Untitled-5 [] · Retained earnings 132 4,313 7,570 Total shareholders' equity 6,510 10,691 29,556...

2004 ANNUAL REPORT 17

STATEMENT OF DIRECTORS' RESPONSIBILITY

After making enquiries, the Directors have a reasonable expectation that the Company and its

subsidiaries have adequate resources to continue in operational existence for the foreseeable

future. For this reason, they have adopted the going concern basis in preparing the financial

statements.

The UK and the Israeli Law requires the Directors to prepare financial statements for each financial

period, which give a true and fair view of the state of affairs of the Company and the group, and of

the profit and loss of the Company for the period. In preparing these financial statements, the

Directors are required to: select suitable accounting policies and then apply them consistently;

make judgments and estimates that are reasonable and prudent; state whether applicable

accounting standards have been followed, subject to any material departures disclosed and

explained in the financial statements; and prepare the financial statements on the going concern

basis unless it is inappropriate to presume that the Company will continue in business. The

Directors consider that in preparing the financial statements from pages 18 to 50, the Company

and Group have used the accounting policies and adopted the principles as set out in this

paragraph.

The Directors believe that they fulfill their responsibility for keeping proper accounting records

which disclose with reasonable accuracy at any time the financial position of the Company and to

ensure that the financial statements comply with the Companies Act 1985. They are also

responsible for safeguarding the assets of the Company and hence for taking reasonable steps for

the prevention and detection of fraud and other irregularities.

VISONIC18

INDEPENDENT AUDITORS' REPORT

To the shareholders of VISONIC LTD.

We have audited the accompanying consolidated balance sheets of Visonic Ltd. and its

subsidiaries ("the Group") as of 31 December 2002, 2003 and 2004, and the related consolidated

statements of income, changes in equity and cash flows for each of the three years then ended.

These consolidated financial statements are the responsibility of the Group's management. Our

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

We did not audit the financial statements of certain subsidiaries, whose assets included in

consolidation constitute approximately 31.8 per cent, 31.5 per cent and 33.4 per cent of total

consolidated assets as of 31 December 2002, 2003 and 2004, respectively, and whose revenues

included in consolidation constitute approximately 45 per cent, 56 per cent and 56.3 per cent of

total consolidated revenues for the years ended 31 December 2002, 2003 and 2004, respectively.

Those statements were audited by other auditors whose reports have been furnished to us, and

our opinion, insofar as it relates to amounts included for these subsidiaries is based solely on the

reports of the other auditors.

We conducted our audits in accordance with International Standards on Auditing. Those

Standards require that we plan and perform the audit to obtain reasonable assurance about

whether the consolidated financial statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated

financial statements. An audit also includes assessing the accounting principles used and

significant estimates made by management, as well as evaluating the overall consolidated financial

statement presentation. We believe that our audits and the report of the other auditors provide a

reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors, the consolidated financial

statements referred to above present fairly in all material respects the consolidated financial

position of the Group, as of 31 December 2002, 2003 and 2004, and the consolidated results of

its operations and its cash flows for each of the three years then ended, in accordance with

International Financial Reporting Standards.

Kost Forer Gabbay & Kasierer3 Aminadav St.Tel-Aviv 67067, IsraelPhone: 972-3-6232525Fax: 972-3-5622555

KOST FORER GABBAY & KASIERERA Member of Ernst & Young Global

Tel-Aviv, Israel15 March 2005


As of 31 December

2002 2003 2004

Note US$ '000 US$ '000 US$ '000

ASSETS

CURRENT ASSETS:

Cash and cash equivalents 5,406 5,562 5,844

Short-term deposits 3a - - 6,500

Available-for-sale financial assets 3b - - 751

Trade receivables 4 9,240 10,038 12,970

Other accounts receivable 5 1,331 1,666 2,494

Inventories 6 7,190 9,796 7,845

Total current assets 23,167 27,062 36,404

NON-CURRENT ASSETS:

Long-term deposits - - 500

Held-to-maturity investments 7 - - 5,206

Property and equipment, net 8 4,186 4,395 4,249

Deferred tax assets 16a5 820 1,482 1,771

Intangible assets, net 9 262 1,617 1,384

Severance pay fund - - 169

Total non-current assets 5,268 7,494 13,279

Total assets 28,435 34,556 49,683

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Credit from banks and current maturities of long-term loans 10 8,508 1,373 2,583

Trade payables 11 4,174 4,816 4,421

Employees and payroll accruals 1,707 1,913 1,922

Related company 12 726 743 805

Convertible debentures to related party 13 617 617 -

Other current liabilities 14 2,999 4,866 2,715

Total current liabilities 18,731 14,328 12,446

LONG-TERM LIABILITIES:

Bank loans 15 2,519 8,517 6,566

Accrued severance pay, net 675 924 1,115

Total long-term liabilities 3,194 9,441 7,681

MINORITY INTEREST - 96 -

SHAREHOLDERS' EQUITY 18

Share capital 16 16 21

Additional paid-in capital 6,362 6,362 21,965

Retained earnings 132 4,313 7,570

Total shareholders' equity 6,510 10,691 29,556

Total liabilities and shareholders' equity 28,435 34,556 49,683

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

15 March 2005

Date of approval of thefinancial statements

CONSOLIDATED BALANCE SHEETS

Yaacov KotlickiChairman of the Board of Directors

Dr. Avigdor SacharaiChief Executive Officer

VISONIC20

Year ended 31 December

2002 2003 2004

Note US$ '000 US$ '000 US$ '000

Sales 45,160 52,886 55,129

Cost of sales 19a (26,006) (29,258) (29,454)

Gross profit 19,154 23,628 25,675

Research and development costs, net 19b (3,607) (4,978) (5,068)

Selling and marketing expenses, net 19c (9,188) (11,118) (13,598)

General and administrative expenses 19d (3,180) (2,989) (3,582)

Restructuring costs 19e - (112) -

Total operating costs and expenses (15,975) (19,197) (22,248)

Operating profit 3,179 4,431 3,427

Financial income, net 19f 556 274 845

Other income (expenses), net 19g (1) 30 (159)

Profit before taxes on income 3,734 4,735 4,113

Taxes on income 16 (1,003) (608) (952)

Profit before losses of associate, net 2,731 4,127 3,161

Losses of associate, net (8) - -

Minority interest in losses of subsidiary - 54 96

Net profit 2,723 4,181 3,257

Basic earnings per share (in U.S. dollars) 20 0.09 0.14 0.09

Diluted earnings per share (in U.S. dollars) 20 0.09 0.14 0.09

Weighted average number of shares used for computing basic earnings per share 20 29,375,430 29,375,430 37,151,584

Weighted average number of shares used forcomputing diluted earnings per share 20 30,383,974 30,695,896 38,017,880


CONSOLIDATED STATEMENTS OF INCOME


STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Retainedearnings

(accumulateddeficit) Total

US$ '000 US$ '000 US$ '000 US$ '000

Balance as of 1 January 2002 16 6,362 (2,591) 3,787

Net profit - - 2,723 2,723

Balance as of 31 December 2002 16 6,362 132 6,510

Net profit - - 4,181 4,181

Balance as of 31 December 2003 16 6,362 4,313 10,691

Issuance of shares, net **) 5 15,494 - 15,499

Exercise of options *) - 109 - 109

Net profit - - 3,257 3,257

Balance as of 31 December 2004 21 21,965 7,570 29,556

*) Represents an amount lower than $ 1,000.

