electrical motors driven by inverters. These inverters rely on current and voltage transducers to measure, optimize and adjust the power sent to the motors. The current transducer is used in the inverter s feedback loop and is one of the main factors of good performance without any interruptions. A locomotive of a modern high-speed train typically features six high-current LEM transducers. Further transducers are used in various auxiliary systems such as door openers. At the heart of modern high-speed trains The lifetime of a train is a long story: 20 to 30 years of constant moving under harsh conditions and very strict safety regulations. High reliability and availability are critical at all times. LEM s expertise lies in its understanding of customers applications and in its ability to adapt products to their specific requirements. LEM specialists are also able to evaluate and calculate the influence of the external environment of the application and assist customers in their own mechanical design processes. LEM s quality is generally recognized as significantly better than the competition s, a fact underlined by the five-year product warranty LEM offers, which is unique in the market. 14

16 Integrating LEM s current transducers into our inverters gives us multiple advantages. They enhance the safety of equipment and people. Sauro Macerini, Lead Engineer Aurora Photovoltaic Product, MAGNETEK S.p.A, a leading manufacturer in alternative energy power conversion SOLAR PANELS At the heart of solar panels The generated electricity can be used for autonomous installations, remote from the distribution grid, which charge a battery. This is commonly referred to as an Off-grid system (30% of the market in 2002). In contrast, the grid-connected system (70% of the market in 2002) feeds energy back into the grid. The connection of solar panels to the grid raised concern about the safety of the entire system and the safety of humans who come into contact with it. LEM has designed specific differential current transducers to meet the needs of modern solar topologies. They are characterized by their small size and light weight as well as their mountability on a printed circuit board, with an aperture for earth leakage wires. LEM s current transducers are designed to ensure safety by measuring alternating or direct leakage currents of 30 ma or above. Such a measurement will automatically trigger the safety system or switch off the installation. High leakage currents can occur if the solar panel is coupled with an earthed grid or when there is a short circuit or ground fault in the solar panel photovoltaic array. A converter managing the connection to the grid requires its own current transducers. Altogether, a typical photovoltaic installation includes three to six current transducers. 15

17 CORPORATE GOVERNANCE The following information complies with the SWX Directive on Information Relating to Corporate Governance, which has been in effect since July Key elements are contained in the Articles of Incorporation of 29 June 1999 and the By-Laws of 10 January In cases where the required information is provided in other sections of this Annual Report, reference is made to the appropriate page number(s). 1 Group Structure The LEM Group is structured into the Industrial Segment (previously called Components ), the Automotive Segment (previously called Corporate Projects ), both segments collectively reported as Continuing Operations, and the Instruments Segment, reported as Discontinued Operations. Appropriate segment reporting pursuant to IFRS is contained on pages of the notes to the consolidated financial statements. All companies in the LEM Group are listed on page 59 and under scope of consolidation on page 51, where the relevant percentages of shares held are indicated. Peter Rutishauser Felix Bagdasarjanz Anton Lauber Fritz Fahrni CH Nationality CH Nationality CH Nationality CH Nationality Born 1956 Born 1945 Born 1951 Born 1942 Member Chairman Member Member External External External External Entry BoD 2003 Entry BoD 2002 Entry BoD 2004 Entry BoD 1999 Member AC Member AC Member NCC Member NCC AC = Audit Committee NCC = Nomination and Compensation Committee

18 Significant shareholders in LEM Holding SA with shareholdings of more than 5% are disclosed on page 56 of the Annual Report. On 14 April 2004, Werner O. Weber announced that his shareholding in LEM Holding SA exceeded the limit of 10%. There are no known shareholder agreements between individual shareholders, nor are there any contracts with third parties for management services. LEM has no cross-shareholdings. 2 Capital Structure LEM Holding SA is domiciled at 8, chemin des Aulx in Plan-les-Ouates, Geneva. Its 300,000 registered shares (par value: 100) are listed on the main segment of the SWX Swiss Exchange (LEHN, security no ; ISIN ). On March 31, 2005, the market capitalization was million. The share capital has been 30 million since The changes in equity are shown on page 30. All registered shares are fully paid up and entitled to a dividend; there are no preferential rights. According to the Articles of Incorporation, restrictions on voting rights may apply to shareholdings of 10% or more. There are no other restrictions on the transfer of shares, and there is no authorized or conditional share capital. On 31 March 2005, LEM Holding SA held of its own shares. Information on share and stock option programs is provided below under Section 5, Compensations and Shareholdings and under Note 34, Stock Options Plan on page The Board of Directors The Board of Directors (BoD) is comprised of at least three members who are elected at the Shareholders Meeting for a mandate of one year, which is renewable. At the Shareholders Meeting on 17 September 2004, Felix Bagdasarjanz, Fritz Fahrni and Peter Rutishauser were re-elected and Anton Lauber, CEO of Schurter AG in Lucerne, was elected as a new member. Patrick De Bruyne, CEO at LEM from September 2004, Michel Mattacchini and Robert Wyss did not stand for re-election. Felix Bagdasarjanz thereupon took over the Chairmanship from Fritz Fahrni. All Members of the BoD are non-executive members and were never members of the Senior Management of LEM. Furthermore, they have no significant business connections with the LEM Group. There is no cross-involvement among Boards of Directors. Peter Rutishauser Education Dr. sc. nat., ETH lic. oec., HSG Professional background Since 1989, independent entrepreneur, participation in and management of medium-sized companies Other notable activities Delegate of the Board of Directors of Equatis AG Member of the Board of Directors of Sigg Switzerland AG, Trisport AG; Glatz AG Felix Bagdasarjanz Education Dr. of Electrical Engineering, ETH Zurich Professional background Since 2002, Independent business consultant CEO of ESEC and Member of the Executive Board of Unaxis Member of the Executive Board of ABB Switzerland Managing Director ABB Drives AG /ABB Industrie AG Other notable activities Member of the Board of Schneeberger Holding AG, Roggwil, BE Head of expert team (engineering sciences), Federal Office for Professional Education and Technology, The Innovation Promotion Agency, KTI/CTI. Anton Lauber Education Federal Proficiency Certificate as a Mechanic Certified Machinery Engineer, Technical College Brugg Windisch Post-graduate studies in business management IBR Horw-Luzern University of St. Gallen (HSG): Program for top managers in SMEs IMD: Program Leading the Family Business Professional background Since 1998 Member of the Board of Directors of SCHURTER Holding AG and other group companies Since 1993 Chairman of the Management of SCHURTER AG, Lucerne, CEO and Delegate of the Board of Directors, Member of the SCHURTER- Group Management 1989 Technical Director SCHURTER AG, Lucerne Up to 1988 Managing Director Generatorenfabrik ABB, Switzerland Other notable activities EFQM-Assessor Chairman of ITZ (Innovation-Transfer Central Switzerland) Member of the Board of SAQ (Swiss Association for Quality) Chairman of TQM-Forum, Switzerland Member of the Board of LIV (Association of Lucerne Industries) Member of the Board of Beutler Nova AG, Gettnau Member of the Board of Zimmermann Technik AG, Reussbühl Fritz Fahrni Education Cert. Engineer ETH Zurich PhD, Illinois Institute of Technology, Chicago, USA Professional background Since 2000, Professor for Technology Management and Entrepreneurship jointly at the ETH Zurich and the University of St. Gallen CEO of Sulzer Corporation Other notable activities Member of the Board of Directors of Ammann Industrie, Langenthal; SAM Private Equity, Zurich Business Tools AG, Zurich President of the Swiss Science and Technology Council Other notable activities (Absence of information on other notable activities indicates that there are none of relevance.) 17

