Translation from the Hebrew. The binding version is the original Hebrew version. Israel Chemicals Limited. Consolidated Financial Statements

Transcription

1 Translation from the Hebrew. The binding version is the original Hebrew version. Israel Chemicals Limited Consolidated Financial Statements As at December 31, 2003

2 Financial Statements as at December 31, 2003 Contents Page Auditors' Report 2 Consolidated Financial Statements In U.S. Dollars: Balance sheets 4 Statements of income 5 Statements of changes in shareholders' equity 6 Statements of cash flows 7 Notes to the finanical statements 10 Appendix Details of investees 82

3 Somekh Chaikin Mail address Office address Telephone PO Box 609 KPMG Millennium Tower Fax Tel Aviv Ha'arba'a Street Israel Tel Aviv Israel Auditors' Report to the Shareholders of Israel Chemicals Limited We have audited the accompanying consolidated balance sheet of Israel Chemicals Limited (hereinafter the Company ) and its subsidiaries, as at December 31, 2003 and the related consolidated statements of income, changes in shareholders equity and cash flow for the year then ended. These consolidated financial statements are the responsibility of the Company s Board of Directors and its management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements as at December 31, 2002 and for the two years ended December 31, 2002 and 2001, were audited by other auditors, whose report dated March 27, 2003, was unqualified. We did not audit the financial statements of certain subsidiaries, whose assets constitute approximately 54.2% of the total consolidated assets as at December 31, 2003, and whose revenues constitute approximately 53.6% of the total consolidated revenues for the year ended December 31, The financial statements of those subsidiaries were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to amounts emanating from the financial statements of such subsidiaries, is based solely on the said reports of the other auditors. Furthermore, the data included in the financial statements relating to the net asset value of the Company's investments in affiliates and to its equity in the operating results is based on the financial statements of such affiliates, some of which were audited by other auditors. We conducted our audit in accordance with generally accepted auditing standards, including Standards prescribed by the Auditors Regulations (Manner of Auditor's Performance) Such standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's Board of Directors and by its Management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of the other auditors, provide a reasonable basis for our opinion. Somekh Chaikin, a partnership registered under the Israeli Partnership Ordinance, is a member of KPMG International, a Swiss cooperative.

4 In our opinion, based on our audit and on the reports of the abovementioned other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as at December 31, 2003, and the results of their operations, changes in the shareholders equity and their cash flow for the year ended December 31, 2003, in conformity with generally accepted accounting principles in Israel. Furthermore, these statements have, in our opinion, been prepared in accordance with the Securities Regulations (Preparation of Annual Financial Statements) As explained in Note 2(A), the abovementioned financial statements are presented in U.S. dollars and constitute a translation into U.S. dollars of the financial statements prepared in shekels adjusted for the changes in the exchange rate of the U.S. dollar. ( ---- ) Somekh Chaikin Certified Public Accountants (Isr.) March 28, 2004

5 Consolidated Balance Sheets as at December 31 Translated into U.S. dollars As at December Note US$ thousands US$ thousands Current assets Cash and cash equivalents 27,323 14,814 Short-term investments, deposits and loans 3 57,807 16,074 Trade receivables 4 262, ,597 Other receivables 5 155, ,480 Inventories 6 540,293 *485,704 1,043,298 1,037,669 Investments and long-term receivables Investments in affiliated companies 7 9,906 9,063 Investments in other companies 8 53,292 53,292 Long-term deposits and receivables 9 15,772 17,495 Inventories 14,412 *20,666 Minority interests in subsidiaries 21,838 *17,226 Property, plant and equipment , ,742 Cost Less accumulated depreciation 4,322,742 4,093,095 2,628,139 2,395,041 Other assets and deferred expenses, net 1,694,603 1,698, , ,239 2,991,158 2,999,704 ( ---- ) ( ---- ) ( ---- ) Yossi Rosen Akiva Mozes Avi Doitchman Chairman of the Board of President and Chief Executive CFO Directors Officer * Reclassified. Approval date of the financial statements : March 28, 2004

6 As at December Note US$ thousands US$ thousands Liabilities and shareholders' equity Current liabilities Short-term credit from banks and others ,945 *659,845 Debentures convertible into shares 13-76,995 Trade payables and contractors , ,023 Other payables , ,111 1,092,323 1,197,974 Long-term liabilities Loans from banks and others ,234 *550,541 Deferred taxes, net , ,167 Employee related obligations , , , ,890 Minority interests in subsidiaries 7,708 *6,259 Commitments, concessions and contingent liabilities 19 Debentures convertible into shares 13 71,669 - Shareholders' equity , ,581 2,991,158 2,999,704 The accompanying notes are an integral part of the financial statements. 4