**) Net of issuance expenses in the amount of $ 1,798,000 (after tax benefit of $ 454,000).


Additionalpaid-in capital

Sharecapital

VISONIC22


2002 2003 2004

Note US$ '000 US$ '000 US$ '000

CASH FLOWS FROM OPERATING ACTIVITIES:

Net profit 2,723 4,181 3,257

Adjustments to reconcile net profit to net cashprovided by operating activities (a) 3,147 (708) (2,591)

Net cash provided by operating activities 5,870 3,473 666

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of short-term deposits - - (6,500)

Purchase of long-term deposits - - (500)

Purchase of available-for-sale financial assets - - (734)

Purchase of held to maturity investments - - (5,332)

Acquisition of know-how - - (22)

Acquisition of newly consolidated subsidiaries (c) (102) 35 -

Investment in associate (6) - -

Proceeds from sale of property and equipment 32 3 31

Purchase of property and equipment (1,405) (1,382) (1,182)

Net cash used in investing activities (1,481) (1,344) (14,239)

CASH FLOWS FROM FINANCING ACTIVITIES:

Issuance of shares, net of expenses - - 15,045

Exercise of options - - 109

Issuance expenses - (6) -

Increase (decrease) in balances with related party (16) 17 62

Receipt of long-term loans from banks 2,500 13,514 849

Repayment of long-term loans from banks (2,508) (13,519) (687)

Repayment of liability to related party (295) -

Repayment of convertible debentures to related party - - (617)

Short-term bank credit, net (2,386) (1,979) (906)

Net cash provided by (used in) financing activities (2,705) (1,973) 13,855

Increase in cash and cash equivalents 1,684 156 282

Cash and cash equivalents at the beginning of the year 3,722 5,406 5,562

Cash and cash equivalents at the end of the year 5,406 5,562 5,844


CONSOLIDATED STATEMENTS OF CASH FLOWS



2002 2003 2004

US$ '000 US$ '000 US$ '000

A. ADJUSTMENTS TO RECONCILE NET PROFIT TO

NET CASH PROVIDED BY OPERATING ACTIVITIES:

INCOME AND EXPENSES NOT INVOLVING CASH FLOWS:

Equity in losses of associate, net 8 - -

Minority interest in losses of subsidiary - (54) (96)

Depreciation and amortisation 1,297 1,420 1,542

Deferred taxes, net (25) (662) 165

Increase (decrease) in accrued severance pay (27) 168 22

Loss from sale of property and equipment, net 1 - 10

Exchange rate differences on liability to related party (22) - -

Revaluation of bank loan - 10 3

Gain on issuance of shares by a subsidiary - (30) -

Fair value revaluation of available-for-sale financial assets - - (17)

Premium amortization - - 126

CHANGES IN OPERATIONS ASSET AND LIABILITIES:

Increase in trade receivables (627) (470) (2,932)

Increase in other accounts receivable (115) (290) (828)

Decrease (increase) in inventories 2,450 (2,164) 1,951

Increase (decrease) in trade payables (22) 134 (395)

Increase in employees and payroll accruals 258 206 9

Increase (decrease) in other current liabilities (29) 1,024 (2,151)

3,147 (708) (2,591)

B. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

CASH PAID DURING THE YEAR FOR:

Interest 317 277 314

Income taxes 456 190 596

C. ACQUISITION OF NEWLY CONSOLIDATED SUBSIDIARIES:

THE NET FAIR VALUE OF THE ASSETS AT THE DATE OF ACQUISITION WAS AS FOLLOWS:

Working capital (excluding cash) (163) 713 -

Property and equipment, net (28) (106) -

Excess of losses over investment in associate (39) - -

Long-term liabilities 377 741 -

Goodwill created upon acquisition (249) - -

Know-how - (1,493) -

Shares issuance to minority in subsidiary - 180 -

(102) 35 -


NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

VISONIC24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 I GENERAL

A. COMPANY DESCRIPTION:

The Company was founded in 1973 under the laws of the State of Israel and it is engaged in the

design, development, manufacture and marketing of security systems and components for

institutional, commercial and residential customers for both personal and property protection.

The Company's products are marketed in Europe, Australia and the U.S. through its various wholly-

owned subsidiaries in each region and in Asia, through its 50 per cent owned joint-venture in

Hong-Kong.

On 15 April 2004, the Company effected an IPO on the London Stock Exchange. The proceeds of

the placing were approximately $ 15,499,000, net of issuance expenses in the amount of

$ 1,798,000 (after the tax effect) - see Note 18.

B. DEFINITIONS:

In these financial statements:

The Company - Visonic Ltd.

Subsidiaries - companies over which the Company exercises control (as defined in IAS 27)

and whose accounts are consolidated with those of the Company.

Jointly controlled entity - company owned by various entities that have a contractual consent for joint

control, and whose accounts are consolidated with those of the Company

using the proportionate consolidation method. The jointly controlled entity in

these financial statements is:

Visonic Deson Limited - 50 per cent owned and controlled through

Visonic Ltd. ("Visonic Deson")

Investees - subsidiaries and jointly controlled entity.

Related parties - as defined in IAS 24 of the IASB.

C. THE FOLLOWING ACTIVE COMPANIES ARE CONSOLIDATED AND PROPORTIONATE

CONSOLIDATED AS OF 31 DECEMBER 2004:

Consolidated companies Share (per cent)

Visonic Technologies Ltd. (“VT”) (1) 85

Visonic Marketing (1988) Ltd. (“VM”) (1) 100

Visonetix Ltd. (“Visonetix”) (1) (2) 85

Elpas Electro-Optic Systems Ltd. (“Elpas”) (1) (2) 85

Visonic Inc. (3) (4) 100

Visonic Iberica de Seguridad S.L. (“Visonic Iberica”) (4) (5) 100

Visonic Sicherheitstechnik GmbH (“Visonic GmbH”) (4) (6) 100

Visonic Sp.Zo.O (“Visonic Sp”) (4) (7) 100

Visonic Limited (4) (8) 100

Visonic Security Pty Limited (“Visonic Pty”) (4) (9) 100

Visonic Technologies Americas Inc. (“VTA”) (3) (10) 85

Visonic Technologies UK Limited (“VT UK”) (8) (10) 85

Proportionate consolidation

Visonic Deson Limited ("Visonic Deson") (4) (11) 50


Visonic and its subsidiary VM focus on residential security and provide global technical and marketing support

throughout the network of subsidiaries and distributors in over 70 countries. VT focuses on location tracking systems

in the institutional and commercial markets through Elpas and Visonetix Ltd.

NOTE 2 I SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies applied in the preparation of the consolidated financial statements, on

a consistent basis, are as follows:

A. BASIS OF PREPARATION:

The consolidated financial statements of the Group have been prepared in accordance with

International Financial Reporting Standards ("IFRS").

B. FOREIGN CURRENCY TRANSLATION:

The majority of the Group's sales are made outside of Israel in non Israeli currencies, mainly the US

dollar. A substantial portion of the Group's expenses, mainly selling and marketing expenses and

service costs is incurred in US dollars. Accordingly, the US dollar is the currency of the primary

economic environment of the Company and its subsidiaries, and thus its functional and presentation

currency.

Transactions in non-US dollar currencies are translated into US dollars at the exchange rate on the

transaction date. Monetary assets and liabilities in non-US dollar currencies are translated into US

dollars at the exchange rate on balance sheet date. All exchange rate differences are recorded in the

statement of income.

C. PRINCIPLES OF CONSOLIDATION:

Subsidiaries are consolidated from the date on which control is transferred to the Company and

cease to be consolidated from the date on which control is transferred out of the Company.

Intercompany balances and transactions including profits from inter-company sales not yet realised

outside the group, have been eliminated upon consolidation.

D. INVESTMENTS:

All investments are initially recognised at cost, being the fair value of the consideration given and

including acquisition charges associated with the investment.

After initial recognition, investments which are classified as available-for-sale, are measured at fair

value. Changes in fair value are presented in the statement of income

Investments with fixed or determinable payments and fixed maturity are classified as held-to-maturity

when the Company has the positive intention and ability to hold to maturity. Held-to-maturity

investments are measured at amortised cost using the effective interest method. Amortised cost is

calculated by taking into account any discount or premium on acquisition, over the period to maturity.


(1) Operates in Israel.

(2) Owned through Visonic Technologies Ltd.

(3) Operates in the United States.

(4) Owned through VM.

(5) Operates in Spain.

(6) Operates in Germany.

(7) Operates in Poland.

(8) Operates in the United Kingdom.

(9) Operates in Australia.

(10) Owned through Elpas.

(11) Proportionately consolidated - see Note 24.

VISONIC26


NOTE 2 I SIGNIFICANT ACCOUNTING POLICIES (cont.)

E. INTEREST IN JOINT-VENTURE:

The Group's interest in a joint venture is accounted for by proportionate consolidation, which involves

recognising a proportionate share of the joint venture’s assets, liabilities, income and expenses with

similar items in the consolidated financial statements on a line-by-line basis.