19 CORPORATE GOVERNANCE The BoD meets as often as necessary, but five or six annual meetings are planned in advance. These meetings usually last one day and are held at the company s headquarters. The agenda is drawn up by the Chairman; the members of the BoD can ask for additional items to be included. Depending on the issues, members of Senior Management participate in the meetings in order to respond to specific questions. In the completed financial year, seven meetings and two phone conferences were held. Decisions can be taken by the Board if at least half of the Directors are present, and a simple majority of them is sufficient. In the event of deadlock, the Chairman has the casting vote. The respective responsibilities of the Board of Directors (BoD) and of the Senior Management are set out in the By-Laws. In addition to the tasks, the decision-making authorities are set out in detail. The Board of Directors: approves the mission, vision, strategy and structure proposed by Senior Management and supervises its implementation appoints/dismisses the Senior Management, approves selection/dismissal of the Senior Management members and direct subordinates of the CEO and monitors the internal development of high potentials establishes and monitors the performance-based reward system for the top management monitors the ethical and legal behavior of LEM On a quarterly basis the BoD receives consolidated financial statements for the LEM Group, together with year-end forecasts. A monthly report with sales, orders, margins and comments on operations is sent to the BoD. Based on the budget, the BoD approves the annual objectives for the CEO and the executive management. Annual assessments of the BOD are carried out related to the performance based remuneration of the executive management, the human resources management and the aspects of risk management and compliance. Every second year the BoD approves a revised version of the strategic business plan and monitors its implementation on an annual basis (incl. innovation and knowledge management). Two standing committees support the BoD. They are comprised of at least two non-executive and independent members of the BoD. They meet whenever necessary but at least twice a year. An audit committee (AC) was introduced in March Its primary objective is to provide the BoD with effective support in financial matters, in particular the selection and supervision of the external auditor, assessment of the effectiveness, compliance and clarity of the Group financial reporting and the assessment and preparation of the financial reports to the shareholders and the general public. In March 2005, a Nomination and Compensation Committee (NCC) was introduced. Its primary objectives are the succession, recruitment and compensation of the members of the BOD and Senior Management. It also ensures and monitors the personnel development plan and adequate succession planning for the middle and top management. It organizes the self-assessment of the BoD. 18

20 4 Senior Management The year under review was a year of transition. Patrick De Bruyne, CEO from 1993 to August 2004, left this function and will leave the Group once the divestment of LEM Instruments is finalized. Paul Van Iseghem, who had been President of LEM Components since 2000, was appointed CEO of Continuing Operations (Industrial and Automotive Segment) in November The CEO of Continuing Operations reports directly to the Chairman of the BoD. The project leader for the divestment of Discontinued Operations also reports directly to the Chairman of the BoD. Eric Wentz, who had been with LEM since 1991 as President of LEM USA Inc. and member of the Senior Management in charge of Corporate Projects including Automotive and New Projects, resigned and left the Group effective as of 31 March The senior management of Continuing Operations is comprised of the following members: With LEM Previous Name Nationality Education Born in Function since companies Paul Van Iseghem Belgian PhD, UCLA 1946 President & CEO, 2000 ITT Canon Continuing Vice President Operations Engineering & Operations Kennerth Lundgren Swedish MBA, SSE 1966 CFO 1992 Hans-Dieter Huber German Cert. Eng. (BA) 1959 Vice President, 1995 ABB Industrial Luc Colombel French Engineer 1959 Vice President, 1996 Arcelor, Clo Traction Electronic, BIP, Electgroprecision Didier J. Baltus Belgian Master in Finance 1962 Vice President, 2002 Alusuisse, Automotive Hydro Aluminium Automotive Simon Siggen Swiss Engineer EPFL 1967 Vice President, 2002 Alcan, Leclaché Master in Logistics Operations Eric Favre Swiss PhD, EPFL 1962 Vice President, 2000 ETEL Aerospace Technology None of the persons listed are engaged in other notable activities. Following the strategic reorientation of the LEM Group the organizational structure of Continuing Operations was adapted in October Prior to this date, the new members of the Senior Management carried out the following tasks for LEM: Hans-Dieter Huber started in LEM as sales manager for industrial transducers in Germany and then took over the worldwide development role for this business in the Industrial Segment. Luc Colombel started initially as sales manager for industrial transducers in France, then moved into business development for Automotive and in August 2004 took on the worldwide responsibility for the traction business in the Industrial Segment Didier Baltus joined LEM in 2002 to head the build-up of the business of the Automotive Segment. Simon Siggen, took over as Operations Manager of the largest production center of the Group, LEM SA in Geneva. He is now in charge of operations worldwide for Continuing Operations. Eric Favre, started as Technology Manager for LEM Components in He is now in charge of worldwide R&D activities for Continuing Operations. 19

21 CORPORATE GOVERNANCE The senior management of Discontinued Operations is comprised of the following members: Name Patrick De Bruyne Kennerth Lundgren David M. North Nationality Belgian Swedish British Education Msc. MBA, SSE PhD Born in Function CEO Continuing and CFO President Discontinued Operations LEM Instruments until August 2004 Project leader divestment LEM Instruments With LEM since Previous companies ABB Power HEME International Ltd Semiconductors Managing Director Division Manager None of the persons listed are engaged in other significant activities. There are no management agreements between LEM Holding SA or its subsidiaries and third parties. 5 Compensation and Shareholdings Remunerations for the BoD and the Senior Management are fixed by the BoD based on recommendations by the NCC. Criteria for bonus systems and option plans have been validated by the BoD. The allocation of stock options is based on consolidated Group ROE. The cash bonus is based on achieving targeted, consolidated EBIT. Executive Director and Senior Management Non-Executive Directors Total annual compensation including members who took up/gave up their function during the year under review of which bonus Severance payments Based on seniority, max 12 months salary None This amount covers two persons. Compensation for former members of governing bodies None None who gave up their function in the year preceding the year under review Share allotment in the year under review None None Share ownership at the time of disclosure deadline Options held at the date of the disclosure deadline of which from 2000/01 of which 348 from 2000/01 of which 356 from 2001/02 of which 86 from 2001/02 of which 546 from 2004/05 Additional fees and remuneration (e.g. supporting N/A communication and strategic matters) in the case these sums exceed half of the ordinary remuneration of the member of the Board in question Loans to members of governing bodies None None Highest total compensation to a member Continuing Operations: Discontinued Operations:

