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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2004
Commission file number 1-9178
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KOOR INDUSTRIES LTD.
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(Exact name of Registrant as specified in its charter and
translation of Registrant's name into English)
Israel
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(Jurisdiction of incorporation or organization)
14 Hamelacha Street, Rosh Ha'ayin 48091, Israel
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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American Depositary Shares, Each New York Stock Exchange
Representing 0.20 Ordinary
Shares, Par Value NIS 0.001 Per Share
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
16,033,213 Ordinary Shares, Par Value NIS 0.001 Per Share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
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Indicate by check mark which financial statements the registrant has elected to
follow:
Item 17 X Item 18
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PRELIMINARY NOTE
This annual report contains historical information and forward-looking
statements within the meaning of The Private Securities Litigation Reform Act
of 1995 with respect to Koor's business, financial condition and results of
operations. The words "anticipate," "believe," "estimate," "expect," "intend,"
"may," "plan," "project" and "should" and similar expressions, as they relate
to Koor or its management, are intended to identify forward-looking statements.
Such statements reflect the current views and assumptions of Koor with respect
to future events and are subject to risks and uncertainties. Many factors could
cause the actual results, performance or achievements of Koor to be materially
different from any future results, performance or achievements that may be
expressed or implied by such forward-looking statements, including, among
others, changes in general economic and business conditions, changes in
currency exchange rates and interest rates, inability to meet efficiency and
cost reduction objectives, changes in business strategy and various other
factors, both referenced and not referenced in this annual report. These risks
are more fully described under Item 3, "Key Information - Risk Factors" of this
annual report. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected, intended, planned or projected. Koor does not intend or assume any
obligation to update these forward-looking statements.
In this annual report, unless otherwise specified or unless the
context otherwise requires, all references to "Koor," "we," "us," or "our" are
to Koor Industries Ltd., a company organized under the laws of the State of
Israel, and its consolidated subsidiaries.
In this annual report, unless otherwise specified or unless the
context otherwise requires, all references to "$" or "dollars" are to U.S.
dollars and all references to "NIS" are to New Israeli Shekels. Unless
otherwise stated, certain amounts reported in adjusted NIS on Koor's
consolidated financial statements for the year ended December 31, 2004 have
been translated into U.S. dollars for the convenience of the reader at the
exchange rate of the dollar on December 31, 2004 (NIS 4.308 = $1.00), as
published by the Bank of Israel (see Note 2B to our consolidated financial
statements included elsewhere in this annual report). Therefore, it is possible
to compute the dollar equivalent of any of the figures in adjusted NIS by
dividing such NIS by the rate of exchange at December 31, 2004.
In this document, all references to Koor's percentage of equity
ownership in its subsidiaries are prior to having taken into account the
possible dilution that may be caused by the exercise of options granted to
executive officers of certain subsidiaries or of other convertible securities.
i
TABLE OF CONTENTS
PART I
Item 1. Identity of Directors, Senior Management and Advisers.....................................1
Item 2. Offer Statistics and Expected Timetable...................................................1
Item 3. Key Information...........................................................................1
Item 4. Information on the Company...............................................................15
Item 5. Operating and Financial Review and Prospects.............................................48
Item 6. Directors, Senior Management and Employees...............................................69
Item 7. Major Shareholders and Related Party Transactions........................................81
Item 8. Financial Information....................................................................84
Item 9. The Offer and Listing....................................................................90
Item 10. Additional Information...................................................................92
Item 11. Quantitative and Qualitative Disclosures About Market Risk..............................109
Item 12. Description of Securities Other than Equity Securities..................................112
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.........................................113
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds............113
Item 15. Controls and Procedures.................................................................113
Item 16A. Audit Committee Financial Expert........................................................113
Item 16B. Code of Ethics..........................................................................113
Item 16C. Principal Accountant Fees and Services..................................................114
Item 16D. Exemptions from the Listing Standards for Audit Committees..............................115
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers..................115
PART III
Item 17. Financial Statements....................................................................116
Item 18. Financial Statements....................................................................116
Item 19. Exhibits................................................................................116
Index to Consolidated Financial Statements..........................................................F-1
Index to Consolidated Financial Statements of Makhteshim-Agan Industries Ltd......................F-142
Index to Consolidated Financial Statements of ECI Telecom Ltd.....................................F-228
ii
PART I
Item 1 Identity of Directors, Senior Management and Advisers.
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Not Applicable.
Item 2. Offer Statistics and Expected Timetable.
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Not Applicable.
Item 3. Key Information.
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Selected Financial Data
The following selected consolidated financial data as of December 31,
2003 and 2004 and for the years ended December 31, 2002, 2003 and 2004 have
been derived from our audited consolidated financial statements included in
this annual report. These financial statements have been prepared in accordance
with generally accepted accounting principles in Israel, or Israeli GAAP, which
differ in certain respects from U.S. GAAP (see Note 28 to our consolidated
financial statements included elsewhere in this annual report), and audited by
KPMG Somekh Chaikin, independent registered public accountants. As described in
Note 28 to our financial statements included elsewhere in this annual report,
we have restated the reconciliation of material differences between Israeli
GAAP and U.S. GAAP for the years ended December 31, 2002 and 2003. The
consolidated selected financial data as of December 31, 2000, 2001 and 2002 and
for the years ended December 31, 2000 and 2001 have been derived from other
audited consolidated financial statements not included in this annual report
and have also been prepared in accordance with Israeli GAAP and audited by KPMG
Somekh Chaikin, except for the U.S. GAAP data for these periods that have been
restated as explained above. The selected consolidated financial data set forth
below should be read in conjunction with and are qualified by reference to
"Item 5, Operating and Financial Review and Prospects" and the consolidated
financial statements and notes thereto and other financial information included
elsewhere in this annual report.
The financial data amounts are expressed in adjusted NIS or in
dollars. For the convenience of the reader, the 2004 data contains translation
of NIS into dollars. No representation is made that NIS amounts have been,
could have been or can be converted into dollars at the prevailing rate on
December 31, 2004, or at any other rate. In accordance with amendments to
Israeli GAAP published in October 2001 and December 2002, our financial
statements for the year ended December 31, 2004 are no longer adjusted to
reflect the effects of inflation. For all financial reporting periods until
December 31, 2003, Israeli GAAP required that our consolidated financial
statements recognize the effects of inflation. Consequently, all figures for
prior periods have been adjusted to reflect the increase in the Israeli
Consumer Price Index, or CPI, and are accordingly all expressed in terms of the
purchasing power as of December 31, 2003, and not in the figures as originally
reported.
1
Year Ended December, 31
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2000 2001 2002 2003 2004 2004
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(In thousands, except share and per share data)
Adjusted NIS as of December 31, 2003 NIS US Dollars
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Operating Data:
Israeli GAAP:
Revenue from sales and services 8,292,026 7,463,419 7,099,790 7,690,430 9,228,673 2,142,218
Gross profit........................ 2,094,776 1,697,733 1,784,010 2,297,486 2,940,994 682,682
Operating earnings.................. 713,507 358,437 479,864 896,285 1,242,786 288,483
Financing expenses, net............. 323,051 432,437 408,437 228,200 271,362 62,990
Other income (expenses), net........ 168,037 (622,660) 5,824 (219,721) (78,759) (18,282)
Minority interest in consolidated
companies' results, net........... (54,102) 8,367 (60,049) (202,807) (432,888) (100,485)
Net earnings (loss) from
continuing activities............. 56,722 (2,621,648) (766,969) 46,362 144,990 33,656
Result of discontinued
activities, net................... 226,928 (29,279) - - - -
Net earnings (loss)................. 283,650 (2,650,927) (766,969) 46,362 144,990 33,656
Basic earnings (loss) per share..... 18.44 (174.54) (50.55) 2.95 8.851 2.054
Weighted average number of shares
used in computing basic earnings
(loss) per share.................. 15,384,206 15,188,463 15,173,291 15,716,725 16,381,279 16,381,279
Diluted earnings (loss) per share... 18.36 (174.54) (50.55) 2.95 8.851 2.054
Weighted average number of shares
used in computing diluted
earnings (loss) per share......... 15,597,253 15,188,463 15,173,291 15,716,725 16,381,279 16,381,279
U.S. GAAP (1):
Net income (loss)................... 245,658 (2,599,987) (762,511) (108,924) 111,572 25,899
Basic earnings (loss) per ordinary
share............................. 15.96 (171.17) (50.25) (7.04) 7.05 1.64
Basic earnings (loss) per ADS....... 3.19 (34.23) (10.05) (1.41) 1.41 0.33
Diluted earnings (loss) per
ordinary share.................... 15.90 (171.17) (50.65) (7.82) 4.89 1.14
Diluted earnings (loss) per ADS..... 3.18 (34.23) (11.75) (1.56) 0.98 0.23
Balance Sheet Data:
Israeli GAAP:
Working capital..................... 1,047,465 1,859,986 1,160,293 1,046,276 1,086,450 252,193
Total assets........................ 15,704,961 13,514,082 13,432,798 11,869,757 13,147,566 3,051,896
Short-term debt..................... 2,856,290 1,811,662 2,315,499 1,577,402 1,738,456 403,541
Long-term debt...................... 3,518,561 4,934,834 4,339,578 3,119,837 2,341,115 543,434
Shareholder's equity................ 4,563,106 2,195,834 1,727,169 1,740,393 1,876,467 435,577
U.S. GAAP (1):
Total assets (2).................... 15,694,727 13,818,527 13,788,604 12,012,241 6,360,235 1,476,378
Shareholder's equity................ 4,349,412 2,065,672 1,626,469 1,582,122 1,767,850 410,364
Number of shares outstanding........ 15,192,379 15,168,884 15,173,377 15,741,160 15,824,185 15,824,185
2
(1) U.S. GAAP amounts for the years ended December 31, 2000, 2001, 2002 and
2003 have been restated. See Note 28 to our consolidated financial statements
included elsewhere in this annual report.
(2) MA Industries' financial statements are not included in our consolidated
financial statements as of and for the year ended December 31, 2004 for U.S.
GAAP, but rather are recognized according to the equity method. See also Note
28 to our consolidated financial statements included elsewhere in this annual
report.
Exchange Rate Information
The following table shows, for each of the months indicated the high
and low exchange rates between New Israeli Shekels and U.S. dollars, expressed
as shekels per U.S. dollar and based upon the daily representative rate of
exchange as reported by the Bank of Israel:
Month High (NIS) Low (NIS)
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January 2005.................. 4.414 4.352
February 2005................. 4.392 4.357
March 2005.................... 4.379 4.299
April 2005.................... 4.395 4.360
May 2005...................... 4.416 4.348
June 2005..................... 4.574 4.405
The following table shows, for periods indicated, the average exchange
rate between New Israeli Shekels and U.S. dollars, expressed as shekels per
U.S. dollar, calculated based on the average of the exchange rates on the last
day of each month during the relevant period as reported by the Bank of Israel:
Year Average (NIS)
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2000.............................................. 4.078
2001.............................................. 4.203
2002.............................................. 4.738
2003.............................................. 4.530
2004.............................................. 4.482
The effect of exchange rate fluctuations on our business and
operations is discussed in "Item 5. Operating and Financial Review and
Prospects."
Dividends
In determining whether to declare a dividend, our Board of Directors
may take into consideration, among other things, our profits, business and
financial condition, economic circumstances and other conditions, as deemed
appropriate by our Board of Directors.
We did not pay or declare any dividend for 2004, 2003, 2002 or 2001.
We paid final dividends of NIS4.10 per share in 2000.
3
Risk Factors
Risks Related to Koor
We depend on our subsidiaries and affiliates for distributions and management
fees.
We conduct our business primarily through our wholly and partially
owned subsidiaries and affiliates, and are partially dependent upon management
fees and cash distributions from our subsidiaries and affiliates as a source of
cash flow for funding our corporate level activities. We received management
fees in the amount of NIS 22 million and NIS 25 million in 2004 and 2003,
respectively, pursuant to management agreements between us and several of our
subsidiaries and affiliates. In addition, in 2004 and 2003 we received NIS 135
million and NIS 28 million, respectively, in distributions from subsidiaries
and affiliates, of which NIS 68 million and NIS 18 million, respectively, was
received from Makhteshim-Agan Industries Ltd., or MA Industries. Of the NIS 135
million in distributions we received in 2004, NIS 67 million was received as a
liquidating distribution in respect of our wholly-owned subsidiary, Tadiran
Ltd.
In recommending dividends and approving management fees, the directors
and applicable committees of each of our subsidiaries must take into
consideration the legal, tax, and financial effects of such dividends and
management fees, as well as the best interests of each such subsidiary. In
addition, several of our subsidiaries and affiliates are subject to dividend
payment restrictions derived from their organizational documents, credit
agreements and tax considerations. If we were to experience a substantial
reduction in the level of payments of dividends and management fees, there can
be no assurance that alternative sources of cash flow, including bank loans and
asset sales, would be available for us to carry out our investment plans, pay
dividends on our capital stock and service our debt.
In addition, all of our unsecured indebtedness is effectively
subordinated to all liabilities, including trade payables of our subsidiaries
and affiliates. Any right we have to receive assets of our subsidiaries and
affiliates upon their liquidation or reorganization (and the consequent right
of the holders of our indebtedness to participate in those assets) will be
effectively subordinated to the claims of that subsidiary's or affiliate's
creditors (including trade creditors), except to the extent that we are
recognized as a creditor of such subsidiary or affiliate, in which case our
claims would still be subordinate to any security interests in the assets of
such subsidiary or affiliate and any indebtedness of such subsidiary or
affiliate senior to that held by us. Under Israeli law, certain indebtedness of
a company under liquidation, including certain indebtedness resulting from an
employment relationship or tenancy, and certain indebtedness resulting from
governmental and municipal tax liabilities, may rank senior to other unsecured
indebtedness.
Continuing adverse conditions in the telecommunications industry and in the
market for telecommunications equipment have led to decreased demand for our
products and have harmed and may continue to harm our business, financial
condition and results of operations.
For the years ended December 31, 2004 and 2003, our telecommunication
equipment business accounted for approximately 6.7% and 10.4%, respectively, of
our consolidated net sales. Our business in this industry is primarily
conducted through our proportionately
4
consolidated subsidiary Telrad Networks Ltd., or Telrad. We also own
approximately 30.2% of ECI Telecom Ltd., or ECI, a publicly traded company
engaged in the telecommunication equipment business, whose results are not
consolidated in our financial statements, but are accounted for based on the
equity method. Telrad's equipment and ECI's systems are used by
telecommunications carriers and service providers. From 2001 through the first
half of 2003, many telecommunications carriers and service providers in markets
throughout the world experienced substantial declines in sales and revenues and
incurred significant operating losses. In addition, many carriers and service
providers stopped deploying new networks or ceased operations completely and
are no longer potential users of Telrad's products or ECI's products. The
general worldwide economic downturn has curtailed the ability of existing and
prospective carriers and service providers to finance purchases of products
such as Telrad's and ECI's, leading to a sharp decline in orders for new
telecommunications equipment. For these reasons, Telrad and to a lesser extent
ECI, have experienced severe declines in sales since the beginning of 2001 and
were forced to take substantial measures to reduce expenses since 2001,
including downsizing manpower, streamlining operations and divestiture of
non-core businesses. As a result of the losses incurred by ECI during 2001 and
2002, we wrote-down the book value of our investment in ECI below its equity
value to us and wrote-off the excess goodwill relating to that investment.
Following a valuation of ECI performed by an independent appraiser in November
2003, we reversed the loss from decline in value of approximately NIS 73
million. The reversal of this loss was charged against the capital reserve from
foreign currency translation adjustments (credit), which was realized when the
provision was created. Under U.S. GAAP, however, this loss was not reversed. As
of December 31, 2004, the balance of our investment in ECI was approximately
NIS 673 million, reflecting our share in ECI's equity.
Since the second half of 2003, there has been an improvement in the
general market for telecommunications equipment. However, we are unable to
predict the duration of this trend or the extent of any impact that it may have
on our revenues or results of operations. Any return to a prolonged and
substantial curtailment of growth in the telecommunications industry will
likely have an adverse impact, which may be material, on our business,
financial condition and results of operations. In addition, market perception
that these conditions could have an impact upon us may harm the trading price
of our ordinary shares, whether or not our business or results of operations
are actually affected.
We need to develop and introduce new products in the telecommunication
equipment and defense electronics businesses in order to remain competitive in
those industries. We are also partially dependent on licensed technology.
For the years ended December 31, 2004 and 2003, our telecommunication
equipment and defense electronics businesses together accounted for
approximately 19.3% and 27.1%, respectively, of our consolidated net sales, and
48.8% and 60.9%, respectively, of our total consolidated research and
development expenses. In addition, as of December 31, 2004 and 2003, our
investment in ECI accounted for 76.3% and 60.9%, respectively, of our total
investments in the telecommunications equipment industry, and our investment in
Tadiran Communications Ltd., or Tadiran Communications accounted for 73.9% of
our total investments in the defense electronics industry as at December 31,
2004. The businesses and markets in these segments are characterized by rapid
technological development. Consequently, the ability to anticipate changes in
technology and to develop and introduce new and enhanced products
5
incorporating such new technologies on a timely basis will be significant
factors in the ability of these businesses to grow and remain competitive.
Several of our competitors in the defense electronics industry have
significantly greater resources (monetary, research and development and
personnel), and may be able to exert political pressures on potential customers
to further their interests. Furthermore, mergers that took place between
companies in the defense industries world-wide, may impede our ability to
compete in this industry. In contrast to our competitors in the defense
industry, which offer their customers a range of equipment and systems, Tadiran
Communications' business is focused largely on military communication
equipment, and Elisra Group's business is focused largely on electronic
warfare, therefore they are more vulnerable to changes in the industry than
their competitors We cannot assure you that we will be able to develop new
products and technologies on a timely basis in order to remain competitive in
the telecommunication equipment and defense electronics industries. In
addition, one of our objectives is to continue to seek to apply several of the
advanced technologies developed in our defense electronic businesses to new
commercial products. However, we cannot assure you that such technologies will
be successfully applied or that markets will develop for such products.
Furthermore, although we believe that there will be continued use of existing
products in the defense electronics industry (subject to improvements) we
cannot be certain that there will not be a transition to new product types that
may diminish the market for our existing products.
Telrad, one of our significant investees, depends on one key customer.
Telrad, one of our significant investees, is substantially dependent
upon its relationship with Nortel as a key supplier of technology and as a key
customer of Telrad's products. For the years ended December 31, 2004 and 2003,
approximately 2.5% and 4.4 %, respectively, of our consolidated net sales and
50.0% and 51.4%, respectively, of Telrad's sales were derived from sales to
Nortel. Accordingly, Telrad's sales volume is directly influenced by Nortel's
sales forecasts and actual purchases. Although we and Telrad believe that the
relationship with Nortel is generally good, if such relationship was to be
terminated or diminished for any reason, it could have a material adverse
affect on Telrad's business, financial condition or results of operation, which
may have an adverse effect on our business as a whole.
We rely on the expiration of patents and depend on regulatory approval in the
agrochemicals industry.
For the years ended December 31, 2004 and 2003, our agrochemicals
business accounted for approximately 74.7% and 67.5%, respectively, of our
consolidated net sales. Our business in this industry is conducted through our
subsidiary Makhteshim-Agan Industries Ltd., or MA Industries. As of January 1,
2005 MA Industries will no longer be consolidated in our financial statements,
but will be accounted for according to the equity basis. See Note 27(4) to the
consolidated financial statements included elsewhere in this annual report.
Several of MA Industries' subsidiaries specialize in the improvement
and production of generic agrochemical products, which are products that are
based on expired patents. Development of new generic products requires
substantial expenditures for research and development, product registration,
construction of production lines and marketing in support of new product
introduction. An important component for the growth of the agrochemicals
business is the successful introduction of new generic chemical products to the
market in a
6
timely manner (promptly after patents expire). Reintroduction of any new
legislation to extend the life of patents on chemical products could adversely
affect the ability of the agrochemicals business to introduce new products.
Patent protection in Europe is valid for 20 years from the date of
application. During the beginning of any patent term, the companies that own
patents deal in licensing products in various countries. In February 1997,
offices of the European Authority approved an extension of the validity of
patents filed for registration since 1985. The extension of the patent term for
an additional period ensures patent owners an additional period of exclusivity
of 15 years from the date of receipt of first license, provided that the
addition may not be greater than 5 years. In most countries, marketing of new
products is conditional upon obtaining licensing from the competent authority.
The obtaining of licenses is a lengthy process with substantial costs. A
possible delay in the development of new products or in obtaining requisite
licenses could have a negative effect on our results of operation and financial
status.
Most countries require us to obtain regulatory approval prior to
selling newly introduced products, which is both time consuming and expensive.
Any delay in the development or introduction of new products or in obtaining
regulatory approval from the countries in which our agrochemicals business
markets its products may have a material adverse effect on our results of
operations and financial condition. In addition, new developments in the field
of trans-genetic plant species that are toxic to insects, and plant species
that are resistant to fungal disease, may have an adverse effect on our
agrochemicals business.
Economic instability in the emerging markets of South America and Central and
Eastern Europe poses a risk to our agrochemicals business.
The activity of MA Industries in South America (mainly Brazil) and in
countries in Eastern Europe, is exposed to risk resulting from the possibility
of economic instability in these countries such as exchange rate fluctuations
(customer accounts receivable are in local currency), high inflation and
interest rates, and changes in economic legislation. A portion of the above
mentioned risks are hedged by means of various instruments. The relative share
of our agrochemicals activities in these markets is decreasing over the years
due to MA Industries' strategy to expand its activities in economically-stable
markets.
7
Disruption in the supply of raw materials and/or disruption in transportation
services could have a negative impact on our agrochemicals business.
MA Industries imports raw materials to its manufacturing facilities in
Israel, and exports products to its non-Israeli subsidiaries for manufacturing,
formulation and distribution through three Israeli ports. In the event that one
of these ports will be disrupted for an extended period of time, such as during
an employee strike, MA Industries may have significant difficulty obtaining raw
materials required for manufacture of its products, or obtaining them at
economically viable prices. Similarly, MA Industries may be unable to transport
its products to its non-Israeli subsidiaries for manufacturing, formulation and
distribution, or to transport them at reasonable costs. Therefore, extensive
disruptions at one of these ports could have a negative effect on our
agrochemicals business.
Concentration of manufacturing in a limited number of manufacturing facilities
could pose a risk for our agrochemicals business.
A significant part of the manufacturing activities of MA Industries
takes place in a limited number of facilities. Significant damage to any of
these facilities due to natural disaster or other causes could have a
significant negative impact on our agrochemicals business.
Our operations are exposed to environmental risks and are subject to
environmental regulation.
The operations of several of our subsidiaries are exposed to the risk
of harming the environment, as they manufacture, use, transmit, store and sell
toxic and other materials. We believe that these subsidiaries are in compliance
with applicable environmental laws and regulations and we have born
considerable costs and investments in order to ensure such compliance. We
cannot estimate the size or impact of additional expenditures that may be
required in the event of amendments to applicable environmental laws or adverse
decisions of applicable regulatory authorities. In addition, the risks of
causing environmental damage are not insurable risks.
MA Industries possesses various permits from environmental regulatory
authorities that stipulate conditions for the operation of its manufacturing
facilities. The expansion of the facilities requires new or additional permits.
The terms of the permits may be altered and/or revoked by the environmental
regulatory authorities and this may have a negative impact on our agrochemicals
business.
Our agrochemicals business may be negatively impacted in the event of
significant product liability claims that exceed our insurance coverage.
The activities of MA Industries are exposed to risk relating to product
liability claims. MA Industries has insurance coverage for third party
liability and defective products of up to $265 million per annum. In the event
that MA Industries would be found liable in a lawsuit concerning product
liability, its insurance coverage may not be sufficient to cover the damages,
and this may have a significant negative impact on our agrochemicals business.
Furthermore, publication of the existence of such a claim could have a negative
impact on the reputation of MA Industries, and this could have a negative
impact on its business.
8
Our investments in hi-tech companies involve a high degree of risk.
Koor Corporate Venture Capital, or Koor CVC, is the venture capital
arm of Koor Industries. As at December 31, 2004 Koor CVC's portfolio comprised
of 10 companies, a limited partnership in Pitango venture capital fund and a
27% interest in Scopus Network Technologies Ltd., with a total book value of
NIS 181 million (approximately $42 million).
Our investment in hi-tech and venture capital companies carries with
it a high level of risk. The main risk factors are:
o The uncertainty involved in advanced technological developments in the
fields of internet and telecommunications, and the lack of certainty
that a product will actually be developed or, if and when it is
developed, that a market will be found for it, as well as the high
marketing costs and intense competition in these fields;
o The uncertainty existing on the date of commencement of projects as to
the total investment required for developing a product and the lack of
certainty that funding will be found for the continued development and
marketing of products, if developed;
o The rapid technological changes that characterize the industries of
the companies in which we have invested could reduce or cancel demand
for products developed by such companies;
o The dependence of start-up companies, including those in which we have
invested, on their founders or on key personnel, especially in the
areas of management and development;
o The lack of certainty regarding the ability of the companies in which
we have invested to recruit appropriate personnel, in particular when
faced with increasing competition for quality personnel;
o The lack of intellectual property protection for internet products and
increased competition in this area; and
o The lack of ability to control and manage a company in which we hold a
minority stake.
We are under investigation by the Israeli Office of Restrictive Trade
Practices.
On February 2, 2005, we received a notice from the Office of
Restrictive Trade Practices ( the Israeli Anti-Trust Authority) that it was
considering the possibility of prosecuting us, together with seven other
companies that are not members of the Koor Group (including two companies that
had been owned by Koor on the relevant dates, and were later sold to third
parties) and nine executives (including two executives who had been salaried
employees of Koor on the relevant dates), for violations of the Law for
Restrictive Trade Practices, 1988 (the Israeli Anti-Trust Law). On June 7,
2005, we received a bill of indictment from the Israeli Anti-Trust Authority in
accordance with the abovementioned notice. The bill came in the wake of an
investigation opened by the Israeli Anti-Trust Authority in the other companies
during 2001, with respect to price fixing and collusion, and the lack of
competition in the frozen and canned vegetable industry. The Israeli Anti-Trust
Authority claims that the two companies that
9
belonged to the Koor Group in the past had colluded with two other companies in
the years 1992-1998.
Under the Israeli Anti-Trust Law, penalties may be imposed against an
entity which has violated the law. In addition, should it be proven that
violations were committed, civil lawsuits may be filed against us and we may be
subject to civil penalties, if damages can be proven as a result of a violation
of the law. At this early stage, it is not possible to predict the likelihood
that any fines will be imposed on us or any civil lawsuits will be filed
against us, nor whether any such fines or lawsuits would have an adverse effect
on our business, financial condition or results of operations.
See also Note 18A1(b) to our consolidated financial statements
included elsewhere in this annual report.
Several of our subsidiaries are exposed to fluctuations in prices of raw
materials and commodities.
Several of our subsidiaries, primarily those in the agrochemical
industry, have exposure to risks stemming from fluctuations in prices of raw
materials and agricultural commodities. An increase in raw material prices or a
decrease in commodity prices (which could lower the selling prices of our
products) could lower the profitability of our business.
Reduction in worldwide spending for military products may adversely affect our
profit.
For the years ended December 31, 2004 and 2003, sales of military
products accounted for approximately 12.6% and 16.8%, respectively, of our
consolidated net sales. Around the world and in Israel demand for military
products has been generally declining during the past few years. This ongoing
trend has negatively affected the size and rate of receipt of orders and
resulted in a decrease in backlog to NIS 2.0 billion as of December 31, 2004
compared to NIS 2.2 billion as of December 31, 2003. In order to counter the
decrease in the Israeli budget, we are seeking to increase our position in
international markets by identifying additional potential avenues for growth;
however, we may not be successful in doing so. In the event that general
military expenditures continue to decline worldwide and are reduced in Israel
for systems or projects of the type we produce or perform, and are not offset
by greater foreign sales or other new systems or products, there will be a
reduction in the volume of contracts or subcontracts we are awarded. Such
reductions may result in a material adverse effect on our results of operations
and financial condition.
Revocation of security clearance and/or permits and licenses could have a
significant negative impact on our defense electronics business.
Companies in our defense electronics business have security clearance
in the United States and Germany that enables them to carry out classified
projects in these countries. Furthermore, these companies have licenses to
export and permits to conduct marketing activities from the governments of
Israel, the United States and Germany. The revocation of this security
clearance and/or these permits and licenses could have a material adverse
effect of our defense electronics business.
10
The trend towards regulatory control standards in the defense electronics
industry could have an adverse effect on our market share in this industry.
Today there are no regulatory standards for certain classified
technologies in the defense electronics industry and each company develops its
own proprietary technology. In Europe, there has been a recent trend toward the
setting of regulatory standards for such technologies, which may not be
accessible to our defense electronics companies due to security clearance. If
this occurs our market share in the defense electronics industry may be
negatively impacted.
Risks Related to Israel
Exchange rate fluctuations and inflation in Israel impact our business.
A significant portion of the sales of our major subsidiaries and
affiliates are made outside Israel in dollars or other non-Israeli currencies
while these companies incur significant portions of their expenses in NIS.
Alternatively, some subsidiaries and affiliates whose sales are principally in
NIS incur expenses in dollars or in other non-Israeli currencies. For example,
a significant portion of the sales of our telecommunication equipment, defense
electronics and the agrochemicals businesses are in dollars, whereas a
significant portion of these businesses expenses are incurred in NIS and are
partially linked to the Israeli CPI. In addition, certain borrowings are linked
to the dollar or other non-Israeli currencies or to the CPI. During the
calendar years 2002, 2003 and 2004, the annual rate of inflation was
approximately 6.5%, -1.9% and 1.2%, respectively, while the NIS depreciated
against the dollar by approximately 7.3% in 2002 and appreciated against the
dollar by approximately 7.6% and 1.6% in 2003 and 2004, respectively.
Consequently, during the calendar years 2002, 2003 and 2004, the annual rate of
inflation as adjusted for devaluation was approximately -0.7%, 6.2% and 2.8%,
respectively. Continued delay in or lack of any devaluation of the NIS in
relation to the dollar or other currencies may have a material adverse effect
on our results of operations and financial condition.
To compensate for inflation in Israel and changes in the relative
value of Israeli currency compared to the dollar and other currencies, we have
adopted financial strategies, including entering into foreign currency
transactions with respect to certain specific commitments and general hedging
transactions with respect to monetary assets and liabilities denominated in
non-Israeli currencies (including Brazilian currency). There can be no
assurance, however, that such activities, or others that we may undertake from
time to time, will eliminate the negative financial impact of such
fluctuations.
Conditions in Israel may affect our operations.
We and our principal subsidiaries and affiliates are incorporated
under the laws of the State of Israel, where our principal offices and a
substantial portion of our operations are located. We are directly influenced
by the political, economic and military conditions affecting Israel.
Accordingly, any major hostilities involving Israel, the interruption or
curtailment of trade between Israel and its present trading partners, a
significant increase in inflation or a significant downturn in the economic or
financial condition of Israel could have a material adverse effect on our
business, our results of operations and our financial condition. In addition,
there are
11
a number of countries, particularly in the Middle East, which restrict business
with Israel or Israeli companies. There can be no assurance that restrictive
laws or policies directed toward Israel or Israeli businesses will not have an
adverse impact on the expansion of our business.
The increased hostilities in the West Bank and Gaza Strip affect tourism and
other businesses.
Since September 2000, there has been an escalation of violence in the
West Bank and Gaza Strip and increased terrorist activities within Israel,
causing a sharp decrease in tourism to Israel and a further deceleration in all
aspects of the Israeli economy. The areas of tourism and aviation have been
most affected by the increased hostilities, and the recession in the Israeli
real estate market has become more entrenched.
Many of our directors, officers and employees are obligated to perform military
reserve duty in Israel.
Generally, Israeli adult male citizens and permanent residents through
the age of 48 are obligated to perform up to 36 days of military reserve duty
annually. Some of our directors, officers and employees are currently obligated
to perform annual reserve duty. Additionally, under emergency circumstances,
all such persons are subject to being called to active duty at any time. We
have operated effectively under these requirements since we began operations.
No assessment can be made, however, as to the full impact of these requirements
on our workforce or business if conditions should change and we cannot predict
the effect on us of any expansion or reduction of these obligations.
Israel's economy may be destabilized.
Israel's economy has been subject to a number of destabilizing
factors. These include a period of severe inflation in the early to mid-1980s,
low foreign exchange reserves, fluctuations in world commodity prices, military
conflicts and civil unrest. For these and other reasons, the Government of
Israel has intervened in different sectors of the economy. Such intervention
has included employing fiscal and monetary policies, import duties, foreign
currency restrictions and controls of wages, prices and foreign currency
exchange rates. The Israeli government has periodically changed its policies in
all of these areas. Changes in these policies may make it more difficult for us
to operate our business as we have in the past.
Service and enforcement of legal process on us and our directors and officers
may be difficult to obtain.
Service of process upon our directors and officers and the Israeli
experts named herein, all of whom reside outside the United States, may be
difficult to obtain within the United States. Furthermore, since substantially
all of our assets, all of our directors and officers and the Israeli experts
named in this prospectus, are located outside the United States, any judgment
obtained in the United States against us or these individuals or entities may
not be collectible within the United States.
There is doubt as to the enforceability of civil liabilities under the
Securities Act of 1933, as amended, or Securities Act, and the Securities
Exchange Act of 1934, as amended, or the
12
Exchange Act, in original actions instituted in Israel. However, subject to
certain time limitations and other conditions, Israeli courts may enforce final
judgments of United States courts for liquidated amounts in civil matters,
including judgments based upon the civil liability provisions of the Securities
Act and the Exchange Act.
We depend on the availability of certain government benefits and programs. If
any of the companies in which we have invested and which have been granted such
benefits fail to comply with the requisite conditions, we may be required to
return benefits previously received or may be unable to utilize tax benefits.
We derive and expect to continue to derive benefits from various
programs and laws in Israel including tax benefits relating to our "approved
enterprise" programs and grants from the Office of the Chief Scientist, or OCS,
for research and development. For the years ended December 31, 2004 and 2003,
our consolidated companies received government grants in the fields of research
and development of approximately NIS 16 million and NIS 21 million,
respectively. To be eligible for these grants, programs and tax benefits, we
must continue to meet certain conditions, including making certain specified
investments in fixed assets from our equity. From time to time, the Israeli
government has discussed reducing or eliminating the availability of these
grants, programs and benefits. A change in government policy in these areas
would likely have a negative affect on our results of operation and financial
condition.
Under this program, by virtue of the "approved enterprise" status
granted to several of our subsidiaries and several of the companies in which we
have invested, these companies are entitled to various tax benefits. The income
derived from these companies during a period of up to 10 years, from the year
in which these companies first had taxable income (limited to 12 years from
commencement of production or 14 years from the date of the approval, whichever
is earlier), is subject to a reduced corporate tax rate ranging from 0-25%.
These companies with "approved enterprise" status are also entitled to an
accelerated amortization deduction for fixed assets serving these companies,
mainly in respect of equipment that is usually amortized over a period of three
to five years.
In the event that one of our subsidiaries or investee companies
distributes a dividend to shareholders out of income attributable to revenues
from an approved enterprise which has received a tax exemption, the company
that distributes the dividend is usually taxed at a rate of 25% of the profit
distributed. However, we did not record deferred taxes in respect of income
from approved enterprises that may in future be distributed as a dividend,
since it is our policy not to initiate a distribution of a dividend that
involves an additional tax liability to us.
Benefits are conditional upon the fulfillment of terms set forth by
law or in deeds of approval. Non-fulfillment of such terms could cause
cancellation of the approved enterprise benefits, in whole or in part, and the
return of previously provided benefits plus interest and linkage differentials.
As of December 31, 2004, the managements of our subsidiaries and the companies
in which we have invested which have been granted "approved enterprise" status
believe that these companies will comply with the terms set forth above and
will not be required to return any benefits previously received.
13
As security for the implementation of the approved projects and
compliance with the conditions of the approval by subsidiaries that received
investment grants, a charge has been registered on the above subsidiaries'
assets in favor of the State of Israel.
The amount by which our taxes would increase depends on the difference
between the then-applicable tax rate for non-approved enterprises and the rate
of tax, if any, that our subsidiaries and the companies in which we have
invested would otherwise pay as an approved enterprise, and the amount of any
taxable income that they may earn in the future.
On March 29, 2005 the Israeli parliament approved a reform of the
Encouragement of Capital Investments Law - 1959, or the Reform, applicable as
of April 1, 2005. The Reform includes changes to the criteria for eligibility
for tax benefits as well as certain procedural changes under the "Alternative
Benefits" (tax benefits) track, mainly cancellation of the requirement for
prior approval from the Investment Center and authorization of the eligibility
for tax benefits within the framework of the income tax audit. The main
criteria for eligibility for tax benefits are existence of an industrial plant;
certain marketing restrictions; and investment in production equipment in
accordance with stipulated amounts.
The Reform grants the following additional benefit alternatives under
the "Alternative Benefits" (tax benefits) track, subject to certain
restrictions:
o Corporate tax of 11.5% for ten years, and additional tax of only 4% on
dividend distributions for a foreign investor, or 15% for an Israeli
investor; and
o Companies with consolidated revenues exceeding NIS 13 billion and an
investment of at least NIS 600 million in an industrial company that
has an approved enterprise in a preferred area, will be exempt from
corporate tax for ten years, and dividends distributed from these
earnings will be tax exempt.
We believe that our relevant subsidiaries and investees meet the
criteria of the Reform.
If our subsidiaries and the companies in which we have invested are
required to pay a significant amount of additional taxes, our business,
financial condition and results of operation could be materially adversely
affected.
Risks Related to Our Ordinary Shares
Our share price may be volatile and may decline.
Numerous factors, some of which are beyond our control, may cause the
market price of our ADSs or ordinary shares to fluctuate significantly. These
factors include, among other things, announcements of technological
innovations, earnings releases by us or our competitors, market conditions in
the industry and the general state of the securities markets (in particular the
technology and Israeli sectors of the securities markets).
14
Our operating results in one or more future periods may fluctuate significantly
and may cause our share price to be volatile.
Our quarterly operating results may be subject to significant
fluctuations due to various factors, including divestitures of companies,
competitive pressures and general economic conditions. Because a significant
portion of our overhead consists of fixed costs, our quarterly results may be
adversely impacted if sales fall below management's expectations. As a result,
our results of operations for any quarter may not be indicative of results for
any future period. Due to all of the foregoing factors, in some future quarters
our sales or operating results may not meet the expectations of public market
analysis or investors. In such event, the market price of our ADSs and ordinary
shares would likely be materially adversely affected.
Item 4. Information on the Company.
---------------------------
We are a company limited by shares organized and existing under the
laws of the State of Israel. We were initially incorporated in 1944 and our
full legal and commercial name is Koor Industries Ltd.
The address of our registered office is 14 Hamelacha Street, Rosh
Ha'ayin 48091, Israel, and our telephone number is +972-3-900-8333. The address
of our Internet website is: www.koor.com. Our ADSs are listed on the New York
Stock Exchange and our ordinary shares are listed on the Tel-Aviv Stock
Exchange.
General
We are a diversified investment holding company. We are engaged,
through our direct and indirect, wholly and partially owned subsidiaries and
affiliates, in the following core businesses: telecommunication equipment,
defense electronics and agrochemicals as well as in other businesses. We are
also engaged in investment in new technologies in the telecom and life science
fields. For the years ended December 31, 2004 and 2003, international sales
represented approximately 85.0% and 86.7%, respectively, of our consolidated
net sales. A majority of our sales are derived from businesses in which we are
the leading producer or provider of such goods and services in Israel. For the
year ended December 31, 2004, we reported consolidated net sales of
approximately NIS 9,229 million ($2.1 billion), consolidated operating profit
of approximately NIS 1,243 million ($288 million) and consolidated net income
of approximately NIS 145 million ($34 million).
Business Overview
Strategy
In October 1997, as a result of several transactions, the Claridge
Group (comprised of Claridge Israel Ltd. and affiliated entities) became our
largest shareholder. During January 1999, Claridge Israel Ltd. transferred its
holdings to Claridge Israel L.L.C. which, during December 2003, transferred
half of its holdings to Esarbee Investments Limited. As of June 30, 2005,
Claridge Israel L.L.C. and Esarbee Investments Limited together held
approximately 28.8% of our outstanding ordinary shares (14.7% held by Claridge
Israel L.L.C. and 14.1% held by Esarbee Investments Limited). Beginning in July
1998, we initiated an extensive corporate
15
restructuring program, designed to transform Koor into a diversified investment
holding company with controlling stakes in leading high-growth, export-oriented
Israeli companies. Based on these criteria, we have made the strategic decision
to focus on three businesses: telecommunication equipment, defense electronics
and agrochemicals. Despite the downturn in the telecom industry, we still
believe that our holdings in these businesses have the potential to grow
internally, as well as through mergers and acquisitions.
We have implemented key elements of our strategy to date, including a
substantial capital reallocation process, in which proceeds from the sale of
low growth domestic businesses have been re-invested to increase our stakes in
our core businesses. In this regard during the years 1999 through 2001 we
divested ourselves of our non-core holdings, including our interests in Koor
Insurance Agency, Koor Finance, Contahal, Merhav, the Switching Division of
Tadiran Telecommunications, Tekem, Tadiran Information Systems, Koor Metals,
Phoenicia, Yonah, Tadiran Com, Tadiran Telematics, Mashav, Merkavim Metal Works
Ltd., Middle East Tube Co. Ltd. and the Q Group PLC. We also sold real estate
assets of Koor Properties for approximately NIS 47 million in 2001 and real
estate assets of Tadiran for approximately NIS 273 million in March 2002.
During 2004, we and our portfolio companies continued to take active
measures to adapt to the changing business climate and to continue to implement
our strategic plan. These measures include bringing in new strategic partners;
identifying new market opportunities; focusing on core competencies, while
divesting non-core assets; and streamlining group operations. During 2004, our
portfolio companies took the following steps in implementing our strategic
plan:
o MA Industries built on its strategy for generating growth through
acquisitions and in-house development, while strengthening its
presence mainly in the Australian and North American markets. In 2004,
MA Industries acquired ownership and control in a group of three
companies which are engaged in the registration, import and marketing
of agrochemicals in the U.S. for a total purchase price of
approximately NIS 303 million. Also in 2004, MA Industries acquired
three marketing companies, two in the U.S. and one in Australia, for
an aggregate purchase price of approximately NIS 186 million.
o ECI continued to implement its strategic plan, which included:
focusing on its core optical networks, bandwidth management and
broadband access businesses; exiting non-core activities; streamlining
operations while improving the organizational structure; strengthening
its financial position; and entering into strategic partnerships. As
part of this plan, in May 2004, ECI distributed the majority of its
shares in ECtel Ltd., or ECtel, to its shareholders, reducing its
holdings of ECtel's shares from approximately 58.4% to approximately
16.0%. In November 2004, ECI signed an agreement with Redback Networks
Inc., or Redback, for the delivery of enhanced triple play (voice,
video and data) services over broadband and IP (Internet Protocol)
networks. In December 2004, ECI entered into a strategic partnership
with Chiaro Networks Ltd., or Chiaro, the developer of the Enstara(TM)
IP/MPLS routing platform. This platform is designed to enable
telecommunications service providers to consolidate multiple existing
networks into a single, simpler network that offers greater
operational efficiency, increased scalability and significant cost
advantages.
16
o Telrad conducted major reorganization measures after our sale of 19.5%
of our shares in the company to a strategic partner, Fortissimo GP
Capital Fund L.P. The plan included reducing expenses through staff
reduction and the merger of businesses.
o The Elisra Group countered challenging international defense markets
and domestic budget cuts by initiating a comprehensive aggressive
sales and marketing effort. Elisra expanded of its international
customer base, and broadened its geographic sales mix.
o Koor CVC continued to work closely with its portfolio companies to
seek out new markets and attract new investors. In 2004, Koor CVC
received approximately $8.8 million in proceeds from the sale of its
holdings in its portfolio companies Riverhead Networks and Envara.
Our Telecommunication Equipment Business
Our telecommunication equipment business is conducted primarily
through ECI and Telrad.
Excluding sales of ECI, which are not consolidated in our results of
operations, our telecommunication equipment business generated NIS 615 million
($143 million) and NIS 796 million ($185 million) of sales in 2004 and 2003,
respectively, representing 6.7% and 10.4%, respectively, of our consolidated
net sales for such years. Excluding sales of ECI, international sales accounted
for 92.6% and 90.7% of our telecommunication equipment business' sales for 2004
and 2003, respectively.
Excluding sales of ECI, a large portion of the sales made by our
telecommunication equipment business are made to one principal customer:
Nortel. In 2004 and 2003, sales to Nortel represented 38% and 42%,
respectively, of our telecommunication equipment business' sales.
The principal companies in our telecommunication equipment business
are:
Percentage
Of Equity
Ownership Principal Products and Services
---------- ---------------------------------------
ECI Telecom Ltd. 30.2% Telecommunication equipment and systems
Telrad Networks Ltd. 80.5% Telecommunication equipment and systems
ECI Telecom Ltd. (ECI)
ECI is a provider of network and access solutions for digital
communications networks. ECI designs, develops, manufactures, markets and
supports digital telecommunications solutions for evolving new services and
converging networks. ECI's products and platforms are designed to create and
manage bandwidth, maximize revenues for network operators, reduce operating
expenses, expand capacity, improve performance and enable new revenue-producing
services. In doing so, they enhance the capabilities of existing networks to
support voice, data, video,
17
multimedia services. ECI's equipment is marketed world-wide to over 300
wireline and wireless service providers.
ECI operates primarily through the following two divisions, although
it has certain other operations and interests:
o The Broadband Access Division which develops, manufactures, markets
and sells innovative access products that enable telecommunications
service providers to mass deploy broadband networks and offer a
variety of new advanced services. The division's primary product is
the Hi-FOCuS, a Multi-Service Access Gateway solution based on a
variety of transmission technologies and networking protocols.
Facilitating the demand for bandwidth and advanced services, Hi-FOCuS
supports interactive TV, or iTV, over digital subscriber lines, or
DSL; games over DSL; video broadcast; video on demand and teleworking
(including remote local area network, or LAN, access and video
conferencing); small office/home office, or SOHO, applications;
transmission of digital video over copper lines; and voice over DSL,
among other residential subscriber applications. The Broadband Access
Division's customers are principally incumbent local exchange carriers
and large operators and include Deutsche Telekom AG and France
Telecom.
o The Optical Networks Division which provides telecommunications
service providers with metropolitan and regional intelligent and
flexible multi-service optical transmission solutions. Its products
enable end-to-end transport of voice and data circuits from the user's
premises to high-capacity optical backbones, support the process of
streamlining the use of optical networks and allow telecommunications
service providers to offer additional services with greater
efficiency. Its primary product is the XDM, a multi-service
provisioning platform, or MSPP. The XDM integrates, within a single
shelf, the functions of dense wavelength division multiplexing, or
DWDM, a method of multiplexing signals by transmitting them at
different wavelengths through the same optic fiber, intelligent
optical networking multiplexer, broadband, narrowband, wideband and
digital cross connects, IP, L2 switching and asynchronous transport
mode, or ATM, switching as well as streaming support and synchronous
digital hierarchy, or SDH, add-drop multiplexers. This all-in-one
optical platform enables a significant savings in network deployment
costs.
On June 6, 2005, ECI announced that it completed the acquisition of
Laurel Networks Inc, a provider of Next-Generation IP/MPLS Multi-Service Edge
Routers, which became ECI's Data Networking Division. ECI paid $88 million in
cash for Laurel. Laurel has approximately 150 employees, and its sales for the
twelve months ended April 30, 2005 totaled $18 million.
In addition, ECI operates in the areas of next generation telephony
solutions and fraud prevention solutions via its minority interests in the
following companies:
o Veraz Networks Inc., or Veraz, a private company in which ECI holds a
43% interest. Veraz designs, markets and sells carrier-class packet
telephony solutions. These solutions help telecommunications service
providers in establishing the carrier-class new voice infrastructure
necessary to provide toll quality, large scale, international and
national, IP telephony services (including voice, fax and voice band
data traffic). Its holding in Veraz enables ECI to maintain a foothold
in an important strategic market, while at the same time
18
focusing internal resources on ECI's core businesses. In addition to
its packet telephony products, Veraz also operates in the DCME market
of bandwidth optimization solutions, with more than 11,000 traffic
compression systems (DTXTM-600 and DTX-360) installed in 140
countries. DCME systems simultaneously compress toll quality voice,
fax, voice band data, native data, and signaling. The system improves
transmission media efficiency and helps achieve maximum bandwidth
utilization and guaranteed QoS provision of traffic payloads. Veraz
was formed in December 2002, by the combination of the principal
activities of ECI's NGTS operations with those of NexVerse Networks,
Inc.
o ECtel Ltd. or ECtel, is a developer and global provider of revenue
assurance solutions for circuit-switched and packet-switched wireline
and wireless networks. Its revenue assurance solutions equip
telecommunications service providers with comprehensive data gathering
and analysis capabilities to improve their operational efficiency and
profitability by detecting and preventing fraud, monitoring the
quality of service over their networks and supporting billing
assurance/mediation functions or interconnection arrangements. ECtel
experienced a sharp decline in revenues in 2003 and, in order to focus
on its telecom business, in March 2004, it sold its government
surveillance business to Verint Systems Inc. for $35.0 million in
cash.
ECtel was previously a majority owned subsidiary of ECI; however, on
May 10, 2004, ECI distributed 7.6 million of its shares in ECtel to its
shareholders, including us, reducing its holdings in ECtel from approximately
57.9% to approximately 16.0%. As a result, ECI no longer consolidates ECtel's
results and the activities of ECtel for prior periods are treated in ECI's
financial statements as discontinued operations. In addition, as a result of
this distribution, we acquired a direct ownership interest in ECtel of
approximately 12.9%. Our investment in ECtel is presented in our consolidated
financial statements by the cost method, and is classified as
available-for-sale under FAS 115 for U.S. GAAP purposes, therefore ECtel's
results are not included in our results of operations.
ECI's other operations include the remaining activities of the NGTS
manufacturing unit, following the transfer of the principal NGTS operations to
Veraz, which primarily focuses on the manufacturing of DCME systems for sale to
Veraz, which has exclusive, world-wide distribution rights for these systems.
In December 2003, ECI entered into a strategic relationship agreement
with Nortel Networks. Under the agreement, ECI and Nortel agreed to deliver
broadband access networking solutions that will address the increasing global
demand for multimedia and triple play services (voice, video and data).
In November 2004, ECI signed an agreement with Redback Networks Inc.,
or Redback, for the delivery of enhanced triple play (voice, video and data)
services over broadband and IP networks. Under the agreement, the two companies
will offer a comprehensive IP solution that includes ECI's Multi-Service Access
Gateway (MSAG) solutions together with Redback's multi-service edge and
broadband portfolio. Pursuant to the terms of the agreement, ECI and Redback
will initially target joint customers and will work together to address
customer needs and requirements for the move to triple play and other advanced
services.
In December 2004, ECI entered into a strategic partnership with Chiaro
Networks Ltd., or Chiaro, the developer of the Enstara(TM) IP/MPLS routing
platform. This platform is designed to
19
enable telecommunications service providers to consolidate multiple existing
networks into a single, simpler network that offers greater operational
efficiency, increased scalability and significant cost advantages. According to
ECI's agreements with Chiaro and its shareholders: (i) ECI received exclusive,
global distribution rights for the Enstara platform for a period expiring in
February 2008; (ii) ECI provided financing to Chiaro in the aggregate amount of
$6.0 million, repayable in full in March 2008 with interest at an annual rate
of LIBOR + 2.3% ($3 million of the financing being convertible, at ECI's
option, at any time into convertible preferred shares of Chiaro); and (iii) ECI
received an option to acquire Chiaro in the future at a price to be determined
based on the revenues derived from the Enstara product. The term of the option
expires in February 2008 and it may be exercised within three defined 90-day
exercise windows during its term.
Under U.S. GAAP, for the year ended December 31, 2004, ECI reported
revenues of $497 million, gross profit of $196 million, income from continuing
operations of $14 million and net income of $10 million. Under Israeli GAAP,
ECI's net loss for the year ended December 31, 2004 was $1 million. ECI is
included in our financial statements on an equity basis only. As of December
31, 2004, our equity interest in ECI was approximately 30.21%.
For a discussion of material legal proceedings relating to ECI, please
see "Item 8, Financial Information - Legal Proceedings."
Telrad Networks Ltd. (Telrad)
Telrad is an innovative developer and marketer of telecom products and
end-to-end solutions. Telrad has over 50 years of experience in both legacy
switching and next generation networking, and has a long-standing partnership
with Nortel Networks. Telrad provides reliable networking solutions to many
countries in Latin America, Africa, Eastern Europe and Asia Pacific.
Telrad's operations are divided into the following three divisions:
o Telrad ODM (original development manufacturer), which is similar to an
OEM (original equipment manufacturer), is the division responsible for
research and development as well as sales and support in wireline,
wireless, enterprise and optical networks. The division develops
carrier-grade quality products with a rapid time-to-market deployment.
This division was created in 2004 through the consolidation of
Telrad's former Telrad Network Solutions, or TNS, and Telrad Optical
Networks, or TON, divisions.
o Public Network Integrator, or PNI, provides end-to-end solutions for
telecom and service providers. PNI specializes in Telrad and Nortel
Networks technology and its operations include the planning, design
and development of switching products, project management integration
and delivery of turnkey telecommunications projects, as well as
third-party equipment.
o Advanced Operations Solutions, or AOS, provides advanced operations
solutions and services, including NPI management, System House
Services and complete Supply Chain Management, or SCM, for companies.
20
In addition, Telrad has interests in several start-up companies and
new subsidiaries offering various products and services, which have been
established as independent subsidiaries of Telrad. These companies offer next
generation solutions in the telecommunications industry.
On September 28, 2004, we entered into an agreement to sell 39% of our
holdings in Telrad to Fortissimo GP Capital Fund L.P., or Fortissimo, for $21
million. The agreement provided that the sale will be effected in two stages.
In the first stage, which closed in November 2004, we transferred 19.5% of
Telrad's shares to Fortissimo for consideration of $10.5 million. In the second
stage, which we expected to close during the second half of 2005, Fortissimo
was to transfer the balance of the consideration, amounting to $10.5 million,
and we were to transfer the balance of the Telrad shares we sold in this
transaction, amounting to 19.5% of Telrad's shares. See also "Recent
developments" below.
Under the terms of the agreement, Fortissimo was given an option,
exercisable for a period of up to 48 months from the closing date of the first
stage, to acquire additional shares of Telrad from us, provided that
Fortissimo's total holdings will not exceed 49% of Telrad's shares. The
exercise price for this option will be determined according to the value of
Telrad, which will not be less than its shareholders' equity in the financial
statements on the exercise date.
Pursuant to the agreement, we agreed to use the proceeds of the sale
to extend loans to Telrad, and upon the closing of the first stage of the sale,
we transferred $9.5 million of the proceeds to Telrad as a loan. Upon the
closing of the second stage, we will extend an additional $11.5 million loan to
Telrad. These loans will bear interest at an annual rate of LIBOR+2%, and will
mature 20 years from the closing date of the first stage.
As of December 31, 2004, based on estimates by our management,
forecasts on the operating results of Telrad and the indemnification we
provided Fortissimo in the transaction, our management assessed that the value
of the $9.5 million loan to Telrad loan was impaired and a provision was
recorded in our consolidated financial statements.
Under the terms of the agreement, we and Fortissimo agreed to vote our
respective shares of Telrad so that following the completion of the second
stage, Telrad's board of directors will consist of seven directors and will be
comprised of three directors nominated by us, three directors nominated by
Fortissimo and one director jointly nominated by us and Fortissimo. In
addition, the agreement stipulates a list of matters which must be approved by
our and Fortissimo's joint consent, including the approval of Telrad's budget,
the appointment of Telrad's executives and the determination of their terms of
employment and the distribution of dividends. These rights confer on
Fortissimo, as the minority shareholder, the right to actually participate in
significant decisions related to the Telrad's normal course of business, and,
therefore, prevent us, as the majority shareholder, from exercising actual
control over Telrad and require our and Fortissimo's joint consent in decisions
on matters that are critical for the operating objectives of Telrad.
Under the terms of the agreement, in the event Fortissimo does not
transfer the entire balance of the consideration in the second stage, it will
receive shares of Telrad on a basis proportionate to the consideration actually
paid. In such event, the agreement provides for a
21
formula for appropriate changes to be made to the composition of Telrad's board
of directors, the voting rights granted to Fortissimo, the loan amounts we
extend to Telrad and the terms of Fortissimo's option to purchase additional
shares, as described above.
As a result of this transaction, since the closing of the first stage
in November 2004, Telrad has been included in our financial statements,
according to Israeli GAAP and according to U.S. GAAP, by the proportionate
consolidation method, at a rate of 80.5%.
Recent developments
On June 22, 2005 we completed the second stage of the sale of shares
of Telrad, amounting to 19.5% of Telrad's shares, thereby completing the sale
of 39% of Telrad's shares. As a result of the accelerated reorganization
measures implemented at Telrad (as described below under "Cost Reduction
Plan"), we and Fortissimo entered into an amendment to the original agreement,
pursuant to which the terms of the second stage of the transaction were
changed. International private equity fund HarbourVest International Private
Equity Partners and Israeli based Poalim Ventures joined Fortissimo Capital in
this investment. Under the amended terms of the transaction, we received $6.25
million for the 19.5% of Telrad's shares transferred in the second stage,
instead of the $10.5 million provided for in the original agreement. However,
instead of extending a loan to Telrad with the proceeds from the sale in the
second stage as provided in the original agreement, under the amended terms of
the transaction, we retained these proceeds. Under the amended terms of the
transaction, we were also relieved from certain of our indemnification
obligations to Fortissimo under the original agreement. As a result of this
transaction, as of the closing of the second stage in June 2005, Telrad will be
included in our financial statements, according to Israeli GAAP and according
to U.S. GAAP, by the equity method.
Reorganization plans
Beginning in November 1998, Telrad's board of directors approved a
series of reorganization plans which included the reduction in the number of
employees through early retirement plans. The reorganization plans were
completed without disturbances to labor relations. In 2004, Telrad's board of
directors approved an additional reorganization plan that included the
reduction of approximately 85 additional employees. For 2004, 2003 and 2002,
our financial statements include expenses of NIS 29 million, NIS 2 million and
NIS 107 million, respectively, recorded under the item "Other income
(expenses), net". The 2004 reorganization plan was completed in 2005, with an
expense of NIS 40 million included in our financial statements for the first
quarter of 2005. As a result of these reorganizations, Telrad has reduced its
workforce to be in line with its current sales volume and requirements.
Start-ups and new subsidiaries
comMATCH Ltd., a wholly-owned subsidiary of Telrad, is a leading
provider of Last-Mile over IP solutions for telecommunications operators,
creator of DUET Carrier Grade VoIP (Voice over Internet Protocol, Gateways
portfolio. comMATCH is a spin-off of Telrad Networks. The company's mission is
to deliver carrier class VoIP and Media over IP solutions
22
enabling Multi-Service Operators and alternative carriers to deliver reliable,
high-quality and feature-rich telephony services over IP and TDM networks.
The DUET family of products enables customers to seamlessly bridge
Legacy Public Switched Telephone Network, or PSTN, and IP networks via various
alternative infrastructures, like Cable TV, xDSL, fixed broadband wireless,
Gigabit Passive Optical Networks (GPON) and more. The company's technology
provides connectivity and interoperability for Next Generation Access and
Public Networks. comMATCH's sales in 2004 and 2003 totaled $3.9 million and
$1.8 million, respectively.
Telrad Connegy Communications Inc. (Connegy). Telrad holds 52% of its
U.S. based subsidiary, Connegy, whose main products consist of the UNITe Family
of Business Systems and IP and LAN telephony solutions, including the advanced
i.Picasso 6000 IP telephone and the CNS 3200 Enhanced Hosted Communications
Platform. Connegy provides enterprise customers, carriers and others with a
comprehensive family of digital and VoIP telecommunication solutions and
applications. In 2004 and 2003, Connegy's net sales were $21.9million $21.0
million, respectively.
Relationship with Nortel
On April 23, 2002, Nortel and Telrad signed license and distribution
agreements, allowing Telrad to sell products based on Nortel know-how and
technology to a defined list of carriers in countries in which Nortel does not
intend to conduct business and/or in which its activities are limited. During
2003, a number of distribution and license agreements were signed by the
parties covering three of the major areas of operation of Nortel. In February
2005, Telrad and Nortel entered into a master reseller agreement, which unified
the parties' obligations under their previous distribution and license
agreements.
Credit Risk Exposure
As part of the above mentioned agreements with Nortel, Telrad retained
the receivables from the related sales that typically include extended credit
terms to customers in countries that involve certain risks in light of their
political and economic conditions. These countries include Ethiopia, Myanmar,
Honduras, Chile, Bolivia and Georgia.
As of December 31, 2004 and 2003, Telrad's long-term credit risk
exposure from these agreements amounted to NIS 22 million and NIS 27 million,
respectively. During the first quarter of 2005, Telrad further reduced its
long-term credit risk exposure by collecting an additional NIS 3 million in
receivables.
Cost Reduction Plan
After completing the first stage of the sale of 39% of the shares of
Telrad to Fortissimo, in addition to the reorganization plans and retirement
plans discussed above, Telrad implemented cost reduction measures, including
the consolidation of Telrad's former TNS and TON divisions into the ODM
division.
23
Other Telecommunication Equipment Business
In addition to ECI and Telrad, a small portion of our
telecommunication equipment business is conducted by Microwave Networks Inc.,
or MNI, in the United States. For the years ended December 31, 2004 and 2003,
MNI had sales of approximately NIS 145 million ( $ 33.6 million) and NIS 126
million ($29.2 million), respectively.
As described above, we also have direct ownership of approximately
12.9% in ECtel, following the distribution by ECI, on May 10, 2004, of 7.6
million of its shares in ECtel to its shareholders, including us.
Our Defense Electronics Business
Our defense electronics business is conducted through the Elisra
Defense Group, or Elisra Group, and Tadiran Communications Ltd., or Tadiran
Communications.
The Elisra Group includes Elisra Electronic Systems Ltd., or Elisra,
Tadiran Electronic Systems Ltd., or Tadiran Electronic, and Tadiran Spectralink
Ltd., or Tadiran Spectralink. The Elisra Group designs, develops, manufactures,
integrates and supports advanced system solutions for air, sea and land
deployment in over 25 countries.
Excluding sales of Tadiran Communications, which are not consolidated
in our results of operations, for the years ended December 31, 2004 and 2003,
our defense electronics business had sales of NIS 1,166 million ($271 million)
and NIS 1,286 million ($299 million), respectively, representing 12.6% and
16.7%, respectively, of our consolidated net sales during these periods. In
2004 and 2003, the majority of sales of our defense electronic business were
made to defense-related customers.
In 2004, the Elisra Group's sales to the Israeli Ministry of Defense,
or IMDF represented approximately 31% of the Elisra Group's sales.
The principal companies in our defense electronics business are:
Percentage
Of Equity
Ownership Principal Products and Services
--------- --------------------------------------------------
Elisra Electronic Systems Ltd. 70.0 Holding Company; Electronic warfare, equipment and
systems
Tadiran Electronic Systems Ltd. 100.0(1) Command, control, communications and intelligence
systems for defense applications
Tadiran Spectralink Ltd. 100.0(1) Advanced data and video links for military use
Tadiran Communications Ltd. 30.8 (2) Communications devices and systems mainly for
military use
(1) Indicates the percentage of direct ownership by Elisra Electronic Systems
Ltd.
(2) Fully diluted, taking into consideration the exercise of outstanding stock
options. As a result of our sale of shares in April 2005 our interest in
Tadiran Communications decreased to 18.6%. See "Recent Developments"
below.
24
Elisra Group
The Elisra Defense Group, managed and controlled by Elisra,
principally is involved in the design, manufacture, distribution and support of
a wide range of advanced electronic systems, primarily for the modern military.
The Elisra Group's companies are ranked among the most sophisticated defense
suppliers of Electronic Warfare systems, or EW, Command, Control, Communication
and Computing Intelligence systems, or C(4)I, and training simulators. The
Elisra Group's companies are suppliers to the Israel Defense Forces and are
deployed by modern armed forces around the world. The Elisra Group's companies
focus on the development of new and innovative technologies for a large range
of platforms with a professional staff of experienced engineers, software
programmers and highly skilled technicians.
As of December 31, 2004, our defense electronics business had an
aggregate backlog of confirmed orders of NIS 2.0 billion ($462 million)
compared to NIS 2.2 billion ($513 million) as of December 31, 2003.
Elisra Electronic Systems Ltd. (Elisra)
Elisra designs, develops and produces electronic warfare and
surveillance systems for military purposes, as well as a range of electronic
and microwave components for the commercial market. Elisra offers a diversified
range of combat-proven electronic warfare systems, or EW, including radar
warning systems, active countermeasure systems, comprehensive self-protection
systems, electronic intelligence systems, or ELINT, and sophisticated
communication links, complemented by extremely light-weight components. Elisra
also develops a wide range of active and passive microwave components.
Microwave and Radio Frequency, or RF, components are essential to nearly all
intricate electronic equipment, as well as microwave telecommunication and
satellite systems.
In July 2002, we entered into an agreement with Elta Systems Ltd. or
Elta, a wholly-owned subsidiary of Israel Aircraft Industries, to sell to Elta
30% of Elisra's shares for $100 million. In addition, we entered into a
shareholders' agreement with Elta to govern the relationship between us and
Elta as the shareholders of Elisra, including voting on the composition of
Elisra's board of directors and its decision making process, and the imposition
of certain limitations on the sale of Elisra's shares.
Tadiran Electronic Systems Ltd. (Tadiran Electronic)
Tadiran Electronic is engaged in providing solutions for a variety of
customers in the field of C(4)I, electronic warfare COMINT systems and spectrum
management and control systems.
An array of electronic hardware and computer software is incorporated
into the C(4)I systems, which enable the collection, processing, analysis and
display of large quantities of information to facilitate effective
dissemination and accelerate decision making for better Battle Management
capabilities.
25
Tadiran Electronic has developed a simulator for a Tactical Ballistic
Missile, or TBM, Defense Battle Management Center for the U.S. Ballistic
Missile Defense Organization, or BMDO, and the Israeli Ministry of Defense. The
simulator is currently operating and providing information for both
organizations.
Tadiran Electronic is also a supplier of the Battle Management Center
of the Israeli Arrow Defense weapons system.
Tadiran Electronics' activities in the field of electronic warfare
systems involve the design, development and distribution of a broad range of
strategic and tactical electronic warfare systems for ground, naval and
airborne platforms. Passive electronic warfare systems analyze and display
incoming signals and weapons information, while active electronic warfare
systems render hostile communication ineffective through electronic
countermeasure techniques.
Based on electronic warfare technology, a new range of commercial
applications has evolved in the area of spectrum management control. Integrated
spectrum management and monitoring systems provide nationwide solutions to
various telecommunication administrations.
Tadiran Spectralink Ltd. (Tadiran Spectralink)
Tadiran Spectralink develops and manufactures data and video links for
a variety of applications, including unmanned aerial vehicles, guided weapons
and satellite systems for locating and rescuing downed pilots. Based on these
links, command and control systems for airborne and naval applications are
developed.
In March 2001, a fire broke out at the plants of Tadiran Electronic
and Tadiran Spectralink, both of which are now wholly-owned by Elisra. The
management of these two companies estimate on the basis of, among other things,
the opinion of their legal advisers in this matter, that the indemnity from the
insurance companies would not be less than the book value of the damaged
property of approximately $36 million. During 2003, these two companies filed a
claim of $96 million to receive insurance payments for the equipment, building,
inventory and projects in progress damaged as a result of the fire. As of
December 31, 2003, we had received advances from the insurance companies
amounting to approximately $10 million. During the second quarter of 2004,
Tadiran Electronic and Tadiran Spectralink filed a motion with the district
court in Tel Aviv to issue a partial ruling of $33 million (in addition to the
$10 million in advances already paid by the insurance company), based on the
admission by the insurance company and its representatives of their liability
deriving from the insurance event, while the dispute focuses on the level of
damages. In December 2004, pursuant to a ruling of the district court in Tel
Aviv, the parties consented to the opening of a separate bank account, in which
the insurance company would deposit $15 million. Any withdrawal from this
account would require the court's approval until the conclusion of the
proceedings in the lawsuit. The lawsuit was sent to arbitration and the court
proceedings will be postponed until the end of the arbitration.
26
Tadiran Communications Ltd. (Tadiran Communications)
On September 10, 2004 we signed an agreement to acquire approximately
33% of the shares of Tadiran Communications (approximately 31% on a fully
diluted basis taking into consideration the exercise of outstanding stock
options) from Trefoil Israel Partners II, L.P., First Israel Mezzanine Fund
L.P. and First Israel Mezzanine Fund (in Israel) Limited Partnership for
approximately NIS 637 million (approximately $144 million). Our acquisition of
these shares, which closed in November 2004, was financed through a loan from
an Israeli bank secured by these shares.
Tadiran Communications develops, manufactures and markets
communication devices and systems mainly for military purposes in over 50
countries world-wide. It provides a comprehensive range of integrated
communication solutions, offering one of the widest ranges of military
communication equipment on the market, including HF and VHF radios,
telecommunication systems, and military computers which also serve as
communication and navigation terminals. These product lines feature highly
immune, secure digital radio communication systems for voice and data.
Tadiran Communications' products are in the fields of RF design and
development in frequencies ranging from 1.5 MHz - 5 GHz, Spread Spectrum
techniques (e.g. frequency hopping and direct sequence), crypto algorithms,
wireless data transfer application modems, error detection and correction
adapted to radio channels, advanced synchronization techniques, communications
protocols and radio channel control.
Tadiran Communications is the Israel Defense Force's signal corps'
main supplier of communications equipment. Furthermore, Tadiran Communications
utilizes its expertise for civilian applications, which consist of Bluetooth
networks developed by its subsidiary TADLYS and Commercial HF radios designed
by its MOBAT division.
Headquartered in Israel, Tadiran Communications has two foreign
subsidiaries: Talla-Com Tallahassee Communications Industries Inc.
("Talla-Com") and Telefunken Radio Communication Systems Co. KG ("Telefunken").
Talla-Com and its subsidiary, Tallahassee Technologies Inc., are both fully
owned. Based in Tallahassee, Fla., they serve as Tadiran Communications' U.S.
production and marketing vehicle, and a vehicle for increased participation in
Foreign Military Support ("FMS") projects. Telefunken is 75% owned by Tadiran
Communications. Based in Germany, Telefunken supplies technology and HF radio
products to the German army. Tadiran Communications is publicly traded on the
Tel Aviv stock Exchange under the symbol TDCM.
Recent Developments
On December 27, 2004, we entered into a series of agreements with
Elbit Systems Ltd., or Elbit, and with Federmann Enterprises Ltd., or
Federmann. Under the terms of an agreement with Elbit, we agreed to sell our
entire holdings in Tadiran Communications (approximately 33%) to Elbit for
approximately $146 million. Concurrently, pursuant to an agreement with
Federmann, we agreed to acquire approximately 9.8% of Elbit's share capital
from Federmann
27
for approximately $99 million and we will have the right to appoint 20% of
Elbit's directors, one of whom will serve as Vice Chairman of the Board.
The two sales, which are interconnected and will be completed in two
stages, are subject to several conditions, including approval of the applicable
anti-trust regulators and approval of Elbit's shareholders.
In the first stage, we will sell approximately 13.8% of the
outstanding share capital of Tadiran Communications to Elbit for approximately
$63 million, and concurrently, we will acquire approximately 5.3% of the
outstanding share capital of Elbit from Federmann for approximately $53
million. In the second stage, we will sell the balance of our holdings in
Tadiran Communications (approximately 19.2%) to Elbit for approximately $83
million and concurrently, we will acquire approximately 4.5% of the outstanding
share capital of Elbit from Federmann for approximately $46 million. The second
stage is contingent, among other things, on the closing of a transaction in
which Tadiran Communications will acquire from us our entire holdings
(approximately 70%) in Elisra. It was further agreed by the parties that if the
second stage of the sales is not closed within sixteen months of the signature
date of the agreements, then the board of directors of Tadiran Communications
will be comprised in a manner whereby we and Elbit will have "joint control" of
Tadiran Communications, meaning that we and Elbit will have an equal number of
directors, and there will be rotation of two-year terms for the chairman of the
board.
On April 18, 2005, following receipt of the requisite approvals, the
first stage of the transaction was closed. Following the closing of the first
stage, we held approximately 18.6% of the outstanding share capital of Tadiran
Communications and approximately 5.3% of the outstanding share capital of
Elbit, and we and Elbit have an identical number of directors on the board of
Tadiran Communications. The closing date for the second stage was scheduled for
September 30, 2005. If all the other contingent conditions are fulfilled, but
the Elisra transaction has not been closed, the date will be postponed to April
30, 2006 or to another date agreed upon by the parties.
On July 6, 2005 we signed an amendment to these agreements, pursuant
to which we will sell our entire holdings in Elisra to Elbit, instead of to
Tadiran Communications as per the original agreements, for approximately $70
million and additional consideration following receipt of future insurance
proceeds. We also received the right to acquire Dekolink Ltd., a start-up
company in the cellular field that is wholly-owned by Elisra. As originally
agreed, we will sell the balance of our holdings in Tadiran Communications to
Elbit for $83 million. However, under the amended terms of the transactions,
contrary to the terms of the original agreement, this sale will be conducted in
two parts, and we and Elbit will share joint control of Tadiran Communications,
as described above, following the sale of the first 5%. The sale of our
remaining shares in Tadiran Communications is contingent on the execution of
our sale of our holdings in Elisra to Elbit. Elbit's acquisition of Elisra is
subject to the approvals of Elbit's shareholders at general meeting to be held
within sixty days and Israel's Anti-Trust Commissioner. In addition, under the
amended terms of the transactions, contrary to the terms of the original
agreement, we will acquire only an additional 2.3% of Elbit from Federmann for
$25 million, regardless of whether the sale of Elisra is approved by the
Israeli Anti-Trust
28
Commissioner. Upon completion of all the stages of these transactions, we will
hold approximately 7.6% of Elbit.
Our Agrochemicals Business
Our agrochemicals business is conducted through the direct and
indirect subsidiaries of Makhteshim-Agan Industries Ltd., or MA Industries. MA
Industries is the world's leading generic manufacturer of crop protection
products. After a long period of coordination and cooperation as separate
publicly-traded entities, Makhteshim and Agan formally merged in May 1998. The
new MA Industries replaced its predecessors on the Tel Aviv Stock Exchange and
now has several wholly-owned subsidiaries which include Makhteshim Chemical
Works Ltd., or Makhteshim, Agan Chemical Manufacturers Ltd., or Agan, and
Milenia Agro Ciensias S.A., or Milenia, all of which are collectively referred
to as "the MA Group." These companies are leading international suppliers of
generic crop protection products. The MA Group produces a full range of crop
protection chemicals, including acaricides, insecticides, fungicides,
herbicides as well as plant growth regulators. The company is also engaged in
the development, production and marketing of fine chemicals, intermediates,
specialty aroma chemicals, industrial chemicals, antioxidants and
nutraceuticals. For the years ended December 31, 2004 and 2003, our
agrochemicals business had sales of NIS 6,895 million ($1,601 million) and NIS
5,192 million ($1,205 million), respectively, representing 74.7% and 67.5%,
respectively, of our consolidated net sales during such periods. International
activities, primarily sales in Europe, North America and Latin America,
accounted for 93.3% and 92.6% of our agrochemicals business' sales in 2004 and
2003, respectively.
The principal companies in our agrochemicals business are:
Percentage
Of Equity
Ownership Principal Products and Services
--------- --------------------------------------------------
Makhteshim-Agan Industries Ltd. 38.6(1)(2) Holding Company
Makhteshim Chemical Works Ltd. 100.0 (3) Insecticides and fungicides and other chemicals
Agan Chemical Manufacturers Ltd. 100.0 (3) Herbicides and synthetic aroma chemicals
Milenia Agro Ciensias S.A. 100.0 (3) Formulation and distribution of crop
protection chemicals
(1) The ordinary shares of MA Industries are traded on the Tel Aviv Stock
Exchange, or TASE.
(2) As a result of our sale of 15.9 million shares of MA Industries on
February 3, 2005 and the issuance of additional shares by MA Industries in
the second quarter of 2005 upon the conversion of convertible debentures
and the exercise of stock options including employee stock options, our
interest in MA Industries decreased to approximately 32.0% as of June 30,
2005 (approximately 28.6% on a fully diluted basis taking into
consideration the exercise of outstanding stock options and the conversion
of outstanding convertible debentures).
(3) Indicates the percentage of direct ownership by MA Industries.
MA Industries results were included in our consolidated financial
statements according to Israeli GAAP as of and for the year ended December 31,
2004 despite the decrease in our
29
ownership to below 50% since, in our management's opinion, we continued to
exercise effective control over MA Industries as of December 31, 2004, as
described below. However, under U.S. GAAP, MA Industries' financial statements
are not included in our consolidated financial statements as of and for the
year ended December 31, 2004, but rather are recognized according to the equity
method. See also Note 28 to our consolidated financial statements included
elsewhere in this annual report.
The Agrochemicals Business Environment in 2004
After several years in which the agrochemicals market underwent
significant structural changes, recovery in the past two years has been
indicated by increased demand for plant protection chemicals and improved
business results of most companies. In 2004, growth has continued in the
agrochemical market, and the market has reached $30.7 billion (an increase of
15% over 2003).The principal factors affecting the market in 2004 were high
demand, excellent harvests in the USA, good weather conditions in northern
Europe, improving economic conditions in South America (mainly Brazil), and an
outbreak of soybean rust in South America. Other contributing factors were the
weak US dollar and low levels of stocks at the beginning of the year. Even
after eliminating the effects of currency fluctuations and inflation, all
regions showed growth in real terms except for North America, where the market
remained stable.
The agrochemicals market has become more concentrated since the recent
years' trend of mergers of the multinational companies. At present, six large
companies hold approximately 85% of the conventional agrochemicals market. This
process of consolidation has led to large gaps between the two leading
companies - Syngenta and Bayer - and the rest of the companies. In the
short-to-medium term, the process has stabilized the market by reducing the
number of competitors and has tempered the falling prices.
Crop Protection
Generic agrochemicals offer an alternative source for widely utilized
chemicals previously manufactured under patents by larger research-based
chemical manufacturers. Research-based chemical manufacturers often focus their
resources on developing new agrochemicals and supply of additional chemicals by
generic manufacturers, such as MA Industries, to supplement their capacity. In
the next few years, as a result of decreased resources committed to research
and development of new agrochemicals products and the expiration of existing
patents, a significant number of widely used agrochemicals are expected to lose
patent protection in many geographic regions (primarily South America),
substantially increasing the available market for sales by generic
manufacturers. The off patent component of the agrochemical industry grew in
recent years to approximately 67% as of December 31, 2003 and is expected to
exceed 70% of the agrochemical market by 2007. In addition, the modernization
of the agricultural industries of Eastern Europe and other developing countries
offers increasing sales opportunities for both research-based and generic
agrochemical manufacturers.
The major competitors in the international market for agrochemicals
are major international research-based chemical producers. These major
international chemical producers have significant influence on the prices of
most of MA Industries' products. In the Israeli
30
market, MA Industries competes with importers with respect to most of its
products, and competes with both importers and Israeli producers with respect
to non-pesticide products.
The development of new generic products requires significant
investment for research, registration, establishment of production and
marketing facilities. The MA Group typically focuses on products that require a
high degree of sophistication in process development and production, and are,
therefore, less susceptible to extensive competition. Their prices, therefore,
tend to be relatively higher than sectors where competition is more prevalent.
For many of these products, the MA Group is the world's second largest
manufacturer, with the original research-based chemical company maintaining the
majority share. We believe that the MA Group's ability to compete with major
international research-based chemical companies and other generic chemical
manufacturers is based upon their flexible manufacturing facilities, advanced
research and development capabilities, fulfillment of stringent registration
and licensing requirements of various countries, compliance with environmental
regulations, material purity and worldwide marketing and cooperation with
certain multinational companies with respect to the production and marketing of
numerous products. An essential component of the MA Group's ability to maintain
its market share on the worldwide market is the successful introduction of new
generic products immediately after the expiration of the patents validity. In
1998, an amendment was passed to Israeli Patents Law 1967, which has certain
beneficial ramifications for the Israeli agrochemical industry. Under this
amendment, (i) subject to certain conditions, research activities on a patent
during the patent period for the purposes of production deployment after the
patent expiration will not constitute misuse of an invention, and (ii) the
period of patents in the agrochemical industry cannot be extended. These
changes should facilitate the introduction of new products by the MA Group.
The MA Group plans to develop, over the next several years additional
agrochemical products, including fungicides, insecticides and herbicides, based
primarily on a substantial number of patents held by other parties expiring
within the next few years. The MA Group purchased the right to manufacture and
market several agrochemical products from the developers of such products.
New research and developments in the field of trans-genetic plant
species that can tolerate insects and in plant species that are resistant to
fungal diseases may have an adverse impact on the demand for the MA Group
products during the next few years, depending upon the success of such
developments.
The MA Group markets its crop protection chemicals primarily to
national distributors and foreign manufacturers, who use such chemicals in the
formulation of a wide range of products and sell the formulations to
distributors and end users. The MA Group manufactures over 70 different active
ingredients, which are sold as technical grade materials and "ready"
formulations. These technical grade materials are used in the formulation of a
wide range of herbicides, insecticides, fungicides and plant growth regulators.
The "ready" formulations are sold to distributors. Agan sells its synthetic
aroma chemicals principally to the detergent, soap and cosmetics industries. No
single product manufactured and sold by the MA Group accounted for more than
10% of MA Industries' total sales in 2004 and 2003.
31
Foreign Activities
As part of our strategy to focus on our core businesses and increase
market penetration in the agrochemicals industry, we have continued to expand
our agrochemicals business abroad.
In October 2001, MA Industries and several of its subsidiaries entered
into a securitization transaction, pursuant to which the subsidiaries agreed to
sell all their accounts receivable to several foreign companies which were
established for this purpose, but which are not owned or controlled by MA
Industries or its subsidiaries. The acquisition of the accounts receivable by
these companies was financed by a United States affiliate of the Bank of
America Group. On September 28, 2004, MA Industries and certain subsidiaries
signed an agreement with Bank of America to terminate the securitization
undertaking. On that same date, they entered into a new agreement with Rabobank
International for the sale of trade receivables in a securitization transaction
to replace the previous agreement with Bank of America. The new agreement is
similar in principle to the prior agreement with several changes, including,
among others, that in the new agreement additional MA Indusries subsidiaries
are included in the transaction. The volume expected to be at the disposal of
the companies purchasing the accounts receivable is approximately $250 million
(compared with $150 million in the previous securitization agreement), on a
current basis, so that the considerations received from the customers whose
debts were sold will be used to purchase new debts. Under the terms of the
securitization agreements, MA Industries will handle collection of the sold
debts for these companies in consideration of a fee, which is to be determined
in accordance with such agreements. The period in which the companies will sell
their trade receivables will be one year from the closing date of the
transaction. This period may be extended, with the consent of all the parties,
for additional one-year periods, up to a maximum of four extensions. Under the
terms of the agreement, MA Industries undertook to meet certain financial
covenants, mainly a ratio of liabilities to capital and profitability ratios,
and as of December 31, 2004 and June 30, 2005, MA Industries is in compliance
with these covenants. As of December 31, 2004, MA Industries received cash
proceeds of approximately $142.5 million from this securitization transaction.
In April 2004, MA Industries, through a wholly-owned subsidiary,
signed agreements to acquire ownership and control in a group of three
companies, Vegetation Management LLC, Farm Saver.com LLC and Nation Ag II LLC,
which are engaged in the registration, import and marketing of agrochemicals in
the U.S. The total purchase price amounted to approximately NIS 303 million.
In June 2004, MA Industries, through a wholly owned subsidiary, signed
an agreement for acquisition of approximately 45% of the rights in Control
Solutions Inc., or CSI, a U.S. company engaged in the marketing of pesticides
to the non-agricultural market in the United States. In addition, the
subsidiary was granted an option, which may be exercised at any time during the
next three years, to increase its share in CSI to 60%, in exchange for a
payment ranging between NIS 6.8 million and NIS 47.8 million, based on CSI's
earnings in 2004-2006. In addition, commencing in 2009, the subsidiary and the
remaining shareholders of CSI have the right to require the subsidiary to
acquire from the remaining shareholders of CSI the balance of their shares in
CSI in consideration for an amount to be determined based on the earnings of
CSI for the three years preceding the acquisition date.
32
In July 2004, MA Industries, through a wholly owned subsidiary, signed
an agreement for acquisition of all the shares and rights of Farmoz PTY
Limited, an Australian company engaged in the marketing and distribution of
pesticides in Australia.
In August 2004, MA Industries, through a subsidiary, signed an
agreement for acquisition of 50.1% of the rights in RiceCo LLC, a U.S. company
engaged in the development and marketing of herbicides for rice.
The total purchase price paid for CSI, Farmoz and RiceCo amounted to
approximately NIS 186 million.
In March 2004, MA Industries issued non-marketable convertible
debentures in a private placement to institutional investors in the amount of
$150 million par value, in consideration for their par value. The debentures
are for a seven-year period and bear annual interest at the rate of 1.75%, to
be paid annually, in the month of March. The debentures may be converted into
ordinary shares of MA Industries, par value NIS 1.00 per share, at a conversion
rate of NIS 20.5 per share, according to a fixed exchange rate of NIS 4.514 per
$1.00. The ordinary shares to be issued upon conversion of the debentures will
be listed for trading on the Tel Aviv Stock Exchange. On March 22, 2007, the
debenture holders will have the right, by serving prior written notice to MA
Industries (between 30 and 60 days prior to March 22, 2007), to demand
redemption of the debentures (principal and interest balance at such date). MA
Industries will have the right to force the conversion of the debentures,
beginning March 22, 2007, as long as the average trading price of MA
Industries' ordinary shares in the period of 20 business days preceding the
notice of forced conversion, will be more than 30% higher than the conversion
price of the debentures. As of June 30, 2005, $121.5 million of the $150
million debentures were converted into approximately 27.8 million shares.
On January 14, 2004, we sold 27 million shares of MA Industries to UBS
Securities Israel Ltd. for approximately NIS 418 million. The sale generated a
capital gain, before tax, of NIS 160 million in the first quarter of 2004, and
our percentage ownership in MA Industries decreased to 41.29%. Additionally, as
a result of the sale, we utilized a deferred tax asset of NIS 59 million that
had been created in 2003, because of expectations to utilize carryforward tax
losses.
As a result of this transaction, and following the issuance by MA
Industries of additional shares upon the conversion of convertible securities
issued by MA Industries, including the convertible debentures mentioned above,
our ownership percentage in MA Industries decreased to 38.6% as of December 31,
2004.
In the opinion of our management, the broad dispersal of voting rights
among the other shareholders of MA Industries, the low level of shareholding by
the other shareholders of MA Industries, the low likelihood of the creation of
a block of votes opposing our interests at shareholder meetings and past
experience related to the attendance at shareholder meetings, as well as the
voting percentages and opposition at the meetings indicate that the economic
substance that stood and continues to stand as the basis of the relationship
between us and MA Industries immediately before and after the transactions
described above demonstrates our effective control of MA Industries, as
measured by our ability to determine the financial and
33
operational policies of MA Industries. Therefore, MA Industries' financial
statements continue to be included in our consolidated financial statements for
the year ended December 31, 2004. However, under U.S. GAAP, MA Industries'
financial statements are not included in our consolidated financial statements
in 2004, but rather are recognized according to the equity method. See also
Note 28 to our consolidated financial statements included elsewhere in this
annual report.
Recent Developments
On February 3, 2005, we sold 15.9 million shares of MA Industries to
Merrill Lynch International for approximately NIS 374 million. The sale
generated a capital gain, before tax, of approximately NIS 201 million in the
first quarter of 2005. Additionally, as a result of the sale, we utilized a
deferred tax asset of approximately NIS 69 million that had been created in
2004, because of expectations to utilize carryforward tax losses. Under the
terms of the sale, we undertook not to sell additional shares of MA Industries
for a nine-month period from the date of sale. As a result of this sale, and
following the issuance by MA Industries of additional shares in the second
quarter of 2005 upon the conversion of convertible securities and the exercise
of employee stock options, our ownership percentage in MA Industries decreased
to 32% as of June 30, 2005 (28.6% on a fully diluted basis taking into
consideration the exercise of outstanding stock options and the conversion of
outstanding convertible debentures).
Following the sale of the shares in February 2005, we evaluated the
implication for continuing to consolidated MA Industries in our financial
statements, beginning from the first quarter of 2005. Based on an evaluation of
the range of circumstances created as a result of the February 2005 sale, we
decided that continuation of the consolidation of MA Industries is not
consistent with the economic substance. Therefore, beginning from the first
quarter of 2005, the consolidation of MA Industries in our financial statements
was discontinued, and our investment in MA Industries is accounted for
according to the equity method.
On March 8, 2005, the board of directors of MA Industries resolved to
adopt a new option plan for its officers and employees and those of its
subsidiaries. Under the terms of the plan, on March 14, 2005, MA Industries
issued stock options exercisable for up to 14,900,000 ordinary shares of MA
Industries. Assuming all the options are exercised, the plan recipients will
hold approximately 3.05% of MA Industries share capital, including 2,500,000
options that were deposited with a trustee for future distribution. However,
the offerees will not be issued the full number of shares underlying the
options, but only the number of shares reflecting the monetary benefit implicit
in the options.
Our Venture Capital Business
In January 2000, we and a wholly-owned subsidiary established a
registered partnership called "Koor Corporate Venture Capital," or Koor CVC,
within which we concentrated our investment activities in venture capital funds
and in high-tech start up companies with growth potential. The action was taken
to implement our strategic decision to increase our investments in those areas.
Within this context, since January 2000, Koor CVC signed investment agreements
with various start-up companies.
34
In 2000, Koor CVC, as a limited partner, also committed to invest up
to a total of $73 million in a number of external venture capital funds. As a
result of the reduction in the size of one of the funds, this commitment
declined to approximately $68 million in 2002.
In March 2001, Koor's board of directors elected to limit Koor CVC's
future investments only to its current portfolio companies and not to seek new
investments from that point onwards.
In June 2003, Koor CVC sold most of its commitment to its portfolio of
external venture capital funds to a secondary venture capital fund. As a result
of this sale, Koor CVC's future commitment to invest in these venture capital
funds was reduced to $14 million.
As of December 31, 2004, Koor CVC's future commitment to invest in its
venture capital fund (Pitango) totaled approximately $5 million. This amount
may be drawn upon by the fund at any time over the next 1-3 years, based upon
their needs.
During 2004, Koor CVC recorded NIS 58 million of provisions. These
provisions were as a result of depreciation in value for some of the Koor CVC
portfolio companies and portfolio funds.
During 2004, Koor CVC transferred approximately $9.1 million in
follow-on investments in its portfolio start-up companies and its portfolio
venture capital funds, and received approximately $8.8 million in proceeds from
the sale of its holdings in its portfolio companies, Riverhead Networks and
Envara.
As of December 31, 2004, the book value of Koor CVC's investments in
its start-up companies, a venture capital fund and Scopus Network Technologies,
or Scopus, in which Koor CVC holds a 27% interest on a fully-diluted basis,
totaled approximately NIS 181 million ($42 million).
Our Other Businesses
We have an interest in several service industries, mainly tourism,
real estate, aviation and trading. In previous years, our "other businesses"
segment also included construction and infrastructures, electrical appliances,
software, food, consumer products and metal products, as well as the production
of batteries.
The principal companies in our other businesses are:
Percentage
Of Equity
Ownership Principal Products and Services
--------- --------------------------------------------------
Sheraton Moriah (Israel) Ltd. 55.0 Hotel chain
Knafaim-Arkia Holdings Ltd. 9.2(1) Aviation and tourism services
Koor Properties Ltd. 100.0 Real estate
Koor Trade Ltd. 100.0 International trade
(1) Not consolidated in our financial statements and not included in our
business data. The ordinary shares of Knafaim are traded on the TASE.
35
Tourism
Our interests in Israel's tourism industry include ownership and
management of hotels and resorts, and other tourism-related services, such as
airlines. For the years ended December 31, 2004 and 2003, our tourism business
had sales of NIS 430 million ($100 million) and NIS 309 million ($72 million),
respectively.
Sheraton Moriah (Israel) Ltd. (Sheraton Moriah)
The Sheraton Moriah hotel network consists of 2,201 rooms (1,724 under
100% ownership) in 8 owned or leased hotels in major tourist destinations in
Israel, operating under the following brand names: Sheraton (six hotels),
Luxury Collection (one hotel) and Sheraton Four Points (one hotel).
Following the continuous crisis due the escalation of violence in
Israel since October 2000, since April 2003, a positive trend has developed in
the incoming tourism market. Tourist entries are still over 40% less than 2000,
but the improvement is consistent. As a result of the environment, Sheraton
Moriah's management has continued its strict control on expenses while
emphasizing revenue enhancement, including focusing on direct sales via a local
central reservations office, hard-sale local web-site, and leverage of its
international brand to increase the market share in both the domestic tourism
and incoming tourism markets.
Knafaim-Arkia Holdings Ltd. (Knafaim)
On September 29, 2004 we signed two agreements to sell 16% of the
shares of Knafaim for approximately NIS 121 million, and a third agreement for
the sale of an additional 3% of the shares of Knafaim for approximately NIS 23
million. As a result of these sales, our shareholding in Knafaim decreased from
approximately 28.3% to approximately 9.2%. Accordingly, for Israeli GAAP
purposes, the investment in Knafaim is stated by the cost method, beginning
from the date of the sale, and is classified as available-for-sale under FAS
115 for U.S. GAAP purposes. In the statement of operations for 2004, we
recorded a gain of NIS 51 million. Since we intend to sell the remainder of the
shares in Knafaim, the investment is presented within current assets. As a
result of management's intention to sell the remainder of its holding in
Knafaim, we recorded deferred taxes of approximately NIS 8 million 2004 in
respect of the anticipated utilization of carryforward tax losses.
Knafaim was incorporated in 1980. Knafaim owns a variety of
businesses in the travel and tourism industry, including Arkia Israeli Airlines
Ltd. (75%), Israel's largest domestic airline. Arkia also purchases and leases
back aircraft and operates charter flights to Europe. Knafaim also holds other
companies that supply various tourism services, both domestically and
internationally.
During 2003 and the first half of 2004, Knafaim acquired shares and
options of El Al Israel Airlines Ltd., or El Al, which was majority-owned by
the Israeli government. During the second quarter of 2004, after receiving the
requisite approval to increase its stake in the shares of El Al above 5%,
Knafaim exercised some of the options. Following this exercise, Knafaim held
22% of El Al's issued share capital, and pursuant to a third-party voting
agreement, Knafaim held 24.9% of the voting rights of El Al. During the third
quarter of 2004, Knafaim filed a request
36
with the State of Israel, which holds a special share in El Al, for approval to
increase its stake in El Al above 25%.
On August 5, 2004 the Anti-Trust Commissioner approved the merger
between Knafaim and El-Al, with restrictive conditions, mainly regarding the
sale of Knafaim's aviation activities to an independent third party.
On December 22, 2004, Knafaim received the requisite approval to
increase its stake in the shares of El Al to 40%, and to a shareholding that
would grant control over El Al. Upon receipt of this approval, Knafaim
exercised part of the purchase option so that as of March 31, 2005, Knafaim
holds approximately 39.6% of the issued and paid shares of El Al and
approximately 42.6% of the voting rights in El Al according to authorization
that was granted to Knafaim by a third-party. The third-party authorization
expired on May 2, 2005 with no other arrangement formulated in respect of the
third party's securities and since May 2, 2005 Knafaim has no voting rights in
connection with the third party's securities.
Real Estate
Tadiran's Real Estate
In March 2002, Tadiran's real estate was transferred to us as a
liquidating dividend. We sold most of the real estate assets to a group of
investors headed by Denisra International Ltd. and Ranitech Ltd for
consideration of approximately NIS 273 million, and we recognized a capital
gain of approximately NIS 29 million. As a result of the sale of this real
estate, we realized a tax reserve of approximately NIS 44 million, created in
respect of those assets, and we paid taxes of approximately NIS 40 million.
The remaining balance of the real estate assets we received from
Tadiran, in the amount of NIS 42 million, was recorded under "Assets designated
for sale" in our consolidated balance sheet as at December 31, 2004.
Koor Properties Ltd. (Koor Properties)
Koor Properties, our wholly-owned subsidiary, owns and develops
directly and indirectly real estate in Israel. As of December 31, 2004, Koor
Properties owned directly and indirectly an aggregate of approximately 52
thousand square meters of real property in different stages of development.
Most of the land is commercially developed.
During 2004, Koor Properties sold most of its remaining real estate
assets for NIS 3 million. We recorded a gain of NIS 2 million from this sale.
Trade
Koor Trade Ltd. (Koor Trade)
Koor Trade, our wholly-owned subsidiary, imports, exports and
distributes a broad range of industrial, agricultural and consumer products
through its worldwide network of offices, including offices in Europe, Asia,
Latin America and Australia. For the years ended December
37
31, 2004 and 2003, Koor Trade had sales of NIS 112 million and NIS 96 million,
respectively. Koor Trade owns a 49% equity interest in Balton C.P limited, an
English international trading company, which is engaged in trading activities
in seven countries in Africa relating to agricultural, telecommunications,
electromechanical and air-conditioning equipment, construction and other
projects.
Suppliers
The companies engaged in our businesses purchase the materials and
components used in their products from numerous independent suppliers. These
materials and components are not normally purchased under long-term contracts.
Most of the items purchased by these businesses are obtainable from a variety
of suppliers, and such businesses normally maintain alternative sources for
major items. In some cases these companies have annual purchasing agreements
with their major suppliers, which establish prices, quality thresholds and
delivery schedules.
To date, our businesses have not experienced any significant
difficulty in obtaining timely delivery of supplies, and management believes
these businesses maintain adequate inventories of certain significant imported
components. However, with respect to certain components, there may be a lengthy
period of preparation for production and adaptation for our businesses'
requirements. Accordingly, short-term shortages may arise in the event that
these companies were required to change suppliers without advance planning. The
unavailability of such components during such change-over period could result
in production delays, which might adversely affect our business.
Research and Development
The companies in our telecommunication equipment, defense electronics,
venture capital investment and in the agrochemicals businesses are actively
engaged in research and development programs intended to develop new products,
manufacturing processes, systems and technologies and to enhance existing
products and processes. Research and development is conducted through our
subsidiaries and affiliates, and is funded by a combination of our own
resources and grants from the Israeli Government. We believe our research and
development effort has been an important factor in establishing and maintaining
our competitive position.
The following table sets forth the percentage of gross research and
development expenditures incurred by our principal businesses in 2003 and 2004
as a percentage of the total sales of these businesses:
2003 2004
-------- --------
Telecommunications Equipment 10.2% 8.4%
Defense Electronics 5.5% 4.4%
Agrochemicals 1.7% 1.6%
Our updated research and development efforts have resulted in an
increase in the sales of internally designed products. We believe that research
and development in high technology areas, such as our telecommunications
equipment, defense electronics and agrochemicals businesses, is important to
our future growth, particularly with respect to products targeted for
38
export markets. Accordingly, we anticipate that these businesses will account
for a majority of our research and development efforts in the future. As part
of our research and development programs, we not only seek to develop new
products, but also to apply newly developed technologies to improve our
existing products.
In each of the last three fiscal years, we received grants from the
Government of Israel through the Office of the Chief Scientist, or OCS, for the
development of certain products. We generally receive from the OCS 20% to 66%
of certain research and development expenditures for particular projects. Under
the terms of the Israeli Government participation, a royalty of 2% to 5% of the
net sales of products developed from a project funded by the OCS is generally
required to be paid, beginning with the commencement of sales of products
developed with grant funds and ending when 100% to 150% of the grant is repaid.
We have paid in the past, and currently pay, royalties on sales of such
products. The terms of the Israeli Government participation also require that
the research and development be conducted by the applicant for the grant as
specified in the grant application and that the manufacturing of products
developed with government grants be performed in Israel, unless a special
approval has been granted. Separate Israeli Government consent is required to
transfer to third parties technologies developed through projects in which the
government participates. Such restrictions, however, do not apply to exports
from Israel of products developed with such technologies. From time to time the
Government of Israel has revised its policies regarding the availability of
grants and participation, and there can be no assurance that the Government's
support of research and development will continue in the future. In addition,
in order to be eligible for the governmental grants, programs and tax benefits,
we must continue to meet certain additional conditions, including making
specified investments in fixed assets. Should we fail to meet such conditions
in the future, we could be required to refund grants or tax benefits, together
with interest and inflation adjustments.
The following table shows, for each of the periods indicated, our
gross research and development expenses, the portion of such expenses that were
funded by the Israeli Government (primarily through the OCS) and the net cost
to us of our research and development expenses:
Year ended December 31,
---------------------------------------------------
2002 2003 2004 2004
-------- -------- -------- --------
($ in
(Adjusted NIS in thousands) thousands)
Gross research and development expenses 257,101 219,391 226,335 52,538
Portion funded by the Israeli Government(1) 788 (1,952) 14,220 3,301
Net research and development expenses 256,313 221,343 212,115 49,237
___________________________
(1) Net of royalties.
Competition
In 2004, the majority of our sales from telecommunications equipment,
defense electronics and agrochemicals businesses were derived from
international sales. The companies comprising these businesses are focusing on
developing new markets to increase international sales. The worldwide marketing
of products in each of these businesses is highly competitive
39
and certain competitors are substantially larger and have substantially greater
financial, production and research and development resources, more extensive
marketing and selling organizations, greater name recognition and longer
selling experience than us. Some of our competitors are also able to provide
their customers with more direct financing or greater access to long-term,
relatively low-cost government loans to finance equipment purchases.
Patents and Intellectual Property
Several of our subsidiaries and affiliates own and control a
substantial number of patents, trade secrets, confidential information,
trademarks, trade names and copyrights which, in the aggregate, are of material
importance to our business. We are of the opinion that our business, as a
whole, is not materially dependent upon any one of these assets or any related
group of assets. We are also licensed to use certain patents and technology
owned and controlled by others, and other companies are likewise licensed to
use certain patents and technology owned and controlled by us.
The IMDF retains (and, in certain limited circumstances, certain of
our other customers, including the United States Government, may retain)
certain rights to technologies and inventions resulting from our performance as
a prime contractor or subcontractor under certain contracts and may disclose
such information to third parties, including other defense contractors who may
be our competitors. When the IMDF and, in certain limited circumstances,
certain of our other customers, fund research and development, they usually
acquire rights to data and title to inventions and we may retain a
non-exclusive license for such inventions. In certain circumstances, the IMDF
and some of our other customers are entitled to receive royalties in connection
with the sale of products, the development of which was financed by those
entities. However, if the IMDF or one of our other customers purchases only the
end product, we normally retain the principal rights to the technology.
Regulation
Our diverse businesses are subject to significant statutory and
administrative regulation in the various jurisdictions in which we operate
throughout the world. Among the regulations to which we are subject are those
described below.
