Israel Corporation Ltd.

Transcription

1 2005 Annual Report This Report does not constitute a Periodic Report in accordance with the Securities Regulations (Periodic and Immediate Reports), 1970

2 Contents Page Directors Report I - XXVI Auditors Report to the Shareholders 1 Financial Statements: Consolidated Balance Sheets 3 Corporation Balance Sheets 5 Consolidated Statements of Earnings 7 Corporation Statements of Earnings 8 Statements of Changes in Shareholders Equity 9 Consolidated Statements of Cash Flows 10 Corporation Statement of Cash Flows Annex Schedule of Investee Companies 110

3 Directors Report to the Shareholders of Israel Corporation Ltd. For the Year Ended December 31, 2005 Description Of The Corporation And Its Business Environment Israel Corporation Ltd. (hereinafter the Corporation ) is an investment company engaged in the initiation, promotion and development of businesses in Israel and abroad, and is actively engaged in management of its Group companies. The Corporation is held at the rate of 55% by the Ofer Group (as at the signing date of the statements) and 18% by Bank Leumi Le-Israel B.M. The Corporation s strategy is designed to adapt its business structure to the business situation existing in Israel and globally, while endeavoring to expand the Group s geographic dispersion and international market penetration in the manufacturing and marketing areas. In 2005, the positive trend in the international markets continued in the areas in which the Corporation operates the fertilizers, shipping and energy fields. The results for 2005 reflect the reorganization and efficiency measures, improvement of the cash flows and strategic acquisitions in the fertilizers and shipping areas made in the prior years. The Group s activities are centered, mainly, in the chemicals, shipping, energy and advanced technology sectors, through an array of investee companies. The Corporation s headquarters provides management services, through a wholly owned subsidiary, and is also actively involved in the strategic planning and business development of the investee companies. This Directors Report is submitted as part of the periodic report for 2005 and under the assumption that the reader also has the other sections of the said periodic report. Financial Position The total assets, as at December 31, 2005, amounted to NIS 25,827 million, compared with NIS 22,058 million, as at December 31, The balance of the long-term investments, loans and receivables as at December 31, 2005, amounted to NIS 1,233 million, compared with NIS 1,337 million as at December 31, The long-term liabilities as at December 31, 2005 amounted to NIS 10,607 million, compared with NIS 8,627 million as at December 31, The increase stems mainly from the issuance of debentures to institutional investors. The financial assets as at December 31, 2005, amounted to NIS 3,890 million, compared with NIS 2,732 million as at December 31, The working capital as at December 31, 2005 amounted to NIS 4,768 million, compared with NIS 1,560 million as at December 31, The Corporation s shareholders equity as at December 31, 2005 amounted to NIS 5,398 million, compared with NIS 3,612 million as at December 31, The cash flows generated by operating activities in 2005 amounted to NIS 3,336 million compared with NIS 2,910 million last year and NIS 1,901 million in I

4 Results Of Operations The Corporation ended the current year with earnings of NIS 1,589 million, compared with earnings of NIS 1,376 million last year. The Corporation finished the fourth quarter with earnings of NIS 218 million, compared with NIS 325 million in the corresponding quarter last year. Set forth below are the factors which impacted the results of operations for the year of the report: A. Israel Chemicals Ltd. (hereinafter ICL ) finished the current year with earnings of $422 million compared with earnings of $251 million last year. B. ZIM Integrated Shipping Services Ltd. (hereinafter ZIM ) finished the current year with earnings of $187 million compared with earnings of $172 million last year. C. Oil Refineries Ltd. (hereinafter ORL ) finished the current year with earnings of NIS 1,451 million, compared with earnings of NIS 773 million last year. The Corporation reduced its share in ORL s earnings by NIS 309 million (see the Section Changes in the Investments Portfolio ). D. Tower Semiconductor Ltd. (hereinafter Tower ) finished the current year with a loss of $203 million, compared with a loss of $138 million last year. In the current year, the Group included its share in Tower s losses, in the amount of NIS 247 million while, on the other hand, it reduced the balance of the provision for decline in value of its investment in Tower by NIS 48 million. E. The financing expenses in the current year amounted to NIS 237 million in the current year compared with NIS 347 million last year. F. The current year s results include non-recurring income, net, in the amount of NIS 325 million, compared with non-recurring income of NIS 510 million last year. The non-recurring income consists of capital gains, in the amount of NIS 192 million, from a change in the Companies Tax rate, in the amount of NIS 171 million (see also section regarding various events occurring during the period of the report and subsequent to the balance sheet date), and deduction of various provisions in the amount of NIS 38 million. The Corporation s earnings after eliminating the non-recurring income amounted to NIS 1,264 million in the current year, compared with earnings of NIS 866 million last year. The Corporation s financial results for the fourth quarter of the current year were affected by the following factors: A. ICL finished the quarter with earnings of $82 million, about the same as in the corresponding quarter last year. B. ZIM finished the quarter with earnings of $31 million, compared with earnings of $57 million in the corresponding quarter last year. C. ORL finished the quarter with earnings of NIS 282 million, compared with earnings of NIS 218 million in the corresponding quarter last year. In the current quarter, the Corporation reduced its share in ORL s earnings by NIS 65 million (see Section on Changes in the Investments Portfolio ). D. Tower finished the quarter with a loss of $45 million, compared with a loss of $23 million in the corresponding quarter last year. II