22 All stock option plans were granted on 31 March with a vesting period of 2 years and an exercise period of 10 years. The strike prices of the share option plans were as follows: 2000/01 405, 2001/ and 2004/ For the years 2002/03 and 2003/04 there were no allotments of stock options. Each option gives the right to buy one share. The allotment in 2004/05 was given to Paul Van Iseghem in connection with his appointment as CEO of Continuing Operations. The former CEO Patrick De Bruyne received a compensation of and a severance payment of LEM Holding and its Group companies have given no loans, advances, credits or sureties to members of the BoD or the Senior Management or persons closely linked to them. No compensations were given to former members of the governing bodies, and there are no agreements for any such compensations. 6 Shareholders participation rights The Articles of Incorporation provide for the possibility of limiting voting rights to 10% per shareholder with a group clause. The BoD may refuse entry of the voting rights for transactions exceeding this limit. In the event of such a refusal, an entry is made for shares without voting rights. In connection with alliances and acquisitions in particular, and in order to improve the marketability of the securities on the stock market, the BoD may approve exceptions to this rule. No such resolution was passed by the BoD in the year under review. The provisions of the Articles of Incorporation on the convening of shareholders meetings are in accordance with applicable legal regulations. One or several shareholders who collectively hold 10% of the share capital can call for a shareholder s meeting. Shareholders with shares to a total nominal value of at least 1 million can call for an item to be put on the agenda. They must provide a description of the relevant motion. Appropriate applications must be submitted to the BoD in writing a minimum of 60 days before the shareholders meeting. At the shareholders meeting the shareholders can ask to be represented by an independent representative who is Mr. Antoine Kohler, lawyer, 44 avenue Krieg, P.O. Box 45, CH-1211 Geneva 17, Switzerland, or by a third party who need not be a shareholder of LEM Holding SA. Dividend Policy The aim is to pay out 25% to 50% of the net profit in the form of dividends. 7 Changes of control and defensive measures In accordance with Art. 32 of the Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA), any shareholder who exceeds 33.3% of the control of the company has to make a public offer for all outstanding shares. The Articles of Incorporation of the company do not provide for any exceptions to this rule. There is no particular clause in the Articles of Incorporation for changes of control. If dismissed in the case of a change of control of the company, the CEO of Continuing Operations, the CFO and the President of LEM Instruments will receive supplementary severance pay equal to 1 year s remuneration. There are no other contractual obligations or plans. 8 Auditors The Group auditors, Alber & Rolle Experts-Comptables Associés SA, were appointed in Their mandate was renewed every year. The lead auditor, Hubert Rolle, has been responsible for this mandate since The audit fees amount to This company also receives for providing tax services and fees totaling for auditing two other Group companies. The Audit Committee supervises and controls the work of the auditors. One meeting with the auditors took place during the year under review. 9 Information policy LEM informs its shareholders on the business status and its results on a quarterly basis. After the first six months a half-year report is published. This report, as well as the Annual Report, is distributed to all shareholders inscribed in the share register and made publicly available. Once a year, LEM holds a presentation for the media and financial analysts. Internal processes assure that price-sensitive facts are published without delay in accordance with the ad hoc publicity rules of the SWX Swiss Exchange. At detailed information (e.g., the Articles of Association, interim and Annual Reports as well as important dates) is available which might interest LEM shareholders. Should you have any questions, please do not hesitate to contact LEM Holding SA, Kennerth Lundgren, CFO, 8 chemin des Aulx, CH-1228 Plan-les-Ouates, or send an to lho@lem.com (phone: ). 21

23 FINANCIAL RESULTS We address sustainable markets that will, in the decades to come, offer further substantial opportunities for profitable growth on a worldwide basis.

24 FINANCIAL RESULTS The review of the financial results concerns the financial year ended on 31 March Important explanations to the consolidated financial statements for 2004/05 The following explanations facilitate the understanding of the financial statements in this annual report: The early adoption of the new IFRS 5 standard on Discontinued Operations, which includes the Instruments Segment and the Real estate activity, had the following impact on the presentation of accounts: - Balance sheet: All assets relating to these activities are presented under the heading Assets held for sale. In the liabilities there is a position called liabilities associated with assets held for sale. This presentation only applies to the year ended on 31 March Presenting the previous year in the same way is prohibited. - Profit & Loss Account: Continuing Operations, i.e. the Industrial Segment (former LEM Components) and the Automotive Segment, are presented line by line not only down to EBIT but also down to net earnings after net financial expense and income taxes. The net earnings from Discontinued Operations are presented on one line with all the details in a note. Figures for the previous year are required to be presented in the same format. - Cash flow statement: The cash flow statement presents the details for Continuing Operations but the net cash flow from Discontinued Operations is presented on one line with details given in a separate note. Figures for the prior year are required to be presented in the same format. The new IFRS 3 standard requires goodwill to be tested for impairment once a year whereas previously the goodwill was amortized on a straight-line basis over the useful lives of the related assets. The sale of the CTN property on 31 March 2005 significantly changed the balance sheet structure and reduced the net debt position to almost zero. A restatement relating to a reassessment of the accounting treatment of derivative financial instruments improved 2003/04 net earnings by 0.7 million due to the change in net financial expense and deferred tax charge. Reported shareholders equity on 1 April 2004 increased by 2.7 million to 68.4 million. Kennerth Lundgren Chief Financial Officer 23

25 EBIT BREAKDOWN in million / / / / / /05 Net earnings Net financial expenses increased by 1.4 million to 2.2 million mainly because foreign exchange losses were incurred in 2004/05 whereas foreign exchange gains were booked in 2003/04. The increase in taxes in 2004/05 is directly linked to the EBIT increase. Net earnings of Continuing Operations reached 6.9 million against 0.5 million in 2003/04. INDUSTRIAL & AUTOMOTIVE INSTRUMENTS OTHERS Continuing Operations Sales Sales reached million in Continuing Operations. This represents growth of 26% in Swiss francs and 30% in local currencies. In the Industrial Segment sales reached million (+17%) and in the Automotive Segment sales increased from 1.7 million to 11.7 million. EBIT The strong sales growth led to a better absorption of fixed production costs and resulted in a slightly improved gross margin of 44.5% compared to 43.5%. Following the sale of the Instruments business some changes in the corporate team were necessary, resulting in one-off costs of 1.6 million that were mainly booked under administration expenses. In 2004/05 R&D expenses were almost maintained at the previous year s level after several years of significant increases. In all, this resulted in an EBIT of 13.7 million for Continuing Operations compared to 2.6 million in the previous year. The Industrial Segment increased its EBIT from 6.6 million to 14.3 million and the Automotive Segment narrowed its EBIT loss to 0.6 million against a loss of 4.0 million in 2003/04. On an EBITDA level the Automotive Segment reached the break-even point in 2004/05. Discontinued Operations Instruments Segment Sales in the Instruments Segment reached 54.4 million compared to 53.4 million. This represents growth of 2% in Swiss francs and 4% in local currencies. EBIT reached 0.4 million against 0.6 million in 2003/04 and EBITDA reached 2.4 million against 4.3 million in 2003/04. The previous year s EBIT was impacted by goodwill amortization of 1.7 million. The lower EBITDA in 2004/05 is attributable to different factors: the businesses with strong growth DFR and Probes have lower gross margins than Power Quality and sales and marketing expenses increased as did R&D expenses relating to projects with major future potential for Probes. Taking into account net financial expense and taxes, this resulted in a net loss of -0.9 million against -0.7 million in 2003/04. 24

26 FINANCIAL RESULTS Real estate activity The net loss for the real estate activity CTN amounted to 5.7 million against positive earnings of 1.2 million in 2003/04. The loss in 2004/05 included a one-off loss of 6.4 million on the disposal of the CTN property, which closed on 31 March The line Net (loss) earnings from Discontinued Operations refers to the net contribution from Instruments and CTN. LEM Group The net earnings of Continuing Operations and Discontinued Operations amounted to , of which is attributable to LEM shareholders and the rest to minorities. The comparable figure for 2003/04 is , of which was attributable to LEM shareholders. Published net earnings after deduction of minority interests in the 2003/04 annual report amounted to The difference between and corresponds to the positive impact of stemming from the restatement of financial instruments. Balance Sheet & Cash flow In Continuing Operations the cash flow from operations amounted to 10.0 million compared to 9.5 million for the previous year. Increased receivables and inventory due to the strong growth explain why the cash flow did not increase in line with the EBIT. Capital expenditure reached 4.8 million for 2004/05 compared with 3.7 million in 2003/04. The increase comes from the Industrial Segment, whereas capital spending in the Automotive Segment remained unchanged at 0.9 million. This resulted in a free cash flow of 5.6 million for Continuing Operations against 5.9 million in the previous year. The sale of the CTN property for 88 million by CTN SA, in which LEM Holding SA owns a 58.24% stake that is accounted for using proportionate consolidation, reduced the consolidated net financial debt position to almost zero. It will result in a net cash inflow to LEM Holding SA of 15 million. 25