7 Consolidated Statements of Income for the Year Ended December 31 Translated into U.S. dollars Note US$ thousands US$ thousands US$ thousands Sales 25 2,270,906 1,980,907 1,858,781 Cost of sales 22(a) 1,558,149 1,352,480 1,271,669 Gross profit 712, , ,112 Expenses Research and development expenses, net 22(b) 29,148 28,461 32,453 Selling, transportation and marketing expenses 22(c) 376, , ,569 General and administrative expenses 22(d) 96,171 83,524 84, , , ,756 Operating income 210, , ,356 Financing expenses, net 22(e) 32,314 48,703 78,456 Income before other expenses, net 178, ,934 81,900 Other expenses, net Write down of DSM plants to its fair value 7(d) ,000 Other 22(f) 51,403 18,631 20,131 Income (loss) before taxes on income 126, ,303 (138,231) Taxes on income 17 26,487 41,691 (33,033) Income (loss) after taxes on income 100,484 89,612 (105,198) Share in losses of affiliated companies, net 7(b) (555) (150) (373) Minority interest in losses of subsidiaries, net 3,148 2,849 63,196 Net income (loss) 103,077 92,311 (42,375) Earnings per share: U.S. dollar U.S. dollar U.S. dollar Basic earnings (loss) per share of NIS 1 par value (0.035) Par value of the shares used for purposes of computing the earnings (loss) per share - in thousands of NIS 1,261,162 1,200,000 1,200,000 The accompanying notes are an integral part of the financial statements. 5

8 Statements of Changes in Shareholders' Equity Israel Chemicals Limited Translated into U.S. dollars Differences arising from translation of Cost of Dividend Additional finanical company declared after Share paid in Capital statements of Retained shares held by balance capital capital reserve subsidiaries earnings a subsidiary sheet date Total US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands US$ thousands Balance as at January 1, ,402-1,110 (21,438) 435,224 (17,402) - 918,896 Changes during 2001: Net loss for the year (42,375) - - (42,375) Dividends* (50,159) - - (50,159) Adjustments from translation of financial statements of subsidiaries (3,076) (3,076) Balance as at December 31, ,402-1,110 (24,514) 342,690 (17,402) - 823,286 Changes during 2002: Net income for the year , ,311 Dividends* (54,446) - - (54,446) Dividends declared after balance sheet date (26,100) - 26,100 - Exercise of options granted to employees (2,237) 6,827-4,590 Adjustments from translation of financial statements of subsidiaries , ,840 Balance as at December 31, ,402-1,110 (15,674) 352,218 (10,575) 26, ,581 Changes during 2003 Net income for the year , ,077 Dividends* (36,173) - (26,100) (62,273) Dividends declared after balance sheet date (25,469) - 25,469 - Purchase of Company's shares by a subsidiary (2,164) - (2,164) Exercise of options granted to employees (893) 1, Conversion of debentures into shares 1,371 5, ,225 Adjustments from translation of financial statements of subsidiaries , ,733 Balance as at December 31, ,773 5,854 1,110 11, ,760 (10,926) 25, ,099 * After deduction of dividends in the amounts of U.S.$ 632 thousand, U.S.$ 487 thousand and U.S.$ 556 thousand paid to a subsidiary in 2001, 2002 and 2003, respectively. The accompanying notes are an integral part of the financial statements. 6

9 Consolidated Statements of Cash Flows Translated into U.S. dollars For the year ended December US$ thousands US$ thousands US$ thosuands Cash flows from operating activities Net income (loss) for the year 103,077 92,311 (42,375) Adjustments to reconcile net income (loss) to net cash flows generated by operating activities (see A below) 350, , ,213 Net cash inflow provided by operating activities 453, , ,838 Cash flows from investing activities Acquisition of property, plant and equipment (135,488) (178,750) (128,892) Investment grants received 10,074 12,004 7,077 Acquisition of newly consolidated subsidiaries (see B below) (1,632) (23,091) 157 Sale of investments in formerly consolidated subsidiaries (see C below) - (566) - Subsidiaries acquisition of minority interests - - (6,788) Affiliated companies and other company acquisition of shares and changes in loans, net (328) (2,922) (1,847) Proceeds from sale of affiliated company - - 6,928 Acquisition of marketable securities and long-term deposits (6,199) (1,428) (4,675) Short-term deposits and loans, net (43,572) (7,020) 5,428 Amounts charged to other assets and deferred expenses (2,413) (3,647) (4,765) Proceeds from sale of fixed assets 3,326 12,705 29,086 Proceeds from realization of marketable securities and long-term deposits 6,829 20,165 10,796 Net cash outflow used in investing activities (169,403) (172,550) (87,495) Cash flows from financing activities Proceeds from exercise of options granted to employees 724 4,590 - Issuance of share capital to minority shareholders in a subsidiary Proceeds from issuance of convertible debentures, net of issuance expenses ,659 Receipt of long-term loans and other long-term liabilities 105, , ,715 Repayment of long-term loans and other long-term liabilities (377,805) (332,606) (312,108) Dividends paid to shareholders (62,273) (54,446) (50,159) Dividends paid to minority shareholders in subsidiaries (646) (544) (400) Short-term credit from banks and others, net 63,887 (33,653) (50,681) Purchase of Company shares by a subsidiary (2,164) - - Net cash outflow used in financing activities (272,145) (183,489) (207,974) Translation differences in respect of balances in autonomous entities (50) Increase (decrease) in cash and cash equivalents 12,509 (752) (2,681) Cash and cash equivalents at beginning of the year 14,814 15,566 18,247 Cash and cash equivalents at end of the year 27,323 14,814 15,566 The accompanying notes are an integral part of the financial statements. 7

