ISRAEL CHEMICALS LIMITED (An Israeli Corporation)

Transcription

1 (An Israeli Corporation)

2 (An Israeli Corporation) 1999 ANNUAL REPORT INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page AUDITOR S REPORT 2-3 CONSOLIDATED FINANCIAL STATEMENTS - IN U.S. DOLLARS: 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 11-63

3 REPORT OF INDEPENDENT AUDITORS To the shareholders of ISRAEL CHEMICALS LIMITED We have audited the primary consolidated financial statements of Israel Chemicals Limited ( the Company ) and its subsidiaries, expressed in New Israeli Shekels ( NIS ) adjusted to reflect the changes in the exchange rate of the U.S. dollar: balance sheet as of December 31, 1999 and 1998 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, 1999 and 1998 constitute approximately 75% of total consolidated assets, and whose income from sales for the years ended December 31, 1999, 1998 and 1997 constitutes approximately 83%, 82%, and 83%, 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 Israeli 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. 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 and reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based upon our audits and the reports of the other auditors referred to above, the aforementioned financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1999, 1998 and the consolidated results of operations, changes in shareholders equity and cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in Israel. Also, in our opinion, the abovementioned financial statements have been prepared in accordance with the Securities (Preparation of Annual Financial Statements) Regulations,

4 Without qualifying our opinion, we draw attention to the uncertainty relating to contingent liabilities of the Company and certain subsidiaries, as stated in note 10c to the consolidated financial statements. In respect to certain of these contingent liabilities, provisions have been included in the consolidated financial statements, in amounts which, in the opinion of management of the said companies, are considered 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 2b. Tel-Aviv, Israel March 20, 2000 Kesselman & Kesselman Certified Public Accountants (Israel) 3

5 CONSOLIDATED BALANCE SHEETS December 31 Note U.S. dollars in thousands A s s e t s 13 CURRENT ASSETS: 15 Cash and cash equivalents 2q 40,747 65,911 Short-term investments, deposits and loans 14a 52,248 37,057 Accounts receivable: 14b Trade 488, ,850 Other 150, ,505 Inventories 14c 505, ,314 T o t a l current assets 1,237,608 1,256,637 INVESTMENTS AND LONG-TERM RECEIVABLES: 15 Associated companies 4a 2,507 3,651 Other companies 4b 49,170 49,170 Long-term deposits and receivables, net of current maturities 5 33,100 49,414 84, ,235 FIXED ASSETS: 6 Cost 3,889,764 *3,805,352 L e s s - accumulated depreciation 1,939,471 1,797,316 1,950,293 2,008,036 OTHER ASSETS AND DEFERRED CHARGES, net of accumulated amortization 2i 34,679 *45,365 3,307,357 3,412,273 Yossi Rosen Chaim Erez Akiva Mozes Chairman of the Board Director President and Chief of Directors Executive Officer Date of approval of the financial statements: March 20,

6 December 31 Note U.S. dollars in thousands Liabilities and shareholders' equity CURRENT LIABILITIES: 13;15 Short-term credit from banks and from others 7 453, ,288 Accounts payable and accruals: Suppliers and contractors 215, ,011 Other 14d 244, ,508 Dividend payable T o t a l current liabilities 913,144 1,212,807 LONG-TERM LIABILITIES: Loans and other liabilities, net of current maturities: 8;13;15 Debentures 14,375 18,667 Bank loans 969, , , ,417 Deferred income taxes 12c 220, ,005 Liability for employee rights upon retirement, net of amounts funded 9 115, ,580 T o t a l long-term liabilities 1,319,723 1,207,002 COMMITMENTS AND CONTINGENT LIABILITIES 10 T o t a l liabilities 2,232,867 2,419,809 MINORITY INTERESTS IN SUBSIDIARIES 149, ,282 SHAEHOLDERS EQUITY , ,182 3,307,357 3,412,273 * Reclassified The accompanying notes are an integral part of the financial statements. 5