F. CASH EQUIVALENTS:

The Company considers all highly liquid investments originally purchased with maturities of three

months or less to be cash equivalents.

G. TRADE RECEIVABLES:

Trade receivables are recognised and carried at original invoice amount less an allowance for any

uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no

longer probable. Bad debts are written-off as identified.

H. INVENTORIES:

Inventories are presented at the lower of cost or net realisable value. Cost is determined as follows:

Raw materials - at weighted average cost.

Work in progress and finished goods - on the basis of weighted average costs of materials and other

direct and indirect manufacturing costs.

I. PROPERTY AND EQUIPMENT:

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is

calculated using the straight-line method over the estimated useful lives of the assets, at the following

annual rates:

per cent

Machinery and equipment 10 - 20 (mainly 10 per cent)

Computers and peripheral equipment 20 - 33 (mainly 33 per cent)

Office furniture and equipment 6 - 20 (mainly 7 per cent)

Motor vehicles 15

Leasehold improvements 10 over the term of the lease

The carrying values of property and equipment are reviewed for impairment when events or changes

in circumstances indicate the carrying value may not be recoverable. If any such indication exists and

where the carrying values exceed the estimated recoverable amount, the assets or cash-generating

units are written down to their recoverable amount. The recoverable amount of property and

equipment is the greater of net selling price and value in use. In assessing value in use, the estimated

future cash flows are discounted to their present value using a pre-tax discount rate that reflects

current market assessments of the time value of money and the risks specific to the asset. For an

asset that does not generate largely independent cash inflows, the recoverable amount is determined

for the cash-generating unit to which the asset belongs.



J. DEFERRED TAXES:

Deferred taxes are calculated using the liability method for temporary differences between the tax

base of assets and liabilities and their carrying amounts for financial reporting purposes. A deferred

tax asset has been recognised for tax loss carryforwards only to the extent that it is probable that

these will be utilised in the foreseeable future.

Deferred taxes are not recorded in respect of temporary differences associated with investments in

subsidiaries and interests in joint ventures, as the timing of the reversal of the temporary differences

can be controlled and it is probable that the temporary differences will not reverse in the foreseeable

future.

K. REVENUE RECOGNITION:

Revenues are recognised when the significant risks and rewards of ownership of the goods have

passed to the buyer and the amount of revenues can be measured reliably.

The Company sells products on consignment to Visonic Deson. The Company recognises revenues

from sales on consignment when Visonic Deson recognises revenues from the end customer.

Consigned inventories totalled $ 68,000, $ 102,000 and $ 62,000 at Visonic Deson for 2002, 2003

and 2004, respectively.

L. RESEARCH AND DEVELOPMENT COSTS:

Research and development costs are expensed as incurred.

M. INTANGIBLE ASSETS:

Intangible assets acquired separately are capitalised at cost. Intangible assets acquired as part of an

acquisition of a business are capitalised separately from goodwill at fair value created within the

business are not capitalised and expenditure is charged against profits in the year in which it is

incurred.

GOODWILL:

Goodwill represents the excess of the cost of the acquisition over the fair value of identifiable net

tangible assets of a subsidiary or associate at the date of acquisition. Goodwill is amortised using the

straight-line method over its useful economic life of 10 years. The amortisation is included in general

and administrative expenses.

Goodwill is reviewed for impairment when events or changes in circumstances indicate that the

carrying value may not be recoverable.

KNOW-HOW:

Know-how is amortised using the straight-line method over its useful economic life of 8 years. The

amortisation is included in general and administrative expenses.

N. BASIC AND DILUTED EARNINGS PER SHARE:

Basic earnings per share are computed using the weighted average number of Ordinary shares

outstanding during the period. Diluted earnings per share are computed based on the weighted

average number of Ordinary shares outstanding during each period, adjusted for the effects of dilutive

options.

VISONIC28

NOTE 2 I SIGNIFICANT ACCOUNTING POLICIES (cont.)

O. ACCRUED SEVERANCE PAY, NET:

The Company's liability for severance pay for Israeli resident employees, is calculated pursuant to

Israeli Severance Pay Law, based on the most recent salary of the employees multiplied by the

number of years of employment as of the balance sheet date. Employees are entitled to one month's

salary for each year of employment or a portion thereof. The Company's liability for all of its

employees is partly provided by monthly deposits with severance pay funds, insurance policies and

by an accrual.

The amounts deposited with managers' insurance policies on behalf of the employees and the

respective liabilities are not included in the balance sheet as they are not under the control and

management of the Company.

The amounts deposited in severance pay funds may be withdrawn only in accordance with Israeli

Severance Pay Law or labour agreements.

P. CONVERTIBLE DEBENTURES:

A convertible debenture comprises two components: a financial liability and an equity instrument (a

call option granting the holder the right, for a specified period of time, to convert the debenture into

Ordinary shares). Accordingly, the liability and equity elements are measured at fair value and

presented separately on the balance sheet.

On the issue of the convertible debenture, the fair value of the liability component is determined using

a market rate for an equivalent non-convertible bond and this amount is carried as a long-term liability

at amortised cost using the effective interest method until extinguished on conversion or redemption.

The remainder of the proceeds is allocated to the conversion option that is recognised and included

in shareholders’ equity, net of issuance costs. The value of the conversion option is not changed in

subsequent periods.

Q. GOVERNMENT GRANTS:

Royalty-bearing grants from the Government of Israel for funding approved research and development

projects are recognised at the time the Company is entitled to such grants, on the basis of the costs

incurred and included as a deduction of research and development costs.

The liability for these grants with a corresponding charge to profit and loss may need to be recorded

in the future to the extent of the Group’s estimate of sales from products developed of these projects.

Non-royalty-bearing grants from the Fund for Encouragement of Marketing Activity are recognised at

the time the Company is entitled to such grants on the basis of the costs incurred and included as a

deduction from sales and marketing expenses.

R. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:

In December 2003, the International Accounting Standards Board ("IASB") released revised IAS 32,

Financial Instruments: Disclosure and Presentation and IAS 39, Financial Instruments: Recognition

and Measurement. These standards replace IAS 32 (revised 2000), and supersedes IAS 39 (revised

2000), and should be applied for annual periods beginning on or after January 1, 2005. The

amendments are not expected to have a material impact on the Group's consolidated financial

statements.




In December 2003, as a part of the IASB's project to improve International Accounting Standards, the

IASB released revisions to the following standards that supersede the previously released versions of

those standards: IAS 1, Presentation of Financial Statements; IAS 2, Inventories; IAS 8, Accounting

Policies, Changes in Accounting Estimates and Errors; IAS 10, Events after Balance Sheet Date;

IAS 16, Property, Plant and Equipment; IAS 17, Leases; IAS 21, The Effects of Changes in Foreign

Exchange Rates; IAS 24, Related Party Disclosures; IAS 27, Consolidated and Separate Financial

Statements; IAS 28, Investments in Associates; IAS 31, Interests in Joint Ventures; IAS 33,

Earnings per Share and IAS 40, Investment Property. The revised standards should be applied for

annual periods beginning on or after January 1, 2005. The amendments are not expected to have a

material impact on the Group's consolidated financial statements. In March 2004, the IASB issued

IFRS 3 ‘Business Combinations’. IFRS 3 applies to accounting for business combinations for which

the agreement date is on or after 31 March 2004.

IFRS 3 requires all business combinations to be accounted for by applying the purchase method.

Further, upon acquisition the identifiable assets and liabilities acquired are measured at their fair values

at the acquisition date and any minority interest in the acquiree is stated at the minority proportion of

the net fair values of those items.

In respect of goodwill acquired in a business combination for which the agreement date was before

31 March 2004, IFRS 3 requires that the Group discontinue amortising such goodwill commencing

from 1 January 2005 and to test the goodwill for impairment annually at the cash generating unit level

(unless an event occurs during the year which requires the goodwill to be tested more frequently).