27 LEM GROUP

28 Assets Notes (restated) Current assets Cash and cash equivalents Trade debtors Other current assets Inventories Total current assets Non-current assets Deferred taxes Investments in associates Available-for-sale financial assets Non-current receivables Investment property Property, plant and equipment Intangible assets Total non-current assets Assets held for sale Total assets Liabilities and equity Notes Current liabilities Trade creditors Other current liabilities Current income tax payable Provisions Derivative financial instruments Current financial debt Total current liabilities Non-current liabilities Non-current financial debt Other non-current payables Deferred income tax liabilities Total non-current liabilities Liabilities associated with assets held for sale Total liabilities Equity Share capital Reserves Retained earnings Minority interests Equity Total liabilities and equity The accompanying notes are an integral part of the consolidated financial statements. 27CONSOLIDATED BALANCE SHEET

29 CONSOLIDATED PROFIT & LOSS ACCOUNT Notes 2004/ /04 (restated) Continuing Operations Sales Cost of goods sold ( ) ( ) Gross margin Sales expense ( ) ( ) Administration expense ( ) ( ) Research & development expense ( ) ( ) Amortization & impairment Loss on goodwill 11 ( ) ( ) Other expense 23 ( ) ( ) Other income Earnings before interests and taxes Financial Expense (net) 25 ( ) ( ) Share of profit of associates Earnings before taxes Income taxes 27 ( ) ( ) Net earnings from Continuing Operations Discontinued Operations (Loss) earnings from Discontinued Operations 12 ( ) Net earnings Attributable to: LEM shareholders Minority interests Continuing Operations Minority interests Discontinued Operations 0 (22 234) Net earnings Earnings per share for profit attributable to the equity holders of the company during the year - basic Continuing Operations basic Discontinued Operations (23.0) diluted Continuing Operations diluted Discontinued Operations (23.0) 1.7 The accompanying notes are an integral part of the consolidated financial statements. 28

30 Notes 2004/ /04 (restated) CASH FLOW FROM OPERATING ACTIVITIES Net earnings from Continuing Operations Reconciliation of net earnings to cash flows from operating activities: Depreciation and amortization 10, Goodwill impairment charge Constitution of provisions Reversal of provisions 15 ( ) ( ) Deferred taxes ( ) Share in results of companies consolidated with the equity method (8 983) (18 011) Interest expense Financial income ( ) ( ) Fair value gains on derivative financial instruments 16, Tax charge 4' Share based compensation expense Cash flow Conversion differences on cash flows ( ) (54) Change in inventory ( ) Change in receivables ( ) ( ) Change in payables Interest paid ( ) ( ) Interest received Taxes paid (1'968'932) ( ) Changes in working capital: ( ) ( ) Cash flow from operating activities CASH FLOW FROM INVESTING ACTIVITIES Capital expenditure in intangible fixed assets 11 ( ) ( ) Capital expenditure in tangible fixed assets 10 (4' ) (3' ) Proceeds from the sale of fixed assets 10, Investment in long-term receivables (57 805) (12 893) Proceeds from long-term receivables Acquisition of companies 30 ( ) ( ) Cash flow from investing activities ( ) ( ) CASH FLOW FROM FINANCING ACTIVITIES Variation in own shares ( ) Other changes in equity ( ) ( ) Dividends paid to the shareholders of LEM Holding SA 0 0 Dividends paid to minorities in NANALEM KK and TVELEM (17 550) (14 450) Proceeds from borrowings ' Repayment of borrowings ( ) ( ) Cash flow from financing activities ( ) Net cash flow Discontinued Operations ( ) Change in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rates on cash and cash equivalents ( ) Cash and cash equivalents at the end of the year Change in cash and cash equivalents Reconciliation of cash and cash equivalents with the balance sheet: Cash Marketable securities Equals the position cash in the balance sheet Plus: Cash included in the position disposal group held for sale Equals cash and cash equivalents The accompanying notes are an integral part of the consolidated financial statements. 29CONSOLIDATED CASH FLOW STATEMENT

31 30CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to equity holder of the company Share Other Treasury Retained Minority Total capital reserves shares earnings Interest equity Balance at 1 April '252 ( ) Currency translation difference (13 334) Dividends paid 0 Treasury shares ( ) ( ) Changes in scope ( ) ( ) Attribution of earnings Other variations (82 021) (82 021) Restatement (72 812) (72 812) Balance at 31 March ( ) Balance at 1 April ( ) Currency translation difference ( ) ( ) Dividends paid 0 Treasury shares Changes in scope ( ) ( ) ( ) Attribution of earnings Balance at 31 March ( ) The accompanying notes are an integral part of the consolidated financial statements.

32 General Information The LEM Group (the Group) in Continuing Operations provides transducers for measuring electrical parameters like current and voltage in a broad range of applications. In Discontinued Operations LEM provides instruments and systems for the measurement, analysis and visualization of electrical parameters. The Group has operations in 15 countries and employs over 1000 people. The parent company of the LEM Group is LEM Holding SA (the Company), which is a limited company incorporated in Switzerland. The financial year ends on 31 March. The registered office is as follows: 8, chemin des Aulx; CH-1228 Plan-les- Ouates/Geneva. The Company has been listed on the Swiss Exchange, SWX, since The Board of Directors authorized the financial statements for issue on 26 May Accounting policies The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. A. Basis of preparation The LEM Group consolidated financial statements are prepared in accordance with the historical cost convention except for the revaluation to market value of certain financial assets and liabilities and comply with the International Financial and Reporting Standards (IFRS). The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed below. New accounting standards In 2004/05, the Group early adopted the IFRS and revised IAS below, which are relevant to its operation. The 2003/04 accounts have been amended as required, in accordance with the relevant requirements. The early adoption of IAS 1, 2, 8, 10, 16, 17, 21, 24, 27, 28, 32 and 33 did not result in substantial changes to the Group s accounting policies. In summary: - IAS 1 (revised 2003) has affected the presentation of minority interest and other disclosures. - IAS 2, 8, 16, 17, 24, 27, 28, 32, 33 and 39 had no material effect on the Group s policies. The early adoption of IFRS 2 has resulted in a change in the accounting policy for share-based payments. Until 31 March 2004, the provision of share options to employees did not result in a charge in the income statement. Subsequent to that date, the Group charges the cost of share options to the income statement (note 34). The adoption of IFRS 3, IAS 36 (revised 2004) and IAS 38 (revised 2004) resulted in a change in the accounting policy for goodwill. Until 31 March 2004, goodwill was: - Amortized on a straight line basis over a period ranging from three to 10 years; and - Assessed for an indication of impairment at each balance sheet date. In accordance with the provision of IFRS 3 (Note 11): - The Group ceased amortization of goodwill from 1 April 2004; - Accumulated amortization as at 31 March 2004 has been eliminated with a corresponding decrease in the cost of goodwill; - From the year ended 31 March 2004 onwards, goodwill is tested annually for impairment, as well as when there are indications of impairment. The early adoption of IFRS 5 has resulted in the presentation of the Instruments business and the real estate activity CTN as Discontinued Operations in the income statement. Additionally, the assets and related liabilities of these activities that have not been sold yet are presented as held for sale in the 31 March 2005 balance sheet. B. Group Accounting (1) Subsidiary undertakings Subsidiary undertakings, being those companies in which the Group, directly or indirectly, has an interest of more than half of the voting rights and is able to exercise control over the operations, have been fully consolidated. Separate disclosure is made of minority interests. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. All inter-company transactions, balances and gains on transactions between group companies are eliminated. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group. (2) Joint-ventures In jointly controlled entities like CTN SA, the Group s real estate activity, the method of proportionate consolidation is applied. (3) Associated Undertakings Investments in associated undertakings are accounted for using the equity method. These are undertakings over which the Group exercises significant influence, but which it does not control. (4) Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated financial statements are presented in Swiss francs (), which is the Company s functional and presentation currency. ACCOUNTING POLICIES (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation difference on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the fair value reserve in equity. (c) Group companies The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (I) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of the balance sheet; (II) Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the 31