Monopoly and Pricing Regulations
We and our subsidiaries or affiliates may be declared monopolies or
otherwise be subject to certain legal obligations and restrictions established
by the Controller or by the Restrictive Business Practices Court, or the Court,
in the event that our market share, or the market share of our subsidiaries or
affiliates, exceeds certain prescribed limits.
Environmental, Health and Safety Matters
General
We are subject to laws and regulations concerning environmental
conditions, product safety, health and safety matters and the regulation of
chemicals in countries where we manufacture and sell our products. These
requirements include regulation of the handling,
40
manufacturing, transporting and use and disposal of certain materials, as well
as regulation concerning the discharge of pollutants into the environment. In
the normal course of our businesses, we are exposed to risks relating to the
possible release of hazardous substances into the environment, which may cause
environmental or property damage or personal injuries. In Israel, where we
maintain our principal production facilities, losses and damages relating to
continuous environmental pollution are currently uninsurable.
It is our policy to comply with environmental, health, product safety
and other safety requirements, and to provide workplaces for our employees that
are safe and environmentally sound, and that will not adversely affect the
health or environment of the communities in which we operate. From time to
time, our facilities may be subject to environmental compliance actions and the
resolution of such matters has in the past involved the establishment of
certain compliance programs. Israeli legislation enacted in 1997 amended
certain environmental laws by authorizing the relevant administrative and
regulatory agencies to impose sanctions on non-complying parties, including
issuing an order against any person that violates environmental laws to remove
the environmental hazard. In addition, these laws impose criminal liability on
the officers and directors of a corporation that violates environmental-related
laws, and increases the monetary sanctions that such officers, directors and
corporations may be ordered to pay as a result of such violations. We have
established worker safety programs and procedures in our plants, which we
believe are reasonable under the circumstances. We believe that our experience
relating to worker accidents is generally consistent with industry-wide
experience. Furthermore, we believe that we are not currently subject to
material liabilities for non-compliance with applicable environmental, health
and safety laws, although there is a risk that legislation enacted in the
future could create liabilities for past activities undertaken in compliance
with then-current laws or regulations. In addition, we may be held liable for
environmental damage of which we are not presently aware.
In addition to the specific matters described below, at a number of
locations at which certain of the businesses have conducted manufacturing
operations for many years, it is possible that contamination may exist as a
result of on-site waste disposal, spills, use of wastewater treatment ponds, or
other historical practices. While in recent years, industrial solid wastes
generally have been disposed of at a central State-authorized disposal facility
in Ramat Hovav, this central facility was not available to Israeli industry
during earlier periods of our operations. It is unclear whether any existing
conditions on any property owned by us will require significant redemption or
cleanup in the future, and we cannot speculate about the timing or potential
costs associated with any such cleanup. It is possible, however, that material
expenditures could be required with respect to these past practices.
In recent years, the operations of our businesses have become subject
to increasingly stringent legislation and regulation related to occupational
safety and health, product registration and environmental protection. Such
legislation and regulations are complex and constantly changing, and there can
be no assurance that such regulatory changes in the future will not require us
to make significant capital expenditures to modify, supplement or replace
equipment, or to change methods of disposal or discharge, or the manner in
which we manufacture products or operate our businesses. In Israel, in
particular, we anticipate that increasingly stringent requirements will result
in substantial expenditures, particularly for improvements of environmental
controls at older facilities. We have generally adopted, or intend to adopt in
our
41
newer facilities, environmental control standards comparable to those set by
the German Technische Anleitung Luft air emission regulations. These
regulations set forth strict controls on air emissions from industrial
facilities. The Israeli government has looked to these standards as a basis for
upgrading its air pollution requirements and has applied the standards to some,
but not all, facilities in Israel.
We regularly incur capital expenditures and operating costs to comply
with various environmental, health and safety laws and regulations. The costs
related to environmental matters may increase significantly in the future if
the implementation of new environmental standards in Israel is more rapid or
stringent than currently anticipated by us, or if contemplated pollution
control measures do not achieve the desired results.
Agrochemical Industry
The distribution and use of agricultural chemical products, including
crop protection chemicals such as those produced by the agrochemicals business,
are regulated in most parts of the world, and require extensive testing,
quality control and compliance with registration procedures. The strictest
standards are applied in the United States, where the Environmental Protection
Agency, or EPA, is the leading regulator, and in Japan and Western Europe. The
granting of a registration involves consideration of health, safety and
environmental issues, as well as the performance and benefits of the product.
The registration for an agricultural chemical product in the U.S. and in
Western Europe is often subject to data call-in or process. Usually, updating
the registration necessitates the submission of additional data by the MA
Group, our agrochemical division. Re-registrations, which permit the continued
sales of pesticides for an additional period, are frequently granted as a
matter of course, subject to compliance during the term of the registration
period. While the MA Group is not aware of any immediate intent to cancel any
of its registrations, there can be no assurance that the MA Group will not face
a revocation process or encounter difficulties in renewing the registrations
for its products for additional periods.
From time to time, some of the MA Group's agrochemical products are
subject to legislative or other initiatives to curtail or regulate their use
due to environmental, health or safety concerns.
Registration expenses (according to US GAAP) for the MA Group in 2004
were $17 million compared to $12 million in 2003 and $33 million in 2002. The
registration expenditures decreased as compared to the registration
expenditures in 2002 as a result of MA Industries' purchase of several business
licenses and distribution rights for agrochemical products from Bayer during
2002. The MA Group believes that its registration expenditures in the future
will increase, based on the stricter standards that are expected to be applied
in countries where the MA Group sells its products and the likelihood that MA
Group will purchase additional products from competitor's on the agrochemical
industry. As a result of the foregoing developments and obligations, virtually
all of the MA Group's businesses in recent years have spent significant amounts
on operation and maintenance, as well as under capital programs to address
increasingly stringent requirements with respect to environmental, safety, and
health protection concerns.
42
Most of the manufacturing activities of the MA Group take place at the
two production facilities in Israel. The board of directors of MA Industries
appointed an Ecology Committee to receive regular reports from all the
subsidiaries where manufacturing takes place (Israel, Brazil, Colombia, Greece
and Spain). The subsidiaries control the environmental issues pertinent to
their particular products, which differ from site to site and from country to
country. The investment in meeting environmental standards amounted to about
$19 million in 2002, $23 million in 2003 and $24 million in 2004, and it is
estimated that the annual investment will be between $18 and $22 million in the
coming years, including expenditures as described below.
One of MA Industries' plants is located in the Ramat Hovav industrial
zone. The Ramat Hovav Industrial Council has been required to take intensive
action to prevent odor nuisances, the source of which is the evaporation ponds
in the Ramat Hovav industrial zone.
The industrial wastes of the plants, after pre-treatment at the
plants, are transferred to the responsibility of and for further treatment by
the industrial council. This arrangement has been in effect since the
industrial zone in Ramat Hovav was built at the end of the 1970s. In 1998-99
the council erected and operated a biological installation for industrial
wastes, to reduce the biological load of industrial wastes before piping them
to the evaporation ponds.
The industrial council was directed by the Ministry of Environmental
Protection to make arrangements to end the piping of the industrial wastes to
the evaporation ponds, no later than June 30, 2006. In addition, the Ministry
of Environmental Protection stated that on that date, the quality of the wastes
must meet a minimum level of Total Organic Carbons, Carbon Oxygen Demand and
Biological Oxygen Demand, or TOC, COD and BOD, respectively. The industrial
council adopted a significant resolution in principle to change its operations
so that each plant in the industrial zone is required to treat its own wastes
in order to reduce the biological load and attain new required standards.
Furthermore, the plants are required to reduce the plant BOD levels by June 30,
2006.
Each of MA Industries' plants in Ramat Hovav makes preparations to
treat its own wastes. In order to comply with the TOC, COD and BOD standards, a
biological treatment installation will have to be built, as well as additional
upstream pre-treatment installations. MA Industries has hired the professional
services of entities of proven experience in the chemicals industry in Germany
and Switzerland, and believes it can achieve the correct technological
solutions for an amount of between $30 million and $35 million. The short-term
requirements for BOD are currently being clarified and the options discussed,
between the plant, the industrial council and the Ministry for Environmental
Protection.
During recent years, the MA Group has invested consistently and
regularly in all its plants, in Israel and abroad, to improve standards
relating to the quality of the environment, and its plants have been awarded
the President's Prize as well as commendations from the Ministry for
Environmental Protection in the last few years. MA Industries is in compliance
with ISO-9001 and ISOP-14,001 (environment) and with OHSAS 18,000 (safety). The
production sites at Ramat Hovav and Ashdod in Israel have been operating in
compliance with ISO 14.001 since that standard was approved by the Israel
Institute of Standards in 1997. Compliance with the standard requires the
senior management to formulate an environment policy and develop a
43
program for its implementation. In addition, in 1998 the MA Group also adopted
the German standard Ta Luft (air pollution) at its Ramat Hovav and Ashdod
sites.
Over the past several years various tests have been performed by
different agencies to test the ground contamination in the Ramat Hovav area as
well as the area surrounding the subsidiary's premises in Be'er Sheva. As of
December 31, 2004, MA Industries' management did not expect a significant
impact with respect to MA Industries from implementation of the report's
recommendations, and, therefore, no provision has been included in the
financial statements.
In May 2004, a subsidiary of MA Industries owning plants at the Ramat
Hovav site, received notice of a change in the terms of its business license,
pursuant to which the plants were required to change the method used to treat
sewage from the existing treatment, and to do so independently through the
implementation of vaporization processes. These terms include demands that,
within a short period of time, the plants conduct research and development for
the purpose of customizing the process to the composition of each plant's
sewage, and later, to build a suitable facility. Additionally, formulation
processes are to be implemented, whereby the plants must present the Ministry
of Environmental Protection with a research and development program for the
purpose of implementing the process with respect to the sewage. At the same
time, the Ministry of Environmental Protection set January 1, 2008 as the date
by which the plants must treat the sewage in the requisite format and to stop
the flow of sewage into the Ramat Hovav Industrial Council's vaporization pools
and treatment facilities.
On October 10, 2004, a subsidiary of MA Industries, together with the
Israel Manufacturers Association and other companies, filed an administrative
appeal with the Beer Sheba District Court against the Ministry of Environmental
Protection. The subject of the appeal is the additional conditions for
obtaining a business license described above. In the appeal, the District Court
was asked to issue an order declaring that the additional terms are nullified.
In March 2005 the Court approved the mutual agreement of the parties to try to
end the dispute by way of meditation.
In the estimation of MA Industries' management, based on advice of its
legal counsel, in view of the preliminary stage of the process, it is not
possible at this time to estimate the prospects of the mediation. In the
estimation of MA Industries' management, if the appeal is dismissed, it will
have a material effect on the activities of the plant in Ramat Hovav and/or
will require investments of amounts that MA Industries' management is unable to
estimate at this time.
On November 28, 2004, the Israeli government reached a decision
approving a plan to reduce air and water pollution deriving from the Ramat
Hovav industrial area. The plan calls for, among other things, (i) more
restrictive rules regarding the treatment of sewage by the plants in the area
(derived from the additional business license conditions that are the subject
of the administrative appeal described above) to be complied with in two
stages, the first by June 30, 2006 and the second by December 31, 2007; (ii)
the drying and rehabilitation of the vaporization pools in the area by the
Ramat Hovav Industrial Council, to be completed no later than December 31,
2012; and (iii) the formulation and implementation by the Ministry of
44
Environmental Protection of a plan to prevent exceptional emission of hazardous
materials into the air from the Ramat Hovav industrial area.
In the estimation of MA Industries' management, based on advice from
its legal counsel, in view of the preliminary stage of the process, it is not
possible at this time to estimate the costs of complying with the Israeli
government's plan.
In November 2004 the Board of Directors of MA Industries approved a
master plan for investments in environmental matters as they relate to the
manufacturing sites in Israel. This included approval of investments of
approximately $60 million during the period from 2005 through 2008, the
implementation of which will depend on numerous factors, such as environmental
conditions and technology feasibility studies for the sites), some of which are
beyond MA Industries' control and there is therefore no certainty that they
will take place.
In August 2003, a criminal complaint was filed against MA Industries
and one of its officers by the Man, Nature and Law Foundation. The complaint
alleges that in several instances from 1999 to 2003, there were measurements at
MA Industries' Ramat Hovav plant of chimney emissions of materials at
prohibited concentrations, and that such emissions created strong air
pollution. MA Industries believes the charges in the complaint are without
merit and intends to defend itself against such charges. In the opinion of MA
Industries' management, based on advice from its legal counsel, due to the
early stage of the proceedings, it is not possible to estimate the outcome of
the complaint and/or the resultant exposure. Therefore, the financial
statements did not include a provision in respect of the proceedings.
Defense and Government Contracts
Our businesses which sell products to military and governmental
markets are subject to various statutes, regulations and administrative rules
governing defense and government contracts and the manufacture and sale of
defense products in the United States, Israel and other countries throughout
the world.
Defense electronics subsidiaries export a number of military systems
and products in accordance with the military export policy of the State of
Israel. Current Israeli policy encourages exports to approved customers of
military systems and products similar to those manufactured by us, provided
that such exports do not run counter to Israeli Government policy, including
national security considerations. A permit is required to initiate a sale
proposal and an export license is necessary for the actual sale transaction. To
date, we have not encountered significant difficulties in obtaining or
retaining the necessary permits or licenses, but no assurance can be given that
we will continue to be able to obtain or retain such permits or licenses or
that one or more permits or licenses will not be revoked, or that governmental
policy with respect to military exports will not be altered. Difficulties in
obtaining or retaining such permits or licenses, if encountered in the future,
could have a material adverse effect upon our business.
In addition, the revocation of a required permit or license, after
having been granted, would likely preclude us from fulfilling our contractual
obligations. In such a case, we might be unable to assert the defense of force
majeure (or a similar defense) relating to any resulting
45
breach of contract claim and might therefore be held liable for damages, or
subject to other penalties. Substantial damages arising from such a claim could
have a material adverse effect upon our results of operations and financial
condition. In addition, suspension or disbarment of us as a government
contractor is among the possible penalties that could be imposed for defaulting
on a contractual obligation due to the revocation of a license.
Joint Ventures, Subcontracting and Teaming Arrangements
Several of our military projects are conducted through joint ventures,
subcontracting and other "teaming" arrangements pursuant to which we are
responsible for a portion, but less than all, of a project. In certain
instances, we are not permitted to participate, or even assist, in portions of
projects for which we are not responsible. Notwithstanding the foregoing, in
the event of a termination of, or a default under, certain prime contracts or
subcontracts (whether or not we are a party to such prime contract or
subcontract), including a termination for cause or convenience or a default on
the part of a joint venture partner, prime contractor, subcontractor or
"teaming" partner (for which termination or default neither we nor such other
person is responsible and which termination or default may be beyond our
control and such other person's control), we might be held liable for damages,
or subject to other penalties, which could be very substantial and might have a
material adverse effect on our results of operations and financial condition.
Moreover, certain joint ventures, subcontracting or other "teaming" agreements
to which we are a party, deny or limit the right of the non-defaulting party to
seek damages or indemnification from the defaulting party in such
circumstances.
Contract Financing
There are various types of financing terms applicable to defense
contracts (and in some cases, large telecommunications contracts). In some
cases, we receive progress or milestone payments according to the percentage of
progress in our performance or the achievement of specific milestones. In
certain cases, work is performed prior to receipt of any payment, which means
that we finance the project. In other cases, we receive advance payments prior
to incurring the costs of fulfilling a contract, which creates a positive
project cash flow. In this latter case, the customer normally requires
financial guarantees against advance payments. We often receive substantial
advances from our customers. In the event that a contract under which an
advance has been paid is canceled, we may be required to return all or a
portion of such advances to the customer.
Fixed Price Contracts
Approximately 90% of our defense contracts are made on a fixed price
basis. Such contracts are subject to the risk that actual costs may exceed
those anticipated at the time the contracts are executed, particularly when the
products to be sold pursuant to the contracts require a substantial amount of
development.
46
Organizational Structure
The following is a list of all of our significant subsidiaries and
affiliates as of December 31, 2004, including the name, country of
incorporation or residence, proportion of ownership interest and, if different,
proportion of voting power held.
Country of Percentage Percentage of voting
Incorporation or of ownership power (if different
Name of Subsidiary/Affiliate residence interest from ownership)
--------------------------------- ---------------- ------------ --------------------
Koor Corporate Venture Capital Israel 100% N/A
Elisra Electronic Systems Ltd. Israel 70% N/A
Makhteshim-Agan Industries Ltd. Israel 38.6%(1) N/A
Tadiran Communications Ltd. Israel 30.8%(2) N/A
ECI Telecom Ltd. Israel 30.2% N/A
Telrad Networks Ltd. Israel 80.5% N/A
ECtel Ltd. Israel 12.9% N/A
Sheraton Moriah (Israel) Ltd. Israel 55.0% N/A
Knafaim-Arkia Holdings Ltd. Israel 9.2% N/A
Koor Trade Ltd. Israel 100% N/A
______________________
(1) As a result of our sale of 15.9 million shares of MA Industries on
February 3 ,2005 and the issuance of additional shares by MA Industries in
the second quarter of 2005 upon the conversion of convertible debentures
and the exercise of stock options including employee stock options, our
interest in MA Industries decreased to approximately 32.0% as of June 30,
2005 (approximately 28.6% on a fully diluted basis taking into
consideration the exercise of outstanding stock options and the conversion
of outstanding convertible debentures).
(2) Fully diluted, taking into consideration the exercise of outstanding stock
options. As a result of our sale of shares in April 2005, our interest in
Tadiran Communications decreased to 18.6%. See "Our Defense Electronics
Business - Recent Developments" above.
Property, Plants and Equipment
Our headquarters are located in 2,785 square feet of leased office
space on the top floor of the Telrad building at 14 Hamelacha Street, Rosh
Ha'ayin, Israel.
We own an aggregate of 18,000 square feet of office space in the
Platinum Building in Tel Aviv, where our headquarters were previously located.
We purchased this facility in 1998 and since January 1, 2004, this property has
been sublet in its entirety.
The manufacturing facilities of our subsidiaries and affiliates are
located throughout Israel. Major concentrations are in the Be'er Sheva/Ramat
Hovav area in the south of Israel and the Tel Aviv-Petach Tikva-Lod-Ashdod area
in the central part of Israel. We own our major manufacturing plants,
facilities, machinery and equipment. In addition, we lease certain
manufacturing and office facilities.
Most of the industrial land utilized by us is under 49-year leases
from the Israel Lands Authority with options for an additional 49 years in a
significant number of cases. Land rent on
47
uncapitalized leases is generally equal to 4% of the value of the land per
annum and is subject to revaluation every seven years.
Item 5. Operating and Financial Review and Prospects.
---------------------------------------------
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this annual report. Our financial
statements have been prepared in accordance with Israeli GAAP, which differ in
significant respects from U.S. GAAP. See Note 28 to our consolidated financial
statements, included elsewhere in this annual report, for a description of the
principal differences between Israeli GAAP and U.S. GAAP as they relate to us.
In accordance with amendments to Israeli GAAP published in October
2001 and December 2002, our financial statements for the year ended December
31, 2004 are no longer adjusted to reflect the effects of inflation. For all
financial reporting periods until December 31, 2003, Israeli GAAP required that
our consolidated financial statements recognize the effects of inflation.
Consequently, financial data for all periods until December 31, 2003 in our
consolidated financial statements and throughout this annual report, except as
otherwise noted, have been adjusted to reflect changes in the Israel consumer
price index, or CPI, and have been restated in NIS in terms of the purchasing
power as of December 31, 2003. The financial statements of the MA Group, the
Elisra Group, Knafaim and ECI are prepared in dollars, the functional currency
of these companies, which are then translated into NIS using the exchange rate
prevailing at the end of the period for balance sheet items and the exchange
rate prevailing on the transaction date for income and expense items. See Notes
2B and 2D to our consolidated financial statements included elsewhere in this
annual report.
Transactions among our subsidiaries and transactions between our
company and our subsidiaries are entered into on an arm's-length basis and, in
management's opinion, generally on terms no less favorable than those available
from third parties.
The following discussion may contain forward-looking statements that
involve risks and uncertainties. Our actual results may differ significantly
from those projected in the forward-looking statements. Factors that might
cause future results to differ significantly from those projected in the
forward-looking statements include, but are not limited to, those discussed
below and elsewhere in this annual report, particularly those described above
under Item 3, "Key Information - Risk Factors."
Critical Accounting Policies
Our consolidated financial statements included elsewhere in this
annual report have been prepared in accordance with Israeli GAAP, which differ
in significant respects from U.S. GAAP. See Note 28 to our consolidated
financial statements, included elsewhere in this annual report, for a
description of the principal differences between Israeli GAAP and U.S. GAAP as
they relate to us.
Pursuant to our application of Israeli GAAP, we have identified below
accounting policies critical to understanding the overall financial reporting
of Koor. A more complete
48
discussion of the significant accounting policies which we follow in preparing
our financial statements is set forth in Note 2 to our financial statements
included elsewhere in this annual report.
In addition, the preparation of our financial statements requires us
to make estimates, judgments and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. On a regular basis, we evaluate and
may revise our estimates. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities, that are not readily apparent.
Some of those judgments can be complex, and consequently, actual results may
differ from those estimates. For any given individual estimate, judgment or
assumption made by us, there may be alternative estimates, judgments or
assumptions, which are also reasonable. The following discussion of our
critical accounting policies includes references to several critical accounting
policies that are impacted significantly by judgments, assumptions and
estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Our revenue recognition policy is significant because our revenue is a
key component of our results of operations. We follow very specific and
detailed guidelines, several of which are discussed below, in measuring
revenue. However, such guidelines may require the exercise of certain
judgments, estimates and assumptions.
Revenues from product sales and services rendered are recognized upon
delivery of the products and/or when the economic risk of loss passes to the
customer, or upon performance of the services. In special contracts, revenues
from product sales are recognized after performing the work and passing
acceptance tests, as provided in the applicable product delivery contract.
Revenues and costs from work in progress under long-term contracts are
recognized by the "percentage of completion" method, if the following
conditions are met:
o the revenues are known or can be reliably estimated;
o the collection of revenues is expected;
o the costs involved in carrying out the project are known or can be
reliably estimated;
o there is no material uncertainty as to the ability to complete the
project and to meet the terms of the contract with the customer; and
o the percentage of completion may be reliably estimated.
If any of these conditions are not met, revenues are recognized at an
amount equal to the costs incurred and the recovery of which is expected.
The percentage of completion is determined based on the cost (actual
cost vs. projected total cost) or based on the delivery of products, depending
on the nature of the agreement.
49
Revenues and costs from government contracts, which are based on cost
plus a fixed margin, are recognized on an accrual basis.
In the event that we anticipate a loss on a particular contract, such
anticipated loss is provided for in full.
Projected earnings or losses from long-term contracts could change as
a result of changes in estimates, between the actual performance and the
original estimate. Such changes in estimates are charged to the statement of
operations when identified.
Inventories
Inventories are stated at the lower of cost or market value. Cost for
raw materials, auxiliary materials and spare parts is determined at average
cost or by the "first-in, first-out" method. Cost for finished goods and goods
in process is determined primarily on the basis of direct manufacturing costs
and, in part, on the basis of average manufacturing costs with the addition of
indirect manufacturing costs. Cost for merchandise is determined by the
"first-in, first-out" method or by the "moving average method." In determining
inventory value, we make assumptions as to the market value of inventory. If
there is a sudden and significant decrease in demand for our products or there
is a higher risk of inventory obsolescence because of a rapidly changing
technology and customer requirements, we may be required to increase our
inventory allowances and our gross margin could be adversely affected.
Investments in Non-consolidated Subsidiaries and Affiliates
Our investments in our non-consolidated subsidiaries and affiliates
are presented using the equity method. Since January 1, 2004 we have applied
IASB Accounting Standard No. 20 - "Goodwill amortization", according to which
goodwill arising from the acquisition of equity in a non-consolidated
subsidiary or affiliate is generally amortized at equal annual rates over a
period of 10 to 20 years commencing from acquisition date. See also "Intangible
Assets and Deferred Expenses" below.
From time to time we review our investments in our non-consolidated
subsidiaries and affiliates to identify whether there has been a decrease in
the value of such investments which is not of a temporary nature. We would
conduct such reviews when there are signs that the value of permanent
investments has been harmed, including a drop in stock market prices, the
subsidiary's or affiliate's sequential loss, the segment in which the
subsidiary or affiliate operates, the value of the goodwill aggregated in the
investment and other parameters. Following management's assessment of all the
relevant factors that are not of a temporary nature, we may make appropriate
provisions for the adjustment of the value of these investments, which would be
reflected in our consolidated statement of operations.
Since January 1, 2003, we have applied IASB Accounting Standard No. 15
- "Impairment In value of Assets," or Standard No. 15, to ensure that our
assets in the consolidated balance sheet are not stated at an amount exceeding
their recoverable value, which is the higher of the net sales price and the
usage value, which is the present value of the estimated future cash flows
expected to derive from the use and realization of the asset. Standard No. 15,
which is
50
based on International Accounting Standard No. 36, applies to all of our assets
in the consolidated balance sheet, except for tax assets and monetary assets.
Likewise, Standard No.15 prescribes the presentation and disclosure principles
for assets that have declined in value. When the carrying value of an asset in
the consolidated balance sheet exceeds its recoverable amount, we recognize an
impairment loss equal to the difference between the book value of the asset and
its recoverable value. A loss in recognized in this manner will be reversed
only if changes have occurred in the estimates used in determining the
recoverable value of the asset, from the date on which the last impairment loss
was recognized.
Intangible Assets and Deferred Expenses
Intangible assets are amortized over the estimated period of the
economic benefit provided by the particular asset. We assess the recoverability
of these intangible assets periodically by determining whether unamortized
capitalized costs do not exceed the net realizable value of the particular
asset. Licensing of products and acquisition of know-how are stated at cost and
are mostly amortized over 8 years. Marketing rights are stated at cost and
amortized over periods of 5 to 10 years. Intangible assets in the purchase of
products are stated at cost and are mainly amortized over 20 years. Since
January 1, 2004 we have applied IASB Accounting Standard No. 20 - "Goodwill
amortization", according to which goodwill deriving from acquisitions or
investments is amortized over the period of economic benefit at equal annual
rates over a period of 10 to 20 years commencing from the acquisition date.
Non-compete and confidentiality agreements are mostly amortized over 5 years.
Deferred expenses relating to debenture issuance costs are amortized
using the straight-line method over the life of the debentures, which is
usually six years.
Recently Issued Accounting Pronouncements in Israel
In July 2004, the IASB published Accounting Standard No. 19, "Taxes on
Income," or Standard 19, which prescribes that a deferred tax liability is to
be recognized for all temporary differences that are taxable, except for a
limited number of exceptions. Likewise, a deferred tax asset is to be
recognized for all temporary differences that are deductible, losses for tax
purposes and unutilized tax benefits, if it is expected that there will be
taxable income against which it will be possible to utilize them, except for a
limited number of exceptions. Standard No. 19, which applies to financial
statements beginning on January 1, 2005, was adopted as the cumulative effect
of a change in accounting method. Our annual financial statements as of
December 31, 2004 includes footnote disclosure regarding the anticipated effect
of the first-time application of Standard No. 19 of an increase in net earnings
of NIS 19 million, primarily due to the recording of deferred taxes in an
investee for intercompany revenues. However, as a result of a reexamination of
Standard No. 19 by the investee, regarding the creation of deferred taxes for
unrealized intercompany sales, the investee's management reached the conclusion
that continuing to apply the "deferral approach," whereby it would continue to
allocate taxes to this income based on the tax rate applicable to the seller
company, is consistent with the provisions of Opinion No. 57 of the Institute
of Certified Public Accountants in Israel. Accordingly, our first-time
application of Standard No. 19 during the first quarter of 2005 had a one-time
cumulative effect, as at January 1, 2005, of reducing our net earnings for the
year ended December 31, 2004 by approximately NIS 3
51
million, as a result of the revised application of Standard No. 19 by the
investee as described above.
Impact of Devaluation on Results of Operations and on Monetary Assets and
Liabilities
The following table sets forth, for the periods indicated, certain
information with respect to the rate of inflation in Israel, the rate of
devaluation of the NIS in relation to the dollar and the rate of inflation in
Israel adjusted for the NIS-dollar devaluation:
Israeli Israeli Closing Exchange Annual Annual Inflation
Year Ended Consumer Inflation Rate of the Devaluation Adjusted for
December 31, Price Index (1) Price Rate (2) Dollar (3) Rate (4) Devaluation (5)
----------- --------------- -------------- ---------------- ----------- ----------------
2000 168.53 0.0 NIS 4.041 (2.7) 2.8
2001 170.91 1.4 NIS 4.416 9.3 (7.2)
2002 182.01 6.5 NIS 4.737 7.3 (0.7)
2003 178.58 (1.9) NIS 4.379 (7.6) 6.2
2004 180.74 1.2 NIS 4.308 (1.6) 2.8
__________________
(1) For purposes of this table, the CPI figures use 1993 as the base equal to
100. These figures are based on reports of the Israel Central Statistics
Bureau.
(2) Annual inflation is the percentage change in the CPI in Israel between
December of the year indicated and December of the preceding year.
(3) Closing exchange rate is the rate of exchange between the NIS and the
dollar as of December 31 of the year indicated, as reported by the Bank of
Israel.
(4) Annual devaluation is the percentage increase in the value of the dollar
in relation to the NIS during the year indicated.
(5) Annual inflation adjusted for devaluation is obtained by dividing the
Israeli inflation rate (column 2 plus 1) by the annual devaluation rate
(column 4 plus 1), minus 1.
Since most of our operations are based in Israel, we incur significant
expenses in NIS, which expenses are usually linked, wholly or partially, to
changes in the CPI.
The relationship between our monetary assets and liabilities, and the
extent to which these are linked to a particular currency or price index,
affects our financial results. In the event of a devaluation of the NIS in
relation to the dollar, we would report a financial expense to the extent that
our dollar-denominated or dollar-linked monetary liabilities exceed our
dollar-denominated or dollar-linked monetary assets or, conversely, we would
report financial income if our dollar-denominated or dollar-linked monetary
assets exceeded our dollar-denominated or dollar-linked monetary liabilities.
On December 31, 2004, the excess of our foreign currency denominated or linked
monetary liabilities over our foreign currency denominated or linked monetary
assets was NIS 1,773 million (the majority of which was dollar-denominated or
dollar-linked).
In addition, we and certain of our subsidiaries have entered into
financial agreements with major Israeli banks and other financial institutions
in order to reduce the overall exposure of assets and liabilities denominated
in foreign currencies, and commitments for the purchase of raw materials and
the sale of goods in currencies other than the dollar arising from foreign
currency exchange rates. Such agreements include forward sales, purchase
contracts, sale
52
options and swap transactions. For more details regarding the balance of our
hedging agreements as of December 31, 2004, see Note 21 to our consolidated
financial statements included elsewhere in this annual report. The caption
"Financing expenses, net" in our consolidated financial statements includes the
impact of these factors on monetary assets and liabilities, as well as regular
interest expense.
53
Results of Operations
The following tables summarize certain recent financial information relating to
each of our businesses. The tables are prepared on the same basis as that
utilized in our consolidated financial statements included elsewhere in this
annual report.
Translation
CPI - adjusted NIS as of December 2003/2002 into 2004/2003
31, 2003 Changes NIS Dollars Changes
------------------------------------ --------- ----------------- ----------- ---------
2002 % 2003 % % 2004 % 2004 %
--------- ------ --------- ------ --------- --------- ------ ----------- ---------
(In (In (In (In
thousands) thousands) thousands) thousands)
REVENUES FROM SALES AND
SERVICES
Telecommunication equipment 814,108 11.47 796,059 10.35 (2.22) 615,057 6.66 142,771 (22.74)
Defense electronics 1,687,551 23.77 1,286,432 16.73 (23.77) 1,165,998 12.63 270,659 (9.36)
Agrochemicals 4,140,471 58.32 5,191,913 67.51 25.39 6,895,238 74.72 1,600,566 32.81
Other 457,660 6.44 416,026 5.41 (9.10) 552,380 5.99 128,222 32.78
--------- ------ --------- ------ --------- --------- ------ ----------- ----------
Total 7,099,790 100 7,690,430 100 8.32 9,228,673 100 2,142,218 20.00
========= ====== ========= ====== ========= ========= ====== =========== ==========
OPERATING EARNINGS (LOSS):
Telecommunication equipment (178,623) (34.43) 3,158 0.34 (101.77) (64,491) (5.02) (14,970) (2142.15)
Defense electronics 78,853 15.2 (4,294) (0.46) (105.45) 30,865 2.40 7,164 (818.79)
Agrochemicals 658,507 126.93 949,290 102.61 44.16 1,312,534 102.10 304,674 38.26
Venture capital investments (7,894) (1.52) (1,445) (0.16) (81.69) (1,457) (0.11) (338) 0.83
Other (32,062) (6.18) (21,536) (2.33) (32.83) 8,030 0.63 1,864 (137.29)
--------- ------ --------- ------ --------- --------- ------ ----------- ----------
Total 518,781 100 925,173 100 78.34 1,285,481 100 298,394 38.94
Joint general expenses (38,917) (28,888) (25.77) (42,695) (9,911) 47.79
--------- --------- --------- --------- ----------- ----------
Total operating earnings 479,864 896,285 86.78 1,242,786 288,483 38.66
========= ========= ========= ========= =========== ==========
CAPITAL EXPENDITURES:
Telecommunication equipment 15,554 1.19 7,173 2.25 (53.88) 21,015 2.39 4,878 192.97
Defense electronics 45,753 3.48 28,210 8.85 (38.34) 21,408 2.44 4,969 (24.11)
Agrochemicals 1,241,091 94.53 277,195 86.94 (77.67) 816,287 92.90 189,482 194.48
Other 10,464 0.8 6,262 1.96 (40.16) 19,991 2.27 4,641 219.24
--------- ------ --------- ------ --------- --------- ------ ----------- ----------
Total 1,312,862 100 318,840 100 (75.71) 878,701 100 203,970 175.59
CORPORATE ASSETS 108 392 262.96 423 98 7.91
--------- --------- --------- --------- ----------- ----------
1,312,970 319,232 (75.69) 879,124 204,068 175.39
========= ========= ========= ========= =========== ==========
EXPORTS OF KOOR PRODUCTS BY
BUSINESSES (1)
Telecommunication equipment 695,962 13.49 721,957 12.23 3.74 569,701 8.20 132,243 (21.09)
Defense electronics 1,056,968 20.49 760,964 12.89 (28.01) 549,440 7.91 127,539 (72.20)
Agrochemicals 3,404,650 66.02 4,419,795 74.88 29.82 5,828,607 83.89 1,352,973 31.88
--------- ------ --------- ------ --------- --------- ------ ----------- ----------
Total 5,157,580 100 5,902,716 100 14.45 6,947,748 100 1,612,755 17.70
========= ====== ========= ====== ========= ========= ====== =========== ==========
REVENUES FROM SALES AND
SERVICES BY DESTINATION (2)
North America 1,125,915 15.86 1,152,009 14.98 2.32 1,542,409 16.71 358,034 33.89
Europe 1,864,012 26.26 2,473,635 32.17 32.70 3,150,853 34.14 731,396 27.38
South America 1,213,485 17.09 1,670,256 21.72 37.64 2,056,261 22.28 477,312 23.11
Asia and Australia 1,123,387 15.82 1,050,873 13.66 (6.45) 842,986 9.13 195,679 (19.78)
Africa 228,632 3.22 323,206 4.20 41.37 256,010 2.77 59,427 (20.79)
Israel 1,544,359 21.75 1,020,451 13.27 (33.92) 1,380,154 14.96 320,370 35.25
--------- ------ --------- ------ --------- --------- ------ ----------- ----------
Total 7,099,790 100 7,690,430 100 8.32 9,228,673 100 2,142,218 20.00
========= ====== ========= ====== ========= ========== ===== =========== ==========
____________________________
(1) Including foreign industrial operations.
(2) Destination to which shipment is made.
54
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
The following is an analysis of our consolidated results of
operations, followed by an analysis of the results of operations of each of our
businesses.
Revenues from sales and services. Revenues from sales and services
increased 20.0% to NIS 9,229 million in 2004 compared to NIS 7,690 million in
2003. The increase was mainly due to an increase of NIS 1,703 million in MA
Industries' revenues and a slight increase in the revenues of Sheraton Moriah
and Isram (NIS 121 million), partially offset by decreases in the revenues of
Telrad (NIS 186 million) and the Elisra Group (NIS 120 million).
Export and international operations, representing 85% of our net
revenues in 2004, increased 17.7% in 2004 compared to 2003, primarily as a
result of a NIS 1,620 million increase in MA Industries' exports , partially
offset by decreases in the exports of Telrad (NIS 171 million) and the Elisra
Group (NIS 212 million).
Gross profit. Gross profit increased 28.0% to NIS 2,941 million in
2004 compared to NIS 2,297 million in 2003. The increase in gross profit was
primarily attributable to improved profits at MA Industries (NIS 680 million),
partially offset by a decrease in the gross profit of Telrad (NIS 119 million).
Gross profit as a percentage of revenues was 31.9% in 2004 compared to 30.0% in
2003.
Operating earnings. Operating earnings increased 38.7% to NIS 1,243
million in 2004 compared to NIS 896 million in 2003. The increase in operating
earnings was mainly due to an increase in the operating earnings of MA
Industries (NIS 363 million), partially offset by Telrad's operating loss.
Operating earnings as a percentage of revenues was13.5% in 2004 compared to
12.0% in 2003.
Financing expenses, net. Financing expenses, net were NIS 271 million
in 2004 compared to NIS 228 million in 2003. Despite the decrease in our
consolidated net debt, financing expenses increased in 2004 compared to 2003
due to the impact of the increase in the CPI on our CPI-linked long-term loans
following the discontinuation of the adjustment of our financial statements for
inflation as of January 1, 2004.
Other income (expenses), net. Other expenses, net, amounted to NIS 79
million in 2004 compared to NIS 220 million in 2003. Other expenses, net, in
2004 included:
o Capital gains of NIS 223 million from sale of investments, mainly the
sale of 7% of our equity interest in MA Industries and the sale of 19%
of our equity interest in Knafaim. In 2003 we recorded capital gains
of NIS 33 million from the sale of investments, mainly from the sale
by Telrad of certain investments, and our sale of 2.6% of our equity
interest in MA Industries;
o Impairment in the value of investments and assets of NIS 73 million,
including a NIS 58 million impairment of Koor CVC's investments. In
2003, we recorded an impairment in the value of investments and assets
of NIS 107 million, including a NIS 72 million impairment of Koor
CVC's investments;
55
o Provision for severance compensation of NIS 54 million, primarily at
MA Industries (NIS 22 million) and Telrad (NIS 24 million), compared
to NIS 28 million in 2003; and
o Goodwill amortization and write-off of NIS 136 million, primarily at
MA Industries (NIS 131 million) and Elisra (NIS 4 million), compared
to NIS 119 million in 2003.
Income tax. Income tax recorded in 2004 amounted to NIS 287 million
compared to NIS 85 million in 2003. The increase was mainly due to increases of
NIS 84 million and NIS 21 million in the tax expenses of MA Industries and
Elisra, respectively, as well as an increase of NIS 42 million in the tax
expense of Telrad, mainly as the result of the impairment of a deferred tax
asset. In addition, tax expenses at the parent company level increased by NIS
37 million, mainly due to the realization of a deferred tax asset, created in
2003 in connection with the sale of shares of MA Industries in 2004. Taxes on
income as a percentage of revenues in 2004 and 2003 were 3.1% and 1.1%,
respectively.
Group's equity in the operating results of affiliates, net. The
Group's equity in the operating results of affiliates, net in 2004 was a loss
of NIS 28 million compared to a loss of NIS 114 million in 2003. This item
mainly included the write-off of NIS 20 million of the purchase price of
Tadiran Communications allocated to in-process research and development, and
our equity share in the net loss of ECI in the amount of NIS 15 million,
compared with NIS 101 million in 2003. In 2004, our equity share in the
earnings of Knafaim was negligible, compared to a loss of NIS 11 million in
2003.
Minority interest in consolidated companies' results, net. Minority
interest in consolidated companies' results, net amounted to earnings of NIS
433 million in 2004 compared to earnings of NIS 203 million in 2003. The
increase was mainly due to MA Industries (NIS 191 million) and Telrad (NIS 26
million).
Net earnings (loss). For the reasons mentioned above, we reported net
earnings of NIS 145 million in 2004, compared to NIS 46 million in 2003.
Telecommunications Equipment Business
Year Ended December 31,
-----------------------------------------------
2003 2004 2004
------------- ------------- ----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 796,059 615,057 142,771
Operating earnings (loss)................... 3,158 (64,491) (14,970)
Revenues from sales and services from our telecommunication equipment
business decreased 22.7% in 2004 to NIS 615 million from NIS 796 million in
2003. The decrease was primarily due to a decrease of NIS 186 million in sales
of Telrad, continuing the decline in orders for new telecommunications
equipment that Telrad has experienced over the past few years. Telrad's
decrease in sales was partially offset by an increase of NIS 18 million in
sales of Microwave Networks Inc., a U.S. subsidiary.
56
Sales from our telecommunication equipment business attributable to
sales of telecommunication equipment to Nortel were NIS 232 million in 2004
compared to NIS 440 million in 2003, or 38% compared to 42% of total
telecommunication equipment business sales in 2004 and 2003, respectively.
Telecommunication equipment business exports amounted to NIS 570
million in 2004 compared to NIS 722 million in 2003. The decrease in export
sales resulted from Telrad.
Operating loss from our telecommunication equipment business was NIS
64 million in 2004 compared to operating earnings of NIS 3 million in 2003. The
operating loss in 2004 resulted from the decrease in Telrad's sales.
Defense Electronics Business
Year Ended December 31,
-----------------------------------------------
2003 2004 2004
------------- ------------- ----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 1,286,432 1,165,998 270,659
Operating earnings (loss) (4,294) 30,865 7,164
Revenues from sales and services from our defense electronics business
decreased 9.4% to NIS 1,166 million in 2004 from NIS 1,286 million in 2003
primarily as a result of a major reduction in the Israeli defense budget, as
well as a lag in new orders and delays by subcontractors.
Operating earnings from our defense electronics business amounted to
NIS 31 million compared to operating loss of NIS 4 million in 2003 primarily as
a result of reduction of costs due to implementation of efficiency measures in
2003.
Agrochemicals Business
Year Ended December 31,
-----------------------------------------------
2003 2004 2004
------------- ------------- ----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 5,191,913 6,895,238 1,600,566
Operating earnings.......................... 949,290 1,312,534 304,674
Revenues from sales and services from our agrochemicals business
increased 32.8% to NIS 6,895 million in 2004 from NIS 5,192 million in 2003, as
a result of increased sales of the MA group (see below). Approximately 93.3%
and 92.7% of the sales in 2004 and 2003, respectively, were made outside of
Israel.
The increase in the MA group's sales was primarily attributable to the
consolidation of newly acquired subsidiaries, sales of new products, increased
sales of existing products (mainly in Brazil), as well as the strengthening of
the Euro against the dollar.
57
Operating earnings from our agrochemicals business increased 38.3% to
NIS 1,313 million in 2004 from NIS 949 million in 2003 as a result of increased
sales and, to a lesser extent, as a result of the strengthening of primary
trading currencies against the Dollar partially offset by an increase in raw
material costs.
As of January 1, 2005 MA Industries will no longer be consolidated in
our financial statements, but will be accounted for according to the equity
basis. See Note 27(4) to the consolidated financial statements included
elsewhere in this annual report.
Venture Capital Business
Year Ended December 31,
-----------------------------------------------
2003 2004 2004
------------- ------------- ----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ -- -- --
Operating loss.............................. (1,445) (1,457) (338)
This segment was established for the first time in 2000, when we
established the Koor Corporate Venture Capital Partnership, or Koor CVC. As of
December 31, 2004, the book value of Koor CVC's investments in its start-up
companies, a venture capital fund and Scopus Network Technologies, or Scopus,
in which Koor CVC holds a 27% interest on a fully-diluted basis, totaled
approximately NIS 181 million ($42 million). During 2004, Koor CVC recorded NIS
58 million of provisions for the decline in value of several of its portfolio
companies. This expense was recorded in our consolidated financial statements
under the caption "Other income (expenses), net".
In 2004, Koor CVC received approximately $8.8 million in proceeds from
the sale of its holdings in its portfolio companies Riverhead Networks and
Envara. The gain to Koor CVC was NIS 17 million which was recorded in our
consolidated financial statements under the caption "Other income (expenses),
net".
Other Businesses
Year Ended December 31,
-----------------------------------------------
2003 2004 2004
------------- ------------- ----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 416,026 552,380 128,222
Operating earnings (loss)................... (21,536) 8,030 1,864
Revenues from sales and services from our other businesses increased
32.8% to NIS 552 million in 2004 from NIS 416 million in 2003. This increase
was primarily attributable to the increase in sales of Sheraton Moriah as a
result of the increase in tourism to Israel, as well as the increase in the
sales of Isram.
Operating earnings from other businesses were NIS 8 million in 2004,
compared to operating loss of NIS 22 million in 2003, mainly due to the
increase in sales of Sheraton Moriah.
58
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
The following is an analysis of our consolidated results of
operations, followed by an analysis of the results of operations of each of our
businesses.
Revenues from sales and services. Revenues from sales and services
increased 8.3% to NIS 7,690 million in 2003 from NIS 7,100 million in 2002. The
increase consists of a NIS 1,051 million increase in MA Industries' revenues
and a NIS 42 million increase in Telrad's revenues, which were partially offset
by decreases in the revenues of the Elisra Group (NIS 401 million), Tadiran
Electronic (NIS 68 million) and Sheraton Moriah (NIS 27 million).
Export and international operations, representing 87% of our net
revenues, increased 20.1% in 2003 compared to 2002, primarily as a result of a
NIS 1,015 million increase in MA Industries' exports due to improved prices of
agricultural commodities, good weather conditions in North America and Asia and
the improving South American economy (mainly Brazil), which were partially
offset by harsh weather conditions in Europe, the increasing market share of
genetically-engineered seeds and the strengthening of most currencies against
the dollar. The increase in exports was also partially offset by a NIS 296
million decline in Elisra's exports.
Gross profit. Gross profit increased 28.8% to NIS 2,297 million in
2003 from NIS 1,784 million in 2002. The increase in gross profit is primarily
attributable to improved profits at MA Industries (NIS 450 million) and Telrad
(NIS 180 million), which were partially offset by a decline in the gross profit
of Elisra (NIS 109 million). As a percentage of revenues, gross profit
increased from 25.1% in 2002 to 30.0% in 2003.
Operating earnings. Operating earnings increased 86.8% to NIS 896
million in 2003 from NIS 480 million in 2002. The increase in operating
earnings is mainly due to an increase in the operating earnings of MA
Industries (NIS 291 million) and Telrad (NIS 166 million), partially offset by
a decline in the operating earnings of Elisra (NIS 77 million). As a percentage
of revenues, operating earnings increased from 6.8% in 2002 to 12.0% in 2003.
Financing expenses, net. Financing expenses, net decreased 44.1% to
NIS 228 million in 2003 from NIS 408 million in 2002. The decrease in financing
expenses in 2003 is primarily attributable to the repayment of debt, primarily
at the parent company level, the depreciation of the dollar against the NIS and
a negative CPI.
The dollar cost of our operations in Israel is influenced by the
extent to which any increase in the rate of inflation in Israel is not offset
(or is offset on a lagging basis) by a devaluation of the NIS in against the
dollar. During 2003, the shekel was strengthened against the dollar by 7.6%
while the CPI decreased by 1.9%, compared to 2002, during which there had been
a devaluation of 7.3% of the shekel against the dollar while the CPI increased
by 6.5%.
Other income (expenses), net. Other expenses, net, amounted to NIS 220
million in 2003 compared to other income, net of NIS 6 million in 2002. Other
expenses, net, in 2003 included:
An NIS 33 million capital gain following the sale of investments,
mainly at Telrad and our sale of 2.6% of our equity interest in MA Industries.
In 2002 we recorded a capital gain of NIS
59
342 primarily resulting from the sale of 30% of Elisra's shares to Elta and the
partial sale of Tadiran's real-estate;
o A NIS 107 million impairment of investments and assets, which includes
an NIS 72 million impairment of Koor CVC's investments. In 2002, we
recorded an NIS 165 million impairment in the value of investments and
assets, including a NIS 93 million impairment of Koor CVC's
investments and an NIS 35 million charge following the impairment of
BVR Systems' goodwill;
o A NIS 28 million provision for severance compensation, primarily at MA
Industries (NIS 9 million) and Elisra (NIS 9 million), compared to a
NIS 127 million provision in 2002; and
o A NIS 119 million goodwill amortization and write-off, primarily at MA
Industries (NIS 112 million) and Elisra (NIS 4 million), compared to a
NIS 91 million write-off in 2002.
Transfer to statement of income of translation differences of
autonomous investee in voluntary liquidation. As a result of the liquidation of
Tadiran in March 2002, we recorded an expense of approximately NIS 391 million
due to the recognition of the cumulative foreign currency translation
adjustments to the value of our investment in Tadiran. We recorded this
expense, which was previously reflected as a decrease in shareholders' equity,
in accordance with Israeli GAAP, which provides that changes in the value of
investments in subsidiaries as a result of foreign currency adjustments are not
recognized until the sale or liquidation of the subsidiary. This accounting
entry did not have any effect on our net equity.
Income tax. Income tax decreased 40% to NIS 85 million in 2003 from
NIS 141 million in 2002. The decrease is primarily attributable to a NIS 58
million decline in Telrad's tax expense, a NIS 53 million decline in our tax
expense at the corporate parent level due to deferred tax from the sale of
shares of MA Industries, and a NIS 31 million decline in Elisra's tax expense.
These declines were partially offset by a NIS 60 million increase in MA
Industries' tax expense. Income tax as a percentage of revenues in 2003 and
2002 was 1.1% and 2.0%, respectively.
Group's equity in the operating results of affiliates, net. The
Group's equity in the losses of affiliates, net in 2003 totaled NIS 114 million
compared with NIS 252 million in 2002. This item includes mainly our equity
share in the net loss of ECI, in the amount of NIS 101 million (partially
offset by a reversal of a NIS 73 million write-down of our investment in ECI),
compared with NIS 246 million in 2002 (including a NIS 25 million write-down of
our investment in ECI), as well as our equity share in the losses of Knafaim,
in the amount of NIS 11 million in 2003, compared with insignificant amount in
2002.
Minority interest in consolidated companies' results, net. Minority
interest in consolidated companies' results, net amounted to NIS 203 million in
2003 compared with NIS 60 million in 2002. The increase in minority interest in
2003 derives mainly from MA Industries (NIS 122 million), Elisra (NIS 13
million) and Sheraton Moriah (NIS 12 million).
Net earnings (loss). As a result of the above factors, we reported net
earnings of NIS 46 million in 2003, compared to a net loss of NIS 767 million
in 2002.
60
Telecommunications Equipment Business
Year Ended December 31,
-----------------------------------------------
2002 2003 2003
------------- ------------- ----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 814,108 796,059 184,786
Operating earnings (loss)................... (178,623) 3,158 733
Revenues from sales and services from our telecommunication equipment
business decreased 2.2% in 2003 to NIS 796 million from NIS 814 million in
2002. The decrease was primarily due to a decrease in sales of MNI, a
subsidiary of TEI, by approximately $13.1 million (NIS 57 million) in 2003
compared to 2002, primarily as a result of decreased demand for its products,
which was only partially offset by an increase in Telrad's sales by NIS 42
million in 2003 compared to 2002, primarily as a result of a sale of $30
million in South America.
Sales from our telecommunication equipment business attributable to
sales of telecommunication equipment to Nortel were NIS 440 million in 2003
compared to NIS 423 million in 2002, or 55% compared to 52% of total
telecommunication equipment business sales in 2003 and 2002, respectively.
Telecommunication equipment business exports amounted to NIS 722
million in 2003 compared to NIS 696 million in 2002. The increase in export
sales resulted primarily in Telrad for the reasons discussed above.
Operating earnings (loss) in our telecommunication equipment business
improved from a NIS 179 million operating loss in 2002 to operating earnings of
NIS 3 million in 2003. The improvement resulted from the increase in sales at
Telrad combined with its significant cost reductions following its successful
reorganization.
Defense Electronics Business
Year Ended December 31,
-----------------------------------------------
2002 2003 2003
------------- ------------- ----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 1,687,551 1,286,432 298,615
Operating earnings (loss) 78,853 (4,294) (997)
Revenues from sales and services from our defense electronics business
decreased 23.8% to NIS 1,286 million in 2003 from NIS 1,688 million in 2002
primarily as a result of a major reduction in the Israeli defense budget. Sales
from our defense electronics business were also affected by BVR whose results
were not consolidated since June 2003 subsequent to the sale of the company,
and were consolidated for the entire year in 2002, and which accounted for
approximately NIS 123 million in sales in 2002.
61
Operating earnings (loss) from our defense electronics business
decreased to operating losses of NIS 4 million in 2003 from operating earnings
of NIS 79 million in 2002 primarily as a result of decrease in sales.
Agrochemicals Business
Year Ended December 31,
-----------------------------------------------
2002 2003 2003
------------- ------------- ----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 4,140,471 5,191,913 1,205,179
Operating earnings.......................... 658,507 949,290 220,355
Revenues from sales and services from our agrochemicals business
increased 25.4% to NIS 5,192 million in 2003 from NIS 4,140 million in 2002,
primarily as a result of increased sales of the MA group (see below).
Approximately 92.7% and 90.9% of the sales in 2003 and 2002, respectively, were
made outside of Israel, and approximately 26.2% and 27.9% of total sales in
2003 and 2002, respectively, were to South America.
The increase in the MA group's sales was primarily attributable to
sales of new products, and increases in sales of existing products, as well as
improved prices of agricultural commodities, good weather conditions in North
America and Asia and the improving South American economy (mainly Brazil).
These positive effects were partially offset by harsh weather conditions in
Europe, the increasing market share of genetically-engineered seeds and the
strengthening of most currencies against the dollar.
Operating earnings for our agrochemicals business increased 44.2% to
NIS 949 million in 2003 from NIS 659 million in 2002 as a result of increased
sales and the reduction of manufacturing expenses as a result of internal
restructuring and a decrease in raw material costs.
Venture Capital Business
Year Ended December 31,
-----------------------------------------------
2002 2003 2003
------------- ------------- ----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ -- -- --
Operating loss.............................. (7,894) (1,445) (335)
This segment was established for the first time in 2000, when we
established the Koor Corporate Venture Capital Partnership, or Koor CVC. As of
December 31, 2003, the book value of Koor CVC's investments in its start-up
companies, a venture capital fund and Scopus Network Technologies, or Scopus,
in which Koor CVC holds a 27% interest on a fully-diluted basis, totaled
approximately NIS 231 million ($54 million).
The decrease in operating loss in our venture capital business in 2003
compared to 2002 resulted primarily from a reduction in Koor CVC's operating
expenses.
62
Other Businesses
Year Ended December 31,
-----------------------------------------------
2002 2003 2003
------------- ------------- ----------------
(NIS in thousands) ($ in thousands)
Revenues from sales and services............ 457,660 416,026 96,571
Operating loss.............................. (32,062) (21,536) (4,999)
Revenues from sales and services from our other businesses decreased
9.1% to NIS 416 million in 2003 from NIS 458 million in 2002. This decrease was
primarily attributable to the decline in sales of Sheraton Moriah as a result
of the sharp decline of tourism in Israel due to increased hostilities in the
West Bank and Gaza.
Operating loss of our other businesses was NIS 22 million in 2003
compared to NIS 32 million in 2002, primarily due to the decrease in sales of
Sheraton Moriah.
Quarterly Results
The following table presents unaudited quarterly financial information
for each of the four quarters of the year ended December 31, 2004. Such
information has been prepared on the same basis as our consolidated financial
statements.
Quarter Ended Year Ended
--------------------------------------------------------- --------------
March June September December December
31, 2004 30, 2004 30, 2004 31, 2004 31, 2004
------------ ------------- ------------- ------------- --------------
(in millions of NIS)
Revenues from sales and services... 2,400 2,227 2,202 2,400 9,229
Gross profit....................... 780 686 708 767 2,941
Research and development, net...... 49 54 53 56 212
Operating earnings ................ 372 289 290 292 1,243
Net earnings....................... 94 20 14 17 145
Our operating results may be subject to significant fluctuations in
future periods. Our operating results for any particular quarter are not
necessarily indicative of any future results. Our quarterly operating results
may be subject to significant fluctuations due to various factors, including
the length of the sale cycles, the timing and size of orders and shipments to
customers, variations in distribution channels, mix of products, new product
introductions, competitive pressures and general economic conditions.
Recent Developments
Koor Industries Ltd.
--------------------
63
On February 3, 2005, we sold 15.9 million shares of MA Industries to
Merrill Lynch International for approximately NIS 374 million. The sale
generated a capital gain, before tax, of approximately NIS 201 million in the
first quarter of 2005. Additionally, as a result of the sale, we utilized a
deferred tax asset of approximately NIS 69 million that had been created in
2004, because of expectations to utilize carryforward tax losses. Under the
terms of the sale, we undertook not to sell additional shares of MA Industries
for a nine-month period from the date of sale. As a result of this sale, and
following the issuance by MA Industries of additional shares upon the
conversion of convertible securities and the exercise of employee stock
options, our ownership percentage in MA Industries decreased to 34% as of March
31, 2005 (28.6% on a fully diluted basis).
Following the sale of the shares in February 2005, we evaluated the
implication for continuing to consolidate MA Industries in our financial
statements, beginning from the first quarter of 2005. Based on an evaluation of
the range of circumstances created as a result of the February 2005 sale, we
decided that continuation of the consolidation of MA Industries is not
consistent with the economic substance. Therefore, beginning from the first
quarter of 2005, the consolidation of MA Industries in our financial statements
was discontinued, and our investment in MA Industries is accounted for
according to the equity method.
On April 10, 2005, as part of a private placement to Israeli
institutional investors, we issued NIS 400 million in aggregate principal
amount of debentures for NIS 400 million in cash, as well as 800,000 options
without consideration. The debentures bear annual interest at a rate of 3.75%,
linked to the CPI, which is paid on April 30 and October 31 of each year. The
debentures are required to be repaid in a balloon payment on April 30, 2010.
Each of the 800,000 options we issued in this transaction is exercisable for
one of our ordinary shares at an exercise price of NIS 300 and expires on April
30, 2010. We intend to register the ordinary shares we issue upon the exercise
of these options for trading on the Tel-Aviv Stock Exchange.
On April 15, 2005, we sold all the ordinary shares we held in treasury
(193,229 shares) to an overseas institutional investor for approximately NIS 50
million.
ECI Telecom
-----------
In February 2005, ECI entered into a preliminary agreement to sell all
of its long-term receivables to ABN Amro Bank for the sum of approximately $96
million in cash, plus potentially a further amount of approximately $3.3
million. In April 2005, the approvals for the sale were received and the
transaction was completed. As a result, during the second quarter of 2005, ECI
recognized a net gain of approximately $10.4 million (excluding additional
profit resulting from the contingent amount). Our equity in this gain is
approximately NIS 14 million.
On June 6, 2005, ECI announced that it completed the acquisition of
Laurel Networks, a provider of Next-Generation IP/MPLS Multi-Service Edge
Routers, which became ECI's Data Networking Division. ECI paid $88 million in
cash for Laurel. Laurel had approximately 150 employees, and the company's
sales for the twelve months ended April 30, 2005, totaled $18 million.
64
Effective Corporate Tax Rate
We do not file a consolidated tax return with our subsidiaries, and we
are taxed only on our own income. Most of our subsidiaries file their own tax
returns, based on their own taxable income. Our income tax obligations and our
Israeli subsidiaries' income tax obligations are based on profits determined in
nominal NIS for Israeli statutory purposes, adjusted for tax purposes, in terms
of end-of-year Israeli currency, in accordance with changes in the CPI. The tax
provision in our financial statements does not directly relate to income shown
on such statements. See Note 16 to our consolidated financial statements
included elsewhere in this annual report for the reconciliation between the
theoretical and actual tax expense. Non-Israeli subsidiaries are taxed based
upon tax laws in their respective countries of residence. The effective
corporate tax rate is affected mainly by tax benefits arising from reduced tax
rates applied to approved enterprises, utilization of tax loss carry forwards
for which no deferred taxes were recorded, the effect of the Inflationary
Adjustment Law on Israeli companies, whose functional currency is the dollar,
and the disallowance of provisions for anticipated losses from the sale of
assets. In 2004, we had a profit before taxes of NIS 893 million. See Note 16A
to our consolidated financial statements included elsewhere in this annual
report.
Liquidity and Capital Resources
We finance our corporate level activities principally through the
proceeds from divestitures, management fees and dividends we receive from our
subsidiaries and affiliates and through debt financing. In 2004 and 2003, we
received management fees in the amount of NIS 22 million and of NIS 25 million,
respectively. In addition, in 2004 and 2003 we received NIS 135 million and NIS
28 million, respectively, in distributions from subsidiaries and affiliates, of
which NIS 68 million and NIS 18 million, respectively, was received from
Makhteshim-Agan Industries Ltd., or MA Industries. Of the NIS 135 million in
distributions we received in 2004, NIS 67 million was received as a liquidating
distribution in respect of our wholly-owned subsidiary, Tadiran Ltd.
Our shareholders' equity at December 31, 2004 increased 7.8% to NIS
1,876 million, compared to NIS 1,740 million at December 31, 2003. The increase
in 2004 was primarily due to the increase in our net earnings.
Working capital at December 31, 2004 was NIS 1,086 million compared to
NIS 1,046 million at December 31, 2003 and NIS 1,160 million at December 31,
2002.
Long-term debt totaled NIS 3,152 million at December 31, 2004, or
24.0% of total assets on that date, compared to NIS 3,460 million at December
31, 2003, or 29.1% of total assets on that date. See Note 15C(1) to our
consolidated financial statements included elsewhere in this annual report.
Total debt at December 31, 2004 decreased 2.9% to NIS 4,891 million,
or 37.2% of total assets, compared to NIS 5,038 million, or 42.4% of total
assets, at December 31, 2003.
In accordance with several of our financing agreements, we and several
of our subsidiaries and affiliates, undertook to maintain certain financial
covenants, including minimum shareholders' equity and debt capital, ratio of
shareholders' equity to debt capital, and a ban on
65
creating pledges or furnishing guarantees without the advance consent of the
banks providing the financing. We also undertook to use the proceeds from the
sale of certain assets to repay a portion of our existing debt. As of December
31, 2004 and June 30, 2005, we and our relevant subsidiaries and affiliates are
in compliance with the above covenants. See also Note 18 to our consolidated
financial statements included elsewhere in this annual report.
Summary of our Contractual Obligations and Commercial Commitments
For purposes of presenting the approximate cash flows that will be
required to meet our material contractual obligations, the following table
presents a summary of those obligations, as of December 31, 2004:
Payments Due by Period
-------------------------------------------------------------------
(in millions of NIS)
Less Than 2-3 4-5 After
Contractual Obligations Total 1 Year Years Years 5 Years
---------------------------------------- ------------- ----------- --------- --------- ---------
Debt From Banks(1)...................... 3,945 1,736 1,884 235 90
Debentures(1)........................... 811 -- 165 - 646
Operating Lease Obligations............. 133 42 55 9 27
Other Obligations....................... 135 2 38 22 73
Total Contractual Cash Obligations...... 5,024 1,780 2,142 266 836
(1) See Note 15 to our financial statements included elsewhere in this
annual report for applicable interest rates and linkage bases.
For purposes of presenting the approximate cash flows that will be
required to meet our other commercial commitments, the following table presents
a summary of those commitments, as of December 31, 2004:
Amount of Commitment Expiration Per Period
-------------------------------------------------------------------
(in millions of NIS)
Total Less Than 2-3 4-5 After
Contractual Obligations Commitment 1 Year Years Years 5 Years
---------------------------------------- ------------- ----------- --------- --------- ---------
Guarantees(1)......................... 678 138 185 43 312
Commitments for environmental
expenditures(2) 172 172
Commitments for the Purchase of Fixed
Assets................................ 22 22 -- -- --
Commitments for investment in Venture
Capital Funds(3)...................... 20 15 5 -- --
Total Commercial Commitments 892 175 362 43 312
(1) Includes:(i) a guarantee Bezeq (Israeli telecommunications company)
received from Koor in the amount ofNIS 125 million; (ii) a guarantee
totaling NIS 172 million issued by Telrad to a major customer; (iii)
guarantees in respect of advances received from customers amounting to NIS
266 million; and (iv) guarantees
66
by us for affiliates and other non-consolidated companies in the amount of
approximately NIS 115 million. See Note 22E to our consolidated financial
statements included elsewhere in this annual report.
(2) This amount represents MA Industries' estimation of the cost of
construction of facilities for the biological treatment of waste pursuant
to an agreement with the Ministry of Environmental Protection.
(3) This amount represents Koor CVC's remaining obligation for investment in
its portfolio funds, which may be drawn upon by the funds over the next
1-3 years, based on their needs.
Cash Flows
Cash and cash equivalents increased by NIS 24 million in 2004 compared
to 2003.
Cash flows from operating activities in 2004 were NIS 891 million,
compared to NIS 775 million in 2003. The increase in cash flows from operating
activities stems mainly from net earnings of NIS 145 million in 2004 compared
to NIS 46 million in 2003.
Cash flows used in investment activities in 2004 were NIS 723 million,
compared to cash generated by investment activities of NIS 267 million in 2003.
Cash used for the acquisition of subsidiaries (mainly by MA Industries) and
affiliates (mainly the acquisition of Tadiran Communications) was NIS 946
million, compared to NIS 21 million in 2003. Proceeds from sale of investee
companies (mainly the sale of shares of MA Industries) and proceeds from sale
of subsidiary's shares that became proportionately consolidated (Telrad) were
NIS 636 million and NIS 38 million respectively, compared to NIS 124 million in
2003. The investment in fixed assets, net after deduction of investment grants,
amounted to NIS 225 million, compared to NIS 185 million in 2003. The principal
investments in fixed assets in the reporting period were in MA Industries.
Investment in intangible assets amounted to NIS 153 million in 2004, compared
to NIS 313 million in 2003, mainly as a result of investments by MA Industries.
Investments in venture capital companies amounted to NIS 35 million, compared
to NIS 14 million last year. Furthermore, in 2003, cash generated by repayment
of loans by affiliates and by the decrease in short-term deposits and
investments amounted to a total of NIS 653 million, compared to a negligible
amount in 2004.
Financing activities during 2004 consumed NIS 128 million, compared to
NIS 1,210 million during 2003. Long-term loans received in 2004 amounted to NIS
1,063 million, compared to NIS 949 million in 2003. The loans were received
mainly at Koor (the parent company). Repayment of long-term loans in 2004
amounted to NIS 1,791 million compared to NIS 1,892 million in 2003. Loans were
repaid mainly at Koor (the parent company) and MA Industries. Proceeds from
issuance of convertible debentures by MA Industries amounted to NIS 666 million
in 2004.
Short-term credit, net, increased by NIS 26 million in 2004, compared
to a decrease of NIS 268 million in 2003.
Impact of Inflation and Currency Fluctuations
The dollar cost of our operations in Israel is influenced by the
extent to which any increase in the rate of inflation in Israel is not offset
(or is offset on a lagging basis) by a
67
devaluation of the NIS in relation to the dollar. The inflation rate in Israel
was 1.2 % in 2004 as compared to -1.9% in 2003. At the same time, the
appreciation of the NIS against the dollar was 1.6% in 2004 as compared to 7.6%
in 2003. The increase in the dollar cost of our operations in Israel relates
primarily to the cost of salaries in Israel, which are paid in NIS, and
constitutes a substantial portion of our expenses.
Trend Information
Our financial condition and results of operation may be subject to
significant fluctuations in future periods. Our past financial condition and
results of operation are not necessarily indicative of any future results. Our
future financial condition and results of operation may be subject to
significant fluctuations due to various factors, including the divestiture of
subsidiaries or other companies, the length of the sale cycles, the timing and
size of orders and shipments to customers, variations in distribution channels,
mix of products, new product introductions, competitive pressures and general
economic conditions.
Off-Balance Sheet Arrangements
The only off-balance sheet arrangements we have that are reasonably
likely to have a material effect on our financial condition, operating results,
liquidity or capital resources are the guarantees and commitments described
above under "Liquidity and Capital Resources -- Summary of our Contractual
Obligations and Commercial Commitments."
68
Item 6. Directors, Senior Management and Employees.
-------------------------------------------
Directors and Senior Management
The following table sets forth, as of June 20, 2005, the name, age and
position of each of our directors and executive officers:
Charles R. Bronfman 75 Chairman of the Board of Directors
Rolando Eisen(1)(2)(3) 64 Director
Paulette Eitan(1)(2)(4) 60 Director
Ron Feinstein(1) 68 Director
Andrew Hauptman(3) 37 Director
Chemi Peres 48 Director
Dan Propper(3) 64 Director
David Rubner 66 Director
Prof. Gabriela Shalev(1)(3) 64 Director
Jonathan B. Kolber 44 Chief Executive Officer
Danny Biran 63 President
Yuval Yanai(5) 54 Senior Vice President and Chief
Financial Officer
Aaron Zuker 60 Vice President
Shlomo Heller 62 General Counsel and Corporate
Secretary
_________________________________
(1) Member of the Audit Committee.
(2) External director. Under the Israeli Companies Law, 1999, publicly held
companies in Israel are required to appoint at least two "external
directors" who serve for three-year terms, as described below. Our
external directors were appointed in June 2002 and pursuant to the
Companies Law, their terms expired on June 24, 2005. At our annual general
meeting of shareholders held on July 3, 2005, our shareholders voted to
re-appoint our external directors for a second term of three years.
(3) Member of the Remuneration Committee.
(4) Serves as the Audit Committee Financial Expert.
(5) On May 24, 2005, Mr. Yanai announced his intention to resign from office
in August 2005.
Set forth below is a biographical summary of each of our above-named
directors and executive officers.
Charles R. Bronfman has been Chairman of the Board of Directors of
Koor since November 1997. Mr. Bronfman is Chairman of the Board of Directors of
Claridge Israel L.L.C., Chairman of Andrea and Charles Bronfman Philanthropies
Inc., Co-Chairman of Birthright Israel International and Co-Chairman of the
Board of Trustees, McGill Institute For the Study of Canada. Mr. Bronfman is a
former Co-Chairman of the Seagram Company Ltd. and a former Chairman of the
United Jewish Communities.
69
Rolando Eisen has been an external director of Koor since June 2002.
Mr. Eisen serves as a board member in several companies, including Mercantile
Discount Bank Ltd., I.D.B. Holdings Ltd. (external director) and Healthcare
Technologies Ltd. which is traded on NASDAQ. Mr. Eisen is a co-founder and a
Managing Director of Rim Industries Ltd. Mr. Eisen has a B.Sc. in Industrial
Management from Carnegie Mellon University. Mr. Eisen is an Israeli citizen.
Paulette Eitan has been an external director of Koor since June 2002.
Ms. Eitan is the Managing Director of Paulette Eitan, Business Planning
Services Ltd., a management consulting firm focusing on business strategy,
performance, monitoring and management incentive programs, mostly for Israeli
high-tech and multinational companies. Ms. Eitan also serves as a board member
of Ham-Let Israel Canada Ltd. (external director). Ms. Eitan has an M.B.A. from
Tel Aviv University and a B.Sc. in Economics and Business from HEC-Paris. Ms.
Eitan is an Israeli citizen.
Ron Feinstein has been a director of Koor since October 1991. Since
1999, Mr. Feinstein has served as a Chairman of the Board of Directors of
Sheraton Moriah Israel Ltd. From 1996 until 1998, Mr. Feinstein served as a
Chairman of the Board of Radisson Moriah Hotels Ltd. Between 1992 and 1998, Mr.
Feinstein also served as the Chairman of the Board of Tourist Industry
Development Corporation Ltd. Mr. Feinstein was a partner in the law firm of
Glass, Feinstein and Bar-Sela from 1981 through March 1997 and since then he is
a senior partner in the law office and notary of Feinstein and Feinstein. Mr.
Feinstein is presently a member of the Board of Directors of Migdal Insurance
Corp. and the Chairman of the Board of Directors of Am-Oved Publishers Ltd.
Andrew Hauptman has been a director of Koor since November 1997. Mr.
Hauptman is the Co-Chairman and Chief Executive Officer of Andell Holdings LLC,
a private investment firm. Mr. Hauptman serves on the Board of Directors of
several privately held and publicly traded companies, including Elizabeth Arden
Spas LLC, Dick Clark Productions Inc. and Canyon Ranch Holdings LLC. Mr.
Hauptman also serves as the Chairman of the Board of Storage Mobility LLC, as
well as Andell Entertainment LLC and Mission Pictures LLC. In addition, Mr.
Hauptman serves on the Board of Trustees of the Los Angeles County Museum of
Art, the Zoe Saidye Hauptman Memorial Fund and The Hauptman Family Foundation.
Prior to joining Andell Holdings LLC, Mr. Hauptman worked in restructuring and
mergers and acquisitions with Alex. Brown & Sons in New York and served as a
Director of Business Development and Strategic Planning at Universal Studios
Holdings (UK) Ltd. Mr. Hauptman holds an M.B.A. from Harvard University and a
B.A. in History from Yale University. Mr. Hauptman is the son-in-law of Charles
R. Bronfman, our Chairman of the Board.
Chemi Peres has been a director of Koor since June 2000. Mr. Peres is
a co-founder and Managing Director of Pitango Venture Capital, an Israeli
venture capital fund. In 1992, Mr. Peres founded and managed the Mofet Israel
Technology Fund, a venture capital fund publicly traded on the Tel Aviv Stock
Exchange. Prior to founding Mofet, Mr. Peres served as Vice President of
Marketing and Business Development at Decision Systems Israel Ltd, and as a
Senior Consultant to Israel Aircraft Industries Ltd. Mr. Peres currently serves
on the board of several Pitango portfolio companies, including Go Networks
Ltd., Mercado Software Ltd., Provigent Ltd., Radwin Ltd. and Voltaire Ltd.. Mr.
Peres also serves as a board member of the Israel Venture Association, the
Ministry of Industry, the Trade Seed Fund and the Weizman
70
Institute of Science. Mr. Peres holds an M.B.A. and a B.Sc. in Industrial
Engineering and Management from Tel Aviv University.
Dan Propper is the Chairman and Chief Executive Officer of the Osem
Group of Companies, one of Israel's leading food manufacturers and a public
company traded on the Tel Aviv Stock Exchange. Mr. Proper is a member of the
boards of various industrial companies as well as the Technion, Israel
Institute of Technology, the Weizman Institute of Science and Ben-Gurion
University. Mr. Propper graduated summa cum laude from the Technion with a
degree in chemical engineering and food technology. In 1999, he received an
honorary doctorate from the Technion for his contribution to Israeli industry
and economy.
David Rubner has been a director of Koor since June 2000. Mr. Rubner
is the Chairman and Chief Executive Officer of Rubner Technology Ventures Ltd.
and a partner in Hyperion Israel Advisors Ltd., a venture capital firm. Mr.
Rubner was employed by ECI from 1970 until February 2000, and served as its
President and Chief Executive Officer from 1991 to October 1999 and February
2000, respectively. Mr. Rubner serves on the board of directors of Chekpoint
Software Ltd., Elbit Imaging Ltd. and Lipman Electronic Engineering Ltd., as
well as several privately held companies. Mr. Rubner also serves on the board
of trustees of Bar-Ilan University and Shaare Zedek Hospital. Mr. Rubner holds
a B.Sc. in Engineering from Queen Mary College, University of London and a
M.Sc. degree from Carnegie Mellon University..
Prof. Gabriela Shalev has been a director of Koor since February 1999.
Prof. Shalev is the President and Rector of Ono Academic College. Prof. Shalev
also serves on the board of directors of several other companies, including
Teva Pharmaceutical Industries Ltd. and Osem Ltd.
Jonathan B. Kolber has been Chief Executive Officer of Koor since July
1, 1998. Mr. Kolber served as the Vice Chairman of the Board of Directors of
Koor from November 1997 until he resigned from the Board on March 26, 2003. Mr.
Kolber served as President of Claridge Israel Ltd. from 1989 to 2001 and as
Vice President of Claridge Inc. from 1986 to 1990. Mr. Kolber was associated
with Cemp Investments from 1985 to 1987. Mr. Kolber serves as a director of
several Israeli companies, including ECI Telecom Ltd., MA Industries, Telrad,
Knafaim-Arkia. and Sheraton-Moriah. Mr. Kolber has a B.A. in Near Eastern
Languages and Civilizations from Harvard University and a Certificate on
Advanced Arabic from the American University of Cairo.
Danny Biran has been President of Koor since July 1, 1998. Mr. Biran
currently serves as Chairman of the Board and Chief Executive Officer of Elisra
Electronic Systems Ltd. and as Chairman of the Board of A Industries, Isrex
(94) Ltd., Koor Trade, R.M. Renaissance Management (1993) Ltd., Tadiran
Electronic, Tadiran Spectralink and Dekolink Wireless Ltd. Mr. Biran is also a
director of ECI and Sheraton-Moriah. Mr. Biran is a graduate of the Law faculty
of the Tel Aviv University and a member of the Israeli Bar.
Yuval Yanai has been Senior Vice President and Chief Financial Officer
of Koor since October 1, 2000. He served as Senior Vice President and Chief
Financial Officer of NICE Systems Ltd. from April 1998 to September 2000. From
1991 to April 1998, he was the Vice President, Finance and Chief Financial
Officer of Elscint Ltd. and director of several of Elscint's
71
subsidiaries, as well as a director of certain public and private companies. He
joined Elscint in 1985 and served as Corporate Controller and Corporate
Treasurer through 1991. Mr. Yanai is a director of MA Industries, Tadiran
Communication, Elisra, Tadiran Electronic, Tadiran Spectralink and Telrad. Mr.
Yanai holds a B.Sc. in Accounting and Economics from the Tel Aviv University.
As described above, on May 24, 2005, Mr. Yanai announced his intention to
resign from office in August 2005.
Aaron Zuker has been a Vice President of Koor since January 1999. He
serves as Managing Director of R.M. Renaissance Management (1993) Ltd. Mr.
Zuker is a director of MA Industries, Elisra, Tadiran Electronic and Tadiran
Spectralink. Mr. Zuker is also a director of Isrex (94) Ltd., Clalcom Ltd. and
Barak ITC (1995). Between the years 1990 - 1995, Mr. Zuker served as Chief
Financial Officer and then Chief Executive Officer of The Jerusalem Report
Publication.
Shlomo Heller has been General Counsel and Corporate Secretary of Koor
since August 1997. From 1990 to 1997, Mr. Heller served as the General Counsel
of United Mizrahi Bank Ltd. Mr. Heller also serves as a director of several
other companies within Koor.
Compensation
The aggregate compensation paid to or accrued on behalf of all our
directors and executive officers as a group (15 persons) during 2004 consisted
of approximately $2.75 million, in salaries, fees, bonuses, commissions and
directors' fees and $0.6 million in amounts set aside or accrued to provide
pension, retirement or similar benefits, excluding expenses (including business
travel, professional and business association dues and expenses) reimbursed to
officers and other fringe benefits commonly reimbursed or paid to such officers
and directors by companies in Israel.
The directors associated with Claridge Israel L.L.C. (two directors in
2004) assigned their directors' compensation to Claridge Israel L.L.C. These
directors received compensation identical to that received by our other
directors. All of our directors received compensation identical to that
received by our external directors as described below.
Compensation and reimbursement for external directors (as described
below) is statutorily determined pursuant to a formula stated by the Israeli
Companies Law, 1999, which became effective on February 1, 2000, and which we
refer to in this annual report as the Companies Law, and we adopted the highest
compensation payable pursuant to the formula. Compensation and reimbursement of
all other directors who do not serve as officers are the same as the statutory
rates paid to external directors pursuant to a decision of our shareholders at
our annual general meeting. For additional information concerning the
compensation of directors, see Note 25C to our consolidated financial
statements included elsewhere in this annual report.
In addition, according to decisions of our shareholders at the annual
general meetings of shareholders held on July 23, 2003, and September 12, 2004,
eight directors (including the external directors) who are not associated with
Claridge Israel L.L.C. or with Esarbee Investments Limited and who are not
related to the controlling shareholders, have each been
72
granted 50,000 options under the 2003 Stock Option Plan which is described
below. One of these directors has since resigned.
We have not entered into any service contracts with our directors that
provide for benefits upon termination of employment.
Board Practices
Composition of Board; Election of Directors
Pursuant to our articles of association, the number of directors
serving on the board is required to be not less than five. The appointment of
members to the board of directors, their replacement and removal, and the
appointment of the chairman of the board of directors requires approval by our
shareholders by ordinary resolution. Each member of the board of directors
remains in office until his/her office is vacated due to any one of the
following events: death, legal incompetency, bankruptcy, resignation or removal
at a shareholders meeting. Our chief executive officer is appointed by the
board of directors. Our executive officers serve at the discretion of our chief
executive officer pursuant to powers delegated to him by our board of
directors.
The board may appoint committees of the board and delegate to such
committees the powers of the board as it deems appropriate, unless the
Companies Law restricts it. Notwithstanding the foregoing, the board may, from
time to time, revoke the delegation made to a committee of its powers and
authorities or a portion thereof. The board has appointed an Audit Committee
and a Remuneration Committee.
External Directors; Independent Directors
Israeli Companies Law Requirements
Under the Companies Law, companies incorporated under the laws of
Israel whose shares have been offered to the public inside or outside of Israel
are required to appoint at least two "external directors". The Companies' Law
provides that a person may not be appointed as an external director if the
person or the person's relative, partner, employer or any entity under the
person's control, has, as of the date of the person's appointment to serve as
an external director, or had during the two years preceding that date, any
affiliation with us or any entity controlling, controlled by or under common
control with us. The term "affiliation" includes:
o an employment relationship;
o a business or professional relationship maintained on a regular basis;
o control; and
o service as an office holder.
No person may serve as an external director if the person's position
or other business activities create, or may create, a conflict of interest with
the person's responsibilities as an
73
external director or may otherwise interfere with the person's ability to serve
as an external director.
Under a recent amendment to the Companies Law, at least one of the
external directors is required to have "financial and accounting expertise" and
the other external directors are required to have "professional expertise".
These requirements are subject to regulations to be promulgated in which the
terms "financial and accounting expertise" and "professional expertise" would
be defined.
External directors are to be elected by majority vote at a
shareholders' meeting, provided that either:
(1) The majority of shares voted at the meeting, including at
least one-third of the shares of the non-controlling shareholders
voted at the meeting, vote in favor of election of the director; or
(2) The total number of shares of non-controlling
shareholders voted against the election of the director does not
exceed one percent of the aggregate voting rights.
The initial term of an external director is three years and may be
extended for an additional three years. Both of our external directors are
members of our audit committee and one of them is a member of our remuneration
committee.
An external director is entitled to compensation as provided in the
regulations adopted under the Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, in connection with
service provided as an external director.
New York Stock Exchange Requirements
Our ADSs are listed on the New York Stock Exchange, or NYSE, and we
are subject to the rules of the NYSE applicable to listed companies. Under the
current NYSE rules, we are required to have an audit committee consisting of at
least three directors, all of who must be independent. The independence
standard under the NYSE rules generally excludes (1) any person who is an
employee of a company or its affiliates or any person who is an immediate
family member of an executive officer of a company or its affiliates, until the
lapse of three years from the termination of such employment, (2) any person
who is a partner, controlling shareholder or executive officer of an
organization that has a business relationship with a company or who has a
direct business relationship with a company, unless the board of directors of
the company determines that the business relationship does not interfere with
such person's independent judgment, or unless three years have lapsed from the
termination of such relationship or his status as a partner, controlling
shareholder or executive officer, and (3) any person who is employed as an
executive of another corporation where any of the company's executives serves
on that corporation's compensation committee. See "- Audit Committee - New York
Stock Exchange Requirements" for a description of the NYSE rules that become
effective with respect to Koor on July 31, 2005.
74
Audit Committee
Israeli Companies Law Requirements
The Companies Law requires public companies to appoint an audit
committee. The responsibilities of the audit committee under the Companies Law
include identifying irregularities in the management of our business and
approving related party transactions as required by law. The audit committee is
also responsible for recommending to our shareholders the appointment of our
external auditors, for approval of the amounts to be paid to our external
auditors and for assisting our board of directors in overseeing the work of our
external auditors. The audit committee has also adopted procedures for handling
complaints regarding accounting and auditing matters, including anonymous and
confidential methods for addressing concerns raised by employees. Under the
Companies Law, an audit committee must consist of at least three directors,
including at least two external directors. The chairman of the board of
directors, any director employed by or otherwise providing services to us, and
a controlling shareholder or any relative of a controlling shareholder, may not
be a member of the audit committee.
New York Stock Exchange Requirements
Under the current NYSE rules, we are required to maintain an audit
committee consisting of independent directors, all of whom are financially
literate and one of whom has accounting or related financial management
expertise. Our audit committee complies with these requirements. The
responsibilities of the audit committee under the NYSE rules include evaluating
the independence of a company's outside auditors.
Pursuant to the Sarbanes-Oxley Act of 2002, the Securities and
Exchange Commission, or SEC, issued new rules which, among other things,
require the NYSE to impose independence requirements on each member of the
audit committees of listed companies. The NYSE adopted rules that comply with
the SEC's requirements and become effective with respect to Koor on July 31,
2005.
The requirements implement two basic criteria for determining
independence: (i) audit committee members would be barred from accepting any
consulting, advisory or other compensatory fee from the issuer or an affiliate
of the issuer, other than in the member's capacity as a member of the board of
directors and any board committee, and (ii) audit committee members of an
issuer that is not an investment company may not be an "affiliated person" of
the issuer or any subsidiary of the issuer apart from his or her capacity as a
member of the board and any board committee.
The SEC has defined "affiliate" for non-investment companies as "a
person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person
specified." The term "control" is intended to be consistent with the other
definitions of this term under the Securities Exchange Act of 1934, as "the
possession, direct or indirect, of the power to direct or cause the direction
of the management and policies of a person, whether through the ownership of
voting securities, by contract, or otherwise." A safe harbor has been adopted
by the SEC, under which a person who is not an executive officer, director or
10% shareholder of the issuer would be deemed not to have control of the
issuer. The
75
SEC has also provided certain limited exceptions for an audit committee member,
who also sits on the board of directors of an affiliate to a listed issuer, so
long as, except for being a director on such board of directors, the audit
committee member otherwise meets the independence requirements for each entity.
The role of the audit committee for NYSE purposes includes assisting
our board of directors in fulfilling its responsibility for oversight of the
quality and integrity of our accounting, auditing and reporting practices.
Remuneration Committee
The remuneration committee is responsible for determining the
compensation for all our executive officers, which determinations are subject
to approval by our audit committee and board of directors. The remuneration
committee is also responsible for setting the annual bonus compensation, on an
aggregate basis, for all our employees.
Internal Auditor
Under the Companies Law, the board of directors must appoint an
internal auditor, nominated by the audit committee. The role of the internal
auditor is to examine, among other matters, whether our actions comply with the
law and with orderly business procedure. Under the Companies Law, the internal
auditor may be an employee of ours but not an office holder, or an affiliate,
or a relative of an office holder or affiliate, and may not be our independent
accountant or its representative. We have appointed Mr. Ezra Yehuda , , who is
not an employee of ours, as our internal auditor in accordance with the
requirements of the Companies Law and his reports are submitted to and reviewed
by the Chairman of our board of directors and the audit committee. The audit
committee follows up on the implementation of the recommendations of the
internal auditor.
Summary of Significant Differences between Koor's Corporate Governance
Practices and Those Required of U.S. Companies under NYSE Listing Standards
Section 303A.11 of the NYSE's Listed Company Manual, or LCM, requires
that listed foreign private issuers, such as Koor, must disclose any
significant ways in which their corporate governance practices differ from
those followed by U.S. domestic companies under NYSE listing standards.
Our corporate governance practices are governed by our Articles of
Association, by the corporate governance provisions set forth in the Companies
Law and by applicable U.S. securities laws, including the Sarbanes-Oxley Act of
2002, to the extent they apply to foreign private issuers. We are also subject
to the NYSE corporate governance rules to the extent they apply to foreign
private issuers. Except for those specific rules, foreign private issuers are
permitted to follow home country practice in lieu of the provisions of Section
303A of the LCM.
In order to comply with Section 303A.11 of the LCM, the following is a
summary of significant ways in which our corporate governance practices differ
from those required to be followed by U.S. domestic companies under the NYSE's
listing standards.
76
Majority of Independent Directors: Under Section 303A.01 of the LCM,
U.S. domestic listed companies must have a majority of independent directors.
We do not have a similar requirement under Israeli practice or the Companies
Law, however we do have a majority of independent directors serving on our
board of directors.
Separate Meetings of Non-Management Directors: Under Section 303A.03
of the LCM, the non-management directors of each U.S. domestic listed company
must meet at regularly scheduled executive sessions without management. We do
not have a similar requirement under Israeli practice or the Israeli Companies
Law, and our independent directors do not meet separately from directors who
are not independent, other than in the context of audit committee meetings.
Nominating/Corporate Governance Committee: Under Section 303A.04 of
the LCM, a U.S. domestic listed company must have a nominating/corporate
governance committee composed entirely of independent directors. We are not
required to have such a committee under the Companies Law.
Compensation Committee: Under Section 303A.05 of the LCM, a U.S.
domestic listed company must have a compensation committee composed entirely of
independent directors. We do have a remuneration committee, which is similar to
a compensation committee, although there is no requirement for a compensation
committee under Israeli practice or the Companies Law. However, our
remuneration committee is composed entirely of independent directors.
Audit Committee: Under Section 303A.06 of the LCM, domestic listed
companies are required to have an audit committee that complies with the
requirements of Rule 10A-3 of the Securities and Exchange Act of 1934. Rule
10A-3 requires the audit committee of a U.S. company to be directly responsible
for the appointment, compensation, retention and oversight of the work of any
registered public accounting firm engaged for the purpose of preparing or
issuing an audit report or performing other audit, review, or attest services,
and that each such firm must report directly to the audit committee. Among
other exceptions, Rule 10A-3 provides an exception to such standards for
foreign private issuers where applicable home country law (i) requires or
permits shareholders to appoint the auditors or (ii) prohibits or limits the
delegation of responsibility to the issuer's audit committee.
Pursuant to the Companies Law, our auditors are appointed by the
shareholders at the annual meeting of shareholders. Our audit committee is
responsible for recommending to the shareholders the appointment of our
auditors and to recommend the amounts to be paid to our auditors. In addition,
pursuant to the Companies Law, our financial statements must be approved by our
board of directors. Our audit committee is responsible for assisting the board
of directors in overseeing the work of our auditors.
Equity Compensation Plans: Under Section 303A.08 of the LCM,
shareholders must be given the opportunity to vote on all equity-compensation
plans and material revisions thereto, with certain limited exemptions as
described in the Rule. We intend to follow the requirements of the Companies
Law under which requirement for shareholder approval is generally limited to
cases where our directors would be entitled to receive equity under the
equity-compensation plan.
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Corporate governance guidelines: Under Section 303A.09 of the LCM,
domestic listed companies must adopt and disclose their corporate governance
guidelines. We do not have a similar requirement under Israeli practice or the
Companies Law.
Employees
At December 31, 2004, we had 6,559 employees worldwide, which
represented an increase of 4% from year-end 2003.
The table below sets forth the number of our employees on a
consolidated basis and a break down of their geographic location at the end of
each of the last three fiscal years:
Latin
Israel America USA Europe Others Total
2002 5,201 1,020 344 257 77 6,899
2003 4,605 993 311 329 90 6,328
2004 4,732 965 369 373 120 6,559
Our future success will depend in part upon our ability to attract and
retain highly skilled and qualified personnel. Although competition for such
personnel in Israel is generally intense, we believe that adequate personnel
resources are currently available in Israel to meet our requirements.
Israeli law generally requires the payment by employers of severance
upon the death of an employee, his retirement or upon termination of employment
by the employer without due cause. We currently fund our ongoing severance
obligations by making monthly payments to approved severance funds or insurance
policies. In addition, according to the National Insurance Law, Israeli
employers and employees are required to pay predetermined sums to the National
Insurance Institute, an organization similar to the United States Social
Security Administration. These contributions entitle the employees to benefits
in periods of unemployment, work injury, maternity leave, disability, reserve
military service and bankruptcy or winding-up of the employer. Since January 1,
1995, such amount also includes payments for national health insurance. The
payments to the National Insurance Institute are equal to approximately 15.93%
of an employee's wages limited to a specified amount, of which the employee
contributes approximately 63% and the employer contributes approximately 37%.
We are subject to various Israeli labor laws, collective bargaining
agreements, Israeli labor practices, as well as orders extending certain
provisions of collective bargaining agreements between the Histadrut (currently
the largest labor organization in Israel) and the Coordinating Bureau of
Economic Organizations (the federation of employers' organizations). Such laws,
agreements and orders have a wide scope, including minimum employment standards
(including, among other things, working hours, minimum wages, vacation and
severance pay), and special issues, such as equal pay for equal work, equal
opportunity in employment, and employment of women, youth and army veterans.
According to the National Insurance Law, Israeli employers and employees are
required to pay predetermined sums to the National Insurance Institute, an
organization similar to the United States Social Security Administration. These
contributions entitle the employees to benefits during periods of unemployment,
work
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injury, maternity leave, disability, reserve military service, and bankruptcy
or the winding-up of the employer, in addition to health insurance. The
National Health Insurance Law 1994 imposes a health tax at a rate of
approximately 4.8% of an employee's base wage.
The collective bargaining agreements of our subsidiaries cover a term
of one to three years, or are for an indefinite period. Upon expiration of the
term of an agreement, and pending negotiations for extension, the provisions of
the agreement remain in force unless one of the parties gives a notice of
termination or a new collective agreement is entered into which explicitly
terminates the previous collective agreements. Management believes that, upon
expiration of such existing agreements, its subsidiaries will be able to
negotiate, without material disruptions to our businesses, satisfactory new
agreements. However, there can be no guarantee that satisfactory agreements
will be reached in each subsidiary or that the negotiation of such agreements
will not generate material disruptions to our businesses.
Several of our subsidiaries have collective retirement agreements.
These agreements are due to expire in 2006. Unlike the collective bargaining
agreements, because these agreements have a termination date, the provisions of
these agreements will not remain in force in the period between the expiration
and the signing of an alternative agreement.
In 2004, our total labor costs (including temporary employees)
amounted to approximately NIS 1,484 million, which represented approximately
16.1% of our total net sales, as compared to NIS 1,345 million in 2003. The
majority of our labor costs are denominated in NIS and are affected by the
periodic changes in the inflation rate in Israel.
Share Ownership
Our directors and executive officers who are deemed to have beneficial
ownership of more than 1% of our outstanding ordinary shares are Mr. Charles R.
Bronfman, Mr. Andrew Hauptman and Mr. Jonathan Kolber. Mr. Charles R. Bronfman
and Mr. Andrew Hauptman are affiliated with Claridge Israel L.L.C., one of our
major shareholders, and Mr. Kolber is affiliated with Anfield Ltd. For details
of their shareholdings, please see "Item 7. Major Shareholders and Related
Party Transactions" and the related footnotes.
As of June 30, 2005, our executive officers, in the aggregate, held
11,787 ordinary shares and options under our stock option plans to purchase up
to 386,957 ordinary shares. These options have an exercise price of NIS 95 per
share and an expiration date of December 31, 2010.
Employee Benefit Plans
As of June 30, 2005, options granted, or approved for grant, to all
our directors and employees to purchase up to 887,228 ordinary shares were
outstanding.
The 1997 Stock-Based Compensation Plan
On May 27, 1997, 5,039 stock options were granted under this plan, and
on November 6, 1997 another 31,282 stock options were granted. All of the stock
options outstanding under this plan were exercised as of June 30, 2005.
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The 1998 Stock-Based Compensation Plan
On August 30, 1998, at an extraordinary general meeting of
shareholders, our shareholders approved a private placement of 400,000 stock
options, free of charge, to our employees. The options are exercisable for up
to 400,000 of our ordinary shares. All stock options under the 1998 plan were
granted on different dates, and after expiration of some options and exercise
of others, 670 options remained outstanding for exercise as of June 30, 2005.
Under the terms of the 1998 plan, each stock option is theoretically
exercisable for one share, subject to adjustments. However, in practice,
offerees who exercise the options will not be allotted the full quantity of
shares underlying each option, but only shares which reflect the amount of the
monetary bonus inherent in their option, computed on the date of exercise.
Accordingly, the exercise price of each stock option is intended only for
computation of the bonus component (above and hereafter - the "Bonus Component
Method").
The options outstanding under the 1998 plan have an exercise price of
NIS 101.38 per share and an expiration date of July 16, 2006.
The 2000 Stock-Based Compensation Plan
On August 6, 2000, our board of directors approved the 2000
Stock-Based Compensation Plan, which was previously approved by our audit
committee. A framework was approved for the allotment of 400,000 stock options
exercisable for up to 400,000 of our ordinary shares, out of which only 165,000
options have been granted, and after expiration of some options and exercise of
others, 1,734 options remained outstanding for exercise as of June 30, 2005.
The options are exercisable for shares in a quantity reflecting the
amount of the monetary bonus inherent in the options, according to the Bonus
Component Method.
The options outstanding under the 2000 plan have an exercise price of
NIS 101.38 per share and an expiration date of June 14, 2007.
Pursuant to the terms of the 2000 plan, the remaining 235,000 stock
options, which were approved, but were not granted under the plan, expired on
June 14, 2005.
The 2003 Stock Based Compensation Plan
On July 27, 2003, at our annual general meeting of shareholders, our
shareholders approved the 2003 Stock-Based Compensation Plan, which had been
previously approved by our audit committee and by our board of directors, on
May 25, 2003 and June 5, 2003, respectively. A framework was approved for the
allotment of up to 1,200,000 stock options exercisable for up to 1,200,000 of
our ordinary shares, out of which 1,102,903 options have been granted.
The options will be exercised for shares in a quantity reflecting the
amount of the financial benefit inherent in the options, according to the Bonus
Component Method.
The options are designated for directors and employees who are not
related parties and will not become related parties as a result of allotment of
the stock options. In any event, the total
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number of offerees under Plan 2003 will not exceed 35 offerees, excluding our
directors and chief executive officer.
The options will vest gradually over a three-year period from the
record date, with one-sixth of the total number of options vesting every six
months.
In connection with the approval of the 2003 plan, our shareholders
approved the granting a total of 400,000 options out of the total number of
options allotted under the 2003 plan to eight directors, including one director
who has since resigned (the two directors who are controlling shareholders,
directly or indirectly, were not granted any options), divided equally, as well
as 175,000 options out of the total number of options allotted under the 2003
plan to our chief executive officer. The balance of the options allotted under
the 2003 plan is intended for other employees and officers of the Koor Group.
As of June 30, 2005, 887,228 options to purchase our ordinary shares
were outstanding under the 2003 plan, which have an exercise price of NIS 96
per share and an expiration date of December 31, 2010.
Option Plans of Certain Subsidiaries
In April 2001, the board of directors of MA Industries decided to
distribute options to employees of MA Industries and its consolidated
companies. According to this plan, during 2002 and 2003, 17,400,000 options
were allocated, each of which is exercisable into one ordinary share of MA
Industries. Following the exercise of options, as of March 31, 2005, 4,987,294
options to purchase shares of MA Industries were outstanding under this plan.
In April 2003, the board of directors of MA Industries approved a
framework for the allotment of 17,000,000 stock options, each of which is
exercisable into one ordinary share of MA Industries. Out of the framework,
3,400,000 options were allotted to the Chief Executive Officer and to directors
of MA Industries, and following the exercise of options, 4,679,020 options
remained outstanding as of March 31, 2005.
On March 8, 2005, the board of directors of MA Industries adopted a
new option plan for its and its subsidiaries' officers and employees. Under the
terms of the plan, on March 14, 2005, 14,900,000 stock options, each of which
is exercisable into one ordinary share of MA Industries, were allotted,
including 2,500,000 options that were deposited with a trustee for future
distribution. Out of the total number of options allotted under the plan,
800,000 options were granted to MA Industries' chief executive officer.
All the options of MA Industries will be exercised for shares in a
quantity reflecting the amount of the financial benefit inherent in the
options, according to the Bonus Component Method.
Item 7. Major Shareholders and Related Party Transactions.
--------------------------------------------------
Major Shareholders
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The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of June 30, 2005 with respect to
each person known to us to be the beneficial owner of 5% or more of our
outstanding ordinary shares. None of our major shareholders has any different
voting rights than any other shareholder.
Number of Percentage of
Ordinary Outstanding
Shares Ordinary Shares
Beneficially (1)
Name Owned
---- ---------------- -------------------
Claridge Israel L.L.C. (2)........................................ 2,375,835 14.74%
Esarbee Investments Limited (3)................................... 2,271,167 14.09%
IDB Development Corporation Ltd. (4) ............................. 1,630,214 10.11%
All officers and directors as a group (14 persons) (5)............ 1,130,925 7.02%
_______________________
(1) Based upon 16,118,784 ordinary shares issued and outstanding on June 30,
2005, which amount excludes 15,799 ordinary shares held by one of our
wholly-owned subsidiaries, which according to the Companies Law do not
confer voting rights while held by a subsidiary. The respective numbers of
ordinary shares listed as beneficially owned in the table above, and the
percentage of outstanding ordinary shares represented thereby, do not give
effect to ordinary shares issuable upon exercise of options granted
pursuant to the 1998, 2000 and 2003 plans, which are exercisable within 60
days of this annual report. See "Item 6. Directors, Senior Management and
Employees," and Note 20 to our consolidated financial statements included
elsewhere in this annual report.
(2) Claridge Israel L.L.C., a Delaware limited liability company, is mainly
(99%) owned by The Charles Bronfman Trust. The Charles Bronfman Trust is a
trust established under the laws of the U.S. primarily for the benefit of
Ellen J. Bronfman Hauptman and her issue. Mr. Andrew Hauptman, one of our
directors is the husband of Mrs. Ellen J. Bronfman Hauptman, the daughter
of Charles R. Bronfman, our Chairman of the Board.
The holdings of the Claridge Israel L.L.C. in our ordinary shares were
pledged in favor of Bank Hapoalim as a guarantee for a loan that was given
to Claridge Israel L.L.C. by Bank Hapoalim.
(3) Esarbee Investments Limited, a company registered in Canada, is owned by
The Charles Rosner Bronfman Family Trust. The Charles Rosner Bronfman
Family Trust is a trust established under the laws of Canada primarily for
the benefit of Stephen R. Bronfman and his issue. Mr. Stephen R. Bronfman
is the son of Charles R. Bronfman, our Chairman of the Board.
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The holdings of the Esarbee Investments Limited in our ordinary shares
were pledged in favor of Bank Hapoalim as a guarantee for a loan that was
given to Esarbee Investments Limited by Bank Hapoalim.