In February 2004, the IASB issued International Financial Reporting Standard 2, Share-Based

Payment (IFRS 2), on the accounting for share-based payment transactions, including grants of share

options to employees. IFRS 2 requires an entity that follows IAS to recognise the effect of share-

based payment transactions in the financial statements based on the award's fair value. IFRS 2 will

be effective for annual periods beginning on or after January 1, 2005 and will apply to grants of

shares, share options or other equity instruments that were granted after November 7, 2002 and had

not yet vested at the effective date. The Company is currently evaluating the impact of this standard.

NOTE 3 I SHORT-TERM INVESTMENTS

As of 31 December

2002 2003 2004

US$ '000 US$ '000 US$ '000

(a) Short-term deposits - - 6,500

The deposits bear interest at annual rates ranging between 1.5 per cent to 2.47 per cent.

(b) Available-for-sale financial assets:

Bonds - listed - - 751

The bonds are traded in Israel and United States and mature in 2005.

VISONIC30

NOTE 4 I TRADE RECEIVABLES

As of 31 December

2002 2003 2004

US$ '000 US$ '000 US$ '000

Trade receivables 9,223 10,073 13,115

Checks receivable 317 430 357

9,540 10,503 13,472

Allowance for doubtful accounts (300) (465) (502)

9,240 10,038 12,970

NOTE 5 I OTHER ACCOUNTS RECEIVABLE

Government authorities 569 882 853

Prepaid expenses 347 464 573

Income receivable 52 17 322

Employees 42 33 83

Advances to suppliers 89 124 176

Other 232 146 487

1,331 1,666 2,494

NOTE 6 I INVENTORIES

Raw materials 4,021 5,426 3,885

Work in progress 933 1,345 1,198

Finished goods 2,236 3,025 2,762

7,190 9,796 7,845

NOTE 7 I HELD-TO-MATURITY INVESTMENTS

Held-to-maturity investments (1) - - 5,206

(1) Marketable bonds which will mature through April 2007.

The bonds bear annual interest at rates of between 2.56 per cent and 3.75 per cent.

The market value of these bonds at 31 December 2004 amounted to $ 5,222,000.




NOTE 8 I PROPERTY AND EQUIPMENT

Total

US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000

COST:

Balance as of 1 January 2002 6,975 2,525 1,835 250 1,174 12,759

Property and equipmentof newly consolidated subsidiary - 18 16 55 - 89

Additions during the year 398 498 293 33 183 1,405

Disposals during the year - (3) (23) (107) - (133)

Balance as of 31 December 2002 7,373 3,038 2,121 231 1,357 14,120

Property and equipmentof newly consolidated subsidiary 19 341 110 15 27 512



Balance as of December 2003 8,092 3,758 2,315 405 1,424 15,994


Disposals during the year - - (24) (59) - (83)

Balance as of 31 December 2004 8,637 4,236 2,362 381 1,477 17,093

ACCUMULATED DEPRECIATION:

Balance as of 1 January 2002 5,093 2,073 967 154 422 8,709

Property and equipment of newly consolidated subsidiary - 10 11 40 - 61



Balance as of 31 December 2002 5,679 2,397 1,110 148 600 9,934

Property and equipment of newly consolidated subsidiary 3 310 57 15 21 406


Disposals during the year - - (17) - - (17)



Disposals during the year - - (5) (37) - (42)


Depreciated cost as of 31 December 2004 1,849 811 850 177 562 4,249

Depreciated cost as of 31 December 2003 1,873 697 983 201 641 4,395

Depreciated cost as of 31 December 2002 1,694 641 1,011 83 757 4,186

Machineryand

equipment

Computersand

peripheralequipment

Officefurniture

andequipment

Motorvehicles

Leaseholdimprovements

VISONIC32

NOTE 9 I INTANGIBLE ASSETS

Goodwill derives from the acquisition of Visonic Sp, a Polish company, in April 2002 by VM.

IssuanceKnow-how Goodwill expenses Total

US$ '000 US$ '000 US$ '000 US$ '000

Balance as of 1 January 2002 46 - - 46

Acquisition of subsidiary - 249 - 249

Amortisation charge for the year (9) (24) - (33)

Balance as of 31 December 2002net of accumulated amortisation 37 225 - 262

Issuance expense - - 6 6

Acquisition of subsidiary 1,493 - - 1,493

Amortisation charge for the year (121) (23) - (144)

Balance as of 31 December 2003 net of accumulated amortisation 1,409 202 6 1,617

Acquisition of know-how 22 - - 22

Amortisation charge for the year (223) (26) (6) (255)

Balance as of 31 December 2004 net of accumulated amortisation 1,208 176 - 1,384

NOTE 10 I CREDIT FROM BANKS AND CURRENT MATURITIES OF LONG-TERM LOANS

As of 31 December

2002 2003 2004

per cent US$ '000 US$ '000 US$ '000

Credit from banks in NIS 5.45 - 204 282

Current maturities of long-term bank loans 5,500 167 2,301

Short-term loan linked to the US dollar 3,008 1,002 -

8,508 1,373 2,583

The bank credit is secured by a floating charge over certain of the Company’s assets.


Weighted averageinterest rate 31.12.04



NOTE 11 I TRADE PAYABLES

As of 31 December

2002 2003 2004

US$ '000 US$ '000 US$ '000

Open accounts 4,100 4,745 4,383

Notes payable 74 71 38

4,174 4,816 4,421

NOTE 12 I RELATED COMPANY

The current balance represents a liability to S.M.D., a company under the control of the Company's controlling

shareholders, linked to the Israeli CPI and has no maturity date.

NOTE 13 I CONVERTIBLE DEBENTURES TO RELATED PARTY

On 19 March 2004, the Company repaid the convertible loan in the amount of $ 617,000.

NOTE 14 I OTHER CURRENT LIABILITIES

As of 31 December

2002 2003 2004

US$ '000 US$ '000 US$ '000

Accrued expenses 1,604 2,293 1,393

Income taxes payable 922 1,988 739

Customer advances 130 60 43

Related party (1) 225 391 99

Other 118 134 441

2,999 4,866 2,715

(1) The balance is linked to the Israeli CPI.

NOTE 15 I BANK LOANS

A. COMPOSITION:

As of 31 December

2002 2003 2004

per cent US$ '000 US$ '000 US$ '000

Linked to the dollar 3.33 8,019 8,684 8,705

Linked to the NIS 5.35 - - 162

Less - current maturities 5,500 167 2,301

2,519 8,517 6,566

B. THE LOANS MATURE IN THE FOLLOWING YEARS

subsequent to the balance sheet date:

First year (current maturities) 2,301

Second year and thereafter 6,404

8,705

C. AS FOR CHARGES, SEE NOTE 17C.

Weighted averageinterest rate 31.12.04

VISONIC34

NOTE 16 I TAXES ON INCOME

A. ISRAELI INCOME TAXES:

1. Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the Law"):

a) The Company:

Four expansion programs of the Company have been granted "Approved Enterprise" status, under

the Law. For these expansion programs, the Company has elected alternative benefits, waiving grants

in return for tax exemptions. Pursuant thereto, the income of the Company derived from the following

"Approved Enterprise" expansion programs is tax-exempt for the periods stated below and will be

eligible for reduced tax rates thereafter, as described below.

1. The Company received special approval regarding four of the expansion programs described

henceforth. The special approval determines a specific ratio in respect of allocating the income

deriving from the Approved Enterprise between income deriving from the plant in the centre of

Israel (Development Region C) and income deriving from the plant in Kiryat Gat (Development

Region A). The Company's management estimates that most of the income deriving from those

programs will be attributed to the plant in Development Region A.

2. The first program that commenced in 1999 and is to expire in 2007 was an expansion of S.M.D.

Income deriving from the first program and attributed to the plant in Development Region A will be

tax-exempt for the six-year period ending 31 December 2007. Income deriving from the first

program and attributed to the plant in Development Region C is not entitled to benefits and is

liable to tax at the regular rate. See Note 16f.

3. Income deriving from the second program, which commenced in 2002 and is to expire in 2011,

entitles the Company to a tax exemption for the 10-year period ending 31 December 2011 in

respect of income attributed to the plant in Development Region A. Income attributed to the plant

in Development Region C is liable to tax at the regular rate. See Note 16f.