7 CONSOLIDATED STATEMENTS OF INCOME Year ended December 31 Note U.S. dollars in thousands (except per share data) SALES - net 17e 1,874,984 1,792,787 1,685,749 COST OF SALES 14e 1,358,631 1,284,183 1,249,084 GROSS PROFIT 516, , ,665 RESEARCH AND DEVELOPMENT EXPENSES - net 14f 38,821 42,009 44,775 SELLING AND MARKETING EXPENSES 14g 112, , ,114 GENERAL AND ADMINISTRATIVE EXPENSES 14h 99, , ,957 OPERATING INCOME 265, , ,819 FINANCIAL EXPENSES - net 14i 76,595 93,495 52, , , ,524 OTHER INCOME - net 14j 4,607 18,639 21,484 INCOME BEFORE TAXES ON INCOME 193, , ,008 TAXES ON INCOME 12 58,669 71,034 51,929 INCOME FROM OPERATIONS 134, , ,079 SHARE IN PROFITS (LOSSES) OF ASSOCIATED COMPANIES - net (1,048) 4,503 MINORITY SHARE IN LOSSES (PROFITS) OF SUBSIDIARIES - net (10,157) (294) (5,177) NET INCOME 125, , ,405 EARNINGS PER SHARE 2s NUMBER OF SHARES USED FOR THE PURPOSE OF COMPUTING PER SHARE DATA - in thousands of shares 1,201,072 1,200,000 1,200,000 The accompanying notes are an integral part of the financial statements. 6

8 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY Differences from translation of financial Share statements of capital Capital subsidiaries Retained (note 11) surplus (note 2b) earnings Total U.S. dollars in thousands BALANCE AT JANUARY 1, ,402 3, , ,405 CHANGES DURING 1997: Net income 101, ,405 Dividend (51,995) (51,995) Other (12,928) (12,928) BALANCE AT DECEMBER 31, ,402 (9,372) 302, ,887 CHANGES DURING 1998: Net income 109, ,972 Dividend (64,122) (64,122) Other 5,445 5,445 BALANCE AT DECEMBER 31, ,402 (3,927) 348, ,182 CHANGES DURING 1999: Net income 125, ,230 Dividend (55,924) (55,924) Capital surplus arising from a transaction with a controlling shareholder, net of related income tax, see note 3h 1,100 1,100 Other (11,248) (11,248) BALANCE AT DECEMBER 31, ,402 1,100 (15,175) 418, ,350 The accompanying notes are an integral part of the financial statements. 7

9 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) - 1 Year ended December U.S. dollars in thousands CASH FLOWS FROM OPERATING ACTIVITIES: Net income 125, , ,405 Adjustments required to reflect the cash flows from operating activities (a) 232, ,029 85,844 Net cash provided by operating activities 358, , ,249 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (235,755) (216,512) (307,874) Investment grants relating to fixed assets 39,832 33,862 76,439 Acquisition of a subsidiary consolidated for the first time (b) (3,484) (125,981) (1,313) Proceeds from disposal of investments in subsidiaries consolidated in the past (c) 30,571 (932) 2,821 Payment for companies acquired in a previous period (7,071) Acquisition of shares in subsidiaries (16,192) (2,047) Investments in shares of associated companies, and loans thereto - net 889 (608) (1,134) Proceeds from disposal of investment in associated company 376 Investments in marketable securities and long-term deposits (6,356) (31,783) (38,156) Decrease (increase) in short-term deposits and loans - net 189 (332) (371) Amounts carried to other assets and deferred charges (6,856) (285) (3,825) Refund of part of the consideration of acquisition of a subsidiary 3,541 Proceeds from sale of fixed assets 11,201 2,883 4,308 Proceeds from disposal of marketable securities and long-term deposits 9,776 66,571 97,124 Net cash used in investing activities (179,339) (275,164) (171,981) CASH FLOWS FROM FINANCING ACTIVITIES: Issue of share capital in a subsidiary to minority shareholders 35,827 3,437 2,051 Long-term loans received and other long-term liabilities undertaken 268, , ,523 Repayment of long-term loans and discharge of other long-term liabilities (186,589) (220,915) (241,696) Dividend paid: To shareholders of ICL (55,924) (64,122) (51,995) To minority shareholders in consolidated subsidiaries (18,283) (2,679) (7,694) Short-term credit from banks and others - net (244,405) 138,160 (24,481) Net cash provided by (used in) financing activities (200,798) 30,799 (32,292) ADJUSTMENTS FROM TRANSLATION OF CASH AND CASH EQUIVALENTS OF CERTAIN NON-ISRAELI SUBSIDIARIES (3,112) 596 (2,498) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (25,164) 27,232 (19,522) BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 65,911 38,679 58,201 BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR 40,747 65,911 38,679 8