An additional 104,669 shares are held by the Charles R. Bronfman trust, a
trust established under the laws of New York primarily for the benefit of
Charles R. Bronfman and Stephen R. Bronfman.
(4) IDB Development Corporation Ltd., or IDBD is controlled (66%) by IDB
Holding Corporation Ltd., or IDBH. Both IDBD and IDBH are public Israeli
companies traded on the Tel Aviv Stock Exchange. Approximately 51.7% of
the outstanding share capital of IDBH is owned by a group comprised as
follows: (i) 31.02% is held by Ganden Investments I.D.B. Ltd., a private
Israeli company controlled by Nochi Dankner and his sister, Shelly
Bergman; (ii) 10.34% is held by Manor Investments-IDB Ltd., a private
Israeli company controlled by Ruth Manor; and (iii) 10.34% is held by
Avraham Livnat Investments (2002) Ltd., a private Israeli company
controlled by Avraham Livnat. The members of this group entered into a
shareholders agreement relating to, among other things, their joint
control of IDBH, the term of which expires in May 2023. In addition to her
holdings as a controlling shareholder in one of the members of this group,
as described above, Shelly Bergman separately holds approximately 4.9% of
IDBH's outstanding share capital.
(5) Includes (i) 508,439 options to purchase our ordinary shares held by
several of our directors and officers, which are exercisable within 60
days of the date of this annual report, (ii) 74,584 ordinary shares held
by several of our directors and officers and (iii) 547,902 ordinary
shares, representing 3.4% of our outstanding ordinary shares, held by
Anfield, Ltd., a company registered in Israel and owned by Jonathan B.
Kolber, our Chief Executive Officer. The holdings of Anfield in our
ordinary shares were pledged in favor of Bank Hapoalim as a guarantee for
a loan that was given to Anfield by Bank Hapoalim. Does not include the
ordinary shares held by Claridge Israel L.L.C., which may be deemed
beneficially owned by Ellen J. Bronfman Hauptman and Andrew Hauptman as
described in footnote 3 above, or the ordinary shares held by Esarbee
Investments Limited described in footnote 4 above.
As of December 31, 2004, we had 50 ADS holders of record in the United
States, holding ADSs representing approximately 4.4% of our outstanding
ordinary shares, as reported by The Bank of New York, the depositary for our
ADSs.
To our knowledge, (A) we are not directly or indirectly owned or
controlled (i) by another corporation or (ii) by any foreign government and (B)
there are no arrangements, the operation of which may at a subsequent date
result in a change in control of our company.
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Related Party Transactions
For details regarding transactions and loans between us and related
parties, please see Note 25 to our consolidated financial statements included
elsewhere in this annual report.
Item 8. Financial Information.
----------------------
Consolidated Statements and Other Financial Information
See "Item 17. Financial Statements" and pages F-1 through F-141.
Legal Proceedings
Claims against Telrad
In October 1994, a claim was filed by the Engineers Union against
Telrad, for an unspecified amount. The claim pertains to the recognition and
applicability to Telrad engineers of the salary tables included in the general
collective bargaining agreements, which were signed in 1994 and 1995 between
the Engineers Union and the employers in the public service sector. Various
legal proceedings took place in connection with this claim and in March 2005
the National Labor Court dismissed the claim with the consent of the parties.
In 1999, a claim was filed against Telrad by employees who are members
of our workers' committee. The employees sued for access to Telrad's accounts
so that they could examine the calculation of the distribution of profits to
employees and for a declaratory judgment that Telrad is obliged to draw up new
accounts for the distribution of profits. Various legal proceedings took place
in connection with this claim and in March 2005 the National Labor Court
dismissed the claim with the consent of the parties.
Restrictive Trade Practices
TTL/Telrad/Tadiran
During October 1997, following the publication of a newspaper article
containing details about alleged violations of the Law for Restrictive Trade
Practices, 1988 (the Israeli Anti-Trust Law) regarding price coordination and
lack of competition between Tadiran, TTL (a former subsidiary of Tadiran which
merged with ECI in 1999) and Telrad, the Israeli Anti-Trust Commissioner
conducted an investigation at the offices of Tadiran, TTL and Telrad and at our
offices during which documents were confiscated, employees were questioned and
additional information was requested and provided.
On September 7, 2004, the Israeli Anti-Trust Commissioner agreed to
issue an order according to Section 50B of the Anti-Trust Law pursuant to which
Tadiran and Telrad would pay to the State Treasury the total amount of NIS 8
million, without this being considered an admission of guilt by the above
companies and/or any of their officers to committing any crime. It was further
agreed that indictments would not be filed, in the field of public switches and
in the field of private switches, and the Israeli Anti-Trust Commissioner would
not take any further action against the companies and/or their officers. The
order was approved by the court. In
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accordance with the agreement with the Israeli Anti-Trust Commissioner, a
provision of NIS 8 million was included in our consolidated financial
statements as of December 31, 2004.
On September 21, 2004, a suit was filed against us, Bezeq - the Israel
Telecommunications Company Ltd., or Bezeq, Tadiran Ltd. (a subsidiary of Koor),
Tadiran Telecommunications Ltd. (a former subsidiary of Koor which was merged
with ECI), Tadiran Public Switching Ltd., (a former subsidiary of Telrad
Telecommunications Ltd.), and Telrad alleging that during the previous decade,
the defendants had engaged in activities prohibited by the Israeli Anti-Trust
Law that resulted in damages to Bezeq's customers. A motion for recognition of
the suit as a class action was filed together with the suit in accordance with
the Israeli Anti-Trust Law. The plaintiff is asking for damages for the group
that he is seeking to represent in the amount of NIS 1.7 billion.
On March 10, 2005, we and the other defendants submitted to the
District Court an objection to the plaintiff's request to certify the claim as
a class action. As of the date of this annual report, the plaintiff had not yet
filed its response to the objection.
Based on advice from our legal counsel, we believe the chances for the
suit and for the action to be recognized as a class action are remote.
On February 2, 2005, we received a notice from the Office of
Restrictive Trade Practices ( the Israeli Anti-Trust Authority) that it was
considering the possibility of prosecuting us, together with seven other
companies that are not members of the Koor Group (including two companies that
had been owned by Koor on the relevant dates, and were later sold to third
parties) and nine executives (including two executives who had been salaried
employees of Koor on the relevant dates), for violations of the Israeli
Anti-Trust Law. On June 7, 2005, we received a bill of indictment from the
Israeli Anti-Trust Authority in accordance with the abovementioned notice. The
bill came in the wake of an investigation opened by the Israeli Anti-Trust
Authority in the other companies during 2001, with respect to price fixing and
collusion, and the lack of competition in the frozen and canned vegetable
industry. The Israeli Anti-Trust Authority claims that the two companies that
belonged to the Koor Group in the past had colluded with two other companies in
the years 1992-1998.
Under the Israeli Anti-Trust Law, penalties may be imposed against an
entity which has violated the law. In addition, should it be proven that
violations were committed, civil lawsuits may be filed against us and we may be
subject to civil penalties, if damages can be proven as a result of a violation
of the law. At this early stage, it is not possible to predict the likelihood
that any fines will be imposed on us or any civil lawsuits will be filed
against us, nor whether any such fines or lawsuits would have an adverse effect
on our business, financial condition or results of operations.
Environmental
Pursuant to an agreement with the Ministry of Environmental
Protection, subsidiaries of MA Industries decided to construct facilities for
the biological treatment of waste. Construction of these facilities is expected
take approximately three years. In the estimation of MA
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Industries' management, the aggregate construction cost will be between $30
million and $40 million.
One of MA Industries' plants is located in Ramat Hovav, along with
other chemical plants, since the government determined that the geological
layers in that particular area are completely impenetrable to liquid or
pollution. The Ministry of Environmental Protection conducted examinations,
which determined that there is data indicating subterranean pollution in Ramat
Hovav. The examiners recommended the taking of measures to prevent the
continuation of leakages from active and inactive plants, which are liable to
constitute a source of pollution of the water table, in the area. MA Industries
may be required to clean up the relevant areas or subterranean layers if it is
found that MA Industries is responsible for the contamination. Over the past
several years, various tests have been performed by different agencies to test
the ground contamination in the Ramat Hovav area as well as the area
surrounding the subsidiary's premises in Be'er Sheva. As of December 31, 2004,
MA Industries' management did not expect a significant impact with respect to
MA Industries from implementation of the report's recommendations, and,
therefore, no provision has been included in MA Industries' financial
statements. At this stage, MA Industries cannot estimate the costs involved of
implementing a solution, if, as a result of the research that will be carried
out, a solution will be found. Furthermore, the local municipality at Ramat
Hovav is continuing to take rehabilitation steps relating to past incidents.
In May 2004, a subsidiary of MA Industries owning additional plants at
the Ramat Hovav site, received notice of a change in the terms of its business
license, pursuant to which the plants were required to change the method used
to treat sewage from the existing treatment, and to do so independently through
the implementation of vaporization processes. These terms include demands that,
within a short period of time, the plants conduct research and development for
the purpose of customizing the process to the composition of each plant's
sewage, and later, to build a suitable facility. Additionally, formulation
processes are to be implemented, whereby the plants must present the Ministry
of Environmental Protection with a research and development program for the
purpose of implementing the process with respect to the sewage. At the same
time, the Ministry of Environmental Protection set January 1, 2008 as the date
by which the plants must treat the sewage in the requisite format and to stop
the flow of sewage into the Ramat Hovav Industrial Council's vaporization pools
and treatment facilities.
On October 10, 2004, a subsidiary of MA Industries, together with the
Israel Manufacturers Association and other companies, filed an administrative
appeal with the Beer Sheba District Court against the Ministry of Environmental
Protection. The subject of the appeal is the additional conditions for
obtaining a business license described above. In the appeal, the District Court
was asked to issue an order declaring that the additional terms are nullified.
On December 29, 2004 a preliminary hearing on the appeal was held. In March
2005 the Court approved the mutual agreement of the parties to try to end the
dispute by way of meditation.
In the estimation of MA Industries' management, based on advice from
its legal counsel, in view of the preliminary stage of the process, it is not
possible at this time to estimate the prospects of the mediation. In the
estimation of MA Industries, if the appeal is dismissed, it will have a
material effect on the activities of the plant in Ramat Hovav and/or will
require investments of amounts that MA Industries is unable to estimate at this
time.
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On November 28, 2004, the Israeli government reached a decision
approving a plan to reduce air and water pollution deriving from the Ramat
Hovav industrial area. The plan calls for, among other things, (i) more
restrictive rules regarding the treatment of sewage by the plants in the area
(derived from the additional business license conditions that are the subject
of the administrative appeal described above) to be complied with in two
stages, the first by June 30, 2006 and the second by December 31, 2007; (ii)
the drying and rehabilitation of the vaporization pools in the area by the
Ramat Hovav Industrial Council, to be completed no later than December 31,
2012; and (iii) the formulation and implementation by the Ministry of
Environmental Protection of a plan to prevent exceptional emission of hazardous
materials into the air from the Ramat Hovav industrial area.
In the estimation of MA Industries' management, based on advice from
its legal counsel, in view of the preliminary stage of the process, it is not
possible at this time to estimate the costs of complying with the Israeli
government's plan.
In August 2003, a criminal complaint was filed against MA Industries
and one of its officers by the Man, Nature and Law Foundation. The complaint
alleges that in several instances from 1999 to 2003, there were measurements at
MA Industries' Ramat Hovav plant of chimney emissions of materials at
prohibited concentrations, and that such emissions created strong air
pollution. MA Industries' management believes the charges in the complaint are
without merit and intends to defend itself against such charges. In the opinion
of MA Industries' management, based on advice from its legal counsel, due to
the early stage of the proceedings, it is not possible to estimate the outcome
of the complaint and/or the resultant exposure. Therefore, the financial
statements did not include a provision in respect of the proceedings.
Claims filed against Tadiran and its subsidiaries
In October 1999, Bezeq filed a claim against Tadiran asserting various
losses incurred by Bezeq due to delays in the performance of works which were
ordered under development and application contracts originally entered into
between Bezeq and TTL in the amount of approximately $8.6 million.
Alternatively, Bezeq is suing for the balance of arrearage penalties
to which it alleges is entitled pursuant to the same contracts, and which were
not paid in full, in the amount of approximately $1.7 million.
In an arbitration judgment entered on February 17, 2000, all of
Bezeq's arguments regarding TTL's liability for the principal claim were
dismissed. The arbitration judgment determined that pursuant to the engagement
contracts between the parties, Bezeq is entitled to compensation within the
framework of arrearage penalties only. The negotiations between the parties for
a settlement were unsuccessful and on February 15, 2003, the matter was
returned to the arbitrator for his decision. In the opinion of management of
Tadiran, based on the opinions of its legal counsel, Tadiran will not bear
additional substantial expenses over and above the allocations contained in the
financial statements. The negotiations between the parties for a settlement
were unsuccessful, and the matter has been returned to the arbitrator who
issued his ruling on February 26, 2004. In his ruling, the arbitrator affirmed
Tadiran's position and ruled, in
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accordance with the parameters for calculating the damages that Tadiran is
meant to pay to Bezeq. The parties conducted negotiations regarding
implementation of the parameters described above, and they agreed that the
final amount would be NIS 4.6 million, which was paid on January 10, 2005.
Claims filed against MA Industries and its foreign subsidiaries
A claim was filed against several parties including a MA Industries
subsidiary in Brazil, for an aggregate amount of $36 million, by a group that
acquired the rights to two banks that had declared bankruptcy. With respect to
the balance of the claim, the subsidiary has been sued as the guarantor of
debts of agricultural cooperatives, which were its former shareholders.
The position of the subsidiary is that it was removed from the
guarantee agreement under the terms of a subsequent agreement between the bank,
the previous shareholders and a subsidiary of the former shareholders. The
subsidiary's financial statements include a provision of $2 million, based on
the possibility of a compromise agreement with the plaintiffs. In the
estimation of the subsidiary, based on the opinion of its legal counsel, the
provision recorded is sufficient to cover any possible loss from this claim.
Claims and other monetary demands have been filed against MA
Industries' subsidiary in Brazil, in the aggregate amount of $48.5 million.
Based on the opinion of its legal counsel, the subsidiary's management
estimates that the chances of the subsidiary's success in the proceedings and
its defense against the above claims and demands are high. The subsidiary
believes that the provisions recorded in its financial statements are adequate
to cover any possible damage which may result from these claims.
Claims filed against ECI
In January 2005, ECI was named as one of the defendants in a purported
class action complaint filed in the United States Federal District Court for
the District of Maryland against ECtel, certain officers and directors of
ECtel, and ECI. The complaint alleges violations of U.S. Federal Securities
laws by ECtel and breach of fiduciary duties by the individual defendants, in
connection with disclosure of ECtel's financial results between April 2001 and
April 2003. The complaint also alleges that ECI was the controlling shareholder
of ECtel during this period and, as such, influenced and controlled the acts
and omissions of ECtel. Damages claimed by the plaintiff have not yet been
quantified. ECI's management believes that the allegations made in the
complaint with respect to it are without merit.
Claims filed against Sheraton Moriah
The other shareholders in Herods Hotel Spa and Recreation Ltd., or
Herods, a proportionately consolidated company of Sheraton Moriah (Israel)
Ltd., Sheraton, filed a "motion for approval of a claim as a derivative action"
with the Tel Aviv District Court against Sheraton and Herods. The derivative
action for which they are seeking approval is for the cancellation of the
management agreement between Herods and Sheraton, as part of the arbitration
process to which the claim has been referred. The claim itself deals with the
plaintiffs' arguments regarding breaches in the management and image promotion
agreements.
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On March 16, 2005, a compromise agreement was signed between Sheraton,
Herods and the plaintiffs, whereby the parties agreed to resolve all the
disputes that arose between them, and to instill proper relations in the
management of Herods and in the management of the hotel owned by Herods. After
the signing of this agreement, the parties agreed to withdraw all the legal
proceedings they had instituted, in Israel and overseas.
The parties signed a motion to confer the validity of a ruling on this
agreement. The agreement is in effect until June 30, 2020.
Other Claims
A number of claims have been filed against certain other companies
concerning various matters arising in the normal course of business, including
taxes, customs and VAT liabilities. The management of these companies believes,
based on the opinion of the legal counsel handling the claims, that appropriate
provisions in light of the circumstances have been included in the financial
statements.
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Item 9. The Offer and Listing.
----------------------
Trading in our ADSs
In the United States, our American Depositary Shares, or ADSs, have
been traded on the NYSE since our initial public offering in October 1995 under
the symbol "KOR" and are evidenced by ADRs. Each ADS represents 0.20 fully paid
ordinary shares. The following table sets forth, for the periods indicated, the
high and low last reported sale prices for our ADSs.
ADSs
------------------------
High Low
----------- -----------
Annual $ $
------
2000............................................. 22.0625 13.0000
2001............................................. 13.9375 4.1400
2002............................................. 7.2700 2.1000
2003............................................. 7.9600 2.0500
2004............................................. 10.5600 7.0500
Quarterly 2003
--------------
First Quarter.................................... 2.8000 2.0500
Second Quarter................................... 4.4000 2.6000
Third Quarter.................................... 4.2200 3.2400
Fourth Quarter................................... 7.9600 4.2000
Quarterly 2004
--------------
First Quarter.................................... 8.5700 7.2500
Second Quarter................................... 9.4500 7.0500
Third Quarter.................................... 9.5500 7.2500
Fourth Quarter................................... 9.8300 7.5600
Monthly 2005
------------
January.......................................... 11.1400 9.9100
February......................................... 12.1100 11.0500
March............................................ 12.2900 10.4500
April............................................ 12.0000 10.5400
May.............................................. 13.1800 12.1800
June............................................. 12.9500 11.1000
On June 30, 2005, the closing price of our ADSs was $11.10 per ADS.
The ADSs are issued pursuant to a Deposit Agreement entered into
between us and the Bank of New York, as depository. The Bank of New York's
address is 101 Barclay Street, New York, New York 10286.
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Trading in our Ordinary Shares
Our securities have been listed on the Tel Aviv Stock Exchange, or
TASE, since 1956. Our ordinary shares have been listed on the TASE since 1991.
The ordinary shares are not listed on any other stock exchange and have not
been publicly traded outside of Israel (other than through ADSs as noted
above). The table below sets forth the high and low last reported prices of our
ordinary shares (in NIS and dollars) on the TASE. The translation into dollars
is based on the average period rate of exchange published by the Bank of
Israel.
Ordinary Shares
--------------------------------------
High Low
------------------ ------------------
NIS $ NIS $
-------- -------- -------- --------
Annual
------
2000.............................. 455.00 111.85 255.50 62.81
2001.............................. 281.20 67.08 89.80 20.34
2002.............................. 166.60 36.92 48.60 10.26
2003.............................. 171.00 39.05 49.80 11.37
2004.............................. 224.90 52.21 165.30 38.37
Quarterly 2003
--------------
First Quarter..................... 68.00 14.51 49.80 10.63
Second Quarter.................... 93.00 21.57 63.9 14.82
Third Quarter..................... 95.20 21.44 70.70 15.92
Fourth Quarter.................... 171.00 39.05 91.90 20.99
Quarterly 2004
--------------
First Quarter..................... 188.30 41.59 167.20 36.93
Second Quarter.................... 208.50 46.36 167.40 37.22
Third Quarter..................... 211.10 47.10 165.30 36.88
Fourth Quarter.................... 224.90 52.21 173.30 40.23
Monthly 2005
------------
January........................... 242.20 55.26 216.60 49.42
February.......................... 259.40 59.54 236.70 54.33
March............................. 261.90 60.06 229.20 52.56
April............................. 263.80 60.38 229.30 52.48
May............................... 287.20 65.04 267.20 60.51
June.............................. 283.30 63.17 250.00 55.74
On June 30, 2005, the closing price of our ordinary shares on the
TASE was NIS 251.00 (or $ 54.88) per share.
91
Item 10. Additional Information.
-----------------------
Memorandum and Articles of Association
Organization and Register
We are a public company organized in the State of Israel under the
Companies Law. We are registered with the Registrar of Companies of the State
of Israel and we have been assigned company number 52-001414-3.
Objects and Purposes
Our objects and purposes include a wide variety of business purposes,
including many types of investments, borrowing and lending, owning and
transacting in real estate, and are set forth in detail in Section 2 of our
memorandum of association.
Directors
Pursuant to our articles of association, the number of directors
serving on the board is required to be not less than five. The appointment of
members to the Board of Directors, their replacement and removal, and the
appointment of the Chairman of the Board of Directors requires approval by our
shareholders by ordinary resolution. Each member of the Board of Directors
remains in office until his/her office is vacated due to any one of the
following events: death, legal incompetency, bankruptcy or resignation or upon
removal at a shareholders meeting. Our chief executive officer is appointed by
the Board of Directors. Our executive officers serve at the discretion of our
chief executive officer pursuant to powers delegated to him by our Board of
Directors. The board is authorized to appoint additional directors (whether to
fill a vacancy or create new directorship) to serve until the next annual
shareholders meeting, provided that the total number of directors does not
exceed the maximum set by the general meeting. Compensation of the Board of
Directors is fixed by the general meeting and directors are not required to
hold qualifying shares
A meeting of the board may be called at the request of each director.
The quorum required for a meeting of the board consists of a majority of
directors holding office, for the time being, and entitled under any law to
attend and vote at such meeting, provided that the quorum is not less than
three. In lieu of a board meeting a resolution may be adopted by written
consent.
The board may appoint a committee of the board and delegate to such
committee all or any of the powers of the board, as it deems appropriate.
Notwithstanding the foregoing, the board may, from time to time, revoke the
delegation made to a committee of its powers and authorities or portion
thereof. The board has appointed an audit committee and a remuneration
committee, which have four members each.
The board has borrowing powers that may be exercised in accordance
with our articles of association. Our articles of association are silent with
regards to the retirement age of directors and directors' involvement in
matters to which they are materially interested.
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Approval of Certain Transactions
The Companies Law codifies the fiduciary duties that "office holders,"
including directors and executive officers, owe to a company. An office
holder's fiduciary duties consist of a duty of care and a duty of loyalty. The
duty of loyalty includes avoiding any conflict of interest between the office
holder's position in Koor and his personal affairs, avoiding any competition
with Koor, avoiding exploiting any business opportunity of Koor in order to
receive personal advantage for himself or others, and revealing to Koor any
information or documents relating to Koor's affairs which the office holder has
received due to his position as an office holder. Under the Companies Law, all
arrangements as to compensation of office holders who are not directors require
approval of the board of directors. Arrangements regarding the compensation of
directors also require audit committee and shareholder approval.
The Companies Law requires that an office holder of Koor promptly
disclose any personal interest that he or she may have and all related material
information known to him or her, in connection with any existing or proposed
transaction by Koor. In addition, if the transaction is an extraordinary
transaction as defined under Israeli law, the office holder must also disclose
any personal interest held by the office holder's spouse, siblings, parents,
grandparents, descendants, spouse's descendants and the spouses of any of the
foregoing. In addition, the office holder must also disclose any interest held
by any corporation in which the office holder is a 5% or greater shareholder,
director or general manager or in which he or she has the right to appoint at
least one director or the general manager. An extraordinary transaction is
defined as a transaction other than in the ordinary course of business,
otherwise than on market terms, or that is likely to have a material impact on
Koor's profitability, assets or liabilities.
In the case of a transaction which is not an extraordinary
transaction, after the office holder complies with the above disclosure
requirement, only board approval is required unless our articles of association
provide otherwise. The transaction must not be adverse to our interest.
Furthermore, if the transaction is an extraordinary transaction, then, in
addition to any approval stipulated by the articles of association, it also
must be approved by our audit committee and then by the board of directors,
and, under certain circumstances, by a meeting of our shareholders. An office
holder who has a personal interest in a matter that is considered at a meeting
of the board of directors or the audit committee may not be present at this
meeting or vote on this matter.
The Companies Law applies the same disclosure requirements to a
controlling shareholder of a public company, which includes a shareholder that
holds 25% or more of the voting rights if no other shareholder owns more than
50% of the voting rights in Koor. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest, and
the terms of compensation of a controlling shareholder who is an office holder,
require the approval of the audit committee, the board of directors and our
shareholders. The shareholder approval must include at least one-third of the
shareholders who have no personal interest in the transaction and are present,
in person or by proxy, at the meeting or, alternatively the total shareholdings
of those who have no personal interest in the transaction who vote against the
transaction must not represent more than one percent of the voting rights in
Koor.
93
In addition, a private placement of securities that will increase the
relative holdings of a shareholder that holds five percent or more of our
outstanding share capital (assuming the exercise or conversion of all
securities held by such person that are exercisable for or convertible into
shares) or that will cause any person to become, as a result of the issuance, a
holder of more than five percent of our outstanding share capital, requires
approval by the board of directors and our shareholders.
Certain types of resolutions, called special or extraordinary
resolution, such as resolutions amending a company's articles of association
and regarding changes in capitalization, mergers, consolidations, windings up,
or authorizing a class of shares with special rights, require approval of the
holders of 75% of the shares represented at the meeting and voting thereon.
Under the provisions of the Companies Law, the shareholders of a company may
decide to amend such company's articles of association to reduce the percentage
required for a special resolution to as low as a simple majority or eliminate
the distinction between ordinary and special resolutions completely; such an
amendment must be adopted by a 75% majority.
Under the Companies Law, our shareholders have a duty to act in good
faith towards us and our shareholders and to refrain from abusing his or her
power in Koor including, among other things, while voting in a general meeting
of shareholders on the following matters:
o Any amendment to the articles of association;
o An increase of our authorized share capital;
o A merger; and
o Approval of interested party transactions which require shareholders
approval.
In addition, any controlling shareholder, any shareholder who knows
that it possesses power to determine the outcome of a shareholder vote and any
shareholder who, pursuant to the provisions of a company's articles of
association, has the power to appoint or prevent the appointment of an office
holder in Koor, is under a duty to act with fairness towards us. The Companies
Law does not describe the substance of this duty.
Insurance, Exemption and Indemnity of Office Holders
Under the Companies Law and pursuant to our articles of association as
amended by a special resolution of the shareholders meeting held on June 1,
2003, we may, from time to time enter into a contract to insure any office
holder including directors, in full or in part, for liability resulting from an
obligation imposed on him or her as a result of an action performed in his or
her capacity as an office holder in Koor, for each of the following:
(1) A breach of a duty of care towards the company or towards
another person.
(2) A breach of a duty of trust towards the company, provided that
the office holder acted in good faith and had reasonable grounds to presume
that his or her action would not harm the interests of the company.
(3) A financial obligation imposed on him in favor of another
person.
94
In addition, Under the Companies Law and pursuant to our articles of
association as amended, we may, from time to time, indemnify an office holder,
in full or in part, for an obligation or expense imposed on him or her as a
result of an action performed in his or her capacity as an office holder in
Koor, with respect to: (1) any financial obligation imposed on him or her in
favor of another person pursuant to a judgment, including a judgment given in a
settlement or arbitration decision approved by the court; and (2) any
reasonable litigation expenses, including lawyer's fees requited by the office
holder or imposed on him by a court, in a proceeding submitted against him by
Koor or in its name or by another person, or in a criminal indictment in which
he was acquitted, or a criminal indictment in which he was convicted of an
offense not requiring proof of criminal intent.
We may give an advance undertaking to: (1) indemnify an office holder,
provided that the undertaking is limited to types of events which, in the
opinion of the board of directors, are foreseeable in advance at the time the
undertaking to indemnify is given, and in an amount which the board of
directors has determined is a reasonable amount under the circumstances, on
condition that the amount paid for one set of events shall not exceed 25% of
our equity according to the latest financial statements - annual or quarterly -
as published near the date of payment of the indemnification; and (2) indemnify
an office holder retroactively.
Required Approvals
In addition, under the Companies Law, indemnification of, and
procurement of insurance coverage for, our office holders must be approved by
our audit committee and board of directors and, in specified circumstances, by
our shareholders.
Description of Koor's Deferred Shares
As of June 30, 2005, we had 15,156,533 Deferred Shares, par value NIS
0.001 per share, outstanding. Holders of Deferred Shares are only entitled to
receive the nominal paid-up value of the Deferred Shares in the event of the
winding up of Koor, subject to prior payment of the nominal paid-up value of
the ordinary shares to the holders of ordinary shares. The holders of the
Deferred Shares do not have any voting rights and they are not entitled to
participate in the distribution of dividend of any kind. As of June 30, 2005,
one of our wholly-owned subsidiaries held 13,575,441 (89.6%) of our Deferred
Shares.
Description of Koor's Ordinary Shares
The par value of our ordinary shares is NIS 0.001 per share, and all
issued and outstanding ordinary shares are fully paid and non-assessable.
Holders of paid-up ordinary shares are entitled to participate equally in the
payment of dividends and other distributions and, in the event of liquidation,
in all distributions after the discharge of liabilities to creditors. Our
shareholders do not have preferential rights to purchase new shares in Koor.
As of June 30, 2005, one of our wholly-owned subsidiaries held 15,799
of our ordinary shares; however, pursuant to the Companies Law these ordinary
shares do not confer voting rights while held by our subsidiary.
95
Voting is on the basis of one vote per share. An ordinary resolution
(for example, resolutions for the approval of final dividends or the
appointment of auditors) requires the affirmative vote of a majority of shares
voting in person or by proxy. A special resolution (for example, resolutions
amending the articles of association or authorizing changes in capitalization
or in the rights of shareholders) requires the affirmative vote of at least 75%
of the shares voting in person or by proxy.
Under the articles of association, if at anytime the share capital is
divided into various classes, we may, by way of special resolution consented to
in writing by the holders of three quarters of our issued shares or a special
resolution passed at an extraordinary meeting, alter the previous benefits
restrictions and provisions applicable to that class. We shall also be
entitled, by special resolution, to amend our share capitalization.
The Board of Directors has the power to set aside our cash profits to
pay a final dividend after making appropriations for capital reserves; such a
dividend must be approved at a general meeting. No dividend shall be declared
at a general meeting which is greater than that recommended by the Board of
Directors. The Board of Directors is also entitled to pay shareholders an
interim divided if it is justified in light of our financial position. All
ordinary shares represented by ADRs will be issued in registered form only.
Ordinary shares do not entitle their holders to preemptive rights.
Meetings of Shareholders
Under the Companies Law, we are required to hold an annual meeting
every year no later than fifteen months after the previous annual meeting. In
addition, under the Companies Law, we are required to hold a special meeting in
the following circumstances:
o At the direction of the Board of Directors;
o If so requested by two directors or 1/4 of the serving directors; or
o Upon the request of one or more shareholder who have at least 5% of
the issued share capital and at least 1% of the voting rights or more
shareholders who have at least 5% of the voting rights.
If the Board of Directors receives a demand to convene a special
meeting, it must publicly announce the scheduling of the meeting within 21 days
after the demand is delivered. The meeting must then be held no later than 35
days after notice was made public.
Under the Companies Law, the agenda at an annual meting is determined
by the Board of Directors. The agenda must also include the proposals for which
the convening of a special meeting was called, as well as any proposal
requested by one or more shareholder who holds no less than 1% of the voting
rights, as long as the proposal is one suitable for discussion at an annual
meeting.
Under the Companies Law, a notice of an annual meeting must be made
public (and delivered to every shareholder registered in the shareholders
register, unless it is stated otherwise in the articles of the company as it is
with Koor) at least 21 days before the meeting is convened.
96
The shareholders entitled to participate and vote at the meeting are the
shareholders as of the record date set at the time of the decision to convene
the meeting, provided that the record date is not more than 40 days, and not
less than four days, before the date of the meeting.
A quorum is represented by at least two holders of ordinary shares
personally, or by proxy, who together hold at least 1/3 of the voting rights of
Koor. If such quorum is not present, the meeting stands adjourned until the
same day of the following week. At the adjourned meeting, two members,
irrespective of their percentage holding of voting rights, shall constitute a
quorum.
Under the Companies Law, a shareholder who intends to vote at a
meeting must demonstrate that he owns shares in accordance with the
regulations. Under these regulations, a shareholder whose shares are registered
with a member of a stock exchange (such as NYSE or the TASE) must provide us
with an authorization from such member regarding his ownership as of the record
date.
Right of Non-Israeli Shareholders to Vote
Our memorandum of association, the articles of association, and the
laws of the State of Israel do not restrict in any way the ownership or voting
of our ordinary shares by nonresidents or persons who are not citizens of
Israel, except with respect to citizens or residents of countries that are in a
state of war with Israel.
Change of Control
The Companies Law allows mergers, provided that each party to the
transaction obtains the approval of its board of directors and shareholders.
For purposes of the shareholder vote of each party, unless a court rules
otherwise, the merger will not be deemed approved if a majority of the shares
not held by the other party (or by any person who holds 25% or more of the
shares or the right to appoint 25% or more of the directors of the other party)
have voted against the merger. Upon the request of a creditor of either party
to the proposed merger, the court may delay or prevent the merger if it
concludes that there exists a reasonable concern that as a result of the merger
the surviving company will be unable to satisfy the obligations of that party.
Finally, a merger may not be completed unless (i) at least 50 days have passed
from the time that the requisite proposals for approval of the merger have been
filed with the Israeli Registrar of Companies and (ii) 30 days have passed
since the merger was approved by the shareholders of each of the parties.
Provisions of the Companies Law that deal with "arrangements" between
a company and its shareholders may be used to effect squeeze-out transactions
in which the target company becomes a wholly-owned subsidiary of the acquirer.
These provisions generally require that the merger be approved by a majority of
the participating shareholders holding at least 75% of the shares voted on the
matter. In addition to shareholder approval, court approval of the transaction
is required. The Companies Law also provides for a merger between companies,
after completion of the above procedure for an "arrangement" transaction and
court approval of the merger.
97
The Companies Law also provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% shareholder of the company, unless
there is already another 25% shareholder of the company. Similarly, the
Companies Law provides that an acquisition of shares in a public company must
be made by means of a tender offer if as a result of the acquisition the
purchaser would become a 45% shareholder of the company, unless there is
already a 45% shareholder of the company. This requirement does not apply if
the acquisition (i) occurs in the context of a private placement by the company
that received shareholder approval, (ii) was from a 25% shareholder of the
company and resulted in the acquirer becoming a 25% shareholder of the company
or (iii) was from a 45% shareholder of the company and resulted in the acquirer
becoming a 45% shareholder of the company. The tender offer must be extended to
all shareholders, but the offeror is not required to purchase more than 5% of
the company's outstanding shares, regardless of how many shares are tendered by
shareholders. The tender offer may be consummated only if (i) at least 5% of
the company's outstanding shares will be acquired by the offeror and (ii) the
number of shares tendered in the offer exceeds the number of shares whose
holders objected to the offer. In any event, if as a result of an acquisition
of shares the acquirer will hold more than 90% of a company's shares, the
acquisition must be made by means of a tender offer for all of the shares. If
more than 95% of the outstanding shares are tendered in the tender offer, all
the shares that the acquirer offered to purchase will be transferred to it. The
law provides for the appraisal rights if a shareholder files a request in court
within three months of a full tender offer.
Material Contracts
Elisra Shareholders' Agreement
On November 2, 2002, we entered into a shareholders' agreement with
Elta and Elisra in order to govern the relationship between us and Elta as the
sole owners of Elisra. The shareholders' agreement includes provisions with
regard to the composition of the board of directors of Elisra, which will
consist of 10 members in addition to any outside directors as may be required.
Under the terms of the agreement, we and Elta will be able to nominate a number
of directors on a pro rata basis based on the number of shares held at such
time by us and Elta. If outside directors are required by law or stock exchange
rules, we will consult with Elta to determine which outside directors are to be
recommended by the board of directors. We and Elta may each oppose the
appointment of an outside director proposed by the board of director for
reasonable cause only and must provided reasoned notice within four business
days from the date on which the board of directors gives notice of its proposed
candidates. We have agreed with Elta to vote all of our shares for the
candidates proposed by each of us pursuant to the agreement and to vote all of
our shares for the outside director candidates nominated by the board of
directors and to vote against the removal of a member of the board whose
nomination was proposed by us or Elta unless we or Elta receive prior written
consent permitting us to vote for removal of the director. These provisions
remain in effect as long as each party owns at least 20% of the issued share
capital of Elisra or in the instance when one party fails to hold 20%, the
other party notifies the party that no longer holds 20% that the provisions
remain in effect.
Under the terms of the agreement, as long as we and Elta each hold 20%
or more of the issued share capital of Elisra, the resolutions adopted on
several subjects listed in the agreement
98
will be adopted by a majority vote of the board of directors or general meeting
of Elisra, provided that at least one board of director appointed by each of us
and Elta voted for the resolution, and at the general meeting, we and Elta
voted for the resolution. This clause will expire on the closing date of an
initial public offering of shares of Elisra.
The shareholders' agreement restricts our and Elta's ability to sell
shares of Elisra. In addition, the shareholders' agreement contains a right of
first offer which requires us or Elta, whoever wished to sell shares of Elisra,
to provide written notice of its wish to negotiate with the other party for the
sale of the shares. We and Elta have 15 days from the date of delivery of the
written notice to negotiate for the sale of the shares. The right of first
offer contains a right of first refusal when either we or Elta, whoever is
offered to purchase the shares, submits a bid for such shares that exceeds
$2.8275, but we do not reach an agreement within the 15 days. In addition, if
we sell all of our shares of Elisra to a third party, we have a drag-along
right to require Elta to sell all of its shares to the third party at a price
to be determined in accordance with the agreement. The drag-along provision
will expire on the closing date of an initial public offering of shares of
Elisra.
Under the terms of the agreement, we may sell part of our holdings in
Elisra in an initial public offering and if we elect to do so, then Elta has
the right to sell shares in the initial public offering with us on a pro rata
basis. Pursuant to the agreement, Elisra is required to announce dividends of
25% of its net profits for that year, subject to a limitation for tax
liability. This provision will expire on the closing date of an initial public
offering of shares of Elisra.
Sales of MA Industries Shares
On January 14, 2004, we entered into an agreement, pursuant to which
we sold 27 million shares of MA Industries to UBS Securities Israel Ltd. for
approximately NIS 418 million.
On February 3, 2005, we entered into a block transfer deed, pursuant
to which we sold 15.9 million shares of MA Industries to Merrill Lynch
International for approximately NIS 374 million. Under the terms of the share
transfer deed, we undertook not to sell additional shares of MA Industries for
a nine-month period from the date of sale. As a result of this sale, and
following the issuance by MA Industries of additional shares in the second
quarter of 2005 upon the conversion of convertible securities and the exercise
of employee stock options, our ownership percentage in MA Industries decreased
to 32% as of June 30, 2005 (28.6% on a fully diluted basis taking into
consideration the exercise of outstanding stock options and the conversion of
outstanding convertible debentures).
Tadiran Communications Share Purchase Agreement
On September 10, 2004 we entered into a share purchase agreement with
Trefoil Israel Partners II, L.P., First Israel Mezzanine Fund L.P. and First
Israel Mezzanine Fund (in Israel) Limited Partnership to acquire approximately
33% of the shares of Tadiran Communications (approximately 31% on a fully
diluted basis taking into consideration the exercise of outstanding stock
options) from them for approximately NIS 637 million (approximately $144
million). Our acquisition of these shares, which closed in November 2004, was
financed through a loan from an Israeli bank secured by these shares.
99
Sale of Knafaim Shares
On September 29, 2004, we entered into three share transfer deeds to
sell a total of 19% of the shares of Knafaim to Mr. Israel Borowitz, Ms. Tamar
Borowitz (controlling shareholders of Knafaim) and Mr. Avshalom Nuriel for a
total purchase price of approximately NIS 144 million. As a result of these
sales, our shareholding in Knafaim decreased from approximately 28.3% to
approximately 9.2%.
Koor-Elbit-Federman Transactions
On December 27, 2004, we entered into a series of agreements with
Elbit Systems Ltd., or Elbit, and with Federmann Enterprises Ltd., or
Federmann. Under the terms of an share transfer deed with Elbit, we agreed to
sell our entire holdings in Tadiran Communications (approximately 33%) to Elbit
for approximately $146 million. Concurrently, pursuant to a share transfer deed
with Federmann, we agreed to acquire approximately 9.8% of Elbit's share
capital from Federmann for approximately $99 million . In connection with each
of these transactions we entered into a shareholders agreement with the other
party relating to, among other things, the voting of shares in the election of
directors and rights of one party in connection with certain dispositions of
shares by the other party. The two sales are interconnected and will be
completed in two stages, the first of which closed on April 18, 2005. For a
more detailed description of these transactions, see "Item 4 - Information on
the Company - Business Overview - Our Defense Electronics Business - Recent
Developments."
On July 6, 2005 we signed an amendment to these agreements, pursuant
to which we will sell our entire holdings in Elisra to Elbit, instead of to
Tadiran Communications as per the original agreements, for approximately $70
million and additional consideration following receipt of future insurance
proceeds. We also received the right to acquire Dekolink Ltd., a start-up
company in the cellular field that is wholly-owned by Elisra. As originally
agreed, we will sell the balance of our holdings in Tadiran Communications to
Elbit for $83 million. However, under the amended terms of the transactions,
contrary to the terms of the original agreement, this sale will be conducted in
two parts, and we and Elbit will share joint control of Tadiran Communications,
as described above, following the sale of the first 5%. The sale of our
remaining shares in Tadiran Communications is contingent on the execution of
our sale of our holdings in Elisra to Elbit. Elbit's acquisition of Elisra is
subject to the approvals of Elbit's shareholders at general meeting to be held
within sixty days and Israel's Anti-Trust Commissioner. In addition, under the
amended terms of the transactions, contrary to the terms of the original
agreement, we will acquire only an additional 2.3% of Elbit from Federmann for
$25 million, regardless of whether the sale of Elisra is approved by the
Israeli Anti-Trust Commissioner. Upon completion of all the stages of these
transactions, we will hold approximately 7.6% of Elbit.
Exchange Controls
Holders of ADSs are able to convert dividends and liquidation
distributions into freely repairable non-Israeli currencies at the rate of
exchange prevailing at the time of repatriation,
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pursuant to a general permit issued by the Controller of Foreign Exchange at
the Bank of Israel, or Controller, under the Currency Control Law, 1978, or
Currency Control Law, as modified by certain reforms in May 1998, provided that
Israeli income tax has been withheld by us with respect to such amounts.
Our ADSs may be freely held and traded pursuant to the General Permit
and the Currency Control Law. The ownership or voting of ADSs by non-residents
of Israel, except with respect to citizens of countries that are in a state of
war with Israel, are not restricted in any way by our memorandum of association
or articles of association or by the laws of the State of Israel.
Pursuant to the reforms, the Bank of Israel has issued a new "general
permit." Under such general permit, foreign currency transactions are generally
permitted, except for transactions described in the permit that are
specifically restricted. Among these restricted transactions are foreign
currency transactions by institutional investors, including investments outside
of Israel by pension funds and insurers, as well as futures contracts by
foreign residents for periods of more than one month. All foreign currency
transactions must be reported to the Bank of Israel under the new general
permit.
Certain changes in Israeli tax legislation are expected as a result of
the reforms. No assurance can be given that such legislative changes will be
forthcoming in any particular time frame, or at all.
Taxation
The following is a discussion of Israeli and United States tax
consequences material to our United States shareholders. The discussion is not
intended, and should not be construed, as legal or professional tax advice and
does not exhaust all possible tax considerations.
Holders of our ADSs should consult their own tax advisors as to the
United States, Israeli or other tax consequences of the purchase, ownership and
disposition of our ADSs, including, in particular, the effect of any foreign,
state or local taxes.
Israeli Tax Considerations
The following discussion describes the current corporate tax structure
applicable to companies in Israel, as well as a summary of certain Israeli tax
laws affecting U.S. and other non-Israeli shareholders, for general information
only and is not intended to substitute for careful or specific tax planning. To
the extent that the discussion is based on legislation yet to be judicially or
administratively interpreted, there can be no assurance that the views
expressed herein will accord with any such interpretation in the future. This
discussion is not intended, and should not be construed, as legal or
professional tax advice, and does not cover all possible tax considerations.
Each investor should consult his or her own tax advisor as to the particular
tax consequences of an investment in the ordinary shares including the effects
of applicable Israeli or foreign or other tax laws and possible changes in the
tax laws.
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General Corporate Tax Structure
Israeli companies are generally subject to corporate tax on taxable
income at the rate of 35% for the 2004 tax year, 34% for the 2005 tax year, 32%
for the 2006 tax year and 30% for the 2007 tax year and thereafter and are
subject to capital gains tax at a rate of 25% for capital gains (other than
gains deriving from the sale of listed securities) derived after January 1,
2003. For capital gains derived from assets acquired prior to January 1, 2003,
the tax rate will be proportionate, based upon the corresponding periods. See
also Item 3- "Risks Related to Israel" for a discussion of tax benefits under
the Encouragement of Capital Investments Law.
Special Provisions Relating to Taxation under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, which we refer to
in this annual report as the "Inflationary Adjustments Law", represents an
attempt to overcome the problems presented to a traditional tax system by an
economy undergoing rapid inflation. The Inflationary Adjustments Law is
complex. Among other features, there is a special tax adjustment for the
preservation of equity as follows:
Where a company's equity exceeds the depreciated cost of fixed assets,
as calculated under the Inflationary Adjustments Law, a deduction from taxable
income is permitted equal to the excess multiplied by the applicable annual
rate of inflation. The maximum deduction permitted in any single tax year is
70% of taxable income, with the unused portion permitted to be carried forward,
linked to the increase in the Israeli Consumer Price Index, or CPI;
Where a company's depreciated cost of fixed assets exceeds its equity,
then the excess multiplied by the applicable annual rate of inflation is added
to taxable income;
Subject to specified limitations, depreciation deductions on fixed
assets and losses carried forward are adjusted for inflation based on the
increase in the CPI.
However, during any fiscal year (or until February 28th of the
following year) in which the rate of increase of the CPI would not exceed or
shall not have exceeded, as applicable, 3%, the Israeli Minister of Finance
may, with the approval of the parliamentary Finance Committee, determine by
order that all or some of the provisions of this Law shall not apply to such
fiscal year, or, that the rate of increase of the CPI relating to such fiscal
year shall be deemed to be 0%, and to make the adjustments required to be made
as a result of such determination. No such determination was made by the
Minister in respect of 2004, even though the rate of increase of the CPI in
2004 was less than 3%.
Recent Israeli Tax Reforms
On January 1, 2003, the Law for Amendment of the Income Tax Ordinance
(Amendment No. 132), 2002, known as the Tax Reform, came into effect, which
significantly changed the taxation basis of corporate and individual taxpayers
from a territorial basis to a worldwide basis.
The Tax Reform, aimed at broadening the categories of taxable income
and reducing the tax rates imposed on employment income, introduced the
following, among other things:
o Reduction of the tax rate levied on real capital gains (other than
gains deriving from the sale of listed securities) derived after
January 1, 2003, to a general rate of 25% for both
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individuals and corporations. Regarding assets acquired prior to
January 1, 2003, the reduced tax rate will apply to a proportionate
part of the gain, in accordance with the holding periods of the asset,
before or after January 1, 2003, on a linear basis;
o Imposition of Israeli tax on all income of Israeli residents,
individuals and corporations, regardless of the territorial source of
income, including income derived from passive sources such as
interest, dividends and royalties;
o Introduction of controlled foreign corporation rules into the Israeli
tax structure. Generally, under such rules, an Israeli resident who
holds, directly or indirectly, 10% or more of the rights in a foreign
corporation which has 70% or more of its shares not publicly traded,
and in which more than 50% of the rights are held directly or
indirectly by Israeli residents, and a majority of whose income in a
tax year is considered passive income, will be liable for tax on the
portion of such income attributed to his holdings in such corporation,
as if such income were distributed to him as a dividend, provided that
the tax imposed by the foreign country on the passive income is equal
to or less than 20%; and
o Imposition of capital gains tax on capital gains realized by
individuals as of January 1, 2003, from the sale of shares of publicly
traded companies (such gain was previously exempt from capital gains
tax in Israel). For information with respect to the applicability of
Israeli capital gains taxes on the sale of ordinary shares, see
"Capital Gains and Income Taxes Applicable to Non-Israeli
Shareholders" below;
o Introduction of a new regime for the taxation of shares and options
issued to employees and officers (including directors).
Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders
Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares publicly traded on the TASE, and are
exempt from Israeli capital gains tax on any gains derived from the sale of
shares of Israeli companies publicly traded on a recognized stock exchange
outside of Israel in a country with which Israel has a tax treaty, such as the
NYSE, provided however that such capital gains are not derived from a permanent
establishment in Israel and provided that such shareholders did not acquire
their shares prior to an initial public offering, unless the holder is subject
to the Inflationary Adjustments Law. In addition, non-Israeli corporations will
not be entitled to the exemption with respect to gains derived from the sale of
shares of Israeli companies publicly traded, if an Israeli resident (i) has a
controlling interest of 25% or more in such non-Israeli corporation, or (ii) is
the beneficiary or is entitled to 25% or more of the revenues or profits of
such non-Israeli corporation, whether directly or indirectly.
Under the convention between the United States and Israel concerning
taxes on income (See "U.S.-Israel Tax Treaty" below), Israeli capital gains tax
will not apply to the sale, exchange or disposition of ordinary shares by a
person who qualifies as a resident of the United States (within the meaning of
the U.S.-Israel tax treaty) and is entitled to claim the benefits available to
the person by such treaty.
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In the event that the conditions for tax exemption described above are
not met, or if capital gains are not tax exempt according to the tax treaty
between Israel and the shareholder's country of residence, the following shall
apply:
Israeli law generally imposes a capital gains tax on the sale of
capital assets located in Israel including shares in Israeli companies by both
residents and non-residents of Israel, unless a specific exemption is available
or unless a tax treaty between Israel and the shareholder's country if
residence provides otherwise. The law distinguishes between real gain and
inflationary surplus. The inflationary surplus is a portion of the total
capital gain that is equivalent to the increase of the relevant asset's
purchase price that is attributable to the increase in the Israeli consumer
price index (or to the increase in the currency in which they purchased shares)
between the date of purchase and the date of sale. The real gain is the excess
of the total capital gain over the inflationary surplus.
Pursuant to the Tax Reform, generally, capital gains tax is imposed at
a rate of 15% on real gains derived on or after January 1, 2003, from the sale
of shares in companies (i) publicly traded on the TASE or; (ii) Israeli
companies publicly traded on a foreign stock exchange in a country with which
Israel has a tax treaty (such as the New York Stock Exchange). This tax rate
does not apply to: (1) dealers in securities; (2) shareholders that report in
accordance with the Inflationary Adjustment Law; (3) shareholders who acquired
their shares prior to an initial public offering (that are subject to a
different tax arrangement); (4) sale of shares between related parties, as
defined by law; and (5) if financing expenses are deducted for tax purposes. In
all of these cases, capital gains tax is imposed at a rate of 25%.
The tax basis of shares acquired prior to January 1, 2003 will be
determined in accordance with the average closing share price in the three
trading days preceding January 1, 2003. However, in some cases, the actual
adjusted cost of the shares will be considered as the tax basis if it is higher
than such average price.
In some instances where our foreign shareholders may be liable to
Israeli tax on the sale of their ordinary shares, the payment of the
consideration may be subject to the withholding of Israeli tax at the source.
Non-residents of Israel are subject to income tax on income accrued or
derived from sources in Israel. Such sources of income include passive income
such as dividends, royalties and interest paid by an Israeli resident, and
non-passive income if the services were rendered in Israel. On distributions of
dividends by us other than bonus shares (stock dividends), income tax at the
rate of 25% (15% in the case of dividend distributed from the earnings of an
approved enterprise) is generally withheld at source, unless a different rate
is provided in a treaty between Israel and the shareholder's country of
residence.
U.S.-Israel Tax Treaty
Pursuant to the Convention Between the Government of the United States
of America and the Government of Israel with Respect to Taxes on Income, as
amended (the "U.S.-Israel Tax Treaty"), which became effective as of January 1,
1995, the sale, exchange or disposition of ADSs or ordinary shares by a person
who qualifies as a resident of the United States within the
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meaning of the U.S.-Israel Tax Treaty and who is entitled to claim the benefits
afforded to such resident by the U.S.-Israel Tax Treaty ("Treaty U.S.
Resident") will generally not be subject to Israeli capital gains tax unless
such Treaty U.S. Resident held, directly or indirectly, shares representing 10%
or more of our voting power during any part of the 12-month period preceding
such sale, exchange or disposition, subject to certain conditions. A sale,
exchange or disposition of ADSs or ordinary shares by a Treaty U.S. Resident
who held, directly or indirectly, shares representing 10% or more of our voting
power at any time during such preceding 12-month period would be subject to
such Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax
Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such
taxes against the U.S. income tax imposed with respect to such sale, exchange
or disposition, subject to the limitations in U.S. laws applicable to foreign
tax credits.
On distributions of dividends other than bonus shares or stock
dividends, income tax is generally withheld at the source at the rate of 25%,
or 15% for dividends of income generated by an approved enterprise, unless a
different rate is provided in a treaty between Israel and the shareholder's
country of residence.
Under the U.S.-Israel tax treaty, the maximum Israeli tax on dividends
paid to a holder of ordinary shares who is a U.S. resident (as defined in the
treaty) is 25%, and if such shareholder is a U.S. corporation holding at least
10% of our issued voting power during the part of the tax year which precedes
the date the dividend is distributed as well as throughout the previous tax
year and the company distributing the dividend in not an "investment company"
as defined in the tax treaty, the maximum Israeli tax on dividends paid to such
corporation is 12.5%, or 15% for dividends derived from income generated from
an approved enterprise.
U.S. Federal Income Tax Considerations
The following is a summary of the material U.S. Federal income tax
consequences of the purchase, ownership and disposition of our ADSs to U.S.
Holders. This summary is based on U.S. Federal income tax laws, regulations,
rulings and decisions in effect as of the date of this annual report, all of
which are subject to change at any time, possibly with retroactive effect. This
summary does not address all tax considerations that may be may be relevant to
any particular U.S. holder in light of the holder's individual circumstances.
In particular, this summary does not address the potential application of the
alternative minimum tax or the U.S. federal income tax consequences to U.S.
holders that are subject to special treatment, including U.S. holders that:
o Are broker-dealers or insurance companies;
o Are financial institutions or financial services entities;
o Are tax-exempt organizations or retirement plans;
o Own directly, indirectly or by attribution 10% or more of our voting
shares;
o Hold ADSs as part of a straddle or a hedging or conversion
transaction;
105
o Hold their ADSs through partnerships or other pass through entities;
o Have elected mark-to-market accounting; and
o Have a functional currency that is not the dollar.
This summary does not address the effect of any U.S. Federal taxation
other than U.S. Federal income taxation. In addition, this summary does not
include any discussion of state, local or foreign taxation.
You are urged to consult your tax advisors regarding the foreign and
United States Federal, state and local tax considerations of purchasing,
holding or disposing of our ADSs.
For purposes of this summary, a U.S. Holder is:
o An individual who is a citizen or, for U.S. Federal income tax
purposes, a resident of the United States;
o A corporation (or other entity taxable as a corporation) created or
organized in or under the laws of the United States or any political
subdivision thereof;
o An estate whose income is subject to U.S. Federal income tax
regardless of its source; or
o A trust if:
(a) a court within the United States is able to exercise primary
supervision over administration of the trust; and
(b) one or more United States persons have the authority to
control all substantial decisions of the trust.
Taxation of Dividends
Subject to the discussion below under "Passive Foreign Investment
Companies," the gross amount of any distributions that you receive with respect
to ADSs, including the amount of any Israeli taxes withheld from these
distributions, will constitute dividends for U.S. Federal income tax purposes,
to the extent the distribution is paid out of our current or accumulated
earnings and profits, as determined for U.S. Federal income tax principles. You
will be required to include this amount of dividends in gross income as
ordinary income on the date such dividend is actually or constructively
received. Distributions in excess of our earnings and profits will be treated
as a non-taxable return of capital to the extent of your tax basis in the ADSs
and, to the extent in excess of your tax basis, will be treated as capital
gain. See "--Dispositions of ADSs" below for the discussion on the taxation of
capital gains. Dividends generally will not qualify for the dividends-received
deduction available to corporations.
Dividends that we pay in NIS, including the amount of any Israeli
taxes withheld from these dividends, will be includible as income to you in a
U.S. dollar amount calculated by reference to the exchange rate in effect on
the day such dividends are distributed. If you convert
106
dividends paid in NIS into U.S. Dollars on the day the dividends are
distributed, you generally should not be required to recognize foreign currency
gain or loss with respect to such conversion. Any gain or loss resulting from a
subsequent exchange of such NIS generally will be treated as U.S. source
ordinary income or loss.
Further, and subject to the discussion below under "Passive Foreign
Investment Companies," noncorporate U.S. Holders may be eligible for reduced
rates of U.S. federal income tax (currently a maximum federal tax rate of 15%)
in respect of dividends received with respect to ADSs in taxable years
beginning before January 1, 2009, provided the holders satisfy certain holding
period requirements. Please note that certain restrictions apply to the ability
of an individual U.S. Holder to benefit from the lower rates. For example, the
lower rates are only available to such an individual if such individual (i)
holds stock for at least 61 days during the 121-day period beginning on the
date that is 60 days before the date on which the share becomes ex-dividend
(disregarding any period during which the U.S. Holder has diminished the risk
of loss with respect to such stock (for example, by holding an option to sell
such stock)), and (ii) is not under an obligation to make related payments with
respect to positions in substantially similar or related property. Subject to
certain conditions and limitations, you may elect to claim a credit against
your U.S. Federal income tax liability for Israeli tax withheld from dividends
received in respect of the ADSs. Dividends generally will be treated as
foreign-source passive income or financial services income for United States
foreign tax credit purposes. The rules relating to the determination of the
foreign tax credit are complex, and you should consult your personal tax
advisors to determine whether and to what extent you would be entitled to this
credit. Alternatively, you may elect to claim a U.S. tax deduction, instead of
a foreign tax credit, for such Israeli tax, but only for a year in which you
elect to do so with respect to all foreign income taxes.
Dispositions of ADSs
If you sell or otherwise dispose of your ADSs, you will recognize gain
or loss for U.S. Federal income tax purposes in an amount equal to the
difference between the amount realized on the sale or other disposition and
your adjusted tax basis in your ADSs. Subject to the discussion below under the
heading "Passive Foreign Investment Companies,"' such gain or loss generally
will be capital gain or loss and will be long-term capital gain or loss if you
had held the ADSs for more than one year at the time of the sale or other
disposition. Long-term capital gains realized by individual U.S. Holders
generally are subject to a lower marginal U.S. federal income tax rate than
ordinary income. Under most circumstances, any gain that you recognize on the
sale or other disposition of ADSs will be U.S.-source for purposes of the
foreign tax credit limitation; and losses recognized will be allocated against
U.S. source income.
Passive Foreign Investment Companies
For U.S. Federal income tax purposes, we will be considered a passive
foreign investment company, or PFIC, for any taxable year in which either 75%
or more of our gross income is passive income, or at least 50% of the average
value of all of our assets for the taxable year produce or are held for the
production of passive income. For this purpose, passive income includes
dividends, interest, royalties, rents, annuities and the excess of gain over
losses from the disposition of assets which produce passive income. If we were
determined to be a PFIC for U.S.
107
Federal income tax purposes, highly complex rules would apply to U.S. Holders
owning ADSs. Accordingly, you are urged to consult your tax advisors regarding
the application of such rules.
If we are treated as a PFIC for any taxable year,
o you would be required to allocate income recognized upon receiving
certain dividends or gain recognized upon the disposition of ADSs
ratably over your holding period for such ADSs,
o the amount allocated to each year during which we are considered a
PFIC other than the year of the dividend payment or disposition would
be subject to tax at the highest individual or corporate tax rate, as
the case may be, and an interest charge would be imposed with respect
to the resulting tax liability allocated to each such year,
o gain recognized upon the disposition of ADSs would be taxable as
ordinary income,
o noncorporate holders will not be eligible for the reduced rate on
dividends received with respect to ADSs and
o you would be required to make an annual return on IRS Form 8621
regarding distributions received with respect to ADSs and any gain
realized on your ADSs.
One method to avoid the aforementioned treatment is to make a timely
mark-to-market election in respect of your ADSs. If you elect to mark-to-market
your ADSs, you will generally include in income any excess of the fair market
value of the ADSs at the close of each tax year over your adjusted basis in the
ADSs. If the fair market value of the ADSs had depreciated below your adjusted
basis at the close of the tax year, you may generally deduct the excess of the
adjusted basis of the ADSs over its fair market value at that time. However,
such deductions generally would be limited to the net mark-to-market gains, if
any, that you included in income with respect to ADSs in prior years. Income
recognized and deductions allowed under the mark-to-market provisions, as well
as any gain or loss on the disposition of ADSs with respect to which the
mark-to-market election is made, is treated as ordinary income or loss.
Based on our income, assets and activities for the year 2004, we
believe that we were not a PFIC for that year, nor do we expect to become a
PFIC in the foreseeable future. However, there can be no assurances that we
will not be treated as a PFIC for that year or any taxable year. If we are or
become a PFIC for any taxable year included in your holding period, we
generally will remain a PFIC for all subsequent taxable years with respect to
your holding of our ADSs.
You are urged to consult your tax advisor regarding the possibility of
us being classified as a PFIC and the potential tax consequences arising from
the ownership and disposition (directly or indirectly) of an interest in a
PFIC.
Backup Withholding and Information Reporting
Dividend payments made with respect to ADSs and proceeds received in
connection with the sale or other disposition of ADSs may be subject to
information reporting to the U.S. Internal
108
Revenue Service (the "IRS") and backup withholding. Backup withholding will not
apply, however, if a U.S. Holder (i) is a corporation or comes within certain
other exempt categories and, when required, demonstrates such fact or (ii)
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable backup
withholding rules. Persons required to establish their exempt status generally
must provide such certification on IRS Form W-9 or Form W-8BEN (as applicable).
Amounts held as backup withholding may be credited against a U.S. Holder's U.S.
federal income tax liability, and a U.S. Holder may obtain a refund of any
excess amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS and furnishing any required
information.
Documents on Display
We are subject to certain of the information reporting requirements of
the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act. We,
as a "foreign private issuer" are exempt from the rules and regulations under
the Exchange Act prescribing the furnishing and content of proxy statements,
and our officers, directors and principal shareholders are exempt from the
reporting and "short-swing" profit recovery provisions contained in Section 16
of the Exchange Act, with respect to their purchase and sale of our shares. In
addition, we are not required to file reports and financial statements with the
U.S. Securities and Exchange Commission, or SEC, as frequently or as promptly
as U.S. companies whose securities are registered under the Exchange Act.
However, we will file with the SEC an annual report on Form 20-F containing
financial statements audited by an independent accounting firm. We will also
furnish quarterly reports on Form 6-K containing unaudited financial
information after the end of each of the first three quarters.
You may read and copy any document we file with the SEC at its public
reference facilities at, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the SEC's regional offices at 500 West Madison Street, Suite 1400, Chicago, IL
60661-2511. You may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC also maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of this web site
is http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference facilities.
Item 11. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
General
Our market risk represents the risk of changes in the value of
financial instruments caused by fluctuations in foreign exchange rates,
interest rates and equity prices. From time to time, we enter into hedging
arrangements to reduce our overall exposure to market risk; however, as a
matter of policy, we do not enter into transactions of a speculative or trading
nature. Foreign currency exchange rate and interest rate exposures are
monitored by tracking actual and projected commitments and through the use of
sensitivity analysis. We do not believe that it is exposed to any material
market risk with regard to market risk sensitive instruments.
109
Market risk related to foreign currency exchange rates
We have financial liabilities denominated in various currencies
(primarily dollars). Fluctuations in foreign currency exchange rates are likely
to affect our financing expenses.
As of December 31, 2004, we had consolidated foreign currency-linked
financial liabilities of approximately NIS 4,759 million, of which
approximately NIS 3,433 million was dollar-linked and the rest, approximately
NIS 1,326 million, was linked to other currencies (mainly the Brazilian Real).
As of December 31, 2004, our net financial liabilities in foreign
currency totaled approximately NIS 1,773 million, of which total dollar-linked
financial liabilities are approximately NIS 1,791 million, and net financial
assets linked to other foreign currencies (mainly the Brazilian real) amount to
approximately NIS 18 million. A portion of the currency exposure also stems
from the export sales included in our consolidated financial statements for the
year ended December 31, 2004, which amounted to approximately NIS 7,849
million, representing approximately 85% of our total consolidated sales for
such period, while a considerable portion of the expenses included in the
consolidated statements are stated in shekels.
Our policy regarding hedging against exposure to fluctuations in
currency prices is that each subsidiary will hedge according to the needs and
markets in which it operates; there is no policy of engaging in currency
hedging over the entire consolidated balance sheet.
Our consolidated statements as of December 31, 2004 include
transactions with financial instruments that serve mainly as a hedge against
foreign currency exchange rate exposure for our subsidiary companies.
During 2004, we bought dollars in exchange for other currencies in
forward contracts, call options, put options and swaps totaling, as of December
31, 2004: approximately NIS 140 million, NIS 1,454 million, NIS 698 million,
and NIS 25 million, respectively. At the same time, we had consolidated sales
of dollars in exchange for other currencies through forward contracts, call
options, put options and swaps totaling, as of December 31, 2004: NIS 46
million, NIS 510 million, NIS 1,626 million and NIS 258 million, respectively.
For a detailed description of transactions with financial instruments, see Note
21 to our consolidated financial statements included elsewhere in this annual
report.
Market risk related to inflation rates
Some of our financial loans are linked to the Israeli Consumer Price
Index, or CPI. In accordance with Israeli GAAP, until December 31, 2003 our
financial statements were presented in terms of NIS of identical purchasing
power as of December 31, 2003 to account for the effects of inflation based
upon changes in the CPI. As a result, the CPI linkage component of our
financing expenses was neutralized. Subsequent to the discontinuation of the
adjustment of financial statements for inflation as of January 1, 2004, our
financing expenses are now exposed to fluctuations in the CPI.
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As of December 31, 2004, our consolidated balance sheet contained
CPI-linked loans and other liabilities totaling approximately NIS 1,500
million. As of such date, our consolidated balance sheets contained CPI-linked
financial assets totaling approximately NIS 203 million.
Our net financial liabilities exposed to CPI-linkage amounted to
approximately NIS 1,297 million as of December 31, 2004. Should the CPI rise by
2%, our financing expenses would increase by approximately NIS 26 million.
We believe that a 2% increase in the CPI constitutes a reasonable
increase for examining the impact of exposure to interest rates on our
financing expenses, in view of the changes that have occurred in recent years
and those that are forecast for the coming year.
Market risk related to interest rates
Some of our financial loans are denominated in variable interest rates
that are likely to fluctuate from time to time. Our policy regarding exposure
to interest rates is that each company in our consolidated group manages its
own exposure.
We engage in hedge transactions against interest rate fluctuations
from time to time. As of December 31, 2004, these transactions totaled
approximately NIS 215 million at the parent company level.
As of December 31, 2004, our consolidated balance sheet contained
loans and other liabilities in foreign currencies (mainly in U.S. dollars)
totaling approximately NIS 4,759 million, and non-index linked
shekel-denominated loans totaling approximately NIS 1,646 million. As of such
date, our consolidated balance sheets contained financial assets in foreign
currencies (mainly in U.S. dollars) totaling approximately NIS 2,986 million
and non-index linked shekel-denominated assets totaling approximately NIS 632
million.
As of December 31, 2004, our net financial liabilities exposed to
fluctuations in the LIBOR interest rate amounted to approximately NIS 2,034
million. Should the LIBOR interest rate rise by 1%, our financing expenses
would increase by approximately NIS 20 million.
As of December 31, 2004, our net financial liabilities exposed to
fluctuations in the interest rate in Israel is approximately NIS 870 million.
Should the interest rate in Israel rise by 2%, our financing expenses would
increase by approximately NIS 17 million.
We believe that a 1% increase in the LIBOR interest rate and 2% in the
interest rate in Israel constitutes a reasonable increase for examining the
impact of exposure to interest rates on our financing expenses, in view of the
changes that have occurred in recent years and those that are forecast for the
coming year.
Market risk related to equity prices
We had equity marketable short-term securities at December 31, 2004 of
approximately NIS 375 million. Market risk was estimated as the potential
hypothetical decrease of 10% in the prices of these securities. Assuming such a
decrease, the fair value of the equity marketable securities would decrease by
approximately NIS 38 million.
111
In addition, we have long-term equity holdings in several subsidiaries
whose securities are traded on the Tel Aviv Stock Exchange and Nasdaq. Ordinary
fluctuations in the prices of these subsidiaries' securities would not affect
our financial statements; however, significant fluctuations may have an adverse
affect on our financial statements.
Item 12. Description of Securities Other than Equity Securities.
-------------------------------------------------------
Not Applicable.
112
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
------------------------------------------------
Not Applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds.
-------------------------------------------------------------------
Not Applicable.
Item 15. Controls and Procedures.
------------------------
Disclosure Controls and Procedures. Our Chief Executive Officer and
Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act as of December 31, 2004. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to us (including our consolidated
subsidiaries) required to be included in our reports files or submitted under
the Exchange Act.
Internal Control Over Financial Reporting. There were no changes in
our internal control over financial reporting (as defined in Rules 13a-15(f) or
15d-15(f) under the Exchange Act) that occurred during the year ended December
31, 2004 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 16A. Audit Committee Financial Expert.
---------------------------------
Our board of directors has determined that Mrs. Paulette Eitan, an
external director and a member of the audit committee of our board of
directors, is an "audit committee financial expert" as defined in Item 16A of
Form 20-F.
Item 16B. Code of Ethics.
---------------
We have adopted a written code of ethics that applies to our Chief
Executive Officer, our Chief Financial Officer and all of our other executive
officers.
You may request a copy of our code of ethics, at no cost, by writing
to or telephoning us as follows:
Koor Industries Ltd.
Telrad Building
14 Hamelacha Street
Park Afek
Rosh Ha'ayin 48091, Israel
Attn: Shlomo Heller, General Counsel
Telephone: +011-972-3-900-8333
113
Item 16C. Principal Accountant Fees and Services.
---------------------------------------
Audit Fees: KPMG and its affiliates charged us and our consolidated
subsidiaries an aggregate of approximately $2,436,000 for fiscal year 2004 in
connection with the professional services rendered for the audit of our annual
consolidated financial statements and our consolidated subsidiaries' annual
financial statements, review of quarterly consolidated financial statements and
services normally provided by them relating to statutory and regulatory filings
or engagements, including review of documents filed with the SEC. For fiscal
year 2003, KPMG and its affiliates billed us and our consolidated subsidiaries
an aggregate of approximately $2,064,000 for these services.
Audit-Related Fees: KPMG and its affiliates billed us and our
consolidated subsidiaries an aggregate of approximately $148,000 in fiscal year
2004 for assurance and related services reasonably related to the performance
of our audit. In fiscal year 2003, KPMG and its affiliates charged us and our
consolidated subsidiaries an aggregate of approximately $59,000 for
audit-related services. These fees relate mainly to the issuance of special
confirmations.
Tax Fees: KPMG and its affiliates charged us and our consolidated
subsidiaries an aggregate of approximately $124,000 in fiscal year 2004 for tax
compliance, tax advice and tax planning. KPMG and its affiliates billed us and
our consolidated subsidiaries an aggregate of approximately $115,000 for
tax-related services in fiscal year 2003.
All Other Fees: KPMG and its affiliates billed us and our consolidated
subsidiaries an aggregate of approximately $271,000 in fiscal year 2004 for
products and services other than those comprising audit fees, audit-related
fees and tax fees. These fees mainly relate to assistance to the companies
regarding documentation of internal control over financial reporting. In fiscal
year 2003, KPMG and its affiliates charged us and our consolidated subsidiaries
an aggregate of approximately $23,000 for products and services in this
category.
Audit Committee Pre-Approval Policy and Procedures
Our audit committee is responsible, among other things, for
recommending to our shareholders the appointment of our external auditors, for
approval of the amounts to be paid to our external auditors and for assisting
our board of directors in overseeing the work of our external auditors. To
assure the independence of our independent auditors, our audit committee
pre-approves annually a catalog of specific audit and non-audit services in the
categories Audit Services, Audit-Related Services, Tax-Related Services, and
Other Services that may be performed by our auditors, as well as the budgeted
fee levels for each of these categories. All other permitted services must
receive a specific approval from our audit committee. Our external auditor
periodically provides a report to our audit committee in order for our audit
committee to review the services that our external auditor is providing, as
well as the status and cost of those services.
During 2004, none of the services provided to us by our external
auditors were provided pursuant to the de minimis exception to the pre-approval
requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
114
Item 16D. Exemptions from the Listing Standards for Audit Committees.
-----------------------------------------------------------
Not Applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers.
-----------------------------------------------------------
None.
115
PART III
Item 17. Financial Statements.
---------------------
See pages F-1 through F-141, incorporated herein by reference.
Item 18. Financial Statements.
---------------------
Not Applicable.
Item 19. Exhibits.
---------
Exhibit No. Description
----------- -----------
1.1 Memorandum of Association of Koor Industries Ltd.*
1.2 Articles of Association of Koor Industries Ltd.*
1.3 Amendments to Articles of Association of Koor Industries Ltd.
Pursuant to a General Meeting of Shareholders held on June 1,
2003.***
2.1 Form of Ordinary Share Certificate.*
2.2 Form of Deposit Agreement including Form of American Depositary
Receipt.**
4.1 Shareholders Agreement, dated November 2, 2002, by and among
Koor Industries Ltd., Elta Systems Ltd. and Elisra Electronic
Systems Ltd.***
4.2 Agreement, dated January 14, 2004, between Koor Industries Ltd.
and UBS Securities Israel Ltd.****
4.3 Share Purchase Agreement, dated September 10, 2004, between Koor
Industries Ltd. and Trefoil Israel Partners II, L.P., First
Israel Mezzanine Fund L.P. and First Israel Mezzanine Fund (in
Israel) Limited Partnership.****
4.4 Share Transfer Deed, dated September 29, 2004, between Koor
Industries Ltd. and Mr. Israel Borowitz.****
4.5 Share Transfer Deed, dated September 29, 2004, between Koor
Industries Ltd. and Ms. Tamar Borowitz.****
4.6 Share Transfer Deed, dated September 29, 2004, between Koor
Industries Ltd. and Mr. Avshalom Nuriel.****
4.7 Share Transfer Deed, dated December 27, 2004, and amended July
6, 2005, between Koor Industries Ltd. and Elbit Systems Ltd.****
4.8 Shareholders' Agreement, dated December 27, 2004, and amended
July 6, 2005, between Koor Industries Ltd. and Elbit Systems
Ltd.****
4.9 Share Transfer Deed, dated December 27, 2004, and amended July
6, 2005, between Koor Industries Ltd. and Federmann Enterprises
Ltd.****
4.10 Shareholders' Agreement, dated December 27, 2004, and amended
July 6, 2005, among Koor Industries Ltd., Federmann Enterprises
Ltd. and Heris Aktiengesellschaft.****
4.11 Share Transfer Deed, dated February 3, 2005, between Koor
Industries Ltd. and Merrill Lynch International.****
8.1 List of significant subsidiaries and affiliates.****
12.1 Certification of the Principal Executive Officer of Koor
Industries Ltd. pursuant to
116
Section 302 of the Sarbanes-Oxley Act of 2002.****
12.2 Certification of the Principal Financial Officer of Koor
Industries Ltd. pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.****
13.1 Certification of the Principal Executive and Financial Officers
of Koor Industries Ltd. pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.****
14.1 Consent of KPMG Somekh Chaikin to the incorporation by reference
into the effective registration statement on Form S-8 of Koor
Industries Ltd. under the Securities Act of 1933 of their report
with respect to the consolidated financial statements of Koor
Industries Ltd., which appears in this Annual Report on Form
20-F.****
________________
* Incorporated herein by reference to Koor Industries Ltd.'s Registration
Statement on Form F-1 (Registration No. 333-97732) filed with the
Securities and Exchange Commission on October 3, 1995.
** Incorporated herein by reference to Koor Industries Ltd.'s Registration
Statement on Form F-6 (Registration No. 333-97758) filed with the
Securities and Exchange Commission on October 4, 1995.
*** Incorporated by reference to Koor Industries Ltd.'s Annual Report on
Form 20-F for the year ended December 31, 2002 filed with the Securities
and Exchange Commission on July 15, 2003.
**** Filed herewith.
117
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rosh
Ha'ayin, State of Israel, on the 15th day of July, 2005.
KOOR INDUSTRIES LTD.
By: /s/ Jonathan B. Kolber
-------------------------
Jonathan B. Kolber
Chief Executive Officer
Koor Industries Ltd. (an Israeli Corporation)
Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Contents
Page
Auditors' Report F-2
Financial Statements
Consolidated Balance Sheets F-3
Company Balance Sheets F-5
Consolidated Statements of Operations F-7
Company Statements of Operations F-8
Statement of Shareholders' Equity F-9
Consolidated Statements of Cash Flows F-12
Company Statements of Cash Flows F-18
Notes to the Financial Statements F-20
F-1
[Letterhead of Somekh Chaikin, a Member Firm of KPMG International]
Report of Independent Registered Public Accounting Firm
The Shareholders
Koor Industries Ltd.
We have audited the accompanying balance sheets of Koor Industries Ltd.
(hereinafter - the "Company" or Koor) and the consolidated balance sheets of
the Company and its subsidiaries as at December 31, 2004 and 2003, and the
related statements of operations, shareholders' equity and cash flows, for each
of the three years, the last of which ended December 31, 2004. These financial
statements are the responsibility of the Company's Board of Directors and of
its Management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We did not audit the financial statements of certain subsidiaries, including
those consolidated by the proportionate consolidation method, whose assets
constitute 12% and 20% of the total consolidated assets as at December 31, 2004
and 2003 respectively, and whose revenues constitute 14%, 19% and 20% of the
total consolidated revenues for the years ended December 31, 2004, 2003 and
2002, respectively. Furthermore, we did not audit the financial statement of
certain affiliates, whose company's investments constitute NIS 204,878 thousand
and NIS 218,081 thousand, as at December 31, 2004 and 2003, respectively, and
its equity in earnings constitute NIS 5,647 thousand for the year ended
December 31, 2004 and its equity in losses, NIS 12,875 thousand and NIS 6,748
thousand for the years ended December 31, 2003 and 2002, respectively. The
financial statements of those subsidiaries and affiliates were audited by other
auditors whose reports thereon were furnished to us. Our opinion, insofar as it
relates to amounts included for such subsidiaries and affiliates, is based
solely on the said reports of the other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Board of Directors and
Management, as well as evaluating the overall financial statement presentation.
We believe that our audits, and reports of the other auditors, provide a
reasonable basis for our opinion.
In our opinion, based on our audits and on the reports of the above-mentioned
other auditors, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company and the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2004 and 2003 and the results of their operations, the changes in
shareholders' equity and their cash flows for each of the three years, the last
of which ended December 31, 2004, in conformity with accounting principles
generally accepted in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (US GAAP). Information related to the nature and effect of such
differences is presented in Note 28 of the financial statements. As further
described in Note 28 to the financial statements, the reconciliation of
differences between Israeli GAAP and US GAAP as of and for the years ended
December 31, 2003 and 2002 has been restated.
As explained in Note 2(B), the financial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board. The financial statements for dates and reporting periods that ended up
to the aforementioned date are stated in values that were adjusted to that date
according to the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
March 29, 2005, except for Note 28, as to which the date is July 13, 2005.
F-2
Consolidated Balance Sheets as at December 31
------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
December 31 December 31 December 31
2004 2003 2004
-------------- --------------- ---------------
Adjusted in
Reported terms of NIS of Reported
amounts* December 2003 amounts
-------------- --------------- ---------------
2004 2003 2004
-------------- --------------- ---------------
Note NIS thousands US $ thousands
-------- -------------------------------- ---------------
Assets
Current assets
Cash and cash equivalents 617,310 593,403 143,294
Short-term deposits and investments 4 416,468 366,809 96,673
Trade receivables 5 2,173,599 2,052,461 504,549
Other receivables 6 528,983 452,170 122,791
Inventories and work in progress, net
of customer advances 7 2,294,885 1,885,751 532,703
Assets designated for sale 41,765 42,525 9,695
-------------- --------------- ---------------
Total current assets 6,073,010 5,393,119 1,409,705
-------------- --------------- ---------------
Investments and long-term
receivables
Investments in affiliates 8 1,375,160 943,764 319,211
Other investments and receivables 9 489,031 483,384 113,517
-------------- --------------- ---------------
1,864,191 1,427,148 432,728
-------------- --------------- ---------------
Fixed assets 10 2,852,907 2,928,407 662,235
-------------- --------------- ---------------
Intangible assets deferred tax assets and
deferred expenses 11 2,357,458 2,121,083 547,228
-------------- --------------- ---------------
13,147,566 11,869,757 3,051,896
============== ============== ==============
* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
F-3
Koor Industries Ltd. (An Israeli Corporation)
-------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
December 31 December 31 December 31
2004 2003 2004
-------------- --------------- ---------------
Adjusted in
Reported terms of NIS of Reported
amounts* December 2003 amounts
-------------- --------------- ---------------
2004 2003 2004
-------------- --------------- ---------------
Note NIS thousands US $ thousands
-------- -------------------------------- ---------------
Liabilities and Shareholders' Equity
Current liabilities
Credit from banks and others 12 1,738,456 1,577,402 403,541
Trade payables 13 1,667,455 1,342,783 387,060
Other payables 14 1,369,442 1,270,217 317,884
Customer advances, net of costs incurred on project 7 211,207 156,441 49,027
-------------- --------------- ---------------
Total current liabilities 4,986,560 4,346,843 1,157,512
-------------- --------------- ---------------
Long-term liabilities
Net of current maturities: 15
Bank loans 2,208,096 3,006,343 512,557
Other loans 133,019 113,494 30,877
Convertible debentures of consolidated company 646,200 - 150,000
Customer advances 142,164 194,094 33,000
Deferred taxes 16G 240,468 199,787 55,819
Liability for employee severance benefits, net 17 197,168 192,002 45,768
-------------- --------------- ---------------
Total long-term liabilities 3,567,115 3,705,720 828,021
-------------- --------------- ---------------
Contingent liabilities and commitments 18
Convertible debentures of consolidated company 165,091 340,270 38,322
-------------- --------------- ---------------
Minority Interest 2,552,333 1,736,531 592,464
-------------- --------------- ---------------
Shareholders' Equity 20 1,876,467 1,740,393 435,577
-------------- --------------- ---------------
13,147,566 11,869,757 3,051,896
============== =============== ===============
/s/ Jonathan Kolber /s/ Gabriela Shalev /s/ Yuval Yanai
------------------------ -------------------------------- -------------------------
Jonathan Kolber Prof. Gabriela Shalev Yuval Yanai
Chief Executive Officer Member of the Board of Directors Vice President
Chief Financial Officer
March 29, 2005, except for Note 28, as to which the date is July 13, 2005
* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
The accompanying notes are an integral part of the financial statements.
F-4
Company Balance Sheets as at December 31
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
December 31 December 31 December 31
2004 2003 2004
-------------- --------------- ---------------
Adjusted in
Reported terms of NIS of Reported
amounts* December 2003 amounts
-------------- --------------- ---------------
2004 2003 2004
-------------- --------------- ---------------
Note NIS thousands US $ thousands
-------- -------------------------------- ---------------
Assets
Current assets
Cash and cash equivalents 29,665 9,205 6,886
Short-term deposits and investments 4 298,641 310,806 69,322
Short-term loans and current maturities
of loans to investee companies 49,928 16,480 11,590
Receivables:
Investee companies 9,435 28,650 2,190
Others 6 84,038 67,774 19,507
Assets designated for sale 41,765 42,525 9,695
-------------- --------------- ---------------
Total current assets 513,472 475,440 119,190
-------------- --------------- ---------------
Investments and long-term receivables
Investments in investees 8 3,601,557 3,453,066 836,016
Other investments and receivables 9 33,175 33,177 7,701
-------------- --------------- ---------------
3,634,732 3,486,243 843,717
-------------- --------------- ---------------
Fixed assets, net 10 22,484 23,323 5,219
-------------- --------------- ---------------
4,170,688 3,985,006 968,126
============== =============== ===============
* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
F-5
Koor Industries Ltd. (An Israeli Corporation)
-------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
December 31 December 31 December 31
2004 2003 2004
-------------- --------------- ---------------
Adjusted in
Reported terms of NIS of Reported
amounts* December 2003 amounts
-------------- --------------- ---------------
2004 2003 2004
-------------- --------------- ---------------
Note NIS thousands US $ thousands
-------- -------------------------------- ---------------
Liabilities and Shareholders' Equity
Current liabilities
Credit from banks and others 12 719,730 588,535 167,068
Trade payables 13 383 503 89
Other payables:
Investee companies 14,311 57 3,322
Others 14 49,132 43,266 11,405
-------------- --------------- ---------------
Total current liabilities 783,556 632,361 181,884
-------------- --------------- ---------------
Long-term liabilities
Net of current maturities: 15
Loans from banks and others 1,505,690 1,610,768 349,510
Liability for employee severance
benefits, net 17 4,975 1,484 1,155
-------------- --------------- ---------------
Total long-term liabilities 1,510,665 1,612,252 350,665
-------------- --------------- ---------------
Contingent liabilities and commitments 18
Shareholders' equity 20 1,876,467 1,740,393 435,577
-------------- --------------- ---------------
4,170,688 3,985,006 968,126
============== =============== ===============
/s/ Jonathan Kolber /s/ Gabriela Shalev /s/ Yuval Yanai
----------------------- -------------------------------- --------------
Jonathan Kolber Prof. Gabriela Shalev Yuval Yanai
Chief Executive Officer Member of the Board of Directors Vice President
Chief Financial Officer
March 29, 2005, except for Note 28, as to which the date is July 13, 2005
* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
The accompanying notes are an integral part of the financial statements.
F-6
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Operations
------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
--------------
Year ended December 31 Year ended
------------------------------------------------ December 31
2004 2003 2002 2004
------------ -------------- -------------- ---------------
Reported Adjusted in terms of NIS Reported
amounts* of December 2003 amounts*
------------ -------------------------------- ---------------
Note NIS thousands US $ thousands
--------- ------------------------------------------------ ---------------
Revenue from sales
and services 23A 9,228,673 7,690,430 7,099,790 2,142,218
Cost of sales and services 23B 6,287,679 5,392,944 5,315,780 1,459,536
------------ ------------ ------------- ------------
Gross profit 2,940,994 2,297,486 1,784,010 682,682
Selling and marketing expenses 23C 1,172,204 940,457 814,777 272,099
General and administrative
expenses 23D 526,004 460,744 489,369 122,100
------------ ------------ ------------- ------------
Operating earnings 1,242,786 896,285 479,864 288,483
Financing expenses, net 23E 271,362 228,200 408,437 62,990
------------ ------------ ------------- ------------
971,424 668,085 71,427 225,493
Other income (expenses), net 23F (78,759) (219,721) 5,824 (18,282)
Transfer to statement of income
of translation differences of
autonomous investee in voluntary
liquidation 3B - - (390,901) -
------------ ------------ ------------- ------------
Earnings (loss) before income tax 892,665 448,364 (313,650) 207,211
Income tax 16H (287,100) (85,372) (141,179) (66,643)
------------ ------------ ------------- ------------
605,565 362,992 (454,829) 140,568
Group's equity in the operating
results of affiliates, net 23G (27,687) (113,823) (252,091) (6,427)
------------ ------------ ------------- ------------
577,878 249,169 (706,920) 134,141
Minority interest in consolidated
company's results, net (432,888) (202,807) (60,049) (100,485)
------------ ------------ ------------- ------------
Net earnings (loss) from
continuing activities 144,990 46,362 (766,969) 33,656
============ ============ ============= ============
NIS NIS NIS US$
------------ ------------ ------------- ------------
Basic and diluted earnings
(loss) per NIS 1 par value
of ordinary shares: 26 8.851 2.950 (50.547) 2.054
============ ============ ============= ============
* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
The accompanying notes are an integral part of the financial statements.
F-7
Koor Industries Ltd. (An Israeli Corporation)
Company Statements of Operations
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
--------------
Year ended December 31 Year ended
------------------------------------------------ December 31
2004 2003 2002 2004
------------ -------------- -------------- ---------------
Reported Adjusted in terms of NIS Reported
amounts* of December 2003 amounts*
------------ -------------------------------- ---------------
Note NIS thousands US $ thousands
--------- ------------------------------------------------ ---------------
Income
Management services
from subsidiaries 22,334 25,006 35,573 5,184
Other income 23F 234,959 5,691 365,431 54,540
------------ ------------ ------------- ------------
Total income 257,293 30,697 401,004 59,724
Expenses
General and administrative
Expenses 23D 46,648 41,164 48,136 10,828
Financing, net 23E 110,806 35,108 199,808 25,721
------------ ------------ ------------- ------------
Total expenses 157,454 76,272 247,944 36,549
------------ ------------ ------------- ------------
Earnings (loss) before
income tax 99,839 (45,575) 153,060 23,175
Income tax 18,951 55,667 3,722 4,399
Earnings after income tax 118,790 10,092 156,782 27,574
Koor's equity in the
operating results of
investee companies, net 23G 26,200 36,270 (923,751) 6,082
------------ ------------ ------------- ------------
Net earnings (loss) for the
year 144,990 46,362 (766,969) 33,656
============ ============ ============= ============
NIS NIS NIS US$
------------ ------------ ------------- ------------
Basic and diluted earnings
(loss ) per NIS 1 par value
of ordinary shares : 26 8.851 2.950 (50.547) 2.054
============ ============ ============= ============
* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
The accompanying notes are an integral part of the financial statements.
F-8
Koor Industries Ltd. (An Israeli Corporation)
Statement of Shareholders' Equity
---------------------------------------------------------------------------------------------------------------------------------
Company Cumulative
shares held foreign
Number of by the currency Retained
ordinary Share Capital Company and translation earnings
shares (1) capital reserves subsidiaries adjustments (deficit) Total
------------ --------- ---------- ------------ ------------ ---------- -----------
Adjusted in terms of NIS of December 2003
---------------------------------------------------------------------------------------------
NIS thousands
---------------------------------------------------------------------------------------------
Balance at December 31, 2001 15,168,884 564,515 2,564,099 (272,458) (418,923) (241,409) 2,195,824
Changes during 2002:
Net loss - - - - - (766,969) (766,969)
Exercise of stock options
granted to Israeli banks 4,493 *- - - - - -
Cumulative foreign currency
translation adjustments, net - - - - 12,538 - 12,538
Provision for decline in value of
autonomous investee
(see Note 3A(1)) - - - - (105,125) - (105,125)
Transfer to statement of income
of translation differences
of autonomous investee in
in voluntary liquidation
(see Note 3B) - - - - 390,901 - 390,901
------------ --------- ---------- ------------- ------------ ----------- -----------
Balance as December 31, 2002 15,173,377 564,515 2,564,099 (272,458) (120,609) (1,008,378) 1,727,169
============ ========= ========== ============= ============ =========== ===========
Balance at December 31, 2002 15,173,377 564,515 2,564,099 (272,458) (120,609) (1,008,378) 1,727,169
Changes during 2003:
Net earnings - - - - - 46,362 46,362
Exercise of stock options
granted to employees 67,783 *- - - - - -
Issuance of "treasury stock"
(see Note 20B) 500,000 - - 192,137 - (149,126) 43,011
Cancellation of provision for
decline in value of autonomous
investee (see Note 3A(1)) - - - - 73,401 - 73,401
Cumulative foreign currency
translation adjustments - - - - (149,550) - (149,550)
------------ --------- ---------- ------------- ------------ ----------- -----------
Balance at December 31, 2003 15,741,160 564,515 2,564,099 (80,321) (196,758) (1,111,142) 1,740,393
============ ========= ========== ============= ============ =========== ===========
* Represents an amount lower than NIS 1,000.
(1) Net of the Company holdings and its subsidiaries' holdings.
The accompanying notes are an integral part of the financial statements.
F-9
Koor Industries Ltd. (An Israeli Corporation)
Statement of Shareholders' Equity (cont'd)
---------------------------------------------------------------------------------------------------------------------------------
Company Cumulative
shares held foreign
Number of by the currency Retained
ordinary Share Capital Company and translation earnings
shares (1) capital reserves subsidiaries adjustments (deficit) Total
------------ --------- ---------- ------------ ------------ ---------- -----------
Adjusted in terms of NIS of December 2003
---------------------------------------------------------------------------------------------
NIS thousands
---------------------------------------------------------------------------------------------
Balance at December 31, 2003 15,741,160 564,515 2,564,099 (80,321) (196,758) (1,111,142) 1,740,393
Changes during 2004:
Net earnings - - - - - 144,990 144,990
Exercise of stock options
granted to employees 83,025 *- - - - - -
Cumulative foreign currency
translation adjustments, net - - - - (8,916) - (8,916)
------------ --------- ---------- ------------- ------------ ----------- -----------
Balance as December 31, 2004 15,824,185 564,515 2,564,099 (80,321) (205,674) (966,152) 1,876,467
============ ========= ========== ============= ============ =========== ===========
* Represents an amount lower than NIS 1,000.
(1) Net of the Company holdings and its subsidiaries' holdings.
The accompanying notes are an integral part of the financial statements.
F-10
Koor Industries Ltd. (An Israeli Corporation)
Statement of Shareholders' Equity (cont'd)
--------------------------------------------------------------------------------------------------------------------------------
Convenience translation into US Dollars (Note 2B)
Company Cumulative
shares held foreign
by the currency Retained
Capital Company and translation earnings
Share capital reserves subsidiaries adjustments (deficit) Total
------------- ---------- ------------ ----------- ----------- ----------
US$ thousands
--------------------------------------------------------------------------------------------
Balance at January 1, 2003 131,039 595,194 (18,645) (45,672) (257,925) 403,991
Changes during 2004:
Net earnings - - - 33,656 33,656
Exercise of stock options
granted to employees *- - - - -
Cumulative foreign currency
translation adjustments - - - (2,070) - (2,070)
------------- ---------- ------------ ----------- ----------- ----------
Balance at December 31, 2004 131,039 595,194 (18,645) (47,742) (224,269) 435,577
============= ========== ============ =========== =========== ==========
* Represents an amount lower than US$ 1,000
** With respect to discontinuance of adjustment to the effect of inflation as from the CPI of December 2003 (see Note 2B).
(1) Net of the Company holdings and its subsidiaries' holdings.
The accompanying notes are an integral part of the financial statements.
F-11
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statement of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
--------------
Year ended
Year ended December 31 December 31
-------------------------------------------------
2004 2003 2002 2004
------------- --------------- -------------- --------------
Reported Adjusted in terms of NIS of Reported
amounts* December 2003 amounts*
------------- --------------------------------- --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
Cash flows generated by operating activities:
Net earnings (loss) for the year 144,990 46,362 (766,969) 33,656
Adjustments to reconcile net earnings to net
cash flows generated by operating activities (A) 745,683 728,413 1,194,420 173,093
------------- --------------- -------------- --------------
Net cash inflow generated by operating
activities 890,673 774,775 427,451 206,749
------------- --------------- -------------- --------------
Cash flows generated by investing activities:
Purchase of fixed assets (232,146) (193,424) (260,119) (53,887)
Investment grants in respect of fixed assets 6,908 8,482 7,583 1,603
Amounts charged to intangible assets
and deferred expenses (153,206) (313,125) (810,649) (35,563)
Additional investments in subsidiaries - (600) (2,802) -
Acquisition of subsidiaries (B) (299,305) (14,372) (92,746) (69,477)
Investments in affiliates (646,672) (6,316) (13,652) (150,110)
Investments in loans to affiliates (1,680) (1,616) (1,405) (390)
Repayment of loans from affiliates and others - 226,765 4 -
Proceeds from realization of investments
in formerly consolidated subsidiaries,
net of cash in those subsidiaries at the
time they ceased being consolidated (c) - (14,182) - -
Repayment of liability in respect of
subsidiary in prior years (28,309) - - (6,571)
Proceeds from realization of activity of
prior year - - 11,849 -
Acquisition of minority in subsidiaries (4,762) - - (1,105)
Proceeds from disposal of investments
in investee companies and others 636,286 123,742 484,355 147,699
Proceeds from sale of fixed assets and
intangible assets 10,519 30,998 314,396 2,442
Investment in venture capital companies (34,928) (13,580) (47,025) (8,108)
Decrease (increase) in other investments, net (5,110) 7,465 (58,406) (1,186)
Decrease (increase) in short-term deposits
and investments, net (8,673) 426,348 210,804 (2,013)
Proceeds from realization of subsidiary's shares
that became proportionately consolidated (D) 38,239 - - 8,876
------------- --------------- -------------- --------------
Net cash inflow (outflow) generated by
investing activities (722,839) 266,585 (257,813) (167,790)
============= =============== ============== ==============
* With respect to discontinued of adjustment for the effect of inflation as
from the CPI of December 2003 (see Note 2B).
The accompanying notes are an integral part of the financial statements.
F-12
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
--------------
Year ended
Year ended December 31 December 31
-------------------------------------------------
2004 2003 2002 2004
------------- --------------- -------------- --------------
Reported Adjusted in terms of NIS of Reported
amounts* December 2003 amounts*
------------- --------------------------------- --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
Cash flows generated by financing activities:
Issuance of equity - 43,011 - -
Issuance of shares to minority interest in
subsidiaries 14,617 14,137 2,928 3,393
Dividend paid to minority interest
in subsidiaries (107,006) (56,529) (27,104) (24,839)
Payment of suppliers credit received
for the purchase of fixed assets - - (13,014) -
Purchase of convertible debentures of
subsidiary by its subsidiary in the market - - (15,137) -
Issuance of convertible debentures in subsidiary 665,982 - 136,210 154,592
Proceeds from principal of long-term
loans and other long-term liabilities 1,063,387 949,392 1,551,258 246,840
Repayment of long-term loans, debentures
and other long-term liabilities (1,791,112) (1,891,766) (1,875,023) (415,764)
Increase (decrease) in credit from banks
and others, net 26,063 (268,028) 16,162 6,050
------------- --------------- -------------- --------------
Net cash outflow generated by
financing activities (128,069) (1,209,783) (223,720) (29,728)
------------- --------------- -------------- --------------
Translation differences in respect of cash
balances of autonomous foreign investee
companies (15,858) (28,273) 3,056 (3,681)
------------- --------------- -------------- --------------
Increase (decrease) in cash and cash
equivalents 23,907 (196,696) (51,026) 5,550
Balance of cash and cash equivalents
at beginning of year 593,403 790,099 841,125 137,744
------------- --------------- -------------- --------------
Balance of cash and cash equivalents
at end of year 617,310 593,403 790,099 143,294
============= =============== ============== ==============
* With respect to discontinued of adjustment for the effect of inflation as
from the CPI of December 2003 (see Note 2B).
The accompanying notes are an integral part of the financial statements.
F-13
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
--------------
Year ended
Year ended December 31 December 31
-------------------------------------------------
2004 2003 2002 2004
------------- --------------- -------------- --------------
Reported Adjusted in terms of NIS of Reported
amounts* December 2003 amounts*
------------- --------------------------------- --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
A. Adjustments to reconcile net earnings
(loss) to cash flows generated by operating
activities:
Income and expenses not involving cash flows:
Minority interest in subsidiaries, net 432,888 202,807 60,049 100,485
Equity in operating results of affiliates, net 27,687 113,823 252,091 6,427
Depreciation and amortization 463,800 440,856 423,580 107,660
Deferred taxes, net 49,647 (45,206) 64,479 11,524
Increase (decrease) in liabilities in respect of
employee severance benefits, net 20,619 (49,822) 52,138 4,786
Net capital losses (gains) from realization:
Fixed assets and intangible assets 16,091 22,863 (23,079) 3,735
Investments in formerly consolidated
subsidiaries - (16,428) - -
Investments in investee companies (227,477) (4,852) (342,343) (52,804)
Translation differences of autonomous
investee in voluntary liquidation - - 390,901 -
Inflationary erosion (linkage) of principal of
long-term loans and other liabilities 8,241 (77,510) 56,490 1,913
Inflationary erosion (linkage) of principal of
credit from banks and others - (10,565) (11,010) -
Inflationary erosion of value of investments,
deposits and loans receivable 9,314 32,540 (19,749) 2,162
Impairment in value of assets and investments 58,144 70,503 143,400 13,497
------------- --------------- -------------- --------------
858,954 679,009 1,046,947 199,385
============= =============== ============== ==============
* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
The accompanying notes are an integral part of the financial statements.
F-14
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
--------------
Year ended
Year ended December 31 December 31
-------------------------------------------------
2004 2003 2002 2004
------------- --------------- -------------- --------------
Reported Adjusted in terms of NIS of Reported
amounts* December 2003 amounts*
------------- --------------------------------- --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
A. Adjustments to reconcile net
earnings to cash flows generated
by operating
activities (cont'd)
Changes in operating asset and liability items:
Decrease (increase) in trade receivables
and other receivables (after taking into
account non-current receivables) (71,964) (218,826) 300,164 (16,705)
Decrease (increase) in inventories, projects in
progress and customer advances (including
long-term customer advances and deposits) (319,645) (116,927) 52,251 (74,197)
Increase (decrease) in trade payables
and other payables 278,338 385,157 (204,942) 64,610
------------- --------------- -------------- --------------
(113,271) 49,404 147,473 (26,292)
------------- --------------- -------------- --------------
745,683 728,413 1,194,420 173,093
============= =============== ============== ==============
B. Acquisition of subsidiaries
Assets and liabilities of the subsidiaries
at date of acquisition:
Working capital deficit (surplus),
excluding cash and cash equivalents (34,493) (12,160) 6,516 (8,007)
Fixed assets and investments, net (287,724) (2,404) (36,434) (66,788)
Issuance of shares by investee company 34,238 - - 7,947
Long-term liabilities 187,144 192 10,280 43,441
Contingent liability - - 18,516 -
Goodwill (198,470) - (91,624) (46,070)
------------- --------------- -------------- --------------
(299,305) (14,372) (92,746) (69,477)
============= =============== ============== ==============
* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
The accompanying notes are an integral part of the financial statements.