4. Income deriving from the third program, which commenced in 2002 and is to expire in 2011,

entitles the Company to a tax exemption for the 10-year period ending 31 December 2011 in

respect of income attributed to the plant in Development Region A. Income attributed to the plant

in Development Region C is liable to tax at the regular rate. See Note 16f.

5. In February 2004, the Company received approval for an additional expansion. The Centre of

Investment approved an investment plan in property and equipment to be carried until 15

February 2006, in the amount of $ 2,400,000.

The entitlement to the above benefits is conditional upon the fulfilment of the conditions stipulated by

the above law, regulations published thereunder and the letter of approval for the investments in the

Approved Enterprises. In the event of failure to comply with these conditions, the benefits may be

cancelled and the Company may be required to refund the amount of the benefits, in whole or in part,

including interest.

Management of the Company believes that the Company has complied with all the conditions

described above.

Any income derived from sources other than Approved Enterprise is subject to the regular corporate

tax rate. See Note 16f.

In the event of distributions of dividends out of income deriving from an Approved Enterprise, which is

entitled to tax exemptions, the distributing company shall be liable to pay tax at the rate of 25 per

cent on the distributed earnings.




Dividend distributions derived from an approved enterprise are subject to 15 per cent withholding tax.

The Company may distribute dividends from earnings that do not derive from tax exempt income by

virtue of the Approved Enterprise status.

b) Visonic Networks (“VN”):

VN was granted Approved Enterprise status according to the Law under a letter of approval, which

VN received during May 2000.

On 30 November 2003, VN's operations were acquired by Elpas. In October 2003, VN filed an

application to the Investment Centre to transfer its status as Approved Enterprise to Elpas.

On 22 December 2004, VN received temporary approval from the Centre of Investment , regarding

the transfer of its status as an "Approved Enterprise" to Elpas. The approval will become effective only

if Elpas will finance 30 per cent of the investment in property and equipment which was purchased by

VN according to VN’s Approved Enterprise by a share issuance. If the abovementioned condition

remains unfulfilled 60 days from 22 December 2004, then the temporary approval will expire.

In January and February 2005, Elpas complied with the abovementioned condition.

Income deriving from this program entitles VN to a tax exemption for a period of over 10 years.

The benefit period in respect of the investment program has not yet commenced and it is limited until

the end of 2013.


the above law, regulations published thereunder and the letter of approval for the investments in the



including interest.

The management of VN believes that VN has complied with all the conditions stipulated above.

In the event of distributions of dividends out of income deriving from an Approved Enterprise, which is

entitled to tax exemptions, the distributing company shall be liable to pay tax at the rate of 25 per




c) Visonetix:

According to the Law, Visonetix is entitled to various tax benefits by virtue of the Approved Enterprise

status that was granted to its plant.

Income deriving from this program, which commenced in 2001 and is to expire in 2005, entitles

Visonetix to a tax exemption for a period of four years ending 31 December 2004 and to a reduced

tax rate of 25 per cent for an additional one year ending 31 December 2005.


the above Law, regulations published thereunder and the letter of approval for the investments in the



including interest.

The management of Visonetix believes that Visonetix has complied with all the conditions stipulated

above.

VISONIC36

NOTE 16 I TAXES ON INCOME (cont.)

In the event of a distribution of dividends out of income deriving from an Approved Enterprise which is

entitled to a tax exemption, the distributing company shall be liable to pay tax at the rate of 25 per




d) Elpas:

Elpas' production facilities in Development Area C have been granted the status of an Approved

Enterprise under the above Law. Pursuant to the provisions of the Law, Elpas' undistributed income

will be tax-exempt for a period of two years commencing with the year it first realises taxable income.

In the remaining five years of benefits, Elpas will be subject to corporate tax at a reduced rate of 25

per cent.

The period of tax benefits, described above, is subject to limits of the earlier of 12 years from the

commencement of production, or 14 years from the approval date, whichever is earlier.

If a dividend is distributed out of such tax-exempt profits deriving from the Approved Enterprise, Elpas

will be liable to corporate tax at the rate of 25 per cent.



The entitlement to the abovementioned benefits is conditional upon Elpas fulfiling the terms stipulated

by the Law, regulations published thereunder and letters of approval for the specific investments in

the Approved Enterprises. In the event of failure to comply with these conditions, the benefits may be

cancelled and the Elpas may be required to refund the amount of the benefits, in whole or in part,

including interest.

The management of Elpas believe that Elpas has complied with all the conditions stipulated above.

2. The provisions of the Income Tax (Inflationary Adjustments) Law, 1985 apply to the Company and

certain of its Israeli investees. According to the law, the results for tax purposes are measured based

on changes in the Israeli CPI.

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

The Company and certain investees are "industrial companies", as defined by this law and, as such,

are entitled to certain tax benefits, mainly accelerated depreciation of machinery and equipment, as

prescribed by regulations published under the Inflationary Adjustments Law, and the right to claim

public issuance expenses and amortisation of patents and other intangible property rights as a

deduction for tax purposes.

4. Subsidiaries which were incorporated outside Israel are taxed according to their countries of

residence.

5. Deferred taxes:

The deferred tax assets reported in the balance sheet are based on the following temporary

differences. The deferred taxes were determined using tax rates in Israel ranging between 21 per cent

to 30 per cent.




Significant components of the Company's deferred tax assets are as follows:

Total

US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000

Balance as of 1 January 2002 (115) 40 252 203 377 38 - 795

Amounts chargedto statement of income 42 194 (13) (71) (152) 25 - 25

Balance as of31 December 2002 (73) 234 239 132 225 63 - 820

Amounts charged tostatement of income 48 252 74 21 250 17 - 662

Balance as of31 December 2003 (25) 486 313 153 475 80 - 1,482

Amounts charged toadditional paid-in capital - - - - - - 454 454

Amounts charged tostatement of income 79 (40) (80) 13 - (15) (122) (165)

Balance as of31 December 2004 54 446 233 166 475 65 332 1,771

B. THEORETICAL TAX:


2002 2003 2004

US$ '000 US$ '000 US$ '000

Profit before taxes on income, as reported 3,734 4,735 4,113

Provision at statutory rate - 2002 and 2003 - 36 per cent, 2004 - 35 per cent 1,344 1,705 1,439

Effect of benefits to approved enterprises (886) (875) (517)

Adjustment of the tax rates in the computation of deferred taxes 233 168 (114)

Non-deductible expenses 87 75 152

Increase in losses for which deferred taxes were not provided(utilisation of losses for tax purposes) 202 (248) 639

Difference between measurement basis of income for taxpurposes and for reporting purposes, net 19 (247) (514)

Other 4 30 (133)

1,003 608 952

per cent

Effective tax rate 26.9 12.81 23.11

C. TAXES ON INCOME CONSISTS OF THE FOLLOWING:

Current 1,028 1,270 787

Deferred (25) (662) 165

1,003 608 952

D. LOSS CARRYFORWARDS:

Certain subsidiaries have tax loss carryforwards in the amount of $ 14,571,000 in respect of which deferred

taxes in the amount of $ 3,697,000 were not provided.

Property and

equipment Inventories

Accruedseverance

pay

Accruedvacation and

recreation pay

Tax losscarry-

forward

Allowancefor doubtful

accounts

Issuanceexpensesaccounts

VISONIC38

NOTE 16 I TAXES ON INCOME (cont.)

E. TAX ASSESSMENTS:

The Company and the subsidiaries have received final assessments or assessments considered as

final as detailed below:

Up to and including tax year

The Company 1999

Elpas 2000

Visonetix 1999

Visonic GmbH 2002

Visonic Pty 2003

The other subsidiaries have not yet been assessed since their inception.

F. TAX RATES:

Until December 31, 2003, the regular tax rate applicable to income of companies (which are not

entitled to benefits due to "approved enterprise", as described above) was 36 per cent. In June 2004,

an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision), 2004 was passed

by the "Knesset" (Israeli parliament), which determines, among other things, that the corporate tax

rate is to be gradually reduced to the following tax rates: 2004 - 35 per cent, 2005 - 34 per cent,

2006 - 32 per cent and 2007 and thereafter - 30 per cent.