10 Consolidated Statements of Cash Flows (cont'd) Translated into U.S. dollars For the year ended December US$ thousands US$ thousands US$ thosuands (A) Adjustments to reconcile net income to net cash flows from operating activities Income and expenses not affecting operating cash flows Minority interest in losses of subsidiaries, net (3,148) (2,849) (63,196) Share in losses of affiliated companies, net Depreciation and amortization 169, , ,208 Deferred income taxes, net (14,793) 29,515 (45,558) Liabilities for employee severance pay, net 23,874 2,339 10,953 Capital loss (gain) on sale of property, plant and equipment 1,749 (703) (2,410) Capital gain on sale of shares in subsidiaries - (77) - Capital loss (gain) on sale of shares in affiliated companies (4,493) Capital gain on issuance of shares to outsiders in affiliated company - (2,154) - Write-down of production facilities 21,540 9, ,059 Write-off of long-term investments Erosion of principal of long-term loans and other liabilities, net (591) (8,077) (2,674) Erosion of principal of long-term deposits and receivables, net 3, ,502 Loss (gain) from marketable securities, net (465) , , ,226 Changes in operating assets and liabilities: Decrease in trade receivables 100,577 63, ,123 Decrease (increase) in other receivables 31,309 (3,516) (2,270) Decrease (increase) in inventories (28,837) 6,897 (106) Increase (decrease) in trade payables and contractors 13,497 14,495 (27,054) Increase (decrease) in other payables 31,829 (9,683) (14,706) 148,375 72,113 55, , , ,213 8

11 Consolidated Statements of Cash Flows (cont'd) Translated into U.S. dollars For the year ended December US$ thousands US$ thousands US$ thosuands (B) Acquisition of newly consolidated subsidiaries Working capital (excluding cash and cash equivalents) (1,215) (1,812) 419 Deferred taxes, net - (11,872) - Property, plant and equipment, net (417) (10,711) (2,796) Investment in affiliated companies - - 2,504 Liability for employee severance pay, net (1,632) (24,395) 157 Less amounts paid in 2001 presented among other assets as at December 31, ,304 - (1,632) (23,091) 157 (C) Sale of investments in formerly consolidated subsidiaries Working capital (excluding cash and cash equivalents) - (903) - Property, plant and equipment, net Other long-term liabilities - (96) - Capital gain on sale of investment (566) - (D) Material non-cash transactions Receivables in respect of sale of investee company and its real estate assets ,985 Acquisition of property, plant and equipment on credit 2,201-2,271 9

12 Note 1 - General A. Operations Israel Chemicals Limited (hereinafter "ICL" or "the Company" ), and its subsidiaries and affiliated companies (hereinafter "the Group") is a multi-national enterprise which operates in four main segments: fertilizers (which includes potash and phosphates); performance products; industrial products (which includes agricultural products); and metallurgy (magnesium). In addition, the Group is also involved in certain other business activities. Most of the Group s production activities are carried out in Israel, with the rest being carried out mainly in Europe. The Group also has production activities in the United States and China and marketing offices worldwide. Over 90% of the Group s products are sold to customers outside of Israel. Regarding financial data relating to business and geographical segments, and sales according to markets see Note 25. 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 natural resources are produced by the Group s companies in Israel under concessions granted by the State of Israel (regarding royalties and the concession periods see Note 19B). Exploitation of the natural resources consists of extraction of the above-mentioned raw materials and marketing them worldwide, as well as development, production and marketing of products based mainly on those raw materials. ICL and some of the Group companies were declared a monopoly in respect of some of the products they produce and/or sell in Israel. The manufacturing companies overseas are engaged mainly in the production of products that are integrated with the activities of the companies in Israel or are in closely related fields. A subsidiary in Spain quarries potash from a mine, under a concession granted to it for the development of mines for potash deposits. Regarding the period of validity of the concession see Note 10B(2). A subsidiary in England also quarries potash from a mine located on leased property see Note 19A(3). The shares of ICL are listed for trading on the Tel-Aviv Stock Exchange (hereinafter the TASE ). B. State share The State of Israel holds a Special State Share in ICL and in some of its subsidiaries, entitling the State the right to safeguard certain vital State interests (see Note 20B). 10