5 Results Of Operations (cont d) E. The results of the fourth quarter of the year include non-recurring expenses, in the amount of NIS 42 million, compared with non-recurring income in the amount of NIS 51 million in the corresponding quarter last year. The total earnings in the quarter after eliminating the effect of the non-recurring income/expenses amounted to NIS 260 million, compared with regular earnings of NIS 274 million, in the corresponding quarter last year. As an investment company, the results of the Corporation s operations are affected by the results of the operations of its investee companies and by non-recurring gains/losses. Changes In The Investment Portfolio A. Tower Semiconductor Ltd. (hereinafter Tower ) In December 2005, Tower published a prospectus on the Tel-Aviv Stock Exchange and on the NASDAQ in the United States, for the issuance through a rights offering of up to $50 million of debentures convertible into shares of Tower. Pursuant to the prospectus, the debentures are convertible into shares of Tower at the rate of one ordinary share for each $1.1 principal of debentures (subject to adjustments) repayable in one lump-sum payment of interest and principal in In the framework of the prospectus, Tower raised the amount of $48.2 million, of which the Corporation s share is $20 million. If all of the debentures are converted into shares of Tower the Corporation s share in Tower will increase from 21.3% to 29.3% Subsequent to the balance sheet date, NIS 6.6 par value of debentures were converted into shares. As a result of the conversion, Corporation s share in Tower from 21.3% to 19.6% and the Corporation realized a capital gain of NIS 0.5 million. In November 2003, the Corporation committed to Tower s lending banks to provide a security net to Tower in the amount of $50 million. Upon execution of the aforementioned issuance, the Corporation s commitment expired. B. On February 5, 2004, the Corporation acquired all of the State s shares in ZIM International Shipping Services Ltd. (hereinafter ZIM ), at the rate of 48.6%. In addition, during the Corporation acquired additional shares at the rate of 0.8% of ZIM s share capital and of ZIM s other shareholders. The total cost amounted to NIS 524 million. As at the balance sheet date, the Corporation holds 98.3% of ZIM s share capital. C. In the second quarter of the period of the report, an affiliated company, Oren Semiconductor Inc. (hereinafter Oren ) signed an agreement with Zoran Corporation (hereinafter Zoran ) pursuant to which Zoran acquired all of Oren s shares from its shareholders. The value of the consideration to the Group in cash and in shares of Zoran amounts to NIS 52 million. The after-tax capital gain is NIS 42 million. D. In the fourth quarter of the year of the report, the Corporation acquired about 0.6% of the shares of ICL for a consideration of NIS 133 million, and an excess of cost over book value was created to the Corporation in the amount of NIS 94 million. Subsequent to the balance sheet date, the Corporation acquired an additional 1.5% of ICL s shares for a consideration of NIS 355 million. Most of the shares were acquired from ICL s employees after exercise of options they held. The excess of the cost over the book value amounted to NIS 252 million. III

6 Changes In The Investment Portfolio (cont d) E. On November 4, 2005, a subsidiary in the ICL Group completed acquisition of most of the business activities and assets, including working capital, of Astaris LLC (hereinafter Astaris ), a U.S. company that is a joint venture, in equal shares of Solutia Inc. and FMC Corporation (public companies from the United States). The amount paid in respect of the assets and operations of Astaris, including acquisition expenses, is $266 million (of which $68 million in exchange for the working capital). The amount of the payment for the working capital is not final and it will be finally determined in accordance with a mechanism provided in the agreement. Astaris was a leading manufacturer and marketer in North and South America of salt phosphate, phosphorous acid at different quality levels (technical, electronic and food) and phosphorous-based chemicals for industrial uses and products for the prevention of the spreading of fires. F. Sale of ORL Subsequent to the Balance Sheet Date On December 2, 2002, an arrangement (hereinafter the Arrangement ) was signed between ORL, the Government and Israel Corporation in connection with all that involved with the period after expiration of the concession. Based on the Arrangement, upon expiration of the concession period (October 18, 2003), all of ORL s rights deriving from the concession will terminate, and an arrangement will enter into effect according to which, subject to the conditions of the arrangement, the highlights of which are detailed below, ORL shall be permitted to continue to hold the assets it held on the eve of expiration of the concession (hereinafter the Assets ). The Arrangement was made for 25 years, commencing October 18, 2003 (hereinafter the First Period ). ORL or if it is split up into two separate refineries, each of the separate refineries was granted an option to continue the aforesaid period for an additional 25 years, provided it notifies the Government no later than two years before the end of the First Period. The Arrangement provides that each side reserves the right to petition the court for clarification of the disagreement regarding the question whether or not all of ORL s assets return, by virtue of the historical concession, to the ownership of the Government without consideration, however in any case, any decision made regarding this matter will be implemented only at the end of the arrangement period (25 years or 50 years, as the case may be). If a final court decision is rendered, each side will be permitted to implement its provisions regarding recording of the rights in the Assets, provided such registration will not adversely affect the validity of the remainder of the Arrangement s provisions and ORL s right to pledge the Assets in the ordinary course of its business, subject to the provisions of the Arrangement. Upon expiration of the original concession and in accordance with the Arrangement, ORL began paying license fees under the Arrangement. Attached to the agreement was Appendix C, which was signed by the State and Israel Corporation at the same time and which was intended to arrange the various relationships between the State and Israel Corporation in their capacity as shareholders of ORL (it is noted already at this point for purposes the presenting a complete picture that as a result of negotiations, as described further on, Appendix C was amended several times and its final version was signed on November 11, 2005). On June 4, 2003, a petition was filed with the Supreme Court sitting as the High Court of Justice by the Israeli Society for Proper Government (hereinafter the Petitioner ), for the issuance of conditional and interim orders, which will direct the Prime Minister, the Minister of Finance, the Minister of National Infrastructures, the Director of the Government Companies Authority, ORL, Israel Corporation and others, to provide reasons why they should not be prevented from acting in accordance with the arrangement and/or why they do not act to cancel the arrangement. The Petitioner s main reasons are that the arrangement negatively impacts the principle of equality and equitable allocation, and it circumvents the tender laws by granting private parties a concession to use Government assets in a process having based on the Petitioner s contention various deficiencies. IV