NOTE 17 I COMMITMENTS AND CONTINGENT LIABILITIES

A. ROYALTIES:

The Company and a subsidiary received from the Government of Israel grants for participation in

research and development and, in return, it is committed to pay royalties at the rate of 2 per cent -

5 per cent on sales proceeds of the financed research and development in an amount not to exceed

100 per cent of the total amount of the grants received. As of 31 December 2004, total grants

received amounted to approximately $ 3,755,000 and total royalties paid and accrued amounted to

approximately $ 1,248,000. As of 31 December 2004, total commitments amounted to $ 2,507,000.

B. LEASE AGREEMENTS:

1. Lease agreements with related parties:

The Company and certain of its subsidiaries rent their facilities under various operating lease

agreements, which expire on various dates, the latest of which is in 2015.

The minimum rental payments under non-cancellable operating leases are as follows:

31 December

US$ '000

2005 877

2006 854

2007 699

2008 590

2009 590

2010 - 2015 3,019

6,629

Total rental expense for the years ended 31 December 2002, 2003 and 2004 were approximately

$ 361,000, $ 504,000 and $ 873,000, respectively.




2. Other lease agreements:

The minimum rental payments under non-cancelable operating leases are as follows:

31 December

US$ '000

2005 260

2006 203

2007 31

494

Total rental expenses for the years ended 31 December 2002, 2003 and 2004 were approximately

$ 412,000, $ 446,000 and $ 328,000, respectively.

C. CHARGES:

As collateral for a bank loan in the amount of $ 8,122,000 at 31 December 2004, an unlimited first

priority fixed charge was recorded on all the past and future notes of the Company, on the unpaid

share capital and on the goodwill, and a first priority floating charge was recorded on the plant and

equipment in favour of the bank.

D. A LETTER OF CREDIT:

Pursuant to a letter of credit dated 25 December 2003, Bank Leumi Le-Israel B.M. ("Bank Leumi" or

the "Bank") makes available credit facilities to the Company. The letter provides for a total credit

facility for an amount not exceeding $ 12,700,000 ("the Loan Facility") available for a period of three

years from the date of the letter. In addition, the letter specifies that Bank Leumi will provide bank

guarantees ("the guarantee Facility") for a total amount not exceeding $ 200,000 for a period of one

year from the date of the letter. As at 31 December 2004, $ 8,122,000 of the Loan Facility.

The approved Loan Facility and guarantee Facility shall be valid up until 31 January 2006, and subject

to fulfilment of the following terms:

1. There shall have been no material adverse change in the value of the collateral which the

Company has provided in favour of the Bank.

2. The Tangible Equity (as defined in the agreement) of the Company shall not, at any time, be less

than 29 per cent of its total assets as set forth in its balance sheet on a consolidated basis in the

quarterly and annual financial statements. In addition, said tangible equity of the Company shall

not, at any time, be less than NIS 45,554,326 ($ 9,500,000) linked to the Israeli Consumer Price

Index known on the date of signature thereof; and all such data shall appear in the quarterly and

annual financial statements of the Company on a consolidated basis.

3. At all times, the EBITDA of the Company shall be not less than the total amount of current

maturities of long-term loans, which the Company has undertaken with the addition of all of the

Company's financing costs, as the same appear in the quarterly and annual financial statements

(as defined in the agreement).

4. There will not be any change whatsoever in the control (as defined in the agreement) of the

Company, without the prior written consent of the Bank.

Notwithstanding the aforesaid, it was agreed that the Company shall be entitled to issue up to

30 per cent of its shares to the public (as defined below), provided that, following such a public

offering, Yaacov Kotlicki shall remain the controlling shareholder of the Company.

VISONIC40

NOTE 17 I COMMITMENTS AND CONTINGENT LIABILITIES (cont.)

There will not be any change whatsoever in the Company’s control of Visonic Inc., Visonic Limited

and Visonic Iberica, without the prior written consent of the Bank.

As of 31 December 2004, the Company is complying with the abovementioned terms.

E. CLAIMS:

On 17 March 2004, the Company received notice of a claim filed in US courts by Versus Technology,

Inc. (“Versus”) against several subsidiaries of a Group customer, Hill-Rom, Inc. and naming two of the

Group’s subsidiaries, Visonic Technologies Limited and Visonic, Inc. as co-defendants. The two Group

subsidiaries are named in only two out of the eight counts of the claim alleging, inter alia, that the

Hill-Rom defendants and the Visonic defendants have infringed at least one of four of Versus' patents.

The remedies claimed against the two Group companies are an injunction to prevent further

infringement and damages for past infringement arising from sales of certain products by the Group

companies. Hill-Rom has also indicated that it intends to defend the claim vigorously.

The Company strongly denies the allegations made against its two subsidiaries and the claim will be

vigorously defended. The Company has obtained preliminary legal advice from its US counsel and

firmly believe that Versus will not be successful in its claim against the Company's two subsidiaries.

Recently the Michigan court decided to move the lawsuit North Carolina. Since the complaint was

filed, Versus has amended its complaint twice. The present amendment names the Group

subsidiaries defendants VT, VTA and Elpas. Furthermore, Versus amended the complaint to include

also products sold by VTA to other customers (and not only those products sold to Hill-Rom).

Furthermore, the Company received from its US legal counsels an legal opinion, according to which

Hill-Rom is obligated to indemnify VTA and Elpas for liabilities, cost and legal fees actually incurred by

VTA and Elpas in relation to the Versus litigation.

On January 5, 2005, VTA filed a counter claim against Versus alleging an infringement of a VTA patent

by Versus.

Group sales of the relevant products in the financial year ended 31 December 2004 represent less

than 3 per cent of 2004 Group sales. The Company does not consider that the claim, even if upheld,

would have a significant effect on the Group’s financial position.

NOTE 18 I SHARE CAPITAL

A. On 15 April 2004, the Company effected an IPO in the London Stock Exchange. The proceeds of the

Placing were approximately $ 15,499,000, net of issuance expenses in the amount of $ 1,798,000

(after the tax effect). The Company issued 10,864,885 Ordinary shares representing approximately 27

per cent of the issued and outstanding Ordinary shares. The shares were listed on the London Stock

Exchange under the symbol VSC.L and trade commenced on 15 April 2004.

B. SHARE CAPITAL:Year ended 31 December

2002 2003 2004

1. Authorised:

Ordinary shares of NIS 0.002 par value 497,475,000 497,475,000 500,000,000

Ordinary A shares of NIS 0.002 par value 2,525,000 2,525,000 -

2. Issued and outstanding:

Ordinary shares of NIS 0.002 par value 29,157,240 29,157,240 40,400,815

Ordinary A shares of NIS 0.002 par value 218,190 218,190 -

In April 2004, the Company redesignated the Ordinary A shares as Ordinary shares.




C. STOCK OPTION PLAN:

1) The Company

a) The Company has three Stock Option Plans authorised in 2001; Israeli Stock Option Plan 2001,

Global Stock Option Plan 2001 and US Stock Option Plan 2001. Under the Company's three

Stock Option Plans, the Company may issue up to 1,843,500 stock options exercisable into

Ordinary shares.

The options expire within 10 years from the date of grant. The options were equally granted

throughout four vesting periods over four consecutive years, with the first vesting period

scheduled 12 months after the date of grant. The exercise prices of the options granted under the

plans range between $ 0.68 - $ 1.08 per share.

b) In December 2003, the Company authorised three new stock option plans to the employees of

the Company and to services providers; Israeli Stock Option Plan 2003, Global Stock Option Plan

2003 and US Stock Option Plan 2003. The plan addressed tax reforms enacted since the 2001

Stock Option Plan. As a result, most of the non-vested options from the former plan were

cancelled and were re-granted under the new plan, under the same terms as the former plan. On

15 April 2004, the Company granted 1,120,750 options to its employees. According to the plan,

as of 31 December 2004, the Company may issue up to 123,750 options exercisable into

Ordinary shares. Any options under the Israeli Stock Option Plan 2001 that will be forfeited will be

reissued under the Israeli Stock Option Plan 2003.

The total pool option balance of the six stock option plans as of 31 December 2004 is 2,839,500

options.

The options to the employees in Israel were granted under section 102 to Israel's Income Tax

Ordinance and the options to the Israeli service providers were granted under section 3(i) to the

Income Tax Ordinance.