10 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) - 2 (a) Year ended December U.S. dollars in thousands Adjustments required to reflect the cash flows from operating activities: Income and expenses not involving cash flows: Minority share in losses (profits) of subsidiaries - net 10, ,177 Associated companies: Share in losses (profits) - net (699) 1,048 (4,503) Dividend received 2,599 2,931 Depreciation and amortization 188, , ,460 Deferred income taxes - net 35,648 54,248 33,287 Liability for employee rights upon retirement - net 4,763 7,540 2,374 Capital losses (gains): On sale of fixed assets (1,030) 346 (1,169) On sale of shares in an investee company (22,722) (16,542) (16,168) On sale of shares in associated companies (126) Amortization of production facilities 14, Erosion of principal of long-term loans and other long-term liabilities - net (6,916) (1,826) (8,634) Erosion of (exchange and linkage differences on) principal of long-term deposits and receivables - net (672) 4,763 1,483 Loss (gain) from marketable securities (2,015) 6,803 (106) 218, , ,132 Changes in operating asset and liability items: Decrease (increase) in accounts receivable: Trade (52,789) (18,437) (32,426) Other 24, (9,513) Increase (decrease) in accounts payable and accruals: Suppliers and contractors 12,258 (12,857) 3,447 Other 21,836 (17,346) 12,438 Decrease (increase) in inventories 7,921 (14,157) (41,234) 13,905 (62,090) (67,288) 232, ,029 85,844 9

11 (Concluded) - 3 ISRAEL CHEMICALS LIMITED 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 and cash equivalents) (1,246) (d) 56,451 (2,938) Fixed assets - net (4,695) (d) (163,341) (366) Intangible assets (234) (2,556) Long-term liabilities 311 3,874 2,377 Purchase price not yet paid (d) 7,224 Goodwill arising on acquisition 2,380 (d) (27,633) (386) (3,484) (125,981) (1,313) (c) Proceeds from disposal of investments in a subsidiary consolidated in previous years: Assets and liabilities of the subsidiary previously consolidated to date of disposal: Working capital (excluding cash and cash equivalents) (8,248) Fixed assets 15,526 Goodwill 1,569 Long-term loans and other liabilities (1,774) Minority interests in the subsidiary at date of disposal 776 Capital gain from sale of the investment 22,722 30,571 (d) Reclassified. The accompanying notes are an integral part of the financial statements. 10

12 NOTE 1 GENERAL: a. Operations ISRAEL CHEMICALS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Israel Chemicals Limited ("ICL" ), an Israeli corporation - together with its subsidiaries and associated companies ("the Group") - is a multi-national enterprise which operates principally in the following segments: fertilizers, bromide and bromide compounds, other chemicals and metallurgy (magnesium) and is also involved in certain other business activities. The main portion of the Group s production activities is carried out in Israel; most of the rest is carried out in Europe. The Group has also production activities - in the United States and China and marketing offices worldwide. About 90% of the Group s products is sold to customers outside of Israel. As to financial data regarding business and geographical segments and sales by destination - see note 17d, e and f. The operations in Israel are based mainly on exploitation of natural resources in the Dead Sea - a rich source of minerals from which potash, bromine magnesium and magnesium chloride are extracted, and in the Negev deposits of phosphate rock. These resources are exploited 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 shares of ICL and some of the companies in the Group are traded on the Tel Aviv Stock Exchange ( TASE ) and the shares of one of its subsidiaries are also listed on the London Stock Exchange. b. Privatization Until the beginning of 1992, ICL was wholly-owned by the State of Israel ("the State"). The full privatization of ICL was approved in accordance with various resolutions of 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. To the best of knowledge of the Company s management, as of the date of issue of these financial statements the State does not hold any ordinary shares. Therefore, ICL and its subsidiaries are no longer considered Government Companies. 11