13 Note 1 - General (cont'd) C. Definitions 1. Subsidiaries companies whose financial statements are fully consolidated with those of the Company, directly or indirectly. 2. Proportionately consolidated companies companies, including partnerships, whose financial statements are proportionately consolidated, directly or indirectly, with those of the Company by the proportionate consolidation method. 3. Affiliated companies companies, other than subsidiaries or proportionately consolidated companies, including partnerships, the investment in which is included, directly or indirectly, in the financial statements of the Company, on the equity basis. 4. Investee companies subsidiaries, proportionately consolidated companies and affiliated companies. 5. Goodwill the difference between the cost of the investment in investee companies and the Group s share in the fair value of the identified assets, net of the fair value of the identified liabilities (net of taxes), set on the date of acquisition. 6. The Group the Company and its investee companies. 7. Other companies companies in which the Group has an interest at a rate which does not give it significant influence. 8. Related parties as defined in Opinion No. 29 of the Institute of Certified Public Accountants in Israel. 9. Interested parties as defined in Section 1 Paragraph (1) of the Securities Law. 10. Controlling interests as defined in the Securities Regulations (Presentation of Transactions in the Financial Statements between a Company and a Controlling Interest Therein), CPI the Consumer Price Index published by the Central Bureau of Statistics. 12. Dollar the U.S. dollar. 11

14 Note 2 - Significant Accounting Policies A. Financial statements translated into US 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 dollar in accordance with Opinions of the Institute of Certified Public Accountants in Israel (hereinafter "the IICPA"), 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 at 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 at December 31, 2003 $1 = NIS ) The adjustment of the primary financial statements is based on the accounts of the Company and its Israeli subsidiaries, maintained on a current basis in nominal NIS. The components of the statements of income were, for the most part, adjusted as follows: The components relating to transactions carried out during the year sales, purchases, labor costs, etc. were adjusted on the basis of the exchange rate on the transaction date; 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 item represents financing 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 2R. below). As mentioned in (1) above, the primary financial statements have been prepared in accordance with the principles of adjustment prescribed by Opinions of the IICPA, on the basis of the changes in the exchange rate of the dollar. Regarding foreign subsidiaries whose financial statements are prepared in non-dollar currencies see (3) below. The amounts presented in these financial statements in dollars should not be construed as representing amounts receivable or payable in dollars or convertible into dollars, except when otherwise indicated in the financial statements. 12

15 Note 2 - Significant Accounting Policies (cont'd) A. Financial statements translated into US dollars: (cont'd) 3) Foreign subsidiaries, the financial statements of which are prepared in currencies other than the dollar. 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 up to the end of the period. Differences resulting from the above treatment are recorded as a separate item on the shareholders' equity section ("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 financial expenses, net, in the statements of income. 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 means adjusted cost translated as described above, into dollars. 13

16 Note 2 - Significant Accounting Policies (cont'd) B. Principles of consolidation 1) The financial statements include the financial statements of ICL and its subsidiaries. In addition to the above-mentioned subsidiaries, which have been fully consolidated, the consolidated financial statements include, based on the proportionate consolidation method, partnerships and investee companies under common control. Intercompany balances and transactions have been eliminated. Profits from intercompany sales, not realized outside the Group, have also been eliminated. 2) Goodwill is included within "other assets and deferred expenses" and is amortized in equal annual amounts, commencing in the year of acquisition, as follows: a) Goodwill arising on acquisition of minority interests in Dead Sea Works Ltd. (hereinafter "DSW") is amortized over a 20-year period. In the opinion of Company Management, the amortization of goodwill over a 20 year period appropriately reflects the estimated period of economic benefit from DSW, this being due to the special circumstances and characteristics of DSW, as follows: DSW s main activity is the production of potash. Potash is produced using basic chemical processes and no significant technological changes in the processes are expected in the future. Potash is an irreplaceable commodity for agriculture. The demand for potash has been increasing steadily at the annual rate of 2% 3% about the same rate as the increase in the world's population. There are only a few large producers of potash in the world. ICL has held DSW for tens of years and has extensive experience and know how in the area of the activities and production processes of DSW. DSW is profitable and has positive cash flows from operating activities, which increase over the years. b) Goodwill arising on acquisition of other subsidiaries is amortized over periods of up to 10 years. 14