F-15
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
--------------
Year ended
Year ended December 31 December 31
-------------------------------------------------
2004 2003 2002 2004
------------- --------------- -------------- --------------
Reported Adjusted in terms of NIS of Reported
amounts* December 2003 amounts*
------------- --------------------------------- --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
C. Proceeds from realization of
investments in formerly
consolidated subsidiaries, net of cash
in those subsidiaries at the time
they ceased being consolidated:
Assets and liabilities of the formerly
consolidated subsidiaries at the time
they ceased being consolidated:
Working capital deficit, excluding cash
and cash equivalents - (47,105) - -
Fixed assets and investments - 8,765 - -
Intangible assets - 15,440 - -
Long-term liabilities - (3,463) - -
Investments in affiliated companies, net - 12,971 - -
Capital loss on sale of investments in
subsidiaries - (790) - -
- (14,182) - -
D. Proceeds from realization of subsidiary's shares that became
proportionately consolidated
Working capital surplus excluding cash and
cash equivalents 23,057 - - 5,352
Fixed assets 40,851 - - 9,482
Realization proceeds receivable (25,544) - - (5,929)
Capital gain (125) - - (29)
------------- --------------- -------------- --------------
38,239 - - 8,876
============= =============== ============== ==============
* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
F-16
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
--------------
Year ended
Year ended December 31 December 31
-------------------------------------------------
2004 2003 2002 2004
------------- --------------- -------------- --------------
Reported Adjusted in terms of NIS of Reported
amounts* December 2003 amounts*
------------- --------------------------------- --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
E. Non-cash transactions:
Purchase of fixed assets by credit 9,172 24,514 10,680 2,129
============= =============== ============== ==============
Purchase of other assets by credit 28,178 6,639 245,924 6,541
============= =============== ============== ==============
Proceeds from sale of fixed assets, formerly
consolidated subsidiaries and realization
of activities - 15,145 - -
============= =============== ============== ==============
Proposed dividend to minority shareholders
by subsidiaries 29,614 15,446 - 6,874
============= =============== ============== ==============
Dividend in kind from affiliate company 33,363 - - 7,744
============= =============== ============== ==============
Loans converted into shareholders' equity
of subsidiary 14,042 - - 3,260
============= =============== ============== ==============
Purchase of fixed and other assets and inventory
in consideration of issuance subsidiary shares
to minority - - 28,683 -
============= =============== ============== ==============
Contingent liability from consolidated
subsidiary - - 18,516 -
============= =============== ============== ==============
Conversion of investment to loan in an
affiliates - 470 - -
============= =============== ============== ==============
* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
The accompanying notes are an integral part of the financial statements.
F-17
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
--------------
Year ended
Year ended December 31 December 31
-------------------------------------------------
2004 2003 2002 2004
------------- --------------- -------------- --------------
Reported Adjusted in terms of NIS of Reported
amounts* December 2003 amounts*
------------- --------------------------------- --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
Cash flows generated by operating activities:
Net income (loss) for the year 144,990 46,362 (766,969) 33,656
Adjustments to reconcile net income to net cash
flows generated by operating activities (A) (136,907) (163,429) 310,315 (31,780)
------------- --------------- -------------- --------------
Net cash outflow generated by operating
activities 8,083 (117,067) (456,654) 1,876
------------- --------------- -------------- --------------
Cash flows generated by investing activities:
Investee companies:
Acquisition of shares (667,779) (17,488) (12,007) (155,009)
Loans granted\received, capital notes
and non-current accounts 34,950 304,725 18,258 8,113
Purchase of fixed assets (423) (392) (108) (98)
Increase in investments and
other receivables, net - (31,428) (54,106) -
Proceeds from sale of fixed assets - 30 272,776 -
Proceeds from realization of investments
in investee companies 562,177 102,875 454,752 130,496
Investment in short-term deposits and
investments, net 63,412 460,818 197,446 14,719
------------- --------------- -------------- --------------
Net cash inflow (outflow) generated by
investing activities (7,663) 819,140 877,011 (1,779)
------------- --------------- -------------- --------------
Cash flows generated by financing activities:
Equity issuance - 43,011 -
Receipt of long-term loans and other
long-term liabilities 637,000 360,213 574,422 147,864
Payments of long-term loans and
other long-term liabilities (628,703) (1,107,283) (883,190) (145,938)
Credit from banks and others, net 11,743 (13,600) (148,154) 2,726
------------- --------------- -------------- --------------
Net cash (outflow) inflow generated by
financing activities 20,040 (717,659) (456,922) 4,652
------------- --------------- -------------- --------------
Increase (decrease) in cash and cash
equivalents 20,460 (15,586) (36,565) 4,749
Balance of cash and cash equivalents at
beginning of year 9,205 24,791 61,356 2,137
------------- --------------- -------------- --------------
Balance of cash and cash equivalents at
end of year 29,665 9,205 24,791 6,886
============= =============== ============== ==============
* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
The accompanying notes are an integral part of the financial statements.
F-18
Koor Industries Ltd. (An Israeli Corporation)
Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
(Note 2B)
--------------
Year ended
Year ended December 31 December 31
-------------------------------------------------
2004 2003 2002 2004
------------- --------------- -------------- --------------
Reported Adjusted in terms of NIS of Reported
amounts* December 2003 amounts*
------------- --------------------------------- --------------
NIS thousands US $ thousands
------------------------------------------------- --------------
(A) Adjustments to reconcile net earnings
(losses) to cash flows generated by
operating activities:
Income and expenses not involving cash flows:
Equity in operating results of investee
companies in addition, net of dividend
received therefrom 47,879 (17,120) 952,414 11,114
Depreciation and amortization 2,022 13,718 2,899 469
Deferred taxes, net (18,580) (58,903) (43,798) (4,313)
Increase (decrease) in liability in respect of
employee severance benefits, net 3,491 (6,898) 5,643 810
Net capital losses (gains) from realization:
Fixed assets - 96 (29,189) -
Investment in investee companies (213,249) (11,635) (336,621) (49,501)
Increase in value of deposits and other
erosions, net (6,623) (11,260) (10,880) (1,537)
Exchange rate differences and erosion of
long-term loans and other liabilities 6,077 (24,865) 29,083 1,411
Erosion (linkage) of loans from banks
and others - (10,526) 5,056 -
Changes in value of investments and assets - 673 10,037 -
------------- --------------- -------------- --------------
(178,983) (126,720) 584,644 (41,547)
------------- --------------- -------------- --------------
Changes in operating assets and liability items:
Increase in current accounts of
investee companies, net 36,543 (43,975) (270,044) 8,482
Decrease (increase) in receivables (213) 42,817 (18,118) (49)
Increase (decrease) in trade payables
and other payables 5,746 (35,551) 13,833 1,334
------------- --------------- -------------- --------------
42,076 (36,709) (274,329) 9,767
------------- --------------- -------------- --------------
(136,907) (163,429) 310,315 (31,780)
============= =============== ============== ==============
(B) Significant non-cash transactions:
Dividend in kind from investee company - - 244,067 -
============= =============== ============== ==============
Proceeds from realization of affiliated
company in capital note - - 27,373 -
============= =============== ============== ==============
Loans converted into shareholders' equity
of subsidiary 6,837 - - 1,587
============= =============== ============== ==============
* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
The accompanying notes are an integral part of the financial statements.
F-19
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 1 - General
Koor Industries Ltd. is a holding company, which operates in the
fields of telecommunications, defense electronics, agro-chemicals and
other chemicals and venture capital investment, through its
subsidiaries, proportionately consolidated companies and affiliates
(hereinafter - the "Koor Group" or the "Group").
The Company's shares are traded both on the Tel Aviv Stock Exchange
and on the New York Stock Exchange.
Note 2 - Significant Accounting Policies
The financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") in Israel.
The significant accounting policies, which were applied on a
consistent basis, are as follows:
A. Definitions:
In these financial statements:
1. The Company - Koor Industries Ltd. ("Koor" or "the Company").
2. Subsidiaries - companies, including partnerships, whose
statements are fully consolidated, directly or indirectly,
with those of the Company.
3. Proportionately consolidated companies - jointly controlled
companies, which are consolidated by the proportionate
consolidation method, directly or indirectly, in Koor's
consolidated financial statements.
4. Affiliates - companies in which Koor has voting rights which
give it significant influence over the operating and
financial policies of these companies, and which are not
subsidiaries or proportionately consolidated companies. Such
companies are included on the equity basis.
5. Investees - subsidiaries, proportionately consolidated
companies or affiliates.
6. Other companies - companies, the investment in which does not
confer significant influence, which are accounted for by the
cost method.
7. Interested parties - as defined in Paragraph (1) to the
definition of "related parties" in Section 1 of the Israeli
Securities Law, including related parties as defined in
Opinion 29 of the Institute of Certified Public Accountants
in Israel ("ICPAI").
F-20
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
A. Definitions (cont'd):
8. Controlling shareholders - as defined in the Israeli
Securities Regulations (Financial Statement Presentation of
Transactions between a Company and its Controlling
Shareholder), 1996.
9. Venture capital fund - as defined in Standard No. 1 of the
Israel Accounting Standards Board ("IASB").
10. Venture capital investments - an investment in a company that
meets the following two conditions:
(a) The company is engaged primarily in research,
development or marketing of innovative,
high-technology products or processes; and
(b) At least 90% of the company's financing stems from
owners' capital (including shareholder loans and
owner-guaranteed credit), with the support of state
authorities or research grants.
11. Consumer Price Index - the Israeli Consumer Price Index
(CPI) published by the Central Bureau of Statistics.
12. Dollar - U.S. dollar.
13. Adjusted amount - the historical nominal amount that was
adjusted in conformity with the provisions of Opinions 23
and 34 and Opinions 36 and 37.
14. Reported amount - an amount adjusted to the transition date
(December 31, 2003), plus amounts in nominal values that
were added after the transition date, minus amounts that
were deducted after the transition date.
15. Adjusted financial reporting - financial reporting based on
the provisions of Opinions 23, 34, 36, 37 and 50.
16. Nominal financial reporting - financial reporting based on
reported amounts.
B. Financial statements in reported amounts
(1) In October 2001, the Israel Accounting Standards Board
published Accounting Standard No. 12 on "Discontinuation of
Adjustment of Financial Statements". According to this
standard, and in accordance with Accounting Standard No. 17
published in December 2002, the adjustment of financial
statements for the effects of changes in the general
purchasing power of the shekel will be discontinued,
commencing January 1, 2004. Until December 31, 2003, the
Company continued to prepare adjusted financial statements in
accordance with Opinion No. 36 of the ICPAI. The Company is
applying the provisions of the Standard and, accordingly, the
adjustment was discontinued, as stated, commencing January 1,
2004.
(2) In the past, the Company prepared its financial statements on
the basis of historical cost, adjusted to the Consumer Price
Index. The adjusted amounts that were included in the
financial statements as at December 31, 2003, served as the
starting point for the nominal financial reporting commencing
January 1, 2004. Additions made during the period were
included in nominal values.
F-21
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
B. Financial statements in reported amounts (cont'd)
(3) The non-monetary asset amounts do not necessarily represent
their realizable or current economic value, but rather the
reported amounts of those assets.
(4) In the financial statements, the term "cost" means cost in
reported amount.
(5) The financial statements of companies classified as
autonomous units, are stated based on the changes in the
exchange rates of their relevant functional currencies - see
2.D below.
(6) All comparative data for earlier periods are stated adjusted
to the CPI for December 2003.
C. Reporting principles
(1) Balance sheets:
a. Non-monetary items (namely - fixed assets,
inventory of projects in progress and investments
stated at cost) are stated in reported amounts.
b. Monetary items are stated in the balance sheet at
historical nominal values as at the balance sheet
date.
(2) Statements of operations:
a. Revenues and expenses deriving from non-monetary
items (such as: depreciation and amortization,
changes in inventory, prepaid expenses and income,
etc.) or from balance sheet provisions, are derived
from the change between the reported amounts in the
opening balance and closing balance.
b. The remaining statement of operations items (such
as: sales, purchases, current manufacturing costs,
etc.) are stated at nominal values.
(3) Statement of changes in shareholders' equity
A dividend declared in the reporting period is
stated at nominal values.
D. Effects of the changes in foreign currency exchange rates
The Company has been applying Accounting Standard No. 13 on "The
Effect of Changes in Foreign Currency Exchange Rates" since January 1,
2004. The Standard deals with the translation of foreign currency
transactions and the translation of financial statements of overseas
operations for their inclusion in the financial statements of the
reporting corporation. The Standard prescribes rules for classifying
foreign operations as an autonomous foreign unit or as an integrated
unit, based on indications listed in the Standard and the use of
judgment, as well as the manner in which the financial statements of
autonomous held units are to be translated.
F-22
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
D. Effects of the changes in foreign currency exchange rates
Foreign currency transactions
-----------------------------
Transactions denominated in foreign currency are recorded when first
recognized at the exchange rate prevailing on the transaction date.
Exchange rate differences deriving from the discharge of monetary
items, or deriving from the reporting of the Company's financial items
at exchange rates that are different than those used for preliminary
recording during the period, or from those reported in prior financial
statements, will be charged to the statement of operations.
Foreign operations classified as an autonomous held unit
--------------------------------------------------------
For certain investees which are domiciled in Israel, and whose
revenues and most of their raw materials and fixed assets are acquired
in dollars, and for which the dollar is the major currency in the
economic environment in which the companies operate, the dollar
constitutes the measurement and reporting currency in their financial
statements. This is in accordance with the rules provided in Section
29A of Opinion 36 of the Institute of Certified Public Accountants in
Israel.
The financial statements of investees operating in a foreign country
as "an autonomous held unit" of the Group and companies registered in
Israel, the measuring and reporting currency of which is foreign
currency (dollar) as aforementioned, were translated to Israeli
currency as follows:
(1) The monetary and non-monetary assets and liabilities of an
overseas autonomous held unit were translated at the closing
rate. The goodwill balance created in the acquisition of the
overseas autonomous held unit is treated as an asset of that
unit and is translated at the closing rate as of January 1,
2004.
(2) Income and expense items are translated at the exchange rate
prevailing on the transaction date.
(3) All exchange rate differences created were classified as a
separate item in shareholders' equity until the net
investment is realized.
The impairment of an investment in an autonomous held unit overseas
does not constitute partial realization. Therefore, no part of the
translation differences were charged to the statement of operations
when the impairment was recorded.
The financial statements of investees operating overseas that are an
"integrated unit" of the Group, in accordance with the indicators
provided in Standard 13 of the Israeli Accounting Standard Board, are
translated from foreign currency to Israeli currency - with
non-monetary items translated at the historical exchange rate
prevailing on the transaction date and monetary items translated at
the exchange rate prevailing on the balance sheet date. Statement of
operations items are translated at the average exchange rate, except
for revenues and expenses related to non-monetary items that were
translated at the historical exchange rates at which the related
non-monetary items were translated. Differences created from the
translation are charged to financing.
E. Consolidation of financial statements
(1) The consolidated financial statements include the financial
statements of Koor and of all the companies in which the
Company has control. Jointly controlled companies are
included in the consolidated financial statements by the
proportionate consolidation method.
F-23
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
E. Consolidation of financial statements
(2) For the purpose of the consolidation, the amounts
included in the financial statements of the
consolidated companies were included after the
adjustments necessitated by the application of the
uniform accounting principles adopted by the Group.
(3) The consolidated financial statements include the
pro rata share of asset, liability, income and
expense items of proportionately consolidated
companies, based on the holding percentages in these
companies.
(4) As to the financial statements of subsidiaries that
are adjusted according to changes in foreign
currency exchange rates - see Note 2.D.
(5) a. The excess cost of an investment over the fair
value of its identified assets less the fair
value of the identified liabilities (after
allocation of the tax deriving from temporary
provisions) on acquisition date, is charged to
goodwill.
b. The excess cost allocated to assets and
liabilities is charged to the appropriate
balance sheet items.
c. Material intercompany balances and
transactions between Group companies were
eliminated for consolidation purposes.
Likewise, material unrealized income from
intercompany sales not yet realized outside
the Group were eliminated.
(6) The Company's shares that were acquired by the Company and
subsidiaries are presented as treasury stock.
(7) When the sale and/or exercise of convertible securities that
were issued by investees (including in respect of employee
options) is probable, according to the criteria prescribed in
Opinions 48 and 53 of the IACPA, and a decline in the
shareholding percentage is expected when they are converted
or exercised, as a result of which the holder will sustain a
loss, an appropriate provision is included in respect of the
anticipated loss.
(8) The Company applies Accounting Standard No. 20 on the
"Goodwill Amortization Period". Goodwill is stated in the
consolidated balance sheet in "other assets and deferred
expenses" and is amortized over its estimated useful life, in
a methodical manner. The amortization period represents the
best possible estimate of the period in which the Company
expects to derive future economic benefit from the goodwill.
The amortization period is not to exceed 20 years from the
date of initial recognition. Accordingly, the Group companies
amortize goodwill mainly over a period of 10 to 20 years.
The Standard applies to financial statements for periods
beginning on or after January 1, 2004. The change in the
amortization period of amortization balances as at January 1,
2004 is treated as a prospective change in estimate. These
goodwill balances will be amortized methodically over the
remainder of the prescribed amortization period.
F. Use of estimates:
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to use estimates
and assessments that influence the reported amounts of assets and
liabilities and the disclosure relating to contingent assets and
liabilities, as well as the revenues and expenses in the reporting
period. It should be clarified that actual results may differ from
such estimates.
F-24
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
G. Cash and cash equivalents:
Cash and cash equivalents include short-term bank deposits and
short-term government notes traded in banks, with an original maturity
of three months or less and which are not restricted.
H. Marketable Securities:
(1) Marketable securities
Investments in marketable securities held for the short term
as a current investment are stated at realization value on
the stock market as at the balance sheet date. Investments
in marketable securities, which are permanent investments,
are stated at cost (debentures - including accrued
interest), as long as there has not been a decrease in
value, which is not of a temporary nature (see also section
(3) below). The changes in the value of the securities are
charged in full to the statement of operations.
(2) Non-marketable securities
Stated at cost (debentures - including accrued interest),
which, in management's opinion is not higher than realization
value (see also section (3) below).
(3) Decrease in value of investments
From time to time, the Company reviews its permanent
investments in other companies to identify if there has been
a non-temporary decrease in their value. Such a review is
carried out where there are indications of the possibility
that the value of permanent investments has been impaired,
including a drop in stock market prices, the investee's
businesses, the industry in which the investee operates and
other parameters. The impairment in the value of these
investments, which management bases on an evaluation of all
the relevant aspects, giving appropriate weight to each and
which is not temporary, is charged to the statement of
operations.
I. Allowance for doubtful accounts:
The financial statements include allowances for doubtful accounts,
which management believes fairly reflect the loss inherent in accounts
whose collection is doubtful. Among the factors on which management
bases its determination of the appropriateness of the allowances are
an assessment of risk, based on information it has on the financial
status of the debtors, the volume of their activity and a valuation of
the collateral received from them.
The allowance is determined specifically for accounts whose
collection is doubtful.
J. Inventories:
Inventories are included at the lower of cost or market value. Cost is
determined as follows: Raw materials, auxiliary materials and spare
parts - at "moving average" or by the "first-in, first-out" method.
Finished goods and work-in-process - some on the basis of direct
manufacturing costs (including materials, labor and subcontractor
costs) plus the related part of indirect manufacturing costs, and some
on an average basis (including raw materials, tools, labor) and other
direct and indirect expenses.
Merchandise at "first-in, first-out" method or by the "moving
average".
F-25
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
K. Work in progress:
Inventory of long-term projects in progress is stated at cost, less
the part of cost that has been charged to the statement of operations
by the "percentage of completion" method. The cost includes the direct
cost of materials, wages, subcontractors, other direct costs and
indirect manufacturing costs allocated to the said projects (also see
Note 2.5 below).
Projects in progress and customer advances in respect of long-term
contracts include amounts in respect of contracts to be executed over
a period exceeding one year.
Where a loss is anticipated from the project, a provision is made for
the entire loss anticipated until completion of the project.
L. Venture capital investments:
The holdings of a venture capital fund in venture capital investments
are stated at cost in their reported amounts, net of provisions for
decline in value, if a non-temporary decline occurs. Gains from
venture capital investments are charged to the statement of operations
when the investment is realized.
M. Investments in investees:
(1) The investments in investees are presented by the equity
method. Taken into account when computing the Company's share
are losses due to the expected realization of convertible
securities issued by investees, if the conversion or exercise
of those securities is probable.
Taken into account when determining the equity value of the
investments in these companies are the amounts as they are
included in the companies' financial statements, after the
adjustments necessitated by the application of generally
accepted accounting principles.
(2) Regarding the goodwill amortization policy - see Note 2E(8)
above.
(3) Regarding the decline in value of investments in investees -
see Note 2.AD.
A list of investee companies is presented as an appendix to
the financial statements.
N. Monetary balances stated at present value
Monetary balances - long-term debts and liabilities that are interest
free or bear interest at below-market rates, are stated at their
present value, computed using the interest rate prevailing in the
market on the date created.
F-26
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
O. Fixed assets:
1. The assets are stated at cost, after deduction of related
investment grants.
2. Cost includes interest capitalized during the set-up period,
which was calculated using the interest rates applicable to
the sources used to finance the investment.
3. Improvements are charged to the cost of assets and are
amortized over the economic life of the asset. Repair and
maintenance expenses are charged to the statement of
operations as incurred.
4. Depreciation is computed using the straight-line method, on
the basis of the estimated useful lives of the assets.
The annual depreciation rates used are as follows:
%
---------
Buildings and leasehold rights 1.2-10 (mainly 2%)
Machinery, equipment and
installations 5-20 (mainly 10%)
Vehicles and forklifts 10-20 (mainly 15%)
Office furniture and equipment 6-33 (mainly 6% and 25%)
Computers and auxiliary equipment 20-33
Lease hold improvements *10
* or over the lease period, whichever shorter.
P. Other assets and deferred expenses:
Other assets and deferred expenses are amortized on a straight-line
basis over the expected period of benefit therefrom, as follows:
1. Licensing of products and acquisition of know-how are stated
at cost and are mostly amortized over eight years.
2. Marketing rights are stated at cost and amortized over
periods of five to ten years.
3. Intangible assets in the purchase of products are stated at
cost and are mainly amortized over 20 years.
4. Deferred expenses - debenture issue costs:
These costs are amortized by the straight-line method over
the life of the debentures - mainly six years.
5. See Note 2.E(8) regarding goodwill deriving from the
acquisition of companies that were consolidated.
6. Non-compete and confidentiality agreements are mostly
amortized over 5 years.
The amortization period is reevaluated periodically, based on the
estimated period of economic benefit.
F-27
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
Q. Convertible securities:
1. Debentures, the conversion of which is not probable, are
included at their liability value as at the balance sheet
date, in accordance with the provisions of Opinion 53 of the
ICPAI, and are stated in long term liabilities. Debentures,
the conversion of which is probable, are included between the
long-term liabilities item and the shareholders' equity item,
according to the liability value or the capital value,
whichever is the higher.
2. In accordance with Opinions 48 and 53 of the ICPAI, the
provision for loss on a decline in the shareholding
percentage in investee companies is included in the item
"minority interest" in the consolidated balance sheet, and in
the item "investment in investees" in the Company balance
sheet.
R. Deferred taxes:
1. Deferred taxes are calculated in respect of temporary
differences between the amounts included in the adjusted
financial statements and the amount taken into account for
tax purposes. Such deferred taxes are allocated for
differences related to assets, the consumption or
depreciation of which are deductible for tax purposes. As for
the main components in respect of which deferred taxes have
been created - see Note 16.G.
2. Deferred tax balances (asset or liability) are computed at
the tax rate expected to be in effect at the time these taxes
will be utilized, or when the tax benefit will be realized,
based on the tax rates and tax laws legislated or whose
legislation is essentially complete by the balance sheet
date.
The deferred taxes amount in the statement of operations
expresses the change in these balances during the year.
3. Taxes that would be imposed in the event of realization of
investments in investees, the sale of which is not expected
in the foreseeable future, are not included in deferred
taxes.
Deferred taxes were not created for taxes to be imposed on
earnings distributed by subsidiaries, as it is the Company's
policy not to distribute taxable dividends in the foreseeable
future. Likewise, tax benefits are not included in respect of
temporary differences, the realization of which is doubtful.
S. Revenue recognition:
Revenues and costs from work in progress under long-term contracts are
recognized in accordance with Accounting Standard No. 4 ("Standard 4")
published by the Israel Accounting Standards Board ("IASB"), as
follows:
A. Revenues and costs from work in progress under long-term
contracts will be recognized by the "percentage of
completion" method, if the following conditions are met: the
revenues are known or can be reliably estimated, the
collection of revenues is expected, the costs involved in
carrying out the project are known or can be reliably
estimated, there is no material uncertainty as to the ability
to complete the project and to meet the terms of the contract
with the customer, and the percentage of completion may be
reliably estimated.
As long as all the conditions listed above are not met,
revenue will be recognized at an amount equal to the costs
incurred and the recovery of which is expected ("zero
margin").
F-28
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
S. Revenue recognition: (cont'd)
B. Revenues and costs in government contracts, which are based
on cost plus a fixed margin ("cost plus"), are reported on
the basis of the invoices submitted to the customer
(essentially - on an accrual basis).
C. The percentage of completion is determined based on the cost
(actual cost vs. projected total cost) or based on the
delivery of products, depending on the nature of the
agreement.
D. For contracts in which a loss is anticipated, a provision is
recorded immediately for the full amount of the anticipated
loss at the time it is identified by management.
E. Projected earnings or losses from long-term contracts could
change as a result of changes in estimate, between the actual
performance and the original estimate. Such changes in
estimates are charged to the statement of operations when
identified.
2. Sale of products and providing services:
Revenues from sales and services are recognized upon delivery
of the products and transfer of the main risks and rewards
involved in ownership of the products, or upon performance of
the services.
In special contracts, sales are recognized after the work is
performed and acceptance tests are passed, as prescribed in
the product supply contract.
T. Sale of trade receivables:
See Note 3C(2).
U. Research and development expenses:
Research and development expenses -
Research and development costs, net of participations (mainly from the
Government of Israel), are charged to the statement of operations as
incurred. Research and development costs financed by the customer are
charged to the cost of projects in progress, and are included in the
statement of operations as part of the recognition of results from
such projects.
Research and development in process -
Costs to acquire in-process research and development which have no
alternative future use and which have not reached technological
feasibility at the date of acquisition are expensed as incurred.
F-29
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
V. Presentation of transactions between the Company and the
controlling shareholder:
Transactions between the Company and its controlling shareholder are
included in accordance with the Securities Regulations (Financial
Statement Presentation of Transactions between a Company and its
Controlling Shareholder), 1996. Accordingly, the difference between
the price paid to the controlling shareholder on the sale of an asset
and the book value of the asset to the controlling shareholder, is
included in the shareholders' equity.
In addition, the amount of the erosion of an unlinked interest-free
loan having no maturity date which was received from the controlling
shareholder, and that the parties do not intend to repay, is included
in shareholders' equity
W. Derivative financial instruments:
Koor and its subsidiaries enter into different kinds of option
contracts and forward trades that are intended to reduce the financial
risks (i.e. commitments for the import of raw materials, export of
goods, liabilities linked to the CPI or foreign currency) involved in
the exposure to fluctuations in inter-currency exchange rates,
interest rates and changes in the CPI.
The results of financial derivatives held to hedge assets and
liabilities are recorded in the statement of operations concurrently
with the recording of the changes in the hedged assets and
liabilities. Financial derivatives that are not held for hedging are
stated in the balance sheet at fair value. Changes in the fair value
are included in the statement of operation in the period they
occurred.
The fair value of derivative financial instruments is determined
according to their market values or quotes by financial institutions,
and when such do not exist, according to a valuation model.
X. Earnings (losses) per share:
Earnings (losses) per share data are computed in accordance with
Opinion 55 of the ICPAI.
Taken into account in the computation of basic earnings (losses) per
share are convertible securities issued by the Company, if their
conversion or exercise is probable, based on tests prescribed in the
opinion. Taken into account in the computation of fully-diluted
earnings (losses) per share are convertible securities issued by the
Company and its investees, that were not included in the computation
of basic earnings (losses) per share, when their conversion or
exercise does not increase earnings per share.
Y. Dividend declared subsequent to balance sheet date
In accordance with Accounting Standard No. 7 on "Subsequent Events",
the liability related to a dividend proposed or declared subsequent to
the balance sheet date is expressed in the accounts only in the period
in which it was declared. Likewise, separate expression is given in
the statement of changes in shareholders' equity to the dividend
amount to be distributed against a reduction in the retained earnings
balance.
F-30
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
Z. Segment reporting
Segment reporting is presented in accordance with Accounting Standard
No. 11, which requires the inclusion of information in respect of
business and geographical segments, as well as detailed guidelines for
identification of the business and geographical segments.
AA. Environmental costs
The current operating and maintenance costs of facilities to prevent
environmental pollution and provisions for expected costs related to
the rehabilitation of the environment deriving from current or past
activities, are charged to the statement of operations. Construction
costs of facilities for prevention of environmental pollution, which
increase the economic life or efficiency of the facility or reduce or
prevent environmental pollution, are charged to the cost of the fixed
assets and are depreciated in accordance with the depreciation
policies practiced by the Group.
AB. Impairment of assets
The Company applies Accounting Standard No. 15 - Impairment of Assets
("the Standard"), which prescribes procedures that the Company must
implement in order to assure that its assets in the consolidated
balance sheet (which are subject to the Standard) are not stated at an
amount exceeding their recoverable value, which is the higher of the
net sales price and the usage value (the present value of the
estimated future cash flows expected to derive from the use and
realization of the asset).
The Standard applies to all of the assets in the consolidated balance
sheet, except for tax assets, construction contracts and monetary
assets (aside from monetary assets that are investments in investees
that are not subsidiaries). Likewise, the Standard prescribes the
presentation and disclosure principles for assets that have declined
in value. When the carrying value of an asset in the consolidated
balance sheet exceeds its recoverable amount, the Company recognizes
an impairment loss equal to the difference between the book value of
the asset and its recoverable value. A loss so recognized will be
reversed only if changes have occurred in the estimates used in
determining the recoverable value of the asset, since the date on
which the last impairment loss was recognized.
F-31
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 2 - Significant Accounting Policies (cont'd)
AC. Data regarding the CPI and the Dollar exchange rate:
Israeli Exchange rate
CPI* of one Dollar
------------- ------------------
Points NIS
------------- ------------------
For the year ended:
December 2004 180.74 4.308
December 2003 178.58 4.379
December 2002 182.01 4.737
% %
------------- ------------------
Changes during:
2004 1.2 (1.6)
2003 (1.9) (7.6)
2002 6.5 7.3
%
-------------
Real rate of increase (decrease) in the CPI
relative to the exchange rate of the
dollar during the year:
2004 2.8
2003 (5.7)
2002 (0.8)
(*) According to the CPI for the month of the balance sheet date 1993 average basis = 100
Assets and liabilities in foreign currency or linked thereto are
included in the financial statements according to the representative
exchange rate published by the Bank of Israel on the balance sheet
date.
Assets and liabilities linked to the CPI are included in the financial
statements according to the CPI of the balance sheet month, or the
previous month, as relevant.
AD. Influence of new accounting standards prior to their
application
In July 2004, the IASB published Accounting Standard No. 19, "Taxes on
Income", which prescribes that a deferred tax liability is to be
recognized for all temporary differences that are taxable, except for
a limited number of exceptions. Likewise a deferred tax asset is to be
recognized for all temporary differences that are deductible, losses
for tax purposes and unutilized tax benefits, if it is expected that
there will be taxable income against which it will be possible to
utilize them, except for a limited number of exceptions. The new
Standard will apply to financial statements beginning on January 1,
2005. The Standard will be adopted as the cumulative effect of a
change in accounting method. First time application of the said
Standard will have a net non-recurring impact, as at January 1, 2005,
of increasing the net income by approximately NIS 19 million (which
mainly derives from recording deferred taxes in an investee company in
respect of unrealized profits which are anticipated to be realized in
the near future).
F-32
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees
A. ECI Telecom Ltd. ("ECI") - an affiliate
1. In November 2003, a valuation of ECI was performed by an
independent appraiser, for the purpose of evaluating the
recoverable value of Koor's investment in ECI. In accordance
with this appraisal, the Company reversed the impairment loss
from decline in value that had been created in 2001, based on
various indications, including a valuation for ECI. The
reversal of the loss of NIS 73 million was charged against
the capital reserve from foreign currency translation
adjustments (credit), which was realized when the provision
was created.
At the request of the appraiser (who agreed that the Company
would make use of the valuation), the Company undertook to
indemnify him against any expense or financial damage he will
sustain, if any, with respect to any claim to be filed by any
third party against the appraiser, the cause of action of
which is the valuation.
As at December 31, 2004, the balance of the investment in
ECI, stated by the equity method, is NIS 673 million.
2. In its financial statements for 2003, ECI reported on a
retroactive restatement of its financial statements for 2002
and for the fourth quarter of that year, relating to a
decrease in the value of its investment in an affiliate
(received in exchange for the transfer of certain assets),
having an effect on the investment in ECI of about 2 million
dollars.
The amount of the restatement was taken into account by the
Company, when in the third quarter of 2002, it included an
impairment provision for decline in value of its investment
in ECI, based on a valuation obtained from an independent
appraiser. Therefore, this restatement in the financial
statements of ECI has no effect on the financial statements
of the Company for the years 2002 and 2003.
3. On March 9, 2004, the board of directors of ECI resolved to
distribute 7.6 million shares of ECtel (42% of the paid-up
share capital of ECtel) as a dividend to the shareholders of
ECI. The shares of ECtel were distributed on May 10, 2004,
after all the requisite approvals were obtained. Prior to the
distribution, ECI had held 10.5 million shares of ECtel (58%
of the paid-up share capital of ECtel). Following the
distribution, ECI holds 16% of the shares of ECtel and Koor
directly holds 12.9% of the shares in ECtel. The investment
in ECtel is presented in the financial statements of ECI and
of Koor by the cost method.
F-33
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
A. ECI Telecom Ltd. ("ECI") - an affiliate (cont'd)
4. ECI prepares its financial statements in accordance with
generally accepted accounting principles in the U.S. For the
adjustment of ECI's net income (loss) as reported in
accordance with U.S. generally accepted accounting principles
(US GAAP) to the net losses according to Israeli generally
accepted accounting principles:
Year ended December 31
---------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
US$ thousands US$ thousands US$ thousands
-------------- -------------- --------------
Net gain ( loss) of ECI based on its
reporting according to US GAAP 10,153 (71,040) (155,685)
-------------- -------------- --------------
Adjustments:
Temporary differences resulting from
recognition of revenue arising from
application of SAB 101 - (5,905) (1,548)
Finance income - FAS 133 (8,303) (4,843) (3,632)
Tax expenses (1,529) (956) 645
Amortization of excess cost attributed to
intangible assets (1,233) (1,556) (1,809)
Profit from marketable securities (1,282) 1,282 -
Decline in value of assets 968 2,452 (533)
Cumulative effect of a change in
accounting method - FAS 142 - - 550
Discontinued activities - - (570)
-------------- -------------- --------------
Net loss of ECI according to Israeli GAAP (1,226) (80,566) (162,582)
-------------- -------------- --------------
B. Tadiran Ltd. (in voluntary liquidation) ("Tadiran") - a
subsidiary
On March 7, 2002, Tadiran's Board of Directors adopted a resolution to
begin the voluntary liquidation of Tadiran and to appoint a
liquidator. Following the liquidation, the debit balance of the
capital reserve from foreign currency translation adjustments at Koor
in respect of its investment in Tadiran of approximately NIS 391
million was transferred to the statement of operations.
F-34
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
C. Makhteshim Agan Industries Ltd. ("M-A Industries") - a
subsidiary
1. As at December 31, 2003, Koor held 48.59% of the voting
rights in M-A Industries, and taking into account the voting
agreement with certain other shareholders, Koor held most of
the voting rights. Therefore, the financial statements of M-A
Industries for 2003 were included in the consolidated
financial statements of the Company.
In January 2004, Koor sold 27 million shares of M-A
Industries for approximately NIS 418 million. The capital
gain of NIS 160 million (before tax) is included in "other
income". Likewise, a tax asset of NIS 59 million which had
been created in 2003, because of the expectation that the
carryforward tax losses would be utilized, was realized as a
result of this sale.
As a result of this sale, and after the realization and
conversion of convertible securities that had been allotted
to the public and to employees, Koor's holding percentage in
the voting rights of M-A Industries at December 31, 2004 is
38.6% (32.9% on a fully diluted basis).
Following the sale of the shares in January 2004, as a result
of which Koor's shareholding percentage in M-A Industries
fell below 50%, Koor evaluated the existence of effective
control in M-A Industries and the implications for continuing
to consolidate M-A Industries in the financial statements of
Koor, beginning from the first quarter of 2004.
In the opinion of Koor's management, the range of
circumstances that weight Koor's shareholding percentage in
M-A Industries, the broad dispersal of voting rights among
the other shareholders, the low level of shareholding by the
other shareholders, the slim probability of the creation of a
block of votes opposing Koor at shareholder meetings and past
experience related to the attendance at shareholder meetings,
as well as the voting percentages and opposition at the
meetings, show that the economic substance that stood and
continues to stand at the basis of the relationship between
the Company and M-A Industries immediately before and after
the said transactions demonstrates effective control, i.e.,
Koor's ability to set the financial and operational policies
of M-A Industries.
See Note 27(4) regarding an additional sale of shares of M-A
Industries.
2. In October 2001, M-A Industries and its subsidiaries entered
into a securitization arrangement, pursuant to which those
companies sold all of their trade receivables to foreign
companies established for that purpose and which are neither
owned nor controlled by M-A Industries ("the Special Purpose
Companies"). Purchase of the receivables was financed by an
American company from the Bank of America Group.
On September 28, 2004, M-A Industries and certain
subsidiaries ("the Companies") signed an agreement with Bank
of America to terminate the securitization undertaking. On
that same date, the Companies entered into a new agreement
with Rabobank International for the sale of trade receivables
in a securitization transaction to replace the previous
agreement with Bank of America. The new agreement is similar
in principle to the prior agreement with certain changes
including among others that in the new agreement additional
M-A Indusries subsidiaries are included in the transaction.
F-35
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
C. Makhteshim Agan Industries Ltd. (M-A Industries) -
subsidiary (cont'd)
2. (cont'd)
Under the terms of the new securitization agreement, the
Companies will sell their trade receivables to a foreign
company established for this purpose and which are neither
owned nor controlled by M-A Industries ("the Purchasing
Company"). The purchase of the trade receivables by the
Purchasing Company will be financed by the American company
Erasmus Capital Corporation of the Rabobank International
Group. During the transition from the previous agreement to
the new agreement, the Purchasing Company purchased the trade
receivables remaining in the ownership of the Special Purpose
Companies. The trade receivables included in the
securitization transaction meet certain criteria, as
stipulated in the agreement.
The maximum amount of financial resources expected to be made
available to the Purchasing Company to purchase the trade
receivables of the Companies is 250 million dollars (compared
with 150 million dollars in the previous securitization
agreement), on a current basis, so that the proceeds received
from the customers whose receivables had been sold will be
used to purchase new trade receivables.
The period in which the companies will sell their trade
receivables to the Purchasing Company will be one year from
the closing date of the transaction. This period may be
extended, with the consent of all the parties, for additional
one-year periods, up to a maximum of 4 extensions.
As at balance sheet date, cash in the amount of about 142.5
million dollars was received from the sale of customer debts
(December 31, 2003 - about 125.3 million dollars).
The price at which the trade receivables are sold is the
amount of the sold receivables, which are reduced based on
the period expected to elapse between the date the trade
receivables are sold and the date they are repaid.
On the purchase date of the receivables, the Purchasing
Company will pay most of the price of the receivables in
cash, and the balance in a deferred liability that will be
paid after collection of the sold receivables. The percentage
of the cash proceeds varies according to the behavior of the
trade receivables portfolio.
The companies will bear all the losses sustained by the
Purchasing Company as a result of the non-payment of the
trade receivables included in the securitization transaction,
up to the balance of the total unpaid balance of the sales
price included in the subordinated note.
The Purchasing Company will have no recourse against the
companies in respect of amounts paid in cash, except for
receivables in respect of which a commercial dispute arises
between the companies and their customers, i.e. a dispute
with respect to the non-fulfillment of the seller's
obligation in the agreement to supply the product, such as:
not supplying the correct product, a defective product, a
delay in the supply date, etc.
The Companies will handle the collection of the trade
receivables included in the securitization transaction for
the Purchasing Company.
F-36
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
C. Makhteshim Agan Industries Ltd. (cont'd)
2. (cont'd)
The essence of the accounting treatment of the sale of trade
receivables in a securitization transaction is the
recognition of the sale of the trade receivables only for
that part for which the control and risks were transferred
finally and absolutely to the purchaser. Accordingly, the
trade receivable balances included in the securitization
transaction, for which the consideration of cash and/or non
recourse liabilities was received, were written off. In
respect of the part of the trade receivables included in the
securitization transaction not recognized as a sale, a
subordinated note was recorded in the amount of the
difference between the trade receivable balances included in
the securitization transaction and the proceeds, as noted,
and the recording of receivables in respect of those trade
receivables sold for which proceeds were received subsequent
to the balance sheet date.
A loss from the sale of trade receivables is charged at the
time of sale to the statement of operations in the item
"other expenses".
Under the terms of the agreement, M-A Industries undertook to
meet certain financial covenants, mainly a ratio of
liabilities to capital and profitability ratios. As at the
balance sheet date, M-A Industries is in compliance with the
covenants.
3. In April 2001, the board of directors of M-A Industries
resolved to adopt a dividend policy of distributing 15%-30%
of annual net earnings, subject to the existence of
distributable earnings and to specific resolutions by the
board of directors.
In accordance with this policy, a dividend was declared and
paid in 2004 in the amount of 32.9 million dollars (of which
7.2 million dollars is in respect of the earnings of 2003). A
dividend of 11.2 million dollars was declared in December
2004 and paid in early 2005.
Subsequent to balance sheet date, another dividend was
declared in respect of the earnings of 2004, in the amount of
12.7 million dollars.
4. Acquisition of companies in the report year:
a. In April 2004, M-A Industries, through a
wholly-owned and controlled subsidiary, signed
agreements to acquire ownership and control in a
group of three companies, Vegetation Management LLC,
Farm Saver.com LLC and Nation Ag II LLC ("the
acquired companies"), which are engaged in the
registration, import and marketing of agrochemicals
in the U.S.
The total sales price amounted to NIS 303 million
(the price is after an amendment to the original
contract made in December 2004). NIS 34.4 million of
the total sales price was paid through a transfer of
1,908 thousand shares of M-A Industries that had
been held by a subsidiary (cost of shares - NIS 19.2
million).
The excess cost of investment created upon the
acquisition was NIS 235.8 million, of which NIS
130.2 million was allocated to intangible assets
(namely registration and licensing). The amount of
NIS 2.3 million was attributed to tax liabilities
and NIS 2.7 million was allocated to inventories.
The balance of NIS 105.2 million was allocated to
goodwill.
The excess cost allocated to licensing and
registration, as well as to goodwill, are amortized
over a 20-year period, which, in the estimation of
M-A Industries, represents the period of economic
benefit deriving from them.
F-37
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
C. Makhteshim Agan Industries Ltd. (cont'd)
4. Acquisition of companies in the report year: (cont'd)
a. (cont'd)
The statements of operations and the statements of
cash flows of the acquired operations were
consolidated beginning May 1, 2004. The effect on
the consolidated statement of operations of the
first-time consolidation of the acquired operations
is additional revenues of NIS 108 million for the
period ended December 31, 2004 and an addition to
net earnings (after amortization of goodwill) of NIS
25 million for that period (Koor's share in the
additional net earnings is NIS 10 million). The
effect on the consolidated balance sheet as at
December 31, 2004 is an increase in assets of NIS
334 million.
b. In the report year, M-A Industries, through
subsidiaries, signed agreements for the acquisition
of three marketing companies, as follows:
1) In June 2004, M-A Industries, through a
wholly owned and controlled subsidiary,
signed an agreement for acquisition of 45%
of the rights in the U.S. company, Control
Solutions Inc. ("CSI"), which is engaged in
the marketing of pesticides to the
non-agricultural market in the United
States.
Pursuant to the acquisition agreement, as
long as the subsidiary holds 45% of the
shares of CSI, decisions in areas critical
to CSI are to be made jointly by all the
shareholders of CSI. Therefore, CSI has
been consolidated in the financial
statements by the proportionate
consolidation method.
In addition, the subsidiary was granted an
option, which may be exercised at any time
during the next three years, to increase
its share in CSI to 60%, in exchange for a
payment ranging between NIS 6.8 million and
NIS 47.8 million, based on CSI's earnings
in 2004-2006.
Furthermore, commencing in 2009, the
subsidiary and the remaining shareholders
of CSI have the right to require the
subsidiary to acquire from the remaining
shareholders of CSI the balance of their
shares in CSI in consideration for an
amount to be determined based on the
earnings of CSI in the three years
preceding the acquisition date.
2) In July 2004, M-A Industries, through a
wholly owned and controlled subsidiary,
signed an agreement for acquisition of all
the shares and rights of Farmoz PTY
Limited, an Australian company engaged in
the marketing and distribution of
pesticides in Australia.
3) In August 2004, M-A Industries, through a
subsidiary, signed an agreement for
acquisition of 50.1% of the rights in the
U.S. company, RiceCo LLC, which is engaged
in the development and marketing of
herbicides for rice.
The aggregate acquisition cost of the acquired
marketing companies was NIS 185.7 million. The
excess cost created as at the acquisition date
totalled NIS 140.9 million, of which NIS 68 million
was allocated to intangible assets (namely
registration and licensing), the amount of NIS 15.8
million was attributed to deferred tax liabilities,
NIS 3.1 million was allocated to inventories, and
the balance of NIS 85.6 million was allocated to
goodwill.
F-38
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
C. Makhteshim Agan Industries Ltd. (cont'd)
4. Acquisition of companies in the report year: (cont'd)
b. (cont'd)
The excess cost that was allocated to registration
and licensing as well as the goodwill are amortized
over a 20-year period, which, in the estimation of
M-A Industries, represents the period of economic
benefit deriving from them.
The statements of operations and the statements of
cash flows of the three marketing companies were
consolidated from their acquisition date. The total
effect of the first-time consolidation of the
acquired marketing companies on the consolidated
statement of operations is additional revenues of
NIS 207 million for the period ended December 31,
2004 and a decrease in net earnings (after
amortization of goodwill) of NIS 1 million during
that period. The effect on the consolidated balance
sheet as at December 31, 2004 is an increase in
assets of NIS 314 million.
5. In a private placement to institutional investors (mainly
overseas) in March 2004, M-A Industries allotted
non-marketable convertible debentures in the amount of 150
million dollars par value (including 5 million dollars which
was issued to the underwriters in April 2004), in
consideration for their par value. See Note 15B(1).
6. In March 2004, a subsidiary of M-A Industries transferred to
a third party, in an off-exchange transaction, 7 million
shares of M-A Industries it had held. Under the terms of the
agreement, the proceeds will be paid by the end of one year
from the transfer date, whether in cash, based on the share
price on the stock exchange on such date, or whether in the
shares of M-A Industries plus an increment of 0.5% of the
share price on the stock exchange. Since the cash proceeds
have not yet been received, no capital issuance was recorded
by M-A Industries in respect of the transferred shares.
During the second quarter, 1,908 thousand shares of the above
shares were returned, for the purpose of paying the
consideration for the acquisition of a group of companies in
the U.S., as discussed in Note 3(C)(4)(a) above.
Subsequent to balance sheet date an additional 750 thousand
shares were returned and an extension was granted with
respect to the rest of the shares.
See Note 27(1) regarding the purchase of MABENO.
7. On February 3, 2005, Koor sold 15.9 million shares of M-A
Industries for NIS 374 million. The resultant gain of NIS 204
million will be charged in the Company's financial statements
for the first quarter of 2005. As a result of the sale, the
utilization of carryforward tax losses is certain. Therefore,
the Company recorded a deferred tax asset of NIS 69 million
in the reporting period - (see Note 27(4)).
F-39
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
D. Telrad Networks Ltd. ("Telrad") - a subsidiary
1. On September 28, 2004, Koor and Telrad Holdings, a
wholly-owned subsidiary ("the Koor Group") entered into an
agreement to sell 39% of its holdings in Telrad Networks to
Fortissimo GP Capital Fund L.P. ("Fortissimo") for 21 million
dollars.
The sale will be effected in two stages. In the first stage,
which was closed in November 2004, Koor transferred 19.5% of
the Telrad Networks shares to Fortissimo for consideration of
10.5 million dollars. In the second stage, to be closed 180
days after the closing of the first stage, Fortissimo will
transfer the balance of the consideration, amounting to 10.5
million dollars, and will receive the balance of the sold
shares. The Koor Group and Fortissimo agreed on a formula,
whereby if Fortissimo does not transfer the entire balance in
the second stage, it will receive shares on a basis
proportionate to the consideration paid. In such a situation,
there are cases in which changes will be made to the
composition of the board of directors, in the voting rights
given to the minority shareholders, in the loan amounts and
in the options terms, as described below.
Fortissimo was given an option, exercisable for a period of
up to 48 months from the closing date of the first stage, to
acquire additional shares from the Koor Group, whereby
Fortissimo's total holdings will not exceed 49% of the shares
of Telrad Networks. The exercise price will be determined
according to the value of Telrad Networks, which will not be
less than its shareholders' equity in the financial
statements on the exercise date.
As part of the share-sale agreement, the parties agreed that
upon the closing of the first stage of the sale, the Koor
Group would transfer 9.5 million dollars as a loan to Telrad
Networks, and with the closing of the second stage, would
transfer an additional 11.5 million dollars. These loans will
bear annual interest of Libor+2% per annum, and will mature
20 years from the closing date of the first stage.
On the closing date of the first stage, the Koor Group
provided Telrad Networks with the said 9.5 million dollar
loan. As at December 31, 2004, based on estimates by the
Company's management, forecasts on the operating results of
Telrad Networks and a range of indemnifications provided in
the transaction, the management of Koor Group assessed that
the value of the loan was impaired. Therefore a provision was
recorded in the amount of the net loss that will be incurred
by the Group.
As to the indemnifications given by the Koor Group as part
of this transaction, see Note 18A(5)(C).
Pursuant to the sale agreement, Telrad's board of director
appointed 3 directors from Koor, 3 directors from Fortissimo,
and an outside expert with the consent of the parties, who,
as at the publication date of the financial statements, was
not as yet appointed.
The agreement stipulates a list of matters which must be
approved by the joint consent of the Koor Group and
Fortissimo, including: approval Telrad's budget, appointment
of Telrad's executives and determining their terms of
employment and a dividend distribution. Those rights confer
to the minority shareholders the right to actually
participate in the significant decisions related to the
Telrad's normal course of business, and, therefore, prevent
Koor's Group, the majority shareholder, from actual control
over Telrad Networks and require the joint consent of Koor
and Fortissimo in decisions on matters that are critical for
the operating objectives of Telrad.
Therefore, beginning from the fourth quarter of 2004, Telrad
is included in Koor's financial statements by the
proportionate consolidation method, at a rate of 80.5%.
F-40
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
D. Telrad Networks Ltd. (cont'd)
1. (cont'd)
Below is the Company's share in the balance sheet date of
Telrad as at December 31, 2004 (in NIS thousands):
Current assets 296
Non-current assets 144
Current liabilities 197
Long-term liabilities 91
The Company's share in the results of Telrad at the fourth
quarter of 2004 (in NIS thousands):
Income 93
Costs and expenses 155
2. During the report period Telrad recorded an impairment of its
deferred tax assets by NIS 67 million, due to changes in
management's estimation of the probability of utilization of
the company's carryforward tax losses.
3. In 2004, Telrad's board of directors approved a
reorganization plan that includes additional employee layoffs
in addition to prior early retirement plans in 2000 to 2002.
The financial statements for 2004 included in the item "other
income (expenses), net" an expense of NIS 29 million (of
which NIS 3 million is in respect of previous plans)
(expenses of reorganization plan in 2003 and 2002 totaled NIS
2 million and NIS 107 million, respectively).
E. Elisra Electronic Systems Ltd. ("Elisra") - a subsidiary
1. On March 17, 2001, a fire broke out at the plants of
Elisra's subsidiaries - Tadiran Systems Ltd. and Tadiran
Spectralink Ltd. ("the companies"). The fire caused damage
to equipment, building, inventories and projects in
progress. The book value of the equipment, inventories and
identified costs in projects in progress that were damaged
in the fire, together with the building restoration costs
and other costs, are estimated at approximately 36 million
dollars. As at the balance sheet date, advances were
received from the insurance company of approximately 10
million dollars. The claim sent by the companies to the
insurance company, which was based on the terms of the
insurance policy, also include a demand for amounts related
to consequential damage and other damages that, in the
opinion of the companies, is covered by the insurance
policy. Therefore, the total amount of the claim is
significantly higher than the book value damage and
restoration cost of the building, as aforesaid.
The companies took legal measures to receive insurance
compensation and even filed a lawsuit in Tel Aviv District
Court against the insurance company and its appraisers in the
amount of 96 million dollars. In view of the duration of the
proceedings, the managements of the companies decided to
classify the balance of the income receivable from the
insurance companies as a long-term receivable.
F-41
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
E. Elisra Electronic Systems Ltd. ("Elisra") - a subsidiary
(cont'd)
1. (cont'd)
In the estimation of the companies, based on factors
including opinions from their counsel on this matter, it is
difficult to estimate at this stage what the chances are that
the companies will receive the full amount of the claim,
although they are assessed as solid. Nonetheless, the
managements of the companies, based, as aforesaid, on the
opinions of their counsel on this matter, estimate that the
chances are good that indemnification will be received from
the insurance company at an amount exceeding the balance of
the receivable recorded by them as assets in the financial
statements.
In April 2004, the companies filed a motion with the court to
issue a partial ruling of 33 million dollars (beyond the
advances already paid by the insurance company), based on the
admission of liability by the insurance company and its
representatives deriving from the insurance incident, whereas
the dispute focuses on the level of damages. In December
2004, a hearing was held in the Court in which a ruling was
put into effect, with the consent of the parties, whereby a
separate bank account would be opened, in which the insurance
company would deposit 15 million dollars. Any withdrawal from
this account would require the Court's approval, until the
conclusion of the proceedings in the lawsuit. According to
the above agreement, the lawsuit was sent to arbitration
before retired Supreme Court Justice Prof. Yitzhak Zamir, and
at this time, the court proceedings will be stayed until the
end of the arbitration.
2. In July 2002, the Company, Elisra and Elta Electronic
Industries Ltd. ("Elta" or "the Buyer") signed an agreement
("the Purchase Agreement"), whereby Koor sold 30% of Elisra's
shares to Elta for 100 million dollars. The sale was closed
in November 2002. As a result of the sale, Koor recorded a
capital gain in 2002 of NIS 339 million, under the item
"other income, net".
In addition, Koor granted options to Elta, exercisable until
December 31, 2003, to increase its holdings in Elisra by up
to an additional 8% in consideration of a maximum sum of
approximately 26 million dollars. This option expired and was
not exercised by Elta. Under the Purchase Agreement, Koor
agreed to indemnify Elta if certain conditions, set out in
the Agreement, are fulfilled. Also see Note 18A(3).
As part of the agreement between Koor and Elta, an agreement
was signed, to which Elisra is a party, setting forth the
structure of Elisra's board of directors and the
decision-making process, as well as certain limitations with
respect to the sale of Elisra's shares. In addition, a
cooperation agreement was signed between Elisra and Elta,
with regard to activities between the companies, including a
proposal for an agreed range of products and the principles
for selecting a project leader from time to time.
F-42
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
F. Koor Corporate Venture Capital ("Koor CVC") - a consolidated
partnership
1. Regarding commitments to invest and other investments
subsequent to balance sheet date, see Note 18B(5).
2. During the current year, Koor CVC's management estimated that
the value of the portfolio investments was lower than their
cost, and therefore decided to write-down the value of the
investment by approximately NIS 58 million (in 2003 and 2002
- NIS 72 million and NIS 93 million, respectively).
3. In June 2004, Cisco Systems purchased all the shares of
Riverhead Inc. from its shareholders for consideration of 39
million dollars. The share of Koor CVC in the proceeds is 7
million dollars. The gain to Koor CVC is NIS 17 million.
G. Knafayim Holdings Arkia ("Knafayim") - affiliate
1. During 2003 and in the first quarter of 2004, Knafayim
acquired shares, which did not confer the status of related
party, and various types of options of El Al Israel Airlines
Ltd. ("El Al"). During the second quarter of 2004, after
receiving the requisite approval to increase its stake in the
shares of El Al above 5%, Knafayim exercised some of the
options. Thus, after the exercise, Knafayim held 22% of El
Al's issued share capital. Pursuant to a third-party voting
agreement, Knafayim held 24.9% of the voting rights of El Al.
During the third quarter of 2004, Knafayim filed a request
with the State of Israel, which holds a special share in El
Al, for approval to increase its stake in El Al above 25%.
On August 5, 2004 the Anti-Trust Commissioner approved the
merger between Knafayim and El-Al, with restrictive
conditions, mainly regarding the sale of Knafayim's aviation
activities to an independent third party.
On December 22, 2004, Knafayim received the requisite
approval to increase its stake in the shares of El Al to 40%,
and to a shareholding that would grant control over El Al.
Upon receipt of this approval, Knafayim exercised part of the
purchase option so that as of December 31, 2004 Knafayim
holds approximately 39.8% of the issued and paid shares of El
Al and approximately 42.8% of the voting rights in El Al
according to authorization that was granted to Knafayim by a
third-party.
2. On September 29, 2004 the Company signed two agreements to
sell 16% of the shares of Knafayim for approximately NIS 121
million. In the statement of operations for the third quarter
of 2004, the Company recorded a gain of NIS 43 million. As a
result of the sale, the Company's shareholding in Knafayim
decreased from approximately 28.3% to approximately 12.2%.
Accordingly, the investment in Knafayim is stated by the cost
method, beginning from the date of the sale.
In addition, on September 29, 2004, the Company signed an
agreement for the sale of an additional 3% of the shares of
Knafayim for approximately NIS 23 million. The conditions for
closing the sale were fulfilled on October 20, 2004.
Therefore a gain of approximately NIS 8 million was recorded
in the fourth quarter of 2004.
As of the balance sheet date, the Company holds approximately
9% of Knafayim. Since management intends to sell the
remainder of the shares in Knafayim, the investment is
presented within current assets. As a result of management's
intention to sell the remainder of its holding in Knafayim,
the Company recorded deferred taxes of approximately NIS 8
million during the reporting period in respect of the
anticipated utilization of carryforward tax losses.
F-43
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
H. Tadiran Communications Ltd. ("Tadiran Communications") - an
affiliated Company
1. On September 10, 2004 the Company signed an agreement to
acquire about 33% of the shares of Tadiran Communications
(about 31% taking into consideration stock options the
exercise of which is probable) from two shareholders for
approximately NIS 637 million (approximately 144 million
dollars). Tadiran Communications develops, manufactures and
markets communication devices and systems mainly for military
purposes. The sale was closed in November 2004. The purchase
was financed by a loan received from an Israeli bank in
consideration for a lien in favor of the bank on the sold
shares.
Excess cost created on the acquisition date totaled NIS 490
million (111 million dollars), which was allocated based on
the valuation received from an independent appraiser. At the
request of the appraiser (who agreed that the Company would
make use of the valuation), the Company undertook to
indemnify him against any expense or financial damage he will
sustain, if any, with respect to any claim to be filed by any
third party against the appraiser, the cause of action of
which is the valuation.
Provided below is the allocation of excess cost (according to
a holding rate of 31%):
NIS millions
------------
Current assets 14
Investments and long-term receivables 1
Fixed assets 1
Intangible assets (1) 308
Goodwill (2) 242
Current liabilities 19
Long-term liabilities 3
Deferred taxes (3) (98)
(1) The intangible assets include NIS 20 million
allocated to in-process research and development,
which were charged to the statement of operations on
the acquisition date, in accordance with the
provisions of FIN 4. The balance of NIS 288 million
was allocated to intangible assets with an average
life of seven years, according to the following
breakdown: NIS 14 million allocated to brand name,
NIS 173 million allocated to customer list, NIS 98
million allocated to technology and NIS 3 million
allocated to the orders backlog.
(2) Useful life of goodwill is estimated at 10 years.
(3) Deferred taxes deriving from the allocation of excess
cost.
2. On December 27, 2004, Koor entered into a series of
agreements with Elbit Systems Ltd. ("Elbit") and with
Federman Enterprises Ltd. ("Federman"). Under the terms of
the agreements, Koor will sell its entire holdings in Tadiran
Communications (33%) to Elbit for 146 million dollars ("Elbit
sale"). Concurrently, Koor will acquire 9.8% of Elbit's share
capital from Federman for 99 million dollars ("Federman
sale"). On the date the agreements were drafted, Elbit held
4.2% of the shares of Tadiran Communications and Federman
held 50% of Elbit's shares. On March 1, 2005, a general
meeting of the shareholders of Elbit ratified the Elbit sale.
F-44
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 3 - Information Regarding Certain Investees (cont'd)
H. Tadiran Communications Ltd. ("Tadiran Communications") - an
affiliate (cont'd)
2. (cont'd)
The two sales are interconnected and will be executed -
subject to the conditions stipulated in the agreements,
including approval of the Anti-Trust Commissioner and other
approvals - in two stages.
In the first stage, Koor will sell 13.8% of Tadiran
Communications to Elbit for 63 million dollars and
concurrently Koor will acquire 5.3% of the shares of Elbit
from Federman for 53 million dollars. The closing date for
the first stage will be in the second quarter of 2005, or at
a later date, if so agreed by the parties. After the closing
of the first stage, Koor will be entitled to appoint one
director to Elbit's board, and Elbit will be entitled to
appoint three of the members of Tadiran Communications' board
of directors.
In the second stage of the transaction, Koor will sell the
balance of its holdings in Tadiran Communications (19.2%) to
Elbit for 83 million dollars and concurrently will acquire
4.5% of the shares of Elbit for 46 million dollars. In
addition to the aforementioned conditions, the second stage
is contingent on the closing of a transaction in which
Tadiran Communications will acquire from Koor the holdings of
Koor (70%) in Elisra Elecronic System Ltd.
The closing date for the second stage of the agreements was
scheduled for September 30, 2005. If all the other
conditions are fulfilled, but the Elisra transaction has not
been closed, the date will be postponed to April 30, 2006 or
to another date agreed upon by the parties.
After both stages in the Elbit sale and the Federman sale are
executed, Koor will no longer hold shares of Tadiran
Communications, although it will hold 9.8% of the Elbit
shares and will have the right to appoint 20% of Elbit's
directors. One of the directors nominated by Koor willl serve
as Vice Chairman of the Board of Directors of Elbit.
It was further agreed by the parties that if the second stage
of the sales is not closed within sixteen months of the
signature date of the agreements, then the board of directors
of Tadiran Communications will be comprised in a manner
whereby Koor and Elbit will have the same number of directors
in the board of directors of Tadiran Communications, and
there will be rotation of two-year terms for the chairman of
the board, with Koor's candidate being the first to serve.
F-45
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 4 - Short-Term Deposits and Investments
Consolidated Company
----------------------------- ------------------------------
December 31 December 31
----------------------------- ------------------------------
2004 2003 2004 2003
------------ ---------- ----------- ----------
NIS thousands NIS thousands
----------------------------- ------------------------------
Marketable securities (1):
Debentures 122,706 141,221 117,110 132,218
Short-term Treasury notes 145,927 74,628 81,901 74,628
Shares and options 106,773 56,010 99,630 48,753
Mutual fund participation
certificates - 5,618 - -
------------ ---------- ----------- ----------
375,406 277,477 298,641 255,599
Deposits in banks and financial
institutions 37,584 89,161 - 55,207
Short-term loans and current
maturities of long-term loans 3,478 171 - -
------------ ---------- ----------- ----------
416,468 366,809 298,641 310,806
(1) Presented at market value.
============ ========== =========== ==========
Note 5 - Trade Receivables
Consolidated:
December 31
------------------------------
2004 2003
------------ -----------
NIS thousands
------------------------------
Open accounts 1,877,696 1,732,827
Deferred promissory note and receivables from sale of
customers' debts* 261,004 250,492
Post dated checks receivable and credit card companies 29,920 43,561
Current maturities of long-term trade receivables 4,979 25,581
------------ -----------
2,173,599 2,052,461
============ ===========
Including:
Net of allowance for doubtful accounts 121,922 106,305
============ ===========
* See Note 3C(2).
F-46
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 6 - Other Receivables
Consolidated Company
----------------------------- ------------------------------
December 31 December 31
----------------------------- ------------------------------
2004 2003 2004 2003
------------ ---------- ----------- ----------
NIS thousands NIS thousands
----------------------------- ------------------------------
Government agencies 195,708 126,043 357 7
Deferred taxes, see Note 16G 171,310 156,030 77,483 58,903
Accrued income 31,639 31,289 390 717
Prepaid expenses 48,498 45,712 - -
Employees 8,524 8,855 - -
Affiliates - current accounts 643 2,378 376 -
Others 72,661 82,863 5,432 8,147
------------ ---------- ----------- ----------
528,983 452,170 84,038 67,774
============ ========== =========== ==========
Note 7 - Inventories and Work in Progress
Consolidated:
December 31
------------------------------
2004 2003
------------ -----------
NIS thousands
------------------------------
A. Inventories and work in progress, net of
customer advances
Presented as current assets:
Industrial inventory:
Raw and auxiliary materials 712,021 570,455
Goods and work in progress 228,122 199,748
Finished goods 1,171,574 1,024,181
Advances in respect of materials 13,974 4,562
Inventories for trading operations -merchandise,
including advance payments 169,194 91,591
------------ -----------
2,294,885 1,890,537
Less - customer advances - 4,786
------------ -----------
2,294,885 1,885,751
============ ===========
B. Customer advances, net of work in progress
Presented as current liabilities:
Customer advances in respect of work in progress(1)(2) 211,297 156,831
Less - inventory and work in progress 90 390
------------ -----------
211,207 156,441
============ ===========
(1) Not including long-term advances
(2) See Note 22 regarding guarantees provided for
securing the gross amounts of customer advances
(including long-term advances).
F-47
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 7 - Inventories and Work in Progress (cont'd)
December 31
------------------------------
2004 2003
------------ -----------
NIS thousands
------------------------------
C. Financial value of contracts signed during the report
period 902,621 736,517
============ ===========
D. The balance of the financial value of existing contracts
which were not recognized as revenues as at the
balance sheet date 1,990,684 2,245,371
============ ===========
F-48
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 8 - Investments in Investee companies
A. Consolidated balance sheet - affiliates
December 31
------------------------------
2004 2003
------------ -----------
NIS thousands
------------------------------
Net asset value of the investments (1)(2) 882,854 902,343
------------ -----------
Goodwill and original difference (2):
Original amount 491,044 66,465
Accumulated amortization (26,859) (51,395)
------------ -----------
464,185 15,070
------------ -----------
Long-term loans (3) 28,121 26,351
------------ -----------
1,375,160 943,764
============ ===========
(1) As follows:
Net asset value of investments as at December 31, 1991 277,159 277,159
Changes from January 1, 1992:
Cost of shares acquired or received 1,427,857 1,266,706
Accumulated losses, net (744,819) (708,007)
Changes in capital reserves and foreign currency
translation adjustments (32,626) (11,648)
Initially consolidated subsidiaries, net 465,193 465,193
Disposals, net (509,910) (387,060)
------------ -----------
882,854 902,343
============ ===========
(2) Including investments in companies traded on the
Stock Exchange in Tel Aviv or abroad, in NIS millions:
Carrying value at the balance 1,275 862
============ ===========
Market value as at balance date 1,754 985
============ ===========
(3) Linkage terms and interest rates relating to long-term loans:
Linked to the CPI - bearing interest at the rate of 5.5%,
without maturity date 22,335 20,470
Linked to the Dollar - bearing interest at the rate of
LIBOR + 1%, without maturity date (*) 5,786 5,881
------------ -----------
28,121 26,351
============ ===========
(*) On December 31, 2004, the LIBOR rate is 3.1%.
F-49
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 8 - Investment in Investee Companies (cont'd)
B. Company balance sheet - investees
December 31
------------------------------
2004 2003
------------ -----------
NIS thousands
------------------------------
Shares:
Net asset value of the investments 1,729,813 1,940,588
------------ -----------
Goodwill and original differences:
Original amount, net 556,043 158,187
Accumulated amortization (57,236) (90,179)
------------ -----------
498,807 68,008
------------ -----------
Book value (1) 2,228,620 2,008,596
Payments on account of shares (1) 60,927 60,927
Long-term loans and capital notes (2) 1,307,998 1,379,561
Non-current inter-company accounts (3) 4,012 3,982
------------ -----------
3,601,557 3,453,066
============ ===========
(1) As follows:
Cost of shares including accumulated earnings as at
December 31, 1991 2,032,681 2,032,681
Changes from January 1, 1992:
Cost of acquired shares 7,714,479 7,055,603
Accumulated losses, net (4,467,604) (4,432,466)
Changes in capital reserves and erosion of capital notes, net (33,483) 14,648
Disposals (2,956,526) (2,600,943)
------------ -----------
Book value, including payments on account of shares (4) 2,289,547 2,069,523
============ ===========
F-50
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 8 - Investment in Investee Companies (cont'd)
B. Company balance sheet - investees (cont'd)
December 31
------------------------------
2004 2003
------------ -----------
NIS thousands
------------------------------
(2) Long-term loans and capital notes:
Long-term loans (a) (b) 93,476 65,633
Capital notes - unlinked and not bearing interest (c) 1,251,902 1,316,457
------------ -----------
1,345,378 1,382,090
Less - current maturities of long-term loans (37,380) (2,529)
------------ -----------
1,307,998 1,379,561
============ ===========
(a) Long-term loans classified by linkage terms and interest rates:
Interest rate
at December 31 December 31 December 31
-------------- -------------- -------------
2004 2004 2003
-------------- -------------- -------------
% NIS thousands
-------------- ---------------------------------
Linked to the Dollar 3 42,765 12,184
Linked to the CPI 7-2 41,803 43,205
Linked to the CPI No interest 8,908 10,244
-------------- -------------
93,476 65,633
============== =============
(b) The loans mature in the years subsequent to the balance sheet date
(excluding current maturities) as follows:
December 31
---------------------------------
2004 2003
-------------- ------------
NIS thousands
-----------------------------
Second year 5,385 -
Third year - 5,474
Fourth year - 6,710
Fifth year - -
Thereafter 50,711 50,920
-------------- -------------
56,096 63,104
============== =============
(c) Capital notes are not presented at their present value, since
their repayment date has not yet been fixed by the parties.
F-51
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 8 - Investment in Investee Companies (cont'd)
B. Company balance sheet - investees (cont'd)
(3) Non-current inter-company accounts:
December 31
---------------------------------
2004 2003
-------------- ------------
NIS thousands
---------------------------------
Linked to the Dollar 599 569
Unlinked-bears interest at the rate of the increase in the CPI 3,413 3,413
-------------- ------------
4,012 3,982
============== ============
December 31
---------------------------------
2004 2003
-------------- ------------
NIS millions
---------------------------------
(4) Including investments in marketable shares traded on the Tel
Aviv Stock Exchange or abroad in NIS millions:
Carrying value 754 498
============== ============
Market value as at balance date 960 867
============== ============
Note 9 - Other Investments and Receivables
A. Composition:
Consolidated Company
------------------------------- ---------------------------------
December 31 December 31
2004 2003 2004 2003
-------------- -------------- -------------- ------------
NIS thousands NIS thousands
------------------------------- ---------------------------------
Deposits in banks and in
financial institutions 47,278 49,180 32,028 32,028
Non-current trade receivables 5,229 9,362 - -
Long-term loans receivable
from others 113,637 73,498 - -
-------------- -------------- -------------- ------------
Total (see Note B above) 166,144 132,040 32,028 32,028
Marketable securities 33,471 1,625 - -
Venture capital investment 171,207 230,390 - -
Indemnification receivable for fire
damages (1) 111,508 113,346 - -
Non-marketable shares and
payments on account 1,040 1,036 1,040 1,036
Others 5,661 4,947 107 113
-------------- -------------- -------------- ------------
489,031 483,384 33,175 33,177
============== ============== ============== ============
(1) See Note 3E(1)
F-52
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 9 - Other Investments and Receivables (cont'd)
B. Classification by linkage terms and interest rates of deposits, non - current debts of customers and
long - term loans from others:
Consolidated:
Interest rates at
December 31 December 31
----------------- ----------------------------------
2004 2004 2003
----------------- --------------- --------------
% NIS thousands
----------------- ----------------------------------
Linked to the CPI Mainly 5.7 36,228 39,028
Linked to the foreign currency (mainly to the Dollar) Mainly 0 106,715 93,012
Linked to dollar Libor* + 2% 12,757 -
Unlinked - 10,444 -
--------------- --------------
166,144 132,040
=============== ==============
* As at December 31, 2004 the Libor rate is 3.1%.
Company: December 31
----------------------------------
2004 2003
--------------- --------------
NIS thousands
----------------------------------
Linked to the CPI 5.7 32,028 32,028
=============== ==============
C. Repayment schedule of deposits, non-current customers balances and long-term loans
from others, in the consolidated balance sheet:
Consolidated Company
-------------------------------- ---------------------------------
December 31 December 31
-------------------------------- ---------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- ------------
NIS thousands NIS thousands
-------------------------------- ---------------------------------
Amounts collectible in the:
Second year 75,680 50,094 32,028 -
Third year 19,957 45,958 - 32,028
Fourth year 13,748 8,230 - -
Fifth year 3,852 3,909 - -
Thereafter and without a
specific maturity date 52,907 23,849 - -
-------------- -------------- -------------- ------------
166,144 132,040 32,028 32,028
============== ============== ============== ============
F-53
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 10 - Fixed Assets
A. Consolidated
Land Machinery, Vehicles
(including equipment and and forklifts
leasehold land) Buildings installations
---------------- ------------ -------------- -------------
NIS thousands
--------------------------------------------------------------------
Cost as at January 1, 2004 115,651 1,705,294 3,751,016 39,455
Additions during the year 679 34,908 146,112 9,042
Disposals during the year (8) (5,446) (18,403) (13,261)
Adjustments resulting from foreign
currency translation differences* (257) (7,153) (41,928) (465)
Acquisition of subsidiaries, net 932 2,694 2,973 2,962
Company that became proportionately
consolidated (4,184) (31,526) (55,397) (157)
---------------- ------------ -------------- -------------
Balance as at December 31, 2004 112,813 1,698,771 3,784,373 37,576
================ ============ ============== =============
Accumulated depreciation as at
January 1, 2004 1,233 652,118 2,072,799 21,029
Additions during the year 46 38,812 159,431 5,294
Disposals during the year - (2,054) (16,256) (8,162)
Adjustments resulting from foreign
currency translation differences* (13) (1,698) (23,920) (709)
Acquisition of subsidiaries, net - 372 1,189 1,155
Company that became proportionately
consolidated (82) (9,178) (48,301) (155)
---------------- ------------ -------------- -------------
Balance as at December 31, 2004 1,184 678,372 2,144,942 18,452
================ ============ ============== =============
Write down for decline in value - 11,707 - -
---------------- ------------ -------------- -------------
Net book value as at December 31, 2004 111,629 1,008,692 1,639,431 19,124
================ ============ ============== =============
Net book value as at
December 31, 2003 114,418 1,041,469 1,678,217 18,426
================ ============ ============== =============
* See Note 2B(5)
(TABLE CONTINUED)
A. Consolidated
Installations Total
under
construction
Office and payments
furniture Tools and on account
and equipment instruments of acquisition
of assets
-------------- ------------- -------------- -------------
NIS thousands
-----------------------------------------------------------------
Cost as at January 1, 2004 202,506 3,167 822 5,817,911
Additions during the year 18,391 - 764 209,896
Disposals during the year (3,185) - (92) (40,395)
Adjustments resulting from foreign
currency translation differences* (283) - 71 (50,015)
Acquisition of subsidiaries, net 5,685 - - 15,246
Company that became proportionately
consolidated (6,973) - - (98,237)
-------------- ------------- -------------- -------------
Balance as at December 31, 2004 216,141 3,167 1,565 5,854,406
============== ============= ============== =============
Accumulated depreciation as at
January 1, 2004 130,618 - - 2,877,797
Additions during the year 22,876 - - 226,459
Disposals during the year (2,250) - - (28,722)
Adjustments resulting from foreign
currency translation differences* (2,094) - - (28,434)
Acquisition of subsidiaries, net 1,592 - - 4,308
Company that became proportionately
consolidated (3,900) - - (61,616)
-------------- ------------- -------------- -------------
Balance as at December 31, 2004 146,842 2,989,792
============== ============= ============== =============
Write down for decline in value - - - 11,707
-------------- ------------- -------------- -------------
Net book value as at December 31, 2004 69,299 3,167 1,565 2,852,907
============== ============= ============== =============
Net book value as at
December 31, 2003 71,888 3,167 822 2,928,407
============== ============= ============== =============
* See Note 2B(5)
F-54
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 10 - Fixed Assets (cont'd)
A. Consolidated (cont'd)
(1) Some of the real estate properties have not yet been
registered in the Land Registry Office in the name of the
subsidiaries, in some cases because of the absence of formal
parceling of the area.
Leasehold rights are for a period of 49 years, ended in the
year 2004 and thereafter. Certain leases provide an option
for extension for another 49 years.
The cost of leasehold real estate as at December 31, 2004, is
approximately NIS 751 million, of which approximately NIS 402
million is under capitalized lease.
(2) After deduction of investment grants, net of depreciation,
which have been received from the State of Israel by certain
subsidiaries under the terms of the Law for the Encouragement
of Capital Investments, 1959, amounting to NIS 553 million
and NIS 181 million as at December 31, 2004 and 2003,
respectively (see also Note 16A).
(3) Includes capitalized interest amounting to about NIS 137
million and about NIS 141 million to December 31, 2004 and
2003, respectively.
(4) As for amounts charged to cost of fixed assets, see Notes
23B and E.
(5) Including fully depreciated assets amounting to NIS 895
million to December 31, 2004.
(6) See Note 22 regarding liens.
B. Company
Composition of the assets and accumulated depreciation, according to major
groups, and changes therein during the current year, are as follows:
Offices Office
and land(*) Equipment Total
--------------- --------------- --------------
NIS thousands NIS thousands NIS thousands
--------------- --------------- --------------
Cost as at January 1, 2004 36,275 5,370 41,645
Additions during the year - 423 423
--------------- --------------- --------------
Balance as at December 31, 2004 36,275 5,793 42,068
--------------- --------------- --------------
Accumulated depreciation as at January 1, 2004 4,252 2,363 6,615
Additions during the year 721 541 1,262
--------------- --------------- --------------
Balance as at December 31, 2004 4,973 2,904 7,877
--------------- --------------- --------------
Write down for decline in value 11,707 - 11,707
--------------- --------------- --------------
Net book value as at December 31, 2004 19,595 2,889 22,484
=============== =============== ==============
Net book value as at December 31, 2003 20,316 3,007 23,323
(*) Represents the ownership of two stories in an office building
in Tel Aviv and leasehold rights to land in Dimona, in an
area of 27 dunams, not yet registered in the Company's name.
The offices have not as yet been registered in the name of
the Company at the Land Registry Office. The offices are on
land leased under a capital lease for a period of 49 years
ending in 2044.
F-55
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 11 - Intangible Assets, Deferred Tax Assets and Deferred Expenses
A. Consolidated balance sheet
December 31
------------------------------
2004 2003
----------- ------------
NIS thousands
Intangible assets-goodwill:
Original amounts 859,238 714,841
Accumulated amortization 348,568 298,430
----------- ------------
510,670 416,411
----------- ------------
Licensing of products abroad:
Original amounts 1,144,717 783,206
Accumulated amortization 474,767 413,741
----------- ------------
669,950 369,465
----------- ------------
Intangible assets in the purchase of products:(1)
Original amounts 1,211,508 1,231,476
Accumulated amortization 177,429 100,993
----------- ------------
1,034,079 1,130,483
----------- ------------
Marketing rights and others:
Original amounts 186,940 189,757
Accumulated amortization 67,503 52,654
----------- ------------
119,437 137,103
----------- ------------
Deferred expenses:
Debentures issuance costs:
Original amount 16,069 10,799
Accumulated amortization 5,480 3,715
----------- ------------
10,589 7,084
----------- ------------
Deferred taxes receivable (see Note 16(G)) 12,733 60,537
----------- ------------
2,357,458 2,121,083
=========== ============
(1) Including intellectual property rights, trade mark, technological know-how, etc.
F-56
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 12 - Credit from Banks and Others
A. Composition:
Consolidated Company
------------------------------ -------------------------------
December 31 December 31
------------------------------ -------------------------------
2004 2003 2004 2003
------------ ------------- ------------ ------------
NIS thousands NIS thousands
------------------------------ -------------------------------
From banks 1,084,944 914,260 181,452 169,709
Current maturities of long-term
loans and debentures 653,512 663,142 538,278 418,826
------------ ------------- ------------ ------------
1,738,456 1,577,402 719,730 588,535
============ ============= ============ ============
See also Note 15A
B. Classification by linkage terms and interest rates:
Interest rates at Consolidated
-------------------------------
December 31 December 31
-------------------------------
2004 2004 2003
------------------------------ ------------ ------------
% NIS thousands
------------------------------ -------------------------------
Linked to foreign currency (mainly to
the Dollar) 3.0 - 16.9 753,900 647,098
(mainly 3.5 - 4.8)
Unlinked 1.8 -11.4
(mainly 10.6) 331,044 267,162
------------ ------------
1,084,944 914,260
============ ============
Interest rates at Company
-------------------------------
December 31 December 31
-------------------------------
2004 2004 2003
------------------------------ ------------ ------------
% NIS thousands
------------------------------ -------------------------------
Linked to the Dollar 3.5 - 4.8 166,427 169,704
Unlinked 5.5 15,025 5
------------ ------------
181,452 169,709
============ ============
C. See Note 22 regarding liens to secure credit.
F-57
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 13 - Trade Payables
Consolidated Company
------------------------------ -------------------------------
December 31 December 31
------------------------------ -------------------------------
2004 2003 2004 2003
------------ ------------- ------------ ------------
NIS thousands NIS thousands
------------------------------ -------------------------------
Open debts 1,660,762 1,337,442 379 484
Cheques and notes payable 6,693 5,341 4 19
------------ ------------- ------------ ------------
1,667,455 1,342,783 383 503
============ ============= ============ ============
Note 14 - Other Payables
Consolidated Company
------------------------------ -------------------------------
December 31 December 31
------------------------------ -------------------------------
2004 2003 2004 2003
------------ ------------- ------------ ------------
NIS thousands NIS thousands
------------------------------ -------------------------------
Employees and
withholdings remitted 162,639 162,035 3,213 291
Provision for vacation pay and
vacation expense allowance 93,436 100,006 4,795 3,353
Expenses to be paid 360,760 252,491 22,932 21,341
Government agencies
(including taxes) 252,894 192,770 1,217 2,143
Provision for warranty and repairs
and provision for losses in
respect of long-term contracts 104,171 *87,695 - -
Payables for purchase of assets
and investees 30,036 *27,588 - -
Severance pay payable and current
portion of early retirement
pensions (see Note 17) 59,873 87,438 122 134
Dividend proposed by subsidiary 29,615 15,231 - -
Deferred income 23,037 43,148 - -
Liability in respect of securities
that were sold short 24,241 67,515 - -
Liabilities regarding forward
transaction 46,388 57,061 4,997 9,457
Others 182,352 *177,239 11,856 6,547
------------ ------------- ------------ ------------
1,369,442 1,270,217 49,132 43,266
============ ============= ============ ============
Includes interested parties 712 1,544
============ ============
* Reclassified
F-58
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 15 - Long Term Liabilities
A. Loans
Consolidated Company
------------------------------ -------------------------------
December 31 December 31
------------------------------ -------------------------------
2004 2003 2004 2003
------------ ------------- ------------ ------------
NIS thousands NIS thousands NIS thousands NIS thousands
------------- ------------- ------------- -------------
1. Loans from banks 2,859,180 3,668,341 1,995,835 1,875,279
Less - current maturities 651,084 661,998 498,270 320,200
------------- ------------- ------------- -------------
2,208,096 3,006,343 1,497,565 1,555,079
------------- ------------- ------------- -------------
2. Loans from others:
Shareholders in subsidiaries
and in proportionately
consolidated companies 37,611 52,386 - -
Investees - - 48,133 154,315
Receipts from
time-sharing units 33,053 33,765 - -
Others and long-term
accrued expenses 64,783 28,487 - -
------------- ------------- ------------- -------------
135,447 114,638 48,133 154,315
Less - current maturities 2,428 1,144 40,008 98,626
------------- ------------- ------------- -------------
133,019 113,494 8,125 55,689
------------- ------------- ------------- -------------
2,341,115 3,119,837 1,505,690 1,610,768
============= ============= ============= =============
3. Classification by linkage terms and interest rates:
The consolidated balance sheet:
Interest rate at
December 31 December 31
---------------------------------
2004 2004 2003
---------------- -------------- ------------
% NIS thousands
---------------- ---------------------------------
Linked to the foreign currency
(mainly Dollar) 1.7-8.1 982,275 2,147,952
Linked to the CPI 3.7-7.7 1,368,683 1,581,728
Linked to the CPI - - 46,227
Unlinked 6.2-7.9 643,669 7,072
------------- -------------
2,994,627 3,782,979
Less - current maturities 653,512 663,142
------------- -------------
2,341,115 3,119,837
============= =============
F-59
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 15 - Long Term Liabilities (cont'd)
A. Loans (cont'd)
The Company balance sheet:
Interest rate at
December 31 December 31
---------------------------------
2004 2004 2003
---------------- -------------- ------------
% NIS thousands
---------------- ---------------------------------
a. From banks:
Linked to the CPI 6.2-6.9 1,256,006 1,502,011
Linked to the Dollar 3.6-7.7 102,829 373,268
Unlinked 6.2 637,000 -
------------- -------------
1,995,835 1,875,279
Less - current maturities 498,270 320,200
------------- -------------
1,497,565 1,555,079
============= =============
Interest rate at
December 31 December 31
---------------------------------
2004 2004 2003
---------------- -------------- ------------
% NIS thousands
---------------- ---------------------------------
b. From investees:
Capital note - 8,125 8,125
Linked to the CPI - - 98,626
Linked to the CPI - 40,008 47,564
-------------- ------------
48,133 154,315
Less - current maturities 40,008 98,626
-------------- ------------
8,125 55,689
============== ============
B. Debentures
Consolidated
---------------------------------
December 31
---------------------------------
2004 2003
-------------- ------------
NIS thousands
---------------------------------
1. Presented at long-term liabilities
Debentures convertible into shares of subsidiary (1) 646,200 -
-------------- ------------
2. Presented between long-term liabilities and shareholders equity
Debentures convertible into shares of subsidiary (2) 165,091 340,270
============== ============
(1) In a private placement to institutional investors
(mainly overseas) in March 2004, M-A Industries
allotted non-marketable convertible debentures in
the amount of 150 million dollars par value
(including 5 million dollars which was issued to the
underwriters in April 2004), in consideration for
their par value. The debentures are for a 7-year
period and bear annual interest at the rate of
1.75%. The debentures may be converted into ordinary
shares of M-A Industries, of NIS 1 par value each,
at a conversion rate of NIS 20.5 par value,
according to a fixed exchange rate of NIS 4.514 per
1 U.S. dollar. The ordinary shares to be allotted as
a result of the conversion of the debentures will be
listed for trading on the Tel Aviv Stock Exchange.
F-60
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 15 - Long Term Liabilities (cont'd)
B. Debentures (cont'd)
(1) (cont'd)
On March 22, 2007, the debenture holders will have
the right, by serving prior written notice to M-A
Industries (between 30 and 60 days prior to March
22, 2007), to demand redemption of the debentures
(principal and interest balance at such date).
M-A Industries will have the right to force the
conversion of the debentures, beginning March 22,
2007, as long as the average share price of M-A
Industries in the period of 20 business days
preceding the notice of forced conversion will be
more than 30% higher than the conversion price of
the debentures.
M-A Industries committed to the debenture purchasers
that it would refrain from creating additional liens
on its property, the purpose of which is the
guarantee of marketable securities or other
securities which the M-A Industries intends to
register for trading.
The issue costs for these debentures amounted to
NIS 11 million.
(2) a. In 2001, M-A Industries issued convertible
bonds and options for net consideration of
NIS 276 million, of which NIS 257 million
was allocated to the fair value of the
convertible bonds.
M-A Industries issued NIS 270,000 thousand
par value of debentures (Series A) listed
on the Tel Aviv Stock Exchange, bearing
interest at 2.5% p.a. and linked (principal
and interest) to the representative
exchange rate of the Dollar. The debentures
are repayable in one payment in November
2007 if not converted before then into
shares. The debentures are convertible into
ordinary shares of NIS 1 par value each of
M-A Industries at the rate of NIS 10.03
(following distribution of a dividend) par
value of debentures per one ordinary share.
b. In January 2002 M-A Industries issued NIS
133,980 thousand par value of debentures
(Series A) in a private placement in a
total consideration of approximately NIS
129 million. The terms of the debentures
are the same as the terms of the debentures
(Series A) issued by M-A Industries as
above.
c. In June 2002 a consolidated company of M-A
Industries purchased in the stock exchange
approximately NIS 16,684 thousand par value
of debentures (Series A) in consideration
of approximately NIS 14 million.
During June 2003, all of the above
debentures were sold for NIS 18.8 million.
F-61
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 15 - Long Term Liabilities (cont'd)
B. Debentures (cont'd)
(2) (cont'd)
d. In 2003, NIS 57,661 thousand par value of
debentures (Series A) were converted into
5,566 thousand ordinary shares, NIS 1 par
value, most at an exercise price of NIS
10.36 par value of debenture per ordinary,
NIS 1 par value, share. M-A Industries
total share capital issued as a result of
the conversion is 1,270 thousand dollars,
at a premium of 11,331 thousand dollars.
In 2004, 179,608 thousand par value of
debentures (Series A) was converted into
17,582 thousand ordinary shares, NIS 1 par
value, at a conversion rate of between NIS
10.03 and NIS 10.36 in par value of the
debentures for 1 ordinary share, NIS 1 par
value. The total share capital issued as a
result of the conversion is 3,974 thousand
dollars, with a premium of 35,581 thousand
dollars.
Subsequent to the balance sheet date and
proximate to the approval date of the
financial statements, NIS 12,839 thousand
par value of debentures (Series A) was
converted into 1,280 thousand ordinary
shares, NIS 1 par value.
Subsequent to the balance sheet date and
proximate to the approval date of the
financial statements, NIS 12,839 thousand
par value of debentures (series A) was
converted into 1,280 thousand ordinary
shares, NIS 1 par value.
The debentures are secured by a symbolic
fixed senior lien on a deposit of NIS 1 in
favor of the trustee for the
debenture-holders.
Beginning from 2003, conversion of the
debentures became probable. Accordingly,
the balance of the debentures is stated in
a separate item between long-term
liabilities and shareholders' equity.
F-62
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------------
Note 15 - Long Term Liabilities (cont'd)
C. Liabilities (net of current maturities) that will mature in the following years subsequent to balance sheet
date are as follows:
1. Consolidated
Loans from banks Loans from others
--------------------------- ----------------------------
December 31 December 31
--------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
NIS thousands
-----------------------------------------------------------------
Second year 1,284,673 626,983 20,120 7,929
Third year 598,769 1,649,252 17,704 13,622
Fourth year 182,326 308,944 12,941 5,150
Fifth year 52,786 224,854 9,076 4,832
Sixth year 18,710 43,029 1,030 1,000
Subsequent years 70,832 153,281 72,148 80,961
----------- ----------- ----------- ------------
2,208,096 3,006,343 133,019 113,494
=========== =========== =========== ============
2. The Company
Loans from banks
December 31
---------------------------
2004 2003
----------- ------------
NIS thousands
--------------------------------
Second year 1,027,889 314,174
Third year 461,000 1,232,086
Fourth year - -
Fifth year 8,676 -
Sixth year - -
Subsequent years - 8,819
----------- ------------
1,497,565 1,555,079
=========== ============
D. See Note 22 for details of security pledged to secure loans.
(Table Continued)
Debentures Total
----------------------------- -----------------------------
December 31 December 31
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
NIS thousands
-------------------------------------------------------------------
Second year - - 1,304,793 634,912
Third year 165,091 - 781,564 1,662,874
Fourth year - 340,270 195,267 654,364
Fifth year - - 61,862 229,686
Sixth year - - 19,740 44,029
Subsequent years 646,200 - 789,180 234,242
------------ ------------ ----------- ------------
811,291 340,270 3,152,406 3,460,107
============ ============ =========== ============
2. The Company
Loans and capital note Total
from investees
December 31 December 31
----------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ----------- ------------
NIS thousands
------------------------------------------------------------------
Second year - 47,564 1,027,889 361,738
Third year - - 461,000 1,232,086
Fourth year - - - -
Fifth year - - 8,676 -
Sixth year - - - -
Subsequent years 8,125 8,125 8,125 16,944
------------ ------------ ----------- ------------
8,125 55,689 1,505,690 1,610,768
============ ============ =========== ============
D. See Note 22 for details of security pledged to secure loans.
F-63
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 16 - Taxes on Income
A. Tax benefits under the Law for Encouragement of Capital
Investments, 1959:
Under this law, by virtue of the "approved enterprise" status granted
to certain enterprises of several investees, these companies are
entitled to various tax benefits. The income derived from these
enterprises during a period of up to 10 years, from the year in which
these enterprises first had taxable income (limited to 12 years from
commencement of production or 14 years from the date of the approval,
whichever is earlier), is subject to a corporate tax rate of 0 - 25%.
According to the alternative track, some of the plants of subsidiaries
were granted a tax exemption for a two to four year period and are
taxed at the preferential rate of 25% during the remaining benefits
period.
For fixed assets serving the approved enterprise, investees are
entitled to an accelerated amortization deduction over five years.
In the event that an investee distributes a dividend to shareholders
out of income attributable to revenues from an approved enterprise
which received a tax exemption, the company that distributes the
dividend would be liable to tax at 25% of the earnings distributed.
Deferred taxes in respect of income from approved enterprises were not
provided, since it is the Subsidiaries policy not to initiate a
distribution of dividend that involves an additional tax liability to
the Group.
Benefits are conditional upon the fulfillment of terms set out in law
or in deeds of approval. Non-fulfillment of terms could cause
cancellation of the benefit, in whole or in part, and the return of
benefit sums, plus interest and linkage differentials. The investees
met all terms set out as above as at the dates of the financial
reports.
As security for the implementation of the approved projects and
compliance with the conditions of the approval, a pledge has been
registered on the above subsidiaries' assets in favor of the State of
Israel.
B. Measurement of results for tax purposes in accordance with
the Income Tax (Inflationary Adjustments) Law, 1985
(hereinafter - "the Adjustments Law"):
The Income Tax (Inflationary Adjustments) Law, 1985 (hereinafter -
"the Adjustments Law") which has been in effect since the 1985 tax
year, instituted the measurement of results for tax purposes on a real
basis. The various adjustments required under the Adjustments Law are
meant to bring about taxation of income on a real basis. However, the
adjustment of nominal income under the tax laws is not always
identical to the inflationary adjustment according to the Opinions of
the ICPAI. Consequently, differences are created between reported
incomes according to the financial statements and between the adjusted
income for tax purposes.
F-64
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
C. Law for the Encouragement of Industry (Taxation), 1969:
Certain companies qualify as "industrial companies" under the above
law. By virtue of this status and certain regulations published under
the inflationary adjustments law, the companies are entitled to claim,
and have in fact claimed, accelerated rates of depreciation. Likewise,
certain subsidiaries are entitled to file consolidated tax returns
with the tax authorities.
D. Tax rates applicable to income from other sources:
Income not eligible to "approved enterprise" benefits, mentioned in
Note 16 A. above, is liable to tax at the regular rate of 35% (or if
the investee is registered and operates outside of Israel, at the tax
rate prescribed for that territory).
E. Losses for tax purposes carried forward to future years and
tax assessments:
1. The consolidated balance of tax loss as at December 31, 2004
carryforwards to next years amounted to approximately NIS
3,030 million as at balance sheet date, out of which NIS
1,432 million relates to Koor.
Carryforward tax losses are linked to the CPI, according to
the Adjustments Law.
2. The Company has received final assessments until 2002 tax
year.
3. See Note 18A(7)(C) regarding fiscal claims against a
subsidiary of M-A Industries.
F. Amendment to the Income Tax Ordinance
On June 29, 2004, the Knesset passed the "Law for the Amendment of the
Income Tax Ordinance (Amendment No. 140 and Temporary Order) - 2004"
(hereinafter - the Amendment). The amendment provides for a gradual
reduction in the company tax rate from 36% to 30% in the following
manner: in 2004 the tax rate will be 35%, in 2005 the tax rate will be
34%, in 2006 the tax rate will be 32% and from 2007 onward the tax
rate will be 30%.
Current taxes and deferred tax balances as at December 31, 2004 were
calculated based on the new tax rates prescribed in the Amendment. The
effect of the change in the consolidated financial statements as at
the beginning of 2004 is a decrease in income tax expenses of NIS
5,083 thousand.
F-65
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
G. Deferred taxes:
1. Deferred taxes are presented in the consolidated balance sheet as follows:
December 31
-------------------------------
2004 2003
------------ ------------
NIS thousands
-------------------------------
Within current assets in respect of:
Provision for vacation pay and severance benefits 16,098 28,185
Operating loss and capital loss carried forwards (2) 89,513 92,327
Inventory, net of customer advances 67,868 3,757
Timing differences in respect of recognition of income
and expenses, net (2,169) 31,761
------------ ------------
Total in current assets, net 171,310 156,030
============ ============
Within long-term assets in respect of:
Depreciation (21,110) (33,256)
Operating loss and capital loss carried forwards 691,275 *917,920
Liability in respect of employee severance benefits 9,523 28,680
Other (367) 3,709
------------ ------------
679,321 917,053
Balance not expected to be realized (1) (666,588) *(856,516)
------------ ------------
Total in other long-term assets 12,733 60,537
============ ============
Within short-term liabilities in respect of:
Provision for vacation pay and severance benefits - 71
Timing differences in respect of recognition of income
and expenses (183) (5,054)
------------ ------------
Total in other payables (183) (4,983)
============ ============
Within long-term liabilities in respect of:
Depreciation (374,761) (364,906)
Operating loss and capital loss carried forwards 81,115 *125,892
Inventories less customer advances 9,934 -
Liability in respect of employee severance benefits 45,049 41,842
Other (1,805) (2,615)
------------ ------------
(240,468) (199,787)
============ ============
(1) The Company and certain subsidiaries have deferred tax
assets, that are not expected to be realized, because of
accumulated tax loss carryforwards and other timing
differences. Companies Management's believes that it is
not likely that these balances will be realized and,
accordingly, no deferred taxes were created in respect
thereof.
(2) The Company's balance - see Notes: 3G(2), 3C(7).
* Reclassified
F-66
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
G. Deferred taxes (cont'd):
2. Balances and movement of deferred taxes in the consolidated balance sheet:
Timing
differences in
Inventories Provisions Losses and respect of
Depreciable net of for deductions recognition
fixed customer employee carried of income
assets advances rights forward and expenses Total
----------- ------------- ------------- ------------- -------------- ---------------
NIS thousands
--------------------------------------------------------------------------------------------
Balance as at
January 1, 2003 (400,721) (6,905) 140,842 178,883 39,849 (48,052)
Translation
differences in
subsidiaries 21,304 1,386 (7,627) (9,026) 8,606 14,643
Amounts charged
to statement of
operations (18,745) 9,276 (34,437) 109,766 (20,654) 45,206
------------ ------------- ------------- ------------- -------------- ---------------
Balance as at
December 31,
2003 (398,162) 3,757 98,778 279,623 27,801 11,797
Translation
differences in
subsidiaries 8,057 (59) (1,124) (4,219) (211) 2,444
Adjustments to
changes in
tax rate 19,202 (93) (918) (9,704) (3,404) 5,083
Amounts charged
to statement of
operations (7,229) 74,197 (26,066) (66,922) (28,710) (54,730)
Other differences, (17,739) - - (3,463) - (21,202)
net*
------------ ------------- ------------- ------------- -------------- ---------------
Balance as at
December 31,
2004 (395,871) 77,802 70,670 195,315 (4,524) (56,608)
============ ============= ============= ============= ============== ===============
* Mainly subsidiaries that were sold/acquired, net.
Deferred taxes were computed at tax rates of 22% - 35%.
F-67
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------
Note 16 - Taxes on Income (cont'd)
H. Taxes on income included in consolidated statements of operations:
1. Composition:
Year ended December 31
-------------------------------------------------
2004 2003 2002
---------- ---------- ----------
NIS thousands
-------------------------------------------------
Current taxes 242,082 111,910 84,836
Deferred taxes 49,647 (45,206) 64,479
In respect of previous years, net (4,629) 18,668 (8,136)
----------- ---------- ----------
287,100 85,372 141,179
=========== ========== ==========
2. Below is the adjustment between the theoretical tax amount
which would have been applicable if all the income of Koor
Group and the consolidated companies were taxable at 35%, and
the tax amount charged in the statement of income.
Year ended December 31
-------------------------------------------------
2004 2003 2002
---------- ---------- ----------
NIS thousands
-------------------------------------------------
Earnings (losses) before taxes on income, as
reported in the statement of operations 892,665 448,364 (313,650)
=========== ========== ==========
Statutory tax rate 35% 36% 36%
=========== ========== ==========
Theoretical tax expenses (income) in respect
of these earnings (losses) 312,433 161,411 (112,914)
Increase (decrease) in taxes resulting from
the following factors - the tax effect:
Tax benefits under various encouragement laws (49,676) (32,790) (58,461)
Non-deductible expenses for tax purposes 19,611 22,650 144,711
Losses for which deferred taxes were
not recorded 113,347 40,470 194,666
Provisions for anticipated losses from the
sale of assets, net - 25,748 43,699
Tax loss carried forwards from prior years for
which deferred taxes were not created and
which were utilized during the current year (20,037) - (60,132)
Deferred taxes in respect of prior years and
which were written-off at the reporting year 75,601 - -
Tax losses from prior years, for which
deferred taxes were recorded this year (77,483) (58,903) -
Differences between the measurement
basis according to the financial statement
to measurement basis for tax purposes 9,520 (25,660) 24,032
Taxes in respect of prior years (4,629) 18,668 (8,136)
Effect of foreign subsidiaries * (93,213) (63,328) (28,862)
Others ** 1,626 (2,894) 2,576
----------- ---------- ----------
Total taxes on income 287,100 85,372 141,179
=========== ========== ==========
* Relates to territories of operations in which the statutory tax rate is lower than that used in Israel.
** Including influence of changes in tax rate.
F-68
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 17 - Liabilities for Employee Severance Benefits, Net
A. Pension, severance pay and retirement grants:
Under current labor laws and existing labor agreements, the companies
in the Group are required to make severance payments, to employees who
are dismissed or who retire. In respect of these liabilities, regular
deposits are made by Group companies with pension and severance pay
funds. The balance sheet amount represents the unfunded balance of the
liabilities. As the funds deposited are not under the control and
management of the Group companies, the funded amounts are not
reflected in the balance sheets. These deposits and the amount stated
in the balance sheet fully cover the Company's liability for employee
severance benefits. Employees dismissed before reaching retirement age
are entitled to severance pay, computed on the basis of their latest
salary. Where amounts accumulated in the pension funds are
insufficient to cover such severance pay, the company and its
subsidiaries will make up the amount of the shortfall at the time of
payment.
In certain subsidiaries, past experience has shown that the vast
majority of employees continue to work until they reach retirement
age, and these companies were not required, in the past, to make up
significant shortfalls for employees who chose early retirement.
Accordingly, the managements of these companies believe that there is
a low probability that such shortfalls will be paid. Therefore, the
financial statements of these companies do not include a provision.
The financial statements of the other Group companies include a
suitable provision, based on management's estimate of the salary
components used to compute the pension for full coverage of the said
obligation.