33 ACCOUNTING POLICIES cumulative effect of the rates prevailing on the transaction date, in which case income and expenses are translated at the dates of the transaction); and (III) all resulting exchange differences are recognized as a separate component of equity. C. Property, plant and equipment Property, plant and equipment is stated at historical cost less depreciation. Depreciation is calculated on the straight-line method to write off the cost of each asset over its estimate useful life as follows: Land nil Plant and equipment 4-10 years Buildings years Vehicles 4-5 years Repairs and renewals are charged to the profit and loss account when the expense is incurred. D. Investment Property Investment property, principally comprising office buildings, is held for long-term rental yields. Investment property is treated as a long term investment and is carried at fair value, representing open market value determined annually by external valuers. On 31 March 2005 the Group had sold its investment property. E. Intangible assets (1) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net assets of the acquired subsidiary/associated undertaking at the date of acquisition. Goodwill on acquisitions is reported in the balance sheet as an intangible asset and is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. (2) Research and development Research costs are written off as incurred. Development costs are written of as incurred, except for major projects where it is reasonably anticipated that the costs will be recovered through future commercial activities. Such development costs are capitalized and written off over the life of the product or process, subject to a maximum of three years. (3) Other intangible assets Expenditure on computer software, acquired patents, trademarks and licences is capitalized and amortized using the straight-line method over their useful lives, but not exceeding 10 years. (4) Impairment of intangible assets Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating unit). F. Assets held for sale Groups of assets are reclassified as held for sale when a sale within one year is highly probable and the assets are available for immediate sale in their present condition. Property, plant and equipment and intangible assets held for sale are remeasured at the lower of fair value less cost to sell or the carrying amounts at the date they meet the held for sale criteria. Any resulting impairment loss is recognized in the profit & loss account. G. Investments The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at Initial recognition and re-evaluates this designation at every reporting date. (a) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realized within 12 months of the balance sheet date. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are included in non-current receivables in the balance sheet (Note 8). (c) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group s management has the positive intention and ability to hold to maturity. During the year, the Group did not hold any investments in this category. (d) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Through its 58.24% owned investment in CTN SA, the Group owns minority stakes in small seed-money companies. Access to financial information is limited and these investments are valued at cost minus impairment if there is objective evidence that these financial assets are impaired. H. Leases Assets acquired under long-term finance leases are capitalized and depreciated in accordance with the Group s policy on property, plant and equipment. The associated obligations are included in the financial liabilities. Rentals payable under operating leases are charged to the profit & loss account as incurred. I. Inventory 32

34 Inventory is stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (FIFO) method. The cost of finished goods and work in process comprises raw materials, other direct costs and related production overheads, but exclude interest expense. J. Trade receivables Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts at the year-end. Bad debts are written off when identified. K. Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash-flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks and other short-term highly liquid investments with a term of less than three months. L. Share capital The Company has only ordinary registered shares. Dividends on ordinary shares are recognised in equity in the period in which they are declared. When the Company or its subsidiaries purchases its own shares, the consideration paid including any attributable transactions costs and taxes is deducted from shareholders equity as treasury shares (own shares) until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders equity. M. Deferred income taxes Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The principal temporary differences arise from depreciation on property, plant and equipment, revaluations of certain non-current assets, post retirement benefits and tax losses carried forward; and in relation to acquisitions, on the difference between the fair values of net assets acquired and their tax base. Tax rates enacted or substantially enacted by the balance sheet date are used to determine deferred income tax. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. No deferred taxes have been provisioned on undistributed earnings in the subsidiaries since these earnings will not be distributed in the foreseeable future. N. Employee benefits (1) Defined benefit pension obligations The liability in respect of defined benefit pension plans represents the defined benefit obligation calculated annually by independent actuaries using the projected unit credit method. The defined benefit obligation is measured at present value of the estimated future cash flows. the charge for such arrangements, representing the benefit expense less employee contributions, is included in the personnel expenses of the various functions where the employees are located. Plan assets are recorded at fair values. Significant gains or losses arising from experience effects and changes in actuarial assumptions are charged or credited to income over the service lives of the related employees to the extent to which they fall outside the 10% corridor permitted under IAS 19. (2)Termination benefits These obligations are covered by a provision in the balance sheet according to the legal requirements of certain countries. (3) Equity compensation benefits The Group operates an equity-settled, share-based compensation plan. Share options are granted to directors and managers. The attribution is linked to return on equity. The options are granted at the market price of the shares on the date of the grant and are exercisable at that price after a vesting period of two years. The fair value of the employees services received in exchange for the grant of the options is recognized as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimates of the number of options that are expected to become exercisable. It recognizes the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period. O. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. (1) Warranty The Group recognises the estimated liability to repair or replace products still under warranty at the balance sheet date. This provision is calculated based on past history of the level of repairs and replacements. (2) Termination benefits These obligations are covered by a provision in the balance sheet according to the legal requirements of certain countries. (3) Onerous contracts and restructuring The Group has no provisions for onerous contracts or restructuring. (4) Restructuring Restructuring charges are recorded in the Profit & Loss Account in the period in which the Group has committed to a plan, which has either been commenced or announced publicly and it is probable that a liability was incurred and the amount can be reasonably estimated. Restructuring charges are included in the heading other expense in the P&L. P. Revenue recognition Sales are recognized upon delivery of products and customer acceptance, if any, or on the performance of services after deducting volume discounts and sales taxes, and after eliminating sales within the Group. Q. Financial Instruments Financial instruments are initially recognized in the balance sheet at cost and subsequently remeasured to their fair value. The method of recognizing the resulting gain or loss is dependent on whether the derivative contract is designed to hedge a specific risk and qualifies for hedge accounting. On the date a derivative contract is entered into, the Group designates certain derivatives as either a) a hedge of fair value of a recognized asset or liability (fair value hedge), or b) a hedge of a forecasted transaction (cash flow hedge) or firm commitment or c) a hedge of a net investment in a foreign entity. At the end of the financial year, the Group did not have any open positions that qualified for hedge accounting. The changes in fair value of derivative financial instruments are recognised in the profit and loss account in the net financial expense. The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The fair value of interest-rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the balance sheet date. Segment Information The LEM Group is structured into the Industrial Segment (previously called Components ), the Automotive Segment (previously called Corporate Projects ), both segments collectively reported as Continuing Operations, and the Instruments Segment and the real estate activity CTN, reported as Discontinued Operations. The Industrial Segment develops, manufactures and sells electronic components called transducers for the measurement of current and voltage for various industrial applications. The Automotive Segment develops, manufactures and sells transducers for applications in automotive markets. The Instruments Segment develops, manufactures and sells instruments and services for the measurement, analysis and visualization of electrical parameters for electrical networks and for professional electricians. Non-allocated assets correspond to cash, long-term financial receivables as well as deferred tax assets. Non-allocated liabilities comprise bank borrowings, income tax payable and provisions for deferred taxes. Financial Risk Management The Group s operating activities expose it to a variety of financial risks, including the effects of interest rates, credit and foreign currency exchange rates. The Group s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance of the Group. The objective is to reduce financial risks by balancing the cost of hedging against the amounts at risk. Derivative financial instruments are entered for any underlying risk in accordance with the Group s risk policy. Risk management is carried out by the CFO, who identifies, evaluates and hedges financial risks. (1) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the USD, the euro and the yen. The net USD exposure is hedged by using forwards and derivatives. On the contrary, the exposure to yen is not significant since most revenues and expenses of NANALEM in Japan are in 33