13 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 ) 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 items 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 note 2o. 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. 12

14 NOTE 2 SIGNIFICANT ACCOUNTING POLICIES 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 period or the date of each change, respectively, and then adjusted as described above through the end of the period. 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 dollar. 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 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. 13

15 NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (continued): 2) Goodwill is included among "other assets and deferred charges" and amortized in equal annual installments 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 moving average of periodic production costs, including the cost of overburden removal. Raw materials and supplies - mainly on moving average basis. Spare parts and miscellaneous materials stores - on an average basis, see also g(1) below. 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 g. Fixed assets: As to presentation of investments in other companies - see note 4b. 1) Fixed assets are stated at cost, net of related investment grants or, in respect of subsidiaries purchased subsequent to January 1, 1996, at their fair value at date of acquisition. 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. 14

16 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. The Group capitalizes to cost of fixed assets borrowing costs which were incurred as a result of financing the investment in such assets by specific credit. If the investment in fixed assets in not financed, or not wholly financed, by specific credit, the capitalization to the asset (or to the part not financed by specific credit) is made by applying a capitalization rate representing the weighted average of costs of those sources of financing not capitalized on a specific basis. This capitalization continues until the regular operation of the asset. This policy is in conformity with the provisions of Standard No.3 issued by the Israeli Accounting Standards Board - Capitalization of Borrowing Costs, which was recently published. 3) As to capitalization of costs of erecting facilities for prevention of environmental pollution, see m. 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, office equipment, vehicles, computer equipment and other fixed assets 6-33 h. Impairment of long-lived assets The Group reviews the need to provide for an impairment of long-lived assets, identifiable intangibles and goodwill related to those assets held and used by the Group, whenever events or changes in circumstances indicate that the carrying amount of the assets exceeds the amount recoverable. Also, the Group includes in its accounts a provision for impairment of those assets when the undiscounted value of the expected future cash flows is lower than the carrying amount of such asset. Accordingly, when indicators of impairment as above are present, the Group evaluates the carrying value of the foregoing assets and intangibles in relation to the operating performance and present value of expected future cash flows of the underlying assets. 15

17 NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (continued): i. Other assets and deferred charges The item mainly represents goodwill. As to amortization policy - see c. above. The balance of this item includes, among other things, trademarks and deferred expenses in respect of geological surveys, which are amortized by the straight-line method over a five year period (mainly) from the date the expense was incurred. j. 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 period. 2) ICL has not provided deferred taxes for the future realization of investments in subsidiaries or associated companies, as it is ICL s policy to hold these investments, not to realize them. 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 ICL 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. k. Revenue recognition Revenue from sales of products is recognized upon shipment to the customer. l. 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. m. 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 construction 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 Group s depreciation policy. 16

18 NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (continued): n. Allowance for doubtful accounts The allowance for doubtful accounts has been determined for specific debts doubtful of collection. o. 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 payment or sales 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). p. 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. q. 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 Group as cash equivalents. r. Costs of adaptation to the year 2000 The Company expensed the costs of adjusting and converting existing software. s. Earnings per share: 1) Earnings per share have been determined on the basis of the number of outstanding shares; in 1999 with the addition of shares issuable upon exercise of warrants, which is expected, see note 11c. 2) The imputed income, net of the related income tax, assuming receipt with retroactive effect - of the exercise increment in respect of warrants, is immaterial. 17