Regarding companies in which enhanced severance has been planned or
agreed upon for the employees, appropriate provisions have been made
for the supplementary amounts.
In January 2004, the Retirement Age Law, 2004 ("the Law") was enacted.
The Law raises the retirement age for men and women. In the estimation
of the management of the Company and its investees, the Law will not
have a material impact on the Group's recorded liability for early
pension in respect of its employees, beyond the provisions that were
included in this respect.
B. Funds for severance pay and retirement grants:
The funds provisions in severance pay funds include accrued linkage
differences and interest, and they are deposited in severance pay
funds in banks and insurance companies. Withdrawals from the funded
provision monies are contingent on fulfillment of the provisions of
the Severance Pay Law.
C. Early retirement pension:
Under agreements with certain employees who retired from service, Koor
Group companies have undertaken to make pension payments until they
reach retirement age. The entire liability for such pensions is
included in the accounts on the basis of the present value of future
pension payments, computed at a monthly discount rate of 0.3%-0.4% per
month (3.6% - 5% per annum).
D. Compensation for unutilized sick leave:
A provision for unutilized sick leave, according to agreements, is
included in the accounts in respect of those employees who have
reached the age of 55. Due to the uncertainty as to whether employees
who have not reached that age will be entitled to such compensation
(as a result of utilization of sick leave or early retirement), no
provision has been made. The provision is computed on the basis of the
latest salary for 8 working days in respect of each year during which
the sick leave was not utilized.
F-69
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 17 - Liabilities for Employee Severance Benefits, Net (cont'd)
E. Liabilities for severance benefits, which are presented in
the balance sheet, and the amount funded in severance pay
funds, are as follows:
Consolidated Company
------------------------------ ------------------------------
December 31 December 31
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
NIS thousands NIS thousands
------------------------------ ------------------------------
Severance pay and retirement grants 265,013 259,455 6,903 3,227
Amount accrued for
early retirement 184,335 186,059 575 548
Amount accrued in respect of
unutilized sick leave 14,177 11,853 362 314
------------ ------------ ------------ ------------
463,525 457,367 7,840 4,089
Less - amount funded 266,357 265,365 2,865 2,605
------------ ------------ ------------ ------------
197,168 192,002 4,975 1,484
============ ============ ============ =============
Note 18 - Contingent Liabilities and Commitments
A. Contingent liabilities
1. Anti-Trust Commissioner:
a) During 1997, an investigation was conducted on
behalf of the Anti-Trust Commissioner ("the
Commissioner") in connection with alleged violations
of the Anti-Trust Law, 1988 ("the Anti-Trust Law"),
relating to alleged price fixing and absence of
competition between Tadiran Ltd. (a subsidiary of
Koor - "Tadiran") and Tadiran Telecommunications
Ltd. (a former subsidiary of Koor that merged with
ECI - "Telecommunications") and between Telrad
Networks Ltd. (a subsidiary of Koor - "Telrad").
On September 7, 2004 it was agreed with the
Commissioner that he would issue an order according
to Section 50B of the Anti-Trust Law by which
Tadiran and Telrad would pay to the State Treasury
the total amount of NIS 8 million, without this
being considered an admission of guilt by the above
companies and/or any of their officers to committing
any crime. It was further agreed that indictments
would not be filed, in the field of public switches
and in the field of private switches, and the
Commissioner would not take any further action
against the companies and/or their officers. The
order was approved by the Court. In accordance with
the agreement with the Commissioner, a provision of
NIS 8 million was included in the consolidated
financial statements as at December 31, 2004.
F-70
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments
A. Contingent liabilities (cont'd)
1. Anti-Trust Commissioner (cont'd)
b) On February 2, 2005, Koor's offices received notice
from the Anti-Trust Authority that it was
considering the possibility of prosecuting Koor,
together with 7 other companies that are not
members of the Koor Group (including 2 companies
that had been owned by Koor on the relevant dates,
and were later sold to third parties) and 9
executives (including 2 who had been salaried
employees of Koor on the relevant dates), for
violations of the anti-Trust Law. The notice came
in the wake of an investigation opened by the
Anti-Trust Authority in the other companies during
2001, with respect to price fixing and collusion,
and the lack of competition in the frozen and
canned vegetable industry. The Anti-Trust Authority
claims that two companies that belonged to the Koor
Group in the past had colluded with two other
companies in the years 1992-1998.
According to the Anti-Trust Law, penalties can be
imposed on those who violate the Law, but the
Company believes, based on its legal counsel, that
the said penalties, if imposed, will not have a
material effect on the financial statements.
Moreover, there may be civil implications if it is
possible to prove that damages were caused by the
aforementioned violation. The Company is unable to
assess the implications in the civil law track, if
any, especially due to the fact that in the opinion
of the Company and its legal counsel, for the vast
majority of the period involved, the statute of
limitations has expired.
2. On September 21, 2004 a suit was filed against the Company,
Bezeq - the Israel Telecommunications Company Ltd., Tadiran
Ltd., Telecommunications, Tadiran Public Switching Ltd., (a
former subsidiary in Telecommunications), and Telrad in
connection with the public switches. A motion for
recognition of the suit as a class action was filed together
with the suit in accordance with the Law, and according to
Civil Procedure regulations. In the Statement of Claim, the
plaintiff alleges that during the previous decade, the
defendants had engaged in activities prohibited by the
Anti-Trust Law that resulted in damages to Bezeq's
customers. In respect of the actions alleged by the
Plaintiff, the plaintiff is asking for damages for the group
that he is seeking to represent in the amount of NIS 1.7
billion.
On March 10, 2005, the Company and the other defendants
submitted to the District Court their decisive objection to
the request of the plaintiff to certify the claim as a class
action.
In the estimation of the Company, based on its legal counsel,
the chances for the suit and for the action to be recognized
as a class action are remote.
As to the indemnification Tadiran gave to ECI, see Note
18A(6)(a) below.
F-71
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
3. Elisra
a) As part of the agreement for the sale of part of the
Company's holdings in Elisra to Elta, as described
in Note 3E(2), Koor undertook to indemnify Elta for
damages, as defined in the agreement, which will be
sustained as a result of breach of representations
made to Elta in the agreement. The main points of
the indemnification undertaking liabilities that
have not expired are as follows:
1. Any amount of damages that will be
sustained as a result of breach of the
representation concerning the insurance
indemnity rights to which the Elisra Group
is entitled, relating to the fire that
occurred at the Group's plants, see Note
3E(1). Elta's right to demand payment of
the indemnity in this matter carries no
time limit.
2. Any amount of damages that will be
sustained as a result of tax payments in
respect of the tax year 2001, for which
Elisra will be liable, and that are at
least 4 million dollars higher than the
total provisions for taxes included in
Elisra's financial statements for 2001;
provided that the demand for payment of
indemnity is submitted by Elta not later
than 30 days after the date on which the
self-assessment in respect of that tax year
becomes final.
b) Financial covenants
1. Elisra's undertakings with banks are
secured by negative pledges. Under the
terms of the negative pledges, Elisra
undertook to maintain financial covenants
(which will be measured on the basis of the
consolidated financial statements),
including a minimum ratio of shareholders'
equity to total assets (as described in the
agreement), minimum current ratio, amount
of shareholders' equity and minimum pre-tax
earnings. In addition, certain limitations
were imposed on the Elisra with respect to
furnishing guarantees to third parties,
creating new liens and the sale or transfer
of assets in material amounts.
2. During 2004, Elisra took out long-term
loans totalling 20 million dollars. Under
the terms of these loans, Elisra's
undertakings toward the credit providers
include meeting financial covenants as
provided in Note 18(b)(1) above, as well as
a debt coverage ratio, as defined in the
agreement, which will be measured on the
basis of Elisra's unconsolidated financial
statements. Likewise, limitations were also
imposed on Elisra relating to the
distribution of a dividend and other
payments to its shareholders, as stipulated
in the agreement.
In the estimation of Elisra's management,
during the report period and as at the
balance sheet date, Elisra was in
compliance with the above financial
covenants.
F-72
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
4. In accordance with the agreements with the banks, Koor
undertook to maintain certain financial covenants, including
minimum shareholders' equity and debt capital - of Koor and
certain investees, ratio of shareholders' equity to debt
capital, a ban on creating pledges or furnishing guarantees
without the advance consent of the banks, and limitations
prescribed in the agreement. Koor also undertook to repay
part of the existing debt, by using the proceeds to be
received from the realization of certain assets, if they are
realized.
Additionally, Koor undertook not to sell the shares of a
certain investee, except for cash, and at a percentage not to
exceed that stipulated in the agreement with the banks and
other limitations as mentioned in the above agreements.
As at the balance sheet date, Koor is in compliance with the
above covenants.
5. Telrad
a. In October 1994, a claim in an unspecified amount
was filed by the Engineers Union against Telrad.
The claim pertains to recognition of the
applicability to Telrad engineers of the salary
tables included in the general collective
agreements signed in the years 1994 and 1995,
between the Engineers Union and employers in the
public service sector, beginning January 1, 1993.
On January 31, 1996, Tel Aviv District Labor Court
issued a ruling, which dismissed outright the
claims of the Engineers Union.
The Engineers Union appealed the ruling to the
National Labor Court, which ruled that the agreement
is a collective agreement governing the relations
between Telrad, the Union and the Telrad employees.
Telrad filed an appeal with the Supreme Court.
On January 29, 2002, a ruling was issued dismissing
Telrad's appeal. Consequently, the next stage is a
hearing of evidence by the Labor Court concerning
the applicability of public service sector to
salaries in Telrad.
In April 1996 a parallel claim was filed by the Lod
Workers Council and the Monthly Workers Committee,
to have the salary scales of the public services
sector applied to the employees of Telrad.
b. In 1999, a claim was filed against Telrad by company
employees who are members of Telrad's workers'
committee. They are suing to be given accounts so
that the plaintiffs can examine the calculation of
the distribution of earnings to employees. They are
also suing for a declaratory judgment which will
rule that Telrad is obliged to draw up new accounts
for the distribution of earnings. In addition, a
motion was filed to recognize the plaintiffs as
representatives of all of Telrad's workers and
employees. The court dismissed the motion for a
class action. A defense brief has been filed by
Telrad.
Telrad recorded an appropriate provision in respect of the
above claims.
F-73
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
5. Telrad (cont'd)
c. As part of the agreement for the sale of shares of
Telrad Networks (see Note 3D(1)), Koor and Telrad
Holdings (a wholly-owned subsidiary of Koor)
undertook indemnifications in respect of the
following events:
1. Damage or loss sustained by the buyer from
a decline in the value of the acquired
shares as a result of a decrease in the
equity value of Telrad Networks due to
erroneous representations made on the
transaction date. This indemnification
will be in force until 30 days after
publication of the financial statements of
Telrad Networks as at December 31, 2006,
except for representations on the capital
structure of Telrad Networks and tax items
in the financial statements, for which
there is no time limit on indemnification.
2. Telrad Networks not meeting certain
targets as defined in the agreements. The
indemnifications listed in this item are
for between two and five years.
3. Damage or loss sustained by the buyer in
respect of erroneous representations with
respect to the sellers' ownership of the
shares being sold and their ability to
execute the sale. This indemnification will
have no time limit.
The total amount of the indemnification is limited
to the amount of the consideration received from the
sale of the shares of Telrad Networks (except in
respect of claims, the cause of action of which is
fraud, in which the amount is unlimited). As at the
publication date of the financial statements, the
amount of the proceeds received is about 10 million
dollars.
In the event the indemnification is invoked
according to one of the causes of action described
previously, the amount of the indemnification will
be deducted from the loans that the seller made
available to Telrad Networks as part of the sale
agreement.
Additionally, indemnification was given in respect
of expenses that Telrad Networks will incur at an
amount exceeding the sum stipulated in the agreement
in respect of the recognition of a class action
filed in September 2004 relating to anti-trust
activities (see Note 18A(2)).
6. Tadiran and its investees
a. In the 1999 merger agreement between ECI and Tadiran
Telecommunications Ltd. ("TTL"), Tadiran Ltd.
undertook to indemnify ECI for any damages (in
excess of the amount defined in the agreement) it
sustains as a result of matters under investigation
by the Anti-Trust Commissioner.
This indemnification will remain valid for a period
of seven years from the date of the merger and may
be extended for an additional period, as long as
these matters are under investigation by the
Commissioner.
F-74
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
6. Tadiran and its investees (cont'd)
b. Employees of a Tadiran plant that closed during 1990
filed actions against Tadiran, alleging that they
sustained injuries or certain work-related illnesses
resulting from alleged exposure to certain
substances.
Tadiran has insurance policies which, relying on
legal opinions, substantially cover possible damages
resulting from these claims. Therefore, no
provisions have been made in respect of these
claims. Tadiran recorded provisions in respect of
possible damages which had been covered by an
insurance company currently in liquidation.
c. In October 1999, Bezeq - The Israel
Telecommunication Corp. Ltd. ("Bezeq") lodged a
claim against Tadiran Ltd. whose main cause is
various losses sustained by Bezeq due to delays in
the performance of projects ordered in development
and application contracts originally signed between
Bezeq and TTL, in the amount of approximately 8.6
million dollars ("main claim").
Alternatively, Bezeq is suing for the balance of
arrearage penalties to which it alleges it is
entitled pursuant to these contracts, and which were
not paid in full, in the amount of approximately 1.7
million dollars ("alternative claim").
In an arbitration judgment issued on February 17,
2000, all of Bezeq's arguments regarding Tadiran's
liability for the main claim were dismissed. The
arbitration judgment rules that pursuant to the
contractual commitments between the parties, Bezeq
is entitled to compensation within the framework of
arrearage penalties only. The negotiations between
the parties for a settlement were unsuccessful, and
the matter was returned to the arbitrator for his
decision. In February 2003, a supplementary
arbitration agreement was signed. The parties
submitted their written arguments and the arbitrator
issued his ruling on February 26, 2004. In his
ruling, the arbitrator affirmed Tadiran's position
and ruled in accordance with the parameters for
calculating the damages that Tadiran is meant to pay
to Bezeq. The parties conducted negotiations
regarding implementation of the aforementioned
parameters, and they agreed that the final amount
would be NIS 4.6 million, which was paid subsequent
to balance sheet date. The financial statements of
the Company include an adequate provision.
F-75
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
7. M-A Industries and its investees
a. Quality of the environment
The activities of M-A Industries are exposed to the
risks of harming the environment, since it
manufactures, stores and sells chemicals. M-A
Industries invests significant amounts in order to
comply with the provisions of environmental laws and
regulations, and in the opinion of the management it
does comply therewith. According to M-A Industries'
insurance experts, the insurance policies provide
coverage in the event of a sudden unexpected
occurrence of environmental pollution in Israel and
worldwide, subject to the relevant terms of the
policy. As at balance sheet date, M-A Industries
does not have insurance coverage for continuous
environmental pollution.
Such insurance is difficult to obtain, and even
where it can be obtained, M-A Industries believes
that the terms of the insurance, including the sum
insured, do not at present justify taking out such
insurance.
Pursuant to an agreement with the Ministry of
environmental Protection, subsidiaries decided to
construct facilities for the biological treatment of
waste. Construction of the facility will take about
3 years. In the estimation of M-A Industries
management, the aggregate construction cost will be
between 30 million dollars and 40 million dollars.
One of the plants of M-A Industries subsidiary is
located in Ramat Hovav, along with other chemical
plants, since the Government decided that the area
is suitable for the construction of chemical plants
under the assumption that the geological layers in
that particular area are completely impermeable to
seepage or pollution. The Ministry of the
Environment ("The Ministry") conducted tests, which
determined that there are indications of
subterranean pollution in Ramat Hovav. The
investigators recommended that steps be taken to
prevent the continuation of leakages from active and
inactive plants, which could constitute a source of
pollution of the water table in the area. The
subsidiary may be required to clean up the relevant
areas or subterranean layers if and when it is found
that the subsidiary is responsible for the said
contamination. Over the past several years various
tests have been performed by different agencies to
test the ground contamination in the Ramat Hovav
area as well as the area surrounding the
subsidiary's premises in Be'er Sheva. In the opinion
of the subsidiary Management, no material
consequences on the financial statements are
expected due to application of the recommendations
deriving from the said examinations.
In May 2004, a subsidiary of M-A Industries owning
additional plants at the Ramat Hovav site, received
notice of a change in the terms of the license,
whereby the plants must change the method used to
treat sewage from the existing treatment, do so
independently and through the implementation of
vaporization processes. These terms include demands
that, within a short period of time, the plants
conduct research and development for the purpose of
customizing the process to the composition of each
plant's sewage, and later, to build a suitable
facility. Additionally, formulation processes are to
be implemented, whereby the plants must present the
Ministry with a research and development program for
the purpose of implementing the process with respect
to the sewage. At the same time, the Ministry of the
Environment set the date by which the plants must
treat the sewage in the requisite format and to stop
the flow of sewage into the Council's vaporization
pools and treatment facilities.
F-76
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
7. M-A Industries and its investees
a. Quality of the environment (cont'd)
On October 10, 2004, a subsidiary of M-A Industries,
together with the Israel Manufacturers Association
and other companies, filed an administrative appeal
with the Beer Sheba District Court against the
Ministry of the Environment. The subject of the
appeal is the additional conditions for obtaining a
business license imposed on the appealing plants in
May 2004 which are engaged in the treatment and
discharge of sewage created by their activities. In
the appeal, the District Court was asked to issue an
order declaring that the additional terms are
nullified.
On December 29, 2004 a preliminary hearing on the
appeal was held. The hearing on the appeal was
scheduled for March 2005.
In the estimation of M-A Industries management,
based on its legal counsel, in view of the
preliminary stage of the process, it is not possible
at this time to estimate the prospects of the
administrative appeal. In the estimation of M-A
Industries, if the appeal is dismissed, it will have
a material effect on the activities of the plant in
Ramat Hovav and/or will require investments of
amounts that M-A Industries is unable to estimate at
this time.
On November 28, 2004, the Government reached a
decision approving a plan related to reducing air
and water pollution deriving from the "Ramat Hovav"
industrial area.
The key points of the plan are:
(a) Treatment of the plants' sewage
1. By June 30, 2006, the flow of
untreated sewage to the joint
biological treatment facility will
be halted and each plant will
treat the sewage to the quality
level prescribed by the Ministry
of the Environment (as derive from
the additional conditions for a
business license from May 2004).
2. By December 31, 2007, the flow of
waste water to the vaporization
pools will be halted and each
plant will treat the waste water,
to the level of quality and
concentration of salts prescribed
by the Ministry of the Environment
(as derived from the additional
conditions for a business license
from May 2004).
F-77
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
7. M-A Industries and its investees (cont'd)
a. Quality of the environment (cont'd)
(b) Rehabilitation of existing vaporization
pools
1. On January 1, 2005, the Ramat
Hovav Industrial Council will
begin taking action to dry and
rehabilitate the area of the
vaporization pools spanning 15,000
square meters, in an attempt to
complete the drying and
rehabilitation activities by not
later than the end of 2012.
2. The Ramat Hovav Industrial Council
will submit a detailed plan and
timetable for drying and
rehabilitating the vaporization
pools site to the Ministry of the
Environment for approval by
December 31, 2004.
(c) Treatment of air pollution
The Ministry of the Environment will
formulate and operate a plan to prevent
exceptional emission of hazardous materials
into the air from the Ramat Hovav
industrial area.
As to the possible implications of the Government's
decision on the activities of M-A Industries, see
above.
A criminal complaint was filed against M-A
Industries and one of its executives by the Man,
Nature and Law Foundation. The complaint accuses M-A
Industries that in several instances during
1999-2002, there were measurements at its Ramat
Hovav plant of chimney emissions of materials at
prohibited concentrations, which created strong air
pollution.
M-A Industries does not admit to the charges in the
complaint.
In the opinion of M-A Industries and its legal
counsel, because of the early stage of the
proceedings, it is not possible to estimate the
outcome of the complaint and/or the resultant
exposure. Therefore, the financial statements do not
include a provision in respect thereof.
b. In 1995, a claim was filed against a subsidiary of
M-A Industries and several other defendants,
totaling approximately NIS 137.5 million, by a group
that had acquired the rights of two banks which
declared bankruptcy. The subsidiary is being sued as
the guarantor of debts of agricultural cooperatives
that were its former shareholders.
The position of the subsidiary is that it was
removed from the guarantee agreement under the terms
of a subsequent agreement between the bank, the
previous shareholders and a subsidiary of the former
shareholders. The subsidiary's financial statements
include a provision of NIS 8.6 million, based on the
possibility of a compromise agreement with the
plaintiffs. In the estimation of the subsidiary,
based on the opinion of its legal counsel, the
provision recorded is sufficient to cover any
possible loss from this claim.
F-78
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
7. M-A Industries and its investees (cont'd)
c. Administrative proceedings, civil actions and other
monetary claims of approximately NIS 209 million
have been filed against a subsidiary of M-A
Industries. Based on the opinion of its legal
counsel, the subsidiary's management estimates that
the chances of the subsidiary's success in the
proceedings and its defense against the above claims
and demands are high. The subsidiary believes that
the provisions recorded in its financial statements
are adequate to cover any possible damage which may
result, if any, from these claims.
d. On the matter of undertaking in securitization of
transactions, and on the matter of compliance with
financial covenants, see Note 3C(2).
8. The other shareholders ("the plaintiffs") in Herods, a
proportionately consolidated company of Sheraton Moriah
(Israel) Ltd., a subsidiary of Koor, filed a "motion for
approval of a claim as a derivative action" with the Tel Aviv
District Court against Sheraton and a subsidiary. The
derivative action for which they are seeking approval is for
the cancellation of the management agreement between Herods
and a subsidiary, as part of the arbitration process to which
the claim has been referred. The claim itself deals with the
plaintiffs' arguments regarding breaches in the management
and image promotion agreements.
As a result of negotiations conducted between the parties, a
compromise agreement was signed on February 26, 2005,
pursuant to which the motion for approval of the derivative
claim will be dismissed, and the proceedings of the
derivative claim will be stricken. The compromise agreement
is subject to the approval of the board of directors of the
parties. After such approval is given, a final binding
agreement will be signed and the parties will appeal to stay
the proceedings.
9. In addition, a number of claims have been filed against
certain investees concerning various matters arising in the
normal course of business, including litigation with tax,
customs and VAT authorities, which are in various legal
proceedings. In the estimation of the managements of these
companies, based on the opinions of their legal counsel, the
provisions for these claims included in their financial
statements, are adequate in light of the circumstances.
10. On conditions relating to an investment grant - see Note
10A(2).
11. In Israel, the Stamp Duty on Documents Law, 1961 ("the Law")
is applicable to various documents at different rates,
depending on the kind of document and the amount stipulated
therein, or not stipulated therein. In June 2003, the wording
of Section 15.A of the Law was amended, prescribing who is
obligated for the stamping of documents. Since June 2003, the
Israeli tax authorities have intensified the enforcement of
the Law. The amendment to the Law and the enforcement
activities of the tax authorities were brought before the
Supreme Court for a hearing, on which a ruling has not yet
been issued. Moreover, according to the legislative trends,
the Stamp duty tax is expected to be gradually eliminated,
until it is fully cancelled in 2008.
Certain investee companies received a request from Tax
Authorities to produce documents.
In the estimation of the managements of the Company and the
investees, based on the opinions of their legal counsel, the
Companies are not expected to have material exposure in
respect of any demand related to the Stamps Duty Law.
12. On the indemnity granted to Claridge as advisor - see Note
25C(2).
13. In connection with the indemnification of the appraiser who
conducted a valuation for ECI, see Note 3A(1).
F-79
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 18 - Contingent Liabilities and Commitments (cont'd)
A. Contingent liabilities (cont'd)
14. The liabilities of directors and officers in the Company and
investees are insured by leading insurance companies in
Directors and Officers Insurance (D&O), subject to the terms
of the insurance policy.
Additionally, in accordance with a resolution of the general
meeting of the Company's shareholders, the Company resolved
to indemnify the directors and officers for various events
that are not covered by the insurance, at a monetary amount
exceeding the insured amounts, all as provided in the said
resolution.
15. In connection with the indemnification of the appraiser who
conducted a valuation for Tadiran Communications Ltd, see
note 3H(1).
B. Commitments
1. Several companies in the Group have research and development
contracts with the Government of Israel. Under these
contracts, the companies are required to pay royalties to the
Government of Israel if they generate income from such
research (at rates of 2% - 5% of sales proceeds from products
resulting from the research and development), in amounts not
exceeding 100% - 150% of the amounts of the grants, linked to
the dollar, received by the companies as participation in the
research and development projects.
Royalty expenses paid to the Government of Israel in respect
of these research and development contracts, are as follows:
In the year ended December 31, 2004 - NIS 29,758 thousand.
In the year ended December 31, 2003 - NIS 22,902 thousand. In
the year ended December 31, 2002 - NIS 24,662 thousand.
2. Certain subsidiaries undertook to pay royalties at the rate
of 3% per year in respect of the incremental export sales, up
to the amount financed by the Fund for the Encouragement of
Marketing Abroad. Such amounts are linked to the exchange
rate of the dollar.
3. Commitments for the purchase of fixed assets: December 31,
2004 - NIS 22 million; December 31, 2003 - NIS 50 million.
4. Certain companies in the Group lease and rent industrial and
office premises under long-term contracts. The lease
contracts are non-cancelable and in most cases include
renewal options. The expenses of these companies were NIS 43
million in 2004, NIS 50 million in 2003 and NIS 60 million in
2002.
Future minimum payments under the operating leases and rental
fees for the years subsequent to balance sheet date, are as
follows:
December 31
2004
---------------
(NIS thousands)
---------------
First year 41,960
Second year 34,044
Third year 21,514
Fourth year 8,748
Fifth year and thereafter 26,961
---------------
133,227
===============
5. Koor Corporate Venture Capital's commitment for additional
investments in a venture capital fund, as at the signing
date of the financial statements is approximately 5 million
dollars.
6. A subsidiary of M-A Industries has agreements regarding
long-term supply contracts with a multinational company in
the amount of 17 million dollar per year for a period of five
years (2001-2006).
F-80
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 19 - Convertible Securities of Investee Companies
Option warrants to employees:
Certain investees issued options to their employees until 2004
inclusive. Employee entitlement to such options is usually accrued
over a number of years from their date of issue, subject to continued
employment. The exercise term of the options varies according to the
terms of the different plans.
Convertible debentures and options
See Note 15B.
At each reporting period, Koor reviews the probability that the
convertible securities will be exercised. If a loss, as a result of
dilution, following the convertible securities exercise, is expected,
the Company records the loss.
Note 20 - Share Capital and Stock Options
A. Share capital is composed as follows:
December 31, 2004 December 31, 2003
---------------------------------- ----------------------------------
Authorized Issued and Authorized Issued and
Outstanding outstanding
----------------- --------------- --------------- ----------------
Number of shares:
Ordinary shares, par value
of NIS 0.001 (1) (3) (5) 83,932,757 16,033,213 83,932,757 15,950,188
================= =============== =============== ================
Deferred shares, par value
of NIS 0.001 (2) (4) 15,792,243 15,156,533 15,792,243 15,156,533
================= =============== =============== ================
Amount in nominal NIS:
Ordinary shares, par value
of NIS 0.001 83,933 16,033 83,933 15,950
================= =============== =============== ================
Deferred shares, par value
of NIS 0.001 15,792 15,157 15,792 15,157
================= =============== =============== ================
F-81
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options
A. Share capital is composed as follows:
(1) These shares are listed on the Tel Aviv Stock Exchange
(TASE). On December 31, 2004, the share price on the TASE
was NIS 224.90.
The ADS, (American Depository Shares) each of which
represents 0.2 ordinary shares, par value of NIS 0.001
(hereinafter - Ordinary Shares), are traded on the New York
Stock Exchange (NYSE). The ADS price on the NYSE on December
31, 2004 was 10.56 dollars.
(2) The holders of the deferred shares are entitled to recovery
of paid up capital upon liquidation in its nominal amount,
after payment of the nominal amount to the holders of the
Ordinary Shares. The holders of the deferred shares do not
have voting rights, and they are not entitled to participate
in a dividend distribution of any kind.
(3) On the balance sheet date, subsidiaries hold 15,799 Ordinary
Shares.
(4) A subsidiary of Koor - Koor Trusts (1995) Ltd. (in voluntary
liquidation) had held 624,577 deferred shares of Koor, and in
anticipation of its final liquidation, sold them to Koor
Investments Ltd. (a subsidiary of Koor) in 2004.
(5) During 2004, options in the employee stock option plans (See
Note 20C) were exercised for 83,025 ordinary shares.
B. Buy-back of Company shares
On April 7, 2000, Koor's Board of Directors resolved to approve a
framework of 50 million dollars for buying back ordinary shares of
Koor.
In the framework, which was fully utilized in 2000, 538,592 ordinary
shares were purchased (approximately 3.4% of the ordinary share
capital), at a cost of approximately NIS 219 million. This amount is
deducted from the shareholders' equity of the Company.
On December 31, 2001, the Company purchased 154,637 of its ordinary
shares from a subsidiary at the market price. The transaction was
treated according to the Israeli Securities Regulations (Financial
Statement Presentation of Transactions between a Corporation and its
Controlling Shareholders), 1996.
On May 27, 2003, a foreign institutional investor (hereinafter - "the
Buyer") purchased 500,000 of the aforementioned Company's shares. The
Purchaser declared that the sale was effected without his requesting
or receiving any information from the Company, and undertook not to
trade the shares to be purchased within a specified period.
The sale was effected on that day in an off-market transaction, at
the market price, for total consideration of NIS 43 million.
The Company holds a total of 193,229 of its shares. The amount
deducted from shareholders' equity at the balance sheet date in
respect of the shares held by the Company and subsidiaries is NIS
80,321 thousand.
F-82
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options (cont'd)
C. Stock options to senior employees
1. 1997 plan:
In 1997, 188,968 stock options were allotted under this plan.
On March 22, 2000, Koor's Board of Directors resolved to
amend the plan so that for an employee who resigned and who
holds stock options that vested before his resignation, their
exercise period would be until the end of the five years from
the inception date of the plan (hereinafter - "Amendment of
the exercise period for employees who resign").
On August 6, 2000, Koor's Board of Directors resolved that
for Company employees who are not related parties in the
Company and who did not resign before the end of 2000, the
exercise period of each stock option would be extended to the
end of 5 years from the vesting date (hereinafter -
"Amendment of extension of the exercise period").
On November 15, 2001, Koor's Board of Directors resolved that
for Company employees on the date of resolution and who are
not related parties in the Company the exercise price of
their stock options would be amended to NIS 101.38 per share.
The Board of Directors also resolved that the technical
method of exercise would be the "Bonus Component Method" (see
below, in sub-section 2).
On June 5, 2003, the Company's Board of Directors resolved to
extend the exercise period of the options of Koor Group
employees on the date of the resolution, to December 31,
2010.
Balance of
stock option Exercise Exercise
not exercised price date
-------------- -------- --------
NIS
--------
2,519 101.38 05/2005
3,000 101.38 12/2010
--------------
5,519
--------------
2. 1998 plan:
On August 30, 1998, an extraordinary general meeting of the
shareholders of the Company approved a private placement of
400,000 stock options, free of charge, to Company employees.
The options are exercisable for up to 400,000 ordinary shares
of a par value of NIS 0.001 each (hereinafter - "the Plan").
Under the terms of the Plan, each stock option is
theoretically exercisable for one share, subject to
adjustments. However, in practice, offerees who exercise the
options will not be allotted the full quantity of shares
underlying each option, but only shares which reflect the
amount of the financial benefit inherent in their option,
computed on the date of exercise. Accordingly, the exercise
price of each stock option is intended only for computation
of the benefit component (above and hereafter - "the Benefit
Component Method").
F-83
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options (cont'd)
C. Stock options to senior employees (cont'd)
2. 1998 plan: (cont'd)
On March 22, 2000, the Board of Directors approved an
amendment of extension of the exercise period for employees
who resign, applicable to option holders under the Plan who
are not related parties (see Note 20C(1)). The Board of
Directors also resolved that for these option holders, the
exercise price would be adjusted in respect of distribution
of a dividend for all the options, even if the vesting date
preceded the entitlement to the dividend.
On October 6, 2000, the Board of Directors approved the
amendment of extension of the exercise period for Company
employees who are not related parties in the Company and who
did not retire before the end of 2000.
On November 15, 2001, the Board of Directors approved the
amendment of the exercise price to NIS 101.38 per share for
Company employees on the resolution date who are not related
parties in the Company.
On June 5, 2003, the Company's Board of Directors resolved to
extend the exercise period of the options for Koor Group
employees on the resolution date to December 31, 2010.
Balance of
stock option Exercise Exercise
not exercised price date
--------------- --------- --------
NIS
---------
670 101.38 07/2006
52,593 101.38 12/2010
---------------
53,263
---------------
3. 2000 Plan:
On August 6, 2000, the Board of Directors of the Company
approved the 2000 stock options plan, which was previously
approved on June 14, 2000 by the Executive Committee of the
Board of Directors. The main points of the plan are these:
1) A total framework was approved for the allotment of
400,000 stock options theoretically exercisable for
up to 400,000 ordinary shares of the Company, i.e.
about 2.5% of the ordinary issued share capital of
the Company.
2) The options will be exercised for shares in a
quantity reflecting the amount of the financial
benefit inherent in the options, according to the
Benefit Component Method.
3) The exercise price of each stock option, pursuant to
the amendment by the Board of Directors of the
Company on November 15, 2001, will be NIS 101.38 per
share.
4) The options are designated for Company employees who
are not related parties in the Company and will not
become related parties in the Company as a result of
allotment of the stock options.
F-84
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options (cont'd)
C. Stock options to senior employees (cont'd)
3. 2000 Plan: (cont'd)
5) The stock options will vest in accordance with a
division of the options into three batches, so that
at the end of the first year from the record date
(June 14, 2000) or from the date on which the
employee started work in the Company (whichever is
the later), one third of the quantity allotted will
vest, and the remaining two thirds of the quantity
will vest at the end of each of the two subsequent
years. The exercise period of each vested option is
5 years from the vesting date.
6) On October 5, 2000, the total quantity of 400,000
stock options was allotted to a trustee.
7) On June 5, 2003, the Company's Board of Directors
resolved to extend the exercise period of the
options of Koor Group employees on the date of the
resolution to December 31, 2010.
Balance of
stock option Exercise Exercise
not exercised price date
--------------- --------- --------
NIS
---------
1,734 101.38 6/2007
30,000 101.38 12/2010
---------------
31,734
---------------
4. 2003 Plan:
On July 27 2003, a general meeting of shareholders approved
Stock Option Plan 2003, which had been approved previously by
the Audit Committee of the Company's Board of Directors and
by the Board of Directors, on May 25, 2003 and June 5, 2003,
respectively. The key points of the Plan are:
1) A total framework was approved for the allotment of
1,200,000 stock options, theoretically exercisable
for up to 1,200,000 ordinary shares of the Company,
i.e. about 6.8% of the ordinary shares (fully
diluted) of the Company.
2) The options allotted to the trustee will be
exercised for shares in a quantity reflecting the
amount of the financial benefit inherent in the
options, according to the Benefit Component Method.
3) The exercise price of every option will be NIS 96,
linked to the CPI, unless the Company decides to
prescribe a higher exercise price for options that
will be allotted on dates subsequent to the approval
date of the plan.
F-85
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 20 - Share Capital and Stock Options (cont'd)
C. Stock options to senior employees (cont'd)
4. 2003 Plan: (cont'd)
4) The options are designated for Company employees who
are not related parties in the Company and will not
become related parties in the Company as a result of
allotment of the stock options. In any event, the
total number of offerees under Plan 2003 will not
exceed 35 offerees, including the Company's
directors and the CEO.
5) The right of every offeree to exercise the options
for shares will vest in six stages during the
three-year period from the record date, whereby at
the end of every calendar half-year, one-sixth of
the number of options allotted to the trustee on his
behalf will vest.
6) Options not exercised by December 31, 2010 will
expire.
7) The Plan will be taxed under the Capital Gains
Track, under the provisions of Section 102 of the
Income Tax Ordinance and the regulations promulgated
hereunder. Any tax to be imposed in respect of the
exercise of the options will be borne solely by the
offerees. And on the other hand, the Company will be
unable to claim any tax deduction for the expense.
8) Also approved within the framework of the approval
of Plan 2003 was the granting of 350,000 options out
of the total number, to seven directors (except for
two directors who are controlling shareholders in
the Company, directly or indirectly), divided
equally, as well as 175,000 options to the Company's
CEO. The balance of the options is intended for
other employees and officers of the Koor Group.
9) The balance of options remaining as at December 31,
2004 is 939,450 options.
Balance of
stock option Exercise Exercise
not exercised price date
--------------- --------------- ---------------
NIS
---------------
856,450 96 12/2010
33,000 175.95 12/2010
50,000 186.20 12/2010
---------------
939,450
==============
Changes in the options during 2004:
1997 Plan 1998 Plan 2000 Plan 2003 Plan Total
--------------- --------------- --------------- --------------- ---------------
Balance as at
beginning of year 26,039 65,926 61,667 951,789 1,105,421
Granted - - - 93,000 93,000
Exercised (20,520) (12,663) (29,933) (105,339) *(168,455)
--------------- --------------- --------------- --------------- ---------------
Balance as at end
of year 5,519 53,263 31,734 939,450 1,029,966
=============== =============== =============== =============== ===============
* Because of the "Benefit Component Method", a total of 83,025 ordinary shares of the Company were issued.
F-86
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances
A. General:
The Company and certain subsidiaries have entered into forward
transactions and option contracts, in order to hedge assets and
liabilities denominated in foreign currency and in order to reduce the
overall exposure of commitments for the purchase of raw materials and
the sale of goods, in currencies other than the function currency.
Those subsidiaries neither hold nor issue financial instruments for
trading purposes.
B. Details of the open foreign exchange transactions made to
hedge the company's and subsidiaries' assets and liabilities
in foreign currency as at December 31, 2004:
Forward Call Put Swap
Transaction options options transactions
------------ ------------ ------------ ------------
NIS thousands
--------------------------------------------------------------------
Purchase of Dollars in exchange for:
NIS 25,848 124,932 335,716 -
European currencies 53,850 1,185,992 141,302 -
Brazilian Real 15,078 43,080 43,080 24,509
Others 45,234 99,515 177,920 -
------------ ------------ ------------ ------------
140,010 1,453,519 698,018 24,509
============ ============ ============ ============
Sale of Dollars in exchange for:
NIS 17,232 142,164 196,014 -
European currencies 28,433 189,983 1,334,618 -
Brazilian Real - - - 258,480
Others - 178,351 95,638 -
------------ ------------ ------------ ------------
45,665 510,498 1,626,270 258,480
============ ============ ============ ============
C. The Company entered into an interest rate swap (IRS) in the
amount of 50 million dollars, in order to reduce its exposure
to fluctuations in interest rates. In the transaction,
variable interest was exchanged for fixed interest.
Additionally, the Company executed hedges on its CPI-linked
loans and acquired a CPI-dollar forward contract in the
amount of NIS 170 million.
D. Fair value of financial instruments:
Condensed data of monetary assets and liabilities, whose fair value as
at December 31, 2004, based on their market value, is different from
those presented in the financial statements, is as follows:
Carrying Fair
amount value
------------ ------------
NIS millions
-------------------------------
Investments in affiliates 1,275 1,754
============ ============
F-87
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)
D. Fair value of financial instruments: (cont'd)
The carrying amounts of cash and cash equivalents, short-term
investment, trade receivables, other accounts receivable, credits from
banks and others, trade payables and other accounts payable,
debentures and convertible debentures derivatives and other financial
instruments is approximate or similar to at their fair value.
E. Credit risk of trade receivables:
NIS millions
---------------
Condensed data of credit risk of trade receivables as at December 31,
2004:
Receivables insured by credit card companies 341
Receivables insured by foreign trade risk insurance 22
Receivables - Government authorities and Bezeq 42
Other receivables, including checks and credit card companies 1,774
---------------
Total, including non-current receivables 2,179
===============
In Management's opinion, the financial statements include suitable
provisions in respect of exposure to doubtful debts.
The exposure to credit risks relating to trade receivables is limited,
due to the relatively large number of customers.
F-88
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------------------------------------------------------
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)
F. Linkage terms of monetary balances:
(1) Consolidated
December 31, 2004
---------------------------------------------------------------
In foreign Linked Unlinked Total
currency or to the
linked thereto CPI
-------------- ------------ ------------ ------------
NIS thousands
---------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents 512,511 - 104,799 617,310
Short-term deposits and investments 91,312 101,785 223,371 416,468
Trade receivables 1,968,387 13,546 191,666 2,173,599
Other accounts receivable 177,180 29,131 102,298 308,609
Investments and other
long-term receivables 236,974 58,562 10,346 305,882
-------------- ------------ ------------ ------------
2,986,364 203,024 632,480 3,821,868
============== ============ ============ ============
Liabilities
Current liabilities:
Credits from banks and others
(not including current maturities
of long-term liabilities) 753,900 - 331,044 1,084,944
Trade payables 1,371,290 - 296,165 1,667,455
Other accounts payable 840,327 130,893 375,002 1,346,222
Long-term loans and debentures
(including current maturities) 1,793,566 1,368,683 643,669 3,805,918
-------------- ------------ ------------ ------------
4,759,083 1,499,576 1,645,880 7,904,539
============== ============ ============ ============
(Table Continued)
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-------------------------------------------------------------------------------------------------------------------------------
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)
F. Linkage terms of monetary balances:
(1) Consolidated
December 31, 2003
-----------------------------------------------------------------
In foreign Linked Unlinked Total
currency or to the
linked thereto CPI
-------------- ------------ ----------- --------------
NIS thousands
-----------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents 491,889 - 101,514 593,403
Short-term deposits and investments 87,534 150,495 128,780 366,809
Trade receivables 1,794,141 11,945 246,375 2,052,461
Other accounts receivable 139,050 25,770 85,608 250,428
Investments and other
long-term receivables 217,970 59,565 2,823 280,358
-------------- ------------ ----------- --------------
2,730,584 247,775 565,100 3,543,459
============== ============ =========== ==============
Liabilities
Current liabilities:
Credits from banks and others
(not including current maturities
of long-term liabilities) 647,098 - 267,162 914,260
Trade payables 1,030,693 - 312,090 1,342,783
Other accounts payable 642,646 171,487 407,953 1,222,086
Long-term loans and debentures
(including current maturities) 2,488,222 1,627,955 7,072 4,123,249
-------------- ------------ ----------- --------------
4,808,659 1,799,442 994,277 7,602,378
============== ============ =========== ==============
F-89
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)
F. Linkage terms of monetary balances (cont'd):
(2) Company
December 31, 2004
---------------------------------------------------------------
In foreign Linked Unlinked Total
currency or to the
linked thereto CPI
-------------- ------------ ------------ ------------
NIS thousands
---------------------------------------------------------------
Assets
Cash and cash equivalents 2,547 - 27,118 29,665
Short-term deposits and
investments 51,909 80,235 166,497 298,641
Other receivables 1,121 - 14,869 15,990
Short term loans to
investee companies - 12,548 - 12,548
Other investments and receivables 107 32,028 - 32,135
Investments and other long-term receivables:
Investee companies (including
current maturities of loans) 43,364 50,711 1,255,315 1,349,390
-------------- ------------ ------------ ------------
99,048 175,522 1,463,799 1,738,369
============== ============ ============ ============
Liabilities
Current liabilities:
Credits from banks and others
(not including current maturities
of long-term liabilities) 166,427 - 15,025 181,452
Trade payables 43 - 340 383
Other accounts payable 18,864 17,143 27,436 63,443
Long-term liabilities (including
current maturities of loans) 102,829 1,296,014 645,125 2,043,968
-------------- ------------ ------------ ------------
288,163 1,313,157 687,926 2,289,246
============== ============ ============ ============
(Table Continued)
Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)
F. Linkage terms of monetary balances (cont'd):
(2) Company
December 31, 2003
-----------------------------------------------------------------
In foreign Linked Unlinked Total
currency or to the
linked thereto CPI
-------------- ------------ ----------- --------------
NIS thousands
-----------------------------------------------------------------
Assets
Cash and cash equivalents 4,066 - 5,139 9,205
Short-term deposits and
investments 57,202 144,133 109,471 310,806
Other receivables 11,074 - 23,598 34,672
Short term loans to
investee companies - 13,951 - 13,951
Other investments and receivables 109 32,028 4 32,141
Investments and other long-term receivables:
Investee companies (including
current maturities of loans) 12,753 53,449 1,319,870 1,386,072
-------------- ------------ ----------- --------------
85,204 243,561 1,458,082 1,786,847
============== ============ =========== ==============
Liabilities
Current liabilities:
Credits from banks and others
(not including current maturities
of long-term liabilities) 169,704 - 5 169,709
Trade payables 85 - 418 503
Other accounts payable 4,408 12,057 26,858 43,323
Long-term liabilities (including
current maturities of loans) 373,268 1,648,201 8,125 2,029,594
-------------- ------------ ----------- --------------
547,465 1,660,258 35,406 2,243,129
============== ============ =========== ==============
F-90
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 22 - Liens and Guarantees
A. In order to secure some liabilities, certain subsidiaries
have mortgaged their real estate and have placed fixed
charges on plant, equipment and bank deposits, as well as
floating charges on all of their assets. They also pledged a
portion of their shares in investee companies.
Regarding the pledge in respect to an investment grant - see
Note 10A(2).
B. The balances of secured liabilities are as follows:
Consolidated
------------------------------
December 31
------------------------------
2004 2003
----------- ------------
NIS thousands
------------------------------
Credit from banks 333,113 392,341
Loans from banks and others and debentures (including
current maturities), see Note 15, and also C and D, E,
below 2,017,912 1,288,411
----------- ------------
2,351,025 1,680,752
=========== ============
C. The Company financed the acquisition of Tadiran
Communications through a NIS 637 million loan from a bank in
Israel, in consideration for a lien on the acquired shares
in favor of the bank.
D. The convertible debentures, which were issued by M-A
Industries, are guaranteed by first level fixed symbolic
lien with a deposit to the amount of NIS 1 for the Trustee
of the convertible debenture holders (see Note 15B).
E. Guarantees to banks and others for loans and for assuring
credit lines and other guarantees in favor of: Consolidated
Company December 31 December 31 2004 2003 2004 2003 NIS
thousands NIS thousands
Consolidated Company
------------------------------ ------------------------------
December 31 December 31
------------------------------ ------------------------------
2004 2003 2004 2003
----------- ------------ ----------- ------------
NIS thousands NIS thousands
------------------------------ ------------------------------
Subsidiaries - - 240,151 314,125
Affiliates - 340 - 340
Others 78,473 67,723 150 154
----------- ------------ ----------- ------------
78,473 68,063 240,301 314,619
1) In certain cases when advances from customers are received, a
subsidiary provides its customers with bank guarantees to
secure the advances. Guarantees in excess of the amount of
advance payments stated as liabilities in the balance sheet,
amounted to NIS 265,786 thousand, and NIS 302,782 thousand,
as at the years ending December 31, 2004 and 2003,
respectively.
F-91
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 22 - Liens and Guarantees (cont'd)
E. Guarantees to banks and others for loans and for assuring
credit lines and other guarantees: (cont'd)
2) In connection with the Bezeq agreement to transfer ownership
of public switching, Bezeq received from Koor a guarantee in
the amount of NIS 125 million.
3) A subsidiary has a guarantee for a major customer to pay any
amounts up to 40 million dollars in relation to an
indemnification that the subsidiary signed for the same
customer, on account of breaches of contracts to Bezeq, the
Israeli Communication Company. The guarantee is at least till
2015.
4) A subsidiary and its subsidiary in Brazil are, under certain
conditions, a guarantor to financial institutions for credit
that its customers received in relation to commercial sales
of the consolidated company to those customers. The balance
of guarantees, as at the balance sheet date, was
approximately 98 million dollars. (December 31, 2003
approximately 85 million dollars).
5) There are also guarantees, in an unlimited amount, to ensure
due performance of work and customer agreements, product
warranty, advance payments received and guarantees on behalf
of liabilities to customs and excise authorities.
6) As a condition for the continued availability, see Notes 3
and 18.
Note 23 - Data concerning Items in Statements of Operations
A. Revenues from sales and services - net (1) (2):
Consolidated:
Year ended December 31
--------------------------------------------------
2004 2003 2002
----------- ----------- -----------
NIS thousands
--------------------------------------------------
Local:
Industrial operations 874,861 757,759 899,768
Trading operations 505,293 262,692 644,591
Abroad:
Industrial operations - export and
international operations 6,947,748 5,902,716 5,157,580
Trading operations 900,771 767,263 397,851
----------- ----------- -----------
9,228,673 7,690,430 7,099,790
=========== =========== ===========
(1) Not including agency sales 425,224 386,491 315,124
=========== =========== ===========
(2) Revenues and expenses relating to work performed under
long-term contracts:
Revenues 880,959 979,950 1,359,621
Costs (709,899) (793,260) (949,898)
----------- ----------- -----------
171,060 186,690 409,723
=========== =========== ===========
F-92
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 23 - Data to Items in Statements of Operations (cont'd)
B. Cost of sales and services - consolidated:
Year ended December 31
--------------------------------------------------
2004 2003 2002
------------ ------------ ---------------
NIS thousands
--------------------------------------------------
Industrial operations:
Materials 3,817,178 2,757,523 2,766,122
Labor 750,457 775,567 906,158
Subcontracted work 41,640 49,725 68,009
Depreciation and amortization 177,535 180,228 189,720
Research and development expenses, net (*) 212,115 221,343 256,313
Other manufacturing expenses 645,915 533,736 493,684
------------ ------------ ---------------
5,644,840 4,518,122 4,680,006
Less - expenses charged to cost of fixed assets 6,510 8,027 10,350
------------ ------------ ---------------
5,638,330 4,510,095 4,669,656
(Decrease) increase in inventory of goods and
work in process (39,305) 43,428 13,057
------------ ------------ ---------------
5,599,025 4,553,523 4,682,713
Increase in inventory of finished goods (176,611) (18,778) (208,753)
------------ ------------ ---------------
5,422,414 4,534,745 4,473,960
------------ ------------ ---------------
Trading operations:
Merchandise 508,189 537,512 533,532
Labor 55,394 93,235 69,319
Depreciation 26,155 26,873 29,160
Others 275,527 200,579 209,809
------------ ------------ ---------------
865,265 858,199 841,820
------------ ------------ ---------------
6,287,679 5,392,944 5,315,780
============ ============ ===============
(*) Net of grants and participations that were
received and royalties that were paid, net 14,220 (1,952) 788
============ ============ ===============
C. Selling and marketing expenses - consolidated:
Year ended December 31
--------------------------------------------------
2004 2003 2002
------------ ------------ ---------------
NIS thousands
--------------------------------------------------
Salaries 338,629 258,260 251,372
Commissions 150,556 142,256 97,030
Advertising expenses 40,993 30,384 45,584
Depreciation and amortization 113,638 97,086 78,843
Other 528,388 412,471 341,948
------------ ------------ ---------------
1,172,204 940,457 814,777
============ ============ ===============
F-93
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 23 - Data to Items in Statements of Operations (cont'd)
D. General and administrative expenses:
Consolidated Company
------------------------------------------ ----------------------------------------------
Year ended December 31 Year ended December 31
------------------------------------------ ----------------------------------------------
2004 2003 2002 2004 2003 2002
------------ ------------ ------------ ------------- ------------ ---------------
NIS thousands NIS thousands
------------------------------------------ ----------------------------------------------
Salaries 229,180 217,525 234,098 22,399 17,325 24,342
Bad and
doubtful debts 54,959 36,903 33,933 - - -
Depreciation and
amortization 24,171 24,070 30,797 1,262 1,342 1,665
Other 217,694 182,246 190,541 22,987 22,497 22,129
------------ ------------ ------------ ------------- ------------ ---------------
526,004 460,744 489,369 46,648 41,164 48,136
============ ============ ============ ============= ============ ===============
E. Financing expenses (income), net:
Consolidated Company
------------------------------------------ ----------------------------------------------
Year ended December 31 Year ended December 31
------------------------------------------ ----------------------------------------------
2004 2003 2002 2004 2003 2002
------------ ------------ ------------ ------------- ------------ ---------------
NIS thousands NIS thousands
------------------------------------------ ----------------------------------------------
In respect of
convertible
debentures 18,942 15,319 17,825 - 612 1,139
In respect of
debentures (480) - 651 - - -
In respect of
long-term loans 200,509 141,078 240,713 111,396 94,641 170,283
In respect of
short-term loans
and credit 79,521 182,868 168,478 10,756 (2,458) 15,024
Amortization of
capital raising
expenses 4,334 2,106 2,250 - - -
Losses (gains)
from
marketable
securities, net (24,238) (72,681) 44,112 (18,568 ) (61,974) 35,691
Interest
capitalized to
fixed assets and
work in process (1,544) (371) (14,860) - - -
Expenses
(income) from
balance with
investees, net - - - 1,430 (2,833) 6,478
Expenses
(income) from
deposits and
others, net (5,682) (40,119) (50,732) 5,792 7,120 (28,807)
------------ ------------ ------------ ------------- ------------ ---------------
271,362 228,200 408,437 110,806 35,108 199,808
============ ============ ============ ============= ============ ===============
F-94
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 23 - Data to Items in Statements of Operations (cont'd)
F. Other income (expenses), net
1. Consolidated
Year ended December 31
--------------------------------------------------
2004 2003 2002
------------ ------------ ---------------
NIS thousands
--------------------------------------------------
Sale of investments and activities in investees
(including changes in rates of holding) 223,095 32,916 342,343
Expenses relating to the termination,
sale of activities and sale and write down
of assets, net (73,078) (107,306) (164,401)
Supplemental severance pay and pensions (54,010) (28,279) (126,997)
Management services - affiliated companies 2,682 2,272 2,674
Securitization costs (see Note 3C(2)) (27,783) **(16,112) **(22,254)
Compensation for damages - 5,580 37,957
Amortization of goodwill (136,437) (118,736) (91,085)
Miscellaneous, net (13,228) **9,944 **27,587
------------ ------------ ---------------
(78,759) (219,721) 5,824
============ ============ ===============
2. Company
Year ended December 31
--------------------------------------------------
2004 2003 2002
------------ ------------ ---------------
NIS thousands
--------------------------------------------------
Profit (loss) from sale of investments in
investee companies 212,024 7,039 336,621
Net changes in value of long-term assets - (12,382) (10,036)
Rental income, net* 8,135 7,216 9,219
Capital gain from sale of fixed assets - (96) 29,189
Dividend 4,701 - -
Miscellaneous, net 10,099 3,914 438
------------ ------------ ---------------
234,959 5,691 365,431
============ ============ ===============
* Depreciation included in the item 760 668 1,235
============ ============ ===============
** Reclassified
F-95
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 23 - Data to Items in Statements of Operations (cont'd)
G. Equity of the Koor Group in the operating results of affiliates,
net
1. Consolidated
Year ended December 31
--------------------------------------------------
2004 2003 2002
------------ ------------ ---------------
NIS thousands
--------------------------------------------------
Affiliated companies, net (1) 3,406 108,049 245,703
Amortization of goodwill * 24,281 5,774 6,388
------------ ------------ ---------------
27,687 113,823 252,091
============ ============ ===============
(1) Including loss from a discontinued operation
in an affiliate - - 110,911
============ ============ ===============
* In 2004 - net of in process research and development in the amount of NIS 20 million with respect to purchase of
affiliated company - See Note 3H.
2. Company
Year ended December 31
--------------------------------------------------
2004 2003 2002
------------ ------------ ---------------
NIS thousands
--------------------------------------------------
Equity of Koor in operating results for the year (1) 57,192 **51,709 (900,592)
Amortization of goodwill (30,992) **(15,439) (23,159)
------------ ------------ ---------------
26,200 36,270 (923,751)
============ ============ ===============
Dividend received/proposed 74,201 23,043 28,663
============ ============ ===============
(1) Including loss from a discontinued operation
in an affiliate - - 110,911
============ ============ ===============
(2)
Year ended December 31
--------------------------------------------------
2004 2003 2002
------------ ------------ ---------------
NIS thousands
--------------------------------------------------
Subsidiaries 122,172 151,053 (680,871)
Proportionately consolidated companies (61,114) - -
Affiliates (34,858) (114,783) (242,880)
------------ ------------ ---------------
26,200 36,270 (923,751)
============ ============ ===============
* In 2004 - net of in process research and development in process
in the amount of NIS 20 million with respect to purchase
of affiliated company. - See Note 3H.
** Reclassified
F-96
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 23 - Supplementary Data to Items in Statements of Operations (cont'd)
I. Income (expenses) from investee companies and their participation
in expenses - Company
Year ended December 31
-----------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------- ----------------------------- -------------------------------
Consolidated Affiliated Consolidated Affiliated Consolidated Affiliated
companies companies companies companies companies companies
-------------- ----------- ------------- ------------ ------------ --------------
NIS thousands
-----------------------------------------------------------------------------------------------
Income:
Management
services 22,334 - 25,006 - 35,573 -
-------------- ----------- ------------- ------------ ------------ --------------
Administrative
expenses --
Salary and other
administrative
expenses 1,457 - 1,679 - 9,002 -
-------------- ----------- ------------- ------------ ------------ --------------
Financing
income
(expenses), net (1,430) - 2,828 5 (6,480) 2
-------------- ----------- ------------- ------------ ------------ --------------
Rental income,
net - - - - 654 -
-------------- ----------- ------------- ------------ ------------ --------------
F-97
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 24 - Business Segments
A. The Koor Group operates in the following business segments:
The Company's telecommunication activities are focused in two
companies - Telrad Networks Ltd., which develops and markets
telecom products and provides end-user solutions, and ECI
Telecom Ltd., an affiliated company, that provides solutions
for access networks (Inovia) and transmission systems and
optical networks (Enavis, Lightscape).
The Company's agrochemical activities are carried out through
M-A Industries considered a world's foremost manufacturer of
generic crop protection solutions. M-A Industries produces a
full range of products, including insecticides, fungicides
and herbicides, as well as plant growth regulators. In
addition, the M-A Industries is engaged in specialty aroma
chemicals and other different kinds of chemicals.
Activities in the defense space are carried out mainly by the
Elisra Electronics Industries Ltd. Group, a leader in the
planning, development and manufacturing of solutions for
electronic warfare and defense, wireless communication
systems, command and control systems, pilot rescue systems
and advanced communications systems.
Activities in venture capital investments space are carried
out through the Koor Corporate Venture Capital partnership,
which invests in high-tech companies and venture capital
funds with high growth potential. Most of the investments are
in the fields of communication and life sciences.
The Company's remaining business activities are in tourism,
through Sheraton Moriah, which holds the Sheraton Hotel chain
in Israel and Knafayim-Arkia (an affiliated company until the
third quarter of 2004) which holds 40% of the EL-AL airline
company which provides aviation and holiday services and
leases aircrafts to other companies. Additional activities
include international trade through several companies.
B. Segment sales include products sold and services rendered to
unrelated customers, which are not part of the group.
Inter-industry segment sales are immaterial and are based
primarily on prices determined in the ordinary course of
business. Accordingly, these sales are not presented
separately.
Segment operating earnings include all costs and expenses
directly related to the relevant segment and charged on a
proportionate basis, expenses that benefit more than one
segment. Expenses and revenue presented in the statements of
operations after operating earnings are not taken in account
in the determination of operating earnings or loss.
Identifiable assets and liabilities by industry segments are
those that are used by Koor in its activities in each
segment.
F-98
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 24 - Business Segments (cont'd)
C. Data regarding business segments of the Koor Group:
Year ended December 31
----------------------------------------------------------------------------------------------
2004 2003 2002
----------------------------- ------------------------------ --------------------------------
NIS thousands % NIS thousands % NIS thousands %
--------------- ------------- --------------- -------------- --------------- ---------------
Revenues from
sales and
services:
Segments:
Telecommunication* 615,057 6.66 796,059 10.35 814,108 11.47
Defense electronics 1,165,998 12.63 1,286,432 16.73 1,687,551 23.77
Agro-chemicals and
other chemicals 6,895,238 74.72 5,191,913 67.51 4,140,471 58.32
Others 552,380 5.99 416,026 5.41 457,660 6.44
Total segments 9,228,673 100.00 7,690,430 100.00 7,099,790 100.00
=============== ============= =============== ============== =============== ===============
* Including sales
to major customer 586,114 753,863 415,442
=============== ============= =============== ============== =============== ===============
Year ended December 31
----------------------------------------------------------------------------------------------
2004 2003 2002
----------------------------- ------------------------------ --------------------------------
NIS thousands % NIS thousands % NIS thousands %
--------------- ------------- --------------- -------------- --------------- ---------------
Pre-tax earnings
(losses):
Operating earnings
(loss) according to
segments:
Telecommunication (64,491) (5.02) 3,158 0.34 (178,623) (34.43)
Defense electronics 30,865 2.4 (4,294) (0.46) 78,853 15.20
Agro-chemicals
and other chemicals 1,312,534 102.1 949,290 102.61 658,507 126.93
Venture capital
investments (1,457) (0.11) (1,445) (0.16) (7,894) (1.52)
Others 8,030 0.63 (21,536) (2.33) (32,062) (6.18)
--------------- ------------- --------------- -------------- --------------- ---------------
Total segments 1,285,481 100.00 925,173 100.00 518,781 100.00
=============== ============= =============== ============== =============== ===============
Joint general
expenses (42,695) (28,888) (38,917)
--------------- --------------- ---------------
Total operating
earnings 1,242,786 896,285 479,864
Financing
expenses, net (271,362) (228,200) (408,437)
Other income
(expenses), net (78,759) (219,721) 5,824
Transfer to
statement of income
of translation
differences of
autonomous
investee in
voluntary liquidation - - (390,901)
--------------- ------------- --------------- -------------- --------------- ---------------
Pre-tax earnings
(losses) 892,665 448,364 (313,650)
=============== ============= =============== ============== =============== ===============
F-99
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 24 - Business Segments (cont'd)
C. Data regarding business segments of the Koor Group: (cont'd)
The Koor Group's equity in the excess of losses over earnings of
affiliates, net, is as follows:
Year ended December 31
----------------------------------------------------------------------------------------------
2004 2003 2002
----------------------------- ------------------------------ --------------------------------
NIS thousands % NIS thousands % NIS thousands %
--------------- ------------- --------------- -------------- --------------- ---------------
Telecommunications (15,919) (57.5) (101,795) (89.43) (246,998) (97.98)
Defense
electronics - - (130) (0.11) (172) (0.07)
Venture capital
investments (329) (1.19) (329) (0.30) (329) (0.13)
Others (11,439) (41.31) (11,569) (10.16) (4,592) (1.82)
--------------- ------------- --------------- -------------- --------------- ---------------
(27,687) (100.00) (113,823) (100.00) (252,091) (100.00)
=============== ============= =============== ============== =============== ===============
December 31
---------------------------------------------------------------------
2004 *2003
------------------------------ -----------------------------------
NIS thousands % NIS thousands %
------------- -------------- --------------- ------------------
Identifiable assets
Segments:
Telecommunications 550,914 4.97 778,182 7.50
Defense electronics 1,119,371 10.10 1,104,515 10.66
Agro-chemicals and
other chemicals 8,242,246 74.33 7,329,815 70.69
Venture capital investments 175,818 1.58 223,733 2.16
Others 1,000,295 9.02 932,586 8.99
------------- --------------- --------------- ------------------
Total segments 11,088,644 100.00 10,368,831 100.00
--------------- ------------------
Corporate assets 683,762 557,162
Affiliates** 1,375,160 943,764
------------- ---------------
13,147,566 11,869,757
============= ===============
** Including an investment in ECI as at December 31, 2004 and 2003 in
the amount of NIS 673 million and NIS 726 million respectively,
which operates in the telecommunications segment and investment in
Tadiran Communications Ltd. which operates in the defense
electronics in the amount of NIS 602 million as at December 31,
2004.
F-100
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 24 - Business Segments (cont'd)
C. Data regarding business segments of the Koor Group: (cont'd)
December 31
---------------------------------------------------------------------
2004 *2003
------------------------------ -----------------------------------
NIS thousands % NIS thousands %
------------- -------------- --------------- ------------------
Identifiable liabilities
Segments:
Telecommunications 215,060 6.87 263,873 9.12
Defense electronics 668,157 21.34 728,443 25.16
Agro-chemicals and other chemicals 2,089,083 66.72 1,733,760 59.89
Venture capital investments 24 - 8,930 0.31
Others 158,607 5.07 159,870 5.52
------------- --------------- --------------- ------------------
Total segments 3,130,931 100.00 2,894,876 100.00
Corporate liabilities 49,515 63,676
------------- ---------------
3,180,446 2,958,552
Financing commitments 4,725,771 4,697,239
Others 647,458 396,772
------------- ---------------
8,553,675 8,052,563
============= ===============
Year ended December 31
----------------------------------------------------------------------------------------------
2004 2003 2002
----------------------------- ------------------------------ --------------------------------
NIS thousands % NIS thousands % NIS thousands %
--------------- ------------- --------------- -------------- --------------- ---------------
Capital
investments:
Segments:
Telecommunications 21,015 2.39 7,173 2.25 15,554 1.19
Defense
electronics 21,408 2.44 28,210 8.85 45,753 3.48
Agro-chemicals
and other
chemicals 816,287 92.9 277,195 86.94 1,241,091 94.53
Others 19,991 2.27 6,262 1.96 10,464 0.80
--------------- ------------- --------------- -------------- --------------- ---------------
Total segments 878,701 100.00 318,840 100.00 1,312,862 100.00
============= ============== ===============
Corporate assets 423 392 108
--------------- --------------- ---------------
879,124 319,232 1,312,970
=============== =============== ===============
F-101
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 24 - Business Segments (cont'd)
C. Data regarding business segments of the Koor Group: (cont'd)
Year ended December 31
----------------------------------------------------------------------------------------------
2004 2003 2002
----------------------------- ------------------------------ --------------------------------
NIS thousands % NIS thousands % NIS thousands %
--------------- ------------- --------------- -------------- --------------- ---------------
Depreciation and
amortization:
Segments:
Telecommunications 31,863 6.89 44,696 10.17 57,664 13.67
Defense electronics 35,721 7.72 39,297 8.94 49,825 11.81
Agro-chemicals
and other
chemicals 364,995 78.91 318,492 72.47 278,482 66.03
Others 29,957 6.48 37,029 8.42 35,792 8.49
--------------- ------------- --------------- -------------- --------------- ---------------
Total segments 462,536 100.00 439,514 100.00 421,763 100.00
============= ============== ===============
Corporate assets 1,264 13,050 1,817
--------------- ------------- --------------- -------------- --------------- ---------------
463,800 452,564 423,580
=============== =============== ===============
D. Revenues from sales and services by geographic destinations
according to customer location
Year ended December 31
---------------------------------------------------
2004 2003 2002
------------- ---------------- ---------------
NIS thousands
---------------------------------------------------
North America 1,542,409 1,152,009 1,125,915
Europe 3,150,853 2,473,635 1,864,012
South America 2,056,261 1,670,256 1,213,485
Asia and Australia 842,986 1,050,873 1,123,387
Africa 256,010 323,206 228,632
Israel 1,380,154 1,020,451 1,544,359
------------- ---------------- ---------------
9,228,673 7,690,430 7,099,790
============= ================ ===============
F-102
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 24 - Business Segments (cont'd)
E. Assets by geographic location of manufacturing operation
December 31
----------------------------------
2004 2003
-------------- ----------------
NIS thousands NIS thousands
----------------------------------
Israel 9,411,628 8,636,399
South America 1,821,643 1,530,178
Europe 1,630,720 1,495,176
United States 169,497 167,808
Others 114,078 40,196
-------------- ----------------
13,147,566 11,869,757
============== ================
F. Capital investments in assets by geographic location
December 31
----------------------------------
2004 2003
-------------- ----------------
NIS thousands NIS thousands
----------------------------------
Israel 798,310 248,131
Brazil 37,184 40,725
United States 2,839 2,719
Others 40,791 27,657
-------------- ----------------
879,124 319,232
============== ================
Note 25 - Transactions and Balances with Interested Parties
A. The following are details of interested parties in Koor
resulting from their holdings of Koor's ordinary shares:
1. Claridge Group (Claridge).
2. Anfield Ltd.
B. On October 15, 2002 the Board of Directors of Bank Hapoalim
B.M. decided, on the distribution of a dividend in kind of
all its holdings in the Company. On November 27, 2002, the
date of actual distribution, Bank Hapoalim B.M. ceased to be
an interested party in the Company.
During the period when Bank Hapoalim B.M. was an interested
party, Koor and its consolidated companies also made
transactions with Bank Hapoalim. These transactions, which
were mainly for receipt of banking services, were made in the
normal course of business, and therefore, no separation is
made with regard to the management and the recording of the
transactions.
F-103
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 25 - Transactions and Balances with Interested Parties (cont'd)
C. Benefits to interested parties - Company
1. Directors (*)
Year ended December 31
----------------------------------------------
2004 2003 2002
---------- ------------- -------------
NIS thousands
----------------------------------------------
Directors not employed by the Company:
Annual compensation and participation
in meetings:
Claridge Group 116 115 245
========== ============= =============
Number of directors 2 3 3
========== ============= =============
Poalim Assets (Shares) Ltd. - - 95
========== ============= =============
Number of directors - - 2
========== ============= =============
Other directors 516 442 533
========== ============= =============
Number of directors 8 8 10
========== ============= =============
(*) Including directors who have been replaced during the
year.
2. Consultancy services
Year ended December 31
----------------------------------------------
2004 2003 2002
---------- ------------- -------------
NIS thousands
----------------------------------------------
Claridge 1,788 1,789 1,871
========== ============= =============
Poalim Capital Markets and Investment Ltd. - - 1,433
========== ============= =============
The Company has agreements with interested parties - Poalim
Capital Markets and Investments Ltd. (Poalim) (at the time
when Bank Hapoalim B.M. was an interested party) and Claridge
for the receipt of consultancy services. These services
include, inter alia, advice in respect of investment
strategies, monetary policies, international activities,
strategic partnerships and company structuring. The
agreements include instructions regarding the indemnification
of the consultants (Claridge/Poalim) in respect of claims
connected to the consultancy, except for cases of gross
negligence and/or intentional damage.
In consideration for the consultancy the Company has agreed
to pay an annual sum which will not exceed 400,000 dollars to
each of the consultants. The agreements are for the period of
one year and are automatically renewable each year, unless
one of the parties gives 60 days' prior notice of the
termination of the agreement.
On the date on which Bank Hapoalim ceased to be an interested
party in Koor, the agreement with Poalim expired.
3. See Note 18A(14) regarding insurance and indemnification of
interested parties.
F-104
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 26 - Earnings (Loss) Per Share
A. Adjusted net earnings (loss) used in the computation of
earnings per NIS 1 par value of the share capital:
Year ended December 31
---------------------------------------------------
2004 2003 2002
------------- ---------------- ---------------
NIS thousands
---------------------------------------------------
Net earnings (loss) used in the computation
of earnings (loss) per NIS 1 par value of shares 144,990 46,362 (766,969)
============= ================ ===============
B. Weighted number of ordinary shares of NIS 0.001 used in
the computation of net earnings (loss) per NIS 1 par value of
the share capital:
Number of ordinary shares
--------------------------------------------------
2004 2003 2002
------------ ------------- -------------
Total share capital used in the computation of
16,381,279 16,381,279 15,716,725 15,173,291
============ ============= =============
C. To examine that the conversion or exercise of convertible
securities is reasonable, the present value of these
securities was computed according to a discount rate of 3.5%
(December 31, 2003 - 4%, December 31, 2002 - 6%) for
securities linked to the CPI.
Note 27 - Events Subsequent to the Balance Sheet Date
1. In January 2005, M-A Industries, through a wholly-owned and
controlled subsidiary, signed an agreement to acquire 49% of
the shares and rights of Mabeno, a Dutch company serving as
exclusive distributor of the agrochemical products of the
Makhteshim-Agan Group in Benelux and Scandinavia.
Under the terms of the agreement, the purchase will be
effected in consideration for the allotment of the number of
shares of M-A Industries equal to 2,940 thousand euro(about
NIS 17 million), according to the share's market price on the
transfer date. Additionally, M-A Industries received an
option to increase its holdings in Mabeno to 55%.
2. In January 2005, a lawsuit and a motion to recognize it as
a class action, were filed in a U.S. court against ECtel,
directors and officers of ECtel and against ECI. In their
lawsuit, the plaintiffs claim that, in the period between
April 2001 and April 2003, ECtel violated provisions of the
U.S. securities laws, and that directors and officers of
ECtel breached their duty of faith in connection with the
disclosure of its business results in its financial
statements. The lawsuit was also directed against ECI,
because control in ECtel during that period was held by ECI,
and the plaintiffs claim that the acts and omissions of ECtel
were directed by and carried out at ECI's initiative. The
plaintiffs did not cite the amount they are claiming.
Management of ECI is of the opinion that the plaintiffs'
claims, as they relate to it, are baseless.
3. In February 2005, ECI entered into a preliminary agreement
with ABN Amro Bank for the sale of the balance of long-term
receivables for cash totalling 96 million dollars, as well as
possible future consideration of 3.3 million dollars. The
sale is subject to several conditions and approvals,
including approval from the shareholders of ECI, and is
expected to be approved in April 2005. The sale is expected
to generate a gain to ECI of 11 million dollars (excluding
the future consideration). The Company's share in the
aforementioned gain will be NIS 15 million.
F-105
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 27 - Events Subsequent to the Balance Sheet Date (cont'd)
4. On February 3, 2005, Koor sold 15.9 million shares of M-A
Industries for NIS 374 million, at a gain of NIS 204 million,
which will be charged in the Company's financial statements
for the first quarter of 2005.
Within the framework of the sale, Koor undertook to not sell
additional shares of M-A Industries for a nine-month period
beginning from the date of the sale.
Following the sale of the shares by Koor in February 2005, as
a result of which Koor's shareholding percentage in M-A
Industries fell to 34.6% (29.5% on a fully diluted basis),
the management of Koor reevaluated the issue of continuing to
consolidate M-A Industries, beginning from the first quarter
of 2005.
Based on an evaluation of the range of circumstances, as
discussed in Note 3C(1), Koor decided that due to the
combination of new circumstances created as a result of the
aforementioned sale of its holdings, continuation of the
consolidation of M-A Industries is not consistent with the
economic substance. Therefore, beginning from the first
quarter of 2005, the consolidation of M-A Industries in the
financial statements of Koor will be discontinued, and the
investment therein will be stated by the equity method.
5. On March 14, 2005, M-A Industries published a prospectus
offering employees of M-A Industries and its subsidiaries up
to 14,900 thousand stock options exercisable for up to 14,900
ordinary registered shares of par value NIS 1 of M-A
Industries.
Assuming all the options are exercised, the grantees will
hold approximately 3.05% of M-A Industries issued and paid
share capital. However, the grantees will not be issued the
full number of shares underlying the options, but only the
number of shares reflecting the monetary benefit implicit in
the options.
F-106
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements
A. Differences between Israel GAAP and US GAAP
Koor's consolidated financial statements conform with Israeli
generally accepted accounting principles ("Israeli GAAP"),
which differ in certain respects from those generally
accepted in the United States of America ("US GAAP") as
described below:
1. Effect of inflation
In accordance with Israeli GAAP:
The Company, in accordance with Israeli GAAP, comprehensively
includes the effect of price level changes in the
accompanying financial statements, as described in Note 2B.
According to such Israeli accounting principles, the Company
has discontinued the adjustment of the financial statements
as of January 1, 2004.
US GAAP does not provide for recognition of the effects of
such price level changes. Such effects have not been included
in a reconciliation to US GAAP.
2. Debt arrangement within the framework of an overall
financial arrangement
In accordance with Israeli GAAP:
Koor reported an extraordinary gain in 1991 as a result of
restructuring part of its debts.
In accordance with US GAAP:
In accordance with FAS No. 15 - "Accounting by Debtors and
Creditors for Doubtful Debt Restructuring" future interest
payments were deducted from the restructuring of an old debt.
The recognition of non-realized earnings (which represents
deferred interest) is affected by payments of interest over
the period from the date of the restructuring of the debt up
to its repayment date.
As at December 31, 2002, the entire balance of the deferred
interest was fully amortized.
F-107
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
3. Deferred taxes
a) Measurement differences
In accordance with Israeli GAAP:
Deferred taxes should be recognized in respect of
differences related to assets and liabilities that
result from translation of the local currency into
the functional currency using historical exchange
rates and that result from (1) changes in exchange
rates or (2) indexing for tax purposes.
In accordance with US GAAP:
According to paragraph 9(f) of FAS No. 109, deferred
tax liabilities or assets are not provided for
differences related to assets and liabilities that
are remeasured from the local currency into the
functional currency and that result from (1) changes
in exchange rates or (2) indexing for tax purposes.
b) Earnings from "Approved Enterprises"
Under the Israeli Law for the Encouragement of
Capital Investments, 1959, a 25% tax rate is
generally applicable on the profits of an "approved
enterprise" that received investment grants, usually
during a period of seven years.
An "approved enterprise" which chooses the
"alternative benefits" track is generally eligible
for tax benefits during the benefit period (seven or
ten years, depending on the geographical location of
the approved enterprise) as follows: tax exemption
on undistributed profits during a period of two to
ten years depending on the geographical location of
the approved enterprise and a reduced tax rate of
25% for the remainder of the benefit period.
In the event that a dividend is distributed out of
tax-exempt earnings of the "approved enterprise"
under the "alternative benefits" track, the
distributing company will generally be subject to
25% tax on the distributed earnings.
Dividends paid to shareholders from the earnings of
an "approved enterprise" are subject to income tax
at a rate of 15%. However, if the shareholder is a
company, that shareholder will be entitled to a 15%
tax credit, if and when such dividend out of
"approved enterprise" earnings is distributed to its
shareholders.
In accordance with Israeli GAAP:
Deferred taxes should be provided on the excess of
the financial statement carrying value over the tax
basis of an investment in an Israeli subsidiary as
the Company does not have any means under local tax
law to recover this difference in a tax-free manner.
Koor has not provided deferred tax in respect of
undistributed tax-exempt or tax reduced earnings
attributed to the "approved enterprise" of
subsidiaries, which may be distributed, since it is
the Group's policy not to initiate such a dividend
distribution.
F-108
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
3. Deferred taxes (cont'd)
In accordance with US GAAP:
A reserve for deferred tax should be provided on the
undistributed tax-exempt earnings of local subsidiaries
established subsequent to December 15, 1992, as their
distribution results in additional tax.
4. Salary expenses in respect of share options issued
to employees
In accordance with Israeli GAAP:
No expense is recorded due to stock options granted to
employees.
In accordance with US GAAP:
a) Fixed Option Plan:
Under APB-25, the expense is measured as the
difference between the share market price and the
exercise price of the option, at the date of grant.
The difference is charged as a salary expense during
the period in which the employee performs the
services for which the benefit was granted.
b) Variable Option Plan:
Under APB-25 the expense is measured as the
difference between the share market price and the
exercise price of the option at the end of each
reporting period. In each reporting period the
expense is recorded based on the vested part of the
period which has passed, taking into consideration
amounts previously recorded as expenses.
5. The accounting treatment of marketable securities:
In accordance with Israeli GAAP:
Marketable securities which constitute a short-term
investment are stated at market value. Changes to the market
value are recorded as profits or losses.
Marketable securities which constitute a permanent investment
are stated at cost (regarding debentures, including
accumulated interest), except where market value is lower,
and the decline in value is not considered to be temporary.
(See Note 2H).
In accordance with US GAAP:
FAS No. 115 differentiates between three categories of
marketable securities: securities held for a short period and
traded at a high frequency (trading securities), available
for sale securities and held to maturity securities.
F-109
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
5. The accounting treatment of marketable securities:
(cont'd)
A change in the value of trading securities, including
unrealized earnings, is charged to the statement of
operations, while unrealized earnings after tax, if any, of
the available for sale type is reported as a separate item
within shareholders' equity.
Marketable securities that are classified as held-to-maturity
are stated at cost (regarding debentures, including
accumulated interest), except where market value is lower,
and the decline in value is not considered to be temporary.
Most of the short term securities held by the Company are
available-for-sale securities.
6. Allocation of proceeds from an issuance of
debentures and stock warrants, when securities are
issued as a package (issuance by Koor in 1994):
According to the accounting policy at this issuance:
The proceeds from an issuance of debentures and stock
warrants, as a package, are allocated to debentures according
to their face value while the remainder of the proceeds is
attributed to the share warrants.
In accordance with US GAAP:
The proceeds from an issuance of share options and
convertible debentures, as a package, are split based on the
relative fair value, of these securities at the date of
issuance. This will sometimes result in the recording of a
discount in respect of the convertible debentures that is to
be amortized as interest expense over the term of debentures.
As at December 31, 2003, the entire balance of the deferred
interest was amortized in full.
7. Provisions for anticipated losses from realization of
convertible securities of investee companies:
In accordance with Israeli GAAP:
According to Opinions No. 48 and 53 of the ICPAI, a parent
company is required to create a provision for losses, which
it may incur from the dilution of its holdings in investee
companies, when it is probable that the share options will be
exercised or the debentures will be converted.
In accordance with US GAAP:
A loss in the parent company resulting from the dilution of
its holdings, because of share options being exercised or
debentures being converted, is recorded only at the time of
exercise or conversion.
8. Employee severance benefits as a part of an
efficiency program:
In accordance with Israeli GAAP:
Up to and including 2002 employee severance benefits, as part
of future anticipated dismissals, were recorded when
management decided on the dismissals, and/or when management
declared its intention regarding the dismissals. Since 2003,
management's decision or intention regardingthe dismissals
does not in itself constitute a reason to record a provision
for employee severance benefits, rather a provision is
recorded only when an obligation to the employees exists.
F-110
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
8. Employee severance benefits as a part of an
efficiency program: (cont'd)
In accordance with US GAAP:
One-time termination benefits are benefits provided to
current employees that are involuntarily terminated under the
terms of a one-time benefit arrangement. A one-time benefit
arrangement is an arrangement established by a plan of
termination that applies for a specified termination event or
for a specified future period.
A one-time benefit arrangement exists at the date the plan of
termination meets all of the following criteria and has been
communicated to employees (hereinafter referred to as the
communication date):
a. Management, having the authority to approve the
action, commits to a plan of termination.
b. The plan identifies the number of employees to be
terminated, their job classifications or functions
and their locations, and the expected completion
date.
c. The plan establishes the terms of the benefit
arrangement, including the benefits that employees
will receive upon termination (including but not
limited to cash payments), in sufficient detail to
enable employees to determine the type and amount of
benefits they will receive if they are involuntarily
terminated.
d. Actions required to complete the plan indicate that
it is unlikely that significant changes to the plan
will be made or that the plan will be withdrawn.
9. Earnings per share:
In accordance with Israeli GAAP:
In accordance with Opinion No. 55, the dilutive effect of
share options and convertible debentures is included in the
computation of basic earnings per share if their exercise or
conversion is considered to be probable. Calculation of the
probability is based on the ratio between the market price of
the shares and the present value of the price of exercising
the stock options into shares or the present value of the
payments for conversion of the debentures into shares.
In accordance with US GAAP:
In accordance with FAS 128 "Earnings Per Share" - basic
earnings per share is computed on the basis of the weighted
average number of shares outstanding during the year and does
not include any dilutive potential effect of convertible
instruments. Diluted earnings per share arecomputed on the
basis of the weighted average number of shares outstanding
during the year, plus the dilutive potential effect of
ordinary share options considered outstanding during the
year.
F-111
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
10. Venture capital fund investments:
In accordance with Israeli GAAP:
Venture capital fund investments in venture capital
investments are presented according to their cost less a
provision for devaluation in the event of a permanent
devaluation.
In accordance with US GAAP:
Venture capital fund investments are presented according to
their fair value.
11. Revenue recognition - Adoption of SAB 101:
In accordance with US GAAP:
During the fourth quarter of 2000, the US SEC published Staff
Accounting Bulletin No. 101 (hereinafter - "SAB 101"), which
provides stricter criteria for revenue recognition
implemented retroactively to the beginning of 2000, by way of
cumulative effect at the beginning of the year and
presentation of the previous quarters once again.
ECI implemented these guidelines in its financial statements,
which are prepared in accordance with US GAAP. The cumulative
effect, of the sales deferred upon initial adoption of SAB
101, under US GAAP, was recognized over the years 2000
through 2003. Commencing in 2004, there is no additional
impact from the deferral of these revenues.
In accordance with Israeli GAAP:
The provision does not apply in Israel, although it is
possible to adopt the principles set out in the rule, if
management estimates that the method of revenue recognition
prescribed in SAB 101 is appropriate for economic and
commerce conditions presently existing in its area of
business.
This rule was adopted prospectively as of the fourth quarter
of 2000, without implementing cumulative effect to the
beginning of 2000 and without presenting data, which has
already been published in the past.
12. Exchange of assets:
In accordance with Israeli GAAP:
Certain share exchange transactions were considered as
exchanges of similar assets transactions and therefore
neither a profit nor a loss was recorded subsequent to the
transaction and the newly acquired assets were recorded based
on book value of the original assets.
In accordance with US GAAP:
According to EITF 98-3 and EITF 01-2 such transactions are
not considered as exchanges of similar assets transaction and
therefore the newly acquired assets were recorded based on
their fair values.
F-112
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
13. Derivatives
In accordance with Israeli GAAP:
The Company applied FAS 52, FAS 80 and EITF 90-17 to account
for its financial derivatives.
The results of financial derivatives held to hedge assets and
liabilities are recorded in the statement of operations
concurrently with the recording of the changes in the hedged
assets and liabilities. Financial derivatives that are not
held for hedging are stated in the balance sheet at fair
value. Changes in the fair value are included in the
statement of operations in the period they occurred.
In accordance with US GAAP:
The Company applied FAS 133 to the derivatives.
Most derivatives in the consolidated group do not meet the
hedging criteria prescribed by FAS 133, therefore they are
stated at fair value and changes in the fair value are
charged to the statement of operations in the period they
occurred.
14. Impairment of Assets and Investments
In accordance with Israeli GAAP:
The Company applied Standard No. 15 under which the Company
is required to test the recoverable amount of the assets,
which is the higher of the net sales price and usage value. A
loss from impairment will be reversed only if changes have
occurred in the estimates used in determining the recoverable
value of the asset, from the date of recognition of the last
impairment.
In accordance with US GAAP:
The Company applied FAS 144 with respect to long-lived assets
and APB 18 with respect to equity method investees.
Under FAS 144 an impairment of a long-lived asset is
considered to be impaired only if the undiscounted cash flows
of the related asset do not exceed its book value.
Under APB 18 a loss is recorded only when the impairment of
the investee is other than temporary.
Under both FAS 144 and APB 18 reversals of impairments are
not allowed.
F-113
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
14. Impairment of Assets and Investments (cont'd)
ECI's impairment:
In accordance with Israeli GAAP, on September 30, 2002 the
Company wrote down its equity method investment in ECI by NIS
130 million (see Note 3A(1)). Of the NIS 130 million write
down, the Company realized a capital reserve from foreign
currency translation adjustments generated by Koor in
relation to its investment in ECI, in the amount of NIS 105
million. The balance of NIS 25 million was charged to the
statement of income. In accordance with US GAAP, under FAS
52, the capital reserve from translation differences will be
realized only upon realization of the investment or
liquidation of the investee company. Accordingly, an expense
in respect to impairment in value was charged to the
statement of operations of 2002.
Under US GAAP, due to the fact that Koor's share in ECI's
shareholders' equity was higher than its investment in ECI,
the excess of Koor's share in the equity over the investment
was attributed to ECI's non-current assets.
From November 2003, the Company reversed the impairment under
Israeli GAAP. The cancellation was recorded against the
capital reserve from translation differences (credit) which
was realized when the provision was recorded. According to US
GAAP, the reversal of the impairment was not allowed.
15. Amortization of Goodwill:
In accordance with Israeli GAAP:
Goodwill is amortized over its economic life which may not
exceed 20 years. Goodwill is monitored for an impairment in
value where there are indications indicating a permanent
impairment in the value of the goodwill.
In accordance with US GAAP:
Effective January 1, 2002, goodwill balances are not
amortized systematically but are instaed evaluated for
recoverability by means of an impairment test to be performed
at least once a year on a fixed date in accordance with the
directives of FAS 142. Impairment of goodwill subsequent to
the first implementation of the impairment test on January 1,
2002, was recorded as a cumulative effect in respect of a
change in the accounting method. Accordingly, a cumulative
effect of NIS 806 thousand was recorded in the adjustment
note in 2002. No further impairments have been required
subsequent to the initial implementation.
F-114
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
16. Consolidation of M-A Industries
As a result of the sale of shares of M-A Industries at the
beginning of 2004, Koor's share in M-A Industries decreased
to below 50%.
In accordance with Israeli GAAP:
The position of the Israeli Securities Authority is that when
a company has been consolidated in the financial statements
of the holding company and there has been a decrease in the
voting rights to below 50%, if the overall economic
circumstances have not essentially changed the consolidation
of the investee company should be continued because of the
importance of continuity and consistency of the accounting
reports. Therefore and as explained in Note 3C(1) Koor
continues to consolidate M-A Industries' financial
statements.
In accordance with US GAAP:
The condition for a controlling financial interest is
ownership of a majority voting interest, and, therefore, as a
general rule ownership by one company, directly or
indirectly, of over fifty percent of the outstanding voting
shares of another company is a prerequisite for
consolidation. Therefore, M-A Industries is accounted under
the equity method for US GAAP purposes, beginning in 2004.
17. Capitalization of licensing costs
In accordance with Israeli GAAP:
Certain costs incurred by the Company in connection with the
registration process to obtain licenses to sell products in
various jurisdictions are capitalized.
In addition, amounts which are paid by the Company to the
original registrant as data compensation costs only after the
U.S. Environmental Protection Agency (hereinafter: "EPA")
issues a registration to the Company are also capitalized.
The capitalized licensing costs are amortized over the
expected benefit period.
In accordance with U.S. GAAP:
The costs incurred by the Company in connection with the
registration process to obtain licenses to sell products in
various jurisdictions are deemed to be development costs
under US GAAP and are expensed as incurred.
The amounts paid by the Company to the original registrant as
data compensation costs only after the EPA issues a
registration to the Company are capitalized and amortized
over the expected benefit period.
F-115
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
A. Differences between Israel GAAP and US GAAP (cont'd)
18. Liabilities for employee severance benefits
In accordance with Israeli GAAP:
Amounts funded by purchase of insurance policies and by
deposits with recognized severance pay funds are deducted
from the related severance pay liability, which is then
presented at a net amount.
In accordance with US GAAP:
The amounts funded would be presented as other long-term
assets and the amount of the liability would be presented
under long-term liabilities.
19. Restatement
In prior years, one of the Company's subsidiaries capitalized
for U.S. GAAP purposes certain costs incurred in connection
with the registration process to obtain licenses to sell
products in various jurisdictions. Under U.S. GAAP these
costs are deemed to be development costs and should have been
expensed as incurred.
In addition, one of the Company's subsidiaries incorrectly
applied FAS No 109 with respect to the calculation of certain
deferred tax items relating to temporary differences that
arose from currency exchange rate differences.
Therefore, the reconciliation of material differences between
Israeli and US GAAP has been restated. The impact on the
reconciliation is disclosed below:
As reported As restated
-------------- ----------------
2003
Net loss (105,308) (108,924)
Earnings (loss) per ordinary share (6.81) (7.04)
Intangible assets 2,240,439 (2,011,874)
Deferred taxes 269,468 206,189
Minority interests 1,774,894 1,689,966
Shareholders equity 1,662,480 1,582,122
2002
Net loss (761,561) (762,511)
Earnings (loss) per ordinary shares (50.18) (50.25)
F-116
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and
US GAAP on the financial statements
1. Statements of operations:
Year ended December 31
----------------------------------------------------
2004 2003 2002
------------ ----------------- -----------------
NIS thousands
----------------------------------------------------
a) Net earnings (loss) as reported, according to
Israeli GAAP 144,990 46,362 (766,969)
Amortization of deferred interest in respect of
the restructuring of debts - - 4,812
Salary expenses in respect of share options
issued to employees (91,318) (185,276) 486
Loss (gain) from marketable securities, net (4,295) (58,319) 54,145
Provisions for anticipated losses from realization
of convertible securities in investee companies 10,106 50,729 (515)
Amortization of discount in respect of
convertible debentures - (18) (338)
Severance pay arising from an efficiency program 17,326 (10,181) 7,130
Capital gain from a decline in holding in
consolidated company 11,829 - 6,199
Venture capital investments (20,726) 15,790 (16,327)
Temporary differences resulting from recognition
of revenue arising from application of SAB 101 - 7,949 2,230
Profit from exchange of assets - - 15,105
Discontinued activities - - 835
Impairment in value of assets and investments (1,277) (4,983) 5,858
Differences from investee due to impairment
previously recorded 29,588 (19,676) (14,342)
Foreign currency translation due to impairment - - (105,124)
Amortization of goodwill 39,938 40,949 87,234
Expensing of licensing costs (8,859) *(16,793) *(53,594)
Derivatives (FAS 133) 4,602 (34,002) (12,690)
Other 711 1,078 (4,669)
------------ ----------------- -----------------
(12,375) (212,753) (23,565)
Income taxes (21,212) (79,808) 42,434
Minority interests in respect of the above
differences 170 *137,275 *(13,605)
------------ ----------------- -----------------
(33,418) (155,286) 5,264
Cumulative effect as beginning of the year - - (806)
------------ ----------------- -----------------
(33,418) (155,286) 4,458
------------ ----------------- -----------------
Net earnings (loss) according to US GAAP 111,572 *(108,924) *(762,511)
============ ================= =================
* Restated, see Note 28A(19).
F-117
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and US
GAAP on the financial statements (cont'd)
1. Statements of operations (cont'd):
b) Earnings (loss) per ordinary share
Year ended December 31
----------------------------------------------------
2004 2003 2002
------------- --------------- ----------------
NIS
----------------------------------------------------
Basic earnings per ordinary share:
As reported according to Israeli GAAP 8.85 2.95 (50.55)
As reported according to US GAAP 7.05 * (7.04) * (50.25)
============= =============== ================
Weighted average of number of shares
and share equivalents according to
US GAAP 15,824,185 15,474,614 15,173,291
============= =============== ================
Fully diluted earnings per ordinary share:
As reported according to Israeli GAAP 8.85 2.95 (50.55)
============= =============== ================
As reported according to US GAAP 4.89 * (7.82) * (50.65)
============= =============== ================
Weighted average of number of shares and
share equivalents according to US GAAP 16,242,770 **15,474,614 **15,173,291
============= =============== ================
* Restated, see Note 28A(19).
** Share equivalents are not reflected in US GAAP due to the
fact that they are anti-dilutive.
F-118
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and US
GAAP on the financial statements (cont'd)
2. Balance sheet:
December 31
----------------------------------------------------------------
2004
-------------------------------------------------------------
Israeli Discontinuance of
GAAP consolidation of
M-A
Industries(11) Adjustments US GAAP
------------- ----------------- ----------- ------------
Cash and cash equivalents 617,310 (174,375) - 442,935
Short-term deposits and investment (1) 416,468 (6,733) 32,911 442,646
Receivables 2,173,599 (1,590,552) - 583,047
Other receivables 528,983 (332,817) - 196,166
Inventories and projects in progress 2,294,885 (1,985,428) - 309,457
Assets designed for sale 41,765 - - 41,765
Investments in affiliates (2) 1,375,160 1,471,197 (154,317) 2,692,040
Investments and other receivables (1)(3) 489,031 (95,073) 202,105 596,063
Fixed assets, net 2,852,907 (1,876,731) 8,574 984,750
Intangible assets after amortization (4) 2,357,458 (2,316,290) 30,198 71,366
Total assets 13,147,566 (6,906,802) 119,471 6,360,235
Short-term liabilities 1,738,456 (603,210) - 1,135,246
Trade payables 1,667,455 (1,404,171) - 263,284
Other payables (5)(6) 1,369,442 (867,233) 8,020 510,229
Customer advances 353,371 (9,891) - 343,480
Bank loans and other 2,341,115 (440,968) - 1,900,147
Convertible debentures 811,291 (811,291) - -
Deferred taxes (7) 240,468 (234,157) 29,304 35,615
Liability for employee severance benefits (3) 197,168 (115,061) 197,614 279,721
Minority interests (8) 2,552,333 (2,420,820) (6,850) 124,663
Capital reserve for "available-for-sale" securities (2) - - 6,442 6,442
Capital reserves (9)(10) 2,358,425 - 276,419 2,634,844
Retained losses (8) (966,152) - (391,478) (1,357,630)
Total shareholders' equity 1,876,467 - (108,617) 1,767,850
* Restated, see Note 28A(19).
Continued --
------------------------------------------------
2003
-----------------------------------------------
Israeli
GAAP
Adjustment US GAAP
------------- ------------ -------------
Cash and cash equivalents 593,403 - 593,403
Short-term deposits and investment (1) 366,809 - 366,809
Receivables 2,052,461 10,847 2,063,308
Other receivables 452,170 - 452,170
Inventories and projects in progress 1,885,751 - 1,885,751
Assets designed for sale 42,525 - 42,525
Investments in affiliates (2) 943,764 (60,839) 882,925
Investments and other receivables (1)(3) 483,384 290,230 773,614
Fixed assets, net 2,928,407 11,455 2,939,862
Intangible assets after amortization (4) 2,121,083 *(109,209) *2,011,874
Total assets 11,869,757 *142,484 *12,012,241
Short-term liabilities 1,577,402 - 1,577,402
Trade payables 1,342,783 - 1,342,783
Other payables (5)(6) 1,270,217 75,551 1,345,768
Customer advances 350,535 - 350,535
Bank loans and other 3,119,837 - 3,119,837
Convertible debentures 340,270 - 340,270
Deferred taxes (7) 199,787 *6,402 *206,189
Liability for employee severance benefits (3) 192,002 265,365 457,367
Minority interests (8) 1,736,531 *(46,565) *1,689,966
Capital reserve for "available-for-sale" securities (2) - (30,074) (30,074)
Capital reserves (9)(10) 2,367,341 *229,863 *2,597,204
Retained losses (8) (1,111,142) *(358,060) *(1,469,202)
Total shareholders' equity 1,740,393 *(158,271) *1,582,122
* Restated, see Note 28A(19).
F-119
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and US
GAAP on the financial statements (cont'd)
(1) Adjustment of value of investment securities to market value.
(2) Adjustments to the investments in M-A Industries and ECI
(3) Reconciliation of deposits funded in respect of severance
pay.
(4) Reversal of periodical provisions related to goodwill and
intangible assets.
(5) Provision for employee severance benefits resulting from an
efficiency program.
(6) Financial derivatives.
(7) Change in deferred taxes.
(8) Effects of the reconciliation to US GAAP.
(9) Share options issued to employees.
(10) Cumulative foreign currency translation adjustments,
cancellation of provision for decline in value of autonomous
investee.
(11) See Note 28 A(16).
3. Comprehensive loss
"Comprehensive earnings (loss)" consists of the change, during the
current period, in the Company's shareholder equity that does not
derive from shareholders' investments or from the distribution of
earnings to shareholders.
Comprehensive earnings (loss) include two components - net earnings
and other comprehensive earnings. Net earnings are the earnings stated
in the statement of operations and other comprehensive earnings
include the amounts that are recorded directly in shareholders' equity
and that do not derive from transactions with shareholders.
Year ended December 31
---------------------------------------------------
2004 2003 2002
------------ ---------------- ----------------
NIS thousands
---------------------------------------------------
Net earnings (loss) according to US GAAP 111,572 *(108,924) *(762,511)
------------ ---------------- ----------------
Other comprehensive earnings, after tax:
Adjustments from translation of
financial statements of investee
companies (9,546) *(143,585) *389,873
FAS 133 (10,964) 6,487 (5,397)
Unrealized gains (loss) from securities 36,516 32,572 (54,145)
------------ ---------------- ----------------
Total other comprehensive earnings (loss) 16,006 (104,526) 330,331
------------ ---------------- ----------------
Total comprehensive earnings (loss) 127,578 (213,450) (432,180)
============ ================ ================
* Restated, see Note 28A(19).
F-120
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
the Financial Statements (cont'd)
C. Condensed figures of M-A Industries and ECI according to
Regulation S-X 4-08
(1) M-A Industries condensed figures
A. As at December 31, 2004
Israeli GAAP Adjustments US GAAP
-------------- ------------- --------------
US$ thousands US$ thousands US$ thousands
-------------- ------------- --------------
Current assets 949,338 5,323 954,661
Non-current assets 985,229 42,118 1,027,347
Current liabilities 669,571 14,685 684,256
Non-current liabilities 333,423 24,631 358,054
Minority interests 18,756 (1,981) 16,775
Convertible debentures 38,322 - 38,322
B. For the year ended December 31, 2004 according to Israeli GAAP
Revenue from sales and services 1,539,702
Gross profit 595,794
Net income according to Israeli GAAP 165,527
Adjustment to US GAAP (41,789)
Net income according to US GAAP 123,738
(2) ECI's condensed figures according to US GAAP
2004 2003
-------------- --------------
US$ thousands US$ thousands
-------------- --------------
As at December 31
Current assets 449,556 537,528
Non-current assets 405,253 364,468
Current liabilities 248,012 242,037
Non-current liabilities 50,943 86,673
Minority interests 4,086 3,781
For the year ended December 31
Revenues 496,712 392,567
Gross profit 195,741 153,269
Income (loss) from continuing operations 14,056 (44,723)
Net income (loss) 10,153 (71,040)
F-121
Koor Industries Ltd. (An Israeli Corporation)
Notes to the Financial Statements
------------------------------------------------------------------------------
Note 29 - Events (Unaudited) Subsequent to the Date of the Independent Auditors'
Report
A. On July 6, 2005 the Company signed an amendment to the agreements
with Elbit and Federman (see Note 3H(2)), pursuant to which the
Company will sell its entire holdings in Elisra to Elbit, instead of
to Tadiran Communications as per the original agreements, for
approximately $70 million and additional consideration following
receipt of future insurance proceeds. The Company also received the
right to acquire Dekolink Ltd., a start-up company in the cellular
field that is wholly-owned by Elisra. As originally agreed, the
Company will sell the balance of its holdings in Tadiran
Communications to Elbit for $83 million. However, under the amended
terms of the transactions, contrary to the terms of the original
agreement, this sale will be conducted in two parts, and the Company
and Elbit will share joint control of Tadiran Communications, as
described in Note 3H(2), following the sale of the first 5%. The sale
of the Company's remaining shares in Tadiran Communications is
contingent on the execution of the sale of its holdings in Elisra to
Elbit. Elbit's acquisition of Elisra is subject to the approvals of
Elbit's shareholders at general meeting to be held within sixty days
and Israel's Anti-Trust Commissioner. In addition, under the amended
terms of the transactions, contrary to the terms of the original
agreement, the Company will acquire only an additional 2.3% of Elbit
from Federman for $25 million, regardless of whether the sale of
Elisra is approved by the Israeli Anti-Trust Commissioner. Upon
completion of all the stages of these transactions, the Company will
hold approximately 7.6% of Elbit.
