ISRAEL CHEMICALS LIMITED. (An Israeli Corporation) 1998 CONSOLIDATED ANNUAL REPORT (TRANSLATED INTO U.S. DOLLARS)

Transcription

1 (An Israeli Corporation) 1998 CONSOLIDATED ANNUAL REPORT (TRANSLATED INTO U.S. DOLLARS)

2 (An Israeli Corporation) 1998 CONSOLIDATED ANNUAL REPORT (TRANSLATED INTO U.S. DOLLARS) TABLE OF CONTENTS Page REPORT OF INDEPENDENT AUDITORS 2-3 CONSOLIDATED FINANCIAL STATEMENTS - TRANSLATED INTO U.S. DOLLARS (note 2): Balance sheets 4-5 Statements of income 6 Statements of changes in shareholders' equity 7 Statements of cash flows 8-10 Notes to financial statements APPENDIX - DETAILS OF SUBSIDIARIES 60-62

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4 REPORT OF INDEPENDENT AUDITORS To the shareholders of We have audited the primary consolidated financial statements of Israel Chemicals Limited ("the Company") and its subsidiaries, expressed in adjusted New Israeli Shekels ( NIS ): balance sheets as of December 31, 1998 and 1997 and the statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, These financial statements are the responsibility of the Company's board of directors and 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 as of December 31, 1998 and 1997 constitute approximately 75% and 72%, respectively, of total consolidated assets, and whose income from sales for the years ended December 31, 1998, 1997 and 1996 constitutes approximately 82%, 83%, and 80%, respectively, of total consolidated sales. The financial statements of those companies were audited by other auditors, whose reports have been furnished to us. Likewise, we did not audit the financial statements of the associated companies (see note 4). Our opinion, insofar as it relates to amounts included for the foregoing companies, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards, including those prescribed by the Auditors (Mode of Performance) Regulations, Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either due to error or to intentional misrepresentation. 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 management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a fair basis for our opinion. The aforementioned financial statements have been prepared on the basis of historical cost adjusted to reflect the changes in the general purchasing power of Israeli currency, on the basis of the changes in the exchange rate of the U.S. dollar, in accordance with pronouncements of the Institute of Certified Public Accountants in Israel (see note 2b).

5 Based on our audits, we issued an unqualified opinion on the aforementioned financial statements on March 15, Without qualifying our opinion, we draw attention to the uncertainty relating to contingent liabilities of certain subsidiaries, as stated in note 10c to the consolidated financial statements. In respect to certain of these contingent liabilities, the Company has made provisions in its consolidated financial statements, in amounts which it considers sufficient to cover any liability that may arise in respect thereof; no provisions have been made in respect of the contingent liabilities the amount and ultimate outcome of which cannot be determined at this stage. The accompanying financial statements are a translation into U.S. dollars of the abovementioned primary financial statements, in accordance with the principles described in note 2. Tel-Aviv, Israel March 15, 1999 Kesselman & Kesselman Certified Public Accountants (Israel) 3

6 CONSOLIDATED BALANCE SHEETS TRANSLATED INTO U.S. DOLLARS (note 2b) December 31 Note In thousands A s s e t s 13 CURRENT ASSETS: 15 Cash and cash equivalents 2p 38,679 65,911 Short-term investments, deposits and loans 14a 87,373 37,057 Accounts receivable: 14b Trade 412, ,850 Other 160, ,505 Inventories 14c 493, ,314 T o t a l current assets 1,192,628 1,256,637 INVESTMENTS AND LONG-TERM 15 RECEIVABLES: Associated companies 4 56,333 3,651 Other companies 4b 49,170 Long-term deposits and receivables, net of current maturities 5 27,948 49,414 84, ,235 FIXED ASSETS: 6 Cost 3,308,104 3,746,596 L e s s - accumulated depreciation 1,476,508 1,797,316 1,831,596 1,949,280 OTHER ASSETS AND DEFERRED CHARGES, net of accumulated amortization 3a 17, ,121 3,125,573 3,412,273 Yossi Rosen Chaim Erez Igal Dimant Chairman of the Board Director President of Directors 4