19 NOTE 3 SUBSIDIARIES: a. Investment of the subsidiary Dead Sea Works Ltd. (hereafter - DSW) in the Spanish Potash Group On December 22, 1998, the acquisition of a group of Spanish potash companies, known as Grupo Potasas (hereafter GP) from SEPI (a Spanish entity similar to the Israeli Government Companies Authority) through Iberpotash S.A. (hereafter IP), a company held to the extent of 60% by DSW through its subsidiary (hereafter Ashli), was completed. The acquisition price was 17.2 billion pesetas (approximately $ 121 million). GP has the mining rights to potash mines in the Spanish province of Catalonia and it produces and sells potash. IP financed the abovementioned acquisition using shareholders loans and bank loans. In 1999, the structure of the shareholders investments in IP was settled and some of the shareholders loans were converted into shareholders equity. As security for the loans granted to IP to finance the said acquisition, the Group s shareholding in IP was pledged in favour of those banks. Under the agreement between IP and SEPI, the purchase price was not finalized and it is subject to examination of certain components of the consolidated balance sheet of GP. 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 IP and SEPI. As of December 31, 1999, SEPI has refunded 586 million pesetas (approximately $ 3.8 million) to IP in respect of the abovementioned adjustments. SEPI has also undertaken an obligation recorded on the books of GP for payment of value added tax and interest accrued thereon, amounting to 410 million pesetas (approximately $2.5 million, to the local tax authorities. During 1999, the evaluation of the fair value of GP s assets net of liabilities as of the date of acquisition was completed. Prior to the completion of the said evaluation, the excess of cost of acquisition over the equity in net assets of GP was temporarily attributed in the financial statements as of December 31, 1998, to goodwill. Following completion of the evaluation, that excess, at its value as of December 31, 1999 (before amortization), was recorded as follows: $ in thousands Fixed assets: Installations, machinery and equipment (1) 6,133 Rights in land designated for development of mines (2) 44,468 Other assets - goodwill (3) 8,422 59,023 18

20 NOTE 3 SUBSIDIARIES (continued): The figures as at December 31, 1998 have been reclassified according to the above evaluation. (1) Installations, machinery and equipment are depreciated by the straight-line method over their estimated useful life (10 years). (2) The rights in land are designated for development in the future of new potash mines. GP holds the concession to exploit the mines until The development of new mines has not yet commenced; accordingly, amortization of the rights to this land has not yet commenced. (3) Goodwill is amortized by the straight-line method over 10 years. The assets and liabilities of IP were included in the consolidated balance sheet for the first time as of December 31, The results of operations of IP are included in the consolidated financial statements commencing January 1, Following are operating results data of IP: $ in thousands Income 99,044 Net income - before minority share in profits 2,714 Under the agreement between the shareholders of IP, Ashli has a call option for purchase of the minority s shares in IP and the minority shareholders have a put option for sale of their 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 IP shares, in the case of Ashli s exercising its call option, will be the price in pesetas that the minority shareholders actually paid for the shares of IP, with the addition of 12% per annum, or a price derived from the net asset value of IP at that time, whichever is higher. If the minority shareholders exercise their put option, the price will be the same; however, the addition will be 7% per annum instead of 12% per annum, as above. b. Dead Sea Magnesium Ltd. (hereafter - DSM): 1) In August 1999, the Group received preliminary results of the valuation of the magnesium plant by an independent expert. Among other things, that valuation was carried out in order to examine a new business plan for the plant and the Group's intention to separate the activities of the magnesium plant from DSW. The valuation which was based on the discounted value of the future expected cash flows from DSM, indicated impairment of $46.5 million in value in relation to the carrying value of the assets as of that date. 19

21 NOTE 3 SUBSIDIARIES (continued): The Group s accounting policy (see note 2h) does not allow recognition of impairment in value of assets if the undiscounted expected future cash flows exceed the carrying value of the assets. Therefore, no write-down in respect of the impairment in value of those assets is included in the accounts and the said assets are presented at their carrying value. 2) Under an agreement of January 27, 2000 (hereafter the agreement), the Company acquired from DSW all its shares in DSM (conferring 65% of ownership and 67% of control) for $ 66.3 million. The remaining ownership and voting rights are held by Volkswagen. The closing date of the agreement was set at January 1, The consideration for the DSM shares was determined on the basis of the opinion of the abovementioned independent appraiser as to the fair value of DSW s holdings in DSM. In addition, ICL has also undertaken guarantees in the amount of $ 101 million for DSM s liabilities. These liabilities are included in ICL s consolidated accounts. As a result of the transaction, the Company s share in the control of DSM increased by 7.3% and its share in ownership and operating results increased by 7.1%. Under an agreement between ICL and Volkswagen, ICL has a right to first refusal if Volkswagen wishes to sell its shares in DSM. Moreover, if Volkswagen wishes to sell all, or part of, its shares in DSM not through the stock exchange, and does not find a bona fide purchaser, it should notify ICL; in such a case, ICL is obliged to purchase these shares at a price to be determined at 75% of the net assets (shareholders equity) of DSM. c. Acquisition offer plan for the shares of DSW Subsequent to December 31, 1999, ICL submitted an acquisition offer for all of DSW s shares held by the public; these shares represent approximately 10.77% of DSW s share capital, at a price of approximately $ 4.5 per share. The acquisition offer is contingent upon minimal response to the offer. The last date on which acceptance notifications may be submitted is March 27, d. Acquisition offer plan for the shares of Fertilizers and Chemicals Ltd. (FCL) Following the acquisition offer issued by ICL in 1998, in February and March 1998, ICL purchased directly 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 approximately $ 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%. 20