B. On April 10, 2005, as part of a private placement to Israeli
institutional investors, the Company issued NIS 400 million par value
in debentures for NIS 400 million in cash, as well as 800,000 options
without consideration. The debentures bear annual interest of 3.75%,
linked to the CPI, which is paid on April 30 and October 31 of each
year. The debentures are linked to the CPI and will be repaid in a
balloon payment on April 30, 2010. Each option is exercisable for one
ordinary share par value NIS 0.001 of the Company until April 30,
2010, at an exercise price of NIS 300. The Company intends to register
for trade on the Tel-Aviv stock exchange the shares that will ensue
from exercise of the options.
C. On June 7, 2005, the Company received a bill of indictment from the
Anti-Trust Authority in accordance with the notice from February, 2
2005 as described in Note 18A(1)(b).
F-122
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF
TADIRAN COMMUNICATIONS LTD.
We have audited the consolidated balance sheet of Tadiran
communications Ltd. ("the Company") and its subsidiaries as of December 31,
2004 (not presented separately herein.) This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet based on our audit. We did not audit the balance
sheet of a certain subsidiary, whose assets included in consolidation
constitute approximately 7% of total consolidated assets as of December 31,
2004. The balance sheet of this subsidiary was audited by other independent
auditor, whose report has been furnished to us, and our opinion, insofar as it
relates to amounts included for this certain subsidiary, is based solely on the
report of the other independent auditors.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were not engaged
to perform an audit of the Company's internal control over financial reporting.
An audit includes consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other independent
auditors, the consolidated balance sheet referred to above presents fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2004, in conformity with generally accepted
accounting principles in Israel, which differ in certain respects from
accounting principles generally accepted in the United States (see Note 32 to
the consolidated financial statements).
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
March 20, 2005 A Member of Ernst & Young Global
F-123
[Letterhead of Hoberman, Miller, Goldstein & Lesser, P.C.]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder and Board of Directors
Talla-Com, Tallahassee Communications Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Talla-Com,
Tallahassee Communications Industries, Inc. and Subsidiaries as of December 31,
2004 and 2003, and the related consolidated statements of operations and
retained earnings and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Talla-Com, Tallahassee Communications Industries, Inc. and Subsidiaries as of
December 31, 2004 and 2003, and the results of their operations and their cash
flows for the years then needed, in conformity with accounting principles
generally accepted in the United States of America.
Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Israel.
Application of accounting principles generally accepted in Israel did not have
a material effect on the results of operations, shareholder's equity and cash
flows for the years ended December 31, 2004 and 2003.
/s/ Hoberman, Miller, Goldstein & Lesser, CPA'S, P.C.
January 28, 2005
F-124
[Letterhead of Brightman Almagor & Co., a Member Firm of
Deloitte & Touche Tohmatsu]
Report of Independent Registered Public Accounting Firm To The
Shareholders of
Tadiran Electronic System Ltd.
We have audited the accompanying balance sheets of Tadiran Electronic System
("the Company") as of December 31, 2004 and 2003 and the related statements of
operations, changes in shareholders' equity and cash flows, for each of the
three years, in the period ended December 31, 2004. These financial statements
are the responsibility of the Company's Board of Directors and of its
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statements presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2004 and 2003, and the results of its operations, changes in its shareholders'
equity and its cash flows for the three years, in the period ended December 31,
2004, in conformity with generally accepted accounting principles in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 16 to the financial statements.
As explained in Note 2A, the financial statements are presented in U.S. dollars.
/s/ Brightman Almagor & Co.
Brightman Almago & Co.
Certified Public Accountants
Tel Aviv, Israel
February 14, 2005
F-125
[Letterhead of Brightman Almagor & Co., a Member Firm of
Deloitte & Touche Tohmatsu]
Report of Independent Registered Public Accounting Firm To The
Shareholders of
Tadiran Spectralink Ltd.
We have audited the accompanying balance sheets of Tadiran Sprectralink Ltd.
("the Company") as of December 31, 2004 and 2003 and the related statements of
operations, changes in shareholders' equity and cash flows, for each of the
three years, in the period ended December 31, 2004. These financial statements
are the responsibility of the Company's Board of Directors and of its
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statements presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2004 and 2003, and the results of its operations, changes in its shareholders'
equity and its cash flows for the three years, in the period ended December 31,
2004, in conformity with generally accepted accounting principles in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 22 to the financial statements.
As explained in Note 2A, the financial statements are presented in U.S. dollars.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
Tel Aviv, Israel
February 14, 2005
F-126
[Letterhead of Hoberman, Miller, Goldstein & Lesser, P.C.]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Member and Board of Directors
Tadiran Electronic Industries, LLC
We have audited the accompanying balance sheet of Tadiran Electronic
Industries, LLC (formerly Tadiran Electronic Industries, Inc.) as of December
31, 2004 and the consolidated balance sheet of Tadiran Electronic Industries,
LLC and Subsidiary as of December 31, 2003, and the consolidated statements of
operations, member's equity, and cash flows for each of the three years in the
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tadiran Electronic
Industries, LLC as of December 31, 2004 and the consolidated financial position
of Tadiran Electronic Industries, LLC and Subsidiary as of December 31, 2003,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The additional information
on pages 13 through 16 is presented for the purpose of additional analysis
rather than to present the financial position and results of operations of the
individual companies, and is not a required part of the basic consolidated
financial statements. This additional information is the responsibility of the
Company's management. Such information has been subjected to the auditing
procedures applied in our audits of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects when considered
in relation to the basic consolidated financial statements taken as a whole.
Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Israel.
Application of accounting principles generally accepted in Israel did not have
a material effect on the results of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2004.
/s/ Hoberman, Miller, Goldstein & Lesser, CPA'S, P.C.
January 21, 2005
F-127
[Letterhead of Hoberman, Miller, Goldstein & Lesser, P.C.]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Microwave Networks, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Microwave
Networks, Inc. and Subsidiary as of December 31, 2004 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements of material mismanagement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Microwave Networks,
Inc. and Subsidiary as of December 31, 2004, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Israel.
Application of accounting principles generally accepted in Israel did not have
a material effect on the results of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2004.
/s/ Hoberman, Miller, Goldstein & Lesser, CPA'S, P.C.
January 21, 2005
F-128
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
KOOR TRADE LTD.
We have audited the accompanying balance sheets of Koor Trade Ltd.
("the Company") as of December 31, 2004 and 2003 and the related statements of
operations, changes in shareholder's equity and cash flows for each of the
three years in the period ended December 31, 2004 (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We did not audit the financial statements of certain companies the
investment in which based on the equity method of accounting, amounted to NIS
49 million and NIS 34.1 million as of December 31, 2004 and 2003, respectively,
and the Company's equity in their income amounted to NIS 8.7 million, NIS 5.6
million and NIS 6.5 million for the years ended December 31, 2004, 2003 and
2002, respectively. Those financial statements which presented in accordance
with U.S. generally accepted accounting principles, were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
it relates to the amounts utilized by Company's management (before
reconciliation to Israel generally accepted accounting principles), is based
solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were not engaged
to perform an audit of the Company's internal control over financial reporting.
An audit includes consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts (including the Company's
reconciliation of the financial statements of the aforementioned certain
subsidiaries to Israel generally accepted accounting principles from U.S.
generally accepted accounting principles) and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of the Company at December 31, 2004 and 2003,
and the results of its operations and its cash flows for each of the three
years in the period ended of December 31, 2004, in conformity with accounting
principles generally accepted in Israel, which differ in certain respects from
those followed in the United States, as described in Note 7 to the financial
statements.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
March 21, 2004 A Member of Ernst & Young Global
F-129
[Letterhead of Blick Rothenberg, Chartered Accountants]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE
SHAREHOLDERS OF BALTON CP LIMITED
We have audited the accompanying consolidated balance sheets of Balton CP
Limited (the "Company") and its subsidiaries as of December 31, 2004 and 2003,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2004 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the company's internal control over financial reporting. An
audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries at December 31, 2004 and
2003, and the consolidated results of their operations and cash flows for each
of the three years in the period ended of December 31, 2004, in conformity with
accounting principles generally accepted in United States.
/s/ Blick Rothenberg
Blick Rothenberg
Chartered Accountants and Registered Auditors
London, England
20 March 2005
F-130
[Letterhead of Einfeld Symonds Vince]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF KOOR INTER-TRADE (ASIA)
PTY LIMITED AND ITS SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of KOOR
INTER-TRADE (ASIA) PTY LIMITED ("the Company") and its subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2004 (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts (including the Company's reconciliation of the financial statements
to Israel generally accepted accounting principles and to U.S. generally
accepted accounting principles) and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2004 and 2003, and the consolidated results of their operations
and cash flows for each of the three years in the period ended of December 31,
2004, in conformity with Australian generally accepted accounting principles,
which differ in certain respects from those followed in the United States and
in Israel as described in Note 1 to the consolidated financial statements.
Dated at Sydney the 8th day of March 2005
/s/ Einfeld Symonds Vince
EINFELD SYMONDS VINCE
Chartered Accountants
/s/ Graham B. Einfeld
GRAHAM B. EINFELD
Partner
F-131
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of
Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
LUXEMBURG PHARMACEUTICAL LTD.
We have audited the accompanying consolidated balance sheets of
Luxemburg Pharmaceutical Ltd. ("the Company") and its subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the two
years in the period ended December 31, 2004 (not presented separately herein).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts (including the Company's reconciliation of the consolidated
financial statements to U.S. generally accepted accounting principles) and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2004 and 2003, and the consolidated results of their operations
and cash flows for each of the two years in the period ended of December 31,
2004, in conformity with Israel generally accepted accounting principles, which
differ in certain respects form those followed in the United States, as
described in Note 21 to the consolidated financial statements.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
February 17, 2005 A Member of Ernst & Young Global
F-132
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of
Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
LYCORED NATURAL PRODUCTS INDUSTRIES LTD.
We have audited the accompanying consolidated balance sheets of
Lycored Natural Products Industries Ltd. ("the Company") and its subsidiaries
as of December 31, 2004 and 2003, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2004 (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We did not audit the financial statements of a certain subsidiary,
whose assets included in consolidation constitute approximately 18% and 16% of
total consolidated assets as of December 31, 2004 and 2003, and whose revenues
included in consolidation constitute approximately 37% and 35% of total
consolidated revenues for the two years ended December 31, 2004. Those
financial statements, presented in accordance with accounting principles
generally accepted in the United Kingdom and including reconciliation to United
States generally accepted accounting principles, were audited by other auditors
whose reports as of and for the years ended December 31, 2004 and 2003, have
been furnished to us, and our opinion, insofar as it relates to the amounts
utilized by Company's management (before reconciliation to Israel generally
accepted accounting principles) of and for the years ended December 31, 2004
and 2003, is based solely on the reports of other auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were not engaged
to perform an audit of the company's internal control over financial reporting.
An audit includes consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts (including the Company's reconciliation of the
financial statements of the aforementioned subsidiary to Israel generally
accepted accounting principles) and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2004 and 2003, and the consolidated results of their operations
and cash flows for each of the three years in the period ended of December 31,
2004, in conformity with Israel generally accepted accounting principles, which
differ in certain respects form those followed in the United States, as
described in Note 21 to the consolidated financial statements.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
February 24, 2005 A Member of Ernst & Young Global
F-133
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
Nutriblend LTD.
We have audited the accompanying balance sheets of Nutriblend Ltd.
("the Company") as at December 31, 2004 and 2003, and the related statements of
operations, changes in shareholder's equity and cash flows for each of the two
years in the period ended December 31, 2004 (not presented separately herein).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were not engaged
to perform an audit of the company's internal control over financial reporting.
An audit includes consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits the financial statements referred
to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2004 and 2003, and the results of its operations
and its cash flows for each of the two years in the period ended of December
31, 2004, in conformity with accounting principles generally accepted in United
Kingdom, which differ in certain respects from those followed in the United
States, as described in Note 22 to the financial statements.
/s/ Goodman Jones
London Goodman Jones
January 20, 2005 Chartered Accountants Registered Author
F-134
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of
Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
TELRAD CONNEGY COMMUNICATIONS INC.
We have audited the accompanying consolidated balance sheet of Telrad
Connegy Communications Inc. ("the Company") and its subsidiaries as of December
31, 2004 and 2003 and the related consolidated statements of operations in
shareholders' equity (deficiency) and the consolidated cash flows for each of
the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were not engaged
to perform an audit of the Company's internal control over financial reporting.
Our audit included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries as of December 31, 2004, and 2003
and the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States, which differ in
certain respects from those followed in Israel, as described in Note 14 to the
consolidated financial statements.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
March 27, 2005 A Member of Ernst & Young Global
F-135
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of
Ernst & Young Global]
Report Of Independent Registered Public Accounting Firm
to the Partners of Koor Venture Capital L.P.
We have audited the accompanying balance sheets of Koor Ventures Capital L.P.
(the "Partnership") as at December 31, 2004 and 2003, and the related
statements of operations, shareholders' equity and cash flows, for each of the
three years, the last of which ended December 31, 2004. These financial
statements are the responsibility of the Partnership's Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We did not audit the financial statements of an affiliate, which Partnership's
investment constitute NIS 12,466 thousand and NIS 7,313 thousand, as of
December 31, 2004 and 2003, respectively, and its equity in losses constitute
NIS 329 thousand for the years ended December 31, 2004, 2003 and 2002,
respectively. The financial statements of the affiliate were audited by other
auditors whose reports thereon were furnished to us. Our opinion, insofar as it
relates to amounts included for the affiliate, is based solely on the said
reports of the other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Management, as well as
evaluating the overall financial statement presentation. We believe that our
audits, and reports of the other auditors, provide a reasonable basis for our
opinion.
In our opinion, based on our audits and on the reports of the above-mentioned
other auditors, the financial statements referred to above present fairly, in
all material respects, the financial position of the Partnership as of December
31, 2004 and 2003 and the results of their operations, the changes in
shareholders' equity and their cash flows for each of the three years, the last
of which ended December 31, 2004 in conformity with accounting principles
generally accepted in Israel.
As explained in Note 2, the financial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board. The financial statements for dates and reporting periods that ended up
to the aforementioned date are stated in values that were adjusted to that date
according to the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects form accounting principles generally accepted in the United States of
America. (US GAAP). Information relating to the nature and effect of such
differences is presented in Note 8 to the financial statements.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
March 20, 2005 A Member of Ernst & Young Global
F-136
[Letterhead of Brightman Almagor & Co., a Member Firm of
Deloitte & Touche Tohmatsu]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Scopus Network Technologies Ltd
We have audited the accompanying balance sheets of Scopus Network Technologies
Ltd ("the Company") as of December 31, 2004 and 2003 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows, for each of the three years, in the period ended December 31, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statements presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 2004 and 2003, and the consolidated results of its operations,
changes in its shareholders' equity and its cash flows for the three years, in
the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
Accounting principles generally accepted in the United States of America vary
in certain respects from accounting principles generally accepted in Israel. As
stated in Note 2Q, for purposes of these financial statements, the application
of the latter would not have materially effected the Company's net loss for
each of the three years in the period ended December 31, 2004, and its
shareholders' equity and its financial position as of December 31, 2004 and
2003 as reported in these financial statements.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
February 17, 2005
F-137
[Letterhead of Brightman Almagor & Co., a Member Firm of
Deloitte & Touche Tohmatsu]
Report Of Independent Registered Public Accounting Firm
To the Shareholders of
Koorshevel Ltd
We have audited the accompanying balance sheets of Koorshevel ("the Company")
as of December 31, 2004 and 2003 and the related consolidated statements of
operations, shareholders' equity, and cash flows, for each of the three years,
in the period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statements presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and on the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2004 and
2003, and the results of operations and cash flows of the Company for each of
the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in Israel.
As explained in Note 2(2), the financial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board. The financial statements for dates and reporting periods ended up to the
aforementioned date are stated in values that were adjusted to that date
according to the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (U.S. GAAP). Information relating to the nature and effect of such
differences is presented in Note 8 to the financial statements.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants (Isr.)
A member firm of Deloitte Touche Tohmatsu
Tel Aviv, March 9, 2005
F-138
[Letterhead of Brightman Almagor & Co., a Member Firm of
Deloitte & Touche Tohmatsu]
Report Of Independent Registered Public Accounting Firm
To the Shareholders of
Sheraton Moriah (Israel) Ltd.
We have audited the accompanying balance sheets of Sheraton Moriah (Israel)
Ltd. (the "Company") as of December 31, 2004 and 2003, and the consolidated
balance sheets of the Company and its subsidiaries as at such dates, and the
related statements of operations, shareholders' equity, and cash flows, for
each of the three years, in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of certain subsidiaries,
including those whose assets constitute 2% of the total consolidated assets as
of December 31, 2003, and whose revenues constitute 12% and 18% of the total
consolidated revenues for the years ended December 31, 2003 and 2002
respectively. Furthermore, we did not audit the financial statements of an
affiliate accounted for by use of the equity method. The Company's equity in
that affiliate's net assets as of December 31, 2004 and 2003, amounts to NIS
4.7 million and NIS 5.6 million, respectively and its shares in losses
constitutes NIS 0.9 million, NIS 1.1 million and NIS 2.2 million in that
affiliate's net loss for the years ended December 31, 2004, 2003 and 2002,
respectively. The financial statements of those consolidated subsidiaries and
the affiliate which were prepared in accordance with Israeli GAAP, were audited
by other auditors whose reports thereon were furnished to us, and our opinion,
insofar as it relates to amounts included for such subsidiaries and affiliate,
before conversion to generally accepted accounting principles in the United
States of America, is based solely on the reports of the other auditors.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and on the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of the Company and the consolidated financial
position of the Company and its subsidiaries as of December 31, 2004 and 2003,
and the results of operations and cash flows - of the Company and on a
consolidated basis - for each of the three years in the period ended December
31, 2004, in conformity with accounting principles generally accepted in
Israel.
As explained in Note 2(1), the financial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board. The financial statements for dates and reporting periods ended up to the
aforementioned date are stated in values that were adjusted to that date
according to the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.
F-139
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The effect of the application of the latter on the consolidated
financial position as of December 31, 2004 and on the consolidated results of
operation for the year then ended is summarized in Note 28.
As described in Note 2 (15) to the financial statements the 2002 and 2003
annual financial statements have been restated due to an expense paid by a
controlling party for the Company to a third party.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants (Isr.)
A member firm of Deloitte Touche Tohmatsu
Tel Aviv, March 9, 2005
F-140
[Letterhead of Kost, Forer Gabbay & Kasierer, a Member of
Ernst & Young Global]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Venturers of the
Joint Venture - Sheraton City Tower
We have audited the balance sheets of the Joint Venture - Sheraton
City Tower ("the Joint Venture") as of December 31, 2004 and 2003, and the
related statements of operations, changes in venturers' deficiency and cash
flows for the years then ended (not presented separately herein). These
financial statements are the responsibility of the Joint Venturer's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Joint
Venture's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the financial position of the Joint Venture
as of December 31, 2004 and 2003 and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles in Israel (which principles differ in certain respects
from accounting principles generally accepted in the United States - see Note
18).
As described in Note 2A, the financial statements as of the dates and
for the reported periods subsequent to December 31, 2003, are presented in
reported amounts, in conformity with Accounting Standards of the Israel
Accounting Standards Board. The financial statements as of the dates and for
the reported periods until the aforementioned date are presented in values that
were adjusted until that date according to the changes in the general
purchasing power of the Israeli currency, in accordance with pronouncements of
the Institute of Certified Public Accountants in Israel.
/s/ Kost, Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER
March 2, 2005 A Member of Ernst & Young Global
F-141
Makhteshim-Agan Industries Ltd.
Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
CONTENTS
PAGE
Auditors' Report F-143
Consolidated Balance Sheets F-144
Company Balance Sheets F-146
Consolidated Statements of Income F-147
Company Statements of Income F-148
Statements of Changes in Shareholders' Equity F-149
Consolidated Statements of Cash Flows F-150
Company Statements of Cash Flows F-152
Notes to the Financial Statements F-154
Appendix to the Financial Statements - Schedule of Investee Companies F-226
F-142
[Letterhead of Somekh Chaikin, a Member Firm of KPMG International]
AUDITORS' REPORT TO THE SHAREHOLDERS OF
MAKHTESHIM-AGAN INDUSTRIES LTD.
We have audited the accompanying balance sheets of Makhteshim-Agan Industries
Ltd. (the Company) as at December 31, 2004 and 2003, and the consolidated
balance sheets of the Company and its subsidiaries as at such dates, and the
related statements of income, changes in shareholders' equity and cash flows -
Company and consolidated - for each of the three years, the last of which ended
December 31, 2004. These financial statements are the responsibility of the
Company's Board of Directors and its Management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, whose assets
constitute 5% and 4% of the total consolidated assets as at December 31, 2004
and 2003, respectively, and whose revenues constitute 4%, 6% and 1% of the
total consolidated revenues for each of the three years last of which ended
December 31, 2004, respectively. The financial statements of those subsidiaries
were audited by other auditors whose reports thereon were furnished to us. Our
opinion, insofar as it relates to the amounts included for those companies, is
based solely on the said reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed under the Auditors' Regulations (Manner
of Auditor's Performance), 1973. Such standards require that we plan and
perform the audit to obtain reasonable assurance that the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Company's Board of Directors and by its
Management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and on the reports of other auditors, as
mentioned above, the financial statements referred to above present fairly, all
material respects, the financial position of the Company and the consolidated
financial position of the Company and its subsidiaries, as at December 31, 2004
and 2003, and the results of the operations, the changes in the shareholders'
equity and the cash flows - Company and consolidated - for each of the three
years, the last of which ended December 31, 2004, in conformity with generally
accepted accounting principles. Furthermore, these statements have, in our
opinion, been prepared in accordance with the Securities Regulations
(Preparation of Annual Financial Statements), 1993.
Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (US GAAP). Information related to the nature and effect of such
differences is presented in Note 34 of the financial statements.
As explained in Note 2(A), since the Company's functional currency is the U.S.
dollar, the financial statements are prepared in U.S. dollars.
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
March 8, 2005, except for Note 34, as to which the date is July 13, 2005.
F-143
Consolidated Balance Sheets
---------------------------------------------------------------------------------------------
As at December 31
--------------------------------
2004 2003
------------- ---------------
Note US$ thousands US$ thousands
------------ ------------- ---------------
Current assets
Cash and cash equivalents 40,477 49,849
Short-term investments 1,563 1,100
Trade receivables 3 369,209 301,694
Other receivables 4 77,219 54,538
Inventories 6 460,870 360,993
------------- ---------------
949,338 768,174
Long-term investments, loans and receivables 8 22,070 18,044
------------- ---------------
Fixed assets 9
Cost 824,544 786,416
Less - accumulated depreciation 388,805 359,671
------------- ---------------
435,739 426,745
------------- ---------------
Other assets and deferred charges 10
Cost 743,310 612,275
Less - accumulated amortization 215,890 163,873
------------- ---------------
527,420 448,402
------------- ---------------
------------- ---------------
1,934,567 1,661,365
============= ===============
F-144
Makhteshim-Agan Industries Ltd.
-------------------------------------------------------------------------------------------------
As at December 31
--------------------------------
2004 2003
------------- ---------------
Note US$ thousands US$ thousands
------------ ------------- ---------------
Current liabilities
Credit from banks 11 140,021 142,817
Trade payables 12 325,945 243,070
Other payables 13 192,405 150,541
Proposed dividend 11,200 7,000
------------- ---------------
669,571 543,428
------------- ---------------
Long-term liabilities
Loans from banks 14 93,023 269,233
Convertible debentures 15 150,000 -
Other long-term liabilities 16 9,337 2,470
Deferred taxes, net 17 54,354 43,778
Employee severance benefits, net 18 26,709 24,774
------------- ---------------
333,423 340,255
------------- ---------------
Minority interest 18,756 6,436
------------- ---------------
Commitments and contingent liabilities 19
------------- ---------------
Convertible debentures 15 38,322 77,705
------------- ---------------
Shareholders' equity 21 874,495 693,541
------------- ---------------
------------- ---------------
1,934,567 1,661,365
============= ===============
/s/ Danny Biran /s/ Shlomo Yanai /s/ Eli Assraf
---------------------------------- ---------------- --------------
Danny Biran Shlomo Yanai Eli Assraf
Chairman of the Board of Directors Chief Executive Officer Chief Financial Officer
Date of approval of the financial statements: March 8, 2005, except for Note 34, as to which the date is July 13, 2005.
The notes and appendix to the financial statements are an integral part thereof.
F-145
Makhteshim-Agan Industries Ltd.
Company Balance Sheets
-----------------------------------------------------------------------------------------------------
As at December 31
--------------------------------
2004 2003
------------- ---------------
Note US$ thousands US$ thousands
------------ ------------- ---------------
Current assets
Cash and cash equivalents 2,649 3,191
Short-term investments 1,900 5,454
Other receivables 4 11,699 12,945
Loans to investee companies 5 30,959 16,111
------------- ---------------
47,207 37,701
------------- ---------------
Long-term investments, loans and receivables
Investee companies 7 1,008,999 735,005
Bank deposits 8 19,016 29,101
Deferred taxes, net 17 6,674 1,095
------------- ---------------
1,034,689 765,201
------------- ---------------
Office furniture and equipment, net 601 472
------------- ---------------
Deferred charges 10 2,458 1,618
------------- ---------------
1,084,955 804,992
============= ===============
Current liabilities
Credit from banks 11 - 4,500
Other payables 13 6,760 6,373
Proposed dividend 11,200 7,000
------------- ---------------
17,960 17,873
------------- ---------------
Long-term liabilities
Loans from banks 14 - 12,375
Convertible debentures 15 150,000 -
Employee severance benefits, net 18 4,591 3,911
------------- ---------------
154,591 16,286
------------- ---------------
Commitments and contingent liabilities 19
Convertible debentures 15 37,909 77,292
------------- ---------------
Shareholders' equity 21 874,495 693,541
------------- ---------------
1,084,955 804,992
============= ===============
---------------------------------- ----------------------- -----------------------
Danny Biran Shlomo Yanai Eli Assraf
Chairman of the Board of Directors Chief Executive Officer Chief Financial Officer
Date of approval of the financial statements: March 8, 2005, except for Note 34, as to which the date is July 13, 2005.
The notes and appendix to the financial statements are an integral part thereof.
F-146
Makhteshim-Agan Industries Ltd.
Consolidated Statements of Income
------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31
----------------------------------------------------
2004 2003 2002
Note US$ thousands US$ thousands US$ thousands
-------- -------------- ------------- ---------------
Revenues 23 1,539,702 1,177,255 890,863
Cost of sales 24 943,908 730,305 564,763
-------------- ------------- ---------------
Gross profit 595,794 446,950 326,100
-------------- ------------- ---------------
Expenses
Research and development, net 25 19,480 16,820 15,175
Selling and marketing 26 220,212 163,836 128,986
General and administrative 27 66,915 53,899 42,803
-------------- ------------- ---------------
306,607 234,555 186,964
-------------- ------------- ---------------
Operating income 289,187 212,395 139,136
Financing expenses, net 28 27,571 37,956 34,406
-------------- ------------- ---------------
Income before other expenses, net 261,616 174,439 104,730
Other expenses, net 29 42,735 38,245 31,770
-------------- ------------- ---------------
Income before taxes on income 218,881 136,194 72,960
Taxes on income 17 52,334 32,618 12,458
Income after taxes on income 166,547 103,576 60,502
Minority interest in income of
subsidiaries, net (1,020) (802) (424)
-------------- ------------- ---------------
Net income 165,527 102,774 60,078
-------------- ------------- ---------------
US$ US$ US$
-------------- ------------- ---------------
Earnings per share 31
Basic earnings per NIS 1 par value of shares 0.39 0.26 0.17
============== ============= ===============
Fully diluted earnings per NIS 1 par value
of shares 0.37 0.25 0.15
============== ============= ===============
The notes and appendix to the financial statements are an integral part thereof.
F-147
Makhteshim-Agan Industries Ltd.
Company Statements of Income
-----------------------------------------------------------------------------------------------------------------------------
For the year ended December 31
---------------------------------------------------
2004 2003 2002
Note US$ thousands US$ thousands US$ thousands
-------- -------------- ------------- --------------
Income
Company's equity in income of investee
companies, net 163,406 104,015 59,682
Management fees from investee companies 13,559 10,007 9,227
-------------- ------------- --------------
176,965 114,022 68,909
-------------- ------------- --------------
Expenses
Research and development, net - 401 233
General and administrative 27 15,371 13,927 8,992
-------------- ------------- --------------
15,371 14,328 9,225
-------------- ------------- --------------
Operating income 161,594 99,694 59,684
Financing income, net 28 (5,036) (598) (1,726)
-------------- ------------- --------------
Income before other expenses (income), net 166,630 100,292 61,410
Other expenses (income), net 1,850 (4) 1,118
Income before taxes on income (tax benefit) 164,780 100,296 60,292
Taxes on income (tax benefit) 17 (747) (2,478) 214
-------------- ------------- --------------
Net income 165,527 102,774 60,078
============== ============= ==============
US$ US$ US$
-------------- ------------- --------------
Earnings per share 31
Basic earnings per NIS 1 par value of
shares 0.39 0.26 0.17
============== ============= ==============
Fully diluted earnings per NIS 1 par value
of shares 0.37 0.25 0.15
============== ============= ==============
The notes and appendix to the financial statements are an integral part thereof.
F-148
Makhteshim-Agan Industries Ltd.
Statements of Changes in Shareholders' Equity
---------------------------------------------------------------------------------------------------------------------
Receipts from
Share Premium issuance of Capital
capital on shares options reserves
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- -------------- ------------- -------------
Balance as of December 31, 2001 101,757 357,090 4,046 (3,978)
Employee options exercised 47 234 - -
Adjustments deriving from translation of
financial statements of investee companies - - - (3,700)
Realization of Company shares held by a
subsidiary (see Note 21C) - - - -
Capital reserve from acquisition of
convertible debenture by a subsidiary - - - 399
Dividend - - - -
Proposed dividend subsequent to
the balance sheet date - - - -
Net income for the year ended December 31, 2002 - - - -
------------- -------------- ------------- -------------
Balance as of December 31, 2002 101,804 357,324 4,046 (7,279)
Employee options exercised 581 (581) - -
Conversion of convertible debentures into shares 1,270 11,331 - -
Options exercised 138 1,469 (134) -
Adjustments deriving from translation of
financial statements of investee companies - - - 1,886
Dividend - - - -
Proposed dividend - - - -
Proposed dividend subsequent to
the balance sheet date - - - -
Net income for the year ended December 31, 2003 - - - -
------------- -------------- ------------- -------------
Balance as of December 31, 2003 103,793 369,543 3,912 (5,393)
Employee options exercised 578 (578) - -
Conversion of convertible debentures into shares 3,974 35,581 - -
Options exercised 913 9,637 (903) -
Adjustments deriving from translation of
financial statements of investee companies - - - 2,825
Realization of Company shares held by a
subsidiary (see Note 21C) - 3,304 - -
Dividend - - - -
Proposed dividend - - - -
Proposed dividend subsequent - - - -
to the balance sheet date
Net income for the year ended December 31, 2004 - - - -
------------- -------------- ------------- -------------
Balance as of December 31, 2004 109,258 417,487 3,009 *(2,568)
============= ============== ============= =============
Composition of capital reserves: * US$ thousands
-------------
Capital reserve in the framework of the arrangement plan (Note 1B(2)) 257
Adjustments deriving from translation of financial statements of investees (1,425)
Adjustment of commitment to purchase Company shares (1,799)
Capital reserve from acquisition of convertible debentures by a subsidiary 399
-------------
(2,568)
=============
[table continued]
Proposed
dividend
subsequent Company
to balance Retained shares held
sheet date earnings by subsidiary Total
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Balance as of December 31, 2001 - 115,862 (18,004) 556,773
Employee options exercised - - - 281
Adjustments deriving from translation of
financial statements of investee companies - - - (3,700)
Realization of Company shares held by a
subsidiary (see Note 21C) - - 2,576 2,576
Capital reserve from acquisition of
convertible debenture by a subsidiary - - - 399
Dividend - (8,500) - (8,500)
Proposed dividend subsequent to
the balance sheet date 9,500 (9,500) - -
Net income for the year ended December 31, 2002 - 60,078 - 60,078
------------- -------------- ------------- -------------
Balance as of December 31, 2002 9,500 157,940 (15,428) 607,907
Employee options exercised - - - -
Conversion of convertible debentures into shares - - - 12,601
Options exercised - - - 1,473
Adjustments deriving from translation of
financial statements of investee companies - - - 1,886
Dividend (9,500) (16,600) - (26,100)
Proposed dividend - (7,000) - (7,000)
Proposed dividend subsequent to
the balance sheet date 7,200 (7,200) - -
Net income for the year ended December 31, 2003 - 102,774 - 102,774
------------- -------------- ------------- -------------
Balance as of December 31, 2003 7,200 229,914 (15,428) 693,541
Employee options exercised - - - -
Conversion of convertible debentures into shares - - - 39,555
Options exercised - - - 9,647
Adjustments deriving from translation of
financial statements of investee companies - - - 2,825
Realization of Company shares held by a
subsidiary (see Note 21C) - - 4,196 7,500
Dividend (7,200) (25,700) - (32,900)
Proposed dividend - (11,200) - (11,200)
Proposed dividend subsequent 12,700 (12,700) - -
to the balance sheet date
Net income for the year ended December 31, 2004 - 165,527 - 165,527
------------- -------------- ------------- -------------
Balance as of December 31, 2004 12,700 345,841 (11,232) 874,495
============= ============== ============= =============
Composition of capital reserves: *
Capital reserve in the framework of the arrangement plan (Note 1B(2))
Adjustments deriving from translation of financial statements of investees
Adjustment of commitment to purchase Company shares
Capital reserve from acquisition of convertible debentures by a subsidiary
The notes and appendix to the financial statements are an integral part thereof.
F-149
Makhteshim-Agan Industries Ltd.
Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Cash flows from operating activities
Net income 165,527 102,774 60,078
Adjustments to reconcile net income to net cash flows
from operating activities (see A. below) 50,126 146,466 48,152
------------- ------------- -------------
Net cash provided by operating activities 215,653 249,240 108,230
------------- ------------- -------------
Cash flows from investing activities
Acquisition of fixed assets (38,823) (33,606) (42,612)
Investment grant received 686 1,937 1,282
Additions to other assets and deferred charges, net (33,749) (20,463) (31,565)
Purchase of products and intangible assets - (50,876) (142,054)
Short-term investments, net (463) (241) 767
Investments in newly consolidated companies (see B. below) (72,152) (3,282) (19,955)
Proceeds from disposal of fixed and other assets 574 2,049 900
Proceeds from sale of long-term investments 2,819 406 1,883
Other long-term investments (828) (2,963) (2,036)
Acquisition of minority interest in subsidiaries (1,056) - (603)
------------- ------------- -------------
Net cash used in investing activities (142,992) (107,039) (233,993)
------------- ------------- -------------
Cash flows from financing activities
Receipt of long-term loans from banks 24,700 97,693 186,566
Repayment of long-term loans and liabilities from banks
and others (227,851) (148,251) (109,948)
Issuance of convertible debentures less issuance expenses 147,450 - 29,309
Realization (acquisition) of Company debentures by a subsidiary - 4,301 (3,257)
Increase (decrease) in short-term credit from banks and
others, net 4,222 (84,801) 33,181
Proceeds from options exercised 9,647 1,473 -
Proceeds from employee options exercised - - 281
Dividend to shareholders (39,900) (26,100) (11,500)
Dividend to minority shareholders in subsidiaries (301) (241) (549)
------------- ------------- -------------
Net cash (used in) provided by financing activities (82,033) (155,926) 124,083
------------- ------------- -------------
Translation differences in respect of cash in autonomous units - - (272)
------------- ------------- -------------
Decrease in cash and cash equivalents (9,372) (13,725) (1,952)
Cash and cash equivalents at beginning of the year 49,849 63,574 65,526
------------- ------------- -------------
Cash and cash equivalents at end of the year 40,477 49,849 63,574
============= ============= =============
The notes and appendix to the financial statements are an integral part thereof.
F-150
Makhteshim-Agan Industries Ltd.
Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
A. Adjustments to reconcile net income to net
cash flows from operating activities:
Revenues and expenses not affecting operating cash flows
Depreciation and amortization 82,624 75,673 58,105
Adjustment of long-term liabilities to banks and others 1,791 2,537 3,765
Minority interest in income of subsidiaries, net 998 802 424
Increase in employee severance benefits, net 1,973 4,358 1,058
Deferred taxes, net (163) 3,233 6,287
Amortization of discount on convertible debentures 916 978 1,272
Capital loss on disposal of fixed and other assets, net 511 858 331
Provision for loss with respect to options granted to
employees of subsidiaries 2,090 330 -
Gain on issuance of a subsidiary to a third party (926) - -
Changes in operating assets and liabilities
Decrease (increase) in trade and other receivables (53,236) (48,358) 59,069
Increase in inventories (69,345) (15,323) (38,398)
Increase (decrease) in trade and other payables 82,893 121,378 (43,761)
------------- ------------- -------------
50,126 146,466 48,152
============= ============= =============
B. Investments in newly consolidated companies
Working capital (excluding cash and cash equivalents) (6,485) (2,777) 1,355
Fixed assets, net (2,258) (506) (1,625)
Other assets, net (63,081) - (6,168)
Goodwill created on acquisition (41,851) (43) (19,714)
Long-term liabilities 33,896 44 2,213
Contingent liability - - 3,984
Exercise of Company shares held by a subsidiary 7,500 - -
Minority interest 6,398 - -
------------- ------------- -------------
(65,881) (3,282) (19,955)
Repayment of liability in respect of investee company
previously acquired (6,271) - -
------------- ------------- -------------
(72,152) (3,282) (19,955)
============= ============= =============
C. Non-cash activities
Acquisition of other assets on supplier credit 6,287 1,516 52,913
============= ============= =============
Acquisition of fixed assets on supplier credit - 3,904 2,204
============= ============= =============
F-151
Makhteshim-Agan Industries Ltd.
Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Cash flows from operating activities
Net income 165,527 102,774 60,078
Adjustments to reconcile net income to cash flows from
operating activities (see A. below) (130,946) (67,443) (49,962)
------------- ------------- -------------
Net cash provided by operating activities 34,581 35,331 10,116
------------- ------------- -------------
Cash flows from investing activities
Investment in investee companies (3,938) (5,501) (931)
Long-term loans to investee companies (135,582) (326) (49,704)
Repayment of long-term loans to investee companies - 21,623 -
Short-term credit to investee companies, net (9,056) 2,850 (5,350)
Acquisition of fixed assets (431) (221) (279)
Investment in short-term bank deposits, net 3,554 3,687 (9,141)
Realization of long-term bank deposits 10,000 25,000 -
Proceeds from sales of fixed assets 8 10 -
------------- ------------- -------------
Net cash (used in) provided by investing activities (135,445) 47,122 (65,405)
------------- ------------- -------------
Cash flows from financing activities
Issuance of convertible debentures less issuance expenses 147,450 - 29,309
Proceeds from options exercised 9,647 1,473 -
Dividend to shareholders (39,900) (26,100) (11,500)
Proceeds from employee options exercised - - 281
Receipt of long-term loans from banks - - 22,500
Repayment of long-term loans from banks (16,875) (4,500) (46,725)
Receipt of long-term loan from investee company - - 11,500
Increase (decrease) in short-term credit from banks, net - (50,684) 50,084
------------- ------------- -------------
Net cash (used in) provided by financing activities 100,322 (79,811) 55,449
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (542) 2,642 160
Cash and cash equivalents at beginning of the year 3,191 549 389
------------- ------------- -------------
Cash and cash equivalents at end of the year 2,649 3,191 549
============= ============= =============
The notes and appendix to the financial statements are an integral part thereof.
F-152
Makhteshim-Agan Industries Ltd.
Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
A. Adjustments to reconcile net income to net cash
flows from operating activities
Revenues and expenses not affecting operating cash flows:
---------------------------------------------------------
Depreciation and amortization 1,235 741 717
Capital loss (gain) on disposal of fixed assets 25 (4) 2
Company's equity in undistributed earnings of investee
companies, net (122,931) (74,153) (49,401)
Increase in employee severance benefits, net 680 1,660 188
Amortization of discount on convertible debentures 916 978 1,272
Adjustment of long-term investments (5,333) 731 3,907
Adjustment of long-term bank loans - - (3,304)
Deferred taxes, net (749) (2,507) 214
Changes in operating assets and liabilities:
--------------------------------------------
Decrease (increase) in other receivables (5,143) 2,362 (3,556)
Increase (decrease) in other payables 354 2,749 (1)
------------- ------------- -------------
(130,946) (67,443) (49,962)
============= ============= =============
The notes and appendix to the financial statements are an integral part thereof.
F-153
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - General
A. Definitions
(1) The Company - Makhteshim-Agan Industries Ltd.
(2) The Group - Makhteshim-Agan Industries Ltd. and its
investees.
(3) Subsidiaries - Companies, including partnerships, whose
financial statements are fully
consolidated, directly or indirectly,
with the financial statements of the
Company.
(4) Proportionately - Companies, including partnerships, whose
consolidated financial statements are consolidated,
companies directly or indirectly, with those of
the Company by the proportionate
consolidation method.
(5) Investees - Subsidiaries and proportionately
consolidated companies.
(6) Related parties - As defined in Opinion 29 of the Institute
of Certified Public Accountants in
Israel.
(7) Interested parties - As defined in Paragraph (1) of the
definition of an "interested party" in a
corporation, in Section 1 of the
Securities Law, 1968.
(8) Controlling - As defined in the Securities Regulations
shareholders (Financial Statement Presentation of
Transactions between a Company and a
Controlling Shareholder Therein), 1996.
(9) CPI - The Consumer Price Index as published by
the Central Bureau of Statistics.
(10) Dollar - The US dollar.
B. Description of the Company and its activity
1. The Company is engaged through its local and foreign investee
companies primarily in the manufacture and marketing of
pesticides, intermediate materials for other industries and
synthetic fragrances, mainly for export. The Company is held
by Koor Industries Ltd. (Koor). As at December 31, 2004, Koor
holds 38.6% of the Company's shares whereas on December 31,
2003, Koor held 48.6% of the Company's shares. In addition,
at that time Koor had a voting agreement, that was not of a
temporary nature, with two other shareholders who hold
together 3.82% of the Company's shares. In July 2004, the
voting agreements was cancelled.
The Company was established on December 8, 1997 for the
purpose of executing a plan for implementing changes in the
holdings in Makhteshim Chemical Works Ltd. (Makhteshim) and
Agan Chemical Industries Ltd. (Agan), as described below.
F-154
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - General (cont'd)
B. Description of the Company and its activity (cont'd)
2. On April 26, 1998, the shareholders of Makhteshim and of Agan
approved an exchange arrangement, the substance of which was
a change in the structure of holdings in the Makhteshim-Agan
Group. Prior to the implementation of the arrangement,
Makhteshim was a 67% subsidiary of Koor, Makhteshim held a
46.6% interest in Agan and Koor held a 5% direct interest in
Agan.
On May 4, 1998, the Court approved the arrangement, which was
consummated pursuant to the provisions of Section 233 of the
Companies Ordinance (New Version). On May 7, 1998, the shares
of Makhteshim and of Agan were delisted from the Tel-Aviv
Stock Exchange and on May 11, 1998, trading commenced in the
shares of the Company.
On May 10, 1998, the following actions were taken pursuant to
the approved exchange arrangement:
- The Company issued shares to all of the shareholders
of Makhteshim and of Agan (except in respect of the
shares of Agan held by Makhteshim) in exchange for
the transfer to the Company of the shares of
Makhteshim and Agan held by them.
- Pursuant to the exchange ratio that was determined
(based on the opinion of economic appraisers), the
shareholders of Makhteshim received 2.446 shares of
the Company for each share of Makhteshim, and the
shareholders of Agan (excluding Makhteshim) received
10.247 shares of the Company for each share of Agan.
Following the implementation of the above-mentioned
transactions, the Company fully owns and controls Makhteshim
and Agan.
Note 2 - Reporting Principles and Accounting Policy
A. Financial statements in US dollars
General:
--------
The Company and its Israeli subsidiaries maintain their current
accounting records in nominal shekels and dollars using a
multi-currency system. Since most of the Group's revenues are received
in dollar and the principal raw materials and fixed assets are
purchased in dollar. The dollar is the principal currency of the
economic environment in which the Group operates ("the functional
currency"). Accordingly, the dollar is the measurement and reporting
currency in these financial statements. It should not be construed
that the translated amounts actually represent or can be converted
into dollars, unless otherwise indicated in these statements.
F-155
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
A. Financial statements in US dollars (cont'd)
1. Balance sheet:
--------------
a) Non-monetary items (items, the stated amounts of
which reflect their historical value upon
acquisition or creation) that were acquired in a
currency other than the dollar, were translated
according to the exchange rate of the dollar on
their date of acquisition or creation. The following
items were treated as non-monetary items: fixed
assets and the related accumulated depreciation,
inventory, other assets, deferred expenses and the
related accumulated amortization, and shareholders'
equity items which derive from funds invested by
shareholders.
The amounts of the non-monetary assets do not
necessarily represent their realizable value or
current economic value, rather only the original
dollar cost thereof in nominal values.
b) The net asset value of investments in investees and
the minority interest in consolidated subsidiaries
are determined on the basis of the dollar translated
financial statements of those companies.
c) Monetary items (items, the amounts of which as
stated in the balance sheet reflect current or
realizable values, as at the balance sheet date)
were translated into dollars at the exchange rate at
the balance sheet date.
2. Statement of income:
--------------------
a) The components of the statement of income reflecting
transactions carried out during the year - sales,
purchases, labor costs, etc. - in a currency other
than the dollar, were translated according to the
exchange rate of the dollar on the date of the cash
flow. The erosion in monetary balances is included
in the specific expense or income items to which
they relate.
b) The components of the statement of income relating
to non-monetary balance sheet items have been
translated according to the same exchange rate used
for translating the related balance sheet items
(mainly: changes in inventory, depreciation and
amortization, capital gain, etc.).
c) Company equity in operating results of investees is
determined on the basis of the financial statements
of those companies.
d) Taxes on income:
Current taxes are composed of payments on account
during the year, plus amounts due as at the balance
sheet date (or net of amounts refundable at the
balance sheet date). The payments on account were
translated according to the exchange rate of the
dollar on the date of each payment, while the
amounts due or refundable are included without
adjustment. Therefore, current taxes also include
the expense or income resulting from the erosion of
the payments on account, from the payment date until
the balance sheet date. Deferred taxes - see Note 2R
and Note 17G.
F-156
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
B. Proposed dividend subsequent to the Balance Sheet Date
Pursuant to Accounting Standard No. 7, "Events Occurring Subsequent to
the Balance Sheet Date", a liability which relates to a dividend
proposed or declared subsequent to the balance sheet date, is
reflected in the financial statements only in the period declared. In
addition, separate expression of the amount of the dividend intended
for distribution is provided as part of the statement of changes in
shareholders' equity, as stated, against reduction of the retained
earnings' balance.
C. Foreign investee companies
As of January 1, 2004, the Company applies Accounting Standard No. 13,
"Effect of changes in Exchange Rates of Foreign Currency". The
Standard discusses the translation of transactions in foreign currency
and the translation of financial statements of foreign operations for
purposes of including them in the financial statements of the
reporting entity. The Standard provides rules for classifying foreign
operations as an autonomous foreign investee or as an integrated
investee, on the basis of the indications described in the standard
and the use of discretion, and it provides the method for translating
the financial statements of autonomous foreign investees.
The financial statements of foreign investees that are integral to the
Group's operations based on the criteria provided in Accounting
Standard No. 13, are translated into dollars as follows: non-monetary
items in the balance sheet are translated at the historical exchange
rates as at the transaction date whereas monetary balance sheet items
are translated at the exchange rate in effect on the balance sheet
date. Items in the statement of income are translated at average
exchange rates, except for revenues and expenses relating to
non-monetary items that were translated based on the historical
exchange rates according to which the corresponding non-monetary items
were translated. Translation differences are recorded in the statement
of income.
The financial statements of foreign investees that operate as
"autonomous entities" based on the criteria provided in Accounting
Standard No. 13, are translated into dollars as follows: monetary and
non-monetary balance sheet items are translated based on the closing
exchange rate. Items in the statement of income are translated at the
exchange rate on the transaction date. Translation differences are
recorded in the statement of income in a separate category in the
shareholders' equity section ("adjustments deriving from translation
of financial statements of investee companies") up to the time of
realization of the net investment.
F-157
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
D. Consolidated financial statements
(1) The financial statements of the Company are consolidated with
the statements of those companies that it controls.
Companies, which are under joint control, are consolidated by
the proportionate consolidation method.
(2) A list of companies whose financial statements are included
in the consolidated statements as well as the rate of control
and ownership thereof, is presented in the appendix to the
financial statements.
(3) For purposes of the consolidation, the amounts appearing in
the financial statements of the subsidiaries were taken into
account, after the adjustments required by the application of
the uniform accounting policies used by the Group.
(4) The excess of the cost of investments in subsidiaries over
the fair value of identified assets, less the identified
liabilities (net of taxes in respect of temporary
differences) at the date of acquisition, is recorded as
goodwill.
The goodwill is presented in the consolidated balance sheet
in the category "other assets and deferred charges" and is
amortized in the "other expenses" item (regarding the
amortization period, see Section L., below).
(5) The consolidated financial statements include the share of
assets, liabilities, income and expenses of proportionately
consolidated subsidiaries, based on the percentage interest
held in these companies.
(6) Material intercompany balances and transactions, including
profits on intercompany sales which have not yet been
realized outside the Group, are eliminated in consolidation.
E. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F. Cash equivalents
Cash equivalents include short-term bank deposits with an original
maturity not exceeding three months.
F-158
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
G. Short-term investments
Marketable securities held as a short-term investment are stated at
their market value as at balance sheet date. Changes in the value of
the marketable securities are fully recognized on a current basis.
H. Allowance for doubtful accounts
The financial statements include an allowance for specific doubtful
accounts which fairly reflects, in management's estimation, the loss
expected from receivables the collection of which is doubtful.
Management determines the allowance, based, in part, on an evaluation
of credit risk using available information regarding the financial
position of the debtors, the extent of their activities and evaluation
of collateral received from them. The financial statements include
specific allowances for doubtful accounts and, as mentioned in section
I below, with respect to trade receivables included in the framework
of a subordinated capital note received as part of a securitization
transaction.
I. Sale of financial assets
The sale of financial assets is recognized as a sale when control over
the asset is transferred in full to an independent third party, and
the full amount of the risks and rewards embodied by the asset are
transferred to an independent third party.
J. Inventories
Inventories are valued at the lower of cost or market, cost being
determined as follows:
- Raw materials, packing materials, purchased products, spare
parts and maintenance materials on the "moving average"
basis.
- Finished products and work in progress on the basis of
average production cost including materials, labor and
manufacturing expenses.
K. Investments in investee companies
(1) Investments in investee companies are stated in the Company's
balance sheet according to the equity method. In determining
the net asset value of the investments in these companies,
the amounts taken into account are based on the financial
statements of these companies, after making the adjustments
thereto required by the application of generally accepted
accounting principles.
(2) Regarding goodwill amortization - see Note 2M.
F-159
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
L. Fixed assets
(1) The fixed assets are presented at cost.
(2) The cost of assets includes financing expenses related to the
financing of their construction during the pre-operation
period. The financing expenses were capitalized as follows:
A. Where the assets under construction are financed by
specific credit - the financing expenses relating to
such credit.
B. Where the financing is not made by specific credit -
by using a rate representing the weighted average
cost rate of the credit sources, the cost of which
was not specifically capitalized.
(3) The cost of the self-constructed assets includes materials
and labor costs during the pre-operation period.
(4) The cost of assets with respect to which an investment grant
was received is presented after deduction of the investment
grant received with respect thereto. The investment grant is
amortized to the statement of income based on the rate of
depreciation of the assets in respect of which it was
received.
(5) Depreciation is computed by the straight-line method over the
estimated useful lives of the assets. Annual rates of
depreciation are:
%
-----------
Leasehold rights and buildings 2 - 4
Plant and equipment 4.5
Motor vehicles 15 - 20
Office furniture and equipment 6 - 15 (mainly 7%)
Computer and auxiliary equipment 20 - 33
M. Other assets and deferred charges
Other assets and deferred charges are amortized by the straight-line
method over the expected benefit period as follows:
- Product registration and acquisition of know-how - mainly eight
years.
- Goodwill arising on the acquisition of subsidiaries - ten or twenty
years (mainly twenty years).
- Intangible assets in purchase of products and companies - mainly
twenty years.
- Marketing rights - five years to ten years.
- Debenture issuance expenses - six years.
- Non-competition and confidentiality agreement - five years.
The amortization periods are re-examined from time to time in accordance with
the estimated expected benefit period of the assets.
F-160
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
N. Debentures convertible into shares
Debentures convertible into shares are included in the balance sheet
based on the probability of their conversion, as provided in Opinion
53 of the Institute of Certified Public Accountants in Israel.
Debentures, the conversion of which is not probable, are included as a
liability at their liability amount. Debentures, the conversion of
which is probable, are stated between the items "long-term
liabilities" and "shareholders' equity", in accordance with the higher
of the liability or capital value.
Convertible debentures issued by the Company and held by a subsidiary,
are included net of the liability value of the debentures issued. The
difference between the acquisition cost and the liability value which
was deducted, is recorded in a capital reserve in the shareholders'
equity category.
O. Company shares held by subsidiary
Company shares held by a subsidiary are stated at cost, as a deduction
from the Company's shareholders' equity.
P. Revenue recognition
Revenues from sales of products are recognized upon shipment to the
customer along with transfer of the main risks involved with ownership
of the products sold.
Q. Research and development costs
Research and development costs, net of grants and participations, are
charged to the statement of income as incurred. The net research and
development expenses are presented separately in the statement of
income after gross profit.
R. Deferred taxes
The Group companies create deferred taxes in respect of temporary
differences. The temporary differences are differences in the value of
assets and liabilities for tax purposes and for financial reporting
purposes. Allocation of the taxes, as stated, is executed with respect
to the differences applying to assets, the amortization of which is
deductible for tax purposes.
The deferred tax balances (asset or liability) are calculated
according to the liability approach, i.e., the tax rates expected to
be in force when the deferred tax liability is utilized, or when the
deferred tax asset is realized, as they are known proximate to the
date of approval of the financial statements.
In calculation of the deferred taxes, no account was taken of the
taxes, which would apply in a case of sale of the investments in the
investee companies, since it is the intention of the Company to hold
these investments and not to sell them.
The Group may be subject to additional tax in a case of distribution
of dividends between the Group companies. This additional tax was not
provided for in the financial statements in cases where Group policy
is not to distribute a dividend which involves additional tax to the
Group.
F-161
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
S. Earnings per share
The earnings per share data is calculated in accordance with opinion
No. 55 of the Institute of Certified Public Accountants in Israel,
retroactively adjusted for the bonus element in the issuance of
rights, and taking into consideration the likelihood of the exercise
of option warrants and convertible debentures issued by the Company.
T. Derivative financial instruments
The results of derivative financial instruments held as hedge for
existing assets and liabilities are recognized concurrently with the
results of the hedged assets and liabilities.
The results of derivative financial instruments held as a hedge for
firm commitments are deferred, and are recognized in the same period
in which the results from the hedged transactions are recognized.
Derivative financial instruments, which are not earmarked for hedging
purposes, are presented in the balance sheet based on their fair
value. Changes in fair value are recorded in the statement of income
in the period in which they occur.
The fair value of derivative financial instruments is determined based
on their market value, and in the absence of such a price, fair value
is determined based on a valuation model.
U. Environmental costs
The ongoing cost of maintenance and operation of facilities for the
prevention of environmental pollution and projected provisions for
environment rehabilitation costs stemming from current or past
activities, are charged to expense as incurred. The cost of
constructing facilities to prevent pollution, which increase the life
expectancy of a facility or its efficiency, or decrease or prevent
pollution, are charged to the cost of fixed assets and are depreciated
according to the usual depreciation rates used by the Group.
V. Impairment in value of assets
The Company applies Accounting Standard No. 15 - Impairment in Value
of Assets (hereinafter - "Standard"). The Standard provides procedures
which a company must apply in order to ensure that its assets in the
consolidated balance sheet (to which the Standard applies), are not
presented at an amount which is in excess of their recoverable value,
which is the higher of the net selling price or the realization value
(the present value of the estimated future cash flows expected to be
derived from use and disposal of the asset).
The Standard applies to all the assets in the consolidated balance
sheet, except for tax assets and monetary assets. In addition, the
Standard provides rules for presentation and disclosure with respect
to assets whose value has declined. Where the value of an asset in the
balance sheet is greater than its recoverable value, the Company
recognizes a loss from impairment in value in an amount equal to the
difference between the book value of the asset and its recoverable
value. The loss recognized, as stated, will be eliminated only if
there have been changes in the estimates used in determining the
asset's recoverable value from the date on which the last loss from
impairment in value was recognized.
W. Balances in foreign currency and linked balances
Balances in or linked to foreign currency are included in the
financial statements at the representative exchange rates on the
balance sheet date. Balances linked to the Consumer Price Index are
included on the basis of the index relevant to each linked asset or
liability.
F-162
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
------------------------------------------------------------------------------------------------------------------
Note 2 - Reporting Principles and Accounting Policy (cont'd)
W. Balances in foreign currency and linked balances (cont'd)
Data regarding the representative exchange rate of the US dollar and
the Consumer Price Index are as follows:
Consumer Exchange rate Exchange rate Exchange rate
Price of the US dollar of the US dollar of the US dollar
Index against the against the against the
(Points) NIS Brazilian real Euro
------------ ---------------- ---------------- ----------------
As at
-----
December 31, 2004 107.44 4.308 2.654 0.733
December 31, 2003 106.16 4.379 2.889 0.791
Changes during the year:
------------------------
2004 1.21% (1.62%) (8.13%) (7.33%)
2003 (1.9%) (7.5%) (18.2%) (16.9%)
2002 6.5% 7.3% 52.3% (15.9%)
X. Disclosure of the impact of new accounting standards in the
period prior to their application
In July 2004, the Israeli Accounting Standards Board published
Accounting Standard No. 19, "Taxes on Income". The Standard provides
that a liability for deferred taxes is to be recorded for all
temporary differences subject to tax, except for a limited number of
exceptions. In addition, a deferred tax asset is to be recorded for
all temporary differences that may be deducted, losses for tax
purposes and tax benefits not yet utilized, if it is anticipated that
there will be taxable income against which they can be offset, except
for a limited number of exceptions. The new Standard applies to
financial statements for periods beginning on January 1, 2005. The
Standard provides that it is to be implemented by means of a
cumulative effect of a change in accounting method. First time
application of the said Standard will have a net non-recurring impact,
as at January 1, 2005, of increasing the net income by approximately
US$ 11.6 million (which mainly derives from recording deferred taxes
in respect of unrealized profits which are anticipated to be realized
in the near future).
Note 3 - Trade Receivables
Consolidated
Composition:
December 31
---------------------------------
2004 2003
-------------- -------------
US$ thousands US$ thousands
-------------- -------------
Open accounts -
Foreign 312,661 242,292
Domestic (Israel) 14,812 10,710
Checks receivable 5,796 8,868
Subordinated capital note and receivables related to sale of
trade receivables in a securitization transaction (1) 60,586 57,203
-------------- -------------
393,855 319,073
Net of allowance for doubtful debts 24,646 17,379
-------------- -------------
369,209 301,694
============== =============
F-163
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
------------------------------------------------------------------------------------------------------------------
Note 3 - Trade Receivables (cont'd)
(1) Sale of trade receivables in a securitization transaction:
----------------------------------------------------------
December 31
---------------------------------
2004 2003
-------------- -------------
US$ thousands US$ thousands
-------------- -------------
Trade receivables included in the securitization transaction
as at the balance sheet date 202,832 182,529
Less - proceeds in respect of such receivables, net (*) 141,654 115,769
Subordinated capital note 61,178 66,760
Trade receivables which were collected and the
proceeds in respect thereof were paid subsequent
to the balance sheet date, net (592) (9,557)
Subordinated capital note and receivables related to sale of
trade receivables in a securitization transaction 60,586 57,203
(*) As at the balance sheet date cash proceeds in the amount of US$ 142.2 million were
received in respect of the sale of trade receivables in a securitization
transaction (December 31, 2003 - approximately US$ 125.3 million).
In October 2001, the Company and certain subsidiaries signed
an agreement according to which those companies entered into
a securitization transaction, under which such companies sold
all their trade receivables to foreign companies, which were
incorporated for this purpose and which are not owned or
controlled by the Makhteshim Agan Industries Group
(hereinafter - "the Target Companies"). The purchase of the
debts by the purchasing companies was financed by Kitty Hawk
Funding Corp., a US corporation of the Bank of America Group.
On September 28, 2004, the Company and subsidiaries signed an
agreement with Bank of America to end the undertaking in the
securitization transaction. On the same date, the Company and
certain subsidiaries (hereinafter - "the Companies") entered
into a new agreement with Rabobank International for sale of
customer receivables in the framework of a securitization
transaction, this being in place of the prior agreement with
Bank of America. The new agreement is similar in principle to
the prior agreement with certain changes including, among
others, that in the new agreement additional Company
subsidiaries are included in the transaction. Pursuant to the
new securitization agreement, the Companies will sell their
trade receivables to a foreign company which was set up for
this purpose and which is not owned or controlled by the
Makhteshim Agan Industries Group (hereinafter - "the
Acquiring Company").
Acquisition of the trade receivables by the Acquiring Company
will be financed by a U.S. company, Erasmus Capital
Corporation, of the Rabobank International Group. At the time
of transition from the prior agreement to the new agreement
the Acquiring Company purchased the trade receivables that
remained in the ownership of the Target Companies.
Trade receivables included in the securitization transaction
are those who stand in compliance with a number of criteria,
as determined in the agreement.
The maximum expected volume of the financial means available
to the Acquiring Company for the purpose of purchasing the
trade receivables of the consolidated subsidiaries, is US$
250 million (as opposed to US$ 150 million in the former
securitization agreement) on a current basis, such that the
amounts to be collected from customers whose debts were sold,
will serve to purchase new trade receivables.
F-164
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 3 - Trade Receivables (cont'd)
(1) Sale of trade receivables in a securitization transaction: (cont'd)
---------------------------------------------------------
The period in which the Companies will sell their trade
receivables to the Acquiring Company is one year from the date of
the closing of the transaction. The period may be extended, with
the consent of both parties, for additional one-year periods, up
to a maximum of 4 extensions.
The price at which the trade receivables will be sold is the
amount of the debt being sold less an amount calculated on the
basis of the period anticipated to pass between the date the debt
was sold and the repayment date.
On the date of purchasing the debt, the acquiring company will pay
in cash the major part of the debt price. The balance of the debt
price will be embodied in a subordinated capital note to be paid
after the debt is collected. The rate of the cash payment will
vary in accordance with the composition of the client portfolio
and its performance.
The Company shall bear in full losses sustained by acquiring
companies due to the non-payment of the trade receivables included
in the securitization transaction, up to the amount of the total
outstanding balance of the debt included in the subordinated
capital note.
The acquiring company will not have a right of recourse to the
Companies with respect to the amounts paid in cash, except in the
case of debts in respect of which a commercial dispute arises
between the Companies and their customers, namely, a dispute
arising from an alleged failure to comply with an obligation of
the seller in the supply agreement for the product, such as:
failure to supply the correct product, defect in the product,
non-compliance with the supply date, etc.
The Companies will handle for the acquiring company the collection
of the sold trade receivables included as part of the
securitization transaction.
The main principle of the accounting treatment of the sale of
trade receivables in a securitization transaction is the
recognition of the sale of only that part of the debt where the
risk and control thereof has been finally and absolutely
transferred to the buyer. Accordingly, trade receivables sold were
deleted where the consideration in respect thereof had been
received in cash and/or by a non-deferred liability. With respect
of that part of the trade receivables included in the
securitization transaction, which was not recognized as a sale, a
subordinated capital note receivable was recorded in the amount of
the difference between the amount of trade receivables included in
the transaction and the amounts of consideration received, as
above, and receivables were recorded in respect of the debts sold
where the consideration in respect thereof was received subsequent
to the balance sheet date.
The loss on sale of the trade receivables is recognized at the
date of sale and is reflected in the item "other expenses".
As part of the agreement, the Company committed to maintain
certain financial ratios, mainly, debt to equity and profitability
ratios - see Note 20C.
F-165
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-----------------------------------------------------------------------------------------------------------------------------
Note 4 - Other Receivables
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Claims from the government in
respect of participations and
tax refunds 28,277 15,410 - -
Advance tax payments, net of
provisions 11,071 7,895 - -
Employees (1) 1,376 1,259 6 49
Deferred taxes (Note 17G) 17,037 10,256 325 5,155
Current maturities of long-term
receivables 420 380 - -
Prepaid expenses and accrued
income 10,372 9,819 168 741
Dividend receivable - - 11,200 7,000
Other 8,666 9,519 - -
------------- ------------- ------------- -------------
77,219 54,538 11,699 12,945
============= ============= ============= =============
(1) Includes a non-linked bank deposit
designated for the purpose of
granting loans to employees and
bearing annual interest at the
rate of 5% 417 566 - -
============= ============= ============= =============
Note 5 - Loans to Investee Companies
Company
December 31
--------------------------------
2004 2003
------------- -------------
US$ thousands US$ thousands
------------- -------------
Current maturities of long-term loans - 4,500
Short-term loans (1) 16,056 2,500
Current accounts (2) 14,903 9,111
------------- -------------
30,959 16,111
============= =============
(1) The loan is a dollar loan and bears interest of 1.8% - 2.4%.
(2) The accounts are mainly linked to the US dollar and are
non-interest bearing.
F-166
>
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 6 - Inventories
Consolidated
December 31
--------------------------------
2004 2003
------------- -------------
US$ thousands US$ thousands
------------- -------------
Finished products 263,579 225,678
Work in progress 29,117 23,772
Raw materials 115,046 76,100
Packing materials 4,863 3,078
Spare parts and maintenance materials 12,820 13,739
------------- -------------
425,425 342,367
Purchased products 35,445 18,626
------------- -------------
460,870 360,993
============= =============
Note 7 - Investments in Investee Companies
Company
A. Composition
December 31
--------------------------------
2004 2003
------------- -------------
US$ thousands US$ thousands
------------- -------------
Subsidiaries -
Cost of shares 424,865 417,623
Company's equity in retained earnings and
capital reserves accumulated from date of
acquisition, net 351,475 232,744
Adjustments deriving from translation of
financial statements of investee companies (1,425) (4,250)
------------- -------------
774,915 646,117
Less - investment in Company shares held by
subsidiary (11,232) (15,428)
Capital reserve from acquisition and sale of
debentures convertible into shares of the
Company by a subsidiary 399 399
------------- -------------
764,082 631,088
Loans - C(1) 242,417 101,417
Perpetual loan - C(2) 2,500 2,500
------------- -------------
1,008,999 735,005
============= =============
F-167
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 7 - Investments in Investee Companies
Company
B. Movement during the year
2004
-------------
US$ thousands
-------------
Balance at beginning of year 735,005
Company's equity in net earnings
of investee companies, net 163,406
Adjustments deriving from translation of
financial statements of investee companies 2,825
Dividend (44,675)
Realization of Company shares held by a subsidiary 4,196
Additional investments, net 7,242
Change in loans and capital notes, net 141,000
-------------
Balance at end of year 1,008,999
=============
A list of the investee companies is presented in the Appendix.
C. Terms of loans and capital notes
(1) The loans bear interest at the Libor rate plus a margin which
ranges between 0.8% and 2%. The loans as at December 31, 2004
are presented net of current maturities in the amount of US$
4.5 million.
(2) The perpetual loan is non-linked and does not bear interest.
D. Additional information
(1) Acquisition of companies during the year of the report:
a. In April 2004, the Company, through wholly owned and
controlled subsidiaries, signed agreements for
acquisition of the ownership and control of a group of
three companies: Vegetation Management LLC, Farm Saver.
Com LLC, and Nation Ag II LLC - which are engaged in
licensing the import and marketing of herbicides from
the United States (hereinafter - "the Companies
Acquired").
The aggregate consideration for the acquisition amounted
to approximately US$ 67 million (the consideration is
after an amendment to the original agreement made in
December 2004). Approximately US$ 7.5 million of the
aggregate consideration was paid through a transfer of
1,908 of the Company's shares that were held by a
subsidiary (the cost of the shares is US$ 4.2 million).
The excess cost created on the acquisition date amounted
to US$ 51.4 million, of which $28.4 million was
attributed to intangible assets (mainly licensing and
licenses), US$ 0.5 million was attributed to deferred
tax liability, US $0.6 million was attributed to
inventory and the balance, in the amount of US$ 22.9
million, was recorded as goodwill.
The excess cost attributed to the licensing and the
licenses, as well as the goodwill, are being amortized
over a period of 20 years which, in the Company's
estimation, represents the period of economic benefit to
be derived therefrom.
F-168
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 7 - Investments in Investee Companies (cont'd)
Company
D. Additional information (cont'd)
(1) Acquisition of companies during the year of the report: (cont'd)
a. (cont'd)
The statements of income and cash flows of the Companies
Acquired were consolidated as of May 1, 2004.
The effect of the first time consolidation of the
activities acquired on the consolidated statements of
income is an increase in revenues of US$ 24.1 million
for the period ended December 31, 2004, and an increase
to net income (after amortization of goodwill) of US$
5.6 million for the same period. The impact on the
consolidated balance sheet as at December 31, 2004 is an
increase of assets in the amount of US$ 77.5 million.
b. During the year of the report, the Company signed,
through subsidiaries, agreements for acquisition of
three marketing companies, as follows:
1) In June 2004, the Company, through a wholly owned
and controlled subsidiary, signed an agreement for
acquisition of 45% of the rights in the U.S.
company, Control Solutions Inc. (hereinafter -
"CSI"), which is engaged in the marketing of
pesticides to the non-agricultural market in the
United States.
Based on the acquisition agreement, so long as the
subsidiary holds 45% of the shares of CSI, decisions
in areas critical to CSI are to be made jointly by
all the shareholders of CSI. Therefore, CSI has been
consolidated in the financial statements by means of
the proportionate consolidation method.
In addition, the subsidiary was given an option,
which may be exercised at any time during the next
three years, to increase its share in CSI to 60%, in
exchange for a payment ranging between US$ 1.5
million and US$ 10.5 million, in accordance with the
earnings of CSI in 2004-2006.
Furthermore, commencing from 2009, both the
subsidiary and the remaining shareholders of CSI
have the right to require the subsidiary to acquire
from the remaining shareholders of CSI the balance
of their shares in CSI in consideration of an amount
to be determined based on the income of CSI in the
three years preceding the acquisition date.
2) In July 2004, the Company, through a wholly owned
and controlled subsidiary, signed an agreement for
acquisition of all the shares and rights of Farmoz
PTY Limited, an Australian company engaged in the
marketing and distribution of pesticides in
Australia.
F-169
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 7 - Investments in Investee Companies (cont'd)
D. Additional information (cont'd)
(1) Acquisition of companies during the year of the report: (cont'd)
3) In August 2004, the Company, through a subsidiary, signed
an agreement for acquisition of 50.1% of the rights in the
U.S. company, RiceCo LLC, which is engaged in the
development and marketing of herbicides in the rice
sector.
The aggregate cost of the acquisition of the marketing
companies amounted to US$ 41 million. The excess cost created
on the acquisition date amounted to US$ 31.1 million, of which
US$ 15 million was attributed to intangible assets (mainly
licensing and licenses), US$ 3.5 million was attributed to
deferred tax liability, US$ 0.7 million was attributed to
inventory and the balance, in the amount of US$ 18.9 million,
was recorded as goodwill.
The excess cost attributed to the licensing and the licenses,
as well as the goodwill, are being amortized over a period of
20 years which, in the Company's estimation, represents the
period of economic benefit to be derived therefrom.
The statements of income and cash flows of the three marketing
companies acquired were consolidated as of their acquisition
dates. The total effect of the first time consolidation of the
aforementioned marketing companies on the consolidated
statements of income from the date of their initial
consolidation is an increase in revenues of US$ 46.2 million
for the period ended December 31, 2004 and a reduction of net
earnings (after goodwill amortization) of US$ 0.3 million for
that period. The effect on the consolidation on the balance
sheet as at December 31, 2004, is an increase of assets in the
amount of US$ 72.8 million.
(2) Subsequent to the balance sheet date, in January 2005, the
Company signed an agreement by means of a company it wholly
owns and controls, for acquisition of 49% of the shares and
rights of Makhteshim Agan Benelux & Nordic B.V. ("Mabeno"), a
Dutch company that serves as the exclusive distributor of
herbicides of the Makhteshim Agan Group in the areas of Benelux
and Scandinavia. In accordance with the agreement, the
acquisition will be executed in exchange for an issuance of
Company shares in the amount of (euro) 2,940 thousand,
according to the market price of the share on the day of the
transfer. In addition, the Company received an option to
increase its holdings in Mabeno to 55%.
(3) With respect to Goodwill on acquisition of investee
companies and the unamortized balance thereof - see Note
10.
(4) With respect to guarantees for investee companies - see
Note 19E.
E. Convertible securities in investee companies
(1) A subsidiary, Lycored - Natural Products Industries Ltd.
(hereinafter - "Lycored"), has granted stock options to
employees, which, if exercised, will dilute the Company's
holding in Lycored to about 87.72%.
F-170
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 7 - Investments in Investee Companies (cont'd)
E. Convertible securities in investee companies (cont'd)
(2) On October 28, 2003, the Board of Directors of Luxembourg
Medicine Ltd. (hereinafter - "Luxembourg") approved the
issuance of options to employees of Luxembourg and its
subsidiary. Exercise of the options will dilute the holding
of the Company in Luxembourg to about 92%.
(3) As at the balance sheet date, exercise of the said options is
reasonable and if all of the options are exercised (see Note
7E (1) (2)), the Company will sustain a loss from decline in
the holdings' percentage, in the amount of US$ 2 million. The
financial statements include a provision for this amount.
Note 8 - Long-Term Investments, Loans and Receivables
A. Composition
Consolidated Company
----------------------------- ------------------------------
December 31 December 31 December 31 December 31
2004 2003 2004 2003
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Long-term investments, loans and
receivables [B(1)] 23,265 18,349 - -
Bank deposits [B(2)] - - 19,016 29,101
------------- ------------- ------------- -------------
23,265 18,349 19,016 29,101
Net of allowance for doubtful debts 1,500 1,500 - -
------------- ------------- ------------- -------------
21,765 16,849 19,016 29,101
Less - current maturities 420 380 - -
------------- ------------- ------------- -------------
21,345 16,469 19,016 29,101
Other investments [B(3)] 725 1,575 - -
------------- ------------- ------------- -------------
22,070 18,044 19,016 29,101
============= ============= ============= =============
B. Additional information
(1) Long-term investments, loans and receivables
--------------------------------------------
A. Linkage terms and interest rates
Consolidated
-------------------------------
December 31 December 31
2004 2003
------------- -------------
US$ thousands US$ thousands
------------- -------------
In Israeli currency - not linked 2,353 -
In dollars 1,710 5,485
In Brazilian reals 15,715 7,699
In Argentine pesos 2,352 4,319
Other foreign currency 1,135 846
------------- -------------
23,265 18,349
============= =============
The above investments, loans and receivables are non-interest bearing.
F-171
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 8 - Long-Term Investments, Loans and Receivables (cont'd)
B. Additional information (cont'd)
(1) Long-term investments, loans and receivables (cont'd)
--------------------------------------------
B. Maturities
The investments, loans and receivables mature as follows:
US$ thousands
-------------
First year (current maturities) 420
-------------
Second year 6,333
Third year 2,865
Fourth year 2,180
Fifth year 662
With no defined repayment date *10,805
-------------
22,845
-------------
23,265
=============
* Including restricted deposits and other assets in the amount of
$5.3 million.
(2) Bank deposits
------------
Company
Interest rate --------------------------------
as at balance December 31 December 31
sheet date 2004 2003
------------- ------------- -------------
% US$ thousands US$ thousands
------------- ------------- -------------
Dollar deposits 4.0 10,711 20,799
Dollar deposits 5.1 8,305 8,302
------------- -------------
19,016 29,101
============= =============
During the years 2001 and 2000, the Company made deposits in
a Brazilian bank in the amount of US$ 8,300 thousand and US$
45,600 thousand, respectively, for a five-year period. Such
deposits serve as sole security for loans taken out by a
subsidiary from the same bank and in the same amounts. The
loans are in dollars, bear interest at the rate of 5.3% and
3.5% p.a. and are scheduled to be repaid in 2006 and 2005,
respectively. The Company and the subsidiary are able to
realize the deposit and make early repayment of the loan on
certain dates as provided in the agreement.
In September 2003, the amount of $ 25 million was paid out of
these deposits and in February 2004 the amount of an
additional US$ 10 million was paid out of these deposits.
Concurrently, loans were repaid in the same amount.
In the consolidated balance sheet, the amounts of the
deposits were set-off against the amounts of the loans taken
out by the subsidiary (see Note 14A).
(3) In 1998, the Company entered into an agreement with the
shareholders of Hazera Genetics Ltd. and established a joint
venture intended to function as a venture capital fund for
the investment in companies which are engaged in the field of
agricultural biotechnology. Other investments include the
Group's share (50%) in biotechnology companies. In the year
of account the subsidiary provided the amount of US$ 1.1
million as impairment in value of these investments.
F-172
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------------------------------------------------------
Note 9 - Fixed Assets
A. Composition
Consolidated
Office
Land and Plant and Motor furniture Total
buildings equipment vehicles and equipment
------------- ------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- ------------- -------------
Cost
Balance as at the
beginning of the year 123,345 635,438 4,824 22,809 786,416
Additions net of grants 6,979 26,174 1,101 3,835 38,089
Newly consolidated
company 809 635 587 1,252 3,283
------------- ------------- ------------- ------------- -------------
Disposals (408) (925) (1,513) (398) (3,244)
Balance as at
the end of the year 130,725 661,322 4,999 27,498 824,544
------------- ------------- ------------- ------------- -------------
Accumulated
depreciation
Balance as at the
beginning of the year 44,304 297,561 2,812 14,994 359,671
Additions 4,059 22,717 719 3,132 30,627
Newly consolidated
company 82 264 227 351 924
Eliminated on
disposals (408) (589) (1,158) (262) (2,417)
------------- ------------- ------------- ------------- -------------
Balance as at
the end of the year 48,037 319,953 2,600 18,215 388,805
------------- ------------- ------------- ------------- -------------
Net book value
As at
December 31, 2004 82,688 341,369 2,399 9,283 435,739
------------- ------------- ------------- ------------- -------------
As at
December 31, 2003 79,041 337,877 2,012 7,815 426,745
============= ============= ============= ============= =============
December 31
--------------------------------
2004 2003
------------- -------------
US$ thousands US$ thousands
------------- -------------
Cost of assets includes:
Buildings and development on freehold land 83,289 75,970
Buildings and development on land held under capitalized leases 47,436 47,375
Capitalized financing expenses 19,019 19,019
Fully-depreciated equipment 107,741 106,639
Cost of assets is net of grants received 99,015 98,559
F-173
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 9 - Fixed Assets (cont'd)
B. Additional information
(1) Makhteshim's plants are located on land in Ramat Hovav and in
Beer-Sheva which is leased from the Israel Lands
Administration. The leasehold periods terminate between 2018
and 2029 with renewal options. The leasehold rights have not
yet been registered in the name of Makhteshim in the Israel
Land Registry. (The legal advisors of Makhteshim are
attending to the registration).
Agan's plant is located on freehold land of approximately 121
dunams in Ashdod, of which 90 dunams are registered in the
name of Agan in the Land Registry with the remaining area of
approximately 30 dunams, which was acquired in 1996,
currently undergoing the registration process.
Plants of foreign investee companies are constructed on
freehold land.
(2) Regarding liens - see Note 20.
Note 10 - Other Assets and Deferred Charges
A. Composition:
Consolidated
December 31, 2004
--------------------------------------------------
Accumulated Unamortized
Cost amortization balance
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Product registration and acquisition of know-how 265,719 110,206 155,513
Goodwill on acquisition of subsidiaries 153,963 51,489 102,474
Intangible assets on purchase of products 281,223 41,186 240,037
Marketing rights 36,099 10,705 25,394
Debenture issuance expenses 3,730 1,272 2,458
Non-competition and confidentiality agreement 2,576 1,032 1,544
------------- ------------- -------------
743,310 215,890 527,420
============= ============= =============
December 31, 2003
--------------------------------------------------
Accumulated Unamortized
Cost amortization balance
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Product registration and acquisition of know-how 178,855 94,483 81,386
Goodwill on acquisition of subsidiaries 111,056 37,093 73,963
Intangible assets on purchase of products 281,223 23,063 258,160
Marketing rights 36,099 7,870 31,215
Debenture issuance expenses 2,466 848 1,618
Non-competition and confidentiality agreement 2,576 516 2,060
------------- ------------- -------------
612,275 163,873 448,402
============= ============= =============
F-174
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------------------------
Note 10 - Other Assets and Deferred Charges (cont'd)
Company
December 31, 2004
--------------------------------------------------
Accumulated Unamortized
Cost amortization balance
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Debenture issuance expenses 3,730 1,272 2,458
============= ============= =============
December 31, 2003
--------------------------------------------------
s Accumulated Unamortized
Cost amortization balance
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Debenture issuance expenses 2,466 848 1,618
============= ============= =============
B. Additional details
1. In October-November 2002, subsidiaries, which are
wholly-controlled by the Company, signed a number of
agreements with Bayer Crop Science AG for acquisition of a
number of products, licenses and distribution rights in the
area of vegetation protection. The total consideration for
acquisition of the products amounted to US$ 185.3 million,
which is presented in the "other assets and deferred
expenses" category.
Approximately US$ 34.6 million of the consideration was
allocated to acquisition of permits and licenses in
connection with the products and is amortized over a 20-year
period in the "selling and marketing expenses" category, and
approximately US$ 144.1 million was allocated to acquisition
of the products in the framework of a "going concern", which
constitutes goodwill on the acquisition of products, and
which is amortized over a 20-year period in the "other
expenses" category.
The consideration in respect of acquisition of the marketing
and distribution rights, in the amount of US$ 6.6 million, is
being amortized over a period of 6-8 years.
2. In 2001, fully controlled subsidiaries of the Company signed
agreements with Aventis and Syngenta A.G. for the purchase of
four new agrochemical products as well as the purchase of
marketing and distribution rights of a product package in the
Scandinavian countries. One of the products which was
purchased is still protected by patents which were
transferred to the purchasing company.
The total price paid for purchase of the four products
totaled US$105 million, and it is included in the "other
assets and deferred charges" category. Of the amount paid,
US$20 million was attributed to registration costs and
licensing, which are amortized over a period of 20 years in
the "selling and marketing expenses" category, US$2.5 million
was attributed to the purchase of agreements with third
parties, which is amortized over a period of 10 years, and
the balance of the amount was attributed to the purchase of
the product as a going concern which includes: intellectual
rights, trade name, brand name, technological know-how,
information on customers and suppliers of materials, etc.,
which constitutes goodwill on the purchase of the products
and is amortized over a period of 20 years under other
expenses. The price of the marketing and distribution rights
was US$5 million and is amortized over a period of 9 years.
F-175
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 10 - Other Assets and Deferred Charges (cont'd)
B. Additional details (cont'd)
3. Regarding goodwill and other assets created in the framework
of acquisition of companies during the period of the report,
see Note 7D.
4. In connection with a non-competition and confidentiality
agreement with the former CEO of Milenia, see Note 30A(4).
Note 11 - Short-term Credit from Banks
A. Composition
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Credit from banks
Overdrafts 55,613 54,656 - -
Short-term loans 57,366 24,946 - -
------------- ------------- ------------- -------------
112,979 79,602 - -
Current maturities of long-term loans 27,042 63,215 - 4,500
------------- ------------- ------------- -------------
140,021 142,817 - 4,500
============= ============= ============= =============
B. Linkage terms and interest rates
Consolidated Company
-------------------------------- --------------------------------
Weighted December 31 December 31
interest rate -------------------------------- --------------------------------
at balance 2004 2003 2004 2003
sheet date ------------- ------------- ------------- -------------
% US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- ------------- -------------
Credit from banks
Overdrafts:
----------
In Israeli currency 1.8 2,892 543 - -
In US dollars 4.0 39,272 33,996 - -
In Euro 4.5 11,350 17,228 - -
In Brazilian currency 16.9 1,814 2,408 - -
In other currencies 285 481 - -
------------- ------------- ------------- -------------
55,613 54,656 - -
------------- ------------- ------------- -------------
Short-term credit:
-----------------
In Euro - 1,807 - -
In dollars (1) 3.5 51,677 18,895 - -
In other currencies 4.7 5,689 4,244 - -
------------- ------------- ------------- -------------
57,366 24,946 - -
------------- ------------- ------------- -------------
112,979 79,602 - -
============= ============= ============= =============
(1) The loans mainly bear variable interest at an annual rate of between 0.8% and 1.7% above the LIBOR.
C. Regarding collateral - see Note 20A.
F-176
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------------------------------------------------
Note 12 - Trade Payables
Consolidated
December 31
--------------------------------
2004 2003
------------- -------------
US$ thousands US$ thousands
------------- -------------
Open accounts 325,770 242,795
Checks payable 175 275
------------- -------------
325,945 243,070
============= =============
Note 13 - Other Payables
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Salaries and payroll accruals 32,591 29,852 2,627 4,550
Accrued income taxes, net of
advance payments 38,047 17,819 - -
Government agencies 5,804 7,058 142 327
Subsidiaries - current account - - 33 56
Liability for securities sold short (1) 5,627 15,418 - -
Payables in respect of currency
transactions 9,608 9,956 - -
Accrued expenses and deferred
income 63,672 34,180 3,209 687
Payables in respect of acquisition
of subsidiary 6,500 6,300 - -
Others 30,556 29,958 749 753
------------- ------------- ------------- -------------
192,405 150,541 6,760 6,373
============= ============= ============= =============
(1) Subsidiary borrows marketable bonds from a bank for purposes
of the short sale thereof. The borrowing period is three
months, which is renewed every three months subject to the
lender's agreement.
The subsidiary's liability in respect of the bonds borrowed,
is presented based on the market value of the bonds as at the
balance sheet date.
F-177
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------------------------------------------------
Note 14 - Long-Term Loans from Banks
A. Composition
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Loans from banks* 120,065 332,448 - 16,875
Less - current maturities 27,042 63,215 - 4,500
------------- ------------- ------------- -------------
93,023 269,233 - 12,375
============= ============= ============= =============
* After the deduction of an
investment in bank deposits (see
Note 8B2) in the amount of: 19,016 29,101 - -
============= ============= ============= =============
B. Linkage terms and interest rates
Consolidated Company
-------------------------------- --------------------------------
Weighted December 31 December 31
interest rate -------------------------------- --------------------------------
at balance 2004 2003 2004 2003
sheet date ------------- ------------- ------------- -------------
% US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- ------------- -------------
In US dollars 3.6 103,124 313,148 - 16,875
In Euro 3.5 9,189 9,396 - -
In Israeli currency 7.4 1,548 2,633 - -
In other foreign
currency 5.2 6,204 7,271 - -
------------- ------------- ------------- -------------
120,065 332,448 - 16,875
============= ============= ============= =============
* Most of the loans bear interest at the Libor rate plus a margin.
C. Maturities
Consolidated
-------------
US$ thousands
-------------
First year - current maturities 27,042
Second year 51,015
Third year 19,282
Fourth year 11,830
Fifth year 5,896
Sixth year and thereafter 5,000
-------------
120,065
=============
F-178
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 14 - Long-Term Loans from Banks (cont'd)
D. Regarding the commitment of the Company and certain
subsidiaries to banks, to maintain certain financial
criteria, mainly, debt-equity and profitability ratios - see
Note 20C.
E. Collaterals - see Note 20A.
Note 15 - Convertible Debentures
A. Presented in the "long-term liabilities" category
-------------------------------------------------
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Debenture principal 150,000 - 150,000 -
============= ============= ============= =============
1. In March 2004, the Company issued, as part of a private
issuance to institutional investors (mainly overseas),
non-marketable convertible debentures, in the amount of
US$ 150 million par value (including US$ 5 million which
was issued to the underwriters in April 2004), in
exchange for their par value. The period of the
debentures is 7 years and they bear annual interest at
the rate of 1.75%, which is to be paid once a year, in
March. The debentures may be converted into ordinary
registered shares of NIS 1 par value each, at a
conversion rate of NIS 20.5 par value, based on a fixed
rate of exchange of US$1 = NIS 4.514. The ordinary
shares to be issued as a result of conversion of the
debentures shall be registered for trading on the
Tel-Aviv Stock Exchange.
The owners of the debentures shall have the right to
demand payment of the debentures (principal and interest
up to that date) on March 22, 2007, by means of advance
written notice (which is given 30-60 days prior to March
22, 2007).
The Company shall have the right to execute a forced
conversion of the debentures commencing on March 22,
2007, this being so long as the average price per
Company share in the period of 20 business days which
preceded its notification of forced conversion, shall be
at least 30% higher than the price of the conversion
rate of the debentures.
The Company committed to the debenture purchasers that
it would refrain from creating additional liens on its
property, the purpose of which is the guarantee of
marketable securities or other securities which the
Company intends to register for trading.
The total issuance expenses with respect to the
aforementioned debentures amounted to US$ 2.5 million.
2. As at the balance sheet date, conversion of the said
debentures is not expected and, accordingly, they
are presented in the balance sheet as part of the
"long-term liabilities" category.
F-179
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 15 - Convertible Debentures (cont'd)
B. Presented in a separate category between "long-term liabilities"
and "shareholders' equity"
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Debenture principal 39,474 81,950 39,474 81,950
Discount balance, net (1,152) (4,245) (1,565) (4,658)
------------- ------------- ------------- -------------
38,322 77,705 37,909 77,292
============= ============= ============= =============
1. In November 2001, convertible debentures and options were
issued pursuant to a prospectus, as follows:
NIS 270,000,000 par value registered debentures (Series A)
offered at 90% of the par value, repayable in a lump-sum
payment on November 20, 2007, bearing interest at the
annual rate of 2.5% and linked (interest and principal) to
the representative exchange rate of the dollar. On any
trading day, commencing with the registration date of the
debentures (Series A) for trading on the stock exchange and
up to and including October 31, 2007, the debentures
(Series A) are convertible into fully paid-up ordinary
registered shares of NIS 1 par value each, based on a
conversion rate of NIS 10.68 par value debentures (Series
A) for one ordinary share of NIS 1 par value.
As a result of dividend distributions, the conversion rate
was updated and, as at the balance sheet date, it stands at
NIS 10.03 par value.
18,000,000 registered options (Series 1), exercisable for
18,000,000 ordinary shares of NIS 1 par value each of the
Company, on any trading day, commencing with the
registration date thereof for trading on the stock exchange
and up to and including November 20, 2005, such that every
option (Series 1) may be exercised for one ordinary share
of NIS 1 par value (subject to adjustments), against a cash
payment of the exercise price of NIS 10.68, linked to the
representative exchange rate of the dollar. In any case,
the exercise price will not be less than NIS 10.68. An
option (Series 1) which is not exercised up to and
including November 20, 2005, will be invalid and will not
convey to its holder any right vis-a-vis the Company.
As a result of dividend distributions, the exercise price
was updated and, as at the balance sheet date, it stands at
NIS 10.03
The securities were offered to the public in 1,200,000
units by means of a tender on the unit price, where the
composition of each unit is NIS 225 par value of debentures
(Series A) at the price of 90% of their par value (NIS
202.5) and 15 options (Series 1) for no consideration. The
total minimum price per unit was NIS 202.5.
The price per unit determined as part of the tender was NIS
220. Taking into account the economic value of the options
(Series 1) the discount rate with respect to the debentures
(Series A) is 9.3%. The gross consideration received in the
issuance is US$ 62.5 million, of which US$ 58.5 million was
attributed to the debentures (Series A) and US$ 4.0 million
was attributed to the options (Series 1).
F-180
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 15 - Convertible Debentures (cont'd)
B. Presented in a separate category between "long-term
liabilities" and "shareholders' equity" (cont'd)
------------------------------------------------
2. In January 2002, the Company issued to investors, as part
of a private placement, NIS 133,980 thousand par value
convertible debentures (Series A), at a price of NIS 1.015
for NIS 1 par value of debentures (Series A), for an
aggregate consideration of US$ 29.5 million. The terms of
the convertible debentures (Series A) are identical to the
terms of the debentures (Series A), issued by the Company,
as stated in Section A., above.
3. In June 2002, a subsidiary acquired on the stock exchange,
approximately NIS 16,684 thousand par value of debentures
(Series A), for a consideration of US$ 3.2 million. The
difference between the acquisition cost and the liability
value of the debentures acquired on the books, in the
amount of US$ 0.4 million, was recorded as a capital
reserve in the shareholders' equity section. During June
2003, all the above-mentioned debentures were sold for a
consideration of US$ 4.3 million.
4. In 2003, NIS 57,660,575 par value of debentures (Series A)
were converted into 5,565,649 ordinary shares of NIS 1 par
value, the majority at a conversion rate of NIS 10.36 par
value debentures for one ordinary share of NIS 1 par value.
The total share capital issued as a result of the
conversion is US$ 1,270 thousand, with a premium of US$
11,331 thousand.
In the year of account, NIS 179,607,707 par value of
debentures (Series A) were converted into 17,582,221
ordinary shares of NIS 1 par value, at a conversion rate of
NIS 10.03-10.36 par value debentures for one ordinary share
of NIS 1 par value. The total share capital issued as a
result of the conversion is US$ 3,974 thousand, with a
premium of US$ 35,581 thousand. Subsequent to the balance
sheet date and proximate to the date of authorization of
the financial statements, NIS 12,839 thousand par value of
debentures (Series A) were converted into 1,280 thousand
ordinary shares of NIS 1 par value.
5. As at the balance sheet date, conversion of the said
debentures is expected and, accordingly, they are presented
in the balance sheet in a separate category between the
"long-term liabilities" and the "shareholders' equity"
sections based on their liability value.
F-181
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 16 - Other Long-Term Liabilities
Consolidated
Linkage terms and interest rates
Weighted
interest rate
as of balance December 31
sheet date ------------------------------
------------- 2004 2003
% US$ thousands US$ thousands
------------- ------------- -------------
Liabilities linked
to the US dollar 2 9,195 400
Liabilities linked
to the Brazilian Real - 1,880
Liabilities linked to
another currency 4.5 142 190
------------- -------------
9,337 2,470
============= =============
The liabilities are schedule for repayment in the years 2006 - 2008.
Note 17 - Taxes on Income
A. Benefits under the Law for the Encouragement of Capital Investments,
1959
The plants of the subsidiaries in Israel have been granted "Approved
Enterprise" status under the Law for the Encouragement of Capital
Investments, 1959. Part of the income deriving from the approved
enterprises during the benefit period is subject to tax at the rate of
25% (the total benefit period is for seven years and in certain
circumstances ten years, but does not exceed beyond either 14 years from
the date of the letter of approval or 12 years from the date the approved
enterprise commenced operations).
Other plants of subsidiaries in Israel are entitled to a tax exemption
for periods of between two and six years and a reduced tax rate of 25%
for the remainder of the benefit period. Should a dividend be distributed
from the tax-exempt income, the subsidiaries will be liable to pay tax on
the income from which the dividend was distributed at a rate of 25%.
The benefit period has ended for some of the plants of the subsidiaries
and the benefit period for others will end during years up to 2008. In
addition, subsidiaries have other investment programs in progress, or for
which the benefit period with respect thereto has not yet commenced.
The abovementioned benefits are conditional upon compliance with certain
conditions specified in the Law and related Regulations, and in the
letters of approval, in accordance with which the investments in the
approved enterprises were made. Failure to meet these conditions may lead
to cancellation of the benefits, in whole or in part, and to repayment of
any benefits already received, together with interest. Management
believes that the companies are complying with these conditions.
B. Benefits under the Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes) 1969, the Company
is an industrial holding company and the subsidiaries in Israel are
"industrial companies". The main benefit under this law is the filing of
consolidated income tax returns. The Company files a consolidated income
tax return with Makhteshim.
F-182
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 17 - Taxes on Income (cont'd)
C. Taxation under inflationary conditions
The Company and its subsidiaries in Israel are subject to the Income
Tax Law (Inflationary Adjustments), 1985. Under this Law, the results
for tax purposes are adjusted principally for the changes in the
Consumer Price Index. The financial statements are presented in US
dollars.
D. Benefits for development areas
A subsidiary is subject to the Income Tax Regulations (Tax Reductions
in Certain Settlements and Agriculture-based Army Units ("Nahal")),
1978. Under these Regulations, the subsidiary is entitled to an
additional deduction, at the rate of 25% of the tax depreciation
claimed in respect of the plants constructed in Ramat Hovav.
These Regulations were in effect until December 31, 2003.
E. Foreign subsidiaries
The subsidiaries are assessed according to the tax laws applicable in
the respective countries where these subsidiaries operate.
F. Change in tax rate
On June 29, 2004, Income Tax Ordinance Amendment (No. 140 and
Temporary Order), 2004 (hereinafter - "the Amendment") passed the
second and third reading in the Israeli Knesset. The Amendment
provides that the Companies Tax rate shall be gradually reduced,
commencing from January 1, 2004 from 36% to 30% in the following
manner: in 2004 - 35%, in 2005 - 34%, in 2006 - 32% and in 2007 and
thereafter - 30%.
G. Deferred taxes
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
(1) Movement
Balance at beginning
of year 33,522 30,289 (6,250) (3,743)
Included in statement
of income (163) 3,233 (749) (2,507)
Newly consolidated 3,958 - - -
------------- ------------- ------------- -------------
Balance at end of year 37,317 33,522 (6,999) (6,250)
============= ============= ============= =============
Classified as:
Other receivables (17,037) (10,256) (325) (5,155)
Long-term liabilities (in the
balances of the long-term
debt) 54,354 43,778 (6,674) (1,095)
------------- ------------- ------------- -------------
37,317 33,522 (6,999) (6,250)
============= ============= ============= =============
F-183
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 17 - Taxes on Income (cont'd)
G. Deferred taxes (cont'd)
(2) Composition
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Deferred taxes in respect of:
Depreciable assets 81,606 81,876 - -
Carryforward tax losses (19,864) (33,233) (5,343) (4,077)
Inventories (17,615) (7,124) - -
Employee severance
benefits, net (11,467) (11,142) (1,656) (2,097)
Other temporary
differences 699 3,145 - (76)
Newly consolidated 3,958 - - -
------------- ------------- ------------- -------------
37,317 33,522 (6,999) (6,250)
============= ============= ============= =============
In the consolidated balance sheet, deferred taxes are computed at rates ranging between
approximately 29% and 35% (Company - 29%).
H. Composition of tax expense (benefit)
Consolidated
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Taxes in respect of the reported period:
Current 51,228 24,702 10,334
Deferred (3,034) 3,173 4,371
48,194 27,875 14,705
Taxes in respect of prior years:
Current 1,269 4,683 (4,793)
Deferred 2,871 60 2,546
4,140 4,743 (2,247)
------------- ------------- -------------
52,334 32,618 12,458
============= ============= =============
F-184
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 17 - Taxes on Income (cont'd)
H. Composition of tax expense (benefit) (cont'd)
Company
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Current 2 29 -
Deferred (749) (2,507) 214
------------- ------------- -------------
(747) (2,478) 214
------------- ------------- -------------
I. Theoretical tax
Following is a reconciliation between the theoretical tax and the tax
expense included in the statement of income:
Consolidated
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
35% 36% 36%
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Tax expense computed at regular tax rate 76,608 49,030 26,266
Tax benefit for approved enterprises (10,203) (3,727) (5,985)
Benefit for plants in development areas - (2,109) (1,723)
Difference between financial statement
measurement of income and tax basis 2,559 (4,868) 4,388
Change in rate of deferred taxes (1,912) 2,384 -
Income taxable at other tax rates (20,732) (14,490) (9,672)
Taxes in respect of previous years 4,140 4,743 (2,247)
Nondeductible expenses and other differences 1,874 1,655 1,431
------------- ------------- -------------
52,334 32,618 12,458
============= ============= =============
Company
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
35% 36% 36%
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Tax expense computed at regular tax rate 57,673 36,107 21,705
Difference between financial statement
measurement of income and tax basis 353 166 166
Equity in earnings of investee companies, net (57,192) (37,446) (21,486)
Nondeductible expenses and other differences (1,581) (1,305) (171)
------------- ------------- -------------
(747) (2,478) 214
============= ============= =============
F-185
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 17 - Taxes on Income (cont'd)
J. Final assessments
The Company, Makhteshim, Agan and Lycored have received final tax
assessments up to and including the 2001 tax year. Luxembourg and
Bio-Dar Ltd. have received final tax assessments up to and including
1998. Other companies in Israel have not received tax assessments
since their inception.
K. Losses and deductions available for carryforward to future years
As at the balance sheet date, the losses for tax purposes which are
available for carryforward to future tax years, amount to US$ 66
million.
The Company has recorded a deferred tax asset with respect to the
accrued losses, in the amount of US$ 19.9 million, based on
Management's estimation that there is a high level of certainty that
such losses will be utilized in the upcoming years.
L. Additional Information
Regarding fiscal claims against Milenia - see Note 19D(3).
Note 18 - Employee Termination Benefits, Net
A. Composition
Consolidated Company
-------------------------------- --------------------------------
December 31 December 31
-------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Accrued severance pay and
retirement grants 26,576 23,831 4,591 3,911
Less - deposits in severance pay funds 15,957 13,763 - -
------------- ------------- ------------- -------------
10,619 10,068 4,591 3,911
Early retirement pension 13,248 12,399 - -
Accrual for unutilized sick leave 2,842 2,307 - -
------------- ------------- ------------- -------------
26,709 24,774 4,591 3,911
============= ============= ============= =============
F-186
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 18 - Employee Termination Benefits, Net
B. Severance pay and retirement grants
The Company and its subsidiaries in Israel make regular deposits with
"Nativ" (the Pension Fund of the Workers and Employees of the
Histadrut Ltd.) and insurance companies. These deposits are intended
to provide employees with pension rights or severance pay upon
reaching retirement age. Amounts deposited in the pension fund and
insurance companies are not included in the balance sheet because they
are not under the management or control of the companies.
Employees dismissed before attaining retirement age are eligible for
severance benefits, computed on the basis of their most recent salary.
Where the amounts accumulated in the pension fund are not sufficient
to cover the computed severance benefits, the companies will cover the
difference. Experience has shown that the majority of salaried
employees continue to work until retirement age and the companies have
not been required to cover substantial differences in severance pay to
employees who retire prior to reaching retirement age. Management of
the Company and the subsidiaries accordingly believe that it is
unlikely that it will be necessary to cover such differences and
therefore no accrual has been made in the financial statements.
In addition to their abovementioned pension rights, employees are
entitled to receive retirement grants at the rate of 2.33% of their
salary at retirement age. The accrual in the balance sheet covers the
companies' obligations with regard to these retirement grants, as well
as their liability to pay severance benefits to some of their
employees for the period prior to the date on which these employees
joined the pension plan, during which period no deposits had been made
in the fund in the name of the employee.