7 Date of approval of the financial statements: March 15,

8 December 31 Note U.S. dollars in thousands Liabilities and shareholders' equity CURRENT LIABILITIES: 13;15 Short-term credit from banks and from others 7 653, ,288 Accounts payable and accruals: Trade 197, ,011 Other 14d 223, ,508 T o t a l current liabilities 1,075,041 1,212,807 LONG-TERM LIABILITIES: Loans and other liabilities, net of current maturities: 8;13;15 Debentures 38,142 18,667 Bank loans 845, , , ,417 Deferred income taxes 12c 120, ,005 Liability for employee rights upon retirement, net of amounts funded 9 108, ,580 T o t a l long-term liabilities 1,111,532 1,207,002 COMMITMENTS AND CONTINGENT 10 LIABILITIES T o t a l liabilities 2,186,573 2,419,809 MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 124, ,282 SHAREHOLDERS' EQUITY: Share capital , ,402 Differences from translation of financial statements of subsidiaries (9,372) (3,927) Retained earnings 302, , , ,182 3,125,573 3,412,273 The accompanying notes are an integral part of the financial statements. 5

9 CONSOLIDATED STATEMENTS OF INCOME TRANSLATED INTO U.S. DOLLARS (note 2b) Year ended December 31 Note U.S. dollars in thousands (except per share data) SALES - net 14e 1,636,075 1,685,749 1,792,787 COST OF SALES 14f 1,214,719 1,249,084 1,284,183 GROSS PROFIT 421, , ,604 RESEARCH AND DEVELOPMENT EXPENSES - net 14g 48,778 44,775 42,009 SELLING AND MARKETING EXPENSES 14h 105, , ,664 GENERAL AND ADMINISTRATIVE EXPENSES 14i 98, , ,727 OPERATING INCOME 169, , ,204 FINANCIAL EXPENSES - net 14j 56,682 52,295 93, , , ,709 OTHER INCOME (EXPENSES) - net: Reorganization plan 3c (7,646) Other - net 14k (2,851) 21,484 18,639 INCOME BEFORE TAXES ON INCOME 102, , ,348 TAXES ON INCOME 12 31,501 51,929 71,034 INCOME FROM OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES 70, , ,314 SHARE IN PROFITS (LOSSES) OF ASSOCIATED COMPANIES - net 4 6,415 4,503 (1,048) MINORITY SHARE IN PROFITS OF SUBSIDIARIES - net (7,622) (5,177) (294) NET INCOME FOR THE YEAR 69, , ,972 NET INCOME PER NIS 1 OF PAR VALUE OF SHARES 2q PAR VALUE OF SHARES USED FOR THE PURPOSE OF COMPUTING PER SHARE DATA - NIS in thousands 1,200,000 1,200,000 1,200,000 The accompanying notes are an integral part of the financial statements. 6

10 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY TRANSLATED INTO U.S. DOLLARS (note 2b) Share capital (note 11) Differences from translation of financial statements of Retained subsidiaries earnings U.S. dollars in thousands Total BALANCE AT JANUARY 1, ,402 9, , ,840 CHANGES DURING 1996: Net income 69,462 69,462 Other (5,897) (5,897) BALANCE AT DECEMBER 31, ,402 3, , ,405 CHANGES DURING 1997: Net income 101, ,405 Final dividend for 1996 (20,880) (20,880) Final dividend for 1997 (31,115) (31,115) Other (12,928) (12,928) BALANCE AT DECEMBER 31, ,402 (9,372) 302, ,887 CHANGES DURING 1998: Net income 109, ,972 Interim dividend for 1998 (64,122) (64,122) Other 5,445 5,445 BALANCE AT DECEMBER 31, ,402 (3,927) 348, ,182 The accompanying notes are an integral part of the financial statements. 7