17 Note 2 - Significant Accounting Policies (cont'd) C. Investments in affiliated companies Investments in these companies are accounted for by the equity method. D. Inventories Inventories are valued at the lower of cost or market. Cost is determined as follows: Finished products and work in progress on the basis of a moving average of periodic production costs, including the cost of overburden removal. Raw and auxiliary materials mainly on the basis of a moving average. Maintenance materials on the basis of a moving average, see also Note F(1), below. Some of the raw materials, finished products and work in progress are in bulk. The quantities thereof are based on estimates (mostly made by external experts, who measure the volume and density of the inventories). E. Investments in marketable securities and in other companies: 1) Marketable securities Marketable securities (except investment in another companies see Note 8) are presented at market value or regarding participation certificates in mutual funds redemption value. Changes in value of these securities are recorded in financing expenses, net, in the statement of income. 2) Other companies Investments in other companies are stated at cost, see also Note 8. F. Property, plant and equipment 1) Property, plant and equipment 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, net of a provision for decline in value of assets. 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 renovations are capitalized. Spare parts are stated at cost, determined on a moving average basis, net of a reduction for obsolescence. Spare parts for current use are presented in inventories in current assets. 15

18 Note 2 - Significant Accounting Policies (cont'd) F. Property, plant and equipment (cont'd) 2) Property, plant and equipment include capitalization of construction expenses and financing expenses during the period prior to regular operation of the plants. Capitalization of the financing expenses is calculated as follows: a) If the asset being constructed is financed by specific credit, then the actual borrowing costs relating to that credit are charged to the cost of the asset. b) When the financing is non-specific, the borrowing costs that are charged to the cost of the asset are calculated using a capitalization rate of 1.73% ( %) being the weighted average rate of all the borrowing costs, net of those relating to specific credit. 3) As to capitalization of costs of constructing facilities for prevention of environmental pollution, see O. below. 4) Depreciation is provided by the straight-line method, on the 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 4-10 Dikes and evaporating ponds 4-17 Heavy mechanical equipment, railroad cars and containers Office furniture and equipment, vehicles, computer equipment and other property, plant and equipment 6-33 G. Impairment of long-lived assets The Group previously adopted SFAS 121 of the Financial Accounting Standards Board of the United States ( FASB ) Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of, which related prior to its amendment in 2002 to property, plant and equipment and intangibles, including goodwill related to those assets (hereinafter long-lived assets ). Through December 31, 2002, in accordance with the provisions of the aforementioned Standard, the Group regularly reviewed, in situations where an event had occurred or circumstances had changed, which might indicate that an impairment had taken place of the long-lived assets used by the Group, whether the undiscounted cash flows anticipated from those assets, exceeded the amount at which those assets were included in the accounts; when the aforementioned cash flows did not cover the amount at which the asset was presented in the accounts, it was written down to its fair value, with the resulting impairment loss being reflected in the statement of income. 16

19 Note 2 - Significant Accounting Policies (cont'd) G. Impairment of long-lived assets (cont'd) In 2003, Accounting Standard No. 15 of the Israeli Accounting Standards Board (hereinafter the Board ) Decline in Value of Assets, became effective. This Standard, which is based on International Accounting Standard No. 36, requires a periodic assessment at each balance sheet date of the need for a provision for decline in value of the company s non-monetary assets property, plant and equipment and identifiable intangibles, including goodwill, as well as investments in affiliated companies. Adoption of the Standard is required in financial statements prepared for periods beginning on or after January 1, Pursuant to the provisions of the Standard, if any events have occurred or changes in circumstances have taken place, which might indicate that there has been a decline in value of one or more of the above assets, the company is required to evaluate whether the carrying value of the investment in the asset is recoverable from the cash flows anticipated from that asset, and, if necessary, to record a provision for decline in value up to the amount needed to adjust its carrying value to its recoverable value. The loss from decline in value is recorded directly in income. The recoverable amount of an asset is determined as being the greater of the asset s net selling price and its value in use to the company. The asset s value in use is determined according to the present value of anticipated cash flows from the continued use of the asset, including those expected at the time of its future retirement and disposal. H. Other assets and deferred expenses 1) Other assets Other assets are presented at cost and are amortized in equal annual installments as follows: a) Goodwill see note 2B above. b) Concessions are amortized over the balance of the life of the concession, that was granted to the companies. 2) Deferred expenses Trademarks and deferred expenses in respect of geological surveys are amortized in equal annual installments, mainly over 5 years, commencing in the year in which the expense was incurred. Debenture issuance expenses are deferred and depreciated over the expected life of the debentures. 17