35 ACCOUNTING POLICIES yen. The sales subsidiaries have all their transactions in their local currency and the foreign exchange exposure is concentrated in the production centres. The long-term exposure in USD for contracts for the Automotive Segment is hedged with Currency Overlay Management. Investments in foreign subsidiaries, whose net assets are exposed to currency translation risk, are not hedged. This exposure has no impact on the profit & loss account but shareholders equity. (2) Interest rate risk The Group s net earnings and operating cash flow are substantially independent of changes in market interest rates. The industrial debt is at variable rates and the Group uses derivatives as hedging to limit the impact of rising interest rates. (3) Credit risk The Group has no significant concentrations of credit risk in its trade debtors. The Group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates (Note 11). (b) Income taxes The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Changes in the scope of consolidation Prior to the divestment of the Instruments Segment the full minority interests in Universal Technic SAS and Beijing Dianyan El. Instruments Co. Ltd. were acquired. 41% of the minority interests in TVELEM Ltd. were also acquired by LEM Holding SA during the financial year 2004/05. The remaining 10% are owned by local management. The investment in Qualimatest SA, consolidated with the equity method at 39.6%, was sold on 30 March Restatement of the financial statements for the financial year ended on 31 March 2004 due to a reassessment of the accounting treatment of derivative financial instruments. The financial statements for the financial year ended on 31 March 2004 have been restated due to a reassessment of the accounting treatment of derivative financial instruments. A cash-flow hedge for the USD/EUR exposure on contracts received in the Automotive Segment in 2000 had been put into place in 2001 with Currency Overlay Management. The gains on this hedge had been deferred in the balance sheet. This position has been reassessed and it did not fulfil the criteria for hedge accounting. Therefore, the deferred gains were taken to the Profit & Loss Account in the year they had been realized taking into account the associated deferred tax charge. Prior to the restatement, the realized gains had been recorded as Cash to Other Payable and the unrealized gains as Fair Value Reserve in the Equity to Other Payables. The fair value of a cash flow hedge against rising interest rates had previously not been recorded on the balance sheet. The changes in fair value have now been recorded retroactively in the right financial year. 34

36 The impacts on the Profit & Loss Account of 2003/04 for this restatement was as follows: Consolidated Profit & Loss Account Previously Reclassification Restatement published Discontinued derivative financial figures Operations IFRS 5 Instruments As restated 2003/ /04 Continuing Operations Sales ) Cost of goods sold ( ) ( ) ( ) Gross margin ' ' Sales expense ( ) ( ) ( ) Administration expense ( ) ( ) ( ) Research & development expense ( ) ( ) ( ) Amortisation & impairment loss on goodwill ( ) ( ) ( ) Other expense ( ) ( ) ( ) Other income Earnings before interests and taxes Financial Expense (net) ( ) ( ) ( ) Share of profit of associates Earnings (loss) before taxes ( ) Income taxes ( ) ( ) ( ) Net earnings (loss) from Continuing Operations ( ) ( ) Discontinued Operations Instruments Segment Real estate activity ( ) Earnings from Discontinued Operations Net earnings Attributable to : LEM shareholders Minority interests Continuing Operations Minority interests Discontinued Operations (22 234) (22 234) Total minorities Net earnings Earnings per share for profit attributable to the equity holders of the company during the year basic Continuing Operations 1.6 basic Discontinued Operations 1.7 total net earnings diluted Continuing Operations 1.6 diluted Discontinued Operations 1.7 total net earnings 0.70 Weighted average number of ordinary shares in issue The impacts from the restatement on the equity are as follows: Equity excluding Minority Equity including minority interests Interests minority interests Published on 1 April Reversal of fair value reserve P&L impact 2002/03 from reversing deferred realized gains, net of deferred tax Restated on 1 April Published on 31 March Reversal of fair value reserve ( ) Restatement impact from previous year P&L impact 2002/03 from reversing deferred realized gains, net of deferred tax Restated on 31 March

37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (ALL AMOUNTS IN SWISS FRANCS UNLESS OTHERWISE STATED) Segment information Primary reporting format by Business Segment Year ended on Continuing Operations Discontinued Operations in thousand Industrial Automotive Instruments Real-Estate Group Sales EBIT (620) Net financial expense (2 176) Income from associates 9 Taxes (4 603) Earnings from Continuing Operations Earnings from Discontinued Operations (note 12) (922) (5 704) (6 626) Net earnings 301 Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities 82'641 Capital expenditure: Tangible non-current assets Intangible non-current assets Goodwill Total Depreciation & amortization: Tangible non-current assets ' Intangible non-current assets Goodwill impairment Total Provisions: Allocated additions Unallocated additions Total 918 Allocated reversals Unallocated reversals Total Secondary reporting format by Geographical Segment Year ended on North Rest of the in thousand Europe America Asia world Group Sales by location of customers Continuing Operations Discontinued Operations Segment assets by location of assets Unallocated assets Total assets Capital expenditure: Tangible non-current assets Intangible non-current assets Goodwill Total

38 Segment information Primary reporting format by Business Segment Year ended on Continuing Operations Discontinued Operations in thousand Industrial Automotive Instruments Real Estate Group Sales EBIT (4 030) Net financial expense (762) Income from associates 18 Taxes (1 380) Earnings from Continuing Operations 457 Earnings from Discontinued Operations (note 12) (707) Net earnings 931 Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Capital expenditure: Tangible non-current assets Intangible non-current assets Goodwill Total 3' Depreciation & amortization: Tangible non-current assets Intangible non-current assets Goodwill amortization Total Provisions: Allocated additions Unallocated additions 265 Total 1052 Allocated reversals 622 1' Unallocated reversals 365 Total Secondary reporting format by Geographical Segment Year ended on North Rest of the in thousand Europe America Asia world Group Sales by location of customers Continuing Operations Discontinued Operations Segment assets by location of assets Unallocated assets Total assets Capital expenditure: Tangible non-current assets Intangible non-current assets Goodwill Total

39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Cash and cash equivalents Cash at bank and in hand Securities Total Trade debtors Trade debtors, third party Allowance for bad debt ( ) ( ) Total Other current assets Advances to suppliers Prepayments and accrued income Other current assets Real-estate debtors Allowance for bad debt on real estate debtors ( ) ( ) Current portion of non-current receivables Total Inventory Raw material Work in progress Finished goods and goods for resale Total Deferred tax assets Assets associated with: - Legal termination benefits Other items Total deferred tax asset Investments in associates Qualimatest SA (equity method at %, control 21.67%) Total The investment in Qualimatest SA was sold to Fongit for on 30 March

40 Available-for-sale financial assets Miscellaneous of CTN SA at historical cost with % of control below 20% Total On 31 March 2005 these investments were reclassified into assets held for sale. They are related to the discontinued real-estate activity. In accordance with a master agreement with Fongit, a public foundation, and the State of Geneva, CTN SA has committed to transferring these investments to Fongit later in Non-current receivables Loan Dynamp llc Less: current portion ( ) ( ) Kipp & Zonen BV (in 2005 it is part of the disposal group held for sale LEM Instruments ) Miscellaneous CTN SA Miscellaneous Total Investment property The investment property CTN is owned by CTN SA, which is consolidated with proportionate consolidation at 58.24%. On 23 March 2005 an assignment agreement for the sale of the properties was signed and the transaction was closed on 31 March The sale price was 88 million. In thousand In CTN SA LEM 100% 58.24% Fair value on 1 April Disposal (95 000) (55 328) Book value on 31 March