11 CONSOLIDATED STATEMENTS OF CASH FLOWS TRANSLATED INTO U.S. DOLLARS (note 2b) (Continued) - Year ended December U.S. dollars in thousands CASH FLOWS FROM OPERATING ACTIVITIES: Net income 69, , ,972 Adjustments required to reflect the cash flows from operating activities (a) 70,127 85, ,029 Net cash provided by operating activities 139, , ,001 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (601,800) (307,874) (216,512) Investment grants relating to fixed assets 173,551 76,439 33,862 Acquisition of a subsidiary consolidated for the first time (b) (60,574) (1,313) (125,981) Proceeds from disposal of investments in subsidiaries consolidated in previous years 2,821 (932) Acquisition of shares in subsidiaries (2,047) Investments in shares of associated companies, and loans thereto - net (1,358) (1,134) (608) Investments in marketable securities and long-term deposits (222,418) (38,156) (31,783) Decrease (increase) in short-term deposits and loans - net 63,918 (371) (332) Amounts carried to other assets and deferred charges (894) (3,825) (285) Proceeds from sale of fixed assets 3,623 4,308 2,883 Proceeds from disposal of marketable securities and long-term deposits 252,187 97,124 66,571 Net cash used in investing activities (393,765) (171,981) (275,164) CASH FLOWS FROM FINANCING ACTIVITIES: Issue of share capital in a subsidiary to minority shareholders 38,902 2,051 3,437 Long-term loans received and other long-term liabilities undertaken 473, , ,918 Repayment of long-term loans and discharge of other long-term liabilities (177,185) (241,696) (220,915) Dividend paid: To shareholders of ICL (51,995) (64,122) To minority shareholders in consolidated subsidiaries (7,512) (7,694) (2,679) Short-term credit from banks and others - net (44,385) (24,481) 138,160 Net cash provided by (used in) financing activities 283,065 (32,292) 30,799 ADJUSTMENTS FROM TRANSLATION OF CASH AND CASH EQUIVALENTS OF CERTAIN NON-ISRAELI SUBSIDIARIES (352) (2,498) 596 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 28,537 (19,522) 27,232 BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 29,664 58,201 38,679 BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR 58,201 38,679 65,911 8

12 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) - 2 TRANSLATED INTO U.S. DOLLARS (note 2b) Year ended December U.S. dollars in thousands (a) Adjustments required to reflect the cash flows from operating activities: Income and expenses not involving cash flows: Minority share in profits of subsidiaries - net 7,622 5, Associated companies: Share in losses (profits) - net (6,415) (4,503) 1,048 Dividend received 1,712 2,931 2,599 Depreciation and amortization 131, , ,417 Deferred income taxes - net 2,614 33,287 54,248 Liability for employee rights upon retirement - net 4,822 2,374 7,540 Capital losses (gains): On sale of fixed assets (788) (1,169) 346 On sale of shares in investee companies (2,868) (16,168) (16,542) Loss on reorganization plan, net of amount paid in cash 7,646 Amortization of production facilities 4, Erosion of principal of long-term loans and other long-term liabilities - net (5,894) (8,634) (1,826) Erosion of (exchange and linkage differences on) principal of long-term deposits and receivables - net (3,370) 1,483 4,763 Loss (gain) from marketable securities (3,490) (106) 6, , , ,119 Changes in operating asset and liability items: Decrease (increase) in accounts receivable: Trade (18,501) (32,426) (18,437) Other (10,319) (9,513) 707 Increase (decrease) in accounts payable and accruals: Suppliers and contractors (3,263) 3,447 (12,857) Other 18,236 12,438 (17,346) Increase in inventories (52,724) (41,234) (14,157) (66,571) (67,288) (62,090) 70,127 85, ,029 9

13 (Concluded) - 3 CONSOLIDATED STATEMENTS OF CASH FLOWS TRANSLATED INTO U.S. DOLLARS (note 2b) Year ended December U.S. dollars in thousands (b) Acquisition of subsidiaries consolidated for the first time: Assets and liabilities of the subsidiaries at date of acquisition: Working capital (excluding cash) (34,433) (2,938) 63,675 Fixed assets - net (73,410) (366) (104,585) Intangible assets (2,556) Long-term liabilities 54,478 2,377 3,874 Goodwill arising on acquisition (7,209) (386) (86,389) (60,574) (1,313) (125,981) The accompanying notes are an integral part of the financial statements. 10