20 Note 2 - Significant Accounting Policies (cont'd) I. Pension plans 1) The subsidiary, Cleveland Potash Ltd. (hereafter CPL) has a liability in respect of employee pension payments. Below are the measurement principles employed by the Company. (As to the pension plans and pension fund assets, see also Note 18C(2) below). (a) The net pension expenses for each accounting period consist of the following components: i. Current service costs the actuarial increase in the pension liability relating to employee pension benefits in respect of the reporting period; ii. Current interest costs the increase in the pension liability due to the passage of time; iii. The expected return on the fund s assets; iv. Actuarial losses (profits) recognized during the period, as described in (c) below. (b) The net pension liability (or the net pension fund assets), included in the balance sheet, reflects the difference between the following two components, computed as stated below: i. The liability for pension payments computed on the basis of the liability at the beginning of the period, plus the current service costs and the current interest costs (as referred to in (a) above), net of pension payments made during the period; ii. The pension fund assets computed on the basis of the assets at the beginning of the period, plus the expected return on the fund s assets (as referred to in (a) above) and payments made into the fund during the period, net of pension payments made during the period. (c) The difference, at the balance sheet date, between the net pension liability, computed as stated in (b) above and the actuarial liability net of the fair value of the pension fund assets at the same date reflects the balance of actuarial gains or losses which are deferred and are not immediately recognized in the financial statements. These deferred actuarial gains or losses (that derive from the difference between the amounts of the liabilities and the difference between the amounts of the assets, as stated above) are calculated on an annual basis at the end of each year and are recorded in the statements of income partially in the following year, if and only if at the end of the current reporting year, they amount to more than 10% of the greater of the following: (1) the actuarial liability for pension payments; or (2) the fair value of the pension fund assets. 18

21 Note 2 - Significant Accounting Policies (cont'd) I. Pension plans (cont'd) The amount in excess of 10%, as stated above, will be recorded in the statements of income, commencing from the following year, in equal annual installments over the anticipated period of employment (16 years) of the CPL employees, who are members of the plan. 2) As for the rest of the Groups pension liability it was fully provided for, based upon actuarial calculation at the balance sheet date. J. Convertible debentures Debentures convertible into shares are classified based on the probability of their conversion, as provided in Opinion No. 53 of the Institute of Certified Public Accountants in Israel. Debentures which are not expected to be converted are reported as a liability based on their liability value. Debentures which are expected to be converted are reported between the long-term liabilities and the shareholders' equity at the greater of their liability value or their equity value. K. Deferred taxes 1) The deferred taxes are computed in respect of differences between the amounts presented in these statements and those taken into account for tax purposes. Regarding the main items in respect of which deferred taxes have been recorded see Note 17C. The deferred tax balances are computed at the average tax rate expected to be in effect at the time such deferred taxes are released to the statement of income. The amount of the deferred taxes presented in the statement of income reflects changes in the above balances during the period of the report. 2) ICL has not provided deferred taxes for the future realization of investments in subsidiaries or affiliated companies, as it is ICL's policy to hold these investments and not to realize them. 3) As stated in Note 17A(1), some of the enterprises of subsidiaries have been granted approved enterprise status and, accordingly, dividends distributed from those approved enterprises and received by ICL are likely to be subject to tax. No account was taken of this additional tax, since it is the Group s policy not to cause distribution of a dividend which would involve additional tax liability to the Group in the foreseeable future. L. Revenue recognition Revenue from sales of products, net of discounts, is recognized upon shipment of the products or upon transfering the ownership to the customer, the later of the two. 19

22 Note 2 - Significant Accounting Policies (cont'd) M. Research and development expenses Research and development expenses are charged to income as incurred. N. Transportation expenses Transportation expenses are included in selling, transportation and marketing expenses. O. Environmental costs Ongoing costs of operating and maintaining installations for prevention of environmental pollution, and anticipated provisions for costs relating to improvement of conditions resulting from ongoing or past operations are charged to the statement 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 are amortized according to the Group s amortization policy. P. Allowance for doubtful debts The allowance for doubtful debts has been determined in a specific manner for debts, the collection of which is doubtful. Management determines the allowance based on, among other things, an evaluation of the credit risk based on available information regarding the financial position of the debtors, the extent of their activities and an evaluation of the collateral received from them. In addition, the financial statements include specific allowances for doubtful debts, as above, with respect to trade receivables included in the framework of the subordinated capital note received as part of the securitization transaction. See Note 4B. Q. Sale of trade receivables The Company recognizes the sale of trade receivables as a sale when the control and risks with respect to the financial debt have been transferred to the acquirer. 20