7 Changes In The Investment Portfolio (cont d) F. Sale of ORL Subsequent to the Balance Sheet Date (cont d) Concurrent with the proceedings with respect to the petition and at the end of additional negotiations held between the State and Israel Corporation regarding ORL, in connection with the amended version of Appendix C to the Agreement, the parties formulated an amended and final version of Appendix C to the Agreement (hereinafter the Final Appendix C ), which was signed by the parties on November 7, 2005, the highlights of which are set forth below: A. Israel Corporation will sell to the State its shares in ORL (26%) and in exchange for these shares the State will pay Israel Corporation approximately NIS 570 million (the average value of the valuations to the parties), where such amount will be linked to the Consumer Price Index and will bear annual interest at the rate of 6% (commencing from July 1, 2003 up to the date of actual payment). B. Commencing from the signing date of the Final Appendix C and prior to its closing date, dividends will be distributed by ORL to all its shareholders in an amount in shekels equal to $100 million and Israel Corporation will receive 26% of this amount. This amount will be offset from the amount of the consideration Israel Corporation is to receive (amounts of statutory dividends will not be offset against the amount of the consideration). C. In addition the parties agreed that Israel Corporation has the right to take any legal action it deems appropriate regarding the amount of the consideration in respect of its shares and rights in ORL, and in such a case the State of Israel will have the right to take any legal action it deems appropriate regarding the amount of the consideration in respect of Israel Corporation s shares and rights in ORL. On December 28, 2005, an expanded panel of five justices of the Supreme Court, unanimously rejected the petition and determined that the reasons for the decision rejecting the petition will be provided at a later stage. As at the signing date of these financial statements, the reasons for the decision had not yet been provided. As a result of rejection of the petition, on February 12, 2006, the transaction that is the subject of the Final Appendix C was completed and executed, and the State acquired and received from Israel Corporation all its shares in ORL (26%). The consideration was received as follows: NIS 98 million that was paid as a dividend from ORL and NIS 579 million that was paid by the State. In total, the amount of NIS 677 million was received and from that date Israel Corporation ceased to be a shareholder of ORL. At the time of completion of the sale of Israel Corporation s shares in ORL, and shortly after rejection of the petition, on January 11, 2006, the Israeli Society for Proper Government filed a claim in the District Court of Tel-Aviv Jaffa against the State, ORL and Israel Corporation, including contentions identical to the contentions raised in the Petition and which were rejected by the Supreme Court (hereinafter the Claim ). In the framework of the Claim, the Israeli Society for Proper Government requested that the Court declare, among other things, that based on the interpretation of the conditions of the Concession (as it argues), at the end of the concession period (November 18, 2003) ORL s assets were to pass over to the State for no consideration. On February 16, 2006, Israel Corporation filed a request to summarily dismiss the Claim on the basis of a number of preliminary reasons (hereinafter the Request for Summary Dismissal ), which has not yet been decided. Concurrent with submission of the Request for Summary Dismissal, Israel Corporation filed a request in the District Court of Tel-Aviv Jaffa for an extension of time for filing a statement of defense with respect to the Claim, regarding which no decision has been received. Nonetheless, and for reasons of good order and avoidance of uncertainty, as well as solely for reasons of caution, on March 13, 2006, Israel Corporation filed a statement of defense on its behalf with respect to the Claim, pursuant to which the Claim should be rejected whether by means of a summary dismissal or whether by means of rejection of the substance of the Claim. V