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL: a. Operations Israel Chemicals Limited ("ICL") or the Company - an Israeli corporation - together with its subsidiaries and associated companies ("the Group") operate in three major industrial segments: fertilizers, bromide and bromide compounds and other chemicals. The Group is also engaged in metallurgy (magnesium) and is a multi-national enterprise. The main portion of the Group s production activities is carried out in Israel; most of the rest is carried out in Europe and the remainder - in the United States. About 90% of the Group s products is sold to customers outside of Israel. For a breakdown of data by business and geographic segments, see notes 14e, 17d, and 17e. The operations in Israel are based mainly on exploitation of natural resources in the Dead Sea potash, bromide and other minerals and in the Negev deposits of phosphate ore. These resources are extracted by the Group s companies in Israel under concessions granted by the State of Israel (as to royalties and the concession periods see note 10b). The exploitation of natural resources consists of extraction of the abovementioned raw materials and marketing them worldwide, as well as development, production and marketing of products based mainly on those raw materials. The products produced abroad consist mainly of products that fit in with the companies activities in Israel or are in closely related fields. The securities of ICL and some of the companies in the Group are traded on the Tel Aviv Stock Exchange ( TASE ) and on the London Stock Exchange. b. Privatization Until the beginning of 1992, ICL was wholly-owned by the State of Israel ("the State"). The privatization of ICL was approved in accordance with various resolutions, the Israeli Government's Ministerial Committee for Privatization and of the Finance Committee of the Knesset, except that the State would continue to hold a Special State Share in ICL and in some of its subsidiaries entitling the State to safeguard certain vital State interests (see note 11b). In accordance with the above resolutions, the State sold its holdings in ICL, by private placement and sale offerings, among others. In the last offering, which took place on November 30, 1998, the State offered the remainder of its holdings, with the exception of the Special State Share, to the public and to the employees of the Group. Following that offering, approximately 2% of the shares of ICL that were not acquired by the employees, are still held by the state. 11

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1 - GENERAL (continued): Due to low percentage of shares held by the State, ICL and its subsidiaries are no longer considered Government Companies. Those subsidiaries in which the State has no share are no longer subject to laws applicable to Government Companies. However, as long as the Government holds ordinary shares of ICL and some of its subsidiaries, those companies are considered to be mixed companies and are subject to some of the laws applying to Government Companies. c. Uncertainty due to the Year 2000 ( Y2K ) issue The Y2K issue arises because many computerized systems use two digits, rather than four, to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Y2K issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure, which could affect an entity s ability to conduct normal business operations. It is not possible to be certain that all aspects of the Y2K issue affecting the Group, including those related to the efforts of customers, suppliers or other third parties, will be fully resolved. Certain major subsidiaries are still examining the ways of recovering in the event of systems failure due to the Y2K issue (the matter is being discussed, but has not yet been finalized). These companies have no list of third party systems that are critical for their activities. They have applied to their major suppliers to receive the latters explanation regarding their preparation for the Y2K issue. At this stage, it is not possible to determine the anticipated cost of completion of adaptation of software to address this issue. However, management estimates such cost at $ 3-4 million. The costs of adaptation of the computer systems to the year 2000 are charged to income upon incurrence. 12

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies, applied on a consistent basis, are as follows: a. Definitions: Subsidiary - a company controlled to the extent of over 50%, the financial statements of which have been consolidated with the financial statements of ICL. Associated company - a company (which is not a subsidiary) the investment in which is presented by the equity method. Investee company - a subsidiary or associated company. Goodwill - the difference between the cost of the investment in the investee company and the Group s share in the fair value of the underlying assets, net of the fair value of its underlying liabilities, at time of acquisition. b. Financial statements translated into U.S. dollars: 1) The primary financial statements of the group have been prepared on the basis of historical cost adjusted to reflect the changes in the exchange rate of the U.S. dollar (hereafter - the dollar), in accordance with pronouncements of the Institute of Certified Public Accountants in Israel (hereafter - the Israeli Institute), see (2) below. All figures in the primary financial statements are presented in adjusted new Israeli shekels (NIS) which have a uniform value - based upon the exchange rate of the dollar as of December 31, The attached financial statements are a translation of the aforementioned primary financial statements into dollars on the basis of the exchange rate as of December 31, $1 = NIS