41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. Property, plan & equipment Land & Machinery & In k Buildings Equipment Total Net book value on 1 April Conversion differences (44) (169) (213) Change in scope of consolidation Increases Decreases 0 (670) (670) Other movements Assets reclassified as held for sale (2 374) (3 701) (6 075) Discontinued Operations (152) (876) (1 028) Depreciation charge (5) (3 519) (3 512) Net book value on 31 March On 31 March 2004 Cost or fair value Depreciation (697) (52 705) (53 402) Net book value on 31 March On 31 March 2005 Cost or fair value Depreciation (143) (27 680) (27 823) Net book value on 31 March Intangible assets Deferred R&D Goodwill Other Total In k intangible Assets Net book value on 1 April Conversion differences 0 (155) (38) (193) Change in scope of consolidation Increases Decreases 0 0 (74) (74) Other movements Assets reclassified as held for sale (431) (5 807) (53) (6 291) Discontinued Operations (427) (152) (5) (584) Amortization charge (894) 0 (273) (1 167) Impairment loss 0 (430) 0 (430) Net book value on 31 March On 31 March 2004 Cost Amortization (1 744) (10 921) (2 502) (15 167) Net book value on 31 March On 31 March 2005 Cost Amortization (1 893) (5 230) (1 270) (8 392) Net book value on 31 March The impairment loss of relates to an acquisition of intellectual property in the UK in Following the divestment of LEM Instruments it was decided to keep this project in the Continuing Operations but to strategically reorient it. It was impaired down to zero since no business exists yet. The remaining goodwill of 4.1 million in the Continuing Operations, which relates to the cash generating unit NANALEM KK in Japan, has not been impaired. 40

42 12. Assets held for sale and Discontinued Operations The assets and liabilities related to the disposal group LEM Instruments have been presented as held for sale following the decision by the Board of Directors on 17 May 2004 to divest this activity. On 23 December 2004, a sale and purchase agreement was signed with Danaher Corporation for 67 million on a cash and debt free basis. Closing of the transaction is pending anti-trust clearance in the UK. No impairment had to be recorded since the sale price is above the carrying amounts of the net assets. At the end of the financial year the real-estate activity CTN fulfilled the requirements of IFRS 5 to be qualified as Discontinued Operations. The sale of the CTN property was effective on the last day of the financial year for 88 million (see note 9). There are still certain assets in CTN SA that will be transferred to Fongit, a public foundation, later 2005 based on a master agreement with the State of Geneva. Instruments Cash and cash equivalents Trade debtors Loans Other current assets Inventories Long-term receivables Land and buildings Machinery and equipment Intangible assets Total Instruments Real estate Cash and cash equivalents Participations Total real estate Total assets held for sale Liabilities associated with assets held for sale Instruments Trade creditors Other current liabilities Provisions Short-term borrowings Long-term borrowings Total Instruments Real estate Other current liabilities Total liabilities associated with assets held for sale

43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2004/ /04 Profit & Loss Account of Discontinued Operations Instruments ( ) ( ) Real estate ( ) Total ( ) Detailed Profit & Loss Account of LEM Instruments Sales Gross profit in % 52.8% 52.5% Sales expense ( ) ( ) Administration expense ( ) ( ) R&D expense ( ) ( ) Amortization/impairment of goodwill 0 ( ) Other expense ( ) ( ) Other income EBIT Net financial expense ( ) ( ) Taxes ( ) ( ) Loss from Discontinued ( ) ( ) Operations Instruments Detailed Profit & Loss Account of real estate (CTN SA) Rental income Other income Total rental income Operating real estate expenses ( ) ( ) Loss on sales of the building ( ) 0 Depreciation and provisions 0 (58 581) Financial income Fee to Fongit ( ) ( ) Financial expense ( ) ( ) Net real estate (loss) earnings ( )

44 Cash flow of Discontinued Operations 2004/ /04 Instruments Operating cash flows Investing cash flows ( ) ( ) Financing cash flows ( ) ( ) Total cash flows ( ) ( ) Real-estate Operating cash flows ( ) Investing cash flows Financing cash flows ( ) ( ) Total cash flows ( ) Total cash flow of Discontinued Operations ( ) 13. Trade creditors Trade creditors, third party Trade creditors, real-estate Total Other current liabilities Advances from customers Accruals and deferred income Other payables Total Provisions Conversion Increase Reversal Discontinued Provisions difference Operations associated with assets held for sale Pensions (3 704) Termination benefits (62 112) ( ) ( ) ( ) Warranty, repair and maintenance (62 171) ( ) ( ) Restructuring ( ) (17 515) 0 Total (65 816) ( ) ( ) ( ) The column Discontinued Operations relates to the net movement in provisions for these activities during the year. Warranty, repair and maintenance include a reversal of of a provision for maintenance on the CTN property, which was reversed upon the disposal of the property. The constitution of provisions of in the cash flow statement corresponds to the column increases of in the above table plus increase in allowances for loss on receivables of (notes 2,3 and 8). The amount reversal of provisions in the cash flow statement of corresponds to the amount of in the column reversal in the above table plus relating to reversals of allowances for loss on receivables (notes 2,3 and 8). 43

45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Derivative financial instruments Cash-flow hedges: Fair value of interest rate hedge Fair value on currency overlay management USD/EUR Fair value of currency options USD/ Total The interest rate hedge is against rising interest rates on the debt for an underlying amount of 30 million. The currency overlay management relates to the exposure of long-term orders in the automotive industry. Sales prices are in USD and the costs mainly in EUR. The underlying amount for the currency overlay management is USD 20 million. Changes in fair value of the above cash-flow hedges are recorded in the profit & loss account. For the above transactions the collaterals in the form of short term deposits amount to on ( on ). 17. Non-current financial debt Borrowings in: EUR (Mortgage of CTN SA) JPY Total Other non-current payables Silent partner of LEM NORMA GmbH Total Deferred income tax liabilities Trade debtors Inventory Fair value gains Total At 1 April Charged (credited) to P&L ( ) (52 062) Translation differences At 31 March Charged (credited) to P&L ( ) Discontinued Operations ( ) ( ) Reclassified as liabilities associated with assets held for sale ( ) ( ) Translation differences (12 346) (12 346) At 31 March

46 20. Share capital Authorized Liberated Registered shares of 100 each Reserves Movements in own shares: Number of shares in the beginning of the financial year Purchases Sales (9 934) (6 209) Number of shares at the end of the financial year The company has purchased own shares for ( ) for last financial year and sold own shares for ( ). 22. Minority interests On the minority interests correspond to 10% in TVELEM On the minority interests correspond to 49% in TVELEM, 48% in BEIJING DIANYAN El and 35% in Universal Technic 45

47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Other expense Loss on sales of fixed assets Miscellaneous Total Other income Royalties Recharged R&D participation Miscellaneous Total Net financial expenses Financial income Hedging income on Currency Overlay Management Allowance for loss on loans 0 (58 759) Interest expense ( ) ( ) Share of mortgage interest of LEM SA ( ) ( ) Foreign exchange (losses) gains ( ) Variation in fair value of financial instruments ( ) ( ) Total ( ) ( ) The net financial expense relates only to the industrial activities. However, the interests on the CTN building occupied by LEM SA are included as in previous years to take better into account the industrial/real estate separation. 26. Share of profit of associates Share in profits of Qualimatest SA according to the equity method Income taxes Taxes on income Deferred taxes ( ) Total Analysis of taxes: Normal taxes on profitable companies Reduced tax rates (25 027) (39 607) Utilisation of losses carried forward ( ) ( ) Deferred taxes ( ) Total Tax losses carried forward: M M Expiration in the next five 5 to 10 years Expiration Without date of expiration Total