8 Condensed Consolidated Quarterly Statement of Earnings 1 st Qtr nd Qtr rd Qtr th Qtr Total for 2005 NIS millions NIS millions NIS millions NIS millions NIS millions Revenues from sales, shipping and services 5,978 6,658 6,641 7,128 26,405 Cost of sales, shipping and services 4,454 5,080 4,956 5,579 20,069 Gross profit 1,524 1,578 1,685 1,549 6,336 Research and development, selling and administrative expenses ,005 Operating income ,331 Financing expenses, net (46) (15) (57) (119) (237) Other income (expenses), net (27) (131) 125 Income before taxes ,330 Taxes on income (305) (257) (1) (58) (621) Income after taxes ,598 Group s equity in income (losses) of affiliates 10 (18) 6 (78) (80) Minority interest in earnings of subsidiaries (211) (232) (334) (152) (929) Net income for the period ,589 Following is a brief summary of the financial results of the principal investee companies: Israel Chemicals Ltd. ICL finished the period of the report with earnings of $422 million, compared with earnings of $251 million last year. Sales of the ICL Group totaled $2,986 million in the year of the report, compared with $2,715 million last year, constituting an increase of 10%. The increase in the sales of the ICL Group reflects an increase in turnover of the ICL Group s activities due, mainly, to an increase in prices for most of the Group s products, and from acquisition of the activities of Astaris, the results of which were consolidated for the first time commencing from November On the other hand, with respect to some of the products there was a decline in the quantities sold. (Regarding acquisition of the activities of Astaris, see the Section Changes in the Investments Portfolio). The gross profit in the year account reached 38.2% of sales, compared with 34.5% of sales last year. The increase in the gross profit was generated by the increase in sales, as well as by continuation of the efficiency processes. The increase in the gross profit was offset to a certain extent by increases in the prices of some of the raw materials, an increase energy prices, and an increase of land shipping prices. The gross profit is after recording non-recurring expenses that do not involve cash flows, in the amount of $11.3 million, in respect of decline in value of inventory of ICL Metallurgy as well as other non-recurring expenses deriving from the accounting treatment of the acquisition of Astaris. After eliminating these expenses, the gross profit amounts to $1,152 million, an increase of 22.9% over last year. Regarding expenses, there was a decrease of 0.4% in selling and marketing expenses and an increase of 0.1% in general and administrative expenses, compared with last year. VI

9 Israel Chemicals Ltd. (cont d) The net financing expenses in the year of account came to $10 million, compared with $38 million last year. In the year of the report, ICL recorded income from exchange rate differences, in the amount of $20 million. In addition, during the year the average balance of the net financial liabilities decreased, which was offset, in part, by an increase in the average dollar interest rate. Other expenses less other income amounted to $37 million in the year of account. This category includes, mainly, the impact of the provision for decline in value of assets of Magnesium company and expenses deriving mainly from a change in the actuarial assumptions in the pension plan overseas. Last year the other expenses less the other income amounted to $7 million. In accordance with amendments to the Income Tax Law, which decreased the tax rates, the tax expenses for the ICL Group in the year of the report decreased by $29 million and decreased by $14 million in the corresponding period last year. (See also Section Various Events Occurring During the Period of the Report and Thereafter ). ICL finished the fourth quarter of the year with earnings of $82 million, about the same as the earnings in the corresponding quarter last year. The sales in the fourth quarter totaled $775 million, compared with $746 million in the corresponding quarter last year. The sales in the fourth quarter were impacted by an increase in prices and the first time consolidation of the activities of Astaris commencing from November On the other hand, there was a decrease in the quantities of potash sold. The weakening of the euro against the dollar had an adverse impact on receipts in dollar terms and contributed, to a certain extent, to the decrease in the revenues from sales. The gross profit in the fourth quarter of the year of account is after recording non-recurring expenses that do not involve cash flows, in the amount of $11.3 million, in respect of decline in value of inventory of ICL Metallurgy as well as other non-recurring expenses deriving from the accounting treatment of the acquisition of Astaris. After eliminating these expenses, the gross profit for the quarter amounts to $277 million, an increase of 4.6% over last year. Other expenses less other income amounted to $31 million in the fourth quarter, mainly, due to the impact of the provision for decline in value of assets of Magnesium company. Last year the other expenses less the other income amounted to $7 million. Zim Israel Navigation Co. Ltd. ZIM finished the current year with earnings of $187 million compared with earnings of $172 million last year. Set forth below is main data from ZIM s statement of income: For the Year Ended December 31 For the Three Months Ended December In Millions of Dollars Income from voyages and accompanying 2,884 2, services Operating expenses and cost of services 2,519 2, Depreciation Gross profit Administrative and general expenses Operating income Taxes on income Net gain on sale of ships after taxes Net income for the period VII