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): 2) The adjustment of the primary financial statements is based on the accounts of the company and its Israeli subsidiaries, maintained in nominal NIS. The components of the income statements were, for the most part, adjusted as follows: the components relating to transactions carried out during the year - sales, purchases, labour costs, etc. - were adjusted on the basis of the exchange rate on transaction date, while those relating to non-monetary balance sheet items (mainly - changes in inventories, depreciation and amortization) were adjusted on the same basis as the related balance sheet item. The financing component represents financial income and expenses in real terms, the erosion of balances of monetary items during the year, the changes in value of marketable securities during the year and gains and losses on transactions in derivative financial instruments (see also n. below). As mentioned in (1) above, the primary financial statements have been drawn up in accordance with the principles of adjustment prescribed by Opinions of the Israeli Institute, on the basis of the changes in the exchange rate of the dollar. As to subsidiaries and associated companies whose financial statements are drawn up in non-dollar currencies - see (3) below. The amounts presented in these financial statements in dollars should not be construed to represent amounts receivable or payable in dollars or convertible into dollars, except when otherwise indicated in the financial statements. 3) Foreign subsidiaries the financial statements of which are not drawn up in dollars For purposes of consolidation or inclusion on the equity basis, the amounts (in foreign currency terms) included in the statements of the above companies were treated as follows: Investee companies operating independently Balance sheet items at the end of each period and the results of operations for each period were translated at the exchange rate of the relevant foreign currency at the end of each period. Balance sheet items at the beginning of the period and changes in shareholders equity items during the period were translated at the relevant exchange rate at the beginning of the year or the date of each change, respectively, and then adjusted as described above through the end of the period. 14

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): Differences resulting from the above treatment are carried as a separate item under adjusted shareholders' equity ("differences from translation of financial statements of subsidiaries ). Investee companies abroad the activities of which are an integral part of the activities of the investor company (long arm) The financial statements of such companies were remeasured in terms of dollars. The remeasurement was effected by way of translation of the amounts (in terms of foreign currency) on the basis of historical exchange rates in relation to the NIS; the resulting figures were then adjusted on the basis of the changes in the exchange rate of the dollar by the same method as the financial statements of the Israeli companies in the Group were adjusted. Differences resulting from the above treatment are included in the adjusted statements of income under financial income or expenses. 4) The amounts of non-monetary assets do not necessarily represent realization value or current economic value, but only the original historical values, adjusted to reflect the changes in the exchange rate of the dollar. In these financial statements, the term cost signifies adjusted cost translated as described above, into dollars. c. Principles of consolidation: 1) The consolidated financial statements include the accounts of ICL and its subsidiaries. The consolidated financial statements also include the proportionate share of subsidiaries in partnerships. Intercompany balances and transactions have been eliminated. Profits from intercompany sales, not realized outside the Group, have also been eliminated. The companies included in consolidation are listed in the appendix. 15

19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): 2) Goodwill is included among "other assets and deferred charges" and amortized in equal annual installments, as follows: goodwill arising from acquisition of a Spanish group of Companies - see note 3; goodwill arising from acquisition of other companies - over a period of up to 10 years commencing with the year of acquisition. d. Investments in associated companies Investments in these companies are accounted for by the equity method. e. Inventories Inventories are valued at the lower of cost or market. Cost is determined as follows: Products in process and finished products - on basis of periodic production costs. Raw materials and supplies - mainly on moving average basis. Some of the raw materials, finished products and products in process are in bulk. The quantities thereof are based on estimates (mostly done by external experts, who measure the volume and density of the inventories). f. Investments in marketable securities and in other companies: 1) Marketable securities Marketable securities (except investment in another company - see note 4b(1)) are stated at market value or - for participation certificates in mutual funds - redemption value. Changes in value of these securities are carried to financial income or expense. 2) Other companies As to presentation of investments in other companies - see note 4b. g. Fixed assets: 1) Fixed assets are stated at cost, net of related investment grants. Expenditures for capital improvements - maintenance and repair expenditures which improve the quality of products or increase the output or the useful life of the plant - and renewals are capitalized. Spare parts are stated at cost determined on the moving average basis, net of a provision for obsolescence. Spare parts for current use are presented among inventories. 16