23 Note 2 - Significant Accounting Policies (cont'd) R. Derivative financial instruments Gains and losses on hedges of existing assets or liabilities are recognized in income commensurate with the results of 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 the said results or carried to financing income or expenses when the transaction is no longer expected to take place. The net premiums paid for currency options are charged to financing expenses over the term of the options. Derivative financial instruments, which do not derive from hedging transactions, as stated, are presented in the balance sheet based on their fair value. Changes in the fair value are recorded in the statement of income in the period in which they occur. The fair value of derivative financial instruments is determined based on their market value, and in the absence of such a price, the fair value is determined based on a valuation model (see also Note 23). S. 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. T. Cash equivalents Highly liquid investments, including short-term deposits with banks (with a maturity of three months or less from the date of investment) that are not restricted as to withdrawal or use, are considered by the Group as cash equivalents. U. Earnings (loss) per share of NIS 1 par value The earnings (loss) per share data is calculated in accordance with opinion No. 55 of the Institute of Certified Public Accountants in Israel, taking into consideration the likelihood of the exercise of options and convertible debentures issued by the Company, and net of shares held by a subsidiary. 21

24 Note 2 - Significant Accounting Policies (cont'd) V. Acquisition of Company shares by a subsidiary The cost of Company shares acquired by a subsidiary is presented as a deduction from the Company s shareholders equity. In the event the shares are sold, the difference between the selling price of the shares and their cost will be recorded to a capital surplus (if a gain) or deducted from retained earnings (if a loss). W. Balances in foreign currency and linked balances Balances in or linked to foreign currency are included in the financial statements at the representative exchange rate on the balance sheet date. Balances linked to the Consumer Price Index are included on the basis of the index relevant to each linked asset or liability. Data regarding the representative exchange rates and the Consumer Price Index are as follows: Consumer Exchange Exchange rate Price rate of the of the US dollar Index US dollar against the (Points) (In NIS) Euro December 31, December 31, Changes during the year: 2003 (1.9%) (7.5%) (16.9%) % 7.3% (15.9%) % 9.3% 5.5% X. Disclosure of the effect of new accounting standards in the period prior to their application 1. In 2001, the Israel Accounting Standards Board (hereinafter "the Board") published Accounting Standard No. 12 Discontinuance of Adjustment of Financial Statements. Pursuant to this Standard, commencing January 1, 2003, the adjustment for inflation of financial statements was to be discontinued. In addition, Accounting Standard No. 13 Effect of Changes in Exchange Rate of Foreign Currency was published. The Standard deals with the translation of transactions in foreign currency and the translation of financial statements of foreign operations for the purpose of including them in the financial statements of the reporting entity, commencing January 1,

25 Note 2 - Significant Accounting Policies (cont'd) X. Disclosure of the effect of new accounting standards in the period prior to their application (cont'd) The Standard provides rules for classifying outside activities as an autonomous investee entity overseas or as an integrated entity based on the indicators listed in the Standard and use of discretion, as well as the manner for translating financial statements of autonomous investee entities as stated. The goodwill created on the acquisition of an autonomous investee entity overseas is to be treated as an asset of that autonomous investee entity overseas and is to be translated based on the closing exchange rate, this being different than the rules presently in effect pursuant to which goodwill is translated based on the rate of exchange on the execution date of the transaction. Translation of the financial statements of an autonomous investee entity overseas is to be made based on the rate of exchange on the execution date of the transaction or, due to practical reasons, based on an average rate of exchange for the period, this being different than the rules presently in effect pursuant to which translation of the statements is executed based on the closing exchange rate. According to Accounting Standard No. 17, application of these Standards was postponed to January 1, In the Company's estimation, since it adjusts its financial statements in accordance with the changes in the exchange rate of the dollar, these Standards are not expected to have a significant impact on the financial statements. 2. In March 2004, the Israeli Accounting Standards Board published Accounting Standard No. 20, regarding the amortization period for goodwill. The Standard provides that goodwill is to be amortized over its useful life, in a systematic manner. The amortization period is to reflect the best estimate of the period in which future economic benefits are expected to derive from the goodwill, however such period is not to exceed 20 years from the initial date of recognition. The Standard applies to financial statements for periods beginning on January 1, 2004 and thereafter. A change in the amortization period for goodwill balances as at January 1, 2004, is to be treated prospectively as a change in accounting estimate ("from here on"). Goodwill balances, as stated, are to be amortized in a systematic manner over the balance of the period remaining to complete the amortization period determined. In the estimation of the Company, application of the Standard will not have a material impact on the Company's financial or the results of its operations. 23

26 Note 3 - Short-Term Investments, Deposits and Loans December 31 December US$ thousands US$ thousands Marketable securities (1) 1,704 3,698 Deposits in banks and financial institutions and short-term loans 52,342 8,763 Current maturities of long-term deposits and receivables 3,761 3,613 57,807 16,074 1) Includes government debentures and mutual funds which invest, mainly, in government debentures. Note 4 - Trade Receivables A. Composition December 31 December US$ thousands US$ thousands Trade - open accounts: Outside Israel* 84, ,455 Domestic (Israel) 60,571 48,944 Subordinated capital note and receivables related to sale of trade receivables in securitization transaction (B) 127, , , ,413 Less allowances for doubtful debts 10,276 12, , ,597 * Including discounted notes (C) 10,218 12,288 24