10 Zim Israel Navigation Co. Ltd. (cont d) Set forth below is main data from ZIM s statement of cash flows: For the Year Ended December 31 For the Three Months Ended December In Millions of Dollars Cash flows provided by operating activities Acquisition of ships, investments and fixed assets (125) (291) (22) (50) Proceeds from sale of ships, investments and fixed assets Cash flows provided by (used in) financing activities (105) 15 (72) 66 Set forth below is main data from ZIM s balance sheet: As at December In Millions of Dollars Total financial liabilities Total monetary assets Shareholders equity Total assets 1,699 1,577 The increase in ZIM s total sales in the year of the report stems from an increase in the average shipping price per container of 12% and an increase in the quantity of containers shipped of 3%, compared with last year. The ship leasing expenses increased in the period of the report by 30% compared with last year. Fuel expenses increased by 48% in the year of account over last year, due to an increase in fuel prices during the year and an increase in activities. The number of containers shipped in the year of the report by ZIM came to 2,041 thousand, compared with 1,987 thousand last year. In accordance with the Income Tax Law, which decreased the tax rates, ZIM s tax expenses in the year of the report decreased by $23 million and decreased by $17 million in the corresponding period last year. (See also Section Various Events Occurring During the Period of the Report and Thereafter ). In the first quarter of the period of the report, ZIM sold three container ships, for a consideration of $111 million. The after-tax capital gain realized by ZIM totaled $31 million. The ships were leased to ZIM by means of a bare boat lease for a period of 5 6 years. VIII

11 Zim Israel Navigation Co. Ltd. (cont d) In the third quarter of the period of the report, the Knesset Finance Committee approved a privatization compensation payment to ZIM employees in the amount of $3.5 million, in respect of the sale of ZIM s shares that were held by the State to Israel Corporation. The amount is to be paid directly by the State to the employees and ZIM recorded the amount as an expense in its statement of earnings against a capital reserve. In Israel Corporation s consolidated financial statements the expense was eliminated against the capital reserve. In the year of the period of the report, ZIM raised $145 million by means of a private issuance of debentures to institutional investors. Part of the debentures are linked to the CPI and bear annual interest at the rate of 5.4%, repayable in 3 equal annual payments at the end of 7 years, and part of them are linked to the dollar and bear annual interest at the rate of Libor + 2.4%, repayable in 1 payment at the end of 7 years. Tower Semiconductor Ltd. During the year of the report, Tower s sales totaled $102 million, compared with $126 million last year. The cost of sales amounted to $238 million in the year of account, compared with $228 million last year. Tower finished the year with a loss of $203 million, compared with a loss of $138 million last year. Last year, the results included a capital gain from sale of the investment in Saifun Semiconductor Ltd. (hereinafter Saifun ) in the amount of $32 million. Tower finished the fourth quarter of 2005 with a loss of $45 million, compared with a loss of $23 million in the corresponding quarter last year. The corresponding quarter last year included the capital gain from sale of the investment in in Saifun. Pursuant to the credit facility with the banks, Tower is required to comply with certain conditions and financial covenants (hereinafter the Financial Covenants ). In January 2005, Tower and the banks signed a letter of waiver on the part of the banks with respect to Tower s non-compliance with the Financial Covenants in the fourth quarter of In addition, the letter of waiver signed includes an update of the Financial Covenants Tower must comply with in In light of Tower s continuing losses, negative cash flows from operating activities, Tower is endeavoring to obtain the financing necessary for its continuing operations in the short run, and is also taking steps to reduce its current liabilities and to cutback costs, including by streamlining its workforce. In July 2005, Tower and the banks signed an amendment to the credit facility (hereinafter Amendment to the Facility ), pursuant to which the banks will provide financing of up to $30 million subject to the same amount being raised by Tower from investors. In the Amendment to the Facility, the Financial Covenants were also updated. In December 2005, Tower published a prospectus on the Tel-Aviv Stock Exchange and on the NASDAQ in the United States, for the issuance through a rights offering of up to $50 million of debentures convertible into shares of Tower. Pursuant to the prospectus, the debentures are convertible into shares of Tower at the rate of one ordinary share for each $1.1 principal of debentures (subject to adjustments) repayable in one lump-sum payment of interest and principal in In the framework of the prospectus, Tower raised the amount of $48.2 million, of which the Corporation s share is $20 million. IX