20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): 2) Erection expenses and financial expenses in respect of loans and credit applied to finance erection or acquisition of fixed assets - incurred during the period prior to regular operation of the plants - are capitalized in cost of the assets. 3) As to capitalization of costs of erecting facilities for prevention of environmental pollution, see l below. 4) Depreciation is provided by the straight-line method, on basis of the estimated useful life of the assets. The annual rates of depreciation are as follows: % Land development, roads and buildings 4-8 Installations, machinery and equipment 5-10 Dikes and evaporating ponds 4-17 Heavy mechanical equipment, railroad cars and containers Furniture, vehicles and other fixed assets 6-33 h. Other assets and deferred charges The item mainly represents goodwill. As to amortization policy - see c. above. i. Deferred taxes: 1) Deferred taxes are computed in respect of differences between the amounts presented in these statements and those taken into account for tax purposes. As to the main factors in respect of which deferred taxes have been included - see note 12c. Deferred tax balances are computed at the tax rate expected to be in effect at time of release to income from the deferred tax accounts. The amount of deferred taxes presented in the income statements reflects changes in the above balances during the year. 2) The Company has not provided deferred taxes for the future realization of investments in subsidiaries or associated companies, as it is the Company s policy to hold these investments, not to realize them. 17

21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): 3) As stated in note 12a(1), some of the enterprises of subsidiaries have been granted approved enterprise status. Hence, dividends derived from those approved enterprises and received by the Company are likely to be subject to tax. Since the amount of profits available for distribution derived from the approved enterprises of subsidiaries is not significant, no additional taxes were reflected in the accounts in respect of such dividends. j. Revenue recognition Revenue from sales of products is recognized upon shipment to the customer. k. Research and development expenses Research and development expenses, net of participations which are not conditional upon the success of the research, are charged to income as incurred. l. Environmental costs Ongoing costs of operating and maintenance of installations for prevention of environmental pollution, and anticipated provisions for costs relating to existing conditions resulting from ongoing or past operations are charged to the statements of income. Costs of erection of installations for prevention of environmental pollution, which extend the life of, or efficiency of, the installation, or reduce or prevent environmental pollution, are charged to the cost of the assets and depreciated according to the Company depreciation policy. m. Allowance for doubtful accounts The allowance for doubtful accounts has been determined for specific debts doubtful of collection. n. Derivatives Gains and losses on hedges of existing assets or liabilities are recognized in income commensurate with the results from those assets and liabilities. Gains and losses related to qualifying hedges of firm purchase or sale commitments are deferred and included as part of the measurement of the results from the underlying hedged transactions, at the time of recognition of said results or carried to financial income or expenses when the transaction is no longer expected to take place. The net premiums paid for currency options are charged to financial expenses over the term of the options (see also note 15). 18

22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): o. Use of estimates in the preparation of financial statements 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting years. Actual results could differ from those estimates. p. Cash equivalents Highly liquid instruments, including short-term deposits with banks (with a maturity of three months or less from date of investment) that are not restricted as to withdrawal or use are considered by the Company as cash equivalents. q. Net income per NIS 1 of par value of shares Net income per NIS 1 of par value of shares has been determined on the basis of the par value of the outstanding share capital. The par value of shares used in the computation of net income per NIS 1 of par value of shares is NIS 1,200,000,000. NOTE 3 - SUBSIDIARIES: a. Investment in the Spanish potash group On October 21, 1998 an agreement was signed by Iberpotash S.A. and SEPI (a Spanish entity similar to the Israeli Government Companies Authority). Iberpotash S.A. (hereafter - the syndicate company) is a company registered in Barcelona, Spain. It is held to the extent of 60% by DSW, through a subsidiary, Ashli Chemicals (Holland) B.V. (hereafter - Ashli). The remaining 40% is held in equal parts by two Spanish companies (hereafter - the Spanish companies). 19