27 Note 4 - Trade Receivables (cont'd) B. Sale of trade receivables under a securitization transaction December 31 December US$ thousands US$ thousands Trade receivables included as part of the securitization transaction as at the balance sheet date 356, ,049 Less consideration in respect of said trade receivables, net** 238, ,537 Subordinated note 117,977 67,512 Trade receivables sold where the consideration in respect thereof was received subsequent to the balance sheet date, net 9,498 60,502 Subordinated note and receivables in respect of sale of trade receivables 127, ,014 ** As at the balance sheet date, cash proceeds in the amount of US$ million were received in respect of the sale of trade receivables in a securitization transaction (December 31, 2002 US$ 93 million). In December 2002, the Company and certain subsidiaries (hereinafter "the Companies") entered into a securitization agreement, under which the Companies are to sell all their trade receivables to a foreign company which was set up specially for this purpose and which is neither owned nor controlled by the ICL Group (hereinafter "the Acquiring Company"). The Acquiring Company finances acquisition of the debts by means of a loan received from a financial institution, which is not related to ICL, that finances the loan out of the proceeds from the issuance of commercial paper on the U.S. commercial paper market. The repayment of both the commercial paper and the loan are backed by credit lines from a banking consortium organized by Bank of America Securities. The expected amount of the financial resources that will be available for acquiring the trade receivables of the Companies is approximately $ 250 million. The acquisition will be on an ongoing basis, which will enable the Acquiring Companies to utilize the proceeds received from customers whose debts were sold, to acquire new trade receivables. The Companies will sell their trade receivables to the Acquiring Company during a period of one year from the closing date of the transaction. This period may be extended, subject to the approval of all parties, for a maximum of four additional one-year periods. Each of the parties may terminate the period upon compliance with the terms stipulated in the various agreements. The selling price of the trade receivables is based on the balance of the related debt, discounted by an amount based on the anticipated period from the sale until repayment. Upon acquisition of the trade receivables, the Acquiring Companies pay most of the balance in cash and the remainder in a subordinated note, which is paid after collection of the related debt. The rate of the cash consideration varies according to the composition and behavior of the customer portfolio. 25

28 Note 4 - Trade Receivables (cont'd) B. Sale of trade receivables under a securitization transaction (cont'd) The Companies bear all losses incurred, if any, by the Acquiring Companies as a result of trade receivables sold under the securitization transaction and not repaid, all up to the aggregate balance of the debt not yet paid, which is included in the subordinated liability. The sale is final. The Acquiring Company has no right of recourse to the Companies in respect of amounts paid, with the exception of debts in respect of which a commercial dispute arises between the Companies and their customers (i.e., a dispute involving a claim concerning the failure of the seller to fulfill the terms of the product supply agreement, such as: supply of the wrong product, supply of a defective product, overdue supply, etc.). The Companies will handle collection of the trade receivables included in the securitization transaction, on behalf of the Acquiring Company. The main principle of the accounting treatment for sale of the trade receivables within the framework of a securitization transaction is that sale of the trade receivables is recognized only for that part in respect of which the control and risks have passed irrevocably to the acquirer. Accordingly, the balances of trade receivables sold and for which the consideration has been received in cash and/or by way of an irrevocable undertaking, have been eliminated. In respect of that part of the trade receivables included in the securitization transaction and not recognized as a sale, a subordinated note has been recorded for the amount of the difference between the balance of the trade receivables included in the securitization transaction and the aforesaid consideration and the list of debtors in respect of the sale of trade receivables, which have been sold and the consideration in respect thereof was received subsequent to the balance sheet date. A loss resulting from sale of the trade receivables is recorded in the statements of income at the time of the sale in financing expenses. In the agreement, the Company undertook to comply with certain financial ratios, according to which the ratio of the net debt to shareholders' equity will not exceed 2.1 and the ratio of the net debt to EBITDA will not exceed If the Company does not comply with the aforementioned ratios, the Acquiring Company is allowed to stop acquiring new receivables (without this affecting existing acquisitions). The Company is in compliance with these financial ratios. C. Discounting of notes The subsidiaries regularly factor a portion of their trade receivables with banks and enter into agreements to secure payment of the trade receivables. Regarding the portion of the notes factored which the bank does not have recourse, the proceeds are offset against the balance of the trade receivables. The balance of the notes factored regarding which the bank has recourse, are presented in the "trade receivables" category and, at the same time, the related credit received from the bank is included in the category "short-term credit from banks". 26