22 NOTE 3 SUBSIDIARIES (continued): At FCL s request, the Court approved an extraordinary meeting of shareholders at which acquisition of the minority shareholding by ICL was proposed and approved. On August 2, 1999, ICL purchased the remainder of FCL s share capital from the minority shareholders for $ per share (total cost of $ 0.5 million). The cost of the above purchases was attributed to goodwill. e. Acquisition offer plan for the shares of Dead Sea Periclase ltd. (hereafter - Periclase) On November 30, 1999, ICL published an acquisition offer for Periclase s shares. Following the acquisition offer, through December 31, 1999, ICL purchased directly 30.7% (out of the 40.7% held by the public) of the share capital of Periclase for $ 3.84 per share (total cost of approximately $ 15.3 million). As of December 31, 1999, ICL held 90% of the share capital of Periclase. The excess of the fair value of the assets (net of liabilities) so acquired over cost of acquisition was deducted from cost of fixed assets. Subsequent to December 31, 1999, on January 13, 2000, ICL published a supplementary acquisition offer, at identical terms, for the acquisition of the balance of shares from the public. Following the supplementary offer, ICL acquired additional 6.84% of the share capital of Periclase for $ 3.89 per share (total cost of $ 3.5 million). On February 16, 2000, ICL acquired the balance of Periclase s shares, under a compulsory acquisiton, for $ 3.96 per share (total cost of $ 1.6 million). On February 17, 2000, the trade in Periclase s shares was suspended and on February 22, 2000, these shares were delisted. f. Sale of investment in Perio Products Ltd. On August 5, 1999, ICL signed an agreement for sale of its holdings in Perio Products Ltd., which confer 84.9% of ownership and control in that company, to Dexxon Ltd. ICL has recorded a capital gain of approximately $ 23 million in respect of this transaction. No tax liability in respect of this transaction is expected. g. Sale of Investment in Rami Ceramic Industries (1991) Ltd. (hereafter Rami) On December 2, 1999, ICL signed an agreement for the sale of all of its holdings in Rami, which confer upon 100% of ownership and control in Rami, to a French Corporation. The sale agreement is effective as of January 5, The Group included in its accounts a provision for decline in value of Rami s assets in an amount of $ 3.6 million, which was determined on the basis of the purchase price agreed upon. The Company does not expect any additional material costs in connection with this sale. 21

23 NOTE 3 SUBSIDIARIES (continued): h. Sale of investment in a partnership - the Maritime Company (hereafter - the partnership) In 1999, the subsidiary Mifalei Tovala Ltd. (hereafter Tovala) sold its entire investment in the partnership to a company owned by the controlling shareholder of ICL. The sale was effected after Tovala completed the purchase of 100% of the controlling interests in the partnership, by acquiring the remaining 50% which had been held by a third party. The consideration for 100% of the partnership is $ 4.3 million. The investment in 100% of the partnership, as included in Tovala s accounts on the date of the sale, was $ 2.6 million. The excess - $ 1.1 million (net of the related tax - $ 0.6 million) of the consideration for the sale over cost of the investment as per the books of accounts, was carried to capital surplus, as prescribed by the Regulations on the Presentation in the Financial Statements of Activities between a Corporation and a Controlling Shareholder Therein, i. Special State share Certain subsidiaries, DSW, Rotem Amfert Negev Ltd. (hereafter 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. j. Market value of subsidiaries whose securities are marketable ICL s share in the value of certain subsidiaries which are traded on the stock exchange (one subsidiary - only 69% of the shares are quoted), on the basis of the market prices as of December 31, 1999, approximates $ 1,228 million (including shares of approximately $ 278 million which are not marketable. ICL s share in the net assets of these subsidiaries, as reflected the accounts as of such date, is approximately $ 586. million. 22