A summary of the Company's stock options activities in 2002, 2003 and 2004 is as follows:

Options outstanding

Weighted Average exercise Number of options price per share

US$

Balance as of 1 January 2002 2,173,500 0.68

Options granted 412,000 0.77

Options forfeited (59,000) 0.68

Balance as of 31 December 2002 2,526,500 0.69



Options granted 1,120,750 1.70


Options exercised (160,500) 0.68


VISONIC42

NOTE 18 I SHARE CAPITAL (cont.)

The options outstanding as of 31 December 2004 have been separated into ranges of exercise price as follows:

US$ US$ US$

0.68 1,507,000 7 0.68 1,058,540 0.68

1.08 88,000 7 1.08 44,000 1.08

1.70 1,120,750 9.25 1.70 - 1.70

2,715,750 1,102,540

2) VT:

In December 2003, VT authorised three stock option plans to its employees and to service providers;

Israeli Stock Option Plan 2003, Global Stock Option Plan 2003 and US Stock Option Plan 2003.

According to the plan VT reserved 2,300,000 options exercisable into VT shares. The options expire

within 10 years from the date of grant. As of 31 December 2004, VT granted 1,631,001 options of VT

to employees and 54,000 option of VT to service providers.

The options were equally granted throughout four vesting periods over four consecutive years, with

the first vesting period scheduled 12 months after the date of grant, except for 605,001 options of VT

granted in November 2003 which vest in equal tranches on a monthly basis over a three year period

from the date of grant.

The exercise price of the options granted under the plan is $ 0.07 per share.

As of 31 December 2004, the Company hold 85 per cent of VT's shares. On a fully diluted basis, the

Company will hold 77.7 per cent of VT's shares. (See Note 26).

NOTE 19 I SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF INCOME


2002 2003 2004

US$ ‘000 US$ ‘000 US$ ‘000

A. COST OF SALES:

Materials consumed (1) 13,545 20,522 (1) 16,524

Salary and related benefits 6,482 7,355 6,831

Subcontractors 1,139 1,582 1,809

Depreciation 1,042 1,022 1,047

Other manufacturing costs 2,426 2,675 2,833

Decrease (increase) in inventory of work in progress (2) 813 (275) 147

Decrease (increase) in inventory of finished goods 559 (3,623) 263

26,006 29,258 29,454

(1) Including $ 520,000 in respect of write down of raw materials.

(2) Including write down of $ 100,000.


WeightedOptions Weighted Options average

outstanding average Weighted exercisable exerciseas of remaining average as of price of

Exercise 31 December contractual exercise 31 December optionsprice 2004 life (years) price 2004 exercisable




2002 2003 2004

US$ ‘000 US$ ‘000 US$ ‘000

B. RESEARCH AND DEVELOPMENT COSTS:


Purchase of materials 77 117 188

Subcontractors 106 525 753

Foreign travel 124 137 161

Maintenance of vehicles 271 341 333

Other expenses 212 259 399

Research and development costs, gross 3,658 4,978 5,485

Less – participation of the Chief Scientist 51 - 417

Research and development costs, net 3,607 4,978 5,068

C. SELLING AND MARKETING EXPENSES:


Lease of offices and maintenance 615 625 777

Advertising and marketing expenses 1,389 1,264 1,748

Depreciation 137 177 147

Professional consultation 95 299 360

Foreign travel 531 876 1,100

Delivery, export and insurance 521 530 826

Participation of the Fund for Encouragement of Marketing (35) - -

Other 1,474 2,177 1,855

9,188 11,118 13,598

D. GENERAL AND ADMINISTRATIVE EXPENSES:


Maintenance of offices 262 258 205

Professional consultation 421 329 600

Depreciation and amortisation 118 221 348

Bad debts, net 199 (24) 255

Other 646 551 611

3,180 2,989 3,582

E. RESTRUCTURING COSTS - 112 -

F. FINANCIAL INCOME, NET:

Interest from related parties, net (42) - -

Interest expenses, net (590) (271) (197)

Linkage differences income 1,188 545 1,042

556 274 845

VISONIC44

NOTE 19 I SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF INCOME


2002 2003 2004

US$ ‘000 US$ ‘000 US$ ‘000

G. OTHER INCOME (EXPENSES), NET:

Capital loss from sale of property and equipment (1) - (10)

Profit from issuance of shares by a subsidiary - 30 -

Other - - (149)

(1) 30 (159)

(1) In November 2003, the Company restructured the activities of its subsidiaries, Elpas and VN. In the framework

of the restructure, the Company elected to compensate several employees in an amount aggregating to $ 112,000.

H. STAFF NUMBERS AND COSTS:

The average number of persons employed by Visonic (including directors) during the period and their cost were as

follows:Number of employees - Year ended 31 December

2002 2003 2004

Salaried 331 352 385

Other 126 130 52

457 482 437


2002 2003 2004

US$ '000 US$ '000 US$ '000

Salary 10,952 12,924 14,555

Manpower employees 1,593 1,849 984

National Insurance 642 809 952

Pension expenses 1,188 1,411 1,580

Other expenses 970 897 759

15,345 17,890 18,830

NOTE 20 I EARNINGS PER SHARE

The following reflects the income and share data used in the basic and diluted earnings per share computations:


2002 2003 2004

Net profit attributable to Ordinary shareholders forbasic and diluted earnings per share 2,723 4,181 3,257

Weighted average number of Ordinary shares forbasic earnings per share 29,375,430 29,375,430 37,151,584

EFFECT OF DILUTION:

Share options 1,008,544 1,320,466 866,296

Adjusted weighted average number of Ordinaryshares for diluted earnings per share 30,383,974 30,695,896 38,017,880




NOTE 21 I FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS:

The following methods and assumptions are used by the Company and its investees in estimating the fair

value of their financial instruments:

The carrying amounts of cash and cash equivalents, short-term deposits, trade receivables, other

accounts receivable, credit from banks, employees and payroll accruals, trade payables and other current

liabilities, approximate their fair value due to the short-term maturity of such instruments.

The carrying amount of the Company’s long-term bank loans approximates their fair value based on the

Company's incremental borrowing rates for similar type of borrowing arrangements.

CONCENTRATION OF CREDIT RISK:

Financial instruments that potentially subject the Company and its subsidiaries to concentration of credit

risk consist principally of cash and cash equivalents, short and long-term deposits, held to maturity

securities and trade receivables.

Cash and cash equivalents are invested in major banks in Israel, Europe and the United States. Such

deposits in the United States and Europe may be in excess of insured limits and are not insured in other

jurisdictions. Management believes that the financial institutions that hold the Company's investments are

financially sound and, accordingly, minimal credit risk exists with respect to these investments.

The Company's trade receivables are mainly derived from sales to customers in Europe, North America

and the Far East.

The Company performs ongoing credit evaluations of its customers and to date has not experienced any

material losses. An allowance for doubtful accounts is determined with respect to those amounts that the

Company has determined to be doubtful of collection.

FOREIGN CURRENCY RISK:

The Company sells its products in several countries and, as a result, is exposed to movements in foreign

currency exchange rates. The primary purpose of the Company’s foreign currency hedging activities is to

protect against the volatility associated with foreign currency created in the normal course of business.

The Company primarily utilises forward exchange contracts with maturities of less than 12 months and

foreign currency options to hedge foreign-currency-denominated firm financial commitments. Any gains

or losses arising from changes in the fair value of the hedged item and the hedging instruments are

carried directly to the net profit and loss for the period.

The Company does not use foreign currency forward exchange contracts or purchased currency options

for trading purposes.

When possible, it is the Company's policy to negotiate the terms of the hedged derivatives to match the

terms of the hedged item to maximise hedge effectiveness.

As of 31 December 2004, the Company has no forward exchange contracts and no foreign currency

options.

The total gain resulting from derivative financial instruments for the year ended 31 December 2004 was

$ 15,000.