23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 3 - SUBSIDIARIES (continued): Under that agreement, the syndicate company acquired all the issued share capital of the Spanish potash group, Grupo Potasas, for 17.2 billion pesetas (approximately $121 million). The entire amount had been paid by December 22, the closing date. As of December 31, 1998 the percentage of owners investment in the syndicate company was not yet finalized. The Spanish potash group has the mining rights to potash mines in the Spanish province of Catalonia and it produces and sells potash. The annual production of the Spanish potash group in the year 1998 aggregated 0.8 million tons and its sales turnover for 1998 was approximately $137 million. Under an agreement between the syndicate company and SEPI, the purchase price is subject to examination of certain components of the consolidated balance sheet of the group of companies being acquired. As of the date of preparation of these financial statements, the amount of the consideration for the acquisition has not yet been finalized. It is subject to certain adjustments, to be agreed upon by the syndicate comany and SEPI. The excess of cost of acquisition over equity in net assets on acquisition date - $77,630,000 (including acquisition costs of $ 5, 095,000) - was temporarily carried to goodwill of the group of companies acquired. The goodwill is presented among other assets and will be carried to income in equal annual installments over a period which is not to exceed 20 years. Under the agreement with the shareholders of the syndicate company, Ashli has a call option for purchase of the shares of the Spanish companies and they have a put option for sale of the shares to Ashli. These options come into effect two years after the date of signature of the agreement and expire eleven years after that date. The price of the Spanish companies' shares, in the case of Ashli s exercising its call option, will be the price in pesetas that the Spanish companies actually paid for the shares of the syndicate company, with the addition of 12% per annum, or a price derived from the net asset value of the syndicate company at that time, whichever is higher. If the Spanish companies exercise their put option, the price will be the 20

24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 3 - SUBSIDIARIES (continued): same; however, the addition will be 7% per annum instead of 12% per annum, as above. Following are data regarding the companies acquired by the syndicate company and included in the consolidated balance sheet as of December 31, 1998: $ in thousands Current assets 28,512 Long-term receivables and deposits 126 Fixed assets 99,308 Other assets 2,273 Current liabilities (78,578) Long-term liabilities (3,648) 47,993 The results of operations of the companies acquired will be included in consolidation commencing January 1, b. Restructuring of the activities of the subsidiary in Germany In January 1996, ICL, through subsidiaries of Rotem Amfert Negev Ltd., ( Rotem ), acquired full control and ownership of BK Ladenburg GmbH ( BK ), a German company. BK mainly deals in unique phosphates, food additives, water treatment and the paper industry, some of which coincide with the activities of Rotem and Giulini Chemie GmbH ( Giulini ). Following the acquisition of BK, and for efficiency considerations, the Company formulated, during 1996 and 1997, a reorganization plan for the operations of BK and Giulini, including consolidation of operations and reduction in administrative personnel. As a result of this plan, the consolidated statement of income for 1996 includes a charge of approximately $ 7.6 million. In 1997, a statutory merger was carried out. The name of the new company is B.K. Giulini GmbH (hereafter BK Giulini). c. Dead Sea Magnesium Ltd. ("DSM ) Dead Sea Works Ltd. ( DSW ), holds 65% of the issued share capital of DSM and 67% in the voting rights therein, and Volkswagen holds the balance. Under an agreement between DSW and Volkwagen, DSW has a right of first refusal in the case that Volkswagen wishes to sell its shares in DSM. Moreover, if Volkswagen decides to sell all or part of its shares in DSM off the stock exchange and it does not find a bona fide buyer, it will be obliged to notify DSW. In that case, DSW will be obliged to purchase those shares at a price based on 75% of the shareholders equity of DSM, as determined by the auditors of DSM. 21