24 NOTE 4 - INVESTMENTS IN ASSOCIATED COMPANIES AND OTHER COMPANIES: a. The changes in investments in associated companies in 1999 are as follows: U.S. dollars in thousands Balance at January 1, ,651 Changes during 1999: Long-term loans - net (1,128) Share profits net 699 Sale of investment (250) Other changes net (465) Balance at December 31, ,507 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 1,?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). The subsidiary s holding of shares in SQM entitle it to 7.7% of the rights to profits, and 12.6% of the voting rights. The value of SQM shares held by the Group, on the basis of market prices on the U.S. and Chilean stock exchanges as of December 31, 1999, approximates $ 65 million. 2) The investment in shares of Mekoroth Israel National Water Company Ltd. (hereafter - Mekoroth), which are held by Rotem, is presented at token value. The shares in Mekoroth were allotted to Rotem for investments made by Rotem in the past in water infrastructure. Rotem has joined a claim against Mekoroth, which was partly recognized as a class action. The class action includes, among other things, Rotem s claim for allotment of additional shares of Mekoroth in respect of its investments in water infrastructure and its claim that the state make an offer for its shareholding in Mekoroth both present and claimed. 23

25 NOTE 5 - LONG-TERM DEPOSITS AND RECEIVABLES: a. Composed as follows: December U.S. dollars in thousands Deposits: Banks 38,538 39,524 The Treasury - Accountant General 3,435 3,717 Other 12,134 9,855 54,107 53,096 L e s s - current maturities 21,007 3,682 33,100 49,414 b. Classified by currency and interest rates: Weighted interest rates as of December 31 December U.S. dollars % in thousands In Israeli currency - mainly linked to the Israeli consumer price index ( the Israeli CPI ) ,117 48,506 In dollars 6.9 4,316 3,549 In other non-israeli currencies (mainly European currencies) 2.6 1,674 1,041 54,107 53,096 c. The deposits and receivables (net of current maturities) mature in the following years after balance sheet date: December U.S. dollars in thousands Second year 4,090 19,194 Third year 4,980 3,876 Fourth year 2,464 4,226 Fifth year 2,349 3,013 Sixth year and thereafter (through 2017) 18,366 15,680 Not yet fixed 851 3,425 33,100 49,414 24

26 NOTE 6 FIXED ASSETS: a. Composition of assets and accumulated depreciation, grouped by major classifications, and the changes during the year ended December 31, 1999, are as follows: Balance at Balance at January 1, Changes during the year December 31, 1999 Additions Retirements Other net (5) ) Cost (4): U. S. d o l l a r s i n t h o u s a n d s Land, land development, roads and buildings - mainly on leased land, see b. below *419,060 19,012 (2,617) (31,580) 403,875 Installations, machinery and equipment *2,612, ,520 (13,044) (43,694) 2,688,036 Dikes and evaporating ponds 334,395 3,060 (10,762) 326,693 Heavy mechanical equipment, railroad cars and containers 142,365 3,650 (4,945) (121) 140,949 Furniture, office equipment, vehicles, computer equipment and other fixed assets 151,103 18,909 (6,937) (4,257) 158,818 3,659, ,151 (27,543) (90,414) 3,718,371 Plants under construction changes representing purchases during the year, net of transfers to fixed assets 123,722 22,548 (117) 146,153 Spare parts net 22,453 2,787 25,240 3,805, ,486 (27,543) (90,531) 3,889,764 2) Accumulated depreciation (4): Land development, roads and buildings 164,239 11,818 (1,184) (6,994) 167,879 Installations, machinery and equipment 1,262, ,292 (6,771) (4,731) 1,376,390 Dikes and evaporating ponds 192,308 18,948 (8,256) 203,000 Heavy mechanical equipment, railroad cars and containers 88,133 10,327 (3,985) (109) 94,366 Furniture, vehicles, office equipment, computer equipment and other fixed assets 90,036 15,659 (5,432) (2,427) 97,836 1,797, ,044 (17,372) (22,517) 1,939,471 * Reclassified.. 25