VISONIC46

NOTE 22 I BALANCES AND TRANSACTIONS WITH RELATED PARTIES

A. BALANCES WITH RELATED PARTIES:

As of 31 December

Linkage basis 2002 2003 2004

US$ '000 US$ '000 US$ '000

CURRENT ASSETS:

Trade receivables - related company US dollar 104 134 107

CURRENT LIABILITIES:

Related party CPI 225 391 99

Related company CPI 726 743 805

Related party - convertible debentures - 617 617 -

B. TRANSACTIONS WITH RELATED PARTIES:


2002 2003 2004

US$ '000 US$ '000 US$ '000

REVENUES:Sales to investees (1) 237 329 292

EXPENSES:Salary bonus and other benefits to 200 268 760related party employed by the Company

Non executive directors fee - - 64

Rental fees payable to related party (2) 361 504 873

(1) In 2002, the amount shown represents sales to Visonic Sp (an associate until May 2002) and to Visonic Deson,

a jointly controlled entity. In 2003 and 2004, the amount shown represents sales to Visonic Deson.

(2) See Note 17b(1).

NOTE 23 I DIRECTORS REMUNERATION

A. In April 2004, the Board of Directors of the Company resolved to enter into new employment

agreements with each of Yaacov Kotlicki (see (1) below), Avigdor Shachrai (see (2) below) and Shmuel

Koren (see (3) below) and to appoint Mr. Walter Goldsmith and Mr. Anthony McCann as non-

executive directors of the Company. (See (4) below).

(1) Yaacov Kotlicki’s annual salary under the agreement is NIS 360,000 (equivalent to $ 79,000)

(linked to the Israeli Consumer Price Index) and the agreement also entitles him to social benefits

and a bonus of 2.5 per cent of the annual operating profit of the Group and, in addition, a bonus

of up to 50 per cent of his annual salary depending upon the success and profitability of the

Group and a company car. The agreement is terminable by either party on three months’ prior

written notice to the other.

(2) Avigdor Shachrai’s annual salary under the agreement is NIS 660,000 (equivalent to $ 145,000)

and the agreement also entitles him to social benefits and a bonus of up to 25 per cent of his

annual salary in the event the Company achieves its annual targets and up to 50 per cent of his

annual salary in the event the Company significantly exceeds its annual targets and a company

car. The agreement is terminable by either party on six months’ prior written notice to the other.




(3) Shmuel Koren’s annual salary under the agreement is NIS 516,000 (equivalent to $ 113,000) and

the agreement also entitles him to social benefits and a bonus of up to 50 per cent of his annual

salary (linked to his individual performance, the annual turnover of the Company and the annual

operating profit of the Company) and a company car. The agreement is terminable by either party

on three months’ prior written notice to the other.

(4) According to the agreements, the appointment of Mr. Walter Goldsmith and Mr. Anthony McCann

as non-executive directors of the Company shall be for an initial period of 12 month from the

appointment date but it may be terminable by either party upon three months prior written notice

to the other party. The non-executive directors annual fee under the agreement is £ 20,000 each

(equivalent to $ 38,000 each).

C. DIRECTORS:


2002 2003 2004

US$ '000 US$ '000 US$ '000

Salary (1) 76 (1) 79 (2) 343

Fee - - (3) 64

Bonus 76 120 160

Other benefits 48 69 192

200 268 759

(1) Includes one director.

(2) Includes three directors.

(3) Includes two directors.

D. DIRECTORS SHAREHOLDINGS IN THE COMPANY:

Shareholder Ordinary shares Per cent of issue share capital

Yaacov Kotlicki 25,829,000 63.92

Batia Kotlicki 500 *) -

Akiva Laxer (held in trust for Yaacov Kotlicki) 1,828,620 4.53

S.M.D. Advanced Technologies Limited (1) 1,868,620 4.62

Avi Shachrai 20,000 0.05

Shmuel Koren 1,000 0.01

Walter Goldsmith 30,000 0.07

Antony McCann 6,000 0.01

29,583,740 73.21

(1) A company wholly owned by Yaacov Kotlicki.

E. YAACOV KOTLICKI AND S.M.D. rent properties to the Company. The rental fee is mentioned in

Note 22(b) and Note 17(b)(1).

*) Less than 0.01 per cent.

VISONIC48

NOTE 24 I INTEREST IN JOINT VENTURE

The Company has a 50 per cent interest in the assets, liabilities, expenses and output of Visonic Deson

Limited, which is involved in the marketing and support of electronic security and alarm systems.

The Company's share of the assets, liabilities, revenue and expenses of the joint venture, which are

included in the consolidated financial statements, were as follows:

As of 31 December

2002 2003 2004

US$ '000 US$ '000 US$ '000

BALANCE SHEET ITEMS:

Current assets 166 213 173

Current liabilities 110 145 140


2002 2003 2004

US$ '000 US$ '000 US$ '000

STATEMENT OF OPERATIONS ITEMS:

Revenue 285 385 315

Cost of revenues 241 331 265

Operating expenses 29 41 68

Net profit (loss) 15 12 (18)

NOTE 25 I BUSINESS SEGMENTS

A. GENERAL

1. The Group companies operate in two principal business segments: location tracking systems and

security and home management.

2. The segment's assets include all the operating assets which are used by the segment and are

composed mainly of cash and cash equivalents, checks receivable, trade receivables, equipment

and other assets. Most of the assets are attributed to a specific segment. The amounts for certain

assets that are used together by two or more segments are attributed to the segments on a

reasonable basis.

3. The segment's liabilities include all the operating liabilities that derive from the operating activities

of the segment and are composed mainly of trade payables and other accounts payable. The

segment's assets and liabilities do not include taxes on income.




B. THE FOLLOWING DATA IS PRESENTED IN ACCORDANCE WITH IAS 14:

Year ended 31 December 2002

US$ '000 US$ '000 US$ '000 US$ '000

Total revenues 40,076 5,084 - 45,160

Segment operating profit (loss) 3,361 (65) (117) 3,179

Unallocated financial income, net 556

Other expenses, net (1)

Taxes on income (1,003)

Equity in losses of investee companies (8) - - (8)

Profit from continuing operations 2,723

Minority interest in losses of subsidiaries -

Net profit 2,723

ADDITIONAL INFORMATION:

Assets of the segment 27,223 1,279 (887) 27,615

Unallocated joint assets 820

Total assets in consolidation 28,435

Liabilities of the segment 8,932 2,236 (887) 10,281

Joint unallocated liabilities 11,644

Total liabilities in consolidation 21,925

Capital investments 1,616 32 - 1,648

Depreciation and amortisation 1,218 79 - 1,297


US$ '000 US$ '000 US$ '000 US$ '000

Total revenues 47,340 5,546 - 52,886

Segment operating profit (loss) 4,704 (208) (65) 4,431


Other income, net 30

Taxes on income (608)


Minority interest in losses of subsidiaries - 54 - 54

Net profit 4,181


Assets of the segment 30,534 4,032 (1,492) 33,074

Unallocated joint assets 1,482


Liabilities of the segment 12,857 2,793 (2,388) 13,262



Capital investments 1,326 1,549 - 2,875


Security Location and home tracking Total

management systems Adjustments consolidated



VISONIC50

NOTE 25 I BUSINESS SEGMENTS (cont.)


US$ '000 US$ '000 US$ '000 US$ '000

Total revenues 49,231 5,898 - 55,129

Segment operating profit (loss) 4,749 (1,322) - 3,427


Other expenses, net (159)

Taxes on income (952)


Minority interest in losses of subsidiaries 96

Net profit 3,257


Assets of the segment 47,378 4,085 (3,720) 47,743

Unallocated joint assets 1,771


Liabilities of the segment 10,130 4,417 (3,720) 10,827



Capital investments 1,103 101 - 1,204


C. GEOGRAPHICAL SPLIT OF SALES: Below are the consolidated sales of the Group according to

geographic markets without taking into account the location where the product was

manufactured.


2002 2003 2004

US$ '000 US$ '000 US$ '000

Mainland Europe 22,784 24,669 29,720

North America 9,403 10,777 11,774

U.K. 5,650 11,930 7,411

Israel 2,807 2,305 3,253

Far East and Pacific 3,367 2,063 1,895

Other 1,149 1,142 1,076

45,160 52,886 55,129




Untitled-5 [] · Retained earnings 132 4,313 7,570 Total shareholders' equity 6,510 10,691 29,556...

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