48 28. Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Company and held as treasury shares. 2004/ /04 Profit from Continuing Operations attributable to equity holders of the company Profit from Discontinued Operations attributable to equity holders of the company ( ) Weighted average number of ordinary shares in issue Basic earnings per share Continuing Operations Basic earnings (loss) per share Discontinued Operations (23.0) 1.7 Diluted earnings per share from Continuing Operations Diluted earnings per share from Discontinued Operations (23.0) 1.7 We only have ordinary shares Staff cost Salaries and wages Continuing Operations Salaries and wages Discontinued Operations Number of employees at the end of the financial year Continuing Discontinued Acquisition of companies Purchase of minority interests in TVE (39%) Purchase of the last minority interests in NANALEM KK (7.92%) Total

49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31. Related parties Associated companies: There have been no transactions between the companies of the Group and the associated company Qualimatest SA. Directors of the board: The fees to the board of directors amount to for the financial year 2004/05 ( for 2003/04). No loans have been granted to the board of directors or their families. Senior management: The remuneration to the Senior Management is disclosed in the Corporate Governance section on page 20 under chapter Contingent liabilities Total guarantees for credits of subsidiaires Total guarantees to third parties Total off balance sheet liabilities Continuing Operations Total guarantees for credits of subsidiaires Total guarantees to third parties Total Continuing Discontinued Operations Total guarantees for credits of subsidiaires Total guarantees to third parties Total Discontinued On 31 March 2005 the Group had contigent liabilities in respect of bank and other guarantees and other matters arising in the ordinary course of business from which it is anticipated that no material liabilities will arise. The operations of earnings of the Group continue, from time to time and in varying degrees, to be affected by political, legislative, fiscal and regulatory environments, inlcuding those relating to environmental protection, in the countires in which it operates. The industries in which the Group is engaged are also subject to physical risks of various kinds. The nature and frequency of these developments and events, not all of which are covered by insurance, as well as their effect on future operations and earnings are not predictable. 48

50 Operating leasing liabilities Total Less than 1 year Between 2 and 5 years Beyond 5 years Stock options plan Grant Quantity Quantity Quantity Quantity Exercise Exercise Exercice date options options options options price period period issued forfeited exercised outstanding in from until (315) (178) (356) , (493) (356) The Board of Directors introduced a stock options plan for the management team and the directors in The plan is based on the share capital composed of 300'000 shares. Each option gives the right to buy one share at the pre-determined exercise price, which corresponds to the share price on the last day of the financial year. The vesting period is two years. 35. Interests in joint-ventures The Group holds 58,24% in a real estate company, CTN SA, which is jointly managed with the minority shareholders. The company is integrated with proportionate consolidation. The following amounts are included proportionally in the balance sheet and the profit and loss account of the Group. Inter-company transactions are also eliminated proportionally Tangible fixed assets Investments and long-term receivables Other current assets Inter-company loan to LEM Holding SA Cash Non-current liabilities Current liabilities Net assets / /04 Total income Total expenses of which operating expenses (Loss) Earnings before taxes ( ) The number of employees in the company CTN SA amounts to 3 on ( : 3). 49

51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 36. Retirement benefit obligations With effect from the financial year 2004/05 the Group considers its Swiss pension fund a defined benefit plan. Previously, it was dealt with as a defined contribution plan. This change had no material impact on the Group s financial statements. The Group sponsors this defined benefit plan in Switzerland, which provides benefits primarily based on years of service and level of compensation in accordance with local regulations and practices. The components of net pension expense for the defined benefit plan are: 2004/ /04 Service cost Interest cost Expected return on plan assets ( ) ( ) Employee contributions ( ) ( ) Total The following tables provide a reconciliation of the changes in the net benefit obligation as of March 31, 2005: Net projected benefit obligation beginning of the year Expected service cost Employer contributions ( ) ( ) Gain on actual return of plan assets ( ) ( ) Actuarial gains ( ) ( ) Projected benefit obligation end of the year Projected benefit obligation ( ) ( ) Plan assets Projected benefit obligation end of the year ( ) ( ) Unrecognized net actuarial losses Asset/liability recognized in the balance sheet 0 0 The principal assumptions used in determining the pension benefit obligation are as follows: 2004/ /04 Discount rate 3.5% 3.5% Salary increases 1.5% 1.5% Expected return on plan assets Equities 7.0% 7.0% Bonds 3.75% 3.75% Other assets 2.5% 2.5% 50

52 37. Scope of consolidation Full consolidation (of all companies owned to 100% if no other indication) Europe LEM Belgium sprl-bvba Belgium LEM Deutschland GmbH Germany LEM BE SA (ex LEM ELSIS SA) Belgium Discontinued LEM France Sàrl France LEM Heme Ltd Great Britain Discontinued LEM Holding SA Switzerland LEM Italia Srl Italy LEM Norma GmbH Austria Discontinued LEM SA Switzerland TVELEM Ltd Russia (90%) Universal Technic SA France Discontinued North America LEM Dynamp Inc. USA Liquidated on LEM Holding USA Inc. USA LEM Instruments Inc. USA Discontinued LEM USA Inc. USA Asia Beijing Dianyan El. Instruments Co. Ltd. China Discontinued Beijing LEM Electronics Co. Ltd. China Hokuto KK Japan LEM Instruments & Meters Co. Ltd. China Discontinued LEM Malaysia Sdn Bhd Malaysia NANALEM KK Japan Proportionate consolidation CTN SA CTN SA Switzerland Discontinued (58.24%) Equity method Qualimatest SA Switzerland Sold on (39.634%) 38. Events after the balance sheet date There were no events subsequent to the balance sheet date that require adjustment to or disclosure in the financial statements. 51

53 GROUP AUDITOR S REPORT Report of the Group Auditors to the Shareholders Meeting of LEM Holding SA As auditors of the Group, we have audited the consolidated financial statements (balance sheet, profit and loss account, cash flow statement, statement of changes in equity and notes on pages 27 to 51) of the LEM Holding SA for the year ended 31 March The consolidated financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence. Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession and with the International Standards on Auditing (ISA), which require that an audit be planned and performed to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the consolidated financial statements. We have also assessed the accounting principles used, significant estimates made and the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the financial position, the results of operations and the cash flow comply with the Swiss law and are in accordance with the International Financial Reporting Standards (IFRS). We recommend that the consolidated financial statements submitted to you be approved. Geneva, 10 June 2005 ALBER & ROLLE Experts-comptables Associés SA H. Rolle Certified Public Accountant (Auditor in charge) J.-C. Vitali 52

54 LEM Holding SA Statutory Accounts

55 BALANCE SHEET OF LEM HOLDING SA ON 31 MARCH (before distribution of earnings) Assets Notes Current assets Cash Own shares Group debtors Sundry current assets Sundry current assets, Group Total current assets Fixed assets Group loans Investments in subsidiaries Tangible fixed assets Intangible fixed assets Total fixed assets Total assets Liabilities & Equity Notes Current liabilities Bank borrowings Current liabilities Group current liabilities Total current liabilities Equity Share capital General reserve Reserve for own shares Retained earnings Net earnings of the period 6 ( ) ( ) Total equity Total liabilities & equity

56 Income Notes 2004/ /04 Dividends Interest income on inter-company loans Other financial income Central services to the Group Sundry income Foreign exchange gains Gain on sale of own shares Decrease of provision for loss on investments in subsidiaries Total income PROFIT AND LOSS ACCOUNT OF LEM HOLDING SA Expenses Notes 2004/ /04 Office and administration expenses Financial expenses Foreign exchange losses Loss on loans to subsidiaries Loss on investments in subsidiaries Increase of provision for loss on investments in subsidiaries Loss on sale of own shares Increase of provision for loss on own shares Total expenses Loss before taxes ( ) ( ) Taxes (45 350) (50 000) Net loss ( ) ( ) 55