C. Deposits with severance pay fund and retirement grants
The deposits in the severance pay funds include accrued linkage
differences and interest and are made in severance pay funds with
banks and insurance companies. Withdrawal of the amounts on deposit is
contingent upon the fulfillment of the provisions set forth in the
Severance Pay Law.
D. Compensation for unutilized sick leave
The financial statements include an accrual for compensation in
respect of unutilized sick leave for employees who are 55 and older.
No accrual is made in respect of employees under the age of 55 as it
is uncertain as to whether or not they will receive such compensation
(by reason of utilization of sick leave or early retirement). The
accrual is computed, using the latest wage rates, on the basis of
eight work days for each year of employment in which sick leave was
not utilized.
E. Early retirement pension
The financial statements include a provision for payment of pension
benefits to a number of employees whose work was terminated before
they reached retirement age. The provision was calculated by reference
to the period from the time their work was terminated until the date
stipulated in the agreement, on the basis of the present value of the
pension payments (the interest rate used in the present value
calculation was 3.6% per annum).
At the beginning of 2004, the Knesset passed a law according to which
the Articles of Association for pension funds were changed, such that
the retirement age will be gradually raised for men from 65 to 67 and
for women from 60 to 62.
In the estimation of Company Management, the above-mentioned law will
have no effect on the Company's liabilities for early retirement in
connection with its employees who left prior to reaching retirement
age.
F-187
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities
A. Commitments
(1) The Articles of Association of the Company and its
subsidiaries permit, subject to the governing companies'
laws, including the provision of the Companies Law,
indemnification and insurance of the responsibilities of
directors and officers therein, provided that if the Company
decides to provide advance indemnification, the amount of
such indemnification shall be limited to 25% of the Company's
shareholders' equity as at the date the indemnification is
granted.
(2) Liability of directors and officers of the Company and its
subsidiaries is insured as part of a policy. The limit of the
insured responsibility is US$ 100 million. The directors who
were insured within the policy include all of the Company's
directors as well as the directors of the subsidiaries.
(3) A subsidiary has a long-term supply contract with an
international company in the annual amount of US$ 17 million
for a five-year period (2001 - 2006). Based on the contracts,
a multi-national company participates in part of the
manufacturing costs.
(4) Regarding undertakings of the Company and its subsidiaries as
part of a securitization transaction - see Note 3(1).
(5) Regarding undertakings with interested parties - see Note
30A.
B. Contingent liabilities
(1) In accordance with the Law for the Encouragement of Capital
Investments, 1959, subsidiaries received grants from the
State of Israel in respect of investments made in fixed
assets as part of plant expansion projects authorized by the
Investment Center. Receipt of grants is conditional upon
fulfillment of the terms of the letter of approval which
include, among other things, exports at certain rates. If the
companies do not comply with the required terms, the grants
will have to be refunded, together with interest from the
date of their receipt. Management believes that the
subsidiaries are in compliance with the conditions for
approval.
(2) In accordance with the Law for the Encouragement of Research
and Development in Industry, 1984, subsidiaries received
grants from the State of Israel in respect of their research
and development expenses incurred on projects approved by the
Industrial Research and Development Administration. Receipt
of the grants is conditional upon compliance with the terms
of the letter of approval which include, among other things,
the payment of royalties to the State at rates of between
2%-3.5% of the sales of products, up to the amount of the
State's participation.
The balance of the State's participation in the companies'
research and development expenses (net of royalties paid in
respect thereof), after deduction of participations in
expenses of unsuccessful research projects which were
abandoned, amounts to approximately US$ 6 million.
F-188
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities (cont'd)
B. Contingent liabilities (cont'd)
(3) The Company has undertaken to indemnify the economic
consultants who determined the exchange ratio for the
Arrangement (see Note 1B) for reasonable expenses that they
may be required to pay for legal consultation and
representation in the event that legal proceedings are
brought against them in connection with their opinion. In
addition, the Company will indemnify the economic consultants
for any damages payable in consequence of legal proceedings
which exceed US$ 1.5 million. The Company shall not be liable
to indemnify the economic consultants if it is determined
that they acted with gross negligence or willful misconduct
in connection with their opinion.
(4) A subsidiary has an agreement pursuant to which it will pay
royalties at the rate of 4% of sales, with certain reductions
stated in the agreement, with respect to a product whose
development rights were acquired by the subsidiary, for a
period of 10 years beginning from the year 2000, the date on
which sales of the product to outsiders reached the level of
sales stipulated in the agreement. Under certain conditions,
the royalties may be reduced to a rate of not less than 2%.
(5) In Israel the Stamp Duty on Documents Law - 1961 (hereinafter
- the Law) applies to various documents at various rates,
according to the type of the document and the amount
specified or not specified in it. In June 2003 Section 15A of
the Law regarding the identity of those required to pay stamp
duty was amended.
Beginning from June 2003 the Israeli Tax Authorities
increased enforcement of the law. The amendment to the Law
and the enforcement measures taken by the Tax Authorities
were raised for discussion at the Supreme Court, which has
not yet established its opinion on the matter. Furthermore,
in accordance with legislative trends it is anticipated that
the Stamp Duty Law will be gradually annulled and that by
2008 it will be completely annulled.
In August 2004 the Customs and VAT Department requested from
a subsidiary to produce documents the company had signed
after June 1, 2003. The Customs and VAT Department contends
that the Law requires the payment of stamp duty on the
requested documents. Furthermore, the company was issued a
stamp duty notice with respect to a document it had signed
with a third party.
In the opinion of management of the Company, which is based
on the opinion of its legal counsel, the Company does not
stand before any material exposure in respect of any demand
arising from the Stamp Duty Law.
F-189
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities (cont'd)
C. Environmental quality
(1) The operations of the Company and of its investee companies
are exposed to risks related to environmental contamination,
since they produce, store and sell chemicals. The Group
invests substantial sums in order to comply with
environmental laws and regulations, and management believes
that the Group companies are in compliance with those laws.
In accordance with the estimate of the Company's insurance
experts, the Group insurance policies cover any sudden,
unexpected environmental contamination caused in Israel and
the rest of the world, subject to the conditions of the
relevant policies. As at December 31, 2004, the Group did not
have any coverage against ongoing environmental
contamination. Such insurance is difficult to obtain, and in
cases when it can be obtained, the Company believes that the
terms of the policy, including the amount of the insurance
coverage, do not presently justify obtaining such a policy.
(2) Pursuant to an agreement with the Ministry of Environmental
Protection, subsidiaries decided to construct facilities for
the biological treatment of waste. Construction of the
facility will take about 3 years. In the estimation of the
subsidiary's management, the aggregate construction cost will
be between US$ 30 million and US$ 40 million.
(3) One of the subsidiary's plants, together with other chemical
plants, was constructed in Ramat Hovav, since the Government
of Israel determined that the location was suitable for
chemical plants as it was assumed that the layers of the soil
in that area were absolutely sealed against penetration by
liquid discharges or contamination. The Ministry of
Environmental Protection conducted tests as a result of which
it was reported that data exist indicating subterranean
contamination in Ramat Hovav. The inspectors recommended that
steps be taken to prevent further leakage from active and
dormant installations which are likely to constitute a source
of contamination of the subterranean water in the region.
The subsidiary may be required to clean up the relevant areas
or subterranean layers if and when it is found that the
subsidiary is responsible for the said contamination. Over
the past several years various tests have been performed by
different agencies to test the ground contamination in the
Ramat Hovav area as well as the area surrounding the
subsidiary's premises in Be'er Sheva. In the opinion of
Company Management, no material consequences on the financial
statements are expected due to application of the
recommendations deriving from the said examinations.
(4) In May 2004, a subsidiary and other factories in the Ramat
Hovav area received a notification of a change in the terms
of the license, according to which the factories will be
required to treat their waste, in contrast with the current
treatment, independently and through application of
evaporation procedures, in the framework of which the
factories are required to perform within a short time,
research and development for purposes of conformance of the
procedures to the composition of each factory's waste, and
later on to construct an appropriate facility, as well as
application of formulation procedures, in the framework of
which the factories are required to present research and
development plans to the Ministry for purposes of application
of the procedures with respect to the waste. At the same
time, the Ministry of Environmental Protection set a date by
which the factories are required to treat their waste in the
required format and to stop the flow of waste into the
evaporation pools and the waste treatment facilities of the
Council.
F-190
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities (cont'd)
C. Environmental quality (cont'd)
(4) (cont'd)
On October 10, 2004, the subsidiary, together with the
Israeli Union of Industrialists and other companies, filed an
administrative petition with the District Court of Be'er
Sheva against the Ministry of Environmental Protection. The
subject of the petition is in respect of the additional
conditions for receipt of a business license that were
imposed on the petitioning factories in May 2004 that deal
with treatment and removal of waste accumulated as a result
of their operations.
As part of the petition, the Court was requested to issue an
order declaring that the additional conditions are null and
void.
On December 29, 2004, a preliminary hearing was held with
respect to the petition and it was determined that the
hearing on the petition will be held on March 7, 2005.
In the estimation of Company Management, based on the advice
of its legal advisors, in light of the early stage of the
proceedings, it is not possible at this stage to predict the
chances of the administrative petition succeeding.
In the Company's estimation, if the petition is rejected,
such rejection will have a material impact on the activities
of the factory in Ramat Hovav and/or investments will be
required, the scope of which the Company is unable to
estimate at this point.
(5) On November 28, 2004, a Government decision was received that
approves a plan in connection with reduction of damaging air
and water pollution agents deriving from the Ramat Hovav
area.
A. Treatment of Factory Waste
--------------------------
1. By June 30, 2006, flow of the untreated waste into the
joint biological treatment facility will be
discontinued, and every factory will treat its waste up
to the quality level determined by the Ministry of
Environmental Protection (as determined in additional
terms of the business license from May 2004).
2. By December 31, 2007, flow of the runoff into the
existing evaporation pools will be discontinued, and
every factory will treat its runoff up to the quality
level determined by the Ministry of Environmental
Protection (as determined in additional terms of the
business license from May 2004).
F-191
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities (cont'd)
C. Environmental quality (cont'd)
B. Rehabilitation of the Existing Evaporation Pools
------------------------------------------------
1. From January 1, 2005, the Ramat Hovav Industrial Council
will commence activities to dry out and rehabilitate the
area of the evaporation pools spanning an area of about
1,500 dunams, in an attempt to complete such drying out
and rehabilitation activities no later than the end of
2012.
2. The Ramat Hovav Industrial Council will submit a
detailed plan along with timetables for the drying out
and rehabilitation of the area of the evaporation pools
for approval by the Ministry of Environmental Protection
by December 31, 2004.
C. Treatment of Air Pollution
--------------------------
The Ministry of Environmental Protection will formulate and
operate a plan for prevention of exceptional emissions of
dangerous substances into the air in the Ramat Hovav Industrial
Area.
Regarding the possible consequences of the said Government
decision on the Company's activities, see Section 4, above.
D. Claims against subsidiaries
(1) A claim has been submitted against Milenia on the grounds
that a certain process it uses is a protected trade secret,
which was copied from the plaintiff. Accordingly, Milenia is
demanded to indemnify the plaintiff for unfair competition at
an amount of approximately US$ 9 million (based on a
calculation of the amount of the material used). Furthermore,
the plaintiff demands that Milenia be fined US$ 25 per day,
in respect of the unlawful use of trade secrets.
In February 2004, Milenia and the plaintiff reached a
settlement with no indemnity to the parties, under which each
of the parties paid fees to their own attorneys. The total
cost to Milenia amounted to approximately US$ 0.2 million.
(2) In 1995, a claim was submitted against Milenia and a number
of other parties for a total amount of approximately US$ 36
million by a group which purchased the rights of two banks
which went bankrupt. The remainder of the claim is being
submitted against Milenia in its capacity as a guarantor for
agricultural cooperatives, which were its former
shareholders.
Milenia's position is that it was excluded from the guarantee
agreement by a later agreement between the bank, the former
shareholders and the other subsidiary of the former
shareholders. A provision of approximately US$ 2 million was
recorded in the financial statements for this claim, based on
a possibility of settlement in due course. Milenia's
position, based on an analysis by their legal advisors, is
that, the provision recorded is sufficient to cover any
probable losses it may have on this case.
F-192
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities (cont'd)
D. Claims against subsidiaries (cont'd)
(3) Administrative proceedings as well as civil and other fiscal
claims have been submitted against Milenia totaling
approximately US$ 48.5 million. Milenia's management believes
based on, inter alia, the opinion of its legal advisors, that
its chances of winning in the administrative proceedings and
successfully defending against the aforesaid claims and
demands, are probable and the provisions included in the
financial statements are sufficient to cover any losses,
which may be incurred as a result of these claims.
(4) A claim was filed against Agan in the District Labor Court,
for payment of approximately US$1 million, in respect of
severance pay. The plaintiff contends that he was a salaried
employee of Agan and that the payments made by Agan to a
company which he owned must be considered his determining
salary for purposes of payment of severance pay. Agan
submitted a statement of defense. In the estimation of Agan's
Management based on the opinion of its legal advisors, the
claim's chances are remote. No provision has been included in
the financial statements in respect of this claim.
(5) A criminal complaint has been filed against Makhteshim and
one of its managers by the Man, Nature and Law Amuta
(Society). In the charge sheet, it is stated that in a number
of cases during 1999-2002, discharges of materials were
measured in the exhaust vents in Makhteshim's factory in
Ramat Hovav in forbidden concentrations which created strong
pollution. Makhteshim does not admit to the allegations
stated in the complaint. In the estimation of Makhteshim and
its legal advisors, in light of the early stage of the
proceedings, it is not possible to predict the results of the
complaint and/or the related exposure and, therefore, no
provision has been recorded in the books in respect thereof.
(6) A number of other claims have been filed against Agan, the
total amount of which is US$ 3.5 million, in respect of
damages which, according to the plaintiffs, were caused due
use of Agan's products, breach of agreement to market a
product, supply of a faulty product, as well as in connection
with additional claims. In Agan's estimation, based on the
opinion of its legal advisors, with respect to some of these
claims the chances of defense are good, while regarding some
of the claims it is not possible, at this stage, to predict
their outcome. Accordingly, no provisions have been recorded
on the books in connection with these claims.
(7) A number of other claims have been filed against Makhteshim,
the total amount of which is US$ 1.4 million, in respect of
damages which, according to the plaintiffs, were caused by,
among other reasons, use of its products as well as a claim
of a supplier which provided the planning work with respect
to construction of the plant in Ramat Hovav.
In Makhteshim's estimation, based on the opinion of its legal
advisors, with respect to some of these claims the chances of
defense are good or the provisions included in the books are
adequate. With respect to claims regarding which it is not
possible, at this stage, to predict their outcome, no
provisions have been included in the financial statements.
F-193
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 19 - Commitments and Contingent Liabilities (cont'd)
E. Guarantees
(1) The Company has guaranteed the liabilities to banks of a
subsidiary without any limitation as to amount. As at the
balance sheet date, the outstanding liabilities of the
subsidiary to the banks totaled US$ 51 million.
(2) The Company has guaranteed the liabilities to banks and
suppliers of subsidiaries, the amount of which as at the
balance sheet date totaled US$ 42 million.
(3) Makhteshim and Agan have guaranteed the liabilities to banks
of subsidiaries in the amount of US$ 15 million.
(4) Foreign suppliers and banks have provided credit lines in the
approximate amount of US$ 137 million to foreign subsidiaries
and to one subsidiary in Israel relying upon, among other
things, the commitments of Makhteshim and Agan as to their
proper fiscal management and the policies of Makhteshim and
Agan to take steps that will enable those companies to meet
their obligations. The amount of the credit lines utilized as
at December 31, 2004, amounted to approximately US$ 91
million.
(5) The Company and Milenia committed to indemnify financial
institutions, upon the existence of certain conditions, in
respect of credit received by Milenia's customers from those
financial institutions, which were used for repayment of the
debts of such customers to Milenia in respect of its sales to
those customers. The amount of the commitment for
indemnification, as at the balance sheet date, was
approximately US$ 98 million, of which approximately US$ 80
million was a commitment for indemnification of Milenia and
approximately US$ 18 million was a commitment for
indemnification of the Company and Milenia (December 31, 2003
- approximately US$ 85 million, of which approximately US$ 55
million was a commitment for indemnification of Milenia and
approximately US$ 30 million was a commitment for
indemnification of the Company and Milenia).
F-194
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 20 - Liens and Collaterals
A. Following are details of collateralized liabilities to banks:
December 31
2004
US$ thousands
-------------
Current liabilities -
=============
Long-term liabilities (including current maturities) 78,632
=============
As collateral for the above liabilities, a subsidiary has registered a
mortgage on land and buildings, and other subsidiaries have registered
a first degree charge on assets including machinery and equipment,
share capital and intangible assets.
- A foreign subsidiary has deposited with banks, documents for
collection amounting to US$ 17 million and other foreign
subsidiary companies have registered charges on some of their
assets.
- The Company and its Israeli subsidiaries have made
commitments to banks not to register charges on their assets
in favor of other parties, except specific liens for
acquisition of an asset for the benefit of the party
financing the acquisition on certain terms and subject to the
giving of notification to the bank, and except for creation
of liens related to receipt of investment grants, as stated
in Section B, below.
In addition, the Company committed not to transfer or sell
any one of its assets (except for sales in the Company's
ordinary course of business and at customary market terms,
including sale of trade receivables), without obtaining the
bank's written consent in advance, except for the following:
(a) Transfer to a subsidiary which did not create and
will not create general liens and which commits not
to pledge or sell the pledged assets without
obtaining the bank's consent in advance.
(b) Sale or transfer of assets, the value of the
Company's interest in which does not exceed US$20
million for any particular year and provided that
the cumulative value of the total assets to be
transferred or sold will not exceed US$ 60 million.
- Regarding bank deposits which serve as the sole security for
repayment of loans taken by a subsidiary from that bank - see
Note 8B(2).
B. As collateral for the fulfillment of the requirements in
respect of investment grants received (see Note 17A), the
Company and its subsidiaries have registered floating charges
in unlimited amounts on all of their assets and have provided
an unlimited guarantee in favor of the State of Israel.
F-195
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 20 - Liens and Collaterals (cont'd)
C. The Company and it's subsidiary have committed to banks to
maintain financial criteria, the main ones of which are as
follows:
- The ratio of the interest-bearing financial
liabilities to shareholders' equity shall not exceed
1.0.
- The ratio of the interest-bearing financial
liabilities to income before financing expenses,
taxes, depreciation and amortization (EBITDA) shall
not exceed 3.3 (in subsidiary - 4).
- The shareholders' equity will not be less than US$ 720
million.
In the opinion of the management of the Company and it's
subsidiary, as at the balance sheet date the company and it's
subsidiary are in compliance with the aforementioned
financial ratios.
Note 21 - Shareholders' Equity
A. Share capital
December 31
--------------------------------------------------
2004-2003 2004 2003
------------- ------------ ------------
Number of shares
--------------------------------------------------
Authorized Issued and paid-up
------------- -------------------------------
Ordinary shares of NIS 1 par value 500,000,000 402,088,045 377,916,876
============= ============ ============
All of the shares are registered for trading on the Tel Aviv Stock Exchange.
B. Employee stock options
1. On April 23, 2001 (hereinafter - the determining date), the
Company's Board of Directors resolved to grant options to
employees of the Company and to employees of its
subsidiaries. In accordance with this plan, the said
employees will be allotted 17,400,000 option warrants which
are exercisable for up to 17,400,000 ordinary shares of a par
value of NIS 1 each, of the Company, at an exercise price of
US$ 1.882 as at the balance sheet date after adjustments made
to all options due to a dividend distribution (the market
value of a share as of April 22, 2001 was NIS 8.12).
All options warrants are to be issued to a trustee pursuant
to the plan. The options were issued in accordance with
Section 102 of the Income Tax Ordinance and the shares to be
issued on the exercise thereof will be held by the trustee
for a period of at least two years from the date of issuance
of the options.
Eligibility to receive the option warrants, subject to the
terms of the plan, is in three portions, as follows: One
third on the determining date, an additional third after the
elapse of one year from the determining date and the balance
after the elapse of two years from the determining date.
F-196
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 21 - Shareholders' Equity (cont'd)
B. Employee stock options (cont'd)
The options of each portion can be exercised after the elapse
of one year from the date of entitlement, and they expire
after the elapse of five years from the date of the beginning
of the exercise period of each portion.
Pursuant to the option plan, at the time of exercise of the
options the Company will issue shares in a number which
reflects the amount of the monetary benefit inherent in the
option, that is, the difference between the regular price of
a Company share on the exercise date and the exercise price
of the option.
Under this plan, the CEO of the Company will be allotted
1,400,000 option warrants exercisable into 1,400,000 ordinary
shares of a par value of NIS 1 each of the Company, which
constitute 8% of the total amount of options to be granted
under the plan.
In 2003, 7,361,923 options were exercised by Company
employees for 2,551,247 of the Company's ordinary shares of
NIS 1 par value each.
In 2004, 4,159,719 options were exercised by Company
employees for 2,505,938 of the Company's ordinary shares of
NIS 1 par value each.
Subsequent to the balance sheet date and proximate to the
date of authorization of the financial statements,
approximately 262 thousand options were exercised by Company
employees for 171 thousand of the Company's ordinary shares
of NIS 1 par value each.
2. On April 14, 2003 (hereinafter - "the determination date"),
the Company's Board of Directors resolved to adopt an
employee compensation plan for the employees of the Company
and its subsidiaries and for their directors (hereinafter -
"the Plan"), pursuant to which 17,000,000 options will be
issued to the employees, which are exercisable for up to
17,000,000 of the Company's ordinary shares of NIS 1 par
value each, at an exercise price of NIS 7.72 as at the
balance sheet date after adjustments made due to a dividend
distribution (the closing share price of the Company's shares
on the stock exchange on the Determination Date, was NIS 9.13
per share).
All of the options will be issued under Section 102 of the
Income Tax Ordinance. The options issued and the shares
issued upon the exercise thereof, will be held by a trustee
for a period of at least two years from the end of the year
in which the options are issued.
In accordance with the Plan, at the time of exercise of the
options, the Company will issue shares in an amount which
reflects the amount of the monetary benefit implicit in the
options, that is, the difference between the price of an
ordinary share of the Company on the exercise date and the
exercise price of the option.
In the framework of the Plan, Company employees who were
issued options under the Company's prior employee
compensation plan, which was adopted on April 23, 2001
(hereinafter - "the Prior Plan") were offered to convert the
options issued to them under the Prior Plan into 12,180,000
options under the Plan. The offer was not accepted by any of
the Company's employees.
F-197
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 21 - Shareholders' Equity (cont'd)
B. Employee stock options (cont'd)
2. (cont'd)
The right to exercise the options, with respect to offerees
who are not included with those who received options under
the Prior Plan and are converting them to options issued
under the Plan, is in three increments, as follows: one-third
at the end of one year from the Determination Date, an
additional one-third at the end of two years from the
Determination Date and the balance at the end of three years
from the Determination Date. The expiration date of the
options is five years from the beginning of the exercise
period of each increment.
In the framework of the Plan, the former CEO of the Company
was entitled to convert the options issued to him pursuant to
the Prior Plan into 980,000 options pursuant to the Plan,
which are exercisable for up to 980,000 of the Company's
ordinary shares of NIS 1 par value each and which constitute
5.8% of the total options issued in the framework of the
Plan. The Company's former CEO did not convert the options.
In addition, in the framework of the Plan, the Company's CEO
was issued 1,600,000 options which are exercisable for up to
1,600,000 of the Company's ordinary shares of NIS 1 par value
each and which constitute 9.4% of the total options issued in
the framework of the Plan.
In addition, in the framework of the Plan, the Company's
directors were issued a total of 1,800,000 options which
constitute 10% of the total options issued in the framework
of the Plan.
In 2004, 1,420,000 options were distributed to Company
directors and employees.
In 2004, 105,663 options were exercised by Company employees
for 64,746 of the Company's ordinary shares of NIS 1 par
value.
Subsequent to the balance sheet date and proximate to the
date of authorization of the financial statements, Company
employees exercised 8,000 options for 5,000 of the Company's
ordinary shares of NIS 1 par value.
3. Subsequent to balance sheet date, on March 8, 2005, the
Company's Board of Directors resolved to adopt a new stock
option plan for the officers and employees of the Company and
its subsidiaries. Pursuant to the plan they will be issued up
to 20,000,000 options exercisable into up to 20,000,000
ordinary shares of the Company of a par value of NIS 1 each,
of which up to 3,000,000 options will be issued to the
Company's CEO and directors.
Regardless of the aforementioned, the assumption regarding
the full exercise of the options is purely theoretical, since
the offerees that exercise the options will not actually be
issued the full amount of the shares deriving from them, but
only shares in an amount which reflects the amount of the
monetary benefit implicit in the options, that is, the
difference between the price of an ordinary share of the
Company on the exercise date and the exercise price of the
option.
The options are offered to the offerees at no cost. The
options will be issued to the offerees in three equal
portions, with the vesting period of the first portion of the
plan beginning after the third and last vesting period of the
employee stock option plan from 2003 (meaning after April 14,
2006).
F-198
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 21 - Shareholders' Equity (cont'd)
B. Employee stock options (cont'd)
3. (cont'd)
The exercise price is NIS 25.10, which is equal to the
opening price of the Company's share on the stock exchange
when the decision was made by the Company's Board of
Directors (March 8, 2005).
The options of the plan will be issued to the offerees
according to the provisions of Section 102 of the Income Tax
Ordinance under the capital track.
The issuance under this plan is subject to the publication of
all the reports required by the Securities Law - 1968 and its
related regulations, the Company's General Meeting approving
the issuance of the options to directors, the Income Tax
Commission approving the issuance being executed according to
the provisions of Section 102 under the capital track and the
Stock Exchange approving registration for trading of the
shares issued upon exercise of the options.
C. Acquisition of Company shares by a subsidiary
As at December 31, 2003, a subsidiary holds 7,017,152 of the Company's
shares.
In March 2004, a subsidiary transferred to a third party, in an
off-market transaction, 7 million shares of the Company which it held.
Pursuant to the agreement, the consideration will be paid by the end
of one year from the transfer date, whether in cash, linked to the
share price at the same date on the stock market, or in Company shares
plus 0.5% of price of the shares on the stock market. Since the
consideration has not yet been received in cash, issuance of the
shares in respect of the shares transferred has not yet been recorded.
During the second quarter, 1,908 thousand of the aforementioned shares
were returned, for purposes of payment of the consideration in respect
of acquisition of a group of companies in the United States, as stated
in Note 7D(1)a above.
As at the balance sheet date, the subsidiary holds 5,108,755 of the
Company's shares, which constitute 1.3% of the Company total issued
and paid-up share capital.
Regarding acquisition of Mabeno, subsequent to the balance sheet date,
in exchange for transfer of shares of an investee company by a
subsidiary - see Note 7D(2).
F-199
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 21 - Shareholders' Equity (cont'd)
D. Dividend distribution policy
On April 23, 2001, the Company's Board of Directors resolved to adopt
a dividend policy at rates of between 15% and 30% of net annual
income, beginning from 2001. In accordance with this policy an interim
quarterly dividend will be distributed. The amount of the dividend
will be calculated according to the net income for the quarter and
will be within the limits specified above. This interim dividend will
be considered as an advance on account of the annual dividend.
Application of the policy is subject to there being sufficient income
for distribution on the relevant dates, to the provisions of any law
regarding dividend distribution, to specific decisions of the
Company's Board of Directors in respect of each distribution and to
any other decision the Board of Directors is permitted to make at any
time, including regarding a different designation of the Company's
earnings and a change in this policy.
In March 2004, the Company's Board of Directors decided to distribute
a dividend in respect of the earnings of 2003, in the amount of US$
7,200 thousand.
During 2004, the Company's Board of Directors decided to make three
interim dividend distributions, in the total amount of US$ 36,900
thousand.
Subsequent to the balance sheet date, the Company's Board of Directors
decided to distribute a dividend in the amount of US$ 12,700 thousand.
E. Convertible debentures and options (Series 1)
Regarding the convertible debentures and the options (Series 1) issued
in the framework of a prospectus from November 2001 - see Note 15A.
In the year of account, 4,018,625 options (Series 1) were converted
into 4,018,625 ordinary shares of NIS 1 par value, based on a
conversion rate of 10.03 per share. The total share capital issued as
a result of the conversion was US$ 913 thousand, at a premium of US$
9,637 thousand.
Subsequent to the balance sheet date and proximate to the date of
authorization of the financial statements, 909 thousand options were
converted into 909 thousand ordinary shares of NIS 1 par value.
Regarding conversion of the debentures - see Note 15B(4).
F-200
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------
Note 22 - Linkage Terms of Monetary Balances
Consolidated
In or linked In Euro In Brazilian In or linked In Israel Total
to US reals to another currency
dollars currency
------------- ------------- ------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- ------------- ------------- -------------
December 31, 2004
Assets:
Cash and cash equivalents 10,751 14,799 3,418 10,624 885 40,477
Short-term investments - 603 - 160 800 1,563
Trade and other receivables 126,638 74,775 136,831 51,673 32,820 442,737
Long-term investments,
loans and other receivables 1,710 328 15,715 1,239 2,353 21,345
------------- ------------- ------------- ------------- ------------- -------------
139,099 90,505 155,964 63,660 36,858 486,122
============= ============= ============= ============= ============= =============
Liabilities:
Credit from banks 90,949 11,350 1,814 5,974 2,892 112,979
Trade and other payables 158,430 146,850 64,328 54,287 90,527 514,422
Proposed dividend 11,200 - - - - 11,200
Long-term bank loans and
other (including current
maturities) and long-term
liabilities 112,319 9,331 - 6,204 1,548 129,402
Liability for employee
severance benefits, net 78 481 310 105 25,735 26,709
------------- ------------- ------------- ------------- ------------- -------------
372,976 168,012 66,452 66,570 120,702 794,712
============= ============= ============= ============= ============= =============
December 31, 2003
Assets:
Cash and cash equivalents 27,662 8,392 4,457 6,875 2,463 49,849
Short-term investments 1,034 39 - 27 - 1,100
Trade and other receivables 74,126 98,078 91,149 48,061 28,500 339,914
Long-term investments,
loans and other receivables 5,485 333 7,699 2,517 435 16,469
------------- ------------- ------------- ------------- ------------- -------------
108,307 106,842 103,305 57,480 31,398 407,332
============= ============= ============= ============= ============= =============
Liabilities:
Credit from banks 52,883 19,035 2,408 4,733 543 79,602
Trade and other payables 83,708 147,209 40,562 32,606 81,694 385,779
Proposed dividend 7,000 - - - - 7,000
Long-term bank loans and
other (including current
maturities) 313,548 9,586 1,880 7,271 2,633 334,918
Liability for employee
severance benefits, net 246 134 324 24 24,046 24,774
------------- ------------- ------------- ------------- ------------- -------------
457,385 175,964 45,174 44,634 108,916 832,073
============= ============= ============= ============= ============= =============
With respect to futures transactions in foreign currency, see Note 32.
F-201
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 23 - Revenues
Consolidated
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Foreign sales -
Industrial 1,351,450 1,001,435 732,085
Commercial 85,007 89,303 77,628
------------- ------------- -------------
1,436,457 1,090,738 809,713
------------- ------------- -------------
Domestic sales -
Industrial 47,461 40,268 34,232
Commercial 55,784 46,249 46,918
------------- ------------- -------------
103,245 86,517 81,150
------------- ------------- -------------
1,539,702 1,177,255 890,863
============= ============= =============
Foreign sales by geographic area:
Latin America 428,638 308,628 248,756
Europe 649,859 525,851 350,430
North America 198,035 142,280 117,450
Far East 55,467 41,398 37,931
Africa and Australia 104,458 72,581 55,146
------------- ------------- -------------
1,436,457 1,090,738 809,713
============= ============= =============
Note 24 - Cost of Sales
Consolidated
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Industrial:
Materials 674,675 443,565 363,144
Labor 71,534 63,606 59,932
Subcontractors 5,822 6,286 9,050
Other manufacturing expenses 111,624 83,611 62,548
Depreciation 25,891 24,571 22,864
------------- ------------- -------------
889,546 621,639 517,538
Less - expenses capitalized to fixed assets (mainly
engineering salaries) 848 958 988
Change in work in progress and finished
products inventories (43,246) (7,528) (52,440)
------------- ------------- -------------
845,452 613,153 464,110
Commercial:
Cost of merchandise sold 98,456 117,152 100,653
------------- ------------- -------------
943,908 730,305 564,763
============= ============= =============
F-202
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 25 - Research and Development Expenses, Net
Consolidated
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Payroll and related expenses 10,508 9,868 9,633
Materials 267 1,210 931
Other expenses 9,758 6,738 5,601
20,533 17,816 16,165
Less -
Government participation in R&D expenses 1,053 996 990
------------- ------------- -------------
19,480 16,820 15,175
============= ============= =============
Note 26 - Selling and Marketing Expenses
Consolidated
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Payroll and related expenses 52,460 37,678 30,547
Commissions and delivery costs 70,480 51,268 42,055
Advertising 14,049 9,957 5,043
Depreciation and amortization 24,685 20,916 15,806
Registration 11,504 7,568 6,170
Professional services 6,263 6,069 3,315
Insurance to the Chief Scientist 6,474 5,746 3,688
Royalties 4,758 2,802 2,483
Other 29,539 21,832 19,879
------------- ------------- -------------
220,212 163,836 128,986
============= ============= =============
Note 27 - General and Administrative Expenses
Consolidated
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Payroll and related expenses 24,743 22,549 17,687
Administrative services and directors' fees to Koor 2,557 2,676 2,548
Depreciation and amortization 3,359 3,446 3,577
Bad and doubtful accounts 11,481 7,752 2,655
Professional services 12,058 6,756 6,770
Insurance 1,925 950 1,262
Other 10,792 9,770 8,304
------------- ------------- -------------
66,915 53,899 42,803
============= ============= =============
F-203
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 27 - General and Administrative Expenses (cont'd)
Company
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Payroll and related expenses 6,073 7,401 2,713
Administrative services and directors' fees to Koor 2,557 2,676 2,548
Depreciation and amortization 269 276 234
Professional services 3,607 1,234 2,112
Other 2,865 2,340 1,385
------------- ------------- -------------
15,371 13,927 8,992
============= ============= =============
Note 28 - Financing Expenses, Net
Consolidated
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
In respect of long- term liabilities, net 17,885 17,604 13,804
In respect of short- term liabilities and credit, net 9,686 20,352 23,417
Less - Interest capitalized to fixed assets - - 2,815
------------- ------------- -------------
Financing expenses, net 27,571 37,956 34,406
============= ============= =============
Company
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Expenses: (*)
In respect of long-term liabilities 5,193 3,815 4,074
In respect of short-term liabilities and credit - 936 1,217
5,193 4,751 5,291
Less:
Financing income 10,229 5,349 7,017
------------- ------------- -------------
Financing income, net 5,036 598 1,726
============= ============= =============
* See Note 32C.
F-204
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------
Note 29 - Other Expenses, Net
Consolidated
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Expenses with respect to devaluation of the currency
and bad debts in Argentina (Note 32C) - - 10,886
Expenses in respect of early retirement of employees
and payment of early pension benefits 4,802 6,721 4,055
Expenses relating to sale of trade receivables
as part of securitization transaction 1,825 - -
Loss on sale of trade receivables as part
securitization transaction 4,374 3,850 4,366
Loss on sale of fixed assets and other, net 1,099 858 331
Provision for loss with respect to options granted to
employees of subsidiaries 2,090 330 -
Amortization of goodwill in investee companies 14,396 9,826 8,179
Amortization of goodwill on acquisition of products 10,164 11,782 4,557
Write-off of fixed and other assets 2,555 2,667 -
Sundry expenses (income), net 1,430 2,211 (604)
------------- ------------- -------------
42,735 38,245 31,770
============= ============= =============
Note 30 - Transactions and Balances with Related and Interested Parties
A. Transactions with interested parties
(1) In the ordinary course of business, Group companies conduct
transactions with entities that are related parties
(principally, sales of the companies' products and purchases
of raw materials and services). It is impracticable to
identify the abovementioned related parties and to separately
record these transactions in the accounting records.
Therefore, the Securities Authority has exempted the Company
from providing details of immaterial transactions involving
acquisitions and sales of goods and services at market value
that the Company is likely to execute in the normal course of
its business with Bank Leumi LeIsrael Ltd., Bank Hapoalim
Ltd. and their investee companies. In any event, the Company
is required to disclose any unusual transactions.
(2) On April 1, 2000, the Company signed an agreement with Koor
according to which the Company will pay Koor $2.5 million per
year for consulting and management services to be rendered by
Koor to the Company. The agreement was effective up to May
2003. The agreement was extended for additional three years,
effective from May 2003 (see Note 27).
In addition, the Company pays directors' fees to Koor
Industries Ltd. in amounts identical to those paid to public
directors, see B., below. Regarding payments made to Koor -
see Section A(10), below.
F-205
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 30 - Transactions and Balances with Related and Interested Parties (cont'd)
A. Transactions with interested parties (cont'd)
(3) The Company has an agreement covering management fees with
Agan and Makhteshim according to which Agan and Makhteshim
paid management fees at the rate of 1% of the annual
revenues. In 2003, this agreement was revised for management
fees at the rate of 1.8% of the annual revenues. In 2004,
Makhteshim and Agan paid management fees to the Company
amounting to US$ 13.5 million (2003 - US$ 10.0 million, 2002
- US$ 9.2 million).
(4) The Company entered in an agreement with the former CEO of
Milenia (who is a director of the Company), covering
non-competition and confidentiality, pursuant to which on
April 30, 2002 (shortly after the termination of his service
as Milenia's CEO), he received 1,000,000 of the Company's
shares in consideration for his agreement not to compete with
the Company and to protect all the Company's confidential
information, provided that up to this time he complies with
his obligation as stated.
The agreement is valid for a period up to the later of July
2007 or the end of 3 years from the date on which he ceases
to serve as CEO, director or other position in the one of the
Group companies.
(5) In November 2002, the Company's Board of Directors decided to
appoint a new CEO who took up his position in May 2003.
The Company entered into an employment agreement with the new
CEO, pursuant to which the CEO will serve in his position for
an unlimited period, unless one of the parties gives notice
of its wish that the employment shall not be continued, by
means of an advance notice of three months.
In a case of transfer of control of the Company up to July 1,
2005, where as a result the CEO's employment is discontinued,
in circumstances under which he is entitled to severance
benefits pursuant to law, the CEO is entitled to an annual
salary, including the accompanying benefits.
(6) A subsidiary has an agreement with STIM Holdings (1991) Ltd.,
a company owned by a shareholder who served as a director of
the Company until September 2003, which was extended up to
September 30, 2004, according to which his company will
supply to the subsidiary management and business organization
services, for a consideration of NIS 60,000 per month plus
linkage differences based on the CPI for December 2001. In
July 2004, the aforesaid shareholder ceased being an
interested party.
(7) A subsidiary has an agreement with S.H.M. Ltd., a company
owned by a shareholder who served as a director of the
Company until September 2003, which was extended up to
September 30, 2004, according to which his company will
supply to the subsidiary management and business organization
services, for a consideration of NIS 60,000 per month plus
linkage differences based on the CPI for December 2001. In
July 2004, the aforesaid shareholder ceased being an
interested party.
F-206
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 30 - Transactions and Balances with Related and Interested Parties (cont'd)
A. Transactions with interested parties (cont'd)
(8) Regarding insurance and indemnification of interested parties
- see Note 19(A)(1) and (2).
(9) Transactions between Makhteshim and Agan with Koor and its
subsidiaries, are made in the regular course of business and
on usual business terms. Set forth below are details of the
transactions:
Consolidated
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Management services and directors fees to Koor 2,557 2,676 2,548
============= ============= =============
Other related parties:
Revenues - 5,638 7,542 5,626
============= ============= =============
Expenses -
Selling 1,863 1,593 1,439
============= ============= =============
Financing - - 29
============= ============= =============
B. Benefits to interested parties
For the year ended December 31
--------------------------------------------------
2004 2003 2002
------------- ------------- -------------
US$ thousands US$ thousands US$ thousands
------------- ------------- -------------
Fees to interested parties employed by the Group (*) 1,147 *3,656 1,179
============= ============= =============
Number of interested parties **4 5 4
============= ============= =============
Fees to directors appointed by Koor Industries Ltd. 57 176 48
============= ============= =============
Number of directors 4 5 4
============= ============= =============
Fees to other directors 75 57 58
============= ============= =============
Number of directors 6 5 5
============= ============= =============
(*) Including settlements in respect of employee severance
benefits with the Company's former CEO. Regarding options
issued to the Company's present and former CEOs, see Note
21B.
(**) In July 2004, two of the four directors ceased being
interested parties - see paragraphs A7 and A8 above.
F-207
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 30 - Transactions and Balances with Related and Interested Parties (cont'd)
C. Balances with related and interested parties
Consolidated
------------
December 31 December 31
2004 2003
------------- -------------
US$ thousands US$ thousands
------------- -------------
Trade receivables (1) -
Related parties 3,403 4,062
============= =============
Trade payables -
Related parties 445 410
============= =============
Other payables
Koor Industries Ltd. 748 753
============= =============
Severance pay fund administered by related companies 2,331 2,126
============= =============
(1) Highest balance during the year - trade receivables 3,403 4,062
============= =============
Bank Hapoalim Ltd. and Bank Leumi Ltd. are related parties of the
Company due to their holdings in the Company through mutual funds and
provident funds which they manage. Financing transactions with these
parties are conducted in the ordinary course of business under normal
commercial terms.
Note 31 - Earnings per Share
Share capital and net income used as the basis for the computation of
basic earnings per share are as follows:
For the year ended December 31
------------------------------------------------
2004 2003 2002
---------- ---------- -----------
Weighted-average par value of share capital
(in thousands) 432,776 410,373 361,815
========== ========== ===========
Net income used for the computation
(US$ thousands) 166,900 105,809 60,078
========== ========== ===========
Interest rates used in computing earnings per share
(linked to the US dollar) 2.5% 1.0% 2.5%
========== ========== ===========
F-208
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
--------------------------------------------------------------------------------
Note 31 - Earnings per Share (cont'd)
Share capital and net income used as the basis for the computation of
fully diluted earnings per share are as follows:
For the year ended December 31
------------------------------------------------
2004 2003 2002
---------- ---------- -----------
Weighted-average par value of share capital
(in thousands) 457,548 427,772 433,215
========== ========== ===========
Net income used in computing earnings per share
(US$ thousands) 168,817 106,118 64,112
========== ========== ===========
Interest rates used in computing earnings per share
(linked to the US dollar) 2.5% 1.0% 2.5%
========== ========== ===========
Note 32 - Financial Instruments and Risk Management
A. General
The Group has extensive international operations, and, therefore, it
is exposed to risks that derive from exchange rate fluctuations, and
to changes in interest rates, in respect of credit received. In order
to reduce the overall exposure to those risks, the Group uses
financial instruments, including derivative instruments and options
(hereinafter - "the Derivatives"). The Group does not hold financial
instruments for trading purposes.
Transactions in derivatives are undertaken with major financial
institutions in Israel and abroad and, therefore, in the opinion of
Group Management the credit risk in respect thereof is low.
B. Exchange rate risk management
The Group uses foreign currency derivatives - forward transactions and
option contracts - in order to hedge the risk that the dollar cash
flows, which derive from existing assets and liabilities and
anticipated sales and costs, may be affected by exchange rate
fluctuations.
Subsidiaries execute swap transactions in order to reduce the exposure
to exchange rate fluctuations. In 2004 a subsidiary entered into
transactions with banks for swapping dollar liabilities (loans and
supplier credit) amounting to a principal of $ 60 million with
liabilities in Brazilian reals at a variable interest rate of a
weighted average of 6%. The transactions will expire in 2005.
In 2004 another subsidiary and a bank entered into transactions
swapping a long-term loan denominated in Colombian pesos with a
variable interest of 7.7% amounting to a principal of 13 million pesos
with a dollar loan bearing variable interest of the Libor rate minus
0.1%. The transactions expire in semi-annual amounts until the end of
2006.
F-209
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 32 - Financial Instruments and Risk Management (cont'd)
B. Exchange rate risk management (cont'd)
As at the balance sheet date, the Company and its subsidiaries had
open forward exchange contracts, which are intended to hedge exposure
with respect to assets and liabilities in foreign currency, as
described below:
Foreign- Foreign-
currency currency
Futures options options
transactions purchased sold
------------ --------- --------
Acquisition of dollars in exchange for:
Shekels 6.0 4.0 21.5
Pounds sterling 6.3 27.5 7.9
Euro - 236.3 14.0
Brazilian reals 3.5 10.0 10.0
South African rands 6.2 3.1 -
Japanese yen 2.3 2.4 1.3
Australian dollars 2.0 17.6 -
Swiss francs - - 6.9
Polish zloty 6.5 11.5 1.0
Korean Yuan - - 40.0
Swedish krona - - 3.0
------------- --------- --------
32.8 312.4 105.6
============= ========= ========
Foreign- Foreign-
currency currency
Futures options options
transactions purchased sold
------------ --------- --------
Sale of dollars in exchange for:
Shekels - 26.5 20.5
Pounds sterling - 2.0 23.6
Euro 6.6 32.1 269.6
Swedish krona - 3.0 1.5
South African rands - - 3.1
Japanese yen - 1.4 2.5
Australian dollars - - 16.6
Swiss francs - 7.0 3.6
Polish zloty - - 11.5
Korean Yuan - 40.0 -
------------- --------- --------
6.6 112.0 352.5
============= ========= ========
F-210
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 32 - Financial Instruments and Risk Management (cont'd)
C. Credit risks
General
-------
The Group's revenues are derived from a large number of
geographically-dispersed customers in many different countries.
Customers include multi-national companies and manufacturing
companies, as well as distributors, agriculturists and agents of
plant protection chemicals manufacturers who purchase the products
either as finished goods or as intermediate products in relation to
their own requirements.
The agricultural sector to which most of the Group's products are
directed, is characterized by lengthy periods of credit.
The financial statements contain specific provisions for doubtful
debts, which properly reflect in management's estimate, the loss
inherent in debts, the collection of which is in doubt. In addition,
up to June 2004, the Company insured its trade receivables by means
of credit insurance in a joint policy with the entire Makhteshim-Agan
Group. Pursuant to the policy, the aggregate amount of credit
insurance for the entire Group is an annual cumulative amount of US$
25 million. The insurance indemnification is limited to 90% of the
debt per event. The terms of the insurance policy require the
implementation of a credit control system for the entire Group which
is required to operate in accordance with procedures stipulated in
the insurance policy. Commencing from July 2004, the Company
discontinued the said insurance because of it not being worthwhile.
Subsequent to balance sheet date, a subsidiary in Brazil purchased a
credit insurance policy which insures deliveries made in Brazil as of
January 1, 2005. The indemnity of the insurer is limited to 85% of
the debt per event in respect of the insured customers. The total
amount of insurance is anticipated to amount to an overall amount of
US$ 20 million per year.
Economic Crisis in Argentina
----------------------------
A serious deterioration in the political and economic situation in
Argentina began in December 2001, and a situation of paralysis of the
political and economic systems in the country has developed, together
with almost complete uncertainty as to the future, followed by a
temporary discontinuation of foreign currency trading. In January
2002, the Congress empowered the President to execute a devaluation
of the Argentine Peso as against the dollar (to which the Peso was
linked under the law for a period of about ten years). Following
approval by Congress, the Argentine Government declared a devaluation
of 29% (namely, Peso 1.4 for US$ 1).
During February 2002, the law was changed in Argentina providing for
total flexibility in the rate of exchange, and that the exchange rate
of 1.4 to the dollar applying to importers and exporters no longer
exists. Foreign currency trading was resumed on January 11, 2002, and
the exchange rate was fixed at Peso 1.7 = US$ 1. This rate is the
applicable rate at December 31, 2001. As a result of the devaluation,
the assets of the subsidiary in Argentina (mainly trade and other
receivables) were eroded by US$ 15 million. Furthermore, in view of
the economic and political situation in the country in 2001, the
subsidiary in Argentina recorded a one-time write-off of US$ 8
million, mainly in respect of bad debts.
In 2002, the severe economic crisis in Argentina continued. The Peso
was devalued by additional 98% (from the rate of US$ 1 = Peso 1.7, at
December 31, 2001, to US$ 1 = Peso 3.37, at December 31, 2002).
In March 2002, the Argentine government issued Regulation 10/02 to
the Conversion Law, pursuant to which trade receivables resulting
from the sale of agricultural inputs, are to be paid on the basis of
the same exchange rate applying to the consideration received from
the export sale of the agricultural products in respect of which
those inputs were used.
F-211
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 32 - Financial Instruments and Risk Management (cont'd)
C. Credit risks (cont'd)
In July 2002, the Argentine government issued Regulations 143/02 and
24/02, which cancel Regulation 10/02 and which provide the various
rates for linking customer debt to the dollar in such a manner that
trade receivables resulting from the sale of agricultural inputs
denominated in dollars, are to be paid on the basis of the dollar
exchange in effect on the date of payment, less a discount at rates
between 25%-60%, in accordance with those products which used the
agricultural inputs as detailed in these Regulations.
Due to the devaluation and the continuing economic crisis in
Argentina, and in light of the accumulated experience regarding
application of Regulations 143/02 and 24/02, in 2002, the subsidiary
included an additional provision, in the amount of US$ 10.8 million,
with respect to bad debts and erosion of its assets in Argentina.
In the estimation Company Management, after the additional
write-downs made in 2001 and 2002, no further material effect is
expected on the results of operations and the financial position of
the subsidiary in Argentina.
The Company and the subsidiaries are guarantors for the subsidiary's
liabilities to banks in Argentina, in the aggregate amount of
approximately US$ 10 million.
D. Currency risks
As at December 31, 2004, monetary assets in excess of monetary
liabilities in Brazilian reals amounted to approximately US$ 90
million, monetary assets in Israeli shekels in excess of monetary
liabilities in Israeli shekels amounted to approximately US$ 75
million, and monetary liabilities in excess of monetary assets in
Euro amounted to approximately US$ 78.
The Group has taken measures to reduce the exposure in respect to
this excess as described in Note B. above.
Regarding the linked balance sheet covering monetary balances - see
Note 22.
E. Fair value of financial instruments
The Group's financial instruments consist of mainly non-derivative
assets and liabilities, e.g.; cash and cash equivalents, investments
in deposits, other receivables, long-term investments, short-term
credit, payables, loans and other long-term liabilities, as well as
derivatives.
In view of their nature, the fair value of financial instruments
included in working capital is usually identical or close to their
carrying amount. Also the fair value of deposits and long-term
receivables and loans and other long-term liabilities is close to
their fair value, as these financial instruments bear interest at
rates which are close to the prevailing market rates.
F-212
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 33 - Segment Information
A. Geographical segments according to location of assets
For the year ended December 31, 2004
Israel Latin America Europe* Adjustments Consolidated
US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- ------------- -------------
Income
Income from
external sources 937,769 337,123 264,810 - 1,539,702
Inter-segment
income 95,558 13,084 25,722 (134,364) -
------------ ----------- ------------ ------------- -----------
Total income 1,033,327 350,207 290,532 (134,364) 1,539,702
=========== =========== =========== ============ ===========
Segment results** 146,996 56,764 61,260 (393) 264,627
=========== =========== =========== ============ ===========
Additional
information
Assets utilized by
the segment 1,148,344 414,428 371,795 - 1,934,567
=========== =========== =========== ============ ===========
Liabilities of the
segment 499,168 255,637 286,511 - 1,041,316
=========== =========== =========== ============ ===========
Capital
investments 139,031 8,631 7,823 - 155,485
=========== =========== =========== ============ ===========
Depreciation and
amortization 60,437 9,352 12,835 - 82,624
=========== =========== =========== ============ ===========
* Mainly products manufactured by non-Group companies.
** Includes amortization of goodwill on the acquisition of products and amortization of goodwill and other
assets arising on the acquisition of subsidiaries.
F-213
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 33 - Segment Information (cont'd)
A. Geographical segments according to location of assets (cont'd)
For the year ended December 31, 2003
Israel Latin America Europe* Adjustments Consolidated
US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- ------------- -------------
Income
Income from
external sources 684,619 246,757 245,879 - 1,177,255
Inter-segment
income 57,431 18,360 - (75,791) -
------------ ----------- ------------ ------------- -----------
Total income 742,050 265,117 245,879 (75,791) 1,177,255
=========== =========== =========== ============ ===========
Segment results** 92,520 47,466 48,326 2,475 190,787
=========== =========== =========== ============ ===========
Additional
information
Assets utilized by
the segment 977,530 342,542 334,832 6,461 1,661,365
=========== =========== =========== ============ ===========
Liabilities of the
segment 417,921 211,166 288,523 43,778 961,388
=========== =========== =========== ============ ===========
Capital
investments 47,685 9,300 6,316 - 63,301
=========== =========== =========== ============ ===========
Depreciation and
amortization 51,022 12,413 12,238 - 75,673
=========== =========== =========== ============ ===========
* Mainly products manufactured by non-Group companies.
** Includes amortization of goodwill on the acquisition of products and amortization of goodwill and other
assets arising on the acquisition of subsidiaries.
F-214
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 33 - Segment Information
A. Geographical segments according to location of assets
For the year ended December 31, 2002:
Israel Latin America Other Adjustments Consolidated
US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- ------------- -------------
Income
Income from
external sources 616,470 196,804 77,589 - 890,863
Inter-segment
income 43,500 7,820 - (51,320) -
------------ ----------- ------------ ------------- -----------
Total income 659,970 204,624 77,589 (51,320) 890,863
=========== =========== =========== ============ ===========
Segment results* 98,302 25,026 3,750 (678) 126,400
=========== =========== =========== ============ ===========
Additional
information
Assets utilized by
the segment 1,055,519 323,230 244,807 - 1,623,556
=========== =========== =========== ============ ===========
Liabilities of
the segment 590,604 213,214 206,175 - 1,009,993
=========== =========== =========== ============ ===========
Capital
investments 278,215 12,174 1,270 - 291,659
=========== =========== =========== ============ ===========
Depreciation and
amortization 46,048 9,309 2,748 - 58,105
=========== =========== =========== ============ ===========
* Includes amortization of goodwill on the acquisition of products and amortization of goodwill and other assets
arising on the acquisition of subsidiaries.
- Regarding the breakdown of sales based on geographic area - see Note 23.
F-215
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 33 - Segment Information (cont'd)
B. Business segments
Year ended December 31
---------------------------------------------------
2004 2003 2002
------------- ------------- --------------
US$ thousands US$ thousands US$ thousands
------------- ------------- --------------
Sales by products
Plant protection products 1,357,913 1,034,702 775,563
Others (non-plant protection products) 181,789 142,553 115,300
------------ ----------- ------------
1,539,702 1,177,255 890,863
============ =========== ============
December 31, 2004 December 31, 2003
------------------------------- --------------------------------
Assets Assets
utilized by utilized by
the Capital the Capital
sector investments sector investments
------------- ------------- ------------- -------------
US$ thousands US$ thousands US$ thousands US$ thousands
------------- ------------- ------------- -------------
Segment assets and
capital investments
Plant protection products 1,722,458 133,188 1,438,007 53,680
Others (non-plant protection
products) 212,109 22,297 223,358 9,621
------------ ----------- ----------- ------------
1,934,567 155,485 1,661,365 63,301
============ =========== =========== ============
F-216
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements
A. Material Differences between Israeli GAAP and US GAAP
The Company's consolidated financial statements conform with Israeli
generally accepted accounting principles ("Israeli GAAP"), which
differs in certain material respects from generally accepted
accounting principles in the United States of America ("US GAAP") as
described below:
1. Deferred taxes
a) Measurement differences
In accordance with Israeli GAAP:
Deferred taxes should be recognized in respect of
differences related to assets and liabilities that result
from translation of the local currency into the functional
currency using historical exchange rates and that result
from (1) changes in exchange rates or (2) indexing for tax
purposes.
In accordance with US GAAP:
According to paragraph 9(f) of FAS No. 109, deferred tax
liabilities or assets are not provided for differences
related to assets and liabilities that are remeasured from
the local currency into the functional currency and that
result from (1) changes in exchange rates or (2) indexing
for tax purposes.
b) Earnings from "Approved Enterprises"
Under the Israeli Law for the Encouragement of Capital
Investments, 1959, an "approved enterprise" which chooses
the "alternative benefits" track is exempt from income tax
on undistributed profits.
In the event that a dividend is distributed out of
tax-exempt earnings of the "approved enterprise" under the
"alternative benefits" track, the distributing company will
be subject to a 25% tax on the distributed earnings.
Furthermore, the shareholders will be liable for tax at the
rate of 15%. However, if the shareholder is a company, that
shareholder will be entitled to a 15% tax credit, if and
when such dividend out of "approved enterprise" earnings is
distributed to its shareholders.
In accordance with Israeli GAAP:
Deferred taxes should not be provided in respect of the
undistributed tax-exempt earnings of an "approved
enterprise" of subsidiaries, whose earnings have been
reinvested and will not be distributed to their
shareholders.
The Company has not provided deferred taxes in respect of
undistributed tax-exempt earnings attributed to the
"approved enterprise" of subsidiaries, which may be
distributed, since it is the Group's policy not to initiate
such a dividend distribution.
In accordance with US GAAP:
Deferred taxes should be provided on the excess of the
financial statement carrying value over the tax basis of an
investment in domestic subsidiary as the company does not
have any means under local tax law to recover this
difference in a tax-free manner.
F-217
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Material Differences between Israeli GAAP and US GAAP
(cont'd)
2. Share-based payments to employees
In accordance with Israeli GAAP:
No expense is recorded with respect to options granted to employees
of the Company.
In accordance with US GAAP:
The Company issued stock appreciation rights that under APB 25 and
FIN 28 should be accounted as variable options to employees relating
to the future performance of work or services. In such cases, the
benefit is charged to salary expense in the statement of income. The
"benefit component" is measured as the difference between the market
price of the share and the exercise price of the option at the end of
each reporting period, and the proportional part of the period which
has passed, in relation to amounts previously recorded at the
beginning of that reporting period.
3. Financial derivatives
In accordance with Israeli GAAP:
The Company applies FAS 52, FAS 80 and EITF 90-17 to account for
derivatives. Accordingly, the gains and losses on derivative
instruments held for hedging purposes are recognized in the statement
of income concurrently with gains or losses on the hedged assets.
Certain derivative financial instruments, which are not intended for
hedging purposes are presented in the balance sheet at their fair
value. Changes in fair value are included in the statement of income
in the period in which they occur.
In accordance with US GAAP:
All derivative instruments are recognized as either assets or
liabilities in the balance sheet and are measured at fair value.
Changes in the fair values of derivative instruments are recognized
currently in earnings since the specific hedge accounting criteria
are not met.
4. Goodwill
In accordance with Israeli GAAP:
Goodwill is amortized over its economic life but no more than 20
years. Goodwill is examined for a decrease in value where there are
indications that there has been a permanent decrease in the value of
the goodwill.
In accordance with US GAAP:
Goodwill balances is not amortized but is examined by means of an
impairment test carried out at least once a year on a fixed date in
accordance with the directives in FAS 142, where in the first year of
implementation the impairment test was on January 1, 2002.
F-218
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Material Differences between Israeli GAAP and US GAAP (cont'd)
4. Goodwill (cont'd)
In accordance with US GAAP: (cont'd)
A two-step impairment test is used to identify potential goodwill
impairment and measure the amount of a goodwill impairment loss t be
recognized (if any). The first step of the goodwill impairment test,
used to identify potential impairment, compares the fair value of a
reporting unit with its carrying amount, including goodwill. If the
fair value of a reporting unit exceeds its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not impaired,
thus the second step of the impairment test is unnecessary. If the
carrying amount of a reporting unit exceeds its fair value, the
second step of the goodwill impairment test shall be performed to
measure the amount of impairment loss, if any.
The second step of the goodwill impairment test, used to measure the
amount of impairment loss, compares the implied fair value of
reporting unit goodwill with the carrying amount of that goodwill. If
the carrying amount of reporting unit goodwill exceeds the implied
fair value of that goodwill, an impairment loss shall be recognized
in an amount equal to the excess.
5. Stock options issued by investee companies
In accordance with Israeli GAAP:
The Investor is required to create a provision for losses, which it
may incur from the dilution of its holdings in investee companies,
when it is probable that the securities will be converted.
In accordance with US GAAP:
A loss of the parent company resulting from the dilution of its
holdings, because of securities being converted is recorded only at
the time of the conversion.
6. Capitalization of licensing costs
In accordance with Israeli GAAP:
Certain costs incurred by the Company in connection with the
registration process to obtain licenses to sell products in various
jurisdictions are capitalized.
In addition, amounts which are paid by the Company to the original
registrant as data compensation costs only after the EPA issues a
registration to the Company are also capitalized.
The capitalized licensing costs are amortized over the expected
benefit period.
In accordance with U.S. GAAP:
The costs incurred by the Company in connection with the registration
process to obtain licenses to sell products in various jurisdictions
are deemed development costs under U.S. GAAP and are expensed as
incurred.
The amounts paid by the Company to the original registrant as data
compensation costs only after the EPA issues a registration to the
Company are capitalized and amortized over the expected benefit
period.
F-219
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Material Differences between Israeli GAAP and US GAAP (cont'd)
7. Dividend Declared after the Balance Sheet Date
In accordance with Israeli GAAP:
Dividends declared subsequent to the balance sheet date are reflected
as a deduction of retained earnings.
In accordance with US GAAP:
Dividends declared subsequent to the balance sheet date are deducted
from retained earnings in the period in which the dividend was
declared.
8. Liabilities for employee severance benefits
In accordance with Israeli GAAP:
Amounts funded by purchase of insurance policies and by deposits with
recognized severance pay funds are deducted from the related
severance pay liability, which is then presented at a net amount.
In accordance with US GAAP:
The amounts funded would be presented as other long-term assets and
the amount of the liability would be presented under long-term
liabilities.
9. Convertible debentures
In accordance with Israeli GAAP:
If a conversion of the debentures is expected, the debentures are
presented in the balance sheet in a separate category between
"long-term liabilities" and "shareholders' equity", whereas, if the
conversion of the debentures is not expected they are presented in
the balance sheet as part of "long-term liabilities".
In accordance with US GAAP:
All convertible debentures are presented in the balance sheet as part
of "long-term liabilities".
10. Contingent consideration
In accordance with Israeli GAAP:
Contingent consideration in respect of acquisition of investee
companies is recorded as part as the purchase cost when it is
expected to be paid.
In accordance with US GAAP:
Contingent consideration is recorded as part of the purchase cost
only when the payment probability is beyond any reasonable doubt
which generally is the date that the contingency is resolved.
F-220
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
A. Material Differences between Israeli GAAP and US GAAP (cont'd)
11. Earnings per share:
In accordance with Israeli GAAP:
In accordance with Opinion No. 55 of the Institute of Certified
Public Accountants in Israel, the dilutive effect of share options
and convertible debentures is included in the computation of basic
earnings per share only if their exercise or conversion is considered
to be probable. Calculation of the probability is based on the ratio
between the market price of the shares and the present value of the
price of exercising the stock options into shares or the present
value of the payments for conversion of the debentures into shares.
In accordance with US GAAP:
In accordance with FAS 128 "earnings per share" - basic earnings per
share are computed on the basis of the weighted average number of
shares outstanding during the year. Diluted earnings per share are
computed on the basis of the weighted-average number of shares
outstanding during the year, plus the dilutive potential effect of
ordinary share options considered to be outstanding during the year
using the treasury stock method.
12. Comprehensive income
In accordance with Israeli GAAP:
Presentation of comprehensive income and other comprehensive income
is not required. In accordance with US GAAP:
An enterprise (a) classifies items of other comprehensive income by
their nature in the financial statements and (b) presents the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity
section of the balance sheet.
13. Purchase of minority shares of Agan
In accordance with Israeli GAAP:
The purchase of minority shares of Agan in May 1998 (Note 1B) was
accounted according to recorded amounts.
In accordance with US GAAP:
Under FTB 85-5 the purchase of the minority shares was accounted at
fair value.
F-221
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and
US GAAP on the financial statements
1. Statements of income:
a) Net income:
Year ended December 31
-----------------------------------------------
2004 2003 2002
US$ thousands
-----------------------------------------------
Net income as reported, according to
Israeli GAAP 165,527 102,774 60,078
--------- --------- ---------
Deferred taxes (A1) (15,861) (21,171) (2,069)
Share-based payments to employees (A2) (26,185) (28,004) -
Financial derivatives (A3) (10,374) (2,030) (4,573)
Amortization of goodwill (A4) 10,569 5,277 8,178
Stock option issues by investee companies (A5) 1,760 330 -
Capitalization of licensing costs (A6) (5,325) (3,835) (11,314)
--------- --------- ---------
120,111 53,341 50,300
Income tax in respect of the above differences 3,736 2,790 3,389
Minority interest in respect of the
above differences (109) (60) (130)
--------- --------- ---------
Net income according to US GAAP 123,738 56,071 53,559
========= ========= =========
b) Earnings per ordinary share
Year ended December 31
-----------------------------------------------
2004 2003 2002
US$ thousands
-----------------------------------------------
Basic earnings per ordinary share:
As reported according to Israeli GAAP 0.39 0.26 0.17
========== ========== =========
As reported according to US GAAP 0.32 0.15 0.15
========== ========== =========
Weighted average of number of shares and
share equivalents according to US GAAP 383,907 363,308 361,815
========== ========== =========
Fully diluted earnings per ordinary share:
As reported according to Israeli GAAP 0.37 0.25 0.15
========== ========== =========
As reported according to US GAAP 0.28 0.14 0.13
========== ========== =========
Weighted average of number of shares and
and equivalents according to US GAAP 446,098 401,109 399,071
========== ========== =========
F-222
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and
US GAAP on the financial statements (cont'd)
2. Balance sheet:
December 31, 2004 December 31, 2003
--------------------------------------------- -------------------------------------------
As reported Adjustments US GAAP As reported Adjustments US GAAP
------------ ----------- -------- ----------- ----------- -------
US$ thousands US$ thousands
--------------------------------------------- -------------------------------------------
Other receivables(1) 77,219 5,323 82,542 54,538 3,872 58,410
Long-term
investments, loans
and receivables (4) 22,070 15,957 38,027 18,044 13,763 31,807
Intangible assets after
amortization(2)(3)(6)(10) 527,420 26,161 553,581 448,402 17,907 466,309
Other payables(3)(5) 192,405 14,685 207,090 150,541 1,196 151,737
Deferred taxes, net(1) 54,354 8,674 63,028 43,778 (4,902) 38,876
Employee severance
benefits, net(4) 26,709 15,957 42,666 24,774 13,763 38,537
Minority interest(7)(12) 18,756 (1,981) 16,775 6,436 (330) 6,106
Capital reserve(8)(9)(10) (2,568) 128,993 126,425 (5,393) 102,913 97,520
Proposed dividend
subsequent to balance
sheet date(11) 12,700 (12,700) - 7,200 (7,200) -
Retained earnings((1)2) 345,841 (106,187) 239,654 229,914 (69,898) 160,016
Shareholders' equity 874,495 10,106 884,601 693,541 25,815 719,356
(1) Change in deferred taxes.
(2) Reversal of systematic amortization related to goodwill.
(3) Reconciliation of additional goodwill related to contingent
consideration.
(4) Reconciliation of deposits funded in respect of severance pay.
(5) Recognition of all derivatives at fair value.
(6) Capitalization of licensing costs.
(7) Elimination of provisions for potential losses resulting from dilution
of holding in investee companies.
(8) Share options issued to employees.
(9) Cumulative foreign currency translation adjustments with respect to
GAAP differences.
(10) Purchase of minority shares of Agan.
(11) Dividend declared subsequent to balance sheet date.
(12) Effects of the reconciliation to US GAAP.
F-223
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 34 - Material Differences Between Israeli and US GAAP and their Effect
on the Financial Statements (cont'd)
B. The effect of the material differences between Israeli and
US GAAP on the financial statements (cont'd)
3. Comprehensive income
"Comprehensive income" consists of the change, during the current
period, in Company's shareholder equity that does not derive from
shareholders' investments or from the distribution of income to
shareholders.
Comprehensive income include two components - net income and other
comprehensive income. Net income is the earning stated in the
statement of operations and other comprehensive income include
amounts recorded directly to shareholders' equity that do not derive
from transactions with shareholders.
Year ended December 31
-----------------------------------
2004 2003 2002
--------- --------- ---------
US$ thousands
-----------------------------------
Net income according to US GAAP 123,738 56,071 53,559
--------- --------- ---------
Other comprehensive income, net of nil tax:
Adjustments from translation of financial statements
of investee companies 2,825 1,886 (3,700)
--------- --------- ---------
Total comprehensive income 126,563 57,957 49,859
======== ========= =========
F-224
Makhteshim-Agan Industries Ltd.
Notes to the Financial Statements
-------------------------------------------------------------------------------
Note 35 - Events (Unaudited) Subsequent to the Date of the Independent Auditors'
Report.
1. Subsequent to the date of the Independent Auditors' Report
and proximate to July 13, 2005, NIS 5,359 thousand par value
debentures (Series A) were converted into 539 thousand of
the Company's ordinary shares of NIS 1 par value, and US$
133,650 thousand par value of the debentures that were
allotted in March 2004 in a private placement to
institutional investors (hereinafter - "The Debentures")
were converted into 29,429 thousand shares of the Company's
ordinary shares of NIS 1 par value. Furthermore, at the
aforesaid period, 2,182 thousand options (Series 1) were
exercised for 2,182 thousand of the Company's ordinary
shares of NIS 1 par value.
2. Until December 31, 2004 it was not anticipated that The
Debentures would be converted and accordingly they were
presented according to their liability value as part of the
long-term liabilities. Proximate to July 13, 2005,
management of the Company believes that conversion of The
Debentures is probable and accordingly the balance of The
Debentures will be classified (together with the Series A
debentures) at their liability value as a separate balance
sheet item between the long-term liabilities and the
shareholders' equity.
3. As described in Note 21B(3), on March 8, 2005, the Company's
Board of Directors decided to adopt a new option plan for
officers and employees of the Company and its subsidiaries.
Pursuant to the plan, 14,900,000 option warrants exercisable
into up to 14,900,000 ordinary shares of the Company of a
par value of NIS 1 each were issued on March 14, 2005. Of
these, 800,000 option warrants were issued to the CEO of the
Company, 9,600,000 to the employees of the Company in
Israel, 2,000,000 to the employees of the Company abroad and
2,500,000 were deposited with a trustee for future
distribution.
4. Subsequent to the date of the Independent Auditors' Report
and proximate to July 13, 2005, Company employees exercised
approximately 714 thousand options granted in April 2001 (as
described in Note 21B(1)) for 493 thousand of the Company's
ordinary shares of NIS 1 par value each.
5. Subsequent to the date of the Independent Auditors' Report
and proximate to July 13, 2005, Company employees exercised
approximately 166 thousand options granted in April 2003 (as
described in Note 21B(2)) for approximately 119 thousand of
the Company's ordinary shares of NIS 1 par value.
6. In May 2005, the Company's Board of Directors resolved to
distribute an interim dividend, in the amount of US$ 18.3
million, to be paid on September 1, 2005.
F-225
Makhteshim-Agan Industries Ltd.
Appendix to the Financial Statements
-------------------------------------------------------------------------------
Rate of Control and Ownership in Subsidiaries as at December 31, 2004
A. Domestic consolidated subsidiaries
Control and
ownership
of holding
Holding company Investee company company
--------------- ---------------- -----------
%
-----------
Makhteshim-Agan Industries Ltd. Makhteshim Chemical Works Ltd. (Makhteshim) 100
Agan Chemical Manufacturers Ltd. (Agan) 100
Lycored - Natural Products Industries Ltd. (Lycored) 100
Luxembourg Medicine Ltd. 100
Makhteshim Prisma Industries Ltd. 100
Negev Peroxide - Registered Partnership 100
Agan Agan Aroma Chemicals Ltd. 100
Agan Chemical Marketing Ltd. 100
Lycored Bio-Dar Ltd. 100
Dalidar Pharma Israel (1995) Ltd. 100
Luxembourg Medicine Ltd. Isramedcom Ltd 100
Luxvision Ltd. (formerly Curex Ltd.) 100
B. Foreign consolidated subsidiaries
Makhteshim Celsius Property B.V. (Celsius) 100
Agan Fahrenheit Holding B.V. (Fahrenheit) 100
Lycored Nutriblend International Sarl 100
ALB Holdings UK 100
ALB Holdings UK Nutriblend Ltd. 100
Makhteshim and Agan in equal parts Makhteshim Agan Holding B.V. 100
Celsius Irvita Plant Protection N.V. 100
Irvita Plant Protection N.V. White Rock Insurance Company PCC Limited/Macell 100
Fahrenheit Quena Plant Protection N.V. 100
Celsius and Fahrenheit in equal parts Magan HB B.V. 100
Aragonesas Agro S.A. 100
Magan Argentina S.A. 100
Proficol S.A. 57.5
Proficol Andina N.V. 57.5
Magan HB B.V. MAB Participacoes S/C Ltd. 100
MAB Participacoes S/C Ltd. Milenia Participacoes S.A 100
Milenia Participacoes S.A. Milenia Paraguay S.A. 100
Emerald Agrochemical Company AVV 100
Milenia Biotechnologia e Genetica Ltd. 55
Milenia Agro Ciencias S.A. 100
Defensa S.R.L. 100
Proficol S.A. Proficol Venezuela S.A. 100
Proficol Andina N.V. Rice Co. LLC (USA) 50.1
F-226
Makhteshim-Agan Industries Ltd.
Appendix to the Financial Statements
-------------------------------------------------------------------------------
B. Foreign consolidated subsidiaries (cont'd)
Control and
ownership
of holding
Holding company Investee company company
--------------- ---------------- -----------
%
-----------
Makhteshim Agan Holding B.V Makhteshim Agan Costa Rica S.A. 100
Makhteshim Agan Espana S.A. 100
Makhteshim Agan of North America Inc. 100
Makhteshim Agan France S.A.R.L. 100
Makhteshim Agan (UK) Ltd. 100
Makhteshim Agan Romania S.R.L. 100
Makhteshim Agan (Thailand) Ltd. 100
Agricur Defensivos Agricolas Ltd. 100
Makhteshim Agan Italia S.R.L. 95
Makhteshim Agan South Africa PTY Ltd. 100
Magan Korea Co. Ltd. 100
Makhteshim Agan India Private Ltd. 100
Makhteshim Agan Poland SP. zo.o 100
Magan Holding Germany GmbH 100
Makhteshim Agan Sweden AB 100
Makhteshim Agan Portugal Ltd. 100
Magan Japan Co. Ltd. 100
Magan Italia S.R.L 100
MA U.S. Holding Inc. (USA) 100
Agronica Australasia Pty
Limited Australia 100
Magan Holding Germany GmbH Feinchemie Schwebda GmbH 100
Makhteshim Agan Deutschland GmbH 100
Feinchemi Schwebdan GmbH FCS France S.A 100
Feinchemi (UK) Ltd. 100
MA U.S. Holding Inc. (USA) Farm Saver Group 100
Control Solutions Inc. 45
Agronica Australasia Pty
Limited Australia Farmoz Pty Limited 100
C. Companies Proportionately Consolidated
Makhteshim Agan Industries Biotec M.A.H. Management Ltd 50
Biotec M.A.H. - Registered Partnership 50
Biotec M.A.H -
Registered Partnership Biotec Agro Ltd. 100
Makhteshim Agan Holdings B.V. Alfa Agricultural Supplies S.A. 49
Fahrenheit InnovAroma S.A. 50
D. Affiliated companies
Makhteshim Fibertec Fiberglass Ltd. 45.5
Makhteshim and Agan hold shares in other foreign companies which retain
registration rights to certain products sold outside of Israel.
F-227
ECI Telecom Ltd.
Consolidated Financial Statements as of December 31, 2004
--------------------------------------------------------------------------------
CONTENTS
Page
Report of Independent Registered Public Accounting Firm F-229
Consolidated Balance Sheets as of
December 31, 2004 and 2003 F-230
Consolidated Statements of Operations for the Years
ended December 31, 2004, 2003 and 2002 F-232
Consolidated Statements of Other Comprehensive Income (Loss) for the
Years ended December 31, 2004, 2003 and 2002 F-233
Consolidated Statement of Changes in Shareholders' Equity for the
Years ended December 31, 2004, 2003 and 2002 F-234
Consolidated Statements of Cash Flows for the
Years ended December 31, 2004, 2003 and 2002 F-236
Notes to the Consolidated Financial Statements F-239
F-228
[Letterhead of Somekh Chaikin, a Member Firm of KPMG International]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ECI TELECOM LTD.
We have audited the accompanying consolidated balance sheets of ECI Telecom
Ltd. ("the Company") and its subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of operations, comprehensive income (loss),
changes in shareholders' equity and consolidated cash flows for each of the
years in the three-year period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Company's Board of Directors
and management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Board of Directors and
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of the Company and its subsidiaries as of December 31, 2004 and 2003,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2004, in conformity with generally
accepted accounting principles in the United States of America.
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Israel)
Member firm of KPMG International
March 10, 2005
F-229
Consolidated Balance Sheets as of December 31
--------------------------------------------------------------------------------------------------
2004 2003
Note $ in thousands $ in thousands
---------- -------------- ----------------
ASSETS
Current assets
Cash and cash equivalents 17A 74,182 126,411
Short-term investments 2,17B 24,714 33,939
Receivables:
Trade, net 17C 142,928 136,799
Other 17D 23,441 14,175
Prepaid expenses 5,982 5,255
Work in progress 3,244 3,323
Inventories 3 175,065 116,883
Assets - discontinued operations 21 - 100,743
-------------- ----------------
TOTAL CURRENT ASSETS 449,556 537,528
-------------- ----------------
LONG-TERM RECEIVABLES, NET 4 89,975 106,645
-------------- ----------------
LONG-TERM DEPOSITS AND MARKETABLE SECURITIES 2 119,359 59,199
-------------- ----------------
ASSETS HELD FOR SEVERANCE BENEFITS 10 25,182 24,431
-------------- ----------------
INVESTMENTS 5 26,766 28,916
-------------- ----------------
PROPERTY, PLANT AND EQUIPMENT 6
Cost 259,318 271,048
Less - accumulated depreciation 139,965 151,991
-------------- ----------------
119,353 119,057
-------------- ----------------
SOFTWARE DEVELOPMENT COSTS, NET 7 14,435 16,289
-------------- ----------------
GOODWILL 8 1,039 1,039
-------------- ----------------
OTHER ASSETS 15F 9,144 8,892
-------------- ----------------
TOTAL ASSETS 854,809 901,996
============== ================
/s/ Shlomo Dovrat /s/ Doron Inbar
--------------------- ----------------------------------
Shlomo Dovrat Doron Inbar
Chairman of the Board President, Chief Executive Officer
March 10, 2005
F-230
ECI Telecom Ltd.
----------------------------------------------------------------------------------------------------------------
2004 2003
Note $ in thousands $ in thousands
-------- -------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debts 9A, 17E 30,000 30,000
Trade payables 68,364 51,004
Other payables and accrued liabilities 17F 149,648 100,439
Liabilities - discontinued operations 21 - 60,594
-------------- --------------
TOTAL CURRENT LIABILITIES 248,012 242,037
-------------- --------------
LONG-TERM LIABILITIES
Banks loans 9A - 30,000
Other liabilities 9B - 6,015
Liability for employee severance benefits 10 50,943 50,658
-------------- --------------
TOTAL LONG-TERM LIABILITIES 50,943 86,673
-------------- --------------
TOTAL LIABILITIES 298,955 328,710
-------------- --------------
MINORITY INTERESTS 4,086 3,781
-------------- --------------
COMMITMENTS AND CONTINGENCIES 11
SHAREHOLDERS' EQUITY 12
Ordinary shares NIS 0.12 par value per share, authorized
200,000,000 shares; Issued and outstanding 109,391,828
shares as of December 31, 2004 and 108,038,063 as of
December 31, 2003 6,198 6,163
Capital surplus 642,222 662,903
Accumulated other comprehensive loss (12,637) (5,393)
Accumulated deficit (84,015) (94,168)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 551,768 569,505
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 854,809 901,996
============== ==============
The accompanying notes are an integral part of the financial statements.
F-231
ECI Telecom Ltd.
Consolidated Statements of Operations for the Year Ended December 31
-------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
-------------- ------------- ------------
Note $ in thousands, except per share amounts
--------------- -------------------------------------------------
Revenues 17G 496,712 392,567 550,434
Cost of revenues 17H; 20 300,971 239,298 357,116
------------- ------------ ------------
GROSS PROFIT 195,741 153,269 193,318
Research and development costs, net 17I 64,870 62,041 80,179
Selling and marketing expenses 17J 78,423 73,643 97,309
General and administrative expenses 17K 35,491 38,956 82,452
Amortization of acquisition-related intangible assets - 1,773 1,760
Impairment of assets 20 - 667 3,725
Loss from exchange of assets 20 - - 6,783
Restructuring expenses 19 2,585 8,394 -
------------- ------------ ------------
Operating income (loss) 14,372 (32,205) (78,890)
Financial expenses 17L (6,562) (8,534) (17,893)
Financial income 17L 9,169 7,791 23,591
Other income (expenses), net 17M 2,693 (5,376) (11,074)
------------- ------------ ------------
Income (loss) from continuing operations
before taxes on income 19,672 (38,324) (84,266)
Taxes on income 15 (1,924) (2,141) (8,456)
------------- ------------ ------------
Income (loss) from continuing operations after
taxes on income 17,748 (40,465) (92,722)
Company's equity in results of investee
companies, net (3,387) (4,334) (3,055)
Minority interest in results of subsidiaries, net (305) 76 575
------------- ------------ ------------
Income (loss) from continuing operations 14,056 (44,723) (95,202)
Cumulative effect of accounting change, net of nil 1T - (550)
taxes
Loss on discontinued operations, net of income tax
(tax benefit) of ($55 thousand); $38 thousand and
$356 thousand for the years ended 2004, 2003
and 2002, respectively 21 (3,903) (26,317) (66,716)
------------- ------------ ------------
Net income (loss) 10,153 (71,040) (162,468)
============= ============ ============
EARNINGS (LOSS) PER SHARE 17O
Basic earnings (loss) per share:
Continuing operations 0.13 (0.41) (0.90)
Cumulative effect of accounting change, net - - (0.01)
Discontinued operations (0.04) (0.24) (0.63)
-------------- ------------- ------------
Net earnings (loss) per share 0.09 (0.65) (1.54)
============== ============= ------------
Diluted earnings (loss) per share:
Continuing operations 0.12 (0.41) (0.90)
Cumulative effect of accounting change, net - - (0.01)
Discontinued operations (0.03) (0.24) (0.63)
-------------- ------------- ------------
Net earnings (loss) per share 0.09 (0.65) (1.54)
============== ============= ------------
The accompanying notes are an integral part of the financial statements.
F-232
ECI Telecom Ltd.
Consolidated Statements of Comprehensive Income (Loss) for the Year Ended December 31
-------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
-------------- -------------- ---------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- ---------------
Net income (loss) 10,153 (71,040) (162,468)
-------------- -------------- ---------------
Other comprehensive income (loss):
Changes in fair value of financial instruments, net of nil taxes (8,303) (4,843) (3,632)
Realization of gain on available for sale securities, net of nil taxes (1,282) - -
Unrealized holding gains on available for sale
securities arising during the year, net of nil taxes 2,341 1,282 -
-------------- -------------- ---------------
Total other comprehensive loss (7,244) (3,561) (3,632)
-------------- -------------- ---------------
Comprehensive income (loss) 2,909 (74,601) (166,100)
============== ============== ===============
The accompanying notes are an integral part of the financial statements.
F-233
ECI Telecom Ltd.
Statement of Changes in Shareholders' Equity
----------------------------------------------------------------------------------------------------------------------------------
Number Share Capital Accumulated Accumulated Treasury Total
of shares(1) capital surplus other earnings stock shareholders'
comprehensive (deficit) equity
income (loss) (Note 15A2)
------------- --------- --------- ------------- ------------- --------- -------------
$ in thousands, except share amounts
----------------------------------------------------------------------------------------------
Balance at January 1, 2002 93,573,549 5,873 656,614 1,800 173,567 (82,998) 754,856
CHANGES DURING 2002 -
Net loss for the year ended
December 31, 2002 - - - - (162,468) - (162,468)
Share issuance, net 13,160,000 263 - - (34,227) 82,998 49,034
Share issuance to
employees and others 779,063 16 1,960 - - - 1,976
Amortization of deferred
compensation expenses - - (149) - - - (149)
Changes in fair value of
financial instruments - - - (3,632) - - (3,632)
------------- --------- --------- ------------- ------------- --------- ------------
Balance at December 31, 2002 107,512,612 6,152 658,425 (1,832) (23,128) - 639,617
CHANGES DURING 2003 -
Net loss for the year ended
December 31, 2003 - - - - (71,040) - (71,040)
Share issuance to employees 424,633 8 647 - - - 655
Employees stock options
exercised and paid, net 100,818 3 263 - - - 266
Amortization of deferred
compensation expenses - - 3,568 - - - 3,568
Net unrealized gain on available
for sale securities - - - 1,282 - - 1,282
Changes in fair value of
financial instruments - - - (4,843) - - (4,843)
------------- --------- --------- ------------- ------------- --------- ------------
Balance at December 31, 2003 108,038,063 6,163 662,903 (5,393) (94,168) - 569,505
============= ========= ========= ============= ============= ========= ============
(1) Issued and outstanding
The accompanying notes are an integral part of the financial statements.
F-234
ECI Telecom Ltd.
Statement of Changes in Shareholders' Equity (cont'd)
----------------------------------------------------------------------------------------------------------------------------------
Number Share Capital Accumulated Accumulated Treasury Total
of shares(1) capital surplus other earnings stock shareholders'
comprehensive (deficit) equity
income (loss) (Note 15A2)
------------- --------- --------- ------------- ------------- --------- -------------
$ in thousands, except share amounts
-----------------------------------------------------------------------------------------------
Balance at January 1, 2004 108,038,063 6,163 662,903 (5,393) (94,168) - 569,505
CHANGES DURING 2004 -
Net income for the year
ended December 31, 2004 - - - - 10,153 - 10,153
Employees stock options
exercised and paid, net 1,353,765 35 2,445 - - - 2,480
Amortization of deferred
compensation expenses - - 1,650 - - - 1,650
Net unrealized gain on
available for sale securities - - - 2,341 - - 2,341
Realization of gain on
available for sale securities - - - (1,282) - - (1,282)
Changes in fair value of
financial instruments - - - (8,303) - - (8,303)
Distribution of shares of a
subsidiary as dividend in
kind (see Note 21B) - - (24,776) - - - (24,776)
------------ --------- --------- ------------- ------------- --------- ------------
109,391,828 6,198 642,222 (12,637) (84,015) - 551,768
============ ========= ========= ============= ============= ========= ============
(1) Issued and outstanding
The accompanying notes are an integral part of the financial statements.
F-235
ECI Telecom Ltd.
Consolidated Statement of Cash Flows for the Year Ended December 31
--------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
$ in thousands $ in thousands $ in thousands
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 10,153 (71,040) (162,468)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 35,356 41,622 56,451
Cumulative effect of accounting change, net - - 550
Amortization of deferred compensation 1,650 3,568 81
Loss (gain) on sale of property and equipment (735) 1,362 1,736
Impairment of assets - 6,686 3,725
Loss from exchange of assets - - 6,783
Capital losses, net 3,950 4,862 8,738
Other - net (mainly deferred taxes) (468) 7,066 6,039
Company's equity in results of investee companies 3,387 4,334 3,055
Minority interest in net results of subsidiaries 305 (16,956) 6,045
Loss (gain) from marketable securities 987 (111) 852
Decrease in trade receivables (including
non-current maturities of bank deposits and trade receivables) 10,741 69,069 112,056
Decrease (increase) in other receivables (8,806) 9,531 30,170
Decrease (increase) in prepaid expenses (727) (1,410) 4,501
Decrease in work in progress 79 3,192 19,540
Decrease (increase) in inventories (58,182) 24,149 113,056
Change in net balance of discontinued operations 870 - -
Increase (decrease) in trade payables 17,360 14,413 (35,217)
Increase (decrease) in other payables and accrued liabilities 41,443 (23,500) (38,461)
Decrease in other long-term liabilities (5,015) (2,364) (3,194)
Increase (decrease) in liability for employee severance benefits, net (715) - (1,584)
Cumulative effect of an accounting change on discontinued operations operation - - 36,646
Impairment of long-lived assets relating to the discontinued - - 22,678
------------- -------------- --------------
Net cash provided by operating activities 51,633 74,473 191,778
------------- -------------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Investments in deposits, net 2,681 (22,563) (450)
Software development costs capitalized (11,151) (11,364) (12,935)
Investment in property, plant and equipment (23,937) (11,347) (11,759)
Proceeds from sale of property, plant and equipment 1,487 878 746
Purchase of technology - (869) -
Acquisition of investee companies (1,212) (203) (2,584)
Long-terms loans granted (6,000) - (6,227)
Investment in marketable securities (43,075) (80,317) -
Changes in assets held for severance benefits (751) 537 (497)
Acquisition of newly consolidated subsidiary (A) - - 513
Repayment of convertible notes 5,400 - -
Proceed from realization of consolidated subsidiary and operations (B) - 9,100 (10,003)
Proceeds from realization of shares at consolidated subsidiary - - 20,302
-------------- -------------- --------------
Net cash used for investing activities (76,558) (116,148) (22,894)
--------------- -------------- --------------
The accompanying notes are an integral part of the financial statements.
F-236
ECI Telecom Ltd.
Consolidated Statements of Cash Flows for the Year Ended December 31 (cont'd)
-----------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
$ in thousands $ in thousands $ in thousands
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of loans from banks (30,000) (100,000) (90,000)
Decrease in short-term credit, net - (70,012) (18)
Share issue expenses - - (646)
Exercise of stock options 2,480 921 51,656
--------------- --------------- ---------------
NET CASH USED FOR FINANCING ACTIVITIES (27,520) (169,091) (39,008)
--------------- --------------- ---------------
EFFECT OF CHANGE IN EXCHANGE RATE ON CASH 216 (508) 581
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (52,229) (211,274) 130,457
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 126,411 356,649 226,192
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 74,182 (*) 145,375 356,649
==============- =============== ===============
SUPPLEMENTAL DISCLOSURES:
INCOME TAXES PAID, NET OF TAX REFUNDS 282 7,158 (124)
==============- =============== ===============
INTEREST PAID 1,518 2,479 10,008
==============- =============== ===============
A. ACQUISITION OF NEWLY CONSOLIDATED SUBSIDIARIES
2004 2003 2002
--------------- --------------- ---------------
$ in thousands $ in thousands $ in thousands
--------------- --------------- ---------------
Net current assets (other than cash) - - (1,795)
Investment in investee companies - - 2,482
Property, plant, equipment and other assets, net - - (171)
Goodwill - - (3)
--------------- --------------- ---------------
- - 513
==============- =============== ===============
(*) Include $ 18,964 thousand related to discontinued operations.
The accompanying notes are an integral part of the financial statements.
F-237
ECI Telecom Ltd.
Consolidated Statement of Cash Flows for the Year Ended December 31 (cont'd)
------------------------------------------------------------------------------------------------------------------------
B. Disposition of a consolidated subsidiary as dividend in kind:
Year ended December 31
---------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Assets - discontinued operations 96,454 - -
Liabilities - discontinued operations (57,175) - -
Investments in investee company (10,822) - -
Capital surplus (24,776) - -
Loss from disposition (3,681) - -
-------------- -------------- --------------
- - -
============== ============== ==============
C. Non-cash activities
Sale of fixed assets in return for shares in investee company - 1,053 -
============== ============== ==============
The accompanying notes are an integral part of the financial statements.
F-238
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies
Significant accounting policies, applied on a consistent basis (except
as disclosed in Note 1T below) are as follows:
A. General
(1) ECI Telecom Ltd. ("ECI" or the "Company") is an Israeli
corporation that provides network and access solutions for
digital telecommunications networks. ECI designs, develops,
manufactures, markets and supports digital telecommunications
solutions for evolving services, including voice, data, video
and multimedia, and for building next generation converging
networks. ECI's products and platforms are designed to create
and manage bandwidth, maximize revenues for network
operators, reduce operating expenses, expand capacity,
improve performance and enable new revenue-producing
services.
(2) On November 7, 2000, the Board of Directors adopted a plan to
split ECI into five distinct companies, as follows: Inovia
Telecoms Ltd. ("Inovia"), ECI Telecom - NGTS Ltd. ("NGTS"),
Enavis Networks Ltd. ("Enavis"), Lightscape Networks Ltd.
("Lightscape"), and InnoWave ECI Wireless Systems Ltd.
("InnoWave") (already operating as a separate company), with
the parent company to serve as a holding company and
sub-contractor of the split-up companies.
The Company established the four new subsidiaries, which
absorbed the employees of the various divisions and were to
receive operating assets from the Company (for segment
reporting see Note 17G). The Company received a tax ruling
that the transfer of activities to the new companies would be
tax free, retroactive to the beginning of 2001.
The plan of demerger contemplated that the parent company
would continue to manufacture for the split-up companies, to
distribute certain of their products abroad through certain
subsidiaries and to hold shares in ECtel Ltd. and the various
start-up companies. It would also provide the split-up
companies with management and other services.
The transfer of assets to the subsidiaries was never carried
out. In November 2002, the Board of Directors decided to
reverse the split-up plan and not to transfer the assets and
liabilities to the subsidiaries.
In December 2002, the Company notified the Israeli Tax
Authorities of the retroactive cancellation of the split-up
plan.
During 2002, the Company's Board of Directors decided to
focus the Company's activities on its two core businesses,
which are organized in two divisions: Broadband Access
Division (formerly - Inovia) and Optical Network Division
(formerly - Lightscape and Enavis).
F-239
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
A. General (cont'd)
(3) In December 2002, the Company transferred part of the NGTS
activities to a new company subsequently called Veraz
Networks Inc., which was set up with third parties and in
which the Company holds approximately 43 % of the share
capital (36 % on a fully diluted basis), see Note 5A.
In addition, in April 2003, the Company sold the activities
of InnoWave, see Note 21. Accordingly, the results of these
activities for all periods reported were reclassified to one
line in the statement of operations following the results
from continuing operations.
(4) On March 9, 2004, the Board of Directors of ECI decided,
in principle, that ECI would distribute 7.6 million of its
shares in ECtel Ltd. to ECI's shareholders.
On April 28, 2004, after the Company obtained court approval
and the consent of its banks, the Board of Directors declared
a distribution of 7.6 million shares of ECtel to the
Company's shareholders of record on May 5, 2004. The shares
were distributed on May 10, 2004. Before distribution, ECI
held approximately 10.5 million, or 58%, of ECtel's shares.
After distribution of the shares, ECI holds approximately 16%
of ECtel's outstanding shares.
Accordingly, the results of ECtel for all periods reported
were reclassified to one line in the statement of operations
following the results from continuing operations.
The assets and liabilities of ECtel as at December 31, 2003
were reclassified in the Company's balance sheets as assets
from discontinued operations and liabilities from
discontinued operations, respectively. See Note 21.
(5) The financial statements have been prepared in conformity
with generally accepted accounting principles (GAAP) in the
United States of America.
(6) The currency of the primary economic environment in which the
operations of the Company and its subsidiaries are conducted
is the U.S. dollar ("dollar").
Most of the Company's sales are made outside of Israel, in
dollars and other non-Israeli currencies (see Note 17G as to
geographical distribution). Most purchases of materials and
components, as well as most selling and other expenses
incurred outside Israel, are in dollars. In view of the
foregoing, the dollar has been determined to be the Company's
functional currency.
Transactions and balances denominated in dollars are
presented at their original amounts.
Non-dollar transactions and balances have been remeasured
into dollars in accordance with the principles set forth in
Statement No. 52 of the Financial Accounting Standards Board
(FASB) of the United States of America.
All exchange gains and losses from remeasurement of monetary
balance sheet items denominated in non-dollar currencies are
reflected in the statement of operations when they arise.
Such foreign exchange gains and losses are included in the
same statement of operations items as those in which the
related transactions are included.
F-240
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
A. General (cont'd)
(7) The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. These are management's
best estimates based on experience and historical data,
however, actual results could differ from these estimates.
B. Principles of consolidation
The consolidated financial statements include those of the Company and
all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
C. Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase, to be cash equivalents
(except for held to maturity debt investments).
D. Investments
1. Investee companies
Investments in investee companies, in which the Company has
significant influence (affiliated companies) are presented
under the equity method, that is, at cost plus the Company's
share of the post-acquisition gains or losses.
Investment in entities in which the Company does not have
significant influence ("other companies"), are stated as
follows:
- Marketable securities - as stated in 2 below.
- Non-marketable securities - at cost, less any
decline in value which is not of a temporary nature.
F-241
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
D. Investments (cont'd)
2. Marketable securities
The Company classifies its debt securities in one of three
categories: Trading, available for sale or held to maturity
and its equity securities as trading or available for sale.
Trading securities are bought and held principally for the
purpose of selling them in the near term. Held-to-maturity
debt securities are those securities in which the Company has
the ability and intent to hold the security until maturity.
All debt securities not included in trading or held to
maturity are classified as available for sale.
Trading, and available-for-sale securities are recorded at
fair value. Held-to-maturity debt securities are recorded at
amortized cost, adjusted for the amortization or accretion of
premiums or discounts. Unrealized holding gains and losses,
net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a
separate component of other comprehensive income until
realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a
specific-identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost, that is deemed to be
other than temporary, results in a reduction in carrying
amount to fair value. The impairment is charged to earnings
and a new cost basis for the security is established.
Premiums and discounts are amortized or accreted over the
life of the related held-to-maturity or available-for-sale
security as an adjustment to yield using the
effective-interest method. Dividend and interest income are
recognized when earned.
E. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined as follows:
Raw materials (including components) - on the moving average basis.
Work in process and finished products:
Raw materials and components - on the moving average basis. Labor and
overhead components - on the basis of actual manufacturing costs.
F-242
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
F. Property, plant and equipment
1. Assets are stated at cost.
2. Depreciation is computed using the straight-line method, over
the estimated useful economic life of the assets as estimated
by the Company.
Annual rates of depreciation are as follows:
Buildings 2.5%
Machinery and equipment 10% - 33% (mainly 10%)
Motor vehicles 15%
Office furniture and equipment 7% - 10%
Leasehold improvements are amortized by the straight-line
method over the lower of the lease term or the estimated
useful economic life.
3. Major renewals and improvements are capitalized, while
repairs and maintenance are expensed as incurred.
4. Upon the sale or retirement of equipment and leasehold
improvements, the cost and related accumulated depreciation
and amortization are eliminated from the respective accounts
and the resulting gain or loss is reflected in the
consolidated statements of operations.
G. Accrued warranty costs
Accrued warranty costs are calculated in respect of products sold and
work performed (for periods subsequent to delivery of the products or
performance of the work) based on management's estimation and in
accordance with the Company's prior experience. (See also Note 17F).
H. Allowance for doubtful debts (see also Note 17C)
The financial statements include an allowance which Management
believes adequately reflects the loss inherent in receivables for
which collection is in doubt. In determining the adequacy of the
allowance Management based its estimate on information at hand about
specific debtors, including their financial situation, the volume of
their operations, aging of the balance and evaluation of the security
received from them or their guarantors.
I. Software development costs
The Company capitalizes certain software development costs in
accordance with SFAS No. 86 "Accounting for Costs of Computer Software
to be Sold, Leased or Otherwise Marketed". Capitalization of software
development costs begins upon the determination of technological
feasibility as defined in the Statement and continues up to the time
the software is available for general release to customers, at which
time capitalized software costs are amortized to research and
development costs on a straight-line basis over the expected life of
the related product, generally one to two years. (for 2003 and 2002 -
generally two to three years).
F-243
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
I. Software development costs (cont'd)
Software development costs include costs which relate principally to
projects which have recently been released or are not yet available
for release to customers. Management believes that future revenues
related to these projects will be sufficient to realize the amounts
capitalized at December 31, 2004, and as such these amounts will be
recovered over the lives of the related projects. It is possible,
however, that those estimates of future revenues could be adversely
impacted if these projects are not finally completed and released in
the future or if market acceptance of related technology is not as
anticipated by Management. As a result, the recovery of these
capitalized software development costs through future revenues could
be reduced materially. In such event, the related capitalized software
development costs will be written-off.
J. Business combinations
The Company adopted SFAS No. 141 "Business Combinations", issued in
July 2001 which requires that the purchase method be used for all
business combinations initiated after June 30, 2001. Separate
recognition of intangible assets is required if they meet one of two
criteria - the contractual-legal right criterion or the separability
criterion. In addition to the disclosure requirements of APB Opinion
No. 16, this Statement requires disclosure of the primary reason for
the business combination and the allocation of the purchase price paid
to the assets acquired and liabilities assumed by major balance sheet
caption.
K. Goodwill and other intangible assets
The Company adopted SFAS No. 142 "Goodwill and Other Intangible
Assets", issued in July 2001. According to SFAS No. 142, goodwill and
intangible assets that have indefinite useful lives will not be
subject to amortization, but instead will be tested at least annually
for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives, but without the
constraint of an arbitrary ceiling (as was set before by APB Opinion
No. 17, "Intangible Assets"). (See also Note 1T).
L. Acquisition of Company's stock
Acquisition of Company's stock is presented as Treasury Stock in the
statement of changes in shareholders' equity, according to the cost
method.
M. Revenue recognition
1. System revenues are recognized when the product has been
delivered and when title to the system and risk of loss have
been substantially transferred to the customer, provided that
collection is reasonably assured. When the sale arrangement
includes customer acceptance provisions with respect to
network interoperability, revenue is not recognized before
the Company has demonstrated that the criteria specified in
the acceptance provisions have been satisfied.
F-244
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
M. Revenue recognition (cont'd)
When a sale involves multiple elements, such as sales of
products that include installation and integration services,
the entire fee from the arrangement is evaluated under EITF
00-21, "Revenue Arrangements with Multiple Deliverables".
Accordingly, in an arrangement with multiple deliverables,
the arrangement consideration is allocated to each respective
element based on its relative fair value and recognized when
revenue recognition criteria for each element are met if all
of the following conditions are met: (1) the delivered items
have value to the customer on a standalone basis, (2) there
is objective and reliable evidence of the fair value of the
undelivered items, (3) if the arrangement includes a general
right of return, delivery or performance of the undelivered
items is probable and substantially in the control of the
Company.
2. The Company makes certain sales through resellers. The
Company recognizes revenues from sales to resellers, assuming
all other criteria for revenue recognition are met and
provided that there is no contractual right of return, either
(i) when it receives adequate collateral (which in almost
every case is a Letter of Credit) from the reseller to secure
payment to the Company, or (ii) in certain instances where
the Company has an established ongoing relationship with the
reseller and a proven track record of payments, when it
receives written evidence of the identity of the end-user and
the existence of an agreement by the end-user to purchase the
product from the reseller (e.g. a copy of a purchase order)
or (iii) in instances where the reseller is a major
internationally known corporation and the Company has an
established ongoing relationship with such reseller and a
proven track record of payments, upon delivery of the
products to the reseller. When the collectability from the
reseller is not reasonably assured or when the right of
return exists, revenue is recognized on a cash basis,
provided that the reseller has ultimately sold the products
to an end-user or the return privilege has substantially
expired.