12 Tower Semiconductor Ltd. (cont d) In the credit facility with the banks it is stated that in the case of any violation, the banks may accelerate Tower s obligations and Tower will be forced, among other things, to immediately repay all of the loans it received from the banks (which at the balance sheet date amounted to $527 million) and the banks will be permitted to realize their available remedies in the credit agreement, including realization of liens recorded on all of Tower s assets. In December 2000, Tower received a Letter of Approval for an investment grant for FAB2 that ended on December 31, Tower is carrying on discussions with the Investments Center for purposes of receiving approval of an expansion plan for FAB2 that would begin on January 1, The plan was submitted in April Tower s Management is unable to estimate if and when the approval will be received as stated. Oil Refineries Ltd. ORL finished the year with earnings of NIS 1,451 million, compared with earnings of NIS 773 million last year. The continued worldwide demand for fuel products for transportation and heating that began in 2004, particularly in the developing economies in Asia (China and India) and in the United States, caused an increase in the average price per barrel of crude oil of the brent type in the first and second quarters to an average level of $50, compared with $34 in the corresponding period last year. In addition to the fears regarding the existing shortage with respect to the production of crude oil and the worldwide shortage with respect to the oil refining capacity, the hurricane damage in the United States entered the picture, which almost completely shutdown the production of oil and gas in the area and caused a closing of oil refineries in the total amount of 2 million barrels a day. As a result, the price per barrel soared to $67 in the third quarter and the average price was $61 barrel. In the fourth quarter of the year of account there was a decline in prices and the average price per barrel of crude oil declined to about $57. The average price per barrel in the year of account was about $55, compared with $38 in the corresponding period last year. This increase in the price per barrel of roughly 45%, was accompanied by a doubling of the price fluctuations. The average price per ton of the main products basket in the Mediterranean Sea area similar to ORL s product basket was sold for NIS 2,085 in the period of the report, compared with NIS 1,454 in the corresponding period last year. Compared with last year, there was an increase in fuel consumption of about 1.5%, including an increase in the consumption of refined fuel products at the rate of 4%. Regarding the consumption of crude oil, there was a decline of 8% due to the commencement of use of natural gas for the production of electricity. The margin on refining activities ($ per ton): January March April June July September October December January December Sources Of Financing Of The Corporation And The Headquarters Companies As at December 31, 2005, the total financial liabilities of the Corporation and its wholly-owned and controlled headquarters companies (hereinafter the Headquarters Companies ), amounted to NIS 2,920 million. As at December 31, 2005, the Corporation and the Headquarters Companies had investments in liquid assets of NIS 1,449 million, invested, primarily, in treasury bills, corporate debentures in CPI-linked and unlinked shekel channels, medium-term dollar debentures and short-term shekel and dollar deposits. During the year of the report, options of the Corporation (Series 1) were exercised such that 266 thousand shares of NIS 1 par value of the Corporation were issued for an aggregate consideration of NIS 199 million. X

13 Sources Of Financing Of The Corporation And The Headquarters Companies (cont d) During the period of the report, NIS 194 million par value of convertible debentures Series 1 were converted and in consideration thereof 277 thousand of the Corporation s ordinary shares of NIS 1 par value were issued. Correspondingly, the Corporation s liabilities were reduced by NIS 201 million. In the second quarter of the period of the report, the Corporation made the first of five payments in respect of the convertible debentures Series 1, in the amount of NIS 8 million. During the year of account, the Corporation paid current maturities of long-term loans, in the amount of $44 million, and also made early repayment of maturities of $47 million, which were supposed to be repaid after In addition, the Corporation recycled credit received for financing acquisition of shares of Israel Chemicals Ltd., in the amount of $114 million, and increased the credit by $77 million. The full amount of the credit is to be repaid partly in one lump-sum payment in 2010 and partly in quarterly payments beginning from March 2007 and running until December Part of the loans was secured by a lien on ICL shares in place of the negative pledge that was cancelled. The Corporation s Headquarters Companies repaid current maturities in the amount of $25 million and recycled a loan in the amount of $40 million, repayable in on lump-sum payment on March 31, In the third quarter of the period of the report, the Corporation raised the amount of about NIS 652 million by means of a private issuance of debentures to institutional investors. The debentures are linked to the Consumer Price Index and are repayable in 4 annual payments commencing from The debentures were rated AA by Ma alot, The Israeli Securities Rating Company. Subsequent to the balance sheet date, the Corporation entered into a transaction for replace of part of its liabilities, in the amount of NIS 152 million, with a dollar liability. Subsequent to the balance sheet date, the Corporation received a loan in the amount of $100 million repayable in three equal annual installments commencing from Exposure To Market Risks And Risk Management Risks affecting the Corporation The Corporation views its investment in ICL as a dollar-based investment. Accordingly, the loans taken by the Corporation to finance its interest therein are mainly dollar loans. The effect of changes in the exchange rate of the dollar on the foreign currency liabilities of the Corporation and its headquarters companies, which finance investments in companies who issue dollar-adjusted financial statements, is recorded in a capital reserve and, therefore, is not reflected in the operating results. Despite the aforesaid, there may be differences stemming primarily from timing differences with respect to the receipt and repayment of the loans. The Corporation partially hedges this exposure by means of various financial instruments, including the holding of dollar deposits and execution of currency and derivative transactions in commercial banks (such as dollar/shekel forward transactions and dollar/shekel options). As part of the loan agreements, there are requirements to maintain certain financial ratios, including a minimum ratio between the value of collateral and the balance of the outstanding credit. The collateral given is shares of ICL and the value thereof for purposes of the agreements is derived from their stock market value. The Corporation s main dollar financing activities bear variable interest that changes on a quarterly or semiannual basis. In this context, the Corporation has adopted policies whereby it hedges the outstanding loans bearing variable interest with the volume being determined from time to time, and according to which the range and limitation on the interest rate is determined or created. As at December 31, 2005, the amount of the hedged loans is $135 million, which bears maximum interest of 5.5% and minimum interest of 2.63%. For these transactions, it has been determined that they will lapse or expire should the 3-month or 6-month LIBOR interest rate rise above 5.5% 7.5%. XI