27 NOTE 6 FIXED ASSETS (continued): 3) Depreciated balance at balance sheets dates (4): December U.S. dollars in thousands Land, land development, roads and buildings 235,996 *254,821 Installations, machinery and equipment 1,311,646 *1,349,654 Dikes and evaporating ponds 123, ,087 Heavy mechanical equipment, railroad cars and containers 46,583 54,232 Furniture, office equipment, vehicles, computer equipment and other fixed assets 60,982 61,067 1,778,900 1,861,861 Plants under construction 146, ,722 Spare parts 25,240 22,453 1,950,293 2,008,036 * Reclassified. 4) The Group has assets that have been fully depreciated and which are still in use. The original cost of those assets is over $ 826 million, as of December 31, ) The other changes (net) during the year arise from: $ in millions Translation differences 36.8 Provision for impairment of value of assets, see 7 below 12.0 Acquisition of companies consolidated for the first time (4.7) Realization of a company previously consolidated 15.5 Excess of the fair value of the assets (net) over cost of purchase in Periclase, see note 3e 6.3 Assets retired from use 2.1 6) Investment grants 68 Fixed assets are net of investment grants, as follows (see note 13d): December U.S. dollars in thousands Amount of the grant 906, ,711 L e s s - accumulated depreciation 375, , , ,506 26

28 NOTE 6 FIXED ASSETS (continued): 7) Having regard to the continuing losses of the subsidiary FCL, its negative cash flows during 1999 and other factors, FCL s management examined the need to provide for the impairment of value of in its assets. As result of the above examination, and based on the expected cash flows in the next ten years, FCL included in its accounts a provision for impairment in value if its assets amounting to $ 12 million. b. Leasehold land: 1) The Group leases the land on which most of the Israeli operations are conducted from the Israeli Lands Administration under long-term leases (for periods ending mainly between ), with options to renew in some cases. Part of the property and long-term leasehold rights have not yet been registered in the name of the Group in the Israeli Land Registry. 2) Regarding leasehold rights relating to the Spanish subsidiary - see note 3 (a). c. As to pledges on the assets see note 13. NOTE 7 - SHORT-TERM CREDIT FROM BANKS AND OTHER CREDIT GRANTING INSTITUTIONS: a. Composed as follows: December U.S. dollars in thousands Short-term credit: From banks 327, ,694 From other credit granting institutions 8,953 24,134 From an interested party 15,000 20, , ,917 Current maturities of long-term loans and other long-term liabilities, see note 8: Debentures 4,568 17,534 Bank loans 96,814 94, , ,288 27

29 NOTE 7 - SHORT-TERM CREDIT FROM BANKS AND OTHER CREDIT GRANTING INSTITUTIONS (continued): b. Classified by currency and interest rates, the amounts of the loans and credit are as follows: Weighted interest rates as of December 31, December U.S. dollars % in thousands Short-term bank credit: In dollars * , ,472 In other non-israeli currencies (mainly European currencies) *3.5 75, ,899 In Israeli currency - unlinked ,209 38,323 Short-term credit from other credit granting institutions: 24,134 In pesetas In Euro 3.5 8,488 In dollars 465 Short-term credit from an interested party - in dollars **6.5 15,000 20, , ,917 * Interest in respect of most of this debt is determined on the basis of LIBOR + 0.2% to 0.5%. ** Interest in respect of this credit is determined on the basis of LIBOR + 0.1%. c. As to pledges to secure the credit and restrictions imposed in respect thereof - see note 13. NOTE 8 - LONG-TERM LOANS AND OTHER LONG-TERM LIABILITIES: a. As follows: December U.S. dollars in thousands Debentures (some of which are traded on TASE) 18,943 36,201 Bank loans* 1,065, ,587 1,084,825 1,016,788 L e s s - current maturities in respect of: Debentures 4,568 17,534 Bank loans 96,814 94, , , , ,417 * The Group has the right to repay the bank loans before due date. 28