3. Revenues from sales involving long-term credit arrangements
at less than accepted interest rates are recorded at the
present value of the related future cash flows. The
difference between the amounts receivable and their present
value is to be recognized as interest income over the period
of the debt.
4. Software license revenue is generally recognized at the time
the software is delivered to the customer, if collection is
probable and the Company has no significant obligations
remaining under the sales or licensing agreement and no
significant customer acceptance requirements exist subsequent
to software delivery.
5. Service revenues from product maintenance contracts and
separately priced extended warranty contracts are generally
recognized ratably over the contract period, while revenue
from software services generally is recognized as the
services are performed or, if no pattern of performance is
evident, ratably over the period during which they are
performed.
6. Long-term contracts are those requiring design, development,
engineering and modification and are of a significantly
longer duration than contracts for system sales. Revenue from
long-term contracts is recognized using the percentage of
completion method, which is in accordance with Statement of
Position (SOP 81-1). The percentage of completion is
determined according to the contract milestones. In the event
that management anticipates a loss on a particular contract,
such anticipated loss is provided for in full in the period
when the loss is first anticipated.
F-245
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
N. Research and development
Research and development costs, net of any grants, are charged to the
statements of operations as incurred. Royalties paid and accrued in
respect of the said grants are classified as cost of goods sold.
O. Reclassification
1. Certain amounts in prior years' financial statements have
been reclassified to conform to the current year's
presentation. (See also Note 21).
2. The results of ECtel for all periods have been reclassified
to one line in the statement of operations following the
results from continuing operations. The assets and
liabilities of ECtel as at December 31, 2003 have been
reclassified in the balance sheets as assets from
discontinued operations and liabilities from discontinued
operations, respectively, see Note 21(B).
P. Income taxes
1. The Company accounts for income taxes under Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for
Income Taxes".
Under SFAS 109 deferred tax assets or liabilities are
recognized in respect of temporary differences between the
tax bases of assets and liabilities and their financial
reporting amounts as well as in respect of tax losses and
other deductions which may be deductible for tax purposes in
future years, based on tax rates applicable to the periods in
which such deferred taxes will be realized. Deferred tax
assets for future tax benefits from realization are included
when their realization is more likely than not. Valuation
allowances are established when necessary to reduce deferred
tax assets to the amount considered more likely than not to
be realized. Deferred tax assets and liabilities are
classified as current or long-term items in accordance with
the nature of the assets or liabilities to which they relate.
When there is no underlying assets or liabilities the
deferred tax assets and liability are classified in
accordance with the period of expected reversal.
F-246
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
P. Income taxes (cont'd)
Deferred taxes were not recorded in respect of the following
matters -
o Certain undistributed earnings of foreign
consolidated subsidiaries which are taxable upon
distribution by way of dividend, as no such dividend
distribution intention exists (for domestic
consolidated subsidiaries, see 2 below).
o Differences between the rate of change in the
Israeli Consumer Price Index (which serves as a
basis for measurement for tax purposes) and the rate
of change in the NIS/US dollar exchange rate, this
in accordance with paragraph 9 (f) of SFAS 109.
2. In accordance with paragraph 33 of SFAS 109, deferred taxes
have not been provided for the Parent Company's temporary
difference relating to operations in both its domestic
subsidiaries and domestic "approved enterprises" as the tax
laws provide methods whereby the reported amounts of these
investments can be recovered tax-free and the parent company
expects that it will ultimately utilize these methods.
- Earnings distributed by domestic subsidiaries relating to
"approved enterprises? can be transferred to the Parent
Company by way of a tax-free merger.
- Earnings distributed related to the Parent Company's
"approved enterprises" are not taxable to the Parent Company
in a liquidation as such taxes would be due from the
shareholders.
- Earnings distributed by domestic subsidiaries which are not
attributable to an "approved enterprise" are not taxable.
Income tax expense represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
Q. Derivative financial instruments
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities" and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activity, an Amendment of SFAS 133". SFAS Nos. 133 and 138 require
that all derivative instruments be recorded on the balance sheet at
their respective fair values.
The Company has significant international sales transactions in
foreign currencies and has a policy of hedging forecasted and actual
foreign currency risk with forward foreign exchange contracts and
foreign exchange options. The Company's forward foreign exchange
contracts are primarily denominated in Euro, Pounds Sterling and NIS
and are for periods consistent with the terms of the underlying
transactions, generally one year or less. Derivative instruments are
employed to eliminate or minimize certain foreign currency exposures
that can be confidently identified and quantified.
F-247
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
Q. Derivative financial instruments (cont'd)
On the date a derivative contract is entered into, the Company
designates the derivative as either a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment
(fair value hedge), a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a
recognized asset or liability (cash flow hedge), a foreign-currency
fair-value or cash-flow hedge (foreign currency hedge). For all
hedging relationships the Company formally documents the hedging
relationship and its risk-management objective and strategy for
undertaking the hedge, the hedging instrument, the item, the nature of
the risk being hedged, how the hedging instrument's effectiveness in
offsetting the hedged risk will be assessed, and a description of the
method of measuring ineffectiveness. This process includes linking all
derivatives that are designated as fair-value, cash-flow, or
foreign-currency hedges to specific assets and liabilities on the
balance sheet or to specific firm commitments or forecasted
transactions. The Company also formally assesses, both at the hedge's
inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items.
When it is determined that a derivative is not highly effective as a
hedge or that it has ceased to be a highly effective hedge, the
Company discontinues hedge accounting prospectively.
Changes in the fair value of a derivative that is highly effective and
that is designated and qualifies as a fair-value hedge, along with the
loss or gain on the hedged asset or liability or unrecognized firm
commitment of the hedged item that is attributable to the hedged risk,
are recorded in operations. Changes in the fair value of a derivative
that is highly effective and that is designated and qualifies as a
cash-flow hedge are recorded in other comprehensive income (loss) to
the extent that the derivative is effective as a hedge, until
operations are affected by the variability in cash flows of the
designated hedged item. Changes in the fair value of derivatives that
are highly effective as hedges and that are designated and qualify as
foreign-currency hedges are recorded in either operations or other
comprehensive income (loss), depending on whether the hedge
transaction is a fair-value hedge or a cash-flow hedge. The
ineffective portion of the change in fair value of a derivative
instrument that qualifies as either a fair-value hedge or a cash-flow
hedge is reported in operations. Changes in the fair value of
derivative trading instruments are reported in current period
operations.
The Company discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in offsetting
changes in the fair value or cash flows of the hedged item, the
derivative expires or is sold, terminated, or exercised, the
derivative is de-designated as a hedging instrument, because it is
unlikely that a forecasted transaction will occur, a hedged firm
commitment no longer meets the definition of a firm commitment, or
management determines that designation of the derivative as a hedging
instrument is no longer appropriate.
F-248
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
Q. Derivative financial instruments (cont'd)
When hedge accounting is discontinued because it is determined that
the derivative no longer qualifies as an effective fair-value hedge,
the Company continues to carry the derivative on the balance sheet at
its fair value and no longer adjusts the hedged asset or liability for
changes in fair value. The adjustment of the carrying amount of the
hedged asset or liability is accounted for in the same manner as other
components of the carrying amount of that asset or liability. When
hedge accounting is discontinued because the hedged item no longer
meets the definition of a firm commitment, the Company continues to
carry the derivative on the balance sheet at its fair value, removes
any asset or liability that was recorded pursuant to recognition of
the firm commitment from the balance sheet, and recognizes any gain or
loss in operations. When hedge accounting is discontinued because it
is probable that a forecasted transaction will not occur, the Company
continues to carry the derivative on the balance sheet at its fair
value with subsequent changes in fair value included in operations,
and gains and losses that were accumulated in other comprehensive
income are recognized immediately in operations. In all other
situations in which hedge accounting is discontinued, the Company
continues to carry the derivative at its fair value on the balance
sheet and recognizes any subsequent changes in its fair value in
operations.
R. Comprehensive income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income"
which establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial
statements. Comprehensive income consists of net income (loss) and net
unrealized gains (losses) on securities and on the change in the fair
value of financial instruments that are used for cash flow hedging,
and is presented in the statement of shareholders' equity and
comprehensive income (loss).
S. Stock option plan and employee purchase plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations, including FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation an Interpretation of
APB Opinion No. 25" issued in March 2000, to account for its fixed
plan stock options. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price.
SFAS No. 123, "Accounting for Stock-Based Compensation", established
accounting and disclosure requirements using a fair value-based method
of accounting for stock-based employee compensation plans. As allowed
by SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has
adopted the disclosure requirements of SFAS No. 123.
F-249
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
S. Stock option plan and employee purchase plan (cont'd)
Had compensation expenses for stock options granted under the
Company's stock option plan been determined based on the fair value at
the grant dates consistent with the method of SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have
been as follows:
For the year ended December 31
-------------------------------------------------
2004 2003 2002
----------- ------------ ------------
$ in thousands, except per share amounts
-------------------------------------------------
Net income (loss), as reported 10,153 (71,040) (162,468)
Add: Stock-based employee compensation
expenses included in reported net
income (loss), net of related tax effects 1,650 3,568 286
Deduct: Total stock-based employee compensation
expense determined under the fair value
based method for all awards, net of
related tax effects (10,072) (23,450) (59,930)
----------- ------------ ------------
Pro Forma net income (loss) 1,731 (90,922) (222,112)
=========== ============ ============
Basic earnings (loss) per share ($):
- as reported 0.09 (0.65) (1.54)
- pro forma 0.02 (0.84) (2.10)
Diluted earnings (loss) per share($):
- as reported 0.09 (0.65) (1.54)
- pro forma 0.01 (0.84) (2.10)
T. Accounting changes
Effective January 1, 2002, the Company applies the provisions of SFAS
No. 142 "Goodwill and Other Intangible Assets".
In connection with the transitional impairment evaluation, Statement
No. 142 required the Company to perform an assessment of whether there
was an indication that goodwill was impaired as of January 1, 2002. To
accomplish this, the Company was required to (1) identify its
reporting units, (2) determine the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units, and (3)
determine the fair value of each reporting unit. If the carrying value
of any reporting unit exceeds its fair value, detailed fair values for
each of the assigned and unassigned assets (excluding goodwill) and
liabilities are determined to calculate the amount of goodwill
impairment, if any. The difference between the fair value of the
reporting unit and the fair value of the assigned and unassigned
assets (excluding goodwill) and liabilities related to the reporting
unit represents the implied fair value of the goodwill. If the implied
fair value of the goodwill is lower than its carrying value, the
Statement required that the difference be written-off.
In 2002, the Company performed the transitional impairment evaluation
as provided in the said standard. Accordingly, a loss in the amount of
$ 37,196 thousand from a decline in value of goodwill (including an
amount of $ 36,646 thousand, which is attributed mainly to InnoWave -
see also Note 21) was included as a cumulative effect of a change in
accounting policy.
F-250
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 1 - Significant Accounting Policies (cont'd)
U. Impairment or disposal of long-lived assets
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" as of January 1, 2002. This Statement
requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset to future cash flows expected to be generated by the asset or
used in its disposal. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. (See also Notes 20 and 21).
V. Sale of financial assets
The Company adopted SFAS No. 140 - "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The
Statement requires that a transfer of financial assets in which
control is surrendered, is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred
assets is received in exchange. See Note 17P.
W. Earnings (loss) per Ordinary Share
Basic and diluted earnings (loss) per Ordinary Share are presented in
conformity with Statement of Financial Accounting Standard No. 128,
"Earnings Per Share", for all years presented. Basic earnings (loss)
per Ordinary Share are calculated by dividing the net earning (loss)
attributable to Ordinary Shares, by the weighted average number of
Ordinary Shares outstanding. Diluted earnings (loss) per Ordinary
share calculation is similar to Basic Earnings Per Share except that
the weighted average of common shares outstanding is increased to
include the number of additional common shares that would have been
outstanding if the dilutive potential common shares such as options,
had been exercised.
X. Commitments and contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties and other sources are recorded when it
is probable that a liability has been incurred and the amount of the
assessment can be reasonably estimated.
Y. Impairment of loans
The Company applies the provisions of SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures" which prescribes the accounting treatment by
creditors with respect to impairment of loans. These standards cover
all loans, which are restructured in a troubled debt restructuring,
involving modifications of terms of the loans, including those
involving a receipt of assets in partial satisfaction of a receivable.
In accordance with FAS 114, a loan is impaired when it is probable,
based on current information and events, that the creditor will be
unable to collect all amounts (contractual interest and principle
payments) due according to the contractual terms of the loan
agreement. Loans impaired are measured based on the present value of
the expected future cash flows, discounted at the loan's effective
interest rate or, alternatively, based on the observable market price
of the loan or the fair value of the collateral, if the loan is
collateral dependent.
F-251
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 2 - Investment Securities and Deposits
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Short-term:
Short-term deposits (see Note 17B.) 5,628 2,398
Marketable securities:
Trading - 359
Available for sale securities* - 1,282
Held to maturity securities 19,086 29,900
-------------- --------------
24,714 33,939
============== ==============
Long-term:
Long-term deposits 11,659 15,346
Available for sale securities* 10,694 -
Held to maturity securities 97,006 43,853
-------------- --------------
119,359 59,199
============== ==============
* As of December 31, 2004 and 2003, the Company had net unrealized
gains on Available for Sale Securities of $ 2,341 and $ 1,282
thousand, respectively.
The amortized cost, gross unrealized holding gains (loss), and fair
value of held-to-maturity securities by major security type at
December 31, 2004, were as follows:
Gross
Unrealized
Amortized Holding Fair
Cost Gains (Losses) Value
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Held to maturity
U.S. Government agencies 46,925 (423) 46,502
Corporate debt securities 43,338 (525) 42,813
Other 25,829 34 25,863
-------------- -------------- --------------
116,092 (914) 115,178
============== ============== ==============
Maturities of debt securities classified as held-to-maturity were as
follows at December 31, 2004:
Amortized Fair
Cost value
$ in thousands $ in thousands
-------------- --------------
Held to maturity:
First year 19,086 19,014
Due after one year through five years 95,242 94,414
Due after five years through ten years 1,764 1,750
-------------- --------------
116,092 115,178
============== ==============
F-252
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 3 - Inventories
Consist of the following:
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Raw materials and components 58,050 44,142
Work in process 13,706 21,419
Finished products 103,309 51,322
-------------- --------------
175,065 116,883
============== ==============
Note 4 - Long-Term Receivables, Net of Current Maturities
A. Consist of the following:
Weighted
average interest
rate as of
December 31 December 31 December 31
2004 2004 2003
---------------- -------------- --------------
% $ in thousands $ in thousands
---------------- -------------- --------------
Long-term trade receivables (1) 10.24% 186,604 178,903
Less deferred interest income (*) - 7,583
-------------- --------------
Total (2) 186,604 171,320
Less - provision for doubtful debts (**) 77,252 40,600
Less - current maturities 19,377 24,075
-------------- --------------
89,975 106,645
============== ==============
The trade receivables are denominated in U.S. dollars.
(*) The deferred interest income represents the difference
between the original amount of the receivables and their net
present value computed, at the transaction date, by the
relevant interest rate.
(**) See Notes 17C and 4C.
(1) Long-term trade receivables ("receivables") (a)(b) consist
mainly of receivables resulting from sales of the Company's
products, providing from one to ten years credit commencing
on the date of signing of the sales contract or the finance
agreement related thereto or other date as mentioned in the
contract. Such receivables are interest bearing and are
payable in quarterly or semi-annual payments. The principal
is paid generally after the grant of a grace period. These
receivables are partially secured by trade risk insurance
policies.
(a) The long-term receivables include also certain
related pledged deposits, which are disclosed
together because the economic substance of the two
assets is very similar (see (b) below).
(b) The deposits are pledged to a commercial bank in
Israel (the "commercial bank") and are mainly
released simultaneously with, and in amounts equal
to, payments on account of the loan extended by the
commercial bank to a foreign commercial bank (the
"customer bank"). The commercial bank serves the
customer bank as a source of financing for the
purpose of the sale transaction with the Company.
F-253
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 4 - Long-Term Receivables, Net of Current Maturities (cont'd)
A. Consist of the following: (cont'd)
(2) As at December 31, 2004 and 2003 - includes GVT, a Brazilian
company, amounting to $ 86 million (including current
maturity) and $ 85 million, respectively (see 4C below) and
certain other customers whose indebtedness does not exceed $
3.5 million per customer as at December 31, 2004 and, $ 5
million as at December 31, 2003.
(3) In the opinion of the Company's management, due to the nature
of the customers and their activities, their financial
performance, updated financial and business data, previous
business relations and existing trade insurance as stated
above, as well as provision for doubtful debts, the Company
has limited risk exposure in relation to the long-term
receivables.
B. Aggregate maturities are as follows:
December 31
2004
--------------
$ in thousands
--------------
First year (current maturities) 19,377
Second year 9,041
Third year 8,121
Fourth year 19,281
Fifth year 24,700
Thereafter 106,084
--------------
186,604
==============
C. 1. In 2000, the Company and a subsidiary (InnoWave) entered
into an agreement for the sale to Global Village Telecom
("GVT"), a Brazilian company, of wireless local loop
systems and services. Pursuant to the agreement, the
Company agreed to grant GVT long-term financing for the
purchase, comprising a line of credit of up to $168
million, based upon the progress of sales. This financing
was granted in conjunction with credit made available to
GVT by a group of other equipment vendors. The credit was
to be repaid (in semi-annual payments) during the years
2004 through 2007. The interest payable under the line of
credit was variable (ranging from LIBOR plus 6.5% to LIBOR
plus 4.5%). As security for its obligations under the
agreement, GVT granted the Company (together with three
other major international suppliers) a charge on its
license to operate its communications network in Brazil,
together with additional security including shareholders'
guarantees and charges on revenue and contracts.
F-254
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 4 - Long-Term Receivables, Net of Current Maturities (cont'd)
C. (cont'd)
2. As GVT's revenues were denominated in Brazilian
currency and its vendor debt was in dollars, this
negatively impacted its ability to maintain the debt
repayment schedule, due primarily to a significant
devaluation of the Brazilian currency relative to
the dollar. Commencing December 2002, GVT defaulted
in its payments to the Company. Accordingly, during
2002 and 2003, the Company recorded a provision for
doubtful debts, in the amount of $34.0 million and $
6.6 million, respectively with respect to this debt.
3. Following extensive negotiations, agreements to
reschedule GVT's debt repayments were signed on
November 11, 2004 among GVT, its shareholders and
its principal creditors, including the Company.
These agreements, which closed on December 23, 2004,
encompassed GVT's commercial debt to the creditors
for the supply of equipment and services, the debt
due under the convertible notes referred in Note 5B
below and accumulated interest on the debts to the
closing. As a precondition to the closing of these
agreements, the sum of $5.4 million was paid to the
Company. The main provisions of the agreements, as
regards the Company, are:
o All the said debts were canceled and in
place thereof GVT issued to the Company
notes in the aggregate sum of approximately
$163 million to be paid from 2005 through
2013 at variable rates of interest. Notes
for an aggregate of $131 million will carry
interest at rates varying from LIBOR plus
2.7% at commencement to LIBOR plus 12.4% in
later years. Notes for an aggregate of $32
million will be interest free. The weighted
average interest rate on the Notes will
vary between LIBOR plus 1% at commencement
and LIBOR plus 9% in later years.
o The Company was granted warrants
convertible, at no further consideration,
into shares of GVT's parent company,
equating to approximately 2.4% of its
outstanding share capital.
4. According to SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan", the carrying amount of
the said restructured debt is presented based on the
present value of the expected future cash flows
discounted at the debt 's original contractual
interest rate which is LIBOR plus 6.5%.
See Note 22C.
F-255
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 5 - Investments
Consist of the following:
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Affiliated companies (A) 16,259 19,646
Convertible notes (B) - 5,600
Loans (C) 6,000 -
Other 4,507 3,670
-------------- --------------
26,766 28,916
============== ==============
A. Investments in affiliated companies are comprised of:
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Cost of shares 28,223 28,223
Accumulated losses (11,964) (8,577)
-------------- --------------
16,259 19,646
============== ==============
In December 2002, the company closed a transaction pursuant to which
it transferred the VoIP and other activities, including certain
related net assets with a book value of $ 19.6 million of the NGTS
business, plus $10 million in cash, to NexVerse Networks, in exchange
for approximately 43% (fully diluted 36%) of the shares of NexVerse
valued at $ 22.8 million.
The name of the company resulting from this transaction was changed to
Veraz Networks and ECI's investment in Veraz has been accounted for by
the equity method. According to the agreement, Veraz became an
exclusive distributor of ECI's DCME products which are produced by the
Company and sold to Veraz in accordance with the terms set in the
agreement. In addition, the Company manufactures and sells to Veraz
certain of its VoIP products.
As a result of the transaction, the Company recorded in 2002 a loss in
the amount of $ 10.8 million. This loss included the amount of $ 6.8
million related to loss from exchange of assets, $ 2.2 million from
impairment of assets and $ 1.8 million (which was included in the cost
of revenues) of inventory which, according to Veraz's business plan,
were unlikely to be used. See Note 20B.
F-256
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 5 - Investments (cont'd)
A. Investments in affiliated companies are comprised of: (cont'd)
Summarized financial information of an affiliated company is as
follows:
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
BALANCE SHEET INFORMATION
Current assets 65,832 69,907
Total assets 72,345 76,064
Current liabilities 40,230 38,471
Total liabilities 43,355 39,165
Shareholders' equity 28,990 36,899
STATEMENT OF OPERATIONS INFORMATION
Revenues 48,612 42,784
Gross profit 36,207 30,687
Net loss (7,996) (7,430)
F-257
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 5 - Investments (cont'd)
B. Convertible notes
In addition to the sale and financing agreement with GVT referred to
in Note 4C, the Company made a loan of $ 27 million to GVT's parent
company, GVT Holding NV, in return for convertible subordinated notes
that carried interest at 5% per annum. The maturity date of the notes
was in November 2003 and they carried the right to convert into
marketable securities in certain circumstance. Conversion of the notes
would not have given the Company significant influence in the said
company. Due to significant concern regarding the financial ability of
GVT Holding NV to repay the notes, during 2002, the Company included a
provision in the amount of $ 18 million, as part of other expenses, to
reflect an other than temporary decline in the value of this
investment. In 2003, the Company recorded an associated $ 3.4 million
charge, also in other expenses, for a further decline in the value of
this investment, to reflect the expected outcome of then advanced
discussions with GVT Holding NV with a view to restructuring this
debt.
Following extensive negotiations, agreements were signed on November
11, 2004 among GVT, its parent company and other shareholders, and its
principal creditors, including the Company. These agreements, which
closed on December 23, 2004, encompassed GVT's commercial debt to the
creditors for the supply of equipment and services referred in Note 4C
above, the debt due under the said convertible notes and accumulated
interest on the debts to the closing. As a precondition to the closing
of these agreements, the Company was paid the sum of $ 5.4 million.
C. Loans
In December 2004, the Company signed a series of transactions with
Chiaro Networks Ltd. ("Chiaro") a developer of infrastructure-class
IP/MPLS routing platforms. The transactions consist of: (i) a loan
agreement (ii) a call option agreement for the acquisition of Chiaro
by the Company (iii) a distribution agreement.
a) Loan agreement
Pursuant to the terms of the loan agreement, the Company
provided two loans to Chiaro in the aggregate amount of $ 6
million. The first loan of $ 3 million bearing interest at an
annual rate of LIBOR + 2.3%, will be payable in full 39
months from the closing date of the transaction.
The second loan of $ 3 million will bear interest at an
annual rate of LIBOR + 2.3%, and will be payable in full 39
months from the closing date of the transaction. The Company
may convert the second loan at any time into convertible
preferred BB shares of Chiaro.
The loans are secured by a first-priority floating charge
over substantially all of Chiaro's assets.
F-258
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 5 - Investments (cont'd)
C. Loans (cont'd)
b) Call option agreement
Pursuant to the terms of the call option agreement, the
Company has the option to acquire Chiaro under terms defined
in the agreement. The term of the option is 37.5 months and
it may be exercised within three defined 90-day exercise
windows during its term.
c) Distribution agreement
Pursuant to the distribution agreement, the Company received
exclusive, global distribution rights for Chiaro's products,
for a period of 37.5 months from closing.
Note 6 - Property, Plant and Equipment
Property, plant and equipment as of December 31, 2004 consists of the following:
Freehold Machinery Office Leasehold Total
land and and Motor furniture and improvements
buildings equipment vehicles Equipment
----------- ----------- ----------- ----------- ------------ -----------
$ thousands $ thousands $ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- ----------- ------------ -----------
COST
Balance at
beginning of year 56,944 183,341 7,897 9,485 13,381 271,048
Additions 314 22,566 165 226 666 23,937
Disposals - 29,498 2,278 2,929 962 35,667
----------- ----------- ----------- ----------- ----------- -----------
Balance at end
of year 57,258 176,409 5,784 6,782 13,085 259,318
----------- ----------- ----------- ----------- ----------- -----------
ACCUMULATED
DEPRECIATION AND
AMORTIZATION
Balance at
beginning of year 7,653 121,871 5,121 7,067 10,279 151,991
Additions 1,094 18,368 1,009 474 1,767 22,712
Disposals - 29,410 2,142 2,436 750 34,738
----------- ----------- ----------- ----------- ----------- -----------
Balance at end
of year 8,747 110,829 3,988 5,105 11,296 139,965
----------- ----------- ----------- ----------- ----------- -----------
Net book value at
December 31, 2004 48,511 65,580 1,796 1,677 1,789 119,353
=========== =========== =========== =========== =========== ===========
Net book value at
December 31, 2003 49,291 61,470 2,776 2,418 3,102 119,057
=========== =========== =========== =========== =========== ===========
Regarding pledge, see Note 14.
F-259
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 7 - Software Development Costs, Net
Capitalization and amortization of software development costs during
the years ended December 31, 2004, and 2003 is comprised as follows:
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Balance at beginning of year 16,289 20,082
Capitalization of software development costs during the year 11,151 11,364
Amortization and write-offs during the year (13,005) (15,157)
-------------- --------------
14,435 16,289
============== ==============
Note 8 - Goodwill
Consist of the following:
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Goodwill (1) 1,039 1,039
(1) Original amount 139,137 139,137
Amortization and write down due to decline in value (138,098) (138,098)
-------------- --------------
1,039 1,039
============== ==============
Note 9 - Long-Term Liabilities
A. Loans
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Long-term loans * 30,000 60,000
Less - current maturities 30,000 30,000
-------------- --------------
- 30,000
============== ==============
* The loans carry an annual interest rate of LIBOR plus 2% (the
LIBOR interest rate at December 31, 2004 and 2003 is 2.56%
and 1.2%, respectively), and are repayable quarterly.
According to the loan agreement, the Company repaid an amount
of $ 30 million during the current period. See Note 14 (for
assets pledged) and Note 22B.
F-260
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 9 - Long-Term Liabilities (cont'd)
B. Other liabilities
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Provision for claim (see Note 11A(5)) - 6,000
Other liabilities - 15
-------------- --------------
- 6,015
============== ==============
Note 10 - Liability for Employee Severance Benefits, Net
A. Employees of the Company and of its consolidated subsidiaries
in Israel (Israeli companies)
Under Israeli law and labor agreements, the Israeli companies are
required to make severance and pension payments to their retired or
dismissed employees and to employees leaving employment in certain
other circumstances.
1. The liability in respect of most of its non-senior employees
is discharged by participating in a defined contribution
pension plan and making regular deposits with a pension fund.
The liability deposited with the pension fund is based on
salary components as prescribed in the existing labor
agreement. The custody and management of the amounts so
deposited are independent of the companies and accordingly
such amounts funded (included in expenses on an accrual
basis) and related liabilities are not reflected in the
balance sheet.
2. In respect of the liability to other employees, individual
insurance policies are purchased and deposits are made with
recognized severance pay funds.
The liability for severance pay is calculated on the basis of
the latest salary paid to each employee multiplied by the
number of years of employment. The liability is covered by
the amounts deposited including accumulated income thereon as
well as by the unfunded provision.
3. As to the union employees of Tadiran Telecommunication Ltd.
(TTL) who are covered by the labor agreements which were in
force in TTL, the Company's liability for severance pay is in
accordance with such labor agreements.
If the Company terminates the employment of these employees
up to 2011, they are entitled to additional benefits. After
that time, the employees will no longer be eligible for such
benefits.
4. The expenses in respect of severance and pension pay (not
including expenses in restructuring) for the years ended
December 31, 2004, 2003 and 2002 are $ 4,008, $ 5,593
thousand and $8,869 thousand respectively.
F-261
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 10 - Liability for Employee Severance Benefits, Net (cont'd)
A. Employees of the Company and of its consolidated subsidiaries
in Israel (Israeli companies) (cont'd)
5. Company's liability for termination of the employer-employee
relationship is composed as follows: 2004 2003
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Provision for severance pay 50,943 50,658
Amounts funded including
accumulated income 25,182 24,431
-------------- --------------
25,761 26,227
============== ==============
Withdrawals from the funds may be made only for the purpose
of disbursement of severance pay.
B. Employees of U.S. consolidated subsidiaries (U.S. companies)
The subsidiaries sponsor a section 401(K) defined contribution plan or
401(A) plan which permits its employees to invest up to certain
amounts of their compensation (subject to limitation by Internal
Revenue Service Regulations) on a pretax basis in certain
self-directed investment programs. The subsidiaries may, at the
discretion of the Board of Directors, make contributions to the plan.
Company contributions with respect to this plan were $ 244 thousand, $
499 thousand and $ 588 thousand in 2004, 2003 and 2002, respectively.
C. Employees in the rest of the world
The provision for severance pay includes amounts related to employees
in countries other than Israel and the U.S. and are calculated in
accordance with the rules of the country in which they operate.
Note 11 - Commitments and Contingencies
A. Claims and potential claims
1. Following the reduction in workforce (see Note 19), in
accordance with the reorganization plan of the Company,
claims and demands for higher amounts of severance pay were
submitted by certain former employees. Management of the
Company believes, based on the opinion of its legal advisors,
that the effect, if any, of the results of such claims and
demands on the financial position of the Company and the
results of its operations, will be immaterial and the
provisions which are included in the financial statements in
respect thereof are appropriate and sufficient.
2. The Company conducts negotiations from time to time with
international technology companies ("technology companies")
regarding allegations that it is using certain patents owned
by the technology companies in its products. Although the
Company cannot assess each negotiation for its merit, it
estimates that any settlement, if needed, will not have a
material adverse effect on the Company's financial position
or results of operations.
F-262
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
A. Claims and potential claims (cont'd)
3. In December 1999, an agreement was signed with SCI Systems
("SCI") for the sale of a plant which manufactures electronic
components. SCI is one of the largest manufacturers of
electronic components in the world. As part of the agreement,
SCI will, for several years to come, be the subcontractor for
part of the manufacturing activities of the Company, on a
cost plus basis.
The Company is in dispute with SCI as to the interpretation
of certain aspects of the agreement, such as volume
commitments; discount terms for large orders; the minimum
size of orders; timing; untimely payments etc. The dispute
was referred to an arbitrator in December 2002. In April
2003, SCI submitted claims in an aggregate amount of $ 30
million.
The Company rejected the allegations made against it and
filed a claim against SCI in an amount of $ 50 million.
Since the arbitration began, the parties have appointed an
independent mediator in an additional attempt to settle this
dispute.
In the opinion of the Company's legal counsel, since the
defense arguments of SCI have not yet been thoroughly studied
and the inquiries regarding the facts relating to the
allegations have not yet been completed, it is not possible,
at this early stage of the proceedings, to evaluate the
chances of the Company's claim as well as the chances of
SCI's claim.
In the opinion of Management, the arbitrator's decision will
not have a material adverse effect on the Company's financial
position or results of its operation.
4. Several claims have been submitted against the Company and
against consolidated subsidiaries, resulting from ordinary
business operations inter alia, for using patents owned by
others. The Company's Management based mainly on opinions of
its legal advisors, believes that the effect, if any, of the
results of such claims on the financial position of the
Company and the results of its operations will be immaterial
and the provisions which are included in the financial
statements in respect thereof are appropriate and sufficient.
F-263
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
A. Claims and potential claims (cont'd)
5. In October 1997, an investigation was commenced by the
Israeli Comptroller of Restrictive Trade Practices
("comptroller") regarding alleged price fixing and
non-competitive practices among Tadiran Telecommunications
Ltd. ("TTL"), Tadiran Ltd (Tadiran was the parent company of
TTL) and Telrad Telecommunications and Electronics Industries
Ltd., a subsidiary of Koor Industries Ltd. (a significant
shareholder of the Company and Tadiran Ltd.).
In the 1999 merger agreement between the Company and TTL,
Tadiran Ltd. had agreed to indemnify the Company for damages
above $6 million.
In the third quarter of 2004, the Company was informed that
the comptroller has ceased the investigation without taking
any action against the Company. Accordingly, a provision in
the amount of $6 million that was recorded at the time of the
acquisition of TTL was reversed and recorded as other income.
6. In September 2004, following the completion of the
investigation by the comptroller mentioned above, a claim was
filed against Bezeq (Israel's national telecommunications
provider), Koor, TTL, Tadiran and Telrad in the District
Court of Tel Aviv-Jaffa. Attached to the claim was a request
for certification thereof as a class action, brought in the
name of all Bezeq customers against the aforesaid companies,
including the Company, in an amount of $ 396 million.
Management of the Company believes, in light of the advice of
its legal counsel, that the allegations against the Company
are without merit and therefore no provision was recorded in
respect thereto in the financial statements.
B. Lease commitments
The Company and its consolidated subsidiaries have entered into
several operating lease agreements in Israel and abroad. The
agreements expire on various dates from 2004 to 2011 (some of which
have renewal options) and are in local currencies or linked to the
dollar or to the Israeli Consumer Price Index.
Future minimum annual rent payments to which the Company and its
subsidiaries are committed under the above leases, at rates in effect
at December 31, 2004, are as follows:
Year ending December 31 $ in thousands
----------------------- --------------
2005 6,770
2006 5,435
2007 4,750
2008 3,942
2009 and thereafter 4,821
As to rent expense under the Company's leases, see Note 17N.
F-264
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
C. Royalty commitments
1. The Company is committed to pay royalties to the Government
of Israel on proceeds from sale of products in the Research
and Development of which the government participated by way
of grants. The royalties are computed mainly at the rates of
3.5% of the aggregated proceeds from sale of such products,
up to the amount not exceeding 100% of such grants. As at
December 31, 2004, the maximum possible future commitment of
the Company is approximately $ 137 million (excluding
interest).
2. The Company is committed to pay royalties to certain parties
whose products, patents or technology are incorporated in
certain products of the Company. Such royalties are based on
sales of systems or a family of products incorporating such
products, patents or technology and are paid based either on
a fixed rate, a price per unit sold or as a rate of the
system or the family of products sale price.
D. Financial instruments
(1) Derivative financial instruments
The Company has significant international sales transactions
in foreign currencies and has a policy of hedging forecasted
and actual foreign currency risk with forward foreign
exchange contracts and purchased and written options. The
Company's forward foreign exchange contracts and purchased
options are primarily denominated in Euro, Pounds Sterling
and NIS and are for periods consistent with the terms of the
underlying transactions, generally one year or less.
Derivative instruments are employed to eliminate or minimize
certain foreign currency exposures that can be identified and
quantified. The Company was exposed to but realized no losses
from non-performance by counter parties on these derivatives.
The Company uses foreign currency forward contracts
designated as fair value hedges to protect against the
foreign currency exchange rate risks related to the
remeasurement of firm sales commitments and recognized assets
such as accounts receivable. Changes in the fair value of
these derivatives are recognized in operations as offsets to
the changes in the fair value of the related assets or
liabilities.
The Company uses a combination of forwards and purchased and
written options designated as cash flow hedges to protect
against the foreign currency exchange rate risks inherent in
its forecasted revenue denominated in currencies other than
the U.S. dollar. The Company's cash flows hedges mature
generally within less than a year. For derivative instruments
that are designated and qualify as cash flow hedges, the
effective portions of the gain or loss on the derivative
instruments are initially recorded in accumulated other
comprehensive income (loss) as a separate component of
shareholders' equity and subsequently reclassified into
operations in the period during which the hedged transactions
is recognized operations. The ineffective portion of the gain
or loss is reported in financial income or expenses
immediately. The effective portion of cash flow and foreign
currency hedges is reported in the same financial statement
line item as the changes in value of the hedged item. For
foreign currency option and forward contracts designated as
hedges, hedge effectiveness is measured by comparing the
cumulative change in the hedge contract with the cumulative
change in the hedged item, both of which are based on forward
rates.
F-265
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
D. Financial instruments (cont'd)
(1) Derivative financial instruments (cont'd)
The Company uses variable-rate debt to finance its
operations. The debt obligations expose the Company to
variability in interest payments due to changes in interest
rates. Management believes that it is prudent to limit the
variability of a portion of its interest payments. To meet
this objective, management enters into interest rate swap
agreements to manage fluctuations in cash flows resulting
from interest rate risk. These swaps change the variable-rate
cash flow exposure on the debt obligations to fixed cash
flows. Under the terms of the interest rate swaps, the
Company receives variable interest rate payments and makes
fixed interest rate payments thereby creating the equivalent
of fixed-rate debt.
Changes in the fair value of interest rate swaps designated
as hedging instruments that effectively offset the
variability of cash flows associated with variable-rate,
long-term debt obligations are reported in accumulated other
comprehensive income (loss). These amounts subsequently are
reclassified into interest expense as a yield adjustment of
the hedged interest payments in the same period in which the
related interest affects earnings.
Other derivatives not designated as hedging instruments under
SFAS No. 133 consist primarily of purchase and written
options used to hedge foreign currency cash flows. For
derivative instruments not designated as hedging instruments
under SFAS No. 133, changes in the fair values are recognized
in operations in the period of change.
Fair value hedging transactions
-------------------------------
As at December 31, 2004, the Company had entered into 42
currency forward contracts, as a hedge against sales
contracts receivable and firm commitments, as follows:
Obligation to sell Euro 22.6 million for a total amount of
US$ 27.2 million. Obligation to sell Pounds Sterling 2.6
million for a total amount of US$ 4.6 million. Obligation to
sell NIS 5.7 million for a total amount of US$ 1.3 million.
Since the effect of the fluctuations in foreign currency
exchange rates is set off against the effect on the hedged
sales agreements, the Company does not have any exposure to
exchange rate differentials in this connection.
As at December 31, 2004, the fair value of the fair value
hedging transaction is credit US$ 5.4 million.
F-266
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
D. Financial instruments (cont'd)
Anticipated cash flow hedging transactions
------------------------------------------
As at December 31, 2004, the Company had entered into forward
exchange contracts and also purchased and written options as
hedges for currency exchange rates for various periods of
time. These transactions constitute a future cash flow hedge
for sales agreements and for the anticipated backlog of
orders.
As at December 31, 2004, the Company had entered into 156
hedge transactions and strategies in respect of anticipated
sales amounting to 218.9 million Euro, 16.7 million Pounds
sterling and $ 1.3 million in other currencies.
The hedge transactions strategies are shown in the balance
sheet at fair value. The fair value of future transactions is
based on future exchange rates, as quoted at the balance
sheet date.
As at December 31, 2004, the fair value of the cash flow
hedging transaction is credit US$ 13.1 million.
Payroll expenses
----------------
As at December 31, 2004, the Company had entered into 11
future cash flow hedge transactions and strategies in respect
of payroll expenses amounting to NIS 46.5 million.
As at December 31, 2004, the fair value of the cash flow
hedging transaction is debit US$ 0.1 million.
The Company had net realized foreign currency exchange losses
from all hedge transactions of $ 11.0 million, $ 6.9 million
and $ 1.5 million in 2004, 2003 and 2002, respectively.
Comprehensive income (loss) for the year ended December 31,
2004 includes an unrealized loss of $ 8.3 million relating to
the above hedge transactions. As of December 31, 2004 the net
unrealized loss on financial instruments is $ 15.0 million.
This amount is expected to appear in the statement of
operations for the year ended December 31, 2005.
Interest rate cash flow risk
----------------------------
Interest expense for the years ended December 31, 2004, 2003
and 2002, includes net losses in the amount of $ 294
thousand, $ 502 thousand and $ 522 thousand, respectively,
arising from the difference between the fixed interest rate
in the interest rate swap agreements and the variable
interest rate on the hedged debt obligation.
Non-hedging transactions
------------------------
The financing expenses include a loss of $ 0.2 million, $ 2.0
million and $ 1.5 million for the years ended December 31,
2004, 2003 and 2002, respectively. This amount reflects the
change in the exercise rate of the foreign currency between
the future exercise rate and the rate prevailing at the
balance sheet date deriving from the time value factor, which
is not considered as being for hedging purposes.
F-267
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
D. Financial instruments (cont'd)
(2) Concentration of credit risks
Financial instruments which expose the Company to risks of
credit concentration, include cash, deposits, currency
hedging transactions, trade and other receivables. The cash
and deposits as well as the hedging transactions are
deposited and/or executed through a number of established
financial institutions. These financial institutions are
located in Israel, the USA and Europe. The policy of the
Company is to avoid the risk of making deposits with one
financial institution. The Company frequently evaluates the
amounts and volume of the transactions executed with each one
of the said financial institutions. The exposure in respect
of credit to customers is limited due to the large number of
customers and their geographical spread as well as the
provision for doubtful debts in the financial statements. As
to the long-term deposits and customer debts see Note 4.
Management of the Company believes that the credit risk is
limited since the customers are large suppliers of
communications services operating in countries in which this
sector is anticipated to grow.
(3) Fair value of the financial instruments
Management estimates that the fair value of the financial
instruments is not materially different from the amounts
included in the financial statements. In its determination of
fair value, management used certain estimates, as described
below, which do not necessarily indicate amounts which are
recoverable in current market trading.
- Cash and cash equivalents, short-term investments, trade
receivables, other receivables, trade payables, other
payables and advances from customers:
The book value is the same as the fair value due to the
short realization period and/or repayment date of these
instruments.
- Long-term receivables and liabilities:
The book value is not materially different from the fair
value since the Company's interest rates on its long-term
liabilities or receivables are not materially different
from those indicated in respect of the assets and
liabilities as at the balance sheet date.
E. Capital expenditure commitments
The Company in Israel incurs capital expenditures pursuant to
"Approved Enterprise" programs. At December 31, 2004, the Company is
not committed to invest pursuant to existing programs. However, the
Company submitted a request to the Investment Center to approve new
investment plans at the value of $ 15.5 million. Approval and
completion of such investment programs will provide tax benefits in
the future (see Note 15A2).
F-268
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
F. Purchase commitments
At December 31, 2004, the Company has commitments, in the aggregate
amount of $ 64.7 million, covering, primarily, the purchase of
materials as well as, to a lesser extent, for the acquisition of
equipment (December 31, 2003 - $ 68.9 million).
G. Guarantees
1. The Company maintains certain third-party guarantees
(primarily with banks) to support its performance obligations
under customer contracts and other contracts that can be
demanded in case of material breach of contracts. As at
December 31, 2004, these guarantees approximated $ 17,043
thousand.
2. The Company also maintains other third-party guarantees
(primarily with insurance companies). As at December 31,
2004, these guarantees approximated $ 9,671 thousand.
H. Commitments
1. In November 2001, the Company sold its information technology
unit ("IT") to EDS and signed a five-year outsourcing
contract with EDS. Under the agreement, EDS assumed all the
IT operations and is required to supply maintenance, support
and development services during the term of the agreement,
for a sum of between $ 15 and $ 18 million, per year. In 2003
a new five-year agreement replacing the previous agreement
was signed with effect through 2007. The Company undertook to
pay EDS $ 11.8 million in 2003 and amounts between $ 7.8
million and $ 8.8 million in 2004-2007 (in 2004 the Company
paid to EDS $ 8.8 million).
In addition, for the years ended December 31, 2004 and 2003,
the Company paid EDS $ 3 million and $ 2.2 million,
respectively, for additional services.
2. The Company has an obligation to indemnify the purchasers of
certain activities and/or the purchasers of subsidiaries at
rates which are stipulated in the sales agreement, should the
purchasers be forced to discharge former employees of TTL
during a period up to 2011 (see Note 10A(3)) and, therefore,
to pay increased severance benefits.
In the opinion of Company management, the provisions for
future indemnification, as stated, which are included in the
financial statements, are proper and adequate.
F-269
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 11 - Commitments and Contingencies (cont'd)
H. Commitments (cont'd)
3. If the Company dismisses any of the remaining unionized
employees who joined from TTL by 2011, it is committed to pay
them increased severance benefits or early retirement
pensions, depending on age and seniority (see Note 10A(3)).
As at December 31, 2004, the maximum amount payable as a
result of this commitment is $ 15.8 million. Management does
not expect to dismiss the said employees and therefore no
provision in respect thereof has been included in the
financial statements.
4. Commitments to indemnify directors and officers
In August 2001, the Board of Directors of ECI resolved to
grant ECI's directors and officers at the level of vice
president and above, who may serve from time to time,
indemnification to the fullest extent permitted by law and
approved the form of indemnification letter provided to each
such director and officer. The Company has undertaken to
indemnify its directors and officers for financial
obligations and reasonable litigation costs imposed on them
in connection with their duties. The undertaking is limited
to categories of events set forth in the indemnification
letter and to an amount of $ 15 million per director and
officer, per case.
The prospective indemnification and form of indemnification
letter were approved by the shareholders of ECI.
In July 2002, the audit committee and the Board of Directors
of ECI resolved, subject to shareholders approval, to raise
the amount of the aforesaid undertaking to a limit of $ 30
million per director per case, but not more than a commitment
of $ 225 million in the aggregate for all persons to be
indemnified. The aforesaid changes were approved by ECI's
shareholders.
Note 12 - Shareholders' Equity
A. Authorized, issued and outstanding shares
Authorized
------------------------------
December 31 December 31
2004 2003
----------- -----------
Number of shares
------------------------------
NIS 0.12 par value per share 200,000,000 200,000,000
============ ============
1. The Company's shares (NIS 0.12 par value each) are traded in
the United States on the over the counter market and are
listed on the Nasdaq Stock Market.
2. For details of the issued share capital and treasury stock,
see Statement of Changes in Shareholders' Equity.
F-270
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 12 - Shareholders' Equity (cont'd)
A. Authorized, issued and outstanding shares (cont'd)
3. On December 6, 2001, a private placement agreement was signed
with a group of investors in respect of 12.5% of the issued
share capital of the Company. The investors paid an amount of
$ 50 million to the Company for the shares received. Part of
the shares allotted to the investors were the balance of the
Company's shares held as Treasury stock.
4. Pursuant to a service agreement with one of the Company's
directors, the Company issued to him in 2004, 2003 and 2002,
1,653, 5,650 and 3,940 Ordinary shares, respectively.
B. Dividends
According to the Israeli corporate laws, dividends may be paid by the
Company only out of accumulated earnings, or out of net income, in two
consecutive years. See Note 15A(2).
C. Share incentive and stock option plans
1. ECI Plan
a. The Company's current stock option plans are the ECI Telecom
Ltd. Key Employee Share Incentive Plan 1991 and the ECI
Telecom Ltd. Employee Share Incentive Plan 2002 (together the
"ECI Plans"), which were adopted by the shareholders at the
Annual General Meetings held respectively on August 29, 1991
and November 19, 2002. The ECI Plans will expire on December
31, 2012.
The ECI Plans provide that options may be granted to any
employee, director, consultant or contractor of the Company
pursuant to (a) one or more sub-plans designed to benefit
from the provisions of Section 102 of the Israeli Income Tax
Ordinance (New Version) 1961 and (b) any other share
incentive plan approved by the Board of Directors of the
Company.
Under the terms of the ECI Plans, as of December 31, 2004,
the Company is authorized to grant options for a total of
29,760,700 shares, subject to anti-dilution adjustment. The
option awards are personal and non-assignable and terminate
automatically upon termination of employment (except for
approved retirement or termination caused by death or
disability or as otherwise approved by the Board of Directors
or its Remuneration Committee).
F-271
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 12 - Shareholders' Equity (cont'd)
C. Share incentive and stock option plans (cont'd)
1. ECI Plan (cont'd)
Grants during the reporting period
The Company granted options to its employees and managers, as
follows:
On March 4, 2004, the Company granted 70,896 share options at
an exercise price of $ 6.80 per share.
On April 21, 2004, the Company granted 2,439,500 share
options at an exercise price of $ 5.90 per share.
On May 10, 2004, the Company granted 400,000 share options at
an exercise price of $ 5.42 per share.
On July 1, 2004, the Company granted 400,000 share options at
an exercise price of $ 6.91 per share. The share options vest
as follows: 200,000 options vest over 4 years, 6.25% on the
last day of each quarter during 16 quarters. Additional
200,000 options vest over 5 years, 5% on the last day of 20
quarters.
On August 23, 2004, the Company granted 82,000 share options
at an exercise price of $ 6.56 per share.
In September 2004, the Company's shareholders approved the
grant by the Company of an aggregate of 79,452 share options
to two directors. One grant was of 52,452 share options at an
exercise price $2.89 per share of which one-third vested in
September 2004 and remaining two thirds vest in July 2005 and
July 2006, respectively. The other grant was of 27,000 share
options at an exercise price $6.56 per share, of which fifty
percent vest in March 2005 and March 2006, respectively.
On November 16, 2004, the Company granted 125,000 share
options at an exercise price of $ 7.95 per share.
On December 9, 2004, the Company granted 60,000, share
options at an exercise price of $ 8.13 per share.
F-272
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 12 - Shareholders' Equity (cont'd)
C. Share incentive and stock option plans (cont'd)
1. ECI Plan (cont'd)
Unless otherwise stated, the majority of the share options
mentioned above vest as follows: 12.5% after six months and
6.25% on the last day of each following quarter over a period
of 14 quarters.
None of the above share options were granted at exercise
prices below the market price on the date of the grant.
Following approval by the board of directors and audit
committee, the Company's shareholders approved adjustments to
the terms of outstanding stock option awards, in order to
preserve the aggregate intrinsic value of such stock options
in light of the distribution to shareholders of 7.6 million
of the Company's shares in ECtel Ltd. (See Note 21B). On
April 30, 2004, immediately prior to the ex-dividend date for
the distribution of the ECtel shares, the closing market
price of the Company's shares on Nasdaq was $5.60 per share.
As a result of the proposed distribution, the opening market
price on the business day immediately following, May 3, 2004,
was adjusted to $5.36 per share, a reduction of $0.24 per
share, or 4.305%. The main provisions of the adjustments are
set forth below and applied to stock options granted prior to
May 3, 2004:
o The exercise price of outstanding stock options granted
at an exercise price of less than $5.60 per share, was
reduced by 4.305% and rounded upwards to a whole cent.
o The exercise price of outstanding stock options granted
at an exercise price of, or in excess of, $5.60 per
share, was reduced by $0.24 per share.
o Additional 462,939 stock options were granted to
employees, directors or consultants of the Company who,
on May 3, 2004, held stock options with an exercise price
of less than $5.60 per share. The number of additional
stock options equated to approximately 4.5% of the said
stock options held by such grantees at May 3, 2004. The
additional stock options are exercisable at a price per
share equivalent to the new, reduced exercise price of
the original stock options, and in the same proportions
and will expire on the same dates as the original stock
options.
There was no accounting consequence for the above changes
made to the exercise price and the number of shares, since
the above adjustments meet the criteria set forth in FIN 44,
"Accounting for Certain Transactions involving Stock
Compensation (an interpretation of APB Opinion No. 25)" as
follows:
a. The aggregate intrinsic value of the award immediately
after the change was not greater than the aggregate
intrinsic value of the award immediately before the
change.
b. The ratio of the exercise price per share to the market
value per share was not reduced.
During the reporting period, 1,353,765 options were exercised.
F-273
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 12 - Shareholders' Equity (cont'd)
C. Share incentive and stock option plans (cont'd)
1. ECI Plan (cont'd)
b. Stock options under the ECI Plans are as follows:
2004 2003 2002
---------------- ---------------- ----------------
Number of shares Number of shares Number of shares
---------------- ---------------- ----------------
Total number authorized at beginning of year 29,760,700 26,760,700 14,760,700
Increase in number authorized during year - 3,000,000 12,000,000
Options unexercised at beginning of year (19,067,545) (12,349,747) (12,087,850)
Exercised till beginning of year (2,129,800) (2,028,982) (2,028,982)
Granted during year (*) (4,154,481) (10,523,271) (780,000)
Cancelled during year 2,429,077 3,704,655 518,103
---------------- ---------------- ----------------
Authorized for future grant at end of year 6,837,951 8,563,355 12,381,971
================ ================ ================
Exercised during the year ** 1,353,765 100,818 -
================ ================ ================
** Average price of options exercised
during year (in US$) 1.83 2.62 -
================ ================ ================
Options unexercised at end of year 19,439,184 19,067,545 12,349,747
================ ================ ================
Options may be exercised as follows (1):
First year or thereafter 16,840,697 16,540,199 11,997,247
Second year or thereafter 1,328,180 1,911,858 147,500
Third year or thereafter 1,270,307 615,488 205,000
---------------- ---------------- ----------------
19,439,184 19,067,545 12,349,747
================ ================ ================
(*) Including grants as a result of distribution of ECtel's shares (see C1 and Note 21B).
F-274
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 12 - Shareholders' Equity (cont'd)
C. Share incentive and stock option plans (cont'd)
1. ECI Plan (cont'd)
b. Stock options under the ECI Plans (cont'd)
(1) To be paid in NIS based on the rate of exchange of the dollar on the date of payment as follows:
2004 2003 2002
---------------- ---------------- ----------------
Dollars per Share (*)(**) Number of shares Number of shares Number of shares
---------------- ---------------- ----------------
Zero 2,518,982 2,942,728 -
1.26 - 3.04 2,213,569 2,587,619 650,000
3.11 4,673,266 5,124,326 -
3.12 - 8.13 4,102,460 598,334 798,600
13.76 - 20.76 748,991 1,134,842 1,443,016
23.76 - 26.14 176,500 183,500 269,000
26.42 3,075,356 3,985,054 5,630,531
27.27 - 29.29 1,295,610 1,792,292 2,705,950
29.76 - 39.76 634,450 718,850 852,650
---------------- ---------------- ----------------
19,439,184 19,067,545 12,349,747
================ ================ ================
(*) The dollars per share exercise range figures were
adjusted as a result of distribution of ECtel's shares
(see C1 and Note 21B).
(**) As of December 31, 2004, the weighted average exercise
price was $ 10.34 and the weighted average remaining
contractual life of outstanding options was 7.1 years.
2. Fair value method
a. In October 1995 the Financial Accounting Standards Board
(FASB) issued SFAS 123 "Accounting for Stock-based
Compensation" which establishes financial accounting and
reporting standards for stock-based compensation plans. The
statement defines a fair value based method of accounting for
an employee stock option.
As required by SFAS 123, the Company has determined the
weighted average fair value per option of stock-based
arrangements grants during 2004, 2003 and 2002 to be $ 3.4, $
1.7 and $ 2.2, respectively. The fair values of stock based
compensation awards granted were estimated using the "Black -
Scholes" option pricing model with the following assumptions.
Option Expected Risk free
Year of grant Term volatility interest rate
------------- ------- ---------- -------------
2004 5 72 2.00%
2003 5 70 1.00%
2002 5 105 1.50%
F-275
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 12 - Shareholders' Equity (cont'd)
C. Share incentive and stock option plans (cont'd)
2. Fair value method (cont'd)
b. Had the compensation expenses for stock options granted under
the Company's stock option plans been determined based on
fair value at the grant dates consistent with the method of
SFAS 123, the Company's net income (loss) and net income
(loss) per share would have been as follows:
For the year ended December 31
---------------------------------------------
2004 2003 2002
-------- ----------- -----------
$ in thousands, except per share amounts
---------------------------------------------
Net income (loss), as reported 10,153 (71,040) (162,468)
Add: Stock-based employee compensation
expenses included in reported net
income (loss), net of related tax
effects 1,650 3,568 286
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of related
tax effects (10,072) (23,450) (59,930)
-------- ----------- -----------
Pro Forma net income (loss) 1,731 (90,922) (222,112)
======== =========== ===========
Basic earnings (loss) per share ($):
- as reported 0.09 (0.65) (1.54)
- pro forma 0.02 (0.84) (2.10)
Diluted earnings (loss) per share ($):
- as reported 0.09 (0.65) (1.54)
- pro forma 0.01 (0.84) (2.10)
3. Employee Stock Purchase Plans ("ESPP")
In July 2000, the ECI Telecom Ltd. 2000 Employee Stock Purchase Plans
were approved. Under the ESPP plan all employees were permitted to
purchase shares at a price equal to 85% of the lower of the fair
market value at the beginning or end of each offering period.
Under the ESPP, the Company sold to its employees during 2003 and 2002
418,983 and 775,123 ordinary shares of the Company (which, in 2001
were previously treasury stock), respectively. The ESPP plan is no
longer in effect.
F-276
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 13 - Balances in Currencies Other Than the Dollar
December 31, 2004 December 31, 2003
---------------------------------------------- --------------------------------------------
Israeli Foreign Israeli Foreign
currency currency currency currency
-------- ------------------------------------- -------- ---------------------------------
Pounds Pounds
Euro Sterling Others Euro Sterling Others
-------- --------- -------- ---------- ---------- ---------
$ in thousands
-------------------------------------------------------------------------------------------------------------------------------
Assets
Trade receivables 18,838 35,161 5,285 1,346 11,613 48,343 997 1,390
Other current assets (include
discontinued operations) 23,460 10,630 1,162 2,068 26,262 5,123 5,945 4,253
Long-term deposits and marketable
securities 14,870 - - - 18,282 - - -
Asses held for severance benefits 25,182 - - - 24,431 - - -
------- -------- --------- -------- -------- --------- -------- --------
82,350 45,791 6,447 3,414 80,588 53,466 6,942 5,643
======= ======== ========= ======== ======== ========= ======== ========
Liabilities
Trade payables 32,471 8,305 186 1,269 27,985 3,909 195 2,462
Other current liabilities (include
discontinued operations) 23,297 17,111 3,775 1,403 36,621 6,571 3,057 4,553
Liabilities for employee severance
benefits 50,514 - - 190 50,024 - - 65
------- -------- --------- -------- -------- --------- -------- --------
106,282 25,416 3,961 2,862 114,630 10,480 3,252 7,080
======= ======== ========= ======== ======== ========= ======== ========
F-277
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 14 - Charges (Assets Pledged)
The existing and future liabilities of the Company towards Israeli
banks are collateralized by certain pledges on assets (real estate in
Israel), on certain rights (shares in companies held by the Company )
and by an unlimited "negative pledge" on the Company's assets. As a
condition to the continued granting of credit by the banks, the
Company is to maintain certain financial ratios, inter alia, tangible
equity to total liabilities, current ratio and certain ratios of
operating income. See Note 22B.
See Note 4A for pledges on deposits. See Note 17B for restricted
deposits.
Note 15 - Taxes on Income
A. Tax programs under various Israeli tax laws:
1. Israel tax reform
During 2003, tax reform legislation was enacted, which
significantly changed the taxation basis of corporate and
individual taxpayers from a territorial basis to a worldwide
basis. From such date an Israel resident taxpayer will be
taxed on income produced and derived both in and out of
Israel.
The main provisions of the tax that are relevant to the
Company are as follows:
a) Transfer pricing of international transactions with
related parties.
The Income Tax Ordinance was amended to include
provisions concerning transfer pricing between
related parties, where one of the parties is
situated abroad. The Company considers that the
transfer pricing policy adopted with foreign
affiliates and subsidiaries is economically fair and
that it complies with the said regulations.
b) Employee stock incentive plans
The tax reform codified past practice and determined
three alternative tracks for taxing employee stock
option plans. Where a trustee arrangement is in
place, the employer can either claim an expense for
tax purposes while the employee will be fully taxed
up to the maximum marginal tax rate of 49% or the
Company can waive the tax expense and the employee
will pay a reduced tax rate of 25% after ending of a
"trustee period" (2-3 years from the date of grant).
Where there is no trustee arrangement, the employee
is fully taxable and no expense is allowed to the
Company. There are detailed provisions for
implementing these tracks. The Company chose to
waive the tax expense and the employees will pay a
reduced tax rate of 25%.
c) Controlled foreign company (CFC)
The amendment to the law introduced Controlled
Foreign Company (CFC) provisions, which, in certain
circumstances, will lead to the Israeli company
being charged to tax on passive income of foreign
affiliates as if it had received a dividend from
such companies.
F-278
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
A. Tax programs under various Israeli tax laws: (cont'd)
d) Capital gain tax is reduced to 25% from 36%, (except
with respect to capital gains from marketable
securities which consist to be 36%), with
transitional provisions for assets acquired prior to
January 1, 2003.
e) The seven year limit for carrying forward of capital
losses has been removed with respect to capital
losses arising from 1996 and thereafter.
2. In June 2004, the Knesset (the Israeli Parliament) approved
the Income Tax Ordinance Amendment (No. 140 and Temporary
Order), 2004 ("the Amendment").
The Amendment prescribes a gradual reduction in the corporate
tax rate, from 36% (in 2001 to 2003) to 30%, in the following
manner: in the 2004 tax year, a tax rate of 35% will be
imposed, in 2005 a tax rate of 34% will be imposed, in 2006 a
tax rate of 32% will be imposed, and from the 2007 tax year
and thereafter, the tax rate will be 30%. The Israeli tax
rate change had zero current impact on the Company due to its
loss carryforwards and the associated valuation allowance.
The current taxes for 2004 (other than an "Approved
Enterprise" related income) and the deferred tax balances at
December 31, 2004 are calculated based on the new tax rates,
as prescribed in the Amendment.
In the event of distribution of cash dividends from income
taxed at zero rate, a reduced tax rate in respect of the
amount distributed would have to be paid. As of December 31,
2004, the Company has an accumulated loss and therefore it
cannot distribute a cash dividend - see Note 12B. Effectively
such dividend distribution would be reduced by the amount of
the tax. Benefits are attributed to an "Approved Enterprise"
based on the growth in turnover upon implementation of each
plan.
3. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959.
Pursuant to the above Law, the Company and its Israeli
subsidiaries are entitled to tax benefits relating to
investments in "Approved Enterprises" in accordance with
letters of approval received.
A major part of the production facilities of the Company and
its Israeli subsidiaries has been granted the status of an
"Approved Enterprise" under the above Law. According to the
Law, a company is entitled to an investment grant (up to 24%
of investment cost) and also to a tax benefit, which grants
the company a reduced tax rate of 25% for a specific period
(Alternative A). The Company's "Approved Enterprise" is
subject to zero tax rates under the "Alternative Benefit
Method" and reduced tax rates (25% subject to examination of
the level of foreign ownership), for specified periods
(alternative B). All of the approved enterprises, which
currently entitle the Company to benefits, are under
alternative B.
The period of benefits in respect of most of the Company's
production facilities will terminate in the years 2005-2011.
Some of the Company's current investments are made under new
approvals, or under a request of a new approval.
F-279
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
A. Tax programs under various Israeli tax laws: (cont'd)
4. Measurement of results for tax purposes under the Income Tax
Law (Inflationary Adjustments), 1985.
Under this law, operating results for tax purposes are
measured in real terms, in accordance with the changes in the
Israeli CPI, or in the exchange rate of the dollar - for a
"Foreign Investors' Company", as defined by the Law for the
Encouragement of Capital Investments, 1959. The Company and
its Israeli subsidiaries elected to measure their operating
results on the basis of the changes in the Israeli CPI. As a
result the Company and its subsidiaries are entitled to
deduct from their taxable income an "equity preservation
deduction" (which partially compensates for the decrease in
the value of shareholders' equity resulting from the annual
rise in the Israel CPI).
5. Tax benefits under the Law for the Encouragement of Industry
(Taxation), 1969.
The Company is an "Industrial Company" as defined by this
Law, and as such is entitled, among other benefits, to claim
accelerated depreciation of machinery and equipment as
prescribed by regulations issued under the inflationary
adjustments tax law.
6. The rate of company tax on income received in Israel from
sources other than an Approved Enterprise is mainly 35%.
7. In 2002 the Company came to an arrangement with the income
tax authorities concerning tax returns filed by TTL through
1998. Among other terms of the arrangement, the Company
undertook to pay a further $ 1.4 million in taxes if it does
not produce certain confirmations from government agencies in
future periods as defined in the arrangement. In the opinion
of Management, the provisions included in the balance sheet
are adequate and sufficient.
B. Non-Israeli subsidiaries
Non Israeli subsidiaries are taxed based upon tax laws in their
countries of residence.
F-280
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
C. Taxes on income from continuing operations
Taxes on income included in the consolidated statements of operations
are comprised as follows:
Year ended December 31
--------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Current taxes relating to -
The Company and its Israeli subsidiaries 1,436 1,402 1,792
Foreign subsidiaries* 693 (6,704) 211
-------------- -------------- --------------
2,129 (5,302) 2,003
-------------- -------------- --------------
Deferred taxes relating to -
The Company and its Israeli subsidiaries - 559 6,179
Foreign subsidiaries (205) 6,884 274
-------------- -------------- --------------
(205) 7,443 6,453
-------------- -------------- --------------
1,924 2,141 8,456
============== ============== ==============
(*) In 2002 - Including tax benefits of $ 1,136 thousand with respect to previous years.
In 2004 - including tax benefits of $ 758 thousand - with respect to previous years.
D. Loss from continuing operations before taxes on income
Year ended December 31
--------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
The Company and its Israeli subsidiaries 22,677 (31,395) (86,066)
Foreign subsidiaries (3,005) (6,929) 1,800
-------------- -------------- --------------
19,672 (38,324) (84,266)
============== ============== ==============
F-281
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
E. Reconciliation of the statutory tax expense (benefit) to actual tax
expense
A reconciliation of the statutory tax expense, assuming all income is
taxed at the statutory rate (see A2 above) applicable to the income of
companies in Israel, and the actual tax expense is as follows:
Year ended December 31
--------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Income from continuing operations as reported in
the consolidated statements of operations 19,672 (38,324) (84,266)
Tax rate 35% 36% 36%
============== ============== ==============
Statutory income tax on the above amount 6,885 (13,796) (30,335)
Foreign tax rate differential (7) (1,519) 2,403
Current income/ (losses) for which no deferred
tax expense (benefit) has been recorded (3,851) 10,160 5,661
Tax benefits with respect to previous years (758) - (1,136)
Effect of lower tax rates arising from
"Approved Enterprise Status" (1,805) 2,652 15,357
Increase (decrease) in taxes resulting from
permanent differences and non deductible
expenses 2,693 7,154 15,963
Other* (1,233) (2,510) 543
-------------- -------------- --------------
Taxes on income for the reported year 1,924 2,141 8,456
============== ============== ==============
(*) Resulting from the difference between the changes in the
Israeli CPI, which forms the basis for computation of taxable
income of the Company and its Israeli subsidiaries - (see A4
above) and the exchange rate of Israeli currency relative to
the dollar.
F-282
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
F. Components of deferred income tax
(1) As at December 31, 2004 and December 31, 2003, deferred
income tax consists of future tax assets (liabilities)
attributable to the following:
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Deferred tax assets:
Capital loss carryforward 52,281 40,815
Operating loss carryforward (a) 119,471 60,584
Vacation pay accruals, severance pay fund, net, and
other accruals 13,785 3,770
Property, plant and equipment 3,138 4,526
Other 4,577 3,887
-------------- --------------
Gross total deferred tax assets 193,252 113,582
Valuation allowance for deferred tax assets (a) (181,218) (100,984)
-------------- --------------
Net deferred tax assets (a) 12,034 12,598
-------------- --------------
Deferred tax liabilities:
Software development costs (2,887) (1,629)
Property, plant and equipment - (2,027)
-------------- --------------
Net deferred tax liabilities (2,887) (3,656)
-------------- --------------
Deferred income taxes, net (b) 9,147 8,942
============== ==============
(a) In assessing the realizability of deferred tax
assets, management considers whether it is more
likely than not that some portion or all of the
deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is
dependent upon the generation of future taxable
income during the periods in which those temporary
differences become deductible and during which the
carryforwards are available. Management considers
the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning
strategies in making this assessment. Based upon
the level of historical taxable income and
projections for future taxable income over the
periods in which the deferred tax assets are
deductible, management believes it is more likely
than not that the Company will realize the benefits
of these deductible differences, net of the
existing valuation allowances at December 31, 2004.
The amount of the deferred tax asset considered
realizable, however, could be reduced in the near
term if estimates of future taxable income during
the carryforward period are reduced. Based on this
assessment, as of December 31, 2004, the Company
determined that it is more likely than not that $
9.1 million of such assets will be realized,
therefore resulting in a valuation allowance of $
181.2 million.
F-283
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 15 - Taxes on Income (cont'd)
F. Components of deferred income tax (cont'd)
(1) (a) (cont'd)
The valuation allowance for deferred tax assets as
of January 1, 2004, 2003 and 2002 was $ 101 million,
$ 94 million and $ 70 million, respectively. The net
change in the total valuation allowance for the year
ended December 31, 2004, 2003 and 2002 was an
increase of $ 80 million, $ 7 million and $ 24
million, respectively.
If changes occur in the assumptions underlying the
Company's tax planning strategies or in the
schedulings of the reversal of the Company's
deferred tax liabilities, the valuation allowance
may need to be adjusted in the future.
The Company has not recognized a deferred tax
liability of approximately $ 901 thousand for the
undistributed earnings of its foreign operations
that arose in 2004 and prior years because the
Company currently does not expect those unremitted
earnings to reverse and become taxable to the
Company in the foreseeable future. A deferred tax
liability will be recognized when the Company is no
longer able to demonstrate that it plans to
permanently reinvest undistributed earnings. As of
December 31, 2004, the undistributed earnings of
these subsidiaries were approximately $ 7,301
thousand.
(b) Long-term deferred taxes in the amount of $ 9,033
thousand are included in the other assets item of
the balance sheet, short-term deferred taxes in the
amount of $ 114 thousands are included in other
receivables.
(2) As at December 31, 2004, the Company and its subsidiaries
had, for tax purposes, operating loss carryforwards, capital
loss carryforwards and general business credit carryforward
of $ 504.9 million, $ 147.1 million and $ 1.0 million,
respectively.
The Company had no minimum tax credit carryover. A portion of
the federal net operating loss carryforwards will begin to
expire over the period of 2019 through 2023. The general
business credits will expire as follows: $ 302 thousand, $
495 thousand and $ 208 thousand in through 2005, 2007 and
2008, respectively. Substantially, all of the capital losses
have an unlimited carryforward period.
G. Tax assessment
Final tax assessments have been received by some of the Israeli
companies through the 1999 tax year.
F-284
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 16 - Related Party Transactions
Related parties are comprised of principal shareholders (10% and up of
the Company's share capital) and their subsidiaries and affiliates as
well as affiliates of the Company. All related party transactions were
at market rates.
Transactions with related parties are mainly as follows:
a. Sales of certain of the Company's products and expenses related to
such sales;
b. Financing expenses owing to the issue of capital notes convertible
into shares and working capital balances;
A. Balances due to or from related parties:
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Assets:
Trade receivables 18,362 3,530
Other receivables 236 317
Long-term receivables, net 81,112 85,538
Investments - 5,600
Liabilities:
Trade payables 1,383 3,635
Other payables 59 10,064
B. Income from, and expenses to, related parties:
Year ended December 31
--------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Sales 25,610 28,473 4,945
Cost of revenues 3,287 8,751 2,264
Selling and marketing expenses 1,028 2,779 2,043
General and administrative expenses 955 8,098 39,338
Financial expenses 68 15 108
Financial income 47 46 9,974
Other expenses - 3,400 18,000
F-285
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information
Balance sheet:
A. Cash and cash equivalents
Including deposits of $55,039 thousand at December 31, 2004 (December
31,2003 - $ 109,319 thousand).
B. Short-term investments
Including restricted balances of $1,035 thousand at December 31, 2004
(December 31, 2003 - $ 1,035 thousand).
C. Trade receivables
Net of provision for doubtful accounts of $ 25,387 thousand at
December 31, 2004 (December 31, 2003 - $ 29,775 thousand).
The activity in the allowance for doubtful accounts for impaired notes
receivable for the years ended December 31, 2004 and 2003 follows:
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Allowance for doubtful accounts at beginning of year 29,775 34,764
Additions charged to bad debt expense 3,798 10,378
Write-down charged against the allowance (5,258) (1,200)
Recoveries of amounts previously charged off (2,928) (1,038)
Reclassified to discontinued operations - (13,129)
-------------- --------------
Allowance for doubtful accounts at end of year 25,387 29,775
============== ==============
As to sales of certain trade receivables, see Note 17P.
F-286
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
D. Other receivables
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Employees 918 1,147
Chief Scientist 3,031 2,033
Deferred income tax 114 101
Accrued income and interest 2,341 976
Advances to suppliers 4,228 708
Related parties 18 317
Others 12,791 8,893
-------------- --------------
23,441 14,175
============== ==============
E. Short-term loans and current maturities of long-term debts
Consist of the following:
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Short term loans - -
Current maturities of long term debts 30,000 30,000
-------------- --------------
30,000 30,000
============== ==============
F. Other payables and accrued liabilities
Consist of the following:
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Employees and social benefits 28,023 25,640
Chief Scientist 2,919 -
Tax authorities 11,913 4,741
Commissions payable 12,234 13,670
Advances from customers 37,202 7,761
Warranty accrual (*) 6,007 6,328
Accrued expenses 35,182 28,384
Fair value of derivatives 13,174 5,944
Other payables and accrued liabilities 2,994 7,971
-------------- --------------
149,648 100,439
============== ==============
(*) Balance at the beginning of the year 6,328 9,546
Warranty expenses (3,123) (5,104)
Change in accrual 2,802 2,866
Reclassified to discontinued operations - (980)
-------------- --------------
Balance at the end of the year 6,007 6,328
============== ==============
F-287
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
G. Disclosures about segments and related information
1. Segment Activities Disclosure:
Segment information is presented in accordance with SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information."
This standard is based on a management approach, which requires
segmentation based upon the Company's internal organization and
internal financial reports to management. The Company's internal
financial reporting systems present various data for management to run
the business, including statement of operations (P&L).
In 2003, following the sale of NGTS and the merger of Enavis and
Lightscape, there was a change in the segments of the Company.
Accordingly, in prior years the results of Enavis and NGTS were
classified under Optical Networks and Others, respectively.
Hereunder the Company's segments:
Broadband Access Division (formerly - Inovia)
---------------------------------------------
The broadband access systems division focuses on the development and
production of access products for communications systems, including
broadband solutions which make it possible to transfer multi-media
content, as well as certain narrowband solutions. These products are
designed to allow telecom operators to offer their retail customers
broadband access for data applications over telephone (copper) lines,
primarily using DSL technology.
Optical Network Division (formerly - Lightscape and Enavis)
-----------------------------------------------------------
The division is a supplier of intelligent optical networking solutions
for the metro and regional optical markets. It provides fully managed
and scalable optical networks allowing "just on time" seamless
coupling of network growth to the changing service needs of the
operator, while delivering a variety of services including data, voice
and video by means of optic DWDM, SDH/Sonet or Gigabit, Ethernet or
other data transmission interfaces.
The products are based on advanced synchronic digital hierarchy and
optical technologies. Its lead product is the XDM, an optical dubbing
system based on a new technique of band flattening which makes
extensive use of state-of-the-art technology. The XDM enables the user
to choose the initial platform for simple, low-speed, applications
and, at a later stage, to expand them as required, simply, efficiently
and at low cost
In addition, the division develops, markets and supplies modular
solutions for broadband management on digital cross connect platforms
for long haul applications, enabling operators to provide services in
a variety of protocols and technologies, thus profiting from the width
of the band laid in the optical infrastructure.
F-288
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
G. Disclosures about segments and related information (cont'd)
1. Segment Activities Disclosure: (cont'd)
Other
-----
The Other segment contains mainly the Company's manufacturing and
service units; head office and management services; general and
project management services to outside customers and others; and other
activities which are not identified with any of the operational
segments.
The Company's manufacturing and service units serve as manufacturing
and service sub-contractors and carry out activities primarily for the
above divisions and for Veraz. The cost of manufacturing is included
in the cost of sales of each of the divisions, as applicable.
Included in the Other segment until December 2002, were the activities
of the Company's NGTS (Next Generation Telephony System) division,
whose principal operations were transferred to Veraz. (See Note 5A.)
This division developed and manufactured solutions for the
transmission of telephony over internet protocol (IP) networks at
carrier grade levels of quality, reliability and density. It
specialized in supplying media gateways connecting IP networks to
traditional communication networks and offered combined solutions for
the transmittal of telephony over IP networks.
2. Operational segments statement operation disclosure:
The following financial information is the information that management
uses for analyzing the results. The figures are presented in
consolidated method as presented to management.
Year ended December 31, 2004
--------------------------------------------------------------------
Optical Broadband Other Consolidated
Network Access
----------- ----------- ----------- -----------
$ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- -----------
Revenues 254,058 212,939 29,715 496,712
=========== =========== =========== ===========
Operating expenses (*) 250,964 188,336 40,455 479,755
Restructuring expenses - - 2,585 2,585
----------- ----------- ----------- -----------
Operating income (loss) 3,094 24,603 (13,325) 14,372
=========== =========== =========== ===========
F-289
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
G. Disclosures about segments and related information (cont'd)
2. Operational segments statement operation disclosure: (cont'd)
Year ended December 31, 2003
--------------------------------------------------------------------
Optical Broadband Other Consolidated
Network Access
----------- ----------- ----------- -----------
$ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- -----------
Revenues 177,706 182,290 32,571 392,567
=========== =========== =========== ===========
Operating expenses (*) 207,659 165,862 42,190 415,711
Impairment of assets - - 667 667
Restructuring expenses 7,243 478 673 8,394
----------- ----------- ----------- -----------
Operating income (loss) (37,196) 15,950 (10,959) (32,205)
=========== =========== =========== ===========
Year ended December 31, 2002
------------------------------------------------------------------
Optical Broadband Other Consolidated
Network Access
----------- ----------- ----------- -----------
$ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- -----------
Revenues 233,218 241,807 75,409 550,434
=========== =========== =========== ===========
Operating expenses (*) 262,754 237,154 118,908 618,816
Impairment of assets - - 3,725 3,725
Loss from exchange of assets - - 6,783 6,783
----------- ----------- ----------- -----------
Operating income (loss) (29,536) 4,653 (54,007) (78,890)
=========== =========== =========== ===========
(*) Includes cost of sales, research and development costs,
selling and marketing expenses, general and administrative
expenses and amortization of acquisition - related intangible
assets.
3. The following financial information identifies the assets to
segments:
Year ended December 31, 2004
--------------------------------------------------------------------
Optical Broadband Other Consolidated
Network Access
----------- ----------- ----------- -----------
$ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- -----------
Assets * 241,291 131,597 170,018 542,906
Unallocated assets 311,903
-----------
Total consolidated assets 854,809
===========
Depreciation and amortization** 20,684 10,658 6,021 37,363
Capital investments 15,271 6,392 13,720 35,383
F-290
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
G. Disclosures about segments and related information (cont'd)
3. The following financial information identifies the assets to
segments: (cont'd)
Year ended December 31, 2003
--------------------------------------------------------------------
Optical Broadband Other Consolidated
Network Access
----------- ----------- ----------- -----------
$ thousands $ thousands $ thousands $ thousands
----------- ----------- ----------- -----------
Assets* 189,235 108,288 199,280 496,803
Unallocated assets 405,193
-----------
Total consolidated assets 901,996
===========
Depreciation and amortization** 18,332 11,208 14,458 43,998
Capital investments 11,322 4,130 5,751 21,203
(*) The assets include: trade receivables (short and
long-term), inventories, property, plant and equipment,
software development costs, goodwill and other
intangibles.
(**) Including impairment of assets.
4. Sales to significant customers
The following table summarizes the percentage of sales to significant
customers group (when they exceed 10 percent of total revenue for the
year):
Year ended December
----------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Customer 1 13% 19% 23%
Customer 2 14% 11% 11%
5. Information on sales by geographic distribution
Year ended December 31
----------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
North America 21,894 21,627 40,665
Europe 291,460 232,136 344,590
Asia Pacific and Australia 99,436 64,731 111,327
Israel 68,742 61,818 31,522
Others 15,180 12,255 22,330
-------------- -------------- --------------
496,712 392,567 550,434
============== ============== ==============
F-291
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
H. Cost of revenues
Year ended December 31
----------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Finished products consumed 267,981 197,906 288,867
Other manufacturing and other service costs 25,972 43,024 51,486
-------------- -------------- --------------
Cost of revenues 293,953 240,930 340,353
Provision for inventory write off
(see also Note 20) - - 7,446
Royalties to the government (see Note 11(C)(1)) 7,018 *(1,632) 9,317
-------------- -------------- --------------
300,971 239,298 357,116
============== ============== ==============
(*) In 2003, the Company reached an arrangement with the Chief
Scientist according to which it would be credited with the
amounts of the excess royalties that were paid in respect of
the sale of certain products in prior years. Such credits
amount to $ 6.3 million.
I. Research and Development costs, net
Year ended December 31
----------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Expenses incurred 72,893 76,557 102,022
Less - grant participations (see Note 11C) 8,023 14,516 21,843
-------------- -------------- --------------
64,870 62,041 80,179
============== ============== ==============
F-292
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
J. Selling and marketing expenses
Year ended December 31
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Salaries and employee benefits 37,387 35,033 42,858
Agents' commissions 13,457 10,903 17,969
Advertising and exhibitions 2,699 2,195 1,978
Foreign travel 5,047 4,469 5,986
Other 19,833 21,043 28,518
-------------- -------------- --------------
78,423 73,643 97,309
============== ============== ==============
K. General and administrative expenses
Year ended December 31
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Salaries and employee benefits 19,225 16,949 21,628
Rent and maintenance of premises 1,065 1,817 3,210
Bad and doubtful debt expenses 1,200 (1)9,108 (1)44,623
Other 14,001 11,082 12,991
-------------- -------------- --------------
35,491 38,956 82,452
============== ============== ==============
(1) See also Note 4C(2).
L. Financial income/expenses, net
Year ended December 31
--------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Financial expenses:
Interest on loans from banks 1,518 2,449 10,036
Bank charges 2,117 1,529 2,837
Exchange rate differences (see Note 1A(6)) 2,927 4,556 4,359
Loss from marketable securities - - 661
-------------- -------------- --------------
6,562 8,534 17,893
============== ============== ==============
Financial income:
Interest mainly on bank deposits and receivables 3,038 6,397 19,935
Exchange rate differences (see Note 1A(6)) 2,772 624 3,656
Gain from marketable securities 3,359 770 -
-------------- -------------- --------------
9,169 7,791 23,591
============== ============== ==============
F-293
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
M. Other income (expenses), net
Year ended December 31
--------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Gain from sale of shares and issuance of new shares
in a consolidated subsidiary (1) - - 11,397
Gain (loss) from sale of property and equipment, net 735 (167) (881)
Loss from realization of investments and allowance
for impairment of investments (2) (2,469) (1,587) (3,139)
Realization of gain on available for sales securities 1,487 - -
Decline in value of convertible notes (see Note 5B) - (3,400) (18,000)
Gain from cancellation of a provision to the Israeli
Comptroller of Restrictive Trade Practices
(see Note 11A(5)) 6,000 - -
Loss from impairment of amounts funded for
severance pay (1,000) - -
Provision for the payment of indirect duty (1,600) - -
Other (460) (222) (451)
-------------- -------------- --------------
Total other income (expenses), net 2,693 (5,376) (11,074)
============== ============== ==============
(1) During 2002, the Company sold 8.5% of the share capital of
ECtel. As a result, the Company recognized a pre-tax gain of
$ 11.4 million. Following the sale and conversion of options,
the Company's holding in ECtel decreased to 59%.
(2) Arising from a permanent impairment in the value of an
investment. The write down is based, among other factors, on
stock exchange prices, the operations of the investee and a
series of other relevant considerations.
N. Supplementary Statement of Operations information
Year ended December 31
--------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Expenses:
Maintenance and repairs 9,034 9,963 7,459
Depreciation of property, plant and equipment 22,712 23,830 32,009
Taxes (other than income taxes) 1,521 2,171 2,453
Rent 7,820 11,507 21,200
Advertising costs 3,259 1,980 2,558
Royalties 7,018 162 11,412
Amortization of capitalized software 13,005 15,157 19,939
F-294
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
O. Earnings (loss) per share ("EPS")
Following are the details of the basic EPS:
2004
----------------------------------------------
Net income Number of Earnings per
shares share amount
-------------- ------------ ------------
$ in thousands in thousands $
-------------- ------------ ------------
Income (loss) from continuing operations 14,056 108,575 0.13
============== ============ ============
Cumulative effect of accounting
change, net of taxes - - -
============== ============ ============
Discontinued operations (3,903) 108,575 (0.04)
============== ============ ============
Net income (loss) per share 10,153 108,575 0.09
============== ============ ============
(Table Continued)
2003
---------------------------------------------
Net loss Number of Loss per
shares share amount
-------------- ------------ ------------
$ in thousands in thousands $
-------------- ------------ ------------
Income (loss) from continuing operations (44,723) 107,831 (0.41)
============== ============ ============
Cumulative effect of accounting
change, net of taxes - - -
============== ============ ============
Discontinued operations (26,317) 107,831 (0.24)
============== ============ ============
Net income (loss) per share (71,040) 107,831 (0.65)
============== ============ ============
(Table Continued)
2002
---------------------------------------------
Net loss Number of Loss per
shares share amount
-------------- ------------ -------------
$ in thousands in thousands $
-------------- ------------ -------------
Income (loss) from continuing operations (95,202) 105,512 (0.90)
============== ============ =============
Cumulative effect of accounting
change, net of taxes (550) 105,512 (0.01)
============== ============ =============
Discontinued operations (66,716) 105,512 (0.63)
============== ============ =============
Net income (loss) per share (162,468) 105,512 (1.54)
============== ============ =============
F-295
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
O. Earnings (loss) per share ("EPS") (cont'd)
Following are the details of diluted EPS:
2004
----------------------------------------------
Net income Number of Earnings per
shares share amount
-------------- ------------ ------------
$ in thousands in thousands $
-------------- ------------ ------------
Income (loss) from continuing operations 14,056 117,133 0.12
============== ============ ============
Cumulative effect of accounting
change, net of taxes - - -
============== ============ ============
Discontinued operations (3,903) 117,133 (0.03)
============== ============ ============
Net income (loss) per share 10,153 117,133 0.09
============== ============ ============
(Table Continued)
2003
---------------------------------------------
Net loss Number of Loss per
shares share amount
-------------- ------------ ------------
$ in thousands in thousands $
-------------- ------------ ------------
Income (loss) from continuing operations (44,723) 107,831 (0.41)
============== ============ ============
Cumulative effect of accounting
change, net of taxes - - -
============== ============ ============
Discontinued operations (26,317) 107,831 (0.24)
============== ============ ============
Net income (loss) per share (71,040) 107,831 (0.65)
============== ============ ============
(Table Continued)
2002
---------------------------------------------
Net loss Number of Loss per
shares share amount
-------------- ------------ -------------
$ in thousands in thousands $
-------------- ------------ -------------
Income (loss) from continuing operations (95,202) 105,512 (0.90)
=============== ============ ==============
Cumulative effect of accounting
change, net of taxes (550) 105,512 (0.01)
=============== ============ ==============
Discontinued operations (66,716) 105,512 (0.63)
=============== ============ ==============
Net income (loss) per share (162,468) 105,512 (1.54)
=============== ============ ==============
F-296
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 17 - Supplementary Financial Statement Information (cont'd)
P. Factoring of financial assets
The Company entered into accounts receivable factoring agreements with
a number of financial institutions ("banks"). Under the terms of the
agreements, the Company has the option to factor receivables, with the
banks on a non-recourse basis, provided that the banks approve the
receivables in advance. In some cases, the Company continues to be
obligated in the event of commercial disputes, (such as product
defects) which are not covered under the credit insurance policy,
unrelated to the credit worthiness of the customer. The Company
accounts for the factoring of its financial assets in accordance with
the provisions of SFAS No. 140.
The agreements call for factoring fees on invoices or promissory notes
factored with the banks, as follows: USD and EUR transactions - in
most cases, LIBOR for the relevant period on the basis of the
semi-annual discount to yield plus a margin of 3.4% per annum on
average. In the past, there were no cases in which the Company had to
reimburse the banks for accounts receivables following business
disputes. The Company does not expect any reimbursements to take place
in the foreseeable future.
As at December 31, 2004, trade receivables amounting to $ 31,698
thousand (December 31, 2003 - $ 16,671 thousand) were factored.
Note 18 - Relevant Recently Enacted Accounting Standards
A. In November 2003, the FASB ratified the consensus reached by
the Task Force on EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-1") regarding disclosures for
certain SFAS 115 investment securities and investments
accounted for under SFAS 124. In March 2004, the FASB
ratified other consensuses reached by the Task Force on EITF
03-1. The objective of EITF 03-1 is to provide guidance on
determining when an investment is considered impaired,
whether that impairment is other-than-temporary, and the
measurement of an impairment loss. The guidance also
includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and
requires certain disclosures about unrealized losses that
have not been recognized as other-than-temporary
impairments. In September 2004, the FASB issued FASB Staff
Position ("FSP") EITF Issue 03-1-1 which delays the
effective date for the measurement and recognition guidance
included in EITF 03-1. The FASB recently announced that it
intends to reconsider in its entirety EITF 03-1 and all
other guidance on disclosing, measuring, and recognizing
other-than-temporary impairments of debt and equity
securities. Until new guidance is issued, companies must
continue to comply with the disclosure requirements of EITF
03-1 and all relevant measurement and recognition
requirements in other accounting literature.
F-297
Note 18 - Relevant Recently Enacted Accounting Standards (cont'd)
B. In November 2004, the FASB issued FASB Statement No. 151,
Inventory Costs, an amendment to ARB 43, Chapter 4 (SFAS
151). The amendment made by SFAS 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs,
and wasted material (spoilage) should be recognized as
current-period charges, and also requires the allocation of
fixed production overhead to inventory based on the normal
capacity of the production facilities. The guidance is
effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is
permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The provisions of SFAS
151 should be applied prospectively. Adoption of this
statement is not expected to have a material impact on the
financial statements of the Company.
C. In December 2004, the FASB issued SFAS No. 123R,
"Share-Based Payment." This statement is a revision to SFAS
No. 123, "Accounting for Stock-Based Compensation" and APB
Opinion No. 25, "Accounting for Stock Issued to Employees."
This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity
instruments for goods or services, primarily focusing on the
accounting for transactions in which an entity obtains
employee services in share-based payment transactions.
Entities will be required to measure the cost of employee
services received in exchange for an award of equity
instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over
the period during which an employee is required to provide
service, the requisite service period (usually the vesting
period), in exchange for the award. The grant-date fair
value of employee share options and similar instruments will
be estimated using option-pricing models. If an equity award
is modified after the grant date, incremental compensation
cost will be recognized in an amount equal to the excess of
the fair value of the modified award over the fair value of
the original award immediately before the modification. This
statement is effective as of the beginning of the first
interim or annual reporting period that begins after June
15, 2005. In accordance with the standard, the Company will
adopt SFAS No. 123R effective July 1, 2005.
Upon adoption, the Company has two application methods to
choose from: the modified-prospective transition approach or
the modified-retrospective transition approach. Under the
modified-prospective transition method the Company would be
required to recognize compensation cost for share-based
awards to employees based on their grant-date fair value from
the beginning of the fiscal period in which the recognition
provisions are first applied as well as compensation cost for
awards that were granted prior to, but not vested as of, the
date of adoption. Prior periods remain unchanged and pro
forma disclosures previously required by SFAS No. 123
continue to be required. Under the modified-retrospective
transition method, the Company would restate prior periods by
recognizing compensation cost in the amounts previously
reported in the pro forma disclosure under SFAS No. 123.
Under this method, the Company is permitted to apply this
presentation to all periods presented or to the start of the
fiscal year in which SFAS No. 123R is adopted. The Company
would follow the same guidelines as in the
modified-prospective transition method for awards granted
subsequent to adoption and those that were granted and not
yet vested. The Company has not yet determined which
methodology it will adopt and, at this stage, cannot evaluate
the potential impact of the adoption of SFAS No. 123R on its
financial position or results of operation because this
impact depends on the number of options that will be granted
in the future.
F-298
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 18 - Relevant Recently Enacted Accounting Standards (cont'd)
D. In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment to APB No. 29." This
Statement amends Opinion No. 29 to eliminate the exception
for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future
cash flows of the entity expected to change significantly as
a result of the exchange. Adoption of this statement is not
expected to have a material impact on the Company's financial
position or results of operations.
Note 19 - Restructuring
A. Consist of the following
Year ended Year ended
December 31 December 31
2004 2003
----------- -----------
$ thousands $ thousands
----------- -----------
Severance expenses - 6,120
Rent contract expenses 2,585 2,274
----------- -----------
2,585 8,394
=========== ===========
B. Additional information
1. Following the Company's Board of Directors' decision to focus
on its two core activities, in the first quarter of 2004, the
Company recorded $ 2,585 thousand in restructuring expenses
associated with the completion of reorganization plan and the
integration of Lightscape Optical Networks and Enavis
Networks into the Optical Networks Division. The expenses
were due to abandonment of several leased buildings.
2. As part of the Company's Board of Directors' decision to
focus on its two core activities, in 2003, the Company
recorded $ 8,394 thousand in reorganization expenses
associated largely with the integration of Lightscape Optical
Networks and Enavis Networks into the Optical Networks
Division, mainly termination benefits and rent contract
expenses as follows:
C. A reconciliation of the beginning and ending restructuring
liability balances is as follows:
Year ended December 31, 2004
------------------------------------------------
Severance
pay Rent contract Total
----------- ------------- -----------
$ thousands $ thousands $ thousands
----------- ------------- -----------
At the beginning of the year 707 5,450 6,157
Restructuring expenses - 2,585 2,585
Paid (707) (3,461) (4,168)
----------- ------------- -----------
At the end of the year - 4,574 4,574
=========== ============= ============
F-299
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 19 - Restructuring
C. A reconciliation of the beginning and ending restructuring
liability balances is as follows: (cont'd)
Year ended December 31, 2003
------------------------------------------------
Severance
pay Rent contract Total
----------- ------------- -----------
$ thousands $ thousands $ thousands
----------- ------------- -----------
At the beginning of the year - 3,944 3,944
Restructuring expenses 6,120 2,274 8,394
Paid (2,428) (768) (3,196)
Classified to pension liability (2,985) - (2,985)
----------- ------------- -----------
At the end of the year 707 5,450 6,157
=========== ============= ===========
Note 20 - Impairment of Assets and Loss from Exchange of Assets
A. For the year ended December 31, 2003
During 2003, the Company recorded $0.7 million impairment charges
associated with NGTS.
In addition, the Company recorded in the loss on discontinued
operations, $6.0 million impairment charges associated with ECtel,
arising from the write-down by ECtel of goodwill from the acquisition
of Net-Eye in October 2001.
In June 2003, due to significant reduction in ECtel's revenues, it
was determined that goodwill has been impaired.
This determination was based upon the guidance set forth in paragraphs
19-22 of SFAS 142, which requires a two-step analysis. The first step
used the Discounted Cash Flow approach to measure the fair value of
the Telecommunication Systems reporting unit of ECtel Ltd., the result
of which indicated that the carrying amount of such reporting unit,
including goodwill, exceeded its fair value. The second step was then
conducted in order to measure the amount of impairment loss, by means
of a comparison between the implied fair value of the goodwill and the
carrying amount of the goodwill. In the second step, the fair value of
the Telecommunication Systems reporting unit of ECtel, as determined
in the first step, was assigned to the reporting unit's individual
assets and liabilities. The excess of the fair value of the reporting
unit over the amounts assigned to its assets and liabilities
represented the amount of the implied fair value of the goodwill. The
excess of the carrying amount of goodwill over the implied fair value
of goodwill was identified as the amount of the impairment loss.
See also Note 21.
F-300
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 20 - Impairment of Assets and Loss from Exchange of Assets (cont'd)
B. For the year ended December 31, 2002
1. Impairment of assets
During 2002, the Company made a provision of $ 3.7 million for a
decline in value of assets relating to land and building including in
property, plant and equipment and also, wrote off $ 7.4 million of
inventory relating to discontinued production and marketing of certain
products.
2. Loss from exchange of assets
In December 2002, the Company closed a transaction pursuant to which
it transferred the VoIP and other activities, including certain
related net assets with book value of $ 19.6 million, of the business
NGTS, plus $10 million in cash, to NexVerse Networks, in exchange for
approximately 43% (fully diluted 36%) of the shares of NexVerse. The
name of the company resulting from this transaction was changed to
Veraz Networks.
A third party valuation commissioned by Veraz, which evaluated among
other things, the fair value of the shares transferred to ECI as at
December 31, 2002, indicated that the fair market value as at December
31, 2002 of the Veraz shares held by ECI to be $ 22.8 million. Due to
the fact that the value of the shares received by ECI was less than
the value of the assets transferred, ECI recorded a loss from exchange
of assets of $ 6.8 million.
Note 21 - Discontinuance of Operations
A. During the third quarter of 2002, the Company's Board of
Directors decided on a plan to sell the operations of the
InnoWave segment, which specializes in development of
solutions for broadband wireless access to communications
networks.
In April 2003, the Company signed an agreement with Alvarion
to sell the InnoWave operation. The total value of the
transaction was approximately $ 20 million, consisting of a
cash consideration paid by Alvarion and the cash balances
withdrawn by ECI at closing. In addition, Alvarion granted
warrants to purchase 200,000 Alvarion shares over a period
of five years at an exercise price of $ 3 per share (of
which, warrants to purchase 50,000 transferred to certain
key InnoWave employees transferred to Alvarion). In the
first quarter of 2004, the Company sold all the shares it
had obtained from exercising the aforementioned warrants.
The gain from the sale of the shares amounted to $ 1.5
million and was recorded in other income.
B. During 2003, ECtel's Board of Directors decided on a plan to
sell the operations of the Government Surveillance business
of ECtel, which provided telecommunication monitoring needs
to government agencies. In February 2004, ECtel signed a
definitive agreement to sell the Government Surveillance
business to Verint Systems Inc. for $35 million in cash.
According to the terms of the transaction, ECtel transferred
to Verint various assets and liabilities relating to its
Government Surveillance business and undertook certain
commitments to Verint. ECtel recorded during the first
quarter of 2004 in respect of this transaction a gain of
$24.2 million.
F-301
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 21 - Discontinuance of Operations (cont'd)
B. (cont'd)
On March 9, 2004, the Board of Directors of ECI decided, in
principle, that ECI would distribute 7.6 million of its
shares in ECtel Ltd. to ECI's shareholders. On April 28,
2004, after the Company obtained court approval and the
consent of its banks, the Board of Directors declared a
distribution of 7.6 million shares of ECtel to the Company's
shareholders of record on May 5, 2004. The shares were
distributed on May 10, 2004. Before distribution, ECI held
approximately 10.5 million, or 58%, of ECtel's shares. After
distribution of the shares, ECI holds approximately 16% of
ECtel's outstanding shares.
Accordingly, the results of ECtel for all periods reported
were reclassified to one line in the statement of operations
following the loss from continuing operations. The assets and
liabilities of ECtel as at December 31, 2003 were
reclassified in the Company's balance sheets as assets from
discontinued operations and liabilities from discontinued
operations, respectively.
Note 21 - Discontinuance of Operations (cont'd)
C. Assets and liabilities of the discontinued segments
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Assets relating to discontinued segments*
Cash and cash equivalents - 18,964
Short-term investments - 11,006
Trade and other receivables - 32,862
Prepaid expenses - 456
Work in progress - 7,175
Inventory - 6,442
Long-term deposits and marketable securities - 6,604
Property, plant and equipment - 5,589
Other assets - 589
Goodwill and other intangible assets, net - 11,056
-------------- --------------
- 100,743
============== ==============
December 31 December 31
2004 2003
-------------- --------------
$ in thousands $ in thousands
-------------- --------------
Liabilities relating to discontinued segments*
Trade payables - 5,681
Other payables and accrued liabilities - 18,128
Liability for employee severance benefits, net - 567
Minority interests - 36,218
-------------- --------------
- 60,594
============== ==============
(*) The assets and liabilities as of December 31, 2003 relate to the
discontinued ECtel segment.
F-302
ECI Telecom Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------
Note 21 - Discontinuance of Operations (cont'd)
D. Results of operations of the discontinued segments
Year ended December 31
2004 2003 2002
-------------- -------------- --------------
$ in thousands $ in thousands $ in thousands
-------------- -------------- --------------
Revenues 3,948 44,697 142,414
Expenses (1) (7,851) (71,014) (172,484)
Cumulative effect of an accounting change, net
(Note 1T) - - 36,646
-------------- -------------- --------------
Net results (3,903) (26,317) (66,716)
============== ============== ==============
(1) Including, loss from disposition for the year ended December
31, 2004 in the amount of $ 3,681 thousand, impairment of
goodwill for the year ended December 31, 2003 in the amount
of $ 6,017 thousand and impairment of long-lived assets for
the year ended December 31, 2002 in the amount of $ 22,678
thousand (*).
(*) As a result of the decline in the first quarter of 2002 in
the demand for products of InnoWave, Management updated its
forecast of anticipated sales. In accordance with the
provisions of SFAS 144 (see Note 1T), a loss was recorded
from the decline in value of intangible assets in InnoWave in
the amount of $ 15,835 thousand. Also as a result of the
expected disposal proceeds, the Company wrote down property,
plant and equipment in the amount of $ 6,843 thousand.
Note 22 - Subsequent Events
A. In January 2005, the Company was named as a defendant in a
purported class action complaint filed in the United States
against ECtel, certain officers and directors of ECtel, and
ECI. The complaint alleges violations of U.S. Federal
Securities laws by ECtel and breach of fiduciary duties by
the individual defendants, in connection with disclosure of
ECtel's financial results between April 2001 and April 2003.
It also alleges that ECI was the controlling shareholder of
ECtel during this period and, as such, influenced and
controlled the purported actions by its subsidiary. Damages
claimed by the plaintiff have not yet been quantified.
ECI believes that the allegations made in the complaint with
respect to it are without merit.
B. On February 9, 2005, the Company repaid to its Israeli banks
the balance of its long-term loans of $ 30 million. See
Notes 9A and 14.
C. In February 2005, the Company has entered into a preliminary
agreement to sell the long-term receivables from GVT to ABN
Amro Bank for the sum of $96 million in cash, plus
potentially a further amount of approximately $3.3 million
based on certain contingencies. The sale is subject to
certain conditions and corporate approvals, including that of
the Company's shareholders, and is anticipated to close in
April 2005. It is expected to result in a gain for the
Company of approximately $11 million, excluding the
contingent amount. See Note 4.
F-303