14 Exposure To Market Risks And Risk Management (cont d) Risks affecting the Corporation (cont d) Part of the sources of the Corporation s financing is supported by the local stock market. Credit from these sources is usually executed in CPI-linked shekels. From time to time, the Corporation exchanges part of the aforesaid liabilities for dollar liabilities in SWAP transactions at interest rates that change, in general, once a year. As at December 31, 2005, the scope of these transactions is NIS 206 million. The Corporation s policy, insofar as how the monetary balances are to be held, is to invest these balances in low risk investments with the mix being changed from time to time. As at December 31, 2005, 45% of the financial assets were invested in shekel investments, mainly, government debentures, about 17% in index-linked investments, mainly government debentures, about 29% in the dollar channel in corporate bonds in Israel and overseas, and about 9% in shares. The risks involved in these investments are: exposure to changes in interest rates, and the expectation of changes in these rates which is reflected in the prices of bonds on the stock exchange, and the exposure of the dollar-linked investments to an upward revaluation of the shekel. The Corporation s risk management is derived from the policies of the Board of Directors and decisions of the Board of Directors Finance Committee, which receive reports from time to time. The responsible party for risk management is the Chief Financial Officer and details with respect thereto are included in the Section Additional Details on the Corporation. Linked Balance Sheet As at December 31, 2005 In Millions of Shekels Other foreign In dollars In euro currency Linked or linked or linked or linked to the thereto thereto thereto CPI Unlinked Other Total Current assets 4, ,434 3,330 11,134 Non-current assets ,379 14,693 Current liabilities 3,375 1, , ,366 Long-term liabilities 6, ,679 10,634 The consolidated linked balance sheet does not constitute a tool in the monitoring of the Corporation s exposure to market risks. XII

15 Exposure To Market Risks And Risk Management (cont d) Corporation s Consolidated Derivative Positions as at December 31, 2005 Hedging changes in variable LIBOR interest rates on dollar loans Over One Year Par value in NIS millions Fair value in NIS millions Long Short Long Short CAP options recognized for accounting purposes 2, FLOOR options recognized for accounting purposes 2,062 (10.1) IRS transactions recognized for accounting purposes 1, (7.5) Up to One Year CAP options recognized for accounting purposes 350 (0.1) FLOOR options recognized for accounting purposes Hedging changes in exchange rate and interest rate swaps on loans, recognized for accounting purposes SWAP of dollar liability with variable interest from index-linked liability with fixed interest over one year SWAP of dollar liability with fixed interest from index-linked liability with fixed interest over one year 515 (28.5) SWAP of dollar liability with variable interest from euro liability with fixed interest over one year 9 Hedging changes in exchange rates on cash flows over one year Forward contract euro/dollar recognized for accounting purposes Hedging changes in exchange rates on cash flows up to one year Shekel/Dollar Forward contract recognized for accounting purposes 23 Call options recognized for accounting purposes 810 (4.1) Put options recognized for accounting purposes XIII

16 Exposure To Market Risks And Risk Management (cont d) Corporation s Consolidated Derivative Positions as at December 31, 2005 (cont d) Par value in NIS millions Fair value in NIS millions Long Short Long Short Dollar/Euro Forward contract recognized for accounting purposes 57 (0.2) Forward contract not recognized for accounting purposes Call options recognized for accounting purposes (5.8) Put options recognized for accounting purposes (3.3) (0.4) Call options not recognized for accounting purposes Put options not recognized for accounting purposes 41 (1.5) Dollar/Canadian Dollar Forward contract not recognized for accounting purposes Call options not recognized for accounting purposes 26 Put options not recognized for accounting purposes Euro/British Pound Forward contract recognized for accounting purposes Yen/Dollar Forward contract not recognized for accounting purposes Call options recognized for for accounting purposes Put options recognized for accounting purposes Call options not recognized for accounting purposes 6 (0.5) Put options not recognized for accounting purposes 6 British Pound/Dollar Call options recognized for accounting purposes Put options recognized for accounting purposes Korean Wann/Dollar Call options not recognized for accounting purposes 14 Put options not recognized for accounting purposes 14 Futures contract not recognized for accounting purposes Dollar Singapore/Dollar 22 Dollar/Korean Wann 34 Swiss Franc/Dollar XIV