25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 3 - SUBSIDIARIES (continued): d. Acquisition offer plan for the shares of fertilizers and Chemicals Ltd. (FCL) Following the acquisition offer issued by the Company in 1998, the Company purchased directly, during February and March 1998, 12.6% (out of the 14.9% held by the public) of the share capital of FCL for $ 0.31 per share (total cost of $ 2 million). Following the acquisition offer, and the supplementary offer prepared as a consequence, the Company s direct and indirect holding in FCL increased to 97.7%. The extraordinary general meeting of shareholders of FCL, which was held on July 16, 1998, resolved to approve the arrangement between FCL and its shareholders whereby the shares of FCL were to be delisted. The court approved this resolution on September 9, According to a decision of The Board of Directors of the Stock Exchange the shares were delisted on November 25, At FCL s request, the Court approved a general meeting of shareholders at which acquisition of the minority shareholding by ICL would be proposed. e. Special State share Certain subsidiaries, DSW, Rotem Dead Sea Bromine Company Ltd. (hereafter - the Bromine Company), Bromine Compounds Ltd. (hereafter - Bromine Compounds), DSM and Tami (IMI) Institute for Research and Development Ltd., issued a special State share. As to the rights conferred upon the State as a result of holding the special State share, see note 11b. f. Market value of investments in the quoted securities of subsidiaries ICL's share in the value of the shares of certain subsidiaries, which are traded on the stock exchange (in one subsidiary, only 69% of the shares are traded), based on the quoted prices as of December 31, 1998, is approximately $ 977 million, including shares of approximately $ 205 million not traded on the stock exchange. ICL's share in the equity in net assets of those companies, as presented in the financial statements as of that date, is approximately $ 620 million. 22

26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 4 - INVESTMENTS IN ASSOCIATED COMPANIES AND OTHER COMPANIES: a. The composition of the investments and the changes therein are as follows: December U.S. dollars in thousands Sociedad Quimica y Minera de Chile S.A. ( SQM ), see g. below - equity in net assets: Cost 23,860 Share in profits accumulated since acquisition, net of dividends received 27,909 51,769 Other (including long-term loans) 4,564 3,651 56,333 3,651 The changes in investments in associated companies in 1998 are as follows: U.S. dollars in thousands Balance at beginning of year 56,333 Changes during the year: Classification of the investment in SQM as an investment in another company, due to discontinuation of recording thereof by the equity method, net of dividend received amounting to $2,599,000, see g. below (51,769) Long-term loans - net (174) Share in losses - net (1,048) Other changes, net 309 Balance at end of year 3,651 b. The investments in other companies include: 1) SQM shares are held by a foreign subsidiary and traded on the stock exchange in Chile and on the New York Stock Exchange in the United States. This investment was accounted for by the equity method until December 31, 1997, due to the Company s significant influence in SQM, based on a voting agreement with other shareholders of SQM. Early in 1998, the voting agreement was cancelled; accordingly, with effect from January 1998, the investment is no longer recorded on the equity basis. The investment is now classified as an investment in another company (presented at equity in net assets as of December 31, 1997, net of dividends received in 1998 in respect of 1997). 23

27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 4 - INVESTMENTS IN ASSOCIATED COMPANIES AND OTHER COMPANIES (continued): As of December 31, 1998 the subsidiary s holding of shares in SQM grants it 8.1% of rights to profits and 12.4% of voting rights. The value of SQM shares held by the subsidiary, on the basis of market prices on the U.S. and Chilean stock exchanges as of December 31, 1998, amounts to $ 61 million (December 31, $ 71 million). 2) The investment in shares of Mekoroth Israel National Water Company Ltd., which are held by Rotem, are presented at token value. NOTE 5 - LONG-TERM DEPOSITS AND RECEIVABLES: a. Composed as follows: December U.S. dollars in thousands Deposits: Banks 24,445 39,524 The Treasury - Accountant General 4,326 3,717 Other 8,250 9,855 37,021 53,096 L e s s - current maturities 9,073 3,682 27,948 49,414 b. Classified by currency and interest rates: December 31 Weighted interest rates as of December 31, 1998 U.S. dollars in thousands % In dollars 6.9 8,242 3,549 In other non-israeli currencies (mainly European currencies) ,041 In Israeli currency - mainly linked to the Israeli consumer price index ( the Israeli CPI ) ,823 48,506 37,021 53,096 24

28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 5 - LONG-TERM DEPOSITS AND RECEIVABLES (continued): c. The deposits and receivables (net of current maturities) mature in the following years subsequent to December 31, 1997 and 1998: December U.S. dollars in thousands Second year 3,068 19,194 Third year 930 3,876 Fourth year 1,709 4,226 Fifth year 2,343 3,013 Sixth year and thereafter (through 2017) 16,329 15,680 Not yet fixed 3,569 3,425 27,948 49,414 25