17 Exposure To Market Risks And Risk Management (cont d) Risks applicable to investee companies (These risks are managed by the investee companies independently and are reported to their separate Boards of Directors). ICL Some of ICL s products and some of its inputs are characterized by set prices, where ICL has only limited ability to influence such price. The Group is exposed to price changes with respect to these products and inputs. Regarding the prices of the ICL s products, as detailed above, there are no hedging mechanisms. As at the balance sheet date, ICL has no hedging protection with respect to heavy fuel oil prices The dollar is the primary currency of the economic environment in which most of the ICL Group companies operate. Most of the transactions sales, material purchases, selling, marketing and financing expenses, as well as acquisition of the fixed assets are effected in foreign currency, mainly the dollar and, accordingly, the dollar serves as ICL s measurement and reporting currency. ICL has a number of subsidiaries overseas which operate independently autonomously. The measurement currencies of these companies are the euro and the British pound. Some of ICL s sales in currencies other than the dollar expose ICL to changes in the exchange rate of these currencies vis-à-vis the dollar. Revenues and expenses of overseas subsidiaries operating independently autonomously in a local currency other than the dollar, do not involve exposure while, on the other hand, revenues and expenses of these companies in dollars expose them to changes in the exchange rate of their local currencies vis-à-vis the dollar. Measurement of ICL s exposure, as stated, is on the basis of the net revenues/expenses in every currency that is not the measurement currency of that company. ICL s policy is to hedge a significant portion of this exposure by means of various financial instruments, including derivatives. The prices of certain transactions, even though they are not conducted in dollars, are affected by changes in the exchange rate of the dollar to the currency of the transaction and adjust themselves to changes in the exchange rate within a short period of time. ICL does not hedge against this temporary exposure. Some of ICL s inputs in Israel are denominated and paid in shekels and, therefore, ICL is exposed to declines in the shekel dollar exchange rate (upward revaluation of the shekel). ICL decides whether to hedge this exposure and at what level based on the market conditions and the forecast of the exchange rate s development. The results of ICL and some of the Group companies are measured for tax purposes in a currency other than the dollar, e.g., in Israel shekels adjusted to the Consumer Price Index, and abroad in the respective local currency. As a result, ICL is exposed to the difference between the rate of change in the dollar exchange rate and the measurement basis for tax purposes. ICL does not hedge against this item of exposure. Companies in the ICL Group have liabilities for employee severance pay that are denominated in local currency. In Israel, they are also affected by the increase in the Index. The Israeli ICL companies have funded amounts to partially cover their liabilities. These funded amounts are shekel denominated and are affected by the profits of the funds in which they are invested. ICL does not hedge against this exposure. ICL has monetary assets and liabilities in currencies other than the dollar or which are not linked to the dollar that relate, respectively, to the local currency of the foreign autonomous companies (except for that stated above). The difference between the assets and liabilities in the various currencies generates risk. ICL s policy is to hedge against most of the risk by means of financial instruments, including derivatives. XV

18 Exposure To Market Risks And Risk Management (cont d) Risks applicable to investee companies (cont d) ICL (cont d) ICL has a number of foreign subsidiaries whose activities are independent autonomous. The ending balance sheet balances of these companies are translated into dollars based on the dollar exchange rate at the end of the period in relation to the reporting currency of the aforesaid companies. The balance sheet balances at the beginning of the period as well as the capital changes during the period are translated into the dollar based on the exchange rate at the beginning of the period or at the time of the capital change, respectively. The differences stemming from the effect of the change in the exchange rate as between the dollar and the reporting currency of the companies create risk. The effects of the said exposure are recorded directly to shareholders equity. ICL does not hedge against this exposure. ICL has loans bearing variable rates of interest and, accordingly, there is exposure of the financial results (financing expenses) to changes in these rates. In respect of a portion of this exposure, ICL is protected by means of financial instruments, including derivatives. As at December 31, 2005, ICL has cap options to secure a ceiling of LIBOR interest rates at 3%-4% that cover a theoretical amount of $30 million and $100 million, respectively. ICL also purchased and wrote interest options that serve to fix the LIBOR interest rate within the range of 2% to 6% (collar). The theoretical amount covered by such collars is $376 million. Part of these transactions are combined with options according to which, if the variable interest, based on LIBOR, reaches 6% to 7%, the transactions will be null and void in that period. Transactions in derivative financial instruments are made through banks. In ICL s opinion, no credit risk is anticipated with respect thereto. ICL does not demand or provide collaterals in respect of these derivatives. The companies in the ICL Group monitor the scope of the exposure and the hedging rates for the various items on a current basis. The hedging policy for all types of exposures is discussed by ICL s Board of Directors as well as by the Boards of Directors of the Group companies as part of the annual budget. The Finance Committees of the ICL Group companies receive a report on a quarterly basis in the framework of the review of the quarterly results as part of the control over application this policy and for purposes of updating it, if necessary. The managements of the companies implement the policy set while taking into account the actual developments and the expectations in the various markets. ICL uses derivative financial instruments (hedging instruments) for hedging purposes only. The hedging instruments eliminate the risks created to ICL, as described above. Therefore, ICL includes the financial results of the transactions hedging the existing assets and liabilities as well as firm commitments with the results of the hedged assets and liabilities. The financial results of the rest of the hedging transactions are recorded in the financing expenses category. ZIM ZIM is engaged in the provision of global shipping services, where most of its revenues are denominated in U.S. dollars and some of its expenses are in different currencies. ZIM s functional currency is, then, the dollar. Based on the nature of its activities, ZIM is exposed to market risks that relate to changes in the exchange rates of the currencies of the various countries in which it has activities, as well as to changes in the exchange rates relating to some of the long-term loans denominated in non-dollar foreign currencies. In addition, ZIM is exposed to changes in the prices of heavy fuel oil. Most of ZIM s liabilities are in dollars and, as such, ZIM is exposed to changes in the dollar interest rate (LIBOR). As at the balance sheet date, the level of the debt bearing variable interest is 77%. ZIM summarizes the exposure to interest risks on a semi-annual basis and partially hedges the loans bearing variable interest by means of SWAP transactions and options. XVI